Part 3 (Chapter 9-12) Flashcards
★ What kinds of things would you consider in predicting whether a business idea will be successful? (Long Answer) ★
Characteristics of the Entrepreneur (Kirzner’s Theory of Alertness & Hindle’s model of Entrepreneurial Success)
The Opportunity Landscape (Profitability and Viability Factors)
The Nature of The Venture
- uniqueness
- investment size
- expected growth
- product availability
- customer availability
Describe Kirzner’s Theory of Alertness
- entrepreneurs - people who are more alert to new opportunities than other people.
- have the advantage of seeing things differently
- are opportunity identifiers who can spot unexploited market niches.
- Their ability to see this connection depends on a broad range of sources of ideas, networks and relationships.
Describe Hindle’s Model of The Entrepreneurial Process
- argues that the entrepreneurial process involves the jerky process of opportunity identification, evaluation, creating a business model, and then moving from commitment to the actual achievement of the value.
- BUT central function of this process is evaluation which distinguishes entrepreneurs from regular people.
- are able to evaluate and determine whether an idea has commercialisable value through identifying all the contextual factors that may influence value creation.
- The evaluation process is an iterative and repetitive one where factors are tested and verified.
- are able to identify risks and uncertainties for which strategies can be developed to manage risks or reduce uncertainty;
- In terms of evaluation, they will look into profitability and viability and venture opportunity.
What are the factors of Profitability and Viability? (Opportunity Landscape)
- Choosing suitable, exploitable markets.
- Choosing niche markets that cater for specialist needs.
- Opening new markets. The smartest entrepreneurs see emerging trends early and manoeuvre themselves into the cash flow.
- Steering clear of overcrowded marketplaces.
- Offering a unique product or service.
What kinds of things would you consider in predicting whether a business idea will be successful? (short answer)
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What are the venture opportunity assessment factors? (Nature of Venture)
Relative uniqueness of the venture
Relative investment size at start–up
Expected growth of sales and/or profits
Product availability
Customer availability
Explain PEST: Opportunity Landscape Analysis
PEST systematically examines the external conditions that both shape and influence an opportunity. It is based on Political, Economical, Social and Technology (PEST) factors and trend analysis.
It will help the entrepreneur:
- Locate the source of opportunity or the changing conditions that create the opportunity
- Identify the size of the likely market needs that may arise from those changing conditions and the extent of change or momentum
- Identify the likely duration of the need and how the conditions will influence the timing of the opportunity
- Locate the trends which create new needs and may show how the need will increase of decrease
- Indicate the emerging issues, values or lifestyles which uncover emerging needs
The opportunity landscape analysis sets out the major proposition as to why a business proposal exists.
What is the simplified model of the Value Chain?
Raw materials»_space; Producer »_space; Distributor»_space; End User
Describe how the Value Chain works in detail
Any business is set within an Industry Value Chain.
Each position or link in the chain carries the cost imposed upon it by the upstream suppliers and contributes to the costs of each of the downstream purchasers.
Therefore, each link must be able to purchase its supplies and sell its goods or services at a profit margin that enables the whole chain to produce, distribute and deliver the good/service to the end user at a price they are willing to pay.
Each link in the Industry value chain can exert influence on its upstream and downstream channel associates and some opportunities can be adversely affected by the nature of these influences.
For example, in Australia, two major retailers exert high influence in the fast moving consumer goods markets, Woolworths and Coles.
If you are a producer of goods that uses the supermarket channel to reach the end user, you may find yourself in a weak position as the supermarkets often control much of the purchasing and shelf positioning decisions of the products that are stocked and displayed.
This may be overcome by opening your own shop, but overhead costs will slash profit margins.
Alternatively e-Commerce may reduce costs and shorten the path to market (circumvent supermarket distributes, distribute via online platforms)
Each link provides a function and the question remains whether you can afford to do without that link and function while still maintaining an effective presence and reach to your target market.
What two other topics can you link Value Chain to?
Porter’s 5 Forces and Importing (Going Global)
Briefly describe Porter’s 5 Forces
Porter’s 5 Forces is designed to help companies understand how profitable an industry is and what strategies they can adopt to mitigate negative forces and improve profitability.
The 5 forces are:
Degree of Competition Threat of Substitution Threat of New Entrants (Barrier to Entry) Supplier Power Consumer Power
What does the Degree of Competition look at in Porter’s 5 Forces?
