ENTREPRENEURSHIP Strategies and Resources FOURTH EDITION Marc J. Dollinger Kelley School of Business INDIANA UNIVERSITY MARSH PUBLICATIONS Lombard, Illinois U.S.A. n memory of Ken Marino, a great teacher, a wonderful colleague, I and a true friend. EDITOR Libby Rubenstein COPYEDITOR Shelia Whalen TYPESETTER Phoenix Graphics, LLC EDITORIAL SUPPORT Barbara Burwold, Thomas Serb MANUFACTURER Sheridan Books, Inc. Library of Congress Cataloging-in-Publication Data Dollinger, Marc J. Entrepreneurship : strategies and resources / Marc J. Dollinger. — 4th ed. p. cm. Includes bibliographical references and index. ISBN 978-0-9713130-6-4 1. New business enterprises. 2. Entrepreneurship. I. Title. HD62.5.D65 2008 658.4’21—dc22 2007022574 Copyright © 2008 by Marsh Publications LLC. All rights reserved under the International and Pan-Ameri- can Copyright Conventions. No part of this publication may be reproduced, stored in a retrieval system, copied, or transmitted in any form or by any means without written permission from the publisher. For further information contact Marsh Publications LLC, 341 N. Charlotte St., Lombard, IL 60148-2037 USA. Manufactured in the United States of America 10 9 8 7 6 5 4 3 2 1 ∞ PRINTED ON ACID-FREE PAPER Contents Preface vii 1. A Framework for Entrepreneurship 2 Entrepreneurship and the Future 4 What Is Entrepreneurship? 7 Where Is Entrepreneurship? 12 Who Is the New Entrepreneur? 14 Diemsions of Entrepreneurship 16 Paradoxes of Entrepreneurship 25 Organization of this Book 26 A Final Word 27 Summary 28 Discussion Questions 28 Key Terms 29 Exercises 29 Discussion Case 30 2. Resources and Capabilities 32 Identifying Attributes of Strategic Resources 35 Resource Types 43 A Psychological Approach 55 A Sociological Approach 55 Summary 60 Key Terms 61 Discussion Questions 61 Exercises 61 Exercises for Writing a Business Case 62 Discussion Case 63 Appendix: Creativity and Idea Generation 64 3. The Environment for Entrepreneurship 70 Schematic of the New Venture’s Environment 71 Processes of Business Environment Analysis 73 Political and Governmental Analysis 78 Stakeholder Analysis 82 Macroeconomic Analysis 83 Technological Analysis 84 Sociodemographic Analysis 87 Ecological Analysis 90 Competitive Analysis 91 Competitor Analysis 102 Summary 103 Key Terms 105 Discussion Questions 105 Exercises 106 Discussion Case 107 4. Entrepreneurial Strategies 110 Entrepreneurship and Strategy 112 Business Models and Strategy 113 Entry Wedges 116 Resource-Based Strategies 123 Isolating Mechanisms and First- Mover Advantages 125 Information Rules Strategies 129 Strategy and Industry Environments 132 Crafting and Evaluating Strategy 144 Summary 148 Key Terms 149 Discussion Questions 149 Exercises 150 Discussion Case 151 5. The Business Plan 154 Why Write a Business Plan? 158 Elements of the Business Plan 160 Critiquing the Plan 175 Format and Presentation 177 Summary 180 Key Terms 181 Discussion Questions 181 Exercises 182 Discussion Case 182 Appendix: Babyyourway.com Business Plan 183 iii iv ENTREPRENEURSHIP 6. Marketing the New Venture 206 The Marketing and Entrepreneurship Interface 208 Marketing Concept and Orientation 299 Marketing Strategy 214 Marketing on the Internet 232 Sales Forecasting 240 Summary 242 Key Terms 243 Discussion Questions 244 Exercises 244 Discussion Case 245 Appendix: Case Study: EMC Site Expansion 246 7. Foundations of New Venture Finance 252 Determining Financial Needs 254 Sources of Financing 261 New Venture Valuation 276 Legal and Tax Issues 282 Summary 291 Key Terms 292 Discussion Questions 292 Exercises 293 Discussion Case 293 Appendix: The Initial Public Offering (IPO) Process 295 8. Securing Investors and Structuring the Deal 298 Approaching Investors 301 Structuring the Deal 309 Negotiation Skills 319 Summary 327 Key Terms 328 Discussion Questions 328 Exercises 328 Discussion Case 000 Appendix A: Sample Series A Preferred Stock Term Sheet 330 Appendix B: Investment Agreement Outline 333 Appendix C: Negotiable Terms to a Financial Agreement 335 9. Creating the Organization 338 The Top Management Team 341 Building An Enduring Organization 351 The Organization’s Boundaries 355 Networking and Alliances 357 Traditional Organizational Structure 364 Entrepreneurial Performance: The Balanced Scorecard 366 The Entrepreneurial Workplace 369 Most Successful Human Resource Practices 373 Summary 376 Key Terms 378 Discussion Questions 378 Exercises 379 Networking Exercises 379 Discussion Case 380 10. Intrapreneurship and Corporate Venturing 382 Intrapreneurship 384 Advantages and Barriers to Intrapreneurship 389 The Process of Intrapreneurship 391 Intrapreneurial Strategies 398 Guildelines for Success 404 Summary 407 Key Terms 407 Discussion Questions 408 Exercises 408 Discussion Case 409 Appendix: The Franchising Alternative 410 Contents v Cases 1. MedTrack 422 2. Rubio’s: Home of the Fish Taco (A) 442 3. Rubio’s: Home of the Fish Taco (B) 456 4. Rubio’s Restaurants, Incorporated (C) 466 5. Stamps.com: Maintaining a Leadership Position 475 6. Suzy’s Zoo 482 7. Tellme Networks: Dial Tone 2.0? 