Solutions

Chapter 2 Pathway to Success: Process and Instruments
Chapter 2 Contents
Feasibility Analysis: Will My Idea Work? 38
Analyzing Product and/or Service Feasibility 38
Analyzing Market and Industry Feasibility 39
Analyzing Financial Feasibility 41
Using the Lean Startup Methodology 42
Creating a Business Model Canvas 43
What Is a Business Plan? 46
Do You Need a Business Plan? 47
Your Business Plan Is the Key to Raising Capital 48
The Business Plan Is an Operations/Execution Guide 48
Business Plan Components 49
Cover Page and Table of Contents 49
Executive Summary: A Snapshot of Your Business 50
Mission, Vision and Culture: Your Dreams for the Organization 50
Company Description -- Background and Track Record 50
Opportunity Analysis and Research --Testing Ideas 51
Marketing Strategy and Plan: Reaching Customers 52
Management and Operations: Making the Plan Happen 53
Financial Analysis and Projections: Translating Action into Money 54
Funding Request and Exit Strategy: The Ask and the Return 58
Appendices: Making the Case in Greater Detail 59
Business Plan Suggestions 59
Presenting Your Business Plan 60
Business Plan and Venture Competitions 61
Chapter 2 Overview
This chapter is an introduction to the concepts of feasibility analysis, lean startup, business
models, and business plans. The reasons for creating these documents and the recommended
contents and applications are discussed.
Chapter 2 Objectives
Learning Objective 2.1: Describe what a feasibility analysis is and choose when to create one.
Learning Objective 2.2: Articulate the Lean Startup methodology.
Learning Objective 2.3: Prepare a Business Model Canvas.
Learning Objective 2.4: Identify primary business plan contents.
Learning Objective 2.5: Summarize the various purposes for a business plan and the audiences
for one.
Learning Objective 2.6: Differentiate the components of a business plan.
Learning Objective 2.7: Recognize and demonstrate proper development and formatting of
a business plan.
Copyright © 2020 Pearson Education, Inc.

Chapter 2 Outline
I. Describe what a feasibility analysis is and choose when to create one. The feasibility
analysis essentially tests a business concept for viability through:
A. product and/or service feasibility,
B. market and industry feasibility, and
C. financial feasibility.
II. Articulate the lean start-up methodology.
The lean startup methodology is a hypothesis-driven approach for start-ups to validate
business models using:
A. Hypotheses often illustrated in a business model canvas
B. Minimum viable products
C. Pivots, perseverance, and perishing
D. Actionable metrics
E. Build–measure–learn loops
III. Prepare a Business Model Canvas and make a visual representation of the nine facets:
A. Key partners
B. Key activities
C. Key resources
D. Value propositions
E. Customer relationships
F. Channels
G. Customer segments
H. Cost structure
I. Revenue streams
IV. Identify primary business plan contents.
A. the story of what the business is and will be,
B. all costs and a marketing plan,
C. description of how the business will be financed, and
D. an estimate of projected earnings.
V. Summarize the various purposes of a business plan and the audiences for one.
A. A business plan is used by entrepreneurs to organize their thoughts before starting
a business and to determine business viability.
B. It can be used to raise money from investors and lenders. Almost always, bankers
and other potential investors will refuse to consider funding an entrepreneur who
does not have a business plan.
C. It can help guide the operation of the business.
VI. Differentiate the components of a business plan.
The parts of a business plan include a cover page; table of contents; executive summary;
mission, vision, and culture; company description; opportunity analysis; marketing
strategy and plan; management and operations; financial analysis and projections;
funding request; and exit strategy.
VII. Recognize and demonstrate proper development and formatting of a business plan.
A solid, viable business plan that is sloppy and filled with errors may be rejected on that
basis alone. The business plan should be well organized, neatly presented, and written in
correct English.

Chapter 2 Teaching Notes
Class Discussion Ideas:
1. Present this problem: The students want to go from your location to Wall Street, in
New York. Ask them how they would figure out how to get there. Some may say, use
MapQuest (or Google Maps or your car’s GPS system)—particularly if it is within
driving distance. Others may suggest getting train, subway, bus or airline schedules
(depending on your location). There may be some who recommend driving east,
north, or south until reaching New York City, and then finding Wall Street. Discuss
how there can be many ways to achieve the same goal. Explore the estimated travel
time and cost of each option. Emphasize that different financial costs and time
investments can be involved to accomplish the same goal. Next, ask what happens if
they simply get into a car and start driving with no particular destination in mind.
Make the connection with the road map to success.
2. The chapter’s opening quote, from Lewis Carroll, is: “If you don’t know where you
are going, any road will get you there.” Ask class how this pertains to business. How
does it relate to business plans?
3. Ask students to describe what they would want to know about a business before they
invested in it? What would determine how much they would invest? (Should help
with understanding of contents and rationale.) What would determine whether or not
they would invest at all?
4. Suggest that students imagine themselves working at a bank rather than being
individual investors. What is the role of the lending officer? (Looking for sales of
loans and making profitable loans that are repaid on time.) What would you need to
know about a business before approving a loan, or making a positive
recommendation to a loan committee?
5. Give students examples of different businesses to show distinctions in what a plan
could emphasize. Start with an example such as a student-run T-shirt silkscreen-
printing business. Then, progress to a restaurant or retail store. Next, present a high-
tech venture. Discuss commonalities and differences in what their respective
business plans should include and emphasize.
6. Show examples of well-formatted and poorly formatted business plans and ask
students for their reactions to each. Explore reasons why style and format matter.
7. Select an excellent business plan presentation and a poor one or develop one of each.
Demonstrate approximately one minute of each. Launch a discussion regarding
presentation quality.

