Management 566 Entrepreneurship and New Venture Creation Fall 2009

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Management 566

Entrepreneurship and New Venture Creation

Fall 200
9



Howard Van Auken, Ph.D.

3363 Gerdin Building

Ames, Iowa 50011

vanauken@
iastate.edu



Recommended Text


The Successful Business Plan: Secrets & Strategies

by
Rhonda Abrams, 4
th

edition

(I
SBN




# 0
-
9669635
-
6
-
3)

or any

other
entrepreneurship text.


Useful References



Books

New Venture Creation by Timmons and Spinelli

Paradigms: The Business of Discovering the Future
, by Joel Barker

Writing a Convincing Business Plan
, by DeTho
mas and Fredenberger, Barron’s Press.

Entrepreneurship: A Contemporary Approach
, by Kuratko and Hodgetts Dryden Press.



Entrepreneurship
, by Hisrich and Peters, Irwin Pub.



New Venture Creation
, by Timmons, Irwin Pub.





Magazines

Inc.



Entrepreneu
r



Web sites

http://www.slu.edu/eweb/

http://www.sba.gov/



http://www.inc.com (Inc Magazine)



http://www.lowe.org/smbiznet/index.htm (SmallbizNet
-

services to small firms and links)



http://www.smartbiz.com (Smart Business Supersite with how
-
to in
formation)



http://www.global
-
reach.com/aedc/ (Ames trade area statistics)



http://www.city.ames.ia.us (current estimates of population)



http://www.census.gov/population/estimates/state/st
-
99
-
1.txt (estimates of state population)



http://www.profiles.
iastate.edu/econ/ (Iowa industry information)



http://www.state.ia.us/trends/ (Iowa economic trends)





Overview


The purpose of this course is to introduce students to issues related to innovation, opportunity recognition, planning,
organization, and th
e launch of a new entrepreneurial business. Course content will concentrate on innovation and
include material related to identifying business ideas, screening market opportunities, acquiring resources necessary
for capturing market opportunities, and lau
nching new ventures. This process of business creation will primarily be
examined from the perspective of the individual who is considering starting a
n entrepreneurial

business.
The
material covered during the semester will be organized around three dist
inct themes: (1) Prestart
-
Up Issues:
Identifying and Capturing Market Opportunities, (2) Start
-
up and Initial Operations: Resource Acquisition and
Management, and (3) Beyond Start
-
up: Growth, International, and Harvest. W
omen, minority, family and
intern
ational issues

will be discussed

when appropriate.

Course Objectives


(1)

introduce
t
he field of entrepreneurship and the role of entrepreneurship in the US

economy;

(2)

understand the relationship between innovation, business opportunities, and entrepreneurship;

(3)

distinguish between a business idea and business opportunity;

(4)

understand
the process through which business
ideas are
develop
ed
, opportunities identified, resources
acqui
red, and new firms are launched;

(5)

explore new business
opportunities.



Course Organi
zation


One of the most important philosophies behind the structure of the class time will be to make the course as
interactive as possible. Active class discussion will continually be encouraged and supported. Much of the class
time will be devoted to d
iscussions about various aspects of entrepreneurship in practice.

The theme of the course
will consistently revolve innovation as related to new business creation and management. Innovation is the essence
to entrepreneurship rather than simply launching
a small business.


Email will be the most important method of contact during the semester. I encourage you to contact me by email as
often as you wish. I will reply to your messages promptly.

Students are responsible for checking email daily for
course
information and announcements.


Week

Module



Activity





Points




1

Introduction



Innovation




5

Business Success



5


2

Opportunity Recognition


Trend

and Unmet Need
Assignment
s

10












3

Business Idea and Plan


Business Plan Evaluation



10




Submit description of business idea



4

Industry Trends



Industry analysis




10








Competitive strategy


5

Competitive Advantage


Competitive Advantage



10

Marketing Plan



M
a
rketing plan





6

Financial Analysis


Start
-
up Balance Sheet



10


7

Financial Analysis


Cash Budget




10






End of year income statement





8

Adversity and Ethics


Case





10


9

Business Analysis


Lessons Learned Discussion


10


10

Preliminary Business Plan

Submit draft copy of business plan






Include names
and emails of

team



11

Peer Review



Team peer review of preliminary plans

10



12

Business Plan Project


Submission




100

Evaluation (+/
-

grades will be used)


Assignment





Points




Weekly Assignments

*

(10@10 each)


100

Peer Review






30

Final P
roject





100



Total Points




230


* Evaluation of Written Assignments


Submitting on due date



10%

Organization




20%

Content





50%

Participating in class discussion


20%


A

> 92

A
-

90


92


B+

87


89

B

83


86

B
-

80


82


C+

77


79

C

73


78

C
-

70


72


D+

67


69

D

63


66

D
-

60


62


F

< 60



Sample Innovation Plan Outline



1.
Title Page

2.
Table of Contents

3.
Business Description



Firm Description


Background of Owner


Organizational Form


Business Goals


4.
Operating Plan


5.
Market
Analysis



Industry Information


Target Market



Competitive Advantage


Competitive Strategy


Risk Assessment


6.
Marketing Plan



Image


Pricing


Promotions


7. Exit Plan


8.
Financial Plan



Initial Balance Sheet


Cash

flow Projections


End of year i
ncome statement

Weekly Information A
ssignments


Please refer to this syllabus for information and follow all guidelines on assignments.

Organize your assignments
according to the evaluation criteria below. Please keep a copy of all submission. Grades w
ill be determined by
quality of content, composition, and format. Remember that much of the evaluation of these assignments will
revolve around the extent to which you incorporate innovation into the discussion.

Week 1: Introduction

Overview


Welcome to e
ntrepreneurship. To a large extent, the US history and culture have been shaped by entrepreneur
ial
activity
. Some believe that the first English speaking colony in the US, Jamestown, could be described as an
entrepreneurial venture. The King of Eng
land for
med a company, New Virginia

Stock Company, to seek economic
opportunities in the new world. Many characteristics of early settlers, especially those who migrated west, might be
considered to have traits commonly associated with entrepreneurships.


This fi
rst week will be devoted to introducing you to the field on entrepreneurship and the role of entrepreneurship
in the US. This background will in important in understanding the extent that small companies are important to
individuals, the US and local econo
mies, and US world economic competitiveness.


Readings


Chapters 1 and 2: The Successful Business Plan: Secrets & Strategies (Rhonda Adams)


Assignments


1. Write a one page paper on entrepreneurship and business innovation that includes (1) the relation
ship between
innovation and entrepreneurship; (2) the challenges to innovation when launching a new firm; and (3) how can these
challenges be overcome?


2. Develop a one page plan on what owners of new firms can do to increase the likelihood of their firm

being
successful.


Additional Comments


General


1. The entrepreneurial mind embraces many attributes

the strategies, habits, attitudes, and behaviors that work for
entrepreneurs who build higher potential ventures.

2. Entrepreneurs are men and women of

all sizes, ages, shapes, religions, colors, and backgrounds. There is no one
single profile or psychological template.

3. Successful entrepreneurs share common themes that describe their attitudes and ways of thinking and acting.

4. Rather than being in
born, the behaviors inherent in these six attributes can be nurtured, learned, and encouraged,
which successful entrepreneurs model for themselves and those with whom they work.

5. Entrepreneurs love competition and actually avoid risks when they can, pre
ferring carefully calculated risks.

6. Entrepreneurship can be learned; it requires an apprenticeship.

7. Most entrepreneurs gain the apprenticeship over 10 years or more after the age of 21 and acquire networks, skills,
and the ability to recognize busi
ness patterns.

8. The entrepreneurial mind
-
set can benefit large, established companies today just as much as smaller firms.

9. Many myths and realities about entrepreneurship provide insights for aspiring entrepreneurs.

10. The principal task for the e
ntrepreneur is to determine what kind of entrepreneur he or she wants to become
based on his or her attitudes, behaviors, management competencies, experience, and so forth.

11. Self
-
assessment is the hardest thing for entrepreneurs to do, but if you don't

do it, you will really get into trouble.
If you don't do it, who will?

1
0 Stupid Things Entrepreneurs Do



10. Assume that their idea is the only new idea since sliced bread. Too often, you may get so caught up in the
passion and focus required to build
the company that your idea emerges as the only one that deserves to be funded,
and how dare could anyone turn that down! Keep in mind that if you thought of it, so, most likely, did someone else.
If you acknowledge that, you won't be surprised, and you wil
l be free to focus on spectacular execution.


9. Assume financial, market and sales numbers that make Al Gore and George Bush's math look as good as
Einstein's. You only need one percent of the trillion
-
trillion
-
dollar market, and the current players will

give it to you
on a silver platter. Right. Building the market and acquiring it are two very different things. Just as nature abhors a
vacuum, so does a market, and current players will not give away even a piece of their market without a fight. So
please
, no more funny math. VC's don't pay attention to that anyway.


8. Team? What do you mean that I need a team? Don't you know that my idea will materialize by itself? I am the
team! People make or break a company. The founder(s) need to realize that the te
am is the single most important
contributing factor for success and for VC's considering whether or not to fund the company. I consider it to be the
deciding factor between two business plans with similar attributes. And the leadership and maturity of the
CEO is
the key ingredient on that team.


7. You mean someone has to buy what I make? The technology can sell itself. Its Super Technology! Okay, I
concede
--
who does not like new technology? Hey, for boys its a statement of testosterone, and for women it i
s a way
of telling men that they, too, can play the game just as well. However, technology is a fickle partner. I am not
knocking it (as a former CIO, I should know), but rather lamenting that the half
-
life of a technology seems to be
growing steadily shor
ter and shorter. As a result, value has to come not only from a technological edge but also
--
very quickly
--
from the supply
-
chain and strategic partnerships that extend the half
-
life of a technology all the way to
profit
-
ability.


6. I am a CEO, and I alre
ady know it all, you can tell because I now have the title. Underestimating the cost and
energy required to build a company, as many an exuberant CEO has done, has led to many a downfall. Building
companies is serious business, sort of like making a baked
Alaska in Saudi Arabia. Everything has to be exactly
right, and even then something may go wrong.


5. I only need a small amount of money and don't worry, someone will buy us soon. This assumption is related to
fuzzy math and lack of maturity. You always
need to raise more money than you think you do, as many an Internet
company has discovered. As for being bought out, that, like all things in the future, can be planned for but not
anticipated with certainty.


4. Well, its just a feature today, but everyo
ne will want one of these watchamacallit's. The days of the uncritical
enthusiasm for one
-
feature companies are over, so please stop. You need to have a product, not just one feature;
remember, the 'build it and they will come' idea only worked as long as
there were fewer than three competitors.
Now, unless you have come up with something new, something to rival, say Marc Andreeson's Netscape.com or
Shawn Fanning's Napster, go back to the drawing board.


3. I can't believe you won't give me the valuation!
After all, you do GIVE away money, don't you? Will you fund
me, because we are close to a deal....Right, and we also have a nice bridge we can sell you. Look, you don't get paid
if you don't make money, and it' snot about the valuation. Good VC's tend to b
e fair and will give you decent
valuations. Focus on the plan and concentrate on negotiating like the good businesspersons you are.


2. What do you mean I have to solve a problem and not just create something? Focus closely on solving a specific
problem.
Too many people are busy making vitamins, but not focusing on current pain points. The companies that
seem to focus on the pain points have no problem raising money and being successful.


1. Letting their eggs get in the way of truly running a company. Th
e ego factor is the difference between the right
CEO and the wrong CEO. To assist all of you who have or will sweat blood for the sake of your idea, make sure that
you take a hard look at who leads the company. Remember also, as the company grows, that you

may need to call on
different people to lead the way. Focus on the company's success first. Yes, you may grow, but typically the people
who create companies are not the same kind of people who can lead after the company has become a stable entity.


Seven

Secrets About Entrepreneurs



There are some facts of entrepreneurship or "secrets" not often discussed that can help you to better understand
entrepreneurs, and even why sometimes they are not successful.


Secret #1: Entrepreneurs are not always the hea
lthiest, most well
-
balanced creatures around. The same ingredients
that cause someone to put in the needed work to move mountains and make the impossible possible often make for
unhappy people. Initially, breathing life into an entrepreneurial venture dema
nds an intensity that shifts the scales of
life, putting almost anything other than that dream a distant second. Despite the initial motivations, which sometimes
can be extreme and even unhealthy, most entrepreneurs mellow and mature. The wisdom that comes

with maturity
and experience can lead to a fuller, healthier personal life.


