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CHAPTER 6 ASSESSMENT OF ENTREPRENEURIAL OPPORTUNITIES
CHAPTER OUTLINE
FEATURED CONTENT
The Entrepreneurial Process: Facing Your Fears!
LEARNING OBJECTIVES
1 To explain the challenge of new-venture start-ups
2 To review common pitfalls in the selection of new-venture ideas
3 To present critical factors involved in new-venture development
4 To examine why new ventures fail
5 To study certain factors that underlie venture success
6 To analyze the traditional venture evaluation process methods: profile analysis, feasibility
criteria approach, and comprehensive feasibility method
7 To highlight the contemporary venture evaluation methods: design methodology and the
lean start-up methodology
The complexity of factors involved in new-venture start-up (as shown in Figure 6.1) makes it
difficult to clearly assess and evaluate each one. In addition, the difficulty of obtaining reliable
data on failed firms adds to this dilemma. Improvements are being made, however, and new-
venture assessment is becoming a stronger process.
A number of pitfalls may occur in the selection of a new venture: lack of an objective
evaluation of the venture, lack of insight into the market, inadequate understanding of technical
requirements, poor financial understanding, lack of venture uniqueness, and failure to be aware
of legal issues.
When assessing a new venture, an entrepreneur needs to consider several critical factors:
the uniqueness of the good or service, the amount of capital investment required to start the
venture, the growth of sales, and the availability of the product.
Some major reasons new ventures fail are inadequate knowledge of the market, faulty
product performance, ineffective marketing and sales effort, inadequate awareness of
competitive pressures, rapid product obsolescence, poor timing, and undercapitalization. In
drawing together these and other reasons, recent research reveals three major categories of
causes for failure: product/market problems, financial difficulties, and managerial problems. In
addition, entrepreneurs face internal and external problems.
The feasibility of the entrepreneur’s product or service can be assessed by asking the
right questions, by making a profile analysis of the venture, and by carrying out a comprehensive
feasibility study.
LECTURE NOTES
Uniqueness
Range of uniqueness in a new venture can be considerable.
Uniqueness is further characterized by the length of time a nonroutine venture will
remain nonroutine.
Investment
Required capital investment can vary considerably.
Extent and timing of funds needed is critical.
Key questions to ask to determine the amount of funding needed during the start-up
phase:
• Will industry growth be sufficient to maintain break-even sales to cover a high fixed
cost structure during the start-up period?
• Do the principal entrepreneurs have access to substantial financial reserves to protect
a large initial investment?
Growth of Sales
Key questions to ask about growth of sales during the start-up phase:
• What is the growth pattern anticipated for new-venture sales and profits?
• Are sales and profits expected to grow slowly or level off shortly after start-up?
• Are large profits expected at some point with only small or moderate sales growth?
• Are both high sales growth and high profit growth likely?
• Will there be limited initial profits with eventual high-profit growth over a multiyear
period?
In answering these questions, it is important to remember that most ventures fit into one
of the three following venture classifications:
• Lifestyle ventures
o Independence, autonomy, and control are the primary driving forces.
o Sales and profits are deemed to provide a sufficient and comfortable living for the
entrepreneur.
• Small profitable ventures
o Financial considerations play a major role.
o Autonomy and ownership control are important factors.
• High-growth ventures
o Significant sales and profit growth are expected.
o May be possible to attract venture capital money.
o May be possible to attract funds raised through public or private placements.
Product Availability
Goods or services must be available.
Lack of product availability can affect the company’s image and its bottom line.
Customer availability
• Risk continuum (two extremes):
o Customers willing to pay cash before delivery.
o Venture begun not knowing exactly who will buy the product.
• Two critical considerations:
o How long will it take to determine who the customers are?
o What are the customers’ buying habits?
TECHNICAL FEASIBILITY
• Functional design of the product and attractiveness in appearance
• Flexibility for ready modification
• Durability of the materials from which the product is made
• Reliability
• Product safety
• Reasonable utility
• Ease and low cost of maintenance
• Standardization
• Ease of processing or manufacture
• Ease in handling and use
MARKETABILITY
Three major areas involved: (1) investigating the full market potential and
identifying customers (or users) for the goods or service, (2) analyzing the extent
to which the enterprise might exploit this potential market, and (3) using market
analysis to determine the opportunities and risk.
