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BUSINESS PLAN PART 1.

Consider the following scenario: You recently inherited $50,000 and you would like to use this money to help start a small business. However, you will need additional funding.

Create a business plan to convince the bank or other investors that you have a viable business plan.

Decide on the type of business and a name for the business.

Part 1 is worth 5%

1. Read chaps.3, 6, 8 & 9 in the text.

2. Give an overview of your business.

3. List and describe your management team, describe the legal structure, and decide on a location.

CHAPTER

3
Startinga Small

Business

LEARNING OBJECTIVES

By studying this chapter, you should be able to…
3-1 Distinguish among the different types and sources

of startup ideas.
3-2 Use innovative thinking to generate ideas for high-

potential startups.
3-3 Describe external and internal analyses that can

shape the selection of venture opportunities.
3-4 Explain broad-based strategy options and focus

strategies.
3-5 Screen business ideas to identify those with the

greatest potential.
3-6 Assess the feasibility of a startup idea.

INTRODUCTION

• Opportunity recognition – Identification of
potential new products or services that may
lead to promising businesses.

• Entrepreneurial alertness – Readiness to act
on existing, but previously unnoticed, business
opportunities.

• Startups – New business ventures created
“from scratch.”

3-1 DEVELOPING STARTUP IDEAS

• New venture concepts can come from many
different sources.
• By recognizing the nature and origin of startup

ideas, an entrepreneur can broaden the range of
new ideas available for his or her consideration.

3-1a Types of Startup Ideas

• New market ideas – Startup ideas centered around
providing customers with an existing product or service
not available in their market.

• New technology ideas – Startup ideas involving new or
relatively new technology, centered around providing
customers with a new product or service.
• Because of the complexities involved with new technology

businesses, it often becomes necessary for entrepreneurs to
pivot at some point after startup.

• Pivot – To refocus or recreate a startup if the initial concept turns
out to be flawed.

• New benefit ideas – Startup ideas centered around
providing customers with new or improved products and
services or better ways of performing old functions.

3.1 Types of Ideas That Develop into Startups

3.2 Common Sources of Startup Ideas

3-1b Common Sources of
Startup Ideas (slide 1 of 2)

PERSONAL/WORK EXPERIENCE
• Often, knowledge gleaned from a present or former job allows a

person to see possibilities for:
• Modifying an existing product.
• Improving a service.
• Becoming a supplier that meets an employer’s needs better than current

vendors.
• Duplicating a business concept in a different location.

• Startup concepts may result from trying personal circumstances or
misfortunes, especially when the entrepreneur can use work
experience or technical skills to address the challenge at hand.

3-1b Common Sources of
Startup Ideas (slide 2 of 2)

HOBBIES AND PERSONAL INTERESTS
• Some entrepreneurs start their new ventures based on their hobbies and

personal interests, which can add passion and energy to the enterprise.
• Recent research has revealed that startups based on a personal pastime

are more likely than others to generate early sales and reach profitability,
and the entrepreneurs who launch these businesses tend to be more deeply
committed to them.

ACCIDENTAL DISCOVERY
• Accidental discoveries may also provide ideas for startups.
• Serendipity – A facility for making desirable discoveries by accident.

OTHER IDEA LEADS
• Personal contacts, trade shows, current trends, and trade publications are

among other idea leads for startups.

3-2 USING INNOVATIVE THINKING
TO GENERATE IDEAS (slide 1 of 2)

• A commitment to creative thinking can
generate many ideas for new businesses and
also help to keep an existing business fresh
and moving forward.

3-2 USING INNOVATIVE THINKING
TO GENERATE IDEAS (slide 2 of 2)

• Business ideas can be spurred by:
• Borrowing ideas from existing products and services or other

industries.
• Combining businesses to create a market opening.
• Focusing on a problem.
• Responding to a trend.
• Improving the function of an existing product or service.
• Considering possible ways to make customers’ lives easier.
• Meeting customer needs in a new way.
• Expanding the market for a product or service.
• Figuring out how to cash in on the sharing economy.
• Making a product or service “green.”
• Tapping into new technologies.
• Offering products through a subscription service.

3-3 INTERNAL AND EXTERNAL ANALYSES
TO ASSESS NEW BUSINESS IDEAS

• Two general approaches can help to identify
business ideas:
1. Outside-in analysis.

• Entrepreneurs look for needs in the marketplace and then
determine how to use their own capabilities to pursue
those opportunities.

2. Inside-out analysis.
• Entrepreneurs first evaluate their capabilities and then

identify new products or service they might be able to offer
to the market.

3-3a Outside-In Analysis (slide 1 of 4)

• Outside-in analysis considers the external
environment, including the general, industry, and
competitive environments.
• General environment – The broad environment,

encompassing factors that influence most businesses
in a society.

• Industry environment – The environment that
includes factors that directly impact a given firm and
all of its competitors.

• Competitive environment – The environment that
focuses on the strength, position, and likely moves
and countermoves of competitors in an industry.

3-3a Outside-In Analysis (slide 2 of 4)

THE GENERAL ENVIRONMENT
• The general environment encompasses a number of important trends.

• Economic trends include changes in the rate of inflation, interest rates,
and even currency exchange rates, all of which promote or discourage
business growth.

• Sociocultural trends refer to societal currents that may affect consumer
demand, opening up new markets and forcing others into decline.

• Political/legal trends include changes in tax law and government
regulations that may pose a threat to existing companies or devastate an
inventive business concept.

• Global trends reflect international developments that create new
opportunities to expand markets, outsource, invest abroad, and so on.

• Technological trends refer to changes in technology that may spawn—or
wipe out—new ventures.

• Demographic trends include population size, age structure, ethnic mix,
and wage distribution.

3.3 Trends in the General Environment

3-3a Outside-In Analysis (slide 3 of 4)

THE INDUSTRY ENVIRONMENT
• The major forces that determine the potential attractiveness and

profitability of a target industry include:
• The threat of new competitors.
• The threat of substitute products or services.
• The intensity of rivalry among existing competitors.
• The bargaining power of suppliers and buyers.

• Profits in an industry tend to be inversely related to the strength of
these factors—that is, strong factors yield weak profits, whereas
weak factors yield strong profits.

• Entrepreneurs who understand these industry factors can position
their ventures in a way that makes the most of what the industry
offers.

3.4 Major Factors Offsetting Market Attractiveness

3-3a Outside-In Analysis (slide 4 of 4)

THE COMPETITIVE ENVIRONMENT
• Determining the strength, position, and likely responses of rival

businesses to newcomers is critical for the assessment of any
business idea.

• Every aspiring entrepreneur should answer several questions about
the competitors he or she is likely to encounter in the marketplace:
• Who would be the new venture’s current competitors?
• What unique resources do they control?
• What are their strengths and weaknesses?
• How will they respond to the new venture’s decision to enter the

industry?
• How can the new venture respond?
• Who else might see and exploit the same opportunity?
• Are there ways to co-opt potential or actual competitors by forming

alliances?

3-3b Inside-In Analysis (slide 1 of 4)

• Inside-out analysis helps the entrepreneur to
understand a startup’s sources of potential
strengths and the unique competencies that can
be formed from them.

3-3b Inside-In Analysis (slide 2 of 4)

BUILDING ON INTERNAL RESOURCES AND
CAPABILITIES
• Entrepreneurs who want to start or build a business

based on inside-out analysis will first need to have a solid
grasp of the resources and capabilities that are available
to them.
• Resources – The basic inputs that an entrepreneur can use to

start and/or operate a business.
• Capabilities – A company’s routines and processes that

coordinate the use of its productive assets in order to achieve
desired outcomes.

3-3b Inside-In Analysis (slide 3 of 4)

• A startup or small business can have both tangible and
intangible resources.
• Tangible resources – Organizational resources that are visible

and easy to measure.
• Examples: An office building, manufacturing equipment, and cash

reserves.
• Intangible resources – Organizational resources that are

invisible and difficult to assess.
• Examples: Patents, copyrights, an established brand, and an

entrepreneur’s personal network of contacts and relationships.

3-3b Inside-In Analysis (slide 4 of 4)

IDENTIFYING CORE COMPETENCIES AND ACHIEVING
A COMPETITIVE ADVANTAGE
• Once entrepreneurs have an accurate view of their

resources and capabilities, they will be in a better
position to identify core competencies that can be
created and used to compete.
• Core competencies – The capabilities that distinguish a firm

competitively and reflect its focus and personality.
• In most cases, these strengths make it possible to

achieve a competitive advantage.
• Competitive advantage – A benefit that exists when a firm has a

product or service that is seen by its target market as better than
that of competitors.

3-3c Integrating Internal and
External Analyses (slide 1 of 3)

• A solid foundation for competitive advantage
requires a reasonable match between the
strengths and weaknesses of a given business
and the opportunities and threats present in its
relevant environments.
• This integration is best revealed through a SWOT

analysis.
• SWOT analysis – An assessment that provides a concise

overview of a firm’s strategic situation.

3.5 Examples of SWOT Factors

POSITIVE FACTORS NEGATIVE FACTORS
Inside the company Strengths Weaknesses

• Important core competencies
• Financial strengths
• Innovative capacity
• Skilled or experienced management
• Well-planned strategy
• Effective entry wedge
• Strong network of personal contacts
• Positive reputation in the marketplace
• Proprietary technology

• Inadequate financial resources
• Poorly planned strategy
• Lack of management skills or experience
• Limited innovations capacity
• Negative reputation in the marketplace
• Inadequate facilities
• Distribution problems
• Insufficient marketing skills
• Production inefficiencies

Outside the company Opportunities Threats

• An untapped market potential
• New product or geographic market
• Favorable shift in industry dynamics
• High potential for market growth
• Emerging technologies
• Changes allowing overseas expansion
• Favorable government
• Deregulation
• Increasing market fragmentation

• New competitors
• Raising demands of buyers or suppliers
• Sales shifting to substitute products
• Increased government regulation
• Adverse shifts in the business cycle
• Slowed market growth
• Changing customer preferences
• Adverse demographic shifts

3-3c Integrating Internal and
External Analyses (slide 2 of 3)

• In practice, a SWOT analysis provides a snapshot view
of current conditions.

• Outside-in and inside-out approaches come together in
the SWOT analysis to help identify potential business
opportunities that match the entrepreneur and his or
her planned venture.