Secret #2: You've got to know when to hold
them and know when to fold them.
Almost always, entrepreneurs start
out extremely sure of themselves. Many entrepreneurs are a little

cocky in the beginning. They have passion and a
commitment to an idea. Only time and getting beaten up tends to bring them down to earth. But tough experiences
test us and teach real lessons. Many of the traits of successful entrepreneurs, especially duri
ng challenging times, are
conflicting. The resolution of that conflict is often a secret to success. The secret is in balancing the conflicting traits
within the narrow scope of workable bounds. There is no perfect formula that can apply to every situation
. The key
is to hone an instinctual sense of conflict resolution between these various traits.


Secret #3: It's only the one or two (us
ually simple) ideas that matter.
So often we make things overcomplicated.
People tend to think of business situations a
s a series of important decisions. The secret is keeping it simple. It is
only one or two, usually simple, ideas that really matter. Certainly management is critical, but if the main ideas don't
work, the whole concept is doomed. One simple idea well execu
ted makes the difference.


Secret #4: Don't underestimate luck and timing
.
Luck comes and goes, and knowing when and how to cash in and
take advantage of it is a critical component of success. Sometimes that knowledge comes from experience, critical
judgm
ent, or good sense, but often it's just plain luck. Luck and lucky timing is without a doubt a significant factor
in many American success stories.


Secret #5: Boredom and believing your own pres
s are the entrepreneur's devils.
The tendency of entrepreneu
rs to
feel infallible while desiring constant action can be dangerous. It's important for entrepreneurs to understand that it's
okay and even good to have time on the sideline. It's important to keep perspective, to look at the big picture, and to
hedge yo
ur bets. Outside forces are always bigger than any of us might think.


Secret #6: Being honest and fair pays off. In the United States, just as anywhere else in the world, people get greedy.
Attempts are made to take advantage of positions of weakness. Th
ese greedy types often try to get the edge on a deal
by renegotiating and tying up transactions for months. While someone might benefit in such a transaction, I believe
that being honorable has been far more beneficial than engaging in a delay tactics and
dirty dealings ever could
have.


Secret #7: Positive cash flow is an entrepreneurial law of nature. Being true to cash needs with careful cash
-
flow
budgeting and monitoring is critical to being a successful entrepreneur. As sure as Newton showed the law o
f
gravity with an apple falling from a tree, entrepreneurs over and over prove that positive cash flow is a critical law
of success.


Week 2: Opportunity Recognition


Overview


Opportunity recognition is the search and capture of new ideas for business s
tart
-
up. Opportunity recognition is
often referred to as the most basic and important aspect of entrepreneurship. No one has specifically determined why
some people are better able to identify ideas that are good business opportunities than others. However
, the concept
of entrepreneurial alertness, which is the ability to see business opportunities overlooked by others without doing a
formal search/analysis, is sometimes used to refer to a set of skills that help entrepreneurs identify good
opportunities. A
t the most basic level, one should be alert to opportunities and develop a perspective on which
opportunities might be worth pursuing. New business ideas may arise from a variety of sources


work experience,
similar business, hobby, education, systematic
search, etc. Having the ability to filter ideas into opportunities is an
important skill.


Reading


Chapter 3: The Successful Business Plan: Secrets & Strategies (Rhonda Adams)


Assignment



Identify two business opportunities. See specifics below. One

idea for a


business should be based on a societal
trend and a different idea for a business should be based on an unmet need in the market. Post the information in the
thread.


1.
Trend Assignment: Identify a market or societal trend and the impact th
at the trend will have on market
opportunities. Examples of broad market trends and societal changes might include the aging of the US population,
changing lifestyles, women in the workforce, health care, deregulation of utilities, genetics research, and
integration
of technology in society. The requirements for this part of the assignment are:



Identify a broad market trend and/or societal change that are currently occurring.



How will this trend and/or societal change affect consumers in the future?



What types of innovation (products or services) can be developed to meet the future demand?


2.
Unmet Need Assignment: Develop an innovative business that can be started to take advantage of a market need
that is currently not being met. NOTE: THIS I
S A DIFFERENT BUSINESS THAT IDENTIFIED IN THE
SECOND ASSIGNMENT. The focus of the project is to develop innovative solutions to market opportunities that
exist due to factors such as limited availability, poor delivery, disruptions in delivery, etc. The r
equirements for this
part of the assignment are:




Description of the opportunity and proposed new innovative business;



Description of customers that will be interested in the innovative business opportunity;




Description of how the innovative busine
ss better meet customer needs than available alternative


Additional Comments


1. The entrepreneurial revolution in the United States is beginning to have a profound impact on the rest of the
world.

2. Entrepreneurs, innovators, and their growing companie
s is the engine of wealth and job creation, innovation, and
new industries, and how venture and risk capital fuels that engine.

3. Entrepreneurship is the principal source of philanthropy in America.

4. The entrepreneurship revolution will drive future e
conomic prosperity worldwide.

5. Entrepreneurs are the creators, the innovators, and the leaders who give back to society, as philanthropists,
directors, and trustees, and who, more than any others, change the way people live, work, learn, play, and lead.


6. Entrepreneurs create new technologies, products, processes, and services that become the next wave of new
industries, and these in turn drive the economy.

7. Entrepreneurs create value with high potential, high growth companies, which are the job cre
ation engines of the
U.S. economy.

8. Venture capital provides the fuel for the high potential, high growth companies.

9. America and the world are at the dawn of a new age of equity creation as evidenced by a 10
-

to 30
-
fold increase
in our capital marke
ts in just 20 years.

10. More than 95 percent of the wealth America has today has been created since 1980.

11. America's 2.5 million millionaires are mostly self
-
made entrepreneurs.

12. It is important to think big enough.

13. It is important to unders
tand the differences between an idea and an opportunity.

14. The www has wonderful sources of information.

15. Ideas are a dime a dozen. Perhaps one out of a hundred becomes a truly great business, and one in 10 to 15
becomes a higher potential business.

The complex transformation of an idea into a true opportunity is akin to a
caterpillar becoming a butterfly.

16. High potential opportunities invariably solve an important problem, want, or need that someone is willing to pay
for now. In renowned venture

capitalist Arthur Rock's words: "I look for ideas that will change the way people live
and work."

17. There are decided patterns in superior opportunities, and recognizing these patterns is an entrepreneurial skill
aspiring entrepreneurs need to develop.


18. Some of the best opportunities actually require some of the least amount of capital, especially via the Internet.

19. The best opportunities often don't start out that way. They are crafted, shaped, molded, and reinvented in real
time and market spa
ce. Fit with the entrepreneur and resources, the timing, and the balance of risk and reward
govern the ultimate potential.

20. The highest potential ventures are found in high growth markets, with high gross margins, and robust free cash
flow characterist
ics, because their underlying products or services add significantly greater value to the customer,
compared with the next best alternatives.

21. Getting the odds in your favor is the entrepreneur's perpetual challenge, and the smaller the business the po
orer
are the odds of survival.

22. Thinking big enough can improve the odds significantly. Higher potential ventures are sought by successful
entrepreneurs, venture capitalists, and private investors.

Week 3:
Business Idea


Overview

If you need ideas f
or a business, there are a number of places you can look. It is important to keep looking for
opportunities until you find the one you want. There are hundreds of sources for ideas. Here are some of the best,
and where you can find them:


1. Yourself.

Keep a list of things that bother you, or you would like to see improved. Is there a business
opportunity hidden there?


2. Family and friends. During conversations, listen for what is bothering them. Ask them if they have ideas for a
business.


3. S
mall business owners in you community. Join civic and other community groups. In talking to these new
friends, some good ideas may be generated.


4. The Yellow Pages telephone directories of big cities. Most established businesses advertise there. You

will see
hundreds of idea - some new, some old. Can you start one of these in your

town or neighborhood? Your library may have copies of directories from some of the larger cities.


5. Business magazines and newspapers. Fortune, Forbes, Business Week
, and the Wall Street Journal report on new
trends and activities in the business world. Check your local library and

get in the habit of spending time there.


6. Small business magazines. Entrepreneur, Inc., and Success report on small businesses and
their problems. You
will find these magazines in libraries, or you can buy recent issues at magazine stands.


7. Opportunity magazines. Magazines such as Extra Income, Income Opportunities, and New Business
Opportunities can be found at newsstands.


8.

“How
-
to” books. There are dozens of books describing how to start a particular business. You will find some in
libraries or book stores. Many are sold by mail order through magazine advertising.


9. New business opportunity fairs. These have become ve
ry popular and are being run in many cities. You will be
able to meet and talk with representatives of companies offering programs to

people like you . Watch for advertisements in you local paper.


10. Trade shows. If you happen to live near a city th
at is hosting a trade sow of interest to you, try to attend. This
may be difficult because some shows take rigorous steps to restrict attendance to people in the trade. But for some,
a business card will get you in.


Readings


Chapters 4 and 5: The Succ
essful Business Plan: Secrets & Strategies (Rhanda Adams)


Assignments


1. By the end of week 3, your team is required to have identified a business on which you write your business plan
(e.g. the semester project). Please write a one paragraph descripti
on of your business idea.


2. Business Plan Review: Please refer to the business plans posted on line. Critically review one of the plans in
terms of strengths and weakness.



Additional Comments


General



1. The business plan is more of a process an
d work in progress than an end in itself.

2. Given today's pace of change in all areas affecting an enterprise, the plan is obsolete the moment it emerges from
the printer.

3. The business plan is a blueprint and flight plan for a journey that converts i
deas into opportunities, articulates and
manages risks and rewards, and articulates the likely flight and timing for a venture.

4. The numbers in a business plan don't matter, but the economics of the business model and value proposition
matter enormously
.

5. The plan is not the business; some of the most successful ventures were launched without a formal business plan
or with one that would be considered weak or flawed.

6. Preparing and presenting the plan to prospective investors is one of the best way
s for the team to have a trial
marriage, to learn about the venture strategy, and to determine who can add the greatest value.

7. The dehydrated business plan can be a valuable shortcut in the process of creating, shaping, and molding an idea
into a busin
ess.

8. A well
-
articulated business plan is an important part of the entrepreneurial process, not an end in itself.

9. Entrepreneurs must make a commitment to turn vision into a written document.

10. The textbook covers what should be included in a busi
ness plan, why, and for whom as well as identifies pitfalls
in business plan preparation process and how to avoid these.


Additional Comments: Dos and Don'ts:



TOP TEN DO'S


1. Prepare a complete business plan for any business you are considering.

2. U
se the business plan templates furnished in each session.

3. Complete sections of your business plan as you proceed through the course.

4. Research (use search engines) to find business plans that are available on the Internet.

5. Package your business
plan in an attractive kit as a selling tool.

6. Submit your business plan to experts in your intended business for their advice.

7. Spell out your strategies on how you intend to handle adversities.

8. Spell out the strengths and weaknesses of your mana
gement team.

9. Include a monthly one
-
year cash flow projection.

10. Freely and frequently modify your business plans to account for changing conditions.


TOP TEN DON'TS


1. Don't be optimistic (on the high side) in estimating future sales.

2. Don't b
e optimistic (on the low side) in estimating future costs.

3. Don't disregard or discount weaknesses in your plan. Spell them out.

4. Don't stress long
-
term projections. Better to focus on projections for your first year.

5. Don't depend entirely on the

uniqueness of your business or the success of an invention.

6. Do not project yourself as someone you're not. Be brutally realistic.

7. Do not be everything to everybody. Highly focused specialists usually do best.

8. Don't proceed without adequate fin
ancial and accounting know
-
how.

9. Don't base your business plan on a wonderful concept. Test it first.

10. Never, never, never skip the step of preparing a business plan before starting.


Reasons Business Plan is Needed


1. To Map the Future
-
A busines
s plan is not just required to secure funding at the start
-
up phase, but is to help you
manage your business more effectively. By committing your thoughts to paper, you can understand your business
better and chart specific courses of action. A plan can de
tail alternative future scenarios and set specific objectives
along with the resources required to achieve these goals.

2. To Support Growth and Secure Funding
-

Most businesses face investment decisions during the course of their
lifetime. A well
-
written

business plan can help investors feel confident in you and your business. The most crucial
component for them will be clear evidence of the company's future ability to generate sufficient cash flows to meet
financial obligations, while operating the busin
ess effectively.