DESIGN DEVELOPMENT
Utilizes skills we all possess but are generally ignored due to more conventional
problem solving practices.
Takes the initial concept idea and develops a proof of concept that elicits
feedback from relevant stakeholders.
Design-Centered Entrepreneurship
The entrepreneur applies design methods in four action stages of developing an
opportunity.
• Ideation
• Prototyping
• Market engagement
• Business model
3. Many entrepreneurs lack objectivity and have no real insight into the market. Why
are these characteristics considered pitfalls of selecting new ventures?
Engineers and technically trained people are particularly prone to falling in love with an
idea for a product or service. They seem unaware of the need for the careful scrutiny they
would give to a design or project in the ordinary course of their professional work.
Some entrepreneurs show a managerial short-sightedness. Also, they do not understand
the life cycle that must be considered in introducing a new product or service.
4. Many entrepreneurs have a poor understanding of the finances associated with their
new venture and/or have a venture that lacks uniqueness. Why are these
characteristics considered pitfalls of selecting new ventures?
Sometimes entrepreneurs are ignorant of costs or are victims of inadequate research and
planning. Quite often they tend to underestimate development costs by wide margins. A
new venture should be unique. It ought to have special characteristics and/or design
concepts that draw the customer to it, and it should provide performance or service that is
superior to competitive offerings.
5. Describe each of the five critical factors involved in the prestart-up and start-up
phases of a new venture.
(1) UniquenessThe range of uniqueness in a new venture can be considerable,
extending from fairly routine to highly nonroutine. What separates the routine from
the nonroutine venture is the amount of innovation required during prestart-up.
Venture uniqueness is further characterized by the length of time a nonroutine venture
will remain nonroutine.
(2) InvestmentThe capital investment required to start a new venture can vary
considerably. Another critical issue is the extent and timing of funds needed to move
through the venture process.
(3) Growth of salesThe growth pattern needs to be anticipated for new-venture sales
and profits. Key questions to answer: Are sales and profits expected to grow slowly
or level off shortly after start-up? Are large profits expected at some point with only
small or moderate sales growth? Or are both high-sales growth and high-profit growth
likely? It is important to remember that most ventures can be classified as: life-style
ventures, smaller profitable ventures, or high-growth ventures.
(4) Product availabilityEssential to the success of any venture is the availability of a
salable good or service at the time the venture opens its doors. Lack of product
availability in finished form can affect the company’s image and its bottom line.
(5) Customer availabilityIf the product is available before the venture is started, the
likelihood of venture success is considerably better than otherwise. Venture risk is
affected by the availability of customers for start-up. A critical consideration is how
long it will take to determine who the customers are and what their buying habits are.
7. Identify and discuss two examples of financial difficulties that can cause a venture to
fail.
(1) Assuming debt too earlyAssuming debt financing too soon and in too large
amounts can result in debt service problems.
(2) Venture capital relationship problemsEntrepreneurs may have different goals and
motivations that cause the venture to fail.
8. Identify and discuss two examples of managerial problems that can cause a venture
to fail.
(1) Concept of a team approach: Hiring and promoting personnel because they are family
or friends, not because they are qualified. Examples: incompetent support
professionals, poor relationship with parent companies, and venture capitalists.
(2) Human resource problems: An owner who can’t relate to employees or never fulfills
promises can cause a venture to fail. Examples: kickbacks and subsequent firings,
verbal agreements not honored, deceit by the venture capitalist or the president.
10. How can asking the right questions help an entrepreneur evaluate a new venture?
What types of questions are involved?
Asking the right questions can help the entrepreneur by screening an idea before
implementing it, taking into account the feasibility and possible profits to be had from the
idea.
The types of questions involved include these: Is it a new product/service idea? Has a
prototype been tested by independent testers? Has it been taken to trade shows? Is the
product or service easily understood? What is the overall market? Has market research
been conducted? What distribution and sales methods will be used? How will the product
be made? Will the business concept be developed and licensed to others, or developed
and sold away? Can the company get or has it already lined up the necessary skills to
operate the business venture?
11. Explain the traditional methods of new venture evaluation: profile analysis,
feasibility criteria approach, and comprehensive feasibility method.
The profile analysis is a tool that enables entrepreneurs to judge a business venture’s
potential by sizing up the venture’s strengths and weaknesses along with a number of key
The feasibility criteria approach is a criteria selection list, based on questions from which
entrepreneurs can gain insights into the visibility of their venture.
