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Please respond if you can answer in 3 hours please see the doc attached and respond please study see doc 5 and doc 6 and answer e56 Section 2: The Entrepreneurial Journey Begins Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. If this PowerPoint presentation contains mathematical equations, you may need to check that your computer has the following installed: 1) MathType Plugin 2) Math Player (free versions available) 3) NVDA Reader (free versions available) 1 Essentials of Entrepreneurship and Small Business Management Ninth Edition Chapter 6 Forms of Business Ownership Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Learning Objectives Explain the advantages and disadvantages of sole proprietorships and partnerships. Describe the similarities and differences of C corporations and S corporations. Understand the characteristics of a limited liability company. Explain the process of creating a legal entity for a business. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. In this chapter, you will: 1. Explain the advantages and disadvantages of sole proprietorships and partnerships. 2. Describe the similarities and differences of C corporations and S corporations. Understand the characteristics of a limited liability company. Explain the process of creating a legal entity for a business. 3 Choosing a Form of Ownership There is no one “best” form of ownership. The best form of ownership depends on an entrepreneur’s particular situation. Key: Understanding the characteristics of each form of ownership and how well they match an entrepreneur’s business and personal circumstances. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. When an entrepreneur makes the decision to launch a business, one of the first issues he or she faces is choosing a form of ownership. 4 Factors Affecting the Choice Tax considerations Liability exposure Start-up and future capital requirements Control Managerial ability Business goals Management succession plans Cost of formation Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. These are some of the factors entrepreneurs should consider when they evaluate different forms of ownership. 5 Major Forms of Ownership Sole Proprietorship General Partnership Limited Partnership Corporation S Corporation Limited Liability Company Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Percentage of Business (1 of 3) Figure 6.1 Forms of Business Ownership: (a) Percentage of Businesses, (b) Percentage of Sales, and (c) Percentage of Net Income Source: Based on data from Sources of Income, Internal Revenue Service. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. When it comes to organizing their businesses, entrepreneurs have a wide choice of forms of ownership, including sole proprietorship, general partnership, limited partnership, corporation, S corporation, and limited liability company. This figure provides a breakdown of these forms of ownership as a percentage of business. 7 Percentage of Business (2 of 3) [Figure 6.1 Continued] Source: Based on data from Sources of Income, Internal Revenue Service. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. This figure provides a breakdown of the different forms of ownership as a percentage of sales. 8 Percentage of Business (3 of 3) [Figure 6.1 Continued] Source: Based on data from Sources of Income, Internal Revenue Service. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. This figure provides a breakdown of the different forms of ownership as a percentage of net income. 9 Advantages of a Sole Proprietorship Simple to create Least costly form to begin Profit incentive Total decision making authority No special legal restrictions Easy to discontinue Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. The simplest and most popular form of ownership remains the sole proprietorship. A sole proprietorship, as its name implies, is a business owned and managed by one individual. Sole proprietorships make up 72% of all businesses in the United States. 10 Disadvantages of a Sole Proprietorship Unlimited personal liability The company’s debts are the owner’s debts. Limited skills and capabilities Feelings of isolation Limited access to capital Lack of continuity of the business Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Entrepreneurs considering the sole proprietorship as a form of ownership must be aware of its disadvantages. 11 Partnership An association of two or more people who co-own a business for the purpose of making a profit. Always wise to create a partnership agreement: states in writing the terms under which the partners agree to operate the partnership and that protects each partner’s interests in the business. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. A partnership is an association of two or more people who co-own a business for the purpose of making a profit. In a partnership, the co-owners (partners) share the business’s assets, liabilities, and profits according to the terms of a previously established partnership agreement (if one exists). 12 Revised Uniform Partnership Act Three key elements of any partnership under RUPA: Common ownership in a business. Agreement on how the business’s profits and losses will be shared. The right to participate in managing the operation of a partnership. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. When no partnership agreement exists, the Revised Uniform Partnership Act (RUPA) governs a partnership. 13 Advantages of the Partnership (1 of 2) Easy to establish Complementary skills of partners Division of profits Larger pool of capital Ability to attract limited partners Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Here are some of the advantages of the partnership. 14 Types of Partners General Partners: Take an active role in managing a business. Have unlimited liability for the partnership’s debts. Every partnership must have at least one general partner. Limited Partners: Cannot participate in the day-to-day management of a company. Have limited liability for the partnership’s debts. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. When partners share in owning, operating, and managing a business, they are general partners. Limited partners are financial investors in a partnership, cannot participate in the day-to-day management of a company, and have limited liability for the partnership’s debts. 15 Types of Limited Partners Two Types of Limited Partners: Silent Partners: Not active in a business but are generally known to be members of the partnership Dormant Partners: Neither active nor generally known to be associated with the business Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Two types of limited partners are silent partners and dormant partners. 16 Advantages of the Partnership (2 of 2) Easy to establish Complementary skills of partners Division of profits Larger pool of capital Ability to attract limited partners Minimal government regulation Flexibility Taxation Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Here are some reasons to form a partnership. 17 Disadvantages of the Partnership Unlimited liability of at least one partner Capital accumulation Difficulty in disposing partnership interest without dissolving the partnership Potential for personality and authority conflicts Partners bound by law of agency Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. A partnership is like a business marriage, and before entering into one, an entrepreneur should be aware of the disadvantages. 18 Limited Liability Partnerships All partners in a business are limited partners. Gives the advantage of limited liability for the debts of the partnership. Does not pay taxes – income is passed through to the limited partners who pay taxes on their share of the company’s income. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Many states now recognize limited liability partnerships (LLPs), in which all partners in a business are limited partners, giving them the advantage of limited liability for all of the partnership’s debts. 19 Corporations Corporation: a separate legal entity from its owners. Types of corporations: Publicly held: a corporation that has a large number of shareholders and whose stock usually is traded on one of the large stock exchanges. Closely held: a corporation in which shares are controlled by a relatively small number of people, often family members, relatives, or friends. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. The corporation is the most complex of the three major forms of business ownership. It is a separate entity apart from its owners and may engage in business, make contracts, sue and be sued, own property, and pay taxes. 20 Avoiding Legal Tangles (1 of 2) Identify the company as a corporation by using “Inc.” or “Corporation” in the business name. File all reports and pay all necessary fees required by the state in a timely manner. Hold annual meetings to elect officers and directors. Keep minutes of every meeting (formal and informal) of the officers and directors. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Follow these tips to avoid legal tangles in a corporation: Identify the company as a corporation by using “Inc.” or “Corporation” in the business name. File all reports and pay all necessary fees required by the state in a timely manner. Hold annual meetings to elect officers and directors. Keep minutes of every meeting (formal and informal) of the officers and directors. 21 Avoiding Legal Tangles (2 of 2) Be sure that the corporation’s board makes all major decisions. Make it clear that the business is a corporation – officers should sign all documents in the corporation’s name. Keep corporate assets and the personal assets of the owners separate. Never sign or negotiate corporate documents, such as contracts and other agreements, or sign official corporate correspondence, as an owner or shareholder. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. In addition: Be sure that the corporation’s board makes all major decisions. Make it clear that the business is a corporation – officers should sign all documents in the corporation’s name. Keep corporate assets and the personal assets of the owners separate. Never sign or negotiate corporate documents, such as contracts and other agreements, or sign official corporate correspondence, as an owner or shareholder. 22 C Corporation Traditional form of incorporation. Pays taxes at the corporate tax rate and stockholders also pay taxes on dividends they receive at their individual tax rates. Double taxation: a disadvantage of the corporate form of ownership in which the corporation’s profits are taxed twice, once at the corporate rate and again at the individual rate on the portion of profits distributed to shareholders as dividends. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. All large publicly traded companies and some small businesses are C corporations. C corporations are separate legal entities and therefore must pay taxes on their net income at the federal level, in most states, and to some local governments as well. 23 S Corporation No different from any other corporation from a legal perspective. An S corporation is taxed like a partnership, passing all of its profits (or losses) through to individual shareholders. To elect “S” status, all shareholders must consent, and the corporation must file with the IRS within the first 75 days of its tax year. Follow 1/3, 1/3, 1/3 rule of thumb. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. In 1954, the IRS Code created the Subchapter S corporation, more commonly known as S corporation or S Corp. Unlike C corporations, S corporations do not pay taxes on corporate income. Income earned by S corporations is passed through to the owners, just as it is in a sole proprietorship or a partnership. 24 Tax Rate Comparison Table 6.2 Tax Rate Comparison: C Corporation and S Corporation or Limited Liability Company Blank C Corporation S Corporation or LLC Corporate or limited liability company net income $500,000 $500,000 Maximum corporate tax 35% 0% Corporate tax $175,000 0 After-tax income $325,000 $500,000 Maximum shareholder tax rate 39.6% 39.6% Shareholder tax $65,000* $198,000** Total tax paid $240,000 $198,000 (Corporate tax plus shareholder tax) Blank Blank Total tax savings by choosing an S corporation or limited liability company = $42,000 blank blank *Using the marginal 20% tax rate on dividends: $325,000 × 20% = $65,000. **Using the marginal 39.6% tax rate on ordinary income: $500,000 × 39.6% = $198,000. Source: U.S. Small Business Administration, 2010. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Table 6.2 shows a comparison of the tax bill for a small company organized as a C corporation and the tax liability of the same company organized as an S corporation (or a limited liability company, which shares the same tax treatment as an S corporation). 25 Limited Liability Company (LLC) Resembles an S Corporation but is not subject to the same restrictions. Two documents required: Articles of organization: creates an LLC by establishing its name and address, method of management, its duration, etc. Operating agreement: establishes for an LLC the provisions governing the way it will conduct business. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. A limited liability company (LLC), like an S corporation, offers its owners limited personal liability for the debts of the business, providing a significant advantage over sole proprietorships and partnerships. 26 Creating a Legal Business Entity The average cost to create a legal business entity is about $1,000, but it can range from $500 to $5,000. Can use Web sites like MyCorporation and BizFilings and incorporate for just $100. But, be careful! The cost of filing incorrectly can be high. States have different regulations on forming business entities. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Establishing and maintaining C corporations, S corporations, and LLCs can be costly and time-consuming. 27 Conclusion To choose the best form of ownership, consider the characteristics of each form. Evaluate tax considerations, liability exposure, start-up and future capital requirements, amount of control over the company, managerial ability, business goals, management succession plans, and cost of formation. The forms of business ownership include sole proprietorship, general partnership, limited partnership, C corporation, S corporation, and limited liability company. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. An entrepreneur must decide among several forms of business ownership when launching a new business. Each form of ownership offers both advantages and disadvantages. 28 Copyright Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. 29 Section 2: The Entrepreneurial Journey Begins Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. If this PowerPoint presentation contains mathematical equations, you may need to check that your computer has the following installed: 1) MathType Plugin 2) Math Player (free versions available) 3) NVDA Reader (free versions available) 1 Essentials of Entrepreneurship and Small Business Management Ninth Edition Chapter 5 Crafting a Business Plan and Building a Solid Strategic Plan Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Learning Objectives (1 of 2) Explain the benefits of an effective business plan. Describe the elements of a solid business plan. Explain the “five Cs of credit” and why they are important to potential lenders and investors reviewing business plans. Understand the keys to making an effective business plan presentation. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. In this chapter, you will: 1. Explain the benefits of an effective business plan. 2. Describe the elements of a solid business plan. 3. Explain the “five Cs of credit” and why they are important to potential lenders and investors reviewing business plans. 4. Understand the keys to making an effective business plan presentation. 