In this chapter, we will present the history of entrepreneurship and how entrepreneurs have evolved through history. Definition of “what entrepreneurship is?” will be provided. Finally, a review some common myths on entrepreneurship is given in order to understand demystify entrepreneurs and entrepreneurship.
History at the very beginning… Throughout history, the notion and the definition of the entrepreneur has evolved and in spite of all this interest, a concise, universally accepted definition has not yet emerged. The development of the theory of entrepreneurship parallels to a great extent the development of the term itself.
At the earliest Period, an example of the earliest definition of an entrepreneur is Marco Polo, who attempted to establish trade routes to the Far East. As an entrepreneur, Marco Polo would sign a contract with a money person (forerunner of today's venture capitalist) to sell his goods. A common contract during this time provided a loan to the merchant-adventurer at a 22.5 percent rate, including insurance. While the capitalist was a passive risk bearer, the merchant-adventurer took the active role in trading, bearing all the physical and emotional risks. When the merchant-adventurer successfully sold the goods and completed the trip, the profits were divided, with the capitalist taking most of them (up to 75 percent), and the merchant-adventurer settling for the remaining 25 percent.
This image represents a painted portrait of Marco Polo, who was born in 1254 and died in 1324.
In the Middle Ages, the term entrepreneur was used to describe both an actor and a person who managed large production projects. In such large production projects, this individual did not take any risks, but merely managed the project using the resources provided, usually by the government of the country. A typical entrepreneur in the Middle Ages was the cleric - the person in charge of great architectural works, such as castles and fortifications, public buildings, abbeys, and cathedrals.
This image represents a painted portrait of a cleric in the Middle Ages.
History during the 17th and 18th centuries …
The reemergent connection of risk with entrepreneurship developed in the 17th century, with an entrepreneur being a person who entered into a contractual arrangement with the government to perform a service or to supply stipulated products. Since the contract price was fixed, any resulting profits or losses were the entrepreneur's.
Richard Cantillon, a noted economist and author in the 1700s, developed one of the early theories of the entrepreneur. He viewed the entrepreneur as a risk taker, observing that merchants, farmers, craftsmen, and other sole proprietors "buy at a certain price and sell at an uncertain price, therefore operating at a risk."
This image represents a painted portrait of Richard Cantillon, who was born in 1680 and died in 1734.
In the 18th century, the person with capital was differentiated from the one who needed capital. In other words, the entrepreneur was distinguished from the capital provider (the present-day venture capitalist). One reason for this differentiation was the industrialization occurring throughout the world (industrial revolution). Many of the inventions developed during this time were reactions to the changing world.
It was the case with the invention of Thomas Edison for example. He was developing new technologies and was unable to finance his inventions himself. Thus, Edison raised capital from private sources to develop and experiment in the fields of electricity and chemistry. He was capital user (entrepreneur), not provider (venture capitalists).
Thomas Edison and the invention of the electric light bulb presented for the first time on December 31, 1879
This image represents a black and white picture of Thomas Edison, who is standing proudly next to his first electric light bulb.
In the late 19th and early 20th centuries, entrepreneurs were frequently not distinguished from managers and were viewed mostly from an economic perspective. Andrew Carnegie is one of the best examples of this definition. Carnegie invented nothing, but rather adapted and developed new technology in the creation of products to achieve economic vitality.
This image represents a black and white picture of Andrew Carnegie, who was born in 1835 and died in 1919.
In the middle of the 20th century, the notion of an entrepreneur as an innovator was established. The function of the entrepreneur is to reform or revolutionize the pattern of production by exploiting an invention or, more generally, an untried technological method of producing a new commodity or producing an old one in a new way, opening a new source of supply of materials or a new outlet for products, by organizing a new industry. The concept of innovation and newness is an integral part of entrepreneurship in this definition.
Indeed, innovation, the act of introducing something new, is one of the most difficult tasks for the entrepreneur. It takes not only the ability to create and conceptualize but also the ability to understand all the forces at work in the environment. The newness can consist of anything from a new product to a new distribution system to a method for developing a new organizational structure.
Entrepreneurship’s importance to an economy and the society in which it resides was first articulated in 1934 by Joseph Schumpeter. In his book “The Theory of Economic Development”, Schumpeter argued that entrepreneurs develop new products and technologies that over time make current products and technologies obsolete. Schumpeter called this process creative destruction. Because new products and technologies are typically better than those they replace and the availability of improved products and technologies increases consumer demand, creative destruction stimulates economic activity. The new products and technologies may also increase the productivity of all elements of a society.
This image represents a black and white picture of Joseph Schumpeter, who was born in 1883 and died in 1950.
Definition of entrepreneurship
At the origin, the word entrepreneur is French and, literally translated, means "between-taker" or "go-between. »
According to the European Start-up Monitor, “Entrepreneurship is an activity that involves the discovery, evaluation, and exploitation of opportunities to introduce new goods and services, ways of organising, markets, processes, and raw materials through organising efforts that previously had not existed.” (2003, p. 4).
We can also define entrepreneurship as: “the process of creating something new with value by devoting the necessary time and effort, assuming the accompanying financial, psychic, and social risks, and receiving the resulting rewards of monetary and personal satisfaction and independence” (T. Astebro and P. Thompson, “Entrepreneurs, Jacks of all Trades or Hobos,” Research Policy 40, no. 5 (2011): 637–49.)
This definition of entrepreneurship stresses four basic aspects of being an entrepreneur.
First, entrepreneurship involves the creation process--creating something new of value. The creation has to have value to the entrepreneur and value to the audience for which it is developed. This audience can be
the market of organizational buyers for business innovation,
the hospital's administration for a new admitting procedure and software,
prospective students for a new course or even college of entrepreneurship, or
the constituency for a new service provided by a non-profit agency.
Second, entrepreneurship requires the devotion of the necessary time and effort. Only those going through the entrepreneurial process appreciate the significant amount of time and effort it takes to create something new and make it operational. As one new entrepreneur so succinctly stated, "While I may have worked as many hours in the office while I was in industry, as an entrepreneur I never stopped thinking about the business. »
The third part of the definition involves the rewards of being an entrepreneur. The most important of these rewards is independence, followed by personal satisfaction. For profit entrepreneurs, the monetary reward also comes into play. For some profit entrepreneurs, money becomes the indicator of the degree of success achieved.
Assuming the necessary risks is the final aspect of entrepreneurship. Because action takes place over time, and the future is unknowable, action is inherently uncertain. This uncertainty is further enhanced by the novelty intrinsic to entrepreneurial actions, such as the creation of new products, new services, new ventures, and so on. Entrepreneurs must decide to act even in the face of uncertainty over the outcome of that action. Therefore, entrepreneurs respond to, and create, change through their entrepreneurial actions, where entrepreneurial action refers to behaviour in response to a judgmental decision under uncertainty about a possible opportunity for profit.
Common myths about entrepreneurs
There are many misconceptions about who entrepreneurs are and what motivates them to launch firms to develop their ideas. Some misconceptions are because of the media covering atypical entrepreneurs, such as a couple of college students who obtain venture capital to fund a small business that they grow into a multimillion-dollar company.
Such articles rarely state that these entrepreneurs are the exception rather than the norm and that their success is a result of carefully executing an appropriate plan to commercialize what inherently is a solid business idea.
Indeed, the success of many of the entrepreneurs we study in each chapter’s Opening Profile is a result of carefully executing the different aspects of the entrepreneurial process. Let’s look at the most common myths and the realities about entrepreneurs.
Myth 1: entrepreneurs are born, not made
This myth is based on the mistaken belief that some people are genetically predisposed to be entrepreneurs. The consensus of many hundreds of studies on the psychological and sociological makeup of entrepreneurs is that entrepreneurs are not genetically different from other people. This evidence can be interpreted as meaning that no one is “born” to be an entrepreneur and that everyone has the potential to become one. Whether someone does or doesn’t is a function of environment, life experiences, and personal choices.
However, there are personality traits and characteristics commonly associated with entrepreneurs. These traits are developed over time and evolve from an individual’s social context. For example, studies show that people with parents who were self-employed are more likely to become entrepreneurs. After witnessing a father’s or mother’s independence in the workplace, an individual is more likely to find independence appealing. Similarly, people who personally know an entrepreneur are more than twice as likely to be involved in starting a new firm as those with no entrepreneur acquaintances or role models. The positive impact of knowing an entrepreneur is explained by the fact that direct observation of other entrepreneurs reduces the ambiguity and uncertainty associated with the entrepreneurial process.
This image lists the common traits and characteristics of entrepreneurs, which are the following: a moderate risk taker, a networker, achievement motivated, alert to opportunities, creative, decisive, energetic, a strong work ethic, lengthy attention span, optimistic disposition, persuasive, promoter, resource assembler/leverage, self-confident, self-starter, tenacious, tolerant of ambiguity, visionary
Myth 2: entrepreneurs are gamblers
A second myth about entrepreneurs is that they are gamblers and take big risks. The truth is, entrepreneurs are usually moderate risk takers, as are most people.
The idea that entrepreneurs are gamblers originates from two sources. First, entrepreneurs typically have jobs that are less structured, and so they face a more uncertain set of possibilities than managers or rank-and-file employees. For example, an entrepreneur who starts a social network consulting service has a less stable job than one working for a state governmental agency. Second, many entrepreneurs have a strong need to achieve and often set challenging goals, a behaviour that is sometimes equated with risk taking.
Myth 3: entrepreneurs are motivated primarily by money
It is naïve to think that entrepreneurs don’t seek financial rewards. As discussed previously, however, money is rarely the primary reason entrepreneurs start new firms and persevere. The importance and role of money in a start-up is put in perspective by Colin Angle, the founder and CEO of iRobot, the maker of the popular Roomba robotic vacuum cleaner. Commenting on his company’s mission statement Angle said: Our, “Build Cool Stuff, Deliver Great Products, Have Fun, Make Money, Change the World” (mission statement) kept us (in the early days of the Company) unified with a common purpose while gut-wrenching change surrounded us. It reminded us that our goal was to have fun and make money. Most importantly, it reminded us that our mission was not only to make money, but to change the world in the process.
Some entrepreneurs warn that the pursuit of money can be distracting. Media mogul Ted Turner said, “If you think money is a real big deal.. you’ll be too scared of losing it to get it.”
Myth 4: entrepreneurs should be young and energetic
Entrepreneurial activity is fairly evenly spread out over age ranges. The graph below is based on the Index of Entrepreneurial Activity maintained by the Kauffman Foundation. We can see on this graph the distribution of entrepreneurs according to the age: 26 percent of entrepreneurs are ages 20 to 34, 25 percent are ages 35 to 44, 25 percent are ages 45 to 54, and 23 percent are ages 55 to 64. The biggest jump, by far, from 1996 to 2010, which is the period the Kauffman date covers, is the 55 to 64 age bracket. A total of 14 percent of entrepreneurs were 55 to 64 years old in 1996, compared to 23 percent in 2010.
The increasing number of older-aged entrepreneurs is a big change in the entrepreneurial landscape in the United States.
Although it is important to be energetic, investors often cite the strength of the entrepreneur (or team of entrepreneurs) as their most important criterion in the decision to fund new ventures.
In fact, a sentiment that venture capitalists often express is that they would rather fund a strong entrepreneur with a mediocre business idea than fund a strong business idea and a mediocre entrepreneur.
What makes an entrepreneur “strong” in the eyes of an investor is experience in the area of the proposed business, skills and abilities that will help the business, a solid reputation, a track record of success, and passion about the business idea. The first four of these five qualities favour older rather than younger entrepreneurs.
Myth 5: entrepreneurs love the spotlight
Indeed, some entrepreneurs are flamboyant; however, the vast majority of them do not attract public attention. In fact, many entrepreneurs, because they are working on proprietary products or services, avoid public notice.
Consider that entrepreneurs are the source of the launch of many of the 2,850 companies listed on the NASDAQ, and many of these entrepreneurs are still actively involved with their firms. But how many of these entrepreneurs can you name? Perhaps a half dozen? Most of us could come up with Bill Gates of Microsoft, Jeff Bezos of Amazon.com, Steve Jobs of Apple Inc., Mark Zuckerberg of Facebook and maybe Larry Page and Sergey Brin of Google.
