Business Plan Document

marketing project and need a sample draft to help me learn.

I have now created a brand and made some content that you can see in the file I attached. You can make more improvements on top of mine as well as more detailed content. Later I will send you my course content file and you can follow the requirements that I have learned.
first file：the template you should do
second file：my textbook
the rest three files：assignment finished before
Requirements: depend on the template
ASSIGNMENT 08

Table of Content:
AUDIENCE OF THIS PRESENTATION
EXECUTIVE SUMMARY
BUSINESS IDEA
Problem and Solution
Product/Services Concept
Scope and Target Market/Customer
Point of Differentiation and Value Proposition
Mission / Vision
Business Model
PRODUCTS AND SERVICES
Product/Service Development
Product Manufacturing & Sourcing
Operating Model Distribution
Service Supply
In case of an APP Development or Software Solutions detail the SDLC:
APP/Software Development approach & Requirements Gathering
APP/Software Analysis and Design, APP/Software Functionality
APP/Software Testing
APP/Software Deployment
APP/Software Production Model
APP/Software Support Model
APP/Software Maintenance Model
High Level Pricing
 ADMINISTRATIVE STRUCTURE
Location
Legal Formation
Intellectual Property
Organization
Management
Organizational Chart
Personnel Matrix – Monthly for 3 Years
Strategic Partners
Advisory Board
MARKET RESEARCH
Market Research & Analysis (PESTLE)
Macro and Micro economics
Industry size, and structure
Income and spending analysis (US $)
Trends
Estimated Size of the Market (By Location in US $)
Competition
Target Market
Market Segmentation (identify customer segments)
Demographics and Psychographics / Persona
Customer and needs assessment
Primary Research: concept, message, advertising testing; surveys; interviews,
Secondary Data: public data, institutions, agencies, etc.
Competitors – Competitor Analysis (Analysis & Strategy)
Direct Competitor 1 to n (company, product, pictures, market share, operations, target market)
Indirect Competitor 1 to n (company, product, pictures, market share, operations, target market)
Competitors Matrix – products comparison (table), also skills, HR, etc.
Branding
Brand your Business Plan
Sales Forecast
APPENDIX – TABLES – FIGURES

Target Audience of this presentation, THAT WILL RECEIVE THIS BUSINESS PLAN: (which of them?)
Bankers
Investors (Angel Investors / Venture Capital)
Internal Endorsement

EXECUTIVE SUMMARY
Often considered the most important section of a business plan. Briefly tells where your company is, where you want to take it, and why your business idea will be successful. It is also your first opportunity to grab a potential investor’s interest.
It should highlight the strengths of your overall plan and therefore be the last section you write.
Explain what problem are you trying to solve and that you have done thorough market analysis. Include information about a need or gap in your target market, and how your particular solutions can fill it.
Draft at high level:
Current situation
Desired Outcome (The concept)
Recommended Strategies (Opportunity)
Funding Request
Exit Strategy
Benefits for the investors/partners/company
All of the information in the executive summary should be covered in a concise fashion and kept to one page
Always try to engage the audience with statements that will answer their question: What’s in it for me? (WIITFM)

BUSINESS IDEA
Objective
Problem and Solution (Detail what makes your product or service different)
Product/Services (You can post a video, showcasing the product/services/concept)
Scope and Target Market/Customer
Point of Differentiation and Value Proposition (Proposal with real value to the customers. Unsatisfied Needs)
Mission / Vision
Business Model (How you will make money though business operations), Business Model Canvas will be developed later

PRODUCTS AND SERVICES

Product/Service Development (Research & Development or Product/Service Available)
Product Manufacturing & Sourcing (Location. Facilities. Equipment. Supply Chain. Warehouse. Real Estate Research. Suppliers. Process Flow. Quality Control. Regulations to be accomplished)
Operating Model Distribution (How it works, security, compliance. Distributors. Cost of Distribution)
Service Supply (from human resources to activities)
In case of an APP Development or Software Solutions detail the SDLC:
APP/Software Development approach & Requirements Gathering
APP/Software Analysis and Design, APP/Software Functionality – WIREFRAMES – Website Map –
APP/Software Testing
APP/Software Deployment
APP/Software Production Model
APP/Software Support Model
APP/Software Maintenance Model
Pricing (High Level Idea for Product/Service/APP/Software. Research performed)

 ADMINISTRATIVE STRUCTURE

Location (Office and Shop: Design. Blue Prints, Real Estate. Research Performed)
Legal Formation (Corporate structure – C Corp., S Corp., LLC, etc.)
Intellectual Property (Website Registration (URL), patents, trademarks, copyrights, etc.)
Organization
Core Team – Management (Key Roles/Individuals and high-level background)
Organizational Chart (FTEs and Contractors)
Personnel (FTEs and Contractors. Cost Matrix)
Minimum 3 Years (Best 5 years), in monthly detail
By Area / Identifying Roles and Personnel
Considering impact of Seasonability, Major events, and Inflation
Strategic Partners
Advisory Board

MARKET RESEARCH
Market Research & Analysis (PEST)

Macro and Micro economics
Industry size, and structure
Income and spending analysis (US $)
Trends
Estimated Size of the Market (By Location in US $)
Competition
Target Market
Market Segmentation (identify customer segments)
Potential Customers Estimation – Use the Funnel Technique
Demographics and Psychographics – Persona
Customer and needs assessment
Primary Research: concept, message, advertising testing; surveys; interviews,
Secondary Data: public data, institutions, agencies, etc.
Competitors – Competitor Analysis (Analysis & Strategy)
Direct Competitor 1 to n (company, product, pictures, market share, operations, target market)
Indirect Competitor 1 to n (company, product, pictures, market share, operations, target market)
Competitors Table – Products comparison (table), also skills, HR, etc.

BRANDING
Brand Name- name, tagline, logo (meaning of each of them)
Brand Associations- colors, tagline, images, celebrities
Sales forecast
3 years of sales forecast estimated by month, consolidated by year, showing line by line of products/services. Including assumptions. i.e., inflation, % of increase of customers, seasonability, etc.
Appendixes
Tables
Figures