- the number of competitors
- the strength of each competitor
- what drives the competition
- what the competition can do.
The bigger the number of competitors, the lower the market share and profitability of an industry.
Eg. Australian supermarkets, airlines, butchers, bakeries, high tech technological companies
What does Threat of Substitution look at in Porter’s 5 Forces?
The availability of close substitutes and the value-price ratio of the substitute products. The higher the number of available close substitutes, the higher the threat of substitution.
Close substitutes lower market share and profitability.
Eg. Supermarket, petrol kiosks
What does Threat of New Entrants look at in Porter’s 5 Forces?
Threat of new Entrants. is referring to barriers to entry for incoming businesses.
These barriers may include proprietary technology (expensive to access), access to distribution channels (limited or closed to newcomers), access to raw materials and other inputs (for example, skilled labour), cost disadvantages due to lack of experience (magnified with the technological and competitive uncertainties), or risk (which raises the effective opportunity cost of capital).
Are we abe the barriers to entry and what factors lower them? When will they enter our markets?
Some of these barriers will decline or disappear as the industry develops. Eg. In the early 1980s Apple was doing well as it was the first to introduce the home computer, however in 1984, new entrants such as Pineapple (a cheap China knock-off) started emerging because the industry had developed the facilities to build these computers.
These new entrants turn an industry into a Red Ocean and lower profitability.
What does Consumer Power look at in Porter’s 5 Forces?
How much pressure can the consumer on businesses to get them to provide higher quality products, better customer service, and lower prices?
The bargaining power of buyers in an industry affects the competitive environment for the seller and influences the seller’s ability to achieve profitability.
If there are few buyers and many sellers, power of buyers is high
If switching costs – the cost of switching from one seller’s product to another seller’s product – are low, the bargain power of buyers is high.
If buyers can easily backward integrate – or begin to produce the seller’s product themselves – the bargain power of customers is high.
If the consumer is price sensitive and well-educated regarding the product, buyer power is high.
If the customer purchases large volumes of standardized products from the seller, buyer bargaining power is high.
If substitute products are available on the market, buyer power is high.
What does Supplier Power look at in Porter’s 5 Forces?
The number of important suppliers and the importance of the components or materials being supplies. The lower the number of suppliers for a particular material, the higher their supplier power and ability to charge a high price for their materials.
What are the 3 important components in effective marketing (developing the Marketing Concept)?
Marketing Philosophy
Market Segmentation
Consumer Behaviour
What are the 3 different types of Marketing Philosophy?
Production-Driven Philosophy: An entrepreneur’s philosophy htat the product and production are of primary importance in marketing and managing a company and that sales is secondary
Consumer-Driven Philosophy: Marketing philosophy that relies on research to discover consumer preferences, desires and needs before production actually begins
Sales-Driven Philosophy: An entrepreneur’s philosophy that the customer and sales are of primary importance in marketing and managing a company
What are the three factors that influence choice of a Marketing Philosophy?
Competitive pressure
Entrepreneur’s background
Short-term focus
Describe the three factors that influence choice of a Marketing Philosophy?
Competitive pressure: strong competition will force entrepreneurs to develop a consumer orientation in order to gain edge over competitors. If little competition exists, the entrepreneur may remain with a production orientation in the belief that what is produced will be sold
Entrepreneur’s background: While some have sales and marketing background. Others possess operations and production experience. Entrepreneur’s strengths will influence the choice of a market philosophy
Short-term focus: Sometimes sales-driven philosophy may be preferred due to short-term focus on moving the merchandise and generating sales. Although this focus appers to increase sales, it can also develop a hard-selling approach that soon ignores customer preferences and contributes to long-range dissatisfaction
Why do we conduct Market Segmentation?
A business must target specific market because of scarce resources. Before businesses can target a specific markets, they must conduct market segmentation to understand the different needs, characteristics and behaviours of distinct groups of buyers
Segmentation Variables: categorising consumers by geographic, demographic, psychographic, and behavioural variables in order to target a specific type of people and not just people in a geographic area
Example: Wine-related lifestyle segments in the Australian wine market have been categorised as ritual-oriented conspicuous wine enthusiasts, purposeful inconspicuous wine drinkers, fashion/image-oriented wine drinkers, basic wine drinkers and enjoyment-oriented social wine drinkers