• However, because a SWOT analysis focuses on the
present, the entrepreneur also needs to consider
whether the targeted opportunity will lead to other
opportunities in the future and whether pursuit of the
opportunity is likely to set off a competitive response
by potential rivals.

3-3c Integrating Internal and
External Analyses (slide 3 of 3)

• The entrepreneur’s “opportunity sweet spot” is
found at the point of overlap of emerging
potentials in the external environment and the
unique strengths and capabilities of the
entrepreneur and the venture.
• This area typically offers the greatest potential for

superior business results.

3.6 The Entrepreneur’s Opportunity “Sweet Spot”

3-4 SELECTING STRATEGIES
THAT CAPTURE OPPORTUNITIES

• Strategy – A plan of action that coordinates
the resources and commitments of an
organization to achieve superior performance.

3-4a Broad-Based
Strategy Options (slide 1 of 2)

• Broadly speaking, companies can choose to
build their strategies around an emphasis on
either low cost or differentiation as they
consider how to position themselves relative to
their competitors.

3-4a Broad-Based
Strategy Options (slide 2 of 2)

COST-BASED STRATEGY
• Cost-based strategy – A plan of action that requires a firm to hold down

its costs so that it can compete by charging lower prices and still make a
profit.

• Perhaps the most enduring downside of this strategy is that, because it
attracts customers who are always searching for the best deal, it can be a
great challenge to develop customer loyalty and generate long-term
success.

DIFFERENTIATION-BASED STRATEGY
• Differentiation-based strategy – A plan of action designed to provide a

product or service with unique attributes that are valued by consumers.
• For the strategy to be effective, the consumer must be convinced of the

uniqueness and value of the product or service, whether real or
perceived.

3-4b Focus Strategies (slide 1 of 3)

• Focus strategies – A plan of action that
isolates an enterprise from competitors and
other market forces by targeting a restricted
market segment.

• Cost-based and differentiation-based
strategies can be used when focusing on a
market niche.

3-4b Focus Strategies (slide 2 of 3)

FOCUS STRATEGY SELECTION AND IMPLEMENTATION
• By selecting a particular focus strategy, an entrepreneur decides on

the basic direction of a business, which determines the venture’s
very nature.

• A firm’s overall strategy is formulated, therefore, as its leader
decides how the firm will relate to its environment—particularly to the
customers and competitors in that environment.

• Focus strategies can be set up in the following ways:
• By restricting the target market to a single subset of customers.
• By emphasizing a single product or service.
• By limiting the market to a single geographical region.
• By concentrating on the superiority of the product or service.

• Entrepreneurs can exploit very different market niches within the
same general industry.

3-4b Focus Strategies (slide 3 of 3)

DRAWBACKS OF FOCUS STRATEGIES
• The benefits of a focus strategy can diminish when:

• The firm becomes too specialized.
• The strategy is imitated.
• The target segment becomes unattractive or demand dwindles.
• The segment loses its uniqueness.
• New firms subsegment the industry.

• In addition, firms that adopt a focus strategy and are profitable are
likely to face an influx of new competitors that will pursue the same
niche, thereby luring away customers and driving down returns for all
rivals until the segment is no longer profitable.
• Paradox of attraction – The self-contradictory idea that an attractive

market opportunity is likely to draw multiple competitors, thereby
diminishing its attractiveness.

3-5 SCREENING NEW
BUSINESS IDEAS (slide 1 of 4)

• If too many new business ideas are generated,
it will be necessary to use a screening process
to determine which idea deserves more
focused attention.

• The screening of ideas can be performed
quickly (usually in an hour or less) and should
precede the decision to complete a feasibility
analysis of the idea selected.

3-5 SCREENING NEW
BUSINESS IDEAS (slide 2 of 4)

• The business idea screening process takes into
account the merits of an idea relative to five very
important factors:
1. Strength of the business idea.

• The best business ideas will meet a definite market need, create
value for end users, and offer products or services that customers
favor and find easy to use.

• They will also have no fatal flaws.
2. Targeted market and customers.

• Businesses are more likely to thrive if they focus on a sizable
market that is easy to identify, growing rapidly, and composed of
customers with high levels of purchasing power that they are very
willing to use.

• Further, the best customers will be easily reachable through clear
channels of promotion.

3-5 SCREENING NEW
BUSINESS IDEAS (slide 3 of 4)

3. Industry and competitive advantage.
• The most favorable industries for startups have few or no

competitors, are growing quickly, and have high operating margins.
• They also present few or no barriers to keep new businesses out

and would allow a startup to establish and sustain its specific
competitive advantage.

4. Capability of founder(s).
• In the best-case scenario, the founder(s) will have industry-

related experience, skills, and networks, as well as a great
passion for and a good fit with the new business.

5. Capital requirements and venture performance.
• An entrepreneur will fare best when the venture needs little

capital to launch, its anticipated profit potential is great, and
similar enterprises perform very well.

• Low levels of liability and other risks are ideal, as is the ability to
start the business incrementally or test it cheaply before full launch.

3-5 SCREENING NEW
BUSINESS IDEAS (slide 4 of 4)

• An idea can be revised and screened again if
doing so will improve its projected viability.

3-6 IS YOUR STARTUP
IDEA FEASIBLE?

• A feasibility analysis should be conducted to
identify potential fatal flaws prior to making the
decision to invest the substantial time, energy,
and other resources required to put together a
full-scale business plan.
• Feasibility analysis – A preliminary assessment of a

business idea that gauges whether the venture
envisioned is likely to succeed.

• Fatal flaw – A circumstance or development that
alone could render a new business unsuccessful.

3.7 A Feasibility Analysis Framework

3-6a Market Potential (slide 1 of 2)

• It is important to make clear the distinction
between a market and an industry.
• A market consists of buyers, current or potential

customers who are interested in purchasing a
particular class of products or services to satisfy
wants or needs—and they must also have the
ability to pay for them.

• An industry is composed of sellers who compete
with one another by offering identical or similar
products or services for sale to the same general
group of buyers.

3-6a Market Potential (slide 2 of 2)

• A feasibility analysis should assess the potential of a
market on two levels—the broad macro-market and the
micro-market.
• As part of a feasibility analysis, an evaluation of the general

environment will help to identify a potential-laden trend that
can support promising startup ideas, one of which will be
selected for more thorough consideration.

• This sets the framework for a macro-market analysis, establishing
the boundaries for research regarding the number of customer
targeted and their overall purchasing power and habits.

• An evaluation of the micro-market should clarify the unique
value that the startup idea would offer customers, but it should
also provide estimates of the size of the niche, its rate of
growth, and its long-term prospects.

3-6b Industry Attractiveness

• Like markets, industries should be considered
from a “big-picture” and a more focused point
of view.
• A macro-level analysis assess the overall

attractiveness of the industry in which the startup
will be established.

• A micro-level industry assessment is focused less
on whether industry conditions overall are suitable
to launching a new business and more on the
profitability of a startup’s success over the long run.

3-6c New Venture Leadership

• Entrepreneurs are likely to be successful in a
startup situation to the degree that the planned
venture fits with their mission, aspirations, and
tolerance for risk.

• Successful entrepreneurs understand and are
able to manage the factors that are critical to
the operation of the enterprise.

• Successful entrepreneurs are able to connect
with suppliers, customers, investors, and
others whose involvement is crucial to the
future performance of the planned venture.

Key Terms

capabilities
competitive advantage
competitive environment
core competencies
cost-based strategy
differentiation-based strategy
entrepreneurial alertness
fatal flaw
feasibility analysis
focus strategies
general environment
industry environment
intangible resources

new benefit ideas
new market ideas
new technology ideas
opportunity recognition
paradox of attraction
pivot
resources
serendipity
startups
strategy
SWOT analysis
tangible resources

CHAPTER�3��Starting a Small Business

LEARNING OBJECTIVES
INTRODUCTION
3-1 DEVELOPING STARTUP IDEAS
3-1a Types of Startup Ideas

3.1 Types of Ideas That Develop into Startups
3.2 Common Sources of Startup Ideas
3-1b Common Sources of �Startup Ideas (slide 1 of 2)
3-1b Common Sources of �Startup Ideas (slide 2 of 2)
3-2 USING INNOVATIVE THINKING TO GENERATE IDEAS (slide 1 of 2)
3-2 USING INNOVATIVE THINKING TO GENERATE IDEAS (slide 2 of 2)
3-3 INTERNAL AND EXTERNAL ANALYSES �TO ASSESS NEW BUSINESS IDEAS

3-3a Outside-In Analysis (slide 1 of 4)
3-3a Outside-In Analysis (slide 2 of 4)

3.3 Trends in the General Environment

3-3a Outside-In Analysis (slide 3 of 4)

3.4 Major Factors Offsetting Market Attractiveness

3-3a Outside-In Analysis (slide 4 of 4)
3-3b Inside-In Analysis (slide 1 of 4)
3-3b Inside-In Analysis (slide 2 of 4)
3-3b Inside-In Analysis (slide 3 of 4)
3-3b Inside-In Analysis (slide 4 of 4)

3-3c Integrating Internal and �External Analyses (slide 1 of 3)
3.5 Examples of SWOT Factors
3-3c Integrating Internal and �External Analyses (slide 2 of 3)
3-3c Integrating Internal and �External Analyses (slide 3 of 3)
3.6 The Entrepreneur’s Opportunity “Sweet Spot”
3-4 SELECTING STRATEGIES THAT CAPTURE OPPORTUNITIES
3-4a Broad-Based �Strategy Options (slide 1 of 2)
3-4a Broad-Based �Strategy Options (slide 2 of 2)

3-4b Focus Strategies (slide 1 of 3)
3-4b Focus Strategies (slide 2 of 3)
3-4b Focus Strategies (slide 3 of 3)

3-5 SCREENING NEW �BUSINESS IDEAS (slide 1 of 4)
3-5 SCREENING NEW �BUSINESS IDEAS (slide 2 of 4)
3-5 SCREENING NEW �BUSINESS IDEAS (slide 3 of 4)
3-5 SCREENING NEW �BUSINESS IDEAS (slide 4 of 4)
3-6 IS YOUR STARTUP �IDEA FEASIBLE?
3.7 A Feasibility Analysis Framework

3-6a Market Potential (slide 1 of 2)
3-6a Market Potential (slide 2 of 2)
3-6b Industry Attractiveness
3-6c New Venture Leadership
Key Terms

CHAPTER

6
The Business Plan:

Visualizing The
Dream

LEARNING OBJECTIVES

By studying this chapter, you should be able to…
6-1 Explain the purpose and objectives of business plans.
6-2 Give the rationale for writing (or not writing) a business plan

when starting a new venture.
6-3 Explain the concept and process for developing a firm’s

business model.
6-4 Describe the preferred content and format for a business

plan.