Chapter 2 Lecture Enhancers
PPT Lecture Slides Chapter 2
Outside the Classroom:

http://www.rmahq.org: Risk Management Associates is an organization that provides
comparative financial information for businesses.
http://www.entrepreneurship.org: The Kauffman Foundation site provides a broad array of

resources and information for entrepreneurs, as well as significant financial resources to
support entrepreneurship education.
The Art of the Start: The Time-Tested, Battle-Hardened Guide for Anyone Starting Anything, by
Guy Kawasaki (Portfolio, 2004).
Business Model Generation: A Handbook for Visionaries, Game Changers, Challengers, by

Alexander Osterwalder and Yves Pigneur (John Wiley & Sons, 2010).
The Lean Startup: How Today's Entrepreneurs Use Continuous Innovation to Create Radically
Successful Businesses, by Eric Reis (Crown Business, 2011).
The Startup Owner’s Manual: The Step-by-Step Guide to Building a Great Company, by Steve
Blank and Bob Dorf (K & S Ranch, 2012).
Start Your Own Business, by Rieva Lesonsky (Entrepreneur Press, 4e, 2007).
Chapter 2 Key Terms

Actionable metrics 42
advertising 52
asset 56
balance sheet 56
breakeven point 57
business model 43
Business Model Canvas 43
business plan 46
cash flow statement 56
competitive analysis 52
culture 50
direct marketing 52
elevator pitch 60
environmental analysis 51
feasibility analysis 38
income statement 56
industry analysis 51
initial public offering (IPO) 59
Lean Startup 42

liability 56
marketing mix 52
marketing plan 52
minimum viable product 43
mission 50 mission statement 50
net worth 56
owner’s equity 56
profit and loss statement (P&L) 56
proof of market 51
public relations 52
publicity 52
target market 52
vision 50
Chapter 2 Class Activity Ideas and Group Exercises

1. Pick a familiar product or service, such as computers or fast food, and list several
companies for that product or service category—for example, Apple, IBM, Dell, and
Asus; or Sonic, McDonald’s, Wendy’s, KFC, and Burger King. Break students into
small groups and assign one company to each. Have each group create a list of key
competitors, including direct and indirect competition, and what makes the company
unique. Have them summarize this on a poster board and present it. Then, discuss how
each company might incorporate the information into their business plan.
2. Form several teams to create fictitious companies in different fields. Ask them to
answer the following about their company (when they have answered the questions,
explain that they have essentially created an Executive Summary for a business plan):
a. Name
b. Type of business (manufacturing, retail, wholesale, or service)
c. Location (city and state at a minimum)
d. Key product or service
e. Who will buy/use the product or service?
f. What makes the company different from its competition?
g. Why is this a good opportunity?
h. How will customers know about the product and be induced to buy it?
i. Who will manage the company? What are their qualifications?
j. How long will it take before the company is profitable?
k. How much will it cost to start the company?
l. Where will the start-up funds come from? If they are borrowed or invested, how
will investors or lenders be paid back or realize gains?
m. How will the owners exit from the company?
3. Divide the students into pairs. Distribute examples of excellent and poor executive
summaries from business plans to each pair. Ask the students to identify the
differences in the summaries and comment on them to the class. Depending upon class
size, the number of plans may range from 2 to 6.

4. How does voice inflection affect how an elevator pitch is received? Have the students
do some research on psychological studies of voice inflection. What things can you do
to be more convincing?
5. Give students a simple business plan or one from the text and have them write
elevator pitches to present in front of the class.
Chapter 2 Critical Thinking Exercises
2-1. Shawn is creating a business that provides advertising on public restroom stall
doors. He is funding the project from his personal savings of $5,000 and does not
expect to use any outside financing. Should he utilize the Lean Startup process?
Create Business Model Canvases? Develop a business plan? Why or why not?
L.O. 2.5 Summarize the various purposes for a business plan and the audiences for
one.
AACSB Application of knowledge
Shawn should first put his hypotheses into the Business Model Canvas
format and use the Lean Startup process to complete customer
discovery and test the viability of the concept. Once he has found a
sustainable, profitable model, he should develop a business plan for
funding and to guide his operations. He may find that he needs outside
funding or that what he had in mind is not practical.
2-2. Charity and Devon are planning to license technology from NASA that would
make it impossible to accidentally lock a child in a car. The technology is complex,
and the market analysis and financial assumptions take up a lot of pages. The two
women have written a 63-page business plan. Explain your concerns about the plan
considering the chapter text.
L.O. 2.7 Recognize and demonstrate proper development and formatting of a

business plan.
AACSB Application of knowledge & Analytical thinking
The plan is just too long. Investors and lenders will not want to sift through
that much information. Charity and Devon need to revise the plan to make
it more concise. They need to explain the complex technology in terms that
non-technical people can understand, but not so simplistically that technical
reviewers are put off.
2-3. What factors make the difference between a good business plan and an excellent
one?
L.O. 2.4 Identify the primary business plan contents.

