ENTREPRENEURSHIP EIGHTH EDITION ROBERT D. HISRICH.PhD Garvin Professor of Global Entrepreneurship Director, Walker Center for Global Entrepreneurship Thunderbird School of Global Management MICHAEL P. PETERS, PhD Professor Emeritus Carroll School of Management Boston College DEAN A. SHEPHERD, PhD Randall L. Tobias Chair in Entrepreneurial Leadership and Professor of Entrepreneurship Kelley School of Business Indiana University McGraw-Hill Irwin
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ENTREPRENEURSHIPE I G H T H E D I T I O N
ROBERT D. H ISRICH.PhD
Garvin Professor of Global EntrepreneurshipDirector, Walker Center for Global Entrepreneurship
Thunderbird School of Global Management
MICHAEL P. PETERS, PhDProfessor Emeritus
Carroll School of ManagementBoston College
DEAN A. SHEPHERD, PhDRandall L. Tobias Chair in Entrepreneurial Leadership and
Professor of EntrepreneurshipKelley School of Business
Indiana University
McGraw-HillIrwin
CONTENTS
PREFACE vi
PART 1 THE ENTREPRENEURIALPERSPECTIVE
1 ENTREPRENEURSHIP AND THEENTREPRENEURIAL MIND-SET 2
Opening Profile: Ewing Marion Kauffman 3Nature and Development of Entrepreneurship 6The Entrepreneurial Process 7
Identify and Evaluate the Opportunity 7Develop a Business Plan 9Determine the Resources Required 9Manage the Enterprise 10
How Entrepreneurs Think 10Effectuation 10Cognitive Adaptability 13
As Seen in Entrepreneur Magazine: What Me Worry?.How Smart Entrepreneurs Harness the Powerof Paranoia 14
Learning from Business Failure 18Recovery and Learning Process 20A Dual Process for Learning from Failure 21
Ethics and Social Responsibility of Entrepreneurs 21Ethics: Company's Code of Ethics 23Role of Entrepreneurship in Economic Development 23
Opening Profile: Robert Mondavi 35The Intention to Act Entrepreneurially 38Entrepreneur Background and Characteristics 38
Education 38Ethics: Ethical Conduct of Entrepreneurs versus
Managers 39Age 40Work History 40
Role Models and Support Systems 40Moral-Support Network 41Professional-Support Network 41
CONTENTS
As Seen in Entrepreneur Magazine: Hot or Not? 42Minority Entrepreneurs 43As Seen in Entrepreneur Magazine: Provide Advice
to an Entrepreneur about Improving a Businessthrough Certification as a Woman-OwnedBusiness 44
Entrepreneurial Intentions within ExistingOrganizations 45
Managerial versus Entrepreneurial DecisionMaking 45
Strategic Orientation and Commitment toOpportunity 46
Commitment of Resources and Control ofResources 46
Management Structure and Reward Philosophy 47Growth Orientation and Entrepreneurial Culture 48Causes for Interest in Corporate Entrepreneurship 48Establishing a Culture for Corporate Entrepreneurship 51Leadership Characteristics of Corporate Entrepreneurs 53
Establishing Corporate Entrepreneurship in theOrganization 54
Problems and Successful Efforts 56
3 ENTREPRENEURIAL STRATEGY: GENERATINGAND EXPLOITING NEW ENTRIES 64
Opening Profile: Justin Parer 65New Entry 66Generation of a New Entry Opportunity 67
Resources as a Source of Competitive Advantage 67Creating a Resource Bundle That Is Valuable, Rare,
and Inimitable 68Assessing the Attractiveness of a New Entry
Opportunity 70Information on a New Entry 70
As Seen in Entrepreneur Magazine: Elevator Pitchfor Project Alabama 71
Comfort with Making a Decision underUncertainty 72
Decision to Exploit or Not to Exploit theNew Entry 72
Entry Strategy for New Entry Exploitation 73Environmental Instability and First-Mover
(Dis)Advantages 74Customers' Uncertainty and First-Mover
(Dis)Advantages 76Ethics: Do the Right Thing 78
Lead Time and First-Mover (Dis)Advantages 78As Seen in Entrepreneur Magazine: Provide Advice to
an Entrepreneur about Being More Innovative 80
CONTENTS xi
Risk Reduction Strategies for New EntryExploitation 81
Innovation 106Types of Innovation 106Defining a New Innovation (Product or Service) 108Classification of New Products 109
xii CONTENTS
Opportunity Recognition 110Product Planning and Development Process 111
Establishing Evaluation Criteria 111Ethics: Leadership Is about Doing, Not Saying 112
Idea Stage 114 "*Concept Stage 114Product Development Stage 117Test Marketing Stage 117