6-5 Offer practical advice on writing a business plan.
6-6 Understand how to present to investors.
6-7 Identify available sources of assistance in preparing a business

plan.

6-1 AN OVERVIEW OF THE
BUSINESS PLAN

• Business plan – A document that outlines the
basic concept underlying a business and
describes how that concept will be realized.

• Writing a business plan is an opportunity to
assess if a good idea is also a good
investment opportunity.
• It does so by providing evidence that your business

can sell enough products or services to make an
attractive profit.

6-1a Key Elements of
the Business Plan

• At a minimum, every business plan should
include the following three key elements:
1. A logical statement of a problem and its solution.
2. A significant amount of hard evidence.
3. Candor about the risks, gaps, and assumptions

that might be proved wrong.

6-1b The Business Plan as a Tool

• Two important groups are users of business
plans:
1. Company insiders.

• They use the plan as a framework to focus on important
issues and activities.

2. Outsiders.
• They use the plan to determine whether they will partner

with the firm.

6.1 Users of Business Plans

6-2 WILL WRITING A PLAN
MAKE A DIFFERENCE?

• Studies attempting to measure whether
entrepreneurs who have business plans do
better than those who don’t have produced
mixed results.
• Some findings suggest a relationship; others do not.

6-2a The Business Plan
Is Not the Business (slide 1 of 2)

EXECUTION MATTERS
• Business plans are not effective if not executed.
• An entrepreneur must find the right balance between planning and

becoming operational.

LISTENING MATTERS
• Lean startup – An iterative process that aims to shorten the product

development process by beginning small, trying out a minimally-viable
product or service with customers, and then making changes based on
what you learn; also, called the build-measure-learn loop.

• Instead of engaging in months of planning and research, the
entrepreneur should accept that all he or she has at the beginning of a
new venture are untested hypotheses.

• Pivoting – Refocusing or recreating a startup if the initial concept turns
out to be flawed.

6-2a The Business Plan
Is Not the Business (slide 2 of 2)

CONTEXT MATTERS
• An extensive business plan may not be very helpful when:

• The environment is too turbulent for extensive planning to be
beneficial.

• The timing of the opportunity is a critical factor and becoming
operational as quickly as possible may have to take priority over in-
depth planning.

• A business may be so constrained by a shortage of capital that
planning is not an option.

• Most entrepreneurs need the discipline that comes with writing a
business plan.
• A written plan helps to ensure systematic, complete coverage of the

important factors to be considered in starting a new business.

6-2b What Form Will the
Business Plan Take?

• In addition to deciding when to plan, an
entrepreneur must choose the form that the
planning will take.
• Preparing a plan requires time and money, two

resources that are always in short supply.
• The entrepreneur has two basic choices when it

comes to writing a business plan:
1. Short plan – An abbreviated business plan that presents

only the most important issues in a firm’s success.
2. Comprehensive plan – A complete business plan that

provides an in-depth analysis of the critical factors that
will determine a firm’s success or failure, along with the
underlying assumptions.

6-3 BEGIN WITH
THE BUSINESS MODEL

• The business model serves as the foundation
of the business plan.
• Without a good business model, there can be no

good business plan.

6-3a What Is a Business Model?

• Business model – An analysis of how a firm
plans to create profits and cash flows given its
revenue sources, its cost structures, the
required size of investment, and sources of
risk.

• The business model measures the anticipated
results of the core business decisions and
activities that determine a company’s profits
and cash flows.

6-3b Creating a Business Model
(slide 1 of 7)

• Existing firms frequently revise or adapt
existing business models.

• A startup must create or discover its business
model, which means there is greater
uncertainty in the process.

• Creating a business model forces an
entrepreneur to be disciplined and avoid
wishful thinking about financial projections.

6.2 Basic Business Model Framework

6-3b Creating a Business Model
(slide 2 of 7)

THE PROCESS
• Four key elements make up the business model:

1. The revenue model.
2. Cost structures.
3. Required resources to grow the business.
4. Business model risk.

REVENUE MODEL
• Revenue model – A component of the business

model that identifies the nature and types of a
company’s sources of revenue.

6-3b Creating a Business Model
(slide 3 of 7)

• The following are common revenue models:
• Volume or unit-based revenue model.

• Customers pay a fixed price per unit in exchange for a product or
service.

• Subscription/membership revenue model.
• Customers pay a fixed amount at regular intervals, prior to

receiving a product or service.
• Advertising-based revenue model.

• Customers pay based on cost per impression, cost per click, or
cost per acquisition.

• Licensing revenue model.
• Customers pay a one-time licensing fee to be able to use or

resell the product or service.

6-3b Creating a Business Model
(slide 4 of 7)

• Actual revenue streams can also be classified:
• Single stream.

• A firm’s revenues come from a single product or service.
• Multiple streams.

• A business realizes revenues from a combination of multiple
products and services.

• Independent streams.
• Revenues come from selling one or more products or services to

generate revenues from other products or services.
• Loss leader.

• One or several revenue streams are sold at a loss to create
sales in a profitable revenue stream.

6-3b Creating a Business Model
(slide 5 of 7)

• An important part of the revenue model is the value
proposition.
• Value proposition – A statement of how a company creates

value for its customers compared with its competitors, which
provides the basis for the company’s competitive advantage.

• In other words, it lets readers of the business plan know exactly
what the entrepreneur will do for his or her customers that no
other company currently does for them.

COST STRUCTURES
• Cost structures – A component of the business

model that provides a framework for estimating a
firm’s cost of goods sold and operating expenses.

6-3b Creating a Business Model
(slide 6 of 7)

• Costs and expenses can be classified in terms of the
following:
• Fixed costs.

• Costs that do not vary at all with volume.
• Example: Rent expense.

• Variable costs.
• Expenses that vary directly and proportionately with changes in

volume.
• Example: Sales commissions.

• Semi-variable costs.
• Expenses that include both variable costs and fixed costs.
• These costs vary in the direction of, but not proportionately with,

changes in the volume of sales.
• Example: Certain types of payrolls that change as a firm becomes

larger but do not change proportionally with sales changes.

6-3b Creating a Business Model
(slide 7 of 7)

KEY RESOURCE REQUIREMENTS
• Key resource requirements – The types and amounts of

resources required to achieve positive profits and cash flows.
• Resources include the amount of investment in hard assets, such as

equipment and buildings, as well as the amount of working capital in
the form of cash, accounts receivable, and inventory.

• Critical resources also include the key partners, including
employees, buyers, suppliers, and investors, and the intellectual
property needed to achieve the business’s success.

BUSINESS MODEL RISK
• Business model risk – A component of the business model that

identifies potential risks in the model and how the model can
adjust to them.

6-4 PREPARING A BUSINESS PLAN:
THE CONTENT AND FORMAT

• A comprehensive business plan should consider the
following key factors:
1. The opportunity.
2. Critical resources.
3. The entrepreneurial team.
4. The financing structure.
5. The context.

• Thus, the business plan will need to demonstrate that
the entrepreneur has pulled together the right
opportunity, the right resources, the right people, and
the right financing structure.

6.3 Key Factors for Success

6.4 Abbreviated Business Plan Outline (slide 1 of 3)

Section Heading Information Provided
Cover Page Company name, logo, tagline, contact information, copy

number, date prepared, and disclaimer (if needed)
Table of Contents Listing of the key sections of the business plan
Executive Summary One- to three-page overview of the significant points,

intended to motivate the reader to continue reading
Company
Description

Company objectives, the nature of the business, its
primary product or service, its current status (startup,
buyout, or expansion) and history (if applicable), and
the legal form of organization

Industry, Target
Customer, and
Competitor Analysis

Key characteristics of the industry, including the
different segments, and the niche where you plan to
compete

6.4 Abbreviated Business Plan Outline (slide 2 of 3)

Section Heading Information Provided
Product/Service
Plan

Justification for why people will buy the product or
service, based on its unique features

Marketing Plan Marketing strategy, including the methods of identifying
and attracting customers, selling approach, type of
sales force, distribution channels, types of sales
promotions and advertising, and credit and pricing
policies

Operations and
Development Plan

Operating or manufacturing methods, operating facilities
(location, space, and equipment), quality-control
methods, procedures to control inventory and
operations, sources of supply, and purchasing
procedures

Management Team Description of the management team, outside investors
and/or directors, and plans for recruiting and training
employees

6.4 Abbreviated Business Plan Outline (slide 3 of 3)

Section Heading Information Provided
Critical Risks Any known inherent risks in the venture
Offering How much capital the entrepreneur needs and how the

money will be used (section used to attract investors)
Exit Strategy Ways an investor—and the entrepreneur—may be able

to harvest their business investment
Financial Plan Contemplated sources of financing; any historical

financial statements, if available; pro forma financial
statements for three to five years, including income
statements, balance sheets, cash flow statements, and
cash budgets

Appendix of
Supporting
Documents

Various supplementary materials and attachments to
expand the reader’s understanding of the plan

6-4a Cover Page

• The cover page should contain the following
information:
• Company name, address, phone number, and website.
• Tagline and company logo.
• Name of contact person with mailing address, phone number,

and e-mail address.
• Date on which the business plan was prepared.
• If the plan is being given to investors, a disclaimer that the

plan is being provided on a confidential basis to qualified
investors only and is not to be reproduced without permission.

• Number of the copy.

6-4b Table of Contents

• The table of contents provides a sequential
listing of the sections of the plan, with page
numbers.

6.5 Table of Contents for BlueAvocado’s Business Plan

Table of Contents
1.0 Introduction
2.0 The Company
3.0 Market Opportunity
4.0 Product Overview
5.0 Lauren Conrad Partnership
6.0 Technology Initiatives
7.0 Supply Chain
8.0 Marketing/Sales Plan
9.0 Financial Overview

10.0 People
11.0 Sustainability Issues
12.0 Conclusion/Contact Appendices

Source: BlueAvocado, Co. Reprinted with permission.