3 Learning Objectives (2 of 2) Understand the importance of strategic management to a small business. Explain why and how a small business must create a competitive advantage in the market. Develop a strategic plan for a business using the nine steps in the strategic management process. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. In addition, you will: 5. Understand the importance of strategic management to a small business. 6. Explain why and how a small business must create a competitive advantage in the market. 7. Develop a strategic plan for a business using the nine steps in the strategic management process. 4 Benefits of Creating a Business Plan Business Plan: A written summary of: An entrepreneur’s proposed business venture The operational and financial details The marketing opportunities and strategy The managers’ skills and abilities A business plan is the best insurance against launching a business destined to fail or mismanaging a potentially successful company. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. For decades, research has proved that companies that engage in business planning outperform those that do not. Most potential investors and lenders insist on a business plan as an essential step when considering funding an entrepreneurial venture. A business plan describes the direction the company is taking, what its goals are, where it wants to be, and how it intends to get there. It captures a full picture of the business model and all of the planning and preparation an entrepreneur undertakes when starting a business. The plan is written proof that an entrepreneur has performed the necessary research, has studied the business opportunity adequately, and is prepared to capitalize on it with a sound business model. 5 Essential Functions of a Business Plan Guiding the company by charting its future course and defining its strategy for following it. Attracting lenders and investors who will provide needed capital. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. A business plan serves two essential functions. First, it provides a battery of tools – a mission statement, goals, objectives, budgets, financial forecasts, marketing plans, and entry strategies – to help entrepreneurs subject their ideas to one last test of reality before launching a business and serve as benchmarks to evaluate the progress of the business as it grows. The second function of a business plan is to attract lenders and investors. 6 A Plan Must Pass Three Tests The Reality Test: proving that: A market really does exist for your product or service. You can actually build or provide it for the cost estimates in the plan. The Competitive Test: evaluates: A company’s position relative to its competitors. Management’s ability to create a company that will gain an edge over its rivals. The Value Test: proving that: A venture offers investors or lenders an attractive rate of return or a high probability of repayment. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. To get external financing, an entrepreneur’s plan must pass three tests with potential lenders and investors: (1) the reality test, (2) the competitive test, and (3) the value test. 7 Why Take the Time to Build a Business Plan? Although building a plan does not guarantee success, it does increase your chances of succeeding in business. A plan is like a road map that serves as a guide on a journey through unfamiliar, harsh, and dangerous territory. Don’t attempt the trip without a map! Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Building a business plan is one controllable factor that can reduce the risk and uncertainty of launching a company. 8 Key Elements of a Business Plan (1 of 5) Title Page and Table of Contents Executive Summary Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. A business plan should contain a title page with the company’s name, logo, and address as well as the names and contact information of the company founders. To summarize the presentation to each potential financial institution or investors, the entrepreneur should write an executive summary. It should be concise – a maximum of one page – and should summarize all of the relevant points of the proposed deal. 9 Executive Summary The executive summary is a written version of “the elevator pitch” A good elevator pitch provides: Context Benefit Target customers Point of differentiation Clincher Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Like a good movie trailer, an executive summary is designed to capture readers’ attention and draw them into the plan. If it misses, the chances of the remainder of the plan being read are minimal. 10 Key Elements of a Business Plan (2 of 5) Title Page and Table of Contents Executive Summary Mission and Vision Statement Description of a Firm’s Product or Service Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. A mission statement expresses an entrepreneur’s vision for what his or her company is and what it is to become. An entrepreneur should describe the company’s overall product line, giving an overview of how customers will use its goods or services. Drawings, diagrams, and illustrations may be required if the product is highly technical. 