Reading 8-01 CASE STUDY: Project Destiny – , Source: Harvard Business Press Chapters – Harvard Digital Course Pack
Executive Summary of the Reading
Key concepts that you got from the reading:
Insights from this reading to your Business Plan (What and how can you apply this reading to your Business Idea?)
A New Entrepreneurial Dynamic21st Century Startups and Small BusinessesVersion 1.0.1Greg AutryAdapted by Omar Alvarez-Pousa978-1-4533-4246-6© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
A New Entrepreneurial Dynamic: 21st Century Startups andSmall BusinessesVersion 1.0.1Greg AutryAdapted by Omar Alvarez-PousaThis version ofA New Entrepreneurial Dynamic: 21st Century Startups and Small Businessesincludes customizations byOmar Alvarez-Pousa. It was created on July 21, 2022.Edits to the original are shown with this marker.Additions to the original are shown with this marker.Published by:FlatWorld292 Newbury StreetSuite #282Boston,MA02115-2832©2023byBoston Academic Publishing, Inc. d.b.a. FlatWorldAll rights reserved. Your use of this work is subject to the License Agreement available athttps://catalog.flatworldknowledge.com/legal.No part of this work may be used, modified, or reproduced in any form or by any means except as expresslypermitted under the License Agreement.Gen:202207211530© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
ForewordChapter 1Chapter 2Chapter 3Chapter 4Chapter 5Chapter 6Chapter 7Chapter 8Chapter 9Chapter 10Chapter 11Chapter 12Chapter 13Chapter 14Chapter 15Chapter 16Chapter 17Chapter 18Appendix AAppendix BBrief ContentsAbout the AuthorAcknowledgmentsDedicationPrefaceEntrepreneurs and the New Entrepreneurial Dynamic,by Randy KomisarThe Entrepreneur in ContextThe New Entrepreneurial DynamicStrategy: Capturing and Maintaining Competitive AdvantageOpportunity RecognitionFeasibility Analysis and Opportunity EvaluationProduct Design and DevelopmentOperations Management in Manufacturing and Service IndustriesTeam Building and LeadershipFundingLaunchingBrand BuildingMarketingSellingOperationsAccountingManaging Cash Flow and FinanceThe Business Environment and GovernmentExiting and HarvestAppendix: Introducing Your Business Plan ProjectFinal ThoughtsIndex© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
135711Foreword15Chapter 1161617181919202021222222242526262729323235363637383940ContentsAbout the AuthorAcknowledgmentsDedicationPrefaceEntrepreneurs and the New Entrepreneurial Dynamic,by Randy KomisarThe Entrepreneur in Context1.1LetÕs Start SmallItÕs Small, but Is It a Small Business?Corporate IntrapreneurshipThe Rapid Growth StartupThe Main Street EntrepreneurThe Organic-Growth Small BusinessesThe Buyable StartupThe Lifestyle BusinessThe Social Entrepreneur and Nonprofits1.2The New Entrepreneurial DynamicÑFusion Firms, Shifters, and MoreFusion Firms and ShiftersFranchisesOnline Stores, Apps, and the Virtual Businesses1.3Who Are the Entrepreneurs? Are You One?Entrepreneurial TalentÑBorn or Learned?Risk and Coping with the UnknownThe Serial EntrepreneurAn Ever-Changing Economy and TodayÕs Nontraditional Entrepreneurs1.4ChallengesSurvivalWhoÕs the Boss?Getting StuckWhere to Start: Make a Bucket ListItÕs Not Always About YouStay Healthy1.5Case Study: Tiantian, Kai, and Hip Hot Restaurant: Entrepreneurs Learnand Adapt1.6Endnotes© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
41Chapter 2424243444848495051525455555656586061Chapter 362626466676969707171727273757682838587879296979798100The New Entrepreneurial Dynamic2.1The Stormy Seas of CommerceBusiness PlansWhat Is the New Entrepreneurial Dynamic?Planning Depends on ForecastingAnd Yet, There Is a Time for EverythingAdded Monetary Value Makes an Organization a BusinessCustomers Are Required, Everything Else Is Optional2.2Uncertainty Is the New NormalRisk and RewardEmbracing Open InnovationGlobalization2.3Networking Starts Before Your Business DoesBuilding a TeamTotal Commitment, Burn Your BoatLetÕs Go!2.4Case Study: Pivoting Pet Adoption withAdoptimize2.5EndnotesStrategy: Capturing and Maintaining Competitive Advantage3.1Being StrategicStrategy, a Serious GameMarket DisruptionObjectives, Strategies, and TacticsOvercoming Barriers to EntryThe Two Basic Strategies: Price and DifferentiationLetÕs Get SmallTactics3.2Sustainable Competitive AdvantageDynamic AdvantageInnovation StrategyOperational Effectiveness StrategyWhat Exactly Is a Market?3.3The Economic Basis of Business StrategyThe Supply CurveWhat About Profits?WhereÕs the Strategy?Start at the Top3.4Strategy Analysis ToolkitPorterÕs Five ForcesSWOT Analysis3.5Strategic FitSync to Market ConditionsTrends Matter3.6Case Study: Overcoming Barriers to Entry via Strategic Partnerships3.7Endnotes© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
101Chapter 4102102104105107107108109110111112113113114116117118118119121121122123123125125128132133Chapter 5134134136137139140140141142143144146147148Opportunity Recognition4.1Searching for IdeasChoosing a DestinationYes, There Are Two Paths You Can Go By!Customer Pain and Delight4.2The Entrepreneur as Innovator and DisrupterCreative DestructionDisruptive InnovationImitation and Second Mover AdvantageLast Mover AdvantageSerendipityManaging Chance4.31 + 1 = NewWhen Preparation Meets OpportunityNetworking with CreatorsOpen InnovationExternal Acquisitions4.4Saving an OpportunityÑImproving Existing Products or Target MarketsAdaptationScouring the Global Supply Chain4.5De NovoIndustries: The Challenges of Paving a New RoadDe Novo IndustriesTNBT, Riding Trends While Avoiding FadsQuick Opportunity ScreeningExperience and the Power of NaivetyGeographic OpportunityIs Buying a Franchise or Licensing for Me?4.6Case Study: Fred Ross Takes the Entrepreneurial Plunge with DecksidePool Service4.7EndnotesFeasibility Analysis and Opportunity Evaluation5.1Feasibility AnalysisVettingYour Market and IndustryThe Value ChainValue MismatchTechnical FeasibilityResource FeasibilityCommercialization and Scale Feasibility5.2Opportunity ValuationTalking to CustomersCustomer DevelopmentBeta Testing and the Minimum Viable ProductSafety and Environmental Concerns5.3Financial Feasibility© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
149150152152154155155157158159Chapter 6159160160163163165166167168168169170171172172173176176177179181183185186189191Chapter 7191192193194199203204Capital InvestmentPricing, Margins, Affordability, and Demographics5.4Difficult Distribution ChannelsAccess Barriers5.5Does the Idea Really Fit the Entrepreneur?Business-Entrepreneur FitBusiness Model Transformation: When Your First Idea IsnÕt Quite the Thing5.6Case Study: 121C, Inc.ÑThe Skateboard MVP5.7EndnotesProduct Design and Development6.1Riding the Crest of Innovation6.2What Is a Product?Types of Product Developments6.3Where Do Product Ideas Come From?Purple Cow Ideas6.4Identifying Business OpportunitiesUtility6.5Understand Your IndustryEvaluating Your IndustrySegmenting Your MarketAssessing Your Competition6.6Forecasting DemandPeople in Similar BusinessesPotential CustomersPublished Industry Data6.7Breakeven Analysis6.8Product DevelopmentProduct Development Is a Risky PropositionThe Product Development ProcessArtificial Intelligence6.9Protecting Your Idea6.10Cases and Problems6.11Business Plan Project6.12Nike Case6.13EndnotesOperations Management in Manufacturing and Service Industries7.1The Challenge: Producing Quality Jetboards7.2Operations Management in ManufacturingOperations Management in ManufacturingPlanning the Production Process7.3Facility Layouts7.4Managing the Production Process in a Manufacturing CompanyPurchasing and Supplier Selection© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
205206207207208210211211212212212214218219222224225226227229231232233235Chapter 8235236237238239241241243244245246248249250250251252255258261261Inventory ControlWork Scheduling7.5Graphical Tools: Gantt and PERT ChartsGantt ChartsPERT Charts7.6The Technology of Goods ProductionComputer-Aided DesignComputer-Aided ManufacturingComputer-Integrated ManufacturingFlexible Manufacturing SystemsThe Technology of Goods Production3D Printing7.7Operations Management for Service ProvidersOperations PlanningManaging Operations7.8Producing for QualityQuality ManagementInternational Quality StandardsOutsourcing7.9Cases and Problems7.10Business Plan Project7.11Nike Case7.12EndnotesTeam Building and Leadership8.1How to EntrepreneurLearning Leadership SkillsLeadership StylesThe Elite NetworkBuilding the Right Team8.2The Organizational ChartStructureTraditional Positions and TitlesDesigning the Dynamic Team8.3Slicing the Pie and Valuing Startup InputsThe Equity SplitDynamic Equity AdjustmentWhose Intellectual Property Is It?8.4Evolving Roles as Your Business MaturesThe Challenges of GrowthCulture Change and InertiaRecruitingBuilding an Ethnically Diverse or Global TeamAvoiding Troublesome Hires and CYADispute ResolutionLayoffs Versus Sharing the Pain© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
262262263266267Chapter 9267268270271272273275280280280283284284285286289291294295Chapter 10295296304307308308310310311312313315318322323Chapter 11324324325328339TerminationDepartures8.5Case Study: Brian Fitzgerald and Future Point8.6EndnotesFunding9.1Source of CapitalEarly CapitalDetermining Startup Funding RequirementsPersonal Credit and SavingsThe Three FsAngelsVenture CapitalistsOther Sources of Equity CapitalClasses of StockCrowdfundingOther Prepayment Financing Schemes9.2Debt FinancingÑLoansSmall Business Bank Loans and Government ProgramsHome LoanSelecting a BankEstablishing Your Business Credit9.3Case Study: Embedded Ventures9.4EndnotesLaunching10.1Reducing Launch RiskSmart Entrepreneurs DonÕt Seek Risk, They Manage ItStill Other FormsSpinoffs, Distractions, and Focus10.2Getting GoingLeaving Your Comfy Day JobPreventing a LawsuitAvoiding DisasterGood CommunicationsSolid Written AgreementsInsuranceFacilities10.3Case Study: An Entrepreneurial Marketing Misfit Finds His Niche10.4EndnotesBrand Building11.1Product BrandingPerception ManagementDefining Your BrandManaging the BrandTrademarks, Brandmarks, Copyright© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
340341342345346347Chapter 12348348349351352356357357359361363365370372375377379Chapter 13380380380381382383384385392394399399402404404407411413415Chapter 1441611.2Your Brand in the New Entrepreneurial DynamicBuilding Your BrandCashing In on Your Brand11.3Case Study: WahooÕs Tacos11.4EndnotesMarketing12.1Beyond BrandsMarketing Versus Advertising Versus SellingSatisficing and DifferentiatingAdvertising CampaignsThe Technology Adoption Life Cycle12.2Marketing StrategiesRiding Your Brand PowerRadio and TVManaging the NewsTrade ShowsSocial MediaInternet AdsTraditional Print AdsMarketing Integrity12.3Case Study: Building One Hot Brand12.4EndnotesSelling13.1The Context of SellingThe Process of SellingPeople Buy Stuff from PeopleSales and Business DevelopmentMarketing and Ads Fill the Sales FunnelIntegrated Marketing13.2The Sales ProcessWorking the FunnelAdditional Important Sales TopicsCorporate Sales13.3Customer Loyalty and MaintenanceKeeping Your New Customer Is Job 1Customer Relationship Management13.4Organizing SalesSales CompensationOutsourcing Sales13.5Case Study: Unboxing the Sales Process with unboXt13.6EndnotesOperations14.1Execution and Resources© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
416416421425433436437438440442442444447450451Chapter 15452452456456458462463464468469471471472473476477Chapter 16478478482484486486488490492493Chapter 17494Execution Is EverythingMeasuring What You ManageFacilities (or Not)ManufacturingService and Retailing14.2Managing GrowthPlanning to Grow DynamicallyInventory Management and Cash FlowThe Challenge with Staffing14.3Globalized OperationsThe Global ImperativeManaging across Space and Time14.4Case Study: Shifting Operations at Nikki’s Kitchen14.5EndnotesAccounting15.1Managerial AccountingBasic Accounting Skills15.2Financial AccountingIncome StatementsCash Versus Accrual AccountingAmortization and DepreciationBalance SheetsCash Flow StatementsInternational Accounting StandardsFinding and Selecting Accounting Professionals15.3Accounting SystemsSoftwareOnline Solutions15.4Case Study: When Things Go Bad, Very Bad: An Accounting Nightmare15.5EndnotesManaging Cash Flow and Finance16.1Cash FlowAnalyzing DataBankruptcy and the Return of the Living DeadRenting and Leasing16.2FinanceCollateral for LoansA Cautionary Word on Debt16.3Case Study: Betting It All: An Unorthodox Cash Flow Gamble by YourAuthor16.4EndnotesThe Business Environment and Government17.1The Business Environment© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
494497499503504505509512517517518519521522524525526527532536537Chapter 18538538540547549550550551552553553554555557559Appendix A559560561565Appendix B567Factors of the Business EnvironmentThe Biggest Environmental Influence Is GovernmentRegulations and TaxesLawsuits17.2The Macroeconomic EnvironmentKeynesian EconomicsThe Business Cycle and Your BusinessGlobal Secular Trends17.3Cultural EnvironmentThe Culture of Doing BusinessGlobalizationDynamic CultureGovernment and Culture17.4Technical Environment17.5Government as a Customer or a VendorThe Inside TrackGovernmental Competitors17.6International Trade17.7Case Study: A Young Entrepreneur Learns about Taxes the Hard Way17.8EndnotesExiting and Harvest18.1The End of the RoadShould You Stay or Should You Go Now?Capturing the Value YouÕve CreatedValuation: What Is It Worth?18.2The Self-Sustaining BusinessThe Milking StrategyInheritance Strategies and Tax Considerations18.3The SaleDiligencePart Way In/Part Way OutPayment StructuresExit Strategy Starts at Day One18.4Case Study: Selling Trojan Storage18.5EndnotesAppendix: Introducing Your Business Plan ProjectA.1Choices and TasksA.2Standard Business Plan Format: InstructionsSection DescriptionsFinal ThoughtsIndex© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
About the AuthorGreg AutryGregAutry(PhDUniversityofCalifornia,Irvine)isClinicalProfessorofSpaceLeadership,Policy,andBusinessatThunderbirdSchoolofGlobalManagement,VisitingProfessorintheInstituteforSecurityScienceandTechnologyatImperialCollegeLondon,andaffiliateprofessorwiththeInter-planetaryInitiativeatArizonaStateUniversitywhereheleadstheworld’sfirstdegree-programinthebusinessofspace.HealsoservesastheChairoftheSafetyWorkingGroupontheCommercialSpaceTransportationAdvisoryCommittee(COMSTAC)withintheU.S.FederalAviationAdminis-tration(FAA);aformeradvisortoRelativitySpace,astartuprocketmanufacturer;aboardmemberofInterstellarLab;andVicePresidentforSpaceDevelopmentattheNationalSpaceSociety.GregpreviouslyservedasWhiteHouseLiaisonwithNASAandwasPresidentialNomineeforChiefFinancialOfficerofNASA.PriortojoiningThunderbirdSchoolofGlobalManagement,GregwasAssistantProfessorofClinicalEntrepreneurshipinMarshallSchoolofBusinessattheUniversityof Southern California.Gregisaserialentrepreneurwhoco-foundedHALLabs,agamedeveloperthatcodedanAppleversionofPac-Manwhilehewasstillahigh-schoolstudent.Thatsoftwarewassubsequentlypur-chasedbyAtari.Gregalsoco-foundedDr.Micro,aPCservicesfirmsoldtoCompuComSystem;WiredImages,anecommercecontentcreator;NetworkCorps,adeveloperofhealthcareenterpriseapplicationsforKaiserPermanente;andElevatedMaterials,anupcyclerofaerospacecarbonfiberscrap.© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
2A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
AcknowledgmentsI would like to acknowledge the contributions of the following individuals:•Dr. Laura Huang, Harvard, whocontributed to the initial planning of this text•Dr. Kaye Schoonhoven, UC Irvine, for hermentoringand work that inspired the title•Dr. Peter Navarro, UC Irvine, for invaluable lessonsin authorship and life•Emily Carney,for editorial assistance early on•SusanHoldenMartin,MBA,J.D.forediting,support,andencouragementingettingthroughthe last, very challenging months of the project•My wife, Susan Autry, for her immensepatiencewith this project•Dr.HelenaYli-Renko,forbeingtheworld’smostsupportivebossduringthedevelopmentofthis book•Cassidy Masters and Lani Faualo for assistance developing test and homework items•Everyone at NASA Headquarters for making theprocess interesting•Dean Sanjeev Khagram for daring to dream big!•The team at FlatWorld, for being willing to dosomethingdifferent with a textbookIwouldalsoliketothanktothefollowingindividualswhoreviewedthetextandwhosecon-tributions were invaluable in shaping the final product:•Stephanie Kloos Donoghue, Pace University, Lubin School of Business•Francis Green, Penn State University•Martin Luytjes, Florida International University•JohnieL.Reed,MPOD,M.Ed.,AFC®,AssistantProfessor,BusinessAdministration,CuyahogaCommunity College•Joseph N Scarbaci, Raritan Valley Community College•Joy Turnheim Smith, ECSU•Leann Mischel, PhD. Coastal Carolina University•Jeffrey Muldoon, Emporia State University© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
4A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
DedicationDedicatedtothebusinesspartnerswhosharedmyjourneythroughtheentrepreneurialschoolofhardknocks:TomDeLellis,BrianFitzgerald,TonyTribelli,DavidVerespey,DanHaste,JohnThomp-son, Brian Bishop, Ryan Olliges, Paul Olliges, and Adrian Stern.© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
6A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
The textbook author, as an 18-year-oldentrepreneur, stands at the right.Source: Greg AutryThe author and his wife outside Mission Controlat Kennedy Space Center, 2017Source: Greg AutryThe author with his son at his collegegraduation.Source: Greg AutryPrefaceYou’lllikelynoticethatANewEntrepreneurialDynamic(NED)isaverydifferenttextbook.IstartedthiswritingadventurebecauseIcouldn’tfindjusttherightbookformyownstudentsofentrepreneurshipattheUniversityofSouthernCalifornia.Mosttextswereintolerablyexpensive,longerthannecessary,inacces-sible,andoftenboring.I’mnotaloneinthatevaluation.Manyofmycolleagues,leadingprofessorsofentrepreneurship,haveabandonedthosetextsinfavorofaself-assembledcollectionofarticlesandcasestudies.Whilethatsortofbricolage-basedapproachisaffordable,personal,andaccessible,itcannotprovidebusinessstudentswiththeorganizedandcompletetoolkittheywillrequireinthearenaof the marketplace. So, I’ve written a textbook!ImadetheconsciousdecisiontokeepNEDmorepersonalandmoreengag-ing.Ihopeyou’llsensethatI’veenjoyedmyownentrepreneurialjourneyaswellasmycareerinmanagementresearchandinstruction.It’sbeenaheckofarideforafirst-generationcollegestudentwhodroppedoutonhisfirstattempt.Iwantyoutosharemyenthusiasmforjusthowawesomeentrepreneurshipcanbe.ManyofthebusinesspeopleIuseasexamplesordetailinthecasestudiesarefoundersthatI’vehadthepleasuretoobservedirectlyorworkwithduringmydualcareersasastartupfounderandasanacademic.Asaveryyoungentrepre-neurintheearlypersonalcomputergamebusiness,IhadthegoodfortunetospendtimewithApplecofoundersSteveWozniakandSteveJobs.Ialsoencoun-teredmanybrilliant,engaging,anddangerouslydisruptiveindividualswhoareless famous but no less amazing.Asaresearcherandleadingexpertoncommercialspaceflightentrepreneur-ship,I’vebeensimilarlyblessedtopersonallyengagewithRichardBranson,ElonMusk,andJeffBezos.ThisresultedinthepresidentappointingmetoleadershiprolesatNASA—anamazingexperiencethatmadethesix-year-oldinmeveryhappy.Lookingbackonit,Icouldhavemadebetterchoicesatseveraljunctures,andthoseexperiencesinformthelessonsinthisbook.Butpersonally,Ienjoyedthe journey so much that I probably wouldn’t change my own path.NEDoffersrecommendationsformanagingyourpersonallifeaswellasyourbusinessbecauseIhavelearnedthatinreality,theyareinseparablefortheentrepreneur.IoncefoundedabusinesssothatIcouldleavemycorporatejobinordertofinishcollegeandspendtimeathomewithmynewlyadoptedson.Thatbusiness grew, lasted for nearly twenty years, and made millions.Textbooksthatleavethatoutandsiloeveryaspectofabusinessintoneatlydividedandseparatelymanageableactivitiesareexcellentatpreparingstudentsforexams.However,thosestudentsareunlikelytosurvivecontactwiththemar-ketplace.So,NEDcontainsthewisdomofacademicresearchers,theinsightsofreal businesspeople, and my own learning moments.© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Atsomepointsinthetext,Ibreakthefourthwallandaddressthereaderdirectly.That’sunheardofinthetradition-boundworldoftextbookpublishing,butIfeltitwasexactlywhatwasneededtobringtherealityofentrepreneurshiptotheclassroomsetting.I’dliketothanktheeditorsatFlatWorldforbeingdaringenoughtoembraceallthisandforprovidingyouwithacomplete,affordable,andinnovativetextbook.Ihopeyouenjoyyourquarter,semester,orself-studyjourneythrough theNew Entrepreneurial Dynamic.Greg Autry, Southern California, 2021SupplementsANewEntrepreneurialDynamic:21stCenturyStartupsandSmallBusinessesisaccompaniedbyarobustsupplementsprogramthataugmentsandenrichesboththeteachingandstudentlearningexperiences.Iwroteallsupplementstoensurebothaccuracyandfullalignmentwiththebook’snarrative.FacultyshouldcontacttheirFlatWorldsalesrepresentativeorFlatWorldsupportatsup-port@flatworld.com for more information or to obtain access to the supplements upon adoption.Sample SyllabiSamplesyllabibasedoneither16-weekor10-weektermsprovideusefultemplatesthathelpnewadopterstransitionfromtheircurrentcoursetextbooktoANewEntrepreneurialDynamic:21stCenturyStartupsandSmallBusinesses.FacultycandownloadthesyllabifromtheFlatWorldwebsiteortheycanbeobtainedbycontactingyourlocalFlatWorldrepresentativeorFlatWorldsupport (support@flatworld.com).InstructorÕs ManualTheinstructor’smanual(IM)includeslearningobjectives,anoutline,keytakeaways,interactiveactivities, and key terms with definitions for each chapter.PowerPoint SlidesPowerPointlectureslidesprovideaconcisebutthoroughoutlineforeachchapterandincluderel-evanttables,figures,andimagesfromthetexttoenlivenlecturesandstimulateclassdiscussions.ThesePowerPointslidesalsoincludealistofLearningObjectivesbychapter.Instructorscanusetheslidesascomposedtosupportlecturesorcustomizeandbuilduponthemtosuittheirparticu-lar teaching needs.8A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Test Item FileTheTestItemFile(TIF)includesmorethanfiftyquestionsperchapterinmultiple-choice,comple-tion,true/false,andessay-questionformats.Allanswersareprovided,includingpossibleresponsestotheessayquestions.Theitemshavebeenwrittenspecificallytoreinforcethemajortopicscov-eredineachchapterandtoalignwithFlatWorldHomeworkandin-textquizitems.TheTestItemFilequestionsarealsoavailableinpre-formattedformforeasyexportintopopularlearningman-agement systems such as Canvas or Blackboard.Test GeneratorÑPoweredby CogneroFlatWorldispleasedtoprovideacomputer-generatedtestprogrampoweredbytheleadingassess-mentprovider,Cognero,toassistinstructorswithselecting,randomizing,formatting,loadingonline,orprintingexams.PleasecontactyourlocalFlatWorldrepresentativeorFlatWorldsupport(support@flatworld.com) for more information or to request the program.FlatWorld HomeworkAccompanyingFlatWorldHomeworkforthistextisprovidedinaneasy-to-useinterface.Multiplechoice,fill-in-the-blank,matching,andotherquestiontypesareavailableforuseandareallauto-gradable.StudentswhoutilizethehomeworkquestionsshouldseetheirperformanceimproveonexaminationsthataregivenusingtheTestItemFilequestionsprovidedtoadoptersviaWorddoc-uments or LMS packages.Online QuizzesQuizquestionsforstudentself-evaluationareavailablebysectionandbychapterintheonlinever-sionofthistext.Studentscanusethequizzestotestthemselvesontheircomprehensionastheymove through the different sections of the text or once they have completed a chapter.Preface9© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
10A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Foreword: Entrepreneurs andthe New EntrepreneurialDynamic,by Randy KomisarAcenturyagoitwasbelievedthatgreatentrepreneurswereborn,thattheentrepreneurialprocessitselfwasintuitive,mysterious…unknowable.Therewassurelysomedeep,primevalforcelurkingdeepinsideThomasEdisonthatcompelledhimtoforgeGeneralElectric,aforceofnaturethatcouldnomorebecapturedorduplicatedthancouldthemysteriouselectricalfluidthatlitthenightsky on dark and stormy nights.Atthesametime,thelowlyshopkeeperwasborntohisjob,exactlyastheplowmanoraris-tocratwasborntohis.Economistssawthebourgeoisie(smallbusinessowners)asaclassoracondition,notasachoice.WhilethegreatentrepreneurslikeEdison,Carnegie,andFordwereawe-inspiringfiguressurroundedbycultsofpersonality,thestatusofasmallbusinesspersonwasseenasanunearnedinheritanceandperhapsasanunenviableburden.Theshopkeeperwastiedtohisshopandtheironsmithtohisforge.Hisemployeesweregenerallyhischildrenorindenturedser-vants.Whileself-employmentprovidedsustenance,itlackedsecurityandsocialstanding.Smallbusinessesofferedneithermobilitynortheopportunityforpersonalgrowth.Smallbusinessown-ership was a dead end.Inthemid-twentiethcentury,theadventofscientificmanagementradicallyshiftedthebusi-nesslandscape.Moderntechniquesandtoolsweredevelopedthatdroveefficienciesinthelarge,multinationalcorporationsthatdominatedthatperiod.SmartyoungcollegegraduateslineduptojoinconglomeratefirmslikeIBM,Honeywell,andITT,whichmadeeverythingfromtypewriterstomilitary weaponry.Itwasassumedthatthemodernmanagementprinciplesthatdrovethesebehemothscouldbeminiaturizedandappliedtoanynewfirmwithsimilarsuccess.ItwastheheydayofPeterDrucker,andtheprecisionengineeringofbusinesses,largeandsmall,wasalltherage.GrandoldbusinessesdeemedinefficientweresnappedupbycorporateraidersinleveragedbuyoutsandhackedintoshapebylegionsofpinstripedMBAsandCPAswithlittleregardtotheirnoncapitalstakeholders.Smallbusinesseswouldlaunchwithacarefullyorganizedfifteen-chapterbusinessplanthatcom-mencedwithanirresistiblycompellingexecutivesummaryandculminatedinasetoffive-yearcashflowprojections.Growthwasalwaystheobjective,andthenewbusinesswouldthenmoveforward with the stately conviction of the planets in their Newtonian orbits.EntrepreneursneedonlyapplyThePlantoagivenproductorserviceidea,andeagerinvestorswouldpavetheroadundertheirfeetwithdollarstodrivemarketingandscaletheenterprisequickly,seizingtheall-powerfulfirst-moveradvantage.Customers,unabletoresistthebrillianceofThePlan,wouldlineuptohandovertheirpaychecks,fulfillingthecertaintyofthosecashflowpro-jections.Thebusinessglobehadbeenmapped,reasonhadreplacedfaith,andalltheforcesinthemanagement universe were now encompassed within The Plan.Armedwiththisknowledge,would-beentrepreneursobtainedMBAs,abandonedtheirsafecorporateandgovernmentjobs,andracedtoapplyThePlantocountlessideas,bothnewandold.Bigboxstoresandstandardizedserviceorganizationsrolledacrossanationalandgloballandscapeformerlyoccupiedbythesmallshopkeepersandregionalchains.Hamburgerstands,coffeeshops,andpetstoresbecamestandardized,predictable,globalprofit-generatingmega-chains.Housekeep-ingservices,exterminators,andtaxpreparationfirmsweresimilarlycommoditizedandglobalized.Shopkeepersbecameshiftmanagers,andentrepreneurshipseemedlimitedtothegraduatesof© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
prestigiousbusinessschoolsbackedbyatightlyconnectedgroupofventurecapitalists.Smallbusi-ness was still a dead end.Asthelastcenturycametoaclose,theinternetpresentedtheperfectopportunitytodemon-stratethepowerofThePlantoconquernewterritory.Theverymodelofthemodernmajorentrepreneurblessedwithaprestigiousuniversitypedigreegeneratedhermagnificentbusinessplanforamassiveonlinedrugstore,grocerydeliveryservice,orinternetpetstore.Venturecapital-ists,captivatedbytheperfectelevatorpitch,fundedthesenewenterpriseswithtensofmillionsofdollars.Spiffycorporateheadquarterswerebuilt.Coffeebars,beanbagchairs,andping-pongtableswereinstalled,andhundredsofreallysmartyoungpeoplewerehired.EverythingintheinternetworldmovedforwardaccordingtoThePlan.Thewebsitewentup,thefirmcapturedthefirst-moveradvantage,anditsinitialpublicoffering(IPO)securedhundredsofmillionsofdollarsmore.Success was clearly inevitable. . . .Oddly,thecustomersfailedtofollowThePlan.Itturnedoutalotofcustomersweren’treallyreadyforaninternetpetstoreoratleastnottheonedescribedinThePlan.Lackinganyalternativeplanorevenamentalprocessfordevelopingorapprovinganalternateplan,thosegreatandwonderfulinternetgiantswentdowningloriousflames.ThetimehadcometofindaNewEntre-preneurial Dynamic.I’vebeenluckyenoughtoworkatalotofgreatplaces,learnfromalotofamazingpeople,andtakepartinsomeamazingthings.I’vebeenacorporatelawyer,anentrepreneur,aventurecapi-talist,andevenaconcertpromoter.IwasatAppleintheearlydays,launchedaspin-offandsolditback,workedforGeorgeLucas’gamecompany,andhavebeenthe“virtualCEO”ofseveralcoolstartupslikeTiVoandWebTV.IamnowproudtobeatoneofSiliconValley’smostsuccessfulandmostdiverseventurecapitalgroups,whereI’vefundedandmentoredincrediblefirmslikeRPXandNest.I’vealsotakenthetimetotravelbroadlyandtoseekoutpeoplewhoselivesandviewpointsare very different from my own.WhatI’vegainedfromallthoseexperiencesareafewverysimplebutveryimportantlessons.Amongtheseisthefactthatwegenerallydon’tcontrolourcircumstances;weonlycontrolour-selves.Alotofthingsinlifeandbusinessarelefttochance.Tomanagethatrisk,we’vegottomanageourselvesholisticallyandenjoytheprocess.Businessandlifeareinseparable,andwemustsurf the waves we catch and learn to enjoy them.Ifeelthetimeisrighttochallengeafundamentalassumptionofsmallbusinesses:thattheymustscaleintobigbusinessesordie.Theimperativetoscaleisnoteventaughtinbusinessschoolstoday;itisassumed.Butwhy?Ithinktheanswerissimple:Capitallikestoscale,andourcurrentmarketcultureisdrivenbytheneedsofcapital—notthedesiresofcustomers,workers,ortheircommunities.Therelentlessdriveofcapitaltoscalehashadnegativeimplicationsforthetypesofjobsthatsatisfyhumanbeings.Andweonlyhavetorevisittheleveragedbuyoutdaysofthego-go1980s to remember the devastating impact on communities of blindly maximizing returns.Smallbusinessesarenotalldestinedtobebigbusinesses.Butiftheysupporttheircon-stituents—theirworkers,theircustomers,andtheircommunities—thentheyhavethemeansofsuccessatwhatevertheirappropriatescaleis.Beingconsciousfromtheinceptionofwhyyouarestarting a business and what success means to you is core to being a great small business owner.Iassertthatbeinganentrepreneurisnotlimitedtostartingbusinesses;it’saphilosophyoflife.It’saboutfindingapurposethatmakesyoursuccessimportant.Teachingentrepreneurshipisnotonlyaboutcreatingbusinesses,it’sawayofseeingtheworld,aworldthatishalffullofwonderfulopportunitiesandexperiences.Thebiggestriskofallisnotfailing;itisnottryingand,therefore,not experiencing and learning.Thebookyouareabouttospendyoursemesterorquarterwithapproachessmallbusinesswiththatmindset.ANewEntrepreneurialDynamiccoversthemundanetechnicalskillseverybusi-nessownerneedstokeepthegearsofprofitturning,whilerecognizingthatthoseprofitsareaverynecessaryresourcebutnotthegoalofentrepreneuriallife.Inthepursuitofrealgoals,theauthorbringsyouinsightsfrominspiredentrepreneurs,bothgreatandsmall.GregAutryunder-standsthatallbusinessesarenotcreatedequal,andeachmustidentify,understand,andleverage12A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
itsuniqueadvantagesanddealwithitsparticularshortcomings.Hewillshowyouhowwell-runsmall businesses can act smarter and move faster than their bigger competitors.Understandingallthiscanmakeowningyourownsmallbusinessmorelucrativeandalotmorefunthanjoiningtheranksofabigcorporationorevenawell-fundedstartup.Importantly,yourauthoralsorecognizesthenoneconomiccontributionsthatsmallshopsandartisanalmanu-facturersbringtoourlives,communities,andculture.Inthiscentury,beingasmallbusinessownerof the right sort can be very cool. Enjoy the journey.—Randy KomisarRandy Komisar with Stacyann Walker and Carlie Carpio, two of the author’s former students from the University ofSouthern California.The trio are holding a carbon fiber skateboard from another student startup.Source: Randy KomisarRandyKomisarisapartneratKleinerPerkinsCaulfieldandByers.RandyholdsaBAineconomicsfromBrownUniversityandaJDfromHarvardLawSchool.SomeofhiscareerhighlightsincludeservingasseniorcounselatAppleComputer,CEOofLucasArts,andfoundingClarisCorporation.HeistheauthorofTheMonkandtheRiddleandGettingto Plan B(with John Mullins) and teaches entrepreneurship at Stanford University.Foreword: Entrepreneurs and the New Entrepreneurial Dynamic,by Randy Komisar13© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
14A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
CHAPTER 1The Entrepreneur in ContextTwo roads diverged in a wood, and I—I took the one less traveled by,And that has made all the difference.—Robert FrostAlmost every business starts small; a few will grow very large.Source: Shutterstock, Inc.Thisbookisaboutentrepreneurs,andbyextensionbusinessesthatareusuallysmall—thosethatwillremainsmall,thosethatwillgrow,andtherarefewthatwillscalerapidlyintohugecor-porations.Weallthinkweknowwhat“smallbusiness”means.Themediaisfullofstoriesaboutthegrowthofsmallbusiness,thejobcreationpowerofsmallbusiness,thesignificanceofsmallbusinessinoureconomy,thepoliticalinterestsofsmallbusinessowners,andmore.Still,“Whatisasmallbusiness?”turnsouttobeacuriouslydifficultquestiontoanswer.Totheaverageperson,thedefinitionofsmallbusinessremainslimitedto“IknowitwhenIseeit.”Whenyoupressfurther,things begin to break down.© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Each Starbucks location appears to be a smallbusiness. Is it?Source:Thinglass/Shutterstock.comHow does this business differ from a Starbuckslocation?Source:Gina Power/Shutterstock.comnonprofitAn organization, very like abusiness, that does notgenerate returns for itsinvestors. It may run ondonations as well asrevenue, but all profits arereturned to its mission.1.1LetÕs Start SmallLearning Objectives1.Understandthatstartupcompaniesnearlyalwaysstartassmallbusinessesbutdivergefromthat point based on the entrepreneur’s intent and opportunities.2.Recognize that it is not as easy to tell what a “small business” is as we may think.3.Learn the different types of startups and their characteristics.4.Understand that that many entrepreneurs have goals beyond just growth or profits.ItÕs Small, but Is It a Small Business?ConsiderthataStarbucksCoffeestoremaycontainonlyahandfulofemployeesandahandfulofcustomersandperhapsdoonlyafewthousanddollarsofbusi-nessperday.Thatsoundslikeasmallbusiness,buttheunseenweightofanother20,000ormorecorporatebrandedlocationstellsus,“Thisisnotasmallbusiness.”However,eventhoughthesimilarshopownedbytheniceladyacrossthestreetisverymuchasmallbusiness.Okay,thatissimpleenough,butlet’stryatrickierone:IsasingleMcDonald’sfranchiseownedbyalocalfamilyasmallbusiness,evenifitmustlookandoperateidenticallytothethousandsoflocationsownedby the McDonald’s corporation?Anewsoftwarefirmwithfiveteammembersandnoprofitsclearlyseemstobeasmallbusiness.ButwhatifthatsamestartupattractsmillionsofdollarsinventurefinancinginhopesitcanbesoldtoGoogleforsometensofmillions,anticipatingthatGooglewillshuttheoperationdownjusttogettheteamandtechnology?Anexclusive,privatelyownedjewelrystoreinTokyogrossesmorethan$30millionayearwithlessthanadozenfull-timestaff.Isitsmall?Whataboutafactorywith150employeesthatgrosses$5millionayear?ThinkaboutalittlenonprofitorganizationthatfundsitssocialadvocacybysellingT-shirts.It’ssmall,butisita“business”?Isa5,000-acrefamily-runCaliforniaalmondfarma“smallbusiness”?Wouldyouanswerdifferentlyifyouknewthatthelandwasvalued at $25,000 per acre?16A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Small BusinessAdministrationA U.S. government agencythat provides supportservices for smallbusinesses, including loanassistance andguarantees.business modelA description of how abusiness operates with anemphasis on how itengages customers,produces its product,makes a profit, andgenerates returns oninvestment.TheU.S.SmallBusinessAdministration(SBA)hastheunenviabletaskofofficiallydefiningasmallbusinessforqualificationinitsbusinessassistanceprograms.TheSBAhascreatedtheTableofSmallBusinessSizeStandards,whichallowsasmallbusinesstohaveasmanyas1,500employeesandrevenueupto$38millionperyear,dependingontheindustry.[1]Usingthesecriteria,theSBAtalliedthattheUnitedStateshadsome28millionsmallbusinessesasof2012.Themajorityoftheseare “nonemployer” firms, with only the entrepreneur at work.[2]TakingacloserlookatanSBAtableshowsthatacasketmanufacturerissmallifithasan“averageemployment”offewerthan500employees.Thatmaybesensible,butconsiderthatassoonastheverysamefirmhiresemployeenumber501,it’ssomehowanentirelydifferentbeastanddisqualifiedfromanumberofbeneficialgovernmentprogramsandopportunities.Similarly,aliquorstorecangrossupto$7.5millionandstillbesmall,butafteritsellsoneadditionalcaseofbeer, it is transformed in the eyes of the government into a large business.TheEuropeanCommission(EC)definesSmallandMedium-SizedEnterprises(SMEs)ashavingfewerthan250employeesand€50millioninrevenue($60million)andlessthan€43million($51million)innetassets.AccordingtotheEC’s2014report,Europehas21millionSSMEs,andtheycon-stituteafull99.8percentofEuropeanfirms.Thevastmajorityofthese(92.4percent)arewhattheEC terms “micro-enterprises,” with fewer than ten employees.WhiletheSBAorECdefinesthelegalcriteriaforsmallbusinessesintheireconomies,thesearearbitraryandinflexibledefinitions.Infact,theyareprettymuchuselessforourpurposes.Measure-mentsofemployeesandrevenuesdealonlywiththeoutwardmanifestationsofthebusinessandneglecttheessenceofasmallbusiness.Theyalsofailtounderstandthatthereareseveraldifferenttypes of small businesses.ConsidertheChinesegiantpanda.Atbirth,agiantpandaisabout3incheslongandweighsinat1/900themassofitsmother.Wouldbiologistscategorizethisbabyasaseparate“smallanimal”speciesuntilitgrowspastacertainpointandthenreclassifyitasa“largeanimal”?Ofcoursenot!Ababypandacannotsurviveonitsownwithouttheprotectionofitsmassiveparent.Itisaninfantlargeanimal,notasmallanimal.Similarly,anyusefulcategorizationofbusinessesmustbemorenuanced and contextually aware than “small” and “large” allow for.Intheend,theNewEntrepreneurialDynamicsuggeststhatasmallbusinessisbetterrecog-nizedbythenatureofitsbusinessmodelthanbyitssize.Thistextwilldiscussbusinessmodelinmoredetail,butfornowconsiderabusinessmodeltobethewayinwhichabusinessisrun,createsvalueforitscustomers,andcapturesprofitsfromthatactivity.Youwillfindthebusinessmodeldescribedinthisbookfitsfirmswhosenaturedoesnotrequirethemtoscalerapidly,whosetopmanagementknowsalltheemployees,andwhoseownersarelikelytobeinvolvedinbothstrategicdecision-makinganddailyoperations.AdoptingaCinderellaapproachtoourquestion,Idefine“small business” as an organization that fits the tools offered you in this book!Corporate IntrapreneurshipImaginethattheCoca-ColaCompanydecidestoenterthehotnewbeveragecategoryof“artichokewater”bylaunchingastartupcompany.Initsfirstquarter,thatnewventuremighthaveonlyfiftyemployeesandafewmilliondollarsinrevenue.Likeourbabypanda,suchanorganizationwouldbewellsupportedbyitsparentanddesignedfromtheoutsettobelarge-scale.Itsmandatewouldbetogrowverylargeinthefirstyearortwo.Failingtogrowlarge,itwouldbeshutdown.WhiletheSBAruleswouldcallthisfirm“small,”suchacorporatespin-offwouldnotbeasmallbusinessbyourdefinition.Sometoolsinthisbookthatareapplicabletosuchcorporateintrapreneurship,butthat will not be our focus.Chapter 1The Entrepreneur in Context17© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
angel investorAn investor or small groupthat funds early-phasestartup businesses withthe capital they need forearly growth, usually in therange of hundreds ofthousands of dollars. Mostlarge startups start withangel investment.venture capitalistA sophisticated investorwho makes largeinvestments in startupswith the hope ofoccasionally finding a bighit. Venture capitaliststypically look for firms withpotential marketsmeasured in billions ofdollars and makeinvestments of $5 millionand more.The Rapid Growth StartupSimilarly,manynewfirmsaretinyatbirthbutaredesignedtobecomeverylarge,veryquickly,andtheywillperishiftheyfailtogrow.Entrepreneur,educator,andauthorSteveBlankcallsthesebusi-nesses“ScalableStartups.”ThesefirmsoftenfollowtheSiliconValleystartupmodel,whichdependsonseveralroundsofangeland/orventurecapitalinvestmenttofundrapidgrowth.Oneoftheuniquethingsaboutthesefirmsisthattheystartoutwithan“exitstrategy,”aplanforinvestorstogettheirmoneyback.Typicalexitstrategiesincludeeithersellingthefirmtoalargercompetitororcollecting billions of dollars in a Wall Street initial public offering (IPO).Google (Alphabet) is the archetype for a rapid growth startup. It was not small for long.Source: Uladzik Kryhin/Shutterstock.comWhilethebest-knownrapid-growthfirmsarehigh-techcompanieslikeApple,Google,andFacebook,thecategoryalsoincludesthemoremundaneretailfield.So-called“bigbox”storessuchasBestBuyandHomeDepotandrestaurantssuchasStarbucksandOutbackhaveleveragedascalabledesignandventurefundingtoquicklyproliferateacrossthenationalandgloballandscape.Thearrivalofthesewell-craftedandwell-fundedventuresoftenresultsinthedemiseofthelocalmainstreetbusinesses.Thisprocessofdisplacementhasbeensosuccessfulthatduringthefirstdecadeofthiscentury,ithasrenderedtheshoppingdistrictsofmanycitiesaroundtheworldeerilyidentical.TheexcitementoftheRapidGrowthStartuphasallowedthemtodominatecoverageofentre-preneurshipinthefinancialpressandhasalsomadethemtheprimaryfocusofbusinessschoolcoursesandtextbooksonthetopic.SteveBlankremarked,“WhenIstartedteaching,IthoughtallentrepreneursandstartupsdidwhatIdidfortwenty-oneyears—aimforbillion-dollarmarketsandkeep at it until you achieved liquidity or ran out of money.”However,RapidGrowthStartupsrepresentaninfinitesimalpercentageofglobalstartups,andwhiletherocket-rideapproachtobusinessisexciting,thevastmajorityofthesefirmsfailveryquickly.Infact,venturecapitalistfundsgenerallyanticipateaboutaone-in-tenhitratefromthe18A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
organic growthGrowing a firm with moneyfrom its own profit stream.smallsubsetofcompaniestheyactuallyfund.TheRapidGrowthStartupisaveryuniqueanimaland requires a unique set of tools to mature.[3]The Main Street EntrepreneurThemainstreetfirmisthequintessentialsmallbusiness.Wefindthemainstreetfirmineverycity,ineverycountry.It’syourneighborhooddonutstore,malasadastand,ordimsumjoint.It’sthelandscapingcompanywithonetruckortheAmishfurnituremanufacturer.Anindividual,afamily,oracoupleofpartnerstypicallyownsthemainstreetfirm.Althoughitmayhavebankloansandcreditcards,aswellasrealestate,equipment,andinventoryfinancing,themainstreetfirmrarelyhas outside investors.A classic American “Main Street” lined with small businesses.Source: © Shutterstock, Inc.Thegoalsofthemainstreetfirmareusuallytomaximizereturnstotheoperatorsratherthanfundgrowth.Theyaretypicallyone-locationfirmsthathavebecomefixturesintheircommunities.Themainstreetbusinessisoftengivenshortshriftintextbooksofentrepreneurshipbutwillbeamajor focus of this text.The Organic-Growth Small BusinessesThisdoesnotmeanasmallbusinessmustfollowtheBuyableStartuportheSiliconValleymodelinordertogrow.Anorganicgrowthbusinessisasmallbusinessthatcanoperatesuccessfullywhilebeingsmallandreinvestitsprofitstofundgrowth.Thesebusinessesmayseekexpansionfundedprimarilybytheirownprofits.Smallfactoriesmayaddcapacity;retailstoresmaygrowtoincludeahandfuloflocations,usuallyinaparticularregion.Avoidingoutsideinvestors,theorganicgrowthmodelallowsthefoundingentrepreneurtomaintainfullcontrolofhisoperationaswellasretainChapter 1The Entrepreneur in Context19© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
A resort business can support a personallyrewarding lifestyle for an entrepreneur.Source: Greg Autrylifestyle businessA business designed tosupport the lifestyle of theentrepreneur.alltheprofitsfromhisendeavor.Ibelievethisisapreferablestrategyformostentrepreneurs,andI will be focusing on it throughout the book.The Buyable StartupWhatSteveBlankhascalledthe“BuyableStartup”isasmallerscalevariantoftheRapidGrowthStartup.It’sabusinessthatputsoutthe“ForSale”signevenbeforethe“OpenforBusiness”one.Thepurposeofabuyablebusinessistodevelopordemonstrateaparticulartechnology,product,orserviceandsellthefirmtoalargercompanyformillions(ratherthanbillions)ofdollarsasquicklyaspossible.Thislessambitiousmodelismuchmorelikelytosucceed.TheBuyableStartupoffersentrepreneurswholovethelaunchingprocessagreatwaytorelivethatandtocashoutagainandagain.Whileapplicabletonearlyanyindustry,thebuyablestartuphasrecentlybecomeaverypop-ularmodelforsoftwareserviceandmobileappfirms.Thesefirmstypicallybegintogeneraterevenuesextremelyquicklyandmayevenbeprofitable.Thebestofthemarecapableofbeingself-sustaining,removinganyobviouspressureforthefounderstoreachadealthatwouldbeexploitedby potential buyers.The Lifestyle BusinessAtthefarendofthebusinessspectrumfromthecorporatespin-offandtheSili-conValleymodelstartup,weencounterthelifestylebusiness.Alifestylebusinessisafirmwhoseprimarymissionisnottoachievegrowth,butrathertoenablethedesiredlifestyleofthefounder/owner.Whilethismustincludesomereasonableamountofincome,otherconsiderationsoverridethepursuitofprof-itsandscaling.Theseconsiderationsincludeallowingtheentrepreneurtoworkinthegeographyofherchoice(perhapsbybeingentirelymobile),providingschedulingflexibilitythatenableshertoattendtootherinterests,orevensimplybeing in an industry she finds attractive. Examples of lifestyle businesses include the following:•AscubashopinHawaiiallowsanamateurmarinenaturalisttocombineherworkwithherloveforthesea.Whilenotgeneratingagreatdealofprofitandhavinglittlegrowthpotential,thisentrepreneurhassecuredheropportunityto“getwet”everydayandspendtimewithpeo-ple who share her passion for diving.•AsmallresortcomposedofadozenrentalcabinsnearAspen,Colorado,permitsamountainenthusiasttohittheslopesonhissnowboardseveraldaysaweekduringthewinterandfly-fish for trout in the summer.•Acollegestudentrunsanonlinespecialtystorethatprocessestransactionswhileconnectinghiscustomerstofulfillmentcentersrunbyotherfirms.Theentrepreneurcarefullyselectsproductsandorganizesthesalessite,butpartnerfirmshandlethefulfillment,shipping,andreturns.Henevertouchestheproducts.Thearrangementallowshimtostudyinthewinterand backpack around the world while working from his laptop and mobile devices.Inthemid-1990s,theauthorofthisbookestablisheda“virtualized”softwaredevelopmentfirmthathadnophysicalofficesorfull-timeemployees.Thefirmprovidedmewithreliableincomeandenabledmypursuitofotherpersonalinterests,includingtraveling,completingmyPhD,conduct-ing academic research, writing, and advocacy.20A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Actor Paul Newman and his neighbor founded abusiness that would leverage Newman’s fameto support charities.Source: ZikG/Shutterstock.comThe Social Entrepreneur and NonprofitsSocialentrepreneurshipisagrowingfieldofbusinessesthatpursuegrowthandprofitsinsupportofabroadersocialmission,usuallyinanareaofspecificinter-esttothefirm’sfounder.Afamiliarexampleofsocialentrepreneurship,foundontheshelvesinanyAmericangrocerystore,istheNewman’sOwnbrandofpack-agedfoodproducts.ActorPaulNewmanandhisneighbor,A.E.Hotchner,foundedthefirmin1982withtheirnow-classicsaladdressingrecipe.Overthecourseofthreedecades,thefirm’sprofitshavefueledanexpansionintomorethan100products,includingpastasauce,lemonade,frozenfoods,andevenpetfood.Atthesametime,thefirmhasbeenabletodivertinexcessof$400milliontocharities,includingtheSeriousFunChildren’sNetwork,asummercamppro-gram for children with serious illnesses.LikePaulNewman,manysocialentrepreneurslaunchbusinessesthatcom-petedirectlyintraditionalmarketsandsimplyredistributeaportionoftheirprofitstocharity.Suchfirmsmaygainfreemediaexposureorbeabletochargepremium pricingby appealing to the public’s sense of charity.Otherfirmsactuallyfulfilltheirsocialmissionthroughthenatureoftheiroperationsbyworkinginamoreenvironmentallysustainablefashionoreducat-ingthepublic.GoodwillIndustriesfulfillsitsmissionbyhiringdisadvantagedanddisabledemployees.ElonMuskfoundedhisfirm,SpaceX,arapidlygrowingcommercialspacelaunchcompany,toperformasocialgoodofepicpropor-tions—movinghumanbeingstoMars.Thisisafeatheconsidersessentialtoprotectinghumanityfromaninevitableextinctioneventsuchastheimpactofanasteroidornuclearwar.Anonprofit,likeGoodwill,doesnotreturnfundstoshareholders.Otherformsofsocialentrepreneurship,likeSpaceX,maybeveryprofitablefortheirinvestorswhileful-filling their social mission.Aswehaveseen,thewidevarietyofsmallbusinessestakeverydifferentformsandhavedif-ferentobjectives.Thismeansthatnoteverypieceofadvice,everytextbooklesson,oreverygreatrecommendationfromthepagesofInc.magazinewillapplytoeverystartup.Understandwhichpathyouhavechosen,andasyoureadthisbook(andothers)chosewhatappliesbesttoyourownentrepreneurial journey. That is the New Entrepreneurial Dynamic.Key Takeaways•A potential entrepreneur has many different choices when launching a new business.•There are many types of startups and small businesses.•A startup can be a tool for achieving objectives beyond making money.•A business could be the best way to enable your lifestyle choice.•A business could be the best way for you to make a difference in the world.•Since not all startups are the same, not all lessons will apply to every startup.Chapter 1The Entrepreneur in Context21© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
fusion firmsA firm that combines morethan one basic type of firminto its model.shiftersA firm that moves fromone type of firm toanother. For instance, afirm started as a lifestyleproject could find aproduct with hugepotential and shift into ascalable startup mode.1.2The New EntrepreneurialDynamicÑFusion Firms, Shifters, andMoreLearning Objectives1.Understandthatsomebusinessesdon’tfitintoonecategory.Theymaycombinemodelsorchange models.2.Recognize the opportunities and risks that franchising and multi-level marketing may offer.3.Understandwhyonlineandvirtualbusinessesareincreasinglyattractivefornewentrepre-neurs.Whilethesecategoriesofsmallbusinessdoseemniceandtidy,theyarestillsomewhatarbitraryconstructs,anditmaybedifficulttoforcemanyreal-worldbusinessesintothem.ANewEntrepre-neurialDynamicacknowledgesthatthebarriersbetweencategoriesarereallyquitepermeable.Assoonasyoudrawlinesbetweentwoitems,asinestablishingthedifferencebetweenhorsesanddonkeys,somebodywillcertainlypresentyouwithamule—amatingbetweenthetwothatpro-duces a pack animal celebrated for its strength and versatility.Fusion Firms and ShiftersAnumberofsmallbusinessesmaybealotlikethatmule:workingintwoormorecategoriessimul-taneouslyandstrongerforit.There’snoreasonthesocialentrepreneurmightnotchooseabusinessthatalsoenableshisorherlifestylechoice.ImagineanenvironmentalistworkingtosavetheorangutansofSumatraestablishingabusinessthatallowshertoliveclosetothehairypri-matessheadores.Anentrepreneurialcouplelivingabovetheirmainstreetcornershopmayfeelgreetingfamiliarcustomerseachmorningistheoptimallifestyle.Asocialentrepreneurcouldevenplantorapidlygrowhisbusinesswithaninvestmentfromasociallyconsciousventurefund.Ilabelsuch hybrid companiesfusion firms.Similarly,abusinesscancertainlyshiftfromonecategorytoanother.Atonetime,McDonald’swastrulyasmallbusinessofhamburgerstandsownedbyRichardandMauriceMcDonaldofSanBernardino,California.Thetwobrothersdevelopedstandardizedproductionandserviceprocessesthatrevolutionizedthefast-foodindustry.Itwasagreatlittleorganicgrowthbusinessthateven-tuallyreachedeightrestaurantsalongwithascatteringoffranchisesthebrothershadsoldtolocalentrepreneurs.Ittookanexceptionallyambitiousoutsider,RayKroc,toseethemassivescalabilityintheMcDonald’smodel.Krocboughtoutthebrothersandtooktheirlittlehamburgerchaintothenextlevel,creatingthepubliclytradedglobaliconweknowtoday.Firmsthatchangetheirplansso radically as to shift entirely into another category, I labelshifters.FranchisesSpeakingoffranchising,itcanbeafantasticwayforsomeonewiththeentrepreneurialspirittogetstartedwithouthavingtoinventandcommercializeanewproduct,service,orbuildabusiness22A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
loan defaultsThe failure of a firm tomeet its paymentobligations on a loan.charged offA loan that a lender hasgiven up on collecting.due diligenceThe research work thatinvestors do about a firmand its potential in order toensure they are making awise investment.model.Afranchisorsuppliesprovenproducts,professionalmarketingmaterials,andacompleteoperationalsystem.Therighttousetheseitems,alongwithassistance,training,anddocumenta-tion, are offered in exchange for upfront fees and recurring royalties on the business.Intheverybestoffranchises,theproductsaresolid,thebusinessmodeliswell-designedandtested,andthefranchisingcompanyisdedicatedtoensuringonlysuccessfulcandidatestakeontheirbrand.Withsuchfirms,thelikelihoodofsuccessisveryhighwhentheentrepreneursdotheirpart.A2012SBAreportshowedthatanumberofmajorfranchiseshadnoloandefaultsforthepreviousdecade!Notoneoftheforty-fourSBA-backedWendy’sfranchisorsfailedtorepaytheirSBAloansinthatyear.TimHorton’sDonuts,PlanetFitness,HarleyDavidsondealers,andanotherforty-seven different franchise opportunities also had perfect SBA records.A franchise can be an attractive option for entrepreneurs without specific inspiration.Source: QualityHD/Shutterstock.comHowever,thingsarenotalwayssopretty,andmanyentrepreneurswhopursuefranchisesdofail.TheSBAreportedthat94percent(16/17)oftheWings-N-Thingslocationsthegovernmentagencyhadbackedhadfailed,andthatmorethan$2millionintaxpayer-backedloanswerechargedoff.Otherfirmswithhigherthan75percentfailureratesincludedAthlete’sFootshoestores,ExecutiveTanssalons,andBlockbusterVideooutlets.Whydoyouthinkthefailurerateforthe giant video rental chain was so high?BeingpreparedforchangeisakeyelementoftheNewEntrepreneurialDynamic.Inthefran-chisemodel,thefranchisordesignsyourproductandyourbusinessmodel.Theentrepreneurbuyingafranchiseisentirelydependentonthismothercorporationtofitthemarket.Beingverylargeandgeographicallydiversified,franchisebusinessesdon’tchangerapidly.Partoftheirattrac-tiontotheconsumerisaprovenmodelwiththepromiseofstability,andtheyarelesslikelytoexperimentortopivotwhentheirenvironmentchanges.Therefore,franchiseesmustresearchthemarkettheyaregettingintoandperformtheirownduediligenceonthebusinessmodeltheyarebuying into.Thisstartupperiodalsoprovidesanopportunitytorealizethatwhilegettingintothe“nextbigthing”mightseemmostattractive,timelessproductsaremuchlessrisky.Astechnologyandconsumertastesevolve,thedemandforproductsandservicescanshift,sometimesverysuddenly.ThemovierentalbusinessthatdroveBlockbuster’spopularityearlyonrapidlycollapsedinthefaceofcompetitorslikeNetflixandApple’siTunes,whichcouldprovidein-homedownloadsandliveChapter 1The Entrepreneur in Context23© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
logisticsThe actual work involved inmanaging the resources(usually physical) in yourbusiness operations.Shipping, storing,processing, and delivering.startup costsThe money needed to getthe business off theground and usuallydesigned to help it reachthe point where it is stable.barriers to entryThe obstacles that preventnew businesses fromentering a market. Highcapitalization, specializedequipment, certifications,or licensing are examples.Millions of apps can be found on the GooglePlay and Apple iOS App Stores.Source: Creative Caliph/Shutterstock.comstreamingofmoviesondemand.Thisshiftwasentirelypredictableandhadalreadyplayedoutinthemusicbusiness,wipingoutchainslikeTheWarehouseandTowerRecords.Whilefashionabletrendstowardhealthiereatingmayimpacttheirrelativepopularity,hamburgersanddonutsareunlikely to disappear from the market in our lifetimes.Online Stores, Apps, and the VirtualBusinessesTherewasatimewhenanentrepreneurplanningtosellgoodstothepublichadtospendagreatdealofmoneytosecureandimproveanattractiveretaillocationandevenmoretostockitwithgoods.Theshopowneralsohadtohireemployeestohandlecustomerinteractionsandthelogisticsofreceivinganddeliveringtheproduct.Thoselocationsandemployeeshadtobepaidforregardlessofthesalesvolumethestoreexperienced,creatingsignificantfinancialrisk.Thesestartup costsestablished seriousbarriers to entryfor entrepreneurs in the retail world.Thearrivaloftheinternetandtheglobalizationofbusinessoverthelastdecadehaschangedallthat.Thecoronaviruspandemicof2020acceleratedthistrend.Evenbigfirmsarevirtualizing.ApplecansellyouaniPhonefromitswebsiteandwillshipthephonedirectlytoyoufromitsman-ufacturer,HonHaiPrecisionIndustryCo.(Foxconn)inShenzhen,China.Appledoesn’tevertouchitsproductbutcollectsthesignificantportionoftheprofits!ThismodelissosuccessfulthatdespitetrailingAndroidphonesinsales,theiconicCupertino,California,companyhasbeenabletograbthevastmajorityofprofitsinthesmartphoneindustry.(Appletook20percentofsalesbut93percent of profits according to a 2015 report.)[4]Anysmallbusinesspersoncanenjoyasimilarlyleansalesanddistributionmodelsellingproductsontheinternet.Amazon,eBay,andaplethoraofsmallerfirmswillhostyouronlinestore,andmanyvendorswilldrop-shiptheproductstoyourcustomer.Infact,withAmazon’sAssociatesProgram,youcanevencreateaspecialinterestsitethatdirectspeopletoAmazon’sownstoreandcollectaroy-altycheckfromAmazon.OntheAppleAppStoreorGooglePlay,homesoftwaredeveloperscanuploadtheirgames,utilities,andotherappsandjustsitbackwaitingfortheirpaymentstorollin—minusaroyaltytoAppleorGoogle,thatis.Thebarrierstoentryarenearlynonexistent,whichseemsreallyattractive.Doyou think there might be a problem with that?Itturnsoutthatnearlyeveryoneandtheirbrotherwantstoplayinthevir-tualonlinebusinessworld,andthatcreatesalotofcompetitionforthewould-beentrepreneur.Withliterallymillionsofonlinestoresandappsoutthere,gettinginfrontofyourcustomerintheonlineworldishard.Itusuallytakesalotofmoney,justlikeleasingthebestcornerintownoraspotintheshoppingmalldidfortheold-styleretailers.Asmallbusinesspersonworkinginthisfieldhastobeclever and nimble to compete with better-funded entrants.Key Takeaways•Don’t limit your entrepreneurial opportunities to any one business model.•Consider taking advantages of other firms’ business models via franchising.•Ifyoudoconsiderpayingforabusinessmodel,youmustperformyourduediligencetounderstand what you are paying for and what you will really get.•Neverunderestimatetheopportunitiestechnologyoffersvirtualizedbusinesses,butrealizethat nearly everyone else is thinking the same way.24A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
1.3Who Are the Entrepreneurs? AreYou One?Learning Objectives1.Understandthatmanyfactorscontributetoentrepreneurialsuccess,includingtalent,predis-position, and education.2.Recognizethattheentrepreneurassumestheriskofthebusinessoperationandthatman-aging risk is fundamental to entrepreneurship.3.Differentiate between perceived risk and actual risk.4.Understand the difference between serial and parallel entrepreneurs.5.Understand how necessity creates entrepreneurs.6.Recognize that entrepreneurship can be a path to comfortable wealth.Thereareknownknowns.Thesearethingsweknowthatweknow.Thereareknownunknowns.Thatistosay,therearethingsthatweknowwedon’tknow.Buttherearealso unknown unknowns. There are things we don’t know we don’t know.—Donald RumsfeldChapter 1The Entrepreneur in Context25© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Photo from the Homestead High YearbookofSteve Jobs at age 14 in 1969.Source: https://commons.wikimedia.org/wiki/File:Steve_Jobs_in_1969_Pegasus.jpgEntrepreneurial TalentÑBorn or Learned?SteveJobsisprobablytheverymodeloftheNewEntrepreneurialDynamic.JobsfoundedAppleComputerwithengineerSteve“Woz”Wozniakin1976.AlthoughWozdidthedesignwork,itwasJobs’visionthatdefinedthepersonalcomputerasaproductandshapedthepersonalcomputerindustry.WhenAppleranintotroubleinthelate90s,Jobsreturnedtorescuethecompanybyentirelyreinvent-ingit.Inhissecondtermatthehelm,hechangedtheworldagainwithamazingproductsliketheiPhoneandiPad.Indoingso,hebuiltAppleintotheworld’smostvaluablecompanyandbrand.Inhissparetime,JobshadpurchasedPixar,anobscurecomputeranimationfirm,fromStarWarsdirectorGeorgeLucas.Jobsnurturedthatseedasitgrewintoabelovedglobalphenomenon,producingmegahitfamilyfilmslikeToyStoryandFindingNemo.In2006,hebecamethefirstmodernentrepreneurtoearnoverabilliondollarsintwodistinctindustrieswhen he sold his film company to Disney.SteveJobswasborntoJoanneSchieble,anunwedstudentattheUniversityofWisconsinandwasraisedbyhisadoptedparents,PaulandClaraJobs.Byallaccounts,hisbirthparentswerebothverybright,andhisbiologicalfather,AbdulfattahJandali,evenearnedaPhD.Jobs,however,gavethecreditforhissuc-cesstohisworking-classadoptivefamily,stating,“PaulandClaraare100percentmy parents.”Therehasbeenalong-runningdebateaboutwhethersomepeoplearesim-plyborntobeentrepreneurs.Twofactorsshouldbeconsidered.Onefactorisentrepreneurialtalent—aresomepeoplenaturallymoreadeptatrunningastartupjustascertainchildrenareclearlymoretalentedatmusicorsports?Theotherfactorisentrepreneurialpredisposition—aresomepeoplemoredeterminedthanotherstolaunch new ventures?Thistwo-dimensionalviewofentrepreneurshipisveryimportantbecausebothaptitudeanddeterminationarerequiredelementsofsuccessinanyendeavor.Entrepreneurshipthenmightbesimilartotheworldofprofessionalbaseballwheretherewillalwaysbeasmallnumberofhighlysuccessfulindividualspossessingboththetalentanddeterminationtowininthemajorleaguesaswellasalargegroupoffrustratedminorleaguerswhoseloveofthegameexceedstheirabilitiesonthe field.Theflipsideofthisquestionis,“Canpeoplelearntobeentrepreneurs?”Ibelievetheycan!Jobscreditedhisdedicationtoqualityworktolessonslearnedfromhisadoptedfather.Ibelievethatmostpeoplewithadesiretopursuetheirownbusinesswillfindsuccessandjoy.Youwon’tallbethenextSteveJobs,butyoushouldbeabletomakeagoodlivinginsmallbusinessandenjoyyourworkaswell.Withalittleluck,youmightevenbecomemoderatelywealthy.Thepurposeofthisbook is to help you find your entrepreneurial happy place.Risk and Coping with the UnknownOneparticulartraitthatacademicscholarshavespentalotoftimelookingatistheentrepreneur’sabilitytodealwithrisksandcopewiththingsunknown.Somepeoplemaynothavethetoleranceforperceivedriskorperceivedambiguitynecessarytoenjoytheentrepreneurialexperience.Beingin business for themselves gives them ulcers and migraines!NotethatIusethephrasesperceivedriskandperceivedambiguity—that’simportant.Itisn’tclearwhetheritisriskiertobeasmallbusinessownerorpartofalargeandseeminglystableinsti-26A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
agencyThe capacity forself-directed action thatoften results in a conflict ofinterests between thepersonal motivations of anindividual and those of hisemployer.serial entrepreneurAn individual who launchesmany businesses, oneafter another.parallel entrepreneurAn individual who launchesmany businesses at thesame time.tution.Whileentrepreneursareoftenseenasgamblers,throwingcautiontothewindanddivingheadfirst into waters of unknown depth, in reality, nothing could be further from the truth.Themanagerinalargecorporation,usingotherpeople’smoney,ismuchmorelikelytomakeaquickandill-informeddecisionbecausethefinancialconsequencedoesnotdirectlyimpacther.Lossesaccruetotheownersofthefirm,nottheemployees.Corporationsmust,therefore,employcomplexprocesses(projectapprovalandreviewprocedures)andmotivationaltools(bonusesandperformanceevaluations)toaligntheinterestsofthemanagerswhorunthebusinesswiththoseofthestockholderswhoownit.Entrepreneursfacenosuchproblemofagency.Withtheirveryownlivelihoodsintheirhands,businessownersareamongtheworld’smostpracticalandcautiousdecision-makers. They may take risks, but they tend to be well-chosen risks.However,businessrisksarefrighteninglyvisibletotheentrepreneur.Theentrepreneurcanviewthescopeofherentirebusiness.Seeingthedecliningsalesinherstoresortheslowpaymentsfrommajorclients,shecannothelpbutanticipatetheconsequencestoherincome.Thesuperiorinformationthattheentrepreneurhasaboutthestateofherownbusinessactuallyaddstothesenseofuncertaintysheexperiences.Lackingthefalsesenseofsecuritycreatedbytheprocessesofalargefirm,theentrepreneurismoreawarethatthereare“unknownunknowns”lurkingoutthere.Thebigcompanymanagerwhosecheckhasalwaysarrivedautomaticallyanddependablymayneversuspectthatheisabouttolosehishealthbenefits,belaidoff,orthatthecorporatepensionfundhehasbeenpayingintohasbeenraidedtocoveradepartingCEO’senormousbonus.Uppermanagementdoesn’tlikebadnewsgettingouttoinvestorsorunderminingemployeemoraleandwillhideitaslongaspossible.Acorporatemanagermaybeunabletoseeclearlybeyondthehori-zonofhisownunitorstore.Ifthatisdoingwell,hecouldbeentirelycluelessaboutamuchlargerdisasterbrewingatheadquartersuntilhereadsastoryabouthiscompany’smountingwoesonsome investment blog or in a news story.Ihavefoundthataquietself-confidencemarksmanysuccessfulentrepreneurs.TheNewEntrepreneurialDynamicsuggeststhatentrepreneurswhohonestlymatchtheiraspirationstotheirabilitiesandacceptthattherearethingsbeyondtheircontrolwillbesuccessfulandatpeacewith themselves.The Serial EntrepreneurManyentrepreneursfindtheyareparticularlyadeptatlaunchingabusinessorperhapsenjoythestartupprocessmorethantheyenjoydailymanagement.Theserialentrepreneurfoundsonenewfirmafteranother,typicallysellingtheirpreviousfirmfirst.Serialentrepreneursaremostoftenfoundintherapid-growthstartuporbuyablestartup.Still,manymainstreetbusinessownershavehadoneortwoventuresbeforesettlingintotheircurrentbusiness.SteveJobswasaserialentre-preneur.Ararebreedofentrepreneur,theparallelentrepreneurmanagestorunmorethanonesuc-cessfulbusinessatatime.SteveJobswasalsoaparallelentrepreneur,runningbothPixarandApple.ElonMuskistoday’squintessentialserialplusparallelentrepreneur(see”InterviewwithElonMusk—TheQuintessentialSerialandParallelEntrepreneur”).In1995hefoundedZip2,aweb-basedcityguidefornewspapers,andsolditfor$307milliontoCompaqComputer.Afterthat,hefoundedX.com,anelectronicpaymentservicethat,throughmergers,eventuallybecamePayPalandwassoldtoeBayin2002for$1.5billion.MuskisnowCEOofTeslaMotors,thefirstsuccessfulnewAmericanautocompanyinthelastninetyyears,aswellSpaceX,theworld’sleadingprivatecommercialspacelaunchprovider.Inhissparetime,healsoservesaschairmanofSolarCity,thesecond-largest solar installer in the United States.Onamoretypicalscale,aretailshopownermayfindthathealsohasthetimetorunanonlinestoreorperhapsgetinvolvedinhelpinghischildrenlaunchastartup.JustassomeworkersmayChapter 1The Entrepreneur in Context27© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
needmorethanonejobtopaythebills,somemicro-entrepreneursmayneedmorethanonebusi-nesstokeepaheadduringdifficulteconomictimes.Adonutshopownermaybesellingrealestatein the afternoon.Interview with Elon MuskÑThe Quintessential Serial and ParallelEntrepreneurElon MuskSource: Courtesy Elon MuskElonMuskandhisbrotherKimballaunchedZip2,awebsoftwarecompany,in1995.Thiswasasmallbusinessdevelopinganinternet“cityguide”forthenewspaperpublishingindustry.Muskhadmuchgranderaspirationsinmind.HeobtainedcontractswiththeNewYorkTimesandtheChicagoTribune.Compaqlateracquiredhiscompanyfor$307millionincashand$34millioninstockoptions.Muskreceived7percentor$22millionfromthesale.MuskthenwentontofoundX.com,whichwasrolledintothehugelysuccessfulinternetpaymentservice,PayPal.HewasthelargestPayPalshareholderwhenthatfirmwassoldtoeBayfor$1.5billion.In2002,hefoundedSpaceExplorationTechnologies(SpaceX),theleadingcommercialspacelaunchservicescompany.MuskalsoservesastheCEOandchiefproductarchitectoftheinnovativeelectriccarmaker,TeslaMotors.Inhis“sparetime,”heisthechairmanofSolarCity,America’ssecond-largestinstallerofsolarpanelpowersystems.IhadaconversationwithElonMuskinhiscubicle at the Hawthorne, California headquarters of SpaceX.Prof.Prof.Autry:Autry:Entrepreneurshipisthoughttobeladenwithfailure.Whydoyouthinksomanyhavefailed where you have succeeded?Elon:Elon:Well,Ibelievethosewhodonotsucceedhaveperhapsfaced,perhaps,asituationwheretheyweren’tabletogatherasufficientcriticalmassoftalentortheyranoutofmoneyortheyhadan approach where success was not one of the possible outcomes—or all three.Prof.Prof.Autry:Autry:Whatabouttheroleofperseverance?Youhaveareputationforperseverance—doyou feel that that is a big factor?Elon:Elon:Yes.Sure,partofperseveranceischangingstrategy,knowingtochangestrategywhenyou need to.Prof.Prof.Autry:Autry:Alongthoselines,you’reoftenseenasthisidea-driveninventor,butlookingatTeslaandSpaceX,it’salsoclearthatyou’retenaciousandbrilliantatexecution.Whichdoyouthinkismore important?Elon:Elon:IhavefarmoreideasthanIcanexecuteon.Idothinkideasaremucheasierthanexe-cution.Ifyouwanttotryandbringsomethingusefultoabroadaudience,it’saverydifficultexecution.It’sonethingtomakeaprototypethatisextremelyexpensiveandunreliableandhandmadebyagroupofengineers—thatiseasy.Totrytomakethatwholethingsothataveragepeoplecanafforditinhighvolume,andit’sreliableandpassesalltheregulatoryrequirements,issuper hard.Prof. Autry:Prof. Autry:So how do you know if you have an idea worth pursuing?Elon:Elon:I’mjusttryingtosolveproblemsthatIthinkareimportantforthefuture.That’sreallyall.Imean,IlikeworkingonthingsthatareontheedgeoftechnologybecauseIfindthatintrinsicallyfulfilling.It’sexciting;it’snew.Ilikethecreativeprocessofcomingupwithnewproductsandtechnology.28A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
developed worldCountries withsophisticated economiesand high standards ofliving such as the UnitedStates, Japan, andGermany.offshoringThe practice of movingproduction, usuallymanufacturing or softwaredevelopment, to anothercountry with a cheaperlabor rate.automatedA process done bytechnology such asrobots.Prof.Prof.Autry:Autry:Isthissomethingthatyouhavealwaysknownaboutyourself,orsomethingthatyourealized over time?Elon:Elon:Itwaspartlyincollege.MostlyIdidn’tgotoclass.Ifoundthedatarateofalecturewastooslow.Itwasmuchfastertoreadthebook.AndI’dalsohangoutwithstudentsandsortofexchange information without realizing that I was learning.Prof.Prof.Autry:Autry:Andsowhatdoesthatmeanforprospectiveentrepreneursandtheabilityto“learn”entrepreneurship through examples?Elon:Elon:Thereisalotofreasoningbyanalogy,orgeneralsortofcopyingwhatothersdo,thatoccurs.Itisafareasierthingtodothantocomeupwithsomethingbyfirst-principlereason-ing—whichistremendouslyarduous,andyoubasicallywouldnotbeabletogetthroughyourday.Youshoulduseheuristicsandanalogiesandcopying,ingeneral,togetthroughyourday.Youdon’tneedtoreinventhowtouseaknifeandforkordriveacar.There’slikenopointindoingthat.Butifyouaretryingtocomeupwithsomethingnewwheretheresultcouldbecounter-intu-itive, that doesn’t work . . . you can’t copy if you’re trying to design something new.An Ever-Changing Economy and TodayÕsNontraditional EntrepreneursAstheglobaleconomyhasevolvedoverthelasttwodecades,multinationalcorporationshavesig-nificantlyredistributedtheirproductionandservicestotakeadvantageofcheaperlabor,moreattractiveregulatoryenvironments,andlowertaxrates.Theyhavealsoinvestedsignificantlyinautomationandinformationsystemsthatincreaseefficienciesandreduceemployeeheadcount.Millionsofworkingpeopleinthedevelopedworldhavefoundtheirjoboffshoredorautomatedoutofexistenceinrecentyears.Worsethansimplylosingaparticularjob,theyhavefoundthatthistectonicshiftinthebusinessworldhascompletelyderailedtheircareer.Thereisnodomesticdemandfortheirskills,andtheyhavefewchoicesbeyondworkingoneormorelow-payingretailjobs.Thesituationisnobetterformanyyoungpeopleenteringtheworkforce,amatterthatshouldconcernourreaders.Whilemorehighschoolgraduatesarepursuingcollegedegreesthaneverbefore,thevalueofthatdegreeisinquestion.A2014studybytheFederalReserveBankofNewYorkreportsthathalfofrecentU.S.collegegraduatesareeitherunemployed(6percent)orworkinginjobsthatdonotrequiretheircollegedegree(44percent)—oftenafinancialburdentheyarestillcarrying.Moreimportantly,aboutafifthofrecentgraduatesareworkingin“lowwagejobs”(under25,000peryearwithfewbenefits),andanotherfifthareworkingparttime.[5]AreportinthesameyearfromtheEconomicPolicyInstitutenotesthatnearly70percentofrecentgraduatesdonothaveemployer-coveredhealthinsurance.Finally,itappearsthatdespitesomeimprovementintheoverall state of the economy, most of these negative trends are continuing.Necessitybeingthemotherofinvention,manypeopleinbothofthesegroupshaveturnedtoentrepreneurship,perhapsmoreoutofasenseofdesperationthanofinclination.Unabletofindsuitableemploymentinthecorporatemarket,theyarecreatingjobsforthemselvesbyestablishingbusinesses.Thischart(Figure1.1)fromtheU.S.SBAhighlightsthattrendbyshowingtherelativegrowthofnon-employer(singleperson)enterprisesoverthepreviousdecade.Fewerandfewerpeo-pleareestablishingsmallbusinessesthatcreatejobsforothers,whilemoreandmoreareworkingfor themselves.Chapter 1The Entrepreneur in Context29© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
part-timeentrepreneurshipRunning a business as asideline while working afull-time job.direct salesWhen a business sells itsproducts directly to theconsumer rather thanthrough intermediariessuch as distributors orretailers, often through theinternet.Someemployedpeoplearefindingtheirtraditionaljobsofferlittlegrowthorinadequatesalariesandtakeonpart-timeentrepreneurship.AnofficeworkermighthaveasmallbusinessrepresentingadirectsalesproductlikeAvonorCookieLeejewelry.Anelementaryschoolteachermightspendthesummersworkinganotherjoborprovidetutoringservicesformoneyintheevenings after school.Inmanyways,beingsomesortofentrepreneuristhe“newnormal”inAmerica.AsthechartofNewBusinessFoundingsintheUnitedStatesshows,unemploymentdrivenbythe2020pandemicresulted in a huge number of involuntary entrepreneurs founding businesses.FIGURE 1.1New Business Foundings in the United StatesHigh-propensity applications are likely to be employers; others reflect self-employment.Source: United States Census Bureau, https://www.census.gov/econ/bfs/index.htmlOpportunitiesOwningasmallbusinesscanbefinanciallyrewarding;manyaspiringentrepreneursviewitasthetickettowealth,andthedatasupportthat.Thericheryouare,themorelikelyyouaretobeabusinessowner.A2014U.S.FederalReservestudyreportsthatfamilieswithincomesinthetop10percentaresignificantlymorelikelytoownaprivatebusiness(seeFigure1.2)thantheirmiddle-andlower-incomepeers.Americanswithincomesabovetheaverageweremorethantwiceaslikelyto be business owners!30A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
state ownedenterpriseA business primarilyowned or controlled by agovernment—the UnitedStates Postal Service, forexample.FIGURE 1.2Families That Own a Business Are WealthierSource: U.S. Federal Reserve Consumer Finance Survey https://www.federalreserve.gov/publications/files/scf20.pdfAcrosstheglobe,theopportunitiesforentrepreneursareencouraging.Foundingabusinessisalsooneofthebestwaystoclimbtheeconomicandsocialladderinthedevelopingworld.InmostofAsia,Africa,andLatinAmerica,businessownersenjoysignificantlyhigherstandardsoflivingthanthosewhoareworkingforothers.NowhereisthismoreevidentthaninChina,wherethecareerchoiceforambitiousyoungpeopleisstark;eitherspendyourlifeworkingthenotoriouspol-iticsrequiredtoclimbtheladderinalargestateownedenterprise(SOE)oroptforindependenceandhopefullyfortuneinaprivatebusiness.AccordingtoZhibinLi,chairmanoftheChinaAssocia-tionofSmallandMediumEnterprises,therearenowmorethan35millionregisteredprivatebusinesses in China, and 90 percent of these are SME (small and medium-sized enterprises).Yorba Linda, CaliforniaEntrance to Yorba Linda Main Street.Source: Barbara Kalbfleisch/Shutterstock.comIn2007,theresidentsofYorbaLinda,California,wokeuptotheheadline,“YorbaLindaIsRichestU.S.City.”[6]TakingadrivethroughthesleepyOrangeCountytownwhosemottois“LandofGra-ciousLiving,”you’dneversuspectthattheU.S.CensusDepartmentwouldfindthatYorbaLindaresidentshadthehighestmedianincomeofanycitywithapopulationover50,000.Theydidn’tsuspectiteither.YorbaLindaresidentsalwaysassumedthattheirmoreostentatiousneighborsinseasidecommunitieslikeNewportBeachhadmoremoney.Smallbusinessownersarecon-Chapter 1The Entrepreneur in Context31© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
servativewiththeirwealth.SpeakingtotheOrangeCountyRegister,LesFujimoto,aYorbaLindarealestateagent,remarked,“YougotoNewport,andthere’scarsthatcost$350,000runningup and down the streets. You don’t see that in Yorba Linda.”YorbaLinda’ssourceofunderstatedwealthwasingreatpartduetothelargenumberofsmallbusinesspeoplewhochosetolivethere.Acityofficialcommentedtome,“We’vegotalotoffolkswhoowncontractingfirms,insuranceagencies,computerservicecompanies,andsmallmanu-facturers.Theirbusinessmaybeinothercities,buttheyarebringinghomesixandsevenfigures.These are millionaires, not billionaires, but we’ve got a lot of them.”Key Takeaways•Somepeoplearenaturalentrepreneurs,butalmostanyonecanlearntoruntheirownbusi-ness well.•Entrepreneurshipmayseemriskierthanatraditionaljob,butthatisnotnecessarilythecase.•Ifyousucceedinonebusiness,youmaybejustaslikelytosucceedinanothereitheratthesame time or when you’ve exited the first one.•The global market is dynamic, and entrepreneurs must be as well.1.4ChallengesLearning Objectives1.Understand the reality of business failures.2.Understand that most business startups do fairly well.3.Learn about opportunity cost and the sunk cost fallacy.4.Understandthatyourentrepreneurshipmustsupportyourbroaderplans,lifegoals,andfam-ily.What [President Obama] misunderstands is that nine out of ten businesses fail.—Senator Rand Paul (R-Ky), Jan 26, 2014SurvivalThefirstchallengeinbusinessissimplysurviving.You’vesurelyheardsomeoneauthoritativelypronounce,“Nineoutoftenbusinessesfail!”astheUnitedStatessenatordoesinthequoteabove.Thisisascary“fact”thatnearlyeveryoneaccepts,andmanyintelligentpeoplerepeat.However,aswiththepopularadvicethatyoushoulddrinkeightglassesofwateraday,[7]ithasnoscientificbasiswhatsoever,andSenatorPaul’scommentisjustmisleading.Thetruthisthattenoutoftenbusinessesfail,eventually!Nothinglastsforever,andasfamedeconomistJohnMaynardKeynes32A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
quipped,“Inthelongrun,wearealldead.”Whatismoreinterestingtoknowishowlongourbusi-nessesarelikelytolive.Thechartentitled“BusinessSurvivaloverTime”showsbusinessfailureratesintheUnitedStatesbasedontheirnumberofyearsinexistence.YoucanseethatabouthalfofU.S.businessesstillexistfiveyearsaftertheirfounding,andmorethanathirdarestillaroundafter a decade.Whilea50percentfive-yearsurvivalrateisstilladauntingstatisticforentrepreneurswhoviewtheirglassashalfempty,therealityofbusinesssurvivalismoreencouraging.Firstly,notallfirmsmeettheirendinbankruptcy.Theymaydisappearformorecheerfulreasons,includingthatthefirmisacquiredforabigwindfall.Theymayalsoshutdownsimplybecauseasuccessfulentrepreneurretiredorpassedawayatacomfortableoldageormovedontopursueanevenmoreexciting new venture or career.Ifyoudevelopproductsthatfityourmarket,adapttochange,executewell,andworkveryhard,itislikelyyourbusinesswillprovideyouwithsustenanceandsatisfactionformanyyears.Iencourage prospective entrepreneurs to view their glasses as more than half full!FIGURE 1.3Survival Rates of Establishments, by Year Started and Number of Years SinceStarting, 1994Ð2015Source: U.S. Bureau of Labor StatisticsChapter 1The Entrepreneur in Context33© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
How Long Can a Firm Live? Interview with Brian OÕShaughnessy(Revere Copper)Front entrance to the Revere Copper office in Rome, NY.Source: Revere CopperBrianO’ShaughnessyownsAmerica’soldestmanufacturingcompany!TheiconicAmericanpatriot,PaulRevere,establishedRevereCopperin1801,andhisfirmrolledthecoppertosheaththehulloftheU.S.S.Constitution(“OldIronsides”).AhostiletakeoverofRevere’sparentcom-panyresultedinspinningoffthreeofitsfourbusinessunits,leavingthecorebusinessfoundedbyRevere.ThecorporateraidersthenhiredO’Shaughnessy,whosoonrealizedthattheywerepreparingtolayoffitsemployeesandliquidatethefirm’svaluablecopperholdings.O’Shaugh-nessy borrowed money and bought the investors out, returning Revere to a family-run company.Prof. Autry:Prof. Autry:What do you believe are the most important factors in firm survival?OÕShaughnessy:OÕShaughnessy:Youhavetosticktoyourknittingandknowwhatyourstrengthsareandplaytothose.Youalsohavetobebrutallyhonestaboutyourweaknesses.Wedon’tdothingsonthespurofthemoment.Basedonourguidingprinciples,wecandothemquickly,butwedon’tdothem spur of the moment. You must be team-based and practice what you preach.Prof. Autry:Prof. Autry:Give us an insight into the importance of teamwork.OÕShaughnessy:OÕShaughnessy:ThepeopleatReverefeelitisveryimportanttokeepthiscompanygoing.Theyrespectitsheritage,andI’dgiventhem30percentoftheownership,sotheyparticipateinthegood times and understand how in the bad times, we must all work together.Prof. Autry:Prof. Autry:What does “brutal honesty” mean in business?OÕShaughnessy:OÕShaughnessy:Letmegiveyouanexample.Onedayinameeting,Isaidsomethingunfor-tunateaboutourCFOthatdidnotreflectwellonhim.Gregsatback,andthenhesaidtome,“F-you,Brian!”Theteamwasshocked,butmyresponsetothatwas,“You’reright.Ishouldn’thavesaidthat,andIapologize.”Thattoldothermembersoftheteamtheycouldchallengeme,and that’s important. I don’t want any “yes men” on the team.Prof. Autry:Prof. Autry:When has your survival been threatened?OÕShaughnessy:OÕShaughnessy:ASouthKoreanfamily-ownedfirmpurchasedalotofCanadianequipmentandsetupoperationsintheU.S.Iunderstandtheyspentupto$500million,whichiswaymorethanus.Inordertorecoupthatkindofmoney,theyreallyneededtodominatethemarket.TheyneededtoputRevereCopperoutofbusiness.Theyhavenotsucceeded,andpartofthatisthededication our team has to keeping this American company going.Prof.Prof.Autry:Autry:HowisbeinganiconicAmericanfirmimportanttoyou,andwhatdoesthathavetodo with anyone else’s business?OÕShaughnessy:OÕShaughnessy:That’swhat’sspecialaboutourfirm,itsnationalheritage.ThathaskeptitaliveandpartofthereasonItookthechancetokeepitgoing.Ithinkeverycompanyhasreallygottoknowwhatisimportantabouttheirfirm.It’sgottohaveareasonmoreimportantthanjustmaking money for the owners, and the employees have to buy into that.Leaderscreateandmaintainaculturethatuniteseveryoneaspartofateamwithamissiontosucceed.Mysonaddedalinetoourmissionstatementtoenshrinethat:“Ourfuturewillconsiderequallyouremployeesandshareholders,ourcustomersandourcountry.”Youknow,alotofKoreanandGermancompanieshavethatsenseofcountry,andthathasworkedgreatforthemand for their nations.34A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Prof. Autry:Prof. Autry:What do you think kills small companies?OÕShaughnessy:OÕShaughnessy:Alotofprivatelyheldfirmsfailbecauseofthegenerationalshifts.Theheirsarenotwell-suitedtorunthefirm;theyhaveasenseofentitlementorarepressuredbyotherstogutit for cash.Prof. Autry:Prof. Autry:How can a small business avoid that?OÕShaughnessy:OÕShaughnessy:Wehadthreesons.Whentheyweregrowingup,weencouragedthemtogooutsideandmakeitontheirownandthencomebackiftheywantedto.Itoldthem,“YouaregoingtocomeintoRevereatalevelthatreflectstheknowledgeandabilityyou’vedemonstratedelsewhere.”Youshouldnotexpecttojustbebumpeduptothetop,andtheremightbebetterpeople above you. They must feel they are competing.WhoÕs the Boss?Manyaspiringentrepreneursenvisiontheestablishmentofasmallbusinessasaliberatingexpe-riencethatwillfreethemfromthetyrannyofanunreasonablebossorarepressivebureaucracy.Often,theyaresurprisedtofindthatratherthanreportingtoonepersonorasingleorganization,theysuddenlyhaveaplethoraof“bosses”intheformofdemandingcustomers,employees,vendors,bankers,andgovernmentalregulators.Eachoftheseconstituentshasasurprisingamountoflever-ageoverthefreedomofactionofasmallbusinessowner.Worse,eachofthemhasaseparateagendawithlittleornorespectforthedemandsoftheothersorthebandwidthoftheentrepre-neur.Thecustomerofyourspecialtybakerysimplydoesn’tcareifyourbakergoesoutonsixmonthsofstate-mandatedmaternityleaveorthatacityhealthinspectorhasdelayedapprovalontheinstallationofthenewovenyouneedtodeliverthecustomer’smuffins.Shewantsthemuffinswhensheneedsthem.Similarly,theemployeeandtheinspectoraremoreconcernedabouttheirownschedulesthanaboutyourcustomer’sneeds,andyouhaveabsolutelynoauthoritytoforcethemtoact;theyholdallthepower.Ifyoucan’tdeliverthemuffins,youwon’tgetpaid,andyouwillmisstheleasepaymentsontheuninstalledoven.Guesswhat?Yourlenderdoesn’twanttohearyourexcuses,andthegovernmentstillwantsitstaxes!YoulayawakeatnightwonderingifthebankortheIRSmightforecloseorattachyourhome,andifyourwifeleavesyou,whowillgetthekidssinceyouhavenohomeand…suddenlylivingwithyouroldbossdoesn’tsoundsobadafterall.Takeadeepbreathandrelax.Smallbusinessmanagementisachallenge,andentrepreneurswillencountertryingtimessimilartothescenariooutlinedabove.ThekeytosuccessinbusinessintheNewEntrepreneurialDynamicisfindingtherightbalanceofplanning,preparation,andadapt-ability.Severalpositivethingscouldhavebeendonetomitigatethefrighteningbakeryscenario.Ourentrepreneurshouldhaveplannedtokeepenoughreservecashonhandtoavoidlosinghisbakeryoveroneorderofmuffins.Heshouldhavedevelopedfriendlyrelationswithotherlocalbak-ersthatcouldhavehelpedhimfilltheorderwhilehisovenwasdown.Heshouldhaveinvestedthetimeinadvancetoestablishpositiverelationshipswithlocalpoliticalleaderswhocouldintervenewiththeinspector.Seeingtheproblemunfolding,hemighthaveapproachedhispregnantbakertoseeifshehadcolleagueswillingtotemporarilyfillherpositionwhenshewentonleave.Hemightalsohavereachedouttotemporaryemploymentagencies.Heshouldhavecontactedhiscreditorsinadvancetoexplainthepossibilityhemightneedtodelaypayments.Inthecomingchapters,Iwillhelpyoudevelopapreparedandadaptablebusinessandbecomeaconfidentandcoolentre-preneur.Chapter 1The Entrepreneur in Context35© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
sunk cost fallacyA misguided focus oninvestments that havebeen previously made intoa project, rather than onthe project’s immediatepotential for success. Sunkcosts often compelentrepreneurs to keepworking on doomed effortsand investors to “put goodmoney after bad.”opportunity costThe value of somethingthat must be sacrificed inexchange for pursuing aventure. If you choose towork full-time on yourstartup, your opportunitycosts include the moneyyou might have earned in aregular job.bucket listThe list of achievementsone would like toaccomplish in their life.Getting StuckYougottoknowwhentohold’em,knowwhentofold’em,knowwhentowalkaway,know when to run.—Kenny RogersTheonlythingworsethanwatchingthebusinessofyourdreamsdiemightbefindingyourselfstuckinsideanunfulfillingventurethatwon’tdie.WatchingentrepreneursstaywithstrugglingfirmsthatarealwaysontheedgeofdisasterisoneofthesaddestspectaclesIhaveobserved.Admittingthatyou’renotgoinganywhereandthatallyourworkonanenterprisemighthavebeenfornaughtisverydifficultforentrepreneurswhoseetheirfirmsastheir“babies.”Evenworse,themoretime,money,andresourcesanownerhasinvestedintryingtokeephisbusinessgoing,themorepressurehefeelstojustifythatinvestmentbycontinuingtosupportit!Thetruthisthathisremainingcashandlabormightbemuchbetterspentonanotherventure.Thebadlogicbehindthis insidious trap is known as thesunk cost fallacy.Youmightnotwanttostickwiththestrugglingbusinessfortwomainreasons.Oneofthebestwaystoavoidthissnareistosolicitconstructivecriticismfromcredibleoutsiderswhoviewyoursituationmoreobjectively.Seekoutindividualswhomyouknowtobeinformedandfrank.Avoidlisteningtoeitherthe“doomsayers”whoseglassisalwayshalfemptyandthe“cheerleaders”whowilltellyoutostickwithyourdreamnomatterhowdirethesituationlooks.Intheend,thedeci-siontocutloosefromabusinessmustbeyourownchoice,butiteasiertodowhenyouhavegoodmentors and advisers.Therearetwomainreasonsthatyoumaynotwanttostickwiththestrugglingbusiness.Oneistheeconomicopportunitycostgeneratedwhendecliningotherlucrativeprospects.Theotheristheemotionaltollsuchastruggletakesandthedamageitmaycausetothosearoundyou.Whenyourtimeandenergyareconsumedinastressfulenterprise,youareprobablynotenjoyinglifetoitsfullest,andyoumayverywellbemakinglifemiserableforyourspouse,family,andfriends.Strikingabalancebetweenyourworkandyoursociallifeisachallengeforallworkersintoday’scompetitiveenvironment,anditcanbeparticularlydifficultforthesmallbusinessowner.Itiscrit-icalthatyouestablishasenseofwhereyouwantthatbalancetobesothatyoucanplanforandmanage a business that meets your goals.Where to Start: Make a Bucket ListOneofthetasksIoftenassigntoaspiringentrepreneursistoprepareabucketlistofthingsthey’dliketoachieveinlife.Doyouplantotraveltheworld?Doyouwanttomakeamilliondollarsforitsownsake?Doyouwanttocontinueyoureducationandgetamaster’sdegree?Doyouwanttomakeasignificantcontributiontosomesocial,religious,political,orenvironmentalcause?Ifso,then make sure your business commitments can support these long-term personal goals.36A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
A public bucket list, Hot Springs, NCSource: CREATISTA/Shutterstock.comInfact,theincomeandflexibilitythatasuccessfulsmallbusinesscanproducemakeentre-preneurshiptheidealcareerpathformanyhighlyaspirationalindividualstoachievetheirnon-businessdreams.BillGateshasleveragedhisentrepreneurialsuccessintoasecondcareerworkingonphilanthropiccauseswithhiswife,Melinda.“Business”isbyfarthemostcommonoccupationlistedbymembersoftheU.S.HouseofRepresentatives.Inthe113thU.S.Congress,187membersself-identified as businesspeople, significantly more than the 156 who identified as lawyers.ItÕs Not Always About YouAsyouestablishyourpersonalgoals,you’llfindouttheyincludeanddependonalotofotherpeople.Yournextstepistoconsidertheneedsofthoseimportantindividualsinyourlife.Idon’tmeantosuggestthatyoumustabandonyourowndreamstokeepothershappy,butyoushouldavoidprofitingattheexpenseofpeopleyoulove.Toooften,Ihavesatdownwithsuccessfulentre-preneurstolookbackattheiramazingcareersandfoundthemdwellingoverthetrailofbrokenrelationshipsthey’veinadvertentlyleftintheirwake.Theirsingle-mindedfocusontheirbusinesshasemptiedtheirliveswhilefillingtheirbankaccounts.Findingabusinessmodelthatdoesn’talienateyourspouse,children,friends,andcommunitycanbejustasimportantasfindingonethatisprofitable.Again,balanceisthekeytosuccess.Whenallthesethingsarealigned,businessesrunmoresmoothlyandentrepreneuriallivesarehappier,morerewarding,andoftenmorefinanciallysuccessful.Chapter 1The Entrepreneur in Context37© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Staying healthy is job 1 for entrepreneurs.Source: © Shutterstock, Inc.Stay HealthyEntrepreneurshipisnotjustaboutyourbusiness,andit’snotjustaboutyourobligationstoothers.Sustainedsuccessrequiresasharpmind.Researchshowsthatyourphysicalhealthisasignificantdeterminantinmaintainingmentalfit-ness.Dietandexercisearethetwomostimportantfactorsyoucancontrol.Findingthetimeandenergyforworkingoutwhileworkinghardisachallenge.Demandingschedulesandstresscanerodeyoursleep.Theconvenienceoffastfoodandtheeasyrefugesofotherpoorlifestylechoicesmaypresentaconstantchallengetothewillpowerofthebusybusinessowner.Oftenstartingorrunningyour own business may seem incompatible with a healthy lifestyle.Whatismostimportantfortheentrepreneurtounderstandisthatastheboss,allofthesechoicesareactuallywithinhisorhercontrol.Makingtimetokeepyourmostimportantasset—yourself—workingwellisjustasimportantasclosingthenextbigdeal,shippingthenextorder,orfindingthenextemployee.You’vegottomakeithappen.WhileI’mnotgoingtoofferyouanydetailedhealthprescriptive—youandyourhealthcareprovidersknowwhatthoseare—Icansayfromexperienceandresearchthatregularexercise,goodsleep,andabalanceddietareallpositivefactorsinentrepreneurialperformance.Beingtiredandoverweightandsmokingordrinkingtoomucharelikelytoslowyoudownandperhapslandyouinahospitalbed,which,evenintoday’sconnectedworld,isnottheoptimalplacefromwhichto run a business.NED Theme: The Six Types of Startups . . . and the Fusion Firm as theSeventh Type1.Lifestyle Startups:“Your job is your passion.”2.Small-Business Startups:“Your own gig.”3.Scalable Startups:“A focus on growth.”4.Buyable Startups:“Being the perfect target to be bought.”5.Social Startups (as a nonprofit, for-profit, or hybrid):“Doing good; making a difference.”6.Large-Company Startups:“Continuous innovation.”And . . . the Fusion Startup:Rememberthatentrepreneurshipisdynamic.Thereisnoreasonwhyyoucannotstartwithonetypeofstartupandthenshifttoanothertype…orevenshiftbackagain.Goalswillchangeandyourbusinesswillevolve.TheNewEntrepreneurialDynamicencouragesstartupsthatcombine,or evolve to be, many of these types of startups at once.Key Takeaways•Don’t believe the story that most businesses fail.•Learnthatyourtimeisyourmostvaluableassetanddon’tinvestitineffortsthataren’tgoingto return sufficient value.•Identify your personal life goals and integrate them into your startup planning.•Knowthatotherpeopledependonyou,andyourentrepreneurialchoicesmayimpactthelives of many others.•Keeping physically fit must be job 1 for a successful entrepreneur.38A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Business owner Tiantian Qiu takes an orderduring Chinese New Year in her newly openedrestaurant.Source: Greg Autry1.5Case Study: Tiantian, Kai, and HipHot Restaurant: Entrepreneurs Learnand AdaptTiantian,astudentfromChengdu,China,recentlygraduatedfromtheMarshallSchoolofBusinessattheUniversityofSouthernCalifornia.Tiantianhastwogreatpassionsinlife—cookingandentrepreneurship.Cookingissomethingshehasalwaysloved.Shelovesexperimentingwithnewingredientsandtryingoutnewcombinations.Whenshefirstmetherboyfriend,Kai,anddiscoveredthathewasapickyeater,Tiantiansawitasawelcomechallenge.Nightafternight,shewoulduseKaiashertastertocreatemealsthatwouldmeettheapprovalofeventhemostdiscerningpalates.Entrepreneurship,ontheotherhand,wasapassionthatwasappointedtoher.Likemanyotherfirst-generationChineseimmigrants,sheheldherfather’sopinioninextremelyhighregard—andhealwaystoldTiant-ianthatgoingintobusinessforherselfwastheonlywaytoavoidgettingtakenadvantage of by others.Notsurprisingly,shedecidedtostartabusinessofherownsoonaftergrad-uation.Givenherloveforcooking,startingherownrestaurantwashernaturalchoice.Infact,itwastheonlychoice.“IknewIneededtogointobusinessformyself.Thatwastheonlyway.AndtheonlythingI’veeverknowniscooking…cookingauthenticChinese food.”Tiantian,withalittlefinancialassistancefromherfather,begantosearchforlocationsforherrestaurantwithinthegreaterLosAngeles’growingChinesedistrict.Whiletheassistancefromherfatherbeganasasmallamountofcapital,itveryquicklyskyrocketed.Asshenoted,“Myfathertoldme,ifyougotoacasinoandbet$50,youhavethepotentialtowinperhaps$100.Ifyougotoacasinowith$1,thentheluckiestyou’llgetiswalkingawaywith$2.”Thatwashowherfatherjusti-fied the large infusion of cash, which totaled in the hundreds of thousands of dollars.Kaijoinedhisgirlfriendintheendeavorasabusinesspartner.Theysettledoncuisinethatcateredtothelocalpopulation—authenticChengducuisinewithaSzechuanflairthatwouldleavenotonlythetonguetinglingwithspice,butalsothebody.TheywouldnametheirrestaurantHipHot.TheyalsosettledonalocationonMontereyPark’sAtlanticBoulevardinthefashionablenouveaucenterofLA’sChinesediaspora.It’salocationthatyoung,hipAsiantrendsetterswouldfrequentandwheretherewasadensepopulationofotherrestaurantssharinghermissionofpro-vidinganauthenticChineseeatingexperience.Infact,adumplinghousehadpreviouslyoccupiedtherealestateHipHotwouldbetakingover.Aftersteadilydecreasingsales,thedumplinghousefolded, and the location became available.Onereasontheygaveforthepossibledeclineofthedumplinghousewasthetypicalclientelethatwouldfrequentrestaurantsinthearea.Thesepatronswouldoftenleavesharp-tonguedcom-mentsonYelpifthefoodwasnotauthentic—somethingTiantiansawasachallenge.AsTiantianhasadamantlystated,“Thatwouldbealossofmypride—tohavepeoplesayingmyfoodwasnotauthentic. That would be shameful.”Theydidconsideranalternatelocationatonepoint—closetoalargecollegecampuswheretherewasalargepopulationofstudentswhocravedauthenticChinesecuisine.Demandforthiscuisinewasalmostentirelyunmetinthisarea,butasTiantianremarked:“Wejustcouldn’tfindaplace to rent. The rent was almost double what we are paying now.”Astheybegantostarttheirrestaurant,TiantianandKairealizedtheimmensityoftheendeavor they had embarked upon. There were a number of issues that they faced.Chapter 1The Entrepreneur in Context39© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
First,theyrealizedthattheyjustdidnotunderstandthebusinesscultureoftheUnitedStates.Thebureaucracyaroundbuildingpermits,paperwork,localgovernmentregulations,andlegalandtaxissuesbegantoworrythem.Themoretheywereoverwhelmed,themoretheyreliedontheChi-nesecommunitytoassistthem.SoontheyfoundthatitwasmostreassuringtorelyonaChinesecontractorforconstructionwork,aChineselawyerthatherfatherknewthroughafriend,andaChinese accountant who could speak with them entirely in Chinese to explain tax regulations.Yet,afterabriefperiodofrelieffromworkingwithpeopleculturallyfamiliartothem,TiantianandKaibegantofeelunsettledandrealizedthattheyweregettingtakenadvantageofonanumberofaccounts.Legaldiscussionsthatwereinitially“verystraightforwardandnotaproblem,”soonbecameanexpensivetaskthattheyhadtopayseriousmoneyfor.Ashippingcontainerofauthen-ticporcelaindishwarethatwassupposedtocostonly$5,000toshipbecamedelayedandonlydeliverableuponanextrapaymentof$3,000.Thesameshippingcontainerarrivedwith40percentof the dishware broken, and Tiantian and Kai had no recourse for getting any money back.Anotherissuethatperhapscompoundedtheirsituationwastherealizationthattheywerebeingtakenadvantageofbecausepeoplesawthemasbeingyoungandintheirearlytwen-ties—andhencenotseriousaboutentrepreneurship.Theywererepeatedlyaskediftheywere“justdoing this for fun” with Tiantian’s father’s money.TiantianandKaibegantodomorethemselves.Whentheyweretoldthatitwouldcost$500topaintawall,theydecidedtodoitthemselves.Butastheytookonmore,therewerealsodisastrousrepercussions.Whentheyweretoldthatitwouldcost$4,000toinstallvideocameras,Kaitookthistaskonhimself,anditresultedinafallfromthesecondstoryofthebuildingthatlefthimhospi-talized.Helosthissenseofsmellentirelyandonlypartiallyregainedhissenseoftastesixmonthsafter the accident.Despitethesesetbacks,TiantianandKaiheldsteadywitha“learnbydoing”attitude.Echoingthe famous NASA maxim, Kai maintains, “Failure is not an option.”Astheypreparefortheirgrandopening,theyplanondoinganumberofthingstopromotetheirrestaurantwhileholdingsteadfasttotheChinesewayofdoingthings.TheyplanonhavingadaywhereallmealsarefreeforthosewhoareapartofTiantian’sWeChatnetwork(apopularChi-nesesocialcommunicationappsimilartoWhatsApp).TheyarealsodeterminedtostaytruetotheChengdutasteandnotcatertoomuchtoWesterntastebuds.TiantianandKaiplacegreatimpor-tanceonthesesortsofideasastheyremainfearfulofbeingblastedonChinesesocialmedia.“Thatis also success,” Tiantian remarks of gaining positive WeChat comments.Withthestressoverneedingtoachievesuccessinmultipleways—profitabilityfromthestand-pointofherfather’sinvestmentandauthenticityfromthestandpointofthecommunity—itisnowonder that Tiantian is nervously excited about opening day.Endnotes1.YoucanfindthistableontheSBAwebsite:https://www.sba.gov/content/small-business-size-standards.2.https://www.sba.gov/sites/default/files/FAQ_March_2014_0.pdf3.Rapidgrowthwillbediscussedlaterinthisbook,butifyouarelaunchingsuchanambitiousstartup,thereareanumberofadditionalbooksthatarerecommended,includingLaunchingNewVenturesbyKathleenAllen,andTheStartup OwnerÕs Manualby Steve Blank and Bob Dorf.4.http://fortune.com/2015/02/09/canaccord-apple-took-home-93-of-mobile-profits-last-quarter/5.http://www.newyorkfed.org/research/current_issues/ci20-1.pdf6.OrangeCountyRegister(http://www.ocregister.com/articles/linda-11551-yorba-newport.html).7.http://psychcentral.com/blog/archives/2010/12/08/the-myth-behind-drinking-8-glasses-of-water-a-day/40A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
business planA written plan that outlinesbusiness goals, methodsto achieve them, and aprojected timeline.CHAPTER 2The New EntrepreneurialDynamicNo business plan survives first contact with customers.—Steve Blank[1]The future is unpredictable.Source: © Shutterstock, Inc.Traditionaltextbooksofentrepreneurshippresumethatstartupfounderscannotonlyseeintothefuturebutthattheycanactonthatknowledgeinadvance,eliminatingambiguityandreducingrisk.Thesebooksfocusmostoftheirchaptersonthebusinessplan,fundingsources,pitches,andotheractivitiesthatgobeforedoingbusiness.Thiscurriculumhasproducedlegionsofwell-trainedentrepreneursarmedwithspecial-purposebusinesstools,carefullyselectedtoover-comepredefinedobstacles,andwhobelievetheyaresettingoutwitharoadmaptosuccess!Seemingly, nothing is left to chance. . . .However,therealworldwillswiftlyshowthemthatchanceremainsthemostimportantvariableinanybusinessmodel,regardlessofthelevelofpreparation.Itwon’tbelonguntilthecon-fidenceofthesewell-trainedentrepreneursisshatteredbycompletelyunexpectedchallengesforwhichtheyfindnosuitabletoolsintheirkits.Atthatpoint,theyrealizethattheirtextbookscon-© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
tainedverylittleinformationonhowtoactuallyconductbusinessinaconstantlychangingrealworld.2.1The Stormy Seas of CommerceLearning Objectives1.Understand why traditional business plans are inappropriate for most startups.2.Recognizethatbusinessesexistinadynamicenvironmentandmustadaptrapidlytosurviveand prosper.3.Understand that planning depends on having accurate information about the future.4.Appreciatethevalueofdevelopingbusinesscapabilitiestocopewithbothexpectedandunexpected events.5.Realize that what makes an organization a business is its search for profits.6.Understand that customers are the one thing every business must have.Business PlansTheNewEntrepreneurialDynamicisallaboutchangeandadaptation.Intheirexcellentbook,Get-tingtoPlanB,StanfordProfessorJohnMullinsandfamedventurecapitalistRandyKomisartellus:EveryaspiringentrepreneurhasaPlanA.Andvirtuallyalloftheseindividualsbelieve,like[Pay-PalfounderMax]Levchin,thatPlanAwillwork.Theycanprobablyevenimaginehowthey’lllookonthecoverofFortune,orthecommentsthey’llgivewhenasked,”Howdidyoucreatetheworld’sbest business?” Unfortunately, they are usually wrong.[2]MullinsandKomisarhaveseenalotofplans,manyofthemwelllaidandsomewellfunded.Theyhavealsoseenthatinalmosteverycase,theplanfails.Occasionally,however,thestartupsuc-ceeds.Whenthestartupsucceeds,itisusuallybecausetheentrepreneursthemselvesrefusedtofollowtheirowndubiousplansintofailure.MullinsandKomisarrespectthoseentrepreneurswho“licktheirwounds,getbackontheirfeet,andmorphtheirnewlyfoundinsightsintogreatbusi-nesses.”Infact,mostentrepreneurssimplylaunchblindlyintothestormyseasofcommerceinsearchofopportunitieswithoutanyformalplan.Naturalentrepreneursoftenresenttheenergy,money,andtimespentproducingwrittenbusinessplansandareintuitivelyskepticaloftheirrelevanceintherealworld.Theirstartupsarefaster,nimbler,andfarmoretolerantofambiguitythantheonesfeatured in the textbooks.Recently,managementresearchersanalyzingthevalueofplanninghavefoundthattheseentrepreneursarenotmisguided.Langeetal.(2007)[3]concludethat“newventureslaunchedwithformalwrittenbusinessplansdonotsubsequentlyoutperformoneslaunchedwithoutthem.”ChwolkaandRaith(2012)[4]notethat“themajorityofex-postsuccessfulentrepreneursmaynothave a business plan.”Forexample,SteveWozniakandSteveJobshadnobusinessplanwhentheylaunchedApplein1977.Theentrepreneurialduojustwentforit,guidedbyinstinctandalotofreal-worldfeedback42A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
pivotA significant change in afirm’s business strategy.frompotentialcustomers.TheirAppleIIquicklybecamethemostsuccessfulhomecomputerofitstime.Fiveyearslater,amorematureAppleproducedabusinessplanfortheirMacintoshandLISAcomputers,developedinaclosed,secretiveprocess.TheMacintoshwasgoingtobelaunchedin1982at$1,000,withanevencheaper“VeryLowCost”(VLC)computertofollow.MacandVLCwouldgrabmarketshareonprice,introduceuserstothegraphicalcomputingofthe1980s,andconvincepro-fessionals to move up to the more expensive LISA system.Thisplanturnedouttobesignificantlydisconnectedfromreality.Thecostestimateswereoffbymorethan100percent,andcompetingonpriceswasnotanoption.TheMacwasactuallyintro-ducedin1984at$2,500anditspriceincreasedwithnewversions.VLCneversawthelightofday,andLISAwasdiscontinued.Applesufferedasignificantreputationalandfinancialblowfromthismisdirect.However,thefirmquicklypivotedoutoftheplan,redeployedthebestofitsideas,andwent on to eventually become the world’s most valuable firm.FIGURE 2.1Product Price and Timeline Page from the 1981 Apple Business PlanEssentially all the products, prices, and time estimates shown here were wrong.Source: The Computer Museum https://www.computerhistory.org/collections/catalog/102712692LikeChristopherColumbus,entrepreneurialexplorersmaynotreachthegoaltheywereaim-ingfor,buttheyremainconfidenttheywillfindtreasuresalongtheway.Theymitigaterisknotbyplanningeverylittledetailinadvancebutbysurroundingthemselveswithflexiblepeopleandbuilding a versatile rather than a specialized toolkit.What Is the New Entrepreneurial Dynamic?Afteryearsofresearchanddecadesofworkingasandwithentrepreneurs,Ihavecometobelievethatarigidlyformalbusinessplanactuallyrobsstartupsoftheirprimarysourceofcompetitiveadvantageagainsttheirlarger,entrenchedcompetitors.Thatcompetitiveadvantageistheflexi-Chapter 2The New Entrepreneurial Dynamic43© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
bilityrequiredtolearnfromfailureandtoswiftlyadapttoenvironmentalchanges.Thisinsightestablishes the basis for the New Entrepreneurial Dynamic, withdynamicbeing the key word.Dynamicadaptabilityisthemostimportantsingleaspectofthesuccessfulentrepreneur.Con-sequently,Iamthrilledtoseethatventurecapitalists,popularpresspundits,andevenbusinessschoolsarelabelingthetraditionalapproachtoteachingandplanningaspasséforstartupsandsmall businesses. Entrepreneur and educator Steve Blank has written:Today,afterhalfacenturyofpractice,weknowunequivocallythatthetraditionalMBAcurricu-lumforrunninglargecompanieslikeIBM,GM,andBoeingdoesnotworkinstartups.Infact,it’stoxic.[5]Toxic!That’saprettystrongword,butBlankshouldknow.He’sbeeninvolvedinlaunchingeightstartups,hastaughtentrepreneurshipattheUniversityofCaliforniaatBerkeley,NewYorkUniversity,andStanford,andwrittensomegreatbooksonthestartupprocess.TheNewEntre-preneurialDynamicconcurswithBlank;startupsandallformsofsmallbusinessarenotsimplyscaled-downmodelsofthemultinationalcorporationsthatourtraditionaleducationalbusinesseducationcurriculumhasbeendesignedtoserve.Thecoreofthiscurriculumisaformalstrategicplanningprocessandsupportingtoolkitthathasworkedverywellforlargeorganizations,withvastresources,inrefiningtheircompetitiveadvantagesinexistingindustriesorenteringotherestablished markets.Thatdoesn’tsuggestthatbusinessplanningitselflacksvalueorthatbusinessplansmustalwaysbeignored.Theprocessofplanningcanbeavaluableexperienceofentrepreneurialself-discovery(seeIkethePlannersidebar).Carefullyimagininghowoneormorefuturebusinessscenariosmightplayoutandplanningforhowtobestexecuteonthatparticularrealitycanbeaveryvaluableexercise.Whatiscriticalinthisexerciseisunderstandingthatanyoneofthesescenariosisonlyasinglepossibilityamongamultitudeofalternativefutures.Modernacademicresearchbacksupthisapproach.ChwolkaandRaith(2012)concludethatthevalueofplanningliesin “evaluating alternative actions and being able to improve strategies.”Planning Depends on ForecastingTobeuseful,aplanmustassumethatyouknowwhatyouareplanningfor,anditisherethatthesinglebiggestweaknessofthetraditionalbusinessplanemerges.Aswithforecastingtheweather,theeconomy,oranyothercomplexsystem,therearecountlesspointsofpossibledivergencefromany particular path.ConsiderFigure2.2,whichillustratesaverysimpleprogressionofmarketeventsforahypo-theticalsnackfoodcompany.Atthecurrenttime,thebaselinemarketstateisattimezero,des-ignatedT0.ThepastisT–1,andthereisonlyonepossibleeventshownbetweenthereandnowbecauseweknowexactlywhatdidhappeninthepreviousevent.T+1istheimmediatefuture,andourfirmfacestwopossibleanticipatedevents,thingswesuspectmayshapethefuturemarket.This event might be future consumers preferring chocolate or hazelnut.Suchasimpledivergencecanbeanticipated,andeachcontingencycouldbeplannedforinadvance.Planningforbothmightrequirealargerproductdevelopmentgroup(twoteamsworkingonflavoredsnacks)orestablishingane-commercesitejustincase.Thissortofplanningisverydoable,thoughitwillincreasecostsandnecessitatekeepingabitmorecashonreserveorslightlyreducingprofitsforamoresignificantreductioninrisk.It’samanagementchoiceovercontingen-cies.44A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
contingency planningThe process of planning inadvance for more than onepossible outcome or set ofcircumstances.market disruptionA circumstance wheremarkets stop operating inthe normally acceptedway. Market disruptionsoften result in value lossfor incumbent firms andinvestors and create anopportunity for newentrants.FIGURE 2.2The Chain of Market EventsSource: Greg AutryContingencyplanningbeginstounravelwhenyourealizehowmanysucheventsthereareinthefirm’sfuture.LookingaheadtoT+2,wefaceonemoresetofpossibilities.Perhapsthisisacom-inggovernmentregulationthatmandatesahealthierratherthantastieringredient.Wenowhavefourpossiblescenarios.Wecanplanforthedevelopmentoftwoseparatesupplierrelationsfordif-ferentingredients(e.g.,healthyversustasty).Wenowhavetoprepareforchocolatehealthy,chocolate tasty, hazelnut healthy, and hazelnut tasty. That’s four possible realities.Ifwefaceanothertwo-choicedecisionatT+3,saythedevelopmentofapossiblenewonlinedistributionchannel,wenowhaveeightpossiblescenariostoplanforandtofundcontingencyoperations.That’sexpensive!Worse,decisionsaren’talwaysbinary;theremaybethree,four,ormorepossibledirections.Mostbusinesseswouldfacemanydozenpossiblescenariosinafewyears.Many of them would be similar, but many would be different enough to require changes in plans.Further,eachpointofdivergencealsohasaprobabilityofeventsgoingonewayortheother.Youcouldbetonthefavoritestoreducetheneedforplanning!IftheoddsofeventAoccurringthewayyouplannedare70percent,andtheoddsofeventBgoingyourwayare70percent,thenyoumayfeelprettyconfident,right?Sadly,however,theoddsofeacheventoccurringmustbemul-tiplied(0.7×0.7or70percentof70percent).NowthechancesofyourgettingtoyourpointCarealready down to less than half (42 percent)!Thelongerthetimeframecovered,thelesslikelytheplanwillmatchanyfutureenvironmen-talreality.Imagineiftherewere100discreetpointsofpossiblecriticaldivergence.Evenifeachofthesehada95percentprobabilityofgoingyourway,it’sstillveryunlikelyyou’llgettoyourpre-dictedscenario.Themultiplicationofalltheseprobabilitiesmakesitveryimprobablethatyourbusinessplanisdesignedforthefutureinwhichyouwillfindyourcompanyoperating.Infact,evenbeingassuredoftheseoddspresumesyouatleastknowinadvancewhereallthepossiblepointsofmarketdivergenceare.That’simpossible—youcanbarelyseethemostimmediateones.Someunexpectedchanceoccurrenceswilleventuallyrenderanylong-termplandangerouslyoutofsyncwithreality.Youcan’tmakecontingencyplansforeventsyoudon’tevenseecoming.Thehis-toryofbusinessislitteredwiththecorpsesofgreatfirmsthatfailedtoseeasignificantmarketdisruptioncoming.Thecomputerindustryistheperfectlaboratoryinwhichtoviewthisprocessbecauseithascontinuedtoevolvequicklyoverseveraldecades.Inthemid-1970s,ahandfulofinnovativeyoungfirmscenteredaroundBostonwereridinghigh.FirmslikeDigitalEquipmentCorporation(DEC),DataGeneral,andWangLaboratorieshadsuccessfullydisruptedthedominanceofthemainframecomputercompaniesledbyIBM.Theyhadleveragednewlydevelopedintegratedcircuittech-nologytocreateanewclassofsmaller,cheapercomputers.ThePDP-8,NovaEclipse,andother“minicomputers”quicklybecamethesystemsofchoiceformanufacturingandengineeringfirms.Thenewfirmsviewedtheirmainframepredecessorsasdinosaurs.TheentrepreneurswhofoundedChapter 2The New Entrepreneurial Dynamic45© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
empirical evidenceKnowledge derived fromdirect observation of theactual world.DEC,KenOlsenandHarlanAnderson,wererightlyhailedasgeniusesofinnovationandplanning.Their venture capital team was headed by a professor from the Harvard Business School.Sadly,thesenewlymintedcaptainsofindustrypaidnoattentiontoagroupofhobbyistsinCaliforniawhowerebuilding“homebrew”computersbasedontheevennewermicroprocessortechnology.ThesehobbyistsincludedSteveWozniakandSteveJobs,whomwemetearlierfound-ingApple.DECandtheotherminicomputerfirmsexecutedontraditionalbusinessplans.AnunexpecteddisruptionfromtheWestCoastwasnotinanyoftheplans,andconsequently,itdidnotexistfortheirmanagement.Theywereunwillingtosignificantlychangetheirplansinthefaceofachangingreality,andasthesayinggoes,“realitybites.”Inlessthantenyears,everylastoneoftheminicomputerfirmswassweptawaybythepersonalcomputerwavethatemergedfromSili-conValley.Inthefaceofanunpredicteddisruptivechallenge,theminicomputerfirmshadprovento be even less dynamic than their mainframe predecessors.KenOlsenatfirstsimplydismissedthepersonalcomputer(PC)marketasnonexistent;thenheinsisteditwasoutoflinewiththeirnewVAXsuperminicomputerstrategy.Whycompetewiththemselves?WhenDECfinallyenteredthePCmarket,theyfoundthemselvesfarbehindandplay-ingahopelessgameofcatch-upwiththeiroldrivalIBM,whichhadwiselypivotedtheirstrategytoembrace the PC.Olsenandtheotherminicomputerentrepreneursweren’tanylessbrilliantthanSteveJobsorBillGates.Ironically,theprimarydifferencewastheyhadcompletedcollege,whereastheirPCcom-petitorshaddismissedschoolasirrelevantanddroppedout.Theminicomputermogulswerevictimsoftheirsuperioreducation.Theirengineeringandbusinessschooltraininghadtaughtthemtodesigneverythingupfront,andtheirinvestorsexpectedthemtoexecuteaccordingtoaplan.AppleandMicrosoftsimplydoveintothemarket,determinedonlytomeetcustomerneeds.Sadly,manyschoolsandtextsonentrepreneurshipcontinuedtoteachthebusinessplanapproachlong after theempirical evidencehad demonstrated its failure in actual practice.ThethirdgenerationofcomputerfirmsembracedthefoundationsoftheNED,andthatiswhymanyofthemarestillgoingstrong.CompanieslikeAppleandMicrosoftintuitivelyreplacedtra-ditionalbusinessplanningwithrapidanditerativeproductdevelopment.Theyaredynamicallyredefiningthemselvestofittheactualrealitiesofthemarket.Applehasrepeatedlyattemptedtodisruptitself,fearlesslyintroducingnewproductlinesevenwhentheythreatenedthefirm’smostsignificantrevenuesources;witnesstheMacintoshdisplacingthemoreexpensiveLISAandtheearlycash-cowAppleIIandmorerecently,theiPadeatingintothesalesofthepopularMacBooknotebooks.Thecomplexityofamarketenvironment,thespeedatwhichthatenvironmentchanges,andtheprecisionofyourdataonhowitischangingwilldeterminehowfaraheadyoucanreasonablylookintothebehaviorofanyparticularsystem.Forweatherpredictions,anythingbeyondaweekortwoishighlyspeculative.Ineconomicforecasting,usefulnessismeasuredinmonths.Intherapidlyevolvingtechnologybusinessclimate,anybusinessplanthatlooksbeyondayearisproba-blynotworththetrouble.Thereisaverygoodreasonwhyoneoftoday’sleadingjournalsonthetech business is calledFast Company!46A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Ike the PlannerEisenhower led the most complex logistical planning operation in history.Source: https://commons.wikimedia.org/wiki/File:Dwight_D._Eisenhower_as_General_of_the_Army_crop.jpgBeforehebecamepresidentoftheUnitedStatesin1950,DwightD.EisenhowerwasageneralintheU.S.Army.DuringWWII,heservedaschiefoftheWarPlansDivisionandwaseventuallyappointedalliedsupremecommander,directingalltheforcesofFreeEuropeagainstHitler.Ike,ashewasaffectionatelyknown,oversawtheplanningofthemostcomplexmilitaryactioninhis-tory,theamphibiousinvasionofNormandy,France,onJune6,1944,code-named“OperationOverlord.”ThisimmenseeffortwasthemostimportantstepinliberatingEuropefromNazioccu-pation and restoring freedom to many millions of Europeans.TheD-DaybeachlandingsatNormandyinvolvedmorethan150,000soldiersfromseveralnationsactinginunison.DespiteyearsofstudyandplanningbythemosttalentedmilitarymindsfromAmericaandBritain,thesoldierswhofoughtthebattlethatdayuniversallydescribeitascompletelychaotic.Notsurprisingly,thereal-worldactionsofthedefendingGermansoldiersprettymuchfailedtomatchthosedreamedupbythegeneralsbackinLondon.ThefilmSavingPrivateRyanaccuratelydisplaysthechanginglandscapeinwhichofficersquicklyditchedtheirplansandwereforcedtoimprovisetacticsmerelytokeeptheirtroopsaliveduringthefirsthourofbattle.Tomostofthem,D-Daylookedlikeadisasterinprogress.Nonetheless,theinforma-tionthealliedcommandershadcollectedandthepreparationsthatIkeandhisstaffprovidedfortheofficersworkedwellenoughfortheinvasiontogainitsfoothold.TheAlliesheldthebeaches,andthewarinEuropewasoverwithinayear.MillionsweresavedfromthebrutaloppressionandgenocidalactivitiesoftheNaziregime.Consideringthisandotherlessonsfromhiscareer,Eisenhowerfamouslyremarked,“Ihavealwaysfoundthatplansareuseless,butplanningisindis-pensable.”Chapter 2The New Entrepreneurial Dynamic47© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
disruptThe act or strategy of asmall business to enter anestablished market, andsuccessfully challenge thewell-establishedincumbent businessmodel.Tim Hortons is the most successful fast-foodchain in Canada.Source: https://commons.wikimedia.org/wiki/File:Tim_Hortons,_Tottenham.jpgAnd Yet, There Is a Time for EverythingAllthatsaid,Ibelievethatthetraditionalbusinessplandoeshaveaplaceinsomemarkets.Itisentirelyappropriatefor“metoo”businessesenteringrelativelystaticenvironments.Forinstance,ifyouwereplanningtoopenachainofconventionaldonutshopsinCanada,we’dinstantlypointoutthatthenationalchampion,TimHortons,trulyownsthatterritory.We’dstronglyadviseyoutodevelopamoreinnovativestrategywithwhichtodisrupttheCanadianbreakfastfoodsmarket.However,ifyouweredeterminedtosimplydoonebetterthanHortons,youhadbetterplanverywellindeed.Adetailedbusinessplanandawholelotoffinancialbackingwouldbeminimalprereq-uisites for such an uphill, head-on assault against a powerful and entrenched competitor.Thetraditionalbusinessplanisalsoanextremelyusefulpropforpresenta-tiontoyourmostconservativeconstituents,suchasyourbankersoryourparents!Thesefolkswantyoutotellthemthateveryaspectofyourbusinessiscompletelypredictableandtotallyundercontrol,evenif,intheirhearts,theyknowthatcan’treallybetrue.Thesefolkssleepbetteratnightbelievingintheplan.Inthischapter,wewillreviewseveralalternativeapproachestoplanningthatbetterreflecttoday’sdynamicbusinessenvironment.Thesesolutionsfocusonestablishingateam,abusinessmodel,andaculturethataredynamic.TheNewEntrepreneurialDynamiccallsforapowerful,diversecoreteam,unitedinacommonmission;avirtualizedstructure;anddecision-makingclosetothepointofcustomercontact.Thesefirmsneedaculturethatsupportsindividualsstep-pingbeyondtheirassignedroles,andthatevencelebratestheirvaliantfailures.Inlieuofabusinessplan,whatthetwenty-firstcenturysmallbusinessrequires,aresystemstoprovidereal-timedatacollection and analysis in support of rapid market hypothesis testing and decision-making.Thelifeexpectancyofabusinessmodelhasbecomeshorterandshorter,andfirmsthatsurviveoftenhavetochangetheirsregularly.ConsidertheworldwhenCoca-Colaopeneditsdoors.Themarketopportunityforanewclassof“softdrinks”wasclear.Thebusinessmodelwassmartbutfixed:produceaqualityproduct,developaleadingbrand,anddelivertheproductataprofitthroughregionalbottlerstosodacountersandstores.Thismodelworkedflawlesslyformorethanacenturyanddevelopedintoaglobalphenomenonthatseemedasifitwouldneverend.Today,however,trendsinfashionablebeveragesfromenergydrinkstoorganiccoconutwatercomeandgoatatorridpace,andtraditionalsodasalesareinasharpdecline.Tosurvivethelastdecade,theven-erableCoca-Colacorporationhashadtoconstantlyreinventitself.Similarsituationsfacenearlyevery institutional firm from McDonald’s to General Motors.Today’sbusinessmantrais“changeordie.”Entrepreneursmustprosperinanenvironmentdefinedbymobiledevices,constantinterruptions,fastfashion,andanentiregenerationwithincrediblyshortattentionspans.ThisisaworldwhereFacebookreportsbacktoadvertiserswhichpercentageoftheirviewersstuckwithanadvideofor10secondsormore,andsadly,25percentisagood result for that paltry level of consumer engagement.Added Monetary Value Makes an Organizationa BusinessItmayseemobviousthatabusinessisanorganization,butnotallorganizationsarebusinesses.ConsidertheRedCross.Isitabusiness?TheRedCrossisclearlywellorganized.Further,itisanorganizationwithapowerfulandinstantlyrecognizablebrand.Ithandlesmillionsofdollarsand48A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Red Cross workers distribute supplies to Syrianrefugees.Source: Richard Panasevich/Shutterstock.comhasthousandsofemployees.Peoplearoundtheworldhavebenefitedfromthevalueitsservicesprovide. So, is it a business?TheRedCrossisacharity.Acharityisaparticulartypeofnonprofitenter-prisewediscussedinChapter1.Theimportantdifferenceisfoundinthewaythatacharity’sservicesareessentiallydisconnectedfromitsrevenue.Acharitycollectsdonationstoprovideservicestopeoplewhousuallypaynothing.Ithasbenefactors,andithasbeneficiaries,butitdoesn’thavecustomers.Itisnotabusiness.Allbusinesseshavecustomers.Customersarethepeoplewhopaymoneyforaproductorservice,andtheydefineabusiness.Betterservingthechangingneedsofcustomerseffectivelymaximizesthevaluetheyreceiveandwillpayfor.Understandingthatyourcustomers’perceptionofvaluechanges,sometimesinpredictablewaysandsometimesinunpredictablewaysorwaysthatmayevenrender your product irrelevant, is part of the New Entrepreneurial Dynamic.Businesseshaveownersorshareholderswhosegoalisusuallytoobtainthereturnsontheirinvestment.Theyputtheirhard-earnedmoneyintotheenterpriseinhopesofgettingmoremoneyout of it.However,thisisnottosaythatafirm’sownersmaynothaveagreatervisionorsocialmission.Theymayevenreinvesttheirreturnsintothebusinesssoitcanfurtherthoselargergoals.Therearesomenonprofitenterpriseswhoseentirepurposeistodelivertheirproductorservicetothecustomerwhoneedsitandnottocapturethevalueithascreated.Thisisverydifferentfromtheold-schoolphilanthropymodel,whereprofitablefirmsorsuccessfulentrepreneurswouldassuagetheirsenseofguiltbymakinglargedonationstocharitiesorrunninginternalcorporatefundrais-ers.Havingapopularsocialmissioncanaddvaluetocustomersandactuallyincreaseafirm’srev-enues.ThesearethebestofthesocialenterprisesthatwementionedinChapter1.Newman’sOwncanchargemoreforacomparablebottleofspaghettisaucethanitscompetitorsbecausecustomerswanttobepartofthemission.Recognizingthatdoinggoodcanbeafirm’scorevalueandanimpor-tant source of strategic advantage rather than an afterthought is part of the NED.WouldyouconsiderabloggeroraYouTuberabusiness?Iftheseindividualshaverevenue(moneyfromads),thestatewouldconsidertheiractivitytobeabusinessfortaxpurposes,butaretheyreallyrunning“organizations?”AbloggerorYouTuber’sorganizationistheaudiencetheybuildintoanonlinecommunity.Itisthesizeandengagementofthiscommunitythatallowsthemtocapturevaluebysellingads.Itisasiftheyhaveturnedcustomersintoworkers.Youcanthinkoftraditionalradioandtelevisioninthesameway.Therearemanywaystocomposeanorganizationand even more ways to create value.Customers Are Required, Everything Else IsOptionalIn2013,Snapchat,thephoto-sharingapp,receivedaninvestmentthatvaluedthefirmatoverhalfabilliondollars.Thefirmhadnorevenueandnorevenuemodel.Doesthatmakeanysense?WouldyouratherownSnapchatoraprofitabledairyfarm?AsubcategoryoftheRapidGrowthStartup,theSiliconValleyStartupemphasizesgrowthoverprofitstothepointthatevensalesareoptional.California’sventurecapitalmogulsbelievethatjustaboutanyMBAstudentcantypeupatightbusinessplanandstructureaprofitable-lookingmodel.Still,iftheycannotdriveenoughcus-tomersintothatmodel,thefirm’simpactwillbecompletelyirrelevant.Forthem,thefirststepisalwaysamyopicfocusonmarketshareandbrand.Oncethathasbeenestablished,theprofitscanbe extracted from the brand’s loyal followers.Chapter 2The New Entrepreneurial Dynamic49© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
data analyticsThe formal analysis of datasets to draw conclusionsrelevant to decisionmaking. Data analytics isparticularly important in themarketing of products.customer discoveryA process of interviewingand surveying customersabout their needs.Customer discovery iscritical to the process ofdeveloping products andservices.WhiletheSiliconValleyStartupseemsobsessive,anditis,thelessonshouldnotbelostonanysmallbusinessperson.Nomatterhowmuchmarketresearchyoudo,ifyourproductsells,itsells;ifit does not sell, you must fix it. Customers are required; everything else in a business is optional.Customersarealsothegreatestsourceofinsightforyourcompany.Listeningcarefullytowhatthecustomerwantsisawholeloteasierthantryingtosellthemsomethingtheyreallydon’tneed.Findouthowyourproductorserviceideacanbestfitintothelivesofrealconsumersortheoper-ationsofrealbusinesses.Getoutandaskrealpeoplehowtheyarecurrentlydealingwiththeproblemyouthinkyoumayhavesolved.Don’tbiasthemwithyourideas;justlisten.Asyourprod-uctdevelops,continuethisprocesstorefineit.Getfeedback,usesurveys,makeyourshoefitthecustomer’sfootasperfectlyaspossiblebeforeyoumakeit.Thiscustomer-focusedtrendhasresultedinanexplosionindataanalytics.GoogleAdWordsandothertoolsaredesignedtoprovideinsightsfromcustomerbehaviorthatwillimproveyourproductanditspositioninginthemarket.This process ofcustomer discoveryis integral to the New Entrepreneurial Dynamic.Key Takeaways•Yourbusinesswillalwaysexistinabusinessenvironmentfilledwithunexpectedeventsthatcannot be planned for.•Youmustbuildupdynamiccapabilitiesthatallowyoutoadaptandprosperunderanycir-cumstances.•Planningisvaluable,notbecauseitproducesaplanyoucanfollowtotheletter,butbecauseit forces you to think about the future environment and your capabilities.•A startup can be a type of organization other than a business.•Finding and keeping customers is the most essential element of any business.2.2Uncertainty Is the New NormalLearning Objectives1.Appreciate the trade-off between risk and reward in a startup.2.Understand the power of innovation.3.Recognize the power of disruption.4.Appreciatethesignificanceoftheimpactofglobalizationonbusinessesandtheeconomythey exist in.50A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
certificate of depositA bank instrument thatpays a higher rate ofinterest in exchange for aguarantee by a depositorthat funds will not bewithdrawn for a specifiedperiod of time.Bank deposits are guaranteed bythe FDIC.[6]Source: DCStockPhotography/Shutterstock.comrisk averseThe state of being overlyconcerned with takingchances. A risk-averseindividual or firm is unlikelyto invest in new conceptsor technologies for fear ofmissing out.Risk and RewardOneofthemostimportantlessonsinfinanceisthatthereisacorrelationbetweenriskandreward.Investorsexpecthigherratesofreturnforriskyinvestmentsandwillacceptlowerratesforsafeones.AsIwritethis,theaveragesavingscertificateofdeposit(CD)accountatabankispayingabout1percentinterest,andmanygovernmentbondsarepayingrealnegativerates(lessthantherateofinflation).Thisrecord-lowinterestratesituationhasbeenaglobalphenomenonformorethan a decade. What does this tell you about the concern that investors are showing over risk?Ifinvestorsweren’tsoeagertobuyuptheseCDsandbonds,banksandgov-ernmentswouldhavetoofferthemhigherrates.Lowinterestratessuggestthatglobalinvestorshavebecomequiteriskaverseonaverage.Stagnantgrowthindevelopedeconomies,insecurityinthedevelopingworld,financialcrisis,andter-rorismhavetemperedtheirmoods.Ontheotherhand,fundingastartupisclearlyariskyendeavor.Doyoususpectthatfundingforstartupsandsmallbusi-nesses has become more difficult to find during the same period?Surprisingly,growthinthefoundingandfundingofnewbusinessesremainedstrongduringmuchofthisperiod.Globaluncertaintyhasbeengoodforentrepreneurs.Onthehighend,theso-called“Unicorn”startupslikeUberandSnapchatwereabletosecurehugeinvestmentsathighvaluations.Inthesmallbusinessworld,foundingsalsosoared.ThegrowthinsmallbusinesslauncheshasbeendrivenbythislowinterestrateenvironmentaswellasthefactorswewillcoverinChapter18,suchasunemploymentandlowwagegrowth.InvestorswithevenamoderatetoleranceforriskwereappalledattheideaoftyingtheirmoneyupinCDsorbondsthatwouldbewhittledawaybyinflation,andtheywereincreasinglyattractedtothestartupscene.Firmsbigandsmallbenefitedfromthis.Canyouthinkofotherwayssmall business has benefited from low interest rates?Whenratesarelow,asmallbusinesscanaffordtoborrowmoneyforexpansion.Theybuild,grow,andhire,andtheirsuppliersdothesame.Thisbusinessgrowthtolowinterestratesrelation-ship is the primary reason that the government historically lowers rates during a recession.Uncertaintyoffersanothergreatbenefitforentrepreneurs:changeintheeconomicandbusi-nessenvironment.Dynamicsmallbusinessesaresimplybetterequippedtoadapttochangecomparedtotheirlargercompetitors.Consequently,uncertainenvironmentsfavorentrepreneursoverlargecorporations.Infact,inthemostchaoticenvironments—countriestornbycivilwar,forinstance—smallbusinessesareoftentheonlygameintownaslargecompetitorsfleefromuncer-tainty.Whilethisuncertaintyisnotforthefaintofheart,entrepreneurswhoarewillingtotoleratesleeplessnightsandanulcerortwowillenjoyplentyofthrillsandperhapssomegreatrewards.Businessinadynamicenvironmentisalotlikeapokertournament:Youmustmanageandexploitrisk.Intelligentlydecidingwhentobetheavily,whentohold,andwhentofoldwillgivetheentrepreneurastatisticaledge;therestdependsonfate.Whileourcareersdependoneducatingentrepreneurs,therereallyareopportunitiessovaluablethatitmakessensetodropoutofcollegeandinvestallofyourmoneyinasmallbusiness.ThatplanworkedforBillGates,SteveJobs,andmanyothers,right?Youshouldn’tbesurprisedtoknowthatthesamechoicehashaddisastrousconsequencesformanyentrepreneursthatyou’llneverhearabout.Likeeverythingelse,theselifechoices come down to risk management. The NED is about playing uncertainty to your advantage.Chapter 2The New Entrepreneurial Dynamic51© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
STEMScience, Technology,Engineering, andMathematics. Thesedisciplines are highlycorrelated with innovationand economicdevelopment.disruptionA sudden dislocation thatresults in major shifts to amarket. Consumerchoices, dominantvendors, distributionchannels, and pricingmodels may all change.Often caused byinnovation in processes ortechnology.Embracing Open InnovationItiscommonlyacceptedthatinnovationisthelifebloodoftechnologycompanies.Googlebelievesprofitsandsuccesscomefromlettingtheproblem-solversthinkoutsidethebox.Inordertodriveinnovationasastartup,Googleatfirsthiredonlyengineers.Thequintessentialinternetfirmstillaimstohavemorethanhalfofitsemployeesbescientistsorengineers.GooglewantstheseSTEMmajorsworkinginmanagementandothernontechnicalareasbecausetheyaretrainedtothinkasexperimentersandproblemsolvers,notas“rulefollowers.”ManyofSiliconValley’stechnologistsbelievethatinnovationgetsboggeddownwhenpeopletrainedinrotethinkingobtainpositionsofpower.They,veryrightly,fearthatprofessionalseducatedinrule-following—accountants,MBAs,andlawyers—bringdangerouslynarrow,risk-averseperspectivesintostartups.Asthese“businessprofessionals”takeover,theyincreasinglydefinewhatcan’tbedone,orshouldn’tbeattempted,reducingthefirm’sexposuretoinnovationandclosingoffthepossibilities.Doesinnovationmatterto your small business?Intoday’sfast-moving,technology-drivenworld,eventhesimplestsmallbusinessesfindthem-selvesvictimsofdisruption.Before2010,aNewYorkCitycabdriver,holdingoneofthattown’sprecioustaximedallions,wasensuredofacomfortable,independentliving.Similarly,theownersofaquaintNewEnglandbedandbreakfastwereconfidentthattheirtime-testedbusinessmodelguaranteedalifetimeofenjoyableself-employment.By2013,thesesmallbusinessoperatorsfoundthemselvesinfightsfortheirlivelihoodswithunexpectedopponents:UberandAirbnb,amateuroperatorsbackedbythetechnology,capital,andmarketingprowessofSiliconValleystartups.Whetheryouownadrycleaneroradonutstore,youcanbetthatthereisagroupofbrilliantyoungpeopleinSanFrancisco,Bangalore,orShanghaiplanningthedownfallofyourindustryandpow-erfulinvestorswithbillionsofdollarsarereadytobacktheirall-outassaultonyoursmallbusiness.Ifyoudon’twanttobeavictim,you’vegottobeonestepaheadofthatinnovationgameorreadytojoinit.TheNewEntrepreneurialDynamicdemandsconstantinnovation,eveninthesimplestcompany.Asasmallbusiness,howmightyouinspireorevenenshrineinnovationinyourcompanyculture?52A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
moonshotA majorly ambitious effortor program designed toachieve a particularlyaudacious goal.spinoffA product or service that isdeveloped as the fortunateoutcome of an investmentin another developmentproject. A spinoff is oftenthe serendipitousapplication of sometechnology developed inorder to move the primaryproject forward.Ridesharing disrupted the taxi business during the 2010s.Source: TY Lim/Shutterstock.comOnegreatwaytoinspireendlessinnovationisbyusingamoonshot,anorganizationalgoalthatisbothaudaciousandinspiring.Itneedstobeanobjectiveyoucan’tachievequickly,perhapsever,butwhichwilldriveyouremployeestodogreatthings.Thespinoffs,unexpectedproductsandtechnologiesthataregeneratedintheseeffortscandrivecompaniestonewheights.ElonMuskhasfamouslyusedthistechniquewithhisstartup,SpaceX.Fromitsdayoffoundingin2002,thefirm’sstatedgoalwastogethumanbeingstoMars,ataskthatthemostpowerfulgovernmentswerestillveryfarfromachieving.Foryears,thelittlefirmstruggledwithlaunchfailuresandwithfinances,butits“OccupyMars”goaldrovetheSpaceXteamtoworkinsanehoursandachieveamaz-ingthings.Theyeventuallymasteredthetechniqueofspacelaunchesandestablishedagrowingandprofitablespacelaunchservicesbusiness,loftingpayloadsforNASA,theU.S.military,andglobalcommercialfirms.Alongtheway,theSpaceXteamwascompelledtodevelopmoreefficientenginedesigns,toperfectscalablerocketmanufacturing,andtorevolutionizetheeconomicsofspacetravelbydevelopingreusableorbitalboosters.TheRedPlanetremainstheirgoal.Cananysmall business achieve this?Ibelievethemoonshotcanbeappliedtoanyfirmormarket.SimplebusinesseslikeMcDon-ald’sandStarbucksstartedastiny,localentitiesinhighlycompetitive,maturemarkets.Whentheylaunched,nobodywouldhaveexpectedanyonetobecomeabillionaireflippinghamburgersorserv-ingcoffee.Ineachcase,ittookavisionary(RayKrocandHowardSchulz,respectively)withtheaudaciousgoalofcoveringtheworldwiththeiroutletsandtodifferentiatethemselvesfromtheircompetitors.Toachievethisscalability,thelittlefirmswereforcedtoinnovate.Theydesignednewproducts,newprocedures,developedworld-classefficiencies,andperfectedtheartofcustomersat-isfaction.IftheyhadaspiredsimplytobethebiggesthamburgerchaininSouthernCaliforniaorhavethemostcoffeehousesinSeattle,theymightnothavesucceededatall.Yourlittlefirmcandothesame,andif,perchance,youdon’tconquertheglobalmarket,youwillmostlikelyhaveamoreprofitable, competitive, and manageable small business.Chapter 2The New Entrepreneurial Dynamic53© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
globalizationAn ongoing process ofinternationalization ofmarkets characterized byincreased cross-bordertravel and trade andreduced barriers to theseactivities. Globalization hasdisrupted markets aroundthe world.offshoringThe process of movingmanufacturing from thedomestic market toanother country to capturehigher profits via lowerwages and less onerousworker safety andenvironmental regulations.supply chainThe network of suppliersand subsuppliers (yoursuppliers’ suppliers) thatprovide the inputs yourfirm requires to produce itsproduct or provide itsservice.GlobalizationThelongstandinggapbetweenthe“developedworld”andthe“developingworld”israpidlynarrow-ing.Productsandservicesareproducedaroundtheworldinanincreasinglyinterconnectedsupplychain.Thetraditionalmanufacturing/agriculturaldividethatusedtoseparateEuropeandAmericafromtherestoftheworldhasvanished.India,Malaysia,andTurkeyarebecominghubsofserviceandmanufacturing.Chinaisdevelopingamatureconsumereconomy,andtheUnitedStatesisexportingmassiveamountsofgrainandpoultrytoAsia.Thisprocessofglobalizationbringswithit new opportunities as well as challenges for firms of all sizes.Whilethephrase“globalbusiness”bringstomindimagesofWalmart,Volkswagen,orIBM,webelievesmallerfirmsalwayshavetheadvantagesofadaptationandspeed.Changingenvironmentsaregoodenvironmentsforentrepreneurswhoadapt.WhilemanytraditionalmanufacturingfirmsinAmericaandEuropehavesufferedverybadlyfromglobalization,thosewhoeitherexploitedtheopportunitiesofloweredcostsbyoffshoringtheirproductionorreinvestedintheircommitmenttothehighestqualitystandardsindomesticmanufacturing(MadeintheUSAorMadeinGermanyproducts, for instance) have profited.Thekeypointhereisthatenvironmentalchangerequiresabusinessmodelchange.InthedecadefollowingChina’sentryintotheWorldTradeOrganization,57,000Americanfactoriesclosed.ForawoodfurnituremanufacturerinNorthCarolinaoranathleticshoecompanyinMassachu-setts,followingtheiroriginalbusinessplanwhencheapChineseproductsbegantofloodtheirmarketwasjustlikewalkingoffacliff.NewBalance,therunningshoecompany,adaptedbysimul-taneouslyoffshoringitslow-endproductsandbyrefocusingitsU.S.productiononhigh-endcustomizedfootwear.Theeconomicsofglobalizationhavealsochangedthemakeupofentiremar-kets,drivingincomeupbutoftenincreasinginequality.IntheUnitedStates,wealthrapidlyincreasedforaselectfew,whilemoreandmoreAmericansfoundthemselveswithdecliningrealincomes.TheGinicoefficient,ameasureofinequality,hasshotupinrecentyears.Afigureofzerorepresentspureincomeequality(allincomesareequal),and1representstotalinequality(oneper-sonholdsallincome).Asof2018,theU.S.reached0.49,upfrom0.43in1992.[7]By2015,theAmericanmiddleclasshadbecomeaminorityforthefirsttimesincetheGreatDepression.Smallbusinesseswithproductsaimedathigh-incomebuyershaveflourished.Sohavethoseaimedatthepoorestconsumers.Consequently,we’veseenaboominluxuryboutiqueclothingstores,aswellascornerpaydaycheck-cashingfirms.ThetrendinmuchofEuropehasbeensimilar.Understandingeco-nomic trends is part of the New Entrepreneurial Dynamic.Meanwhile,agrowingmiddleclassinChinahascreatedopportunitiesforentrepreneursinShanghaiandBeijingtoduplicatemanyofthetraditionalWesternsmallbusinessmodels.Chinesearenowdrinkingwine,buyingpetsupplies,andlookingfordistractingentertainment,andsmallbusinessesarepoppingupeverywheretoservethesetrends.TheboominChinese“escaperooms”isaperfectexampleofthistrend.Still,theGinicoefficientisrelativelyhighinChina(0.468vs.0.328intheUnitedKingdomin2018)dueprimarilytonewlywealthyChineseentrepreneursandwell-connected government figures advancing much more rapidly than the working class.Offshoringcreatessomeimportantinherentchallenges.Afirmthatoffshoressuffersfromincreasedshippingcostsandatimelagofseveralweeks.Italsofaceschallengesofoversightandcommunicationsthatcanresultinqualityissues.ReceivingabigshipmentofincorrectorflawedproductsinOctoberhasspoiledmanyafirm’sentireholidayseasonandevenputafewofthemoutofbusiness.ManyAmericanmanufacturersarenowbringingmuchoftheirproduction,oratleastfinalassembly,closertohome.TheyarereshoringtotheU.S.orseekingsuppliersinlower-costLatinAmericancountriesliketheDominicanRepublic.Similarly,manyEuropeanproducershavelocatedproductioninTurkey.Smallfirmsthathelpthesemanufacturersimprovetheirsupplychainare involved in this process all along the way.54A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
The largest factory in the world produces manyproducts for Apple in Foxconn City, Shenzhen,China.Source: Greg AutryZaramadeAmancioOrtegaoneoftheworld’srichestmen.Ortegasawtheweaknessinglobalizationandwasabletoexploititwithhisownintegratedman-ufacturingandretailingsolution.Hemasteredtheartof“FastFashion,”gettingcheaptrendyclothesfromlocalproducersintohisstoresbeforehisrivalscouldrampuptheirAsianproduction.BythetimethecompetingproductsarrivedinEurope,Zarahadmovedontothenexthotthing.ConsumerschoseZaratostayaheadofthefashioncurve.Recognizingthatonefirm’sproblemalmostalwayscreates an opportunity for another firm is key to the NED.PictureasmallAmericanproducerofspecialtyicedteas.It’sasimpleopera-tion:brewfineteas,infusethemwithhigh-qualitynaturalflavors,bottlethem,andshipthemtocustomersaroundtheworld.SuchabusinesscouldfinditsteasupplychaininterruptedbyanunexpectedbreakdowninaChinese-Taiwantradedeal.Theglobalcollapseofhoneybeecoloniesmaydriveitssweetenercostsup.ItmayfindmarketdemanddropsduetoinstabilityinGreecethatlowersthepurchasingpowerofallEuroconsumers.Itssalesmightriseduetounexpectedconsumertrendsin India.Key Takeaways•You must evaluate every opportunity in light of the risk it entails.•Innovation is critical to every business in the twenty-first century.•All businesses are being disrupted by technology; be the disruptor, not the victim.•Every business in the world now exists in a global market.2.3Networking Starts Before YourBusiness DoesLearning Objectives1.Understandthateverybusinessthatplanstogrowisaboutateam,notjustanentrepreneur.2.Making a firm commitment to your endeavor is critical for its success.3.Understand the power of video technology in pitching your firm.Building a TeamBuildingabusinessusuallyrequiresbuildingateam,andbuildingasuccessfulbusinessrequiresbuildingagreatteam.Withoutaqualifiedteam,yourshipissunkbeforeitleavesportbecause,intheend,executionisall-important.Ifyoumustoutsourcelabororfindtalentelsewhere,youneedtoprioritizedoingitright.Ahaphazardlaunchwiththewrongpeopleorpartnerswillsurelyleadtofailure.CategoryFiveBoatShoesCEO,JasonShuman,wasperfectforthejobbutfoundthathisbuddy’scofounderswereactuallyliabilitiesandtheykeptthecompanyfromgettingfundingandsecuring the best connections.Chapter 2The New Entrepreneurial Dynamic55© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Painting in the Naval History Museum, MexicoCity.Source: Alejandro Linares Garcia.Source: https://commons.wikimedia.org/wiki/File:ScuttleFleetNHMDF.JPGFindingtherightpeopleandpartnersisn’tassimpleasgatheringstudentsinaprojectteamforyourentrepreneurshipclass.You’llneedtonetworkalottofindpeoplewiththerightmixofattributes,experience,andeducation.Whenyoufindthem,youcan’tsimplyinvitethemtohopon.You’llfindthatgreatpeoplehavealotofotheroptions—joboffersortheirownstartupideas.You’llhavetonurturetherelationshipanddemonstrateyourowncapabilitiesandvaluewhiledoingit.Todothat,youmustinteractwiththesepeopleregularly.NetworkssuchasLinkedIn,Facebook,etc.aregoodforkeepingtrackofandconnectingtotheseusefulpeople,butyouneedtomakeitmorepersonalthanthat.Evenifyoudon’tneedthemtoday,onceyou’vegotavaluableconnection,take them to lunch or coffee, or talk on the phone every few months at the least.Total Commitment, Burn Your BoatIn1519,theSpanishConquistadorHernánCortésandhis500menfacedaseem-inglyimpossibletask:conqueringanunknowncontinentwithapopulationofmillionsruledbythepowerfulAztecempire.ShortlyafterlandingontheYucatanpeninsula,thesmallSpanishforcewasconfrontedbyintimidatingmassesofMesoamericanwarriors.Theconquistadorswereconfusedbyunknowncustomsandterrifiedbyactsofhumansacrificeandtheritualcanni-balismtheAztecsdemanded.SeveralofCortés’stroopsplannedtomutinyandfleeviathesea.CortéshungtheleadersandforcedtheresttorecommitbydestroyingalltheshipsthatcouldcarrythembacktoSpain.Withnowheretogobutforward,thesmallbandofconquerorsoutmatchedtheAztecsinruthless-ness and brought Mexico under Spanish rule in just two years.Manyentrepreneursliketoplayitsafeandapproachtheirbusinessasaside-job.Theyplaywithitandhopeittakesoff,butmeanwhile,theykeeptheirday-jobtopaybillsandfundtheirlittleexperiment.Thissaferouteleadstocomplacency.Ifyouquityourdayjob,youwillfindawaytopaythebillsfromyourstartup,andyourbusinesswillbemuchmorelikelytosucceed.Youwillhavemoretimetodedicatetothesuccessofyourstartup,andmoreimportantly,youwillfeeltremendouspressuretosucceed.Whileembracingflexibility,theNewEntrepreneurial Dynamic also requires commitment.LetÕs Go!You’vegottheideanow.Today’ssmallbusinessesneedtobeconstantlyintouchwiththeirchang-ingenvironment.Theymustconstantlyadaptasthatenvironmentevolves,andtheymayocca-sionallyneedtopivottoentirelynewmodels.Dynamicentrepreneursmustembracenewtrendsandtechnologies.Theremainderofthistextbookwilltakeyouthroughthemechanicsoflaunch-ing and running a real-world business in the context of the New Entrepreneurial Dynamic.Video Pitches Are the New Executive SummaryTheNewEntrepreneurialDynamicembracestechnologicalprogress.Weliveintheageofvideo,andifapictureisworthathousandwords,avideomustbeworthamillion!ThepitchvideoisthecenterpieceofcrowdfundingonsiteslikeKickstarter,anditisrapidlybecomingthebestbetforreachinginvestors.Inaworldof280-charactertweets,fewofuslookforwardtoreadinglongdocuments,andnobodyismoretunedintothefastpaceandtechnologyofcontentdeliverythan56A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
today’sinvestors.SendingaprintedandboundbusinessplantoaSiliconValleyventurecapital-istimmersedintoday’sinterconnectedmediamakesnosense.Everystartupshouldhaveasolidpitch video in its arsenal.Videorulesbecauseultimately,investmentdecisionsarelikelybasedonyourteamandunder-standingwhatyourproductorservicedoes.Nocompilationofphrasesandchartscanconveythat the way a video can. If your team is tangible on the video, your product is doing its thing.Videopitchesneednotbeelaborateproductions.Theyshouldbeshort,sincere,andwellexe-cuted,butanythingisusuallybetterthannothing.TheNewEntrepreneurialDynamicembracesthe latest technology and media.Snapchat founder Evan Spiegel explains his vision for a new social media app.View in the online readerGoogleavideoentitled“WhatisSnapchat?”andwatchthatInternetphenomenon’sfounder,EvanSpiegel,pitchhisvision.Whilethevideoisn’tamasterpieceofproductionquality(youwilldobetter),itissincereandexplainstheserviceinfourminutes.Spiegelrevealshimselfasbothinnovativeandpassionateabouthisproject,aswellasshowingwhySnapchatissocohesivewithregularcommunication.Apparently,itworked,butwe’drecommendyouspendafewbucksonavideographerandeditor.Recruitsomecinemaorvideoproductionstudentsfromyourlocaluniversity if you can. They love to add projects like this to their resumes.Key Takeaways•Building a team needs to be in your plan; great entrepreneurs do not succeed on their own.•Never approach a business half commited.•Use the latest tools to run and represent your business.What is Snapchat?Chapter 2The New Entrepreneurial Dynamic57© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
The Adoptimize app.Source: Jessica Schleder2.4Case Study: Pivoting Pet AdoptionwithAdoptimizeAsastudentinanMBAentrepreneurshipclassattheUniversityofSouthernCalifornia,JessicaSchlederneededanentrepreneurialprojectidea.Herexpertisewasinmarketinganddigitalmedia.ShehadproducedmajorcampaignsforlargefirmslikeNestlé,Universal,Sony,and20thCenturyFox.Whileeachoftheseseemedexcitingatthetime,sherealizedthat“HelpingBartSimpsonpitchBut-terfingercandybarsjustdidn’taddalotofmeaningtomylife.”Attheencouragementofherprofessor,shebegantolookforanintersectionwhereherpassionsmightmeetarealmarketneed.Wherecouldshesimultaneouslycreatevalueforaconsumerororganizationaswellasforherself?Wasthereacustomerwith a pain point that she shared?Jessica’smindquicklysettledontheplightofshelterpets,anissueaboutwhichshehadlongbeenpassionate.AccordingtotheAmericanSocietyforthePreventionofCrueltytoAnimals(ASPCA),nearly6.5millioncompanionanimalsendupinU.S.petsheltersannually.Onlyabout10percentoftheselostpetsmakeitbacktotheirowners.ASPCAreportsthat1.5millionofthemareeuthanizedeachyear.Alotofpetloversaredisturbedbythesefigures,andmanyofthemdonatetono-killsheltersorputinvolunteertimewiththeirlocalshelters.How-ever,Jessicawantedtodosomethingbigger—somethingscalablethatwouldhaveanimpactbeyondthemoneyortimeshecouldpersonallycontributetothisproblem.Shebegantothinkofwaystoimprovetheoddsforanimalsseekingadoptive families.Jessica’sfirstthoughtsrevolvedaroundthematch-makingprocess.Oneoftheproblemsintheanimaladoptionworldoccurredwhenprospectivepetparentsfellinlovewithananimalthatwasn’treallybehaviorallyappropriatefortheircircumstances.Breedsweremisidentifiedbyintakeworkers,andsomanyanimalsweremixedbreedthatdeterminingactivitylevelbasedondescrip-tionwashard.Sheltersdidn’thavethecapabilitytopostavideoshowingtheorphanedanimal“inaction,”butJessicareasonedthatanAIalgorithmcouldanalyzeananimal’smotionandcategorizeits activity level to help fit it to prospective adoptive families and their homes.Jessicanamedherstartup“Adoptimize,”recruitedaprogrammer,andbegantoworkontheconcept.Workingwithfacultymentors,sherefinedthebusinesspitchandenteredUSC’spremierbusinesscompetition,theNewVentureSeedCompetition.Adoptimizetooksecondplaceanda$15,000 check.58A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Shelter photo of a dog.Source: Jessica SchlederAdoptomized photo of a dog.Source: Jessica SchlederReal-worldtestingquicklymadeitclearthatthebehaviorofdogsandcatsatashelterwasn’trepresentativeoftheiractualpersonalitiesinanormalhomeenvironment.Theaspiringpetmatchentrepreneurrecallsthat“Inoticedthataveryactivedogmightbecomefrightenedandmeekafterbeingdraggedintotheholding area and a normally calm animal might completely freak out.”Jessicabegantolookforarelatedproblemshecouldpivotherefforttowardandsettledontheideaofimprovingphotographs.Scrollingthroughthousandsofadsforshelterpets,sheimmediatelynoticedthatmostofthemlookedlikebadprisonmugshots.Theanimalswereposedawkwardlyandlookeduncomfort-able.Oftentheanimalwasactuallychainedintopositionsotheshelterworkercouldtakethephoto.Thebackgroundswereusuallydreadfulcementcellswithstainedfloorsandwalls.Jessicaremarked,“Theoverallimpressionfromthesephotoswasthatanimalsheltersdidn’tevencareabouttheanimals—andthisisso far from the truth.”Lookingthroughhervideos,Jessicanoticedthattherewerealmostalwaysmomentswhentheanimalwasmoving,vibrant,andhappy.Shethought,“WhatifwecoulduseAItoidentifythosehappymomentsandgrabthebestframetopresenttheanimal?”Inthatcase,theshelterworkercouldjustletthedogorcatlooseandshootaminuteorsoofvideoandletthesoftwarefindagreatshot.Agoodshotwouldbeonewiththeeyesfacingthecamera,tailheldhigh,earsperky,etc. She set her coder to work.Jessicaconfided,“Thefirstattemptwasprettyhilarious!”Wantingtoensurethattheanimal’seyeswerealwayscenteredintheframe,theprogrammerusedanexistinglibraryofcodethatwasdesignedtoidentifyhumaneyeballsinpho-tos.Thewhitesofthehumaneyearealwaysvisible,surroundingthedarkeriris.Animaleyesareusuallyalliris,withnowhiteshowing.Thesoftwarewaslookingforadarkspotsurroundedbyalightercircleandconsistentlyselectedphotosfocusedontheanimal’sanus.“Weturnedthealgorithmonanditspitoutallthese perfectly framed pictures of dog butts!” she laughed.Theprogrammerwasabletoresolvethatissue,butthebackgroundswerestillanissue.Jessicadevelopedastandardizedpetstudiowithacamera,lighting,andawhiteclothbackdropandlookedforasitetotesthersysteminthefield.TheAmarillo,Texas,animalshelterwasherfirstbreak.AmarillowasfarfromconvenienttoherbaseinLosAngelesandnotthemostexcitingplacetowork,butJessicadugin.Shequicklydiscov-eredthathersetupwasgoingtohavetroubleintherealworld.Awhitebackgroundworkedgreatfordarkeranimalsbutwasproblematicforthelightersubjects.Worse,thecrittersthatJessicawastryingtohelpfindtheir“foreverhome”simplyshowednorespectforherstudio.“IthinkitwasthethirddogItriedthatpeedonthebackgroundcloth,andeveryonethatfollowedafterthathadtoleavetheirownsignature.”Theclothwasquicklyunusable.Beingapersistentproblemsolver,sheswitchedtovinylandconsideredofferingdifferentcolorbackgrounds.Shespentalotofmoneyand rolled the solution out to five shelters across the country.Thewholeprocessendedupbeingalotofworkforunderstaffedsheltersplusa30-secondvideotooktoomuchtimewhenshelterswereintaking100dogsaday.TheexpensesofbuyingastudiowithastandardizeddigitalcamerareducedtheirabilitytopayforAdoptimize’ssoftwareser-vices.Ontopofthat,somedogsdidn’tevenneedavideobecausetheysatandlookedatthecamera.“I realized that we had way overengineered that solution,” Jessica recalled.Onceagain,Jessicalookedforapivot.Whynotjustremovethebackgroundinthesoftware?Ontopofthat,everyshelterworkerhadaverycapablecameraintheirphone;whynotleveragethatinvestment?Initsthirditeration,Adoptimizeletshelterworkersshootpictureswiththeirphonesanduploadthemtotheprocessingwebsitewherethesoftwareidentifiedtheanimal,strippedoutthebackground,andreplaceditwithacheerfulsolidcolor.Thiswasfasterandcheaper for the shelter, leaving more funds to pay for the startup’s software services.Chapter 2The New Entrepreneurial Dynamic59© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Jessicaalsopivotedhereconomicmodel.Ratherthantryingtogetpaymentfromsheltersthatalwaysseemedtobejustscrapingby,shereachedouttocommercialpetproductsuppliersforsponsorship.Adoptimizephotoscouldincludethesponsoringcompany’slogo,andthesesponsorswouldalsobeabletosendspecialofferstothenewpetparents.Connectingthesefirmswithadop-tionwasgoodmarketing,andconnectingthemwithnewcustomerscoulddirectlydrivesales.Itwas a real win/win, and Jessica quickly signed up some sponsors.ThisnewAdoptimizesystemwaseasy,effective,andpaidforbysomeoneelse.What’snottolovefortheshelters?Jessicafoundoutthatevenafreeandusefulsystemcanrunintoopposition.Sheshared,“I’vediscoveredthatsheltershaveoccasionalvolunteerphotographerswhodoreallyniceshotsofafewoftheanimals,andtheydon’tlikebeingdisplaced.Oftentheseindividualsaresignificantdonorsandvolunteersthatthesheltersdon’twishtooffend.”Shecontemplatedhowtodeal with this latest challenge, “It’s always something. I’ll figure it out.”Endnotes1.Blank,S.G.,&Dorf,B.(2012).ThestartupownerÕsmanual:Thestep-by-stepguideforbuildingagreatcompany(1sted.).Pescadero,CA:K&SRanch; 53.2.Mullins,J.W.,&Komisar,R.(2010).GettingtoplanB:Breakingthroughto a better business model. Boston, MA: Harvard Business Press.3.Lange,J.E.,Mollov,A.,Pearlmutter,M.,Singh,S.,Bygrave,W.D.(2007).Pre-startupformalbusinessplansandpost-startupperformance:Astudyof 116 new ventures.Venture Capital9, 237–256.4.Chwolka,Anne,andMatthiasG.Raith.(2012).“Thevalueofbusinessplanningbeforestart-up—Adecision-theoreticalperspective.”JournalofBusiness Venturing27.3:(2012),385–399.5.Blank,S.,andDorf,B.(2012)Thestart-upownerÕsmanual.K&SRanch,Inc. p. xii6.TheFDICstandardinsuranceamountis$250,000perdepositor,perinsuredbank,foreachaccountownershipcategory.https://www.fdic.gov/resources/deposit-insurance/#:~:text=Depositinsuranceisoneof,foreachaccount ownership category7.https://www.statista.com/statistics/219643/gini-coefficient-for-us-individ-uals-families-and-households/60A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
strategyThe art of analyzing aposition and planning formoves that, within therules of the game andconsidering the capabilitiesof the competitors, willresult in strategicadvantage.strategicmanagementThe discipline thatcoordinates all the otherareas of management toadvantage.CHAPTER 3Strategy: Capturing andMaintaining CompetitiveAdvantageTo win by strategy is no less the role of a general than to win by arms.—Gaius Julius CaesarYour business strategy forms the brain of your business model.Source: © Shutterstock, Inc.Abusinessstrategyformsthebrainofyourbusinessmodel.Astrategyisaplannedmethodthatanorganizationusestoachieveaspecificobjectiveovertime.Itistheartofanalyzingaposi-tionandplanningformovesthat,withintherulesofthegameandconsideringthecapabilitiesofthecompetitors,willresultinstrategicadvantage.Strategicmanagementisthedisciplinethatcoordinatesalltheotherareasofabusinesstoadvantage.Astartupwithoutastrategyisadrift,anditsoutcomesarerandomatbest.Abusinesswithawell-conceivedstrategythatfitsitsenviron-mentanditscompetitionandexecutesthatstrategywellwillnotfail.Thischapterwillintroduceyoutothefundamentalsofstrategictheorywithpowerfulexamplesfromfirmsyouprobablyknowwell,aswellassomesurprisinganalogiesfromhistoricmilitarystrategyandevengaming.Itwill also reveal how small businesses can obtain an advantage over their larger rivals.© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Chess, a popular game of strategy, originated inIndia.Source: © Shutterstock, Inc.3.1Being StrategicLearning Objectives1.Embrace the power of disruption in entrepreneurial success.2.Understand the central role of strategy in business competition.3.Understand the relationship of objectives, strategies, and tactics.4.Appreciate the lessons that military and sports strategy offer to business leaders.5.Understandthatasuccessfulbusinessmusthaveeitherapriceadvantageorasignificantdifferentiator.6.Recognize the strategic advantages that startups and smaller businesses possess.7.Remember that tactics support strategy.Strategy, a Serious GameStrategicthinkingisfundamentallythesameinsports,warfare,andbusiness.Atthemostabstractlevel,theseareall“games.”Eachoftheseendeavorsfeaturesacompetitivebattlebetweenopponentswhoaresimultaneouslyattemptingtoachievesomegoalwhilealsodefendingtheirownposition.Forabaseballcoach,thegoalistogetmorerunsthantheopponent.Foranarmygeneral,areasonablegoalmightbetocapturetheenemy’scapitol.Foranentrepreneurlaunchingafoodservicesbusiness,thegoalmightbetocapturethedowntowncateringmar-ket.Lackingacleargoalorobjective,therecanbenoeffectivestrategy.You’vegottoknowwhereyouwanttogoinordertodeveloptheprocessandplanrequiredtogetthere.Organizationsledbygenerals,coaches,orCEOswhoareunabletoidentifyandclearlycommunicateobjectivestotheirteamsinvariablyflounderand fail.ClassicgamesofskilllikechessandGo(Weiqi,圍棋)arecommonlyidentifiedasgoodstrategictraininggroundsforbusinesspeople.Theyhaveclearlydefinedrulesandarechal-lengingmentalexercisesinstrategy.Whilethisistrue,bothofthesegameslackoneofthemostimportant elements in determining business success. Can you think of what that is?62A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Poker offers a combination ofluck, strategy, andpsychology that is similar tobusiness competition.Source: Iurii Osadchi/Shutterstock.comScreenshot from the Inc.com website.Source: https://www.inc.com/josh-linkner/a-winning-secret-from-chess-grand-masters.htmlTheelementI’mreferringtoisluck,theinfluenceofrandomexternaleventsthatchangetheenvironmentinwhichcompetitionoccurs.TheonlythingthatcansurpriseyouinchessandGoisyouropponent’smoves,whichareallforeseeablepossibilities.Thesegameslackanyelementofluck.Consequently,strategiesdesignedforthesegamesareliketheoldschoolbusinessplansthatpresumetheentrepreneurcanfollowapredeterminedsetofdirections.TheNewEntrepreneurialDynamicemphasizesthatthebusinessenvironmentisinfluencedbyrandomevents,andthereforechess and Go are actually of limited value in preparing for business competition.Ontheotherhand,populargamesofchance,likecraps,blackjack,orMonopoly,havesomuchluckinthemthatthereislittletobelearnedfromthematall.Therearefairlystraightforwardsta-tisticalstrategiesanyonecanmasterinafewhoursthatwillnearlymaximizeyourresultsinthesegames(thoughmostplayersputtheirmoneyonthetablewithoutlearningthese).Canyouthinkof a popular game that balances the planning of chess with the statistical analysis of blackjack?Themostpopulargamethatbalancesstrategyandluckwouldbepoker.Competitivepokerrequiresplayerstocompeteinanenvironmenttheyhavelittlecontrolover.Eachhandis,forthemostpart,determinedbytherandomlydealtcards.However,playerscananalyzetheirownstrengths,estimatetheiropponents’resources,andthenmaximizethechancesofawinningout-comebasedonbothmathematicalskills(knowledgeofstatistics)andpsychologicaltactics.AsKennyRogers’famoussong,“TheGambler,”remindsus,inpoker,“Everyhand’sawinner,andeveryhand’saloser.”Strategyiswhatmakesaweakhandapotentialwinneranddifferentiatespokertournamentchampionsfromrankamateurs.Anothergamethatbalancesluckandstrategyisthepopular board game, Catan.Massivelymultiplayeronlinegames(MMO/MMOG),suchasBlizzard’sWorldofWarcraft,offercomplexenvironmentsthatcombineluckwithstrategicandtacticalchallenges.Theyareoftensta-tisticallyanalyzableandmayevenincluderudimentarymarketplacessubjecttomicroeconomicforces we will be exploring in this chapter.Chapter 3Strategy: Capturing and Maintaining Competitive Advantage63© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
BlizzCon 2019 banners outside of the AnaheimConvention Center.Source: Natalia Leen/Shutterstock.comgame theoryA branch of math theorywhich models the optimaldecision-making of playersin a competition.Nash EquilibriumA model in game theory inwhich each player reachesan optimal strategy fromwhich they will not deviateafter considering theopponents’ choices. Inbusiness this results instable oligopolies.oligopolyA situation in which a smallnumber of firms dominatea stable market.duopolyA market dominated bytwo firms.Giventhenatureofhumanhistory,it’sprobablynosurprisethatmanyofthegreatestmindshavebeendedicatedtoplanningwarfareanddestruction.ItisnotuncommonforbusinessleaderstostudyTheArtofWarbyChinesemilitarystrategistSunTzuandthewritingsofthePrussianGeneralCarlvonClausewitz.Theymayalsobefamiliarwithbattles,fromtheGermanflankingoftheFrenchMaginot Line in 1940 to the American blunders at Tora Bora in 2001.[1]Youmaynotthinkaboutit,butlikeallgames,thestrategicoptionsinwar-fareareconstrainedbyrules.Thesearen’tjusttheonesintheGenevaConvention,aninternationaltreatythatrestrictstheuseofweaponslikepoisongasanddefinesthetreatmentofprisonersofwar.Generalsandadmiralsarealsorestrictedbygeographicrealities,thetechnologyoftheirtime,thelawsofphysics,andeventhepoliticalrealitiesinwhichtheirrulersoperate.Rulesdefinewhatoptionsstrategistscanchoosefrom.Chessplayerscan’tknockovertheboard,pokerplayerscan’tpeekattheface-downcards,andAmericangeneralscannotusenuclearweaponstosolvetheirproblemsinforeignwars.Businessrulesaredeterminedbyeconomicforcesand by local and national laws.Athigherlevels,themathematicaldisciplineofgametheoryisusefulinsimulatingallofthesecompetitivefields.Gametheoryisthescienceofidentifyingalgorithmsformaximizingoptimaldecision-makinginstrategicsettings.EconomistOskarMorgensternandmathematiciansJohnvonNeumannandJohnNashdevelopedthisscienceinthe1940s.TheNashEquilibrium[2]isapar-ticularlyfamousexamplethatdefinescircumstanceswhereonceallplayershavedefinedastrategy,noplayercanimprovehissituationbymakingachange.Itisusefulinanalyzingmilitarystandoffsaswellasoligopoliesinbusiness.Anoligopolyisasituationinwhichasmallnumberoffirmsdominateastablemarket.ThesmartphonebusinessisanoligopolycurrentlyunderaNashEquilibrium;neitherApplenorGoogle(Alphabet)candomuchstrategicallytochangethebalancein the iOS vs. Android market shares. A two-member oligopoly is referred to as aduopoly.Market DisruptionConsidertheluxuryautoindustry,dominatedforseveraldecadesbymajorfirmsBMW,Audi,Mer-cedes,andLexus,withminorplayerslikeJaguarandCadillac.In2012,theTeslaModelSburstoutofnowheretocompletelydisruptthisequilibrium.Thenine-year-oldCaliforniafirmhadsuddenlybecomethefirstsuccessfulU.S.carcompanytoemergesinceChryslerwaslaunchedin1925.Overthenextthreeyears,theModelScapturedanastoundingnumberofaccolades,including2013MotorTrendCaroftheYear,Automobilemagazine’s2013CaroftheYear,andTimemagazine’sBestInventions of 2012. In 2015,Car and Drivereven dubbed it “The Car of the Century.”Afterexhaustivetesting,ConsumerReportsgavetheTeslaModelSitsbestratinginhistory,choseitas“BestOverallVehicle”twoyearsrunning,anddescribedthecaras“sorevolutionaryandadvanced,it’slikeacarfromanotherplanet.”TheTeslaeventoppedtheU.S.NationalTransporta-tionSafetyBoardtestingregimebyscoringperfectlyineverycategoryandsubcategory,earningthehighestratingever.Mostimportantly,thecarsoldwell.TeslacarsproliferatedacrossCaliforniaandthenthenation.By2013,theModelSwasoutsellingsimilarlyconfiguredsedansfromLexus,BMW,Mercedes,Audi,andPorsche.Infact,saleswereprimarilyconstrainedonlybythefirm’sabil-itytodelivercarsfastenough.Teslabuyerswereplacingdepositsandwaitingforseveralmonthstogettheircars.In2014,TeslabegantakingdepositsforitsSUV,theModelX,andquicklypresoldmorethan20,000cars,sightunseen.ThesurprisingfactwasthatallofTesla’scarswereelectricvehicles,acategorypreviouslyrestrictedtounattractive,low-performancecarssoldinlowvolumes.Howdidthis happen? Was it luck or simply great execution?64A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
mature industryAn industry where thedominant design (technicalstandards), firm positions,and market shares havebeen established. Wherelittle change has beenseen recently.market disruptionA fundamental shift orchange to a market thatresults in the appearanceof new firms and theelimination of incumbentsthat fail to adapt.market shareThe percentage of aparticular market orproduct segment held byone firm or product.entrenchedcompetitorsIncumbent firms that havea strong market position;difficult to assail.skunkworksA development facilityintentionally isolated fromthe public and otherdivisions of a firm. Typicallyworking on the mostleading-edge technologies.Therearekeymomentsinbusinesshistorywhenthedominantplayersofamatureindustrysuddenlyfindthemselveschallengedbyanunexpectedupstartthatenterstheirmarketfromoutofthebluewithanewtechnicalapproach.Wecallthisprocessmarketdisruption.Intheearly2000s,themusicindustryfounditstraditionaldistributionofproductsthroughretailrecordstoresupended by a digital music revolution dominated by Apple’s iPod plus iTunes ecosystem.Planningtocausemarketdisruptionispossiblythemostpowerfulstrategyabusinesscanemploy.Inthecaseofdisruption,theobjective(orgoal)istocapturemarketsharefromentrenchedcompetitors.Apple’siconicleader,SteveJobs,wastheall-timemasterofmarketdis-ruption.Steve Jobs, Master DisruptorThe iPad was one of many dominant products Steve Jobs brought to market.Source: Bloomicon/Shutterstock.comSteveJobsdisruptedmoremarketsthananyentrepreneursinceThomasEdison.Jobswastheadoptedchildofaworking-classfamilyinCalifornia’sSiliconValley,anareafamouslyfilledwithengineers,inventors,andentrepreneurs.Withhispartner,Steven“Woz”Wozniak,JobsformedAppleComputerin1976.With$1,300scrapedtogetherfromthesaleofaVolkswagenvanandanHPcalculator,theduosetouttotakeonIBMandthepowerfulmainframeandminicomputerChapter 3Strategy: Capturing and Maintaining Competitive Advantage65© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
firmsthatdominatedcomputing.Fouryearslater,thefirm’sIPOmadehistory,creating300newmillionaires.Whenthedustcleared,anewindustry(thepersonalcomputer)hadbeenborn,andanewentrepreneurialparadigm(theSiliconValleycollegedropoutstartup)hadbecomeenshrinedin business culture.Jobs’nexttrickwastodisruptAppleitselfbyrecruitingagroupofengineerstoworkonaskunkworksskunkworksprojectthatwasnotentirelyendorsedbyApple’sexecutives,inabuildingthatwastoppedwithaJollyRoger(pirate)flag.TheresultwastheMacintoshcomputerthatwasintro-duced in early 1984 and still defines how all personal computers operate to this day.Jobs’lackofrespectforrulesandhisfamouslyabrasivepersonalityturnedouttobetoomuchforamaturingcompanythatwasseekingtoingratiateitselfwithconservativecorporateinstitutions.ShortlyafterthelaunchofMacintosh,Apple’sboardofdirectorschasedhimfromthecompanythathe’dfounded.Insulted,butundaunted,Jobspursuedanewcomputerfirm,NeXT,andinhissparetime,hefundedandthenpurchasedPixarAnimationStudiosfromdirectorGeorgeLucas.Pixarwasformedtodevelophardwareandsoftwaretoolstoassistmoviemakerswithspecialeffects.However,JobssawmoreinPixarthanitstechnologyandledthecompanyinitsdevel-opmentintotheworld’sleadinganimationstudio,knockingouthitfilmslikeToyStory,MonstersInc.,andFindingNemo.Theamazing,three-dimensionalrenderingsofthesecomputer-animatedfilmsobliteratedthetraditionalhand-drawnfilmsthatwerethemainstayofcompanieslikeDisney.In2006,DisneypurchasedPixarfor$7.4billion,andJobsendedupasDisney’slargestshare-holder.Bythelate1990s,AppleComputerwasacompanyadriftandinfinancialtrouble.ThefirmhadbeencrankingoutslightimprovementstotheMacintoshcomputerforadecadebuthadnotexecutedanydisruptiveinnovationsinceSteveJobs’departure.Marketsharewasdown,andindustryobserverswerepredictingthefirm’scollapse.In1997,JobsreturnedandtookthehelmatApplewithapowerfulintent.Hequicklyoverthreweverythingfromproductdevelopmenttodistributionandbeganlookingfordisruptionopportunities.In2001,AppleintroducedtheiPodand,in2003,itsiTunesmusicstore.Thispowerfulcombinationofplayerandconvenientcon-tentdistributiondestroyedtheCDplayerbusiness,dominatedbyJapanesefirmslikeSony,andretailmusicstoreslikeTowerRecordsandWherehouseMusicthathadbeenpresentinAmer-ica’s malls and shopping centers for decades.JobstoppedhisiPodsuccessin2007withtheintroductionoftheiPhone,adevicethatdec-imatedcellphonegiantsNokia,Blackberry(RIM),andMotorolaandcompletelyupendedtherelationshipbetweenhardwaresuppliersandnetworkproviders(ATT,Verizon,etc.).Onceagain,hehadessentiallydefinedexactlyhowaubiquitousconsumerdevicewouldfunctionandhowanentireindustrywouldberun.TheiPadfollowedshortlyafterthat,definingthedominantdesignforthetabletcomputermarket.Intheprocess,hecapturedimmenseprofitsanddroveAppletobe the world’s most profitable firm and the most admired brand on Earth.Objectives, Strategies, and TacticsAllmencanseethesetacticswherebyIconquer,butwhatnonecanseeisthestrategyout of which victory is evolved.—Sun TzuWhileit’scleartomoststudentsthatstrategyinvolvesplanningtooutwitanopponent,itisnotalwaysobvioushowstrategyintegrateswithotheraspectsofentrepreneurshiptoproducesupe-riorresults.Figure3.1helpsyouvisualizehowstrategyispartofaprocessthatbeginswithsettinga goal or objective.66A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
FIGURE 3.1Strategic ExecutionSource: Greg AutryObjectivesorgoalsshapeyourstrategy.Strategydefineswhichtacticstoapply.Tacticsdriveexecution.Excellentexecutionofthepropertacticsattherighttimeproducegreatbusinessresults.Overcoming Barriers to EntryYou’vealsogottoknowwhatobstaclesmightbeobstructingthepathtowardyourobjective.Almostallindustrieshaveobstaclesthatmakeitdifficultfornewfirmstogetestablished.Wecallthesebarrierstoentry.ThesebarriersarerepresentedinFigure3.1bythebarthatblockstheobjec-tivearrow.You’llnoticethatthestrategyarrowpassesthroughthebarrier.Strategicplanningisthesolution to overcoming barriers to entry.WhenElonMuskandtheTeslafoundersdecidedtoentertheautomobilemarket,theydidnotfindtheroadaheadsmoothlypavedforanewelectriccarcompany.Itturnsoutthattheprocessofmanufacturingacarandgettingittested,approvedforsale,anddistributedtoconsumersisverydifficult.OneverysimpleexampleofabarriertoentrywasencounteredbyTeslawhentheydis-coveredthatmanypartssupplierswerenoteagertoworkwithasmallnewstartup.Wantingtogetallthebestparts,thecompanysoughtoutthetopsupplierforhundredsofsimplecomponentslikesunvisorsandmirrors.Veryoften,theydiscoveredthattheexistingsupplierswereunwillingtoaccommodatetheminatimelymanner.Itispossiblethesesuppliersjustdidn’twanttobotherwithasmallfirmthattheyfeltwasn’tverylikelytosucceed,oritmaybethatoutofloyaltytotheirbigclients,theyintentionallyrefusedtoservicenewcompetitors.Eitherway,thebigfirmshadestab-lished barriers to entry that throttled Tesla’s supply chain.Teslasawsimilarbarrierstoentryonthedistributionside,wherethebigautofirmshadthou-sandsofcardealersrunningsaleslotsacrossthecountrystaffedwithhundredsofthousandsofsalespeople,financemanagers,andservicestaff.Creatingsuchanetworkwouldrequireyearsofworkandbillionsincapital.Convincingindependentdealerstotakeachancebyfillingtheirlotswitharadicalnewcarwouldbearealchallenge.Gettingthemtosellacarthatwasdesignedtolastlongerandrequiredmuchlessoftheirhigh-costrepairserviceswasgoingtobeevenharder.Thedealerships’ hold on access to car buyers represented another barrier to entry.Goodstrategycanguideyourorganizationaroundthebarrierstoentrythatkeepyoufromachievingyourobjectives.AclassicexampleofsuchastrategyisthePersianvictoryovertheSpar-tansin480BCEattheBattleofThermopylae.ThePersianemperor,Xerxes,sailedtoGreeceanddepositedthemostmassivearmyinhistoryonawidecoastalplain.Accesstothecitiesbeyondwasblockedbyachainofmountainsveryneartheseashore,withapassjust300feetwideper-mittingtravel.BeforethePersianscouldmovetheirforcesthroughthisnarrowpoint,theGreeksdispatchedacontingentofabout7,000soldierstoblockthePersianadvance.TheGreeks,ledbytheSpartangeneralLeonidas,heldthepassfortwodays,usingthemselvesandtheirshieldsasanextremely effective barrier to entry.Chapter 3Strategy: Capturing and Maintaining Competitive Advantage67© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
flanking maneuverA strategy or avoidingdirect confrontation withan (often superior) enemyby going around the end ofits lines and attacking fromthe side or rear.outflankedTo be a victim of a flankingmaneuver when anopponent goes aroundyour defenses to attackyour vulnerable side.vertical integrationThe purchase of suppliersand or customers tocreate a firm thatencompasses more of itsvalue chain. A fullyvertically integrated firmwould take in raw materialand sell products directlyto end-users.XerxeswasfrustratedbyhisinabilitytomoveforwardandwasfacingarealdisasterunlesshequicklycapturedsignificantGreekfoodstoresandfarmstofeedhisenormousarmy.RecognizingthatthePersianswouldpaydearlyforaccess,aGreektraitoralertedXerxestotheexistenceofatrailthroughthehillsthatcouldcircumventLeonidas’forces.Suchastrategyofgoingaroundthesideofabarriertoentryiscalledaflankingmaneuver.LeonidasdispatchedmostofhisarmytofightthePersiansonthetrailandcontinuedtoholdthepasswithafewhundredmen.ThePer-siansoverwhelmedtheGreeksonthemountaintrailandoutflankedLeonidas.Thegeneralandhis300SpartansthenfamouslysteppedoutontotheplaininfrontofthemillionPersiansoldiersandfoughttothedeath.[3]Thethree-daydelayweakenedthePersianarmyaswellasXerxes’resolve,and the Greeks were eventually able to drive the invaders out of their peninsula.FIGURE 3.2The Battle of Thermopylae, 480 BCE.Maps courtesy of the Department of History, United States Military Academy.Source: https://commons.wikimedia.org/wiki/File:Battle_of_Thermopylae_and_movements_to_Salamis_and_Plataea_map-it.svg#/media/File:Battle_of_Thermopylae_and_movements_to_Salamis_and_Plataea_map-en.svgInasimilarmove,TeslaMotorssimilarlydecidedtodrivearoundmarketbarrierserectedbyToyota,Ford,andtheotherbigautofirms.First,Elonsolvedhisfirm’ssupplyfrustrationsthroughverticalintegration,astrategyofbuildingmanyofyourownparts,whichwasfamouslyexecutedbyHenryFordwithhisModelTandModelAproduction.Togetaroundthecardealers,Teslamar-keteddirectlytoconsumersviatheinternet,positivewordofmouth,andsmallbutstylishshowroomslocatedinsidemalls.Itturnedout,notsurprisingly,thatAmericancarbuyersweren’tinlovewiththewholecardealershipsalesandserviceexperienceinthefirstplace,andtheyflockedto buy the Model S. Musk had outflanked the giants of Detroit and Kyoto.However,thestorydoesn’tendhereasthemajorcarmanufacturersandtheirdealersquicklyrespondedbytryingtoassertthatitwasillegalforTeslanottosellthroughdealers.SeveralU.S.statespasseddealership-backedlawsblockingTesla’sdirectsalesmodel.Manipulatingthegovern-mentinordertoestablishlegalbarrierstoentryisatimelesscounterstrategyandisatopiccoveredin detail in a later chapter of this text.[4]68A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
differentiationThe way in which a firm isable to distinguish itsproducts (positively) fromits competitor’s offerings.The Two Basic Strategies: Price andDifferentiationHarvardBusinessSchoolprofessorMichaelPorterisconsideredbymanytobetheacademicgod-fatherofbusinessstrategy.Hisfamousbook,CompetitiveAdvantage,detailsthewaysbusinessespositionthemselvesforsuccessinmarkets.OneofPorter’smajorinsightsisthatwhendistilledtotheircore,businessstrategiescomedowntooneoftwothings:eithertheydependonofferingalowerprice,ortheyprovideuniquefeaturescustomersarewillingtopayextrafor.Lowerpricingmaybesecuredthroughexclusiveaccesstorawmaterialsoruniqueefficienciesinthelogisticsofproduction,distribution,orsales.Lackingeitherapriceadvantageordifferentiationfromtheircompetitors,afirmisdoomedtobeanother“also-ran”or“knock-off”fromthecustomer’sperspec-tive.Suchafirmisunlikelytosecureorholdasignificantpositionintheirmarket.Whyshouldcustomers choose them or stick with them?Walmartstoresaretheposterchildforeffectivepricingstrategies.AlmosteveryfactoratWalmart,fromstoredisplaystoadvertising,isdonewithlittlemoneyorattention,anditshows.NobodyshopsatWalmartfortheambiance,buteveryoneexpectstogetagreatprice.Inordertodeliverthatlowpricetoitsshoppers,theBenton,Arkansas-basedretailerisalwaysfocusedonreducingcosts.Thefirmfamouslypressuresitsvendorsandlogisticalsupplierstolowertheirprices.Walmartcanbesotoughonitssuppliersthatacommonjokeamongentrepreneursis:“Whatis the quickest path to failure for a small business?” The answer?“A big order from Walmart.”Differentiationisbasedonbetterperformance,perceivedproductquality,superiorservice,orpositivebrandassociations.ThinkaboutApplehere.Applebuyersreadilypaysignificantlymorefortheirlaptops,phones,andtabletsthantheywouldforsimilarproductsfromcompetingcom-paniessuchasKorea’sSamsungorChina’sLenovoGroup.TheypaythishigherratebecausetheyperceivethatApple’sproductsaredesignedandbuiltbetterthantheircompetitorsandbecausethey wish to be associated with a brand that reflects their values and lifestyle.LetÕs Get SmallWe’venowseensomeprettybigexamples,butstrategicthinking,disruption,andflankingarestrategiesutilizedbysmallbusinessentrepreneurseveryday.Imaginethatyou’vedecidedtoopenasmallcoffeehousebut,notsurprisingly,thereareStarbuckslocationsonnearlyeverycornerintown.Starbuckshasagreatproduct,they’rewellknownandtrusted,andthey’vegotamazingcor-porateresourcesinmarketing,planning,etc.Isthereanywayyoucandifferentiateyourselfandsucceed?YoumustfollowanotherofSunTzu’sadmonitions,“Ifyouknowyourenemiesandknowyour-self,youwillnotbeimperiledinahundredbattles…ifyoudonotknowyourenemiesnoryourself,youwillbeimperiledineverysinglebattle.”Whenyouunderstandyourcapabilitiesandthoseofyour competitors, you can develop a strategy that turns their advantages into weaknesses.InthecaseofstartupversusStarbucks,youcanalwayscompeteonprice.Starbucksisnotcheap,andwiththeircorporateheadquarterssettingprices,demandingfancyoutlets,andbraggingofacommitmenttorelativelyhigherwages,individuallocationsarevulnerabletoapriceplayinmarketswhereconsumersarereallypriceconscious.Considerlocatingnearacommunitycollegecampus,wherestudentsenjoythecoffeehouseexperiencebutarecountingtheirpenniesfortextbooks.Bychoosinganoncornerlocation,aslightlylessglamorousstorefront,findingyourfur-nishings,andpayingyourstudentworkersabitless,youcancutthecostoffancycoffeeswithoutcutting the quality.Chapter 3Strategy: Capturing and Maintaining Competitive Advantage69© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
tacticsThe individual actions usedto implement a strategy.Patton was a tactical genius.Source: Tupungato/Shutterstock.comYoucanalsodifferentiatebyplayingupyour“indie”positionversus“corporate”Starbucks.Stu-dentsappreciatetherebelattitude—iftheygettheproductandservicetheywant.Tobeclear,thiswon’tbetheeasiestthingyou’veeverdone.Yourexecutionmustbeperfect,particularlyon-sitedesignandstyle.Customerscansmellthedifferencebetweenshabbychicandjustplainshabby:Oneiscool;theotherissad.Makesureyougetgoodstyleadviceandtestitwithpotentialcus-tomersinadvance.Also,make100percentsureyourstoreispackedwithhappycoffeecampersonlaunch.Thatmeanspromocoupons,giveaways,andbribingfriendsandfamilytohangoutandtalkup the place.TacticsOnceyou’veestablishedastrategydesignedtoreachyourmajorobjective,youwillsendyourforcesforwardtoconquerthemarket!However,indoingso,theywillquicklyencountermoreimmediateobstacles.Maneuversdesignedtoovercomethoseshort-termchallengesaretactics.Tacticssup-port the execution of strategy.Agreattacticianispreparedtomakequickadjustmentsinthefieldandkeepsamentalplay-bookoftacticsonhandtooutwittheenemy.LookingbacktotheSecondWorldWaragain,MajorGeneralGeorgeS.PattonJr.wasthemasterofarmoredvehicletacticsandauthorofahandbookondesertwarfaretactics.Amonghistacticalinsightswasthesimpleinstructionthattanksshouldadoptstaggeredformationsandmustneverformalineinanydirectionbecausehelearnedthatalineismostefficientlystrafedwithmachine-gunfirefromaircraft.Ingeneral,startupsandsmallbusinesses have the tactical advantage because they can shift tactics quicker when they learn.Manybusinesstacticsaresimilarlystraightforwardandseeminglyobviousafterthefact.Acommontacticweareexposedtoeverydayistheretailpricinggimmickwherebyapackageofchipsisofferedat$2.98ratherthan$3.00becauseitturnsoutthatevenmathmajorsarepsycho-logicallyinclinedtotruncatedigits.Whilewerationallyknowbetter,whenwesee2.98,oursubconsciousbrainsimplyrejectsdealingwiththecomplexityof2.98andtakesabadshortcutdirectlyto“2.”Anotherretailtacticistopositionmoreprofitableitemsonshelvesthatareeasiesttoseeandreach,placingtheleastexpensivestuffonthoselowershelveswhereyou’llhavetobendovertogetit.Advertisingtacticsincludethetime-honoredtraditionoffeaturingattractivepeople,sometimesplacingthemininappropriatelysuggestiveposestomanipulateourinstinctiveimpulses to look at such things.Key Takeaways•Disruption is inevitable; find strategic opportunity when it occurs.•Objectives (goals) drive strategy, which drives tactics, which require execution.•Barriers to entry can often be avoided with innovative approaches.•Ifyouwanttobeamajorcompetitor,youmusteitherfindawaytobelessexpensive(price)or provide unique (differentiation) value to your clients.•Being small can be an advantage in itself.•Even the most brilliant strategies cannot succeed unless supported by smart tactics.70A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
sustainablecompetitiveadvantageAn advantage that is nottransitory and can clearlybe maintained by the firmfor some time in the futureas in patented intellectualproperty that cannot beduplicated.competitiveadvantageA unique valueproposition, marketposition, technology, orother resource that givesone firm the ability tooutcompete another in themarket.termsDetails and/or the length oftime of an agreement.3.2Sustainable CompetitiveAdvantageLearning Objectives1.Understandthevalueofcompetitiveadvantagesandthehighervalueofasustainablecom-petitive advantage.2.Understand the strategy of constant innovation.3.Recognize that operational effectiveness is an advantage.4.Understand clearly what defines a market.Thestrategiesforholdingapositionareascriticalasthoseinvolvedintakingit.Todominateamar-ket,whatafirmtrulyneedsisasustainablecompetitiveadvantage.Acompetitiveadvantageisafactorthatprovidesafirmwithapositionofmarketpowertogenerateprofits.Asustainableoneisafactorthatafirmcanmaintaininthefaceofattacksfromitscompetitorsovertime.Wheninvest-ing in a strategy to gain advantage, you must consider how durable that advantage is likely to be.Imagineyouownalocalsolarinstallationcompany.Youknowtherearesomenew,ultra-effi-cientpanelscomingoutthatcustomerswillpreferoveralltheexistingoptions.Youcouldsignupasoneofmanydealersandgohead-to-headwithyourlocalcompetitorstosellthishotnewprod-uct.Everybodywoulddowellforawhileandcapturehigherprofitsfromeagernewcustomerswhoinsistonthenewestthing.However,oncetheeasycustomersweresold,you’dhavetostartdiscountingtokeeporgainmarketshareamongtheremainingcustomerpool.Yourcompetitorswouldnaturallyfollowsuit,andtheprofitswouldsoonevaporatefromthatbusiness.Whatcouldyou do to avoid this scenario?Whatifyouapproachedtheultra-efficientpanelsmanufacturerinadvanceandofferedtocommittoahighnumberoftheirpanelsupfrontandtoheavilypromotetheirproductaboveallothers—orevenabandonsellingcompetingpanels?Perhapsyoucouldaskthemforanexclusivedistributioncontract,wherenootherfirminyourareacouldsellthesepanels,forsomeperiodoftime—sayfiveyears.Thelongeryoucannegotiatesuchanagreement,themoresustainableyourcompetitive advantage would be.Dynamic AdvantageAsanentrepreneur,youcan’talwaysholdacompetitiveadvantagejustbecauseyou’dliketo.Asnotedinthesolarpanelexampleabove,exclusivecontractshaveterms,andwhentheyend,sodoesyouradvantage.Ifyoutieyourfortunetoasingleproducerforalongperiodoftime,thenyouhavebecomedependentonanotherfirmmaintainingyourcompetitiveadvantage.That’soutofyourcontrol,andifyoursupplierlosesitsedge,itmaytakeyourbusinessdown.Atwenty-first-centurybusinessmuststrategizebybothplanningaheadandbeingwillingtoswiftlydeviatefromtheplan.WhenApplewasdesigningtheiPod,theyrealizedthekeyto“1,000songsinyourpocket”wouldbethesupersmallharddriveintheirfirst-generationdevice.WhentheyfoundthatToshibaCor-porationofJapanwasdevelopingsuchaharddrive,ApplenegotiatedtopurchaseallofToshiba’smicrodrivesproductionforthefirst18months.Thisstrategypreventedanyonefrom“knockingChapter 3Strategy: Capturing and Maintaining Competitive Advantage71© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
A first-generation iPod.Source: marleyPug/Shutterstock.comswitching costCosts incurred by acustomer when changingto a competing product orservice. Typically, the timeconsumed with learning anew procedure.innovation strategyA strategy based on thedevelopment of newtechnologies or processesthat will provide acompetitive advantage.operationaleffectivenessThe ability of a firm toexecute well.off”Apple’sdesign,andtheiPodhadnorealcompetitorsformorethantwoyears.Jobssawtheben-efit from this strategic move as sustainable just long enough for him to make two more moves.Jobs’firstfollow-upmovewastoestablishan“ecosystem”thatmadeiPodusersdependentonthedeviceandtheconvenientiTunessoftwarethatorga-nizedtheirMp3songsontheircomputerintoplaylists.UserswhoswitchedtoanotherMp3playerwouldhavetogiveupthissoftwareandrecreatealltheirplaylists.Wecallthetroubleofchangingfromoneplatformtoanotheraswitchingcost.Whenusersfacehighswitchingcoststoleaveyourproduct,you’ve established a barrier for your competitors.Jobs’secondmovewastouseApple’smarketdominanceasalevertonegoti-atedealswiththemajormusiclabelstodistributetheirsongsonitsnewiTunesstore,whichlaunchedin2003.iPodownerscouldnowbuydigitalsongsconve-nientlyandlegally,butthemusictheyhadpaidforwascopy-protectedwithasystemcalledDigitalRightsManagement(DRM)thattherecordlabelswantedinplacetopreventusersfromsharingmusicfilesfreely.DRMsongsfromtheiTunesstorecameinaformatthatwasnoteasilytransferabletonon-AppleMp3players.Ifyouboughtanotherdevice,you’d lose your investment in music.Themusiclibraryissuewasaverytangibleswitchingcostthatworked,andthebarriertoentryitestablishedwasunsurmountable.ThevastmajorityofusersstuckwithAppleandignoredoffer-ingsfromSony,Microsoft,andothers.NomatterhowinexpensiveMicrosofteventuallymadetheirZuneplayer,yoursonglibrarywasprobablyworthmorethananyhardwaresavings,andyoujustweren’t going to buy one. No amount of marketing could overcome that barrier to entry.Ironically,itwasthemusiccompaniesthathadwantedthecopyprotectiononsongs,andJobssawthebenefitforApple.However,Jobswasneverafanoftheinconvenienceofprotectedmedia.In2009,longafterApple’scompetitorshadinvestedindevelopinganddeployingtheirownDRMschemes,JobsconvincedthelabelstoremoveiTunes’protectionandpromotedseveralsongsharingtechniques,providingApplewithanothersourceofadvantage.GreatstrategistsintheNewEntre-preneurial Dynamic are always at least one step ahead of their competitors, often several.Innovation StrategyApple’sstrategyisaninnovationstrategy.Constantlydevelopingnewsourcesofcompetitiveadvantagecanallowyourfirmtodelivereitherthelowerpriceordifferentiationandsometimesboth.Ofcourse,“constantlyinnovating”iseasiersaidthandone.Doingitrightrequiresacombina-tionofforesight,genius,anddaring.Thisinvolvestheentrepreneurhavingvision,beinginspirationalenoughtorecruitthebestteammembers,andhavingthestomachtostepoutsidetheboundsoftheprovenorthodoxy.It’satoughthingforasmallfirmtodo,butthatmakesitaverypowerful strategy if you’re in a market dominated by small firms.Operational Effectiveness StrategySomecompaniesjustdowhattheydoverywell.Asacustomer,itisapleasuretodobusinesswiththem.Youaresurethingswillgowell,andiftheydon’t,theproblemwillbepromptlycorrected.SouthwestAirlines,Costco,andDisneylandareallexamplesofbusinessesthatembraceoperationaleffectiveness.Operationaleffectivenessisoneofthemoststraightforwardstrategiesforasmallfirmtocapture.Establishingacultureofexcellencewithinyourorganizationisthekeytothisadvantage.Everyonemustbefocusedondeliveringtheverybestproductorserviceatalltimes.72A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
marketAn environment, real orvirtual, where buyers andsellers can negotiate andexchange of products andservices or money.Manyindustriesthataredominatedbysmallfirmsarenotoriousforinconsistentcustomerservice.Theylacktheprocesses,humanresources,andinventorytodeliverproductsandservicesinadependablematter.Breakingthatmoldcanbepowerful.Itdoeshappen.Inthelate1980s,HowardSchultzwasconvincedthathecouldchangethewaycoffeewasconsumedinAmerica.Atthattime,youwenttoa“coffeeshop,”anditwasalow-end,full-servicerestaurantthatofferedonetypeofmediocrecoffeeforcheap,usuallysomethinglike50centsacup.Thecoffeemightbestale,itmightbecold,itmightbeweak—youneverknew,andtheunsympatheticwaitressusuallydidn’tcare.Schultzpurchasedalittlesix-shopcoffeeshopchaininSeattletoexecutehisstrategy.Byofferingaconsistentlygoodproductandapleasurablein-storeexperience,hetransformedcoffeefromaprice-drivencommodityintoadifferentiated,high-marginproductandmadeafortune.TodayStar-bucks has more than20,000 locations around the world.What Exactly Is a Market?Youprobablythinkyouknowwhatamarketis,right?Well,ifyouthoughtitwasaplacewhereyouwenttobuygroceries,yourdefinitionisonlypartiallycorrect.Technicallyamarketisaplacewheregoodsorservicesaresoldforcashorbartered,butitneednotbeaphysicalplace!ThinkoftheonlineauctionsiteeBay.It’sahugemarketormultiplemarketsformanydifferentcategoriesofgoods.WhiletheLondon,NewYork,andShanghaiStockExchangeshavephysicallocations,mostoftheirtransactionshappensomewhereincyberspacewithbuyersinofficesandhomesaroundtheworld.Usingsmartphonesorevenwatches,peoplebuyandsellbillionsofdollarsingoodsandequities while riding on the train or sitting on the beach.Foryoursmallbusiness,yourmarketmightbedefinedbythetypeofgoodorserviceyousell,butyourcustomerbasecouldbenationalorevenglobal.ConsiderastudentinTaiwanwhohasastoreonAmazon.comsellingcollectibleHelloKittymerchandise.HercustomersmightbeinJapan,Europe, or Africa.Yourmarketmightalsoberestrictedtoamorelimitedgeographyforpracticalreasons.Sup-poseyou’rerunningaresidentialconstructionbusiness.Inthatcase,youprobablykeepmostofyourjobswithin50milesorsoforanumberofreasons,includingcontrollingthetimeandexpenseoftraveltosites,maintaininganetworkoflocalcustomerreferences,ormaintaininganetworkoflocal contract workers.Chapter 3Strategy: Capturing and Maintaining Competitive Advantage73© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
de alio marketsAn existing market.de novo marketsA new or emergingmarket.Rental bicycles parked in front of aLondon café.Source: Thinglass/Shutterstock.comAcaféinthegentrifiedSohodistrictofWestLondonislikelytoconsidertheirmarketasdefinedbytheothercaféswithinahalfdozenblocksorso.Clientsmaycomeintotheareabycarortube,buttheyprobablycametoshop,nottoeatatyourcafé.Theywillselectaplacetoeatwhilethey are there. So, it’s really the local competitors that define the scope of the market.Instrategizing,it’salwaysimportanttounderstandanddemarcateyourmarketasclearlyaspossible.Inparticular,youneedtodefinethemarket,soyouknowwhoyourcompetitorsare.Thisdoesn’tmeanyoucan’tintentionallyexpandthescopeofyourmarketdefinitionorgoafterentirelydifferentmarkets;youjustwanttomakesureyouunderstandtheterritoryanditsinhabitantsbefore you land your forces.Existing Versus New MarketsThereareexistingmarkets,ordealiomarkets,wherepeopleandfirmshavebeendoingbusinessforsometime.Newmarkets,ordenovomarkets,areusuallycenteredaroundachangeintechnol-ogy, culture, or law. Can you guess which type of market is more attractive to a startup?Newmarketslackpowerfulincumbentsandareoftennotheavilyregulated(becausethegov-ernmenthasn’tnoticedthemorfiguredthemoutyet).Thismeanstheyarelikelytohavelowerbarrierstoentryandareeasierforverysmallbusinessestogetastartinonthecheap.SteveWoz-niakandSteveJobsenteredthepersonalcomputerbusinessin1976withafewhundreddollars.Can you think of any problems with entering new markets?74A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
1970s“Videophone.”Source: https://commons.wikimedia.org/wiki/File:Videophone_IMG_1107-white.jpgmicroeconomicsThe study of the forces ofsupply and demand withina particular market.Existingmarketsareprovenquantities;peopleunderstandhowtheywork,theircharacteristics,andwhotheopponentsare.Planninganassaultonanexist-ingmarketmaytakecapitalandotherresources,buttheobjectivesareclear.Withnewmarkets,nobodyquiteknowshowtheywork,thecharacteristics,whothecustomersare,whotheopponentsare,orwhatitwillcosttoconquerthem.Whenpersonalcomputerfirmsfirststartedadvertising,theyoftenpicturedthecomputer situated in the kitchen as a tool for storing recipes.Newmarketsarerisky.Often,itisnotevencleartheywillturnouttobesus-tainableindustries.Inthemid-1970s,manypeoplebelievedthattherewouldbeaboomingmarketinwiredvideotelephonesthatsatonyourdesk.AT&Tactuallylaunchedaservice,butnobodycared.Banks,forone,distrustnewmarketsandloathelendingfundsforindustriestheydon’tunderstand.Newmarketsdemandrisk-tolerantinvestors,suchasventurecapitalists,andtheywillinsistontakingsignificantequitypositionsinyourfirm.Enteringanewmarketisoftencalledablueoceanstrat-egy,whereasenteringanexistingmarket,especiallyahighlycompetitiveone,isaredocean(thinkblood and sharks) strategy.Key Takeaways•If you want to be a top-level competitor, you must find a competitive advantage(s).•Today’sdynamicenvironmentdemandsthatentrepreneursconstantlyseeknewadvan-tages.•Doing your work better than the competition can be a significant advantage.•Being clear about which market(s) you choose to compete in is essential to success.•Consider the advantages and disadvantages of entering established versus new markets.3.3The Economic Basis of BusinessStrategyLearning Objectives1.Learn or review the basics of microeconomics.2.Learn to price strategically within the supply and demand of your market.3.Understand the relationship between sales prices and quantities sold to profits.4.Understand the power of discriminatory pricing.5.Appreciate the power of capturing the high end of markets.Businessstrategyisagameaboutcapturingprofitsfrommarkets.Theprinciplesofmicroeconomicsdefinemanyoftherulesofthegame.You’velikelyhadaneconomicscourseinhighschoolorcollege,butnowisagoodtimetoreviewafewbasicconceptsstartingwithsupplyand demand.Chapter 3Strategy: Capturing and Maintaining Competitive Advantage75© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
supply curveA curve showing thequantity supplied byproducers for a givenproduct or service at eachprice point.demand curveA curve showing thequantity demanded byconsumers for a givenproduct or service at eachprice point.The Supply CurveImagineyouownabakerythatsuppliescakestocateringbusinesses.Doyouwanttogetmoreorlessmoneyforyourcakes?Thisisnotatrickquestion.Youwantmore,andsodoyourcompetitors,theotherbakers.Ifpricesarehigh,you’llbakemorecakes!Itwillbeworthstayinglate,investinginextraovens,whatever.Whenpricesarelow,you’llbeinclinedtoprovidefewercakes,andsowillyour competitors.FIGURE 3.3Supply CurveSource: Greg AutryIfwetookeachpossiblepricelevelforacupcakeandcalculatedhowmanycakesallthesup-pliersinyourmarketwouldprovide,wecouldrepresentthisasamathematicalfunction.SuchafunctionisgraphicallydepictedinFigure3.3,whichdepictsasupplycurveforcakes.Theverticalaxisshowsthepriceofeachpoint,andthehorizontalaxisshowsthequantityproduced.Thesup-plycurveslopesupwardaspricesandquantitysuppliedincreasetogether.Inreality,theshapeofthe curve would not be a perfectly straight 45° line, but it would surely slope upward.The Demand CurveNowimagineyou’rethecatererwhobuyscakes.Doyouwanttopaymoreorlessforcakes?Again,it’snotatrickquestion.Youwanttopayless.Ifcakesarecheap(presumingqualitydoesn’tsuffer),you’llbuymorecakes.Ifcakesareexpensive,you’llsubstitutepies,icecream,orsomethingelse.Graphically,thislookslikeFigure3.4,whichdepictsademandcurveforcakes.Thedemandcurveslopesdownwardaspricesandthequantitydemandedmoveinversely.Again,we’veusedahypo-thetically straight line.76A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
market priceThe price of acommoditized product orservice as determined bymarket forces of supplyand demand.market quantityThe quantity of acommoditized product orservice produced asdetermined by marketforces of supply anddemand.FIGURE 3.4Demand CurveSource: Greg AutrySupply, Demand, and Market EquilibriumNowwebringsupplyanddemandtogether.Asupplierwantshigherprices,andabuyerwantslowerprices.Itisthisinterchangeofthesemotivationsthatestablishesamarketpriceandamarketquantity.Figure3.5showsushowthesupplyanddemandcurvesworktogethertodeter-mine this market price and quantity.Chapter 3Strategy: Capturing and Maintaining Competitive Advantage77© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
market equilibriumThe point at which thesupply of products fromproducers and the quantitydemanded by consumersare equal.efficient marketA market in which marketforces easily produceequilibrium. Also, in theequities or bond markets,a market in which currentprices accurately reflectfuture earnings from thoseinvestments.logisticalcomplexitiesThe difficulties in thecoordination oftransporting and storingmaterial goods ordelivering services.FIGURE 3.5Supply & Demand Curves + EquilibriumSource: Greg AutryThepointatwhichthecurvesintersect—wherethesuppliers’desiresandthoseofthebuyermeet—iscalledmarketequilibrium(orjustequilibrium).Thenumberofcakesproducedandtheaveragepriceofcakessoldcanbefoundbylookingatwherethispointmapstooneachaxis.Ifyoufollowthestraightarrowtotheverticalaxisontheleft,youcandeterminehowmanycakeswillbesold.Ifyoufollowthestraightarrowdowntothehorizontalaxis,youcandeterminehowmanycakeswillbeproduced.Inatheoreticalmodel,thequantityproducedandthequantityconsumedarealwaysequal,andtheconsumercanaffordthepricing.Wecallthisanefficientmarketbecausethereisnowasteofmoneyorproduct.Intherealworld,therearelogisticalcomplexities,timingproblems, and human error, so it’s just pretty close to efficient.78A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
price elasticityThe ratio in which a pricechange impacts demandfor that product or service.inelastic goodsA product where pricechanges have a limitedimpact on demand, whichconsumers find sonecessary that theygenerally continue to buy itregardless of priceincreases.elastic goodsA product where pricechanges have a significantimpact on demand, inwhich consumers easilystop purchasing or choosesubstitutes when pricesincrease.Price ElasticityAsInotedearlier,thedemandcurveisnotactuallyastraightline.Itsshapevariesbyproduct,andthathasimportantimplicationsforstrategy.Priceelasticityisthecause.Considerthatsomeitems,likegasolineandbasicfoodstuffs,areproductspeoplemusthave,regardlessofprice,andthequantitydemandeddoesn’tvaryalotregardlessofprice.Howoftendoyouseegasolineonsale?Wecall these sorts of goodsinelastic goodsbecause their demand is less flexible than other goods.FIGURE 3.6Elasticity of DemandSource: Greg AutryThisinelasticitydoesnotmeanthatonevendorcansimplyraiseprices.Consumerswillchoosethelowestprice,whichiswhynearbygasstationsarealmostalwayspricedwithinafewcentsofeachother.Theywilllowerpriceswhentheircostsdroptogainafewcustomers,andthatwillforcetheirneighbortodothesame.It’stheoverallmarketrelationshipthatwearelookingathere.Whenthe market price rises or drops, inelastic products see little change in the quantity demanded.Otheritemslikecamerasorboatsarenon-necessitiesthatpeoplewillavoidbuyingwhenpricesarehighandleapatwhentheyareonspecial.Theseproductsareelasticgoods.Figure3.6shows the relationship between an elastic and non-elastic demand curve.You’llnoticethatthemilkdemandcurveissteeper.Itsslopeindicatesthateachchangeinpricehaslessimpactonthequantityofmilksold.Milkis,therefore,moreinelastic.Thedemandcurveforcupcakes,ontheotherhand,isshallow.Itsslopeindicatesthatevenasmallchangeinpricewillsignificantlyimpactthequantitysold.Cupcakesare,therefore,moreelastic.Whatdoyouthinkthedemand elasticity of cigarettes would be? Why?Capturing All the Revenue Under the Demand CurveConsiderthedemandcurvepicturedinFigure3.7.Everypointalongthatcurverepresentsapos-sibletransaction,apointatwhichabuyerandsellercouldagreeonaprice.NoticethatthecurveChapter 3Strategy: Capturing and Maintaining Competitive Advantage79© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
revenueAll the money generatedby a firm by the sale ofproducts or in payment forservices rendered.doesn’tactuallytouchthehorizontalaxisbecausetherearefewproductswhereasellercanorwillagreetoazeroprice,andiftheydid,demandmight(theoretically)beinfinite.Thecurverealisticallyendsatthepointwhere,regardlessofeconomiesofscale,theseller’scostequalsthepriceofthegoodorservice.Anythingbelowthatwouldbeoperatingataloss,andyoucan’tmakeuplossesinvolume.FIGURE 3.7Quantity Determined by the Demand Curve at Price $50Source: Greg AutryTheareaunderthedemandcurverepresentsalltheconsumersalesavailableinthemarket.Ateachpoint,wecancalculatethepriceandmultiplyitbythequantitysoldatthatpointandgettherevenue, or total monetary value of our sales.Workingourwaydownthecurve,we’dgetthemaximumpossiblerevenueoftheentiremarket.Doingthatwithanonlinearfunctioninvolvescalculus,andthat’snotarequirementofthistext,sowe’regoingtopass(phew!).Whatwearegoingtodoislookatafewspecificpricepointsonthecurve.80A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
FIGURE 3.8Quantity Determined by the Demand Curve at Price $100Source: Greg AutryIfyou’rethepurveyorofItemX,andyoupriceItemXat$50,youcanseethatthecurvetellsyouthatyouwillsell400unitsofItemX.Howmuchmoneyisthat?Yourrevenuewillequaltheprice($50)timesthevolume(400units),or$20,000.All400buyersinyourmarketwhowerewillingtopay$50ormoreboughtyourproduct.Didyoumaximizeyourrevenue?No!Why?Youdidnotcapturealltherevenuebecausetherewerebuyerswillingtopaymorethan$50!However,ifyou’dpriced at $100, as inFigure 3.8, you can see you would have gotten much fewer sales.Infact,at$100,youonlysell100units.Whatisyourrevenuethen?It’s$100/unitx100units=$10,000.Notasgood.Doesthatmeanyoushouldpriceat$50?Whataboutgoinglower?Figure3.9shows the outcome at $25.Chapter 3Strategy: Capturing and Maintaining Competitive Advantage81© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
FIGURE 3.9Quantity Determined by the Demand Curve at Price $25Source: Greg AutryYouwillseethatifyouofferItemXat$25,you’llhave700eagerbuyers!Lowerpricemeanslotsmorebuyers.Great!Let’sruntoWalmart(highvolume,lowprices)!Butwait!Howdoesthatworkoutrevenue-wise?Itturnsoutthat$25/unitx700units=just$17,500.We’dmakemorerevenue($20,000)withfewercustomersat$50/unit.Sometimeslessreallyismore!So,ifyourobjectiveistomaximize revenues, you’ll price Item X at $50.What About Profits?Now,itturnsoutthatrunningabusinessisn’treallyaboutmaximizingrevenue.Youdon’tgettokeeprevenue.It’saboutmaximizingyourprofits,themoneyyouhaveleftafteryourcostsaresub-tracted.Wewillcoverthatinmoredetailinthechaptersonaccountingandfinance.Fornow,here’sthe simplified version below.Let’ssaythateachItemXcostsyou$20tomake(nomatterhowmanyyouproduce).Ifyoumake100units,yourcostsare$20/unitx100units=$2,000.Sincewealreadyknowthatyourrevenueat100unitswas$10,000($100/unitx100units)yourprofitmustbe$10,000-$2,000=$8,000.Whatareyour profits at each pricing level?So,again,inthiscase,maximizingprofitswouldsuggestthatyougowiththe$50price.The$100pricing yields a nice $8,000, and in this case, the Walmart strategy yields much less.82A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
discriminatorypricingA pricing model designedto maximize sales revenueby charging more to thosewilling to pay more andless to those who will not.Itisnotalwaysthecasethatprofitsmaximizeatthesamepointasrevenues.Let’simagineascenariowhereyougetpricebreaksatdifferentquantitiesfromyoursuppliers.Yourcostsare$36for100units,$34for200ormoreunits,andjust$22for500ormoreunits.Manufacturinginquan-tity might be the way to go here, right? Let’s see.Wow.Thelow-priceleaderisstillthelow-profitloser,andboththe$100priceand$50priceyieldthesameprofit!Whatwouldyoudo?Gowith$50againandsell400units?Thetacticalchoiceistogowith the $100 price and do a lot less work and make the same amount of profit selling 100 units.Buthowdoyoudeterminethedemandcurveformymarket?Well,youcansurveyagroupofpotentialcustomersandsay,“Whatisthemostyou’dpayformyproduct?”Withanadequatenum-berofrespondents,youcanapproximateacurve.Otherwise,youcandothisexerciselesspreciselyinyourhead,thenvalidateitbyadjustingyouractualpricesupanddownabit(ifthatispossiblein your business).WhereÕs the Strategy?It’sgreattounderstandpricing(andwewillcoverthatmoreinChapter12),butisthatstrategic?Notreally.It’satacticalmovethateverybusinessownershouldconsider.Hereistherealstrategicobjective:Trytocapturealltheprofits(orrevenue)underthedemandcurve!LookagainatFigure3.7,withthe$50price.Inthatcase,wearemaximizingrevenueandprofits(ifwehaveafixed$20cost),butwearen’treallygettingthemoneyoutofalltherichfolkwhoarewillingtopay$100ormore, right? How can we get some people to pay more and still offer the product to others for less?Businessesdothisallthetime,anditiscalleddiscriminatorypricing.Thoughitmaynotbeentirely“fair,”it’snotillegalsincethediscriminationisbasedonincomeratherthanlegallypro-tected classes like race, religion, or disability.Chapter 3Strategy: Capturing and Maintaining Competitive Advantage83© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Geographic Pricing StrategyHarrods is a popular high-end department store.Source:Wei Huang/Shutterstock.comAtthemostbasiclevel,discriminatorypricingisseenwhenfancystoresinniceneighborhoodschargemoreforthesamestuffthanstoresinlessaffluentareas.Ifyou’reinLondon,checkoutthepriceofaNikebrandshoeatHarrodsinKnightsbridge,andthenrundowntosomediscountsportsshopinSohoandseehowmuchthesameshoecosts.You’llfindthesameeffectinLosAngeles(RodeoDriveversusSportsAuthority),Shanghai(ShanghaiTimesSquareversusSuperBrandMallPudong), and any other major city.Model Pricing StrategyOnewaytoachievethisinthesamelocationistocreateanartificialdistinctionbetweenproducts.WhenAppleintroducedtheAppleWatch,itstartedatabout$350foranaluminum-case“Sport”version.Applealsohadamoreexpensivestainless-steelversionstartingatabout$600andacrazyexpensivesolidgold“Edition”for$10,000.Youcanevenspend$7,000onafancybandforit—seri-ously.Theactualwatchelectronicswerethesameinallversions.Witharoundahalf-ounceofgoldinthewatchcase,theaddedcostfortheEditionwassurelylessthan$1,000.Still,theaddedpricetotheaffluentconsumerwasawhopping$9,000to$16,000,makingtheprofitmarginsprettyinsane.There weren’t a lot of people willing to shell out that much, but Apple set out to capture them.Time Pricing StrategyAnotherwaytodothisistovaryyourpriceovertime.You’veseenthisaswell.Whenanewproductcomesout,itisintroducedat$100andallthosewhocan’twaitpaythathighprice.Thenwhenthatmarket segment is tapped, the vendor lowers the price to capture a larger market segment.84A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
