Business Resource Analysis: New Story

Introduction

Figure 14.1 New Story is changing the way social enterprises manage resources through an innovative business model that uses crowdsourcing to fund construction. (credit: modification of photo provided by New Story)

New Story, a forward-thinking social enterprise, set out to solve a global issue that affects more than one billion people worldwide: homelessness and lack of adequate shelter. The organization has impressed many investors by revolutionizing homebuilding techniques. Its founders - Brett Hagler, Alexandria Lafci, Mike Arrieta, and Matthew Marshall - share a passion for "improving lives through safe homes and a shared vision to change the traditional charity model". When its founders realized the global need for proper shelter, many people having been displaced by natural disasters, they decided to take advantage of an alternate charity model by connecting with other building organizations and using crowdfunding. These four innovators combined their skills to create an organization that emphasizes building sustainable homes at a quick pace and affordable price. New Story's business model includes an innovative approach to home building and design by incorporating the needs of each family, local partners and workers, and crowdfunding campaigns to pay for construction.

At their start, New Story knew they needed the support of great mentors and an accelerator to raise funds for overhead costs, so they applied to one of the most prominent accelerators in the United States - Y Combinator, a community of founders that funds startups in an accelerated three-month development process. Optimizing this opportunity, New Story built 113 houses through their "100 Homes in 100 Days" campaign in Haiti, a challenge that Y Combinator posed to them. This experience enabled the New Story team to identify global partners that extended their reach to developing communities in Bolivia, Mexico, and El Salvador.

One of the best technological advances that New Story has leveraged in its collaborations with companies is the 3-D printer by ICON, which allows a home to be printed in as little as twelve hours for only $6,000. The 3-D printer uses three main components to build a house: robotics, a special mix of materials that dry quickly, and a tablet that runs the software needed to design the home.

By securing funding and finding local community partners, New Story has built sixteen communities, with more than 2,200 homes in four countries.

Source: Rice University, https://openstax.org/books/entrepreneurship/pages/14-introduction
This work is licensed under a Creative Commons Attribution 4.0 License.

Types of Resources

Learning Objectives

By the end of this section, you will be able to:

• Distinguish between tangible and intangible resources
• Determine the venture's tangible and intangible resource needs and how to attain them
• Describe the various funding resources available to entrepreneurs and discuss the pros and cons of each
  

You have learned about many opportunities for entrepreneurs to explore and the processes that ensure their success. This discussion focuses on the various resources that entrepreneurs need to start, maintain, and grow an enterprise, and, in general, how to procure those assets. Many entrepreneurs make the mistake of moving forward in their business endeavor without taking enough time to research their industry and determine what resources are required to help their business not only get off to a positive start but also the resources needed for its continued operation. Entrepreneurial Marketing and Sales covered primary and secondary sources of information and how to make use of the information gleaned from them for marketing purposes. Much of that research also applies to questions surrounding resource allocation. But before we delve into allocation, let's examine the general categories of resources needed in just about every new venture: tangible, intangible, and financial.

Tangible Resources

As you can imagine, resources needed for the enterprise are varied and can have different attributes. These assets are essential in the operation of the business enterprise. Assets are property or resources that create a benefit to the person (or company) who owns them. They can be tangible or intangible. Tangible resources are assets that have a physical form. They can be seen, touched, and felt. Tangible resources differ between product-based and service-based businesses. A product-based business uses tangible resources in the production of goods sold to customers, such as raw materials, land, facilities, buildings, machinery, computers, supplies, and vehicles. The warehouse shown in (Figure 14.2) would be considered a tangible resource for a tire (product-based) company.

Figure 14.2 Facilities, machinery, and other equipment are necessary tangible resources for a product-based company.

Tangible resources for a service-based business include buildings such as a doctor's office, bank, movie theater, amusement park, retail store, or restaurant, which are enterprises that include both products and services (Figure 14.3). Facilities and resources that the business needs to provide its services and run operations may include computers, office equipment, furniture, and technological resources. As Figure 14.3 shows, the equipment and décor need to be taken into consideration because they becomes part of the product offerings, even if the core product is a service.

Figure 14.3 Resources needed for a doctor's office include (a) furniture, decorations, and amenities for a waiting room and check-in areas, as well as (b) rooms with medical equipment and supplies in which to see and treat patients.

Place of Operation

Your facility needs will depend on the type of product or service you are offering and vary in scope from office space to a food truck to a manufacturing facility to a storefront for sales. Knowing the limit of your budget (discussed in the next section) should help you focus on locations that you can afford. Experts recommend that you allocate only a certain percentage of your sales to your lease or purchase; some businesses use industry averages as guidelines. Factors to assess are location, visibility, foot traffic (how many potential customers walk by), how well the building has been maintained, the maintenance it will need in the future, how long you would want to stay in that location, and the insurance, property tax, and renovation costs, or the cost to build a new building. One approach is to make an assessment of your sales per square foot and compare those to sales of similar companies in the same industry or market. These data can be found through local commercial realtor offices, city or county government offices, and local associations.

Machinery/Equipment

Machinery and equipment are critical assets to helping launch a business. For service businesses, such as restaurants, dry cleaners, print shops, etc., the equipment can be expensive. In recent years, however, a larger reseller market has emerged for many types of equipment that are still serviceable. It is important for tax purposes to report the current asset value of used equipment and have an accountant confirm its useful life for your income statement and tax returns.

For companies that manufacture products, you may have to order customized tooling and assembly equipment. Again, if you must acquire new equipment, you will need to understand what its useful life is and determine whether you must procure or acquire the equipment from a supplier who charges a "piece price" on top of each component or finished product they supply to you. If you choose this second approach, your supplier may insist on a long-term manufacturing agreement to manage their risk.