AACSB Analytical thinking
A good plan contains all the required information but may not be interesting
or engaging. It may look functional but not attractive. Or, it may be too
elaborate. An excellent plan includes all the requisite information, is visually
appealing, is clear and concise, and draws the reader into the concept. An
excellent business plan “sells” the business.
2-4. Visit an Internet shopping site such as the Home Shopping Network
(http://www.HSN.com) or QVC (http://www.QVC.com). Select five products for
sale that you find interesting or unusual. Make a list of the products and your
explanation of the market opportunities they reflect.
L.O. 2.4 Identify the primary business plan contents.

AACSB Information technology and analytical thinking
Answers will vary.
2-5. Explain how this statement applies to business plans: Errors of omission can
sometimes be greater than errors of commission.
L.O. 2.7 Recognize and demonstrate proper development and formatting of a business
plan.
AACSB Reflective thinking and ethical understanding and reasoning
Leaving out parts of a business plan is worse than putting in too much
information. For example, an investor or lender cannot evaluate a plan
without a complete set of financial statements and may reject the entire
concept due to a lack of a cash flow statement, or other crucial item. Also,
there are ethical implications of excluding information that may represent a
substantial, known or expected, risk for the business.
Chapter 2 Key Concept Questions:
2-6. Explain why a prospective business founder might want to create a feasibility study or
Business Model Canvas before developing a complete business plan.
L.O. 2.1 Describe what a feasibility analysis is and choose when to create one.
AACSB Reflective thinking
A prospective business owner can save time and money by discovering early
in the process that an idea or strategy is not viable and that a pivot is in
order. He or she can avoid prolonged product development efforts that are
based upon “hunches” or hypotheses by testing the hypotheses and creating
products and services that are more viable.

2-7. How can investing time in the Lean Startup process save an entrepreneur time and
money in the short and long term?
L.O. 2.2 Articulate the Lean Startup methodology.

Answers should include:

a. Potential loss of investment and personal assets may be
avoided by determining viability up front.
b. The process of lean startup involves answering many questions about
business strategy, tactics, and operations before “opening the doors.”
This can save both time and money.
c. Preparation in general is a time saver because of the focus it brings.
2-8. What are the parts of a Business Model Canvas? How can the entire canvas assist an
entrepreneur?
L.O. 2.3 Prepare a Business Model Canvas.

The components of a Business Model Canvas are:

A. Key partners
B. Key activities
C. Key resources
D. Value propositions
E. Customer relationships
F. Channels
G. Customer segments
H. Cost structure
I. Revenue streams
It provides a visual representation of the business model that clarifies the
organizations thinking and compels customer inquiry and development. It can
assist in shortening the time to market and make the development process more
efficient.
2-9. Explain why the executive summary is the most important section of any business
plan.
L.O. 2.6 Differentiate the components of a business plan.

The executive summary is the most important section because it usually is

the first part of the plan that an investor or lender will read. It needs to
capture their attention and entice them to read more, or they will go no
further.
2-10. One mistake entrepreneurs make in their business plans is that of only including an

income statement. What other financial statements should be incorporated and why?

The balance sheet and cash flow statements should also be included.
Although not strictly financial statements, the financial ratios should also
appear. The balance sheet shows what the business owns and owes, as well
as its liquidity and debt structure. The cash flow statement shows the
inflows and outflows of cash from the business. Both documents help
readers understand the whole picture of company finances. For example, a
business can be profitable but temporarily in a poor cash flow situation.
2-11. Print an assignment or any body of text, with 1-inch margins, double-spaced, using
12-point Times New Roman font. Then, print the same document with 0.8-inch
margins, single-spaced, using a 10-point Arial typeface. Which is easier to read?
Why? How would this relate to a business plan?
L.O. 2.7 Recognize and demonstrate proper development and formatting of a business
plan.
The former is easier to read than the latter. The document has space around
the text and the font size is more legible. The same is true for business plans.
2-12. Name three categories of investors/lenders that might have an interest in your
business plan.
L.O. 2.5 Summarize the various purposes for a business plan and the audiences for one.
Answers will vary depending upon the business interests of the student. They
typically include bankers, venture capitalists, angel investors, friends, family,
and crowd funders.
2-13. Why is it important to identify a business’s culture from the beginning?

