CHAPTER TWO

Essential Steps for Success Before Starting Your

Business
1. Master Your Industry Inside and Out

• Before launching a business, gaining comprehensive knowledge of your industry

can significantly improve your chances of success. Dive into trade journals, business
periodicals, and industry reports to understand what makes businesses in your field
thrive.

• Building a network by connecting with suppliers, customers, and trade associations

can also provide valuable insights.

• Attending trade shows and joining industry associations are excellent ways to gain
knowledge and build relationships that can support you once your business is up
and running.
2. Build a Viable Business Model—And Test It
• Before launching a business, an entrepreneur should define the business
model on which he or she plans to build a company and test it, preferably
with actual customers or potential customers, to verify that it can be
successful. Does real market demand for the proposed product or service
actually exist?
• Validating an idea before investing significant time and money to develop it is
important.
• Creating a successful business model requires entrepreneurs to
identify all of the model’s vital components, including:
i. The resources, partners, and activities they must assemble;
ii. The customer segments they are targeting;
iii. The channels they will use to reach them;
iv. The value proposition they offer customers; and
v. The sources of revenue and accompanying costs they will incur.
3. Use Lean Start-up Principles

• Entrepreneurs are accustomed to accomplishing big goals with few

resources and often rely on the principles of the lean start-up.

• The first step is to identify a customer need or a pain point and build a
minimum viable product (or service) to address it.

• Getting the minimum viable product (or service) into customers’ hands is
an essential part of validating an idea because it produces valuable
feedback that entrepreneurs use to improve and refine the product or
service and the business model.
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• The lean approach views an entrepreneur’s idea and business model
as hypotheses to be tested by subjecting them to potential customers
for feedback.

• The goal is to minimize waste and maximize the customer’s value

proposition.

• Customer feedback tells entrepreneurs whether they are pulling the

right levers and pushing the right buttons on their business models.
4. Know When to Pivot

• Following lean start-up principles means that entrepreneurs often must

make pivots in their business models and plans.

• A pivot is a course correction in which an entrepreneur keeps a company

fixed on the original vision but changes the direction in which the
company is moving.

• Successful entrepreneurs often start their companies with one product,

service, market, or model in mind and then change course once market
realities redirect them.
5. Develop a Solid Business Plan
• If an entrepreneur’s business model passes the feasibility test, the
next step is to prepare a business plan. A business plan explains how
an entrepreneur intends to implement the business model.
• Without a sound business plan, a company merely drifts along without
any real direction and often stalls out when it faces its first challenge.
• Entrepreneurs, who tend to be people of action, often jump right into
a business venture without taking time to prepare a written plan
outlining the essence of the business.
• Not only does a plan provide a pathway to success, but it also creates
a benchmark against which an entrepreneur can measure actual
company performance.
• A business plan allows entrepreneurs to replace faulty
assumptions with facts before making the decision to go into
business.
• The planning process forces entrepreneurs to ask and then
answer some difficult, challenging, and crucial questions:
 Right questions about target customers
 Right questions about market potential
 Right questions about the competition
 Right questions about the cost of doing business
 Right questions about pricing
 Right questions about realistic revenue forecasts, and other
matters.
6. Manage Financial Resources
• The best defense against financial problems is to develop a practical
information system and then use that information to make business
decisions. No entrepreneur can maintain control over a business
unless he or she is able to judge its financial health.
• The first step in managing financial resources effectively is to have
adequate start-up capital. Too many entrepreneurs start their
businesses undercapitalized. Wise entrepreneurs follow the old
axiom “Estimate how much capital you need to get the business
going and then double that figure” because launching a business
almost always costs more (and takes longer) than any entrepreneur
expects.
• The most valuable financial resource to any small business is cash. Although
earning a profit is essential to its long-term survival, a business must have an
adequate supply of cash to pay its bills and obligations.

• Some entrepreneurs count on growing sales to supply their company’s cash

needs, but this almost never happens. Growing companies usually consume
more cash than they generate, and the faster they grow, the more cash they
gobble up.