aspirational goodA product that a companypriced above a customer’sability to pay, but whichthey wish to have.Appleisalsofamousforthispricingstrategy.Eachyear,lastyear’smodelisdiscountedsoitiswithinthereachofalargegroupofpeople,andanewmodelistrottedoutataveryhighprice.Youcanbetthatabout12monthsfromnow,you’llbeabletobuythatversionforabout30%lessifyou’rewillingnottobethecoolestsmartphoneuseroncampus.Thetimepricingstrategysuggestsyou can lower prices to capture different segments of the market. Can you also move up?Start at the TopMilitarystrategistshavelongunderstoodthatitiscriticaltooccupythehighgroundfirst.Assailingacompetitorentrenchedonthetopofthehillfromapositionatthebottomisanextraordinarilydifficultanddangeroustask,evenifyouhaveanumericallyorqualitativelysuperiorforce.DuringtheU.S.CivilWar,oneofAmerica’smostbrilliantgeneralsfamouslyignoredthismaximatthebattleofGettysburg.OnJuly3,1863,RobertE.LeedirectedGeneralGeorgePicketttoleadthreedivisionsofConfederatetroopsinafutileuphillassaultagainstafortifiedUnionpositionatopahill,ironicallynamed“CemeteryRidge.”Theattemptwasacompletedisaster.ThecasualtyratefortheSouthernattackerswasmorethan50percent,theConfederatetroopsweredemoralized,andLee’sreputationasanunbeatablestrategistwasdestroyed.Somehistorianscreditthissinglepoorgamble with sealing the fate of the South and preserving the Union.Thishigh-groundruleappliestobusinessaswell.Fromacommandingpositioninthehighendofthemarket,youcanmoreeasilymoveintothehigher-volume,lower-endmarket.Movingfromthelow-endtothehigh-endmarketisrarelysuccessful.Makingitworkrequiresenormousexpense,perseverance,andtime.Shouldyoustartatthebottomofthedemandcurveandthenmoveyourpriceup?No,thatwon’tworkbecausewhenyousetaprice,everyoneabovethatpointwillbeabletobuyyourproductatthelowerpriceandwilldoso.Ifyoustartlow,you’llhaveengagedmostofyourbuyersatthatprice.There’salsoanotherissuethatarisesinsettingprices.Whenyousetthepricehighonaqualityproduct,itbecomesanaspirationalgood,somethingpeo-plewanteveniftheycannotaffordit.Whenthepricelaterdrops,you’llalreadyhaveeagerbuyerslinedup.Theexactoppositeeffectcanoccurwhenyoutrytomoveaproductupthepricingscale.Theoriginallowpricewillhavetarnishedtheimageoftheproduct.Itwillbeperceivedasanover-priced, low-end good.High-groundstrategyappliesnotjusttoindividualproductsbutyourentirebrandimageandhowcustomersperceiveyourfirm(wewillexplorethismoreinChapter11andChapter12).Con-siderfast-foodbranding.In1973,AndrewCherngandhisfather,MasterChefMing-TsaiCherng,openedanaward-winningChineserestaurantinPasadena,California,andlaterexpandedtofivePandaInnlocations.In1983,theyopeneda“PandaExpress”storeinthefoodcourtofthenearbyGlendaleGalleria.Thehigh-qualityreputationofthefirm’srestaurantssupportedthenewfast-foodconcept,anditwasabigsuccess.Thechainnowownsmorethan1,700Chinesefast-foodout-letsworldwide.MostcustomershaveprobablyneverheardofthePandaInn,butitonlyheightenstheirappreciationofthePandaExpressexperience.CouldMcDonald’sopenahigh-end,sit-downrestaurantchain?Probablynot.McDonald’senteredthemarketatthebottomofthedemandcurve,withlowpricesandhighvolume.Theydoanamazingjobinthatspace,butthefirmhasexperi-encedresistanceinrepeatedattemptstomoveintomoreupscalesandwiches,andthepublicwouldsimply laugh at a $22 McDonald’s meal.Chapter 3Strategy: Capturing and Maintaining Competitive Advantage85© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Market Entry Point Strategies: The Model S and the LeafThe Nissan Leaf was an early low-end entry in the electric car market.Source:Massimo Parisi/Shutterstock.comNissanintroduceditsall-electricLeafvehiclein2010.TheLeafwaspricedat$33,000intheUnitedStates.Itwaseligiblefor$7,500infederaltaxcreditsaswellasstatesubsidies($2,500inCalifornia)thatcouldcutasmuchas30percentoffthepurchaseprice.Thisisanaffordablecar,clearlytargetedatthebroadbaseofthedemandcurve,andbyallaccounts,it’sbeenahitwiththeenvironmentalandcost-consciousbuyer.TheLeafdominatedtheU.S.salesstatisticsforelectriccars.Thevehiclewasalsodesignedtoappealtotheenvironmentallyconsciouscon-sumer with a utilitarian design that would never be described as “sexy.”A Tesla Model S.Source:Des-Green/Shutterstock.comIn2012,TeslaMotorsbegantoshipitsModelS.TheModelSpricingstartedat$70,000intheU.S.,butmostModelScarswereconfiguredatwellover$100,000.TheModelSwaseligibleforthesamesubsidiesastheLeaf,buttheywereproportionatelymuchlesssignificant—typicallybeingworthlessthan10percentoffthepurchaseprice.Thevehiclewasclearlyaimedatthetopofthedemandcurve.ThedesignoftheModelSwaspowerfulandsexy.LiketheLeaf,theModelS was an instant hit, and by mid-2015, it was outselling the Leaf by a small margin.StrategicallytheTeslapositionwasenviable.Thefirmenjoysgrossmarginsthataretwicetheautomobileindustryaverage(22percentversus11percent).TheModelShasreceivedcountlessaccolades(notedearlier),andmanydriverswhocannotaffordtheModelSclearlyaspiretoownaTesla.ItwasreasonabletopresumetheywouldgladlysnapupaTeslathatwaspricedsimilarlytotheLeaf.Withthatdemandalreadyinplace,ElonMuskannouncedthatthecompanywouldbeintroducingtheModel3in2016atanestimatedpriceof$35,000.TheModel3swiftlybecamethe world’s best selling electric car.Isthereanydemandfora$100,000luxuryLeaf?Probablynot.Despiteitspositivereviewsandthousandsofsatisfiedowners,theLeaf’sreputationasautilitarian,everyman’scarwillnothelpitatallwiththeaffluentbuyerlookingtodistinguishthemselves.Itwillrequiresignificantbrandingorbuildingawholenewbrandtomakethatleapintothehighend.It’salmostalwaysbettertostart at the top.86A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Five Forces modelAn analysis tool developedby Michael Porter of theHarvard Business Schoolthat determines theattractiveness of a market.Key Takeaways•Thelawsofmicroeconomics—notyourcostsordesires—determinemarketpricingforyourproducts.•You can use strategic pricing to capture more profits from a market over time.•Sellingmoreunitsisnotalwaystherightstrategy;oftensellingfewerunitsatahigherpriceis both easier and more profitable.•Finding ways to charge more to those who can pay more is critical to maximizing profits.•Itismosteffectivetoestablishareputationasthebestbeforemakingmoreaffordableprod-ucts.3.4Strategy Analysis ToolkitLearning Objectives1.Learn a variety of strategy tools and where to apply them.2.Learn to apply Porter’s Five Forces model to analyze market attractiveness.3.Learn to use SWOT analysis to understand your firm’s strategic position.Strategicanalysiscomeswithaplethoraofmodels.Hereareacoupleofthemorepopularonestouse with your small business.PorterÕs Five ForcesMichaelPorter’sFiveForcesmodelisprobablythemostfamousofallstrategytools.Themodelisdesignedtodeterminewhetheraparticularmarketisattractivetoenter.ThoughPorterdevelopeditforlargecorporationstoconsidertheirdiversificationoptions,it’sagreatinstrumentforthelikely small business owner as well.Figure 3.10depicts the model.Chapter 3Strategy: Capturing and Maintaining Competitive Advantage87© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Rivalry withCompetitorsThe intensity of infightingamong competitors in aparticular market.industry cultureThe particular socialcharacteristic of onemarket as compared toanother.FIGURE 3.10PorterÕs Five Forces ModelSource: Greg AutryThemethodologyofPorter’smodelistodeterminewhetheramarketshouldoffertheopportu-nitytogeneratesignificantprofitsforyourfirmbylookingatthe“power”ofeachofthefiveforces.RivalryInthecenterofthemodel,youwillfindRivalrywithCompetitors.Thisisameasureoftheinten-sityofcompetitionwithinthemarket.Marketswithlowrivalryarepreferred.Somemarketsarebrutallycompetitive,whileothersaremorepassive.Conveniencefoodcompanies(cereal,sodas,snacks)oftengoaftereachotherinadsandevenpaysupermarketsforguaranteedshelfspaceasatactictoblockrivals.Atfirst,youmightthinkallbusinessesfighttoothandnaillikethis,butthatisnotalwaysthecase.Therearemarketswherethecompetitorsarerelativelycongenialwitheachother.Inthehealthcarefield,generalpractitionersandfamilydoctorsrarelyadvertiseandessentiallyneverbad-mouththeircompetition.Whydoyouthinkthatis?Thefirstreasonisindustryculture.Medicaldoctorsgenerallyviewtheirprofessionasasacredtrustwithhumanity,abovethefrayofcommercialendeavor.Whiletheyarehappytomakealotofmoneyanddrivenicecars,theygener-allydisdaintheideaoffightingformarketshareopenly.Everyindustryisacommunitywithaculture.Theparticipantsgenerallyknoweachother,weretrainedtogether,andoftenhaveworkedtogetherinthepast.Forfamilydoctors,thismeansmedicalschoolandmembershipinprofessionalorganizationssuchastheAmericanMedicalAssociation(AMA).They’veeventakentheHippocraticOath,whichholdstothemobligationstotheirpatientsandtothesocietyofphysicians.Theoathspecificallystatesthatprosperitycomesonlyfromfulfillingtheseobligations.Toaggressivelymar-kettheirservicestopatientsandunderminethepracticeofafellowphysicianwouldbeabreachofthis sacred trust.Asecondreasonisdemand.Doctorswhocureillnesscannotgeneratemoredemandnomatterhowmuchtheyadvertise.Peopleareeitherill,ortheyarenot.Totrytoconvincethehealthythatthey are sick would also be a violation of their Hippocratic Oath.[5]88A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
underdogThe competitor deemedleast likely to win byparticipants.Threat of NewEntrantsThe likelihood of new firmsentering the market tocompete, constrained bybarriers to entry.trade secretsInformation (usuallytechnical) kept secret by afirm and protected by lawfrom industrial espionage.Threat of SubstituteProductsThe likelihood ofcustomers switching to analternative solution to theirneeds.Athirdreasonissupply.Wheneveryvendorinamarkethasplentyofcustomers,thereisnoneedtofightovermarketshare,butwhentherearemanymorevendorsinamarketthanrequiredtosupplycustomers,thingsusuallygetugly.TheAMAattemptstoregulatethiscompet-itivepressurebyspecificallylimitingthenumberofdegreesawardedintheUnitedStates.[6]Thefamilydoctormarkethaslowrivalry.Canyouthinkofotherindustrieswherethereislittlerivalry?How about somewhere rivalry is very intense?Portersuggeststhatinmostcases,theworstcompetitionoccurswhentherearea“handful”(fiveorso)majorcompetitorsinamarket.Thetheoryisthatwhentherearetwoorthreebigcom-petitors,theyareabletoreachapointofstabilitywheretheyeachhaveanicehalforthirdofthemarket,andtheydon’twanttorisktheirownpositionbyprovokingafight.Also,whentherearedozens,nobodycangainalargemarketshare.Inthefiveorsixcompetitorrange,thereisalwaysanunderdogfirm eager to make a leap at the throat of the market leader.Ingeneral,itispreferabletoavoidmarketswithintenserivalrybecausethecostofmarketingtostaycompetitivedrainsprofitsandresourcesfromyourfirm,andtheriskofbeingupendedbyanaggressivecompetitorishigher.Forthesmallbusinessperson,suchmarketsoftensuggestlatenights,stressatworkandathome,ulcers,andperhapsanearlyheartattack.Stayawayfromtheseif you don’t love a fight.Threat of New EntrantsAtthetopofthemodel,youwillfindtheThreatofNewEntrants.Thisisameasureofthelikeli-hoodofnewcompetitorsenteringthemarket.Doyourecallfromourearlierreadinginthischapterwhatpreventsnewentrantsfromenteringyourmarket?Itisbarrierstoentry.Ifcomplexregula-tions,highcapitalinvestmentrequirements,orintellectualpropertyrestrictionssuchaspatentsortradesecretsprotectyourmarket,thenthethreatofnewentrantsislow,andyouneedn’tworrysomuchaboutthisfactor.Suchamarketismoreattractiveifyoucangetintoitinthefirstplace.Youwanttoenteramarketwiththehighestbarrierstoentrythatyouarecapableofscaling,andthen there will be fewer climbers coming in after you!Thecupcakestorebusinesshasvirtuallynobarrierstoentry.Bakingisanartthatgoesbackhundredsofyearswithmuchpublicsharingofrecipesandtechniques.Therearefewreal“secrets”toprotect.Thecostofsettingupashopwithmixers,pans,andovensisnottrivial,butit’swithinreachofmostseriousentrepreneurs.Theregulatoryenvironmentinfoodservicesdoesincludesomepaperworkandinspections,butit’ssomethingmany,manypeoplehaveexpertiseinmanag-ing.Consequently,thethreatofnewentrantsishighinthecupcakestoremarket,anditisnotattractive from this perspective.[7]Ontheotherhand,thefamilydoctorbusinesshashighbarrierstoentry,includingtheseriousrequirementofobtainingamedicaldegree,boardcertification,insurance,andexpensivespecialequipment. The threat of new entrants is low, rendering this business attractive.Threat of Substitute ProductsAtthebottomofthemodel,youwillfindtheThreatofSubstituteProducts(orservices).Thisisameasureofthelikelihoodofsomeonechoosingadifferenttypeofproductorservicetomeettheirneeds.Amarketwheretheproductisuniqueorindispensablehasfewornosubstitutesandismoreattractive.Amarketwhereyourproductiseasilydisplacedorreplacedbysomethingelsethatcandothejobhasmanysubstitutesandisnotveryattractive.Forexample,supposeyouownausedcardealership.Inthatcase,yougenerallyconsideryourcompetitorstobeothercardealersyourcustomersmightchoose,right?Well,foryourcustomertherearemoreoptionsthanaredreamtofinyourmarket;theycouldbuyamotorcycleorbike,ortakepublictransport!YourcupcakeshopChapter 3Strategy: Capturing and Maintaining Competitive Advantage89© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Buyer BargainingPowerThe ability of yourcustomers to negotiateprice and terms with yourfirm. Often a measure oftheir dependence uponyour product.state-ownedenterprise (SOE)A business that is ownedentirely or substantially bythe government. Commonin socialist and communistcountries. The U.S. PostalService is a state-ownedenterprise.customer loyaltyprogramA marketing program thatinvolves rewarding repeatcustomers as an incentiveto ensure their return, suchas airline frequent-flyerprograms or promo codesor membership cardsproviding a discount orextra service.Cupcakes on display.Source: © Shutterstock, Inc.hasthesameproblemassugarydessertsubstitutesabound.Icecream,snowcone,yogurt,andcandyshopsareallconsiderationsforyourpotentialclientswithasweettooth.Again,acupcakeshop does not appear attractive when viewed from the model.Let’sthinkofamarketwheretherearefewsubstitutes.Howaboutaswimmingpoolservice?Ifyouareacustomerandyouownapool,youcan’texactlyhireagardeneroraplumbertocleanitandadjustthepHlevel.Theonlypracticalsubstituteistodoityourself.So,overall,thethreatofsubstitutesislow,andtheswimmingpoolservicesbusinessisprettyattractivefromtheperspec-tive of this force.Buyer Bargaining PowerOntheleftofthemodel,youwillfindBuyerBargainingPower.Thisforcemeasurestheamountofleveragethatyourbuyersholdoveryourbusiness.Areyoureallydependentonyourbuyers’sat-isfactionandcooperation,ordotheybasicallyhavetoputupwithyou?Well,ifyouhappentorunamonopolylikeastate-ownedenterprise(SOE),sayanationaltelephonesystemormunicipalbusservice, your customers just have no choice.Beingamonopolyisnotverylikelyformostsmallbusinesses,butyoucouldownanexclusivedealershipforsomepopularproductorserviceinyourarea.Forinstance,HarleyDavidsonisn’tgoingtoauthorizetwomotorcycledealershipsside-by-side.Likeallsmartfranchisers,theykeeptheirlocationsfarenoughapartthatbuyersarecompelledtogotoaparticularlocation.Havingsuchadealershipmeansbuyershavelowpowerandthatthebusinessisattractivefromtheper-spective of this force.Again,thecupcakebuyercaneasilygosomeplaceelse.Onewaytoreducethisistoestablishaswitchingcostbyinstitutingacustomerloyaltyprogram.Perhapsyougiveoutapunchcard,andforeverysixcupcakespurchased,yourcustomersgetoneforfree!Somebodywithfourpunchesontheircardislesslikelytostrayacrosstheavenuebecausetheywouldratherearnthatfreecupcakefromyou.Ontheotherhand,acupcakeshophashundredsorthousandsofcustomers,andthatreducesthepowerofanyoneparticularbuyer.Abusinesswheretherearemanycustomerswhoarenotorganizedhaslowbuyerpowerandisattractive.Ifyouhavefewcustomersorthecus-tomers are organized into some sort of buying coalition, it can make life more difficult.Somesmallbusinessownersmaysubcontractworkforonlyasinglecustomer.ConsideramachinistwhotakesearlyretirementfromBoeingaircraftandthensetsupshopasasubcontrac-tormakingpartsforhisoldfirm.Heunderstandstheirneedsandprocessesperfectly,andBoeingcanavoidthecapitalinvestmentofequipmentandtheoverheadinvolvedwithhiringunionizedemployees.Thisisaverycommonsituation.Althoughthismakesforaveryeasytomanagebusi-ness,buyerpowerisextremelyhighinthissituation.Boeingmustbekepthappy,orallislost.Sucha business is very unattractive from the perspective of this force.90A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Supplier BargainingPowerThe ability of yoursuppliers to negotiateprices and terms with yourfirm. Often a measure ofyour dependence uponthem.leverageThe ability of one group tocompel another to take aparticular action theyotherwise might notchoose to do.cartelA group of suppliers orbuyers organized togetherto obtain leverage overtheir vendors orcustomers. OPEC, forexample, has often beenable to keep oil priceshigher than the marketwould normally bear bylimiting competitiveproduction.Supplier Bargaining PowerOntherightofthemodel,youwillfindSupplierBargainingPower.Thisforcemeasurestheleveragethatsuppliershaveoveryourbusiness!Thelowerthisforce,themoreattractiveyourmar-ket,anditoperatesverymuchlikebuyerpower.Inthiscase,youwantlotsofsupplierswhooperateindependentlyandcompeteforyourbusiness—youwantyoursupplierstobeinanindustrywithintenserivalry.Whatyoudon’twantistobedependentonasingle,criticalsupplieroracoalitionofsuppliers who operate together in acartelto control prices or constrain supplies.Ifyou’reinthecupcakebusiness,you’regoingtolovethisforce.You’vegotthousandsoffirmsthatcansupplyyouwithflour,sugar,sprinkles,etc.Youcanbuyovensandpansfrommanysources.It’sallgoodfromasupplierperspective.Supplierpowerislow,andthecupcakestorebusi-ness is attractive from the perspective of this force.Ontheotherhand,ifyouownthatHarleyDavidsondealership,you’veprobablygotonesup-plierofproduct—motorcyclesandHarleylicensedswag—andthey’vegotseriouspoweroveryou.Supplierpowerisveryhigh,andfromtheperspectiveofthisforce,havingafranchiseoperationisunattractive.However,tobefair,itisclearlyinthefranchisor’sinterestthatalltheirfranchiseessucceed. So, they are not likely to put the screws to your operation.Aworsesituationwouldbeifyouwereinanonexclusiverelationshipforakeycomponentofyourbusinessfromasinglecompanythatdidnotneedyouasacustomer.Imagineyou’restartingupafirmmanufacturingcarbonfiberpaddlesforstand-uppaddleboards(SUP),andyouengi-neeredyourentireproductionandmarketingaroundaveryhigh-performancematerialthatisonlyavailablefromasinglesupplier.Thefirmthatmakesthisstuffnormallysellsinlargequanti-tiestohugeaerospacecompanies.Thevolumeofbusinessyoudoisentirelyinconsequential.Iftheyencounteratemporaryshortageofmaterial,itisn’tgoingtobeLockheedorAirbustheycutofffirst;it’sthesmallbusinesseslikeyours.Itisalsopossibletheycoulddecidedealingwiththeirsmallcustomersisn’tworththeoverheadandshutyoudown.That’saveryunattractivebusinessfrom the perspective of this force.The Sum of All ForcesThepointofanymodelistouseittoreachasolution.AlwayscompletethePorterAnalysisanddeterminewhetherthemarketasawholeisattractive.Anattractivemarkettypicallyyieldsabusi-nesshigherprofitsforalongertime.Whatwewanttoknow,whenbalancingalloftheseindividualforces,ishowthingswillpanout.Let’sreviewacoupleofourexampleswithaquickanalysisandsummation.Cupcake StoreRivalry=MediumtoHigh.NotAttractive.Probablytoomanycompetitorsallfightingformar-ket share.Threat of New Entrants = Very High.Not Attractive. It’s very easy to get into this business.Threat of Substitutes = Very High.Not Attractive. Ice cream, yogurt, candy, etc.BuyerPower=Medium.Moderate.Buyershavemanychoices,butyouhavemanypotentialbuyers as well, and they have no organized power.SupplierPower=Low.Attractive.Youhavemanysuppliers,andtheyhavenoleverageoveryou. The only exception might be the landlord if you desire to locate in a particular spot.Conclusion:NotAttractive.Threeofthefiveforcesarenotattractive,andonlyoneisratedattractive,drivingprofitabilityinthisbusinessdown.Don’tenterthismarketunlessyouaretrulydetermined.Chapter 3Strategy: Capturing and Maintaining Competitive Advantage91© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
SWOT AnalysisAn analysis tool used todetermine the fit of a firmto its market by evaluatingthe firm’s strengths andweakness in relationship tothe opportunities andthreats in the market.Family DoctorRivalry = Low.Attractive. Competitors don’t fight much.ThreatofNewEntrants=LowtoMedium.Moderate.It’srelativelyhardtogetintothisbusi-nessduetosignificanteducationandcapitalrequirements—however,thethreatofnewentrantshas been more of a problem recently.ThreatofSubstitutes=Low.Attractive.Religionandnewagealternativemedicineaside,therearen’t any scientifically viable choices for most of the services a medical doctorprovides.BuyerPower=LowtoMedium.Attractive.Buyershavemanychoices,butyouhavemanypotentialbuyersaswell,andtheyhavenoorganizedpower.Moreimportantly,theydon’ttendtoshop around once they make a choice.SupplierPower=Medium.Moderate.Youhavemanysuppliersofequipmentandservices,andtheyhavenoleverageoveryou.Theexceptionsaremalpracticeinsurance,boardcertification,governmentallicensing,andpaymentsfromgovernmenthealthplans.Thepressuretoreducepay-mentsfromgovernmenthealthplansandincreasingpaperworkcomplexityhasresultedinlowercollectionsforprivatedoctorsintheUnitedStatesandhasputsignificantpressureonthebusinesslately, reducing profits.Conclusion:Attractive.Threeoftheforcesareattractive,andnoneareratednotattractive,thuskeepingprofitabilityinthisbusinessup.Thisisagoodmarketifyoucanaffordthecostofentry-education.Theincreasingsupplierpressurefromthefederalgovernmentisaseriouscon-cern for family MDs however.AlwayscompletethePorterAnalysisbydeterminingifthemarketisattractiveornot.Thatisthe purpose of the exercise.SWOT AnalysisThis above all: to thine own self be true.—ShakespeareWhilePorter’sFiveForcesisatoolforanalyzingtheattractivenessofaparticularmarketforanyorganization,SWOTAnalysisisusedtodetermineyourfirm’ssuitabilitytocompeteinaparticularmarket.Ingeneral,itmakessensetoworkthroughthePortermodelonyourtargetmarket(s)andthenconductaSWOTanalysisinformedbyyourFiveForcesconclusionstoseeifyourfirmislikelytosucceed.It’saverysimpleandusefulexercisetorepeatregularlyasyourorganizationandtheenvironment evolve over time.92A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
What Is SWOT?FIGURE 3.11SWOT AnalysisSWOT is a popular tool for analyzing a firm’s competitive potential in a market.Source: © Shutterstock, Inc.SWOTisanacronymforStrengths,Weaknesses,Opportunities,andThreats.Thefirsttwoitemsareaninternalanalysisofyourbusiness’scapabilities,andthesecondtwoareexternalfac-torsthatdetermineyourfitforthismarket.Inallcases,thequote[8]aboveshouldguideyou.Bebrutallyhonestaboutyourself,yourteam,yourresources,andthechallengesyouface.Todooth-erwiseistodoyourselfagreatdisserviceandtoleadothersonafoolishmissionthatmayputtheminto harm’s way, at least financially.Internal ControlÑStrengths and WeaknessesWhatdoesyourorganizationdowell,andwhatareyounotreallygoodat?NoticethatIsaid,“notreallygoodat”ratherthanusingthekinderphrase“coulddobetterat.”Thisisnotimetoworryabout people’s feelings.Startyouranalysisbymakingalistofyourstrengths.First,listtheuniqueresourcesyourfirmhas.Thesearethingsthatnootherfirminyourmarkethas.Doyouhavealeaseontheverybestlocationintown?Doyouhaveastrongpersonalrelationshipwiththedecision-makeratthelargestcustomerinyourmarket?Doyouownapatentorexclusiverighttosomematerial?It’sokayifyoudon’t have any unique resources; few businesses do.Next,listthingsthatmakeyourfirmbetterthanaverage.Isyouralumninetworkreallyhelp-ful?Areyouamasterofthesocialmediauniverse?Isthechefatyourrestaurantoneofthebestintown? Do you have a lock on an amazing location?Finally,listyourweaknesses—thingsthatyoudonotdowellorareasinwhichyouneedimprovement.Chapter 3Strategy: Capturing and Maintaining Competitive Advantage93© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
opportunityA chance to do somethinggood, such as providing aproduct or service to solvea problem that customerswill pay well for.first-moveradvantageA theoretical advantageheld by the first firm toenter the market. Oftenfrom consumer awarenessor association of the firmwith the product orservice.second-moveradvantageThe advantage a firm gainsentering a market after themarket leader. The abilityto learn from the successand mistakes of the firstmover.U.S. Navy SEALSSource: © Shutterstock, Inc.External ControlÑOpportunities and ThreatsAnopportunityisamomentintimewhenasituationexiststhatwouldallowyoutodosomethingpositive.Opportunitiesrequirebothrecognitionandaction.Theyarerarelyluckyeventsthatjustfallinyourlap.Manyentrepreneursfailtoseethemorfailtotakeadvantageofthem.Opportuni-tiesarerarelyexclusive,meaningyourcompetitorsmayactonthemaswell.Usually,thefirstfirmtoexecute wellon an opportunity will seize the advantage it offers.Tobeclear,thiswinnerisnotalwaysthefirstfirmtotry.Thefirstcompanytotrygainstheelusiveconceptoffirst-moveradvantage,butasoftenasnot,theseearlymoversstillfail.Thefail-ureofyourcompetitortoexecuteonanopportunitycorrectlywillbringittoyourattentionandeducateyouonwhatnottodo!Youcanthenleaponit.Thispowerfulpositionisknownasasecond-mover advantage. (See”Opportunity Fail at Xerox”.)Makealistofcurrentopportunitiesandtrytothinkaboutthesortofopportunitiesthatmightemerge in the future. Opportunity recognition requires that you always be looking ahead!Threatscomeinmanyforms,butthemostobviousthreatisfromyourcompetitors.Theywouldprobablyliketoseeyourbusinessdeadoratleastchasedoutoftheirmarket.Understand-ingyourcompetitors’capabilitiesisjustasimportantasunderstandingyourown.RememberSunTzu’s advice on knowing your enemy.Forasmallbusiness,scopingoutthecompetitioncanoftenbeaverypersonaltask.Youmayevenknowthesepeoplepersonally.YourunintothemattradeshowsorChamberofCommercemeetings.Isuggestthatyoualwaysbecivilandcordialontheseoccasions.Competitorsarealsocolleagues,andyouneverknowwhenworkingtogethermightbeofgreatvaluetoyouinsomeendeavor—like getting some misguided law that impedes your industry corrected.Findingoutmoreaboutyourcompetitorsisbestdonethroughaprocessofdiscovery.Mostofthetechniquesareprettyobvious.Gousetheirproductorservice!Iftheyrunacompetingrestaurant,goeatthereandthinklikeacritic.Howistheambiance,thefood,theservice,thevalue?Discoverwhattheydowellandwheretheirweaknessesarelocated.Testthebusinessundernonoptimalconditions,whenit’sbusyortheweatherisbad.Challengethemwithmoredifficultlogisticaltasks.Ifit’sanonlinestore,tryreturningsomething.Ifit’saplumbingservice,calltheminthemiddleofthenightandseeifyoucanreachanyone.Mostcompaniesdotheirjobsprettywellinnormalconditions;it’sunderadversitythatoperationalexcellenceandvulnerabilitiesreallyshow.Don’ttrustonlyyourownevaluations.Youhaveparticularlikesanddislikesthat,tryasyoumight,cannotbedislodged.So,askotherpeopleyoutrusttogiveyoutheircandidopinions.Lookattheironlinereviewsandseewhattheircus-tomerspraiseorcriticize.Arethesevalidcommentsorjustbogusreviewsfromtheirparentsandfriends?Arethenegativesrealinfoforyouorjustthesnarkingof internet trolls and personal enemies?94A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Golfer Michelle WieSource: Mai Groves/Shutterstock.commarket capitalizationThe total worth of a firm’sstock. Its share pricemultiplied by the numberof shares outstanding.Confidenceisagreatstrengthofentrepreneurs,butitcanalsobeamajorweakness.Sometimesconfidenceextendstobluster,andtheentrepreneurissim-plyunabletoseetheirownshortcomingsorthoseoftheirteam.Don’tletyouregogetinyourway.Therearetasksthataparticulargroupofpeoplewillneverperformwell,andnoamountoftrainingisgoingtofixthat.AU.S.NavySEALTeamiscomposedofsomeofthefittest,bravest,smartest,best-educated,well-trained,andmostresourcefulfolksyou’lleverfind.Ifyouwanttorescuehostagesortakeoutaterroristhidinginsomeremoteandhiddenlair,Ihighlyrecommendthem.However,thatdoesn’tmeantheSEALteamisgoingtowinonAmerica’sBestDanceCreworcapturetheWorldCupnextyear.MichelleWiecouldeasilywhipanySEALineighteenholesofgolf.Youandyourfirmhaveweaknesses too.Opportunity Fail at XeroxXerox Alto computer.Source: https://commons.wikimedia.org/wiki/File:Xerox_Alto_mit_Rechner.JPGAclassicexampleofopportunityrecognitionandexecutionfailureoccurredinPaloAlto,Cal-ifornia,intheearly1970s.Atthetime,theXeroxcorporationwasoneoftheworld’spremiermultinationalfirms.Theyhadintroducedthemodernphotocopyprocessin1959andquicklyrosetoprominenceandwealth.Manypeopleconsidereditthemostsuccessfulproducteverdeveloped(beforetheiPhone),and“Xerox”becameacommonAmericanverbsynonymouswith“copy.”Understandingthattheirfundamentalpatentson“xerography”wouldexpireandthatthere was a “paperless office of the future,” Xerox developed a strategic plan.Xerox’sstrategywastoinvestheavilyintoresearchanddevelopmentofmodernofficeautomationtools.Itwasasmartmove.Thefocusofthiseffortwasafamousresearchanddevelopmentfacil-itycalledXeroxPARC(PaloAltoResearchCenter)inCalifornia’sSiliconValley.ThePARCteamwasledbythevisionarycomputerengineer,BobTaylor,andtheteamwasfilledwithcomputergeniusesdestinedtobefuturetechluminariesandentrepreneurs.Taylor’steamimmediatelysawthatthefundamentalproblemwiththecomputersofthedaywasthedifficultyinsupportingandusingthem.Theroom-sizedandcabinet-sizedbeastiesofthedayrequireddedicatedsupportteams.Thecrypticinstructionsthesecomputersusedcompelledpotentialcomputeruserstogetdaysofspecializedtrainingevenforasimpletask,likewritingaletter.Thearrivaloftheinte-gratedcircuitwouldallowthemtobuilda“personalcomputerstation,”andmodernprogrammingtechniques(object-orientedprogramming)wouldenablethemtocreateagraphicaluserinterfaceChapter 3Strategy: Capturing and Maintaining Competitive Advantage95© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
(GUI).Thiswasanamazingopportunitytocapturefirst-moveradvantageinaneweraofcomput-ingandtakeoutIBM,DEC,andtheotherfirmsthatdominatedthecomputinglandscapeofthe1970s.TheAltocomputersystemthatthePARCengineersdevelopedwaswayaheadofitsday.Nearlyfifteenyearsbeforethesethingsbecamestandardoncomputers,theAltohadamouse,window-ingsoftware,movabledocumentswithavarietyoffonts,alocalareanetwork(LAN),andalaserprinter.Infact,theAltowassoadvancedthatthecorporatemanagementatXerox“justdidn’tget it” and did not immediately commercialize the system.NotonlydidXeroxcompletelyfailtoexploititsopportunitytoowntheglobalcomputerindustry,itcompoundedtheproblembydemonstratingtheproducttoAppleComputer’sSteveJobsandhisdevelopmentteam!Appleironically“Xeroxed”thefeaturesoftheAltoanddevelopedafailedcomputercalledLisa,whichinturninspiredtheirwildlysuccessfulMacintosh.MicrosoftimitatedApple’ssuccesstocreateitspopularWindowsoperatingsystem.Asofthiswriting,Appleisnowtheworld’smostvaluablecompanywithamarketmarketcapitalizationcapitalizationof$620billion.Microsoftisnumberfiveat$335billion.Xeroxisn’trankedonanylists,andthemarketvaluesitatjust$10.5billion.Xeroxfailedtoexecuteonthemostsignificantopportunityinbusinesshistory.TheyhadalsofailedtoseethattinyAppleandMicrosoftwereactuallytheircompetitors.Therest,ofcourse,ishistory.Basically,allcomputers,phones,andtabletsarereflectionsofthevisionofBobTaylor’steam.UnfortunatelyfortheshareholderswhofundedtheincredibleresearchanddevelopmentatPARC, it wasn’t Xerox history.Key Takeaways•There are a variety of tools you can use to analyze your strategic environment.•Understanding the reality of your market is critical to success.•Being honest about your organization’s capabilities is empowering.•Never let overconfidence lead you into danger.3.5Strategic FitLearning Objectives1.Understand that strategy must fit the circumstance.2.Understand that the strategy must be appropriate to the entrepreneur.3.Learn to spot and exploit trends.Eddie would go.—Mark Foo, surfer96A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
regulatory and taxclimateFrom the point of view of afirm, the level of intrusionand cost generated byregulations in a givenregion and the level of thetaxes they are subject to.Sync to Market ConditionsBeinginsyncwithitsenvironmentiscrucialtothelong-termsuccessofanyendeavor.Besidescompetitors,yourstartupwillhaveahostofenvironmentalconditionstoconsider,includingthehealthofyourlocaleconomy,thestrengthofyourcustomerbase,andtheregulatoryandtaxclimate.Asuccessfulstrategymustconsiderandworkwithintherealitiesofthatenvironment.Youprobablyshouldn’tlaunchaluxuryproductinadepressedneighborhood,norpushalow-priceserviceinawealthyone.Youdon’twanttobepeddlingumbrellasinPhoenix,Arizona,whichgetsjust8inches(20centimeters)ofrainayear,orsellswimwearinHelsinki,Finland,wheretheaveragetempinJulyisjust62°F(17°C).AswithDarwin’stheory,thebetteryourbusinessmodelfitstheenvi-ronment, the more likely your firm will survive.Sync to the EntrepreneurAbusinessstrategymustalsofittheentrepreneurherself.Thebusinessmustworkinawaythatwillnotcontinuallyproduceconflictwithyourpersonallife.Ifthephysicaldemandsofproduc-tion,thehoursrequired,thecommutetime,oranyofahundredotherfactorscreatestress,itwillimpacttheorganization.Whileweoftenencounterthestereotypeofanentrepreneurworkedtothebone,burningthemidnightoil,andsacrificingtheirpersonallifefortheircompany,thatmodelisunsustainable.Startupsarehardwork,butinthelongrun,ahealthy,happyleaderisessentialtothe success of any organization.Trends MatterDon’tjusttakeasnapshotofyoursituation;lookatwhereit’sgoing.Whatarethevectorsandthetrendsinyourbusinessandyourmarket?Opportunitiesandthreatsareconstantlyemerging.Twenty-first-centurymarketsareparticularlydynamic.Technologyandfashionappeartobechangingatarapidlyincreasingrate.Thebusinessstrategistfindshimselfonatreadmillkeepingup with the changing environment.Whereistechnologytakingyourmarket?Areyoupossiblyworkinginthenextdoomedindus-try?Didyoueverhearofaone-hourphotolab(aplacetodevelopoldschoolfilmphotosontopaperprints)?Thatwasasignificantgrowthindustryforyoungentrepreneursagenerationago,buttodayitisgone.You’veprobablyseenDVDandBlu-raydisksatyardsales.Beforeinternetband-widthallowedstreamingmoviesathome,therewerethousandsofDVDrentalstoresacrosstheU.S.andDVDrentalkiosksineverygrocerystore.It’samazinghowmanyentrepreneurs,bigandsmall,wentdownwiththatship.Noamountofstrategicbrillianceorexcellentexecutioncansavea business in an extinct market. Never bet into a losing hand; move on when the market moves on.Yourstrengthsandweaknesseswillchangeasyourbusinessmatures,andyourteamchangeswithlosses,additions,andmaturity.Isyourrestaurantfilledwitholderfolks?That’sswellintheshorttermbecausetheyareprobablyloyalrepeatcustomers,butyouneedtobringinacontinualflow of new clients because, sadly, the old ones are not going to last forever.However,themostfundamentallessonoftheNewEntrepreneurialDynamicisthatchangeisopportunity.Embracechangebecauseyoursmallbusinesshasanamazingadvantageoveryourlargecompetitors:Youcanplanstrategyandexecuteontacticsquickerthanyourlargecompeti-tors.Speedisthesustainablecompetitiveadvantageintrinsictostartupsandsmallbusinesses;useit!Chapter 3Strategy: Capturing and Maintaining Competitive Advantage97© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
The Young Entrepreneur and the SeaA surfer waits for one last wave.Source: © Shutterstock, Inc.TheentrepreneurwalksalongtheCaliforniashoreline.Kickingthesandandwatchingthesea,sheconsidersthepowerofwaves.Sheiseagerandpreparedtoharnessthepowerofthenexttechwave.Sheplanstocontrolthatpower,todefinethenewmarket,andthenrideoutallofhercompetitors.Acrustyoldsurferhaulsoutoftheseainfrontofher.Hethrowshislongbutthinningblondhairoveramahoganytannedshoulderandpausesonhiswaytotheshowerstoexchangetheobliga-torygreeting.Annoyedbythisdistractionbutpolite,theentrepreneuraskstherequisitequestion,“How was it?”Asthoughsensingherthoughts,thesurferremarkscryptically,“Youcan’tshapethewaves;youcan only shape your board.”Theentrepreneurconsidersthisandasks,“Istherenothingmoreyoucandotokeepfromwast-ing your day?”Thesurferchucklesandadds,“Youshouldlookatthesurfreportandchoosethebestbeach.Thenkeepyoureyeontheswellandbepatientenoughtowaitfortherightwave.Thenyoujusthave to paddle like hell and make the best out of the ride you find yourself on top of.”That is the essence of strategy and execution in harmony with the dynamic environment.Key Takeaways•You can’t force the market to accept a business model it doesn’t want.•You won’t succeed at a business you can’t run well.•When the market changes, change with it or get out.•As always, change is opportunity, and startups are best at it.3.6Case Study: Overcoming Barriersto Entry via Strategic PartnershipsKingHealthSystemsisalargeHealthMaintenanceOrganization(HMO)headquarteredinCalifor-nia.TheKingHealthsystemcomprisesofdozensofhospitalsandhundredsofclinicsequippedwithpharmacies,labs,andradiologycenters.Theorganizationdirectlyemploysthousandsofproviders(medicaldoctors,nursepractitioners,andphysicianassistants)aswellasclinicalstaff,pharmacists,andtechnicians.Italsohasanextensiveinternalinformationtechnology(IT)group98A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
thatmanagesoneofthelargestandmostsophisticatedcorporateenterprisenetworksintheworld.King’sITdomainincorporateslargedatacenters,dedicatedwideareanetworks(WANs),localareanetworks(LANs),andWi-Finetworksconnectingthousandsofdesktopcomputers,laptops,andmobiledevices.Thisinfrastructuresupportsanareaofsoftwareproducts,fromoff-the-shelfitemssuch as Microsoft Office to customized diagnostic tools and clinical information systems.e-Rxisastartupproducinganelectronicprescriptionauthorizationsystemthatreplacestra-ditionalpaperscripts.e-RxidentifiedKingHealthasthebesttargetfortheirsolutionbecauseoftheirintegratedclinicalandpharmacysystemandsophisticatedITinfrastructure.Thee-RxteamchoseanupcomingmedicaltechnologiesconferenceasthebestvenuetoconnectwithKingemployeesandstartasalesprocess.Attheconference,e-Rx’sbusinessdevelopmentexecutive,SteveBiden,capturedtheattentionofaKingHealthPharmacyoperationsmanager,SamiJones.BidenintriguedJoneswiththepotentialofhisfirm’sproducts.Bidenquicklyrealizedshewasavisionary,willingtolookintonewideasandseetheirpotential.Shealsohadtherespectandcharisma to advocate for major projects within the King organization.Jonesofferedthee-RxsalesteamafootinthedooratKing,butBidenandhisteamfacedanuphillbattlebecausetheywereunknowntothehigher-updecision-makers.e-Rxalsolackedreferenceableclients;theirsystemhadneverbeeninstalledanywhere.ConvincingKing’sadmin-istrators,doctors,andpharmaciststotakeachanceonanunprovensystemfromanunprovenvendorwouldbearealchallenge.GettingtheITdepartmenttograntsecurityaccesstothedatacentersandloginstodevelopinterfacesforexistingdatabaseswouldbeasalesjobinitself.Thesegroupswerelikelytosay,“Gotrythisoutwithsomeminorleagueclinicandshowushowthatwent.”Therewasreallynowayfore-Rxtoprovethemselvesbyputtingtheirsystemintoasmallerclientorganizationasaminimumviableproduct,orMVP.Thenatureofthee-Rxsolutionrequiredanextensive,integratedhealthsystemthatcontrolleditsownpharmaciesandpossessedasophis-ticatedITinfrastructure.Moreimportantly,e-Rx’sstrategywastoquicklyestablishthemselvesastheleaderintheemergingelectronicprescriptionmanagementmarketandgetventurefundingtobackthat.Theteamwassurethatabigclientwouldbringthemthebiginvestorsneededtoestab-lishtheirfirmasafixtureintheboomingelectronichealthindustry.Thiswasaclassic“chickenandegg” problem for a small firm going after a very large client.SamiJonesunderstoodthesalesdilemmathate-Rxfacedandwassensitivetotheirplight.Jonesconceivedastrategyforgettingthroughthebarrierstoentrythate-Rxfaced.SheintroducedSteveBidentoGaryRogers.RogersownedNetworkLabs,asystemsintegratorthathad,formanyyears,providednetworkinstallationandsupportservicesforKingHealth.NetworkLabswouldbeperfectlysuitedtosetuptheservers,supportthenetworkingrequirements,andtrainusers.Evenmoreimportantly,theywereanestablishedandrespectedvendorwithinKing’senvironment.IfNetworkLabsjoinede-Rxinthesaleseffortandpromisedtobeon-handtosupporttheinstal-lation,deployment,andtraining,King’sdecision-makerswouldhaveamuchhigherdegreeofconfidence.Bidenwasattractedtotheidea,buthedidfindthesuggestionsomewhatpresumptuous.Herecalls,“Ourcustomerwasreworkingourcorporatestrategytogetusoverbarrierstoentryherownfirmhadestablished.”Hewasalsohesitanttopartnerupwithacompanyandindividualshehadnevermetbefore.Bidennotes,“Iwasn’tsurewhatNetworkLabswasgoingtobelike,butIfiguredweweregoingtohavetofindout,soIacceptedthemeeting,anditturnedouttobethebeststrate-gic partnership we ever made.”Thee-RxandNetworkLabsteamssharedthe“startupmentality,”andthetwogroupsquicklybonded.GaryRogerswasparticularlyimpressedwithRobynRoss,thesoftwaregeniusbehinde-Rx.Rosshaddevelopedtheentiresolutionsinglehandedly,injustafewmonths.ShewasnotonlyabletobuildtheSQLdatabaseonthebackendbutalsobuiltaslickandeasytouseweb-basedfrontendandswiftlycodedcustominterfacestomultiplemainframedatabasesthatwereuniqueto King.Chapter 3Strategy: Capturing and Maintaining Competitive Advantage99© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Thesalescycleforthee-Rxsystemtookmanymonths.Thecombinede-RxandNetworkLabssolutionhadtoaddressmanyconcernsaswellastheeffortsofsaboteurswithinKingHealth,whowantedtodevelopinternalsolutionstheycoulddirect.Intheend,averylucrativedealwasstruck.e-RXreceived$300,000inadvancepaymentsforcustomizationanddeploymentaswellasamonthlysoftwarelicensingfeeof$48,000.Thee-RxteamwasabletobringinSiliconValleyinvestorswhoappointedanewpresidentwithextensivecorporateexperiencetorunthefirm.Thee-RXimplementationandtrainingrequirementsallowedNetworkLabstosignificantlyexpandthesize of their team within King Health.Afewyearslater,KingHealthexpressedaneedforaclinicalmessagingsystemofsimilarcon-figurationandscopetothee-Rxsystem.Theyrequestedproposalsonthenewsystemfrome-RxandHAL,ahugeinternationalcomputerandconsultingfirm.e-Rx’snewpresident,installedbytheinvestinggroup,hadsidelinedBidenandthefoundingteamandreplacedthemwithatraditionalgroupofexperiencedexperts.Theseoldhealthcareprosproducedacomplexandexpensivepro-posal for King that was indistinguishable from the HAL solution.ThisproposalworriedGaryRogersoveratNetworkLabs.RogersbelievedthatadvocateswithinKinghadintentionallysetuptheproposalcompetitionine-Rx’sfavor,expectingthestartuptoprovideanothernimble,cost-effectivesolutionthatwouldhavelookedveryattractivecomparedtoapriceyandcumbersomeHALbid.Hetriedtowarnthenewe-RxleadershipthattheyweregoingdownthewrongpathwithKingHealth,butthenewe-Rxpresidentwouldn’tevenmeetwithhim.Kingendedupwithtwobig,complex,andexpensiveproposals,andtheydidn’twanteither.Thee-Rxfoundersandsalesteamwereextremelyfrustratedwiththeirnewmanagement,buttheyalsobelievedtheyweretiedtoe-Rxbytheirstockoptions.Rogerswasfrustratedtoo.HewantedtheimplementationworktogotoNetworkLabsandknewHALwouldrelyonitsownarmyofengineerstodothat.Rogersdecidedtherightstrategyatthistimewastojettisontheburdensomepartofthee-Rxpartnershipandcapturetheportionthataddedvalue.HewenttoRoss,theorig-inale-Rxdeveloper,andproposedofferingKinganunsolicitedproposalfromNetworkLabswithsoftware by Ross.Endnotes1.Thisofteninvolvesacknowledgingthestrategicgeniusofverydisagree-abletyrantsfromNapoleontoBinLaden,whilerecognizingtheinhumanegoals to which they applied it.2.Nash,JohnF.“Equilibriumpointsinn-persongames.”ProceedingsoftheNational Academy of Sciences 36(1),48–49.3.TheverysamelocationwasusedasadefensivepositionduringtheSec-ondWorldWar(1941)byAlliedforcesopposingtheNaziinvasionofGreece.Inthiscase,theGermanmechanizedforcescouldnotusethemountaintrailandtheBritishwereabletodelaythemlongenoughtoevac-uate thousands of New Zealand and Australia soilders to Crete.4.AtthetimeofthiswritingtheTeslaversusstatedealersbattlewasstillrag-ing, but our money is on the entrepreneur.5.Somenoncriticalspecialtiessuchascosmeticsurgeryareaclearexcep-tion.Peopledon’tneedliposuction,botoxtreatments,orbreastaugmen-tationtosavetheirlives,anddoctorsinthesefieldsneedtogeneratedemand and advertise very aggressively.6.AsoflatethishasnotbeenentirelyeffectiveintheUnitedStates,andfamilydoctorincomeshavebeenunderpressure.ThishasbeenduetodegreesawardedtoU.S.doctorsfromoffshoreschoolsandtheimmigra-tion of foreign medical doctors into the U.S.7.Thatisn’ttosayyoucan’tsucceedthereifyouarepassionate.Justbeawareyouwillfaceconstantcompetitioninadditiontodealingwiththepossibility that such shops are a passing fad.8.Laertes final advice to his departing son, Polonius, in the playHamlet.100A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
CHAPTER 4Opportunity RecognitionEureka!—ArchimedesFinding your opportunity.Source: © Shutterstock, Inc.Doyoualreadyknowwhatyournext,orperhapsyourfirst,entrepreneurialendeavorwillbe?Theveryfirststepinanyprojectrequiresidentifyingthedestination.Inbusiness,thatmeansknowing what business you are going to enter.© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
severance packageExtra monies provided bya company to anemployee who is leaving,typically during a layoff.seed capitalThe initial money used tofund a new venture.hang a shingleTraditional Englishbusinesses would hang apainted shingle outside thedoor indicating the type ofbusiness inside: pub,barber, bookseller, etc.4.1Searching for IdeasLearning Objectives1.Understandsomefounderscometoentrepreneurshipwithaclearbusinessidea,whileoth-ers chose entrepreneurship seeking an opportunity.2.Understand the approaches of exploration and exploitation.3.Understand that adding value is what makes an idea an opportunity.4.Recognize how customer pain points create business opportunities.5.See that delighting people is of huge value.Choosing a DestinationWhatisyourbusiness“idea”?Thisquestionisa“nobrainer”forthethousandsofsmallbusinessownerswhofindthemselvestakingovertheoperationsofanexistingfirm,eitherthroughcarefulplanningoraluckybreak.Theymayinheritthefamilyconstructionbusiness,buyouttheirbossataspecialtyaluminumfoundry,orpurchasetheirfavoritecornerpubwithacorporateseverancepackage.Manyskilledcraftspeopleandprofessionalsknowexactlywhichbusinesstheyaregoinginto.Iftheyhavetheseedcapital,theycanmovedirectlyintobusinessaftercompletingtheiredu-cationorapprenticeship,ortransitionfairlyeasilyfromworkingforanotherfirm.Abaker,electrician,orlawyeroftenfeelstheyneedonlyhangashingletobeinbusiness.So,thischaptermightnotbesoimportanttothem,thoughthisbookwillmakeitclearthatthereisalotmoretofinding success in business than opening your door and waiting for customers to arrive!102A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
feasibility analysisTake the time to review theaspects of your businessplan to see if it isachievable.A skilled tradesperson with tools can hang a shingle and go into business.Source: James Kirkikis/Shutterstock.comAnotherbiggroupofentrepreneursismadeupofcreativeworkers:particularlyartistsandengineers.Artistsareeagertogeneratenewideasbecausetheyareinclinedandtrainedtolookattheworlddifferently.Engineersareeducatedtodefineproblemsandproducesolutions.However,creativeworkersoftenfreezeupwhenforcedtochoosebetweenanabundanceofgreatideas.Someentrepreneursfailsimplybecausethey’reunabletorestrainthemselvesfrompursuingeveryideatheyencounter.Thesemaybetheirownideas,thoseproposedbyfriends,oronestheyencounterintheworldorreadaboutonline.AshasbeennotedbyThomasEdisonandElonMusk,ideasareabundant.Gettingthemdoneanddonerightisnearlyimpossible.Time,money,andotherresourceshavelimits,andeachnewideayoutakeonreducesthevalueyoucanaddtothepreviousones.Chapter5,onfeasibilityanalysis,willhelpsolvethedilemmaofselectingtheideawiththebestpotentialtobeasuccessfulbusiness.However,IunderstandthatnoteveryoneisburdenedwithElonMusk’sorThomasEdison’sproblemofhavingtoomanyworld-changingbusinessideasclogginguptheirheads.Manyotherwiseentrepreneurial-mindedpeoplehavetroublelaunchingtheirownventuressimplybecausetheycannotfindaclearreasontostartone.Businessstudentsoftensaythingslike,“Ireallywanttobeindependentandrunmyowncompany,butIdon’tknowwhatitshouldbe,”or“Iwanttobepartofastartup,butIdon’thaveagreatideaofmyown.”Howmightsuchanaspiringentrepreneursearchforideas?Ifyou’reoneofthoseambitioussoulswhowanttobetheirownbossorjuststartsomethingnew,butyouaren’tsureinexactlywhatarea,thischapter is designed to help you stir up a lot of ideas for further analysis.Chapter 4Opportunity Recognition103© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
innovationThe process engineers orartists pursue to createsomething new. See alsocreative destruction;disruption innovationtheory;exploration.explorationSearching for newbusiness ides. See alsoinnovation.exploitationThe process of creatingnew products from themodification of existingand proven products.slackThe resources, such astime, money, or facilities,that an organization doesnot require for itsimmediate operations andcan therefore be allocatedto the development of newproducts or services.risk toleranceThe ability to faceunknown outcomeswithout stress.There are two fundamental paths to finding abusiness opportunitySource: © Shutterstock, Inc.Yes, There Are Two Paths You Can Go By!Innovationistheprocessthatartistsorengineersfollowtocreatesomethingnew.Therearetwobasic paths to innovation:explorationorexploitation.Explorationinvolvessearchingfornewideas,experimentation,andfailure.Somenewideasalreadyexist,justnotwithinyourorganization,andpartofexploringishuntingforthem.Mostsmallbusinessesinvolvesomedegreeofexplorationofthissort.Theyrequiretheentrepreneurtodiscoveracustomerneedandfillthatneedbyfindingasolution.Sometimesthatsolutioninvolvesdeveloping a whole new product category.Exploitationoffersaneasierpathforproductdevelopment,availabletobusinessesthatalreadyexistandhaveworkingproducts.Ratherthancreatingorfindinganewproductcategoryviaexploration,exploitationdependsonincrementallymodifyingexistingproductsorapplyingthemtonewmarkets.Productproductionorservicedeliveryisusuallyrelativelystraightforwardbecausethishasbeendonebefore.Customersaretypicallyabletounderstandandeagertoembrace incrementally improved products.Managementscholarshavespentagreatdealoftimelookingattheappropriateallocationofresourcesbetweenexplorationandexploitation.ProfessorJamesMarchofStanfordnotedinaseminal1991paperthatthedevelopmentofnewproductswithinorganizationsisrestrictedbythelimitedresourcesofemployeetime,money,andfacilities.Mostfirmsarefocusedontheprocessofproducinganddeliveringtheirgoodstothecustomer.Additionalresources,notusedinthatprocessandavailabletopursuesomethingnew,areknownasorganizationalslack.Balancingbetweenthepotentialbiggerpayoffsfromabreakthroughversusthemoreassuredoutcomesfromanincrementalproductdependsontheavailableslackandtherisktoleranceofthemanagementteam.Doinginnovationviaexplorationmayinvolvetheinventionofanentirelynewclassofelec-tronicproductsoraninspirednewfashionlineunlikeanythingelseonthemarket.It’snotanincrementalimprovementorsurface-levelchangetosomethingthatalreadyexists.Thissortofopportunityismuchriskier.Therearetwofundamentaltypesofinnovationrisk:developmentriskandmarketrisk.Firstly,becauseatrulynewproductoftenrequiresthedevelopmentofnewtech-nologiesorprocessestodeliverit,itmayactuallyturnouttobeimpossibletodowhatyouproposeto do, at least at any reasonable cost.104A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
This innovative touch screen tablet, called theApple Newton MesagePad, was a failure in themarket.Source: Christopher W., https://commons.wikimedia.org/wiki/File:Apple_Newton_2100.jpgpain pointsCircumstances thatproduce great discomfortor simply mild annoyancefor potential customers.Apple’searlyattempttodevelopapersonaldigitalassistant(whatwenowthinkofasasmartphone,minusthephonepart)wasaclassicexampleofinnov-ativevisionoverreachingtechnicalcapabilitiesoftheday.TheAppleNewtonMessagePadwasreleasedin1993andpromisedtogiveusersaportablecomputerintheirpockettomanagedatesandcontacts,takenotes,andrunother“apps”usingatouchscreenwithhandwritingrecognition.Thecomputingpowerofthedaymadethedevicethesizeofabrick,gaveitashortbatterylife,andresultedinnotoriouslyhumorousblundersonthepartofitsrecognitionsystem.Thoughmosteveryonelovedtheidea,nobodylovedtheproduct,anditwasatotalfailure.TodaythevisionoftheNewtoncanbefoundinanyAppleorAndroidsmart-phone.Secondly,innovationisdifficultbecauseyouhavetoconvincecustomerstotrysomethingnew.Thismayinvolvechangingtheirroutinesoreventheirsenseof identity, and a great deal of customer education may be required.Forexample,despitetheenvironmentalbenefitsandhigherperformance,electricvehiclesinitiallyfacedgreatresistancefromthoseaccustomedto,andofteninlovewith,specifictypesofgasoline-burningautomobiles.Peoplewereperplexedabouttheideaofcharging.Theykeptimaginingthatahugenetworkofchargerswouldberequiredoneverycorner—muchlikegasstations,butlarger—andthewholeprocesswouldbetime-intensive.Ittookawhileforthemtodiscoverthatfordailycommuters,theprocessofchargingacarovernightathomeorinaworkparkinglotactuallysavedtimeovervisitinggasstations.Otherssimplyweren’treadytogiveuptheirJeeporMercedesbecausetheysawthemselvesasa“Jeepperson”or“Mer-cedesdriver.”BeingseeninaNissanLeaforaTeslawouldbedisruptivetoamajorexpressionoftheirpersonalidentity.Chapter5willinvestigatewaystominimizetherisksassociatedwithexplo-ration-based innovation.Customer Pain and DelightNo,wearen’ttalkingaboutanythingodd;today’shotbuttonopportunitygenerationmethodologyisthesearchofcustomerpainpoints.Bypainpoints,Imeanthethingsthatreallyannoyyourpotentialcustomers.Mostpeoplewillpaygoodmoneytogetridofanannoyanceandalotofmoneyiftheannoyanceisaseriousthreattotheirlivelihood.Ifthereisatechnologyorprocessavailabletosolveit,anentrepreneurwillfindit.AsDeanKamen,inventoroftheSegway,mobileinsulinpump,freestylesodamachine,andmanyotherthingsdescribesit,“Everyonceinawhile,anew technology, an old problem, and a big idea turn into an innovation.”Painpointscanbemassive,sharedproblemslikeglobalwarmingorproblemsthatareincred-iblyimportanttoindividualslikeheartdisease.Theycanbeevenrelativelytrivialmatterslikeuncomfortabletravelpillows.Asimplesmallbusinesspainpointmightbethelackofagoodbreak-fastcafealongaparticularlybusyurbanblock.Theobservantentrepreneurwhoseesthissituationleavingthousandsofmorningcommutersunder-caffeinatedandhungryontheirwaytoworkcould find a living in that.Chapter 4Opportunity Recognition105© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Rush hour commuter trafficpresents a massive, sharedproblem that offers manyopportunities for businessesthat can alleviate this pain.Source: © Shutterstock, Inc.customer delightThe value added when aproduct or service bringsjoy to the purchaser.net valueThe total value of asolution after purchaseand associated costs arededucted. See alsonetutility.utilityThe total satisfactionderived by a consumerfrom a product or aservice. See alsonetvalue.suboptimal choicesAn economic decision thatdoes not produce the finalbest financial result. Achoice that does notoptimize net value orconsumer utility.Thankfully,businessisnotalwaysfocusedonpain!Entrepreneurscanalsosucceedbycreat-ingjoywhereitdidnotpreviouslyexist.ThinkaboutDisneyland.Billedas“TheHappiestPlaceonEarth,”thismind-bogglinglysuccessfulamusementparkinAnaheim,California,brightens50,000liveseveryday.NobodyneedsaDisneyland,DisneyWorld,TokyoDisneyResort,DisneyCruiseline,oranimatedprincessfilms,butthecompanythatcreatedthesethingsrunsamassiveglobalbusi-ness based entirely on creating joy. We call that valuecustomer delight.College-educatedentrepreneurslovebusinessschooljargonlike“painpoints”and“customerdelight.”However,becarefulaboutlettingauthoritativelanguageelevatesomethingextremelytrivialintotherealmofseriousdiscussion.Buzzwordsliketheseareoftenusedtodeceiveentre-preneursandinvestorsintosolvingproblemsthatareveryabstract.Asolutioncanonlybecomeabusinessifthecustomerisconvincedthatitaddsenoughnetvalue(totalvalueafterpurchaseandassociatedcostsarededucted)toherlife.NetvaluewillbediscussedfurtherinChapter5,butkeepinmindthatasanentrepreneur,youarelookingforrelativelyseriouspainpointsorverysignifi-cant delights.Ineconomictheory,theprocessofeitherstoppingpainorcreatingjoyincreasesaconsumer’sutility.However,peoplearenottherobotsmosteconomistswouldliketostudy.Humanbehaviorresultsinmanyeconomicallysuboptimalchoices.Considerthatpeoplewillinglybuytobaccoprod-ucts,eventhoughthenetutilityovertimeisrenderednegativebyasignificantincreaseintheriskofdevelopingseveralfatalhealthconditions.Tobaccoconsumersmayalsowishforinsurancewhentheyarediagnosedwithlungcancerbutaren’talwayswillingtopayforsolvingtomorrow’sproblems.Alleviatingimmediatepainandprovidinginstantsatisfactionisaneasiersellthanaddressing long-term problems.Rememberourglobalwarmingpainpoint?Abigproblem,butifyousolvedit,whowouldyoubill?Wouldtheypay?Beyondbeingabletofixapainpoint,Chapter5willinvestigatewhetheryoucan get someone to pay for it.Key Takeaways•A systematic approach to search can be very effective.•Someideasmaybenewdiscoveries,butmostwilllikelybeimprovementstoornewappli-cations of existing ideas.•Recognize that some great ideas may not be technically possible, yet.•Alwaysassumethecustomer’sperspectivewhenlookingforopportunitiesandimaginetheirpain points or potential sources of delight.106A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
creative destructionA phrase coined byAustrian economistJoseph Schumpeter(1942) to describe theprocess by which aninnovative product ortechnology supplants anexisting product ortechnology, therebydisrupting a market. Seealsodisruption innovationtheory.4.2The Entrepreneur as Innovatorand DisrupterLearning Objectives1.Understand market disruption.2.Recognize the danger of being overconfident with your own success.3.Accept that changes in consumer demands and technologies are inevitable.4.Understand that second mover advantage is easier to recognize than a new idea.5.Understand last mover advantage.6.Appreciate that chance can be encouraged.Creative DestructionPeterThiel,afamedtechnologyentrepreneurandventurecapitalist,writesinhisbookZerotoOnethatthehardestthingtodoistocreatesomethingentirelynew.Hecontendsthattakingtheworldfrom“zerotoone”inanovelcategoryisordersofmagnitudemoredifficultthandevelopingone,five,orevenadozennewversionsofanexistingtechnology.Imitationisalwayssimplerandlessrisky,andthismakesitattractivetothevastmajorityofbusinessfounders,butthisapproachusu-ally offers a smaller potential upside.Whensomethingbrandnewsucceeds,itveryoftendisplacesanexistinginferiorsolutiontothecustomer’spainorstealsthepaymentsbeingmadeforcustomerdelight.Thesenewproductsdisrupttheexistingmarketsanddriveentireindustriesoutofbusiness.Economistsrefertothisprocessascreativedestruction,aphrasecoinedbytheAustrianeconomistJosephSchumpeter(1942).[1]Today,creativedestructionhasbecomeakeycomponentofeconomictheory,economicpol-icy, and business strategy.Chapter 4Opportunity Recognition107© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
tyranny of successThe inability of matureorganizations to adoptdisruptive solutions thatthreaten existingsuccessful businesses.disruption theoryClay Christensen ofHarvard Business Schoolidentified disruptioninnovation as “a processby which a product orservice takes root initially insimple applications at thebottom of a market andthen relentlessly movesupmarket, eventuallydisplacing establishedcompetitors.”The mass-produced automobile destroyed a transportation industry built around horses.Source: © Shutterstock, Inc.AclassicexampleofSchumpeteriancreativedestructionwasHenryFord’sModelTautomo-bile,whichdecimatedthebusinessofcarriagemakers,horsebreeders,stables,feedlots,andveterinarians.Morerecently,ApplesimilarlydestroyedNokia’s“featurephone”mobilebusinesswithitsinnovativetouchscreeniPhone.DVDandBluRaydiscsdisruptedthemarketforvideocas-settetapesinthe1990sand2000sonlytobeannihilatedbyvideo-on-demandserviceslikeNetflixinthe2010s.Inmostofthesecases,itisworthnotingthattheprocessofcreativedestructiontookmanyyears,andthedesignsofthenewproductswereplainlyvisiblelongbeforetheygainedsig-nificantmarketshare.Theincumbentfirms,dependentontheoldparadigm(e.g.,Nokia,Blockbuster),hadplentyoftimetoexploitthenewdesigns(copy)orexplore(invent)forevenbettersolutions.Despitehavingadominantpositionandvastresources,theyfailedtoexecutebecausetheyweretoocomfortablewithwhattheyhadbeendoingsowell.Thissyndromeisknownasthetyranny of success.Disruptive InnovationCreativedestructionmanifestsitselfinentrepreneurshipscholarshipinthestudyofdisruptiveinnovation.Disruptiontheory[2]wasmadefamousbyHarvard’sClaytonChristenseninseveralarticlesandhisseminalbook,TheInnovator’sDilemma.[3]Christensendescribesdisruptiveinnova-tionas“aprocessbywhichaproductorservicetakesrootinitiallyinsimpleapplicationsatthebottomofamarketandthenrelentlesslymovesup-market,eventuallydisplacingestablishedcom-petitors.”Thereisnosecretformulafordisruption.Inventionultimatelycomesfromlookingatineffi-cienciesinthemodernworldandfiguringoutinterestingsolutionstoovercomethem.WalterLawrenceGill,ayounginventorintheearlytwentiethcentury,notedthatcarsandairplanesneededspecializedstarterbatteries.Earlyinternalcombustionenginevehiclesrequiredamanualcrankorprop-pushtostart.Electricstarterswereplaguedbythefactthatwetbatterieswouldspilldangeroussulfuricacidwhentippedorjostled.Atthetime,therewasnotextbooktotellGillhow108A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
A traditional Hawaiian appetizer, poke,dicedraw fish, became a global food fad in the2010s.Source: © Shutterstock, Inc.toidentifysuchanopportunityorhowtoexploitit.Withapairofeyesandamindopentopos-sibilities,Gilldevelopedaspecializedbatteryandlateranonspillcaptosolvetheseproblems.Hehadhisfirstfactoryupandrunningwhenhewasjustnineteenyearsold.[4]GilllatersoldhisfirmtoTeledyne, which makes his products to this day.Christensenisveryawareofthetyrannyofsuccessandhaspointedoutthatwhentechnicalinnovationdisruptsamarket,itmayultimatelyputitsowncreatoroutofbusiness!Aclassicexam-pleofthiswasKodakcorporation’spioneeringworkbringingdigitalcamerastomarket.Althoughtheydevelopedthetechnologythatmadethemoderndigitalandphonecameraspossible,theycompletelyfailedtogaintractioninthatmarketwhilethesesamedevicesdestroyedtheirtradi-tionalfilmbusiness.InChapter3ofthistext,youreadthestoryofXeroxcorporation’sPaloAltoResearchCenter(PARC).ThecomputingtechnologiesdevelopedthereerodedXerox’scopierbusi-ness and helped reduce a former global giant to an also-ran in the business technology world.Ifyourplanistechnologicaldisruptionandtakingonbigincumbents,you’reprobablynotgoingtobeasmallbusinessforlong.You’relikelyrunningarapid-growthstartup.You’llneedmoneyandresourcesfromoutsidetomaintainmomentum.Iwilldiscussfundraisingrequirementsinafuturechapter.How-ever,doyouthinkdisruptionhappensatthesmallbusinesslevel?Aretheresmallincumbentfirmsthatfailtoadapttonewcircumstancesinawaythatother small entrepreneurs can take advantage of?Ifyou’dbeenwatchingsmallstreet-frontrestaurantsinLosAngeles,Califor-nia,overthelasttwentyyears,youwouldhaveseenalargenumberoficecreamstoresreplacedbyfrozenyogurtor“froyo”shops,includingpopularfranchisechainslikePenguinsandPinkberry.DidthedominanticecreamchainslikeDairyQueenandBaskin-Robbinsmakethetransitionwithconsumertastes?Howhardwouldthathavebeentoseeortoexecuteon?No,thetyrannyofsuccessdoomedthemtostickwiththeirmodelandperhapsaddingoneortwoflavorsofyogurttonoavail.Notthatitwouldhavematteredbecausejustafewyearslateryouwouldhaveseenmanyofthesefroyoshopsreplacedbyjuicebars—thinkJambaJuiceorNekter.Nextcamecupcakeshopsandthenpoke(apopularHawaiiandishofdicedrawfish).Consumerbusinessessubjecttofashionchangesarelikethis.Stickingwiththeoldproductisunlikelytosucceed,butchangingyourbusinesseveryfiveyearsisreallyexpensivetoo.Canyouthinkofhowyoucouldbestprofitonsuchaprocessofcontinual disruption?Imitation and Second Mover AdvantageForabusinessperson,pursuingthewell-wornpathofprovensuccessisnottheworstthing.Infact,itmaybethebestthing!Noteveryoneismeanttoorneedstochangetheworld.TheNewEntrepre-neurialDynamicisnotjustaboutbeingadriverofchange,becausefewpeopledothat;itismostlyaboutrecognizingwhentheenvironmenthaschangedandadaptingtoit.Mostbusinesses,bigorsmall,ridethewaves;theydonotcreatethem.Manygreatfirmshavecapturedthemajorityofprof-itsfromasectorafterwatchinganinnovatorstruggleinamarketandthenmovingintodothejob.Applewasn’tthefirstmakerofasmartphone.AcompanycalledPalmstruggledforyearstoestablishthatmarket.ThescreenonthePalmTreowastoosmall;thephysicalkeyboardtookuphalfthephone,andtherequirementtouseastyluswasawkward.RIM’sBlackberryessentiallycopiedthesefeaturesandfailingsbutaddedencryptionandstrongcorporatemarketing.Con-sumeradoptionofsmartphonesremainedsporadicuntilApple“gotitright”withtheiPhone’slarge,all-glassscreenandvisualvoicemailsystem.ThatisthesecondmoveradvantagewelearnedaboutinChapter 3.Forasmallbusinessentrepreneur,thesamerulesapply.ImaginethatyouobservethatanewlyestablishedThaicuisinefast-foodrestaurantnearyourschoolisdoingmoderatelywell.However,Chapter 4Opportunity Recognition109© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
last mover advantageBusiness conceptidentified by Peter Thiel inwhich an innovativeproduct or service isdeveloped with the maturemarket in mind.youconcludethattheThaiPadhasmadeapooreconomicchoicebylocatinginalow-incomeurbanneighborhood.Studentsareflockingtotheplace,butthelocalshaveneithertheincomenortheinclinationtotestexoticfoods.Youcarefullynotethatthisbusinesshasdonewellwithitsmenu,foodpreparation,presentation,andprocess,andthenyouopenasimilarplaceacrosstowninanupscaleneighborhood.WhileyournewBangkokPlatesrestaurantisalsosituatednexttoalargecampuswithhungrystudents,itwillcapturealotmorevaluefromwealthierlocalcustomerswhocanaffordtobemoreadventuresomeintheirdininghabits.Youmaysimplyenjoyyoursmallbusiness until you retire, or you might try to build that into a national chain, à laPanda Express.ButwhatifThaifoodlosesitsconsumerappeal?Rememberourquestionendingthelastsec-tion,onhowtoprofitfromcontinuousdisruptioninLA’sfad-drivenstreet-frontrestaurantscene?One way to ride the waves is to time the market and “flip” businesses.AnyexperiencedSoCalsurferstudiesthesurfbeforeenteringtheocean.Itiscriticaltounder-standthesize,timing,anddurationoftheswellsforagoodrideandtoremainsafe.Thesameistrueoffad-drivenbusiness.Waitfortheswellofthenextbigfadtoemergeandthenopenabusi-ness.ObservationwouldshowthatLAfoodfadspeakafterthreetofiveyears.Don’teverbethefirstpokejoint,bethesecondmover.Whenthefrenzyreachesapeak,alongwithyourrevenues,sellyourbusinessforthehighestvaluebeforethewaveinevitablycrashes.Then,moveontothenext fad and repeat the process!Whatotherbusinessperson,besidestherestaurantowner,mustpayattentiontothesewaves?How about the landlord? The food and restaurant equipment suppliers?Last Mover AdvantageInZerotoOne,PeterThielsuggeststhatthesecretoflong-termsuccessisto“studytheendgamefirst.”Ifyoucanforeseewhatthematuremarketforaninnovationwilllooklike,canyouaimforadominantpositionthatlastsforyears?Thatiswheretherealvalueoffuturecashflowsisfound.Thiel calls thislast mover advantage. Can you think of any examples?ThielisfamouslythefirstoutsidertoinvestinFacebook.DidFacebooklaunchthesocialmediafrenzy?Actually,aproductcalledMyspacelaunchedfirstandwasthebiggestsocialmediasiteintheworlduntil2009.Meanwhile,Facebooklingeredquietlyinthecollegemarket.Infact,until2006,you couldn’t use Facebook without having an “.edu” email account.PerhapsthegreatestexampleofalastmoverisMicrosoftWindows.Atthetimeitwaslaunchedin1985,WindowswasseenasanobviouscopyofApple’sLisa(1981)andMacintosh(1984)operatingsystems.LesswellknownisthatApplewasthesecondmover,havingborrowedallthefundamentalsfroma1970s-computerdevelopmentprojectatXerox.Inanycase,thelastmover,Microsoft,hasruledthebusinessdesktopformorethanthirtyyearsandcapturedthevastmajor-ity of the profits in the market for graphical user interface operating systems.110A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
serendipityAn unanticipatedintersection ofcircumstances that resultsin a positive outcome.Microsoft used last mover advantage to capture a leading position in the graphical computer operating systemmarket.Source: Wei Huang/Shutterstock.comThisisn’ttosuggestthateveninaprovenmarketyoushouldproduceatraditionalbusinessplanandsitbackwhileitisexecuted.TheNewEntrepreneurialDynamicstillapplies.Adaptabilitywillberequiredeverystepoftheway.Facebook,foundedbyandforcollegestudents,facestheproblemofhavinganagingdemographic.Whilethefirmstillcapturesthelion’sshareofsocialmediaadvertisingprofits,allthosestudentsgraduatedalongtimeago,andmanyyoungpeopledon’twanttobeonasocialmediaplatformwiththeirparentsorgrandparents.Thecompanyhasresponded by buying and integrating Instagram into its highly profitable advertising machine.SerendipityManygreatbusinessopportunities,bigandsmall,arriveentirelybychance.Sometimespeoplearenot looking for a business opportunity at all, and something great just “falls into their lap.”Icallthisluckyprocessoftherightentrepreneuraccidentallyencounteringtherightideaserendipity.Andby“right,”Idon’tmeanjustsomeonewholikestheidea,butanentrepreneurwhohastheskillsandresourcestoexecuteonitaswell.Youstumbleacrossacool3Ddisplayanddecidetheworldneedsa3Dsmartphone,butcouldyoumakeoneorturnthatintoabusiness?Unlessyou’realsoanengineerorknowwheretofindone,youwon’tbeabletoproduceevenaprototype,andatthatpoint,you’llstillalsoneedaccesstoalotoffunding.Doyouknowanyonewithanextra$100milliontoinvestinanewphonestartup?Ifnot,youcantrytogetsomemeetingswithventurecapitalistsonCalifornia’sfamedSandHillRoad,butyoumightbebetteroffsettingyoursightslower.Agreathistoricalexampleofserendipityisthemicrowaveoven,aconvenienceineverykitchen,andonethatmanyundergradskeepintheirdormroomtoday.Anyideawhereitcamefrom?Itwasaproductdiscoveredentirelybyaccident!PercyLebaronSpencerwasorphanedatanearlyage,droppedoutofgrammarschool,andbecameaself-taughtengineer.AfterworkinginamillandservingintheNavy,hefoundworkattheRaytheonCorporationworkingonradarsys-Chapter 4Opportunity Recognition111© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
This ubiquitous home appliance came from anaccidental discovery in a defense lab.Source: © Shutterstock, Inc.search processA systematic procedure forlooking for new things.myopicAn unhealthy,short-sighted focus on onething that prevents theviewer from seeing otherthings that are equally ormore important.tems.Whiledevelopinganew,mass-produciblemagnetron,Spencernoticedthatthecandybarinhispockethadcompletelymelted.Hebegantestingmicrowaveradiationonotherfoods,includ-ingpopcorn.Pleasedwiththeresults,theinventordevelopedacontainedmetalcookingboxandinstalledthefirstoneinhisboss’skitchen.In1945,Raytheonfiledforapatentonthemicrowaveoven,whichitnamedthe“RadarRange.”Thisserendipitousspin-offofanaerospacefirmintocon-sumer products is an example of corporateintrapreneurship, which I discussed inChapter 1.Whilethemicrowaveisanamazingcreationbysomeonewhowasn’tplan-ningtolaunchanewproduct,mostluckyentrepreneursareactivelyengagedinanopportunitysearchprocessbutfindsomethingotherthanwhattheythoughttheywerelookingfor.Theysucceededbecausetheywerenotmyopicintheir searching; they kept their eyes and minds open for the unexpected.CanadianentrepreneurStewartButterfieldhasexperiencedthisprocessofaccidentaldiscoverytwice.Intheearly2000s,Butterfield’steamatLudicorpwaslaunchingagamecalled“GameNeverending,”andalthoughthatproductnevergainedmuchtraction,itdidincludeauniquefeaturethatallowedyoutouploadyourownimagesandsharethem.TheimagesharingfunctionturnedouttobemoreattractivethanthegameandresultedinthepopularsocialimageprogramFlickr, which Butterfield sold to Yahoo for more than $20 million.[5]In2009,theserialentrepreneurthenmovedbacktothegamedevelopmentprocesswithmoreexperienceandmoney.Hisnewfirm,TinySpeck,workedonanonlinemassivelymultiplayergameproductnamed“Glitch.”Havinghadalotofexperiencewiththecomplexitiesofsoftwaredevelopment,whichinvolvedalotofcommunicationsandsharingoffilesovermultiplesystems,Butterfieldandhisteamsetaboutcreatinganinternaltooltomanagetheflowofallthisinformationbetweenthedevelopmentteamsandmadeitmobileandsearchableinasingleapptheycalled“SearchableLogofAllConversationandKnowledge.”Glitchfailedtogaintractionforavarietyofreasons,includingbeingdependentonFlash,awebtechnologythatfelloutoffavoraboutthesametimethegamewaslaunched.TinySpeck,whichhadraisedtensofmillionsinven-turecapital,concludedthattheircommunicationsinformationmanagementtoolmightbemorevaluableandopenedS.L.A.C.K.,laterreducedtojust“Slack,”uptotheworldwithhugesuccess.In2018,ithad8millionusersand3millionpaidaccounts,andaccordingtoCrunchbase,itwasraisingadditionalfundsata$7billionvaluation.Butterfield’sfirstbusiness“failure”madehimamulti-mil-lionaire; his second blunder made him a billionaire.[6]Managing ChanceSo,ifserendipityisessentiallyjustchance,couldyourcompanymanagechancelikeanyotherresourceanduseittoincreaseyourlikelihoodoffindingtherightopportunity?Doyourecallourdiscussion of the significance of chance inChapter 2?Bigpharmaceuticalcompaniesutilizeaprocessofcontrolledserendipityforthedevelopmentofamajorityoftheirdrugs.Thesecompanieshaveadatabasewithmillionsofvariouschemicals,andtheyfairlyrandomlyselectbatchesofthemtotestforpropertiesthatmightcurediseasestheyhaveidentifiedashavinghigh-valuemarketpotential.Tensofthousandsofcompoundsaretestedforonechemicalthatproceedstoproductdevelopment.Manysimulations,animaltests,andhumantrialsareconductedbeforeyoufinditbehindthecounteratyourlocalpharmacy.It’saveryexpensivewaytodobusiness—andoneofthereasonshealthcareissocostly—buttheircustomersliterallyhavethehighestpainpointsandwillpayagreatdealtogetrelieforperhapseventolive.Can a small business entrepreneur utilize this sort of exposure to chance to find their product?Manysmallbusinessownersconductsimilar“randompathsearches,”byessentiallyleavingthemselvesopentodiscovery.Theymayspendyearslookingfortherightpathoutofanunful-fillingcorporatejob.Theymayinvestigatefranchises,consideropportunitiestojoinafriendinanexistingbusiness,workwiththeirspousetorefurbishand“flip”homes,orconsiderpursuing112A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Sweet treats sell because they delightcustomers.Source: © Shutterstock, Inc.theirfavoritehobbyasabusiness.Whileyoumaynotstumbleuponamiraculousbusinessmodelentirelybyaccident,veryoftenyourstartupwillseeminglyfindyou.Travelandkeepyourselfopentonetworkingintroductions,randomencounters,andoddconversationswithstrangers.Mostimportant, keep your ears and your mind wide open.Key Takeaways•Be prepared to take advantage when incumbents become overconfident.•Look for good ideas executed poorly, where you can do better.•Be open to serendipity when it comes.4.31 + 1 = NewLearning Objectives1.Recognize the possible combination of existing products into new solutions.2.Recognize that you must understand what your core competency is.3.Understand the power of networking.4.Understandthattheadditionofbusinessacumentotechnicalorartisticendeavorscancre-ate a powerful combination.5.Appreciate the power of the open innovation concept.6.Understand you can simply acquire an entrepreneurial activity.When Preparation Meets OpportunityOccasionally,anewproductemergesfromthefruitfulcombinationoftwoexist-ingones.In1906,St.Louis,Missouri,hostedtheWorld’sFair.Inadditiontoexhibitsoftechnologyandculturefromacrosstheglobe,theeventfeaturedavarietyofvendorsofferingallsortsofnewfoodsandproducts.Duringonepar-ticularlyhotsummerday,anicecreamvendoratthefairwasdoingabriskbusiness.Nextdoor,thewafflevendorwasstrugglingwithaslowday.Eventually,theicecreamsellerranoutofpapercupsandcouldnotsellanymoreicecream,despitehavingplentyofproductandsoliddemand.Thewafflevendorhadtimetoobservethisdilemmaand,beinganaturalentrepreneur,curledhiswafflesintoconesandsoldthemtotheicecreamvendorasanew-fangledicecreamholder.Outofthiscollaborativeinnovation,atrulyiconicnewproductcategory,theicecream cone, was born. Customers have been delighted ever since!I’mnotreallysurewhofirstsaid,“Luckiswhenpreparationmeetsopportu-nity,”[7]butlikeanygoodscout,anentrepreneurmustalwaysbepreparedtoseizeandexecuteontherightideaorchancetolaunchanenterprise.Carryatablet,notepad,orsmartphonetokeepnotes.Haveyourbusinesscards,yourphonecontactentry,andyoursocialmediaprofileuptodateand ready to share. Interact with your peers and even your competitors on a regular basis.Chapter 4Opportunity Recognition113© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
gig economyA market environment inwhich individuals andorganizations contract withindependent workers forshort-term engagement.Networking with CreatorsDoyoulikemeetingnewandinterestingpeople?Ifyouareabusinessstudentoranaspiringentre-preneur,locatingthescientists,artists,engineers,orcraftspeoplerequiredtomakeyourdreamsrealcanbebothfunandchallenging.Youwillnothaveanopportunityifyoucan’tgathertheresourcesrequiredtomakeitwork.WhileIdigintothemeatofevaluatingavailableresourcesinChapter5,asIindicatedbackinChapter2,undertheNewEntrepreneurialDynamic,“NetworkingStartsBeforeYourBusinessDoes.”Findinganopportunityandthepeopletohelpmakeitrealarebestapproachedasanintegratedprocessbecausemakingthefitlaterwillbebothmoredifficultand less perfect.ConsidertheclassicAmericanstoryofentrepreneurship,thefoundingofApple.SteveJobsandSteve“Woz”Wozniakwereintroducedbyamutualfriend,BillFernandez,whorecognizedtheirloveoftechnologyandofpranking.Fromalmosttheverystart,theJobs-Wozrelationshipwasbusi-nessfocused.FernandezandWozhadbeenworkingtobuildahobbycomputer,andJobsalmostinstantlysawthebusinesspotential.Jobsdidnothavetheengineeringskillstobuildthemachine,butinWoz,hefoundboththeproductandthepersonwhocoulddoit.FernandezbecameApple’sfirst employee and very wealthy—networking pays!Intoday’sgigeconomy,manybusinessstudentshavecometoviewengineersandartistsascommoditiestheycanpurchaseonamarket.Usingagrowingvarietyofonlineserviceslikefiverr.comandfreelancer.com,youcanfindengineersandartistswhowillworkcheaply.Thisprocesshasalwaysexisted,andbeforetheinternet,itdependedonpersonalnetworking.In1971,PhilKnight,anaccountingprofessoratPortlandStateUniversity,wasrebrandinghisrunningshoecompanyunderthenewname,“Nike.”KnightrecruitedastudentnamedCarolynDavidsontocre-ate a logo that conveyed fluid motion and paid her $35 for the now iconic “Swoosh.”[8]The iconic Swoosh logo was commissioned for $35.Source:TY Lim/Shutterstock.com114A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
core competencyA specific ability that yourorganization doesparticularly well and bywhich you create value foryour customers.mission-criticalcomponentAn element of a business(software, device,personnel, etc.) that iscrucial to its success.commercializeTo undertake a process oftransforming an inventionor artwork into a for-profitbusiness model.PhilKnightobviouslygotsomeexceptionalvalue,butwhenyouhirepeopleascommoditiestodevelopyourproduct,expecttogetacommodity-classproduct.Thatmaybewhatyouneedtogetbyinthemarketplace,providedyourwebsiteorlogoorpromotionalphotoisnotacorecompetencyofyourbusiness.Bythis,Imeanthatitisnotamission-criticalcomponentofyourbusiness or the secret sauce that generates your profits.However,ifyou’vegotanamazingideaforrockingthebusinessworld,youprobablywon’twanttoshareyoursuperdisruptivetechnologyorprocesswithsomeonlinestranger.Anexcep-tionalproductorservicerequiresmorethanagreatidea;youmusthavetheverybestinexecutionaswell.Ifyouwanttobuildabrandthatwilllast,yourcompanywillneedatleastacoreofdedi-cated,long-termteammembers.ThesoftwaredevelopmentandgraphicartistA-Teamisnotsittingaround on fiverr.com waiting to bid on your work.Recruitingthebestpeoplerequiresthatyoutreatthemandthepositionsyouwishtofillwiththegreatestrespect!ThereisatechrecruitingblogonTumblrentitled“Whartoniteseekscodemonkey.”[9]Whiletheoperatorsmayhavechosenthenameasatongue-in-cheekattemptathumor,itreflectsarealandunhealthyattitudeinsomebusinessschools.Referringtoyourfuturebusinesspartner or key employee as a “code monkey” is no way to attract a quality candidate.Ifyou’reanartistoranengineerlookingtocommercializeyourwork,thissituationmaybeexactlyreversed.Manycreativevisionariesviewbusinesspeopleasexploitiveprofitmongerswhosteponinventorsandcreativeemployeesinordertoaccumulatewealthforthemselves.Thisdis-tortedstereotypeisconstantlyreinforcedinourmedia.Sadly,thissortofScroogeMcDuckcaricatureisparticularlyprevalentinfilmsandTVaimedatyoungpeople,whichperpetuatesacynical,anti-socialviewofbusiness.Ifyou’reacreativesortandwanttheresourcestoworkonyourdreams,demonizingthepeoplewhoknowhowtoacquireandmanagethoseresourcesisself-defeating.Overcomingthisfundamentaldisconnectrequiresviewingeveryonewhocontributestoyouropportunityasastakeholder.Allyourstakeholdersdeservetobeviewedandtreatedwithrespect.Conduct your search with this attitude, and good people and great results will follow.Findingthebestpeopleforthelonghaulwillcomeviaanexhaustivesearchandpersonalnet-working.Agreatplacetostartislocalcolleges.Theplacementofficesofcollegesarealwayslookingforinternshipsandjobsfortheirgraduates.Ifyou’relookingforengineersoramarketingexpert,pick a school that excels in those areas.Asasmallbusinessowner,youmayfinditreallyhardtorecruitthetopcandidates.Multi-nationalcorporationsandprestigiousconsultingfirmsaregoingtobethrowingmoneyatallthesummacumlaudegrads.Don’tworry,that’sokay.NoteveryoneontheA-TeamisnecessarilyanA-student.Actually,studentswhofittheorganizedandrigorousacademicworldmaynotfitverywellintothechaosthatisastartup.SteveJobsandmanyotherbusinessgeniusesdroppedoutofcollegeafterfindingthatanacademicone-size-fits-allapproachtoevaluatingandadvancingtal-entdidnotcomportwiththeiroutside-the-boxthinking.DidyouknowthatBillGatesleftHarvardUniversitytotakeajobwritingsoftwareandansweringthehelpdeskphoneatatinycomputerstartup operating out of a strip mall in Albuquerque, New Mexico?Chapter 4Opportunity Recognition115© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
open innovationA process of collaborativedevelopment of technologyacross organizationsbased on rules of sharedownership.pecuniaryHaving to do with money.enlightened self-interestThe understanding thatsome sacrifice for thecommunal good is in yourown best interest. A stateof constructive competitionand cooperationdifferentiated from “greed.”FIGURE 4.1Altair Computer ManualPage from the Altair 8800 Computer Manual, Circa 1975Source: Library of Greg AutryOpen InnovationOpeninnovationisabusinessdiscoveryanddevelopmentconceptpopularizedbyHenryChes-broughattheUniversityofCaliforniaatBerkeley’sHaasSchoolofBusiness.[10]Openinnovationintegratesdevelopmentcomponentsfrominternalandexternalsources.Underopeninnovation,thetransferofknowledgebetweenorganizationsmaybepecuniaryornonpecuniary,meaningtheuseroftheinformationmayormaynotberequiredtopaythedeveloper.Someindividualsandfirms offer their ideas and work for free, and others ask you to pay if you use their work.Itoffersaparticularlyattractiveparadigmforthesmallbusinessentrepreneurorstartuponabudgetbecauseitoutsourcesexpensiveresearchanddevelopmenttoabroadcommunityofdevel-opers.Utilizingoutsideresourceseliminatesthetimeandcapitalinvestmentrequiredtobuildadedicated development team and helps provide diversity (often international) to a small team.Smallbusinessesalsobenefitfromthefactthatlargecorporationsareengagingintheopeninnovationapproachfortheirowndevelopmentprojects.TheydothisinordertotapthevitalityoftheNewEntrepreneurialDynamic,sincetheyarecomingtounderstandthattheircorporatecul-turesandrecruitingprocessesservetoweedoutthesortofradicalthinkersthatdriveinnovation.Onlinecommunitiescollaboratingwithuniversities,crowdsourcinginformation,andparticipatingincompetitionslikehackathonsaresomeofthemostproductivewaysforentrepreneurstoengagein open innovation.Operatingintheopeninnovationmodel,youwillalsoshareyourdevelopments.Youmayevendevelopanadditionalrevenuestreamprofitingfromthem.Doyouthinkthatcouldalsobeaprob-lem?RecallourconceptofsustainablecompetitiveadvantageinChapter3andhowthatwasoftenbasedonintellectualpropertyresourcesthatwereeitherprotectedbypatentsandcopyrightsorhiddenbytradesecrets.Whileopeninnovationmakesdevelopmentalotmoreaffordableandisarguablygoodforabroadercommunity,itmakesitverydifficultforanyorganizationtoobtainthecompetitiveadvantageneededtoclaimhigherprofits.Somehavearguedthatopeninnovationmayslowprogressbecauseitreducedeconomicmotivationstodevelopnewknowledge.Advocatesofopeninnovationsuggestitisaformofenlightenedself-interest.Indefiningthisconcept,AlexisdeTocquevillewroteofAmericansthat“enlightenedregardforthemselvesconstantlypromptsthemtoassisteachotherandinclinesthemwillinglytosacrificeaportionoftheirtimeandprop-erty to the welfare of the state.”[11]UndertheNewEntrepreneurialDynamic,youarefreetochoosebetweenopenandclosedorsomehybrid.Thinkcarefullyaboutwhetheropeninnovationisrightforyourstartup.Dothehighcostsofdevelopmentthreatenthelaunchofyourbusiness?Ismostofthevalueyouwilladdtobe116A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
foundinyourexecutionratherthanintheideas?Ifso,openmaybethewaytogo.Ontheotherhand,ifyoucometoyourbusinesswithamazing,proprietaryconcepts,youshouldconsiderclosed.External AcquisitionsInZerotoOne,PeterThielrecalledthatduringadebateoverhowtheirnascentPayPalstartupmightcompetewithElonMusk’sfirmX.com,“Oneofourengineersactuallydesignedabomb.”Whiletheideaofliterallyblastingtheirproblemsawaywascertainlynotpursued,FastCompanyreportsthatseveralofPayPal’sfounderspursuedthedubioushobbyofhomemadepyrotechnicswhiletheywereinhighschool.[12]Whilemostinnovatorsdon’ttrytokilltheircompetitors,theyareoftenthesortoffolkswhowillnotscorewellonthepersonalityexamsorbackgroundchecksthatlargeestablishedcorporationsrequireofnewemployees.Corporationsoftentrytomaintainanarms-lengthrelationshipwithradicalthinkerswhowouldnotfitintotheircorporatecultureviacontracting and research collaboration.Ambitioussmallbusinessescanleveragethiscorporatetimiditytosupporttheirowndevelop-menteffortswithacashinfusionfromthesecollaborationswithlargefirms.TheMojave,Califor-nia,startupXCORAerospacesupportedthedevelopmentoftheirLynxspacecraftbyconsultingonenginedesignwithaerospacegiantUnitedLaunchAlliance(ULA).Alargesatellitelaunchprovider,ULAfocusedonthemilitarymarketthatXCORdidnotviewasapotentialcompetitorinitstargetmarket of suborbital space tourism.The original XCOR aerospace hangar in Mojave, California.Source: Greg AutryChapter 4Opportunity Recognition117© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
acquisitionTaking control of acompany by purchasing itoutright or by acquiring amajority of the company’sstock. Instead of investingfunds in in-housedevelopment, establishedcompanies often buystartups to obtain anexisting innovation ortechnology.Veryoften,alargerfirmwouldratherjustbuyanexistingbusinessthandevelopasimilarprod-uct.WhenFacebookwantedtogetintothesocialphoto-sharingtrend,itcouldhaveaddedfeaturestoitscoreproductordevelopedaspecializedapp,butinstead,itsimplyboughtInstagramfornearlyabilliondollarsofcashandshares.Thissortofacquisitionhappensonasmallerscaleeveryday.Whoknows?TheownersofPandaExpressmightconcludethatthebestwaytogetintotheThai cuisine business is to purchase your little Bangkok Plates chain for several million!Key Takeaways•Look for ways to combine existing products into new opportunities.•Always be networking.•Follow open innovation developments.•Consider buying a startup or eventually being bought out.4.4Saving an OpportunityÑImprovingExisting Products or Target MarketsLearning Objectives1.Understand that opportunity identification can be a continuing process.2.Understand the business opportunities the global supply chain offers.3.Realize you can travel virtually through online global marketplaces.4.Beawarethattariffsandtraderestrictionsmayinterferewithyourimport/export-basedopportunities.AdaptationSometimesyourfirstideadoesn’tquiteturnouttobearealopportunity.Youcouldabandonthewholeenterprise,oryoucouldlookaroundandperhapsdiscoverthatyourrealopportunityinvolvesachangetotheproductortoyourtargetmarket.Chapter5willdiscusshowthesemis-takesmightbeavoidedinthefirstplace,butitisimportanttoconsiderhowanexistingeffortcouldbe applied to a slightly different opportunity.Imaginethatyou’veproducedaskateboarddesignyoulove.It’sexactlythesortoflongboardyoulike.Itturnsandfeelsjustthewaythatismostcomfortableforyou.You’vebuiltitoutwithyourfavoritetrucksandwheels.Thedeck’sfinishhasadeepwood-grainvarnishthatyouadore.Butitturnsoutthatthemarketisnotasinlovewithyourcreationasyouhadhoped.Thelongboardappealstoalimitedmarket;it’sexpensivetomakeandmoreexpensivetoship.Yourcus-tomerskeeppraisingthestyleandthefinishbuttellyouthey’dlikeasmallerboard,similartothePennybrandboards,thatfiteasilyintoschoollockers.Alotofthemalsotellyouthattheydon’tloveyourchoiceinwheelsandwanttobuildtheirown“complete”skateboard.Youhavetwochoicesatthispoint.Youcanstickwithyourvisionandprobablynothaveabusiness,oryoucanadapttotheneedsofthemarket.Makingasmallerdeckandsellingitwithouttrucksandwheelswillbe118A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
distribution channelThe way in which yourproduct reachesconsumers, such as retailstores, online sales, ormultilevel marketing.B2CBusiness to consumer. Afinancial exchangebetween a business andan end user of thatbusiness’s service orproduct.B2BBusiness to business. Afinancial exchangebetween two businesses,for example, between themanufacturer of acomponent part and themanufacturer of thefinished product.A bottle of Mexican Coca-Cola relabeled forsale in the U.S.Source: Greg Autrycheaperandeasiertoship.Ifthatchangeinproductdesignresultsinincreasedsalesandmargins,you may have a business! Listening to your customers is the key.Also,maybeitisnottheproductbutthedistributionchannel.Maybegoingdirectlytoyourconsumerbasewithyournewskateboardisnottheidealstrategy.YourB2C(businesstoconsumer)modelfailedbecausereachingasufficientnumberofnewskatersrequiredalotofsocialmediaadvertisingthatwasprohibitivelyexpensive,costingyoumoretogeteachsalethanyouearned.Perhapsyouarebetteroffsellingtoskateshopsratherthanskaters.InthatB2B(businesstobusi-ness)model,youmayonlyneedtoreachafewdozenstoresinordertoaccessthousandsofendcustomers.Onceyou’vebuiltbrandawarenessandskatersarelookingforyou,thensellingdirectwill be profitable. Opportunity identification may be a continuing process.Scouring the Global Supply ChainAnothersimplewaytogetabusinessgoingistolocateandimportaforeignprod-uctthatyoubelievewouldbepopularorpricecompetitiveinyourhomemarket.Keepyoureyesopenwhenyou’reonvacation.Considerthebusinessofimport-ingMexicansodaintotheUnitedStates.Foryears,U.S.sodacompanieslikeCoca-Colasavedmoneybysubstitutinghigh-fructosecornsyrupforcanesugar(sucrose)intheirsodarecipes.[13]Manyconsumersbelievethatthehigh-fructosesubstitutionspoiledthetasteoftheproduct,andsomeareconcernedthatitmayeven contribute to systemic health issues.[14]Longago,AmericantouristsinMexicodiscoveredthatnotonlydidMexicansstillenjoytheoriginalCokeformula(withsugar)butthatitalsostillcameinthedistinctiveglassbottlethatkeptiticycold.Someenterprisingentrepreneurreal-izedhecouldselltheproducttohisAmericanfriendsforahighpriceandbegantruckingcasesofitacrosstheborderintoCalifornia.TherelabeledSpanishlan-guagebottlesarenowcommonlyavailableacrosstheUnitedStatesandsellforas much as $3 a bottle—several times their price in Tijuana.Ifyou’renotupfortravelinginhopesoffindingaserendipitousidea,youcouldconductanonlinesearch.Travelblogsarefullofpeoplesharingdiscoveriesofawesomelocalfoods,coolcrafts,andamazingconveniencesfromaroundtheworld.ThoseamazingAfricanchilirecipes,Peruvianfingerpuppets,andspace-age Japanese toilets could find an enthusiastic market in the U.S.Alibaba and FriendsTherearealsoonlineglobalmarketplaceswhereyoucansourcemillionsofprod-ucts,manyofthematastoundinglylowprices.Alibaba.com,oneoftheworld’slargestonlinecommercesites,usesthetagline“Globaltradestartshere,”though,intruth,almostallofitsproductscomefromChina.Youcanfindalmostany-thingonAlibaba,inlargequantities,andatverycompetitiveprices.CruisingAlibabacanbefunandprofitableforaspiringentrepreneurs.Asearchforthephrase“phonecase”found18,062results,ofwhich17,995camefrommainlandChina.Therearecasesmadeofallsortsofmaterials,includingleather,wood,plastic,andmetal.Theyareavailableineverycoloroftherainbowandwithcustomprintedlogosorphotosaswell.Almostallofthemareofferedwholesaleforlessthan$2,andsomeofthemarepricedatjustthreetofivecentsapiece!Imaginetheprofitmarginperunitthatthelittlekiosk in your mall is enjoying. They may be selling you a ten-cent phone case for $19.95!Chapter 4Opportunity Recognition119© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Case for iPhones on Alibaba.comSource: Alibaba.comTherearechallengeswithusingimportationasacompetitiveadvantage.RememberthatanyofyourcompetitorscanandwillgetthesamepricingfromAlibabaorotheronlinemarkets.Dis-tinguishingyourselfwiththesecommodityproductsisverydifficult.Alibabavendorsarealsonotoriousforofferingcounterfeitbrandnameproducts—sodon’tassumetheDisneyorRalphLau-renlabeleditemsaregenuineorevenlegalinyourmarket.IftheEuropeanUnionCustomsofficialsimpoundacontainerofbogusGuccihandbagsyoupaidforinadvance,you’llprobablynevergetyourmoneyback.Therearealsodelays,logisticalproblems,andcommunicationschallengesasso-ciatedwithreceivingproductsfromhalfwayaroundtheworld.Qualitycontrolproblemscanalsobecommon,andresolvingthemwithavendorwhoisdistantanddoesn’tspeakyourlanguagecanbe a challenge as well.Finally,itisimportanttonotethattraderegulationsareconstantlychangingandsubjecttodomesticpoliticaltrendsaswellasgeopolitics.Tariffsandtraderestrictions,whichweregenerallyfallingduringthefirstpartofthiscentury,havebeenreturning.ThishasbeenparticularlytrueinthecaseofChineseimportstotheU.S.,wheretariffshaveincreasedand,insomecases,productshavebeenbanned.ChinahasbannedU.S.socialmediaproductslikeTwitterandFacebookinitsmarketsformanyyears.In2020theAmericangovernmentrespondedtothisandothersecurityconcerns with attempts to block China’s popular WeChat and TikTok apps.Key Takeaways•You may not correctly identify your real opportunity at first. Adapt.•Consider how importing products into a new market may offer a simple opportunity.•Use online marketplaces.•Avoidbeingdependentonasourceorexportmarketthatmaysufferfromtradedisruptions.120A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Ryan Olliges and his skateboard.Source: Greg Autry4.5De NovoIndustries: TheChallenges of Paving a New RoadLearning Objectives1.Understand the opportunity de novo industries offer.2.Realizethatbigplayersinnewmarketsareestablishinganewsupplychainfullofopportuni-ties.3.Understand that being an outsider to an industry can bring a powerful perspective.4.Understand the value of franchising and the different models of franchising.De Novo IndustriesYoumayrecallthatinChapter3itwasstated,“Thereareexistingmarkets,placeswherepeopleandfirmshavebeendoingbusinessforsometime,andthentherearenewmarkets,usuallycenteredaroundachangeintechnology,culture,orlaw.”Sometimessuchchangesallowacompletelynewordenovoindustry.Whentheseshiftsoccur,thefast-movingentrepreneurcanjoinanewpopula-tionofbusinessleadersembarkingonenterprisesthathaveneverbeendonebefore.Thinkaboutsmartphonesenablingappbusinesses,thefocusonhealthyeatingdrivingnewtypesofrestau-rants,andmarijuanalegalizationcreatinganentirelynewlegalvaluechaintobefilled(forbetterorworse).In2004,RichardBransonstoodontherunwayofasmallairportintheCali-forniadeserttoannouncehewasstartingtheworld’sfirstdedicatedspacetourismbusiness,VirginGalactic.Hewasgoingtosendanyonetospace,atleastanyonewith$200,000tospare!Ataboutthesametime,ElonMuskdecidedtoparlayhisPayPalwinningsintoSpaceExplorationTechnologies,orSpaceX,afirmthatwouldachieveitsgoalofputtinghumansonMarsbytakingoninter-national state-owned entities in the commercial space launch business.WhileBransonandMuskarerockstarentrepreneurswhosebusinessesareknownaroundtheworld,whatyoudon’tseeisthehundredsofstartupsandsmallbusinessesthathavejoinedtheminanindustryknownasNewSpace.Nongovernmentalspaceprogramshavediversesupplychainneedsthatincludeaplethoraofcomponents,softwaresystems,spacesuitmanufacturing,andpri-vate astronaut training.RyanOlliges,anaerospaceengineeringmajorattheUniversityofSouthernCalifornia,discoveredthatrocketproductionproducedasignificantamountofcarbonfiberscrap.RyancollectedmaterialfromtheUSCRocketPropulsionLabanddesignedacustommachinetocureitintoskateboarddecks.HetookhisprototypeskateboardtoabusinessschoolprofessorfamiliarwiththeNewSpaceindustry.Togethertheylaunched121C,abusinessthatcollectsandupcyclesscrapmaterialintoskateboardsandotherconsumerproducts.Thefirmhadtwosuccessfulcrowdfundingcampaignsandraisedoverhalfamillioninprivatecap-ital.TherecouldalsobeasmallbusinessopportunityforyouinspaceorperhapsclosertoEarth.Keep your eyes open.Chapter 4Opportunity Recognition121© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
green techTechnology developed tobe environmentally friendlyor to mitigateenvironmental harm. Seealsogreenwashing.greenwashingCreating the deceptiveappearance of a productor service beingenvironmentally sound foreconomic gain or positivepublic image. See alsogreen tech.TNBT, Riding Trends While Avoiding FadsProspectiveentrepreneursandinvestorsareofteneagertotalkaboutTheNextBigThingcolloqui-allyknownas“TNBT.”Theresultistheytendtofindthemselvescaughtupinfads.Wenotedthistrendearlierinfoodchoicewiththefrozenyogurttopoketrend.However,lastingnewindustriesdoemergeaswell.Inthe1980s,itwasthepersonalcomputer.Inthe1990s,itwastheinternet.Inthe 2000s, it was smartphones. In the 2010s, the commercial spaceflight industry boomed.Today,greentechisanimportanttopic.Environmentalawarenessamongconsumers,drivenbynewdataandincreasedpoliticalattentiontoclimatechange,droveastronginterestinenviron-mentallyfriendlyproducts.Ithasbeenveryfashionabletobeagreentechstartuportoinvestinone.Largecorporationsandsmallbusinesseshaveworkedtoburnishtheirenvironmentalcredibil-ityaswell.Forawhile,itseemedthateveryonewaspushingrecycling,alternativeenergy,carboncapture,andelectriccars.GreentechinvestmentboomedintheUnitedStatesandEurope.EvenChinesestate-ownedenterprises,longcriticizedasmajorpolluters,havegottenintothegamebyannouncinganumberofambitiousenvironmentalinitiatives.Isitwiseforasmallbusinessentre-preneur to leap into this green frenzy?Theanswerdependsonthestrategy.Increasingitsenvironmentalcredibilityinrecyclingandsustainabilitycouldboostanyfirm’sreputationandattractnewcustomers.Aslongastheeffortisnotprohibitivelyexpensive,itcouldhardlyhurt.Consequently,companiesbigandsmallhavelaunchedgreeninitiatives.Itquicklybecamedifficulttodistinguishbetweengenuineenvironmen-talprogramsandtokeneffortsatgreenwashing—aninsincereprocessofmakingacompanyorproduct look more environmentally conscious than it actually is.Going“allin”onanewgreenstartupofferedamuchlesscertainpaththangreenwashing.Manynewgreenfirmscollapsedinignominyafterburningthroughmillionsininvestmentcapital.ThephotovoltaicsolarcellmanufacturerSolyndrabecametheposterchildforwhatmanybelieveisagreentechbubble.Thehigh-flyingenvironmentalfirmhadcollectedhundredsofmillionsinventurefundingandreceiveda$535millionU.S.federalloanguaranteein2009.Astoundingly,underpressurefromcheaperimports,thecompanymanagedtogobankruptinjusttwoshortyears.However,it’simportantnottoletafewhigh-profiledisasterstaintyourviewofanopportunity.Noteverygreentecheffortfailed.Whilepeople’sattentioncomesandgoes,globalandlocalenvi-ronmentalconcernsareveryreal,andtheywillnotsolvethemselves.Realbusinessopportunitiesaboundinthissector.Thesecrettosuccessistodosomethingseriousthatsomeonecanandwillpayfor.Inordertoprosperandtolast,yourbusinesspropositionmustaddimmediatevalueforyourcustomersandhaveapositiveenvironmentalimpactinthelongrun.Ifyourproductcostsmore,offerslowerperformance,andislessattractive,consumerswillquicklytireofpayingforonlythe “feel good” factor and return to their old ways.ElonMuskunderstoodthisverywellwhenhisfirm,Tesla,designedtheModelS.Hebuiltanelectriccarthatboasted“zeroemissions”butwasalsoverycompetitiveamongitspeers.TheTeslaModelSwaspricedsimilarlytohigh-endsedansfromBMWandMercedesanddidnothavethe“quirky”lookthatbrandedmanyotherenvironmentallyconsciousvehicles.MostreviewersagreedthatMusk’selectriccardesignwasgorgeousandofferedsafety,speed,andtechnologyfeaturesthatcompletelyoutdistanceditsrivals.ThenewcarcapturedthehighestratingevergivenbyConsumerReportsandthehighestsafetyratingeverissuedbytheU.S.NationalTransportationSafetyBoard(NTSB).Itwasnotonlythehighestperforminglargesedanbutalsotheworld’squickestcar,capa-bleofembarrassingevenLamborghinisandFerraris.[15]Notsurprisingly,Tesla’sbiggestchallengebecamekeepingupwithorders.FeelinggoodaboutgoinggreenwasonlyicingonthecupcakeforTesla owners.Youcanfindsimilarsuccesswithasmallbusiness.KaemerzDotiwalawasanexecutiveinapetroleumfirm.Duringacyclicaldownturnintheoilbusiness,herecognizedanopportunitytocollectandrecycleusedoil.In2003,DotiwalafoundedQEnvironmental,whichdoesjustthis,as122A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
wellassellingenvironmentallyfriendlyproductsthatautomobileoilchangecompaniescanuse.In2004,hereceivedanSBAloantoexpandhisbusiness.[16]BecauseDotiwala’sbusinessmakeseco-nomicsenseforitscustomersaswellasbeingenvironmentallyfriendly,he’slikelytodowell.HehasevensecuredacontractwiththecityofHoustontohelpthemconvertthecostofoildisposalinto a source of revenue.Canyouthinkofacomplementaryproductyoumightdeveloporaserviceyoumightprovideforthegrowingnumberofelectriccarowners?Ifitprovidesthemrealeconomicvalueinadditionto enhancing their environmental creds, you’ll probably have a winner.Quick Opportunity ScreeningWhileChapter5addressesthescienceandartofvalidatingyouropportunity,makinganinitialassessmentofanopportunityiscriticalduringthesearchphase.HowcanyoutellwhetheryouropportunitycontainsanicesustainablebusinessoronethatmightevenexplodeintothenextFacebook?Orperhapsit’samoneypitthatwillconsumeyourtimeandresourceswithoutproduc-ing results.Theessenceofabusinessiscapturingprofits.Inordertodothat,youneedsomecompetitiveadvantageinthemarketplace.RecallthataccordingtoMichaelPorter,therearejusttwobasicbusi-ness strategies: differentiation and price (seeChapter 3).Consideryouropportunity.Customerswithapainpointorinneedofjoyaresurelyusingsomesortofsolutioncurrently.Whatisit?Isitadequate?Canyouimagineasignificantlybettersolu-tion?Ifnot,canyouimaginethattherewouldbeawaytomakeasolutionthatissignificantlycheaper?Iftheansweristhatyoucan’tdoitbetterorcheaper,peopleprobablywon’tswitchfromtheirexistingsolutions;thisissimplynotabusinessopportunity.Moveon.That’sallthereistothequick screening process!Anegativeanswercanbedifficultfortheentrepreneurtosee,andonceseen,difficulttoaccept.You,ofcourse,wanttobelievethatyouarecreatingsomethingvaluable,andyourmom,spouse,andfriendswillsurelyagree!FoolingyourselfissuchabigproblemthatmuchofthediscussionofvalidationinChapter5isdesignedjusttoprotectyoufromit.Thegreaterthelevelofrealismyoubringtothisquickscreeningprocess,themoretimeyou’llsaveyourselfandotherpeoplewhomayhave to deal with the really bad ideas you should have rejected in the first place.Experience and the Power of NaivetyBydefinition,newideasrequiretheabilitytodefyassumptionsandquestioncommonbeliefs.Peo-plewithinasystemadapttoacceptitslimitationsandoperatewithinaculturalcontextthatmakeschallengingitunlikely.Forthisreason,anaïveorevenfoolishoutsiderisofteninthebestpositionto change things.TheAmericansportofbaseballisabigbusinesswitha150-yearhistory.Muchofitsappealisbasedonthetime-honoredtraditionsingrainedinthesport.Aconservativerespectforthesetraditionspermeateseverythinginthatbusiness.Anyonewhoquestionedthesetraditionswasconsideredtobehopelesslynaïve.BillyBeane,aformerplayerturnedtalentscoutfortheOaklandAthletics(A’s),wasnaïveenoughtoquestiontheentirepracticeofbaseballrecruiting.Beane,whosecareerinspiredthebookandmovieMoneyball,choseplayersbasedontheiroptimalstatisticalresultsratherthanqualitativelychoosingindividualsbasedonanecdotalobservationsoftheirdemonstratedskills.Insteadoffollowingtraditionandgoingouttowatchplayerspracticeforanafternoon,Beaneanalyzedtheircareerperformance,usuallyintheminorleagues.BeanerealizedthatobservationwasbiasedinfavorofspectaculareventsthatcapturedtheattentionofthescoutsChapter 4Opportunity Recognition123© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
The Cue Cat turned out to be a solution for aproblem that did not really exist.Source: https://commons.wikimedia.org/wiki/File:Cuecat1.jpgdue diligenceThe research and analysisdone by a reasonableperson to assess abusiness idea oropportunity.andoverlookedtheconsistent“smallball”playofmanygreatplayerswhoactuallygotonbasemorethanothers.Beaneskippedoverbig-namehomerunhittersandinsteadcollectedlower-paidplayerswhocouldsimplygetonbase.Thiswasadisruptiveapproachthatledthepreviouslydown-and-out A’s to a winning season and shifted the paradigm of the sport.NaivetypaidoffforBeaneandtheA’s,andthatiswhySteveJobsfamouslyadvisedyoungpeo-pleto“stayfoolish.”However,unprovenideasinmarketswherealotofsmartfolksthinkstheyhave it all figured can be risky. There are times when a crazy idea really is just a crazy idea.The A’s famously built a winning team on the cheap.Source: Eric Broder Van Dyke/Shutterstock.comIn2000,astartupcalledDigitalConvergenceCorporationreleasedtheCueCat,asmallplasticbarcodescannerthatwasshapedlikeacat.Thefirm’sfounder,J.JovanPhilyaw,realizedthatcompanieslikeCoca-Colawerespendingalotofmoneybuildingfancywebsitesbuthadtroublegettinguserstospendtimethere.Heconcludedthatproblemwasthattypingaproductnameintoasearchbarwasn’teasyenoughforcustomers.Philyaw’sideawasthatifcustomerswantedtoknowsomethingaboutaproduct,sayabottleofCoke,theywouldplugintheirCueCat,scantheproduct’sbarcodeintotheircomputer,andthenspecialsoft-waretheyhadinstalledwouldtakethemtoawebsiterelatedtotheitem.Itturnedoutthatalmostnobodywantedabarcodescannershapedlikeacatandthatitwasaloteasiertotypein“coke.com”thanmesswiththeweirdplasticcatanditsattendantsoftware.Thismayseemobviousnow,butPhilyawraised$185millionfrominvestorsincluding$10millionfromtheCoca-ColaCorporation.WhatPhilyawdidn’tseewasthatwhilepeoplelovedtodrinksoda,theydidn’tcaretospendtimereadingaboutitontheinternet.Nothingwasgoingtomakethemspendtheirtimeatcoke.comifthereweresports,games,andcatvideoselsewhere.Evenaweirdplasticcatwasn’tgoingtolurethemintodoingthat.Performingextensiveresearch,orduediligence,beforeinvesting your time or other people’s money into a seemingly crazy idea is a pretty sane approach.124A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
licensingBuying the rights to use atrademark (a logo orproduct) with restrictionson quality. See alsofranchising.Geographic OpportunitySometimesthebestwaytostartaninnovativebusinessistobeginbycopyinganexistingproductandimproveitasyouexpand.Walmart’soriginalsourceofcompetitiveadvantagehadnothingtodowithitscurrent“EverydayLowPrices”modelbutratherwasbasedongeographicpotential.Atthattime,Kmartwastheleadinglow-costproviderinthecompetitiveU.S.retailmarket,buttheirstoreswerecenteredinbigcityhubs.Kmartwashappygetting5percentoftheretailbusinessinSt.LouisorAtlanta.WalmartfounderSamWaltonrealizedthatstoreslocatedinsuburbsandsmallercitiessuchasOmaha,Nebraska,orRedding,California,couldavoidcompetitionfromKmart.Hischainwasbigenoughtoeasilybeatthelocalmainstreetretailersandsnagupto45percentofthosesmallermarkets,capturingthesamelevelofrevenuesandprofitsthatKmartwasgettinginthebigcities.Walmartusedthislowcompetitionmarkettooptimizeitslogisticalmodelsowellthatiteas-ily overtook Kmart on cost as it expanded into the larger markets.Additionally,thinkofwhatsortofbiasesandopportunitiescomewithmarketsandgeogra-phies.IntheSaharaDesert,thereisagreaterdemandforwater;inNYCisthereisagreaterdemandfortransportation.PatientsinXiangyang,China,maybelesswillingtovisitaWesternmedicalclinic,whileanacupunctureclinicmaynotfindmanyclientsinElkport,Iowa.Whatcomeswiththelocaleorculture?Whatmakesonepopulationmorelikelytopurchaseaproductorservicethananother?Similarly,thinkabouthowthesefactorscanaffectyourbusinessasyoustartoutorexpand.Is Buying a Franchise or Licensing for Me?Ifyoucan’tinnovate,youcancopy,butit’sbesttodothislegally.Licensingandfranchisingofferopportunitiestodojustthat.Licensingtherightstouseatrademarklogoisawaytoaddinstantvaluetoagenericproductlikeabackpackorpullover.Generally,licensesarerelativelyinexpensiveandhavefewerobligations.Thebuyerorlicenseesimplyhastorespectthetermsoftheagreementandusethetrademarkappropriately.Forexample,formerMicrosoftentrepreneurPaulAllenhastheNationalFootballLeague(NFL)franchisefortheSeattleSeahawks.WhileAllenactuallyownsthehugebusinessthatrunsthestadiumandhiresplayers,smallerentrepreneurscanacquirelicensesfromtheNFLtodevelopandsellmerchandisebrandedwiththeSeahawks’teamlogoaslongastheyfollowspecificrulesonitsuseandpayfees.Allen’sbusinessmightevenbuysomeofthose Seahawks shirts, hats, or magnets to sell in their team store or online.Chapter 4Opportunity Recognition125© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
franchisingBuying the rights to use abusiness model,trademark, marketing, andother assets for operatinga standardized business.franchiseeAn individual or companypaying for the right to usea business model,trademark, marketing, andother assets for operatinga standardized business.franchisorA company offering theright to use a businessmodel, trademark,marketing, and otherassets for operating astandardized business.turnkeyA complete and ready torun operation.McDonald’s franchises in Cheyenne Wyomingare carefully distributed in a relatively smalltown.Source: Screenshot, Map Data © 2019 GoogleFranchisingispayingfortherightstouseabusinessmodelaswellasthetrademarksandassociatedmarketingcollateralofabrand.You’reprobablyfamiliarwithpopularretailfranchiseslikeWendy’s,Subway,and7-11.Thesestoresalllookliketheyarethesamecompany,butmanyofthemareownedbylocalbusinesspeoplewholiveinyourcommunity.Suchabusinesspersonisafranchisee, and the brand they are working under is owned by thefranchisor.Afranchiseusuallyrequiresanupfrontfeeandroyaltiesonallfutureprofits.Formanypopu-larretailandfoodfranchises,theinitialsfeesaretypicallybetween$50,000and$200,000,andtheroyaltiesareafewpercentofallsales.Thefranchiserulescanbeveryrestrictivetoabusinessandincludethingslikethelayoutofthestore,theproductstobesold,employeeuniforms,andcus-tomerserviceprocedures.EverythingfromthemenutotheemployeetrainingprocessispredeterminedbySubwaycorporateandcarefullydocumented.Infact,thefranchiseeisprohibitedfromdeviatingfromthemodelonevenminorthingslikethebrightyellowandgreencolorofthefixtures in their restaurant.Goodfranchisorsoffertheirfranchiseesalotofsupport.Thefranchisorwilllikelyprovidemanagementtrainingandrunnationalpromotionalcampaigns.AnownerofaSubwayfranchisegetsabusinessthatisnearlyaturnkeyoperation.Allthefranchiseeneedstoputinismoneyandeffort.Mostimportantly,franchisorsusuallyofferexclusiverightstoageographicareafortheuseoftheirhighlyrecognizedbrand.Wanttoseethisinaction?UseGoogleMapsandlookattheMcDon-ald’srestaurantfranchisesinanyU.S.city,suchasCheyenne,Wyoming.You’llfindtheyarefairlyevenlydistributedbasedonthepopulationdensityofthearea.McDonald’swillnotgrantyouafranchise to operate within walking distance of an existing store.Thereareseveralothertypesoffranchisesbesidesthefamiliarretailbrandrestaurantsandstores.Theseincludetheproductcreatorsasafranchisoroffer-ingtherighttoproducetheproductstheydesignandbrand.Coca-Colabottlersareagoodexampleofthis.ThepopularcokeproductsdeliveredtoyourstorearelikelyproducedinafactoryownedandoperatedunderalicensefromCoca-Colatousetheirformula,packaging,andbranding.ClothingbrandssuchasLevi’salsolicensetherighttomanufacturertheirpopularproducts.Levi’snowfocusesalmostentirelyondesignandmarketingofclothing,notmanufacturing.Theyclosedtheirlastcompany-ownedU.S.factoryin2003.Theirjeansandothergeararemadebyglobalmanufacturesandshippeddirectlytoretailers,includingtheLevi’sownedstores.Levi’sandCoca-Colaissuestrictguidelinesdesignedtoensurethattheircustomersalwaysgetwhattheyareexpectingfromthesevalu-ablebrands.Thebrandsalsoconductqualityinspectionstoensurecompliancewith these guidelines.126A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
McDonald’s is the most successful franchise operation in history.Source: ATIKAN PORNCHAIPRASIT/Shutterstock.comAnotherfranchisingsituationiswherethefranchisorisawholesalerofproducts,andthevaluetheybringisinaggregatingandmanagingthesupplychainforyou.ManyMainStreet-typebusinessesdon’thavethecapacitytodealwithhundredsofdifferentcompanies,sotheyjoinfran-chisegroupsthathandlethat.Thesefirmsmayalsoprovidebrandingandmarketingsupportbuttendtobemuchlessprescriptiveaboutthebusinesssetupandoperations.AceHardwareisonesuchcompanythathelpssmallhardwarecompaniesacrosstheUnitedStatesstocktheirshelvesaswell as offering a known brand name to operate under.Thequestionoflicensingversusfranchisingcomesdowntoanentrepreneur’sappetiteforriskanddesireforindependence.Ontheonehand,franchiseesbenefitfromatried-and-trueformulabutmustadheretostrictrules.Anentrepreneurwhowantstoworkwithcertainbrandsbutmain-tainindependencemightforgothesecuritythatcomeswithaprovenbusinessmodelandbecomealicenseeifthatisanoption.Manyotherssimplywon’twanttodealwithanylimitationsoutsideof their control and will strike out on their own.IntheNewEntrepreneurialDynamic,findingtherightopportunityisalwaysuptoyou,theindividualentrepreneur.Spendthetimetoknowyourselfwellandusethattoframeyouroppor-tunitysearch.Startingoutrightwillgoalongwaytowardcraftinganentrepreneurialdestinythatis most rewarding for you.NED Factors That Influence Opportunity SearchGlobalization:Globalization:Entrepreneurscaneasilysearchglobalmarketsfornewproductsandservicestobringtotheirlocale.Smallbusinessescanalsoeasilyexploitarbitrageopportunitiesacrossgeo-graphic markets.Technological,Technological,Political,Political,andandCulturalCulturalTrends:Trends:Entrepreneurs,particularlyyoungerones,areoften more in touch with new technologies and fashions than the busy managers at large firms.OpenOpenInnovation:Innovation:StartupsareabletomaketheopeninnovationchoiceeasilywhereasthelegaldepartmentsinestablishedfirmsareverylikelytoopposeanddelaytheuseofIPthefirmdoesnot control.Chapter 4Opportunity Recognition127© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Disruption:Disruption:Entrepreneursareinherentlydisruptive.Keepingthatdisruptivespiritimbeddedinyourstartupcultureiscriticaltomaintainingacompetitiveadvantageoverlarger,establishedfirms with more resources.Key Takeaways•Ifyouseehigh-profilestartupsenteringadenovomarket,thereareprobablylotsofoppor-tunities for smaller startups in the new industry.•Think outside the box about the supplies and services a new industry requires.•Watch out for fads that won’t last long enough to support your startup dreams.•Don’t fear entering new markets you lack experience in.•Always perform the due diligence before taking a risk on a radical new idea.•Consider the value of buying into a franchise to reduce search costs and risk.4.6Case Study: Fred Ross Takes theEntrepreneurial Plunge with DecksidePool ServiceTraci and Fred Ross (center) with the Deckside Pool teamSource: Fred Ross128A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
FredRosshadmadeacareerasahighlyrespectedbusinessdevelopmentexecintheboomingenterpriseITworld.Hehadworkedasageneralmanager,director,andvicepresidentofsalesforaseriesofmajorcomputerservicesandnetworkingfirmsprovidingITsupporttocorporateAmer-ica.Fredhaddevelopedareputationforbeinga“turnaround”executive.Companieswouldassignhimtothemostunderperformingbranchorregionaloffice,wherehewouldputanewteam,newprocess,andanewcultureinplace—oftenresultinginrecord-breakingsalesandprofit.Imple-mentingtheleading-edgesystemsandtravelingtheworldformeetingswithtopexecutivesofferedanexcitinglife.Rossrecalls,“Iwasworkingwiththeindustry‘moversandshakers’anddoingthingslikeflyinguptoSiliconValleytopitchoutsourceddatacenterstoMegWhitman,CEOateBay.”However,Rosssaysthepacewasliterallykillinghim,“Thepressure,pace,24/7workinghours,travel, and politics were destroying my health and my family.”Fredwasatthepinnacleofhisindustry,butsomethingimportantwasmissinginallthat.Fredadmits,“Everythinginthatworldwasfilledwithdramaticcorporatepolitics,andIwasreallytiredoftherelentless,unreasonablegoalsandsoullessworldoftech.”Thedown-to-earthIowanadmits,“IfeltlikeIwasputtingonafakesmileandsteelplatearmorbeforegoingtoworkeachdaytodobattlewithpeopleinmyowncompany!”Theobvioussolutionwastobecomehisownbossandsethis own agenda as an entrepreneur.Fred’sfirstinclinationwastogorightbackintotheindustryheknewbest,corporateIT,andhelaunchedeNetCentric,astartuptoprovideservicesforthe“dot.com”firmsoftheearlyinternetage.Inhindsight,notonlywasthetimingpoor,astheinternetboomwasjustabouttobust,butitwasn’treallytheradicalchangehewaslookingforinhislife.Supportingabigfirm’s“mission-critical”infrastructureasanentrepreneurmeantthestresswasaboutthesame,butthepaycheckswerelessreliable.Pausing,headdsinagentleMidwesternaccent,“Ireallyjustwantedtoworkwithgoodpeopleandaddsomerealvaluetotheirlives.”Fredconcludedthattoexperiencearealchange,hewouldhavetodefinehisownabilitiesmorebroadly.Hehadanentrepreneurialepiphanythathe summed up like this:Peoplegetstuckinthistrapof“I’manetworkengineer,”or“Iaminaerospaceorinsurance,andthat’sallIknow.”That’snottrue.IbegantothinkaboutwhatskillsdoIREALLYhavelikeproblemsolving,recruitingandhiring,operationalefficiency,criticalthinking,managing,leading,organizingand,ofcourse,hard-workingjusttonameafew.Ihaveskillsthatgofarbeyondmyspecificeduca-tion.Icansucceedinalotofindustries,andthereisnoneedformetofocusononethatishighlycompetitive and filled with drama.Rossbegantomethodicallyevaluatebusinessesofallsorts.Theonlycriteriawerethathewouldbehisownbossandapplyhisoperationalandcriticalthinkingskillswithdetermination.Heconsideredavarietyofretailfranchisesandopportunities,thosebeingapopularrouteforcorpo-rateexecslookingtoescapethedailygrind.Freddidn’tseethoseasanescape,noting,“Idon’twanttoworksevendaysandopenatsevenandcloseatten!”Healsothoughtaboutrealestate,anotherpopulargigforbusinessdevelopmentprofessionals,buthereallydidn’twanttofocusonsalesorfight over commissions.Fredhadavisionofturninganold-schoolbusinessintoamoresophisticatedmodelandcre-atingabitofindustrydisruption.“Iwantedsomethingthatdidn’thaveaninsaneamountofcompetition,andIwaslookingforabusinessthatwasstillfragmented,butthatwasn’tsoattrac-tiveandlargethatitwouldbegobbledupbybigcorporations,”heexplains.Hesays,“Lookatthemarijuanabusiness.It’snewandhot,butitisalreadysobigthatyou’regoingtobecompetingwithmajor companies.”Atafamilygettogether,Fred’sbrother-in-law,Chance,mentionedthathetalkedwithafriendwho was happily running a successful swimming pool maintenance business. Fred recalls:Chancestartstellingmeaboutit,andI’mlike,“Really,thatkindofbusinessstillexistsintheUnitedStates?”Goodgrossmargins,minimalcompetition,highlyfragmented,lowtech.Ihadneveractuallyownedorevencleanedaswimmingpoolbuthadbeenonmanyswimteamsinmyyouth.Ihadnorealexposuretotheswimmingpoolindustry,butIwasstillexcitedbythesimplicityofthebusiness.Chapter 4Opportunity Recognition129© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
FredstarteddoingresearchabouttheindustryandquicklyrealizedhowmanypoolsthereareintheU.S.(morethansevenmillion)andthatthebiggestconcentrationwasinSouthernCalifornia(morethanonemillion).Heexclaims,“Iwaslivingrightinthecenterofthatmarket.”Itwasabigenoughnichebutnotsobigorexcitingthatitattractedoutsidestrategicplayers.Poolservicefirmsalsohadotherlinesofrevenueyoumightnotthinkabout.Whenacustomer’ssystemneedsanewpumporfilterorheater,theygototheguywhomaintainstheirpool.Thatstuffislikefreeextramoney. Fred decided to dive in!Ifyou’reinanewindustry,startingfromscratchandbuildingtoacriticalmassofcustomersisreallyhardandtakesalongtime.Fredexplainstheadvantageof“buyingversusbuilding”whenentering an established market:Inmanyindustries,Icouldeasilygotoabrokerandbuyasmallbusinesswithexistingcus-tomers,operations,brandname,etc.Aftermorecarefulfinancialanalysis,Idecidedto“buyversusbuild”toreachacriticalsustainablelevelofvolume.Theinitialinvestmentwasinasmallrouteof50poolsfor12timesthemonthlygrossrevenues.Thatcostmearound$40ktoachieveaquickandavery solid start.Fred’swife,Traci,wasskepticalatfirst.Shewasaskinghim,“Whywouldyouleaveyour$300KVPjobandgetintoaFordRangerandgocleanswimmingpoolsfor$20anhour?”Thatwasagoodquestion,andFredhadtoassureherthathewasn’tgivingupanentirecareertobecomealowpaidblue-collartradesman.Ashetoldhiswife,“Iwasstartingabusinessthatwouldletmespendmoretimewithmyfamily.”Ontopofthat,buyingtheexistingbusinessrequiredaseriesofequityloanson their home in Coto de Caza, California. Traci was quick to point that risk out as well!Still,itworked.Fredbeams,“Assoonaswegotinthepoolbusinesseverythingseemedtoflow,andeachdayIthought‘Wow,thisiswhereIwasmeanttobe.’”Thatpositiveattitude,lessenedtravel,andnolate-nightcorporateemergenciesandpoliticswonTraciovertoo.Fredbrags,“Therewasalotofsatisfactioninajobwelldone.IknewthefamilywhosepoolIwascleaningwasgoingtoenjoytheirweekend,andIwasproudtohelp.”Andwhiletheworkwassometimesgrueling,itusu-allyendedat5:00p.m.orearlier,andthemoneyrolledin.Hebeamed,“Thiswasfun,Ilostweight,Igot back in shape, and I was making good money. It was a personal win/win!”Youmightwonderhowaone-personbusinessoperationcanhandledealingwithlife.Howdoyougoonvacation,orwhatifyougetsick?Fredwasabletoscheduleacoupleweeksoffwithhishomeclientsinthewinterwhenmostpeopledidn’tusetheirpoolmuch,andhisresearchhadrevealedthattheindependentoperatorshandledthatwithatradeassociationcalledTheIndepen-dentPoolman’sAssociationorIPSA.IPSAprovidedFredwithinsurance,acertificationprogram,andeducationalprogramsthatincluded“lunchandlearns”frommanufacturersofpoolequipmentand supplies. Most importantly, if you went on vacation, you could get someone to cover for you.Frednotesthat,“Ifaguybreakshislegorgetsreallyill,thememberswillallgettogetherandcover for you, and they’d do it for free.” He recalls being pretty satisfied at this point:Ihaddecompressedfromthestressofthecorporateworld.Wehadgrownthebusinesstoabout130–140poolsanduppedthefeestoabout$80amonth,whichbroughtinabout$135,000.Plus,wehadthegoodrepairbusinessgoing.Atfirst,Ioutsourcedthingslikeinstallingnewheaters,butIquicklyfiguredthatout,andthatmademeevenmoremoney.Withbasicallynooverheadbeyondatruck,Igot to keep almost all of that.Whileallthiswasrewarding,itwasindeedjustthesortofblue-collarworkhe’dpromisedTracihewouldnotgetstuckin,anditdidnotsatisfyhiscompetitivenaturenorstophismindfromthinkingofbiggerthings.“Oneday,Iwasinthetruckdrivingtothenextpoolandwondering“WhatisaguywithanMBAandanewBMWinthegaragedoingcleaningpools?”Itwastimetogetbackto that vision of a more sophisticated business.Aroundthistime,FredandTraciwereataBiblestudyandbegantalkingtoChris,whoranalargecommercialpoolcompanycalledDeckside.Hehaddonewellbutwastiredofhisbusinessandjustwantedtomoveon.Commercialpoolsareownedandoperatedbycities,hotels,apartmentbuildings,high-schools,colleges,amusementparks,andevenwaterparks.Fredknewthatthese130A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
biginstallationswereintimidatingtothetypicalsuburbanbackyardpoolcleaner.Hesaid,“Mycol-leagueswouldgoinandseethese2millionBTUheaterswithrowsandrowsofsandfiltersand480-voltcircuits,andtheywouldthrowuptheirhands.”ToFred,ontheotherhand,thatsituationwas“justlikethewayasmall-timecomputerrepairpersonlookedatthosebigserverfarmsIhadbeensettingup.”ForFred,thechallengewassimplyamatteroftrainingandscaling.Takingacrewtodoseveralhoursofworkatonelocationcouldbealotmoreefficientthangettingbackinthetruck and heading to a new home for each and every billable hour.FredagreedtobuyDecksidebutthenthoughtaboutwherehewasgoingtogetthe$300,000todoit.“I’mlikeChris,Ilovethebusiness,butIjustdon’thave$300,000layingaround.”Chrisdidn’texpectasinglebigpaymentandtaughtFredthatmostbusinessesgetsoldforalittlebitofcash,alotofsweatequitypaymentsovertime,andacheckattheend.Freddoveinandpulleditoff.ThereweretimeswhenheandTracihadtoborrowmoneyjusttomakethemonthlypayment,butthebusiness grew and making the final buyout was not a problem.Decksidealreadyhadthreeemployeeswhoknewwhattheyweredoing,andtheybroughtFredup to speed while he juggled maintaining his residential pool business.Iquicklyrealized,“Igottagetridoftheresidentialpoolsandfocusonthecommercial.Iquicklyrealizedtheyweretwodifferentmarketswithuniquecustomerdemands.Ifwetriedtoserviceboth,we would fail.”Hesoldsomeoftheresidentialpoolsingroupstofriendsinthebusinessforthestandardrateof10–12xmonthlybillings.Foronereallysweetgroup,anumberofpoolslinedupinatightneigh-borhood,andhegot14x.Fortherest,heusedabroker,justliketheonehehadboughthisfirstbusiness from.In2003,Decksidewasgenerating$300Kayear,butithadmoreoverhead.Infact,Fredwasn’tbillinghisowntime.Hewasnow100percentoverhead,sothenetincomewasless.Fredwasintheofficedoingcustomerservice,scheduling,purchasing,hiring,andmarketingbutalwaysfocusedongrowing.Fredtriedservicinglargeapartmentownershipgroupsandevensomehugemillion-gal-lonpoolsatamusementparksandtheU.S.NationalWaterPolotrainingfacilityinLosAlamitos,California.Hefoundthosecustomersandtheirtendencytobe“vendorbeaters”wasnotprofitable.Hequicklydiscoveredthathisfirm’ssweetspotwasthe25-yardjuniorOlympictypepoolfoundatapartment buildings or homeowner associations (HOAs) and explains:ThelargeHOAsbecameourbreadandbuttercustomer.Theywouldn’tnickelanddimeus.Theirrequirementsanddemandswereaspredictableastheseasons.Theywerealsothebestofthebestcustomers,nicetodobusinesswith,willingandabletopay,andyoucankeepthecontractsforeverif you don’t screw up. In short—a niche within a niche.FocusingongrowthpaidoffforFred,andDecksidegrewtoannualrevenuesover$3millionayear.ThebusinesswasgeneratingEBITDAofbetween8percentand15percenteachyear.Hepaidhimselfagoodsalaryandhadgreatperkslikeacompanycarandgenerousexpenseaccounts.Eventually,heusedthemoneytomakeotherinvestmentsandpursuehispassionforsailingandbought a boat he named “No Drama” as a reflection of his new lifestyle.Afterawhile,maintainingthegrowthbegantogetharderbecauseofastrongeconomyanddoingbusinessinaveryhighlyregulatedstate.“I’drunanad,andalmostnobodywouldshowup.Worse,thosewhodiddidn’twanttowork.”FredstartedlookingintoroboticsandITsolutionsinthehopesofreducinglaborbymaybe30percent.Atthesametime,tocompoundtheproblem,theCal-iforniaDepartmentofEnvironmentalRegulationsadoptednewCDC(CenterforDiseaseControl)recommendationsthateverypublic/commercialpoolhadtobechemicallytestedeachday.Fredexplains,“TheCDChaddiscoveredthatmanybacteriahadbecomemoreresistanttochlorine.”Thisshocktotheindustrycoulddoubleortriplethecostofpoolownership!Customersdidn’twanttopay for those extra stops.TheregulatoryshiftandlaborclimatehadkilledthefunandwasasignaltoFredthatitwastimeforhimtomoveon.HeputDecksideonthemarketandfoundaNewYorkinvestmentbankerwhohadworkedwithVCsandstartupsandwhowantedtogetoutofthatratrace.ThispotentialChapter 4Opportunity Recognition131© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Fred and Traci Ross on theNo Drama II.Source: Greg Autrybuyerhadalreadyboughtupover1,000residentialpoolcontractsinSanDiegoandOrangeCounty.Fred notes:Wedidseriousduediligenceonhisbackgroundwithhisformeremployers.HiswifeisanMD,andhe’ssupersmart:MBAfromabig-nameschoolandoperationsexperienceinmultipleVC-backedhighlysuccessfulstartups.Mostimportantly,hewasnotafraidtoworkhardandgethishandsdirty;he’s got some experience in residential.FredvaluedthebusinessatanEBITDA5–7x(seeChapter15),whichcameouttoalittleover$2million.ThedealclosedinJanuaryof2018,anditincludedarequirementthatFredstayonboardfor12monthstorunthings.Fredrecallsthatforthefirstmonth,hewas“asbusyashelltrainingthenewowneronalloursys-tems.”Butbythesecondmonth,hesays,“Iwasrunningoutofstufftodobynoon.”Bythethirdmonth,he’dcheckineachmorningat7:00a.m.andask,“Doyouneedanything?”andthey’dsay“No,”andFredwouldjustgohome.Still,itturnedoutthatthenewownerneededFredmorethanheimagined.Fredrecalls:Itoldhim,“Gothroughonesummer”beforeyouchangeanything,butassoonasI’mgone,he’schangingeverything.Hewantstochangethenameofthecom-pany,whichhadbeeninthemarketsince1981.Hechangestheculture.Thenloandbehold,inearlyJuly,Igetacallandhe’stellingme,“Welostourasslastmonth,”andIhadtotellhim,“Youdidn’tlistentomeaboutprocesses!”Itwasalljust100littlemistakeslikelettinghistechsgotothewholesalerswithoutanofficialpurchaseorder(nocon-trol)andlosingfocusonthedashboardofmetricswehaddeveloped.Hehadoverlyfocusedonsalesandmarketingtothedetrimentofoperations—ambitiousbutnotpractical.Fredgothisbuyerbackontrack.Thepaymentsarecomingin,andheisconfidentthedealwillendwell.HeandTraciarehappilyspendingtheirtimevisitingfriendsandfamilybackinIowaandsailingonanewboatnamed theNo Drama II.Endnotes1.Schumpeter,J.(1945)“Creativedestruction.”Capitalism,SocialismandDemocracy,82–5.2.Seealsocreativedestruction.ClaytonChristensen:http://www.clay-tonchristensen.com/key-concepts/.3.Christensen,C.(2013)Theinnovator’sdilemma:Whennewtechnologiescause great firms to fail.Harvard Business Review Press.4.http://www.everipedia.com/97c46756-89ea-4683-b187-a89cde649e89/5.https://techvibes.com/2015/01/07/facts-stewart-butterfield-slack-2015-01-076.Thanks to Danny Charlton for suggesting the great example of Slack.7.It has been attributed to Seneca the Younger.8.https://web.archive.org/web/20071023034940/http://www.nike.com/nikebiz/nikebiz.jhtml9.http://whartoniteseekscodemonkey-blog.tumblr.com10.Chesbrough,H.,Vanhaverbeke,W.,&West,J.(Eds.).(2006).Openinno-vation:Researchinganewparadigm.OxfordUniversityPressonDemand.11.DeToqueville,A.(1835).DemocracyinAmerica.NewYork:AMentorBook from New American Library.12.https://www.fastcompany.com/3035816/hit-the-ground-running/what-paypals-cofounder-can-teach-U.S.-about-embracing-weirdness13.ThisisbecauseAmericancornsyrupproductionissubsidizedbythefed-eral government and sugar imports face a U.S. high tariff.14.Goran,M.I.,Ulijaszek,S.J.,&Ventura,E.E.(2013).Highfructosecornsyrupanddiabetesprevalence:Aglobalperspective.Globalpublichealth,8(1), 55–64.https://www.ncbi.nlm.nih.gov/pubmed/2318162915.The Tesla P100D accelerates from 0 to 60mph in just 2.5 seconds.16.https://www.sba.gov/sites/default/files/files/QEnvironmentalArti-cle.doc(1).pdf132A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
CHAPTER 5Feasibility Analysis andOpportunity EvaluationAdvice is what we ask for when we already know the answer but wish we didn’t.—Erica JongThere are tools to test the likelihood that your entrepreneurial vision will succeed.Source: © Shutterstock, Inc.Justbecauseyoucandosomethingdoesn’tmeanyoushoulddoit.Thereareaninfinitenum-berofbusinessideasthatwillnotproducetheresultsthatthefounderhadenvisioned.Beforesteppingoutintothemarketplace,youcandoseveralthingstoensurethatyourstartupvisionhasa fair chance of success. That is the purpose of this chapter.© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
vettingA thorough and diligentreview of a potential hire orinvestment.5.1Feasibility AnalysisLearning Objectives1.Understandthatmostideashaveprobablyoccurredtoothersandhaveeitherbeenrejectedor have failed.2.Understandthatinvestorsarelookingforateamthatcanexecuteonyourideabetterthanothers.3.Recognize that your initial approach will likely require a course adjustment or pivot.4.Understand the importance of market research.5.Understand that every business contains a firm value chain.6.Understand that every business operates in an industry value chain.7.Understand technical feasibility analysis.8.Understand resource feasibility analysis.9.Recognize that not all ideas scale equally.VettingInvestorswillaskanentrepreneurtwofundamentalquestionsbeforediggingintothedetailsofthe proposed venture:1.Why hasn’t this already been done?2.Why is your team the best team to do this?Regardlessofwhetheryourbusinessrequiresoutsideinvestment,youshouldalsoaskyourselfthesevettingquestionsbeforeyouputyourowntimeandmoneyintotheventure.Ifyoucan’tanswertheminawaythatwouldmakeanoutsideinvestorputhermoneydown,shouldyouinvestyour own time and resources into the venture?Thefirstquestion,“Whyhasn’tthisalreadybeendone?”doesn’tpresumethatyouareplanningsomethingincrediblyradicalsuchasdevelopinganelectricpassengerairplane.Your“newidea”mightbesomethingasmundaneasopeningapancakerestaurantnearyourcampuswhereonedoesnotcurrentlyexist.Thequestionofwhythereisn’talreadyagoodbreakfastoptionforstu-dentsmayleadyoutoconsiderwhichcustomerandsupply-drivenfactorswouldpreventsomeonefromhavingalreadydoneit.Inthisprocess,youmightdiscoveranimportantfactlikefewstudentswake up early enough to enjoy a traditional sit-down breakfast.Thesecondquestion,“Whyisyourteamthebestteamtodothis?”alsoappliestoanybusiness.Imaginethatyou’reamedicalstudent,planningtobeasurgeon,withadeepandabidingloveforclassicAmericanbluesmusic.Yourfascinationwiththisgenreandthestressofyourcareerleadyoutoimagineyourselfopeningaretrovinylrecordstoreasarelaxingsidebusinessandawaytohelppayyourschoolbills.Itwouldseemthatvirtuallyanyonecouldlaunchandrunthisbusiness.It’s not brain surgery, right?134A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Carefully consider any business idea.Source: © Shutterstock, Inc.feasibility analysisA review processundertaken in order toensure that your businessidea fits you as well as itfits the market.pivotA shift in strategy topursue a different businessmodel when a previousmodel has provenuntenable.Thinkingthroughthisscheme,oranybusinessidea,meansconsideringtheresourcesyourbusinessideaneeds.Sourcingyourproductwillrequirepokingthroughbinsofrecordsindustyantiquestores,lurkingatgaragesaleseverySat-urday,andcruisingCraigslist.Marketingwillrequireslowlybuildingacommunityofbluesaficionados.Operationswillrequirecategorizingandade-quatelymaintainingalarge,physicalinventoryofrecordsandhavingaveryknowledgeablepersontherewhenpeoplecomeintobrowse.Youwillquicklyrealizethatthesignificantresourcethisbusinessconsumesistime.Andthatmeansyourtimebecauseyoucan’tjusthirestudentworkerstodothiswork;itrequires expertise and passion.Runningavintagerecordstoreisalifetimecommitment,notapart-timehobby.Unlessyouwanttodropoutofschoolanddedicateyourlifetothiswhiletryingtopayoffthestudentdebtyou’vealreadycollected,itisn’tgoingtowork.Ifyou’vegottheskillstoactuallydobrainsurgery,that’sprobablythecareeryoushouldfocuson.Whenyourcareergetsgoing,you’llbeabletobuyallthevinylyouwantandinvestinarecordbusinessrunbyanentrepreneur with a similar passion but not as distracted by other life opportunities.Whenyoushareanewbusinessidea,you’llfindthatmostofthepeopleyoupresentyourcon-cepttofallintotwocategories.Yourmomandthosewholoveyoumakeupthefirstgroup.Withthem,youcannotlose!Mommightevenhangyourbusinessplanonthefridgewithamagnet!Thisinformationhaslittlevaluebecauseitiscompletelylackinginobjectivityandwillverylikelyleadyou into wasting time and money.Thesecondgroupyouwillencounterismadeupofskepticswhowishtoprotectyoufromtheignominyoffailureandthespitefulwhoarejealousofyourcreativityandentrepreneurialaspira-tion.Withthemyoucan’twin!Allyourideasarenaïve,overlyambitious,oroutrightpreposterous.Whileyoumustneverletthespitefuldispirityou,realchallengestoyourplansareveryuseful.Everyobjectionyoureceivethatyoucanovercomewithalogicalargumentwillmakeyourbusi-nesscasebetter,andtheprocessitselfwillarmoryouforthemorepowerfulcriticismyouwillfaceintherealmarket.TheGermanphilosopherFriedrichNietzschefamouslysaid,“Whatdoesnotkillmemakesmestronger,”andcounteringcriticismisafasterandcheaperwaytolearnthanenteringthe arena of the marketplace with an unchallenged idea.Todothisright,youshouldconductamethodicalandscientificfeasibilityanalysisofyourplan.Itisnotsufficienttoemotionallyrejectadoubter’sarguments.Youmustprovethatyouhaveidentifiedrealcustomerpainpointsorwaystodelightthosecustomers.Youmustproveyouandyourteamhavetheskillstoeffectivelyandprofitablyaddresstheseneeds.Youmustshowyouarecapableofgatheringtheresourcesrequiredtolaunchthisbusinessandseeitthroughtosustain-ableprofitability.Mostimportantly,tomakeatrulyscientificargumentinsupportofyourplanyoumusthavereliabledata.Youneedtounderstandyourindustryandyourmarketandknowexactlyhowyourbusinessfitsinandcreatesvalueforcustomers.Thesedatamayincludemarketstatistics,customerinterviews,consumersurveys,anddetailedreviewsofyoursupplychainandcostsmodel.Thistexthasrepeatedlycautionedthatentrepreneursmustbehonestwiththemselvestosuc-ceed.Thattraitismoreimportantatthisstageofthebusinessdevelopmentprocessthananyother.Anyrealanalysisofabusinessopportunitywilluncoverflaws.Youmustbepreparedtoadmittheyexistandtakethehardactionofchangingyourplanstoavoidthem.Dependingonthenatureandseverityoftheflawsuncoveredinyouranalysis,youwillneedtomakeminorchangestoyourmodelordoamajorpivottowardaverydifferentidea.Thischapterisaboutthatprocessoffeasi-bility analysis.Chapter 5Feasibility Analysis and Opportunity Evaluation135© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Your Market and IndustryUnderstandingwhereyourproductorserviceideafitsintothebroadereconomyiscritical.Ifyou’reinanestablishedmarket,youneedtoresearchitthoroughly.Howbigisthemarket,andhowmuchofitmightyouactuallycapture?Makesureyouknowwhotheincumbentplayersareandwhythey’vebeensuccessfulincapturingmarketshareandprofits.Whatdotheydowell?Whataretheir weaknesses?Ifyou’relaunchingacafé,forexample,yourindustryisthebroad,globalrestaurantindustrythatdoesbillionsofdollarsinrevenueannually.Therestaurantindustryitselfispartofabiggerandmorecomplexfoodservicessector.BigglobalchainslikeKFC,McDonald’s,andOutbackSteak-housemaybesomeofyourcompetitors.Ifyourlong-termgoalistolaunchasimilarcorporatechainbusinessoramega-franchiseoperation,thenyourpotentialmarketmaybecustomersintheworld who eat out or might do so. That is a lot to chew on!Ontheotherhand,ifyou’reretiringfromyourcorporatejobtosetupacaféinthestyleofamainstreetsmallbusiness,youmightdefineyourmarketaspeoplewhoeatatrestaurantsinyourtown.Thesecustomersincludethelocalsandthevisitors,ifthereareany.Yourcompetitionisprobablythechainoperationsandsomeothersmallbusinesses.RememberfromthediscussionofPorter’sFiveForcesinChapter3thatyoualsomustcompeteindirectlywithsubstituteproviders—othermeansbywhichpeoplemightsatisfytheirhunger—includinggrocerystores,pizza delivery, and fast-food outlets with drive-thru windows.Market SizeYourfirstimportanttaskisdeterminingisthesizeofyourmarket.Ifyou’recompetinginanationalorglobalindustry,youcanusuallyfindlotsofvaluabledataonline.GovernmentagenciessuchastheU.S.CensusBureauoffersomeusefulinfothere.You’llfindvolumesofdataindownloadableExcelspreadsheetswithbreakdownsofeveryindustrybysalesandemployeesaswellasbystateandcountry.TherearealsoprivatecompanieslikeHoover’s,Statista,andIBISWorldthatconsoli-date data and provide detailed reports on industries for a fee.View in the online readerYoushouldbeawareofthelifecycleofindustriesandfigureoutwhereyouareenteringonthecurve.Lookingatseveralreportsacrossbotholdandnewmarketsyouwillnotethatnewindus-trieshaveashallowemergencephasewhenahandfulofcompaniesareworkingtomaketheirnewIBIS Industry Report Overview136A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
ideasintobusinesses.Iftheysucceed,theindustrytypicallyenjoysrelativelyrapidgrowth.Inthesedenovoindustries,manynewcompaniesenterthemarket.Whilemostwillcrashandburn,thisiswherenewfortunesaremostoftenmade.Thinkofthepersonal-computerindustryinthe1980sorthe smartphone industry in the 2000s.FIGURE 5.1Industry Life CycleSource: Greg AutryEventually,themarketforthenewproductbecomessaturatedandgrowthstalls.Duringthisslow-downperiod,competitivepressuresbuild.Seekingeconomiesofscale,firmsmergeandareboughtoutbybiggercompetitors.Somefailasprofitmarginsshrink.AswenotedinChapter3,manyindustriesendupinastateofstableoligopoly,whereahandfuloffirmsdominatethemar-ket.Thisperiodmaylastdecadesorevenacentury.Mostindustries,suchasrestaurants,areinthe“mature”state,thelongestphaseofthecycle.TheAmericanautomobileindustryhasbeeninthismature state for more than seventy years.The Value ChainAnotherimportantsteptowardunderstandingifyourproductisworthlaunchingistodetermineifitactuallyaddsvaluetothetargetmarket.Thisaddedvalueisnotmerelytheoretical.Ifyournewphoneappcanmakeraisintoastsomewhereinthecloud,that’sreallyswell,butitisvaluelessunlesssomebodyiswillingtopayforit.Sincepeoplecan’tconsumevirtualtoast,thisisn’tlikelytodelight anyone; it adds no real economic value.Chapter 5Feasibility Analysis and Opportunity Evaluation137© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
value chainThe entire set of activitiesand processes performedby a company to delivervalue to its customer,including, but not limitedto, manufacturing,distribution, andmarketing.Atraditionalfirmaddsrealvaluebytakinginmaterials(forexample:flour,sugar,water,etc.)andproducingaproduct(cake)viaaprocess(recipe)thatutilizeslabor(mixing,baking,frosting),marketing(coupons),anddistribution(cupcakevendingmachine).Itmayalsoprovideservices(cleanup)requiredwiththeproduct.Thedifferentelementsinthisprocessmakeupthefirm’svalue chain.LookattheillustrationofthefirmvaluechainforamanufacturingcompanyinFigure5.2.Itshowsthesefundamentalstepsalongthebottomaswellastherequiredsupportactivitiesneededforthemtoflowsmoothly.Inourcupcakestore,inboundlogisticsistheprocessofreceivingtheflourandsugarfromyoursupplier’struckandputtingitinyourstoragecupboards.Thesupportactivityprocurementistheworkoforderingtheflour.Outboundlogisticsmaybetheprocessofshippingthecupcakesofftothecustomerorjusthandingthemoverthebakerycounter.Wheredoyou think the mixing, baking, and frosting fall inFigure 5.2?Forsoftwareorappcompanies,whichessentiallyconvertmentallaborintoaproduct,thefirmvaluechainwouldcombineinboundlogisticsandoperationsintodevelopment,butthebasiccon-cept would remain consistent.Youmightbesurprisedtofindthatinreality,thevaluechainextendsfarbeyondyourcupcakestore.Yoursuppliersaddvaluewhentheybuysugarandflourbythetruckorrailcarloadandputtheminconvenientbagsforyourstore.Inturn,theirsuppliersmillwheatandsugarcaneintotheflourandsugar.Ifyousellyourcupcakeswholesaletoarestaurant,theyaddvaluebyputtingthemonthemenuandservingthem.Whathappenstothepriceofthematerialineachofthesestepsinthe chain?FIGURE 5.2Firm Value ChainSource: Based on https://commons.wikimedia.org/wiki/File:Porter_Value_Chain.png138A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
industry value chainThe entire set of activitiesand processes performedby many firms to supportthe production of productsor provision of services.TheOuya game console.Source: https://commons.wikimedia.org/wiki/File:OUYA-Console-set-h.jpgLookattheillustrationoftheindustryvaluechainforalaptopcomputer.Youcanseetherearealotofrawmaterialsthatwillgointotheproducttoberefinedbyvariousfirmsalongtheway.Thebottomrowtracesthepathfollowedbycrudeoil,whichismadeintoplastic,thenintoakey-board,whichisintegratedintothelaptop.Thefinishedcomputerissoldtoawholesalerwhoshipsit to a computer store, where a customer purchases it.FIGURE 5.3Industry Value Chain for Laptop ComputerSource: https://commons.wikimedia.org/wiki/File:Supply_and_demand_network_(en).pngValue MismatchSometimesthevalueaddeddoesn’tmatchwhatthemarketdesires.Let’scon-siderthecaseoftheOuya,avideogameconsolethatdrasticallyreducedbarrierstogamedevelopmentandreducedthesizeofconsumerconsoles.Basedonthistheoreticallysoundidea,thecompanywasabletoraisemorethan$8milliononKickstarter.TheproblemisthatOuyaprioritizedsizeandcostoverperformanceandquality.Itturnsoutthatgamerswouldratherspendalittlemoremoneyforabetterexperience.They’realsounwillingtotakeastepbackwardingamingpower.DoingeverythingonthecheapleftOuyawithoutamarketbecauseitjustdidnotprovideanyvaluetocustomers.HadOuyaunderstooditscustomersbet-ter,theycouldhaveavoidedthisproblemeitherbydevelopingastrongerproductor by not selling the inferior one in the first place.Onceyouunderstandwhatitisthatyourcustomersvalue,youneedtocon-siderwhattheyaregivingupbyswitchingtoyourproductandhowthatmightaffectthevaluechain.Youmightbuildthebest,cheapestsmartphoneever,butchancesareyouwon’tbreakthedeathgripApplehasonthesmartphonemarket.Applehasbrilliantmarketingandhighbrandawarenessandprovidesacompleteecosystemthatincludescomputers,anonlinecontentstorewithmusic,movies,andbooks,apaymentsystem,relationshipswithallthemajormobilenetworkChapter 5Feasibility Analysis and Opportunity Evaluation139© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
providers,andhundredsoffirst-rateretailstoreswithsupportservices.Simplyhavingbettertech-nicalspecificationsisn’tgoingtobeatallthat.Soevenifyourproductfitsnicelyintothevaluechain, consider that there may be barriers set up around the value chain that can block you.Technical FeasibilityRecallthatweopenedthischapterwiththequestion,“Whyhasn’tthisalreadybeendone?”Amajorcomponentofthatquestionrevolvesaroundtheissueoftechnicalfeasibility.Theworldisfullofingeniouspeopleconstantlyfacingthesameproblemsyoudo.Ifyouwereintheconsumerelectronicsmarket,forexample,youwouldwanttoseriouslyponderthequestionof,“Whyhasn’tSamsungorGoogleorHPdonethis?”Ifleadingtechnicalfirmsfullofbrilliantengineershaven’tpursuedthispath,perhapsthereissimplynotafeasibleengineeringsolution.Lookatyourspecificcategory and consider the reasons why your idea is not already a reality.Itispossible,aswehavediscussedinearlierchapters,thattheincumbentfirmsaresimplyunabletograspthenextbigthing,andthemarketmightbeopenfordisruption.It’spossiblethatGoogleisthenextXerox,andyourideaisabouttodestroythem.However,thesefirmsarenowveryawareofthetheorybehinddisruptionandthehistoryoftheirpredecessors.Theyareworkinghardnot to miss the next big thing.Technicalissuescanbedevileventhesimplesttraditionalsmallbusiness.Imaginethatyou’vedecidedtostartalunchtruckoperationservicingaresortcommunityinthenearbymountains.Therearen’talotofconvenientdiningsolutionsforthemanyhigh-incomeoutdoorenthusiaststhatflockfromthecityyear-roundtohike,fish,andsnowboard.Thefoodoptionsarelimitedandnotinlinewiththehealthylifestylesoftheupscaleclients.You’resurethesestarvinghikersandskierswouldbewillingtopaygoodmoneyforahealthyandfillingmeal.Ifyouresearchthisclien-tele,you’llfindtheyliketopaynearlyeverythingwithcreditcardsorapp-basedpaymentsystems.You’llthenlikelysettleonasolutionfromSquareorPayPalrunningonatabletorsmartphone.Great! You’re good to go, right?Soyougetallthatcreditcardtechsetupwithyourbankandinvest$150,000inanamazinglunchtruck,stockitfullofkalesaladsandfree-rangechickenbreasts,andarriveoutsidethemostpopularskiresortparkinglotonabusyholidayweekend!Peoplestartawkwardlyrunningoverintheirclunkybootsassoonasyoupark.Bythetimeyougettheawningup,alinehasformed!You’rereadytorakeinthebucks,andyousmuglyaskyourself,“Whyhasn’tsomebodydonethisalready?”Theanswercomestoyouasyouringupyourfirstorderandprocesshercreditcard:“Nocellser-vice!” That’s why there are no lunch trucks in the mountains.Resource FeasibilityOursecondquestionwas,“Whyisyourteamthebestteamtodothis?”Thefeasibilityofyournewbusinessisconstrainedbyyourowncapabilitiesandresources,oryourabilitytoobtaintheneces-saryresources.Youcan’tlaunchasoftwarestartupifyoucan’tprogramorcan’tfindcompetitiveprogrammers.Youcan’topenasuccessfulrestaurantifyoucan’tcookorhireachef.Youcan’tstartthesortofrapidgrowthnecessarytodoabigtechdisruptionifyoudon’thaveaccesstothemas-sive capital necessary to enter those markets.So,beforeyouwasteyourtimeorotherpeople’stimewithyourgrandiosevision,takesometimetoconsiderifyoucanactuallyimplementit.Ifnot,yournextquestionshouldbe,“CanIlearnto do this in a reasonable amount of time and with reasonable effort?”Mostfolkssimplyaren’treadytolearnawholenewindustryorembraceanewskillset.How-ever,entrepreneursareremarkablyflexible.WhileSteveJobsorElonMuskepitomizethatconcept140A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Most business ideas requireteams to execute.Source: © Shutterstock, Inc.inabigway,manysmallerbusinessownershavemadesuccessfultransitionsfromcorporateaccountantormarketingreptorestaurateurordeep-seafishingguide.It’saloteasiertodothisifyournewbusinesshasbeenalong-standingpersonalhobbyorpassion.Ifyounevercookathome,you’reprobablynotgoingtoflourishinthekitchenofthatnewpancakerestaurant.Ontheotherhand,ifyouspendeverydayoffworkoutonatseahuntingforalbacore,you’veprobablydevelopeda lot of the basic understanding necessary to manage a charter fishing boat.Ifyou’veconcludedyou’renottheonetodothis,thenyou’llneedtoask:“CanIfindtherightexpertstojoinme?”Recruitingisn’tassimpleasplacinganadforashort-ordercookoranexperi-encedboatcaptain.Cookingandcaptainingarecriticalcorecompetenciesinyourbusiness,andaswe’vecautioned,theyshouldprobablynotsimplybeoutsourced.Forthebestchanceofsuccess,yourbusinessmustexcelatitscorefunctions.Youcanoutsourcethemenudesignandtheboatmaintenance,butthefoodandthefishinghavetobegreat.Thatmeansthatyourrecruitsshouldbepartofthefoundingteam.Theyneedtocareaboutyourbusinessinawaythattranscendsasimplecontractoremploymentagreement.Youshouldbelookingforpartnerstoassumethesecritical functions and share your business with you.Commercialization and Scale FeasibilityWalmartpurchasesproductsbythehundredsofthousandsormillions.Doingsocapturesmassiveeconomiesofscale,allowingWalmarttopressureitssuppliersintocostreductions.Satisfyingthedemandsofthissortofmassivevolumeapproachispracticallytheonlywaytokeepthemegastorechain’sbusiness.Additionally,tomaintainthelowestpossibleconsumerprices,productswilllikelybegloballysourcedtolocationswithlowlaborrates,lowtaxes,andpliantenvironmentalrules.RunningabusinesssuchasWalmartrequiresexpertiseinglobalsourcing.Youneedtrustworthyemployeeswithlocalknowledgetohelpyouselectreliablefactoriesandthenkeepaneagleeyeonthe pace of production and quality of output.WhilenoteverybusinessneedstosupplyWalmart,everybusinesshastobeabletoreachalevelofscalewheretheyareprofitable.Beyondmeetingyourminimumrequirementsforscale,moreisnotalwaysbest.JustbecauseyoucouldfindafactoryinBangladeshreadytomakeamil-lionT-shirtswithyourgrinningfrogillustrationdoesnotsuggestthereareamillioncustomerswhowouldappreciateyourdesignenoughtopayforit.Ifyourpancakerestaurantservesonlytwomealsaday,doyouthinkyou’llbeabletoaffordtopaytherent,utilities,andsalaries?Evenifeachofthosecoupleofmealswereincrediblyprofitableandyourrentwaslow,itisunlikelyyoucouldcoveryourcosts.Wewilldiscusshowtodetermineyourfirm’scostsandprofitrequirementsinfuture chapters on accounting and cashflow.Regardlessofhowgoodyourproductis,youneedtodosomeresearchtodetermineifyourmarketisbigenoughandifyoucancapturealargeenoughsharetosupportyouroperation.Youalsoneedtofigureouthowmuchofityoumustcapturetoremainviable.Canyoustayasmallfishinyourindustry’spond?Ifyourtargetindustryissmall-townrestaurants,theanswerisyes.Aquicklookaroundanytownwillshowyoumultipleexamplesofsuccessfulsinglelocationestab-lishments.However,ifyou’vedecidedtobuildyourcarandentertheautomobilemanufacturingindustry,theanswertothequestionto“CanIstayasmallfish?”becomesaresounding“no.”Inordertodealwiththecomplexregulatoryenvironmentandtocaptureanyeconomies,youmustscalethatbusi-nesstothousandsofcarsorchargeaveryhighpricepercar.Yousucceedasamass-marketcarmakerlikeNissanbysellinghalfamillioncarseachyearatreasonableprices.Youmayalsosucceedasaspecialized,high-endcarcompanylikesupercarmakerMcLaren,whichsells1,500ultra-high-endcarsforupto$1.5millioneach.Eitherway,anautomobilemanufacturermusttakeinatleasthundredsofmillionsofdollarsperyeartosurvive.Withinthecurrentlayoutofthatindustry,anautomobile firm simply cannot be a small business.Chapter 5Feasibility Analysis and Opportunity Evaluation141© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Manygreatartisanalmanufacturersproducesmallrunsofhigh-qualitygoodswithloveandcare.TheseproductsarepricedmuchhigherthangoodsatWalmart,andthehigherprofitsoneachitemsoldcangoalongwaytowardmakingupforlowvolume.Infact,manysmallvendorshavecollapsedtryingtomakethetransitiontohighvolumeatlowprices.Theyhavefoundthattheylostmoneytakinghuge,low-costordersfromcorporationslikeWalmartandthatfrontingthefundsrequiredtobuildthoseorderspushedthemintobankruptcy.Evenifyouthinkyoucanavoidbank-ruptcytopulloffthatsortofWalmartscale,youmayalsofindthatthestressofthissituationdisruptsyourpersonallifetoanunacceptableextent.Oftentheartisanalpathisbothmoreprof-itable and personally rewarding.TheNewEntrepreneurialDynamicdoesnotpursuegrowthatallcosts.Itencouragesyoutofindaprofitablebalancebetweenthenatureofyourproductorserviceandthereal-worldneedsofyour customers, all in the context of creating a business that satisfies your own needs.Key Takeaways•Find out why previous entrepreneurs rejected your idea or failed at it.•Besureyoutrulybelievethatyourteamcanwinwithyourideaandwhytheyaretherightteam.•Bewillingtochallengeyourownideaandchangeittofittherealityyoufindinthemarket-place.•Research your market carefully before entering. The data is out there.•Beclearonwhatvalueyourfirmwilladdwithintheindustrysupplychainandfindaprofitableniche.•Make sure your idea can scale to where you want to go.5.2Opportunity ValuationLearning Objectives1.Understand the limitations and appropriate use of surveys and focus groups.2.Understand the application of Blank’s customer development model.3.Understand the processes of customer discovery and customer validation.4.Understand the difference between your customer and the user.5.Recognize the value of a minimum viable product (MVP).6.Understand your responsibility in making a safe and environmentally considerate product.142A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
surveyA formal set of questionspresented to a statisticallyrelevant sample ofrespondents, such astarget customers.focus groupA small gathering ofpotential customersdesigned to provokeconversational insights intoproposed products,features, and designs.Talking to CustomersTheverybestsourceofinformationaboutthesalesviabilityofyourproductorserviceinthemar-ketplacewillalwayscomefromthosewhoplantobuyit—potentialcustomers.Traditionalfirmsoftensolicittheopinionsofconsumersviasurveysorfocusgroupstodetermineiftherearewill-ing buyers for a particular product.Listen to potential customers.Source: © Shutterstock, Inc.Whilesurveyscanbeveryusefultoolswhenyouwanttopriceoutordefinethefeaturesetofafairlymatureconcept,theycanbeextremelymisleadingwhenyouaretryingtofleshoutaninno-vativenewidea.Althoughsurveysmayhaveopen-endedquestions,theyareessentiallyone-way,asynchronouscommunications.Meaningyoucan’tlookatasurveyresponseandquicklyasktherespondenttoclarifyorexpandontheirpointorsay,“Ah,Iseewhatyoumean,butwhatifwediditthisway?”Whatyouneedatthelaunchofanewbusinessisadeeper,morenuancedconversationwith potential customers.Whataboutfocusgroupsthen?Focusgroupsareatime-honoredmarketingtechniqueofbringingasmallnumberofpotentialcustomersintocontactwithapotentialproduct.Thiscouldbeanythingfromacartoanewmovie—andinfact,I’vepersonallyparticipatedinfocusgroupsforbothofthoseproductcategories.Theideaisthatthemarketingteamwilluseafewquestionstoprovokeadynamicdiscussionamongthecustomersaboutthebenefitsandshortcomingsofapotentialproduct.Duringthisdiscussion,thecustomerswillquicklyrevealtheirrealfeelings.Theproblemisthattherecordofaproduct,likeanewTVseries,vettedbyfocusgroupsisratherdis-mal.ProfessorGeraldZaltmanofHarvardBusinessSchoolsumsitupthisway:“Thecorrelationbetweenstatedintentandactualbehaviorisusuallylowandnegative.”[1]That’sanicewayofsayingthat people lie, even in focus groups. Can you think of why that is?FurtherresearchhasshownthatpeopleinfocusgroupsarekeenlyinterestedinhowsmartandinformedtheyappeartotherestofthegroupandtheywanttobelikedbythemarketingChapter 5Feasibility Analysis and Opportunity Evaluation143© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
customer validationThe process of verifyingproduct-market fit bytesting the basicassumptions of a businessmodel. See alsoalphatest;beta test;customerdiscovery;minimum viableproduct.personleadingthegroup,whoisviewedasauthoritative.Tostandout,theytendtobeeithertookindortoocriticaloftheproductstheyareevaluating.Thisisanaturalprocess,andsincemanypeoplearepaidtoparticipateinfocusgroups,theywanttobeinvitedback.Praisingtheproductpresentedwouldbeanaturalstrategytogainfavor,andcriticizingitmightmakeyouappeartobeboldandsmart.Theproblemhereisthefocusgroupparticipantisthinkingaboutthedynamicsoftheprocess,nottheproduct.Worse,onceoneortwomembersofthegroupshowapreference,thegroup as a whole often falls in line with the “group think,” making it hard to get honest responses.Whiletheywereverypopularinthesecondhalfofthelastcentury,focusgroupshavefallenoutoffavorwithmanyinnovators.SteveJobsfamouslyrejectedfocusgroupsandlikedtoquoteHenryFordwhosaid,“IfIhadaskedpeoplewhattheywanted,theywouldhavesaidfasterhorses.”TheproblemwassummedupbyProfessorRobertK.Merton,thefatherofthefocusgroupcon-cept.Hecautionedthattheywerenotmeanttobethesourceofvalidationforproducts.Mertonsaid,“Evenwhenthesubjectsarewellselected,focusgroupsaresupposedtobemerelythesourceof ideas that need to be researched.” If focus groups aren’t the solution, what is?Customer DevelopmentEntrepreneur,writer,andadjunctbusinessprofessorSteveBlankhasofferedacompellingformal-izedprocessoffindingmarketneedshecallsthecustomerdevelopmentmodel.Blank’sprocessdefinespartofanimportantbusinessdevelopmentmodelcalledtheleanstartup,whichwascre-atedbyEricReisandpopularizedbybothhimandBlank.Theideabehindcustomerdevelopmentistofindandevennurturethecustomersforyourproductwhileyoudevelopit.Youdothedevel-opmentinanagiledevelopmentprocess,wheretheproductisiterativelyrefinedbasedonthefindingsofthecustomerdevelopmentprocess.Whenthisisdoneright,youshouldendupwithanearlyperfectproduct-customerfitwhenyougotomarketandavoiduglysurprises,suchasalackof sales.Thefirststepofthecustomerdevelopmentprocessiscustomerdiscovery.Duringcustomerdiscovery,youwillgointothemarketyouhavemostbroadlyidentifiedandlisten(nottalk)tocus-tomersabouttheirpainanddesires.Whileanyeagerentrepreneurwillalreadyhaveaproductidea,orseveral,readytogo,theprocesshereisnottoseekvalidationofyourideas,buttolearnwhatcustomersreallyneedsoyoucandevelopaproductforwhichtheywillpay.Thequestionsyouaskduringcustomerdiscoveryareonlytheretoprompttheintervieweesintosharingtheirneeds.Neverpresumethatyoualreadyunderstandthoseproblemsorthatyouknowhowtosolvethem.Onceyouhaveidentifiedthatalikelygroupofcustomershasaproblemthatyoucanlikelysolvewiththeresourceyouhave,gotoyouriterativedevelopmentprocessandstartsolvingthecus-tomer’s problem.Customer ValidationAfteryou’vedesignedaproductandabusinessmodeltodeliverit,youshouldverifythatyouhavecorrectlyinterpretedandfulfilledyourcustomer’sneedsbeforeyouinvestmoretimeandotherpeople’smoneyintomassproducingthisidea.Theprocessofcustomervalidationinvolvesshow-ing,absolutelyneversellingorpitching,yourconcepttoactualpotentialcustomersandseeingiftheymightpayforit,andifso,howmuch?Thiscanbeaccomplishedwithfurtherinterviews,sur-veys, and the sale of a very simple product (seeSection 2).Duringthisprocessofcustomerengagement,youshouldbeawareoftheriskofexposingyourconceptstoalotofpeoplewhocouldofferyourideastocompetitors.However,experiencesuggeststhemuchgreaterriskliesinmakingaproductthatcustomerswon’tbuyoruse.Assumingeveryonewantstostealyourideaandhasthetime,money,andtheresourcestomakeagoofitisusuallyaconceitoftheentrepreneurratherthanarealthreat.Onceyourproductisonthemarketandis144A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
An Apple Watch in use.Source: DenPhotos/Shutterstock.comthird-party payerThe organization orindividual paying for aproduct or service to beconsumed by anotherparty. A scholarship orhealth insurer are commonthird-party payers.successful,youcansurelyexpectimitatorsandevencounterfeiterstoappear.However,thievesarelazy; they want you to do the hard work of customer validation and product development first.TheAppleWatchunderwentyearsofsecretproductdevelopmentbeforeitwasintroducedin2015.RenownedAppledesignerJonyIvewassurethatevery-onewouldwantthisproductandfamouslystatedwiththereleaseoftheAppleWatch,“Swisswatchmakerswere#$%^&@!”(Wecan’tprintwhatJonyactuallysaid.)However,initialpublicadoptionoftheAppleWatchandcompetingsmart-watchesfromSamsungwasmutedatbest.Anumberoftechypeopleboughttheseproductsatfirsttotrythemout,butfewpeoplepersistedinwearingthem.Itturnedoutthathavingasmallcomputeronyourwristdidn’treallysolvemanyreal-worldproblemsoraddenoughvalueformostpeopletowearaclunkygizmothathadtobechargedeveryday.Worse,youhadtocarryaroundasmartphonejusttousethewatch,sowhatwasthepoint?Potentialusers’problemswerealreadybeingsufficientlyaddressedbymechanicalwatchesandthealwayspre-sentsmartphone.BreachingtheirsecrecywallanddoingsomesignificantcustomerdiscoverywouldverylikelyhaveenabledAppletodiscoverallthisbeforethefirminvestedsomuchtimeandcredibilityinthewatch.ToApple’scredit,theylistenedtocustomerfeedback,andbylate2018theirSeries3and4watches,whichwereabletofunctionuntetheredfromaphone,gainedsignificanttraction in the market and returned profits to the firm.Blank’sLeanStartupModelisheavilyfocusedonthecustomerdemandsideofthebusinessmodel.That’snotabadthingbecause,asChapter2stated,intheNewEntrepreneurialDynamic,“Customersarerequired;everythingelseinabusinessisoptional.”However,thiscustomerfocusmakestheLeanStartupModelbestforrapidgrowthstartupsenteringunprovenmarketswithnewideas,likeanewtechproductorapp.IstronglyrecommendBlank’sbook(withSteveDorf),TheStartup Owner’s Manual[2]forentrepreneurs pursuing rapid growth/Silicon Valley startups.Themodelismuchlessappropriateforbusinessesenteringproven,maturemarketswithoutarevolutionaryproduct.Ifyourcustomersarealreadyprovenandyourcompetitiveadvantageisgoingtocomefromcostratherthandifferentiation,you’llwanttopursueamoresupply-sidefocusedapproach.Thatdoesnotmeanyoushouldeverignoreyourpotentialcustomers;youmaystill discover something unexpected by talking to them.Customer and the UserDuringthisprocessofcustomerdevelopmentandinyourfuturemarketingandsalesefforts,youmustalwaysbeawarethatthepersonpayingfortheproductorserviceyousell,yourcustomer,mayormaynotbethepersonusingorconsumingit,youruser.ConsiderMcDonald’s.Mostofthetime,thecustomeratMcDonald’spaysforhisorhermealandtheneatsit.Inthiscase,theyarealsotheuser.WhatifDadtakesthekidsoutforchickennuggets?WhoisthecustomerforaHappyMeal?Inthiscase,theuser,thekids,isdistinctfromthepayingcustomer,Dad.McDonald’smustdevelopaproductthatthekidsdesirebutforwhichtheparentwillpay.Thisinvolvesmakingsuretheproductistastytoyoungpalatesraisedonsugarandfat,whileconvincingatleastoneadultthat the meal is sufficiently nutritious. In this case, the parent is athird-party payer.Manybigmarketslikeeducationandhealthcaredependonthird-partypayers.InK–12educa-tion,thisisoftenthegovernment,whichfundstheschoolsmoststudentsattend.However,itcouldbeachurchorparentpayingfortuitionataprivateschool.Asahighereducationstudent,thereisagoodchancemuchofyourtuitionisbeingcoveredbysomecombinationofloans,scholarships,grants,orparents.Ifyouareintheeducationbusiness,youneedtomakesurethatyourinstitu-tionisaccreditedwithorganizationsthatwillpermittheseloans,scholarships,andgovernmentsupport—aswellastosufficientlyimpresstheparents.Inmanycountries,healthcareisfundedsubstantiallyorentirelybythegovernment.IntheU.S.,acomplexmixofinsurance,government,andpatientcopaysfundsthesystem.Makingsureyourdrugormedicaldevicewillbecoveredbyboth public and private insurance systems is super critical before you go to market.Chapter 5Feasibility Analysis and Opportunity Evaluation145© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
alpha testProcess by which a firmtests its own unfinishedproduct in-house todetermine marketreadiness. See alsobetatest;minimum viableproduct (MVP).beta testProcess by which a firmtests its own unfinishedproduct by providing it toactual consumers to use inreal-life situations todetermine marketreadiness. See alsoalphatest;minimum viableproduct (MVP).early adopterA consumer who will use anew technology or productas soon as it becomesavailable.minimum viableproduct (MVP)A version of product withthe fewest features todeliver maximum customervalidation. See alsoalphatest;beta test;customerdiscovery;customervalidation.Tesla automobiles continuously capture realworld data.Source: TierneyMJ/Shutterstock.comBeta Testing and the Minimum Viable ProductIdeally,beforeyouinvestalotoftimeandenergyinafull-blownproductandbusinessmodel,youwillhaveconclusivelydeterminedthatthereisamarketforyourbasicconceptbygeneratingcus-tomerfeedback.Oneapproachtothisisanalphatest,wherebyyourownfirm’sstaffworkwithandtestafunctionalbutunfinishedversionofyourfinalproductinreal-lifesituations.Abetatestprovidesaselectgroupofreal-worlduserswithanunfinishedproducttofindouthowtheylikeitandidentifyanybugsthatneedfixing.Followingthispathisstandardoperatingprocedureinthesoftwareworld.Keepinmindthatinmostcases,youcan’tchargecustomersforaproductthathasbeen released for testing purposes.Arelatedapproachistodevelopthesimplestfinishedproductyoucanthatcapturesyourvaluepropositionandsellthattoearlyadopters.Somepeoplemaybeentirelysatisfiedwithamin-imalistimplementationofyourbasicidea,orsimplysoattractedtonewthingsthattheywillbeexcitedtogettheirhandsonthefirstiterationandwaitforamorerobustsolutionlater.BusinessconsultantFrankRobinsonchristenedthisaminimumviableproduct(MVP),andtheideahasbeenpromotedbyauthorsEricReisandSteveBlankaspartoftheirLeanStartupModel.AnMVPgivesyouearly-stagefeedbackbeforeyougettoofaralonginthedesignofthecompleteproduct.Theimportantfactthatyousell(notgiveaway)yourMVPmeansthatitalsovalidatesyourclaimthat you are adding value for customers. It also doesn’t hurt at all that you get paid.Intheearly2010s,itbecamecleartoanumberoftechnologiststhatasoftware-driven,self-dri-vingcarwaspossible.TeslaMotors,Google,andApplealllaunchedeffortstoexploitthisnewopportunity,andeachtookadifferentroutetodevelopment.Applekepttheircarproject,liketheiPhoneandAppleWatch,asecretanddevelopeditprimarilyinahiddenlaboratoryandtesttrack.Googleopenlydisplayedtheirproductunderdevelopmentandlaunchedanextensivealphatestprogram with Google engineers supervising the vehicles in operation in real-world environments.ElonMuskchosetheMVProuteatTesla.Ratherthanmakingafullyself-drivingvehiclethatcouldtakeyoudoortodoor,thecompanydevelopedaproductthatusedcameras,radarandultra-sonicsensorstomaintainthevehicle’sspeed,keepitsfollowingdistancesafe,holditwithintrafficlanes,andavoidobstacles.Thissystempresumedthedriverwouldremainalerttoroadconditionsandincontrolatalltimes.Itcoulddetectifthedriverwasholdingthewheel,andfailuretodosowouldtriggeranalertorautomaticallyslowthecar.Thesoftwarealsoprovidedautoparkingfea-tures,limitedremotecontrolfromyoursmartphone,andcollisionavoidancetechnologiesthatwouldmoveorbrakethecarintheeventthedriverfailedtoreacttoanimminentthreat.Teslareleasedthis“autopilot”solutionasanoptionfor$2,500withthevehiclepurchaseorasasoftwaredownloadfor$3,000.Thefirmgeneratedmillionsinrevenue,alotofpressforbeingthe“firsttomarketwithself-driving,”andcollectedmillionsofmilesofreal-worldroaddata.CanyouthinkwhyTesla’sMVPdatamightbemorevaluablethanthatcollectedundertheGooglealphatestorbytest drivers on Apple’s test track?Fromthedataacquiredfromrealdriverbehaviorinaself-drivingcar,Teslalearnedthatcustomersdon’talwaysfollowdirections!Justaboutanyonewhohasreleasedaproducttotheworldcantellyouhorrorstoriesofhowcustomersmisinterpretedorabusedtheirproductinwaysthemanufacturerneverimag-ined.Insomenotablecases,autopilotcustomerscrashedtheirvehiclesbyusingitinappropriatelyorinunforeseencircumstances.Teslawasabletomakesignif-icantsoftwareimprovementsanddevelopnewhardwarebasedontheseincidentsandotherdata.[3]Googlealsohadsomeaccidents,butbecausetheyusedtheirownemployees,youcanwellimaginethatthetestersmayhavebeencarefulnottosignificantlychallengetheirownsystem.TestdriversonApple’stesttrackaresurelygoingtosimulateallthedifficultscenariosthattheycananticipate,butuntiltheyhandovertheproducttorealcustomers,theyaren’tlikely to find out what can go wrong.146A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
economy of scaleThe inverse relationshipresulting from increasedproduction driving downthe price per unit due tothe overall cost beingspread out among a highnumber of goods sold.See alsofixed costs.TheMVPapproachisacentralpartoftheNewEntrepreneurialDynamic.Wheneverpossible,findwaystotestyourproductsintherealworldbeforecommittingyourtime,resources,andotherpeople’smoneytoafull-blownimplementationofyoursmallbusinessideaorstartupvision.Ifyou’replanningtolaunchthatsmallcafénearcampus,whynottestyourfareonstudentsbyget-tingagigcateringeventsattheuniversity?Youcouldalsoconsideracartorfoodtruck.Ifyou’replanningacakeshop,youmightofferyourcakestolocalrestaurantsbeforeopeningthedoorsofyourbakery.Wheneverpossible,setupasmalle-commercesiteandsellsomeproductsdirectlytoconsumersbeforeyouattempttodowholesaledistributionthroughretailoutlets.Thiswillallowyoutotestthemarket,establishthebestpricepoint,andgainvaluablecustomerfeedback.Theadditionalprofitmarginyoucapturewhensellingdirectatretailpricesratherthandiscountingforwholesalepricingisalsoveryhelpfulintheearlystagesofyouroperation.Thismakesevenmoresenseiframpingupproductionisdifficultandyouhavenotcapturedtheeconomiesofscaleorhave a limited quantity of product to deliver.Safety and Environmental ConcernsIfyoumakesomethingorprovideaservice,youmustmakesureyourproductissafeforcon-sumers.Youshouldbeparticularlycarefulwithanythingthatislikelytobehandledbychildrenorispresentatanyfacilitywherechildrenmaybe.Childrenmakechoicesthatadultssimplycan’tpre-dictandcanfinddangerinthemostbenignenvironments.Failuretoputsafetyfirstcouldresultinlawsuits that may quickly put your small business out of business.Beyondsimplythinkingthroughwhatissafeordoingyourowntesting,therearemanycom-merciallabsthatconductproductsafetycertification.UnderwritersLaboratoriescertifieselectricalappliancesas“ULApproved”forinstance.Keepinmindthatpayingforcertificationscanbeexpen-sive.You’llalsowanttoconsiderwhetheryourproductissafeforworkerstomake.Canitbedisposedofinanenvironmentallyfriendlyway?Isthemanufacturingprocesscompliantwithenvironmentallaws?Youmaybesurprisedtofindthatprocesseslikepaintingandsandingcanbeheavilyregulatedbecauseexposuretodustorvaporscanbehazardousandemittingthemintotheatmospherecancontributetodangeroussmog.Ifyououtsource,inspectingthefactorieswhereyourproductsaremadecanbeburdensome,particularlyoverseas.Onestrategyistorideonsome-oneelse’sinspections.Manyhigh-profilemultinationalslikeDisneymustmaintainahighlevelofmanufacturingoversightbecausetheyaresubjecttoalotofmediascrutiny.FactoriesinplaceslikeChinawilltoutbeing“Disneycertified,”andyoucanchoosetousethosemanufacturerswithsomeassurance that they meet basic levels of safety and environmental responsibility.Keepingyourownworkerssaferequiresyouunderstandthejobstheyaredoingorhireexpertswhodo.Ensurethatyourworkersareproperlytrainedandequippedwithappropriatesafetygearforthetasksathand.Simplethingslikeeyeprotectionareinexpensivepreventorsofcostlyinjuries.Thelawand/oryourinsuranceproviderwillalsolikelyrequirethatyoudocumenttheproperproceduresandpoliciesforperforminganypotentiallydangeroustasksthatincluderequiringtheuseofsafetygear.Haveyouremployeessignoffthattheyhavereadandarefamiliarwiththesedocuments.Thatistomakesuretheyactuallypayattentionandtoprotectyouintheevent they chose not to do the right thing when you aren’t looking.Chapter 5Feasibility Analysis and Opportunity Evaluation147© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Keeping workers safe requires properequipment.Source: © Shutterstock, Inc.predatory plaintiffsLitigants who actively seekopportunities to suebusinesses for claimedinjuries.Itisparticularlyimportanttoensuresafetyinfacilitiesthatareopentocus-tomers.Forinstance,ifyouownaretailshoporrestaurant,youmustbesuretherearenoinherenthazards,suchasoddlyplacedorsizedsteps,lowbeams,orexposedsharpedgesonfurnishings.Youandyourstaffmustalsobeconstantlyonthelookoutfortemporaryriskssuchasbrokenglass,slipperyliquids,orpower cords on walking surfaces.Sadly,youmustalsoknowthatintheUnitedStates,therearepredatoryplaintiffs,peoplewhoactivelylookforopportunitiestointentionally“injure”themselvesandsueinattentivesmallbusinesses.Theyhaverelationshipswithcorruptdoctorsandlawyerswhoareexpertsatextortingpaymentfrombusinessownersandtheirinsurancecompanies.Ifanybodyappearstohaveinjuredthem-selvesinyourbusiness,besuretoprovidepromptmedicalassistanceanddocumenteverythingthatoccurred,includingtakingphotosoftheareaorany-thingtheinjuredpersonclaimswashazardous.Youmayneedthisevidenceincourt.Atthesametime,becarefultoavoidconfrontationanddon’toffendrealcustomersbyassumingahostileatti-tude.TheNewEntrepreneurialDynamicfavorsentrepreneurswhothinkaheadandoperateethi-cally—evenwhennobodyislooking.Yourbusinessshouldprotectitsworkers,customers,andtheenvironmentbecauseitistherightthingtodo,becauseyoudon’twanttoincurliability,andbecause your reputation is invaluable.Key Takeaways•In the end, delivering a product customers will pay for is what counts.•Don’t rely on surveys because they are easy and avoid contact.•Listen to your potential customers; don’t sell to them.•Thepersonwhopaysforyourproductormakesthepurchasingdecisionmayormaynotbethe user of the product.•Run an alpha and beta test on your product before selling it.•Make an MVP, if you can, before trying to build the perfect complete solution.•Keep your workers safe and document your firm’s safety procedures.•Beingconsiderateofyourcustomers’safetyandtheenvironmentistherightthingtodoandit is probably the best thing to do as well.5.3Financial FeasibilityLearning Objectives1.Understand that the capital requirements of each startup are different.2.Recognizethepossibilityofbootstrappingyourstartupratherthanseekingoutsideinvestors.3.Understand that identifying profitability is fundamental to validating any business model.4.Understand the demographics of your clients.5.Understand the basics of variable and fixed costs.6.Learn to apply the economics of one unit model.148A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
capital investmentFunds invested to supporta startup with theexpectation that they willbe recovered throughfuture earnings. See alsobootstrap.bootstrapCreatively financing thestartup costs of a firmusing existing resources.See alsocapitalinvestment.Capital is required to grow a business.Source: © Shutterstock, Inc.cash flowThe incoming andoutgoing of money in abusiness.Capital InvestmentAstheadagegoes,“Ittakesmoneytomakemoney,”andthereareveryfewbusinessesyoucanlaunchwithoutcapitalinvestment.Theeasiestroutetogettingstartedistosaveupmoneyorbeluckyenoughtoborrowitfrommomanddadorsomeclosefriend.Thatsaid,theNewEntrepre-neurialDynamicrewardsthosewhocreativelybootstraptheirsmallbusiness.Bootstrappingistheprocessofcreativelyfinancingthestartupcostsofafirmwhenyoudon’thavethetimetosaveoraccesstoeasycash.Canyouthinkofalternativewaysentrepreneursfundthecostsrequiredtostart a business?Someofthemostcommonbootstrappingtechniquesincludeusingpersonalcreditcards,negotiatingdeferredpaymentonrent,equipment,andinventory,andcollectingadvancepaymentsfromcustomers.Toputthosethingsincontext,let’simaginethatyouaregoingtosetupasmallartisanalmanufacturingbusi-nessmakingceramics.You’llneedaworkshoplocation,apotter’swheel,akiln,andotherspecializedceramicsequipmentlikebats,cones,brushes,andsculptingtools.You’llalsoneedinitialsuppliessuchasclay,coloringagents,andglazes.How do you get all this with minimal investment?Ifyouarewillingtolocateinadistressedareaorrun-downproperty,youmaybeabletoconvincethelandlordtoaccommodateyouwithreducedrentinexchangeforimprovingthefacility.Aceramicsfactorycertainlydoesn’tneedtolook fancy, so a property in need of some love may work very well.Thebestwaytogetanysortofequipmentorsuppliesforyourstartup—fromofficefurnituretospecializedovens—istolookforsimilarbusi-nessesthataregoingoutofbusiness.Theymaybesellingtheirgearandsuppliesinaliquidationsale,ortheymayhavealreadygonebankrupt,andthegearmaybeofferedatauction.Suchequipmentusuallysellsforpenniesonthedollar.Machinesthatcost$10,000newcanoftenbepurchasedfor$1,000atauction.However,“buyerbeware”alwaysapplieswhenpurchasingusedequipment.Inthecasesofauctions,youareoftenunabletotesttheequipmentbeforebidding.Ithelpstohaveapracticedeyeandtoassumeinadvancethatwhatyoubuymayrequiremaintenance.Insomecases,youmaybeabletoconnectwithabusinessownerwhoisgoingoutofbusinessandnegotiatetotaketheirequipmentfromthemonapaymentschedule.Ratherthandefaultontheirexistingfinancingarrangement,bankruptbusinessownersmaybewillingtoexchangetheirequipmentforanagreementtotakeoverpayments.Ifyoudothis,becarefultoensurethattheowneris,infact,usingyourpaymentstopaytheirdebt—otherwise,thelienholdercouldpotentiallyseizethegearthatyou’vebeenpay-ing for.Youmayalsobeabletopickupsuppliesfromafailedbusiness,butyou’llprobablyhavetobuysometoo.Somebootstrappingoptionshereincludenegotiatingwithsuppliersfordelayedpay-ments and using your personal credit cards to get stocked.Finally,gettingmoneyupfrontisalwaysthebestsolutiontoearlystartupcashflowchal-lenges.HowaboutrunningacrowdfundingcampaignonKickstarterorIndiegogotogetcustomerstoprepayforsomeofyourceramiccreations?Youmightusethewheelsandkilnsatschooltomakesome great looking prototypes and film yourself in action tossing clay!Chapter9willaddressallthisinmoredetail,butwhatisimportantnowisforyoutorigorouslyinvestigatefeasiblewaysforyoutogetthefundsyouneedtolaunchyourbusiness.Initialcapitalrequirementsofthissortcanbeguesstimatedfrombasicresearchandconsultationswithexperts,manufacturers,andsuppliers.Experiencealsosuggeststhatyoushouldincludeasignificantbufferforunexpectedexpenses.Ifyouconcludeyouridearequiresagreatdealofadditionalstartupcap-ital,youmayneedtofindinvestors.Doyouknowanyinvestors?Doyouhaveanetworkthatcanhelp you find investors?Chapter 5Feasibility Analysis and Opportunity Evaluation149© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
profit marginThe amount by whichrevenue from salesexceeds costs in abusiness. See alsogrossprofit,net profit.variable costsBusiness expenses thatchange with each unit ofproduction, for example,the cost of supplies, labor,and energy.fixed costThe expenses that mustbe paid by a companyregardless of businessactivity, for example, rentand insurance. See alsoeconomy of scale;variablecosts.Pricing, Margins, Affordability, andDemographicsWhenyoulookintothefeasibilityofaproduct,oneofthemostimportantthingstolookforisarealisticprofitmargin.Ifyoucannotsellyourproductformorethanitcostsyoutoproduceorprocure,thenyouarenotaddingvalue.Ifyouarenotaddingvalue,thenyoudon’thaveabusiness.Youmaydesigntheultimatetoothbrush,butifeachonecostsyou$200tomake,itwillhavetoretailfor$400ormore.Atthatprice,it’sunlikelyyou’llfindenoughbuyerstosupportyourbusi-ness.Toreduceprice,youmayhavetocutfeaturesorquality.Thisbalancebetweenfeatures,quality,andcostmustserveyourtargetcustomer.Somepeoplearewillingtopayexorbitantpricesforhautecoutureclothingandwouldn’tbuyfastfashionifitwerenearlyfree.Thatdoesn’tmeanthatZarahasn’tmadebillionsbyprovidingsuchclothingascheaplyaspossible.Yourdemograph-icswilldictatewhatpricesyoucansupportand,inturn,whatyourcostsmustbeinordertosupport workable margins.Itisessentialtoresearchtheportionsoftheindustryvaluechainthataredownstreamfromyourbusiness.Thatmeansyoumustunderstandwhoyouwillsellto,whotheysellto,andknowhowmanystepstherearebetweenyouandthefinalconsumer.Ifyou’reamanufacturerofarti-sanalpottery,youmightselldirectlytoconsumersatfairs,andthepriceyouchargeisboththecustomer’spriceandyourrevenue.Ontheotherhand,youmightselltoaninternationaldistrib-utorwhosellstoalocaldistributor,whosellstoretailers,whosellstocustomers.Inthiscase,todiscoverthevaluechain,youmightvisitaretailstorethatsellspotteryandaskthemanager,“I’mthinkingofsellingmypotteryinstoreslikeyours.Whodoyoubuyyourpotteryfrom?”Theywilllikelybehappytoputyouintouchwiththeirdistributor,who,iftheylikeyouandyourproduct,will explain the industry value chain to you.Eachorganizationbetweenproductproductionandthecustomeraddsvalue,andeachwillchargeforthatvalue.So,yourrevenuemaybealotlessthanthepricethecustomerpays.Forinstance,ifacustomerpays$100forapot,youarelikelytohavegottensomethinglike$20forthatsamepotfromtheinternationaldistributor.Theinternationaldistributormightsellthepottothelocaldistributorfor$35,whosellsittotheretailerfor$50.Sincemostretailstoreswantmarginsof50percentormore,meaningtheydoublethepriceofitemstheysell,yourpotnowcarriesapricetag of $100.Variable Costs, Controlling Unit Costs, COGS, and EOUVariablecostsarethecoststhatchangewitheachunitofproduction.Ifyourunahotdogcart,thenhotdogsandbunsarevariablecostsbecausethenumberofhotdogsandbunssoldwillchangedaytoday.Thecartitselfisafixedcost—itstaysthesameregardlessofhowmanyhotdogsyousell.Dealingwithyourvariablecostsmayrequiresomeoptimizationcalculationstofigureouttheidealbatchsizes.It’strickytofigureouthowmanyhotdogsyouaregoingtosell.Interestingly,hotdogstypicallycomeinpacksoftenandbunsinpacksofeight.So,fortyandeightyarenaturalinventory targets.150A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
economics of oneunitA systemic method ofanalyzing the cost andsales price of a product atthe unit level. Essentiallyanswering the question:“Can we sell this productor service for more than itcosts us to make orprovide?”cost of goods soldThe total cost to producea good or service to besold. See alsofixed costs,gross profit, net profit,profit margin, variablecosts.gross profitA company’s revenue afterdeducting the cost toproduce and deliver goodsor services. See alsonetprofit;profit margin.A hot dog vendor at work.Source: https://commons.wikimedia.org/wiki/File:Hot_Dog_Cart_(37004358434).jpgnet profitA company’s totalearnings, after all businessexpenses are deducted,over a specified period,often a year. See alsogross profit;profit margin.opportunity costThe potential benefit givenup when one choice ismade over another.Theeconomicsofoneunit(EOU)modelisatechniquetoanalyzeyourfinancialfeasibility.Thefirststepistodeterminewhatyourunitofsaleis.Forourhotdogcart,it’sonehotdog.Nowwewanttoknowwhatitcostsustomakeahotdogorwhatourcostofgoodssold(COGS)perunitis.TocalculateourCOGSperunit,weneedthecostofthehotdogandthebunalongwiththecondi-ments and the napkin. Let’s cost that out:Hot Dog Cost of Goods Sold per UnitHot Dog$0.70Bun$0.20Condiments$0.05Napkin$0.05COGSCOGS$$1.001.00So,ifwe’vedeterminedthatwecansellourhotdogstothepublicfor$2,arewemakingmoney?Onaper-unitlevel,YES!Wearemakingagrossprofitof$1perhotdog($2saleprice–$1COGS=$1).Thenextquestionis:Dowesellenoughhotdogs,profiting$1each,tocoverthecostofourcartandotherfixedcosts?Let’stakealookatwhatwethinkahotdogcartwouldcostpermonthtocover the cart lease, a city sidewalk vendor permit, and insurance.Monthly Costs for Hot Dog Cart BusinessCart Lease$200City Vendor Permit$50Insurance$50Fixed CostsFixed Costs$$300300So,howmanyhotdogsmustyouselleachmonthtobreakeven?Ifyousaid300hotdogspermonth,you’recorrect.At$1grossprofitperdog,youneedtosell300tocoverthefixedcostsof$300.Soundseasy,right?ButrealizethatleavesNOTHINGforyou.At300hotdogspermonth,youareonlycoveringcosts,notearninganynetprofit—moneyleftoveraftercoststhatyoucouldtakehome.Whatifyousold1,000hotdogspermonth?That’salot,andyou’dtakehome$700—nothingtowritehomeaboutforsure.YoumightaswelljustgetajobatMcDonald’sunlessyoucansellthousandsofhotdogseachmonth.Thehotdogcart is a pretty tough business.ThatchoicetotakethejobatMcDonald’sisarealoption,andifyoudon’tdoit,you’vegivenuptheopportunitytoearnsomemoney.Thateconomicconceptiscalledopportunitycost—thevalueofwhatyougiveupwhenyouchoosetodo something else.Ifyou’reamanufacturer,onewaytocontrolforthevariablecostsandreducetheneedforstor-inglargequantitiesofpartsistotrytoincorporateasmanyofthesamepartsintomultipleproducts.Usingthesamerivetinallofyourshoecollectionsorthesameprocessorsinallofyourdeviceswillallowyoutoreducetheinventoryneeded,whichinturnwillreducestoragecostsandmoney stuck in product.Chapter 5Feasibility Analysis and Opportunity Evaluation151© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Key Takeaways•Don’tstartabusinessthatisn’tgoingtomakeyoumoneyortakessomuchmoneyitwillnever recover the investment.•Know who your customers are.•Understand what your fixed costs are and if your profits can overcome them.•Honestlyconsiderwhatotherthingyoumightbedoinginsteadofinvestingtimeandmoneyinto this project.5.4Difficult Distribution ChannelsLearning Objectives1.Understand access barriers at the distribution level.2.Recognize that the Porter model applies to opportunity analysis.3.Recognize the challenge of overcoming consumer brand loyalty.Access BarriersAswesawinChapter3,whichcoveredcompetitiveadvantage,barrierstoentryofteninvolvepro-ductionchallengesandaccesstocustomersinretailmarkets.Therearetimeswhenyouknowthatyoucanmakeagreatproductattherightprice,butsimplygettingyourcreationintothehandsofconsumersisdifficult.Securingspaceonshelvesatsupermarketsissocompetitivethatnewbrandsoftenactuallypaythemarkettoputtheirproductsoutthere.Canyouthinkofanyotherpoints in the value chain where customer access is limited?Often,thiscustomeraccessbarrieriscreatedatthedistributionlevel.Imaginethatyoulovebeerandyouenjoymakingyourownmicrobrew.YourfriendstellyouthatyourIPAissogoodthatyoushouldsellit.Production,inlimitedquantities,isnoproblem,andyouknowyoucanmakeaprofit. This sounds like a pretty easy business to get into on a small scale, right?152A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
distribution systemHow a product or aservice is transferred fromits source to theconsumer, for example,internet download, directmail, or trucking from awholesale warehouse to aretail store. See alsovaluechain.prohibitionThe period between 1920and 1933 when theproduction, distribution,sale, and consumption ofalcohol was prevented bylaw in the United States.Itturnsoutthatbeerisanextremelydifficultindustryto“tap”intoduetoacomplicateddistributionsystem.IntheU.S.,anunusualsetofregulationsaroundthesaleofalcoholemergedafterprohibition(aperiodwhenalcoholproductionandconsumptionwasillegalintheUnitedStates),regulatingthesaleofalcohol.Firmsareonlyallowedtomanufacture,distribute,orsellbeer,butinmostcases,theymaynotengageinmorethanoneoftheseactivities.Thismeansifasmallcraftbreweryopensup,ithastogetadistributioncontractorelseitwillnotgetanysales.However,distributorswillonlyhandlebeersthatcustomershavedemanded.That’sfine,buthowcanacus-tomerknowtheywantsomethingifthedistributorisnotcarryingit?So,beerbecomesanunbreakableloopunlessthebrewer’ssalespeoplearetrulyamazingatconvincingdistributorstotakeriskstheydon’tneedto.So,forthebeerindustry,thedistributionchallengeisbiggerthantheproduct development or manufacturing challenge.Oneofthebestwaystoovercomethesebarriersistodevelopanduseyournetwork.Ifyou’regoingtobeinthebeerbusinessoranyother,youshouldcultivaterelationshipswithactorsinthatindustry.Therearemanyreasonstodothis,butforbeer,themajorreasonistogettheopportunityto pitch your product to the industry gatekeepers, the distributors.Market AttractivenessChapter3detailedtheuseofPorter’sFiveForcesmodeltodetermineifyoursmallbusinessorstartupcanenteranexistingmarketandoperateprofitably.Beforeenteringamarket,itiscriticaltounderstandtheseforcesofindustry:rivalry,supplierpowers,buyerpowers,threatsofnewentrants,andthreatsofsubstituteproducts.Conductingthisindustryanalysiscouldsaveyouthepainofenteringanawfulmarketorhelpyoudevelopastrategyforeffectivelydealingwiththebar-riers to entry.Nowyoumaywonderhowyouaresupposedtoanalyzeadenovomarket,onethatdoesnotyetexistorisjustemerging.Inthesecases,thedataaresparse.Youmayneedtorelyonyourgut,butanothergoodoptionistoconsiderinvestigatingsimilarindustries.Ifyouarecontemplat-ingleapingintothespacetourismbusiness,understandinghowthecommercialairlineindustryevolvedcouldprovidevaluableinsights.Ifyouarethinkingaboutenteringthewearablecomput-ingappspace,understandinghowtheearlysmartphoneandappmarketsfunctionedwilltellyoualotofthings—forinstance,thatfirst-moveradvantageintheappspaceiscriticalinordertogettheattentionofinfluentialearlyadopters.Withverylowbarrierstoentry,everyonemakesanappassoonastheybelievethemarketisreal.Afteracertainpoint,gainingcustomers’attentionbecomesnearlyimpossible.So,ifyouactuallybelievethatpeoplewillusesmartwatchesorclothes,moveearly!Overcoming Loyalty in Existing MarketsSomemarketshaveverystablebrandsthatcommandtremendousloyaltyfromtheirconsumers.Breakingintosuchmarketscanbenotoriouslydifficult.Sometimesloyaltyisbasedonthesuccessofaparticularproduct,butoftenitistheconsumer’sdeeperrespectforthefirmthatmakestheproductsuccessful.BrandslikeSony,Nike,BMW,HarleyDavidson,andLouisVuittonhavebuiltafollowing that transcends their individual products. We call such brands “iconic.”Consumerloyaltyismostoftenbasedsimplyonconservatismandthefactthatexistingprod-uctswork.Tryingsomethingnewisn’tworththeriskintimeandnegativeoutcomes.Peoplearenotoriouslybrandloyalinpersonalhygieneproductslikeshampoo,hairdye,andrazors.Theybuythesamethingsbecausereliabilitymattersalotintheirdailyroutine.Ifanewhairdyemightpotentiallyturntheuser’shairanunintendedshade,thehighcostofthatresultwilldampencon-sumers’ appetite for novelty.Chapter 5Feasibility Analysis and Opportunity Evaluation153© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
signalThe passive transmissionof information amongconsumers or within amarket.Personal grooming products enjoy strongcustomer loyalty.Source: © Shutterstock, Inc.Finally,insomemarkets,loyaltyisbasedonthewayabrandservesasasignalorasourceofsocialidentificationforitsconsumers.UsersofApplelaptopsbelievethatthefirm’ssleekalu-minummachinesconveythemessagethatthey,asusers,arehip,modern,andaheadofthetechnologycurve.SomedriversbuyMercedesBenzvehiclesbecausetheywishtoconveythemes-sagethattheyhave“madeit”asmuchastheyenjoytheactualcraftsmanshipoftheGerman-builtluxury car.Inthesmallbusinessworld,loyaltiescanbeverypersonal.PeopleeatatJoe’sDinerbecausetheyknowandloveJoe.He’sbeenbehindthecountersincetheywerekids,andheisaninstitutionintheircommunity.Suchpersonalaffectionisimmenselyhardtoovercome.Justtryingoutyournewplaceacrossthestreetmightmakethemfeelguilty.Goingtoyourcafécouldbeapersonalaffronttosomebody they see as family.Whenbrandscommandloyaltyforanyofthesereasons,itcanbeveryhardforanewfirmtobreakintothemarket.Youmustberealisticaboutthisbeforeyoudecidetoproceed,andifyoudoproceed,youmusthaveaplantodealwithit.Forinstance,theloyaltyinthemen’srazormarketkeptitstablydominatedforyearsbyahandfuloffirms—Gillette,Schick,andBic.Butthatdoesn’tmeanyoucanneverbreakintothesemarkets.Yousimplycan’tdoithalf-heartedly.Youhavetogotheextramiletogetpeople’sattentionandfindwaystobreakthedis-tributionbarriers.ThefoundersoftheDollarShaveClubgainedtractionwithafamouslyamusingvideodebutandastrategyofoutflankingtheU.S.retaildistributionbarrierbysellingdirecttocon-sumersontheinternet.Anotherrazorcompany,Harry’s,similarlyusedthedirect-to-consumerroute but focused on establishing differentiation via a higher-end experience.Key Takeaways•Understand the laws and structure of the market you are entering.•Use the Porter Five Forces model to see if you can find profits in your target market.•Understand how your potential customers relate to their existing brands.•Recognize your target customer’s loyalty to their current brand choice.5.5Does the Idea Really Fit theEntrepreneur?Learning Objectives1.Learn to analyze whether an opportunity suits the entrepreneur.2.Recognize the reality of the entrepreneur’s age as it relates to business opportunities.3.Consider again if your idea is ready for the market.4.Recognize that abandoning your idea may lead to a better one.154A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Business-Entrepreneur FitAcriticalfunctionofyourfeasibilityanalysisistoensurethatyourbusinessideafitsyouaswellasitfitsthemarket.Thistakesusbacktooursecondquestion:“Whyisyourteamthebestteamtodothis?”Ifyou’vecomeupwithabrilliantidea,butyouarenottherightpersontodoit,thenyoushouldprobablynotproceed.Ifyouaretherightone,thengoforit.Thisgoesbeyondthequestionofwhetheryoucanhiretherightteammembers.TheNewEntrepreneurialDynamicisallaboutrecruitingandoutsourcingthebestresourcestogetthejobdone,butitrequiresafundamentalbusiness-entrepreneurfit.If,astheleader,youarenotpassionateaboutyourbusiness,itwon’tsuc-ceed,nomatterhowwellqualifiedyourteamis.Toputitanotherway,youreallyshouldn’ttrytosell pet products if you don’t like animals.Thereisalsothequestionofwhetheryou’requalified,asyet,toleadanorganizationintoafield.WhileMarkCubandidrunabarbeforehewasoldenoughtolegallydrink,youprobablyshouldn’ttry to enter a field you aren’t qualified for or allowed to be in.Manyfields,suchasfinance,placeagreatemphasisoncredentials.Ifyouwanttostartabank,thenitwouldhelptohaveadegreeinfinanceandsomebankingexperience.Whiletherearealwaysexceptions—forexample,ElonMusk’syouthfuldeterminationtodisruptthebankingindustrywithhisX.com,andlaterPayPal,startups—itisrecommendedthatyouattackmarketsinwhichyouarelikelytosucceed.Thisisparticularlytruewhenyoureffortwillrequireoutsideinvestment.Youneedtolooklikeyou’regoingtosucceedbeforemostinvestorswillsupportyourefforts.Thatdoesn’tmeanbeingyoungisalwaysadisadvantage.Ifyou’re19andwanttotakeontheappgamingworld,investorsmayseeyouryouthandinexperienceasanadvantageinthatmarket.Infact,havingamatureandsuccessfulcareercansometimesactuallyinhibityourattractivenesstoinvestors.A50-year-oldlaunchingthatappgamecompanywouldprobablyneverbeabletosecurebackingbecauseshewouldbeperceivedaslessinnovativeandoutoftouchwiththecoreyouthgamingmarket.Moreimportantly,older,successfulentrepreneursareoftenviewedaslessdedi-cated.Theyprobablyhavesomemoneyandsomeincome,andtheyaren’thungry.Investorsmayassumeolderentrepreneurshavelessphysicalenergyandstamina,sotheywillbelesslikelytostayupallnightworkingontheproject.Theymayalsohavealotofotherobligationstomanage,includ-ing families and personal investments.Business Model Transformation: When YourFirst Idea IsnÕt Quite the ThingIntheend,thisprocessoffeasibilityanalysismayresultinawisedecisiontoabandonyouridea.That’sokay.Don’tpanic!Maybeyoujustfilethatoneawayforlater,whenyouhavetherightresources,andmoveon.Theprocessofanalysismightalsohelpyoudiscoveradifferentpath.Alotofgreatstartupsbegintheirjourneydownacertainpath,butwhenconfrontedwiththerealityofcustomersorproduction,discoverthattheymustpivottoadifferent,oftenrelated,ideatocapturea market.PayPal’sPeterThielwasactuallydiscussingreplacingtheU.S.dollarwithelectroniccurrencyyearsbeforeBitcoinandtheblockchainrevolution.RealityforcedhimtopivotandjoinforceswithElonMusktopursueamorerealisticandsmallernicheinthefinancialindustry—electronicpay-menttransfersforonlineauctions.Thatnicheturnedouttobeworthmorethan$3billionwhenPayPal was sold to eBay. Do such pivots occur in small businesses?AsmallbusinesscandothesamethingthatMuskandThieldid.Whileyoumightbedisap-pointedtodiscoverthatyourdreamofopeninganewcaféintownisdoomedbecauseofimmenseChapter 5Feasibility Analysis and Opportunity Evaluation155© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
customerloyaltytoJoe’sDiner,alunchtruckcouldstillbeawinner.Itmightturnoutthatbecausethelunchtruckbusinessisinherentlycheapandmobile,itisalsomorescalableandgeographicallyexpandable.Soonyou’reservingseveralnearbytownswithafleetoftrucksandreadytostartsell-ingfranchises.Thatopportunitywouldneverhavearisenifyou’dopenedatraditionaldineracrossfrom Joe!Doingasolidfeasibilityanalysisiscostlyandtime-consuming,butitisasmallinvestmentthatwillallowyoutoavoidideasthatreallyaren’tgoingtoworkbeforeyouinvestyourtimeandotherpeople’smoney.Withthatinformation,self-honesty,andyourcreativenature,thetoolsoftheNewEntrepreneurialDynamicwillallowyoutobuildabusinessmodelthatwillmakeyouwealthyandhappy.Factors That Shape FeasibilityListenListentotocustomers.customers.Youcanalwaystellacustomer—theyaretheoneswiththemoney—butyou can’t tell them much. Don’t tell them what they want; listen and hear about what they need.StartStartwithwithaasmallsmallcommitment,commitment,thentheniterateiterate..MinimizeyourriskandmaximizetheinformationyougatherbystartingwithanMVPandlearnfromthatexperiencebeforeyou“goallin”withyouridea.LetLetyouryourfinancialfinancialfailuresfailureshappenhappenininthethemodel.model.UseEOUandbuildamodelthatwillhelpyoudetermineifyouhavegrossprofits.Ifyoudo,canyouscaletothepointtoovercomefixedcosts?If not, don’t proceed.AnalyzeAnalyzeininreal-time.real-time.Thebusinessenvironmentisfartoodynamicformonthlyreports.Youneed to build a dashboard, maintain it, and listen to it.Key Takeaways•Be sure the opportunity fits your life and plans before proceeding.•Never be afraid to walk away from an idea or reboot your startup.156A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
5.6Case Study: 121C, Inc.ÑTheSkateboard MVPRyanOlliges,anaerospaceengineeringstudentattheUniversityofSouthernCalifornia,workedasthecompositesleadintheuniversity’sstudent-runRocketLab.Realizingthathislabthrewoutasignificantamountofaerospace-gradecarbonfibertrimscrap,hebegantoponderpotentialreusesfor the material as well as the bigger issue of carbon fiber disposal in the aerospace industry.Ryanmighthavedecidedtobuildacomplex,high-valueproductlikeacarbonfiberracingbicycle.Suchaproductwouldhavecapturedalotofrevenue.However,abicycleisarelativelycom-plexpieceofequipmentwithdozensofmovingpartsandhundredsofcomponents.Ryansettledontheskateboardbecausehelovedskatingandthenearlyflatdeckofaskateboardwaseasytoprocess.Further,theadditionalmaterialsrequiredtobuildacompleteskateboard—trucks,wheels,and bearings—were simple to obtain and integrate.Ryanbuiltacarbonfiberskateboardandbegantotakeitaroundcampustocollectfeedbackonthedesignfromstudentriders.Skaterslikedtheideaofanewstrongerandlightermaterialatareasonableprice.Theyalsolikedtheideaofaboardthatlookedentirelydifferentthantraditionalwooddecks.Ryanusedthisfeedbacktorefinehisdesign,movingawayfromatraditionalsurfboardstyle to a sleeker shape inspired by aircraft.Healsobegantotalktobusinessschoolprofessorsabouthisplantobuildacarbonfiberskate-boardbusiness.Hebroughttheboardtoaprofessorathisschool’sCenterforEntrepreneurialStudiesbecausehehadheardthattheprofessorwaswellconnectedinthespaceindustry.Thepro-fessorindeedknewseveralcompaniesthathadliterallytonsofthismaterialtodisposeof.HewasexcitedbytheopportunitytosolveanimportantenvironmentalproblemaswellasbythechancetomanufactureavarietyofcarbonfiberproductsintheU.S.atasignificantcostadvantage.Whilemanyotherproductswouldofferbiggermarkets,higherprices,andlargerprofitmargins,thepro-fessorfeltRyan’sskateboardwouldbetheperfectMVP.Theskateboardwouldbeagreatwaytodemonstrate the more significant concept of sustainably handling the material.Infact,theentrepreneurshipprofessorandafellowinstructorfromtheaccountingschooljoinedRyan’sfather,PaulOlliges,infundingthenewfirm.Ryannamedthecompany“121C”tocommemorateanimportantpersonalachievementinbuildingatooltoreachthattemperature,acriticalrequirementtocurethethermosetresininthecarbonfibercomposite.Withhisentrepre-neurshipprofessor’sintroductionsandassistance,Ryanwasabletosecuresupplycontractswithtwolocalspacecraftmanufacturersgeneratingcarbonfiberscrap.Athirdmajorcompanyalsoocca-sionallyprovidedmaterial.Afteraninitialattempttooutsourceproductionfailed,thefirmbroughtthe deck pressing operation in-house.Thefinalskateboarddesignwasdesignatedasthe“Aileron”andbecamethefirm’sfirstproduct.Itlaunchedthenextsummerwiththesupportofasuccessful$44,000Kickstartercampaign.Thefollowing year, 121C managed to generate more than $250,000 in skateboard sales with the Aileron.Chapter 5Feasibility Analysis and Opportunity Evaluation157© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Carbon fiber Rover skateboards.Source: Greg AutryAsecondskateboard,the“Rover,”waslaunchedthefollowingsummer,andthistimethefirmraised$102,000fromKickstarterbackers.Pauldesignedandbuiltanew,heavierdutypressfortheRoverthatallowedthemtopressmultipleboardsatatime.Moreimportantly,saleseventuallyexceededcosts,andthefirmreachedacashflowpositiveposition.Mostcritically,theMVPdemon-stratedtopotentialinvestorsandsuppliersthatthisstartupfirmcoulddeliveronitsbasicmodelofupcyclingindustrialwasteintoaprofitableconsumerproduct—somethingmuchbiggerandbet-ter-funded competitors had not achieved.BasedinlargepartonthesuccesswiththeMVP,the121Cteamwasabletoraisemorethan$1millioninprivatefundingtoexpandtheoperationandattracttheattentionoflargerangelinvestors.Todaythefirmmakesframesfordrones,cylindersforsnaredrums,andsheetsforhigh-endofficefurniture.Infact,RyanhasrenamedthefirmElevatedMaterialsandissellingofftheskateboard business in order focus on these higher volume products.Endnotes1.Zaltman,G.(2003).Howcustomersthink:Essentialinsightsintothemindof the market. Harvard Business Press.2.Blank,S.,&Dorf,B.(2012).Thestartupowner’smanual:Thestep-by-stepguide for building a great company.BookBaby.3.Teslamaintainsthattheirdatademonstratesthatvehiclesoperatingunderautopilot are safer per mile than cars driven by human beings.158A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
CHAPTER 6Product Design andDevelopment6.1Riding the Crest of InnovationHaveyoueverwantedtogosurfingbutcouldn’tfindabodyofwaterwithdecentwaves?Younolongerhaveaproblem:thePowerSkiJetboardmakesitsownwaves.Thisinnovativeproductcombinestheeaseofwaterskiingwiththeexcitementofsurfing.Ahigh-techsurfboardwithaforty-five-horsepower,forty-five-poundwatercraftengine,thePowerSkiJetboardhasthepowerofasmallmotorcycle.Experiencedsurfersuseittogettothetopofrisingoceanwaves,butifyou’rejustaweekendwater-sportsenthusiast,youcangetyouradrenalinegoingbyskimmingacrossthesurfaceofalocallakeatfortymilesanhour.Allyouhavetodoissubmergethetailoftheboard,slideacrossonyourbelly,andstandup(withthehelpofaflexiblepole).Toinnocentbystanders,you’ll look like a very fast water-skier without a boat.WheredoproductideaslikethePowerSkiJetboardcomefrom?Howdopeoplecreateproductsthatmeetcustomerneeds?Howareideasdevelopedandturnedintoactualproducts?Howdoyouforecastdemandforaproduct?Howdoyouprotectyourproductideas?Thesearesomeofthequestions that we’ll address in this chapter.View in the online readerPowerSki Jetboard High-Speed Chase Down the Colorado River© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
productSomething that can bemarketed to customersbecause it provides abenefit and satisfies aneed.FIGURE 6.1Holiday decorating kits haveextended Just Born’sproduct line beyond Peeps.Source: © 2010 JupiterimagesCorporation6.2What Is a Product?Learning Objectives1.Define “product.”2.Describethefourmajorcategoriesofproductdevelopments:new-to-the-market,new-to-the-company, improvement of existing product, and extension of product line.3.Contrast a calculated risk and an unnecessary risk.4.Indicate how entrepreneurial decision making can be improved.Basically,aproductissomethingthatcanbemarketedtocustomersbecauseitprovidesthemwithabenefitandsatisfiesaneed.Itcanbeaphysicalgood,suchasthePowerSkiJetboard,oraservice,suchasahaircutorataxiride.Thedistinctionbetweengoodsandservicesisn’talwaysclear-cut.Say,forexample,thatacompanyhiresaprofessionaltoprovideanin-houseexecutivetrainingpro-gramon“netiquette”(internetetiquette).Offthetopofourheads,mostofuswouldsaythatthecompanyisbuyingaservice.Whatiftheprogramisofferedonline?We’dprobablystillarguethattheproductisaservice.ButwhatifthecompanybuystrainingmaterialsthatthetrainerfurnishesonDVD?Isthecustomerstillbuyingaservice?Probablynot:we’dhavetosaythatwhenitbuystheDVD, the company is buying a tangible good.Inthiscase,theproductthatsatisfiesthecustomer’sneedhasbothatangiblecomponent(thetrainingmaterialsonDVD)andanintangiblecomponent(theeducationalactivitiesperformedbytheseller).Notsurprisingly,manyproductshavebothtangibleandintangiblecomponents.If,forexample,youbuyanApplecomputer,yougetnotonlythecomputer(atangiblegood)butcertainpromisestoansweranytechnicalquestionsthatyoumighthaveandcertainguaranteestofixyourcomputer if it breaks within a specified time period (intangible services).Types of Product DevelopmentsNewproductdevelopmentscanbegroupedintofourmajorcategories:new-to-the-company,improvement of existing product, extension of product line, and new-to-the-market.Forexamplesofthefirstthreetypesofnewproductdevelopments,we’lltakealookatJustBorn.Thecompanyisknownforitsfamous“MarshmallowPeeps,”andconsequentlyitsmanage-mentisveryinterestedinmarshmallows.Itconductedresearchthatrevealedthatfamiliesusemarshmallowsinlotsofways,includingcraftsanddecorating.ThisledJustBorntodevelopanEasterdecoratingkitthatusedPeepsmarshmallows.ItwassuchahitthatthecompanyfollowedbycreatingdecoratingkitsforHalloweenandtheChristmasseason.Becausesimilarproductsaremadebyothercompanies,thedecoratingkitsarenot“newtothemarket”butare“newtothecom-pany.”Now,let’slookatanotherproductdevelopmentinvolvingJustBorn’salsofamousMike&Ike’scandies.ThemarketingpeopleatJustBorndiscoveredthatteenagersprefertobuycandiesthatcomeinpouches(whichfitintotheirpantspockets)ratherthaninsmallboxes.Inresponse,thecompanyreducedthepiecesize,addedsomenewingredients,andputtheMike&Ike’sinpouches.This“improvementinanexistingproduct”resultedina20percentannualsalesjumpforMike&Ike’s.OurlastlookatJustBorndemonstratesanapproachusedbythecompanyto“extenditsexistingproductline.”Mostofuslikechocolateandmostofusalsolikemarshmallow,sohowaboutputtingthemtogether?ThisisjustwhatJustBorndid—thecompanyextendeditsPeepsproductlinetoinclude“Peepsinachocolateegg.”Consumerslovedthecombination,anditssuc-160A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
cesspromptedthecompanytoextenditsproductlineagainandlaunchachocolatecrispyversionfor Easter.New-to-the-Market ProductsThePowerSkiJetboardisa“new-to-the-marketproduct.”Beforeitwasinvented,nocomparableproductexisted.Launchinganew-to-the-marketproductisveryrisky,andonlyabout10percentofproductscreatedfallintothiscategory.Onapositivenote,introducinganewproducttothemar-ket can be very profitable, because the product often enjoys a temporary monopolistic position.Entrepreneurial Start-UpsInventorsofnew-to-the-marketproductsoftenformentrepreneurialstart-upstorefinetheirprod-uctideaandbringittomarket.ThiswasthepathtakenbyBobMontgomery,inventorofthePow-erSkiJetboard.Asistypicalofentrepreneurialstart-ups,thecompanythatMontgomeryfoundedhas these characteristics:[1]•It’scharacterizedbyinnovativeproductsand/orpractices.BeforethePowerSkiJetboardwasinvented, no comparable product existed.•Itsgoalsincludeprofitabilityandgrowth.BecausethepatentedJetboardenjoysatemporarymonopolistic position, PowerSki potentially could be very profitable.•Itfocusesonnewopportunities.BobMontgomerydreamedofcreatingthefirstmotorizedsurf-board.Thisdreambeganwhenheandafewofhissurferfriends(allaroundagetwelve)missedawavebecauseitwastoofardownthebeachforthemtocatch.Heimaginedthatifhehadbeenonamotorizedsurfboard(insteadofanordinaryonethatyouhadtopaddle),hewouldhavebeenabletocatchthatwave.Hisdreambecamethemissionofhiscompany:“PowerSkiInternationalCorp.wasfoundedtodeliverthepatentedPowerSkiJetboard,theworld’sonlymotorizedsurfboard,anditsenginetechnologytotheworldmarket.It’sPowerSki’sgoaltobringtheexperienceofsurfingtoeveryoneonlakes,rivers,seas,andtheocean.‘Nowevery-body has an ocean, and can ride an endless wave.’”[2]•Itsownersarewillingtotakerisks.Anybodywhostartsanybusinessistakingariskofsomekind.Thekeytoentrepreneurialriskisrelatedtotheideaofinnovation:asWoodyAllenonceputit,“Ifyou’renotfailingeverynowandagain,it’sasignyou’renotdoinganythingveryinno-vative.”[3]How to Take a Calculated RiskAsMontgomerylearned,theintroductionofaninnovativeproducttothemarketismoreunpre-dictable,andthusmorerisky,thantheintroductionofamarket-testedproduct.Startingupastoretosellanimprovedversionofanexistingsurfboardentailsonelevelofrisk;startingupabusi-nesstomarketthefirstmotorizedsurfboardentailsquiteanother.Eventhoughtheintroductionofnew-to-the-marketproductsaremorerisky,someofthisriskcanbeavoided.Whatif,forexam-ple,MontgomeryhadbroughttheJetboardtomarketonlytodiscoverthatmanyofthebuyersinhistargetmarket—water-sportsenthusiasts—couldn’teasilymaneuvertheJetboard?Wecouldthensaythathetookanunnecessarilyriskystepinbringinghisproducttomarket,butwecouldalsosaythathesimplyattemptedtomarkethisproductwithoutadequateinformation.SurelyalittleresearchwouldhavealertedMontgomerytotheprobableconsequencesofhisdecisiontogoto market when he did and with his product in its current state of development.Chapter 6Product Design and Development161© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
FIGURE 6.2Taking a “risk” is risky, buttaking a “calculated risk” canbe a good business move.Source: Sohel Parvez Haque/Shutterstock.comAcoupleoffinalwords,therefore,aboutintroducinganentirelynewproducttothemarket.First,thistypeofproductintroductionisaboutcarefullycalculatedrisks,notunnecessaryrisks.Second,thoughlittleiscertainintheentrepreneurialworld,mostdecisionmakingcanbeimprovedwith input from one or both of two sources:1.Information gathered from research2.Knowledge gained from personal experienceAgain,youcan’tbecertainaboutanyresults,butrememberthatuncertaintyreflectsmerelythelackofcompleteknowledgeorinformation;thus,themoreknowledgeandinformationthatyoucanbringtoasituation,thelessuncertain—andthelessrisky—thedecisionbecomes.[4]Inshort,alwaysdoyourhomework,andifyou’renewtoentrepreneurshiportoyourmarket,makeita point to work with people who know from experience what they’re talking about.Key Takeaways•Aproductissomethingthatcanbemarketedtocustomersbecauseitprovidesthemwithabenefit and satisfies a need. Products can be goods or services or a combination of both.•A“new-to-the-companyproduct”isagoodoraservicethatisnewtothecompanybuthasbeensoldbyacompetitorinthepast—forexample,PeepsmarshmallowEasterdecoratingkits.•An“improvementinanexistingproduct”isanenhancementofaproductalreadyonthemar-ket—for example, a change of ingredients and packaging for Mike & Ike’s.•An“extensiontoanexistingproductline”isanewproductdevelopedasavariationofanalready existing product—for example, Peeps chocolate eggs.•A“new-to-the-marketproduct”isagoodoraservicethathasnotbeenavailabletocon-sumers or manufacturers in the past—for example, the PowerSki Jetboard.•Four characteristics of the entrepreneurial start-up are:•It’s characterized by innovative products and/or practices.•Its goals include profitability and growth.•It focuses on new opportunities.•Its owners are willing to take risks.•Entrepreneurshipisaboutcarefullycalculatedrisks,notunnecessaryrisks.Mostentrepre-neurial decision making can be improved with input from one or both of two sources:•Information gathered from research•Knowledge gained from personal experienceBeforegoingtothenextsectionofthischapter,takeafewminutestotakeanonlinequizinordertotestyourknowledgeofthematerialcoveredinthissection.Quizzescanbefoundunderthe“Quiz” tab at the bottom of the online reader.Exercise1.Identifyagoodoraserviceforeachofthefollowingproductdevelopmentcategories:new-to-the-market,new-to-the-company,improvementofexistingproduct,andextensionofproductline.Tocomeupwiththeproducts,youmightvisitagrocerystoreoramall.Don’tuse the Just Born examples presented in the chapter.162A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
FIGURE 6.3Keep looking—maybesomeday you will come upwith a “purple cow” idea.Source: © Shutterstock, Inc.6.3Where Do Product Ideas ComeFrom?Learning Objectives1.Explain where product ideas come from.2.Identify the approaches used by firms to seek product ideas.Forsomepeople,comingupwithagreatproductideaisagratifyingadventure.Formost,however,it’sadauntingtask.Thekeytocomingupwithaproductideaisidentifyingsomethingthatcus-tomerswant—or,perhapsmoreimportant,fillinganunmetcustomerneed.Incomingupwithaproductidea,asknot“whatdoIwanttosell?”butrather“whatdoesthecustomerwanttobuy?”[5]Withthispieceofadviceinmind,let’sgetbacktothetaskofcomingupwithaproductidea.NobelPrize–winningchemistLinusPaulingsuggestedthat“thebestwaytohaveagoodideaistohavelotsofideas,”andthoughthisnotionmightseemalittlewhimsicalatfirst,itactuallymakesalotofsense,especiallyifyou’retryingtobeinnovativeintheentrepreneurialsense.Everyyear,forexam-ple,companieslaunchabout30,000newfood,beverage,andbeautyproducts,andupto90percentfail within a year.[6]You might need ten good ideas just to have one that stands a chance.Purple Cow IdeasSowheredotheseideascomefrom?Productideascanoriginatefromalmostanywhere.Howmanytimeshaveyoulookedataproductthatjusthitthemarketandsaid,“Icouldhavethoughtofthat”?Justaboutanybodycancomeupwithaproductidea;basically,youjustneedalittleimagination.Successismorelikelytoresultfromatrulyremarkableproduct—somethingthatgrabstheatten-tionofconsumers.EntrepreneurandmarketingconsultantSethGodinreferstotrulyremarkableproductsas“purplecows.”[7]Hecameupwiththetermwhiledrivingthroughthecountrysideoneday.Ashedrovealong,hisinterestwasattractedbythehundredsofcowsdottingthecountryside.Afterawhile,however,hestartedtoignorethecowsbecauselookingatthemhadbecometedious.Foronething,theywereallbrown,anditoccurredtohimthataglimpseofapurplecowwouldbeworthwritinghomeabout.Peoplewouldrememberapurplecow.Infact,theymightevenwantone.Whothinksup“purplecow”ideas?Wheredothetrulyremarkablebusinessideascomefrom?Aswepointedoutinanearlierchapter,entrepreneursandsmall-businessownersarearichsourceofnewproductideas(accordingtotheSmallBusinessAdministration,55percentofallnewprod-uctinnovationscomefromsmallbusinesses).TakeDeanKamen,inventoroftheSegwayHumanTransporter,abattery-operatedvehiclethatrespondstotherider’smovements:leanforward,andyoucangostraightaheadat12.5milesperhour;tostop,justtiltbackward.Thisrevolutionaryprod-uctisonlyoneofKamen’smanyremarkablebusinessideas.Heinventedhisfirstproduct—awearableinfusionpumpforadministeringchemotherapyandotherdrugs—whilehewasstillacol-lege undergraduate.[8]JacobDunnackalsogotanearlyentrepreneurialstart.Atagesix,Jacobbecamefrustratedonedaywhenhetookhisbaseballbattohisgrandmother’shousebutforgottotakesomebaseballsaswell.Hissolution?Ahollowbaseballbatthatholdsbaseballs.Dunnack’sinvention,nowcalledtheJDBatball,wasquicklydevelopedandsoldinsomeofthebiggesttoystores.But,thereisaninspir-ingstorythatgoesalongwithJacob’sgreatbusinessidea.JacobwasbornwithararecongenitalChapter 6Product Design and Development163© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