Identifying an organization’s culture from the beginning is important

because it impacts all aspects of the business going forward, from hiring
to product development to customer service.

Chapter 2 Application Exercises
2-14. Prepare a Business Model Canvas for Honest Tea based on the business plan
included at the end of this chapter.
L.O. 2.3 Prepare a Business Model Canvas.

AACSB Application of Knowledge
Key Key Value Customer Customer

Partners Activities Propositions Relationships Segments
Tea growers Bottling Less sweet tea Consumers
(access to Marketing Organic build Niche
markets) product relationships markets
Retail stores Quenching through blogs Athletes
(new, novel thirst without and Health
products) the calories correspondence conscious
Performance Retailers have consumers
direct contact Consumers
with sales force of organic
Key Channels foods
Resources Retail health
Production food stores
capacity Independent
Marketing sales
expertise representatives
Funding for (Really not
startup - $1.1 addressed well
million in plan)
Cost Structure Revenue Streams
Bottling by outside vendor Paying for a less sweet alternative to energy
Tea and sweetener drinks and/or a more flavorful alternative to
water
Revenue type: sale of product (bottled iced tea)
2-15. Call or visit an entrepreneur in your community to discuss business plans.

a. Ask whether he or she wrote a business plan before starting the business. Since
then?
b. If the owner did write a plan, for what has it been used?
c. If the owner did not write a plan, why not?
d. Did the owner have any assistance in writing or reviewing the plan?
e. If so, what was the source of assistance?
L.O. 2.5 Summarize the various purposes for a business plan and the audiences for
one.
The answers will vary but should respond to each part of the exercise.
Chapter 2 Exploring Online
2-16. Find and provide the URL for a business plan on the Internet. Examine it to see
whether it follows the guidelines provided in this text. Use a highlighter to mark the
sections of the plan that are present. Then, make a list of missing or incomplete
sections. Indicate how it does/does not follow the “rules” for formatting and
content. Is the plan viable? Why or why not? Would you invest in it? Why or why
not?
L.O. 2.6 Differentiate the components of a business plan

AACSB Application of knowledge and reflective thinking
The student should cite the URL and include a business plan from the
Internet that has each part of the plan highlighted. Often, there are missing,
or incomplete sections and the students should list them. Then, there should
be formatting and content comments/critiques. The student should evaluate
viability and the rationale for the answer. He/she should do the same with
the question of whether or not to invest.
2-17. Find a Business Model Canvas example online (can be a video). Compare its
hypotheses to the types identified in the Business Model Canvas section of the
chapter. What has been added? What is missing?
L.O. 2.3 Prepare a Business Model Canvas

AACSB Application of knowledge and reflective thinking
Students will find a variety of BMCs on the web. Some will be full of
description and information, while others will have barely any hypotheses.
Clearly, the specifics will vary. Some students may find mission model or
lean canvases as well.
Chapter 2 In Your Opinion
2-18. If an entrepreneur presents a business plan that an investor believes is deliberately

vague and has provided inflated financial statements, what should that investor do?
L.O. 2.7 Recognize and demonstrate proper development and formatting of a

business plan.
AACSB Ethical understanding and reasoning.
Recommendations will vary but should note the importance of clarity and
realistic projections. One answer will probably be that the investor should
decline the opportunity. Another may be to probe for better, more realistic
information.
2-19. What, if any, value do you see in the hypothesis-driven approach of the lean start-
up, with its iterative processes? How does this compare to the value in the
traditional linear process of creating a business plan? How do they conflict, if at
all? How do they complement one another?

Students may see that the lean startup lends itself to opportunities to fail
early and often but minimize the risk of fully scaling without a good model.
It may lead to a higher business success rate. They may comment on the
intuitive nature of generating hypotheses and the scientific process of testing
the hypotheses. The lean startup process is more iterative or even circular
than the linear business plan development process. While a business plan
may be of value for financing or operations, it does not explore the customer
discovery and validation of lean startup. They don’t conflict as much as they
take different perspectives. They complement one another because the
resources for one support the other.
Suggested Answers for Chapter 2 Case Studies

Short Case Study Analysis: Frankie’s Challenge: Customer Discovery
2-20. What specific steps of customer discovery are described above? What, if anything,
is missing?
Frankie conducted several steps of customer discovery including:
observation of problems for specific target customers, identification of value
propositions, brainstorming, hypothesis generation, creation of evolving
Business Model Canvases, pivots, and customer interviews. Business
interviews are missing.
2-21. How might Frankie improve her chances of success? Identify a minimum of five
ways.
Frankie could improve her chances of success by incorporating more entities
into the process and increasing her understanding of the entire pictures.
Some specifics include:

 Complete customer interviews with independent funeral homes
 Create and test an MVP
 Partner with a website developer
 Worth with an industry association
 Plan to attend a professional association meeting and/or tradeshow
 Understand the competition better
2-22. What customer segments and value propositions would you suggest apply for this
business? How would you test them?
Customer Segment Value Propositions Tests

Consumers – immediate Convenience, comfort, ease- Provide partial online
need of-use, speed options to current
customers. Interview prior
customers.
Consumers – pre-planning Convenience, comfort, ease- Use wireframe MVP to
of-use, privacy gather emails and contact.
Provide partial online
options for inquiries at
present locations. Interview
new customers.
Independent funeral homes Cost savings, efficiency Conduct customer discovery
interviews with specific
pass/fail criteria.
Honest Tea Business Plan
The Honest Tea Business Plan is included in Chapter 2 to illustrate what a real company did as
an early plan. This can be discussed in class or given as an assignment. The “Exploring
Online” questions from the chapter are a good starting point.

