ENTREPRENEURSHIPE I G H T H E D I T I O N

ROBERT D. H ISRICH.PhD

Garvin Professor of Global EntrepreneurshipDirector, Walker Center for Global Entrepreneurship

Thunderbird School of Global Management

MICHAEL P. PETERS, PhDProfessor Emeritus

Carroll School of ManagementBoston College

DEAN A. SHEPHERD, PhDRandall L. Tobias Chair in Entrepreneurial Leadership and

Professor of EntrepreneurshipKelley School of Business

Indiana University

McGraw-HillIrwin

CONTENTS

PREFACE vi

PART 1 THE ENTREPRENEURIALPERSPECTIVE

1 ENTREPRENEURSHIP AND THEENTREPRENEURIAL MIND-SET 2

Opening Profile: Ewing Marion Kauffman 3Nature and Development of Entrepreneurship 6The Entrepreneurial Process 7

Identify and Evaluate the Opportunity 7Develop a Business Plan 9Determine the Resources Required 9Manage the Enterprise 10

How Entrepreneurs Think 10Effectuation 10Cognitive Adaptability 13

As Seen in Entrepreneur Magazine: What Me Worry?.How Smart Entrepreneurs Harness the Powerof Paranoia 14

Learning from Business Failure 18Recovery and Learning Process 20A Dual Process for Learning from Failure 21

Ethics and Social Responsibility of Entrepreneurs 21Ethics: Company's Code of Ethics 23Role of Entrepreneurship in Economic Development 23

2 ENTREPRENEURIAL INTENTIONS ANDCORPORATE ENTREPRENEURSHIP 34

Opening Profile: Robert Mondavi 35The Intention to Act Entrepreneurially 38Entrepreneur Background and Characteristics 38

Education 38Ethics: Ethical Conduct of Entrepreneurs versus

Managers 39Age 40Work History 40

Role Models and Support Systems 40Moral-Support Network 41Professional-Support Network 41

CONTENTS

As Seen in Entrepreneur Magazine: Hot or Not? 42Minority Entrepreneurs 43As Seen in Entrepreneur Magazine: Provide Advice

to an Entrepreneur about Improving a Businessthrough Certification as a Woman-OwnedBusiness 44

Entrepreneurial Intentions within ExistingOrganizations 45

Managerial versus Entrepreneurial DecisionMaking 45

Strategic Orientation and Commitment toOpportunity 46

Commitment of Resources and Control ofResources 46

Management Structure and Reward Philosophy 47Growth Orientation and Entrepreneurial Culture 48Causes for Interest in Corporate Entrepreneurship 48Establishing a Culture for Corporate Entrepreneurship 51Leadership Characteristics of Corporate Entrepreneurs 53

Establishing Corporate Entrepreneurship in theOrganization 54

Problems and Successful Efforts 56

3 ENTREPRENEURIAL STRATEGY: GENERATINGAND EXPLOITING NEW ENTRIES 64

Opening Profile: Justin Parer 65New Entry 66Generation of a New Entry Opportunity 67

Resources as a Source of Competitive Advantage 67Creating a Resource Bundle That Is Valuable, Rare,

and Inimitable 68Assessing the Attractiveness of a New Entry

Opportunity 70Information on a New Entry 70

As Seen in Entrepreneur Magazine: Elevator Pitchfor Project Alabama 71

Comfort with Making a Decision underUncertainty 72

Decision to Exploit or Not to Exploit theNew Entry 72

Entry Strategy for New Entry Exploitation 73Environmental Instability and First-Mover