11 Product or Service Description Describe the benefits customers get from the product or service A feature is a descriptive fact about a product or service. A benefit is what the customer gains from the product or service feature. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. The emphasis of this section should be on defining the benefits customers get by purchasing the company’s products or services rather than on just a “nuts and bolts” description of the features of those products or services. 12 Key Elements of a Business Plan (3 of 5) Title Page and Table of Contents Executive Summary Mission and Vision Statement Description of a Firm’s Product or Service Business and Industry Profile Competitor Analysis Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. If one goal of creating a plan is to raise funding, the entrepreneur should include a section that acquaints lenders and investors with the industry in which the company competes. This section should provide readers with an overview of the industry or market segment in which the new venture will operate. An entrepreneur should describe the new venture’s competition and the ways in which its business strategy will position it effectively against key competitors. 13 Competitor Analysis (1 of 2) Who are the company’s key competitors? What are there strengths and weaknesses? What are their strategies? How successful are they? What distinguishes the entrepreneur’s product or service from others already in the market, and how will these differences produce a competitive edge? Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. The plan should include an analysis of each significant competitor and how well the competing business is meeting the important criteria that target customers use to make their purchase decisions among the various companies. 14 Key Elements of a Business Plan (4 of 5) Title Page and Table of Contents Executive Summary Mission and Vision Statement Description of a Firm’s Product or Service Business and Industry Profile Competitor Analysis Market Entry Strategy Marketing Strategy Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. The market entry section of a business plan addresses the question of how to attract customers. By laying out a market entry strategy, an entrepreneur explains how he or she plans to enter the market and gain a competitive edge and how his or her value proposition sets the business apart from the competition. Proving that a profitable market exists involves two steps: showing customer interest and documenting market claims. 15 Marketing Strategy (1 of 2) Show customer interest Prove that target customers actually need or want the product or service. Document market claims Support market size and growth rates with facts. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. An important element of any business plan is showing how a company’s product or service provides a customer benefit or solves a customer problem. Entrepreneurs must be able to prove that their target customers actually need or want their goods or services and are willing to pay for them. Entrepreneurs must support claims of market size and growth rates with facts, and that requires market research. Quantitative market data are important because it forms the basis for all of the company’s financial projections in the business plan. 16 Marketing Strategy (2 of 2) Address: Target market Advertising and promotion Market size and trends Location Pricing Distribution Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. An effective market analysis should address the following items in detail, based on the framework developed in the business model. Target market Advertising and promotion Market size and trends Location Pricing Distribution 17 Key Elements of a Business Plan (5 of 5) Title Page and Table of Contents Executive Summary Mission and Vision Statement Description of a Firm’s Product or Service Business and Industry Profile Competitor Analysis Marketing Strategy Entrepreneurs’ and Managers’ Resumes Plan of Operation Pro Forma (Projected) Financial Statements The Loan or Investment Proposal Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. A plan should include the résumés of business officers, key directors, and any person with at least 20% ownership in the company. This is the section of the plan in which entrepreneurs have the chance to sell the qualifications and the experience of their management team. To complete the description of the business, an entrepreneur should construct an organization chart that identifies the business’s key positions and the people who occupy them. One of the most important sections of a business plan is an outline of the proposed company’s financial statements – the “dollars and cents” of the proposed venture. An entrepreneur should carefully prepare projected (pro forma) financial statements for the operation for the next year using past operating data (if available), published statistics, and research to derive forecasts of the income statement, balance sheet, cash forecast (always!), and a schedule of planned capital expenditures. The loan or investment proposal section of a business plan should state the purpose of the financing, the amount requested, and the plans for repayment or, in the case of investors, an attractive exit strategy. 18 Visualizing Risks and Rewards Figure 5.1 Visualizing a Venture’s Risks and Rewards Source: Based on William A. Sahlman, “How to Write a Great Business Plan,” Harvard Business Review, July/August 1997, pp. 98–108. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Figure 5.1 explains how two simple diagrams communicate effectively to investors both the risks and the rewards of a business venture. 19 Tips for a Good Business Plan First impressions count! Use an attractive cover. Checks for errors. Make it visually appealing. Include a table of contents with page numbers. Make it interesting! Show that it will make money. Use spreadsheets for realistic financial forecasts. Include cash flow projections. Keep the plan “crisp.” Tell the truth. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. A plan is usually the tool an entrepreneur uses to make a first impression on potential lenders and investors. To make sure that impression is a favorable one, an entrepreneur should keep in mind these tips. 20 What Lenders and Investors Look for in a Business Plan The “5 Cs” of Credit Capital Capacity Collateral Character Conditions Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. To increase their chances of success when using their business plans to attract capital, entrepreneurs must be aware of the criteria lenders use to evaluate the creditworthiness of businesses seeking financing. Lenders and investors refer to these criteria as the five Cs of credit: capital, capacity, collateral, character, and conditions. 21 The Pitch: Presenting the Plan The time allotted for presenting is usually less than 20 minutes, so it’s important to rehearse and be prepared. A basic presentation should cover: Your company and its products and services. The problem to be solved. A description of your solution to the problem. Your company’s business model. Your company’s competitive edge. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. No matter how good a written business plan is, entrepreneurs who stumble through the presentation will lose the deal. Entrepreneurs who are successful at raising the capital their companies need to grow have solid business plans and make convincing presentations of them. 22 Tips for Making the Pitch (1 of 3) Prepare Practice your delivery and then practice some more. Demonstrate enthusiasm about the business but don’t be overly emotional. Focus on communicating the dynamic opportunity your idea offers and how you plan to capitalize on it. Hook investors quickly with an up-front explanation of the new venture, its opportunities, and the anticipated benefits to them. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Entrepreneurs should follow these tips when making a business plan presentation to potential lenders and investors. 23 Tips for Making the Pitch (2 of 3) Use visual aids. Follow the 10/20/30 rule for PowerPoint presentations. Explain how your company’s products or services solve some problems and emphasize the factors that make your company unique. Offer proof. Hit the highlights. Keep the presentation “crisp.” Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. 24 Tips for Making the Pitch (3 of 3) Avoid the use of technical terms that will be above most of the audience. Remember to tell lenders and investors how they will benefit. Be prepared for questions. Anticipate questions and prepare for them in advance. Focus your answers on what’s important to lenders and investors. Follow up with every lender and investor to whom you make a presentation. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Building a Strategic Plan Entrepreneurs must be able to adapt to changes in the marketplace. Strategic planning is a tool that can help: it involves developing a game plan to guide the company as it works to accomplish its vision, mission, goals, and objectives and to keep it from straying off course. It’s crucial to building a successful business. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. The strategic plan gives everyone targets to shoot for, and it provides a yardstick for measuring actual performance against those targets, especially in the crucial and chaotic start-up phase of the business. 26 A Major Shift . . . The biggest change facing entrepreneurs today is the shift from financial capital to intellectual capital Human Structural Customer Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Today, a company’s intellectual capital is likely to be the source of its competitive advantage in the marketplace. 27 Building a Competitive Advantage Developing a strategic plan is crucial to creating a sustainable competitive advantage: the aggregation of factors that sets a company apart from its competitors and gives it a unique position in the market that is superior to its competitors. Example: Whole Foods Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Companies that fail to define their competitive advantage fall into “me-too” strategies that never set them apart from their competitors and do not allow them to become market leaders or to achieve above-average profits. 28 Define Competitive Advantage Consider five aspects of a small company: Products they sell Service they provide Pricing they offer Way they sell Values to which they are committed Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Entrepreneurs should examine these five aspects of their businesses to define their companies’ competitive advantages. 