6-4c Executive Summary
(Overview) (slide 1 of 2)

• Executive summary (overview) – A section of the business plan
that conveys a clear and concise overall picture of the proposed
venture and creates interest in the venture.

• The executive summary should be written last.
• In no more than three (preferably two) pages, the executive

summary should include the following subsections:
• A description of the opportunity.
• An explanation of the business concept.
• An industry overview.
• The target market.
• The competitive advantage you hope to achieve in the market.
• The economics of the opportunity.
• The management team.
• The amount and purpose of the money being requested (the

“offering”), if you are seeking financing.

6-4c Executive Summary
(Overview) (slide 2 of 2)

• The executive summary may be in the form of a synopsis or a
narrative.
• A synopsis briefly covers all aspects of the business plan, giving

each topic relatively equal treatment.
• The narrative tells a story.

• In deciding which format to use, consider the following:
• Composing an effective narrative requires a gifted writer who can

communicate the necessary information and generate enthusiasm
without crossing the line into hype.

• A narrative is more appropriate for businesses that are breaking new
ground with a new product, a new market, or new operational
techniques.

• Ventures that have one dominant advantage find the narrative
format to be effective.

• A narrative works well for companies with interesting or impressive
backgrounds or histories.

6.6 BlueAvocado Overview

6-4d Company Description (slide 1 of 2)

• In writing this section, the entrepreneur should answer
the following questions:
• When and where is the business to be started?
• What is the history (if any) of the company?
• What are the firm’s objectives?
• What changes have been made in structure and/or

ownership?
• In what stage of development is the firm—for example, seed

stage or full product line?
• What has been achieved to date?
• What is the firm’s competitive advantage or distinctive

competence?

6-4d Company Description (slide 2 of 2)

• What are the basic nature and activity of the business?
• What is its primary product or service?
• What customers will be served?
• What is the firm’s form of organization—sole proprietorship,

partnership, limited liability company, corporation, or some
other form?

• What are the current and projected economic states of the
industry?

• Does the firm intend to sell to another company or an
investment group? Does it plan to be a publicly traded
company, or do the owners want to transfer ownership to the
next generation of the family?

6-4e Industry, Target Customer,
and Competitive Analysis

• The primary purpose of this section is to present the opportunity
and demonstrate why there is a significant market to be served.

• This section should:
• Describe the broader industry in which the business will be

competing, including industry size, growth rate, fundamental trends,
and major players.

• Identify the different segments of the industry.
• Describe the niche in which the business will be participating.
• Provide the context of the opportunity and demonstrate that a market

segment is being underserved.
• Describe target customers in terms of demographics and

psychological variables, such as their values, their attitudes, and
even their fears.

• Analyze competitors in terms of product or service attributes that
they offer or are failing to provide.

6-4f Product/Service Plan

• Product/service plan – A section of the
business plan that describes the product
and/or service to be provided and explains its
merits.

6-4g Marketing Plan

• Marketing plan – A section of the business
plan that describes how the firm will reach and
service customers within a given market.

• This section should include the following
topics:
• Methods of identifying and attracting customers.
• Pricing strategies.
• Selling approach.
• Types of sales force.
• Distribution channels.

6-4h Operations and
Development Plan

• Operations and development plan – A
section of the business plan that offers
information on how a product will be produced
or a service provided, including descriptions of
the firm’s facilities, labor, raw materials, and
processing requirements.

6-4i Management Team Section

• Management team section – A section of the
business plan that describes a new firm’s
organizational structure and the backgrounds
of its key employees.

6-4j Critical Risks Section

• Critical risks section – A section of the
business plan that identifies the potential risks
that may be encountered by an investor.

• Common risks include:
• A lack of market acceptance.
• Competitor retaliation.
• Longer time period and higher expenses than

expected to start and grow the business.
• Inadequate financing.
• Government regulations.

6-4k Offering

• Offering – A section of the business plan that
indicates to an investor how much money is
needed, and when and how the money will be
used.

6-4l Exit Strategy

• Exit strategy section – A section of the
business plan that focuses on options for
cashing out of the investment.

6-4m Financial Plan

• Financial plan – A section of the business
plan that projects the company’s financial
position based on well-substantiated
assumptions and explains how the figures
have been determined.

• Pro forma statements – Projections of a
company’s financial statements for up to five
years, including balance sheets, income
statements, and statements of cash flows, as
well as cash budgets.

6-5 ADVICE FOR WRITING
A BUSINESS PLAN

• The following are recommendations for writing an
effective business plan:
• Know your customers well.
• Recognize your competition.
• Provide solid evidence for any claims you are making.
• Think like investors think.
• Identify potential fatal flaws.
• Maintain confidentiality, when appropriate.
• Pay attention to the details.

• Use good grammar.
• Limit the presentation to a reasonable length.
• Go for an attractive, professional appearance.
• Describe your product or service in lay terms.

6-6 PITCHING TO INVESTORS
(slide 1 of 3)

• In addition to having a written business plan, an
entrepreneur seeking capital from investors may be
asked to give a pitch.
• Pitch – An oral presentation of the business idea to investors.
• Frequently, the entrepreneur is given 15 to 20 minutes to

present, followed by about the same amount of time for
questions and answers.

• What investors want to know is relatively
straightforward, as is the order in which they want to
see the topics in the pitch.

• Also, the essential topics that need to be covered are
the same for most businesses.

6-6 PITCHING TO INVESTORS
(slide 2 of 3)

• Caroline Cummings at Palo Alto Software suggests that 12
PowerPoint slides be prepared to accompany the pitch:
1. Identify the problem to be solved.
2. Introduce your solution to the problem.
3. Discuss your beginning traction for getting sales.
4. Identify the target market.
5. Explain the costs of acquiring customers in your target market.
6. Communicate the value proposition relative to competitors.
7. Describe the basics of the revenue model.
8. Provide financial projections, along with the assumptions.
9. Sell the team.
10. Identify your funding needs, and explain the use of the funds.
11. Describe possible exit strategies.
12. End on a high note—remind investors why your

product/service/team is so great.

6-6 PITCHING TO INVESTORS
(slide 3 of 3)

• Guy Kawasaki’s 10/20/30 rule provides
guidelines for the pitch:
• Have only 10 presentation slides.
• Limit the presentation to 20 minutes.
• Use a 30-point font in your slides.

6-7 RESOURCES FOR
BUSINESS PLAN PREPARATION

• A variety of books, websites, and computer
software packages are available to assist in
the preparation of a business plan.

6-7a Computer-Aided
Business Planning

• Numerous business plan software packages
have been designed to help an entrepreneur
think through the important issues in starting a
new company and organize his or her
thoughts to create an effective presentation.
• However, while they can facilitate the process,

software packages in and of themselves are not
capable of producing a unique plan.

• In fact, they can limit an entrepreneur’s creativity and
flexibility if not used properly.

6-7b Professional Assistance

• Professionals with planning expertise, such as
attorneys, accountants, and marketing
specialists, can provide useful suggestions
and assistance in the preparation of a
business plan.

• The Small Business Administration (SBA), the
Service Corps of Retired Executives
(SCORE), and the Kauffman FastTrac
entrepreneurial training program can also be
helpful.

Key Terms

business model
business model risk
business plan
comprehensive plan
cost structures
critical risks section
executive summary (overview)
exit strategy section
financial plan
key resource requirements
lean startup

management team section
marketing plan
offering
operations and development plan
pitch
pivoting
product/service plan
pro forma statements
revenue model
short plan
value proposition

�CHAPTER�6��The Business Plan: Visualizing The Dream

LEARNING OBJECTIVES

6-1 AN OVERVIEW OF THE BUSINESS PLAN
6-1a Key Elements of �the Business Plan

6-1b The Business Plan as a Tool

6.1 Users of Business Plans
6-2 WILL WRITING A PLAN �MAKE A DIFFERENCE?
6-2a The Business Plan �Is Not the Business (slide 1 of 2)
6-2a The Business Plan �Is Not the Business (slide 2 of 2)
6-2b What Form Will the �Business Plan Take?
6-3 BEGIN WITH �THE BUSINESS MODEL

6-3a What Is a Business Model?

6-3b Creating a Business Model �(slide 1 of 7)
6.2 Basic Business Model Framework
6-3b Creating a Business Model �(slide 2 of 7)
6-3b Creating a Business Model �(slide 3 of 7)
6-3b Creating a Business Model �(slide 4 of 7)
6-3b Creating a Business Model �(slide 5 of 7)
6-3b Creating a Business Model �(slide 6 of 7)
6-3b Creating a Business Model �(slide 7 of 7)
6-4 PREPARING A BUSINESS PLAN: THE CONTENT AND FORMAT
6.3 Key Factors for Success
6.4 Abbreviated Business Plan Outline (slide 1 of 3)
6.4 Abbreviated Business Plan Outline (slide 2 of 3)
6.4 Abbreviated Business Plan Outline (slide 3 of 3)

6-4a Cover Page
6-4b Table of Contents

6.5 Table of Contents for Blue Avocado’s Business Plan
6-4c Executive Summary (Overview) (slide 1 of 2)
6-4c Executive Summary (Overview) (slide 2 of 2)
6.6 Blue Avocado Overview

6-4d Company Description (slide 1 of 2)
6-4d Company Description (slide 2 of 2)

6-4e Industry, Target Customer, and Competitive Analysis
6-4f Product / Service Plan

6-4g Marketing Plan

6-4h Operations and �Development Plan

6-4i Management Team Section
6-4j Critical Risks Section
6-4k Offering
6-4l Exit Strategy
6-4m Financial Plan

6-5 ADVICE FOR WRITING �A BUSINESS PLAN
6-6 PITCHING TO INVESTORS �(slide 1 of 3)
6-6 PITCHING TO INVESTORS �(slide 2 of 3)
6-6 PITCHING TO INVESTORS �(slide 3 of 3)
6-7 RESOURCES FOR �BUSINESS PLAN PREPARATION
6-7a Computer-Aided �Business Planning

6-7b Professional Assistance
Key Terms

CHAPTER

8
The Organizational
Plan: Teams, Legal

Structures, Alliances,
and Directors

LEARNING OBJECTIVES

By studying this chapter, you should be able to…
8-1 Describe the characteristics and value of a strong management

team.
8-2 Explain the common legal forms of organization used by small

businesses.
8-3 Identify factors to consider in choosing among the primary legal

forms of organization.
8-4 Discuss the unique features and restrictions of six specialized

organizational forms.
8-5 Understand the nature of strategic alliances and their uses in

small businesses.
8-6 Describe the effective use of boards of directors and advisory

boards.