Whether or not they sought attention, these are the entrepreneurs who are often in the news. But few of us could name the founders of Netflix, Twitter, or GAP even though we frequently use these firms’ products and services. These entrepreneurs, like most, have either avoided attention or been passed over by the popular press. They defy the myth that entrepreneurs, more so than other groups in our society, love the spotlight.
This video shows the MIT professor of entrepreneurship Bill Aulet, who is standing in front of the camera, and speaks about the six myths around entrepreneurship, such as "Entrepreneurs are undisciplined," "Entrepreneurs are all about charisma," and more. Through this video, you can uncover key myths about entrepreneurship that are often not just untrue, but also unproductive.Bill Aulet begins his speech:“I want to talk about the six myths that people have about entrepreneurs, which are not only not true but not helpful. And, as we think about this and think, in looking through as to how we're going to educate you to be an entrepreneur, it's important to understand these six myths are not true.
First of all, entrepreneurs are the smartest, most high-achieving people in the room. This is a myth that's perpetuated by entrepreneurs themselves, I think, sometimes, and they're rewriting history. Most of the entrepreneurs I know are not the valedictorians of their class. In fact, it's very rare they are. Entrepreneurs are not looking to please other people. They are, in fact, trying to figure out what they really think they have passion about, and then they kind of reject everything else.
So they're more likely to get A-plus in one class and not go to the other classes. In fact, that's one of the reasons why they often drop out of school. They don't see the relevance of it. Now, I am not encouraging you drop out of school. But I am saying that you can see this pattern, where people get very excited about one thing, focus on that, and then don't do some of the other things they should do.
So the first myth is smartest and high-achieving people in the room.”
Bill Aulet writes the following keywords on the board behind him: 1. SMARTEST + HIGH-ACHIEVING. Then he turns back and continues his speech:
“OK? So that's just not true, and data shows that. The second thing entrepreneurs are individuals. They're mercurial individuals who make things happen by themselves, a kind of Horatio Alger story. That's not true either. Ed Roberts's research shows that, in fact, teams are much more likely to succeed than individuals.
If you have two people on your team, you're more likely to succeed statistically than one person; three, more than two; four, more than three, up to a certain point. So it is not an individual sport. It's a team sport. So entrepreneurs as individuals...”
Bill Aulet then writes the following keywords on the board behind him: 2. INDIVIDUALISTS. Then he turns back and continues his speech:
“... Not true. You need to be looking to find people to join your team all the time.
The third thing is entrepreneurs are born, not made, again a story that's often told. The research shows, again, that entrepreneurs don't come from parents who were entrepreneurs. There's no statistical correlation between that, nor is there a gene that makes you an entrepreneur. It's basically a skill that can be acquired, and that's what we're going to be working with you on. At MIT, everyone says, well, it's all because people are smart at MIT. Well, there are a lot of other places where people are very smart, and they don't start companies at the rate they do at MIT. So entrepreneurs being born, not made...”
Bill Aulet then writes the following keywords on the board behind him: 3. BORN NOT MADE. Then he turns back and continues his speech:
“...Not true. You can become an entrepreneur. This is possible. That's what happens.
The fourth one is entrepreneurs love risk. You know, I hear this all the time. They love risk, they love risk. No, let me tell you what entrepreneurs-- I don't like to go to a casino. Entrepreneurs I know don't like to go to casinos, because that's kind of stupid. You're not in control of your own destiny. What we like to do is take calculated risk where we know we have an unfair advantage. Now let me explain that. We actually de-risk risk.
So we say we have an advantage in this one area, and then we take the risk out of everything else. But I'll take risk in an area where I have an advantage. I have asymmetric information. I have a particular asset that will give me competitive advantage over everybody else. I will then bet on that and think of the long term, and then I'll de-risk everything else. Great example of this, the MIT blackjack team. Very interesting, the movie 21 or the book Bringing Down the House.
These people became entrepreneurs. You think, well, they did all these algorithms and things like that, they become hedge fund managers. And it was very interesting on the panel, when I worked with them, I was able to moderate with them. And, asking the questions, you understand why they become entrepreneurs. They know how to take risk and use it to their advantage, and then patient in the long term.
The next thing is-- four, risk, …”
Bill Aulet then writes 4. RISK on the board behind him. Then he turns back and continues his speech:
“... misunderstanding of risk-- the fifth one is successful entrepreneurs are charismatic. That's what makes a successful. In fact, entrepreneurship is about effecting change. And effecting change is about leadership. And the MIT Leadership Center here, led by Deb Ancona, actually has shown that charisma is not correlated with success and changing the world.
What it is, it's made up of basically five other things. It's do you have a vision? Do you have a sense-making capability to understand what's going on in the world? Fourthly, do you have the relationships to make that happen? And then-- sorry, so thirdly.
And then fourthly it's called this thing which I will call innovation engineering. How do you take where we are today, the as-is state, and get to a future state that hasn't existed before, and then have a personal signature on that, which is the fifth point. So you have the vision that's a possible state. The sense-making state is the as-is state where we can go. Who are the people, the relationship? And then how do we move into a world that's never been done before and then do that with our own, personal signature? So it does not have to do with charisma, …”
Bill Aulet then writes 5. CHARISMA on the board behind him. Then he turns back and continues his speech:
“... the fifth myth.
The sixth myth, I would say, is that entrepreneurs are undisciplined.”
Bill Aulet then writes 6. UNDISCIPLINED on the board behind him. Then he turns back and continues his speech:
“And this, in fact, is why I called my book Disciplined Entrepreneurship. Because, as I said that, some people would say, disciplined entrepreneurship? No, entrepreneurs are undisciplined. That's an oxymoron. Nothing could be further from the truth. It is essential to be disciplined when you're an entrepreneur, because you are, as my colleague Howard Anderson says, you are the attacker going up against the defender.
As the attacker, you don't have a lot of resources. You don't have a lot of time. You have cash flow. All that belongs to the defender. You just have this small, small thing called passion. And how do you execute against this bigger foe requires an extraordinary amount of discipline. So we at the Center say, you know, to be a great entrepreneur, you have to have the spirit of a pirate, which means we're trying to do something new. We're creatively irreverent, we're thinking of new ideas. How do we innovate?
But you also, while you have the spirit of a pirate, you have the execution skills of a Navy SEAL Team 6. So all the entrepreneurs you see, if you think they're not disciplined, look closely. And you'll see they actually are very, very self-disciplined. So these six myths, …”
Bill Aulet then begins, for each myth, to point at the related keywords that he wrote on the board behind him, in order to make a summary of his speech.
“... that you have to be smartest, high-achieving person in the room, not true. You have to be passionate.
They're individuals. Not true. You're a team, and you have to get people to work with you.
Three, born, not made-- not true either. You can become an entrepreneur. We teach it. We see it happening all today. It's not just in the classroom, it's outside of it.
Risk-- how do you de-risk risk, and how do you think about that in the long term and use it to your advantage? Fifth, charismatic. Not true. There's a whole kind of skill set that you can learn to effect change. And six, discipline. These are myths that have to go if we're going to be effective entrepreneurs.”
This chapter aims to explain the difference between a business idea and an opportunity. At the very beginning of a business, there is most of the time an idea. But all the ideas are not opportunities economically exploitable. Entrepreneurs must differentiate ideas form opportunities if they want to have higher rate of success.
How to define an opportunity ?
Essentially, entrepreneurs recognize an opportunity and turn it into a successful business. An opportunity is a favourable set of circumstances that creates a need for a new product, service, or business. Most entrepreneurial ventures are started in one of two ways :
> Some ventures are externally stimulated. In this instance, an entrepreneur decides to launch a firm, searches for and recognizes an opportunity, and then starts a business, as Jeff Bezos did when he created Amazon.com. In 1994, Bezos quit his lucrative job at a New York City investment firm and headed for Seattle with a plan to find an attractive opportunity and launch an e-commerce company.
> Other firms are internally stimulated, like BenchPrep. An entrepreneur recognizes a problem or an opportunity gap and creates a business to fill it.Regardless of which of these two ways an entrepreneur starts a new business, opportunities are tough to spot. Identifying a product, service, or business opportunity that isn’t merely a different version of something already available is difficult.A common mistake entrepreneurs make in the opportunity recognition process is picking a currently available product or service that they like or are passionate about and then trying to build a business around a slightly better version of it. Although this approach seems sensible, such is usually not the case.
The key to opportunity recognition is to identify a product or service that people need and are willing to buy, not one that an entrepreneur wants to make and sell.Example: Jeff Bezos biography
https://www.biography.com/people/jeff-bezos-9542209Q1: An opportunity is a favourable :
> set of circumstances that creates a need for a new business
> set of figures that creates a need for a new business
> set of ideas that creates a need for a new business
> set of ideas that creates money
The four essentials qualities of an opportunity
The four essential qualities of an opportunity:Description of the image: This image synthesizes the four essential qualities of an opportunity (rather than just an idea). The four qualities (attractive, timely, durable, and anchored in a product, service or business that creates or adds value for its byer or end user) surround the opportunity concept, written at the centre of the image.As illustrated on the image, an opportunity, rather than just an idea, is:
> Attractive, meaning you have to launch a product or service customers must be willing to buy.
> Durable, meaning your business has to be based on strong trends (economic trends, social trends, political trends, technological trends with be described on block N°3).
> Timely, meaning your business has to be launched at the good moment regarding your market characteristics (example below with the window of opportunity and the search engine on Internet).
> Anchored in a product, service, or business that creates or adds value for its buyer or end user. It means that your customers must be easily able to understand your offer and its added value.For an entrepreneur to capitalize on an opportunity, its window of opportunity must be open. The term window of opportunity is a metaphor describing the time period in which a firm can realistically enter a new market. Once the market for a new product is established, its window of opportunity opens. As the market grows, firms enter and try to establish a profitable position. At some point, the market matures, and the window of opportunity closes.
This is the case with Internet search engines. Yahoo!, the first search engine, appeared in 1995, and the market grew quickly, with the addition of Lycos, Excite, AltaVista, and others. Google entered the market in 1998, sporting advanced search technology. Since then, the search engine market has matured, and the window of opportunity is less prominent.In the following blocks, we will develop the three approaches to identify an opportunity. Indeed, an entrepreneur can:
> Observe trends
> Solve a problem
> Find gaps in a market placeQ2: The window of opportunity describes the :
> time period in which a firm can enter a new market
> time period to end your business partnership
> time period to sell your idea
> time to close the window
Identify an opportunity by observing trends
The first approach to identifying opportunities is to observe trends and study how they create opportunities for entrepreneurs to pursue.
The most important trends to follow are:
> economic trends,
> social trends,
> technological advances, and
> political action and regulatory changes.As an entrepreneur or potential entrepreneur, it’s important to remain aware of changes in these areas. When looking at environmental trends to discern new business ideas, there are two caveats to keep in mind. First, it’s important to distinguish between trends and fads. New businesses typically do not have the resources to ramp up fast enough to take advantage of a fad. Second, even though we discuss each trend individually, they are interconnected and should be considered simultaneously when brainstorming new business ideas.For example, one reason that smartphones are so popular is because they benefit from several trends converging at the same time, including an increasingly mobile population (social trend), the continual miniaturization of electronics (technological trend), and their ability to help users better manage their money via online banking and comparison shopping (economic trend). If any of these trends weren’t present, smartphones wouldn’t be as successful as they are and wouldn’t hold as much continuing promise to be even more successful as is the case.> Understanding economic trends
Understanding economic trends is helpful in determining areas that are ripe for new business ideas as well as areas to avoid. When the economy is strong, people have more money to spend and are willing to buy discretionary products and services that enhance their lives.
In contrast, when the economy is weak, not only do people have less money to spend, they are typically more reluctant to spend the money they have, fearing the economy may become even worse—and that in turn, they might lose their jobs because of a weakening economy. Paradoxically, a weak economy provides business opportunities for start-ups that help consumers save money. Examples include GasBuddy and GasPriceWatch.com, two companies started to help consumers save money on gasoline. A similar example is e.l.f., a discount retailer of women’s cosmetics. The company (which stands for Eyes Lips Face) sells cosmetics products for as little as $1.00.A poor or weak economy also provides opportunities for firms to sell upscale and everyday items at a “discount.” For example, daily deal sites like Groupon and LivingSocial have experienced rapid growth by providing consumers’ access to local providers of massages, trips to museums, high-end restaurants, and similar products or services at deep discounts. A similar example is Gilt Groupe, which sells luxury goods at a discount in time limited sales. Brick-and-mortar retailers are affected by the search for discounts too. For example, in 2009, Neiman Marcus reported a 14.8 percent drop in sales while Family Dollar experienced a 25 percent increase in revenues. The same mind-set is contributing to people wanting the most value for their money, across the spectrum. For example, the recession has caused an upswing in the number of people frequenting local farmers markets, where people can buy locally grown produce, meats, and other food products that are fresher and often cheaper than similar products at the grocery store.