E-Commerce and Business Start-Up 117Using E-Commerce Creatively 118WebSites 118Tracking Customer Information 119Doing E-Commerce as an Entrepreneurial Company 119
5 IDENTIFYING AND ANALYZING DOMESTIC ANDINTERNATIONAL OPPORTUNITIES 124
Opening Profile: A. Malachi Mixon III 125Introduction 127Opportunity Recognition and the Opportunity
Assessment Plan 128Information Sources 130
General Information 130Industry and Market Information 131Competitive Company and Product Information 131Government Sources 131
As Seen in BusinessWeek: Mom-and-PopMultinationals 132.' Search Engines 132
Trade Associations 132Trade Publications 133
The Nature of International Entrepreneurship 133The Importance of International Business to
the Firm 134International versus Domestic Entrepreneurship 134
Economics 134Stage of Economic Development 134Current Account 135Type of Economic System 135Political-Legal Environment 135Language 137
Technological Environment 137Ethics: Ethics Must Be Global Not Local 138Culture 138
Social Structure 140Religion 141Political Philosophy 141Economics and Economic Philosophy 141Education 141Manners and Customs 141
CONTENTS xiii
Available Distribution Systems 142Motivations to Go Global 142Strategic Effects of Going Global 143Foreign Market Selection 144 .As Seen in BusinessWeek: Stranger in a
Strange Land 145Entrepreneurial Entry Strategies 147
Business Method Patents 166Start-Up without a Patent 167As Seen in BusinessWeek: Provide Advice to an
Entrepreneur Inventor about How toMake Patents Pay 168
Trademarks 167Registering the Trademark 169
Copyrights 170Ethics: How Much Responsibility Should Our Youth
Have for Illegal Downloading? 171Trade Secrets 171
xiv CONTENTS
Licensing 173Product Safety and Liability 175Insurance 175Sarbanes-Oxley Act 177Contracts 178
PART 3 FROM THE OPPORTUNITY TOTHE BUSINESS PLAN 185
7 THE BUSINESS PLAN: CREATING AND STARTINGTHE VENTURE 186
Opening Profile: Belinda Guadarrama 187Planning as Part of the Business Operation 189
What Is the Business Plan? 189Who Should Write the Plan? 190Scope and Value of the Business Plan—Who Reads
the Plan? 191As Seen in BusinessWeek: Don't Expect a Fee for Making
an Introduction 192How Do Potential Lenders and Investors Evaluate
the Plan? 192Ethics: Protecting Your Business Idea 194Presenting the Plan 194Information Needs 195
Market Information 195Operations Information Needs 198
Financial Information Needs 199Using the Internet as a Resource Tool 199Writing the Business Plan 200
Introductory Page 202Executive Summary 202Environmental and Industry Analysis 203Description of Venture 205Production Plan 207Operations Plan 207Marketing Plan 208Organizational Plan 208Assessment of Risk 209Financial Plan 209
As Seen in BusinessWeek: Elevator Pitch forPerfect Dinner 210
Appendix 210Using and Implementing the Business Plan 210
Measuring Plan Progress 211Updating the Plan 212
Why Some Business Plans Fail 212Appendix 7A: Sample Business Plan—Gopher It 216
CONTENTS xv
8 THE MARKETING PLAN 222
Opening Profile: Warren G. Jackson 223Industry Analysis 225
Competitor Analysis 225 1Marketing Research for the New Venture 226
Step One: Defining the Purpose or Objectives 227Step Two: Gathering Data from Secondary Sources 227
As Seen in BusinessWeek: How to Expand YourCustomer Base 229
Step Three: Gathering Information from PrimarySources 229
Step Four: Analyzing and Interpreting theResults 232
Understanding the Marketing Plan 232Characteristics of a Marketing Plan 233Ethics: Devil's Advocate 236The Marketing Mix 236Steps in Preparing the Marketing Plan 237
Defining the Business Situation 237Defining the Target Market: Opportunities and Threats 237Considering Strengths and Weaknesses 240Establishing Goals and Objectives 240Defining Marketing Strategy and Action Programs 240Marketing Strategy: Consumer versus Business-to-
Business Markets 244As Seen in Entrepreneur Magazine: Provide Advice
to an Entrepreneur about Web Sites 245Budgeting the Marketing Strategy 246Implementation of the Market Plan 246Monitoring the Progress of Marketing Actions 246
Appendix 8A: Marketing Plan Outlines 250
THE ORGANIZATIONAL PLAN 254
Opening Profile: Jim Sinegal 255Developing the Management Team 256As Seen in Entrepreneur Magazine: Provide Advice
