PowerPoint Presentation by Charlie Cook The University of West Alabama Entrepreneurship theory | process | practice Donald F. Kuratko Richard M. Hodgetts Seventh edition Part 3 Developing the Entrepreneurial Plan © 2007 Thomson/South-Western. All rights reserved. CHAPTER 8 Environmental Assessment of Entrepreneurial Ventures

Chapter Objectives 1. 1.To examine some of the major ways of assessing the economic environment 2. 2.To review the regulatory environment within which a new venture must exist 3. 3.To examine the industry environment from a competitive market analysis and strategic point of view 4. 4.To present the community environmental perspective to ensure an understanding of the local impact Studying this chapter should provide you with the entrepreneurial knowledge needed: © 2007 Thomson/South-Western. All rights reserved.8–2

Chapter Objectives (cont’d) 5. 5.To examine community support in terms of reliance and deservedness 6. 6.To review the nature of business incubators and their importance to emerging ventures Studying this chapter should provide you with the entrepreneurial knowledge needed: © 2007 Thomson/South-Western. All rights reserved.8–3

© 2007 Thomson/South-Western. All rights reserved.8–4 Sustainable Competitive Advantage Sustainable Competitive Advantage.  Is achieved when a venture has implemented a strategy that other companies simply cannot duplicate or find it too costly to compete with that particular element.  Can only be maintained until competitors are able to duplicate or develop a substitute for the advantage.  The pursuit of a sustainable competitive advantage requires a full complement of commitments, decisions, and actions by the entrepreneur.

© 2007 Thomson/South-Western. All rights reserved.8–5 The Environment for New Ventures Environmental Scanning  Refers to the efforts of an owner-entrepreneur takes in examining the external and internal environments before making a decision. External Environment  General environment Demographic, economic, political/legal, sociocultural, technological, and global segments.Demographic, economic, political/legal, sociocultural, technological, and global segments.  Industry environment New entrants, suppliers, buyers, product substitutes, intensity of rivalry among competitorsNew entrants, suppliers, buyers, product substitutes, intensity of rivalry among competitors  Competitor environment Position of the venture within the industryPosition of the venture within the industry

© 2007 Thomson/South-Western. All rights reserved.8–6 Figure 8.1The External Environment Source: Michael A. Hitt, R. Duane Ireland and Robert E. Hoskisson, Strategic Management 6th ed (South-Western Publishing, 2005), 39.

© 2007 Thomson/South-Western. All rights reserved.8–7 Table 8.1The Environmental Variables Source: Michael A. Hitt, R. Duane Ireland and Robert E. Hoskisson, Strategic Management 6th ed. (South-Western Publishing, 2005), 40.

© 2007 Thomson/South-Western. All rights reserved.8–8 Table 8.1The Environmental Variables (cont’d) Source: Michael A. Hitt, R. Duane Ireland and Robert E. Hoskisson, Strategic Management 6th ed. (South-Western Publishing, 2005), 40.

© 2007 Thomson/South-Western. All rights reserved.8–9 A Macro View: The Economic and Industry Environments Assessing the Economic Environment  Nature of the industry  The regulatory environment Examining the Industry Environment  Common industry characteristics  Barriers to entry  Competitive analysis

© 2007 Thomson/South-Western. All rights reserved.8–10 Figure 8.2Impact of Regulatory Agencies on the Typical Business Source: Murray L. Weidenbaum, Business, Government and the Public, 4th ed. (Englewood Cliffs, NJ: Prentice Hall, 1990), 9. Reprinted by permission of Prentice-Hall, Englewood Cliffs, New Jersey.

© 2007 Thomson/South-Western. All rights reserved.8–11 The Regulatory Environment Governmental regulations affect smaller ventures in a variety of ways:  Prices  Cost inequities  Competitive restriction  Managerial restriction  Mental burden

© 2007 Thomson/South-Western. All rights reserved.8–12 Figure 8.3 An Entrepreneur’s Contingency Decision Model for Public Policy Source: Ronald G. Cook and David Barry, “When Should the Small Firm Be Involved in Public Policy?” Journal of Small Business Management (January 1993): 44.

© 2007 Thomson/South-Western. All rights reserved.8–13 Trends in Policy Formation The Regulatory Flexibility Act The Equal Access to Justice Act The Congressional Review Act The Small Business Regulatory Enforcement Fairness Act The Paperwork Reduction Act The Unfunded Mandates Reform Act

© 2007 Thomson/South-Western. All rights reserved.8–14 Table 8.2Legislation Implementing Recommendations of the 1995 White House Conference on Small Business Source: Building the Foundation for a New Century: Final Report on the Implementation of the Recommendations of the 1995 White House Conference on Small Business (Washington, D.C.: U.S. Small Business Administration, 2000).

© 2007 Thomson/South-Western. All rights reserved.8–15 Table 8.2Legislation Implementing Recommendations of the 1995 White House Conference on Small Business (cont’d) Source: Building the Foundation for a New Century: Final Report on the Implementation of the Recommendations of the 1995 White House Conference on Small Business (Washington, D.C.: U.S. Small Business Administration, 2000).