It’s also important to evaluate how economic forces affect people’s behaviours—beyond looking for discounts and the most value for their money. For example, when the economy is weak, more people go back to school, largely as a result of poor employment prospects. This trend provides opportunities for not only traditional and online colleges and universities but for businesses that develop products to assist them. An example is BenchPrep, the student initiated business profiled in the opening feature. BenchPrep, which sells Apple iPhone and Android apps that help people prepare for college admission tests, is benefiting from an increase in college enrolments. Similarly, when the economy is poor, more people start businesses. Web-based businesses like Etsy, which provides a platform for people to sell handmade items, thrive when an increasing number of people are looking to open full-time or part-time businesses.An understanding of economic trends can also help identify areas to avoid. For example, this is not a good time to start a company that relies on fossil fuels, such as airlines or trucking or perhaps even local transportation-related businesses such as a taxicab company, because of high fuel prices. There are also certain product categories that suffer as result of economic circumstances. This is not a good time to open a store or franchise that sells premium-priced food products like cookies or ice cream.> The impact of social forces on trends
An understanding of the impact of social forces on trends and how they affect new product, service, and business ideas is a fundamental piece of the opportunity recognition puzzle.
Often, the reason that a product or service exists has more to do with satisfying a social need than the more transparent need the product fills. The proliferation of fast-food restaurants, for example, isn’t primarily because of people’s love of fast food but rather because of the fact that people are busy and often don’t have time to cook their own meals. Similarly, social networking sites like Facebook and Twitter aren’t popular because they can be used to post information and photos on a Web site. They’re popular because they allow people to connect and communicate with each other, which is a natural human tendency.Changes in social trends alter how people and businesses behave and how they set their priorities. These changes affect how products and services are built and sold. Here is a sample of the social trends that are currently affecting how individuals behave and set their priorities:
> Aging of baby boomers
> The increasing diversity of the workforce
> Increasing interest in social networks such as Facebook and Twitter
> Proliferation of mobile phones and mobile phone apps
> An increasing focus on health and wellness
> Emphasis on clean forms of energy including wind, solar, biofuels, and others
> Increasing number of people going back to school and/or retraining for new jobs
> Increasing interest in healthy foods and “green” products> Technological advances
Advances in technology frequently dovetail with economic and social changes to create opportunities. Technological advances also provide opportunities to help people perform everyday tasks in better or more convenient ways.
Another aspect of technological advances is that once a technology is created, products often emerge to advance it. For example, the creation of the Apple iPod, iPhone, iPad and similar devices has in turned spawned entire industries that produce compatible devices. An example is H2OAudio, a company that was started by four former San Diego State University students, which makes waterproof housings for the Apple iPhone and iPod. The waterproof housings permit iPhone and iPod users to listen to their devices while swimming, surfing, snowboarding, or engaging in any activity where the device is likely to get wet.
> Political action & regulatory changes provide the basis for opportunities
Political and regulatory changes also provide the basis for opportunities. For example, new laws create opportunities for entrepreneurs to start firms to help companies, individuals, and governmental agencies comply with these laws.
On some occasions, changes in government regulations motivate business owners to start firms that differentiate themselves by “exceeding” the regulations.
Some businesses and industries are so dependent on favourable government regulations that their literal survival is threatened if a regulation changes. An example of a business that fits this profile is Almost Family, a company that provides home health nursing services. Almost Family receives the majority of its income via fixed payments from Medicare based on the level of care that it provides its clients. As a result, the company’s profitability is highly sensitive to any changes in Medicare reimbursement policies.
Political change also engenders new business and product opportunities. For example, global political instability and the threat of terrorism have resulted in many firms becoming more security conscious. These companies need new products and services to protect their physical assets and intellectual property as well as to protect their customers and employees. The backup data storage industry, for example, is expanding because of this new trend in the tendency to feel the need for data to be more protected than in the past. An example of a start-up in this area is Box.net, which was funded by Mark Cuban, the owner of the Dallas Mavericks. Box.net allows its customers to store data “offsite” on Box.net servers, and access it via any Internet connection.
Q3: A poor economy can provide opportunities
Q4: Fill in the gap – “Often, the reason that a product or service exists has more to do with… than the more transparent need the product fills”
> collecting feedbacks from the customers
> satisfying desires
> satisfying a social need
> buying an experience
Identify an opportunity by solving a problem
The second approach to identifying opportunities is to recognize problems and find ways to solve them. These problems can be recognized by observing the challenges that people encounter in their daily lives and through more simple means, such as intuition, serendipity, or chance. There are many problems that have yet to be solved.
Consistent with this observation, many companies have been started by people who have experienced a problem in their own lives, and then realized that the solution to the problem represented a business opportunity. For example, in 1991, Jay Sorensen dropped a cup of coffee in his lap because the paper cup was too hot. This experience led Sorensen to invent an insulating cup sleeve and to start a company to sell it. Since launching his venture, the company, Java Jacket, has sold over 1 billion cup sleeves.
Advances in technology often result in problems for people who can’t use the technology in the way it is sold to the masses. For example, some older people find traditional cell phones hard to use—the buttons are small, the text is hard to read, and it’s often difficult to hear someone on a cell phone in a noisy room.
Some business ideas are gleaned by recognizing problems that are associated with emerging trends. For example, SafetyWeb, the focus of the “You Be the VC 4.1” feature, has created a Web-based service that helps parents protect their children’s online reputation, privacy, and safety. The social trend toward more online activity by children resulted in the need for this service. Similarly, the proliferation of smartphones enables people to stay better connected, but results in problems when people aren’t able to access electricity to recharge their phones for a period of time. Several companies, including Iogear and Solio, now make solar rechargers for smartphones.Q5: Find the wrong way to identify an opportunity
> observing trends
> solving a problem
> finding gaps in the marketplace
> finding gaps in opportunities
Identify an opportunity by identifying gaps in the marketplace
There are many examples of products that consumers need or want that aren’t available in a particular location or aren’t available at all. Part of the problem is created by large retailers, like Walmart and Costco, which compete primarily on price and offer the most popular items targeted toward mainstream consumers. While this approach allows the large retailers to achieve economies of scale, it leaves gaps in the marketplace. This is the reason that clothing boutiques and specialty shops exist. These businesses are willing to carry merchandise that doesn’t sell in large enough quantities for Walmart and Costco to carry.
Product gaps in the marketplace represent potentially viable business opportunities. For example, in 2000, Tish Cirovolo realized that there were no guitars on the market made specifically for women. To fill this gap, she started Daisy Rock guitars, a company that makes guitars just for women. Daisy Rock guitars are stylish, come in feminine colours, and incorporate design features that accommodate a woman’s smaller hand and build.
A common way that gaps in the marketplace are recognized is when people become frustrated because they can’t find a product or service that they need and recognize that other people feel the same way. This scenario played out for Lorna Ketler and Barb Wilkins, who became frustrated when they couldn’t find stylish “plus-sized” clothing that fit. In response to their frustration, they started Bodacious, a store that sells fun and stylish “plus size” clothing that fits. Ketler and Wilkins’s experience illustrates how compelling a business idea can be when it strikes just the right chord by filling a gap that deeply resonates with a specific clientele.
A related technique for generating new business ideas is to take an existing product or service and create a new category by targeting a completely different target market. This approach essentially involves creating a gap and filling it. An example is PopCap games, a company that was started to create a new category in the electronic games industry called “casual games.” The games are casual and relaxing rather than flashy and action-packed and are made for people who want to wind down after a busy day.Q6: To find gaps in the marketplace, we can take an existing product or service:
> and create a new category in a different market
> and refresh it
> and sell it
As a conclusion, a speech from Steve Jobs
This extract sheds light on the way we connect things, the way we connect dots. And according to Jobs, we can only connect the dots looking backwards. This extract tells us that sometimes we do things without really knowing and we have to trust these activities will connect somehow and will give birth of something.
It is probably the same process concerning creativity and entrepreneurship. The business idea you will have probably come from the connection of 2 or several things you did before, you have heard about, you have read, you have discussed with someone… Description of the video.This video shows the American entrepreneur and co-founder of Apple, Steve Jobs, who is standing in front of the camera, and speaks about entrepreneurship and the way to make connections between things.
Appearance of a first screen on a white background with two logos next to each other: On the right, PSB’s one, Paris School of Business, On the left, h'up entrepreneurs’ one, with the caption: disabled maybe, entrepreneurs first
Second screen: title of the video in capital letters: motivation 3.0
A man appears on the screen, standing in a warm-colored living room, with two frames in the background. On the bottom right is inlaid a caption about him: Pierre Carnicelli, President: Association for Social Coaching, Psychologist, Coach, Hypnotherapist. He is standing up. Hello my name is Pierre Carnicelli I’ve been a professional coach for 20 years I support business leaders in their establishment I support people with disabilities to enable them to know how to introduce their disability and manage it Today I am going to speak to you about entrepreneurship, potential obstacles and what allows an entrepreneur to start a project in a correct way The man is now in front of a white board on which he writes during his demonstration I will now present you the “motivation 3.0” by Daniel Pink and you are going to see that there are a lot of points that as an entrepreneur you have to consider and check against your own motivation Daniel Pink presents motivation regarding to three pillars The first pillar is the finality the Meaning What makes sense to you? Why are you doing things? How important are they for you to to do? The second pillar is autonomy. Do you feel self-sufficient? If you have things to do and that you are compelled to do them it's not the same as if you have decided yourself to do them if I decide to do something I am much more motivated than if someone imposes it on me. Is it imposed by my environment or am I choosing? Third pillar: the Mastery. This is the most difficult pillar to nderstand. Mastery means becoming a master if you pay attention to the learning strategies the path goes from junior, which eans I am consciously incompetent, I do not know not yet things, I'm aware of that after I will become consciously competent I will become a senior in the company, then after I will become subconsciously competent I become an expert. From that moment if I start to realize that I can be wrong that I keep my mind open that I can continue to to learn that I can transmit things to people and that I can myself learn the pedagogy i will move on to the stage of the mastering so first and foremost mastering is being able to learn to make mistakes, being able to explain to others how not to be wrong. So if you want we'll develop that in the framework of entrepreneurship how to put this motivation at the service of your program if you want I will you explain it so we'll come all together and we will move on to the next point. The man sits in a couch and is now facing camera if you want to start a project it is important to ask yourself the question of your own autonomy in relation to this project Is this project coming directly from you? Has it been whispered in your ear by someone? By something? Do you have to do it? Do you listen to yourself talk about your project? How do you talk about it? I want to do this I want to do that or I wish, maybe, or I have to do that? What terms do you use? If you say I must, who obliges you? Is it a duty? But which type of duty is it? Who for? Compared to what? You want to make a living out of it? You've already won your life. You're alive. Your aim is not to die? You're in avoidance of a disaster? Or actually you want to achieve something? Are you alone or are you well accompanied? Who makes your base camp? Who can you count on? How are you going to rely on your resources and what are your resources? Have you taken stock of your resources? You have resources in personal energy you have resources in willpower But you also have maybe famiy resources Is your family with you? Your spouse if you have one, what does he think about your project? Your children maybe? What do they think about your project? And what do you think that others think? Autonomy is what will allow you to maintain some of your motivation. Depending on your ability to be self-sufficient the chances of success of your project are increasing. The more you will be self-sufficient the more your chances of being able to succeed will increase You can cultivate your autonomy maybe with the banker maybe with your friends maybe with associates. Create a business it's not necessarily being alone in the company. Being an entrepreneur can also be being an entrepreneur with others. Have you considered that?
“There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know”.
80% of newly created businesses fail, and most of them fail because of : poor opportunity evaluation, weak business proposition and poor management. Thus, evaluation of those three aspects is crucial. Evaluation helps to operate adjustments and/or eliminate irrelevant hypothesis. In fact, questions aim to characterize and understand the environment. The main purpose is to understand the context or the environment through several questions and dimensions. Useful frameworks exist to help entrepreneurs to make decisions at each step.
