Discussion 6
Entrepreneurship & Ideation
COURSE READER
Becoming an entrepreneur requires various skills and talents. First you must
understand who you are and what you want by identifying your skills and knowing
your passions. A successful entrepreneur matches his or her skills and passions
with the right opportunity. However, it takes more than passion to be successful;
it also takes hard work and preparation. Analyzing the industry and the feasibility
of your idea is critical to success. This course gets you started.
As you proceed through this section of the course, you will be asked to
refer to chapters within this course reader. The content of each chapter in this
reader reinforces and expands on the key ideas that are presented in the course.
You are introduced to the history and foundations of entrepreneurship and given
tools for success. Throughout the chapters, you are presented with two cases
studies that describe two companies, Starlink (satellite internet) and Hometown
Brewery. The case studies are used to illustrate important concepts using “real-
world” examples.
There are many steps along the path to creating a successful
entrepreneurship. Each chapter gives you the background and the basics you need
to understand the first steps to creating the idea. You must
1. Identify an opportunity (Chapter 2)
2. Conduct feasibility analysis (Chapters 3–6)
3. Develop the concept (Chapter 7)
Once you have completed these steps, you will be ready for implementation
and management! Good luck!
Page ii
Table of Contents
Chapter 1: Introduction to Entrepreneurship
1
Chapter 2: Opportunity Identification 9
Chapter 3: Technical Feasibility 14
Chapter 4: Market Feasibility 18
Chapter 5: Industry Feasibility 25
Chapter 6: Financial Feasibility 31
Chapter 7: Developing the Concept 39
Epilogue: Personal Reflection 43
List of Key Terms by Chapter 45
Sources 48
Page iii
Entrepreneurship & Ideation
Entrepreneurship & Ideation Chapter 1 page 1
1 INTRODUCTION TO ENTREPRENEURSHIP Entrepreneurship has much to offer to anyone who has the passion and
drive to start a venture and follow it through. To be a successful
entrepreneur, you need to be aware of your own passions, motivations,
skills, and objectives, and you must know what areas you may need to
improve on or develop. Then, ideally, you will be able to align your skills
and desires with your venture.
History of entrepreneurship Our definition and understanding of entrepreneurship has evolved over the years,
and it continues to evolve in terms of focus and scope. In the broadest terms, we define
entrepreneurship as the pursuit of an opportunity without regard to the resources that
the entrepreneur currently controls. An entrepreneur is therefore a person who identifies
an opportunity, then acquires the resources needed to pursue that opportunity as a
venture.
This is how we think about entrepreneurship today. However, the concept has
taken quite a journey from its roots over 500 years ago. The word entrepreneur comes
from the word enterprise, which has roots in the Latin language in the 15th century—
from the words entre, meaning “between,” and prehendere, meaning “to grasp or take
hold.” Then the word enterprise made its way into French and become entreprendre, which
means “to undertake.” From there, the word evolved and became entrepreneur.
In 1755, the French economist Richard Cantillon (in Essay on the Nature of Trade
in General) was one of the first individuals to define an entrepreneur in a business sense
as someone who uses business judgment to take on a difficult commercial enterprise. Key
to Cantillon’s definition were the ideas that this commercial enterprise had uncertain
outcomes and that the business person was motivated by personal gain. Both of these
features have carried down to our modern thinking about entrepreneurship. Adam Smith,
the Scottish philosopher and economist, added to Cantillon’s definition by incorporating
the idea that an entrepreneur is someone who accumulates capital and is an agent of
progress.
By the mid-19th century, the word entrepreneur was firmly part of the English
language of business. Around this time, the German mathematician Hans von Mangoldt
expanded the idea to include an element of risk; in his mind, risk was essential to the
concept. Then in the early 20th century, Joseph A. Schumpeter, an Austrian economist,
suggested that key elements of entrepreneurship are innovation, vision, and creativity.
Scholars and practitioners further refined the concept, and by the early 20th
century, an entrepreneur was someone who used business judgment in commercial
enterprises with uncertain outcomes, accumulated capital, took risks, and was innovative
and creative. Some people believe that to be truly entrepreneurial, a person has to create
something disruptive, such as a new product, industry, or market, or identify and serve
needs that are not currently being met.
Entrepreneurship & Ideation Chapter 1 page 2
In modern times, the definition of entrepreneurship has been broadened to
describe an entrepreneur as someone who starts a commercial venture, such as
developing and selling a brand-new product or starting a small accounting business in the
downtown of a big city, and someone who starts a nonprofit organization designed to
address a social issue or problem in the community.
Today there is no single commonly accepted definition of the word entrepreneur.
For some people, being an owner or operator of a business is enough. For others, to be
properly classified as an entrepreneur, the business owner must also be the founder of
the business. The common thread that runs through the definitions is the concept of value
creation, such as economic value for the entrepreneur, or social value for the community.
Table 1-1 lists several successful 21st century entrepreneurships, each of which has
created value either as a profitable venture for the founder or as a beneficial resource for
a community.
Goals and objectives of entrepreneurship The goals of entrepreneurship are to create a new venture and to create value of
some kind, such as social, intellectual, or financial value.
Commercial entrepreneurs often come to mind when one thinks about
entrepreneurship. Their goals are to create viable businesses and to create value, usually
in the form of financial value. One commercial entrepreneur may choose a technology
start-up with the goal of making large profits, growing quickly, and selling the business
to another company. Another commercial entrepreneur may choose to build a small
business with the goal of growing very slowly and generating income for himself or
herself.
Social entrepreneurs are individuals who seek to create nonfinancial value, such as
providing products or services to a community in need. These individuals use the
entrepreneurial process to start nonprofit ventures or otherwise create social value. Their
objectives are not necessarily money or profit; quite often, the goal is to create change in
society and further specific nonfinancial goals (see Table 1-2). These entrepreneurs seek
to build organizations with strong, well-defined missions and to operate within a structure
that enables them to attract funding from people who believe in the mission.
Intrapreneurs are individuals who seek to create new products or services from
within an existing organization (see Table 1-2). These individuals usually work with the
support of the organization, and their objective is to generate a profit for the larger
company.
Hybrid entrepreneurs are individuals who seek to create organizations that have
both nonfinancial and financial goals, such as providing a service to a community and
creating financial value for the owners and investors (see Table 1-2).
Entrepreneurship & Ideation Chapter 1 page 3
Table 1-2: Types of Entrepreneurships
Type of entrepreneurship
Goals
Commercial Business creation
Innovation
Wealth
Social Social mission Social engagement
Intrapreneurship Innovation
Business creation within
existing organization
Profit
Hybrid Business creation
Social mission
Wealth
The entrepreneurial process
The entrepreneurial process can be broken into seven key steps, which can be
applied to any type of venture.
1. Identify an opportunity. Use creative techniques to come up with a new idea, seek
inspiration from existing sources to find an opportunity, or create one of your own
(see Chapter 2).
2. Conduct feasibility analysis. Understand the attractiveness or profitability of the idea
with a technical feasibility analysis (see Chapter 3), a market feasibility analysis (see
Chapter 4), an industry feasibility analysis (see Chapter 5), and a financial feasibility
analysis (see Chapter 6).
3. Develop the concept. Create a strategy and a business model, and write a venture
plan (see Chapter 7).
4. Determine the resources needed. Use the feasibility studies to understand what resources are required to conduct the venture.
5. Acquire the resources. Engage in activities such as hiring employees, renting space,
buying materials, and acquiring supplies.
Entrepreneurship & Ideation Chapter 1 page 4
6. Implement and manage the venture. Run the venture, plan for growth and expansion
and be agile enough to adapt to changing conditions as necessary.
7. Harvest/exit the venture. Close, sell, or transform the venture into something new.
Types of entrepreneurs In addition to the types of ventures they seek to create (such as social or
commercial), entrepreneurs can be categorized by their different ideas for growth of the
venture.
• Lifestyle. These entrepreneurs build a business in a way that is integrated into their
lifestyle. For some lifestyle entrepreneurs, profit (beyond what is needed to sustain
their lifestyle) is not the motive; they plan to keep the venture small. Other lifestyle
entrepreneurs may grow businesses with many employees and significant revenues.
• Foundation. These entrepreneurs plan to build a large, ongoing business with an
objective of long-term growth and profitability. These ventures do not typically attract
venture capital funding or become public companies because of their size and modest
growth potential.
• High-potential growth. These entrepreneurs are interested in building a business that
will grow to be worth a lot of money with the goal of becoming public or acquired by
another company. High-growth companies that grow significantly, at least 20% per
year in the recent past, are called gazelles.
The entrepreneurial mind-set Why does someone decide to start a business? There is no single reason to become
an entrepreneur, and there is no single factor that is true for everyone. Some people see
an opportunity, a need that is not being filled, and work to create a business that fills that
need. Others have different objectives: They are interested in starting a business, so they
look for opportunities that fit their life and work styles.
One individual may see a consumer need that is not being met and find a way to
address that. Another individual may have a personal hobby that inspires him or her to
create a venture. Someone else may discover an opportunity as a result of previous
employment. Another individual may want to create an organization that is a mechanism
for social change. Someone else may choose to start a new venture because of a desire
for a certain lifestyle or level of wealth.
