In the previous lesson, we discussed the first two stages of the entrepreneurial process, determining that our commitment is sufficient, and selecting and evaluating the venture idea. Next, we must develop a plan as to how to bring our idea to market.
Once a business idea is selected, the concept must be sharpened by a detailed planning process. The result of this step is a comprehensive business plan, with its major components being the marketing "mix", the strategic plan, operational and logistical structures, and the financial proposal.
The business plan is the "blueprint" for the implementation process. It focuses on the four major sub-plans: marketing; strategy; operational/logistic; and financial.
While the business plan often goes through some revision, it generally represents a rather advanced stage in the planning process. The primary product or service to be offered, based on the results of the market research, should be determined. Whether the business will be a start-up, purchase of an existing business or a franchise should certainly be firm at this point. Often, a specific business location is indicated, or at least a rather specific area.
Time estimates in a business plan should allow for meeting all the necessary regulatory requirements and acquisition of permits to get to a "customer-ready" condition. The amount of funding required and a general approach to raising these funds should be determined.
Marketing mix issues focus on how the product or service is differentiated from the competition. A business can differentiate itself on any of what are often referred to as the "four P's" of marketing: product characteristics, price structure, place or method of distribution, and/or promotional strategy. How did our neighborhood coffee shop differentiate itself?
Strategic issues relate broadly to the company's mission and goals. Every venture must continually assess its strengths and weaknesses, the opportunities to be seized, and any threats to the success and plans of the business. Operational issues relate to company structure, and the scope of the business. The operational plan addresses tangible items such as location, equipment, and methods of distribution. Decisions on these issues largely determine startup costs.
The financial proposal includes an estimate of the amount of money needed to start the venture, to absorb losses during the start-up period, and to provide sufficient working capital to avoid cash shortages. It projects sales and profitability over some period into the future, generally 3 to 5 years. Where outside funding is sought, it also describes distribution of ownership of the venture and methods of debt repayment and/or buyback of partial ownership
Sidebar: The Nature of Small Business
At this stage, a discussion of some broad characteristics of small business can add some perspective to the development of our plan.
What does small business have to do with entrepreneurship? A small business is the usual product of entrepreneurship. Can a person start a large business? Only 4% of businesses employ over 20 people at start-up. What kinds of businesses are the larger start-ups likely to be? My sense is that most would be food service businesses, and many of those would be franchises.
Over half of business start-ups consist of 1 or 2 employees. What kinds of businesses can you enter with only 1 or 2 employees? Most would probably be considered professional practices (medical, law, accounting) rather than businesses.
Small businesses are characterized by independent management, closely-held ownership, a primarily local area of operations, and a scale that is small in comparison with competitors. Many are small by design, or are "lifestyle" businesses, where the primary objective is employment for the principals. Many are intended to be more "entrepreneurial ventures," with the intention of generating substantial growth in scale of operations and profitability.
Why do people start small businesses? The most frequently cited motivation for business start-ups is to allow the entrepreneur to achieve independence; money is secondary. Is this surprising? The other reasons named most often are that an opportunity presented itself, a person took over the family business, or the person simply wanted to be an entrepreneur. Identify your motivation.
For context, what reasons might people offer for joining a large corporation? For choosing a government career? A union job? Certainly, many people desire security, fringe benefits, and a predictable career "trajectory."
What kind of people start businesses? Their skills are seldom different from those of people who succeed at working for others. Do they need to be their own boss because they are incapable of working for other people? The opposite is more often the case.
Most entrepreneurs value control, freedom, flexibility; and self-reliance. They generally desire responsibility and personal fulfillment. Most entrepreneurs are not "gamblers;" they have a preference for moderate risk (What is the largest financial risk that you would consider moderate?). They are always searching for opportunities, and willing to pursue some.
The more successful entrepreneurs tend to be proactive, assertive, and highly observant. They are efficient, quality-conscious, and good at planning and procedures. As business operators, they are committed to "partnership" with employees, customers, suppliers, and their community. Would these skills or personality traits lead to success at any professional pursuit?