Vehicles

For some businesses, vehicles are necessary equipment to run day-to-day operations. You can use your own, which can be cost effective, or you can purchase or lease one. If purchasing a used vehicle, it is best to check the Kelley Blue Book (www.kbb.com), a reference guide that lists market prices, before purchasing it from a dealership; make sure that there are no defects or negotiate a lower price if you find them; and make sure to secure documentation on warranties. Other reliable valuation sources are carfax.com, nada.com, and edumunds.com.

Many small business owners are undecided as to whether buying or leasing a business vehicle nets better benefits. Let's assume for the purposes of this discussion that the vehicle is primarily a business vehicle and is not used a majority of the time for personal use. Relevant considerations include both tax and cost-related issues.

One difference between the purchase and lease of the vehicle relates to the tax deduction for depreciation. When you own a business vehicle, you can deduct a depreciation value over the life of the vehicle. Generally, you are not eligible to deduct depreciation on a leased vehicle. However, there is a corresponding difference with regard to the deductibility of monthly payments. With a leased vehicle, the monthly lease payments are tax deductible, whereas if the vehicle is purchased with a car loan, only the interest on the car loan is deductible as a business expense. Ultimately, the decision to lease or buy is one that an entrepreneur should make in concert with a tax advisor.

Technology

No matter what business you are in, you must invest in technology to support your day-to-day operations. This typically includes computers and software, as well as Internet service and intranet/network functionality. The following list includes most of the basic investments you will need to make for your business:

• Computers: Laptops, desktops, and tablets are an obvious necessity for day-to-day tasks, communication, and even production of products or services. Think about the performance and attributes needed to operate the business for insight about what brand and quality to buy. A good operating system that can process calculations and requests faster can make your business operations smoother and more efficient.
• Internet: Every business must have strong and reliable Internet service to ensure connectivity of computers, routers, and peripherals. Communication in today's environment cannot happen without this technology, and there are many providers that have good packages for businesses to get the bandwidth necessary to operate a business and/or to provide connectivity to customers.
• Router: If you are using multiple computers, laptops, and printers that need to be connected to each other, you will need a wireless router. A wireless router will help you keep documents and printers accessible from anywhere in your office, even if it's a small home office. You can also have a hard-wired router, which blocks outside signal interference.
• Printer: Most businesses need a good quality printer for printing documents, marketing materials, and forms. Most printers now use color ink and come with the ability to scan and copy documents. They also vary in quality, so you will need to consider your printing needs and the costs of toner/ink to determine the level of quality you need.
• Server: If you need to store and retrieve data - such as customer profiles, emails, and sales information - you will likely need a server. The server is a hardware system with software that performs various functions that cannot be done from one computer.
• Cloud computing: Cloud services have emerged as a cost-effective way to process, store, and use data for company operations. Rather than host your data and systems on your own hardware services, many large companies like Amazon, Verizon, and Microsoft offer web services hosted on a network of computers. This option provides ongoing data integrity and security, while lowering the cost of IT services and equipment.
• Software: There are many software applications and tools that are essential for business operations. These tools support day-to-day tasks. Common software needs include accounting and billing software like QuickBooks, customer relationship management tools such as Salesforce or Marketo, word processing and spreadsheet software like Microsoft Word and Microsoft Excel, presentation software such as Microsoft PowerPoint, diagram tools like Draw.io, email marketing tools like Constant Contact or Mail Chimp, file management systems like Dropbox, online phone/meeting apps like Skype and Zoom, social media management systems such as Hootsuite, project management tools like Bootcamp, and more. Some of these tools are free. Others carry a cost but may have free trial periods if you need to test them before investing. Most offer easy subscription payment schedules that can be set up monthly or yearly, and include ongoing software updates.

Supplies

There are many other supplies needed to operate the business, mostly basic items that you might take for granted but that need to be expensed: paper, toner, files, staplers, writing utensils, cleaners, and so on. You will likely need basic office furniture too. You may also want to invest in certain amenities that create a working environment and set the stage for your envisioned company culture - whether that's a coffeemaker, a dartboard in a break area, or whiteboards for meetings and brainstorming.

Licenses and Permits

What types of licenses might be required to operate your business? You may need a basic business license or permit provided by the government for the business to be valid, such as registering as an LLC, partnership, or company (Business Structure Options: Legal, Tax, and Risk Issues discusses these business structures in more depth). These licenses let the government know what kind of activities the business performs and ensure taxes are collected properly. They also make your business a legal entity and prove that it exists in case you need funding or permits. Some businesses require a sales tax license for products and services, whether they are tangible or digital.

Other considerations include professional certifications that pertain to the industry you are working in, such as certifications in accounting (CPA), financial advising, cosmetic services, or healthcare. Many industries require licenses before you can begin to operate; such industries include healthcare, financial services, construction, real estate, insurance, transportation, and engineering. If you will be receiving customers in your home office or storefront, you may be required to undergo a home inspection, especially from the health department if you are in a foodservice industry. Signage outside your business location may also require a permit or compliance with local regulations.

Other permits that may be required for a building include a certificate of occupancy, fire, electrical, HVAC, plumbing, and hazardous materials such as gasoline, diesel, oil, or compressed gas cylinders. Check the laws and regulations of your local and state governments to ensure your business meets the legal requirements for licensing and permits. You can do this by contacting the secretary of state in your state and also by contacting your local chamber of commerce. Importantly, these licenses and permits often carry a cost and should be part of your startup costs with renewals included in your operational budget.

Entrepreneur In Action

Service-Based versus Product-Based Resources

Go to bizjournals.com and select one of the small businesses profiled in the listings of current local business news. Select one service-based enterprise and one product-based enterprise. Make a list of all the different types of tangible resources they each need to start their enterprise and sustain it. How do the resource needs of each enterprise differ and how are they similar? What did you learn about resources from this activity?