Some people believe that the entrepreneurial mind-set is something a person is
born with. In some ways, this is true. To be an entrepreneur, a person must have a passion
and a core set of values that are in line with the type of business the person is interested
in creating. These two factors give certain people the drive and dedication to create a new
venture and be successful at it. However, many aspects of entrepreneurship require basic
business skills that can be learned by anyone who is interested in doing so.
Entrepreneurship & Ideation Chapter 1 page 5
Attributes and skills of successful entrepreneurs
Despite the impression given by stories in the media about successful
entrepreneurs who are mavericks and extreme risk takers, there is no single personality
trait that predicts that someone will become an entrepreneur or be successful at it. Among
entrepreneurs, there are introverts and extroverts, artistic and scientific individuals,
sensitive and tough people—they can have any type of personality. What entrepreneurs
share is their drive to launch a new venture and to create value.
There are several skills, both personal and professional, that entrepreneurs need
to have to succeed. On the personal side, people who choose to be entrepreneurs need to
have a certain understanding of themselves, especially who they are and how they work
best, since starting or running a business of any type requires dedication and a lot of
work. On the business side, an entrepreneur needs to have enough organizational or
management skills to turn an idea into a viable business.
Examples of key attributes include the following:
• Adaptability
• Creativity
• Drive to achieve
• Initiative
• Leadership skills
• Motivation
• Perseverance
• Tolerance of ambiguity
• Tolerance of risk
• Vision
One thing that most successful entrepreneurs have is either a mentor or a strong
network of friends, colleagues, and supporters. Although in some cases an entrepreneur
may work alone, for the most part starting a venture requires teamwork and the input and
advice of several individuals. Entrepreneurs who work with a mentor can tap into the
expert guidance of someone in the same industry or someone who has experience with
entrepreneurship or general business. A broad network of colleagues and friends provides
access to resources, ideas, and support that are critical to success in the entrepreneurial
world.
Entrepreneurship & Ideation Chapter 1 page 6
CASE STUDY
Company: Starlink satellite internet company
Business: Provider of low-orbit satellite wireless internet globally. The
company often is the only way for some users to obtain internet service in
hard to reach world areas.
Key attributes of founder:
• Motivation to solve the problem of erratic and patchy or often non-
existent internet access in many areas of the world • Tolerance of risk in entering global markets • Adaptability in addressing changing technologies and market needs
Company: Hometown Brewery
Business: Brewer of craft beers for sale locally
Key attributes of founder:
• Creativity in designing craft beer • Desire to share passion and create lifestyle business • Perseverance in finding the right product recipes and funding to start
the business
Self-assessment
Creating an entrepreneurial venture from the ground up is an arduous process. An
individual who is interested in doing so needs to understand himself or herself to know
whether this type of lifestyle is suitable.
As you consider starting a new venture, it is helpful to understand your strengths
and weaknesses, what you are able to contribute to the venture, and in what areas you
will need to partner with someone to be successful. Because of the nature of
entrepreneurship and how it differs from being an employee at a company, it is also very
helpful to understand your feelings about and capacity for hard work, how you deal with
insecurities and adversity, and your capacity for working toward a goal.
As you think about your skills and attributes, it is also important to understand
your life goals—personal, professional, and financial. Where does a venture fit into those
Entrepreneurship & Ideation Chapter 1 page 7
goals? How will starting a new venture help you to meet the goals you have set for your
future?
Entrepreneurship & Ideation Chapter 1 page 8
Are you ready?
Understanding yourself is a vital step toward understanding what type of
entrepreneur you are and to increase your odds for success. Here are some questions to
ask yourself as you consider starting a new venture. There are no right or wrong answers.
Your answers will help you understand who you are, what type of venture may be best for
you to start, and what is important to you in starting a venture.
Entrepreneurial
• Why do I want to start a venture?
• Do I have a passion for a certain market or type of venture?
• Am I willing to work long hours?
• Am I willing and able to work without pay for some amount of time?
• What experience do I have running a business or managing people?
• Am I am able to rely on the expertise of others?
• Do I have good organizational skills?
Personal
• How do I feel about risk?
• How do I face failure or the possibility of failure?
• How do I deal with change and unpredictability?
• Am I able to make decisions about important things?
• Am I able to meet my commitments?
• How do I deal with pressure?
• What is my comfort level with debt and financial insecurity?
• Am I creative?
• Do I have a strong ability to solve problems?
Our understanding of entrepreneurship has evolved over the years. In modern
times, entrepreneurs have been thought of as a unique type of person, unorthodox or
daring. We now know that entrepreneurs are not a special breed of individual. Some
Entrepreneurship & Ideation Chapter 1 page 9
entrepreneurs are born with many of the attributes needed to be successful. But it is also
possible to develop some of the skills necessary to create a successful venture. The
important thing to understand is that if you are interested in an entrepreneurial life, it is
attainable.
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Chapter 2
2 OPPORTUNITY IDENTIFICATION Identifying opportunities is the first critical step of an entrepreneurial
venture. Opportunities can present themselves in a variety of ways. An
opportunity may appear as a problem that needs to be solved or as a good
idea that can be made better. The key to finding the right opportunity for
you is creativity. Creativity is an important attribute for an entrepreneur. It
is what enables entrepreneurs to stand out from the crowd, create
businesses that are different from others in the market, and solve unique
and challenging problems. Creativity is also the basis for innovation,
discovery, and finding new ideas; these are key elements to success in any
entrepreneurial venture.
Creativity and innovation What is creativity? It is the ability to use imagination to see something in a new
way or to make connections between disparate objects, thoughts, or ideas. Being creative
also involves a willingness to take a risk on something new, to be open to failure, perhaps
even to go against accepted thinking or ways of doing something. There are many ways
to be creative. For the entrepreneur, creativity is about finding a new way to solve a
problem or deliver a service.
There is no single formula for being creative, and everyone has the potential to be
creative in some way. Creative ideas can come from anywhere—from researching and
learning about a topic, talking to others, or imagining different ways to solve a problem.
For those who need a little inspiration, there are plenty of exercises that can encourage
creative thinking. Table 2-1 provides some sample techniques.
Table 2-1: Creative Problem-Solving Techniques
Name Technique
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Chapter 2
Brainstorming This is the process of identifying as many ideas as
possible and choosing potential solutions from the
ideas that are generated.
• Define the problem to be solved, for
example: How do we make high-quality
shoes? Generate ideas for solving the
problem without criticism or judgment
of any of the ideas. All ideas, even
those that seem crazy, are welcome
and useful in this process, for example:
hire a team of cobblers, set up a
traditional factory, use a 3D printing
machine, buy already manufactured
shoes and alter them, use recycled
paper, melt wax around consumers’
feet, give materials to third graders
and see what they develop, etc.
• Try to generate as many ideas as
possible— more is better.
Brainstorming can be done individually or with a team. Look at all the answers, and see whether any of them may be useful to test or whether any spur additional ideas.
Entrepreneurship & Ideation page 12
Chapter 2
Analogy This is the process of thinking of something similar to
the problem you want to solve. This technique gets you
thinking about another topic or field as a way to generate fresh ideas.
• Identify what information you want to end
up with, and find a phrase that captures it, for
example: how to make shoes.
• Then create a list of items that are like that
original idea in some way, for example: how to
build a house. Making shoes and building a house
both involve using raw materials to create a
complex final product.
• Try to generate as many items and
analogies as possible—more is better.
• Choose one analogy, ideally one that is in a
very different field or topic area from what you are
trying to solve, and describe all the active and
passive aspects of the items in your analogy, for
example: shoes are used by consumers to protect
their feet but also to make fashion statements. A
single shoe is small enough to hold in your hand.
People generally own many shoes.
Are there aspects of the analogy that are directly applicable to the problem you are going to solve? Do the differences give you any ideas about how to solve your problem?
Asking who, what, why, when, where, and how
This is the process of coming up with as many ways to think about a problem as you can. This technique is helpful to open up your mind to think about a problem from for many different angles.
Entrepreneurship & Ideation page 13
Chapter 2
• Use these terms to create a list of questions about
the problem you are trying to solve, for example:
What is the best way to make high-quality shoes—
by machine or by hand?
• Look for answers to the questions. This can be
with a formal technique like brainstorming or more
informal techniques such as a checklist.
Use the answers to generate actions or next steps, for example: if the best way to make shoes is by hand, how do we find the talented craftspeople to make our shoes? If we can’t find very many people who make high-quality shoes, do we want to use machines or train people to make shoes the way we want them?
New opportunities
Where do entrepreneurs find ideas for new opportunities? In addition to using creative
problem-solving techniques for inspiration, there are many other ways to find ideas for
new business ventures. While inspiration can come from anywhere, there are several key
sources that are useful for generating ideas and sparking innovation.
• Demography. Use statistical data about the population (such as gender, age, race,
employment status) to learn about various segments of the population and become
aware of changing demographic shifts. If there is growth in a certain area of the
population, this may spark ideas for products or services aimed at that demographic
group. For example, a growing population of elderly people may present opportunities
for new healthcare services and leisure activities.
• Technology. Keep up to date with technology in your field and related fields,
equipment, techniques, current trends, and projections for future trends. For
example, new equipment and technology might offer opportunities for ventures that
process raw materials in more cost-efficient and environmentally safe ways.
• Laws and regulations. Study existing and proposed laws and regulations to
understand how changes may affect the manufacture or sale of a product or service.
