1. ENTREPRENEURSHIP
EIGHTH EDITION
ROBERT D. H I S R I C H . P h D
Garvin Professor of Global Entrepreneurship
Director, Walker Center for Global Entrepreneurship
Thunderbird School of Global Management
MICHAEL P. PETERS, PhD
Professor Emeritus
Carroll School of Management
Boston College
DEAN A. SHEPHERD, PhD
Randall L. Tobias Chair in Entrepreneurial Leadership and
Professor of Entrepreneurship
Kelley School of Business
Indiana University
McGraw-Hill
Irwin

2. CONTENTS
PREFACE vi
PART 1 THE ENTREPRENEURIAL
PERSPECTIVE
1 ENTREPRENEURSHIP AND THE
ENTREPRENEURIAL MIND-SET 2
Opening Profile: Ewing Marion Kauffman 3
Nature and Development of Entrepreneurship 6
The Entrepreneurial Process 7
Identify and Evaluate the Opportunity 7
Develop a Business Plan 9
Determine the Resources Required 9
Manage the Enterprise 10
How Entrepreneurs Think 10
Effectuation 10
Cognitive Adaptability 13
As Seen in Entrepreneur Magazine: What Me Worry?
.How Smart Entrepreneurs Harness the Power
of Paranoia 14
Learning from Business Failure 18
Recovery and Learning Process 20
A Dual Process for Learning from Failure 21
Ethics and Social Responsibility of Entrepreneurs 21
Ethics: Company's Code of Ethics 23
Role of Entrepreneurship in Economic Development 23
2 ENTREPRENEURIAL INTENTIONS AND
CORPORATE ENTREPRENEURSHIP 34
Opening Profile: Robert Mondavi 35
The Intention to Act Entrepreneurially 38
Entrepreneur Background and Characteristics 38
Education 38
Ethics: Ethical Conduct of Entrepreneurs versus
Managers 39
Age 40
Work History 40
Role Models and Support Systems 40
Moral-Support Network 41
Professional-Support Network 41

3. CONTENTS
As Seen in Entrepreneur Magazine: Hot or Not? 42
Minority Entrepreneurs 43
As Seen in Entrepreneur Magazine: Provide Advice
to an Entrepreneur about Improving a Business
through Certification as a Woman-Owned
Business 44
Entrepreneurial Intentions within Existing
Organizations 45
Managerial versus Entrepreneurial Decision
Making 45
Strategic Orientation and Commitment to
Opportunity 46
Commitment of Resources and Control of
Resources 46
Management Structure and Reward Philosophy 47
Growth Orientation and Entrepreneurial Culture 48
Causes for Interest in Corporate Entrepreneurship 48
Establishing a Culture for Corporate Entrepreneurship 51
Leadership Characteristics of Corporate Entrepreneurs 53
Establishing Corporate Entrepreneurship in the
Organization 54
Problems and Successful Efforts 56
3 ENTREPRENEURIAL STRATEGY: GENERATING
AND EXPLOITING NEW ENTRIES 64
Opening Profile: Justin Parer 65
New Entry 66
Generation of a New Entry Opportunity 67
Resources as a Source of Competitive Advantage 67
Creating a Resource Bundle That Is Valuable, Rare,
and Inimitable 68
Assessing the Attractiveness of a New Entry
Opportunity 70
Information on a New Entry 70
As Seen in Entrepreneur Magazine: Elevator Pitch
for Project Alabama 71
Comfort with Making a Decision under
Uncertainty 72
Decision to Exploit or Not to Exploit the
New Entry 72
Entry Strategy for New Entry Exploitation 73
Environmental Instability and First-Mover
(Dis)Advantages 74
Customers' Uncertainty and First-Mover
(Dis)Advantages 76
Ethics: Do the Right Thing 78
Lead Time and First-Mover (Dis)Advantages 78
As Seen in Entrepreneur Magazine: Provide Advice to
an Entrepreneur about Being More Innovative 80

