Entrepreneurship: Strategies and Resources

601 Pages·2007·3.63 MB·English

ENTREPRENEURSHIP
Strategies and Resources
FOURTH EDITION
Marc J. Dollinger
Kelley School of Business
I U
NDIANA NIVERSITY

MARSH PUBLICATIONS
Lombard, Illinois U.S.A.
In memory of Ken Marino, a great teacher, a wonderful colleague,
and a true friend.
EDITOR Libby Rubenstein
COPYEDITOR Shelia Whalen
TYPESETTER Phoenix Graphics, LLC
EDITORIAL SUPPORT Barbara Burwold, Thomas Serb
MANUFACTURER Sheridan Books, Inc.
Library of Congress Cataloging-in-Publication Data
Dollinger, Marc J.
Entrepreneurship : strategies and resources / Marc J. Dollinger. — 4th ed.
p. cm.
Includes bibliographical references and index.
ISBN 978-0-9713130-6-4
1. New business enterprises. 2. Entrepreneurship. I. Title.
HD62.5.D65 2008
658.4’21—dc22

2007022574
Copyright © 2008 by Marsh Publications LLC. All rights reserved under the International and Pan-Ameri-
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Contents
Preface vii
1. A Framework for Entrepreneurship 2
Entrepreneurship and the Future 4 What Is Entrepreneurship? 7 Where Is
Entrepreneurship? 12 Who Is the New Entrepreneur? 14 Diemsions of
Entrepreneurship 16 Paradoxes of Entrepreneurship 25 Organization of this
Book 26 A Final Word 27 Summary 28 Discussion Questions 28
Key Terms 29 Exercises 29 Discussion Case 30
2. Resources and Capabilities 32
Identifying Attributes of Strategic Resources 35 Resource Types 43 A
Psychological Approach 55 A Sociological Approach 55 Summary 60
Key Terms 61 Discussion Questions 61 Exercises 61 Exercises for Writing a
Business Case 62 Discussion Case 63 Appendix: Creativity and Idea
Generation 64
3. The Environment for Entrepreneurship 70
Schematic of the New Venture’s Environment 71 Processes of Business
Environment Analysis 73 Political and Governmental Analysis 78 Stakeholder
Analysis 82 Macroeconomic Analysis 83 Technological Analysis 84
Sociodemographic Analysis 87 Ecological Analysis 90 Competitive Analysis 91
Competitor Analysis 102 Summary 103 Key Terms 105 Discussion
Questions 105 Exercises 106 Discussion Case 107
4. Entrepreneurial Strategies 110
Entrepreneurship and Strategy 112 Business Models and Strategy 113 Entry
Wedges 116 Resource-Based Strategies 123 Isolating Mechanisms and First-
Mover Advantages 125 Information Rules Strategies 129 Strategy and Industry
Environments 132 Crafting and Evaluating Strategy 144 Summary 148 Key
Terms 149 Discussion Questions 149 Exercises 150 Discussion Case 151
5. The Business Plan 154
Why Write a Business Plan? 158 Elements of the Business Plan 160 Critiquing
the Plan 175 Format and Presentation 177 Summary 180 Key Terms 181
Discussion Questions 181 Exercises 182 Discussion Case 182 Appendix:
Babyyourway.com Business Plan 183
iii
iv ENTREPRENEURSHIP
6. Marketing the New Venture 206
The Marketing and Entrepreneurship Interface 208 Marketing Concept and
Orientation 299 Marketing Strategy 214 Marketing on the Internet 232 Sales
Forecasting 240 Summary 242 Key Terms 243 Discussion Questions 244
Exercises 244 Discussion Case 245 Appendix: Case Study: EMC Site
Expansion 246
7. Foundations of New Venture Finance 252
Determining Financial Needs 254 Sources of Financing 261 New Venture
Valuation 276 Legal and Tax Issues 282 Summary 291 Key Terms 292
Discussion Questions 292 Exercises 293 Discussion Case 293 Appendix: The
Initial Public Offering (IPO) Process 295
8. Securing Investors and Structuring the Deal 298
Approaching Investors 301 Structuring the Deal 309 Negotiation Skills 319
Summary 327 Key Terms 328 Discussion Questions 328 Exercises 328
