Topic 3

Starting a Business

Zainon Che Mat

 Learning Outcome
After studying this chapter, student should be able to:

1.Distinguish among the different types and sources of startup

ideas, and identify the most common sources of startup ideas.
2.Use innovative thinking to generate ideas for high-potential
startups.
3.Describe external and internal analysis that might shape the
selection of venture opportunities.
4.Explain broad-based strategy options and focus strategies.
5.Assess the feasibility of a startup idea before writing a
business plan.
 Introduction
• Startups
– new business ventures created “from scratch”
• Opportunity Recognition
– Identification of potential new products or
services that may lead to promising businesses
• Entrepreneurial alertness
– Readiness to act on existing, but unnoticed,
business opportunities
Types of ideas that develop into
startups
Type C ideas
Type A ideas Type B ideas

New Market New Technology New Benefit

Example:
Example: Using Example:
Targeting the
high-tech Developing a
“New Age”
computers to personal misting
beverage market
develop a device to keep
by selling soft
simulated workers cool.
drinks with
helicopter ride.
nutritional value

• Type “A” Ideas: startup ideas centered around providing customers with an existing product or service not
available in their market.
• Type “B” Ideas: Startup ideas involving new or relatively new technology, centered around providing customers
with a new product.
• Type “C” Ideas: Startup ideas centered around providing customers with new or improved products or services.
Common Sources of Startup
Ideas
 Change Based Sources of
Entrepreneurial Opportunities
Change Factor Definition Illustration
Industry or Enterprise
Factors
The unexpected Unanticipated events lead to either Pet pharmaceuticals
enterprise success or enterprise failure
The incongruous What is expected is out of line with what Low-fat ice cream for those trying to reduce
will work weight
Process needs Current technology is insufficient to GM creates an electric car “VOLT” to deal with
address as emerging challenge rising energy costs
Structural change Changes in technologies, markets, etc., The use of digital cinema technology had led to
after industry dynamics the widespread showing of 3 D movies

External Factors

Demographics Shifts in population size, age structure, The rapid growth of the Hispanic markets in the
ethnicity, and income distribution impact United States has spawned a flood of Spanish
product demand language news papers

Changes in perception Perceptual variations determine product Perceived security threats have led to the
demand development of gated communities
New knowledge Learning opens the door to new product Breakthroughs in solar power technologies have
opportunities with commercial potential fueled the growth of “green” residential
developments
 Other Idea Leads to business
startup;
• Tapping personal contact with potential customers,
suppliers, former or current employees
• Visiting trade shows, production facilities or
Universities
• Observing trends related to the business intention
• Reading trade publication, bankruptcy
announcement or business classified
• Reading articles on the creativity of entrepreneurs
• Travelling or visit entrepreneurs in your field interest
• Internet information
 Using innovative
thinking to generate
business ideas
1. Ideas, borrow from existing products or services or other industries
2. Combine two businesses into one to create a market opening
3. Begin with a problem in mind, or think of a “pain” that you can relieve
4. Recognize a hot trend and ride the wave
5. Study an existing product or services and explore ways to improve
function
6. Think of possibilities that would streamline a customer’s activities
7. Consider ways to adapt a product or service to meet customer needs in a
different way
8. Imagine how the market for a product or service could be expanded
9. Study a product or service to see of you can make it “green”
10. Keep an eye on new technologies
 Using Internal and External
Analyses to Assess Business Ideas
Outside In Analysis
•Entrepreneur are more successful when they study a business context in
order to identify potential start up opportunities and determine which are
most likely to lead to success.
•Should consider the 3 environments: general environment or big picture,
and the industry environment in which the venture might do business. Also,
competitive environment.
General environment - broad environment encompassing factors that influence most
businesses in society; political, socialcultural, demographic, economic, global and
Technological
Industry environment – that includes factors that directly impact a given firm and its
competitors. As Michael Porter list; New competitors, Substitute products, Rivalry,
Suppliers & Buyers
Competitive environment – important to determine strength, position and response of
rival businesses to newcomers. The newcomers should answering several question
(William A.Sahlman); Who would be new venture’s current competitors?, What unique
resources do they control?, What are their strengths and weaknesses? How they respond to
new ventures decision entering industry?, Who might see the opportunity?, How can new
venture respond?
 Inside Out Analysis
Catalogues the resources and capabilities available to the startup (or
those that can reasonably be obtained or created) as well as its core
competencies.

