Entry Strategies MBAX 6100 Entrepreneurship & Small Business Management Frank Moyes Leeds School of Business University of Colorado Boulder, Colorado

Entry Strategies Today’s Agenda  Entry strategies  Jim Sharpe case

Entry Strategies Next Week  3 entrepreneurs from the food industry  Read a magazine that you would never buy

Entry Strategies  Develop a new product or service  Develop a similar product or service  Competitive approaches  Franchise  Buy a going concern  Joint venture – customer or supplier

Entry Strategies Develop a New Product or Service  Proprietary  First to market  Growth markets  Risks  High failure rate  Pioneer  Time to market – missionary selling  New design doesn’t work  Underestimate resources  One trick pony

Entry Strategies Develop a Similar Product or Service  Market is well defined  Customer understands the product & is already buying  Value chain is established  Risks  Can’t compete with the pros  Time to profitability  Underestimate the marketing required  Retaliatory action of competitors

Entry Strategies Competitive Approaches  Cost Superiority  Differentiation  Niche Strategy K. Allen, Launching New Ventures

Entry Strategies Cost Superiority  Lean & mean  Tight cost controls (low overheads?)  New production process/technologies  Quantity targets  Emerging industry – everyone has same disadvantage  Risks  Don’t have economies of scale  Don’t have infrastructure K. Allen, Launching New Ventures

Entry Strategies Differentiation  Distinguished by  Product/process innovation  Unique marketing or distribution  Creates brand loyalty  Substitute products less of a threat  Higher margins  Less price sensitive  Focus is not on the cost of your product/service  Risk? K. Allen, Launching New Ventures

Entry Strategies Niche Strategy  Select a segment of the market  Focus is on customer, product design, price, service, packaging, geography, distribution  Allows you to compete without going head-to-head with the major companies  Gives you time to develop & become stronger  Risks  Not sustainable over long term  If successful, will attract competitors K. Allen, Launching New Ventures

Entry Strategies Practical Entry Strategies  Sentry strategy  Observation of a need  Spin-offs  Company outsourcing  Customer in hand  Desperation – no job, no money  Hobbies  Home based business  Non-profit

Entry Strategies Advantages to Buying a Business?  Lower risk  Easier to assess  Track record  First two years are the riskiest  Invest fewer dollars  If can get seller to finance purchase  Favorable lending terms  Trade off with a higher purchase price  Acquire assets more cheaply  Expertise of employees  Training provided by the seller  Reduces time to get into a business  Must do the due-diligence  Risk  Price is too high  Pig in a poke

Entry Strategies Good Reasons for Selling?  Retirement  Other interests  Illness or death  Internal disputes  Business too complex  Inadequate capital  Exit strategy FASTTRAC, Planning and Growing a Business Venture

Entry Strategies Bad Reasons for Selling?  Deteriorating market  Product obsolescence  Loss of key people  Lease problems  Legal problems  Poor location  Competition  Problems with key suppliers  Dependency on key customer  Do you want to own a turn- around? FASTTRAC, Planning and Growing a Business Venture

Entry Strategies Where to Look  Newspapers  Industry trade magazines  Banks  Business brokers  Chambers of Commerce  SBA and development agencies  Bankruptcy listings  Network FASTTRAC, Planning and Growing a Business Venture

Entry Strategies Franchising  “Arrangement in which an owner of a trademark, trade name, or copyright has licensed others to use it in selling goods or services.”   26 % of small companies started   3,000 franchise chains   500,000 outlets Kuratko, Entrepreneurship

Entry Strategies Franchising Advantages?  Training and Guidance  Brand Name Appeal  Proven Track Record  Financial Assistance Kuratko, Entrepreneurship

Entry Strategies Franchising Fees  Celluland (cellular telephones)  Fee $25,000  Royalty 5%  Store Costs $80,000 to $250,000  Papyrus (greeting cards)  Fee $29,500  Royalty 6%  Store Costs $70,000 to $150,000 Kuratko, Entrepreneurship

Entry Strategies Franchising Fees  Valvoline (auto oil change)  Fee $35,000  Royalty 6%  Store Costs $55,000 to $100,000  Pizza Franchise $325,000  Starbucks ? Kuratko, Entrepreneurship

Entry Strategies Franchising Disadvantages  Franchise Fees  Dependent on Franchisor for product, services, training  Control exercised by the Franchisor  Advertising not free  Time consuming reports

Entry Strategies Franchising Risks  Concept may not be proven – franchisor is a start-up  Franchisor reputation and resources  Trade name with no drawing power  No assistance  Unfilled promises  Economics don’t work – can’t get the volume  Overlapping territories - Subway  You must get customers

Entry Strategies Franchise Conclusions  Different kind of risk  Need to do due-diligence  Must write a business plan

Entry Strategies Entry Strategies Conclusions  Lots of ways  Must be proactive  Sentry strategy

Entry Strategies “Millions of people have “an idea”, but unless they do something with it, their ideas aren’t worth a damn. There are a lot of quacks and kooks out there who claim they invented the Weed Eater, and I don’t doubt that there are some people who genuinely thought of this idea--but what did they do with it? Nothing. What do they deserve? Nothing.” George C. Ballas, inventor of Weed Eater