Intangible Resources

Intangible resources are assets that cannot be seen, touched, or felt. Intellectual property - which includes creative imaginings such as formulas, designs, brands, and inventions - is an intangible resource, and so are the patents, trademarks, and copyrights that protect the intellectual property. For example, if you are a small business owner, you might want to protect your logo, company name, website, slogan, new product prototype, or maybe a newly developed manufacturing process that allows you to shorten production time.

In our current technological era, intellectual property has become more important than ever. The Ethical and Social Responsibilities of Entrepreneurs introduced you to intellectual property protection as an important measure to safeguarding creativity. Entrepreneurs must protect their ideas for as long as possible to sustain a competitive advantage. A competitive advantage for a business could be a formula for a product, like the recipes Kentucky Fried Chicken or Coca-Cola use for their food and beverage products. They protect their formulas so other companies do not replicate them and profit from them. Smaller companies can also invent new products, methods, and branding that will need to be protected. Patents, trademarks, and copyrights are three protections for this type of intangible resource.

Patents

As Creativity, Innovation, and Invention discusses, a patent grants the owner the right to claim the ability to exclude others from making, selling, using, and importing a product or process to the United States for a period of time. This time is usually twenty years from the date the application was first submitted to the US Patent and Trademark Office (USPTO). This allows the inventor to recuperate the costs of researching and developing the novelty before competitors can copy it. Types of patents include utility, business process, design, and plant patents.

A utility patent is granted to an individual who invents or discovers something novel and purposeful such as a machine, a process, a product, an improvement to any of these, or even a composition of matter. Most patents awarded to inventors are utility or plant patents. The USPTO receives more than half a million applications each year.

The application and approval process can take several years and can involve a substantial investment that can range from a couple thousand dollars to over $15,000, depending on the complexity and type of patent, as well as the fee for a patent lawyer. Lawyers can help with conducting a patent search and ensuring that the invention doesn't yet exist, while providing guidance on the application process. Patent attorneys are often expensive, charging between $200 and $800 an hour, but they can make the process easier.

Usually, the first application an inventor files is for provisional twelve-month patent protection, which covers the invention for the first year while the inventor waits for the approval of a final, nonprovisional patent. A patent examiner processes the application and determines whether to award the protection or not. Having the help of a patent lawyer is not necessary, but it usually makes the process easier and increases the odds of receiving the patent. Not having a lawyer can delay the process or prevent the inventor from getting the patent, especially if the inventor is not familiar with the process, or if the invention is complex. Choosing a lawyer carefully is important, as experience and knowledge of the process matters. If the patent is awarded, the final patent goes into effect retroactively to the filing date of the provisional patent, and the inventor has twenty years of protection against other companies copying the design. Figure 14.4 shows an example of a patent for the well-known 3-D printer, which was awarded in 1986 to its inventor Chuck Hull.

Figure 14.4 Here is an example of a schematic from Chuck Hull's 3-D printer patent provided by the US Patent and Trademark Office.

A business process patent is a type of utility patent granted to someone who develops a new business method, and just like a tangible product, the method must be new and nonobvious, and it must employ an equipment or type of technology to be valid. Nonobviousness is a legal requirement for a patent acquired under federal law (35 U.S.C. § 103), and generally means something that is not readily apparent. A proposed invention is obvious if someone of ordinary skill in a relevant field could easily make the invention based on prior art and thus would not be patentable, whereas a nonobvious invention is capable of being patented. The application must include a description of how the method works with the technology or equipment, and it must have a real-world application and not just be an idea. An example is Amazon's 1-Click shopping cart that enables people to store credit card and shipping information to enable speedy purchases.

A design patent is granted to an individual who creates something original and novel as an ornamental design. A design patent involves the actual design of an invention. For example, Apple has hundreds of design patents for its iPhone, and Samsung has hundreds of patents for its various products. (Figure 14.5) shows a patent granted to Apple in 2011. Read the "Abstract" portion. Does it describe something familiar? Every design element, like the LCD screen, the width and length of the phone, and many of its other features that are added to each of its generations, requires a new patent.

Figure 14.5 Here is an example of a US patent awarded to Apple.

A plant patent is as it sounds - it's granted to someone who creates or discovers a new type of plant, as in the living organism, not facility. The patent applies to a plant or its contents, which must be innovative and nonobvious, and must have utility.

Trademarks

A trademark provides the owner the ability to use a name, symbol, jingle, or character in conjunction with a specific good. A service mark is, according to the USPTO, a word, phrase, symbol, or graphic that identifies the origin or source of a service. Both marks prevent others from using those same assets to sell their products. A trademark can be the most valuable asset a company owns. Customers will often pay more for a product or service if it comes from a specific brand with a good reputation. Customers view brands as a promise of the experience they will have: Brands promote confidence in the product and the benefits that the consumer may enjoy. Successful businesses create brand loyalty through these efforts, creating a relationship with customers. When users see themselves in the brand, they will choose that brand to create their own identities.

Protecting the name of the company and its products, jingles, logos, and even social media is therefore necessary to gain and protect a competitive advantage, because among competitors, the trademark is often the only way to distinguish among products. Can you think of a brand you are loyal to - perhaps your Apple iPhone, your Starbucks coffee, or your local entertainment spot? Consider what that company has done to earn your loyalty.

Usually, once the business begins to use its name, logo, character, and other assets, they are informally protected by trademark law and can use the ™ symbol. However, if a business wants extended protection, they should file for legal trademark protection.

Trademarks can be registered at the state or federal level. As the names imply, state trademark registration protects the business's mark within its own state, and federal trademark registration protects the business's mark across the United States. Once the registration has been filed and accepted at the federal level, the business can use the ® symbol after the protected item. Examples of trademarks include the Apple name and logo, the McDonald's logo, the talking GEICO lizard, and Nike's "Just Do It" slogan.