29 The Key: Core Competencies Unique set of capabilities a company develops in key areas, such as superior quality, customer service, innovation, team-building, flexibility, responsiveness, and others that allow it to vault past competitors. They are what a company does best. Best to rely on a natural advantage (often linked to a company’s “smallness”). Example: Noodles & Company Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. In the long run, a company gains a sustainable competitive advantage through its ability to develop a set of core competencies that enable it to serve its selected target customers better than its rivals. 30 Building a Sustainable Competitive Advantage Figure 5.2 Building a Sustainable Competitive Advantage Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. The key to success is building the company’s strategy on its core competencies and concentrating on providing value for target customers. 31 Strategic Management Process (1 of 2) Step 1: Develop a vision and translate it into a mission statement Step 2: Assess strengths and weaknesses Step 3: Scan environment for opportunities and threats Step 4: Identify key success factors Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Strategic management is a continuous process that consists of nine steps. 32 Strategic Management Process (2 of 2) Step 5: Analyze competition Step 6: Create goals & objectives Step 7: Formulate strategies Step 8: Translate plans into actions Step 9: Establish accurate controls Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Step 1: Develop a Vision and Create a Mission Statement (1 of 2) Vision: the result of an entrepreneur’s dream of something that does not exist yet and the ability to paint a compelling picture of that dream for everyone to see. A clearly defined vision: Provides direction Determines decisions Inspires people Allows for perseverance in the face of adversity Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Highly successful entrepreneurs communicate their vision and their enthusiasm about that vision to those around them. 34 Step 1: Develop a Vision and Create a Mission Statement (2 of 2) Mission statement: addresses the question: “what business are we in?” Clarifies “why we are here” and “where we are going.” Serves as a “strategic compass.” Examples: Bongo World, Nisolo Shoes, Badger Mining, Putney, Inc., Clymb Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Establishing the purpose of the business in writing gives a company a sense of direction. 35 Elements of a Mission Statement Four key questions: What are we in business to accomplish? Who are we in to business to serve? How are we going to accomplish that purpose? What principles and beliefs form the foundation of the way we do business? Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. A sound mission statement need not be lengthy to be effective. In fact, shorter usually is better. 36 Step 2: Assess Company Strengths and Weaknesses Use a balance sheet to identify: Strengths Positive internal factors a company can draw on to accomplish its mission, goals, and objectives. Weaknesses Negative internal factors that inhibit a company’s ability to accomplish its mission, goals, and objectives. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Building a successful competitive strategy requires a business to magnify its strengths and overcome or compensate for its weaknesses. 37 Step 3: Scan for Opportunities and Threats Identify and manage: Opportunities Positive external factors the company can exploit to accomplish its mission, goals, and objectives. Threats Negative external factors that inhibit the firm's ability to accomplish its mission, goals, and objectives. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Once entrepreneurs have taken an internal inventory of company strengths and weaknesses, they must turn to the external environment to identify any opportunities and threats that might have a significant impact on the business. 38 Identifying and Managing Threats Table 5.4 Identifying and Managing Threats Source Specific Threat Severity (1 = Low, 10 = High) Probability of Occurrence (0 to 1) Threat Score (Severity × Probability, Max = 10) 1. Channels of distribution Blank Blank Blank Blank 2. Competition Blank Blank Blank Blank 3. Demographic changes Blank Blank Blank Blank 4. Globalization Blank Blank Blank Blank 5. Innovation Blank Blank Blank Blank 6. Waning customer or supplier loyalty Blank Blank Blank Blank 7. Offshoring or outsourcing Blank Blank Blank Blank 8. Stage in product life cycle Blank Blank Blank Blank 9. Government regulation Blank Blank Blank Blank 10. Influence of special interest groups Blank Blank Blank Blank 11. Influence of stakeholders Blank Blank Blank Blank 12. Changes in technology Blank Blank Blank Blank Source: Based on Edward Teach, “Apocalypse Soon,” CFO, September 2005, pp. 31–32. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Table 5.4 provides a simple analytical tool to help entrepreneurs identify the threats that pose the greatest danger to their companies. 39 Step 4: Identify Key Success Factors Key Success Factors (KSFs): factors that determine the relative success of market participants. The keys to unlocking the secrets of competing successfully in a particular market segment. Example: Five Guys Burgers an d Fries Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Identifying the KSFs in an industry allows entrepreneurs to determine where they should focus their companies’ resources strategically. 