12. Describe the contemporary methods of new venture evaluation: design methodology
and the lean start-up methodology.
Mirroring the general design approach of companies like IDEO that tackle problems in
industries ranging from medicine to consumer products, Stanford University has founded
an Institute of Design (known as the d school) and the Rotman School of Management at
the University of Toronto has built a curriculum based on the power of design.
Design is a learning process that shapes and converts ideas into form, whether that is a
plan of action, an experience, or a physical thing. Mistakes and failures along the way are
to be seen as opportunities to learn and adapt.
Design development utilizes skills we all possess but are generally ignored due to more
conventional problem solving practices. This takes an initial concept idea and develops a
proof of concept that elicits feedback from relevant stakeholders. Several criteria must be
met: concept feasibility, concept desirability, and concept viability.
Based on your analysis, what three recommendations would you make to the company’s
management?
The major competitor is a large national franchise unit that—in addition to its regular
foodservice menu of pizzas, salads, soft drinks, and desserts—offers door-to-door delivery. This
delivery service is very popular with the university students and has helped the franchise unit
capture approximately 40 percent of the student market. The second competitor is a “pizza
wagon” that carries precooked pizzas. The driver circles the university area and sells pizzas on a
first-come, first-served basis. The pizza wagon starts the evening with 50 pizzas of all varieties
and sizes and usually sells 45 of them at full price. The last 5 are sold for whatever they will
bring. It generally takes the wagon all evening to sell the 50 pizzas, but the profit markup is
much higher than that obtained from the typical pizza sales at the franchise unit. The other
competitor offers only in-house services, but it is well known for the quality of its food.
George does not believe that it is possible to offer anything unique. However, he does believe
that a combination of door-to-door delivery and high-quality, in-house service can help him win
15 to 20 percent of the local market. “Once the customers begin to realize that ‘pizza is pizza,’”
George told his partner, “we’ll begin to get more business. After all, if there is no difference
between one pizza place and another, they might just as well eat at our place.”
Before finalizing his plans, George would like to bring in one more partner. “You can never have
too much initial capital,” he said. “You never know when you’ll have unexpected expenses.” But
the individual whom George would like as a partner is reluctant to invest in the venture. “You
really don’t have anything unique to offer the market,” he told George. “You’re just another ‘me
too’ pizzeria, and you’re not going to survive.” George hopes he will be able to change the
potential investor’s mind, but if he is not, George believes he can find someone else. “I have 90
days before I intend to open the business, and that’s more than enough time to line up the third
partner and get the venture under way,” he told his wife yesterday.
QUESTIONS
1. Is there any truth to the potential investor’s comment? Is the lack of uniqueness going to hurt
George’s chances of success? Explain.
2. If George were going to make his business venture unique, what steps might he take? Be
complete in your answer.
3. In addition to the uniqueness feature, what other critical factors is George overlooking?
Identify and describe three, and give your recommendations for what to do about them.
Examine the following points for conducting business on E-Bay. Based on our chapter
material how would you analyse an E-Bay entrepreneurial opportunity? Would you consider
pursuing E-Bay? Why or why not?
Fledgling entrepreneurs are flocking to eBay because of the ease with which users can start a
business. In 2015, more than 150 million active users conducted business on eBay, contributing
to nearly $150 billion of commerce volume through eBay’s online platforms. Taking the
following steps will get you well on your way to starting a successful eBay business.
Research the market. Selling on eBay does not excuse anyone from the usual legwork
involved in starting a business. In order to determine the right market, research should be
conducted on how much items in a given category are selling for on eBay as well as elsewhere.
Marketplace Research is a subscription based tool available through eBay that allows you to
view historical pricing information for products.
Develop a specialty. The more specialized your business becomes, the more confidence
your customers will have in your offerings and the less time you will spend addressing questions
about the random products you found in your basement. Most sellers start by selling used items,
but eventually, the successful eBay seller will develop a niche to allow for greater economies of
scale.
Access assistance. You will certainly make mistakes as you build your eBay business, but
many of your questions can be answered by accessing eBay’s help files or by reading the
discussion boards, through which successful sellers provide feedback and advice.