The image, entitled « understanding your context”, represents a scheme. This scheme is composed of 5 elements. At the centre of the image, there is a sketch of a business model canvas. This sketch is surrounded by 4 elements. Frome each element, an arrow leaves from the element to the direction of sketch at the centre of the image. On the left, there is a block named “competitive analysis”. This block enumerates the 5 industry forces that are: Suppliers and value chain actors
Substitute products and services
On the right, there is a block named “market analysis”. This block enumerates the 5 market forces that are:
Needs and demands
On the top of the sketch, there is a block named “key trends”. This block enumerates the 4 key trends that are:
Social and cultural trends
On the bottom of the sketch, there is a block named “macroeconomics forces”. This block enumerates the 4 macroeconomics forces that are:
Commodities and resources
Every business starts small. But by taking on some calculated risks, a lot of determination and some luck, a start-up business can become very large, profitable and valuable. However, not every entrepreneur wants to build a big business and earn a fortune.
The objectives when starting a business can be broadly split into two categories:
Financial objectives, and
Most business start-ups begin with one main financial objective – to survive.
Why survival? Because a large percentage of new businesses do not survive much beyond their launch. The entrepreneur discovers that the business idea is not viable – the business cannot be run profitably or it runs out of cash. Start-ups have a high failure rate. Survival is about the business living within its means. To survive, the business needs to have enough cash to pay the debts of the business as they arise – suppliers, wages, rent, raw materials and so on. To survive, a business needs to have:
sufficient sources of finance (e.g. cash, a bank overdraft, share capital)
a viable business model – i.e. one which can make a profit
If survival can be assured, then profit is the next most important financial objective for a new business. A profit is earned when the revenue of the business exceeds the total costs. The entrepreneur can choose to reinvest (aka "retain") the profit in the business, or take it out as a personal payment or dividend.
For many small business owners, profit is the return for all the hard work and risks taken. Profit is the reward for taking a risk and making an investment. Ideally, the profit earned is sufficient to provide the entrepreneur with enough income to live. In many cases it will be more than sufficient, once the business has been trading successfully for a few years. However, it is important to appreciate that, to make a sustainable profit, a new business needs to be able to:
aell into a large enough market
Another financial objective is personal wealth. Some entrepreneurs have an objective that goes beyond wanting to earn an adequate income. They aim to build a valuable business that can substantially increase their personal wealth.
Very often a new business is started with other, non-financial objectives in mind.
Here are some of the non-financial motives that are often quoted by entrepreneurs:
more control over working life – want to choose what kind of work is done. The need for greater independence is a major motivator.
need a more flexible and convenient work schedule, including being able to work from or close to home. This motive is an important reason behind the many home-based business start-ups
feel that skills are being wasted and that potential is not being fulfilled
a desire to pursue an interest or hobby
want the feeling of personal satisfaction from building a business
want a greater share of the rewards from the effort being put in – compared with simply being paid by an employer
What should you test?
The value proposition(s) of your product or service
Which segments (user groups) to target
Your revenue model
Your position in the value chain and key partnerships
Communication, distribution and sales channels
Will people actually buy it?
How to know if people will buy it?
How do customer currently think, feel and behave?
Where is the pain?
How can we add value?
How can we make it easy?
How to define value proposition ?
A value proposition defines the kind of value a company will create for its customers. It is the element of strategy that looks outward at customers, at the demand side of the business. Strategy is fundamentally integrative, bringing the demand and supply sides together.
Three core questions to define value proposition :
Which customers are you going to serve?
Within an industry, there are usually distinct groups of customers, or customer segments. A value proposition can be aimed specifically at serving one or more of these segments. For some value propositions, choosing the customer comes first. That choice then leads directly to the other two legs of the triangle: needs and relative price.
Which needs are you going to meet?
In many cases, choosing the need the company will serve is the primary decision that leads to the other two legs of the triangle. Here, strategy is built on a unique ability to meet a particular need or a subset of needs. Often that ability arises from the specific features of a product or service.
Typically, value propositions based on needs appeal to a mix of customers who might defy traditional segmentation. Instead of belonging to a clear demographic category, the company’s customers will be defined by the common need or set of needs they share at a given time.
What relative price will provide acceptable value for customers and acceptable profitability for the company?
For some value propositions, relative price is a primary leg of the triangle. Some value propositions target customers who are overserved (and hence overpriced) by other offerings in the industry. A company can win these customers by eliminating unnecessary costs and meeting “just enough” of their needs. Where customers are overserved, the lower relative price is often the dominant leg of the triangle.
Conversely, some value propositions target customers who are underserved (and hence underpriced) by other offerings in the industry. These customers want an enhanced product or service and are willing to pay a premium for it. The unmet need is typically the dominant leg of the triangle, while the higher relative price supports the extra costs the company has to incur to meet it.
How to enhance value proposition ?
How do we :
raise awareness about our company’s products and services? (awareness)
help customers evaluate our organisation’s value proposition? (evaluation)
allow customers to purchase specific products and services? (purchase)
deliver a value proposition to customers? (delivery)
provide post-purchase customer support? (after sales)
Why a business plan?
A business plan is a comprehensive overview of the business idea. It outlines what the business will do and how it will be launched, covering everything from sources of funding to potential competitors. Business plans are especially useful for startup companies looking to attract and convince prospective investors. The business plan covers what you intend to do with your business and how it will be done. The process of writing down what is involved in bringing your idea to reality requires dealing with the why, what, who, how, where, when, and how much of your venture. Doing so helps you recognize areas that need rethinking or support.
You can use a convincing business plan to gain capital needed to get beyond the initial difficult years. If the purpose of your plan is to seek funding, request those funds, and describe how they will be used. As with any venture, there will be risks. Identify and describe the most threatening risks to your success. Outline the activities you will pursue to manage the risks.
The Lean Startup provides a scientific approach to creating and managing startups and get a desired product to customers' hands faster. The Lean Startup method teaches you how to drive a startup-how to steer, when to turn, and when to persevere-and grow a business with maximum acceleration.
> Emilinate uncertainty
The lack of a tailored management process has led many a start-up to abandon all process. They take a "just do it" approach that avoids all forms of management. But this is not the only option. Using this approach, companies can create order by providing tools to test a vision continuously. Lean isn't simply about spending less money. Lean isn't just about failing fast, failing cheap. It is about putting a process, a methodology around the development of a product.
>Work smarter not harder
The questions are "Should this product be built?" and "Can we build a sustainable business around this set of products and services?" This experiment is more than just theoretical inquiry; it is a first product. If it is successful, it allows a manager to get started with his or her campaign: enlisting early adopters, adding employees to each further experiment or iteration, and eventually starting to build a product. By the time that product is ready to be distributed widely, it will already have established customers. It will have solved real problems and offer detailed specifications for what needs to be built.
> Develop an MVP (minimum viable product)
A core component of the methodology is the build-measure-learn feedback loop. The first step is figuring out the problem that needs to be solved and then developing a minimum viable product (MVP) to begin the process of learning as quickly as possible. Once the MVP is established, a startup can work on tuning the engine. This will involve measurement and learning and must include actionable metrics that can demonstrate cause and effect question.
The startup will also use an investigative development method called the "Five Whys"-asking simple questions to study and solve problems along the way. When this process of measuring and learning is done correctly, it will be clear that a company is either moving the drivers of the business model or not. If not, it is a sign that it is time to pivot or make a structural course correction to test a new fundamental hypothesis about the product, strategy and engine of growth.
> Validated learning
Progress in manufacturing is measured by the production of high quality goods. The unit of progress for Lean Startups is validated learning-a rigorous method for demonstrating progress when one is embedded in uncertainty. Once entrepreneurs embrace validated learning, the development process can shrink substantially. When you focus on figuring the right thing to build-the thing customers want and will pay for-you need not spend months waiting for a product beta launch to change the company's direction. Instead, entrepreneurs can adapt their plans incrementally.
Entrepreneurs are everywhere
You don’t have to work in a garage to be in a startup. Prerequisites to be an entrepreneur include a strong vision for the future, and an appetite for risk taking.
Entrepreneurship is management
A startup is a human institution designed to create a new product or service under conditions of extreme uncertainty. It is not just a product, and so it requires a new kind of management geared towards its context of extreme uncertainty.
Startups exist not just to make stuff, make money, or even serve customers. They exist to learn how to build a sustainable business.
The fundamental activity of a startup is to turn ideas into products, measure how customers respond, and then learn whether to pivot or persevere. The faster you get through this loop, the better your chance of success.
Improving entrepreneurial outcomes requires a new kind of accounting designed for startups and the people who hold them accountable.
Validated learning is the unit of progress for lean startups which shrinks the development process substantially especially in uncertain markets. The process is rigorous as it attempts to demonstrate, with empirical evidence collected from real customers, valuable truths about a startup's present and future business prospects. It helps to treat your startup, regardless of the industry as a grand experiment.
Startups validate learning by asking questions:
What products do customers really want?
How will our business grow?
Who is our customer?
Which customer should we listen to and which should we ignore?
These are the questions that should inform the establishment of structures in the company.
Measuring productivity, the lean way In the lean startup, everything the startup does, is an experiment designed to achieve validated learning. Among the data the startup will acquire in this “grand experiment”, one of the most significant is the Customer Insight.
Customer Insight : “Value is seen as providing benefits to the customer; anything else is waste”.
Experimentation is encouraged because it is the only way to discover how to build a sustainable business. Experiments with a negative outcome prove useful, perhaps more so than ones with positive outcomes, because they provide instruction and can inform strategy.
An MVP allows a startup to fill in real baseline data in its growth model, such as conversion rates, sign up and trial rates, customer lifetime value etc. This data will prove invaluable as it forms the foundation for learning. Once the baseline has been established, the startup can work toward the second learning milestone - tuning the engine. Every product development, marketing or any other initiative that a startup undertakes should be targeted at improving one of the drivers of it growth models. This is called tuning the engine. If tuning activities are not having desired effect on the baseline, that is a sure sign that it is time to pivot.
The two most important assumptions entrepreneurs make in this model are:
the value hypothesis – test whether a product or service really delivers value to customers using it.
the growth hypothesis – test new ways of acquiring new customers for a product or service.
Pivot or preserve
The true measure of a startup's runaway is how many pivots it has left. It means the number of opportunities it has to make a fundamental change to its business strategy. A lean startup sees its runaway - the time until it runs out of money - not in months or years, but in the number of cycles it has. Pivot is a structured course correction designed to test a new fundamental hypothesis about the product, strategy and engine of growth. A pivot requires the startup to keep one foot rooted in learnings they have acquired so far, while making a fundamental change in strategy in order to seek even greater validated learning. It is about repurposing what has been built and what has been learned to find a more positive direction.
Types of pivots:
A single feature in a product becomes the whole product, highlighting the value of “focus” and “minimum viable product,” delivered quickly and efficiently.
In the reverse situation, a single feature is insufficient to support a customer set, so what was considered the whole product becomes a single feature of a much larger product.
Customer segment pivot:
A product attracts real customers but not the ones in the original vision. Although it solves an actual problem, it must be positioned and optimized for a more appreciative segment.
Customer need pivot:
Early customer feedback indicates that the problem solved by the product is not very important, necessitating a repositioning or the development of a completely new product. Platform pivot: an application is changed to a platform, or vice versa.
Value capture pivot:
The monetisation or revenue model is tweaked to capture value, with corresponding changes in business, product, and marketing strategies.
Engine of growth pivot:
A startup selects one of three primary growth engines — the viral, sticky, or paid growth models — to affect the speed and profitability of growth.
A company selects unique pricing, feature, and competitive positioning adjustments to deliver its product to customers.
A startup achieves the same solution using a completely different technology that can provide superior price and/or performance to improve competitive posture.
Lean Startup metrics’ characteristics
Creating learning milestones is not to make the decision easy; rather it is to make sure that there is relevant data in the room when it comes time to decide.
> Split test
Split tests save amount of time in the long run by eliminating work that doesn’t matter to customers. It also helps teams refine their understanding of what customers want and don’t want. In order to avoid collecting data which is useless to the startup.
To be considered actionable, metrics it must demonstrate clear cause and effect. When cause and effect is clearly understood, the startup is better able to learn from its actions.
