ENTREPRENEURSHIP ROBERT D. HISRICH, PH.D. Garvin Professor of Global Entrepreneurship Director, Center for Global Entrepreneurship Thunderbird

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1 2008 AGI-Information Management Consultants ENTREPRENEURSHIP May be used for personal purporses only or by libraries associated to dandelon.com network. SE VENTH EDITION ROBERT D. HISRICH, PH.D. Garvin Professor of Global Entrepreneurship Director, Center for Global Entrepreneurship Thunderbird MICHAEL P. PETERS, PH.D Professor Emeritus Carroll School of Management Boston College DEAN A. SHEPHERD, PH.D Research Fellow and Associate Professor Kelley School of Business Indiana University McGraw-HHI Irwin Boston BurrRidge, IL Dubuque, IA Madison, Wl New York San Francisco St. Louis Bangkok Bogota Caracas Kuala Lumpur Lisbon London Madrid Mexico City Milan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto

2 CONTENTS IN BRIEF PART 1 THE ENTREPRENEURIAL PERSPECTIVE 1 The Nature and Importance of Entrepreneurship '. 2 The Entrepreneurial Mind-Set 26 3 Entrepreneurial Intentions and Corporate Entrepreneurship 54 4 International Entrepreneurship Opportunities 84 PART CREATING AND STARTING THE VENTURE 135 Creativity, the Business Idea, and Opportunity Analysis 136 Intellectual Property and Other Legal Issues for the Entrepreneur 168 The Business Plan: Creating and Starting the Venture 196 The Marketing Plan 232 The Organizational Plan 262 The Financial Plan 288 PART 3 FINANCING THE NEW VENTURE Sources of Capital Informal Risk Capital, Venture Capital, and Going Public 370 PART 4 MANAGING, GROWING, AND ENDING THE NEW VENTURE Entrepreneurial Strategy: Generating and w Exploiting New Entries Strategies for Growth and Managing the Implications of Growth Going Global Accessing Resources for Growth from External Sources Ending the Venture 568 viii

3 CONTENTS PREFACE vi PART 1 THE ENTREPRENEURIAL PERSPECTIVE THE NATURE AND IMPORTANCE OF ENTREPRENEURSHIP Opening Profile: Oprah Winfrey 3 Nature and Development of Enlrepreneurship 5 Earliest Period 6 Middle Ages 6 17th Century 6 18th Century 6 19th and 20th Centimes 7 Definition of Entrepreneur Today 8 Entrepreneurs versus Inventors 9 The Entrepreneurial Process 9 Idcntify and Evaluate the Opportunity 9 Develop a Business Plan 13 Determine the Resources Required 13 Manage the Enterprise 13 Types of Start-Ups 13 Role of Entrepreneurship in Economic Development 14 Government as an Innovator 16 Corporate Entrepreneurship 16 Independent Entrepreneurship 16 Ethics and Social Responsibility of Entrepreneurs 17 The Future of Entrepreneurship 19 THE ENTREPRENEURIAL MIND-SET 26 Opening Profile: Ewing Marion Kauffman 27 How Entrepreneurs Think 30»Effectuation 30 Cognitive Adaptability 34 Learning from Business Failure 38 Managerial versus Entrepreneurial Decision Making 41 Strategie Onentation and Commitment to Opportunity 42 Commitment of Resources and Control of Resources 44 Management Strueture and Reward Philosophy 45 Growth Orientation and Entrepreneurial Culture 45 ix

4 CONTENTS ENTREPRENEURIAL INTENTIONS AND CORPORATE ENTREPRENEURSHIP 54 Opening Profile: Robert Mondavi 55 The Intention to Act Entrepreneurially 58 Entrepreneur Background and Characteristics 58 Education 58 Personal Values 59 Age 59 Work History 60 Role Models and Support Systems 61 Moral-Support Network 61 Professional-Support Network 62 Male versus Female Entrepreneurs 64 Minority Entrepreneurship 67 Entrepreneurial Intentions within Existing Organizattons 68 Causes for Interest in Corporate Entrepreneurship 68 Traditional Corporate Culture versus Entrepreneurial Culturc 70 Climate for Corporate Entrepreneurship 71 Leadership Characteristics of Corporate Entrepreneurs 73 Establishing Corporate Entrepreneurship in the Organization 75 Problems and Successful Efforts 76 INTERNATIONAL ENTREPRENEURSHIP OPPORTUNITIES 84 Opening Profile: A. Malachi Mixon III 85 Introduction 87 The Nature of International Entrepreneurship 89 The Importance of International Business to the Firm 89 International versus Domestic Entrepreneurship 90 Economics 90 Stage of Economic Development 91 Balance of Payments 91 Type of System 91 Political-Legal Environment 91 Cultural Environment 93 Technological Environment 94 Culture 94 Social Structure 96 Religion 97 Political Philosophy 97 Economics and Economic Philosophy 97 Education 97 Manners and Customs 98 Economic System and Development 99 Available Distribution Systems 100 Barriers to International Trade 100 General Agreement on Tariffs and Trade (GATT) 100 Tncreasing Protectionist Attitudes 101 Trade Blocs and Free Trade Areas 101