If you are opening your own candle and soap company, for example, you might want to register your company name and logo initially to prevent others from using it and benefiting from your reputation. If you decide to create a jingle, a slogan, a character, or another branding asset, you can do it while you develop and grow your business, as it can become cumbersome and expensive if it's done all at once. Getting a trademark itself is not as difficult as getting a patent, but just as with a patent, getting a lawyer's help can prove beneficial. Trademarks are not as costly - it may cost a few hundred dollars to file the application - but attorney fees can vary, depending on the type of project and the length of time it takes to process the application. This can range from a few hundred to thousands of dollars. This type of intellectual property can provide an opportunity for your company to be sustainable for years to come and avoid other businesses copying or using your ideas to promote themselves.

Copyrights

A copyright is provided to an author of an original work, including artistic, dramatic, architectural, musical, literary, and software works. Copyrights are granted by the Copyright Office, which is a part of the Library of Congress. Table 14.1 summarizes the types of US intellectual property protection.

Types of Intellectual Property Protection

Determining Your Resource Needs and How to Attain Them

Are You Ready?

Get Organized

• Create a checklist of the various resources you might need for your own business idea. Categorize them into tangible and intangible.
• Prioritize them in order of importance to your growing enterprise and what cost factors to consider for each.
• Construct a decision tree that shows what choices you had to make as you made your checklist.

Funding Resources

Personal Savings

Bootstrapping

Bank Loans

Friends and Family Members

Angel Investors

Venture Capitalists

Crowdfunding

Grants

Resource Funding Considerations

• How will I obtain the money needed to operate the business on a daily basis?
• When might I need to hire staff, and how much would their wages and benefits cost?
• Where are these sources of money I can tap into for both immediate and long-term needs?
• Would a line of credit be a better option for my business or should I pursue a term loan?
• Is borrowing from friends and family a practical option?
• Are there angel investors who fund businesses in my industry who I can investigate?
• What will I need in terms of assets and financial reserves to open my business and keep the doors open for at least six months? One year? Five years?

Work It Out

Informational Interviews

• What experience did you have in your industry before you started your own business?
• What made you consider opening a business?
• What were some of the positive aspects you saw about this industry? What were some negative aspects?
• What are the obstacles of entry into this industry?
• How much funding did you need to get started? How much to continue operating?
• What networks of business owners, mentors, and guides did you tap into before you started your business?
• What organizations did you join to get help with your business?
• How much time did you spend in your business each week?
• What did you give up in your personal life when you started your business?
• If you could start over, what would you do differently? Would you still open your own business?
• What advice do you have for someone who is just starting?

Managing Resources over the Venture Life Cycle

Learning Objectives

By the end of this section, you will be able to:

• Explain how resource dependence theory helps a venture grow
• Understand typical resource needs through the life cycle
• Describe the basic steps in securing human resources
• Understand the importance of educational and personal resources to the entrepreneur
  

The evaluation of needed resources does not end with the startup phase. This is an essential activity that the business owner must engage in throughout the life cycle of the business. Many entrepreneurs have failed to re-assess how their needs have changed as industry, technology, economic, political, or social changes emerge in the marketplace. This lack of timely assessment of operational needs can result in business struggles or even failure. Business owners need to be engaged in ongoing research, monitoring of the external environment, ensuring they have the ability to easily respond to changing circumstances.

When Birchbox, a business covered in Entrepreneurial Marketing and Sales, first entered the cosmetics sales market through an innovative business model, the founders (Katia Beauchamp is pictured in Figure 14.14), were able to fund their startup through venture capitalists who saw a great opportunity to tap into a new model of selling cosmetics. After it had been in business for a while, Birchbox grew not only in customers and employees, but also in competitors. The company struggled with cash flow as it grew its customer base and struggled to keep a healthy profit due to its tight margins from selling other brands' items. After talks of selling to QVC and Walmart, Birchbox sold its ownership to an internal investor who provided the cash for the company to continue to innovate its products and digital processes, and to add more cosmetic partners.

Figure 14.14 Katia Beauchamp, owner of Birchbox, will stay at the helm of the company with the help of a hedge fund investor. 

As we can see from the Birchbox example, business operations are impacted by various internal factors such as increases in the customer base, employee growth, as well as changes in marketing needs and external factors, which include fierce competition that can curtail the venture's productivity, impact competitive advantage, or limit its access to key resources. In the case of Birchbox, cash flow was necessary for product innovations and digital marketing changes to combat their competition.

To counteract some of this, dependencies can be formed with others in a network of enterprises. This can aid in circumventing the impact of external factors such as an increase in competition in their respective market, limited ability to obtain credit for capital resources, shortages of the raw materials needed to produce their goods, or human resources to meet demanded service and production levels.

For example, many businesses within a particular industry are dependent on the same purchasers, vendors, raw materials, or other environmental resources. The resource dependence theory (RDT) model posits that forming networks such as mergers, vertical integrations, and joint ventures, or engaging in joint political activities, can help mitigate dependencies among member groups. This classic model remains relevant today.

As Launch for Growth to Success discussed, mergers occur when two companies have the same specific goal and create a contract to become one company, with the shared goal usually of gaining new customers, growing market share, improving purchasing power, or reaching new markets.

In vertical integration, a company acquires members of its supply chain, which helps gain economies of scale, improve deliveries of inventories, reduce costs, and may also stifle competition.

A joint venture (see Business Structure Options: Legal, Tax, and Risk Issues) can be less taxing to the companies involved, as each of them retains their identities and management teams while pooling their assets to create synergy through a new project or engagement in political activities. Being able to gain control over their external environment through these alliances is essential to aid a small business toward growth and sustainability.