FIGURE 6.4Have you ever thought of agreat product idea? Did youconsider selling the idea to acompany? To sell your idea,you will need to make apresentation to an interestedcompany. But first, protectyour idea by applying for apatent.Source: gst/Shutterstock.comdiseasethatrequiredaseriesofoperations.Oneoperation,atelevenmonthsold,causedastroke.Doctorswerenotoptimisticandfearedhewouldbeblind,paralyzed,andpermanentlydisabled.ButabraveanddeterminedJacobdefiedtheoddsbynotonlyseeingbutalsowalking.And—youguessedit—playingbaseball,eventhoughthestrokehadresultedinJacob’slosingtheuseofhisrighthand.Withouttheuseofhishand,hecouldnotcarryboththebatandballs.So,hisinventionwasdesignedtohelphim.But,atthesametime,ithelpedotherbaseball-playingkidskeeptheirbatand balls together.[9]Whydosomanyentrepreneursandsmallbusinesspeoplecomeupwithsomanypurplecows?Foronething,entrepreneursareoftencreativepeople.Moreover,they’reoftenwillingtotakerisks.ThisiscertainlytrueofBobMontgomery,inventorofthePowerSkiJetboard(whichundoubtedlyqualifiesasapurplecow).Withmorethantwentyyears’experienceinthewater-sportsindustryandconsiderableknowledgeofthepersonal-watercraftmarket,Montgomeryfinallydecidedtofol-lowhislong-cherisheddreamofcreatinganentirelynewandconceptuallydifferentproduct—onethatwouldofferuserseaseofoperation,highperformance,speed,andquality.Hiscreativeeffortshave earned him the prestigiousPopular Science“Best of What’s New” award.[10]Toremaincompetitive,mediumandlargeorganizationsalikemustalsoidentifyproductdevel-opmentopportunities.Manycompaniesactivelysolicitproductideasfrompeopleinsidetheorganization,includingmarketing,sales,research,andmanufacturingpersonnel,andsomeevenestablishinternal“entrepreneurial”units.Othersseekproductideasfromoutsidetheorganizationbytalkingtocustomersandpayingattentiontowhatthecompetitionisdoing.Inadditiontolook-ingoutfornewproductideas,mostcompaniesconstantlyseekoutwaystomakeincrementalimprovements in existing products by adding features that will broaden their consumer appeal.Anovelapproachtogeneratingnew-to-the-worldproductideasishiring“creativity”consul-tants.OneofthebestisDougHall,who’sbeencalled“America’sNumber1IdeaGuru.”AtaCincinnatiideafactorycalledEureka!Ranch,Hallandothermembersofhisconsultingfirmspe-cializeinhelpingcorporateexecutivesgettheircreativejuicesflowing.[11]Hall’sjobisgettingpeopletoinventproductsthatmakearealdifferencetoconsumers,andhisstrategiesaredesignedtohelpcorporateclientsbecomemoreinnovative—tojump-starttheirbrains.Eureka!Ranch’sextensiveclientlistincludesDisney,Kellogg,Johnson&Johnson,Procter&Gamble,Coca-Cola,andNikeaswellasanumberofbuddingentrepreneurs.HallboaststhattheaveragehomeuseseighteengoodsorservicesthattheRanchhelpedshape,andifhe’sright,youyourselfhaveprobablybenefitedfrom one of the company’s idea-generating sessions.[12]Key Takeaways•Themajorityofproductideascomefromentrepreneursandsmall-businessowners,thoughmediumandlargeorganizationsalsomustidentifyproduct-developmentopportunitiesinorder to remain competitive.•Firmsseekproductideasfrompeopleinsidetheorganization,includingthoseinmarketing,sales,research,andmanufacturing,aswellasfromcustomersandothersoutsidetheorga-nization.Beforegoingtothenextsectionofthischapter,takeafewminutestotakeanonlinequizinordertotestyourknowledgeofthematerialcoveredinthissection.Quizzescanbefoundunderthe“Quiz” tab at the bottom of the online reader.164A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
FIGURE 6.5There might be many creativeways for Bic to extend itsproduct lines, aside from thedisposable underwear idea.Can you think of a productidea that might be moresuccessful for Bic?Source: © 2010 JupiterimagesCorporationExercise1.The“StrangeNewProducts”websitebragsthatitdisplaysthe“weirdest,funniest,stupidest,and[most]ingeniousnewproductsenteringthemarketplace.”Thisseemstobeanaccuratestatement.Visitthefollowingsite:http://removeandreplace.com/2013/05/28/ridiculous-products-stupid-strange-funny-and-weird-things-you-can-actually-buy/.Reviewtheproductsin“Ridiculousproducts—funnyandstrangethingsyoucanactuallybuy”and do the following:a.Pick your favorite new product.b.Describe the idea.c.Explain how the product works.d.Indicate whether you believe the product fills an unmet need. Explain why or why not.e.Ratetheproduct’slikelihoodofsuccessonascalefrom1(extremelyunlikely)to10(verylikely). Explain your rating.6.4Identifying Business OpportunitiesLearning Objectives1.Explain how an idea turns into a business opportunity.2.Describe the four types of utility provided by a product: time, place, ownership, and form.Anideaturnsintoabusinessopportunitywhenithascommercialpotential—whenyoucanmakemoneybysellingtheproduct.Butneedlesstosay,notallideasgeneratebusinessopportuni-ties. Consider these products that made the list of the “Top 25 Biggest Product Flops of All Time”:[13]•Bicunderwear.WhenyouthinkofBic,youthinkofinexpensivepens,disposablerazors,andlighters.Butdisposableunderwear?Womendidn’tfindtheideaofbuyingintimateattirefroma pen manufacturer appealing, and the disposability factor was just plain weird.•Harley-Davidsonperfume.EvenitsloyalfansfoundtheideaofHarley-Davidsonperfumepeculiar(andtheyweren’tterriblyfondoftheHarley-Davidsonaftershave,either).Perhapsthey were afraid they would end up smelling like a motorcycle.•Bottledwaterforpets.OK,sopeoplelovetheirpetsandcatertothem,butdoesitreallymakesensetoserveThirstyCat!andThirstyDog!bottledwatertoyourfour-leggedfriends?EventhoughthewatercameintantalizingflavorssuchasTangyFishandCrispyBeef,itnevercaught on. Do you wonder why?•Colgatekitchenentrees.Colgate’sentranceintofoodproductswasn’twellreceived.MaybethecompanybelievedcustomerswouldbuyintotheideaofeatingoneofitspreparedmealsandthenbrushingtheirteethwithColgatetoothpaste.Formostofus,thenameColgatedoesn’tget our taste buds tingling.Chapter 6Product Design and Development165© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
UtilityRemember:beinginbusinessisnotaboutyou—it’saboutthecustomer.Successfulbusinesspeopledon’taskthemselves“WhatdoIwanttosell?”butrather“Whatdoesthecustomerwanttobuy?”Customersbuyproductstofillunmetneedsandbecausetheyexpecttoderivesomevalueorutilityfromthem.Peopledon’tbuyAlka-Seltzerbecausetheylikethetasteorevenbecausethepriceisright:theybuyitbecauseitmakestheirindigestiongoaway.Theydon’tshopatAmazon.combecausethewebsiteisentertaining:theyshoptherebecausetheywanttheirpurchasesdeliveredquickly.TherealizationthatthiskindofservicewouldmeetcustomerneedsmadeAmazon.comagenuine business opportunity.Products provide customers with four types of utility or benefit:1.Timeutility.Thevaluetoaconsumerofhavingagoodoraserviceavailableataconvenienttime.Aconcessionairesellingbottledwateratasummerconcertismakingliquidrefreshmentavailable when it’s needed.2.Placeutility.Thevaluetoaconsumerofhavingaproductavailableinaconvenientlocation.Astreetvendorsellinghotdogsoutsideanofficebuildingismakingfastfoodavailablewhereit’sneeded.3.Ownershiputility.Valuecreatedbytransferringaproduct’sownership.Arealestateagenthelpingayoungcouplebuyahomeistransferringownershipfromsomeonewhodoesn’tneedit to someone who does.4.Formutility.Thevaluetoconsumersfromchangingthecompositionofaproduct.Acompanythatmakesapparelisturningrawmaterial(fabric)intoaform(clothing)thatpeopleneed.Acompanythatproducesliquiddetergent,ratherthanpowdereddetergent,isaddingformutil-ity for some consumers.Howcanyoudecidewhetheranideaprovidesutilityandhasthepotentialtobecomeabusi-nessopportunity?YoushouldstartbyaskingyourselfthequestionsinFigure6.6:ifyoucan’tcomeupwithgoodanswerstothesequestions,youprobablydon’thaveahighlypromisingproduct.Ontheotherhand,ifyouconcludethatyouhaveapotentialproductforwhichpeoplewouldpaymoney,you’rereadytotakethenextstep:analyzethemarkettoseewhetheryoushouldgoforwardwith the development of the product.FIGURE 6.6When Is an Idea a Business Opportunity?166A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Key Takeaways•Anideaturnsintoabusinessopportunitywhenithascommercialpotential—whenyoucanmake money by selling the product.•Time utility provides value by having a product available at a convenient time.•Place utility provides value by having a product available in a convenient location.•Ownership utility provides value by transferring a product’s ownership.•Form utility provides value by changing the composition of a product.Beforegoingtothenextsectionofthischapter,takeafewminutestotakeanonlinequizinordertotestyourknowledgeofthematerialcoveredinthissection.Quizzescanbefoundunderthe“Quiz” tab at the bottom of the online reader.Exercise1.Providetwoexamplesofeachofthefourtypesofutility:time,place,ownership,andform.Don’t use the examples given in the book.6.5Understand Your IndustryLearning Objectives1.Define an “industry.”2.Explain how to research an industry.3.Define and give an example of a “niche market.”Beforeyouinvestalotoftimeandmoneytodevelopanewproduct,youneedtounderstandtheindustryinwhichit’sgoingtobesold.AsinventorofthePowerSkiJetboard,BobMontgomeryhadtheadvantageofbeingquitefamiliarwiththeindustrythatheproposedtoenter.Withmorethantwentyyears’experienceinthewater-sportsandpersonal-watercraftindustry,hefeltathomeinthisbusinessenvironment.Heknewwhohispotentialcustomerswere,andheknewwhohiscom-petitorswere.Hehadexperienceinmarketingsimilarproducts,andhewasfamiliarwithindustryregulations.Mostpeopledon’thavethesameheadstartasMontgomery.So,howdoestheaveragewould-bebusinesspersonlearnaboutanindustry?Whatshouldyouwanttoknowaboutit?Let’stacklethe first question first.Chapter 6Product Design and Development167© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
industryGroup of businesses thatcompete with one anotherto market products thatare the same or similar.marketGroup of buyers orpotential buyers who sharea common need that canbe met by a certainproduct.market segmentGroup of potentialcustomers with commoncharacteristics thatinfluence their buyingdecisions.nicheNarrowly defined group ofpotential customers with afairly specific set of needs.Evaluating Your IndustryBeforeyoucanstudyanindustry,youneedtoknowwhatindustrytostudy.Anindustryisagroupofrelatedbusinesses:theydosimilarthingsandtheycompetewitheachother.Inthefootwearindustry,forexample,firmsmakefootwear,sellit,orboth.PlayersintheindustryincludeNikeandAdidas,bothofwhichspecializeinathleticfootwear;buttheindustryisalsosprinkledwithcom-panieslikeCandies(whichsellsyoungwomen’sfashionfootwear)andFlorsheim(qualitymen’sdress shoes).Let’ssaythatyouwanttoknowsomethingaboutthefootwearindustrybecauseyourpoten-tialpurplecowisalineofjoggingshoesdesignedspecificallyforolderpeople(thoseoversixty-five)wholiveintheSoutheast.You’dcertainlyneedabroadunderstandingofthefootwearindustry,butwouldgeneralknowledgebeenough?Wouldn’tyoufeelmorecomfortableaboutpursuingyourideaifyoucouldfocusonasmallersegmentoftheindustry—namely,thesegmentthatspecial-izesinproductssimilartotheoneyouplantosell?Here’samethodthatwillhelpyounarrowyourfocus.[14]Segmenting Your MarketBeginwiththeoverallindustry—inthiscase,thefootwearindustry.Withinthisindustry,thereareseveralgroupsofcustomers,eachofwhichisamarket.You’reinterestedintheconsumermar-ket—retailcustomers.Butthis,too,isafairlybroadmarket;itincludeseverybodywhobuysshoesatretail.Yournextstep,then,istosubdividethismarketintosmallermarketsegments—groupsofpotentialcustomerswithcommoncharacteristicsthatinfluencetheirbuyingdecisions.Youcanuseavarietyofstandardcharacteristics,includingdemographics(age,sex,income),geography(region,climate,citysize),andpsychographics(lifestyle,activities,interests).Thesegmentyou’reinterestedinconsistsofolderpeople(ademographicvariable)livingintheSoutheast(ageographicvariable)whojog(apsychographicvariable).Withinthismarketsegment,youmightwanttosub-dividefurtherandfindaniche—anunmetneed.Yournichemightturnouttobeprovidinghigh-quality jogging shoes to active adults living in retirement communities in Florida.Thegoalofthisprocessistoidentifyprogressivelynarrowersectorsofagivenindustry.Youneedtobecomefamiliarwiththewholeindustry—notonlywiththefootwearindustrybutalsowiththeretailmarketforjoggingshoesdesignedforolderpeople.Youalsoneedtounderstandyour niche market, which consists of older people who live active lives in Florida.168A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
FIGURE 6.7Let’s go through anothersegmenting-your-marketexample: industry(computer); market (thoseinterested in buying a laptop);market segment (collegestudents interested in buyinga hybrid laptop/tabletcomputer); niche (collegestudents who want and canafford a high-quality,expensive hybrid laptop/tablet with high-speedgaming capabilities).Source: © Shutterstock, Inc.Nowthatweknowsomethingabouttheprocessoffocusinginonanindustry,let’slookatanotherexample.Supposethatyourproductideaisofferingdedicatedcruisesforcollegestudents.You’dbeginbylookingattherecreational-activitiesindustry.Yourmarketwouldbepeoplewhotravelforleisure,andwithinthatmarket,you’dfocusonthemarketsegmentconsistingofpeoplewho take cruises. Yournichewould be college students who want to take cruises.Market Segmentation and Selected VariablesTakeamomenttocompleteanonlineexercisethatreinforcesyourunderstandingofsegmenta-tion variables.Assessing Your CompetitionNowthatyou’veidentifiedyourindustryanditsvarioussectors,you’rereadytoconsidersuchques-tions as the following:[15]•Is the industry growing or contracting? Are sales revenues increasing or decreasing?•Whoareyourmajorcompetitors?Howdoesyourproductdifferfromthoseofyourcompeti-tors?•What opportunities exist in the industry? What threats?•Has the industry undergone recent changes? Where is it headed?•How important is technology to the industry? Has it brought about changes?•Is the industry mature, or are new companies successfully entering it?•Do companies in the industry make reasonable profits?Chapter 6Product Design and Development169© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
FIGURE 6.8You don’t have to spy onyour competitors usingbinoculars, but you do needto understand your industryand know who your majorcompetitors are.Source: F8 studio/Shutterstock.comWheredoyoufindanswerstoquestionssuchasthese?Agoodplacetostartisbystudyingyourcompetitors:Whoaretheircustomers?Whatproductsdotheysell?Howdotheypricetheirproducts?Howdotheymarketthem?Howdotheytreattheircustomers?Dotheyseemtobeoper-atingsuccessfully?Observetheiroperationsandbuytheirgoodsandservices.Searchforpublishedinformationonyourcompetitorsandtheindustry.Forexample,there’sagreatdealofinformationaboutcompaniesontheInternet,particularlyincompanywebsites.TheInternetisalsoagoodsourceofindustryinformation.Lookforthesitepostedbytheindustrytradeassociation.Findoutwhetheritpublishesamagazineorothermaterials.Talkwithpeopleintheindustry—businessowners,managers,andsuppliers.Thesepeopleareusuallyexperts.Andtalkwithcustomers.Whatdotheylikeordislikeabouttheproductsthatarecurrentlyavailable?Whatbenefitsaretheylook-ing for? What benefits are they getting?Key Takeaways•Beforedevelopinganewproduct,youneedtounderstandtheindustryinwhichitwillbesold.•Anindustryisagroupofrelatedbusinessesthatdosimilarthingsandcompetewitheachother.•Toresearchanindustry,youbeginbystudyingtheoverallindustryandthenprogressivelynarrowyoursearchbylookingatsmallersectorsoftheindustry,includingmarkets(orgroupsofcustomers)andmarketsegments(smallergroupsofcustomerswithcommoncharacter-istics that influence their buying decisions).•Withinamarketsegment,youmightwanttosubdividefurthertoisolateaniche,orunmetneed.Beforegoingtothenextsectionofthischapter,takeafewminutestotakeanonlinequizinordertotestyourknowledgeofthematerialcoveredinthissection.Quizzescanbefoundunderthe“Quiz” tab at the bottom of the online reader.Exercise1.Tointroduceasuccessfulnewservice,youshouldunderstandtheindustryinwhichyou’llbeofferingtheservice.Selectaservicebusinessthatyou’dliketorunandexplainwhatinfor-mation you’d collect on its industry. How would you find it?6.6Forecasting DemandLearning Objective1.Forecast demand for a product.Itgoeswithoutsaying,butwithoutenoughcustomersyourbusinesswillgonowhere.So,beforeyoudelveintothecomplex,expensiveworldofdevelopingandmarketinganewproduct,askyour-selfquestionslikethoseinFigure6.9.WhenBobMontgomeryaskedhimselfthesequestions,he170A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
concludedthathehadtwogroupsofcustomersforthePowerSkiJetboard:(1)thedealershipsthatwouldselltheproductand(2)thewater-sportsenthusiastswhowouldbuyanduseit.Hisjob,therefore,wastodesignaproductthatdealerswouldwanttosellandenthusiastswouldbuy.Whenhewasconfidentthathecouldsatisfythesecriteria,hemovedforwardwithhisplanstodevelopthe PowerSki Jetboard.FIGURE 6.9When to Develop and Market a New ProductAfteryou’veidentifiedagroupofpotentialcustomers,yournextstepisfindingoutasmuchasyoucanaboutwhattheythinkofyourproductidea.Remember:Becauseyourultimategoalistorolloutaproductthatsatisfiescustomerneeds,youneedtoknowaheadoftimewhatyourpoten-tial customers want. Precisely what are their unmet needs? Ask them questions such as these:[16]•What do you like about this product idea? What don’t you like?•What improvements would you make?•What benefits would you get from it?•Would you buy it? Why, or why not?•What would it take for you to buy it?Beforemakingasubstantialinvestmentinthedevelopmentofaproduct,youneedtoaskyourselfyetanotherquestion:arethereenoughcustomerswillingtobuymyproductatapricethatwillallowmetomakeaprofit?Answeringthisquestionmeansperformingoneofthehardesttasksinbusiness:forecastingdemandforyourproposedproduct.Thereareseveralpossibleapproaches to this task that can be used alone or in combination.People in Similar BusinessesThoughsomebusinesspeoplearereluctanttoshareproprietaryinformation,suchassalesvolume,othersarewillingtohelpoutindividualsstartingnewbusinessesorlaunchingnewproducts.Talk-ingtopeopleinyourprospectiveindustry(oronethat’ssimilar)canbeespeciallyhelpfulifyourproposedproductisaservice.Say,forexample,thatyouplantoopenapizzaparlorwithanoldcar-toonstheme:customerswillbeabletoeatpizzawhilewatchingrerunsoftheirfavoritecartoonsonportableDVDplayers.Ifyouvisitedafewlocalrestaurantsandaskedownershowmanycus-tomerstheyservedeveryday,you’dprobablylearnenoughtoestimatethenumberofpizzasthatyou’dserveduringyourfirstyear.Iftheownersweren’tcooperative,youcouldjusthangoutandmake an informal count of the customers.Chapter 6Product Design and Development171© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
market shareCompany’s portion of themarket that it has targeted.FIGURE 6.10Forecasting your products’share of the pie is verydifficult. Be careful to keepmarket share estimatesrealistic.Source: iQoncept/Shutterstock.comPotential CustomersYoucanalsolearnalotbytalkingwithpotentialcustomers.Askthemhowoftentheybuyproductssimilartotheoneyouwanttolaunch.Wheredotheybuythemandinwhatquantity?Whatfactorsaffectdemandforthem?IfyouwerecontemplatingafrozenyogurtstoreinNorthDakota,itwouldn’thurttoaskcustomerscomingoutofabakerywhetherthey’dbuyfrozenyogurtinthewinter.Published Industry DataTogetsomeideaofthetotalmarketforaparticularproduct,youmightbeginbyexaminingperti-nentindustryresearch.Forexample,toestimatethedemandforjoggingshoesamongconsumersagessixty-fiveandolderwholiveinretirementcommunitiesinFlorida,youcouldlookatdatapublishedbytheNationalSportingGoodsAssociation(http://www.nsga.org).Thisorganizationcol-lectsextensivedataannually,compilesthedata,createsreportsonvarioustopics,andsellsthereportsonitswebsitetoitsmembersandotherinterestedbuyers.Youmightbeparticularlyinter-estedinfouroftheorganization’sreports:(1)“SportsParticipationintheU.S.”(providesoverallstatisticsonthecurrentandfuturestateofthesportinggoodsindustry),(2)“SportsParticipationState-by-State”(reportssportsparticipationstatisticsforeachstate,includingFlorida),(3)“SportsParticipation:LifecycleDemographics”(detailsparticipationinsportsbyvariousdemographicvari-ables,includingageandgeographicallocation),and(4)“SportsParticipation,SingleSport”(reportsdetailed participation figures for a variety of sports, including running and jogging).Now,let’ssaythatyourresearchturnsupthefactthatthereare3millionjoggersolderthansixty-fiveandthat600,000ofthemliveinFlorida,whichattracts20percentofallpeoplewhomovewhentheyretire.Howdoyouusethisinformationtoestimatethenumberofjoggingshoesthatyou’llbeabletosellduringyourfirstyearofbusiness?First,youhavetoestimateyourmarketshare:yourportionoftotalsalesintheolder-than-sixty-fivejoggingshoemarketinFlorida.Beingrealistic(buthavingfaithinanexcellentproduct),youestimatethatyou’llcapture2percentofthemarketduringyourfirstyear.Soyoudothemath:600,000pairsofjoggingshoessoldinFlorida×0.02(a2percentshareofthemarket)=12,000,theestimatedfirst-yeardemandforyourproposedproduct.Granted,thisisjustanestimate.Butatleastit’saneducatedguessratherthanawildone.You’llstillwanttotalkwithpeopleintheindustry,aswellaspotentialcustomers,toheartheirviewsonthedemandforyourproduct.Onlythenwouldyouuseyoursalesestimatetomakefinancialpro-jectionsanddecidewhetheryourproposedbusinessisfinanciallyfeasible.We’lldiscussthisprocess in a later chapter.Key Takeaways•Afteryou’veidentifiedagroupofpotentialcustomers,yournextstepisfindingoutasmuchas you can about what they think of your product idea.•Beforemakingasubstantialinvestmentinthedevelopmentofaproduct,youneedtoaskyourself:arethereenoughcustomerswillingtobuymyproductatapricethatwillallowmeto make a profit?•Answeringthisquestionmeansperformingoneofthehardesttasksinbusiness:forecastingdemand for your proposed product.•Thereareseveralpossibleapproachestothistaskthatcanbeusedaloneorincombination.172A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
breakeven analysisMethod of determining thelevel of sales at which thecompany will break even(have no profit or loss).•Youcanobtainhelpfulinformationaboutproductdemandbytalkingwithpeopleinsimilarbusinesses and potential customers.•Youcanalsoexaminepublishedindustrydatatoestimatethetotalmarketforproductslikeyours and estimate yourmarket share, or portion of the targeted market.Beforegoingtothenextsectionofthischapter,takeafewminutestotakeanonlinequizinordertotestyourknowledgeofthematerialcoveredinthissection.Quizzescanbefoundunderthe“Quiz” tab at the bottom of the online reader.Exercise1.Yourfriendssayyoumakethebestpizzasthey’veevereaten,andthey’reconstantlyencour-agingyoutosetupapizzabusinessinyourcity.Youhavelocatedasmallstorefrontinabusysectionoftown.Itdoesn’thavespaceforaneat-inrestaurant,butitwillallowcus-tomerstopickuptheirpizzas.Youwillalsodeliverpizzas.Beforeyousignaleaseandstartthebusiness,youneedtoestimatethenumberofpizzasyouwillsellinyourfirstyear.Atthispoint you plan to offer pizza in only one size.Before arriving at an estimate, answer these questions:a.What factors would you consider in estimating pizza sales?b.Whatassumptionswillyouuseinestimatingsales(forexample,thehoursyourpizzashop will be open)?c.Where would you obtain needed information to calculate an estimate?Then, estimate the number of pizzas you will sell in your first year of operations.6.7Breakeven AnalysisLearning Objective1.Learnhowtousebreakevenanalysistoestimatethenumberofsalesunitsatwhichnetincome is zero.Forecastingsalesofshoeshasstartedyouthinking.Selling12,000pairsofshoesthefirstyearyourunthebusinesssoundsgreat,butyoustillneedtofindananswertotheall-importantquestion:arethereenoughcustomerswillingtobuymyjoggingshoesatapricethatwillallowmetomakeaprofit?IstheresomewaytofigureoutthelevelofsalesIwouldneedtoavoidlosingmoney—to“breakeven”?Fortunately,anaccountantfriendofyoursinformsyouthatthereis.Notsurprisingly,it’scalledbreakevenanalysis,andhere’showitworks:tobreakeven(havenoprofitorloss),totalsalesrevenuemustexactlyequalallyourexpenses(bothvariableandfixed).Todeterminethelevelof sales at which this will occur, you need to do the following:Chapter 6Product Design and Development173© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
fixed costsCosts that don’t changewhen the amount of goodssold changes.variable costsCosts that vary, in total, asthe quantity of goods soldchanges but stay constanton a per-unit basis.contribution marginper unitExcess of revenue per unitover variable cost per unit.breakeven point inunitsNumber of sales units atwhich net income is zero.FIGURE 6.11Breakeven analysis is a usefultechnique. It allows you todetermine the point at whichyour company will break even(have neither a loss nor aprofit).Source: © Shutterstock, Inc.1.Determineyourtotalfixedcosts,whicharesocalledbecausethetotalcostdoesn’tchangeasthe quantity of goods sold changes:•Fixedcosts=$210,000salaries+$60,000rent+$10,000advertising+$8,000insurance+12,000 other fixed costs = $300,0002.Identifyyourvariablecosts.Thesearecoststhatvary,intotal,asthequantityofgoodssoldchanges but that stay constant on a per-unit basis. State variable costs on a per-unit basis:•Variable cost per unit = $40 (cost of each pair of shoes) + $5 sales commission = $453.Determineyourcontributionmarginperunit:sellingpriceperunitlessvariablecostperunit:•Contribution margin per unit = $80 selling price minus $45 variable cost per unit = $354.Calculate yourbreakeven point in units: fixed costs ÷ contribution margin per unit:•Breakeven in units = $300,000 fixed costs ÷ $35 contribution margin per unit = 8,571 unitsYourcalculationmeansthatifyousell8,571pairsofshoes,youwillendupwithzeroprofit(orloss) and will exactly break even.Ifyoursalesestimateisrealistic(abig“if”),thenyoushouldbeoptimisticaboutstartingthebusiness.Allyourfixedcostswillbecoveredonceyousell8,571pairsofshoes.Anysalesabovethatlevelwillbepureprofit.So,ifyousellyourexpectedlevelof12,000pairsofshoes,you’llmakeaprofit of $120,015 for the first year. Here’s how we calculated that profit:•12,000expectedsaleslevel–8,571breakevensaleslevel=3,429units×$35contributionmarginper unit = $120,015 first-year profitAsyoucansee,breakevenanalysisisprettyhandy.Itallowsyoutodeterminethelevelofsalesthatyoumustreachtoavoidlosingmoneyandtheprofityou’llmakeifyoureachahighersalesgoal. Such information will help you plan for your business.Key Takeaways•Breakevenanalysisisamethodofdeterminingthelevelofsalesatwhichthecompanywillbreak even (have no profit or loss).•Thefollowinginformationisusedincalculatingthebreakevenpoint:fixedcosts,variablecosts, and contribution margin per unit.•Fixedcostsarecoststhatdon’tchangewhentheamountofgoodssoldchanges.Forexam-ple, rent is a fixed cost.•Variablecostsarecoststhatvary,intotal,asthequantityofgoodssoldchangesbutstayconstantonaper-unitbasis.Forexample,salescommissionspaidbasedonunitsalesarea variable cost.•Contribution margin per unitis the excess revenue per unit over the variable cost per unit.•Thebreakevenpointinunitsiscalculatedwiththisformula:fixedcostsdividedbycontribu-tion margin per unit (selling price per unit less variable cost per unit).Beforegoingtothenextsectionofthischapter,takeafewminutestotakeanonlinequizinordertotestyourknowledgeofthematerialcoveredinthissection.Quizzescanbefoundunderthe“Quiz” tab at the bottom of the online reader.174A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Exercise1.Forthepasttenyears,you’veworkedataPETCOSalonasadoggroomer.You’rethinkingofstartingyourowndoggroomingbusiness.Youfoundaplaceyoucouldrentthat’srightnexttoapopularshoppingcenter,andtwoofyourfriends(whoarealsodoggroomers)haveagreedtoworkforyou.Theproblemisthatyouneedtoborrowmoneytostartthebusinessandyourbankerhasaskedforabreakevenanalysis.Youhavepreparedthefollowingcostestimates for your first year of operations:Fixed CostsSalaries$120,000Rent and utilities$39,000Advertising$2,000Equipment$3,000Variable Cost per DogShampoo$2.00Coat conditioner$1.50Pet cologne$0.75Dog treats$1.40Hair ribbons$0.50Youwentonlineandresearchedgroomingpricesinyourarea.Basedonyourreview,youhave decided to charge $35 for each grooming.Part 1:a.What’sthebreakevenpointinunits—howmanydogswillyouneedtogroominthefirstyear to break even?b.Ifyouandyourtwoemployeesgroomeddogsfivedaysaweek,sevenhoursaday,fiftyweeksayear,howmanydogswouldeachofyouneedtogroomeachday?Isthisreal-istic given that it takes one hour to groom a dog?Part 2:a.Ifyouraisedyourgroomingfeeto$40,howmanydogswouldyouneedtogroomtobreak even?b.Atthisnewprice,howmanydogswilleachofyouhavetogroomeachday(assuming,again,thatthethreeofyougroomdogsfiftyweeksayear,fivedaysaweek,sevenhoursa day)?Part 3:a.Would you start this business?b.What price would you charge to groom a dog?c.How could you lower the breakeven point and make the business more profitable?Chapter 6Product Design and Development175© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
FIGURE 6.12If you head up a shoecompany, you can’t justdesign and manufacture ashoe and hand it to themarketing group and tellthem to sell it.Representatives from allfunctional areas (design,engineering, manufacturing,accounting, finance, andmarketing) must join togetheras a project team to arrive ata salable shoe.Source: Aleksandr Lupin/Shutterstock.comproject teamIndividuals from differentfunctional areas assignedto work togetherthroughout the productdevelopment process.6.8Product DevelopmentLearning Objectives1.Explain what drives the success of a business.2.Describe the process of developing a product that meets customer needs.3.Define “project team” and the “product development process.”4.Identify the seven steps or activities that transform a project idea into a final product.5.Appreciate the creation of artificial intelligence and identify some of its advances.LikePowerSki,everyorganization—whetheritproducesgoodsorprovidesservices—seesJob1asfurnishingcustomerswithqualityproducts.Thesuccessofabusinessdependsonitsabilitytoidentifytheunmetneedsofconsumersandtodevelopproductsthatmeetthoseneedsatalowcost.[17]Inotherwords,effectiveproductdevelopmentresultsingoodsandservicesthatcanbesoldataprofit.Inaddition,itresultsinhigh-qualityproductsthatnotonlysatisfyconsumerneedsbutalsocanbedevelopedinatimely,cost-efficientmanner.Accomplishingthesegoalsentailsacollab-orativeeffortbyindividualsfromallareasofanorganization:operationsmanagement(includingrepresentativesfromengineering,design,andmanufacturing),marketing,accounting,andfinance.Infact,companiesincreasinglyassignrepresentativesfromvariousfunctionalareaswhoworktogetherasaprojectteamthroughouttheproductdevelopmentprocesses.Thisapproachallowsindividualswithvariedbackgroundsandexperiencetoprovideinputastheproductisbeingdevel-oped.Product Development Is a Risky PropositionNotsurprisingly,developingprofitableproductsisdifficult,andthesuccessrateislow.Onaverage,foreverysuccessfulproduct,acompanyhastwelvefailures.Atthisrate,thefirmsontheFortune1000listwasteover$60billionayearinresearchanddevelopment.[18]Thereareseveralreasonswhyproduct development is such a risky proposition:•Trade-offs.Youmight,forinstance,beabletomakeyourjoggingshoeslighterthanyourcom-petitors’,butifyoudo,theyprobablywon’twearaswell.Theycouldbeofhigherquality,butthat will make them more costly (they might price themselves out of the market).•Timepressure.Developingaproductcanrequirehundredsofdecisionsthatmustbemadequickly and with imperfect information.•Economics.Becausedevelopingaproductrequiresalotoftimeandmoney,there’salwayspres-suretomakesurethattheprojectnotonlyresultsinasuccessfulproductbutalsogetsittomarketatthemostopportunetime.Failuretobefirsttomarketwithanotherwisedesirablenew product can cost a company a great deal of money.Evenso,organizationscontinuetodedicateimmenseresourcestodevelopingnewproducts.Yoursupermarket,forexample,canchoosefromabout100,000itemstocarryonitsshelves—including20,000newproductseveryyear.Unfortunately,thetypicalsupermarketcanstock only 30,000 products.[19]176A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
product developmentprocessSeries of activities bywhich a product idea istransformed into a finalproduct.The Product Development ProcessTheproductdevelopmentprocessisaseriesofactivitiesbywhichaproductideaistransformedinto a final product. It can be broken down into the seven steps summarized inFigure 6.13.FIGURE 6.13The Product Development ProcessWatch this videoto experience an active version of this figure.View in the online readerThe Product Development ProcessChapter 6Product Design and Development177© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
product conceptDescription of what a newproduct will look like andhow it will work.prototypePhysical model of a newproduct.Evaluate Opportunities and Select the Best Product IdeaIfyou’restartingyourfirstbusiness,youmighthaveonlyoneproductidea.Butexistingorganiza-tionsoftenhaveseveralideasfornewproducts,aswellasimprovementstoexistingones.Wheredotheycomefrom?Theycancomefromindividualswithintheorganizationorfromoutsidesources,suchascustomers.Typically,variousideasarereviewedandevaluatedbyateamofindividuals,whoidentifythemostpromisingideasfordevelopment.Theymayrelyonavarietyofcriteria:Doestheproposedproductfillanunmetneedofourcustomers?Willenoughpeoplebuyourproducttomake it commercially successful? Do we have the resources and expertise to make it?Get Feedback to Refine the Product ConceptFromtheselectedproductidea,theteamgeneratesaninitialproductconceptthatdescribeswhattheproductmightlooklikeandhowitmightwork.Memberstalkbothwithotherpeopleintheorganizationandwithpotentialbuyerstoidentifycustomerneedsandthebenefitsthatcon-sumerswillgetfromtheproduct.Theystudytheindustryinwhichtheproductwillbesoldandinvestigatecompetingproducts.Theybrainstormvariousproductdesigns—thatis,thespecifica-tionsforhowtheproductistobemade,whatitwilllooklike,andwhatperformancestandardsitwill meet.Basedoninformationgatheredthroughthisprocess,theteamwillrevisetheproductconcept,probablypinpointingseveralalternativemodels.Thenthey’llgobacktopotentialcustomersandgettheirfeedbackonboththebasicconceptandthevariousalternatives.Basedonthisfeedback,theteamwilldecidewhattheproductwilllooklike,howitwillwork,andwhatfeaturesitwillhave.Make Sure the Product Performs and Appeals toConsumersTheteamthendecideshowtheproductwillbemade,whatcomponentsitwillrequire,andhowitwillbeassembled.Itwilldecidewhethertheproductshouldbemadein-houseoroutsourcedtoothercompanies.Forproductstobemadein-house,theteamdetermineswherepartswillbeobtained.Duringthisphase,teammembersareinvolvedindesignworktoensurethattheproductwill be appealing, safe, and easy to use and maintain.Design with Manufacturing in MindAsarule,there’smorethanonewaytomakeanyproduct,andsomemethodsaremoreexpensivethanothers.Duringthenextphase,therefore,theteamfocusesitsattentiononmakingahigh-qualityproductatthelowestpossiblecost,workingtominimizethenumberofpartsandsimplifythe components. The goal is to build both quality and efficiency into the manufacturing process.Build and Test PrototypesAprototypeisaphysicalmodeloftheproduct.Inthenextphase,prototypesareproducedandtestedtomakesurethattheproductmeetsthecustomerneedsthatit’ssupposedto.Theteamusu-allybeginswithapreliminaryprototypefromwhich,basedonfeedbackfrompotentialcustomers,amoresophisticatedmodelwillthenbedeveloped.Theprocessofbuildingandtestingprototypeswillcontinueuntiltheteamfeelscomfortablethatithasfashionedthebestpossibleproduct.The178A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
ramp-up stageStage in the productdevelopment processduring which employeesare trained in necessaryproduction processes andnew products are tested.artificial intelligenceThe ability of a digitalcomputer orcomputer-controlled robotto perform taskscommonly associated withintelligent beings.FIGURE 6.14Many advances broughtabout by artificial intelligenceare positive and will make lifein the U.S. better, but someadvances will harm people byeliminating their jobs.Source: Panchenko Vladimir/Shutterstock.comfinalprototypewillbeextensivelytestedbycustomerstoidentifyanychangesthatneedtobemade before the finished product is produced.Ramp Up Production and Run Market TestsDuringtheproductionramp-upstage,employeesaretrainedinmanufacturingandassemblyprocesses.Productsturnedoutduringthisphasearecarefullyinspectedforresidualflaws.Sam-ples are often demonstrated or given to potential customers for testing and feedback.Launch the ProductInthefinalstage,thefirmstartsongoingproductionandmakestheproductavailableforwide-spread distribution.Artificial IntelligenceMostlikely,artificialintelligence(AI)isnotanewtermforyou.Itssuccessessurroundus:thinksmartphones,videogames,AmazonEcho,drones,GoogleMaps,facerecognitiontechnologyandautonomouscars.Acommondefinitionofartificialintelligenceis:“Theabilityofadigitalcom-puterorcomputer-controlledrobottoperformtaskscommonlyassociatedwithintelligentbeings.”[20]Machinelearning,asubfieldofartificialintelligence,“isthescience(andart)ofprogrammingcomputerssotheycanlearnfromdata.”[21]Thefundamentalstructurecreatedbyamachine-learn-ingprogrammerisa”neuralnetwork,”ascaled-downmodelofpartofahumanbrain.We’lluseasimplemachine-learningexampletohelpyouunderstandhowsomeartificialintelligenceapplica-tionsaredeveloped.Let’sbeginbypretendingourgoalistotrainacomputertotellthedifferencebetweenanappleandanorange.Thefirststepistotrainthenetworkbyinputtinghundredsoreventhousandsofpicturesofthetwofruits(eachlabeled”apple”or”orange”asappropriate).Whenthenetworkcorrectlyidentifiesthefruitshownineachofthe”training-set”inputs,a”testset”ofnewpicturesisprovided.Ifthenetworkcorrectlyidentifiesthefruitshownineachofthetest-setinputs,thenetworkissaidtohave”learned”todistinguishapplesfromoranges.Otherwise,moretrainingandtestingareneeded.Oncelearninghasoccurred,thenetworkcanthenbeusedtoinstruct a computer (perhaps a robot), to separate real apples from real oranges.Now,distinguishingbetweenanappleandanorangeisnotterriblydifficultforacomputerprogram.So,let’slookata“learning”thedifferencebetweenadogandacat.Toteachanetworktodistinguishbetweenthesetwoanimals,anetworkwouldneedtobetrainedusingthousandsorevenmillionsofpicturescontainingdogsandcats(thankstoalltheproudpetownersonFacebookandInstagram).Usingsuperspeed(thankstopowerfulcomputerchipsfromNvidia),testing,retraining,andretesting,asabove,thenetworkwilleventuallybeabletogroupdogsintoa“dog”group and cats into a “cat” group.So,whatcanwetakeawayfromtheseexamples:(1)acomputerdoesnotlearnwithouttheaidofaperson(likelyaprogrammer)whoidentifiesthetrainingandtesting;(2)beforeyoustarttrain-inganetwork,youneedtodefineyourgoal;(3)unlessaccurateinformationisusedinthetrainingprocess,theresultswillbefaulty(garbagein—garbageout);and(4)achievingnetworklearningcanrequireextensivetraining,testing,andretesting,butcomputersoperateatelectronicspeed.Theseguidelinesapplytothetrainingofnetworkstoperformotherartificialintelligenceapplications,suchasnaturallanguageprocessing(thatenablesprogramsto“understand”writtenorspokenlan-guage), and computer vision (that allows computers to see and navigate around objects).[22]Chapter 6Product Design and Development179© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Whatdobusinessexecutivesthinkofartificialintelligence?InarecentsurveybyForbesofmorethan300topexecutives,95percentreportedthat“AIwillplayanimportantroleintheirresponsibilitiesinthenearfuture.”Theseexecutivesidentifiedthefollowingbenefitsfromartificialintelligence:increasedproductivity;reducedoperatingcosts,improvedspeedtomarket;andtrans-formed business and operating models.Whatdoyouthinkofartificialintelligence?WillitmakelifeintheU.S.betterorworse?Istheriseofartificialintelligencesomethingtoadmireortofear?Theanswertothesequestionsis“itdepends.”ManyoftheadvancesbroughtaboutbyartificialintelligencearepositiveandwillmakelifeintheU.S.better.Forexample,theuseofartificialintelligenceinthemedicalprofessionhashadandwillcontinuetohaveapositiveinfluenceonourlives.Thispositiveinfluencecanbedemon-stratedbyarecentstudycomparingthesuccessrateofGoogle’sAIandthatoftrainedradiologistsindetectingsignsoflungcancer.ThefindingsrevealthatGoogle’sAIdetectedlungcancerbetterthandidhumandoctors.Similarresultsoccurredinarecentstudyofbreastcancer.Google’sAIwas better at detecting breast cancer than were human doctors.[23]You’relikelyasking,whataboutme?HowwillAIaffectmyfuturecareer?AIcanhelporhurtemployeesintwoways:(1)AIautomatesrepetitive,oftenboringwork,and(2)AIhelpsemployeesbecomemoreeffectiveatwhattheydo.Asfarasjobsecuritygoes,youwanttoavoidbeinginthefirstcategory.ThiscategoryincludesjobsthatarealreadybeinghithardbyAI,suchasthoseinfastfood,retail,agricultureandwarehousing.Overthenexttenyears,thisfirstcategorywillexpandtoincludelow-tomedium-skilljobsinoccupationssuchasretailsales,trucking(asautonomoustrucksbecomeareality),manufacturingandrepetitiveofficework.[24]So,forthoseincategory1,AIissomethingtofear.Butforthoseincategory2,AIissomethingtoadmire.Jobsinthiscategoryareprotectedfromjobloss,atleastinthenearterm.Thetypesofjobsthatfallintothiscategoryrequirehighereducation,judgment,andsocialskills.Itisthiscategoryofjobsthatyoushouldinclude in your career plans.[25]Key Takeaways•Thesuccessofabusinessdependsonitsabilitytoidentifytheunmetneedsofconsumersand to develop products that meet those needs at a reasonable cost.•Accomplishingthesegoalsrequiresacollaborativeeffortbyindividualsfromallareasoftheorganization:operationsmanagement(includingrepresentativesfromengineering,design,and manufacturing), marketing, accounting, and finance.•Representativesfromthesevariousfunctionalareasoftenworktogetherasprojectteamsthroughouttheproductdevelopmentprocess,whichconsistsofaseriesofactivitiesthattransform a product idea into a final product.•This process can be broken down into seven steps:•Evaluate opportunities and select the best product mix.•Getfeedbacktorefinetheproductconceptthatdescribeswhattheproductmightlooklike and how it might work.•Make sure that the product performs and appeals to consumers.•Designwithmanufacturinginmindtobuildbothqualityandefficiencyintothemanufac-turing process.•Build and testprototypes, or physical models of the product.•Runmarkettestsandentertheramp-upstageduringwhichemployeesaretrainedintheproduction process.•Launch the product.•Artificialintelligencecanbedefinedas“Theabilityofadigitalcomputerorcomputer-con-trolled robot to perform tasks commonly associated with intelligent beings.”180A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
patentGrant of the exclusive rightto produce or sell aproduct, process, orinvention.Beforegoingtothenextsectionofthischapter,takeafewminutestotakeanonlinequizinordertotestyourknowledgeofthematerialcoveredinthissection.Quizzescanbefoundunderthe“Quiz” tab at the bottom of the online reader.Exercises1.Useyourimaginationtocomeupwithahypotheticalproductidea.Now,identifythestepsyou’d take to design, develop, and bring your product to market.2.You’reincollegeandlivinginanever-changingworld.Manyofthesechangesarebeingbroughtaboutbecauseofadvancesintechnologyand,inparticular,artificialintelligence(AI).AsyouappreciatetheAI-drivenadvancesthathaveoccurredinthemedicalprofession,youcannothelpbutwonder:“Whataboutme.”HowwillAIaffectmycareer?Thisquestionbringsabout a number of other questions, such as:a.What industries will likely be helped or harmed by AI?b.What types of workers will be replaced by AI?c.What entry-level positions will be enhanced by AI?Afteransweringthesequestions,developacareerplanforyourselfthatisdesignedtoprotectyoufromsomeofthenegativesofAIand,instead,allowyoutobenefitfromitsadvances.6.9Protecting Your IdeaLearning Objective1.Learn how to protect your product idea by applying for a patent.YoucanprotectyourrightstoyourideawithapatentfromtheU.S.PatentandTrademarkOffice,whichgrantsyou“therighttoexcludeothersfrommaking,using,offeringforsale,orselling”theinvention in the United States for twenty years.[26]Whatdoyouneedtoknowaboutapplyingforapatent?Foronething,documentyourideaassoonasyouthinkofit.Simplyfilloutaform,statingthepurposeofyourinventionandthecurrentdate.Thensignitandgetsomeonetowitnessit.Theproceduresoundsfairlyinformal,butyoumayneedthisdocumenttostrengthenyourclaimthatyoucameupwiththeideabeforesomeoneelsewhoalsoclaimsit.Later,you’llapplyformallyforapatentbyfillingoutanapplication(generallywiththehelpofalawyer),sendingittotheU.S.PatentandTrademarkOffice,andwaiting.NothingmovesquicklythroughtheU.S.PatentandTrademarkOffice,andittakesabouttwoyearsforanyapplication to get through the process.Chapter 6Product Design and Development181© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
FIGURE 6.15Even if you’re very proud of anew product you designed,avoid showing it to yourfriends until you havesubmitted a patentapplication. Otherwise,someone could steal youridea.Source: Waldemarus/Shutterstock.comWillyourapplicationgetthroughatall?There’sagoodchanceifyourinventionmeetsallthefollowing criteria:•It’snew.Nooneelsecanhaveknownaboutit,usedit,orwrittenaboutitbeforeyoufiledyourpatent application (so keep it to yourself until you’ve filed).•It’snotobvious.Ithastobesufficientlydifferentfromeverythingthat’sbeenusedforthepur-pose in the past (you can’t patent a new color for a cell phone).•It has utility. It can’t be useless; it must have some value.ApplyingforaU.S.patentisonlythefirststep.IfyouplantoexportyourproductoutsidetheUnitedStates,you’llneedpatentprotectionineachcountryinwhichyouplantodobusiness,andgettingaforeignpatentisn’tanyeasierthangettingaU.S.patent.Theprocesskeepslawyersbusy:duringathree-yearperiod,PowerSkiInternationalhadtotakeoutmorethaneightypatentsonthePowerSkiJetboard.Itstillhasalongwaytogotomatchthenumberofpatentsissuedtosomeextremelylargecorporations.Forexample,IBMwasgranted9,088U.S.patentsin2018.Thisisthe26th consecutive year that IBM was granted more patents than any other company.[27]Clearly,thepatentbusinessisbooming.TheU.S.PatentandTrademarkOfficeissuedapproxi-mately310,000patentsin2018.Onereasonfortherecentproliferationofpatentsisthehigh-techboom. Over the last decade, the number of patents granted has doubled.[28]Key Takeaways•YoucanprotectyourrightstoyourideawithapatentfromtheU.S.PatentandTrademarkOffice.•Apatentgrantsyou“therighttoexcludeothersfrommaking,using,offeringforsale,orsell-ing” the invention in the United States for twenty years.•Tobepatentable,aninventionmustmeetallthefollowingcriteria:it’snew(nooneelsecanhaveknownaboutit,usedit,orwrittenaboutitbeforeyoufiledyourpatentapplication);it’snotobvious(it’ssufficientlydifferentfromeverythingthat’sbeenusedforthepurposeinthepast); and it has utility (it must have some value; it can’t be useless).Beforegoingtothenextsectionofthischapter,takeafewminutestotakeanonlinequizinordertotestyourknowledgeofthematerialcoveredinthissection.Quizzescanbefoundunderthe“Quiz” tab at the bottom of the online reader.Exercise1.Afriendofyoursdescribedaproductideashehadbeenworkingon.Itisachild’sswingsetwithasensortostoptheswingifanyonewalksinfrontofit.Shecametoyouforadviceonprotectingherproductidea.Whatquestionswouldyouneedtoaskhertodeterminewhetherherproductideaispatentable?Howwouldsheapplyforapatent?Whatprotectionwould the patent give her? How long would the patent apply?182A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
6.10Cases and ProblemsLearning on the WebBreaking Even on BurgersBreaking Even on BurgersYouandyourbusinesspartnerplantoopenagourmetburgerrestaurant.Yourpartneresti-matedthenewbusinesswillsell150,000burgersduringitsfirstyearandahalfofoperations.You want to determine the number of burgers you must sell to break even during this period.Here are the figures you know so far:•The variable cost for each burger is $0.95 each.•Thefixedcostofmakingburgersforeighteenmonthsis$180,000(thisincludescostssuchas rent, utilities, and insurance).•You will sell your burgers for $2.10 each.•At the $2.10 per-unit selling price, how many burgers will you have to sell to break even?Part1:Usingthepreviousinformation,calculatethebreakevennumberofburgers.Howcloseisthebreakevennumberofburgerstoyourpartner’ssalesestimateof150,000burgers?Howconfident are you that your restaurant will be profitable?Part2:Now,recalculatethebreakevennumberofburgersusingahighersellingprice.Pretendthatyourlikelycustomersareburgerfanaticsandwillpay$2.99foraburger(ratherthan$2.10).Alsopretendthatthevariablecostforeachburgerandyourfixedcostswon’tchange(variablecostperburgerisstill$0.95andfixedcostsarestill$180,000).Manuallycalculatethenumberofburgersyoumustselltobreakevenatthishighersellingprice.Areyounowmoreconfidentthat the business will succeed?Part 3Part 3: Without recalculating breakeven, answer these two questions:1.Ifthevariablecostforeachburgerwentdownfrom$0.95to$0.80perburger(andyourselling price stayed at $2.10), would you need to sell more or fewer burgers to break even?2.Iffixedcostswentdownfrom$180,000to$120,000(andyoursellingpricestayedat$2.10andvariablecostperburgerreturnedto$0.95),wouldyouneedtosellmoreorfewerburg-ers to break even?Career OpportunitiesBeing a ÒBig IdeaÓ PersonBeing a ÒBig IdeaÓ PersonImagineacareerinwhichyoudesigntheproductspeopleuseeveryday.Ifyou’rea“bigidea”person,haveanactiveimagination,haveartisticflair,andpossesstheabilitytounderstandhowproductsfunction,thenacareerinproductdesignanddevelopmentmightbeforyou.Tolearnwhatopportunitiesareavailableinthisfield,gototheJobBanksectionoftheProductDevel-opmentandManagementAssociation’swebsite(http://www.pdma.org)andclickon“CareerCenter”andthen“JobSeekers.”Explorethevariousjobopeningsbyclickingonaposition(tohighlightit),andthenreadthesectiontitled“JobDescription”atthesideofthescreen.Findaposition that interests you and look for answers to these questions:1.What’s the job like?2.What educational background, work experience, and skills are needed for the job?3.What aspects of the job appeal to you? What aspects are unappealing?4.Are you cut out for a career in product design and development? Why, or why not?Chapter 6Product Design and Development183© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Ethics AngleWhoÕs Getting Fat from Fast Food?WhoÕs Getting Fat from Fast Food?Productliabilitylawscovertheresponsibilityofmanufacturers,sellers,andothersforinjuriescausedbydefectiveproducts.Underproductliabilitylaws,atoymanufacturercanbeheldliableifachildisharmedbyatoythat’sbeenmanufacturedandusedwithadesignflaw.Themanufacturercanalsobeheldliablefordefectsinmarketingthetoy,suchasgivingimproperinstructionsonitsuseorfailingtowarnconsumersaboutpotentialdangers.Butwhatiftheproductisn’tatoy,butratherafast-foodkid’smeal?Andwhatiftheharmisn’timmediatelyobvious but emerges over time?Thesequestionsarebeingdebatedinthelegalandhealthprofessions(andthemedia).Somepeoplebelievethatfast-foodrestaurantsshouldbeheldresponsible(atleastinpart)forchild-hoodobesity.Theyarguethatfast-foodproducts—suchaskids’mealsmadeupofhigh-calorieburgers,friedchickenfingers,Frenchfries,andsugarysoftdrinks—arehelpingtomakeU.S.childrenoverweight.Theypointoutthatwhilerestaurantchainsspendbillionseachyeartoadvertisefastfoodtochildren,theydon’tdonearlyenoughtowarnparentsofthedangersposedbysuchfoods.Ontheothersideofthedebatearerestaurantowners,whoarguethatthey’renottheculprits.Theysaythattheirfoodcanbeapartofachild’sdiet—ifit’seateninmoderation.There’snodisputingthat20percentofAmericanchildrenages6–11and10percentofchildrenages2–5areobeseandthatfast-foodconsumptionbychildrenhasincreasedby500percentsince1970.MostobserversalsoacceptthedatafurnishedbytheU.S.SurgeonGeneral:thatobesityintheUnitedStatesclaimssome300,000livesayearandcosts$117billioninhealth-care. The controversy centers on the following questions:1.Who really is to blame for the increase in obesity among U.S. children?2.Undercurrentconsumer-protectionlaws,isfast-foodmarketingaimedatchildrenmislead-ing?3.Shouldfast-foodrestaurantsbeheldlegallyliableforthehealthproblemsassociatedwiththeir products?What’syouropinion?Ifyouownedafast-foodrestaurant,whataction(ifany)wouldyoutakeinresponse to the charges leveled by critics of your industry?Team-Building SkillsThe Great IdeaThe Great IdeaGettogetherwithmembersofyourteamandbrainstormideasforanew-to-the-marketproduct.Beginthebrainstormingsessionbyaskingeachpersontowriteanideaonastickynote.Posttheideaandrepeattheprocessfourtimes.Aftertheteamhasevaluatedanddiscussedtheideas,allmembersshouldvote.Eachgetstenvotes,whichcanbeplacedononeideaorspreadovermany.Oncethevotingends,addupthevotesreceivedbyeachideaanddeclareoneideathe winner.Write a group report that answers the following questions:1.Product Idea•What is the idea?•How would the idea work?•Who would our customers be?•What unmet need does it fill?2.Industry•What is the product’s industry, segment, and niche?•Is the industry growing or contracting?•Who are our major competitors?184A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
•How does our product differ from those of our competitors?•What opportunities exist in the industry? What threats?3.Product•What will the product look like?•What features will it have?•How will customers benefit from our product?•Why will customers buy the product from us?•Why will our product be financially successful?The Global ViewFake GoodsFake GoodsIfsomeoneonthestreettriedtosellyoua“Rolex”watchfor$20,you’dprobablysuspectthatit’safake.ButwhataboutapairofNewBalanceathleticshoes?Howdoyouknowthey’reauthentic?Howcanyoutell?Oftenyoucan’t.Counterfeitersaregettingsogoodatcopyingproductsthatevenexpertshavetroubletellingafakefromtherealthing.Whatifthecounterfeitproductinquestionwasaprescriptiondrug?Evenworse,whatifithadbeencounterfeitedwithunsterile equipment or contained no active ingredients?Howlikelyisitthatyou’llbuyacounterfeitproductinthenextyear?Unfortunately,it’sverylikely.Tolearnalittlemoreabouttheglobalcounterfeitingbusiness,readthesearticles:“Counterfeitgoods:Howtotelltherealfromtherip-off”(byConsumerReports),https://www.consumerreports.org/cro/magazine/2015/05/counterfeit-goods-how-to-tell-real-from-ripoff/index.htm;and“FakeGoods,RealDangers”(byU.S.CustomsandBorderProtection),https://www.cbp.gov/FakeGoodsRealDangers.Thenwatchthefollowingvideo,titled“FakeGoodsCreatingRealProblem”:https://youtu.be/yvAmcSje_j4.Afteryoureadthearticlesandwatchthevideo, answer the following questions:1.Howhasthepracticeofcounterfeitingchangedovertime?Whatfactorshaveallowedittoescalate?2.Whattypesofproductsarecommonlycounterfeited,andwhymighttheybeunsafe?Whatcounterfeit products are particularly dangerous?3.Howdothecounterfeitersgetgoodsontothemarket?Howcanyoureduceyourchancesof buying fake goods?4.Whyiscounterfeitingsoprofitable?Howcancounterfeiterscompeteonpricewiththosemaking the authentic goods? How do counterfeiters harm U.S. businesses?5.What efforts are being made to stop counterfeiters?6.If you know that a product is fake, is it ethical to buy it?6.11Business Plan ProjectGroup Report #6: Products and ProductionReportReportTheteamshouldsubmitawrittenreportthatprovidesadescriptionofallgoodsandservicestobeprovided,indicatestheadvantagesthattheyhaveoverthoseofferedbycompetitors,andexplainshowtheteamintendstoobtainorproducetheproductsthatit’sgoingtosell.Theinformationinyourreportwillvarydependingonwhetheryou’veestablishedaservicecompany,Chapter 6Product Design and Development185© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
aretailer,oramanufacturer.Fordetailsontheinformationrequired,seethesectionheaded“GoodsorServicesand(IfApplicable)ProductionProcess”inAppendixASection2.Thereportshouldbeabouttwodouble-spaced,typedpages.Thenameofyourproposedbusinessandthenames of all team members should appear on the report.Reasonable ContributionsReasonable ContributionsAllmembersoftheteamwhomakeareasonablecontributiontothereportshouldsignit.(Ifanyteammemberdoesnotworkonthereport,hisorhernameshouldnotappearonit.)Ifastudentwhohasmadeacontributionisunabletosignthereport(becauseofsicknessorsomeothervalidreason),theteamcansignhisorhername.Toindicatethatanamewassignedbytheteamon a member’s behalf, be sure to attach a note to the signature.6.12Nike CaseBeforedevelopinganewproduct,youneedtounderstandtheindustryinwhichitwillbesold.Thesuccessofabusinessthatentersaparticularindustrydependsonitsabilitytoidentifytheunmetneeds of consumers and to develop products that meet those needs at a reasonable cost.First, take a few minutes to familiarize yourself with the industry in which Nike competes.Then, take a moment to read about the product-development practices of Nike.About Nike Case: Chapter 7, Case 1Athletic Shoes, Apparel, and Equipment: NikeÕs IndustryAthletic Shoes, Apparel, and Equipment: NikeÕs IndustryFrom Sneakers to Athletic ShoesFrom Sneakers to Athletic ShoesAthleticshoesareoneofthecentury’smostsuccessfulproducts.Americanteensbuyaboutthreepairseachyearandadultsbuytheequivalentof1.8pairs.Thefirstversionoftheathleticshoe(thencalled“sneakers”)appearedinnineteenth‑centuryEngland.Upper‑crustBritons,whoworesoft‑soledfootwearforcroquet,cricket,andotherlawnsports,calledthem“sandshoes.”ButitwastheAmericaninventorCharlesGoodyearwhomadethemodernsneakerpossible.Usinghispatented“vulcanization”process,GoodyearcreatedfootwearthatyouandIwouldrec-ognizeassneakers—shoeswithrubbersolesandcanvastops.By1897,activeAmericanscouldbuy sneakers from the Sears catalogue for 60 cents a pair.Bytheearlytwentiethcentury,therewasasmallbutviablesneakerindustry.Itconsistedmostlyofrubbercompaniesconcentratedinthenortheast,whereU.S.RubberwasmanufacturingsneakersforkidsandConverseRubberwasmaking“basketballshoes.”AsneakerindustrywasalsoemerginginEurope,whereReebok(foundedinEnglandin1895)wasproducing“runningshoes.”Thesneakerindustrygrewataslowbutsteadypacethroughthe1940s.Ithititsstrideinthe1950sand1960s,whenbothleisuretimeandsportsparticipationincreasedandschooldresscodeswererelaxed.Suddenlysneakersweresociallyacceptableforgeneralwear,andsalesjumpeddramatically(especiallysalesofimportedsneakers).Buteventhegiantleapforwardofthe1950sand1960sgavelittleindicationofthemonumentalchangesthatlayaheadatthedawn of the 1970s.Jogging as an Import ProductJogging as an Import ProductWhileonarunwithagroupoflocalsinahillysectionofNewZealand,afitBillBowerman(PhilKnight’srunningcoachattheUniversityofOregonandfuturebusinesspartner)foundhimselfoutofbreathandatthebackofthepack.Hewasembarrassedthathecouldn’tkeepupwiththerunners,eventhosewhoweremucholder.Hesoondiscoveredtheirsecret:Ratherthanmovingataquickpace,therunnersengagedinaneasygoingstylewhich,asBowermansoonlearned,wascalled“jogging.”BowermanbroughtthetechniquebacktoOregonandbeganofferingjog-gingclasses—notforhiscollegiaterunners,butratherforordinary,sedentaryAmericans.Then186A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
hecoauthoredJogging:APhysicalFitnessProgramforAllAges,abestsellerthathelpedusherinthejoggingmovement,which,inturn,changedforeverthewayAmericansthoughtaboutphysi-cal activity.Athletes and the Ath‑Leisure MarketAthletes and the Ath‑Leisure MarketDuringthe1970s,moreandmoreAmericans,spurredbyanincreasinginterestinhealthandphysicalfitness,begantoparticipateinsometypeofphysicalactivity.Millionsofmenandwomentookupjoggingorsomeotherformofaerobicexercise.Aboomingmarketopeneduptocom-paniesthatcouldsupplyallthesenewsportsenthusiastswithshoesthatwouldputthemonthetracktobetterhealthandshapewhilekeepingthemsafefrominjury.Sneakerswouldnolongerdo:Americanswantedtojogthroughtheirneighborhoodsandnearbyparksincushionedathleticshoes made out of light materials.Inadditiontothefitnessrevolution,the1970smarketforathleticshoeswasbuoyedbyanincreaseddesireforcomfortandstyleinfootwear.Anewgroupofconsumers—theso‑called“ath‑leisuremarket”—wanted“authentic”athleticshoeseventhoughtheydidn’tintendtowearthemforsportsoranythingelseoverlystrenuous.Moreimportant,thismarketwasevenlargerthanthe“sports‑participation”market:Today,analystscalculatethatabout80percentofall“ath-letic” shoes are purchased by people who don’t wear them for athletics.Thenewathleticshoeswerealotmoreexpensivethantheoldcanvasandrubber‑solesneakers,butwithlightermaterialsandsuchfeaturesasairbagsandwafflesoles(bothofwhichwereNikeinnovations),theyweretechnologicallyfarsuperior.Theyweremadenotbytheold‑linesneakermakers,butratherby“performanceshoe”companiessuchasNikeandAdidas.Thesecompaniesflourishedbecausetheyestablishedbrandnamesandcapturedtheendorsementsofcelebrityathletes.And,ofcourse,theybecameextremelyadeptatadvertisingandotherformsofbrand promotion.Apparel and Sports EquipmentApparel and Sports EquipmentStrongbrandawarenessalsoprovidedaspringboardintothemarketforapparel:Theindustrysoondiscoveredthatpeoplewhoidentifiedwithaparticularbrandofshoecouldalsobeinter-estedinclothingfromthesamecompany.Germany’sAdidastookthefirststep,enteringtheEuropeanapparelmarketinthe1960s,and,bythe1980s,mostofitscompetitorshadaddedappareltotheirproductmixes.Today,salesofathleticapparelrepresentasizableandgrowingshare of the business of companies that once specialized in athletic shoes.Brandawarenessalsohelpedthesamecompaniesenterthesports‑equipmentandaccessoriesmarket.Bythe1990s,theirbrandswereappearingonsportwatches,eyewear,athleticbags,anddozensofotherproducts.Sports-relatedproductsnowaccountforasmallbutgrowingpor-tion of the industry’s total business.The Industry TodayThe Industry TodayThebigplayersintheglobalsportinggoodsmarket(athleticfootwear,apparel,andequipment)areNikeandAdidas.Therearealsoanumberofsmaller,nicheplayers,includingPuma,Sketch-ers, New Balance, and Under Armour.Becauseofcompetitivelaborrates,mostcompaniesintheindustryoutsourcetheirproductsfromindependentlyownedfactoriesinsuchcountriesasChinaandVietnam.Theysellthroughspecialtyathleticshoestores(FootLocker,Athlete’sFoot,TheFinishLine),departmentstores(Sears,Macy’s),sportinggoodsstores(Dick’sSportingGoods,AcademySportsandOutdoors)andonlineretailers(Amazon).Additionally,theyselldirectlytocustomersthroughtheirownretailstores, outlets, and websites.About Nike Case: Chapter 7, Case 2Product InnovationProduct InnovationFrom the Drawing Board to the Retail ShelfFrom the Drawing Board to the Retail ShelfNikehasachieveditsgreatsuccessbyservingsportsandfitnessenthusiaststhroughproductinnovation.Itspenchantforinnovationbeganintheearly1970s,whentrackcoachBillBowermanusedhiswaffleirontomakerubbersolesdesignedtoimproverunners’performance.InthelateChapter 6Product Design and Development187© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
1970s,NikecapitalizedonaninnovationproposedbyaNASAengineernamedFrankRudy:cushiontheathlete’sfootbyputtingpressurizedgasinthemidsolesofshoes.Bothofthesetechnological advances revolutionized the industry.Nikecontinuestofocusoninnovationandstillprovidesasteadystreamofhigh-performancenewproducts.Tofulfillitscommitmenttoinnovation,ofcourse,Nikemustcontinuetopayattentiontoitscustomers.Eventhoughahighpercentageofitscustomersdon’tuseNikeproductsforsportspurposes,Nikepridesitselfonproducingauthenticsportsandsports-relatedproductsanddesignsshoes,apparel,andequipmenttomeettheneedsofathletes.Theappealtotheathlete’sdesiretoperformbetterdroveNike’searlyproductdesigns,andthefirmremainscom-mitted to fulfilling the same customer need.Ofcourse,theprocessofdesigning,testing,andbringinganewproducttomarketistimecon-suming.Nikedesignsabout300shoesayear,and,onaverage,ittakesapproximatelyseventeenmonths to move a shoe from the drawing board to the retail shelf.Theresponsibilityfordesigningnewproductsandbringingthemtomarketissharedbythreegroups: creative designers, the Sport Research Lab, and product category teams.The ÒInnovation KitchenÓThe ÒInnovation KitchenÓNikecallsthecenterofitscreativeactivitythe“InnovationKitchen,”whichishousedina8,500‑square‑footloftonthetopflooroftheMiaHammbuildingonNike’scampus.Toanoutsideobserver,thefacilitylooksprettymessy,butthat’sthewayNikedesignerslikeit;creatingprod-ucts,they’lltellyou,isamessybusiness.Nike’sdesignersworktogetherinopenworkrooms,generallyusingsimpletools—pencilsandsketchpads—ratherthanhigh‑techequipment.Theirgoaldoesn’thavemuchtodowiththebusinessofsellingshoes,apparel,andequipment:Theirjobistoimproveathleticperformance.Everyonewantstocomeupwithsomething“cool,”but“cool”issubsidiarytotheguidingprincipleofhelpingathletesperformbetter.(Recall,bytheway,Nike’s definition of an “athlete” as anyone who has a body.)The Sport Research LabThe Sport Research LabClosetotheInnovationKitchenyou’llfindagroupofmenandwomenwhosharethedesigners’dedicationtotheprincipleofimprovingathleticperformance.TheemployeesintheSportResearchLabworkcloselywithdesignerstobringtomarketproductsthatnotonlyraisethelevelofathleticperformance,butalsohelptopreventsports-relatedinjuries.Inthis13,000‑square‑footfacility,Nikeusesstate-of-the-artequipmenttoconductscientificresearchontheproductneedsof athletes.Category Product TeamsCategory Product TeamsDesignerscancomeupwithcreativeideas,andresearcherscandeterminewhetheraproductwillenhanceperformance.Butwhodecidesifaproductwillactuallysellandwhatthetargetmarketshouldbe?Whodecidesiftheproductideamakessenseandthattheproductshouldbemanufactured?Inputintodecisionssuchasthesecomesfromseveralsources,includingthemarketingdepartment,engineers,accountants,coaches,athletes,andconsumers.Toorganizeandtakeadvantageofthisvarietyofinput,Nikereliesoncategoryproductteams.Here’showthe process works:•Thecategoryproductteam(consistingofdesigners,productdevelopers,sportsresearchexperts,marketingspecialists,engineers,accountants,coaches,athletes,consumers,and others) is assembled.•Theteampreparesaproductdefinitionreportspecifyingdesiredproductfeatures,targetconsumers, and suggested price.•Adesigner“conceptualizes”theidea,creatingasketchbasedontheproductdefinitionreport.•Engineers make a prototype—a physical sample of the product.•Theteamreviewstheprototype,refinestheproductconcept,andpreparesmanufacturingspecifications, which are then sent to a Nike contract factory.•Theteamtestsandmodifiestheprototypeandreturnsittothefactoryforrevisions(ifneeded).Oncerevisedspecificationshavebeensatisfied,theteamapprovestheproduct.•The product is manufactured and shipped to retailers, which sell it to consumers.MisstepsMissteps188A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Onthewhole,Nikehasbeenquitesuccessfulinintroducingnewproducts,butnoteverythingthat’scomeoutoftheKitchenandtheLabhasbeenahit.Infact,oneofNike’sveryfirstshoeswasaresoundingdud.Afterseveringa10-yearrelationshipwithJapan’sTigerShoes,founderPhilKnight’shastilyformedcompany,Nike,hadtosupplementthereducedvolumeofshoesitwasstillgettingfromTigerwithsomeshoesofitsown.Oneofitsfirsteffortswasanall-leatherfootball/soccershoe.Unfortunately,theproduct,whichwasmadeinMexico,wasnevertestedincoldweather.Whenfootballplayerstookthefieldinthemiddleofwinter,thesolescrackedintwo.Nikealsointroducedothersports‑relatedequipmentthatfailedmiserably.Itsforaysintotheinlineandice‑skatingmarketsdidn’tgosmoothly,andNikehasstruggledtobecomeaplayerintheoutdoorandextreme‑sportsmarkets.Itenteredthesnowboardmarketin1999andexitedayearlater,andithadnomoreluckwithalineofsurf-inspiredapparel.Thecompanyhassincerevisedtheprocessforenteringmarketsinwhichithaslimitedexperienceandlowcredibility.NowNikeentersnewmarketsbyacquiringestablishedcompanies.Forexample,ittookanotherrunatthesurf‑ and skate‑apparel market by acquiring market leader Hurley International.Endnotes1.SeeMaryCoulter,EntrepreneurshipinAction(UpperSaddleRiver,NJ:Prentice Hall, 2001), 9–11.2.MittCafe,”PowerSkiJetboards,”MittCafe,October21,2011,http://www.mittcafe.com/Downhome/Outdoors/powerskijetboards,(accessed September 18, 2019).3.“WoodyAllenQuotes,”BrainyQuote,http://www.brainyquote.com/quotes/quotes/w/woodyallen121347.html(accessedSeptember18,2019).4.SeeMaryCoulter,EntrepreneurshipinAction(UpperSaddleRiver,NJ:Prentice Hall, 2001), 9, 206–7.5.ScottThurmandJoannS.Lublin,“PeterDrucker’sLegacyIncludesSim-pleAdvice:It’sAllaboutthePeople,”WallStreetJournal(November14,2005),B1,https://www.wsj.com/articles/SB113192826302796041(accessed September 17, 2019).6.PhilipKotlerandGaryArmstrong,PrinciplesofMarketing,12thed.(UpperSaddle River, NJ: Pearson Education, 2008), 253.7.SethGodin,PurpleCow:TransformYourBusinessbyBeingRemarkable(New York: Penguin Group, 2003).8.See“FascinatingFactsaboutDeanKamenInventor,”TheGreatIdeaFinder,October,11,2006,http://www.ideafinder.com/history/inventors/kamen.htm(accessed September 17, 2019).9.StephenPaulGnass,Editor,”7-Year-OldSurvivorAndInventor,”AnInven-torsJourney,Issue001,http://www.inventionconvention.com/journey/001.html, (accessed September 18, 2019)10.PowerSkiInternational,“AwardsandMedia,”http://www.powerski.com/content/psi_index.php(accessed March 13, 2017).11.SeeEureka!Ranchathttp://eurekaranch.com(accessedSeptember18,2017).12.“WhyEureka,”Eureka!Ranch,http://eurekaranch.com(accessedSeptem-ber 18, 2019).13.WalletPop,“Top25BiggestProductFlopsofAllTime,”AOL.finance,March25,2016,https://www.aol.com/article/2016/05/25/top-25-biggest-product-flops-of-all-time/21383586/(accessedSeptem-ber 18, 2019).14.ThisapproachisadaptedfromKathleenAllen,EntrepreneurshipforDum-mies(New York: Wiley, 2001), 73–77.15.BasedonKathleenAllen,EntrepreneurshipforDummies(Foster,CA:IDGBooks, 2001), 67.16.BasedonKarlUlrichandStevenEppinger,ProductDesignandDevelop-ment,2nded.NewYork:IrwinMcGraw-Hill,2000,p.66;KathleenAllen,Entrepreneurship for Dummies (Foster, CA: IDG Books, 2001), 79.17.KarlUlrichandStevenEppinger,ProductDesignandDevelopment,2nded. (New York: Irwin McGraw-Hill, 2000), 3.18.TonyUlwickandJohnA.Eisenhauer,“PredictingtheSuccessorFailureofaNewProductConcept,”TheManagementRoundtable,http://www.con-sensuspoint.com/wp-content/uploads/2017/01/Product_Con-cept.pdf(accessed September 18, 2019).19.SteveHannaford,“SlottingFeesandOligopolies,”http://investor-shub.advfn.com/boards/read_msg.aspx?mes-sage_id=8975654(accessed September 18, 2019).20.B.J.Copeland,“ArtificialIntelligence.”Encyclop¾diaBritannica,March24,2020.Retrievedfrom:https://www.britannica.com/technology/artifi-cial-intelligence;Note:Togainanunderstandingofthecreationofartificialintelligenceapplications,let’sexploremachinelearning,atechniqueofextremevaluetobusinesses.FOOTNOTE:JillianD’Onfro,“AI-50:Amer-ica’sMostPromisingArtificialIntelligenceCompanies,”Forbes,September17,2019,https://www.forbes.com/sites/jilliandonfro/2019/09/17/ai-50-americas-most-promising-artificial-intelligence-compa-nies/#52ddd6fe565c(accessedJanuary4,2020).nies/#52ddd6fe565c(accessed January 4, 2020).21.AurélienGéron,Hands-OnMachineLearningwithScikit-LearnandTen-sorFlow. Sebastopol, Canada: O’Reilly Media, Inc., 2019, p.2.22.In the area of game playing there are neural networks that have becomeexperts at chess, Go, Texas Hold-em, and many more video games. Forsome of these networks, the only input consists of the rules of the game!The network plays against itself millions of times to master the game.JillianD’Onfro,“AI50:America’sMostPromisingArtificialIntelligenceCompanies,”Forbes,September17,2019,https://www.forbes.com/sites/jilliandonfro/2019/09/17/ai-50-americas-most-promising-artificial-intelligence-companies/#52ddd6fe565c (accessed January 4, 2020).23.MikeWehner,“GooglebuiltanAIthatdetectslungcancerbetterthanhumandoctors,”BGR,May21st,2019,https://bgr.com/2019/05/21/google-ai-cancer-lung-study/(accessedJanuary4,2020);DavidReid,“Google’sDeepMindA.I.beatsdoctorsinbreastcancerscreeningtrial,”CNBC,January2,2020,https://www.cnbc.com/2020/01/02/googles-deepmind-ai-beats-doctors-in-breast-cancer-screening-trial.html(accessed January 4, 2020).24.DavidRoe,“7JobsthatArtificialIntelligence(AI)willsoonovertake,”CMSWire,January23,2018,https://www.cmswire.com/information-manage-ment/7-jobs-that-artificial-intelligence-ai-will-soon-overtake/(accessedJanuary 4, 2020).25.“900,000TruckDriversCouldLoseJobtoAutonomousTrucks,U.S.GovernmentWarns,”TransportationNationNetwork,March20,2019,https://transportationnation.com/900000-truck-drivers-could-lose-job-to-autonomous-trucks-u-s-government-warns/(accessedJanuary4,2020);JillianD’Onfro,“AI50FoundersSayThisIsWhatPeopleGetWrongAboutArtificialIntelligence,”Forbes,September17,2019,https://www.forbes.com/sites/jilliandonfro/2019/09/17/ai-50-founders-say-this-is-what-people-get-wrong-about-artificial-intelli-gence/#53d807e07077(accessedJanuary4,2020);JeffDesjardin,“Visu-alizingtheJobsLosttoAutomation,”VisualCapitalist,May20,2017,https://www.visualcapitalist.com/visualizing-jobs-lost-automation/(accessed January 4, 2020).26.U.S.PatentandTrademarkOffice,“HowtoGetaPatent,”http://www.uspto.gov/web/patents/howtopat.htm(accessedSeptember 18, 2019).27.NiallMcCarthy,”TheU.S.CompaniesGrantedTheMostPatentsIn2018,”Forbes,August13,2019,https://www.forbes.com/sites/niallmccarthy/2019/08/13/the-us-companies-granted-the-most-patents-in-2018-info-graphic/#5f3fdb0d302e (accessed September 18, 2019).28.”2018TrendsandInsights,”ifiClaimsPatentService,https://www.ifi-claims.com/rankings-trends-2018.htm,(accessed September 18, 2019).Chapter 6Product Design and Development189© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
190A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
CHAPTER 7Operations Management inManufacturing and ServiceIndustries7.1The Challenge: Producing QualityJetboardsTheproductdevelopmentprocesscanbecomplexandlengthy.IttooksixteenyearsforBobMont-gomeryandothersathiscompanytodevelopthePowerSkiJetboard,andthisinvolvedthousandsofdesignchanges.Itseemedworthit:theJetboard,anexciting,engine-propelledpersonalwater-craftthat’sacrossbetweenahigh-performancesurfboardandacompetitionwater-ski/wakeboard,receivedextensivemediaattentionandearnedravereviews.Itwasshoweredwithhonors,includ-ingTimemagazine’s“BestInventionoftheYear”award.StoriesabouttheJetboardappearedinmorethanfiftymagazinesaroundtheworld,anditappearedinseveralmovies,inovertwenty-fiveTVshows,andonYouTube.OnerevieweroftheJetboardexclaimed,“Up,upandaway.PowerSki’stheclosestyou’llgettobeingSupermanonthewater.With40hpunderyourtoes,the100-poundboard literally flies. You supply the cape.”[1]MontgomeryandhisteamatPowerSkienjoyedtakingtheirwell-deservedbowsforthejobtheydiddesigningtheproduct.Buthavingaproductwasonlythebeginningforthecompany.Thenextstepwasdevelopingasystemthatwouldproducehigh-qualityJetboardsatreasonableprices.Beforeputtingthissysteminplace,PowerSkimanagershadtoaddressseveralquestions:WhatkindofproductionprocessshouldtheyusetomaketheJetboards?Howlargeshouldtheirproduc-tionfacilitiesbe,andwhereshouldtheybelocated?Howshouldtheplantbelaidout?Shouldeverycomponentbemadein-house,orshouldsomebefurnishedbysubcontractors?WhereshouldtheybuythematerialstheyneededtobuildJetboards?Whatsystemswouldtheyneedtoensurethatproductionwasasefficientaspossibleandthatqualitystandardsweremaintained?AnsweringthesequestionshelpedPowerSkisetupamanufacturingsystemthroughwhichitcouldaccom-plish the most important task that it had set for itself: efficiently producing quality Jetboards.© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
operationsmanagement (OM)Management of theprocess that transformsresources into products.7.2Operations Management inManufacturingLearning Objectives1.Define“operationsmanagement,”anddiscusstheroleoftheoperationsmanagerinaman-ufacturing company.2.Describethedecisionsmadeinplanningtheproductionprocessinamanufacturingcom-pany.3.Compareandcontrastthreebasicproductionmethods:make-to-orderstrategy,masspro-duction, and make-to-stock strategy.4.Identify the factors considered by the operations manager when selecting a plant location.5.Explainhowmanagersestimatethequantityofproductstobeproducedanddeterminecapacity requirements.LikePowerSki,everyorganization—whetheritproducesgoodsorprovidesservices—seesJob1asfurnishingcustomerswithqualityproducts.Thus,tocompetewithotherorganizations,acompanymustconvertresources(materials,labor,money,information)intogoodsorservicesasefficientlyaspossible.Theupper-levelmanagerwhodirectsthistransformationprocessiscalledanopera-tionsmanager.Thejobofoperationsmanagement(OM),then,consistsofalltheactivitiesinvolvedintransformingaproductideaintoafinishedproduct,aswellasthoseinvolvedinplanningandcontrollingthesystemsthatproducegoodsandservices.Inotherwords,operationsmanagersmanagetheprocessthattransformsinputsintooutputs.Figure7.1illustratesthistraditionalfunc-tion of operations management.FIGURE 7.1The Transformation Process192A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Watch this video to experience an active version of this figure.View in the online readerIntherestofthischapter,we’lldiscussthemajoractivitiesofoperationsmanagers.We’llstartbydescribingtherolethatoperationsmanagersplayinthevariousprocessesdesignedtoproducegoodsandofferservices.Next,we’lllookattheproductionofgoodsinmanufacturingfirms;then,we’lldescribeoperationsmanagementactivitiesincompaniesthatprovideservices.We’llwrapupthechapterbyexplainingtheroleofoperationsmanagementinsuchprocessesasqualitycontroland outsourcing.Operations Management in ManufacturingLikePowerSki,allmanufacturerssetouttoperformthesamebasicfunction:totransformresourcesintofinishedgoods.Toperformthisfunctionintoday’sbusinessenvironment,man-ufacturersmustcontinuallystrivetoimproveoperationalefficiency.Theymustfine-tunetheirproductionprocessestofocusonquality,toholddownthecostsofmaterialsandlabor,andtoeliminateallcoststhataddnovaluetothefinishedproduct.Makingthedecisionsinvolvedintheefforttoattainthesegoalsisthejoboftheoperationsmanager.Thatperson’sresponsibilitiescanbe grouped as follows:•Productionplanning.Duringproductionplanning,managersdeterminehowgoodswillbepro-duced, where production will take place, and how manufacturing facilities will be laid out.•Productioncontrol.Oncetheproductionprocessisunderway,managersmustcontinuallyscheduleandmonitortheactivitiesthatmakeupthatprocess.Theymustsolicitandrespondtofeedbackandmakeadjustmentswhereneeded.Atthisstage,theyalsooverseethepurchas-ing of raw materials and the handling of inventories.•Qualitycontrol.Finally,theoperationsmanagerisdirectlyinvolvedineffortstoensurethatgoods are produced according to specifications and that quality standards are maintained.Let’s take a closer look at each of these responsibilities.The Transformation ProcessChapter 7Operations Management in Manufacturing and Service Industries193© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Planning the Production ProcessThedecisionsmadeintheplanningstagehavelong-rangeimplicationsandarecrucialtoafirm’ssuccess.Beforemakingdecisionsabouttheoperationsprocess,managersmustconsiderthegoalssetbymarketingmanagers.Doesthecompanyintendtobealow-costproducerandtocompeteonthebasisofprice?Ordoesitplantofocusonqualityandgoafterthehighendofthemarket?Perhapsitwantstobuildareputationforreliability.Whatifitintendstoofferawiderangeofprod-ucts?Tomakethingsevenmorecomplicated,allthesedecisionsinvolvetrade-offs.Upholdingareputationforreliabilityisn’tnecessarilycompatiblewithofferingawiderangeofproducts.Lowcost doesn’t normally go hand in hand with high quality.Withthesefactorsinmind,let’slookatthespecifictypesofdecisionsthathavetobemadeintheproductionplanningprocess.We’vedividedthesedecisionsintothosedealingwithproductionmethods, site selection, facility layout, and components and materials management.Production-Method DecisionsThefirststepinproductionplanningisdecidingwhichtypeofproductionprocessisbestformak-ingthegoodsthatyourcompanyintendstomanufacture.Inreachingthisdecision,youshouldanswer such questions as the following:•How much input do I receive from a particular customer before producing my goods?•AmImakingaone-of-a-kindgoodbasedsolelyoncustomerspecifications,oramIproducinghigh-volume standardized goods to be sold later?•DoIoffercustomerstheoptionof“customizing”anotherwisestandardizedgoodtomeettheirspecific needs?Onewaytoappreciatethenatureofthisdecisionisbycomparingthreebasictypesofprocessesormethods:make-to-order,massproduction,andmasscustomization.Thetaskoftheoperationsmanageristoworkwithothermanagers,particularlymarketers,toselecttheprocessthat best serves the needs of the company’s customers.194A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
FIGURE 7.2The owner of this candystore wanted a “sweet” signthat would draw customersin. To get this one-of-a-kindsign, the owner went to amake-to-order sign shop.Source: tandaV/Shutterstock.commake-to-orderstrategyProduction method inwhich products are madeto customer specification.mass production (ormake-to-stockstrategy)Production method inwhich high volumes ofproducts are made at lowcost and held in inventoryin anticipation of futuredemand.Make-to-OrderAtonetime,mostconsumergoods,suchasfurnitureandclothing,weremadebyindividualsprac-ticingvariouscrafts.Bytheirverynature,productswerecustomizedtomeettheneedsofthebuyerswhoorderedthem.Thisprocess,whichiscalledamake-to-orderstrategy,isstillcommonlyusedbysuchbusinessesasprintorsignshopsthatproducelow-volume,high-varietygoodsaccord-ing to customer specifications.Mass ProductionBytheearlytwentiethcentury,however,anewconceptofproducinggoodshadbeenintroduced:massproduction(ormake-to-stockstrategy)isthepracticeofproducinghighvolumesofidenti-calgoodsatacostlowenoughtopricethemforlargenumbersofcustomers.Goodsaremadeinanticipationoffuturedemand(basedonforecasts)andkeptininventoryforlatersale.Thisapproachisparticularlyappropriateforstandardizedgoodsrangingfromprocessedfoodstoelec-tronic appliances.FIGURE 7.3Automakers produce a high volume of cars in anticipation of future demand.Source: Shutterstock, Inc.Chapter 7Operations Management in Manufacturing and Service Industries195© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
FIGURE 7.4You probably know M&M’staste good, but did you knowthat you can buy“customized” M&M’s? Whenyou graduate, you mightwant to get M&M’s in yourschool colors for yourgraduation party.Source: Roman Samokhin/Shutterstock.commass customizationProduction method inwhich fairly high volumesof customized productsare made at fairly lowprices.Mass CustomizationButthere’sadisadvantagetomassproduction:customers,asonecontemporaryadvertisingsloganputsit,can’t“haveittheirway.”Theyhavetoacceptstandardizedproductsastheycomeoffassem-blylines.Increasingly,however,customersarelookingforproductsthataredesignedtoaccommodateindividualtastesorneedsbutcanstillbeboughtatreasonableprices.Tomeetthedemandsoftheseconsumers,manycompanieshaveturnedtoanapproachcalledmasscustomization,which(asthetermsuggests)combinestheadvantagesofcustomizedproductswiththose of mass production.Thisapproachrequiresthatacompanyinteractwiththecustomertofindoutexactlywhatthecustomerwantsandthenmanufacturethegood,usingefficientproductionmethodstoholddowncosts.Oneefficientmethodistomass-produceaproductuptoacertaincut-offpointandthen to customize it to satisfy different customers.Thelistofcompaniesdevotingatleastaportionoftheiroperationstomasscustomizationisgrowingsteadily.Oneofthebest-knownmasscustomizersisNike,whichhasachievedsuccessbyallowingcustomerstoconfiguretheirownathleticshoes,apparel,andequipmentthroughitsNikeiDprogram.TheWebhasalottodowiththegrowthofmasscustomization.Levi’s,forinstance,letsawomanfindapairofperfectfittingjeansbygoingthroughanonlinefittingprocessthatfirstidentifiesher“curve”type:slight(straightfigure),demi(evenlyproportioned),bold(curvyfigure),andsupreme(curviestshape).Oakleyofferscustomizedsunglasses,goggles,watches,andback-packs,whileMars,Inc.canmakeM&M’sinanycolorthecustomerwants(say,schoolcolors)aswellas add text and pictures to the candy.[2]Naturally,masscustomizationdoesn’tworkforalltypesofgoods.Mostpeopledon’tcareaboutcustomizeddetergentsorpaperproducts.Andwhilemanyofusliketheideaofcustomizedclothes,footwearfromNike,orsunglassesfromOakley,weoftenaren’twillingtopaythehigherpricestheycommand.FIGURE 7.5Nike has a full line of athletic shoes and gear that can be customized.Source: pio3/Shutterstock.com196A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Production Processes, Technology, and VolumeTakeafewminutestocompleteanonlineexercisethattestsyourunderstandingofthelinkbetween volume and standardization.Facilities DecisionsAfterselectingthebestproductionprocess,operationsmanagersmustthendecidewherethegoodswillbemanufactured,howlargethemanufacturingfacilitieswillbe,andhowthosefacilitieswill be laid out.Site SelectionIn choosing a location, managers must consider several factors:•Tominimizeshippingcosts,bothforrawmaterialscomingintotheplantandforfinishedgoods going out, managers often want to locate plants close to suppliers, customers, or both.•They generally want to locate in areas with ample numbers of skilled workers.•They naturally prefer locations where they and their families will enjoy living.•Theywantlocationswherecostsforresourcesandotherexpenses—land,labor,construction,utilities, and taxes—are low.•Theylookforlocationswithafavorablebusinessclimate—oneinwhich,forexample,localgovernmentsmightofferfinancialincentives(suchastaxbreaks)toenticethemtodobusinessin their locales.Managersrarelyfindlocationsthatmeetallthesecriteria.Asarule,theyidentifythemostimportantcriteriaandaimatsatisfyingthem.IndecidingtolocateinSanClemente,California,forChapter 7Operations Management in Manufacturing and Service Industries197© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
capacityMaximum number ofproducts that a facility canproduce over a givenperiod under normalworking conditions.instance,PowerSkiwasabletosatisfythreeimportantcriteria:(1)proximitytothefirm’ssuppliers,(2)availabilityofskilledengineersandtechnicians,and(3)favorablelivingconditions.Thesefac-torsweremoreimportantthanoperatinginalow-costregionorgettingfinancialincentivesfromlocalgovernment.BecausePowerSkidistributesitsproductsthroughouttheworld,proximitytocustomers was also unimportant.Capacity PlanningNowthatyouknowwhereyou’regoingtolocate,youhavetodecideonthequantityofproductsthatyou’llproduce.Youbeginbyforecastingdemandforyourproduct.AswediscussedinChapter6,forecastingisn’teasy.Toestimatethenumberofunitsthatyou’relikelytoselloveragivenperiod,youhavetounderstandtheindustrythatyou’reinandestimateyourlikelyshareofthemarketbyreviewing industry data and conducting other forms of research.Onceyou’veforecastedthedemandforyourproduct,youcancalculatethecapacityrequire-mentsofyourproductionfacility—themaximumnumberofgoodsthatitcanproduceoveragiventimeundernormalworkingconditions.Inturn,havingcalculatedyourcapacityrequirements,you’rereadytodeterminehowmuchinvestmentinplantandequipmentyou’llhavetomake,aswell as the number of labor hours required for the plant to produce at capacity.Likeforecasting,capacityplanningisdifficult.Unfortunately,failingtobalancecapacityandprojecteddemandcanbeseriouslydetrimentaltoyourbottomline.Ifyousetcapacitytoolow(andsoproducelessthanyoushould),youwon’tbeabletomeetdemand,andyou’lllosesalesandcus-tomers.Ifyousetcapacitytoohigh(andturnoutmoreunitsthanyoushould),you’llwasteresources and inflate operating costs.Key Takeaways•Thejobofoperationsmanagementistooverseetheprocessoftransformingresourcesintogoods and services.•Theroleofoperationsmanagersinthemanufacturingsectorincludesproductionplanning,production control, and quality control.•Duringproductionplanning,managersdeterminehowgoodswillbeproduced(productionprocess),whereproductionwilltakeplace(siteselection),andhowmanufacturingfacilitieswill be laid out (layout planning).•Inselectingtheappropriateproductionprocess,managerscomparethreebasicmethods:make-to-orderstrategy(goodsaremadetocustomerspecifications),massproductionormake-to-stockstrategy(highvolumesofgoodsaremadeandheldininventoryforlatersale),andmass customization(high volumes of customized goods are made).•Inchoosingthesiteforacompany’smanufacturingoperations,managerslookforlocationsthatminimizeshippingcosts,haveanamplesupplyofskilledworkers,provideafavorablecommunityforworkersandtheirfamilies,offerresourcesatlowcost,andhaveafavorablebusiness climate.•Managersestimatethequantityofproductstobeproducedbyforecastingdemandfortheirproductandthencalculatingthecapacityrequirementsoftheproductionfacility—themaximumnumberofgoodsthatitcanproduceoveragivenperiodundernormalworkingconditions.Beforegoingtothenextsectionofthischapter,takeafewminutestotakeanonlinequizinordertotestyourknowledgeofthematerialcoveredinthissection.Quizzescanbefoundunderthe“Quiz” tab at the bottom of the online reader.198A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
layoutArrangement in a facility ofequipment, machinery,and people to make aproduction process asefficient as possible.process layoutLayout that groupstogether workers ordepartments that performsimilar tasks.Exercises1.Twoformersurfersinventedamaterialforsurfboardsthat’slighterandstrongerthanany-thingmanufacturersnowuse.Theyhavereceivedfundingtosetupaproductionfacility,andtheywantyoutohelpthemselectalocation.Inadditiontoyourrecommendation,identifythe factors that you considered in reaching your decision.2.Compareandcontrastthreecommontypesofproductionprocesses:make-to-order,make-to-stock,andmasscustomization.Whataretheadvantagesanddisadvantagesofeach?Whyaremorecompaniesdevotingatleastaportionoftheiroperationstomasscustomiza-tion?Identifythreegoodsthatcouldprobablybeadaptedtomasscustomizationandthreethat probably couldn’t.7.3Facility LayoutsLearning Objective1.Describe four major types of facility layouts: process, product, cellular, and fixed position.Thenextstepinproductionplanningisdecidingonplantlayout—howequipment,machinery,andpeoplewillbearrangedtomaketheproductionprocessasefficientaspossible.Inthissection,we’llexamine four common types of facility layouts: process, product, cellular, and fixed position.Theprocesslayoutgroupstogetherworkersordepartmentsthatperformsimilartasks.Goodsinprocess(goodsnotyetfinished)movefromoneworkstationtoanother.Ateachposition,workersusespecializedequipmenttoperformaparticularstepintheproductionprocess.Tobetterunder-standhowthislayoutworks,we’lllookattheproductionprocessattheVermontTeddyBearCompany.Let’ssaythatBrookeCollinsjustplacedanorderforapersonalizedteddybear—a“hikerbear”withkhakishorts,awhiteT-shirtwithhernameembroideredonit,faux-leatherhikingboots,andanylonbackpackwithsleepingbag.Brooke’sbearbeginsatthefur-cuttingworkstation,whereitshoney-brown“fur”coatiscut.Itthenmovestothestuffingandsewingworkstationtogetitsinsidesandhaveitssidesstitchedtogether.Next,itmovestothedressingstation,whereit’soutfit-tedwithallthecoolclothesandgearthatsheordered.Finally,itwindsupintheshippingstationandstartsitsjourneytoherhouse.Foramorecolorfullookattheprocess,seeFigure7.6).Ifyou’reeveratalossforaplacetogoonspringbreak,whynottakeatriptoShelburne,Vermontandvisitthebirthplaceofthebears.YoucantakeatourledbyateamofenthusiasticBearAmbas-sadors.Chapter 7Operations Management in Manufacturing and Service Industries199© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
product layoutLayout in which productsare produced by people,equipment, ordepartments arranged inan assembly line.FIGURE 7.6Process Layout at Vermont Teddy Bear CompanyWatch this videoto experience an active version of this figure.View in the online readerInaproductlayout,high-volumegoodsareproducedefficientlybypeople,equipment,ordepartmentsarrangedinanassemblyline—thatis,aseriesofworkstationsatwhichalready-madepartsareassembled.JustBorn,acandymakerlocatedinBethlehem,Pennsylvania,makesaprod-uctcalledMarshmallowPeepsonanassemblyline.First,theingredientsarecombinedandwhippedinhugekettles.Then,sugarisaddedforcolor.Atthenextworkstation,themixture—col-oredwarmmarshmallow—ispouredintobabychick–shapedmoldscarriedonconveyorbelts.Theconveyor-beltparadeofcandypiecesthenmovesforwardtostationswhereworkersaddeyesorotherdetails.Whenthefinishedcandyreachesthepackagingarea,it’swrappedforshipmenttostoresaroundtheworld.TotakeanonlinetouroftheMike&IkeandHotTamalesproductionprocess,logontotheJustBornwebsiteathttps://www.justborn.com/who-we-are/how-our-candy-is-made/andclickonthepictureshowingboxesofMike&Ike’sandHotTamales.IfyoulikePeanutChewsbetter,clickonthePeanutChews’block(althoughitisnotasinterestingastheoneshowingMike&Ike’s!).Also,foraprintedvisualoftheproductionprocessforMarshmallowPeeps,seeFig-ure 7.7).Process Layout at Vermont Teddy Bear Company200A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
cellular layoutLayout in which teams ofworkers perform all thetasks involved in building acomponent, group ofrelated components, orfinished product.FIGURE 7.7Product Layout at Just Born, Inc.Watch this videoto experience an active version of this figure.View in the online readerBothproductandprocesslayoutsarrangeworkbyfunction.AttheVermontTeddyBearCom-pany,forexample,thecuttingfunctionisperformedinoneplace,thestuffing-and-sewingfunctioninanotherplace,andthedressingfunctioninathirdplace.Ifyou’reacutter,youcutallday;ifyou’reasewer,yousewallday:that’syourfunction.ThesameistruefortheproductionofMarsh-mallowPeepsatJustBorn.Ifyourfunctionistodecoratepeeps,youstandonanassemblylineanddecorate all day. If your function is packing, you pack all day.Arrangingworkbyfunction,however,isn’talwaysefficient.Productionlinescanbackup,inventoriescanbuildup,workerscangetboredwithrepetitivejobs,andtimecanbewastedintransportinggoodsfromoneworkstationtoanother.Tocountersomeoftheseproblems,manymanufacturershaveadoptedacellularlayout,inwhichsmallteamsofworkershandleallaspectsofbuildingacomponent,a“family”ofcomponents,orevenafinishedproduct.Eachteamworksinasmallarea,orcell,equippedwitheverythingthatitneedstofunctionasaself-containedunit.MachinesaresometimesconfiguredinaU-shape,withpeopleworkinginsidetheU.Becauseteammembersoftenshareduties,they’retrainedtoperformseveraldifferentjobs.Teamsmonitorboththequantityandthequalityoftheirownoutput.Thisarrangementoftenresultsinfastercomple-tiontime,lowerinventorylevels,improvedquality,andbetteremployeemorale.Cellularmanufacturingisusedbylargemanufacturers,suchasBoeing(airplanemanufacturer),Raytheon(defensecontractormakingweaponsforthemilitary),andPratt&Whitney(aviationandspacecon-tractor),[3]aswellasbysmallcompanies,suchasLittleEnterprise,whichmakescomponentsforrobots.[4]Figure 7.8illustrates a typical cellular layout.Product Layout at Just Born, Inc.Chapter 7Operations Management in Manufacturing and Service Industries201© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
fixed-position layoutLayout in which workersare moved to the product,which stays in one place.FIGURE 7.8Cellular LayoutWatch this videoto experience an active version of this figure.View in the online readerIt’seasytomoveteddybearsandmarshmallowcandiesaroundthefactorywhileyou’remak-ingthem,butwhataboutships?Inproducinglargeitems,manufacturersusefixed-positionlayoutinwhichtheproductstaysinoneplaceandtheworkers(andequipment)gototheproduct.ThisisthearrangementusedbyGeneralHousingCorporationinconstructingmodularhomes.Eachhouseisconstructedatthecompany’sfactoryinBayCity,Michigan,accordingtothecustomer’sdesign.Becausecarpenters,electricians,plumbers,andothersworkoneachbuildinginsidethecli-mate-controlledfactory,theprocesscan’tbehinderedbyweather.Onceit’sdone,thehouseistransportedinmodulestotheowner’sbuildingsiteandsetupinoneday.ForacloserviewofGen-eral Housing Corporation’s production process, go tohttp://www.genhouse.com.Cellular Layout202A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Key Takeaways•Managershaveseveralproductionlayoutchoices,includingprocess,product,cellular,andfixed-position.•Theprocesslayoutgroupstogetherworkersordepartmentsthatperformsimilartasks.Ateachposition,workersusespecializedequipmenttoperformaparticularstepintheproduc-tion process.•Inaproductlayout,high-volumegoodsareproducedinassembly-linefashion—thatis,aseries of workstations at which already-made parts are assembled.•Inacellularlayout,smallteamsofworkershandleallaspectsofbuildingacomponent,a“family of components,” or even a finished product.•Afixed-positionlayoutisusedtomakelargeitems(suchasshipsorbuildings)thatstayinone place while workers and equipment go to the product.Beforegoingtothenextsectionofthischapter,takeafewminutestotakeanonlinequizinordertotestyourknowledgeofthematerialcoveredinthissection.Quizzescanbefoundunderthe“Quiz” tab at the bottom of the online reader.Exercise1.Aspurchasingmanagerforacompanythatfliescorporateexecutivesaroundtheworld,you’reresponsibleforbuyingeverythingfromairplanestoonboardsnacks.Youplantovisitalltheplantsthatmakethethingsyoubuy:airplanes,passengerseats,onboardenter-tainmentsystemsthatgointhebackofthepassengerseats,andthespeciallydesigneduniforms(withembroideredcompanylogos)wornbytheflightattendants.Whattypeoflay-outshouldyouexpecttofindateachfacility—process,product,orfixed-position?Whatwilleachlayoutlooklike?Whyisitappropriateforthecompany’sproductionprocess?Couldanyoftheseplantsswitchtoacellularlayout?Whatwouldthistypeoflayoutlooklike?Whatwould be its advantages?7.4Managing the Production Processin a Manufacturing CompanyLearning Objectives1.Identifytheactivitiesundertakenbytheoperationsmanagerinoverseeingtheproductionprocess in a manufacturing company.2.Identify the major materials management decisions made by operations managers.3.Examine the importance of vendor selection and material acquisition.4.Discussthefollowingtechnologyadvancesthataidthepurchasingfunction:e-purchasingand electronic data interchange (EDI).Chapter 7Operations Management in Manufacturing and Service Industries203© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
materialsmanagementAll decisions pertaining tothe purchase of inputs, theinventory of componentsand finished products, andthe scheduling ofproduction processes.purchasingProcess of acquiringmaterials and services tobe used in production.FIGURE 7.9A purchasing manager at alarge company usinge-purchasing(e-procurement) follows thesame process as you wouldbuying something fromAmazon.Source: © Shutterstock, Inc.electronic datainterchange (EDI)Computerized exchange ofbusiness transactiondocuments.5.Explainthefollowinginventorycontrolmethods:just-in-time(JIT)productionandmaterialrequirements planning (MRP).6.Explain how managers schedule jobs by using a master production schedule (MPS).Oncetheproductionprocessisinplace,theattentionoftheoperationsmanagershiftstothedailyactivitiesofmaterialsmanagement,whichencompassthefollowingactivities:purchasing,inven-tory control, and work scheduling.Purchasing and Supplier SelectionTheprocessofacquiringthematerialsandservicestobeusedinproductioniscalledpurchasing(orprocurement).Formanyproducts,thecostsofmaterialsmakeupabout50percentoftotalman-ufacturingcosts.Notsurprisingly,then,materialsacquisitiongetsagooddealoftheoperationsmanager’s time and attention.Asarule,there’snoshortageofvendorswillingtosupplypartsandothermaterials,butthetrickisfindingthebestsuppliers.Inselectingasupplier,operationsmanagersmustconsidersuchquestions as the following:•Can the vendor supply the needed quantity of materials at a reasonable price?•Is the quality good?•Is the vendor reliable (will materials be delivered on time)?•Does the vendor have a favorable reputation?•Is the company easy to work with?Gettingtheanswerstothesequestionsandmakingtherightchoices—aprocessknownassup-plier selection—is a key responsibility of operations management.E-Purchasing (or E-Procurement)Technologyischangingthewaybusinessesbuythings.Throughe-purchasing(ore-procurement),companiesusetheInternettointeractwithsuppliers.Theprocessissimilartotheoneyou’dusetofindaconsumergood—say,afiftyinchLEDTV—overtheInternet.YoumightstartbybrowsingthewebsitesofTVmanufacturers,suchasSonyorSamsung,orelectronicsretailers,suchasBestBuy.Togathercomparativeprices,youmightgotoacomparison-shoppingwebsite,suchasAmazon.com,theworld’slargestonlineretailer.YoumightevenconsiderplacingabidoneBay,anonlinemarketplacewheresellersandbuyerscometogethertodobusinessthroughauctions.Onceyou’vedecidedwheretobuyyourTV,you’dcompleteyourtransactiononline,evenpayingforitelectronically.IfyouwereapurchasingmanagerusingtheInternettobuypartsandsupplies,you’dfollowbasicallythesameprocess.You’didentifypotentialsuppliersbygoingdirectlytoprivatewebsitesmaintainedbyindividualsuppliersortopublicwebsitesthatcollectinformationonnumeroussup-pliers.Youcoulddoyourshoppingthroughonlinecatalogs,oryoumightparticipateinanonlinemarketplacebyindicatingthetypeandquantityofmaterialsyouneedandlettingsuppliersbidonprices.Someofthesee-marketplacesarequitelarge.Finally,justasyoupaidforyourTVelectroni-cally,youcoulduseasystemcalledelectronicdatainterchange(EDI)toprocessyourtransactionsand transmit all your purchasing documents.TheInternetprovidesanadditionalbenefittopurchasingmanagersbyhelpingthemcommu-nicatewithsuppliersandpotentialsuppliers.TheycanusetheInternettogivesuppliersspecificationsforpartsandsupplies,encouragethemtobidonfuturematerialsneeds,alertthem204A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
FIGURE 7.10Your room contains your “inventory.” How areyou managing it? Do you have too much stuff?Can you find something when you need it? Canyou actually move around your room?Source: trekandshoot/Shutterstock.cominventory controlManagement of inventoryto ensure that a companyhas enough inventory tokeep operations flowingsmoothly but not so muchthat money is beingwasted in holding it.just-in-timeproductionSystem for reducinginventories and costs byrequiring suppliers todeliver materialsjust intimeto go into theproduction process.tochangesinrequirements,andgivetheminstructionsondoingbusinesswiththeiremployers.UsingtheInternetforbusinesspurchasingcutsthecostsofpurchasedproductsandsavesadmin-istrativecostsrelatedtotransactions.Andit’sfasterforprocurementandfostersbettercommuni-cations.Inventory ControlIfamanufacturerrunsoutofthematerialsitneedsforproduction,thenproduc-tionstops.Inthepast,manycompaniesguardedagainstthispossibilitybykeepinglargeinventoriesofmaterialsonhand.Itseemedlikethethingtodoatthetime,butitoftenintroducedanewproblem—wastingmoney.Companieswerepayingforpartsandothermaterialsthattheywouldn’tuseforweeksorevenmonths,andinthemeantime,theywererunningupsubstantialstorageand insurance costs.Mostmanufacturershavesincelearnedthattoremaincompetitive,theyneedtomanageinventoriesmoreefficiently.Thistaskrequiresthattheystrikeabalancebetweentwothreatstoproductivity:losingproductiontimebecausethey’verunoutofmaterials,andwastingmoneybecausethey’recarryingtoomuchinventory.Theprocessofstrikingthisbalanceiscalledinventorycontrol,and companies now regularly rely on a variety of inventory-control methods.Just-in-Time ProductionOnemethodiscalledjust-in-time(JIT)production:themanufacturerarrangesformaterialstoarriveatproductionfacilitiesjustintimetoenterthemanufacturingprocess.Partsandmaterialsdon’tsitunusedforlongperiods,andthecostsof“holding”inventoryaresignificantlycut.JIT,how-ever,requiresconsiderablecommunicationandcooperationbetweenthemanufacturerandthesupplier.Themanufacturerhastoknowwhatitneeds,andwhen.Thesupplierhastocommittosupplying the right materials, of the right quality, at exactly the right time.Chapter 7Operations Management in Manufacturing and Service Industries205© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
FIGURE 7.11Making lasagna requiresdecision making andcalculations to ensure ayummy final product.Source: © 2010 JupiterimagesCorporationmaterialrequirementsplanning (MRP)Technique of using acomputerized program tocalculate the quantity ofmaterials needed forproduction and toreschedule inventoryordering.manufacturingresource planning(MRP II)System for coordinating afirm’s materialrequirements planningactivities with the activitiesof its other functionalareas.master productionschedule (MPS)Timetable that specifieswhich and how manyproducts will be producedand when.Material Requirements PlanningAnothermethod,calledmaterialrequirementsplanning(MRP),reliesonacomputerprogrambothtocalculatethequantityofmaterialsneededforproductionandtodeterminewhentheyshouldbeorderedormade.Let’ssay,forexample,thatyouandseveralclassmatesareplanningafund-raisingdinnerforthelocalanimalshelter.First,youestimatehowmanypeoplewillattend—say,fifty.Next,youplanthemenu—lasagna,garlicbread,salad,andcookies.Then,youdeterminewhatingredientsyou’llneedtomakethefood.Next,youhavetodecidewhenyou’llneedyouringredients.Youdon’twanttomakeeverythingontheafternoonofthedinner;somethings—likethelasagnaandcookies—canbemadeaheadoftime.Nordoyouwanttobuyallyouringredientsatthesametime;inparticular,thesaladingredientswouldgobadifpurchasedtoofarinadvance.Onceyou’vemadeallthesecalculationsanddecisions,youworkoutaschedulefortheproductionofyourdinnerthatindicatestheorderandtimingofeveryactivityinvolved.Withyourschedule in hand, you can determine when to buy each ingredient. Finally, you do your shopping.Thoughtheproductionprocessatmostmanufacturingcompaniesisalotmorecomplexthanplanningadinner,anMRPsystemisdesignedtohandlesimilarproblems.Theprogramgeneratesaproductionschedulebasedonestimatedoutput(yourfood-preparationtimetableforfiftyguests),prepares a list of needed materials (your shopping list), and orders the materials (goes shopping).ThebasicMRPfocusesonmaterialplanning,butthere’samoresophisticatedsystem—calledmanufacturingresourceplanning(MRPII)—thatgoesbeyondmaterialplanningtohelpmonitorresourcesinallareasofthecompany.Suchaprogramcan,forinstance,coordinatetheproductionschedule with HR managers’ forecasts for needed labor.Work SchedulingAswe’veseen,manufacturersmakeprofitsbytransforminginputs(materialsandotherresources)intooutputs(finishedgoods).Weknow,too,thatproductionactivities,likeallbusinessactivities,havetobecontrolled:theyhavetobemonitoredtoensurethatactualperformancesatisfiesplannedperformance.Inproduction,thecontrolprocessstartswhenoperationsmanagersdecidenotonlywhichgoodsandhowmanywillbeproduced,butwhen.Thisdetailedinformationgoesintoamasterproductionschedule(MPS).TodrawupanMPS,managersneedtoknowwherematerialsarelocatedandheadedateverystepintheproductionprocess.Forthispurpose,theydeterminetheroutingofallmaterials—thatis,theworkflowofeachitembasedonthesequenceof operations in which it will be used.Key Takeaways•Oncetheproductionprocessisunderway,theattentionoftheoperationsmanagershiftstothedailyactivitiesofmaterialsmanagement,whichencompassesmaterialspurchasing,inventory control, and work scheduling.•Becausematerialcostsoftenmakeupabout50percentoftotalmanufacturingcosts,vendorselectionandmaterialacquisitiongetsagooddealoftheoperationsmanager’stimeandattention.•Inrecentyears,thepurchasingfunctionhasbeensimplifiedthroughtechnologyadvances,includinge-purchasingandelectronicdatainterchange(EDI),whichprocesstransactionsand transmit purchasing documents.206A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Gantt chartGraphical tool fordetermining the status ofprojects.•Commonlyusedinventorycontrolmethodsincludejust-in-time(JIT)production,bywhichmaterialsarrivejustintimetoenterthemanufacturingprocess,andmaterialrequirementsplanning (MRP), which uses computer programming to determine material needs.•To schedule jobs, managers create amaster production schedule (MPS).Beforegoingtothenextsectionofthischapter,takeafewminutestotakeanonlinequizinordertotestyourknowledgeofthematerialcoveredinthissection.Quizzescanbefoundunderthe“Quiz” tab at the bottom of the online reader.Exercise1.Whatise-purchasing(ore-procurement)?Howdoesitwork?Whatadvantagesdoesitgiveapurchasingmanager?Howdoesitbenefitacompany?Howdoesitchangetherelation-ship between purchasing managers and vendors?7.5Graphical Tools: Gantt and PERTChartsLearning Objective1.Explain how to create and use both Gantt and PERT charts.Becausetheyalsoneedtocontrolthetimingofalloperations,managerssetupschedules:Theyselectjobstobeperformedduringtheproductionprocess,assigntaskstoworkgroups,settimeta-blesforthecompletionoftasks,andmakesurethatresourceswillbeavailablewhenandwherethey’reneeded.Thereareanumberofschedulingtechniques.We’llfocusontwoofthemostcom-mon—Ganttand PERTcharts.Gantt ChartsAGanttchart,namedafterthedesigner,HenryGantt,isaneasy-to-usegraphicaltoolthathelpsoperationsmanagersdeterminethestatusofprojects.Let’ssaythatyou’reinchargeofmakingthe“hikingbear”thatweorderedearlierfromtheVermontTeddyBearCompany.Figure7.12isaGanttchartfortheproductionofonehundredofthesebears.Asyoucansee,itshowsthatseveralactiv-itiesmustbecompletedbeforethebearsaredressed:thefurhastobecut,stuffed,andsewn;andtheclothesandaccessoriesmustbemade.OurGanttcharttellsusthatbydaysix,allaccessoriesandclothinghavebeenmade.Thestuffingandsewing,however(whichmustbefinishedbeforethebearsaredressed),isn’tscheduledforcompletionuntiltheendofdayeight.Asoperationsmanager,you’llhavetopaycloseattentiontotheprogressofthestuffingandsewingoperationstoensurethat finished products are ready for shipment by their scheduled date.Chapter 7Operations Management in Manufacturing and Service Industries207© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
PERT chartTool for diagramming theactivities required toproduce a product,specifying the timerequired to perform eachactivity in the process, andorganizing activities in themost efficient sequence.FIGURE 7.12Gantt Chart for Vermont Teddy BearPERT ChartsGanttchartsareusefulwhentheproductionprocessisfairlysimpleandtheactivitiesaren’tinter-related.Formorecomplexschedules,operationsmanagersmayusePERTcharts.PERT(whichstandsforProgramEvaluationandReviewTechnique)isdesignedtodiagramtheactivitiesrequiredtoproduceagood,specifythetimerequiredtoperformeachactivityintheprocess,andorganizeactivitiesinthemostefficientsequence.Italsoidentifiesacriticalpath:thesequenceofactivitiesthatwillentailthegreatestamountoftime.Figure7.13isaPERTdiagramshowingthesameprocess for producing one “hiker” bear at Vermont Teddy Bear.208A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
FIGURE 7.13PERT Chart for Vermont Teddy BearWatch this videoto experience an active version of this figure.View in the online readerOurPERTchartshowshowtheactivitiesinvolvedinmakingasinglebeararerelated.Itindi-catesthattheproductionprocessbeginsatthecuttingstation.Next,thefurthat’sbeencutforthisparticularbearmovesfirsttothestuffingandsewingstationsandthentothedressingsta-tion.Atthesametimethatitsfurismovingthroughthissequenceofsteps,thebear’sclothesarebeingcutandsewnanditsT-shirtisbeingembroidered.Itsbackpackandtentaccessoriesarealsobeingmadeatthesametime.Notethatfur,clothes,andaccessoriesallmeetatthedressingstation,wherethebearisdressedandoutfittedwithitsbackpack.Finally,thefinishedbearispackagedandshipped to the customer’s house.Whatwasthecriticalpathinthisprocess?Thepaththattookthelongestamountoftimewasthesequencethatincludedcutting,stuffing,dressing,packaging,andshipping—asequenceofstepstakingsixty-fiveminutes.Ifyouwantedtoproduceabearmorequickly,you’dhavetosavetimeonthispath.Evenifyousavedthetimeonanyoftheotherpaths—say,thesequenceofstepsinvolvedincutting,sewing,andembroideringthebear’sclothes—youstillwouldn’tfinishtheentirejobanysooner:thefinishedclotheswouldjusthavetowaitforthefurtobestuffedandsewnandPERT Chart for Vermont Teddy BearChapter 7Operations Management in Manufacturing and Service Industries209© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
movedtothedressingstation.Inotherwords,wecangainefficiencyonlybyimprovingourperfor-mance on one or more of the activities along the critical path.Key Takeaways•GanttandPERTchartsaretwoofthemostcommongraphicaltoolsusedbyoperationsmanagers to diagram the activities involved in producing goods.•AGanttchartisaneasy-to-usegraphicaltoolthathelpsoperationsmanagersdeterminethestatus of projects.•PERTchartsareusedtodiagramtheactivitiesrequiredtoproduceagood,specifythetimerequiredtoperformeachactivityintheprocess,andorganizeactivitiesinthemostefficientsequence.•APERTchartidentifiesacriticalpath—thesequenceofactivitiesthatwillentailthegreatestamount of time.Beforegoingtothenextsectionofthischapter,takeafewminutestotakeanonlinequizinordertotestyourknowledgeofthematerialcoveredinthissection.Quizzescanbefoundunderthe“Quiz” tab at the bottom of the online reader.Exercise1.Earningacollegedegreerequiresnotonlyalotofhardworkbutalso,asyouknow,alotofplanning.Youmust,forexample,completeaspecifiednumberofcreditsandtakemanyrequiredcourses,particularlyinyourmajor.Decidingwhichcoursestotakeandwhentotakethemcanbecomplicatedwhensomeofthemhaveprerequisites.APERTchart—whichdiagramstheactivitiesrequiredtocompleteagoal—mighthelpyoudeterminetheorderinwhichyoushouldtakecoursesforyourmajor.Pickamajorthatinterestsyouandfindoutwhatcoursesyou’dneedtocompleteit.ThenprepareaPERTchartshowingallthecoursesyou’dplantotakeeachsemestertocompleteyourmajor.(Forexample,ifyouselecttheaccountingmajor,includeonlyaccountingcourses;don’tincludeyourotherbusinesscoursesoryourelectivecourses.)Identifythecriticalpathlaidoutinyourchart.Whathap-pens if you fail to take one of your critical-path courses on time?7.6The Technology of GoodsProductionLearning Objectives1.Providethepurposeofthefollowingsoftwaresystems:computer-aideddesign(CAD),com-puter-aidedmanufacturing(CAM),computer-integratedmanufacturing(CIM),andflexiblemanufacturing systems (FMS).2.Understand how these various software systems can be linked together.3.Explainhowmanufacturingcompaniesusetechnologytoproduceanddelivergoodsinanefficient, cost-effective manner.210A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
computer-aideddesign (CAD)System using computertechnology to createmodels representing thedesign of a product.computer-aidedmanufacturing (CAM)System using computertechnology to controlproduction processes andequipment.4.Defineautomationandroboticsandappreciatehowtheycontributetothemanufacturingand service industries.5.Describe the 3D printing process and identify its advantages.6.Compare 3D printing to traditional manufacturing.Computer-Aided DesignRecallthatPowerSkifounderandCEOBobMontgomeryspentsixteenyearsdesigningtheJet-boardandbringingittoproduction.Atonepoint,inhiseffortstogetthedesignjustright,he’dconstructedthirtydifferentprototypes.Needlesstosay,thisprocesstookaverylongtime,butevenso,Montgomerythoughtthathecouldhandlethedesigningoftheenginewithouttheaidofacomputer. Before long, however, he realized that it was impossible to keep track of all the changes.That’swhenMontgomeryturnedtocomputertechnologyforhelpandbeganusingacomputer-aideddesign(CAD)softwarepackagetodesignnotonlytheenginebutalsotheboarditselfandmanyofitscomponents.TheCADprogramenabledMontgomeryandhisteamofengi-neerstotesttheproductdigitallyandworkoutdesignproblemsbeforemovingtotheprototypestage.ThesophisticatedCADsoftwareallowedMontgomeryandhisteamtoputtheirdesignpaperinadrawerandtostartbuildingboththeboardandtheengineonacomputerscreen.Byrotatingtheimageonthescreen,theycouldevenviewthedesignfromeveryangle.HavingusedtheirCADprogramtomakemorethan400designchanges,theywerereadytotesttheJetboardinthewater.Duringthetests,onboardsensorstransmitteddatatoportablecomputers,allowingtheteamtomakeadjustmentsfromtheshorewhiletheprototypewasstillinthewater.Nowadays,PowerSkiusescollaborationsoftwaretotransmitdesignchangestothesuppliersofthe340componentsthatmake up the Jetboard.Computer-Aided ManufacturingFormanycompanies,thenextstepistolinkCADtothemanufacturingprocess.Acomputer-aidedmanufacturing(CAM)softwaresystemdeterminesthestepsneededtoproducethecomponentandinstructsthemachinesthatdothework.BecauseCADandCAMprogramscan“talk”witheachother,companiescanbuildcomponentsthatsatisfyexactlytherequirementssetbythecomputer-generatedmodel.CAD/CAMsystemspermitcompaniestodesignandmanufacturegoodsfaster,moreefficiently,andatalowercost,andthey’realsoeffectiveinhelpingfirmsmonitorandimprovequality.CAD/CAMtechnologyisusedinmanyindustries,includingtheautoindustry,electronics,and clothing.Chapter 7Operations Management in Manufacturing and Service Industries211© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
computer-integratedmanufacturing (CIM)System in which thecapabilities of a CAD/CAMsystem are integrated withother computer-basedfunctions.flexiblemanufacturingsystem (FMS)System in whichcomputer-controlledequipment is programmedto handle materials used inmanufacturing.automationThe replacement ofworkers with machines.robotAn advanced form ofautomation that can carryout a complex series ofactions automatically.Computer-Integrated ManufacturingByautomatingandintegratingallaspectsofacompany’soperations,computer-integratedmanufacturing(CIM)systemshavetakentheintegrationofcomputer-aideddesignandmanufac-turingtoahigherlevel—andareinfactrevolutionizingtheproductionprocess.CIMsystemsexpandthecapabilitiesofCAD/CAM.Inadditiontodesignandproductionapplications,theyhan-dle such functions as order entry, inventory control, warehousing, and shipping.Flexible Manufacturing SystemsFinally,aCIMsystemisacommonelementinflexiblemanufacturingsystems(FMS),inwhichcomputer-controlledequipmentcaneasilybeadaptedtoproduceavarietyofgoods.AnFMShasimmenseadvantagesovertraditionalproductionlinesinwhichmachinesaresetuptoproduceonlyonetypeofgood.Whenthefirmneedstoswitchaproductionlinetomanufactureanewprod-uct,substantialtimeandmoneyareoftenspentinmodifyingequipment.AnFMSmakesitpossibletochangeequipmentsetupsmerelybyreprogrammingcomputer-controlledmachines.Such flexibility is particularly valuable to companies that produce customized products.[5]The Technology of Goods ProductionAutomation and RobotsIfyouwalkedthroughanautomobilefactoryintheU.S.fiftyyearsago,youwouldwitnesshun-dredsofautoworkersbusymakingcars.Ifyouvisitedanautomobileplanttoday,thepicturewouldbemuchdifferent.Therewouldbefarfewerworkers.Intheirplacewouldbemachinesdoingrepet-itivetasksthatusedtobehandledbytheworkers.Automation,thereplacementofworkerswithmachines,isprevalentintheautoindustryandmostmanufacturingfirms.Whenautomationwasfirstintroducedintheautoindustry,high-levelmanagementnotedthatthelossofautoworkers’jobs“[freed]humanworkersfromdirty,dull,ordangerousjobs[andimproved]qualitybyeliminat-ingerrorsandreducingvariability.”Butmostworkersunderstoodthattheprimaryreasonforindustrialautomationwasto“cutmanufacturingcostsbyreplacingincreasinglyexpensivepeoplewith ever-cheaper machines.”[6]Automationinthemanufacturingindustryhasevolvedfromsemi-automatedassemblylinestotoday’smodernrobots.AlthoughIamsureyouhaveseenarobot,adefinitionmightbehelpful.Here’sone:Arobotisanadvancedformofautomationthatcancarryoutacomplexseriesofactionsautomatically.Somerobotsareautonomous,meaningtheycanfunctionontheirown;oth-ers, called semi-autonomous, need a little help from humans.[7]Let’slookatafewexamplesofrobotsinaction.We’llstartfromthetop:There’safactorythatmakesrobotstwenty-fourhoursadayusingrobotsandonlyfourhumanworkerspershift.There’sanindoorroboticfarmentirelyrunbyrobotsthatharvests30,000headsoflettuceeveryday.Toseethesefactoriesinaction,though,youwouldneedtoflytoJapan.Closertohome,youcangotoCal-iforniaandwatch“flippy”flippinghamburgersandusingitsthermalvisiontocheckwhethertheburgeristhoroughlycooked.Or(whenyouare21)visitabarinLasVegasthathasarobotbartenderthat can make up to 120 drinks an hour.[8]212A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
View in the online readerEvenclosertohome—onyourcollegecampus—you’llfindarobotofparticularinteresttocol-legestudents.The“delivery”robotismadeandmarketedbyacompanyinEstonia(acountryinNorthernEuropethatwasformerlyapartoftheSovietUnion).Hereishowtherobotcouldhelpyou:Sayyoupreferdonutsandcoffeeforbreakfast,ratherthanthefoodservedinthecollegedin-inghall.Andyoudon’twanttoruntoDunkin’,particularlybecauseitisrainingout.Noproblem.CallinanordertoDunkin’onyourphone.Acutewagon-lookingrobotwillbringcoffeeanddonutstoyouwithin30minutes.Whenit’sclose,therobotsendsyouatwo-minutewarning.Whentherobotarrives,enteracodeonyourphone,openthelidandtakeoutyourfood.Theserobotscanbringyoulotsofdifferentfoods(pizza,subs,etc.)fromanumberofrestaurantsonorclosetocam-pusuntillateatnightorearlyinthemorning.Therobotscancrossstreetsandnavigatearoundcampus,avoidingpeopleandotherbarriers.Prettysmartrobot.Anditcostsonly$1.99fordelivery,whichyoucanchargetoyourcollegemealplan.Watchthevideobelow.Ifyouliketheidea,con-vince your college administrators to bring the delivery robot to your campus.[9]Whatdotheexamplesonautomationandrobotshaveincommon?Bothreplacejobspreviouslyheldbyhumanswithmachines.Thisispartgoodandpartbad.Thegoodpartisincreasedprofitsforbusinessesandpossiblybetter-qualityproductsorservices.Thebadpartislostjobsforwork-ers. Only time will tell how this dilemma will play out.View in the online readerBurger-Flipping RobotFood-Delivery Robots at CollegesChapter 7Operations Management in Manufacturing and Service Industries213© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
3D printingA process that builds athree-dimensional objectfrom a computer-aideddesign model bysequentially addingmaterial layer by layer,which is why it is alsocalled additivemanufacturing.3D PrintingOverthelastseveralyears,mostbusinesseshavefacedtremendouschangesintheirindustries.ThinkaboutthechangesbroughtaboutintheretailindustrybyAmazon,thehospitalityindustrybyAirbnb,thetransportationindustrybyUberandLyft,andthecableandsatelliteTVindustriesbyNetflixandHulu.Similartobusinessesintheseindustries,companiesinthemanufacturingindustryfaceanever-changingenvironment.Toremaincompetitiveinatechnology-basedenvi-ronment, many companies in the manufacturing industry have turned to 3D printing.[10]View in the online readerWhat Is 3D Printing?Tounderstandwhycompanieshaveincorporated3Dprintingintotheirproductdevelopmentandmanufacturingoperations,let’sfirstlearnwhat3Dprintingentails.3Dprintingisaprocessthatbuildsathree-dimensionalobjectfromacomputer-aideddesignmodelbysequentiallyaddingmateriallayerbylayer,whichiswhyitisalsocalledadditivemanufacturing.[11]Thisdefinition,althoughaccurate,canseemvague.Let’slookataspecificexampleofthe3Dprintingprocessinaction.Let’ssayyouare6’7”tall(averageheightforNBAplayers)butyoudon’twanttoplaybasketball;instead,youwanttoplaybaseball,butyouwantanaluminumbatthatworksforyou.Youcanbuyonemadeusingtraditionalmanufacturingmethodsoracustomizedbatmadeusinga3Dprinter.Thetraditionalmanufacturingapproachbeginswithlongaluminumrods,whichareslicedintosmallerrods.Aholeisdrilledinthesmallerrod,anditgoesthroughaprocessthatstretchestherodtobatsize.Thebatisnotfinishedatthispoint,butwhatisimportantisthattheprocessistop-down—youbeginwithlongrodsandendupcuttingthingsawaytoendupwithasmallerbat.Usingthe3Dprinter,theprocess,ontheotherhand,isbottom-up.Youbeginwithacomputerdesignofyour“for-a-6’7”-batter.”Youfeedthedesignintoyour3Dprinter,loadinsomematerials,andpress“print.”Theprinterconvertsthebatpictureintothousandsoftinyslices.Thenit“builds”yourcustomizedbatonelayeratatime.Itisquiteamazing!Whatismoreamazingisthegrowinglistofusesfor3Dprintersbothpersonallyandforcompanies.Hereareafewexamplesof3Dprint-ing products:NewBalance,Nike,AdidasandUnderArmourareallexploring3Dprintingtocreatetheper-fectcustomizedshoethattakesintoaccountone’sfootshapeandthecommonproblemofonefoot’sbeingalittlebiggerthantheother.Nikehascomeoutwitha3D-printedfootballcleat.ABuild Your Own Lamborghini Aventador Using 3D Printing214A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
smallermemberoftheathleticshoeworld,Feetz,hascomeoutwitha3D-printedshoemadefromrecycledandrecyclablematerials.And,bytheway,theyareabletomake7billiondifferentshoesizes. This is real customization.[12][13][14]Ahousingcharityorganization(NewStory)andaconstructiontechcompany(ICON)takeafirststeptowardreducingglobalhomelessnessbydesigningandconstructinga3D-printedhousethatcanbebuiltinlessthantwenty-fourhoursfor$4,000.TheprototypeofthehouseisinAustin,Texas.ThegoalistobuildanentirevillageofthesehomesinElSalvador.Seethefollowingvideo.[15]Using3Dprinting,thishomecanbebuiltinlessthantwenty-fourhoursfor$4,000.ThegoalofNewStory(ahousingcharityorganization)andICON(aconstructiontechcompany)istobringanendtoglobalhomelessness.TheywillstartbybuildinganentirevillageofthesehousesinElSalvador. A prototype of the house is in Austin, Texas.View in the online readerAdvantages of 3D PrintingThoseadopting3Dtechnologydosobecauseitprovidesthemwithanumberofadvantages.Let’slook at three of these: rapid prototyping, customization, and cost reduction.Rapid PrototypingYoumightrecallfromChapter6thatanimportantstepintheproductdevelopmentprocessistobuildandtestaprototype—aphysicalmodelofanewproduct.Buildingandrefiningaprototypeusingtraditionalmanufacturingmethodsisverytimeconsumingandexpensive.Using3Dprint-ing,however,thetimeandcostcanbereducedsubstantially.ThisistheprocessusedbyBMWasitbuilt and refined a prototype of its first 3D-printed motorcycle, the S1000RR.[16]CustomizationAsmentionedearlierinthechapter,consumersoftendesirecustomizedproductsthatmeettheirneedsandtastes.Tosatisfytheseconsumers,manycompanieshaveturnedto3Dprinting.Asanexample,let’ssayyouplayonyourcollege’ssoccerteam.Thenyouknowhowimportantitistowearamouthguard(withoutthisprotection,youcouldeasilychipatoothorevenknockoneout).Butyoualsoknowthatyourmouthguardoftendoesn’tfitproperlyandyouhavetobiteorclenchtokeeptheguardinplace.Youwouldn’tneedtodothisifyouhadacustomizedmouthguard(which,bytheway,youcangetbecauseof3Dprinting).Hereishowit’sdone:youhaveyourteethscanned3D-Printed Home Can Be Constructed for Under $4,000Chapter 7Operations Management in Manufacturing and Service Industries215© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
atalaboryourdentist’soffice(whichtakesaboutfiveminutes).Anexactdigitalreplicaofyourteethismadefromthescan,whichisfedintoa3Dprintertocreateacustommouthguard.Ifyouwant, you can have your name printed on the front of the guard.[17]Butlet’slookatadifferentscenario.Thistime,youdonotwearamouthguard.You,likemorethan350,000athletesayear,chipatooth.Noproblem,3Dprintingcanfixthisalso.Asitturnsout,dentistsuse3Dtechnologytocreatecrowns(coversorcapsthatgooverabrokentoothandmakeitlooklikenew).Afterscanningyourbrokentooth,thedentistcreatesamodeloftheneededcrownusing3Dprinting.Thenewcrownisputoveryourbrokentooth.Theentireprocesscanbedoneinaboutthirtyminutes(incontrasttoweeksusingtheold“mailanimprintofthetoothawaytoalab”andwaitforweekswearingatemporarycrown).And,ifyouwanttorewardyourselfforfixingyourtooth,considerbuyingapairof3D-printedearbuds,calledNormals.JustdownloadNormals’appandfollowtheinstructionsfortakingapictureofeachear.Theappthensendsthepicturestothecompany,wheretheyareproducedona3Dprinter.Yougetapairofcustom-fittedearbudsfromthe company within forty-eight hours.[18][19][20][21]Cost ReductionEventhough3Dprintingisinitsinfancy,earlyadoptersofthistechnologyenjoysizeablecostreductions.Herearefourareasinwhich3Dtechnologyislessexpensivethantraditionalmanufac-turing:1.Prototypes:Thisareaofcostsavingswasmentionedearlier:using3D-printerstobuildandrefineprototypes.3Dprintingtechnologyspeedsuptheproductdesignanddevelopmentprocess and allows companies to get their products to market quicker.2.Labor:3Dtechnologysaveslaborcosts.Whereastraditionalmanufacturingrequiresseveralworkerstooverseemultiplemachines,3Dprintingrequiresonlyoneworkertoturnoneachprinter. Once on, the printer automatically creates the product.3.MaterialWaste:Costsavingscomeaboutbecauseofthe“additive”natureof3Dprinting.The3Dprinteraddsonlytherequiredamountofmaterialsonelayeratatime,sothereisverylittlewaste. And waste is money.4.Storage:With3Dprinting,companieshavetheluxuryofcreatingsmallquantitiesoftheirproducts,justenoughtocovercurrentsales.There’snoneedtomaintainalargeinven-toryofgoodsthattakeupstoragespaceandtieupmoney.Ifapartoraproductisneededinarush,itcanbeprintedimmediately.Thisadvantageof3Dprintingisparticularlyrelevanttotheautoindustryinwhichcompanies,suchasMercedes-Benz,providetheircustomerswithspare parts even if their cars are no longer being made.[22]3D Printing Versus Traditional ManufacturingThemaincostsgeneratedwhenusing3D-printingtechnologyarebuyingtheprinterandmaterials.Themaincostsusingtraditionalmanufacturingarethesametwo,machineryandmaterials,pluslabor.Theanswertothequestion,“Whichislessexpensive:3Dtechnologyortraditionalmanufac-turing?”fallsunderthecategory:“Itdepends.”Productioncostsusing3Dtechnologywillbelessexpensivethanproductioncostsusingtraditionalmanufacturingif:(a)thevolumeofunitsbeingproducedislow—generallyunderacouplehundredunits;(b)theproductiscomplexwithmanyparts; (c) the item being made is not very large; and (d) the product is customizable.[23][24]216A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
The Future of 3D PrintingInthenot-too-distantfuture,3Dprinterswillbringaboutmajoradvancementsinalmostallindus-tries,“fromaerospacetoautomotivetohealthcareandtofashion.Manufacturingasweknowitwill never be the same.”[25]Key Takeaways•Inadditiontocreatinghigh-qualityproducts,companiesmustproduceanddelivergoodsand services in an efficient, cost-effective manner.•Sophisticatedsoftwaresystems,includingcomputer-aideddesign(CAD),computer-aidedmanufacturing(CAM),computer-integratedmanufacturing(CIM),andflexiblemanufacturingsystems (FMS), are becoming increasingly important in this area.•Computer-aideddesignsoftware(CAD)isusedtocreatemodelsrepresentingthedesignofa product.•ManycompanieslinkCADsystemstothemanufacturingprocessthroughcomputer-inte-gratedmanufacturing(CIM)systemsthatnotonlydeterminethestepsneededtoproducecomponents but also instruct machines to do the necessary work.•ACAD/CAMsystemcanbeexpandedbymeansofcomputer-integratedmanufacturing(CIM),whichintegratesvariousoperations(fromdesignthroughproduction)withfunctionalactivities ranging from order taking to shipping.•ACIMsystemisacommonelementinaflexiblemanufacturingsystem(FMS),inwhichcom-puter-controlled equipment can easily be adapted to produce a variety of goods.•Automation,thereplacementofworkerswithmachines,isprevalentinmostmanufacturingfirms.•Arobotisanadvancedformofautomationthatcancarryoutacomplexseriesofactionsautomatically.Somerobotsareautonomous,meaningtheycanfunctionontheirown;oth-ers, called semi-autonomous, need a little help from humans.•The3D-printingprocessbuildsathree-dimensionalobjectfromacomputer-aideddesignmodelbysequentiallyaddingmateriallayerbylayer,whichiswhyitisalsocalledadditivemanufacturing.•Manycompanieshaveturnedto3Dprintingtosatisfyconsumers’desireforcustomizedgoods.•Fourareasinwhich3Dtechnologyislessexpensivethantraditionalmanufacturingare:fasterbuildingandrefiningofprototypes,reducedlaborcosts,littlematerialwaste,andlowerinventory levels.Beforegoingtothenextsectionofthischapter,takeafewminutestotakeanonlinequizinordertotestyourknowledgeofthematerialcoveredinthissection.Quizzescanbefoundunderthe“Quiz” tab at the bottom of the online reader.Exercises1.Thedesignandproductionofbothgoodsandservicescanbefacilitatedbyvarioushigh-techtools,includingCAD,CAM,CIM,andFMS.WhatdoesCADsoftwaredo,andhowdoesitimproveadesignprocess?WhatisCAM,andwhyisitbeneficialtointegrateCADandCAMprograms?HowdoCIMsystemsexpandthecapabilitiesofCAD/CAM?WhatisanFMS, and what are its advantages over traditional manufacturing systems?2.Inanarticle“TheFutureof3-DPrinting,”publishedinForbes,theauthorclaims:Inthenot-too-distantfuture,3Dprinterswillbringaboutmajoradvancementsinalmostallindustries,Chapter 7Operations Management in Manufacturing and Service Industries217© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
“fromaerospacetoautomotivetohealthcareandtofashion.Everyhomewillhaveone.Man-ufacturingasweknowitwillneverbethesame.”Doyouagreewiththisstatement?Identifywaysinwhichtheindustriesmentioned(aerospace,automotive,healthcare,fashion)couldutilize3Dprintingintheirmanufacturingprocessesnowandinthefuture.Also,identifywaysin which you could benefit from 3D printing now and in ten years.7.7Operations Management forService ProvidersLearning Objectives1.List the characteristics that distinguish service operations from manufacturing operations.2.Describethedecisionsmadeinplanningtheproductdeliveryprocessinaservicecompany.3.Contrast a make-to-order approach and a make-to-stock approach.4.Identify the activities undertaken to manage operations in a service organization.5.Explainwhyitisdifficultformanagersintheserviceindustrytoestimatecapacityandsched-ule workers.AstheU.S.economyhaschangedfromagoodsproducertoaservicesprovider,thepredominanceofthegoods-producingsectorhasdeclinedsubstantiallyoverthelastsixtyyears.Today,onlyabout13percentofU.S.workersareemployedinthegoods-producingsector,madeupofthreeindus-tries:manufacturing(8percentofU.S.workers),construction(4percentofU.S.workers)andmining(1percentofU.S.workers).[26]Mostofusnowholdjobsintheservices-providingsector,whichemploys 80 percent of workers in the U.S.[27]IfwecreatedalistofU.S.companiesrankedbysize,wewouldbeginwithWalmart,America’slargestemployer,followedbyAmazon,UnitedParcelService(UPS),Yum!Brands(ownerofKen-tuckyFriedChicken,TacoBell,PizzaHut,andWingStreet),Kroger,HomeDepot,IBM,FedEx,andTarget.Notuntilwelistedthetenth-largestemployer—GeneralElectric—wouldwefindacompanywith a manufacturing component.[28]Thoughtheprimaryfunctionofbothmanufacturersandserviceprovidersistosatisfycus-tomerneeds,thereareseveralimportantdifferencesbetweenthetwotypesofoperations.Let’sfocus on three of them:•Intangibility.Manufacturersproducetangibleproducts—thingsthatcanbetouchedorhan-dled,suchasautomobilesandappliances.Servicecompaniesprovideintangibleproducts,suchas banking, entertainment, or education.•Customization.Manufacturedgoodsaregenerallystandardized;onetwelve-ouncebottleofPepsiisthesameasanyothertwelve-ouncebottleofPepsi.Services,bycontrast,areoftencustomizedtosatisfythespecificneedsofacustomer.Whenyougotothebarberorthehair-dresser,youaskforahaircutthatlooksgoodonyoubecauseoftheshapeofyourfaceandthetextureofyourhair.Whenyougotothedentist,youaskhimorhertofillorpullthetooththat’s bothering you.•Customercontact.YoucouldspendyourentireworkinglifeassemblingcarsinDetroitandnevermeetacustomerwhoboughtacarthatyouhelpedtomake.Butifyouwereawaitress,you’dinteractwithcustomerseveryday.Infact,theirsatisfactionwithyourproductwouldbe218A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
FIGURE 7.14Your college is in the service-providing sector. Itprovides education (an intangible product),varied programs of study (customization), andin-class and outside-of-class interactions withstudents (customer contact). Is it providingthese promised services?Source: Africa Studio/Shutterstock.comdeterminedinpartbytheservicethatyouprovided.Unlikemanufacturedgoods,manyser-vices are bought and consumed at the same time.Notsurprisingly,operationalefficiencyisjustasimportantinserviceindustriesasitisinman-ufacturing.Togetabetterideaoftheroleofoperationsmanagementintheservicesector,we’lllookcloselyatthefast-foodhamburgerchainBurgerKing(BK),homeoftheWhopper.BKhasgrownsubstantiallysincesellingthefirstWhopper(for$0.37)sixty-fiveyearsago.Theinstantsuc-cessofthefire-grilledburgerencouragedtheMiamifoundersofthecompanytoexpandbysellingfranchises.Today,therearemorethan11,300BKcompany-andindependently-ownedfranchisedrestaurantsintheUnitedStatesandsixty-nineothercountries.[29]Approximately11millioncus-tomers visit BK each day.[30]Operations PlanningWhenstartingorexpandingoperations,businessesintheservicesectormustmakeanumberofdecisions quite similar to those made by manufacturers:•What services (and perhaps what goods) should they offer?•How will they provide these services?•Where will they locate their business, and what will their facilities look like?•How will they forecast demand for their services?Let’s see how service firms like BK answer questions such as these.[31]Operations ProcessesServiceorganizationssucceedbyprovidingservicesthatsatisfycustomers’needs.Companiesthatprovidetransportation,suchasairlines,havetogetcus-tomerstotheirdestinationsasquicklyandsafelyaspossible.Companiesthatdeliverpackages,suchasFedEx,mustpickup,sort,anddeliverpackagesinatimelymanner.Collegesmustprovidequalityeducations.Companiesthatpro-videbothservicesandgoods,suchasDomino’sPizza,haveadualchallenge:theymust produce a quality good and deliver it satisfactorily.Serviceprovidersthatproducegoodscan,likemanufacturers,adopteitheramake-to-orderoramake-to-stockapproachtomanufacturingthem.BK,whichencouragespatronstocustomizeburgersandothermenuitems,usesamake-to-orderapproach.BKcancustomizeproductsbecauseitbuildssandwichesoneatatimeratherthanbatch-processthem.Meatpatties,forexample,gofromthegrilltoasteamerforholdinguntilanordercomesin.Thenthepattyispulledfromthesteamerandrequestedcondimentsareadded.Finally,thecompletedsandwichchutestoacounterworker,whogivesittothecustomer.Incontrast,manyofBK’scompetitors,includingMcDonald’s,relyonamake-to-stockapproachinwhichanumberofsandwichesaremadeatthesametimewiththesamecondiments.Ifacustomerwants,say,ahamburgerwithoutonions,heorshehastowaitforanewbatchofpattiestobegrilled.Theprocedurecouldtakeuptofiveminutes,whereasBKcanprocess a special order in thirty seconds.Chapter 7Operations Management in Manufacturing and Service Industries219© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
FIGURE 7.15Unlike Burger King, which follows amake-to-order approach that asks consumersto customize their orders, McDonald’s follows amake-to-stock approach in which they makehamburgers and stock them until an order isfilled. Which do you prefer: fresh food or fastservice?Source: Mohd Nasirruddin Yazid/Shutterstock.comLikemanufacturers,serviceprovidersmustcontinuouslylookforwaystoimproveoperationalefficiency.Throughoutitshistory,BKhasintroducedanum-berofinnovationsthathavehelpedmakethecompany(aswellasthefast-foodindustryitself)moreefficient.BK,forexample,wasthefirsttoofferdrive-through service (which now accounts for 70 percent of its sales).[32]ItwasalsoaBKvicepresident,DavidSell,whocameupwiththeideaofmovingthedrinkstationfrombehindthecountersothatcustomerscouldtakeoverthetime-consumingtaskoffillingcupswithiceandbeverages.BKwasabletocutbackoneemployeeperdayateveryoneofitsmorethan11,000restaurants.Materialcostsalsowentdownbecausecustomersusuallyfillcupswithmoreice,whichischeaperthanabeverage.Moreover,thereweresavingsonsupplycostsbecausemostcustomersdon’tbotherwithlids,andmanydon’tusestraws.Ontopofeverythingelse,mostcustomerslikedthesystem(foronething,itallowedthemtocustomizetheirowndrinksbymixingbeverages),andasaresult,cus-tomersatisfactionwentup,aswell.Overall,thenewprocesswasamajorsuccessand quickly became the industry standard.FacilitiesWhenstartingorexpandingaservicebusiness,ownersandmanagersmustinvestalotoftimeinselectingalocation,determiningitssizeandlayout,andforecastingdemand.Apoorlocationorabadlydesignedfacilitycancostcustomers,andinaccurateestimatesofdemandforproductscanresult in poor service, excessive costs, or both.Site SelectionPeopleintherealestateindustryoftensaythatthethreemostimportantfactorstoconsiderwhenyou’rebuyingahomearelocation,location,location.Thesameprincipleapplieswhenyou’retryingtolocateaservicebusiness.Tobesuccessfulinaserviceindustry,youneedtobeaccessibletoyourcustomers.Someservicebusinesses,suchascable-TVproviders,package-deliveryservices,ande-retailers,gototheircustomers.Manyothers,however—hotels,restaurants,stores,hospitals,andairports—havetoattractcustomerstotheirfacilities.Thesebusinessesmustlocatewherethere’sahigh volume of available customers. Let’s see how BK decides where to place a restaurant.“Throughthelightandtotheright.”ThisisafavoritecatchphraseamongBKplannerswhoarelookingforapromisingspotforanewrestaurant(atleastintheUnitedStates).Inpickingaloca-tion,BKplannersperformadetailedanalysisofdemographicsandtrafficpatterns,yetthemostimportantfactorisusuallytrafficcount—thenumberofcarsorpeoplethatpassbyaspecificloca-tioninthecourseofaday.IntheUnitedStates,wherewetravelalmosteverywherebycar,BKlooksforbusyintersections,interstateinterchangeswitheasyoffandonramps,orsuch“primarydes-tinations”asshoppingmalls,touristattractions,downtownbusinessareas,ormovietheaters.InEurope,wherepublictransportationismuchmorecommon,plannersfocusonsubway,train,bus,and trolley stops.Onceplannersfindasitewithanacceptabletrafficcount,theyapplyothercriteria.Itmust,forexample,beeasyforvehiclestoenterandexitthesite,whichmustalsoprovideenoughparkingtohandleprojecteddine-inbusiness.Localzoningmustpermitstandardsignage,especiallyalonginterstatehighways.Finally,expectedbusinessmustbehighenoughtojustifythecostofthelandand building.220A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
FIGURE 7.16How often do you go inside a fast-foodrestaurant and eat? Probably not often. Mostlikely you use the drive through. This allowsBurger King to reduce the size of their averagestore.Source: photocritical/Shutterstock.comSize and LayoutBecausemanufacturersdobusinessoutofplantsrarelyvisitedbycustomers,theybasethesizeandlayoutoftheirfacilitiessolelyonproductionneeds.Intheservicesector,however,mostbusi-nessesmustdesigntheirfacilitieswiththecustomerinmind:theymustaccommodatetheneedsoftheircustomerswhilekeepingcostsaslowaspossible.Performingthistwofoldtaskisn’teasy.Let’s see how BK has met the challenge.Foritsfirstthreedecades,almostallBKrestaurantswereprettymuchthesame.Theyallsatononeacreofland(located“throughthelightandtotheright”),hadabout4,000squarefeetofspace,andheldseatingforseventycustomers.Allkitchenswereroughlythesamesize.Aslongaslandwascheapandsiteswerereadilyavailable,thissystemworkedwellenough.Bytheearly1990s,however,mostoftheprimesiteshadbeentaken,ifnotbyBKitself,thenbyoneofitsfast-foodcompetitorsorotherbusinessesneedingachoicespot,includinggasstationsandconveniencestores.Witheveryonebiddingonthesamesites,thecostofaprimeacreoflandhadincreasedfrom$100,000 to over $1 million in a few short years.Tocontinuegrowing,BKneededtochangethewayitfoundanddevelopeditslocations.Plan-nersdecidedthattheyhadtofindwaystoreducethesizeofatypicalBKrestaurant.Foronething,theycouldreducethenumberofseats,becausethebusinessatatypicaloutlethadshiftedovertimefrom90percentinsidediningand10percentdrive-throughtoa50-50split.BKcustomerstended to be in a hurry, and more customers preferred the convenience of drive-through “dining.”DavidSell(thesameexecutivewhohadrecommendedlettingcustomersfilltheirowndrinkcups)proposedtosavespacebywrappingWhoppersinpaperinsteadofservingtheminthecardboardboxesthattookuptoomuchspaceinthebackroomofeveryrestaurant.SoBKswitchedtoasinglepaperwrapperwiththelabel“Whopper”ononesideand“CheeseWhopper”ontheother.Toshowwhichproductwasinside,employeesjustfoldedthewrapperintherightdirection.Ultimately,BKreplacedpalletspiledhighwithboxeswithafewboxesfull of wrappers.IdeaslikethesehelpedBKtrimthesizeofarestaurantfrom4,000squarefeettoaslittleas1,000.Inturn,smallerfacilitiesenabledthecompanytoentermarketsthatwereoncecostprohibitive.NowBKcouldlocateprofitablyinair-ports,foodcourts,stripmalls,center-cityareas,andevenschools.Thecompanyevendesigned10-foot-by-10-footkiosksthatcouldbetransportedtospecialevents, stadiums, and concerts.Capacity PlanningEstimatingcapacityneedsforaservicebusinessisn’tthesamethingasestimatingthoseofaman-ufacturer.Amanufacturercanpredictoveralldemand,producetheproduct,storeitininventory,andshipittoacustomerwhenit’sordered.Serviceproviders,however,can’tstoretheirproductsforlateruse:hairdresserscan’t“inventory”haircuts,hospitalscan’t“inventory”operations,andamuse-mentparkscan’t“inventory”roller-coasterrides.Servicefirmshavetobuildsufficientcapacitytosatisfycustomers’needsonan“as-demanded”basis.Likemanufacturers,serviceprovidersmustconsider many variables when estimating demand and capacity:•How many customers will I have?•When will they want my services (which days of the week, which times of the day)?•How long will it take to serve each customer?•How will external factors, such as weather or holidays, affect the demand for my services?Chapter 7Operations Management in Manufacturing and Service Industries221© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
ForecastingdemandiseasierforcompanieslikeBK,whichhasalonghistoryofplanningfacilities,thanforbrand-newservicebusinesses.BKcanpredictsalesforanewrestaurantbycombiningitsknowledgeofcustomer-servicepatternsatexistingrestaurantswithinformationcol-lectedabouteachnewlocation,includingthenumberofcarsorpeoplepassingtheproposedsiteand the effect of nearby competition.FIGURE 7.17Retailers have to be prepared to accommodate much heavier traffic than normal during the holiday season.Source: © 2010 Jupiterimages CorporationManaging OperationsOverseeingaserviceorganizationputsspecialdemandsonmanagers,especiallythoserunningfirms,suchashotels,retailstores,andrestaurants,thathaveahighdegreeofcontactwithcus-tomers.Servicefirmsprovidecustomerswithpersonalattentionandmustsatisfytheirneedsinatimelymanner.Thistaskiscomplicatedbythefactthatdemandcanvarygreatlyoverthecourseofanygivenday.Managers,therefore,mustpayparticularattentiontoemployeeworkschedulesand (in some cases) inventory management. Let’s see how BK deals with these problems.222A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
FIGURE 7.18Too many employees at a Burger King wastesmoney. Too few employees leads to upsetcustomers waiting in lines. How doesmanagement schedule the right number ofemployees?Source: Akin Ozcan/Shutterstock.comSchedulingInmanufacturing,managersfocusonschedulingtheactivitiesneededtotrans-formrawmaterialsintofinishedgoods.Inserviceorganizations,theyfocusonschedulingworkerssothatthey’reavailabletohandlefluctuatingcustomerdemand.Eachweek,therefore,everyBKstoremanagerschedulesemployeestocovernotonlythepeakperiodsofbreakfast,lunch,anddinner,butalsotheslowerperiodsinbetween.Ifheorshestaffstoomanypeople,laborcostpersalesdollarwillbetoohigh.Iftherearen’tenoughemployees,customershavetowaitin lines. Some get discouraged, and even leave, and many may never come back.Schedulingismadeeasierbyinformationprovidedbyapoint-of-saledevicebuiltintoeveryBKcashregister.Theregisterkeepstrackofeverysandwich,bev-erage,andsideordersoldbythehour,everyhouroftheday,everydayoftheweek.Thus,todeterminehowmanypeoplewillbeneededfornextThursday’slunchhour,themanagerreviewslastThursday’sdata,usingsalesrevenueandaspecificBKformulatodeterminetheappropriatestaffinglevel.Eachmanagercanadjustthisforecasttoaccountforotherfactors,suchascurrentmarketingpromotions or a local sporting event that will increase customer traffic.Inventory ControlBusinessesthatprovidebothgoodsandservices,suchasretailstoresandauto-repairshops,havethesameinventory-controlproblemsasmanufacturers:keepinglevelstoohighcostsmoney,whilerunningoutofinventorycostssales.Technology,suchasthepoint-of-saleregistersusedatBK,makesthejobeasier.BK’ssystemtrackseverythingsoldduringagiventimeandletseachstoremanagerknowhowmuchofeverythingshouldbekeptininventory.Italsomakesitpossibletocountthenumberofburgersandbuns,bagsandracksoffries,andboxesofbeveragemixesatthebeginningorendofeachshift.Becausetherearefixednumbersofsupplies—say,beefpattiesorbagsoffries—ineachbox,employeessimplycountboxesandmultiply.Injustafewminutes,themanagerknowswhethertheinventoryiscorrect(andshouldbeabletoseeifanythefthasoccurred on the shift).Key Takeaways•Thoughtheprimaryfunctionofbothmanufacturersandserviceprovidersistosatisfycus-tomer needs, there are several important differences between the two types of operations.•Whilemanufacturersproducetangible,generallystandardizedproducts,servicefirmspro-videintangibleproductsthatareoftencustomizedtosatisfyspecificneeds.Unlikemanufac-tured goods, many services are bought and consumed at the same time.•Operational efficiency is just as important in service industries as it is in manufacturing.•Operationsmanagersintheservicesectormakemanydecisionsthataresimilartothosemadebymanufacturers:theydecidewhichservicestooffer,howtoprovidetheseservices,wheretolocatetheirbusinesses,whattheirfacilitieswilllooklike,andwhatthedemandwillbe for their services.•Serviceprovidersthatproducegoodscan,likemanufacturers,adopteitheramake-to-orderapproach(inwhichproductsaremadetocustomersatisfaction)ormake-to-stockapproach(in which products are made for inventory) to manufacturing them.•Estimatingcapacityneedsforaservicebusinessismoredifficultthanforamanufacturer.Serviceproviderscan’tstoretheirservicesforlateruse:servicesmustbedeliveredonanas-needed basis.Chapter 7Operations Management in Manufacturing and Service Industries223© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
•Overseeingaserviceorganizationputsspecialdemandsonmanagers,especiallyservicesrequiring a high degree of contact with customers.•Giventheimportanceofpersonalizedservice,schedulingworkersismorecomplexintheserviceindustrythaninmanufacturing.Inmanufacturing,operationsmanagersfocusonschedulingtheactivitiesneededtoproducegoods;inserviceorganizations,theyfocusonschedulingworkerstoensurethatenoughpeopleareavailabletohandlefluctuatingcus-tomer demand.Beforegoingtothenextsectionofthischapter,takeafewminutestotakeanonlinequizinordertotestyourknowledgeofthematerialcoveredinthissection.Quizzescanbefoundunderthe“Quiz” tab at the bottom of the online reader.Exercise1.Startinganewbusinesscanbeanexcitingadventure.Here’syourchancetostarta“pretend”business.Selectaservicebusinessthatyou’dliketoopen,andanswerthesequestions. Provide an explanation for each answer:a.What services (and perhaps goods) will I provide?b.How will I provide these services?c.Where will I locate my business?d.Whatwillthefacilitieslooklike(howlargewillthefacilitiesbeandwhatwillthelayoutlooklike)?e.How many customers will I serve each day?f.Whenwillmycustomerswantmyservices(whichdaysoftheweek,whichtimesoftheday)?g.How long will it take to serve each customer?h.Why will my business succeed? Why will my customers return?7.8Producing for QualityLearning Objectives1.Explainhowmanufacturingandservicecompaniesalikeusetotalqualitymanagementandoutsourcing to provide value to customers.2.Definetotalqualitymanagement(TQM),andidentifythethreetasksacompanyadheringtoTQM principles focuses on.3.Describe how statistical process control (SPC) is used to identify areas for improvement.4.Explainwhyoutsourcingisanappealingoptionforcompanieswithouttheexpertiseinpro-ducing everything needed to make a product.Whatdoyoudoifyougetithomeandyourbrand-newDVDplayerdoesn’twork?Whatifyouwerelateforclassbecauseittookyoutwentyminutestogetaburgerandorderoffriesatthedrive-throughwindowofafast-foodrestaurant?Likemostpeople,you’dprobablybemoreorlessdisgruntled.Asacustomer,you’reconstantlyassuredthatwhenproductsmakeittomarket,they’re224A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
qualityAbility of a product tosatisfy customer needs.total qualitymanagement (TQM)All the steps taken by acompany to ensure that itsproducts satisfy customerneeds.FIGURE 7.19What happens if you buy acar that you later find outrepeatedly fails to meetrequired standards of quality.What you have is called a“lemon.” Getting a defectivecar is frustrating but there’s away to make things right.There are state laws thatrequire the manufacturer ofthe defective car to buy itback from you. Let themanufacturer deal with thelemon.Source: 7th Son Studio/Shutterstock.comofthehighestpossiblequality,andyoutendtoavoidbrandsthathavefailedtoliveuptoyourexpectationsortoproducers’claims.You’retoldthatworkersinsuchbusinessesasrestaurantsaretheretoserveyou,andyouprobablydon’tgobacktoestablishmentswhereyou’vereceivedpoor-quality service.Butwhatisquality?AccordingtotheAmericanSocietyforQuality,qualityrefersto“thechar-acteristicsofaproductorservicethatbearonitsabilitytosatisfystatedorimpliedneeds.”[33]WhenyoubuyaDVDplayer,youexpectittoplayDVDs.Whenitdoesn’t,youquestionitsquality.Whenyougotoadrive-throughwindow,youexpecttobeservedinareasonableamountoftime.Ifyou’reforced to wait, you conclude that you’re the victim of poor-quality service.Quality ManagementTocompetetoday,companiesmustdeliverqualitygoodsandservicesthatsatisfycustomers’needs.Thisistheobjectiveofqualitymanagement.Totalqualitymanagement(TQM),orqualityassur-ance,includesallthestepsthatacompanytakestoensurethatitsgoodsorservicesareofsufficientlyhighqualitytomeetcustomers’needs.Generallyspeaking,acompanyadherestoTQMprinciples by focusing on three tasks:1.Customer satisfaction2.Employee involvement3.Continuous improvementLet’s take a closer look at these three principles.Customer SatisfactionCompaniesthatarecommittedtoTQMunderstandthatthepurposeofabusinessistogenerateaprofitbysatisfyingcustomerneeds.Thus,theylettheircustomersdefinequalitybyidentifyingandofferingthoseproductfeaturesthatsatisfycustomerneeds.Theyencouragecustomerstotellthem how to make the right products, both goods and services, that work the right way.Armedwiththisknowledge,theytakestepstomakesurethatprovidingqualityisafactorineveryfacetoftheiroperations—fromdesign,toproductplanningandcontrol,tosalesandservice.Togetfeedbackonhowwellthey’redoing,manycompaniesroutinelyusesurveysandothermeth-odstomonitorcustomersatisfaction.Bytrackingtheresultsoffeedbackovertime,theycanseewhere they need to improve.Employee InvolvementSuccessfulTQMrequiresthateveryoneintheorganization,notsimplyupper-levelmanagement,commitstosatisfyingthecustomer.Whencustomerswaittoolongatadrive-throughwindow,it’stheresponsibilityofanumberofemployees,notthemanageralone.AdefectiveDVDisn’tsolelytheresponsibilityofthemanufacturer’squalitycontroldepartment;it’stheresponsibilityofeveryemployeeinvolvedinitsdesign,production,andevenshipping.Togeteveryoneinvolvedinthedriveforqualityassurance,managersmustcommunicatetheimportanceofqualitytosubordi-natesandmotivatethemtofocusoncustomersatisfaction.Employeeshavetobeproperlytrainednot only to do their jobs but also to detect and correct quality problems.Chapter 7Operations Management in Manufacturing and Service Industries225© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
quality circleEmployees who performsimilar jobs and work asteams to identify quality,efficiency, and otherwork-related problems; topropose solutions; and towork with management inimplementing theirrecommendations.continuousimprovementCompany’s commitmentto making constantimprovements in thedesign, production, anddelivery of its products.statistical processcontrolTechnique for monitoringproduction quality bytesting sample outputs toensure that they meetspecifications.FIGURE 7.20Job opening: raisin counter.Duties:periodically taking abox of Raisin Bran cereal offthe production line andcounting the number ofraisins.If there aren’tenough raisins, shuttingdown the production line.Source: JeniFoto/Shutterstock.combenchmarkingPractice of comparing acompany’s ownperformance with that of acompany that excels in thesame activity.Inmanycompanies,employeeswhoperformsimilarjobsworkasteams,sometimescalledqualitycircles,toidentifyquality,efficiency,andotherwork-relatedproblems,toproposesolu-tions, and to work with management in implementing their recommendations.Continuous ImprovementAnintegralpartofTQMiscontinuousimprovement:thecommitmenttomakingconstantimprovementsinthedesign,production,anddeliveryofgoodsandservices.Improvementscanalmostalwaysbemadetoincreaseefficiency,reducecosts,andimprovecustomerserviceandsatis-faction. Everyone in the organization is constantly on the lookout for ways to do things better.Statistical Process ControlCompaniescanuseavarietyoftoolstoidentifyareasforimprovement.Acommonapproachinmanufacturingiscalledstatisticalprocesscontrol.Thistechniquemonitorsproductionqualitybytestingasampleofoutputtoseewhethergoodsinprocessarebeingmadeaccordingtopredeter-mined specifications.AssumeforamomentthatyouworkforKellogg’s,themakerofRaisinBrancereal.Youknowthatit’sthecompany’sgoaltopacktwoscoopsofraisinsineveryboxofcereal.Howcanyoutesttodeterminewhetherthisgoalisbeingmet?Youcoulduseastatisticalprocesscontrolmethodcalledasamplingdistribution.Onaperiodicbasis,youwouldtakeaboxofcerealofftheproductionlineandmeasuretheamountofraisinsinthebox.Thenyou’drecordthatamountonacontrolchartdesignedtocompareactualquantitiesofraisinswiththedesiredquantity(twoscoops).Ifyourchartshowsthatseveralsamplesinarowarelowonraisins,you’dshutdowntheproductionlineand take corrective action.BenchmarkingSometimesitalsohelpstolookoutsidetheorganizationforideasonhowtoimproveoperationsandtolearnhowyourcompanycompareswithothers.Companiesroutinelyusebenchmarkingtocomparetheirperformanceonanumberofdimensionswiththeperformanceofothercompaniesthatexcelinparticularareas.FrequentbenchmarktargetsincludeL.L.Bean,foritssuperiorperfor-manceinfillingorders;3M,foritsrecordofintroducinginnovativeproducts;Motorola,foritssuccessinmaintainingconsistentqualitystandards;andMaryKayCosmetics,foritsskillsininven-tory control.[34]International Quality StandardsAsaconsumer,wouldn’tyouliketoknowwhichcompaniesensurethattheirproductsmeetqual-ityspecifications?Someofuswouldliketoknowwhichcompaniestakestepstoprotecttheenvironment.Someconsumerswanttoknowwhichcompaniescontinuouslyimprovetheirperfor-manceinbothoftheseareas—thatis,practicebothqualitymanagementandenvironmentalmanagement.Bythesametoken,ifyouwereacompanydoingagoodjobintheseareas,wouldn’tyouwantpotentialcustomerstoknow?Itmightbeworthyourwhiletofindoutwhetheryoursuppliers were also being conscientious in these areas—and even your suppliers’ suppliers.226A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
ISO 9000Set of international qualitystandards established bythe InternationalOrganization forStandardization.ISO 14000Set of internationalstandards forenvironmentalmanagement establishedby the InternationalOrganization forStandardization.outsourcingPractice of using outsidevendors to manufacture allor part of a company’sactual products.ISO 9000 and ISO 14000ThroughtheInternationalOrganizationforStandardization(ISO),anongovernmentalagencybasedinSwitzerland,it’spossibletofindthiskindofinformation.Theresourcesofthisorganiza-tionwillenableyoutoidentifythoseorganizationsthathavepeopleandprocessesinplacefordeliveringproductsthatsatisfycustomers’qualityrequirements.Youcanalsofindoutwhichorga-nizationsworktoreducethenegativeimpactoftheiractivitiesontheenvironment.Workingwithrepresentativesfromvariouscountries,theorganizationhasestablishedtheISO9000familyofinternationalstandardsforqualitymanagementandtheISO14000familyofinternationalstan-dards for environmental management.ISOstandardsfocusonthewayacompanydoesitswork,notonitsoutput(thoughthere’scer-tainlyastrongcorrelationbetweenthewayinwhichabusinessfunctionsandthequalityofitsproducts).CompliancewithISOstandardsisvoluntary,andthecertificationprocessistime-con-sumingandcomplex.Evenso,hundredsofthousandsoforganizationsaroundtheworldareISO9000andISO14000certified.ISOcertificationhasbecomeaninternationallyrecognizedsymbolofquality management and is almost essential to be competitive in the global marketplace.OutsourcingPowerSki’swebsitestatesthat“PowerSkiInternationalhasbeenfoundedtobringanewwatercraft,thePowerSkiJetboard,andtheenginetechnologybehindit,tomarket.”[35]ThatgoalwasreachedinMay2003,whenthefirmemergedfromalengthydesignperiod.Havingalreadygarneredpraiseforitsinnovativeproduct,PowerSkiwasreadytobeginmass-producingJetboards.Atthisjuncture,themanagementteammadeastrategicdecisionthat’snotuncommoninmanufacturingtoday.RatherthanproducingJetboardsin-house,theyoptedforoutsourcing:havingoutsidevendorsmanufacturetheengines,fiberglasshulls,andassociatedparts.AssemblyofthefinalproducttookplaceinamanufacturingfacilityownedbyExperiencePowersportsinMosesLake,Washington.Thisdecisiondoesn’tmeanthatthecompanyrelinquishedcontroloverquality;infact,everycom-ponentthatgoesintothePowerSkiJetboardismanufacturedtoexactspecificationssetbyPowerSki.Oneadvantageofoutsourcingitsproductionfunctionisthatthemanagementteamcandevote more attention to refining its product design and designing future products.Outsourcing in the Goods-Producing SectorUnderstandably,outsourcingisbecominganincreasinglypopularoptionamongmanufacturers.Foronething,fewcompanieshaveeithertheexpertiseortheinclinationtoproduceeverythingneededtomakeaproduct.Today,morefirms,likePowerSki,wanttospecializeintheprocessesthattheyperformbest—andoutsourcetherest.LikePowerSki,theyalsowanttotakeadvantageofout-sourcing by linking up with suppliers located in regions with lower labor costs.Chapter 7Operations Management in Manufacturing and Service Industries227© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
FIGURE 7.21Outsourcing the production of its engines, hulls, and other components enables PowerSki to reduce the cost ofproducing each Jetboard through manufacturing efficiencies and lower labor costs. All components that go into theJetboard are made to PowerSki’s specifications and are inspected upon arrival to ensure that they meet thecompany’s high-quality standards.Source: Photo used with permission granted by PowerSki Jetboards.Outsourcing in the Service SectorOutsourcingisbynomeanslimitedtothegoods-producing(manufacturing)sector.Servicecompa-niesalsooutsourcemanyoftheirnoncorefunctions.Yourschool,forinstance,probablyoutsourcessuchfunctionsasfoodservices,maintenance,bookstoresales,printing,groundskeeping,security,information-technology (IT) support, and even residence operations.Key Takeaways•Today,companiesthatcompeteinboththemanufacturingandservicesectorsmustdeliverqualitygoodsandservicesthatsatisfycustomers’needs.Manycompaniesachievethisgoalby adhering to principles oftotal quality management (TQM).•CompaniesusingaTQMapproachfocusoncustomersatisfaction,engageallmembersoftheorganizationinqualityefforts,andstriveforcontinuousimprovementinthedesign,pro-duction,anddeliveryofgoodsandservices.Theyalsobenchmarkothercompaniestofindways to improve their own performance.•Toidentifyareasforimprovement,companiescanuseatechniquecalledstatisticalprocesscontrol(SPC),whichmonitorsqualitybytestingtoseewhetherasampleofoutputisbeingmade to predetermined specifications.•Anothercost-savingapproachisoutsourcing—havingoutsidevendorsmanufacturecompo-nentsorevenentireproductsorprovideservices,suchasinformation-technologysupportor service center operations.•Outsourcingisanappealingoptionforcompanieswithouttheexpertiseinproducingevery-thingneededtomakeaproductorthosethatwanttotakeadvantageoflowlaborcostsindeveloping countries.228A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Beforegoingtothenextsectionofthischapter,takeafewminutestotakeanonlinequizinordertotestyourknowledgeofthematerialcoveredinthissection.Quizzescanbefoundunderthe“Quiz” tab at the bottom of the online reader.Exercise1.YouknowthatorganizationsadheringtotheprinciplesofTQMfocusonthreetasks:customersatisfaction,employeeinvolvement,andcontinuousimprovement.Thinkaboutthecourse-registrationprocessatyourschool.DoestheprocessappeartobemanagedaccordingtoTQMprinciples?Isitdesignedtosatisfythecustomer(you)?Doemployeesintheregistrar’soffice,aswellasothersinvolvedintheprocess,focusoncustomersatisfac-tion? Does anyone seem to be on the lookout for ways to do things better?7.9Cases and ProblemsLearning on the WebGhost RestaurantGhost RestaurantHungry,butdon’twanttogoouttoarestaurantorhavepizzadelivered?Noproblem,getyourfavoritefoodfromaghostrestaurant.Haven’theardtheterm?Aghostrestaurantisadelivery-onlyrestaurant.Lotsofpeopledon’twanttogettheirdinnerbyrunningthroughadrive-uplineatafast-foodrestaurantorcomehomefromabusydayatworkorschoolandcook.Somecleverentrepreneurscameupwithagreatidea:createamenuofappetizingfoods,getabusi-nessphonenumber,createanonlinewebsite,setupakitchen,hireachefandadriver,andyouaregoodtogo.Tofindoutsomeoftheadvantagesofthisadditiontotheserviceindustry,readanarticletitled“HowGhostRestaurantsAreChangingtheRestaurantBusinessModel,”writ-tenbyLanaBandoin(seehttps://www.forbes.com/sites/lanabandoim/2019/01/28/how-ghost-restaurants-are-changing-the-restaurant-business-model/#62acc45441d7),thenanswerthesequestions:1.Why is starting a ghost restaurant less risky than opening a traditional restaurant?2.How can ghost restaurants remain profitable?3.Do you think ghost restaurants will survive or will be just another fad?4.Would you be interested in opening a ghost restaurant? Why or why not?Career OpportunitiesWanted: Problem Solvers and Creative ThinkersWanted: Problem Solvers and Creative ThinkersIfyouhadatimemachineplusacravingforagreathamburger,youcouldreturntotheearly1950sandswingbyDickandMacMcDonald’sburgerstandinSanBernardino,California.Takeabreakfromeatingandwatchthepeopleinthekitchen.You’llseeanearlyapplicationofoper-ationsmanagementintheburgerindustry.DickandMac,inanefforttosellmoreburgersinlesstime,redesignedtheirkitchentouseassembly-lineprocedures.Asthenumberofhappycustomersgrew,wordspreadabouttheirspeedysystem,andtheirbusinessthrived.Curiously,itwasn’tDickandMacwhomadeMcDonald’swhatitistoday,butratheratravelingmilkshake-mixersalesmannamedRayKroc.HevisitedthehamburgerstandtolearnhowtheycouldsellChapter 7Operations Management in Manufacturing and Service Industries229© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
20,000shakesayear.Whenhesawtheiroperationsandthelinesofpeoplewalkingawaywithbagsfilledwithburgers,fries,andshakes,heknewhehadawinner.IncooperationwiththeMcDonald brothers, he started selling franchises around the country, and the rest is history.So,whatdoesthisstoryhavetodowithacareerinoperationsmanagement?Ifyou’reaproblemsolverlikeDickandMac(whodiscoveredawaytomakeburgersfasterandcheaper)oracreativethinkerlikeRayKroc(whorecognizedthevalueinanassembly-lineburgerproduc-tionsystem),thenacareerinoperationsmanagementmightbeforyou.Thefieldisbroadandoffersavarietyofopportunities.Togetaflavorofthechoicesavailable,gotoCareerbuilder.comandenterthejobcategory“operationsmanager”inthefirstblock(thatstatesjobtitle,skill,industry).Thereisnoneedtoindicatealocation.Hitthe“searchjobs”buttonandreviewtheoperationsmanagementpositionslisted.Provideabriefdescriptionoffivepositions.Indicatehowinterestingyoufindeachpositionbyratingitusingafive-pointscale(with1beinguninter-estingand5beingveryinteresting).Basedonyourassessment,pickthepositionyoufindmostinteresting and the one you find least interesting. Explain why you made your selections.Ethics AngleGood or Bad Corporate Citizen?Good or Bad Corporate Citizen?Severalyearsago,theworldwasshockedtolearnthatamassiveexplosionatBP’sDeepwaterHorizonsoilplatformintheGulfofMexicohadsentthousandsofbarrelsofoilflowingintotheGulf.Thepublicwasoutragedtolearnthereasonforthespill:companymanagementhadignoredobvioussafetyhazardsinanefforttomeetacost-baseddeadline.Asthestoryunfolded,thepubliclearnedofBP’spastunfavorabletrackrecordonenvironmentalinitiativesandworkersafety.Followingtheoilspill,BP’spublicrelationsteamhaspaintedarosypictureofBPanditseffortstoaddressenvironmentalconcerns.Now,it’syourturntodecidewhetherBPisagoodor a bad corporate citizen.Readthe“CorporateResearchReport”athttps://www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdfs/sustainability/archive/archived-reports-and-translations/2015/bp-sustainability-report-2015.pdfandreadBP’sownassessmentofitsenvironmentalpracticesin“TheEnergyChallengeandClimateChange”section,whichbeginsonpage12.Thenanswerthe following questions:1.InwhatwaysisBPrespondingtocriticismsofitsenvironmentalpracticesandimprovingthem?2.Dothestatementsin“TheEnergyChallengeandClimateChange”sectionofBP’s“2015SustainabilityReport”meshwiththecriticismthatthecompanyhasreceived?Ifnot,whataccounts for the differences?3.Would you say that BP is a good or a bad corporate citizen? Why/why not?Team-Building SkillsGrowing Accustomed to Your FitGrowing Accustomed to Your FitInsteadofgoingtothestoretotryonseveralpairsofjeansthatmayormaynotfit,wouldn’titbeeasiertogoonlineandorderapairofperfect-fittingjeans?Lands’Endhasmadethiskindofshoppingpossiblethroughmass-customizationtechniquesandsomesophisticatedtechnology.Togainsomefirsthandexperienceatshoppingformass-customizedgoods,haveeachmemberofyourteamgotoNike’siDsite(http://www.nike.com/us/en_us/c/nikeid).EachteammembershouldgothroughtheprocessofcustomizingadifferentNikeproductbutstoprightbeforeplacinganorder.Aftereveryonehasgonethroughtheprocess,gettogetherandwriteareportinwhichtheteamexplainsexactlywhat’sentailedbyonlinemasscustomizationanddetailstheprocessatNike.Besuretosaywhichthingsimpressedyouandwhichdidn’t.ExplainwhyNikedevelopedthismeansofmarketingproductsand,finally,offersomesuggestionsonhowtheprocess could be improved.230A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
The Global ViewWhatÕs the State of Homeland Job Security?WhatÕs the State of Homeland Job Security?Overthepastseveraldecades,moreandmoreU.S.manufacturersbeganoutsourcingpro-ductiontosuchlow-wagecountriesasMexicoandChina.ThenumberofU.S.manufacturingjobsdwindled,andtheUnitedStatesbecamemoreofaserviceeconomy.Peoplewhoweredirectlyaffectedwereunderstandablyunhappyaboutthisturnofevents,butmostpeopleinthiscountrydidn’tfeelthreatened.Atleast,notuntilservicejobsalsostartedgoingtocountriesthat,likeIndia,havelargepopulationsofwell-educated,English-speakingprofessionals.Today,moretechnology-orientedjobs,includingthoseinprogrammingandInternetcommunications,arebeingoutsourcedtocountrieswithlowerwagerates.Andtechworkersaren’talone:thejobsofaccountants,analysts,bankers,medicaltechnicians,paralegals,insuranceadjusters,and even customer-service representatives have become candidates for overseas outsourcing.ManyU.S.workersareconcernedaboutjobsecurity(thoughthelikelihoodofaparticularindi-vidual’slosingajobtoanoverseasworkerisstillfairlylow).TheissuesaremorecomplexthanmerelydecidingwhereU.S.employersshouldbemailingpaychecks,andpoliticians,econo-mists,businessexecutives,andthegeneralpublicdifferaboutthecausesandconsequencesofforeignoutsourcing.Somepeoplethinkit’sathreattoAmericanquality-of-life,whileothersactually think that it’s a good thing.Spendsometimeresearchingtrendsinoutsourcing.Formulatesomeopinions,andthenanswerthe following questions:1.AboutwhatpercentageofU.S.jobshaveleftthecountryinthelastfiveyears?Whatper-centage will probably leave in the next five years?2.Whatkindsofjobsarebeingoutsourced,andwherearetheygoing?Whatkindsofjobscan’t be outsourced?3.How does global outsourcing help U.S. businesses? How does it hinder them?4.Howhasthetrendinoutsourcingmanufacturingandserviceoperationstoforeigncountrieshelped average Americans? How has it harmed them?5.Does overseas outsourcing help or hurt the U.S. economy? In what ways?7.10Business Plan ProjectGroup Report #7: Purchasing or Manufacturing Goods and ServicesReportReportTheteamshouldsubmitawrittenreportthatindicateshowthecompanyintendstoobtainorpro-ducetheproductsthatitwillsell.Yourwrite-upwilldependonwhetheryourcompanyisaservicecompany,aretailer,oramanufacturer.Fordetailsontheinformationrequired,seethesectionheaded“GoodsorServicesand(IfApplicable)ProductionProcess;PurchaseorManufactureofGoodsorServices”inAppendixASection2.Thereportshouldbeabouttwodouble-spaced,typedpages.Thenameofyourproposedbusinessandthenamesofallteammembersshouldappear on the report.Reasonable ContributionsReasonable ContributionsAllmembersoftheteamwhomakeareasonablecontributiontothereportshouldsignit.(Ifanyteammemberdoesnotworkonthereport,hisorhernameshouldnotappearonit.)Ifastudentwhohasmadeacontributionisunabletosignthereport(becauseofsicknessorsomeothervalidreason),theteamcansignhisorhername.Toindicatethatanamewassignedbytheteamon a member’s behalf, be sure to attach a note to the signature.Chapter 7Operations Management in Manufacturing and Service Industries231© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
7.11Nike CaseTakeamomenttoreadaboutNike’seffortstomeettheneedsofitscustomersbyprovidingcus-tomized products.About Nike Case: Chapter 8, Case 1Do You Have Designs on the Shoe Business?Do You Have Designs on the Shoe Business?Yougotoasportinggoodsstoreandlookatthelargeinventoryofathleticshoes.Buttheydon’treflectyouruniquepersonality.SoyouaddapersonaltouchtoapairofathleticshoesbyusingNikeiD(alsocalled“NikeByYou”).NikeiDallowscustomerstopersonalizeshoes,sportswear,bags,backpacks,andevengolfclubs,umbrellas,andsunglassesorderedfromtheNikesite.Thisconcept,calledmasscustomization,allowsbuyerstocustomizefootwearorequipmenttoreflecttheirownindividualstyles.Let’ssaythatyou’reintoretroshoesandhaveyoureyeonapairofNikeDunks(classicbasketballshoesfromthe1980s).Becausethey’repopularwithskateboarders,youcangototheskateboardingsectionoftheNike.comsiteandfindseventy-fivedifferentpairsofDunksintwostyles(highandlow)andavarietyofcolorcombinations.YousettleonlowDunksbutaren’tthrilledwithanyofthecolorcombinations.Noproblem—justgotohttps://www.nike.com/nike-by-youanddesignyourown.Yougettopickcolorsforeverypartofthe shoe and materials for some parts.Youcanevenaddyournameorsomeotherdistinctivemarktocertainshoes(bearinginmindthatNikedrawsthelineatsomewordchoices).Forsomestyles,youcanevenordertwodifferentsizes—say,9rightand9½leftifonefootisbiggerthantheother(aphenomenonthat,bytheway,isn’tparticularlyunusual).Or,youcanorderyourshoesinwideornarrowwidths.Let’ssaythatyou’vefinishedcreatingyourmasterpiecebutstillaren’tsurethatyouwanttobuyit(orthatyoumaynotwanttodosomefurthercustomizationlater).Inthatcase,youcanstoreitinyourownNike“locker.”Ifyoudoplaceanorder,yourshoeswillarriveatyourdoorinaboutfourtosixweeks—withapricetagonlyslightlyhigherthanatretail.WhydoesNikeoffercustomization?Because(likealotofthingsthatNikedoes)itmakesgoodbusinesssense.Moreandmore,con-sumersarelookingforproductsthatreflectpersonalstyles,andInternettechnologysimplifiestheprocessesoforderinganddeliveringcustomizedgoods.Inaddition,buyerswhocustomizetellNike a lot about what people like and don’t like.Onthedownside,someconsumersarereluctanttobuycustomizedfootwearonlinebecausethey’renotsureifshoeswillfitrightordesignswillmatchwhattheyhadinmind.Nike,ofcourse,continuestosearchforsolutionstosuchproblems.Oneresponsehasbeentosetup“NikeiDstudios”orkiosksaroundthecountrywherecustomerscancreatetheirowncustomfootwear,apparel,andaccessoriesfromNike,Converse,andHurleyproducts.PopularHurleyitemsattheMalibu location are customized board shorts for males and bikinis for females.Shopping on Times SquareShopping on Times SquareAnotherproblemishowtogetpeopletogotoNikeiD.Thisproblem,ofcourse,isn’tuniquetoNike.GettingcustomerstoitswebsiteisamajorissueforeverycompanythatsellsovertheInter-net.Obviously,peoplearen’tgoingtobuyyourproductsonlineunlessyoucanfirstgetthemtoyourwebsite.AlotofconsumershearaboutNikeiDthroughtraditionaladvertisingmedia(printandtelevision)oraredirectedtothesitefromNike’smainwebsite.Nike,howeverusedauniqueapproachtoeducateconsumersaboutNikeiD:a23-storyinteractivebillboardinNewYorkCity’sTimesSquare.Passersbyusedtheircellphonestointeractwiththebillboard,designshoes(withina60‑secondtimeframe),andthenboughtthemovertheNikewebsite(usingauniquepinnumbersenttotheirphone).Thefascinatingpartoftheexperiencewasthefactthatshoesunderdesignwerebeingdisplayedtomassesofpeoplewalkingby,therebygivingeachuser—oratleast his or her shoe—60 seconds in a very prominent spotlight.232A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Endnotes1.PowerSkiwebsite,PressReleases,http://www.powerski.com/content/psi_index.php(accessed March 16, 2017).2.SeetheseWebsitesforexamplesofcustomizedproducts:Nike(http://www.nike.com/us/en_us/c/nikeid?sitesrc=id_redir&chan-nel=CN_NIKEID&region=AP&country=CN&language=EN);Levi’s(https://www.levi.com/US/en_US/features/tailor-shop;Oakley(http://www.oakley.com/shop/custom?cm_mmc=google-semsearch-_-G-BRD-Low-Sunglasses-BMM-_-U-Custom-_-+customizable++oak-leys&gclid=COmW4NCn2tICFYa7fgodNyILyA&gclsrc=ds),andMars’sM&M’s(https://www.mymms.com/home.do?code=evgsem25&gclid=CI7w_-qn2tICFQKUfgodFuYAuw)(accessed September 20, 2019).3.WayneChaneski,“CellularManufacturingCanHelpYou,”ModernMachineShop,August1,1998,http://www.mmsonline.com/columns/cel-lular-manufacturing-can-help-you(accessed September 20, 2019).4.“BetterProduction—ManufacturingCellBoostsProfitsandFlexibility,”ModernMachineShopMagazine,May2001,http://www.mmson-line.com/articles/manufacturing-cell-boosts-profits-and-flexibil-ity(accessedSeptember20,2019),LittleEnterprises,Inc.,http://www.lit-tleenterprisesinc.com/(accessed September 20, 2019).5.January5,2018,https://www.forbes.com/sites/quora/2018/01/05/how-can-businesses-adapt-to-a-rapidly-changing-world/#4701310c5930,(accessedSeptember26,2019);“20IndustriesThreatenedbyTechDis-ruption,”Investopedia,May 9, 2019,6.JonathanTilley,Automation,robotics,andthefactoryofthefuture,McKin-sey&Company,September2017,https://www.mckinsey.com/business-functions/operations/our-insights/automation-robotics-and-the-factory-of-the-future, (accessed October 4, 2019).7.RabindraGhemosu,“What’sthedifferencebetweenBotsandRobots?”,Quora,https://www.quora.com/Whats-the-difference-between-Bots-and-Robots#targetText=Botsandrobotsaredifferentthings.&targetText=Aninternetbot,alsoknown,possibleforahumanalone.(accessedOctober5, 2019).8.“Companiesalreadyreplacinghumanswithrobots,”LoveMoney,Febru-ary14,2019,https://www.lovemoney.com/gallerylist/61607/companies-already-replacing-humans-with-robots, (accessed October 5, 2019).9.HowrobotfooddeliveryatGeorgeMasoncouldbecomethewaveofthefuture,WJLA,ABC7,May14,2019,https://wjla.com/news/local/robots-deliver-food-at-george-mason-university (accessed October 5, 2019).10.HowCanBusinessesAdapttoaRapidlyChangingWorld?Quora,January5,2018,https://www.forbes.com/sites/quora/2018/01/05/how-can-busi-nesses-adapt-to-a-rapidly-changing-world/#4701310c5930,(accessedSeptember26,2019);“20IndustriesThreatenedbyTechDisruption,”Investopedia,May9,2019,https://www.investopedia.com/articles/invest-ing/020615/20-industries-threatened-tech-disruption.asp(accessedSep-tember 26, 2019).11.Wikipedia,3Dprinting,https://en.wikipedia.org/wiki/3D_printing,(accessed September 27, 2019).12.JessicaWalrack,“5RemarkablySuccessfulProductsMadewith3DPrint-ing,”ZMorphBlog,http://blog.zmorph3d.com/products-made-with-3d-printing/, (accessed September 27, 2019).13.JessicaWalrack,“5RemarkablySuccessfulProductsMadewith3DPrint-ing,”ZMorphBlog,http://blog.zmorph3d.com/products-made-with-3d-printing/,(accessedSeptember27,2019).AndrewWalkerPrintingForDummies:HowDo3dPrintersWork?”,Independent,June21,2013,https://www.independent.co.uk/life-style/gadgets-and-tech/features/3d-printing-for-dummies-how-do-3d-printers-work-8668937.html,(accessedSeptember 27, 2019).14.CharlesGoulding,“TheR&DTaxCreditAspectsof3DPrintedFootwear,”3Dprint.com,August11,2017,https://3dprint.com/183805/rd-tax-cred-its-3dp-footwear/,(accessedSeptember27,2019);AmericanPearl,acompanythatspecializesincustom-designedjewelry,isabletoturncus-tomers’ ideas into reality using 3D printing.15.NewStory(ahousingcharityorganization)andICON(aconstructiontechcompany),“3D-PrintedHomeCanBeConstructedforUnder$4,000,”TechInsider,Mar24,2018,https://www.youtube.com/watch?v=wCzS2FZoB-I, (accessed September 27, 2019).16.“BMWincorporates3Dprintedpartsontotheirnewmotorcycle,”3Dna-tives,May3,2018,https://www.3dnatives.com/en/bmw-3d-printing-motorcycle030520184/.17.GUARDLAB, https://guardlab.com, (accessed September 19, 2019).18.“BuildYourOwnMouthguard”,GuardLab,https://guardlab.com,(accessed September 30, 2019).19.LucieGaget,“3Dprintingandsports:The3Dprintedsportsequipmentsarehere!,”sculpted,April18,2018,https://www.sculpteo.com/blog/2018/04/18/3d-printing-and-sports-the-3d-printed-sports-equipments-are-here/, (accessed September 30, 2019).20.“Dental3dPrinting—AThrivingIndustry,”All3DP,https://all3dp.com/2/dental-3d-printing-all-you-need-to-know/,(accessedSeptember30,2019).21.EllisHamburger,“Normalsare3D-printedearbudsmadejustforyou,”TheVerge,July8,2014,https://www.theverge.com/2014/7/8/5878733/normals-3d-printed-earbuds-nikki-kaufman-normal,(accessedSeptember30, 2019).22.ZMorphBlog,“WhoReallyUses3DPrintingandWhy,”http://blog.zmorph3d.com/really-uses-3d-printing/,(accessedSeptember30, 2019).23.C.Thornsberry,“ProsandConsof3DPrinting,”3Space,December27,2018,https://3space.com/blog/pros-and-cons-of-3d-printing/,(accessed September 29, 2019).24.AndyArchive,“Additivevssubtractivemanufacturing–what’sthedif-ference?”,3DPrinterPrices,http://www.3dprinterprices.net/advantages-of-3d-printing-over-traditional-manufacturing-2/,(accessedSeptember29, 2019).25.AviReichental,“TheFutureOf3-DPrinting,”Forbes,January23,2018,https://www.forbes.com/sites/forbestechcouncil/2018/01/23/the-future-of-3-d-printing/#13c0c68365f6, (accessed September 29, 2019).26.Forallofyouwholiketocheckthings,youmighthavenoticedthatthepercentofworkersinthegoodsproducingsectionof13%andthepercentofworkersintheservices—providingsectionof80%addupto93%—whichisnot100%.Forthecurious,themissingsectorsareagriculture,forestry,fishingandhunting(1%ofU.S.workers)andnona-griculturalself-employedworkers(6%).Noweverythingaddsuptoatidy100%.BureauofLaborStatistics,Employmentbymajorindustrysec-tor,https://www.bls.gov/emp/tables/employment-by-major-industry-sec-tor.htm, September 4, 2019 (accessed September 22, 2019).27.Forallofyouwholiketocheckthings,youmighthavenoticedthatthepercentofworkersinthegoodsproducingsectionof13%andthepercentofworkersintheservices—providingsectionof80%addupto93%—whichisnot100%.Forthecurious,themissingsectorsareagriculture,forestry,fishingandhunting(1%ofU.S.workers)andnona-griculturalself-employedworkers(6%).Noweverythingaddsuptoatidy100%.BureauofLaborStatistics,Employmentbymajorindustrysec-tor,2014,https://www.bls.gov/emp/ep_table_201.htm(accessedMarch16,2017).Note:Forallofyouwholiketocheckthings,youmighthavenoticedthatthepercentofworkersinthegoodsproducingsectionof13%andthepercentofworkersintheservices—providingsectionof80%addupto93%—whichisnot100%.Forthecurious,themissingsectorsareagriculture,forestry,fishingandhunting(1%ofU.S.workers)andnonagri-cultural workers (6%).Now everything adds up to a tidy 100%.28.UnitedStatesLargestPrivateEmployers(asof2017),Wikipedia,Septem-ber20,2019,https://en.wikipedia.org/wiki/List_of_largest_United_States-based_employers_globally#cite_note-1, (accessed September 22, 2019).29.DonDaszkowski,BurgerKingFranchiseReview,TheBalance-SmallBusiness,January30,2019,https://www.thebalancesmb.com/burger-king-franchise-review-1350380, (accessed September 22, 2019).30.”GreatFoodComesFirst,”BurgerKing,AboutUs,https://www.bk.com/about-bk, (accessed September 22, 2019).31.InformationonBurgerKingwasobtainedfromaninterviewwithDavidSell,formervicepresidentofCentral,Eastern,andNorthernEuropedivisionsand president of Burger King France and Germany.32.BobKrummert,“BurgerKing:HeadedForAFast-CasualFlame-out?”RestaurantHospitality,http://restaurant-hospitality.com/news/burger-king-headed-flameout-1019(accessed September 23, 2019).33.AmericanSocietyofQuality,QualityGlossary,https://asq.org/quality-resources/quality-glossary (accessed September 23, 2019).34.CharlesJ.Nuese,BuildingtheRightThingsRight(NewYork:QualityResources, 1995), 102.35.PowerSkiInternational,“AboutPowerSkiInternational,”http://www.pow-erski.com/aboutpsi.htm(accessed March 16, 2017).Chapter 7Operations Management in Manufacturing and Service Industries233© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
234A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
CHAPTER 8Team Building and Leadership8.1How to EntrepreneurLearning Objectives1.Recognize that some people may be predisposed to leadership or entrepreneurship.2.Understand that anyone can learn to be a better leader or entrepreneur.3.Recognize the skills that will enable entrepreneurial leadership.4.Understand the styles of leadership.5.Recognize the prevalence of networks in the startup world.6.Learn to build a cohesive environment.Nelson Mandela, the former dissident and eventual president of South Africa was a charismatic natural leader.Source: https://commons.wikimedia.org/wiki/File:Nelson_Mandela-2008_(edit).jpgRecentresearchsuggeststhatleadershipandmanagementskillshaveageneticcompo-nent,[1]andthisshouldnotbesurprising.HistoryisfullofindividualsfromthefourthMacedonianconqueror,AlexandertheGreat,totheanti-apartheidleaderandSouthAfricanpresident,Nelson© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Mandela,whoseemtohavebeenborntolead.Todaythereisagreatmystiquesurroundingfamousnatural entrepreneurs such as Richard Branson and Jack Ma.Jack MaSource: Frederic Legrand – COMEO/Shutterstock.comIt’sveryimportanttorealizethatthesenaturallycharismaticgeniusesareinshortsupplyandthatwhiletheycanbegreatforrapid-growthstartups,theymightactuallybedangerousinanorganic-growthsmallbusiness,wheretheirambitionsmightfarexceedtheorganization’sscopeandresources.Mostoftheleadershipskillsyouwillrequireasanentrepreneurcanbelearnedandrefined.Learning Leadership SkillsAshortwalkthroughanytraditionalbookstoreorabriefsearchoftheinternetwillrevealabun-dantliteratureonleadership.You’llalsoquicklydiscoverthatthereisanentireindustryofsem-inarsandmotivationalspeakersdedicatedtotransformingyouintoasuccessfulleader.Muchofthismaterialisofquestionablevalue,butifreadingagoodbookorlisteningtoaninspirationalspeaker makes you feel more confident and empathetic, it might not hurt.Skill BuildingReadingthroughtheleadershipliterature,thefollowinglistoftraitsandskillsareadistillationofthe qualities that are truly beneficial to the entrepreneurial leader.Honesty:Thisonecomesfirstbecause,withouthonesty,alltheworkyoudowilllackcredibil-ity.Youremployees,investors,vendors,andcustomersmustbelievethatyouaretellingthemthetruth and can be trusted to do the right thing by them.236A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
leadership styleThe manner in which theleader establishescohesion and motivatesthe team to pursueorganizational goals.autocratic leadershipA leader who unilaterallymakes decisions withoutconsulting the team.democratic leaderA leader who consults withhis team before makingdecisions.laissez-faireleadershipA leadership style in whichthe manager empowersemployees to make mostdecisions on their own.Confidence:Aleadermustprojectsincereconfidence.Employeescansmellfear.Ifyoudon’tgenuinelybelieveinthefutureofyourenterpriseandcan’tconveythatfaithtoyourteam,nobodywill follow you.Communication:Communicationerrorsplagueallorganizations.Inasmallbusinesswithlit-tlehierarchy,thecommunicationbetweentheleaderandhisteamiscritical.Leadersmustbeabletoconveytheirvisionandstrategytotheteam.Whenyoudiscussprocedureswithyourdirectreports,youneedtobeclearandconcise.Justasimportant,aneffectiveleaderisagoodlistener.Youmustunderstandwhatyourteamistellingyouaboutthebusinessandtheirneeds,andtheteam must believe that you are listening.Delegation:Handingoffresponsibilitiestotherightpeopleattherighttimeandwiththerightexpectationsiskeytoeffectiveleadership.Teammemberswanttocontribute,andleaderswhocan-notdelegateeffectivelyhavenofollowers.Settingrealisticexpectationsfordelegatedtasksisalsoimportant. Leaders who simply “dump” on their employees or expect too much will not get far.Inspiration:Leadersalsoneedtoinspiretheirteams.Ifyouhaveconfidenceandcommunicatewell,youcanpassyourvisionontoateamthatwillcarryitforwardwithoutconstantoversight.Ifyouhavetherightteammembersandtheytrulywanttogettothesameplaceinbusinessasyoudo, your business nearly runs itself.Drive:Aleaderneedstowakeupeachmorningreadytotakeonthechallengesoftheday.Ifyou’re not driven, your team isn’t driven, and the organization isn’t going anywhere.Mentoring:Agreatleaderisalsoateacher.Whenyoumentoryouremployees,youmakethemmorevaluable,andinturn,theyrespectabosswhotransfersvaluetothem.Whenteammembersfailyou,it’srarelyanintentionalact.Aleaderfindsoutwhymembersfailedandgetsthemthetraining or support they need to do better the next time.Leadership StylesSuccessfulleadershavemanydifferentapproachesorleadershipstyles.PsychologistKurtLewindefines three different leadership styles.Thetraditionalviewofaleaderisaking-likeindividualwhomakesdecisionswithoutconsult-ingtheteam.Heissuesordersandexpectsthemtobeobeyed.Thisisautocraticleadership,andmostindividualsfindthissortofleadertobedemoralizing.Ifaleaderishighlycharismatic,hemaysucceedincompellingateamtofollowhisvisionthroughthepowerofhispersonality.Autocraticleadershipiseffectivewhendecisionsmustbemadequickly,asinacrisis.Consequently,militaryleaders are often autocratic.Aleaderwhomakesdecisionsbasedoninputfromtheteamisademocraticleader.Thisstyleworksbestwhenthereistimetosolicitandevaluatemultipleopinions.Employeesgenerallypreferworking in democratic organizations.Someleadersarerelaxedandletemployeesfindtheirownpathtosuccess.Suchaleaderdoeslittlemorethanprovidetheresourcesemployeesneedtoexecutetheirtasks.Lewincallsthislaissez-faireleadership.Itworksbestinsimplebusinesseswithcleargoals.Employeeswhoareindependentthinkerswillhavehighjobsatisfactionundersucharegime.However,democraticandlaissez-faireleaderscanbeineffectiveinacrisisorinhighlycompetitivesituationsthatdemandswift and clear decisions.Chapter 8Team Building and Leadership237© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
participative leaderA leader who establishescredibility by proving hecan do his employees’work and works alongsidehis team.transactional leaderA leader who is focusedon minimizing the cost oftransactions with clearlydefined, impersonal,contractual relationships.transformationalleaderA modern leader identifiedby their ability to raise theperformance of anorganization throughinspired mutual change inthe organization.Peter ThielSource: https://commons.wikimedia.org/wiki/File:Peter_Thiel_by_Dan_Taylor.jpgteamworkThe combined action of agroup of people, notablyan organization like abusiness.ManyadditionalleadershipstylesandframeworkshavebeenproposedsinceLewin.Oneimportantstyleistheparticipativeleader,whoworkshand-in-handwiththeteamtoachievethegoal.Employeesusuallyappreciatealeaderwhounderstandstheirworkintimatelyandiswillingtodoit.Theriskhereisthattheleaderhasotherresponsibilitiestoattendtoandbeing“justoneofthe guys” may cause the staff to lose respect for his authority.Thetransactionalleaderapproachesthemanagementrelationshiplikeacontract.Rewardsandpunishmentsaretheresultofemployeessucceedingorfailingtoadheretoagreed-upongoalsandmeasures.Thisimpersonalstyleofleadershiptendstorewardambitious,self-motivatedemployees but does not bond the team together.JamesMcGregorBurnsintroducedtheconceptofthetransformationalleader,andBernardM.Bassrefinedit.Thetransformationalleaderstrivestoimproveherownperformanceinconcertwithherorganization.Shesetscleargoalsandhashighexpectationsofherstaff.Herpersonalintegrityandinspirationalnaturebringeveryonealong.Atransformationalleaderestablishesatwo-way,trust-basedrelationshipwithemployees.Sheseeksfeedbackfromherteamandhastheintegritytocorrectherownshortcomingswhentheyareidentified.TheNewEntrepreneurialDynamicfavorsthetransformationalleaderbecausealeaderwhoisself-aware,trusting,andcapa-ble of improvement can best adapt to and exploit changing environments.The Elite NetworkInSiliconValley,aclose-knitgroupofentrepreneursnicknamedthe“PayPalMafia”hasestablishedaninformalandelitenetworkinwhichselectedstartupscangrowandprosper.Thosewhoarecho-senobtaininsideaccesstocapitalandpricelessindustryconnections.Ratherthanmakingcrimepay,this“mafia,”whosemembersarethefoundersofPayPal,havemadetechnologicalinnovationandmarketinsightpay.AftersellingPayPaltoeBayfor$1.5billionin2002,ElonMusk,PeterThiel,andMaxLevchinhaveindividuallygoneontofoundbillion-dollarcompanies.TheirfirmsincludeSpaceX, Tesla Motors, LinkedIn, Yelp, and YouTube.PayPalwasnottheresultofasinglevisionaryCEOandfoundersingle-hand-edlyleadingabrillianttechstartuptoinevitablesuccess.Thenow-ubiquitousinternetpaymentsystemwastheresultofamergeroftwosmallstrugglingfirms,Musk’sX.comandThielandLevchin’sConfinity,Inc.Makingasuccessofthecombinedorganizationsnecessitatedrealteamworkwithmultiplemembersplayingoffoneanother’sstrengthsandweaknesses.Theprocessinvolvedalotofdisappointmentandcompromise.Muskdidnotgetthechancetocompletelydis-rupttheglobalbankingsystem,whichwashisoriginalaspiration.ThielandLevchinwerenotabletopursuethedevelopmentofsecurityproductsforhand-helddevices.However,Musk’sbankinginsightscombinedwithThielandLevchin’ssecurityskillsproducedatrustworthyonlinemoneytransfersystemthat the evolving internet economy required, and it made them all very rich.Whileyouarenotlikelytobecomeabillionaire,thelessonsofthePayPalfoundersspeakdirectlytosmallbusinesssuccess.Greatteamsworktogethertofindgreatbusinessmodels.Smallbusinessusedtothriveunderasingle,determinedleadersupportedbyasetofhomogenousemployeesdedicatedtodoingtheirjobwell.Amyopicfocusonexcellenceinexecu-tion—doingthesamethingoverandover,verywell—wastheprovenformulaforsuccessintheold,staticbusinessworld.Today,thatsameformulaisarecipeforfailure.UndertheNewEntrepreneur-ialDynamic,greatexecutionremainsimportant,butitnolongeroffersthesmallbusinessownerastrategic advantage. Can you think of why that is?238A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
diversityThe characteristic ofheterogeneousorganizations; having avariety of team membersbased on skill, experience,and demographics.social networksThe human connectionsthat an individual brings toan organization,composed of friends,family members, andbusiness associates thatthey regularly interact with.It may also be judged byhow well it is connected toother important networks.rolesThe specific functions thatan individual performs inan organization.generalistAn individual who iscapable of performing awide variety of tasks. Theopposite of specialist.specialistAn individual who is anexpert in one narrow areaor endeavor and not skilledin a variety of tasks. Theopposite of generalist.rewardsIncentives offered toemployees to increasetheir performance.cohesionHolding together. A groupis cohesive if it maintainsits identity as a teamthrough trials andtribulations.Building the Right TeamProfessorNoamWasserman,anexpertonteamfounding,cautionsthat“nothingcanbedevilastartupmorethanits‘peopleproblems.’”Makingtherightchoicesasyouaddmemberstoyourteam,particularlyearlyon,iscriticaltosuccessinanybusiness.Wassermannadvisesthatforateam to be highly functional, “Three Rs” must be in sync: relationships, roles, and rewards.Whileentrepreneursaremostcomfortablebuildingtheirteamoutofclosefriendsorfamilymembers,itisunlikelythatthepeopleyouknowbestarethebestonesforthejob.Further,evenifyourfriendsareextremelytalentedandhardworking,relationship-basedfirmsoftenlackdiversity.Managementresearchershavelongknownthatheterogeneousteamscomposedofpeo-plewithabroadrangeoflifeandworkexperienceoutperformthosecomposedofverysimilarindividuals.Onesimplereasonisthatyourfriends’experiencesareverylikelysimilar,andtheirsocialnetworksoverlapwithyours,offeringalimitednumberofredundantconnections.Profes-sorWasserman’sresearchsuggeststhatteamsbuiltofpastcoworkersperformbest.Insuchasituation,thefounderhasareal-worldunderstandingoftheteammembers’capabilitiesandworkhabits without being so close that their experiences and networks are too similar.Rolesarethedefinedareasofresponsibilitythatapersontakesonintheorganizationandaretypicallyreflectedintheirtitle.Startupsandsmallbusinessesrequireasmallerteamtotakeonawidearrayofchallenges.Theseorganizationsfunctionbestwhenteammembersareversatilegeneralistswho“wearseveralhats.”Iftheorganizationgrowsinscale,itcanbenefitfromtheeffi-ciency ofspecialistswho excel at particular tasks.Rewardsarethevaluethatteammembersextractfromtheirinvolvementinthebusiness.Theseincludeimmediatemonetaryrewardslikesalaryandbonusesaswellaspromisesoffuturefinancialreturnsfromownershipsharesoroptions.(Splittingownershipisaparticularlytrickydilemmatobediscussedlater.)Rewardsmayalsoincludefewertangiblebenefitssuchaslifestyleandflexiblehours.Thereisthe“coolfactor”ofbeinginvolvedinanattractivenewindustryorofjust being part of a startup at a time when entrepreneurship is hot.Cohesion and Team BuildingSuccessfulleadersoftenestablishgroupcohesionindirectlybygeneratingaconstructiveenviron-mentinwhichtheirteamfeelsmorehomogenousthanitis.Whenpeoplesharepersonalinterestsandgoals,theydevelopa“sameness”thatcanhelpthemexcelinotherareas.Forinstance,thePay-PalMafiadiscoveredthattheyalllovedsciencefiction(StarWars,notStarTrek),playedvideogames,andsharedapassionforestablishingadigitalcurrency.ElonMuskmadeapointofsupport-ingtheseinterestsintheteamandengenderingthis“sameness.”Thissenseofsharedidentityhelpeduniteateamofstrongegosandkeepthemontracktowardtheircommongoalofcreatingapractical internet payment system. Can you use a similar technique to bring your team together?Herearesomesuggestionsofplacestolookforandbuildcommonalityamongyourteammembers based on their own inclinations.1.Aretheyinterestedinwatchingsports?Taketheteamoutforaneveningatalocalballpark.Findaminor-leagueteamtogetthegroupinterestedintoavoidtheirlifetimeloyaltiestopop-ularbig-nameteams(everyfirmhasonediehardCubsfan).Anotheroptionistocreateafantasy league or a (low-value) betting pool on the season.2.Dotheyliketoplaysports?Establishasoftballteamorabowlingleagueteam.Engagethenonplayersasfansandfindwaysforthemtoparticipate,suchasdesigningtheshirtsandbringing the food.Chapter 8Team Building and Leadership239© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
3.Dotheyappreciategoodfood?Howaboutbringinginlunchordinneronedayaweekfromadifferentlocaleateryandreviewingittogether.Makeitmorethanameal;makeitanevent.After sampling everything, pull out your phones and post your reviews on Yelp.4.Do they play games?Set up a competitive video game league.5.Movies?Schedule a movie night once a month.Thesearejustideas.Almostanysmallteamcanfindsomeareaofmutualinterest,andasaleader,yourjobistoengagethe“strays”withtheactivities.Thisisn’talwaysaseasyasitseems.Peo-plearebusyandhaveotherseriouscommitmentsinlifebeyondwork.Makesureyouunderstandeveryone’sreality.Someonewhohastocarefortheirsickmomathomemayparticipateless.How-ever,partnersoremployeeswhoobviouslydonotwanttoengagewiththeteamoutsideofsimplydoingtheirdailyjobforpayarenotidealforasmallbusiness.Theyseenothingspecialinyourbusi-ness,andtheyarenotgoingtoputintheextratimeoreffortwhenarealcrisisarrives.Getthemout of your organization.Somethingswillalmostsurelybreakdownteamcohesion.Religionandpoliticsarefamousforfracturingfamilies,friendships,andteams.Youmayhavestrongopinionsonthesetopicsyour-self,andunlessyouarespecificallyrecruitingpeoplebasedontheirreligionorpolitics—whichisoftenillegaldiscrimination—youarelikelytohaveteammemberswithconflictingpersonalbeliefs.Tocreateunity,itiscrucialthatyourespecteveryone’spointsofviewandmakeitclearthatyouexpectthesamefromallyourteammembers.Whileyourreligionandyourpoliticalviewsarevaluabletoolsinguidingyourchoicesandtheywillbepositivelyreflectedintheethicsofyourorga-nization,youshouldscrupulouslyavoidintroducingtheparticularsofanybeliefsystemorpoliticalparty into the work environment.Teambuildingrarelygoessmoothly.Whenyougetfrustratedbytheprocess,recalltheadagethatsays,“Romewasn’tbuiltinaday.”Theperfectteamisn’tgoingtomaterializeinyourfirstweek,andyouarenotgoingtotieittogetherwithsomepopteam-buildingexerciselikebuildingabridgeoutofmarshmallowsandtoothpicks.Leadership,likemostothertasksinasmallbusiness,requiresconsistent hard work.Key Takeaways•You and your startup will be stronger if you call on others to build it.•Being a leader requires being part of a team.•Find shared values and passions on which to build your team.•Always be networking and stay open to becoming part of a band rather than a soloist.•Avoid introducing contentious issues into your team environment.240A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
organizational chartThe nature of powerrelationships and personalinteractions within anorganization such as abusiness.8.2The Organizational ChartLearning Objectives1.Understand the organizational chart.2.Understand traditional positions and titles.3.Understand that traditional titles may not fit entrepreneurial endeavors.4.Recognize that startups need multifunctional team members.5.Recognize that investors want fully committed team members.StructureBusinessesareorganizationsand,bydefinition,musthavesomestructure.Inlargeorganizations,thismeansformaltitlesandjobdescriptionsthatcarefullydefineindividualrolesandresponsibil-ities.Insmallfirms,founderswhoarefriendsaresometimesreluctanttoestablishanyformalroles.However,lackinghierarchyordefinedresponsibilities,thefoundationofyourcompanywillbetoounsteadytosupportevenminimalgrowth.Thebestorganizationalchartor“orgchart”leveragesthestrengthsofyourteam.Itisacontractthatstateswhoisresponsibleforwhatandthetitletheyget to put on their resume, in as formal or informal a structure as the team needs and desires.Chapter 8Team Building and Leadership241© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
FIGURE 8.1NASA HeadquartersA large organization has very formal titles and reporting structures.Source: NASAExternalcontingencies,includinggovernmentalagenciesandbanks,willrequireyoutofillspe-cifictitles,includingpresidentandsecretary,ifyourbusinessisacorporation.Yourcustomersorvendorswillexpecttofindtraditionaltitleslikesalesdirectororpurchasingdirectorforthemtointerfacewithaswell.Whilesmallbusinessesaren’tencouragedtoadoptallthesetitles,the“C-Suite” positions that head up a traditional company are listed inFigure 8.2.242A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
FIGURE 8.2Sample Small Business Org ChartA smaller organization has a simple reporting structure and is more flexible.Source: Greg AutryTraditional Positions and Titles1.FounderorCEO.ThefounderorCEOisultimatelyresponsibleforthestartup.Whetherornottheventuretakesoffisduetotheeffortsofthisindividualwhoiscallingtheshotsandset-tingthecourseforthecompany.ThisisyourElonMuskorSteveJobs:straightinnovatorandleader.2.ChiefTechnologyOfficer.Whatisastartupwithoutaproduct?Thispositioncreatesandmaintainsproductsforthestartup,whetheritbetheservice/merchandiseitself,thecompanydomain,orsomeotherinnovativegizmo.Decisionsrequiringexpertiseandtechnicalknowl-edge pass by this person’s desk. Think Bill Gates or Mark Carges: techy.3.ChiefFinancialOfficer.Thisisthe“moneyperson”whotakescareofthebooks,managesmar-gins,andbalancestheinfamousdebitsandcredits.Whenitcomestothebottomline,thisisthemainperson.IndraNooyiwasoncePepsi’sCFObeforehermeticulousnatureledtoherpromotion to CEO.4.ChiefMarketingOfficer.Oneofthebiggestconcernswithnewcompaniesisuseracquisition,whichisthedomainoftheCMO.Managingthefaceofthecompany,advertising,anduserdevelopmentallonaleanbudgetisthedutyoftheCMO.BethComstockandNikeshAroraaretwoofthemostrecognizablenamesoffolksresponsibleforbringingawell-definedproductcampaign to market.Manynaïveentrepreneursattempttoemulatethelargefirmapproachtocorporatestructure,believingtheyarefollowinginthefootstepsofthegreatbusinesslegends.Theywilldefineallsortsofrolesmoresuitedtoalargerbusinessandmaketheirorganizationmorecomplexthanisneces-saryorhelpful.Atraditionaltitlecanalsobelimiting;itsaysasmuchaboutwhatyoudon’tdoasChapter 8Team Building and Leadership243© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
whatyoudo.Ifyourbusinesscardsays“CFO,”customerssimplywillnotexpectyoutobeabletosell your product or to support them with technical issues.Inreality,yourbusinessneedssomeonewhomakesaproduct,someonewhosellsaproduct,andoftenanindividualtomakethisprocessflow.TheNewEntrepreneurialDynamictakesthebusinessjargonoutofteampositions.Feelfreetobecreativeandevenhaveabitoffunwithyoursmallbusinesstitles.Forexample,“leader,”“designer,”“hacker,”and“hustler”aregreattitles.Theleader’sroleisobvious.Thedesignerhandlesproductorservicedevelopmentandcustomer-fac-ingissues.Thehackerisaproblemsolverwhomakesthebackendofthingswork,andthehustlersearches for new customers and markets.Designing the Dynamic TeamTheproblemwithadoptingcorporateformalityisthatyoucan’tmovequickly—youcan’tbenim-ble.Formaltitlesdon’tplayintheNewEntrepreneurialDynamic.Moreimportantthanwhatteammembersarecallediswhattheydo.Inverysmallfirms,traditionaltitlesactuallysoundprettysillytosophisticatedpeople:pictureMargeWhite,ayoungentrepreneurialbakeroperatingafoodtrol-ley.Margehasboldlytitledherselfchiefexecutiveofficer.Imaginehergoingaroundsaying,“I’mtheCEOofMarge’sMuffinCart.”Ifyouchuckledathowridiculouslypretentiousthatis,you’renotalone. “The Muffin Maven” would be way cooler and generate smiles rather than smirks.In the early days, most firms require just three roles:1.Designing your product or service2.Building the product or delivering the service3.Getting customers or users to buyDependingonthescaleofyourinitialrollout,theremaybemorethanonepersonineachrole.Inmostcases,afirmprobablyhasmultiplepeoplebuildingtheproductordeliveringtheservice,and they may have more than one salesperson as well.Virtualizing PositionsBeyondtheroleslistedjustlisted,everythingelsecanbefarmedout.TheNewEntrepreneurialDynamicfirmsimplydoesn’trequireaCFO,achiefcounsel,oraVPofhumanresources;youcanoutsourceaccounting,legal,andHR.Forasmallbusiness,outsideprofessionalsaretheonlythingthatmakessense.Forastartupwithgrowthexpectations,filingthoseroleswiththeperfectindi-vidualcanwaituntilyouhavesufficientworktokeepthesespecialistsbusy.Youmightevenfarmoutthesalesandmanufacturing.Inmanymodernsmallbusinesses,theonlycorerolesareproductdesign and marketing.Switch-HittingSteppingawayfromthesecurityofasteadyjobandoutonthelimbofsmallbusinesscanbeterrifying.So,manyentrepreneurscontinuetoworkadayjobandlaunchtheirbusinessasasidepassion.Thisapproachprovidesthebusinessfounderwithincomestabilityandbenefitslikehealth insurance while they develop their product and recruit customers.Switch-hittingmayseemliketheidealchoiceforgettinganewbusinessofftheground,buthavingtwojobsandgoingbetweenthemcanbeincrediblyhardtodowell.Thisscenarioalsocon-sumesalotoftime,anditoffersarealchallengetoanyonewithafamilyorwhowantstomaintaina social life.244A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
AsnotedinChapter3,failuretocommitfullytoyourbusinessby“burningyourboats”maycauseittoremainunderdevelopedandotherpeoplesensethat.Recruitinggreatemployeestoworkonyourdreamcanbedifficultifyouaren’twillingtototallycommittoityourself.Investorsarealso highly skeptical of part-time entrepreneurs.Utility PlayersAstartuporsmallbusinessoftendoesnothavetheluxuryofbuildingafull-fledgedteamofexpertspecialists.Idealteammemberscanpitch,catch,andfieldthevarietyoftasksthatarisedailyinasmallbusiness.Whenyourecruit,lookdeeplyintotheexperiencesofyourcandidatesandseewhohasdemonstratedtheversatilityandwillingnesstohandleanumberofroles.Individualswhoareobsessedwiththeirqualificationsandseethemselvesasprivilegedprofessionalsprobablywon’tbewillingtogettheirhandsdirtyortakeondullormundanetasks.Thesepeoplearebetteroffinacorporate job, and you should avoid them no matter how smart or credentialed they seem to be.IntheNewEntrepreneurialDynamic,nothingbeatsadaptabilityandthewillingnesstowork.Stockuponutilityplayersandsettheexpectationwithinyourorganizationthatallpositionsaresubjecttochange.Donotletanyonefeelentitledtotheirposition.Theyearniteachdayandthemomenthavingtheminaparticularslotisnotoptimalforthefutureoftheorganization,thingsmustchange.Thatisn’ttosuggestthatloyaltyisn’timportant,butrathertobeclearwitheveryonethat you aren’t going to sacrifice everyone else simply to keep one team member’s ego unbruised.Key Takeaways•Stay dynamic. Consider your team as flexible as any other part of the business.•Consider that a title is a contract for performance of a job.•Don’t give important titles to individuals who won’t grow to fill those important jobs.•Never use a title to make yourself appear important.8.3Slicing the Pie and Valuing StartupInputsLearning Objectives1.Understand that an equity split should be a formalized and fair process of negotiation.2.Understandthepotentiallydisastrousconsequencesofaninformalorambiguousagreementon equity.3.Understandthataquantitativemodelcanbedevelopedtovaluetheindividualinputstoacompany.4.Understandequityisinexchangeforuncompensatedvaluedeliveredbyindividualstothefirm.5.Recognizethatsomeindividualsbringskillsornetworksthatmaketheirtimemorevaluablethan others.Chapter 8Team Building and Leadership245© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
equity splitThe division of shares ofownership of a company.equityFirm ownership usuallyrepresented by stockshares.Deciding the equity split should be atransparent process.Source: © Shutterstock, Inc.The Equity SplitEstablishingthecorrectdivisionofownership,ortheequitysplit,isacomplexcalculationthatmanywould-bebusinesspartnerssimplywon’taddressdirectly.Butwhenownershipisnotdis-cussed,misperceptionsbegintobuildamongthefoundingteamastowhattheirfairshareshouldbe.Often,you’llfindthatifyouadduptheexpectationsagroupoffoundershaveabouttheirindi-vidualpercentageownership,yougetsomethinglike150percenttotal.Ifthisproblemisnotdealtwithhonestlyandopenly,argumentsandevenlawsuitsaresuretofollow.Themoresuccessfulthefirmbecomes,themoredissatisfiedtheparticipantsmaybe.ThetragicstoryoftheFacebookequitysplitandtheensuinglawsuitsdetailedinthefilmTheSocialNetworkshouldstandasanobject lesson to every entrepreneur.Thesimplestwaytodeterminethevalueofeachindividual’sinputistoiden-tifythelaunchandgrowthactivitiesandwhocontributestothem.Theseactivitiesthenshouldbeevaluatedontheirweightofimpacttosuccess.Forinstance,inahighlytechnicalproduct,theinventor,whodevelopsthefunda-mentalvaluebehindtheproduct,islikelytobemoreimportanttothefirm’seventualsuccessthantheco-founder,whomanagesmarketing.It’sprobablyprettyeasytofindacompetentmarketingpersonandrelativelyhardtofindabrilliantengineer.Ontheotherhand,ifyou’reworkingonabrandedfashionline,themarketinggeniusbehindtheproductpositioningmightactuallybemoreimportantthantheclothingdesigner.Inthesecases,everyoneprobablyintu-itivelyunderstandstherelativevalueofthesecontributions,butiftheyarenotopenly addressed, the situation will eventually become awkward.Itcanbeveryattractiveandfartooeasytosimplydivideequityevenlyinthespiritoffriendshipinthe“ThreeMusketeers”modelofequityformation.However,whentheinputsinvalueandtimeareimbalanced,theequitydistributioninequalitywillbegintognawonthosewhogottheshortendoutofthedeal.Inturn,theyarelikelytocontributelessefforttothefirm,and this costs everyone money in the long run.Anotherreasontoconsiderdoingtheduediligenceontheequitysplitisthatitservesasasig-naltooutsidersabouttheseriousnessofyourfirm.ResearchbyNoamWassermanandThomasHellman[2]suggeststhatfirmsthatchosesimpleequalequitysplitsarelessattractivetoinvestors.Thismaybebecausetakingashortcutaroundtheownershipconversationisanindicationthattheteammembersareunabletohaveanhonestconversationaboutimportantissuesoraresimplyunrealistic about how equity is divided.Establishingamutuallyacceptableequitydivisionfromthestartisclearlycriticalforentre-preneurs.Sohowexactlydoyoudothat?Isitjustamatterofsittingdownandarguingwitheachother?Entrepreneursmusttakethemostdocumentedandsystematicapproachpossibleinpreparingforequitydivisions.Usingdatahelpsavoidemotionaldiscussions,whicharenonproductive.Onemethodofprovidingrigortoequitydivisionisasimple,four-stepprocessthathasbeensuccess-fully applied to startups.TaketheexampleofSuperiorCasers.Thisstartupplanstomakeuniquecustomcoversforphonesandtablets.Superiorwasfoundedbyfourstudentsfromasmallbusinessmanagementclass:Young,Sally,Dylan,andLoc.Thefourfoundersaretryingtodeterminehowtodivideupthestockintheircompany.Theamountofactualcashthateachmemberputsiniseasytodetermine,but the intangible assets are less clear.246A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Step One: Identify the Most Important Value CreatingActivitiesMostfounderscanidentifyahandfulofcriticalactivitiesthatcreatevalueintheirbusiness.EachmemberofSuperiorCasessubmitsalistofhigh-levelactivitiestheythinkarecriticaltothestartup,and then together they reduce the list to four simple factors:1.Product Design:Who came up with the initial ideas and will design the merchandise?2.Unpaid Labor:Who will do the actual work before it is possible to pay anyone for their time?3.PersonalNetworks:Whohasaccesstosuppliers,investors,andretailersthefirmwillneedtosucceed?4.MarketingandSales:Whoisgoingtoestablishabrandthatwillattractcustomersandresellers?Fourmajoractivitiesareareasonablecountforaverysimplebusiness.Youmightfindyouneedsixoreightforyourstartup.Avoidgoingmuchovereightbecausetheprocessbecomesunwieldy, and some of your activities will surely overlap each other, leading to confusion.Step Two: Value Those ActivitiesThenextstepisdecidinghowrelativelyimportanteachoftheseactivitiesis.Clearly,thecasesmustbedesignedbeforeanythingelsecanhappen,andtheyneedtobegreat,ornobodyisgoingtobuythem.Sotheteamagreesthatproductdesignisthemostcriticalfunctionandsetsthatat40per-centofthecompany’svalue.Theteamalsoconcursthatthepeopleworkingforfreewhilethestartupisgrowingarecriticalandsetitat25percent.Marketingisalsodeterminedtobe25percent.Finally,someteammembersbringvaluablerelationshipstothefirmandcanconnectthecompanywith suppliers, customers, and investors. Those personal networks are valued at 10 percent.So, we now have the following functions and values:•Product Design: 40 percent•UnpaidLabor: 25 percent•Marketing:25 percent•Personal Networks: 10 percentTotal: 100 percent (It’s important to verify these add to 100 percent.)Step Three: Rate Each PersonÕs Contribution to EachActivityStepthreeisdecidinghowmucheachindividualcontributestoeachoftheactivitiesthathavebeendefined.TheSuperiorCaseteamstartedbyaskingeachmembertoranktheirvalueineachactivityonascaleof0-5,wherea0indicatestheyprovidenovalueanda5thattheyarecompletelyindispensable in this area.AtSuperior,Youngknowshehasdesignedauniqueelectronicscaseandhasgivenhimselfa5,andeveryoneagreed.Healsobelieveshewillbedoingmostoftheunpaidlaborofproductionandlogistics,sohegavehimselfa4.Hehasastrongsetofnetworks,includinginvestorsandafamilyconnectionwithaKoreanfirmthatoperatesafactoryinShenzhen,China,wherethecaseswillbemade.Young,therefore,giveshimselfa5underpersonalnetworks.Youngdoesnotintendtogetinvolvedinbrandingorsales,sohegiveshimself0there.Inthiscase,thepartnersallagreewithhisratings.Chapter 8Team Building and Leadership247© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Sallyhelpswithproductdesignandsuggestsshebegivena3,buttheteampolitelydisagreesthathercontributionisthatstrong,andtheysettleon2.Sheproposes2forthelaborand4fornetworksassheiswellconnectedintheretailsaleschannelformobileaccessories.Shewillbehan-dlingthemajorbranding,marketing,andsalesworkandgivesherselfa5inthatactivity.Everyoneagrees on these points.DylanandLocsimilarlyproposetheircontributions,andtheteammakesconsensusadjust-ments. Finally, we are ready to calculate everyone’s relative contributions.Step Four: Calculate Each PersonÕs Relative ContributionInFigure 8.3, you will see a row for each of the Superior Case team members.FIGURE 8.3Potential Equity SplitExample of potential equity split for Superior Case.Thereisacolumnforeachvalue-addingactivity:productdesign,unpaidlabor,personalnet-works,andcustomerrelations.Eachofthosecolumnsisfollowedbya“weight”column,whichsimplymultipliesthenumberintheactivitycolumn(Young’s5inproductdesign)bytheweightforthatcategory(40percent)anddisplaystheresult(5×0.4equals2inthiscase).Alloftheweightedcolumnsaretotaledforeachteammember,andtheresultsare3.5forYoung,2.95forSally,1.050forDylan,and0.850forLoc.Thetotalofallthecolumnsis8.350.Dividingeachoftheteammembers’weighted total by this value provides an equity percentage out of 100.ThefinalresultssuggestYounggets42percentofSuperior,Sally35percent,Dylan13percent,andLoc10percent.Themembersreviewedthisbreakdown,andallagreed.Withthisdone,actualstockcanbeissuedinproportiontotheownershippercentages.TheSuperiorCaseteamtookthistotheirattorney,whoissuedcertificatesfor100,000sharesofstock.Youngreceived42,000shares,Sally 35,000, Dylan 13,000, and Loc 10,000.Dynamic Equity AdjustmentTheessenceoftheNewEntrepreneurialDynamicischangeandadaptation.Thatappliestoequitysplitsaswell.Actualcontributionsfromindividuals,aswellastheirpersonalperceptionsoftheircontributions,andthecontributionsothersmake,changeovertime.It’scriticalfortheteamtohavecontinuingdiscussionsaboutcompensationandequitytomakesuretheyremaininalign-ment.Whenequity,pay,andcontributionsgetoutofalignment,badfeelingsarise.Companiesshouldestablishregularmeetings,everyyearorso,toreviewandadjusttheownershiptoreflectreality. During the first few years, they might want to do that even more often.248A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