Discussion Case 000 Appendix A: Sample Series A Preferred Stock Term Sheet 330
Appendix B: Investment Agreement Outline 333 Appendix C: Negotiable Terms to
a Financial Agreement 335
9. Creating the Organization 338
The Top Management Team 341 Building An Enduring Organization 351 The
Organization’s Boundaries 355 Networking and Alliances 357 Traditional
Organizational Structure 364 Entrepreneurial Performance: The Balanced
Scorecard 366 The Entrepreneurial Workplace 369 Most Successful Human
Resource Practices 373 Summary 376 Key Terms 378 Discussion
Questions 378 Exercises 379 Networking Exercises 379 Discussion Case 380
10. Intrapreneurship and Corporate Venturing 382
Intrapreneurship 384 Advantages and Barriers to Intrapreneurship 389 The Process
of Intrapreneurship 391 Intrapreneurial Strategies 398 Guildelines for Success 404
Summary 407 Key Terms 407 Discussion Questions 408 Exercises 408
Discussion Case 409 Appendix: The Franchising Alternative 410
Contents v
Cases
1. MedTrack 422
2. Rubio’s: Home of the Fish Taco (A) 442
3. Rubio’s: Home of the Fish Taco (B) 456
4. Rubio’s Restaurants, Incorporated (C) 466
5. Stamps.com: Maintaining a Leadership Position 475
6. Suzy’s Zoo 482
7. Tellme Networks: Dial Tone 2.0? 492
8. Master International Franchising in China: The Athlete’s Foot, Inc. 503
9. Biocon Ltd.: Building a Biotech Powerhouse 515
10. Software Innovation Inc. 528
Notes 541
Company and Name Index 563
Subject Index 572

Preface
Since the publication of the first edition of Entrepreneurship: Strategies and Resources, the
field of entrepreneurship has grown even faster than I would have predicted. There are
more courses and schools teaching entrepreneurship than ever. The major business peri-
odicals, Business Week, Fortune, and The Wall Street Journal continue expanding their cov-
erage of entrepreneurs and their companies. There are a number of publications that
rank graduate and undergraduate entrepreneurship programs. Business plan competi-
tions at the graduate and undergraduate level continue to proliferate and the prizes get
larger and larger. International interest in new venture creation has grown exponential-
ly. Programs in the United States and overseas have partnered to provide cross-cultural
and multinational entrepreneurial courses for their students. I personally participated in
one such effort between Indiana University and City University of Hong Kong. The
technology enabled us to form joint ventures between students in the United States and
Hong Kong for the purpose of starting businesses. It was marvelous.
In this fourth edition of Entrepreneurship: Strategies and Resources, I have tried to
improve upon the foundation set in the first three editions. This book is intended to be
friendlier to the user, beginning with its new design and soft cover. A number of fea-
tures will help make the text easier to read and understand. Dozens of new examples and
minicases, called “Street Story,” have been added. International examples and applica-
tions are integrated throughout the book.
ORGANIZATION OF THE BOOK
Entrepreneurship: Strategies and Resources is organized into three parts. Part I introduces
the major themes and theory of the book. Chapter 1 describes the roles that new venture
creation plays in the international economy, defines entrepreneurship, and shows how
three factors—individuals, environments, and organizations—come together to create
the entrepreneurial event. I also make a point of explaining that studying entrepreneur-
ship cannot be done in a formulaic, by the numbers fashion.. It requires judgment.