A big mistake is spending your energy learning how to use data to get what you want rather than treating data as genuine feedback to guide future actions. Remember that your metrics are going to be used by actual people on your team. Everyone must understand the reports. Try to write user stories that described the feature from the point of view of the customer.
Unsure that the data is credible to employees. Transparency is the name of the game here.
Every business has a few key numbers that can be used to measure how well it is performing. These numbers are key for both measuring progress and identifying hot spots in your customer lifecycle.
Acquisition describes the point when you turn an unaware visitor into an interested prospect.
In the case of the flower shop, getting someone walking by your window to stop and come in to your shop is an acquisition event.
On a product website, getting someone to do anything other than leave your website (abandon) is a measure of acquisition.
I specifically measure successful acquisition as getting my visitors to view my signup page.
Activation describes the point when the interested customer has his first gratifying user experience.
In the case of the flower shop, if the prospect found the shop in disarray once he comes inside, there would be a disconnect with the promise made at the front of the store. That wouldn’t be a gratifying first user experience.
On the product site, once the prospect signs up, you have to make sure you get the customer to a point where he can connect the promise you made on your landing page (your UVP) with your product.
Retention measures “repeated use” and/or engagement with your product.
So, in the case of the flower shop, the action of coming back to the store—and in the case of the product website, the act of logging back in to use the product again—would count toward retention.
As we’ll see in Part 4 of the book, this is one of the key metrics to measuring product/market fit.
Revenue measures the events that get you paid.
These could be buying flowers or buying a subscription for your product. These events may or may not occur on the first visit.
Referral is a more advanced form of a user acquisition channel where your happy customers refer or drive potential prospects into your conversion funnel.
In the case of the flower shop, this could be as simple as telling another friend about the store.
For the software product, this could range from implicit viral or social sharing features (like Share with a friend), to explicit affiliate referral programs or Net Promoter Score.
Startups need a disciplined, systematic approach to measuring and recording progress and validated learning. This is called innovation accounting, an alternative method of accounting that begins by turning the leap-of-faith assumptions into a quantified financial model. Lean Startups can grow to become lean enterprises whilst maintaining their agility, learning orientation and culture of innovation. Organisational structures are a startup's major weapon against the extreme uncertainty that defines startups in general.
The critical first question for any lean transformation is about value. Which activities create value and which are a form of waste? Understanding this distinction makes lean techniques become effective in eliminating waste and increasing the efficiency of the activities creating value. Value in a startup is not about the creation of stuff, but rather validated learning about how to build a sustainable business.
Innovation accounting works in three steps:
use of an MVP to accumulate real data on the company's current performance
tuning the engine from the current baseline toward the ideal
make an important call - to pivot or to persevere. This is based on outcome of all the micro changes and product optimizations made when "tuning the engine".
The innovation accounting framework makes it clear when the company is stuck and needs to change direction.
How to use it? Lean Startup Canvas
The Lean Startup method teaches you how to drive a startup-how to steer, when to turn, and when to persevere-and grow a business with maximum acceleration. As a business entrepreneur it’s your duty to get ideas out from your head onto paper so that others can see and help build the problem solution. Traditional business plans are not relevant in the ideation stage, they take too much time and are usually created without any validated learning. Business plans are more suited to once you have a business running and are look to scale.
During the ideation stage try to stay lean, use the Lean Canvas to get your ideas down and use lean principles to test your hypothesis by getting out the building. The idea is to spend around 15–20 minutes to get that idea down on to paper. Some people prefer to project the PDF onto a wall and use sticky notes to add their ideas into the boxes. But I’ve become so used to Lean Canvas that I sketch my business model ideas directly into my notebook.
The image represents an A4 page in the landscape orientation and is composed of 9 rectangles. At the bottom of the page stand 2 rectangles in the landscape mode. The rectangle on the left corner is named “cost structure” and contains the following sentences:
Customer acquisition costs
The rectangle on the right corner is named “revenue streams” and contains the following sentences:
Life time value
Over these 2 rectangles, there are 7 rectangles composing 5 columns. On the left side, there is a rectangle named “problems”. This rectangle contains the following sentence: Top 3 problems
On the right of the first column, there is another one composed of 2 rectangles. The one on the top is named “solutions” and contains the following sentence : top 3 features.
Below this rectangle and still in the same column, the other rectangle is named “key metrics” and contains the following sentence: key activities you measure.
The third column is made by 1 rectangle named “Unique Value proposition” in which there are the following sentence: single, clear, compelling message that states why you are different and worth paying attention.
The fourth column is composed of 2 rectangles. The one on the top is named “unfair advantage” and contains the following sentence: can’t be easily copied or bought.
Below this rectangle and still in the same column, the other rectangle is named “channels” and contains the following sentence: path to customer.
The last column contains 1 rectangle named “customer segments” in which the following sentence is written: target customers.
Each customer segment (CS) you are thinking to work with will have a set of problems that they need solving. In this box try listing the one to three high priority problems that you CS has. Without a problem to solve, you don’t have a product / service to offer.
The problem and Customer Segments can be viewed as intrinsically connected — without a CS in mind you can’t think of their problems, and visa versa.
Unique Value Proposition
In the middle of the canvas is the UVP. A value proposition is a promise of value to be delivered. It’s the primary reason a prospect should buy from you. A way to get your head around this is to think why are you different and why should your CS buy / invest time in you .
Finding a solution to the problem is the golden egg! You’re not going to get this right off the first bat — it’s OK, as that’s what Lean is all about. What you need to do is ‘get out the building’. It means that the solution is not in your office, it’s out there in the streets. So go interview your customer segment, ask them questions, and take those learnings. Remember the Lean Startup is validated learning through a continual build-measure-learn cycle.
Channels are ways for you to reach your CS. And remember that in the initial stages it’s important not to think about scale but to focus on learning. With that in mind try to think which channels will give you enough access to your CS at the same time give you enough learning. Channels can be email, social, CPC ads, blogs, articles, trade shows, radio & TV, webinars etc. and BTW you don’t have to be on all of them, just where your CS are.
How you price your business will depend on the type of model it is however it’s quite common for startups to lower their cost, even offer it for free to gain traction however this can pose a few problems. The key being it actually delays / avoids validation. Getting people to sign up for something for free is a lot different than asking them to pay. There is also the idea of perceived value.
Here you should list all the operational costs for taking this business to market. How much will it cost to build / landing page? What is your burn rate — your total monthly running costs? How much will it cost to interview your customer segment? How much do market research papers cost? etc. You can then use these costs and potential revenue streams to calculate a rough break-even point.
Every business, no matter what industry or size, will have some key metrics that are used to monitor performance. The best way to help with this is to visualise a funnel top down that flows from the large open top, through multiple stages to the narrow end.
A good model to help with this is Dave McClure’s ARRRR (aka Pirate Metrics) .
This is the most difficult to block to answer. However, do try to think about this as having an unfair advantage can help when it comes seeking partners & investors. Here is a great definition of unfair advantage: “The only real competitive advantage is that which cannot be copied and cannot be bought.” — Jason Cohen.
Unfair advantage can be insider information, a dream team, getting expert endorsements, existing customers etc. So rather than think about adding something like “commitment and passion” as an unfair advantage (because it is not), think about what you have that no one else can buy.
Case study (source : Run Lean (Maurya, 2014))
Case study : cloudfire
Prior to CloudFire, I had launched a file-sharing application called BoxCloud that simplified the process of sharing large files, using a proprietary peer-to-web (p2web) framework we had built.
BoxCloud’s unique value proposition (UVP) was that it allowed the sharer to share a file/folder directly from his computer without any uploading. Recipients accessed the shared file/folder directly from their browser without the need to install any ad- ditional software.
BoxCloud was primarily targeted at business users and was in use by graphic design- ers, attorneys, accountants, and other small-business owners.
I was interested in exploring other uses of the p2web framework, especially around media sharing (photos, videos, and music), which is how CloudFire came about.
Really broad category:
Anyone that shares lots of media content.
More specific possible customers:
Media consumers (scratch my own itch)
While I was initially drawn to building something for the consumer segment (with myself as the prototypical customer), I had recently become a parent and witnessed some pain points around photo and (especially) video sharing. That is the segment I decided to model first.
Question : based on all the elements you can find, try to fulfil Cloudfire lean canvas
1.Definition In recent years, the business model has been the focus of substantial attention by both academics and practitioners. Since 1995 there have been 1,177 papers published in peer- reviewed academic journals in which the notion of a business model is addressed. However, there is no widely accepted understanding and modelization of what business model is (Zott, Amit and Massa, 2010).
Definition of business model
Architecture for product and service flows including a description of the business activities and its sources of income
Stewart and Zhao
How the company aims to make profits and sustain them over time
Amit and Zott
Structured prepapred to create value
Plé, Lecocq and Angot
Choices made by a company to make profit. These include resources and expertise to create value through products operated by the firm, internally or externally
Casadesus-Masanell and Ricart
How the organisation creates and delivers value to its stakeholders
Osterwalder and Pigneur
Logic of creation, delivery and capture of value by an organisation
Zott, Amit and Massa
How a company does business and creates value
Nielsen and Lund
Coherence of the strategic choices of the company, which enable relationships to create value at its operational, tactical and strategic levels
Source : Bonazzi and Zilber (2014)
One the most consistent definition is given by Osterwalder (2004) : «A business model is a conceptual tool that contains a set of elements and their relationships and allows expressing the business logic of a specific firm. It is a description of the value a company offers to one or several segments of customers and of the architecture of the firm and its network of partners for creating, marketing, and delivering this value and relationship capital, to generate profitable and sustainable revenue streams».
Image description for text to speech software, click here
(Description: Picture with seven steps for Business plan for Dummies: 1st – Learn how to implement a Business plan and make it work. 2nd – Know all the major parts of a Business plan. 3rd – Include all vital pieces of information for your Business planning checklist. 4th – Include a basic financial statement. 5th – Research your customers and target market. 6th – Know your competitors. 7th – Try to avoid mistakes that lead to business failure)
The business model encourages the entrepreneur to :
conceptualize the venture as an interrelated set of strategic choices;
seek complementary relationships among elements through unique combinations;
develop activity sets around a logical framework;
ensure consistency between elements of strategy, architecture, economics, growth, and exit intentions.
Through the building and the ongoing adjustment of the model, the Business Model guide the entrepreneur to understand and analyze :
how the company works ;
the environment and identify the stakeholders that govern it;
how to create economic value and create margin ;
the end customer and the means to put in place to ensure a lasting relationship of trust over time;
the key resources and skills needed to set up our offer.
2. Framework building : The Business Model CanvasAs defined, the business model is consistent with a number of emerging concepts from the field of strategic management. It has elements of both strategy and operational effectiveness. Activity systems can be mapped so as to capture the evolution of organizations along discernable developmental paths. Siggelkow (2002) characterizes activity sets in terms of core elements, elaborating elements, and interactions. The business model organizes these core elements and activities around six key decision areas. The model captures all of a firm’s core elements, although more than one core element can fall into a given decision area. Further, each of the six decision areas and the interactions between areas are supported by a variety of activity sets. The business model represents a framework for doing this constructing in the early stages of a venture and for conducting predictive, what-if scenario analysis. For early stage entrepreneurs, many of the potentially most productive activity sets are less apparent, as the firm has little experience, highlighting the importance of entrepreneurial vision.