In the case of Birchbox, there could be a time when a cosmetics brand and Birchbox could merge to create a new line of products, or Birchbox could acquire one of its cosmetics brands in vertical integration. However in more recent years, cooperative ("coop") arrangements have emerged to help small businesses share resources collaboratively based on a common interest and trust. For example, Community Supported Agriculture is a popular way for farmers and other commodity growers to gain selling power through their combined efforts. In particular, Red Hen Bakery, a small artisanal cheese making company in Ontario, has supported its business by partnering with both local pig farmers and craft breweries to help manufacture their cheeses. They also sell vouchers to customers in advance to help manage seasonality.

In another example, farmers have turned to commercial aerial drones to help assess their crops' viability and optimize their use of fertilizers, irrigation, and other resources. Consulting firms have emerged to provide these monitoring services, despite the constraints that the Federal Aviation Administration (FAA) imposes on commercial drones. These common interests have helped them lobby the Farm Bureau and other trade associations to accelerate FAA permits for this type of commercial use.

Work It Out

Auntie Anne's Pretzels and Strategic Partnership

Visit Auntie Anne's Pretzels to learn more about their story.

• Write a summary on how Anne Beiler leveraged relationships in the initial launch of her business.
• What strategies did Beiler use to identify strategic partners, resources and processes to protect her profitability?

Resources Needed Based on Life Cycle

Entrepreneurs need to identify and plan for their resource needs (Table 14.6) and costs for all stages of the venture's life cycle, which is shown in Figure 14.15. Evaluating the cost of the enterprise at each phase for both a good and a service helps the entrepreneur assess its feasibility.

Figure 14.15 Entrepreneurs and business owners should plan for resource needs and their associated funding across all phases of the business life cycle.

Startup Phase

The startup phase is an exciting and exploratory time for the entrepreneur. In this phase, ventures are defining their identity, growing their customer base, learning more about their target market and how best to serve it, how to develop the products that will meet demand, and how to hire the people that will make it all happen. At this time, resources are often scarce, and the entrepreneur may be bootstrapping to keep costs low. This means that the entrepreneur might be working from home to save on rent and utilities, and may have only a part-time employee or none at all. The product may be created on a single piece of equipment that can produce on only a small scale. When a product is first developed, there are also costs to consider. These include costs of raw materials, production, packaging, and personnel for the production, or what is commonly known as cost of goods sold. Recall that the cost of goods sold is the accumulated costs of creating a product (materials, direct labor) or a service (direct labor). At introduction, there is packaging, marketing, promotions, and shipping, and, if inventory is maintained, warehousing.

Any sales revenue is immediately re-invested into the business with the aim of developing a cycle of growth. The entrepreneur at this point may forgo a salary while the business takes off and may also wear many hats to keep the ball rolling instead of hiring employees.

Advisory boards are crucial during this phase, as they bring current information to the table to inform entrepreneurs of trends, changes, or regulatory adjustments within the industry that could affect their enterprise. An advisory board is a group of knowledgeable people who aid an organization to make strategic decisions about the business and its issues without having the power to vote or make any legal decisions. Having access to key contacts, networks of professionals, and public resources are key to having a current toolkit from which to draw information to inform decision-making and resource management.

In the case of Christina's Confections, she started baking goods at home with her own oven. She did quite a bit of bootstrapping and used her savings to buy ingredients, utensils, packaging materials (boxes and containers), marketing materials (flyers, brochures, business cards), and a basic website, and to pay a part-time employee. For two years, Christina didn't collect a salary so she could save money for the next phase, which is growth.

Growth Phase

During the growth phase, the business has been around for a few years, its identity has been developed, its customer base has grown, sales are accelerating, and there is a need for more resources to sustain this growth. Resource needs can take the form of cash to invest in new equipment, new materials, more marketing, or new personnel. Additional equipment may be needed to help with a higher output, or perhaps the current location is too small to produce at a larger scale. The location might not be big enough for customers, or to welcome guests, so a new building may be required. More material might also be needed to create more products due to higher demand, and more people may need to be hired for production. There may be a need for management and administration to expand as the organization grows, too. Departments may now evolve and require processes to coordinate efforts between functions such as production, human resources, and marketing.

Link to Learning

https://s3.amazonaws.com/mentoring.redesign/s3fs-public/Visa-SCORE-7-Steps-for-Growing-Your-Business_0.pdf

Take a look at this checklist for growing a small business from Visa and SCORE. Review the seven steps that address key issues that can affect business growth.

During the growth phase, the entrepreneur might need to change marketing strategy, advertising, production, or even packaging to keep up with demand.

Let us revisit Christina's Confections bakery. Two years into operations, she needs to identify a larger location for her bakery. She now has ten employees and has several corporate accounts she services for special events. She recently partnered with a neighborhood catering company and has been retained to provide the baked goods for their catered events. These changes mean that Christina will need to obtain funding for the expansion, locate a space near her existing location, or expand on the location she is currently leasing. Part of her consideration at this point is determining if it is feasible for her to purchase a location, which would allow her to gain all the benefits of facility ownership as she often works long hours and needs flexibility for access. The ideal location would be one in which she could reside above the storefront so she can incorporate living expenses into her monthly expenses.

Maturity Phase

In maturity, when the product has perhaps saturated the market and there may be lower-cost alternatives, the entrepreneur has to deal with competition as sales level off and more companies are fighting for customers' dollars. At this point, spending resources in branding becomes very important, as customers have many choices available to them and having a reputable image and uniqueness as well as a brand that inspires brand loyalty helps businesses attract them.