For example, a regulatory change may mean that you can start a venture importing
several types of cheese that were previously illegal to bring into the country and selling
them to restaurants and grocery chains.
• Supply levels. Examine supply chains and issues in manufacturing to identify
opportunities in areas where supply is lacking or excessive. For example, you may
discover that you can buy surplus T-shirts that manufacturers would otherwise discard
and sell them to theaters and schools for use as costumes.
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Chapter 2
• Franchising. Explore the possibility of taking advantage of an existing business model
and brand. The parent company, or franchisor, enables entrepreneurs to use its brand
and assets in exchange for a fee and/or royalty payments. For example, you may
purchase an auto supplies franchise for a given geographic territory that allows you
to sell the company’s products, use its brand, and operate using its business model
within that territory.
• Licensing. Find an existing, legally protected asset or property of another business
and lease its use. For example, you can license the use of an athletic team’s logo to
put on mugs and plaques.
• Hobbies. Determine whether something that you do for fun has a broader application.
For example, if you enjoy helping others learn how to read, that may present an
opportunity to create a nonprofit venture that works with teachers to provide remedial
reading help for adults in your community.
CASE STUDY
Company: Starlink
Source of idea: The founder of Starlink (the famous entrepreneur Elon
Musk) saw this opportunity by virtue of the SpaceX satellite delivery system
the company had. He realized that there was a gap in the world market in
places for high speed internet and there would be an increase in demand
for wireless Internet services. This gave him the idea to use new technology
to create a better wireless network method and sell the services in
underserved areas as well as to war-torn Ukraine.
Entrepreneurship & Ideation Chapter 3 page 15
3 TECHNICAL FEASIBILITY
Once you have identified an opportunity, the next stage of the
entrepreneurial process is to understand whether or not the idea for the
venture is feasible. Entrepreneurs need to know the strengths and the
weaknesses of an idea and whether or not it has the possibility of success.
Feasibility analysis helps you minimize the risk of a new venture by
developing an understanding of how easily something can be
accomplished.
Technical feasibility, the first of four categories of feasibility
analysis, helps entrepreneurs understand if the opportunity is technically
viable: Can this physically be made or accomplished? At what cost? In the
planning stages, it is critical to thoroughly understand the product or
service you wish to offer, from its component parts to how it is physically
manufactured or performed.
That means understanding a variety of aspects of the product or
service, including the features and benefits, how the product or service is
different than what is currently available, and the product design and
development process. Determining technical feasibility includes analyzing
prototyping and design and intellectual property issues.
Prototyping and design Creating a physical prototype of a product is a key step in determining the viability
of a product idea as well as projected costs and estimated time involved in manufacturing.
A prototype is a preliminary model, alike in form and function to what the final product
will be. This enables the entrepreneur to get a sense of whether the product will work as
planned and whether it will meet the needs it was designed to address.
Creating a prototype of the final product also gives the entrepreneur a chance to
work with vendors, learn about supply chain issues, and get cost quotes for materials and
labor. This information enables an entrepreneur to understand the cost structure and
whether the product can be produced at a price that will generate a profit.
Although you cannot create a physical prototype for a service, it is important to
evaluate the processes involved and think about the service in a similar fashion to thinking
about a physical product. For services, the first step may be creating a flowchart of the
process.
Some entrepreneurs have an idea but do not have the tools or equipment to
produce a physical prototype. In those cases, entrepreneurs sometimes work with small
engineering or modeling firms to create the prototype. Rapid prototyping is a way of
creating a functional model of a product; this is sometimes done by using cheaper
resources than will be used for the final product. The goal is to start testing the
Entrepreneurship & Ideation Chapter 3 page 16
functionality right away, so the prototype may not look like the final product or may not
be produced to scale.
Involving other stakeholders in the prototyping process is a way to test out working
with specific manufacturers, service providers, and suppliers, which is part of
understanding technical feasibility as well. Some entrepreneurs also involve their
customers in the process, either in the design phase or in testing the prototype in
realworld conditions.
After the prototype has been built, the entrepreneur must evaluate the design to
determine whether if meets the manufacturing requirements and performs as designed.
Final technical specifications to be used for manufacturing the product are then created.
These specifications include details about things such as materials requirements, size and
dimensions, environmental conditions under which the product can or must be
manufactured, expected lifetime of the manufactured product, testing requirements, and
anything else that is specific to the type of product that is being created.
CASE STUDY
Intellectual property
The term intellectual property refers to creations of the mind such as inventions;
artistic and literary works; and symbols, names, images, and brands used in the world of
commerce. Often referred to as IP, these are the nonphysical assets of a company. There
are four types of intellectual property: patents, trademarks, copyrights, and trade secrets.
• A patent is an exclusive right to an invention of a product or process. It provides
protection for a limited time, and the information about the product or process
becomes publicly available. To be eligible for a patent, inventions must adhere to
certain conditions: They must be useful, novel, and nonobvious.
Company: Hometown Brewery
Product: New summer seasonal beer using a local fruit that the brewery
has never used before.
Prototype: The brewer decided to use his regular recipe for the beer and
add the fruit in the fermentation stage. After several rounds of testing, he
discovered that the type of hops he used overpowered the flavor of the
fruit. He tested new recipes using different types of hops until he found
one that did not overpower the flavor of the fruit. His taste testers
approved.
Entrepreneurship & Ideation Chapter 3 page 17
• Trademarks are distinctive symbols, logos, words, colors, designs, or other elements
that are used to specifically identify a business or organization.
• A copyright protects original works by individuals such as writers, composers, and
computer programmers. A copyright does not protect facts; it protects the specific
form or expression of the facts or idea.
• Trade secrets are various pieces of confidential information that may provide a
competitive advantage. Trade secrets may include formulas, ideas, processes, or other
information that is unique to a venture. In contrast to other types of intellectual
property, there are no laws that protect trade secrets. The only way to protect them is
to keep them confidential by limiting access and using contracts and confidentiality
agreements with the people who require access to the secrets.
For any venture, especially new ones, protecting intellectual property is critical.
Patents, trademarks, copyrights, and trade secrets are unique elements that enable
organizations to stand apart from their competitors. Governments offer intellectual
property protections specifically to provide businesses with exclusive rights to their own
assets in order to maintain a competitive advantage. Intellectual property rights are
complex and vary around the world. Some countries have treaties with each other to make
conducting business across borders easier.
The most important step you can take to protect your venture’s intellectual and
creative assets is to work with a professional intellectual property attorney. Failure to
protect intellectual property can result in significant losses for the venture. For example,
unless you trademark your logo, others might copy it or use something similar, causing
confusion in the minds of consumers, a loss of market share, and reduced profitability.
Not only is it important to protect your own intellectual property, it is also
important to respect others’ intellectual property. A key part of planning a new venture
includes researching existing intellectual property. First, this helps you to determine
whether someone has already patented your idea or trademarked a similar name or logo
so that you can make sure you do not violate the rights of another entity. Second, it helps
to paint a picture of the market, your competition, and whether any similar products or
services exist.
CASE STUDY
Company: Starlink
Patent: The founder of Zed WiFi created a new design for a wireless network
interface device that will cover a large global area deploying thousands of
low-orbit satelites. He built a prototype of his own to test. Though satellite
internet was not a new idea, the method of delivery was. To protect the
Entrepreneurship & Ideation Chapter 3 page 18
Technical feasibility is a critical element in the venture planning process. It has
many aspects, from understanding your offering to protecting it from the competition.
Each piece of this analysis will help you to create a strong business model so that your
venture is profitable and meets the needs of your market. Once the entrepreneur
understands these basic factors, he or she can decide whether or not to go forward with
the venture.
design and the new technology that he had developed, he submitted a
patent application on the device before submitting application for
government approvals.
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4 MARKET FEASIBILITY
Just as you tested the technical feasibility of your product or service, it is
equally important to test the market feasibility. Market research is a critical
step in the entrepreneurial process for entrepreneurs pursuing social or
not-for-profit ventures as well as those pursuing commercial business
opportunities.
Market research is the process of gathering information about the
market and understanding the potential customer base. Entrepreneurs
need to spend significant time learning about the customer base for their
product or service. The primary goal of market feasibility analysis is to
gather information on customers so that you can ultimately segment the
market and choose a target segment for your product or service.
There are two types of market research: primary and secondary.
Primary research is the process of finding and analyzing information that
comes directly from potential customers. Secondary research is finding and
analyzing information that has already been collected by someone else for
another purpose. Table 4-1 describes the pros and cons of both types of
market research.
Table 4-1: Primary and Secondary Market Research
Advantages Disadvantages
Primary • Timely data
• Firsthand knowledge of
market
• Unfiltered information
• Ability to ask specific
questions and customize
research
• Narrow view of the market
• Time consuming • Resource consuming
• Identifying sources can be difficult
• Confidentiality issues may
prevent people from sharing
• Data are not always easily aggregated
Secondary • Broad overview
• Aggregated data
• Authority of source (i.e.,
research firm)
• Readily available
• Inexpensive • Wealth of sources
• Information in the public domain
• Not always current
• Filtered information
• Need to verify authority of the
source
• Potentially too much
information to review
• No ability to customize
• Some sources can be expensive (e.g., analyst reports)
Entrepreneurship & Ideation Chapter 4 page 20
It is important to conduct both types of research whenever possible to get a
thorough picture of the market. An entrepreneur who is new to an industry or a particular
market segment may have to spend more time on market feasibility analysis in order to
understand better the customer base.
