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3.1: Entrepreneurial Process

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    Entrepreneurial Process

    Task Summary:

    Learning Outcomes:

    • Identify exciting entrepreneurial opportunities
    • Evaluate exciting entrepreneurial opportunities
    • Model the entrepreneurial process for the exciting entrepreneurial opportunities
    • Create entrepreneurial planning documents

    Successful entrepreneurship occurs when creative individuals bring together a new way of meeting needs and or wants. This is accomplished through a patterned process, one that mobilizes and directs resources to deliver a specific product or service to those in a way that is financially viable. While these could be 100% business ideas, they could also be concepts that are based in the spirit of altruism or non-profit. For innovative ideas that are strictly business concepts. sustainability can (and should) be embedded in the design of a product and operations by applying the criteria of reaching toward benign (or at least considerably safer) energy and material use, a reduced resource footprint, and elimination of inequitable social impacts due to the venture’s operations, including its supply-chain impacts.

    Entrepreneurial innovation combined with sustainability principles can be broken down into the following four key elements, each of which requires analysis. Each one needs to be analyzed separately, and then the constellation of factors must fit together into a coherent whole. These four elements are as follows:

    • Opportunity
    • Market
    • Entrepreneur/team
    • Resources

    Successful ventures are characterized by coherence or “fit” across and throughout these steps. The interests and skills of the entrepreneur must fit with the product design and offering; the team’s qualifications should match the required knowledge needed to launch the venture. There needs to be a financially viable demand (enough people at a financially viable price) for the product or service, and of course, early adopters (those willing to purchase) have to be identified. Finally, sufficient resources, including financial resources (e.g., operating capital), office space, equipment, production facilities, components, materials, and expertise, must be identified and brought to bear. Each piece is discussed in more detail in the sections that follow.

    Lesson 3.1.1: The Entrepreneurial Process: Part 1

    Identify, Analyze, and Plan the Opportunity

    As discussed in the last section, Opportunity Recognition is the active, cognitive process (or processes) through which individuals conclude that they have identified the potential to create something new that has the potential to generate economic value and that is not currently being exploited or developed and is viewed as desirable in the society in which it occurs (i.e. its development is consistent with existing legal and moral conditions). (Baron, 2004b, p. 52) Because opportunity recognition is a cognitive process, according to Baron (2004b), people can learn to be more effective at recognizing opportunities by changing the way they think about opportunities and how to recognize them.

    The opportunity is a chance to satisfy the needs and desires of a certain group of people while generating returns that enable you to continue to operate and to build your organization over time. Many different conditions in society can create opportunities for new goods and services. As a prospective entrepreneur, the key questions are as follows:

    • What is a need that is not being met?
    • What are the conditions that have created an opportunity for my idea?
    • Why do people want and need something new at this point in time?
    • What are the factors that have opened up the opportunity?
    • Will the opportunity be enduring, or is it a window that is open today but likely to close tomorrow?
    • If you perceive an unmet need, can you deliver what the customer wants while generating durable margins and profits?
    • How can I take on this venture while supporting the Sustainable Development Goals?

    Opportunity conditions arise from a variety of sources. At a broad societal level, they are present as the result of forces such as shifting demographics, changes in knowledge and understanding due to scientific advances, a rebalancing or imbalance of political winds, or changing attitudes and norms that give rise to new needs. Certain demographic shifts and pollution challenges create SDG opportunities. When you combine enhanced public focus on health and wellness, advanced water treatment methods, clean combustion technologies, renewable “clean” energy sources, conversion of used packaging into new asset streams, benign chemical compounds for industrial processes, and local and sustainability has grown organic food, you begin to see the wide range of opportunities that exist due to macrotrends.

    Make sure to answer the opportunity questions above in your Entrepreneurial Plan.

    Identify, Analyze, and Plan the Market

    What are you offering/doing/selling/contributing? New ventures offer solutions to people’s problems. This concept requires you to not only examine the item or service description but also further understand the group of people whose unmet needs you are meeting (often called market analysis). In any entrepreneurial innovation circumstance you must ask the following questions:

    • What is the solution for which you want someone to pay?
    • Is it a service or product, or some combination?
    • To whom are you selling it? Is the buyer the actual user? Who makes the purchase decision?
    • What is the customer’s problem and how does your service or product address it?

