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ENTREPRENEURSHIP

EIGHTH EDITION

ROBERT D. H I S R I C H . P h D

Garvin Professor of Global Entrepreneurship Director, Walker Center for Global Entrepreneurship Thunderbird School of Global Management

MICHAEL P. PETERS, PhD

Professor Emeritus Carroll School of Management Boston College

DEAN A. SHEPHERD, PhD

Randall L. Tobias Chair in Entrepreneurial Leadership and Professor of Entrepreneurship Kelley School of Business Indiana University

McGraw-Hill Irwin

CONTENTS

PREFACE

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PART

1

THE ENTREPRENEURIAL PERSPECTIVE ENTREPRENEURSHIP AND THE ENTREPRENEURIAL MIND-SET

Opening Profile: Ewing Marion Kauffman 3 Nature and Development of Entrepreneurship 6 The Entrepreneurial Process 7 Identify and Evaluate the Opportunity 7 Develop a Business Plan 9 Determine the Resources Required 9 Manage the Enterprise 10 How Entrepreneurs Think 10 Effectuation 10 Cognitive Adaptability 13

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

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Learning from Business Failure 18 Recovery and Learning Process 20 A Dual Process for Learning from Failure 21 Ethics and Social Responsibility of Entrepreneurs 21 Ethics: Company's Code of Ethics 23 Role of Entrepreneurship in Economic Development 23 2 ENTREPRENEURIAL INTENTIONS AND CORPORATE ENTREPRENEURSHIP Opening Profile: Robert Mondavi 35 The Intention to Act Entrepreneurially 38 Entrepreneur Background and Characteristics Education 38

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Ethics: Ethical Conduct of Entrepreneurs versus Managers 39

Age 40 Work History 40 Role Models and Support Systems 40 Moral-Support Network 41 Professional-Support Network 41

CONTENTS As Seen in Entrepreneur Magazine: Hot or Not? 42 Minority Entrepreneurs 43 As Seen in Entrepreneur Magazine: Provide Advice to an Entrepreneur about Improving a Business through Certification as a Woman-Owned Business 44 Entrepreneurial Intentions within Existing

Organizations 45 Managerial versus Entrepreneurial Decision Making 45 Strategic Orientation and Commitment to Opportunity 46 Commitment of Resources and Control of Resources 46 Management Structure and Reward Philosophy 47 Growth Orientation and Entrepreneurial Culture 48 Causes for Interest in Corporate Entrepreneurship 48 Establishing a Culture for Corporate Entrepreneurship 51 Leadership Characteristics of Corporate Entrepreneurs 53 Establishing Corporate Entrepreneurship in the Organization 54 Problems and Successful Efforts 56 3 ENTREPRENEURIAL STRATEGY: GENERATING AND EXPLOITING NEW ENTRIES Opening Profile: Justin Parer 65 New Entry 66 Generation of a New Entry Opportunity 67 Resources as a Source of Competitive Advantage 67 Creating a Resource Bundle That Is Valuable, Rare, and Inimitable 68 Assessing the Attractiveness of a New Entry

Opportunity 70 Information on a New Entry 70 As Seen in Entrepreneur Magazine: Elevator Pitch for Project Alabama 71 Comfort with Making a Decision under

64

Uncertainty 72 Decision to Exploit or Not to Exploit the New Entry 72 Entry Strategy for New Entry Exploitation 73 Environmental Instability and First-Mover (Dis)Advantages 74 Customers' Uncertainty and First-Mover

(Dis)Advantages 76 Ethics: Do the Right Thing 78 Lead Time and First-Mover (Dis)Advantages 78 As Seen in Entrepreneur Magazine: Provide Advice to an Entrepreneur about Being More Innovative 80

CONTENTS

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Risk Reduction Strategies for New Entry Exploitation 81 Market Scope Strategies 81 Imitation Strategies 82 Managing Newness 84

PART

2

FROM IDEA TO THE OPPORTUNITY CREATIVITY AND THE BUSINESS IDEA

Opening Profile: Frederick W. Smith Trends 96 Green Trend 96 Clean-Energy Trend 96 Organic-Orientation Trend 96 Economic Trend 97 Social Trend 97 Health Trend 97 Web Trend 97 Sources of New Ideas 97 Consumers 97 Existing Products and Services 98 Distribution Channels 98 Federal Government 98 Research and Development 98 93

91 92

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

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Focus Groups 99 Brainstorming 100 Brainwriting 100 Problem Inventory Analysis 100 Creative Problem Solving 101 Brainstorming 102 Reverse Brainstorming 102 Gordon Method 102 Checklist Method 103 Free Association 103 Forced Relationships 103