Morris, Schindehutte and Allen (2005) developed a standardized framework in order to characterise a Business Model. Three increasingly specific levels of decision making are the dimensions of the framework called : foundation, proprietary, rules. At each level, six basic decision areas are considered. The different components are reflecting the need to translate core competencies and the value proposition into a sustainable marketplace position. Moreover, the framework is developed in order to be consistent and be applied to all types of ventures. It remains important to emphasize on the necessity to accommodate differing levels of growth, time horizons, resource strategies, ...Thus, the sixth decision area captures growth and time objectives of the entrepreneur. Foundation level: “defining basic components”
This dimension encompass six components related to value creation, firm position and entrepreneur’s characteristics :
Component 1 : Factors related to the offering (how do we create value? select from each set), offering:
access to product/ product itself/ product bundled with other firm’s product
internal manufacturing or service delivery/ outsourcing/ licensing/ reselling/ value added reselling
direct distribution/indirect distribution (if indirect: single or multichannel)
Component 2 : Market factors (who do we create value for?select from each set)
type of organization: b-to-b/b-to-c/ both
where customer is in value chain: upstream supplier/ downstream supplier/ government/ institutional/ wholesaler/ retailer/ service provider/ final consumer
broad or general market/multiple segment/niche market
Component 3 : Internal capability factors (what is our source of competence? select one or more)
technology/R&D/creative or innovative capability/intellectual
supply chain management
Component 4 : Competitive strategy factors (how do we competitively position ourselves? select one or more)
image of operational excellence/consistency/dependability/speed
product or service quality/selection/features/availability
intimate customer relationship/experience
Component 5 : Economic factors (how we make money? select from each set)
pricing and revenue sources: fixed/mixed/flexible
operating leverage: high/medium/low
Component 6 : Personal/investor factors (what are our time, scope, and size ambitions? select one)
Proprietary level: creating unique combinations
Sustainable advantage depends on the entrepreneur’s skills and abilities to apply specific approaches to one or more of the foundation components (factors related to the offering ; market factors ; internal capability factors ; competitive strategy factors ; economic factors ; personal/investor factors). The identification of novel ways to realize the decisions identified at the first level of this framework is crucial for entrepreneurs. This is referred to as the proprietary level of the model, as it entails innovation unique to a particular venture. The proprietary level is specific and unique for each venture, contrary to foundation level that is generic. Thereby, strategy becomes specific.
Rules level: establishing guiding principles
Rules and principles are guidelines ensuring that the model’s foundation and proprietary elements are reflected in ongoing strategic actions. The definitions of those guidelines have to be in coherence with the characteristics of the venture. Their role is indivisible from the business strategy as discussed by Eisenhardt and Sull (2001). They discuss ‘‘priority rules’’ that determine how Intel allocates manufacturing capacity and ‘‘boundary rules’’ that govern the types of movies Miramax decides to make. Girotto and Rivkin (2000) explain how Yahoo! adheres to a set of guiding rules in the formation of partnerships, a critical part of the firm’s business model.
Business Model Canvas application : flexibility and sustainability
Consistency of the dimensions and components is the most important characteristic of the Business Model to build. Consistency can be defined as fit, both internal and external ‘‘fit’’. Internal fit refers to a coherent configuration of key activities within the firm. It includes both consistency and reinforcement within and between the six subcomponents of the model. External fit addresses the appropriateness of the configuration given external environmental conditions.
A given economic model might not be workable when selling in a regional b-to-b market where significant investment in customer relationships is required or when selling a value offering involving extensive customization. If the economic model calls for penetration pricing with low margins and high fixed costs, this may imply a value proposition that centers on medium to low quality, a target market that is fairly broad and relatively price elastic, competitive positioning based on cost leadership, and a growth-oriented investment model.
Ultimately, each component affects and is affected by the other components. While each is vital, the firm’s investment model effectively delimits decisions made in all the other areas. For instance, a speculative business, with its shorter time horizon, may require a cost structure with lower operating leverage and a customer focus that is not predicated on long-term customer relationships. Alternatively, if one is building a lifestyle business, the firm is apt to have a more narrowly defined product and market focus, may be more dependent on customer relationships, and is likely to require an economic model that includes lower volumes. With the lifestyle venture, it may not be necessary to invest as much in the model’s proprietary elements. External fit is concerned with consistency between choices in the six areas of the model and conditions in the external environment. As environmental conditions change, the model may require adaptation or wholesale change. Adaptability may require models with loosely fitting elements or introduction of new elements that change the dynamics among existing elements.
A process of experimentation may be involved as the model emerges (and a viable model may never emerge). Lessons are being learned regarding what is required to make money on a sustainable basis. As competencies are developed, keener insights may result regarding sources of innovation or advantage as they relate to those competencies. The entrepreneur is also likely to become more strategic in his/her view of business operations over time. In terms of the proposed framework, a firm’s model might be expected to evolve from the foundation level toward a more complete articulation of the proprietary and rules levels.
Initially, the entrepreneur may have a fair picture of the foundation level and limited notions about some components at the proprietary level. As the firm develops and learns, it is able to flesh out more components at the proprietary level, furthering its advantage, and develops rules that guide operations and ongoing growth. Model evolution can also be linked to the type of venture being pursued. Models for survival, lifestyle, growth, and speculative ventures might be expected to vary in formality, sophistication, and uniqueness.
The image represents an A4 page in the landscape orientation and is composed of 9 rectangles. At the bottom of the page stand 2 rectangles in the landscape mode. The rectangle on the left corner is named “cost structure” and contains the following questions:
What are the most important costs inherent in our business model ?
Which Key Resources are most expensive?
Which Key Activities are most expensive?
The rectangle on the right corner is named “revenue streams” and contains the following questions:
For what value are our customers really willing to pay?
For what do they currently pay?
How are they currently paying?
How would they prefer to pay?
How much does each Revenue Stream contribute to overall revenues?
Over these 2 rectangles, there are 7 rectangles composing 5 columns. On the left side, there is a rectangle named “key partners”. This rectangle contains the following questions:
Who are our Key Partners?
Who are our key suppliers?
Which Key Resources are we acquiring from partners?
Which Key Activities do partners perform?
On the right of the first column, there is another one composed of 2 rectangles. The one on the top is named “key activities” and contains the following questions:
What Key Activities do our Value Propositions require?
Our Distribution Channels?
Below this rectangle and still in the same column, the other rectangle is named “key resources” and contains the following questions:
What Key Resources do our Value Propositions require?
Our Distribution Channels?
The third column is made by 1 rectangle named “value propositions” in which there are the following questions:
What value do we deliver to the customer?
Which one of our customer’s problems are we helping to solve?
What bundles of products and services are we offering to each Customer Segment?
Which customer needs are we satisfying?
The fourth column is composed of 2 rectangles. The one on the top is named “customer relationships” and contains the following questions:
What type of relationship does each of our Customer Segments expect us to establish and maintain with them?
Which ones have we established?
How are they integrated with the rest of our business model?
How costly are they?
Below this rectangle and still in the same column, the other rectangle is named “channels” and contains the following questions:
Through which Channels do our Customer Segments want to be reached?
How are we reaching them now?
How are our Channels integrated?
Which ones work best?
Which ones are most cost-efficient?
How are we integrating them with customer routines?
The last column contains 1 rectangle named “customer segments” in which the following questions are written:
For whom are we creating value?
Who are our most important customers?
Decisions at the proprietary level become vital for sustainable advantage. Conceptually, it is possible to envision a business model life cycle involving periods of specification, refinement, adaptation, revision, and reformulation. Initially and during a period, the model is fairly informal or implicit is followed by a process of trial and error. Number of core decisions are made that delimit the directions in which the firm can evolve. After a period, it leads to a fairly definitive and formal model. The model is the result of several adjustments subsequently to errors and experiments processes. Such adjustments are described as : augmentation, reinforcement, and deletion (Siggelkow, 2002).
Bonazzi F.L. and Zilber M.A. (2014). Innovation and business model : a case study about integration of innovation funnel and business model canvas. Review of business management, 16(53), 616-637.
Eisenhardt K.M. and Sull D.N. (2001). Strategy as simple rules. Harvard Business Review, 79(1), 106-116.
Morris M., Schindehutte M. and Allen J. (2005). The entrepreneur’s business model : Toward a unified perspective. Journal of business research, 58(6), 726-735.
Osterwalder A. (2004). The business model ontology : A proposition in a design science approach. PhD thesis. Université de Lausanne – Ecole des Hautes Etudes Commerciales.
Siggelkow N. (2002). Evolution toward fit. Administrative science quarterly, 47(1), 125–159.
Zott C., Amit R. and Massa L. (2010). The business model : Theoretical roots, recent developments, and future research. Working paper, WP-862, June 2010. IESE, Business School, University of Navarra.
This part discusses the importance of writing a business plan. Although some new ventures simply “wing it” and start doing business without the benefit of formal planning, it is hard to find an expert who doesn’t recommend preparing a business plan. A business plan is a written narrative, typically 25 to 35 pages long, that describes what a new business intends to accomplish and how it intends to accomplish it. For most new ventures, the business plan is a dual-purpose document used both inside and outside the firm.
Inside the firm, the plan helps the company develop a “road map” to follow to execute its strategies and plans. Outside the firm, it introduces potential investors and other stakeholders to the business opportunity the firm is pursuing and how it plans to pursue it.
To begin this part, we discuss issues with which entrepreneurs often grapple when facing the challenge of writing a business plan.
Topics included in this part are reasons for writing a business plan, a description of who reads the business plan and what they’re looking for, and guidelines to follow when preparing a written business plan.
A large percentage of entrepreneurs do not write business plans for their new ventures. In fact, only 31 percent of the 600 entrepreneurs who participated in a Wells Fargo/Gallup Small Business Study indicated that they had started their venture with a business plan. This statistic should not deter an entrepreneur from writing a business plan, however. Consider that we do not know how many of the entrepreneurs participating in the Wells Fargo/Gallup Small Business study who did not write a business plan wish they had done so.
We’re also not sure how many aspiring entrepreneurs never got their businesses off the ground because they didn’t have a business plan. One academic study found that potential entrepreneurs who completed a business plan were six times more likely to start a business than individuals who did not complete a business plan.
1.2. Two primary reasons to write a business plan
We show the two primary reasons to write a business plan.
First, writing a business plan forces a firm’s founders to systematically think through each aspect of their new venture. This is not a trivial effort—it usually takes several days or weeks to complete a well-developed business plan—and the founders will usually meet regularly to work on the plan during this period. Consistent with Whiting and Wieber’s experience, writing a business plan forces a firm’s founders to intently study every aspect of their business, a process that’s hard to replicate in any other way.
The second reason to write a business plan is to create a selling document for a company. It provides a mechanism for a young company to present itself to potential investors, suppliers, business partners, key job candidates, and others. Imagine that you have enough money to invest in one new business. You chat informally with several entrepreneurs at a conference for start-ups and decide that there are two new ventures that you would like to know more about. You contact the first entrepreneur and ask for a copy of his business plan. The entrepreneur hesitates a bit and says that he hasn’t prepared a formal business plan but would love to get together with you to discuss his ideas. You contact the second entrepreneur and make the same request. This time, the entrepreneur says that she would be glad to forward you a copy of a 30-page business plan, along with a 10-slide PowerPoint presentation that provides an overview of the plan. An hour or two later, the PowerPoint presentation is in your e-mail in-box with a note that the business plan will arrive the next morning. You look through the slides, which are crisp and to the point and do an excellent job of outlining the strengths of the business opportunity. The next day, the business plan arrives just as promised and is equally impressive.
Which entrepreneur has convinced you to invest in his or her business? All other things being equal, the answer is obvious—the second entrepreneur. The fact that the second entrepreneur has a business plan not only provides you with detailed information about the venture but also suggests that the entrepreneur has thought through each element of the business and is committed enough to the new venture to invest the time and energy necessary to prepare the plan. Having a business plan also gives an investor something to react to. Very few, if any, investors will free up time to “listen” to your idea for a new business, at least initially. Investors prefer to vet or evaluate business ideas by looking through business plans (or the executive summaries of business plans) initially before they are willing to invest more of their time and effort.
1.3. Who reads the business plan and why ?
There are two primary audiences for a firm’s business plan. Let’s look at each of them.
A Firm’s Employees
A clearly written business plan, which articulates the vision and future plans of a firm, is important for both the management team and the rank-and-file employees.
Some experts argue that it’s a waste of time to write a business plan because the marketplace changes so rapidly that any plan will become quickly outdated. Although it’s true that marketplaces can and often do change rapidly, the process of writing the plan may be as valuable as the plan itself.
A clearly written business plan also helps a firm’s rank-and-file employees operate in sync and move forward in a consistent and purposeful manner.
The existence of a business plan is particularly useful for the functional department heads of a young firm. For example, imagine that you are the newly hired vice president for management information systems for a rapidly growing start-up.
The availability of a formal business plan that talks about all aspects of the business and the business’s future strategies and goals can help you make sure that what you’re doing is consistent with the overall plans and direction of the firm.
Investors and Other External Stakeholders
External stakeholders who are being recruited to join a firm such as investors, potential business partners, and key employees are the second audience for a business plan.
To appeal to this group, the business plan must be realistic and not reflective of overconfidence on the firm’s part. Overly optimistic statements or projections undermine a business plan’s credibility, so it is foolish to include them. At the same time, the plan must clearly demonstrate that the business idea is viable and offers potential investors financial returns greater than lower-risk investment alternatives.
