ENTREPRENEURSHIP

EIGHTH

EDITION

ROBERT D. H I S R I C H . P h D
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

CONTENTS

PREFACE

PART

vi

THE ENTREPRENEURIAL
PERSPECTIVE

ENTREPRENEURSHIP AND THE

ENTREPRENEURIAL MIND-SET

Opening Profile: Ewing Marion Kauffman 3

Nature and Development of Entrepreneurship 6
The Entrepreneurial Process 7
Identify and Evaluate the Opportunity 7
Develop a Business Plan 9
Determine the Resources Required 9
Manage the Enterprise 10
How Entrepreneurs Think 10
Effectuation 10
Cognitive Adaptability 13
As Seen in Entrepreneur Magazine: What Me Worry?
.How Smart Entrepreneurs Harness the Power
of Paranoia 14

Learning from Business Failure 18

Recovery and Learning Process 20
A Dual Process for Learning from Failure 21
Ethics and Social Responsibility of Entrepreneurs 21
Ethics: Company's Code of Ethics 23
Role of Entrepreneurship in Economic Development 23
2

ENTREPRENEURIAL INTENTIONS AND

CORPORATE ENTREPRENEURSHIP
Opening Profile: Robert Mondavi 35
The Intention to Act Entrepreneurially 38
Entrepreneur Background and Characteristics
Education 38

38

Ethics: Ethical Conduct of Entrepreneurs versus

Managers 39

Age 40
Work History 40
Role Models and Support Systems 40
Moral-Support Network 41
Professional-Support Network 41

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CONTENTS
As Seen in Entrepreneur Magazine: Hot or Not? 42
Minority Entrepreneurs 43
As Seen in Entrepreneur Magazine: Provide Advice
to an Entrepreneur about Improving a Business
through Certification as a Woman-Owned
Business 44
Entrepreneurial Intentions within Existing

Organizations 45
Managerial versus Entrepreneurial Decision
Making 45
Strategic Orientation and Commitment to
Opportunity 46
Commitment of Resources and Control of
Resources 46
Management Structure and Reward Philosophy 47
Growth Orientation and Entrepreneurial Culture 48
Causes for Interest in Corporate Entrepreneurship 48
Establishing a Culture for Corporate Entrepreneurship 51
Leadership Characteristics of Corporate Entrepreneurs 53
Establishing Corporate Entrepreneurship in the
Organization 54
Problems and Successful Efforts 56
3

ENTREPRENEURIAL STRATEGY: GENERATING

AND EXPLOITING NEW ENTRIES
Opening Profile: Justin Parer 65
New Entry 66
Generation of a New Entry Opportunity 67
Resources as a Source of Competitive Advantage 67
Creating a Resource Bundle That Is Valuable, Rare,
and Inimitable 68
Assessing the Attractiveness of a New Entry
Opportunity 70
Information on a New Entry 70
As Seen in Entrepreneur Magazine: Elevator Pitch
for Project Alabama 71
Comfort with Making a Decision under

Uncertainty 72
Decision to Exploit or Not to Exploit the
New Entry 72
Entry Strategy for New Entry Exploitation 73
Environmental Instability and First-Mover
(Dis)Advantages 74
Customers' Uncertainty and First-Mover
(Dis)Advantages 76
Ethics: Do the Right Thing 78
Lead Time and First-Mover (Dis)Advantages 78
As Seen in Entrepreneur Magazine: Provide Advice to
an Entrepreneur about Being More Innovative 80

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xi

Risk Reduction Strategies for New Entry

Exploitation 81
Market Scope Strategies 81
Imitation Strategies 82
Managing Newness 84

PART

FROM IDEA TO THE OPPORTUNITY

91

CREATIVITY AND THE BUSINESS IDEA

92

Opening Profile: Frederick W. Smith

Trends 96
Green Trend 96
Clean-Energy Trend 96
Organic-Orientation Trend 96
Economic Trend 97
Social Trend 97
Health Trend 97
Web Trend 97
Sources of New Ideas 97
Consumers 97
Existing Products and Services 98
Distribution Channels 98
Federal Government 98
Research and Development 98

