Chapter 3: Starting a Small Business
CHAPTER 3: STARTING A SMALL BUSINESS
CHAPTER OUTLINE
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1) Developing Startup Ideas
LO1: Distinguish among the different types of sources of startup ideas
a) Types of Startup Ideas- Exhibit 3-1 Types of Ideas That Develop into Startups
i) Type A Ideas –New Market Ideas- ideas centered around providing customers
with a product or service that does not exist in a particular market but that exists
somewhere else.
ii) Type B Ideas – New Technology Ideas- ideas which involve new or relatively
new knowledge breakthroughs.
iii) Type C ideas – New Benefit Ideas- ideas based on offering customer benefits
from new and improved products or better ways of performing old functions.
(1) Ask students if they know of examples of a startup (created from scratch). Ask
students for businesses that fit each of these types of ideas.
b) Common Sources of Startup Ideas- Discuss circumstances that led to ideas for
starting a new business. Exhibit 3-2, Common Sources of Startup Ideas. Ask students
if they have individual ideas for possible business startups.
i) Personal Experiences
ii) Hobbies and Personal Interests- grow beyond leisure into business.
iii) Accidental Discovery (Serendipity)- a gift for making desirable discoveries by
accident.
iv) Other Idea Leads
(1) Tapping personal contacts with potential customers and suppliers, professors,
patent attorneys, former or current employees or co-workers, venture
capitalists, and chambers of commerce.
(2) Visiting trade shows, production facilities, universities, and research institutes
(3) Observing trends everywhere
(4) Paying close attention to all forms of change, including shifts in specific
industries and markets, demographic swings, and emerging discoveries or
scientific breakthroughs.
(5) Reading trade publications, bankruptcy announcements, and profiles on
entrepreneurs and various business opportunities.
(6) Searching the Internet.
2) Using Innovative Thinking to Generate Business Ideas
LO2: Use innovative thinking to generate ideas for high-potential startups.
a) Suggestions to help guide your thinking:
i) When it comes to ideas, borrow heavily from existing products and services or
other industries.
ii) Combine two businesses into one to create a market opening
iii) Begin with a problem in mind, or think of a “pain” that you can relieve.
iv) Recognize a hot trend, and ride the wave
v) Explore ways to improve the function of an existing product or service.
Chapter 3: Starting a Small Business
vi) Think of possibilities that would streamline a customer’s activities
vii) Consider adapting a product or service to meet customer needs in a different way
viii) Imagine how the market for a product or service could be creatively expanded
ix) Offer products through a subscription service.
x) Cash in on the sharing economy.
xi) Study a product or service to see if you can make it “green”
xii) Keep an eye on new technologies.
3) Internal and External Analyses and New Business Ideas
LO3: Describe external and internal analyses that can shape the identification and
selection of venture opportunities.
a) Outside-In Analysis
i) The general environment- the broad environment, encompassing factors that
influence most businesses in society.
(1) Economic trends – changes in the rate of inflation, interest rates, and even
currency exchange rates which promote or discourage business growth
(1) Sociocultural trends – societal currents that may affect consumer demand,
opening up new markets and forcing others into decline
(2) Political/legal trends – changes in tax law and government regulation that may
pose a threat to existing companies or devastate an inventive business concept
(3) Global trends – reflect international developments that create new
opportunities to expand markets, outsource, and invest abroad
(4) Technological trends – may spawn or wipe out new ventures
(5) Demographic trends- population size, age structure, ethnic mix, and wage
distribution.
ii) The industry environment- the combined forces that directly impact a given firm
and its competitors.
(1) New competitors
(2) Substitute products/services
(3) Rivalry
(4) Suppliers
(5) Buyers
iii) The competitive environment – the environment that focuses on the strength,
position, and likely moves and counter-moves of competitors in an industry
(1) Who would be the new venture’s current competitors?
(2) What unique resources do they control?
(3) What are their strengths and weaknesses?
(4) How will they respond to the new venture’s decision to enter the industry?
(5) How can the new venture respond?
(6) Who else might see and exploit the same opportunity?
(7) Are there ways to co-opt potential or actual competitors by forming alliances?
b) Inside-Out Analysis
i) Building on Internal Resources and Capabilities
(1) Resources – The basic inputs that a firm uses to conduct its business
(2) Tangible resources – Those organizational resources that are visible and easy
to measure
(3) Intangible resources – Those organizational resources that are invisible and
difficult to assess
(4) Capabilities – The integration of various organizational resources that are
deployed together to the firm’s advantage
ii) Core Competencies and Competitive Advantage
(1) Core competencies are those crucial capabilities that distinguish a company
competitively and reflect its general thrust and personality.