3. To Develop and Communicate a Course of Action
-

A business plan helps a company assess future opportunities
and commit to a particular course of action. The plan can assign milestones to specific individuals and ultimately
help managem
ent to monitor progress.

4. To Help Manage Cash flow
-

Careful management of cash flow is a fundamental requirement for all businesses.
The reason is quite simple
--
many businesses fail, not because they are unprofitable, but because they ultimately
become

insolvent (i.e., are unable to pay their debts as they fall due).

5. To Support a Strategic Exit
-

At some point, the owners of the firm will decide it is time to exit. Considering the
likely exit strategy in advance can help inform and direct present da
y decisions. The aim is to liquidate the
investment, so the owner/current investors have the option of cashing out when they want.


Common Business Plan Mistakes

1. No clear plan for progress


You must make it clear to the reader just what the business i
s, and that you can reach the goals outlined in your plan.
Avoid broad, unsubstantiated statements like "It is a known fact..." If you cannot support statements with good, solid
data, then don't make them. Show prior successes; write detailed sales plans w
ith numbers and schedules. Talk about
previous marketing efforts and compare them with future marketing efforts.



any plans describe where the business is now and talk about the markets they will sell to and how much money they
will make, but present no s
tep
-
by
-
step method to get there. Lenders want real facts. Be able to support everything
you say, every number in your projections.


Vague ideas, circuitous statements and shot
-
in
-
the dark guesses just
won't do.

2. Failing to describe the product in layma
n's terms


Be clear, in simple language, what you are doing or making. In general, product description isn't tool helpful for
running the business, except that it leads you to question how you designed your product, and if it is right for the
market. Avoid

talking about the product too much, and when you do, avoid using a lot of industry jargon. Lenders
will not be inclined to approve a loan or provide financing if they cannot tell what the business is.


Pretending that
you are explaining your product to a
group of 10
-
year olds will do the trick.



3. Lack of market and competitor research


You must show where you fit in your market and you must know the details of your competitors' products.

List your
competitors and identify their strengths and weaknesses
. If possible, include estimates of their market shares and
profit levels. Everyone has competitors, and to say that "We have no competition" in a business plan is almost a sure
predictor of failure. To run a company effectively you have to know them and r
espect them.

4. Incomplete financials


Provide financials that are detailed enough that a reviewer can make guesses about your accuracy, including a clear
and complete list of assumptions that form your financials. You must show actual figures if you hav
e them. It is also
advisable to have monthly figures at least for the first year; while tedious, it shows your foresight in getting through
the slow months of your business. Most importantly, make sure that your numbers make sense. Review them
thoroughly t
o ensure consistency in all sections, and back
-
up with facts and sensible plan every growth assumptions
that you make.

5. Huge appendixes



The business plan should include supporting materials such as brochures, resumes of key managers, technical
papers
, summaries of market research studies, references from people acquainted with the company or founders.
However, the idea that a heavier document is more impressive doesn't work here. Be careful not to go into too much
detail.

6. Bad Grammar


Nothing turn
s off a prospective investor faster than a poorly written business plan. If you think that your writing is
not at par, get a good editor. And review, review and review.

7. Too little detail.

There are some principals who write four
-
page plans and feel the
y have nothing more to say. Use the outline as a
crutch and keep researching and writing. Also, many of you who write four
-
page plans think businesses don't need
plans and that you can do it all from your head. If you want investors, you must have a plan.

8. The overall plan is too long

Avoid being excessively wordy in your plan. Forty pages or fewer is ideal for attracting investors; eighty pages is
definitely too long, especially when you can reduce it just to 15 pages. Stick to the facts, state them cle
arly, and do
not repeat them unnecessarily. The goal is not to write a long business plan, but a good business plan.

9. Overuse of Acronyms

As much as possible, reduce the use of acronyms in the plan, making your readers go back and reread the definition.

If the full name is too tedious to type out, consider renaming it.


10. Redundancy

Organize your plan carefully and put each fact and plan in only one place, the place where it tells the story the best
way. People who read business plans appreciate brevit
y and view it as an indication of your ability to identify and
describe in an organized manner the important factors that will determine the success of your business.



Business Image


Everything connected with your business should lead customers to believ
e their product or service needs will be met
to their satisfaction. Your business facility can make a powerful statement about your business. It should, of course,
be the type of statement that will present your business in a good light. But just what you
mean by "in a good light"
will be influenced by who will see the facility, and by the nature of the business that you are in.

People form opinions and share their opinions, which is a good definition of image. Now the next step is to
determine if your ima
ge is having a positive or negative impact on your business. A good image means sales and
profitability that are rewarding to the owner.

The business image is the aggregate thoughts of people who know something about your business. A good way to
begin to
consider the concept of image is to think about some business you know in your community. Recall some
of your impressions about that business. What would you tell somebody else who is new in town if they were to ask
you, "What do you think about that place
? Should I buy such
-
and
-
such there?" You would probably say some things
like, "Well, the selection is good, but you have to wait in line a long time at the cash register. The store is a little
crowded, and it is sometimes hard to find what you want. It doe
s have an excellent clothing department and has the
appropriate sizes and a lot of variety." If you go back and consider the issues in that conversation, you will begin to
identify some of the characteristics that constitute your image. As you look at thos
e characteristics, I think you can
begin to see that those do have a great impact on your ability to generate sales.

Now we need to consider the issue of "Is the image good or bad?" It is impossible to please everybody, but to be
successful, a business is

going to have to be thought of as excellent in several of the characteristics that people are
going to talk about. Now, if you have agreed with the position that you do have an image and it can be good or bad,
the next question is, "Can you do something a
bout that image if it is not desirable, or are there certain characteristics
that need to be changed?" The answer to this has to be yes, and we can cite some examples of changing images

Many times with an independently owned business, the image of the busi
ness is actually an expression of the image
people have of you, the owner. This is perhaps the toughest area to deal with because it means some personal
changes might need to be made in order to improve your business image. At times, there is cost involved

in
changing the image of a business. However, in most cases, and especially if it involves you, the owner/manager,
making personal changes, the cost is minimal.


Who will see the facility?
If your business regularly deals with retail customers, then the q
uestion of what will put
your business in a good light will be closely related to what kind of business it is. If customers don't enter your
facility, the facility's appearance usually will be less important. But this doesn't mean that you can totally igno
re the
issue, since no matter what your business is,
someone

will see it
-

your employees, suppliers, and certainly yourself.
Thus, even if your facility is Spartan, it should be clean and well
-
maintained, and should serve as an efficient tool of
your busi
ness. If it is otherwise, you risk having suppliers (and employees) question your business's prospects for
long
-
term survival. At a minimum, your business site should not de
-
motivate anyone (including you!) who works
there.


What type of business are you
in?
If you expect your business facility to help customers view your business as you
would like them to, they must see it as evidence that you (rather than your competitor) understand their needs and
desires. The type of facility that helps establish this
image is not the same for all kinds of businesses. If you are
selling "high
-
end" products or services at retail, your customers may expect a spacious and elegant sales area. Not
only that, but any facility that bears your company name
-

even if it does not

directly serve customers
-

may be
expected to live up to a similar standard.

If your business relies on low prices to beat out the competition, a luxurious facility may work to your disadvantage.
Cost
-
conscious customers may feel that your prices couldn'
t possibly be all that low if you can spend big bucks on
your facility. Some businesses that emphasize their low prices have had some success touting the fact that their
stores are barren, cheap
-
looking, or in low
-
rent, out
-
of
-
the
-
way areas.

What kind of
statement would you want your facility to make about the business? What would put it in a good light?
For most small businesses, the answer will probably be somewhere between the pricey mansion, on one hand, and
the "boy
-
is
-
our
-
store
-
ugly" facility, on the

other. Put yourself in your customers' shoes. As a potential consumer of
your company's products or services, what kind of facility would make you want to step inside to do business?

Week 4: Industry Analysis and Competitive Strategy


Overview


Week 4 w
ill be devoted to developing two sections in your term project


(1) the industry analysis and (2)
determination of competitive strategy.


The industry analysis is one of the more challenging sections, but also very important. The goal is to identify
ec
onomic trends in the industry in which your business will operate. Using as much hard date and statistics as
possible, you must demonstrate that the industry is strong, viable, dynamic, and just a good industry in which to
operate. The market research a
ssignment is for you to develop as convincing an argument as is possible that the
industry is viability. The argument should not be subjective (e.g. stating that "I think"), but should have as much
data as possible (e.g. growth rate, consumer spending, nu
mbers of consumers, etc).



Competitive strategy refers to how your firm will compete. I generally recommend keeping the analysis easy. Firms
can compete either on price (e.g. K
-
Mart or Wal
-
Mart) or features (e.g. many niche/specialized small firms). Ni
che
firms, or firms competing on features, commonly charge higher prices than firms competing on price.



Readings


Chapters 6,7, 8: The Successful Business Plan: Secrets & Strategies (Rh
o
nda Adams)


Assignment


Market Research

-

The purpose of this secti
on of the business plan is to present information that demonstrates the
viability of the industry in which the business will operate. The market research assignment is for you to develop as
convincing an argument as is possible that the industry is viabil
ity. The argument should not be subjective (e.g.
stating that "I think"), but should have as much data as possible (e.g. growth rate, consumer spending, numbers of
consumers, etc).


The market research and industry trends section of your business plan sho
uld demonstrate the economic viability of
the industry in which your business will operate. This is one of the first and most important sections of the plan that
should be developed, but is also one of the most difficult. Credible market research showing i
ndustry trends can
provide evidence of industry growth, market strength, and customer demand. This section is also a basis for creating
a credible sales forecast. Specific information in this section would include industry description, industry trends, and

strategic opportunities.


Competitive Strategy

-

the two basic ways in which a company can compete are (1) price (such as Wal
-
Mart) and
(2) features (e.g. selection, convenience, color, etc). The assignment is to explain and justify how your business wil
l
compete.


Risk Assessment
-

Please explain the major assumptions behind your business idea or model and how these are
related to risk exposure. Additionally, explain how your proposed business will manage the risk exposure.


Additional Comments


-

Definin
g Marketing Research



Marketing research involves the gathering of information about a particular market, followed by analysis of
that information. A knowledge and understanding of the procedures involved in marketing research can be
very helpful to the e
ntrepreneur in gathering, processing, and interpreting market information. In addition,
specific objectives should be established. For example, one study has suggested the following set of
questions for establishing objectives for general marketing researc
h:


Identify where potential customers go to purchase the good or service in question.

Why do they choose to go there?

What is the size of the market? How much of it can the business capture?

How does the business compare with competitors?

What impact

does the business's promotion have on customers?

What types of products or services are desired by potential?


Furthermore, the need for marketing research before and during a venture will depend on the type of
venture. However, typical research questio
ns might include the following, which are provided by subject:


Sales


Do you know all you need to know about your competitors' sales performance by type of product and
territory?

Do you know which accounts are profitable and how to recognize a potentia
lly profitable one?

Is your sales power deployed where it can do the most good, maximizing your investment in selling costs?


Distribution


If you are considering introducing a new product or line of products, do you know all you should about
distributo
rs' and dealers' attitudes toward it?

Are your distributors' and dealers' salespeople saying the right things about your products or services?

Has your distribution pattern changed along with the geographic shifts of your markets?


Markets


Do you know

all that would be useful about the differences in buying habits and tastes by territory and kind
of product?

Do you have as much information as you need on brand or manufacturer loyalty and repeat purchasing in
your product category?

Can you now plot, f
rom period to period, your market share of sales by products?


Advertising


Is your advertising reaching the right people?

Do you know how effective your advertising is in comparison to that of your competitors?

Is your budget allocated appropriately f
or greater profit
--
according to products, territories, and market
potentials?


Products


Do you have a reliable quantitative method for testing the market acceptability of new products and product
changes?

Do you have a reliable method for testing the e
ffect on sales of new or changed packaging?

Do you know whether adding higher or lower quality levels would make new profitable markets for your
products?


Achieving Communication Effectiveness



How can owner
-
managers overcome these communication barrie
rs and develop communication
effectiveness? The best way is to understand the steps in the communication process.


Attention
--
The first step in the communication process is attention. Listeners must stop what they are doing
and direct attention to the spe
aker. Listeners are often preoccupied with many tasks they have to do, and if
the speaker is not very interesting, their mind will begin to wander. Other thoughts listeners have constitute
what is called message competition. In order to get a listener's at
tention, a speaker must overcome this
competition.


