Week 2 Discussion - Ethical Models
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cf_katz_ESB_6e_chap004_PPT.pptxChapter Four Entrepreneurs and Ideas: The Basis of Small Business
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Ideas, Opportunities, and Business
Opportunity recognition and entrepreneurial alertness help identify good opportunities.
The opportunity identification process assesses whether the situation is traditional or unexpected.
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Source: Adapted from C. M. Gaglio and J. A. Katz, “The Psychological Basis of Opportunity Identification: Entrepreneurial Alertness,” Small Business Economics 16, no. 2, (March 2001), p. 99.
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Ideas, Opportunities, and Business - Strategies
Doing the same thing as others, is pursuing an imitative strategy.
An incremental strategy offers a slightly better way to do something.
A radical innovation strategy presents a different way to do things.
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Two Ways to Think About Opportunity and Business Creation
Effectuation model.
Feel.
Recognize you want to start a business
Check.
Assess resources to determine your product and customers.
Plan.
Offer your product and see if it sells.
Do.
If you get sales, keep going – if not, go back to the Check step.
Causal model of entrepreneurship.
Feel.
Decide you have a great idea and want to start a business.
Check.
Assess resources, get help if needed, then assess feasibility.
Plan.
If feasible and there is interest, keep going, if not – go back to Check.
Do.
Make product and the company to sell it and get it into the market.
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Figure 4.2: The Screening Process in the Causal Model of Entrepreneurship
The goal is to start with lots of ideas and narrow them down to a few.
Test ideas with an IDEO screen, a business model canvas, or a feasibility plan.
Develop a business plan for the most promising ideas.
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Effectual and Causal Approaches - PSED
In the nationwide Panel Study of Entrepreneurial Dynamics (PSED), entrepreneurs were asked whether the decision to start some kind of business (effectuation) or the business idea came first (causal) or if they combined the two.
Source: Original analysis using PSED 1 and PSED 2 data (covering 1998 and 2006, N = 1,767) done by Kelly Shaver, College of Charleston, for Entrepreneurial Small Business, February 2019.
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Ten Sources of Business Ideas
Work/personal experience.
A similar business.
Chance – retail arbitrage.
Family and friends.
Education or expertise.
Magazines.
Idea sites.
Side gigs.
Make and sell, locally or online.
Going online to spot trends.
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One Last Powerful Source of Ideas
Universities and government agencies develop new technologies and offer them free to small businesses to develop.
Federal Labs is a centralized location for over 700 federal programs.
If a university is near you, contact the technology transfer office.
These organizations will offer a licensing arrangement.
A license is a legal agreement granting you rights to use a particular piece of intellectual property.
In return, you (the licensee) are required to pay the owner of the license (the licensor).
Can be an up-front payment, an annual fee, or a royalty per item sold.
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From Ideas to Opportunities through Creativity - SCAMPER
A pioneer in the field of creativity, who first coined the word brainstorming, invented SCAMPER.
What opportunities result from substituting or replacing something that already exists?
What separate products, services, or businesses can you combine to create a distinct business?
What could you adapt from other industries?
What could you make more noticeable or different in some way from competitors?
What other uses might there be?
What could you get rid of that would eliminate something the customer has to do?
What can you rearrange in the way your product or service appears, or the way businesses in your industry usually look or are decorated or located?
Source: Michael Michalko, Thinkertoys: A Handbook of Business Creativity (Berkeley, CA: Ten Speed Press, 1991).
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From Ideas to Opportunities through Creativity
Thinking of other ways to be creative.
Creative business owners question and challenge the way things appear, to see if they can find a new way of doing things.
One process for organizing creative thinking consists of four steps.
Preparation – explore problem/opportunity from all directions.
Incubation – think about it in a “not-conscious” way.
Illumination – bring ideas together to spark new insights.
Verification – test the idea and reduce it to its most exact form.
Another variant is to use painstorming and ask people for pains or aggravations they face in a situation you choose.
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Avoid Pitfalls
Identifying the wrong problem.
Judging ideas too quickly.
Stopping with the first good idea.
Failing to act.
Obeying rules that do not exist.
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Screen Ideas
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The IDEO screen hails from the creators of design thinking.