Chapter 2 sets this textbook apart from others because it casts entrepreneurial phe-
nomena in terms of the predictive theory of the resource-based framework. In this
chapter, I present the basic concepts and model of the resource-based theory. There are
six types of resources in our theory: financial, physical, technological, human, organi-
zational, and reputational. The theory says that entrepreneurs can create sustainable
competitive advantage for their ventures when they possess or can acquire and control
resources that are rare, valuable, hard to duplicate, and nonsubstitutable. Here I
emphasize the importance of human resources, especially the entrepreneur. I then
explain how these resources are a source of profit and rent for the entrepreneur, and
how the new venture needs to protect these rents and profits through isolating mech-
anisms and first-mover advantages. The chapter also has an appendix that introduces
the basics of creativity as I believe that this is a personal resource that can be further
developed in all of us.
vii
viii ENTREPRENEURSHIP
Part II of Entrepreneurship: Strategies and Resources describes the environment for
entrepreneurship. It presents the tools and techniques for analyzing business and com-
petitive conditions, and for evaluating entrepreneurial opportunities. It is comparable to
the strategy formulation phase of corporate strategic management. The purpose of this
section is to show how the environment affects, directs, and impinges on the strategy
formulation problem in new venture creation. It does this in two ways that can be
expressed by the resource-based model: The environment helps determine what is rare,
valuable, imitable, and substitutable and it is the source of resources that possess these
four attributes. The strategy formulation problem in new venture creation can be stated
as follows: What configuration of resources will provide the new firm with the best
chances of achieving a competitive advantage?
Chapter 3 covers the aspects of the macro- and microenvironment that affect entre-
preneurship and new venture creation. I present a process model for environmental
analysis and then describe a six-element model of the macroenvironment: political, stake-
holder, economic, technological, sociodemographic, and ecological. . Next I offer the
elements of the competitive environment. I incorporate the Porter model (five-forces
model) into the analysis. I begin by asking two questions of utmost importance to the
entrepreneur in the early stages of new venture creation:
1. Is the industry the entrepreneur is about to enter an attractive one?
2. What are the best ways to compete to increase the chances of creating a high prof-
itability venture?
To address the first question, the chapter depicts an industry’s profitability as a func-
tion of buyer and supplier power, the threat of substitutes, entry barriers, and the state
of interfirm rivalry. Students are shown how to do this analysis in sufficient depth and
with limited data by resorting to the basics of microeconomic theory. To address the sec-
ond question, I discuss the ways that the possession and acquisition of the four-attrib-
ute resource base provide the entrepreneur with tools to overcome strong industry forces
and exploit weak industry forces. The resource-based model is incorporated into this dis-
cussion by demonstrating its applicability as a screening device for new venture ideas. I
create and describe a resource-based implementation matrix—the four attributes of sus-
tainable competitive advantage by the six types of resources: financial, physical, techno-
logical, reputational, human, and organizational resources.
Chapter 4 presents types of new venture strategies and examines different positions
that entrepreneurs take regarding the resources required for their firms. I present the
basic entry wedges available to the new venture and develop the set of resource-based
strategies. I introduce the concepts of strategy for businesses-producing information-
type products. I look at how the industry life cycle influences strategy choice. New ven-
tures can be created successfully across the life cycle, but each poses its special challenges.
The chapter concludes with an overview of strategic postures and orientations that entre-
preneurs can take.
Chapter 5 presents the major tool for formulating and creating new ventures: the
business plan. It offers an in-depth outline for a business plan, including all the key sec-
tions and tips on how to structure the plan and the financial proposal for maximum
effectiveness. The chapter continues with a discussion of the criteria and techniques for
Preface ix
evaluating business plans. At the end of the chapter, there are proven tips for the format
and presentation, writing, and editing of successful business plans. A complete business
plan follows the chapter.
Part III of Entrepreneurship: Strategies and Resources makes the transition from the
formulation of entrepreneurial strategy to the implementation stage. The section covers
marketing, financing, and organizational issues. The final chapter in the book covers
some special topics that students might need as they work their way through the course.
These are intrapreneurship and franchising.
Chapter 6 is the marketing chapter. It introduces the basics of marketing for a new
venture. I cover customer orientation, selection of segments and the basics of segmen-
tation, the primary marketing activities, and the special problems of marketing on the
Internet. The chapter concludes with a treatment of the problems and issues of sales
forecasting. The appendix to Chapter 6 offers an example of sales forecasting using the
market potential/sales requirements technique.
Chapter 7 introduces the elements of entrepreneurial finance. It discusses how
financial resources can and cannot be a source of advantage for the new venture. Then
we show how the venture can determine its financial and cash flow needs. After re-
viewing the types and sources of potential financing, I present three methods of new
venture valuation. The chapter has an appendix: a brief introduction into the process of
going public.