Understanding
--
Even when individuals pay attention, it is likely they will not know what is being
communicated; they may not understand. How can understanding be achieved? Owner
-
mangers commonly
try to a
ttain it by asking their people, "Do you understand what I have just said?" However, this is the
wrong question to ask because it puts pressure on the person to say yes. Rather, the owner
-
manager should
ask, "What have I just told you?" In this way, the li
stener is forced to reformulate the message. If a lack of
understanding occurs, the owner
-
manager should be able to pick it up at this point.


Acceptance
--
Some people understand the message but are not willing to go along with it; they lack
acceptance. Th
e manager often can tell if someone is going to follow a message just by the way the person
responds. The manager must remain sensitive to feedback the employee gives.


Action
--
The last step in the communication process is action. The person must follow t
hrough and do what
is expected of him or her. Sometimes people try very hard to do what is expected, but because of
unforeseen difficulties, they are unable to do so. At other times, they need further assistance from their
boss. In either event, the commun
ication process does not end until the message is carried out as expected.
The effective owner
-
manager realizes that telling people to do something and then sending them off to do it
does not end the communication process. A completed feedback cycle is nec
essary, in which the action is
checked and it is determined that tasks were done as required.

Week 5: Competitive Advantage and Marketing Plan

T
he reason for the existence of a new business is to solve a problem in the market. Larger problems and better
solutions create higher values


more greater potential for success.


Readings


Chapters 9 and 10: The Successful Business Plan: Secrets & Strategies (Rhanda Adams)


Assignment


Week 5 assignments are in two sections. Each section will become part of th
e business plan. The intent at this
point is for you to begin doing preliminary work on your plan. Your final submission will almost certainly be
revised from these initial submissions. This week the areas for you to submit are (1) Competitive Advantag
e, and
(2) Marketing Plan.


Competitive Advantage


This assignment requires that you evaluate the strengths and weaknesses of 3
-
4 main
competitors. You new business probably should not compete against competitor’s strengths, but against their
weaknesses.

So, (1) identify the competitors, (2) evaluate their strengths and weaknesses, and (3) determine how
you will compete.


Marketing plan
-

Determine (1) the pricing strategy and prices for products/services that you will sell (This requires
that you decide

on what will be sold and the competitive strategy (price versus features) used. The competitive
strategy depends on what your customers want.); (2) the products/services that you will sell; and (3) identify your
suppliers
.


Additional Comments


Identifyi
ng the Competition



There are three types of competitors for a product or service: direct, indirect or substitute, and emerging. Identifying
specifically who these companies are
--
their strengths, weaknesses, and market share
--
will put the new venture in a

better position to be a contender in the industry and particularly in the target market.

Direct Competitors

Those businesses supplying products or services that are the same as or similar to yours, or are a reasonably good
substitute for yours, are dire
ct competitors to the new venture. However, be careful: the term competition is not quite
that simple. Suppose you are going to open an entertainment center that offers virtual reality computer games in a
shopping mall. One possible direct competitor that
comes to mind is a video archade. But if you consider your
venture to be in the entertainment business, you will see that other direct competitors for the consumer dollars you
are seeking are movie theaters, miniature golf courses, bowling alleys, and vide
o rental stores. That certainly
complicates the picture, and you will need to have a strategy for competing against each different type of competitor
you have now identified.

Indirect or Substitute Competitors

Indirect competitors may not even be in the
same industry as the new venture but do compete alongside it for
consumer dollars. For example, consumers may choose to spend their limited dollars at the movies rather than on an
expensive restaurant. Or, a business looking for videoconferencing capabilit
y may choose an Internet
-
based system
delivered through an application service provider (ASP) rather than purchase and maintain equipment. When you're
considering who your competitors might be, you must look outside the immediate industry and market for
al
ternatives to what you offer.

Emerging Competitors

Assess not only the existing competition but also the potential for future competition
--
emerging competitors. In
many industries today, technology and information are changing at such a rapid pace that t
he window of opportunity
for successfully starting a new venture closes early and fast. Consequently, the entrepreneur must be ever
-
vigilant to
new trends and new technology, both in the industry in general and in the specific target market. For example, o
ne
engineer/entrepreneur spent several years developing a video
-
streaming technology. Now that he is ready to
consider commercializing that technology, he has discovered to his dismay that not only are there competing (and in
some cases better) technologie
s already in the market through major companies like Microsoft, but there are
emerging technologies from major companies that will make his technology obsolete in a very short time. How do
you avow such a calamity? You need to stay in touch with your indus
try and look not only at technologies already in
the market, but look at what types of research and development projects are going on at major research universities
that might foretell a shift in technology. Journals like MIT Technology Review regularly lo
ok ahead to see where
the world of technology is going. In other industries, trade journals, conferences, and trade shows are excellent
sources of emerging competitors.


Developing Advertising Appeals



It is also important for the small business owner to

keep advertising in perspective. In so doing, he or she must
remember that people simply do not buy things; they purchase goods and services that will satisfy their wants.
People buy value. Thus, an advertisement must communicate: "Buy at our store; we ha
ve the value you want." In
more explicit terms, people want the following: Convenience and comfort, Love and friendship, Security, Social
approval and status, Life, health and well
-
being, Profit, savings, and economy and Stylishness.


Of course when doing

such, the owner
-
manager must keep in mind the three types of customers: those who are
thrifty (bargain appeal); those who seek service (convenience appeal); and those who look for quality (snob appeal).


Another factor the small business owner
-
manager ne
eds to keep in mind is that a good advertisement has certain
qualities:


1
-

Simplicity
-

People can understand the message easily.

2
-

Informative
-

The message tells people something valuable or useful.

3
-

Enthusiastic
-

The message is optimistic, sh
owing that the company believes in its product or service.

4
-

Truthful
-

The information is factual and honest.

5
-

Provides essential answers
-

The message tells who is providing what, when, where, how and why. This makes
the nature and purpose of the
advertisement clear to people.


By interpreting products or services in terms of these appeals, the small business owner
-
manager can begin to focus
on the market niche the store is trying to capture.


Defining Marketing Research


Marketing research invol
ves the gathering of information about a particular market, followed by analysis of that
information. A knowledge and understanding of the procedures involved in marketing research can be very helpful
to the entrepreneur in gathering, processing, and inter
preting market information. In addition, specific objectives
should be established. For example, one study has suggested the following set of questions for establishing
objectives for general marketing research:


Identify where potential customers go to p
urchase the good or service in question.

Why do they choose to go there?

What is the size of the market? How much of it can the business capture?

How does the business compare with competitors?

What impact does the business's promotion have on customer
s?

What types of products or services are desired by potential?


Furthermore, the need for marketing research before and during a venture will depend on the type of venture.
However, typical research questions might include the following, which are provi
ded by subject:


Sales


Do you know all you need to know about your competitors' sales performance by type of product and territory?

Do you know which accounts are profitable and how to recognize a potentially profitable one?

Is your sales power deploy
ed where it can do the most good, maximizing your investment in selling costs?


Distribution


If you are considering introducing a new product or line of products, do you know all you should about distributors'
and dealers' attitudes toward it?

Are your

distributors' and dealers' salespeople saying the right things about your products or services?

Has your distribution pattern changed along with the geographic shifts of your markets?


Markets


Do you know all that would be useful about the differences

in buying habits and tastes by territory and kind of
product?

Do you have as much information as you need on brand or manufacturer loyalty and repeat purchasing in your
product category?

Can you now plot, from period to period, your market share of sale
s by products?


Advertising


Is your advertising reaching the right people?

Do you know how effective your advertising is in comparison to that of your competitors?

Is your budget allocated appropriately for greater profit
--
according to products, terri
tories, and market potentials?


Products


Do you have a reliable quantitative method for testing the market acceptability of new products and product
changes?

Do you have a reliable method for testing the effect on sales of new or changed packaging?

Do

you know whether adding higher or lower quality levels would make new profitable markets for your products?

Week 6: Finance

Week 6 focuses on developing your start
-
up balance sheet. The balance sheet should reflect (1) how much money is
needed to start

the business (e.g. assets) and (2) where the money will come from (e.g. debt versus equity).


Readings


Chapters 16 and 19: The Successful Business Plan: Secrets & Strategies (Rhanda Adams)


Assignment


Develop the balance sheet as it would look the da
y before your business opens. This would reflect all equipment
purchased and capital raised. The process is (1) list all items that you would spend money on to start your business
(e.g. equipment, marketing, wages, supplies, remodeling, legal, etc.), (2)

identify how much all of the items will
cost, (3) total these items (=total assets), and (4) determine where you will raise the capital (=liabilities and net
worth).

The three central finance questions for small firms are (1) how much money is needed, (2
) where will the
money come from, and (3) what are the risk/return trade
-
offs associated with each funding alternative.


Additional Comments

Assessing Financial Performance



Once an effective accounting system is in place, a firm's owner must determine h
ow to use the data it generates most
productively. Mark Twain said of a person who doesn't read, "He who does not read is no better off than he who
cannot read." An owner who has good accounting system but doesn't use it is in the same situation. This sect
ion
provides a framework for interpreting financial statements, designed to clarify these statements for individuals with
varied accounting backgrounds and experience.

An owner needs to understand the financial effect
-

positive or negative
-

that managem
ent decisions may have.
Ultimately, the results of operating decisions appear in a firm's financial statements.

The exact methods used to interpret financial statements can vary, with the perspective of the interpreter determining
what areas are emphasize
d. For example, if a banker and an entrepreneur were analyzing the same financial
statements, they might focus on different data. But whatever perspective is taken, the issues are fundamentally the
same and are captured in the following four questions:

1.

Does the firm have the capacity to meet its short
-
term (one year or less) financial commitments?

2. Is the firm producing adequate operating profits on its assets?

3. How is the firm financing its assets?

4. Are the owners (stockholders) receiving an a
cceptable return on their equity investment?

Answering these questions requires restating the data from the income statement and the balance sheet in relative
terms, or financial ratios. Only in this way can comparisons be made with other firms, with indu
stry averages, and
across time. Typically, the industry averages or norms used for comparison purposes are those published by
companies such as Dun & Bradstreet, Robert Morris Associates, or Standard & Poor's.

Pricing Strategies

Premium Pricing
-

U
se a hi
gh price where there is uniqueness about the product or service.

This approach is used
where a

substantial competitive advantage exists.

Penetration Pricing
-

The price charged for products and services is set artificially low in order to gain market shar
e.
Once this is achieved, the price is increased.

Economy Pricing
-

This is a no frills low price. The cost of marketing and manufacture are kept at a minimum.
Supermarkets often have economy brands for soups, spaghetti, etc.

Price Skimming
-

Charge a hi
gh price because you have a substantial competitive advantage. However, the
advantage is not sustainable. The high price tends to attract new competitors into the market, and the price inevitably
falls due to increased supply. Manufacturers of digital watc
hes used a skimming approach in the 1970s. Once other
manufacturers were tempted into the market and the watches were produced at a lower unit cost, other marketing
strategies and pricing approaches are implemented.

Perplexing Pricing Strategies

Part art,
part science, pricing is perhaps the most important of the four Ps of marketing. It's such a critical piece of
the mix that developing and refining your strategy can be agonizing. There are so many possibilities, but only one
price.

Charge a lot more for i
t, and people will think it's better.

Whether you're looking at bottled water, cosmetics,
clothing, or athletic equipment, you'll see this strategy in use everywhere today. If you're seeking a way to increase
revenue, try upgrading your packaging and setti
ng your price 50 percent higher than your competitors'. No
explanation to the consumer is necessary. People will see your significantly higher price, assume your product
must

be significantly better, and you might see an instant increase in both revenue an
d units sold.

Create a fake price, then give a fake discount.

This strategy has been a mainstay of the travel industry for quite some
time, with hotels being the most successful at employing it. It's also widely used in the consumer goods industry,
particu
larly at outlet malls or other "discount" stores. And it's so easy to implement! You simply invent a new,
staggeringly high price for your product and display it as the "retail price" (or "rack rate," as it's known in the travel
industry). The actual price

you charge for the product doesn't change, but it's displayed now as a discount price.
Your customers go wild over the amount they save and feel as if they have money left over to buy more from your
store. You make a lot more money without even changing y
our price.

Match your competitor
--

even if the products are different.

