20140829084254_Topic 2 Starting a New Small Business

STUDY GUIDE BMSB5103 Small Business Management

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Topic 2: Starting a New Small Business

Learning Outcomes

By the end of this topic, you should be able to:

1. Distinguish among the different types and sources of start-up ideas and identify the most common sources of start-up ideas;

2. Use innovative thinking to generate ideas for high-potential start-ups;

3. Describe external and internal analyses that might shape the selection of venture opportunities;

4. Explain broad-based strategy options and focus strategies; and

5. Assess the feasibility of a start-up idea before writing a business plan.

Topic Overview

Venturing into business world as an entrepreneur or owner-manager of a small firm is not always simple. Instead, it is a complicated and time-consuming venture as a decision that should be taken seriously. The reason is that it is not about owning and managing a firm but the whole lifestyle has to be changed and adapted according to the business changing needs and environment. Thus, one must consider and weigh the advantages and disadvantages of going into business. When the choice is made and/or personal goals have been set, business opportunities examined and resources determined, the choices of business option can be finalised. Starting one’s own small business operation offers a totally new journey and venture for an individual entrepreneur.


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Focus Areas and Assigned Readings

Focus Areas Assigned Readings

2.1 Coming up with start-up ideas Distinguish among the different types and sources of start-up ideas and identify the most common sources of start-up ideas

2.2 Using innovative thinking to generate ideas Use innovative thinking to generate ideas for high-potential start-ups

2.3 Using internal and external analyses to identify business ideas Describe external and internal analyses that might shape the selection of venture opportunities.

2.4 Selecting strategies that capture opportunities Explain broad-based strategy options and focus strategies. Have students define strategy.

2.5 Assessing feasibility of start-up ideas Assess the feasibility of a start-up idea before writing a business plan.

Moore et al. (2010). Chapter 3, pp 62-66

Extra Readings:

Schaper et al. (2011), Chapter 5, pp 108-112.

Moore et al. (2010). Chapter 3, pp 67-70.



Moore et al. (2010). Chapter 3, Chapter 3, pp 83–86.

Other Sources

1. Business start up and resource guide, (Small Business and Technology Development Center, University of North Carolina) http://www.sbtdc.org/pdf/start-up.pdf

2. How to set up your own business http://www.hw.ac.uk/careers/self_emolyment.pdf

3. Challenges of starting a business http://www.prenhall.com/behindthebook/0131403656/pdf/Collins_CH02.pdf

4. Starting a business http://www.doingbusiness.org/method


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ology/~/media/FPDKM/Doing%20Business/Documents/Annual-Reports/English/DB12-Chapters/starting-a-business.pdf

Content Summary

2.1 Coming Up With Start-up Ideas

Types of Start-up Ideas

(a) Type A ideas – Start-up ideas centred on providing customers with an existing product not available in their market

(b) Type B ideas – Start-up ideas, involving new technology, centred on providing customers with a new product

(c) Type C ideas – Start-up ideas centred on providing customers with an improved product

2.3 Common Sources of Start-up Ideas Discuss circumstances that lead to ideas for starting a new business.

(a) Personal Experience – One primary source

(b) Hobbies and Personal Interests – Grow beyond leisure into business

(c) Accidental discovery such as serendipity – A gift for making desirable discoveries by accident

2.3 Other Idea Leads

(a) Personal contacts with potential customers and suppliers, professors, patent attorneys, former or current employees or co-workers, venture capitalists and chambers of commerce,

(b) Visiting trade shows, production facilities, universities and research institutes

(c) Observing trends everywhere

(d) Reading widely – Even if the materials do not seem related, they can spark ideas


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Figure 2.1: Sources of start-up business

2.4 Using Innovative Thinking to Generate Business Ideas

Begin with a problem in mind

Recognise a hot trend and ride the wave

Study an existing product or service and explore ways to improve its function

Think of possibilities that would streamline a customer’s activities

Consider ways to adapt a product or service to meet customer needs in a different way

Imagine how the market for a product or service could be expanded

Study a product or service to determine whether if you can make it green

Keep an eye on new technologies

2.5 Using Internal and External Analyses to Identify Business Ideas

Outside-In Analysis General environment – The broad environment, encompassing factors that influence most businesses in a society

(a) Economic trends – Changes in the rate of inflation, interest rates and even currency exchange rates which promote or discourage business growth