ENTREPRENEURSHIP: Starting and
Operating a Small Business
Fifth Edition
Chapter 2
Pathways to Success:
Processes and Instruments
Copyright © 2020, 2016, 2013 Pearson Education, Inc. All Rights Reserved
Learning Objectives (1 of 2)
2.1 Describe what a feasibility analysis is and choose when
to create one.
2.2 Articulate the Lean Startup methodology.
2.3 Prepare a Business Model Canvas.
2.4 Identify primary business plan contents.
Learning Objectives (2 of 2)
2.5 Summarize the various purposes for a business plan
and the audiences for one.
2.6 Differentiate the components of a business plan.
2.7 Recognize and demonstrate proper development and
formatting of a business plan.
2.1: Feasibility Analysis: Does My
Idea Work? (1 of 2)
The time and energy involved in generating and exploring
business ideas can be extensive, with the SBA reporting
that, for many entrepreneurs, the process can take years.
“If you don’t know

where you are going,
any road will get you
there.” —Lewis
Carroll, English
author
Feasibility Analysis: Does My Idea
Work? (2 of 2)
feasibility analysis - a study to assist in making the go/no
go decision based on a close examination of
product/service, market, industry, and financial data in a
sufficient degree of detail to ensure confidence in the results.
The feasibility analysis essentially tests a business concept
for viability in three areas:
1. product and/or service feasibility,
2. market and industry feasibility, and
3. financial feasibility.
Analyzing Product and/or Service
Feasibility (1 of 2)
Entrepreneurs are often described as committed to their
business idea.
• They take on an almost religious zeal and essentially fall in
love with the concept of the product or service, creating a
fantasy of what the business will be.
• A product or service is only worthwhile pursuing if it can be
produced and delivered at a profit in an ongoing manner.
• In order to avoid such unwelcome surprises, you can
create the production design for your product and create a
working model, called a prototype, fabricated for testing by
laboratories and prospective customers.
Analyzing Product and/or Service
It is important to perform this feasibility study in order to avoid
wasting valuable resources.
An amazing product or innovative service would not
necessarily translate into enough sales to sustain your
business.
Analyzing Market and Industry
One tool that is frequently used for industry analysis is the
“five forces” model created by Michael Porter of Harvard
University, which focuses on the competitive intensity of a
market.
The five industry forces identified by Porter are essentially:
1. existing competitive rivalry,
2. barriers to entry,
3. threat of substitutes,
4. supplier power, and
5. buyer power.
Analyzing Market and Industry
Figure 2-1 Porter’s Five Forces of Competition in an Industry
Existing Competitive Rivalry
Key aspects of intense rivalry, according to Porter, include:
• Many firms of approximately the same size
• An industry experiencing slow growth
• Lack of differentiation
• Low switching costs for customers
• High fixed costs
• Perishable products
• The need to create new production capacity in large increments
• High barriers to exiting
• Diverse rivals
Barriers to Entry
In an industry the threat of new entrants is largely defined
by the strength of the barriers erected to prevent them.
According to Porter, sources of barriers to entry include:
• Capital requirements
• Cost advantages
• Economies of scale
• Access to distribution channels
• Product differentiation
• Government policy
Threat of Substitutes
The level of threat posed by alternative products and
services to industry customers matters.
Some defining factors include:
• Convenience
• Price competitiveness
• Supply availability
• Switching costs
• Public policies
Supplier Power
The less bargaining power and control the suppliers of raw
materials, components, and labor have over competitors,
the more attractive the industry.
Porter suggests that suppliers are more powerful when the
following industry factors apply:
• There is domination by a few companies.
• The products are differentiated.
• Switching costs are high.
• Substitutes are not readily available.
• They can threaten to move into the business themselves.
• The industry is not important to the supplier.
Buyer Power
This force is similar to that of suppliers, but on the demand
side. According to Porter, buyers are more powerful in an
industry if:
• They are concentrated.
• They purchase a lot.
• Products are undifferentiated or standard.
• Products are not a big part of the overall cost.
• Profits are low.
• Product quality is not important.
• Products do not save money for the buyer.
Analyzing Financial Feasibility
Having completed the product or service feasibility analysis
and also conducted one for the market and industry, you
can complete the process by assessing the financial
viability of your business idea.
• This analysis does not need to be detailed.
• The amount of start-up capital required will be a function
of the size and type of organization you are starting.
• An entrepreneur can assess feasibility better with a
reasonable projection of revenues, based on anticipated
pricing and volume.
• Finally, cost factors should be calculated and returns on
investment projected.
2.2: Using the Lean Startup
Methodology (1 of 3)
Lean Startup is a hypothesis driven approach to business
startup using iterative development.
Figure 2-2 Build–Measure–Learn Loop
Using the Lean Startup Methodology
(2 of 3)
The process of focusing on speed in product development