The same is true for potential business partners, customers, and key recruits. Unless the new business can show that it has impressive potential, investors have little reason to become involved with it. A firm must validate the feasibility of its business idea and have a good understanding of its competitive environment prior to presenting its business plan to others.
Sophisticated investors, potential business partners, and key recruits will base their assessment of the future prospects of a business on facts, not guesswork or platitudes. The most compelling facts a company can provide in its business plan are the results of its own feasibility analysis and the articulation of a distinctive and competitive business model.
A business plan rings hollow if it is based strictly on an entrepreneur’s predictions of a business’s future prospects. Morphology, the board game company started by Dartmouth student Kate Ryan Reiling, is an example of a business that laid a firm foundation for its business plan via the feasibility analysis that it conducted very early on. Morphology is profiled in the opening feature for Chapter 3.
In addition to the previously mentioned attributes, a business plan should disclose all resource limitations that the business must meet before it is ready to start earning revenues. For example, a firm may need to hire service people before it can honor the warranties for the products it sells. It is foolhardy for a new venture to try to downplay or hide its resource needs. One of the main
reasons new ventures seek out investors is to obtain the capital needed to hire key personnel, further develop their products or services, lease office space, or fill some other gap in their operations. Investors understand this, and experienced investors are typically willing to help the firms they fund plug resource or competency gaps.
Guidelines that influence the writing of a business plan
There are several important guidelines that should influence the writing of a business plan.
It is important to remember that a firm’s business plan is typically the first aspect of a proposed venture that an investor will see. If the plan is incomplete or looks sloppy, it is easy for an investor to infer that the venture itself is incomplete and sloppy. It is important to be sensitive to the structure, content, and style of a business plan before sending it to an investor or anyone else who may be involved with the new firm.
2.1. Structure of the Business Plan
To make the best impression, a business plan should follow a conventional structure, such as the outline shown in the next section. Although some entrepreneurs want to demonstrate creativity in everything they do, departing from the basic structure of the conventional business plan format is usually a mistake. Typically, investors are very busy people and want a plan where they can easily find critical information. If an investor has to hunt for something because it is in an unusual place or just isn’t there, he or she might simply give up and move on to the next plan.
2.2. Content of the Business Plan
The business plan should give clear and concise information on all the important aspects of the proposed new venture. It must be long enough to provide sufficient information, yet short enough to maintain reader interest. For most plans, 25 to 35 pages (and typically closer to 25 than 35 pages) are sufficient.
Supporting information, such as the résumés of the founding entrepreneurs, can appear in an appendix.
After a business plan is completed, it should be reviewed for spelling, grammar, and to make sure that no critical information has been omitted. There are numerous stories about business plans sent to investors that left out important information, such as significant industry trends, how much money the company needed, or what the money was going to be used for. One investor even told the authors of this book that he once received a business plan that didn’t include any contact information for the entrepreneur. Apparently, the entrepreneur was so focused on the content of the plan that he or she simply forgot to provide contact information on the business plan itself. This was a shame, because the investor was interested in learning more about the business idea.
2.3. Style or Format of the Business Plan
The plan’s appearance must be carefully thought out. It should look sharp but not give the impression that a lot of money was spent to produce it. Those who read business plans know that entrepreneurs have limited resources and expect them to act accordingly.
A plastic spiral binder including a transparent cover sheet and a back sheet to support the plan is a good choice.
When writing the plan, avoid getting carried away with the design elements included in word-processing programs, such as boldfaced type, italics, different font sizes and colors, clip art, and so forth. Overuse of these tools makes a business plan look amateurish rather than professional.
Key sections of a business plan
3.1. Executive summary
Characteristics and advice
It appears at the start of a business plan, but is written last, after other sections have been written, evaluated and redesigned. The executive summary provides a short overview of the business plan. It is often considered the most crucial part of the plan because it is the first section your readers see. It should invite the prospective investor to read the rest of the business plan.
A strong executive summary should be concise and engaging.
The executive summary will touch on all of the areas of the plan, including:
The main objective of the business
What makes the business unique or distinctive
The skills and experience of the management team
The target audience
How the business will operate
The current competition in the market
Costs and financial projections (Cost benefit analysis)
3.2. Company Description or Business Overview
Characteristics and advice
This section is used to explain your vision and goals for the business venture in practical terms. It provides an overview of the company, explaining how it is run, how it makes money and what plans are in place for the future.
By the end of this section, the reader should understand why you believe this business will work by presenting steady data and arguments.
The legal structure of the business (Sole proprietorship, corporation, etc);
Type of business (Manufacturing, retail or sales, service or a combination);
Potential for profitability (How you will make money);
Location (Where you will be based);
Means of doing business (Internet, storefront operation, mail order);
Time of business operations (Open daily, seasonal, specific hours, etc.);
Resources (What you will need to get started and operate, from machinery to computers to manpower).
3.3. Products & Services
Characteristics and advice
This section describes the products manufactured or sold, or the services offered. Classify the different types of products or services and provide a brief description of each. Indicate why you have selected to market such products or services and the need you fulfill for your prospective customers.
Types of products, services
Description – present their advantages or quality characteristics
Which customers needs are fulfilled?
Benefits of your products or services and how they provide something other than what is currently available from competing companies
3.4. Market Information
Characteristics and advice
Market information describes the larger picture of the industry and market trends in which your business will compete. This sets a framework where you will build your customer base. Carefully research and evaluate the industry and determine how you can make an impact. Market information must be Timely, Accurate, Measurable, Easy to read and understand.
Your market information should correlate with the products and, or services you have presented above.
An overview of the market and current status
Trends and changes in the market
Possible or recognized Niche markets or segments within the larger market
Your target audience
The specific needs of your target audience
How you will impact on those needs
How you anticipate the market will change over the next two, three or five years
3.5. Competitive analysis
Characteristics and advice
It is vital that you study; analyse, understand and evaluate your competition. This will provide investors and stakeholders with a clear understanding of what market share you can realistically gain. Learn how your competitors conduct business, price their merchandise or services and manage their businesses.
More creativity will be required on your part.
Include the strengths, weaknesses and details of the competition.
Describe exactly how your business will differ and present alternatives to what your competition is offering.
You may need to find a niche market that will allow you to compete against a more established business.
3.6. Operational plan and operational strategy
Characteristics and advice
This section describes how the business will operate. It will include how items will be ordered, stored, sold and/or produced or a service will be offered and performed.
The key to the operations section is to explain your strategies and approach and how they best facilitate the type of business you plan to do.
Include other companies, vendors and distributors that your business will rely on to complete transactions and explain why you have chosen them.
A contingency plan may be necessary if your business is sensitive to external factors.
How you do business will change with time and you need to address changes in technology, ecosystem and marketing trends. You should include some general projections of how you expect the operational plans of your business to change and grow over time to meet the demand for increased sales.
The operations plan should include:
Who will handle specific tasks;
How the business will be physically set up;
Manufacturing details including supplier chains;
The need for sub-contractors or freelancers.
Strategy: How your method of doing business
will benefit your customers;
will ensure quality customer service;
give you a competitive advantage.
Projections for sustainable functioning and future growth
3.7. Management and ownership
Characteristics and advice
This section features short biographies of the key personnel involved in forming and running the business. You will also include key staff members and members of your Board of Directors. What each member of the team brings to this business, including past experience and significant achievements. His or her key responsibilities in the company should also be noted.
Explaining who is behind the company and what each person brings to the table is of great interest to any potential investor.
Key personnel – short biographies, incl. past experience and achievements; responsibilities, roles;
Board of Directors;
External advisors or Advisory Body – if any
Characteristics and advice
Pricing needs should be carefully determined and be in line with the market you are trying to reach. Your pricing strategy should reflect the applicable factors listed along with your overall market strategy.
For example, you may be setting your prices low to penetrate a saturated market. Conversely, you may have an offering that is unique to your demographic region and can therefore set higher prices.
Costs of purchasing or manufacturing goods
Time involved in performing a service or making a sale
Availability or exclusivity of an item or service
Manpower or labor involved
3.9. Financial plan
Characteristics and advice
A solid financial plan should be outlined within the overall business plan. Outline the financial structure of the business before including it in the business plan.
All of these elements of your initial financing should coincide with the goals and visions of the business as stated earlier in the business plan.
The financial plan will also include the start-up budget and operations budget, indicating what you need to launch the business and how much you will need to keep the business going on an ongoing basis.
The financial section should outline:
How much money is necessary to start the business
How much money will be needed over the next two, three and even five years
How funds will be utilized
How many funding sources you will exploit
A timeline of when you will need funding
Financial documents will include:
Projected Profit and Loss Statement
Projected Cash Flow Statement
Other assets – if any
The financial plan should provide for: salaries, wages, insurance costs, accounting costs, equipment costs,land cost, legal fees, taxes, cost of goods sold, advertising and promotional expenses and all other pertinent costs in each of your two budgets.
3.10. Review your business plan
Characteristics and advice
Once you have completed your business plan, go back and review your work. Make sure that you include all major sections.
This document is typically designed to attract investors and also to provide a blueprint for the business.
Include a Table of Contents listing where each section can be found
Cover all key points in clear and concise language
Proofread carefully for spelling and grammar
Fact check to make sure all data is accurate and all claims are substantiated
Eliminate any extraneous information
Have clearly visible contact information on a cover page and at the end of the document
Present all graphs or charts in a clear and easy to read manner
Have not over-estimated your financial projections or underestimated your time frame for launching the business
When you are starting a business, there are a number of mistakes you can make. These could be classified according to the different aspects of your business such as planning, analysis, marketing, financial, hiring personnel, sales, business name mistakes etc., as well as various overall and practical mistakes.
A. Overall mistakes:
Absence of overall realism about the Business (general vision concerning economic parameters)
Overall realism about the Business is important as it is the backbone of everything you engage in. To check that you are realistic try to formulate 3 main challenges as well as your vision statement, mission statement and core values.
The answers to the following questions will help you clarify your business vision:
What will put you out of business?
What is your ultimate vision of success?
What is your ideal community vision?
What about your priorities?
Absence of clear aims of your new business
Formulating clear aims of your new business will help you ensure its success. These aims could be:
Entering new market niches
Replacing similar product from the given market sector
Earning more incomes and return investment
Enlarging product/services portfolio
Upgrading a company
Definition of a good idea
To meet a significant customer need – a market
Achieving competitive advantage
B. Planning and analysis mistakes
Before putting a business idea into practice a number of analyses, plans, assessments, choices will have to be made. Absence of these will prove a mistake.
Image description for text to speech software, click hereDescription: Picture of what SWOT Analysis is:
S – Strengths – these are the things that your company does well. Qualities that separate you from your competitors; Internal resources such as skilled, knowledgeable staff; Tangible assets such as intellectual property, capital, proprietary technologies and etcetera.
W – Weakness – these are the things your company lacks. Things your competitors do better than you; Resource limitations; Unclear unique selling proposition and etcetera.
O – Opportunities – these are the opportunities which you can transfer to strengths, things like: Underserved markets for specific products; Few competitors in your area; Emerging need for your products or services; Press/media coverage of your company and etcetera.
T – Threats – these are the threats which can be transferred to weaknesses such as: Emerging competitors; Changing regulatory environment; Negative press/media coverage; Changing customer attitudes towards your company and etcetera.
Absence of market analysis and strategy
The market analysis is a study on the current situation from various informative sources. Main issues which should be investigated here are:
Community trends and needs
Potential market opportunities and problems (Transform the problem into opportunity)
Assessing what competitors offer
Scanning internal capacity
Assessing functioning network
Evaluating product attractiveness
Evaluating marketing issues
How likely is the product/service to be implemented successfully (easy or hard)?
Does the product advance mission and strategic priorities?