(Dis)Advantages 74Customers' Uncertainty and First-Mover

(Dis)Advantages 76Ethics: Do the Right Thing 78

Lead Time and First-Mover (Dis)Advantages 78As Seen in Entrepreneur Magazine: Provide Advice to

an Entrepreneur about Being More Innovative 80

CONTENTS xi

Risk Reduction Strategies for New EntryExploitation 81

Market Scope Strategies 81Imitation Strategies 82Managing Newness 84

PART 2 F R O M IDEA TO THE O P P O R T U N I T Y 91

CREATIVITY AND THE BUSINESS IDEA 92

Opening Profile: Frederick W. Smith 93Trends 96

Green Trend 96Clean-Energy Trend 96Organic-Orientation Trend 96Economic Trend 97Social Trend 97Health Trend 97Web Trend 97

Sources of New Ideas 97Consumers 97Existing Products and Services 98Distribution Channels 98Federal Government 98Research and Development 98

As Seen in BusinessWeek: The Myth of Creativity 99Methods of Generating Ideas 99

Focus Groups 99Brainstorming 100Brainwriting 100Problem Inventory Analysis 100

Creative Problem Solving 101Brainstorming 102Reverse Brainstorming 102Gordon Method 102Checklist Method 103Free Association 103Forced Relationships 103Collective Notebook Method 103

As Seen in BusinessWeek: How to ProduceBig Ideas on Demand 104

Attribute Listing 105Big-Dream Approach 106Parameter Analysis 106

Innovation 106Types of Innovation 106Defining a New Innovation (Product or Service) 108Classification of New Products 109

xii CONTENTS

Opportunity Recognition 110Product Planning and Development Process 111

Establishing Evaluation Criteria 111Ethics: Leadership Is about Doing, Not Saying 112

Idea Stage 114 "*Concept Stage 114Product Development Stage 117Test Marketing Stage 117

E-Commerce and Business Start-Up 117Using E-Commerce Creatively 118WebSites 118Tracking Customer Information 119Doing E-Commerce as an Entrepreneurial Company 119

5 IDENTIFYING AND ANALYZING DOMESTIC ANDINTERNATIONAL OPPORTUNITIES 124

Opening Profile: A. Malachi Mixon III 125Introduction 127Opportunity Recognition and the Opportunity

Assessment Plan 128Information Sources 130

General Information 130Industry and Market Information 131Competitive Company and Product Information 131Government Sources 131

As Seen in BusinessWeek: Mom-and-PopMultinationals 132.' Search Engines 132

Trade Associations 132Trade Publications 133

The Nature of International Entrepreneurship 133The Importance of International Business to

the Firm 134International versus Domestic Entrepreneurship 134

Economics 134Stage of Economic Development 134Current Account 135Type of Economic System 135Political-Legal Environment 135Language 137

Technological Environment 137Ethics: Ethics Must Be Global Not Local 138Culture 138

Social Structure 140Religion 141Political Philosophy 141Economics and Economic Philosophy 141Education 141Manners and Customs 141

CONTENTS xiii

Available Distribution Systems 142Motivations to Go Global 142Strategic Effects of Going Global 143Foreign Market Selection 144 .As Seen in BusinessWeek: Stranger in a

Strange Land 145Entrepreneurial Entry Strategies 147

Exporting 147Nonequity Arrangements 148Direct Foreign Investment 149

Entrepreneurial Partnering 151Barriers to International Trade 152

General Agreement on Tariffs and Trade(GATT) 152

Increasing Protectionist Attitudes 152Trade Blocs and Free Trade Areas 152Entrepreneur's Strategy and

Trade Barriers 153Implications for the Global Entrepreneur 153Appendix 5A: Example Outline of an International

Business Plan 156

PROTECTING THE IDEA AND OTHER LEGAL ISSUESFOR THE ENTREPRENEUR 158

Opening Profile: Steve Lipscomb 159What Is Intellectual Property? 161Need for a Lawyer 161

,/ How to Select a Lawyer 161As Seen in Entrepreneur Magazine: Provide Advice

to an Entrepreneur about Intellectual PropertyProtection 162

Legal Issues in Setting Up theOrganization 163

Patents 163International Patents 164The Provisional Application 164The Patent Application 165Patent Infringement 166