93

As Seen in BusinessWeek: The Myth of Creativity

Methods of Generating Ideas 99

99

Focus Groups 99
Brainstorming 100
Brainwriting 100
Problem Inventory Analysis 100
Creative Problem Solving 101
Brainstorming 102
Reverse Brainstorming 102
Gordon Method 102
Checklist Method 103
Free Association 103
Forced Relationships 103
Collective Notebook Method 103
As Seen in BusinessWeek: How to Produce
Big Ideas on Demand 104

Attribute Listing 105

Big-Dream Approach 106
Parameter Analysis 106
Innovation 106
Types of Innovation 106
Defining a New Innovation (Product or Service)
Classification of New Products 109

108

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CONTENTS

Opportunity Recognition 110

Product Planning and Development Process

111

Establishing Evaluation Criteria 111

Ethics: Leadership Is about Doing, Not Saying

112

Idea Stage 114

Concept Stage 114
Product Development Stage 117
Test Marketing Stage 117
E-Commerce and Business Start-Up 117
Using E-Commerce Creatively 118
WebSites 118
Tracking Customer Information 119
Doing E-Commerce as an Entrepreneurial Company
5

"*

119

IDENTIFYING AND ANALYZING DOMESTIC AND

INTERNATIONAL OPPORTUNITIES
Opening Profile: A. Malachi Mixon III 125
Introduction 127
Opportunity Recognition and the Opportunity
Assessment Plan 128
Information Sources 130
General Information 130
Industry and Market Information 131
Competitive Company and Product Information
Government Sources 131
As Seen in BusinessWeek: Mom-and-Pop
Multinationals 132
.' Search Engines 132

Trade Associations 132

Trade Publications 133
The Nature of International Entrepreneurship 133
The Importance of International Business to
the Firm 134
International versus Domestic Entrepreneurship 134
Economics 134
Stage of Economic Development 134
Current Account 135
Type of Economic System 135
Political-Legal Environment 135
Language 137
Technological Environment 137
Ethics: Ethics Must Be Global Not Local
Culture 138

Social Structure 140

Religion 141
Political Philosophy 141
Economics and Economic Philosophy
Education 141
Manners and Customs 141

138

141

131

124

CONTENTS

Available Distribution Systems 142

Motivations to Go Global 142
Strategic Effects of Going Global 143
Foreign Market Selection 144

xiii

As Seen in BusinessWeek: Stranger in a

Strange Land 145

Entrepreneurial Entry Strategies 147
Exporting 147
Nonequity Arrangements 148
Direct Foreign Investment 149
Entrepreneurial Partnering 151
Barriers to International Trade 152
General Agreement on Tariffs and Trade
(GATT) 152
Increasing Protectionist Attitudes 152
Trade Blocs and Free Trade Areas 152
Entrepreneur's Strategy and
Trade Barriers 153
Implications for the Global Entrepreneur 153
Appendix 5A: Example Outline of an International
Business Plan 156

PROTECTING THE IDEA AND OTHER LEGAL ISSUES

FOR THE ENTREPRENEUR
Opening Profile: Steve Lipscomb 159
What Is Intellectual Property? 161
Need for a Lawyer 161
,/ How to Select a Lawyer 161
As Seen in Entrepreneur Magazine: Provide Advice
to an Entrepreneur about Intellectual Property
Protection 162
Legal Issues in Setting Up the
Organization 163
Patents 163
International Patents 164
The Provisional Application 164
The Patent Application 165
Patent Infringement 166
Business Method Patents 166
Start-Up without a Patent 167
As Seen in BusinessWeek: Provide Advice to an
Entrepreneur Inventor about How to
Make Patents Pay 168
Trademarks 167
Registering the Trademark 169
Copyrights 170
Ethics: How Much Responsibility Should Our Youth
Have for Illegal Downloading? 171
Trade Secrets 171