5 CONTENTS Entrepreneur's Strategy and Trade Barriers 101 Implications for the Global Entrepreneur 102 CASES FOR PART Case 1A "Airner Test Prep Co. 107 Case 1B A. Monroe Lock and Security Systems 109 Case 1C Beijing Sammies 112 Case 1D "Mamma Mia!" The Little Show That Could! 126 PART 2 CREATING AND STARTING THE VENTURE CREATIVITY, THE BUSINESS IDEA, AND OPPORTUNITY ANALYSIS 136 Opening Profile: Frederick W. Smith 137 Sources of New Ideas 140 Consumers 140 Existing Products and Services 140 Di stribution Channels 140 Federal Government 140 Research and Development 141 Methods of Generating Ideas 142 Focus Groups 142 Brainstorming 142 Problem InventoryAnalysis 143 Creative Problem Solving 144 Brainstorming 144 Reverse Brainstorming 144 Brainwriting 144 Gordön Method 145 Checklist Method 146 Free Association 146 Forced Relaüonships 146 Collective Notebook Method 147 Attribute Listing 147 Big-Dream Approach 147 Parameter Analysis 147 Innovation 148 Types of Innovation 148,XJefining a New Innovation (Product or Service) 150 Classification of New Products 150 Opportunity Recognition 152 Opportunity Analysis Plan 152 The Tdea and Its Competition 153 The Market and the Opportunity 153 Entrepreneur and Team Assessment 154 TheNextSteps 154

6 XÜ CONTENTS Product Planning and Development Process 154 Establishing Evaluation Criteria 154 ldeastage 156 ConceptStage 158 Product Development Stage 158 Test Marketing Stage 159 E-Commerce and Business Start-Up 160 Using E-Commerce Creatively 160 WebSites 161 Tracking Customer Information 162 Doing E-Commerce as an Entrepreneurial Company INTELLECTUAL PROPERTY AND OTHER LEGAL ISSUES FOR THE ENTREPRENEUR 168 Opening Profile: Steve Lipscomb 169 What Is Intellectual Property? 171 Need for a Lawyer 171 How to Select a Lawyer 171 Legal Issues in Setting Up the Organization 172 Patents 172 International Patents 174 The Disclosure Document 174 The Patent Application 175 Patent Infringement 175 Business Method Patents 176 Start-Up without a Patent 177 Trademarks 177 Registering the Trademark 178 Copyrights 179 Trade Secrets 181 Licensing 183 Product Safety and Liability 185 Insurance 186 Sarbanes-Oxley Act 188 Contracts THE BUSINESS PLAN: CREATING AND STARTING THE VENTURE 196 Opening Profile: Belinda Guadarrama 197 Planning as Part of the Business Operation 199 What Is the Business Plan? 199 _ Who Should Write the Plan? 200 Scope and Value of the Business Plan Who Reads the Plan? 201 How Do Potential Lenders and Investors Evaluate the Plan? 202 Presenting the Plan 203 Information Needs 204 Market Information 205 Operations Information Needs 207 Financial Information Needs 208 Using the Internet as a Resource Tool 208