In previous lessons, we discussed the first three of the four stages in the entrepreneurial process: Commitment, Selection and Evaluation, and Planning. Let us now consider some issues relating to the fourth step, implementation.
A primary inhibitor of business start-up is that few people have the financial cushion to give up a job for the uncertain income of a start-up venture. In a recent survey, about 30% of new business founders identified inadequate funding as their biggest hurdle, and a similar amount said lenders were too conservative. About 15% reported being unable to find investors, and a similar amount claimed a lack of collateral.
The prospective new business owner approaching a lending institution should keep in mind the "five c's of credit:" character, cash flow, capital, collateral, and (economic) conditions. Character consists of the borrower's integrity, experience, and ability; particularly close attention is paid to a borrower's credit history, which is a matter of record. Should you decide to try to fund a startup through a commercial lender, the remaining criteria are addressed in the loan request.
The loan request should include a credit application, financial information such as tax returns and personal financial statements, and a brief business plan emphasizing projected financial performance of the new venture. The plan should demonstrate how the business will generate sufficient cash flow to repay the loan, specify collateral, and show the borrower's personal investment.
In addition to servicing the loan, cash flow should also cover operating expenses, and provide for some re-investment for the increasing financial demands of a start-up venture. As collateral, banks will often lend up to 80% of the market value of real estate, and up to 50% on business assets such as equipment, inventory, and current accounts receivable. Lenders and investors often require that the bulk of start-up monies be provided by the business owner. This assures these stakeholders that the owner is committed, and has confidence in the financial projections.
When the entrepreneur can not meet the requirements of commercial lenders, and does not have a favorable arrangement with partners or other investors, the remaining options are difficult and expensive. These options include public-sector guarantees, finance companies, and the venture capital market. We will discuss the issue of venture financing in greater detail in a later lesson.
Even where the start-up investment consists largely of other people's money, the amount of financial risk for the entrepreneur is beyond what most can responsibly handle. For many with the financial means, the stress of bearing complete responsibility for the company's direction and performance is the discouraging factor.
Once the venture is off the ground, a new set of challenges faces the entrepreneur. A recent survey showed their major concerns, named by more than half of respondents, were: "getting new business/clients;" "managing my time;" and, "promoting my business." Another interesting question was what they missed about the corporate world. The top three responses were "company-paid health insurance," "a regular paycheck," and "retirement plans."
Various estimates have been made for the failure rate of business start-ups, based on various concepts of failure and of appropriate survey methods. The consensus seems to be that less than half of new businesses survive the start-up "trauma." Perhaps, a major reason for what seems to be a high failure rate is that it is so easy to start a business. There is no institutionalized check of qualifications in the U.S.; on the contrary, our tax dollars fund the Small Business Administration and other agencies and programs that encourage business formation.
Another survey showed that over 80% of entrepreneurs would take a pay cut if that is what it took to keep the business going. Just over a third would sell the business, even if a good price were offered.
Successes tend to be those who can find some competitive edge, even when their product or service is similar to those around them. Marketing professionals often call this edge the "unique selling proposition," or USP. Pinpointing and refining one's USP, however, is not a simple matter. An approach is unique only in the context of our competitors' marketing messages.
Some marketing messages go beyond product and service characteristics. For example, Charles Revson, founder of Revlon, insisted that he sold hope, not makeup. Similarly, United Airlines sells "friendly skies," and Wal-Mart sells "always" the low price. Do these slogans convey how each company views their customers? Does their selling proposition appeal to your preferences?
Sharpen your USP:
Try now to recast your business idea in terms of its competitive advantage. Prepare an industry analysis (size, customers, trends, competitiveness). Identify what you see as your specific market, and estimate the share you think you can capture.
Surveys consistently show the American regard for entrepreneurs; approval of a son or daughter starting a business exceeds 80%. Entrepreneurship is part of our culture, recognized as far back as 1840, when Alexis de Tocqueville, in Democracy in America, said "What most astonished me in the United States is not so much the marvelous grandeur of some undertakings as the innumerable multitude of small ones."
|Title:||The Entrepreneurial Process|
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