158

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CONTENTS

Licensing 173
Product Safety and Liability
Insurance 175
Sarbanes-Oxley Act 177
Contracts 178

PART

175

FROM THE OPPORTUNITY TO

THE BUSINESS PLAN
THE BUSINESS PLAN: CREATING AND STARTING
THE VENTURE
Opening Profile: Belinda Guadarrama 187
Planning as Part of the Business Operation 189
What Is the Business Plan? 189
Who Should Write the Plan? 190
Scope and Value of the Business PlanWho Reads
the Plan? 191
As Seen in BusinessWeek: Don't Expect a Fee for Making

an Introduction 192
How Do Potential Lenders and Investors Evaluate
the Plan? 192
Ethics: Protecting Your Business Idea 194
Presenting the Plan 194
Information Needs 195
Market Information 195
Operations Information Needs 198
Financial Information Needs 199
Using the Internet as a Resource Tool 199
Writing the Business Plan 200
Introductory Page 202
Executive Summary 202
Environmental and Industry Analysis 203
Description of Venture 205
Production Plan 207
Operations Plan 207
Marketing Plan 208
Organizational Plan 208
Assessment of Risk 209
Financial Plan 209
As Seen in BusinessWeek: Elevator Pitch for
Perfect Dinner 210

Appendix 210
Using and Implementing the Business Plan 210
Measuring Plan Progress 211
Updating the Plan 212
Why Some Business Plans Fail 212
Appendix 7A: Sample Business PlanGopher It 216

185

186

CONTENTS

THE MARKETING PLAN

xv

222

Opening Profile: Warren G. Jackson 223

Industry Analysis 225
Competitor Analysis 225
Marketing Research for the New Venture 226
Step One: Defining the Purpose or Objectives 227

Step Two: Gathering Data from Secondary Sources 227

As Seen in BusinessWeek: How to Expand Your
Customer Base 229

Step Three: Gathering Information from Primary

Sources 229
Step Four: Analyzing and Interpreting the
Results 232
Understanding the Marketing Plan 232
Characteristics of a Marketing Plan 233
Ethics: Devil's Advocate 236
The Marketing Mix 236
Steps in Preparing the Marketing Plan 237
Defining the Business Situation 237
Defining the Target Market: Opportunities and Threats 237
Considering Strengths and Weaknesses 240
Establishing Goals and Objectives 240
Defining Marketing Strategy and Action Programs 240
Marketing Strategy: Consumer versus Business-toBusiness Markets 244
As Seen in Entrepreneur Magazine: Provide Advice
to an Entrepreneur about Web Sites 245

Budgeting the Marketing Strategy 246

Implementation of the Market Plan 246
Monitoring the Progress of Marketing Actions 246
Appendix 8A: Marketing Plan Outlines 250
THE ORGANIZATIONAL PLAN
Opening Profile: Jim Sinegal

255

Developing the Management Team 256

As Seen in Entrepreneur Magazine: Provide Advice
to an Entrepreneur about Some Legal Aspects of
Starting a Business 257
Legal Forms of Business 258

Ownership 258
Liability of Owners 258
Costs of Starting a Business 260
Continuity of Business 260
Transferability of Interest 261
Capital Requirements 261
Management Control 262
Distribution of Profits and Losses 262
Attractiveness for Raising Capital 263

254

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CONTENTS

Tax Attributes of Forms of Business 263 ,

Tax Issues for Proprietorship 263
Tax Issues for Partnership 263
Tax Issues for Corporation 265
The Limited Liability Company versus the
S Corporation 265
S Corporation 265
Advantages of an S Corporation 266
Disadvantages of an S Corporation 266
Ethics: Lawyers Explain the Steps to Take If Your
Business Partner Violates His or Her Obligations
to the Business 267
The Limited Liability Company 267
Advantages of an LLC 268
Designing the Organization 268
Building the Management Team and a Successful
Organization Culture 271
As Seen in BusinessWeek: Elevator Pitch
for 20x200 Web Site 272
The Role of a Board of Directors 273
The Board of Advisors 274
The Organization and Use of Advisors 274
10

THE FINANCIAL PLAN

280

Opening Profile: Tony Hsieh 281

Operating and Capital Budgets 282
Ethics: Are You a Good Leader?