4. CONTENTS xi
Risk Reduction Strategies for New Entry
Exploitation 81
Market Scope Strategies 81
Imitation Strategies 82
Managing Newness 84
PART 2 FROM IDEA TO THE OPPORTUNITY 91
CREATIVITY AND THE BUSINESS IDEA 92
Opening Profile: Frederick W. Smith 93
Trends 96
Green Trend 96
Clean-Energy Trend 96
Organic-Orientation Trend 96
Economic Trend 97
Social Trend 97
Health Trend 97
Web Trend 97
Sources of New Ideas 97
Consumers 97
Existing Products and Services 98
Distribution Channels 98
Federal Government 98
Research and Development 98
As Seen in BusinessWeek: The Myth of Creativity 99
Methods of Generating Ideas 99
Focus Groups 99
Brainstorming 100
Brainwriting 100
Problem Inventory Analysis 100
Creative Problem Solving 101
Brainstorming 102
Reverse Brainstorming 102
Gordon Method 102
Checklist Method 103
Free Association 103
Forced Relationships 103
Collective Notebook Method 103
As Seen in BusinessWeek: How to Produce
Big Ideas on Demand 104
Attribute Listing 105
Big-Dream Approach 106
Parameter Analysis 106
Innovation 106
Types of Innovation 106
Defining a New Innovation (Product or Service) 108
Classification of New Products 109

5. xii CONTENTS
Opportunity Recognition 110
Product Planning and Development Process 111
Establishing Evaluation Criteria 111
Ethics: Leadership Is about Doing, Not Saying 112
Idea Stage 114 "*
Concept Stage 114
Product Development Stage 117
Test Marketing Stage 117
E-Commerce and Business Start-Up 117
Using E-Commerce Creatively 118
WebSites 118
Tracking Customer Information 119
Doing E-Commerce as an Entrepreneurial Company 119
5 IDENTIFYING AND ANALYZING DOMESTIC AND
INTERNATIONAL OPPORTUNITIES 124
Opening Profile: A. Malachi Mixon III 125
Introduction 127
Opportunity Recognition and the Opportunity
Assessment Plan 128
Information Sources 130
General Information 130
Industry and Market Information 131
Competitive Company and Product Information 131
Government Sources 131
As Seen in BusinessWeek: Mom-and-Pop
Multinationals 132
.' Search Engines 132
Trade Associations 132
Trade Publications 133
The Nature of International Entrepreneurship 133
The Importance of International Business to
the Firm 134
International versus Domestic Entrepreneurship 134
Economics 134
Stage of Economic Development 134
Current Account 135
Type of Economic System 135
Political-Legal Environment 135
Language 137
Technological Environment 137
Ethics: Ethics Must Be Global Not Local 138
Culture 138
Social Structure 140
Religion 141
Political Philosophy 141
Economics and Economic Philosophy 141
Education 141
Manners and Customs 141

6. CONTENTS xiii
Available Distribution Systems 142
Motivations to Go Global 142
Strategic Effects of Going Global 143
Foreign Market Selection 144 .
As Seen in BusinessWeek: Stranger in a
Strange Land 145
Entrepreneurial Entry Strategies 147
Exporting 147
Nonequity Arrangements 148
Direct Foreign Investment 149
Entrepreneurial Partnering 151
Barriers to International Trade 152
General Agreement on Tariffs and Trade
(GATT) 152
Increasing Protectionist Attitudes 152
Trade Blocs and Free Trade Areas 152
Entrepreneur's Strategy and
Trade Barriers 153
Implications for the Global Entrepreneur 153
Appendix 5A: Example Outline of an International
Business Plan 156
PROTECTING THE IDEA AND OTHER LEGAL ISSUES
FOR THE ENTREPRENEUR 158
Opening Profile: Steve Lipscomb 159
What Is Intellectual Property? 161
Need for a Lawyer 161
,/ How to Select a Lawyer 161
As Seen in Entrepreneur Magazine: Provide Advice
to an Entrepreneur about Intellectual Property
Protection 162
Legal Issues in Setting Up the
Organization 163
Patents 163
International Patents 164
The Provisional Application 164
The Patent Application 165
Patent Infringement 166
Business Method Patents 166
Start-Up without a Patent 167
As Seen in BusinessWeek: Provide Advice to an
Entrepreneur Inventor about How to
Make Patents Pay 168
Trademarks 167
Registering the Trademark 169
Copyrights 170
Ethics: How Much Responsibility Should Our Youth
Have for Illegal Downloading? 171
Trade Secrets 171