Absence of operational plan, time-schedule
Operational plan consists of detailed steps for product/service realization. It should deal with:
Needed equipment and/or facilities
Needed providers (suppliers)
Various scopes of sells techniques
Compulsory elements to be defined before the business starts are:
Business location - venue, access to the market; resources; acceptable infrastructure
Facilities; buildings; equipment; infrastructure, management plan
Basic operations (this could be not applicable for new starting business)
Absence of Risk analysis
Risk analysis is one of the main element of business planning and includes two main parts:
Assessment of risk factors ( market, technical, financial etc)
Defining (envisaging) measures for risk minimizing
There are two main types of risks – internal and external. Examples of internal type are:
Non properly functioning equipment
Leaving of key expert or manager
Not enough skilled personnel
Higher costs than calculated ones
Low innovative technologies
As for the external risks most often they are connected with:
Unrespectable competitors intervention - offering lower prices for the same product
Drastic changes in the political conditions
Sharp inflation increase
New competitor on the stage
Tax fee increasing
Measures reducing the risk should correspond to every identified risk:
Key expert or manager leave the company
Creation of fast reacting system for HR qualification
Agreed on credit turnover line
Lower prices of competitors
More rebuts from providers
Absence of realistic assessment of resources (financial, human)
Concerning financial resources, the entrepreneurs have to assess the investments needed. Primary investments include infrastructure expenditures - equipment, materials, software products and licenses, etc; administrative tax fees; HR investments. Secondary investments are connected with depreciation payments, serving of loans or credits, labor cost, tax fees, operational costs, satellite events incl. promotions, advertising, etc.
Concerning HR resources we have to assess:
Needed staff for entrepreneur project performance
Number of necessary special qualified staff
Additional training and retraining
Expenditure for further qualification
Concerning financial resources one has to assess the overall investment evaluation - this is the last stage of resources assessment
It is good to answer the following questions:
Is there economic use for project realization
What is the balance between investments and incomes
How to manage cash flow
What is pay back period or what is the period of investment return
Absence of appropriate management structure
A management structure includes the creation of a new or adaptation of existing organisation in order to integrate administrative and fundraising functions, and thus to increase the administrative efficiency and effectiveness.While a sole proprietorship requires less formality and administrative work, you may want to consider forming a corporation to protect your personal assets from any liability of your company. The type of business structure you choose affects certain aspects of how you conduct your business and your taxes. Consult accounting and legal resources to help determine the best fit for your company.
The above is a short summary of several of the most common risk for entrepreneurs when starting a new business. The awareness and measures proposed will help you avoid them
A. Do’s in other aspects of your new business
Check the business name you have chosen
Don’t start using a business name on your business cards, social media, and other marketing collateral before verifying it’s not taken by someone else.
Set up a business bank account
Keep personal and business monies separate—and certain legal structures require you to do it that way.
Market to a defined group. Determine your marketing audience and gear your plan to address this group.
Have a clear marketing message.
Business owners feel the need to take care of everything themselves. But do not be afraid to delegate appropriate tasks to appropriate people. Otherwise, there is a risk of becoming unable to direct the proper level of attention on the task at hand, rendering a business incapable of reaching its full potential.
The market analysis is an important part of of the business plan and any startup strategy. The market analysis is a study on the current situation of the market by various sources.
Your market analysis should enable you to:
Avoid putting a lot of resources and time into creating a product or service before you’ve determined that your solution is needed.
Determine that the need for your product or service is big enough that people will pay for it.
Aspects of market analysis
Main issues which should be addressed are:
Community trends and needs
Potential market opportunities
Assessing what competitors offer
Evaluating product attractiveness
Evaluating marketing issues
Make a comparative analysis with other offered market competitive products and assess your product/service advantages
How likely is the product/service to implemented successfully(easy or hard)?
The following topics also should be considered when preparing a market analysis:
General economic trends
Branches trends and characteristic
Specificity of the competitors
Market state of the art
General economic trends include GDP trends, inflation, demand trends, general ability for purchasing of the population and trends of labor market, including level of unemployment.
The next step includes analysis of the main market characteristic of the branch where your product/service will be sold. The main branch factors are connected with technology changes,changes of the consumers need and preferences,demographic changes, social media, etc.
Usually the competitive forces on the market are: companies from other branches delivering similar products and services; providers, consumers, new competitors, barrier for entering the market.
Market analysis reflects possible consumers and their specifies- size; social status; motivation; possible share of market; frequencies of demand; balance - “demand - supply” of the offered product/ services; acceptable price level.
Prognosis in market analysis reflects capacity and sustainability of demand, market absorption capacity.
In short to make an offer successful you should answer the following questions:
Who are my potential customers?
What are their buying and shopping habits?
How many of them are there?
How much will they pay?
Who is my competition?
What have their challenges and successes been?
Strategy of the 4 Ps
Market analysis includes creating of a successful market strategy. It consists of several strategy steps:
1. Product Strategy
Aims at the attractiveness of your offer. It is a mix of:
Trade mark - if any
Main specificity – your offer should pose competitive advantages
2. Price Strategy
Should take into account market reality and reducing the risk. There are different mixtures of price defining approaches. Some of them are:
On the base of company criteria
Competitors pricing - considering prices of competitive services or product
3. Providing strategy
Concerns the system of product/services distribution you are offering.
Is it flexible or rigid
What kind of distribution do you apply?
On common point
On big stores with follow up redistribution
Door to door services
What is the time lag of service/product providing
Do you offer contestation and what is the manner of receiving it; Time for reaction?
4. Promotion strategy
Information about it is included in the next chapter 4 Marketing and communication.
Tips for writing an effective market analysis
Here are some tips to help you write an effective market analysis for your small business plan.
Use the Internet
Since much of the market analysis section relies on raw data, the Internet is a great place to start. A series of searches can uncover information on your competition, and you can conduct a portion of your market research online.
Be the Customer
One of the most effective ways to gauge opportunity among your target market is to look at your products and services through the eyes of a purchaser. What is the problem that needs to be solved? How does the competition solve that problem? How will you solve the problem better or differently?
Conduct Thorough Market Research
Put in the necessary time during the initial exploration phase to research the market and gather as much information as you can. Then use the data gathered as supporting materials for your market analysis.
Relate Back to Your Business
All of the statistics and data you incorporate in your market analysis should be related back to your company and your products and services. When you outline the target market's needs, put the focus on how you are uniquely positioned to fulfill those needs.
This section will address sales tactics, advertising and an overall marketing plan.
Sales & Marketing
Your sales and marketing strategies will need to coincide with your overall company goals and vision. External influences, including political changes, changes in the marketplace, competition and the overall economic climate will play a role in how you plan to market your business. Manufacturing companies will include methods of sales and distribution; retailers will include an overview of their anticipated product sales. Specific sales strategies including how the services will be offered to the public, anticipated promotions, should be detailed.
Marketing will play a significant part in the success of any new business. To create a successful marketing plan, you need to first do market research and learn as much as possible about your potential customer base. By learning the preferences and buying habits of your projected target audience you can create a marketing plan that will peak their interest and meet their needs.
Your marketing plan, should include:
An overview of market trends in general, your current market
Description of your target audience
New markets you plan to tap into
Methods of reaching your target audience.
Promotional and advertising campaigns
You need to portray your product or service in the marketplace.
Explain how your choice of marketing vehicles will best reach the audience that you are targeting.
Define the image that you are seeking. For example, are you trying to establish your business as a high-end company or a cost saving alternative to established brands? The corporate image of the company will be part of your plan.
Types of media to use for advertising:
online banner ads,
Internet paid listings or search engines, etc.
Public events - fairs, exhibitions targeted days on given branch etc
Create your corporate image
Targeting Your Audience
When forming a new business it is usually advantageous to focus on capturing a specific narrow market. Typically, this will allow the new business to establish itself. Trying to mass market a new business (in most industries) can be difficult. It is also more cost effective for start-up companies to go after a smaller target audiences to establish themselves. The marketing plan should provide a cross section of carefully selected methods designed to reach your target audience with the features and benefits of your product or service. It should be outlined in the business plan in a manner that shows diversity and fits within the scope and means of your overall budget.
Create marketing plan. Includeplans for:
Promotional activities or sponsoring events
Contests, coupons and free giveaways
Special incentives and discounts
Trade show representation
Search engine optimization and search engine marketing
Social media marketing
Professional events with education elements
Image description for text to speech software, click here(Description: Picture with seven steps for Business plan for Dummies: 1st – Learn how to implement a Business plan and make it work. 2nd – Know all the major parts of a Business plan. 3rd – Include all vital pieces of information for your Business planning checklist. 4th – Include a basic financial statement. 5th – Research your customers and target market. 6th – Know your competitors. 7th – Try to avoid mistakes that lead to business failure)
Basic rules for marketing communication
Define the goal of your marketing communications
For example, the goal could be:
Create demand for your products
Create awareness of your company and brand for potential customers
Create awareness for fundraising (VC, angels, corporate partners)
Create awareness for potential acquirers of our company
Once you figure out why you’re creating a communications strategy, you can figure out how to use it. It requires four steps:
Understand your audience(s)
Craft the message for that specific audience
Select the media you want the message to be read/seen/heard on
Select the messenger you want to carry your message
Step 1: Who’s the audience?
The audience is who specifically you want your messages to reach. It can be potential customers, venture capitalists who may want to invest, other companies. Often there are multiple audiences you want to communicate with. Different audiences require their own messages, media, and messengers.
How do you figure out who the audience is? Who’s the user of the product? The recommender? The decision maker? It depends on the role each of these people play in the buying process. And you should spend some time on investigations.
Step 2: What’s the message?
Messages are what you deliver to the audience you’ve selected. Messages answer three questions:
1. Why should the audience care?
2. What are you offering?
3. What action is expected?
4. Things to keep in mind about messages: Message context. In crafting your messages, remember that all messages operate in a context that may have an expiration date. Make sure your context is current, and revisit your messages periodically to see if they still work. Memorable messages. The more memorable the message, the greater its ability to create change. Not only do we want people to change their buying behavior, we also want them to change how they think. If you were told you were going to pay for cold, dead fish wrapped in seaweed, you might not be too hungry. But when we call it sushi, people line up.
(Description: Picture with all of the popular companies logos’ – Facebook, Instagram, Twitter, YouTube, Google+, Skype, Yammer, etcetera).
HAVE A BREAK. HAVE A KIT KAT – Rowntree, 1957
I LIKED IT SO MUCH, I BOUGHT THE COMPANY – Remington, 1979
THE BEST A MAN CAN GET – Gillette Razors, 1989
THERE ARE SOME THINGS MONEY CAN’T BUY. FOR EVERYTHING ELSE, THERE’S MASTERCARD – Mastercard, 1997 Product versus company messages. There is a difference between detailed product messages and messages about your company. At times, you may have to communicate what the company stands for before a customer is ready to listen to you talk about product messages
Step 3: Media
Media refers to the type of communications media each audience member reads/listens to/watches. It could be print (newspapers/magazines), Internet (website, etc.), broadcast (TV, radio, etc.), or social media (Facebook, Twitter, etc.). In customer discovery, you probably asked how they get information about new companies and new products (if not, do so!). The media your prospective customers told you they use ought to be on top of your target media.
Question: Which are the most common medias?
A) Social medias;
B) Broadcast medias;
C) Print medias;
D) It depends on the audience.
The online media your company controls (your corporate website, company Facebook page, etc.) should be the first place you experiment finding your audience(s) and message.
Typically, you pick several media to reach each audience. It’s likely that each audience reads different media (potential customers read something very different than potential investors.) You’ll need a media strategy – a plan that describes the mix of media and how you will use it. This plan should start with the right category of media (print, Internet, broadcast) and then identify specific sites, blogs, magazine, etc.
Step 4: Messengers
Messengers are the well-placed and highly leveraged individuals who have influence over your audience(s). Messengers convey and amplify your message to your audience through the media you’ve chosen.
There are three types of messengers: reporters, experts, connectors. (Each audience will have its own unique set of messengers.)
Customer discovery never stops
Understanding your audience is important not just for startups but for companies already selling products. It helps you stay current with customers, get ideas for other needs to fill, and create new products. In addition, the audience > message > media > messenger cycle seamlessly moves this learning into getting, keeping, and growing customers.
Use the Value Proposition Canvas to understand who your audiences are
Craft messages to match what your audience has already told you
Pick the media they said they read
Find the right messengers to amplify your message
Value proposition canvas - a tool to understand what customers want and needs, and design products and services they want. It works in conjunction with the Business Model Canvas and other strategic management and execution tools and processes. https://strategyzer.com/canvas/value-proposition-canvas
Find the right messengers to amplify your message
What is a marketing plan about?
List 3 media to use for advertising
Which is more effective for start-up companies in targeting their audience?
To go after a smaller target audiences Y N
To go after a large target audience Y N
List 4 steps of a basic communications strategy.
Why is it important to understanding your audience?