7 CONTENTS xiii Writing the Business Plan 209 Introductory Page 209 Executive Summary 211 Environmental and Industry Analysis 212 Description of Venture 213 Production Plan 215 Operations Plan 216 Marketing Plan 217 Organizational Plan 218 Assessment of Risk 218 Financial Plan 219 Appendix 219 Using and Implementing the Business Plan 219 Measuring Plan Progress 220 Updating the Plan 221 Why Some Business Plans Fail 221 Appendix 7A: Sample Business Plan Gopher It THE MARKETING PLAN 232 Opening Profile: Warren G. Jackson, Circulation Experti, Ltd. 233 Industry Analysis 235 Competitor Analysis 235 Marketing Research for the New Venture 236 Step One: Defming the Purpose or Objectives 237 Step Two: Gathering Data from Secondary Sources 237 Step Three: Gathering Information from Primary Sources 237 Step Four: Analyzing and Interpreting the Results 240 Understanding the Marketing Plan 240 Characteristics of a Marketing Plan 241 The Marketing Mix 243 Steps in Preparing the Marketing Plan 245 Defining the Business Situation 245 Defining the Target Markel/Opportunities and Threats 245 Considering Strengths and Weaknesses 248 Establishing Goals and Objectives 248 Defining Marketing Strategy and Action Programs 248 Marketing Strategy: Consumer versus Business-to- Business Markets 253 Budgeting the Marketing Strategy 254 Implementation of the Market Plan 254 Monitoring the Progress of Marketing Actions 255 Appendix 8A: Marketing Plan Outlines THE ORGANIZATIONAL PLAN 262 Opening Profile: Jim Sinegal, Costco 263 Developing the Management Team 264 Legal Forms of Business 265 Ownership 265 Liability of Owners 267 Costs of Starting a Business 268

8 xiv CONTENT5 Continuity of Business 268 Transferability of Interest 269 Capital Requirements 269 Management Control 270 Distribution of Profits and Lösses 270 Attractiveness forraising Capital 271 Tax Attributes of Forms of Business 271 Tax Issues for Proprietorship 271 Tax Issues for Partnership 271 Tax Issues for Corporation 273 The Limited Liability Company versus the S Corporation 273 S Corporation 274 Advantages of an S Corporation 274 Disadvantages of an S Corporation 275 The Limited Liability Company 275 Advantages of an LLC 276 Designing the Organization 276 Building the Management Team and a Successful Organization Culture 278 The Role of a Board of Directors 280 The Board of Advisors 282 The Organization and Use of Advisors THE FINANCIAL PLAN 288 Opening Profile: Bill Porter E*TRADE and ISE 289 Operating and Capital Budgets 291 Pro Forma Income Statements 293 Pro Forma Cash Flow 297 Pro Forma Balance Sheet 300 Break-Even Analysis 302 Pro-Forma Sources and Applications of Funds 304 Software Packages 305 CASES FOR PART Case 2A BizLand, Inc. 311 Case2B The Beach Carrier 317 Case2C Gourmet togo 320 Case 2D Intervela D.O.O. Köper Victory Sailmakers 327 Case 2E The Gril-Kleen Corporation 334 PART 3T FINANCING THE NEWVENTURE SOURCES OF CAPITAL 342 Opening Profile: Scott Walker 343 An Overview 346 Debt or Equity Financing 346

9 CONTENTS xv Internal or External Funds 346 Personal Funds 348 Family and Friends 349 Commercial Banks 350 Types of Bank Loans 350 Cash Flow Financing 351 Bank Lending Decisions 352 Role of SBA in Small Business Financing 353 Research and Development Limited Partnerships 354 Major Elements 354 Procedure 355 Benefits and Costs 355 Examples 356 Government Grants 356 Procedure 357 Private Placement 358 Types of Investors 358 Private Offerings 358 Regulation D 359 Bootstrap Financing INFORMAL RISK CAPITAL, VENTURE CAPITAL, AND GOING PUBLIC 370 Opening Profile: Tom Kitchin 371 Financing the Business 372 Informal Risk-Capital Market 374 Venture Capital 377 Nature of Venture Capital 377 Overview of the Venture-Capital Industry 378 Venture-Capital Process 382 Locating Venture Capitalists 386 Apprbaching a Venture Capitalist 387 Valuing Your Company 389 Factors in Valuation 389 Ratio Analysis 390 Liquidity Ratios 391 Activity Ratios 391 Leverage Ratios 392 Profitability Ratios 392 General Valuation Approaches 393 General Valuation Method 394» Evaluation of an Internet Company 395 Deal Structure 396 Going Public 396 Advantages 397 Disadvantages 397 Timing of Going Public and Underwriter Selection 401 Timing 401 Underwriter Selection 402