284

Pro Forma Income Statements 285

Pro Forma Cash Flow 288
As Seen in BusinessWeek: Provide Advice to an
Entrepreneur about Solving Their Cash-Flow

Problem to Stay in Business 290

Pro Forma Balance Sheet 292
Break-Even Analysis 294
Pro Forma Sources and Applications of Funds 296
As Seen in BusinessWeek: Elevator Pitch
for Beer Chips 297
Software Packages 298

PART

11

FROM THE BUSINESS PLAN TO

FUNDING THE VENTURE
SOURCES OF CAPITAL
Opening Profile: Scott Walker 305
An Overview 308
Debt or Equity Financing 308
Internal or External Funds 309

303
304

CONTENTS

xvii

Personal Funds 310

As Seen in BusinessWeek: Show Me the

Moneymen 311
Family and Friends 312
Commercial Banks 312
Types of Bank Loans 313
Cash Flow Financing 314
Bank Lending Decisions 314
Role of the SBA in Small-Business
Financing 315
Ethics: We Need an Ethics Czar 316
Research and Development Limited
Partnerships 318
Maj or Elements 318
Procedure 319
Benefits and Costs 319
Examples 320
Government Grants 320

As Seen in BusinessWeek: From 401 (k) Nest Egg

to Seed Money 321

Procedure 322
Other Government Grants 323
Private Placement 324
Types of Investors 324
Private Offerings 324
Regulation D 324
Bootstrap Financing 326
12

INFORMAL RISK CAPITAL, VENTURE CAPITAL,

AND GOING PUBLIC
Opening Profile: Mark Zuckerberg
Financing the Business 336
Informal Risk-Capital Market 337

333

As Seen in BusinessWeek: Old Banks, New

Lending Tricks 338

Venture Capital 341
Nature of Venture Capital 341
As Seen in BusinessWeek: She's an Angel 342
Overview of the Venture-Capital Industry 342
Venture-Capital Process 347
Locating Venture Capitalists 350
Approaching a Venture Capitalist 350
Valuing Your Company 352
Factors in Valuation 352
Ratio Analysis 353
Liquidity Ratios 353
Activity Ratios 354
Leverage Ratios 354
Profitability Ratios 355

332

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CONTENTS

General Valuation Approaches 355

General Valuation Method 357
Evaluation of an Internet Company 358
Deal Structure 359
Going Public 359
Ethics: Financial Transparency a Must 360
Advantages 360
Disadvantages 362
Timing of Going Public and Underwriter
Selection 364
Timing 364
Underwriter Selection 365
Registration Statement and Timetable 366
The Prospectus 367
The Registration Statement 368
Procedure 368
Legal Issues and Blue-Sky Qualifications 369
Legal Issues 369
Blue-Sky Qualifications 369
After Going Public 369
As Seen in BusinessWeek: Where Venture Capital
Never Ventured Before 370

Aftermarket Support 370

Relationship with the Financial Community 370
Reporting Requirements 371

PART

13

FROM FUNDING THE VENTURE TO

LAUNCHING, GROWING, AND
ENDING THE NEW VENTURE
STRATEGIES FOR GROWTH AND MANAGING
THE IMPLICATIONS OF GROWTH
Opening Profile: Brian and Jennifer Maxwell 379
Growth Strategies: Where to Look for Growth Opportunities 380
Penetration Strategies 381
Market Development Strategies 382
Product Development Strategies 382
Diversification Strategies 383
As Seen in Entrepreneur Magazine: Provide Advice
to an Entrepreneur about Growing into New
Markets Using the Internet 384