intellectual property(IP)The valuable ideas acompany uses to gaincompetitive advantage thatmay be protected aspatents, copyrights, andtrade secrets.AtSuperior,Sally’smombecameveryill,andSallyhadtocutbackhercontributionstothefirmduringsomecriticalmonthsinyeartwo.LocsteppedupandtookoveralotofSally’sworkduringthisperiod.Asthestartupdidn’thavethecashflowtopayhimforthistime,theteamagreedtoawardhimsomeadditionalsharesforhiseffort.Locwaspleasedbytherecognition,andthequal-ity of his work increased.Whenevernewsharesareissued,everyone’spercentagesdropinproportion,buttheteamdidnotreduceSally’ssharesbecauseofherabsence.Thatwouldhavebeenareasonabletopicofcon-versationhaditbotheredtheothermembers.Uponherreturntofull-timework,Sallymadeanextraefforttomakeupforherabsencebecauseshewasawareofthegraciousnessofherfellowteam members in this decision.Whose Intellectual Property Is It?Intellectualproperty(IP),thevaluableideasthatacompanyusestogaincompetitiveadvantage,canbeeventrickiertosliceupthanequity.Dothesepatents,tradesecrets,copyrights,andtrade-marksbelongtothecompanyandarethusincludedintheequity,ordoestheindividualwhocreated the idea hold the rights? What factors might influence how you decide?Ifyouwerethesolegeniusbehindapatentableideaanddevelopeditentirelyonyourown,youmaychoosetoholdtheIPinyournameindividuallyandlicenseittothecompany.Iftheideawasdevelopedwithresourcespaidforbythefirm,thenthecompanyanditsstockholdershaveaninterestinit.Ifyou’reseekinginvestmentinyourfirm,rememberthatinvestorswillviewthepatentasaparticularlyimportantpartofthefirm’svalue.Ifyouaddyourpatentorpatentableideato the firm, be sure you are adequately compensated.Inthecircumstancewhereothersinsideoroutsideofthefirmcontributetothedevelopmentofabasicideaintoapatentabledeviceorprocess,thesituationcanbemorecomplex.ConsiderthedebacleatSnapchat,wherethreefriendsdiscussedtheirideaforanawesomeappandtoyedwithit,butonlytwoendeduplaunchingthenowubiquitousappanddoingallthehardwork.ReggieBrown,thethird“founder,”endedupsuingEvanSpiegelandBobbyMurphyforhisthirdstakeinthemulti-billion-dollarstartup.IfanyoneconceivablycontributedtoyourIP,youneedtohaveanagreementwiththemthatspecifieswhat,ifanything,theyaregoingtoreceive.Ifyou’vegotavalu-able idea, it is important that you consult a lawyer.Suchproblemsareendemictosuccessfulcompanies,largeandsmall.Afailuretodealwiththingscorrectlyupfrontcanresultinpainfulconversationslater.Manyanentrepreneurhasfoundthemselvesincourtfightingwithaformerpartner,employee,friend,orfamilymemberovertheirclaims of contributions to the firm’s initial ideas.Key Takeaways•Take the time to make the equity split fair.•Establish a model that accurately quantifies the value of founder’s contributions.•Understand that equity split can be a dynamic process.•Be clear from the start about who developed the intellectual property behind your product.•Ifsomeoneoutsidethefoundingteamcontributestoyourbusinessbesuretheirrelationshipand contribution is clearly defined.•Itisbettertoengagealawyertosetthingsupcorrectlythantohireseveraltoargueoveritlater.Chapter 8Team Building and Leadership249© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
lean ventureA startup that minimizesinvestment in capital andhuman resources andmaximizes flexibility in theallocation of these, aka“lean startup.”Mark ZuckerbergSource: Frederic Legrand – COMEO/Shutterstock.com8.4Evolving Roles as Your BusinessMaturesLearning Objectives1.Understand that as firms grow their leadership needs to change.2.Learn to build a company culture that will last.3.Recognize organizational inertia.4.Understand the importance of recruiting in building firm culture.5.Appreciate the value of diversity to firm performance and growth.6.Learn to set clear expectations of employees and be prepared for problems.7.Learn to handle terminations with grace.The Challenges of GrowthItwouldbealittleshockingifMarkZuckerbergwasstillwritingcodeforFacebookwebsitesorapps.Withmoreresourcescomemoreflexibility,anditisimportanttokeepaneyeonthefuturesothatwhenflexibilityallowsmovement,acompanycanadaptandproperlyfillitsnewcapacity.Forexample,inanicetraditionalleanventure,thefounderwillprobablybefunctioningastheCEO/CFO/CTOaswellasdoingsales,marketing,andperhapsahandfulofotherjobs.Agoodteamhasmemberswhocanaddressanynumberofchallengesonanygivendayandareopenandwillingtowork under a job title, unconstrained by antiquated expectations and practices.Themostimportantlessontolearn,though,isthatyourcompanyisabusi-nesswithemployeeswhooughttohelpthebusinessgrow.Ifacofounderoremployeewasinstrumentalintheideationorproductdevelopmentphasebutnolongerservesapurposeinthegrowthofthesalesphase,compensatethemfortheirworkandletthemgo.Thismayseemharsh,butwhatisthepurposeofkeepingadeveloperwhocandonothingbutprototypeifthereisnothinglefttoprototype?Asthecompanygrows,itsneedswillevolve,andyouandthecom-panyshouldmakesureeverypersononboardisservingapurpose.Discardedearlyemployeesandfoundersmayfindthemselveswealthyfromincreasesintheir stock holdings, without putting in any additional work.Life Cycle of a Growth BusinessAstartupdoesnotsimplybecomeFacebookovernight,andFacebookdoesnotsimplystayFace-bookperpetually.Theaveragecompanylastseighteenyearsintoday’smarketconditions,whichmeansthatifitisaverage,Facebookwillonlybeinbusinessuntil2022.However,ifMarkZuckerbergistheinnovatorthatheappearstobe,Facebookwillcontinuouslyevolveandavoidthisexpirationdate.JackMa,thefounderofAlibaba,hasfamouslystatedthathehasdesignedhisfirmtolastfor100years.It’sbeenaroundforacoupleofdecadesalready,andtopersist,ithashadtotransformitsmodel several times. Can your small business do the same?250A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
organizationalcultureThe beliefs and behaviorsthat define interactionswithin an organization andwho the organizationappears to and engageswith outside entities.TheNewEntrepreneurialDynamicacknowledgesthatbusinessesmustchangeovertimetosurvive.Culture Change and InertiaEverycompanyhasanorganizationalculture,andthecultureofabusinessisanincrediblyimpor-tantfactorinitssuccess.Mostimportantly,inlightoftheNewEntrepreneurialDynamic,yourcompany culture should be purposefully established upfront because it is difficult to change.Dozensofmodelsoforganizationalculturethatdivideorganizationsintofour,five,ormoretypes.AusefulframeworkfromprofessorsKimS.CameronandRobertE.QuinnattheUniversityof Michigan’s Ross Business School places businesses in a two-axis matrix with four quadrants.[3]FIGURE 8.4Competing Values FrameworkSource: Cameron, Kim S., and Robert E. Quinn. Diagnosing and changing organizational culture: Based on the competing valuesframework. John Wiley & Sons, 2011.InthisCompetingValuesFramework(Figure8.4),firmsareevaluatedbasedontheirorganiza-tionalflexibilityandwhethertheircultureisinternallyorexternallyfocused.Themoreflexibleanorganization,thehigherontheverticalaxisitisplaced.Conservativeorganizationsthatseeksta-bility are lower on this axis.Organizationsthatdevelopandmaintaintheiruniqueculturesinternallyandfocusontheirownattributesaremappedontheleftsideofthehorizontalaxis.Thosefirmsthatactivelyincorpo-rateexternalinfluencesintotheircultureandarehighlyengagedininteractingwiththeirmarketandcompetitorsareplacedtotheright.Togetherthetwoaxesdivideorganizationsintofourquad-rants: Hierarchy, Market, Adhocracy, and Clan.Chapter 8Team Building and Leadership251© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Hierarchy CultureA culture with stronglydefined roles andtop-down managementstructure. Decisions aremade in an autocraticmanner.Market CultureA closely controlledorganizational culture thatis focused on capturingmarket share.Clan CultureA collaborative culturebased on shared valuesand experiences. Leadersadopt a mentoring style.Feedback is seriouslyconsidered, andindividuals are very loyal tothe group.Adhocracy CultureAn extremely flexiblecompany culture andleadership style. Suchorganizations are externallyfocused, often on atemporary goal.TheHierarchyCultureisinternallyfocusedandcontroloriented.Itisaverytraditionalbusi-nessculture,bestsuitedtolargefirmsthatfocusonconsistentdeliveryandavoidspontaneousinnovation.Anychangesinthisorganizationcomefromthetop.Leadersareauthoritarianandarenotlookingforinputfromemployeesorcustomers.Workersonthefrontlines,interactingwithcustomers,havenoautonomy.Thiscultureisgreatforthemilitary,butintoday’skineticbusinessworld,itisverydifficultforfirmstosurvivewiththistraditionalandnonflexiblemodel.Thiscul-ture is completely incompatible with the New Entrepreneurial Dynamic.TheMarketCultureisfocusedexternallyonitscustomersandmaintainsstabilityandcontrol.Thesefirmsareresults-driven,verydemanding,andevenharshtowardtheirstaff.Takingadomi-nantmarketpositionorexitingthatmarketisatypicalstrategy.Largecorporationslookingforefficienciesintheirtransactionsadoptthisculture.Itslackofdynamismmakesitlesscompatiblewith the needs of most small businesses that must compete on adaptability, not scale efficiencies.InaClanCulture,theteamcollaboratestoexcel.Theircohesioncomesfromsharedvaluesandgoals.Theopinionsofemployees,customers,andvendorsareallconsidered.Employeesareempoweredandloyaltyisearned.Leadersassumeamentoringroletodeveloptheskillsoftheirteams. The clan culture is the natural form adopted by small, family-run businesses.TheAdhocracyCultureisexternallyfocusedonitsgoalandveryflexible.Thisorganizationisdynamic,specialpurpose,andeventemporaryinitsverynature.IntheHollywoodentertainmentindustry,filmcompaniesareformedjustforthepurposeofmakingasinglemovie.Adhocracyworksgreatforsmallbusinessesthatdothingslikepopupsalesoreventswhereeachoneisuniqueand specialized.Where do you think the New Entrepreneurial Dynamic fits best in this framework?Manyentrepreneursneverconsciouslyconsidertheculturetheyarebuildingandjustsortof“gettowork.”Thisapproachcanbedisastrous.Ifyoudonotchoosetoguidethecultureofyourcompany,yourteamwilldeveloponeorganically.Suchanunplannedculturaldevelopmentwillcomewithquirksandcharacteristicsfrommanysourcesthatyoumaynotfinddesirable.Fromtheoutset,sitdownandtrulythinkaboutwhatsortofcultureisbestforyou,yourcompany,andyourbusinessmodel.Inadditiontothinkingaboutthecurrentmoment,thinkaboutwhereyourcom-panyisgoingandwhatsortofculturewillberequiredtogetitthere.WillyoutakeaZapposapproachwhereeveryoneisequalandthecompanyfocusesonfunandpersonality,orwillyoutakeaSpaceXapproachandfocusonchallengesandinnovation?Thereisnorightanswer,butthere is often a wrong one.Itisveryimportanttounderstandthatitisdifficultanddangeroustotrytoswitchorganiza-tionalcultures.Throughoutthisbook,youareencouragedtopivotorchangetheaspectsofyourbusinessthataren’tworkingwell.However,whilemovingtoaPlanBcanbeattractive,researchsuggeststhatkeepingabadcultureintactislessriskythanswitchingtoagoodone.So,whatevercultureyouadoptinthebeginningislikelytoendurefortherestofyourcorporatecareer.Choosewisely.RecruitingRecruitingtop-tiertalentforasmallbusinessthatisn’tgoingtotakeovertheworldorforastartupthatislittlemorethananideaisdifficult.Nothavingmoney,agorgeouscorporatecampus,orthecacheofanamelike“Google”canmakeitseemnearlyimpossible.However,aswithmostthings,smallbusinessesactuallyhavesomespecialpowers.Employeesarenotjustlookingformoneyorprestigiousemployers.Theyalsocareaboutthingsliketheirfamilies,location,lifestyles,andper-sonal passions.Ifyoucan’tcompeteonpayandspending,youcancompeteonthingslikeflexibility,integrity,andcompassion.YoumaynotbeheadquarteredinthehustleandbustleofNewYorkorShanghai,252A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
The group’s founders of Capital Cities met viaCraigslist.Source: https://commons.wikimedia.org/wiki/File:Capital_Cities_rockin’_the_’hoo!.jpgbutthepaceandlivabilityofasmalltownorthesuburbsmightbeexactlywhatalotofgreatemployeesarelookingfor.Finally,you’dbesurprisedhowmanygoodworkershavesimplybeen“burnedout”or“workedover”bymultinationalcorporations.They’vehadenoughoftheratraceandfeelingasthoughalltheirhardworkislostinagiant,soullessmachine.They’dlovetoworkinasmallbusinesswheretheycanseetheireffortactuallymakingadifferenceandaddingvaluetothe lives of real customers.Thisisn’ttosayyouwanttohirecorporatecast-offsorrejects.YoustillwanttheAplayers,butyouwanttheoneswhocanthinkdifferently.Makesureyoudoyourduediligenceinthehiringprocess.Checkthereferences;spendthetimetogettoknowthem.Makesuretheyknowtheirstuffandtheytrulyappreciatewhatyourfirmoffers.Additionally,“A-hires”bringin“A-hires”—eachrecruitcountstwicebecausethebettertheemployeesyoubringin,thebetteremployeesyouwillattract.Neversettle,alwaysreach,andmakesureeveryindividualbringsthegreatestvaluepossi-ble to your venture.Homogeneity versus Diversity in ManagementManyleaderstalkabouttheimportanceofdrawingfromamultidisciplinaryrangeofmanagementfieldstoincreasediversity.Whilediversityandbreadthofknowledgecanbeuseful,especiallywhenitcomestospecializationandadaptation,themostimportantqualityforastartup’smanagementteamistohaveonecommonpassionandsimilarpersonality.Embarkingonastartupventurewillbethewildestrideofyourlife,withupsanddowns,andyouneedtoknowthatthroughitall,youcancountonthepersonnexttoyoutoholdasimilargoalandstickwithitthroughthickandthin.Networking in the Online and the Real WorldsNetworkingmaybethesinglemostimportantskillforanysmallbusinessperson.Inanefforttohelpyourememberothersandgettoknowothers,maintainapos-itiveonlineimage;beopentoconnectingviasocialnetworkinginbothyourbusinessprofileandpersonally.Althoughthesocialmediamarketplaceisdynamic,LinkedInandFacebookaregreatgeneralsourcesforfindingemployees.Inmostcases,thereisalotofonlinenetworkingyoucandoforfree.Youronlycostisthevalueofyourtime.However,ifyoudon’thavealotoftime,payingtoplaycangetyourjoblistingoutinfrontofalotofeyesquickly.WebsitessuchasMonster.comandIndeedspecializeinthis.YoucanfindcontractworkersinplaceslikeUpwork.Theseservicesletyoutargetengineers,salespeople,market-ing experts, or whatever specialists you might need.RyanMerchantandSebuSimonian,foundersofthepopbandCapitalCities,metonCraigslistwhenSebupostedanadofferingproductionservices.IfMer-chanthadnothadthecouragetoconnectwithastranger,theywouldneverhavemadetheir2013BillboardHot100hitsong,“SafeandSound.”Thatsuccessproducedalotofincomeandagreatdealoffun!Themoralofthatstoryisthatinordertohavetheperfectnetwork,youmerely need to be outgoing and receptive to any opportunity or relationship that presents itself.Withallourfocusonourvirtualnetworks,itremainsimportantnottooverlooktherealworld.Thebestconnectionsstillhappenthere.Attendtheregularconferencesforyourindustry.Evenifyourfirmistoosmalltosetupaboothatthetradeshow,youwillmeetpeopleinthehallsandatthelunchtables.Don’tlimitthesearchtotraditionaleventseither.Ifyou’reonvacationorattend-ingabarmitzvah,wedding,orevenafuneral,makeapointofmeetingpeopleandfindingoutwhattheydo.Theycouldverywellturnouttobeyourfutureteammembers,ortheymayhelpyoufindtheperfectrecruits.Additionally,neverbeafraidtoreachouttofriends,family,oracquaintancesfor introductions. When it comes to networking, just remember that “one never knows.”Chapter 8Team Building and Leadership253© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Stealing Talent from CompetitorsOften,themostobviouspooloftalentcanbefoundatyourcompetition.IfyourunSandra’sTacoStandandneedworkerswhocancook,servefood,andrunacashregister,thenBill’sBurgerJointacrossthestreetwouldseemliketheperfectrecruitingground.Ifthereareproblemswiththecul-tureatBill’s—maybeeveryonehatesthenightmanager—thenbringingthemovertoyourteamshouldbeeasy!However,ifthecompetitionisdoingwellbytheiremployees,you’llfinditalothardertorecruitthem.Inthosecases,youmighthavetopaymore,andthatriskscreatingabid-ding war that could needlessly drive up labor costs for both your firms.Beingtooaggressiveaboutthissortofthingcanalsodamageyourreputationinyourlocalbusinesscommunityorwithinyourindustry.YouneverknowwhenyoumightwantBill’shelp.Hemightmakeanintroductionforyoutoatrustedvendor.Thetwoofyoumightneedtoworktogethertofightanewcityparkinglawthatmakesithardforcustomerstogettoyourbusinessesor combat a signage ordinance that makes it hard for people to find you.Thesesamegeneralideasapplywhetheryourbusinessisfastfoodortechnology.Ifyouareinthetechnologyfield,animportantconcernmightbewhatintellectualpropertytheymightbringfromyourcompetitor.Whilehavingaccesstotheinnersecretsofyourarchrivalsmightseemgreat,itisaveryrealpossibilitythatyournewemployeecouldbeconstrainedfromworkingoncertainthingsbyhispreviousemploymentcontractoranoncompeteagreementhemayhavesigned.Evenifheinadvertentlyduplicatessomeprocessordesignfromhispreviousemployer,youmayfindthatyou’refacingalawsuitoverIPtheft.Beverycarefulwiththis.Discussitwithanypotentialnew hires and be sure they understand that your organization operates ethically and openly.Anotherimportantconsiderationistheprocessofintegratingoutsidersintoyourfirmandincorporatingthemintoyouruniquecompanyculture.Yournewhiresareusedtooperatinginasomewhatdifferentbusinessenvironmentandleadershipstyle.Thesuccessoftheirassimilationwilldependonhowdifferentyourmanagementstyleandotherculturalaspectsarefromyourcompetitors.Thinkaboutthatandrealizethatifthecompanytheycamefromissignificantlydif-ferent,thetransitionwilltakelonger,andyouwillneedtobemoreinvolved.Makeapointofgettingallyouremployeesengagedintheprocessofgreetingandintegratingnewteammembers.Askthemtoincludenewhiresinbothworkprojectsandwork-relatedsocialactivities.Considerbring-ingnewhirestoyourhomeorouttodinnerwithyourfamilysotheyknowyoureallycareaboutthem personally.Management CompetenciesZappos,theonlineshoestore,isfamousforhavingallnewlyhiredexecutiveslearnbyworkingintheirphonecentersfirstbecauseitisintegraltotheirbusiness.Pulse,aCaliforniastartup,startsallprospectiveemployeesinshorttrialsaslow-levelofficeworkers.Theyusethesetrialstotestthecandidates’teaminteractionandculturalfit,whichisfarmorevaluableinformationthananythingyou can find on a resume.Findingefficientmanagerswithpassionisnoteasy.Sinceyouwillbeoperatingonatightbud-get,findingamanagerwhohasaknackforsqueezingeverylastpennyoutofanofficebudgetoroptimizingmanufacturingsupplychainsallowsforyoutogetthebiggestbangforyourbuck.Last,beingamanagerforMarge’sMuffinCartorevenXYZtechstartupwillbelessalluringthanthesamepositionatAppleorGoldmanSachs,somakesureyourmanagerisinitforthelonghaulandiszealousaboutwhatyouaredoing.Itwillallowforabetterofficeenvironmentandagreaterchance of retention.254A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Building an Ethnically Diverse or Global TeamResearchershavedemonstratedthevalueofateamwithdiversebackgrounds.Themajorbenefitsofdiversityarenotintheteammembers’physicalcharacteristicssuchastheiroutwardethnicidentity,butratherinthevarietyoftheirlifeexperiences,skillsets,andconnections.Itislikelythatateambuiltaroundthesepointsofdiversitywillalsobeethnicallymixed.Businessownersineth-nicallydiverseareasalsorealizethatbuildingacompanythat“lookslikethecommunity”sendsapositivesignaltopotentialcustomers.Insomecases,yourgovernmentmaycompelorencourageyoutohireminoritycandidates—oratleastyoushouldnotappeartobediscriminatingagainstanygroup.Inanycase,whilegettingthebestcandidateforthejobmustremainthetoppriorityforyoursmallbusiness,howcanyoubestlocateandrecruitgreatcandidateswhowillcontributetoadiverse team?Diverse teams perform better.Source: © Shutterstock, Inc.Yourabilityandyourneedtorecruitdiversecandidateswilldependsignificantlyonwhereyouare.Insomecities,likeHongKong,London,orLosAngeles,thediversityandintegrationofethnic-itiesandculturesrunsodeepthatitwouldbehardtoformahomogenousteam.Inthesecities,businesseswithstaffofasingleethnicityappearclannishandcanbeintimidatingtooutsiders.Ontheotherhand,ifyou’reinasmalltowninAmerica’sruralMidwestorJapan,whereethniciden-tityismorehomogenous,youmightfinditmuchmoredifficult.Regardless,yourbestbetistobeopenandhospitabletoeveryone.Yourmarketingisthemostobviousoutwardmanifestationofyourcompanyculture.Byincludingdifferentfacesandlanguagesinyourmaterials,youcansig-naltocandidatesthateveryoneiswelcomehere.Youcanalsobedirectinyourjobadvertisingbyincludingaproactivephrasesuchas“Wearebuildingadiverseandtalentedteam!”Itisimpor-tantthatyougobeyondtherequiredgovernmentalverbiagesuchas“Weareanequalopportunityemployer”or“Discriminationinemploymentisprohibitedbylaw,”oryouarenotactuallyprovid-ing any discernable signal.Beawareoftheanti-discriminationlawsofyournation,state,orprovince.Yourlargercus-tomersmayevenbeinterestedinyourdiversityprogram.Theserulescanbedifficulttocomplywithdespiteyourbestintentions.Forinstance,youmaybelegallyprohibitedfromaskingacan-didateabouttheirethnicityduringtheapplicationorinterviewprocessinordertopreventactivediscrimination—yetyoumayberequiredtotrackandreportsuchdatatoprovethatyou’renotdis-criminating.Youmaythinkyourecognizediversityinitsphysicalappearancebutrememberyouarealsolookingfordiverseexperience.Donotconflatethesetwoqualities.ThebestapproachistoChapter 8Team Building and Leadership255© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
simplyaskcandidatestosharebroadlyabouttheirlifeexperienceandhowtheybelievesuchexpe-rienceswouldbenefityourfirm.AnAmericansmallbusinessownermaybeverysurprisedtofindthatthe“white”womanheisinterviewinggrewupinKenyaandSingaporeandspeaksfourlan-guages.Hemightalsofindoutthatthe“Asian-looking”candidatewasadoptedbyawhitefamilyasa baby and that he grew up in rural Minnesota speaking only English!Genderdiversitywouldseemtobeaneasiergoaltoachieve.Whiletheworldhasmadesig-nificantprogresstowardintegratingwomenintoallprofessions,muchworkremainsintermsofequalpayandpromotion.Thissuccessalsovariessignificantlyamongnations.Womenentrepre-neursareanimportantpartofthisprogress,andsmallbusinessescancontributesignificantlybygivingyoungwomentheirfirstopportunitiesinmanagement.Attractingfemaleworkersinvolvestreating them as equals. If your competitors aren’t doing that you have an advantage.Today’sgenderenvironmentismorecomplexthanyourgrandparentscouldhaveeverimag-ined.TheLGBTQ+communitydrivesanumberofgenderidentificationissuesinthedevelopedworld.Thismaycomplicateyourhiringpracticesaswellaspoliciessurroundingbenefits,thedefi-nition of maternity leave, and employee and customer bathroom access.Theglobalexperienceofyourteamcanbeveryimportant.Ifastartuprequiresoutsourcedandinexpensivemanufacturing,addingateammemberwithactivetiestoChinaorVietnamcouldbereallyhelpful.Ifitisaboutoutsourceservices,anemployeewithconnectionstoIndiacouldhelp.IfthefirmwantstoexpandintoLatinAmerican,African,orEuropeanmarkets,thenclearlyhir-inganemployeefromthoseregionswouldbeagreatasset.Hiringimmigrantsorfirst-generationimmigrantsisanexcellentwaytoachievethis.Andresearchdata[4]suggestthatimmigrantsarepredisposedtosmallbusiness.Forinstance,inSouthKorea,thebusinesslandscapeisdominatedbyenormousconglomeratefirmsknownaschaebols.ManyyoungKoreansinSeoulaspiretolifelongcorporatepositionswithfirmslikeSamsungorLG.However,aboutathirdofKoreanimmigrantstotheUnitedStatesareinvolvedinsmallbusinessesthatrangefromimport-exportfirmstodrycleaners.[5]Itisimportanttorememberthatforeigncountriesarenotreallythestereotypicaluniformnationalentitiessometimesimagined.Theyhavetheirowndiversesocial,cultural,religious,andbusinesscommunitieswithmanydifferences.ThegovernmentofChinarecognizesfifty-five“offi-cial”minoritygroupswithintheirborders,butinactuality,therearemanymore.Indiacombinesadizzyingarrayofculturesandlanguages.SimplygettingsomeonefromcountryXwhoisproperlyeducatedtodothejobisnotenough.Manynationshavecomplexclassorclansystemsorcustomsthat can bedevil the naïve foreign businessperson’s attempts to quickly enter a market.256A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
b-teamSecond rate employeeswho are not topcompetitors in theirrespective fields.FIGURE 8.5Linguistic DiversityLanguage families of the Indian subcontinent.Source: Wikimedia https://commons.wikimedia.org/wiki/File:South_Asian_Language_Families.jpgTyingyourfirmtothewrongpersonearlyonmayinadvertentlybrandyourfirmastiedtoaparticulargrouporsubculture.Thiscansendthewrongmessagetosomecustomersandperma-nentlydamageyourbrandwithimportantconstituenciesinthatnation.Doyourhomeworkandconductmany,manyinterviewstodeterminethatyouaregettingapersonwhowillletyoucrossculturalboundariesandcangetyouintothenetworkyouactuallyneedtobein.Whileincorporat-ingthesemembersintotheteam,trytoaccountforgeographicandculturaldifferences.Willtheyworkfromadifferentlocation,andhowwouldthisaffectorganizationalflow,legalworkings,andcommunication?Additionally,ifthereareculturalorlanguagebarriers,howdoyouplantoover-come them for a seamless company culture?Establishing an Attractive PackageWhiletoptalentflockstofamousnameslikeGoogleortrendystartupslikeUberandAirbnb,unknowncompaniesdon’tattractthegreatcandidatesautomatically.Infact,lessdesirableb-teamplayersoftentargetsmallbusinessestheythinkarelessdemanding.Asmallbusinesshastomain-tainthehigheststandardsandsellitselftocandidates.Ifyouputyourbestfootforward,youcanattractwinnerstoyourinterviews,butyou’regoingtoneedtocraftanattractiveemploymentpack-age to get them on your team.Designingapackagethatisatalentmagnetrequiresresearch.Importantconsiderationsforanattractivepackageincludesalary,benefits,andstock,aswellasfunperksthatcanhelpbuildcompanyloyaltyandmorale.First,youhavetoknowtherangesforsalaries,benefitpackages,stockoptions, etc. of your industry.Youneednotofferthehighestpayinyourindustry.Smallbusinesseshavetheadvantageofflexibility.Youcancraftattractivepackagestailoredtotheneedsofindividuals.MaybeyourdreamworkerneedstobeathomeeveryThursdaytomeetwithaspecialistwhohelpshisfatherwithaChapter 8Team Building and Leadership257© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
healthproblem.Youcancrediblypromisetomakethathappen,whereasabigcorporation’spromiseto accommodate that might ring hollow!Theverynatureofyourbusinesscanalsobealure.Startupscanbe“cool,”leveragingthatmys-tiqueinrecruiting.Yourcompanyculturemaybehip,orperhapswhatyoudoissociallypopularatthemoment.Somefirmsofferdiscountsandfreemerchandisetoemployeesifthedemographicoftheirworkersmatchestheirconsumersaswell.IdentifyingthingsthatwillfirethepassioninyouridealemployeesandcreatingpackagesthatemphasizethesebenefitsiskeytotheNewEntrepre-neurial Dynamic.Screening Resumes and ReferencesInthemovieConfessionsofaShopaholic,themaincharacter,RebeccaBloomwood,obtainsajobatafinancialmagazineby“fudging”herresume.Luckilyfortheemployer,shesomehowmanagedtobeaperfectfit,butunluckilyforstartupfounders,reallifeisrarelylikethemovies.Youmustcom-pleteyourduediligenceonresumesandreferences.Thevalueofthewordsontheresumedoesnotalwaysequalwhattheyimply.IfyourunanappdevelopmentcompanyandtheprospectivenewhireforthepositionofCTOclaimsheworkedinavarietyofhackathons,quizhimaboutthepro-jects. Give him some real tasks to code and observe his competence firsthand.Beforecheckingemployeereferences,identifythethingsthataregoingtobereallyimportantforyoutoknow.IsthispersonadaptableenoughfortheNewEntrepreneurialDynamic?Howdoesthispersonperforminateam?Howreliableishe?Howdriven?Ifpossible,askforanecdotesthatrevealtheprospectivenewhire’scharacteristics.Rememberthatthepreviousemployermaynotbetellingyoutheabsolutetruth.Formeremployersmaybecoveringforthispersonbecauseoffriendships,financialobligations,orsimplytoavoidbeingsuedfordamagingthecandidate’srepu-tation—afactorthatpushesmanyformermanagersintonearsilence.Validateminorbutspecificclaimstheemployeemadeduringtheinterview.Findinginconsistenciesmayactuallybeeasierinthe seemingly less important areas because any major cover-ups are likely to be well protected.Youmightalsoperformformalbackgroundchecks.Forafee,someorganizationswillverifythepotentialemployees’references,checktheircriminalanddrivingrecords,giveyoutheircreditscore,andletyouknowifthey’veeverbeeninvolvedinalawsuit.Takentogether,thisinformationmaysuggestapatternthatcanbehelpfulinyourhiringdecisions.Whileanygoodcandidatemighthaveabadmarkinoneoftheseareasforavarietyofreasons,asystemicpatternofirresponsibilityisabadsign.Onespeedingticketorlawsuitshouldn’teliminateacandidate,butifyoufindaper-sonwhoisconsistentlyintroublewiththelaw,doesn’tpayherbills,orisroutinelyincivilcourt,keep looking.Last,lookatcandidates’hobbiesorafter-workactivitiesthattheyarewillingtoshare.Thesemayportrayadifferentsideofthem.Whatdothesethingssuggestabouttheircharacterandtheirfitwithinyourorganization?Spendamomentandvisualizewhatitwouldbeliketohavethisper-son in your small business?Oncethey’vepassedallthescreening,doyourbestgettoknowthecandidate,hischaracter,andgetasenseofhowhewillperforminyourcompany.Takehimouttodinner,introducehimtoeveryoneontheteam.Havehimworkonatrialbasisforadayortwoifthatislegalinyourareaand agreeable to everyone.Avoiding Troublesome Hires and CYAToparaphraseSmokeyBear,“Onlyyoucanpreventbusinessfires!”Badpunsaside,problematichiresturnintoproblematicemployeeswhoturnintoproblematicex-employees.Ifanapplicantsetsoffafunnyfeelinginyourgut,trustyourinstinct,andtrytofigureoutwhyyouaresuspicious.258A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
litigiousAn individual ororganization that is proneto engaging in lawsuits,filings, and other legalactions.willingness to workThe amount of effort anindividual is willing to givefor their organization.Many job interviews are now conducted online.Source: © Shutterstock, Inc.Additionally,whensomethingseemstoogoodtobetrue,that’softenexactlythecase.Imagineyou’reinterviewingtheformervicepresidentofsalesofsomeFortune500firm.You’reexcitedtohavesomebodyofthiscaliberatyoursmallcompany.Younotethattheyleftthelargeemployerovera“differenceofopinion,”buttheyclaimthey“feelpassionatelyaboutyourproject.”Still,youpick up a sketchy vibe about the whole thing. Don’t ignore that feeling.Ifyouendupintheunfortunatesituationofhavingaproblememployeeonyourhands,firsttrytomitigatetheissue.Ifsomeonesimplyisn’tdoingthejob,itmayboildowntoeithertrainingorsettingclearexpectations.Thoseproblemscanalwaysbefixed.Theveryworstnewemployeeprob-lemsalwaysmanifestaspeopleissues;thenewcandidatesimplywon’tfitintoyourcultureandisdamagingtomorale.Otheremployeesavoidhim,andmaybesomehaveevenleftyourorganiza-tion.Doyourbesttodocumenttheseincidentsandcounseltheoffender.Ifheisopentodiscussingtheproblemandseemsgenuinelywillingtoaccommodatechange,thereisrealhope.Iftheindivid-ualisimmediatelydefensiveorbelligerentandyougetthesensethathe’sprobablybeenthroughthis at other jobs, you’ve likely got a big problem on your hands. Proceed with caution.Onceyouconcludethesituationisirreparable,taketheonlypossiblerouteandCYA—callyourattorney.Oftenthesetroublemakersarelitigious,andyoudon’twanttoendupwithalawsuit.Consultyourlawyertoensurethattheactionsyoutakenextareproperlydocumentedandhan-dled.Yourbestoptionisoftentoconvincetheemployeetoleavethecompanyvoluntarilywithamutuallypositiveoutcome.Thisisverylikelyhowtheyendedupinyourorganizationinthefirstplace—nobodywantstogiveabadreferencetosomeonewhomaybevengeful.Whentheydoleave,ensure you have a nondisclosure agreement in place.Conducting InterviewsWheninterviewingprospectiveemployees,considereveryaspectofwhattheywillbringtoyourcompany.Yoursmallbusinessistrulyanaggregationofitsemployees,andascalablestartupwillalwaysbeartheimprintofthosefirsthires.Yourinterviewstylemustreflectthecultureyouareseekingtoestablish.CategoryFiveBoatShoes,astartupbasedinBoston,takesamuchmorerelaxedandfriendlyapproachwithitsinterviewsbecausethecompanyhasademocraticleader-shipstyle.Furthermore,thecompanyasksabouttheprospects’ambitionsandpassionsbecausethecompanyitselfwantsandtargetspassionatemillennials.Justasyoumustgaugethecus-tomer’swillingnesstopaytocorrecttheirpainpoints,youalsomustassessthewillingnesstoworkof prospective employees, as a pool and as individuals.Whenlookingforparticularskillsets,ratherthansimplyaskinghowqualifiedtheymightbe,testthoseskills.PickyfirmslikeElonMusk’sSpaceXputsemployeesthroughagauntletoftechni-caltestsremotely,andthen,iftheypass,theyworkthemevenharderinperson.Ifyouneedacoder,have them write code; if you need a manager, give them a trial run in managing the office.Anactiveinterviewandtestingprocesswillgiveyouasenseofhowtheseindividualswouldperforminyourcompanyandwhatitwouldbelikeworkingwiththem.Intentionallyplanforsomelittlethingstogowrongwiththeinter-viewprocess.Forinstance,ensurethattherenotenoughchairsintheconferenceroomwhenyoustarttheinterview.Thenobserveifthecandidateisstressedbythisminorinconvenience,inclinedtoleapinandhelpsolvetheproblem,orjuststandsbackandwaitsforotherpeopletofixthings.Dominordisruptionsannoyhim?Whichoftheseresponsesdoyouthinkyou’dliketoseeinasmallbusinessemployee?Problems and TerminationsSmallbusinesseshaveuniquelypersonalissuesinresolvingemploymentdisputesandconductingterminations.Whatifalong-timeemployeerunsintotrouble?Orworse,afoundernolongerpro-Chapter 8Team Building and Leadership259© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
gamificationThe process of making atask more interesting byframing it as a friendlycompetition.videsadequatevaluefortheventure?Howcanyoudealwithfiringsomeonefromatwo-personteam?Whatifthefirm’srevenuewillnotsupportbothyoursalaryandthatofyourpartnerandbest friend?Therearenoeasyanswerstothesehardquestions,butyoucantrytomoderatetheminadvance.Thebestwaytoavoidthesesituationsistoclearlydefinerelationshipswithpartnersandemployeesbeforeenteringintoaworkenvironment.Coupleshavethehighestmortalityrateinstartupventuresbecausestressatworkcomesrighthomewiththem.Thereisnowheretoescapetheproblemsoftheday.Husbandsandwivesneedtoclearlyunderstandthedemarcationpointsbetween work and home and make their family a priority.Setting ExpectationsTrytoensurethatemployeeexpectationsareclearandthattheyfitthecompanyculture.Makesurethatyouhavepoliciesonperformanceandthatyoudocumentthemregularly—notjustwhenaproblemdevelops.Thisproactiveprocessstartsondayonewithyourchoiceoftitles,assignedobligations,andjobdescriptions.Alwaysattempttoupdateandmaintaincleargoalsandexpecta-tionsfordeliverables.Thiscanbeparticularlydifficultforsmallbusinessesthatarestrivingfordynamism.Theprocessmayseemcountertotheprinciplesofadaptability,buteffortssuchasper-formanceprogramsthatsetreasonablecompetitivegoalsforemployeesfromthebeginningactasa sort ofgamificationthat engenders some “friendly competition” between individuals or teams.Intermsofnondeliverables,thereshouldbeanupfrontconsiderationofwheretheboundariesareintheworkrelationship.Doyouandyouremployeesgrabdinnertogetherafterwork?Whatisthelevelofprofessionalismexpected?AreyouFacebookandSnapchatfriends,ordoyoukeepyoursociallivesseparate?Additionally,whenitcomestogivingandreceivingfeedback,whatisthefor-malizedprocess(e.g.,weeklysit-downs,acommentbox)?Thesedecisionswilllargelysettheculturefortheworkenvironment,soitisbesttothinkaboutwhatyouhopethatculturewillbeandmakethese expectations clear even during the hiring process.Employee EducationTheBostonBeerCompanyservesasagreatexampleofthepowerofemployeeeducation.ThefirmbrewsSamuelAdamsbeerandiswellknownforeducatingitsemployeesabouttheindustry.ThesalespeopleareveryknowledgeableaboutwhatmakesagoodbeerandwhySamAdamsisagreatone.ThesametrainingdrivesproductinnovationbycreatingaknowledgeableR&Dteamthatcanappraise new and quirky tasting beers.Startupsusuallydon’thavealotofassets;theyhaveemployees.Thebestwaytoincreaseoutputsandvalueisbyensuringyouremployeesareworkingefficiently.Knowledgeispower,soensureyoursales,tech,marketing,andallotheremployeeshavetheknowledgetheyneedtoper-formatthelevelrequiredofthem.Multidisciplinaryinstructionisgreatforsmallbusinessteamsaswell.Supportingcontinuingeducation,bothexternalandinternal,isalsoagoodwaytokeepemployees connected with their small firm.EvaluationsEffectiveemployeeevaluationsdependonclearlysetdeliverablesandexpectations.Establishclearmetricsthatyoucanmeasureandholdemployeesaccountabletothem.Forinstance,youcansetarevenuequotaforsalesstaff,aproductiongoalformanufacturingworkers,oracustomersatisfac-tion rating for retail workers.260A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Avoid initiating meetings that will result inarguments.Source: © Shutterstock, Inc.Whenyouremployeesfailtoachievetheirgoals,don’tgetpunitive—askthemwhytheythinkithappened,providethemyouranalysis,andofferthemtoolstoimprove.Keepevaluationsposi-tiveandencouragehardwork.Coachesandmanagerswhopunishengendertemporaryobedienceandlong-termresentment.Itisalsoimportantthatyousetgoalsforyourselfandothermanagers.Itshowsyouunderstandthatneitheryounoranyoneelseinthecompanyisperfectorabovescrutiny. This makes it a whole lot easier for employees to confront their own shortcomings.Keeptheevaluationprocesstransparentandsimple.Largefirmsoftenbuildupcomplexsys-temsovertimethatbecomeconfusingandirritatingtotheemployeessubjectedtothem.Inmanycases,thehumanresourcedepartmentissobusywiththeprocessofevaluationsanddefendingthat process that little value is created for the firm or the employees.Dispute ResolutionSomedisputesareirreconcilable,nomatterhowhardyoutry.Therewasasoft-warestartup(whichwillbeleftunnamed)withanewhirecalled“Stephanie.”StephanieperformedwellinthemainofficeinPhiladelphia,andshewastrans-ferredtothecompany’snewSanFranciscoofficeatherownrequest.Unfortunately,shefeltunderappreciatedamidtheBayAreasoftwarestars,andshestartedspreadingnegativity.Stephaniewascalledoutonthisattitude,andtheCEOmetwithhertodiscusstheproblem.Hequicklyconcludedthatherbehaviorwasunacceptableandgavehertwoweekstoshapeuporshipout.ThenextdayStephaniemaliciouslydeletedallthecompany’ssourcecode,thecrownjewelsoftheorganization.Thesmallfirmfoldedinafewweeks.Whilescreeningoutmaliciousemployeesisagoodidea,justaboutanyonecanmakeareallypoorchoice under pressure. The lesson here is not to jump to disciplinary action.Donotbeafraidtocutnegativeplayers,butmakesurethatalloptionshavebeenexploredfirstbeforereachingfortheeasyaxe.Honestdiscussionaimedatfindingamutualagreementandresolutionisamuchbettertactic.Avoidinitiatinganymeetingthatislikelytosim-ply devolve into an unproductive argument.Layoffs Versus Sharing the PainWhenfinancesgettoughinasmallbusiness,harddecisionshavetobemadequickly,andtheyareoftenpersonal.Imaginethatyourunasmallcoffeeshopwithyourbrother.Revenuesaredown,andyoucannotaffordtopayfortwosalariesandupkeep.Shouldyoulayoffyourbrotherorsac-rificeyourself?Ordoyoutryto“sharethepain”andcutbothyourwagesinhalf?Thisdilemmaisaveryrealonethatcouldhappeninanystrugglingstartupattemptingtograbmarketshare.Theanswerliesinarationalevaluationofthestateofthecompany.Ifthecompanycannotrunwith-outyourbrotherandyoucanbothsurviveonlowerwages,obviouslythatwouldbethewaytogo.However,ifyoucannotsurviveonlowerwagesandcanmakeendsmeetrunningthecompanyyourself,youwillneedtomakethehardcalloflayingofffamily.Attheendoftheday,thisevalu-ationmayseemharsh,butyourcompanycomesfirst,andyoucomesecond;lookatwhatisinthebest interest of your company and then yourself.Chapter 8Team Building and Leadership261© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
TerminationFiringanemployeeisperhapsthemostdisagreeabletaskanentrepreneurfaces.Forthesmallbusi-nessowner,youremployeesareoftenyourfriends,andthereisnodistantHRdepartmenttodothedirtyworkanonymously.Ultimately,theonlywaytomaketheprocesseasieristopointbacktotheclearexpectationssetatthebeginningoftheemployment.Explainingthemismatchinperfor-manceandexpectationscanpresentbothimportanteducationalfeedbackandlendsomerationaletoanemotionalexperience.Iftheterminationisduetoachangeinthecompanylifecycleoramis-matchandnotaperformanceproblem,trytohelpwithatransitionoutofthecompany,suchasfinding a new employer or offering letters of recommendation.Theotherimportantconsiderationwithfiringsistheeffectoncompanymoraleandculture,astheemployeeislikelytobeafriendofyourotheremployees.Explaintotheotherworkers,justasyouexplainedtotheemployeebeingdischarged,whythesituationoccurred,andreassurethemthatitwasnotaneasydecisionbutonethathadtobemade.Donotassurethemoftheirpositionsandappearweak,butalsodonotappearheartless.Remember,takingthetimetoprovidecontinu-ous feedback all along prevents ugly surprises.DeparturesWhenemployeesstepdownorretire,yourfirstconsiderationshouldbefindingareplacement.Thenewcandidatemaycomefrominsideoroutsidethecompany.Ifyoudecidetorecruitoutside,alwaysbecarefulnottosnubanaspirationalemployeehopingtoclimbtheladderinyourorga-nization.Anotherimportantconsiderationiswhathappenstoemployee’sownershipiftheyholdequity?Theyownthesharefairlybutarenolongercontributing,sothequestionarises,dotheydeservetoclaimdividends?Workingoutrealisticcontractsanddocumentedexpectationsatthestartofemploymentwillmakedeparturesthatmucheasier.Inmostcases,partnersandemployeesshouldhavestockbuybackagreementsthatrequirethemtoselltheirstockbacktothefirmortoanotherstockholderwhentheydepart.Otherwise,youmayendupwithagreaterandgreaterper-centage of your firm being held by people who are not engaged in its daily success.Networking for LifeTheNewEntrepreneurialDynamicviewofteambuildingisnotconstructedfromaseriesofdis-connectedefforts,formingonestartup,hiringonekeyplayer,ormakingonegreatbusinessconnectionataconference.NEDisaboutblendingallofyourentrepreneurialmomentsintothearc of a life well-lived.Theinteractionsyouhavetodaymaynotyieldanyimmediateresults,buttheycouldverywelldeterminefutureevents.Thetalentedindividualyoucan’taffordtohiretodaymaybeagreatfitdowntheroadwhenyourfirmisbetterfunded.Hemayendupworkingforanimportantpoten-tialcustomer,supplier,orinvestor.Ifsomeoneleavesyourfirmtoday,shemaywanttocomebacklaterandwithmoreexperienceandbetterskills.Shemighteventurnouttobeyourbossatacompanythatbuysoutyourfirm.Mostindustriesareledbyafairlysmallcommunityofplayers;peoplemovefromorganizationtoorganizationbutstaywithinthecommunity.Thesereconnectionsliterallyhappenallthetime.Thelessonhereistofindvalueineveryteam-buildinginteraction.Whenyouhavetosay“no”or“goodbye,”alwaysdoitinapositivewaythatkeepsthe communication channels open and maintains mutual respect.262A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Key Takeaways•As organizations mature, the players become more specialized.•Organizational culture is an important component of a firm’s success.•Treat recruiting strategically. Get the best.•Diversity is valuable, but cohesion is essential.•Always be networking.•Time spentintegrating a new hire is time well spent.•Keep the evaluation process transparent and simple.•Consider alternatives to layoffs.•Understand the complexities of firing employees.•Considerstockbuybackagreementssothatemployeeswhodepartdonottakesignificantequity outside the firm.8.5Case Study: Brian Fitzgerald andFuture PointBrianFitzgeraldsethispendown,leanedbackinhischair,andconsidered.Signingthedocumentsinfrontofhimwouldendhisentrepreneurialcareer,andthethoughtofgivingupwhathehadbuiltatFuturePointmadehimmelancholy.Ontheotherhand,theofferfromBlizzardEntertain-mentheldapromisingfutureandwasgeneroustohisteam.Itmadeagreatdealofsensefortheoperations of both groups. What path should he take?Fitzgerald,apioneeringentrepreneurinthevideogameindustry,hadbeenthroughalongseriesofgamestartups.Whilethereweresuccessesandmomentsofexcitement,noneoftheseven-tureseverreachedtheirpotential.Shouldheconsiderthisopportunitytosellhislatestfirm,towhatwasarguablytheworld’smostrespectedgamecompany,asavindicationoranotherprema-ture entrepreneurial ending?Asahighschoolstudentinthelate1970s,Fitzgeraldhadpartneredwithhisbestfriend,GregAutry,tolaunchhisfirstventure,H.A.L.Labs.[6]Theteenagers’initialplantobuildapersonalcom-puterprovedfartooambitiousfortheirfewhundreddollarsinseedcapital.Outoffundsandshyofaworkingprototype,theybegantofocusontheideaofdevelopingsoftwareforsuccessfulearlycomputers,liketheAppleII.AutryandFitzgeraldwerebothavidplayersofarcadevideogameslikeLunarLander,SpaceInvaders,andAsteroids.Anumberofamateurprogrammershadtriedtobringthesetitlestohomecomputers,usuallywithmediocreresults.Fitzgeraldfelthecoulddoalotbetter.DuringhisfreshmanyearattheUniversityofCalifornia,Irvine,hedevelopedabrilliantlyaccurateknock-offPac-Man,agamethatwasthentakingtheworldbystorm.Autryworkedonmarketingandsalesofthegame.TheynameditTAXMAN,andthetwosoonfoundtheyhadabighitontheirhands.H.A.L.Labsquicklybecameahighlyregarded,thoughundercapitalized,videogame publisher in the early 1980s.By1984,thefirmwaspushedoutoftheretailgamemarketbyaninfluxofwell-financedcom-petitors.FitzgeraldandAutryturnedtosecuringcontractstododevelopmentforothercompanies,butbothwerealsoeventuallyforcedtotakecorporatejobsinordertosupporttheirstrugglingfirm.ThedevelopmentofaprogrammingenvironmentforthenewAppleIIcomputerwasatechni-caltriumph,butacommercialfailurebecausethatplatformwasovershadowedbyApple’soriginalMacintoshcomputerandthegrowingpopularityofIBM’sPC.Eventually,AutrymovedonandChapter 8Team Building and Leadership263© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
launchedacomputerservicesstartup.WhileH.A.L.Labshadn’tlasted,Fitzgeraldlearnedthatapartnership of complementary individuals was a useful way to run a startup.Fitzgeraldstuckwiththeeffortandwasdeterminedtomakeanotherstabatgamedevelop-ment.Hesearchedfornewpartnersand,withtwocreativefriends,RobinsonHuffandRonMyers,establishedBigScienceSoftware.ThetriobegandevelopmentofaninnovativeapproachtochessfortheMacintosh,inspiredbyMyers,whowasamaster-levelchessplayer.Althoughtheirgame’spotentialmarketwaslimited—chessisn’tPac-Manafterall—thedemowasgoodenoughtosecureasolidpublishingofferfromChangelingSoftware.Fitzgeraldfeltthenewfirmwasofftoasolidstart.However,hequicklyfoundoutthathisverypracticalapproachtobusiness,honedbyyearsof hard knocks at H.A.L. Labs, wasn’t shared by his new partners.HuffandMyers,moreartisticandlessexperiencedinbusiness,wereinclinedtobeskepticaloftheintentionsofbusinesspeople.TheybristledatthedefensivelegalisticclausesintheChangelingcontract.Fitzgeraldrecognizedthislanguageastheboilerplateprotectionsallpublishersinsertedintotheiragreements,buthecouldnotswayhispartnerstoacceptthem.Againsthisbetterjudgment,FitzgeraldworkedthemthroughthedetailsandproducedacounterproposaltotheChangeling contract.Althoughtakenabackbythesmallerfirm’spresumptionindictatingterms,Changelingplayedalongandrespondedwithamoreaccommodatingcontract.HuffandMyerswerestilldissatisfiedwiththelanguageandwantedtocounteragainwithevenmorerewrites.FitzgeraldurgedthemtoacceptthetermsbasedonBigScience’sdesperateneedforcash,thepositivepersonalrelationshipwithChangeling’sleadership,andthefirm’sgoodreputation.Fitzgeraldhadseenalotofcontractsandhadcometounderstandthatitwasalwaysthepersonalrelationshipsbetweenthepartiesthatactuallydeterminedhowbusinessestreatedeachother.Hesawthecontractlanguageasadetailthatwouldonlyemergeinthedirestofcircumstances.However,HuffandMyersstillviewedeverycontingencyinthecontractasaverypossibleorevenprobableoutcome.UnabletoconvincehisBigSciencepartners,FitzgeraldsentChangelinganotherrevisiontothecontract.Frustrated,Changeling chose to simply drop negotiations with what they saw as an immature company.Fitzgeraldexpressedfrustrationwiththisperiod,“Thatwastoughbecause,bythispoint,I’dstartedfocusingmostofmyenergyonthegameandhadbeenslowlyaccumulatinglotsofdebt.”Hewaslivingoncreditcardsandgoingbrokewhilehispartnerschasedawayasolidcashdealfortheprojecttheyallwanted.Thepartnershipstructurethathadworkedsowellinthefirstbusi-nesswasadisasterinthesecond.Worse,thepartnerswereunhappywithhistakingonunrelatedcontractworktomakeendsmeet,andeveryonefeltthesituationwasinequitable.Somethingwasgoing to have to give, and the Big Science trio split with some acrimony.Duringthisperiod,FitzgeraldhadbeenattendingprogrammeetupshostedbyQuicksilverSoftware,asuccessfulIrvine-basedgamedeveloper.Hesawthemeetupsasagreatopportunitytonetwork,ataskthatwasn’thisfavoritethingbutsomethingherecognizedasimportant.Atoneoftheevents,hediscoveredthatQuicksilverhadbeenofferedanddeclinedtheopportunitytodosomeports(conversions)totheMacintoshforanewfirm,BlizzardEntertainment.Seeingtheopportunity,butnotwantingtoengageitwiththedisintegratingBigScienceteam,heintroducedhiscompanyasFutureTenseSoftware,establishinganewsoleproprietorshiptoexploitthisoppor-tunity.Disappointedbypartnerships,Fitzgeraldwasdeterminedtobuildateam,butalsotomaintaindirectcontroloverthefirm’sdirectionsandfinances.HesigneduptheBlizzardcontractandrenamedhisstartupFuturePointbecausetosecuretheURLforFutureTense.comwouldbetoodifficult.FitzgeraldquicklyrecruitedDaveLawrenceoutofoneofthefirmshehadbeendoingcontractworkfor.TogethertheyportedBlizzard’snewWarcraftgamefromMicrosoftDOStoMacintosh.AcontracttoportWarcraftIItobothMacintoshandWindowsquicklyfollowed,andFitzgeraldbroughtonanoldhighschoolfriend,TonyTribelli,tohelp.ThesuccessofthosetwotitlesresultedincontractsforaMacportofDiabloandsomecriticaldesignworkonaspacegamecalledStarcraft.FitzgeraldbroughtinyoungerinternswhowereexcitedbythechancetoworkonBlizzard’s now-famous games.264A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Withthevolumeofworkincreasingandpayrollcostsescalating,FuturePoint’sfinancesgottight.FitzgeralddiscoveredthatasBlizzard’sproductsbecamemorecomplex,theirschedulesslippedconsiderably.Blizzard’steamkeptmakingchangestoDiabloandStarcraftthatrequiredFuturePointtorewritecodethey’dalreadyfinished.ThefixedpricebidshehadprovidedfortheworkonDiabloandStarcraftweresimplytoolowtobeprofitable.Despiteworkingonsomeincred-iblysuccessfulproductsandhavingaverypromisingfuture,FuturePointlackedoutsidecapitaland credit and was unable to reliably pay Fitzgerald or his team.WhenBlizzardrequestedbidsforDiabloIIandWarcraftIII,FitzgeraldmadesurehisbidswerehigherandprovidedforthecontingencyofBlizzarddelayingtheprocess.BlizzardbegantoseethatiftheFuturePointteamwasentirelyfocusedonBlizzardprojectsandtheirpricingwasget-tinghigher,theymightaswellbeaninternalMacintoshdevelopmentteam.Respondingtothenewbids,BlizzardsuggestedthatpickinguptheentireFuturePointteamwouldbeanoptionandoutlinedanacquisitionpackagethatwasveryattractivetobothFitzgeraldandhishardworkingemployees. Brian Fitzgerald now faced the most important decision of his career.Chapter 8Team Building and Leadership265© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Endnotes1.DeNeve,J-E.,Mikhaylov,S.,Dawes,C.T.,Christakis,N.A.,&Fowler,J.H.(2013).Borntolead?Atwindesignandgeneticassociationstudyofleadershiproleoccupancy.LeadershipQuarterly,24(1),45–60.https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3583370/2.Hellman,T.F.,&Wasserman,N.(2011).Thefistdeal:Thedivisionoffounderequityinnewventures(WorkingPaper16922).NationalBureauofEconomic Research. vhttps://www.nber.org/papers/w16922.3.Cameron,K.S.,&Quinn,R.E.(2005).Diagnosingandchangingorgani-zationalculture:Basedonthecompetingvaluesframework.JohnWiley&Sons.4.https://www.inc.com/jessica-stillman/immigrants-play-an-outsize-role-in-small-business.html5.Park,K.(1997).TheKoreanAmericandream:Immigrantsandsmallbusi-ness in New York City. Cornell University Press.6.Note:H.A.L.LabsshouldnottobeconfusedwiththeJapanesefirmHALLaboratory,thoughbothwereinspiredbythecomputerintheArthurC.Clarke’s book and Stanley Kubrick film,2001: A Space Odyssey.266A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
angel investorsWealthy individuals, mostoften successfulbusinesspeople, whotypically make investmentsin the range of $50,000 to$1 million in exchange foran interest in a new firm.See alsoseed capital,startup funds.CHAPTER 9FundingStatement: It’s not about the money.Reply: It’s always about the money.—TraditionalDragons’DenisahitBBCtelevisionprogramthatplaysonthepublic’sgrowinginterestinentre-preneurship.Thisfascinationwithstartupsisaglobalphenomena,andtheDenhasspawnedaCanadianspinoffofthesamename.ThepopularAmericanshowSharkTankisacopyofthatCana-dianseries.Alloftheseshowsfeaturereal-worldentrepreneurspitchingtheirstartupsinhopesofsecuringfundingfromsuccessfulbusinesspeople.The“dragons”and“sharks”intheseseriesareangel investors.View in the online reader9.1Source of CapitalLearning Objectives1.Understand how to estimate necessary startup funding.2.Be able to identify various sources of seed capital.3.Be familiar with different investment rounds.4.Be familiar with angels, venture capitalists, private equity, and family offices.DragonÕs DenÑBiggest Deal© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
5.Know what an accredited investor is.6.Understand what different types of investors look for and why.7.Understand the appropriate use of crowdfunding.Early CapitalPopularTVshows,businessarticles,andthecurriculuminourbusinessschoolshavecreatedafalsebeliefamongwould-beentrepreneursthatgettingoutsideinvestmentisfundamentaltolaunchinga business. For most firms, this is not the case at all.LookatFigure9.1fromtheKauffmanFoundation,illustratinghowInc.magazine’s5,000fastest-growingfirmsarefunded.Youwillnotethatveryfewofthesenotablesmallbusinessesactuallyaccessventurecapital(6.5percent)orangelinvestors(7.7percent),whilethevastmajorityusedpersonalsavings(67percent).Itisimportanttounderstandthatthesedatarepresentinvest-mentinthefastest-growingsmallcompaniesinAmerica,asetoffirmsthathavetheverybestaccesstocapitalintheworld.Theaveragesmallbusinessismuchlesslikelytohaveformaloutsideinvestors.AccordingtoKauffman,lessthan3percentofU.S.firmsuseangelinvestors,andlessthan1percentsecureventurecapitalinvestment.Forglobalsmallbusinesses,suchformalinvestorsareeven less relevant; they simply don’t exist in most of the developed world.FIGURE 9.1Fast-Growing FirmsÕSources of FundingEach year,Inc.magazine lists the 5,000 fastest growing companies in America. In 2014, the Kauffman Foundationsurveyed firms listed byInc.since 1996 to learn about their sources of funding.Source: Data from Ewing Marion Kauffman Foundation;http://www.kauffman.org/what-we-do/resources/entrepreneurship-policy-digest/how-entrepreneurs-access-capital-and-get-fundedWhileveryfewentrepreneursareevergoingtogetcastonanationalTVshow,youngentre-preneursareofteneagertosecuremoneyfrom“dragons,”“sharks,”orotherangelinvestors.Whydo268A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
capitalMoney or other assetsused to finance a startupor investment. See alsoseed capital.seed capitalFunding required to launcha business. See alsostartup funding;three Fs.youthinkthatis?Whydon’ttheyjustselltheirproductorservicetomakeaprofit?Can’ttheyjustborrow from the bank when they need to?Moneyinvestedinabusinessisreferredtoascapital.Theinitialmoneyusedtogetthebusi-nessoffthegroundisknownastheseedcapital.Everysmallbusinessrequiressomeseedmoney,somemorethanothers.Yourgoalasastartupfoundershouldbetominimizeandyetneverunder-estimateyoursmallbusiness’initialcashrequirements.Asanentrepreneur,nothingismorefrustratingthanopeningthedoorstoyournewshoporfactory,turningonyoure-commercestore,orlaunchingyournewappandfindingyouhavetoshutdownyourbusinessbecauseyoucan’taffordtoservicethecustomerswhoarepouringin.Sadly,thishappensalltoooften.Intheend,businessesfailbecauseofalackofcash,justashumansmaysufferfromanynumberofills.Evenifyouhavecustomergoodwillandongoingsales,youwillhavetocloseyourdoorwithoutthecashtopaythebills.Havingcashonhandissoimportantandnothavingitissuchacommondisadvan-tagethatmanybusinesspeoplewilltellyouthat“Cashisking!”Canyouthinkofanyfamousandlarge startups that faced a demand induced cash flow crisis? How can you avoid this trap?Thebestoptionwouldseemtobetogatheralotmoremoneythanyouthinkyouwillneed.That’seasiersaidthandone.Moststartupsaregrowingonashoestringbudget,andlikealow-calo-riediet,thatmaybehealthy.Oddly,however,beingcash-richhasnotalwaysproventobeagoodoptionforstartups.Infact,havingtoomuchmoneyhasalsokilledalotofnewfirms!Canyouimagine how having excess wealth might imperil a group of entrepreneurs?InhislegendarycommencementaddresstothegraduatingclassatStanfordUniversity,SteveJobsfamouslyadvisedstudentsto“Stayhungry.Stayfoolish.”[1]Jobs’messagetoyoungentrepre-neurswasthatifyouwereeagertoworkhardandwillingtochallengeconventionalassumptions,youcoulddogreatthings!Assoonasyou’vegotenoughmoneyandenoughresourcesto“relaxandthink,”yourendeavorsmayactuallybedoomed.Oncethey’veobtaineda“nestegg,”manyentrepre-neursbecomemoreconservativeintheirthinkingandmuchlesslikelytoinvesteithertheirtimeormoneyintoradicalideas.It’simportanttonotethatJobshimselfseemedimmunetothis“spoilage.”Despitehavingmadebillionsmorethanonceandhavingtheresourcesoftheworld’sgreatestcom-panyathiscommand,hemaintainedarelativelymodestlifestyleandcontinuedtobeobsessedwiththeproductsheproduced.Jobscould“stayhungry”inabanquethall.Infact,heseemedtoenjoy self-denial. That’s a powerful skill for entrepreneurs.Chapter 9Funding269© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
financial feasibilityThe potential of a businessventure to be profitable.startup fundingThe monies required topurchase fixed costs likefacilities and equipmentnecessary to launch abusiness.Elite bicycle racers in the Tour de France push themselves up mountain passes.Source: Radu Razvan/Shutterstock.comWhiletheNewEntrepreneurialDynamicencouragesentrepreneurstoavoidoverindulgingthemselvesortheirteam,itisnotaboutbecomingamonk.Successinanyendeavorusuallyrequiresthatyoulearntoenjoytheprocessofovercomingadversity.Watchinganelitecycliststrug-gleuponemoremountainpasstocompletearace,youmaythinkheorshelooksabsolutelymis-erable,butyou’dprobablybewrong.Pushingthemselvestothelimitissomethingtheseextremeathletes enjoy, or they would not do it.Forbetterorworse,overfundingandtoomanyresourcesareproblemswithwhichveryfewentrepreneursevergrapple.Therestofthischapterwillbefocusedonthetaskofgatheringenoughcash and resources to get your business going and to maintain it during its growth phase.Determining Startup Funding RequirementsInChapter5,wecontemplatedthefinancialfeasibilityofyourbusinessmodel.Wewillnowdrilldownonakeyelementoffinancialfeasibility:yourabilitytoobtainstartupfunding.Startupfundsarethemoniesrequiredtopayforfixedcosts,suchasfacilitiesandequipmentneededtogetstarted.Thesefundsalsocovervariablecosts,suchassalariesandinventoryofoperations,untilyour firm makes enough money to break even. These concepts will be detailed inChapter 15.Imagineyou’venoticedthatatowniscompletelylackinginbicycleshops.Youdoyourcus-tomerdiscoveryandconcludethattherearesufficientridersintheareawhowouldprefertoshoplocally.You’velocatedtheperfectspotforashop.Whatyouneedtodonowispaythefirstandlastmonth’srentandsecuritydeposit,setuptheutilities,purchasesomeinsurance,buysomeracks,displaycases,andtools,stockalotofbikes,hiresomestaff,andopenthedoors.Howmuchwillallthat cost? Let’s do a quick estimate in a spreadsheet.270A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
net termsAdvancing product forpayment later.inventory flooringBorrowing to fund itemsfor sale in a store. See alsonet terms.TABLE 9.1Startup Expenses for a Bicycle ShopFirst Month Rent$4,500Last Month Rent4,500Security Deposit3,000Tools25,000Furnishings75,000Utilities1,200Insurance800Initial Bike Inventory250,000Three Sales People per Month15,000Service Person per Month$4,000Total$383,000Thisisaprettysimplifiedmodel;youmayfindyouhavedozensofothersmallerneeds—thingssuchassignageandalocksmithandwindowpaintingforyourgrandopening.Youshouldbuildinacontingencyof20percentorso.Addingasafetymarginof$70,000tothetotalof$383,000indi-catesthatthisbicyclestoreneedstoraiseabout$450,000toopen.Howmanyprospectivebikeshopowners have access to $450,000?Alotofsmallbusinessentrepreneursbegintopanicwhentheythinkofstartupfundingrequirementslike$450,000.Don’tpanic!Let’slookatthissystematically.Whatfundingsourcescanyoutap?Theobviousonesarethingslikepersonalsavingsandfamilymoney.Mostentrepreneursthenbegintothinkaboutoutsideinvestors.However,thatisonlyasmallpartofthefundingstory.You can secure seed capital in more creative ways.Whichofthesestartuprequirementsisthemostexpensive?The$250,000inventoryofbicyclesaccountsformorethanhalfofthecapitalrequired!Didyouknowthatthebicyclemanufacturersandoutsidelenderswilllikelyprovideyouwiththemoneyyouneedtostockallthosebicycles?Advancingproductsandallowingyoutopayforthemlateriscallednetterms.Borrowingtofundtheitemsforsaleinastoreiscalledinventoryflooring.EachoftheseconceptswillbecoveredinmoredetailinChapter15andChapter16,butsufficeittosayitmaybepossibletoopenyourbicycledreamshopforaslittleas$200,000($450,000–$250,000)!Now,wheremightyouget$200,000,thatis besides getting onDragons’ DenorShark Tank?Personal Credit and SavingsThefirstmoneymostentrepreneurstapistheirsavings.Inthedevelopedworld,savingsisusuallyabankaccountbalanceormoneyinvestedinstocksandbondsthatcanbeeasilysold.Inthedevel-opingworld,manysmallerbusinessesareinitiallylaunchedwith“mattresscash,”physicalcurrencysavedupforjustsuchanopportunityorarainyday.Whilepersonalsavingsiseasytoaccess,canyou think of why you might not want to use it?Byputtingallormostofyouravailablesavingsintoyourbusiness,youareriskingpersonaldisasterifthebusinessfailsandyoudon’thaveothersteadyincome.Ifamajorproblemcomesupjustafteryouinvestyourrainy-dayfund,youcouldbeinapinch.Imagineyourcarbreakingdown,yourspouselosinghisorherjob,oranillnessinthefamilythatrequiresmoney.Insuchasituation,youmayfindyourselfunabletomeetyourpersonalfinancialobligationsortryingto“unwind”theinvestmentfromyourbusinessesbybackingoutofaleaseorsellingequipmentyoujustboughtatadiscount.Forthisreason,youmayconsideramixoffinancingsources,evenifyouhaveenoughpersonal cash on hand to proceed.Chapter 9Funding271© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Personal savings is usually the first source offunding for a startup.Source: © Shutterstock, Inc.three FsFamily, friends, andfools—a source of easilyaccessible startup funding.See alsoseed capital.WorkersintheU.S.oftenhavethemajorityoftheirsavingsintax-deferredaccountssuchasindividualretirementaccounts(IRAs)or401(k)retirementsav-ingsplanswiththeiremployer.Whileentrepreneursdooftentapthesesavingstofundtheirstartups,withdrawingfundsfromtheseaccountsbeforeyoureligi-bleretirementageisgenerallynotrecommended.Everyoneshouldbesavingforretirement,andwithdrawalsfromtheseaccountsaresubjecttosignificanttaxesandpenalties.Besuretoconsultwithyourfinancialadvisororataxaccountantbeforetouchingthesefunds.Itisoftenpossibletoborrowagainstyourretire-mentsavingsratherthanwithdrawingthefunds.Borrowingmayavoidearlywithdrawalpenaltiesandallowyourinvestmentstoremaintax-freewhenyoupaythemback.However,aloanwillincurinterest,andyouarestillriskingthefundsthemselvesifthebusinessfailsandyouareunabletopaybacktheloan.Beverycautiousandconsideramixoffundingsourcessoyoudonotundermineyour family’s future.Anothercommonbutevenmoreperiloussourceoffundingforentrepreneursisshort-termpersonalcredit,usuallyintheformofcreditcards.UsingaVisaorMastercardtobuyequipment,supplies,andinventoryforyournewbusinesscanmakealotofsense—ifitisdonewisely.You’relikelytohaveuptoonemonth(dependingonwhereyouareinyourbillingcycle)topaythebills.Youmayalsogeneratesomesortofvaluable“rewardpoints”withyourbankthatyoumayredeemforbusinessorpersonaluse.Anytimeyoucanuseyourcardandthenpayitoffwhenthebillcomesdue,youprobablyshould.However,runningupabalanceonyourcardortakingcashadvanceswiththeintentiontorepaywithfutureearningsyoudon’thaveinhandisveryrisky.Theinterestratesoncreditcardsarenotoriouslyhigh.Ifyoufailtomakethepayments,youmayundermineyourcreditrating—anassetthatisinvaluabletobothyourpersonalandbusinessfuture.Worse,youcouldfindpersonalassets,suchasyourhomeorautomobile,attachedtorepaycreditcarddebt,mostofwhichislikelytobeaccumulatedinterestandpenalties.Again,creditcardsshouldbepartof a mix of funding sources for your start up, rather than a major financing strategy.Theadvantageofallthesesourcesisthattheyareentirelypersonallycontrolledandreadilyavailable.Theyalsodonotdiluteyourequitypositioninyourfirm—meaningyoudonotneedtogiveupeitherownershiporcontrolofyournewbusinesstoothers.However,aspreviouslycau-tioned,theyeachputyourpersonalfinancialsituationatrisk.Fundingabusinesswithyourowncapital and credit and then growing it organically is known as bootstrapping.The Three FsAftertheoptionsofpersonalsavingsandcredit,thenextplacemostentrepreneursturntoisagroupsarcasticallyreferredtoasthethreeFs:family,friends,andfools.Tappingmoneyfrompeo-plethatyouhaveeasyaccesstoandborrowingfromthosewhoknowyourcharacterbestmakesalot of sense, which is why so many entrepreneurs take this route.AsFigure9.1shows,21percentoffast-growingfirmsusedfamilymoney.ForMainStreetentre-preneurs,thisfigureismuchhigher.WhenTiantianQui(Chapter1Section5)hadavisionforanewkindofChineserestaurant,shewenttoherfather,asuccessfulbusinessman,forbacking.Mr.Quiloanedher$350,000tobuildoutandlaunchtheHipHotCaféinMonterreyPark,California.Itwasariskyinvestmentinanunprovenyoungentrepreneur.Smartpositioning,brilliantexecution,andhardworkbuiltherbeautifullittlerestaurantintoalocalsuccessstory.Withintwoyears,shehadsavedupmorethan$400,000fromprofits.Tiantianwasreadytopayherfatherback,butheencouragedhertousethesavingstobuildasecondrestaurant.HipHotCaféisaclassicstoryofafamilybusinessinvestmentthatwentwell.Canyouthinkofwhatmightgowrongwithanentre-preneur taking family money under different circumstances?Inreality,allmoneycomeswithobligationsattached.Ifyoufundyourbusinesswithmoneyfromthebank,withcreditcards,orwithahomeloan,andthebusinessfails,youarelikelyto272A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Business and financial connections can disruptfamily relationships.Source: © Shutterstock, Inc.equityOwnership of a portion orall of a firm at a specificvalue.controlling interestHolding a majority of thestock in a company.becaughtupinanuncomfortableandpenalizinglegalprocessinvolvingcollectionagentsandlawyers.Thesedebtprofessionalsmayharassyouonthephoneandthroughthemail.Still,that’snothingcomparedtothequietlyaccusingstaresyou’llgetfromlovedonesifyoulosetheirsavings.Youcan’tescapefamily,andeveniftheydon’tsayaword,yoursenseofguiltmaytransformjoyfulfamilyeventsintoobligationsthatyoudreadtoattend.Financialstressofthisnaturecanresultindivorce or other permanent family divisions. Think carefully before taking family funds.Imaginethatyouareayoungwomanwhohasadifficultrelationshipwithyourfather-in-law.Youfeelthathehasneverreallyapprovedofyouorsawyouasworthyofhisson.Youfeelthatonewaytoproveyourselftothisdifficultmanisbysucceedinginyourownbusiness.Yourmother-in-law,whoissympatheticandwilldenyhersonnothing,offersyouahandupwithapersonalloan.Youknowthatifthebusinesshitsaroughpatch,you’llfindoutjusthowjudgmentalyourfather-in-lawcanbe.That’sanaddedlevelofpressurethatmighteitherpro-vide you with extra motivation to succeed or an unneeded level of stress.Thesituationwithborrowingstartupfundsfromfriendsissimilar,thoughusuallynotasfraughtwithpotentialdownfallsasitiswithfamily.Friendshavechosenyou,notinheritedyou.Theymustbearsomeresponsibilityfortheirdeci-siontoinvest,andifyoufail,theytendtobelessjudgmental.Still,manyagoodfriendshiphasbeenpermanentlydamagedorevenendedoveramisunderstand-ing involving an investment.Toavoidthedifficultsituationsdescribedhere,neverborrowmoneythatthelendercannotaffordtolose;beabundantlyclearabouttherisksinvolvedandcommunicateregularlyaboutthestatusofthefirm.Ifthingsgobadly,donothidethesituationfromyourinvestors.Ifsomethingverybadoccurs,youaremuchbetteroffifyou’vekeptthemhonestlyworriedaboutoutcomes.Ifyou’vealwayspaintedarosypictureandthenonedayhavetosay,“Bytheway,I’velostallyourmoney,”you’llnotonlylooklikeafailure,butmuchworse,you’lllooklikealiar.Ifitbecomesobvi-ousthatyou’vebeenlyingallalong,what’stokeepyourinvestor,richaunt,orgenerousfriendfromimaginingthatyou’veactuallystolentheirmoneyandarelyingaboutthebusinesshavingcon-sumed it? As the saying goes, “Honesty is the best policy.”AngelsOneoftheadvantagesofgoingwithformalangelinvestorsoverthethreeFsisthattheseexperi-encedentrepreneursandinvestorswillspeakmorehonestlywithyou,andifthingsgobadly,theywillviewthesituationwithinthecontextofabusinessrelationship.Infact,professionalstartupinvestorsexpectmanyifnotmostoftheirinvestmentstofail.Itgoeswiththeterritory,anditisn’tpersonal.Additionally,theywillsharethelessonsofsuccessand,moreimportantly,whatthey’velearned from investments gone wrong. Where do you think you might find angel investors?Angelinvestorstypicallyinvest$50,000to$1millionandoperatebothindependentlyandwithinnetworks.Theyareequityinvestors,buyingstockinafirm.Angelsareusuallylookingforasignificantamountofequity,thoughusuallynotacontrollinginterest,inthenewfirm.Acontrol-ling interest normally requires owning more than half of a firm.Chapter 9Funding273© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
accredited investorsAn investor who has metSecurity ExchangeCommission income or networth requirements todemonstrate that they arequalified to invest in stockofferings that the agencydoes not regulate.UnderU.S.law,fortheseangelstoinvestinunregistered(notcontrolledbyregulators)stockofferings,theangelsmustbeaccreditedinvestors.Anaccreditedinvestormustdemonstratethattheyhaveannualincomeofatleast$200,000peryearindividuallyoranetworthinexcessof$1million.Thepurposeofthisistokeeppredatoryentrepreneursorscoundrelsposingasentrepre-neursfromluringthosewhocanleastafforditintoasituationwheretheymightlosealltheirmoney.Thismeansyoucannotsimplygoouttoaveragepeopleandaskthemformoneytofundyour company.Thesegroupsaresurprisinglyeasytofindandcontact—afterall,theywanttotalktostartupfounders.Youcanfindthesegroupsbytalkingtoothersinyourlocalorinvestorstartupcommu-nityortoothersuccessfulformerentrepreneursthatyoumayknow.Ifyou’reastudentinanentrepreneurshipprogram,youmayhavealegup.Thebusinessschoolofyourlocaluniversityisagreatplacetoconnectwiththeseinvestors,whothemselvesareoftenlookingforopportunitiestoinvestinstudentstartups.Theymaybealumnioftheschoolandlookingtogiveback.Ifyouareinasmallerschoolthatisn’tdirectlyconnectedtosuchnetworks,considerparticipatinginaprizecompetitionataschoolthatis.Someofthesecompetitionsareopentooutsideteams,whileothersmayrequirethatyoujoinanexistingstartuporrecruitapartnerfromthesponsoringschool’sstu-dent body.Anotherwaytofindangelsisbygroupsornetworkstheyformtoshareandtovetinvestmentopportunities.Angelnetworksstrivetomakethemselvesavailabletoentrepreneurs.Theycaneas-ilybelocatedonlinewithaGooglesearchfor“angelinvestornetwork.”Manyareregional,suchasthePasadenaAngels,agroupfromSouthernCalifornia.Otherangelgroupsareindustry-specific,suchastheSpaceAngelsNetwork,whichinvestsincommercialspacefirms.Theyalsofacilitatethesyndicatesofinvestorswhopooltheirmoneyinsingle-purposefundstomakelargerinvestmentsin startups.Therearealsoonlineangelsearchservices,suchasAngelListatangel.com,whichexistspecifi-callytoconnectinvestorswithentrepreneurs.Theyhelpsortinvestorsbyregion,industry,andsize.Crunchbase.comtracksinvestmentsintensofthousandsofstartupsbythousandsofinvestorsfromsmalltohuge.Youcansearchitsdatabasetofindagoodfitforyourstartupbasedonfirmstheyhavepreviouslyinvestedin.Ifitisthateasytofindanangel,thenextquestionsare:Whatshould you be looking for in an angel, and how do you convince them to back you?Youwanttofindangelinvestorswhoaregoingtobecompatiblewithyourapproachtobusi-ness.Anangelinvestorismostoftenasuccessfulentrepreneurwhohasretiredoranestablishedbusinesspersonwithalotofexperienceandincome.Theyfirmlybelievetheyknowwhattheyaredoing,andinadditiontogivingyoumoney,theyexpecttogiveyouadviceandhaveyoutakeit.Someentrepreneursfeeltheyknowmoreabouttheirbusinessthananyoneanddon’twantthatsortofinterferencefrominvestors.Inthatcase,youshouldprobablyconsiderthehomeloanrouteandavoidangels.Butifyouareopentoit,findinganinvestoryouadmireandarewillingtotakeadvice from can be incredibly important.Youalsowantangelswhobringmoretotheventurethansimplytheircheckbooks.Itisessen-tialtofindangelswhohaveexperienceinyourindustry,sotheirmentoringisofpracticalvalue.Greatangelsalsobringnetworksofbusinessconnections.Theyshouldbeabletointroduceyoutopotentialcustomersandsuppliers.Theywillhavereliableandtrustworthyrelationshipswithbankers,accountants,lawyers,andotherprofessionalsuponwhomyoucancall.Withouttheinter-ventionofanangel,connectingwiththesekindsofresourcesmayrequireanexchangeofequityinyourcompany.Finally,manyangelgroupsfeedintosomemoreprominentmoneyinvestorsknownasventurecapitalists.Ifyouaregoingtoneedmillionsofdollarsinthefuture,it’sbesttofindangels who can take you to the venture capitalists (VCs) when you are ready.274A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Venture CapitalistsWhilevirtuallynosmallbusinessesandveryfewstartupswilleverhavetheneedoropportunitytoengagewithVCs,adisproportionateamountofentrepreneurialliteratureisfocusedonhelpingfoundersfindwaystoattractorpleaseVCs.Themostpopularbusinessbooks,entrepreneurshipTVshows,andarticlesinbusinessmagazinesmightleadyoutobelievethatgettingmoneyfromVCsistheactualgoalofastartup,ratherthangeneratingreturnsandothertangiblebenefitsforitsfounders.Manybusinessschoolcoursesinentrepreneurshipfeatureasimilarlymisguidedapproach.TheNewEntrepreneurialDynamicislessfocusedoncapitalacquisitionandmuchmorefocusedondeliveringvaluetothefounders.Itencouragesyoutominimizetheuseofoutsidemoneyandonlyrecruitinvestorswhoshareyourvisionandbringsignificantnonfinancialcon-tributionstoyourstartup.Inmostcases,VCsshouldbethelastthingyouworryaboutinanewbusiness.However,thereisoneclassofstartupwherethesehigh-poweredinvestorsareessentiallyrequired.Rapidgrowthorscalablestartups(perSteveBlank),particularlyinthetechsector,fittheVCmodel.It’snocoincidencethatpioneeringfirmslikeAppleandMicrosoftevolvedalongsidethetopVCfirms.It’swhysomanyofthesetechfirmsandVCsaresidebysideintheSanFranciscoBayareaandnearbySiliconValley.Ifyouhaveanewsoftware-enabledsolutionoradisruptivetechnologywhere the manufacturing is outsourced, VCs will be interested.Thatdoesn’tmeanVCsaresuitableforallgrowingfirms.Theyaregenerallylessattractedtoservicesthatinvolvelotsofrealemployeesortohardwareprojectswheremanufacturingmustbedonein-house.Theyaresurprisinglyuninterestedinfirmswithrelativelylow-riskplans.Ifyouhaveasurefirewaytogeneratedouble-digitgrowthinanewmachinetoolbusiness,youprobablyshouldn’tbothertheVCs!Ontheotherhand,ifyouhaveanewappwithanine-in-tenchanceoftotal failure but a one-in-ten chance of delivering a 100X return, the VCs may love you.Venturecapitalistsdifferfromangelsinseveralways.First,VCsinvestmoremoney.MostVCsarelookingtoinvest$3millionandusuallymuchmoreinastartup.Anythinglessthanthatwillnotgenerateenoughreturntobeworththeirtime.Secondly,theyusuallycomeinaftertheangels.Whilemostsmallbusinesseswon’tneedtogetbeyondtheangels,thosethatfittheVCmodelwillgothroughaformalseriesofVCinvestmentstagesoncetheyhavedemonstratedtheyhaveasome-what viable product.Figure 9.2shows this process.Chapter 9Funding275© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
funding roundA period of time duringwhich a business acceptsoutside investment,typically divided into Seed,Series A, B, C, etc.pre-seed moneyThe money put into arapid-growth startup bythe founders and theirclose associates, beforeany formal outsideinvestment.seed roundThe first round of formalinvesting, usually fromangel investors.Series AUsually the first round ofinvestment usuallyengaging venturecapitalists. Followed bySeries B, C, etc.valuationThe total value of acompany based on theamount paid for shares inits latest investment round.FIGURE 9.2Rapid Growth Funding CycleSource: https://commons.wikimedia.org/wiki/File:Startup_financing_cycle.svgThesectionontherightsidewithitsfirst,second,third(ormore)fundingstagesreflectstheinvestmentsofventurecapitalfunds.Beforeeachfundinground,theVCswillreevaluatethefirm’sinvestmentpotentialandarelikelytopushforchangestotheproduct,team,orbusinessmodelbeforeprovidingthefundsnecessaryforthefirm’sgrowth.TheroundsareoftenlabeledasA,B,C,or first, secondmezzanine.Officiallythefirstmoneyintheformalinvestingprocessisthepre-seedmoneyputinbythefoundersthemselves.Pre-seedfundingisusuallytensofthousandsofdollars.Theseedroundisthefirstofficialoutsideinvestment,usuallymadebyangelinvestors,andistypicallysomehun-dredsofthousandsormaybeafewmilliondollars.VenturecapitaliststhencomeinwiththeSeriesAroundandtypicallyinvest$5millionto$20million.TheinvestmentsandthepoolofinvestorsgrowwithadditionalSeriesB,C,etc.Theseinvestorsgenerallyallknoweachotherandofteninvesttogetheringroups.SomeVCsandotherfundswillonlyinvestasridealonginvestorswithlargeVCs that they know have done the due diligence on the startup.VCsspecializeinsomespecificareaofthissequencewiththemorerisktolerantonesenteringearlyonintheseedroundsandSeriesAinvestments,wherethestartupshavelittletrackrecord.Theseearlyinvestorsstandtomakethemostfromasuccessfulexit.Moreriskadverseinvestorsfollow on in later rounds.Inmostcasesthevaluation,orpriceofthestock,increaseswitheachround.Ifyou’vewatchedSharkTankyou’veseenvaluationsinaction.IfMr.Wonderful(KevinO’Leary)agreestopay$100,000for10percentofabeehivemanufacturingfirm,whatisthatfirmworth?Theansweris$1million. Can you see how that valuation is calculated?276A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
post-moneyvaluationThe value of a companyafter the recent investmentis put in.pre-money valuationThe value of a companynot including the recentinvestment put in.down roundAn investment roundwhere the firm receives alower valuation than inprevious rounds.other peopleÕsmoneyInvestment fundsbelonging to shareholders,customers, or clientsrather than the personinvesting it.venture capital fundAn investment fund madeup of money from wealthyindividuals, pension funds,insurance companies, andother organizationsmanaged by venturecapitalists (VCs). See alsoother peopleÕs money.If$100,000=10percent,thevaluationmustbetentimesthatamountbecause10percentisone-tenthof100percent.Theformulawouldbe:$100,000×100%/10%=$1million.If10percent=$100,000,then20percentwouldbe$200,000,and90percentwouldbe$900,000,andtherefore100percentmustbeacoolmillion.Wecallthisthepost-moneyvaluation,becauseitincludesthe10percentputinbytheinvestor,inthiscaseMr.Wonderful.Thepre-moneyvaluationisthevalueofwhattheinvestorsbroughttothedeal,notcountingtheinvestmentfunds.Inthiscasethatwouldbe $900,000 because $1 million – the $100,000 investment leaves $900,000.Canyoufigureoutwhatthepost-moneyvaluationwouldbeifO’Learygot20percentforhis$100,000?Ifyousaid$500,000,youarecorrect.$100,000×100%/20%=$500,000.Thepre-moneyval-uation would be $500,000 – $100,000 = $400,000.Sometimesafirmfallsonbadtimesorthemacroeconomy(seeChapter17)isinaslump,andinvestorsdonothavealotofmoneytoinvestinstartups.Ifacompanymustraisemoneyunderthesecircumstances,theymayhavetoofferalotofstockandtakealowervaluationthantheygotinthelastround.Thisiscalledadownround,andyoumightimagineitisveryunpopularwithprevious investors who paid more for their stock earlier on.Itisveryimportantforbusinessfounderstounderstandthatifventurecapitalistshaveinvestedmillionsofdollarsduringeachofseveralfundingrounds,thefirmwillbecomedependentonthemtocontinueitsgrowth.Whileyou’relikelytogetotherVCstoinvest,thesefolksaresittingonyourboard,andtheyaregoodpersonalfriendswithalltheotherVCfirmsintheirsector.Iftheydecide,andtheyoftendo,thatthefoundersarenottherightpeopletocontinuemanagementofthefirmasitentersanewstage,theywillreplaceyouandyourpartners.ManyayoungCEOhasbeenfiredfromhisowncompanytomakewayformoreexperiencedmanagement.SteveJobs’fir-ingfromAppleComputerin1985isaclassicexampleofthiscautionarytaleofwhatcanhappenonce you’ve given up control of your firm.Attheendofthecycle,thefirmmayenterthepubliclytradedmarketsinaninitialpublicoffering(IPO)ofstock.AsuccessfulIPOmakestheVCsandmosteveryonestillontheteamverywealthy.It’stheentrepreneurialequivalentofwinningOlympicgold!TheIPO,however,isactuallyaveryrareevent.Inareallygoodyear,theremaybeadozenorsoIPOsinthemarket,andduringeconomicdownturns,theremaynotbeanyatallforyears.Inmostcases,VCschoosetosellthefirmstheyhavefundedtolargercompetitorsratherthanpursueanIPO.Asaleisamucheasier,cheaper,andmorereliablewayofcashingoutontheinvestment.Everyonestillprofits,butcontrolis handed over to the buying firm.Foundersmustunderstandthiscriticalfact:VCslookatyourfirmasanopportunitytoseeareturnoninvestment,notasyourdream.Thebottomlineisthis:Ifyourvisionistobuildandman-ageyourownbusinessempire,venturecapitalistsaremuchmorelikelytosquashthatdreamthanmake it come true.Finally,andmostimportantly,venturecapitalistsareworkingwithotherpeople’smoneyor“OPM.”Venturefundmanagersadministeraventurecapitalfund,whichincludessomeoftheirownfirm’smoneybutismostlycomposedofinvestmentsfromwealthyindividuals,pensionfunds,insurancecompanies,foundations,andotherorganizationswithlargeamountsofmoneytoinvest.ThisobligationtoreturnmoneytootherpeopletiesthehandsofVCsfromactingontheirowninclinations.YourVCmayactuallyloveyouandwantyoutolearnandgrowasanentrepreneur,butheisn’tgoingtoriskmillionsinotherpeople’smoneytogiveyouthatchance.Heisgoingtodowhat is required to maximize returns for the fund’s investors.Chapter 9Funding277© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Interview with Tim EllisTim EllisSource: Tim EllisIfirstmetTimEllisandhisfuturecofounder,JordanNoone,whentheywerestudentleadersintheRocketPropulsionLab(RPL)attheUniversityofSouthernCalifornia,whereItaughtentre-preneurshipforsevenyears.Ihadthepleasureofobservingandoccasionallyofferingadviceastheseyoungentrepreneursbuiltavisionof3DprintingrocketsintooneofAmerica’smostexcit-ingnewcompanies,RelativitySpace.Thatfirmisnowvaluedatover$4billion.IsatwithTimatthe Space Symposium, in Colorado Springs, Colorado to discuss his entrepreneurial journey.Prof.Prof.Autry:Autry:Whenyouwereyounger,didyoupictureyourselfasanentrepreneurandbusinessowner?Ellis:Ellis:Mydadranabusinessdoingkidneydialysisarchitecture.Itwasalwaysasmallbusinessandveryniche.Isawhimfacefailureonmanyoccasionsbutalwayspersevere.Iwasfortunateto see that sort of grit early on.IwentintocollegethinkingthatIwouldbecomeascreenwriter.Igotahalf-tuitionscholarshiptotheUniversityofSouthernCaliforniaasaPresidentialScholarandonmyapplication,Isaid,“mydreamjobiseithertobeafictionwriterorCEO.”Iwasn’tthatentrepreneurialfromthestandpointofknowingthatIwasgoingtolaunchastartup,butalwayscaredaboutcreativityandbigimpact.I’velearnedduringmytimewithRelativitythatengineeringisjustcreativitywithphysicsandI’vebeen able to use that inner passion to drive change in the business world.Prof. Autry:Prof. Autry:What is it that led you into aerospace engineering and into propulsion?Ellis:Ellis:IgotintoUSCundeclaredandswitchedtoaerospaceengineeringbecauseitstartedwithan“A”andwasatthetopofthemajorslist.ItriedtochangemyfreshmanyearwhentakingaclasscalledMATLAB,becauseitscaredmethesamewaywritingdid,whichwasbeingaloneinaroomandhavingtobecreative.Ithought,“Crap,nowI’mgoingtobealonewritingcode.”Luckily,IfoundtheUSCRocketPropulsionLab,whichwasworkingtobethefirststudentgroupintheworldtolauncharockettospace.AfterseeingmyfirstrocketenginetestIwashooked.Itwasthemostvisceral,loud,bright,crazyexperienceIeverhad.Ironically,IendedupwritingtheMATLAB code to design those rockets.278A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Prof.Prof.Autry:Autry:SeveralentrepreneurscameoutoftheRPL.Whatdoyouthinkitwasaboutthatexperiencethatdrovepeopleintoentrepreneurshipasopposedtojustgoingandworkingforlarge companies?Ellis:Ellis:CollegeshapestheDNAofwhoyougrowuptobe.Collegeshaveculturesjustlikecom-panies.USCisoneofthehighestproducersofentrepreneursintheUnitedStates.Ithasthispopulationofverybrightpeoplewithalittlebitofachipontheirshoulders.USChasattitude,butinagoodway;youhavetobegrittyanddisruptive.TheUSCRocketPropulsionLabcultureverymuchembracedthat.Ourunofficialmottowas“SpaceorNothing”andthiswasemblematicofthisideaofbeingallin.Gritandrelentlessnessmapstothenumberonequalityyouneedtobesuccessful in a venture-backed startup.Prof.Prof.Autry:Autry:WhenyouleftUSCandtheUSCRocketPropulsionLabyouwereyoustillthinkingyou might do something entrepreneurial, or did you picture a corporate career?Ellis:Ellis:IstartedmycareerasaninternatMastenSpaceSystems,areallysmallcompany,butmovedtoBlueOrigin,JeffBezos’spacecompany.Istartedasaninternwhenthecompanywasabout150peopleandstayedthroughabout500people.Ilaunchedthemetal3DprintingdivisionatBlueOrigin.Nobodytoldmetodothat,andinfact,Ifacedalotofheadwinds.Mybossfeltitwasawasteoftime,butIbelieved3Dwasthefuture.Soon,Iwasusingmetal3Dprintinginallof my projects, and it was working, surprising everyone, including Jeff.Prof. Autry:Prof. Autry:So that means you started thinking you wanted to go do it on your own?Ellis:Ellis:Imetmywife,Richelle,whenwewerebothgivingTEDxtalksatUSC.She’sanartistandwhenIwasatBlueOrigin,wewereactuallywritingabusinessplantostartascienceartgallerycalled“RelativityGallery.”So,wewrotethewholebusinessplan.Iwaslaunchingthe3Dprint-ingdivisionatBlueandthisartgalleryideathatmademerealizethatIwasprobablyhookedonentrepreneurship.Thebusinessideacameoutofthinkingwhyaren’tmorefirmsbesidesSpaceXtryingtogettoMarstomakehumanitymultiplanetary?Iwasalsowondering,whyarewestillbuildingrocketsoneatatime,withhundredsofthousandstomillionsofparts,ingiantfactoriesfilledwithfixedtoolingandlittleautomation.Ifeltthatthenextsixtyyearscouldn’tpossiblylookthatwayandifitdid,itwouldbeverydepressing.Therehadtobesomecompanyinhumanity’sfuturethatwouldbuild an industrial base on Mars. That was the genesis of 3D printing entire rockets.Prof.Prof.AutryAutry:Andsoyouhaveanidea,butwheredoesonegotogetmoneyto3Dprintrocketson Mars?Ellis:Ellis:ThefirstRelativityemailIsentwastotheonlyinvestorIcouldthinkof,MarkCuban.Iguessedtwentydifferentversionsof“MCuban”and“mark.cuban”whateveratyahooandgmail.Mysubjectlinewas“Spaceissexyandweare3Dprintinganentirerocket.”Wewereraisingaseedroundof$500kandaskingCubanfor$100k.OneoftheemailaddressesworkedandIguesswegothisattentionbecauseherepliedwithinfiveminutesofferingtodothewholeround.The same week we got into Y Combinator and started incorporating.Prof.Prof.Autry:Autry:Iremember,yourcofounder,JordanNoone,cametomeaboutthattimeandaskedme “Should we go with Y Combinator or Cuban,” and I said “That’s not a question, take both.”Ellis:Ellis:Irememberthat.That’shownaïvewewere.Ithoughttherewasnowaywecoulddoboth,butofcourseobviouslywecould.WeraisedourseriesArightoutofYCombinator.Thatwasninetypitchesinthirtydaysorsomethinglikethat.Everyonesaid“no,”exceptSocialCapital,whoagreedtoleadtheround.SeriesBwas140pitchesoverthreeorfourmonthsandPlaygroundGlobaldecidedtotakethelead.WestartedtohireanexecutiveteamfromSpaceXandotherpri-vatespacecompaniesandsignedourfirstcustomercontacts.Ourbigprintingtechnologywasworking.Withthatcredibility,laterfundingroundsmovedfast.We’velearnedwhatinvestorslookfor and with the close of our series E we’ve raised over $1.3 Billion.Prof. Autry:Prof. Autry:What golden nugget of advice do you have for aspiring entrepreneurs?Ellis:Ellis:I’vealwaysfocusedon,“WherecanIlearnthemostandwherecanIlearnthefastest?”Neverstoppullingonthatthreadoflearningandthennotbeingafraidtohirepeoplebetterthanyou.Infact,thatisyourjob,youneedtohirepeoplebetterthanyou,becausethat’showyoulearn even faster.Autry:Autry:What’snextforTimEllis?Ifyoulooktoapost-Relativitystandpoint,ifthereisone,haveyouthoughtofgoingbacktoartsorwritingoranythingwiththewisdomandresourcesyouhaveacquired?Chapter 9Funding279© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
equity investmentAn investment in acompany made inexchange for stock or apercentage of ownershipin the firm.liquidatingSelling off the assets of adistressed company anddividing the proceeds ofthe sale up amongstcreditors andshareholders.Ellis:Ellis:IwanttobuildanindustrialbaseonMarsandhelptobuildamulti-planetaryfuturefortheworld.HelpingputamillionpeopleonMars.Iwanttoseemorepeoplelaunchingambitiouscom-panies with a vision that adds up to something pretty amazing, should they succeed.MywifeandIarestillverypassionateaboutthearts.Iworkalotwithheronherprojects.Sherefusestoletmegiveherhelpormakeconnections.Shewantstostandonherowntwofeet,which I respect a lot.Other Sources of Equity CapitalTherearemanyotherorganizedequityinvestmentstructures.Someofthemorepopularonesinclude the following.PrivateEquityFundsaregenerallylimitedpartnershipsorganizedtoinvestfundsfromindi-vidualsandinstitutionalinvestorstobeinvestedintobusinesses.Venturecapitalisatypeofprivateequitythatfocusesonstartups.Therearefundsthatfocusonbuyingandrestartingorliquidatingdistressedbusinesses,buyingoutdiversifiedfirmsandsellingofftheirparts,andalotthatfocuson real estate development.FamilyOfficeFundsmanagethemoneyofhighnet-worth(wealthy)individualsandtheirheirs.Theytendtobecautiousintheirinvestmentsandareoftengoodsourcesoffundingforfirmsthataren’tasfastgrowingasventurecapitalistspreferbutarealreadygeneratingcashandofferless risk to the fund.HedgeFundsareprivatefundsdesignedtotakeadvantageofcertainmarketconditions.Theymayforinstanceshortthemarketoraclassofstockstoprotecttheinvestorfromaneconomicdownturn.Hedgefundmanagersusuallytakeasignificantportion(20percent)ofthegainsasaperformance fee.Classes of StockNotallcompanystockisequal.Manyfirmsissuedifferentclassesofstockswithdifferentagree-mentsassociatedwiththem.MostcommonlytheyarelabeledasClassA,ClassB,etc.Commonstockreferstostockthatprovidesforequityownershipofafirmandvotingrights,includingelect-ingtheboardofdirectors.Preferredstockmayhavemorepowerfulvotingprivilegesandapriorityposition to be paid back if the firm fails and is liquidated.Someclassesofstockmayhavenovotingrights.Ifyousellsmallamountsofstocktoanumberofindividualinvestorsyoumaywishtomakethesenonvotingshares.Thismeanswhenimportantdecisionsaremade,youdon’thavetospendthetimetocollectballotsfromtheseindividualswho,havingasmallportionoftheequity,won’tmakeadifferenceintheoutcomeofthevoteinanycase.CrowdfundingAnotherincreasinglypopularwaytofundsmallstartupsisthroughcrowdfunding.SiteslikeKick-starterandIndiegogoallowentrepreneurstoconnectwithacommunityoflike-mindedconsumerswhoareeagertosupportthenextcoolcompany.Astartupwillconstructavideoinsupportofafundraising“campaign”thatusuallylasts30to45days.Customerswhoarewillingtopayupfronttoacquireoneofthefirstproductsfromthefirmwillmakeapledgeandreceiveaproductlater280A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
A Kickstarter campaign.Source: Greg Autryasa“premium.”Underthismodel,themoniesreceivedas“pledges”arereallydonationstothefirm,andtheproducttobedeliveredaspremiumsarethankyougiftsinexchangeforthatpledge.Theimportantpointisthatitisnotaloan,noristhereanylegalobligationforthefirmtoeitherdelivertheproductorreturnthemoney,thoughKickstarterwon’tinviteyoubackagainifyoufailtodeliver.It’sarelativelyrisk-freewaytogetthemoneyyouneedupfrontinordertodeliveraprod-uct later. Would crowdfunding work for any business?Aproblemwithcrowdfundingisthatitworksbestforparticularclassesofproductsthatappealtogenerallyyoungerfolkswhodoalotofonlinepurchas-ingandsharecampaignsviasocialmedia.Productslikeskateboardsandgameshaveoftenbeenwellreceived.Campaignsthatappealtotechnologyaficionadosalsodobetterthannontechproducts.Productswithenvironmentalorsocialbenefitslikeelectricvehiclesarepopularincrowdfunding.Onlinecrowdfundingalsorequiresthatyouhavetheskillstoproduceacompellingvideotosellthatproduct.Experiencehasshownthatthemostsuccessfulcrowdfundingcam-paignsareconsumerproductsthatcostafewhundreddollarsorless.Finally,tomaximizereturnsfromfundraisersonKickstarterandIndiegogo,youmustwageglobalcampaigns.OnechampionofcrowdfundinghasbeenPebble,asmart-watchfirmthathasrunthreecampaigns,eachofwhichraisedinexcessof$10millionintheearlydaysofKickstarter.Pebblewatchescostbetween$69and$300andaretargetedattech-savvyfolks.DoyouthinkyoucouldgettheKickstartercommunitytocapitalizeyournewcarwashinBoise,Idaho?Whatcouldyouofferasapremiumbesidescarwashes?Whywouldtechpeoplecareaboutthis?HowcouldthatpossiblyappealtosomeoneinBarcelonaorHongKong?Itprob-ablywouldn’t.Youmightbeabletoselldozensofcarwashticketsinadvance,butyouwon’tmakeenough to buy a $200,000 machine and lease a place to set it up.Ifyoudolaunchacrowdfundingcampaign,youmustdoitwell!ResearchbyEthanMollickoftheWhartonSchoolattheUniversityofPennsylvaniasuggeststhatcampaignsthatsignalqualityhaveamuchhigherdegreeofsuccess.Forinstance,theproductionvalueofthemarketingvideoisveryimportant.Mollickfoundthatevenasinglespellingerrorinthecampaigncanreducethelikelihood of a campaign succeeding by 13 percent![2]Crowdfunding EquityAnotheroptionforstartupsistogatherfundsfromtheiraudienceincrowdfundedequityoffer-ings.AccordingtoareportfromBritishBusinessBank,“Crowdfundingishavingasignificantimpactonseed-stageactivityintheUKequityinvestmentmarket”sinceitsintroductionin2011.ThebusinessresearchfirmBeauhurstreportsthatitisnowthemostactiveinvestorcategoryinBritain (seeFigure 9.3), with the website CrowdCube leading the category.Chapter 9Funding281© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
FIGURE 9.3UK Crowdfunding Deals and Investments by Six MonthsSource: Data from Bearhurst, https://www.beauhurst.com/blog/uk-crowd-funding-landscape-2019/In2015,theSecuritiesandExchangeCommission(SEC)introducedrulesforsimilaronlinecrowdsourcedequityfundingintheU.S.Theruleslimitwhocanparticipateandhowmuchtheycaninvest.Theregulationsaresomewhatcomplextoexecutebut,inessence,providesmallbusi-nessownerswithaccesstoa“miniIPO.”StartEngineisanequitycrowdfundingplatformfoundedinresponsetothisrulechangeforwhichitsfoundershadpreviouslyadvocated.Thesiteoffersanopportunityforrelativelysmallinvestorswithperhapsafewhundreddollarstoinvestinstartups.In2016,ElioMotors,aprospectivemanufacturerofthree-wheeledcars,raised$17millionontheStartEngine.[3]In2018,StartEngineuseditsownplatformtoraise$10millionforitselffromthou-sandsofsmallinvestors.Theinvestorcategoryof“fools”hasbeenexpandedfarbeyondjustthepeople you know!Beawarethateventhe“simplified”SECpaperworkfortheseofferingscanbecomplexforasmallentrepreneurandpossiblygeneratethousandsofdollarsinlegalfees.StartEngineanditscompetitorsdoprovideentrepreneurswithsomesupportforthosewishingtosellstock.Theyalsohave networks of lawyers familiar with their processes.282A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
advancePayment for a productprior to delivery.retainerAn upfront fee charged bya consultant, lawyer, orother professional beforethey will provideprofessional services.exclusive licenseAn agreement to withholdthe same rights, within ascope or field, from otherlicensees.Other Prepayment Financing SchemesKickstarterisn’ttheonlywaytogetyourcustomerstopayyouupfront.Sometimesifyouhaveatrulyinnovativeproductandyoucandemonstrateyourabilitytodeliver,youmaybeabletogetyourcustomerstoadvancepaymenttocompletedevelopment.Thissortofarrangementisespe-ciallycommoninprofessionalservices;forexample,lawyersusuallyinsistoncollectingaretainerbeforeprovidingservices.Itisalsostandardpracticeincustomsoftwaredevelopment.Talentedprogrammersmaydemand30percentoreven50percentpaymentupfrontbeforetheybegin work.Prepaymentoptionsarelesscommonwithphysicalproducts,butifyoudesignaproductthatoffersyourcustomerasignificantcompetitiveadvantage,youmayverywellgetpaidupfronttofinanceyouroperation.Thisusuallyoccursinasituationwhereyoucanlicensesometechnologyorbrandtoacompanythatwillbeabletoincreaseitsmarketsharesimplybecauseofaccesstoyourproduct.Inthatcase,theywon’twanttheircompetitorstohavethesameadvantage.Inexchangeforofferingthecustomeranexclusivelicense,youshouldbeabletodemandsignificantpaymentupfront.Inthissituation,you’veagreedtosellyourproductonlytothiscustomerforapredeterminedperiodoftime.Thelicenseshouldusuallycoveronlyasinglemarketasdefinedbyaproductcategoryorgeography.Canyouseehowthatmighthelpyougetevenmoremoneyupfront?Imagineyou’veinventedanewtypeofshoesolethatisincrediblycomfortableandwater-resis-tant.Youseethatyoursolutioncanbeusedbyshoemanufacturersaswellasscubaandsnowboardbootproducers.Acompanyineachofthosemarketsshouldbesatisfiedtohaveaccesstoyourproductintheircategory.Infact,theymayhavetolicenseyourproducteveniftheydon’tuseit!Why is that?Theleaderinaparticularproductcategorymaynotwanttoseedisruptionintheirsuccessfuldominanceofamarket.Infact,thelastthingtheywanttodoisinnovateanddisrupttheirproduc-tionbyincludinganew,potentiallytroublesomecomponent.However,ifyoulicenseyoursolutiontotheirupstartcompetitor,theirholdonthemarketcouldbelost.Aconservativebrandthatdom-inatestheskibootmarketmaypotentiallypayyousomeamountofmoneysimplynottosellyourproducttoanyotherfirmintheskibootcategoryforacoupleofyearswhiletheyconsideraddingit to their product line in the future. It’s like money for nothing!In2013and2014,Appleadvancednearly$1billiontoGTAdvancedTechnologiestomanufactureunscratchablesapphire-classscreensfortheirwatchesandphones.[4]SadlyforApple,GTfailedtodeliverthescreens.Becauseofhorrorstoriesofthisnature,mostfirmswilldosomeseriousduediligenceinvestigationofyouractualmanufacturingcapabilitiesbeforeproceeding.Bepreparedtoconvince them that if they give you their money, you will deliver for them.Key Takeaways•Always be thinking about how much money your startup is going to require.•Try to avoid using other people’s money for as long as possible.•Be cautious with your own savings and assets.•Recognize that money from friends and family can complicate your life.•Look for angel investors that add value beyond cash.•Only think about venture capital if you need large amounts of cash.•Consider crowdfunding if it fits your product.•Always be looking for ways to get paid before delivering products.Chapter 9Funding283© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
risk analysisA review of the potentialrisks associated with abusiness venture.debt financingMoney borrowed to bepaid back with interest, forexample, a loan or a lease.backendPart of a financial dealresulting in the payment ofa fee to the facilitator ofthe deal.personal guaranteeAn individual’s promise torepay charges to abusiness credit card.9.2Debt FinancingÑLoansLearning Objectives1.Appreciate the risks and benefits of debt financing.2.Understandhowtochooseabankandtheimportanceofbuildingapersonalrelationshipwith a banker.3.Appreciate that getting net terms from a vendor is like getting a loan.4.Recognize the importance of personal credit.5.Understand that investors who have turned you down may come back to fund the startup.RememberourcarwashfinancingdilemmainBoise,Idaho?Kickstarterwasn’tgoingtoworkforthatstartup,buttherearestillsomegoodoptions.Thesmallcarwashbusinessisverywellunder-stoodandfairlypredictable.TherearethousandsandthousandsofthemacrossNorthAmericaandEurope.Existingdatashowswhatthecostsandrevenuesarelikelytobeforoneplacedinaparticulargeography.Knowingthenumberofcarsinthearea,theincomeoftheindividuals,andthedistancefromthenearestcompetitorisverylikelytopredictyourprofitabilitywithreasonableaccuracy. Can you think of why this level of predictability would be an advantage?Havingthatsortofhighdegreeofconfidencethatafirmwillbeprofitableisincrediblyvalu-able.Inthefinanceworld,thisabilitytoanalyzethelikelyfutureoutcomesofabusinessiscalledriskanalysis.Acompanywhoseanalysisindicatesverylowrisk,likeacarwash,cansecuredebtfinancing.Debtfinancingiswhenyouborrowmoneytopaybackwithinterest,asinaloanoralease.Itisusuallymuchpreferabletoequityfinancingbecause,aswithcrowdfunding,youarenotgivingupownershiporcontrolofyourbusiness.Whodoyouthinkmightloanyoumoneytosetup a car wash?First,themanufacturerofthecarwashequipmentwillhaveoneormorefinancingpartnerswhounderstandtheirproductandyourbusiness.Theywillbetheeasiestsourceoffundstogetsetup.However,youmustbeawarethatwhensomebodywhoissellingyousomething(ahouse,car,equipment,orfranchise)introducesyoutoalender,thereisagoodchancetheyarenotonlyhelpingyoubuytheirproduct,buttheyarealsomakingmoneyonthebackend,meaningtheyaregettingpaidsomepercentageofthefeesorinterestyouarepayingforyourloan.Thatwillincreasethe cost of your loan above what you might get if you secured your own financing.Youcanalsoapproachfriendsandfamilyforloansonasimplebusinesslikethis,asitisabusi-nessthatevenanon-businesspersonshouldbeabletounderstand.You’llsleepsoundlyatnightknowing no one’s made a risky investment, provided you’ve done your homework!Small Business Bank Loans and GovernmentProgramsAlthoughbanksaregenerallyaversetolendingtonewlyestablishedbusinesses,ifyouarepursuingaverysimplemodellikethecarwashandhavesolidcreditandsomebusinessexperience,theymaybewillingtoloantoyou.Itisimportanttounderstandthatevenifyourbusinessisanindependentoperationandincorporated,thebankwillaskyou(andyourspouse)tosignapersonalguarantee.Thismeansyouareindividuallyresponsibleforpayingtheloanbackandthatifthebusinessdefaultsontheloan,thebankcanseizeyourpersonalincome(paycheck)orassets(house,auto,etc.)284A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
tax deductibleItem or expense that canbe deducted from taxableincome.encumberTo make a claim againstproperty owned by aseparate entity.repossessedWhen property used ascollateral for a loan orbought on secured creditis seized for repayment orbecause of nonpayment.tocollectontheirloan.Bankerswantentrepreneurstobe“allin”ontheirfirms.Theybelievethatthefounderwillworkhardertomakethebusinessasuccessandpaybacktheloaniftheyareper-sonally invested.Ifyousearch“carwashbusinessfinancing”online,youwillfindbanksandspecialtylendersadvertisingsuchloansaswellasblogsandmessagesfromotherentrepreneurssharingtheirexpe-rience in securing financing.IntheU.S.,theSmallBusinessAdministration(SBA)islikelytoapprovealoanforthissortofbusinessaswell.Inthiscase,theSBAguaranteestheloan,makingthelendingdecisioneasierforthebank.Ifyouarestartingarelativelysimplebusinessinanestablishedcategory,youshouldinvestigateyourabilitytogetanSBA-backedloanfromalocalbank.TheSBAprocessitselfisabitbureaucratic,sobepreparedtospendagooddealoftimechasingpaperandonyourcomputerdetailingyourpersonalandbusinessfinances.Starttheprocessbylookingattheloanchecklistonline at sba.gov or by visiting a local bank approved for SBA loans.InEurope,individualcountries,aswellastheEUandEuropeanCentralBank(ECB),providefinancialassistancetosmallandmedium-sizedenterprises(SMEs).SMEsmakeupthebulkoftheEuropeaneconomy,butaccordingtotheEconomist,bankshaverecentlybeenreducingtheirlend-inginthatsector.TheEU,severalmemberstates,andtheUKhaveallmovedtopropupthatcriticalsourceofcashwithsubsidiesandguarantees.YoucaninvestigateanumberofEuropeanand national programs by visiting the EU’s “Access to Finance” portal page.[5]Home LoanTheverybestsourceoffundsforyournewbusinessmaybeyourhome.Whilemanyentrepreneursarewaryofattachinganyobligationtotheirfamily’sresidence,ahomeloanorlineofcreditcanbethebestfinancialchoiceforseveralreasons.First,ifyouhavesufficientequityinyourhome,mean-ingyouowemuchlessthanthehomeisworth,youcanusuallyeasilygetaloaninafewweeks.Loansbackedbyrealestateusuallyoffersomeofthelowestratesavailable.Ahomeloanisnearlyalwaysmanytimescheaperthancreditcarddebt(perhaps4percentversus18percent).Evenbetter,intheU.S.andsomeothercountries,muchoftheinterestonahomeloanmaybetaxdeductible.Moneyborrowedat4percentonyourhomemayonlycostyou2.5percentaftertaxes.Thisisveryattractive.Itisessentialtounderstandthatanyloanonyourhomedoes,ofcourse,encumberthatasset,meaningitbecomestiedupbythelender,andsellingortransferringitismoredifficult.Further,ifyoufailtomaketheloanpaymentsorpayyourbills,yourhomecouldbeforeclosedorrepossessed,meaningitcouldbeseizedandyourfamilyevictedsothehousecanbesoldbythelendertocoveryourdebt.However,thesamethingisevenmorelikelytohappenifyourunupcreditcarddebtbecauseofthehigherinterestratesincurred.Ifyoudecidedtoborrowagainstyourhometofundyour dream business, be sure that you and your family have considered the risks.Chapter 9Funding285© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
creditworthyDeserving of credit basedon proven financialreliability.collateralizedTo pledge an asset to abank or other lender tosecure a loan. In the eventof default, the lender canseize and liquidate theasset. Typical assetsinclude real property,equipment, and contractrevenues.Developing banking relationships early is criticalfor startups.Source: © Shutterstock, Inc.Aspreviouslynoted,youshouldestablishapersonalrelationshipwithyourbankerbeforeyouapplyforaloan.Youalsoneedtogetyourbusinessintocreditworthyshape.Unlikeinvestors,banksarenotbettingonyourfuturegrowth;theyarelendingtoprofitablefirmsthatarealreadyabletomakepaymentsandcanproveit.Ontopofthat,theywanttheloanscollateralized,whichmeanssometangibleasset(startingwiththecashinyourbankaccounts)canbeusedtocoveryourdebtifyoufailtopay.Thereisatruismamongsmallbusinessownersthat“banksonlyloantobusi-nesses that don’t need loans.”Requirementsvarybybank,industry,location,andtheeconomy,butingeneral,yourbusinessshouldhaveatleastayearofdemonstratedprofitability,goodreasonstoexpectrevenuesandprof-itstocontinuetogrow,asolidcredithistory,andassetstosecuretheloan.Bepreparedtoproveallthis with solid accounting and clear answers to financial questions.Beawarethatmostbusinessloansarebasedonavariablerate,usuallyassomenumberofinterestpointsaboveprime,asin“primeplustwo.”Theprimerateistheratethatcommercialbankschargetheirverybest,low-riskcustomers,typicallybigbusinesses.Ifoneofthesemajorcompaniesisgettingloansat2percent,thenyourprimeplustwoloanisat4percent.Ifinflationincreases,thegovernmentandbankswillraisealltheirrates.Whentheprimejumpsto4percent,youwillbepay-ing 6 percent.Selecting a BankFindingtherightbankforyourcarwashoranyotherstartupisacriticalfirststepforyoursmallbusiness.Therearealotmorethingstoconsiderintheselectionprocessthansimplytheconve-nience of multiple branch locations or thousands of ATMs.Rememberthatyourbankingprioritiesasanindividualdifferfromyourneedsasabusiness.Consumerbankingtransactionsarerelativelysimpleandroutine.Eventhemoresignificantdecisionssuchasgrantingahomeloanorfinancingapersonalcarpurchasearehandledentirelybymechanicalprocessesbasedonyourcreditrating,yourjob,andtheappraisal;verylittle,ifany,humanjudgment is involved.Businessbanking,ontheotherhand,remainsveryrelationshipdriven.Establishingagoodpersonalrapportwithbankofficerswhohavetheauthoritytomakelendingdecisionsismuchmoreimportant.Lendingtoabusinessrequiresalotmoreunderstandingonthepartofthebank.Yourbankerwillneedtoknowandtrustthemembersofyourteam.Shewillalsowanttoknowwhoyourcustomersareandwhytheyneedyourbusiness.Inalocalmarket,shemayevenknowandspeakdirectlytothosecustomers.Sheshouldalsounderstandyour strategic plans and how that will influence your future lending needs.Havingathoroughunderstandingofthecontextinwhichyourbusinessoperatesenablesyourbankertomakebetter,fasterdecisionsaboutlendingrequeststhatcouldmeanthedifferencebetweenlifeordeathforyoursmallbusiness.Findingabankthatunderstandsyourmarket,yourarea,andyourindustryisessential.Forthisreason,regionalbanksareusuallythebestchoiceforasmallbusinessowner.TheWallStreetJournalsumsthisupnicelyintheironlineguide,“HowtoShop for a Bank.”Smaller,regionallyfocusedbanksmaybebetterbecausetheyknowlocalmarketconditions.Theyoftenprovidemoreone-on-oneaccesstoaloanofficerandputmoreemphasisonaborrower’scharacterratherthanjustapplyingacredit-scoremodel.Andtheycanbemoreflexibleduringtoughtimes, such as covering overdrawn accounts without imposing stiff penalties.[6]286A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
TheWallStreetJournalqualifiesthisbynotingthatifyouareinterestedingettinganSBA-backedloan,alargerinstitutionmightbeworthconsideringbecausetheyareoftenmoreintunewith federal programs. On average, interest rates at larger banks also tend to be lower.Here is a list of criteria to consider when evaluating a business bank:•Attitude:Dotheemployeesandmanagersseemhappytoseeyou,anddotheywantyourbusi-ness?Doyoufeeltheywillbeonyoursidewhenyourequestaloanoranexceptiontothenormal banking rules?•Access:Can you establish a direct relationship with lending decision-makers?•Locations:Canyougettothebankwhenyouneedto?Ifyoutravel,doyouneedaccesstobranch offices or ATMs?•Hours:Is the bank open late or on Saturday—if you need that?•Onlinebankingsolutionsandapps:Canyoudepositchecksfromyourphone?Doestheirsys-tem interface to QuickBooks Online (or whatever accounting program you use)?•SBA relations:Is the bank qualified and eager to make SBA loans?•Minimumbalancerequirements:Howmuchmoneydoyouneedtokeepinyouraccounttoavoid paying onerous fees?•Familiarity:Does this bank understand your business or industry?•SBAworkout:Doesthisbankhaveahistoryofgoodfaitheffortstonegotiateaworkoutonseriously delinquent loans?Interview with a Regional BankerInterviewwithKenClark,seniorvicepresidentofCitizensBusinessBank,asuccessfulregionalbank in California.Prof.Prof.Autry:Autry:Ken,canyoudescribethebasicsofasmallbusinessbankingrelationshipandwhyit is important?KenKenClark:Clark:OneoftheunsungheroesoftheAmericanwayoflifeisthebankingsystemthathasmadeoureconomystrongoverthelastcoupleofcenturies.Justlikeasolidbankingsystemisimportanttoacountry’sfinancialhealth,Ibelievethatasolidbankingrelationshipiscriticaltoabusiness’sfinancialhealth.Ifabusinesshasaccesstocapital,itcangrow,itcanexpand,anditcan invest in new ventures and new equipment to increase efficiency.Whenabusinessstartsinthegarage,thebankingrelationshipmaybenothingmorethanacheckingaccount.Asthefirmgrowsovertime,theywillneedloansforequipment,receivables,andotherthingstosupportgrowthortohelpgrowthaccelerate.Asthefirmgrows,theymayneedabuilding,whichcanalsobeagreatinvestmentfortheownersofthatbusiness—partoftheirretirementplan.Whenacompanycandothisandstillhavecash,theycandealwiththingslike 401(k) plans for their employees. Banks make that possible.Finally,bankscanassistwithexitsandsuccessionplansormovingthebusinesstothenextgen-eration.Allalongthatcurve,accesstobankingandthosetoolsreallyhelpsthebusiness.Ifthesmallbusinessownersdidn’thavethatrelationship,theywouldberestrictedateverystageofthat curve.Prof. Autry:Prof. Autry:What do you think a small businessperson should look for in a bank?KenKenClark:Clark:ThecommonwisdomisthatabusinessneedsagoodCPA,agoodbanker,andagoodattorney,thoughhopefullynottoooftenontheattorney!Itisreallytrue.ACPA,alawyer,andabankerdealwithalotofbusinessesinalotofindustries.Ifthey’vebeendoingitforanylengthoftime,theycanguideabusinessperson,alertingthemtohurdlesandopportunitiestheyare likely to encounter. They will say, “Have you thought of this?” or “Look out for that.”Findabankerwhohassomeexperience,notonerightoutofschool.Getsomebodywhohasseenalittlebit,especiallyinyourindustry,whenpossible.However,tomymind,especiallyforasmallbusiness,thenumberonethingtheyshouldlookforissimplygoodcommunications.Ifyoucansitdownwithabankerandcommunicateyourexpectationsandaspirations—whatyourbusinessneedsaretoday,whattheymaybefiveyearsdowntheroad—thenyou’veformedaChapter 9Funding287© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
teamwiththebanker.Thistrustandcommunicationiscritical.Iftheirbankdoesn’thavethetoolyouneedataparticulartime,agoodbankerwillbeabletodirectyoutotheappropriatepartner,perhaps even to another bank to help you with that need or opportunity.Prof.Prof.Autry:Autry:Whatdoyouthinkaretheadvantagesanddisadvantagesofconsideringalocal,regional, or national bank?KenKenClark:Clark:Nationalbankshavetwospecialties.Oneisdealingwiththemassesofconsumers.Theyaredealingwithmillionsandmillionsofaccountsandindividuals,andtheywanttodothatwiththeutmostefficiency.Theadvantageisthatthenationalbankswouldratherputtechnologyupfronttodealwiththosemassesratherthanhavethosemillionsofclientsusingupthetimeofemployees.So,ifwhatyouneedareautomatedsystems,mobileapps,webservices,andthingslikethat,anationalbankwillhavethoseproductsrightaway.Theotherthingthatnationalbanksliketodoisdealwithverylargecompanies,inmanycases,multinationalcorporations.Ofcourse,that doesn’t help the small businessperson at all.Theflipsideofthisisthecommunitybank.Ifyougotoacommunitybank,itmayhaveasinglebranchinyourtownormaybeupto20throughoutasmallarea.Theycan’taffordtodevelopleading-edgetechnologybecausetheydon’thavethemassestosupportthatsortofinvestment.What they do have is people; people that you can sit down and really talk with.Regionalbanksareinthemiddle.Theywillgetthoseautomatedproductsmorequicklythancom-munitybanks.Youcanstilleasilytalktopeople,butyoumayneedtodrivealittlefartherbecausetheydon’thavebranchesoneverycorner.Theywilloftenhavespecialtyareas.InSouthernCal-ifornia,forinstance,somebanksspecializeintheentertainmentindustry.InCalifornia’sCentralValley, many are expert in the agricultural industry.Ifyou’reasmallbusinessandallyouthinkyouneedisautomatedandoff-the-shelfproducts,andyoudon’tseethatalotofcustomizationmaybeneededforyounoworinthefuture,thenalargebankmayworkwellforyou.Ifyouseethatyoucouldusemoreguidanceorthatyou’regoingtoneedalineofcreditorsomesortofloanthatisnotnecessarilystraightofftheshelf,acommunityor regional bank is a better fit.Prof.Prof.Autry:Autry:Whatwouldyousaytoanentrepreneuraboutmaintainingtheirbankingrelation-ship?KenKenClark:Clark:AsImentioned,communicationandvisibility[are]reallyimportant.Reinforcingandbuildingthatcommunicationisalsoimportant.Sittingatyourbanker’sdeskforfiveminuteseverymonthorbuyingthemcoffeemakesabigdifference.They’llrememberyouifyoudothatandkindofwatchyourbacktotheextentthattheycan.Theymayevencallyououtofthebluewithan opportunity! So, I think communication is the most important thing.Itisreallyimportantforasmallbusinesspersontorememberthatyourbankerisonyourside.Ifyouneedaloan,itisinthebanker’spersonalinteresttogiveyoualoan.Therearesomethingsthatcan’tbedone,butifitispossible,theyareonyourteam.Gettingyouthatloanhelpswiththeirbonusandtheirgoals.InJapan,bankersandbusinessownershavesuchatightrelationshipyourbankermaycallyouattheendoftheyearandsay,“Drawonyourlineofcreditforaweek,so I can make my bonus.” That’s an extreme example of the team approach.Ifyouspreadyourrelationshipoverfivebanks,you’renotgoingtohaveastrongrelationship.Theremaybereasonsyouneedtwobanks,buttrytoestablishastrongprimarybankingrela-tionshipandgivethemgoodbusiness.Keepyourfaceinfrontofthem.That’sthenumberonething.Prof. Autry:Prof. Autry:What other words of advice do you have for entrepreneurs?KenKenClark:Clark:Beawarethattherearebusinesscycles.Yourbusinessmayhavealossyearocca-sionally;banksunderstandthat.Abanker’sruleofthumbisthattwooutofthreeyearsareprofitableforabusiness.Youshouldbeshowingenoughprofittosupporttheloansandotherthingsyou’reaskingthebanktohelpwith.Attimesabusinesswillavoidshowingprofitsorshowalossfortaxpurposes.Youcanshoveallyourexpensesintothecurrentyear,youcanmakeadjustments,andyourCPAcanhelpyouwiththosekindsoftaxstrategies.That’sunderstand-able,butrealizethatshowinglosseswon’thelpyourbankergiveyouwhatyouneed,likethatequipmentloanyoumaybeplanningon.Youmustfindahappymedium.Ifyou’reshowingaprofit,you’regoingtohavetopaytaxesonthat,butifyoushowalosseveryyear,it’sgoingto288A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
net termsAn arrangement in which afirm receives goods orservices and pays for themlater, on an agreedschedule.beveryhardforyourbankertosupportyourgrowth.Byshowingaprofit,youarecontributingtoyourcapitalbaseanddemonstratingthatyouareworkingwithyourbankertoexpandyourbusiness. That’s teamwork.Establishing Your Business CreditAswithpersonalcredit,establishingbusinesscreditisimportanttothelong-termfinancialsuccessofyourfirm.Itisalsoaslowprocess,requiringdiligenceandintegrityonyourpart.Aswithyourpersonalcredit,yourfirm’srepaymenthistoryandfinancialswillberatedbyoutsideagencies.IntheU.S.andmanyothercountries,bigandsmallbusinessesaretrackedbyDun&Bradstreet(D&B).Thisfirm,basedinMillburn,NewJersey,maintainsrecordsonmorethan300millionbusinessesworldwide.Whenyoulaunchyourfirmorbegintoseekcredit,youwillwanttogetaD&Bnumber.YoucanobtainthisfromtheD&Bwebsiteatdnb.com.D&Bwillaskforregularupdatesfromyouaboutyourfinancialstatusandcollectinformationfromvendorswithwhichyouhavenetterms.Yourbank,vendors,andotherpotentialcreditorswillcheckyourD&Bratingbeforeextendingcredit.Net TermsEstablishingbusinesscreditoftenbeginswithsecuringnettermsfromyourvendors.Whenyoufirstgotopurchasesomething,yourvendorswillsurelydemandcashondelivery(COD)termsoracreditcardpaymentbeforedeliveringgoodsorservices.Afterafewsuccessfultransactions,youcanusuallyaskfornettermsandgetaninvoicepayablein15days.Besuretopaythosepromptly.Afterestablishingatrackrecord,you’llhavereferenceablevendorswhocantellotherpotentialven-dors, bankers, or lenders that your firm has honored its obligations.Yourpersonalcreditratingisalsoincrediblyimportanttotheestablishmentofsuccessfulbusi-nesscredit.Yourbankandotherlendersarelikelytoinsistoncheckingyourpersonalcreditratingbeforegrantingabusinessloan.So,evenifyoudon’thaveabusinessideacurrently,alwaysworkonestablishingandbuildingyourpersonalcreditrating.Protectyourpersonalcreditratingfromfraudandidentitytheft—thelastthingyouneedwhenyouaretryingtocloseanimportantroundofbusinessfinancingistoexplainthatyourbadcreditscoreisduetosomeonerunningarounddamaging your personal credit.Maintain Your Relationships and Join the NetworkYoursmallbusinessbankingrelationshipdoesnotendwhenyouopentheaccount.Ifallgoeswell,it’sthebeginningofalifelongrelationship.Aswithanyrelationship,yoursmallbusinessbankingpartnershipwon’tsustainitself;youmustnurtureit.Don’tusetheATM.Instead,takethetimetogointothebranch,makeyourdepositsinperson,andbeseen.Stopandsay“hey”tothevicepres-ident(often,everyoneatasmallbankseemstobeavicepresident),branchmanager,orwhomeveryouworkwithonaregularbasis.Theyusuallysitatdesksoutintheopenforthatverypurpose.Gettoknowtheassistantmanagerorseniortellersbyname—theywilleventuallymoveupthechain.Askthemtolunch,andyou’llfindtheywillprobablybothagreeandpickupthecheck!Takeup golf; bankers love to play golf with clients.Thisrelationship-buildingisn’tjustaboutsocializing;it’saprocessthatcreatestheopportunityforyoutobuildtrust.It’sachanceforyourbankertounderstandyourbusinessandyourpersonalcircumstancesbetteraswell.Bringyourfamilytoaneventwhereyourbankerwillbe.WhenaloanChapter 9Funding289© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
officeristhinkingaboutyourkids,saying“no”toyourcreditlinerequestisalotharder.That’sonereason you need to establish this personal relationshipbeforeyou apply for a loan.Theworldsofangelinvestorsandventurecapitalistsaresimilar.Theseindividualsallknoweachother,andtheydiscussopportunities.Ifyoudon’tgetfundingthefirstgo‘round,don’tworry.Investorsrarelysay,“Gettheheckoutofmysight.”Theymaynotgiveyoumoneytoday,buttheymaywanttoseehowyoudo.Updatethemonyourprogressand,ifpossible,maintainasocialrela-tionship.Youandyourfirmmaygrowonthem,ortheymayintroduceyoutotheinvestorwhoisright for you.Ifyouworkonthis,you’lleventuallyfindthatyou’vebecomeanintegralpartofthelocal“goodoldboys”network.Althoughit’snotjustforboysanymore,therereallyisasmallgroupofprofessionalswhorunthingsinmostcommunitiesormarkets.Thesebusinessowners,bankers,accountants,lawyers,andpoliticianssupporteachotherinthedevelopmentoftheircityorindus-try.Whilemostofthemdonotintentionallydiscriminateagainst“outsiders,”thefactremainsisthatifyou’renot“in”agroup,youare“out”andataseriousandunfairdisadvantage.Asabusinessowner,it’smuchbettertobeontheinside,andalocalbankerisakeyconnectiontoenteringthenetwork.Eventually,youmayjointhelocalchamberofcommerce,assumealeadershippositioninanindustryorganization,orbeelectedtopublicoffice.Alwaysrememberwhereyoucamefromandgivethosewholackconnectionsthechancetonetworkandprovethemselves.Whoknowswherethis may lead? You might even find yourself onDragons’ Densomeday as one of the dragons!NED Factors That Are Important in Financing a BusinessFirmFirmandandFounder:Founder:Whenitcomestoraisingmoney,theentrepreneur(s)andtheirstartuparenearlyinseparable.Yourcreditbecomesthecompanycredit.Yournetworkingskillsdetermineaccess to capital. Your credibility closes the deal.MultipleMultiplePaths:Paths:Newentrepreneurialfinancingisdynamic.Youshouldtapmultiplesourcesandalways keep your options open so you can pull in money when you need it most.Network,Network,Network,Network,Network:Network:Theimportanceofrelationshipstosecuringequityinvestmentandloans cannot be overstated. Network!LessLessIsIsMore:More:Youmaybestrugglingeachday,butyouarelearning,learningtoinnovatebecause you must, learning to be efficient because you can’t afford not to.Key Takeaways•Establish business credit early.•Setup up a D&B number as soon as you establish your business.•Use debt financing if you can get it.•Make the effort to develop a banking relationship.•Always consider running a Kickstarter before going into debt or selling equity.•Spend the effort to build your firm’s credit by getting net terms from suppliers.•Expand your network by keeping your banking relationship going.•Work your way into the “in-group” in your community or industry.290A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Jordan NooneSource: Jordan Noone9.3Case Study: Embedded VenturesJordanNoonewasatacrossroads.ThecofounderofRelativitySpacehadbuiltanamazingcom-mercialspacestartupandraisedmorethanhalfabilliondollarsinventurecapital.HisfirmwasopeningabignewcorporateheadquartersinLongBeach,California,andwasrefurbishinga200,000squarefootmanufacturingfacilityatNASA’sStennisSpaceflightCenterinMississippi.Theywereonlyaboutayearawayfromactuallylaunchingthefirst3D-printedorbitalrocketfromoneofthefirm’stwospacelaunchfacilities.Still,Noonehadthenaggingfeelingthatheshouldbedoingsomethingdifferent.Shouldheseethisjourneythroughtoitseventualgoalofputtingarocket on Mars or take the plunge on a new venture?NoonegrewupinSouthPasadena,inSouthernCalifornia’sethnicmeltingpot.“Nooneisanamemostfolkscan’tplace,butit’sIrish,andI’mamixofEuro-pean,Armenian,andFilipinoancestry.”Asahighschoolstudent,hehadappliedforascholarshipthroughtheNavyROTCprogram.“MydadhadbeenAirForceROTC,sothisseemednatural,andIdiscoveredthataerospaceengineeringwasthemajormostlikelytoattractmilitaryscholarships.”TheViterbiSchoolofEngi-neeringattheUniversityofSouthernCalifornia(USC)wasagloballeaderinthatfieldandwouldkeephimclosetohisSoCalroots.ThingsdidnotgoexactlyasNooneandhisfamilyhadplanned.“IgotintoUSC,whichwasamazing,butbeforeIstarted,Idevelopedemergencyappendicitis,andthesurgerypreventedmefromqualifyingfortheROTC.”Noone’sparentshadtofootthebillfortheexpensiveprivateuniversity,aninvestmentwhich,inhindsight,turnedouttobea very good call.Noonewashungeringforacreativeoutletthatwould“letmedosomethingwithmyhandsandtakesomerisks.”Headds,“Iloveddoingthingslikerebuildingcars,andnowalltheworkwasgoingtobeverytheoreticalandentirelyonpaperoracomputer.”Luckilyforthefuturerocketentrepreneur,studentsfromUSC’sRocketPropulsionLaboratory(RPL)cametoclassduringthefirstweektorecruitincomingstudents.Herecallsbeinginstantlyattractedtothestudentrocketgeeks.“TheRPLteamappealedtomebecausetheyseemedlikeabandofrebelliousmisfits.Thatwasverydifferentfromtheothercampusclubsthatfocusedonveryachievablepersonalgoals,likepitchingsomedesignonpapertoacaptiveaudienceofpretendinvestorsinsideaclassroom.TheRPLguyswantedtobuildstuffthatwouldgotospaceandtakeitouttothedesertandlaunchitontheirown,withbasicallynosupervision.Itwasabitcrazy,andIloved that.”Justasimportantly,Noonealsomethisfuturebusinesspartner,TimEllis,andbegantoworkwithhimintherocketlab.Noonetookoverleadershipofthegroupduringhisjunioryear.Althoughhegraduatedin2014,theteamhehelpedbuildwouldlaunchthefirststudent-builtrocketto reach space in the spring of 2019.NoonehadreceivedaninternshipatElonMusk’sSpaceXandeventuallywenttoworkfulltimeonthefirm’sDragonspacecraft.EllismovedtoKent,Washington,toworkforJeffBezos’spacestartup,BlueOrigin.BothoftheformerRPLbuddiessufferedthroughtraffic-filledcommutes.Theybegantosynchronizethattimesotheycouldtalkonthephoneaboutmanythings,includ-ingopportunitiesinthespacebusiness.NooneandEllishadbothencounteredmetallicadditivemanufacturing(3Dprinting)attheirrespectivefirmsbutwereconvincedthatalotmorecouldbedonewiththetechnologythantheywereseeing.Thetwodecidedtomaketheleapandestab-lishacompanythatwouldprintanentireorbitalrocket,eliminatingmostproductionlaborcostsandallowingforunprecedentedflexibilityindesign.NoonesentanunsolicitedinvestmentpitchtocelebrityinvestorMarkCubanandsurprisinglyreceivedacheckfor$500,000toseedfundthecrazy idea. Relativity Space was born!Chapter 9Funding291© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Jenna BryantSource: Jenna BryantNooneandElliswerealsoabletoentertheprestigiousYCombinatoraccelerator.Theysoonraised$14millioninSeriesAfundingfromSiliconValleyVCsPlaygroundGlobalandSocialCapital.Thisroundvaluedthefirmat$35million.Thetwousedthefundstodevelopandbuildtheworld’slargest3Dmetalprintersandwereproducingfull-sizedrocketfueltanksaswellasengines,com-bustionchambers,andnozzles.Performingwell,theywereabletoclosea$35millionSeriesBroundat an $80 million valuation from the same group.In2019,thingsgotseriousastheteamwentfora$100million-plusSeriesCroundfromseveralnewinvestors.Noonenotes,“Thereisadisconnectatthispointwhereyouhavetocommunicateprofessionallytothatclassofinvestor.”Theycloseditwith$140million.Inlate2020,RelativitySpacebroughtinanother$500millioninvestment,andthefirmnowhadavaluationof$2.3billion.Thetwoentrepreneurshadeverythingneededtogotospace.Thefirmhadoperationsgoinginfourstatesandmorethantwohundredemployees.Thatwasexciting,butmanagingallthatwasnotthepartofthestartupprocessthatNooneloved.Hesays,“Ireallyenjoytheriskier‘zerotoone’partoftheprocesswhereyoutakeatotallynewideaandseeifitcanbeturnedintoabusiness.”Jordanhadalsolearnedthathelikedfinanceandcommunicatingwithprofessionalinvestors.ThesameitchforalittlemoreriskanddisruptionthathadattractedhimtotheRPLteamwasworkingonhimagain.Althoughhedidn’thaveanyspecificideainmind,hebegantofeelthathe’dratherbeexploringandfundinganewventureratherthanmanagingandscalingonethatwaswellonitsway to success.Meanwhile,JennaBryanthadmovedtoSouthernCaliforniafromAlabamatofinishadegreeindesignandpursueherpassionasahip-hopdancer.Atthesametime,shepickedupasidegigrecruitingengineersforhard-to-filltechnicalrolesatearly-stagestartups.Throughthis,sherealizedherpassionforworkingwithearly-stagetechcompaniesandtheengineeringcommunityaroundthem.Herfirstmentor,MySpaceco-founderColinDigiaro,encouragedhertotakethisnewlyfoundpassionandturnitintoarecruitingfirmofherown.Shedidthisandquicklyattractedanoverwhelmingnumberofclientsacrosstheentiretechecosystem.ThisalsogottheattentionofRiotVentureswhentheyrelocatedtheirearly-stageVCfundtoLosAngeles.Aftermultipleattemptstorecruithertojointheirfirm,shefinallyagreedtojoinasapartnerafterrealizingtheneedforsome-one like her to improve the venture capital industry.Bryantbeganhosting“secret”eventsinordertoexpandhernetworkof“hardtech”CTOsandtechnicalfounders,andJordanNoonewasoneofthetoptargetsonherlist,givenRelativity’sgrowth.AfterJordanattendedoneofherdefense-focusedevents,theybeganaregulardiscussionaboutthingstheywantedtoseeimprovedintheventurecapitalcommunity.Duringthe2020Coronaviruspandemic,BryantandNoonewereconstantlyonthephone,andBryantsharedherdesiretoformherowninvestmentfirm—with a different twist.Bryantbecameincreasinglymorepassionateaboutprovidingadifferentoptionforearly-stagestartups,drivenbyquestionsshewasaskingherself.“Early-stageinvestingisaboutpredictingwherescienceandtechnologywillmeetinthefuture,andthetechnicalcompetencyandleadershipqualitiesofthefounders.Sowhydomostearly-stageVC’shavepurefinancebackgroundsversushands-ontechnicalandstartupexperience?Early-stagehardtechstartupsneedresourcesbeyondwhatcapitalandconnectionscanprovide.Theyneedexpensivephysicalresourceslikelabspace,rocketlaunchpads,andmanufacturingfacilities.Sowhyistheresomuchdistancebetweenearly-stagestartupsandlargecorporationswhocangrantaccesstotheseresourcesandpossiblyevenbetheirfirstcustomer?Ifdataprovethatdiverseteamsperformbetter,whyistheVCindustrysofarbehind when it comes to diversity?”Shealsonotedthatengineering-focusedentrepreneurslackedafinancialvocabularyandaninitialnetwork.“Thisisthelandofwarmintroductions;nobodygetsanywherenearthemoneyunlesstheyhavetherightfriends.”Thatwasn’tthebestsystemforoptimizingsuccess,anditwasn’tfair.Bryantnotes,“ThelackofdiversityinthetechsectorholdsupamirrortotheVCvettingsys-tem.”292A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Shealsosawthatbigfirmsneededaccesstotheinnovativeculturesofthesmallonesbutcouldn’talwaysdotheduediligenceonthetechnology.Withthisinmind,shedecidedtofocusonthedefensesectorwheretheDepartmentofDefenseandlargeorganizationsdidn’tmeshwellwithtraditionalVCs.Thekeyinthatmarketwastrust,andasasuccessfulrecruiter,sheunderstoodhowto establish that.WhenJordanNoonefinallydecidedtotaketheplungeinthefallof2020andleaveRelativitySpaceonaquesttofindhisnewventure,Bryantwaspracticallythefirstpersontoknowthat.SheimmediatelysawthepotentialofNooneasapartner.Herewasaguywhounderstoodthetechnol-ogyfromhardwaretosoftware,couldtalkfinance,andhadbeenthroughtherealityofbuildingandfundingasuccessfulstartup.WhowouldbebetterattheduediligencethanNoone?Bryantcommentswithawrysmile,“IjustknewIhadtogetJordanonboard;luckyforhim,hewasgame.”Embedded Ventures was about to launch.Chapter 9Funding293© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Endnotes1.SteveJobs’2005StanfordCommencementAddresshttps://youtu.be/UF8uR6Z6KLc.2.Mollick,E.(2014).Thedynamicsofcrowdfunding:Anexploratorystudy.Journal of Business Venturing 29.1, 1–16.3.To date, Elio has not produced a vehicle for sale.4.http://www.wsj.com/articles/inside-apples-broken-sapphire-fac-tory-14164360435.http://europa.eu/youreurope/business/funding-grants/access-to-finance/index_en.htm6.WallStreetJournal,“HowtoShopforaBank,”http://guides.wsj.com/small-business/funding/how-to-shop-for-a-bank/.294A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
CHAPTER 10LaunchingThecriticalingredientisgettingoffyourbuttanddoingsomething.It’sassimpleasthat.Alotofpeoplehaveideas,buttherearefewwhodecidetodosomethingaboutthemnow.Nottomorrow.Notnextweek.Buttoday.Thetrueentrepreneurisadoer,notadreamer.—Nolan Bushnell, founder of Atari10.1Reducing Launch RiskLearning Objectives1.Appreciate that entrepreneurs don’t seek risk but seek to manage it.2.Understand the benefits of various organizational forms.3.Recognize that a partnership is simply a legal agreement.4.Understand that corporations exist primarily to shield individuals from legal liability.5.Understand the tax advantages of S corps and LLCs.6.Understand what a stock option is.7.Understand which forms of business will support acquisitions and IPOs.8.Recognize the purpose of the benefit corporation and the importance of stakeholder theory.9.Understandthatafirmwithaclearpurposeandoperationalgoalislikelytobemoresuc-cessful.© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
existential riskA risk that could result inthe failure (death) of theenterprise.Entrepreneurs do not have to risk their lives as Philippe Petit did tightrope walking the Twin Towers.Source: Alan Welner/APIn1974,aFrenchtightropewalkerandhisassistantsnuckontotheroofsoftheWorldTradeCenter’sTwinTowersinNewYorkCityandtiedacablebetweenthebuildings.PhillipePetitthenfamouslywalkedacrossthegap,over1,000feetabovethecity.Petitwasn’tpaidforthework;infactitcosthimthousandsofdollarsandhisdaringstuntgothimarrested.WhyonEarthwouldany-onedothat?Theanswerappearstobethatsomepeoplethriveonrisk-takingandtheattentiontheygetfromtheirriskybehavior.Popularcultureoftenassumesthatentrepreneursarealsothrillseekers.Smart Entrepreneurs DonÕt Seek Risk, TheyManage ItTheNewEntrepreneurialDynamicrejectstheassumptionthatsuccessfulentrepreneursseekrisk.Ratherthanviewingentrepreneurshashigh-stakesgamblers,NEDviewsentrepreneursasinformedspeculators,willingtoacceptsomelevelofriskwhennecessarybutalwaysendeavoringto minimize it.Minimizingriskmeansanalyzingitandmanagingit.Manyoftheexistentialrisksthatripmanystartupsapartareactually“bakedin”tothecompanyfromitsfounding.Thischapterisaboutavoiding those and setting off on the right foot.The Organizational FormDoyouusetransportationserviceslikeUberandLyft?Aretheridesharedriverstheseappsdeliverindependententrepreneurscontractingwithyoufortemporarywork,oraretheyessentiallyemployeesintheserviceoftheappcompanyyou’vechosen?Thinkaboutitfrombothsidesforawhile, and you should find that the answer isn’t entirely obvious. Is it important?296A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
the gig economyA collection of markets inwhich technology hasreduced the cost ofconnecting customers withindependent contractors,reducing the requirementfor traditional firms andemployment.theory of the firmA collection of economicand organizationalbehavior theories that seekto explain why companiesexist and are structured inthe ways they are.transaction costsThe nondirect costassociated with making atrade for goods or servicesin an economic market.This is not the price of thegood or service itself, butrather the additionalexpense required for eachof the parties to find eachother and settle on agreedterms.ThequestionofwhomanUberdriverisworkingforhaseconomic,legal,andtaximplicationsforUber,thedriver,thecustomer,andforthegovernmentatvariouslevels.It’sbecomeacentralthemeofthedebateoverwhatisoftencalledthegigeconomy,akeyfeatureoftheNewEntrepre-neurialDynamic.Thegigeconomyisreallyacollectionofmarketssuchastransportation,graphicarts,orappcoding,inwhichcustomerscannowconnectdirectlywithindependentcontractorsonanas-neededbasis,andinsituationswherethesecontractorsarenotofficiallyemployedbyanyfirm.Inmanyways,thecontractorisliberatedfromtheburdensofemploymentinthetraditionaleconomybybeingabletochoosethingssuchastheirworkinghours,vacations,andtoolsofthetrade(car,computer).However,theymayalsolosetheguaranteesofsethoursofemploymentandbenefitssuchassickleave,healthcare,orunemploymentinsurance.Thetheoreticalemployer,Uber,oranotherfirm,benefitsfromreducingthecomplexitiesofemploymentassociatedwithsuchthings.Theydon’thavetoestimatemarketdemandandpaydriverstositaroundiftheyarewrong. They are off the hook for a lot of government-mandated benefits, paperwork, and taxes.Itmaysurprisepeople,butmanagementscholarshaveactivelydebatedthequestionof“whydocompaniesexist?”Theseargumentsfallunderthegeneralheadingofthetheoryofthefirm,andformanyyearsmuchofthedebatehascenteredaroundthedifferencebetweencontractingandemployment.Freemarketeconomistshavelongasked,“Whydon’tindividualssimplycontractwitheachotherforproductsandservicestheyneedatthetime?”Oneoftheprimaryanswersinvolvestransactioncosts.RonaldCoaseconcludedthatifthetimerequiredforcustomersandcontractorstosearchforeachotherandnegotiatetermsforeachjobwastooexpensive,afirmwouldthenarisethatwouldorganizethisprocessandreducethecostoftransacting.Forexample,goingtoasupermarketissimplerandcheaperthancontractingdirectlywithfarmers,ranchers,and bakers even though the cost of the goods is actually lower at the source.Inthepast,anorganizedtaxifleet,operatedbyafirmwithadvertisingandcentralizeddis-patchersusingradiostodelivercabs,wasbetterthanwanderingthestreetshopingtofindaride.Ubersimplyremovedthattransactioncostbyleveragingtheubiquityofthesmartphone.Theirentirebusinesswasbasedonthatrecognition,andtheeconomicjustificationfortheexistenceofthetraditionaltaxifirmvanishedovernight.Recallthatinapreviouschapter,itwasnotedhowachange in technology establishes opportunities for new businesses to emerge.Intheend,theenvironmentdeterminesifabusinessaddsenoughvalueforthecustomertosupportit,anditwillalsodeterminehowitisorganized.Thisenvironmentisamixofthemarketforcespreviouslydiscussedandgovernmentregulationsdesignedtoconstrainthoseforces.Inmanyplaces,governmentsreactednegativelytoUberandLyft.Londonbannedthementirelytoprotecttheirtraditionalblackcabservice.Othergovernmentsreactedbytaxingthetransactionsorrequiringtheservicetoprovidecertainbenefitsthegovernmentdidnotwanttoassumethecostfor.Chapter 10Launching297© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
legal formAlso referred to asbusiness structure or legalentity, this is a choiceamong the several definedforms described by thegovernment for purposesof taxation, regulation, andjurisprudence. Thetraditional choices are soleproprietorship,partnership, and variousforms of corporations.sole proprietorshipA business run by a singleindividual for their ownbenefit. In such abusiness, the proprietor isindividually liable for theactivities and the taxes ofthe firm.partnershipAn agreement betweentwo or more individuals orentities to enter intobusiness operationstogether.corporationA legal structure thatcreates an entity withmany of the same legalfunctions as a person forpurposes of distributingproceeds and protectingthe individuals involvedfrom direct liability for thefirm’s actions.fictitious namestatementSeeDBA.DBADoing business as,fictitious name statement,a legal notification that abusiness is operatingunder a different namethan its legal name or ofthe individual founders.liabilityFinancial responsibility fora firm’s action.Whenyouestablishyournewfirm,youwillneedtobeawareofthisenvironmentanddoyourbesttofitboththemarketdemandsandlegalrequirements.Oneofyourfirstmajorchoiceswillbethelegalformorbusinessstructureofyourorganization.Thisreferstowhetheryourfirmwillbesetupasasoleproprietorship,apartnership,corporation,orsomevarianceofthese.Thischoiceisimportantandmustbemadebeforeconductinganybusinessandrequiresthatyouthinkcare-fullyaboutthefutureofyourbusiness.Itwilldependprimarilyonwhomyouplantoincludeinyour business and what you plan to do.What Will You Call It?Ifyougointobusinessbyyourselfwithoutsettingupaspecificlegalstructure,youarebydefaultasoleproprietorship.Thischoiceistheverysimplestandmostcommonformofbusiness.RecallthatinChapter1,itwasnotedthatmostbusinessesintheU.S.hadonlyoneemployee,thefounder.Mostofthose“one-personshops”aresoleproprietorships.Ifyouconductyourbusinessoperationsunderyourownname,theonlyrequirementinmostplacesisthatyoureportthebusinessincomeandexpensesonyourtaxes.Ifyouchoseadifferentnameforyourbusinesssuchas“FancyFarmsGoatMilk,”thenyoumustfileafictitiousnamestatementorDBA(DoingBusinessAs),whichusu-allyinvolvesregisteringatthelocalcountyorcityofficeandplacingapublicnoticeonlineorinalocalpublicationindicatingthatyouaretheresponsiblepartybehindtheoperation.Thepurposeofthisisthatifyourbusinessfailstopayitsbillsordoessomeharm,thoseyouoweorthosewhohavebeenvictimizedcanpursuelegalactionagainstyouasanindividual.That’saconceptcalledliability, and it is a very important point we will come back to.298A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
capitalFunds used to developinfrastructure and acquireresources.ownership stakeAn equity holding (stock) ina company.in-kindProducts or servicestraded directly rather thanfor cash.Launching a partnership is fun, but you needmore than just a group high-five!Source: © Shutterstock, Inc.partnershipagreementA contract betweentwo ormore individualsplanningtomanage and operate abusiness.supermajorityA number larger than 50percent, such astwo-thirds, required bysome voting rules.Ifyourbusinessiscalled“Sally’sPersonalCartoons,”andyouhanddrawcaricaturesofpeoplefromphotostheysendyouovertheinternet,asoleproprietorshipisareasonablebusinessmodel.Tobeclear,Sally’sPersonalCartoonscouldhireemployeesorpaycontractorstohelpdothedraw-ing,butaslongasSallyistheonlyoneputtingincapitalorfundstostartthebusiness,andsheistheonlyoneclaiminganownershipstake,thenshehasultimateresponsibilityandtakesalltheprofitsfromthebusiness.WhathappensifSallywantstoworkwithsomefriendswhocontributesomemoneyorwhoseunpaidworkconstitutesanin-kindvaluethatdeservessomestakeinfuturebusinessoutcomesorownership?IfSallyandherfriendsdecidetostartabusinessanddefinethetermsofownershipandrecordtheirobligationsandbenefitsinaverbalorwrittenagreement,theyhaveformedageneralpartnership.Likeasoleproprietorship,theownersofageneralpartnershiparegenerallyliablefortheworktheydoandallthedebtsandliabilitiesofthebusiness.Again,whileitiseasytosetup,ageneralpartnershipwouldnotbeagoodchoiceforabusinessthatcouldincurany serious liability.A Partnership Is an AgreementWhileinmostplaces,youcanlegallystartapartnershipwithahandshakeorsomenotesscribbledonanapkin,producingacarefullyconsideredandwrit-tenpartnershipagreementisaveryimportantstepinavoidingproblems.Themostimportantpartofapartnershipagreementoutlinesthecontributioneachpartnerwillmakeandtherulesforthedistributionofprofitsnotreinvestedinthe business. Additional critical information should also be included:•Legal name:What is the partnership to be called on legal forms?•Purpose:A brief description of the planned business activities.•Names,identifyinginformation,andcontactinformation:Alistoftheindividualsinvolvedintheagreementandwherecantheybefound.Thisshouldincludelegalnames,datesofbirth,legaladdresses,emailaddresses,and phone numbers.•Capitalcontributions:Thecashandothernoncompensatedcontributionsmadebyeachpart-ner.Thisincludesunpaidlaborandresourceslikecomputers,cars,orotheritemsplacedintothe partnership.•Expectations:Alistofspecificcommitmentspartnerswillmake,usuallyinregardtocon-tributing time or future assets to the partnership.•Ownershipinterest:Thepercentageofownershipagreeduponforeachpartner.Thisobvi-ously must total 100 percent. (SeeChapter 8for suggestions on allocating ownership.)•Distributions:Adescriptionofhowandwhenprofitswillbedistributed.Lossesmayalsobeallocated for tax purposes.•Management:Therulesofhowthepartnershipwillbemanaged.Thismayincludenotingwhethervotingbypartnersisbyownershipinterestorsomeotherformula.Specialrulesmaybe established for things like requiring asupermajorityto remove a partner.•Addition,departure,andremovalofpartners:Rulesforhowthepartnershipmayaddapart-ner,accountforthedeathordisabilityofapartner,forthevoluntarydepartureofapartner,orinvoluntary ejection of a partner.•Dissolution:Definitionofhowandwhenthepartnershipcanbedissolved.Thisshouldincludeadescriptionofhowtheassetsandliabilitiesofthepartnershipwillbedivided.Itwilldocumentwhogetswhat’sleftoverincash,equipment,orcontracts,andwhoisresponsiblefor paying any debts.Templatesforpartnershipagreementsareavailableonline,andtheycanbecreatedusingcom-monlegaltoolsfrompopularserviceslikeLegalZoomandNolo.Ingeneral,ifyouareuncertainofhowtoproceedorifthereareunusualspecialagreementsyouwanttoestablishbetweenpartners,Chapter 10Launching299© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
operating agreementThe rules for running abusiness, includingdistribution of profits anddissolution. See alsopartnership agreement;corporatebylaws.corporate bylawsA legal documentestablishing the rules bywhich a corporationfunctions, including votingrequirements, stockissuance, distribution ofprofits and losses,appointment of officers,and dissolution.liableThe state of being legallyresponsible in law, oftenfor damages caused tosome victim.lienA right to take possessionof a person or firm’sproperty until a debt issatisfied.gettingprofessionallegalguidanceupfrontmaybethebestinvestmentyoumake.IntheUnitedStates,youmightexpecttospend$1,000to$3,000tohavealawyerdraftyourpartnershipagree-ment and help you file the legal documents required to establish your firm.Sometimesthepartnershipagreementisalsoreferredtoasanoperatingagreement.Itshouldbeclearthatanybusiness,largeorsmall,willrequirerulessimilartotheseinordertoavoidconflictbetweenindividualsoverthecontrolanddistributionofprofits.Thebasiccomponentsfromthepartnershipagreementareincludedindocumentsformoreadvancedformsoforganizationsuchas corporations, where they are referred to as thecorporate bylaws.What Do You Plan to Do?Inoursociety,everypersonisfinanciallyresponsibleforanyeconomicdamageorpersonalinjurythattheycauseorcontributeto.Suchdamagescommonlyariseduringautomobileaccidents.InmoststatesintheU.S.andinmostcountries,adriverwhoisfoundtobeatfaultisresponsiblefortherepairstotheotherdriver’svehicleandanymedicalbillstheotherpartygenerates.Youmayalsobesubjectedtoadditionalpenaltiesforcausing“painandsuffering,”andthesecansometimesbeverysignificant.Forthisreason,driversareusuallyrequiredtocarryaninsurancepolicythatissufficienttocoverevenamajoraccident.Youprobablyknowthis,buthaveyouconsideredwhatmighthappenifyouownedapizzarestaurantandthedriverofanuninsuredcampusfooddeliv-eryservicestruckapedestrianwhiledeliveringapepperoniandpineapplepiefromyourshoptoanearby fraternity house?Ifyouoperateabusinessandyourcustomer,employee,contractor,oranyoneelseisinjureddirectlyorevenindirectlybytheoperationofyourbusinessorbytheproductyouproduce,youmaybeliable.Forthisreason,businessesalsocarryinsurance,butthatmaynotbeenough.Imag-inethatSallydecidesthatratherthandrawcartoons,shewillproduceorganic,nonpasteurizedgoatmilkproducts.Pasteurizationisaprocesswherebyafoodproductisheatedtoatemperaturesuffi-cienttokillmostbacteriapresentinthefoodandhasbeenacommonfoodsafetyprocesssincethenineteenthcentury.Sally,however,believesthatthisartificialheatingprocessreducestheinherentnutritionalvalueandruinsthenaturalflavorofdairyproducts.Manycustomersagree,andSallyissuddenlysellingthousandsofpintsofgoatmilkaroundthecountry.That’sgreat,butwhatdoyouthinkmighthappenifalargebatchofherproductweretobeaccidentallycontaminatedwithdan-gerous E. coli bacteria and hundreds of people became ill and several died?It’slikelythatSally’sinsurancepolicycouldnotcoverthedamagesassociatedwiththerashofmajorlawsuitsthatwillsurelyfollowsuchatragicoccurrence.Whenaninsurancepolicyfallsshort,theoperatorofthebusinessisresponsiblefortheremainderofthedamages.Withoutanyfurtherprotection,shewouldliterallyloseeverythingsheownedandlikelyhavealienagainstherfutureearnings,possiblyfortherestofherlife.Giventhatsortofjeopardy,whywouldanyone,nomatter how passionate or meticulous, ever risk entering the food industry?The CorporationIt’shardtoimaginehowyoucouldcauseanyseriousinjurywithabusinesslikeSally’sPersonalCartoons.But,forthegoatmilkbusiness,thereisapreferablelegalform,thecorporation.Acorpo-rationisalegalentity,essentiallyan“artificialperson”forlegalpurposes.Youarecreatinganentitythatwillconductyourbusinessandassumeresponsibilityforit.Youmaybetheownerandoper-atorofthebusiness,butthecorporateentityisresponsibleforitseconomicactionsand,inmostcases,assumesallthelegalliabilitiesgeneratedbythebusiness.Inpracticalterms,thismeansthatifsomeoneispoisonedbysomenastybacteriathatinadvertentlygotintoabatchofSally’sGoatMilk,onlythecompanyislegallyresponsible,andSallyherselfisnot,providedthecorporationhasbeenproperlyformedandmaintained.TheassetsofSally’sGoatMilkwouldbeforfeitedtopaya300A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
corporate veilThe protection fromindividual liability providedto business owners by thecorporate legal structure.Understand how your choice of businessstructure will impact your taxes.Source: © Shutterstock, Inc.Internal RevenueService (IRS)The U.S. federal agencytasked with collectingincome taxes frombusinesses andindividuals.dividendA distribution of a portionof a firm’s profit paid to itsshareholders.judgmentfromalawsuitbythevictimsbutnotSally’shome,car,retirement,etc.Youmayindeedlose your business in such a disaster, but you will not lose your home, car, and future.Thisprotectionofferedbyacorporationisoftenreferredtoasthecorporateveil,anditiswhymostseriousbusinessesarecorporationsofsomesort.Anybusinessoperationsthatcouldconceiv-ablyresultinseriouseconomicorphysicalinjuryshouldbesetupasacorporationfromdayone—beforeanybusinessisconducted.Itcanbetemptingtodoalittlebusinessbeforeyouspendthetimeorpayforincorporation—butdon’t!Ifyouselljustafewpintsofgoatmilkbeforeyougetaroundtothelegalformation,youcouldstillbeatriskoflosingeverythingyouown.Infact,it’sreasonabletoexpectthatproductqualityproblemsaremorelikelytooccurearlyoninthebusinessbefore you’ve built up a great deal of experience.Anotherimportantfeatureofacorporationisthatitcontinuestoexistasalegalentityevenafteritsownersdie.Forthisreason,itispreferredbythosewhowishtoseetheirbusinessescon-tinuewithoutthemandallowforalesscomplextransferofthefirm’sassetstotheirheirs,whosimply inherit the firm’s stock and assume control if that stock represents a majority interest.Who Will Pay the Taxes?Othermotivationsbeyondliabilitywillinfluenceyourchoiceofalegalbusinessstructure.Sinceacorporationisalegalentity,ithastaxobligationsjustlikeaper-son.IntheUnitedStates,atraditionalcorporation,commonlyknownasa“CCorp,”isrequiredtopayincometaxesatthefederallevelandinalmosteverystate.Thismakessensetomostpeoplewhopresumethatbusinessesenjoyingtheprotectionofthecorporatelegalstatus,usinggovernmentinfrastructure(highways,airtrafficsystem,courts),andotherbenefits(militaryprotection,tech-nologydevelopment)shouldberequiredtocontributetogovernmentaloperations.Infact,asofthiswriting,onlySouthDakotaandWyominghaveplacednotaxoncorporateincomeorrevenues.However,manysmallbusinessowners find this extremely unfair. Can you think why?Let’sreturntoSally’sGoatMilkadecadeafteritsfounding.Thegoatmilkmarketisinaboomasanewstudysuggeststhatitmayreducethesymptomsofligma(atragicillnessthevictimsofwhichareprimarilyonlinegameplayers).Thebusinessisnowgrossing$1.2millionayear,andafterallcosts,Sally’sfirmisrecognizingtidyprofitsof$240,000!Sallyhasclearlymadeittotheranksofthewell-to-do.ThereisnoreasonSally’sGoatMilkshouldn’tbepayingitsfairsharetotheU.S.governmentandtheStateofCaliforniawhereSally is headquartered, correct?Sally’sGoatMilk,aCCorp,dutifullyshellsout21percent[1]ofitsprofitsor$50,400totheInternalRevenueService(IRS)and8.84percentor$21,216totheCaliforniaFranchiseTaxBoard.[2]Sally’sfirmnowhas$168,384leftover,andastheonlyshareholder,Sallyissuesadividend,orpaymentofcorporateprofits,toherselfinthatamount.Guesswhat?Sally,theindividual,nowhasincome!TheIRSwouldlike32percent($53,882)ofthat,andCaliforniawouldlike9.3percent($15,660),leavingSallywithjust$98,841ofher$240,000windfall.Herfinaltaxratewaseffectivelyawhopping59percent.Shewillalsohavetopaymanyothertaxesandfees,including15.3percentforthecorporateandpersonalSocialSecurityandMedicarecontributions,reducingheractualincomesignificantlymore.Whilethisisaworst-casescenarioandSallycouldhaveusedmanystrategicdeductionsandothertechniquestolowerthesetaxes,shestillfacesthefundamentalissueofpay-ingtaxestwiceonthesameincome,whichisoftenreferredtoas“doubletaxation”andisthebaneof small business owners around the world.Chapter 10Launching301© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
closely held firmsA company with relativelyfew owners, as comparedto a large publicly tradedcompany that may havemillions of shareholders.shareholdersIndividuals or entities whoown a portion of a firm.optionAn option is an agreementallowing an individual topurchase shares in a firmat a later date for a setamount. They are oftengranted to the employeesof startups, allowing themto participate in the firm ifand when it is successfullysold or goes public. Thismotivates the employeeswhile avoiding thecomplexities of havingmany shareholders duringthe growth state.Luckily,oractually,throughthepoliticalactionofbusinessleaders,therearesolutionstothisproblem,atleastatthefederallevelintheUnitedStates.RecognizingthatSally’sbusinesswouldbetreatedverydifferentlyifitwereasoleproprietorship,theIRSintroducedtheSubchapterSelec-tionor“SCorp”optionforcloselyheldfirms.Acorporationwithfewerthan100shareholders,allofwhomarelegalU.S.citizensorresidents,mayelectthistaxfilingoptionwiththeIRSandessen-tiallyavoidpayingfederaltaxes.Rather,theprofitsorlossesgeneratedbyanSCorparepassedthroughtotheshareholdersofthecompanyfortaxpurposes.ThismeansSallymustpaythetaxesonallofSally’sGoatMilkprofitsonherpersonalincometaxesatherpersonalrate.Shewillnotpayadoubletax.MoststatesfollowtheIRSSCorprule,althoughsome,includingCalifornia,taxatleastaportionoftheSCorpincome.Canyouthinkofanydownsidesforabusinessownerusingthe S Corp structure?Thepersonalincometaxratecanoftenbehigherthanthecorporaterate,particularlyifyourbusinessissmallandyouhaveothersignificantincome(maybefromkeepingyourdayjob).Sec-ondly,whatifyouprefertokeeptheprofitsinthefirmtoreinvestingrowth?Youstillmustpaythefirm’staxesonthemonyourpersonalincometaxfiling!Ifyourfast-growingstartupmade$500,000andyouwantedtoplowitallbackintonewcapabilities,equipment,andadditionalemployees,youcould very well owe $200,000 or more in personal federal and state taxes.ThesetaximplicationscanbeparticularlytroublesomewhenyouhaveseveralownersintheSCorpwithdifferentpersonaltaxsituations.Imagineaquicklygrowingmedicalsoftwarestartup,establishedasanSCorpandhavingthreeshareholders.BeckyandJohan,thefounders,eachhold45percentofthefirm’sstockforatotalof90percentandhaveacontrollinginterestinanycorpo-ratedecisions.Theyhavegenerouslyrewardedtheirtopemployee,Helena,witha10percentshareinthestartup!BeckyandJohanarealreadyindependentlywealthyfromsellingtheirprevioussoft-wareenterprisetoalargecompany.Theydon’tneedanyadditionalincomeandreallywanttokeepthisnewcompanygrowingtoensureanevenbiggerexitandhavedecidedtoreinvesttheentire$1millionintoexpandingtheofficesandrecruitingtopnewdevelopersandsalesstaff.WhileHelenaisthrilledwiththepossibilities,shealsodiscoversthatshehasreceivedaformcalledaScheduleK-1thatinformshershehasanadditional$100,000intaxableincome(10percentofthe$1millionprof-its).Thestateandfederaltaxesonthatincomeareover$40,000,morethanherentiretake-homeincomefortheyear!Inthiscase,Helena’sSCorphasdonesowellthatshemayhavetodeclareper-sonalbankruptcy.Shecouldevenfacecriminalprosecutionforfailuretopayherincometaxes.Intheworstofcircumstances,thefirmcouldfail,andshe’dneverevenseethe$100,000inprofitsshepaidtaxeson,thoughshemightshareinthetaxlossgeneratedatthetimeofthefirm’sfinaltaxfiling. How could such a disaster have been avoided?Thereareseveralwaystoavoidthisscenario,butthemostimportantcomponentiscommuni-cations.OnemightassumethatBeckyandJohandidn’tintendtoruinHelena’sfinanciallifewiththeirgenerousgift.Hadtheyunderstoodthesituation,theycouldhaveagreedtodistributeenoughofthe$1millionsothattheamountHelenareceivedbalancedtheadditionalincometaxsheowed.Ofcourse,everydollargiventoHelenaunderthisplanrequirestheytake$9outofthefirmforthemselves,eveniftheydon’twantthat.OtherstrategiesmightincludeissuinganemployeebonustoHelenaor,ratherthangivingherstockatall,offeringheranoptiontopurchasestocklateratsomegreatlydiscountedprice.Thesetaxissueswillbeexpoundeduponlaterinthetext.Thepointisthattheselectionofalegalstructuremustbecarefullyconsidered;donotchooseonejustbecause it seems the simplest.Still,mostreallybigcompanies,andallpubliclytradedones,areCCorps.OnemightaskiftheSCorpstructureisamechanismwherebysmallbusinessesgainanunfairadvantageoverlargerCCorpfirms.Inreality,verylargecorporationshavebecomeexpertsatavoidingfederalandstatetaxes.Forinstance,GeneralElectriccorporation,consideredbymanytobetheninjaoftaxavoid-ance,hadprofitsofmorethan$40billionfrom2008to2015andpaidnofederalincometax.Infact,GEwasabletostructureitsfinancesinawaytoclaim$1.3billionbackfromthegovernment,aneffective tax rate of -3.4 percent![3]Similarly,whileApplenotesthatitpays40percentonits“U.S.profits,”thefirmhaseffectivelyavoidedmostAmericanandCaliforniataxesforyearsbymovingtwo-thirdsofitsglobalincometo302A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
marginal incomeThe last portions ofincome added to the totalincome of a person or firm.The marginal income isusually taxed at thehighest tax rate.initial public offering(IPO)The first time a firm’s stockis made available toeveryone via its listing on apublic stock exchange likethe New York StockExchange.limited liabilitycompany (LLC)Legal form of businessorganization that protectsthe founders from personalliability and affords“pass-through” taxtreatment at the individualtax rate, avoiding doubletaxation in the distributionof profits. There areseveral variants of the LLCform including theprofessional limited liabilitycompany (PLLC) and thelimited liability partnership(LLP).IrishcorporationsthatarelocatedinobscuretaxhavenslikethetinyislandofJersey,inataxavoid-anceschemethathasraisedtheireofboththeU.S.andEuropeanUnion.[4]Thebottomlineisthatcorporatetaxesamounttolessthan10percentoffederalrevenues,whereaspersonaltaxesaccountforhalfoftherevenues,andagreatdealofthatispaidbysoleproprietorships,partnerships,andSCorps.Entrepreneursoughtnottofeelguiltywhentakingadvantageoflegalstructurestoavoidpaying double taxes.Whilethecomplexitiesofthesetaxstrategiescanbedaunting,worryingabouthowtodistrib-uteprofitsisagoodproblemtohaveforanystartup.Moststartupslosemoneyforthefirstfewyears.Animportantupsideofapass-throughtaxentityistheconversefactthatlossesfromthebusinessflowontothepersonaltaxreturnsoftheshareholdersinproportiontotheirholding.Thismakesthemveryattractivetoinvestorswhoarealmostalwayshigh-incomeindividualslookingforwaystoreducetheirindividualtaxburdens.Whilelossesarenotsustainable,mostinvestorsarehappytoreceiveaScheduleK-1withanegativenumberonitduringtaxseason,directlyreducingtheirmarginalincome,theportionoftheirearningsthatistaxedatthehighestrates.IfSally’sGoatMilkburnsthroughalmostallitsinvestmentsasanSCorp,Sallyandherinvestorswillgetagoodportionofthatmoneybackontheirtaxes.Inthisway,governmentpolicypartiallysubsidizesinvestmentsinriskystartups.Forthisreason,almostallstartupschoosealegalformthatallowspass-through taxation.Lastly,itisworthnotingthatanSCorpcanswitchtoaCCorpsimplybyelectingthatcorpo-rateformwiththeIRS.TheCCorpistherequiredformforapubliclytradedfirm,soifyourorganizationissoambitiousastoplanforaninitialpublicoffering(IPO)ofstockonamajorstockexchange,theCCorpmaystillbetherightchoice.TherearechallengestochoosingtheSCorpform,however. Can you think of what they might be?Other Hybrid FormsAmongthedownsidestotheSCorparethefactthatthetaxobligationsandbenefitsaredoledoutproportionaltotheinvestment.Thisoftenmeansthatastartupfounderwithlittleornoincomeisgettingmostoftheearlytaxlossesfortheorganization.Theselosseswouldbebetterallocatedtothefirm’shigher-incomeinvestors.Additionally,someinvestorscannotinvestinanSCorpatallbecauseoftheirownlegalformsornationality.TheSCorplimitsshareholdersto100U.S.citizensorpermanentresidents.Forinstance,partnershipsmaynotbeownersofstocksinanSCorp.Manyangel investor groups form partnerships or similar legal forms to co-invest.Forthesereasons,anotherlegalformcalledthelimitedliabilitycompany(LLC)wasdevel-oped.TheLLCisessentiallyapartnershipthatalsoprovidessimilarprotection(thoughnotasthoroughasacorporation)ofpersonalassetsfrombusinessliabilityandtheabilitytoelectSCorppass-throughtaxstructure.TheLLCallowsforavoidanceofdoubletaxationwhilebeingmoreflex-ibleonownershipanddistributionoftaxes.TheLLCcanincludepartnerships,corporations,andforeign persons as owners.Scorporationsmayavoid“self-employmenttax”byreportingtheowner(s)asemployee(s)withstandarddeductionsforFICAtaxes(SocialSecurityandMedicare).Corporateearningsaftera“rea-sonable salary” can be treated as unearned income that is not subject to further FICA taxes.OneoftheleastdiscussedandmostimportantadvantagesoftheLLCisthatitcandivideown-ershipintoclassesfortaxpurposes.IfSally’sGoatMilkisanSCorpandburnscashduringitsgrowthphaseandgeneratestaxlossesthatpassthroughtoitsowners,SallyisthebiggestrecipientofthoselossesbecausethetaxableprofitsorlossesaredistributedontheK-1inproportiontoown-ership.Asfounder,Sallyisstillholdingthemajorityofthecompany’sstock.Herinvestors,whoowna minority share in the firm, get lesser losses. Can you think of any problem with that?Asanentrepreneurworkingfulltimeonastartupthatisnotyetmakingaprofit,Sallydoesn’thavemuchincome.Shedoesn’tneedataxlossrightnow.Herinvestors,however,arehigh-incomeindividualsandwouldlovethatloss.Infact,it’soneofthemostattractiveshort-termreasonsChapter 10Launching303© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
toinvest.TheLLCsolvesthatbyallowingprofitsandlossestobeallocatedasthemanagementseesfit.Thatmeanstaxlossescangotoinvestorswhocanapplythemnow.Inthefuture,taxprofitsmightgotolow-incomeshareholderslikeSally,whoareinlowertaxbracketsandareworkingforthefuturereturnsofthecompany.Thisallowsmoneytostayinthefirmforgrowthwhilenotpunishingthehigh-incomeinvestors.Doingthis“taxdance”optimallyandlegallywillrequireconsultingwithalltheinvestorsbeforetaxseasonunderthesupervisionofanexperiencedaccountant.Finally,thelegalrequirementsofanLLCaresimplerthanwithanSCorp.Corporationsarerequiredtoengageinproceduresthatincludemaintainingaboard,electingofficers,conductingmeetings,andrecordingminutes.Inpractice,theserequirementsarerelativelysimple,buttheymustbedone.Thepartnership-likeLLC,ontheotherhand,requiresonlyanoperatingagreementandverylittlefollow-through.Ingeneral,mostnewstartupschoosetheLLCform,andinmostcases, it is probably the preferable choice for the widest variety of firms and circumstances.ItismoredifficulttomoveanLLCtoaCCorpshouldyoudecidetoissueanIPOatafuturedate.LLCsarealsorequiredtouseaccrualaccounting,whereasanSCorpcanfiletaxesonacashoraccrualbasis.Aswillbediscussedinfuturechapters,flexibilityinthisreportingoptioncanenablestrategies to reduce tax obligations.Still Other FormsIntheUnitedStates,corporatelawisastate-levelfunction,andvaryfromstatetostate.TherearealsosomeexoticvariationsontheLLC,suchastheprofessionallimitedliabilitycorporation(PLLC),whichexistsinsomestatesspecificallyforcertainprofessionslikelawyers,accountants,andengi-neers.Californiahasaspeciallimitedliabilitypartnership(LLP)structureforonlyaccountantsandlawyers;otherprofessions(asdefinedbystatelaw)mustoperateunderaformcalledtheprofes-sionalcorporation(PC).NeithertheLLPnorthePCprovidesfulllegalprotectionforprofessionalsasthestatewishestokeepdoctors,accountants,andothersresponsibleformalpractice.Thisisasituation where one should engage experienced legal advice.304A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
benefit corporation(B Corp)A corporate form createdspecifically for firms with asocial mission.socialentrepreneurshipA business with a missionto do some social or othergood in addition to itsefforts to generate profits.stakeholdersIndividuals or entitiesholding an interest in theactions and success of anenterprise. These mayinclude employees,shareholders, customers,community members, etc.stakeholder theoryThe concept thatmanagement has anobligation to consider theinterest of additionalparties beyond just theshareholders.Earning Profits for the Benefit of OthersThebenefitcorporation(BCorp)isarecentlegalstructurerecognizedinsomeU.S.statesfortheincreasingnumberofsocialentrepreneurshipbusinesses.Thisorganizationalstructurehasapri-marygoalofservingasocialneedratherthanbeingentirelyfocusedongeneratingprofitsforstockholders.Thetrendbeganin2011,andasofthiswriting,theBCorpisrecognizedinthirty-threestatesandtheDistrictofColumbia.Theassumptionthatafirmhasobligationstoavarietyofstakeholders,includingitscommunity,nation,andtheenvironment,hashistoricalrootsinthemanagementconceptofstakeholdertheoryadvancedbyR.E.Freeman[5]andtheolderpoliticaldoctrineofcorporateresponsibility.However,inrecentdecadesagrowingperceptionamongbusi-nessleadersandeducatorshasbeenthatafirmislegallyboundtomaximizeshareholdervalue,andanythingthatdistractsfromgeneratingprofitsandreturningthemtoinvestorscouldbeseenasmismanagement.Canyouseeanypotentialproblemwithholdingthemanagersofallfirmsresponsible for generating maximum economic returns?TheBCorpisanefforttoprovideprotectiontocorporateofficersandmanagerswhowanttoprioritizeotherstakeholdersorevenoutsidebeneficiariesoftheirfirm’seffortsoverreturnoninvestment.Tobeclear,aBCorpisnotacharity;itisarealprofit-generatingbusinesswithinvestors.EstablishingafirmasaBCorpsignalstoinvestorsthattheyshouldexpecttheirinvest-mentstobeusedtodosomesocialgoodaswellashopefullyreturnprofits.Forexample,aBCorpmightsimplygiveawayaportionofitsprofitstoneedyindividualsortocharitiesthatalignwithitsfoundingvalues.Itmayalsoconductarelativelynormalbusinesssuchasrunninggrocerystoresbutisintentionallylocatingthosestoresinunderservedoreconomicallydepressedareasthatofferlowerprofitsandgreaterriskoffailure.ABCorpmightchoosetoemploydisadvantagedworkers,suchasconvictedfelons,seniors,orthosewithdisabilities,whomightnototherwisebeable to find steady work.Tofurthercomplicatethings,thereareavarietyofnewvariationsontheBCorpmodelinsomestates,includingthebenefitLLC(BLLC)andthelow-profitlimitedliabilitycompany(L3C).Thescopeofthistextandthedynamicallychangingenvironmentfortheselegalformsdon’tallowfordetailingalltheoptionshere.Ifyouareinterestedinasocialentrepreneurshipstartup,youshoulddosomeseriousonlineresearchandreachouttoyouraccountingandlegalprofessionalsbeforechoosing a status.Chapter 10Launching305© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
LegalLegalPersonalPersonalAssetAssetIncomeIncomeTaxTaxIncome TaxIncome TaxFormFormPerpetualPerpetualDurationDurationLiabilityLiabilityProtectionProtectionRateRateAllocationAllocationOwnershipOwnershipFormalitiesFormalitiesSoleSoleProprietorshipProprietorshipNoNonePersonalRate100%1 personNonePartnershipPartnershipNoNonePersonalRateBy %ownershipSeveralPeoplePartnershipAgreementC CorpC CorpYesVeryStrongCorporateRateToCorporationManyPeople,PartnershipsorCorporationsBylaws,Board,Meetings,FilingsS CorpS CorpYesVeryStrongPersonalRateBy %Ownership100 U.S.Citizens orResidentsBylaws,Board,Meetings,FilingsLLCLLCMaybeStrongChooseAs DesiredManyPeople,Partnerships,orCorporationsOperatingAgreementB CorpB CorpYesStrongChoose Cor S CorpCorp or %OwnershipC or S CorpBylaws,Board,Meetings,FilingsStart Wisely with the First Step, Regardless of Where YouDo BusinessSpecificexamplesfromtheU.S.aredescribedhere.LegalformsintheUK,Europe,andotherdevel-opedcountriesaresimilar,butsubtlydifferent,particularlyinregardtotaxes.Also,remembertheserulesareconstantlychangingatthenationalaswellasthestateorprovinciallevels.Besureyouunderstandyourcurrentlocallawsbeforechoosingalegalform.FormoredetailsontheAmeri-canrules,extensiveonlineresourcesfromthegovernmentagenciesandvariousbusinessadvisorysitescanhelpexplainthemfurther.TheU.S.SmallBusinessAdministration(sba.gov)andtheIRShavewebpagesanddownloadabledocumentsoftheselegalforms.PopularbusinesswebsiteslikeInvestopediaandForbesdoaswell.Finally,onlineprovidersoflegalserviceslikeLegalZoomandNoloalsooffervaluableinformationatnocost,thoughtheydowishtosellyouadditionalservices.IntheUnitedKingdom,CompaniesHouse,agovernmentresource,providesextensiveinfor-mationonformingstartupsonline.[6]TheFederationofSmallBusinesses,orFSB,isanonprofitmembershiporganizationforsmallbusinessesthatalsooffersawealthofinformation.[7]IntheEuropeanUnion,theYourEuropesiteoffersinformationonstartuprulesandtaxeswithlinkstoindividual EU nations.[8]Intheend,youshouldprobablyconsultwithanexperiencedaccountantandlawyerwhounderstandsyourlocallawsandtaxrulesbeforeyouchoosealegalformforyourstartup.Aninvestmentinafewhundreddollars,pounds,oreurosofprofessionalservicesmayhelpyouavoidthousands in liabilities or taxes later.306A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
electronic medicalrecord (EMR)An enterprise softwaresystem designed to recordand track medical patienthealthcare information.spinoffA startup that is launchedfrom an existing company.synergyThe additional benefit thatarises whencomplementary parties orideas come together in aneffort.Not All Startups Are 100 Percent FreshImaginethatSallyhasorganizedSally’sGoatMilkasanLLCandthendiscoversthatcamelmilkisagrowingmarketwithadedicatedbaseofhealth-consciousconsumers.Shedecidestotrydistrib-utingproductsfromthehumpedungulatesalongwithherfamousgoatmilk,cheese,andbutter.Doessheneedtoformanewcompanytodothat?No,shedoesnotneedtoformanewcompany.Infact,SallycoulduseherLLCtosellanythingfrommusictomedicalsoftwareifshesochose.However,whileitmightjustbeaweirdenoughmonikerforanalternativerockband,thehealth-careindustryisn’tlikelytotrustanelectronicmedicalrecord(EMR)fromacompanycalledSally’sGoat Milk.SallymayjustbethenextSteveJobsorElonMusk,aparallelentrepreneurabletosimultane-ouslytacklesomeverydiversemarkets.ButtherearemanyreasonsthatJobsnevermergedPixarwithAppleandthatMuskkeptTeslaandSpaceXgenerallyseparate.Aprimaryreasonisthattheinvestorsforeachventurecanbeverydifferent,andtheirexpectationsofanexitstrategymayvary.Can you see how this applies to Sally’s situation?ImagineSally’sinterestinhealthoutcomesleadshertoenvisionawholenewconceptforaholisticEMR.ShestartsworkingonitwithresourcesfromSally’sGoatMilk,butitquicklybecomesclearitcan’tstaywithinthegoatmilkbrandoroperation.Todothis,SallyisrequiredtofileanadditionalfictitiousnamestatementorDBA,lettingtheworldknowthatherLLCisbehindHolo-Health.Unlesstheygolookingforpublicrecords,nohospitalwillknowthatHoloHealthstartedasagoatmilkdistributor.CanyouseeanyproblemsthatmightdevelopasSallygrowsboththemilkand tool sides of her business?Sally’sGoatMilkbusinessmayrequireonlyafewhundredthousanddollars,anditsfriendsandfamilyinvestorsarelikelytobesatisfiedtakingprofitsoutovertime.HoloHealth,ontheotherhand,willrequiremillionsofdollarsinproductdevelopment,marketing,andsalestopenetratethedemandingandhighlyspecializedmedicalsoftwaremarket.TheinvestorsinHoloHealthwillexpectabigexitintheformofanIPOorsaleofthestartuptoalargerfirmforbillionsofdollars.ThecorporateformforHoloHealthwillprobablybeaCCorpwithaformalboardofdirectorswhohaveabsolutelynoexpertiseorinterestinthegoatmilkbusiness.SallyneedstosetupHoloHealthasaseparatebusiness,evenifshebringssomeofheroriginalteamorresourcesintothenewcom-pany.Spinoffs, Distractions, and FocusIfacompanystartsabusinessandthendecidestomakeitaseparateoperationbecausemanage-mentbelievesitwillcreatemoreshareholdervalueoperatingseparately,thisfirmiscalledaspinoff.Canyouthinkofanyfamousspinofffirms?UnitedAirlineswasaspinoffcreatedbyentrepreneurWilliamBoeingtoensurealargecustomerforhisairplanebuildingbusiness.Heachievedthisviatheacquisitionofanumberofsmallaircarriersaround1930.UnitedhadobvioussynergieswithBoeing,andthatmakesalotmoresensethanSallyheadingoffintohealthcaresoftware.Sally’sHoloHealthmustgrowlargerthanitsparentcompanyandhasnosynergy.ItwillsuckresourcesandSally’stimefromthegoatmilkbusiness,puttingbothstartupsatrisk.Entrepreneursarenatu-rallycuriousandcreative.Theyareconstantlycomingupwithgreatnewideas.Distractingthemselvesbyfollowingunrelatedbrilliantideasthatdonotprovidevaluetotheircorebusinessisoneofthemostcommonwaysthatentrepreneurssabotagetheirownstartups.Alaserfocusonyourcorebusinessandrejectingdistractingopportunitiesisacriticaltacticinminimizingtheriskduring the launch of a new startup.Sometimes,however,aspinoffisagreatopportunityforanentrepreneur.Let’ssayyou’rework-ingonateamatalargefirmbutfeelingyourentrepreneurialoats.Youandyourcoworkershavebeenkickingaroundoneofthesegreatideas,butmanagementsaysitistoounrelatedandtoodis-Chapter 10Launching307© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
tractingforthefirmtopursue.Ratherthanbeingfrustrated,thismaybejusttheopportunityforyoutolaunchanewventurewithsomewindatyourback!Gotoyoursupervisorsandsay,“Thisisahugeopportunity,somebodyneedstodoit,andwecangeneratevalueforourshareholdersifwedoitinaspinoff.”RandyKomisar,whowrotetheprefacetothisbook,seizedjustsuchanoppor-tunitywhenhewasatApple.In1987RandycofoundedanApplespinoffcompany,Claris,withthemissiontodevelopalineofqualitysoftwareforApple’scomputerlinethatwouldnotdirectlycom-petewithApple’sthird-partydevelopers.Applefundedthestartupandprovidedreadyaccesstocustomers,anystartup’sdream.Claris’softwarepackages,particularlyit’sFileMakerdatabase,werebighits,andRandynettedseveralmilliondollarswhenthefirmwassold.Thebuyer,ironically,wasApple!Key Takeaways•Approach risk rationally.•Make a wise choice on your organizational form upfront.•Plan for the tax considerations of your choice of organizational form.•ConsiderformingaBCorpifyouwouldlikeyourbusinesstobegroundedindoingsocialorenvironmental good.•It may be worth spinning off operations that distract from your firm’s core mission.10.2Getting GoingLearning Objectives1.Understand what you can accomplish in launching a startup while remaining employed.2.Recognize the value of developing written agreements.3.Be familiar with the common causes of company failure.4.Understand the value of establishing efficient communications norms in a startup.5.Understandwhyinsuranceisimportantandthevarioustypesofinsuranceastartupmayrequire.6.Understand the basic options for startup facilities.Leaving Your Comfy Day JobOneofthewaystomitigatetheearlyriskofyourstartupgoingbankruptistoworkanotherjobtopayyourownbillssoyoucaninvestsometime,withoutpay,intothestartup.Thechallengehereisthatyouarenotgiving100percenttoeitheryouremployeroryournewventure.Ifyourbusinessisanythingmoreambitiousthansellingsomestuffonlineinyoursparetime,therehastobeapointwhenyouwillcutthecord.Ontheotherhand,youmayhateyourcorporatejobsomuchthatyouarefartooeagertorunawayandjointheentrepreneurswithoutadequatelyplanningfortheharshreality of self-employment. How do you know when it’s time to risk it all on your new venture?308A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
pre-salesSelling products orservices in advance forprepayment. A popularway to improve smallbusiness cash flow.Choose the moment to leave your corporate job carefully.Source: © Shutterstock, Inc.Rememberthequote,“Customersarerequired;everythingelseinabusinessisoptional,”fromChapter2?Itshouldbeyourguidehere.Onceyoucanbefairlyconfidentthatsomebodywillpayforyourproductorservice,youcantaketheriskofinvestingtimeandmoney.Theprocessofcustomerdiscoverycanbeconductedrelativelyeasilyasapart-timepursuitbecauseit’sanasyn-chronousactivitywithascheduledrivenbyyou.Manyotherformsofmarketingcanbeeffectivelyaccomplishedonline,anytime.BasicR&Dandinitialproductdesignanddevelopmentofamini-mumviableproducthavebeenfamouslyaccomplishedbyfolkswithotherjobs.SteveWozniakwasworkingatHewlett-PackardwhenhedesignedandbuiltthefirstApplecomputer.Youcanlineupyour suppliers and get your bank accounts ready.Recruitingthecriticalmembersofyourstartupteamissomethingyouneedtodobeforeyoulaunch.RecallwhatyoulearnedfromNoamWassermaninChapter8aboutthemosteffectiveteams?ProfessorWassermantoldusthatteamsformedfromformercoworkersareoftenthemosteffective.That’swhymanystartups,eveniftheyarenotofficiallyspinoffs,emergefromwork-groupsinlargercompanies.Thisgivesyoutimetoestablishrelationswithyourbanker,lawyer,accountant, and other professionals.Mostimportantly,youcanoftendosomeinitialpre-sales,gettingsolidpurchaseordersbeforedeliveringtheproductorservice,withselectcustomers,aslongasyourregularworkisthesortthatwillallowyoutorespondpromptlytocustomeropportunities.It’sawholelotmorecomfort-abletostepawayfromyourjobnestandflyintoentrepreneurshipwhenyouhavesomerealcommitments for cash under your wing!However,onceyoustartdeliveringproducts,everythingflips,andsuddenlyyoumustbeavail-abletorespondtoyourcustomers’needsandontheirschedule.Exceptforbusinessesthatareentirelyonline,it’sdoubtfulyoucanaccomplishthissatisfactorilyandholddownanotherjob.Anideathatfrequentlyoccurstohighlypaidentrepreneurs,likeskilledengineersholdingdowngoodjobs,istorecruitapartnerorhireanemployeetoworkfull-timehandlingsalesandcustomersup-portwhiletheycontinuetoworktheirdayjob.Thissoundslikeadreamsolution,butinreality,itisnearlyalwaysarecipefordisaster.Suchanarrangementusuallyproducesdismalfinancialresultsbecausethepersonmostqualifiedtopitchtothebestcustomersisobviouslynotfullycom-mittedtotheproductorservicebeingsold.Additionally,thearrangementispracticallyengineeredChapter 10Launching309© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
It is far better to do the legal work before thereis a disagreement.Source: © Shutterstock, Inc.tobreedresentmentbetweenthepartnersoremployerandemployee.TheNewEntrepreneurialDynamic requires full commitment.Preventing a LawsuitEverybusinesshasmultipleimportantstakeholders;owner(s),customers,ven-dors,employees,familymembers,andspousesaresomeofthemostimportantones.Oftenwhenbusinessesfailordoexceptionallywell,someofthesestake-holderswillconcludetheyhavenotbeentreatedproperly.Partnerswantbiggersharesfortheircontributions.Customerswanttorenegotiatepricing.Vendorsdesirebetterterms.Familymembersmayfeeltheycontributed.Finally,spousesandsignificantothershavebrokenupasmanybusinessesastheyhavebands.Whilesomeoftheseconflictsareunavoidable,thevastmajoritycanbepreventedwithalittleforesight,goodcommunications,anopen-doorpolicy,andsolidwrit-ten agreements. Let’s look at these points one-by-one.Avoiding DisasterAsthesayinggoes,“Alwaysexpecttheworst,andyou’llneverbedisappointed.”Trynottodepressyourentrepreneurialspiritbeforeyoulaunchyourfirm,butbewiseandspendsometimeimagin-ingeverythingthatcouldgowrong.IfyouGoogle“reasonsthatbusinessfail,”you’llfindalonglistofarticlesandstudiesofferingthetop5,10,or20causesforfailure.Themostcommonofthesearesummarized next.Lackofcash:Thebusinessequivalentof“cardiacarrest,”runningoutofmoneyistheprox-imatecauseofdeathfornearlyeverystartup,oftenjustwhentheyfeeltheywereabouttoturnthecornertoprofitability.It’sextremelyraretofindanentrepreneurwhocorrectlyanticipatedalltheproblemsandopportunitiesontheroadahead,mostofwhichneedtobeaddressedbyspend-ingmoney.Consequently,mostbusinessplans,pitchdecks,andcocktailnapkinsunderestimatetheinvestmentrequired.Ifyoucan,raisealotmorethanyouthinkyouneed.AsmentionedinChap-ter18,“Cashisking.”Thatsaid,donot“livelarge”asastartup.Manydotcomfirmsdemonstratedthatthesenseofwealthcreatedbybiginvestments,whenspentlavishlyonfacilitiesandgoodies,undermined productivity. Plan to keep money in the bank but operate like it isn’t there.Lackofcustomers:Manyentrepreneursfallinlovewiththeirproduct,anddiscoveringthatnoteveryonefeelstheneedorevenwantsitcomesasabrutalshock.Failuretotakeseriouslythecustomerdiscoveryandproduct/marketfitconceptsdiscussedinChapter4andChapter5hasrunmorebusinessesoutoffundsthananyothercause.Typically,whathappensisthatcustomerdis-coverygetsdoneontheflyafterthefirstproductisbombingintherealmarket.The“postmortem”suggeststhatthebasicbusinessconcepthasmeritbutwasn’tpresentedinawaythatwaspalat-abletoconsumers.Apivotormajoriterationisrequired,andanewdevelopmentcycleburnsthestartup’scash.Newmarketingandsaleseffortsareinitiated,andliabilitiesgrow.Justascustomerordersbegintotricklein,thefirmfindsitselftoolowonfundstocontinue.Doyourcustomerhomework up front. Get some pre-sales in hand before you launch.Wrongteam:Theoriginalgroupoffriendsthatwerehangingaroundwhenthefounderorco-foundersconceivedthebusinessishighlyunlikelytobetheverybestteamfortakingtheproducttomarket.Alltoooften,entrepreneursgrabtheresourcesmosteasilyavailabletothem,includingpackingthestartupwithacadreofbuddieswhohappentohavetimeontheirhands(awarningsign).Later,theharshrealitiesofproductandcustomerdevelopmentdemonstratethatexperi-encedexpertsarerequired.Removing,demoting,orreassigningthewrongpeopleonthestartup310A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
switching costsThe nondirect costsgenerated when acustomer changes fromone product to another,most often the time spentadapting to a new system.teamlaterispainfulandexpensive.It’sadistractionandcostthathasdrivenmanyapromisingfirmintobankruptcy.Doyourresearchaboutwhatskillsyouwillneedandgetthebestfromthestart.Bebrutallyhonestwithyourselfupfront,anddisappointmentwillbeavoided.Beclearaboutwhois“justhelpingout”andtowhomyouhavemadeacommitmentforfullparticipationinyourstartup.Teamdysfunction:Sometimes,evenagroupofhighlyqualifiedindividualswillproducespec-tacularlydisastrousresults.Abandcomposedentirelyofall-stars,withtheiraccompanyingegos,isunwieldy.Findingtherightpeopleandmanagingthemaretwodifferentskills.Inadditiontoselect-ingthebest,youwanttocarefullyconsiderhowyouwilldeploythemandkeepthemsatisfiedwiththeirjobs,pay,andequitystakes.Understandallthepersonalitiesinvolvedinyourendeavorandhowtheyarelikelytobehaveunderseriousstress.Planwaystokeepyourteamalignedandcohe-sivefromthestart,asteam-buildingexercisesappliedafterconflictsemergeareusuallydoomedtofail.Thesetechniquesarebestappliedproactively,sobudgettimeandmoneyforthemfromthestart.Lackofdynamism:Theonlysurelypredictablethingaboutlaunchingabusinessisthattheunpredictablewilloccur.TheNewEntrepreneurialDynamicassumesthatmoststartupswillneedtopivotoriteratetheirproductorserviceinsomesubstantialwayinordertomatchtheirmarketandsurvive.Flexibilityinattitudeandorganizationalstructurearethekeyelementsforsurvivalinthesecases.Additionally,manysuddenbusinessfailurescomefromunanticipateddisastersthatcanrangefromtheemergenceofawell-fundedandsuperiorcompetitortoactsofGodlikefloodsorearthquakes.Rigidbusinessesrapidlycollapseundersuchcircumstances;dynamiconesquicklyadapt, relocate, or reorient and survive.Good CommunicationsEnsuringthatateamholdstogetherandisrowinginthesamedirectionalwaysdependsonrapid,continuous,andeffectivecommunication.Whatthismeansisthateveryoneinthemanagementteamknowswhattheyneedtoknow.Italsomeanstheyaren’tburdenedwithuselessinformationortrappedintime-consumingmeetingsaboutthingstheydonotneedtoknow.Establishingpro-tocolsandsystemswherepeoplecancommunicateactionabledatatooneanotheriskeytothesuccess of your organization.Inanexampleofproactivelymanagingnegativecommunications,ElonMuskfamouslysentanemailtoTeslaemployeesencouragingthemtoavoidfrequentandlargemeetingsandtowalkoutofanymeetingordropanycallwheretheyfelttheywerenotaddingvalue.[9]Thisisverysoundadvice.Toavoidthesemeetings,calls,andunmanageableemailboxes,considerusingmoderndigi-taltoolsthatallowopenaccesstocommunicationsbutmanagethemthroughorganizedandsearchablethreads.TheSlackappisagreattoolforstartupteamstocoordinateandcommunicate.Whateveryouchooseforcommunicationsstandards,choosewiselyandwithintent.Ifyoudonotdefinecommunicationsstandardsandestablishacommunicationsculture,haphazardsystemsandinefficientnormswilldeveloporganicallyasyourfirmgrows.Ifyouaddressthislater,youwillencounterculturalresistancetochange,andtheswitchingcostsofmovingtobettersystemswillbe very high.Open Door PolicyElonMusk’semailtoTeslaemployeesalsostated,“Communicationshouldtravelviatheshortestpathnecessarytogetthejobdone,notthroughthe‘chainofcommand.’”Muskcarriesthisacrossfirms.InhisofficeatSpaceX,hesitsatadeskinanopencubiclethatanyonecanwalkrightupto.Of course, the bearer of news had better have a really good reason to bother the CEO.Chapter 10Launching311© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
side agreementsAgreements made aboutthe future operations,transfer of ownership ordistribution of profits, etc.,in a business that are inaddition to the regularpartnership agreement orcorporate documents.Inadditiontoenablingbetterdecision-making,anothergoodreasonforhavingsuchan“opendoor”policyisthatresentmentandconflictinvariablybuildwithinorganizationswhereexecutivemanagementisseparatedfromthosedoingthework.Asfunasitmightbetobuildanexclusiveexecutivesuite,thatsortofclosed,status-drivenenvironmentistoxictoinnovationandtothedynamismayoungfirmneedstosurvive.Everyoneinyourorganizationneedstobeavailableandresponsive.Buildthatexpectationintotheculturefromdayone,andestablishitwithphysicalfacilities that are open and inviting.[10]Solid Written AgreementsManyofthethingsthatgowronginanorganizationcanbestbepreventedormitigatedbytheeffectiveimplementationofwrittenagreements.Aspreviouslynoted,anagreementisrequiredtohaveapartnershiporoperatingagreement,andacorporationhasbylaws.Toooften,entrepreneurseagertorolluptheirsleevesandgetdowntoworkeschewthedrudgeryofdraftingthesedocu-mentsandcopyboilerplatesfromtheirlawyersorsomeonlineresourceinanattempttofilltheminimumrequirementsforrunningtheirbusiness.Thesegenericdocumentsdon’tactuallydealwiththeissuesthataremostlikelytoarise.Anumberofwrittensideagreementsshouldbecon-sidered with any new business. Among these are the following.Buyoutagreement:Startupsbenefitfromthoseactivelyworkinginthefirmhaving“buy-in”or“skininthegame”intheformofownership.Absenteeownershipdilutestheinfluenceofthoserunningthefirmindeterminingdirectionandisoftendistracting.Ifyousetupyourinitialequitysplittodaywiththeassumptionthateveryonecurrentlyengagedwillremainengagedandnosig-nificantnewplayerswillenterthefirm,you’rewrong.Someonewilldecidetheyhavetotakeagreatjobofferelsewhere,relocatewiththeirspouse,ortheymightevengetillordie.Abuyoutagreementensuresthatwhenacofounder,partner,orothermajorstockholderleavesthefirm,theyleavetheirstockbehindaswell.Suchanagreementshouldincludeamechanismfordeterminingthecircum-stances triggering a sale, a formula for the valuation of the stock, and a schedule for payments.Forexample,imagineSally’sbrotherhasjoinedherinrunningSally’sGoatMilk.ShehasdecidedtogiveJimagenerous30percentofthestockinherfirm.Sheworries,however,thathemightjustdecidetoreturntohisoldjobifthegoatmilkbusinessdoesn’tproducequickreturns.SallydraftsanagreementwithJimthatrequiresthestocktobereturnedtothefirmifheleaves.Inreturn,hereceivesapromissorynoterequiringthecompanytopaytheaccountingbookvalueplus10percentofnetprofitsaftertaxesforthecurrentyearandpromisestodosoonamonthlybasisoverthreeyearswithoutinterest.Theagreementallowsthecompany’sboardtoconsiderexemp-tionstothispolicyonacase-by-casebasis.Thisclausecouldavoidforcingadisagreeabledecisionin the case of a protracted illness or even the sale of the company.Noncompeteagreements:Oneofthecommondisastersthatbefallssmallfirmsishavingakeyplayerdesertthefirmandjoinaneworexistingcompetitor.Whentheydothis,itisalmostimpos-sibleforthemnottotakeideas,connections,andgoodwillfromyourfirmwiththem.Intheworstcases,theymayblatantlyabscondwithintellectualproperty,poachkeyemployees,andstealyourbestcustomers.Anoncompeteagreementisdesignedtopreventcriticalindividualsfromworkinginyourfirm’smarket,usuallydefinedbyindustryandgeography,forsomeperiodoftime.Inmanyjurisdictions,California,forexample,suchagreementsarenotoriouslydifficulttoenforce.However,theywillatleastmakeitcleartoindividualsconsideringleavingthatyoudon’tfindthatagreeableandwillfight.Itmayalsobeagreeabletobackthisstickwithacarrotintheformofaconcretefinancial incentive such as a bonus payable some years from now.Spousalagreements:Aspousalorsignificant-otheragreement,oranagreementwithanyindi-vidualorentitythatisheirtooneofyourkeystockholders,isdesignedtokeepstockinthefirmandensurethatyoudonotfindyourselfinbusinesswithadisinterestedorevenhostilemajorstock-holder.312A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
insurance premiumMoney paid regularly toprovide insurancecoverage.RecallthatSally’sbrotherJimhasjoinedSally’sGoatMilk.KeepingownershipinthefamilyappealstoSally,butshereallyisn’tonthebesttermswithJim’swife.Recognizingthatifherbrothereverdivorcedordied,hersister-in-lawwouldacquireasignificantamountofcompanystock,SallyrequiresJimandhiswifetosignanagreementstatingthatthestockcannotbeownedbyanyonenotworkingatSally’sGoatMilk.Thespousalagreementmirrorsthepaymenttermsofthebuyoutagreement.WhileJim’swifelikelyresentshavingtosignsuchanagreementinthefirstplace,sheisjustaslikelynottowanttoworkwithSallyifherhusbandpasses.Withthissolution,herinterestsare protected, and a difficult process is avoided during a stressful time.Noneofthismeansthatyoucan’tchoosetobenicerthanyouragreementsrequire,andtheNewEntrepreneurialDynamicencouragesgenerosity.It’ssimplyalwaysbettertoletrenegotiationofterms,includingthehandingoutofadditionalsharesorfunds,tobeseenastokensofyourper-sonal munificence rather than the grudging accession to lawsuits or threats.InsuranceInsuranceisoneofthemostobviouswaystohedgeagainstpotentialproblemsinyourcompany’sfuture.Youshouldconsideralargenumberofinsuranceoptionsandtheymaybelegallyrequiredfor you to launch and run your business. Several of the more important ones are addressed next.ÒKey PersonÓ Life Insurance PoliciesThemostdistressingwayforacriticalmemberofyourteamtoleaveyourfirmisthroughdeathordisability.Atsuchatime,bothyourbusinessandyourlifearelikelytobesignificantlydistracted.Revenuesarelikelytobeimpactedbytheloss,anditisnotatimetobeshortoncashorhavetodigupcashtopayoffsomeone’sheirsforastockbuyback.Itisalsoatimewhenyoumayneedtospendmoneyrecruitingareplacement.Inmanycases,thesolutiontothisproblemiskeyper-soninsurance,aninsurancepolicytakenoutbythefirmandpayableonthedeathordisabilityofaspecificindividual.Thepayoutcanthenbeusedtorepurchasethestockheldbythelostmem-berandcoverotherlossesthecompanyislikelytosufferthroughtheloss.Thegoodnewsisthatmanystartupsarefoundedbyactiveyoungindividualsforwhomevenamillion-dollarorhigherlifeinsurancepolicyisrelativelyaffordable.Theolderyourteammemberis,thestatisticallymorelikelytheirdeathis,and,insurancebeinganactuarialbusiness,thehighertherates.Gettingkeypersoninsuranceisrelativelyeasy,andaswillbediscussed,youshouldestablisharelationshipwith an insurance broker or agent in any case.Product Liability InsuranceIfyoumakeaproductforthegeneralpublic,youneedtohaveproductliabilityinsurancetocoveryourselfincaseofalawsuit.Anyonecansueyouforjustaboutanyclaim,anddefendingthatcanbeexpensive.Insurancetypicallycoversthelegalfeesandoftenmanagestheconfusinglegalprocessforyou.Theamountofyourinsurancepremium,theamountyoupayeachyear,willvarybytheriskyourproductposesandthevolumeofproductyousell.Mostpoliciescanbepaideverysix months or even broken into monthly payments to protect your firm’s cash flow.Lestyouimagineyourproductorserviceissosafethatyouneednotworry,notethatawomansuccessfullysuedMcDonald’sfornearly$3millionwhenshewasburnedbyspillingthefast-foodrestaurant’s very hot coffee in her car.[11]Chapter 10Launching313© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Property insurance is critical to protect againstfires and other disasters.Source: Joseph Sohm/Shutterstock.comErrors and Omissions Insurance (E&O)Commonlyreferredtoasprofessionalliabilityinsurance,thispolicycoversyouagainstclaimsmadebyyourcustomersduetoyourfailuretoperform.Essentially,ifyoumessupdoingyourjob,yourcustomerscannotonlydemandtheirmoneybackbutcanalsoinsistthatyourepaythemforanytimeorbusinesstheymayhavelostduetoyourfailure.Forexample,ifyourcompanysuppliesasmallbutcriticalcomponentforacarmanufacturerandaproblemwithyourproductrequiresanentireautofactorytoshutdownwhiletheyfindanewsource,thatmanufacturercouldsueyouformany,manytimesthevalueofyoursale.You’llwanttohaveE&Oinsurancecoverageanytimethat a mistake at your firm could conceivably cause losses to another party.WorkerÕs Compensation InsuranceWorker’scompensationcoversthemedicalcoststoemployeeswhoareinjuredonthejobaswellaslostwagesand,insomecases,compensatesindividualsforthepermanentandlastingeffectsoftheirinjuries.Thereisnomorecriticalinsuranceinyourfirm.Employeeinjuriesareamongthehighestcostlawsuitstosettle,andalmostallU.S.statesrequireyouhavethisinsurancecoveringallyourW2employees.Enforcementoftheselawsistypicallyextremelyserious.Statesdonotmessaroundwiththesafetyofworkers.Thecostofworker’scompisusuallysomepercentageoftheemployee’ssalarybasedontheriskinessoftheirlineofwork.It’srelativelylowforcomputerpro-grammersbutfordangerousjobs,likeroofing,itcanbeveryexpensive.Ifyou’reinaprofessionwhereemployeesareexposedtophysicaldangers,you’llwanttomakesureyoucalculatethiscostinto your business model.Property InsuranceIfyoubuyorrentafacility,you’llneedtoinsureitandyourbusinessproperty(computers,furniture,machinery,etc.)againstfire,burglary,flooding,andotherrisks.Thisinsurancemayalsoprotectyouagainstinjuriestononemployees(cus-tomers or visitors) in your facility.Health InsuranceHealthinsuranceforemployeesisaverycomplexsituationintheUnitedStates.Inmanycases,thelawmayrequireyoutoprovidehealthcareinsuranceforyouremployees,butevenifitdoesnot,itisoftenanattractivebenefitforworkers,andahealthyemployeeisamoreproductiveone.Healthcareinsuranceoptionsandpackagesareparticularlycomplicatedandchangesooftenthattheyexceedthescopeofthistext.Therearethird-partyadviserswhowillconsultforafeeoracommission.ItisimportanttonotethatthecostofhealthinsuranceintheU.S.hasbeenincreasingatdouble-digitratesformanyyears,sowhenyoubuildyourbusinessmodel,itisprobablywisetoassumethiscostwillcontinuetoescalate.Ifyournationprovideshealthinsuranceunderanationalhealthplan,youmaynotbeinvolvedinthisissue,butinsomecountries,employersarerequiredtocontributeto the payments made by their employees or the state.314A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Auto InsuranceAutomobileinsurancewillberequiredforanyvehiclesyourfirmowns.Youshouldalsodiscusscoveragewithyourinsurancebrokeroragentforemployeeswhousetheirownvehiclesforworkpurposesastheirpersonalinsuranceislikelynottocoverthisactivity.Youmayalsorequirethatyouremployeespurchaseautoinsurancethatallowsthemtodriveforworkandthencompensatethem.Youmaybeofferedmanyotherinsuranceoptionsduringlaunchorlater.Databreachinsur-ancehasbecomeaproductasmoreandmoresensitivecompanyandpersonalinformationisstoredonbusinesscomputernetworks.Yourinsurancebrokeroragentandyouraccountantaregood sources of information on these products.FacilitiesWheretolocateyourbusinessisachoicebasedonthenatureofyourbusinessandthemarketyouhaveselected.Forbrick-and-mortarretail,theselectioncriteriaareveryspecificandsuperimpor-tant.Manufacturingandfulfillmentfirmshaveimportantlogisticalconstraintsinselection,suchasproximitytotransportationhubs.Ifyourbusinessisoutboundserviceoronline,youmayhavealotmoreoptions.Youmayevenrunitoutofyourhomeorfromyourlaptopandphoneasyoutraveltheworld.Ifyoudorequireaphysicallocation,selectingandnegotiatingforafacilitycanbeapproached a number of ways.RentingWhenrentingalocation,youareusuallycompelledtosignaleasethatrequiresyoutopaytheland-lordforsomenumberofyears.Forsmallstartups,theseleaseswillinvariablyincludeapersonalguaranteewherebythefoundersareobligatedtopaytherentevenifthebusinessfails.Although$5,000amonthmaynotseemlikealotatfirst,youcouldfindyourselfworkingasecondjob,longafteryourstartupfailed,topayforabuildingyou’renotusinganylongerbuthastwoyearsleftonthe lease.Forthisreason,youshouldseriouslyconsiderrampingupyouroperationfromaminimallyviablefacility.Whatisthesmallest,leastexpensivesitewhereyoucanproveyourconcept,andmost importantly, what is the shortest lease obligation you can find?Formanybusinesses,gettingintoabusinessincubatorthathassharedofficespace,copiers,andthelike,isideal.Theseincubatorsareoftensubsidizedbygovernmentagenciesoruniversitiesandcanbeidealplacestoshareinformationwithotherstartupfounders.Someincubatorsmaybeprovidedbyinvestorswhoareseekingaportionofyourbusinessandmayalsoinvestfurtherinsuccessful incubator tenants.Chapter 10Launching315© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Shared workspaces are increasingly popular.Source: © Shutterstock, Inc.shared workspaceAn office suite sublet to anumber of smallbusinesses and startupsfor daily operations withoutthe commitment to adedicated facility.coworking spaceAn office suite sublet to anumber of smallbusinesses and startupsfor daily operations withoutthe commitment to adedicated facility.leaseholdimprovementsChanges made to aproperty, usually by thelandlord, to satisfy theneeds of a current or newbusiness tenant.tenant improvementsChanges made to aproperty, by the tenant, tosatisfy the needs of thetenant’s operations.Shared or Coworking SpacesAlow-commitmentoptionthatisverymuchinkeepingwiththeNewEntre-preneurialDynamicisacommercialsharedworkspaceorcoworkingspaceprovidedbyfirmslikeWeWork,whereyoucanrentadeskbythemonth.Compa-nieslikeRegusalsosupplyexecutivesuiteswhereyoucanhaveadedicatedoffice(ormore).Theselocationsusuallyprovideamenitieslikereception,officeequip-ment,andcoffeerooms.Overthelongterm,thesesolutionsmaynotbecheaper,but they do avoid long-term commitments.ImprovementsIfyoudodecideyourbusinessrequiresadedicatedfacility,oneofthemattersyou’llhavetodiscussisgettingthatbuilding,storefront,orsuiteconfiguredcorrectlyforyouroper-ation.Modificationstoanexistingfacilitycaneitherbenegotiatedintoyourleasecontractasleaseholdimprovementsoraddedlaterbyyouastenantimprovements.Iftherealestatemarketissoft(notgoingstrongly),thelandlordmaybeeagertoaccommodateyourparticularneedforwalls,lighting,carpet,orwhateveraslongasyoucommittoaleaseofsufficientterm.Ontheotherhand,ifbusinessisgoodforlandlords,youarelikelytofindyou’llbepayingforanychanges.Forthisreason,launchingyourbusinessduringarecessionorlullintherealestatemarketcansaveagreat deal of money over time.Itisalwaysbesttoexplainyourplansupfrontandgetthemapproved.Underalmostanylease,modificationtothefacilitybeyondmovingapieceoffurnitureorhangingapicturewillrequiretheapprovalofyourlandlord.Youdonotwanttocommittorentingaplaceforyourbusinessandfindyou will not be allowed to make changes necessary for conducting that business.BuyingIngeneral,theNewEntrepreneurialDynamicwouldnotsuggestlockingyourbusinessintoaper-manentfacilitybypurchasingabuildingandland.Suchasignificantcommitmenttiesupcapitalandtiesdownyourgeographicandfacilityoptions.Undersomecircumstances,itmaymakesenseforthebusinessor,morelikely,thebusinessowner,topurchaseapropertyforinvestmentortaxpurposes.Inthelattercase,theownercanrentthepropertytohisorherownbusinessandchargeforthingslikeleaseholdimprovements,takingabusinessdeductiononimprovingtheownedprop-erty.Aswithrenting,timingyourcommitmenttoaslowrealestatemarketislikelytosaveyoualot of money; buying in during a boom can cost your firm dearly.Planning Never EndsWhiletherearemanymorethingsyouwilllearninactuallylaunchingyourstartup,thischapterhasgivenyoualottothinkabout.TheNewEntrepreneurialDynamicrecognizesthatallofthesethings,fromlegalformtoinsurancetofacilities,maychangeasyourbusinessevolves.Tocom-peteintoday’sever-changingworld,youmustbecontinuallylookingforward,identifyingpotentialrisks, and planning to mitigate them. Enjoy the launch!316A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
3,2,1 Launch!NewNewLegalLegalForms:Forms:Aroundtheworldpolicymakersarecompetingtoencourageentrepreneur-shipintheirnations.Newadvantageousorganizationalformsareconstantlyemergingatthenationalandstatelevelthatmayprovidelegalortaxadvantages.Besureyou’reusingthebeststructure.NewNewTechTechSupportsSupportsVirtualization:Virtualization:Newtechnologiesandservicesaremakingitpossibletorunmulti-million-dollarbusinesseswithoutoffices,dedicatedITresources,warehousing,orevenemployees.Unlessyourstartupabsolutelyrequiresphysicalspaceformanufacturingorisastorefrontoperation,youshouldconsideravoidingcommitmenttoanyfixedcostsandevendesigning your firm to remain virtual beyond the launch stage.Globalization:Globalization:Itisgettinghardertoholdacompetitiveadvantageinanydomainwithoutlever-agingglobalresources.Unlessyourbusinessiscommittedtoremainingasmall,localstartup,youmustconsidertheglobalopportunitiesandcompetitorsfromthestart.Selectalegalstruc-ture that will easily allow for foreign shareholders and operations.Key Takeaways•Spend the time to write down verbal agreements.•Make important agreements into actual signed contracts.•Get insurancebeforeyou need it.•Ifpossible,delaythepurchaseorleasesofofficespaceforaslongaspossible;govirtualoruse shared spaces.Chapter 10Launching317© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
10.3Case Study: An EntrepreneurialMarketing Misfit Finds His NicheBrett Linkletter (second from right in front) and his Misfit team.Source: Misfit MediaBrettLinkletterwasalwaysabitofatroublemaker.Theaspiringentrepreneurknewhisideaofproducingandsellingacalendarcalled“Trojan12”featuringstudentsfromtheUniversityofSouth-ernCaliforniainswimsuits,wouldbecomeaflashpointofcontroversy.Whathehadn’tcountedonwasgettingintoalegaldisputewiththeuniversityadministrationovertheuseoftheirtrademarksor landing a new career in marketing.Renaminghisproduct“SoCal12”solvedBrett’sproblemwithUSC,albeitatacost.Hehadalready,againsthisprofessor’sadvice,printedthousandsofunits,andregisteredadomainname.Theproductwasactuallyabigsuccess,nettingmorethantenthousanddollarsinsales,butitwasnotsomethingonwhichLinkletterfelthecouldbuildacareer.Anopportunityarosewhenanadagencyownercameinasaguestspeakerinoneofhisbusinessclasses.Thespeakeraskedtheclass,“Doesanyonehereactuallyrunabusiness?”Brettvolunteeredhiscalendarproject,andthevisitingbusinesspersonsaid,“Hey!I’veheardaboutthat.”TheconnectionresultedinhimhiringLinklettertoworkwithsocialmediainfluencers,provingP.T.Barnum’sadagethat“thereisnosuchthingasbadpublicity.”Althoughthejobdidn’treallyamounttomuch,itledhimtoanopportunitytodomarketing for an up-and-coming tequila brand with a famous celebrity founder.Workinglonghoursforsomeoneelse,evenoncoolprojects,justwasn’tBrett’snature.Heendedupacquiringhisownclients,gettingfired,andfoundinganagencycalledMisfitMedia.Atfirst,Brettassumedhe’ddowhateveryoneelseinthemarketingbizseemedtobedoing,buildinganeclecticbaseofclientsacrossawidevarietyofdomains.Hecollectedawatchcompany,fashionstartups,askateboardmaker,andevenlaunchedhisownbrandofmen’sgroomingproducts.ItwasaboutthistimethatJaceKovacevichapproachedBrettwiththeproposalthathejoinMisfitasa318A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
partner,ontheconditionthathecouldroundupsomeclients.Jaceroundeduptheclients,andtothisday,theyremaingreatbusinesspartners.Brettnotes,“Havingapartnermakeseverythingeas-ier.Youjustcan’tdoeverythingyourself,andbeingabletodelegatetaskstosomeonewhocaresabout the firm as much as you do is an incredible relief.”BeingbusyandhavingclientsfeltkindoflikesuccesstoBrett,butevenwithJace,hewasworkingallthetimeandbarelytakinghome$1,500amonth.WhileBrettwashoninghisskillsasaphotographerandlearningalotaboutsocialmedia,hewasinbusinesstomakemoney,andthisclearlywasn’tthewaytodoit.However,oneparticularclientwasbeginningtoshiftthefinancialfortunesofthefirm.AfamilymemberintroducedLinklettertotheownersofOriginalTommy’sBurger,anLAlandmark.TherestaurateursatTommy’shadlittleinsightintointernet-basedadsorwhatFacebookorInstagramcoulddofortheirbusiness.ThesocialmediaworkthatBrett’steambroughttothisold-schooleateryhadanimmediateandsurprisinglymeasurableimpactontheirsales.Brettnotes,“Theseguysthinkwearetotalgeniuses.Whereas,whenwepitchedtotech-savvye-commercebusinessowners,we’dbejustanotherplayerinthegame.”Itgothimthinkingaboutthepowerofowninganichemarketandhowthatcouldaddanenormousamountofvalueasopposed to being another player continually struggling to prove themselves in a crowded space.LinkletterandhispartnerranacrosssomemarketingtrainingvideosfromaguynamedBillyGene.“Atfirstglance,thestuffseemedkindofcheesy,”Brettremembers,“buthereallyopenedoureyestothepowerofthelocalbusinessspaceasatargetmarket.”Linkletterfoundthatbasically,nobodywastryingtoselltoalltheselittlerestaurantchains.Theyhadsolidbusinessmodels,theyhadcustomers,andtheyspentmoneyonmarketing.Mostimportantly,theyhadbeenplacingadsinlocalpapers,onbusstopbenches,andplaceswheretheyreallyhadzerofeedbackontheeffec-tivenessoftheadspent.Itwasdifferentfromthee-commerceworld,whereeveryonewascountinguptheirconversions.Misfitwasabletodevelopanautomatedsystemthatprovidedpromotionalofferstorestaurantcustomerswhooptedintoaprogramtheydeveloped,usingFacebook’sMes-sengerplatform.TheirFBMessengersystemused“messengerbots”thattrackedeverysingletransaction,makingthemverifiablein-storepurchases.Thisprovidedtheclientswithanadvertis-ingprogrambackedwithprovenreturnoninvestment(ROI),somethingtheyhadneverseen.Thelittleagencybegantoinkdealswithmoreandmoreofthesmallrestaurantsandexpandedtolocal-itiesoutsideofSouthernCalifornia.Brettrecallsthatatthatpoint,“Wewereaddingclientsandpeopleallthetime!Wenowknewtherewasabigopportunityintherestaurantspace,butwewerestill keeping and picking up clients in other niches.”Chapter 10Launching319© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Jace and BretSource: Jace and BrettAlllookedgooduntilsuddenlyTommy’sdroppedthem.Misfithadbeenneglectingtheiranchorclientwhiletheyusedthoserevenuestopursueotheropportunities.“Theyweren’tgettingtheattentiontheywereusedto,andtheexpectationsweren’tclear.Thatwasahugewake-upcall.”Misfitbegantodroptheirremainingclientsoutsideoftherestaurantspaceandrefinetheirskillsintheirnewrestaurantniche.AfterhissuccesswithGene’sprogram,Linkletterwaslookingformoreexternaladvice.HefoundSamOvens,anotherbusinessguru,whoownedasitecalledCon-sulting.com.Ovens’programwasdesignedtohelpfirmsexploitopportunitieswithnicheclients.HeshowedtheMisfitteamthatgettingrepeatablesystemsinplacefortheirclientswascriticalformaximizingreturnontheireffortsonbehalfofthoseclients.Brettshares,“Welearnedhowtomar-ketourselvesbetterandhowtoproducenewclientsondemand.”Hegoeson,“Todayweonlydorestaurants.Oneindustry,oneservice.Wedoonethingreallywell.Youcan’tevenreachusunlessyougothroughtheapplicationprocess.Forevery$100Ispendonads,Igetacallbookedwithmewithaqualifiedrestaurantlead.Wethencloseathirdofthoseleadswithin45minutes….Soevery$300wespendonads,wegainanewclient.Ouraverageclientpaysusamonthlyretainerof$1,500,andthemajorityofourclientswillendupworkingwithusforoversixmonths,soourROIonourads is fantastic.”Misfit’ssweetspotisarestaurantwithtwotoeightlocations.Theymayallbeinonecityoracrossthecountry,butsmallisgood.Brettnotedthatlargerchainswereproblematicbecause“Whentheygetadozenormorelocations,thedecision-makingprocessesgrindtohalt.Thesebig-gercompaniesjusthavetoomanypeoplewantingtocritiqueormanageaprocesstheydon’treallyunderstand.That’sfrustratingbecauseit’saprocessthatwehavetotallylockeddownandwherewe deliver proven ROI.”Thislaserfocusonawell-definedbutamplemarketprovidesMisfitwithhigherprofitsandBrettwithpeaceofmind.Brettnotes,“Alotofadvertisingagenciesliveinastateoffearinsteadofastateofabundance.Theyaretooworriedaboutkeepingbadclientsratherthanknowingtherearealwaysmoreoutthere.Theycan’tturndownbusinesswithoutstressing.Igetstressedifwedon’tgrowby10percentormoreamonth,butonlywithinourcompetency.Idon’tcarehowmanythingsyou’vemarketed;it’simpossibletobeanexpertateveryindustry.Youdon’thaveabrainsurgeon320A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
doingyourteeth.Ifyougooutsideyourswimlane,you’renotbuildingexpertise,you’renotdevel-oping skills, you’re not building the case studies you need for your next sale.”Thisfocusalsomakesscalingeasier.Inmarketing,thebiggestinvestmentingrowthisbringingonnewemployeesandgettingthemtobeproductive.Formostmarketingagencies,it’ssuperexpensiveandtime-intensivetotrainnewemployees.Mostnewbiesatotheragencieswillscrewuptheirfirstfewclients,sonobodywantstotrustthemwithgoodleads,andthat’sexpensiveifyourfirmispayingthemasalary.Brettnotes,“IknowtherestaurantbusinesssowellnowthatIcanturnanyuntrainedmarketingpersonintoarestaurantmarketingrockstarinonlyacoupleofweeks. . . . I’ve dedicated 100 percent of myself to owning and dominating this niche.”ThingsaregoodatMisfit.PepsiandU.S.Foods,twobigsuppliersinthesmallrestaurantworld,arenowactivelyencouragingtheirclientstohireMisfitbecauseithelpstheirownsell-through.Linkletterproudlyshares,“Wewillbecelebrating$100kinrevenuethismonthalone.Icanfore-castthatnextmonth,wewillhit$130kinrevenue.”That’sgoodmoneyforabusinesswithverylowoverheadandwhereeachrevenuedollarisprettymuchalsoincrementalprofit.He’snotslowingdown,butBretthasagreatnewapartmentinVeniceBeach,istravelingtheworldandgettingmoresurfing in, all while his business grows.Brett LinkletterSource: Brett LinkletterLookingforward,Linkletterunderstandsthatnobusinessmodelissafeintoday’sdynamicbusinessenvironment.He’sgottokeepmoving,capturingthemostvaluablepartofwhathecalls“theopportunitycurve.”That’sthepointwhereanewidea,likeusingFacebookMessengerbotstodelivercustomerstorestaurants,istechnicallypossible,buteveryoneisn’tdoingityet.Brettnotes,“Fornow,consumersarestillresponsivetomessengernotifications.Theyaren’tignoringouroffersliketheydoonregularsocialmediapostsoremails,andourcompetitorsaren’talloverthisyet.Weknow that won’t last.” He adds, “I’m always looking for the next new thing.”Chapter 10Launching321© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Endnotes1.After the Trump administration’s tax cut of 2017.2.https://www.investopedia.com/articles/personal-finance/102115/taxes-california-small-business-basics.asp3.InstituteonTaxationandEconomicPolicy.March9,2017.“The35Per-centCorporateTaxMyth,”https://itep.org/the-35-percent-corporate-tax-myth/.4.TheIrishTimes.(2017,November6).Apple’scashmountain,howitavoidstax, and the Irish link.5.Freeman,R.E.,&Reed,D.L.(1983).Stockholdersandstakeholders:Anewperspectiveoncorporategovernance.CaliforniaManagementReview,25(3), 88–106.6.CompaniesHouseisathttps://www.gov.uk/government/organisations/companies-house.7.FSB is at https://www.fsb.org.uk.8.YourEuropeinfoisathttps://europa.eu/youreurope/business/running-business/ start-ups/starting-business/index_en.htm.9.Musk,E.(2018).Progress,precisionandprofit(emailtoTeslaemployees).10.Itisnotunreasonabletoprovideshared,closedspaceswhereindividualsorteamscangotoworkorthinkwithoutdistractionsforshortperiodsofintense work.11.Burtka,A.T.(n.d.).Liebeckv.McDonaldÕs:Thehotcoffeecase.AmericanMuseumofTortLaw.https://www.tortmuseum.org/liebeck-v-mcdonalds/.322A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