Do people really want the solution being offered?
Can the solution really solve the problem, and can we make it?
Can we make the solution and make money doing it?
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Make Sure an Idea is Feasible
After screening, move to the “next-stage” issues, like financing.
In general, the next step is to test feasibility.
The extent your idea is viable and realistic.
The extent you are aware of internal and external forces.
Business models are ways to identify and organize key information on organizations and how they achieve their goals.
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The Business Model Canvas Approach
Customer segment.
Problem – pain and gain.
Solution.
Value proposition.
Channels.
Customer relationships.
Revenues – freemium.
Key resources.
Key activities.
Key partners.
Costs.
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Figure 4.7: Pet Élan’s Business Model Canvas
To analyze, we compare the fit by customer segment to the value proposition, problem, and solution.
The four should strongly reflect one another and reflect something the customer will buy.
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Feasibility – Online Pilot Testing
A low-cost, low-risk approach to testing feasibility is an online pilot test.
Deploy an information website and start advertising.
Track the number of visits, get their demographics, and those who provide an email for more information is your conversion rate.
Typically two or more versions are running – called A/B testing.
Make changes according to feedback.
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The Classic Feasibility Study – Overview
The feasibility study consists of investigating five primary areas: the overall business idea, the product/service, the industry and market, financial projections, and the plan for future action.
Within each area, examine the strengths and weaknesses of your business opportunity.
Traditional problems facing new products or services:
The idea cannot be economically made into a product/service.
The resulting product/service works, but lacks a large market appeal.
The product/service works, has a market, and could be profitable, but you need to get additional people, funding, or other resources.
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The Classic Feasibility Study Narrative – Part One
The Business Idea.
Description of your business.
Describe your product/service concisely, with attention to the characteristics you think it brings to the customer experience.
Your customers.
Get demographics, but use creativity to learn as much as you can about potential customers.
If more than one target market, do this for each market segment.
Trends related to the product or service.
How will you stay relevant?
What trends in product use are in the future?
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The Classic Feasibility Study Narrative – Part Two
The Product/Service.
Product/service description.
Describe your product/service very simply, using photos or drawings.
The competition.
Consider both direct competitors and indirect competitors who may sell a substitute.
Competitive advantage.
Consider what they are, why they exist, and how they will help you succeed.
Market penetration.
Describe all the ways you will reach your customers, don’t forget the costs involved.
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The Classic Feasibility Study Narrative – Part Three
The Business.
Description of the entrepreneur, or entrepreneurial team.
Developed from the technical feasibility and business validity sections of the IDEO screen.
Stage of development.
Where are you in the process and what is the time frame?
Legal issues.
List any patents, copyrights, trademarks, licenses, or domain names.
List any franchise agreements or applicable government regulations.
Insurance requirements.
Research the liability involved and protect adequately.
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The Classic Feasibility Study Narrative – Part Four
Future Action Plan.
Summary feasibility evaluation.
Likely outcomes: confirming your idea, holding off until you learn more, or realizing the idea is not feasible in its current form.
Next steps.
This depends on the previous step: if feasible, start working on a business plan and if there are questions, address them.
Start-up capital.
List money needed, including cost of goods sold, marketing and administrative expenses, and additional costs like rent and utilities.
Sources of start-up capital.
Consider all sources – personal savings, family and friends, bank loans, investors, and so on.
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The Classic Feasibility Study Narrative – Part Five
The Financial Projections.
Assumptions.
List all the assumptions on which you are basing your financials.
Summary financial table.
Develop a basic three-year summary including: revenues, cost of goods sold, gross margin, operating expenses, net profit (or loss).
Three-year detailed financials.
Details of the above step – typically you give monthly numbers for the first year and cumulative numbers for years two and three.
Start-up budget.
Provide a list of all costs, including legal costs and other professional fees, initial inventory or manufacturing costs, building and fixture costs, and technology costs.
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Ways to Keep On Being Creative
Keep yourself in an innovative state of mind.
Read magazines or trade journals outside your area.
Invite someone new to a meeting where you are solving a problem or searching for a new opportunity – try a supplier or a friend.
Have a “scan the environment” day to discuss trends.
Try a mini-internship, spending a day with a colleague at their work.