Secondary market research The first step in any market analysis is to examine secondary data sources.
Secondary research is helpful for learning about the customers and the market as well as
for gathering information about primary sources that you may use later to fill in the gaps
where the secondary sources do not contain the information you need.
This type of market research is possible even with a small budget because
secondary sources include the kinds of materials you might find in a library or online,
such as books, white papers, case studies, analyst reports, reports and data from industry
associations, trade or consumer magazines, business data or economic statistics, and
government publications. When you are starting your research, a good place to begin is
the general business press, where you can find high-level information about the market,
learn about the needs and buying habits of potential customers, and get ideas for
additional resources.
Industry associations and trade magazines are good sources for this kind of
secondary market research. Industry associations often gather and publish statistical
information about the market and the competition, although sometimes the detailed
information is available only to members. Trade magazines are specialized magazines
that focus on the business of single industry, so they contain articles and even
advertisements that can shed light on customers and trends in the industry.
Analyst reports are another good source of information. The job of an analyst is to
research an industry, talk to key people, and make assessments about the health and
stability of particular companies or industry segments. As such, they contain a wealth of
information that is useful for entrepreneurs who wish to conduct business in that market
segment.
Analyst reports and secondary information are usually available for large or
common industries, such as food and beverages, consumer goods, and computer
technology. However, some industries or market segments do not have analysts that
research them. Many of those industries also have very few mentions in the general or
business press, although many such industries are represented by industry associations
or trade magazines. This happens when an industry or segment is not yet big enough to
warrant wider coverage. It can also happen when many companies in the industry are
privately held and therefore keep most information confidential.
Entrepreneurship & Ideation Chapter 4 page 21
CASE STUDY
Primary market research
After you have reviewed secondary sources and gathered as much information
about the market as possible, it is time to collect primary data. Primary market research
is the collection of original information from sources within the industry such as
customers or other stakeholders. Primary research fills the gaps in the secondary research
and helps to validate information that you discovered during that research.
Once you have identified the customers to talk to, how do you get the information
from them? The best way is to ask them directly through surveys, focus groups, or
individual interviews.
A survey is a tool that can be targeted to one or more specific type of individual.
Writing survey questions is an art, as questions need to be asked in a way that ensures
that the responses are unbiased and valid. This is an opportunity to ask for exactly the
information you need to understand how your company, product, or service will fit into
the existing market.
Conducting a focus group is a process in which you talk to a group of people at
one time and ask them about their thoughts, opinions, beliefs, and attitudes toward a
product, service, or idea. As in conducting a survey, it is important to ask specific
questions that have been prepared for this purpose and to ask them consistently in all
focus groups so that you gather many answers to the same question. This form of primary
research typically reaches fewer people than a survey does, but the big advantage to
conducting focus groups is the interaction and dialogue within the group.
An individual interview is the process of talking to one person at a time. It is like a
focus group in that you are able to ask a set of consistent questions and then delve deeper
Company: Hometown Brewery
Examples of secondary sources:
• Beer trade magazines such as Beer Business Daily or The Drinks
Business
• Brewers’ associations such as the Beer Institute or the Craft Beer
Industry Association
• Articles in the general press about beer consumption and the craft beer
movement
Entrepreneurship & Ideation Chapter 4 page 22
into any areas that interest or surprise you. Like creating surveys, conducting interviews
to gather useful and valid information is an art.
Conducting interviews Here are some tips for conducting a successful interview.
1. Understand the objective of the interview. Choose carefully whom you will
interview, and know what kind of information you need to get during the interview.
2. Write the questions in advance. This includes doing research to create the questions
and being prepared with potential follow-up questions. Types of questions include the
following:
a. Biographical or demographic questions to categorize the interviewee, for
example: Where do you live?
b. Broad and open-ended questions that are designed to let the interviewee share
his or her own thoughts and opinions, for example: What are your feelings
about donating money to a non-profit organization?
c. Focused and close-ended questions that are designed to elicit Yes or No
responses or very short answers and are important for data gathering, for
example: Do you own a bicycle?
d. Follow-up and open-ended questions that are designed to elicit more details
and require the interviewee to really think about the answer, for example: Why
don’t you own a bicycle?
3. Do not send the questions in advance. This often results in answers during the
interview that do not stray from established thinking. The follow-up questions are
where you will get a lot of the detail you need.
4. Choose a comfortable location. A neutral location, neither your office nor the
interviewee’s, helps both of you to feel comfortable.
5. Get to know the interviewee. Ask a couple of personal questions or have a brief
opening conversation before jumping in with the questions. This is the time to build
rapport.
6. Listen to the answers. This is why you are there. Really listening enables you to get
answers and be able to ask appropriate follow-up or clarifying questions.
Entrepreneurship & Ideation Chapter 4 page 23
7. Be open. You may not get the answers you were expecting, and it is important to be
open to learning what the interviewee really thinks about a topic, as the interviewee
has information that is potentially very important to your venture.
Segmenting, targeting, and positioning The goal of market research is to better understand your customers—the people
who will pay for your product or service. As you conduct secondary and primary market
research, you will find information about your potential customers. Segmenting, targeting,
and positioning is a process that enables you to use that information to target a specific
type of customer and determine the best choices for creating a marketing message to that
audience.
Segmenting
Segmenting customers is a process of using specific criteria to divide a larger
diverse group of customers into smaller groups that share similar characteristics. For
example, demographic segmentation is a way to divide customers into groups based on
demographic information such as age, gender, income, and occupation. This may be
combined with geographic segmentation—dividing the market by the location where the
individuals live, work, or play.
Examples of market segmentation
These are some ways in which markets can be segmented:
• Demographic—i.e., age, income, gender, education
• Geographic—i.e., rural, urban, suburban
• Product benefits—i.e., status, appearance, economic
• Product usage—i.e., heavy, medium, light
• Psychographic—i.e., values, personality, lifestyle
Psychographic segmentation is a way to divide customers by their behavior, using
characteristics such as personality, values, interest, and lifestyle. Segmentation by usage
is also a useful way to divide customers into groups—by how often they use the product
or service or by the time of the day or year when they buy it.
One popular way to understand your customers is to create customer personas,
using segmentation techniques to identify an imaginary version of your ideal customer
based on demographics, psychographics, usage, and so on. This enables you to imagine
the perfect customer for a particular segment and think about how to market and sell to
this person.
Entrepreneurship & Ideation Chapter 4 page 24
Targeting
Once you have segmented the market, it is time to find your target market. That
is, you choose the segment that is most ideal for your venture, product, or service. You
can target a segment on the basis of many criteria: number of potential customers,
frequency of purchase, a segment that is currently underserved by the competition, or the
segment whose needs are best aligned with the features of your product or service.
Starting a new venture is an exciting experience, and many entrepreneurs see multiple
uses and many potential customers for their product or service. The real value in
segmenting and targeting a market is that you can focus your limited marketing resources
on reaching and acquiring the most profitable customers.
CASE STUDY
Positioning
Once you have segmented and targeted your market, it is time to position the
product or service in relation to the competition. Positioning is the process of creating an
identity or image for the brand, product, or service in the minds of the target customers
relative to the competitive offerings.
This is where you help your customers to understand why they want or need to
buy your product or service at this time. For example, if you sell fruit beer to professional
women in their thirties, you could position it as the beer of choice for professional women
because it is refreshing, low-calorie, and inexpensive.
Once you have completed the segmentation, targeting, and positioning, it is time
to start thinking about the marketing mix. The marketing mix is a tool that helps you to
identify the unique selling proposition of your product or service. It is a way to think about
your product in the market—what it is, where to sell it, how much it should cost, and how
you will promote it. The marketing mix is often called the four Ps: product, place, price,
promotion.
Company: Starlink
Market segmentation: The founder of Zed WiFi gathered information
about the types of people he believed were his primary market: young
professionals, male or female, age 21 to 30, in global cities with
populations between 500,000 and 3,000,000 and governments and
organizations worldwide, and who own a mobile phone and at least one
computer.
Entrepreneurship & Ideation Chapter 4 page 25
Product is what you are selling to the customer, such as fresh drinking water or
automobile supplies. Place is how you will distribute the product to your customers, such
as online or in retail outlets. Price is how much the customer will pay for the product.
Promotion is how you will communicate the value of your product or service to your target
market, such as with radio advertisements or with a direct sales force.
What to do with your research The most important aspect of market feasibility analysis, like all types of feasibility
analysis, is that it helps you to determine whether you should pursue the venture. It is
about understanding the customer—whether customers will buy the product or service,
how much they will pay for it, and so on. The market research that you conduct at this
stage will also be useful for financial feasibility analysis and, if you decide to pursue the
venture, it will be helpful in the development of your business model and venture plan.
Entrepreneurship & Ideation page 26
Chapter 5
5 INDUSTRY FEASIBILITY
Now that you have analyzed the technical feasibility and have examined
the potential market for your product or service, it is time to understand
the characteristics of the industry as a whole. An industry feasibility
analysis enables you to evaluate various factors to determine the
attractiveness and potential profitability of an industry. If the industry has
various factors that contribute to low profit margins, this is an opportunity
to learn that and possibly to reconsider entering this industry.