Are you having trouble with a pesky competitor that has
added more bells and whistles to its product? Don't worry; you don't have to change your product. Just raise your
price to match

the competitor's price! Customers are guaranteed to assume the products are the same. This strategy
is underused in most industries, but the folks in electronics and software have mastered it. But be warned, you must
match the price to the penny. A variat
ion in price of even one cent will cause the consumer to wonder. For this
strategy to work, the prices must be
exactly the same.


Pretend you made your product better.

This strategy is also known as "Old Faithful." When all else fails, raise your
price, th
en market the product as "New! Improved!" There is no way consumers can prove you didn't change a thing.
If you tell them the product is better, they'll believe you. This strategy works best if you can communicate the
improvement without changing your prod
uct packaging. A packaging change will just eat away at your increased
revenue.

Charge more for buying more.

This is a great way to increase your price and your order size at the same time. Take a
product with an uneven price, say $3.69, and put a big sign

over it that says, "Special! 2 for $7.75." Trust me, your
customers will not stop to do the math. Your 10 percent price increase goes unnoticed, and your customers buy
twice the amount of product
--

happy they are saving money. This strategy works in rest
aurants, too
--

just create a
"meal deal" that's actually priced higher than the à la carte components. Be warned, this strategy can backfire if you
use rounded numbers, such as $2 or $4. Consumers will add if it's not too hard
--

they aren't stupid.

Charg
e extra for mandatory parts.

This strategy is used widely in the automotive industry. You set a low price for
your product, say $100 for a car. But if you want windows, it's $20,000 extra. Now you must stick to your guns on
this one, because some customers

will try to buy the car without windows. You simply say, "We have none of those
in stock right now." This strategy can work well for any product with more than one piece to it; I don't know why
more businesses haven't figured it out yet.

Change the price
on the shelf, but not in the computer.

A favorite in any business where barcodes are scanned at
checkout, this strategy is passed off as an oversight. Even with a background in pricing, I fall prey to this strategy
repeatedly. You mark the price of the ite
m down on the shelf tag but "forget" to enter the price in the computer.
Customers stock up on the sale item without ever realizing they were charged full price. Some customers will figure
it out and get mad, but with this kind of revenue increase, surely
you can afford to lose a few picky customers.
Although I suspect this strategy is illegal, try auditing your grocery store receipt next week, and you'll see what I
mean. It really works!

Add a toy and charge whatever you want.

This guerrilla attack on pare
nts' wallets uses children's high
-
pitched voices
as the weapon. It's particularly effective with cereals, fast food, and toys. This strategy can't go wrong. It's even
considered child abuse in some states to make your children eat generic
-
brand cereals if
a toy
-
carrying, higher
-
priced alternative is available.

Scare people, then charge whatever you want.

If you tell people they will suffer if they don't purchase your product,
your sales will immediately increase. The more dire the consequences, the better t
he results
--

to a certain extent. If
you claim consumers will die without your product, you will have limited success. Consumers are much more afraid
of going bald, gaining weight, getting wrinkles, and so forth. This is a sure
-
fire way to pass off a pric
e increase in
hard economic times. Pick an unpleasant physical side effect, and you're on your way to a more positive revenue
stream.


Week 7: Finance


Cash Budget and Income Statement


Research studies consistently indicate that poor financial managemen
t is a leading cause of small firm distress and
failure. Inadequate or inappropriate capitalization leads to illiquidity.


Three core principles of entrepreneurial finance are (1) more cash is preferred to less cash; (2) cash sooner is
preferred to cash l
ater; and (3) less risky cash is preferred to more risky cash. One additional item to consider is that
cash with fewer restrictions may be preferred over cash with more restrictions. Cash and cash flow are extremely
importance to entrepreneurial firms. Wit
hout cash, firms can’t pay bills. Without consistent and reliable cash flow,
firms are unable to develop financial or operating plans.



Readings: No new readings


Assignment


Develop a financial plan for the innovative business that is being proposed.
Requirements for this assignment
include:




Monthly

cash

budget for the first year.



End of year income statement


Additional Comments


General


1. Cash is king and queen. Happiness is a positive cash flow. More cash is preferred to less cash. Cash sooner is

preferred to cash later. Less risky cash is preferred to more risky cash.

2. Financial know
-
how, issues, and analysis are often the entrepreneurs' Achilles' heels.

3. Entrepreneurial finance is the art and science of quantifying value creation, slicing
the value pie, and managing
and covering financial risk.

4. Determining capital requirements, crafting financial and fund
-
raising strategies, and managing and orchestrating
the financial process are critical to new venture success.

5. Harvest strategies
are as important to the entrepreneurial process as value creation itself. Value that is unrealized
may have no value.


Due Diligence



Once you and your prospective investors have reached a preliminary agreement, your investors will begin what is
known as

due diligence. Due diligence is the homework investors complete before a final decision is reached. The
process includes background checks on the management team, industry studies, analysis of the competition,
identification of major risks, and other reas
ons, often intangible, why the investments should not be made. In
essence, due diligence is a detailed evaluation of your business plan. Expect at least two to three months to pass
before the exercise is complete.

The most important variables in an invest
or's decision to finance a venture are the integrity, competence, and
commitment of the entrepreneur and his or her management team. Be scrupulously honest about even the smallest
details. One lie and it's over. One bluff and it's over. The key to raising
capital is lowering risk, not hyping the
upside.

But due diligence is a two
-
way street. Entrepreneurs should be equally concerned about the qualifications of their
investors. your banker, accountant, and attorney should know the local venture capital play
ers cold. They will be
glad to steer you toward the good guys and away from the bad. If your prospective investors don't have impeccable
reputations, you need to look further. If you are dealing with angels, ask for references and bio
-
sketches describing
t
heir professional and educational backgrounds. Talk to each of the references.

Remember that you will be living with your investors through stressful times. Finding the right investors is worth
the effort! The most valuable home
-
work you can do is talk to

other entrepreneurs bankrolled by you potential
investors. Ask your investors for a list of their portfolio company CEOs, including those that struggled. If they won't
provide you with references, you've learned all that you need to know
-
keep looking. Cal
l all the CEOs and ask the
following questions:

• Have your investors been of any assistance to you beyond their money? How?

• How have they reacted when setbacks and disappointments came?

• If you had it to do over again and had some choices, would you

bring them on board?

Given the challenges of turning dreams, blood, sweat, tears, and money into market leaders, you should not be
surprised to hear a story or two which gives you pause. Companies do fail. CEOs do under perform for extended
periods of ti
me and over the course of multiple rounds of funding, ultimately straining relationships with any
investor. But you should be hearing vast preponderance of comforting stories
-
stories of support, contribution,
patience, understanding, and mutual sacrifice,
even friendship. If you do, you can be assured that your prospective
investor is not a vulture capitalist.


These questions focus on the relationship between investors and the management they bet on. They are designed to
help you decide whether your inves
tors will make good partners. Satisfying yourself on these issues is part of the
subtle distinction between buying capital and selling stock.


Cash Flow

Entrepreneurs and small business managers must concentrate on cash flow in addition to profit and loss

statements.
For a start
-
up, an early or growth
-
stage business, or a small business, cash is king. What sticks to the cash register is
what counts. Therefore, predicting and measuring cash flow represents a key financial control point. Unfortunately,
most
entrepreneurs and small
-
business people do not know how to accurately predict or measure cash flow and often
confuse pretax profits (EBIT) with cash flow.

Whether you are preparing a business plan to raise equity or debt financing or you are doing your ann
ual or
quarterly forecasts or budgets, do a cash flow analysis. Also, forecast and measure cash balances plus receipts minus
disbursements on a monthly basis. This allows you to anticipate surpluses or deficits which impact payables and
bank borrowings.

Ra
ther than revenues and expenses, the cash flow analyzes


receipts and disbursements. Receipts and disbursements
are not only driven by revenues and expenses but by such balance sheet items as accounts receivable, inventory,
accounts payable, accruals, capi
tal expenditures, debt service, bank borrowing, and paid
-
in capital.

Whether you prepare an annual or monthly cash flow to project internal equity or debt financing or a weekly cash
flow to project internal needs, you should use a similar format. Start wit
h beginning cash at a certain date. Then add
receipts to beginning cash. Receipts would include collection of accounts receivable (based on net sales or
revenues), bank loans, and paid
-
in capital. Based on industry tradition or company experience, what per
centage of
each month's sales are collected over each of the next three months?

Subtract disbursements from receipts and add or subtract the difference to the beginning cash balance to arrive at an
ending cash balance for the period. Disbursements would in
clude payroll, payroll taxes and benefits, payment of
accounts payable, repayments of loans, interest, capital expenditures, dividends, and return of capital. Payroll
-
related
disbursements can be categorized by department or hourly versus salary or some ot
her significant description.
Payment of accounts payable can be categorized by factory or raw material costs, advertising, rent, or any line
-
item
or combination of line
-
items. If it proves difficult to predict when a particular payable will be paid, consid
er due
dates, terms, past history, and industry tradition.


Have your accountant assist in formatting the cash flow. On a monthly basis, compare actual cash flow to forecast or
budget, note variances, and take corrective action. Look at the numbers behind
the numbers. For example, perhaps
February collections were below forecast and March payments of payables above forecast. Why was this the case?

An understanding of the dynamics behind your firm's cash flow will help you obtain debt and equity financing,
a
void unpleasant surprises, and better run your business. Because of limited financial resources, the high cost of
financial distress, critical risks associated with major decisions, and high failure rates, cash
-
flow forecasting and
reporting are essential
key control points for small businesses and start
-
ups.

significantly from the actual outcomes once they start trading.


Common mistakes include:




Over
-
optimistic sales



Poor understanding of internal cost structures



Over
-
optimistic expectation of paymen
t by debtors



Poor credit control procedures, leading to slower than planned collection from debtors



Under
-
estimates of initial capital required.


Sales, Costs, and Profits


In comparing actual sales with forecast sales, entrepreneurs forecast sales tha
t were twice the actual sales achieved.
Entrepreneurs were over
-
optimistic about their business ideas.

Entrepreneurs were better able to forecast costs, with actual costs being about 33 per cent more than forecast costs
(however, these actual costs were b
ased on sales revenues that were 100 per cent less than forecast).

The impact of over
-
estimating sales and under
-
estimating costs was that, rather than achieving profitability, most
new businesses achieved losses during the first year of trading.


Workin
g Capital Requirements


The research also examined the ability of entrepreneurs to forecast working capital requirements.

Entrepreneurs typically expected to be paid faster than was actually the case. The consequence of lower sales and
slower payments wa
s that the entrepreneurs themselves became increasingly slow in paying their creditors.

In addition, their stock turnover was slower than expected (the number of days it takes to sell stock increased).


Capital Requirements


Entrepreneurs typically under
-
estimated the amount of funding required to get their business up and running. Actual
investment in fixed assets was over 90 per cent more than forecast. The combined consequence of this, and the
losses incurred during trading, was that the entrepreneur n
eeded more funds sooner than expected. These additional
funds were typically in the form of debt, with bank debt typically being six times higher than forecast by the end of
the first year's trading.

For those businesses that survived, actual bank debt wa
s only marginally higher than forecast at the end of the first
year. This large increase in the use of debt financing meant that the ratio of debt investment to equity investment
was typically 100 per cent rather than the forecast 50 per cent.


In those b
usinesses that failed, the entrepreneur's ability to forecast sales, costs, profitability, fixed capital
requirements and working capital requirements was worse than the average described above. In particular,
businesses that failed had much higher costs t
han were actually forecast. Also, their working capital needs were
much higher than forecast. And they were worse at collecting payments from customers (waiting on average eight
months for payment).

Solutions


The solutions to these common problems are si
mple:




Over
-
optimistic sales

get hard evidence to underpin your sales forecasts and only include "real" sales




Poor understanding of internal cost structures

work through the calculations yourself so that you
understand where the numbers come from



Over
-
optimistic expectation of payment by debtors

no one pays in 30 days! Allow for slippage



Poor credit control procedures, leading to slower than planned collection from debtors

very few
customers pay without being chased, even gently



Under
-
estimates of ini
tial capital required

whatever you think you need, double it!

Week 8:
Case Study


Dealing with Adversity and Ethics

Adversity due to issues such as death, sickness, divorce, theft, fires, recessions, etc is part of life. The question isn't
whether we wi
ll have adversity, the question is how should we make the adversity that we will face. As a business
owner, you must be prepared to manage adversity when it occurs. At the core of dealing with adversity is


what do
you (as owner of a business) want? Do yo
u want to remain in business or not. If you want to remain in business,
then what actions must be taken to insure business continuity?