Invest in your business. If you plan to start your eBay business by selling off old items
lying around your home, you will not need to invest much, if any, upfront capital; however, as
your business grows, a few items will come in handy. First, designating a computer to be used
solely for your eBay transactions will allow you to fully deduct it on your taxes. Second, a
regulation postal scale will save you several hours waiting in line at the post office. Finally, a
decent camera is a must. Posting poor-quality photos of your merchandise will lead your
customers to wonder about the quality of the rest of your business.
Develop a system. As with any business, policies and procedures become increasingly
important the larger your business becomes. Standardizing your templates or buying some
through eBay’s Seller Tools section will help to streamline the process. In addition, establishing
a routine for corresponding with your customers regarding their questions and concerns will
enable you to prevent any minor issues from escalating into major problems.
Offer PayPal. As an accepted form of payment, approximately 95 percent of buyers prefer
to pay online. Although less popular, some customers might prefer to pay with personal checks
and money orders, so allowing these forms of payment can make those customers less familiar
with online shopping more comfortable.
Know your numbers. eBay charges listing and final value fees, which can add up if you
have to post your merchandise multiple times; however, the cost of gaining access to eBay’s
customer base is insignificant when compared to the cost of using traditional advertising
channels. If you expect your product to take several auctions to sell, cover your costs by charging
higher seller fees.
FOOTNOTES:
[1] "Old woman," a cattle-ranging term for the cook.
[2] Cinch. The cinch corresponds in an American saddle to the
English girth. To cinch a girth up is to draw it tight by means of
several turns of strap or rope between the ring of the girth and a
ring on the saddle, and from this the word has come to being
used in a variety of ways; for instance, Cinch on to that—catch on
to that; It's a cinch that—it's a certainty that; What a cinch!—what
a good thing! what an easy thing!
[3] True.
CHAPTER III
"THE USE OF A SHEATH-KNIFE"
Contrary to the astronomical prophet's forecast, the Higgins
was lucky in carrying the northerly breeze until she picked up the
"trades," and the third day out all hands were turned to shifting sail.
By this time Broncho was beginning to feel his feet. He was fortunate
in having such a useful friend as Jack Derringer, who showed him
the right way to set about his work and saved him from many a
trouble.
It is to be doubted if Broncho's untamed cowboy spirit would have
put up with Barker's bullying and insulting tongue if it had not been
for Jack's strong influence and keen common-sense way of viewing
and explaining everything.
The rolling-stone, except for strange spells of melancholy, when he
seemed to be lost in gloomy thoughts and was hard to get a word
out of, had a way of looking at everything from a comic point of view,
and his infectious smile and cool comments time and again turned
Broncho's smouldering wrath into mirth.
The cowboy prided himself on his philosophical way of taking fate.
His strong points were his virile manhood, his fortitude against
misfortune, and his daredevil bravery, and in these traits he found an
equal, if not a superior, in the cool, self-possessed Britisher.
Only once was the cowpuncher ever heard to discuss his friend, and
that was in one of his queer outbursts of thought.
"This world is shore like a poker game. Some parties is mean an' no
account, like an ace high or pair of deuces; some's middlin', an' has
their good an' bad p'ints, like a pair o' bullets or two low pair in a
Jack-pot; some gents outhold the rest as a general play, like three of
a kind; but is likewise downed themselves by sech superior persons
who, like flushes an' full houses, is bang full o' sand, sense, an'
'nitiative; but thar's only one sport I ever rounds up against who's got
all the vartues of a four of a kind, an' that man's Derringer Jack—he's
shore four aces an' the joker."
Shifting sail started off smoothly enough, chiefly owing to the bosun,
who knew how to get work out of men without using a belaying-pin.
An old Blackwall rigger, he was the very beau ideal of what a bosun
ought to be, and the sight of his spars and rigging was as good for
the old man's liver as a ten-knot breeze astern.
One day the man at the wheel overheard Captain Bob commenting
aloud to himself after a keen look round his ship.
"Me mates be all right as long as it's thumpin' men an' ship-cleaning
as is the ticket; but when it comes to marlin-spike an' riggers work,
that 'ere durned lime-juicer kin give 'em cards an' spades."
The bosun, however, was far from being popular with the bucko
mates, as his methods of enforcing discipline were much too tame to
gain their approval.