492 8. Master International Franchising in China: The Athlete’s Foot, Inc. 503 9. Biocon Ltd.: Building a Biotech Powerhouse 515 10. Software Innovation Inc. 528 Notes 541 Company and Name Index 563 Subject Index 572 Preface Since the publication of the first edition of Entrepreneurship: Strategies and Resources, the field of entrepreneurship has grown even faster than I would have predicted. There are more courses and schools teaching entrepreneurship than ever. The major business peri- odicals, Business Week, Fortune, and The Wall Street Journal continue expanding their cov- erage of entrepreneurs and their companies. There are a number of publications that rank graduate and undergraduate entrepreneurship programs. Business plan competi- tions at the graduate and undergraduate level continue to proliferate and the prizes get larger and larger. International interest in new venture creation has grown exponential- ly. Programs in the United States and overseas have partnered to provide cross-cultural and multinational entrepreneurial courses for their students. I personally participated in one such effort between Indiana University and City University of Hong Kong. The technology enabled us to form joint ventures between students in the United States and Hong Kong for the purpose of starting businesses. It was marvelous. In this fourth edition of Entrepreneurship: Strategies and Resources, I have tried to improve upon the foundation set in the first three editions. This book is intended to be friendlier to the user, beginning with its new design and soft cover. A number of fea- tures will help make the text easier to read and understand. Dozens of new examples and minicases, called “Street Story,” have been added. International examples and applica- tions are integrated throughout the book. ORGANIZATION OF THE BOOK Entrepreneurship: Strategies and Resources is organized into three parts. Part I introduces the major themes and theory of the book. Chapter 1 describes the roles that new venture creation plays in the international economy, defines entrepreneurship, and shows how three factors—individuals, environments, and organizations—come together to create the entrepreneurial event. I also make a point of explaining that studying entrepreneur- ship cannot be done in a formulaic, by the numbers fashion.. It requires judgment. Chapter 2 sets this textbook apart from others because it casts entrepreneurial phe- nomena in terms of the predictive theory of the resource-based framework. In this chapter, I present the basic concepts and model of the resource-based theory. There are six types of resources in our theory: financial, physical, technological, human, organi- zational, and reputational. The theory says that entrepreneurs can create sustainable competitive advantage for their ventures when they possess or can acquire and control resources that are rare, valuable, hard to duplicate, and nonsubstitutable. Here I emphasize the importance of human resources, especially the entrepreneur. I then explain how these resources are a source of profit and rent for the entrepreneur, and how the new venture needs to protect these rents and profits through isolating mech- anisms and first-mover advantages. The chapter also has an appendix that introduces the basics of creativity as I believe that this is a personal resource that can be further developed in all of us. vii viii ENTREPRENEURSHIP Part II of Entrepreneurship: Strategies and Resources describes the environment for entrepreneurship. It presents the tools and techniques for analyzing business and com- petitive conditions, and for evaluating entrepreneurial opportunities. It is comparable to the strategy formulation phase of corporate strategic management. The purpose of this section is to show how the environment affects, directs, and impinges on the strategy formulation problem in new venture creation. It does this in two ways that can be expressed by the resource-based model: The environment helps determine what is rare, valuable, imitable, and substitutable and it is the source of resources that possess these four attributes. The strategy formulation problem in new venture creation can be stated as follows: What configuration of resources will provide the new firm with the best chances of achieving a competitive advantage? Chapter 3 covers the aspects of the macro- and microenvironment that affect entre- preneurship and new venture creation. I present a process model