Industry definition Before examining how an industry operates, it is useful to understand what the
industry is and what its boundaries are. Industries can be defined in many ways and with
varying scope. For example, we might define the industry in which Acme Brewery operates
as beer, alcoholic beverages, or all beverages. Analyses based on these different
classifications will produce different results, so it is important to identity the correct scope
for the objectives of your analysis.
In general, it is best to use a narrow scope of your industry definition, but access
to information or industry structure may point you in one direction over another.
Additionally, you may consider analyzing various industry classifications. If a narrow view
of the industry seems unattractive, you could broaden the scope.
There are many publicly available resources to help define industries and their
characteristics. In North America, the industry classification system is known as the North
American Industry Classification System (NAICS). In the European Union, the industry
classification system is known as NACE (Nomenclature statistique des activitiés
économiques dans la Communauté européenne).
To fully understand how an industry operates, an entrepreneur must understand
things such as barriers to entry, what the existing competition is like, substitute products,
buyer power, and supplier power. Looking at this information helps an entrepreneur to
understand where the industry is heading, what opportunities there are now or may be in
the future, and whether the industry is attractive and is expected to remain so.
Knowledge of how the industry works is critical to the success of any venture in
that industry. In conducting an industry feasibility analysis, you first analyze the
attractiveness of the industry to determine whether its structure is conducive to making a
reasonable profit. Then you use that information to determine whether you should
proceed with the venture. If the industry appears unattractive, you can choose to abandon
this opportunity, find ways to mitigate the negative factors, or look for opportunities in
another industry.
One way to analyze the attractiveness of an industry is to use a framework such as
Porter’s Five Forces Model. Michael Porter is a professor at Harvard Business School and
Entrepreneurship & Ideation page 27
Chapter 5
an expert on competitive strategy. Use the five elements discussed below to examine your
industry and to understand how your new venture might fit within the industry structure
and competitive landscape.
Barriers to entry
Examine what is necessary to start a venture by understanding the obstacles that
may make it difficult to enter the industry. Low barriers to entry mean that it is relatively
easy for new companies to enter the industry. Numerous new entrants have the tendency
to expand the overall capacity of the industry, potentially beyond the existing customer
demand. This expanded capacity may force competitors to decrease price points over time
in an effort to maintain or expand their market share despite the increase in industry
supply. Competition for the same customers might also require an increase in marketing
and promotional expenses. All of these actions result in lower levels of profitability for all
companies operating in the industry. In contrast, high barriers to entry make the industry
more attractive or profitable because of the minimal competition; however, high barriers
to entry also usually present challenges for new entrepreneurs who wish to enter the
industry. Barriers to entry include economies of scale (savings or cost advantages due to
increased production), brand loyalty, cost for the buyer to switch to another supplier,
financial requirements, technology, access to distribution channels, government
regulations, and proprietary factors unique to the industry.
CASE STUDY
Company: Starlink
Barriers to entry:
• Costs. Current wireless network interface devices have limited range
and high power consumption. Because of this, equipment purchases
and leases for a large network can be expensive. This limits entry for
companies that do not have the necessary financial resources. This is
compounded tremendously when utilizing satellites for wireless.
Latency had to be addressed, and very few companies worldwide had
the means to launch satellites as part of their existing business.
• Government regulations. In the US and across the world, Starlink’s
primary market, and national security and other regulations stipulate
the frequency band that is acceptable for base and mobile terminal
stations for wireless communications. This limits entry for companies
that do not meet the standards because of technical considerations.
Entrepreneurship & Ideation page 28
Chapter 5
Substitutes
Substitutes are products or services that perform the same function or meet the
same need as products or services in the industry you are analyzing but are made with
different inputs. For example, tea is a substitute product for soft drinks. High levels of
substitutes generally mean that buyers have a lot of similar products to choose from. This
usually means the industry has lower profit margins and is less attractive because
competitors are forced to lower prices in order to compete.
Understanding the role that substitutes play in the industry includes researching
the price and quantity of alternatives to your product or service, what the customer will
perceive as a differentiation between products or service, the likelihood the customer will
use substitutes, and the cost for the customer to switch from their current vendor.
Buyer power
Before you start a venture in a specific industry, it is advisable to take the time to
understand the bargaining power of customers in that industry. Buyer power is the effect
that customers have on the price of a product or service. Industries with high buyer power
are often unattractive because buyers have a lot of leverage to negotiate, forcing
businesses to lower their prices to compete. It is critical to understand generally what type
of bargaining power customers have in your industry so that you can work to create a
business model with strategies that mitigate their power.
Customer bargaining power includes the volume of business customers do, price
sensitivity, access to information about the product or service, costs for them to switch,
and the availability of substitutes.
Supplier power
Learn about the bargaining power of suppliers to help you understand the impact
on the profitability of a specific industry. Businesses with limited options for the purchase
of raw materials rely on the dependability of those partners and suppliers.
Suppliers have bargaining power when it costs a lot to change to another supplier,
they have strong existing relationships with customers, and few substitute supplies are
available. High supplier power usually means that the industry is unattractive or has lower
profit margins because suppliers have negotiating leverage.
What it means: Starlink created a new network interface device with low
power consumption and a long wireless range. Because of scale of mass
deployment of low orbit satellites, Starlink can reach previously unserved
areas at reasonable costs in many cases.
Entrepreneurship & Ideation page 29
Chapter 5
Rivalry As you research an industry, it is helpful to understand the characteristics and
behavior of competitors that are already part of that industry. Understanding the rivalries
among existing firms includes learning about growth rate, number and size of competitor
firms, product or service differentiation, costs for customers to switch to competitors, and
exit barriers (the factors that may make it difficult to leave the industry).
As an entrepreneur, you need to look carefully at all five factors and determine
whether the industry is attractive and whether it will provide the kind of profitability you
need to meet the goals of your venture.
External factors Industries are affected by that state of the world, not just by the behavior of the
industry itself. To assess industry feasibility, it is also critical to understand the business
environment or context in which the venture will be doing business. Depending on the
industry, that may require you to research and analyze how social, technological,
economic, environmental, political, and global forces could affect your venture.
CASE STUDY
Company: Hometown Brewery
External and industry issues affecting the company:
• After an initial downturn due to the global recession, beer consumption
is increasing in Latin America because of an increase in disposable
income but is decreasing in the United States because of a decrease of
disposable income.
• Beer, especially niche or craft beer, is losing market share to wine in the
millennial generation in the United Sates as a result of health concerns.
What this means: After reading the research, Acme Brewery decided to
investigate selling to the Latin America market, as beer consumption is
increasing there and the company sees a growing opportunity for its style
of beer. Because beer is losing market share to wine in the U.S. market,
Acme is also considering marketing its new fruit beer by focusing on the
differences in calories between wine and the fruit beer.
Entrepreneurship & Ideation page 30
Chapter 5
Competitive analysis As part of your research into the industry, this is the time to look into your
competitors’ businesses as much as possible. Competitive analysis is the process of
learning about the key players in the industry and how well they meet the needs of the
market.
If you are starting a venture in an industry that has many public companies in it,
the job of conducting the initial analysis may be a little bit easier. Public companies
typically have to file financial documents with an oversight agency (such as the Securities
and Exchange Commission in the United States or the Financial Services Agency in Japan).
These documents are publicly available and often contain very good information about
the product or service offering, operations, and financials of the company.
For additional information on public companies and for information on nonpublic
companies, you can often find useful information in analyst reports, in articles in the
business press or trade magazines, and on the companies’ websites. For small industries
or those without analyst coverage, it may be very difficult to access secondary sources
with the kind of information that will be helpful.
In those cases, you may choose to use some of the primary market research
techniques, such as conducting surveys or interviewing people in the industry to get an
understanding of how it works. Primary sources are typically employees in a company in
the industry, suppliers or professionals who otherwise service companies in the industry,
analysts or reporters who regularly research and report on the industry, or even
customers. You can find sources by reviewing the business press or trade magazines; by
attending trade shows, conferences, and presentations; and by using your personal
network.
As you research your competitors, you will discover a few different kinds of
competitors. Direct competitors are current and potential competitors that already do
business in the market and sell the same product or service. Indirect competitors are
current or potential competitors that sell a substitute product or service, one that
customers may choose instead of yours.
No matter what industry your venture is in, not all the competitive information that
you want will be readily available. It is best to use actual data from authoritative sources,
but in some cases, you may be able to estimate the data from the information you do find.
These are examples of metrics and information you should be looking for:
• Sales
• Profit
• Number of customers
• Market share (use sales or number of customers to estimate)
• Features and benefits of product or service
Entrepreneurship & Ideation page 31
Chapter 5
• Product or service pricing
• Social media presence or reach
A competitive analysis is also an opportunity to see how your product or service is
different or could potentially be differentiated from other offerings in the market. There
are several ways to differentiate your product or service, such as price, customer service,
packaging, features, or branding. For example, you can choose to provide your product
or service at a lower price than the prices of all your competitors, becoming the low-cost
provider, or you can choose to differentiate by charging a higher price for a premium
product.
What these factors mean to your venture The structure of the industry is very important to the profitability of a venture
operating in that industry. As you can see from Porter’s Five Forces Model, the behavior
and power of all the players in the industry have a direct impact on your ability to enter
the market successfully, sell your product or service, achieve your business goals, and
make a financial profit.