brandA unique image used toidentify a product orcompany.CHAPTER 11Brand BuildingPerception is reality.—Lee AtwaterCattle brands.Source: © Shutterstock, Inc.Theoriginalbrandisametaltoolwithasymbolonitthatisheatedovercoalsandpressedintothesideofasteer,horse,orothercommerciallivestock.Theresultingindeliblescarcreatesaper-manentsymbolofownershipofthatparticularanimal.Whilethispracticeisgenerallyassociatedwithnineteenth-centuryAmericancowboys,itremainsacommonpracticearoundtheworld.Thebrand concept has been as permanent as its origin.© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
product brandingThe marketing practice ofcreating an image oridentity associated with aspecific product.logoA graphic, text, or symboldesigned to represent abrand.marketing campaignA specific, defined seriesof activities used inmarketing a new orchanged product orservice.marketersThose people whose skilllies in developing brandsand generating attentionfor companies.mass marketingEffort to reach an entirecustomer segmentthrough a single strategyutilizing mass media and/or mass distribution.11.1Product BrandingLearning Objectives1.Understand what a brand is.2.Grasp the power of brand recognition.3.Understand brand definition and the process involved.4.Understand the goodwill value of a brand for its owners.5.Understand what commodity products are.6.Recognize the opportunity to disrupt stale brands.7.Appreciatetheimportanceofcorporateethicsandhowunethicalbehaviorcaninducebranddisasters.8.Recognize the importance of brand fit to the market, the entrepreneur, and the growth plan.9.Learn the value of trademarks.Perception ManagementWalkingthroughamodernshoppingmallorsurfingthroughAmazon.comisanimmersiveexperi-enceinproductbranding.Oursubconsciousinstantlyrecognizeshundredsoflogos—graphicortextsymbolsdesignedtorepresentabrand.WeseeandprocessthesymbolsforApple,Nike,andLouisVuittonmorequicklythancommonwords,andeachoftheselogosgeneratesanemotionalresponse.Thatallhappensbecausethelargefirmswhoseproductsdominatethemallandinternetlandscapehaveinvestedmillionsofdollarsintomarketingcampaignsdesignedtoinstillpositiveassociationswiththesesymbolsinthemindsofconsumers.Whyissomuchtimeandmoneybeingspentoningrainingtheseimagesinyourmindandmanagingyourresponsetothemasopposedtodemonstrating the functionality of the products they represent?Weliveinaworldwhereinformationflowsaregrowingexponentially.Weareconstantlycol-lectingdatafromourschool,work,family,andfriends.Inadditiontoin-personinteractionsandvoicecalls,asynchronouscommunicationssuchasemailandsocialmediaallowthisinformationtoaccumulatetothepointwhereitmustbeprocessedinbulk,consumingmoreandmoreofourtime.Whenweaddtothisabarrageofadvertisementsonsignage,television,computers,andmobiledevices,itissimplyoverwhelming.Mostoftheinformationwereceiveistrivial,andasindi-viduals,wemustspendmoreandmoreofourmentalenergyprocessing,sorting,andeliminatinginformation that we can’t afford to consider.Today’smarketers—thosepeoplewhoseskillliesindevelopingbrandsandgeneratingatten-tionforcompanies—understandthat,tryastheymight,theywillgetverylittleofyourattention.Infact,theywillprobablyonlygetafewsecondsorevenafractionofasecondofyourconsciousawarenessasyoustrollthroughthatmall.Buildingtheimageofabrandateveryopportunityandtyingittothatinstantlyprocessedlogoisthekeytomodernmassmarketing.Whatifyoudon’tmakeaconsumergoodthatwouldbesoldinthemall?Whatifyourcustomersareallotherbusi-nesses? Do nonconsumer companies need to worry about branding?324A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Boeing (and Rolls Royce) Logo on a 787Dreamliner.Source: Ryan Fletcher/Shutterstock.comperceptionmanagementActions taken to guideconsumer understandingof a brand.brand definitionWhat a product orcompany stands for in themind of consumers.ThinkabouttheBoeingcorporation.AreyoulikelytoeverbuyaBoeingproduct?Probablynot,butyouprobablydoknowtheyareagloballeaderintheproductionoflargejetaircraft.You’dalsolikelyrecognizetheBoeinglogo.Whydoyourecognizethelogo?Boeingdoesn’tselljetsdirectlytoconsumers(outsideofafewbillionaireswithprivate737s),butitdoesselltoairlinesandgovernmentsaroundtheworld.Thoselargeorganizationsbuildfleetsofplanesthatcosthun-dreds of millions and even billions of dollars.ThousandsofindividualswillbeinvolvedinmakingtherecommendationtogowithBoeingorwiththeirarchrival,Airbus.Havingglobalbrandawarenessguaranteesthatwhenabuyingdecisionisathand,allthepartiesinvolvedwillinstantlyrecognizetheBoeingbrandandhopefullyhaveapositiveassociationwiththatbrand.DidthelossoftwoBoeing737MAXaircraftin2019impactyouroverallperceptionofthisbrand?YoucanimaginethatBoeing’smarketerswereworkinghardtoensurethattheperceptionoftheirbrandstayedpositiveinthemindsofpeopleacross the globe. That’s quite a task!Asasmallbusinessownerorstartupfounder,yourbrandisapreciousanddelicatething.Youmustplant,nurture,andprotectitatallcosts.Itisaninvestmentintime,dedicationtoquality,andanexerciseinperceptionmanagement.Goodbrandbuildingwillreturnvalueandsupportyourfirminthefutureatnoadditionalcost.Thewell-constructedbrandisaresourceasvaluableasgold.TheNewEntrepreneurialDynamicrequiresthatbrandsstaytruetotheircoreprincipleswhiledynamically adapting to the realities of a global market that is constantly evolving around them.Defining Your BrandEveryestablishedbrandhasabranddefinition—somethingthatitstandsforinthemindofcon-sumers.Figure11.1showstherankingsofthetop-ratedbrandsintheworld,accordingtoInterbrand,a brand consulting and marketing firm.Chapter 11Brand Building325© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
FIGURE 11.1Top 15 Global BrandsTop 15 global brands ranked by Interbrand.Source: Based on rankings fromhttps://interbrand.com/best-global-brands/Apple’sbrandisdefinedashipnessandleadingtechnology;HarleyDavidsonisrebelliousyetpatriotic;BMWisluxuryandexcellenceinengineering.Doyouseesomethingeachofthosebranddefinitions has in common?Noticethateachofthesegreatbrandscombinestwodistinctideastocreateauniqueidentity.Aspiringtosomethingassimpleas“beingthebestinourindustry”isgreat,butnotdistinctive.Youneed another “hook” for your brand.Applehascombinedtechnologicalsavvywithahip,freethinking,andartisticfeel,buttheirarch-rivalMicrosofthasdonetheopposite.ThefirmfromRedmondhascombinedtechnologywiththereliable,button-downcultureofmultinationalcorporations.So,althoughtheirproductsdomanyofthesamethingsinnearlyidenticalways,theiruserbasesaredistinctlyloyal.Acollegepro-fessortodaylooksoutataseaofApplelogosonthelaptopsthatfacehim,whilemanybankersandengineerssimplycan’timagineusinganycomputerthatdoesn’trunWindows.Doesanyofthisapply to a small business?Yes,yoursmallbusinesshasabrand!Regrettably,manysmallbusinessownersdon’tthinkofthat,buttheyshould.Yourbranddefinitionwilldeterminewhoyourcustomersare.Yourcus-tomerswilldeterminetheprofitabilityandlongevityofyourbrand.Consequently,controllingthedevelopmentofyourbranddefinitionisacriticalstrategicfunctionofyourbusiness.Asyoulearnedwithcompanycultureinanearlierchapter,ifyoudonotconsciouslydefineyourbrand,others will define it for you. Allowing that process to proceed randomly is inherently dangerous.326A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
commodityA generic product forwhich the primarydistinguishing feature isprice, i.e., salt, flour, oil.Stores offer non-branded products at lowerprices.Source: Sheila Fitzgerald/Shutterstock.comThe Morton logo dominates its market.Source: Julie Clopper/Shutterstock.comWithout a Brand, You Throw Away ValueLookagainatFigure11.1.Doyouseethedollaramountslistednexttoeachbrand?ThesearethevaluesthatInterbrandhascalculatedforeachbrand,meaningthatifthefirmdecidedtosellitsbrandandnothingelse,itwouldcollectthatamount.Interbrand’svaluationsuggeststhatApplecouldburnitsfacilitiestotheground,fireeverytopemployee,dumpallitsproductinventoryinthesea,andstillsellthefirmfor$170billionsimplybecausetheApplebrandcreatessomuchvalue.Itmayseemhardtobelieve,butacursorylookatproductswithoutabrandeasilydemonstratesthepower of branding.Intoday’smarketing-drivenworld,itishardtoimaginethatthereareproductswithoutabrand!Thereare.Thinkofthosefamouslyunbrandedstoreproductsintheplainwhiteandbluepackagesthatsaynothingmorethan“flour”or“milk”or“sugar.”Thinkofgenericdrugs.Whatisthemainfeaturethatdrivesconsumerstoselectthosechoicesovertheirbrandedpeerproducts?It’sprice,ofcourse.Whenyourbusinesscompetesonlyonprice,youaresellingacommodity,agoodforwhichitisassumedthatallcompetingproductsareessentiallyofequalqualityandperfor-mance. Is that a problem?Commoditiesareatoughplaceforasmallbusinesstomakemoney.Theynearlyalwaystradeonveryslimmarginssincetheyattractcustomerswhoareonlydifferentiatingonprice.Whatcostcontrolthatcanbeachievedisusuallybasedoneconomiesofscalethatfavorlargeincumbentfirms.Usually,thebarrierstoentryareverylowaswell,leavingthethreatofnewentrantshigh.Commoditiesmarketsarealsosubjecttospeculativepricevariationsoutsidethecontroloftheentrepreneur. These factors make commodities very unattractive markets.Ontheotherhand,experienceshowsthatconsumerswillpaymoreforabrandedproduct,evenifitoffersnoreal-worldadvantages!Tablesaltisabasicchemical,sodiumchloride(NaCl).Mostmanufacturersaddalittleiodineasanutritionalsupplement.Skippingsomeexoticcookingsaltscontainingotherminerals,thereisnopatent,additionalfeature,orotherintellectualpropertytomakeonecontainerofthewhitetablesaltcrystalsbetterthananother.So,you’dthink that all brands of salt would sell for the same price, right?InNorthAmerica,thelargestsellerofsaltisacompanycalledMorton,whoselogoofayounggirlwalkingintherainwithanumbrellaiswellknown.Thecompany’sslogan,“Whenitrains,itpours,”isalsofamiliartomanyAmeri-cans.OnAmazon.com,a26-ouncecontainerofMortonsaltsellsfor$11.99,whilea26-ounceofDiamondCrystalbrandsaltsellsfor$5.99.SinceMorton’sinputcostsarethesame,orevenlower,basedontheirmassivescale,themarginsitanditsresellerscapturearefarhigherthanthoseofthecommoditysellers.Thatisarealmeasure of the pure value-add of branding: twice the price for the same thing.GreatbrandslikeApple,Morton,andCoca-Colaaresoculturallyembeddedintheretaillandscapethatitishardforconsumerstoimagineaworldwithoutthem.Apple’sbrandhelpsitsusersidentifythemselves.Appleownersfeelthattheiruseofthefirm’ssleekproductssignalstheirhipness,affluence,andintelli-gence.Fortheamountofprofitsthatitgenerates,Appledoesverylittleadvertisingcomparedtootherlargecompanies.Mortondoesn’tneedtoadvertisetomaintainitsdominanceinsaltandkeepthosehighermargins.Parentssimplypassontheirbuyingchoicetotheirkidsbyobservation.ConsiderthatCoca-Colacanchargehighermarginsforclothingandothergearemblazonedwithitslogo.Anotherwaytolookatthatistorecognizethatpeoplewillpaymoneyfortheopportunity to advertise Coke. Now that is brand power!Interbrandusesfirmfinancialstatementsandtheiranalysisofthebrand’sroleinsalestoana-lyzehowmuchofafirm’shigherprofitscomefromitsbrandvalue.TheysuggestthatnotonlydoesChapter 11Brand Building327© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Every team has its own style of play whichdefines its brand with fans.Source: © Shutterstock, Inc.asolidbrandgeneratemoremoneyforthefirm’sshareholders,butitalsoreducesrisk.Astablebrand supports a stable firm.Product FitWouldanyonebuyaLamborghiniiftheywerenotover-the-topabouteverything?Everybrandappealstosomecustomeridentity.Understandingwhatattractsexistingcustomersandwhatwillbringinnewcustomersisessentialtoabrand.ThebrandingoftheconsumeraudioequipmentcompanyBeatsdifferssignificantlyfromthatofitscompetitor,Sennheiser.Beatsfocusesonyouthappealandlookssinceitscustomerscarelessabouttheintricaciesofmusicandmoreaboutappearancesandtheperceptionofluxury.Theircustomerwantstopayextraforthesakeofevery-oneelseknowingtheyspentthemoney.Sennheiser,ontheotherhand,isapurequalityperformer,andthusitsimageissimplerandgearedtowardthosewhoarewillingtopayforsuperiortechnol-ogy. Browsing the websites of these two companies will clearly reveal this marketing distinction.TOMSshoesknewitwantedtogivebacktotheworldbyprovidingfootweartothoseinneed.Ratherthanchoosingawishy-washyapproach,TOMSsetasimpleone-for-onemodel.Thisclearbrandingforitsproduct,centeredoncharity,allowedtheimpactofeverypurchasetobevisibletoconsumers. Visibility is important in all industries, but especially so in non-profits.Managing the BrandIfyou’reafanofcollegebasketball,youknowthateachteamhasauniquestyleofplay.KansasStateusuallypreferstoplayitslow,whiletheUniversityofKentuckyplaysquickerandmoreactive.Theseplaystylesdefineeachteamasawhole,independentofthecompositionofplayers,andareintentionallydesignedbythemanagementandcoachingstaff.Ifaplaystyleisnotworkingwell,itcanbeadaptedtobettersuitthecompetitionandthesituation,butchangingitcompletelyisn’tlikely to work out well for a team trained to deliver in a particular style.Greatbrandsaresimilar.Justbyitslogoorslogan,aconsumercaninstantlyidentifythebrandedproduct.Doneright,thelogoandtheproductseeminsepa-rableandfeelinevitable.ThinkofApple’siconicaluminumandglassproducts.Thecustomerhasexpectationsthatanewproductfromthatbrandwillmain-tain the style they’ve come to love and identify with.Forthisreason,theproduct-brandconnectionmustbecarefullymanaged.Itisoftenrelativelyeasytomakearadicaltechnicalorphysicalchangeinaproductortopresentaserviceverydifferently.However,whenthatveersawayfromcus-tomers’expectationsofthebrand—imaginetheKentuckycoachaskinghisplayers to “slow it down”—what do you think might happen?Abrand’smessagemuststayconsistent.Thisallowsconsumerstofeelcomfortableusingthebrandtosignalmessagesabouttheiridentity.Theydonotwanttofindthemselvessurprisinglytiedtoanimagetheydon’tadmire.Forinstance,theNikeSwooshsuggests“active,bold,andassertive.”Yet,Nikeisawareofcurrentglobaldemographictrends,andthefirmunderstandsthatthemostdesirablehigher-incomeconsumersinthedevelopedworldareagingandgainingweight.So,thesportswearfirmdoesofferalineofplus-sizedclothingandproductstargetedatseniors.Whilewe’veallseennot-so-athleticpeoplewearingNikegearintherealworld,therearenopicturesofa300pound,60-year-oldmansmokingwhileeatingapizzaonNike’swebsite.Thecarefullycraftedhome page and the firm’s expertly managed social media are dominated by fit young people. Why?WouldaspiringyoungathletesfeelcompelledtobuyNikeafterseeingadvertisementsfea-turingoverweightguysinNikestretchpantsandoldladiesusingwalkersemblazonedwiththeSwoosh?Ofcoursenot!EvenNike’solderandout-of-shapecustomersdonotwanttoseethem-328A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Fans wanted the country music superstar tostick to the country image they had of him.Source: Sterling Munksgard/Shutterstock.comselvesthatway.Greatbrandingisn’taboutthecurrentrealityofthebuyer;it’sabouttheiraspi-rations.Understandingthis,Nikeusesthecleverslogan“WhereAllAthletesBelong,”implyingeveryone is welcome and can feel athletic.View in the online readerCustomersexpectbrandedproductstobehaveinacertainway,andchangeisusuallypunishedbythosecomfortablewiththeexistingparadigm.Rememberthatnoncustomershavealreadyrejectedthebrand,andthatchoicewillblindthemtotheattractivenatureofthenewprod-uct—even if the firm designed it specifically for them.Agreatreal-worldexampleofattemptingtodealwithcustomerbrandexpectationscomesfromlegendarycountrysingerGarthBrooks.Withalongseriesofhits,histrademarkblackStetsonTylercowboyhat,andfriendlygoodlooks,Brookshadestablishedaniconiccountrybrand.[1]How-ever,in1999thecountrystardecidedtomakeanunexpecteddetourintopopularrockwiththereleaseofanalbumunderthepseudonym“ChrisGaines.”Brooksfiguredhecouldhavefunexplor-inganothergenreandexpandhisappealtothoserockfanswhodisdainedcountrymusic.Heevenplannedtomakeadocumentaryfilmabouthisalterego.BrookshostedSaturdayNightLiveoneeveningandintroducedChrisGainesasthemusicalguest.Theconnectionwasobvioustoevery-one.WhenBrooks’fanssawtheirclean-cutcountrystarstrutoutinleatherpantswithshaggyhairandsportingagoatee,theywereappalled.Theyfiguredhe’dgonenuts,andtheyrejectedwhatwasactuallyaprettygoodcollectionofsongs.Rocklistenerswerenotfooledbythepseudonymandgenerallyrefusedtogivethereleaseatryeither.Theresultswereasexpected:pooralbumsaleswithlittleairplayoneithercountryorpopstations.Brooks’esteemandcareersufferedaminorsetback.Luckilyforhim,histalentallowedhimtosliderightbackintothecountry saddle again.ThelessonfromtheBrooks/Gainesstoryisthatitisveryhardtobeallthingstoallpeople.Itisbesttoclearlyidentifyamarket,developyourbrand,andstickwithit.Thisisespeciallytrueforsmallbusinesses,whereresourcesarelim-ited.Ifyou’reabsolutelycompelledtopursueanothermarketordevelopanalternateproduct,you’rebetteroffestablishinganotherbrandthatcapturesthenature of that product in a way that won’tpolluteyour existing brand.Foranalternatebrandtowork,youmustkeepitcompletelyseparateinthepublic’smindasthoughitcomesfromanentirelydifferentsource,somethingacelebritylikeBrookscouldn’tpulloff.Forinstance,PepsiCo,thesodamaker,ownsTropicana.Mostconsumersdon’trealizethis,andThe Nike StoryChapter 11Brand Building329© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Pepsidoesn’temphasizetheconnectionbecausetheassociationwithunhealthy,cornsyrup-sweet-ened soda wouldpollutethese brands and dilute their healthy appeal.Although the popular global brand is owned by PepsiCo, its health-focused branding is entirely different.Source: MAHATHIR MOHD YASIN/Shutterstock.comHowdotheselessonsapplytosmallbusinessbranding?Howmany“DonutsandPizza”storesdoyousee?Don’tlaugh;thereisaveryviablebusinessmodelbehindtheidea.Bothdonutsandpizzaarepopulartakeoutfoods,andthesmallbusinessesthatservethemoperateoutofsimilarlysizedandequippedstripmalllocations.Mostsignificantly,donutsaregenerallysoldonlyinthemorning,whilepizzaislunchanddinnerfare.Asavvysmallbusinessownerwouldmaximizetheutilizationofalocationbyservingdonutsinthemorningandswitchingtopizzaatabout11a.m.Itmakeseconomicsense,butit’sabrandingdisaster.Consumerswillbesuspiciousofabrandthatclaimsexcellenceinbothofthosecategories.Thewholeideaofdonutsandpizzaoffersanimprob-ablemixoftastesandsmells,anditprobablymakesmostpeopleslightlyilljustthinkingaboutit.So,sadly,mostsmalldonutstoresdo90percentoftheirbusinessfrom6a.m.to10a.m.andhavevery low utilization after that.Great Brands and Brand ValueHowdoyoumeasurethevalueofabrand?ConsidertheamazingbrandthatisDisney.TicketstoDisneylandinAnaheim,California,aresubstantiallyhigherthanpassestotheirSouthernCalifor-niacompetitorssuchasKnott’sBerryFarm,Legoland,andUniversalStudios.YetalotmorepeoplevisitMickeyMouse’shomethantheseothermoreaffordablefunspots.Infact,everyoneintheSoCaltourismindustryunderstandsthatDisneylandis“thedestination,”andothersitessimplycompete for tourists choosing a second stop on their California trip.Ontheotherhand,ifaChevrongasstationraisesthepriceonitsregulargasbyfivecentsagallon,driversontheirwaytoDisneylandwillpromptlydashacrossthestreettoalowerpriceatShell.330A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
gross profit marginA financial metriccalculated bydividinggross profitbyrevenues.YoucanmeasuretherelativevalueoftheDisneybrandversusChevronbylookingatthegrossprofitmarginintheirfinancialstatements.Whileoilandgascompaniesmakegoodprofitsduringgoodtimes,it’sabusinessbasedonenormousvolumeatrelativelylowprofitmargins.ValuablebrandslikeDisneycreatementalswitchingcostsaroundthebrandedproductandreducethepricesensitivityofcustomers.Gasisacommodity,andpurveyorsofithavehadaveryhardtimeaddingsignificantbrandvalue.Ifyoursmallbusinesscommandsexceptionalpricesandreportshighermargins than your peers, you’ve probably established some brand value.Imagineaniftyhipstercoffeeshopnearacollegecampus.Thisisthehotplacetohangoutandsiporganic,fair-trade,wholesomebrewunderold-timeylightsinredleatherchairs.Nowimaginethiscoffeeshopmovestwomilesaway,buteveryonestillchoosestohangoutthere.Notonlythat,buttheyarealsochargingmorethanotherlocalshops.Thisisbrandvalueinaction.Whenthecoffeeshopownergoestosellherbusiness,shewillcommandabetterpriceifshecaneffectivelydemonstrate this brand value to potential buyers.New Brands Versus Old BrandsAllofthismakesitclearthatitisdifficulttodisplaceapowerfulexistingbrand.CanyouimaginebeinganewentrantwithadigitaltablettryingtogoupagainstAppleintheconsumermarket?Evenglobalmega-corporations,includingSamsung,Microsoft,andHewlett-Packardhavefoundthattobeadauntingchallenge.Occasionally,however,apluckylittledisruptormanagestoestab-lishafootholdwithanewbrandinamarketlongdominatedbyoneorafewpowerfulincumbents.Can you think of any?TheDollarShaveClub’sdisruptionofthebrandedrazorbusinessisagreatexample.KingCampGillettefoundedtheAmericanSafetyRazorcompanyin1901andbeganmarketingthefirstmass-produced,disposablebladerazorsbasedonhisinnovativepatentforstampingratherthanforgingsteelblades.Heiscreditedwithinventingthefamous“razorandblades”businessmodel.Thefirmsoldtherazoratcost,lockingcustomersintothebrandandnecessitatingtheirpurchaseofexpensivereplacementblades.Thismodelhasbeenappliedsuccessfullyacrossmanyindustries.Formorethan100years,theGillettebranddominatedthehigherendoftheAmericandisposablebladerazorindustry.BrandslikeSchickandBiccompetedmostlyonprice,butmostmenwerewill-ingtopayabitmoreeveryweektonotnicktheirnecks.TheystuckwithGillette’sbrandreputationforquality,andthefirmcouldsupportitsrelativelyhigh-costU.S.manufacturing.Today,Gilletteisowned by the multinational consumer goods firm Proctor and Gamble.MarkLevineandMichaelDubinsawanopportunitytomakehugemarginsinthedisposablerazorbusiness.TheyreducedcostsbyimportingbladesfromAsiaandsellingdirectlyonline,enablingthemtoofferlowerpricestotheconsumerandtakeachunkoftheretailer’smarginaswell.DollarShavearrangedtosourceproductfromaKoreanblademakerandlinedupfundingfromanincubatortooutsourceproductionofthehandleandpackagingandbuildtheirbrand.Thisbrandbuildingiswheretherealmagicoccurred.Remember,mostconsumershadbeenhappywithGilletteformorethan100years.DollarShaveneededtodisruptthatanddidsowithabrilliantlyhumorousonlinevideotitled“OurBladesAreF***ingGreat,”whichnowhaswellover20millionviewsonYouTube.The2012videocaughtpeople’sattention,andDollarShavedeliveredagoodprod-uctatagoodpriceanddemonstratedhighcustomerretentionrates.DollarShavewasnowviewedasacrediblethreattoGilletteandgarneredtheattentionofProctorandGamble’sinternationalcompetitor,Unilever.InJuly2016,thebrandwassoldtoUnileverfor$1billion.Thatisthepowerofbrand disruption. Can you do something like that in a local market?Chapter 11Brand Building331© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
This offbeat YouTube video went viral, establishing a new trend in men’s grooming products.View in the online readerYiuhasbeendreamingofopeninganartgalleryinasmallcoastaltown.It’savibrantareawithastrongcreativestreak.Italsohasatight-knitgroupofwealthybusinesspeoplewhoviewthem-selvesasartpatrons.However,thelocalscenehasbeendominatedformanyyearsbyonegallery.Charleston,theowneroftheincumbentgallery,hasestablishedhisshopasthehubforallthepop-ularartistsaswellasthebuyers.Healsodominatesthesocialscene.Yiufeelsthereisroomformorethanonegallery,butsheknowsthathercompetitorwillseeherentryasathreatandwillnotbe eager to share either his artists or his wealthy clients with her. What can she do?Yiuwillneedtodisrupttheexistingparadigm,andthekeytodoingthatwillbetofindcom-pellingnewlocalartistsortobringinhotoutsidetalentwhoseworksaresubstantiallydifferentfromwhatCharlestonisoffering.Shemustthenconvincetheartbuyersthatherartistsarelead-ing a new wave they need to be aware of. How can she get them in?Yiudecidestohostacharityeventandauctionoffseveralnewpiecestosupportanimportantlocalcause,cleaningupthetown’snotoriouslypollutedwatersupply.Thiscauseengagesthesup-portofmanycommunityactivistswhoareabletopressurelocalpoliticalleadersintobackingtheevent.Thesepoliticians,seeingawaytoscorepointswiththecitizenryoverapopularissueandtosolveamunicipalproblemwithouttappingintotheirownbudgets,eagerlycompelattendanceamongthetown’sbusinessleaders.Atthedramaticopening,Yiufindsshehasacaptiveaudienceforhernewartists.Oncetheownershaveaddedafewpiecesofthenewworktotheircollections,sheissuretheywillwanttoexpandtheirinvestment.Itisanauspiciousbeginningforhernewgallery.Brand DisastersMostconsumerproductcompanieshaveopportunitiestosavemoneybyreducingthequalityoftheirproducts.Theycanuseinferiormaterialsorreducetheamountofmoreexpensiveingredi-ents.Forinstance,acandyfirmmightshrinkapopularcandybarorcutbackonexpensivenuts,hopingbuyerswon’tnotice.Thisisariskystrategy,becauseifthechangebecomesatopicofpublicdiscussion,thebrandcouldbedamaged,andsomeconsumersmightswitchlong-termbrandloyal-ties. Some brand disasters are much worse than that.Women’sclothingboutiquechainLilyPulitzerwasproudtobefeaturedinanewsarticlethatwasgoingtobebasedoninterviewswithexecutivesattheirheadquarters.Unfortunately,thevis-itingreporter’seyelandedonadoodletapedtoanemployee’scubiclewithacaptionreading,“Justanotherdayoffat,white,andhideous.Youshouldprobablyjustkillyourself.”ThislittledrawingDollar Shave Club Video332A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
on messageAdhering to the approvedmessage of anorganization.existential threatA problem so serious thatit threatens the veryexistence of theorganization.Johnson & Johnson earned the public’s trust byresponding in an ethical manner to a brandnightmare.Source: Sean Locke Photography/Shutterstock.comadulterationChanging the formula of aproduct in a negative way.postedinaprivatespacesenttheverypublicnewsarticleinadecidedlynegativedirection.Whiletheemployeewasprobablymotivatingthemselvestostayinshape,itunderscoredthefashionindustry’sdangerouslyobsessivepreoccupationwiththinness.LilyPulitzerendedupinthemiddleofanegativediscussionaroundfat-shamingratherthangettingaloadofpositivepublicity.Whatis the message here?Themessageisthateveryformofcommunicationisamessagetothepublicaboutthevaluesofyourbrand.Thecultureofyourcompanymustgenuinelyreflectthevaluesyouwishtopresenttotheconsumer.Everyonemustbeonmessageallthetime,andthat’seasiertodowhenthemes-sageisgenuineandnatural.Themediaandthepublicwilllatchontoanythingthatlooksdisingenuous and tear it apart.CanyouimagineanythingbeingworsethanthebranddisasterLilyPulitzerfaced?Therehavebeencaseswherebranddisastercreatedexistentialthreatstomajorbusinesses.Sometimestheseeventswerewellhandled,andthebrandwasreinforced.Insomeothercases,thingswentverybadly indeed.MalaysianAirlineslosttwoairplanesin2014.OneplanecompletelyvanishedinMarch,likelytheresultofterrorism.ThatJulyanotherwasmistakenlyshotdownbyamissilewhilecrossingoverawarzoneintheUkraine.Hundredsofpassengersperishedineachevent.Perplexingly,thenationalairline’smarketingdepartmentthenchoosetoproceedwithanadcampaignentitled“BucketList,”askingpeopletotweetaboutplacestheywouldliketoseebeforetheydied.Associat-ingflyingwithdyingisabadideaforanyairlineatanytime,butinthecaseofMalaysianin2014,itwasadestructivemisuseofmarketingresourcesatatimewhenallpublicmessagingshouldhavebeen very carefully controlled.Anexampleofafirmdoingamuchbetterjobofmanagingabrandthreatoccurredin1982,whenapsychopathinsertedpotassiumcyanidepoisonintobot-tlesofTylenolbrandpainreliever.HisactskilledsevenpeopleintheChicagoarea,beginningwithatwelve-year-oldgirlfromElkGrove,Illinois.JamesWilliamLewisdidthisinanattempttoextort$1millionfromTylenol’smanufacturer,Johnson&Johnson.Ratherthanmakeapayoffandkeepthingsquiet,thefirmimmediatelywarnedthepublicandhospitals,andswiftlyrecalled31millioncon-tainersvaluedatover$100million.Johnson&Johnsonincurredahugefinancialloss,butitemergedwithagoldenreputationamongconsumersandtherespectoftheglobalbusinesscommunity.Thefirmthendevelopedtamper-resistantpackagingforitsmedications,whichconsumerproductcompaniesimitated.Whenyoupeelofftheplasticsealonthetopofajuicebottletoday,it’sbecauseofthis case and one firm’s ethical response.OnecompanythatfailedtolearnfromJohnson&JohnsonwastheSanluGroup,amanufacturerofbabyformulainShijiazhuang,China.In2008,someofthefirm’smilksuppliersdiscoveredthataddingmelamine,achemicaltypicallyusedtomakeplasticresins,wouldcausetheirmilktotesthigherforproteincon-tent.Thisadulterationoftheproductincreasedthemilk’swholesalemarketvalue.Unawareofthedeception,Sanlupaidmoreforwhattheythoughtwasbet-termilk.However,consumingmelaminecausesseriouskidneydamage,andsomeSanlucustomersbegantogetsick.WhenSanludiscoveredwhatwasgoingon,theyshouldhaveadmittedthatthey’dbeendupedbytheirsuppliersandalertedthepublictothedanger.Instead,theyattemptedtocoveruptheissuetoprotecttheirbrand’sreputation.Theyevenaskedlocalauthoritiestokeeptheproblemquiet“toavoidwhippinguptheissueandcreatinganegativeinfluenceinsociety.”[2]Someauthoritieswerepaidbribes.Atleastsixchildrendied,morethan50,000werehospitalized,andasmanyas300,000sufferedhealthproblems.Intheend,someofthemilksupplierswereactuallyexecutedbytheChinesegovernment.Itdoesn’tgetmuchworseforabrand than that.It’sunlikelyyouwillhavetodealwithsuchlife-and-deathproblemsthreateningyourbrand,buthonestyisalwaysthebestpolicy,andbroadcastingthebadnewsisusuallybestdonesoonerChapter 11Brand Building333© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
ratherthanlater.Preventingabrandcrisisfromoccurringisanothercasewhereasmallbusinessactuallyholdstheadvantagebecauseabrandimageiseasiertocontrolfornootherreasonthantherearefewerpeopletokeeponmessage.Inasmallbusiness,theownercanpersonallyvetalltheofficial marketing material and interview every candidate for employment.Ifabrandcrisisdoeshappen,asmallbusinessisagainbetterequippedtomanagethedamagecontrolprocessandtonotmakeitworse.Again,thebusinessownercankeephisorherfingerdirectlyonthesituation.Ifyouhaveanyemployeeswhomaynotreactwellunderfire,nowisthetime to send them on a quick vacation.Brand and Market TransitionsCambriaisatopproducerofhigh-qualityquartzcountertops.YoumightbesurprisedtolearnthatStanDavisstartedhisfamily’sbusinessin1936bybuyingintoacreamery,oramanufacturerofbut-ter.Overtheyears,thatfirmexpandeditsdairyprocessingoperationsintocheeseanddevelopedavarietyofbrandsthroughseveralacquisitionsandmergers.Thisishardlythebackgroundforestablishingapresenceinthefickleinteriordesignmarket.Infact,thefirm’swebsitesays,“NothingaboutCambria’sbeginningwasverystrategic.”CambriaPresidentandCEOMartyDavisremarked,“It just kind of happened.”In2000,theDavisfamilysawanopportunitytodiversifyandacquiredaquartzprocessingoperation.Theirdedicationtoqualityresultedinagreatproduct.However,thefirmwasnotrecog-nizedintheworldofinteriordesignorconstruction.TheywiselydecidedtopartnerwithDuPontandbeganutilizingthelarger,moreestablishedfirmfordistributionoftheiroriginalquartztileproducts.Thisgavethefamilyachancetogettheirproductionprocessdownwhiledevelopingtheirown“Cambria”brand.Injustoveradecade,theyhadbuiltasuccessfuloperationandahighlyadmired brand that commands respect in the interior design world.Targeting: Market and Community Specific BrandsYoucanfoolallthepeoplesomeofthetimeandsomeofthepeopleallthetime,butyoucannot fool all the people all the time.—Unknown (often attributed to Abraham Lincoln)Manypeoplewouldassertthatmarketingisnotmuchmorethanasophisticatedtoolusedtotrickcustomersintobuyingaproductorservicetheyotherwisewouldnotneed.Goodmarketingshouldbeaprocessofbringingtheperceivedvalueofagreatbrandinlinewiththevalueofitsgreatprod-ucts.However,thequoteabovemakesanexcellentpoint:brandsmusttargetcustomers,buttheyneednotandshouldnotcourtallcustomers.Brandscanbelaserfocusedonspecifictargetsbyinterest, identity, or geography.Ahardworkingentrepreneurwhohadbuiltasuccessfullineofsnowboardingclothingandaccessorieswasfrustratedbythelackofrespectthathisparentsshowedforhisaccomplishments.Whenheattendedanindustrytradeshoworshowedupontheslopes,hewasarockstar,butnoneofthatprestigetranslatedwhenhevisitedhome.Hewasconsideringexpandinghisadvertisingintotelevisionorprintmediathathisparentswouldappreciate.Hethoughtthatperhapsitmightalso bring him some unexpected customers.334A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
conversion ratePercentage of potentialbuyers exposed to yourmessage who complete anaction, i.e., learning aboutthe product or making apurchase.GOEXPO Winter 2019 FairSource: Aleksandra Suzi/Shutterstock.comDon’tfretifyourmomhasnoideathatyourbrandishugeaslongastheconsumerswhoaremostlikelytobuyyourproductsrespectit.Weliveinanagewhereinformationtechnologyallowsadvertisingandmessagingtobetargetedwithalmostpinpointaccuracy.Thebestmarketingissofocusedanddirectthatyournoncustomermomwillnever,everseeit.Infact,ifshedoescomeacross it, that may be a signal that you’re wasting your time and money.Donotwasteyourpreciousbrand-buildingeffortsoryouradvertisingbudgetonpeoplewhowillneverhelppayforthateffortorproduceprofits.Marketingsimplyforprestige,recognition,and ego are signs of a brand about to fail.Yourmarketinggoalistodrivesalesandbuildawarenesswithinatargetaudience.Youraudi-encemaybedefinedbygeography.Forexample,imagineyouownahotellaundryservicecompanythattargetsinnsalongtheTijuana-Rosarito-EnsenadacorridorofBajaCalifornia.Alternatively,youraudiencemaybethewholeworldbutlimitedbyspecificconsumerinterests,aswiththepre-vioussnowboardproductsexample.Anaudiencemightalsobelimitedbydemographics,asisthecasewithanautobrandaimedatfirst-timecarbuyersinthedevelopingworld.Finally,youraudi-encecouldbesomespecificmixofallthesefactors,geography,interests,anddemographics,suchas for a clothing store in Tokyo that sells only to high-end men’s business suit buyers.Focusingnarrowlyoffersseveralmarketingadvantages.Thefirstisthatgoodtargetingensuresthattheconversionrate,orthepercentageofpotentialbuyersexposedtoyourmessagecomparedwiththosewhocompleteanactionlikelearningaboutyourproductormakingapur-chase,isrelativelyhigh.InChapter12,themechanicsofhowtomakethishappenforyourbrandwill be discussed!Entrepreneur FitHaveyounoticedhowthefacesofsomebrandsjustfittheirproductsorservices?ThinkaboutSirRichardBranson,andthenthinkaboutflying.PictureMarthaStewartandherconservativehomedécor. Look at Alibaba’s Jack Ma, and imagine huge online sales.Chapter 11Brand Building335© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
self-imageA personal identity.focus groupA tool for gatheringinsights from potentialcustomers that brings agroup of individualstogether to discuss aproposed new product orservice and its marketing.Theseentrepreneursfittheircompaniesandtheirproductslikeaglove.Theyseemtolovewhattheydo,andtheircustomerscansenseit.Thefactthatthesefamousentrepreneursareavitalpartoftheirbrandworkswellforthemandfortheircompanies.Youcandothesamewithyour small business.Thetrialsofsmallbusinessownershiparehardenoughwithoutenduringabadmatchbetweenyourbrandandyourownself-image.Ifyoucannotagreewithyourcompany’smodel,brand,orproduct,thenitwillbearoughride.Forexample,ifyoudon’tsmoke,doyouwanttoopenatobaccostore?Ifyouarearecoveringalcoholic,isitsmarttolaunchanightclub?Mostlikely,theanswerisno.So,firstandforemost,dosomethingthat’sbothprofitableandatleastagreeabletoyou. If you can be passionate about your work, all the better.Now,justbecauseyoufittheproductdoesn’tmeanthatanybusinessinthatcategorywillfityou.Ifyoulovescubadivingbutcannotstandhumidityormosquitoes,doyouwanttobuyadiveshopinFlorida?TheNewEntrepreneurialDynamicrequiresthatthebrandbeanintegratedpartoftheentireentrepreneurialfit.Ifsomeaspectofyoursmallbusinessmakesitdifficultforyoutoloveyourwork,itwillbethatmuchharderforyoutobuildabrandthatotherpeoplewilllove.So,ifyoulovetoswimwithfish,openthatdiveshopinHawaiiwheretheweatherisbetterandthemos-quitoesarefewer.Yourundistractedlovefortheworkwillshowandmakethebrandallthebetter.Just make sure that your brand is something that you wake up smiling about each morning.Growth Plan FitAbrandmustfitthecurrentandfuturescaleofanorganization.Ifyou’realocalcafé,partoftheambianceandcredibilityisintheauthenticityofbeingasmallbusiness.Manypeopleprefertheideaofpatronizingalocallyownedestablishmentandexpectahigherqualityandmoreuniqueproductfromit.Theydon’twanttopatronizealarge,impersonal,globalentity.Ifyougettoopro-fessionaland“slick”inyourapproach,yourisklookinglikejustanotherchainrestaurant,andyoumay reduce the value of your brand to this group of “authenticity seekers.”Ontheotherhand,ifyouplantogrowyouroperationintoaglobalfranchise,youwanttomakesureyou’vegotabrandandimagethatcansupportthatgrowth.Somecustomersprefertopatronizealargeorganizationthathasstrictlydefinedqualitystandards.Theyaren’tlookingfornewexperiences,andtheywantaconsistentlyuniformproduct.TheMcDonald’sbrandiswhatworksforthem.Thisgroupiscomfortedbyshinyplasticandanassemblylinefeelthatourauthen-ticity seekers eschew.Multinational Conglomerates Dress Up as Small BizBeawarethattheconsumer’sperceptionofthedifferencebetweenbigandsmallbusinessesisintentionallyblurredbycorporatemarketers.Theyarelookingtoestablishbrandsthatcapturetheauthenticityofsmallbusinesswhilestillleveragingtheireconomiesofscaleinproductionandtheir retail distribution monopolies.Let’sgocheckoutthespecialtysauceaisleinabig,chainsupermarket.Youwillseedozensofproductsinalldifferentcategoriesstrivingtolookauthentictotheircuisine.There’sItalianmari-nara,Thaipeanutsauce,andMexicanmolewithchocolateinit.TherewillalsobealargesectionofSouthern(U.S.)barbecuesaucesaswell.Oureyeslandon“LittleBob’sFamousBBQSauce.”Thebottlefeaturesapictureofawise,smilingoldman,“LittleBob.”Thelabeldesignisabit“cheesy”withabigmapofTexasonit.ItlookslikesomethingLittleBobandhisfamilymadeintheirkitcheninHoustonandshippedoutoftheirgarage.You’rethinking,“That’ssomeauthenticsauce!”336A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Many of these brands aspire to appear “authentic.”Source: Niloo/Shutterstock.comBeforeyouthinkyou’rehelpinganentrepreneurwhenyoubuythisstuff,let’sconsiderhowmanybottlesmusthavebeenshippedtofilluptheshelvesofevenonemajorsupermarketchain.It’shighlyunlikelythistastystuffwasbottledathome.SomeinvestigationwouldshowthattheBBQsaucewasactuallydevelopedinagiantfoodlabinMinnesotausingstatisticaldataonconsumerpreferences.Itwasmadebytechniciansandisbottledbyseverallarge“co-packing”factoriesacross the nation.“Authentic” branded products may actually be developed by scientists in sterile labs.Source: © Shutterstock, Inc.TheLittleBoblabelwasproducedbyagroupofhipstergraphicartistsinVenice,California.Infact,itturnsout“LittleBob”himselfwasportrayedbyamodel.Sadly,thereneverwasapersonofthatname.Thephotoonthelabelwasselectedbyinterviewingconsumersinfocusfocusgroupsgroupsabout which image they felt was most authentic.Chapter 11Brand Building337© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
brand associationA planned relationshipbetween a brand andsomething else, i.e., acolor, concept, person,emotion, or idea thatcomes to the consumer’smind when a brand isconsidered.taglineA catchphrase or sloganused to identify a productor company.AssociationBrandassociationisapowerfulpsychologicaltoolthatmarketershavebeenusingforyears.Attheabstractlevel,brandstiethemselvestothingslikespecificbrightcolors(Coke,Pepsi),smiles(Ama-zon), the sun (BP), or other generally positive concepts, expressions, and things.Iconic public symbols with positive associations are often co-opted by brands.Source: © Shutterstock, Inc.Atthemostconcretelevel,repeatedmessagingisusedtotiethebrandtosomethingorevensomeoneveryspecific.Forinstance,manycompanies,suchasLibertyTaxService,haveleveragedthepublic’spositiveassociationwiththeiconicStatueofLiberty.Otherbrandshavetiedthem-selvestofamouspeople,forexample,theverysuccessfulGeorgeForemanGrill(no,Georgedidnotinventthat).Somehaveestablishedartificialpersonalitieswhoarearchetypesoftheindividualthey want to be associated with (see”Multinational Conglomerates Dress Up as Small Biz”).Ifyoursmallbusinesspullsmostlyfromthelocalcommunity,includingthatcommunity’snameinyourbrandorinatagline,itusuallymakesthelocalshappy.Ifyouhaveastrongreputa-tioninthecommunity,yourownnamemightbeagreatassociationaswell.ImagineJoeBasher,aretiredNHLhockeyplayer,returninghometoMaple,theruraltowninCanada’sManitobaprovincewherehegrewup.Joestillneedsincomeandislookingforawaytoleveragehissports-relatedfameandcontinuetoworkinthesportthatheloves.Joebuysanicerinkthatserveslocalrecreationalskaters and hosts a hockey league. The ice rink is called, not surprisingly, the “Maple Ice Rink.”Joehasanumberofchoices.Hecouldrenametherink“Basher’sSportsComplex,”anassocia-tionthatwouldprobablyattractmorehockeyplayers.Therecreationalskaters,ontheotherhand,areveryfondoftheMapleassociation.Joemighttryacombinationlike“JoeBasher’sMapleIceRink”orkeeptheexistingnameandaddataglinethatplaysonhisfame,asin“MapleIceRink:Home of the Basher Hockey League.” What is the best way to go?Rememberourdiscussionofscaling?Itappliestoassociations.IfJoeislookingforarelaxinglifestylebusinessinMaple,heshouldkeepthetown’sname.Ontheotherhand,ifheaspirestobuildanationalchainlikeTimHortondidindonuts,heshouldleadwiththeBasherbrandthat338A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
trademarkA symbol, word, or phrasethat denotes a specificproduct and may be legallyregistered for protection.Registered Trademark, Copyright, Trademark,and Service Mark symbols.Source: Greg AutrywouldappealtofansacrossNorthAmerica.Thefirstrinkcouldbe“Basher’sSportsComplex:Maple,” and maybe the next one will be “Basher’s Sports Complex: Ottawa”!Associationcanalsobedangerousforyourbrand.Rememberthatalthoughyoucancontrolyourownproductquality,youcannotcontroltheindependentthingsorpeoplethatyouassociateyourbrandwith.NikelearnedthatpainfullywhentheirexpensiveendorsementofTigerWoodsbecameanightmarefollowingpublicrevelationsofthefamousgolfer’sinfamouspersonalmiscon-duct. Could negative association possibly be that big a problem for a small business?Imaginethatitis2003,andyouarelaunchingalineofauthenticJapanesefoodproductsfromyouradoptedcityofSanFrancisco,California.Yourfirstproductisaseafoodseasoningmix.Tolenditsomeauthenticity,younamethemix“FukushimaFlavor”inhonoroftheprefectureonHonshuIslandwhereyoulivedasachild.Thespicesellswell,andyouadd“Fukushima”toallyournewproductnamestokeepthebrandgoing!That’sallverygooduntil2011whenadevastatingearth-quakeandtsunamidestroystheDaiichinuclearpowerplantatFukushima.Suddenly,thename“Fukushima” is indelibly associated with disaster and frightening radiation leakage.Trademarks, Brandmarks, CopyrightIn2009,directorJamesCameronreleasedhisblockbusterfilmAvatar.ThefollowingyeartheNick-elodeonTVnetworkreleasedafilmadaptationofitscartoonseries,Avatar:TheLastAirbender,whichhadbeenrunningsince2006.However,becauseNickelodeondidnotproperlytrademarkthename“Avatar,”theywerelegallybarredfromusingtheirowntitlefortheirownfilmprojectdespitebeing“firsttomarket.”Evenworse,whentheydevelopedasequelTVseries,Avatar:LegendofKorra,they were forced to remove “Avatar” from that media as well. Such disasters are easily avoided.IntheUnitedStates,anyonecansimplyclaimatrademarkfortheirproductnameoraservicemarkfortheirservicebyplacingtheTMorSMsymbolsafterthename.Nopaperworkorregistrationisrequired.However,ifyouwishtogoastepfurthertosecureenhancedrightsandevidentiarybenefitsattrial,youcanobtainaregisteredmark®byfilingwiththeU.S.PatentandTradeOffice.If,asinthecaseof“Avatar,”yourworkisworthmillionsofdollars,youarestronglyadvisedtofilewiththeassistanceofanexperiencedpatentattorney.Ifyou’reopeningPaul’sFishingSupplyonMainStreet,youprobablydon’thavetoworrymuchatall.Formostbusinesses,usingtheTMisgoodpractice.Youcanalsousecopyrightsforslogans,productdescriptions,andsalesver-biage.Again,youdonotactuallyneedtoregister;simplyplacethe©afterwardornoteyourclaimasin“Copyright2021GregAutry.”However,ifyouwishtoclearlyestablishyourlegalrightsandprecedent,youmayfileacopyrightnoticewiththeU.S. Copyright Office.InEurope,somecountriesrespectatrademarkthatisnotregistered,butforfullprotectioninallEUstates,itisrecommendedthatyouregisteryourtrade-markonlinewiththeEuropeanUnionIntellectualPropertyOffice(EUIPO).InChina,youshouldregisterwiththeChinaPatentandTrademarkOffice(CTMO),which is part of the State Administration for Industry & Commerce.Whiletheseintellectualpropertyprotectionsarecriticalinmanyarenas,inmostsmallbusinesses,youcanprobablysafelywaitabitbeforefiling,particularlyifthelegalfeesareachallenge.AswitheverythingintheNewEntrepreneurialDynamic,businessnamesaresub-jecttochange.Youroriginalgutinstinctsonagreatnamemaynotbewhatyoueventuallyrunwith.Forexample,Walmartstartedlifeas“Walton’sFiveandDime.”Ratherthanfeedingyourlawyer your profits, wait until you know it’s the perfect time to file.Chapter 11Brand Building339© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
trendCurrent consumer habitsor behaviors with potentiallong-term significance.See alsofad.fadShort-lived consumerpopularity. See alsotrend.Key Takeaways•Always be building your brand.•Consider brand impact on every decision you make.•Know what your brand definition is and why.•Make sure your brand can grow with your firm.•Protect your valuable trademarks and register if needed.11.2Your Brand in the NewEntrepreneurial DynamicLearning Objectives1.Understand that all brands exist in a changing environment.2.Recognize that brands are tied to feelings as much as rational value judgments.3.Understand the critical importance of brand coherence.4.Recognize that brands create value for entrepreneurs and shareholders.Astheartandthescienceofbrandinghaveimproved,themarketplacehasgottenevermorecompetitive.Themedialandscapehasalsochanged.Thefreneticpaceofsocialmediaprovidescompanieswiththeabilitytoassociatetheirproductswithevents,people,andfadsinreal-time,butitalsodemands7/24/365brandmanagement.Thiscanbearealchallengeforworkingentrepre-neurstomanage.BigfirmshaveautomatedsystemsbackedbyteamsofprofessionalstomanageTwitter.Theentrepreneurhasherphone,andintoday’sworldofbrandmanagement,shecannever,everputitaway.EmbraceabitofZen-likephilosophyfromthe1984filmBuckarooBanzai,andkeepin mind that “no matter where you go, there you are.”Brandsmustalsobedynamicandcapableofevolvingovertime.Adaptingabrandtochangingconditionsandpreferencescanbeadifficultbusiness.Inthe1990s,diningtrendsshiftedfromclas-sicsit-downchainslikeDenny’s,whichgenerallyservedawfulcoffeebutwereoddlycalled“coffeeshops,” to hip coffee-focused venues like Starbucks.Generationaldividespresentparticularproblems.Somebrandssimplyageanddiewiththeirconsumers.Thefactthattheirparentsembracedaspecificbrandcausesmanyyoungconsumerstoactivelyrejectthembecausenothingmomordaddoesiseverlikelytobecool.Thisinabilitytotran-scendgenerationsiswell-knowninthemusicindustry—veryfewdiscothequesoperatetoday—butit is also present in the auto, fashion, and food services industries.Itisessentialtofollowtrendswhileavoidingfads.Trendsarepopularnewpreferencesincul-tureortechnologythataddvaluetopeople’slivesandthatlastforyears.OrganicfoodshavebeenpartofapopulartrendintheU.S.sincethe2000s.Firmsthatcrediblyembracedthattrendforbet-ter quality foods gained long-term positive brand association.340A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
The GPS-enabled augmented-reality smartphone game Pokémon Go was extremely popular in 2016.Source: Wachiwit/Shutterstock.comFads,ontheotherhand,areshort-livedphenomenathatdon’taddenoughvaluetorequirethattheystayaround.Fadsendquickly,ofteninafewmonths.Moreimportantly,whenfadsfade,theyareusuallydisdainedbytheverypeoplewhoadoptedthem.Thisisamentalmechanismpeopleusetojustifyrejectingsomethingtheypreviouslyembraced.Inthespringof2016,everyonewithasmartphoneseemedtobeplayingthepopulargameappPokémonGo,butbythatfall,thefadwasover,anditwasliterallyajoke.CompaniesthatspentthesummerdevelopingamarketingcampaignaroundPokémonGolocationsdidn’tjustwastetheirinvestment,theyweremockedbyconsumers. That’s exactly what a brand doesn’t want.Building Your BrandBrandsaren’tsimplycreatedandthenmagicallyleapintothepublicconsciousness.Theytaketimetogainrecognitionandtotakeonmeaning.Agreatproduct,agreatname,andagreatlogoarestillnotabrand.Youmustrepeatedlypositionalltheseitemssothattheyareviewedintherightcontextbytheconsumer.Thefirsttimeapotentialbuyerseesanewiteminthestore,anad,orinthemedia,theyaren’tnecessarilyclearonwhatitis,whatitdoes,orhowtheyaresupposedtofeelaboutit.Establishingthebrandisabouttheirfeelings.Embeddingpositivefeelingsaboutabrandinto the buyer’s mind demands constantly managed reinforcement.Thefirstpartofthisrequiressimplerepetition,gettingthebrandoutthere,infrontofthecon-sumer,repeatedlyuntiltheyreacttoitsubconsciously.Likeacatchysong,afterenoughrepetitions,yourbrandwillbeintheirbrainforlife.Thefactthatbrandscanbeimprintedontooursubcon-sciousmindshasbeenscientificallydemonstrated.Neuroscientistshaveusedfunctionalmagneticresonanceimaging(fMRI)machinestolookatthebrainsofconsumerswhiletheyviewedseem-inglyrandompicturesflashedonascreen.Whenlogosforwell-knownbrandsappeared,thefMRIdatashowedthatawell-definedemotionalnetworkintheviewers’brainswasactivated.[3]Anotherstudyshowedthattheimprintingofbrandsbeginsveryearlyandfoundthatsomebrainregionsassociated with motivation were activated in children when they observed food company logos.[4]Chapter 11Brand Building341© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
brand managementWork done to ensure thata brand is presentedconsistently and positivelyand/or mitigate anydamage done to a brand.brand coherenceThe consistent applicationof brand identity.overvaluationThe act or instance ofassigning a value higherthan the normal purchaseprice to an asset beingpurchased.Managing Your BrandBrandmanagersworktoensurethatimprintingoccursasquicklyaspossibleandtominimizeanynegativeimprintingthatmightoccurifthebrandisviewedinadisturbingcontext.Thebestbrandsworkhardtomakesuretheirproducts,name,andlogoarealwayspresentedconsistentlyandinanapprovedcontext.Thisiscalledbrandmanagement,anditspurposeistoensurebrandcoherence.Largefirmsestablishofficialstyleguidesandapprovalprocessesthatretailersmustusewhenpre-sentingtheirproductsinthestoreorinadvertising.Dothesameprinciplesapplyinmanagingbrand coherence for small brands?ConsiderJoeBasher’sicerink.Joehasabrandfromhispro-hockeydaysheneedstoprotect.Joeisn’tanexperiencedbusinessperson,buthedoeshavethatonetool—hisownfamousname—thathecanusetolifttheprospectsofastrugglingicerink.However,iftheicerinkisn’texecutedwellandtheconsumerexperienceisnegative,hecouldirreparablydamagehisbrandandreduceitsvalueinotherendeavorslikeproductendorsementsorpersonalappearances.Joeneedstomakesuretheperceptionsoftherinkarepositiveandthattheseperceptionsaremanagedcare-fullybysomeonewhocares.Hemightconsiderhiringanoutsideconsultanttohelphimmanagethis process, particularly in the realms of social media.Cashing In on Your BrandAspreviouslyshown,thevalueofacompanyisnotalwaysintheintellectualpropertyorresourcesofafirm.Muchofitmaybeinthebrandpowerimprintedontothemindsofconsumers.Thatpowercanbeveryattractiveforothercompanieslookingtoleveragethoseimprintedconsumers,andconsequently,theuseofmergersandacquisitionstobuyabrandisamajorindustry.Addi-tionally,mechanismslikefranchises,syndication,andlicensingabrandallowyoutokeepcontrolofyourbrand’sequitywhilestillgettingpaidforitsuse.Atsomepoint,however,youmaywanttocash in the full value of what you’ve created.Thecraftbeerbusinessexplodedinthe2000sand2010s.Atfirst,theincursionofdisruptivefirmsintotheirmarketwasseenasathreatbylargeincumbentslikeBudweiser’sparentfirm,Anheuser-Busch(laterABInBev).However,whilethecustomerswantedthehipnewbrands,theestablishedbigcompaniescontrolledthedistributionsystem.Thissuggestedthatacombinationofthetwobusinesseswouldbemorevaluablethanthefirmscouldbeseparately.ABInBevwentonabuyingspree,acquiringfirmslikeGooseIslandandElysian.Indoingso,theycapturedthe“hipness”ofthesecompaniesandmaintainedtheirmarketdominance.Forthesmallerbrands,thedealwasallabouthow“hipness”drovetheirbrandvalue.Theequipment,recipes,andtechniquesofthesecompanieswereoflittlevaluetothebigbrewer.WhatABInBevwantedwastocashinonthe“craftbrew”creds,whichtheirownbrandslikeBudLightcanneverclaim.ABInBevpaidanovervaluationfor these firms to capture those creds.Valuingabrandforsalecanbetrickyduetothisintangibleaspect.Ultimately,measurementsofcustomerretention,alternatives,andotherstandardbusinessmetricscanbeuseful,buttheemphasismustbeoncapturingthebrand.Forexample,comparingexpenditurestodevelopthebrandandexpendituresofcompetitorstoachievethesameorlesserbrandcanhelpdemonstratevalueintheintangible.Intheend,abrand,likeanythingelse,isworthwhatsomebuyeriswillingtopayforit.Thinkofwhostandstobenefitmostfromincorporatingyourbrandormaybeeveneliminatingitfromthemarket,andyouwillfindyourcustomer.Howdoesthisworkwithsmallbusinesses?Considertwolocalcafés:Jane’sCoffeeShopandtheHipsterCafé.Jane’sCoffeeShophasbeenonMainStreetforaslongasanyonecanremember.AsJaneapproachesretirement,sheisconsid-eringsellingthebusiness.Herfacilityisnotfancy.Infact,thefaçadeisalittlerundown,anditsdarkinteriorislongoverdueforastyleupdate.Theclienteledoesn’tcareorevennoticebecause342A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
A modern café.Source: © Shutterstock, Inc.disposable incomeSpendable money left overafter taxes have been paid.theyhavebeencomingtoJane’stheirentirelives.Manyofthemareretiredandonfixedincomes.Theydon’thavealotofmoney,buttheyareloyal.Eachofthemhastheirfavoritebooth,andtheycansitthereforhoursenjoyingthefreecoffeerefills.Theyareusedtothestainedfabricandtheworntabletops.ThewaitstaffhasbeenatJane’saslongasthecustomers,andeveryoneknowsoneanother.Janehasneverthoughtabouther“brand.”ShehasneverusedsocialmedianorseenherreviewsonYelp.Withoutaplan,thelittlecafé’sbranddevelopedandevolvedovermanyyears.Itmight best be described as “comfort food for seniors.”Acrosstown,JosérecentlyopenedtheHipsterCafé.Joséjustgraduatedfrombusinessschoolandisverybrandconscious.Hipsterisbrightandopenwithout-doorseating.Everythingfromthelogotothemusichasbeencarefullydesignedtoattracteducatedyoungpeoplewithhigherdisposableincomes.Theypayextrafororganicfoodsandfancycoffeesfromaroundtheworld.TheyconnectwithHipsteronTwitterandInstagramtofindoutaboutcool“off-the-menu”items,andthereviewsonYelpareallpositiveandverycarefullymanagedbyJoséandhisyoungtech-savvystaff.Despitebeinginbusinessforonlyayear,JoséisactuallyconsideringsellingHipsterinordertopursueanewideahehasforarestaurant-focused social media management service.Whichofthesetwocafésisgoingtosellformore?IfyouaskedJane,shewouldhavenodoubtthatherlong-establishedbusinessisfarmorevaluablethanJosé’slittleupstartcafé.Shewouldbedeadwrong.Themainassetabuyerwouldbeinterestedinisthefuturerevenuesasdeterminedbythevalueoftheclientbase.Despitetheirloyalty,Jane’solderandlower-spendingdinersdonotpresentanattractivelong-terminvestment.Thereisn’talotofmoneythere,theclientswillliterallydieoff,andtheyarenotconnectedtothebrandbeyondtheirseatinthebooth.Ontheotherhand,thepotentialofgrowingtheHipsterbrandfromthehigh-valueandhighlyconnectedclientelethatJoséhasbuiltupispromising.José’sunderstandingof his brand has made all the difference.Brand Building in a Dynamic WorldCulturalCulturalChange:Change:Publicexpectationsandculturalnormsarechangingatanincreasingrateasglobalizationandtechnologybreakdownandshiftexistingsocialstructures.Recently,definitionsofpersonalidentityhavebecomeatopicalissueintheUnitedStates.Identityconcepts,suchas“manly,”thathavedrivensomebrands(thinkjeans,razors)fordecadesmaynowresonateneg-ativelywithyoungerconsumers.Alwaysconsiderthesocialandpoliticalcontextinwhichyourbrandwillbeinterpretedandhowyouwilladapttochangesinthatcontext.Doingthiswellisacompetitive advantage; doing it poorly may be a serious problem.Technology:Technology:Gettingyourbrandinfrontofconsumersisincreasinglyaboutdigitalexposure.Lookaheadandstayconnectedtowhatyoungpeoplearedoinginordertokeepyourbranddevelopmenteffortsattheleadingedge.Workingongettingyourbrandusedbyacharacterinamobile game app may be better than buying a billboard.Globalization:Globalization:Today,allbrandsareinternational.Withincreasinglevelsofwealthinformerlydevelopingcountries,internationaltravelisexploding.Ifyoudon’tshipaproductoverseas,thereisagoodchancethatinternationalcustomersarecomingtoyoumoreandmorefrequently.Keepyourbrandglobalawareandlanguageindependentwhenpossible.Considerthenames,taglines,andimagesyouselectwithconsiderationtotheirpossiblemeaninginotherculturesandlanguages.Chapter 11Brand Building343© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Earth has no borderlines, and globalization is blurring them in the markets as well.Source: NASAKey Takeaways•Avoid attaching your valuable brand to passing fads.•Always be building your brand.•Keep your brand coherent and on track at all times.•Be ready to leverage your brand or even sell it when it is most valuable.•Customers determine the value of your brand; stay current.344A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
11.3Case Study: WahooÕs TacosThe Lee brothers, Wahoo’s founders (from left: Wing, Mingo, and Ed).Source: The Lee BrothersEdLeewasborntobearestaurateur.Well,thefounderoftheWahoo’sTacoschainwasactuallyborninarestaurant.Edandhisbrothers,WingandMingo,areSouthernCaliforniasurfersofChineseethnicitywhowereborninBrazil.Together,theymakefamouslycreativeMexicanfoodfusedwithunexpectedtasteslikeKoreankimchi.BeforesettlingontheWahoo’sconcept,Edandhisbrothersexperimentedwithclothing,latexhospitalgloves,Asianrestaurantsupply,andoncenearlypurchasedabisonranchinMontana.TheLeefamilyisaclassic“onlyinAmerica”taleofentrepreneurship.Wahoo’sopenedin1988andnowhas60locationsandannualrevenuesofover$65 million. The case is presented here in an interview format.Prof. Autry:Tell me about Wahoo’s brand. How did you build that?Lee:WeopenedthefirstWahoo’sin’88,inCostaMesa,California.ThemenuwasacopyofanauthenticplacewelovedinEnsenada.Thenwejustwentwithwhatweloved.Westartedinfusingotherstuffintotacosandburritos.ThingslikeJapaneseteriyakiandKoreanBBQ.Whodoesthat?Wealsodecoratedthestorewithstickersforsurfculturecompaniesandcoveredthewallswithskateboardsandcoollocalstuff.ItwastotallyembracingtheSouthernCaliforniaculturalmashupthat made the Wahoo’s brand so unique.Prof. Autry:What’s the biggest challenge your brand has faced?Lee:Well, that’s an easy one, the “Band-Aid incident!”Prof. Autry:What was that about?Lee:Backin1995,Igotacallfromourheadquarters’officesaying,“Youneedtogetdownhererightaway.”WhenIarrivedattheHQ,ourparkinglotwaspackedwithnewsvansandcrawlingwithreporters.ThefirstreporterIranintotookmeasidetowarnmewhatwasgoingon,andshesaid, “You want the good news or the bad news first?”Chapter 11Brand Building345© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
I replied, “Give me the good news.”Andshesaid,“Theworldissafe.Thereisabsolutelynothingterriblegoingontodayanywhereon Earth.”So I asked her, “Then what’s the bad news?”Shereplied,“You’rethenews.”ShewentontoexplainthatawomanwasclaimingthataBand-Aid had been found in her burrito.Prof. Autry:How did you handle that?Lee:Well,firstly,theoldadage,“There’snosuchthingasbadpublicity”istrue.Oursalesthenext week were through the roof. We had, like our best week ever.Prof. Autry:That’s pretty surprising!Lee:Wewerehonest,andthatisimportant.Itisalsoimportantthatitshowed.Welookedlikewecaredbecausewedid.Welookedlikerealpeopledealingwithaproblemhonestly.ItoldtheLATimesthattheemployeefelthorribleandthatweallfeltbad.Customersrespondedbysupportingthe Wahoo’s brand and coming into the restaurants.Prof. Autry:So it all worked out that easily?Lee:Ohno!Therewasalawsuit.TheladywiththeBand-Aid,shewasanurse,andsheandherdaughterquittheirjobsfiguringtheyweregoingtohaveabiglegalpaydayonus.Ourinsurancecompanytoldusweweregoingtolose,andthejudgmentwouldexceedourcoverage.Wewereactu-ally preparing to liquidate the entire business. A lot of people were going to lose their jobs.Prof. Autry:What happened then?Lee:IwantedthatBand-Aid.ItoldmyattorneythatifIwasgoingtohavetotrademyentirebusinessoverthisBand-Aid,Iwanteditaspartofthesettlement.Youknowwhat?Shecouldn’tproduceit.Therewasnoevidence!Thatwasprettymuchtheendofthecase.Iactuallyfeelabitsorry for the woman and her daughter.Prof. Autry:What did you learn from this brand crisis, and what did you change?Lee:I’dhavetosayyoualwaysneedtobelevel-headed.Youneedtobereallysincere.Whenthingsgowrong,youfixthem,andyoumakesureeveryoneunderstands.Wemadespecificchangestothefoodpreparationprocess,includingusingsteelmeshglovesandfoodprocessors,butthekeythingisjustconstantlyreinforcingourcommitmenttosafetyandqualityandmakingsureevery-one is on board with that.Endnotes1.Soiconic,infact,thathishathasbeeninstalledasanexhibitattheSmith-sonian National Museum of American History.2.https://web.archive.org/web/20130215164311/http://www.reuters.com/article/2008/10/01/us-china-milk-idUSTRE48T0L920081001.3.Casarotto,S.,etal.(2012).Covertbrandrecognitionengagesemotion-specific brain networks.Archives Italiennes de Biologie, 150(4), 259–273.4.Bruce,A.S.,etal.(2014).Brandingandachild’sbrain:AnfMRIstudyofneuralresponsestologos.SocialCognitiveandAffectiveNeuroscience9(1)118–122.346A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
marketersIndividuals who craft andexecute marketing plans.CHAPTER 12MarketingTheproductisthecontents,thestoreisthepackaging,andthecommunicationisthemagic. People buy magic and stories.—Pietro Becarri, CEO of FendiDisneyland is the physical manifestation of the Disney brand of family fun.Source: wonderlustpicstravel/Shutterstock.comCapturethefirstthoughtthatcomestomindwhenyouthinkofthefollowingbrands:Disney,Toyota,orApple.It’slikelyyouthoughtoffamilyfun,reliability,andasleekelectronicdevice,respectively.Howwerethosebrandimagesimplantedinyourbrain?Toagreatextent,repeatedexposuretocarefullycraftedcommercialmessageshavepermanentlyconnectedtheseattributestothosebrandsinyoursubconsciousmind.Althougheachoftheseglobalcompaniesdeliversatop-qualityproductanddominatestheirrespectivemarketsegments,theydon’ttrustserendipitytoleadconsumerstotheirdesiredbrandperception.Thesefirmsliterallyhavethousandsofpeoplespendingmanymillionsofdollarseachyeartoensurethatyouperceivetheirbrandinpreciselythewaytheywouldlikeyouto.Professionalsareworkinginthebackgroundmanagingeverythingfrom Super Bowl commercials to Instagram posts. They are called professionalmarketers.© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
marketingThe activities of acompany associated withcreating demand for thefirm’s products or serviceswithin their target market.advertisingThe activity of informingpotential customers abouta product or service viapaid publicannouncements overvarious media such asprint, television, digital,and social media.sales processThe process that comesafter consumers are madeaware of a product viamarketing, and that isdesigned to result in aclosing a deal.12.1Beyond BrandsLearning Objectives1.Understand the difference between marketing and advertising.2.Recognize that effective marketing drives a variety of functions in support of sales.3.Understand the concept of satisficing.4.Recognize that markets have limits and advertising can have diminishing returns.5.Understand the technology adoption life cycle.6.Understand the chasm concept, beachhead strategy, and bowling pin effect.Marketing Versus Advertising Versus SellingWhilemarketingandadvertisingarecloselyrelated,theymustnotbeconflated.Eachdoeswhatitsoundslike—marketingcreatesmarkets,andadvertisingcreatesadvertisements.Marketingcanbebroadlydefinedastheactivitiesofacompanyassociatedwithcreatingdemandforthefirm’sproductsorserviceswithintheirtargetmarket.Advertisementsareoneusefultoolforpositioningproductswithinthemarket,informingpotentialcustomersoftheexistenceoftheproduct,andgeneratingdemand.Advertisementsaregenerallypaidmessaginginpublicoutlets,includingprint,television,radio,web,mobile,andsocialmedia.Otherusefultoolsincludepublicity(spinningthenews)andsocialmedia.RecallthediscussioninChapter3ofobjectives,strategy,andtactics.Howmight you apply that thinking in this context?FIGURE 12.1Marketing in ContextSource: Greg AutryTakealookatFigure12.1andimagineyouareinjustaboutanybusiness.FromChapter11,youknowthatbuildingagreatbrandshouldbeouroverridinggoal.Marketingisourstrategicplan.Advertising,socialmedia,publicity,andothertacticsimplementthemarketinggoals.Advertisingandothertactics,inturn,supportthesalesprocessdiscussedinChapter13.Thinkofmarketingastheoverallwaythatyouwillplantoshapethemarketinawaythatisbeneficialforyourfirm’srevenues.Theresults,measuredinsalesunitsorrevenues,providethefeedbackyouwilluseto348A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
satisficingThe theory that consumerssearch long enough to finda solution that meets theirneeds rather than findingthe ultimately bestsolution.iterativelyadjustmarketingstrategy,advertising,andothertacticsuntilsalesareoptimized.Whyare sales dollars the final measure of our efforts?Salesisthemetricthatisusedbecause,intheend,brandvaluethatcannotbeconvertedtosalescannotbesustained.Tobesustainable,marketingandadvertisingactivitiesmustgeneratemoreprofitsthantheyconsume.Saleswillbediscussedfurther,butgoodmarketingandsuccessfuladvertisementsarealwaysalignedwithasuccessfulclose.Thisbeginswithunderstandingwhycustomers purchase products and how they come to decisions about specific brands.Satisficing and DifferentiatingYoumightassumethatconsumerspurchasethebestproductorservicetheycanaffordtobuy.Thefactis,consumersoftenchooselesscapableproductsorserviceproviders.Infact,theyoftenpaymore for the lesser good! Can you think of why this would be?Thereasonspeoplemightpaymoreforlessorchoosealessergradeproductarecomplex.However,agreatdealofconsumerdecision-makingcanbeexplainedbythelimitedresourcesofinformationandtime.Abuyercan’tselectthebestproductiftheydon’tknowitexists,andtheyusuallycan’tspendthetimetoresearcheverypossibleproducttofindtheperfectonefortheirbud-get. Sound familiar?HaveyougonelookingforarestaurantinastrangecityandfoundthatYelp,Google,andotherservicesofferedabewilderingarrayofoptionsandthousandsofcustomerreviewstoconsider?Youknowthatsomewhereinthereistherevieworsetofcriteriathatwillofferyouthegreatestdiningexperience.Youcanonlyviewonereviewatatimeonyoursmartphone,andyoucan’tremembereachreview.Youcouldstartmakingnotesandgobackandforthtocompare.However,yourstom-achissaying,“Musthavefoodnow!”andmostoftherestaurantsstopservingat10p.m.,soyoubettermakeadecision.Intheend,youdojustenoughresearchtoassurethatyouwon’thaveahorridexperienceorgetcompletelyrippedoff.Youselectthebestrestaurantthatyoursearchcapa-bilities and time permit.ThebrilliantbusinessscholarandNobelprize-winningeconomist,HerbertA.Simon,definedthisconceptformallyin1947assatisficingandarguedconvincinglythatpeopledonotseektheoptimalsolutionbutratherthefirstchoicethatwillsatisfytheirneeds.Marketershavelongbeenawareoftheidea,anditiswhytheyspendmoneyonadvertising.Iftheycangetyouinformationabouttheirproductsooner,youmaypurchaseitwithoutdoingexhaustiveresearch.Youwillaccepttheiradasresearchtosaveyourselftheinvestmentoftimerequiredtodothegenuinework.Chapter 12Marketing349© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Herbert SimonDetail of Herbert Simon fromFamily Portrait 2,1965Source: Wikimedia Creative Commons Attribution-Share Alike 4.0 InternationalDecisionmakerscansatisficeeitherbyfindingoptimumsolutionsforasimpli-fiedworld,orbyfindingsatisfactorysolutionsforamorerealisticworld.Neitherapproach,ingeneral,dominatestheother,andbothhavecontinuedtoco-exist in the world of management science.ÑHerbert A. Simon, in his speech accepting the Nobel Prize in EconomicsHerbertA.Simonwasafounderofmodernmanagementtheoryandmuch,muchmore.BorninMilwaukee,Wisconsin,onJune15,1916,Simondevelopedanearlyinterestinscienceandparticularlythestudyofhumanbehavioranddecision-making.HestudiedsocialsciencesandmathematicsattheUniversityofChicago,receivingaBAandaPhDinpoliticalscience.HisPhDdissertationwasonthetheoreticalbasisfororganizationaldecision-making.Amonghismajorcontributionstoorganizationaltheoryweretheconceptsofboundedrationalityandsat-isficing.Boundedrationalitypresumesthathumanbeings(oranysystem)arelimitedintheirdecision-makingcapabilitybytheboundsoftheirmentalabilitiesandthetimeneededtocol-lectinformationandmakethedecision.Consequently,peopleandorganizationsdonotactuallyattempttomakeoptimaldecisions,butrathermakethebestdecisiontheycaninthetimeallot-ted,oftenchoosingthefirstsolutionthatmeetsalltheirrequiredcriteriaratherthanexpendingmore valuable time in further searching.Thissortofthinkinglentitselfverywelltothenewscienceofcomputing,andSimonwasanearlycontributortothefieldofartificialintelligence(AI).HisworkwithAllenNewelldevelopingtheIPLcomputerlanguageandtheirideaofseparatingproblem-solvingcodeinmemoryfromthedataitwasappliedtorevolutionizedsoftwaredesignandresultedinhiswinningtheprestigiousTuringAwardin1975.TheTuringisthehighesthonorinthefieldofcomputerscience.Simon’sinterestinpsychologyresultedinthedevelopmentofElementaryPerceiverandMemorizertheory,which,whencodedinIPL,becameoneofthefirstmachinelearningprograms,thuslayingtheground-work for the modern AI that drives many startup opportunities today.350A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
advertising campaignA series of advertisementsdesigned to create brandawareness.placementThe function of putting anad into a particular locationin media, as in securing anad space in a magazine.market saturationThe point at whichadditional advertising doesnot produce profitablereturns.Simonwentontothinkaboutthewaythatthehumanmindcompensatesforitslimitedpro-cessingabilitybyorganizinginformationinto“chunks”andusingthestructuralregularityoftheenvironmentasashortcutinmakingdecisions.Heevenpublishedworkonhowlanguageandculture(ChineseversusEnglish,forinstance)alteredtheactualorganizationofinformationinthehumanbrain.[1]Hisworkinthisareaformedabedrockforthescienceofbehavioraleconomicsandorganizationaltheory.Expectedutilityandothertheoriesthatpresumedhumanbeingsoper-atedlikemathematicalmachinesusingperfectinformationandunlimitedcomputingpowerhadto be adjusted to account for the reality of human capabilities.In1947,SimonpublishedtheseminalworkAdministrativeBehavior,abookthatanalyzedorga-nizationaldecision-makinginthecontextofbusinessoperations.[2]Itisstillrequiredreadingforscholarsofbusinessstrategyandeconomics.Simon’sinsightthatperfectdecisionsareimpos-siblebecauseofincompleteinformationandboundedrationalityrevolutionizedthescienceofmicroeconomicsandresultedinSimon’sbeingawardedtheNobelMemorialPrizeinEconomicsin1978.In1986,PresidentReaganawardedhimwiththeNationalMedalofScience,America’shighestawardforscientificachievement.Healsoreceivedthe1995IJCAIAwardforResearchExcellenceinartificialintelligence,theAmericanPsychologicalAssociation’sAwardforDistin-guishedScientificContributionstoPsychologyin1969,aswellasAPA’slifetimecontributionaward in 1993.Simon’spersonallifewasasvariedashisprofessionalcareer.Asateen,hespenthissummersworkingafarmonamarshinruralWisconsin.Hisdaughter,Katherine,recallsthathebraggedthatduringhisundergradcareerheonlytookonecourse,whichwasboxing.Therestofhiscur-riculumattheUniversityofChicagowasself-directed,andhegraduatedbysimplychallengingallthefinalexams.[3]Simonwasalsoaskilledpianistandchessplayerwhohadafascinationwiththeclassificationofbeetles.Oneofhisgraduatestudentsremarked,“EverytimeSimonreceivedamajoraward,whichwasoften,hewouldlearnthelocallanguagetoacceptitin.”Hewasanavidmountaineerandspenttheweekofhissixty-fifthbirthdaywanderingthroughtheAlpsonhisown. Simon passed in 2001.Advertising CampaignsMarketingiseffectivewhenthecostofthemarketingactivityislessthanthevaluecreatedbytheactivityovertime.If,forinstance,anadvertisingcampaigncreatesdemandfromenoughnewcus-tomersthatthecumulativeprofitsfromsalestothosecustomersismorethanyouspentonthedevelopmentandplacementofthoseads,you’veprobablygotawinner.Aslongasthegainsarefromcustomerswhowouldotherwisenotbeawareoforchooseyourfirm’sproduct,youaretakingawaysalesandprofitsfromcompetingfirmsinyourmarket.Congratulations,yourmarketinghasbecome a source of competitive advantage! What should you do now?Measure It to Manage ItOneofthemostobviousanswersis:Ifsomethingworks,domoreofit.Shouldyouscaleasuccess-fuladcampaignbyrunningitmoreoften?Thequestiondependsonseveralfactorswhereyoumaynothaveanydata.Themostimportantfactoristhequestionofwhetheryouhavereachedmarketsaturationornot.Thatis,hasyouradvertisementbeenseenbyallthecustomersinthetargetmar-ketthemostappropriatenumberoftimesrequiredtomovecustomerstowardapurchase?Exceedingmarketsaturationisobviouslyinefficient,butitcanalsobedamaging.Canyouthinkofwhy?Chapter 12Marketing351© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
infinitely scalableA system that is notsubject to diminishingreturns, where you cancontinue to invest moneyand always get consistentreturns.diminishing returnsThe concept that as amarket becomessaturated, each additionaldollar placed intodeveloping it will result inlower returns.Isthereanadvertisementthatyouhaveseensomanytimesthatitactuallyirritatesyouwhenitpopsupinyoursocialmediaorontelevision?Doesthiscausenegativeassociationsinyourmindwiththatcompany?Wouldyouactuallybelesslikelytoconsumeitsproductorservice?Toomuchofagoodthingcanproducenegativeresults.So,youcanconcludethatreturnstoadvertisingarenotinfinitelyscalable.Advertisingissubjecttothelawsofdiminishingreturns.Howdoyouknowwherethatpointofdiminishingreturnsis?Whataboutrunningthesameadsindifferentoutletsor in different markets? Will that generate more profits than expense?Thesearegoodquestions,andpeoplehavebeenlookingforanswersforaverylongtime.Inthenineteethcentury,departmentstoreownerJohnWanamakerfamouslysaid,“HalfthemoneyIspendonadvertisingiswasted.Thetroubleis,Idonotknowwhichhalf.”Echoingthisacenturylater,twentieth-centurymanagementguruPeterDruckerwasfondofsaying,“Youcan’tmanagewhatyoucan’tmeasure.”Luckilyforyou,asatwenty-first-centuryentrepreneur,informationtech-nologyandbigdatatoolsareansweringWanamaker’squestionsandfulfillingDrucker’smandate.We’lltakeadeeperlookintothetoolsformeasuringandmanagingmarketingeffectivenesslaterinthe chapter.The Technology Adoption Life CycleEverymarkethasabeginning.ThesmartphonemarketstartedwiththePalmTreoin2002.Theautomobilemarketbeganin1885withtheBenzPatent-Motorwagen.Somewherelongago,someNeolithicfarmersstartedthegrainbusiness,sellingafinishedagriculturalgoodtoothers,relievingthem of the need to farm themselves.The first car, an 1885 Benz Patent Motorwagen.Source: https://commons.wikimedia.org/wiki/File:1885Benz.jpg352A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
technology adoptionlife cycleThe sequential marketcategories (innovators,early adopters, earlymajority, late majority,laggards) that a newproduct or service mustpenetrate over time.innovatorsThe category of buyers ina market who are willing touse new products that arenot fully mature and mayrequire a great deal ofeffort to use.early adoptersThe category of buyerswho are willing to try newproducts as long as theydeliver on their promiseand come with support.chasmThe chasm is a termcoined by Geoffrey Mooreto describe the difficulty inbridging the gap betweenthose who like adoptingnew technologies andthose who just want stuffthat works.Wheneveranewtypeofproductentersthemarketplace,thereisapredictableprocessofmar-ketacceptancereferredtoasthetechnologyadoptionlifecycle.Thislifecyclereallyappliestoallproductsthatarenew,notjustwhatwethinkofastech.Infact,thismodelwasfirstidentifiedintheagriculturalsectorin1956bysociologyresearchersGeorgeBealandJoeBohlen.[4]Itwasformal-izedbyEverettRogersinhis1962bookDiffusionofInnovations,[5]whichrepresentedtheprocessasanormaldistributionbellcurvedividedintocategoriesofinnovators,earlyadopters,earlymajority,late majority, and laggards.FIGURE 12.2Technology Adoption Life CycleRogers’ bell curve and categorization of technology consumers.Source: Greg AutryBeal,Bohlen,Rogers,andmanysubsequentmanagementscholarshavenotedthatsellingaproductinawholenewcategoryisaspecialchallenge.Whenyou’remarketingsomethingtotallynew,youhavetosellthecustomerontheveryidea,notjusttheadvantagesofyourproduct.Benzwasn’tcompetingwithotherautomobilefirms;hewascompetingwithhorsesandwalking!Sellingthefirstcarsinvolvedconvincingpeopletolearnsomethingnew,riskdanger,anddealwithalotofinconveniences, such as finding and storing their own fuel (there were no gas stations).Itturnsoutthatasmallcategoryoffolks,theinnovators,likenewthingsfortheirownsakeandwillrevelintheseinconveniences.Youprobablyknowsomeofthesenerds,theoneswhobragtotheirfriendsabouthowcomplexandhardtousetheirnewgizmosare.Ifitbreaks,theyarehappytofixit.Sellingtoinnovatorsrequireslittlemorethanlettingthemknowyourthingexistsandgivingthemanattractivefeatureset,andthemorecomplex,thebetterforthem.Thenextcat-egory,theearlyadopters,aresimilarinthattheyareinclinedtonewproductsandliketoshowthemoff;however,theygenerallydemandthatthestuffactuallyworkandaddmeasurablevaluetotheirlives.Theyarestillaneasysellandwillingtopaygoodmoneytobeamongthefirstusersofsomethingvaluable.Innovatorsandearlyadopterstendtobeyounger,educated,independentthinkers with enough income to take some risk in product purchases.The Chasm ConceptSofar,sogood.Itseemsyoucansimplychangeyourpitchasyoumovefromonemarketcategorytothenext.However,marketsoftenincludeaproblematicphenomenonknownasthechasm.ThechasmisatermcoinedbyGeoffreyMooretodescribethedifficultyinreachingthethirdcategory,theearlymajority.Moorearguesinhisseminalwork,CrossingtheChasm,[6]thatfundamentaldif-ferencesintheconsumersofthisthirdcategoryfromtheprevioustworenderthemarkettransitiontoearlyadoptersaleapratherthansmoothmigration.Thisanincrediblyimportantproblem.Chapter 12Marketing353© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
referentialCustomers who insist onreceiving positive reviewsbefore they will purchasenew products.beachhead strategyA strategy involving puttingall your resources into asingle market at the sametime in order to secure astrong foothold thatcannot be displaced.AglanceatthetechnologyAdoptionlifecyclesuggeststhatgiventhenormal(bellcurve)distri-bution,nofirmcansurvivewithoutcapturingasubstantialportionoftheverylargeearlymajoritycategory.Firmsleftintheinnovatorandearlyadoptermarketaredoomedtoobscurity.Theywillnothavetherevenuerequiredtokeeptheirproductcompetitive.Eventually,theyloseeventheirownpioneeringcustomers.So,whatissodifferentabouttheearlymajority,andhowdoyouselltothem?FIGURE 12.3MooreÕs ChasmThe chasm is a barrier lying between the early adopters and the majority of customers.Source: Greg AutryTheprimarydifferencewiththeearlymajorityisthattheyarelessindependentandmorerisk-aversethantheearlyadopters.Theyarewillingtotrythingstheyhaven’tusedbefore,butonlyiftheyhavesolidevidencefromreliablesourcesthatanewproductorserviceworksasadvertised.Theyarehighlyreferential,meaningtheywanttoheargoodthingsfromtheirfriends—peersintheearlymajority—whoareusingthenewthing.Thatpresentsanobviousconundrum:Howdoyougettractioninthiscategoryifyoumusthavecustomerreferencesfromwithinthecategorytoget traction?Establishing a BeachheadMooresuggeststhebeachheadstrategyisthemostviableapproachtopenetratingtheearlymajoritycategory.Likemanybusinessstrategies,hechoosesahistoricalmilitaryanalogytoillus-tratehisapproach.MoorearguesthatthestrategyofSupremeAlliedCommanderGeneralDwightD.Eisenhower,developedforthemassive1944invasionofNazi-occupiedEuropefromacrosstheEnglishChannel,isagoodmodelforfirmsattemptingtoleapfromthesmallearlyadoptercategoryacrossthechasmtothelargeearlymajoritycategory.SittingontheislandofBritain,GeneralEisen-howerhadahugetarget,nearlytheentirecoastlineofEurope,toconsider.Shouldhedividehisforcesandassaultseverallocations,forcingtheGermanstospreadtheirdefense?Shouldhepickahandful of locations? Should he deploy his forces all at once or over time?354A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
D-Day Beachhead, Normandy, France, June 6, 1944Source: U.S. National Archives, https://artsandculture.google.com/exhibit/wRQ7nqwaEisenhower’ssimpleplan,calledOperationOverlord,focusedallavailablealliedresourcesintothesmallestpossibleareaintheshortestpossibletime,inordertoabsolutelyguaranteethepene-trationoftheenemydefenses.DuringtheD-Dayinvasion,Eisenhowerusedmorethan5,000shipstodepositover100,000soldiersontoastripofbeachesonFrance’sNormandycoastinasingleday.Tenthousandplanesand23,000paratrooperswereusedaswell.Theforcesweresoclosetogetherthattheprocessseemedtobechaotic,andthecasualtieswereenormous,buttheGermandefend-ersinthissmallareawereutterlyoverwhelmed.Thealliedforcessecuredapermanentbeachhead,fromwhichtheyliberatedEuropeinrelativelyshortorder.Howdoyouthinkthatwouldtranslateto marketing strategy?Theearlyadoptercategoryinanymarketcontainsanumberofsmallermarketnichesorsegments,eachwithpossibledistributionchannels.Let’sthinkabouttheself-drivingcarmarket.Thesenewdevicescouldbemarketedtotheaveragecarbuyer,andyoucouldselltothemthroughexistingcardealers(likenearlyallcarstoday),directontheinternet(likeTesla),oreventhroughmulti-levelmarketing(likeTupperware).Youcouldalsoselltobigcorporationswithfleetsofcarsandchannelsusingcardealerfleetsalesdepartmentsoradirectsalesforce.Therearealsotaxiservices,limousinerentalfirms,towncaroperators,rentalcarcompanies,andfoodandpackagedelivery…youcanseetherearelotsofcustomersintheearlymajoritytosellaself-drivingcar.Shouldyoutrytodominateallofthesesegmentsandtrytoconquerthewholemarketorjusttestthem all to see where your product does best?Therealityis,thatlikeGeneralEisenhower,yourmarketingresourcesarelimited,andspread-ingthemoutintoallofthesesegmentsanddistributionchannelswillresultinadilutedmessagethatwillbeeasilyoverwhelmedbyanycompetitorswhochoosetoconcentratetheirforcesintooneofthesegments.Consequently,youmustconcentrateandpourallyoureffortsintoestablishingabeachheadofreferenceablecustomersinonesegment.Thesizeofthesegmentisnotasimportantasbeing100percentsureyoucanwinit.Everythingdependsontheinvasion.Itwilltakealotofadvertisingandsalesworktogetafewcustomersandthentoleveragethemintovolumesales,butonceanearlymajoritymarketstartstomove,theymoveinaherd,andsubsequentsaleswillberel-atively effortless.Chapter 12Marketing355© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
bowling pin effectThe ability of a firm to leapacross market segmentsfrom a secure beachheadin the early majoritycategory of one segment.Bowling Pin EffectOnceyouareentrenchedinanearlymajoritymarketsegment,saythecorporatefleetmarketforself-drivingcars,gettingintoanotheradjacentsegmentisfairlyeasy.Rentalcarandtaxifleetoper-atorsusethesameprinciplesthatcorporatebuyersdowhenchoosingvehiclestopurchase.IftheyseethatyourfirmhashundredsofvehiclesservingFortune500firms,theywillbeverywillingtotryyourproduct.Youcaneffectivelyuseacross-segmentreferencetogetdirectlytotheearlymajorityinanyadjacentmarket.Astheseadjacentmarketsegmentsbegintofall,Moorecallsthatthebowlingpineffect.Onceyouobtainthatpowerofusingyourconqueredsegmentstoknockdown others, you are on your way to conquering the entire early majority market.Thelatemajorityportionofyourmarketwillsimplyfollowtheearlymajority.Thesearesimplyamorerisk-averseandprice-consciousversionoftheearlymajority.Finally,therearethelaggards,andtheirbusinessisn’treallythatimportantbecausetheyaren’tbigspendersorlargeinnumber.Thinkofyourgrandparentswhoinitiallythoughtasmartphonewouldbehardtouseandstuckwith an old flip phone until they pretty much couldn’t find one anymore.Thelessonisthatyourbiggestmarketingmomenthappensafteryourproductisstabilizedandyouarereadytoscaleyoursaleseffortsbeyondtheenthusiastsandintothelargermarket.Atthatpoint,youmustidentifyanicheandadistributionchannelyoucandominateandthenthroweverything you have in marketing and advertising at it. How do you identify the right segment?Key Takeaways•Use marketing to build your brand and drive sales through several channels.•Remembercustomersaren’tlookingfortheoptimalsolution.Theyarelookingfortheeasiestsolution that stops their pain or provides sufficient pleasure.•Focus your marketing on an initial market segment you can penetrate deeply.•Onceyou’veconqueredamarketsegment,spreadintoadjacentsegmentswhereyourinitialsuccess will carry weight.12.2Marketing StrategiesLearning Objectives1.Understand how brand power can reduce advertising costs.2.Understand the power of an aspirational brand.3.Learn to use the news media for brand building.4.Understand the role of trade shows.5.Appreciate the role of social media in brand building.6.Understand the power of granularity available in social media advertising.7.Understand the importance of search engine optimization.8.Understand how search ads work.9.Understand how influencers are motivated to push products.10.Understand that unethical marketing will not pay in the long run.356A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Huy Fong Sriracha SauceSource: Steve Cukrov/Shutterstock.comaspirational brandA product that manyconsumers wish to ownbut cannot. The exclusivityof this makes the productmore attractive to thosewho can afford it.Riding Your Brand PowerSometimesmarketingresultsinpermanentvaluebeingaddedtoyourbrand.AsnotedinChapter11,companiessuchasCoca-Cola,Nike,andApplepossessimmensebrandpower.Theirpositiveassociationsaresofirmlyembeddedinourmindsthattheirproductscanoutselltheircompetitorssimplybysittingontheshelfwiththeirlogofacingoutward.Doesthatmeanthesefirmsdonotneedtocontinuetheirmarketingeffortsandadvertisingcampaigns?Wouldn’tsalesjustcontinue,and their profits increase, if they stopped spending money on those things?Theanswertothesequestionsisnotasimple“yes”or“no.”Intheshortrun,cuttingtheadbudgettozerowillcertainlydrivedownfixedcostsandincreaseafirm’snetprofitsifthebrandassociationispowerfulenoughtoselltheproduct.It’sverypossiblethattherewouldbelittlechangeinCoca-ColarevenuesiftheyshutdowntheirCokeadvertisingforaquarter.Ontheotherhand,Pepsiwouldnot.Infact,thesecond-placesoftdrinkfirmwouldlikelyuptheanteinthe130-yearwarbetweenthetwobrandsbyboostingadvertising.Itisreasonabletoassumethatatsomepoint,massivePepsiadvertisingcouldeventuallyeclipsetheCokebrandinconsumers’minds.Coca-ColamustcontinuetoadvertiseenoughtosignaltoPepsithattheywillprotecttheirdominant brand position. Are there companies that can get away with it?AwriterforRoadandTrackwhowasreviewingtheTeslaModelXshortlyafteritsdebutreported,“WhenIwastakingphotosofthisModelXP100DinahippartofBrooklyn,everytimeIraisedthedoors,peoplestopped.”Healsonotedthat“attendeesofanearbymusicfestivalstoppedandtookselfies”withthecar.HefinallyconcludedthattheprimarypurposeofuniqueFalconWingdoorswastoattractattention;theyare,inessence,advertising.[7]Whichbringsuptheques-tion, have you ever seen a Tesla advertisement?Asofmid-2019,ElonMusk’selectriccarcompanyhadnotrunanadduringitsrecord-settingsixteenyearsofsalesgrowth.ThemarketingplanatTeslaistoletexcitementaroundtheuniquefeaturesoftheircarsbuildthebrand.Teslaisnottheonlyautofirmwithsuchapolicy.RollsRoyce,aone-hundred-year-oldsuper-luxurybrand,usesasimilaraspirationalbrandstrategy.Fewdriverscanaffordtobuyeitherofthesecars,butmanywantto.Evenjustsittinginaparkinglot,thesecarsareadvertisementsforthebrand.Manyofthosewhocouldbuythesecarswerefondoftheattentionthepublicadmirationoftheirvehiclesbrought.Anumberofotherfamouscompanieshaveskippedpaidadvertising.TheseincludewarehouseretailerCostco,doughnutstorechainKrispyKreme,andtheflaminghotAsiancondimentHuyFongSrirachasauce.HuyFongFoodsfounderDavidTransayssalesgrowthforhisfirmhasbeenconstrainedprimarilybyhisaccesstonewlyripechilipeppers.AshetoldQuartz,“Idon’tadvertise,becauseIcan’tadvertise.”[8]Advertisingwouldonlydrivesalesthathecouldn’tfill.Thecom-pany’sseeminglyunsophisticatedapproachtomarketinghasactuallydevelopedintoapowerfulandvaluablecultbrand.Thebottles’simplelogowithitsline-drawnroosterandaclutteredmultilingualdescriptivetextgracesT-shirts,phonecases,lunchboxes,andavarietyofother consumer goods.Radio and TVWhilenewmediaisalltherage,traditionaloutletsofprint,radio,andtelevisionarefarfromdead.Whenmostpeopleheartheword“advertising,”theystillthinkofoldschoolbroadcasttelevisionspots.ThebiggestvirtualgatheringofAmericansisstillprobablytheSuperBowl,atelevisionmega-Chapter 12Marketing357© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
conversionsSales driven byadvertisements.eventasfamousforitscommercialsasforthefootballgames,whichareoftenlopsidednonevents.Manypeopleactuallywatchtheshowfortheadvertisements,drivingviralvideos,memes,anddis-cussionsacrosssocialmedia.ThisrarefocusontheadsmakestheSuperBowltheworld’smostexpensive and competitive outlet for the marketing efforts of large corporations.View in the online readerTraditionalmediaadvertisingcampaignsaredifficultforstartupsbecausetheyareexpensive,harder to target, and the results are notoriously difficult to track. Can you think of why that is?Thephysicalinfrastructureinvestmentsrequiredforbroadcastandcabletelevisionortradi-tionalandsatelliteradioareimmense.Thecostoffacilities,antennatowers,milesofcables,andspacelauncheshavetoberecoveredbythenetworksandregionaloperatorsalmostentirelyfromadvertisingrevenues.Consequently,mostsmallstartupssimplycan’tparticipateinanythingout-sideoflocalcableTVorradio.Whilethoseoutletsmaybesuitableforalocalrestaurantchain,theyareentirelyuselessforastartupfashionbrandorsmartphoneappwithaglobaltargetmarket.Unlikesocialmediaadsandotherinternet-basedadvertisingsystems,thereachofadsintradi-tionalmediaisdeterminedbyphysicallimitationsofthebroadcast,geography,broadcastlicensing,andotherfactorscompletelyoutsideofyourcontrol.Youmayreachalotofpeople,butyoucan’tbesureexactlywhotheywillbe,andyouprobablywon’tknowexactlyhowmanystayedandwatchedyourad.Whileyoucantry“howdidyoufindus”surveys,therealityisthatyousimplycannottietraditionaladvertisingexpendituresdirectlytoactualconversions(sales)thewayyoucanwithagoodinternetcampaign.Ifyouhaveseveraladvertisingcampaignsrunningsimultane-ouslyit’sevenharder,ifnotimpossible,tofigurewhichsalesweredrivenbyaparticularradioorTVspot.Thebestwayformoststartupstoleveragetraditionalmediaistomakeyourfirmpartofthestoryratherthanapaidadvertiser.Newsreportersarealwayslookingforsomethingtofillthedeadaironslowdays,andmanyacleverorjustluckyentrepreneurhasfoundtheirfifteensecondsoffameontelevisionforfreebytyingthemselvestosomepopulartrend,coaxingafreecelebrityendorsement, or arranging some outrageous stunt that the TV cameras could not stay away from.ThepopulartelevisionshowSharkTankoffersentrepreneurstheperfectchancetopitchtheirproducttoanationwidetelevisionaudienceintheguiseofseekinginvestmentfortheirstartup.It’salittle-knownfactthatmanytimestheentrepreneursbackoutofthedealtheyhadmadeonTVwithSharkslikeMarkCubanorKevin“Mr.Wonderful”O’Learybecausealltheyreallywantedwas10minutesoffreenetworkTVexposure.ThefoundersofaskateboardwheelmanufacturerappropriatelynamedSharkWheelsshookhandsona$250,000three-Sharkdealbutfoundthattheexposurewasworthenoughthattheyreallydidn’tneedtosacrificeanyoftheirequityorbringinthat investment.Super Bowl Advertising358A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
press releaseA written document usedto introduce a new firm,product, or service to theworld, and often designedto be used as the basis fora news story.media kitAn organized collection oftext, images, and videodesigned to allow newsreporters to producestories about your firm orits products.sound bitesA short, catchy, andquotable phrase that newsreporters love to include intheir stories.B-rollBackground video footageoften provided by productdevelopers and eventorganizers to media outletsabout their productreleases.Managing the NewsIfyoucan’taffordormaybejustdon’twanttopayforadvertisingbutwantexposureinthetra-ditionalmedia,oneofthebeststrategiesistogetyourbrandmentionedinthenews.PaycarefulattentionthenexttimeyoupickupanarticleorseeaTVnewsstoryaboutthelatestDisneyfilm,thenewestToyotahybridcar,oramajornewproductannouncementfromApple.You’llseethehand of the firms’ expert marketers in the crafting of that news story.Marketersoftencallthepress“lazy”becausetheyareoftenwillingtoprintorbroadcastmate-rialthey’vebeenhandedbycompanieswithverylittleornoadditionalresearch.Tobefair,newseditorsandproducersoftenfindtheyhavegapsthatneedtobefilledwithsomething,anything,onveryshortnotice.Reportersaregenerallyverybusyandhavetoworkveryquicklytomeettheirdeadlines.Ifyouhaveaninterestingstorythatyoucan“spoonfeed”tothepress,theymaypassonyourmarketingasnews.That’sadoublewin.Firstly,becauseyoudon’thavetopayforit.Secondly,becausenewsconsumerspayattentiontoproductinformationcontainedwithinnewsstories,eventhough they may skip right over a paid advertisement or zone out during a commercial.Thetraditionalwaytoachievethissortoffreeadvertisingistoissueapressrelease.Apressrelease(sometimesPR)isatextdocumentcontaininganannouncementfromyourfirmthatyoubelievewillbenewsworthyenoughtogettheattentionofanewsreporteroreditor.Thesepressreleasescanthenbesentdirectlytonewsoutletsyoufeelareappropriateforyourbusiness,basedontheirgeographiccoverageorspecialty.Forfirmswithnationalorinternationalmarkets,itmaybeworthpayinganewsservicelikePRNewswireorBusinessWiretodistributeyourpressreleasein a stream of information they provide to thousands of media sources around the world.Typicalbusinesspressreleasesareaboutthereleaseofanewproductortheachievementofsomenotableresearch,production,orsalesgoal.Forinstance,youmightbeeagertosharewiththeworldthatyourOrlando-basedroller-skatingrinkisopeningasecondlocationinnearbyTampa!Agoodpressreleasecampaignwillbesupportedwithonlineresourcesintheformofamediakit.Amediakitisanonlinerepositoryofadditionalmaterialsthatwillmakeanewsstorymoreengagingandarelikelytoincludecompanyartworkandphotographsfeaturingtheproducts,thefounders,thedevelopmentteam,orwhatevermightbemostinterestingtothereadersofthetargetedout-lets.Forradio,soundbitesofteammembersorcustomerstalkingabouttheproductcanbeveryhelpful.TelevisionproducerswillexpectyoutohaveB-roll,videosegmentstheycanairinthebackgroundwhiletheirpersonalitiesdiscussyourfirmandproduct.Youmighthaveexteriorandinteriorphotosandvideoclipsofyourskatingrink,orifitisn’tcomplete,anartistrenderingofwhatitwilllooklike.Wheneverpossible,putpeoplefrontandcenterintheseimagesandvideos;theyaremorelikelytoengage.Videoofsmilingkidsrollerskatingisalotmoreengagingthanashot of the exterior of a building.Tobehonest,theworldisunlikelytobeasexcitedaboutyournewsyouare.However,itiscer-tainlyworthemailingyourPRtotheTampaBayTimesnewspaperandthelocalTVstations.Ifyoupickaslownewsday—neverissueapressreleasewhenthereisamajorbreakingstorydominatingthemedia—someeditordesperatetofillspaceorairtimemaycoveryouropeningorprintpartofyourPRasis.Still,anewskatingrinkisgoingtohavetocompetewithalocalseniorcitizenturning100andwouldeasilybedisplacedbykittensupforadoptionatthelocalshelter.Canyouthinkofadditional ways to improve the odds of your skating rink opening story getting covered?IntheU.S.andmanycountries,themediaexiststoselladvertising.Thecontentissimplytheretoattracteyeballs.Boringbusinessstoriesdon’tdriveadvertisingsales;excitingonesdo.Yourjobasamarketingentrepreneuristobeinterestingyourselformakeyourbusinessinteresting.Whatwouldmakethegrandopeningofaskatingrinkmoreinteresting?Onesimplewaytogetattentionandattendeesistoofferaneconomicincentive.Ifyouopenforfreethefirstday,offerprizesorfreefood,thereisabetterchanceyou’llgetthepapertomentionthatbecausetheirreaderswillfeeltheinformationwasofvaluetothem.YoucouldalsooffertorunanadinthepaperiftheycoveryourChapter 12Marketing359© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
event.Whilesuchdealsareconsidereddistastefulbymostjournalists,theharsheconomicrealitiesof the declining local news business mean they happen all the time. Don’t be afraid to ask.Whatifyoubroughtinacelebritytotakethefirstrunaroundtherink?MaybeanOlympicspeedskater,televisionstar,80spopstar,oranastronaut?Thenewscamerasarealotmorelikelytoshowupforthat,andthestoryislikelytodrawmoreattendeesaswell.Maybeyoucanfindafriendlycelebritythroughyournetworkoffriends.Ifnot,youcanprobablyhireamoderatelynotablepersonforanhourorsoforafewthousanddollars,ifyouthinkthatisworthit.Youcanfindcelebritiesforhireviatheirownwebsitesorthroughagenciesthatspecializeinsuchthings.DoaGooglesearch,andyou’llbesurprisedwhomightlovetodropintobeyourskatingrinkatten-tion-getter.Youcouldalsoconsiderarrangingsomesortofrecord-breakingstunt.Findanathleticlocalwho’dliketobreaktheworldrecordforrollerskatejumping(JeffDupont,20ft.3.36in.,2/12/2012),[9]orinventsomenewrecord.Letthemediaknowabouttheattemptandthatyou’llbedoc-umentingitforinclusioninthefamousGuinnessBookofWorldRecords.Betteryet,makethemapartoftherecordsettingbydoingtheworld’slargestskatinglesson(545people,Belagavi,India,11/10/2018).[10]Abigcommunityeventlikethatisagreatnewsstorybecauseeveryoneinvolved(andtheir moms) will buy a paper and tune in to watch the local news.View in the online readerBeforeyoudismissthesesortsofmarketingstuntsasjustsilly,considerthateventhelargefirmsthatcanaffordtraditionaladvertisingindulgeinthem.InJune2019,TacoBell,adivisionofthegiantglobalfast-foodchainYum!Brands,announcedthelaunchofapop-uphotelchaincalled“TheBell:ATacoBellHotelandResort”inPalmSprings,California.ThehotelwouldrunforjustafewdaysinAugustofthatyear,simplyforthesakeofcapturingmediaattention,anditworked.ThestorymadethefrontpageofCNN.comandwascoveredbytheLATimesandmanyothermedia outlets.Infact,theGuinnessBookofWorldRecordswasestablishedin1955asapromotionalmarketingtoolbythemanageroftheIrishbeerbrewingfirm,Guinness.ThebookisnowthemostsuccessfulcopyrightedtitleofalltimeandGuinnessWorldRecordsreportsitsbrandisrecognizedby98per-cent of the people in the English-speaking world.[11]Taco Bell Hotel360A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
tchotchkesInexpensive gifts featuringyour company logo thatare used as free gifts tolure visitors to your exhibitat shows and conventions.swagGifts featuring yourcompany logo that areused as free gifts to lurevisitors to your exhibit atshows and conventions.Trade ShowsEverymarket,fromplumbingtosurfingtosatellites,haseventswherethebroadercommunityofvendors,customers,andmediagathertosharewhat’snewintheirindustry.Theseeventsincludeconferences, seminars, and trade shows.Ideal Home Show, London, UKSource: pcruciatti/Shutterstock.comAttradeshows,sellerspresenttheirwaresfromboothsontheflooroflargehalls.Buyerswalktheaislesoftheseshowslookingforspecificproductsandhopefulofthechancetheywillstumbleacrossasurprisingtreasure.Asanattendee,youmayimprovethesupplierbase,butasanexhibitor,it’syourjobtobethatpleasantsurpriseforyourcustomers.Inorderforyourcustomerstofindyou,yourboothwillhavetofindawaytostandoutfromthecrowd.Largefirmsandwell-fundedstartupswillhaveoversizedexhibitsfeaturingimpressiveandexpensivesignageanddisplays.Howmight a smaller startup attract the attention of buyers?Thetraditionalapproachtoluringcustomersintoyourtradeshowboothisbyofferingthemfreeitems,oftenreferredtoastchotchkesorswag.Thesegiveawaysaretypicallyinexpensivethingsliket-shirts,pens,orkeychains.Theycomeprintedwithyourcompanyorproductlogoandperhapsaslogan.Themainproblemwiththisapproachisthateveryoneelsehasagiveawaybecauseit’salmostexpected.Avoidwastingyourmoneyonpiecesoftrashthatwilljustbepickedupbyindividualsnotreallyinterestedinyourproductandthrownawaywhentheygetbacktotheirhotelroom.Youmightconsiderofferingsomethinglikecandytoeveryoneasageneralattrac-tanttostartaconversationwithpotentialbuyers.Then,onceyou’vevettedtheprospect’sinterestandabilitytobuy,andwantthemtorememberyou,youcanofferthemahigher-qualitypieceofswag.Youcanholdthesemoreexpensiveitemsback,inahiddenspaceinyourboothsoeveryonewon’t be lining up for them.Chapter 12Marketing361© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
marketing collateralMaterial providing detailsabout your firm, service, orproduct that can bedistributed by sales staff atpublic events.elevator pitchThe very tight, one minuteor less, explanation of yourproduct or service that willencourage the listener towant to learn more.Moreimportantthanfreegiftsaremediamaterials,usuallyintheformofprintedhandoutsthatexplainyourproductorservicesindetail.Thesebrochures,flyers,orperhapsvideosonthumbdrivesareknownasmarketingcollateral.Asuccessfulpieceofcollateralhastosurvivethehotelroomsorting—wherethecustomerdecideswhatisactuallyworthreadingandwhatwillbetrashedasdeadweight.Agraphicallycompellingpieceiscriticalforcatchingthebuyer’seye,butassoonastheylookatit,theyneedtofeelthatyourcollateralcontainsvaluableinformation;otherwise,therewillbenoreasontokeepit.Finally,thepurposeofcollateralistomotivatethebuyertoreconnectwithyourfirmafterthetradeshowisover,hopefullybyplacinganorder.Ataminimum,itmusthaveappropriatecontactinformationandawebsiteURL.It’salsoworthconsideringaddingaspe-cialdiscountorbonusofferwithashortexpirationtimeframe(maybeoneweekaftertheshow)that will compel the customer to complete a transaction while it is fresh in their mind.Whenyouinteractwithpotentialcustomers,makesureyoutaketheopportunitytolistentothemasmuchasyoutalkatthemabouttheproduct.Whataretheylookingfor?Whatdotheythinkaboutyourproductorbrand?Ask,“Whatwasyourfavoritethingatthisshow?”andfindouthow they view your competition. This information can be marketing research gold.Finally,gettheprospect’sbusinesscard,scantheQRcodeontheirconferencebadge(mostcon-ferenceshaveasystemforthis),orhavethemfilloutaformwiththeircontactinformationforyoursalesteamtofollowupon.Anotherideaistoofferthemsomeadditionalgiftstopullouttheirmobiledevice,rightthenandthere,andfollowyourcompanyonyourpreferredsocialmediaplat-form.Guerilla Tactics for Trade Shows and ConventionsOkay,ifyou’resayingtoyourself,“Goingtoatradeshoworconvention?Thatsoundsveryexpen-sive,”you’dberight.Youcouldeasilyspend$20,000to$50,000toputinadecentappearanceatanysignificanttradeshow.Thatmeansyouneedtodoyourduediligenceandbesuretheinvestmentislikelytohaveareturn.Ifyou’renotalreadydeeplyembeddedintoyourtargetindus-try,onealternativeistoexperiencetheshowasanattendeeforthefirsttimeandpokearound.Attending a trade show is likely to cost you just a few hundred dollars.Asashowattendee,youcanlearnalotbyobservingyourcompetitorsinaction.Oneapproachistosimplygointroduceyourself.Trytoconnectwithsomeoneatyourownlevel,thefounder,orhigher-levelexecutiveiftheyarethere.Youmaybesurprisedatthecollegialreceptionthatyoureceivefromyourcompetitors.WhenRyanOlligesof121Centeredtheskateboardbusiness,heattendedthepopularAgendaconferencewherehefoundthatotherskatebrandownerswereexcitedabouthiscarbonfiberdeckandsurprisinglyhelpfulwithinformationaboutproductionandmarketingtechniques.Someevenarrangedforhimtocomevisittheirfacilitiesandlearnmore.Whilethissortofreceptionisn’tuniversal,itisn’tuncommon.Competitorsinmostindustrieshaveabasicrespectforeachother.Theylovewhattheydoandwanttoseeahealthyindustrywithqualityplayersinitbecausethatisgoodforattractingmorecustomerstotheirmarket.Insomecases,theyseethemselvesinayoungentrepreneurandfeelobligatedtopassonsageadvice.Ifyougetthatresponse,makethemostofit;itcouldsaveyoufromrepeatingthepainfulmistakesof the industry veterans.Anothertechniqueforvisitingyourcompetitorsistoshiftyourperspectiveandassumetheroleofapotentialcustomer.Whatdoyoulikeordislikeabouttheirproduct?Doyoulikethepresenta-tionoftheirbooth?Itslocationintheshow?Howdidthestaffhandletheinteraction?Weretheytryingtobuildabrand,orweretheyjusttryingtocloseasalewithyou?Howdidtheyrespondtoyourquestions?Askthemwhattheythinkofyourfirm’sproduct.Havetheyheardofyou?Whatdotheythinkaretheiradvantagesoveryouroffering?Theywilleagerlytellyou,thepotential“customer”exactlywhattheythink.Dobeoffendediftheyarehighlycritical.That’stheirjob,andthereisprobablyagrainoftruthtowhatevercriticismstheyoffer.Viewitasanopportunityforyoutoupyourgame.Understandinghowyourcompetitorsviewthestrategiclandscapeinyourmarketcanbeincrediblyvaluable.Collecttheirswagandmarketingcollateralforfurtherevalua-tion.Itmightbeworthhavingaseniormemberofyourteamtakethedirectapproachandtrytocon-nectwithyourpeersintheotherorganizationwhilealessrecognizableemployeeexploresthecustomer experience with your competitor’s sales staff.362A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
monetizedConverted to a money.granularityThe level of detail in amodel or plan.Beingatradeshowattendeecanbeagoodstrategyforbuildingyourbrandanddrummingupsales.Ifyou’reasuppliertotheindustry,yourpotentialcustomerswillhavebooths,andyoucangotothemontheshowfloorratherthanpaymoreandhopetheycometoseeyou.Youcanalsomeetpotentialcustomersrandomlywanderingtheflooroftheshow,particularlyaroundtheboothsofyourdirectcompetitors.Listentothoseconversations,andifyoufeelcomfortable,approachthecustomerlater,andtellthemaboutyourbrand.Tradeshowstypicallyprohibitthedistributionofsalesmaterialsbyattendeeswhoarenotpayingforexhibitspace,butthatdoesn’tmeanitdoesn’thappen.Sharingacardoraflyerislikelynotgoingtobeanissue.Whatyoucannot do is walk the aisles handing out your collateralen masse.Ifyou’reinthesortofindustrywherethereareaveryfew,butverystrategic,customersyouneedtoacquire,thenattendaconferenceoratradeshowwithaspeakertrack.Doyourresearchandseewhoisaddressingtheconferenceorsittingonapanelthatyouwanttomeet.Typically,attheendofthesesessions,theaudiencewilllineuptomeetthespeakersfromthepanelastheyleavethestage.Thatworks,butit’sahighlycompetitivemoment,andyouhavetohaveyourelevatorelevatorpitchpitchreadyandfinelytuned.Anotherstrategyistolookyourtargetupinadvance,learnasmuchasyoucanaboutthem,andbeabletorecognizethem.Thenlookforthemintheshow,aroundthecoffeecart,inoneoftheconferencemeals,oratthebarduringaneveningreception.Thisisamuchbetterplacetoestablishagenuineconnectionandhopefullyhavemorethanafewsecondstobuildyourbrand,getfeedback,andpassonyourcollateral.Becarefulandpolitenottointerruptanyoneelse’sconversation.Ifyourfuturecustomerthinksyou’rerude,thatwon’tbeagoodstart.Standslightlyback,butintheirlineofvisionwhiletheyfinishwhateverconversationtheyarein.Donotappeartobeeavesdroppingontheirconversationbutletthemunderstandyou’dliketospeaknext.Also,rememberthatthereisafinelinebetweendoingyourresearchaboutthecustomerandtheirprofessionalinterestandbeingtoofamiliar.Don’tcomeofflikeastalker.Acomplimenttosomeachievementthey’vehadasin,“Congratulationsonwinningtheindustryleadershipawardlastyear!”isgreat,mentioningyousawtheirkidsonFacebook,notsomuch.Besuretoresearchanyadmissiondiscountsthatyoumayqualifyfor.Typically,theearlieryouregister,thebetter,anddiscountsareusuallyavailableforstudents.Oftentherearedifferentlev-elsofattendance,whichmayincludeeducationalsessionsandmeals.Bestrategicaboutwhatyou need to get your marketing done.Social MediaInreality,allmarketingissocial,bydefinition.Marketingisaboutreachingoutandconnectingwithpeopletoshareideas.Marketingdependsonmediatoaccomplishthis.However,inrecentyears,specifictoolshavebeengroupedintothecategoryofsocialmediaandhavebecomethehottestterritoryinmarketing.Thesetoolsaregenerallyinternet-basedwebsitesandmobileappsthat allow people to connect globally based on their shared interests.Whiletheoriginofsocialmediainthelate1990sandearly2000sisabitmurky,thefirstplat-formthatgarneredsignificantattentionofthegeneralpublicwasMySpace,apersonalwebsite-buildingplatformlaunchedin2003.MySpacebecameverypopular,butitneversuccessfullymonetized;itjustwasn’tclearhowtomakemoneyoffprovidingpagesformillionsofmostlyveryyoungMySpaceuserstoexpressthemselves.ThatplatformwassooneclipsedbyFacebook,founded the following year by a team that included Harvard student Mark Zuckerberg.Zuckerbergisasocialmediatycoonandmulti-billionairebecauseheandhisteamdevelopedwaystoextractmoneyfromtherichuserdataFacebookcollected,specificallybyprovidingapaidadvertisingplatformthatcouldberemarkablywelltargeted.TheverypersonalinformationFace-bookhasaboutitsusersisexactlythesortofthingadvertiserswanttoknow:Wheredoesthispersonlive?Whatintereststhem?Whatbrandsdotheyfollow?Whatkindofworkdotheydo?Theanswerstothosequestionscanhelpamarketercraftaverytightaudiencefortheiradvertisementsatalevelofgranularityimpossiblewithregularads.Howdoyouthinkthisgranularitylooksinpractice?Chapter 12Marketing363© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
FIGURE 12.4Audience Definition In FacebookThis screenshot illustrates audience definition in Facebook.Source: Facebook screenshot captured by author.ImagineyouownastoreinEverett,Washington,thatmakeshigh-pricedorganic,veganbirth-daycakeswithafeminineappeal.YoucancreateaFacebookcustomaudiencethattargetspro-fessionalwomenofacertainagewhoareinterestedinveganismandwholivewithintwenty-fivemilesofyourlocation.Youcandothat,andyoucanevenhitthemonlyinthemonthbeforetheirbirthdays!Thewomenwhoseethatadarehighlylikelytobeinterestedinyourproductandabletobuyacakefromyou.Suchatargetedsocialmediaadisgoingtobealotmoreeffectivethanplac-inganadonKCALradioandhittingtheentiregreaterSeattlecommunity,evenonGilChesterton’srestaurant show.Today,thereareanumberofgloballyrecognizedmajorsocialmediaplatforms,includingFacebook,Twitter,Instagram,LinkedIn,andWeChat.Althoughtheyallallowustoconnectandshareideas—aswellasargueoverthem—theyeachhaveauniquevalueproposition.LinkedIn,forinstance,isclearlyfocusedonmakingprofessionalconnectionsandfacilitatingjobsearches.Ifyourproductorserviceaddsvaluetotheemploymentprocessoritsappealistightlylinkedtoacompany or industry, LinkedIn is probably a great place for you to market.It’simportanttorealizethatsocialmediaisaconstantlyshiftinglandscape.Differentplat-formsappealtodifferentgroupsandcomeinandoutoffavorasthingsprogress.Asofthiswriting,Instagram,apopularphoto-sharingplatform,isthehotcommodityforreachingthemostvaluableconsumerdemographic,andthatiswhyFacebookpurchasedthefirmin2012.Inadditiontothebignames,therearealsothousandsofnicheplatformsandsocialmediacommunitiesappealingtosmaller markets based on very specialized interests, geographic location, or more.Socialmediamarketingishighlycompetitive,andthequalityofthecontentisall-important.Socialmediaplatformsaredeterminedtokeepeyeballsontheirscreensandwillnotpunishtheirmemberswithadsthatarenotengaging.Userscancloseandevenblockyouradswithasingleclick.Consequently,althoughyouradmaybepaidfor,nobodyhastowatchitiftheydon’twantto;thecontentoftheadneedstobesomethingtheuseractuallywantstoseeandchoosestofocuson.Instagramadsneedtobeeye-catchingandbrilliant;Facebookvideosneedtobeinspiringoramus-ing; LinkedIn pieces need to actually be informative.364A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Increasingly,manyconsumer-focusedbrandsareactuallymovingtocontentmarketing,wherethecontentisnotdirectlyrelatedtothebrand,andthebrandmessageridesonthatcontent.Theseadsmaycontainstunningphotosofsomenaturalsceneorvideoofanartisticperformance.Thebrandplaystheroleofcuratorforthiscustomizedcontentandbuildscredibilitywiththecustomerbyengagingthemwithsomethingtheylove.Moreimportantly,thebrandhopestheviewerwillsharethecontentwithfriends,likelytobeinthetargeteddemographic,greatlyleveragingtheirinvestment in advertising.Internet AdsManyblogsandlocal,national,andinternationalnewssitesfundthemselvesbysellingadvertising.Thesemayincludepop-upads,inlineads,orbannersthatrunalongthetoporbottomoftheirsites.Oftensomeoftheadsaredesignedtolooklikeregularnewsstoriesonthatsite,thoughtheymayhaveasmall“sponsored”notenexttothem.Itisimportanttorememberthatadvertisingonthesesitesalignsyouwiththeaudiencesthatfrequentthem.Ifyou’reonacookingblog,that’syouraudi-ence.OnCNNorFox,you’regoingtofindsomewhatseriousnewsreaders;ontheNewYorkTimesorWallStreetJournalsites,you’llbetargetingamoreeducatedaudience.MovefurtherupscaletojournalslikeTheEconomist,TheAtlantic,orForeignPolicytoreachmorefolkswithgraduatedegrees. Each of these news outlets can offer you demographic details about their audience.Youshouldalsobeawarethatnewsisinseparablefrompolicychoices,andeachoftheseout-letsalsohasageneralreputationforleaningonewayoranotheronthepoliticalspectrum.Whilepolicyconsiderationsmaynotberelevanttoyourmessage,thewayyouframeyourproductorser-viceandtheimagesyouusemayresonatedifferentlywiththeviewers.Thinkcarefullyaboutwhowill be seeing your ads and how they will react.SearchWouldn’titbeniceifyouknewwhatyourpotentialcustomerswerelookingforandgettothembeforetheyevensawyourcompetition?Increasingly,consumersinsearchoffulfillmentwilluseGoogle(orinChina,Baidu)tolocatetheproductsorservicestheyarewanting.Lookingforcoral-reef-friendlysunscreen?Typethatin,andyou’llgetascreenliketheoneinFigure12.5.Notethatthefirstthreeresultshaveasmallgreenboxlabeled“ad”nexttotheURL.AlmostanytimeyousearchonGoogle,thefirstcoupleoflistingsarepaidadvertisementsdisguisedassearchresults.You’llalsoseeadswithimagesoverontherightsideofthescreenunderthetitle“sponsored.”It’slikelytheproductsshownareappropriateresultsforyoursearchbecausetheadvertisershaveselectedandbidonsearchtermslike“reef-friendly,”somostsearchersdonotfeelinconvenienced.However,theresultisthatproductsfromfirmsthatpay-to-playgettomorecustomers,andthelessmarketsavvyor under-financed firms struggle for attention.Googlecallsthisadvertisingservicesimply“GoogleAds”(itwasformerlyknownasAdWords),whichincludesnotjustsearchresultsbutalsoadsonYouTubeandotherGoogle-ownedinternetproperties.Thecostoftheseadsisbasedonabiddingprocesswheremorepopularsearchtermsarepricedhigher.Yousetamonthlybudgetforexpenditures,andGoogleconsumesyourmoneyinadynamicprocessyoucanmonitorandadjustbasedonyoursatisfactionwiththeresultingmetrics.Whatmetricsdoyouthinkwouldmatter?Whatyoureallywantisconversions,peoplewho,uponseeingthead,clickovertoyoursiteorappandmakeapurchase.Thesecond-bestresultisjustget-tingthatclicksoyouknowthatpeoplehavebeeninformedaboutyourproductandmayreturn;thisistypicallywhatGooglechargesyoufor.Googlewillprovidereportsthathelpyoumanagethat.Pricesperclickthroughtoyoursitegenerallyfalloutbetweenafewcentsandafewdollars,dependingonthevalueofthetransactionsthatmayresult.AdsforexpensiveitemslikecarsarelikelytobebidupbytheautofirmsbecausetheycanaffordtopayforalotoffailedclicksforeachChapter 12Marketing365© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
organic searchresultsInternet search results thatare not paid advertising.saleof$30,000ormore.Adsforcellphonecasesarepopular,buttherealityofa$30productlimitshow much any firm is willing to pay for priority placement.FIGURE 12.5Google search results.Source: Screen capture by author.The“trick”withGoogleAdsisfindingasearchtermthatyourcustomersareusingbutthatyourcompetitorsarenotalreadybiddingon.Forinstance,maybe“reefsafesunscreen”isapopularterminyourmarket,butjustperhapsusersarealsolookingfor“greensunscreen”bywhichtheymean“environmental”andnotthattheywishtolooklikeKermittheFrogonthebeach.Thebestwaytofindthisoutisthroughacustomerdiscoveryprocess.Askdozensofpotentialcustomerswhatsearchtermstheywouldusetofindyou.Don’tsuggestanytothem(asinamultiple-choicesurvey).Letthemcomeupwiththeirownasyourrealconsumerswould.It’snoteasy,butstum-bling upon the right search term nobody is already paying for is like finding a nugget of gold.Optimizing Your Search ResultsThelistingsbelowthepaidadsandbelowGoogle’sselectedinformationpieceonthetopic(fromHawaii.cominthiscase)aretheorganicsearchresults.ThosearethelistingsthatwouldhavebeenontopifGoogle’snormalalgorithmofoptimizingsearchresultswasallowedtofunctionpurelyintheinterestofthesearcher.TheabilityofGoogle’salgorithmtoswiftlyproducerelevantresultsfromnaturallanguagequeriesiswhatmadethecompany’senginethego-tochoiceforthefreeworld (Google has been stymied by governmental censorship requirements in several nations).ThereisanentireindustrybasedaroundoptimizingwebsitesinwaysthatwillensurehigherplacementinGooglesearches.ThisprocessiscalledsearchengineoptimizationorSEO.Ingeneral,you want to make sure of the following:366A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
crawlerA software bot that scanswebsites for keywords tofeed search results.backlinkA link from one website toanother. Many links to yoursite will improve SEOresults.1.YourwebsiteisopentoindexingbythecrawlersthatGoogle(andotherengines)usetofindwebsites.2.The crawler picks the keywords that you wish to be linked to in the search algorithm.3.Othersiteslinktoyoursite.Thequantityandqualityofthesebacklinksareanimportantmetric in the algorithm.Usingexperiencedcommercialwebsitedeveloperswillensurethatthefirsttwopointsareaddressed.Thethirdpointinvolvesgettingplacement,withlinks,inasmanynewsstories,blogs,andotheronlinelocationsaspossible.Thiscanbedonebyconvincingauthorsandreporterstolinktoyouorbypostingalotofcommentsonstories.Thisiswhyyouwillsometimesseecompletelyunrelatedweblinksthatseemtoberandomlydumpedintothecommentsectionofblogs.Googlehas developed AI to sense and reject those search spam links.SEOisaconstantlyevolvingtacticalbattlefield.ThousandsofmarketplacecompetitorsareworkingdailytoexploitweaknessesintheGooglealgorithm,andGoogle’steamisconstantlyrespondingwithchangestokeeptheplayingfieldlevelandfreeofspammyresults.AnyspecifictechniquesIofferedherewouldlikelyhavebeenrenderedineffectivebythetimeyoureadthis.YouwillfindgoodinformationoncurrentSEOtacticsandtechniquesonblogs,Redditposts,andvideos,butyourbestbet,unlessyouwanttotakeonthenearlyfull-timejobofbecominganexpertandstayingcurrentonSEO,mightbetohireoneofthemanyconsultantswhospecializeinthisfield. They or you may hire teams to go out and get quality backlinks in place for you as well.BlogsAswasjustnoted,linkstoyoursiteplacedininfluentialblogscansignificantlyincreaseyourSEOstanding,andofcourse,anysortofpositiveproductexposuremaydirectlydrivesalesandcertainlyhelpsbuildbrandawareness.Bloggerscoveravarietyofmedia:therearewritten(primarilytext)blogs,podcasts(audio),andvideoblogs.Theyalsocomewithdifferentlevelsofexposureandcred-ibility.Thereareamateurbloggerswhoruntheirownsitesorusepopularself-publishingtoolstogettheirmessagesout,andtherearetop-tiercontributorswithregularcolumnsonbrandnamesitessuchasForbesorConsumerReports.Gettingontothosesitesisthegoldstandardforproductexposure and top-quality backlinks.Thereareseveralmethodstogettingyourproductmentionedpositivelyinagoodblog.Thestraightforwardapproachistoidentifyanappropriateblogyourtargetcustomersarelikelytofollowandreachouttothebloggerthemselves.It’susuallypossibletofindtheircontactinforma-tionwithintheblogor,ifnot,trackthemdownusingaGooglesearchorLinkedIn.Whenyoufindthem,explainwhyyoufeelthatcoveringyourproductwouldbevaluabletotheblogger’sreaders.Remember,thegoalofthebloggeristogetmoreviewsofhiswork,andyourjobistoconvinceherthatyourstoryisrelevantandinterestingenoughtodothat.Peoplearebusy,andtheyareinclinedtorejectmostofthesesortsofappeals.Don’texpectageneric“DearBlogger,pleasewriteaboutmynewbusiness”emailtowork.Makeitshort,butpersonal,andmakethemfeelgoodabouthelpingyou. Explain to them why you personally follow them and what you love about their work:DearSamantha,Iloveyourcatblog!It’sfunandwitty,andI’vefoundsomanygreatcatideasandproductsinit.Thankyoufordoingwhatyoudo.I’msureyourreaderswouldgetakickoutofour new baked goods for cats. May I please send you some samples?Remember,theirgoalistogetmoreviews.Ifyouaregoingtorunanonlineadcampaignforyourproduct,youcouldpromisetolinkbacktotheirpostingandpromoteitdirectlybyrunningsocialmediaadsfeaturingitasin“ReadthegreatreviewofourCatCakesinSamantha’sCatCor-ner!”Knowingyouaregoingtobeworkingonhersideandevenspendingmoneytosendherreaders,Samanthaisfarmorelikelytoaccommodateyou.Tellher,“Wearebudgeting$5,000overthenextsixweekstopromoteCatCakes,andwewilllinkbacktoyourblogpostinthoseads.”Whowouldn’t want $5,000 in free advertising for their blog?Chapter 12Marketing367© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
pay-to-playPaying a blogger, reviewer,or journalist to include yourfirm, product, or service intheir stories.influencerAn individual whosecredibility in a market,often via blogging, videoblogging, or celebritystatus, compelsconsumers to makepurchasing decisions andchoose brands.unboxingThe process of openingand reviewing a newproduct on video.Anothertacticthatiscommonlyusedispay-to-playwriting.Thisisagrayareaintheindustry.Bloggersareusuallyunpaid,andevenwritersformajorpressoutletsareatbestterriblyunderpaid.Thismeanstheyarealwayslookingforexternalmeanstosupporttheirwork.Acceptingsomemoney,perhaps$500–$1,500,towriteacolumnaboutaproductisnotatallunusual.Whileitisprobablyagainsttherulesattheirpublicationforawritertoacceptoutsidepayments,itdoesn’tmeantheyarenecessarilymisleadingthepublic.Mostwriterswillstillonlycovermaterialtheyfeelisrelevanttotheirreadership.Iftheyboreormisleadtheirviewers,theirdaysasabloggerarelim-ited.Youcanoffersuchpaymentdirectlytoawriterorhiremarketingconsultantswhoworkwitha stable of bloggers and successful writers who routinely blog or post for money.VideoblogsonYouTubeandelsewhereworkprettymuchthesame,butthecompetitionisevenmoreintensewhenitcomestopay-to-play.Manyofthemostpopularinfluencershavebeenableto demand thousands of dollars as well as free products and other considerations.Unboxingchannelsarequitepopularforasurprisinglylargenumberofviewers.Vicariouslywatchinganotherpersonopenupandcheckoutacoolproductisafreewayofgettingthethrillofshopping for something, often an aspirational good you can’t afford.Unbox Therapy is a YouTube Channel with 17.3 million subscribers.View in the online readerRyanToysReview,aYouTubechannelrunbyatoy-lovingkidandhisparents,hasmorethan28millionsubscribers,andmostofhispostsreceivemillionsofreviews.GettingyournewtoyonRyan’schannelcouldmakeyourproductallonitsown.Manyunboxersdothesereviewsatnocharge.Ryanislivingeverykid’sdreambygettingatonoffreetoys,andhisfamilycollectsashareofYouTubeadrevenuesfromhispage—banneradsandthevideoadstheyplaceinfrontofhisvideos. Other reviewers are able to charge many thousands of dollars for their services.Unboxing Video368A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
precisionA process which, whenrepeated, consistentlyproduces the sameresults.accuracyA process that, onaverage, yields result asclose to correct aspossible.Ryan’s family has more than 28 million subscribers; this video has 2 billion views!View in the online readerTargeted MarketingEfficientmarketingrequiresbothprecisionprecisionandaccuracyaccuracy,solet’stakealookatwhatthatmeansusingthepopulartargetmetaphor.Imaginethatyouarethrowingdartsatatraditionalround“bull’seye”target.Youthrowalotofdartsandtrackeachone’slocationonthetarget.Figure12.6provides four distinctly different outcomes.Thelowerrightoutcome,lowaccuracywithlowprecision,isterrible;you’vemissedthebull’seyeentirely,andyourdartsarespreadacrossthetopofthetargetseeminglyatrandom.Youclearlyaren’tconsistentandlackprecision,andevenifyoutracksomeaverageoftheXandYaxisval-ues,youwillfindyour“center”ishighaboveandtotheleftofthebull’seye.That’sinaccurate.Ifthiswereasocialmediapromotionoradcampaign,youprobablydidn’tgetexposuretoanyofyour desired consumers.Thelowerleftoutcome,highaccuracywithlowprecision,isanimprovement.Whileyoustillcan’tgettheminthesameplace,yourdartsarenicelycenteredaroundthebull’seye.Theaverageofallyourthrowswouldprobablybeclosetothecenter.That’saccurate,andifitwereacampaign,you’d be sure to get a few good views.RyanÕs World aka Ryan ToysReviewChapter 12Marketing369© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
FIGURE 12.6Accuracy Versus PrecisionAccuracy is getting close to the target. Precision is reliably hitting the same place.Source: © Shutterstock, Inc.Theupperrightoutcome,lowaccuracywithhighprecision,maybetheworstpossiblescenario.Itshowsaveryprecise“grouping”ofdartscenteredcompletelyoutsidethebull’seyes.Thereisnochanceyouhityourtargetaudiencewiththiscampaign.Instead,you’veverysuccessfullytargetedsomeoneelse’scustomers!ThisistheequivalentofmarketingyourBajahotelservicebusiness to bicycle riders in Singapore!Theupperleftoutcome,highaccuracywithhighprecision,isobviouslyyourobjective.Inthiscase,thedartsarealljustwheretheybelong.Achievingaccuracywhilemaintainingprecisionrepresentsthemostefficientutilizationofyoureffortsindartsormarketing.Thisisasocialmediacampaignwhereeachandeverytweethitsthephoneofanactualpotentialbuyer.It’sadirectmail advertisement for your new café that lands on all the right doorsteps of your town.Traditional Print AdsSometimesjustrunningaplainoldadvertisementinamagazineoranewspaperstillmakessense.Aswithdigitalmedia,thechoiceoftraditionalmediaoutletsdependsonthereadershipfittingyourproductwell.AdvertisingafashionproductinPopularMechanicsortechnicalgizmoinVogueareexpensively poor choices.Foradsinnewspapersandlocaljournals,thebenefitisoftenaveryselectgeography.PuttingadiscountcouponintotheTitusvilleHerald,alocalnewspaper,isagreatwaytodrivetraffictoyourcoffeeandpopsiclestoreonMerrittIsland,Florida.Ontheotherhand,ifyourbusinessrunswildlifetoursaroundFlorida,youwanttourists,andtheydon’toftenreadthelocalpaper.Youneedtoplaceyourcouponinaspecialtytourist-focusedpaper.ThatmightbesomethingliketheSpaceCoastVisitor’sGuide,apublicationspecificallygearedtothemillionsofvisitorswhotourNASA’s370A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
promo codeA code used to provideconsumers with a discountat the point of checkout inan online store.ad copyThe main text used in anadvertisement thatdescribes the messagebeing conveyed.KennedySpaceCentereachyear.Canyouthinkofwhyadiscountcouponinboththesecasesisrecommended?The space center attracts millions of visitors to Florida’s “Space Coast.”Source: NASA, credit Dan Casperhttps://www.nasa.gov/press-release/kennedy-space-center-visitor-complex-opens-new-exhibit-saturdayUnlikesocialmedia,printmediadoesnotautomaticallyprovideyouwithdataonviewsandconversions.Usingacouponorpromocodethatcustomerspresentwhentheyappearatyourstoreorwebsitewillallowyoutocounttheconversionsfromtheads.Thesediscounts,eveniftheyarebuiltintoyourpricingmodel,alsomakecustomersfeeltheyaregettingsomethingspecial.Inmanyindustries, such as the tour business, they are practically required to get customers in the door.Ifyoudecidetomarketanationalorinternationalproductintolocaloutletsacrossawidegeography,besureyourproductandmessageareappropriatetothecustomerandcultureyouarereaching.Anadvertisementusingshockinggraphicimagesmightworkwellintheanything-goescultureofNorthernCaliforniaorNewYorkbutconfusesorevenoffendspotentialcustomersinmore conservative Southern states.Neverrunyourdomesticadcopyinternationallyuntilyouhaveconsultedwithlocalexperts.It’sextremelyeasyforawell-meaningmessagetoliterallygetlostintranslation,resultinginnoresponseorevenanegativebrandimage.ThereisafamousmarketingtaleabouttheSwedishappliancemaker,Electrolux.IncomingtotheEnglish-speakingworld,thecompanyranadsforitsvacuumcleanersfeaturingthephrase“NothingsuckslikeanElectrolux.”IntheEnglish-speakingworld,“sucks”isawordfrequentlyassociatedwithpoorquality.Whileexpertsagreethatthisdou-ble-entendre was an intentional attempt to get attention, the lesson on language is still clear.Chapter 12Marketing371© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
View in the online readerMarketing IntegritySoft drinks were originally promoted as health products.Source:By Dr. Pepper Co. – Abbeville progress. (Abbeville, Vermilion Parish, La.), 21 June 1913. Chronicling America: HistoricAmerican Newspapers. Lib. of Congress. <http://chroniclingamerica.loc.gov/lccn/sn88064057/1913-06-21/ed-1/seq-7/>, PublicDomain, https://commons.wikimedia.org/w/index.php?curid=32026659ElectroluxÕs Double-Entendre372A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
snake oilA product, often in thehealthcare area, withmarketing that claimsbenefits that are notscientifically supported.Inmanycases,marketingandadvertisinghavebeenusedasatooltomisleadbuyersbyobscuringaproduct’sdeficienciesorevenoutrightlyingaboutitsbenefits.Thereisalonghistoryofsnakeoilproductsinthehealthsector,featuringremediesbasedonnaturalsolutions,mysteri-ousinternationalsources,anddubious“alternativescience.”Theseproductspreyondesperatebuyers who are particularly willing to believe in miraculous solutions to their chronic conditions.Attheturnofthelastcentury,Coca-Cola,PepsiCola,andmanyothersodasweremarketedasmedicinalproductsdesignedtoinvigorateyourmetabolism.Dr.Pepperwasdevelopedbyaphar-macistandsoldundertheslogan“GoodforLife”withtheprescriptionthatyoushoulddrinkitthreetimesadaytoavoidmiddayletdowns.Thesugarandcaffeineinthemixdoesprovideatem-porary boost, and the brew’s flavor has kept it successful for more than a hundred years.Todayhundredsofdrinksstillclaimtoboostenergyandimprovefitnessandmentalacuity.Whileafewcomewithabitofrealsciencebehindthem,it’slikelymostarecreatedandmarketedbyentrepreneurslackinganyrealmedicalcredibility.Sugarandstimulantswillcontinuetopowerproducts like Monster and Rock Star energy drinks in the market.Regardlessofthesectoryou’rein,it’simportanttobetruthfulwithyourcustomers.Intoday’sworld,therewillalwaysbesomeoneeagertopounceonanythingthatsmellsdisingenuous.Don’tbecometheirtarget.Thevalueofyourbrandisoftenyourmostimportantasset,andthebedrockof brand reputation is honesty.FIGURE 12.7Dilbert CartoonThe Pointy-Haired Boss equates marketing with fraud.Source: DILBERT © 2007 Scott Adams, Inc. Used By permission of ANDREWS MCMEEL SYNDICATION. All rights reserved.Chapter 12Marketing373© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Our Ever-Changing MediaCommunicationsCommunicationsTechnology:Technology:Overthelastseveraldecades,continualinnovationinelectronichardwareandassociatedsoftwaresystemshasresultedinplatformandinformationproliferation.InformationInformationOverload:Overload:Thetechnologytrendhasalsoacceleratedtherateatwhichconsumersreceiveinformationandmultipliedthemeansbywhichtheygatherit.Manyarewearyandwaryofadvertisingandothermarketingtools.Adynamicmarketingeffortmustbegenuinetogatherreal traction.PlatformPlatformCulture:Culture:Everyfewyears,youngerconsumersembraceanewfavoredonlineoutletandleavethelastonetotheirparents.Overthefirsttwodecadesofthiscentury,we’veseenthedesirableyouthmarketmovefromemailtothewebtoFacebooktoTwitterandthenInstagram,whileflirtingwithSnapChat,WeChat,andothers.Adynamicmarketingeffortmustbeplatformindependent and ready to quickly test and evaluate the viability of the next new trend.Regulations:Regulations:Theonlineregulatoryenvironmenthasbecomeincreasinglycomplexasgovern-mentsattempttoensureprivacyandprotectconsumerfrommisinformation.Failuretocomplycouldresultinmassivefines.Adynamicmarketingeffortmustincluderegularresearchintotheregulatory environment.Key Takeaways•Use your brand to drive sales, not advertising, where possible.•Remember that it is conversions that count in the end.•Use the news media for free advertising.•Be creative in maximizing your potential at trade shows.•Leverage social media both organically and as an ad platform.•Invest in SEO and effective search ads.•Learn to manage influencers when they are effective and affordable.•Always be ethical.374A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
12.3Case Study: Building One HotBrandSriracha on store shelves.Source: calimedia/Shutterstock.comWhereveryoumaybeintheworld,thereisagoodchanceyou’refamiliarwiththefamousbrandDavidTrancreated.TranistheimmigrantfounderbehindtheglobalphenomenaofHuyFongFood’sSrirachaSauce,withitsdistinctivebottleandgreencap.ThesaucehasdevelopedsuchacultfollowingthattheHuyFong’sroosterlogoisseenaroundtheworld,emblazonedonevery-thingfromballcapstoshoes.Tran’sentrepreneurialjourneystartedasoneofthethousandsofVietnamese“boatpeople”refugeeswhofledthecommunisttakeoveroftheirhomecountryfollow-ingthewithdrawalofAmericanforcesinthe1970s.DeterminedtosettleintheUnitedStates,TranmadehiswaytoHongKongonasmallvesselnamedHuyFong.HeeventuallysettledinBostonbutquickly decided to head west and arrived in California in 1980.SettlingintothegrowingVietnamesecommunityinSouthernCalifornia,TranquicklyrealizedthatthesaucesofferedtoaccompanytraditionalVietnamesePhosoupinAmericawereapalecom-parisontothosehehadenjoyedinAsia.Heattributedthisdiscrepancytotheuseofunderripegreenpeppersorpreviouslydriedchilis,ratherthanfreshpeppersinthepreparationofAmerican-stylesauces.Tranfoundhimselfhuntingforripepeppersandstirringupbatchesofsauceinabucketathome.WhenaskedifthereareanysecretsastohowHuyFong’sSrirachasauceismade,Davidsimplysaid,“No,anyonecanmakeitathome.Youjustneedtogetthefreshchili,chopit,addafewingredients,andthatisit.Thereisnosecretoranything;theonlydifferenceisthefreshnessof the chili pepper.”Tranwasn’tlookingtogetrichorestablishaniconicbrand.Hepursuedentrepreneurshippurelyforthesakeofofferingabetterproductatafairprice.Byenjoyingthebenefitsofrunningaprivatelyheldfirm,Tranhasbeenabletofocusonthatgoalratherthanonprofit-seeking.Earlyon,heintuitivelyrecognizedhispersonalsenseofmissionasthesourceofHuyFong’sbrandpowerinChapter 12Marketing375© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
itsbattleagainstlargerfoodproductcompetitorslikeKraft-HeinzandHunt-WessonCorporation.WhentraditionalAmericanhotsauceheavyweightTabascoenteredthesrirachasaucemarket,Tranwasabletodismisstheattemptasapoorimitationofhisfamousproductandpowerfulbrand.Fromtheverybeginning,HuyFongwasblessedwithaspontaneousword-of-mouthcampaigndrivenbyitsproductqualityandsupportedbyitscult-likedevotees.Tranneverinvestedintradi-tionaladvertisingormarketingbeyondmaintainingamodestwebsite.Hehasoftenstatedthathesawnopurposeinspendingprofitsonadvertisingbecausehehasalwaysbeenabletosellallthesaucehisfirmcouldproducefromtheavailablechilicrop.Thatdoesnotmeanthatthissuccessfulentrepreneur has not also been an intuitive marketer.TranmadeHuyFong’scelebratedSrirachabottleimageandroosterlogoavailableasano-costlicensetojustaboutanyproductmanufacturerthatappliedforit.TheappearanceoftheHuyFongroosterorsaucebottleonskateboards,dogtoys,andpajamasconstantlyreinforcesthepositivebrandassociationsforSriracha’sdedicatedfanbasewhilesignalingtheexceptionalnatureofthissaucetothosewhomaynothavesampledit.Thisbroadexposureliftedarelativelyobscurebrandimageintothepantheonoficoniccorporatelogos,alongsidethelikesofNike,Coca-Cola,andApple.Transharedthathisbusinessschool-educatedsonhasadvocatedforHuyFongcapturingtheeco-nomic value of the logo, but the elder entrepreneur remains very happy with the way things are.ItisthehumblejalapeñochilipepperthatdrivesHuyFong’smassiveoperations.DuringthepeakoftheCaliforniagrowingseason(August–October),its650,000sq.ft.factoryinIrwindale,Cal-ifornia,receivesthirtytofortytruckloadsofchilisperday.Theseripe,redjalapeñopeppersmustbequicklywashed,ground,andprocessedtocreatethechilipaste.Thispasteisthenstoredin55-gallonbarrelsthatarestackedfromfloor-to-ceilinginthemassivewarehousetoawaititstrans-formationintothesignatureSrirachasauce.Whilethechiliseasononlylastsforthreemonths,enoughchilipasteisstoredinthefactory,roughly200,000barrelsworth,toaccommodateHuyFong’syear-roundproduction.AlmosteveryaspectoftheHuyFongmanufacturingprocessisdonein-house,rightdowntothemoldingoftheplasticSrirachabottlesandthebig,bluechilipastestor-agebarrels.Thechilisarethefirm’sonlymajorexternaldependency.Ittakesuptothreeadditionalmonthsforgreenchilistoturnred.Leavingtheminthefieldtoripenincursanopportunitycostforthefarmerwhocouldbeusinghislandforanothercrop.HuyFong,inordertobeabletomakethebestproductpossible,needsfarmerswillingtoproducethehigher-costredchilis.Thatdepen-dency turned out to be the Achille’s heel in the famous sauce maker’s strategy.Fortwenty-eightyears,DavidTranmaintainedaveryfriendly,somewhatinformalbusinessrelationshipwithUnderwoodRanchesinVentura,California,theexclusivegrowerofredchilisforHuyFong.Duringsomepartsoftheirbusinessrelationship,HuyFongguaranteedapaymentof$20millionto$30millionupfrontfortheentirechilicropregardlessofoutcomes.Furthermore,theSrirachamakerprovided$87millionincapitalinordertobuyaharvestingmachinecapableofpickingthe100millionpoundsofchilisthatHuyFong’sSrirachaoperationdemanded.FornearlythreedecadesthisagreementabsolvedDavid’sgrowersofalmostallriskandprovidedHuyFongwith the red chilis for its sauce.UltimatelytherewasafallingoutbetweenUnderwoodandHuyFong,resultinginthepartiespartingwaysandUnderwoodstartingitsowncompetingchilisauce.AfterUnderwoodmadeitclearthatitwouldnotgrowpeppersforHuyFong,otherpepperfarmers,wellawareofthestrengthofHuyFong’sbrands,eagerlyinkeddealsthatkepttheirchilisinthegrounduntilripe.Retailersremainedloyaltothefamousbrandtheircustomersloved.HuyFongFoodsgreatlyreduceditssup-plyriskandsupplierpower.Tranbelievesheisnowgettingbetter-qualitypeppersatabetterprice.Sales and profits are up, and Huy Fong’s Sriracha brand is stronger than ever.Atage74,DavidTranstillcomestoworkeachday,althoughhenolongermanagestheday-to-dayoperationsofthebusiness.HuyFong’sfounderdelegatesmostoftheoperationalworktohissister-in-lawwhilehesimplyenjoyshisbusinessforitsownsake.Transays,“Icometoworkeverydaybecausewehavethetours,andIliketosayhellotoeveryoneonthetour,andthatmakesmehappy.”[12]Allheeverwantedtodowas“makeaproductfortherichman,withapriceforthepoorman,” and that is an achievement the saucy entrepreneur truly relishes.376A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Endnotes1.Zhang,G.,&Simon,H.A.(1985).STMcapacityforChinesewordsandidioms:Chunkingandacousticalloophypotheses.Memory&Cogni-tion,13(3), 193–201.2.Simon, H. A. (2013).Administrative Behavior. Simon and Schuster.3.Frank,K.S.(n.d.)HerbertA.Simon:Afamilymemoryhttp://www.cs.cmu.edu/simon/kfrank.html.4.Beal,G.M.,&Bohlen,J.M.(1956).Thediffusionprocess(No.761-2016-51585,p.111).https://ageconsearch.umn.edu/record/17351/files/ar560111.pdf.5.Rogers, E. M. (2010).Diffusion of innovations. Simon and Schuster.6.Moore,G.A.,&McKenna,R.(1999).Crossingthechasm.HarperBusi-ness Essentials.7.Perkins,C.(2018).“Tesla’ssillyfalconwingdoorshaveonegreatfunc-tion.”RoadandTrack.https://www.roadandtrack.com/new-cars/a21722920/tesla-model-x-falcon-wing-doors/8.Ferdman,R.(2013).ThehighlyunusualcompanybehindSriracha,theworld’scoolesthotsauce.Quartz.https://qz.com/132738/the-highly-unusual-company-behind-siracha-the-worlds-coolest-hotsauce/.9.GuinnessWorldRecords.(2012).https://www.guinnessworl-drecords.com/world-records/97711-longest-forward-jump-on-roller-skates10.GuinnessWorldRecords.(2018).https://www.guinnessworl-drecords.com/world-records/501223-largest-roller-skating-lesson11.GuinnessWorldRecords.(2015).https://web.archive.org/web/20150821044202/http://corporate.guinnessworldrecords.com/index.aspx12.Tours were unfortunately discontinued during the COVID-19 pandemic.Chapter 12Marketing377© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
378A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
CHAPTER 13SellingYou miss 100 percent of the shots you don’t take.—Wayne Gretzky[1]Home purchases depend heavily on the work of sales professionals.Source: © Shutterstock, Inc.Whileyouwon’thaveanyproblemsstoppingintoacornershopandpickingupacandybar,whatifyouwantedtobuythebuildingthatstorewaslocatedin?Wherewouldyoustart?You’dmostlikelygofindacommercialrealestatesalesagent,andthesellerofthebuildingwoulddothesame. Why?© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
charlatanA fraudulent salesperson.hucksterA fraudulent salesperson.customerrelationshipmanagement (CRM)The formalized process ofinteracting with customers.13.1The Context of SellingLearning Objectives1.Understand why people choose to buy things.2.Understand that the sales process is a social function.3.Recognize when active personal sales functions add value and when they do not.4.Understand the role of the salesperson in the modern age.5.Understandhowpotentialcustomersmovethroughthesalesprocessorcycleasrepre-sented by the sales funnel model.6.Recognize that marketing and advertising feed the sales process.7.Understand the value of tightly integrating marketing and sales efforts.The Process of SellingProfessionalsellingisacriticalskillthatmustbemasteredormanagedbynearlyeverysuccessfulentrepreneur.Salesisoftenseenasadomainofcharlatansandhucksters.Outsideofthemechan-icsofcustomerrelationshipmanagement(CRM),thesalesprocessisoftenignoredinuniversitycourses.Thescienceofsalesattractssignificantlylessacademicresearchthandothepopularareasofmarketingandstrategy.Modernentrepreneurshiptextbooksareheavilyorientedtowardmar-ketingandcustomerdiscovery,butfewofthemdirectlyaddresstheprocessofselling.Thischapterintroduces the basics of the sales process and profession.People Buy Stuff from PeopleIfyou’reinthemarketforanewsetofnoise-cancelingheadphones,it’slikelyyoumightbeinflu-encedbyadvertisements,readonlinereviews,talktoyourfriends,andthenclick“buy”onAmazonorsomeothere-commercesiteandwaitforyournewheadgeartoarrive.You’llneverinteractdirectlywithanotherhumanbeingduringtheentireprocess.Today,weviewthathuman-to-soft-wareinterfacingasentirelynatural.Ifyourgrandfatherhadwantedheadphonesinthe1970s,would his purchasing process have been the same? Would he make the same choice as you today?380A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
sales processThe steps a customerproceeds through duringthe process of buying aproduct or serviceincluding (but not limitedto) awareness,qualification, and closing.salespersonThe individual responsiblefor servicing the customerduring the sales process.Sometimes referred to asan “account executive.”businessdevelopmentThe more sophisticatedname for sales, particularlyin the corporate world.buyerÕs remorseThe psychological state ofregretting the expense orchoice of a majorpurchase.A sales meeting in progress.Source: © Shutterstock, Inc.Imagineyou’reatechnophileenvironmentalistandyou’vebeenthinkingaboutthebenefitsofequippingyourhomewithrooftopsolarpanels.AfteryoudoafewGooglesearchesonthetopic,themodernengineofmarketingkicksin.Algorithmsdetectyoursearchpatterns,andyoursocialmediastreamissuddenlyfilledwithadvertisementsforsuchsystems.Theysuggestyoushould“actnow”beforegenerousgovernmentalsubsidiesexpire.Whatisyournextstep?You’reeagertomakeasolarpurchase,butthesesystemsrequireinstallationandofferavarietyofperformancespecifications,monitoringsystems,andpaymentoptions.Someofthechoiceswilldependonfac-torslikethedirectionyourhomefaces,theangleofyourroof,andeventheshadowsofnearbytrees. You can’t just click on the “buy” button and wait for the box to arrive and set this system up.Peopleoftenseekexpertadvicebeforemakingapurchaseinadomainwheretheylackexper-tise.Someproductsarecomplicatedenough,expensiveenough,orregulatedinsuchawaythatnomatterhowsophisticatedaconsumeryouare,youwillhavenochoicebuttocompleteyourorderwithaperson.Ifyouchosetowalkintoabigboxstore,suchasBestBuy,totalkaboutheadphonesor you submit your contact information to the solar panel installer, asales processis initiated.Duringthesalesprocess,asalespersonwillassistyouwithyourselection,andshewilllikelyemployavarietyoftime-proventechniquesdesignedtoguideyouasrapidlyaspossibletoacom-mitmentthatalignswithherfirms’interestsandhopefullywithyours.However,shemaynotbelabeledasa“salesperson.”Yourheadphonesalespersonislikelytobea“customerserviceassociate,”andthesolarpanelsalespersonmayhaveatitlelike“systemdesigner.”IntheB2B(business-to-busi-ness)world,theprocessofsalesistypicallycalledbusinessdevelopment,andmoreinformally“bizdev.”Salespeopleareoftencalled“accountexecutives”or“businessdevelopmentexecutives”Whyisthat?Sales and Business DevelopmentWhatcomestomindwhenyouheartheword“salesman?”Haveallyourexperienceswithsalespeo-plebeenpositive?Mostpeoplehaveexperienceduncomfortablepressurefromaggressivesalespeopleorevenexperiencedbuyer’sremorseafterbeingsoldaproductthatwasinappropriate,too expensive, or inadequate. Why do we have sales?Chapter 13Selling381© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
transactionalA relationship based on anexchange of value.sales artThe techniques and skillsutilized to sell a product.salesmanshipThe techniques and skillsutilized to sell a product.leadsPotential customersgenerated and identifiedby marketing efforts.sales pipelineA concept representingthe flow of customerscoming into andprogressing through thesales process.Allsalestakeplaceinasocialcontext.Longbeforethedawnofhistory,earlyhumanslikelyengagedintransactionaleconomicrelationships.Theynegotiatedexchangesofmaterialorlaborforthethingstheyrequired:water,food,fire,furs,shelter,andtools.Sincetheseitemsweremostlynecessities,theonlydiscussionwouldhavebeenfairlysimplenegotiationsofpricerelativetootherbarteritems.Asthehumaneconomyprogressed,ourancestorsbegantoacquiremoreluxuries,thingsthatwerenotrequiredforsurvivalbutweredesirable.Imaginethataprimitivehuntercomestoaprimitiveencampmentwithacacheofbeautifulbutverysmallanimalpeltssuitableforadornment.Afewminuteslater,agathererwhohasdiscoveredabatchofdelectableberriesarrives.Why would the exchange of these items be more complex?Whensomeonewishestosellyouanitemthatyoudonotabsolutelyneedorwhenyouhavechoicesonwhattopurchase,asalesprocessbegins.Thevendormustconvinceyou,thecustomer,thatyourlimitedcurrencyshouldbetradedforhisofferings.Thesalesperson’sargumentsmayberationalones,arguingfortheutilityoftheproducttoyouoritstechnicalsuperiorityascomparedtootherproducts.Theargumentsmayalsobepsychologicallybased,manipulatingyoursenseofidentity,perceivedsocialstanding,andself-worthtocompelyoutopurchase.Overthecenturies,productvendorshavedevelopedavarietyofusefulpsychologicaltechniquesdesignedtoseparatecustomersfromtheirmoney.Thesetechniquesconstitutethetacticaltoolboxofthesalesartandform a set of skills often referred to assalesmanship.Marketing and Ads Fill the Sales FunnelForapersonorbusinesstobuyyourproduct,youwillobviouslyneedtoestablishcontactwiththem.Itisalsomucheasiertomakeasaleifthecustomerisfamiliarwithandrespectsyourbrand.It’salsogreatiftheyknowaboutthespecificproductofferingandthevalueitmightaddtotheirworkorpersonallife.Thebranding,marketing,andadvertisingtoolsoutlinedinChapter11andChapter12setthestageforsales.Popularbrands,effectivemarketingcampaigns,andgoodadvertisementsfunnelpotentialcustomers,alsoknownassalesprospectsorleads,intoasalespipeline.FIGURE 13.1The Sales FunnelSource: Greg Autry382A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
integrated marketingA holistic system wherefeedback obtained duringany customer interaction ischanneled to themarketing and advertisingprofessionals allowingthem to optimize theirefforts to produce agreater quantity andquality of leads to fill thesales pipeline.Youcanvisualizethispipelineasarepresentationofpotentialcustomerspassingthroughaseriesofstagesfromidentificationtohandingovertheirmoney.Sincemorecustomersstarttheprocessthanarefinallyclosed(youcan’twinthemall),thepipelinenarrowsasitgoesalong,whichsupports a model often visualized as the sales funnel.Awareness,interest,andconsiderationareusuallyfunctionsperformedbythemarketingandadvertisingteams.Awarenessistheprocessofbringingyourproducttotheattentionofpotentialcustomersviaadvertising,internetsearches,productplacement,andothertoolscoveredinChap-ter11andChapter12.Interestistheefforttogetthecustomeractivelyengagedbycomingtoyourwebsite,calling,visitingyourtradeshowbooth,etc.Considerationisthephasewhereyouareincontactwiththecustomer,andtheybegintothinkseriouslyaboutpurchasingaproduct,solution,orserviceinyourcategory,butnotnecessarilyyours.Pictureapotentialcustomerwhohasbecomeawareofelectriccarsfromnewsstories,begantoresearchthesevehiclesandvisitedseveralweb-sites.Duringtheconsiderationstage,theyusedonlinetoolsandrequestedmoreinformationfromVolkswagen,Rivian,andTesla.Theyarenowasaleslead,apotentialcustomeryouhaveidentified,and they have entered the sales process.Integrated MarketingBeforeleavingtheworldofbranding,marketing,andadvertising,letusrevisitthegraphicfromChapter3onstrategy.Recallthatourorganization’sstrategydrivestacticsthatareexecutedtoproduceresults.Resultsarequantifiedinmetricsthatareusedbymanagementtodevelopstrategies, adapt tactics, and improve execution. Where do those metrics come from?FIGURE 13.2Strategy, Tactics, ExecutionSource: Greg AutryThesalesprocessisthemostimportanttoolinevaluatingthosebusinessfunctions.Thequan-tityandqualityofsalesdeterminethesuccessoftheorganizationinmovingforwardtoitsobjectives.Thesalesprocess,successfulornot,isarichsourceofinformationaboutevolvingcus-tomerneeds,brandperceptions,marketingstrategyeffectiveness,andadvertisingappeal.Salespeoplearethefirsttorecognizeamarketingproblemandareinthebestpositiontoidentifythecauses.Establishareportingsystemthatgeneratesactionabledatafromthesalesprocess.Inte-grateyoursalesteamintoyourmarketingdecision-makingviathisprocedureandbyincludingtheirfeedbackinstrategicmeetingsoneverythingfromproductdesigntoadvertising.Integratedmarketingisaholisticsystemwherefeedbackobtainedduringanycustomerinteractionischan-neledtothemarketingandadvertisingprofessionals,allowingthemtooptimizetheireffortstoproduce a greater quantity and quality of leads to fill the sales pipeline.Anobservantsalespersonmustlearnyourcustomers’perceptionsofyourofferings,brand,marketing,andadvertising.Shewillalsopickupvaluableinformationaboutwhatyourcompeti-Chapter 13Selling383© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
torsaredoingwellandwhatmistakestheyhavemade.Thesecanserveaspowerfulanalogsandantilogsforyourmarketingefforts.Salesshouldsupportanongoingprocessofcustomerdiscoveryand market validation, as discussed inChapter 4andChapter 5.Key Takeaways•Whilesalesareincreasinglymadeonline,personalsalesis”stillathing”inmanyproductandservice categories and will remain so.•Theprocessofbuyingaproductisamultistepcyclewithdifferentrolesassumedbythecus-tomer and the seller.•Your marketing and advertising systems drive potential customers into the sales funnel.•In the B2B world, sales is often referred to as business development.13.2The Sales ProcessLearning Objectives1.Understandhowtherolesofthepotentialcustomerchangeastheymovethroughthefunnel.2.Appreciate the important cost of customer acquisition.3.Understand the varying length of the sales cycle.4.Recognize the importance of qualifying leads.5.Understand the qualifying process.6.Appreciate the need to research your customer.7.Master basic sales techniques.8.Learntocopewithrejectionandhowtobuildandmaintainconfidenceduringthesalesprocess.Mypopularity,myhappinessandsenseofworthdependtonosmallextentuponmyskill in dealing with people.—Dale Carnegie[2]384A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
intentThe stage in the salesfunnel where the customerhas decided to buy aproduct in your category.purchaseThe actual transactionwhere a good or service isfinancially committed to.This may be signing acontract, providing apurchase order, etc.closingThe process of securing afinal agreement on a sale.qualifyingThe process ofdetermining if a potentialcustomer is suitable, able,and willing to purchase aproduct or service.Working the FunnelRecallthesalesfunnelfromSection1?Thesalesprocessbeginswithintentandcarriesthroughtopurchase.Thepurposeofsalesinthisintegratedprocessistotransformcustomerinterestintorev-enues byclosingthe sale.Sales Begin with IntentAttheintentstageinthefunnel,theleadhasdemonstratedanintenttopurchaseaproductinyourcategory.Ifyoursalesprocessishuman-driven,itisatthispointthatasalespersonshouldengagethecustomer.Inmanyautomatedsalessystems,thisprocessmimicsahumanresponse.Ineithercase,thisphasecallsforacautiousandcarefulfirstcontact.Insales,asinfishing,itisextremelyeasytospookyourpreyontheirfirstapproach.Asnotedpreviously,manycustomershavehadnegativeexperiencesorheardhorrificstoriesofaggressivetacticsusedbysomesalespeople.Attheintentstage,youronlygoalshouldbetobuildtrust.Introduceyourselfwithasfewwordsaspossi-ble,letthemknowyouaretheretoassistthemwithquestionsaboutyourfirm’sproductorserviceandeventheproductorservicecategorymorebroadly.Thenshutupandlisten!Waitpatientlyforthe customer to respond and take the bait.QualifyingOncethecustomerintendstobuyaproduct,theyarereadytobeginevaluatingyouroffering,andatthispoint,youcouldbegintospendalotoftimegivingthemtheinformationtheyneedtofallinlovewithit.However,evaluationisatwo-waystreet,andbeforeyouinvestyourtimeinthelead,youwanttobesureyourtimewillbewellspent.Thatprocessiscalledqualifying,anditshouldbedone before you move on to supporting the customer’s evaluation process.Chapter 13Selling385© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
To maximize their time, car salespeople need to qualify buyers.Source: © Shutterstock, Inc.Duringthequalifyingprocessyoudetermineifthispotentialcustomerissuitableforyourproductandyourfirm.You’llwanttoidentifyseveralleadattributesduringthequalifyingprocess,includinghowwelltheofferingfitsthecustomer,thelead’sabilitytopay,whetheryouareworkingwiththedecision-maker,andhowlikelythesaleistocloseinanycase.Let’sreviewthesequalifica-tions individually:Product/customerfit:Isyourproductreallyagoodfitforthelead?If,duringthesalesprocess,theyarelikelytodiscoverthatwhatyouhavetoofferwon’treallysolvetheirproblemorthatanother solution is better for them, they aren’t a qualified lead.Abilitytopay:Ifthecustomerdoesn’thavethecashonhand,creditavailable,orwon’tqualifyfor financing required to purchase your product, they aren’t a qualified lead.Decision-maker:Often,youmaybetalkingtoanindividualwithinterestfromanorganizationthatmightbeabletobuyyourproduct,buttheleadhimselfisn’tactuallyauthorizedtodoso.Iden-tifyingandcontactingthedecision-makeriscriticaltoasuccessfulsale.Ifaleadcan’tgetyouapurchase order or make a payment, they aren’t a qualified lead.Likelihoodtoclose:Somefolksjusthavetroublecomingtodecisions.Ifaleadisn’tlikelytoreachadecisionwithinatimeframethatjustifiesyourinvestmentintheprocess,theyaren’taqualified lead.Tosummarize,aqualifiedleadactuallyneedsorwantsyourproduct,hasmoneytobuyit,andisreadyandauthorizedtomakeapurchasingdecision.Aleadthatmeetsallthesecriteriaadvancestothestatusofasalesprospect.Theyareworthyofinvestingsignificantsaleseffortintotheprocessasyoumovetoclosethesale.Iftheyfailtohaveallthesecriteria,theynotworthpur-suing.Somemarketingsystemsprovidesalespeoplewithprequalifiedleads.Basicqualificationmightbehandledbyalower-paid,front-endcustomerservicestaff.Oncetheyhavedonetheirjob,theyhandovertheprospecttothesalesexperts.Oftenthesefirst-levelstaffareinternsorapprenticesales staff who will observe and learn the ropes before moving up into a full sales position.386A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
honest brokerA person who is willing totell a potential customerthe truth about the bestproduct for them, even atthe expense of losing theirown sale opportunity.evaluationThe customer’s process ofdetermining the value of aproduct. Evaluation shouldbe carefully guided by thesales team.QualificationmayalsobedonebyonlinesystemsbackedwithanalgorithmorincreasinglyanAIsystemthatsearchesmanydatabases,includingthelead’ssocialmedia.Canyouthinkofwhyitwould be valuable to analyze a consumer’s Facebook page or Instagram feed?Seeingtheproductsthataleadalreadyownscantellyoualotabouttheirpreferences,abilitytopay,andthelikelihoodofpurchasingsimilaritems.Ifyou’resellingnewPorsches,youprobablydon’twanttospendtimewithleadswhohaveten-year-oldToyotasorChevysinalltheirsocialmediapictures.Theymightliketotestdriveyour911,buttheyprobablyaren’tgoingtobebuyingone.Usually,onecanfindseveralpredictivedeterminantsofincomeinanindividual’ssocialmediaprofile.Theseincludethecityorareaoftowninwhichtheylive,theireducationallevel,andtheirprofession.WhileitisnotaguaranteethatalawyerwithaPhDfromHarvardlivinginBeverlyHillshasmorepurchasingpowertobuyyourPorsches,it’safairguess.It’simportanttonotethatmanysocialprofilesareexaggeratedorevenentirelyfabricated.Watchoutforthefakers.Youshouldalsobeawarethatmanyrealmillionairesareprettylow-key.AsThomasJ.StanleyandWilliamD.DankonotedinTheMillionaireNextDoor,spendingmoneyisn’tthesameashavingit,andmanyentrepre-neursareintradesthatdon’tattractagreatdealofattention.Theownerofaplumbingbusinessorelectrical contracting firm is entirely qualified to buy a luxury sports coupe.Oftenitistheresponsibilityofthesalespersontohandlethequalifying.Theymaybegivenalistofnames,emailaddresses,andphonenumberscollectedatatradeshoworfromonlineadvertising.Theycanstartdoingsomeoftheresearchusingsocialmediaoraskingtheapplicantsqualifyingquestionsinthecontextofsocializing,suchas“Iliveinthevalley;wheredoyoufolkslive?”or“HowaboutAlabamainthegamelastnight?Wheredidyougotocollege?”or“Whatdoyoudo when you’re not shopping for cars?”Ingeneral,salespeopleprefertoreceivequalifiedleadsoratleasthigh-qualityleadsthatcomefromapoolofverylikelyprospects.Workingthroughalistoftheleadsthatsignedupinexchangeforreceivingafreegift,ratherthanbecausetheyweregenuinelyinterestedorabletobuysome-thing, can be immensely frustrating for the sales staff.Oneofthemostimportanttraitsofthesuccessfulsalespersonistheabilitytoignoredistract-ing,unqualifiedleads,andfocusalltheirtimeonproductiveopportunities.Directingunqualifiedleadstoaproducttheycanaffordoronethatactuallyfitstheirneedswillsaveyoubothtimeandactually give you a reputation as anhonest broker.EvaluatingEvaluationisamongthemostcriticalstagesinthesalesfunnel.Itisduringthisstagethattheprospectwillmovefromsimplywishingtopurchaseaproducttodeterminingwhichbrandandspecific solution will best meet their needs. This is a make-it or break-it moment.Yourprospecthasalreadydeterminedtheyneedordesirethesortofproductyouoffer,andinreachingthatconclusion,theyhaveprobablyalreadycometocertainconclusionsabouttherela-tivemeritsofyourproduct,service,andorganization.Iftheyareworkingwithyourorganizationandenteredyoursalesfunnel,itislikelythatthesepreconceptionsaregenerallypositive,andyourjobduringevaluationisprimarilytoreinforcepositiveperceptions.However,don’tassumetherearen’tsomelurkingreservations.Theymayhaveseenacompetitor’sadvertisementoraproductreviewthatsuggestsyourofferingislackinginsomeway.Ifthosethingsareoutthere,youneedtobe familiar with them and have credible responses that don’t appear defensive.Agoodwaytoassistyourprospectatthestartoftheevaluationprocessistoaskanopen-endedquestionlike,“Whatdoyouknowaboutourservices?”or“Whatbroughtyoutolookatourproducts?”Iftheresponseissuperpositive,don’tbeafraidtocheerfullymovetoaclosewith,“Great,isthereanythingelseyouneedtoknow,orareyoureadytomakeapurchase?”Youcansavealotof time with this no-pressure tactic.Chapter 13Selling387© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Iftheinitialresponseortheresponsetoanearlyclosingattemptincludesconcerns,addressthetechnicalaspectsdirectlyandhonestly.Ifyoucan,backupyourclaimwithaddedcredibilityfromsomeothersourcelikeaproductrevieworanothermemberofyourteam.Youmightsay,“I’msureyou’llbeabletouseourModelZforthatapplicationbutletmebringoveroneofourmostexperiencedtechnicianstoaddressyourspecificconcern.”Takingtheextratimeandaddinganadditionalvoiceofconcernfortheirneedsisusuallyseenasapositivebytheclient.Letthemknowitisnotjustaproducttheyarebuyingbutthatyourorganizationwillbetheretoservethem.Thevalueofthistransactionandthelikelyvalueofrepeatbusinessfromthiscustomershouldguideyouintheamountofeffortyoumightinvestatthispoint.Oncetheprospecthashadalltheirrealconcernsaddressedoryou’vereachedthemaximumtimeyoucanreasonablyexpendoneducation,it is time to close.ClosingJustbecausetheprospecthasdecidedyourproductisthebestfitdoesnotmeanthemoneyisinthebank.Thepurchasingstageis,therefore,proceededbytheall-importantclosingprocess.Itishardtounderstandrationally,butthereisoftenamomentwhentheprospectiswillingtobuytheproduct,thesalespersoniseagertosellit,andyetthetransactionneveroccurs.Canyouthinkofreasons why?Potentialcustomersoftenboltfromthesalesfunnelatthislastmomentbecausetheyarener-vousaboutmakingapurchasingdecisionandwanttogetawayfromthesalesprocesstothinkitthrough.Thisisparticularlycommonwithhigh-costitems.Othertimestheprospectisentirelyready,butthesalesperson,fearingrejection,continuestosellratherthanaskingtheprospectforthepaymentorsignaturerequiredtoclosethedeal.Itisthejobofaprofessionalsalespersontounderstandwhenitistimetocloseandtohavethecouragetodoit.Dealingwithrejectionwillbediscussed later in this chapter.Beforeyoumovetoclose,youneedtoknowtheprospectisreadytocommit,correct?Maybeandmaybenot.Therearetwopointsofviewhere.OnemadefamousbyAlecBaldwin’sshockingsalesspeechinthefilmGlengarryGlennRossis“AlwaysBeClosing.”Baldwin’scharacterterrorizesthestaffofa“boilerroom”salesoperationwheresalespeoplearedriventopushprospectsintodubi-ouslanddealsoverthetelephonewiththemostunsavorytechniques.Theobjectiveistoclosethedealnomatterwhat,andthereisnofinesse.TheNewEntrepreneurialDynamicdoesn’tincorpo-rate this old-school approach.View in the online readerAlways Be Closing388A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Theothermodelisthefishinganalogyprofferedearlierinthechapter.Inthatscenario,theprospectisyourfish,awarethatthesalesprocesscontainsbothbaitandlikelysomehooktheydon’twanttoswallow.Theirjobistoavoidthesalesperson’sscheming,getthebestdeal,andgetoutbeforetheygettrickedintopayingtoomuchorgetsaddledwiththeextendedwarrantyorsomeotherexpensiveandunnecessaryadd-ondesignedprimarilytoincreasesalescommissions.Yourjob is to put the fish at ease and get them to take the bait.Thebestsalesapproachistobetheethicaloperatorand“showthehook”fromthestartbybeingasopenaspossiblewiththeprospect.Makesuretheprospectknowstheywilldeterminewhentobuy.Youwillstandback,offerinformation,andassistthemwhentheyhavequestions,butyouwillneverpressurethem.Thisistheessenceofbeingacustomerservicerepresentativeratherthan a “salesperson.”Therearesituationswhenwaitingfortheprospecttodecidesimplywon’tsupportyourbusi-nessmodel.Ifyouhaveperishablegoods,inventoryfinancedbyflooringthatmustbesold,oryourmarginssimplyaren’thighenoughoneachsaletospendhoursstandingby;youmaychoosetolosesome sales by pushing the customer to a decision. This is when the skill of closing is required.Iftheprospectisreadytobeclosed,theyhaveeithermadeadecision,orthereisnoadditionalinformationorvalueyoucanaddtothesalesprocess.Itistimeforyoutoaskfortheorder.Inmostcases,thisdeterminationismoreofanartthanscience.Anexperiencedsalespersonwillhaveobservedenoughcustomerswithinherdomaintointuitivelysensethemomenttoclose,oftenwithoutunderstandingwhy.Still,therearesomeobvioussignsyoushouldlookfor.Themostnotablecluethataprospectisreadytobeclosediswhentheystopaskingquestions,butdon’tleave.Orthenatureofthequestionsmaychangefromaskingaboutthequalitiesofaproduct(features,sizes,colors)totheprice.Ifthepriceistheonlythingleftonthetable,itistimetosettlethedealand close on that.Inmarketswherepricesarenegotiable—andthismayvarybyproductsandcultures—aclassicclosingtechniqueistoasktheprospect,“IfIcangetyouthepriceyouwant,areyoureadytobuy?”A“yes”fromtheprospecttothatquestionhasprettywellsealedthedealforyou,presumingyourofferingaddsenoughvaluetotheprospect’slifetocoverthemarginyourbusinessmodelrequires.Whatdoyouthinkthebestfollow-upwouldbeatthatpoint?Shouldthesalespersonproposeaprice?No!Neverputapriceforwardinapricenegotiation!Thismayseemcounter-intuitive,butyourjobasapricenegotiatoristogettheprospecttoputupaprice,becausethatpricemightactuallybehigherthanyouwouldhaveoffered.So,thebestresponseto“Yes,I’dbereadytobuyattherightprice,”is:“Whatpriceisthat?”Ifthepriceisn’tright,takeitseriouslybutcomebackwithsomethingthatencouragesthemtomoveclosertowhereyouneedtobe.Youmightoffertoaddinsomeaddi-tionaloptionorincentivetochangetheperceptionofvalue,oryoumightsay,“That’sanhonestopeningoffer,butI’vegottobehonestwithyoutoo,wecan’tmakemoneyatthatprice.Whatdoyouseriouslythinkyoucoulddo?”Now,inordertostayinthenegotiation,they’vegottouptheirprice, and you’ve not offered any information on where your bottom line is.Oncetheprospectcomesbackwithapriceyoucanlivewith,don’tinstantlyleapatitandsay,“Okay,great!”Doingthatwilllettheprospectknowthey’vemadeamistakebycrossingaboveyourbottom-linepriceandregrettheirpriceoffer.Youdon’twantthempullingbackorevenfeelingbadabouttheirpurchase,sopauseandlookdubious.Dosomecalculations.Gotalktoyourbossaboutit,andcomebacklookinglikeyougotyelledatforgoingtoolow.Thengrudginglyconcedetotheirterms. Let your new customer leave feeling like a winner!Beyondthepricenegotiationscenariooutlinedabove,thereareaplethoraofprovenclosingtechniques employed by salespeople. Let’s look at a few.Chapter 13Selling389© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
minor closeSome agreement from thecustomer short of a fullcommitment topurchasing. A minor close,such as agreeing on acolor choice, can bring thecustomer closer to the finaldecision.Minorclose:Theminorclosetechniqueinvolvesgettingtheprospectusedtomakingdeci-sionsbypresentingthemwithaseriesofharmlesschoicesthatallpresumetheyaregoingtoeventuallymakethepurchase.Youmightask,“Whichcolordoyouprefer,”or“Whenyouorder,wouldyouliketopickuptheproductorhaveusshipittoyourlocation?”Whenthetimecomestoactuallyclose,alltheminorquestionsareresolved,andtheprospecthasasenseofcommitment,having invested in all these other choices.Gettingto“yes”:DaleCarnegie,oftenconsideredthefoundingfatherofscientificselling,taughtthatsaying“yes”would“setthepsychologicalprocessofthelistenersmovinginanaffirma-tivedirection.”[3]Carnegiesimilarlynotedthatgettingsomeonetobackoffofa“no”statementwasdifficultbecausejustsaying“no”puttheperson“onguard”andintoastateof“physicalwithdrawalorreadinessforwithdrawal.”TheeasiestwaytoleverageCarnegie’syestechniqueistoqueryyourprospectwithquestionsthatwillsurelyresultinagreement.Youmightask,“Don’tyouagreethatyourcollegefootballteamhasbeendoinggreatthisseason?”or“Hasn’ttheweatherbeenlovely?”Withenoughoftheseaffirmationsmadeinarow,itbecomesroutinefortheprospecttoagreewithyou,andrejectingyour“CanIgoaheadandcompletetheordernow?”requiresanactualchangeintheir mental and physical state. It’s easier to just keep saying “yes.”Theassumptiveclose:Simplyassumingthatthecustomerisgoingtobuyisalsoapowerfultechnique.Talkabouttheprospectenjoyingwhateveryouaresellinginthefuture,“Whenyouareoutonyournewboat…”or“Duringthecruise,youandyourhusbandwill….”Youcanalsotalkaboutthepurchasingdecisionasthoughithasalreadybeenmade,“Nowthatyou’vedecidedtojoinourfamilyofhappycustomers,wecan….”Contradictingyourassumptionmaybedifficultformanyprospects.It’srudetocorrectsomeone,andtheymayevenfeeltheywouldbecallingyoualiar.Weak-willedorextremelypoliteprospectswilloftengoalongwiththesaletoavoidthestressof confrontation.Intimidation:Thisisn’tarecommendedtechnique,butitiscommonlyemployedinsales.Thepurposeistoinciteconfrontationwiththeprospectthatcanonlyberesolvedbytheirmakingapurchase.Aclassicexampleistostatesomethinglike,“Idon’tthinkyoucanactuallyaffordtobuythisfineanautomobile.”Thestatementchallengestheprospect’seconomicandsocialstanding,anditimpliesheisafraud.Itworksevenbetterwhendoneinfrontoftheprospect’sfamilyorpeers.Hecanonlyredeemhisstandingbypurchasingthecar.Healsocan’targueovertheprice,orhewillseemcheap.Bypayingtheaskingprice,heproves,tohisfoolishself,thatyou’rewrongandhe has plenty of money to throw around!Walkingaway:Notbeingaslavetothesunkcostoftimeandeffortspentinnegotiationisaverypowerfultechniqueforbothabuyerandseller.Simplysay,“Thankyouforcoming.Thisisn’tgoingtobeworthmytime,”andifyou’reattheprospect’ssite,starttoleave.Theotherpartyislikelytobeconcernedaboutthetimetheyhaveinvestedandwilllikelybegyoutostay.Atthatpoint,youwillhavetheupperhandinthenegotiationbecausenowtheotherpartycanhardlybackoutwith-outlosingface.DonaldTrumpfamouslyadvocatesthistechniqueinhisbook,TheArtoftheDeal.[4]IfyouGoogle“closingthesale,”you’llfindcountlessbooks,videos,articles,seminars,andtrain-ingsessionsreadytohelpyoumasterthisskill.Thequalityoftheseresourcesvaries,butifyouaregoingtobeinvolvedinthesalesprocess,andmostentrepreneursare,it’sworthyourtimetoexplore this fascinating intersection of economics and psychology.The PurchaseOncetheprospecthasagreedtobuyyourproduct,theremainingstepistheactualprocessofpurchasing.Inmanyretailtransactions,thatmayinvolvenomorethanthesalesclerkscanningabarcodeandtouchingtheirsmartphoneonthecreditcardterminalorthecustomerclickingonthe“BuyNow”buttoninanapp.Inothercases,suchassellingacaroralargeB2Bcontract,therecanbecontracts,regulatorypaperwork,andfinancingarrangementstocomplete.Don’trisklosingyourcustomer by making this process unnecessarily cumbersome.390A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
virtuous cycleA process that repeats in away that creates value witheach previous iterationfeeding the next one.Insomebusinesses,thepurchasingphaseisusedtosneakinadditionalfeesandevenproductsales.Automobilefinanceofficersarenotoriousforthispractice,andthatisoneofthereasonsmanycustomersdreadengagingintheautosalesprocess.Onlinesalesaremakingthisincreasinglydifficultinmostproductcategories.ThispracticeisinconsistentwiththeopennessoftheNewEntrepreneurial Dynamic. Don’t do it!Contract signing is the commitment step in complex sales processes.Source: © Shutterstock, Inc.Thepaperworkinvolvedwithcompletingthepurchaseshouldbesimpleandpleasant.Thedeliveryofyourproductshouldbepromptanduncomplicated.Customersoftenhavetheabilitytohaltthepurchasingprocess,evenaftersigninganagreement.Theycansimplyrefusetomakeapayment.Insomejurisdictions,theymaybeabletorenegeonasalesagreementwithinathree-dayperiod.Thesalespersonmuststayengagedintheprocessatleastupuntilthemoneyisinthebank,butthatisnottheendoftheprocess.Manypeoplebuildupagreatdealofexcitementbeforeapurchaseandthenfeelletdowninthepost-salesprocessanddonotbecomereturncustomers.Worse,theymayreturnproductsorcancelsubscriptionservices.You’vemadeasignificantinvest-mentinacquiringacustomer.Keepingaprovencustomerischeaperthangeneratinganewone,andsatisfiedclientsbringinnewleadsandgrowyourbusinessinavirtuouscycle.Loyaltyisapost-sales function that will be discussed later in this chapter.Chapter 13Selling391© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
sales processThe steps a customerproceeds through duringthe process of buying aproduct or serviceincluding (but not limitedto) awareness,qualification, and closing.sales cycleThe steps a customerproceeds through duringthe process of buying aproduct or serviceincluding (but not limitedto) awareness,qualification, and closing.Same as sales process.cash conversioncycleA measurement of the timeit takes to convert yourfirm’s investments ininventory and resourcesinto cash.target customerA potential customeridentified via a marketingprocess that has justentered the sales funnel.cold callingWhen a salesperson callsupon an unsuspecting leadin the absence of anyrelationship. The likelihoodof rejection in a cold call isvery high.spamUnwelcome anddistracting messages,often in email.Additional Important Sales TopicsQualifyingiscriticalbecauseofallthestepsinvolvedinmovingapotentialcustomerfromaware-nesstopurchase,andthehands-on,one-on-onesalesprocessisbyfarthemostexpensive.Amajorfactor in this cost is the length of thesales process, sometimes referred to as thesales cycle.The Sales Process VariesThesalesprocessvarieswidelybyindustryandbyproduct.Sellingapairofheadphonesinaretailstoreislikelytoinvolveafewminutesoftime.Closingthesaleonanenterprise-wideclinicalsoft-waresystemtoamulti-hospitalmedicalgrouporaweaponssystemtothePentagonwillliterallytakeyears,dozensofmeetings,andmanyhundredsifnotthousandsofhoursfromanentireteamofsalespeople.Suchsaleseffortscosthundredsofthousandsofdollars.Tyingyourteamuponamajorsalealsocomeswithanopportunitycost—theycouldbeworkingonanothertarget.Inthesecircumstances,itiscriticallyimportantthatyouroddsofsucceedingbegood,andproperqualifica-tion of your lead is the key to not wasting money or time on the wrong opportunity.Thesalescycleisanimportantpartofthelargercashconversioncycle(CCC),whichmeasuresthetimeittakestoconvertyourfirm’sinvestmentininventoryorresources(newmoneyorrein-vestmentofprofits)intocashflowsfromsales.Thelongerthiscycleandthemoretimeinvestedinthesalesprocess,thehigheryourfirm’sprofitsmustbetoensurethatthereturnstoyourinvestorsover time are high enough to justify their support.Cold Calling/Warm CallingInsomecases,salespeoplearetaskedwithgeneratingtheirownleadsfromthetargetmarket.Othertimesalistofleadsmaybeprovidedthathavebeenidentifiedviaamarketingprocess,butthetarget customersthemselves are not aware that they’ve entered the sales funnel.Contactingsomeonewhodoesn’tknowtheyareasalesprospectiscalledcoldcalling,anditisperhapsthemostdemandingandintimidatingexperienceinthesalesworld.Theoddsofrejectionareveryhigh.Thereisalsoafairchanceyouwillgetanopenlyhostilereactionfromaleadwhovalues their time and does not want to be distracted with a sales pitch.Whenacoldcallcomesinasanemailoratextmessage,thereceivermayviewitasspamandignoreit.Ifthesalespersonhasmadeanunscheduledphonecallorshowsupatthelead’sdoor,it’shardertonotengagetheminconversation,thoughthereactiontheygetmaybeunpleasant.Toavoidaleadsimplyhangingupthephoneortossingthemout,salespeopleareoftentrainedtomis-leadtheirpreywithastoryabouttakingasurvey,offeringafreeprize,orsomeotherrusedesignedtoengagethecustomer’sinterestandbuildaconversationthatwillbeharderforthetargettoter-minate politely.392A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Most people work to avoid uninvited salespitches.Source: © Shutterstock, Inc.warm callAn initial sales call where arelationship has beenestablished, often througha mutual connection.Preferable to a cold call.You’veprobablybeentherecipientoftheseunwantedsalespitchesyourself.Manybusinessesorganizetheirtelephoneandfacilitiessotheycanavoidcoldcallers.Allcallsgotoareceptionistortovoicemailfirstforscreening.Thedoorhasapasscodeorareceptiondesk,andifyoudon’tpassscreening,you’renotgoingtogettoyourtarget.TheU.S.TradeCommissionevenestablishedanational“DoNotCall”registrytohelpconsumersavoidtheplagueoftechnology-enabled cold callers, and more than 200 million Americans are registered.Allofthatisanoverwhelmingvoteof“no”oncoldcalling,whichisincreas-inglyviewedasawasteoftimebysalesprofessionals.Statisticsarefrequentlyofferedtosuggestthatthesuccessrateofcoldcallsinmovingatargetintothesalesfunnelis2percentorless.Thatmeansonlyoneoutoffiftyattemptstoscheduleameeting,demo,orconsultationworks.Worse,itmeansyou’velikelyirritated forty-nine potential customers, an effect your brand does not need.Themostpopulartechniquesalespeopleusetoavoidthepainfulrejectionofcoldcallingisthewarmcall.Awarmcalliswhenyoureachouttoatargetcustomerinthecontextofsomealreadyestablishedconnectionthatbestowscredibilityuponyourattempttoestablisharapport.Thismightbebecausethecustomersignedupfor“moreinformation”onyourfirm’swebsiteoratatradeshow. It might also be because you are able to leverage a mutual association of some kind.Usingapersonalreferralfromathirdpartythatthecustomerrespectsisaverypowerfulwaytopreventatargetfromgivingyouthebrushoff.Imaginethatyou’reaverybusyexecutiveatalargefirmandasalespersonyoudon’tknowcallsyouonthephone.You’reinthemiddleofworkingonanimportantreportanddonotwanttobedistracted.Considerhowyouwouldrespondtoeachof these two telephone openings:“Hello,I’dliketotalktoyouaboutanincrediblesolutionforyourcompany’stransportationproblems. . . .”“Goodmorning,IwasjusttalkingtoyourcolleagueShanaoveratCompanyX,andshemen-tionedthatyourfirmhasthesamelogisticalproblemwesolvedforher.ShesuggestedItalktoyouabout how we did that. . . .”Inthefirstscenario,you’rethinking,“Whoisthisguy,andhowdoIgetridofhim?”You’llprob-ablyjustwanttogetoffthephoneandbacktoyourreportandrespondwithashort,“Sorry,no,I’mbusy,”andhangup.Withthesecondcall,you’renowthinkingaboutShana,whomyouenjoywork-ingwith,andthatestablishescredibilitytothesolution,createsamorepleasantmood,andplacestheconversationintoasocialcontextyouvalue.Ifyoublowthisguyoff,he’slikelytogobacktoyourcolleagueandsay,“Shana,yourfriendwasreallyrude.”Nobodywantstobeknownasajerk,soattheleast,you’renotgoingtohanguponhim.You’reprobablygoingtoagreetotalknoworscheduleatimetotalklater.Canyouthinkofanevenstrongerwaytoleverageamutualcontactlike this?Thestepbeyondthewarmcallistogetsomeoneelsetomakeareferral.ImagineifShanacalledyouonbehalfofthesalespersonandsaid,“John,IreallythinkyoushouldtalktoJoseoveratAcme Logistics about their logistical solution; it saved us a ton of money and time.”Gettingthattohappenisnotimpossible.Ifyou’rethesalespersonandyouknowthatyourfirmhasdeliveredrealvalueforShana,andsherespectsyouenough,don’tbeafraidtoaskhertohelpout.Thissortoftrustinarelationshipdoesn’thappenwithonesale;itisearnedovertimeandrequiresconstantmaintenance.Thislevelofsalesisapplicabletothehighestendproductsandserviceswheresalesmaygoonforyearsandbeworthmillionsofdollars,pounds,oreuros.Incum-bentfirmshavetheserelationshipswhichprotecttheirexistingcustomersandprovidethemwithverywarmaccesstoothercustomers.Theserelationshipsconstituteasignificantbarriertoentryinmarketssuchasmedicaldevicesandmanufacturingequipment.Ifyourstartupisinthebusi-nessofsellingexpensive,long-termproductsorservices,youhavetoplanforrelationshipbuilding.Canyouthinkofanywaytojumpstartyoursalesandovercomethebarrierstoentryinsuchacat-egory?Chapter 13Selling393© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
proxy sales agentSomeone not employed byyour firm working to helpyou drive sales. These aremost often customersmotivated by an incentiveprogram to bring in referralcustomers.two-for-one saleA promotion where thecustomer gets twice asmuch product if theycommit to buying at aparticular time.multi-level marketingA system that rewards therecruitment of additionalsalespeople by existingsalespeople to rapidlyincrease sales.Thebestsolutionisoftentohireasalespersonwithyearsofexperience,industrycredibility,andestablishedrelationshipswiththecustomersyouwanttocapturefromtheincumbents.Firmsinthesemarketsareawarethatpoachingisathreat,andtheyknowtheymustkeeptheirbestsalespeopleforyears.Theycompensatethemverywell,andtheyprotectthemwiththesameded-icationtheygivetotheirfirm’sintellectualpropertyandbrands.Howcanyourstartupcompetewith the incumbent’s superior finances and other resources?Thebesttoolthatastartuphasinrecruitingistoappealtotheentrepreneurialnatureoftherecruit.Salespeopleareinherentlyentrepreneurialrisk-takers.Theyareusuallycompensatedfortheirsalesandoftenseethemselvesasrunningtheirownlittlebusinesswithintheirfirm.Considerbringingonasuccessfulsalespersonfromoneoftheincumbents,makinghimorherthevicepresi-dentordirectorofsalesandofferingthemauthorityandequitytheydon’thaveatthebigfirmthatcurrently employs them.Ifyou’repitchingconsumergoodswhereasaleoccursonceeveryseveralyears,theopportu-nitytomaintaincontinualrelationshipscanbemoredifficult,butgettingreferralsispossiblewiththerightmotivation.Oftenthesolutiontoawarmcallisofferinganincentivetobuyersthatmakesthempitchtotheirpeers.Withtherightmotivation,yourbestcustomersaretransformedintoproxy sales agents. Have you seen such programs in action?AsdiscussedinChapter3,Teslafacedsignificantbarrierstoentry,breakingintoanautomobilesalesmarketdominatedbytraditionalcardealerships.Whiletheirprimarystrategicplaywastogodirecttoconsumersviatheinternet,oneofthefirm’sbesttacticswastoofferrewardstoclientswhoprovidereferrals.TheydidthisviatheTeslamobileappandonsocialmedia,whereeachTeslauserhadareferralcodethatwouldearnthem“loot”intheformofcash,upgrades,orchargingcred-its.Theprogramwasimmenselysuccessful,andTeslawasabletosignificantlyscalebackthecostoftherewardsasthefirm’sproductsgainedmarketcredibilityandthebarrierstoentryhadbeencleared.Referralmarketingtacticsaren’tjustforbigguyslikeElonMusk.Yoursmallstartupcouldeas-ilydevelopasimilarincentiveprogramtoconvincehappycustomerstosharetheirpositiveexperience.Thetrickisintheexecutionoftheprogramandensuringthatyourcustomersreceivetheirincentives.Theriskisthatindoingitwrong,youcouldturnahappycustomerintoadisgrun-tledproxy.Thesimplestversionofthistechniqueisatwo-for-onesale,frequentlyusedinretail.Ifyourcustomerbringsafriendintoyourrestaurant,oneofyougetsafreemeal.Ofcourse,thefoodhad better be good enough for your customer and her friend to come back for . . . and to pay for.Whatifyourcustomerseachsoldthreefriendsandthosethreeeachsoldthreefriendsandsoon?Takingthereferralconceptastepfurtherleadstoamulti-levelmarketingprogram,discussedlater in this chapter.Corporate SalesMostofwhatwe’velearnedsofarworksforsalestoconsumersandsalestocompanies,butsomethings about selling to an organization are unique. Let’s take a look at those.394A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
decision-makerA person who can makethe final selection of aproduct or service.gatekeeperA person whose approvalis required for access tothe final decision-maker fora sale.saboteurA person, often within thecustomer’s organization,who subverts the salesprocess. A saboteur’s jobmay be threatened by yoursolution or they may havea relationship with yourcompetitor.Preparing for the CallInthecorporateworld,understandingyourcustomerinvolvesunderstandingthestructureoftheorganizationyouaresellinginto.Whichpersoninalargecompanyisthedecision-makerwhocanactuallysay“yes”or“no”toyourproduct?Whoisthegatekeeperwhocankeepasalespersonfromreachingthedecision-maker?Arethereanypotentialsaboteurs,individualswhomayactivelyopposeyourproductorservicebecauseitconflictswiththeirownagendas?Traditionally,thefirstmeetingwithanewpotentialcorporateclimateismostlydedicatedtofiguringallthatout.Atthesametimethatasalespersonislearningallthis,shealsohastoestablishhercredibilitywiththeclient. Early impressions count.Understandingthecustomer’spositionintheirmarketaswellaswhatyourcompetitionisofferingthemisaprerequisiteforestablishingcredibility.Researchingthatbeforeyoumakethefirstcalliscritical,andasresearchbecomesincreasinglyimportant,theeasieritistodo.AnarticleintheJournalofPersonalSelling&SalesManagementnotes,“Customersalsoexpectthesalespeo-plecallingonthemtobecomefamiliarwithinformationavailableinthepublicdomainandontheinternetpriortocalling.”[5]Thearticlegoesontowarn,“Salespeoplewhoattempttousethefirstcalltoobtainbackgroundinformation—becausetheyhadnotaccessedavailableinformationpriortothe first call—will make a poor first impression and likely fail to penetrate the account.”Littlethingscounttoo.Whatisthecompanycultureofyourtarget?Istheircommunicationstyleformalorinformal?Howdotheydress?Aretheyatraditionalsuitandtieshop,oraretheyproudoftheircasualstyle?Contactingtheminthewrongwayorshowingupinwrongattirecouldlabel you as someone who doesn’t understand how they think. How might you figure that out?YoucanGooglesearchforinformationaboutthefirmor,betteryet,useyoursocialmedia,likeLinkedIn,tofindafriendwhohasworkedthere.Ifhesays,“alwaysemail,”thenemail.Ifhesays,“keepcallingthemonthephone,”great.Hemayevenknowusefulthingslike“Mondaysarealwaysslow,andthatwouldbethebesttimetogettheirattention”or“Fridaysarecrazy,andtheywillneverbe able to get the decision-makers in then.”Picturesofthefirmatworkoryourfriendshouldgiveyousomeinsightsintothedresscode.Thisdoesn’tmeanthatifyoufindoutthatthefirm’sCEOwearscargoshortsandaHawaiianshirtasauniform—asisthecasewithPalmerLuckey,thefounderofOculusRiftandAnduril—thatyoushoulddothesame.ShowinguplikeacloneoftheiruniqueCEOwouldberidiculous,butsowouldshowingupinasuitandtie.Thebestbetistochoosesomethingyou’recomfortablein,andthatwon’tlooklikeyou“don’tgetit”oraretryingtoohardtofitin.Asalespersonalwaysdoesbestwhenhe feels comfortable.Chapter 13Selling395© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
pitch meetingA meeting with a customer(investor, etc.) where asolution is proposed.askThe deliverable, or arequest that a salespersonmakes of a lead. Signing acontract, for instance.The author (center), and Ryan Olliges (left) pitch Palmer Luckey, CEO of Anduril (right), in casual clothes.Source: Greg AutryMeetingsIntheworldofcorporatesales,you’llmostlikelybedealingwithagroupofpeoplewhoallhaveinputintothedecisiontobuyorrejectyourproduct.Thismeansthataftertheinitialfact-findingexpeditionsandestablishmentofyourbasiccredibility,youarelikelytoendupinapitchmeetingwiththeprospectivecustomer’sleadershipordecision-makingteam.Theobjectiveofthesemeet-ingsistoestablishthatyourparticularproductorservicesolutionfitsthecustomer’sneedsandaddssufficientvaluetojustifytheexpense.Whileyourgoalistosellyoursolution,you’reveryunlikelytoreachanactualcloseinoneofthesemeetings.Corporateteamsalmostuniversallydefertheirdecision-makingsessionstoalatermeetingwithoutthevendorpresent.Pressingforacloseinademoorpitchmeetingispointlessandpotentiallydamagingtoyourrelationshipwiththeprospect.However,youalwayswanttohavesomeaskorspecificrequestattheendofanycustomermeeting.Thepurposeoftheaskistokeepthecustomerengaged.Youmustfindawaytoobligatetheprospecttocontinuecommunicating.Youmaysimplyaskthemtofindoutmoreabouttheirspecificneeds,budgetlimitations,orsuchandgetbacktoyou.Oftentheaskisarequestforafol-low-on meeting, often to demonstrate your solution for them.Atapitchmeeting,youmaybringalongsomesupportfromyourownteam,butusually,you’llbeoutnumbered,andthemeetingisatthecustomer’slocationfortheirconvenienceandcomfort.Thesefactorsmakeithardtomaintaincontrolofasalesmeetingandguidethesalesprocesstotheconclusion you are looking for. Can you imagine how such a meeting might go badly?396A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
influencerAn independent individualwhose opinions, oftenexpressed in blogs,videos, or social mediaposts, are influential indecisions made by buyers.Influencers can also beprofessionals within a fieldwhose advice is respectedby buyers.demoThe process of showing aproduct or service to apotential customer.dog and pony showDoing a majordemonstration of aproduct in front of acustomer audience.Inanycorporategroup,therearelikelytobedisagreementsamongthepotentialdecision-mak-ersorinfluencers,thoseindividualswhodon’thavedirectpurchasingauthority,butwhoseopinionisvaluedorwhomayhaveleverageinotherareastheycanusetoinfluencedecisions.Itisessentialtoidentifyalltheseindividualsandtrytounderstandwheretheyarelikelytostandinregardtoyourproduct.Willbringingonyourproductpossiblycausethemextraworkorexpense(retraining,replacingexistingsystems)oreveneliminatetheirjobsbyautomatingsomeprocesses?Isitpossi-blethatsomeoneisaclosefriendorevenrelativeofoneofyourcompetitors?Whileemployeesshouldbeactinginthebestinterestoftheirfirms,anyonepersonallymotivatedtostopyoursaleseffortshouldbeviewedasapotentialsaboteur,andtheymayfindwaystoderailyoursalespresen-tation.Somethingsjustneedtobeseentobeappreciated.Ifyourproductfallsintothatcategory,chancesareyouaregoingtohavetogiveademo.Itmightbeafairlystraightforwardpresentationofanexisting,standardproductalreadyonthemarket.Suchproductsareeasytodemobecausetheyarefullyoperationalandtestedintherealworld.Youoryourstaffshouldbeveryfamiliarwiththem.Thechallengecomeswhenyouhavetodemonstrateanideaorprototype.Theusualapproachistomockupaprototypeoranelaboratepresentationandmakeitlooklikethereisalotmoresubstancetoyoursolutionthantheremayreallybe.Suchademoisoftenreferredtointhesalestradeasadogandponyshow,anditcanbehighlyrisky.Demonstratinganappthatthesoft-wareteamcodedthenightbeforeoradeviceyourengineersfabricatedwithoutmuchtestingcanleadtoseriousembarrassmentduringademo.Eveniftheproductdoeswhatitissupposedto,youmayhavehadverylittletimetolearnit.Oftentheseprototypesrequireastageddemonstrationwhereyougostep-by-stepthroughaprovensafeoperation,avoidinguntestedfeaturesorcombi-nations.Ifthecustomersays,“Letmeseethat,”or“Showmewhathappenswhenyouselecttheotheroption…,”softwaremightcrashordevicesmightbreak.Itisalwaysbesttobehonestaboutthestateofyourproduct,butifyoumustdoadogandponyshow,keepcontrolofthedemoandthe audience at all times.Motivation and RejectionGettingupinthemorningandgoingouttoinvestyourtimeandenergyintoanuncertainprocessfilledwithpotentialrejectionisdaunting.Rejectionisintrinsictothesalesprocess.Ifsaleswereassured,wewouldn’tneedprofessionalsalespeople,andbusinesseswouldsimplyhirecashiersandordertakers.Ifyouchoosetopursuesales,itisveryimportantthatyoubeabletoseparateyourworkfromyourpersonallife.Youmustnotallowrejectionofaproductorserviceyourepresenttoimpact your own self-worth, or the sales process will consume you from within.Chapter 13Selling397© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Learning to manage rejection is a critical business and life skill.Source: © Shutterstock, Inc.SalestrainerBrianTracystates,“Thefearofrejectionandfailureisthesinglegreatestobstacletosuccessinadultlife.”[6]Herecommendsrationalizingyourfearsbywritingthemdown,analyzingthem,andacceptingtheworstoutcomesinadvance.Ifyoucandothat,you’relikelytobepleas-antly surprised by what actually happens in the sales process.Thisisnottosayyoushouldberesignedtofailure,simplythatyouhavealreadydealtwiththeemotionsofthatpossibility.Toacceptthepossibilityoffailureandremainconfident,youmustnottakethecustomer’srejectionpersonally.Youaren’tbeingrejected.Aproductorserviceofferingisbeingrejected,andthecausesarelikelybeyondyourcontrol.Veryoften,salesdon’tclosebecauseofissuestheprospectshavethatyouaretotallyunawareof.Theprospectmighthavereceivedbadnewsatwork,herstockaccounttookabighit,ormaybeherhusbandorbusinesspartnerdoesn’tlike the idea.Acceptingrejectionisnoteasy,andlearningtodoitcanbepainful,butthebestsalespeoplearemastersatthisprocess.It’sarealproblemwithinvestorsaswell.Ifyouareanaspiringentre-preneurwhoisparticularlysensitivetothejudgmentofothersandyoudon’tfeelthatyoucanovercomethattrait,you’reatadisadvantage.Recruitingthick-skinnedsalesprofessionalsshouldbe one of your early priorities.Itisalsoworthnotingthatasanentrepreneur,thesalesprocessisnottheonlyplacewhereyouwillencounterrejections.You’llexperiencethatanytimeyouseektoworkwithpeoplewhohaveachoice.You’llfindplentyofrejectionduringfundraisingfromfinickyinvestorsandduringtherecruitingprocessfrompotentialstartupemployees.It’sprobablybesttogrowsomethickskinyourself and learn to accept rejection as an inherent part of your work.398A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Nearly all of this vendor’s sales are one-time.Source: Salty View/Shutterstock.comKey Takeaways•Qualifying customers is critical.•Research your customers to understand their motivations.•Learn to adapt processes from client to client.•Always be aware of the nonverbal messaging you send to customers.•It is crucial that salespeople develop emotional and mental resilience.•Learn to handle rejection.13.3Customer Loyalty andMaintenanceLearning Objectives1.Recognize the value of customer loyalty.2.Understand the value of good customer maintenance.3.Understand customer relationship management and CRM systems.4.Lay the groundwork for the next sale.Keeping Your New Customer Is Job 1Congratulations,you’vegotacustomer.Nowwhat?Yourfirstjobmaybetosoftenanybuyer’sremorseyourcustomermayexperience.Buyer’sremorseistheletdownmanycustomersfeelafterthe adrenaline rush of the new purchase has faded.Ifyou’resellingcheaphatstotouristsonthebeach,itislikelyyouwillneverseemostofyourcustomersagain.Thesalesprocessendsatthepurchase,withtheirmoneyinyourpocket.Thequalityofthehatandthecustomers’long-termexperiencewithitisnotyourconcern.Isthistruewithallproducts?Insomebusinesses,managingthepost-salesphaseandevensupportingthecustomerthrough the entire product life cycle is the responsibility of the salesperson.Chapter 13Selling399© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
customer loyaltyKeeping customers thathave already beenacquired happy andprepossessed to chooseyour product.customer acquisitioncostThe expense of identifyingand closing a singlecustomer. The total cost ofmarketing + advertising +sales/number ofcustomers sold.customerrelationshipInteractions between thefirm, usually the sales staff,and the customer.referenceableA customer who is ableand willing to recommenda product or service tofriends.Nobodyhasabiggerinterestincustomersatisfactionthanthesalespersonorbusinessdevel-opmentteaminbusinesseswherelong-termcustomerloyaltyiswhatdeliverstheprofits.Withsomeproducts,thecustomeracquisitioncostissohighthatmultiplesalesoverasustainedtimeperiodarerequiredtorecoupthem.Imaginethatyourfirmisspending$100onmarketinginordertodriveenoughleadsintoyourfunneltocloseonedeal.Youraccountingdepartmentreportsthatyournetprofitpersaleis$50.Inthatcase,youneedtosellatleasttwoitemstoeachcustomerjustto break even. In these cases, ensuring customer loyalty is not simply desirable but necessary.Forbreakfastcereals,customerloyaltyisprettymuchamatterofproductionqualityandmar-keting,butwhenyouthinkofexpensiveandcomplexproductswithfewercustomers,suchasautomobilesorindustrialequipment,keepingthecustomerhappyoftenrequiresadditionalper-sonalcontact.InB2Bsales,abusiness’constantattentiontothecustomeristypical,anddedicatedsalesstaffaretypicallyassignedtospecificbusinesscustomersorevenindividualbuyers.Thesecustomerrelationshipsmaylastforyears.Customerrelationshipmanagementtechniquesandtools will be discussed inSection 4.Building and Leveraging ReferencesToomanyentrepreneursworkhardtoclosesales,collectthemoneyfromtheirnewcustomers,deliverthegoods,andthenmoveonlookingforthenextcustomer.Satisfiedcustomersareamongthemostvaluableassetsinanybusiness.Fromasalesperspective,theyareabsolutelythemostimportantasset.Thebestcustomerisnotjustsatisfiedbutreferenceable.Referenceablecus-tomersareclientswhowilltakethetimetosharetheirpositiveexperiencewithotherseitherinresponse to queries or proactively.You’resurelyfamiliarwithreviewsonAmazon,Yelp,Google,andthelikewhereusersofprod-uctsandpatronsofrestaurantsratetheirexperiencesandsharethedetailsoftheirexperiences.ThesesortsofreviewsareincreasinglyimportantforB2C(business-to-consumer)firms,andsales-peopleknowit.Youcancountonunhappycustomersorevenyourcompetitorstoprovidenegativereviews;takingthetimetoencourageyourhappycustomerstopostiscritical.Wheneverpossible,reachbackouttorecentcustomersanappropriateamountoftimeaftertheyhavereceivedtheirproduct.Iftheyareingoodspirits,encouragethemtopost,recommendyoutotheirfriends,andperhapsprovideaquoteortwothatyourmarketingteammightbewillingtoshare.Forsignifi-canttransactions,likehomeandautosales,askyourcustomersiftheywouldbewillingtoacceptinquiries from other potential customers about the quality of your product and process.400A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Yes, Yelp can help you find the best tacos in Tokyo.Source: Screenshot by author, 1/15/20https://www.yelp.com/search?find_desc=Tacos&find_loc=Tokyo, JapanForB2Bbusiness,therearealsoonlineratingservices,butveryoftentheword-of-mouthreviewssharedamongindustrypeersarewhatcount.Theconversationsoverlunch,atindustryconferences,orongolfcoursesoftendeterminewhogetsthenextsale.Havinganexistingcus-tomertellapotentialone,“Thatwasthebestsolutionweeverinvestedin,”couldeasilybeworthahundredadvertisements.Asasalesperson,youshouldbeencouragingthoseinteractionsandkeep-ingyourcustomerhappy,andoccasionallyremindingthemthatawell-workingproducttheydon’thavetothinkaboutcanbeofgreatvalue.Askingthemtotakereferencecallsoroffermarket-ingquotesisevenmorevaluableinthebusinessrealmbecauseyourothercustomersarelikelytoactuallyknowtheseindividuals.Checkinginwithformerclientsisalsoagreatwaytopickupanypossibleproblemsbeforetheybecomethetopicofconversationwithyourfutureclientsorcom-plaints to your firm.Handling Complaints and Negative ReviewsHandlingcomplaintsaboutyourproductorserviceistheleastagreeablepartofcustomerrelation-shipmanagement,butsurprisingly,itcanbeanexcellentopportunitytoimprovearelationship.Well-handled complaints are actually the gold standard in customer service.Thefirststepisqualifyingthecomplaint.Youneedtodetermineifthecustomerwantstheproblemtobesolvedbeforeyouinvestagreatdealoftimeintotheissue.Acustomerwhoisunre-coverable is likely just to go away quietly and seek business elsewhere.Chapter 13Selling401© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Some customer relationships can’t be saved.Know when to cut your losses.Source: © Shutterstock, Inc.Ifyourcustomermakesarationalcomplaintaboutyourproduct’sperfor-manceorsomethingyourfirmhasdone,eveniftheyareangry,theyareinvestingtheirtimeinthehopethatyouwilladdresstheirconcernsandresolvetheirprob-lem.Thisisyourchancetoturnangerintohappiness.Thefirststepinsuchasituationistoacknowledgetheclient’sconcernsandmakethemunderstandyouarelookingintotheissueandwillgetbacktothempromptly.Respondingtogen-uinecomplaintswithgenuinesolutionsissimplyaprerequisitefordoingbusiness.However,inallbutthemostminormatters,solvingthecustomer’sproblem will not be a sufficient response. Why is that?Inmostcases,aproblemwithaproducthascostthecustomertime,attheleast,andmayhavecostthemrevenueorembarrassmentaswell.Imaginethatyousellsomesortofmedicaldiagnosticsystemanditfails.Yourcustomer,alocalhospital,haspatientswhorequiretesting,andwithyoursystemdown,theyhavehadtotransportthesepatients,byambulance,toafacilityacrosstownforthetests.That’snotgoodonseveralobviouslevels.Fixingyourmachinewon’tbeenoughtosmoothoverthepainandexpense of such a situation.Ifyouwantahappy,referablecustomer,you’vegottotakeitastepfurtherandletthemknowyouandyourfirmaretrulysorryforhavinginconveniencedthemandthatyouwillgoaboveandbeyondtomakethingsright.Inthecaseofthehospital,youshouldfirstconsiderprovidingthemwithaloanermachinewhiletheirsisbeingservicedtoreducethecostoftransportationandthestressontheirpatientsandmedicalstaff.Ifthevolumeofpatientsjustifiesit,youmightnextaddresstheissueofdowntimebyofferingthehospitalcustomeradiscountonasecondmachine.Thiswin/winsolutionmightprovidethehospitalwiththeredundancytheyclearlyneedandgetyou an additional sale, albeit at a lower margin.Sometimes,however,acustomercan’tbemadehappy,andtheywillthrowsomesortof“stinkbomb”communicationontheirwayout.Ifyoureceiveaprofanity-ladenemailorphonecall,itmaybebestnottorespondinanydetailthatmightprovokefurtheranger.Justletthemknowyou’resorrytoheartheyaren’tsatisfiedandarereadytoaddressanyspecificissues.Ifthisisapubliccommunicationonareviewsiteoronasocialmediaposting,youwillneedtoaddressitcalmlyandrationally in that context.Makeyourfirmlookprofessionalandletothersreachtheirownconclusionsabout“Mr.Stinkbomb.”Ifyourfirmhasprofessionalsocialmediamanagers,thisworkshouldbedelegatedtotheircare.Nevergetintoatit-for-tat,back-and-forthargumentwithacustomer,eitherinpublicoronline.Itispointless,time-consuming,emotionallydraining,andifothersseethemudslinging,itwill simply harm the reputation of your firm.Customer Relationship ManagementCustomerrelationshipmanagement,orCRM,istheformalizedprocessofinteractingwithcus-tomers.Itincludesthesalesprocess,servicing,andforecastingoffutureneeds.AgoodCRMwillensurethatyouareinappropriately—notannoyingly—regularcontactwithyourcustomerstocheckontheirsuccesswithyourproductandrespondproactivelytotheirfutureneedsforreorders,updates,etc.Doingthisrightisaserviceforthecustomerandacontinuingsourceofrev-enues for the client.FirmswithexcellentCRMhavecustomerswhoaremoresatisfiedandloyal,andtheycapturemorevalueoutofeachcustomer.AnystartupdependentonsalesshouldbuildCRMintoitsDNAfrom the start. Keeping a record of your customers and managing this data is critical.WhileCRMistrulyaprocess,intoday’sworld,thatprocessisusuallydefinedbysoftwaresolu-tions,andenterprise-levelCRMsoftwareisthemostsuccessfulcategoryofsoftwareasaservice(SaaS).Theleadersinthis$40billionindustryarefirmssuchasSalesforce,SAP,andOracle.The402A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
enterprise-levelversionofthesesolutionswillbeunaffordableandrequiretoomuchoverheadformoststartups,butmostofthemofferascalablecloud-basedsolution.SomeCRMsystemsaretargeteddirectlyatsmallerfirmsdesignedtointegratewiththepopularQuickBooksaccountingsystem.Thesesolutionsallowsalespeopletoconverttheirclosingsdirectlyintoinvoicesandofferreminders for invoicing subscriptions or contacting customers for reorders.Salesforce built a multibillion-dollar enterprise out of CRM.Source: Tada Images/Shutterstock.comIfyourstartupcan’taffordanyinvestmentinaformalCRMprogram,youcansetupasimplespreadsheetinGoogleDocsorOffice360totrackcustomerdataandshareitwithyourteam.Ifyoursheetdatabaseisorganizedwell,itshouldbepossibletoimportitintoarealCRMsystemlater.You’ll want to include at least the minimal fields in your simple database:•Firm name•Firm description (what do they do)•Firm location and official address, phone•Product needs•Product preferences•Notes on organization•Contact name(s)•Contact email, address, phone•Notes on contactInformationispower,socollectitanduseittoyouradvantage.Don’tbeafraidtorecordrea-sonablypersonalthingslikecollege,birthdays,favoritesportsteams,hobbies,ortouchypoints(i.e.,“don’ttalkabout…”).Themoreyouknowaboutacustomer,theeasieritistounderstandtheirneedsandperspectiveandhowtheyreachdecisionsaboutpurchases.Givingsomeoneashoutout—likeatextmessage—ontheirbirthdayorwhentheirteamwinsanimportantgamecangoalong way to making a sales relationship seem more like a friendship.Astheartificialintelligence(AI)fieldprogresses,moreandmoreoftheCRMprocesswillbeautomated.Remindersaboutcontractrenewals,updateoptions,andtherestarealreadythere.Chapter 13Selling403© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Sales compensation can be very unique.Source: © Shutterstock, Inc.EventhosebirthdaygreetingsandgamedaytextscouldbefiguredoutbyyourAIandexecutedautomatically.StayingontopoftheCRMAItrendwillbeasourceofcompetitiveadvantageforstartups looking to disrupt mature markets and displace incumbent players.Key Takeaways•Customer loyalty may be the single best asset your business can have.•Ifyourbusinessisscalable,youmustestablishasystemtotrackandoptimizecustomerrelationships.•Remember that references, ratings, and reviews must be managed.•Strive to turn negative interactions into positive ones.13.4Organizing SalesLearning Objectives1.Understand how sales outcomes depend on the sales organization.2.Understandthatthemotivationsandperformanceofsalespeoplearecloselytiedtotheircompensation.3.Explore basic compensation systems.4.Understand the options for outsourcing sales.5.Understand the power and risks of multi-level sales systems.When somebody says it’s not about the money, it’s about the money.—H. L. Mencken[7]Sales CompensationEveryoneunderstandsthatemployeesneedtobepaid.Theyperformjobsthataddvaluetothefirm,andtheyhaveopportunitycostsinthattheycouldbedoingsomethingelsetobenefitthemselves.Inmostareasofthemodernfirm,fromproductiontomarketing,employeesarepaidforthetimetheyputin,eitherbyhourlywagesorannualsalaries.Theymayalsogetayear-endbonusorotherperks,butingeneral,theirexpectationsofpayareclearlysetinadvance.Salesisa very different domain when it comes to compensation. Can you think of why?404A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
performance-basedpay planA compensation system,often for sales staff, basedon outcomes such asrevenues or profitsgenerated. Generally, acommission-based orbonus-based sales plan.commissionA form of pay wheresalespeople arecompensated with apercentage of therevenues they generate inclosed sales.base salaryA guaranteed amount ofmoney paid to asalesperson before theircommissions are added.Base pay is designed toprovide a level of incomecertainty.milestonesIdentifiable objectives inthe sales process that canbe used to measureprogress toward closing.Forasalesperson,motivationisalwaystheprimaryfactorinsuccess.Aswe’vediscussed,get-tingupeachdayandfacingrejectionisnoteasy.Offeringaperformance-basedpayplanisthetraditionalsolutiontothisproblemofmotivation.Suchprogramsincludecommissions,bonuses,orotherfinancialrewardstiedtosalesasasubstantialportionofthesalesperson’scompensation.Thelureofincreasedincomeandthefearofnotmakingenoughhavelongbeenthe“carrotandstick” of sales.Salaries and CommissionsPayingemployeesbasedonperformanceisanattractivepropositiontomostbusinessowners.Ide-ally,suchaplanmotivatesthesalesstaffandinsulatesagainstfixedcostsifsalesdonotemerge.Paying a percentagecommissionon sales is the most common way to achieve this.Imagineabicyclerentalbusinessonthebeach.Youcharge$20perhourofrental.Youcouldpaytheattendantswhomanageyourbusiness$15/hour,oryoumightpaythemapercentageoftherevenueforeachbiketheyrent.Ifyourcommissionrateis25percentofrevenue,thentheywouldearn$5perhourlyrentalandneedtorent3bikesperhourtomakethesame$15.Thismightmotivatethemtomovethebikesoutquickerandmaybeeventocallouttopassersbyinhopesofsellingmorerentals.Ifitrainsandthingsareslow,youwon’tbestuckpaying$15/hourfornothing.Are there problems with this model?Oneoftheobviousproblemsisthatyourattendantmightnotwanttobeatriskofhavingnoincomejustbecausetheweatherturnsbad.Manyproductsaremuchhardertosellthanbicyclerentals,andsalespeoplemustinvestsignificanttimeinlearningtheproductsandinworkingleadsthroughthesalesfunnel.Insomeindustries,thelengthofthesalescyclecanbemeasuredinmonths.Imagineifyouaresellingnuclearpowerplantstodevelopingnations.Thereissurelyalottolearnaboutsuchaproduct’sspecification,construction,andadvantages,aswellasthepoliticsandregulationssurroundingit.Spendingayeardoingthatlearningmightnotbeunreasonable.Whenyoufinallyheadouttosell,thetimebetweenyourfirstcontactattheMinistryofEnergyandtheactualcontractsigningwillbeyears.Itcouldbeanotherdecadebeforetheplantbecomesoperationalandisfullypaidfor.Salespeopleinthesesortsofsituationsmustbepaidsomereason-ablebasesalarytosupportthemwhiletheycomeuptospeed.Italsomakessensetopaythesesophisticatedsalespeopleonmilestonesinthesalesprocess,suchassecuringmeetingswithiden-tified decision-makers, signing letters of intent, initiating an order, etc.Whatifyouallowedyourbicycleattendanttonegotiatedealsonbikerentalsinordertoincreasebusiness?Perhapshewillofferadiscountforgrouprentalsormulti-hourrentals?Soundsgood? Can you see a problem here?Let’simaginethatthebikerentalscostyou$10/hour.At$20/houryourgrossprofitisasolid50percent,or$10.Ifyoupaytheattendant$5,you’restilldoingwellwithyourown$5profit.Supposehelowersthepriceoftherentalto$15/houranddoublesthenumberofrentalhours,isthatgood?Notreally,becausenowyouarepayingalltheprofits($5)totheattendant!Ifhedropsthepriceto$12/hourandtriplesrentals,you’llbegetting$7afterhiscommission,leavingyouwitha$3lossoneachhourofrental.Increasingthevolume,inthiscase,isincreasingyourlosses!Howwouldyousolve this problem?Thebestwaytopreventsalescommissionsfromeatingyourprofitsistoalignthesalesperson’sinterestswithyourownbyestablishingacommissionplantiedtoprofits.Ifyoupaythebikesta-tionattendant50percentofgrossprofitsifhekeepsthepriceat$20,hestilltakeshome$5.Hemayofferdiscountswhenitincreasestotalprofits,buthewillneverlettheprofitsdroptoanywherenear zero.Chapter 13Selling405© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
spiffA sales incentive aimed atmoving a specific product.A spiff is often paid as acash bonus on top of theregular commission to thesalespeople for each ofthat item sold.Oftenanorganizationwishestomovesomespecificproduct,perhapsbecauseamistakewasmade,itwasunpopular,ortoomuchofithasaccumulatedininventory.Inthiscase,thefirmislikelytooffersomeadditionalbonusspecificallyattachedtosalesoftheseitems.Suchanincentiveiscalledaspiff.Ifyou’reinastoreandasalespersonisannoyinglypersistentinleadingyoutoaparticularitemthatyouaren’treallyinterestedin,thereisagoodchancethestoremanagerhasputa spiff on that product.Goals and RecognitionSalesmotivationisoftenasmuchaboutrecognitionasitisafinancialreward.Peopleneedmoney,butsalespeoplerequirepsychologicalsupportaswell.Trophies,plaques,congratulatoryemails,andarticlesincompanypublicationscangoalongwaytopatchingtheegoofyoursalesstaffwhoroutinelyfacerejection.Oneofthetraditionalperksofthesalesjobinthecorporateworldhasbeenattendinganannualsalesconferenceatsomenicedestination,oftenplaceslikeLasVegasorHawaii.Theseconferencesusuallyfeatureagaladinnerwherethefirmsoftenpresenttheabove-mentionedtrophiesandplaquesandsometimesadditionalgenerousbonuses.Thosewhodon’twinatthisyear’sconferencemaybemotivatedtoworkharderforrecognitionthefollowingyear.Smallercompaniescandothesethingsonalessgrandscale.Considertakingyoursalesteamonaweekend cruise or a stay at a local beach resort, guest ranch, or a similar destination.Many organizations host annual awards events to recognize top salespeople.Source: Pavel L Photo and Video/Shutterstock.comA Word of Caution about Sales IncentivesWhileperformance-basedpayplanprogramscanbeveryeffective,theycanalsobedifficulttomanageandsometimesgoawryinafewways.Whenthingsaregood,salespeoplecan,attimes,earnunreasonableamounts.Therearetimeswhensalessuccessisduetoforcesoutsidethesales-person’s actual control.406A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