Collective Notebook Method 103 As Seen in BusinessWeek: How to Produce Big Ideas on Demand 104

Attribute Listing 105 Big-Dream Approach 106 Parameter Analysis 106 Innovation 106 Types of Innovation 106 Defining a New Innovation (Product or Service) Classification of New Products 109

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CONTENTS

Opportunity Recognition 110 Product Planning and Development Process

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

Idea Stage 114 Concept Stage 114 Product Development Stage 117 Test Marketing Stage 117 E-Commerce and Business Start-Up 117 Using E-Commerce Creatively 118 WebSites 118 Tracking Customer Information 119 Doing E-Commerce as an Entrepreneurial Company 5

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IDENTIFYING AND ANALYZING DOMESTIC AND INTERNATIONAL OPPORTUNITIES Opening Profile: A. Malachi Mixon III 125 Introduction 127 Opportunity Recognition and the Opportunity Assessment Plan 128 Information Sources 130 General Information 130 Industry and Market Information 131 Competitive Company and Product Information

Government Sources 131 As Seen in BusinessWeek: Mom-and-Pop Multinationals 132 .' Search Engines 132

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Trade Associations 132 Trade Publications 133 The Nature of International Entrepreneurship 133 The Importance of International Business to the Firm 134 International versus Domestic Entrepreneurship 134 Economics 134 Stage of Economic Development 134 Current Account 135 Type of Economic System 135 Political-Legal Environment 135 Language 137

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

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

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CONTENTS

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Available Distribution Systems 142 Motivations to Go Global 142 Strategic Effects of Going Global 143 Foreign Market Selection 144

As Seen in BusinessWeek: Stranger in a

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Strange Land 145 Entrepreneurial Entry Strategies 147 Exporting 147 Nonequity Arrangements 148 Direct Foreign Investment 149 Entrepreneurial Partnering 151 Barriers to International Trade 152 General Agreement on Tariffs and Trade (GATT) 152 Increasing Protectionist Attitudes 152 Trade Blocs and Free Trade Areas 152 Entrepreneur's Strategy and Trade Barriers 153 Implications for the Global Entrepreneur 153 Appendix 5A: Example Outline of an International Business Plan 156

PROTECTING THE IDEA AND OTHER LEGAL ISSUES FOR THE ENTREPRENEUR

Opening Profile: Steve Lipscomb 159 What Is Intellectual Property? 161 Need for a Lawyer 161 ,/ How to Select a Lawyer 161 As Seen in Entrepreneur Magazine: Provide Advice to an Entrepreneur about Intellectual Property Protection 162 Legal Issues in Setting Up the Organization 163 Patents 163 International Patents 164 The Provisional Application 164 The Patent Application 165 Patent Infringement 166 Business Method Patents 166 Start-Up without a Patent 167 As Seen in BusinessWeek: Provide Advice to an Entrepreneur Inventor about How to Make Patents Pay 168 Trademarks 167 Registering the Trademark 169 Copyrights 170 Ethics: How Much Responsibility Should Our Youth Have for Illegal Downloading? 171 Trade Secrets 171

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CONTENTS

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

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PART

3

FROM THE OPPORTUNITY TO THE BUSINESS PLAN

THE BUSINESS PLAN: CREATING AND STARTING THE VENTURE Opening Profile: Belinda Guadarrama 187 Planning as Part of the Business Operation 189 What Is the Business Plan? 189 Who Should Write the Plan? 190 Scope and Value of the Business Plan--Who Reads

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

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an Introduction 192 How Do Potential Lenders and Investors Evaluate the Plan? 192 Ethics: Protecting Your Business Idea 194 Presenting the Plan 194 Information Needs 195 Market Information 195 Operations Information Needs 198 Financial Information Needs 199 Using the Internet as a Resource Tool 199 Writing the Business Plan 200 Introductory Page 202 Executive Summary 202 Environmental and Industry Analysis 203 Description of Venture 205 Production Plan 207 Operations Plan 207 Marketing Plan 208 Organizational Plan 208 Assessment of Risk 209 Financial Plan 209

As Seen in BusinessWeek: Elevator Pitch for Perfect Dinner 210

Appendix 210 Using and Implementing the Business Plan 210 Measuring Plan Progress 211 Updating the Plan 212 Why Some Business Plans Fail 212 Appendix 7A: Sample Business Plan--Gopher It 216

CONTENTS

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8

THE MARKETING PLAN Opening Profile: Warren G. Jackson 223 Industry Analysis 225 Competitor Analysis 225 Marketing Research for the New Venture 226 Step One: Defining the Purpose or Objectives 227