7. xiv CONTENTS
Licensing 173
Product Safety and Liability 175
Insurance 175
Sarbanes-Oxley Act 177
Contracts 178
PART 3 FROM THE OPPORTUNITY TO
THE BUSINESS PLAN 185
7 THE BUSINESS PLAN: CREATING AND STARTING
THE VENTURE 186
Opening Profile: Belinda Guadarrama 187
Planning as Part of the Business Operation 189
What Is the Business Plan? 189
Who Should Write the Plan? 190
Scope and Value of the Business Plan—Who Reads
the Plan? 191
As Seen in BusinessWeek: Don't Expect a Fee for Making
an Introduction 192
How Do Potential Lenders and Investors Evaluate
the Plan? 192
Ethics: Protecting Your Business Idea 194
Presenting the Plan 194
Information Needs 195
Market Information 195
Operations Information Needs 198
Financial Information Needs 199
Using the Internet as a Resource Tool 199
Writing the Business Plan 200
Introductory Page 202
Executive Summary 202
Environmental and Industry Analysis 203
Description of Venture 205
Production Plan 207
Operations Plan 207
Marketing Plan 208
Organizational Plan 208
Assessment of Risk 209
Financial Plan 209
As Seen in BusinessWeek: Elevator Pitch for
Perfect Dinner 210
Appendix 210
Using and Implementing the Business Plan 210
Measuring Plan Progress 211
Updating the Plan 212
Why Some Business Plans Fail 212
Appendix 7A: Sample Business Plan—Gopher It 216

8. CONTENTS xv
8 THE MARKETING PLAN 222
Opening Profile: Warren G. Jackson 223
Industry Analysis 225
Competitor Analysis 225 1
Marketing Research for the New Venture 226
Step One: Defining the Purpose or Objectives 227
Step Two: Gathering Data from Secondary Sources 227
As Seen in BusinessWeek: How to Expand Your
Customer Base 229
Step Three: Gathering Information from Primary
Sources 229
Step Four: Analyzing and Interpreting the
Results 232
Understanding the Marketing Plan 232
Characteristics of a Marketing Plan 233
Ethics: Devil's Advocate 236
The Marketing Mix 236
Steps in Preparing the Marketing Plan 237
Defining the Business Situation 237
Defining the Target Market: Opportunities and Threats 237
Considering Strengths and Weaknesses 240
Establishing Goals and Objectives 240
Defining Marketing Strategy and Action Programs 240
Marketing Strategy: Consumer versus Business-to-
Business Markets 244
As Seen in Entrepreneur Magazine: Provide Advice
to an Entrepreneur about Web Sites 245
Budgeting the Marketing Strategy 246
Implementation of the Market Plan 246
Monitoring the Progress of Marketing Actions 246
Appendix 8A: Marketing Plan Outlines 250
THE ORGANIZATIONAL PLAN 254
Opening Profile: Jim Sinegal 255
Developing the Management Team 256
As Seen in Entrepreneur Magazine: Provide Advice
to an Entrepreneur about Some Legal Aspects of
Starting a Business 257
Legal Forms of Business 258
Ownership 258
Liability of Owners 258
Costs of Starting a Business 260
Continuity of Business 260
Transferability of Interest 261
Capital Requirements 261
Management Control 262
Distribution of Profits and Losses 262
Attractiveness for Raising Capital 263