Business Method Patents 166Start-Up without a Patent 167As Seen in BusinessWeek: Provide Advice to an

Entrepreneur Inventor about How toMake Patents Pay 168

Trademarks 167Registering the Trademark 169

Copyrights 170Ethics: How Much Responsibility Should Our Youth

Have for Illegal Downloading? 171Trade Secrets 171

xiv CONTENTS

Licensing 173Product Safety and Liability 175Insurance 175Sarbanes-Oxley Act 177Contracts 178

PART 3 FROM THE OPPORTUNITY TOTHE BUSINESS PLAN 185

7 THE BUSINESS PLAN: CREATING AND STARTINGTHE VENTURE 186

Opening Profile: Belinda Guadarrama 187Planning as Part of the Business Operation 189

What Is the Business Plan? 189Who Should Write the Plan? 190Scope and Value of the Business Plan—Who Reads

the Plan? 191As Seen in BusinessWeek: Don't Expect a Fee for Making

an Introduction 192How Do Potential Lenders and Investors Evaluate

the Plan? 192Ethics: Protecting Your Business Idea 194Presenting the Plan 194Information Needs 195

Market Information 195Operations Information Needs 198

Financial Information Needs 199Using the Internet as a Resource Tool 199Writing the Business Plan 200

Introductory Page 202Executive Summary 202Environmental and Industry Analysis 203Description of Venture 205Production Plan 207Operations Plan 207Marketing Plan 208Organizational Plan 208Assessment of Risk 209Financial Plan 209

As Seen in BusinessWeek: Elevator Pitch forPerfect Dinner 210

Appendix 210Using and Implementing the Business Plan 210

Measuring Plan Progress 211Updating the Plan 212

Why Some Business Plans Fail 212Appendix 7A: Sample Business Plan—Gopher It 216

CONTENTS xv

8 THE MARKETING PLAN 222

Opening Profile: Warren G. Jackson 223Industry Analysis 225

Competitor Analysis 225 1Marketing Research for the New Venture 226

Step One: Defining the Purpose or Objectives 227Step Two: Gathering Data from Secondary Sources 227

As Seen in BusinessWeek: How to Expand YourCustomer Base 229

Step Three: Gathering Information from PrimarySources 229

Step Four: Analyzing and Interpreting theResults 232

Understanding the Marketing Plan 232Characteristics of a Marketing Plan 233Ethics: Devil's Advocate 236The Marketing Mix 236Steps in Preparing the Marketing Plan 237

Defining the Business Situation 237Defining the Target Market: Opportunities and Threats 237Considering Strengths and Weaknesses 240Establishing Goals and Objectives 240Defining Marketing Strategy and Action Programs 240Marketing Strategy: Consumer versus Business-to-

Business Markets 244As Seen in Entrepreneur Magazine: Provide Advice

to an Entrepreneur about Web Sites 245Budgeting the Marketing Strategy 246Implementation of the Market Plan 246Monitoring the Progress of Marketing Actions 246

Appendix 8A: Marketing Plan Outlines 250

THE ORGANIZATIONAL PLAN 254

Opening Profile: Jim Sinegal 255Developing the Management Team 256As Seen in Entrepreneur Magazine: Provide Advice

to an Entrepreneur about Some Legal Aspects ofStarting a Business 257

Legal Forms of Business 258Ownership 258Liability of Owners 258Costs of Starting a Business 260Continuity of Business 260Transferability of Interest 261Capital Requirements 261Management Control 262Distribution of Profits and Losses 262Attractiveness for Raising Capital 263

xvi CONTENTS

Tax Attributes of Forms of Business 263 ,Tax Issues for Proprietorship 263Tax Issues for Partnership 263Tax Issues for Corporation 265

The Limited Liability Company versus the *S Corporation 265

S Corporation 265Advantages of an S Corporation 266Disadvantages of an S Corporation 266

Ethics: Lawyers Explain the Steps to Take If YourBusiness Partner Violates His or Her Obligationsto the Business 267