Put yourself in the customer’s shoes to see what frustrates them.
Redesign your work environment to give you a new outlook.
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Ideas, Opportunities, and Business – Text Alternative
The flow chart begins with a market situation or event and flows to four possible outcomes: continue as is, imitative strategies, incremental strategies, or innovative opportunities.
At the start of the flow chart on the left, the market situation or even, has two possible next steps: things appear to be usual, as expected or something may be unusual, unexpected, or anomalous.
If the first step is ‘usual,’ then that leads to the next box: maintain status quo or existing mean-ends framework, and the result is: Continue as is.
If the first step is ‘unusual,’ then there are three choices in the third step: ignore, discount, or what’s going on here? If the choice is ignore, that leads to adopting an imitative strategy. If the choice is discount, that leads to an incremental strategy.
If the third step’s choice is ‘what’s going on here?’, the fourth step asks how does the situation/event affect the industry, society, or market rules. This fourth step leads to the fifth: Break existing means-ends framework, leading to the final box in the flow chart: innovative opportunities.
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Figure 4.2: The Screening Process in the Causal Model of Entrepreneurship – Text Alternative
The graph quadrant shows ideas along the vertical axis, ranging from one at the intersection to ‘lots’ at the top of the axis.
The horizontal axis travels across the span of feel, check, plan, and do.
The entrepreneur follows the line which begins at the top left of the quadrant with ‘lots’ of ideas. The line dips down after the IDEO screen, dips again with the business model canvas, or a feasibility plan, until the ideas are down to the most promising, for which you do a business plan.
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Screen Ideas – Text Alternative
This IDEO screen is a Venn diagram with three aspects: market desirability, technical feasibility, and business viability.
This particular diagram is showing the initial IDEO screen for Pet Elan, an upscale pet store.
The market desirability factor includes a market of 30,000 pet owners in Lakeview, IL with interest in high-end pet products, with little direct local competition.
The technical feasibility factor is that high-end products can be readily obtained, comparable-level services can be done, and there is limited competition for high-end curated goods and services.
In the business viability factor, the owners have experience in the industry, the area, and have a passion for pets. Risks are manageable and profit margins are good.
The asterisk in the middle, where the three elements intersect is where the idea is high in all three elements at the same time.
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The Business Model Canvas Approach – Text Alternative
This depiction of the business model canvas shows the model broken into spaces numbered one through eleven. Some numbers correspond the IDEO screen’s technical feasibility, some correspond to the IDEO screen’s market feasibility, and the remaining correspond to the IDEO screen’s business viability.
Numbers three (solution), nine (key activities), and eight (key resources) are completely within the technical feasibility and numbers four (value proposition) and ten (key partners) are partially within this section.
Numbers fully within the market desirability section are one (customer segments), two (problem), five (channels), and six (customer relationship), while number four (value proposition) is partially within this section.
Finally, numbers seven (revenue stream) and eleven (cost structure) are fully within the business viability section, while number ten (key partners) is partially within this section.
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Figure 4.7: Pet Élan’s Business Model Canvas – Text Alternative
The Problem: Pet owners who want to give their pets the very best can’t readily or easily do so in Lakeview.
Customer segments: Pet Pamperers – higher income (>$50,000), in Lakeview, buy pet fashions, support pet-related causes.
Customer relationships: Owners server you. Personal attention and recognition. Pet-friendly store. Active in local pet causes.
Channels: Store in Lakeview shopping area. Informational website. Partner referrals and mentions.
Value proposition: We will be the place that pampers pets with upscale products and services, and supports community pet initiatives.
Key resources: Personal/local knowledge and connections. An excellent location and attractive store.
Key activities: Sell the right products with personalized service. Deliver high-end in-store services.
Key partners: Local pet service providers (e.g., trainers). Local pet support organizations (e.g., Humane Society). SBDC or college for marketing help. High-end product suppliers.
Revenue streams: Product sales; in-house services; referral services; 50% plus margins, 6 days a week. Sales projections needed.
Cost structure: Storefront, equipment, inventory, owner does all. Approximately $50,000 to $80,000.
Finally, Solution: A more appealing Lakeview pet store offering upscale services, products (food, toys, and accessories), and pet community supports.
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