8-1 BUILDING A
MANAGEMENT TEAM (slide 1 of 2)

• Management team – Managers and other key persons who give a
company its general direction.
• In general, the management team consists of individuals with

supervisory responsibilities, as well as nonsupervisory personnel who
play key roles in the business.

• Investors consider the quality of a new venture’s management to be
one of the most important factors in decisions to invest.

• One reason that a management team often can bring greater strength
to a venture than an individual entrepreneur can is that a team can
provide a diversity of talent to meet various managerial needs.

• In addition, a team can provide greater assurance of continuity,
since the departure of one member of a team is less devastating to
a business than the departure of a single owner.

• The competence required in a management team depends on the
type of venture and the nature of its operations.

8-1 BUILDING A
MANAGEMENT TEAM (slide 2 of 2)

• In many cases, a startup owner stacks the
management team with family and friends, rather than
seeking balanced expertise.
• The upside to this is that:

• The owner knows these people well and trusts them.
• They often work for less compensation.
• They are more likely to make personal sacrifices to keep the

business alive.
• The downside to this is that:

• The team can quickly become very homogeneous.
• The team lacks complementary strengths.
• The team entertains feelings of entitlement.
• The team carries the baggage of family dysfunction into the

enterprise.

8-1a Achieving Balance

• Not all members of a management team need
competence in all areas—the key is balance.
• Example: If one member has expertise in finance, another

should have an adequate marketing background.
• A diversity in perspectives and work styles enables the

completion of complex tasks.
• A functionally diverse and balanced team will be more

likely to cover all the business bases, giving the
company a competitive edge.

• A small firm can enhance its management by drawing
on the expertise of competent insiders and outside
specialists.

8-1b The Solo Startup
Is Still an Option

• Despite the advantages of forming a team to
start a business, The Wall Street Journal has
reported that the number of small business
owners who are choosing to go it alone is
increasing significantly.
• Research shows that 44 percent of successfully

funded startups are run by a single entrepreneur.
• Emerging technologies make this option

increasingly manageable today.

8-1c Expanding Social Networks
(slide 1 of 2)

• Management team members can connect the
enterprise with a social network that provides access
to a wide range of resources beyond the reach of
individual team members.
• Social network – An interconnected system of relationships

with other people.
• Small business owners in the process of launching a

startup use their networks:
• To access information or get advice.
• To gain introductions to other people.
• To obtain money, business services, physical facilities and

equipment, help with personal needs, and other forms of
assistance.

8-1c Expanding Social Networks
(slide 2 of 2)

• Social media tools can be very helpful in attracting
customers, connecting with peers, and sharing advice
about common problems.

• Small business owners are finding that they can use
social media tools to build an active and robust social
network to increase their social capital.
• Social capital – The advantage created by an individual’s

connections within a social network.
• The principle of reciprocation can be extremely helpful

in adding to whatever social capital you already have.
• Reciprocation – A powerful sense of obligation to repay in

kind what another has done for or provided to us.

8-2 COMMON LEGAL
FORMS OF ORGANIZATION

• The most basic forms of organization used by
small businesses are the:
• Sole proprietorship.
• Partnership.
• C corporation.

8.1 Forms of Legal Organization for Small Businesses

8.2 Percentage of Small Businesses by Legal Form of Organization

8-2a The Sole Proprietorship
Option (slide 1 of 2)

• Sole proprietorship – A business owned by one
person, who bears unlimited liability for the enterprise.

• Advantages:
• An individual proprietor has title to all business assets.
• He or she receives all of the firm’s profits.
• Forming a sole proprietorship is the simplest and cheapest

way to start operation.
• The owner holds title to all of the firm’s assets.
• The owner is free from interference by partners, stakeholders,

and directors.

8-2a The Sole Proprietorship
Option (slide 2 of 2)

• Disadvantages:
• An individual proprietor is subject to the claims of creditors.
• He or she must assume all losses, bear all risks, and pay all

debts.
• The owner bears unlimited liability.

• Unlimited liability – Liability on the part of an owner that extends
beyond the owner’s investment in the business.

• A sole proprietor is not an employee of the business and
cannot benefit from the advantage of many tax-free fringe
benefits, such as insurance and hospitalization plans.

• The death of the owner terminates the legal existence of the
business.

8-2b The Partnership Option (slide 1 of 6)

• Partnership – A legal entity formed by two or more co-owners to
operate a business for profit.

• Benefits:
• Owners can set it up quickly, avoiding many of the legal requirements

involved in creating a corporation.
• The workload, as well as the emotional and financial burdens of the

enterprise, are shared.
• Management talent that might otherwise break the budget is gained.
• Companionship is added to life in a small business.

• Potential problems:
• The owners share unlimited liability.
• Personal conflicts are common.
• Decision making is more complicated because leadership is shared.
• The owners must share their equity position in the business, which

dilutes the control of each partner.

8-2b The Partnership Option (slide 2 of 6)

CHOOSING A PARTNER
• Any person capable of contracting may legally become

a business partner.
• Individuals may become partners without contributing

capital or having a claim to assets if the decision is
made to close the business down.
• Such persons are partners only with regard to management

and profits.
• Forming a partnership involves consideration not only of

legal issues but also of personal and managerial factors.
• A strong partnership requires partners who are honest,

healthy, capable, and compatible.

8-2b The Partnership Option (slide 3 of 6)

• The following are suggestions for forming a partnership:
• Choose your partner carefully.

• Goals, values, and work habits must be compatible, and skills
should be complementary before committing to the deal.

• Team up with a person you can trust.
• Be open, but cautious, about partnerships with friends.
• Test-drive the relationship, if possible.

• Try more limited forms of business collaboration first.
• Create a shared vision for the business.

• Before joining forces, discuss the expectations of all partners,
planned division of work, anticipated vacation time, and the
sharing of profits and losses.

• Prepare for the worst.
• From the beginning, have an exit strategy.

8-2b The Partnership Option (slide 4 of 6)

RIGHTS AND DUTIES OF PARTNERS
• A written partnership agreement should be drawn up before the

venture is launched.
• Partnership agreement – A document that states explicitly the rights

and duties of

partners.

• Unless the articles of the partnership agreement specify

otherwise, a partner is generally recognized as having certain
implicit rights.
• Partners share profits or losses equally, unless they have agreed to a

different ratio.
• These rights are also balanced against serious liabilities, such as

joint and several liability.
• Joint and several liability – The liability of each partner resulting

from any one partner’s ability to legally bind the other partners.

8-2b The Partnership Option (slide 5 of 6)

TERMINATION OF A PARTNERSHIP
• Death, incapacity, or withdrawal of a partner

ends a partnership and requires liquidation or
reorganization of the business.
• Liquidation often results in substantial losses to all

partners.
• When one partner dies, loss due to liquidation may be

avoided if the partnership agreement stipulates that
surviving partners can continue the business after buying
the decedent’s interest.

• This option can be facilitated by having each partner carry
life insurance that names the other partners as beneficiaries.

8-2b The Partnership Option (slide 6 of 6)

• When a partner decides to leave the business,
the other partners should take several
measures as part of a sound response plan:
• Cut off the departing partner’s access to bank

accounts, physical facilities, and company assets to
avoid loss or damage to equipment critical to the
business.

• Quickly assess that partner’s role in the enterprise,
and take steps to fill his or her shoes to get the
business back to normal as soon as possible.

• Once these very pressing matters are under control,
sort out any legal issues that remain.

8-2c The C Corporation Option
(slide 1 of 6)

• Corporation – A business organization that
exists as a legal entity and provides limited
liability to its owners.
• Legal entity – A business organization that is

recognized by the law as having a separate legal

existence.

• This means that the corporation can file suit and be sued,
hold and sell property, and engage in business operations
that are stipulated in the corporate charter.

• In other words, a corporation is a separate entity from the
individuals who own it, which means that the corporation, not
its owners, is liable for the debts of the business.

8-2c The C Corporation Option
(slide 2 of 6)

• C corporation – An ordinary corporation, taxed by the federal
government as a separate legal entity.

THE CORPORATE CHARTER
• To form a corporation, one or more persons must apply to the

secretary of state (at the state level) for permission to incorporate.
• After completing preliminary steps, including payment of an

incorporation fee, the written application is approved by the
secretary of state and becomes the corporate charter.
• Corporate charter – A document that establishes a corporation’s

existence.

8-2c The C Corporation Option
(slide 3 of 6)

• A corporation’s charter should be brief, in accordance with state
law, and broad in its statement of the firm’s power.

• Details should be left to the corporate bylaws, which outline the
basic rules for ongoing formalities and decisions of corporate life,
including the following:
• The size of the board of directors.
• The duties and responsibilities of directors and officers.
• The scheduling of regular meetings of the directors and shareholders.
• The means of calling for a special meeting of these groups.
• Procedures for exercising voting rights.
• Restrictions on the transfer of corporate stock.

8-2c The C Corporation Option
(slide 4 of 6)

RIGHTS AND STATUS OF STOCKHOLDERS
• Ownership in a corporation is evidenced by shares of

stock owned by a stockholder.
• An ownership interest does not confer a legal right to act for

the firm or to share in its management.
• It does, however, provide the stockholder with the right to

receive dividends in proportion to the shares of stock owned,
but only when the dividends are properly declared by the firm.

• Ownership of stock typically carries a preemptive right.
• Preemptive right – The right of stockholders to buy new shares

of stock before they are offered to the public.

8-2c The C Corporation Option
(slide 5 of 6)

LIMITED LIABILITY OF STOCKHOLDERS
• Stockholders’ financial liability is restricted to the amount of

money they invest in the business.
• Creditors cannot require them to sell personal assets to pay the

corporation’s debts.

DEATH OR WITHDRAWAL OF STOCKHOLDERS
• Unlike a partnership interest, ownership in a corporation is readily

transferable.
• An exchange of shares of stock is sufficient to transfer an ownership

interest to a different individual.
• To prevent any negative repercussions from the death of a

majority stockholder, legal arrangements should be made at the
outset to provide for management continuity by surviving
stockholders and fair treatment of a stockholder’s heirs.