The Limited Liability Company 267Advantages of an LLC 268

Designing the Organization 268Building the Management Team and a Successful

Organization Culture 271As Seen in BusinessWeek: Elevator Pitch

for 20x200 Web Site 272The Role of a Board of Directors 273The Board of Advisors 274The Organization and Use of Advisors 274

10 THE FINANCIAL PLAN 280

Opening Profile: Tony Hsieh 281Operating and Capital Budgets 282Ethics: Are You a Good Leader? 284Pro Forma Income Statements 285Pro Forma Cash Flow 288As Seen in BusinessWeek: Provide Advice to an

Entrepreneur about Solving Their Cash-FlowProblem to Stay in Business 290

Pro Forma Balance Sheet 292Break-Even Analysis 294Pro Forma Sources and Applications of Funds 296As Seen in BusinessWeek: Elevator Pitch

for Beer Chips 297Software Packages 298

PART 4 FROM THE BUSINESS PLAN TOFUNDING THE VENTURE 303

11 SOURCES OF CAPITAL 304

Opening Profile: Scott Walker 305An Overview 308

Debt or Equity Financing 308Internal or External Funds 309

CONTENTS xvii

Personal Funds 310As Seen in BusinessWeek: Show Me the

Moneymen 311Family and Friends 312Commercial Banks 312 1

Types of Bank Loans 313Cash Flow Financing 314Bank Lending Decisions 314

Role of the SBA in Small-BusinessFinancing 315

Ethics: We Need an Ethics Czar 316Research and Development Limited

Partnerships 318Maj or Elements 318Procedure 319Benefits and Costs 319Examples 320

Government Grants 320As Seen in BusinessWeek: From 401 (k) Nest Egg

to Seed Money 321Procedure 322Other Government Grants 323

Private Placement 324Types of Investors 324Private Offerings 324Regulation D 324

Bootstrap Financing 326

12 INFORMAL RISK CAPITAL, VENTURE CAPITAL,AND GOING PUBLIC 332

Opening Profile: Mark Zuckerberg 333Financing the Business 336Informal Risk-Capital Market 337As Seen in BusinessWeek: Old Banks, New

Lending Tricks 338Venture Capital 341

Nature of Venture Capital 341As Seen in BusinessWeek: She's an Angel 342

Overview of the Venture-Capital Industry 342Venture-Capital Process 347Locating Venture Capitalists 350Approaching a Venture Capitalist 350

Valuing Your Company 352Factors in Valuation 352Ratio Analysis 353Liquidity Ratios 353Activity Ratios 354Leverage Ratios 354Profitability Ratios 355

xviii CONTENTS

General Valuation Approaches 355General Valuation Method 357Evaluation of an Internet Company 358

Deal Structure 359Going Public 359Ethics: Financial Transparency a Must 360

Advantages 360Disadvantages 362

Timing of Going Public and UnderwriterSelection 364

Timing 364Underwriter Selection 365

Registration Statement and Timetable 366The Prospectus 367The Registration Statement 368Procedure 368

Legal Issues and Blue-Sky Qualifications 369Legal Issues 369Blue-Sky Qualifications 369

After Going Public 369As Seen in BusinessWeek: Where Venture Capital

Never Ventured Before 370Aftermarket Support 370Relationship with the Financial Community 370Reporting Requirements 371

PART 5 FROM FUNDING THE VENTURE TOLAUNCHING, GROWING, ANDENDING THE NEW VENTURE 377

13 STRATEGIES FOR GROWTH AND MANAGINGTHE IMPLICATIONS OF GROWTH 378

Opening Profile: Brian and Jennifer Maxwell 379Growth Strategies: Where to Look for Growth Opportunities 380

Penetration Strategies 381Market Development Strategies 382Product Development Strategies 382Diversification Strategies 383

As Seen in Entrepreneur Magazine: Provide Adviceto an Entrepreneur about Growing into NewMarkets Using the Internet 384