works toward ensuring product-market fit.
If a start-up’s products are not a good fit with its markets,

the likelihood of success is slim at best.
The process also leads to the generation of actionable

metrics, which are measurements of the key drivers of the
start-up business that guide informed decisions and
actions.
Using the Lean Startup Methodology
(3 of 3)
Start-ups create minimum visible products (MVP) – a

model or version of a new product that is designed to secure
maximum customer feedback with minimal effort.
By testing MVPs, start-ups avoid wasting precious resources

developing product features and benefits that customers
don’t want or need.
Once hypotheses are tested, start-ups can pivot (change the

model to some extent, but keep parts of it), persevere
(continue the same path), or perish (discontinue the start-up).
2.3: Creating a Business Model Canvas
(1 of 8)
business model - a company’s plan to generate revenue

and make a profit from operations.
The canvas includes nine core building blocks that are
intended to supply answers to critical questions. These
building blocks are meant to be implemented in the
company.
Creating a Business Model Canvas
(2 of 8)
1. Customer Segments (CS): the consumers for whom

the company creates value
I. Mass market—large, broadly similar group of
customers
II. Niche market—narrow, specialized, specific
III. Segmented market—groups with slightly different
needs and problems
IV. Diversified markets—segments that aren’t related
and have very different needs
V. Multi-sided markets—generally are composed of
supplier and customer segments that are all served
(3 of 8)
2. Value Proposition (VP): the reason customers select

the products/ services
I. Newness
II. Performance
III. “Getting the job done”
IV. Design
V. Brand/status
VI. Price
VII. Cost reduction
VIII.Risk reduction
IX. Accessibility
X. Convenience/usability
(4 of 8)
3. Channels (CN): how the company reaches and

communicates with customer segments
I. Own channels versus partners
II. Direct (sales force, Web sales, own stores) versus
indirect (partner stores, wholesalers)
(5 of 8)
4. Customer Relationships (CR): types established

through consumer segments reached
I. Personal assistance
II. Dedicated personal assistance
III. Self-service
IV. Automated services
V. User communities
VI. Co-creation
(6 of 8)
5. Revenue Streams (R$): how funds are generated

I. Asset sales
II. Usage fee
III. Subscription fees
IV. Lending/renting/leasing
V. Licensing
VI. Brokerage fees
VII. Advertising fees
(7 of 8)
6. Key Resources (KR): that which is critical to making

the model function
I. Physical
II. Financial
III. Intellectual
IV. Human
7. Key Activities (KA): critical actions for success
I. Production
II. Problem solving
III. Platform/network
(8 of 8)
8. Key Partnerships (KP): the particular suppliers and