• Business history is littered with failed companies whose founders had no idea
how much cash their businesses were generating and were spending cash as if
they were certain there was “plenty more where that came from.
7. Understand Financial Statements

• Every business owner must depend on records and financial statements to know
the condition of his or her business. All too often, entrepreneurs use these only
for tax purposes and not as vital management control devices.

• To truly understand what is going on in the business, an owner must have at least
a basic understanding of accounting and finance. When analyzed and interpreted
properly, these financial statements are reliable indicators of a small firm’s health.

• Financial statements are helpful in signaling potential problems. For example,

declining sales, slipping profits, rising debt, and deteriorating working capital are
all symptoms of potentially lethal problems that require immediate attention.
8. Build the Right Team

• One of the most important steps to creating a successful start-up is

assembling the right entrepreneurial team to refine the business model and
implement the business plan.

• Entrepreneurship is increasingly becoming a team sport. One study of small

businesses reports that top-performing companies are 59 percent more likely
to have multiple founders than businesses in the bottom tier.

• Another study suggests that companies started by two to four cofounders are
more likely to succeed than those started by a single founder.
9. Learn to Manage People Effectively
• No matter what kind of business you launch, you must learn to manage
people. Every business depends on a foundation of well-trained, motivated
employees. No business owner can do everything alone.
• The people an entrepreneur hires ultimately determine the heights to which
the company can climb—or the depths to which it can plunge. Attracting and
retaining a corps of quality employees is no easy task, however, and is a
challenge for every small business owner.
• Entrepreneurs quickly learn that treating their employees with respect and
compassion usually translates into their employees treating customers in
the same fashion.
• Successful entrepreneurs value their employees and constantly find ways to
show it.
10. Set Your Business Apart from the Competition

• The formula for almost certain business failure involves becoming a “me-too business”—
merely copying whatever the competition is doing.

• Most successful entrepreneurs find a way to differentiate their companies from

competitors even if they sell similar products or services. This is especially important for
small companies going up against larger, more powerful rivals with greater financial
resources.

• Ideally, the basis for differentiating a company from its competitors is founded in what it
does best. For small companies, that basis often is customer service, convenience, speed,
quality, or whatever else is important to attracting and keeping satisfied customers.
11. Maintain a Positive Attitude

• Achieving business success requires an entrepreneur to maintain a positive mental

attitude toward business and the discipline to stick with it.

• Successful entrepreneurs recognize that their most valuable resource is their time,
and they learn to manage it effectively to make themselves and their companies
more productive.

• One business writer says that growing a successful business requires entrepreneurs
to have great faith in themselves and their ideas, great doubt concerning the
challenges and inevitable obstacles they will face as they build their businesses,
and great effort—lots of hard work—to make their dreams become reality.
12. Putting failure into perspective

• Because of their limited resources, inexperienced management, and lack of

financial stability, small businesses suffer relatively high mortality rates. As you
learned earlier in this chapter, two years after start-up, 34 percent of small
companies have failed, and after five years, 52 percent have failed. Figure 1.10
shows the failure rate for small businesses over time, clear evidence of the
constant “churn” that exists as entrepreneurs create new businesses and
others close.

• New companies that replace old ones with better ideas, market approaches,
and products actually are a sign of a healthy entrepreneurial economy.
ETHICS AND SOCIAL RESPONSIBILITY:
DOING THE RIGHT THING
Ethics is a branch of philosophy that studies and creates theories
about the basic nature of right and wrong, duty, obligation, and virtue.

• Business ethics involves the moral values and behavioral standards

that businesspeople draw on as they make decisions and solve
problems. It originates in a commitment to do what is right.

• Ethical behavior—doing what is “right” as opposed to what is

“wrong”—starts with the entrepreneur.
• The entrepreneur’s personal values begin to shape the business from day one.
Entrepreneurs’ personal values and beliefs influence the way they lead their
companies and are apparent in every decision they make, every policy they
write, and every action they take.

• In addition, the entrepreneurs’ values set the tone for the culture that will
guide the ethical actions of every employee they bring into their business.

• Entrepreneurs who succeed in the long term have a solid base of personal
values and beliefs that they articulate to their employees, put into practice in
ways that others can observe, and demonstrate throughout the culture of the
organization.
• Values-based leaders do more than merely follow rules and regulations; their
consciences dictate that they do what is right. For many entrepreneurs, the ability to
determine the values and ethics that shape how business will be conducted is a major
motivation to launching a venture.