10 xvi CONTENTS Registration Statement and Timetable 403 The Prospectus 404 Part II 405 Procedure 405 Legal Issues and Blue-Sky Qualifications 406 Legal Issues 406 Blue-Sky Qualifications 406 After Going Public 406 Aftermarket Support 406 Relationship with Ihe Financial Community 407 Reporting Requirements 407 CÄSESFORPART3 416 Case3A The Winslow Clock Company 416 Case 3B NeoMed Technologies 425 Case 3C Rüg Bug Corporation 440 Case3D Nature Bros. Ltd. 450 PART 4 MANAGING, GROWING, AND ENDING THE NEW VENTURE ENTREPRENEURIAL STRATEGY: GENERATING AND EXPLOITING NEW ENTRIES 460 Opening Profile: Justin Parer 461 New Entry 462 Generation of a New Entry Opportunity 463 Resources as a Source of Competitive Advantage 463 Creating a Resource Bündle That Is Valuable, Rare, and Inimitable 464 Assessing the Attractiveness of a New Entry Opportunity 467 Information on a New Entry 467 Comfort with Making a Decision under Uncertainty 468 Decision to Exploit or Not to Exploit the New Entry 468 Entry Strategy for New Entry Exploitation 469 Environmental Instability and First-Mover (Di s)advantages 471 Customers' Uncertainty and First-Mover (Dis)Advanlages 474 Lead Time and First-Mover (Dis)Advantages 475 Risk Reduction Strategies for New Entry Exploitation 477 Market Scope Strategies 477 ^, Imitation Strategies 479 Managing Newness STRATEGIES FOR GROWTH AND MANAGING THE IMPLICATI0NS 0F GROWTH 488 Opening Profile: Brian and Jennifer Maxwell 489 Growth Strategies: Where to Look for Growth Opportunities 490

11 CONTENTS xvll Penetration Strategies 491 Market Development Strategies 492 Product Development Strategies 492 Diversification Strategies 493 Example of Growth Strategies 494 Economic Implications of Growth 496 Implications of Growth for the Firm 497 Pressures on Existing Financial Resources 498 Pressures on Human Resources 498 Pressures on the Management of Employees 498 Pressures on the Entrepreneur's Time 498 Overcoming Pressures on Existing Financial Resources 498 Financial Control 499 Managing Cash Flow 499 Managing Inventory 500 Managing Fixed Assets 503 Managing Costs and Profits 504 Taxes 506 Record Keeping 506 Overcoming Pressures on Existing Human Resources 507 Overcoming Pressures on the Management of Employees 508 Overcoming Pressures on Entrepreneurs' Time 510 Basic Principles of Time Management 511 Implications of Firm Growth for the Entrepreneur 512 A Categorization of Entrepreneurs and Their Firms' Growth GOING GLOBAL 520 Opening Profile: Sam Walton 521 Tntroduction 523 Motivations to Go Global 523 Strategie Effects of Going Global 525 Strategie Issues 525 Tmportant Considerations 526 Foreign Market Selection 528 Entrepreneurial Entry Strategies 530 Exporting 531 Nonequity Arrangements 532 Direct Foreign Investment 533 Entrepreneurial Partnering 535 Appendix 15A: Example Outline of an International Business Plan A0CESSING RESOURCES FOR GROWTH FROM EXTERNAL SOURCES Opening Profile: Bill Gross 541 Using External Parties to Help Grow a Business 542 Franchising 543 Advantages of Franchising to the Franchisee 543 Advantages of Franchising to the Franchisor

12 xviü CONTENTS Disadvantages of Franchising 546 Types of Franchisen 546 Investing in a Franchise 547 Joint Ventures 551 Types of Joint Ventures 551 Factors in Joint Venture Success 552 Acquisitions 553 Advantages of an Acquisition 55 3 Disadvantages of an Acquisition 554 Synergy 555 Structuring the Deal 555 Locating Acquisition Candidates 555 Mergers 556 Leveraged Buyouts 557 Overcoming Constraints by Negotiating for More Resources ENDING THE VENTURE 568 Opening Profile: Teresa Cascioli 569 Bankruptcy An Overview 570 Chapter II Reorganization 574 Surviving Bankruptcy 575 Chapter 13 Extended Time Payment Plans 575 Chapter 7 Liquidation 576 Strategy during Reorganization 576 Keeping the Venture Going 577 Warning Signs of Bankruptcy 579 Starting Over 579 TheRealityofFailure 580 Business Turnarounds 581 Exit Strategy 582 Succession of Business 583 Transfer to Family Members 583 Transfer to Nonfamily Members 584 Options for Seüing the Business 585 Direct Säle 585 Employee Stock Option Plan 586 Management Buyout 587 CASES FOR PART w Case 4A Oklahoma National Bank 593 Case 4B Datavantage Corporation 602 Case 4C Dual Pane Company 613 Case 4D Top Human Technology Limited 614 INDEX 628