© 2007 Thomson/South-Western. All rights reserved.8–16 Examining the Industry Environment Environmental Assessment  What is the structure of the industry, and how is it likely to evolve over time?  What is the company’s relative position in the industry? Common Industry Characteristics  Technological uncertainty  Strategic uncertainty  First-time buyers  Short-time horizons

© 2007 Thomson/South-Western. All rights reserved.8–17 Figure 8.4Elements of Industry—The Five Forces Model Source: Adapted with permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group, from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter, 6. Copyright © 1985, 1998 by Michael E. Porter.

© 2007 Thomson/South-Western. All rights reserved.8–18 Figure 8.5 Guide To Using The Five Forces Model For Industry Analysis Source: Adapted and reprinted by permission of Harvard Business Review. Michael E. Porter, “How Competitive Forces Shape Strategy,” Harvard Business Review (February 1979): Copyright © 1979 by the Harvard Business School Publishing Corporation: all rights reserved.

© 2007 Thomson/South-Western. All rights reserved.8–19 Table 8.3Possible Constraints To Industry Development Source: Adapted with permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group, from Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter, Copyright © 1980, 1998 by The Free Press. Inability to obtain raw materials and components Period of rapid escalation of raw materials prices Absence of infrastructure Perceived likelihood of obsolescence Erratic product quality Image and credibility with the financial community

© 2007 Thomson/South-Western. All rights reserved.8–20 Figure 8.6 Competitive Profile Analysis

© 2007 Thomson/South-Western. All rights reserved.8–21 Figure 8.7Components of a Competitive Analysis Source: Adapted with permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group, from Competitive Strategy: Technique for Analyzing Industries and Competition by Michael E. Porter, 49. Copyright © 1980, 1998 by The Free Press.

© 2007 Thomson/South-Western. All rights reserved.8–22 Taking the Right Steps Clearly define the industry for the new venture. Analyze the competition. Determine the strength and characteristics of suppliers. Establish the value-added measure of the new venture. Project the market size for the particular industry.

© 2007 Thomson/South-Western. All rights reserved.8–23 A Micro View: The Community Perspective Researching the Location  Community demographics  Economic base  Population trends  Overall business climate

© 2007 Thomson/South-Western. All rights reserved.8–24 Table 8.4Selected Sources of Environmental Data The Census of Population (Census Bureau) The Census of Manufacturers (Census Bureau) The Census of Business (Census Bureau) Department of Commerce publications Sales Management magazine’s “Buying Power Index”

© 2007 Thomson/South-Western. All rights reserved.8–25 Determining Reliance and Deservedness Questions for evaluating reliance and deservedness:  How familiar is the entrepreneur with the community where the venture will be located?  Will the proposed venture make any special positive or negative impacts on the community during the prestart-up period or during the start-up period?  Does the entrepreneur have special skills in human relations with which to nurture key local contacts?  What active steps can be taken to strengthen local support and maximize local opportunities during the start-up period?  What active steps can be taken to reduce local opposition and minimize local problems during the start-up period?

© 2007 Thomson/South-Western. All rights reserved.8–26 Determining Reliance and Deservedness Reliance  The strength of community support for a venture is based on: The strength of the community’s reliance on or need for the entrepreneur’s ventureThe strength of the community’s reliance on or need for the entrepreneur’s venture The entrepreneur’s willingness to make a commitment to the communityThe entrepreneur’s willingness to make a commitment to the communityDeservedness  The strength of community support for a venture is based on the extent to which the community perceives that the entrepreneur deserves its support

© 2007 Thomson/South-Western. All rights reserved.8–27 Figure 8.8 Reliance Versus Commitment: Development of Exceptional Community Support Source: Adapted from Robert C. Ronstadt, Entrepreneurship (Natick, MA: Lord Publishing, Inc., 1984)), 84. Reprinted with permission.

© 2007 Thomson/South-Western. All rights reserved.8–28 Figure 8.9 Deservedness Versus Identification: Development of Exceptional Community Support Source: Adapted from Robert C. Ronstadt, Entrepreneurship (Natick, MA: Lord Publishing, Inc., 1984), 85. Reprinted with permission.

© 2007 Thomson/South-Western. All rights reserved.8–29 Examining the Use of Incubators Business Incubator  A facility with adaptable space that small businesses can lease on flexible terms and at reduced rents. Types of Incubators  Publicly sponsored  Nonprofit-sponsored  University-related  Privately sponsored Services Provided:  Below-market-rate rental space.  No maintenance responsibilities.  Sharing of equipment and services.  Financial and technical assistance.  An environment where small businesses are not alone.  Increased visibility to the community.

© 2007 Thomson/South-Western. All rights reserved.8–30 Figure 8.10How Does the Incubator Work?

© 2007 Thomson/South-Western. All rights reserved.8–31 Community Benefits of Incubators Transformation of underused property into a center of productivity Creation of opportunities for public/private partnerships Diversification of the local economic base Enhancement of the locality’s image as a center of innovation and entrepreneurship Increased employment opportunities

© 2007 Thomson/South-Western. All rights reserved.8–32 Key Terms and Concepts barriers to entry business incubator community demographics competitive analysis Congressional Review Act culturedeservedness economic base environmental assessment Equal Access to Justice Act Regulatory Flexibility Act reliance Small Business Regulatory Enforcement Fairness Act societal environment task environment Unfunded Mandates Reform Act value added