Resources – the basic input used by the firm to conduct its business
include intangible and intangible resources
Capabilities – the integration of various organizational resources
that are deployed together to the firm’s competitive advantage.
Competitive advantage – a benefit that exists when a firm has a
product or service that is seen by its target market as better
than
those of competitors
Core competencies – those capabilities that provide a firm with
competitive edge and reflects its personality
 Business Model
• Business model defines the process a company will use
to generate sales and profit.
• It comprise of seven components:
1. A definition of target customers and how your company
will reach them
2. The customer value proposition that your company
offers
3. Point of differentiation
4. Pricing
5. Selling process
6. Distribution system
7. Customer support
 Integrating Internal and External
Analysis
Examples of SWOT Factors
Positive Factors Negative Factors

Inside the Strengths Weaknesses

Company •Important core competencies •Inadequate financial resources
•Financial strengths •Poorly planned strategy
•Innovative capacity •Lack of management skills or experience
•Skilled or experienced management •Inadequate innovation capacity
•Well-planned strategy •Negative reputation in the marketplace
•Effective entry wedge •Inadequate facilities
•A strong network of personal contracts •Distribution problems
•Positive reputation in the marketplace •Limited marketing skills
•Proprietary technology •Production inefficiencies

Outside the Opportunities Threats

Company •An untapped market potential •New competitors
•New product or geographic market •Rising demands of buyers or suppliers
•Favorable shift in industry dynamics •Sales shifting to substitute products
•High potential for market growth •Increased government regulation
•Emerging technologies •Adverse shifts in the business cycle
•Changes allowing overseas expansion •Slowed market growth changing customer
•Favorable government deregulation preferences
•Increasing market fragmentation •Adverse demographic shifts
 The Entrepreneur’s
Opportunity “Sweet Spot”
Inside-Out Analysis Outside-In Analysis

Entrepreneur’s Area of
Opportunity
 Strategy
• Strategy
– a plan of action that coordinates the resources and commitments of an organization to achieve superior
performance
• Two types of strategies:

– Broad based strategies

• Cost based strategy – a plan of action that requires a firm to hold down its costs so that it can compete by
charging lower prices and still make a profit
• Differentiation based strategy – a plan of action designed to provide a product or service with unique attributes
that are valued by consumers

– Focus strategies
• A plan of action that isolated an enterprise from competitors and other market forces by targeting a restricted
market segments
• Focus strategy selection and implementation dependent on the strategic decision ( a decision regarding the
direction a firm will take in relating to its customers and competitors).
• Drawback of focus strategies
– too focus , so might not have sufficient customers
– The focus strategy is imitated
– The target segment becomes structurally unattractive because the structure erodes or because demand
disappears
– The target segment’s differences from other segments narrow
– New firms sub segment the industry
 Is Your Startup Idea
Feasible?
•
A Feasibility Analysis Framework
Feasibility Analysis
– A preliminary assessment Mission, Aspirations, Risk Taking
of a business idea that
gauges whether or not Understanding of Personal connection
the venture envisioned is Success Factors
likely to succeed.
– Refer page 102-103 for
“Questions for Feasibility
Analysis” Micro Level Micro Level

Macro Level
Macro Level

Market Potential Industry Attractiveness

SOURCE: Petty, J.W., Palich, L.E., Hoy, F., and Longenecker, J.G. (2012), Managing Small
Business: An Entrepreneurial Emphasis, 16th edition, South-Western, Cengage Learning.
Industry and Market Feasibility
Analysis
Industry and market feasibility -Industry
Attractiveness:
• Five Forces Model: bargaining power of your firm’s
buyers to lower your prices; bargaining power of your
firm’s suppliers to raise their prices; intensity of rivalry
among existing firms in the industry; threat of new
companies entering the industry to compete; threat of
substitute products or services
Product or service feasibility analysis
•An analysis that determines the degree to which a
product or service idea appeals to potential customers
and identifies the resources necessary to produce the
product or provide the service
•Customer surveys and questionnaires; focus group;
trade associations and business directories; direct mail
lists; demographic data; census data; market research;
articles; local data; internet; prototypes; in home trials
Financial feasibility analysis
•Broad financial analysis – capital requirements;
estimated earnings; return on investment;
 Class Discussion
Jonathan Lugar, 17, had just finished helping his mom with a garage sale when it occurred to him that
he might create a business to do for others what he had done for her and make a little money that he
could save for college.

The idea was to offer a service that could take all of the headaches out of running a garage sale. Lugar
would handle all advertising and sales setup, and his experience with other garage sales in the area
would allow him to coach sellers on pricing so that items would actually be purchased.

Lugar figures he could charge $200 per job for sales that bring in $400 or less, but he and the seller
would split sales above $400 on a 50-50 basis. Lugar believes the greatest value added from his services
would be from his pricing insights, since most people rarely have a garage sale and thus have little idea
about how much to ask for items.

Pricing wisely should make his customers happy since they could maximize their sales and minimize the
risk that they would be left with the very items they were trying to get rid of. In fact, Lugar planned to
keep track of how much things sold for to fine-tune his pricing advice. He estimates that his startup costs
would be minimal and would come mostly in the form of the use of a truck (which he already owned)
and some fuel.

Question 1: How would you classify Lugar’s startup idea? Is it a Type A, Type B, OR Type C idea?

Question 2: What was the source of Lugar’s startup idea?

Question 3: Would you recommend that he give this startup concept a try? Explain your reasoning.
 References
• Petty, J.W., Palich, L.E., Hoy, F., and Longenecker, J.G. (2012), Managing
Small Business: An Entrepreneurial Emphasis, 16 th edition, South-Western,
Cengage Learning.
• Scarborough, N.M. (2014) Essentials of Entrepreneurship and Small
Business Management, 7th edition, Pearson.