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(b) Socio-cultural trends – Societal currents that may affect consumer demand, opening up new markets and forcing others into decline

(c) Political/legal trends – Changes in tax law and government regulation that may pose a threat to existing companies or devastate an inventive business concept

(d) Global trends – Reflect international developments that create new opportunities to expand markets, outsource and invest abroad

(e) Technological trends – May spawn or wipe out new ventures

(f) Industry environment – The combined forces that directly impact a given firm and its competitors

(g) Competitive environment – The environment that focuses on the strength, position, and likely moves and counter-moves of competitors in an industry

Figure 2.2: Trends in General Environment

Inside-Out Analysis Resources and Capabilities

(a) Resources – The basic inputs that a firm uses to conduct its business

(b) Capabilities – The integration of various organisational resources that are deployed together to the firm’s advantage


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(c) 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

(d) Core competencies – Those capabilities that provide a firm with a competitive edge and reflect its personality

(e) Determining the core competencies is possible once there is an accurate view of their resources and capabilities

Integrating Internal and External Analyses SWOT analysis – A type of assessment that provides a concise overview of a firm’s strategic situation that deals with strengths, weaknesses, opportunities and threats

2.6 Selecting Strategies That Capture Opportunities

Broad-Based Strategy Options

(a) Cost-Based Strategy – A plan of action that requires a firm to be the lowest-cost producer within its market

(b) 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) A plan of action that isolates an enterprise from competitors and other market forces by targeting a restricted market segment

(b) Focus strategy selection and implementation

(c) A decision regarding the direction a firm will take in relating to its customers and competitors

2.7 Assessing Feasibility of Start-up Idea

Feasibility analysis – A preliminary assessment of a business idea that gauges whether or not the venture envisioned is likely to succeed

Fatal flaw – A circumstance or development that alone could render a new business unsuccessful

Market Potential Includes buyers (current or potential customers) who have the ability to pay for the product or service and sellers who compete with one another by offering identical or similar products or services to the same general group of buyers


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Industry Attractiveness

(a) Macro-level industry analysis used to establish overall attractiveness of the industry in which the start-up will be established (see questions presented in the appendix to this chapter)

(b) Micro-level industry assessment focused more on the probability of a start-up’s success over the long term

New Venture Leadership – A new business will only be as strong as its leader which means it is important to assess whether the entrepreneur or entrepreneurial team can handle the job

Study Questions

1. Why might an entrepreneur prefer to launch an entirely new venture rather than buy an existing firm?

2. What are the three basic types of start-up ideas? What are the most common sources of inspiration for start-up ideas?

3. List the six general trends of the general environment. Give a hypothetical example of a way in which each trend might affect a small business.

4. What are the two basic strategy options for creating a competitive advantage?

5. Explain what is meant by the term “focus strategy”.

6. What are the advantages of disadvantages of a focus strategy? What must an entrepreneur know and do to maintain the potential of a focus strategy?

7. Based on this case study, answer the question that follows.

8. If you could advise Hani about how to respond to her father, what would you tell her to say? Justify your answer.

A FEASIBILITY ANALYSIS

Hani, a friend of yours, just told you an interesting story. She was at her parents’ house over the weekend and her father saw this book lying next to her backpack. He picked it up and read it. He told Hani, “When you were growing up, I started and sold three successful businesses and never completed a feasibility analysis once. I wonder what the authors of your entrepreneurship book would say about that.

Source: Adapted from Barringer & Ireland 2010, Entrepreneurship: Successfully Launching New Ventures, 3rd Edition, Pearson; Boston. Chapter 3


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9. Based on this case study, answer the question that follows.

If you were the banker, how would you react to Yakob’s statement? Why?

SPORTING GOODS STORE

Yakob just applied for a bank loan to finance a sporting goods store that he plans to open. The banker asked Yakob if he conducted any primary research to assess the feasibility of the store and Yakob replied that he spent countless evenings and weekends in the library and on the Internet collecting data on the feasibility of sporting goods stores, and he was confident that his store would be successful. He said that he even did careful research to make sure that sporting goods stores do well in demographic areas that are similar to the area where he plans to open his store.

Source: Adapted from Barringer & Ireland 2010, Entrepreneurship: Successfully Launching New Ventures, 3rd Edition, Pearson; Boston. Chapter 3