As needs change with this growth, the entrepreneur must reconsider the resources, operationalize how these are used, and determine what efficiencies may be gained by retaining certain resources and outsourcing others. Outsourcing is the activity of hiring an outside company or third party to perform a specific task, job, or process, or to manufacture goods. This is common in human resources, where many companies outsource their workforce to reduce costs and focus on retaining tasks they excel at.

For example, if you are a digital marketing company and have several web design projects you are working on, outsourcing can help you pass some of the most challenging tasks in the design or coding process to another company, while your venture focuses on the steps in the process that are your company's strengths. Similarly, another company could seek to use your company's resources if they believe your company has a greater proficiency for specific tasks.

Decline/Rebirth Phase

During the decline phase of a business, if there is to be rebirth, resources must account for making changes to the product so it can have its renaissance. In Christina's case, if the traditional bakery industry were to decline, she could decide to use different ingredients and equipment to make a new kind of cake that uses only fruit and vegetables, or something completely different that would ensure the business would still be unique enough to come back to the life cycle. Most companies that have lasted many years in business have gone through this cycle several times and have been able to reinvent themselves. Small bakeries, clothing chains, and car manufacturers have been able to "come back" within industries that are easy to fail in due to their decline. Also, many tech companies such as Apple, Nintendo, and Polaroid were once in the decline phase, but their ability to shift allowed them to have a rebirth.

Summary of Resources for Each Phase of Business

Human Resources

Step 1: Determine Resourcing Needs

Step 2: Hire a Team

Step 3: Create an Employee Handbook

Step 4: Secure Independent Contractors, if Necessary

Link to Learning

Step 5: Establish Benefits

Link to Learning

https://www.shrm.org/pages/default.aspx

• Are the skill levels that I need available in the region where I plan to operate?
• What is the prevailing wage for the human resources I need?
• How much can I afford to pay employees at this phase in my business?
• Are independent contractors the best option or are employees a better fit?
• Will I need to provide ongoing formal training or maintain certifications or licensures for my staff or are employees responsible for these items themselves?
• How can I be competitive with other business to attract the talent I need?
• Will I need to provide benefits such as vacation, retirement plans, health insurance, or life insurance?

Educational, Support, and Mentorship Resources

What Can You Do?

Take a SCORE Course

• Mentor: Offer confidential business mentoring services, either in person or online
• Subject matter expert: Provide focused knowledge based on your professional skills or industry
• Workshop presenter: Lead local workshops, seminars and events to help entrepreneurs meet their goals and achieve success
• Chapter support role: Share your skills in marketing, tech, finance, fundraising and more to help expand the outreach of SCORE

Using the PEST Framework to Assess Resource Needs

Learning Objectives

By the end of this section, you will be able to:

• Describe the components of the PEST framework (political, economic, sociocultural, and technological factors)
• Apply the PEST framework to assessing resource needs
• Understand how to assess typical resource costs at startup
  

As you venture into planning the resource allocation for your enterprise, you will learn that there are a variety of tools that can help you. It is important prior to launch to identify the minimum resources needed for startup. Some businesses will require more capital equipment (such as production machines); some require more technological resources, such as software (or software designers); some companies may require a lot of funding at the beginning of their quest, whereas some will require only a small investment of money. The level of resources needed for an enterprise changes over time, as well.

As the entrepreneur goes through the brainstorming process to identify the feasibility of the idea, they can simultaneously begin to think practically about what they will need to make this business operational: What raw materials are needed to manufacture the product? How many employees are needed at each phase? Will a physical site be necessary, and, if so, where will it reside?

Narrowing down the minimum resource needs of the enterprise in response to some or all of these questions is essential to a successful business launch. The entrepreneur can gather information and make an informed decision on what needs have to be covered at the beginning of the venture. This information can be condensed into the business plan, marketing plan, or pitch that can be shared with stakeholders. The information gleaned from the stakeholders' responses to the plans informs not only the entrepreneur and stakeholders internal to the business, but external stakeholders such as banks, investors, suppliers, vendors, and partners. The information is essential for the decision-making process. One tool that can help ensure that planning is comprehensive and well thought through is the PEST framework.

PEST Framework

The PEST framework is a strategic assessment tool that entrepreneurs can use to identify factors that may influence access to essential resources. PEST is an acronym for political, economic, sociocultural, and technological factors (Figure 14.10).

Figure 14.10 Gaining an understanding of these four factors can help entrepreneurs gauge access to important resources.

Link to Learning

Watch the video about PEST to learn more. Why is it important to look at the outside environment? How does the PEST analysis work?

Political Factors

Although you may hope to be your own boss, make your own schedule, and follow your own rules, you must still work within the realities of outside factors that affect your business. Political factors stem from changes in politics, such as the policies of a new presidential administration or congressional legislation. Such policies can affect access to capital, labor laws, and environmental regulations. Moreover, these political changes can take place on federal, state, and local levels. Figure 14.11 lists several political factors that can influence a business. Tax reform law, for example, could influence the amount of taxes a business owes, while actions by the newly appointed chair of the Federal Reserve could affect how much capital may cost the small business owner because of interest rate changes.

Figure 14.11 Businesses must follow all laws and regulations, but political factors such as the ones listed here can influence the profitability of the organization. 

Recently, the 2017 Tax Cuts and Jobs Act changed corporate tax rates, as well as the payments businesses make quarterly to the Internal Revenue Service (IRS). Other changes included the expansion of certain deductions and tax credits (including which specific business expenses can be deducted), and a new method to depreciate assets, as well as other rules related to employees who help businesses receive credits and minimize taxes.

Businesses must also follow environmental laws, such as those from the Occupational Safety and Hazard Association and the Environmental Protection Agency (EPA). For example, these government agencies require businesses to train employees about materials that may be hazardous to people and provide notices and reports on these matters. The EPA also has regulations on air and water emissions that businesses must follow, as improper disposals can harm the environment. Smaller businesses may be exempt from some of the regulations under certain circumstances.