Small business owners will be confronted with ethical issues many times. How much should you tell a customer or a
banke
r, especially if the consequences are detrimental to the business. To what degree is "fudging" on taxes
acceptable? In what ways are ethics based on cultural norms that can be "bent". When might it be okay to not be
completely honest if doing so will save
the business? If something is legal, is it also ethical?


Readings


Chapter 14: The Successful Business Plan: Secrets & Strategies (Rhanda Adams)


Assignment


Please watch the attached video on dealing with adversity. Next, post your analysis of the sit
uation described in the
assignments for week 8 area. This is to be completed individually. Also, please respond to at least one classmates
answer.


Part I


A young man approach me for some advice. He had owned a small retail business in a relatively sma
ll community
for about the past 5 years. The business was profitable enough to support one person with a reasonable standard of
living. He had, however, recently made some bad decisions and received bad news that was causing him financial
and personal pr
essures. The business and personal adversity were unquestionably linked, especially in how they
interrelated and affected the future of this business. Here is a brief review of the adversity that he was experiencing
-



-

He recently expanded his business

to a second location in another community located about 40 miles from
his original business. This required an investment of about $7000. About ½ of this investment was stolen.
He had no insurance to cover the theft.

-

He expanded his product line into me
rchandise that was unrelated to his original business. He did this
because he believed there was a market for the new products that he began selling. The investment for this
merchandise totaled about $5000. He guessed wrong and much of this merchandise
could not be sold.

-

Because he was certain that his modestly successful business would become even more successful, the
borrowed about $5000 to purchase new household furniture and moved into a new apartment that cost
about $1000/month more than he had been

paying.

-

He recently had loaned merchandise for a community event that he sponsored. About $3000 of the
merchandise that he loaned was stolen.

-

He recently had been picked
-
up for an OWI (spent the night in jail). The outcome was that

o

his legal fees cost
about $2000;

o

he was required to undergo testing for alcohol addition that cost about $1000.

o

He was required to install into his car a breathing apparatus that assessed whether he had been
drinking. This cost him about $500.

o

Because of his conviction, he w
as required to attend driving school and lost his drivers license.
His car insurance premiums increased dramatically due to his OWI.

o

He recently received a letter from a former girl friend that he hadn’t seen for about 6 months. She
told him that she was

pregnant with his child.


All of these business and personal issues led to significant financial challenges and personal stress. Because of poor
decisions and theft, he was behind in paying suppliers and landlord. He was selling inventory to generate ca
sh to
pay bills, but not replenishing the inventory. After reviewing this information, he asked the following question:
What should I do?


Develop a process or set of criteria that can be used to help this young man decide on what to do.

What do you thi
nk would be the appropriate response?


Part II


The challenges that this young man was facing had financial consequences. He was currently about $10,000 in debt.
He wanted to apply for a $10,000 line of credit at a local bank. The problem was that he kn
ew that


-

he would not be approved for the line of credit if he told the entire truth

-

he could tell part of the story, but not tell the banker everything.


He was absolutely sure that his business would survive if he was approved for the $10,000 line of cr
edit. He was
willing to do whatever was necessary to insure this success. The question was how much should he tell the banker
when he applied for the line of credit.


-

Briefly review the ethical dilemma faced by this young man.

-

Specify the criteria that h
e should use to make his decision.

-

If asked, what would you recommend and why?



Additional Comments


General


1. The vast majority of CEOs, investors, and entrepreneurs believe that a high ethical standard is the single most
important factor in long
-
term
success.

2. Historically, ethical stereotypes of businesspeople ranged widely, and today the old perceptions have given way to
a more aware and accepting notion of the messy work of ethical decisions.

3. Entrepreneurs can rarely, if ever, finish a day wi
thout facing at least one or two ethical issues.

4. Numerous ethical dilemmas challenge entrepreneur’s at the most crucial moments of survival, like a precarious
walk on a tightrope.


Developing an Ethics Program


Having a code of ethics with an implemen
tation program is the minimum requirement for reputation management.


Find a champion: Unless a senior person is prepared to drive the introduction of a business ethics policy, the
chances of it being a useful tool are not high.


Get endorsement: Manag
ement must be enthusiastic not only about having such a policy but also about receiving
regular reports on its operation.


Produce a code of conduct: This should be distributed in booklet form or via a company intranet.


Try it out: The code needs pilot
ing
-

perhaps with a sample of employees drawn from all levels and different
locations.


Make it Known: Publish and send the code to all employees, suppliers, and others. State that the company has a
code and implementation program that covers the whole
company. Put it on your Web Site and send it to partners.


Make it work: Practical examples of the code in action should be introduced into all company training.


Adopting Good Causes Can Promote Your Firm

Have you considered marketing your business thr
ough community involvement? This strategy can pay important
dividends by helping you become known in a beneficial way. In fact, you may be surprised by the degree that
goodwill gestures can help your company prosper. By giving back to the community, your b
usiness may acquire a
"halo effect. If people are perceived to be good about community service, the assumption is that they're moral,
ethical people and their product and/or service is worthwhile.


The 1% Solution
-

Donate
1% of equity, profits and staff ti
me to worthy projects and organizations through a
philanthropic arm, salesforce.com/foundation.

This is also good PR.


Recruiting Goodwill



The following steps can help you to create a halo effect for your start
-
up.


Do your homework.

Conduct research

to be sure you select a charity that deserves your support

and that you'll feel comfortable working with. To check an organization's credentials, start by

visiting its Web site, reading its materials and meeting with its executives. Ask for verification

of

how much of each donated dollar is spent on problems it's trying to solve.

Ask for references from

benefactors.



Set goals
-

As with all limited resources, decide what you'd like to accomplish with your

donations of time, energy and funds. It's w
ise to plan and implement goodwill gestures just like

any o
ther business
-
related activity.


Look for a good

match
-

Small businesses must have a giving strategy that's consistent with their

overall strategic objectives.

A firm's philanthropic activiti
es should parallel its marketing efforts. If you
don't have money to spare, donate time instead. Learn where industry opinion shapers and decision makers
spend time, then become involved in the same concerns, such as serving with them on a charity's board
or
event
-
planning committee.


Start early
-

Philanthropy and community service are important cultural values that should be

incorporated in a business from its inception.

Announcing good intentions sooner rather than later

has marketing or public
-
relati
ons value, since your business will become known as a good

corporate citizen and its business efforts will be viewed more favorably.


Know when to say when
-

Know when and where to draw the line on how much time and energy

you donate and keep your priori
ties straight. There's a danger of getting carried away so that your

efforts do more harm than good to your business.




Week 9: Business Analysis


You are aware that >60% of new small firms are no longer in operation after a few years. So, the odds are

against
new small firms having longevity.

We also see new small firms that are widely successful. We should ask the question of why ... why did pets.com fail
while companies like Google and YouTube succeed? What are some companies doing right, what are o
ther
companies doing wrong, and why didn’t those companies that fail learn?


Assignment


Small Firm Business Analysis


Your assignment is to identify a small firm and write an analysis on why the firm has been successful or failed
business. Select a busi
ness that is both of interest to you and the class. Two objective of this assignment are lessons
that can be learned and applied from the business that is evaluated


Additional Comments


Causes of Failure


Choosing a business that isn't very profitable.

E
ven though you generate lots of activity, the profits never materialize
to the extent necessary to sustain an on
-
going company.

Inadequate cash reserves.

If you don't have enough cash to carry you through the first six months or so before the
business star
ts making money, your prospects for Success are not good. Consider both business and personal living
expenses when determining how much cash you will need.

Failure to clearly define and understand your market, your customers, and your customers' buying hab
its.

Who are
your customers? You should be able to clearly identify them in one or two sentences. How are you going to reach
them? Is your product or service seasonal? What will you do in the off
-
season? How loyal are your potential
customers to their curr
ent supplier? Do customers keep coming back or do they just purchase from you one time?
Does it take a long time to close a sale or are your customers more driven by impulse buying?

Failure to price your product or service correctly.

You must clearly defin
e your pricing strategy. You can be the
cheapest or you can be the best, but if you try to do both, you'll fail.

Failure to adequately anticipate cash flow.

When you are just starting out, suppliers require quick payment for
inventory (sometimes even COD).

If you sell your products on credit, the time between making the sale and getting
paid can be months. This two
-
way tug at your cash can pull you down if you fail to plan for it.

Failure to anticipate or react to competition, technology, or other changes i
n the marketplace.

It is dangerous to
assume that what you have done in the past will always work. Challenge the factors that led to your Success. Do you
still do things the same way despite new market demands and changing times? What is your competition d
oing
differently? What new technology is available? Be open to new ideas. Experiment. Those who fail to do this end up
becoming pawns to those who do.

Overgeneralization.

Trying to do everything for everyone is a sure road to ruin. Spreading yourself too t
hin
diminishes quality. The market pays excellent rewards for excellent results, average rewards for average results, and
below average rewards for below average results.

Overdependence on a single customer.

At first, it looks great. But then you realize y
ou are at their mercy. Whenever
you have one customer so big that losing them would mean closing up shop, watch out. Having a large base of small
customers is much preferred.

Uncontrolled growth.

Slow and steady wins every time. Dependable, predictable gr
owth is vastly superior to spurts
and jumps in volume. It's hard to believe that too much business can destroy you, but the textbooks are full of case
studies. Going after all the business you can get drains your cash and actually reduces overall profitabi
lity. You may
incur significant up
-
front costs to finance large inventories to meet new customer demand. Don't leverage yourself
so far that if the economy stumbles, you'll be unable to pay back your loans. When you go after it all, you usually
become less

selective about customers and products, both of which drain profits from your company.

Believing you can do everything yourself.

One of the biggest challenges for entrepreneurs is to let go. Let go of the
attitude that you must have hands
-
on control of al
l aspects of your business. Let go of the belief that only you can
make decisions. Concentrate on the most important problems or issues facing your company. Let others help you
out. Give your people responsibility and authority.

Putting up with inadequate
management.

A common problem faced by Successful companies is growing beyond
management resources or skills. As the company grows, you may surpass certain individuals' ability to manage and
plan. If a change becomes necessary, don't lower your standards ju
st to fill vacant positions or to accommodate
someone within your organization. Decide on the skills necessary for the position and insist the individual has them.

Every business starts out with high hopes for success, and entrepreneurs spend vast amounts
of time, energy and
creativity to make that success a reality. Unfortunately for most start
-
up businesses, that hoped
-
for success never
materializes. About 60 percent of all businesses fail within the first two years and for certain industries, such as the

restaurant industry, the failure rate is even higher. Although chances for business failure diminish as time passes,
most businesses are never safe. Competition and changing market conditions ensure that the struggle for success
never ends.

The reasons fo
r business failure vary, but firms such as Dun & Bradstreet suggest several most common reasons for
business failure:

● Bad or improper management practices, including poor cost controls’

● Poorly focused and executed marketing or inadequate marketing

● Po
or location

● Failure to invest in new products and efficient technology

● Lack of adequate financing

Of these common reasons for business failure, lack of adequate financing is the easiest to observe. Indeed, lack of
financing can lead to problems in othe
r areas. For example, a retailer might choose a less
-
than
-
ideal location for its
more affordable lease. But in an industry where location is key, this might not be such a bargain for the retailer.

Despite the discouraging statistics on business failures, t
here is no shortage of entrepreneurs willing to test their
skills in the marketplace. The Internal Revenue Service reports that the number of small businesses is increasing and
in 1997 reached over 23.7 million business tax returns. Overall, the number of
small businesses is growing at a rate
of over 2 percent annually, approximately equal to the general population growth.

Six Rules of How Not to Fail


1
-

Seek out quality, supportive relationships. Entrepreneurs go through more ups and downs than a roller
coaster.
Without the supportive relationships of a spouse, significant other, business coach, family, mentors, or friends it can
be a lonely and confidence
-
shattering journey.


2
-

Pick a strategy for every step of the way. Entrepreneurs spend most of thei
r time focusing on the projected
growth of their company. They don't spend enough time thinking about how far they are willing to go, in terms of
time and money, on their startup. Success may always be right around the corner, but knowing when to pull the
plug
can save you many sleepless rights.


3
-

Volunteer in your community. Building a successful company will depend heavily upon the quality and diversity
of your relationships. I have found no better way to build personal relationships that ultimately l
ead to valuable
business relationships than through my volunteer efforts in the community.


4
-

Maintain your health and well
-
being. Entrepreneurs tend to invest far too much of their time and energy into the
business and forget about their own well
-
being.