manufacturersÕrepresentativeA firm that represents thebusiness interests of amanufacturer.sales agentsOutsourced professionalsalespeople who willrepresent your product.Imaginethatyou’reinamarketdominatedbytwofirms,aduopoly,andyourcompetitormakesaterribleblunderthatpreventsthemfromdeliveringproduct.Saleswillflowtoyourfirmbecausethecustomerhasnootherchoice.Suchasituationoccurredin2019whenBoeing’snew737MAXairlinerwasgroundedforserioussafetyconcernsrelatedtoitsdesignandsoftware.Withthecom-petitionunabletodeliverapopularproduct,youcanimaginethatthesalespeopleatAirbushadlittletroubleclosingsalesinthenarrow-bodyjetmarketthe737hadpreviouslydominated.Inothercircumstances,perhapsyourdesignteamcameupwithanincrediblenewproductthatsweepsthemarket,oryourmarketingdepartmenthitoneoutoftheparkwiththeirnewcampaign.Incaseslike these, the commissions you pay are on dollars that would have come to your firm anyway.Overlygenerousorflamboyantsaleincentivescanalsogenerateresentmentamongtheother,noncommissionedprofessionalswhoaresupportingthesaleseffort.Inorganizationswherethestarsalespeoples’egosaretreatedliketheleadsingersinarockband,therestofthe“band”canbecomejealous.Youneedyourdrummersandbassplayerstoo,sorecognizethemarketing,produc-tion, and services heroes as well.Outsourcing SalesSomebusinesses,suchascardealershipsandrealestatebrokerages,aresalesfocused.Inthesefirms,thesalesorganizationisthecoreoftheorganizationandthesourceofthefirm’scompetitiveadvantage. In these cases, sales are tightly integrated into everything the company does.Inotherbusinesses,salesmaybeaveryimportantfunctionbutnotthecorecompetencyoftheorganization.InafirmwheretheCEOmustfocushisorherenergiesandthecompany’scapitalontechnologydevelopment,production,ordeliveryofservicestomaintainanedge,runningasalesorganization,whilenecessary,canbeadistraction.TheNewEntrepreneurialDynamicencouragesstartupstooutsourcenoncorebusinessfunctionstooutsideprofessionals,andthereareseveralproven ways to do this with sales.Manufacturer RepsAtraditionalwaytooutsourcesalesofaproductyoumakeistohireanindividualoracompanythatprovidessalesservicesformultipleproductcompanies.Theyareusuallypaidwithsomeper-centageofsales.Thesemanufacturers’representativesorsalesagentstypicallyfocusonparticularindustriesandmarkets.Forinstance,therearemanufacturers’representativesinthebicycleindustrywhogooutandpitchbike-relatedproductstoretailstores,chains,anddistribu-tors. They sell bikes, frames, tires, saddles, and accessories of all sorts to several manufacturers.Thepercentagearepgetsgetislikelytobemorethanyou’dpayinternalcommissionedsales-people,becausetherepsneedtofundtheirownoverheadaswell.However,youusuallywon’thavetosupportthemwithanybasepaywhiletheycomeuptospeedonyourproduct.Becausetheybringindustryexpertiseonawidevarietyofproducts,theyoftenhavestrong,establishedrelation-shipswiththebuyersinyourtargetmarket.Thismeansthatamanufacturers’repnotonlysavesyouthetimeandexpenseofrecruitingaprofessionalsalesteambutgetsyourproductstomarketfaster.Theircustomersarenearlyallrepeatcustomers,andyoudon’thavetowaitforthemtobepushedthroughthesalesfunnel!Forthecustomer,meetingwithoneoftheserepsisfarmoreeffi-cientaswell.Forinstance,itismoreefficienttomeetwiththebuyerforachainofbicycleshops,ratherthanmeetingwithadozenormoreindividualsalespeople,eachwithoneproduct.Canyouthink of any downsides or challenges in this system?Whilethebuyerlovesgettinginformationaboutalargeselectionofproductsfromasinglesource,theremaybeproblemsiftheproductsthemselvesareindirectcompetitionwitheachother.Ifthesalesrepsellsyourbiketiresaswellasacompetinglineoftires,theycanbeconflicted.Chapter 13Selling407© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
independent salesagentAn individual who hiresthemselves out as acontractor to sell productsor services.Some organizations use self-organizinghierarchies to sell their products.Source: © Shutterstock, Inc.affiliate marketingOnline marketing throughthird party websitesincentivized to drive trafficto you.click-baitSites that use tantalizingand sometimes luridcontent to lureunsuspecting web surfersto commissionableadvertisements.pyramid schemeA sales system, oftenillegal, where the sales gointo additional agents andwhere the business isunsustainable in theabsence of exponentialgrowth.Anadditionalincentiveorspifffromyourcompetitormightcauseyourvirtualsalespersontosellthosetiresoveryours.Toavoidthis,manymanufacturers’representativestrytoavoidpickingupconflictinglines.Thisbecomesevenmoreproblematicasfirmsexpandtheirproductlines.Perhapsyourrepresentativeonlysellsyourtires,butnowyou’vedecidedtostartmakingwheels.Anygoodbicyclerepprobablyhasalong-standingrelationshipwithawheelmaker.Whattodo?Ifyourtirebusinessissignificantlylargerthanthecompetitors’wheelsales,youmightwinthebattleovertherepresentation,butifitistheotherwayaround,you’llhaveaproblem.Asyourfirm’sproductcata-log gets more diverse, it becomes more and more reasonable for you to bring your sales in-house.Youcanfindmanufacturers’repsbysearchingonline,atindustryconferenceswheretheyarevery active, or through organizations like the Manufactures and Agents Association or MANA.[8]Affiliates, Independent Agents, and Multi-Level MarketingAnotheroptionforoutsourcingsalesistoauthorizealargenumberofindependentsalesagentstorepresentyourproductorservicetothepublic.ThismodelwasmadefamousintheUnitedStatesduringthemid-twentiethcenturybydoor-to-doorsalespeople.Theyliterallywalkedneigh-borhoodsknockingonpeople’sdoorstohawkhouseholdproductslikebrushesandcosmetics.Whilethatmodelismuchlesscommon,somecompaniesstillrelyprimarilyonindividualstoselltheirproductswithintheirnetworks,oftenatproduct-focusedhomeparties.Canyouthinkofanyof these?Ontheinternettoday,affiliatemarketingisapopularwayofdrivingtraffictoasaleswebsite.Blogs,newssites,andothersmaybepaidsomeflatfeeorper-centageofsalestodelivercustomerclickstoyoure-commerceplatform.Thelureofgeneratingcommissionsfromscalableautonomoussystemsontheinternethasresultedinthephenomenaofclick-bait,sitesthatusetantalizingcontenttolure unsuspecting web surfers to commissionable advertisements.Amway,foundedbytwoschoolbuddiesinMichiganinthe1950s,sellshomecarehealthandbeautyproductsthroughagents.OneofthekeydriversofAmway’ssuccesshasbeenitspracticeofrewardingitsagentsforrecruitingaddi-tionalagents.Thispracticeisintendedtoencouragethesalesteamtoexpandtheirranksratherthantojealouslyguardtheirdistributorship.It’sbeenremark-ablysuccessful,andAmwayisnowreportedtohave$8billioninannualrevenuesglobally.Thepracticeofincentivizingsalesagentstobringonmoresalesagentsandrewardingthemforthesuccessofthose“beneaththem”inthechainisknownasmulti-levelmarketing.Ithasbeenaverysuccessfulstrategyformanystartupsneedingtobuildalargeandaggressive sales organizations quickly. Can you think of the potential downsides to this system?Insomecases,thefinancialmotivationtobringonnewagentscanresultinthehigh-pressurerecruitmentofindividualsnotwellsuitedtosales.Thenewrecruitscanbeburdenedwithproductinventoryattheirownexpense,andthispressuresthemtodothesametotheirfriendsandcol-leagues.Therehasbeensignificantpubliccriticismofthispractice,andinsomecases,suchsystemshavebeenshutdownasillegalpyramidschemes.Apyramidschemeisasalessystemwheregain-ingadditionalagentsistheonlysourceofsalesandbusinessisunsustainableintheabsenceofexponential growth.408A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
system integratorA firm that combinesseveral products andservices into a workingsolution for the customer.The system’s integratoroften participates in orleads the sales process forcomplex solutions.technical ecosystemThe technologicalenvironment in which aparticular product mustoperate.turnkey solutionA system that is ready touse without a buildout orcustomization.Integrators and Value-Added ResellersManyproductsrequireadditionalservicesorintegrationwithotherproductstoprovidevalueforthefinalcustomers.Ifyou’reasmallcompanyinIsraelmakingcustomizedCubeSatsforuniversityresearchers,yourlittlesatellitesarenotexactlya“readytouse”product.Theyneedtobelaunchedintospace,andthatissomethingneitheryounoryourcustomerscando.Paying$65millionforaSpaceXFalcon9rockettolaunchyour$500,000payloadisn’taviablechoiceforthecustomer.Luck-ilysuchalargerocketcanlaunchmanydozensofsuchCubeSats.Somebodyneedstobuytherocketlaunch,sellenoughpayloadslots,andmakesureeverythinggoesintothepayloadfairingandworkscorrectly.Payloadintegratorsexisttofillthisspecificneed.InDecember2018,onesuchintegrator,SpaceflightIndustries,successfullyintegrated,launched,anddeployedsixty-fourdiffer-entsmallsatellitesfromasingleFalcon9flight.Ingeneral,suchfirmsarecalledsystemsintegrators,andtheycanbecriticalpartnersinthesalesprocessforanyfirmwhoseproductsarepart of a complextechnical ecosystem.The launch of Falcon 9 rocket contained sixty-four small satellite payloads integrated by Spaceflight Industries.Source: Greg AutryThecustomermaybuytheproductfromyouandcontractwiththesystemsintegratorsepa-rately.Inthatcase,youarelikelytoneedtoworkwiththesalespeopleattheintegrator.Inothercases,thecustomerisseekingaturnkeysolutionandwillwanttopurchasetheentiresolutionfromanintegrator.Imaginethatyousellanenterprisesoftwaresolutionforanalyzinglaboratoryresults.Yourcustomersarelargehealthcarefirms.Yoursoftwarecan’trunwithouthardwarelikeserversandnetworkinggear.Italsorequiresthedevelopmentofcustominterfacestoexistingmed-icaldatabasesandclinicalsystems.Providingthesesortsofservicescouldbeasignificantdistraction and cost to a startup that needs to focus on its core product.Chapter 13Selling409© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
value-added resellerA firm that combinesproducts and services andresells them as a turnkey,ready for purchasesolution, creating value forboth the customer and theproduct developer.Lettingafirmsellyoursolutionbundledwiththeirhardwareandintegrationserviceswouldmakethingseasierforyouandyourcustomer,andmanysmallsoftwareandhardwarefirmspart-nerwithintegratorstofind,sell,andservicetheircustomers.Thefirmsthatprovidethisserviceareknownasvalue-addedresellersorVARs.Thenameimpliesthattheycanchargemoreforyourproductthanyourfirmbecausetheturnkeysolutioncreatesnewvalueforthecustomer.Theyalsoaddvalueforproductdevelopers,likeyou,byfindingcustomersandkeepingthemhappy.Makingthings easier for everyone funds the VAR’s operations.Everything Is SalesYoumaynotintendacareerasasalesperson.Youmayevendisdaintheprofessionasunseemly.Justrememberthatinthereal-worldpeoplemakethedecisionsthatwilldeterminethecourseofyour life. Think about these important life events:GettingGettingintointoYourYourAspirationalAspirationalSchool:School:Beforeyougotintothecollege,university,oracademyofyourdreams,youlikelyhadtowriteacoverletterandathemeofsomesortandthenperhapssit for an interview. If you go on to grad school, you’ll be doing even more selling yourself.GettingGettingthethePerfectPerfectJob:Job:Morecoverlettersandmoreinterviewsandperhapslunchesordin-ners with the boss and the team. All of that time is selling the product that is you!RomancingRomancingandandProposingProposingtotoYourYourSpouse:Spouse:Yourspecialrelationshipmayhavebeenwritteninthestars,butsomebodyhastoclosethedealandthattakesthepositioning,courage,anddetermination called “sales.”RentingRentingYourYourFirstFirstApartment:Apartment:You’vegotthedegree,thejobandafamilyinthemaking.Great,butnowisthetimetoconvinceMr.andMs.Landlordthatyou’retherightfamilytorenttheirtownhouse to. Sales, again.Eachofthesetasksinvolvesconvincinganotherpersontotakeachanceonyou.Theyrequiresalesskills.Appreciatethem.Learnthem.Collectingthesalesmeritbadgecantakeyouplacesin life far beyond collecting commissions.Key Takeaways•Outsourcing the sales function enables your team to focus on firm core competencies.•Outside sales representatives require less time and capital to get sales going.•As your business grows, it may make sense to develop an internal sales team.•Ifyourproductiscomplexandrequiresintegrationservicesandsupport,workingwithsys-tems integrators or value-added resellers is a good option.410A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
13.5Case Study: Unboxing the SalesProcess with unboXtHakeem Atwater and Kendra WardSource: Kendra WardKendraWardwasadualmajoratSpelmanCollegeinmathandindustrialengineering,andHakeemAtwaterwasabusinessundergradatMorehousewhenthetwoAtlanta-areastudentsmetthroughfriends.Kendrahadanideaforanappthatwouldsynchronizetheremoteviewingexpe-rienceofNetflixforvirtualizedviewingparties,andshepitchedHakeemrightaway.Hedidn’tbuyit,whichwasashamesincethesameidealatergeneratedmillionsforanotherentrepreneur.Still,thetwostayedinconversation,becamethebestoffriends,andwouldeventuallybecomesuccess-ful business partners.AtwaterwasborninColumbus,Ohio,intoafamilythatmovedalot.Herecalls,“WewentfromOhiotoNewJerseytoNorthCarolinaandNorthernCalifornia,andIwasalwayschangingschools.”Whilethisgeographicinstabilitymighthavebeenasourceofweaknessforanotheryoungperson,Atwaterthrived.“Ibecamecomfortablesittingaloneatthelunchtablebysittingbackinthelunch-roomorwhereverandobservingthewayotherstudentswouldinteract.Ilearnedhowtoobservethe why behind people’s actions. This still informs my perspective as a businessperson today.”AtwaterwentontohonehisskillswithinternshipsatGoldmanSachsandPriceWaterhouse-CoopersinNewYorkbeforesettlingintoajobwithFifthThirdBankinCincinnati,Ohio.Henotedthatmostcorporationsstruggledwiththeone-to-onemanagementskillsrequiredforemployeeretention,despitehavingalotofdatainsophisticatedhumanresourcesystems.Thefutureentre-preneurremarked,“Thereisalotofunnecessarychurnoutthere.”Atwaterbegantoimagineasoftwareplatformforimprovingrecruitingandleadershipeffectivenessthatwouldbuildteamcohesionandincreaseemployeemotivation.Atwaterrecalls,“Isawhowwecouldtakehighlyfrac-turedcorporateperformancedata,identifycurrentareasofconcernswithemployees,anddeliverChapter 13Selling411© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
actionableinsightsdirectlytotheirmanagersbeforethingsgotoutofhand.”Savingemployeesrather than turning them over would save firms money and increase organizational morale.DiscoveringthatWardwasattendinganeventinLasVegaswithhercolleaguesfromGoldmanSachsinSaltLakeCity,hedroveoutfromLosAngelestopitchheronthisidea,whichheoriginallycalled“MyCabinet.”Wardunderstoodtheideaandbegantovisualizethesolution.Whattheyneedednowwasacustomerwillingtosharetheirvisionandletthemtesttheirinsightsintherealworld.Thatseemedtobeadauntingchallenge.Wardasked,“Whatestablishedcompanyisgoingtoletacoupleofunprovenyoungentrepreneurstryoutsomethingnewontheirprimaryasset,theirpeople?” Surprisingly, it didn’t take long to find an apparent matchup.Atwaterhadtheopportunitytoconnectwitharegionaldirectorfromamajornationalinsur-ancecompany.“Sheaskedmeaboutmysideprojects,andIpitchedherontheMyCabinetidea.”Thedirectorrealizedtheindependentagentnetworktheyusedtosellandservicetheirbusinesssuf-feredfromtheexactproblemsAtwater’ssolutionwouldsolve.Atwaterrecallssayingtothedirector,“Wecandothat!”andsuddenlyunboXtwasarealservicewithapowerfulevangelistinsideabigcompany.However,theregionaldirector’sreal-worldunderstandingoftheproblemandhowtheunboXtsolutionwouldaddressitwasn’tsharedbycorporateleadershipatheadquarters.Negativecustomerfeedbackhadalertedtheheadquarterscrowdtotheturnoverissuewithintheagencies,buttheyweredisconnectedfromthefullarrayofdriversbehindtheproblem.Beingwhotheywere,thecorporateleadershipassumedtheyknewtheirbusinessbetterthananyoutsiderandwantedtodesignthesolutionthemselves.Headquartershadalreadydefinedalistofmetricstheywantedtochange,andtheywantedtodothatwithimmediate,targetedfixes,notmakestructuralchangesto address the more embedded cultural problems Atwater saw.Onecomponentofthesystemwasascreeningfunctionforrecruitment,andtheheadquartersfolksattachedalltheirhopestothatsolution.Theywantedtheyoungentrepreneurstoproduceaspecifictooljustforthem,ratherthanthetoolboxofsolutionsthattheentrepreneurshadenvi-sioned.Tryingtoarguetotheheadquarters’executivesthattheiroriginalvisionwasexactlywhatwasneededfortheagencieswasalostcause.Wardnotes,“Ourtotallackofatrackrecordmadeitimpossibleforustogetthemtochangetheirperspectiveabouttheirbusiness.Wehadlittleproof.”Itwasfrustratingfortheentrepreneurstogetsofar,sofast,andthenfindthemselvesmisdirectedat the finish line.“Tothisfront,KendraandIsawthatwehadtomakeadecision—buildatooltoservicetheclienttodayormoveon.”Whatcomplicatedthesituationwasthatmentorstheyhadwereeitheralsofirst-timefoundersorventurecapitalistsadvisedthemto“takethemoneyandgetthewintoday,” under any circumstances.AtwaterandWardboldlydecidedtopartwayswiththeirfirstcustomerandwalkawayfromaverysignificantrevenueopportunity.Ironically,theirconnectionswiththeoriginalfirm’sregionaldirectorbroughtthemtotheattentionofanothermajorplayerintheinsurancemarket:Allstate.ThesolutionAtwaterhadoriginallyenvisionedworkedwellforAllstate,andunboXthashadalongand successful relationship with that company and its agents. Other customers followed.Today,UnitedParcelService(UPS)hasbecomeunboXt’sbiggestclient,thoughthatsaleprocesshaditsownchallenges.ApilotprojectwithUPSin2019wentverywell.TheunboXtteamwasreadytopitchaproposalforafullrolloutintoAmerica’slargestlogisticscompany!However,pitchdayturnedouttobetheverydayinMarch2020whentheCOVID-19pandemicpummeledthefirm’sstockprice.Still,UPSleadershipsawthatthemarketwaswrongandthatthepandemicwouldresultinincreasedshipping.Theywouldneedstrongleadershiptocontinuetoattract,retain,andtrain the best talent and therefore saw the value in the partnership. Atwater notes:It’sbeenimportantforustorememberorganizations(largeandsmall)areoperatedbyhumans.Humansandorganizations,alike,runontrust.Trustistwo-sided,competenceandcharacter.Char-acterwillgetyouintheroom,whereascompetenceeventuallyearnsyouaseatatthetable.Weadopted this ideal and focused on delivering value, which in turn has awarded us a loyal customer.Find unboXt on the web athttps://getunboxt.com.412A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Endnotes1.CommonlyattributedtoCanadianhockeyplayerWayneGretzky,aka“TheGreat One.”2.Carnegie,D.(2009).Howtowinfriends&influencepeople.Simon&Schuster.3.Carnegie,D.(2009).Howtowinfriends&influencepeople.Simon&Schuster.4.Trump,D.J.,&Schwartz,T.(2009).Trump:Theartofthedeal.BallantineBooks.5.Jones,E.,etal.(2005).Thechangingenvironmentofsellingandsalesmanagement.JournalofPersonalSelling&SalesManagement,25(2),105–111.6.https://www.briantracy.com/blog/personal-success/fear-of-rejection/7.Commonly ascribed to Winston Churchill.8.https://www.manaonline.org/manufacturers/online-directory/Chapter 13Selling413© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
414A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
CHAPTER 14OperationsI am a great believer in Luck. The harder I work, the more of it I seem to have.—Coleman Cox[1]Running your business well is as important as building it right.Source: © Shutterstock, Inc.Deliveringonthepromiseofagreatproductorserviceisamuchbiggerchallengethanplan-ningorraisingfundsforyourplannedbusiness.AsnotedinChapter3,simplyexecutingwellcanbeacompetitiveadvantageinitself.Doingthatisn’tsimplyamatterofcommittingtoexcellence.Itrequireslearning,recruitinggreatpeople,andgatheringtherightresources.Thatiswhatthischap-ter is about.© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
logisticsTransportation of productsto customers or fromsuppliers to businesses.operationsThe managementprocesses that coordinatepeople and resources toensure that a businessruns efficiently.metricsCritical and actionablepieces of information youneed to see to keep yourbusiness on track that canbe used to test thehypothesis behind yourmajor assumptions.14.1Execution and ResourcesLearning Objectives1.Understand the importance of excellence in execution.2.Understand the relationship between tactics and execution.3.Understand that operations should be data driven.4.Understandwhyreal-timedashboardingandaccountingarenecessaryforproperexecution.5.Learn about accounting system options for supporting execution.6.Understand the importance of appropriately locating and configuring facilities in execution.7.Understand the importance of logistics.8.Consider the benefits, costs, and challenges of global sourcing.Execution Is EverythingSomefirms,likeSouthwestAirlines,builttheirentirebusinessonjustdoingtheirjobwell.Foramodernandleanstartup,productproduction,qualitymanagement,andlogisticscanbeadaunt-ingchallenge.Luckily,agreatdealofresearchintobusinessoperationshasbeendone,andwelldocumentedbestpracticesarereadilyavailabletotoday’sdynamicentrepreneurs.Theseconceptsarebackedupwithaplethoraofsoftwaresolutions,apps,andvirtualizedservices.Operationsisone area of your business where risk is very manageable,ifyou pay attention.Measuring What You ManageOperationsareaboutexecutingtacticsinsupportoftheoverallstrategy.Recallagaintheillustra-tiononstrategy,tactics,andexecutionfromearlierchapters.You’llnotethatmetricsderivedfromresults(primarilysales)shouldbethedriversforadjustmentsyouwillmaketoyourplan,tactics,andexecution.Becauseofthis,theadage,“Youcan’tmanagewhatyoucan’tmeasure,”isoneofthemost common phrases in business. So how do you measure?FIGURE 14.1Strategy, Tactics, ExecutionSource: Greg Autry416A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
performance analysisReviewing statistic data toinform and enhancebusiness decisions.dashboardSeebusiness dashboard.thresholdsThe specific data pointsthat validate or rejectassumptions.DashboardingIntoday’scompetitivebusinessclimate,entrepreneursneedtoknowwhatisgoingonandtheyneedtoknowitalmostbeforeithappens.Modernaccountingandbankingsystemsallowsmallbusinessownerstokeeptheirbooksup-to-the-minute,andthat’sgreatbecauseperformanceanalysisneeds to be done in real time.Gauges and displays inform the driver about the state of their vehicle.Source: © Shutterstock, Inc.Thedashboardofanautomobilefeaturesgaugesorelectronicdisplaysthatkeepyoucon-stantlyinformedofimportantdatalikeyourfuellevel,speed,RPMs,mileage,andtheoperatingtemperatureofyourengine.Aninternalcombustionenginemustbewarminordertooperateeffi-ciently,buttoomuchheatwillpermanentlydamageitandcostyouthousandsofdollarsinrepairsandweeksofdowntime.Whatifyourenginetemperaturedatawerepresentedtoyouasaspecificnumericalvalue,say“95°C.”Isthatgood?Whatshouldyoudoifyouseethat?You(andmostdri-vers) probably have no idea.[2]Tobeuseful,datamustbeinterpretableandactionablebythepersonreceivingitandpre-sentedinamatterthatfocusesyourattentiononthecriticalitems.Thismeansyouknowwhichvaluesrequireyourattention,andyoualsoknowwhattodowhenyouseethem.Otherwise,itissimplydistractingnoise.Consequently,mostenginegaugesanddisplayscentertheappropriateoperatingrangeonthegaugeandoffercoloredgraphicshighlightingthetoocold(blue)andtoohot(red)thresholds.Thisinformationiseasilyinterpretable.Thedrivercanquicklyglanceatthegaugeandknowthingsareokaywiththeengine.Havingtostopandthinkaboutspecificnumberswoulddivertthedriver’sattentionfromthemoreimportantbusinessofpayingattentiontonavigationandpotentialroadhazards.Thedataarealsoactionable;ifthetemperaturecrossesthesafetythreshold,thedrivercanpulltothesideoftheroad,stopdriving,andseekassistance.Forgoodmeasure,mostcarsalsofeaturea“checkengine”lightandevenanaudioalerttoensurethatthedriver acts on critical information.Chapter 14Operations417© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
business dashboardA tool, often an internalwebsite or activelyupdated spreadsheet, thatpresents key performancedata.sales volumeThe number of units soldin a given period.inventory levelsThe amount of stock ofproducts or materials usedto make products, kept onhand.hypothesis testingThe process of turningassumptions about yourbusiness model intospecific tests that can bevalidated or rejected byhard data.Managingabusinessinrealtimeisverysimilartodrivingacar.You’redrivingyourbusinessforward,watchingoutforobstacles,andscoutingforbetterroutesahead.Similarly,you’vegottokeepthemechanicsofyourfirminorderanddeliverthegoods.You’vegotnewcustomerstoacquire,existingonestoservice,andvendorstonegotiatewith.Youcannotspendtheentiredaysittinginfrontofyouraccountingsystemlookingatledgersfullofminutia.Youneedinterpretableandactionabledatacloseathand.TheNewEntrepreneurialDynamicencouragestheuseofabusiness dashboardto gather and present information that is critical to managing a business.Building a DashboardAbusinessdashboardisatoolthatallowsyoutomaintainafocusonthethingsthataremostimportantforyourfirmwhilestillrunningyourbusiness.ItmightbeamanualsystembasedonpaperreportsoranExcelspreadsheet.Betteryet,ifyouhavetheexpertiseavailable,usealivedata-base with a web or mobile app on the front end.Alivedatabaseservestwomajorpurposes.Firstly,adashboardcanbeusedtomonitorroutineinformationthatwillallowyoutomakeminoradjustmentsinordertokeepyourbusinessontrack.Imagineyouownapopularshoestoreinasmallcollegetown.Youwillalwayswanttoknowhowyourshoestore’ssalesvolumeofvariousstylesandsizescomparetoyourinventorylevels.Thismeasurementiscriticalsothatyoucanreordertherightshoesinatimelymanner.Keepingtherightproductsinstockattherightlevelsensurescustomersaresatisfied,salesarenotmissed,andthatunsellableitemsdonotaccumulate.Orderingpopularitemsinadvanceandinlargerquanti-tiesgetsyoubetterpricingandpreventsmoneyfrombeingspentonexpeditedshippingtofillgapsin the shelves.Secondly,adashboardcanbeusedtotestmajorassumptionsaboutyourbusiness.VenturecapitalistRandyKomisarandStanfordprofessorJohnMullinsareadvocatesofdashboardingforthispurpose.Intheirbook,GettingtoPlanB,theyexplainthatentrepreneursenteramarketwithcertain“leapsoffaith,”ideasthatcanonlybetestedinthemarketplace.Dashboardsallowtheentrepreneurtoseeiftheseleapsoffaitharevalidthroughaprocessofhypothesistesting—turn-ing these assumptions into specific tests that can be validated or rejected by hard data.Let’sgobacktoyourshoestore.Imaginethatyou’vedecidedthatyoungwomenarethebestcustomersegmenttotargetwithadsbecause(youbelieve)thattheybuyalotofshoesaswomen’sfashionschangemorefrequentlythanmen’s.Youmightbespendingonsocialmediaadvertisingaimedatwomenages16–25inyourtown,buthowdoyouknowthisisworking?You’vemadeanassumptionaboutyoungfemalebuyers,anditshouldbevalidatedbeforeyouinvesttoomuch.Ratherthanblindlypouringmoneyintothecampaign,youconstructatestablehypothesisandaddmetrics to your dashboard that will test it. Can you think of how you might do that?Perhapsyoumightestablishacustomerloyaltyprogramwitha“rewardscard.”Everwonderwhyyourgrocerystoredoesthat?Whencustomersregisterfortheprogram,youcollecttheirdemographicdata(age,gender,etc.).Whenthoserewardcardsarescannedattheregister,youlogthepurchasesbyeachcustomerintoasystemthatcansliceanddicethatdataandfeedittoyourdashboard.Inparticular,youcananalyzeitagainstspecificthresholdsthatwillvalidateorrejectyourassumptionaboutyoungshoebuyers.Yourhypothesismightbestatedas“ouraveragefemalecustomeraged16–24willmakeatleast50percentmorepurchasesthantheaverage(ofall)ourcus-tomers.”Yourdatawilltellyouifthisistrue.Ifitis,continuingorevenincreasingthatfocusedadvertisingmakessense.Ifthedatasayitisnot,saveyouradvertisingdollarsandmoveontoanew hypothesis.TheNewEntrepreneurialDynamicbuildsadashboardoutoffivecomponents:metrics,datacollection, calculation, analysis, and presentation.Metrics:Yourmetricsarethecritical,actionablepiecesofinformationyouneedtoseetokeepyourbusinessontrackandfactsyouneedtotestthehypothesisbehindyourmajorassumptions.Definingthesemetricsisyourfirststep.Onceyou’veidentifiedwhatyouneedtoknow,consider418A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
data collectionThe process of collecting,analyzing, and measuringspecific business variables.howoftenyouneedtoknowit.Toberelevanttoyourdecision-makingprocess,doesthisdataneedtobereal-time,hourly,daily,ormonthly?Finally,youneedtosetthethresholdsforeachdatapoint.What is the safe range, and what values should trigger an alert and force you into action?DataCollection:Youmayhaveheardthephrase,“Ifyoucan’tmeasureit,youcan’tmanageit.”Thedatacollectioncomponentofyourdashboardisaboutquantifyingthephenomenayouwanttoanalyzeandpresentadigestibleviewoftheresults.Thisviewmaycontaindatastraightfromyouraccountingsystem,suchasrevenuespermonth.Itmightalsobesomethingthatwillrequireyou to put specialized systems into place to capture data such as theaverage age of our customers.Calculation:Sometimes,yourdashboardrequirementmaybeforasimplenumberthatrequireslittleornomanipulation,suchasunitsalesperday.Inthiscase,youjustcountupthesaleseachday,andnomathisrequired.Ifyou’vegotamoresophisticatedmetricsuchassalesof$200ormoreshippedtoEUnations,youmayhavetodevelopanalgorithmtolookthroughyoursalesdata,filterthesalesbysize,andmatchthatuptotheinformationinyourshippinglogs.Thisprocesscouldbedonebyhandeachday,orthenumberscouldbetypedintoaspreadsheetprepop-ulatedwiththeformulas.However,thebestwaytodothisiswithalivedatabasethatpullsthenumbersfromyoursalessystemandyourshippingsystemanddoesthecalculationsaswell.Atthispoint,youcanseehowimportantitisthatyourvariousinformationsystemscoordinatewitheachother.Itisalsocriticalthatyouchoosesystemsthatgiveyougoodaccesstothedatainsidethem.However,itisunlikelythatthesystem’s“cannedreports”willprovideeverythingyou’llwantin your dashboard.Analysis:So,you’vegotdata,whatdoesitallmeanincontext?Thisiswhereyouapplyyourthresholds.Someofthemmaybeassimpleasourtemperaturegaugeexample.Ifsalesfallbelow2,000unitsperday,thenALERT!Ontheotherhand,istherearealdifferencebetween2,001unitsand1,999units?Maybethat’sasingledayanomaly?Perhapsyouwanttoissueanalertonlyifsalesdropbelow2,000andstaythereforthreeormoredays.Anotheroptionistolookatthetrend.It’sonethingifsalesdipdownto1,900unitsandthentrendupwardwith1,930thenextdayand1,988thenext;itisentirelyanotheriftheyfallbelow2,000andcontinuedeclining.Byutilizingaspreadsheetordatabase,youcanbuildalgorithmsthatalertyoutovalues,trends,orpatternsthatdemand your attention.Presentation:Finally,yourdataandalertsneedtobeformattedandpresentedtomanagement(thatmaybejusttheentrepreneur),inawaythatisconvenient,attractive,andsensible.Thismaybeapaperreportpreparedeachdayorweekbyyourassistant.Itmaybeaspreadsheetfullofnumbersifyou’readatawonk.SomeofthebestdashboardsI’veseenareweb-enabledspread-sheetsordatabases.Theseallowforattractivegraphicalrepresentationsandeasyaccesstoyourdatafromanywhere.ManycleveryoungentrepreneurshavetheabilitytocreatecustomAndroidoriOS(Apple)appsandgainthecomfortofknowingtheirfirm’svitalstatsareliterallyintheirpocket.AswitheverythingintheNewEntrepreneurialDynamic,nothinghereissetinstone.Yourbusinessisaliving,breathingorganisminaconstantlychangingenvironment,andthemetricsyouneedtokeepaneyeononeyearmaybedifferentthenext.Adaptationscouldbeassimpleaspush-ingoutyourthresholdsettingstoreflectagrowthinsales,oritcouldbeintegratingentirenewdatasourceswithnewcalculations.Whatyoudoisuptoyou,butwhenyouditchedthestaticbusinessplan,youtookontheresponsibilitytomaintainrigorviadashboarding.Allowingyourdashboardto slip slowly into irrelevancy is akin to not maintaining the safety inspections on an aircraft.Additionally,somehypothesesthatyouhavetestedmaybeclearedfromyourdashboardnevertobeseenagain,whilesomeshouldbecontinuallyretestedtoensuretheyarestillvalidinachang-ingenvironment.Whenyoucreatenewassumptionsormakemajorchangestoyourbusinessmodel,thethingsthatshouldbemeasuredalsochange.KomisarandMullinsnote,“There’snosim-pleformulaforwhatadashboardshouldlooklikeinonecompanyoranother,atagivenpointintime. There’s art in their development, and science in their use.”[3]Chapter 14Operations419© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
supply chainA network of external thirdparties that act together toproduce and deliver goodsto customers.Managing What You CanÕt MeasureIt is wrong to suppose that if you can’t measure it, you can’t manage it—a costly myth.—W. Edwards Deming[4]TheabovequoteisironicastheapriorismaboutmeasuringbeingrequiredtomanageisoftenmisattributedtoW.EdwardsDeming.Dr.Demingwasanengineerwhobecamethegloballyrecog-nizedmasterofscientificmanagement.Demingwarnedagainstovermanagementandspecificallyagainstburdeningoperationswithadditionaloversight,audits,andpaperworkrequiredtotrackproductivityandquality.Henotedthatitisentirelypossiblethattheworkrequiredtogatherdatamightobliteratethegainsachievedfrommanagingtheprocess.Somelevelsofaccuracycannotbeobtained, and management must hire professionals and trust them to do their jobs.WhatDemingwantedustodowastoestablishprovenandrepeatablemethodstoachievequality.Hewantedthesemethodstobebasedonsoundassumptions.Inotherwords,intheabsenceofmeasurabledata,orwheremeasuringisimpractical,makewisechoicesandstickwiththem.Youmaynothavetheperfectsystem,butassumingyouunderstandyourbusiness,you’llhaveagoodenoughone.RecallwhatyoulearnedfromHerbertSimonaboutsatisficinginanear-lier chapter.Writingonschoolimprovement,Demingargues,“Numericalgoalsaccomplishnothing.Rank-ingandrewardofindividualpeople,schools,districtsdonotimprovethesystem.Onlythemethodisimportant.”[5]SoDemingarguesthatifyouunderstandthetheorybehindanoperationwell,youcanoptimizethemethodandimproveit,evenifmeasuringitcloselyisinefficient.Thisispartic-ularlytrueinasmallprocessthatisrepeatedatgreatscale,wheretakingthetimetounderstandtheprocessverywellinadvanceisjustifiablebutinterruptingtheprocessoraddinglabortoittomeasureitsoutcomeisunaffordable.Consequently,certificationslikeISO9000areaimedatthereproducibility of processes; they do not judge the actual efficacy of the operations.W. Edwards DemingWilliamEdwardsDemingwasbornwiththe20thcentury(October14,1900).Toagreatextent,hissingularvisiondefinedexcellenceinoperationsduringtheseminalperiodinwhichthemodernglobalsupplysupplychainchaindeveloped.DeminggrewuponfarmsinIowaandWyoming.Hewentontostudyengineering,math,andphysics,eventuallyearningaPhDfromYalein1928.HetaughtstatisticsatNewYorkUniversityBusinessSchoolandlateratColumbiaaswell.Hebecameinter-estedinstatisticalqualitycontrolanddedicatedhimselftomakingthesetechniquessimplerandmore practical.Demingwasparticularlyinterestedinmakingsurethatprocesseswerebasedondatawhendatawereavailableandonsoundtheorywhenitwasnot.“Itisnotenoughtodoyourbest;youmustknow what to do, and then do your best,” is one of his most repeated admonitions.FollowingWorldWarII,DemingtookajobwiththeUnitedStatesArmytoassistGeneralMcArthurinconductingacensusoftheoccupiednationofJapan.HefoundJapaneseindustrytobeeagerlyreceptivetonewmethodsandworkedwiththeUnionofJapaneseScientistsandEngi-neers(JUSE)tohelptheshatteredJapaneseeconomyrebuild.DemingiswidelycreditedasthemajorinspirationfortheJapanesequalityrevolutionthatoccurredoverthenexttwodecades.Companies,suchasToyota,startingwithDeming’sstatisticalprocessmodel,wereabletopro-ducesuperiorproductsatlowercostthantheirAmericanpeers.Thesefirmsrapidlygainedglobalmarketshareandachievedastoundingprofitability.TheJapanesePrimeMinisterawardedDeminganImperialmedalin1960,andU.S.PresidentRonaldReaganpresentedhimwiththeNational Medal of Technology in 1987.420A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
W. Edwards DemingSource:By FDA – http://www.fda.gov/oc/initiatives/criticalpath/stanski/stanski.html, PublicDomain, https://commons.wikimedia.org/w/index.php?curid=3239071DemingremainshighlyregardedinJapanandisrecognizedbyJUSEwiththe“DemingPrize,”theworld’smostprestigiousawardinwhatisnowknownasTotalQualityManagement.In1993,hefoundedtheW.EdwardsDemingInstituteinWashington,D.C.ManyofDeming’sarchivemate-rials are stored in the Library of Congress.Facilities (or Not)Sincetheturnofthemillennium,therapiddevelopmentofe-commerceanddigitalvirtualizationhasrenderedtheconceptofaphysicallocationformanybusinessesaslessimportantorevenirrel-evant.Still,sometypesofbusinessesstillrequirededicatedandoftenspecializedfacilitiesinwhichtoconducttheirregularoperations.Manufacturing,forinstance,ishardtovirtualize,thoughavarietyofsmallmanufacturingdevicessuchas3Dprintersarecreatingnewoptionsforsmalloper-ations.Retailsalesofhighlyperishableandtime-sensitiveitems,likethedonutsandbagelsthatmorning commuters like to grab on their way to work, are also often facility-dependent.Keep It at Home or Go MobileThe2020COVID-19crisisacceleratedthetrendtowardbusinessvirtualizationbyforcingreluctantorganizationstotesttheabilityofemployeestoworkfromremotelocations.Manybusinesseswerepleasantly surprised by the results and made plans to shed offices and cubes.Traditionally,sales,service,andconsultingjobshavelongbeenconductedfromhomeoffices.MostB2Bbusinesseslearnedlongagothatdispatchingsalespeopledirectlytocustomersitesfromtheirhomesacrossthecountryortheglobemademoresensethanflyingthemoutfromacen-tralizedlocationoropeningdozensorhundredsofregionaloffices.Thishome-basedsalesmodelisChapter 14Operations421© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
scalablefromthestartuptotheenterprise.Manylargercorporationsevenhaveregionalsalesman-agers working from home, supervising sales teams in their areas that are all home-based as well.Serviceandrepairworkcanbeperformedunderasimilarmodel.Repairsofofficemachinesandhomeapplianceshavelongbeenhandledbymobileservicepersonnel,oftendispatchedfromtheirhomesbyphoneorelectronicmessaging.Thistrendisexpandingbeyonditsrootsincopieranddishwasherservice.TeslaMotors,aconstantinnovatorintheautoindustry,hasmovedmuchofitslighterrepairwork,includingnonpaintbodyworkfromthegaragetothedrivewaysofitscus-tomers.Whyinconveniencethecustomerandlimityourpotentialservicevolumebytyingittoaphysical service bay when any piece of concrete will do as well?Manyindependentconsultantsorsmallconsultinggroupsflourishinavirtualizedenviron-ment.Creativeindividualsoftenrelishtheflexibilitytoworkremotelyfromhomeorevenmoreidylliclocales.Otherthantheobviouslytemptingdistractions,thereisnoreasonthatmostresearch,interviewing,andreportgeneratingworkcan’tbeaccomplishedfromabeachcottageoraski lodge.Inmanyways,thehardlessonsfromCOVID-19havebeengoodlessonsforbusinesspeople.UndertheNewEntrepreneurialDynamic,ifyourstartuporsmallbusinesscanavoidthecostandcomplicationsofdedicatedfacilities,itisgenerallyagreatideatodosoforaslongaspossible.Own-ingproperty,beinglockedintoleases,andhavingcommitmentstophysicalstructuresandlocationslimits your options in reacting to a changing environment.Peopleoftenthinkofrestaurantsastheclassiclocation-dependentfacility.Proximitytodiners,visibility,parking,andotherfactorshaveplayedakeyroleinthesuccessofcafés,pubs,andfinediningestablishmentsforyears.Holdingsuchlocationsevenproducedabarriertoentryforthecompetition. How could a restaurant survive without those sources of competitive advantage?Restaurants are traditionally very location-dependent businesses.Source: © Shutterstock, Inc.422A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
scaleThe process of growing asmall enterprise into alarge one. A scalableconcept is one that isinherently able to grow.brick-and-mortarUsed to describe abuilding in which abusiness offersface-to-face services.leaseAn agreement between aproperty owner and thetenant, a business ownerwho desires to rent theproperty for a specifiedperiod.tenantA person who occupiesthe land and premises ofanother for a period oftime.security depositMoney paid to a landlordas a good faithdemonstration of intent totake care of the propertyand collateral againstdamage to the premises.UndertheNewEntrepreneurialDynamic,itisassumedthattheenvironmentmaychange,turningpreviouslocationadvantagesintoliabilities.ConsideralunchtimecaféinEvansville,Indi-ana,servingtheworkersofalargefactoryanditsnearbysuppliers.Anunexpectedlybadyearresultsinthefactorybeingsuddenlyshutteredandtheworkforcedispersedtootherjobsacrosstheregion.Acaféthatownsitspropertyoroperatesunderafive-yearleasecan’tjustupandmovetoabetterlocationwhenthebiggestemployerintheneighborhoodsuddenlyshutsdown,right?However,alunchtruckcandojustthat.Itisprotectedagainstlocationrisks.Alunchtruckbusi-nessisalsoeasiertoscalethanatraditionalrestaurant;itiseasiertoaddtruckstoafleetthanpurchase and build out a chain of physical locations.Onceagain,acrisishighlightedthepoweroftheNewEntrepreneurialDynamic.Fooddeliveryandpickupservicesboomed,andinfact,manytraditionalrestaurantsfoundtheirverysurvivaldependent on services like Postmates and Grubhub.Suitability, Location, and PriceIfyoucannotordonotwishtovirtualizeyouroperation,andyoumusthaveatraditionalphysicallocation,oftenreferredtoasbrick-and-mortar,youshouldconsiderseveralfactorsincludingsuit-ability,cost,andlocation.Almostallstartupsleasetheiroffices,storefronts,orsmallmanufacturingfacilities.Tyingupcapitalinrealestateisapoorchoiceforabusinessfocusedongrowthoronreturningcashflowstoinvestors.Somematurefirms,bothlargeandsmall,mayowntheirfacilities,but for the purposes of this discussion it is presumed that you are leasing property.Aleaseissimplyanagreementbetweenapropertyownerandthetenant,abusinessownerwhodesirestorentthepropertyforaspecifiedperiod.Theleasewillprovidethepropertyexclu-sivelytothetenantforanagreed-uponamountoftime,foranagreed-uponamountofrent.Thetermorlengthoftheleaseistypicallyfromonetofiveyears.Therentsareusuallypaidmonthly,inadvance.Theleasewilllikelyincludeadditionaldownpayments.Firstandlastmonth’srentpay-mentsareoftenrequiredinadvance,andtherewillprobablybeasecuritydepositthatispaidbackwhen the tenant exits and the property is deemed to be in good order.Chapter 14Operations423© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
leaseholdimprovementsThe amount a landlord willspend to improve thepremises so as toencourage and secureoccupancy by the tenant.tenant improvementallowanceMoney the landlord mayprovide to the tenant ordeduct from the rent topermit the tenant to makeimprovements to theproperty.tenant improvementsChanges a renter makesto the landlord’s propertythat must be approved inthe lease or anotheragreement.step-up leaseA contract that allows thelandlord to increase rentpayments over the term ofthe lease.Thesuitabilityofafacilityisthemeasureofitsfittoyouroperations.Isitlargeenough?Isitappropriatelydividedintospacelikeoffices,manufacturingfloor,andwarehouses?Doesithavesufficientelectricalcapacityforyourmanufacturingequipment?Doesitoffersufficientparkingforbothemployeesandcustomers?Ifthefacilityislackinginsomeregard,canchangesbemade?Willthecityallowyoutomodifythebuildingtoaccommodateyourneeds?Suchleaseholdimprovementsmightbepartofyourdemandsbeforesigningaleaseandrequiredtobeunder-takenbytheowner.Alternatively,theownermayallocatesomefundspaidtoyouordiscountedfromfuturerentstocovertheimprovementsinwhatiscalledatenantimprovementallowance(TIA).Finally,theownermaynotbewillingtopayforimprovementsbutmightconcedetoallowyoutomakesuchchangesatyourownexpenses.Changesyoumaketotheowner’spropertymustbe approved in the lease or another agreement and are referred to astenant improvements.Improvements may be paid for by the landlord or the tenant depending on agreements.Source: © Shutterstock, Inc.“Location,location,location”haslongbeenthefavoriteaphorismoftherealestatemarket.Thisisparticularlytrueforretailestablishments.Ifyourcustomerscan’tfindyourstore,can’tgettoit,orwon’tgothere,youdon’thaveabusiness.Factorsthatinfluencethevalueofaretailsaleslocationinclude visibility, proximity to customers, transportation access, and neighborhood desirability.Highprofilecornersorlocationsinmajorshoppingcentersordistrictsprovidetheawarenessvalueofadvertisingalongwithinstantaccessibilitywhilethatawarenessisactive.Thereisnobettertimeforyourofferingtoenterthecustomer’smindthanwhentheyarerightoutsideyourlocation;asaleisjustafewstepsaway.Whenashopperseesyourbrandonthestorefront,theoddsofthemwalkinginarefarhigherthanifyouhadspentmoneyonaprintordigitaladthatrequiredthem to journey to your store.Onceyou’vedeterminedafacilityissuitableandinaproperlocation,theremainingissueissimplyprice!Youwilllikelyfindthatthereisnoperfectfacility.Thebestbuildingwillnotbeinthebestlocation.Thebestlocationwillnotbeaffordable.Youwillneedtofindthebestcompromisebetweenallthesefactors.Rememberthatyourleasepaymentswillbemadeoutoffuturecashflows.Youmightbeabletoconvinceyourlandlordthatyourbusinesswillgrowandnegotiateastep-up lease, with rents that start low and then increase when you can afford to pay more.424A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
incubatorAn organization that helpsstartup companies byproviding essentialbusiness services.colocationJoining more than onebusiness in a singlelocation.Mostbusinessleasesincludemorecomplexconditionsandesotericterms,soitishighlyrecom-mendedthatnoviceentrepreneursseekthecounselofanexperiencedfriendorcolleagueduringthenegotiationprocess.Ifyoudon’thaveanassociatetocallon,hirealawyertoreviewtheleasebefore signing anything.Sharing and SavingManystartupsreducetheircostsandtheircommitmentsbysharingspace.Manybusinessincubatorsofferlimitedofficespaceandotherphysicalamenitiesstartupsneedtooperatewhiletheygatherresourcesandinvestment.Dependingontheorganizationbehindtheincubator,thesespacesmaybeprovidedfreeofchargeorinexchangeforequityinthestartup.Colocationfacilitiesprovidesimilarservicestobusinessesforpayment.Theyalsohandleallthelittleissueslikeutilities,repairs,andcleaning.Ifyourbusinessdoesn’treallyneedafull-timeconferenceroomandyoudon’twant to clean the breakroom or unclog the toilets, its seriously worth considering these options.Theincubatororcolocationenvironmentcanbebeneficialinotherways.Beinginthesamespacewithotherentrepreneursfacingsimilardilemmascanbeencouragingandrewarding.Oftencolocatedbusinessesrecognizesynergies.Theyshareexperiences,expertise,andnetworks.It’sagreat place to find access to suppliers, angel investors, and advisors.ManufacturingSpeakingoffacilities,nosectoroftheeconomyismorefacility-dependentthanmanufacturing,thoughthenatureoftheirfacilitieshasshiftedinresponsetochangesinmanufacturingtechnol-ogy.Cottagemanufacturersofthemiddleageswereaggregatedintofactoriesduringtheindustrialrevolutioninordertoprovidespacefornewpoweredmachineryandtocapturetheeconomiesofscalerequiredtofundthepurchasingofsuchexpensivecapitalequipment.Fromthelateeigh-teenthcenturyonward,thequestforeconomiesofscalehasdrivenatrendtowardever-largerproductionfacilities.Cottageindustriesbecamefactories,andfactoriesbecamehugemanufactur-ingcenters.Everyoneinthesupplychainadaptedtotheseenvironmentalshifts,anddynamismwas critical to success.Eventually,entirecitiesbecamedefinedbytheirindustrialfocus.IntheUnitedStates,Detroitwasthecenterforautomobilemanufacturinginthetwentiethcentury,anditbecameknownas“TheMotorCity”or“Motown.”ThemajorU.S.automakers,includingFordandseveralfirmsthatlaterformedGeneralMotors,werealllocatedinthegreaterDetroitarea.Thecomponentsuppli-ersforthingslikebrakesystemsandhydraulichosesfortheautoindustryalllocatedinDetroitorother cities along the Great Lakes to be in close proximity to the auto manufacturers.Chapter 14Operations425© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
factors of productionInputs needed to create aproduct or service.finished productA product that is ready forsale or distribution.value-addAn additional amount,above the cost of thematerials, that providesfunding for themanufacturing process,the distributor, and theretailer.Enabled by commerce on the Great Lakes, the Motor City became the center of U.S. auto production.Source: J. A. Dunbar/Shutterstock.comRecognizingtheeconomicadvantagesofsuchregionalcoordination,theChinesegovernmenthasintentionallyguidedthedevelopmentofspecializedindustrialzonestosupportitsexport-dependenteconomy.Underthiscentralizedplanningmodel,citiesmayspecializeinproducingcommoditiesfromclothingtoelectronics,andthenecessarycomponentmanufacturershavelocatedaroundthesehubs.HundredsofcompaniesworkingintheDatangareaofZhuji,acityinChina’s Zhejiang province, produce nearly a third of all the world’s socks.[6]Whilesuchapolicyprovidesguidanceandsupportforentrepreneurs,italsolimitstheiroptions.Datangprobablyhasalotofyoungpeoplewhodon’tfindthesockbusinessveryexciting,andsomewhereinShanghaiayoungladymighthaveanobsessionwithmakinginnovativesocks.Whileadeterminedentrepreneurcandoanything,people’soptionsareconstrainedbythiscentral-ized planning.Manufacturingbusinessesarefirmsthatgetpaidtomakethings.Tobemoretechnical,manu-facturersaddvaluethroughaprocessofmodifyingandcombiningfactorsofproductioninordertoproduceafinishedproductthattheyselltootherbusinessesorindividualconsumers.Factorsofproduction(orfactorinputs)aretherawmaterialsorcomponentsthatthemanufacturerusestobuildwhateverproductitismaking.Aircraftmanufacturersbuyaluminumsheets,jetengines,andelectronicassembliestobuildairplanes.Clothingfactoriesbuycloth,thread,zippers,andbut-tons to make shirts and dresses. Window makers buy silicon sand to melt down into glass.Thespecialskills,facilities,andprocessesthemanufacturerhasgatheredallowthemtochargecustomersmorethanthepriceofthematerialstheyhavepurchased.PerhapssomelawyerinSpainmakesherowndressesbecausesheenjoysthecraft.Adedicated,trainedworkforceofsewersinafactoryequippedwithcommercialcuttingandsewingequipmentcandothejobfasterthanahomesewer.Andalthoughthehomeseamstressdoesn’thavetopayherself,shedoesincuroppor-tunitycostsonherownwork.Shecouldbedoingsomethingotherthansewingadressandgettingpaidforthatwork.Ifbuyingadressletsherfocusonherlegalcareer,itmakeseconomicsensetopayasignificantpremiumforreadytowearclothes.Infact,fewofusareskilledenoughorpossesstherightequipmenttomakeourownclothesquicklyandwithprofessional-graderesults.Itwouldcostusalottodevelopthoseskillsandbuypropertoolsandsewingmachines.Thisvalue-add,theadditionalamountabovethecostofthematerials,fundsthemanufacturer,theclothingdistribu-tor, and the retailer where the consumer shops.426A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
supply chainmanagement (SCM)The science of efficientlymanaging the factor inputsto production in abusiness.just-in-time (JIT)An inventory managementstrategy that ensuresfactor inputs tomanufacturing aresynchronized withproduction to reducecapital tied up in onsitesupplies.production engineersExperts skilled inredesigning products formass production and thesetup of the workflowrequired to make themmost efficiently.part countThe number ofcomponents required tobuild a product. Reducingpart count often reducesmaterial costs andassembly time in themanufacturing process.Supply Chain ManagementProfessionalmanufacturershaveanadditionalimportantsourceofadvantageovertheirlesssophisticatedcompetitors,supplychainmanagement(SCM).CanyouthinkofwhatSCMmightbe?Considerthecostandsourceofsewingmaterials.WouldourSpanishhomesewerfromthelastsectionpaythesamepriceasthefactorydoesforhersewingmaterials?Wouldshehaveaccesstothesamevarietyofchoices?Sheisprobablylimitedtowhatisavailableinafewretailsewingsup-plystores.Thefactory,ontheotherhand,buysdirectlyfromtextilemillsandcomponentmanufacturersaroundtheworld.Theybuyinmassivequantitiestocaptureeconomiesofscale,andtheyhavededicatedprofessionalbuyerswhoareexpertsinnegotiatingpurchases.Theymaybelargeenoughtospecifytheactualitemstobeproduced,suchascustom-designedprintsandbuttonsinthesize,shape,andcolortomatch.Whileouramateurseamstressmayenjoythequalityand joy of her own work, she can’t compete with that advantage economically.GrahamStevensdescribedtheobjectiveofsupplychainmanagementasaneffort“tosynchro-nizetherequirementsofthecustomerwiththeflowofmaterialsfromsuppliersinordertoeffectabalancebetweenwhatareoftenseenasconflictinggoalsofhighcustomerservice,lowinventorymanagement,andlowunitcost.”[7]ExpertsinSCMensurethatfactoriesgetthebestpriceandthebestqualitymaterialsexactlywhentheyneedthem.Keepingyouronsitesupplyofmaterialslowreducesbusinesscapitaltiedupinthatinventoryandisanimportantprocessknownasjust-in-time(JIT)inventorymanagement.JITcanalsoreducefacilityspacerequirementsforsup-ply storage and the time spent in handling that inventory in warehousing.TQM, Continuous Improvement, ISO 9000, Six SigmaOptimizingtheprocessofmanufacturingaproductisbothanartandascienceinmanufacturing.Experiencedmanufacturingexpertsknowhowtoredesignproductsforproductionandsetuptheworkflowtogetthemmade.Theseexpertsareknownasproductionengineers.Productionengi-neeringistheprocessoftakingadesignandmakingitintosomethingthatcanbemanufacturedinanefficientandreliablemanner.Justbecauseyoucanbuildoneunitofsomethingdoesn’tmeanitisputtogetherinthemannerbestsuitedtoproducingmillionsofunitsreliably.Reducingthepartcountorthenumberofcomponentsintheproduct,thelaborinvolvedinassemblingthem,andremovinguncertaintyandlikelypointsoffailurefromtheprocessareallessentialtocompeti-tive manufacturing.Chapter 14Operations427© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
total qualitymanagement (TQM)A process of detecting andimproving errors inmanufacturing andimproving employee skillsto ensure positiveoutcomes for customers.continuousimprovementprocess (CIP)A system of incrementalimprovements whereprocesses are constantlyevaluated and improved toincrease speed and qualityof production.Scientific management techniques ensure production quality and efficiency in a modern factory.Source: © Shutterstock, Inc.Designingprocessesforbuildingaproductefficientlyandconsistentlywasanobsessionwithtwentieth-centurymanagers.ExpertslikeW.EdwardsDemingintroducedscientificthinkingtowhathadbeenacraft,andentirelynewdisciplinesliketotalqualitymanagement(TQM)andcontinuousimprovementprocess(CIP)emerged.TQMworkstoensurethatthequalityofpro-ductionisconsistent,andthegoalofCIPistoseethatitisincrementallyimprovingbasedonfeedbackfromqualitycontrols.Formalprogramsexisttotrainmanagersandtocertifythatpro-duction systems are consistent and have very low rates of defects.ISO9000isasetofpublishedstandardsfromtheInternationalStandardsOrganization,andthird-partycompaniesuseittocertifythatmanufacturingprocessesadheretoasetofspecificrequirementsdefinedintheISO9000standard.Ithasbeenagloballypopularstandard,butitisimportanttounderstandthatthestandardismoreaboutconsistencyofprocessesinvolvedinmaking a product and ensures that the product itself is useful or of high quality.SixSigma,apopularquality-improvementprogram,isastatisticallydrivenprocessdevelopedatMotorolainthe1980s.SixSigmaseekstoreducedefectratesofaprocesstothestatisticallyinsignificantlevelofonein3.4million,significantlyimprovingcustomerexperiencesandreducingmanufacturingcosts.TheSixSigma“BlackBelt”hasbecomeanextremelypopularcertificationforproduction managers around the world.Inadditiontoqualityandcost,safetyisaparamountconsiderationinthedesignandoperationofmanufacturingsystems.Thefactoryenvironmentisoftenaplacefilledwithpoweredmachinery,sharpedges,andpotentiallyhazardousmaterials.Everyentrepreneurandmanagerhasanethicalobligationtotakereasonablestepstoensurethatthepeopleproducingtheirproductsaresafefromharmduringtheirworkandthattheiroperationdoesnotpresentathreattothesurroundingcommunity.Fromapurelyself-interestedstandpoint,injuriesdisruptproductionandcostfactoriestime and money.Beyondthat,theconsequencesofinjuriesincludepotentialliabilityformedicalexpensesandcompensationforsufferingordisabilitiesresultingfromworkinjuries.Inmanycountries,govern-mentregulatorsprovidestrictoversightoverthehealthandsafetyofproductionenvironments.IntheUnitedStates,theOccupationalSafetyandHealthAdministration(OSHA)maylevyfinesorclosefacilitiesthattheyfindarenotincompliancewithworkersafetyregulations.Someindivid-ualstatesandevenmunicipalitieshavetheirownsafetyregulationsandenforcementagencies.Besureyouarefamiliarwiththeregulationsthatapplyinyourcountryandregion.Again,thereareprofessionalsinthisarea,andentrepreneursshouldconsiderhiringaconsultantwithexperience428A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
makersMakers are part of agrowing movement builtaround the fabrication ofphysical objects; many ofthem are dedicated torestoring cottage industrymanufacturing.makerspaceA place where individualscome together to work onprojects of mutual interest.tohelpthemdesigntheirprocessandprovideaformalsafetyplanfordealingwithaccidentswhenthey occur.New Manufacturing Technologies Yield Strategic AdvantageSomemanufacturershaverecentlymadeboldattemptstocaptureenormouseconomiesofscale,suchasthe“Gigafactory”ElonMuskbuilttodrivedownthecostofbatterypacksforhisTeslaauto-motivecompany.LocatedoutsideofReno,Nevada,theGigafactoryishugeandhighlyautomated.Thebuildingisdesignedtohavethelargestfootprintofanyonearth.Supplierscanoperatewithinthemassivefacility,reducinglogisticalchallengesandcosts.Forinstance,Japan’sPanasonicpro-ducesthecellsforTesla’sbatterypacksrightinsidethefacility,savingthetimeandexpenseofshippingthesecomponentsacrossthePacific.Whilesomefactoriesmaybegettinghuge,thereisalsoaboominsmallscaleproductionandeventhereemergenceofthecottagemodel.Canyouthink of why?Aidedbycontinuousimprovementsinunderlyingtechnologies,automatedmanufacturingtoolshavebecomesmaller,moreaffordable,andeasiertouse.Sophisticatedmachineslikeauto-matedrouters,laser,etchers,andembroiderymachinesarenowsuitableforoperatinginthesmallestofbusinessesandevenhomeuse.Startupsareusingthisequipmenttowindealsinspe-cialized niches across the economy.Theboominadditivemanufacturing(aka3Dprinting)hasdrivenarevolutionintheproduc-tionofprototypesandsmallvolumeparts.ManyplasticprintersaresuitableforhomeoperationandhavebecomepopulartoolsforthoseintheMakerMovement.Makersarefolksinterestedinnewproductiontechniquesandsystemsforfun,education,andsometimesforprofit.Ina2017paper,SofiaPapavlasopoulou,MichailN.Giannakos,andLetiziaJaccheridescribedthemakercul-tureas“aphilosophyinwhichindividualsorgroupsofindividualscreateartifactsthatarerecreatedandassembledusingsoftwareand/orphysicalobjects.”[8]Makersshareideasonlineandworkfromhomeorfromamakerspace.Makerspacesaresharedfacilitiesthatprovideaccesstotheequipmentneededforsmallscaleproduction.Apopularmagazine,Make,focusedonthisphe-nomenon.Andaneventcateringtothemakers,Makerfaire,flourishedinthelate2000sandearly2010s.Makerspace, Sydney, AustraliaSource: haireena/Shutterstock.comChapter 14Operations429© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
contractmanufacturerA firm that producesproducts for othercompanies to market.Products for Apple and other global electronicbrands are made here at Foxconn City,Shenzhen, China.Source: Greg AutryDuringtheCOVID-19pandemicof2020,thousandsofmakersacrosstheworldproducedahugevolumeofpersonalprotectiveequipment(PPE),including3Dprintedframesforfaceshieldsandmasks.Workingfromquarantineathome,theyproducedengineeringprototypesandsoldavariety of items online, including jewelry, game pieces, kitchen utensils, and decorative items.Thisphilosophyhasexpandedtosomeunlikelyindustries,includingaerospace.Avarietyofmanufacturersproducingproductsfromdronestosatelliteshaveusedsmallscaleautomationtocompetewithbig-nameplayers.RelativitySpace,astartupfoundedbytwomillennials,hasraised$175 million to 3D print orbital class rockets and has ambitions to print them on Mars someday.Outsourcing and Offshoring ManufacturingToday,HonHaiPrecisionManufacturing,aTaiwanesefirmbetterknownasFoxconn,operatesafacilitycommonlyreferredtoasFoxconnCityinShenzhen,China.Thismassivefactoryemploysnearlyhalfamillionworkers,morethantwohundredthousandofwhomlivefulltimeindormito-rieswithinthefacility.HonHaiisacontractmanufacturingfirmthatproducesproductsforothercompaniestomarketandthensell.You’veprobablyneverheardofHonHaiorFoxconnCity,buttheoddsareyouownsomethingmadethere.ThemajorityofApple’sproducts,includingtheiPhone,aremadethereoratotherFoxconnfacilitiesinChina.HonHaialsoproduceslaptops,phones, and other products for most global consumer electronics brands.Moreimportantly,HonHaidoesn’tjustmakeaproductthatAppledesignedinaprocessthatApplespecified.Rather,HonHaimanagesproductionengineer-ingforAppleproducts.HonHai’scustomersworkcloselywiththefirmtotaketheirprototypedesignsfornewgizmosandreworkthemsotheywillflowoffamassive assembly line faster, cheaper, and better.Theproductionengineeringprocessmightinvolvedecisionslikereplacingthescrewsthatholdthecasetogetherwithsnap-togetherjointstosimplifyman-uallabororallowforautomation.Makingthatchangemightrequirechangingtheoutlineofthecircuitboardnearthesnapjoints.Thatmayrequirerelocatingthechipsontheboardandreroutingthewiresthatconnecttoit.Acontractman-ufacturermightsuggestchangingoutsomematerial,suchastheplasticonacase,toonethatissimplertosource,cheapertobuy,oreasiertohandleinpro-duction.FirmslikeHonHaihaveamazingexperienceinthisandaddsignificantvaluetothefinalproduct.Theymayactuallycontribute5percentto15percentofthefinaldesignof the brand name products you use.Howcouldyourstartupevercompetewiththatsortofscaleadvantage?Theansweristhatyoudon’thaveto!Whycompetewiththepowerofoutsourcedmanufacturingwhenyoucanlever-ageit?Aspreviouslynoted,AppleisnottheonlycustomeratFoxconnCity.Apple’shugevolumesupportstheeconomiesofscale,butmuchoftheirproductioncomesinwavescenteredaroundApple’snewproductintroductioncycles.ThatmeansHonHaihasextracapacitytoaccommodateotherproducts.BeyondHonHai,therearethousandsofothercontractmanufacturersacrossEastAsia,eagertobidonmakingyourgizmosatthelowestpossibleprice.Today,thevastmajorityofglobalconsumergoodsandagreatdealofB2Bhardwarecomeoutofthesecontractmanufactur-ing facilities.Handingoveryourmanufacturingtoanoutsiderandoftenoffshorefirmdoesnotcomewith-outchallenges.Amongthesechallengesisalackofdirectoversightintotheprocess,whichcanresultinsurprisesinvolvingdeliverydates,quality,andthenatureofyourproducts.Oftenacon-tractmanufacturermaygetabiggerandmoreimportantgigandputoffyourproductiontoaccommodateit,leavingyouandyourcustomerswaiting.Gettingyourcontractright,includingpenaltiesforlatedeliveries,isimportant.SometimeswhatyougetshippedfromChinaisn’texactlywhatyouexpected,andifthatisafullseacontainerofproduct,itmaybetoolatetochangeit.Get-ting little things just right, like colors, may involve you flying across the ocean fairly regularly.430A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
quality fadeThe gradual reduction inquality of manufacturedoutput from a contractmanufacturer, oftencaused by unapprovedcomponent substitutionsand other actions of themanufacturer to reducetheir costs.reverse engineerThe process ofdisassembling a productand analyzing itsconstruction in order toduplicate it.Counterfeit markets are common in much ofAsia.Source: hkhtt hj/Shutterstock.comAclassicproblemassociatedwithcontractmanufacturingisqualityfade.Inthissituation,yourmanufacturingpartnerstartsoutdoingeverythingjustrightbutslowlymakesadjustmentsinmaterialsortheirprocessestosavemoney,andthatmayresultinunexpectedproblemsforyouoryourcustomer.Forinstance,acompanymakingstainlesssteelshowersqueegeeswasverypleasedwiththeinitialsamplesandorderedthousandsofunitsfromtheirfactorypartnerinChina.Atsomepoint,anindividualinthefactoryfiguredtheycouldsaveapennyortwoperunitbysubstitutingcheapernonstainlessscrewsintothehandle.Nobodycouldseethedifference,butmonthslater,hundredsofcustomersbegantoreturnrustingsqueegeesandpostingangry,nega-tivereviewsonlineshowingthedamagetherusthadcausedtotheirshowersandtubs.Thereisnoway to fix that sort of loss or damage to your reputation caused by someone else’s penny-pinching.Anotherunfortunatelycommonproblemispiratingofproducts.Manyfirmshavediscoveredthattheirowncontractmanufacturingpartnerwilltaketheirproprietarydesignsandsimplystartmakingcopiesofitforsalethroughotherchannelsandevendirectlytocompetitorsintheirmar-ket.SometimesindividualsinthefactorywillcopythetoolingandprocessandsetuptheirownlineandshiptheproductintoadifferentinternationalmarketorjuststartsellingitonAlibaba.Thesecounterfeitproductsareasourceofconstantirritationandsometimesathreattothesur-vivaloffirmsthatonlydesignproductsandoutsourcemanufacturing.Ifyoukeepyourmanufacturinginternaltoyourfirmitisharder,thoughnotimpossible,forcounterfeiterstoeffec-tivelyreverse engineerand copy your gear.EnforcingyourtradesecretsandevenU.S.orEuropeanpatentsagainstacompanyinChinaisanexerciseinfrustration.Theircourtsandlocalauthoritiesareseldomwillingtoseeaforeignfirmwinsuchacontestoveradomesticcompetitor.Youcanpurchaseinsuranceagainstcounterfeiting,andthecompaniesthatprovideitwillgoafterU.S.distributorsandretailersthatsellyourprod-ucts, but controlling the online marketplace is very difficult.Youcanfindcontractmanufacturersbysearchingonline.Infact,ifyousim-plyputupawebsitefeaturingamanufacturedproduct,youwillsoonfindyouremailinboxandLinkedInmessageboxfilledwithoffersfromChinaandViet-nam.However,itisstronglyrecommendedthatyoureduceyourriskbyusingonlyfirmsthatprovidesolid,verifiablereferences.Findafriendorcolleaguewhohassomeyearsofexperiencewithcontractmanufacturingandaskfortheirrec-ommendation.Ifyoudon’tknowanyone,makemeetingthemapriority.Attendconferencesorwebinarsonmanufacturingorjoinanindustryorganization.Findsomeonewhoseproductlineissimilarenoughtoyoursthattheirmanufacturingadvicewillbeusefulbutnotadirectcompetitorinyourmarketwhomightfeelconflictedinhelpingyou.Forinstance,ifyouaregoingtomakeanewelectronickeyboardforthemusicmarket,acompanythatmakesalineofcomputerkey-boardsmightbeabletohelpyoufindamanufacturer.Onceyou’vefoundtherightfactory,youcanshipthemasampleortwoalongwithyourCADfiles,schematics,etc.andgetabidonpricingandtiming.Afteryouagreetoterms,you’llusuallyreceiveaseriesofprototypesbeforeactualproductionbegins.However,asnotedpreviously,itisprobablyworthyourtimetoflyover and inspect things before the factory ramps up production.Duringrecentdecades,manufacturingactivitydeclinedintheUnitedStates,Europe,andJapanasapercentageofeconomicactivity.However,higher-endproductmanufacturingstillflour-ishesinthesenations.Luxuryautomobiles,airplanes,militaryequipment,andspacecraftareexam-plesofmanufacturingmarketswherethesecountrieshavemaintaineddominance.Statistareportsthatin2019thetopfiveluxurycarbrandsintheU.S.marketwereBMW,Mercedes-Benz,Lexus,Audi,andTesla.[9]AllofthesecarsaremanufacturedinNorthAmerica,Europe,orJapan.AmericanBoeingandEuropeanAirbusstillruletheinternationalcommercialairlinermarket,thoughChina’sstate-ownedenterprisesareseekinganentrypointintothelowerendofthatmarket.LargefirmslikeBoeingandToyota(Lexus)supportasizablenetworkofsupplierswhomanufactureassembliesandcomponentsfortheiraircraftandautomobilesindomesticandforeignfactories.Thesesuppli-ers often make products for many different firms, including smaller startups.Chapter 14Operations431© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
domesticmanufacturingProduction done in thefirm’s home nation.Wheremarginsarehigh,qualityisparamount,andcloseconnectionsbetweenthedesignerandthefactoryaredesired,domesticmanufacturingisstilloftenpreferred.Forinstance,youwillstillfindsewingshopsmanufacturinghigh-endfashionanddesignerdenimjeansinLosAngeles,California, one of the world’s most expensive and highly regulated labor markets.FIGURE 14.2JapanÕs Manufacturing Value Added as a Percentage of GDP (1981Ð2017)Manufacturing has been in decline in Japan for a generation.Source: Trading Economics https://tradingeconomics.com/japan/manufacturing-value-added-percent-of-gdp-wb-data.htmlIfyourproduct,oratleasttheinitialtargetmarket,doesn’trequiremassivevolumesandyourmarginsarehighenoughtosupportit,havingamanufacturingpartnerwithindrivingdistancecanbearealadvantage.Thisisparticularlytrueforfirst-generationproductswhereyoumaybetweak-ing the design constantly with iterative improvements.Logical OutsourcingMakingthingsisonething;sellingthem,deliveringthem,andservicingthemisanotherentirely.Theskillsinvolvedinconsistentlyproducingaqualityproductatalowpricearenotthesameasthoserequiredforbusinessdevelopmentanddistribution.Thecapitalandhumanresourcesded-icatedtomanufacturingdonotleveragetheseotherbusinessfunctions.Anexpensive3Dprinterisofnovalueinmanaginginventoriesorshipping.Achiefoperationsofficerwhoisanexpertatmanufacturingisunlikelytobecompetitivelyskilledintheseotherdomains.Purchasesofsalesautomationtoolsandshippingrobotsmustnecessarilyreduceinvestmentinyourcoremanufac-turing operations, presenting a difficult choice to a cash-strapped startup. What can be done?Thebigfirmsandtheirpartnersarealreadydoingthis.IfyouorderaniPhoneorlaptopfromApple’swebsite,itwillbemanufactured,packaged,andindividuallyshippedviaFedExfromShen-zhen,China.YournewAppleproductwillarriveatyourdoorstepwithoutseeingtheinsideofanyApplefacilityandwithoutanyAppleemployeeevertouchingit!Byleveragingbusinesspartner-shipssuchasthese,Applecanfocusentirelyonitscorecompetenciesofdesigninggreatproductsand maintaining one of the world’s most highly respected brands.432A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
logistical outsourcingA service that provides forwarehousing and transit ofproducts for productcompanies.fulfillment servicesAn outsourced service thathandles the managementof physical productinventory, delivery, returns,and othercustomer-related services.Doesthisleaveastartupataninsurmountabledisadvantage?Again,theansweris“no.”Logisticaloutsourcingofthisnatureiscommonlyavailabletobusinessesofanysize.Thousandsofregionalfirmsaroundtheworldwillwarehouseyourinventoryandshipittoyourcustomersinaprocesscommonlyknownasfulfillmentservices.Insomecases,thefulfillmentservicemayhan-dle online or phone order taking as well.Thelargestfulfillmentservicesarerunbye-commercegiantslikeAmazonandAlibaba.Underits“FulfilledbyAmazon,”orFBA,service,thee-commercegiantleverageseconomiesofscaletopro-videsmallerfirmsaworld-classplatform.FBAprovidesentrepreneurswithordertaking,automatedwarehouses,andshippingratesnegotiatedwiththeadvantagesoftheirmassivevol-ume.Infact,unlesstheshopperlookscloselyattheproductadvertisement,theyoftenbelievethattheproductisactuallyanAmazonsale.Ofcourse,thereisacosttotheservice;Amazonchargesasmallmonthlyfee(currentlyabout$40/month)andtakesabout15percentofeachsaleforbeingontheirplatform.Theythenchargeyouforshippingandhandling,butthiswilllikelybelessthanwhatitwouldcostyourstartuptomanagethatprocess,andshippingfeesareoftenpaidbyyourbuyer. You will encounter additional fees when customers return or exchange products.A fulfilled by Amazon (FBA) product.Source: Author’s screenshot of Amazon pagehttps://www.amazon.com/July-Independence-Clip-Toddler-Handmade/dp/B07DK6M7WP/ref=sr_1_21Outsourcinglogisticsisexcellentideaforanystartupandformostsmallbusinesses.AkeycomponentoftheNewEntrepreneurialDynamicismaintainingfocusonyoursourcesofcompet-itiveadvantage.Unlessstoring,packing,andshippingarewhatdifferentiatesyourfirm,leavethosemundane tasks to the experts.Service and RetailingWhilerecentenvironmentaltrendshaveentrepreneurschallengingeverybusinessassumption,asalreadynoted,someretailsalesandservicebusinessesstilleffectivelyexploittheadvantagesofChapter 14Operations433© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
abandoned cartWhen an e-commercecustomer adds items totheir shopping cart butabandons the websitebefore completing thepurchase.physicallocations.Regardlessofwhetheryourbusinessisvirtualizedorabrick-and-mortaropera-tion, a number of important factors are specific to retailing.Maintain ConsistencyAsyoulearnedinpreviouschapters,buildingabrandrequiresconsistentmessaging.Yourretaillocation,realorvirtual,ismuchthesame.Theuser’sshoppingexperiencemustbeconsistent.Haveyounoticedthatwhilethedisplaysareconstantlyupdated,thebasiclayoutofyourlocalsuper-marketneverchanges?Thebakeryandbreadstayononesideofthevastexpanse,andtheproducestays on the other. You instinctively know where to find the soda and the toilet paper.Asyoumayrecallfromourdiscussionofsatisficinginanearlierchapter,peoplevaluetheirtimeandseektooptimizetheirsearchtimewhenmakingpurchases.Consequently,theyvaluetheconsistencyoftheirshoppingexperience.Youcannotdependonyourcustomerstoinvestthetimetotrackyoudownatanewlocation(orURL)ortonavigatenewstorelayouts(realorvirtual)inordertomakepurchases.Ifyourwebsiterebootcausedyourbuyerstotakemorethanafewsec-ondstotrackdownwhattheywantontheirphone,theymayjusttakeanincomingcall,andyouend up with anabandoned cart.Customer SatisfactionConsistencyisafundamentaldriverofsatisfaction.Canyouthinkofothers?AhighlycitedDanishstudy[10]oncustomersatisfactionandloyaltyacrossseveralindustriessuggestedthatimagewasthestrongestdriverindeterminingbothcustomersatisfactionandcustomerloyalty.Essentially,customerswantedtofeelgoodabouttheirchoices,sobrandingandmarketingareimportant.However,productqualityfactoredsignificantlyforfoodproducts,andcustomerservicewasanimportant factor for banks, fast-food restaurants, and telephone service providers.A2002publicationintheEuropeanJournalofOperationalResearch[11]concludedthatgoodserviceperformancewasthesecondmostimportantdriverofcustomersatisfactioninretail,andmoreimportantly,poorserviceperformancewasthemostsignificantdriverofdissatisfaction.The“retailexperience”wastheothercriticalcomponent.Thisdriverincludedthestorelayout(attrac-tiveness, consistency) as well as the service component of the sale.Giventheseinsights,itisclearthatcustomerservice,atthepointofsaleandafter,isthemostactionabledriverofsatisfactionintheretailbusiness.Toensuregoodservice,youneedtounder-standthefactorscustomersvalue,beabletomeasurethem,andactonthem.Thefollowingfourfactors are nearly always at the top of any list of customer service deliverables.Responsetime:Customersvaluetheirowntimeandwanttobeservicedpromptly.Whentheyhaveproblems,theywantquicksolutions.Poorresponsetimeisusuallyresolvedbyincreasingthecustomerservicestaff.Additionally,optimizingthescriptandprocessthestaffuseandtrainingthem to handle customers with alacrity can help.Communications:Thequalityofverbalandwrittenexchangesisacriticalsatisfierincustomerrelationships.Itisparticularlyimportantthatcustomersfeeltheyarebeinglistenedto,notspokenat,andthatthebusinessactuallyunderstandstheiruniqueproblem.Problemswithcommunica-tionsmaybebasedontheskillsofthecustomerservicestaff.Hiringforcommunicationabilitiesiscriticalinthisrole.Ithasbeencommonforfirmstooffshorecallcenterworktolocationswherelaborischeaper.Thissolutionriskscustomerfrustrationwhenlanguageandculturalbarriershin-derclearandquickcommunications.Goodtrainingforcustomerservicestaffismandatoryaswell.Empathy:Oncequalitycommunicationsareestablished,thecustomermustfeelthatthefirmandtheindividualservicingthemcareaboutthesituation.Alltoooften,customerservicestaffhaveseenthesameissuesoverandover,andtheythereforetendtotreattheseconcernsascom-monplace.Forthecustomer,theirproblemisnew,immediate,andirritating,andtheyareputoffby434A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
acasualresponse.Theywantasenseofconcernfortheirparticularcircumstanceandasenseofurgencyinresolvingit.Hiringempatheticindividualstohandlecustomerservicesiskey.Trainingforempathyisdifficult,andyoucannotorderstafftobeempathetic.Theymaytry,butcustomersrespond very negatively to insincerity.Professionalism:Thecustomerwantstobelievethatthecustomerservicesystematyourfirmisproperlymanaged,andthestaffaretrainedandempoweredtoresolveissuesforthemandaresupportedbymanagement.Anunfortunatelycommonbehavioramongretailcustomerservicestaffisthattheyoverempathizeattheindividuallevelandmaysuggesttheyaremakingspe-cialaccommodationsforthecustomeroutsidethepoliciesofthefirmasin,“Themanagementdoesn’twantustodothis,butI’mgoingtoreplaceyouritemforyouwithoutthereceipt.”Thisbringsthecustomerintoaconspiracywiththestaffmemberpositioningthefirmasanopponent,exactlywhatyoudonotwanttooccur.Thebetterresponseis,“Itisourstorepolicythatareceiptisrequired, but our company values your business and will be happy to make an exception.”TABLE 14.1Customer Service FactorsFactorFactorMetricMetricActionActionResponse TimeAverage Response Time,ObservationIncrease Staff, TrainCommunicationsSurveyHire Right, TrainEmpathySurveyHire RightProfessionalismSurvey, ObservationTrainSource: Greg AutryMeasuringaverageresponsetimeonlineorinacallcenteriseasilyaccomplishedwithsoft-ware.Inabrick-and-mortaroperation,youcanuseobserverstoclockresponsetimes.Forbothtelephoneandin-personservice,observerscanalsomonitorprofessionalism.However,itisimpor-tanttonotethatthemerepresenceofsuchobserverstendstomotivatestafftoperformbetter.Thisbiasestheobservations,butitalsoinherentlyimprovesthecustomerexperience,whichiswhypro-fessional call centers randomly record or monitor customer calls.Customersurveysareusuallythego-totoolforevaluationofcustomerserviceexperiences.Customerservicesurveysareoftenconducteddigitallyviaaweblinkfromanemailorapp.Typi-callytheywillpresentasmallnumberofquestionsinLikertformat,wherethecustomerisaskedtoselectfromascaleof“StronglyAgree”to“StronglyDisagree”or“VeryPositive”to“VeryNegative.”The five-item Likert scale is most common, and one is shown inTable 14.2.TABLE 14.2Typical Customer Survey Using a Five-Item Likert ScaleThe staffmember whoassisted mewas:StronglyStronglyDisagreeDisagreeDisagreeDisagreeNeutralNeutralAgreeAgreeStronglyStronglyAgreeAgreeResponsiveResponsive☐☐☐☐☐CourteousCourteous☐☐☐☐☐ProfessionalProfessional☐☐☐☐☐Able toAble toresolve myresolve myissueissue☐☐☐☐☐Please tell usPlease tell usmore aboutmore aboutyouryourexperience:experience:Source: Greg AutryChapter 14Operations435© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Somesurveydesignerspreferafour-itemscalethatremovestheneutraloption,forcingallrespondentstoexpressanopinion.Otherswilluseacontinuousslidertoallowrespondentstobemore nuanced in their ratings.Surveyscomewithabiasinthatcustomerswiththemostextremeexperiencesorpredispo-sitionswilltakethetimetorespond.Consequently,surveyresultstendtobebifurcatedintotheverynegativeandverypositivecamps.Itcanbedifficulttogettheaveragecustomertorespond.Itisusuallyadvisabletohaveaseniorcustomerservicerepresentativeorthebusinessowner,ifthefirmissmall,followuponnegativecustomersurveys.Customerswhosecommentsexpressgen-uinecomplaintsinaprofessionalmannerexpectaresponse;thosethatresorttovitriolicangerareprobably best left alone.Key Takeaways•Thebesttechnologyandthegreatestbusinessmodelareuselessintheabsenceofcompe-tent execution.•A business dashboard is the most important tool for management insights into execution.•Selecting an accounting system that fits your operations is critical.•A cloud-based system is the right choice for most startups.•Establishinggoodprocessesandexecutingonthemconsistentlycanfillinwheredataarenot available.•Physicallocationsofferbothcompetitiveadvantagesandliabilitiesthatmustbebuiltintoyour plan.•Plan for the location your business is going to need, not the one sufficient for today.•A well-managed supply chain is a very important source of competitive advantage.•Startups can compete with big firms by carefully leveraging outsourcing.•Customer service is as important as sales.•Focus is the key to operational excellence.14.2Managing GrowthLearning Objectives1.Understand that for most startups, growth is an exploitable assumption.2.Understand that desirable leadership qualities vary with the size and growth rate of the firm.3.Learn techniques for maximizing cash flow.4.Understand how strategic, rather than tactical, recruitment supports long-term growth.Mypopularity,myhappinessandsenseofworthdependtonosmallextentuponmyskill in dealing with people.—Dale Carnegie[12]436A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
black swan eventsRare events that occurwithout warning, have amajor impact, and which inhindsight appear to havebeen foreseeable.Planning to Grow DynamicallyTheNewEntrepreneurialDynamicisallaboutadaptingtoandexploitingchange.Somechangesareunanticipatedexternaleventslikethe2001terrorattacks,the2008financialcrisis,andthe2020COVID-19pandemic.Suchblackswaneventsaredifficulttoplanfor,butbuildingdynamiccapa-bilitiesisalwaystheanswerinpreparingforthem.Onechangeyoucancounton,however,isthegrowthofyourownorganization.Formoststartups,growthisnotoptional,atleastinthebegin-ning.Ifyourfirmcan’treachbreakevenandsurvivewithoutgrowing,youmightaswellbuildgrowth into your plans.Ashasbeenalreadynoted,growthimpactsyourchoicesoffacilitiesandaccountingsystems.Beyondthat,yourgrowthwillchangeyourcoststructure,usuallyforthebetter,byengagingeconomiesofscaleinbothyourcostofgoodssold(COGS)andyouroverheadcosts.Growthwillalsochangetheinternalcultureofyourfirmandthenatureofitsexternalrelationships.Fast-grow-ingstartupsandbiggerfirmsattracttheattentionofthepublic,andthatisusuallygood.Vendorsareeagertosupportfirmstheyseeasonthewayup.Customersviewfirmgrowthasareinforce-mentoftheirgoodchoices.However,youwillalsocatchtheeyeofsomefolksyoumightrathernotencounter, including competitors, regulators, and aggressive lawyers.A Leader for Each Phase of the Growth FirmDifferentsizedorganizationsneeddifferentresourcesatalllevels,includingleadership.Manyyoungentrepreneursareshockedtofindthemselvesreplacedattheorganizationstheyfounded.ThemostfamouscaseofthisphenomenawasthefiringofApplefounder,SteveJobs,bythefirm’sboard of directors, a decade after he founded the iconic computer startup.Venturecapitalistsarenotoriousfordoingthisandwithgoodreason.RandyKomisarwritesinhisbookTheMonkandRiddle,“SiliconValleyveteransshareatacitunderstandingthatwhatastartupneedsisn’toneCEO,butthree—eachatsuccessivestagesofthestartupsdevelopment.”EachoftheseCEOshasverydifferenttraitsandcompetencies.Komisarusesdogbreedsasametaphortodescribethem.HeseesthefirstCEOas“theretriever,”capableoffindingtheproduct,theinitialteam,andmoney.ThesecondCEOis“thebloodhound,”whomustfindtheactualcus-tomers.ThethirdCEOis“thehusky,”whoistheretopulltheestablishedcompanyforthelonghaul.Chapter 14Operations437© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
cash flowMoney that passes in andout of a business.The CEO who runs an established firm is the equivalent of the husky.Source: © Shutterstock, Inc.ItturnsouttheyoungSteveJobswasaretriever.Jobsfoundageniusengineer,SteveWozniak,gatheredmoney,andbuiltanewtypeofcomputer.ThatwasgreatforthenascentAppleComputer.However,asApplematured,theyoungentrepreneurfailedtoidentifyviablemarketsforApple’sincreasinglysophisticatedmachines.Additionally,hisaggressiveanddisruptivepersonality,whichhadbeenwellsuitedforquickdeal-makinginasmallstartup,alienatedmanyofthecareerprofes-sionals brought in to run the multi-million-dollar corporation his startup had become.Adecadelater,hereturnedtothefirmasamorematureandnuancedleadercapableofbeingthebloodhoundApplelacked.Jobsquicklyidentifiedopportunitiesindigitalmusic,smartphones,andtabletsandledAppletoglobaldominanceineachofthoseproductcategories.Today,AppleCEOTimCookisthehuskythathaspulledJobs’provenproductsandbusinessmodelduringthemost profitable corporate decade in history.It’simportantnottoletyouregodecideifyouaretherareindividualwhocanleadafirmthroughallthesephases.It’sperfectlyfinetodiscoverthatyoulikebeingtheretriever,alwayslaunchingneworganizationsandthensteppingasidewhenthepaperworkandbureaucracygetburdensome.Handingthefirmovertothebloodhoundandthehuskyandreapingtherewardsoftheirhardworkasastockholderisn’tabaddeal.Youcanstayonaschieftechnologyofficeroruseyour profits to fund a bold new venture of your own.Inventory Management and Cash FlowChapter16lookscloselyatcashflow,butfornow,itisimportanttounderstandthatgrowingfirmsneedallthereadycashtheycangettofundgrowth.Moneyinvestedinequipment,inventory,oremployeesneedstobelaser-focusedonproducingquickreturns.Machinerythatisn’toperational,productssittingaroundontheshelves,andemployeesintrainingaren’tgeneratingrevenuesforyou.Akeyoperationaljobforamanageristoreducetheamountofmoneytiedupinresourcesandkeepthoseresourcesasproductiveaspossible.Canyouthinkofsomegoodwaysthatgoodman-agers do that?438A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
working capitalThe money a companyuses to fund operations.negative workingcapitalA situation in which thefirm receives funds beforehaving to expend them onproduct production ordelivery of a service.Thebestwaytokeepcashinhandisnottospendit.Seriously,ifyoudon’tneedsomething,holdingontoyourcashuntilyoudogivesyourfirmtheflexibilitytospenditwhereyouneed,whentheopportunityarises.Asthepopularbusinessaphorismgoes,“Cashisking.”Thatavailablemoneyis calledworking capital, and maximizing it is core to the New Entrepreneurial Dynamic.It takes money to make money; firms need working capital.Source: © Shutterstock, Inc.Ifyoudoneedsomething,it’salwaysgoodifyoudon’thavetopayforit.I’mnotsuggestingyoustealit.Iamsuggestingyoufindawaytousetheresourcenowandpayforitlater,outoftheprofitsyouearnedusingit.Thatiswhymostequipmentcanbeleased,andyourinventorycanbefinanced.Aslongasyouexpectyourincreasedearningsgeneratedfromthepurchasetoexceedtheinterestyoupaytofinanceit,it’slikelyagoodchoicetoholdontoyourowncashforotherpur-poses.Anothergreatwaytoimprovecashflowistogetfolkstogiveyoumoneyfornothing.Again,Iamnotsuggestingfraud,butrathergettingpaidnowfordeliveringthegoodslater.Alotofgreatbusinessesoperateontheupfrontpaymentmodel,onlineretailersbeingaprimeexample.Thoughtheyusuallyshipproductsquickly,theyusuallytakeyourmoneybeforetheyplacetheorderwithanotherfirm.Gettingtheirfundsin,includingtheprofitsbeforegeneratinganycostofgoodssold,isanegativeworkingcapitalmodel,anditisthedreamofanycorporateCFO.Amazonhasdevel-opednegativeworkingcapitalintoanart.Oftentheitemsyoupurchaseas“FulfilledbyAmazon”arealreadysittingonconsignmentintheAmazonwarehouse,butAmazondoesn’tpaythesupplierforituntilaftertheyhavethecustomer’sfundsinhand.SuppliersandcustomersfinanceAmazon’sgrowth.Ifyoudohavetorunamoretraditionalworkingcapitalmodelthatinvolvespurchasinginven-tory,sellingtocustomers,andthenwaitingforyourpayments,thekeyisnottowaittoolong.Carefullymanagingtheaccountsreceivableandknowinghowtoincentivizecustomerstopayearlyandhowtoleanonthemwithoutlosingthemareskillseveryaccountmanagershouldacquire.Alwayslookatyouraccountsreceivableagingreportwithaneyetothereliabilityandtheimpor-tanceofeachcustomerwhoowesyou.Iftheygetbehindinpaymentsandyoufeeltheymaybeinfinancialtroubleoraren’tcriticaltoyourbusiness,leanonthemhard.Iftheyarebig,stablecus-tomerswhoarejusttakingadvantageofyou,findawaytoincentivizethemtopaywiththeofferofadiscountorsomeextraservice.Whentheeconomygetstough,manybusinessesgetslowtopay,Chapter 14Operations439© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
andmanywillfail.Beextravigilantthemomentyousensearecessioncomingonoradownturnbrewing in your sector.The Challenge with StaffingAlongwithequipmentandsupplies,thebiggestexpenseformostfirmsislabor.Maximizingthevalueofemployeesandspecificallytheirabilitytogeneraterevenuesforthefirmiscriticaltomain-tainingstrongcashflow.Agooddashboardmeasurementofthiswould-berevenueperemployeemeasuredassomethinglikesalesperday/employeeheadcount.Akeystrategyistofocusyourinvestmentinhumanresourcesonemployeeswhogeneratesalesanddeliverthegoodsandmin-imizeoverheademployeesinadministrativepositionsthatrunyourbureaucracy.Thisisn’ttosaythatyoudon’tneedaccountants,humanresourcestaff,andregulatorycomplianceofficers,butthey cost you money every month and do not directly produce any.Foranascentstartup,thestaffingrequiredtoaccommodategrowthcanbeverydaunting.Ifyou’reasolefounder,hiringyourfirstemployeewilldoubleyourheadcount.It’slikelyyou’renotpayingyourselfwell(oratall),sotheimpacttocostswillbehuge.Ontheotherhand,alargefirmmayhireseveralemployeesaday,anditwillbenearlyinvisibleontheirincomestatement.TheNewEntrepreneurialDynamicwillencourageyoutofindwaystousecontractorsandconsultantsatfirst,ratherthanemployees.Contractorscanbepaidonperformance;theircontractscanbeter-minatedswiftly,andtheydon’trequiretheplethoraofgovernmentalpaperworkandtaxesthatareassociated with having employees.Manyentrepreneursarereactionary.Theywaituntiltheymusthiresomeonebeforedoingsoandthenhirethepersonbestsuitedtoaddresstheirimmediate,tacticalconcerns.Thisprocessoftenresultsinsuboptimalchoicesthatarenotalignedwiththefirm’slong-termstrategicneeds.Youshouldforecasthiringandconsiderrunningacontinualhiringprocesswhereyouarealwayslookingforgoodcandidates.Networkwithyourpeersandfriendsandfindindividualsworkingforyourcompetitorsorelsewherewhoadmireyourbusinessmodel.Stayincontactwiththemuntilanopportunityarises,andthenhirefromthispoolofpre-vettedcandidates.Inthismanner,youcanalwaysbepreparedtoaddressacrisisbyhiringanindividualyouknowwillbewellsuitedtogrowing your company over time.Managing Organizational CultureHaveyounoticedthateveryfirm,everysportsteam,everynonprofit,hasitsownfeel?Haveyounoticedhowtheseorganizationsattractacertaintypeofperson,ormaybethatindividualsactuallyadaptthemselvestotheorganizationalculturewhentheyjoin?Allorganizationshaveaculture,andtheyappeartobefairlypermanentartifacts.Manymanagementandpsychologicalstudieshaveverifiedthisperspective.Moreimportantly,thecultureinabusinessimpactsthefinancialperformanceofthefirm.Ina2001articleintheJournalofManagementDevelopment,GolnazSadriandBrianLeesconclude,“Apositiveculturecanprovideasignificantcompetitiveadvan-tage.”[13]That’sgreatifyourcultureis,astheauthorssuggest,“consistentwiththeenvironmentinwhich the organization operates.”ThatfitbetweenthefirmanditsenvironmentiscentraltotheNewEntrepreneurialDynamic.Wheredoesanorganizationalculturecomefrom?Toagreatextent,organizationalcultureisamanifestationofitsfounder(s).Thefoundingteamandearlyemployeesinanorganizationgener-allycomefromthenetworkofthefounder(s).Ifheorshelikesanaggressiverisk-takingposture,theorganizationusuallydevelopsalongthoselineswithabrashculture.Ontheotherhand,ifthefounder is cautious, methodical, and thoughtful, the organization is likely to be quieter.440A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Organizationalculturesdonothavetodeveloprandomly.Theycanbeconsciouslyestablished.Mostimportantly,theycanbeintentionallymanagedtosuitanevolvingenvironment.SadriandLees note:Whileitisbesttoestablishapositiveculturewithwhichemployeescanidentifyduringanorga-nization’sinfancy,itispossibletochangeanexistingculture.Suchchangeisbestaccomplishedbymodelingdesiredbehavioratalllevelsofmanagementandbyplanningeventsthatfosterfrequentinteraction among cross‐functional employees.Whenmanagementchoosestoactinaparticularway,employeeswillemulatethat.Suchinten-tionalbehaviorsmightincludealwaysbeinghighlyrespectfulofcustomers,beingenvironmentallyconscious,orbeingtolerantoffailureinnewventures.Forexample,ifyouwantyouremployeestotreatyourcustomerslikeroyaltywhenyouarenotwatching,youmustalwaysdosoyourself,evenwhenyouencounteracustomerwhosedemandsorbehaviorwearsonyourpatience.Ifyouwantthemtobegoodenvironmentalstewards,youhavetomakevisibleeconomicsacrificesinthateffortyourself.Ifyouwantyourmanagerstoencourageyouremployeestoberisk-takersandtrynewthings,youcannotpunishthemwhentheserisksdon’tpanout.Organizedeventsandtrainingsessions can reinforce organizational values like these.Rememberthatforafirmseekingoptimalfinancialperformance,thegoalshouldbetodevelopaculturethatbestfitsyourmarket.Thisisnotnecessarilytheculturethatwillemergeasareflec-tionoftheentrepreneur’spersonalityorideology,factorsthatoftenshapehoworganizationsviewtheworld.Behonestwithyourselfaboutthatanddiligentinyourintentionaldevelopmentoforga-nizational culture.However,whileprofitsarenecessary,theNewEntrepreneurialDynamicrecognizesthatmax-imizingthemisnottheonlyreasonpeoplestartandrunbusinesses.Noentrepreneurshouldfeelcompelledtosacrificetheirpersonalintegrityindefiningculture,normusttheyconcedetothesocietalwhimsofthemoment.Thechoicebetweenyourvaluesandprofitsmayoccasionallybeadifficult one.The successful chicken sandwich chain has a religiously influenced culture that includes being closed on Sundays.Source: DW labs Incorporated/Shutterstock.comChapter 14Operations441© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
SamuelTruettCathy,thefounderofthewildlysuccessfulChick-fil-Afast-foodchain,wasdeeplycommittedtohisChristianbeliefsandkepthisrestaurantsclosedonSundaysdespiteanexpectationamongAmericanconsumersthatfast-foodserviceshouldbeascloseto24/7aspossi-ble.WhileCathychoseanorganizationalculturethatwasn’tperfectlyalignedtothemarket,theprofitslostinnotpursuingaseventhdayofbusinessdonotappeartohavesignificantlyhin-deredhisfirm’sgrowth.In2019,BusinessInsiderreportedthatChick-fil-Awasthethird-largestU.S.fast-foodchainbysaleswith2018salesup16.17percent.[14]Perhapsthefirm’sculture,orsimplythesincerity of its convictions, appealed to many customers.Key Takeaways•Being dynamic is key to growth.•Taking advantage of change requires working capital.•Managing cash flow is critical to dynamic advantage.•Reducing outlays for equipment and materials is key to good cash flow.•Strive for a negative working capital model in your business model.•Stay on top of your accounts receivable.•Focus your salary expenses on revenue-generating employees.•Consider options to minimize hiring employees.•Constantlybeconnectingwithpotentialfutureemployeestobuildapoolofcandidates,sothat hiring can address strategic as well as tactical needs.•Anorganizationalculturethatfitstheenvironmentinwhichyourfirmoperatesisasourceofcompetitive advantage.•Organizational culture can be consciously managed.•Theentrepreneurmaybecompelledtochoosetobalancetheirownculturalpreferencesandthose of the market.14.3Globalized OperationsLearning Objectives1.Recognize that the world is interconnected, and global markets are nearly unavoidable.2.Understandthatyoucanoutsourcethelogisticsandbureaucracyofglobalbusinesstoexpert organizations.3.Learn about the advantages and challenges of asynchronous communications.4.Understand the advantages of remote collaborative work environments.5.Learn about options and best practices for language translation.The Global ImperativeInanincreasinglyinterconnectedworld,itisbecomingdifficulttokeepmanyproductsorservicebusinesseslocal,regional,orevennational.Whenyourwebsite,productlistings,orsocialmediagoup,folksfromaroundtheworldwillfindyou.Theymaywanttobuyyourproducts,ortheymaybe442A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
sellingyoutheirservices.Evenifyourstrategicintentistoconstrainyourfirm’sgrowthgeographi-callyandavoidthecomplexitiesofremoteandtransnationalbusiness,youwillfindithardtoturndown.Unlessyouarerunningasmall,MainStreetbusiness,youshouldprobablyplanforthecom-plexities of globalization from the start.Nearly every product is now available in nearly every city on earth.Source: Sudpoth Sirirattanasakul/Shutterstock.comWe’vealreadydiscussedinthischapterhowoutsourcingproduction,sales,andlogisticscanhelpyouscaleyouroperationswithminimalcapitalinvestment.Theselessonsgodoublyforinternationalbusinesses.Theglobalexport/importprocesspresentsuniquechallenges,andthisisanotherreasontooutsourceyourfulfillment.Ordersshippedtoothercountriesrequirespecialpaperworkforthereceivingnations’customsandborderinspectionagenciestoprocesstheincom-ingitems.Thereareoftentariffsorotherfeesthatmustbepaid.Iftheseformsandfeesarenothandledpreciselyaccordingtoregulationsthatvarybycountry,yourproductscanbestuckinlimboorevenlostforeverinabureaucraticprocess.Thatwillmakeyourcustomerunhappyandleaveyourinvoicesunpaid.Paymentfraudisalsomuchmorecommonwithinternationalorders,itsperpetratorsknowingthattheyareoftenoutofyourlegalreach.Attemptingtotracklostpack-ageshalfwayacrosstheworldandarguingwithforeignshippersandgovernmentalbureaucratsindistanttimezonesandacrosslanguage,political,andculturalbarriersarenotthingsuponwhichafocused startup should be spending its time.ServicessuchasFulfilledbyAmazonareagoodchoice.Amazonpromisesto“helpyouidentifywhichofyourproductsareeligibleforFBAExport,fulfillsinternationalorders,handlesimportdutyandcustomsclearance,andshipsyourproducttotheinternationalbuyer’saddress.”Forasmallfirm,thereisalotofvaluetocapturebyavoidingtheopportunitycostofgettingcaughtupin the bureaucracy of international trade.Chapter 14Operations443© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Managing virtualized activities across the globeis a modern challenge.Source: © Shutterstock, Inc.asynchronouscommunicationCommunication betweenparties that does not takeplace in real time.Managing across Space and TimeModerntechnologyhaseliminatedthepriceofdistanceincommunicationsandreducedthepriceoftravelsignificantly.VirtualizationtoolslikeMicrosoftTeams,Zoom,BlueJeans,andWebExareroutinepartsofbusinesstoday,providingvideoconferencingandscreensharinginonlinemeetingspaces.Iftherewasanupsidetothetragiceventsof2020,itwasthatalmosteveryonelearnedtovirtualizedur-ing the pandemic.Whilevirtualizationisagreatwaytorunabusinessacrossacountryandacontinent,itisn’tashelpfulworkingacrosstheglobe.IfitisnooninCalifornia,thetimeis12:30a.m.inIndia.Thetwoareonoppositesidesoftheglobe,andifitweren’tforthepeculiarityofthesubcontinentbeingthirtyminutesoutofsyncwitheverywhereelse,they’dbeexactlytwelvehoursoff.Thereareno“businesshours”atonesitethatcorrespondtoanybusinesshourintheother.ThatmakesmeetingsbetweenyourSantaMonicadesignteamandyourprogrammersinMumbairatherinconvenienttoschedule,andtheweirdhalf-hourthingjustaddstotheconfusion.ThebestyoumightdoishaveyourCaliforniateamgetupandskipbreakfasttobeonlineat7:00a.m.whiletheIndiansmisstheirdinnerstomeetat7:30p.m.theirtime.Toomuchofthatandnobodywillbehappybecausevirtual meals are unsatisfying.Youcould,ofcourse,traveltoMumbaiforanin-personmeetingorinvitetheprogrammingteamtoyourcoolnewbeachfrontoffices.Thatflight,withalikelyconnectioninEurope,wouldlit-erallytakeallday—about24hoursoftraveleachway!You’dlikelyneedadayofrestafterthetrip.What to do?Asynchronous CommunicationsForalotoftraditionalbusinesspeople,emailwouldseemtobethebestsolution.Emailisanasynchronouscommunicationsystem,meaningthatyoucansendamessageandthereceivingpartydoesnothavetobesimultaneously(synchronously)online.YourprogrammersinMumbaicanopenitlaterandreplywhentheywakeup.Likewise,you’llwakeupandfindtheirreplyinyourinbox. Perfect, right?Fromreal-worldexperience,weallknowthatemailcommunicationscanbeconfusing.Tryingtoexplaintheintricaciesofanintermittentsoftwareglitchinwordscanbehard.SittinginyourofficeinToronto,Canada,anddescribingjusthowamechanicalpartmachinedinashopinMalaysiadoesn’tquitefitintothecasingmadeinTijuana,Mexico,canbeimmenselyfrustrating.Thebestsolutionistoaddphotosand,betteryet,videoinyourasynchronouscommunications.Still,emailcanbefrustratingbecauseyoudon’tevenknowifthereceivingpartyhasevenlookedatyourmessage,muchlessiftheyareactingonit.Additionally,asemailsgobackandforth,theconversationdivergesfromtheoriginalsubjectlineoftheemail,andcommunicationchainscanbeconfusing to reconstruct when you go back to find something.Onesoftwaredevelopmentteam,workingonacomplexgamecalledGlitch,ranintojusttheseproblems.Lookingforasolution,theycreatedtheirowninternalweb-basedasynchronouscom-municationssystemtospeeddevelopment.Thegamewasaflopandshutdownafterayear,butthecommunicationssoftwarelivedonasthepopularcollaborationplatform,Slack.Todaythereareanumber of web and app-based collaboration systems such as Asana and Microsoft Teams.Emailalsopresentschallengesforfiletransfers.Emailservershavefilesizelimits,andrevisioncontrol is very messy when users start sending files to each other.444A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
LanguageEvenwhenyoucanconnectinrealtimeoryourasynchronoustoolsareworkingwell,languagecanbealimitingfactor.WhileyourdevelopmentteaminMumbaiislikelytobefluentinEnglish,otherthan their British idioms, you may find your customers in Thailand are another story. What to do?Googleandotherfirmsprovidedecentbutimperfectautomatictranslationsystems.Ifyouavailyourselfofthesecomputerizedsolutions,besuretonotifythereceivingpartythatyouaredependingonmachineintelligence,andtheywillunderstandthattherearelikelytobeawk-wardphrases,potentialerrors,andoccasionallyoutlandishoroffensivewordchoicesinyourcommunications.Alternatively,youcanhireaprofessionaltranslatorasaconsultant.Manypopu-lar work-for-hire websites like Upwork or Fiverr can help you find a translator.Global business may demand you hire translation services in person or virtually.Source: © Shutterstock, Inc.Manyofushaveencounteredoddlywordedproductdocumentation,clearlywrittenbyasec-ondlanguagelearner.Itisusuallybesttorecruitatranslatorwhowilltranslatefromyourlanguageandcomposeintheirnativelanguage.It’seasierto“figureout”whatsomeoneissayinginanotherlanguagethantowriteperfectcopyinit.IfyourproductisgoingtobesoldinThailand,getaThainationaltowritethemanualfromyourEnglish(orwhatever)original.Thesamegoeswithimpor-tant customer proposals and all legal contracts or any area where no mistakes can be tolerated.Ifagreatdealofyourbusinessisgoingtobeconductedinonespecificforeignlanguage,itmight behoove you to bring on a fluent team member and try to learn it yourself.Chapter 14Operations445© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
multitaskingDoing more than one thingat a time.micromanagingControlling behavior thatincludes intense scrutinyand oversight of theperformance ofemployees.Focus on SuccessTheNEDkeytodoingajobwellisfocusingondoingitwell.Minimizedistractionsandmaintainaconsistentpace.Militarytrainersoftenteachrecruitsthat“slowissmooth,andsmoothisfast.”Speedinduceserrors,anderrorscosttime,andinabattlethatmeanslives.Thisadageisafavoriteofoneoftheworld’srichestpeople,AmazonfounderJeffBezos.Bezosputatortoiseintothecoatofarmsforhisspacestartup,BlueOrigin.Theartworkalsofeaturestheslogan“GradatimFerociter,”Latinfor“StepbyStep,Ferociously,”underscoringhisfirm’sdeterminationtoreachitsgoalwithcareful,incrementalapproaches.InaninterviewwithInc.,Bezossaidofthisphilosophy, “I like to do things incrementally.”[15]Source:By https://www.inverse.com/article/14059-the-mystery-behind-blue-origin-s-turtle-friendly-coat-of-arms, Fair use, https://en.wikipedia.org/w/index.php?curid=52012824Buildaworkenvironmentfreeofdistractingvisualandaudio.Thisdoesn’tmeanworkshouldbeboring,particularlyincreativeendeavorswhereserendipityaddsvalue.Considertheworkflowsrequiredtoaccomplishtasksinyourfirm.Createcomfortablephysicalandvirtualspacesthatoptimizeworkflow.Avoidlayoutsthatrequireemployeestomovefromonelocationtoanotherornavigate through nonrelevant areas in a software environment to get to the next task.Reduceoreliminatemultitaskingmultitasking,doingmorethanonejobatatime.Whenwemultitask,wereduceourcommitmenttoanyonejob.Whenweareeagertogetbacktosomeothertaskthatneedsdoing,weoftenrushthejobathand.Thesehumantendenciesreduceoperationaleffec-tiveness.Empoweremployeestomanagetheirowntimesotheycanachievethisandrestrainmanagementfrominterruptingemployeeeffortsbymicromanagingmicromanagingtheirwork.Rewardemploy-ees on goals completed successfully.Key Takeaways•Theworldislikelygoingtobeyourmarket,whetheryouchosethatornot;bepreparedforit.•Travelisexpensiveintime,andtimezonesareexpensivetoproductivity.Donotignorethecosts of a global supply chain.446A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
•Learn to be savvy users of virtualization platforms and asynchronous communication tools.•Treat translation as seriously as the particular communication demands.14.4Case Study: Shifting Operationsat Nikki’s KitchenAsayounggirl,NikkiHernandezlovedtocookandalwaysenvisionedowningasmallcafé.Sherecalls,“Ilovedtheideaofcreatingawelcomingspaceandinvitingpeopleintoitforgoodfoodandcompany.”Still,shepostponedthatdreaminordertoraiseafamilyandtosupportherhusband,TomWare,inbuildinghiscustomconstructionbusiness,ProgressiveBuilders.Yearslater,withthatfirmrunningsmoothlyandherkidsoldenoughtolookafterthemselves,Nikki’sthoughtsreturnedto the food business.Nikkiwasparticularlyfondofbaking.Shesays,“MyhomemadecookieshadalwaysbeenapopularneighborhoodtreatandIfiguredIcouldsellthem.”Afriendwhoranalocalpizzaparlorofferedtosellhercookiesthereasadessertoption.Thecookieswerewildlysuccessful,andshebegantosellthembythedozenastreatstogo.Soon,somecustomerswerecominginjustforthecookies, and Nikki began to wonder if her backing might really support her own shop.Inearly2018,thelocationnextdoortothepizzaparlorbecameavailableforrent,andNikkigrabbedit.Tomspentseveralmonthsofhissparetimebuildingoutacounteranddiningareaintheformerhardwarestorespace.NikkidecoratedtheplacewithcozycountrycharmandopenedthedoorsinDecemberofthatyear.ShealsobroughtinherdaughterCailynasapartner.Nikki’sKitchen was born.Nikki’s KitchenSource: Nikki WareChapter 14Operations447© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Atfirsttheplanwastosellcookiesandotherbakedgoodstogoandprovidesomeseatingforbreakfastdinerstoenjoyapastryandcoffee.Soonhowever,Nikki’scustomerswereaskingforafullerbreakfastmenuaswellasforsandwichesatlunch.Theyalsowantedhertocaterlocalevents.Sheadaptedtothecustomerdemand,thoughdoingshortordergrillworkwasaverydifferentbusi-ness.OperationsweresuddenlymorecomplexthanNikkihadoriginallyplannedfor.Justkeepingupwiththedisheswasagrowinghassle.Nikkirecalled,“Iexperimentedwithpaperware,butitwasn’tanenvironmentallyfriendlychoice,anditalsowasnotwhatourcustomerswerelookingforinadiningexperienceatacozycafé.”Sheendedupwithafull-timedishwasheraswellasashort-ordercook.Thebusinessandstaffgrewtogether,and2019endedwithamuchlargeropera-tionthanNikkihadanticipated.2020lookedlikeitwouldbeagreatyeartooptimizethemodelforprofitability.A customer enjoys breakfast at Nikki’s Kitchen.Source: Nikki WareInMarch2020theCOVID-19pandemichithard,andthegovernorofCaliforniaissuedordersthatlockeddownthestate’srestaurants.Nikkirecalls,“Wehadthisbigweekendofcateringlinedup,andIwasn’tsurehowIwasgoingtofillalltheorders.Thensuddenlyitallvanished,andwehadtoclosethecaféaswell.”Withnosolutiontothepandemicinsight,Nikkiwasforcedtolayoffmostofherstaffandrefocusontake-outorders.Nikkiwasn’tsurethatNikki’sKitchenwouldsurvivethe year.Whilethechangewasn’tNikki’schoice,thefinancialresultsoftheoperationalshiftwerepleas-antlysurprising.Shesays,“Ifoundwecouldjustgetbywiththreepeople,anditwaseasyandsuperprofitable.”Thefederalgovernment’sPaycheckProtectionProgram(PPP)providedanaddi-tionalcashinfusion,andthelandlordofferedarentdeferral,soNikkiwasabletoreinvestherincreasedprofitsinadaptingherbusinesstothedynamicallychangingCOVID-19regulatoryenvi-ronment.WhenCaliforniaadjustedthelockdowntoallowforoutdoordining,Nikkiwasabletoquicklyconvertanemptylumberstorageareanexttotheshopintoanattractiveoutdoordiningareaavailabletohercustomers,andthepatronsofthepizzaparlorandice-creamshopshesharedthecenterwith.Thestatethenreallowedlimitedindoordinningwithadditionalmandatessuchastheuseofdisposablecontainersforcondiments.Nikkiwaspuzzledbymanyoftheserules.“Peo-448A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
pleareallowedtoroamthroughCostcotouchingeverythingandalotofthatproductgoestolocalrestaurantsaswell.”Shealsonoted,“Intherestaurantbusinesswehavealwaysbeenfocusedoncleanliness.Wewipedowneverythingbynature.Clothingstorescan’tsanitizetheirmerchandize,whicheveryonehandles,buttheystayopenwhilewearetheindustrythatgetssingledoutunderthe COVID rules.”COVID-19 didn’t just require masks; it turned operations upside down.Source: Greg AutryWhenthewintercame,coronavirusinfectionsskyrocketed,andthegovernorissuedanothershutdownforrestaurants,butletthemallsstayopen.However,localauthoritiesmadeitclearthattheyweresimplynotgoingtoenforcethoseseeminglyarbitraryrulesthatwouldruinthelivelihoodofmanybusinessownersandleavetheiremployeesunemployedfortheholidays.Mostrestaurants ignored the new lockdown order and did their best to survive.Nikkicontinuestogrowherbusiness,focusingonkeepinghercustomerssafewhilemaintain-inganinvitingatmosphere.Sheremainshopefulthatthepandemicwillsubside,andthingsreturntonormalbyyear-end,butshetakesnothingforgranted.Theadaptableentrepreneurisexperi-mentingwithdeliveryservice.“OurPOSsystemofferedaninety-dayfreetrialfortheinterfacetotheGrubhubapp,sowegaveitashotanditisgoingwell.”Shenotes,“Thishasbeenreallyhard,butit’sbeenagoodeducation.I’mactuallygladmydaughterexperiencedallthischaosearlyinherbusinesscareer.Shehaslearnedquicklythatoperationshavetobeadaptableifyourbusinessisgoing to survive.”Chapter 14Operations449© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Endnotes1.VariouslyattributedbutsourcedtoCox,1922.https://quoteinvestiga-tor.com/2012/07/21/luck-hard-work/.2.Incasethatwasbotheringyou,95°Cisafineoperatingtemperatureformost gasoline engines.3.Ibid., Chapter 2.4.Deming,W.E.(2018).Theneweconomicsforindustry,government,edu-cation. MIT press.5.Ibid.6.Xinhua,“AcrossChina:Sockcapitalonthefrontfoot,”November23,2017http://www.xinhuanet.com/english/2017-11/23/c_136774699.htm.7.Stevens,G.C.(1989).IntegratingtheSupplyChains,InternationalJournalof Physical Distribution and Materials Management, 8(8), 3–8.8.Papavlasopoulou,S.,Giannakos,M.,&Jaccheri,L.(2016).Empiricalstud-iesonthemakermovement,apromisingapproachtolearning:Aliteraturereview.Entertainment Computing,18. 10.1016/j.entcom. 2016.09.002.9.https://www.statista.com/statistics/262921/global-production-of-luxury-cars-by-make/10.Martensen,A.,Gronholdt,L.,&Kristensen,K.(200)0.Thedriversofcus-tomersatisfactionandloyalty:Cross-industryfindingsfromDenmark.TotalQuality Management, 11(4–6), 544–553.11.Conklin,M.,Powaga,K.,&Lipovetsky,S.(2004).Customersatisfactionanalysis:Identificationofkeydrivers.EuropeanJournalofOperationalResearch, 154(3), 819–827.12.Carnegie,D.(2009).Howtowinfriends&influencepeople.Simon&Schuster.13.Sadri,Golnaz,&Lees,Brian.“Developingcorporatecultureasacompeti-tive advantage.”Journal of Management Development(2001).14.Taylor,K.&Yuan,Y.(2019).HowChick-fil-AtookoverAmerica,explainedincharts.BusinessInsider.https://www.businessinsider.com/chickfil-a-fast-food-domination-explained-charts-2019-815.https://www.inc.com/lisa-calhoun/digging-into-how-jeff-bezos-landed-customer-1.html450A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
CHAPTER 15AccountingIt’sdull.Dull.Dull.MyGodit’sdull,it’ssodesperatelydullandtediousandstuffyandboring and des-per-ate-ly DULL.—Michael Palin, of Monty Python, describing accountingBusinesspeople are often portrayed as obsessed with accumulating money.Source: © Shutterstock, Inc.© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
income statementA numeric document thatillustrates a firm’s financialperformance in a givenperiod of time. Also knownas the profit and lossstatement or P&L, it showshow revenues, cost ofgoods, and fixed costsresult in net profits orlosses on a monthly,quarterly, or annual basis.balance sheetA numeric document thatillustrates a firm’s balanceof assets, liabilities, andshareholder equity at aspecific moment in time. Itshows what your businessowns and what it owes.What remains is the valueof the firm owned by itsshareholders.profit marginA ratio found by dividingnet profit (money left aftercosts have beensubtracted from sales)byrevenues (firm’s sales).best-in-classThe highest qualityproduct or service of itstype in its particular pricerange. Firms like Appleand Toyota strive toproduce best-in-classsolutions.cash flowThe monies that move inand out of a business assales are made, andemployees, vendors, andtaxes are paid.cash flow statementA numeric document thatillustrates the entry andexit of cash (or equivalent)from a firm. In a healthycompany, it shows howmuch actual money isbeing generated by thebusiness operation over agiven period of time. In afast-growing or anunprofitable firm, it showshow fast money is beingconsumed by the businessoperations.Thegeneralpublicoftenassociatesbusinesswiththetasksofaccounting.Inpopularmedia,businessownersareoftenportrayedasmodern-dayEbenezerScrooges,obsessedwithmoney,countingstacksofbills,constantlymonitoringtheirincomestatementandbalancesheet,worry-ingoverprofitmargin,andmaneuveringtoavoidpayingtaxes.Formostentrepreneurs,nothingcouldbefurtherfromthetruth.Theyareoftentoobusygrowingtheirbusinessanddealingwithcrises to think about their accounting. That can be a deadly mistake for any startup.15.1Managerial AccountingLearning Objectives1.Understand that accounting is a critical entrepreneurial skill.2.Understand the importance of measuring sales revenues continuously.3.Understand what a profitable firm is.4.Recognize the difference between variable and fixed costs.Basic Accounting SkillsWhenyouthinkofthemostfamousentrepreneurslikeFacebook’sMarkZuckerberg,Amazon’sJeffBezos,orOprahWinfrey,doyouthinkaboutaccounting?Mostlikely,youdon’t.Youlikelythinkaboutthecoolservicestheyprovide,thegreatproductsthey’vecreated,ortheamazingbrandstheyhavebuilt.Thereisagoodreasonforthis.Eachofthesesuccessfulbusinesspeoplehasfocusedmostoftheirenergyondeliveringthebest-in-classtotheircustomers,whetherthatwasasocialmediasystem,anonlinestore,oramediaempire.Themantraofmodernentrepreneurshipisknow-ingthatifyoumaketrulygreatthingsandaddvaluetopeople’slives,themoneywillfollow.Underthisparadigm,entrepreneursoftenseeaccountingasanannoyingdistractionratherthanasasource of competitive advantage.[1]Do not be misled!Bezos,Zuckerberg,andWinfreyarenotoblivioustothingslikeprofitmarginsandcashflow.Anyofourindustrymogulscouldinstantlyspotemergingtroubleinacashflowstatement.Grow-ingtheirbusinessesaggressivelyoftenrequiredthesemoderncaptainsoftheirindustriestorideveryclosetothelineofsolvency,anddoingthatsuccessfullyrequiredathoroughappreciationofaccounting.Asmaturingentrepreneurs,theyhaveeachlearnedthatcompetenceinaccountingisasourceofcompetitiveadvantagethatallowsthemtodeploytheirfinancialresourcesmoreeffi-ciently than their competitors. Today’s small business owners must learn to do the same!Imaginethatyouownalocaldeliverycompany,andyouneedtomaintainyourdeliveryvans.Understandinghowyourvehiclesactuallyworkcanprovideyouwithanadvantageovertheaver-agefleetoperator,evenifsomebodyelseisdoingyourrepairservice.Alotofdrivershavediscoveredthattheirignoranceofbasicautomechanicsrenderedthemvulnerabletodeceitfulautosalespeo-pleandunscrupulousrepairshops.Thisweaknesscouldleaveanentrepreneurstuckonthesideoftheroadwithaloadofundeliveredgoods,watchingthecompetitiondriveonby.Similarly,manyastartup founder has come to regret their lack of accounting skills only after it was too late.Whileabasicunderstandingofaccountingiscriticalforanybusinessowner,youdon’tactuallyhavetodoallthisworkonadailybasis.Entrepreneursrarelyhandlethemechanicsofaccountingthemselves.Inafast-growthstartup,accountingisdelegatedtoanoutsideprofessionalaccounting452A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
school of hardknocksThe experience of learninga skill in the field, usuallyafter having suffered asetback from the lack offormal education on thetopic.revenueThe money collected fromsales of your good orservice. The total of whatall customers have paidyou.sales volumeThe number of units of agood or service that aresold during a particularperiod of time, e.g.,donuts sold per day at abakery.firmortheCFOandhisstaff.Inasmallbusiness,theyaretypicallyfarmedouttoanoutsidebook-keeperandaCPA.Choosingtherightaccountingresourcesforthebusinessisanimportanttaskfor the entrepreneur and will be addressed later in this chapter.Astheopeningquoteforthischaptersuggests,alotofpeoplefeelthataccountingisdullandarethereforedisinclinedtostudyit.Themodernentrepreneurshipcurriculumisalsosoheavilyfocusedontheexcitementoftechnology,customers,andmarketingthatmanyfoundersarebegin-ningtheircareerswithanappallinglackofaccountingliteracy.Theseyoungentrepreneursareoftenforcedtolearnthebasicsofaccountingintheschoolofhardknocks,afterafinancialcrisiswreckstheirdreams.Whilecountingyourmoneyshouldneverbeyourfocus,knowingwhereitisremains an indispensable skill.The tedious nature of accounting has often been the butt of jokes.View in the online readerRevenuesBusinessescollectmoneyfromcustomerswhentheysellaproductordeliveraservice.Theserevenuesarethebasicsustenanceofbusiness.Withoutrevenues,youarenotrunningabusiness;youareplayingwithahobby,orperhapsyouareoperatingacharity.Aprimaryeconomicgoalformostbusinessesistomaximizerevenues.Thisistypicallyachievedbyattemptingtodeterminethehighestpricethatthemarketwillallowandthenexpandingoperationsasmuchaspossibleinordertoincreasesalesvolume.Expansioncanbeachievedthroughcapturingmoreofanexistingmarketviamarketingormovingintoothermarketsthroughgeographicextensionorbyenteringnew product categories.Accountants Turn Piratical in a Monty Python SketchChapter 15Accounting453© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
expensesMoney that must be paidout by your firm toconduct its operations.profitableA state where the firm’ssales revenues exceed itscombined costs in anygiven period of time.variable costsThe monies paid for itemsused in the delivery of yourproduct or service.Variable costs vary witheach and every additionalunit produced. Theseinclude the basic inputs toyour product and laborassociated with producingit.fixed costsThe monies paid for itemsrequired to support yourbusiness operations thatare not directly tied toproduction costs. Theyremain fixed regardless ofnormal variations inproduction volume. Thesetypically include things likerent for facilities,administrative payrolls,and insurance.cost of goods sold(COGS)The direct labor andmaterial required toproduce the product yousell or the service that youdeliver.However,manybusinessownershavegoalsthatoverridesimplymaximizingsales.Theymaywishtokeeptheirbusinessa“manageable”size,wiselychoosetofocusonproductqualityforlong-termsuccessandhigherprofits,orwishtofillsomesocialmission.Intheend,themostimportantthingisthatsalesrevenuesexceedthebusiness’sexpensesorcostsduringanygivenperiodoftime.Such a firm isprofitable.Variable Versus Fixed CostsBusinessexpenses,ormoniesthatmustbepaidoutbyyourfirmtoconductitswork,usuallyfallinto two main categories:variable costsandfixed costs.Variablecostsarethemoniespaidforitemsusedinthedeliveryofyourproductorservice.Theyincludethecostofgoodssold(COGS),whichisthelaborandmaterialsneededtoproducetheproductorserviceyoudelivertothecustomer.Ifyourunapizzastore,COGSincludesthingslikeflour,tomatosauce,pepperoni,andthebaker’spay(ifyoucantieittoeachunitproduced).Vari-able costs are payments that must vary witheachitem sold.Variablecostscanalsoincludeotherthingsthatvarywiththenumberofitemssoldorservicesdelivered.Thismightincludethingslikesalescommissionpaidoneachsaleorpostagetoshipanitem.Ifyourunapizzastore,thismightbeasetpriceyoupaytoyourdeliverystaffforeachpizzadelivered to a home.Fixedcosts,ontheotherhand,donotdirectlyvarywiththenumberofunitssold.Thesearetypicallyitemsliketherentforyourfacility,insurance,andutilities.Inourpizzastoreexample,thesewouldalsoincludethepizzaovenanditsmaintenance.Whetheryouselltwentyorfortypiz-zas a day, you don’t go out and buy a new oven.Admittedly,fixedcostsarenotentirelyunchangeableorimmunetolargevariationsinsalesvolumes.Atsomepoint,likeselling500pizzasaday,youmayneedthatextraovenoreventoexpand your seating area. Fixed costs are things that simply don’t vary witheachitem sold.Thebalancebetweenfixedandvariablecostsiscriticaltothehealthofanyfirm.Aproperinvestmentinfixedcosts,suchasbuyingautomationequipmentdesignedtolowerthecostofpro-duction,canpaybackmanytimesitscostbyactuallyreducingthevariablecostsforeachitemsold.Ifyougetapizza-makingmachinethatcutsyourlaborinhalfandyousellenoughpizzas,you’lleventuallypayforthatinvestmentinper-pizzasavings.Afterthatpayoffperiod,theextraprofitsgointoyourpocketratherthantotheextraemployeesyoumighthavehiredtomakeallthosepiz-zas by hand.454A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
The ingredients in your pizza are variable costs.Source: © Shutterstock, Inc.However,itisalsocriticaltorealizethatifyoudon’tsellenoughmechanical-madepizzastopaywhatyouowethevendororbankforthepizzamachine,youmayfaceaveryseriousproblem.Poorchoicesinfixedcostscommitmentssuchasrentingexpensivelocations,buyingfancyvehicles,andill-conceivedmarketingcampaignsarethenumberonecauseofdeathforsmallbusinesses.Whenindoubt,animportantmantraforanyentrepreneuristo“containfixedexpenses.”Cashonhandisneverabadthingtohave.Itisfarbettertohavemoneyinthebankthananunderutilizedpieceofequipment or a big, empty store.Key Takeaways•Good entrepreneurs master the accounting skills required to track their money.•Variable costs increase with each new unit produced.•COGS is the variable cost of items that go into each item you sell.•Fixed costs do not change with each item you sell.Chapter 15Accounting455© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
EBITEarnings before interestand tax. This is your netprofits with any interest ortaxes paid added back in(not considered).15.2Financial AccountingLearning Objectives1.Understand the purpose and timing of the income statement.2.Learn the differences between cash and accrual accounting.3.Understand the cost of holding inventory.4.Learn about ways to manage accounts receivable and inventory.5.Recognize capital investments, how they depreciate, and how to amortize them.6.Learn the purpose and components of the balance sheet.7.Learn the purpose and components of the cash flow statements.8.Understand the importance of the Accounts Receivable aging report.9.Be aware of varying international accounting standards.Income StatementsAnincomestatement,alsoknownasaprofitandloss(P&L)statement,trackstheincomeandcostsofacompanyoveragivenperiodoftime.Theyaretypicallygeneratedmonthly,quarterly,andannually. The components of a very simple income statement are:A very simple income statement has the following components:Revenue:Themoneyyourfirmreceivesfromitsbusinessactivitiesviathesalesofproductsordelivery of services. In most cases, what your customers pay you.Costofgoodssold(COGS):Thecostofmaterialsanddirectlabor(usuallyvariablecosts)usedto produce your product or deliver your service. These are generally equivalent to variable costs.Grossprofit:Revenue–COGS.Themoneyyou(hopefully)haveleftoveraftersellingyourgoods or delivering your service and paying for all the direct costs used to manufacture or deliver.Operatingcosts:Thecostofnon-directlaborandotherservicesandmaterialsneededtorunyourbusiness.Thisisallnon-productionstaff,rent,utilities,insurance,etc.Thesearegenerallyequivalent to the fixed costs previously discussed.Operatingincomeorearningsbeforeinterestandtaxes(EBIT):Grossprofit–operatingcosts.Themoneyyou(hopefully)haveleftoveraftersubtractingyouroperatingexpenses(fixedcosts) from your gross profit.Taxes:Moniesyourfirmmustpaytovariouslevelsofgovernmentonitsincome,realestateinventory, and countless other things.Netprofit:Themoneyyou(hopefully)haveleftoverafterpayingtaxesfromyouroperatingincome (EBIT).456A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
interestMoney paid as the fee forborrowing funds, usuallyexpressed as percentageper year.assetsThe cash and other itemsof value owned by abusiness.Actualincomestatementsmayincludeanynumberofmorespecializeditemsthatthefirmwishestotrack.Thismayincludethingslikeinterestpaidonloanstofinancematerialsorassets.TheSampleIncomeStatementillustrationshowslineitemsthatreflectprofitsgeneratedinarelated joint venture (associates) and investments (non-controlling interests) in other firms.TABLE 15.1Sample Income StatementDexterity Inc. and SubsidiariesConsolidated Statements of Operations(in millions)Year Ended December 31200920092008200820072007Revenue$36,524.9$29,827.6$21,186.8Cost of Sales(18,545.8)(15,858.8)(11,745.5)Gross Profit17,980.113,968.89,441.3Operating ExpensesOperating ExpensesSelling, General, andAdministrativeExpenses$(4,142.1)$(3,732.3)$(3,498.6)Depreciation(602.4)(584.5)(562.3)Amortization(209.9)(141.9)(111.8)Impairment Loss(17,997.1)––Total Operating Expense(22,951.5)(4,458.7)(4,172.7)Operating Profit (orOperating Profit (orLoss)Loss)$(4,971.4)$9,510.1$5,268.6Interest Income25.311.712.0Interest Expense(718.9)(742.9)(799.1)Profit (or loss) fromcontinuing operationsbeforetax, share of profit(or loss) from associatesand non-controllinginterest$(5,665.0)$8,778.9$4,481.5Income Tax Expense(1,678.6)(3,510.5)(1,789.9)Profit (or Loss) fromAssociates,net of tax(20.8)0.1(37.3)Profit (or Loss) fromNon-Controlling Interest,net of tax(5.1)(4.7)(3.3)Profit (or Loss) fromProfit (or Loss) fromContinuing OperationsContinuing Operations$(7,369.5)$5,263.8$2,651.0Profit (or Loss) fromDiscontinued Operations,Net of Tax(1,090.3)(802.4)164.6Profit or Loss for theProfit or Loss for theYearYear$(8,459.8)$4,461.4$2,815.6Chapter 15Accounting457© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
cash accountingA system of accountingthat looks at businessassets and liabilities as asnapshot in time. Asopposed to accrualaccounting, cashaccounting does notconsider accountsreceivable or payable.Cash accounting isappropriate for only thesimplest of businesses orfor use in some taxstrategies.net termsAn agreement between abuyer and seller wherebythe buyer pays for theproduct sometime afterthey have received it.transit timeThe time a product is inshipment and not availableto the buyer for resale.onerousTerms that are excessivelyburdensome or difficult toaccommodate.Cash Versus Accrual AccountingSofar,wehavelookedatbusinessesoperatinginacashaccountingframework.Cashaccountingisasimplesystemthatonlyconsiderswhatconcretemoniesacompanyhasrightnow.Itcountsthemoneyyouhaveinthebankaftercustomershavepaidyou,andyouhavepaidyourbills.Whenyoureceivemoney,youpostitundersales,andwhenyoupayoutmoney,youlistitoncostofgoodssold(COGS)oroperatingexpenses.Thatisfineifyoubuybagsoforangesatamarketandthenwalkovertoastreetcornertosellthemforcash.Canyouthinkofwhysuchasystemisinsufficientfor running anything but a very simple business?CashaccountingisabitlikemanagingyourpersonalbankaccountbyonlylookingatyourATMstatementbalanceandjustignoringbillsyouhavedueoroverlookingundepositedchecksyoumighthaveinthemail.Anindividualcouldgetintoalotoffinancialtroublebythinking,“Hey,I’vegotmoneyinthebank.Icangoshopping!”Infact,doingsowillleavethemunabletopaythecarinsurancebilltheyhavesittingontheirdesk.Thesameproblemcouldthreatentheoperationofyoursmallbusiness.Thisframeworkdoesnotaddressmoneyyouoweyourvendorsormoniesowed to you by customers who have not paid you yet.Outsideofverysmallretailstores,mostbusinesstransactionsdonothappenonacashbasis.Forbiggerstores,mostpurchasescomeinadayormorelaterfromcreditcardtransactions,andinthebusinesstobusiness(B2B)world,mostfirmsshipgoodstoeachotheronnetterms,wheretheproductcomeswithabillthatisduetobepaidsometimeinthefuture.Typically,suchtermsarefifteen or thirty days, but they may be as long as ninety days or more.Onaninvoice,youwillseethetermslistedas“Net30,”forexample,meaningyoumustpaythisinvoicewithinthirtydays.“Net”referstotheamountdue.Youmayhavepaidsomepartupfrontorondeliveryorhavereceivedsomesortofdiscount.Thenetisthebalancethatyouowe.Thenum-berfollowing“Net”isthetermsindaysinwhichyouhavetopayit.Theclockstartswhenthesellershipstheproductordeliverstheservice.Asthebuyer,youaregenerallyresponsibleforthetransittime,andifyouwantyourgoodssooner,itisyourresponsibilitytopayforafastershippingmethod, like FedEx overnight.Sometimesinvoicetermscanbemorecomplex.IntheUnitedKingdom,thephrase“net30,EOM,”whereEOMmeans“endofthemonth,”iscommonlyusedtoindicatethatthebillisdue30days after the start of the next month.Ifyoudon’tunderstandthetermsofaninvoice,callthesellerandaskwhattheyareexpectingratherthanriskrunningafouloftheircreditrules.Toencourageyoutopayinatimelymanner,yoursellermayaddapenaltyorinterestratetoanypaymentsmadeaftertheagreednetterms.Thesemaybedefinedontheinvoiceorinyourcontractoragreementwiththevendor.Becarefulas these terms can often beonerous.Asellermayalsotemptyouwithadiscounttopayearly,whichinturn,haspositiveramifica-tionsfortheirowncashflows.Todothis,theymaysendyouaninvoicewithtermsthatread“2%10,net30”or“2/10net30,”forexample,whichmeansthatyoucanchoosetotakea2percentdiscount(payless)ifyoupaywithintendaysorsimplychosetopaythenormalamountinthirty.Takingsuchdiscountsisusuallyagreatideaifyoucansparethecashonhand.You’llneverfindsucheasymoney.Afterall,whatistheannualizedinterestrateat2percentamonth?Isthatagoodratecom-pared with what you might earn at the bank or elsewhere?Asabuyer,paymenttermsareanimportantpointofnegotiationwithyourvendor.Canyouthinkofwhyabuyerwouldnotbewillingorabletopayforitemsthemomenttheyarriveorwhythesellerwouldbewillingtowaitsolongforacustomertopayforitemstheyaredeliveringtoday?458A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
floatingHolding monies thatbelong to vendors orcustomers to increase afirm’s working capital or tocollect the interest on it.floatMonies belonging tovendors or customersbeing held for a time toincrease a firm’s workingcapital or to collect theinterest on it.inventoryProduct you produce orsell that has not been soldyet, but that you areholding for sale.The Harsh Reality of Collecting Accounts ReceivableIntherealworld,purchasersoftendonotpaytheirbillsontime.Thecausemayeitherbethattheysimplydon’thavethecashonhandorbecausetheypointedlychoosetoholdontootherpeople’smoneyandprofitfrominvestingit.Dependingonyourcustomerandtheeconomiccon-ditions,theaveragetimeforcollectinganet30invoicemayeasilybeforty-fivedaysormore.Asa seller, you must be aware of this reality.Infact,whendealingwithsmallerbusinesses,youmayoftenneedtoofferthemadiscountwhentheyrunlate,justtogetthemtopayabilltheyalreadyoweyou.Insomecases,theymaysimplyneverpay,andyoumayneedtosuethem,whichcanbeexpensiveandtime-consuming.Finally,yourcustomercangobankrupt,leavingyoustuckwithlittleornothing.Beverycarefulhowyouextendnettermsandtowhichfirmsyouextendthem.Techniquesfordeterminingthiswillbediscussed inChapter 16.Additionally,thepowerbalance(orimbalance)betweenthebuyerandtheselleroftendetermineshowquicklybillsarepaid.Ingeneral,alargercompanyhasmoreleverageoverasmalleroneandcanexpectitsbillstobepaidquickly.Asasmallshopowner,youwillpaythepowercompanyontimebecausethepowercompanywillsimplyshutyoudownifyoudon’t.Yourwindowwasherisn’tsolucky,andyoumaywaittopayheruntilyou’vepaideveryoneelse.Largerfirmsalsohaveprofessionalcollectiondepartments,andifnecessary,lawyersonstaffwhoareskilledinmakingthelifeofasmallbusinesspersonveryuncomfortable.Ifyourepeatedlypayyourbillstolargefirmslate,yourbusinesscreditratingcanbeimpactedastheyreporttoagencieslikeDunnandBradstreet,whocollectsuchinformation.Ifyourbusinessisorganizedassoleproprietorshiporpartnership,abusinesscollectiongroupmayattachyourpersonalassetsorreportnegativelyonyour personal credit rating.Conversely,asasmallbusinessowner,youwillfindthatlargefirmsoftendonotfeelcompelledtopayyourbillsinatimelymanner—again,largelyduetoissuesofpowerimbalances.[2]Yourbusinessneedstheirregular,bigpurchases,andtheyprobablydon’tneedyounearlyasmuch.Othersmallfirmsareeagertoacquiretheirbusiness.Mostlargecorporationsknowinglymakemoneybyfloatingfloatingthemoneytheyowetosmallbusinesses.Bymakingmanythousandsoftheseinvoicesafewdayslate,theybuildupmillionsofdollarsinfloatfloat,moneytheycankeepintheircashflowtofinancetheiroperations.That’smoneytheydonothavetoborrowatinterest.Asshockingasitis,largebusinesseswilldothistoyoursmallfirm,andtheydon’tcarewhatthatmeans to you, even if it drives you out of business.Worse,whenyou,thesmallbusinessowner,trytosolvethisdilemmabyinnocentlysendingalargerfirmoneofthethose“2%10,net30”invoices,theyarelikelytopayinforty-fivedaysorwhenevertheydarnwellfeellikeitandstilltakethe2percentÒearlypaymentÓdiscount!Shouldyoucalltocomplainaboutsuchanabuse,youwilllikelyfindyourselfworkingthroughamazeofbureaucratswhowilltakeupyourtime,butnoneofwhomareauthorizedtosolveyourprob-lem.Infact,you’lloftenfindthatbigfirmshaveasystemwherebynobodyevenknowswhoisauthorizedtotakeactioninfavorofthevendor.Ifyoudecidedtosicyourmainstreetlawyeronabigfirm,theirIvyLeaguelegaleaglesmaynotonlybeatyourguyincourtbutwillleaveyouwithapileoflegalbillsfarlargerthanthemoneythatwasatstake.Inanycase,yourbigcustomerwouldsurelydropyouasavendorforannoyingthem,andyou’llloseagreatdealofbusinessandcredibilitygoingforward.Thispowerimbalanceisanunfairrealitythatsmallbusinessownersmust simply learn to live with.The Need for Accrual AccountingImagineyouownabicycleshop,andtheChristmasholidayseasonisapproaching.Fromexperi-ence,youknowthatcustomersarewillingtopaymoreforholidaygiftsandthatyoursalesrevenuesinNovemberandDecembermayaccountformorethanhalfofyourannualincome.Thisisthe“makeitorbreakitseason”foryourshop,soitisreallyimportantthatyouhaveasmanybicyclesinstockaspossible.Theproblemisthatsincetherestofyouryearisrelativelyslowandtherainyfallisparticularlybadforsales,youdon’tcomeintoNovemberwithalotofcashonhand.However,youwanttodoubleuponthebikesyoukeepinstock.Theseitemsreadyforsalebutasyet unsold are calledinventory.Chapter 15Accounting459© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
accounts receivableMonies owed to you bycustomers for productsthey have received but notyet paid for.accrual accountingAccounting that takes intoconsideration transactionswhere cash has not yetbeen exchanged, wheremonies are owed but notyet paid, the accountsreceivable and payable.The bicycles for sale in a bike store can tie up a lot of the business’s cash.Source: © Shutterstock, Inc.Now,thebikemanufactureralsowantsyoutohavealoadoftheirbikesonhandforcustomersduringthepeakbuyingseason.They’vealsobeeninthisbusinesslongenoughtounderstandthatyouandallyourpeerswillhavemoneyafteryouselltheChristmasbikes.Therefore,theman-ufacturerwillessentiallyloanyourshopthemoneytobuyallthesebikesfromthemwiththeexpectationthatyouwillpaytheminJanuaryafteryou’vesoldtheinventory.Iftheywillnotmakethisaccommodation,anotherbikemanufacturerislikelytodoso,andcustomerswillfindyour(andother)storespackedwiththeircompetitors’productsduringtheholidays.Youcanseethatitisveryimportantthatyouandthebikemanufactureraccuratelyforecastthecomingholidayseason.Ifyouunderestimatethenumberofbikesyoucansell,you’llbeleavingmoneyonthetableandwillbeweakerinthecomingslowseason.Ifyouoverestimate,youmayhavemanyunsoldbikesandnot enough cash to pay for them, an even more desperate situation.Ifyouhavereceivedproduct—saybikesforyourbicycleshop—andhaveyettopaythebillthatcamewiththem,youraccountsarepayable.Ifcustomersoweyoumoney—imagineyou’rethebicy-clemanufacturer—you’vegotanimportantassetinyouraccountsreceivable.Inordertoknowhowyourbusinessisreallydoing,itisimportanttoaccountforwhatyouactuallyowepeopleandwhattheyoweyou.Consequently,thesepayablesandreceivablesshouldbevisibleontheincomestatement.Theaccountingsystemthatincludessuchstatementsiscalledtheaccrualaccountingsystem.Forallbutthesimplestbusiness,accrualaccountingisrequiredtomanageoperationseffectively. In most cases, and in this book, assume accrual accounting is being used.460A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
inventory financingA loan secured byinventory held formanufacturing or for sale.floor planningSeeflooring.flooringA financing arrangementwhere a bank or specialtylender loans money to payfor merchandise for sale bya retailer. When themerchandise is sold, theloan is repaid. Interest isusually due on the loaneach month.installment loanAn agreement for a buyerto make payments on aproduct over time, usuallywith interest, to a thirdparty who pays the sellerfor the product at the timeof sale.Inventory FlooringImaginethatyou’reabicyclemanufacturer.Youhavetobuildalotmorebikesinpreparationfortheholidaysandtodoso,you’vegottopayforextrapartsandlabor.Youmaynothaveunlimitedcashtoloantothousandsofbikeshopsandthenwaitmonthstoberepaid.Whatcanyoudoabout that?Evenanunsoldinventoryofthingslikebicycleshassolidvalue.Thosebikescanalwaysbesoldatsomeprice,evenifitwere50percentoff.Consequently,smallbusinesses,likebicycleshops,canborrowmoneyagainstpartofthevalueofthisinventory.Thisisatypeofinventoryinventoryfinancingfinancingcallfloorfloorplanningplanningorflooringflooring(becauseitputsproductontheshop“floor”).Manybanksandspecialtyfirmsprovidesuchflooringandmakeaprofitbycharginginteresteithertotheshoporthe manufacturer.Most cars for sale on a dealership lot are financed via floor planning.Source: © Shutterstock, Inc.Attheconsumerlevel,thebuyeralsowantstopurchasemoreproduct,particularlyduringtheholidays,thanhecandirectlyaffordtopayfor.Asabikeshopowner,youprobablycan’taffordtoloanthemyourownmoneytobuytheirbike.Again,banksandfinancecompaniesarehappytostepinwithaninstallmentinstallmentloanloanorspecialtycreditcardthatallowsaconsumertomakesmallpaymentsovertimeforlargepurchases.Thisallowstheconsumer,atleastforawhile,tolivebeyond their means.Thissortofproductfinancingisthegreaseoftheconsumereconomy,anditkeepssalesgoing.Whenthereisplentyofmoneytoloanatlowinterestrates,businessesrunverysmoothly.Whenloansarehardtoget,andratesarehigh,thesefirmscutbackonexpenseslikesalariesandpur-chases,andthatmeansjobsforworkersinretailandmanufacturing.Thisisamajorreasonwhytheinterestratesareofsuchconcerntoeconomistsandgovernmentpolicymakers.Canyouseewhymakingtoomuchmoneyavailableattoolowofaninterestrateallthetimemightbeaprob-lem? This will be discussed in more detail inChapter 17.Chapter 15Accounting461© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
capital investmentSignificant monies put intoto facilities, infrastructure,or machinery necessary forthe operation of thebusiness.depreciationA method for distributinglong-term costs of atangible asset over time,usually the length of itsuseful service.tangible assetA physical item owned bya firm, such as property,vehicles, or machinery.Amortization and DepreciationManysmallbusinessesrequirearelativelylargecapitalinvestmentinsomethinglikeamachinetomakedonutsoraspecialtruckfordeliveringpanesofglass.Somebusinessownersmayevenchoosetobuythebuildingthathousestheirstoreorfactory.Whilethesebusinessownersbelievethattheirinvestmentwillpaybackinyearstocome,theinitialoutlayfortheseitemsmaybesolarge that they distort the financial statements.Imaginethatyouownadonutstorethatseesaconsistent$500kayearinrevenuesandafterCOGSandnormalfixedexpenses,alwaysyieldsarespectablenetprofitof$50k.[3]Now,imaginewhathappensifonceeveryfifteenyearsyouneedtobuyanewdonutmakerfor$200k.Well,inthatyear,yournetprofitwillsinktoalossof$150k($50k–$200k)andthensuddenlypopbackupto$50k the next. A graph of your profits would look like the Net Profits Per Year illustration.FIGURE 15.1Net Profits Per YearUnder a cash accounting system, one large expense can distort the firm performance for that year.Source: Greg AutryDoesthataccuratelyreflecttheactualprofitabilityofyourshopovertime?No,it’saridiculousdistortion.Whatwouldyourbankerthinkifyouturnedinthosefinancialsinyear15?Atfirstglance,itlooksasifsomedisasteroccurred,eventhoughyourbusinesswasgoingsteady,justasineveryotheryear.Sinceyourdonutmachinewillprovidevaluetoyourbusinessoverfifteenyearsasitwearsdownslowly,itscostshouldbespreadacrossthattimeaswell.Toaccountforthat,theconceptofdepreciationcanbeused.Depreciationtrackshowmuchofanitem’svalueisusedupovertime,andappliestoatangibleasset,whichisaphysicalitemthatyourbusinessowns,suchasmachinery, real property, or furniture.462A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
intangible assetA nonphysical but valuablething owned by a firm suchas a patent, contract, orestablished relationshipswith customers orvendors.amortizationThe spreading ofexpenses, usually for anintangible asset, over time.accounts payableMonies you owe to yourvendors for products theyhave shipped to you butthat you have not yet paidfor.owner equityThe value of the firm,which is the value of itscapital from investorsalong with any retainedearnings. Same asstockholder equity.Yourbusinessmayalsopossessintangibleassets,whicharevaluablenonphysicalitems.Examplesofintangibleassetsincludethingslikepatents,aspecialprivilegetouseapopularteamlogo,orexclusiverightstosellaproductinsometerritory.Sinceintangibleassetsdon’twearout,theyarenotdepreciated.However,theymaybevaluableforaspecificamountoftime,likethefif-teen-yeartermofaU.S.designpatent,sotheircostmaybeaccountedforusingtheconceptofamortization.Anotheroptionforsmallbusinessestospreadthecostsofmajorpurchasesovertimeistorent,lease,orfinancebig-ticketitemslikestores,vehicles,andmachinery.Doingsonotonlymakesyourbookslookbetter,butitalsospreadsoutyourexpenditureofcashovertime.Afterall,howmanydonutstoreshave$200ksittingaroundinthebanktobuyanewdonutmachine?That’sprobablynot a good use of their capital. These options will be discussed in more detail in theChapter 16.Balance SheetsAccountspayable,accountsreceivable,andthosetangibleandintangibleassetsareitemsthatshowuponyourfirm’sbalancesheet.Abalancesheetshowsafirm’sassets(cashandvalueofwhatit owns), liabilities (what it owes), and the equity (what the firm is worth).A very simple balance sheet has the following components:Assets:Moneyinthebankandassetsthathavevalue,suchasequipment,inventory,andmoney owed to the company by others.Liabilities:Moneythefirmowestoothercompanies,includingbillsformaterialsorservicesand taxes that it has not yet paid.Networth:Assets–Liabilities.The(hopefullypositive)differencebetweenwhatthefirmhasandwhatitisrequiredtopay.Asthismoneyistherightfulpropertyofthefirm’sowners,itisoftenreferred to asowner equity.Chapter 15Accounting463© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
net worthAssets of a firm minus itsliabilities. Usually identicalto owner equity and bookvalue.retained earningsNet profits kept in the firmand reinvested to fundgrowth.book valueThe value of a companycalculated by subtractingthe liabilities from assets.Essentially identical toowner equityornet worth.Typically, the minimumvalue for which a firmmight be sold.liquidatedWhen a firm’s assets areall sold for cash and itsdebts all repaid, leavingthe net worth of the firm ascash. Typically, liquidationresults in the ceasing offirm operations.goodwillAn intangible asset thatusually arises inacquisitions. Typicalgoodwill items includevaluable customerrelations, brand names, orintellectual property.acquisitionThe purchasing of one firmby another.Actualbalancesheetsmayincludeanynumberofmorespecializeditemsthatthefirmwishestotrack.TheSampleSmallBusinessBalanceSheetillustrationincludescash(inthebank),accountsreceivable(moniesowedbycustomers),toolsandequipment,notespayable(aloanthecompanyowestoabank,firm,orindividual),andaccountspayable(moneythefirmowesitssuppliersorven-dors).Thenetworthorowner’sequityisrepresentedbyretainedearnings(profitssaved)andcapitalstock;itisalsoknownasthebookvalueofthefirm’sstock.Thisiswhatthefirmwouldbeworth if it wereliquidated, meaning everything was sold, and the bills were all paid.TABLE 15.2Sample Small Business Balance SheetAssets (Current)Assets (Current)Liabilities and Owners’ EquityLiabilities and Owners’ EquityCash$6,600LiabilitiesLiabilitiesAccounts Receivable6,200Notes Payable$5,000Assets (Non-Current)Assets (Non-Current)Accounts Payable25,000Tools and Equipment25,000Total Liabilities30,000Owners’ EquityOwners’ EquityCapital Stock$7,000Retained Earnings800Total Owners’ Equity7,800Total$37,800Total$37,800Balancesheetsmayalsoincludeaninterestingcatch-allcategorylabeledasgoodwill.Goodwillincludesmanyitemsthataredifficultto(precisely)value,suchasthevalueofyourcustomerandvendorrelationships,orhowgreatyouremployeesare.Goodwillisoftenthesubjectofnegotiationduringtheacquisitionofonefirmbyanotherfirm.Theselleroftenreapstherewardsofhavingbuilthissmallbusinessfromthevaluingofthisgoodwill,sincethetangibleassetsareallthingsheprobablypaidthemarketpriceforandisunlikelytomakeaprofitonsellingtoanothercompany.Thegoodwillistheuniquevaluehehasbuiltupovertimethatcannotbeacquiredelsewhere.Thiswill be discussed in more detail inChapter 18.Cash Flow StatementsIfrevenueisthesustenanceofyourbusiness,cashflowisitsblood.Cashflowisthemovementofmoneyinandoutofabusinessfromrevenuesandexpenses.Themostimportantthingaboutcashflowisthatitisuneven.Ifyourbusinessisn’tapurecash-basedretailestablishment,therewillbetimeswhenyourbusinesshasplentyandoccasionswhenmoneyistight.Thisiscausedbythefactthatthetimingofyourcustomers’paymentswillnotbeperfectlytimedwithwhensuppliesmustbepaidfor.Fornearlyeverysmallbusiness,therewillbetimesyouwillowemoremoneythanyouhaveonhand—evenifyourcustomersoweyouevenmorethanthat.Cashflowstatementshelpyou monitor that problem.LookatTable15.3.Thefirmdepictedherestartedtheyearwith$1,000andtookinanetpositiveof$10,500,endingtheyearwith$11,500.Thisisaveryhealthycashflow,resultinginasignificantincrease in cash on hand.464A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
TABLE 15.3Simple Cash Flow StatementCash Flows From (Used In) Operating ActivitiesCash Flows From (Used In) Operating ActivitiesCash receipts from customers$9,500Cash paid to suppliers and employees(2,000)Cash generated from operations(sum)(sum)7,500Interest paid(2,000)Income taxes paid(3,000)Net cash flows from operating activities$2,500Cash Flows from (Used In) Investing ActivitiesCash Flows from (Used In) Investing ActivitiesProceeds from the sale of equipment7,500Dividends received3,000Net cash flows from investing activities10,500Cash Flows from (Used In) Financing ActivitiesCash Flows from (Used In) Financing ActivitiesDividends paid(2,500)Net cash flows used in financing activities(2,500)Net increase in cash and cash equivalents10,500Cash and cash equivalents beginning of year1,000Cash and cash equivalents, end of year$11,500Thingsarenotalwayssopositive.Table15.4showsafirm’sprogressthroughthreeyears(fromrighttoleft)withavariance.It’spossiblethatafirmcouldhaveanegativecashflowandseeadecrease in cash on hand in a year. How might a firm handle that situation?Chapter 15Accounting465© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
TABLE 15.4Multiyear Cash Flow StatementXYZ Co. Ltd. Cash Flow Statement(All numbers in millions of Rs.)Period ending31 Mar 201031 Mar 200931 Mar 2008Net incomeNet income$21,538$24,589$17,046Operating activities, cashOperating activities, cashflows provided by or usedflows provided by or usedin:in:Depreciation andamortization2,7902,5922,747Adjustments to net income4,6176212,910Decrease (increase) inaccounts receivable12,50317,236—Increase (decrease) inliabilities (A/P, taxespayable)131,62219,82237,856Decrease (increase) ininventories———Increase (decrease) in otheroperating activities(173,057)(33,061)(62,963)Net cash flow fromNet cash flow fromoperating activitiesoperating activities1331,799(2,404)Investing activities, cashInvesting activities, cashflows provided by or usedflows provided by or usedin:in:Capital expenditures(4,035)(3,724)(3,011)Investments(201,777)(71,710)(75,649)Other cash flows frominvesting activities1,60617,009(571)Net cash flows fromNet cash flows frominvesting activitiesinvesting activities(204,206)(58,425)(79,231)Financing activities, cashFinancing activities, cashflows provided by or usedflows provided by or usedin:in:Dividends paid(9,826)(9,188)(8,375)Sale (repurchase) of stock(5,327)(12,090)133Increase (decrease) in debt101,12226,65121,204Other cash flows fromfinancing activities120,46127,91070,349Net cash flows fromNet cash flows fromfinancing activitiesfinancing activities206,43033,28383,311Effect of exchange ratechanges645(1,840)731Net increase (decrease) incash and cash equivalents2,8824,8172,407466A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
aging reportA report that shows thetime, in days, for paymentsdue from your customersor owed to you vendors.Aging ReportsAnothersetofreportsyoushouldbelookingatregularlyareyouragingreports.Youraccountingsystemwillbeablegeneratethese.Theaccountsreceivableagingwillshowyouhowlateintimeyouraccrual-basedpaymentsfromcustomersare.Afullagingreportshowseachinvoicegroupedbycustomerintheverticalaxisanditsamountbythenumberofdaysout(howlongtheinvoicehasbeendue)inthehorizontal.Figure15.2showssuchareportforacompanywithjusttwoclients.FIGURE 15.2Sample Accounts Receivable Aging ReportAsimplersummaryreportcanshowjustthecustomertotals(noteachinvoice)orsimplythebottomlineofallyourbillingsgroupedbydaysout.Youshouldlookattheagingreportwiththesamecriticaleyeaninvestororbankermight,andanythingoutmorethansixtydaysisgoingtolookseriouslydodgy—meaningthatifyourcustomerhasn’tpaidyouyet,aretheyreallyevergoingto?Chapter 15Accounting467© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
FIGURE 15.3Sample Accounts Payable Aging ReportLookatFigure15.3.Thisisbasicallythesameideaastheaccountsreceivableagingandshowsyouhowyouareperforminginpayingyourvendors.Aninvestororbankerwillwanttoknowhowmuchofyourcashflowcomesfromdelayingpayments.Thefirminthisillustrationisresponsiblypaying all its bills within thirty days.International Accounting StandardsInEuropeandmuchoftheworld,accountingprinciplesaredictatedbytheInternationalFinancialReportingStandards(IFRS),originallycreatedbytheEuropeanUnion(EU)andnowoverseenbytheInternationalAccountingStandardsBoard(IASB).IntheU.S.,thesimilar,butstillsignificantlydifferent,standardsoftheGenerallyAcceptedAccountingPrinciples(GAAP),establishedbytheSecurities and Exchange Commission (SEC), are dominant.Everyactioninbusinesshassometaxconsequence,andunderstandingthetaxenvironmentinwhichyouandyourfirmdobusinessiscriticalindefiningyourbusinessstrategyandtactics.Youmayfindthatthechoicebetweeninvestingyourtimeandresourcesinpursuingonelineofbusinessoranothercomesdowntothetaxtreatmentofthatbusiness.Forinstance,theStateof468A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
bookkeeperAn individual whomanages the posting ofrevenues and expenses toa firm’s books, preparesreports, and may assist anaccountant or tax preparerin readying a firm’s booksfor tax filings.Californialeviesarelativelyhighsalestaxongoodssoldatretailbutdoesnottaxlaborservices.ManysmallCaliforniabusinessesfindwaystopurchaseexpensiveproductsfromoutofstatesup-plierstoavoidthe7.5percenttax.Additionally,youmayfindthatbeingresponsibleforcollectingandhandlingthatmoneyforthebenefitofthestateisanunrewardedburden.Forthisreason,ifyou’reacomputerprofessionalinCaliforniawithanentrepreneurialbent,itmaymakemoresenseto leap into computer services as opposed to selling computer hardware.Theprocessofdeclaringtaxesduetothegovernmentmayalsorequireorcallforparticularaccountingapproaches.OftentheaccountingdocumentsthatyouandyourCPAproducefortaxes,whiletheymustbe“true”intheirownright,maylookverydifferentfromtheaccountingreportsyouusetoactuallymanageyourbusiness.Forexample,asmallbusinessmayfindthatwhileaccrualaccountingispreferableforactuallymanagingtheiroperations,usingcashaccountingforfiling their income taxes is a better choice. Can you think of why this would be?Ifabusinessshowsalossattheendoftheyear,itwill,inmostcases,owenoincometaxorevenbeabletopassalossontothebusinessowner’spersonalreturns.Timingthisproperlycanbeverybeneficialfortheownersofthebusiness.Consequently,choosingthecashaccountingmethodcanbehelpful.ConsiderthatifyourcustomersoweyoualotofmoneyattheendoftheyearandyoupayallofyourbillsbeforeJanuary1,youcanendupwithverylittlecashonhandandlikelyshowalossonacashbasis,inwhichcase,youlikelywillnotoweanytaxes.Onanaccrualbasis,yourfirmmaylookveryhealthynow,withnoliabilities(youpaidthosebills)andalotofaccountsreceivable(thosecustomerchecksyouarewaitingfor).Infact,youmayevenwanttopayyourrentamonthortwoinadvanceandjustnotgotothemailboxafterChristmas(wherecustomerchecksmight be sitting).Governmentsmayalsorequiresmallbusinessestofollowsomeveryarcaneaccountingrules.Acommonexampleofthisistaxdepreciationschedulesthatmandatethatspecifictypesofequip-mentbeaccountedforoveracertainnumberofyears,regardlessofhowlongitactuallylastsforyourparticularbusiness.Forexample,theIRSmightrequirethatyoudepreciateyourlaptopcom-putersoverafive-yearperiod,evenifyouactuallymustreplacethemeveryotheryearinordertoremainuptodate.Theactualrulesfordepreciationarebasedontableswithdifferentlinearandnonlinearschedules.Worse,theyaresubjecttochangefromyear-to-yeartosuitthedesireofpoliticianstopromotethepurchasesofsometypesofequipment.Therefore,youshouldconsultanaccounting professional before making significant purchases of capital equipment or property.Tax strategy for small businesses will be discussed inChapter 16andChapter 17.Finding and Selecting AccountingProfessionalsThefirstlevelofaccountingserviceprovidersisbookkeepers.Bookkeepersareusefulfordoingtheregularjobofmakingsureyourrevenuesandexpensesareproperlyenteredintoyouraccountingsystem.Bookkeepersalsodothelegworkofgeneratingaccountingreportsandpreparingthefirm’sbooks for tax preparation by an accountant.Chapter 15Accounting469© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
accountantA person who performsaccounting functions orprovides accountingservices to businesses andindividuals. In most cases,this title implies no specificqualifications, education,or certification.trained accountantAn accounting professionalwith some schooling,usually a four-year degreeand work experience.certified publicaccountantA certification ofaccounting competence inthe United States thatrequires education,experience, and thepassing of a rigorousexam.qualified accountantA member of any one ofsix accountancy bodiesformed by royal charter inthe United Kingdom.chartered accountantAn accounting professionalwho has passed a seriesof examinations and isregistered with the Instituteof Charted Accountants ofEngland, Scotland, Ireland,or another Commonwealthnation. Equivalent to theU.S. CPA designation.Inmanycases,ifsomeonesaystheyareanaccountant,thetitlemaysayverylittleabouttheiractualtraining,credibility,capabilities,orcertification.Outsideofspecificareasofpractice,suchastaxpreparationandauditing,anyonecanclaimtobean“accountant.”Typically,atrainedaccountanthasatwo-orfour-yearcollegedegreeandsomepracticalworkexperiencemanagingafirm’sbooksbutholdsnospecificeducationalqualificationsorcertification.Thisisn’ttosaysuchanindividualmightnotbeverygoodatwhattheydo.Trainedaccountscanbeveryhelpfulinthepreparationofinternalfinancialstatements,simpletaxreturns,andreports.Afterpassingatest,atrainedaccountantcanbeauthorizedtopracticebeforetheU.S.InternalRevenueService(IRS)asenrolled agents.IntheU.S.,acertifiedpublicaccountantorCPAisapersonwhohaspassedanextremelyrig-orousexam,spentatleasttwoyearsworkingforanotherCPA,andinmostcases,alsohasanadvancedcollegedegreeinaccountingorfinance.CPAsaddtherequiredcredibilitytofinancialstatementsforoutsideuserssuchasbanks,flooringcompanies,andotherlenders.Theyalsopre-parecomplicatedincometaxreturnsandcalculatebusinessvaluationsforavarietyofpurposesincluding the sales of businesses. CPAs are also valuable as expert witnesses in court cases.IntheUnitedKingdom,aqualifiedaccountantisamemberofanyoneofsixaccountancybodiesformedbyroyalcharter.TheUKcharteredaccountanttitleisbasicallyequivalenttothatofCPAintheU.S.CharteredaccountantsmustpassaseriesofexaminationsandberegisteredwiththeInstituteofChartedAccountantsofEngland,Scotland,Ireland,oranotherCommonwealthnation.Youcanfindaccountingprofessionalsthroughmanydifferentavenues.Byfar,thebestwayisbypersonalrecommendationfromacolleaguewhorunsabusinesssimilartoyours.Don’tbeafraidtoasktheownersofothersmallbusinessesinyourcommunityforarecommendation.Othergoodreferralsourcesareyourcommercialbanker,yourattorney,andyourinsurancebroker.Youcanalsosearchthewebsiteoftheaccountingprofessionalsocietyinyourstate.Forinstance,theCaliforniaSociety of CPAs maintains an extensive list of its members and their areas of specialization.Accountantsoftenoperatetogetherinpartnershipslargeorsmall.Bookkeepersaretypicallyindependentoperators.Ofthetwo,itistypicallyhardertosecureagoodbookkeeperbecausethegoodonestendtoveryquicklyacquireamaximumloadofclients,whereasaccountingfirmshavethe ability to add capacity in the form of interns and new hires.Aswithanyprofessionalyouhire,thefinalresponsibilityforselectingaccountingserviceprovidersisthebusinessowners’.Thisisimportant.Researchtheirqualificationsandchecktheirreferencescarefully.Ifyoucan,checktheirpersonalcreditandcriminalrecords—youprobablydon’twantanaccountantwhohasgonebankruptorabookkeeperwhohasbeenjailedforfraud,unless that sort of expertise adds value to your particular business.Key Takeaways•You must regularly generate and review your financial statements.•If your money is in your customer’s hands and in your inventory, you can’t use it.•Your vendors or lenders may help fund your inventory so you can use your cash.•Use financial statements to determine if you are profitable.•Remember being profitable is not always the same as generating usable cash.•Hire the right professionals to manage your books, accounting, and taxes.470A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
15.3Accounting SystemsLearning Objectives1.Recognize the importance of choosing an appropriate accounting system.2.Understand the importance of finding a solution that will scale with your business.3.Understand that changing your accounting system is very difficult.4.Plan ahead for a change if your business is going to scale.5.Understand the advantages of cloud-based SAS solutions.6.Recognize the value of keeping your data in a professional data center.SoftwareAsdiscussedinChapter14,dashboardsareaperfectsourceoffeedbackformanagingexecutionandmakingtacticaladjustmentsintheshortrun.Theeffectivenessofyourlonger-termstrategiesismostvisibleintheaccountingdatacoveredinthischapterandthefinancialratiosinfollowingchapters.Quarterlyandannualreviewofthisdatawillletyouknowifyourstrategiesarepayingoff, literally.Whilenotallcompanieschosetoutilizedashboards,accountingisanabsolutenecessity.Infact,inmostanyjurisdictionaroundtheworld,itisalegalrequirementforcompaniestotracksalesandcostsandcalculatetheirprofitsfortaxpurposes.Choosinganaccountingsystemandmakingtherightchoiceupfrontiscritical.Foranythingbiggerthanalunchcart,apaper-basedaccount-ingsystemisoutofthequestion.Evenforthesmallestofbusinesses,thereareexpenseandsalestracking apps add real value.Yourbusinessmaynotalwaysbesmall,however.Aswithfacilities,yourchoiceinaccountingsystemsshouldbeforward-thinkingandsupportyourcompanytodayandintheforeseeablefuture.Theswitchingcostofchangingaccountingsystemscanbeveryhigh.Ittakesalotoftimetoretrainyourstaffandmoveallthedatafromonesystemtoanother.Sincethesoftwarevendorsdonotbenefitfromyourleavingtheirplatform,thetoolstoexportthatdataarerarelysimpletonavigateandfarfromuniversal.YoucanexpecttospendalotoftimedoingmanualentriesanytimeyouchangesystemsfromsomethingsimplelikeQuickBookstoamoresophisticatedenter-prise financial system from Oracle or SAP.Chapter 15Accounting471© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Today, nearly all business accounting and related functions are managed by software systems.Source: © Shutterstock, Inc.Ontheotherhand,installingafeature-richsystemdesignedforamuchbiggerorganizationcanburdenanimblestartupwithcomplexitiesthatwillslowitdown.Training,maintaining,andcomplyingwiththerequirementsofasystemlikeSAPcouldundermineyourprimarysourceofcompetitiveadvantage,speed.Thecostofsuchasystemmayalsobecompletelyoutofline.Intheend,planningforatleastonesoftwaretransitionduringscalingmaybeinevitable.Itshouldn’tsur-priseyouthattherearefirmsandconsultingexpertswhospecializeinhelpinggrowingfirmsdojust that.Online SolutionsAnotherimportantchoicetoconsiderislocalversuscloud-hostedsolutions.Traditionalaccountingsystemsresideonserverswithinyourorganization’snetwork.Cloud-hostedsystemskeepyourdatainremotedatacentersaccessibleovertheinternet.HavingeverythingonlineandaccessiblefromavarietyofdevicesisabasictooloftheNewEntrepreneurialDynamic.Mostmodernaccountingsystemsoffertheseoptions.QuickBooksonline,offeredbyIntuit,iscurrentlythemostpopularsolutionforsmallandmedium-sizedbusinessesandstartups,particularlyintheservicesectors.OtherchoicestoconsiderincludeXeroandSage50cloud.Forsingle-personfirms,ZohoBooks and Intuit’s QuickBooks Self-Employed are good choices.Whenthesoftwareapplicationitself,alongwiththedata,ishostedoffsiteandprovidedtoyouviaawebinterfaceorapp,itiscommonlyreferredtoasSoftwareasaServiceorSaaS.Suchsystemssolutions are commonly purchased as a subscription, which includes support services.WhilehavingeverythingatyourfingertipsanywhereyoutravelandbeingabletoshareyouraccountingdatawithyouroutsideCPAisgreat,securityisacriticalconsiderationaswell.Account-ingdataisatoptargetofcybercriminals.Yourcompetitors,aswellascybervandalsandextor-tionists,canbeaveryrealthreattoyouraccountingsystem.AccordingtoUKinsurerHiscox,cyber-attacks cost firms an average of $200,000 per incident and have put many out of business.[4]Atfirstglance,itmightappearthataninternallyhostedsystemwouldbemoresecure.Still,therealityisthatfewsmallfirmshavetheexpertiseortimetomaintainserversproperly,keepthebackups,andprovideworld-classdatasecurity.UpdatingapplicationsandkeepingthesecuritypatchesinplaceisjustextraworkthatcanbeavoidedinaSaaSsolution.Professionalclouddatacenterproviders,likeAmazonWebServices,dothatforyou.Beingsecureandreliableistheircom-petitive advantage.Ifyouchosetorunyourownaccountingsystem,youwouldstilldowelltohostitonavirtu-alizedserverinthecloud,hostedbyaprofessionalorganization.Unlessyoukeepyouraccountingserveronacompletelyseparatenetwork,inaccessiblefromtheinternet,you’relikelyatriskto472A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
externalhackers.Inanycase,thosewithaccesstoyourfacilities(includingcustodialstaffandvisit-ingcontractors)arealsopotentialsecuritythreats.OnlineaccountingproviderslikeSageandIntuitarealsosecuritypros,andyouareprobablybetteroffifyoucanleavetheaccountingITissuestothem and focus on your firm’s core competencies.Inmakingthesechoices,youshouldconsultyourpeers,otherbusinessownerswithsimilarneedstoyourself.Theycanverylikelyhelpyouavoidmistakesinthefirstplace,helpyouwhenyou make them, and point you to qualified accounting system consultants.Gamify Your Biz!Accounting Need Not Be DullThetraditionalwayoflookingataccountingistoapproachitasataskrequiredforoperational,legal,ortaxpurposes.Whenyouarerequiredtodosomethingandtodoitinwaysthatareverypreciselydefinedbyothers,itcanbelessthanexciting.Thisisparticularlytrueforthemostcre-ative sorts of entrepreneurs, who are by their nature disruptive rule breakers.Thetricktomakingaccountinglessofachoreistorealizethataccountingisthescorekeepingsysteminthegameofbusiness.Whenyouworkinyouraccountingsystemyouareactuallyrackingupthepointsyou’veaccumulatedfromyourcompetitiveworkinthemarket.Visualizereviewingyourmonthlyfinancialstatementsasifyou’vereachedtheendofagamesectionandare“levelingup.”Picturetherewardpartofthegamewhereyourcharacterpauseswhilecoinsflash,musicplays,andyourbonuspointsaretalliedup.Withthisperspective,makingthosenum-bersbettereachmonthcanbecomeavirtuousobsession,drivingyoutoworkharderandtoevenlook forward to reviewing your financial statements.Key Takeaways•Carefully consider your accounting system choices from the start.•Plan for scaling but don’t burden your business with undue complexity.•When in doubt, keep your applications and data in the cloud.•Consider asking your peers for advice on accounting solutions.15.4Case Study: When Things GoBad, Very Bad: An AccountingNightmareItwasearlyMondaymorning,andthewomaninthesharpsuitwiththebriefcasestandingatthebackdoordidnotlookatallhappy.Whenshethrusthercredentialsathim,JoeSingleton[5]wasn’thappyeither.HereadthelaminatedIDthatproclaimedtheladywas“Ms.Baker,RevenueAgent.”Ms.BakerwasfromtheInternalRevenueService,theIRS.Joewasn’texpectingthis.Whyhadarev-enueagent,anaccountantfortheU.S.federaltaxagency,comepoundingonthebackdoorofJoe’ssmallofficeequipmentbusiness?Whateverthiswasabout,itwasunlikelytobegood.IRSagentsdid not hand-deliver refund checks; he was pretty sure about that.Theformalitieswerequicklyover,andJoequicklycametotherealitythathiscompanywasinthemiddleofanunderpaymentoftaxesinvestigationthatheknewnothingaboutandthatthiswomanhadanappointmentwithhisofficemanagertocollectpaymentanddeterminepenalties.That office manager, Sophia, was not in yet.Chapter 15Accounting473© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Somehow,Joewasnotsurprised.Sophiahadbeenactingratheroddlyasoflate,andbeinghon-estwithhimself,he’dnotbeenpayingmuchattentiontotheaccounting.Joehadbeenfocusedonsalesopportunitieswithseveralbigaccountsintown,andSophiahadbeenreallyrunningtheplaceformonths.He’dalwaysdependedonSophia.She’dbeenafriendofthefamilyforyearsbeforeshecameontohelpatthefirm.Sophia’shusband,Tony,waswelloffenoughthattheyreallydidn’tneedthemoney,butshewassmartandenjoyedtheworkandbeingpartofateam.Thingshadgonereallywellforseveralyears.Butlately,Sophiahadbeenunderalotofstressoutsideofwork.Sheseemed distant, and maybe she was hiding something.Joeknewwhatthat“something”wasnow.TheIRShadbeencommunicatingwithSophia,oratleasttryingto,formonths.Shehad,forwhateverreason,notsharedthisinformationwithJoe.Itappearedthefirmowedtensofthousandsofdollarsinwagewithholdings,moneythatSophiahaddeductedfromtheemployees’checksfortheirtaxesbutnotforwardedtotheIRSasrequired.Instead,ithadbeenspent.Thiswasnotonlyafinancialnightmare,itwasapotentiallycriminalact.Anemployerhasafiduciarycommitmenttohandleemployeetaxmoneyproperly.Intentionalfailuretodosoisafelony.Joehadasuddenvisionoftheinsideofthenearbyprison,whichhisfirmprovided services to. It was a very unpleasant visualization.HesetMs.Bakerdownintheconferenceroomandwenttofindhiswaywardofficemanager.Sophiahadnotcomeinatherusualtimethatmorning.Thatwasn’ttooabnormal;nobodypunchedaclockhere,butitwasnowmorethananhourintotheday,andSophiawasapparentlytotallyAWOL.Callstoherhomeandmobilephonewentunanswered.“Howconvenient,”Joethought.Withabsolutelynodataonhandoranyideaofwhattheirexcusemightbe,JoeturnedtotheIRSagent,apologizedprofusely,andthrewhimselfuponthemercyofthefederalgovernment.Hewasreally, really wishing he’d paid a lot more attention to the books.ItappearedtobeJoe’sluckyday;perhapsMs.BakerwaslessofficiousthanherpeersortheIRS’sreputationforbeinghardnosedaboutsuchthingswasoverblown.Inanycase,whilethemat-terwasveryserious,itdidn’tlooklikeJoewasgoingtobeworkingoutintheprisonyardanytimesoon.Ms.Bakershowedhimthepaymentrecords,andhequicklyunderstoodwhatwasgoingon.Thetimingwastheproblem.Itwascleartohimnow.Hecouldseehowhisfocusonsalestobig,slow-payingcustomerslikethecitygovernmenthadsuckedcashoutofhisfirmjustashewashir-ingnewtechnicianstocovertheexpandedbusiness.Sophiamusthaverunoutofmoneytopaythegovernmentand,forwhateverreason,haddecidednottotellhim.HeassuredMs.Bakerhe’dgettothebottomofthispromptlyandgetthemoniesrepaid.Shesaidshe’dseenthisbeforeandwouldgivehimtwoweekstoreportbackwithastatusandplanforrepayment.Joewasthankfultoseeher leave on cordial terms and eager to find out what the hell was going on.Sophianeverreturned,apparentlysufferingfromamentalhealthcrisis.Joewasforcedtogethiswifetotaketimeoffherworktocomeinandhelp.Asthecoupledugintotheaccounting,itturnedouttobeabitofamess,withpaperworkscattered,andsomeofitevenintentionallyhiddeninabathroomcabinet.Slowlyapatternofdeceptionemerged.Whentheircreditlineatthebankhadbeenmaxedout,Sophiahadbeguntotrycreativethingslikesellinginventoryfromtheshopbacktothefirmonitsonecreditcard,generatingcashtodaythatwouldn’tbedueforthirtydays.Whenthatwasn’tenough,shehadbeguntodivertthefundsthatshouldhavegonetothegovern-menttocoverthecriticalbillslikerentandelectricity.Occasionally,Sophiahadbeenabletocatchbackuponthepayments,buteachtimetheamountsgotlarger,andthesituationonlygotworse.Eventually,theywerehopelesslybehind.Joeknewthathewasbusyandcouldreactemotionallytonegativenews,buthecouldstillnotfathomwhySophiahadnevertoldhim.Itwasasthoughshe’dtakenonestepdownthewrongpathandfoundshecouldneverownuptothesituation.Thebot-tomlinewasthattheyweregoingtohavetofindmoneyandseriouslyreduceexpensesforsometime to pay all of this off.Attheendoftheweek,Joecalledageneralmeetingwithhisdozenemployeesandtoldthemthebadnewsthatthefirmhad“madeanerrorinjudgment”andowedthegovernmentagreatdealofmoney.Hewasdreadfullysorry,buteveryonewasgoingtobeimpactedbythissituation.Hewouldbeginbycuttinghisownsalaryinhalfandwasaskingthemalltotakeatemporary10per-centcut,whichhepromisedhe’dmakeup.Theonlyotheroptionwastoshutthefirmdownand474A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
liquidateitsassets,andthatwouldn’tbegoodforanyone.Asitwas,theyweregoingtohavetosellsomeequipment,delayupgrades,andmakedowithlessforayearormore.Theemployees,whileless than happy themselves, agreed to the plan and committed to getting this done.ThefollowingMonday,JoecalledMs.Bakerandmadeanappointmenttopresenthisfindingsandplan.Theagentwasabletocomeoutthesamedayandwaspleasedwiththefirm’squickresponsetothesituation.SheapprovedtherepaymentscheduleJoeproposedandwasevenwillingtoreducesomeofthepenaltiestohelpJoepayoffthedebtmorequickly.Joetookthegoodnewsto the employees, and they set to the task at hand.Joesettoworkbynegotiatingadeepercreditlinewiththebank,convincinghisbigcustomerstopaymorequicklyinexchangeforasmalldiscount,reducingexpensesacrosstheshop,andmov-ingsomeofhisvendorpaymentsouttolongerterm.Withineightmonths,theIRSwaspaidoff,andemployeesalarieswerereturnedtonormallevels.Joe’sownsalarystayedathalfformorethanayear,andthatwasnoteasy,butitwasalessonlearned,andhewasthankfulhestillhadabusiness.Chapter 15Accounting475© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Endnotes1.Peteraf,M.A.(1993).Thecornerstonesofcompetitiveadvantage:Aresource‐based view.Strategic Management Journal, 14(3), 179–191.2.Casciaro,T.,&Piskorski,M.J.(2005).Powerimbalance,mutualdepen-dence,andconstraintabsorption:Acloserlookatresourcedependencetheory.Administrative Science Quarterly, 50(2), 167–199.3.Notethat“k,”asin“kilo,”hasbeenusedtorepresentathousanddollars,so$500kis$500,000.Thisisacommonverbalshortcutusedinsmallbusiness financial discussions.4.https://www.hiscox.com/documents/2019-Hiscox-Cyber-Readiness-Report.pdf5.Duetothesensitivenatureofthiscase,thenamesandidentifyingcharac-teristics of the business and individuals have been changed.476A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
bankruptcyThe condition of a firm orindividual being unable tomeet their debtobligations. Bankruptcyofficially occurs when acreditor, such as alandlord, vendors, oremployees, sues forpayment, or the firmproactively seeksprotection from a court.Bankruptcy may beresolved in several ways.solventThe state of being able tomeet all currentobligations; not bankrupt.CHAPTER 16Managing Cash Flow andFinanceSometimes I think it’s a sinWhen I feel like I’m winnin’ when I’m losin’ again.—Gordon Lightfoot, “Sundown”Running out of money is the event that declares a company dead.Source: © Shutterstock, Inc.Cashflowisthebloodflowofafirm.Justasdeathmaybeofficiallydeclaredwhenaperson’sheartstopsbeating,businessesare“pronounceddead”whentheyrunoutofmoney.Afirmwithoutmoneyonhandisunabletopaythebillsthatkeepthedoorsopen,thewebsiteup,andtheemploy-eesworking.Wecallthisconditionbankruptcy.JustasapersonsufferingheartfailuremayberevivedwithCPRoradefibrillator,somefirmsdosurvivebankruptcyandlivetodobusinessagain.Afirmthatisnotbankrupt,onethatisabletopayitsbills,iscalledsolvent.Thischapterisaboutthe financial management tools that can help your firm remain solvent.© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
cash flow crisisA situation in which abusiness, otherwiseprofitable, is temporarilyunable to meet itsobligation because of thetiming of cash flows in andout of the firm.16.1Cash FlowLearning Objectives1.Recognize that lack of cash is what kills firms.2.Understand how to recognize a cash flow crisis.3.Be aware of options to avert a cash flow crisis.4.Learn critical financial ratios.5.Understand what bankruptcy is and how to use it if necessary.6.Appreciate a variety of tools that can improve cash flow.Analyzing DataBasicaccountingskillsarecriticalforsmallbusinessowners.However,simplycountingyourmoneyisuseless.Youmustanalyzeyourfinancialdatainthecontextofyourbusinessstrategyandbe prepared to make timely adjustments to your business model.Isyourbusinessmovingintherightdirection?Aresalesupordown?Arecustomersrespond-ingtoyourmarketing?Arevendorsdeliveringproductsontimeandatthecostsyouanticipated?Arethereparticularareasthatareunderperforming?Inthepast,businessmanagerswouldlookataccountingstatementsandreportsgeneratedeachquarteroryeartodeterminehowtheirbusinesswasdoing.Inthetwenty-firstcentury,thingsmovefartooquicklyforthat.Repeatingamistakeforthree or twelve months might kill your small business!The Overriding Importance of Cash FlowThemostobviouscauseoffinancialdistressinbusinessislackofrevenue—thefailuretofindsuf-ficientcustomersandsellthemtheproductorservice.Anothercauseisalackofnetincome—theinabilitytodemandamarketpricesufficientlyhighenoughortoholdthecostofgoodssoldandfixed costs low enough to make a profit on sales.However,somethingthatroutinelyshutsdownevenprofitablesmallfirmsisacashflowcrisis—thetragicmistimingofaccountsreceivableandaccountspayable.Thiscomestoaheadwhen some perfect storm of bills hits just when sales or collections are also slow.478A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
anchor customerThe customer orcustomers who providethe bulk of a firm’srevenue. Anchorcustomers are adependable source ofincome that makes thevariations of smaller clientsless significant.Natural disasters can completely upend yourbusiness model.Source: © Shutterstock, Inc.emergency cashreserveMoney a firm keeps savedand allocated for a “rainyday” crisis.line of creditAn arrangement betweena bank and a business topreapprove borrowing upto a certain limit. Similar toarevolving creditagreement.ImagineyourspouseandyouhavelongdreamedoflivingonalovelyislandintheCaribbean.Youcarefullyplanandinvestinalifestylebusiness,rentingbeachgearataresortnotfarfromtheport.Inthefallandwintermonths,sun-seekingcruiseshippassengersfromCanadaandtheMid-weststatesarrivebythethousandsweekly.Theseareyourmostanchorcustomers.Infact,groupsbroughttoyoufromtheexcursionservicesofthecruiselinesaccountformorethanhalfofyourincome.Inordertoprotectitselffromlawsuitsassociatedwithpotentialpassengerinjuriesonthebeach,thecruiselinesrequireyourfirmtomaintainliabilityinsurancefor$1millionandtoalsolisttheirfirmsas“additionallyinsured”onyourpolicy.Suchrequirementsareanincreasinglycommonpartofbusinessserviceagreements.Usually,thesmallerfirmisburdenedwithprovidinginsurancetoprotectthelargerpartnerastheyarethebiggertargetforanypotentiallawsuit.Theannualpre-miumfortherenewalofyourinsurancepolicyisdueeachOctober1,thedateyouoriginallyopenedyour operations and activated the original policy.Yourrentalbusinesshasdonewelleachyear,butrevenuesareseasonal.Everyyearthehotsummermonthsareslow,andcomefall,it’shardtomakeendsmeet.Yournormalpayroll,rent,andutilitiesarealsodueatthestartofeachmonth.However,you’vealwaysmanagedtofindthemoneyonOctober1,andthingslookfinebyNovemberwhenthesnowbirdsbegintoflocksouthforthewinter.Thisyear,twounseasonablylateback-to-backhurricanesthreatenedyourisland.Disasterwasaverted,butthebigcruiseshipsallcanceledtheirportstopsfortwoweeksinlateSeptember.Yourrevenuescompletelyevaporated,butyourbillsdidnot!Forcedtochoosebetweennotpayingyouremployees,thelandlord,theutilities,ortheinsurancecompany,youhadtooptfordelayingtheinsurancepaymentuntilyougotcaughtup.Theinsurerisrequiredtonotifythe“addition-allyinsured”cruiselinesthatyourpolicyhaslapsed.Eventhoughyoumanagetoscrapetogetherthecashandreinstatethepolicywithinweeks,yourliability-con-sciouscustomersinstantlymovedtooneofyourolderandseeminglymorestablecompetitors.Theremainderoftheyear’sholidayrevenuesaredismalwith-outthecruisecustomers,andbyJanuary,youareunabletopaytherentoryouremployees.You’reforcedtoclosethedoorsandheadbacktoyourmiserabledeskjobinthebigcity.YourCaribbeandreamshavebeencrushedbywhatyou’llcall“bad luck,” but it was actually bad financial management.Thepreviousscenario,oronemuchlikeit,issadlyfamiliartobankruptcylawyersandcourtstheworldover.Managingcashflowwellisanartandasciencethateverysmallbusinessownermustmastertoavoidthisfate!Thereareseveralthingsyou,ourhypotheticalbeachrentaloperator,might have done to save this blissful business.Thefirsttaskwouldbetomakesurethatnomajorbillsaredueduringyourmostvulnerableperiod,theendoftheslowsummerseason.TheinsurancepremiumwasdueannuallyonOctober1becausethatwasthedatethebusinessoriginallybeganoperations.Youhadactuallystrategicallypositionedyourselfforaholidayseasonlaunchsothatyournewbusinesswouldstartoutinthehealthiestpossiblerevenueenvironment.However,clearlyunderstandingthecyclicalnatureofyoureconomicenvironment,youshouldhavelookedaheadandseenthattheannualinsurancerenewalwouldcomeoneyearlater,attheendofthesummerdryspell!Andexperiencingthatverytightsqueezeseveralyearsinarowshouldhavealsoalertedyoutohowdangerousthistimingwas.Prepayingsomeoftheinsurancepremiuminthespringoraskingyourinsuranceagenttochangethebillingcyclewouldhavepreventedthisproblemandsavedyourdream!Anothergoodoptionistohaveeitheranemergencycashreservethatissacrosanctoutsideofacrisisortohaveestab-lished aline of creditwith your banker in advance.Chapter 16Managing Cash Flow and Finance479© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
top lineThe revenues or grosssales of a firm.free cash flowA measure of a firm’sfinancial performance. It iscalculated as operatingcash flow—capitalexpenditures.financial ratioThe relative magnitude oftwo or more selectedvalues from an accountingstatement that illuminatethe overall or specificfinancial condition of afirm.Financial Analysis and RatiosNotsurprisingly,certainvaluablemetricsarecommontomany,ifnotall,businesses.Overtheyears,accountantsandinvestmentprofessionalshavedevelopedahelpfularrayofaccounting-basedmetricscalledfinancialratios.Youmayfindthesearepowerfuladditionstobuildinganactionable dashboard of the sort described in previous chapters.Whenyoulookatyourfinancialstatements,howdoyouknowifyou’redoingwell?Isyourtopline(salesrevenues)lookinggood?Let’ssayyou’reselling$1millionayearinproduct.Isthatgood?Well,foradonutshop,amilliondollarsayearinsalesisexcellent.Foracardealership,notsomuch.Just as in our engine temperature example, context is everything.Now,ifyourdonutshopsells$1millionindonutsinayear,thatisfantastic!However,it’snotgoodifyouachievedthatfeatbysellingdonutscheapwhileloadingthemupwithexpensive,high-qualityingredientsandadvertisingheavily.Inthatcase,thecostofmakingdonutsandsellingthemcouldexceedyourrevenues.Ifyou’respending$1.2millionayeartosell$1millionindonuts,yourgrossprofitsareactuallygrosslosses!Evenifyourprofitmarginsaregreat,whatifyourfreecashflowisnegativebecauseyouaresellingalotofdonutswholesaletoagrocerystorechainonnetterms,andtheydonotpayquickly?Thatmightbefineifyou’vegotenoughmoneyinthebanktosurviveuntilyouraccountsreceivablescomein.Ifyoudon’thavethemoneyinthebanktopaythe rent, all that wholesale business could be a bad thing.Let’sgetmorespecific.Imaginethatonatypicalday,yourgrossprofitsare$1,500.Isthatenoughprofit?Withoutcontext,$1,500adaydoesn’tmeananything.Ifyourtotalfixedcosts(rent,salaries,utilities,insurance)arerunning$600aday,thenthat’sprettygoodbecauseyou’vegot$900($1,500–$600)innetprofitseachdaytotakehomeorreinvestinyourbusiness.Iffixedcostsare$2,000aday,thenit’snotgonnafly.You’regoingtohavetoputin$500($1,500–$2,000)eachdayincash to keep this business running.Whatifyouconsideredyourgrossprofitsrelativetoyourfixedcosts?Thatcouldbereallyuse-fulinformation!Forexample,$1,500ingrossprofitsdividedby$600infixedcostsequals2.5.Thatmeansyourdailygrossprofitsare250percentofyourdailyfixedcosts.Aslongasyourgrossprof-its/fixedcostsresultisgreaterthan1(or100percent),you’remakingmoney.Ontheotherhand,$1,500adaydividedby$2,000infixedcostsequalsjust0.75(75percent),andthatmeansyou’vegotaproblem.Thisisaverysimplefinancialratio.Suchratiosarevaluableadditionstoyourdash-board.Afinancialratioisasimplecalculationthatcontraststherelativemagnitudeoftwoimportantdatapoints.Ratiosareamongthemostimportanttoolsinyourentrepreneurialtoolbox.Aquicklookattherightratioscanrevealagreatdealaboutafirm’ssituation.Ratioshelptoidentifydangerpoints as well as opportunities.Lookingatyourprofitsatanyonemomentintimeisprettystraightforward,butwhataboutyourgrowthrate?Isyourbusinessmovingintherightdirectionovertime?Aresalesup?Areprof-itsupyearoveryear?Financialratioscanalsobeusedtoanalyzetheperformanceofyourbusinessovertime.Withthedozensofdatapointsonyourfinancialstatements,therearealotofpossibleratios, but not all combinations are useful.Let’sreviewasamplingofcommonfinancialratiosfavoredbysmallbusinessmanagers,accountants,bankers,andstockanalysts.Theratiosindicatedwithstars(*)aretheonesmostoftenrecommended for small business managers.Currentratio:Ameasureofliquidityoryourfirm’sabilitytopayitsdebts.It’scalculatedascur-rentassets/currentliabilities.Afirmwhoseassets(thevalueofitscash,thingsitowns,andwhatothersoweit)exceeditsliabilities(howmuchitowes)hasacurrentratioofgreaterthan1.0.Afirmwitharatiooflessthan1.0maybeintrouble,andifitwereforcedtopaywhatitowestoday,itwouldgobankrupt.Ifyoufindyourcurrentratioisunder1.0,youhadbetterbecountingonade-quate future growth in profits coming along to pay your obligations that are all due.480A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Quickratio:Ameasureofafirm’sabilitytomeetitsimmediateobligations.Itiscalculatedas(currentassets–inventories)/currentliabilities.Thatmeanscashonhand,cashinthebank,andtheaccountsreceivabledividedbythebillsthatareduenow.Afirmwitharatiooflessthan1iscur-rentlyunabletomeetitsobligations.Whilemanypaymentscanbedelayedpasttheirduedate,afirminthissituationmaybeinserioustrouble.Forthatreason,thequickratioissometimescalledthe “acid test” ratio.Cashratio:Similartoquickratiobutdoesnotincludetheaccountsreceivable.It’sjustthecashon hand over the bills that are due now. It is calculated as cash/current liabilities.Returnonassets(ROA):Ameasureofhowwellyouareusingyourassetstogenerateprofits.Itiscalculatedasnetincome/totalassets.Afirmthathasahighratioisgeneratingalotofincomewithrelativelyfewassets.Ifyouseethisratiodropping,itcouldbeanindicatorthatyoumaynothave purchased the right mix of assets for your operation.Returnonequity(ROE):Ameasureofhowefficientlyafirmisusingtheinvestmentofitsshareholders.Itiscalculatedasnetincome/shareholderequity.Again,we’dlikethistobeahigherratio,withmorenetincomerelativetoequity.Ifyouseethisratiodropping,itcouldbeanindicatorthat your investments are not delivering.Returnoninvestment(ROI):Ameasureoftheprofitableuseofinvestments.Itiscalculatedas(revenuefrominvestment–costofinvestment)/costofinvestment.Forafirmpastitsstartupstage(favoring growth over profits), a negative ROI value is a serious indicator of trouble.Returnoncapitalemployed(ROCE):Ameasureoftheefficiencywithwhichafirmusesitscapital(moneyinvested).ROCEiscalculatedasearningsbeforeinterestandtax(EBIT)/capitalemployed.Investorsareveryinterestedinthisratiobecauseitindicateshowwellyourfirmisusingitsmoney.Ifyourfirmisself-funded,youshouldbejustasconcernedbecauseit’syourmoneyinoperation.Debtratio:Ameasureofafirm’sleverageortheratioofitsobligationstoitsassets.Itiscal-culatedastotaldebt/totalassets.Afirmthatissolventwillhaveavalueoflessthan1.Theactualappropriateratiodependsontheindustrythefirmisin,theinterestthatitpaysforitsdebt,andhoweffectivelyitutilizesthatdebt.Ifthevalueisgreaterthan1,thecompany’sdebtsexceeditsassets, and if there is no additional funding on its way, that firm is technically bankrupt.Debt-equityratio:Anotherindicatorofleverage.Itshowstheratioofliabilitiestothefirm’sshareholderequity(thevalueofallitownsminuswhatitowes).Debtequityratioiscalculatedastotaldebt/(totalassets–totaldebt).Again,thecorrectvaluedependsontheindustry,andanythingabove 100 percent (1.00) is a serious indicator of trouble in a mature business.Capitalizationratio:Yetanotherdebtratiothatfocusesonafirm’slong-termliabilities,whicharethedebtsthatareusuallyinvestedincapitalequipmentlikefacilities,tooling,andvehicles.Itiscalculatedaslong-termdebt/long-termdebt+(totalassets–totaldebt).Notethatthelastterm(total assets – total debt) is our shareholder equity.Interestcoverageratio:Designedtodetermineafirm’sabilitytoserviceorpaytheinterestonitsdebt,itiscalculatedasEBIT/interestexpense.Simplyput,ifinterestpaymentsarealargeper-centageofyourearnings,youmayhaveissues.Ifthisvalueislessthan2,thenyouarepayingmorethanhalfyourearningsoutasinterest.Thatmeansyouareliterallyworkingforsomeoneelse(yourlender) more than for yourself, and that’s probably not the reason you went into business.Cashflowtodebtpaymentratio:Aratiothatshowshowmuchofafirm’soperatingcashflowisconsumedbydebtpayments(interestplusprincipal).Itiscalculatedsimplyascashflowfromoperations/debtpayments.Itisimportanttonotethatunitsoftimespecifiedforbothtermsmustbe identical (month, quarter, year).Fixed-assetturnover:Aperformancemeasurementthatshowshowafirmisabletogeneratesalesfromitsinvestmentinfixed-assets.Itiscalculatedassales/fixedassets.Thehigherthisvalue,themoreefficienttheutilizationoffixedassetsis.Thisratioisappropriateinfirms,likemanufac-turing firms, where fixed assets are significant.Chapter 16Managing Cash Flow and Finance481© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
EBITDAEarnings before interest,taxes, depreciation, andamortization. EBITDA isbasically your sales, minusyour COGS, minus yourfixed costs.liquidatedAn asset that is sold or abusiness whose assetshave all been sold off.trusteeA government-appointedadministrator whooversees bankruptcyreorganization orliquidation.Inventoryturnratio:Averypopularmeasurementofhowoftenafirmreplacesitsinventory.Thisisaveryimportantmetricforretailinganddistributionfirmsbecauseitemssittingonshelvesinstoresandwarehousescostmoney.Turningyourinventorymorefrequentlygenerateshigherprofitsandhealthiercashflow.Thisratioiscalculatedassales/inventoryforagivenperiod(month,quarter, year).Revenueperemployee:Asimplecalculationthatshowshowmuchyouraverageemployeecontributestofirmsales.Thisfigurevariesbasedonindustry.Asoftwarefirmcanhaveanastound-inglyhighratio,whereasa“high-touch”servicefirmlikearestaurantwilllikelyhavealowone.Itiscalculated simply as sales/employee count.EBITDAversusnetsales:Looksatthepercentageofprofitstoyoursales.ItiscalculatedasEBITDA/revenue.EBITDAisearningsbeforeinterest,taxes,depreciation,andamortization.EBITDAisbasicallyyoursales,minusyourcostofgoodssold(COGS),minusyourfixedcosts.It’sthesameasEBIT(coveredinChapter15)butwithanydepreciationoramortizationaddedbackin.Don’t panic; accounting systems will likely be able to provide you with EBITDA.Build Your Own RatiosPickingtherightratiosthatreallymatterforyourcompanyisimportant.Infact,youcanbuildyourownratiosoutofmetricsthatareuniquetoyourfirm.Imagineyouoperateacompanymanu-facturingcustomizedtableware.Youandasmallteamofartistsandcraftworkersdesignauniquepatternforacustomer,andaftertheyapproveitviayourwebsiteormobileapp,youareabletoprinttheimageontounfiredblanks,fireupyourkiln,andproduceamazingcustomstonewareandporcelain.Theprocessofcreatingandgettingthedesignapprovedislabor-intensiveandthemostexpensivepartofyourbusiness;however,youofferittoclientsforfreeinthehopestheywillorderandreorderagreatdealofyourproductovertheyears.Whenplatesbreakortheirfamilygrows,youexpectthemtocomebackforreorders,whicharerelativelyinexpensiveforyoutoreprintandfire.Whatsortofmetricswouldthisbusinesswanttotrack?Itwouldseemtheratioofrevenuestothenumberofnewdesignswouldbereallyvaluable.Itwouldbecalculatedasrevenue/newdesigns.Thehigherthatnumber,thebetterthingsaregoing.Youmightalsowanttotrackreordersper customer per year or sales per customer per year.Bankruptcy and the Return of the Living DeadAsnotedintheintroductiontothischapter,afirmthatcannotpayitsbillsisbankrupt.Thelegalconditionofbankruptcyoccurswheneitherthecreditor(s)filesapetitionwiththecourtdemand-ingthefirmbeliquidatedforpaymentorthedebtorfirmfilesapetitionwiththecourtseekingprotectionfromtheactionsofitscreditors.Inmostcases,itisthedebtorfirmthatfilesthepeti-tion.Oncethishappens,thecourtmustdeterminewhatassetsthefirmhasandwhattheyareworth.InaChapter7bankruptcy,thecompany’sassetsarethenliquidatedtorepayaportionofoutstandingdebt.Whenthebankruptcyisclosed,thefirmnolongerisobligatedtopayanydebtsthatitincurredpriortofilingforbankruptcyprotection.IntheU.S.,therearethreemajortypesofbankruptcy defined by the chapters of the Federal Bankruptcy Code.Chapter7bankruptcyoccurswhenthecourtorthedebtorconcludethatthebankruptfirmcannotbesaved.Operationsarehalted,andatrusteeisappointedbythecourttoshutthefirmdown and liquidate the nonexempt assets.Chapter11bankruptcyoccurswhenthedebtorbelievesitsoperationsareprofitable,andthecourtconcursthatthefirmcanregainsolvencyifitsoperationsoritsdebtarerestructured—thatis,thepaymentamounts,interestrates,andschedulesareadjustedtomakethedebtmanageable482A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
unsecured debtA loan that is notguaranteed by any assetpledged by the borrower.secured debtA loan that is guaranteedby some asset pledged bythe borrower.revolving creditagreementAn agreement with a bankthat allows you to drawcash when it is requiredand pay it back over time.giventhefirm’scashflow.AfirmtypicallyneedstobeprofitableandhaveapositivecashflowtogainChapter11protection.Thedebtorwillsubmitaplan,tobeadjustedbythecourtbasedonthecreditor’sconcerns,tooperatethebusinessandrepaythedebtsinatimelymanner.Usually,thefirmislefttoexecutethisplanonitsownbehalf.Ifthereisanindicationthatthefirm’smanage-menthasbeencorruptorincompetent,thecourtmayappointatemporarytrusteeinaChapter11case.Chapter11bankruptcyisnotoriouslycomplexandcostlyinlegalfees;however,asmallbusinessbankruptcyprovisionreducesthetimeandcostoftheprocessforfirmsthatowelessthan$2,725,625.[1]Themostimportantprovisionisthatthecourtcanprevent[2]thecreationofacreditorscommittee—amethodwherebymanyofthecreditors’accountingandlegalfeesassociatedwiththeprocessfallontothedebtor.Underthisprocedure,thereareshortertimelimits,someadditionalfiling requirements, and more oversight from the federal trustee’s office.Chapter13bankruptcyisreservedforindividualsandsoleproprietorshipswhoowelessthanaspecificamount($419,275inunsecureddebt,and$1,257,850insecureddebt,asofApril2019).Itisgenerallysimplerandlesscostlyintimeandlegalfees,butcorporationsandpartnershipsmaynotapply for this protection. A trustee is nearly always appointed in a Chapter 13 bankruptcy.Itiscertainlybesttoavoidbankruptcy,butifyourfirmfindsitselfinthatsituation,itiscriticaltohandletheprocesswell.Learnaboutbankruptcyprocedures.ExcellentresourcesareavailableonlinefromsiteslikeNolo.com.Listentowhatotherswhohavegonethroughtheexperiencehaveto say. The mistakes they made are hard lessons you need not repeat.Findingaskilledandhonestlawyeriscritical.Whileyoucanfileforbankruptcyonyourown,unlessyourbusinessisvery,verysimple,legalassistanceisrequired.Afirmorindividualinbank-ruptcyislikelytobeinadepressedemotionalstateandoftenfeelsthattheyareatfault(theyprobablyare)andthereforearenotentitledtodemandmuchoutofthisprocess.Theyandtheirremainingassetsareeasytargetsforshystersofallkinds.Skipthebankruptcypityparty;atthismoment,themostimportantthingiseithergettingyourfirmbackonitsfeetorcleaningitupeffi-cientlysoyoucangetyourcreditorsandemployeespaidandmoveonwithyourlifeinthebestsituationpossible.Donotrushoffandhirethelegalfirmthathasthemostadsonbusbenches.Ifyourrelationshipwithyouraccountantisgood,askhimorherforalegalreference.Takeadayortwotoaskaroundandgetreferencesfromyourpeersifyoucan.Checkwithyourlocalchamberofcommerce or other business association.Bank Credit Helps You Avoid BankruptcyThebestwaytohandlebankruptcyistoavoidit.Thebestwaytodothatistonotgettrappedinacashflowcrisis.Andthebestwaytonotgettrappedinacashflowcrisisistohaveasolidrelation-shipwithyourbankandtoestablisharevolvingcreditagreement.Suchanagreementallowsyoutotapthebankformoneyatanytimewithoutadditionalpaperworkorexplanation.Withjustaphonecalloronlinetransaction,thousandsofdollars(ormore)canbetransferredintoyourcom-panycheckingaccount.Thecreditagreementwillalsoallowyoutopaybacktheprincipalandinterestovertime.Theimportantthingaboutsuchanagreementascomparedtoatraditionalloanisthatyouhavedoneallthepaperworkupfronttosatisfythebankofyourcreditworthinessandarrangedtosecuretheloanwithappropriateassetssuchasfacilities,inventory,equipment,orevenaccountsreceivable.Whenacrisisdoesarrive,thelastthingyouneedtobedoingisspendingthetimetofilloutaloanapplicationandwaitingforabanktoapproveit—somethingthatismuchlesslikelytohappenwhenyou’reinacrisis.(SeethediscussiononbankingrelationshipsinChapter10for more information.)Chapter 16Managing Cash Flow and Finance483© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Banks loan money to firms they know can paybut that need cash to fund growth or managecyclical cash flow challenges.Source: © Shutterstock, Inc.dispositionThe action or manner ofdisposing of a businessasset, such as selling it.buyoutMoney required tocomplete the purchase ofa leased or financed item.true leaseA lease where the itembeing leased remains theproperty of the lessor atthe end of the leaseagreement.fair market valueThe price an asset canactually be sold for.capital leaseA lease agreement wherethe lessee actually pays forthe leased item in thepayments and pays atoken amount, usually $1,to transfer the property atthe end of the lease.Renting and LeasingAnotherimportantwaytokeepyourcashflowsmoothissimplytoholdontoyourcashinthefirstplace.Thebestwaytodothatistonotpayforthingsupfrontthatyoucanpayforovertime.Rentingyourfacilityinsteadofpurchas-ingitisamajorchancetonottieupyourfunds.Forotherexpensivefixedassetslikevehicles,computers,furniture,andmanufacturingequipment,leasingisoftentheintelligentthingtodo.Leasescomewithdifferentterms.Dependingonthelifespanoftheasset,youmaychoosetoleaseaproductforamountsoftimefromonetofiveoreventenyears.Thedispositionofthepropertyattheendoftheleaseisalsoaveryimportantconsideration.Inalease,thepropertytechni-callybelongstothelessor(thefirmyou’reborrowingfrom),andwhentheleaseisup,theyownit.Youmayormaynothavetheoptiontopurchasetheitem,andthatbuyoutpricemaybecalculatedindifferentways.Inatruelease,youwillpaythefairmarketvalue,whatevertheitemcouldbesoldforontheopenmarketatthetimetheleaseends.Acapitalleaseisreallyaloanconstructedtolooklikealease,andthebuyoutisanamountspecifiedinthetermsofthelease,veryoftenaslowasatoken$1.Thepaymentsonacapitalleasewillbehigherthanthoseonatruelease.Leasing can make machinery costing hundreds of thousands of dollars affordable to startups.Source: Greg AutryWhilethesellersofmostmajorproductswillprobablyofferyoualease,itisverylikelythattheyareofferingyouconvenienceandnotthebestrate.Occasionallytheleasingdealsofferedtosmallbusinessesbyautoandequipmentdealersareoutrageouslyabusive.Youshouldtakewhat-evertheyoffertoyourbankerandseeifhecandobetter.Differenttypesofleasesmayalsoofferyouvaryingstateandfederaltaxadvantages.Checkingwithyouraccountantonhowtobeststruc-ture a lease is also a good idea.484A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Negotiating Net Terms and FlooringWhileleasingisappropriateforyourfixedcosts,isthereawaytoavoidpayingforyourCOGS?Thefirstthingtodoistonegotiatethebestpaymenttermsonyourmaterialinputsorinventory.AsnotedinChapter15,ifyourunabikeshopandcangetthebikevendortogiveyounet60ornet90terms,youmightactuallycollectmoneyfromyourcustomerbeforeyouhavetopayfortheprod-uct.Thatsortofcashflowmanagementismagicalforagrowingbusiness.Youareusingsomeoneelse’s interest- and equity-free money to finance your growth.InChapter15,wementionedthatlargecompaniesandgovernmentagencieswouldtakeadvantageoftheirrelativepoweroveryoursmallfirmtopayyouslowly.Thisimprovestheircashflow,andyoucandothesamewithyourvendors.Payinganet30invoiceinfortydaysprobablywon’truinyourrelationship;ontheotherhand,itwon’tearnyoufriendseither,andasasmallbuyer,you’vegotlittlepoweroverthesevendors.Ifyouareseriouslyand/orrepeatedlylateinpayments,yourfirm’screditratingmaysuffer.Typically,yoursmallervendorsandindividualcon-tractorsareunlikelytobereportingtoD&B.Picturetheguyswhorepaintedyourshoportheladywhodoesyourwindows.Theyarealsolesslikelytobelegallyaggressive.Ifyouhavetodelaypay-ment, these are usually the folks who sadly will suffer.Therearesomethingsyousimplycan’tbelateon.Amongtheseispayroll.Inmanyjurisdic-tions,youhavealegalobligationtopayyouremployeesontime,andyoumayfaceseriousfinesorevencriminalchargesifyoufailtodosoorifyouwriteabadcheck.Payingsalestaxesthatyou’vecollectedfromcustomersandpayrolltaxesyou’vewithheldfromemployeesisveryserious(seeChapter15Section4).Thesemoniesdon’tbelongtoyouoryourfirm,andyouhaveafiduciaryobligationtoforwardthemtothegovernmentinatimelymanner.Failuretodosocouldshutyoudown and lock you in jail. Similar laws apply to employee retirement funds.Ifyoucan’tgetlongenoughpaymentterms,anotheroptionisflooring,alsodescribedinChap-ter15.Inthissituation,athird-partyfinancefirmwillpayfortheinventoryyoukeeponhandforsale.Eitheryouoryourvendorwillpaytheinterestonthisdebt,andtheinventoryitselfsecuresthe debt—meaning the lender can seize it if you don’t pay up.Key Takeaways•Cash is king.•Leverage outside money to keep your working capital.•Lease rather than buy when possible.•Learn common financial ratios.•Develop your own ratios.•Integrate ratios into your dashboard and monitor them.Chapter 16Managing Cash Flow and Finance485© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
invoice discountingA lender advances moneyto a business based oninvoices that have beenissued to customers butare unpaid. The advancedmoney is discounted bysome amount, typicallyabout 10 percent, whichthe lender keeps when thecustomer pays.factoringA process of borrowingmoney against accountsreceivable, the moneyowed to the firm bycustomers. Typically, theright to collect the invoicesis transferred to the factor(lender).16.2FinanceLearning Objectives1.Understand the variety of business assets that can be collateralized.2.Recognize the availability and risks of assuming personal debt for business purposes.3.Understand the risks inherent in debt.4.Recognize that small business and startup debt can put you personally at risk.Collateral for LoansSpeakingofinventory,yourbankermaybewillingtocollateralize(securealoanwith)thataswell.Whatotherthingsdoyouthinkyourbusinessmighthaveofvaluethatyourbankeroraspecialtylendinggroupcouldlendagainst?Anythingthatyoucanshowthatyouownandthatmightberea-sonablyliquidatedoreasilysoldonsomemarketisanoption.Inadditiontoinventory,thiscouldincludeanyfixedassetsthatarenotalreadyleased,accountsreceivable,thevalueoffuturecon-tracts, or the value of your patents or copyrights.Whenalenderagreestoloanyoumoneybasedoncollateral,youcannotusethatsamecol-lateraltosecureanotherloan.IntheU.S.,thelenderwillfileadocumentundertheUniformCommercialCodewiththeofficeofthesecretaryofstatefortheirstate.ThisUCC-1filingstatesthattheyhavefirstclaimtoaparticularitem.Otherlenderswillsearchthisrecordbeforeallowingyoutomakealoanagainstitandwaitabittomakesureyouaren’tdoingtwoormoreloanssimul-taneouslyonthesameasset.Forthisreason,aloanapprovalprocessusuallytakesatleastafewdays.Usingyouraccountsreceivable,themoniesyourcustomersoweyou,ascollateralforaloanisaspecialcaseknownasinvoicediscounting.Inthatcase,youshowyourbankorotherlenderyoursalesledger,andtheyadvanceyoufundsequaltosomepercentageofthatmoney.Asyoucollectmoney from the customers, you pay the lender back with interest and fees.Anotherpopularoption,particularlyformanufacturingfirms,isfactoring,whereyouareessentiallysellingtheinvoicesyou’vegivenyourcustomers.Thefactoringcompanywillpayyounow,andtheywillcollectthemoneyfromyourcustomerwhenthebillisdue.Forthatservice,theytakeoutapercentageofthemoniesinvoiced.Inthissituation,yourlenderismoreconfidenttheywillgetpaid,butthecustomerisawarethatyouarefinancingtheirpayments.Thelendermayalsobemoreaggressiveincollectingthanyouwouldbe.Thiscanbehelpfulifyou’renotgoodatcollec-tionsbutmayalsoalienateyourclientsifsomerudecollectionpersonmistreatsorfrustratesthem.Remember,thefactoringcompanyknowsnothingaboutyourproductorservice,andifthecus-tomerwantstodisputesomedetailoftheinvoice,theyaren’tlikelytobehelpfulaboutthatwithyour client or happy with you as the borrower.486A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Credit cards can get you back in business whileyou await an insurance payment.Source: © Shutterstock, Inc.Using Personal DebtAswasthecaseinfundingastartup(Chapter9),inmanysoleproprietorshipsorcloselyheldfirms,therearetimeswhenyoumaychoosetousepersonalloanstofinancebusinessactivities.Forinstance,borrowingagainstyourhomewithasecondmortgageorlineofcreditiscomparativelyeasy,offersattractiveinterestrates,andisusuallydeductibleagainstyourpersonalincometax.Thismaybeaverysensiblechoice,butyoushouldworkcloselywithyouraccountanttoensurethatyouarehandlingthetransferofmoniestoyourfirmproperlyfortaxpurposes.Ifthereareothershareholdersinvolved,it’simportantforeveryonetounderstandhowyourinfusionofper-sonalcashimpactstheequityofyourfirm.You’retakingasignificantriskonbehalfofthefirm,andthereshouldbecompensation.Areyouexpectingtobeissuednewstock,oristhisaloanyouaremaking to the firm? If it is a loan, are you entitled to interest?WediscussedtheuseofpersonalcreditcardstolaunchastartupinChapter9,butitisworthrevisitingcreditcardshereaswell.Entrepreneurmagazinereportsthat“creditcardsareamongthemostpopularsourcesofstartupfinancing,”[3]butwealsoknowthatmanysmallbusinessownersusepersonalcreditcardsforongoingbusinessfinancing.Anentrepreneurwithagoodcredithis-toryandsomeincomewillfinditveryeasytoacquiremultiplecreditcardsandcanusethosetopurchasegoodsandservicesforthefirmoreventogetcashadvancesthataretransferredintothefirm.Usingpersonalcreditcardstofundabusinessinthiswaycanbeextremelydangerous.Entre-preneurcautionsthat“theuseofpersonalcreditcardscanbeaveryriskymeansoffinancingbusinessoperations.MasterCardandVisaweren’tdesignedforthispurpose.”[4]Thefirstreasonforthisisthatcreditcardinterestratesarenotoriouslyhigh,andtheyarealsovariable.Thecreditcard“agreement”isveryone-sidedinfavoroftheissuingbank,andsotheminimummonthlypayments,annualfees,andothertermscanalsoincreasewithoutrenegotiation.Moreimportantly,whenyouacquiremoneyinthismanner,youarenotforcedthroughthefinancialandplanning“duedili-gence”thatabankerorinvestorwouldrequire.EvenyourmomwouldaskmorequestionsthanCitibankVisawill.Thismakesitmucheasierforyoutobeself-deludedaboutyourfirm’sprospectsasyou“authorize”yourownloansviacreditcard.Ifyou’vetried,andyoucannotconvinceanyoneelseonearthtofundyourenterprise,youmustaskyourself,“Isthisreallyagoodinvestmentorsimply my personal desire?”Anentrepreneurmustalsodifferentiatebetweenfundinggrowthversusadesperaterescueattempt.Ifyourgizmofactorysuddenlyreceivesasolidorderfor100,000gizmosthatyouknowyoucanproduceatahighprofit,butforwhichyoudon’thavethecashonhandtoordertheparts,then,byallmeans,reachforyourcreditcard.Don’tletthatbigordergetawayjustbecauseofcashflow.However,besureyoupayyourselfbackpromptlywhenthecustomer’scheckarrives.Oh,anddon’t forget to pay your credit card off as well.Thesameideaappliesifyourbusinesshassufferedatrulyone-timeandtemporarysetback.ImagineyourunahardwarestoreinasmalltowninOkla-homa,andatornadohasjustdecimatedMainStreet.Yourshopisinruins,butyourinsurancecompanyissolid,andyouknowthatyouarealsoinlineforfed-eralandstateemergencyassistancemoneytorebuild.Allthatpaperworkwilltakeawhile.However,youwanttoopenyourdoorsthedayaftertomorrowtohelpyourneighborsrebuild.Usingyourcreditcardtorentaconstructiontrailerandpurchasethebasicinventoryyouneedtogetwhathadbeenaworkingbusi-ness back in business might be a fantastic idea.Ontheotherhand,imaginethatinsteadofatornado,theHomeDepotopensanewmegastorejustoutsideoftown.Yoursmallhardwarestoresimplycan’tcompetewiththeirmassiveinventory,professionalmarketing,andlowpriceplushighvolumestrategy.Ifyouengageyourpersonalcredittojustkeepthedoorsopenatashopwithhopelesslydecliningsales,youaresimplytransferringabankruptcyfromacorporationontoyourself.YourpersonalcreditshouldnotbeusedtoextendthepainfullifeofaChapter 16Managing Cash Flow and Finance487© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
A personal guarantee may mean losing yourhome if your business fails to meet itsobligations.Source: © Shutterstock, Inc.businessmodelthatisnolongerworking.Itcanbeveryhardforentrepreneurstoletgooftheirdreamandverytemptingto“rideitallthewaydown.”Don’tdoit.Closethedoorsandsavewhatyou have to put into your next entrepreneurial dream.Partner FinancingOneofthebiggestreasonssmallbusinessesfindthemselvesinacashflowcrisisthatrequiresfinancingisfundingtheexpansionoftheirbusiness.Abiggerfacilityornewlocationwillincreaserent,utilities,andinsurance.Itwillrequireexpensivecapitalinvestmentinequipmentorfixtures,andnewemployeeswillneedtobehiredandtrained.Usually,revenueswilllaginvestmentasthenewlocationtakestimetogatheracustomerbaseand/orgetrunningatfullspeed.Payingsome-one good money to manage a money-losing new operation is extra costly.Acommonsolutiontoboththecashandlaborproblemsisbringingonanewpartnertohelpfundandrunthenewfacility.Apartnerthatcanputinsomecashandworkforless—orevenforfree—canbeaperfectsolution.Suchanarrangementdoesrequiregivingupequity,however.Per-hapsyou’llattractapartnerwiththepromiseoflettingthemshareinyourexistingsuccess,orperhapsyou’llonlyincludetheminapercentageofthenewendeavor.Youmaysimplycreateacon-tracttopayyourpartnerapercentageofrevenues,oryoumayactuallyofferthemequityinyourfirm.Toaccomplishthelatterscenario,youcanestablishaseparatecorporationorLLCwithadif-ferentownershipmixthanyourexistingone;consultyourlawyerandaccountantonhowtobeststructure this.Beextremelycarefulwiththisplan.Manypeoplewillbeeagertojointheexpansionofasuc-cessfulbusiness!Spendthetimetomakesureyourpotentialpartnersaretherightfittomanagethatrelationship.Thekeytoasuccessfulpartnershipmostoftenliesinpersonalcompatibility,settingrealisticexpectations,andkeepingcommunicationsopen.Resentmentcaneasilybuildbetweenbusinesspartnerswhoaretoodifferent,havedifferentvisionsoftheirownvalueandrewards,orwhodon’ttalkregularly.Arelationshipfailurecouldresultinthefailureofyournewventure or even bring down your existing business.A Cautionary Word on DebtIfyoucangetit,debtfinancingcanoftenbethebestwaytobuildyourbusiness.It’sflexible,andmostimportantly,itdoesn’trequirethatyougiveupequityorcontrolofyourbusiness.Puttingthevalueofallyourfirm’sassetstoworkinfundingagrowthfirmoronewithprofitsthatexceedanyinterest you pay can make sense. Borrowing is a particularly good choice when rates are low.488A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
debt loadThe amount of money afirm owes.personal guaranteeThe requirement that thebusiness owner(s) agree topay back a loanthemselves if the businessdefaults. This puts theowner’s personal assets,such as their home, at risk.Thatsaid,youarestronglycautionedagainstrunningyourselforyoursmallbusinessintodebt.Whilegettingyourfirstloansorcreditcardscanbeveryhard,onceacrediblelendertrustsyouwiththeirmoney,you’llquicklyfindthateveryonewantstolendyoumore.Debtcanbeeasytocomeby.Youmayfindittobetheeasywayoutoftoomanydilemmas,andrelyingonitcanbeaddictive.WerecommendyouregularlyconsultwithyourCPAorbankerabouttheappropriatelevel of your totaldebt load.Therealsomaycomeatimewhenyourgrowthphaseisdoneandyoudon’texpecttoneedsomuchcashonhandforoperations.Youmaywanttouseyourbusinesstosaveandinvest.Interestratesalsovaryovertime(wewilldiscussthisinafuturechapter),andattimestheycanberelativelyhigh.Underthosecircumstances,payinginteresttoothersisnotattractiveunlessthetaxadvan-tagesareoverwhelming.Youmayinsteadchoosetopurchaseyourfacilitiesasagoodlong-terminvestmentandeveninvestinrealestatetorenttootherfirms.Again,consultwithyourbankerand accountant.Itisalsoessentialtonoteherehowcloselytiedyourbusinessandpersonaldebtobligationscanbe.Evenifyourfirmisorganizedasacorporation,youmaystillbepersonallyresponsibleforloans,leases,andflooring.Thisisbecauseitisverylikelythatyourcreditorswillrequireyoutosignapersonalguaranteetosecureabusinessloan.Thismeansthatbusinessbankruptcywillnotpro-tectyoufromrepayingthisdebtandthatthebankcanattachyourpersonalincomeandassets—including seizing and selling your home—to fulfill your obligation.Flexibility and CreativityRaisemoneywhenyoudon’tneedit.Whenyouneeditdon’tgoouttoraisemoney, it’s too late.—Jack Ma[5]Today’ssmallbusinessownershouldalwaysbethinkingofcreativewaystosecuremoneyforwhenitwillbeneeded.Financeandaccountingaretraditionallyareasofveryconservativethink-ing,buttoday’sentrepreneurmustbefinanciallycreativeinordertosurvive.Asthischaptershows,yourbankerisnotsittingpatientlywaitingforyoutoruninandrequesthelpwithacashflowcrisis.Youneedtoprepareinadvanceforthatdayandtohavemultiplealternativestoyourbankinmindaswell.Financially,theNewEntrepreneurialDynamicisafusionofpreparationandresourcefulness.Key Takeaways•Utilize personal debt with care to bridge short-term cash flow issues.•Avoid taking on long-term personal debt.•Always think of your assets as potential sources of cash.•Watch your debt load daily.•Be aware of your personal obligations for business loans.Chapter 16Managing Cash Flow and Finance489© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
16.3Case Study: Betting It All: AnUnorthodox Cash Flow Gamble byYour AuthorSo,thiscrazythingreallyhappened—alotofgreatbusinessstoriesbeginthatway.Inmylatetwen-ties,I(textauthorGregAutry)ownedacomputerstoreandrepairshopinRiverside,California.Businesswasgoingverywell,andwehadrecentlybroughtonacoupleoflargercorporateaccountsandcontractswithschooldistrictsandstateandlocalgovernments.Wewerewellonourwaytodoublingour$1millionayearbusinessandlookedreallyprofitableaccordingtotheaccrualfinan-cialreports.Allthisnewbusinessrequiredrapidlyexpandinginventoryandemployeeheadcount.Wewereorderingalotofpartsoncashondelivery(COD)termsandrecruitingnewemployees.Expenseswerealsoincreasingrapidly,butnotasfastasrevenues.So,Ifeltthateverythinglookedgreat.However,thesenew,largerclientspaidmuchmoreslowlythanourtraditionalindividualandsmallbusinesscustomersdid.AlotofthisprofithadbeenaccumulatinginourAccountsReceiv-able(AR),whichhadballoonedtoover$100,000.IfI’dhadabetterfinancialeducation,suchasthistextbookonsmallbusinessmanagement,Iwouldhaveseenacashflowcrisiscoming,andIwouldhavesecuredfactoringonveryhigh-qualityARtoevenoutthecashflow.Lackingthisexpertise,Iinevitablyfoundmyselffacedwithaseriouscashshortfallasoneofournew,largerpayrollscamedue.Iknewthingsweretightbutdisregardedthebookkeeper’swarnings,fullyexpectingoneortwolargecheckstoarriveontime.ComeThursdayafternoon,wehadabouthalfthemoneyweneededtopayouremployeesthenextday.Ourtwo-weekpayrollranabout$20,000,buttherewasjustover$10,000inthebank.Thiswasanimmenselyfrustratingpositiontobeinsinceourcus-tomers owed us more than a hundred grand!Igotonthephoneatthelastminuteandtriedtocollectfromeverycustomer.AsIrecall,Iwasprettyblunt,“Hey,youguysoweusmoney,andIcan’tpaymystaff.Haveyoumailedacheck?Ifnot,letmecomepickituptoday!”AlthoughthebureaucratswhomanagedtheAPatthesebigorganiza-tionsseemedsympatheticandwerewillingtomovepaymentsalonginaweekorso,itwouldtakemultipleinternalstepsandapprovals.Bottomline:weweren’tgoingtogetpaidtodayortomorrow.Icalledmybanker,Ken.Hewasn’teagertomakeanemergencyloanwithoutgoingthroughalltheduediligenceeither.Despiteyearsofbusinesswiththebankandthefactthattheclientswhoowedusmoneywerethetopsnamesinthecounty,thebestKenwouldofferwasthathe’dbe“happytosendoveraloanapplication.”Approvingthatwouldtakedaysorweeks.Meanwhile,thepayrollcheckshadalreadybeenprintedbyPaychex.Halfofthemweregood,buttheslowestonesto the bank would find that their checks had bounced.Iconsideredwhatwouldhappenifhalftheemployeesdidn’tgetpaid:notgood.Theinequalityofthesituationwouldbeblatant.Theemployeeswouldbeupinarms,andwhowasItodecidewhothewinnersandlosersshouldbe?Thatwasano-winsituation.Ialsoponderedwritingnewchecks,givingalltheemployeeshalftheirwages.Iknewtheseguys.Likemostserviceemployees,theylivedpaychecktopaycheckandneededeverypenny.Halfapaycheckwouldn’tcovertheirrent.Itwasclearthatfrommyperspective,nocheckorhalfacheckwouldbothbeequallyunpopularoutcomesthatwouldundermineemployeemoraleandimpactproductivity.Iwouldsurelyfindafewofmytopworkersrunningtomycompetition,whereIknewtheyhadstandingoffers.Icon-cludedthatanyhalf-payschemewoulddoasmuchdamageasdelayingpaychecksentirelyforaweek—whenIwassurewe’dhavemorethanenoughmoneytopaythem.Thiswasoneofthoseallor nothing situations, and I decided to roll the dice, almost literally.490A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