Example of Growth Strategies 385

Economic Implications of Growth 385
Implications of Growth for the Firm 387
Pressures on Existing Financial Resources 387
Pressures on Human Resources 388

377

378

CONTENTS

Pressures on the Management of Employees 388

Pressures on the Entrepreneur's Time 388
Overcoming Pressures on Existing Financial
Resources 388
Financial Control 388
Ethics: Lessons from Enron 389
Managing Cash Flow 390
Managing Inventory 392
Managing Fixed Assets 393
Managing Costs and Profits 394
Taxes 395
Record Keeping 396
Overcoming Pressures on Existing Human
Resources 396
Overcoming Pressures on the Management of

xix

"*

Employees 397
As Seen in Entrepreneur Magazine: Elevator Pitch

for eVest 398

Overcoming Pressures on Entrepreneurs' Time 399
Basic Principles of Time Management 400
Implications of Firm Growth for the Entrepreneur 401
A Categorization of Entrepreneurs and Their
Firms' Growth 402
\k

ACCESSING RESOURCES FOR GROWTH

FROM EXTERNAL SOURCES

410

Opening Profile: Bill Gross 411

Using External Parties to Help Grow a Business 412
Franchising 413
Advantages of Franchisingto the Franchisee 413
Advantages of Franchisingto the Franchisor
As Seen in BusinessWeek: Venture Capital's
Favorite Startups 416

415

Disadvantages of Franchising 417

Types of Franchises 417
Investing in a Franchise 418
Ethics: Fair Enough 419
Joint Ventures 421
Types of Joint Ventures 422
Factors in Joint Venture Success 423
Acquisitions 424
Advantages of an Acquisition 424
Disadvantages of an Acquisition 425
Synergy 425
Structuring the Deal 425
As Seen in Entrepreneur Magazine: Provide Advice
t o an Entrepreneur about Entering into Agreements

Locating Acquisition Candidates 427

426

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CONTENTS

Mergers 428
Leveraged Buyouts 429
Overcoming Constraints by Negotiating for More
Resources 430
15

SUCCESSION PLANNING AND STRATEGIES FOR

HARVESTING AND ENDING THE VENTURE
Opening Profile: Teresa Cascioli

438

439

As Seen in BusinessWeek: Provide Advice to an Entrepreneur on

How to Beat Failure and Be the Boss Again 441
Exit Strategy 442
Succession of Business 442

Transfer to Family Members 443

Transfer to Nonfamily Members 443
Options for Selling the Business 444
Direct Sale 445
Employee Stock Option Plan 446
Management Buyout 446
Ethics: Involving Employees, Bankers, and Business

Associates in the Problem 447

BankruptcyAn Overview 447
Chapter 11Reorganization 449
Surviving Bankruptcy 450
As Seen in BusinessWeek: Elevator Pitch for nPower Personal
Energy Generator 451

Chapter 13Extended Time Payment Plans 452

Chapter 7Liquidation 452
Strategy during Reorganization 453
Keeping the Venture Going 453
Warning Signs of Bankruptcy 454
Starting Over 455
The Reality of Failure 456
Business Turnarounds 456

PART

CASES
Case
Case
Case
Case
Case
Case
Case
Case
Case
Case

1
2
3
4
5
6
7
8
9
10

463
Turner Test Prep Co. 465
Jim Boothe, Inventor 467
A. Monroe Lock and Security Systems 468
Beijing Sammies 470
"Mamma Mia!" The Little Show That Could! 484
The Beach Carrier 492
Gourmet to Go 495
Intervela d.o.o. KoperVictory Sailmakers 502
The Gril-Kleen Corporation 509
The Winslow Clock Company 516

CONTENTS

Case 11
Case 12
Case 13
Case 14
Case 15
Case 16
Case 17

NeoMed Technologies 525

Rug Bug Corporation 540
Nature Bros. Ltd. 550
Amy's Bread 557
Oklahoma National Bank 563
Datavantage Corporation 572
Dual Pane Company 582

INDEX

584

xxi