As you learn about the industry, you should analyze how each of these factors
might affect your business model and strategy. Knowing how these internal and external
factors affect the industry and your specific venture will enable you to think about what
each of these factors may mean for your business. Then you can incorporate that into
your strategy and your business model.
The research that you do to understand industry feasibility will position you to
address any questions potential investors may have. They will want to see that you
thoroughly understand the industry in which your venture will operate.
As an entrepreneur, you must have an understanding of the industry and how your
product or service fits into it. It takes some time to conduct a thorough analysis of the
industry and the competitive environment, but that is time well spent toward turning your
idea into a viable venture.
Entrepreneurship & Ideation Chapter 6 page 32
6 FINANCIAL FEASIBILITY
Creating a venture plan requires a lot of work up front to understand all
aspects of the industry and the market. It also requires work up front to
understand the structure of the venture itself, including the financial
picture. Financial feasibility analysis is the process of learning whether and
how a venture will make a profit. It helps an entrepreneur to tell the story
of the venture—what capital is needed to start and to operate the venture
and how long it will take to generate a profit.
The best way to analyze financial feasibility is with real revenue and
expense data. However, most new ventures do not have an operating
history or enough historical financial data to create a forecast of the
venture’s profitability. So this process may require you to make revenue
and expense estimates that are based on the performance of competitive
companies, industry averages, or your own assumptions about the
projected revenue and costs of your entrepreneurial venture.
Income statements Income statements are also called profit and loss statements (or P&Ls). A pro forma
or forward-looking income statement contains information about the projected profit or
loss for the venture for a stated period of time and includes estimates of both expenses
and revenues. Revenue is money received from transactions through normal business
operations. Expenses are the costs associated with running the venture. The purpose of a
pro forma income statement is to assess feasibility, conduct internal budgeting, determine
the types and amounts of resources needed, and communicate this information to your
investors and other stakeholders. The best place to begin a financial feasibility analysis is
with the expense forecasting.
Expense forecasting Expense forecasting is the process of making financial assumptions on the costs
associated with starting and operating your venture. It is helpful to look at your projected
expenses over a set period of time, often three to five years. Examples of common
expenses include the following:
• Cost of Goods Sold (COGS)
o Raw materials o Direct labor o Overhead such as rent and
utilities
• Selling
Entrepreneurship & Ideation Chapter 6 page 33
o Advertising o Marketing
o Commission
o Retail store operations
• General and administrative
o Executive and office personnel salaries and benefits o Office
supplies o Equipment
o Professional services such as legal and accounting
To forecast expenses for your income statement, you will need information about
the costs to conduct business, including the initial start-up investment and the ongoing
costs associated with operating your venture.
If you are already operating your venture, you can use your expenses for the first
months or years of operations to estimate projected expenses for the next several years
of operation—things such as rent, Internet access, salaries and benefits, supplies,
marketing, and any known costs to produce and deliver the product or service. If the
venture is not yet operating and you do not have any historical data, then you may need
to use industry averages or other information gleaned from your competitive and industry
analysis as a starting point. (See the sample Pro Forma Statement on page 32.)
As you estimate expenses for your pro forma income statement, you will likely
make many assumptions, such as the projected cost of raw materials, expenses associated
with renting and renovating space, and the cost of hiring employees. You can get some
actual data by calling suppliers, looking at the average rent per square foot, or making
assumptions about labor costs based on the minimum wage.
When they are available, you can also use competitive data to help estimate your
projected expenses. For example, if on average, competitors in your industry spend 30%
of revenue on the cost of the raw materials and 15% of revenue on marketing, then you
might assume that your expenses will be comparable. You can then use these industry
averages to determine your projected cost of raw materials and marketing expenses by
multiplying these percentages by your projected revenue. Of course, the danger with this
logic is that your own expenses may vary significantly from the industry average for any
number of reasons. So if you use this method, you will want to account for any significant
differences between your venture and competitive offerings.
As part of forecasting expenses, it is important to understand the types of costs
you are dealing with: fixed, variable, or mixed. A fixed cost is one that stays constant in
terms of dollar amount regardless of sales volume or the number of units produced and
would be difficult to cut back on without a significant impact on the operations. Fixed
costs may include things such as office rent, purchase of equipment, and managerial
salaries.
A variable cost is one that changes in direct proportion to the level of operations
such as the number of units produced and sold. Examples include the cost of fuel per
passenger, packaging per unit, or raw materials per unit. A mixed cost is one that has
Entrepreneurship & Ideation Chapter 6 page 34
both a fixed component and a variable component, such as telephone costs with a
standard monthly fee and variable charges for long-distance calls.
Revenue forecasting Like expense forecasting, revenue forecasting is an important part of analyzing
financial feasibility and predicting when your venture will start to make a profit.
Revenue = sales price per unit × total number of units sold
To forecast revenue for your income statement, you will need to make assumptions
about the source and timing of revenues. If you have historical revenue from the sales of
your product or service, you can use these real data to estimate future sales If you do not
have actual data from your venture because you do not yet have a product or service or
any sales, you can use data from your competitors or industry averages to estimate
projected revenue.
Start by projecting the demand or number of units you anticipate selling over the
next three to five years. Creating a demand forecast, especially in a new industry or market
segment, can be a challenge. As you forecast demand, be sure to take into account
reasonable expectations of how demand will change over time. Sales often do not increase
in a linear fashion; they can slow down or speed up owing to many different factors such
as changes in consumer purchasing habits, influence of economic forces, amount of
money invested in marketing, or new competitive products that enter the market.
Another important element of revenue forecasting is the price at which you will
sell your product or service. There are many different pricing strategies to choose from.
The one that works best for your venture may be determined by the type of product or
service, the industry, the behavior of your customers, or other factors (see Table 6-1).
Knowledge of the market will help you to choose the best pricing strategy for reaching
your financial goals.
Table 6-1: Examples of Pricing Strategies
Strategy Explanation
Low-cost Use a low price for a commodity-like product
Premium Use a high price for a unique product or service
Captive Offer a product or service at an attractive price (e.g., a printer) and a complementary product at a higher price point (e.g., ink cartridges)
Demand Price based on what customers are willing to pay
Entrepreneurship & Ideation Chapter 6 page 35
Psychological Price based on psychological factors such as perceived value
Geographical Price variations based on the regions where it is sold
As you plan for sales and expenses, think about the best-case, worst-case, and
most-likely-case scenarios. When in doubt about what information to include in your
financial projections, remember that it is usually better to underestimate sales in your
planning than to overestimate sales and not meet the goals. The best-case scenario is a
goal, but you may need to be more conservative when budgeting and assessing risk.
There are two main techniques to forecasting revenue: top-down and bottom-up.
Bottom-up forecasting is what you do when you use existing financials or make realistic
estimates for things like revenue per unit and amount and timing of sales. For example,
you may be planning to be open six days a week, 50 weeks a year. You estimate that you
will get five paying customers each day and that each of them will spend $25. Using these
assumptions, you can calculate the projected revenue for next year.
Annual revenue = (# days a week × # customers per day) × # weeks open
× $ per customer
To apply the top-down forecasting technique, you will use data such as the size of
the market, market share of competitors, average sales price, or growth rate to estimate
revenue. For example, assume that the total revenue for your industry was $1 million last
year. You think that it is reasonable for your venture to capture about 10% the market next
year. In that case, your projected revenue using the top-down approach would be
$100,000 for next year.
Because top-down forecasting uses industry-level information, it is less accurate
than a bottom-up approach. If you are in a position in which you need to use this type of
forecasting, make sure to verify that sources are accurate, and consider making very
conservative estimates. Whichever approach you choose, it may be helpful also to look at
the other approach as a point of comparison.
As you create your financial forecast, be aware that revenues and expenses behave
differently depending on the industry and type of business. For example, a venture may
operate at a loss for several months or years before it attracts a loyal customer base and
revenue sufficient to generate a profit.
After you have forecasted expenses and revenue, it is time to compile the income
statement and analyze whether the venture looks viable. The important thing to remember
about creating a pro forma income statement is that you are making assumptions. In
reality, you have no idea what will happen with the venture next year, let alone three years
from now. The more information you are able to validate and verify, the better, but in the
end, these are just assumptions.
Entrepreneurship & Ideation Chapter 6 page 36
CASE STUDY Hometown Brewery Pro Forma Income Statement
Year 1 Year 2 Year 3 Avg. Price Point $2.25 $2.30 $2.50 Demand (units) 15,000 65,000 125,000
Revenue $33,750 $149,500 $312,500 COGS 15,356 68,023 142,500 Gross Income 18,394 81,478 170,000
Gross Margin 54.5% 54.5% 54.4%
Operating Expenses Rent and equipment lease
8,000
8,000
26,000
Marketing 2,500 50,000 73,000 Labor and wages 7,000 16,000 39,000 General administrative Total Operating Expenses Net Operating Income
2,000 5,000 20,000 19,500 79,000 158,000
(1,106) $2,478 $12,000 Net Operating Margin N.M. 1.7% 3.8%
Breaking even
A critical reason for estimating revenues and expenses is to understand when the
venture will break even. The break-even point is the point at which revenues equal
expenses or the venture generates $0 in profit. After that point, the venture should start
generating a profit.