(2) Competitive advantage is a benefit that exists when a firm has a product or
service that is seen by its target market as better than those of competitors
c) Integrating Internal and External Analyses
i) SWOT Analysis- an assessment that provide a concise overview of a firm’s
strategic situation that deals with Strengths, Weaknesses, Opportunities, and
Threats.
(1) Have students enter “SWOT Analysis” into Google and see the many possible
formats SWOT analysis can take. Have them choose a format and use that
format for the Case at the end of the chapter.
4) Selecting Strategies That Capture Opportunities
LO4: Explain broad-based strategy options and focus strategies.
a) Broad-Based Strategy Options
i) A strategy is a set of actions that coordinates the resources and commitments of a
business to boost its performance.
ii) Cost-based strategy. A plan of action that requires a firm to be the lowest-cost
producer within its market.
iii) Differentiation-Based Strategy – A plan of action designed to provide a product or
service with unique attributes that are valued by consumers
b) Focus Strategies
i) A plan of action that isolates an enterprise from competitors and other market
forces by targeting a restricted market segment
ii) Focus Strategy Selection and Implementation
(1) A decision regarding the direction a firm will take in relating to its customers
and competitors
(2) Implemented by
(a) Restricting focus to a single subset of customers
(b) Emphasizing a single product or service
(c) Limiting the market to a single geographical region
(d) Concentrating on superiority of the product or service
iii) Drawbacks of Focus Strategies
(1) A firm may become too specialized
(2) Strategy guru Michael Porter) indicates four conditions that may cause a
segmented market to erode
(a) The focus strategy is imitated
(b) Target segment becomes structurally unattractive because the structure
erodes or because demand simply disappears
(c) Target segment’s differences from other segments narrow
(d) New firms sub segment the industry
5) Screening New Business Ideas
LO5: Screen business ideas to identify those with the greatest potential.
a) Business Idea Screening Tool- five important factors:
i) Strength of the business idea
ii) Targeted market and customers
iii) Industry and competitive advantage
iv) Capability of founders
v) Capital requirements and venture performance
6) Is Your Startup Idea Feasible? Assess the feasibility of a startup idea before writing a
business plan.
LO6: Assess the feasibility of a startup idea.
i) Feasibility analysis – A preliminary assessment of a business idea that gauges
whether or not the venture envisioned is likely to succeed.
ii) Fatal flaw – A circumstance or development that alone could render a new
business unsuccessful.
a) Market Potential
i) Includes buyers (current or potential customers) who have the ability to pay for
the product or service and sellers who compete with one another by offering
identical or similar products or services to the same general group of buyers
ii) Feasibility analysis helps identify a potential trend that can support promising
startup ideas
(1) Macro-market analysis establishes boundaries including the number of
customers target for study and their overall purchasing power and habits
(2) Micro-market analysis ties idea to market niche that appears to offer
acceptable prospects for growth and a path to market entry that seems to be
protected from existing competition
b) Industry Attractiveness
i) Macro-level industry analysis used to establish overall attractiveness of the
industry in which the startup will be established.
ii) Micro-level industry assessment focused more on the probability of a startup’s
success over the long term
c) New Venture Leadership – A new business will only be as strong as its leader
which means it is important to assess whether the entrepreneur or the entrepreneurial
team can handle the job
ADDITIONAL DISCUSSION QUESTIONS
1. What are the three basic types of startup ideas? What are the most common
sources of inspiration for startup ideas?
2. List and describe the 10 approaches outlined in this chapter that can be used to
generate creative new business ideas. What are the most important features of
each of these?
i) Borrow heavily from existing products and services or other industries. Explore
ideas and practices that you come across and think deeply about how you might
3. List the six most important trends of the general environment. Give a
hypothetical example of a way in which each trend might affect a small
business.
The six general trends are economic trends, socio-cultural trends, political/legal
4. What are the primary factors that shape competition in an industry, according
to Porter’s model? In your opinion, which of these factors will have the
greatest impact on industry prices and profits?
The following five forces determine the nature and degree of competition in an
industry:
• The threat of new competitors
5. How are tangible and intangible resources related to a venture’s capabilities?
How are capabilities linked to core competencies? What is the connection
between core competencies and competitive advantage?
Organizational capabilities result from the useful integration of tangible and
competitive advantage and superior performance.
.
6. What is a SWOT analysis? How can a SWOT analysis help the entrepreneur
match opportunities in the external environment with organizational
capabilities?
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An environmental assessment examines the general environment and the industry
environment with the goal of finding opportunities that can be pursued while
uncovering threats against which the firm should provide some sort of defense.