8-2c The C Corporation Option
(slide 6 of 6)

MAINTAINING CORPORATE STATUS
• To retain its standing as a separate entity, a

corporation must:
• Hold annual meetings of both the shareholders and the board

of directors.
• Keep minutes to document the major decisions of

shareholders and directors.
• Maintain bank accounts that are separate from owners’ bank

accounts.
• File a separate income tax return for the business.

8-3 CONSIDERATIONS IN CHOOSING
AN ORGANIZATIONAL FORM

• The key factors in choosing an organization are:
• The initial organizational requirements and costs.
• The liability of the owners.

• Piercing the corporate veil – A situation in which a court
concludes that incorporation has been used to perpetuate a
fraud, skirt a law, or commit some wrongful act, and it
removes liability protection from the corporate entity.

• The continuity of the business.
• The transferability of ownership.
• Management control.
• Its attractiveness for raising capital.
• Income tax considerations.

8.3 Comparison of Basic Legal Forms of Organization (slide 1 of 2)

8.3 Comparison of Basic Legal Forms of Organization (slide 2 of 2)

8-4 SPECIALIZED LEGAL
FORMS OF ORGANIZATION

• The majority of small businesses use one of the three
major ownership structures—the sole proprietorship,
partnership, or C corporation.

• However, other specialized forms of organization are
also used by small firms, including:
• The limited partnership.
• The S corporation.
• The limited liability

company.

• The professional corporation.
• The nonprofit corporation.
• The B corporation.

8-4a The Limited Partnership

• Limited partnership – A partnership with at least one
general partner and one or more limited partners.
• General partner – A partner in a limited partnership who has

unlimited personal liability.
• Limited partners – A partner in a limited partnership who is not

active in its management and whose liability is limited to his or
her investment.

• If a limited partner becomes active in management, however, his or
her limited liability is lost.

• To form a limited partnership, partners must file a
certificate of limited partnership with the proper state
office, as state law governs this form of organization.

8-4b The S Corporation

• S corporation (subchapter S corporation) – A corporation that
offers limited liability to its owners and passes taxable income or
losses on to stockholders.

• To obtain S corporation status, a corporation must meet certain
requirements, including the following:
• The corporation must be domestic.
• The corporation can have no more than 100 stockholders.
• All stockholders must be individuals or certain qualifying estates and

trusts.
• Only one class of stock can be outstanding.
• It must not be an ineligible corporation.

• Because an S corporation does not pay income taxes but instead
passes taxable income or losses on to the stockholders, this allows
stockholders to receive dividends from the corporation without
double taxation on the firm’s profit.

8-4c The Limited
Liability Company

• Limited liability company – A form of organization in which owners
have limited liability but pay personal income taxes on business profits.

• A limited liability company can have an unlimited number of owners,
or “members,” and these may include other limited liability
companies and non-U.S. entities.

• This form differs from the C corporation in that it avoids double
taxation.
• Like S corporations, limited liability companies are not taxed but simply

pass their income on to their owners, who pay taxes on it as part of their
personal income.

• Compared to most other forms of organization, the limited liability
company is easier to set up, is more flexible, and offers some
significant tax advantages.
• Thus, according to many attorneys, the limited liability company is

usually the best choice for new businesses.

8-4d The Professional Company

• Professional corporation – A form of
corporation that shields owners from one
another’s liability and is set up for individuals in
certain professional practices.
• The term professional usually applies to those

individuals whose professions require that they
obtain a license before they can practice.

• Examples: Doctors, chiropractors, lawyers, accountants,
engineers, and architects.

8-4e The Nonprofit Corporation

• Nonprofit corporation – A form of corporation for enterprises
established to serve civic, educational, charitable, or religious
purposes; not for generation of profits.

• The IRS will not grant this option to a sole proprietorship or
partnership.

• In the application process, the officers need to submit articles of
organization that spell out and limit the range of activities of the
enterprise.

• For a tax exemption to be granted, the organization must pass the
organizational test.
• Organizational test – Verification of whether a nonprofit organization

is staying true to its stated purpose.
• A nonprofit corporation must establish a board of directors or

trustees to oversee its operations, and if it should dissolve, it is
required to transfer its assets to another nonprofit corporation.

8-4f The B Corporation

• B corporation – A form of corporation that
creates a positive social or environmental
impact while maintaining high standards of
transparency and accountability.

8-5 FORMING STRATEGIC
ALLIANCES

• Strategic alliance – An organizational relationship that links two
or more independent business entities in a common endeavor.

• Without affecting the independent legal status of the participating
business partners, a strategic alliance provides a way for
companies to improve their individual effectiveness by sharing
certain resources.

• Alliances can take many forms.
• Alliances provide a way for small businesses to become more

competitive:
• By accessing another firm’s first-rate resources.
• By expanding the market range for products or services offered.
• By combining advertising efforts.
• By reaching crucial economies of scale.
• By sharing risks that might prove crippling if borne by a single small

company.

8.4 Most Popular Small Business Alliances by Type

8-5a Strategic Alliances
with Large Companies

• Benefits:
• The complementary skills and expertise of the partnered firms

can promote the competitive edge of both (or all) parties.
• Forming an alliance with a large company may offer a boost to

status and market access.
• Risks:

• The small company may be squeezed financially.
• Partnering with a large firm may result in smothering

bureaucratic complications.
• The parties’ strategic priorities may not mesh.
• Large companies can wield enormous power over small

companies.
• Some large firms have a track record of misbehavior as

partners.

8-5b Strategic Alliances
with Small Companies

• About half of all small businesses maintain one
or more strategic alliances with companies that
are smaller or equal in size.
• These partnerships have been found to be more

flexible, dedicated, creative, and understanding of
the needs of small businesses.

8-5c Setting Up and Maintaining
Successful Strategic Alliances (slide 1 of 2)

• An alliance strategy can be powerful for growing
companies.
• It spreads the risk of entering new markets.
• It helps small players with unattractive balance sheets appear

stable to the end buyer.
• It can provide a fast track to reaching the critical mass required

for pre-sale and post-sale support.
• Working closely with other companies can also

introduce significant hazards.
• Because alliance partners are in a unique position to learn

about your strategy and customer base, they can become
competitors overnight.

• Thus, it is crucial to select partners with care and include an “easy
out” clause in the contract, in case the alliance does not go well.

8-5c Setting Up and Maintaining
Successful Strategic Alliances (slide 2 of 2)

• While strategic alliances often are not easy to
set up, they can be even more difficult to
maintain.
• Entrepreneurs can improve their chances of

creating and maintaining a successful alliance by:
• Establishing productive connections.
• Identifying the best person to contact.
• Being prepared to confirm the long-term benefits of the

alliance.
• Learning to speak the partner’s “language.”
• Ensuring a win-win arrangement.
• Monitoring the progress of the alliance and making any

necessary changes.

8-6 MAKING THE MOST OF A
BOARD OF DIRECTORS

• Board of directors – The governing body of a
corporation, elected by the stockholders.
• In entrepreneurial firms, the board of directors tends to be

small (usually five or fewer members).
• The board chooses the firm’s officers, sets or approves

management policies, considers reports on operating results
from the officers, and declares any dividends.

• Corporations are required by law to have a board of directors.
• Research shows that smaller companies that appoint

entrepreneurs to their boards experience increased
performance along multiple dimensions.

8-6a Selection of Directors

• An entrepreneur who is attempting to assemble a
cooperative and experienced group of directors needs
to consider the value of an outside board.
• Objectivity is a valuable contribution of outside directors.

• They can look at issues more dispassionately than can insiders
who are involved in daily decision making.

• The nature and needs of a business help determine
the qualifications required in its directors.

• After deciding on the qualifications to look for, a business
owner must seek suitable candidates as board members.
• Effective directors are honest and accountable, offer valuable

insights based on business experience, and enhance the
company’s credibility with its stakeholders.

8-6b Contributions of Directors

• Boards of directors can assist small businesses by
offering objective counsel and assistance to their chief
executives.

• Directors can fill gaps in the expertise of a
management team and monitor its activities.

• An active board of directors serves management by:
• Reviewing major policy decisions.
• Advising on external business conditions and on proper

reaction to the business cycle.
• Providing informal advice from time to time on specific

problems that arise.
• Offering access to important personal contacts.

8-6c Compensation of Directors

• The compensation paid to board members varies greatly, and
some small firms pay no fees at all.

• If compensation is provided, it is usually offered in the form of an
annual retainer, board meeting fees, and pay for committee work
(evaluating executive compensation, nominating new board
members, and overseeing the work of the company’s auditors).
• Annual retainers for board work typically range from $5,000 to $10,000,

and board meeting fees can run from $500 to $2,000 per meeting.
• These costs are usually in addition to reimbursements for travel

expenses related to board meetings and the financial burden of
providing directors and officers liability insurance, which protects
board members if they should be sued in the course of carrying
out their duties as directors.

• Sometimes, board members are also given a small percentage of
the company’s profits as a bonus for their participation.

8-6d An Alternative:
An Advisory Board

• Some individuals are reluctant to join a board
of directors because outside directors may be
held responsible for harmful or illegal company
actions, even though they are not directly
involved in wrongdoing.
• Thus, many small companies use an advisory board

as an alternative to a board of directors.
• Advisory board – A group that serves as an alternative to

a board of directors, acting only in an advisory capacity.
• In other words, it has no legal authority over the owner or the

company.