Break-even point = Total fixed costs/(Sales price per unit − Variable
cost per unit)
Entrepreneurship & Ideation Chapter 6 page 37
Evaluation of assumptions After you have compiled your pro forma income statement, it is time to evaluate
your assumptions about the attractiveness and viability of the venture. There are several
metrics that you can evaluate as you prepare an income statement. Each of these metrics
will give you a picture of the future profitability and allow you to compare with competitive
or industry averages.
Gross and net operating income
Gross income is also known as gross profit. This is revenue from sales of a product
or service minus the cost to make the product, before deducting expenses such as
overhead and taxes. Cost of goods sold (COGS) is the total of expenses that are directly
attributable to making the product, such as materials and cost of labor to produce the
item. Expenses such as distribution or marketing costs are not typically included in COGS.
Net operating income, or net operating profit, is a company’s total earnings from
operations. Net operating income is calculated as revenue from the sales of a product,
minus the cost to make the product (COGS), minus the costs for all other operating items
such as executive salaries and administrative expenses such as office supplies. Interest
expenses, taxes, and other nonoperating expenses are not included in this calculation. (See the sample income statement on page 32.)
Gross and net margins
Margins are percentages showing the relationship between the revenue of a
venture and the profit. Gross margin is the ratio of gross income to revenue. It is the
percentage of total revenue after accounting for the cost of goods sold.
Net operating margin is the ratio of net operating income to revenue. This
percentage shows how much of each dollar of revenue remains after all operating
expenses have been accounted for. A net operating margin of 5% means that for every
dollar of revenue, the company generates $0.05 in operating profit. A high net margin
indicates that a venture is good at generating significant profit from revenues.
Calculating net operating margins is a way to indicate whether or not a venture is
efficient or will be successful in the industry and is one way to compare ventures operating
in the same industry. Average net operating margins vary across industries because of a
number of factors. In general, a low net operating margin means that a venture has little
room to make a mistake in pricing, expenses, or budgeting. To calculate gross and net
incomes and margins, use the following formulas:
Gross income = Revenue − COGS
Net operating income = Revenue − (COGS + all other operating expenses)
Gross margin = Gross income/Revenue
Net operating margin = Net operating income/Revenue
Entrepreneurship & Ideation Chapter 6 page 38
For example, here is how to calculate the gross margin for Acme Brewery using the
data in the pro forma income statement in the case study.
$33,750 (Revenue)
− 15,356 (COGS)
= 18,394 (Gross income or profit)
18,394 (Gross income)/33,750 (Revenue) = 54.5% (Gross margin)
Risk assessment After you have conducted feasibility analysis and calculated projected financial
information for the venture, it is time to take a step back and look at the big picture. This
is the time to consider the assumptions that you made during your initial planning and
determine whether they hold true.
As you pull together all this information, you should have a reasonably accurate
picture of your venture: your industry; your market; your customers; your product or
service; how you will create, market, and distribute your product; how much it will cost to
make and sell; and how much profit the venture is expected to make. But you are not done
yet.
At this stage, you must challenge those assumptions and the results of the
research and your hard work in planning. What if you based profitability of your product
on the cost for raw materials, but because of a natural disaster in the place where the
materials are mined, the cost doubled? How would that affect your venture and
profitability?
At this point, it is helpful to create scenarios like those above. Using what you
know about your industry and market, consider best-case, worst-case, and most-likelycase
scenarios, and play around with how they could affect your business model, your strategy,
and your bottom line. This is the kind of information that you will need to have when you
seek financing for your venture.
It is possible that after doing all the research and assessing the financial feasibility,
you will find that the projected profit is insufficient to support the venture and/or the
entrepreneur with the proposed business model. In that case, it is time to decide whether
or not to continue with the plan. To continue, you may have to change the business model
or some other key element of the strategy to make the venture profitable. If that is not an
option, it is better to find out during the planning process that the venture is not financially
viable before investing a lot of time and resources.
This is also the time to evaluate your venture on the basis of your personal goals
and expectations. At this point, you have a reasonable understanding of how the venture
will operate and what your role in it will be. As you look back on why you got involved in
this venture and what you hoped to achieve, does the model as it exists now look like the
right one? Does it fit with your lifestyle and your goals? Can you support yourself and your
desired lifestyle with the projected profitability?
Entrepreneurship & Ideation Chapter 6 page 39
If after all this work, the venture does indeed look like the right one at the right
time, it is time to formulate a strategy, write a venture plan, look for funding, and launch
your venture.
Entrepreneurship & Ideation Chapter 7 page 40
7 DEVELOPING THE CONCEPT
Now that you have proved through research and analysis of the market,
industry, and financials that your venture is viable, it is time to create a
business model and write a venture plan. Finding the right business model
is a very important step in the venture-planning process. Remember that
the core of any entrepreneurship is value creation. The value that your
venture delivers affects what business model you choose.
Ventures create and deliver value in a variety of ways. One venture,
for example, may provide products or services at a lower cost within an
industry. Another venture may provide premium products in the same
industry. Those choices affect how the businesses will operate, including
what kind of suppliers they will use, how they will market the product, and
the best distribution channels.
As you consider what type of business model will work for your
venture, think about the competitive analysis that you conducted of
participants in your industry and the business models they use. With the
information that you gathered during the research phase, you can also
identify specific things that you can do to make your venture stand out
from the crowd.
Business models A business model is the description of how the business will operate, including
details such as the purpose of the business, what it will sell and how, strategy, operational
policies, and organizational structure. You compiled all the information you need to create
a business model during the feasibility analysis. At this stage in the process, it is just a
matter of finding fit and alignment among these nine factors:
• Customers. Defining and describing your customer is a critical step that enables you
to define what product or service you will offer and the value that you will create.
• Value proposition. This is the reason a customer will buy your product or service.
• Distribution channels. This is how you will get your product to the customer. Retail
distribution means that you will sell directly to the consumer or end user. Wholesale
means that you will sell to retailers or other distributors. Online means that you will
sell directly to customers, retailers, and/or intermediaries via the Internet.
• Pricing. This is what customers are willing to pay for the value they receive.
Entrepreneurship & Ideation Chapter 7 page 41
• Expenses. These are the costs of running your business, such as production,
marketing, distribution, salaries, and overhead. Expenses can be fixed, variable, or
mixed.
• Activities. These are the most important actions your venture must take to be
successful, such as design, production, marketing, and sales.
• Resources required. These are the resources and assets that you need to create the
product or service and conduct business operations. These resources can be physical
such as raw materials, financial such as a line of credit, intellectual such as a patent,
or human such as sales staff.
• Partnerships. These are strategic partners, suppliers, distributors, and others with
whom you create alliances to conduct your business operations.
CASE STUDY
The venture plan
Now that you have identified the critical elements of your venture and have decided
on a business model that will enable you to succeed, it is time to create an official venture
plan. Venture plans typically have two purposes: to serve as an internal document that can
be used for planning and implementation and to serve as an external document that is
most often sent to investors in searching for funding but can also be used to persuade
any stakeholder to contribute resources.
A venture plan is usually a written document—sometimes in the form of a report,
other times in the form of presentation slides. As you prepare to create this document,
there are a few things to keep in mind to help you write a plan that will accomplish the
goals you set for it.
The most important thing to remember is that when this document is focused on
an external audience, such as potential investors, it is primarily a marketing document.
The goal of a venture plan is not to educate someone about your industry or your venture,
Company: Starlink
Business model: Because Starlink desires to work in a variety of markets
across the world, the founder decided to create Starlink's business unique
model hinging on the cost-effectiveness and quality of using thousands of
satellites to make the internet easily accessible – both across dense urban
and sparse rural areas. Local customers pay different rates depending on
their local economy in a unique pricing structure.
Entrepreneurship & Ideation Chapter 7 page 42
although it may do that. The goal is to tell a compelling story that inspires someone to
invest resources in your venture.
The other key piece of information to keep in mind is the audience for this
document. Venture capitalists and others who fund entrepreneurial ventures see a lot of
these plans, and it is a good bet that they read a lot of poorly researched or presented
plans. Make yours stand out from the crowd in a positive way.
As much as possible, customize the plan for each audience. It is important that
you know what kind of ventures they invest in and why. While all potential partners want
to see that the venture will be profitable, banks, investors, and strategic partners are
looking for different information. Investors, for example, are typically looking for returns
on their investments. Lenders, on the other hand, are looking for cash flow, liquidity, and
collateral.
When it comes to formatting your venture plan, there are about as many ways to
do it as there are people who can fund your venture. Some investors and banks have
specific formats that they want applicants to use. Some prefer to read only a one- or two-
page executive summary. Others want to see only presentation slides. Still others may be
interested in reading a full document with a lot of detail about the industry, market, and
financials. If you know your audience, you will know which format they prefer.
As you prepare your venture plan, it is important to consider your audience and
then tell them what you can do for them. This is a challenge for many entrepreneurs.
Think of it as an elevator pitch: What if you found yourself in an elevator with an investor
and you had only a 20-floor ride to get her interested in your venture. What would you tell
her?
Most people get more time than that, but not much. Ideally, you should be able to
tell the story of your venture in less than 15 minutes or, if you are using slides, with fewer
than 10 slides.
Other elements that are often included in venture plans, depending on the length
and intended audience, are topics such as detailed financials, management team
experience, overview of industry and results of market research, marketing plans and
sales projections, contingency plans, timelines, and appendices with supporting data.
Following is a list of sections in a typical venture plan and questions that should
be addressed in each.