The organizational assessment, on the other hand, looks inside the firm to
inventory both strengths and weaknesses in the firm’s arsenal of resources,
capabilities, and core competencies. However, a solid advantage foundation can
be established only when the strengths and weaknesses of the organization are
appropriately matched with a current or probable profile of opportunities and
threats. This integration is best mapped out using what is commonly known as
SWOT analysis, which provides a concise overview of the firm’s strategic
situation.
7. What are the two basic strategy options for creating a competitive advantage?
8. Explain what is meant by the term focus strategy? What are the advantages
and disadvantages of a focus strategy?
Focus strategies can be effective in both domestic and international markets.
Small firms are predicted to see rich opportunities in the future, at home and
9. Under what circumstances is a new business idea screening process useful?
Why? What are the major factors that should be considered when screening
new business ideas?
Sometimes it’s not a problem of coming up with a business idea but rather coming
10. Name and describe the major features of a feasibility analysis. Why is
feasibility analysis important?
A feasibility analysis assesses a business idea to determine whether or not the
SUGGESTED ANSWERS TO YOU MAKE THE CALL EXERCISES
Situation 1
1. How would you classify Lugar’s startup idea? Is it a new market idea, new
technology idea, or new benefit idea?
2. What was the source of Lugar’s startup idea?
3. Would you recommend that he give this startup concept a try? Explain your
reasoning.
Chapter 3: Starting a Small Business
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license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3-9
individuals needing his services. He needs to come up with ideas for advertising –
for example, he may want to charge differently for people who want him to
handle the advertising (charge more) than for people who want to do it on their
own (charge less). If he feels that advertising is a vital service, he should develop
a sales approach that indicates to people the advantage of that portion of his
business.
Situation 2
1. Based on the frameworks introduced in this chapter, what kind of strategy is
Whitlock following in his new venture?
2. Identify the strengths upon which this business is built. Do you see any
weaknesses that may be of concern to the company?
3. Are there any particular threats that will put Smokin’ Wheels by Willy at risk
as time goes on? Can you see any opportunities that may allow the company to
expand in the future?
Whitlock will need to remain open to changes in his business industry and seek
4. What resources and capabilities form the foundation for the business? Do you
think these will be sufficient to create a sustainable competitive advantage for
the company? Why or why not?
Chapter 3: Starting a Small Business
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This could be enough to sustain Whitlock as his unique perspective and style of
art his is “signature”. These types of customers are enthusiasts of the product and
are able to identify a particular artist. In other words, Whitlock has the
opportunity of positioning himself to the point that customers can identify a
Whitlock car. They may also like to own a Whitlock car. This is his competitive
advantage. These types of customers aren’t particularly price-sensitive and
therefore, Whitlock could have a long and lucrative business venture.
Situation 3
1. Will the market for Sanderson’s product continue to grow in the years ahead?
2. Given the company’s success, what sources of competition should he expect?
3. What steps would you recommend that he take to protect his company from the
onslaught of competition that is likely to come?
SUGGESTED SOLUTION TO CASE 3: THE KOLLECTION: FROM MUSIC
HOBBY TO STARTUP AND BEYOND
1. How did Lovin come to recognize the opportunity for his young venture? Of the three
types of startups mentioned in Chapter 3, into which does The Kollection fit? What was
the source of this opportunity?
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2. Complete a SWOT analysis for The Kollection. What does it say about the strengths
that the startup can build on or weaknesses that it must be particularly careful to
protect itself against? Does this analysis reveal any promising future opportunities for
Lovin and his venture? By your analysis, what threats put the enterprise most at risk?
As the Kollection continues to grow, Lovin’s business clearly has various strengths and
3. What broad-based strategy is Lovin following at The Kollection? Is this the only and
best way to position the company? Why or why not?
On the most basic level, Lovin operates the Kollection under a “focus” strategy, in which
Chapter 3: Starting a Small Business
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license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3-12
than its competitors. While services like Pandora may require hundreds of employees and
multi-million dollar sources of funding to operate, Lovin’s blog is able to attract a
considerable consumer base with only a handful of associate writers and almost
negligible costs. In the future, Lovin may choose to operate under a similar strategy that
involves incurring comparatively little costs, although continued expansion may become
more difficult as time goes on.
4. Conduct a feasibility analysis on the company, being sure to consider its market
potential, industry attractiveness, and leadership. According to your assessment, how
much promise does the venture offer?
With the goal of offering an unbiased analysis, feasibility studies provide a detailed
assessment of the future prospects of a business and its ability to attain some degree of
5. What recommendations would you make to Lovin as he thinks about the company and
Chapter 3: Starting a Small Business
its future?