5
-

Diversify your interests. Pursue your hobbies and interests as passionately as you pursue the growth of your
startup. It will help your brain to relax and rest. You will also find that you will be a far more interesting person to
others as well as to

yourself.


6
-

Maintain a life vision. Too often, entrepreneurs have their entire future invested in their startup. By maintaining a
vision for all areas of their life they will keep their mind focused on today and the future, not worried about what
worke
d or didn't work in the past.


Success Rules


Succeed with these five rules from five entrepreneurs who have made it.


1. Always Start With the Exit In Mind
-
Steven Nickerson is busy launching his latest venture, Mucho.com, an
Internet portal designed to p
rovide small business owners a single source for all business needs. But it was starting
and running Workforce Strategies where Nickerson learned some valuable lessons. "My plan from the start was to
sell it," he says. "Always start with the exit in mind,
otherwise you work for 40 years and become a penny stacker."
Nickerson also advises owners to share equity.


2. Communicate With Employees and be Flexible
-
Last year Jeff Lawrence learned about truth from about fifty
students at UCLA, and it has helped him
run his business. He gave a two
-
hour lecture to a class on engineering
ethics, and afterward the students wrote a one
-
page report on what they heard. "Fifty people had heard 50 different
things. I read their reports and everyone had their own interpretatio
ns. You can have a set of facts and then everyone
has his own point of view about it. Truth is relative." "To be successful you have to listen to people and be willing to
change. You need to communicate with your people so they know what is going on. Encou
rage their input."


3. Hire Smart People
-

He talks in an authentic you
-
know
-
what
-
I'm
-
talking
-
about New York accent straight out of
the city that never sleeps' mean streets. Glenn Schlossberg was raised on the ultra
-
competitive streets of New York
City's ga
rment district. And at age 36, he has made it there and proved he can make it anywhere. Schlossberg
believes that hiring the best people and providing top
-
notch service to his clients have led to his success. "You need
to hire smart people. I have more tha
n 200 employees, and they are my championship team. It's all about the
people." It is not about being scared to fail. "Never show fear," he says. "Show no fear are the words to live by.


4. Stick to a Realistic Business Plan
-
Jeff Parker has been to battle

on the two great stages of the 20th Century
-
in war
and on Wall Street
-
and has survived and thrived. He became an entrepreneur and founded six companies including
his latest, CCBN.com, an Internet portal that organizes and delivers easy
-
to
-
use investment
-
r
elated information for
the corporate marketplace. "A successful business is about execution," he says. "You need laser focus and then do
everything you can possibly do to stay on your business plan. But you need to be realistic about your business plan."
T
hen, after the plan is set, you must create revenue. "All my businesses have had a heavy sales and marketing side,"
Parker says. "If you sit around and count expenses you will go out of business. You have to go out and sell it.
Remember that cash is king."


5. Never Give Up
-
In the late 1980s Mary Ella Gabler made one of the toughest decisions of her professional life.
Should she give up, get out, and try something else, or should she sink her dream and hope for the best? Gabler, who
in 1964 was one of the f
irst women to work on Wall Street and had seen her share of successes and failures, made
the decision to stick to it. "I don't give up," Gabler says. "If one plan does not work I always try to find plan B. I
have a desire to achieve and have confidence in
my decisions. I figured I was better than the competition, and I
would persevere. It takes a toll on you and you do have setbacks, but you keep going forward." Gabler also
recommends spending money on professional strategic planning. "that is absolutely cr
itical for a growing company.
It is something you cannot afford not to do."


Five Phases to Success


Let's say you have an idea for a new business. What opportunities are there for putting your idea into practice? Is
this something that has been overdone?
Or has it been executed poorly in the past? Or has no one else ever thought
of it? In short, is your idea a potential dead end, a productive angle on an opportunity, or an entirely unexplored
chance to create a business? The first thing you would want to d
o is do an opportunity analysis of your idea. The
opportunity analysis consists of five distinct phases:


Phase One
-

Seize the Opportunity
-

To evaluate the opportunity, read the following questions keeping in mind both
your personal and your professional

experience. What are the clues that indicate this idea and opportunity? What are
the conditions that permit the opportunity to occur? How will the future of this new product or service change the
idea? How great (in terms of time) is the window of opportu
nity? A window of opportunity is a time horizon during
which an opportunity exists before something else happens to eliminate it. A unique opportunity, once shown to
produce wealth, will attract competitors ,and if the business is easy to enter, the indust
ry will become saturated. You
have to get in quickly and be able to get out before revenues become dispersed in an overdeveloped market.


Phase Two
-

Investigate the Need through Market Research
-

It's necessary to identify, measure, and document the
need f
or the product or service. This means making a specific financial forecast that will testify to the actual
potential and anticipated return for this proposed product or service. This process is not the end
-
it's only the
beginning. Here is your chance to in
teract with the actual climate surrounding your company, so you will be
prepared in the early stages of your new venture.


Phase Three
-

Develop the Plan
-

Once an opportunity has been identified, decisions must be made regarding
performance and staffing.
You need to develop a business plan that will stretch your assets as far as possible, while
ensuring flexibility. It should be broad enough to incorporate some unexpected changes in your aim for success and
profitability. Your plan will be the backbone of
your business, helping you in times of crisis and motivating you at
points of indecision.


Phase Four
-

Determine the Resources Needed
-

For any business, asking questions about your own resource
capabilities is crucial. It is particularly the case, howev
er, with a start
-
up venture that uses new technology for its
service or as its product. You need to make sure you have the skills to match
-
and triumph over
-
your competition.
You need to be able to answer questions, such as: Do you have business and financi
al support? Are you prepared for
personal contacts and networking? Have you considered financing requirements? Where are your technical skills
based?


Phase Five
-

Manage the Distinguishing Features of the Business
-

Now you need to run our business, apply
ing your
management structure and style to any questions, difficulties, and successes that come your way. If any advice is
pivotal here, it's the key emphasis on the act of investing. You've invested time, money, experience, and energy in
setting up. Now y
ou'll need to follow the path blazed by the most successful businesses and invest in people,
business procedures, and information technology.



Week 10
: Su
bmission of Preliminary Business Plan


Your assignment this week is to submit a preliminary copy o
f your business plan. Please include names
and emails
of

all

team members with your plan.


Readings


Chapters 11 and 18: The Successful Business Plan: Secrets & Strategies (Rhanda Adams)


Additional Comments


Writing An Effective Business Plan


The busi
ness plan could be the most useful and important document you, as an entrepreneur, ever put together.
When you are up to your ears in the details of starting the business, the plan keeps your thinking on target, keeps
your creativity on track, and concentr
ates your power on reaching your goal.


The plan can be a useful money
-
raising tool to attract venture capital for those entrepreneurs who are willing to
dilute control of their company. Although few owners use a plan to attract venture funds, many more u
se a formal
business plan to obtain loans from lending agencies.


But an effective plan does more than just help convince prospective investors that the new business is sound. It
provides a detailed blueprint for the activities needed to finance the busin
ess, develop the product, market it, and
otherwise manage the new business. Business plan are also used for planning the continuing operations of a firm.


Suggestions for writing an effective business plan:


1. Be honest, not only by avoiding outright li
es, but also by revealing what you actually feel about the significant
and relevant aspects of the plan.


2. Use the third person, not the first person ("I" or "we"). This practice forces you to think clearly and logically from
the other person's perspect
ive.


3. Use transitional words, such as but, still, and therefore, and active, dynamic verbs as a means of leading the reader
from one thought to another.


4. Avoid redundancies, such as "future plans," since repetition adds nothing to the presentation.


Use short, simple words, where feasible, so the plan will be easy to understand and follow.

Use visuals, such as tables, charts, photos, and computer graphics to present your ideas effectively.


The plan should be prepared in an 8 1/2
-
by
-
11
-
inch format
, typed, and photocopied, with copies for outsiders
attractively bound. Most business plans can
--
and should
--
be presented effectively in 15 to 20 pages. Of course, the
plan should be grammatically correct, so have someone proofread it for spelling and gram
mar before you present it.


The plan should be reviewed by people outside the firm, such as accounting and business consultants, other business
people, and attorneys, before it is sent to potential investors or lenders. Other helpful reviewers might inclu
de a
professional writer, editor, or English teacher.


When pertinent, the cover and title page should indicate that the information is proprietary and confidential.
However, there is always the chance that this practice might offend a potential investor.



Writing An Effective Business Plan


The business plan could be the most useful and important document you, as an entrepreneur, ever put together.
When you are up to your ears in the details of starting the business, the plan keeps your thinking on targ
et, keeps
your creativity on track, and concentrates your power on reaching your goal.


The plan can be a useful money
-
raising tool to attract venture capital for those entrepreneurs who are willing to
dilute control of their company. Although few owners

use a plan to attract venture funds, many more use a formal
business plan to obtain loans from lending agencies.


But an effective plan does more than just help convince prospective investors that the new business is sound. It
provides a detailed bluepr
int for the activities needed to finance the business, develop the product, market it, and
otherwise manage the new business. Business plan are also used for planning the continuing operations of a firm.


Suggestions for writing an effective business pla
n:


1. Be honest
, not only by avoiding outright lies, but also by revealing what you actually feel about the significant
and relevant aspects of the plan.


2. Use the third person
, not the first person ("I" or "we"). This practice forces you to think c
learly and logically
from the other person's perspective.


3. Use transitional words
, such as

but, still
, and
therefore
, and active, dynamic verbs as a means of leading the
reader from one thought to another.


4. Avoid redundancies,

such as "
future

pla
ns," since repetition adds nothing to the presentation.

Use short, simple words
, where feasible, so the plan will be easy to understand and follow.

Use visuals
, such as tables, charts, photos, and computer graphics to present your ideas effectively.


Th
e plan should be prepared in an 8 1/2
-
by
-
11
-
inch format, typed, and photocopied, with copies for outsiders
attractively bound. Most business plans can
--
and should
--
be presented effectively in 15 to 20 pages. Of course, the
plan should be grammatically co
rrect, so have someone proofread it for spelling and grammar before you present it.


The plan should be reviewed by people outside the firm, such as accounting and business consultants, other business
people, and attorneys, before it is sent to potential
investors or lenders. Other helpful reviewers might include a
professional writer, editor, or English teacher.


When pertinent, the cover and title page should indicate that the information is proprietary and confidential.
However, there is always the c
hance that this practice might offend a potential investor.


What a lender looks for in a business plan

The average bank manager will be looking to see how you propose to handle the risks, particularly the financial
risks that your business is likely to e
ncounter. Bank managers are concerned about the security of the bank's money
-

or more properly, the depositors' money
-

which you are seeking and for which they are responsible. That is not to
say that a bank manager will not back you. Most bank managers
have some discretion in the amounts they lend to
businesses and will sometimes back their own hunches or gut feelings against the apparent odds, but do not bet on it.
Turn the odds in your favor by writing your business plan well and framing your request f
or finance in the best
possible light.



Why do you need the amount requested?



What will you do with it?



How do you know it's enough?



How much less can you live with?



Who else will you borrow from?



How do you propose to repay it?



How can you prove tha
t you can repay it?



What collateral can you offer?

Unless you can answer these questions to your bank manager's satisfaction, it is unlikely that you will get the money
you are looking for.

Most importantly, don't wait until you're in the middle of your

interview with the manager to give him the answers
to these questions
-

that is far too late. The bank manager's mind will already be more or less made up well before
your meeting, based on what he or she has read in your plan. The interview is intended o
nly to confirm the
manager's decision. If you have not already answered the relevant questions in the business plan, you are not likely
to have much chance to do so later.

You don't have to write your business plan by posing the questions in the form list
ed above and then stating the
answers. However, you must ensure that the information that answers these questions is:



Contained within the plan



Visible within the plan



Capable of being easily extracted from the plan by a reader.

Putting all this in ano
ther way, a bank manager will look for three things:

1.

Character

2.

Collateral

3.

Cash Flow

Character

means you. A bank manager who has any reason to distrust or disbelieve you
-

from previous dealings or
because of your reputation or because of errors or inco
nsistencies in your business plan
-

will not invest money with
you.

Collateral

means the backing that you can give as security for the loan. In some cases, collateral is not necessary.
But to the banker, who is responsible to the bank's depositors for the
ir money, security is all. If you can offer
collateral, it will certainly help your case.