Example of Growth Strategies 385Economic Implications of Growth 385Implications of Growth for the Firm 387

Pressures on Existing Financial Resources 387Pressures on Human Resources 388

CONTENTS xix

Pressures on the Management of Employees 388Pressures on the Entrepreneur's Time 388

Overcoming Pressures on Existing FinancialResources 388

Financial Control 388 "*Ethics: Lessons from Enron 389

Managing Cash Flow 390Managing Inventory 392Managing Fixed Assets 393Managing Costs and Profits 394Taxes 395Record Keeping 396

Overcoming Pressures on Existing HumanResources 396

Overcoming Pressures on the Management ofEmployees 397

As Seen in Entrepreneur Magazine: Elevator Pitchfor eVest 398

Overcoming Pressures on Entrepreneurs' Time 399Basic Principles of Time Management 400

Implications of Firm Growth for the Entrepreneur 401A Categorization of Entrepreneurs and Their

Firms' Growth 402

\k ACCESSING RESOURCES FOR GROWTHFROM EXTERNAL SOURCES 410

Opening Profile: Bill Gross 411Using External Parties to Help Grow a Business 412Franchising 413

Advantages of Franchising—to the Franchisee 413Advantages of Franchising—to the Franchisor 415

As Seen in BusinessWeek: Venture Capital'sFavorite Startups 416

Disadvantages of Franchising 417Types of Franchises 417

Investing in a Franchise 418Ethics: Fair Enough 419Joint Ventures 421

Types of Joint Ventures 422Factors in Joint Venture Success 423

Acquisitions 424Advantages of an Acquisition 424Disadvantages of an Acquisition 425Synergy 425Structuring the Deal 425

As Seen in Entrepreneur Magazine: Provide Adviceto an Entrepreneur about Entering into Agreements 426

Locating Acquisition Candidates 427

xx CONTENTS

Mergers 428Leveraged Buyouts 429Overcoming Constraints by Negotiating for More

Resources 430

15 SUCCESSION PLANNING AND STRATEGIES FORHARVESTING AND ENDING THE VENTURE 438

Opening Profile: Teresa Cascioli 439As Seen in BusinessWeek: Provide Advice to an Entrepreneur on

How to Beat Failure and Be the Boss Again 441Exit Strategy 442Succession of Business 442

Transfer to Family Members 443Transfer to Nonfamily Members 443

Options for Selling the Business 444Direct Sale 445Employee Stock Option Plan 446Management Buyout 446

Ethics: Involving Employees, Bankers, and BusinessAssociates in the Problem 447

Bankruptcy—An Overview 447Chapter 11—Reorganization 449

Surviving Bankruptcy 450As Seen in BusinessWeek: Elevator Pitch for nPower Personal

Energy Generator 451Chapter 13—Extended Time Payment Plans 452Chapter 7—Liquidation 452Strategy during Reorganization 453Keeping the Venture Going 453Warning Signs of Bankruptcy 454Starting Over 455The Reality of Failure 456Business Turnarounds 456

PART 6 CASES 463

Case 1 Turner Test Prep Co. 465Case 2 Jim Boothe, Inventor 467Case 3 A. Monroe Lock and Security Systems 468Case 4 Beijing Sammies 470Case 5 "Mamma Mia!" The Little Show That Could! 484Case 6 The Beach Carrier 492Case 7 Gourmet to Go 495Case 8 Intervela d.o.o. Koper—Victory Sailmakers 502Case 9 The Gril-Kleen Corporation 509

Case 10 The Winslow Clock Company 516

CONTENTS xxi

Case 11 NeoMed Technologies 525Case 12 Rug Bug Corporation 540Case 13 Nature Bros. Ltd. 550Case 14 Amy's Bread 557Case 15 Oklahoma National Bank 563Case 16 Datavantage Corporation 572Case 17 Dual Pane Company 582

INDEX 584