Key Terms

advisory board
B corporation
board of directors
C corporation
corporate charter
corporation
general partner
joint and several liability
legal entity
limited liability company
limited partners
limited partnership
management team
nonprofit corporation

organizational test
partnership
partnership agreement
piercing the corporate veil
preemptive right
professional corporation
reciprocation
S corporation (Subchapter S

corporation)
social capital
social network
sole proprietorship
strategic alliance
unlimited liability

�CHAPTER�8��The Organizational Plan: Teams, Legal Structures, Alliances, and Directors

LEARNING OBJECTIVES

8-1 BUILDING A �MANAGEMENT TEAM (slide 1 of 2)
8-1 BUILDING A �MANAGEMENT TEAM (slide 2 of 2)

8-1a Achieving Balance

8-1b The Solo Startup �Is Still an Option
8-1c Expanding Social Networks (slide 1 of 2)
8-1c Expanding Social Networks (slide 2 of 2)
8-2 COMMON LEGAL �FORMS OF ORGANIZATION
8.1 Forms of Legal Organization for Small Businesses
8.2 Percentage of Small Businesses by Legal Form of Organization
8-2a The Sole Proprietorship Option (slide 1 of 2)
8-2a The Sole Proprietorship Option (slide 2 of 2)

8-2b The Partnership Option (slide 1 of 6)
8-2b The Partnership Option (slide 2 of 6)
8-2b The Partnership Option (slide 3 of 6)
8-2b The Partnership Option (slide 4 of 6)
8-2b The Partnership Option (slide 5 of 6)
8-2b The Partnership Option (slide 6 of 6)

8-2c The C Corporation Option �(slide 1 of 6)
8-2c The C Corporation Option �(slide 2 of 6)
8-2c The C Corporation Option �(slide 3 of 6)
8-2c The C Corporation Option �(slide 4 of 6)
8-2c The C Corporation Option �(slide 5 of 6)
8-2c The C Corporation Option �(slide 6 of 6)
8-3 CONSIDERATIONS IN CHOOSING AN ORGANIZATIONAL FORM
8.3 Comparison of Basic Legal Forms of Organization (slide 1 of 2)
8.3 Comparison of Basic Legal Forms of Organization (slide 2 of 2)
8-4 SPECIALIZED LEGAL �FORMS OF ORGANIZATION

8-4a The Limited Partnership
8-4b The S Corporation

8-4c The Limited �Liability Company

8-4d The Professional Company
8-4e The Nonprofit Corporation
8-4f The B Corporation

8-5 FORMING STRATEGIC ALLIANCES
8.4 Most Popular Small Business Alliances by Type
8-5a Strategic Alliances �with Large Companies
8-5b Strategic Alliances �with Small Companies
8-5c Setting Up and Maintaining Successful Strategic Alliances (slide 1 of 2)
8-5c Setting Up and Maintaining Successful Strategic Alliances (slide 2 of 2)
8-6 MAKING THE MOST OF A BOARD OF DIRECTORS

8-6a Selection of Directors
8-6b Contributions of Directors
8-6c Compensation of Directors

8-6d An Alternative: �An Advisory Board

Key Terms

CHAPTER

9
The Location Plan

LEARNING OBJECTIVES

By studying this chapter, you should be able to…
9-1 Describe the five key factors in locating a brick-and-

mortar startup.
9-2 Discuss the challenges of designing and equipping

a physical

facility.

9-3 Recognize both the attraction and the challenges of

creating a home-based startup.
9-4 Understand the potential benefits of locating a

startup on the Internet.

9-1 LOCATING THE BRICK-AND-
MORTAR STARTUP

• The choice of a location for a physical facility is
often a one-time decision, but a small business
owner may later relocate a venture to reduce
operating costs, be closer to customers, or tap
other advantages.

9-1a The Importance of
the Location Decision

• Brick-and-mortar facility – The traditional physical facility from
which businesses have historically operated.

• The importance of the initial decision as to where to locate a brick-
and-mortar facility is underscored by both the high cost of such a
place and the hassle of pulling up stakes and moving an
established business.

• Also, if the site is particularly poor, the business may never
become successful, even with adequate financing and superior
managerial ability.

• The choice of a good location is much more vital to some
businesses to others.
• Example: The location decision for an apparel store would be much

different than the location decision for a painting contractor’s office.

9-1b Key Factors in Selecting
a Good Location (slide 1 of 9)

• Five key factors guide the location selection
process:
1. Customer accessibility.
2. Business environment conditions.
3. The availability of resources.
4. The entrepreneur’s personal preference.
5. Site availability and costs.

9.1 Factors in Determining a Good Business Location

9-1b Key Factors in Selecting
a Good Location (slide 2 of 9)

• Relevant questions to ask when making the
location decision include the following:
• Neighbor mix: Who’s next door?
• Security and safety: How safe is the neighborhood?
• Services: Does the city provide reliable trash

pickup, for example?
• Past tenants’ fate: What happened to previous

businesses in that location?
• Location’s life-cycle stage: Is the area developing,

stagnant, or in decline?

9-1b Key Factors in Selecting
a Good Location (slide 3 of 9)

CUSTOMER ACCESSIBLITY
• Customer accessibility is a key location factor in

industries with high transportation costs, as well as
those that must provide handy access for targeted
customers to avoid losing those customers to more
conveniently located competitors.

BUSINESS ENVIRONMENT CONDITIONS
• Business environment factors affecting the location

decision are climate, competition, legal requirements,
and the tax structure.

9-1b Key Factors in Selecting
a Good Location (slide 4 of 9)

• Although most state and city governments go to great
lengths to support startups, nearly all cities have
regulations that restrict new business operations under
certain circumstances.
• Zoning ordinances – Local laws regulating land use.
• These ordinances often apply to factors related to:

• Traffic and parking.
• Signage.
• Nonrelated employees working in a home.
• The use of a home more as a business than as a residence.
• The sale of retail goods to the public.
• The storage of hazardous materials and work-related equipment.

9-1b Key Factors in Selecting
a Good Location (slide 5 of 9)

AVAILABILITY OF RESOURCES
• Availability of resources, such as raw materials and

crucial suppliers, can be important to location
decisions.
• Proximity to important sources of raw materials and an

appropriate labor supply are particularly critical considerations
in the location of most manufacturing businesses.

• Access to key suppliers influences site selections for retail
outlets and restaurant operations.

9-1b Key Factors in Selecting
a Good Location (slide 6 of 9)

• Availability of suitable labor can also be important to
location decisions.
• The suitability of the labor supply for a manufacturer depends

on the nature of its production process.
• Labor-intensive operations need to be located near workers with

appropriate skills and reasonable wage requirements.
• A history of acceptable levels of labor productivity and peaceful

relations with employers in a particular area is beneficial to
almost any production operation.

• Companies that depend on semiskilled or unskilled workers
usually locate in an area with surplus labor, while other firms may
need to be close to a pool of highly skilled labor.

• Access to good transportation is important to many
companies, particularly retail stores and small
manufacturers.

9-1b Key Factors in Selecting
a Good Location (slide 7 of 9)

PERSONAL PREFERENCE OF THE ENTREPRENEUR
• The entrepreneur’s personal preference is a practical

consideration in selecting a location.
• Despite a world of alternatives, small business owners often

choose to stay in their home community, which may offer certain
unique advantages that cannot be found elsewhere.
• The entrepreneur may generally appreciate and feel comfortable with

the atmosphere of his or her home community.
• It may be easier to establish credit with hometown bankers who know

an entrepreneur’s personal background and reputation.
• Having personal connections in the local business community can

lead to invaluable business advice.
• The small business owner probably will have a better idea of their

local residents’ tastes and preferences than would an outsider.
• Friends and relatives in the community may be quick to buy the

product or service and spread positive reports about it to others.

9-1b Key Factors in Selecting
a Good Location (slide 8 of 9)

SITE AVAILABILITY AND COSTS
• Once an entrepreneur has settled on a certain area for

his or her business, a specific site must still be chosen.
• If an entrepreneur’s top location choices are

unavailable, other options must be considered.
• One alternative is to share facilities with other enterprises.

• Business incubator – A facility that provides shared space,
services, and management assistance to new businesses.

• The purpose of business incubators is to see new businesses hatch,
grow, and then move on, so the situation is temporary by design.

• Alternatives that are more permanent are the shared-office
arrangement and “co-working” movement, which involves
shared working spaces that allow workers to work and connect
in the same location.

9-1b Key Factors in Selecting
a Good Location (slide 9 of 9)

• Assuming that suitable building space is available, the
entrepreneur must decide whether to lease or buy.
• Although most small business owners choose to purchase,

there are a number of benefits to leasing:
• A large outlay is avoided.
• Risk is reduced by minimizing investment and by postponing

commitments for space until the success of the business is
assured and facility requirements are better known.

• It is usually more affordable to lease in a high-image area than to
buy in a prime location.

• The entrepreneur can focus on running the business rather than
managing a property.

• However, there clearly are disadvantages to leasing as well.
• A well-selected purchased property appreciates in value.
• No permission is needed to make changes or additions to the property.

9-2 DESIGNING AND EQUIPPING
THE PHYSICAL FACILTIES

• A well-written location plan should describe the
physical space in which the business will be
housed and include an explanation of any
equipment needs.
• The plan may call for a new building or an existing

structure, but ordinarily a new business that needs
physical space will occupy an existing building,
perhaps after some minor or major remodeling.

9-2a Challenges in Designing
the Physical Facilities

• The general suitability of a building depends on the functional
requirements of the business.
• It should not be too large and extravagant nor too small and restrictive.

• Important factors to consider include:
• The age and condition of the building.
• Potential fire hazards.
• The quality of heating and air conditioning systems.
• The adequacy of lighting and restroom facilities.
• Appropriate entrances and exits.

• The comfort, convenience, and safety of the business’s
employees and customers must not be overlooked.

• The square feet of office area per employee has decreased in
recent years.

• Office configurations have also gone through a substantial
transformation, with a shift toward open designs.

9-2b Challenges in Equipping
the Physical Facilities (slide 1 of 3)

• The final step in arranging for physical facilities
is the purchase or lease of equipment and
tools.
• Research has shown that, overwhelmingly, owners

of small businesses would rather own their
equipment than lease it.

9.2 Small Business Owners Choose Buying over Leasing

9-2b Challenges in Equipping
the Physical Facilities (slide 2 of 3)

MANUFACTURING EQUIPMENT
• Machines used in factories can include either general-

purpose or special-purpose equipment.
• General-purpose equipment – Machines that serve many

functions in the production process.
• General-purpose equipment requires minimal investment and is

easily adapted to various operations.
• General-purpose equipment also offers flexibility.

• Special-purpose equipment – Machines designed to serve
specialized functions in the production process.

• Special-purpose equipment offers a narrower range of possible
applications and, thus, has little or no resale value.

• Special-purpose equipment is more expensive to buy or lease.

9-2b Challenges in Equipping
the Physical Facilities (slide 3 of 3)

RETAILING EQUIPMENT
• Small retailers must have merchandise display racks and

counters, storage racks, shelving, mirrors, shopping carts, cash
registers, and other equipment that facilitates selling.