    Understanding what you are selling is not as obvious as it might sound. When you sell an electric vehicle you are not just selling transportation. The buyer is buying a package of attributes that might include cutting-edge technology, lower operating costs, and perhaps the satisfaction of being part of a solution to health, environmental, and energy security problems.

    Make sure to answer the market questions above in your Entrepreneurial Plan.

    Lesson 3.1.2: The Entrepreneurial Process: Part 2

    Identify, Analyze, and Plan the Entrepreneur & Entrepreneurial Team

    The opportunity and the entrepreneur must be intertwined in a way that optimizes the probability for success. People often become entrepreneurs when they see an opportunity. They are compelled to start something to find out whether they can convert that opportunity into an ongoing source of fulfillment and potential financial gain. That means that, ideally, the entrepreneur’s life experience, education, skills, work exposure, and network of contacts align well with the opportunity. We have covered this in previous sections, so if you need to refer back to consider the role of the entrepreneur’s skills, abilities, and cognition.

    Entrepreneurs sometimes act alone, but this can only take us so far. A good entrepreneurial plan, an interesting product idea, and a promising opportunity are all positive, but in the end it is the ability of the entrepreneur to attract a team, get a product out, and provide it to customers is the thing that counts.

    Typically there is an individual who initially drives the process through his or her ability to mobilize resources and sometimes through sheer force of will, hard work, and determination to succeed. In challenging times it is the entrepreneur’s vision and leadership abilities that can carry the day.

    Ultimately, led by the entrepreneur, a team forms. As the organization grows, the team becomes the key factor. The entrepreneur’s skills, education, capabilities, and weaknesses must be augmented and complemented by the competencies of the team members they bring to the project. The following are important questions to ask:

    • Does the team as a unit have the background, skills, and understanding of the opportunity to overcome obstacles?
    • Can the team act as a collaborative unit with strong decision-making ability under fluid conditions?
    • Can the team deal with conflict and disagreement as a normal and healthy aspect of working through complex decisions under ambiguity?

    If an organization has been established and the team has not yet been formed, these questions will be useful to help you understand what configuration of people might compose an effective team to carry the business through its early evolutionary stages.

    Make sure to note who / what expertise is needed in your team as part of your Entrepreneurial Plan.

    Identify, Analyze, and Plan the Resources

    Successful entrepreneurial processes require entrepreneurs and teams to mobilize a wide array of resources quickly and efficiently. All innovative and entrepreneurial ventures combine specific resources such as capital, talent and know-how (e.g., accountants, lawyers), equipment, and production facilities. Breaking down an opportunity’s required resources into components can clarify what is needed and when it is needed. Although resource needs change during the early growth stages of an opportunity, at each stage the entrepreneur should be clear about the priority resources that enable or inhibit moving to the next stage of growth. What kinds of resources are needed? The following list provides guidance:

    • Capital. What financial resources, in what form (e.g., equity, debt, family loans, angel capital, venture capital), are needed at the first stage? This requires an understanding of cash flow needs, break-even time frames, and other details. Even non-profits need to make money to stay afloat. Back-of-the-envelope estimates must be converted to pro forma income statements to understand financial needs.
    • Know-how. Record keeping and accounting and legal process and advice are essential resources that must be considered at the start of every venture. Access to experts is important, especially in the early stages of making an opportunity happen. New opportunities require legal incorporation, financial record keeping, and rudimentary systems and resources to provide for these expenses need to be considered.
    • Facilities, equipment, and transport. Does the venture need office space, production facilities, special equipment, or transportation? At the early stage of analysis, ownership of these resources does not need to be determined. The resource requirement, however, must be identified.
    Make sure to note what resources are needed as part of your Entrepreneurial Plan

    The Overall Process

    The process of entrepreneurship melds these pieces together in processes that unfold over weeks and months, and eventually years if the business is successful. Breaking down the process into categories and components helps you understand the pieces and how they fit together. What we find in retrospect with successful launches is a cohesive fit among the parts. The entrepreneur’s skills and education match what the start-up needs. The opportunity can be optimally explored with the team and resources that are identified and mobilized. The resources must be brought to bear to launch the opportunity with an entry strategy that delivers the value-driven concept in a way that solves customers’ problems.