Step Two: Gathering Data from Secondary Sources 227 As Seen in BusinessWeek: How to Expand Your Customer Base 229

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Step Three: Gathering Information from Primary Sources 229 Step Four: Analyzing and Interpreting the Results 232 Understanding the Marketing Plan 232 Characteristics of a Marketing Plan 233 Ethics: Devil's Advocate 236 The Marketing Mix 236 Steps in Preparing the Marketing Plan 237 Defining the Business Situation 237 Defining the Target Market: Opportunities and Threats 237 Considering Strengths and Weaknesses 240 Establishing Goals and Objectives 240 Defining Marketing Strategy and Action Programs 240 Marketing Strategy: Consumer versus Business-toBusiness Markets 244

As Seen in Entrepreneur Magazine: Provide Advice to an Entrepreneur about Web Sites 245

Budgeting the Marketing Strategy 246 Implementation of the Market Plan 246 Monitoring the Progress of Marketing Actions 246 Appendix 8A: Marketing Plan Outlines 250 THE ORGANIZATIONAL PLAN Opening Profile: Jim Sinegal 255

Developing the Management Team 256 As Seen in Entrepreneur Magazine: Provide Advice to an Entrepreneur about Some Legal Aspects of Starting a Business 257 Legal Forms of Business 258

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

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CONTENTS

Tax Attributes of Forms of Business 263 , Tax Issues for Proprietorship 263 Tax Issues for Partnership 263 Tax Issues for Corporation 265 The Limited Liability Company versus the S Corporation 265 S Corporation 265 Advantages of an S Corporation 266 Disadvantages of an S Corporation 266 Ethics: Lawyers Explain the Steps to Take If Your Business Partner Violates His or Her Obligations to the Business 267 The Limited Liability Company 267 Advantages of an LLC 268 Designing the Organization 268 Building the Management Team and a Successful Organization Culture 271 As Seen in BusinessWeek: Elevator Pitch for 20x200 Web Site 272 The Role of a Board of Directors 273 The Board of Advisors 274 The Organization and Use of Advisors 274 10 THE FINANCIAL PLAN Opening Profile: Tony Hsieh 281 Operating and Capital Budgets 282

Ethics: Are You a Good Leader? 284

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Pro Forma Income Statements 285 Pro Forma Cash Flow 288

As Seen in BusinessWeek: Provide Advice to an Entrepreneur about Solving Their Cash-Flow

Problem to Stay in Business 290 Pro Forma Balance Sheet 292 Break-Even Analysis 294 Pro Forma Sources and Applications of Funds 296 As Seen in BusinessWeek: Elevator Pitch for Beer Chips 297 Software Packages 298

PART

4

FROM THE BUSINESS PLAN TO FUNDING THE VENTURE

SOURCES OF CAPITAL Opening Profile: Scott Walker 305 An Overview 308 Debt or Equity Financing 308 Internal or External Funds 309

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CONTENTS

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Personal Funds 310

As Seen in BusinessWeek: Show Me the

Moneymen 311 Family and Friends 312 Commercial Banks 312 Types of Bank Loans 313 Cash Flow Financing 314 Bank Lending Decisions 314 Role of the SBA in Small-Business Financing 315 Ethics: We Need an Ethics Czar 316 Research and Development Limited Partnerships 318 Maj or Elements 318 Procedure 319 Benefits and Costs 319 Examples 320 Government Grants 320

As Seen in BusinessWeek: From 401 (k) Nest Egg to Seed Money 321

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Procedure 322 Other Government Grants 323 Private Placement 324 Types of Investors 324 Private Offerings 324 Regulation D 324 Bootstrap Financing 326 12 INFORMAL RISK CAPITAL, VENTURE CAPITAL, AND GOING PUBLIC Opening Profile: Mark Zuckerberg Financing the Business 336 Informal Risk-Capital Market 337 333

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As Seen in BusinessWeek: Old Banks, New

Lending Tricks 338 Venture Capital 341 Nature of Venture Capital 341 As Seen in BusinessWeek: She's an Angel 342 Overview of the Venture-Capital Industry 342 Venture-Capital Process 347 Locating Venture Capitalists 350 Approaching a Venture Capitalist 350 Valuing Your Company 352 Factors in Valuation 352 Ratio Analysis 353 Liquidity Ratios 353 Activity Ratios 354 Leverage Ratios 354 Profitability Ratios 355

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CONTENTS

General Valuation Approaches 355 General Valuation Method 357 Evaluation of an Internet Company 358 Deal Structure 359 Going Public 359 Ethics: Financial Transparency a Must 360 Advantages 360 Disadvantages 362 Timing of Going Public and Underwriter Selection 364 Timing 364 Underwriter Selection 365 Registration Statement and Timetable 366 The Prospectus 367 The Registration Statement 368 Procedure 368 Legal Issues and Blue-Sky Qualifications 369 Legal Issues 369 Blue-Sky Qualifications 369 After Going Public 369