Chapter 8 shows how entrepreneurs actually obtain investors and structure the
financial deal. It looks at the characteristics of various types of investors and how
to appeal to their needs. The basic elements of the deal structure are presented, and
then more advanced elements, such as phased financing and the use of options, are
introduced. I have a new section on negotiation skills in this chapter. The chapter con-
cludes with a review of the legal and tax issues raised by seeking outside investors. This
chapter has three appendices: an outline of a term sheet, a description of a typical
investment agreement, and a description of the negotiable terms to a financial
agreement.
Chapter 9 examines the creation and development of the organization. It begins
with a discussion of the top management team and provides guidelines for effective top
management processes. I do the same for boards of directors. Then I discuss the design
of the new venture, including alliances and partnerships. I offer the research and recom-
mendations from Collins and Porras’s Built to Last. I feel that the time to begin to think
about building an enduring organization is right at the start of the venture, and the Built
to Last concepts provide great insight into the entrepreneurial problem. I also offer an
introduction to the dimensions of the balanced scorecard. I explore these in the context
of entrepreneurial performance and show that performance is not just financial, but a set
of indicators across four dimensions. The balanced scorecard can be a system of manage-
ment for the entrepreneurial TMT. Last, I offer a vision of the entrepreneurial work-
place. I discuss how culture, ethics, and personnel practices can help make organizations
unique and therefore provide a competitive advantage.
Chapter 10 discusses intrapreneurship—the factors that lead to successful intrapre-
neurship and those that hinder large corporations from being entrepreneurial. This topic
may be assigned if students require an introduction to it to enable them to do their proj-
x ENTREPRENEURSHIP
ects, or if the course has a corporate component. I cover the issues of Innovator
Dilemma and Innovator Solutions. A new addition to this chapter reviews the basic con-
cepts of Blue Ocean Strategy. This important new book offers a method and process for
evaluating the current situation for corporate products and a process to find less com-
petitive but profitable positions. The chapter concludes with an appendix that covers the
foundations of franchising. Again, this can be assigned if the student projects need a
basic treatment of the subject or if the instructor has a franchising component in the
class design.
Note from the author. I recently read a very good book: Deirdre McCloskey, The
Bourgeois Virtues (Chicago: University of Chicago Press, 2006) and came across this
quote in it.
“Courage plus prudence yields enterprise.”
I think this sums up my approach in the book. Entrepreneurs require courage. They
require the courage of their convictions, of their assumptions and the courage to risk
money and time to pursue their ventures. But courage without prudence is too danger-
ous to encourage. Prudence requires thoughtful analysis, getting information, asking the
views of others, and weighing the gains available against the costs incurred.
I wish you all both courage and prudence.
PEDAGOGIC FEATURES
The fourth edition of Entrepreneurship: Strategies and Resources provides several features
that are designed to aid the learning process:
• Chapter outlines at the beginning of each chapter inform the students of what they
should know about entrepreneurship when they complete the reading.
• Chapter objectives are a blueprint of concepts the student should understand upon
completion of the chapter.
• Theory-based text enables the student to analyze, evaluate, and predict the
prospects for various business concepts and plans, and make recommendations that
increase the venture’s chances.
• Practical applications and guidelines are offered in all the chapters to show the
student how to deal with the real world of entrepreneurs, markets, and competitors.
• Street Story is the name of our boxed series of minicases. Each chapter contains
these real-life examples drawn from the pages of the business press. Each Street
Story illustrates the application of good theory to everyday new venture creation.
• Tables and figures throughout the book help illustrate difficult points and summa-
rize the material for the student.
• Extensive references at the end of each chapter provide documentation for all of
the arguments offered and enable the student to follow up with additional reading.
• End-of-chapter case and questions provide the basis for stimulating discussion.
Adapted from real situations described in the business press, these short cases are
provocative illustrations of what can go right and what can go wrong in the process
of new venture creation.
• Key terms are listed at the end of each chapter so that the student can be familiar
with the language used in the field of entrepreneurship.