    Lesson 3.1.3: Entrepreneurial Planning: Part 1

    With all of these things in mind, documenting answers to the questions above, and the analysis undertaken to answer them is contained in an entrepreneurial plan. This is a document that you would use to plan out the details for the elements outlined above. Making sure you identify, analyze, and plan these elements is a great starting point, and to make sure this is all done really well, have a look at the principles below.

    Entrepreneurial Plan Communication Principles

    As Hindle and Mainprize (2006) note, business plan writers must strive to communicate their expectations about the nature of an uncertain future. However, the liabilities of newness make communicating the expected future of new opportunities difficult (more so than for existing organizations).  They outline five communications principles:

    • Expectations
      • Translation of your vision of the venture and how it will perform into a format compatible with the expectations of the readers
      • Communicate that
        • you have identified and understood the key success factors and risks
        • the projected market is large and you expect good market penetration
        • you have a strategy for commercialization, profitability, and market domination
        • you can establish and protect a proprietary and competitive position
    • Milestones
      • Anchoring key events in the plan with specific financial and quantitative values
      • Communicate that
        • your major plan objectives are in the form of financial targets
        • you have addressed the dual need for planning and flexibility
        • you understand the hazards of neglecting linkages between certain events
        • you understand the importance of quantitative values (rather than just chronological dates)
    • Opportunities
      • Nothing lasts forever—things can change to impact the opportunity: tastes, preferences, technological innovation, competitive landscape
      • Communicate these four aspects to distinguish the business concept, distinctive competencies, and sustainable advantages:
        • the new combination upon which venture is built
        • the magnitude of the opportunity or market size
        • market growth trends
        • venture’s value from the market (% of market share proposed or market share value in dollars)
    • Context
      • Four key aspects describing context within which new opportunity is intended to function (internal and external environment)
      • Communicate
        • how the context will help or hinder the proposal
        • how the context may change and affect the organization and the range of flexibility or response that is built into the venture
        • what management can or will do in the event the context turns unfavorable
        • what management can do to affect the context in a positive way
    • Entrepreneurial Model
      • A brief and clear statement of how an idea actually becomes a business that creates value
      • Communicate
        • Who pays, how much, and how often?
        • The activities the company must perform to produce its product, deliver it to its customers, and earn revenue
        • And be able to defend assertions that the venture is attractive and sustainable and has a competitive edge

    Lesson 3.1.4: Entrepreneurial Planning: Part 2

    Entrepreneurial Plan Credibility Principles

    Entrepreneurial plan writers must strive to project credibility (Hindle & Mainprize, 2006), so there must be a match between what the entrepreneurship team (resource seekers) needs and what the resource providers expect based on their criteria. A take it or leave it approach (i.e. financial forecasts set in concrete) by the entrepreneurship team has a high likelihood of failure in terms of securing resources. Hindle and Mainprize (2006) outline five principles to help entrepreneurs project credibility:

    • Team
      • Without the right team, nothing else matters.
      • Communicate
        • What do they know?
        • Who do they know?
        • How well are they known?
    • Elaboration
      • Break down individual tasks into their sub-parts so each step maximizes the upside and minimizes the downside:
        • sub-strategies
        • ad-hoc programs
        • specific tactical action plans
    • Scenario Integration
      • Claiming an insuperable lead or a proprietary market position is naïve.
      • Opportunity building is like chess:
        • Anticipate several moves in advance
        • View the future as a movie vs. snapshot
    • Financial Link
      • Key assumptions related to market size, penetration rates, and timing issues of market context outlined in the entrepreneurial plan should link directly to the financial statements.
      • Income and cash flow statements must be preceded by operational statements setting forth the primary planning assumptions about market sizes, sales, productivity, and basis for the revenue estimate.
    • The Deal
      • If the main purpose is to enact a harvest, then the entrepreneurial plan must create a value-adding deal structure to attract investors.
      • Common things: viability, profit potential, downside risk, likely life-cycle time, potential areas for dispute or improvement

    Lesson 3.1.5: Entrepreneurial Planning: Part 3

    General Entrepreneurial Plan Guidelines

    Many entrepreneurs must have a plan to achieve their goals. The following are some basic guidelines for entrepreneurial plan development.