• The values and morals that entrepreneurs draw on to guide their ethical behaviors
come from a variety of sources, including their family upbringing, their faith traditions,
mentors who have shaped their lives, and the communities they grew up in.

• Bringing their personal values into their decision making and actions in their businesses
helps ensure that entrepreneurs will act with integrity.

• Acting with integrity means that entrepreneurs do what is right no matter what the
circumstances.
• The conflicting interests among a company’s stakeholders,
the various groups and individuals who affect and are affected
by a business influence ethical decision of the entrepreneur
(see Figure 2.1).
•Stakeholders are the various groups and individuals who affect and are affected by a
business. For example, when the founders of a local coffee shop make business decisions,

they must consider the impact of those decisions on many stakeholders, including:
 the team of employees who work there
 the farmers and companies that supply the business with raw materials,
 the union that represents employees in collective bargaining,
 the government agencies that regulate a multitude of activities,
 the banks that provide the business with financing
 the founding partners and other external investors who helped fund the start-up
 the general public the business serves
 the community in which the company operates
 the customers who buy the company’s products, and their families.
• When making decisions, entrepreneurs often must balance the needs and demands of
a company’s stakeholders, knowing that whatever the final decision is, not all groups
will be satisfied.

• Large technology companies such as Apple, Google, Yahoo!, Facebook, Microsoft, and
Verizon have been facing an ethical dilemma as they attempt to comply with the
National Security Administration’s request for information.
 The National Security Agency (NSA) operates a program known as Prism, which

gathers telephone and Internet data to capture information about foreign nationals
living in America. The NSA gets this information from technology companies that
provide Internet and telephone services to consumers and businesses.
• Technology companies gain significant revenue from the data
they gather from their users. For example, although Google
offers many of its products such as Gmail and the Google search
engine free to most users, these products generate significant
revenue from the information Google amasses from its users’
Internet searches and e-mails.
• Google sells the data to advertisers, which then use it to target
ads to specific consumers.
• Although their customers generally are aware that data mining is
commonly a part of having access to technologies at no cost,
there is an implied understanding that this data will be protected
beyond Google’s internal use.
• However, Google and other large technology companies have a duty to
share information from their customers that is tied to national security
concerns with the federal government under the Cybersecurity
Information Sharing Act. As evidenced by this example, balancing the
demands of various stakeholders to make ethical decisions is no easy
task.

• Business operates as an institution in our often complex and ever-

evolving society. Therefore, every entrepreneur is expected to behave
in ways that are compatible with the value system of society.
• The society should impose the rules of conduct for all business owners, in the form of
ethical standards of behavior and responsibilities to act in ways that benefit the long-term
interest of all. Society expects business owners to strive to earn a profit on their
investment.
• Ethics and social responsibility simply set behavioral boundaries for decision makers.
 Ethics is a branch of philosophy that studies and creates theories about the basic nature
of right and wrong, duty, obligation, and virtue.
 Social responsibility involves how an organization responds to the needs of the many
elements in society, including shareholders, lenders, employees, consumers,
governmental agencies, and the environment. Because business is allowed to operate in
society, it has an obligation to behave in ways that benefit all of society.
Three Levels of Ethical Standards
1. The law, which defines for society as a whole those actions that are
permissible and those that are not. The law is the narrowest level of
ethical standards.

• The law merely establishes the minimum standard of behavior. Actions that
are legal, however, may not be ethical.

• Simply obeying the law is insufficient as a guide for ethical behavior; ethical
behavior requires more. Few ethical issues are so simple and one
dimensional that the law can serve as the acid test for making a decision.
3. Organizational policies and procedures, which serve as specific guidelines for
people as they make daily decisions. Policies and procedures include a broader
definition of ethical standards that go beyond what is defined by the law.

4. The moral stance that employees take when they encounter a situation that is
not governed by levels 1 and 2. It is the broadest and most fundamental
definition of ethical standards.

5. The values people learn early in life at home, from their religious upbringing, in
the communities where they were raised, in school, and at work are key
ingredients at this level.

6. Morality shapes a person’s character