And, finally,
Cash Flow

means your ability to repay the loan on time, out of the proceeds of the investment. The
bank manager will prefer to see the loan repaid at r
egular monthly or quarterly intervals with interest paid on the due
dates; anything else upsets the system. Unless you can show that the business will generate enough cash to make the
payments the bank manager requires
-

or you have explained clearly in yo
ur business plan why this will not be
possible for an initial period
-

you will not get the money that you ask for.

What a professional financier looks for in a business plan.

The way in which a financier reads a business plan depends on what kind of fina
ncier he, or increasingly she, is.
There are two types of financier
--
the lender and the investor.

The lender is typically a bank manager. Lenders will invest money in your business, if they think it worth doing so
by their criteria, in return for interest

on the capital. The professional investor, on the other hand, will invest equity
in your business and share in your risk as part
-
owner of the business. Professional investors will postpone their
return for some period of time


typically, three to five yea
rs

but will look for an above
-
average return for the risk
involved in doing so.

Professional Investors


Professional investors, such as venture capitalists, have a viewpoint different from that of lenders: they accept risk as
necessary (though, like any p
rudent investor, they will avoid undue risk and seek to limit their exposure to
unavoidable risk). David Silver, another American venture capitalist and author on enterprise, suggests that their
questions will follow these lines:



How much can I make?



How

much can I lose?



How do I get my money out?



Who says this is any good?



Who else is in it?

How much can I make?

decides whether the project fits the profile of the 30 to 50 per cent annual compound growth
-

well in excess of bank interest
-

usually req
uired by such investors.

How much can I lose?

identifies the downside risk. Although venture capitalists are used to investing in 10 projects
for every one that succeeds, they cannot invest in a project that would seriously jeopardize their own business o
f
investment should it fail.

How do I get my money out?

is important since few venture capitalists invest for the long term. Most are happy to
turn over their investments every three to five years. None will invest in a project unless they can clearly see

an exit
mechanism. There is no point in holding a 25% share in a company valued at several million pounds if you cannot
realize the value of that shareholding when you want to.

Who says this is any good?

Professional investors maintain networks of advise
rs, often on an informal basis.
Venture capitalists will use these advisers to check out all that you say or include in your business plan. This is part
of the "due diligence" process. If you can supply a venture capitalist with evidence that those who oug
ht to know
already support your plans, you will strengthen your case.

Who else is in this?

panders to the investor's residual need for security. Even if investors know that they are going to
take a risk in placing their faith and money in your hands, they

like to know that others have come to the same
conclusion. There is nothing like unanimity to convince people that they are right.

One should not mock

particularly if you are trying to persuade someone to invest. Some venture capitalists have
such a repu
tation for being right, for picking winners, that others try to follow their lead whenever they can.

Above all, in assessing the project itself, a professional investor will look at three key areas:

1.

The market: Is it large and growing rapidly?

2.

The produ
ct: Does it solve an important problem in the market?

3.

Management: Are all the key functional areas on board?

Week 11: Peer Review of Business Plans


Readings

Chapter 15: The Successful Business Plan: Secrets & Strategies (Rhanda Adams)


Assignment

Each

team will be assigned to review another team’s draft business plan. The purpose of this is so that teams can
have independent review of their business plan before submitting. After the review, each team can revise the final
project.


Additional Comments


Lowering the Risks of a Start
-
up


1. Get experienced. Experience in management and in the type of business you plan to start is not the only way to
learn, but it is still the best teacher. Combine experience with course work, study, and participation i
n trade groups,
and you have an almost unbeatable start towards business success.


2. Plan ahead. The action orientation many entrepreneurs pride themselves on has been tempered with foresight
and careful planning. A written business plan is inexpensive

insurance. It will help you focus on the important parts
of your business, use your resources wisely and consistently, and save a lot of trouble.


3. Enlist your family’s support. Even though you’re not devoting 24 hours seven days a week to your busin
ess,
your family will think you are. If your family understands and is willing to provide

the emotional support you’ll need during the start
-
up period, your chances improve dramatically. The impact of
uncertain income, demands on your time and attention

that will preoccupy you 24 hours a day for months at a
stretch, and the sheer anxiety of being the responsible owner of a small business put strains on the best relationships.


4. Be prepared to become tired and discouraged and still persevere. It goes
with the territory. Stamina is important.
So is persistence, because when things get tough (and they will) it’s very easy to give up. Starting a business from
scratch is hard. The consistent in
-
pouring of energy can become draining, but you have to do
it.


5. Use facts to substantiate your insights and hunches before acting on them. Decisions based on facts are far more
likely to be good decisions than those based on whim. Your business is too important to risk on the consequences of
a lot of hasty d
ecisions. An idea that still seems sound after you sleep on it is probably a good idea. Remember the
old clichés, “Haste makes waste” and “Look before you leap.” They apply to business.


6.

Follow your strengths and interests. They will sustain your enthu
siasm. If you like selling, but hate
bookkeeping, hire a bookkeeper so you can do what you like to do. After all, one reason to go into business is to
be able to exercise your favorite skills and interests. Listen to yourself (never easy, but always nec
essary) and be
honest. If you don’t like being in charge, or being responsible, or taking risks, don’t try to start a business.


Ten key questions when starting a business


1.

Do I know what is involved in preparing an effective business plan?

2.

Am I the righ
t person to set up and run a business?

3.

Have I a feasible business idea?

4.

What formalities must I complete before I start my business?

5.

What sales can I expect and how will I generate them?

6.

How, and with what resources will I meet my planned sales?

7.

Can I

describe the people I will need and how will I organize them?

8.

How will I fund my business?

9.

Have I the best plan possible for my business?

10.

Have I a document that does justice to my plan?

How To Overcome 15 “Avoidable” Errors When In Negotiation

“The mos
t critical and complicated decision in a negotiation is which strategy to select and how to implement it
effectively,” Dave Flory, CFPIM, CIRM, JLG Industries, Inc. (Burnt Cabins, Pa.), agrees. At the Congress for
Progress 29 (Mid
-
Atlantic Chapters of APIC
S; www.cp
-
apics.org), he identified the primary negotiation strategies
as:

Withdrawal

A strategy in which you leave the bargaining table, effectively ending a negotiation.

Inaction
. A delaying tactic, and useful when the opposing side is under time pressu
re.

Yielding
. A strategy where the negotiator substantively agrees to the opposing side’s positions. “This is generally
adopted in order to met some time deadline since it generates the fastest way to get agreement,” Flory explains.

Contending

This strat
egy (pushing hard for a stated position) is often employed when the issues are distributive in
nature, that is, there is a fixed pie. However, Flory notes that most negotiations do have the potential to “expand the
pie,” yet many negotiators have an inhere
nt bias that most situations are indeed distributive.

Problem solving.

A strategy where you work to understand the opponent’s interests in order to build an integrative
solution.

Sidestepping negotiation pitfalls. “A variety of avoidable negotiation erro
rs can have disastrous results,” he
expresses. “Therefore, it is beneficial to avoid as many of them as much as possible.” Flory itemizes the more
common pitfalls, and offers his tips on how to avoid these particular efforts:

Failure to be assertive due to

fear of conflict, shyness, or lack of confidence.

“Commitment to the process is a
necessary requirement, as failure to assert your position forces the other negotiator to ‘content’ until resistance is
met, often making the situation worse,” he explains.

Contentiously defending particular solutions rather than basic interests.

Apply a strict policy of firmly defending
your basic interests (the ends), but remain flexible about the solutions to achieve these interests (the means), Flory
advises.

Mixing cont
entious behavior with problem solving.

“This will kill the problem
-
solving effort and erode trust,” he
maintains. Separate necessary contentious exchanges by assigning them to one person (bad cop, while good cop
problem solves), or to separate meetings or
times if you are negotiating alone.

Using threats
. If threats are necessary to curtail the opponent’s contentious behavior, use deterrent threats (“I cannot
agree to…”) to clearly state your position and interests.

Believing negotiation power comes solel
y from superior force or resources
. Negotiation power comes from skills,
knowledge, strong relationships, developing good alternatives, ability to build elegant solutions, legitimacy (having
“right” on your side, or being able to frame it that way), and co
mmitment to interests and the negotiating process.

Announcing “negative” commitments.

In order to be credible, each commitment must be executed. It is illogical to
harm one’s own interests simply to hurt the other party. These types of statements are ofte
n made under stress and
are caused by negative emotions. Learn to sense your own emotions, and stop, look and listen, alter, or avoid is the
advice.

Viewing negotiations as psychological warfare.

“While negotiation has a strong psychological component, vi
ewing
it as a ware is detrimental to achieving the integrative potential in most negotiation situations,” Flory explains. The
advice: communicate clearly, develop listening skills, and keep your own words and actions telling a clear and
consistent message.


Burrowing into details without an overarching agreement
. Without a foundation and a plan on how to address the
various issues, a negotiation can quickly bog down if details are not immediately addressed.

Being unwilling to set or adhere to the pre
-
estab
lished limit
. Generally this problem arises from inadequate
preparation (failure to establish this limit in advance) or misreading how much an issue or item really is worth in
sacrifice.

Failing to commit to agreement when conditions are met.

If you are p
rone to feel that things could ‘always be a little
better,” or that you’ve “left something on the table,” trust your plan. If not, then something else may be wrong, so
think about it and decide tomorrow.

Taking an over
-
aggressive stance early in a negotia
tion
. This turns
-
off the opposing negotiator, so, if you are prone
to this, let others open negotiations or practice “toning down” your opening positions and statements.

Getting distracted by the opposing negotiator’s personality.

“Stay focused on the opp
onent’s interests, however if
the behavior becomes so distracting that negotiations are disrupted, ask for a break,” Flory explains. “Then take him
or her aside and address the behavior clearly and firmly.”

Closing yourself to any attempt to persuade.
Ref
using to be affected by statements from the opposing side is a
classic rookie error, he notes. If the argument is valid it should be addressed; if not, it can be rebutted.

Failing to seek information about the other side’s needs and wants.

“Even experienc
ed negotiators miss this one,”
Flory mentions. “Ask questions and keep communicating, even if you’re not agreeing.”

Bluffing or lying without the strategic advantage to carry through.

“If a negotiator is caught actively lying trust is
immediately lost and

negotiations grind to a halt,” he explains. Due to the risks, as well as the moral implications,
don’t even try it!

-



Week 12: Submission of Final Business Plan


Assignment


The primary requirement is to complete your business plan.


Submission of final

business plan. Please post your final business plan by Sunday of week 12.


Comment: How Not to Fail


Here are six rules to ensure that you do not fail as an entrepreneur:


1
-

Seek out quality, supportive relationships. Entrepreneurs go through more up
s and downs than a roller coaster.
Without the supportive relationships of a spouse, significant other, business coach, family, mentors, or friends it can
be a lonely and confidence
-
shattering journey.


2
-

Pick a strategy for every step of the way. Entre
preneurs spend most of their time focusing on the projected
growth of their company. They don't spend enough time thinking about how far they are willing to go, in terms of
time and money, on their startup. Success may always be right around the corner, bu
t knowing when to pull the plug
can save you many sleepless rights.


3
-

Volunteer in your community. Building a successful company will depend heavily upon the quality and diversity
of your relationships. I have found no better way to build personal rela
tionships that ultimately lead to valuable
business relationships than through my volunteer efforts in the community.


4
-

Maintain your health and well
-
being. Entrepreneurs tend to invest far too much of their time and energy into the
business and forget

about their own well
-
being.


5
-

Diversify your interests. Pursue your hobbies and interests as passionately as you pursue the growth of your
startup. It will help your brain to relax and rest. You will also find that you will be a far more interesting p
erson to
others as well as to yourself.


6
-

Maintain a life vision. Too often, entrepreneurs have their entire future invested in their startup. By maintaining a
vision for all areas of their life they will keep their mind focused on today and the future
, not worried about what
worked or didn't work in the past.




Business Analysis
Assignmen
t (Team)


Each team is required to give a presentation on a

successful or failure business.
Select a
business
that is both of
interest to the group and the class
.

Two objective of this
assignment
are
lessons that can be learned and applied
from the business that is evaluated.
Criteria for evaluating the presentation are:




Content



Quality of presentation



Class interest created by presentation



Innovation Plan (Team)


The primary activity during the course will be the completion of a comprehensive business plan. Each student team
will develop a business plan for a new business. Each of the assignments is designed to support development of and
s
hould be incorporated into the final business plan. All business plans will be presented in class during the last part
of the class. A sample outline is attached