    • A standard format helps the reader understand that the entrepreneur has thought everything through and that the returns justify the risk.
    • Binding the document ensures that readers can easily go through it without it falling apart.
    • Be 100% certain that…
      • everything is completely integrated: the written part must say exactly the same thing as the financial part
      • all financial statements are completely linked and valid (make sure all balance sheets validly balance)
      • the document is well-formatted (layout makes the document easy to read and comprehend—including all diagrams, charts, statements, and other additions)
      • everything is correct (there are NO spelling, grammar, sentence structure, referencing, or calculation errors)
      • the document is easy to read and comprehend because it is organized well with no unnecessary repetition
        • It is usually unnecessary—and even damaging—to state the same thing more than once. To avoid unnecessarily duplicating information, you should combine sections and reduce or eliminate duplication as much as possible.
      • all the necessary information is included to enable readers to understand everything in your document
      • the terms you use in your plan are clear
        • For example, if your plan says something like “there is a shortage of 100,000 units with competitors currently producing 25,000. We can help fill this huge gap in demand with our capacity to produce 5,000 units,” a reader is left completely confused. Does this mean there is a total shortage of 100,000 units, but competitors are filling this gap by producing 25,000 per year (in which case there will only be a shortage for four years)? Or, is there an annual shortage of 100,000 units with only 25,000 being produced each year, in which case the total shortage is very high and is growing each year? You must always provide the complete perspective by indicating the appropriate time frame, currency, size, or another measurement.
      • if you use a percentage figure, you indicate to what it refers, otherwise, the figure is completely useless to a reader.
      • if your plan includes an international element, which currencies the costs, revenues, prices, or other values are quoted in
        • This can be solved by indicating up-front in the document the currency in which all values will be quoted. Another option is to indicate each time which currency is being used, and sometimes you might want to indicate the value in more than one currency. Of course, you will need to assess the exchange rate risk to which you will be exposed and describe this in your document.
    • Credibility is both established and maintained
      • If a statement is included that presents something as a fact when this fact is not generally known, always indicate the source. Unsupported statements damage credibility
      • Be specific. An entrepreneurial plan is simply not of value if it uses vague references to high demand, carefully set prices, and another weak phrasing. It must show hard numbers (properly referenced, of course), actual prices, and real data acquired through proper research. This is the only way to ensure your plan is considered credible.

    Activity 3.1.1: SDG Simulation

    An interactive H5P element has been excluded from this version of the text. You can view it online here:
    https://kpu.pressbooks.pub/introtoentrepreneurship/?p=105#h5p-75

    Unit 3 Assignment: Your Plan of Action

    The purpose of this assignment is to connect all of the dots that you have been learning about and engaging with over the past unit when it comes to the entrepreneurial planning process. Watch this video on developing a process map. You are going to develop your own process map outlining the steps you need to take to develop a robust and well-thought-out entrepreneurial plan. Have a look at the Unit 4 Assignment: Entrepreneurial Plan for more information on what you’re going to be building.

    The submission should be methodical and outline the process you will go through (i.e. what steps you will complete), and the information sources you will need to fill in the gaps and fill out your plan. Your submission should include a process map diagram, and be about 250 words, which is one page double spaced, or it could be done as an infographic, or a two-three minute presentation. If you are doing this as part of a formal course and have a different approach that you would like to take for developing this assignment, please check with your instructor.

    Text Attributions

    The content related to how it all starts and the process steps was taken from “Sustainability, Innovation, and Entrepreneurship” by LibreTexts (2020) CC BY-NC-SA

    The content related to the opportunity identification cognition and the entrepreneurial plan was taken from “Entrepreneurship and Innovation Toolkit, 3rd Edition” by L. Swanson (2017) CC BY-SA

    References

    Baron, R. A. (2004b). Opportunity recognition: Insights from a cognitive perspective. In J. E. Butler (Ed.), Opportunity identification and entrepreneurial behavior (pp. 47-73). Greenwich, Conn.: Information Age Pub

    Hindle, K., & Mainprize, B. (2006). A systematic approach to writing and rating entrepreneurial business plans. The Journal of Private Equity, 9(3), 7-23.

     

     

    3.1: Entrepreneurial Process is shared under a CC BY-NC-SA license and was authored, remixed, and/or curated by LibreTexts.

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