partners needed in the network
I. Strategic alliances between non-competitors
II. Cooperation (strategic alliances between
competitors)
III. Joint ventures
IV. Buyer–supplier relationships
9. Cost Structure (C$): all costs of operations
2.4: What Is a Business Plan?
business plan - a document that thoroughly explains a
business idea and how it will be carried out.
The plan should include the following:
• the story of what the business is and hopes to become,
• all costs and a marketing plan,
• description of how the business will be financed, and
• an estimate of projected earnings.
2.5: Why Do You Need a Business
Plan?
• Whether you are planning a microenterprise with virtually
no start-up costs or a multimillion-dollar venture, you will
find a business plan an essential tool.
• A plan can also help you determine on paper whether your
business is viable before you make mistakes in the real
world—allowing you to adjust accordingly.
• The business plan is vital to current and proposed
businesses as a guide to operations and direction, which
can be modified as the organization evolves.
Your Business Plan Is the Key to
Raising Capital
As mentioned, bankers
and other potential
investors will refuse to
see an entrepreneur who
does not have a business
plan (unless the loan or
investment you are
seeking is very small).
The financial projections
should be realistic and
attainable.
Writing a business plan will allow you to
address all angles of your business idea.
The Business Plan Is an Operations
Guide
• Whether or not you need to raise capital, a business plan
will be a vital tool for guiding the internal operations of
your enterprise.
• Business owners and managers increase the probability
of success by taking the plan in their heads and
committing it to paper.
• With your business plan as your benchmarking tool, you
can compare your company’s progress to your stated
plan.
2.6: Business Plan Components (1 of 2)
Exhibit 2-1 Business Plan Outline
Business Plan Components (2 of 2)
Cover Page and Table of Contents
• The cover page should be professional, neat, and
attractive
Executive Summary: A Snapshot of Your Business
• The executive summary has to be compelling and
comprehensive.
Mission and Culture: Your Dreams for
the Organization (1 of 2)
Each company has the opportunity to create its own unique
mission, vision, and culture.
• mission - a concise communication of strategy, including
a business definition and explanation of competitive
advantage.
• mission statement - a brief, written statement that
informs customers and employees what an organization’s
goal is and describes the strategy and tactics to meet it.
Mission and Culture: Your Dreams for
the Organization (2 of 2)
vision - a broader and more comprehensive perspective on
an organization than its mission; built on the core values
and belief systems of the organization.
culture - the beliefs, values, and behavioral norms of an
organization.
Company Description: Background
and Track Record
• If the company is already established, is a franchise, or is
the reincarnation of a previous business, there will be a
history to share with the reader of the plan.
• If this is a start-up venture, this section should describe
briefly the background story of the company, explaining
what you have done thus far and why you have done it.
• The legal form of the business (sole proprietorship,
corporation, LLC, partnership) should also be noted.
Opportunity Analysis and Research:
Testing Ideas (1 of 2)
industry analysis - a critical view of industry definition,
industry size and growth (or decline), product and industry
life cycle, and any current or anticipated legal or regulatory
concerns.
environmental analysis - a review that addresses the
roles of the community, region, nation, or the rest of the
world, as they relate to a business.
proof of market - an investigation that provides evidence
of a market opportunity.
Opportunity Analysis and Research:
Testing Ideas (2 of 2)
target market - groups defined by common factors such as
demographics, psychographics, age, or geography that are
of primary interest to a business.
competitive analysis - research that compares an
organization with several direct and indirect competitors by
name in a manner that is meaningful to targeted customers.
Marketing Strategy and Plan:
Reaching Customers (1 of 3)
marketing mix - the combination of the four factors: product,
price, place, and promotion—that communicates a marketing
vision.
• Product
• Price
• Promotion
• Place
• Products/Services. The product or service should meet
or create a customer need.
• Pricing. The product or service has to be priced so that
your target customers will buy it and the business will
make a profit.
• Promotion. Promotion consists of advertising, publicity,
and other promotional methods, such as discount
coupons or giveaways.
• Place. This is the venue from which you will sell and
distribute your product.
marketing plan - a statement of the marketing goals and
objectives for a business and the intended strategies and
tactics to attain them.
advertising - paid promotion through media outlets.
public relations - community activities that are designed
to enhance an organization’s image.
publicity - free promotion.
direct marketing - includes telemarketing, direct mail, in-
person selling, and other personalized promotional efforts.
Management and Operations: Making
the Plan Happen (1 of 2)
The people you hire and the processes you plan to
implement will be an essential part of your business plan.
This is where the rubber meets the road in the planning
process.
• The management team is often the deciding factor for a
potential investor’s decision to financially support a
business.
• The team must be composed of an effective balance of
members with technical expertise (e.g., engineering,
marketing, accounting, and operations), experience in
the field, and life experience.
Management and Operations: Making
the Plan Happen (2 of 2)
The description of the
physical location is similar to
the discussion of place in the
marketing mix but with the
emphasis on logistics and
workforce readiness.
The facilities and equipment for

your business should be
planned with the management
team.
Financial Analysis and Projections:
Translating Action into Money (1 of 3)
The financial section is the numeric representation of the business
plan.
It should demonstrate organizational viability in financial terms.
• Sources and uses of capital
• Capital flow projections
• Balance sheet projections
• Income statements for three years
• Breakeven analysis
• Ratio analysis
• Risks and assumptions
cash flow statement - a financial statement showing
cash receipts less cash disbursements or a business over
a period of time.
balance sheet - a financial statement summarizing the
assets, liabilities, and net worth of a business.
asset - any item of value.
liability - a business debt.
net worth - the difference between assets and liabilities.
owner’s equity - net worth.
income statement - a financial document that
summarizes income and expense activity over a specified
period and shows net profit or loss.
profit and loss statement (P&L) - an income statement.
breakeven point - when the volume of sales exactly
covers the fixed costs.
Funding Request and Exit Strategy:
The Ask and the Return
The exit strategy is the way in which you and/or your
investors expect to leave the company someday in a
planned and orderly way.
initial public offering (IPO) - first offering of corporate
stock to investors on the open (public) market.
Appendices: Making the Case in
Greater Detail
• The appendices will provide you with an opportunity to
strengthen your business plan with examples and details
that are not critical for inclusion in the main portions.
• Each appendix should be numbered and placed in the
plan according to the order of reference in the text.
• The appendices should be listed in your table of contents.
2.7: Business Plan Suggestions
As you put together your business plan, a number of
guidelines and suggestions can help you get the most value
for your time and effort.
• Write for your audience
• Show that you are invested in the company
• Be clear and concise
• Use current data and reports for your industry
• Choose a voice and stick with it
• Use a consistent, easy-to-read format
• Number and label
• Present it professionally
Presenting Your Business Plan (1 of 2)
A written business plan is only one component of the
business-planning process.
• Business plan presentations may be formal or informal,
and you may have anywhere from a few minutes to a
couple of hours for the complete presentation and
discussion.
• Presentations to venture capitalists may be limited to as
little as 5 to 20 minutes.
elevator pitch - a 30-second to 2-minute presentation that
conveys in an engaging way what a business is proposing
and why the listener should be interested.
Presenting Your Business Plan (2 of 2)
Exhibit 2-6 Venture Presentation Tips
Timing • Be prompt and ready to start on time.
• Use the entire time allocated, and use it productively.
Audience • Know your audience and tailor the presentation accordingly.
• Establish rapport with the audience.
Presentation Style • Dress appropriately and maintain a professional demeanor.