• Fixtures and other retailing equipment should create an
atmosphere appropriate for customers in the retailer’s target
market.

OFFICE EQUIPMENT
• Every business office—even a home office—needs furniture, filing

and storage cabinets, and other such items.
• Entrepreneurs should choose office equipment (like computers

and communications systems) that reflects the latest advances in
technology applicable to a particular business.

9-2c Business Image

• All new ventures, regardless of their function,
should project an image that is appropriate to
and supportive of the business and its
intentions.

9-3 LOCATING THE STARTUP IN
THE ENTREPRENEUR’S HOME

• Home-based business – A business that
maintains its primary facility in the residence of
the owner.

• Launching a business from home has become
a viable permanent option for an increasing
number of startups.

9-3a The Attraction of
Home-Based Businesses (slide 1 of 2)

• Home-based businesses are started both for financial
reasons and to accommodate family lifestyle
considerations, such as the following:
• To get a business up and running quickly, and with little risk.
• To do something you love to do, and get paid for doing it.
• To be your own boss, and reap the rewards from your efforts.
• To have the flexibility to spend more time with family and

friends.
• To save time and money wasted on daily commutes.

9-3a The Attraction of
Home-Based Businesses (slide 2 of 2)

FINANCIAL CONSIDERATIONS
• Locating a business at home helps increase profits by reducing

costs.
• Starting at home allows you to build your business slowly, without

the pressing burden of having to find the cash to cover rent for
office space every month and pay other expenses.

• It also allows you to deduct costs related to space used in the
home for business from any taxes that may be owed from the
venture’s income, as long as you conform to the rules established
by the IRS.

LIFESTYLE CONSIDERATIONS
• Entrepreneurs who locate business operations in the home are

frequently motivated by the desire to spend more time with family
members.

9-3b The Challenges of
Home-Based Businesses

PROFESSIONAL IMAGE
• Maintaining a professional image when working at home is a

major challenge for many home-based entrepreneurs.
• If clients or salespeople visit the home-based business, it is critical

that a professional office area be maintained.

LEGAL CONSIDERATIONS
• Local laws, such as zoning ordinances, can pose serious problems

for home-based businesses.
• There are also tax issues related to a home-based business.

• Example: A separate space must be clearly devoted to business
activities if an entrepreneur is to claim a tax deduction for a home office.

• Insurance considerations also affect a home-based business.
• A homeowner’s policy is not likely to cover an entrepreneur’s

business activities, liabilities, and equipment.

9-4 E-COMMERCE: LOCATING A
STARTUP ON THE INTERNET

• E-commerce – Electronic commerce, or the
buying and selling of products or services on
the Internet.

• The Internet can significantly boost a small
company’s financial performance.

9-4a Benefits of
E-Commerce for Startups

• E-commerce can benefit a startup in many
ways.
• It allows a new venture to compete with bigger

businesses on a more level playing field.
• The Internet blurs geographic boundaries and

expands a small company’s reach.
• An e-commerce operation can help a startup with

early cash flow problems by compressing the sales
cycle—that is, reducing the time between receiving
an order and converting the sale to cash.

• The shorter cycle translates into quicker payments from
customers and improved cash flows to the business.

9-4b E-Commerce
Business Models (slide 1 of 7)

• A business model is an analysis of how a firm
plans to create profits and cash flows given its
revenue sources, its cost structures, the
required size of investment, and sources of
risk.

• Online companies differ in their decisions
concerning which customers to serve, how
best to become profitable, and what to include
on their websites.

9.3 Basic E-Commerce Business Models

9-4b E-Commerce
Business Models (slide 2 of 7)

TYPE OF CUSTOMERS SERVED
• E-commerce businesses are commonly distinguished

according to customer focus.
• There are three major categories of e-commerce

business models based on the type of customers
served:
1. Business-to-business (B2B).
2. Business-to-consumer (B2C).
3. Consumer-to-consumer (C2C).

9-4b E-Commerce
Business Models (slide 3 of 7)

• Business-to-business (B2B) model – A business
model based on selling to business customers
electronically.
• Example: Hewlett-Packard.
• The dollar amounts generated by firms using a B2B model are

significantly greater than those for firms with a B2C model.
• B2B operations come in all shapes and sizes, but the most

popular form of this strategy emphasizes sales transactions.
• A unique form of B2B trade involves work outsourcing, which

helps connect freelancers and other specialists with
companies that need their services.

9-4b E-Commerce
Business Models (slide 4 of 7)

• Business-to-consumer (B2C) model – A business
model based on selling to final consumers electronically.
• Example: Amazon.
• The B2C model offers three main advantages over brick-and-

mortar retailing:
1. Convenient use.
2. Immediate transactions.
3. Round-the-clock access to a broad array of products and services.

• B2C e-commerce businesses face unique challenges—
payment security risks and data breaches, customers who
refuse to purchase a product without first seeing or trying it, etc.

• However, they also enjoy the advantages of tremendous
flexibility by being able to change merchandise mixes and prices
quickly and easily modify the appearance of their online stores.

9-4b E-Commerce
Business Models (slide 5 of 7)

• Many producers and wholesalers today are using a
strategy sometimes referred to as disintermediation.
• Disintermediation – The bypassing of a middleman by a

producer or wholesaler in order to sell its product or service
directly to the final consumer.

• Consumer-to-consumer (C2C) model – A business
model usually set up around Internet auction sites that
allow individuals to list items available for sale to
potential bidders.
• Auction site – Web-based businesses offering participants

the ability to list products for consumer bidding.
• Example: eBay.
• Auction sites generate most of their revenue through listing

fees and commissions.

9.4 Selling Your Item on eBay

Step 1: Set up an eBay seller’s account, which is free of charge.
Step 2: Create a listing for the item to be offered for sale.
Step 3: Manage your listing to see if anyone has bid on or purchased your item.
Step 4: Wrap up the sale with your buyer by communicating with the buyer,

receiving payment, shipping the item, and leaving feedback for the
buyer.

Source: Adapted from “Getting Started Selling on eBay,” http://pages.ebay.com/
help/sell/sell-getstarted.html, accessed January 22, 2018.

9-4b E-Commerce
Business Models (slide 6 of 7)

THE NATURE OF ONLINE PRESENCE
• A second broad way of categorizing e-commerce models relates

to a firm’s intended level of online presence.
• The role of a website can range from merely offering information

(information-based model) and basic content (content-based model)
to enabling complex business transactions (transaction-based
model).

• Information-based model – A business model in which a website
simply offers information about a business, its products, and other
related matters.
• It is typically just a complement to an existing brick-and-mortar

facility.

9-4b E-Commerce
Business Models (slide 7 of 7)

• Content-based model – A business model in which a website
provides information (content) that attracts visitors, usually with
the hope of generating revenue through advertising or by directing
those visitors to other websites.
• The content-based model does not provide the ability to make

purchases.
• Transaction-based model – A business model in which a

website provides a mechanism for buying or selling products or
services.

• Emerging platforms for online ventures include:
• Blogging.
• Podcasting.
• Creating a following on YouTube or Pinterest to generate revenue

from ads and sponsorships, donations, subscription charges, or fees
for access to live events.

9-4c Internet-Based Businesses and
the Part-Time Startup Advantage

• Instead of giving up their existing job, many
entrepreneurs start Internet-based businesses
on a part-time basis while still holding on to
their full-time job.
• This approach reduces the personal risk of the

entrepreneur if the venture should fail.
• On the other hand, holding on to a full-time career

while launching a new venture on the side can be
extremely grueling due to the amount of hours that
must be spent working two careers.

Key Terms

auction sites
brick-and-mortar facility
business incubator
business-to-business (B2B)

model

business-to-consumer (B2C)

model
consumer-to-consumer (C2C)

model

content-based model
disintermediation
e-commerce
general-purpose equipment
home-based business
information-based model
special-purpose equipment
transaction-based model
zoning ordinances

�CHAPTER�9��The Location Plan

LEARNING OBJECTIVES

9-1 LOCATING THE BRICK-AND-MORTAR STARTUP
9-1a The Importance of �the Location Decision
9-1b Key Factors in Selecting �a Good Location (slide 1 of 9)
9.1 Factors in Determining a Good Business Location
9-1b Key Factors in Selecting �a Good Location (slide 2 of 9)
9-1b Key Factors in Selecting �a Good Location (slide 3 of 9)
9-1b Key Factors in Selecting �a Good Location (slide 4 of 9)
9-1b Key Factors in Selecting �a Good Location (slide 5 of 9)
9-1b Key Factors in Selecting �a Good Location (slide 6 of 9)
9-1b Key Factors in Selecting �a Good Location (slide 7 of 9)
9-1b Key Factors in Selecting �a Good Location (slide 8 of 9)
9-1b Key Factors in Selecting �a Good Location (slide 9 of 9)
9-2 DESIGNING AND EQUIPPING THE PHYSICAL FACILTIES
9-2a Challenges in Designing �the Physical Facilities
9-2b Challenges in Equipping �the Physical Facilities (slide 1 of 3)
9.2 Small Business Owners Choose Buying over Leasing
9-2b Challenges in Equipping �the Physical Facilities (slide 2 of 3)
9-2b Challenges in Equipping �the Physical Facilities (slide 3 of 3)

9-2c Business Image

9-3 LOCATING THE STARTUP IN THE ENTREPRENEUR’S HOME
9-3a The Attraction of �Home-Based Businesses (slide 1 of 2)
9-3a The Attraction of �Home-Based Businesses (slide 2 of 2)
9-3b The Challenges of �Home-Based Businesses
9-4 E-COMMERCE: LOCATING A STARTUP ON THE INTERNET
9-4a Benefits of �E-Commerce for Startups
9-4b E-Commerce �Business Models (slide 1 of 7)
9.3 Basic E-Commerce Business Models
9-4b E-Commerce �Business Models (slide 2 of 7)
9-4b E-Commerce �Business Models (slide 3 of 7)
9-4b E-Commerce �Business Models (slide 4 of 7)
9-4b E-Commerce �Business Models (slide 5 of 7)
9.4 Selling Your Item on e Bay
9-4b E-Commerce �Business Models (slide 6 of 7)
9-4b E-Commerce �Business Models (slide 7 of 7)
9-4c Internet-Based Businesses and the Part-Time Startup Advantage

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