As Seen in BusinessWeek: Where Venture Capital Never Ventured Before 370

Aftermarket Support 370 Relationship with the Financial Community 370 Reporting Requirements 371

PART

5

FROM FUNDING THE VENTURE TO LAUNCHING, GROWING, AND ENDING THE NEW VENTURE

STRATEGIES FOR GROWTH AND MANAGING THE IMPLICATIONS OF GROWTH Opening Profile: Brian and Jennifer Maxwell 379 Growth Strategies: Where to Look for Growth Opportunities 380 Penetration Strategies 381 Market Development Strategies 382 Product Development Strategies 382

Diversification Strategies 383 As Seen in Entrepreneur Magazine: Provide Advice to an Entrepreneur about Growing into New Markets Using the Internet 384

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Example of Growth Strategies 385 Economic Implications of Growth 385 Implications of Growth for the Firm 387 Pressures on Existing Financial Resources 387 Pressures on Human Resources 388

CONTENTS

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Pressures on the Management of Employees 388 Pressures on the Entrepreneur's Time 388 Overcoming Pressures on Existing Financial Resources 388 Financial Control 388 Ethics: Lessons from Enron 389 Managing Cash Flow 390 Managing Inventory 392 Managing Fixed Assets 393 Managing Costs and Profits 394 Taxes 395 Record Keeping 396 Overcoming Pressures on Existing Human Resources 396 Overcoming Pressures on the Management of

Employees 397 As Seen in Entrepreneur Magazine: Elevator Pitch

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for eVest 398 Overcoming Pressures on Entrepreneurs' Time 399 Basic Principles of Time Management 400 Implications of Firm Growth for the Entrepreneur 401 A Categorization of Entrepreneurs and Their Firms' Growth 402 \k ACCESSING RESOURCES FOR GROWTH FROM EXTERNAL SOURCES Opening Profile: Bill Gross 411 Using External Parties to Help Grow a Business 412 Franchising 413 Advantages of Franchising--to the Franchisee 413

Advantages of Franchising--to the Franchisor As Seen in BusinessWeek: Venture Capital's Favorite Startups 416 415

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Disadvantages of Franchising 417 Types of Franchises 417 Investing in a Franchise 418 Ethics: Fair Enough 419 Joint Ventures 421 Types of Joint Ventures 422 Factors in Joint Venture Success 423 Acquisitions 424 Advantages of an Acquisition 424 Disadvantages of an Acquisition 425 Synergy 425 Structuring the Deal 425

As Seen in Entrepreneur Magazine: Provide Advice t o an Entrepreneur about Entering into Agreements 426

Locating Acquisition Candidates 427

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CONTENTS

Mergers 428 Leveraged Buyouts 429 Overcoming Constraints by Negotiating for More Resources 430 15 SUCCESSION PLANNING AND STRATEGIES FOR HARVESTING AND ENDING THE VENTURE Opening Profile: Teresa Cascioli 439

As Seen in BusinessWeek: Provide Advice to an Entrepreneur on How to Beat Failure and Be the Boss Again 441 Exit Strategy 442 Succession of Business 442

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Transfer to Family Members 443 Transfer to Nonfamily Members 443 Options for Selling the Business 444 Direct Sale 445 Employee Stock Option Plan 446

Management Buyout 446 Ethics: Involving Employees, Bankers, and Business

Associates in the Problem 447 Bankruptcy--An Overview 447 Chapter 11--Reorganization 449

Surviving Bankruptcy 450 As Seen in BusinessWeek: Elevator Pitch for nPower Personal Energy Generator 451

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

PART

6

CASES

Case Case Case Case Case Case Case Case Case Case 1 2 3 4 5 6 7 8 9 10 Turner Test Prep Co. 465 Jim Boothe, Inventor 467 A. Monroe Lock and Security Systems 468 Beijing Sammies 470 "Mamma Mia!" The Little Show That Could! 484 The Beach Carrier 492 Gourmet to Go 495 Intervela d.o.o. Koper--Victory Sailmakers 502 The Gril-Kleen Corporation 509 The Winslow Clock Company 516

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CONTENTS

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Case 11 Case 12 Case 13 Case 14 Case 15 Case 16 Case 17

INDEX

NeoMed Technologies 525 Rug Bug Corporation 540 Nature Bros. Ltd. 550 Amy's Bread 557 Oklahoma National Bank 563 Datavantage Corporation 572 Dual Pane Company 582

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