9. xvi CONTENTS
Tax Attributes of Forms of Business 263 ,
Tax Issues for Proprietorship 263
Tax Issues for Partnership 263
Tax Issues for Corporation 265
The Limited Liability Company versus the *
S Corporation 265
S Corporation 265
Advantages of an S Corporation 266
Disadvantages of an S Corporation 266
Ethics: Lawyers Explain the Steps to Take If Your
Business Partner Violates His or Her Obligations
to the Business 267
The Limited Liability Company 267
Advantages of an LLC 268
Designing the Organization 268
Building the Management Team and a Successful
Organization Culture 271
As Seen in BusinessWeek: Elevator Pitch
for 20x200 Web Site 272
The Role of a Board of Directors 273
The Board of Advisors 274
The Organization and Use of Advisors 274
10 THE FINANCIAL PLAN 280
Opening Profile: Tony Hsieh 281
Operating and Capital Budgets 282
Ethics: Are You a Good Leader? 284
Pro Forma Income Statements 285
Pro Forma Cash Flow 288
As Seen in BusinessWeek: Provide Advice to an
Entrepreneur about Solving Their Cash-Flow
Problem to Stay in Business 290
Pro Forma Balance Sheet 292
Break-Even Analysis 294
Pro Forma Sources and Applications of Funds 296
As Seen in BusinessWeek: Elevator Pitch
for Beer Chips 297
Software Packages 298
PART 4 FROM THE BUSINESS PLAN TO
FUNDING THE VENTURE 303
11 SOURCES OF CAPITAL 304
Opening Profile: Scott Walker 305
An Overview 308
Debt or Equity Financing 308
Internal or External Funds 309

10. CONTENTS xvii
Personal Funds 310
As Seen in BusinessWeek: Show Me the
Moneymen 311
Family and Friends 312
Commercial Banks 312 1
Types of Bank Loans 313
Cash Flow Financing 314
Bank Lending Decisions 314
Role of the SBA in Small-Business
Financing 315
Ethics: We Need an Ethics Czar 316
Research and Development Limited
Partnerships 318
Maj or Elements 318
Procedure 319
Benefits and Costs 319
Examples 320
Government Grants 320
As Seen in BusinessWeek: From 401 (k) Nest Egg
to Seed Money 321
Procedure 322
Other Government Grants 323
Private Placement 324
Types of Investors 324
Private Offerings 324
Regulation D 324
Bootstrap Financing 326
12 INFORMAL RISK CAPITAL, VENTURE CAPITAL,
AND GOING PUBLIC 332
Opening Profile: Mark Zuckerberg 333
Financing the Business 336
Informal Risk-Capital Market 337
As Seen in BusinessWeek: Old Banks, New
Lending Tricks 338
Venture Capital 341
Nature of Venture Capital 341
As Seen in BusinessWeek: She's an Angel 342
Overview of the Venture-Capital Industry 342
Venture-Capital Process 347
Locating Venture Capitalists 350
Approaching a Venture Capitalist 350
Valuing Your Company 352
Factors in Valuation 352
Ratio Analysis 353
Liquidity Ratios 353
Activity Ratios 354
Leverage Ratios 354
Profitability Ratios 355

11. xviii CONTENTS
General Valuation Approaches 355
General Valuation Method 357
Evaluation of an Internet Company 358
Deal Structure 359
Going Public 359
Ethics: Financial Transparency a Must 360
Advantages 360
Disadvantages 362
Timing of Going Public and Underwriter
Selection 364
Timing 364
Underwriter Selection 365
Registration Statement and Timetable 366
The Prospectus 367
The Registration Statement 368
Procedure 368
Legal Issues and Blue-Sky Qualifications 369
Legal Issues 369
Blue-Sky Qualifications 369
After Going Public 369
As Seen in BusinessWeek: Where Venture Capital
Never Ventured Before 370
Aftermarket Support 370
Relationship with the Financial Community 370
Reporting Requirements 371
PART 5 FROM FUNDING THE VENTURE TO
LAUNCHING, GROWING, AND
ENDING THE NEW VENTURE 377
13 STRATEGIES FOR GROWTH AND MANAGING
THE IMPLICATIONS OF GROWTH 378
Opening Profile: Brian and Jennifer Maxwell 379
Growth Strategies: Where to Look for Growth Opportunities 380
Penetration Strategies 381
Market Development Strategies 382
Product Development Strategies 382
Diversification Strategies 383
As Seen in Entrepreneur Magazine: Provide Advice
to an Entrepreneur about Growing into New
Markets Using the Internet 384
Example of Growth Strategies 385
Economic Implications of Growth 385
Implications of Growth for the Firm 387
Pressures on Existing Financial Resources 387
Pressures on Human Resources 388