"Them doggoned lemon-pelters never could handle men; they
coddles em an' spiles 'em. Human nature requires whippin', an' if
them skulkin' 'possums don't get a sort o' warnin' pretty frequent,
they're liable to get thinkin' they've got the bulge on us," remarked
Black Davis to Barker one morning in disgust, as he watched the
bosun, Jack, and Paddy chatting amiably together whilst they were
at work patching a fair-weather topsail on the maindeck.
These two bullies spent their time looking for trouble. Their one
delight seemed to be to haze the men and knock them about; they
had already beaten every bit of spirit out of those two poor
greenhorns, Pinto and Jimmy Green, whilst Sam, the great buck
nigger, who topped Black Davis by at least half a foot, and Barker by
more, fairly rolled his eyes in terror when either one of these
worthies approached or spoke to him; they knocked the cowards
about unmercifully, and even such gluttons for a fight as Pat and the
cockney got their fair share of hard usage.
But neither Jack Derringer nor the cowboy had been touched since
the towing out.
It was a mystery to all hands why Jack escaped so easily. It was not
by reason of his muscle, which was not so apparent on the surface
as that of the big nigger. It was not because they liked him, for any
one could see with half an eye that the pair fairly detested him, and
yet their mysterious fear of the rolling-stone seemed greater than
their hate. It was not a ferocity of manner or a desperado air that
caused this fear, for although Jack had a quiet way of taking the lead
and ordering others about which had already made him cock of the
foc's'le, his rule forward was far from being that of a despot; it was
rather that of an easy-going, level-headed man, gentle but firm.
Being also the only educated man forward except the young English
apprentice, his advice and counsel were in constant demand.
Even he, however, could not understand his freedom from ill-
treatment. Several times he complained in the foc's'le with a queer
grin that he was not getting his fair share of belaying-pin soup. It
actually seemed to annoy him, and he began to air his wit on the
buckos in such an insolent, daring fashion that the men, hearing him,
shook in their shoes at his temerity.
There was no mystery forward, however, about Broncho's escape
from brutality.
It was known aft, of course, that he was a cowboy from the south-
west, and Jack, with infinite cunning, had made Broncho out to the
bosun a terrible desperado:
"One of the most noted 'bad men' of the West," he declared. "Known
and feared from Arizona to the Kootenay, from Texas to the Pacific
slope, with more notches on his six-shooter than years to his life."
This precious character, together with several blood-curdling
episodes of his career, invented on the spur of the moment by the
rover's fertile brain, was in due course passed on to the after gang,
with the result that Broncho was treated with a strange deference by
the buckos, much to the amusement of the hands forward who were
in the know.
Barker took care that all the easiest work came the desperado's way,
and often he would favour him in small ways, and even yarn with
him, when the old man was below, in the hopes of hearing from his
own lips one of his many deeds of blood. But all the time the bucko
was nervous and ill at ease; his own gory record seemed mean and
petty compared to the cowboy's wholesale butcheries. One night he
buttonholed the cowpuncher whilst he was coiling up gear on the
poop, and asked him to spin the yarn of how he killed the seven
greasers at Tombstone, and Broncho had a chance of giving free
rein to his inventive powers.
The nickname also of Bucking Broncho, which had long replaced the
cowboy's real name, helped to promote the deception, which
occasioned much unholy joy in the starboard foc's'le.
Thus it was that the buckos treated Broncho with almost servility,
though they daily did their best to arouse every passion of hate,
revenge, and murder in the rest of the ship's company.
But the sand in the time-glass of fate was nearly run out for one of
them.
Whilst the bosun and some hands were busy bending the fore-
topsails, the second mate went aloft on the main with Jack, Broncho,
Ben Sluice, Pedro, and Sam.
They had just hoisted up the main upper-topsail ready for bending.
Barker took his post at the bunt, Jack going out to the weather
earing, with Broncho next to him, and Pedro inside next to Barker;
whilst Ben and Sam went out on to the lee yardarm, where they were
in a short time joined by Curly, who had been waiting below to let go
the spilling-lines.
The head of the sail was spread out along the yard, the earings
passed, and they were all busy making it fast to the jackstay.
Suddenly Barker, who had been watching for an opportunity to raise
trouble, noticed that Pedro had skipped a roving.
"Yew mongrel skunk——" he began, raising his fist to strike the
dago; but the sentence was never finished and the blow never fell,