Imported products are regulated by the federal government through quotas and tariffs. Tariff laws have been used as political instruments to manage the flow of goods between countries. Tariffs are taxes or duties that are added to imported goods from another nation. Quotas, a limit on the number of items entering a country, are also used to restrict the volume of goods entering a country. For example, the US government in 2019 imposed tariffs on $550 billion of Chinese products, while China has imposed tariffs on $185 billion worth of US products. While it is likely that this ongoing trade dispute will be resolved, free trade remains an ongoing source of international economic competition.

For example, business owner Daniel Emerson, CEO of light manufacturer Light and Motion, described in a National Public Radio (NPR) interview that the latest round of tariffs on materials from China might push him to open a manufacturing plant overseas. Light and Motion manufactures lights for bicycles, headlamps, drones, and media production. According to Emerson, in order to get his parts from China, he has to pay the US government for importing them. He states that these tariffs might destroy his company, as his main competitors in China and other countries don't face those tariffs; therefore, his prices are forced higher. Emerson might have to move his company to the Philippines, which has no tariffs. He'll have to build them there and ship the completed lights to the United States. As an entrepreneur, you should remain aware of political issues that may impact your operations and planning.

Economic Factors

Entrepreneurship has a direct impact on the economy by providing employment opportunities to many people. However, economic factors can also affect the success of a business. For example, they can deter customers from purchasing goods and services due to an economic downturn. On the other hand, when the economy is expanding and growing, people tend to feel confident about their jobs and income, and they may spend more than usual. Economic factors - which include inflation rates, interest, currency exchange (if the business operates or engages globally), state of the economy (growth or decline), employment rates, and disposable income - can impact the business owner's pricing of goods or services, the demand for such services, and the cost of production.

Taking the state of the economy, for example, when the economy is down, restaurants will see a decline in clientele as more people prepare meals at home to save money, or they will switch from fine dining restaurants to more casual or fast-food restaurants. In weak economies, consumers tend to purchase store (often called "private label") brands more often than national brands to reduce their grocery bill. When the economy is healthy, consumers spend more on entertainment and restaurants, which can be considered luxury items. The restaurant will need to adjust its resources to meet the economy-driven fluctuating demand. When demand is high, it is likely that the restaurant will need more supplies and more employees. These needs, in turn, result in the restaurant needing additional financial resources to buy more supplies and to pay employees. When demand is low, the opposite is true.

Sociocultural Factors

Knowing about your customers is key to delivering what they really want. Additional factors that need to be taken into consideration include changes in how society is moving and the direction of that movement as it relates to your customer base and potential new markets. These sociocultural factors include population growth rates, changes in where people live, social trends such as eating healthier and exercising, education levels, generational trends (millennial, baby boomer, or Gen X and Y), and religious culture. These factors can affect not only the seven Ps you learned about in the Entrepreneurial Marketing and Sales chapter, but also resource assessment more specifically. It is necessary to look at these factors closely in order to allocate marketing resources optimally. For example, if you are opening a restaurant and you see an increasing trend in healthy food, you may want to allocate your resources to fresh ingredients or more vegetarian and vegan options.

One far-reaching sociocultural factor is the impact that digital shopping has had on brick-and-mortar retailers. This online shopping trend has forced long-established companies such as JCPenney, Payless, Gap, Victoria's Secret, Radio Shack, Macy's, and Sears, to close thousands of stores, file for bankruptcy, or shut down the business altogether. These companies have faced enormous competition from entities such as Amazon and smaller businesses such as ModCloth and Birchbox that interact with customers virtually and stay on top of societal trends. Younger generations such as the Y and Z generations have triggered these social changes, as they are technologically savvier and expect to find exactly what they want, where they want it, and when they want it.

Technological Factors

In the case of technological factors, the enterprise needs to be sure it has equipment that allows it to operate efficiently. There are different types of technology that help with marketing, finances, productivity, collaboration, design, and production.

Being able to use technology to meet the needs of the customer, such as having an informational or an e-commerce website (so the customer can purchase from the comfort of home) is a "must" these days for most ventures. Digital marketing has allowed entrepreneurs to promote their businesses in many different ways, through e-mail marketing, digital ads on search engines such as Google or Bing, websites, social media groups, YouTube videos, and blogs. These tools are easy to use, available, and can be affordable, even on a shoestring budget.

Work It Out

Social Media as a Resource

Leveraging social media technology is essential to building your brand and awareness in today's digital society. Create an idea sheet for a Facebook page for your Helios solar panel enterprise, which was mentioned earlier in the chapter. What are the types of information you want to include? Do you want the page to be operational or just informational? Will this social media tool be used as the main source for customers to learn about your business or will it be a supplemental tool to create deeper relationships?

Other technology can also be helpful in managing payments from customers, billing, human resources payments, and keeping the books. QuickBooks is a popular software program that a starting entrepreneur can purchase and use to manage the company's financials. Other products are available too - ZOHO Books, FRESH Books, GoDaddy Bookkeeping, and Kashoo - each has pros and cons.

Other types of software such as UAttend help small businesses keep track of their employees' time and productivity, and Basecamp helps entrepreneurs keep track of the projects that everyone is working on, while allowing them to collaborate with each other and keep track of what is happening. These tools can make it easy for an entrepreneur to manage a project with contractors or employees.