12. CONTENTS xix
Pressures on the Management of Employees 388
Pressures on the Entrepreneur's Time 388
Overcoming Pressures on Existing Financial
Resources 388
Financial Control 388 "*
Ethics: Lessons from Enron 389
Managing Cash Flow 390
Managing Inventory 392
Managing Fixed Assets 393
Managing Costs and Profits 394
Taxes 395
Record Keeping 396
Overcoming Pressures on Existing Human
Resources 396
Overcoming Pressures on the Management of
Employees 397
As Seen in Entrepreneur Magazine: Elevator Pitch
for eVest 398
Overcoming Pressures on Entrepreneurs' Time 399
Basic Principles of Time Management 400
Implications of Firm Growth for the Entrepreneur 401
A Categorization of Entrepreneurs and Their
Firms' Growth 402
k ACCESSING RESOURCES FOR GROWTH
FROM EXTERNAL SOURCES 410
Opening Profile: Bill Gross 411
Using External Parties to Help Grow a Business 412
Franchising 413
Advantages of Franchising—to the Franchisee 413
Advantages of Franchising—to the Franchisor 415
As Seen in BusinessWeek: Venture Capital's
Favorite Startups 416
Disadvantages of Franchising 417
Types of Franchises 417
Investing in a Franchise 418
Ethics: Fair Enough 419
Joint Ventures 421
Types of Joint Ventures 422
Factors in Joint Venture Success 423
Acquisitions 424
Advantages of an Acquisition 424
Disadvantages of an Acquisition 425
Synergy 425
Structuring the Deal 425
As Seen in Entrepreneur Magazine: Provide Advice
t o an Entrepreneur about Entering into Agreements 426
Locating Acquisition Candidates 427

13. xx CONTENTS
Mergers 428
Leveraged Buyouts 429
Overcoming Constraints by Negotiating for More
Resources 430
15 SUCCESSION PLANNING AND STRATEGIES FOR
HARVESTING AND ENDING THE VENTURE 438
Opening Profile: Teresa Cascioli 439
As Seen in BusinessWeek: Provide Advice to an Entrepreneur on
How to Beat Failure and Be the Boss Again 441
Exit Strategy 442
Succession of Business 442
Transfer to Family Members 443
Transfer to Nonfamily Members 443
Options for Selling the Business 444
Direct Sale 445
Employee Stock Option Plan 446
Management Buyout 446
Ethics: Involving Employees, Bankers, and Business
Associates in the Problem 447
Bankruptcy—An Overview 447
Chapter 11—Reorganization 449
Surviving Bankruptcy 450
As Seen in BusinessWeek: Elevator Pitch for nPower Personal
Energy Generator 451
Chapter 13—Extended Time Payment Plans 452
Chapter 7—Liquidation 452
Strategy during Reorganization 453
Keeping the Venture Going 453
Warning Signs of Bankruptcy 454
Starting Over 455
The Reality of Failure 456
Business Turnarounds 456
PART 6 CASES 463
Case 1 Turner Test Prep Co. 465
Case 2 Jim Boothe, Inventor 467
Case 3 A. Monroe Lock and Security Systems 468
Case 4 Beijing Sammies 470
Case 5 "Mamma Mia!" The Little Show That Could! 484
Case 6 The Beach Carrier 492
Case 7 Gourmet to Go 495
Case 8 Intervela d.o.o. Koper—Victory Sailmakers 502
Case 9 The Gril-Kleen Corporation 509
Case 10 The Winslow Clock Company 516

14. CONTENTS xxi
Case 11 NeoMed Technologies 525
Case 12 Rug Bug Corporation 540
Case 13 Nature Bros. Ltd. 550
Case 14 Amy's Bread 557
Case 15 Oklahoma National Bank 563
Case 16 Datavantage Corporation 572
Case 17 Dual Pane Company 582
INDEX 584