40 Identifying Key Success Factors List the specific skills, characteristics, and core competences your business must possess if it is to be successful in its market segment. Table 5.5 Identifying Key Success Factors Key Success Factor How Your Company Rates . . . 1 Low 1 2 3 4 5 6 7 8 9 10 High 2 Low 1 2 3 4 5 6 7 8 9 10 High 3 Low 1 2 3 4 5 6 7 8 9 10 High 4 Low 1 2 3 4 5 6 7 8 9 10 High 5 Low 1 2 3 4 5 6 7 8 9 10 High Conclusions: Blank Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Table 5.5 presents a form to help owners identify the most important success factors in the industry and their implications for their companies. 41 Step 5: Analyze the Competition (1 of 2) Small business owners believe they operate in a highly competitive environment and the level of competition is increasing. Yet, 97% of all U.S. businesses do not systematically track the progress of their key competitors. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Ask small business owners to identify the greatest challenge their companies face, and the most common response is competition. 42 Step 5: Analyze the Competition (2 of 2) Goal of competitive intelligence: Conduct continuous rather than periodic analysis of competition. Avoid surprises from existing competitors’ use of new strategies and tactics. Identify potential new competitors. Improve reaction time to competitors’ actions. Anticipate rivals’ next strategic moves. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. The primary goals of a competitive intelligence program include the following: ● Conducting continuous rather than periodic analysis of competition ● Avoiding surprises from existing competitors’ new strategies and tactics ● Identifying potential new competitors ● Improving reaction time to competitors’ actions ● Anticipating rivals’ next strategic moves 43 Competitor Analysis (2 of 2) Direct Competitors Offer the same products and services Customers often compare prices, features, and deals among these competitors when they shop Significant Competitors Offer some of the same or similar products or services Product or service lines overlap but not completely Indirect Competitors Offer same or similar products in only a small number of areas Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Sizing up the competition gives a business owner a realistic view of the market and his or her company’s position in it. Yet, not every competitor warrants the same level of attention in the strategic plan. 44 Collecting Competitive Intelligence (1 of 3) Monitor industry and trade publications. Talk to customers and suppliers. Debrief employees, especially sales representatives and purchasing agents. Attend trade shows and conferences and study competitors’ sales literature. Watch for competitor’s employment ads. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Entrepreneurs can use these low-cost competitive intelligence methods to collect information about their rivals. 45 Collecting Competitive Intelligence (2 of 3) Watch for competitor’s employment ads. Conduct patent searches for patents competitors have filed. Get EPA reports for the factories of competing manufacturers. Monitor direct competitors via social media. Learn about the kinds of equipment and raw materials competitors are importing from the Journal of Commerce Port Import Export Reporting Service. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Collecting Competitive Intelligence (3 of 3) Buy competitors’ products and “benchmark” them. Get competitors’ credit reports. Check out the reports publicly-held competitors must file with the SEC. Investigate UCC reports. Check out the resources in your local library. Use the Internet to learn more about competitors. Visit competing businesses to observe their operations. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Competitive Profile Matrix Table 5.6 Sample Competitive Profile Matrix blank blank Your Business Blank Competitor 1 blank Competitor 2 blank Key Success Factors (from Step 4) Weight Rating Weighted Score Rating Weighted Score Rating Weighted Score Quality 0.25 4 1.00 2 0.50 2 0.50 Customer retention 0.20 3 0.60 3 0.60 3 0.60 Location 0.15 4 0.60 3 0.45 4 0.60 Perception of value 0.20 4 0.80 2 0.40 3 0.60 Cost control 0.20 3 0.60 1 0.20 4 0.80 Total 1.00 Blank  3.60 Blank 2.15 Blank  3.10 Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. A competitive profile matrix allows owners to evaluate their firms against the major competitor by using the KSFs for that market segment. 48 Why Set Goals and Objectives? “Would you tell me, please, which … 1. Write 600 words on this For chapters 5 and 6 list: - Number and title of the chapter - Use the text and the PowerPoints are located in the readings from week  - Pick 5 key points you feel are the most important in each chapter. - 1) The most important lesson YOU learned from that chapter that you would share with a business colleague explaining your reasoning for choosing that lesson;  and 2) how you would utilize this lesson in your own work/life. This is the format you should use:  - Chapter number/ Chapter title  - Key points 1. 2. 3. 4. 5. -  PLUS, the most important lesson learned, explaining why you think so.