LasVegasisaboutafour-hourdrivefromRiverside,threeandahalfifyoudon’tstopforthebathroom.Atabout4p.m.,mybusinesspartnerandIwenttothebank,emptiedtheaccount,andheadedforNevada.Likemanyentrepreneurs,wewereinclinedtogamble,withinreason.Ievenconsideredmyselfaskilledcardplayer,primarilyatpoker.Whilepokeristhegamblingthatcomesclosesttodoingbusiness,agamewherestrategyandsalesskillscount,ittakestimetoaccumulateseriouswinnings.Beinginarushistheworstpossiblepositionforapokerplayertobein,andbigmoneypokertablesarefulloffrighteninglygoodcompetitorswhocansmelldesperation.Whatweneededthenwasagamethatcoulddoubleabetquickly—orloseitalljustasfast—andthatgamewas blackjack.Weplannedtogotoacasinothatstilldealtsingle-deckblackjack—importantifyouwanttocountcardstoimproveyourodds—andplaysmallhands,waitingfortherightmomenttomakeaseriesofbigbetswiththe$10kIhad.Thistimeitworked.Withinanhour,wehadwellover$20kandareallynicefreedinner—whethersuspiciousorsuperstitious,casinosoften“comp”successfulgamblerswithmealsorshowticketsinorderto“breaktheirstreak”oratleastencouragethemto“movealong.”Weweremorethanhappytobe“movedalong.”Earlythenextmorning,wewerered-eyedandbedraggledbutparkedoutsideourbankwithabagofcash,waitingforthedoorstoopen.Theemployeesneverhadacluethattherehadbeenaproblem.Thecustomerspaidup,andevery-one was happy except our accountant—who had to figure out how to book $10,000 in cash income.Needlesstosay,thiswasaveryriskyendeavor.Iabsolutelydonotadviseplayingblackjackasabusinessfinancingstrategy,particularlyatmoderncasinoswherehigh-techsurveillanceandcon-tinuouscard-shufflerskeeptheoddsfirmlyinthehouse’sfavor.Thatsaid,Ilaterdiscoveredthatwe were in pretty good company.AccordingtoRogerFrock,FedEx’sfirstgeneralmanager,theovernightdeliveryfirm’sfounder,FredSmith,successfullyusedtheverysametactictopaytheiconicfirm’sjetfuelbillsduringitsearlydays.Inhishistoryofthefirm,ChangingtheWaytheWorldDoesBusiness,Frockwrote,“Bymid-July,ourfundsweresomeagerthatonFridayweweredowntoabout$5,000inthecheck-ingaccount,whileweneeded$24,000forthejetfuelpayment.”[6]Frockcontinues,“However,whenIarrivedbackinMemphisonMondaymorning,muchtomysurprise,thebankbalancestoodatnearly$32,000.”SmithexplainedtoFrock,“Iknewweneededmoney,soItookaplanetoLasVegasandwon$27,000.”Underscoringthedoordienatureofthesituation,thewilyentrepreneuradds,“Whatdifferencediditmake?”FedExwouldhavebeendeadwithoutthegamble,andtodaySmithis worth nearly $4 billion.Youcanbetthatforeachoftheseluckysuccesses,therearedozensoffailuresyou’llneverhearabout;entrepreneurswholefttheirbusinessesonatableinVegas,MonteCarlo,orMacau.Itisalsoimportanttonotethatinmycase,Iwasgamblingmorewithtimethanthefinaloutcome.Ouremployees would all have been paid anyway, albeit a week late.Chapter 16Managing Cash Flow and Finance491© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Endnotes1.11 U.S.C. §§ 1181-1195,Subchapter V.2.Ifthebankruptcycourthasdeterminedthecreditors’committeeisinsuf-ficientlyactiveandrepresentativetoprovideoversightofthedebtor.11U.S.C. § 101(51D).3.https://www.entrepreneur.com/article/818224.https://www.entrepreneur.com/article/415205.Clark,D.(2018).Alibaba:ThehousethatJackMabuilt.HarperCollinsPub-lishers.6.Frock,R.(2006).Changinghowtheworlddoesbusiness:FedExÕsincred-ible journey to successÑThe inside story. Berrett-Koehler Publishers.492A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
state capitalismA hybrid of socialism andcapitalism wherestate-owned enterprisescompete aggressively ininternational markets witheconomic and politicalsupport from theirgovernments.CHAPTER 17The Business Environment andGovernmentEntrepreneurshipisafieldrifewithpolicy-relevantimplicationsandyetwehavelittleknowledge of the role of states in the entrepreneurship dynamic.—Kaye Schoonhoven & Elaine Romanelli (2001)[1]Laws enacted by governments around the world impact startups.Source: © Shutterstock, Inc.Smallbusinessownersareoftensurprisedtodiscoverhowinfluentialthegovernmentcanbeincraftingtheculturalenvironmentandtechnicalenvironmentsinwhichbusinessesmustcom-pete.A2011reportoftheOrganisationforEconomicCo-operationandDevelopment(OECD)concludedthat42.5percentoftheU.S.economyiscontrolledbylocal,state,andfederalgovern-ments.ThisfigureishigherinEurope.UnderthestatecapitalismeconomicsofRussiaandChina,itisoftenunclearwherethecompanyendsandthegovernmentbegins.Giventhatgovernmentissuchamajorenvironmentalfactor,itissurprisingthatitisoftenignoredinmostbusinessman-agement texts.© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Some clothing is still custom made by hand forthe client.Source: © Shutterstock, Inc.fashionA popular cultural trend inproducts, typicallyclothing.17.1The Business EnvironmentLearning Objectives1.Understand that firms must adapt to the business environment.2.Recognizethelegal,economic,cultural,andtechnologicalfactorsthatshapethebusinessenvironment.3.Understand the roles government plays in defining the business environment.4.Understand different types of government.5.Understand regulations and taxes.6.Understand compliance strategies.7.Understand legal options.Factors of the Business EnvironmentImagineyouownaboutiquemen’sclothingstoreinLima,Perutoday.Doesyourbusinessoperateinthesamewayasatailor’sshopinnineteenthcenturyLondondid?Couldyouapplythesameknowledgesetandskillstosucceed?Obviouslynot,butwhyisthat?Whydoessimplysellingclothingtomenvarysomuchwiththechangeintimeandplace?Thereareobviousculturaldifferences,suchaslanguageandfashionchoices.Themoneyandtheclimatemaydiffer.Thoughitishardtoimaginehowthesewouldsignificantlyimpacttheprocessbywhichclothingissold.Thinkabouthowandwhereclothingisproducedineach case.494A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
bespokeA product an individualproduced for a specificcustomer. Notmass-produced.ready-to-wearClothing products thathave been mass-producedin advance in a variety ofpredefined sizes for sale ina retail store to customerswho will not have themtailored to fit.policiesThe particular course oraction of governmentmanifested in laws andregulations.globalizationThe cumulative process ofinternationalizingbusinesses, thedisbursement of markets,supply chains, andproduction across theglobe.businessenvironmentThe external factors thatdefine the opportunitiesand limitations of themarket in which yourbusiness operates.Regulations, taxes, culturalnorms, and customerexpectations are some ofthe more common factors.IntheVictorianEnglishtailor’sshop,eachandeverypieceofclothingwasmeasured,handcut,andsewninthebackoftheshopfortheclientoutofrawcloth.YourshopwouldhavebeenoneofseveralshopsonthesameHighStreetthatlookedandoperatedverymuchthesame.Whileafewofthesebespoketailorsstillservewealthyclients,almosteveryoneonEarthwearsready-to-wearclothingtoday.YourPeruvianstoreisfilledwithracksofready-to-wearclothingitemsthatweremadehalfwayaroundtheworldandtailoringislimitedtoadjustingthehemonpantlegs.YourshopprobablylooksalotlikeothersinLima,andforthatmatter,itisn’tlikelytolookmuchdiffer-entfromasmallclothingstoreinMumbaiorVancouver.Whyisthat?Inexpensiveglobaltransportation,lightspeedcommunications,andmajorshiftsinnationaltradepolicieshavemadeproducingclothingthousandsofmilesfromtheconsumer’spurchaseeconomicallypractical.Thesechanges,generallyreferredtoasglobalization,haveshiftedthebusinessenvironment,theconditions under which your business must operate and compete.Most of our clothing is sold off the rack, ready to wear.Source: © Shutterstock, Inc.Thebusinessenvironmentshapesthewaybusinesseslookandoperate.Everybusiness,bigorsmall,growsandoperateswithinanenvironmentthatprovidesopportunitiesyetalsorestrictsitspossiblepursuits.Fourmajorfactorsshapethisenvironment:thelegal,economic,cultural,andtechnological conditions.Thesefactorscombinetodefineentireindustriesandhowbusinesseswithinthemsucceedorperish.TheNewEntrepreneurialDynamicalsorecognizesthattheseconditionswillchangeovertime.Tosurvive,businessesmustmatchtheircurrentenvironmentandbepreparedtoadapttotheemerging one.Chapter 17The Business Environment and Government495© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
selection processThe evolutionary processby which firms that do notoptimally fit theirenvironment fail and leavethe better-adaptedcompetitors to continue.mimetic isomorphismThe process whereby firmsin a market copy eachother and assume similarcharacteristics.archetypeA very typical example of atype of person or thing.smugglingThe illegal business ofbringing products into acountry outside the legalprocess. Smuggledproducts may be entirelyillegal products or simplyones where the importerhas avoided tariffs.contrabandProducts that are illegallyimported or exported.A Ukrainian border guard seizes Americancigarettes smuggled across the Polish border toavoid Ukraine’s tariff.Source: Ivan Semenovych/Shutterstock.comManagementscholarshavelongknownthatstartupfirms,justlikeDarwin’sanimals,aresub-jecttoaselectionprocessthatweedsoutthosethatarenotwelladaptedtotheirenvironment.Throughaprocessknownasmimeticisomorphism,[2]firmsemulatecompetitorsthattheyperceiveashavingthebestenvironmentalfit.Eventually,allofthebusinessesinaparticularcategorybeginto look very similar.Let’sconsiderAmericangasstations.Regardlessofitsbrandorwhetherthestationisaninde-pendentsmallbusinessoroneoperatedbyamajoroilcompany,theygenerallylookandoperatethesameway.Consumerscaneasilyfindthem,andtheydonothavetolearnanythingnewinordertoutilizetheirservices.Gasstationsarenearlyalwayslocatedonthecornerofamajorstreetinter-section(sometimesallfourcorners);theyaredeckedoutingarishcolors,areroughlythesamesize,acceptcreditcardsatthepump,andhaveaconveniencestoresellingavarietyofunhealthysnacks,drinks, and tobacco products.Industryandfirmarchetypes,likethesegasstations,remainstableuntilsomelegal,cultural,economic,ortechnologicalchangedisruptstheirenvironmentalfit.Inthepast,economiccondi-tionssuchasfuelandlaborcostsmovedgasstationsfromfull-serviceoperationstoself-serve,andtechnologicalinnovations(satelliteandinternetconnectionsforcreditcardprocessing)enabledpayatthepump.Thegrowingcomplexityofmodernautoelectronicsandtheincreasingreliabilityofcarsdrovestationstoreplacetheirservicebayswithconveniencestores.Inthenearfuture,elec-triccarsmaysignificantlydisruptthisbusiness.Fuelpumpsmaychangeorvanishentirely,transformingthesebusinessesfromfuelstationsintocornerstoresorsomethingelse.Rememberthat in the New Entrepreneurial Dynamic,environmental change is opportunity.Legal EnvironmentInmostcountries,asurprisingmyriadoflawsdictatewhatsortofbusinessyoucanandcannotestablishandhowyoumayrunit.DidyouknowthatifyouownacornershopinSingapore,itwouldbeillegalforyoutosellchewinggum?Thegovernmentofthatsmallcity-stateisextremelyprotectiveaboutcleanliness,andalawwasenactedin1992topreventpeoplefromdisposingoftheirguminapublicplace.Itcanbedifficulttorunabusinesswhenyourproductorserviceisinconflictwiththelaw.Thisbookisn’taboutsellingorsmugglingcontraband.However,evenper-fectlylegitimatebusinessesareoftenstymiedbyill-consideredlaws,someofwhichmayevenhavebeen promoted by their competitors, eager to erect legal barriers to market entry.496A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
business cycleThe up and down patternin national economicgrowth, usually measuredas a change in real(inflation-adjusted) GDP.developed nationsA country that isindustrialized and has asophisticated consumereconomy, first-rateinfrastructure, and agenerally high standard ofliving.Cultural expectations of food presentation varyby nation and region within a nation.Source: Greg AutryEconomic EnvironmentOpportunitiestofoundsuccessfulnewenterprisesorrunexistingsmallbusinessesarelimitedbytheeconomicpossibilitiesoftheirplaceandtime—locationmatters.YoucanguessthatitmightbedifficulttosellluxurygoodsormobileappsinNorthKorea,wheremostpeopleareverypooranddon’thavesmartphones.Theeconomicenvironmentalsovariesovertimeinaninconsistentupanddownsequenceknownasthebusinesscycle.Evenindevelopednations,manybusinessesselling nonessentials suffer during economic recessions and major wars.Cultural EnvironmentCulturalnormsareextremelyimportanttobusinesses.Theexpectationsofcon-sumersforthenatureandpresentationofproductsandservicesvarybynation.It’snotuncommoninpartsofSpaintofindbarelegsofhamwithhoovesattachedhanginginacornermarket.InChina,itmightbewholeducks.TheseinvitinggastronomicaldisplaystendtoshockvisitingAmericanswhoprefertheirmeattobehermeticallysealedinplasticandrefrigerated.Americansexpecttheircornershopstooffersugar-packedjunkfoodinbrightplasticpackages.Cul-turalfactorsalsovarybytime,drivingwhatwecallfashion.Whenaparticulargenreofmusicormovieispopular,it’seasytoselldownloadsandpacktheaterswith those products, but a few years later . . . not so much.Technological EnvironmentEngineeringinnovationisperhapsthemostvisiblefactorthatamodernsmallbusinessmustadaptto.Technologyischangingmuchmorerapidlythananyoftheotherfactors,andmostofthetime,technicalchangeisapositivefactorforsmallbusinesses.Smallbusinessescanevaluateandadoptnewtechnologiesquickerthanlargebusinesses.Thesenewtechnologiesoftensimplifyorreducethecostofdoingbusinessinwaysthatleveltheplayingfield.Agoodexamplecanbeseenintheretailcashregisterbusiness.Traditionallargeretailstoreshaveinvestedmillionsofdollarsintocashregistersandcreditcardprocessingsystemsfromcom-panieslikeNCRorIBM.AsingleregisteratamajorretailerlikeNordstrom’smightcost$10,000.Thesesystemswerereliableandintegratedintosophisticatedreportingsystemsthatprovidedbigstoreswithacompetitiveadvantageinmanagingoperations.Today,anykioskinthemallcanusea$300tabletequippedwithaBluetoothcashdrawerandacardreadertoachievethesameorbetterresults.The Biggest Environmental Influence IsGovernmentNowthatthefourmajoraspectsofthebusinessenvironmenthavebeenidentified,let’sconsiderwhatforcesdefinethem.Howaretheparametersoftheseenvironmentsestablished?Dotheychange,andifso,why?Turningagaintotheanalogyofnaturalselection,scientistsandtheologiansdisagreeonwhethertheenvironmentthatanimalscontendwithistheresultofaseriesofrandomcosmicaccidentsorthecreationofasupernaturalbeing.Inthebusinessenvironment,thereisnodoubt that the gods exist; they take the form of governments.Chapter 17The Business Environment and Government497© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
It’sobviousthatgovernmentsdefinethelegalenvironmentforbusiness.Aquickglanceatthefinancialnewswillinformyouthatallmoderngovernmentsactivelymanipulatetheirnationaleconomic environments to various extents, some more than others.Types of GovernmentInherbook,OrganizationandManagementintheEmbraceofGovernment,ProfessorJonePearce,ofthePaulMerageSchoolofBusinessattheUniversityofCaliforniaIrvine,establishedaframe-workforcategorizinggovernmentsbytheirapproachtobusinesscreation.Pearceplacestheformof a government on a continuum between “impeding” and “facilitating.”InPearce’smodel,anauthoritarian-communistgovernmentlikeNorthKorea,opposedtothecreationofindependentorganizations,isimpeding,whileademocratic-capitalistgovernmentliketheUnitedStates,whichencouragesthem,isfacilitating.Theseformsaremanifestationsofcharac-teristicsthatdescribetheattitude(hostile/supportive),stability(erratic/predictable),andstrength(weak/strong)ofthegovernment.Foranindependentbusiness,theworstgovernmentishostile,erratic, and weak. The best is supportive, predictable, and strong.Thisdoesnotsuggestthatagovernmentbehavesasasingle,monolithicentity.Governmentsinterfacewithbusinessthroughavarietyofbodies,offices,andagenciesatthenational,provincial(state),andlocallevels.Figure17.1belowillustratesamodelofgovernmentalroles,whichbuildsuponthePearceframework.Youcanseethatatthelowestlevel,thegovernmentimplementsspe-cificpolicies.Thesearethelaws,regulations,procedures,andtaxesthatdefinetheenvironmentinwhichabusinessoperates.Thesepoliciesareenactedandenforcedbydifferentgovernmentagen-cies acting in specific roles that might include tax layer, regulator, lender, or customer.FIGURE 17.1Government RolesSource: Greg Autry 2014498A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
incumbentA business alreadysecurely in place in anindustry that startupsentering the market mustcompete with.U.S. federal, state, and local regulations fillhundreds of thousands of pages.Source: © Shutterstock, Inc.Regulations and TaxesI’vealwaysfeltthattheninemostterrifyingwordsintheEnglishlanguageare,“I’mfromthe government and I’m here to help.”—President Ronald Reagan[3]Consideringtherolesthatgovernmentplays,youshouldseethattherelationshipofyourbusinesswiththegovernmentwillprobablybebothpositive(loansandpurchases)andnegative(taxesandregulations).Therearetimeswhenabusinessownerfindssimplyunderstandingallthewaysinwhichtheymustinteractwithgovernmentoverwhelming.Regulationsandtaxescanbecomplexandoccasionallyevencontradictory.Officialsfromdifferentlayersofgovernmentdon’tcoordinatewitheachotherontheminutiaeofregulations.Youmayfind,forinstance,theStateofColoradohaslegalizedthesaleofmarijuana,butitremainsillegalunderU.S.federallaw,leavingpotentre-preneurs there at risk.Rules Create Barriers to EntryJustbecausesomethingisagreatideaandconsumersloveitdoesn’tmeanyoucanturnitintoabusiness.Smallbusinessesandevenentirelynewindustriesoftenfindbarrierstoentryintheformofgovernmentrules,taxes,orregulationsdesignedbytheircompetitors.RecallfromChapter3,thattheAmericanstatelawsfavorcardealersoverTesla’sdirectsalesmodel.InChina,govern-ment censors have banned American social media applications like Twitter and Facebook.InbothAmericaandChina,incumbentswereexploitingtheirgovernment’sabilitytokeepcompetitorsoutoftheirlucrativemarkets.InTesla’scase,localcardealerships,backedbytheauto-mobilemanufacturerswhodependonthem,lobbiedstatelegislatorstoblockTeslaandrewardedthosewhosupportedthemwithdonationstotheirpoliticalcampaign.[4]InChina,aspiringdomes-ticchampionslikeTikTokandWeChatunderstoodthatAmericanfirmswouldbeslowtoabandonfreespeech.InvokingChina’scensorshipmachinewasaconvenientwaytoestablishavirtualtradebarrier.A Plethora of Taxes Awaits You!Idon’tmeantogiveyoutheideathateverythinggovernmentsdoisunfairorcor-ruptorthateverylawisaninsiderdeal.Whileyoumustbeawarethattheseinjusticesarereal,mostlawsexistsimplybecauselawmakerstrulyfeeltheyareneeded.However,evenawell-intendedrulecanbeanobstacleforentrepreneurs,andlargeincumbentscanaffordtobemuchmoretolerantofregulatoryandtaxcodecomplexitythansmallfirmscan.Bigcorporationshaveentiredepartmentstohandleenvironmental,tax,andemploymentpaperworkdefinedbyhundredsofthousandsofpagesoffederal,state,andlocallaws.Mostbusinesspeoplegen-erallyhavelittletimeforregulatorycompliance.It’shardforthemtoevenfigurewhich laws apply to their firms, much less comply. What to do?Smallbusinessesoftenchosetooutsourcecompliance.Forexample,serviceslikePaychexandIntuit’sQuickBooksOnlinewillhandlemostofthepayrolltaxfilingcomplexitiesforasmallU.S.businessatareasonablecost.Similarsolutionsareavailableforregulatorypostingrequirements,401kplanadministration,andmore.ItisbeyondChapter 17The Business Environment and Government499© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Value-Added Tax(VAT)A tax placed on productseach time they are resoldin the supply chain.thescopeofthistexttoalertyoutoeverypossiblelawaffectingyoursmallbusiness.Youshouldconsult with an experienced lawyer and a professional accountant.Asmanyregulationsmaybelocalorparticulartoyourtrade,yourbestbetistoconsultyourpeers.Venueslikethelocalchamberofcommerceareperfectforthis.Oftenyouwillfindthatevenyourcompetitorscanberemarkablysympathetictoanothersmallbusinessowner.FollowingareafewofthelegalrequirementsyouwillneedtobefamiliarwithifyouarestartingabusinessintheUnited States.Federalandstatebusinessincometax:Ifyou’reacorporation,youneedtoacquireafederaltaxidnumberoremployeridentificationnumber(EIN).YoumustalsofiletaxesaseitheraCCorp,whichpaysthecorporateincometaxrate,oranSCorporLLC(LLP),whichdonotpaytaxesdirectlybut rather pass their taxes on to the owner’s personal income tax returns (seeChapter 10).Stateandmunicipalsalestax:MostU.S.stateshaveasalestax,andtherulesvaryfromstatetostate.Somestatestaxbothmaterialgoodsandlaborthesame,andsomedifferently.Individualcountieswithinastatetypicallyhavetheirowntaxesaddedontothestatetax.Someproducts,notablyalcoholandfuel,mayincuradditionaltaxes.Ifyoushipgoodsfromonestatetoanother,youareresponsibleforknowingtherulesinthedestinationstateandforcollectingandremittingthe tax to that state.Stateandmunicipalpropertytax:Taxingyourincomeandyoursalesisnotenough;thegov-ernmentisgoingtogoafteryourstuffaswell.Stateswilltypicallytaxyourrealproperty(buildingsandland).Citiesandcountiesmaylayataxonthevalueofallyourassetsfromcomputersandinventory down to your chair. Accounting for this is a nightmare for a small business.Businesslicense:Yourcityorcountywilllikelyrequirealicensetoconductbusiness,aswellasthepublicationofaFictitiousNameStatementorDBA,documentingwhoisbehindyourcompany.Professionallicensesandcertifications:Manystatesandsomecountieswillrequirethatyoubetested,licensed,orcertifiedtoengageinspecifictypesofworksuchasconstructionand(obvi-ously) medicine.Constructionpermits:Youcan’tsimplydecidetobuildorimproveafacilityandcallitastore,shop,orfactoryandopenforbusiness.Anysignificantconstructionyoudo,fromputtinginawalltomovingthetoilet,requireslocalgovernmentalapproval.Infact,makingonesmallchangecanopenyouuptobeingrequiredtobringyourentirefacility“uptocode.”ACaliforniafirmthatwantedtoaddawomen’srestroomdiscoveredthatstateandlocalmandatestobringtheir1939building“uptocode”weresoseverethatitwouldbecheapertobuildanewfacility,whichtheydecided to build in Texas.AmericanswithDisabilitiesAct:Thisisawell-intentionedfederallawdesignedtoensurethatfolkswithidentifieddisabilitiescannavigateandfairlyaccessbuildings.However,ithasgottenoutofcontrol.AsmallbusinessownerinCalifornia,whobikedtowork,addedapersonalshowertotheexistingprivatebathroomadjoininghispersonaloffice.Thestateinspectorrequiredhimtoremovetheentirebathroombecauseitwasupstairsandnotaccessibletothedisabled,eventhoughthebusinessownerhadneverintendedtoshareaccesstotheshowerwithanyone.AcadreoftriallawyersactuallypreyonbusinessownerswhohaveinadvertentlyfailedtocomplywithsomedetailoftheADA.Theyroamaroundwithmeasuringtapeslookingatcounterheightsandpaybountiesto disabled people who are willing to file lawsuits that will generate legal fees for them.[5]InmostothercountriesoutsidetheU.S.,youwillalsoneedtoestablishcompliancewiththeValue-AddedTax(VAT),asystemoftaxesthatcollectsmoneyateachpointaproductpassesfromoneorganizationtoanother.AVATtaxusuallyallowsforrebatesontaxespaidfortheinputstoyourproductiononproductsyouexport.Collectingthoserebatesisveryimportant;I’vespokentobusinessownerswhoreportedthatcollectingthenationalVATexportrebatecomprisedtheirentire profit margin.Thisisbynomeansanexhaustivelistofregulatoryandtaxmattersthatmayensnareawell-meaningentrepreneur.Pleaseconsultyouraccountant,lawyer,andpeerstobeasfamiliaraspossible with your legal obligations before launching your business!500A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
shell companyA corporation with no realbusiness operations,established purely tomanage financialtransactions, often inanother country and oftenused to avoid taxes,regulations, or lawenforcement.Thinking Strategically about TaxesThere is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible.—Federal Judge Learned Hand[6](Yep, that’s really his name!)Notalltaxesarecreatedequalorappliedequally.Itisimportanttounderstandthathowyouposi-tionyourcompany,accountforyourcosts,andconductyoursalescanchangeyourtaxpositiondramatically.Forexample,priorto2018,the35percentU.S.corporatetaxratewasnearlytheworld’shighest.ThismotivatedbigcorporationslikeAppletoavoidtaxesbymovingmostoftheirprofitsintoforeignshellcorporationsandCaribbeanbanks.However,smallbusinessescouldn’tplaythatgameandgotstuckpayingthefederalcorporatetaxplustheirstatecorporatetax,andtheownersweretaxedpersonallyontheirdividends.Going“bythebook,”anentrepreneurcouldenduppay-ing50percentormoreofherprofitstothegovernment.In2018,theU.S.corporatetaxratedroppedto21percent,stillhigherthanmanyothercountriesandhighenoughtowarrantstrategicthinkingon how to legally minimize your firm’s obligations.Ifyouaretax-savvyorhavegoodadvice,youcanlegallyavoidthecorporatetaxinseveralways.Thesimplestapproachistomakean“SCorpelection,”whichrelievesyourfirmofthecorporatetaxandpushesyourbusinessincomeontoyourpersonalincometaxreturnbasedonownership.Eachshareholdermustaccountforbusinessprofitsorlosseswithintheirowntaxes.LLCs are treated in a similar manner. This is usually preferable in a small, closely held firm.Ifyourshareholderscan’thandlethecomplexityofanSCorporLLC,youcanstillavoidthecorporatetaxviastrategictiming.Haveyouraccountantfileyourbusinesstaxesonacashbasisratherthanonanaccrualbasis(seeChapter15),thensimplymakesureyouhavelittleornoprofitleftinthecompanyatfiscalyear-end.Donecorrectly,thiswillmeanyoudon’towecorporatetax.How can a small business owner ensure that his firm has no money left at year-end and get by?Acommonmethodtoreduceannualprofitsistopayyourselfandyouremployeesyear-endbonuses.Thesearesubjecttopersonalincometaxbutareanexpenseforthebusiness.ToavoidgoingbankruptonJanuary1(becauseyouhavenomoneyleft),thefirmcanborrowfundsfromthebankforashortperiodoftime.Thisloancaneasilybesecuredbyyourpersonalbankaccount(which should have the bonus sitting in it).Ifyoufeelguiltyaboutlegallyavoidingthefederaltax,justrememberAppleiskeepingabout$200billioninforeignshellcompaniesforthesamereason.Mosteverylargecorporationisexploit-ingsomesimilarmechanism.It’syourmoney;youearnedit,sopleasekeepasmuchofitasyoulegallycan. If you still feel guilty, you can donate your savings to the charity of your choice.Chapter 17The Business Environment and Government501© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
set asidesGovernment contractsdesignated for particularclasses of vendors, suchas small or minority-ownedfirms.Big tech firms avoid paying U.S. and California taxes by moving assets to foreign shell companies they control.Source: Screenshot by Author, Bloomberg, https://www.bloomberg.com/news/articles/2020-12-26/facebook-shutting-irish-units-at-center-of-tax-dispute-timesThisbookcannotbeaformaltaxguide.Besuretoconsultyouraccountantandlawyerabouttaxstrategybeforetakingaction.Anylawsdiscussedhereortheirinterpretationmayhavechanged or be different in your jurisdiction.Whentheregulatoryortaxenvironmentreachesthepointwhereitisunbearable,oneoptionistousethesametrickthebigfirmshaveusedagainstyouandlobbyyourgovernmentforapolicychange.Thisisharderforentrepreneursbecausetheydon’thavethetime,money,orpoliticallever-agetoworkthesystem.Thebestsolutionistojoinorformanindustryassociationorcoalitionandcombinetheinterestsofmanysmallbusinessesthatfacesimilarproblemsintoanorganizedforcefor political change. Nearly all industries have such organizations.Thistextconstantlyrepeatsthemantra“changeisopportunity,”andthisappliestoregulationsasmuchasanything.Whenregulationschange,somebodywilllose,andsomebodywillbenefit.It’sthejobofthebusinessownerormanagertoseechangecomingandadapttoitmorequicklythanthecompetition.Changemightbesomethingassimpleasyourcityoutlawingplasticbagsatyourspecialtygrocerystore.Ratherthanfightingtheregulation,embracethechange,gogreen,andsellyourcustomersenvironmentallyfriendlyreusablebags.You’llbemovingacost(givingawaydis-posableplasticbags)toarevenuecenter(sellingreusablebags),andyoucanfeelswellaboutdoingthe right thing by the planet too.Subsidies, the Anti-TaxTherearetimeswhenthegovernmentistheentrepreneur’sfriend.TheSmallBusinessAdminis-trationhasavarietyofprogramsdesignedtogivesmallbusinessesalegup.Theseincludeeducational services, federal guaranteed loans, andset asidesfor government contracts.Somecommunitiesworktoattractnewbusinesses,particularlythoseintechnologyindustriestheybelievewillgeneratehighpayingjobs.Youcangettaxwaiversorevenoutrightpaymentstobuildyournewheadquartersintheirarea.TheStateofNewMexicowillsubsidizeasignificantpor-tionofthepayrollofnewlyhiredtechnologystaff.Asmentionedearlier,federalandstategovernmentsoftenhaveparticularindustriestheywanttosupport—currentlyalternativeenergy—and they may loan or give you money to launch your startup.Alternatively,thegovernmentmaysubsidizeyourcustomers.Atthetimeofthiswriting,con-sumerspurchasinganelectriccarcouldreceivea$7,500taxcreditfromthefederalgovernmentand$2,500fromtheStateofCalifornia.NowanelectriccarcompanyisNOTasmallbusiness,butyoumightconsiderthateachelectriccarownerisgetting$10,000backontheirtaxes.Howcouldyou502A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
While U.S. courts are generally corruption free,the process is slow, expensive, and oftenunpredictable.Source: © Shutterstock, Inc.exploitthatasasmallbusinessperson?Whatproductorservicemightyoumarkettothesenewcarowners? Think strategically.LawsuitsWhenrelationshipswithpartners,suppliers,customers,orvendorsbreakdown,thesolutionoflastresortistogotocourt.Ifthisbookcanofferyouoneveryfrankpieceofadvicethatwillmakeyoursmallbusinesscareermoreenjoyableand profitable, it is this:Avoid lawsuits, court actions, and lawyers whenever possible.I’vesetthisoneverystrongsuggestionoutonitsowntounderscorehowseriouslyyoushouldtakeit.Experiencedentrepreneurshavelearnedthatonlylawyersconsistentlyprofitfromlawsuits,eventhelawyerswhodoalltheycanto avoid the courtroom itself.LawsuitsarenothinglikeaTVlegaldrama.Theyaremonthsofexpensivepaperchasing,followedbyabriefandconfusingdecision-makingprocesswithajudgmentthatoftenappearstohavebeenrandomlygenerated.Evenifyouwin,you’llbetooexhaustedtogloat,anditishighlyunlikelyyouwillgetenoughmoneyoutofthedealtomakeitworthit.Muchofthemoneyyoudogetwillbevacuumedupbyyourattorney.Ifyoulose,youmaybepayingyouropponent’sattorneyaswell.ThisdescribestherelativelyuncorruptedU.S.legalsystem.Inmuchoftheworld,justiceisreservedforthepoliticalelite or sold to the highest bidder by officials who openly accept bribes.The secret to staying out of court is following these two simple rules:1.Always produce a clearly understandable contract upfront.2.Only do business with people with whom you would neverneedthat contract.Thesetwoadmonitionsmayseemcontradictory,buttheyaren’t.Thepointofthefirstruleisthatawrittendocumentcanensurethatwhatpartiesbelievethattheyareagreeingtoisindeedwhattheyareagreeingto.Verbalnegotiationscanberemarkablyambiguous,andthatoftenleadstolaterheartache.Eventhebestoffriendsmayendupatoddsifthey’vebeenworkingunderafalse assumption.Thepurposeofthesecondruleistonotethatwhomyoudobusinesswithisactuallymoreimportantthanhowyoudobusiness.Avoiddealingwithcriminals,sociopaths,andgenerallydif-ficultorweirdpeople—eveniftheyseemtohavealotofmoney.Anyonewhobragsaboutfilinglawsuits,forinstance,shouldbeavoided.Thatgoesforcustomers,employees,vendors,and,mostimportantly, business partners.Finally,ifyoumustargueacontract,trytotakeittomediationorprivatearbitration.Medi-ationisaguidedprocesswherethetwopartiesmaycometosomesettlementorreconciliation.Arbitrationisanout-of-courtsettlementprocesswhereanarbitrator—oftenaretiredjudge—hearstheargumentsfrombothpartiesinalessformalprocessandquicklyreachesabindingdecision.Eventhoughitsresultsmaybejustasunpredictableascourt,itisalotlessexpensiveintimeandmoney. Many contracts today specify in their terms that any disputes will be settled in arbitration.AsdiscussedinChapter10,itisbettertopayagoodlawyertodraftproperlegaldocumentsthatwillpreventalawsuitthantoengageonelater.Yourpartnershipagreement,corporatebylaws,stockagreements,aswellasmajorcontractswithcustomersandvendorsshouldallhavebeenpre-paredwithsoundlegaladvice.Thegovernmentwillnotalwaysseethemeaningofself-drafteddocumentsinexactlythewayyouintendedthem.Itistheprimaryjobofalawyertotranslateyourintentions into “governmentalese.”Chapter 17The Business Environment and Government503© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
AnexceptionfortheU.S.smallclaimssystemcanbemade,asitactuallydoesoperateinaman-nerverysimilartothePeople’sCourtTVshow.Thesmallclaimsprocessisswift,inexpensive,andgenerallybasedoncommonsense.Itcanbealmostenjoyableifyourcaseisstrongandyou’vegotyourducksallinorder.Themainthingtorememberisthejudgeisbusy.Don’twastethejudge’stime:“Justthefacts,ma’am.”Ifyouareasmallbusinessownerwhoextendscreditornettermstocustomers,youwillhavealotofcollectionactions.Also,you’rebusytoo,solineupallyoursmallclaims suits and file them all at once so you can get a single court date.Bankruptcycourt,whichprovidesinsolventfirms’protectionfromtheircreditors,isdiscussedinChapter15.Ageneralbankruptcyisamoreefficientandagreeableprocessforallpartiesthanindividualcourtcaseswherelawyersgetmosteverything.Youwillstillneedalawyer,buttheopportunitiestosuckyoudryaremuchnarrowerinbankruptcy,wherethejudgewilldeterminenearly everything.Key Takeaways•Fourmajoraspectsofthebusinessenvironmentarelegal,economic,cultural,andtechno-logical.•Governmenthasasignificantimpactonsmallbusinessoperations;therefore,itisimportantto know which laws and regulations apply to your industry.•Payattentiontotaxesyou’reobligatedtopayandunderstandhowtolegallyavoidthosewhen possible.•Understandthelegalsystemandyourlegalobligations;lawsuitsarecostlyandshouldbeavoided when possible.•Small claims court is a reasonable process for small business owners.17.2The MacroeconomicEnvironmentLearning Objectives1.UnderstandtheKeynesianeconomicconceptsgovernmentsusetomanagethemacroecon-omy.2.Learn how governments measure and manage the macroeconomy.3.Understandwhatgovernmentistryingtoaccomplishineconomicinterventionandhowthatmay impact your startup.4.Understand the business cycle and its impact on business.5.Learn how to forecast the business cycle.6.Understand secular macroeconomic trends.7.Recognize how national circumstances and policy may impact your firm.504A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
market failureA situation in whicheconomic circumstancesdo not result in optimalefficiencies or stableprices.animal spiritsEconomist John MaynardKeynes used this phraseto describe the nonrationalbehaviors of investors,consumers, andbusinesspeople thatresulted in economicoutcomes that didn’tmatch mathematicaltheory.death spiralA situation in which onenegative event precipitatesfurther negative events andcircumstances continuallybecome worse.Ifyouputtwoeconomistsinaroom,yougettwoopinions,unlessoneofthemisLordKeynes, in which case you get three opinions.—Winston Churchill[7]Keynesian EconomicsSincetheGreatDepressionofthe1930s,mostgovernmentshavepresumedthattheirdutyisnotmerelytoestablishandenforceeconomicrulesbutalsotoactivelymanagethebusinesscycle,withthegoalofreducingthefrequency,severity,anddurationofrecessions.ThisbeliefisfoundedonthetheoriesofthelegendaryBritisheconomistJohnMaynardKeynesandisoftenreferredtoasKeynesian economics.LordKeynesbelievedthatinnormalcircumstances,theforcesofsupplyanddemandwould,aseighteenth-centuryeconomistAdamSmithhadproposed,balancepricesinanautomaticsystemthatbenefitedbusinessesandconsumers.However,Keynesalsopostulatedthattherearetimeswhenunexpectedeventsresultinmarketfailure.Keyneswasconcernedwiththehumanbehaviorthatmademarketsimperfect.Unlikeclassicaleconomists,hedidnotbelievethatalargemassofpeoplecouldalwaysbecountedupontomakerationalpricingdecisions.Rather,Keynesbelievedthatgroupsreactedwithemotionalherdinstinctsthathereferredtoasanimalspirits.Hebelievedexternaleventscouldprecipitatesharpdropsinmarketpricesthatwouldresultinconsumersexpectingacontinueddecline.Thisexpectationoflowerpricesinthefuturewouldcausethemtodelaypurchases.Reactingtothisdropinsales,firmswouldcutbackonproduction,andinvestorswouldshyfromputtingmoneyintobusinesses.Workerswouldbelaidoff,andsaleswouldfurtherdecline.Thisdeathspiralwouldleadtoacontinuousreductioninnationaleconomicactivitywithnoautomaticcorrection.Keyneswasconvincedthatitwasthedutyofthegovernmenttostepinat these points and stabilize the markets.Chapter 17The Business Environment and Government505© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
gross domesticproductThe total economic activityof a nation calculated asthe sum of all finaltransactions or as the sumof consumption, businessinvestment, net exports,and government spending.GDP componentsThe subcomponents ofnational economic activity:consumption, businessinvestment, net exports,and government spending.The Great Depression was a global economic downturn that impoverished millions in the 1930s.Source: https://commons.wikimedia.org/wiki/File:Entre_détresse_et_désespoir_pendant_la_grande_dépression.jpg.Gross Domestic ProductThisnationaleconomicactivityismeasuredwithgrossdomesticproductorGDP.GDPisthesumofallfinal[8]goodsandservicesinaneconomy,andKeynesofferedthefollowingsimpleformula[9]tomodel the behavior of a national economy:The variables orGDP componentsin this equation are the following:C=consumerconsumption—theamountofgoodsandservicespurchasedbyindividualsandbusinesses.I = business investment—the money invested in facilities, development, equipment, etc.NX=netexports—thedifferencebetweenthegoodsandservicesanationsellsabroadandthose imported from other countries.G=governmentspending—theamountofmoneythegovernmentputsintotheeconomybypurchasing goods and services, employing people, and subsidizing individuals and businesses.TherelativeimportanceoftheseGDPcomponentsvariesbynation.AccordingtotheWorldBank,[10]intheUnitedStates,consumptionaccountsfornearly70percentoftotalnationalGDP,whereasinGermany,itis55percent,andinChina,about36percent.Germany’stradesurpluspro-videsthatcountrywithapositivenetexportfigureofaround6percent,whileChinaaddsabout4percent. The U.S.losesabout 3 percent of GDP to its chronic trade deficit.506A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
inflationA broad trend ofincreasing prices over timewith a corresponding dropin purchasing power.recessionA period of economicslowdown. In the UnitedStates, this is officiallydefined as twoconsecutive quarters ofdecline in the GDP.unemployment rateA percentage measure ofpeople without jobs whoare actively seeking work.factors of productionThe material inputs to themanufacturing process.inflationary spiralA situation in whichworkers demand higherwages in response torising prices andbusinesses raise prices tocover those wageincreases.hyperinflationA situation in which theinflation rate grows intodouble digits or more.coup dÕŽtatThe swift and forcefulseizure of governmentalpower by the nation’smilitary.ThebusinesscycleismeasuredbythechangeinrealGDP.“Real”meansadjustedforinflation.Inflationisthemeasurementofthenationalcurrency’spurchasingpower,anditshouldn’treflectan actual increase in consumption in the GDP calculation.Economistsgenerallyexpectaneconomytogrowabiteachyear.Theamountofgrowththatispossibleisafunctionofpopulationandtheopportunityforimprovementintheefficiencyoftheeconomy.Developednationshavelowergrowthrateexpectationsthandevelopingcountries.FortheUnitedStates,agrowthrateof3or4percentisconsideredhealthy.China,whichhasdependedondouble-digitgrowthformanyyears,isseeingitseconomymature,andtheBeijinggovernmentnowofficiallytargetsamorecautious7percentinannualgrowth.BoththeU.S.andChinahaverecently had trouble meeting those modest expectations.Whydogovernmentscareaboutthebusinesscycle?AlackofGDPgrowthisbadforbusi-nesses,andthatmeanspeopleareeitherlosingtheirjobsorfindingitdifficulttogetjobs.Thisiscalledarecession,andthejobproblemismeasuredwiththeunemploymentrate,thepercentageofpeoplewhoareableandwillingtoworkthatdon’thaveajob.[11]Governmentswantlowunem-ploymentbecausepeoplewithoutjobseventuallyblametheirleadersandseekachangeingovernment.WhentheeconomyisrobustandGDPisgrowingrapidly,nearlyeveryonehasajob.Businessesseekingtohirenewemployeesmustcontinuallyofferhigherwages,drivinguptheircosts.Thesamebiddingprocessoccursoverfactorsofproduction.Businessespassthesehigherlaborandmaterialcostsontoconsumersbyraisingprices.Ageneralincreaseinpricesacrossmanymarketsisthephenomenoncalledinflation.InflationabovezerobutcomfortablybelowGDPgrowthisgen-erallyconsideredacceptable.WheninflationismuchaboveGDPgrowth,consumersgetfewergoodsfortheirmoney.Workersusuallyreacttothisbydemandinghigherwages,andbusinessagainmustraisepricesandsoon.Thisviciouscircleisknownasaninflationaryspiral.Inflationthat gets into the double-digit rates is known ashyperinflation,and it can ruin an economy.Indemocraticcountries,liketheUK,arecessionorinflationaryspiralcanresultinachangeinpower.Theminoritypartymaycometopower,andtheywillselectanewprimeministerwithneweconomicpolicies.Inatotalitarianstate,economictroublesmay,unfortunately,leadtoriots,acoupd’état,orevencivilwar.Itiswiseforgovernmentstomakesuretheirpeoplearebusyworkingandenjoy a lifestyle they consider adequate.Chapter 17The Business Environment and Government507© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
fiscal policyGovernmental actions oftaxation or spendingdesigned to stimulate orrestrain economic growth.monetary policyGovernmental actionsdesigned to stimulate orrestrain economic growthby expanding orcontracting the supply ofmoney in the economy.stimulateGovernmental spending ortax cuts designed toincrease economic activityunder the Keynesianmodel.contractionaryCausing or relating to thecontraction (decline) of acountry’s economy.open marketoperationsA percentage measure ofaggregate prices overtime.expansionaryEconomic policies thatincrease the supply ofmoney in hopes ofboosting economicactivity.budget deficitThe shortfall between taxrevenues and governmentspending for a given year.national debtThe accumulation ofbudget deficits thataccount for the totalamount of money owed bya national government.Fiscal and Monetary PolicyAgovernmenthastwobasictoolkitsforinfluencingthemacroeconomy,fiscalpolicyandmonetarypolicy.Fiscalpolicyistheabilityofthegovernmenttoeitheraddorremovemoneyfromtheeconomythroughspendingandtaxation.Byspendingmoreortaxingless,thegovernmentattemptstostimulatetheeconomybyaddingmoneytoencouragebusinessestoinvestandcon-sumers to spend. This is known asexpansionarypolicy.Wheninflationthreatens,thegovernmenttriestodotheopposite.Thegovernmentincreasestaxesandreducesspending,moneyisremoved,andinvestmentandconsumptiondecreases.Thisis known ascontractionarypolicy.Savvybusinesspeoplepayattentiontogovernmentfiscalpolicy.Increasedspendingmeansopportunitiesforgovernmentcontracts,andincreasedtaxesarepainful.Increaseinventoryinpreparationfornewgovernmentbusinessorsellittobookprofitsbeforeataxhike.IntheU.S.,knowingwhatthegovernmentisgoingtodoinadvanceisn’treallythathard,asthesepoliciesusu-allytakemonthstowindtheirwaythroughCongressandacquirethepresident’ssignatureandarewell covered in the press.Monetarypolicyinvolvestheabilityofthegovernmenttocontrolthevalueofmoneybyman-agingitsquantityandbysettingkeyinterestrates.Governmentscanadjusttheamountofmoneyintheeconomybysimplycreatingmoreofit,lendingtobanks,andadjustingtherulesthatdeter-minehowbankscanloan.Governmentsareoftenabletocontrolkeyinterestratesdirectly.IntheUnitedStates,theFederalReserveBankisasemi-autonomousentitythatenactsmonetarypolicy.TheFed,asitiscommonlyknown,managesthemoneysupplythroughopenmarketoperations,aprocesswhereitparticipatesactivelyinthecommercialbondmarket.TheFedcanalsosetthereserverequirement—theamountofmoneyU.S.banksmustkeeponhand.Loweringthereserverequirementincreasesthecashavailableforloanstobusinesses,andraisingtherequirementlow-erstheavailablecash.Moremoneyintheeconomyisanexpansionarypolicy,spurringeconomicactivity.Areductioninthemoneysupplyisacontractionarymovetargetedatcontrollinginflation.TheFedalsohasthepowertosetinterestratesfortheovernightmoneyexchangesbanksusetokeeptheirreservesbalancedaswellastoloanmoneydirectlytobanksinneedatspecificinter-estrates.Lowerinterestratesgenerallyincreaselendingandtheavailabilityofmoneyintheeconomy, and higher rates reduce lending.Savvybusinesspeoplepayattentiontocurrentratesaswellasindicatorsinthefinancialpressabout future trends. Rate moves will change the cost of doing business and impact competitors.Deficits and DebtLikeaconsumerorabusiness,governmentscanspendmoremoneythantheytakeinfromtaxesandtariffs.Thisiscalleddeficitspendingorabudgetdeficit.Whenagovernmentengagesindeficitspending,itmakesuptheshortfallbyborrowingmoney,usuallybyissuingbondsthatwillberepaid sometime in the future along with regular interest payments.Theaccumulationofanation’sannualbudgetdeficitsisknownasitsnationaldebt.AccordingtotheU.S.Treasury,[12]theUnitedStateshasaccumulatedanationaldebtequaltoalmost$28tril-lionorabout130percentofU.S.GDPof$21trillion.ThismeansAmericaowesmorethananentireyear’sworthofeconomicactivity.ForGermany,thatnumberisunder100percent.InJapan,wherethegovernmenthasbeenstrugglingforyearstostimulateaneconomyhamperedbydemographictrends,thenationaldebthassurpassed200percentofGDP.Somecountries,suchasNorwayandChina, have a surplus of funds that the country invests or loans out to other nations for interest.508A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
entitlementsNondiscretionarygovernmental payments orservices guaranteed tosome recipients based ontheir prior contributions orstatus.leakageMoney that flows out of acountry’s economy.However,thesenumbersdon’ttelltheentirestoryasprovincial(state)andmunicipalgovern-mentsmayalsoaccumulatesignificantdebt,asisthecaseinboththeU.S.andChina.GovernmentsmayalsohaveincurredsignificantobligationstoprovidepaymentsorservicesforentitlementssuchasSocialSecurity,Medicare,veteransbenefits,ornationalhealthservices.Forashockingreal-time view of America’s debt, go tohttps://www.usdebtclock.org, and look at the “U.S. Debt Clock.”The U.S. debt clock, December 19, 2020.Source: https://www.usdebtclock.orgWhydoesthisconcernanentrepreneur?Firstly,thedebtmustbepaidbackatsomepoint,pos-siblywithhighertaxes.Asanation’sdebtrises,itislikelythatthegovernmentwillbeforcedtoofferhigherinterestratesonitsbonds.Thisraisesallinterestrateswithinthenation,includingbusinessloansandconsumerfinancing.Also,moneyspentonpayinginterestcannotbespentoninfrastructureandactivitiesthatmightbenefitbusinesses.Iftheholdersofyourgovernment’sdebtareforeign,thenthoseinterestpaymentsarenotspentathomeandarealeakagefromthenational economy that may slow future economic growth.The Business Cycle and Your BusinessHow did so many experts, including me, fail to see it [financial crisis] approaching?—Alan Greenspan, former Chairman of the U.S. Federal Reserve[13]Economicforecasting,likeweatherprediction,isanimperfectscienceandabitofanart.Bothemploytheoreticalmodelsandhistoricalobservationstoforecastthebehaviorofacomplexsys-tem.Whilephysicalforcessuchasheat,moisture,andwinddriveweathersystems,therationalandemotionaldecisionsofhumanbeingsmoveoureconomies.Bothshowsystemsthatdemonstratepatternsovershortandlongperiodsoftime.Eventhoughweatherpredictionsareimperfect,weChapter 17The Business Environment and Government509© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
yield curveA graphic representation ofthe rates paid for bondsfor various lengths ofmaturity. A normal yieldcurve ramps up, showingthat investors demandhigher annual returns forlonger commitments.bond termThe length of time until abond reaches its maturity.Bonds are issued withspecific maturity, at theend of which the capital isreturned to thebondholder, and interestpayments cease.Examples include a30-day, 1-year, or 10-yearbond.bond yieldThe rate of return aninvestor realizes on abond. For a newly issuedbond, this is simply thecoupon (interest) rate thebond pays. For a bondbeing resold, the lower thebond’s purchase price, thehigher the yield on thebond. When bonds are indemand, usually as a safeinvestment, prices forbonds rise, and yields fall.opportunity costThe loss incurred bymaking suboptimaleconomic choices. Theadditional monies youcould have earned hadyou been doing somethingelse that is more profitable,rather than what it was youactually chose to do.usethemtoplanourclothingandactivities.Macroeconomicforecastscanbesimilarlyvaluableforyour business.Economicpredictionsfortheimmediatefuturearen’tveryaccurate,andtheyaren’tusefuleitherbecauseknowingwhatisgoingtohappentomorrowdoesn’tprovidesufficienttimeforbusi-nessestomakestrategicchangestoexploitthem.However,thegoodnewsisthatsmallerfirmsreactfasterthanlargeones,arealstrategicadvantage.Stayabreastoftheglobaleconomicandfinancialenvironmentandstarteachdaywithafifteen-totwenty-minutescanofthefinancialnews and markets.Investorsandlargefirmshavemanyforecastingtools,buttheentrepreneurhaslittletimeandlittlemoneytospendonthose.However,youcantakeadvantageofoneofthebest-knownindica-torsoffutureeconomicactivity,thebondyieldcurve.TheU.S.TreasuryoffersbondstofinanceAmerica’spublicdebt.Thesebondspaytheinvestorbackinperiodsrangingfromthirtydaystothirtyyears;thisisthebondterm.TheTreasuryofferstheminanauctionformatwherebyamar-ketpriceisdeterminedfortheinterestrateofeachbondoffering;thisisthebondyield.Theyieldcurveisagraphshowingtheinterestratesofferedforbondsofvariousterms.Undernormaleco-nomicconditions,investorsdemandhigherinterestratesforlongertermsbecausethereisariskinvolvedwithtyingone’smoneyupforalongerperiodoftime.Withoutreadycash,investorsriskmissingoutonbetteruseoftheirmoney;thatriskiscalledtheopportunitycost.So,anormalyieldcurvelooksliketheonefromJulyof2003,showninFigure17.2.Youcanseethatinvestorswereget-tingslightlylessthan1percentannualinterestforathirty-daybondandmorethan4.5percentforatwenty-yearcommitment.Asignificantpremiumwasofferedtoencourageinvestorstotietheirmoney up for so long.FIGURE 17.2The Yield CurveThe Yield Curve on July 1, 2003.Source: U.S. Treasury: https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield510A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
inverted yield curveA circumstance in whichbond buyers are willing totake a lower return forlonger term bonds. Theinverted yield curve isconsidered an indication ofa coming recession.Let’sjumpaheadafewyearstoDecemberof2006.Figure17.3belowshowstheyieldcurvealongwiththe2003curve.Youcanseethatwhilethelong-term,twenty-yearcommitmentisalmostexactlythesameat4.5percent,theshort-termratehasshotuptoover5percent!(Youwillalsonotethatthethirty-yearbondwasintroducedthatyear.)Thisrarephenomenoniscalledaninvertedyieldcurve.Whywouldinvestorsbewillingtotietheirmoneyupforlongerforalowerrate,andwhy would they suddenly want so much for a short investment?FIGURE 17.3The Yield CurveThe Yield Curve on July 1, 2003 versus December 1, 2006.Source: U.S. Treasury: https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldTheexplanationisthatbondspayhigheryieldsandcanberesoldforapremium.Demandforlong-termbondswashigherthanforshort-termbondsinlate2006becausebondinvestorswereanticipatingthatyieldswoulddrop.Theywantedtolockinthecurrenthighyieldsandownvalu-ablehigh-interestbondsthatcouldbesoldataprofitwhenyieldsonnewbondsdrop.Whatarethebondtradersexpecting?Whatfutureeventdoyouthinkwouldcauseasuddendropininterestrates?Ifyouguessed“recession,”youarecorrect.Economicactivitydeclinesduringarecession,anddemandforloansdrops;lenderstendtolowerratestofindcustomers.Moreimportantly,thegov-ernment’sgo-torecessionresponseistostimulatetheeconomybyloweringrates.Bondtradersknowthis,andbondtradersareamongthesmartestpeopleonearth.Bigbanksandhedgefundspaymillionsofdollarstotheworld’stopfinancegraduatesandmathwhizzes,andtheybackthemupwithamazingcomputingpowerrunningmathematicalalgorithmsdesignedbyNobelPrizewinners.Aninvertedyieldcurvemeansthattheworld’ssmartestpeoplebelievethatarecessioniscoming, and they are betting billions of dollars on it. You should listen to them!Manyeconomistsoffereconomicforecastsaswell.TheEconomicCycleResearchInstituteorECRIisaleadingforecastinggroup.Theirmethodologyhasbeenafairlyreliableindicatorofreces-sion.Appliedtothelastfiftyyears,itpredictedallrecessionswithjustone“falsealarm”(a2012slowdownthatcameclosetoarecession).ThoughthedetailedECRIreportsareavailableonlywithasubscription,theirweeklyindexvaluecanbefoundontheirwebsiteatwww.businesscycle.com,and many news organizations offer excerpts of their predictions.HowreliablearetheyieldcurveandtheECRIweeklyindexaspredictors?Figure17.4showstheir combined predictive performance over the last three recessions.Chapter 17The Business Environment and Government511© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
secular trendThe long-term economictrend that occurs overdecades.FIGURE 17.4The Predictive Power of the Yield Curve and ECRI Weekly IndexSource: Greg AutryGlobal Secular TrendsThelonger,multi-decadeeconomictrendisknownastheseculartrend.Itisdrivenbydemo-graphicshifts,majortechnologyshifts,andresourceutilization.Suchtrendscansettheoverallbusinessclimateinanationforagenerationormore.AhistoricalexampleofademographicshiftinfluencingtheseculartrendwouldbethewaveofimmigrationtoCanadathatallowedthatnewnationtodeveloptheresourcesinitsWesternregionsduringthelatenineteenthandearlytwenti-ethcenturies.AnexampleoftechnologyshiftinfluencingtheseculartrendwouldbesteampowerandtheIndustrialRevolution,whichdrovelong-termgrowthinmanufacturingcoun-tries—notablyBritain,Germany,andtheUnitedStates—throughoutthenineteenthcentury.Bothoftheseeventscreatedimmenseopportunitiesforsmallbusinesspeopletoprosper.Manyentre-preneurialfortunesweremadeduringtheseperiodsoflong-termeconomicgrowth,andmanygreat firms were founded.Whileitisimpracticalforatextbooktodiscussthecurrentbusinesscycleandtellyouhowthebusinessclimateisgoingtobenextyear,long-termtrendsareworthnoting.Fourimportantmar-ketswillbebrieflyreviewed—Japan,China,theUnitedStates,andEurope—togiveyouanideaofhowtothinklikeaneconomistaboutthefuturebusinessenvironment.Thesearesimpleanalysesfocusedononeortwoissues,anditisimportanttorealizethatmanyimportantfactorstoconsiderhave been omitted.512A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
deflationThe process of droppingprices reflecting the higherpurchasing power ofcurrency. Deflation is oftenan indicator of lowaggregate demand andtypically occurs during arecession.JapanAfrighteningillustrationofabadseculartrendcanbefoundinJapan’s“lostdecade.”Duringthelatterportionofthetwentiethcentury,Japanenjoyedamajoreconomicboom,fueledbyefficient,qualitymanufacturingthatdroverobustautomobileandtechnologyexports.However,bythelate1990s,Japan’sfortuneshadtakenasharpturnfortheworse.Growthslowedtoalmostnothing,anddeflationthreatened.Thegovernmentattemptedtoaddressthiswiththetraditionalbusinesscycletoolsoffiscalandmonetarypolicy.However,massivedeficitspendingbythegovernmentandsustainedinterestratesnearzerohadonlyshort-termimpacts.Noneoftheusualtreatmentscouldcurethismoribundeconomy,andthe“lostdecade”extendedtomorethantwentyyears.ThetwomajorcausesofJapan’seconomicmorasshavebeentheislandnation’slowbirthrateandtheriseof competition from less expensive Chinese manufacturing.Aprimarydriverofdomesticconsumptionispopulationgrowth:Morepeoplebuymorethings.JapanhasexperiencedseveralyearsofdecliningpopulationasworkingJapaneseparentshavedevelopedapreferenceforsingle-childfamilies.Atthesametime,millionsofcheaperChineseworkersmovedintoenormousnewfactoriesfundedbyinvestmentsfromforeignbanksandcor-porations.Facilitiesliketheenormous“FoxconnCity”plantinShenzhen,wherehundredsofthou-sandsofemployeesbuildproductsforAmericanbrandslikeAppleandHP,underminedJapan’smanufacturingadvantages.EvenJapanesebrandslikeSonyandHondasetupshopacrosstheseatoexploittheopportunitiesinShanghaiandGuangzhou.Japanesecorporateearningsfell,andJapanese salarymen lost their jobs.Isthereanysilverliningtothis?Smallbusinessesmightconsideradoptingproductsandpric-ingstrategiessuchasimportingcheaperChinesegoodsthatmightappealtolessaffluentJapanese.TheymightalsoavoidbusinessesdependentondomesticJapanesemanufacturingaslongastheybelieveChinawillcontinuetodominate.Economy-savvyentrepreneurwillkeeptheireyeontheseculartrendforsignsofchange.However,thingslikebirthratesdon’tchangequicklyandhaveasignificant lag time in their effects.FIGURE 17.5JapanÕs Long Economic SlideSource: https://commons.wikimedia.org/wiki/File:Japan_GDP_Growth_Rate.pngJapanisnotaloneinfacingadecliningandagingpopulation.MostcountriesinAsiaandevenmanyinLatinAmericaandAfricaareseeingdeclinesingrowthratesoractualdropsintheirpop-ulationsastheymovefrompooragriculturaleconomies,wherechildrenareavaluablesourceoffarmlabor,tomanufacturingandservice-dominatedeconomies.Inaserviceeconomy,childrenareacostlyburdentoraiseandeducate.Taiwan,forinstance,nowhasoneofthelowestbirthratesinthe world.Chapter 17The Business Environment and Government513© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
ChinaLikeJapan,Chinaexperiencedaperiodofrapidgrowth,andfromatechnologydevelopmentper-spective,itisstillalandofopportunities.However,thenationfacesaparticularself-inflicteddemographicchallenge.China’sgovernment-mandated“OneChild”policycollapseditspopulationbeforeithadcompleteditstransitiontoaserviceeconomy,andthisthreatensitsfundamentalengineofgrowth.Movingintotheseconddecadeofthetwenty-firstcentury,theproblemhasshoweditselfinworkershortages,particularlyinthefastermovingEasterncoastalcities.Wagesincreased,andsomeforeignmanufacturersrelocatedtolower-wagenationsandhighlyautomatedfacilities in Europe and North America.AlthoughOneChildhasshiftedtoThreeChildren,thedraconianlawestablisheddemographicimbalancesinChinathatwilllastforgenerations.AhighratioofolderretireestoyoungworkersisplacingpressureonChina’ssocialservicessystem.Aculturalpreferenceformalechildrencom-binedwiththeOneChildlawresultedinsignificantshortageoffemalebirths.FemaleworkersdominateChina’smanufacturingassemblylines.ThisgenderdisparitywillslowChina’smanufac-turing-driveneconomyforageneration.Moreover,thelackofyoungwomenwillfurtherreduceChinese births and depress economic growth into the next.China’s active population control policies have impacted economic growth.Source: Greg AutryWouldtheriskofapotentialChineseslowdownmattertoabusinessowneroutsideofChina?ItdoesifyourproductrequiresacomponentmanufacturedinShanghaiorifyoumakeaproductthatChineseconsumersadore.Severalresource-richnationshavebecomedependentonexportingtoChinaratherthandevelopingtheirownmanufacturingindustries.Australia(ironandcoal),Peru(copper),andNigeria(oil)willsufferifChinesedemandfalters.ImaginethatyouownaroadsidecafénearanAustralianironmineoraNigerianoilfield.Ifthemineortheoilfieldshutdown,whatdo you think will happen to your café? Always keep your eye on the global economic environment.514A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
America’s technology-enabled agriculturalproduction is the most efficient on earth.Source: © Shutterstock, Inc.AmericaUntilrecently,theUnitedStateshasmaintainedrelativelyrobustpopulationgrowthduetoitshighrateofimmigration.First-generationimmigrantsarethebiggestcontributorstoitspopulationgrowth.Therearecomplexpoliticalfactorsthatthreatenthisimmigrationflow,butwithoutit,theU.S.birthratewouldfallbelowthereplacementlevel,threateningaJapanese-stylesecularslumpandleavingAmericawithaChinese-styleageimbalancethatcouldunderminetheSocialSecurityand Medicare programs.Ontheupside,Americahasavarietyofmatureindustriesthatsupportaverydiverseeconomy.Inadditiontoautos,agriculture,andbasicresourceproduction,theU.S.istheundisputedworldleaderinthedevelopmentofnewtechnologies.ThepersonalcomputerandinternetboomsfueledAmericangrowthforthelastthirtyyears,andbothneedarefresh.It’shardtoknowwherethenextmajortechnologicalbreakthroughwillcomefrom,butputtingabetontheUnitedStateswillstillgivethebestodds.America’sresearchuniversitiesarethebestintheworldandattractthesmarteststudentsfromaroundtheglobe.Theseschoolsaretightlyintegratedwiththebestangelandven-turecapitalnetworks.DespitemajorinvestmentsinR&Dcentersacrosstheglobe,itisreasonableto conclude the U.S. will continue its technical dominance for a generation.America’snaturalresourcebasealsoremainsstrong.Thislargenationisblessedwithabundantmineralandagriculturalwealth.Asignificantimprove-mentinenergyefficiencycombinedwitharecentboominoilandgasproductionachievedbyhydraulicfracturing(fracking)haseliminatedtheneedforfossilfuelimports.However,recentsocialandpoliticaldivisionsthathaverockedAmericansociety might impact long-term economic growth.EuropeEuropeisinasimilarpositiontotheU.S.,withmanymatureindustriesandafocusonnewtechnologies.ItalsohasasimilardecliningpopulationofethnicEuropeansnowaug-mented by immigrants primarily from Africa and the Middle East.TheEuropeanUnion(EU),apoliticalandeconomicfederationofEuropeanstates,willremainanimportantfactorinEurope’sbusinessclimate.ManyEUcountriesarealsomembersoftheEurozoneandusethecommoncurrencyknownasthe“euro.”TheEUandeurohavemadedoingbusinessacrossEuropemucheasierforbusinesses,largeandsmall.Peopleandgoodstravelacrossborderswithminimalresistance.Tariffsareeliminated,andwithintheEurozone,currencycon-versionsnolongercomplicatetransactions.Theseareupsidesforsmallbusinessesthathavefewresourcesdedicatedtodealingwithcomplexinternationaltradesystems.Italsomakesitmucheas-ier for American and Asian firms selling into the single market.Chapter 17The Business Environment and Government515© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
The European Union creates both cross-border market opportunities and regulatory challenges for startups inEurope.Source: © Shutterstock, Inc.However,anincreasingnumberofsmallfirmshaveconcludedthatEUregulationsandtaxesarenotworththeadvantagesofthesinglemarket.Thisissue,combinedwithasenseofnationalidentity,resultedintheUnitedKingdomvotingtoextractitselffromtheEUinadifficultprocessknownas“Brexit.”Germanyhasdisproportionatelydominatedthecontinenteconomically,asamajorexporterofmanygoods,includingautos,chemicals,andmachinetools.DebtproblemsinSouthern European nations like Greece and Italy have repeatedly destabilized the Eurozone.Key Takeaways•Fiscal and monetary policy are important for entrepreneurs to understand.•There are reasonable tools that can help entrepreneurs forecast the future business climate.•Stay abreast of the financial news.•Itiscriticaltobeawareofglobaleconomiceventsandtrendsthatmayimpactyourbusiness.516A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
cultureThe customs andinstitutional norms of aparticular group of people.consumer cultureThe manifestation ofculture centered aroundthe acquisition and use ofgoods.business cultureThe unique ways in whichbusiness is conducted in aparticular nation orcommunity.17.3Cultural EnvironmentLearning Objectives1.Recognize that cultural variations influence consumers.2.Recognize that cultural differences offer business opportunities.3.Recognize that culture is dynamic, not static.4.Understand how government influences culture.5.Understand how culture drives markets.Ifyou’vehadtheopportunitytotravelfar,you’vesurelynoticedthatconsumerproductandbrandpreferencesvaryfromcountrytocountryandevenfromregiontoregion.Asavisitortoaforeignland,youarelikelytoencounterandtryfoods,clothing,andentertainmentyoudidn’tevenknowexisted.Youmayfallinlovewithmanyoftheseexoticitems.Youmayfindsomeofthemsimplypuzzling.Youmayevenbeoffendedbyafew.Thisphenomenonisamanifestationofculture,thecustomsandinstitutionalnormsofaparticulargroupofpeople.Thecultureinwhichtheygrewupwillalwaysinfluenceyourcustomers’buyingpreferencesandthebehaviorofyourbusinessassociates.The Culture of Doing BusinessTheaspectsofculturesurroundingthesaleofgoodsareknownasconsumerculture.IntheU.S.,consumerculturehasbecomesoimportantthatAmericancitizensareroutinelyreferredtoas“con-sumers”inthemedia,andsupportingpoliciesthatservetheinterestsoftheseconsumersareimportanttoelectedofficials.Non-democraticnationsarelessmotivatedtorewardtheaveragecit-izenwithmaterialwealth.Historically,manyauthoritariancultureshavefocusedonusingmuchoftheireconomicproductiontosupporttheirrulingclass,hugebuildingprojects,nationalarts,andreligious institutions.Theuniquewaysinwhichbusinessisconductedinaparticularnationorcommunityisthebusinessculture.Businesscultureincludesveryobviousritualssuchashandshaking,hugging,orbowinguponmeetingordeparting.ThoseraisedinnationsinfluencedbyBritishstandardstendtogowiththehandshake.SouthernEuropeanscanbefondofhuggingtheirbestbusinessassociates,andkissesareanEasternEuropeantradition.Asiancultureshaveavarietyofunspokenbowingrules that may recognize the relative social or business standing of the various participants.Chapter 17The Business Environment and Government517© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
expatsExpatriates; those livingoutside of their nativecountry.In Japan, bowing is an important gesture of respect when greeting or departing.Source: © Shutterstock, Inc.Moreimportantly,thesesurface-levelbehaviordifferenceshideveryimportantsocialandbusi-nessrulesyoumustunderstandtosuccessfullyconductbusinessabroad.Forinstance,intheU.S.,businesspeoplegenerallyacceptthatthelegalsystemwillenforcetheircontractsandprotectthemfromfraudsters.Therefore,Americansareusuallyeagertosavetimeandmovequicklyfromaproposaltoanagreement.This“getdowntobusiness”attitudeofAmericanscanbegratinginnationswherepersonaltrustmustbefullydevelopedbeforeanysubstantialfinancialarrange-ment is agreed to.Ifyouwillbedoingbusinessinternationallyorwithinternationalcustomersinyourownmar-ket,youwoulddowelltolearnalotmoreaboutglobalbusinesscultures,andinparticular,thoseofthecountriesinwhichyouwillbeworking.Therearemanyexcellentbookstobefoundandonlineblogs written byexpatsliving and working in many countries.GlobalizationAmericanconsumerculturehasspreadfarandwide.Today,globalizationandtheaccompanyinggrowthofmultinationalbrandsandretailershavereducedtheappearanceoflocality.Onthesur-face,ourcitiesarestartingtolooklessunique.Nearlyeverymajorcity(exceptmaybeinNorthKorea)willhaveStarbucks,McDonald’s,andWalmartorsomeclosecopyofthose.Still,regionalandnationalcultureremainstrongunderthesurface,evenwithintheUnitedStates.InHawaii,theMcDonald’smenuincludeslocalfavoriteslikethePortuguesesausagebreakfastwithriceandthetaro pie. In Maine, you can get a lobster roll at the Golden Arches. What does this suggest?518A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
McDonald’s adapts their menu to accommodate regional cultural preferences.Source: Greg AutryWhenyoudobusinessabroad,youneedtobeculturallyawaretobesuccessfulandadapttotherealityyouwillbedoingbusinessin.Youcanalsotapunderservedmarketsbycateringtotrav-elersandimmigrantswithdifferentculturalperspectives.Capturingthesecustomersbymakingthemfeelathomeinastrangelandisagreatwaytoavoidgoinghead-to-headwithlargercompeti-torswhowillbeslowertoreacttodemographicchangesoruninterestedinwhattheyseeasnichemarkets.Thebestwaytodothatwellistohireandempoweremployeeswhounderstandthesecustomers the best—members of your target community.Dynamic CultureLet’sconsiderfastfoodcultureandbusiness.Youmaybesurprisedtofindthatfoodeateriesgobacktoancienttimes.TheRomancityofPompeii,buriedinvolcanicashbytheeruptionofMountVesuviusin79CE,containedhundredsofstreetcafés,calledthermopolium,wherefoodwasservedfromcountertopsthatlooksurprisinglylikeafoodcourtcounterfoundinanymoderncity.Britain’spopular“fishandchips”wasagrabandgomealfromthenineteenthcenturythatwasorig-inally sold across a counter and served in a disposal wrapper of used newspaper.Chapter 17The Business Environment and Government519© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Ancient Roman café counter, Pompeii, 79 CE.Source: Wikicommonshttps://commons.wikimedia.org/wiki/File:Pompeii_thermopolium_interior.jpgWhilemuchremainsthesame,theNewEntrepreneurialDynamicisalwaysfocusedontheopportunitycreatedbychange.Cultureisnoexception.Aspreviouslydiscussed,cultureisnotthesameacrossspace,anditisnotstaticintimeeither.Theprocessofglobalizationhasrecentlychangedbehaviorsandconsumerpreferences.Culturesareconstantlyrubbingupagainstandchanging each other.TheclassicAmericanhamburgerthatdefinestoday’sfastfoodwasdevelopedsometimearound1900,coincidingwiththebeginningofaperiodofAmericaneconomicandgeopoliticalascendency.Bytheendofthatcentury,itwasprobablythemostpopularmealontheplanet.Cui-sineexchangehasbeenatwo-wayprocessforAmericans,andtoday,afoodcourtinamallinHoustonwillofferfoodswithinspirationfromJapan,Mexico,andMongolia.Foodsandotherprod-uctsfalloutoffavorasthisprocesspromotessomeoptionsanddisfavorsothers.InfluencedbySouthAsianeatinghabits,manyAmericanshaveoptedtobecomevegetariansorveganssincethe1960s.Similarly,WesternperceptionshavereducedthepopularityofdogmeatinEastAsiancoun-tries where it was once common fare.520A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Surgeon General’s warning on U.S. cigarettepackages.Source: © Shutterstock, Inc.The Shoppes at Marina Bay Sands is one of Singapore’s largest luxury shopping malls.Source: Sorbis/Shutterstock.comOfcourse,thisprocessisnotlimitedtofood.Duringthetwentiethcentury,Europeanclothingstylesoverwhelmedthebusinessandcasualdressstandardsofmostoftheworld.Inparticular,awidevarietyoftraditionalmen’sclothingstylesgavewaytopants,shirts,andjackets.TodayyoucanbefairlysurethatifyouattendabusinessmeetinganywherefromLima,Peru,toSeoul,Korea,mostofyourmalepeerswillbecomfortablewearingasuitthatwouldbewelcomeinLondonahalf-century ago.Government and CultureGovernmentshavesignificantinfluenceoverconsumerculture.Thetobaccoindustryservesasanotableexampleofconsumerculturemanipulation.Forexample,theU.K.andU.S.governmentshaveconsciouslyunderminedthepopu-larityoftobaccoproductswithhealthwarningsrequiredonpackages,publicserviceannouncements,andeducationalprogramsaimedatdislodgingwhathadbeenamajorculturaltouchstoneinbothnations.Twentieth-centurymoviescenesfeaturingglamoroussmokerswerecounteredbygraphiccommercialsfea-turingindividualsdisfiguredbycancerandbreathingthroughtracheostomytubes.Thisgovernment-fundedmanipulationofculturehasbeenaccompaniedbyaneartotalbanonadvertisingfortobaccoproducts,blockingtheabilityofcigarettecompaniestopromotetheirproductsorfillthemarketwithimagesthatglorifytheuseoftheirdangerousproducts.TheAmericananti-tobaccocam-paignhasbeenextremelysuccessful,withU.S.smokingratesdroppingfrommorethan42percentofadultsin1962tolessthan18percentin2013.Mostofthosestillsmokingsaythat they want to quit.[14]Incontrast,China’scommunistgovernmentowns,runs,andpromotesastatetobaccomonop-olythatservesapopulationstillheavilyaddictedtosmoking.Chinesesmokersarenotunawareoftheriskstheyface,andtherehavebeensomepublicanti-smokingcampaigns.However,thegov-Chapter 17The Business Environment and Government521© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
ernment’sconflictofinteresthasslowedprogress,andcigarettesremainverypopular.BloombergreportsthatChinesegovernmenttobaccofirmshave“sponsored”elementaryschoolsandoneinstalledsignsforyoungstudentsthatread,“Geniuscomesfromhardwork.Tobaccohelpsyoubecometalented.”[15]Anaspiringtobaccoentrepreneurisprobablybetteroffopeningasmokeshopin Shanghai than in San Francisco.Thebroaderlessonisthatyouneedtoconsiderthegovernment’sperspectiveofyourproductandanticipatewhethertheyarelikelytoblessitoropposeitinthefuture.Ifyouareconsideringgoingintothee-cigaretteor“vaping”market,youwillfindthattheU.S.governmentisbeginningtoreacttothisnewtrend.Doyoubelievetheywillletitflourish?Probablynot.Afewcampaignstoopposethisnewhabitarealreadyappearing,andyoushouldexpectalotmoreregulationinthefuture.Ontheotherhand,ifyoustartabusinessinanareathegovernmentconsidersa“socialgood,”youmayverywellfindyourselfsupportedbythetaxpayers.GovernmentsinEuropeandNorthAmericahavebeenparticularlyeagertosubsidizefirmsinthealternativeenergysectorslikesolarandwindpower.Theydothisinthehopethatthesetechnologieswillreducebothlocalandglobalpollution.Entrepreneursintheseindustrieshavewiselypromotedthesocialgoodtheirproductspromise in order to keep the government on their side.Key Takeaways•Your customers’ consumption habits are attached to the culture they were raised in.•Culture varies regionally and globally.•Culture varies over time and is heavily influenced by globalization.•Governments can influence the public’s perception of a product.•Governments will support products that align with their policy goals.17.4Technical EnvironmentLearning Objectives1.Understand how technological change creates opportunities.2.Understand how government policy influences technological developments.AcommonperceptionisthatnewtechnologiesspringfullyformedfromthegaragesofSiliconVal-ley.Inourmind’seye,weseesmartengineersworkingdiligentlyaloneorinsmallgroups.Theyareconceiving,designing,andcommercializingamazingnewproductsandservicesthatwillrev-olutionizeourworld.Therealityisthatthesetransformativegeniusesareactuallyembeddedinacomplextechnologyecosystem.Moreoftenthannot,the“new”productstheycreatearerecom-binedanddisruptiveapplicationsofexistingtechnologiesorthepracticalapplicationofbasicscientificdiscoveriesmadeelsewhere.“Elsewhere,”inthiscase,isusuallyauniversitylaboratory.ManyofthesearefundedbygrantsfromtheNationalScienceFoundation,DepartmentofDefense,or other government agencies.522A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
anchor customerA single early, large, anddependable customer thatprovides a stable revenuesource that enables abusiness to pursue otherclients.A picture of the garage in Los Altos, CA, where Apple was born.Source: turtix/Shutterstock.comPictureSteveWozniakandSteveJobsinthatproverbialgarage.Thegarageitselfisveryreal.Infact,itisstillthere.Ifyouareinthearea,youcandrivebyandtakealook.[16]You’llfinditlooksjustlikeitdidin1975whenthetwoStevesweresittinginthere,quietlypreparingtochangetheworld.You will not notice the invisible hand of government there, but it was very present.Whilethereisnodenyingthegeniusofthesetwogreatentrepreneurs,itisimportanttonotethattheydidnot“invent”thecomputernorfashionthebasiccomponentsthatwentintotheircre-ation.Woz’srealgeniuswasinthemostefficientarrangementof“offtheshelf”technologyintheformofintegratedcircuits(“chips”)intoahomecomputer.ThefirstdigitalcomputersandmuchofthebasicscienceunderlyingthecircuitstheyusedhadbeendevelopedintheproceedingdecadeswithfundingfromtheU.S.governmentandmilitary.Themilitaryandspaceprogramhavealsoserved as importantanchor customersfor many American tech companies.InhisauthorizedbiographybyWalterIsaacson,JobsnotesthatmilitaryresearchandtheArmysurplusstoresaroundSiliconValleyprovidedanenvironmentinwhich“technologygeeks”couldflourish.JobslearnedtoprogramonaNASAtimesharingcomputeratthenearbyAmesResearchCenter.Thattrendofexploitinghybridgovernment-privatetechnologyhasbeenfoundineveryAppleproduct.Inherbook,TheEntrepreneurialState,SussexUniversityeconomistMar-ianaMazzucatowrites,“Nearlyeverystate-of-the-arttechnologyfoundintheiPod,iPhone,andiPadisanoftenoverlookedandignoredachievementoftheresearcheffortsandfundingsupportofthegovernmentandmilitary.”ExamplesofU.S.military-developedtechnologyinyouriPhoneincludethe“Siri”voicerecognitionsystemandtheGPSsatellitesystemthatsupportsthemapsappandpopular geocaching games like Pokémon Go.TheinternetitselfwascreatedbytheU.S.DefenseAdvancedResearchProjectsAgency(DARPA).Tocomplementthat,thefirstwebbrowser[17]wasdevelopedin1991byTimBerners-Lee,aBritishscientistworkingattheCERNnuclearresearchcenter.CERNissupportedbyacoalitionofEuropeangovernments.Berners-Lee’sdesignfortheWorldWideWebwasinspiredbya1980sAppleproductcalled“HyperCard,”andheevendevelopedthewebonaNeXTmachine,thecomputerdevelopedbySteveJobsafterheleftApple.CommercialfirmsquicklycommercializedCERN’swebinterface.Todayyou’llfindabrowseroneverycomputer,tablet,andphone.You’llevenfindthemincars.Chapter 17The Business Environment and Government523© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
power relationshipThe relative positions ofsocial power between twoindividuals or organizations(firms).deferenceA humble and respectfulsubmission to another.Thisconstantfeedbackbetweengovernment-fundedresearchandcommerciallyfocusedentrepreneurshasdriventhetechnologybusinessforwardforyears.Howdoesthisrelatetoyoursmall business?Itmaybethatyourelectronicskioskorgameappissimplythepassivebeneficiaryofcoolnewtechproducts,butifyouareinthetechdevelopmentbusiness,Isuggestthatyoupayattentiontowheregovernmentresearchisheaded.WhatisDARPAworkingontoday?Theyareactuallyprettyopenabouttheirresearchandevenhostpubliceventsandcompetitionstoengagethetechdevel-opmentcommunityinthistwo-wayprocess.[18]Currently,robotics,artificialintelligence,unmannedaerial vehicles, and nanotech are some of their major areas of focus.Key Takeaways•Government-funded research and purchasing create opportunities for startups.•Entrepreneurs should stay abreast of governmental interests and needs in technology.•Alwaysbethinkingofhowagovernment-developedorsubsidizedtechnologymightaddvalue in commercial markets.17.5Government as a Customer or aVendorLearning Objectives1.Understand the role of government in your market.2.Recognize the benefits and challenges of the governmental customer.3.Recognizethataccesstogovernmentbusinessorresourcesmaydependonaccessandstatus.4.Recognize that the government can be a competitor.Formanyentrepreneurs,theideaofwinningacontractfromamunicipalityorregionalgovern-mentisaveryattractiveidea.Agovernmentcontractwouldprovideasteadysourceofrevenuefromadependablecustomerandaddprestigetothefirm.Afterall,ifthecityorstateusestheirproductorservices,shouldn’teveryone?Governmentbusinessisnotwithoutitsdownsides,how-ever. Can you think of what the problems might be?Havingthegovernmentasacustomercanbemuchharderthandealingwithacommercialclient.Governmentshaveawell-deservedreputationforbeingunresponsiveclientsandvendors.Theyknowtheyaretheverybiggestcustomerorsupplierinyourworld,andthatmakesforaveryunequalpowerrelationship.Youneedthem,andtheyprobablydon’tneedyou.Evenifyourprod-uctorserviceismuchbetterorfarcheaper,governmentsarenotsubjecttotheimmediateconcernsofeconomiccompetitivenessthatdriveyourcommercialpartners;theygenerallynevergooutofbusiness.Anotherproblemisthatgovernmentjobsaremuchmoresecurethantheirprivate-sectorcounterparts.Governmentsalariesaredeterminedbyformulaorfavoritism(dependingonthenation),notonperformanceorcustomersatisfaction.Unfortunately,thisoftenshowsintheatti-tudeofindividualgovernmentworkersyouencounter.Notdealingfairlywithyourbusinessis524A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
developing countriesNations that have not fullyindustrialized nordeveloped a sophisticatedconsumer economy andhave a lower averagestandard of living thanwealthier countries.In some cultures, an envelope full of cash is asexpected as a handshake when agreeing to alarge deal.Source: © Shutterstock, Inc.rule of lawThe circumstance underwhich governments followtheir constitutional rulesand firms can predict thelegal outcomes of theirbehavior.request for proposalA document askingpotential vendors topropose a solution to aproblem by defining aproject.request for bidA document askingpotential vendors toprovide pricing on adefined project.bureaucratsThe individuals who do thework in a complexgovernmental system.hardlygoingtocostthemtheirjoborpaycheck.Itisusuallybesttoapproachgovernmentalemployees with charm and somedeference.WhileoutrightcorruptionisrareindevelopedeconomiesliketheUnitedStatesorBritain,inmanydevelopingcountries,itisoftenassumedyouwillhavetobribeagovernmentofficialjusttogetthemtodotheirjob.[19]AsurveyofIndiansreportedthat62percentadmittedtopayingbribesinordertoobtainfairtreatmentfromgovernmentalactorsinsituationsfrompayingtaxestoobtaining health care.[20]Thegovernmentalsohastheuniqueabilitytosetthelegalrequirementsaswellasthetermsofyouragreementandisn’taslikelytoenforcethesamerulesuponitself.Evenifeverythingyoudeliverisentirelysatisfactory,theywillsimplynotpayifthepaperworkisn’t100percentcompletedperfectlyorifsometrivialservice is not performed precisely to specification.The Inside TrackGovernmentsinmuchoftheworldareplaguedwithinstitutionalcorruption.ThisincludesmostofLatinAmerica,Asia,andtheMiddleEast.Inthesecoun-tries,valuablegovernmentcontractsareoftenhandedoutaspoliticalfavors.Beingafriendorafamilymemberofanimportantlocalofficialisoftenthesurestpathtosuccessforasmallbusinesspersonwhoaspirestogovernmentcontracts.Thesecond-bestoptionistosupportthelikelywinnerintheirelectionbidorpowerstruggle.Thedownsideofthisisthatwhenyourfactionlosesitsgriponpower,youmaylosesomeorallofyourbusiness.Youmayevenbethevictimofintentionalregulatoryabusebyanewregimeresentfulofyoursupportfortheirpredecessor.Myethicalcompassrequiresmetoencourageyouto avoid doing business with corrupt governments, though I know that is not always possible.Innationswithabetter-establishedruleoflaw,thereisusuallyadesiretoensurethatpublicmoniesarewellspentandthepurchasingdecisionsofgovernmentalagenciesaremoretranspar-ent.A2011OECDreportnotedthat“Estonia,Iceland,Italy,Japan,andKoreastandoutasmakingthemosttypesofprocurementinformationavailabletothepublic.”Purchasingchoicesarealsoroutinely audited to discourage corruption.Toensurethatthetaxpayersreceivethebestvalue,itiscommonthatcontractsareawardedtothelowest-costqualifiedbidderinaveryformalprocess.Insuchaprocess,theagencyrequiringservicesorproductswillissuearequestforproposalorarequestforbidorsimilardocument.Thisisaformfilledwithquestionsdesignedtodeterminethesuitabilityofyourorganizationtoaccommodatetheagency’sneedsaswellasyourpricing.Thefirmthatoffersthelowestpriceandanswersallthequestionstothereviewers’satisfactionisawardedthesaleorcontract.However,don’tbelievethatthissystemisperfectlyfair.Preferencesforfriendsandfamilystillexist,andthere are many creative ways to circumvent the process.Managerswhorungovernmentagenciespreferdealingwithvendorsthey’vehadsuccesswithandthatarerunbypeopletheycandependon.Theydirectpurchasingtothesefamiliarorganiza-tionsbecauseitmakestheirworkeasierandtheoutcomesmorepredictable.Asthenewfirmontheblock,youwillfacemanybarrierstoentry.However,onceyoudoget“inthesystem,”itcanbeanimportantadvantage.Thekeytosuccessistofindanopportunitytoproveyourselfandmakefriendswithinthesystem.Gainingthetrustofbureaucratstakestimeandpatience.Pushingangrily from outside may label you and your firm as a troublemaker.Thelowestbidderprocessoftenresultsingovernmentvendorsworkingonverythinmargins.Thosesmallprofitscanleavevendorsunabletodeliverahigh-qualityproductorservice.Hence,thesarcasticsaying,“It’sgoodenoughforgovernmentwork”isoftenusedtoexcuseinferiorworkman-ship.Chapter 17The Business Environment and Government525© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Thiscombinationoflowmarginsandtheslowpaymentprocessingofgovernmentcontractsisparticularlydifficultforentrepreneurs.Thecashflowchallengesofwinningagovernmentcontracthavebeenknowntoactuallyputsmallcompaniesoutofbusiness!Thegoodnewsisthatthegov-ernmentusuallydoeshavethemoneytopay,andwhenproperlypushed,itwilleventuallycoughupthecheck.Thatmeansthatgettingaccountsreceivablefinancingorfactoringonyourgovern-mentpurchaseordersisusuallypossible.However,thelowmarginsingovernmentworkcanmakethechoicetopayinterestorfeesonsuchloansunappealing.Ifyoudecidetopursuegovernmentwork,don’tsimplylookatabigsalesfigure;makesureyou’recapableoflivingonthemarginsandwaiting for the payments.Sometimesbeingasmallbusinesscanactuallyofferopportunitiestodobusinesswiththegov-ernment.Manynational,regional,andlocalgovernmentshaveprogramstohelpsmallbusinessesacquireorcompeteforgovernmentcontracts.Theseprogramsincludesetasidesthatprovideexplicitpreferencetosmallbusinessesaswellasthoseownedbyminorities,indigenouspeoples,women,orthedisabled.Suchpreferencesmayincluderequiringthatagenciesawardaspecificper-centageofcontractstosmallormedium-sizedenterprises.Agenciesmayalsobeallowedtoacceptbidsfromsuchfirmsthatareuptosomespecificpercentagehigherthanthoseoftheirlargercom-petitors,ortheymayhavespecial,streamlinedapplicationprocessesforsmallbusinesses.A2012WorldBankstudynotedthatthefollowingcountrieshavesignificantprogramstoincreasegovern-mentalcontractaccessforsuchfirms:Australia,Canada,Malaysia,theUnitedKingdom,theUnitedStates, and South Africa.[21]TheUnitedStatesisparticularlyaggressiveinthisareawithanexplicitrequirementthatatleast23percentofallfederalcontractsbeawardedtosmallbusinesses.Italsohastargetedsub-goals:•Women-Owned Small Business—5 percent•Small Disadvantaged Business—5 percent (ethnic minority-owned)•Service-Disabled Veteran-Owned Small Business—3 percent•HUBZone—3 percent (economically disadvantaged areas)IntheUnitedStates,therequirementfor“ownership”inthesesubgoalcategoriesisasimplemajorityor51percent.Thissuggeststhatinpartnerships,itmaybeadvantageoustoawardmajor-ityownershiptofemale,minority,ordisabledpartner(s).Itisnotuncommonforwife-husbandbusinessesthatareinterestedinpursuinggovernmentcontractstochoosetobe“woman-owned”in anticipation of having an advantage in government set asides.Notethatthat51percentofsharesmustbeheldbymembersofoneofthesegroups,andthatyoucanqualifyfortwogroupsbutnotviaacombinationoflessthan51percentineach.Forinstance,ifaHispanicwomanfoundsabusinessandretainsacontrollinginterestof60percent,thatfirmqualifiesintwocategories(women-ownedandeconomicallydisadvantaged).However,afirmgainsnoadvantageifitsplitsanallocationof50percenttoawhitewomanand50percenttoaHispanicmale.Besureyouunderstandtherulesofthesesetasidesifyouintendtopursuethem.The U.S. Small Business Administration website provides details.Governmental CompetitorsDidyoueverconsiderthatthegovernmentmaybeacompetitorforyoursmallbusiness?Inmanycountries,thegovernmentisamajorownerandoperatorofbusinesses.Althoughnationalcompaniesareusuallypicturedaslargetransportationandresourcefirms,theycanbeseriouscom-petitors for small businesses.TheUnitedStatesisgenerallyconsideredtoberelativelyfreeofstate-ownedenterprises.How-ever,theydoexistanddocompetewithsmallbusinessesinmanyways.Ifyou’rerunningabicyclecourierserviceinNewYorkCity,you’realwayscompetingwiththelowbaseratesetbytheU.S.526A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
PostalService.Ifpeoplecanwaitoneday,theyaregoingtoletthegovernment-subsidizedservicedelivertheirpaperwork.IfyouownasmallcafésouthoftheU.S.CapitolbuildinginWashington,D.C.,you’recompetingwiththecongressionalcafeteriaslocatedinthebasementsofcongressionalofficebuildingsthatofferlow-pricedfaretopoliticians,governmentworkers,andvisitors.Manyutilities and local transportation systems are owned by government-controlled corporations.Europehasgenerallybeenprivatizingbusiness,particularly,governmentownershipinthingslikeoil,mining,andaerospace.However,asinAmerica,itshandcanstillbeseeninmanyplaces.IfyouownalocaltouroperationinDublin,Ireland,oneofyourcompetitorsfortouristdollarsisthe“GhostBusTour,”whichpromises“ThemostterrifyingexperienceinDublin!”TheGhostBusisrunby Dublin Bus, part of Córas Iompair Éireann (CIÉ), an Irish statutory (state-owned) corporation.InChina,variouslevelsofgovernmentownandoperatemanufacturingfirms,banks,airlines,andmore.IfyouownacornerstoreinShanghai,youmustcountthegovernmentamongyourmostseriouscompetitors.Thestate-ownedShanghaiBailianGroupownsseveralofthenation’slargestretailstorechains,includingthepopularLianhuaSupermarkets,whichhavemorethan5,000 locations nationwide.Thesecrettocompetingwithgovernmentfirmsisusuallytoeitherfindanichetheycan’tfillorfindawaytoleveragethegovernment’sinvestmenttoyourownadvantage.TheU.S.PostalSer-vicesisunlikelytogointosame-daydelivery,sosmalloperatorsflourishinthatniche.Ifyou’reinDublin,youmightjustdigupagoodtaleaboutaromanticmurderinordertogetyoursmallrestau-rant included as a stop on the Ghost Bus Tour.Key Takeaways•The government can be a very large customer for your firm.•Entrepreneursmayhaveadvantagesinqualifyingforsomegovernmentalbusinessopportu-nities.•Eventhoughgovernmentcontractsofferbenefits,workingwiththegovernmentcanbechal-lenging due to low margins and slow payment processes.•The government can be a direct competitor to your business.17.6International TradeLearning Objectives1.Understand the international trade environment.2.Recognize the significance of the governmental regulation of trade.3.Understand free trade zones.Chapter 17The Business Environment and Government527© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
importingThe process of bringing aproduct into a countryfrom abroad.importerOne who brings productsinto a country fromabroad.exportingThe process of sending aproduct to anothercountry.Millions of products are shipped between thousands of ports across the globe.Source: © Shutterstock, Inc.AppleisafamousAmericanbrand,anditsproductsallproudlyproclaim,“DesignedinCalifor-nia.”However,ifyouownafloristshopinCupertino,andyougotoApple’swebsitetoorderaniPadtouseasacashregisterforyourfloristshop,youareengagingininternationaltrade.Youwillbeimportingaproduct.American-basedApplecontractsthemanufacturingofthatproducttoTai-wanese-ownedcompanieswhoactuallymakeitinShenzhenorChengdu,China.Apple’sonlinesystemsforwardtheorderdirectlytothefactorywhowillshipitacrossthePacificOcean,onaFedEx plane, to your business.Duringthespringandsummer,mostoftheflowersyourshopsellswillcomefromCalifornia’scentralcoast,hometosomeofthehighestqualityandmostproductiveflowerfarmsintheworld.However,duringthewinter,youwillbesellingflowersflowninfromSouthAmerica.Yourinven-tory needs also make you animporter.IfyouownakioskinashoppingmallinOttawathatsellssmartphoneaccessories,you’reprob-ablybuyingthemfromAlibaba’sonlinemarketplace.ProductslistedonAlibaba.comcomefromallovertheworld,andthemajorityofsmartphonecases,cords,andthelikewillcomefromChina.Intoday’sglobaleconomy,itisnearlyimpossibletorunabusinesswithoutimportingequipmentand/or inventory from some other country.Ifyou’reaflowerfarmerinCalifornia,youmayshipproductstoJapan.Ifyouownasmallfac-toryoutsideofShanghaimakingsmartphonecases,yourcustomermaybethatkioskownerintheOttawamall.Whenacompanysellsgoodstoabusinessorconsumerinanothercountry,theyareexportingtheir product.528A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
customsGovernmental officials oroffices charged withregulating internationaltrade.tariffA tax charged on importedproducts designed toprotect the competitiveadvantage of domesticproducts and raisegovernment revenues.importThe process of bringingproducts from a vendor inanother country into thiscountry for the purpose ofsale.quotaA limit on the quantity ofimports of a particularproduct from a particularcountry.Whenanyoftheseproductscrossaborder,theyaresubjecttoinspectionsbycustomsagents.Customsisagovernmentofficeformanagingtrade.Governmentscontroltheflowofproductsandservicesacrosstheirbordersforeconomic,revenue,political,andnationalsecurityreasons.Themannerinwhichgovernmentsmanageinternationaltraderelationsisextremelyimportanttobusinesseslargeandsmall.Governmentsgenerallychargesomefeeortariffforproductsorser-vicesenteringorexitingtheircountry.Atariffaccomplishesseveraltasks,includingfundingthecustomsservice,generatingadditionalrevenueforthegovernment,andincreasingthepricesofimportedgoodstodiscouragetheirconsumption.Whywouldyourgovernmentwanttoincreasethepriceofaproductyouarebuyingfromabroad?Canyouthinkofwhytheymightwanttodis-courage the consumption of some goods from some countries?Considercigarettes.Inthe1980s,thecountryofThailandbannedtheimportofAmericantobaccoproductsinorder“toprotectthehealthofThaicitizens.”TheU.S.governmentprotestedagainstthis“traderestriction.”Wouldyouagreethatpreventingtheimportationofadangerousdrugwasalegitimatefunctionofgovernmentinthiscase?DidtheThaigovernmentdotherightthing?U.S.tobaccocompaniesarehugeconglomerates.AThaigovernmentmonopoly,actuallycalled“ThailandTobaccoMonopoly,”controlsallproductionanddistributionoftobaccointhatnation.Sowhat does a trade dispute like this have to do with small businesses?ThisdecisionwasfrustratingforThaishopownersastheircustomersliterarilycravedthoseAmericansmokesthatbroughtlargerprofits.TheyunderstoodtheThaigovernmentactuallypro-motedandsubsidizeddomesticcigaretteproduction.Cynically,thegovernment’srealinterestwasprobablyinprotectingitsownbusiness,notthehealthofitscitizens.TheU.S.,backingitsbigtobaccofirms,pushedforahearingbeforetheGeneralAgreementonTariffsandTrade(GATT)panel.TheGATTpanelconcurredwiththisassertion,anditsrulingforcedThailandtoaccepttheAmerican products.Likemostinternationaltradeissues,amuchdeeperissuewasactuallygoingonintheThai-U.S.tobaccoargument.Governmentsandlargebusinessesfighteachotheroverbilateralandmultilat-eraltradeagreements.Smallbusinesses,likeThaicornershops,areoftenstuckinthemiddleofallthis.Ifyourbusinessimportsorexportssignificantlyimpacttradeagreements,itisimportantyouunderstand this.Aquotathatlimitsthequantityofimportsestablishestradebarriersthatkeepforeignfirmsoutofthedomesticmarket.Thiscanbeanadvantageifyoursmallbusinesscompetesdirectlywithimportedproducts.IfyourEuropeanfirmmakesrubberboatsinFinlandandChineseimportsarrivethatsellforlessthanyourcostofrawmaterials,you’reindeepwater.You’dlikealawtolimitthe number of those imports.Yourcompetitorsmayalsogainanadvantagefromlowercostorhigherqualityimports.Imag-inethatyourfamilyhasownedashopinAddisAbaba,Ethiopia,sellinglocallymadeclothingforyears.Youhavestrongpersonalrelationshipswiththesmallfactoriesandin-homeseamstresseswhomaketheseproducts.Inrecentyears,theshopsaroundyoubeginfillingwithclothesimportedfromhugefactoriesinVietnam,Malaysia,andBangladesh.Theimportedclotheshaveafinerfinish,aremoreintouchwithglobalfashiontrends,andarecheaper.Yourstorehasaseriousproblem,andyou’d probably like to see a high tariff on imported clothing.Tradebarriersarebadifyouareexportingaproductintoanationthathashightariffsorimposesquotas.AswiththeThaicornershops,itcanalsobeaproblemifyourbusinessdependsonresellingorusingimportedproducts.Whatdoyouthinkhappenswhenagovernmentbanstheimportation of a product or service that many people want?Inmanycases,resellersandconsumerssimplyfindwaystocircumventtradebarriers.Forinstance,ChinabanstheuseofmanyU.S.smartphoneappsandwebsiteslikeFacebookandTwitter,butsophisticatedusersinShanghaiorBeijingroutinelypostonthesesitesanyway,usingtechnicaltrickstocircumventgovernmentcensors.Individualsandcompaniesmayalsoimportillegalphys-icalproductsbyhidingthemincontainersofotherproducts.WhileIdon’trecommendsmuggling,Chapter 17The Business Environment and Government529© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
globalismA world view and policiesthat encourage the rapideconomic and culturalintegration of all nationswithout regard to nationalboundaries.ithasbeenacompetitiveadvantageofsmallbusinessesthroughouthistory,asitismoredifficultfor higher profile large businesses to get away with this sort of thing.Mosteconomistsbelievethatreducingtradebarriersincreasesglobalwealthandprosperity.Verylargebusinessesbenefitimmenselyfromglobaltrade.TheypromotethiseconomicideaofglobalismandencouragepoliticianstosupportfreetradearrangementssuchastheEuropeanUnionortheNorthAmericanFreeTradeAgreement(NAFTA),whichreducedbarriersbetweenMexico,Canada,andtheUnitedStates.Often,theconsequencesoftheseagreementscanbedisas-trousforsmallbusinessesinthehigher-pricedmarkets.ThousandsofsmallU.S.factoriesshutdown when NAFTA made manufacturing in Mexico attractive.Interview with Congressman Darrell IssaDarrell Issa is a congressman from the State of California.Source: Katherine Welles/Shutterstock.comDarrellIssaisasuccessfulentrepreneurwhomadehisfortunebydevelopingandmarketinginno-vativecaralarmsystemsinthe1980s.HewasamemberoftheUnitedStatesCongressfrom2001to2018andagainin2020.Hehasmaintainedaninterestininnovationandentrepreneur-shipandlegislationthataffectssmallbusiness.Thefollowinginterviewwasconductedinhisoffice in Washington, D.C.Prof. Autry:Prof. Autry:How did you get your start in business? Were you always an entrepreneur?CongressmanCongressmanIssa:Issa:Youknow,Istartedoutasayoungkidwiththeusualentrepreneurialoppor-tunities,likesellingThinMintstopayformyYMCAcampsummersandotherthingsforBoyScoutcamp.Thatsortofworkgetsyoutounderstandtheartofhustlingandwhetheryoucandoitornot.Moreimportantly,afterthesixthgrade,Iwasgrowingupinaneighborhoodinwhichalotofpeopleownedsmallbusinesses.Igottoseealotofwhatitwasliketoownasmallbusiness.Icouldseethesewerepeoplewhoearnedverygoodmoney.Theyusuallyworkedlonghours,butmadefarmoremoneythanmydadeverdidworkingforGeneralMotors.Also,Icametounder-standthattheriskofowningasmallbusinessisabalancingact,andthatwasprobablytheonlywayIcouldmakemoremoneythansomebodymadeworkingforsomebodyelse.So,bythetimeIwasincollege,Ihadasmallbusinessselling8-tracktapes,thecaraudioformatofthe70s.Iwas a wholesaler, and I had customers all over the Ohio area.Prof. Autry:Prof. Autry:Where did you go to school, and did that help with business?530A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
CongressmanCongressmanIssa:Issa:IwasatKentState;Ididn’tstartthere,butmybusinessdevelopedduringthetimeIwasatKent.IhadlearnedthatIcouldmakealotofmoneyif,infact,Icouldbuyatadollarandsellattwodollarsanddothatinvolume.IwasabletomakemoremoneytherethanIwouldhaveeverbeenabletoinawork-studyprogram.Aftergraduation,though,Ihadtoreturnto the Army, and that business came to an end.Prof. Autry:Prof. Autry:What did you do after your military service?CongressmanCongressmanIssa:Issa:BythetimeIlefttheArmy,IhadnodoubtthatIwantedtobeanentrepre-neur.Iinitiallyjoinedafailingcompanyinanefforttoturnitaround.Ididturnitaround,andalongtheway,Iexperimentedwithanumberofproducts.Thesewereoutsidetheboxproductsthatdidn’talwayssucceed.Oneofthemissittingoverthere(pointing),alittleelectronicbugzappertoyourrightinthatbrilliantboxyoucannotmisseveninthedark.Wealsomadeahalfadozenotherproducts.NoneofwhichweregreatsuccessuntilIgotintoradiofrequencyproducts,caralarms, security devices, and ultimately car audio. That was extremely successful.Prof. Autry:Prof. Autry:How successful? Was it easy?CongressmanCongressmanIssa:Issa:Itwasn’teasyatall.Thebusinessclimatewasdisastrous.Ihadstartedmybusinessduringatime,in1980,whenwehadunemploymentindoubledigits,interestratesindoubledigits,inflationindoubledigits.Throughoutthe80s,Iquietlybuiltmybusinessfromzeroto $60 million, with about $20 million of EBITA.Prof.Prof.Autry:Autry:Whatmadeyoutransitiontoapoliticalcareer,andhowdoesyourbusinessexperi-ence inform that?CongressmanCongressmanIssa:Issa:Iwasinvolvedinsigningthefrontsideofapaycheckandwasconcernedaboutmakingpayroll.Iwasworkinghardtomakethathappen,andalongcamepoliticianstellingmethatIwaspartofthe“greedofthe80s.”Thehubrisofthatcomingfromagovernororapresidenttellingsmallbusinessesthattheyweren’tcontributingpositivelytothenationbotheredme.So,Istarteddonatingtocandidateswhounderstoodhowtorunabusiness.Iwasalsolittlebitinvolvedinatradeassociation,whichgotmehereinWashington.Thosetwopathseventuallyledmetorunforoffice.WhenyouhavealltheseexperiencesrubbingupnexttomembersofCongress,youfigureoutthatpoliticiansaren’tanythingspecial;they’rejustcitizenslikeyouandme.Atthesametime,Isawalotofhowyouhavetoworktoteachpeopleingovernmenthowbusiness works because few in government have any idea.Prof. Autry:Prof. Autry:Can a politician truly understand entrepreneurship by being told about it?CongressmanCongressmanIssa:Issa:Idon’tthinkanyoneunderstandsentrepreneurshipunlessthey’vetakentheriskandatleastsomewhatpaidtheprice.Thereareplentypeoplewhoareextremelyfinanciallysuccessfulwhohavenoideaaboutentrepreneurship.Youknow,entrepreneurshipisrisk-taking,and unless you really feel the risk, I don’t think you really know what it is to be an entrepreneur.Ihadlotsofpeoplecometolecturesandseminarsovertheyears,particularlyMBAstudents.Theyallseemtowanttocollectasalarywhiletheyareinnovatingandgetprotectedfromriskbyinvestingotherpeople’smoney.Ihavetoexplaintothemthatthosewhoputinthelion’sshareofthemoneyandtakethelion’sshareoftheriskexpecttogetthelion’sshareofthereward.Youcan’t get anywhere in business without risking it yourself.Prof. Autry:Prof. Autry:Is there a balance to that?CongressmanCongressmanIssa:Issa:Well,thosethatjustputinmoneyandexpectareturnmissthepointthattheyareworkingoffthebacksofothers,andyouremployeeshavetobemotivatedifyou’regoingtobesuccessful.Conversely,employeesoftenunderestimate,particularlyinaunionenvironment,whatthevalueofcapitalandreturnoninvestmentis.It’sabalanceofviewpointsthatoursystemhandlesbetterthanmost.IsithereinWashingtonandseeagovernmentthatdoesn’tunderstandthat, particularly when they are using federal dollars.Prof. Autry:Prof. Autry:How do you work to improve the situation?CongressmanCongressmanIssa:Issa:Ourrepresentativesystemdependsonthepeopletrustingtheirleaderstomaketherightdecisions,butitalsorequiresthattherebealeveloftransparencysothattrustisnotblind.Weallknowthatbehindcloseddoors,humanbeingsdon’talwaysdotherightthing.So,I’vemadeitmybiggestprioritytoworkonexpandingtransparency,improvingtheFreedomofInformationAct,andtryingtobringaccountabilitybroadlytothefederalworkforce,includingcontractorsandpoliticalappointees.That’sbeenalotofwhatIfocusonasamemberofCon-gress, and I believe it is good for business, big and small.Chapter 17The Business Environment and Government531© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Adapt to Your Government or Change It!TheNewEntrepreneurialDynamicrecognizesthatbusinessesmustadapttotherealityoftheirenvironment.Asthischaptershows,thegovernmentisamajorcomponentofthatenvironment.Theremaybecircumstanceswhereyourfirmsimplycannotmakethatadaptationbecausethegovernmentofyournationorregionisopposedtoyourbusiness.Ifyourgovernmentdoesn’tallow you to run your business, you may want to change the government!Inademocraticcountry,youcanworktochangethelaw.Ifthisisalocalregulation,perhapsazoningissuethatwon’tletyourentoutroomsinlargeunoccupiedhomes,itmayberelativelyeasytochangetherule.Ifit’sastateorprovincialissue,itmaybemoreofachallenge,butitcanbedone.AnexampleofsmallbusinesseschangingamajorlawwastheCaliforniaballotpropo-sitionthatlegalizedmedicalmarijuanaclinics.Nationallaws,however,arenotoriouslydifficultforsmall businesses to change.Ifitisnotpossibletochangethelaw,youcanrelocateyourbusinesstoanareawhereitwillbeeasiertorun.Thismaybemovingfromahigh-taxandregulatoryenvironment,suchasNewYork,toalower-taxandless-regulatedstatelikeNewHampshire.Itmayalsoinvolveimmigratingfromahighlyrestrictivecountry,likeVietnam,toadevelopednationlikeCanada.Millionsofbusi-nesspeopleimmigrateeveryyeartopursuetheirentrepreneurialaspirations.Followyourdreams!Key Takeaways•International sales offer both significant opportunities and unique pitfalls.•Entrepreneursshouldbefamiliarwithinternationaltraderequirementsontheirbusiness,such as importing, exporting, and tariffs.•Entrepreneursfacingburdensomegovernmentalchallengescanworktochangethemorrelocate.17.7Case Study: A YoungEntrepreneur Learns about Taxes theHard WayThefollowingdialogueisbasedontheactualexperienceofthetextbookauthorasayoungmanencountering the government for the first time in his business career.“What’sa1099?”askedGreg,ayoungcomputerprogrammerwhohadgoneintobusinesssellingvideogamesacoupleyearsbackasahigh-schoolsenior.Apparently,itwassomesortofformthatcameinthemail.Greghadnotrecalledseeinganythingcalleda“1099,”butasanineteenyearold,hewasn’tparticularlyattentivetohismail,otherthantheenvelopesthatlookedliketheycontainedchecks.Envelopesthatlooked“boring”hadatendencytopileupandgetlostinthegeneralmay-hemofhishomeofficespace.Apparently,somethingaboutthis“1099”hadearnedhiman“auditinterview” at the IRS office in the local federal building.TheIRSagentontheothersideofthetablewasnotlookinghappy.Thisauditorworeasuitwithavestandhadthickglassesthatmadeaveryseriouslookingfacelookevenmoreintimidat-ing.Heexplaineddryly,“The1099isaformthatyourcustomersorcontractemployersusetoreportincomethatthey’vepaidtoyousothatwecanensurethatyouhavereporteditcorrectlyonyourtax return. The problem here is that we don’t see that income on your tax return.”532A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
“Oh. Is that a big problem?” replied the young entrepreneur.“Itcertainlycanbe,”repliedtheauditorsternly.“Ifyouhavenotclaimedthisincomeandyoudon’thaveexpensestooffsetallofit,youcouldowetaxesaswellaspenaltiesandaccumulatedinterest.”“Would that be a lot?”“Thepenaltiesaresubstantial,andsincethereturnisfromlastyear,you’vegotsomesignif-icantinteresttoworryaboutaswell.Ifyouwerefoundtohaveintentionallyavoideddeclaringthisincome,youcouldbesubjecttofurtherto…well,let’snotworryaboutthatyet.”Theauditoradjustedhisglassesandlookedacrosshisdeskatthelong-haired,teenagebusinesspersonslumpedcasuallyinthechair.Gregwaswearingarumpledalohashirt,shorts,andsandals.Notyourtypicalaudit candidate. Normally, they sat bolt upright and were conservatively dressed and respectful.“Worry about what?” asked Greg sheepishly.“Nevermind.Thefirstthingweneedtoknowis,didyou,infact,receivethemoniesreportedbyKent-SamuelCompuworks?Didyoudoworkforthemintheyearinquestion?Didtheypayyouapproximately $100,000 during that year?”“Idon’tknow.Imean,Iguessso.Ididn’treallycountitall.Icouldaskthebank,Ithink.Youknow, which checks I deposited and cashed and stuff.”Theauditorlookedpuzzled,“Couldn’twejustlookatyouraccountingrecords?Whomanagesyour books?”“Books?”“Whoentersinformationaboutyourtransactionsintoyouraccountingsystem?Canwespeakwiththatperson?DoyouhaveabookkeeperoraCPA?”LookingdownatGreg’shandwrittentaxreturn, the auditor seriously doubted there was any professional accounting involved here.“I don’t know. I mean, I just look at the bank balance and make sure I have enough.”“Ohdear,”mumbledtheauditor.Thiswasnotlookinggoodforthebeachbumprogrammerkid.“Sorry!” volunteered Greg, who was now beginning to share the auditor’s nervousness.Theauditorsensedthisnervousnessandusedaslightlyfriendliervoice,“Okay,let’sassumethereportingisaccurate.Doyouhaveanyexpensesagainstthisincomethatyoudidnotclaimonyourreturn? I don’t really see any expenses here at all.”“Expenses? You mean, like money I paid to people?” asked Greg.“Exactly!” the auditor responded hopefully.“Oh yeah, I had to pay a lot of people to do the programming and graphics for the games.”“Good.Idon’tsupposeyouissuedthem1099s?”askedtheauditorbeforeansweringhimself,“No,obviouslynot.”Hepausedandthencontinued,“Couldyougetmecopiesofthechecksyouwrote to these programmers?”“Uh, well, not really.”“Whynot?Yourbankshouldhavemailedthembacktoyouorcanreprintthem.Thoughtheymay charge you a fee to reprint.”“I didn’t use checks.”“Wellthen,justhowdidyoupaytheseprogrammers?”theauditorwasbeginningtolookagi-tated and sounded unfriendly again.“I just gave them money. I mean cash,” Greg offered meekly.“What?!Cash?Whyonearthdidyoupaythemwithcash?”theauditorhadleanedforwardandwasalmostoutofhischair.“Theydon’thavebankaccounts,Ithink?”Gregvolunteeredhelpfully,“They were pretty young.”“Young? How young were these programmers?”Chapter 17The Business Environment and Government533© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
“Idon’texactlyknow.They’rejustkidsfromaroundtheneighborhood.Freshmen,maybesomewere in junior high, like twelve to sixteen.”“Oh, my God,” the auditor buried his head in his hands.“What?” asked Greg and then suggested, “I’ve got some notes here!”“Notes? Records?”“Yep!”Gregwasmorepositive.Hereachedunderthechairandproducedashoeboxfullof3x5cardsandscrapsofnotepaper.“Eachcardshowsthegametheyworkedon.TherewereaLOTofthesegames.Wedidthemrealcheap,like$1,000each,forthiscompanyinL.A.Idon’tknowwhatthey wanted them for because they all sucked, but they didn’t seem to care.”“Kent-Samuelwereusingthemasapartofataxcreditscam.That’saseparateissuewearelooking into. Just let me see your notes.” The auditor reached across the table for the box.TheIRSagentremovedthelidandrifledthroughthebox.“Hmm,”hesaid,“thisonesays,‘Fly-ing Battle Monkeys!’ Is that the game?”“Yes, and underneath are the names of who worked on it and how much I paid them.”“That’s good. Ok, it says ‘Marcus – $200.’ Who is Marcus?” the auditor asked.Gregexplained,“MarcusisoneoftheprogrammersItrained.Well,theyaren’treallyprogram-mers;Ijustshowedthemhowtomodifytheexistingcodetomakeaslightlynewgamewithdifferent shapes.”“Fine, fine, but who is Marcus, and how old is he?”“I’m not sure. I think he’s a freshman. Fourteen, maybe?”Theauditorshookhishead,“Areyouawarethathiringworkersunder18requirespermitsandthat it may not be legal at all to hire those under 16?”“No.Well,Imean,IguessIhadn’tthoughtofitthatway,”Gregsaid.“IguessIhadtogetaworkpermitformyjobatthelibrarywhenIwas16,soIguess,well,Idon’tknow.HowamIsupposedtoknow about all those rules?” Greg was figuring that ignorance was the best play at this point.Theauditorpausedforaverylongtime.HelookedatGregandthecollectionofcardsandscraps of paper in the shoe box.Gregfidgetedanxiouslyinthesuddenlyuncomfortablechair.Hewasbeginningtoseethiswouldturnouttobeamuchbiggerproblemthanjustwastinghistimewithpaperwork.Maybethiswasacriminalviolation?Hebegantothink,“Canthisdudeputmeinjailforhiringkids?Oristhatanotheragencyhe’dhavetoreferthisto?Howmucharethesetaxesgoingtobe?HowwillIpay them?” He looked back over at the auditor.TheauditoradjustedhisglassesagainandlookeddirectlyatGreg.Afterwhatseemedlikefor-ever,hesaid,“It’scommonforyoungentrepreneurstobeunfamiliarwithcertainaspectsofthetaxandlaborcodes.It’simportantyouinvestthetimeinunderstandingwhatthoserulesarebeforeyoudobusiness.Thereareanumberoffederalandstateagenciesyouhavetobefamiliarwithanda lot of rules to follow.”“Yes,sir,”Gregrepliedwithanewlyfound,respectfultone.Suddenlyhewishedhe’ddressedmoreprofessionallyforthisauditinterview.“I’llfindoutaboutthat,”hevolunteered,tryingtosound eager to please.534A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
“Right.Anyway,forrightnow,”theauditorcontinuedashereplacedthelidontheshoeboxandpushed it back across the desk, “everything seems to be in order here.”Gregblinkedandreplayedthelastsentence:“Everythingseemstobeinorder.”Thatsoundedreallygood.Luckybreak.“Uh,thankyou,”hereplied,pickinguptheboxandrising.Theyoungentrepreneurfeltastrongdesiretoexittheroombeforetheauditorchangedhismind.“Thanks,”he offered again as he opened the door.“Oh, and one more thing,” the auditor called to stop him.Gregturnedinthedoorwayandsawthemaninthesuitwassmilingathim.“Yeah?”Gregasked.“Do NOT let this happen again, young man,” the IRS agent said and waved him out.Chapter 17The Business Environment and Government535© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Endnotes1.Schoonhoven,C.B.,&Romanelli,E.(2001).Thenewentrepreneurshipdynamic:Originsofentrepreneurshipandtheevolutionofindustries.Stan-ford University Press.2.Meyer,J.W.,andRowan,B.(1977).Institutionalizedorganizations:Formalstructureasmythandceremony.AmericanJournalofSociology,83(2),340–363.3.RonaldReagan,WhiteHousePressConference,August12,1986.https://www.youtube.com/watch?v=xhYJS80MgYA.4.Crane,DanielA.“Teslaandthecar‘dealers’lobby.”Regulation37(2014):10.5.Asofthedateofthiswriting,smallbusinesseswithfewerthanfifteenemployeesarenotsubjecttoADArequirements;also,anemployerwhoissubjecttoADArequirementsdoesnothavetoprovideareasonableaccommodationifitwouldcausean“unduehardship.”https://www.dol.gov/agencies/odep/publications/fact-sheets/americans-with-disabilities-act.6.Hand,BillingsLearned.Commissionerv.Newman.159F.2d848.2dCir.1947.7.Commonly ascribed to Winston Churchill.8.Itisveryimportanttounderstandthatyouonlycountthelasttimeanitemsold.Amanufacturermightsellawidgettoadistributorwhosellsittoaretailstorewhothensellstoindividuals.Inthisexample,youonlycountthe final sale to the consumer who buys it at the store.9.https://www.bea.gov/system/files/2020-04/GDP-Education-by-BEA.pdf10.https://data.worldbank.org/indicator/NE.CON.TOTL.ZS11.Governmentshaveatendencytofiddlewiththewaythesenumbersarecalculated,perhapstomaketheirconstituentsfeelbetterabouttheecon-omy.IntheUnitedStates,theunemploymentratehasbeenadjusteddownwardinrecentyearsbysimplynotcountingthe“long-termunem-ployed”and“discouragedworkers.”ManyU.S.economiststhereforepre-fertotrackthelaborforceparticipationrate,whichislesssubjecttointerpretation.12.https://www.treasurydirect.gov/govt/reports/pd/pd_debttothepenny.htm13.Greenspan,A.(2013).Neversawitcoming:Whythefinancialcrisistookeconomists by surprise.Foreign Affairs, 92(6), 88–96.14.http://www.cdc.gov/mmwr/preview/mmwrhtml/mm6347a4.htm?s_cid=mm6347a4_w,http://www.cdc.gov/tobacco/data_statistics/tables/trends/cig_smoking/15.http://www.bloomberg.com/bw/articles/2014-12-11/the-chinese-govern-ment-is-getting-rich-selling-cigarettes16.TheApplegarageislocatedat2066CristDriveinLosAltos,California.Thismodesthomeisinaquietresidentialarea.So,ifyouvisit,pleaseberespectfuloftheoccupantsandneighbors.Mostrecently,Jobs’step-motherwaslivinghere.Justtenmilesawayyou’llfindtheHewlett-Packardgarage,knownasthe“birthplaceofSiliconValley,”at367AddisonAvenuein Palo Alto. The HP garage is open to visitors as a privately run museum.17.Youcanstillvisittheveryfirstwebpageathttp://info.cern.ch/hypertext/WWW/TheProject.html.18.WanttohelpDARPAfindawaytofightaswarmofattackdrones?They’dliketohearfromyou:https://www.fbo.gov/utils/view?id=13ac36e8189939fa78f5b3dfc925b126.19.PayingbribestoforeigngovernmentofficialsviolatestheU.S.ForeignCor-ruptPracticesAct(FCPA)andappliestobothprivateandpubliclyheldcompanies.https://www.justice.gov/criminal-fraud/foreign-corrupt-prac-tices-act20.https://web.archive.org/web/20130811123343/http://www.iri.org.in/related_readings/India Corruption Study 2005.pdf21.https://consultations.worldbank.org/Data/hub/files/meetings/Procure-ment_Policies/BP-DIVERSITY-THROUGHSUPPLIERPREFERENCES.pdf536A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
CHAPTER 18Exiting and HarvestIf you don’t know where you are going, you’ll end up someplace else.—Yogi BerraBusiness magazines feature inspiring stories of success.Source: Spech/Shutterstock.comBrowsingthemagazinesatanairportconveniencestore,you’llseetitleslikeInc.andEntrepre-neur.Thinkaboutthecoversofthosemagazines.Whenwasthelasttimeoneofthemfeaturedtheheadline“ObscureSmallBusinessFails:AfterYearsofFruitlessStruggling,FounderBroke”aboveapictureofasad-lookingshopkeeper?Never,ofcourse.Invariably,thecoverstoryisaboutamazingentrepreneursdoingamazingentrepreneurialthingsandmakingitlookamazinglyeasy!Readingthissortof“entrepreneurshippropaganda”luresmanyaspiringbusinessfoundersintobelievingthatjustaboutanysmartyoungpersonwithadreammightscoopupsomeventurecapital,launchaninitialpublicoffering(IPO),andwalkawayabillionaire.Sadly,thatisnotthecase.Thisbookiswritten to prepare you for reality.© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
confirmation biasThe tendency to interpretnew information assupportive of existingbeliefs.18.1The End of the RoadLearning Objectives1.Understand different types of liquidity events.2.Recognize there are many different potential buyers of existing businesses.3.Beabletoassesstheadvantagesanddisadvantagesassociatedwithvariousexitandhar-vest opportunities.4.Understand how the worth of a business may be determined.5.Understand what makes a business self-sustaining or not, and the associated strategies.Should You Stay or Should You Go Now?Themessagesthatwould-befoundersreceivefromthebusinesspress,media,andeventextbooksarerifewithconfirmationbias;onlythemostoutrageouslysuccessfulfirmsgettheattentionoftheseoutlets.Inagoodyear,onlyahandfulofhigh-profilecompaniesexecuteaninitialpublicoffering(IPO)ofstockandmaketheirfoundersrichforlife.In2019,averygoodyearforthemarket,just235U.S.firmswentpublic.[1]Inareallybadyear,thenumberisclosetozero.However,readingaboutMarkZuckerbergandElonMusk,againandagain,establishestheirveryexceptionalexperi-encesasthestandardexpectationsofentrepreneurship.It’sessentialtocorrectthismisconceptionbyputtingitintocontext.ForeachFacebookorTesla,hundredsofcompaniesburnthroughtheirinvestors’hard-earnedcash,blowupinbattlesoflitigation,orsimplyfadequietlyintoobscurity.Therearealsotensofthousandsofambitiousstartupsthatneverevengetaninvestment.Doesthissuggestthatentrepreneurshipisadeadend?Isittooriskyforanybutthemostextremerisk-takers to pursue?538A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
liquidity eventTypically, the conversion ofthe ownership equity heldby a company’s foundersand investors into cash viamerger, sale, or IPO.harvestExtracting cash from yourbusiness by selling part orall of it.An IPO is a rare but exciting way to harvest funds from a very successful startup.Source: © Shutterstock, Inc.Remember,whilemanyentrepreneursdesperatelypursuetheelusivedreamofspendingOtherPeople’sMoney,millionsofsmallbusinessesopentheirdoorseachday,servetheircustomers,paytheiremployeesfromprofits,andprovideagoodlivingfortheirfounders.Manyofthesesmallbusinessesmaketheirfounderswealthyforlife,buttheydoitquietly.Howdotheyachievethat?How could you achieve that?Intheirbook,TheMillionaireNextDoor,[2]ThomasJ.StanleyandWilliamD.Dankotellusthatthesecrettoachievingourpersonalfinancialdreamsliesintheaccumulationofprodigiouswealth.Workinghard,investingwisely,andmaintainingastandardoflivingbelowyourincomelevelenablesyoutobuildupasurprisinglylargenestegg.Asmallbusinessisagreatplatformfromwhichtoexecutethisplan.Ifyoulike,youcanrunyourbusinessasalifestylebusinessuntilyouretireordie.Infact,theclearmajorityofsmallbusinessownersdoexactlythat.Ontheotherhand,ifyouhavebiggerdreams,youmaylookforaliquidityeventthatwillallowyoutoharvestmoney,exit the business, and pursue those dreams.Aliquidityeventisamechanismtoexchangethevalueyou’vebuiltupinyourbusinessforcash.WhileanIPOisonesuchevent,giventhenumberofbusinessesfoundedeachyearglobally,theoddssuggestthatnotasinglepersonwhoreadsthistextbookwillevertakeafirmtotheIPOstage.Ironically,therearefarmorebooksonhowtobringaSiliconValleystartuptoIPOthanthereareentrepreneurswhowillactuallydothat.Sothischapterwillnotdedicatealotoftimetothatmodel.Foraveragesmallbusinessowners,cashingoutmeanssellingtheirbusinesses.Whobuyssmallbusinesses?Someoftheanswerstothatquestionareobvious,andothersmaysurpriseyou.Oneof the most likely buyers for any business is a direct competitor. Can you think of why that is?ImagineyouownJoe’sMuffinShoponMainStreet.Yourarchrival,Jane,ownsanidenticalestablishmentjustdowntheblock.Thetwoofyouareinthesamemarket,andyouarecompetingforthesamecustomers.Thelawsofmicroeconomicstellusthatthiscompetitionandanabundantsupplyofproductswillresultinlowerprices.Iftherewasonlyasinglemuffinshopintown,thatstorecouldchargethelocalsmore.Customersshouldbewillingtopaymore,atleastuptothecostof having to drive to the next town for their muffin fix. This would drive revenues up significantly.Chapter 18Exiting and Harvest539© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Being the only muffin shop in town would be acompetitive advantage.Source: Andriy Blokhin/Shutterstock.comeconomies of scaleThe inverse relationshipresulting from increasedproduction driving downprice per unit due to theoverall cost being spreadout among a high numberof goods sold.net present valueThe current value of afuture set of cashflows,when the buyer considerswhat they might earn ininterest from an alternativeinvestment. What isappropriate to pay todayfor income in the futureover time.future cash flowThe expected amount ofcash and cash-equivalentsmoving in and out of abusiness.acquisitionTaking control of acompany by purchasing itoutright or acquiring amajority of its stock.opportunity costThe potential benefit givenup when one choice ismade over another.roll-up mergerAcquisition in whichseveral smaller companiesare purchased andcombined to create alarger company thus betterpositioned to takeadvantage of economies ofscale.Byincreasingthesalesandproductionvolumes,acombinedmuffinempirewouldbeabletocapturegreatereconomiesofscale.Thenewmega-muffinstoreshouldbeabletonegotiatebetterpriceswithvendorsofflour,sugar,andnapkinsinexchangeforcommitmentstolargerpurchasingvolumes.Thereducedcostsof goods sold will drive higher gross margins for the business.Yourtwoshopsarealsoduplicatingresourcessuchasrent,equipment,andstaff.Itisverylikelythatasinglemuffinshopcoulddothebusinessofbothwiththeresourcesofjustone.Youshouldbeabletogotoeachlandlordandrenegoti-atetheleasebasedontheargumentthatyou’regoingtoexitoneofthefacilities.Cutting all those fixed costs should increase net profits dramatically.Higherrevenues,highermargins,andhigherprofits:what’snottolikehere?Youshouldbothseethatoneofyoumustgo.Doesitmakeadifferencewhobuysoutwhom?Economically,itshouldn’t.Givenefficientnegotiations,thenetpresentvalue(NPV)ofthefuturecashflowthebuyercanrecognizefromthecombinedoperationshouldbesplitbetweenthetwopartiesinthesale.Thechoiceshouldbedeterminedbywhoeverlovessellingmuffinsthemostor,conversely,whoeverwantsoutofthatbusinessthemost.Oneofyou will be the town’s muffin magnate, and the other will retire as a muffin millionaire.Capturing the Value YouÕve CreatedWhilethereareseveraltypesofliquidityevents,anyonewhogivesyoumoneyforyourbusinessislookingtomakeanoutsizedprofitinthelongrunbyleveragingthevalueyouhavecreatedinyourfirm. For you, it’s an opportunity to apply that value elsewhere.There Must Be Fifty Ways to Sell Your FirmAcquisitionisbyfarthemostcommonexitstrategyforsmallbusinessowners.Asinthemuffinshopexample,acquisitioninvolvesonecompanytakingoveranotherinexchangeforpayment.Anacquisitionbenefitstheacquirerbecauseofreducedbusinessdevelopmentcostsandalignedbusi-nesssynergies.Thepointisthatthebuyerobtainsbusinesscomponentslikecustomers,completedfacilities,andintellectualpropertyforlessthanitwouldcostthemtoduplicatetheseontheirown.Itisveryimportanttounderstandthat,inthiscase,theconceptof“cost”involvedinduplicat-ingthosesortsofbusinessassetsincludesbothmoneyandtime.Thismeansabuyermaypaymorecashforafacilityorcustomerbasetoavoidtheopportunitycostofspendingyearsintheprocess.Thiscostisgenerallyhigherforlargerorganizations.Consequently,largebusinessesoftenbuyupsmall businesses to quickly enter markets with an established infrastructure and customer base.Aclassicacquisitionstrategyforlargefirmsbuyingsmallonesistheroll-upmerger.Inaroll-up,alargerfirmoragroupofinvestorsplanningtoquicklycreatealargerfirmwillbuyupseveralsmallerfirmsoperatinginthesamemarketandcombinethemintoan“instantbigbusiness.”Thismayinvolvebuyingupfirmsinthesameindustryacrossalargegeographicarea.AfirmwantingtotakeonDunkin’Donutscouldcreateanationalorglobaldoughnutstorechainbyacquiringthou-sands of mom-and-pop stores across America or the world.540A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
A competitor might build a global donutchallenger with a roll-up strategy.Source: Polarpx/Shutterstock.comvaluationThe process ofdetermining the price forsale of a business.acquisition premiumThe amount by which thepurchase price of abusiness exceeds thetangible value of thatbusiness.national championsStrategic large firms thatare strongly associatedwith a country and oftenprotected by that nation’sgovernment.Aroll-upmayalsoinvolvebuyingcompaniesthathavecomplementaryresourcesandcapabilities.Imaginecombiningapaydaycheck-cashingfirmwithamoneytransfercompanyandataxpreparation/refundforwardingchain.Thiscouldcreateasingle-stopsolutionforthefinancialservicesthatmanylow-income individuals utilize.Intheory,acquisitions,likeanyeconomictransaction,workforbothparties.However,theNewEntrepreneurialDynamicencouragesyoutorecognizethateconomic theory is often not a reality when human beings are involved.Inthecaseofcorporateacquisitions,thegoodnewsisthatintherealworld,asmallbusinessbeingacquiredbyalargeronemostoftenbenefitsdispropor-tionally.Theacquirerallowsinflatedsensesofvalue,expediency,andegotoaffectthevaluationofthefirmtheyareplanningtoacquire.Largecompaniesarerunbyhumanbeings.Ifyouareselling,thevaluationofyoursmallbusinesswillbedonebyindividualswithreallimitations.Theyhavepersonaltimeconstraintsthatlimittheirabil-itytomakeperfectdecisions.Justlikeaconsumer,businesspeopleenjoytheprocessofacquisition.Buyingthingsmakesusfeelgoodintheshortterm.Buyingupseveralsmallbusinessesissome-thingthatacorporateexecutivecanbragaboutatcocktailparties.Itmakeshimorherfeel“entrepreneurial” as well, and right now, entrepreneurship is “in,” so take advantage of that feeling!Theextrabenefittheacquiredcompanygetsiscalledtheacquisitionpremium,andonaver-age,itistypicallyintherangeof20to50percent.It’shardtoknowexactlywhatthisamountisforsmallbusinesses,butit’sveryeasytotrackinlargepublicfirmswhosestocksalesareseeninpublicmarketmovements.Bloombergreportsthattheaverageacquisitionpremiumobservedinthepub-licly traded firms for 2015 was 28 percent,[3]a particularly low number in recent history.Ifyouhaveoutsideinvestors,youwillfindtheyareofteninclinedtopursueacquisitionbyalargerfirmasanexitstrategy.It’sacleanandsimplewayforthemtotaketheirprofitsfromyourfirmandmoveontothenextinvestment.Thisissomethingyoushoulddiscusswithanypotentialinvestorsbeforeyouaccepttheirmoney,particularlyiftheyarelikelytoacquireacontrollinginter-est in your firm.Selling to a Foreign BuyerWhenalargefirmconsidersenteringanewgeographicmarket,particularlyoneinwhichtheylackexpertise,acquiringalocalcompanyisoftenapreferredstrategy.Thisisoftenthecaseininterna-tionalexpansions.Asuccessfullargebusinessmaytrytoacquireasimilarlylargeforeignbusinessinitstargetmarkettomoveintothatmarketallatonce.ImagineabigEuropeanretailerwantingtoexpandintothegrowingmarketinLatinAmerica.BuyingupexistingnationalmarketchainsinMexico,Brazil,etc.,mightbethemostexpedientwaytoachievethis.However,buyingupamajorforeigncompanyisnotalwaysastraightforwardprocess.Mostcountrieslikekeepingtheirnationalchampions,strategiclargefirmsthatareassociatedwiththeircountryandhelpdefinetheirbusinessculture,domesticallyowned.Evenanefforttobuyupretailstoresmayencounteroppositionfromthegovernment.Inmanycountries,suchasChina,mostofthelargestfirms(includingsomeretailchains)arestate-ownedenterprises(SOE),companiesownedbythegovern-ment. SOEs are usually not for sale.Chapter 18Exiting and Harvest541© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Airlines are often national champions. Emirates is owned by the government of Dubai.Source: Bill Roque/Shutterstock.comAnalternativesolutionforaforeignbuyeristopurchaseasmallerfirmandusethatasafootholdtoexplorethenewmarket.Surprisingly,yoursmallbusinessmaybejustwhatalargefor-eignbuyerislookingfor.Inrecentyears,manyChinesecompanieslookingtoenterthevaluableNorth American market have purchased small U.S., Mexican, and Canadian firms for this purpose.Alargeinternationalbuyermightalsobeexecutingaroll-upmergerinaparticularcountry,buyingupseveralsmallfirmstocreateasubstantialpresenceinanewmarket.Keepyoureyeoutfortheseopportunities—theymayonlyarriveonce.Foreignbuyersarenotoriousforpayinghigheracquisitionpremiumsbecauseoftheirlackofexpertiseinvaluingassetsinstrangemarkets.Remember,ifyoudon’tsellout,yourcompetitoracrosstownverylikelywill,andyoumayfindyourself facing a new, well-financed competitor.Selling Your Business ModelImaginethatyou’vedevelopedabrilliantanduniqueproductorserviceandknowthereisdemandforitinotherareas,butyousimplydon’thavethemoneyorthetimetoexpandgeographically.It’sfrustratingnottobecapturingthosesalesandworrisomethatcompetitorsmightpopupinthoseareas to copy your idea and steal your opportunity. What can you do?Onewaytoquicklycapturethepotentialdemandinmanygeographicmarketsistoaskotherpeopletomaketheinvestment,dotheworkforyou,andsendyouprofits.That’sacrazyidea,right?Notreally.Franchisingisduplicatingaprovenbusinessmodelforafee.Franchisesareahugebusi-ness.TheU.S.CensusBureaureportedthatfranchisesaccountedfor$1.3trillioninsalesin2010!Thisbookhasalreadyaddressedfranchisingasanopportunityforentrepreneurslackinganorigi-nalconcepttogetintobusinessbybuyingintoachainlikeSubway,HertzRentalCar,orSpain’sDiaconvenience stores.542A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Franchising is one way for successful entrepreneurs to harvest funds from their business model.Source: Lux Blue/Shutterstock.comNowconsidertheinverseopportunityofferedbyfranchising.Ifyou’vedevelopedapowerful,profit-generatingbusinessmodel,youcouldchargeotherpotentialentrepreneursupfrontfeesandcollectroyaltiesfromtheirworkbyallowingthemtosellyourproductanduseyourbusinessmodel and brand.Aswithanybusiness,agoodplacetostarttoexplorefranchisingistolookattheinformationavailablefromindustryassociationssuchastheInternationalFranchiseAssociation(IFA).Estab-lishinganewfranchisingopportunityisnotforthefaintofheart.It’sverycomplexandrequiresexpertbusinessandlegaladvicetodoitright.Infact,youwillprobablyneedsomeinvestorstohelpyougetitdone.IntheUnitedStates,theSmallBusinessAdministration(SBA)offersadviceonfranchising.Somepropose,“Allinall,youmightbelookingat$250,000ormore(inadditiontothenormalcostsofrunningyourbusinessinthemeantime)tocreateasustainablefranchisesys-tem.”[4]However,thatestimateisactuallyquitelow—expecttospend$500,000to$1milliontodoitright.Youshouldalsotrytoapproachanothersuccessfulfranchisorforadvice.Choosesomeonewhoretiredsuccessfullyfromtheoperationorwhosebusinessisnotadirectcompetitor.You’dbesur-prisedhoweagermanysuccessfulentrepreneursaretohelptheyoungerversionsofthemselvesgetalegup.Youmayevenfindtheycan’tresistbeingpartoftheaction,andtheymaywanttoworkwith you or maybe even invest some of their own winnings into expanding your idea.Chapter 18Exiting and Harvest543© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
private equityCapital that is not notedon a public exchange.leveraged buyoutAn acquiring companyuses a significant amountof borrowed money topurchase an existingcompany, often using theassets of the company tobe purchased as collateral.collateralizeA borrower pledges anasset as recourse tothelenderin the event thatthe borrower defaults onthe initial loan.Selling to Private EquityAnotherviableharveststrategyforanentrepreneurissellingownershiptoaprivateequitygroup.Privateequity(PE)investorsaredifferentfromventurecapitalistsinthattheyinvestinmature,fullyoperatingcompaniesratherthanstartups.Theyaregenerallyinterestedingeneratingreturnsfromrealpositivecashflowaswellasbuildingthemarketvalueofthecompanytowhereitmightbesoldforasignificantprofit.Theamountoftheirinvestmentmayvaryfromloansthatarecon-vertibletoequitytopurchasingtheentirefirmoutright.Often,theywillusealeveragedbuyout(LBO) model, in which they use the assets of the firm tocollateralizeloans for purchasing it.Privateequityfirmsusuallyseekacontrollinginterestinthecompany,whichwillenablethemtoimplementstrategicchangestheybelievewillenhanceitsvalue.Sometimestheywanttosimplytakeoverthewholething.Othertimestheywanttokeeptheoriginalownersengagedinthebusi-ness.Often,awell-runcompany’smanagementwillbeaskedtostayon.You,astheseller,couldthencontinueworkingwithyourcompanyinameaningfulwaywithareducedriskandcommitment,having sold a majority stake to the private equity (PE) firm.Inthepast,privateequityfirmsmostlyfocusedonbuyingdistressed,publiclytradedfirms.However,theyarenowincreasinglyseekingtopurchasesmallandmidsizedcompanieswheretheybelieveacashinfusion,merger,orotherstrategicchangewouldrapidlyboostthevalueofthefirm.Ifyourfirmisn’tbigenoughtobetheprimarytargetofaPEfirm,itmaybeanappropriateacquisitionforoneofthefirmstheyareturningaround.Payattentiontotheindustrynewsandrumorsinyourmarket.Ifyouseethatyourlocation,customerlist,oranotherassetyourfirmcon-trolswouldfitnicelywithalargerfirmbeingacquiredbyaPEfirm,youmightconsiderreachingout to the PE firm to see if they are interested in talking about what you have to offer.Imagineyouownaregionalcomputermaintenancefirmthathasasolidcontractforprovidingservicetoalargecorporationinyourarea.YouseeaPEfirmisbuyingupalargerfirmthatalsoservicesthiscorporationinmanyotherpartsoftheworld.ThatPEfirmmayfindthatspendingafewmilliondollarstoincludethepurchaseofyourlittlefirminthedealwouldbehelpfuland(fromtheirviewpoint)inexpensive.Theymayevenwanttoputyouinchargeofthelargerfirmifyourorganization is running more efficiently than your bigger competitor.Bringinginaprivateequityinvestormayallowyoutoexityourfirmorsimplyreduceyourrisk,getsomecashoutofyourinvestment,andbringinaqualifiedteamtohelpyourcompanyover-comeimmediateissues.Blackstoneisoneofthelargestprivateequityfirmsintheworld.AlookatthecompaniesintheBlackstoneportfoliowouldshedsomelightonthetypicalqualificationsPEinvestors seek.Selling to EveryoneOccasionallyafamousfirmlikeFacebookorAlibabamakesasplashacrossthebusinesspresswithamassiveIPOthatturnsitsfoundersintoinstantbillionairesandmakesentrepreneurstheworldoversalivate.ItisimportanttorealizethatanIPO,aliquidityeventthatraisesmoneybysellingthefirm’ssharestothepublic,isextremelyrare.IntheUnitedStates,youmaytypicallysee100to200initialpublicofferingsinagoodyear.AlthoughIPOsvarywiththestrengthofthestockmarket,therearenevermorethanafewhundred.Toputthatincontext,rememberthattherearenearly28millionAmericanbusinessesandtheU.S.marketsareopentoforeignfirms,suchasAlibaba,aswell. Basically, you’re probably more likely to be struck by lightning than to take your firm public.AnIPOisnotforeveryone.Firmsthatgopublicsacrificealotofcontrol.Theirboardsofdirec-torsareelectedbythousandsormillionsofshareholdersscatteredaroundtheworld.Today’sstocktradershavesophisticatedonlinetradingtoolsandshortattentionspans.Theydropinandoutofstocksrapidlyandaremoreconcernedwithtomorrow’sstockpricethanthelong-termsuccessorgoalsofyourfirm.Financialnewsanalystsarecontinuallysecond-guessingeveryactofthefirm,544A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
special acquisitioncompanyA firm created simply forthe purpose of raisingfunds and completing anIPO.shell companyA legal entity with nooperations and with nodefined market or businessmodel.andmanypubliclytradedcompaniesfinditdifficulttocontinuetoinvestinambitiousresearchorboldmarketdevelopment.Thesedifficultiesandtheriseofprivateequityinvestorshaveresultedin a general decline in IPO activity over the last few decades.ExecutinganIPOisacomplexstrategicandlegaloperationthatrequiresexpertguidance.ThepublicofferingprocessrequireslistingwithapublicstockexchangesuchastheLondon,NewYork,orShanghaistockexchanges.Italsorequiresthefilingofalotofpaperworkwithextensiverulesofgovernmentalauthorities;intheU.S.,thatauthorityistheSecuritiesandExchangeCommission(SEC).Thefirmmustalsoinformtheinvestmentcommunityoftheopportunity,ofteninaroad-show—aseriesofhostedeventspublicizingthestockoffering.Longbeforeyougettothatpoint,youwillhavedevelopedrelationshipswithsophisticatedangels,venturecapitalists,orprivateequityinvestors.Theywilllikelyhavetheexpertisetoguideyouthroughlocatingthefinancial,legal,andpublicrelationsexpertsrequiredtoexecuteanIPO.Recently,anewapproachtopublicofferingshasemergedthatfreesthestartupfromtheburdenofmanagingtheIPOprocess.Aspecialacquisitioncompany,orSPAC,iscreatedsimplyforthepurposeofraisingfundsandcom-pletinganIPO.Itisashellcompany,alegalentitywithnooperations,andithasnodefinedmarketorbusinessmodel.ThesponsorsorfoundersoftheSPACcreateafirmandofferstockforsale.TheyhandletheSECpaperwork,conductaroadshow,andlistonanexchange.TheonlypurposeoftheSPACistogofindanattractivetargetcompany,oftenastartup,toacquire.Asapotentialtarget,yourcompanymayreachouttoSPACstoinquireastotheirwillingnesstobringtheircapitaltoyourfirminamerger.Thenewlyformedentityiscalledthebusinesscombination,anditnowhastheexpertiseandbusinessmodelofthestartupwiththecapitaloftheSPACandpubliclytradedstock listed on an exchange.In2019,SirRichardBranson’sspacetourismstartup,VirginGalactic,usedthismechanismtosuccessfullyraisefundsfromaSPACcalledSocialCapitalHedosophiaHoldingsCorp.Themarketinitiallyvaluedthenewlymergedfirmat$2.3billionunderthetickersymbolSPCE.DuringtheCOVID-19crisisofthefollowingyear,theglobalairlineindustryfellonhardtimes,andBransonwas able to support his Virgin Atlantic company through the sale of SPCE shares.View in the online readerSelling to EmployeesWhileanIPOrepresentstheultimatetransferofcontroltooutsiders,afirmownercanalsoraisemoneywithinthecompanybysellingthefirmtoemployees.Manyretiringentrepreneursprefertoseetheirfirmstransferredtothosewhocaremostaboutthecompanyandwhosharethefounder’svision for its future.Virgin Galactic Holdings, Inc. (NYSE: SPCE) Goes PublicChapter 18Exiting and Harvest545© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
management buyoutA transaction in which themanagement teampurchases the businessthat employs them.nepotismFavoritism given torelatives or close friends.Inmostcases,afirm’sworkerslackthecashtobuytheownersoutallatonce.Inamanagementbuyout(MBO),thecompanyissoldtoitstopmanagers.Withthesupportoftheowner,thesecriticalemployeescansecureloansusingthefirm’sphysicalassetsascollateral.Thebenefitofthischangeofhandsisthatitprovidesarelativelysmoothtransitionofpower,withtheentrepreneur receiving immediate liquidity.Anotherstrategyisanemployeebuyoutdoneovertime.Thecompanyownermayretirewithacontractthatrequiresthenewemployee-ownerstoforwardafixedamountorapercentageoffirmprofitseachyear.Thiscanprovideabusinessownerwithastreamofincomeduringretirement.Reducing the amount of income received in any one year may have tax advantages as well.Anotherpopularoptionistoslowlysellthebusinesstotheemployeeswhiletheownerisstillactivelyengagedinthefirm.Thismaybedoneviatheregularsaleofsharesortheissueofstockoptionstovaluableemployeesasincentives.Itmayalsohavetaxadvantagesforthefirm.TheU.S.InternalRevenueService(IRS)hasestablishedtheemployeestockownershipplan(ESOP),alegalstructure for a qualified, defined contribution trust operating for the benefit of the employees.Employee-ownedfirmsneednotstaysmall,andmanycanberemarkablysuccessful.InGreatBritain,employee-ownedEdinburghBicycleCo-operativehasgrowntofiveshopsinScotlandandNorthernEngland.TheJohnLewisPartnershipisanemployee-ownedretailgiantthatoperatesdepartmentstores,supermarkets,andfinancialservicescompaniesacrosstheUK.IntheU.S.,employee-ownedSouthwestAirlinesis,atthiswriting,oneofthemostsuccessfulfirmsinaverycompetitive market.Eachoftheseemployeeownershipstrategiesrequiresexpertplanningandlegalandaccount-ingadvice.Talkwithyouraccountantandseekoutexpertsinyourarea.Ifyouhaveafriendoracolleaguewhohashadasuccessful(ordisastrous)employeebuyoutexperience,gettheiradviceaswell.Selling to the FamilyAnothercommontransferofownershipofasmallbusinessisthetransitionfromparentstotheirchildren.Insomecases,thebusinessisaninheritancethattheparentspasson,butoftenthepar-entswishtoretireandenjoytheir“sunsetyears”withsomeincomefromthefirm.Inthatcase,theoptions for selling the business to the family are similar to those for selling it to employees.Sellingtofamilymemberscanbeespeciallyrewarding,aswellasproblematic.Sometimes,yourpotentialfamilybuyersarealreadyactiveinthefirm,andsometimestheyhavebeenoutsidersuntilthetransition.If,forinstance,yourchildrenarealreadymanagingthefirm,theprocessislikelytobesmooth.Theemployeeshavebeenworkingalongsidetheseindividualsandhavealreadyestablishedrelationships.Nobodyisgoingtobedisplacedinthisprocess,andtheexpecta-tions of the transition were probably very clear.Ontheotherhand,ifabusinessownerhandscontrolovertoachild,niece,oranotherrelativewhohasnotbeenactivelyengagedinthedevelopmentofthefirm,themanagerswhobuiltthebusinessarelikelytoviewthisasnepotism.Theymayfeeltheiryearsofhardworkhavegoneunre-wardedandbecomeresentful.Inthiscase,thekeyistosetexpectationsonallsidesandavoidsurprises.546A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Your family may be the best team to continueyour business.Source: © Shutterstock, Inc.goodwillAn intangible asset thatresults from the acquisitionof one company byanother, including thevalue of a company’sbrand name, solidcustomer base, goodcustomer relations, goodemployee relations, andany patents or proprietarytechnology.Whilechoosingafamilymembertocontinuethebusinessiseasyandensuresacertainlevelofloyalty,itintroducescomplicationsaswell.Ifthatper-sondoesn’tdowellorthebusinessdoesn’tdowellunderthem,thenstresswillresult.Isyourniecetrulypassionateaboutyourhardwarestore,orisshesimplyrelievedtohaveaguaranteedjobaftercollege?Ifherdreamjobasanengineersuddenly comes up, will she bolt for that and leave your retirement in limbo?Intheend,thebestpersontorunyourbusinessafteryouleaveisprobablythepersonwhowillgeneratethemostvalueoutofit.Thatrewardseveryone,including your heirs.Valuation: What Is It Worth?Onceyouhavedecidedtosellyourfirm,thefirstquestionisusually,“Whatisitworth?”Theanswertothisquestionisverysimple:“Yourbusinessisworthwhateveryoucangetsomebodytopayforit.”Themarketwilldeterminethevalueofwhatyouhavebuilt.Yourjobistogetitinfrontoftherightbuyersandtopresentiteffectivelyforthosebuyers.Whenyou’veidentifiedapotentialbuyerforyourbusiness,thenexttaskistofigureoutwhatyourbusinessisworthtothebuyer.Youmayhavesomeformulafromamagazineorafriendwhotalksabout“fourtimesrevenue”or“seventimesprofit.”Someindustrieshavefairlystandardizedmetricsaroundthembecausetheyare highly commoditized, meaning all the firms in the business operate about the same.Thesemarket-basedfiguresareinterestingasapointofdiscussion,butoutsideofverycom-moditizedbusinesses,theymaybeirrelevanttothebuyer.Yourtargetbuyermaybewillingtopaymorethanthatorlessthanthat,butthefinalpricewillbebasedontheirownneedforwhatyourfirmbringstotheirefforts.WhenFredRosssoldDecksidePools(seeChapter4Section6),hevaluedthebusinessat5–7xEBIDTAbasedontheindustrystandardsforpoolservicecompanies,butwithsome augmentation for the unique efficiencies he had created in his business model.ImaginethatyouownasmallboutiquepizzeriainCentralHongKong.YouramazingAsian-fusionpizzapiesareahitwiththecity’sdiverseinternationalcrowd.Theatmosphereishipandyouthful.Studentsandyoungprofessionalslineuparoundtheblocktogetineveryweekendevening.Cashflowisgreat,butyourowncreativeitchiscallingyoutoyournextentrepreneurialadventure.Youarethinkingofmovingonandsellingthepizzeriawhilethingsaregood.Butwhatis it worth?Ifyouaresellingthepizzeriatoyourmanager,hewouldprobablylookatitasameansofsup-portforhisfamily.Tohim,yourestablishmentrepresentsastreamofprofitsoverthetwentyorsoyearsheexpectstooperateit.Hewouldlikelyofferyouapercentageofthatrevenue,oryoucouldagreeonestimatedannualreturnsandperformanetpresentvalue(NPV)calculationtodetermineacashprice.TheNPVformulaassumessomestandardinflationorinterestratetodeterminewhatfutureincomeovertimeisworthtodayascomparedtoanother,secureinvestment.Youcanfindlessons on the NPV formula online as well as calculators to do the work for you.Youwouldalsoexpecttobepaidforanyhardassetssuchaspizzaovens,freezers,andthelike.Finally,asaseller,youarealsolikelytodemandsomeextravaluefortheconvenienceofacquiringthebusinessyou’vealreadybuilt.Afterall,that’swhyhe’sbuyingyourbusinessratherthanstart-inghisown!Thisintangiblevalueisknownasgoodwill,anditisthehardestitemtovalueinasale.Chapter 18Exiting and Harvest547© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
book valueValuation of a company’sassets minus liabilities;essentially, the shareholderequity.Thebottomendofthevaluationrangemightbedeterminedbythebookvalueofyourfirm.Thisisthevalueofallyourassetsminusyourliabilitiesandisessentiallyequivalenttoyourshare-holderequity.Theoretically,ifyoubrokethebusinessapartandsoldeverythingandpaidoffthedebts,thiswouldbethecashleftover.Doingthisdestroysanyvaluefromthebusinessmodelitselforthegoodwill,soyoudon’twanttogothere,butitisastartingpointbelowwhichyoushouldnotgo.Theremaybesomecomplicationsinthebookvaluecalculation,andtheseusuallyinvolvethemarketvalueoftheassets.Oftenfirmswillhaveassetstheyvaluehighlybutthatcannotactuallybesoldonanymarketforanywherenearthepricetheyareonthebooks.Thebuyermightarguethispoint,butiftheyneedthoseitemstoruntheoperation,andtheycannotacquirethemforless,theirvaluetothebuyeriswhatshouldsetthevalueduringnegotiations.Alternatively,somefirmshavedepreciatedtheirassetsfarbelowmarketvaluefortaxpurposes.YoumayhaveequipmentonyourbooksthathasbeencompletelydepreciatedbasedonascheduletheU.S.InternalRevenueServiceprovidesbutisstillcompletelyfunctionalandcriticaltoyouroperation.Inthatcase,youmust discuss this disconnect between tax law and reality with the buyer during negotiations.Establishingthebookvalueasabottomlineletsyouthenaddinthegoodwillontop,negotiat-ing each less tangible item one at a time. Your final price might be based on a formula such as this:Thatlastitem,“marketsynergywithbuyer’sexistingproductline,”mightpresumethatwiththeadditionofyourtechnology,service,oraccessory,thebuyerwillrecognizeincreasedsales,reducedcosts,andhigherprofitsfromhisnormaloperations.That’srealvaluetothebuyer,andsomepor-tionofthissavingshouldbepaidtoyouifyousell.Alwaysthinklikethebuyerwhennegotiating.Whatvaluewilltheygetoutofthis,andhowmuchofthatnewmoneywilltheypayyoutokeepthe remainder?DeterminingthevalueofarapidgrowthstartupduringitsgrowthphaseismuchtrickierthanvaluingaMainStreetbusinesslikeapizzeria.Thisisbecausetherapidgrowthstartup’struepoten-tialishighlyspeculativeuntilitmatures.Inthiscase,theNPVformulaisuselessbecausewhiletherapidgrowthfirmisrefiningitstechnologyorcapturingmarketshare,itislikelytobegeneratinglossesratherthanprofits.Estimatingthepotentialmarketandsubtractingtheriskthatthefirmmay fail to meet are important considerations here.Onceagain,synergieswiththebuyercanprovidesubstantialextravalue.Ifyourfirmisdevel-opingthelightestweight,mostpowerfulbatteriesintheworld,thenafirmthatbuildsmobileconsumerelectronicswouldlikelypaymorebecauseofthecompetitiveadvantagethatexclusiveaccesstoyourtechnologycouldbringtotheirexistingbusiness.Yourbatteriesmightallowthemtocaptureadditionalmarketshareandprofitsfromtheirlaptoporphonebusiness.Thatcouldactu-ally be far more profitable than selling your batteries on the market.Thereis,however,adarksidetothesevaluecalculations.Itmayturnoutthatyourfirmhastechnologythatanothercompanywouldrathernotseeenterthemarket.Perhapsyourbatterieswouldmakeanelectriccarfirmmorecompetitive.Anexistingmanufactureroffuel-efficientdieselcarsmightsimplywanttokeepthemoffthemarket.Occasionallyfirmsreallydobuyuppromisingstartupsandsimplyshutthemdownorletthemdiefromlackofsupport.Besureyouunderstandwhyacompanyreallywantswhatyou’vecreatedand,iftheywanttomisuseorkillyourdream,make sure the money is enough to satisfy your conscience (if that is even possible).Key Takeaways•Selling a business is the entrepreneurs’ option.•A business may be worth more to someone other than the entrepreneur.548A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
If your business runs itself, you can pursue whatyou love to do.Source: © Shutterstock, Inc.•There are many different ways to sell your business.•Therearemanydifferentbuyersforyourbusiness,includingIPOs,largerfirms,individuals,and existing stakeholders such as your employees.•Youmaybeabletocapturevaluefromyourbusinessmodelandkeeprunningitbysellingthe concept to others as a franchise opportunity.•Valuing the business is not a simple formula; it’s a negotiation.18.2The Self-Sustaining BusinessLearning Objectives1.Recognize that exits are not required.2.Understand the considerations for handing over a company to heirs.3.Understand that some ownership transitions are unpredictable.Buildingacompanyisoftencomparedtoraisingachild.Inmuchthesameway,youhopethatsomedayyourcompanywillreachthestagewhereit’sreallygrownupandmoreorlessindepen-dent.Whenyourbusinessadvancestothepointwhereitcanfunctioneffectivelyunderemployeeoperation, without your constant supervision, the entrepreneurial life can be smooth sailing.Howdoyouknowwhenyou’rethere?Askyourselfthesequestions:Couldyoustepawayfromyourbusinessrightnowwithoutlosingcustomers?Willyourvendorscontinuetodeliverqual-ityinputsatacompetitivepricewithoutyoumanagingtherelationships?Canyouremployeesbetrustedtodotherightthingbyallyourstakeholderswithoutyourconstantoversight?Isyourmanagement ready to handle an unexpected crisis?Ifyouranswertoallthosequestionsis“yes,”thencongratulations;youhaveyourselfaself-sustainingbusiness.Ifyouranswertoanyofthosequestionsis“no”or“notsure,”then,unfortunately,youaren’tquitethereyet.Yourbusinessstillneedsyoutobesuccessful.Butkeepinmindthatwhilebelievingthatyouareindispensablemayboostyourentrepreneurialego,itcanbeatrulydanger-ousmotivation.Oneoftheworstmanagerialhabitsiscreatinganenvironmentwherethemanagerisrequired.Agreatbusinessrunsonitscultureandprocessesand is independent of people and personalities. Such a business can be sold.Chapter 18Exiting and Harvest549© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
milkingA strategy in whichsustaining short-termrevenues is prioritized overlong-term growth orstability.cash cowA business generating asteady return of profits thatfar exceed the outlay ofcash required to acquire orstart it.annuitySum contractually paid outannually.You must have some plan for the ownership ofyour business after your death.Source: © Shutterstock, Inc.The Milking StrategyIfyourbusinesscannotbesold,anotherpopularstrategyforcapturingitsvalueisknownasmilking.Milkingistheprocessofmaximizingtheextractionofprofitsfromyourfirm.Afirmundergoing milking is amusingly called acash cow,and it can be a very good thing to own.Sinceacashcowbusinessisreturningprofitstoitsinvestors,itisgenerallynotinvestinginitsownfuture.Ifyouwantto“exit”acashcow,youstillneedtomakesureitisself-sustaining.Atthatpoint,youcansimplyfindatrustworthyindividualtorunday-to-daymanagementwhileretainingownershipandenjoyingavirtualannuity.Milkingthecowisagreatwayforthebusinessownertomaintainastreamofincomewhilehavingthelibertytodevotetimetowardotheraffairs,likeanother idea or business.Thereisaverysignificantriskinthemilkingstrategy.Afirmthatisnotreinvestinginitselfandlacksastrategicleaderisvulnerabletodisruption.Ifyouarenotpayingattentiontothecom-petitivelandscape,yourrelaxingretirementmaycometoanabruptendwhenacompetitorrecognizesavulnerabilityinyourmodelandattacksit.Onecommonstrategyistohireawayyourtopemployees.Employeesareoftenloyaltoafoundingentrepreneur,butwhenthatfounderleavesthem to pursue other interests, they may feel spurned and become less likely to stay with the firm.Inheritance Strategies and Tax ConsiderationsManybusinessfoundersplantoleavetheircompanytotheirfamilywhentheypasson.SamWal-tonofWalmartfamouslypursuedthisplan,makinghisheirssomeoftheworld’swealthiestpeople.Otherfoundersplantogiftorsellthebusinesstotheirkids.Mostoften,theywillbringtheirchil-drenintothebusinessandteachthemtheropeswhilehandingovermoreandmorecontroluntilthey retire.Manyimportantfactorsshouldbeconsideredwhenworkingwithfamilymembers,butthemostcrucialiswhetheryourheirsreallywanttoownandrunyourbusiness.Inmanycases,theymaypreferthatyousellitandleavethemcashoranincomestreamsothattheycanpursuetheirowndreams.Ifyoudeterminethatyourkids(orwhomeveryou’veselected)are,infact,passionateaboutyourfirm,youmustthendecideiftheyarecapableofrunningitwell.Youwillnotbedoingyourchildrenafavorbylettingthemtakeonatasktheywon’tenjoyorbegoodat.Manyfirmshavebeenrunintothegroundthroughmismanagementbythefounder’schildren,leavingthemandthefirm’s employees out of work.Inmostcases,abusinesscanbepassedonafterdeathviaasimplewill.Youcanleavetheassetsofasoleproprietorshiporpartnershipdirectlyorleavethestockofacorporation.However,ifthevalueoftheestatemakesittaxableinyourarea,atrustmaybethebestmechanismfortaxpurposes.Asof2020,inheri-tances of less than $11.58 million were excluded from federal inheritance taxes.Ifyouplantogiftyourbusinessorstockwhileyouarealive,bothpartiesmaybesubjecttoimportanttaxconsiderations.Itisimportantthatyouconsultwithyourlawyerandyouraccountantwellinadvancetoensurethatyourbusi-nessendsupinthehandsyouintend,notthehandsofthegovernment.Evenifyouareyoungandhealthy,youshouldhaveaplaninplaceincaseanunexpectedtragedystrikes.Hopefully,itwillneverbeneeded,butyoucanrestbetterknow-ing you will not be leaving a mess behind for your business partners or family.Afinal,extremelyimportantpointthatanyentrepreneurmustconsideriswhethertheheirstothebusinesscanallgetalong.Ifyouarepartofapartnershiporcloselyheldcorporationandyourspouseorchildissuddenlythrustintothepicture,willyourbusinesspartnersandmanagers550A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
key person insuranceA life insurance policypurchased by a businesson an essential employeethat names the businessas the beneficiary.welcometheirparticipation?Itisnotatallunusualforthosewhohavebuiltandhavebeenrun-ningabusinesstoresenttheintrusionof“uninformedoutsiders”intotheirrealm.Likewise,manyahusbandorwifehaspresumedthattheirspouse’sbusinesspartnershavebeentakingadvantageofthatperson’sgoodnature,andtheycomeintothesituationwithresentment.Everyoneinvolvedshouldbeinsyncwithyourplan.Whenyouestablishawillortrust,discussthetermswitheachofthem, and preferably all together, so there are no surprises.Manystartupsarefoundedwithstockbuybackagreementsinplace(discussedinChapter8)thatrequirethestockbereturnedtothefirmwhenapartnerexits.Similaragreementscancoverdeath,andinthisparticularcase,itmaybeagoodstrategyforthefirmtosecurekeypersoninsuranceonthosepartnerstofundtherepurchaseoftheirstock.Inthisscenario,ifapartnerdies,thefirmreceivesalifeinsurancepayoutthatissufficienttopurchasethestockbackfromthepart-ner’sheirs.Thecompanycontinueswithitsmanagement,andyourspouseandchildren(orwhomever)arerewardedforyourwork.Itiscriticalthatyouregularlyadjusttheamountoftheinsurancepayouttoaccuratelyreflectthevalueofthestock.Also,beawarethatwhilelifeinsur-ance(includingkeypersoninsurance)isrelativelyinexpensiveforhealthy,youngentrepreneurs,itcan become very costly as you age.Key Takeaways•You may want to keep your business running and just milk the profits.•If you plan to keep your business until the end, you will need to plan for your heirs.•Don’t assume your heirs want the business or would succeed.•Plan ahead for unexpected ownership transitions.18.3The SaleLearning Objectives1.Understand the importance of due diligence during a sale or merger.2.Recognize you can sell part of a business or exit over time.3.Understand common payment structures in a business sale.4.Understand that you should always be planning for a smooth exit.Consideringallthesevariousexitstrategies,whichoneshouldyouplanfor?Whichoneisperfectforyourbusinesstodayandinthefuture?Whichonefitstheneedsofyourfamilyandyourper-sonal lifestyle goals? Which one will satisfy your investors?Liketheweather,youcannotpredictthefutureofyourbusinessorlife;youcanonlymakeforecastsbasedonwhatyouknownow.Youhonestlycan’tevenknowwhenyoumightwantorneedtoexit,muchlesswhatthecircumstanceswillbeonthatday.Itisimportantthatyouunder-standtheoptionsandmakeplansforthemostlikelyevents.However,don’tforgetthoseplansandupdatethemascircumstanceschange.TheNewEntrepreneurialDynamicdependsonconstant,iterativeadjustmentstoyourstrategies,andtheexitstrategyisnodifferent.RecallourquotefromGeneral Dwight D. Eisenhower: “Plans are useless, but planning is indispensable.”Chapter 18Exiting and Harvest551© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
due diligenceA detailed inspection of abusiness conducted by thebuyer before closing apurchase deal.DiligenceWhenyoupurchaseproduceatthegrocerystore,doyoucarefullyinspectthefruitsandvegetablesbeforebuying?Mostpeoplelookcarefullyatthebananasandchoosetheoneswithoutbrownspots;theymaysmellthestrengthofthebasilorcilantro;theymayholdthewatermelontotheirearandtapit—listeningforjusttherightecho—ortastetestagrape.Wouldyoubeanylesscarefulif you were buying a business?FIGURE 18.1Dilbert ComicSource: DILBERT © 1996 Scott Adams, Inc. Used By permission of ANDREWS MCMEEL SYNDICATION. All rights reserved.Savvyindividualsandfirmsthatbuybusinesseswillconductathoroughreviewoftheiracqui-sitiontargetsbeforecompletingadealtoensuretheyaregettingwhattheyarepayingfor.Thisprocess,knownasduediligence,usuallyincludesacompletereviewofthefinancialaccountsandaphysicalinspectionofthefacilities,inventory,andequipment.Itmayevenincludeinterviewswithcustomers,vendors,andemployees.Insomecases,thebuyersmaycheckyourpersonalcreditratingsandconductcriminalbackgroundchecksonthemanagementteam.Ifyouareeverintheposition of acquiring a business, you should be just as meticulous in your review.Shouldyou,theentrepreneur,conductareviewofthebuyer?It’sagoodideaforseveralrea-sons.First,youaregoingtobeworkingcloselywiththemanagersofthiscompanyduringthetransitionprocess,andyou’llwanttomakesureyoucanworkwiththem.Secondly,you’relikelytobeowedmoneybythebuyer,andyouwillwanttobesureyourbuyercanaffordwhattheysaytheywillpay.Lastly,you’rehandingoveryouremployees,customers,andvendorstothesefolks,andyouwillwanttobesurethatthoseimportantstakeholdersinyourbusinessaretreatedwelllongafteryouaregone.Inamergerorcombinationoftwocompanies,eachsideshouldperformdue diligence on the other for all these reasons.Thediligenceprocessneednotbeahostileundertakingandcan,infact,bevaluableforevery-oneinvolved.Itisatimeforthetwoorganizationsandtheirpeopletogettoknoweachotherwellandbeginworkingtogether.Yourwarehouseworkerswillassistthebuyer’steamduringtheinven-tory,andyouraccountingstaffwillworkcloselywiththebuyers’teamandmanagers.Thiscanbea chance for them to establish credibility and good working relations.However,therearetimeswhencompanymergersincludetheeliminationof“duplicateresources.”AcombinedfirmwillnotneedtwoCFOsortwowarehousemanagers,andtheremaybeageneralreductioninheadcount.Infact,thisisoneoftheeconomicdriversthatencouragessmallfirmstocombineintobiggerones;mergerscreateanewfirmwithhigherrevenuesfromcombinedoperationsandreduceoperatingcostsasapercentageofrevenuesbyeliminatingredundantfacil-ities, equipment, and staff. This is why small firms are often consumed in roll-ups.552A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
When you exit your business, you might retainthe part you love.Source: © Shutterstock, Inc.earn-outA deal structure that tiespayments to theperformance of the firmafter the sale.Part Way In/Part Way OutSometimesanentrepreneurwouldliketotakeasignificantportionofcashouttofundamoreenjoyablelifestyle,dealwithalifecrisis,orpursueanotheropportunitybutstillremainengagedandinvestedintheirbusiness.Ifyoucanfindtherightinvestor,thisisaperfectlyreasonablewaytogo.Youdon’thavetosell100percentofyourequity,atleastnotatfirst.Mostnewownersactu-allyvaluehavingthefounderonboardtoguidethebusinessthroughthetransition,andoftenthey’djustliketokeepyourunningit.Youcantakesomecashandalsobringadditionalcapitalintothebusinesstogrowit.Thistransitioncangreatlyreduceyourstressbyhavingbothyourownfinancesandthoseofyourfirmstrengthenedbythecashinfusion.Therecanbeissueswithalin-gering relationship with strangers. Can you think of how those would develop?Agradualexitworksparticularlywellwithemployeeorfamilybuyouts.Althoughconflictscancertainlyarise,theyarelesslikelybecausethesestakeholdersareusuallyveryfamiliarwithyouandtoyou.Expectationsarefairlyclearonbothsides;you’vealreadyworkedouteffectivetech-niques for communications and negotiating disputes.Sometimesanentrepreneurwillchoosetoretainownershipoverportionsofthebusinessorsomeofitsassetswhilesellingothers.Forinstance,imagineyouhaveabusinessthathasgrownovertheyearsandhasbeenabletosuccessfullyenteranumberofdifferentmarketswithitsbasictechnology.Youmaywanttokeeponeoftheproductlinesthatyou’vedevelopedapassionforbutneverhadthetimetofocuson.Forinstance,youcouldownafiberglasstubefabricatorthatmakeseverythingfromantennamaststoknittingneedles.Maybeyou’dliketosettledownandfocusonfishingpolesasalifestylebusinessthatwouldallowyoutospendagreatdealoftimetestingyourequipmentflyfishingintheSierraNevadamountains.Great,sellthecompanybutwriteupacon-tractthatgivesyouexclusivedistributionrightsinthefishingbusiness.Thenewownerwillmakethetubes;youjustfinishofftherodsanddistributethemtooutdooractivityresellers.You’llgener-atealittleincome,andyoucandeclarethosetripsasproductresearchtoreduceyourincometaxes.Oftenanentrepreneurmaywishtounloadthemanagementandtime-con-sumingoperationsofthebusinesswhileretainingsomevaluableincome-generatingassets.Thismightincludekeepingthebuildingyouownandleasingittoyournewowner.Youmightretainyourpatentsorsoftwarecopyrightsandlicensethoseunderanexclusivearrangementtothenewowner.Thisisagreatwaytoextractastreamofincomefromyourbusiness,anditmayhavetaxadvantagesovergettingasinglelargepaymentforyourassets.Additionally,ifyourbuyermismanagesthebusiness,goesbankrupt,orjustdoesn’tpayyouwhattheyoweyouunderthesalesagreement,youhavepowerfulleverageoverthem as well as an asset that can be sold, leased, or licensed to another party.Payment StructuresIt’sunlikelythatthebuyerofyourcompanyisgoingtowriteyouacheckforthefullamountandjustsendyouonyourway.Ifyousellyourfirm,youwillmostlikelyreceivepaymentsforitoverseveral months or even over a few years. Can you think of reasons for that?First,yourbuyerissurelyasuccessfulinvestor,andthatissomeonewhohaswiselykepttheirmoneyproductivelyengaged.Theyaren’tlikelytohaveagreatdealofcashsittinginacheckingaccountwaitingforyourdeal.Second,althoughtheywillperformduediligence,payingfortheirpurchaseovertimegivesthemanopportunitytobesuretheyaregettingexactlywhattheyweresold.Finally,eitheryouortheymaywanttocreateanearn-out,adealstructurethattiestheamountortimingofpaymentstotheperformanceofthefirmafterthesale,andthatusuallyrequires you to hit certain financial or strategic milestones.Chapter 18Exiting and Harvest553© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
contingent liabilitiesPossible expensiveobligations that may arisein the future from pastactions. Lawsuits fromemployees, customers, orregulatory penalties from aviolation of environmentallaws are commonexamples.asset purchaseagreementA contract for thepurchase of select assetsof a business that doesnot include everything inthe firm and usuallyexcludes any contingentliabilities.successor liabilityWhen the purchaser of abusiness is responsible foractions that occurredunder the previousownership.It’salsoimportanttothinkaboutwhatthebuyeriswillingtopayapremiumforinyourbusi-nessandwhatthebuyerdoesnotwishtoacquireatall.Therearecertainassetsyourfirmhasbuilt,suchascustomeraccounts,intellectualproperty,andskilledemployees,whichwilladdalotofvalue.Theremaybeotherthingstheydon’tcaretoomuchfor.Significantly,whatabuyerreallydoesn’twanttoacquireareanycontingentliabilitiesthatmaypopuplater.Thesearethingssuchaslawsuitsfrompreviouscustomers,environmentalclean-upproblemsatafacility,orunexpectedchargesfromvendors.Inastockpurchaseagreement(SPA),thebuyingfirmpicksupeverythinginthecompany,good,bad,andugly.Asyoucanimagine,thisisnotalwaysthefirstchoiceofthebuyer,andasellereagertomakeadealdoesn’twanttoreducethepurchasepricetoovercomethebuyer’sconcerns with a few problem assets.Itispossibletoseparatethewheatfromthechaffduringtheacquisitiontothebenefitofbothparties.Thisisusuallyaccomplishedthroughaprocessknownasanassetpurchaseagreement(APA).InanAPA,thebuyerpicksandchooseswhattheywantbutdoesnotactuallylegallyacquirethecompanyitself.Thebuyermaygettherightstothename,thefacilities,theproducts,andtheemployees;theoriginalcorporation,LLC,orwhateverremainsisanindependent,ifhollowed-outentityownedbytheoriginalshareholders.Thisshellcompanyusuallychangesitsnamesotheacquiringfirmcanusethat,anditkeepsallthelegalcontractsandresponsibilitiesforitspreviousactions.Sincetheshellcompanyhasvirtuallynocashorassets,itisnotaparticularlyattractivetargetforpredatorylawyersoraggressiveregulatorstopursue.BesuretohiregoodlawyerstomanagetheAPA;usually,thebuyerwillseetothatbecauselawsarenotthesameinalljurisdic-tions,andinsomecases,thesuccessorfirmmayfindthemselvesexposedtosuccessorliabilitywhen a claimant contends that a de facto merger actually occurred.AnAPAmayalsobeattractivebecauseitcanallowforthesellertokeepspecificassetstheywouldliketoretain.Perhapsyouhaveacompanytruckthatyoualsousetotowyourboatonweek-end fishing trips. That truck could stay with your shell company if the buyer doesn’t require it.Exit Strategy Starts at Day OneIt’snevertooearlytostartpreparingforanexitstrategy.Whilethistexthasemphasizeddynami-callyadaptingtochangeratherthanblindlyfollowingplans,yourendgoalcanserveasyourNorthStar,guidingyoubacktothetruepathonajourneythatwillsurelyhavemanydetours.Decisionsthat you make early on will affect the options you have during an exit.Forexample,thelegalstructureofyourfirmcanimpactyourabilitytoparticipateinanIPO.IntheU.S.,allpubliclytradedfirmsareCCorporations.CCorpsareresponsible(technically)forpayingcorporatetaxes,andtheymayhavemillionsofinvestors.LLCsandLLPsdistributetaxresponsibilityacrosstheirshareholdersandmaybelimitedinthenumberofparticipantstheycanhave.Typically,whenanLLCstartupgoesIPO,itwillneedtosellitsassetstoaCCorp,whichwillbecomethelegalIPOentity.MostprivateinvestorspreferanLLCbecausetheyarelikelytodotheirinvestingthroughtheirownLLC.AnLLCcaninvestinanotherLLCeasilybutcannottechnicallybe an owner in an S Corp.Thenumberandnatureofyourinvestorscanbeabigfactorintheattractivenesstoyourbuy-ers.Complexcaptablesfilledwithlotsofsmallinvestors,someofwhommaynotfavorasale,arelessattractivetobuyerswhopreferacleandealmadewithaverysmallnumberofowners.Ifyoubring in friends or small investors, consider keeping them in a nonvoting shares category.Rememberourdiscussionofassetpurchaseagreements?Asyougrowyourcompany,itisimportanttothinkaboutmaximizingtheattractivenessofyourassetsandminimizingliabilitiesandunattractiveholdings.Youmaywanttopurchaseasweetfour-wheel-drivetruckasadeliveryvehicleordecorateyourofficewithstunningpiecesofalternativeart,butthoseareprobablythingsyourbuyerisgoingtoexcludefromtheAPA.That’sgreatifyouwanttocollectthosethings,butif554A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
yourgoalisforyouandyourshareholderstocashoutbig,thenyoumustreinvestyourfirm’searn-ings into the most purchasable assets as you grow.Your Next Great AdventureSoyou’vesoldyourbusinessandaresittingonapileofcashoracomfortablestreamofincome.What now?Mostfolksinthissituationpicturean“earlyretirement”tosomeplaceintheworldspecialtothem.Picturealifeofuninterruptedskiing,fishing,scubadiving,orwhateveryoulike.Ormaybeafterallthatwork,you’dliketojustgrowoldonaporchswingwithyourlovedone,astackofgreatnovels, and a faithful golden retriever.Itturnsoutmostentrepreneurscan’tstandthatsortofrelaxingforlong….You’lllikelyfindyour-selfatitagain.Withthereal-worldexperienceyou’veaccumulated,youwillsurelydobetterthanyou did the first go around. You could be a great serial entrepreneur.RememberthattheNewEntrepreneurialDynamicdoesn’trequireyoutolimityourhorizonstobusiness.Youmightalsoconsiderthefreedomoffinancialindependencethatwillallowyoutoachievegoalsoutsideofbusinessonwhichyoucouldnototherwiseaffordtospendtime.Manysuccessfulentrepreneursbecomehighlyinfluentialinarts,politics,orotherdomains.Youcouldgobacktoschoolandgetanadvanceddegree,writeabook,makeadocumentaryfilm,advocateforanimportantcause,orserveyourgovernment.Iactuallydidallthosethings,andentrepreneurialsuccesswaswhatmadethatpossible.Celebrateyoursuccess,andwhateveryour second act choice, aim for the stars!Key Takeaways•The entrepreneur and the buyer need to look carefully at any deal before it closes.•Most sales happen over a period of time and may not involve the entire firm.•You should be planning for your exit from the start.18.4Case Study: Selling TrojanStorageWhenBrettHenrygraduatedfromtheUniversityofSoutherCalifornia’sMarshallSchoolofBusi-nessinMay2000,hewantedtobeacommercialrealestatedeveloper.Notsurprisingly,thereweren’tanyoffersforafreshgraduatetotakeovertheconstructionofamajornewproject.Theopportunityhefoundmightnothavelookedpromising,buthekneweveryonehastostartsome-where.Henrytookajobworkingfor$13/hourataself-storagefacility.Henotes,“Ihadabetterpayingjobofferelsewhere,butthefirmthathiredmehadseasoneddeveloperswhopromisedmehelp on that path if I performed.”Somebusinessesareglamorous,andsomearen’t.Manyyoungentrepreneursfindthemselvesdrawntotechnology,fashion,andentertainmentmarketsbecausetheyfindthesefieldsfascinatingandliketheideaofbeingperceivedasinterestingthemselves.Puttingtogetherappsthatyourfriendsalluse,designingtheclothestheywear,orworkingwithmediacelebritiesis,well,cool.Ontheotherhand,outsideofthepeculiarrealityshowStorageWars,it’shardtoimaginewhatcouldbeinterestingaboutrentingspacetohoardersorfolksintransition.Sometimes,however,thebestplace to be in business is a market nobody else wants to go.Chapter 18Exiting and Harvest555© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Thejobwascertainlynotglamorous.“Iwasinasmallrun-downofficeworkingwithgenerallyhourlypeople,anditwasnothingtobragabout.”Still,Brettwassurprisedhowwellthingswentforhim.Ratherthanjustputtinginhistimeintheself-storagebusiness,hewasabletousehisfinan-cialskillstoquicklyidentifyproblemsintheoperations.Infact,hedemonstratedtotheownersthatseveraloftheirmanagerswereskimmingprofits.TheownersfiredthethievesandpromotedHenrytodirectorofpropertymanagement.Hewassoonearning$200kayearandexpandingoper-ations.Whilehewassurprisedathissuccessasamanager,hewasevenmoresurprisedtodiscoverthathesawalotofopportunityintheself-storageindustry.Henrycomments,“It’sanindustrywithalotofopportunity,butonewheremostoperationsaresmall-timeandverypoorlyrun.”Hehadalreadyfoundalotofwaystoimprovethefinancialperformanceofhisfacilityfortheown-ers,andhebegantothinkaboutdoingthesameforabusinessofhisown.Ratherthanmovingintotheglamorousbuthighlycompetitivemarketsofmallorofficedevelopment,Henrydecidedtoapplyhisskillsandnewlygainedknowledgeintheself-storagemarket.“Whycompetehead-to-headwiththebestandthebrightestcollegegraduatesinanindustrywithintenserivalry,whenyoucaninsteadenteramarketfilledbymom-and-popoperatorsandabsenteeownersusingunre-liable managers?”In2007atage29,Henrysteppedoutonhisownwithinthestorageindustry.Thenewstartupfounderoriginallybroughtinhisbrother,Scott,andrecruitedJohnKoudsi,whowas35andabletoraisethebackingrequiredtogetthenewventureofftheground.JohnandBrettdiscoveredtheywere a great team, and they became the core of the new firm, Trojan Storage.TheTrojanStoragefounderslookedforwardtoanexitfromthestart.Theirgoalwastorein-vestalmostallthefirm’sprofitsintonewventuresandbuildupanumberofvaluableassetsthatcouldeventuallybesoldatapremiumtoalargerfirm.Thevalue-addforTrojanwastopickupself-storageunitsthatwereunderperformingandapplyprofessionalfinancialmanagementtothesebusinesses.Theresultwasnearlyalwaysadramaticimprovementinoccupancyandrents,drivingbetterprofitabilityandcashflow.TheTrojanteamwouldusuallybringinpartnersintothenewLLCtofundtheseacquisitionsforeachspecificfacility.Refinancingwasonewaytoextractcashfromthefacilities,butgettingmoneyoutofbankswasfrustratinglytime-consuminganddistracting.Henry notes, “My job was to acquire facilities, not fill out SBA paperwork.”Henryhadalwayspresumedthatthisbuildingprocesswouldtakemanyyears,“Ithoughtwe’dgofifteenortwentyyearsbecausethatisthenatureofrealestate.”However,by2016hewasgettingfrustrated,“I’dlookatthebalancesheetandwe’dhaveseveralmilliondollars,butitwasdifficulttogetaloan.”Scotthadleft,andHenryandJohnhadabout60percentoftheequityinacompanythat a broker friend had suggested could be worth $200 million to $250 million.HenrydecidedtotestthewatersandputTrojanonthemarket.“WelistedwithNickWalkeratCBREandstartedtogetnoncompellingoffersof$150to$180million.”Theeventualbuyercameinat$165millionbecausetheyhadahardtimebelievingTrojan’sperformanceontheirassets,whichsimplyoutpacedtheindustry.HenryandKoudsiwerefrustratedbythissituationwheretheyknewhowmuchvaluethebuyerwasgetting,butthebuyerjustcouldn’tseeit.Henryexplains,“Thebuyerwasa$20BREIT(RealEstateInvestmentTrust)andverysophisticated,butIknewmyindus-try and properties far better than they.”Thesolutionturnedouttobestructuringthedealasabuyout.Theyagreedtotakethe$165millionandturnedthefirmovertothenewownersinApril2017,whilecontinuingtomanageitforafewmonthsunderthescrutinyofthenewbuyers’accountingteam.Theresultsamazedevery-one.“Wewereabletogetoccupancyupandgetrentincreasesacrosstheboardatthesametime.Wetookthelasttwomonthsandannualizedthoseresultsanddivideditbythecaprateof4.7.”TheTrojanStorageteamhitthecash-outgoalat$245million.Evenbetter,byarrangingthesaleasanassetpurchaseforaspecificgroupoffacilities,theywereevenabletocontinueintheself-storagebusinesswiththeirownbrand.Theystillmanagetenpropertiesandarebuildingupthebusinessfor another exit in the future.556A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Endnotes1.Potter,S.B.(2020,January).U.S.IPOsraisedmoremoneyin2019.Insight.2.Stanley,T.J.,&Danko,W.D.(1996).Themillionairenextdoor:Thesur-prising secrets of AmericaÕs wealthy. Longstreet Press.3.https://www.bloomberg.com/news/articles/2015-11-23/shrinking-takeover-premiums-present-bearish-case-for-u-s-stocks4.https://www.postbulletin.com/business/business/franchise-your-busi-ness-carefully-thoughtfully/arti-cle_7a2ba0f1-906f-58c1-bc0b-50c08dd969da.htmlChapter 18Exiting and Harvest557© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
558A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
APPENDIX AAppendix: Introducing YourBusiness Plan ProjectThepurposeofthebusinessplanprojectistointroduceyoutotheexcitementandchallengesofstartingabusiness.WewantyoutobeasfascinatedwiththeprospectofrunningabusinessasMichaelDellwaswhenhestartedDellComputerfromhiscollegedorm.We’regoingtogiveyouthesameopportunitythatPhilKnightseizedwhenhefirstcreatedhiscompany,nowcalledNike,inorder to complete a graduate-school assignment.Workingwithateamofclassmates,you’lldevelopanideaforstartingacompanythatcom-petesinthesameindustryasthecompanythatyou’restudying.Thus,ifyou’restudyingNike,yourproposedcompanywillbepartoftheindustrythatsellsathleticshoes,apparel,andequipment.LikeKnight,you,too,willintroduceanddescribeyourfuturebusinessintheformofabusinessplan.Thebusinessplanprojectisamajorcomponentofthecourseandhasbeendesignedtoguideyouthroughoutthesemesterbyhelpingyoufocusonthejobofdevelopingandpreparingyourbusinessplan.Thequalityofthefinalproductisuptoyouandyourfellowteammembers.Wehopethateachteamwillnotonlyprovideabusinessplanthatthey’reproudofbutwillenjoytheprocessof collaborating on the project.A.1Choices and TasksAs you progress with this project, you’ll face a number of choices and tasks:1. Type of CompanyYourfictitiouscompanycanbeanytypeofcompanyaslongasit’sconnectedtotheindustryinwhichthecompanythatyou’restudyingcompetes.Itdoesn’thavetodoexactlythesamethingthatyoursamplecompanydoes.Forexample,itcouldbeacomponentsuppliertotheindustry,acompetitor(makingsomeinnovativeproduct),anindustrypublication,acompanyprovidingser-vicestothoseintheindustry,oraretailer.Themostimportantdecisionthatyourteamwillmakeiswhatyourgreatbusinessideawillbe.Putalotofthoughtintothistask.Agreatbusinessideawon’tensureasuccessfulbusinessplan,butyou’llfindithardtoconstructaworkablebusinessplanifyou don’t build it around a good business idea.2. ResourcesUsemultipleresourcestodevelopyourbusinessplan.Resourcesincludeyourtext,othertexts,theInternet,materialshandedoutinclassorobtainedfromtheclasswebsite,libraryresearch,newspapers(suchasTheWallStreetJournal,TheNewYorkTimesandtheFinancialTimes),busi-nessperiodicals(suchasBloombergBusinessweekandFortune),industrypublications,materialsreceiveddirectlyfromcompaniesintheindustry,discussionswithbusinessleaders,andconsulta-tions with your course instructor.Toproduceanexcellentbusinessplan,youshouldalsotakeadvantageoftheconstructivefeedback that you’ll get throughout the course from your classmates, your instructor, and others.© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
3. Format for the Written Business PlanAbusinessplanisawrittendescriptionofabusiness.Itprovidesthereaderwithaninterest-ingstoryofwhattheproposedbusinesswillbelike.It’salsoanindispensabletoolforattractinginvestorsand/orobtainingbankloansforanewbusiness.AppendixASection2laysouttheformatto follow in creating your business plan.4. Group Writing Assignments (Subsections of the Business Plan)Duringthecourse,yourteamwillcompletetengroupwritingassignments,inadditiontothefinalversionofyourbusinessplan.Eachofthesegroupwritingassignmentspertainstoasub-sectionofthebusinessplan.ThesesubsectionsaredescribedinAppendixASection2.Thegroupwritingassignmentsaredesignedtoensurethatteamsmakesteadyprogressontheirbusinessplanprojects.You’llreceivefeedbackfromyourinstructoronthesegroupwritingassignments,andyou’llbeexpectedtorespondtothesesuggestionsandincorporateyourresponsesintothewritingof your final business plan.Althoughyourfinalbusinessplanwillbuildonthesubsectionssubmittedthroughoutthesemester,thefinalversionshouldbemorethanjustacut-and-pasteversionofpreviouslysub-mittedsections.Producingafinalversionofthebusinessplanrequiresadditionalresearchandsubstantialrewritingofthesectionsthatyou’veproducedduringthecourse.Inaddition,yourfinalversion will include sections that haven’t been assigned earlier.A.2Standard Business Plan Format:InstructionsLengthTheteam-preparedbusinessplanshouldbenomorethan15single-spacedpages(notincludingthetitlepageandtable-of-contentspage),withamaximumof10pagesofappendixes.Doublespaceafter headings and between paragraphs and use 12-point type.Writing StyleSpellingerrorsareinexcusable(there’saspelling-checkonyourcomputer),andgrammaticalerrorsarefrownedupon.Althoughitwillbeateameffort,youwantyourbusinessplantoreadasifonepersonwroteit,notasifindividuallywrittensectionshadbeengluedtogetheratthelastminute.Withthesestipulationsinmind,eachgroupshouldassignsomeonetoensurethattheindi-vidual sections fit together into a coherent presentation.Minimum RequirementsYourteam-preparedbusinessplanshouldaddressalltheissuesraisedinthisdocument.Eachteamisencouragedtosupplementrequiredinformationwithadditionalrelevantmaterial.Forexample,ifsocialresponsibilityissuesareparticularlyrelevanttoyourcompany,youcanaddasec-tion even though the topic is not required.Deviations from Standard FormatBecausethestructureandcontentofabusinessplancanvaryaccordingtothetypeofbusi-nessproposed,yourteammayneedtoaltersomedetailsinthesampleformatinordertodescribeyour proposed company. You should let your instructor know of any significant changes in format.560A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Section Descriptions1. Title PageThe title page must contain the following:•Name of the proposed business•Name of each team member2. Table of ContentsSelf-explanatory.3. Executive SummaryTheexecutivesummaryisasynopsisthatshouldgivethereaderapreviewofwhat’scon-tainedinthebusinessplan.It’swhatthereaderlooksatfirstandshouldcapturethereader’sattention.Aneffectiveapproachinwritingtheexecutivesummaryistoparaphraseimportantsentencesfromeachsectionofthebusinessplan.Thisprocesswillensurethattheessentialinfor-mationofeachsectionisincludedintheexecutivesummary.Theexecutivesummaryshouldbeonetothreepageslongandshouldbewrittenaftertheentirebusinessplaniscompleted.Thissec-tion is very important. Spend time on it.4. Description of Proposed BusinessHere,youpresentabriefdescriptionofyourproposedcompany.Thepurposeofthissectionistotellthereaderwhyyou’restartingyourbusiness,whatbenefitsitprovides,andwhyitwillbesuccessful. Some questions to answer in this section include:•Why are you starting your company? What market need will you meet?•What is the basic activity of the business?•Will the company focus on manufacturing, retail, or service?•What goods or services will the business provide?•Who will be your primary customers?•Where will your company be located?•Why will your company be successful?Becauselaterpartsoftheplanwillprovidedetailedanswerstomanyofthesequestions,thissection should provide only an overview.5. Industry AnalysisIndevelopingthissectionofyourbusinessplan,theteam’sfirstchallengewillbetoidentifytheindustryinwhichitscompanywillcompete.Next,you’llneedtolearnasmuchaspossibleaboutthatindustry.Theindustryanalysissectionofyourplanshouldprovideanoverallassess-ment of the industry. It should answer such questions as:•How large is the industry? What are total sales for the industry in volume and dollars?•Is the industry mature or are new companies successfully entering it?•What opportunities exist in the industry? What threats?•What factors will influence future expansion or contraction of the industry?•What is the overall outlook for the industry?•Who are your major competitors in the industry?•How does your product differ from those of your competitors?6. Mission Statement and Core ValuesThemissionstatementdescribesthepurposeormissionofyourorganization—thereasonforits existence. It tells the reader what the organization is committed to doing.Appendix AAppendix: Introducing Your Business Plan Project561© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Corevaluesarefundamentalbeliefsaboutwhatisandisnotappropriateandwhatisimpor-tantinconductingcompanyactivities.Corevaluesarenotaboutprofits,butratheraboutideals.Their function is to help guide the behavior of individuals in the organization.7. Management PlanManagementmakesthekeydecisionsforthebusiness,suchasitslegalformandorgani-zationalstructure.Thissectionofthebusinessplanshouldoutlinethesedecisionsandprovideinformation about the qualifications of the key management personnel.A.LegalFormoftheOrganization.Reportthelegalformofbusinessownershipchosenbyyourcompany, along with the rationale for your choice.B.QualificationsofManagementTeamandCompensationPackage.(Note:Indescribingman-agementqualifications,pretendthatallteammembersgraduatedfromcollege10yearsago.)Provideinformationaboutthequalificationsofthemanagementteammembers(education,experience,expertise,etc.).Alsoindicatetheestimatedannualsalarytobepaidtoeachmemberof the management team.C.OrganizationalStructure.Describetherelationshipsamongindividualswithinthecompany,listingthemajorresponsibilitiesofeachmemberofyourmanagementteam.Presenttheserelationshipsgraphicallybyincludinganorganizationchart(eitherinthebodyofthedocu-ment or as an appendix).8. Goods or Services and (If Applicable) Production ProcessA.DescriptionofGoodsorServices.Thissectionprovidesadetaileddescriptionofallgoodsandservicestobeprovidedtothemarketplace.Youshouldidentifythecharacteristicsofyourgoodsorservices,suchasappearance,features,quality,reliability,durability,usability,andeaseofmaintenance.Explainwhyyourproposedgoodsorserviceshaveadvantagesoverthoseofferedbyyourcompetitors.Inotherwords,besuretoanswerthequestion:Whatcompetitiveadvantage will your company have over similar goods or services now on the market?B.PurchaseorManufactureofGoodsorServices.Thissectionshouldindicatehowthecom-panyintendstoobtainorproducetheproductsthatitwillsell.Yourwrite-upwilldependonwhether your company is a service company, a retailer, or a manufacturer.1.ServiceCompanies.Foreachserviceoffered,indicatehowtheservicewillbeprovided.Alsofurnishinformationaboutthenumberandqualificationsofpeoplethatthecompanywillemploy.2.RetailCompanies.Explainwherethecompanywillpurchasetheproductsthatitwillresell. Who will be your key suppliers?3.Manufacturers.Furnishinformationaboutproductdesignandproductionprocess.Besuretoaddressthefollowingquestions:Howwillproductsbedesigned?Whattechnologywillbeneededtodesignandmanufactureproducts?Willthecompanyrunitsownproduc-tionfacilities,orwillproductsbemanufacturedbysubcontractors?Wherewillproductionfacilitiesbelocated?Whattypeofequipmentwillbeused?Whatarethedesignandlayoutof the facilities? How will the company ensure that its products are of high quality?9. MarketingThissectionshouldfocusonyourtargetmarketandcustomerneedsaswellasproductchar-acteristics, pricing, distribution, and promotion. Each of these items is briefly described below:A.TargetMarket.Provideaprofileofyourintendedcustomers(age,gender,income,interests,etc.).Ifyourcompanyplanstoselltoothercompanies,profilethetypicalbusinesscustomerwho will purchase your products.B.CustomerNeedsandProductCharacteristics.Identifyyourcustomers’needsorwantsandlinkthemtothecharacteristics(appearance,features,quality,reliability,durability,usability,easeofmaintenance)youdescribedinyour“GoodsorServicesandProductionProcess”sec-tion.562A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
C.Pricing.Describeyourproposedpricingstrategyforeachproductandindicatewhyyouselectedthatparticularpricingoption.Compareyourpricingstrategytothatofyourcompeti-tors.D.Distribution.Describethemeansbywhichyourgoodsorserviceswillbedistributedtocustomers.Willyouselltocustomersdirectly,overtheInternet,orthroughretailersorwhole-salers?Howwillyougetyourproductsfromyoursuppliers,subcontractors,ormanufacturingfacilities to your customers? Will you have your own warehouse?E.Promotion.Outlineapromotionstrategyforyourcompany.Howwillyoutellpeopleaboutyourproductandpersuadepotentialcustomerstobuyit?Whattypesofadvertisingwillyouuse? How will you maintain positive relationships with your customers?F.E-Business.IfyouintendtousetheInternettopromoteorsellyourproducts,alsoprovideanswers to these questions:1.Will your company have a website? Who will visit the site?2.What will it look like? What information will it supply?3.Will you sell products over the Internet?4.How will you attract customers to your site and entice them to buy from your company?10. Global Issues (If Applicable)Willyourcompanybeinvolvedininternationalmarkets,whetherbybuying,manufacturing,orsellinginothercountries?Ifso,whatobstacleswillyoufacebecauseyou’reoperatinginaglobalenvironment?Howwillyouovercometheseobstacles?Ifyoudon’tplantooperateinternationallywhenyoufirststartup,whatstrategies,ifany,willyouusetomoveintointernationalmarketsatalater time?11. Financial PlanThissectionwillprovideprojectedsalesforecastsandincomestatementsforathree-yearperiod.Itwillalsoindicatethefundingyouneedforstart-upandinitialoperationsaswellasproposedsourcesoffunding.We’lltellyouwhatyou’llneedforyourfinancialplanandhowtoprepareyourfinancialreportsusingtheprovidedExcelTemplate,accessibleathttps://downloads.flatworldknowledge.com/collins_3/Collins_ExpBus_v3.0_BusPlan_Template.xls.12. AppendicesYoumaywanttoprovidecertaininformationinanappendixratherthaninthebodyofthedocument.Forexample,youmightwanttoincludethedetailedfinancialreportsintheappendix(althoughyoushouldstillincludeasummarydiscussionoffinancinginthebodyofthedocu-ment).Otherpossibleattachmentsyoucouldincludeintheappendix:organizationchart,résumésofyourmanagementteam,drawingsorpicturesofyourproduct,sketchesorpicturesofyourfacil-ities,floorplansofmanufacturingfacilities,resultsofanymarketingsurveys,ordocumentsusedto apply for a patent.13. ReferencesBe sure to cite any outside sources that you use in preparing your business plan.EDITEDAppendix AAppendix: Introducing Your Business Plan Project563© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
564A New Entrepreneurial Dynamic© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
APPENDIX BFinal ThoughtsAsIwritetheselastwordsforthefirsteditionofANewEntrepreneurialDynamic,I’moverwhelmedwithgratitudefortheopportunityI’vebeengiventosharemyinsightsandmypassionforentre-preneurship with so many of you. Thank you for being my readers.Ihopeyou’vebeenempoweredbymytextandinspiredbyyourprofessorstogooutandachievesomethinggreatinbusiness.Itdoesn’tmatterwhetherthatisinrunningasmallbusinessorinfoundingaunicornstartup.Yourinternalself-judgmentwillbetheonlymeasureofsuccessthat really counts. Be kind to your future self and all those you encounter.Ialsowishyoufinancialsuccessinyourendeavor.Ifyouarefortunateenoughtofindextra-ordinarymonetarysuccess,I’daskyoutorememberthatyouwereluckyandthatthereareotherswho,formanyreasons,havenotsucceeded.AsStanLeeremindedusinthefirstSpidermancomic,“Withgreatpowercomesgreatresponsibility.”Ifyouobtainwealthandpower,itisincumbentuponyoutodotherightthingwithit.Thatdoesnotmeanthatyoumustgiveallyourmoneyawaytosomecharitablecause.Becomingaphilanthropistmightbegreat,butreinvestingyourhard-woncapitalintoscalinganenterprisethatprovidesgoodjobsandproducesqualityproductsthatdelightcustomersisanobleendeavorinitsownright.Ifyouspendyourmoneyenjoyingyourself,that’s fine too, but do it responsibly and with some dignity.Thenumberofchipsyouleaveonthetablewhenthegameisoveristheveryleastimportantmeasureofsuccess.Themoneyyoudidn’tspendwillbeleftforotherstocountandperhapsfightover. It is how you played the game, and if you enjoyed it, that should matter most to you.Ilookforwardtopatronizingyournewsmallbusinesssomedaysoonorperhapsreadingaboutyour climb to entrepreneurial stardom in the business press.Ad astra, dear readers.Greg Autry, PhDLake Arrowhead, CA, December 2021© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
Index3D printing211-218, 233, 278-279, 291, 429abandoned cart434accountant40, 141, 173, 272, 304-309, 315, 469-473,483-491, 500-502, 546, 550accounts payable463-464, 468, 478accounts receivable439-442, 456-469, 478-486, 526accredited investors274accrual accounting304, 456-460, 469accuracy8, 284, 335, 369-370, 420acquisition118, 203-206, 243, 265, 275, 307, 384,400, 464, 517, 540-547, 554acquisition premium541ad copy371Adhocracy Culture252adulteration333advance35, 41-45, 67-71, 100, 120, 149, 206, 260,281-283, 309, 363, 398, 404, 418-423,469, 479, 486-489, 495, 508, 550advertising69-70, 75, 111, 119, 174-175, 187, 196,232, 243, 255, 285, 297, 320, 327,334-335, 342, 348-376, 380-387, 400,418, 424, 480, 521, 563advertising campaign351affiliate marketing408agency17, 23, 27, 227, 274, 301, 318-319, 473,523-525, 534aging report439, 456, 467-468alpha test146amortization457, 462-466, 482anchor customer479, 523angel investor18, 158, 267-268, 273-276, 283, 290, 303,425, 515angel investors158, 267-268, 273-276, 283, 290, 425animal spirits505annuity550archetype18, 338, 496artificial intelligence176-181, 189, 350-351, 403, 524ask50, 71, 94, 116, 132-134, 140-144, 150,163-166, 170-172, 182, 218, 254-261,274, 284, 289, 302, 360-362, 366,387-396, 400, 431, 458, 470, 483, 487,533, 542, 549, 565aspirational brand356-357aspirational good85, 368asset purchase agreement554assets17, 126, 246, 260, 269-272, 280-286,299-303, 400, 452, 457-459, 463-464,475, 480-489, 500-502, 540-556asynchronous communication444-447autocratic leadership237automated29, 212, 288, 319, 340, 385, 403, 429,433, 514automation29, 95, 189, 211-213, 217, 233, 279,430-432, 454B2B119, 381-384, 390, 400-401, 421, 430,458B2C119, 400B-roll359b-team257backend99, 244, 284backlink367balance sheet452, 456, 463-464, 556bankruptcy33, 142, 302, 311, 477-483, 487-492, 504barriers to entry24, 67-70, 74, 89, 98-99, 152-153, 327,393-394, 499, 525base salary405beachhead strategy348, 354benchmarking226benefit corporation (B Corp)305bespoke495best-in-class452beta test144-148black swan events437bond term510bond yield510book value312, 464, 548bookkeeper469-470, 490, 533bootstrap149bowling pin effect348, 356© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
brand21-26, 48-49, 66-69, 84-86, 107, 115-120,126-130, 139, 152-154, 187, 222-224,247, 257, 283, 307, 318, 323-351,356-367, 371-376, 382-383, 387, 393,424, 430, 434, 464, 496, 517, 528, 543,547, 556brand association338-340, 357brand coherence340-342brand definition324-326, 340brand management340-342breakeven analysis173-175breakeven point in units174-175brick-and-mortar315, 423, 434-435bucket list36-37, 333budget deficit508bureaucrats443, 459, 490, 525business culture40, 66, 517, 541business cycle497, 504-512business dashboard417-418, 436business development99, 129, 135, 144, 381-384, 432, 540business environment48-50, 63, 156, 167, 193, 254, 321,493-535business model17, 23-24, 37, 41, 48, 52-54, 60-61, 97-98,113-115, 126-127, 144-148, 155-156, 229,252, 270, 276, 299, 314, 321, 330-331,389, 418-419, 436-442, 478-479, 488,542-549business plan11-12, 41-49, 54-57, 111, 135, 185, 231,279, 419, 559-563Buyer Bargaining Power90buyerÕs remorse381, 399buyout12, 131, 312-313, 484, 544-546, 556capacity19, 27, 127, 192, 198, 218-223, 250, 377,424, 430, 470capital12, 18, 39, 46-52, 57-60, 67, 75, 89-92,102, 112, 116, 122, 140, 148-149, 238,250-253, 263-283, 287-292, 299, 316,376, 407-410, 423-427, 432, 439-443,450, 456-469, 480-488, 510, 515, 531,537, 544-545, 553, 565capital investment18, 89-90, 116, 149, 268, 443, 462, 488capital lease484cartel91cash accounting458, 462, 469cash conversion cycle392cash cow550cash flow11, 149, 158, 249, 269, 309, 313, 436-442,452, 456-459, 464-468, 477-491, 526,540, 544-547cash flow crisis269, 478, 483, 488-490cash flow statement452, 465-466cellular layout201-203certificate of deposit51certified public accountant470charged off23charlatan380chartered accountant470chasm348, 353-354, 377Clan Culture252click-bait408closely held firms302, 487closing38, 52, 348, 381, 385-392, 400, 405-407,552cohesion237-240, 252, 263, 411cold calling392-393collateralize486, 544collateralized286, 486colocation425commercialize22, 96, 115commission17, 174, 274, 282, 314, 393, 405-406, 454,468, 545commodity73, 115, 120, 324-327, 331, 364competitive advantage43, 61-99, 116, 120-128, 145, 152, 249,283, 317, 343, 351, 404-407, 415, 422,436, 442, 452, 472, 476, 497, 530, 540,548, 562computer-aided design (CAD)210-211, 217computer-aided manufacturing (CAM)211, 217computer-integrated manufacturing(CIM)210-212, 217confirmation bias538consumer culture517-521contingency planning45contingent liabilities554continuous improvement225-229, 427-428continuous improvement process (CIP)428contraband496© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
contract manufacturer430-431contractionary508contribution margin per unit174controlling interest273, 302, 457, 526, 544conversion rate335conversions264, 319, 358, 365, 371-374core competency113-115, 407corporate bylaws300, 503corporate veil301corporation13-16, 23, 27, 45-48, 95, 109-111, 124,160, 165, 202, 206, 222, 242, 258,295-306, 312, 325, 376, 438, 487-489,500-501, 527, 544, 550, 554cost of goods sold151, 437-439, 454-456, 478, 482cost of goods sold (COGS)151, 437, 454-456, 482coup dÕŽtat507coworking space316crawler367creative destruction104-108, 132creditworthy286culture12-13, 34, 40, 48, 52, 66, 72-74, 88, 113,117, 121, 125-132, 250-266, 279, 296,311-312, 326, 333, 345, 351, 371-374,395, 437-442, 450, 517-522, 541, 549customer acquisition cost400customer delight106-107customer discovery50, 142-145, 309-310, 366, 380, 384customer loyalty90, 154-156, 399-400, 404, 418, 434customer loyalty program90, 418customer relationship380, 399-404, 434customer relationship management(CRM)380customer validation142-145customs56, 120, 185, 256, 443, 517, 529dashboard132, 156, 417-419, 436, 440, 480, 485data analytics50data collection48, 418-419DBA298, 307, 500de alio markets74de novo markets74death spiral505debt financing284, 290, 488debt load489decision-maker93, 386, 395deference524-525deflation513demand curve76-86demo264, 393-397, 512democratic leader237, 259depreciation457, 462, 466-469, 482developed nations497, 507developed world29, 53-54, 256, 268-271, 328developing countries228, 343, 507, 525differentiation69-72, 123, 145, 154diminishing returns348, 352direct sales30, 68, 355, 499discriminatory pricing75, 83-84disposable income343disposition484disrupt46-48, 64-66, 107, 155, 273, 283, 324,331-332, 404, 428, 496disruption45-46, 50-52, 62-70, 104-110, 128-129,140, 233, 283, 292, 331, 550disruption theory108distribution channel45, 119, 356distribution system153, 342diversity116, 239, 250-257, 263, 292, 536dividend301dog and pony show397domestic manufacturing54, 432down round277due diligence23-24, 124, 128, 132, 246, 253, 258, 276,283, 293, 362, 490, 551-553duopoly64, 407early adopter146, 153, 216, 353-355early adopters146, 153, 216, 353-354© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
earn-out553EBIT456, 481-482EBITDA131-132, 482economics of one unit148-151economies of scale80, 137, 141, 147, 327, 336, 425-433, 437,540economy of scale80, 137, 141, 147-150, 327, 336, 425-433,437, 540efficient market78elastic goods79electronic data interchange (EDI)203-206electronic medical record (EMR)307elevator pitch12, 362-363emergency cash reserve479empirical evidence46encumber285enlightened self-interest116entitlements509entrenched competitors43, 65equity75, 130-131, 245-249, 262-267, 272-274,280-285, 290, 299, 311-312, 342, 358,394, 425, 452, 463-464, 481, 485-488,539, 544-548, 553-556equity investment280-281, 290equity split245-249, 312evaluation7-9, 133-157, 208, 261-263, 385-387, 435exclusive license283existential risk296existential threat333expansionary508expats518expenses59, 149-151, 173, 197, 271, 288, 298, 424,428, 442, 454-464, 469, 474-475, 490,533exploitation102-104exploration28, 102-104, 121exporting54, 514, 528-532factoring486, 490, 526factors of production426, 507fad100, 109-110, 122, 128, 229, 340-344fair market value484fashion21, 48, 55, 97, 104, 109, 150, 168, 203,217-218, 246, 318, 333, 340, 358, 370,432, 494-497, 523, 529, 555feasibility analysis103, 133-157fictitious name statement298, 307, 500financial feasibility148-151, 270financial ratio480finished product119, 146, 179, 192-193, 201-203, 426first-mover advantage11, 94-96, 153fiscal policy508Five Forces model87-88, 153-154fixed cost150, 174, 183fixed costs147-152, 156, 174-175, 183, 270, 317,357, 405, 452-456, 478-485, 540fixed-position layout202-203flanking maneuver68flexible manufacturing system (FMS)210-212, 217float459floating459floor planning461flooring271, 389, 461, 470, 485, 489focus group142-144, 336-337franchisee126franchising22-24, 121, 125-127, 542-543franchisor23, 91, 126-127, 543free cash flow480fulfillment services433funding round276fusion firms22future cash flow540game theory64gamification260Gantt chart207-210gatekeeper395GDP components506generalist239© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
gig economy114, 297globalism530globalization24, 50, 54-55, 127, 317, 343-344, 443,495, 518-522goodwill21, 269, 312, 324, 464, 547-548granularity356, 363green tech122greenwashing122gross domestic product506gross profit151, 331, 405, 456-457gross profit margin331hang a shingle102-103harvest537-557Hierarchy Culture252honest broker387huckster380hyperinflation507hypothesis testing48, 418import118-119, 186, 256, 403, 443, 529importer496, 528importing120, 331, 513, 528, 532in-kind299income statement440, 452, 456-460incubator315, 331, 425incumbent45-48, 65, 74, 108-109, 113, 136, 140,327, 331-332, 342, 394, 404, 499, 565independent sales agent408industry17-28, 45-46, 52, 64-66, 86-99, 108,121-122, 128-142, 150-157, 164-173, 178,184-188, 198, 211-220, 224, 229-239,252-263, 274, 286-292, 300, 307, 312,320, 326, 330-334, 339-342, 361-368,392-394, 401-402, 407-408, 420-425,429-431, 449-452, 481-482, 496-504, 521,540-547, 556-561industry culture88industry value chain134, 139, 150inelastic goods79infinitely scalable352inflation51, 286, 497, 507-508, 531, 547inflationary spiral507influencer318, 356, 368, 374, 397initial public offering (IPO)12, 18, 303, 537innovation38, 46, 50-55, 66, 71-72, 104-118, 127,159-161, 187-188, 238, 252, 260, 312,374, 497, 530innovation strategy72innovators117, 144, 353installment loan461insurance premium313, 479intangible asset246, 463-464, 547integrated marketing383intellectual property (IP)249intent16, 66, 143, 311, 385, 405, 423, 443interest24, 51, 91, 116, 122, 163, 187, 213, 240,249, 261, 267, 272-273, 284-288,299-307, 312, 334, 350, 361-366,383-386, 392, 397-400, 429, 439,456-461, 465, 481-489, 508-513, 522,526-533, 540, 544-547, 560Internal Revenue Service (IRS)301, 470, 546inventory19, 73, 135, 149-151, 195-207, 212, 217,221-223, 232, 270-272, 327, 389-392,406-408, 418, 427, 433, 438-439,456-463, 470, 474, 482-490, 500, 508,528, 552inventory control204-207, 212, 223inventory financing19, 461inventory flooring271, 461inventory levels201, 217, 418inverted yield curve511invoice discounting486ISO 9000227, 420, 427-428ISO 14000227just-in-time (JIT)204-207, 427just-in-time production204-207key person insurance313, 551laissez-faire leadership237last mover advantage107-111layout126, 141, 194, 198-203, 220-224, 434,562leadership style237-238, 252-254leads1, 56, 223, 307, 320-321, 382-387,391-394, 400, 405, 409, 503leakage339, 509© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
lean venture250lease35, 93, 151, 173, 271, 281-284, 315-316,423-425, 463, 484-485, 540leasehold improvements316legal form298-306, 316, 562leverage12, 21, 59, 90-92, 117, 338, 342-344,355-358, 374, 390-393, 397, 432, 459,481, 485, 527, 553leveraged buyout12, 544liability148, 184, 295-306, 313-314, 428, 479,554liable184, 298-300, 556licensing24, 92, 100, 125-127, 342, 358lien300lifestyle business20, 338, 479, 539, 553limited liability company (LLC)303line of credit285-288, 479, 487liquidated280, 464, 482, 486liquidating280liquidity event539, 544litigious259loan defaults23logistical complexities78logistical outsourcing433logistics24, 69, 138, 247, 393, 412, 416, 433,442-443logo60, 114-115, 119, 125, 203, 324-328,341-346, 357, 361, 375-376, 463make-to-order strategy192-198makers27, 66, 99, 108, 187, 287, 317, 350, 395,405, 426-430makerspace429management buyout546manufacturersÕ representative407-408manufacturing resource planning (MRPII)206marginal income303market12, 23-24, 29-34, 43-58, 64-99, 104-120,125-147, 152-189, 194, 198, 216,224-227, 238, 243, 250-256, 261-264,277-286, 293, 297-301, 307-320, 324-334,339-342, 347-376, 380, 384, 392-397,401, 407, 412, 418-420, 424, 430-434,441-442, 446, 453, 458, 464, 473, 478,484-486, 495-499, 503-508, 515-516,521-524, 529, 538-548, 555-556, 561-562market12, 23-24, 29-34, 43-58, 64-99, 104-120,125-147, 152-189, 194, 198, 216,224-227, 238, 243, 250-256, 261-264,277-286, 293, 297-301, 307-320, 324-334,339-342, 347-376, 380, 384, 392-397,401, 407, 412, 418-420, 424, 430-434,441-442, 446, 453, 458, 464, 473, 478,484-486, 495-499, 503-508, 515-516,521-524, 529, 538-548, 555-556, 561-562market capitalization95-96Market Culture12, 252market disruption45, 64-65, 107market equilibrium77-78market failure505market price77-79, 464, 478market quantity77market saturation351market segment84, 168-170, 347, 356market share43, 49, 65-66, 71, 88-89, 108, 136,172-173, 252, 261, 283, 420, 548marketers194, 324-325, 336-338, 347-349, 359marketing11, 22-23, 50-52, 58-60, 69-72, 89-91,109, 115, 119, 126-127, 131-145,160-170, 176, 180, 184, 188-189, 194,223, 230, 243-250, 255, 260-263, 281,307-310, 318-336, 341, 347-386, 392-394,400, 404-408, 434, 453-455, 478, 487,530, 562-563marketing campaign324, 341, 382, 455marketing collateral126, 362mass customization194-199, 230-232mass marketing324mass production (or make-to-stockstrategy)195master production schedule (MPS)204-207material requirements planning (MRP)206-207materials management194, 203-206, 450mature industry65media kit359metrics132, 260, 342, 365, 383, 412, 416-419,480-482, 547microeconomics75, 87, 351, 539micromanaging446milestones405, 553milking550© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
mimetic isomorphism496minimum viable product (MVP)142, 146minor close390mission-critical component115monetary policy508, 513-516monetized363moonshot53multi-level marketing22, 355, 394, 408multitasking446myopic49, 112, 238Nash Equilibrium64national champions541-542national debt508negative working capital439-442nepotism546net present value540, 547net profit150-151, 400, 452, 456, 462net terms271, 284, 289-290, 458-459, 480, 485,504net value106net worth274, 463-464niche130-131, 142, 155, 167-170, 184-187,278, 318-321, 356, 364, 519, 527nonprofit16, 21, 38, 49, 306, 440offshoring29, 54, 430oligopoly64, 137on message333-334onerous54, 287, 458open innovation52, 113-118, 127open market operations508operating agreement300, 304, 312operational effectiveness71-72operations17, 21-24, 34, 45, 99-104, 127-138, 164,170-176, 180-183, 191-233, 263, 270,292, 298-301, 308, 312, 316-317, 334,351, 376, 410, 415-460, 464-465, 469,479-482, 487-489, 496-497, 501-504, 508,545-548, 552-556, 563operations management (OM)192opportunity11-12, 20-23, 32, 36, 45-48, 55, 70,94-157, 165-167, 253-255, 263-264, 271,275-277, 282, 288-289, 307-308, 318-327,331-334, 362, 376, 387, 392, 401-404,412, 439-443, 496, 502, 507-510,517-520, 525, 540-545, 549, 553-559, 565opportunity cost32, 36, 151, 376, 392, 443, 510, 540option23, 40-43, 127, 134, 146, 151-153, 194,224-228, 239, 259, 265, 269, 281,292-295, 302-304, 316, 389, 397,408-410, 419, 436, 447, 463, 474, 479,484-486, 502, 525, 546-548, 563organic growth19-22organic search results366organizational chart241organizational culture251-252, 263, 440-442other peopleÕs money27, 124, 147, 156, 277, 283, 531, 539outflanked68outsourcing155, 193, 224-231, 404-410, 430-436, 443overvaluation342owner equity463-464ownership stake299pain points102-106, 112, 135, 259parallel entrepreneur27-28, 307part count427part-time entrepreneurship30participative leader238partnership99-100, 264, 289, 295-306, 312, 412, 459,488, 503, 546, 550partnership agreement299-300, 312, 503patent93, 112, 164, 181-182, 189, 249, 327, 331,339, 352, 463, 563pay-to-play365-368pecuniary116perception management324-325performance analysis417performance-based pay plan405-406personal guarantee284, 315, 488-489PERT chart207-210pitch meeting396pivot23, 43, 56-59, 134-135, 155, 252, 310-311placement115, 351, 366-367, 383policies147, 256, 260, 313, 435, 495-498,507-508, 514-517, 530© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
post-money valuation277power relationship524pre-money valuation277pre-sales309-310pre-seed money276precision11, 24, 46, 322, 369-370, 430predatory plaintiffs148press release359price elasticity79private equity267, 280, 544-545process layout199-203product3, 11, 17-30, 43-60, 65-85, 89-99,104-126, 135-153, 157-230, 243-250, 260,269-271, 275-276, 280-284, 300-301,307-318, 323-343, 347-376, 381-410,415-416, 426-445, 449-463, 478-486,495-496, 500-506, 514-517, 522-529,542-543, 548, 553, 559-563product branding324product concept178-180, 188-189product development process176-180, 191, 215product layout200-203production engineers427profit margin119, 147-151, 331, 452, 500profitable20-21, 37, 49, 53, 66, 70, 87, 111, 119,131, 141-142, 158-161, 175-176, 183-185,229, 265, 270, 284-288, 336, 351, 438,448, 452-454, 470, 478-483, 490, 503,510, 548prohibition153project team56, 176promo code371prototype28, 111, 121, 178-179, 188, 211, 215, 250,263, 397, 430proxy sales agent394purchase68-71, 86, 102, 106, 114, 118, 125, 132,146, 204, 231, 270, 286-289, 302, 309,315-317, 328-331, 335, 342, 349-356,365, 381-392, 399, 409-410, 423,431-434, 439, 461, 469, 484-489, 495,510, 526, 541-544, 551-556, 562purchasing55, 79, 118, 131, 148-149, 203-207, 231,242, 316, 368, 380-391, 397, 425, 439,464, 502, 506-507, 513, 524-525, 540,544pyramid scheme408qualified accountant470qualifying291, 384-387, 392, 399-401, 527quality26, 48, 54-57, 69, 76, 85, 115, 120,125-126, 139-142, 150, 164, 168-169,176-180, 191-194, 198-205, 211-213,217-219, 224-233, 253, 279-281, 301,308, 325-340, 346-347, 361-367, 371,376, 383, 387-390, 399-400, 416,420-421, 427-434, 450-454, 480, 490,513, 525-529, 559-565quality circle226quality fade431quota260, 529ramp-up stage179-180ready-to-wear495recession51, 316, 440, 507, 511-513referenceable99, 289, 355, 400referential354regulatory and tax climate97repossessed285request for bid525request for proposal525retained earnings464retainer283, 320revenue16-20, 46-49, 79-83, 110, 116, 123-125,130-131, 136, 146, 150-151, 157, 169,173-174, 223, 260-261, 284-286, 301-303,313, 320-321, 331, 343-348, 354-358,368, 402-408, 412, 419, 438-442,452-464, 469-473, 478-482, 488-490, 502,508, 523-524, 529, 539-540, 546-552reverse engineer431revolving credit agreement479, 483rewards51, 149, 238-239, 394, 405, 418, 438, 464,488, 547risk analysis284risk averse51risk tolerance104Rivalry with Competitors88robot179-180, 212-213, 217, 233roles7, 48, 239-245, 250-252, 292, 384, 494,498-499roll-up merger540-542rule of law525saboteur100, 395-397sales agents394, 407-408sales art382© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
sales cycle100, 384, 392, 405sales pipeline382-383sales process99, 348, 380-392, 396-405, 409-411sales volume24, 171, 418, 453salesmanship382salesperson244, 380-401, 405-410satisficing348-349, 420, 434scale11-20, 27, 80, 85, 118, 134-137, 141-142,147-152, 156, 165, 230, 239, 244-247,252, 327, 336, 351, 356, 394, 406,420-437, 443, 471, 540school of hard knocks5, 453search process112second-mover advantage94secular trend512-513secured debt483security deposit270-271, 423seed capital102, 263, 267-272seed round276-279selection process286, 496self-image336serendipity111-113, 347, 446serial entrepreneur1, 27, 112, 555Series A276-279, 292set asides502, 526severance package102shared workspace316shareholders21, 34, 49, 96, 277-280, 301-308, 317,328, 340, 452, 481, 487, 501, 544,554-555shell company501, 545, 554shifters22side agreements312signal131, 154, 255, 281, 328, 335, 357skunkworks65-66slack104, 112, 132, 311, 444Small Business Administration17, 163, 285, 306, 526, 543smuggling496, 529snake oil373social entrepreneurship21, 305social networks239sole proprietorship264, 298-302, 459, 550solvent477, 481sound bites359spam367, 392special acquisition company545specialist188, 239, 244-245, 253, 257spiff406-408spinoff53, 267, 307-308stakeholder theory295, 305stakeholders11, 115, 305, 310, 322, 549-553startup costs24, 149startup funding267-272state capitalism493state owned enterprise31state-owned enterprise (SOE)90statistical process control224-228STEM52step-up lease424stimulate8, 508-511strategic management61, 476strategy18-20, 28, 43-48, 61-100, 107, 119-122,135, 144-147, 153-154, 192-198, 237,252, 272, 307, 324, 332, 348-357, 363,376, 380-383, 408, 416, 427, 440,468-469, 478, 487, 491, 502, 540-546,550-554, 563suboptimal choices106, 440successor liability554sunk cost fallacy32, 36supermajority299Supplier Bargaining Power91supply chain54-55, 67, 118-121, 127, 135, 142, 420,425-427, 436, 446, 500supply chain management (SCM)427supply curve76survey31, 50, 83, 135, 142-143, 148, 180, 225,358, 366, 392, 435-436, 525, 563© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.
sustainable competitive advantage71, 97, 116swag91, 361-362switching cost72, 90, 471switching costs72, 311, 331SWOT Analysis87, 92-93synergy307, 548system integrator409tactics47, 62-70, 97, 348-349, 362, 367,383-385, 394, 416, 468tagline119, 338tangible asset286, 462target customer143, 150, 154, 334, 367, 392-393tariff132, 496, 529tax deductible285tchotchkes361teamwork34, 238, 289technical ecosystem409technology adoption life cycle348, 352-354tenant316, 423-424tenant improvement allowance424tenant improvements316, 424terms8, 17, 71, 90-91, 125, 256, 260, 264, 271,284, 289-290, 297-300, 310-313, 365-366,389, 425, 431, 458-459, 474, 480-490,503-504, 510, 525, 551the gig economy114, 297theory of the firm297third-party payer145Threat of New Entrants89-92, 327Threat of Substitute Products89three Fs269-273thresholds417-419top line480total quality management (TQM)224-228, 428trade secrets89, 116, 249, 431trademark125-126, 181-182, 189, 329, 339trained accountant470transaction costs297transactional238, 382transactional leader238transformational leader238transit time458trend24, 29, 48-50, 54-56, 64, 96-97, 118-122,127, 189, 231, 305, 328, 332, 340, 358,374, 404, 419-425, 433, 494, 504-508,512-516, 522-523, 529, 536true lease484trustee482-483turnkey126, 409-410turnkey solution409-410two-for-one sale394tyranny of success108-109unboxing368, 411underdog89unemployment rate507, 536unsecured debt483utility106, 165-167, 182, 245, 351, 382valuation112, 142, 276-277, 292, 312, 327, 541,547-548value chain68, 121, 134-140, 150-152value-add327, 426, 556value-added reseller409-410Value-Added Tax (VAT)500variable costs150-151, 174, 270, 454-456venture capital fund277venture capitalist12, 18, 42, 46-49, 57-60, 107, 268,276-283, 291-292, 537vertical integration68vetting134, 292virtuous cycle391warm call393-394willingness to work245, 259working capital439-442, 459, 485yield curve510-512© 2023 Boston Academic Publishing, Inc., d.b.a FlatWorld. All rights reserved.

The post Business Plan Document first appeared on Bessays.