to an Entrepreneur about Some Legal Aspects ofStarting a Business 257
Legal Forms of Business 258Ownership 258Liability of Owners 258Costs of Starting a Business 260Continuity of Business 260Transferability of Interest 261Capital Requirements 261Management Control 262Distribution of Profits and Losses 262Attractiveness for Raising Capital 263
xvi CONTENTS
Tax Attributes of Forms of Business 263 ,Tax Issues for Proprietorship 263Tax Issues for Partnership 263Tax Issues for Corporation 265
The Limited Liability Company versus the *S Corporation 265
S Corporation 265Advantages of an S Corporation 266Disadvantages of an S Corporation 266
Ethics: Lawyers Explain the Steps to Take If YourBusiness Partner Violates His or Her Obligationsto the Business 267
The Limited Liability Company 267Advantages of an LLC 268
Designing the Organization 268Building the Management Team and a Successful
Organization Culture 271As Seen in BusinessWeek: Elevator Pitch
for 20x200 Web Site 272The Role of a Board of Directors 273The Board of Advisors 274The Organization and Use of Advisors 274
10 THE FINANCIAL PLAN 280
Opening Profile: Tony Hsieh 281Operating and Capital Budgets 282Ethics: Are You a Good Leader? 284Pro Forma Income Statements 285Pro Forma Cash Flow 288As Seen in BusinessWeek: Provide Advice to an
Entrepreneur about Solving Their Cash-FlowProblem to Stay in Business 290
Pro Forma Balance Sheet 292Break-Even Analysis 294Pro Forma Sources and Applications of Funds 296As Seen in BusinessWeek: Elevator Pitch
for Beer Chips 297Software Packages 298
PART 4 FROM THE BUSINESS PLAN TOFUNDING THE VENTURE 303
11 SOURCES OF CAPITAL 304
Opening Profile: Scott Walker 305An Overview 308
Debt or Equity Financing 308Internal or External Funds 309
CONTENTS xvii
Personal Funds 310As Seen in BusinessWeek: Show Me the
Moneymen 311Family and Friends 312Commercial Banks 312 1
Types of Bank Loans 313Cash Flow Financing 314Bank Lending Decisions 314
Role of the SBA in Small-BusinessFinancing 315
Ethics: We Need an Ethics Czar 316Research and Development Limited
Partnerships 318Maj or Elements 318Procedure 319Benefits and Costs 319Examples 320
Government Grants 320As Seen in BusinessWeek: From 401 (k) Nest Egg
to Seed Money 321Procedure 322Other Government Grants 323
Private Placement 324Types of Investors 324Private Offerings 324Regulation D 324
Bootstrap Financing 326
12 INFORMAL RISK CAPITAL, VENTURE CAPITAL,AND GOING PUBLIC 332
Opening Profile: Mark Zuckerberg 333Financing the Business 336Informal Risk-Capital Market 337As Seen in BusinessWeek: Old Banks, New
Lending Tricks 338Venture Capital 341
Nature of Venture Capital 341As Seen in BusinessWeek: She's an Angel 342
Overview of the Venture-Capital Industry 342Venture-Capital Process 347Locating Venture Capitalists 350Approaching a Venture Capitalist 350
Valuing Your Company 352Factors in Valuation 352Ratio Analysis 353Liquidity Ratios 353Activity Ratios 354Leverage Ratios 354Profitability Ratios 355
xviii CONTENTS
General Valuation Approaches 355General Valuation Method 357Evaluation of an Internet Company 358
Deal Structure 359Going Public 359Ethics: Financial Transparency a Must 360
Advantages 360Disadvantages 362
Timing of Going Public and UnderwriterSelection 364
Surviving Bankruptcy 450As Seen in BusinessWeek: Elevator Pitch for nPower Personal
Energy Generator 451Chapter 13—Extended Time Payment Plans 452Chapter 7—Liquidation 452Strategy during Reorganization 453Keeping the Venture Going 453Warning Signs of Bankruptcy 454Starting Over 455The Reality of Failure 456Business Turnarounds 456
PART 6 CASES 463
Case 1 Turner Test Prep Co. 465Case 2 Jim Boothe, Inventor 467Case 3 A. Monroe Lock and Security Systems 468Case 4 Beijing Sammies 470Case 5 "Mamma Mia!" The Little Show That Could! 484Case 6 The Beach Carrier 492Case 7 Gourmet to Go 495Case 8 Intervela d.o.o. Koper—Victory Sailmakers 502Case 9 The Gril-Kleen Corporation 509
Case 10 The Winslow Clock Company 516
CONTENTS xxi
Case 11 NeoMed Technologies 525Case 12 Rug Bug Corporation 540Case 13 Nature Bros. Ltd. 550Case 14 Amy's Bread 557Case 15 Oklahoma National Bank 563Case 16 Datavantage Corporation 572Case 17 Dual Pane Company 582