Entrepreneurship and small business management chapter 05

Routes to Finding Opportunities  Self- or group-developed business ideas through brainstorming  Researching “hot” business ideas or growth areas  Starting with a product or service i

Entrepreneurship and Small

Business Management

Chapter 5

Creating Business from Opportunity

Ch 5 Performance Objectives

 Define your business.

 Articulate your core beliefs, mission,

and vision.

 Analyze your competitive advantage.

 Perform viability testing using the

economics of one unit.

The Business Definition

 Who will the business serve? (target

market)

 What will the business sell? (the offer)

 How will the business provide the

products and/or services it offers?

(production and delivery capability)

Basic Types of Businesses

 Manufacturing—makes a tangible product

and sells it through distributors or direct

 Wholesale—buys in bulk from manufacturers,

and sells smaller quantities to retailers

 Retail—sells individual items to consumers

 Service—sells an intangible product to

consumers or other businesses

Defining an Organization

 Core Values—the fundamental ethical

and moral philosophy and beliefs

 Mission—the business intention, and

the core strategy for achieving it

 Vision—an overall “picture” of what

you want the business to become

 Culture—the working environment

Core Values

 Are used to guide decision making in

the organization

Example: My restaurant believes in supporting

local organic farmers.

 Affect business policies, such as:

 Type of materials used in production

 Prices charged

 How customers are treated

The Mission Statement

 Defines the purpose of the business in 40

to 50 words

 Provides direction and motivation

 Addresses these topics:

 Focus on survival, profitability, and growth

 Broad view of the company’s desired,

future state

 Built on the company’s core values

 Must matter across the organization

 Employees need to be empowered to

fulfill it

 Largely shaped by company’s leaders

 The core values in action

 Learned by employees through stories, ceremonies, events, and symbols

 Impacts behavioral norms such as:

 Risk tolerance and innovation

 Attitudes toward people, teams, outcomes

 Communication—language and methods

Routes to Finding Opportunities

 Self- or group-developed business ideas through brainstorming

 Researching “hot” business ideas or

growth areas

 Starting with a product or service idea, and then searching for a market

Competitive Advantage Factors

 Quality: Can you provide higher quality

than competing businesses?

 Price: Can you offer a lower price on a

sustained basis than your competition?

 Location: Can you find a more

convenient location for customers?

Competitive Advantage Factors

(continued)

 Selection: Can you provide a wider

range of choices?

 Service: Can you provide better, more

personalized customer service?

 Speed/Turnaround: Can you deliver

your product or service more quickly?

Is Your Competitive Advantage Strong Enough?

Unique Selling Proposition (USP):

What features/benefits set your business apart from its competition?

1 Compare what your business offers

to what competitors offer.

2 Determine if you have a cost

advantage or cost disadvantage.

Strategy Versus Tactics

 Competitive strategy

 Your plan for outperforming the competition

 Combines business definition with

sustainable, competitive advantage

 Tactics—ways in which you carry out

your strategy

Feasibility Analysis

Economics of One Unit of Sale (EOU):

What is the amount of gross profit earned on each unit of the product or service your business sells?

1 Define the unit of sale.

2 Calculate the amount of gross profit per unit.

3 If one unit of sale is profitable, the whole

business is likely to be profitable.

Define the Unit of Sale

 Manufacturing—one order

 Wholesale—multiple of the same item

(example: a dozen roses)

 Retail—one item

 Service—one hour of service time or a

standard block of time devoted to a task

 Combination—average sale per customer

minus average cost of sale per customer

(example: restaurant meals)

Determine the Average Sale

Per Customer

 If the business sells differently priced

items, use the average sale per

customer as the unit of sale.

 Average unit of sale = total sales

divided by the number of customers

Calculate Gross Profit Per Unit

Gross profit per unit = selling price

per unit minus COGS or COSS per unit

 Cost Of Goods Sold: cost of labor and

materials required to make one additional unit

of a tangible item

 Cost Of Services Sold: cost of labor and

materials required to provide one additional

unit of a service

Economics of One Unit —

Manufacturing Business

Economics of One Unit —

Wholesale Business

Economics of One Unit —

Retail Business

Economics of One Unit —

Service Business

The Entrepreneur’s Strategy:

 Start a business with a profitable EOU

 Hire others to create the units

 Increase volume of units being sold

 Start new businesses or expand

opportunities Result: The entrepreneur creates jobs

and wealth.