• Be enthusiastic, but not artificial or arrogant.
• Use proper pronunciation and language.
Presentation • Create a “hook” to capture the audience quickly.
Contents • Hit the highlights without going into excessive detail.
• Keep it simple by emphasizing key points and avoiding technical jargon and acronyms
that will lose your audience’s interest.
• Use visual aids, such as slides and sample or prototype products, to reinforce your
message without distracting from it.
• Emphasize the benefits of the opportunity so that they are clear to the audience.
• Conclude with a “Thank You.”
Follow-Up • Expect and prepare for questions. Be thoughtful and positive in your responses.
• Contact each audience member to move toward your goals.
Source: Adapted from Thomas W. Zimmerer and Norman M. Scarborough, Essentials of

Entrepreneurship and Small Business Management, 5th ed. (Upper Saddle River, NJ:
Prentice Hall, 2007).
Business Plan and Venture
Competitions
Numerous business plan and venture-funding competitions
are held each year for young people, undergraduate
students, graduate students (primarily MBAs), and
nonstudent professionals.
• Many business schools and classes hold internal competitions
and then advance winners to regional, national, and even
international events.
• Prizes may range from $500 to financing and professional-
services packages worth millions.
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Chapter 2 Pathway to Success: Process and Instruments

Copyright © 2020 Pearson Education, Inc.

Copyright © 2020 Pearson Education, Inc.

Copyright © 2020 Pearson Education, Inc.

Outside the Classroom:

http://www.entrepreneurship.org: The Kauffman Foundation site provides a broad array of

Business Model Generation: A Handbook for Visionaries, Game Changers, Challengers, by

Chapter 2 Key Terms

Copyright © 2020 Pearson Education, Inc.

Chapter 2 Class Activity Ideas and Group Exercises

Copyright © 2020 Pearson Education, Inc.

Chapter 2 Critical Thinking Exercises

L.O. 2.7 Recognize and demonstrate proper development and formatting of a

L.O. 2.4 Identify the primary business plan contents.

Copyright © 2020 Pearson Education, Inc.

L.O. 2.4 Identify the primary business plan contents.

Answers will vary.

Chapter 2 Key Concept Questions:

Copyright © 2020 Pearson Education, Inc.

L.O. 2.2 Articulate the Lean Startup methodology.

Answers should include:

L.O. 2.3 Prepare a Business Model Canvas.

The components of a Business Model Canvas are:

L.O. 2.6 Differentiate the components of a business plan.

The executive summary is the most important section because it usually is

Copyright © 2020 Pearson Education, Inc.

L.O. 2.6 Differentiate the components of a business plan.

2-13. Why is it important to identify a business’s culture from the beginning?

L.O. 2.6 Differentiate the components of a business plan.

Identifying an organization’s culture from the beginning is important

Copyright © 2020 Pearson Education, Inc.

L.O. 2.3 Prepare a Business Model Canvas.

Key Key Value Customer Customer

2-15. Call or visit an entrepreneur in your community to discuss business plans.

Chapter 2 Exploring Online

L.O. 2.6 Differentiate the components of a business plan

L.O. 2.3 Prepare a Business Model Canvas

Chapter 2 In Your Opinion

2-18. If an entrepreneur presents a business plan that an investor believes is deliberately

L.O. 2.7 Recognize and demonstrate proper development and formatting of a

L.O. 2.2 Articulate the Lean Startup methodology.

Suggested Answers for Chapter 2 Case Studies

Copyright © 2020 Pearson Education, Inc.

Customer Segment Value Propositions Tests

Honest Tea Business Plan

Copyright © 2020 Pearson Education, Inc.

“If you don’t know

The process of focusing on speed in product development

If a start-up’s products are not a good fit with its markets,

The process also leads to the generation of actionable

Start-ups create minimum visible products (MVP) – a

By testing MVPs, start-ups avoid wasting precious resources

Once hypotheses are tested, start-ups can pivot (change the

business model - a company’s plan to generate revenue

1. Customer Segments (CS): the consumers for whom

2. Value Proposition (VP): the reason customers select

3. Channels (CN): how the company reaches and

4. Customer Relationships (CR): types established

5. Revenue Streams (R$): how funds are generated