1. Executive summary: What type of venture is this and why is it unique? What are the
main points from each section of the venture plan that are important to this audience?
2. Venture: What are the venture’s goals or mission? What is the organizational type and
structure? Who are the key executives and management team? How does this company
fit into the industry?
3. Products/services: What is the purpose of the product or service? What need or
opportunity does it address? How much does it cost? Is it ready for production or
Entrepreneurship & Ideation Chapter 7 page 43
delivery? Is there any protected intellectual property associated with your product or
service?
4. Market: What are the buying habits of your customers? What is your target market and
how big is it? How is it segmented?
5. Competitors: Who are the nearest and largest competitors? What is the state of their
business: growing, steady, or declining? How is your venture similar to or different
from the competition?
6. Market strategy: How will you sell your product or service? How will you market or
advertise it? What is your pricing strategy? What is your distribution strategy?
7. Operations: Who and where are your supply sources? What are your facilities like?
8. Risks and threats: What are inherent risks in your industry and with your venture?
What are potential problems? How can you avoid or manage them?
9. Financial data: What are your start-up and development costs? What are your
projected revenues, expenses, and margins? How do your financials compare to others
in the industry? What is the potential return on investment for investors? What is your
exit strategy?
As you create your venture plan and prepare to approach investors, take some time
to remember why you started down the entrepreneurial path. Think about your personal
and business goals and how you created this opportunity for yourself. At this point in the
process, you have done a lot of research and analysis, and your head is probably filled
with numbers and facts so that you can answer any questions a potential investor or
partner asks.
Good work! You are right where you need to be in the process. But do not forget
the enthusiasm and excitement that you had at the beginning of the process and the drive
that kept you going through late nights at the computer, and long days doing research.
Do not forget your belief that this is a good idea for a venture, maybe the best ever. So
when you are in the room with an investor or potential partner, remember that. This idea
started with you and your passion. Don’t be afraid to show it.
Entrepreneurship & Ideation Page 44
Epilogue PERSONAL REFLECTION
Entrepreneurship starts with you. You might desire to start a small family
business that allows you the freedom to be your own boss. Or you might
plan to start a venture to solve a problem in your community. Or you might
want to be the founder of a global venture that disrupts the business world.
If your goal is to create value through a venture, you are an entrepreneur.
There is no single reason that people choose to become entrepreneurs. Some
people see a need and want to solve it. Others have an idea and then find a way to create
a venture from that seed. Whichever type of entrepreneur or intrapreneur you may be, one
of the first steps to take before you get too far along in the process is selfreflection.
Assessing who you are and what you want from life, both personally and professionally,
helps you to understand how your venture fits your goals. Being an entrepreneur is hard
work, so you want to know that you will be ready and able to devote the time and energy
necessary to be successful.
The entrepreneurial process is easy to define It may be harder to understand what
it means in your life. Where are you in the process right now, and what is your next step?
Once again, here are the steps to beginning your entrepreneurial venture.
1. Identify an opportunity. This is your chance to use your knowledge of the industry
or the world to find an opportunity or create one of your own. This is the time to
question the status quo, to innovate, to find your niche in the world of
entrepreneurship.
2. Conduct a feasibility analysis. This is the time to learn about the industry and market
and discover the attractiveness and profit potential. This stage involves a lot of work,
but it is critical to the future success of any venture.
3. Develop the concept. This is the stage at which you start to create a model of your
new venture and plan for some of the details. This is also when you set the stage for
funding the venture and its future.
4. Determine the resources needed. Now that the venture is almost real, it is time to
identify what you need to launch and operate your venture.
5. Acquire the resources. This is the phase at which you hire people, rent space, buy
materials, and acquire other supplies. It is also a good time to take a moment to reflect
on how far you have come from your original idea and where you are heading.
Entrepreneurship & Ideation Page 45
Epilogue
6. Implement and manage the venture. This is it, the time when your vision is a reality.
This is an exciting time, but it can also be a frightening time, especially if you have
employees to pay or you are working without a salary for a while. For many ventures,
it takes time for the venture to start working smoothly. As long as you planned for
that when you designed the business model, you should take that in stride.
7. Harvest/exit the venture. This is your opportunity to reflect on the value you created.
Whatever the future of your venture—you may be ending it, selling it, or transforming
it into something new—take time to remember both the positive and the more
challenging aspects of the experience. Then get ready for the next chapter in your life.
Each entrepreneur takes his or her own journey from the original idea all the way
to the day when the entrepreneur leaves the venture. You can follow the process and plan
your steps, but every entrepreneur experiences some detours and surprises along the
way. The best way to be ready for them is to start by knowing yourself and your goals and
understanding the entrepreneurial process. Are you ready?
Page 45
Epilogue
LIST OF KEY TERMS BY CHAPTER
Chapter 2: Opportunity Identification Franchising
Licensing
Chapter 3: Technical Feasibility Copyright
Design
Intellectual Property
Patent
Prototype
Trade Secret
Trademark
Chapter 4: Market Feasibility Market
Positioning
Primary Market Research
Secondary Market Research
Segmenting
Targeting
Chapter 5: Industry Feasibility Barriers to Entry
Buyer Power
Competitive Analysis
Industry Definition
Substitutes
Supplier Power
Chapter 6: Financial Feasibility Expense Forecasting
Page 46
Gross Margin
Key Terms
Entrepreneurship & Ideation
Page 47
Income Statement
Net Operating Margin
Pricing Strategy
Revenue Forecasting
Chapter 7: Developing the Concept Business Model
Distribution Channel
Executive Summary
Value Proposition
Venture Plan
Page 48
SOURCES Key Terms
Books Allen, K. (2009). Launching new ventures (5th ed.). Boston, MA: Houghton Mifflin.
Spinelli, S., & Adams, R. (2012). New venture creation. Entrepreneurship for the 21st century (9th ed.). New York, NY: McGraw-Hill/Irwin.
Chapters in books Abrams, R., & LaPlante, A. (2008). Passion to profits: Business success for new entrepreneurs. Palo Alto, CA: The Planning Shop. Chapter 14.
Bamford, C., & West, G. (2010) Strategic management: Value creation, sustainability, and performance. Mason, OH: South-Western, Cengage Learning. Chapter 4.
Cornwall, J. (2004). Entrepreneurial financial management: An applied approach. Upper Saddle River, NJ: Prentice Hall. Chapters 4, 5, and 6.
Megginson, L., Byrd, M., & Megginson, W. (2006) Small business management: An entrepreneur’s guidebook. Toronto: McGraw-Hill/Irwin. Chapter 13.
Mullins, J. The new business road test (2nd Ed.). London: Prentice Hall/Financial Times. Chapters 11 and 12.
Articles Economic growth. (2012). In Encyclopædia Britannica. Retrieved from http://www.britannica.com/EBchecked/topic/178400/economic-growth
Ernst & Young LLP. (1997) Outline for a business plan. New York, NY: Author.
Hill, R., & Gatewood, E. (Ed.). Business planning guide. Fresno, CA: Author.
Kenny, M., & Mujtaba, B. (2007). Understanding corporate entrepreneurship and development: A practitioner view of organizational intrapreneurship. Journal of Applied Management and Entrepreneurship 12(3), 73-88.
Nagarajan, K. V. [Review of the book A history of entrepreneurship by R. F. Herbert & A. N. Link]. International Journal of Business and Social Science, 2(9), 241–242.
- 1 INTRODUCTION TO ENTREPRENEURSHIP
- History of entrepreneurship
- Goals and objectives of entrepreneurship
- The entrepreneurial process
- Types of entrepreneurs
- The entrepreneurial mind-set
- Attributes and skills of successful entrepreneurs
- CASE STUDY
- Self-assessment
- Are you ready?
- Entrepreneurial
- Personal
- 2 OPPORTUNITY IDENTIFICATION
- Creativity and innovation
- New opportunities
- 3 TECHNICAL FEASIBILITY
- Prototyping and design
- CASE STUDY
- Intellectual property
- CASE STUDY
- 4 MARKET FEASIBILITY
- Table 4-1: Primary and Secondary Market Research
- Secondary market research
- CASE STUDY
- Primary market research
- Conducting interviews
- Segmenting, targeting, and positioning
- Segmenting
- Examples of market segmentation
- Targeting
- CASE STUDY
- Positioning
- What to do with your research
- 5 INDUSTRY FEASIBILITY
- Industry definition
- Barriers to entry
- CASE STUDY
- Substitutes
- Buyer power
- Supplier power
- Rivalry
- External factors
- CASE STUDY
- Competitive analysis
- What these factors mean to your venture
- 6 FINANCIAL FEASIBILITY
- Income statements
- Expense forecasting
- Revenue forecasting
- Table 6-1: Examples of Pricing Strategies
- CASE STUDY
- Breaking even
- Evaluation of assumptions
- Gross and net operating income
- Gross and net margins
- Risk assessment
- 7 DEVELOPING THE CONCEPT
- Business models
- CASE STUDY
- The venture plan
- LIST OF KEY TERMS BY CHAPTER
- Chapter 2: Opportunity Identification
- Chapter 3: Technical Feasibility
- Chapter 4: Market Feasibility
- Chapter 5: Industry Feasibility
- Chapter 6: Financial Feasibility
- Chapter 7: Developing the Concept
- SOURCES
- Books
- Chapters in books
- Articles