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.
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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)
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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
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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
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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
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The Mission Statement
Defines the purpose of the business in 40
to 50 words
Provides direction and motivation
Addresses these topics:
Target customers and markets served
Products and/or services provided
Use of technology
Importance of public issues and employees
Focus on survival, profitability, and growth
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Vision
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
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Culture
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
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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
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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?
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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?
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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.
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Competitive Analysis
Your
Company
Competitor
#1
Competitor
#2
Competitor
#3
Quality
Price
Location
Selection
Service
Speed
Specializatio
n
Personalizati
on
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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
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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.
2.
3.
Define the unit of sale.
Calculate the amount of gross profit
per unit.
If one unit of sale is profitable, the
whole business is likely to be profitable.
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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)
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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
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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
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Economics of One Unit —
Manufacturing Business
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Economics of One Unit —
Wholesale Business
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Economics of One Unit
— Retail Business
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Economics of One Unit —
Service Business
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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.
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