Other technology that needs to be taken into consideration if you are manufacturing a product includes the tools and equipment that will create goods and services. Some examples are CAD (computer-aided design), 3-D printing for developing quick prototypes (Figure 14.12), CAM (computer-aided manufacture), robots, and new materials that allow faster and cheaper production of goods. 3-D printing, for example, is a manufacturing process that uses a technique of adding layers of material to create rapid prototypes. It can be used to create prototypes of products, toys, architectural models, prosthetics, tools, fashion, automotive parts, and even final products like homes, as in the case of New Story. The use of prototyping allows for creativity, and these newer technologies allow users to create many prototypes. Nike, for example, uses 3-D printing to make their prototypes because it is faster than waiting for a full prototype to go through the manufacturing process. Using these technologies for prototyping can also avoid the expense of building the actual product, allow for the final product to be refined quickly, and help in the reduction of manufacturing errors.

The drawback is that some of these technologies can be expensive to purchase, and it can take a long time to recuperate the cost. (However, when wages and benefits costs rise quickly, they can pay for themselves rather quickly.) Entrepreneurs must be sure to acquire only those tools and materials that will help them get started. Then, as the business thrives, more funding is available for more expensive equipment and software Entrepreneurs then need to have the skills and knowledge to operate specific software and consider upgrades and replacement costs. Questions include: What about support services? How long will support last? If the entrepreneur updates the PC, will the old software run on the new operating system? Can the data be easily copied to the new operating system or software program?

Figure 14.12 3-D printing allows companies to develop prototypes quickly before investing substantial resources. (a) A 3-D sphere, for example, can be created using (b) a 3-D printer.

Assessing Resource Costs for Startup

Starting a business can be an exciting event, and one that requires thoughtful planning. Resource planning can help determine start-up costs, which helps determine an estimate of breakeven sales, profits, what types of funding to use, and how to plan for future expenses like tax payments. According to the SBA business guide, there are several steps you should take to determine startup costs for different types of businesses.

First, figure out the type of business you want to open: brick and mortar, online, or services. Brick-and-mortar businesses have physical locations where a customer may purchase a product in one or several locations. Online businesses operate through e-commerce websites and sell products and services virtually. These may or may not also have a physical location. Service businesses provide services rather than a tangible product. Also, consider the type of business structure you will hav.

Next, make a cost list like the one in Table 14.5. There could be additional costs based on the resource needs identification discussion in Types of Resources. Many of the costs will be easy to determine, but others - like salaries, insurance, and improvements - might be more difficult to estimate. You can consult research sites, local business resources (such as the chamber of commerce), or speak to mentors or consultants (such as SCORE) for more guidance on how to estimate these numbers. Also see Building Networks and Foundations to see how industry professionals can help determine startup costs (Table 14.5).

Examples of Common Costs Related to Starting a Business

Are You Ready?

Specialty Pizzeria Costs

Key Terms

advisory board
group of advisors that helps an organization make strategic decisions about the business, and brings certain knowledge and experience that can bring a new perspective on issues without having the actual authority to vote or govern

copyright
grants the creator of a work the exclusive right to reproduce the work, typically for a specified period of time

decision tree
flowchart diagram used to explore the outcomes of different decisions

economic factors
inflation, interest, employment, and currency exchange, rates, (among many other factors) that impact the business owner's pricing of goods or services, the demand for such services, and the cost of production

funding sources
monetary resources used by the entrepreneur in the operation of the initial startup and early business

human resources
people hired by the entrepreneur to perform various duties in the business, provide customer service, or produce the goods

independent contractors
(also, freelancer) people or businesses that provide work similar to an employee without being part of the payroll for the contracting business, and who pay their own taxes and pay for their own benefits

intangible resources
assets that cannot be seen, touched, or felt, such as intellectual property, patents, designs, and processes

line of credit
lending of funds in exchange for a promise to repay

outsourcing
hiring an outside company or third party to perform a specific task, job, or process, or to manufacture goods

PEST
framework that can be used to distinguish political, economic, sociocultural, and technological factors influencing access to needed resources

political factors
stem from changes in politics, such as the policies of a new presidential administration or congressional legislation, as well as of state and local offices

pre-launch costs
cost of all the resources needed to open the business to the public

quota
specific number of units allowed into a country; sometimes quotas are limited to one source, such as one country, and sometimes the limit is placed on aggregate quantity regardless of source(s)

resource dependence theory (RDT) model
creating networks with business partners through mergers, vertical integration, joint ventures, or engaging in joint political activities to slow dependency among member groups

service mark
word, phrase, symbol, or graphic that identifies the origin or source of a service

sociocultural factors
changes in how society is moving and the direction of that movement as it relates to a customer base and potential new markets

tangible resources
assets that have a physical form as they can be seen, touched, and felt

tariffs
taxes or duties that are added to imported goods from another nation

technological factors
technological equipment and tools the enterprise needs to be sure it operates efficiently

trademark
registration that provides the owner the ability to use a name, symbol, jingle, or character in conjunction with a specific product or service, and prevents others from using those same symbols to sell their products

Summary

Types of Resources

Determining which resources a venture needs is essential to its success. Assets are types of property that benefit the person or company in possession of them. They can be tangible or intangible. Tangible resources can be seen, touched, and felt. They may include raw materials, land, facilities, buildings, machinery, computers, supplies, furniture, information technology, and vehicles.

Intangible resources cannot be seen, touched, or felt. They include intellectual property such as designs, formulas, art, written work, brands, and inventions that can be protected by patents, trademarks, and copyrights.

Entrepreneurs oftentimes have novel ideas about how to provide a service or how to create a better product. These ideas are important to safeguard so other competitors don't copy those same characteristics of a product, process, machine, piece of writing, or any other of the works cited earlier. A way to protect them is to ensure that you have a patent, trademark, or copyright so others cannot benefit from your work. It is always beneficial to do a check before applying for one of the protections and make sure that the invention hasn't been created before. Searching the USPTO website and hiring an attorney will ensure you are the first one to register your idea and help you through the lengthy and often expensive process of protecting a new idea.

Funding sources are essential to starting and scaling a business. These include an entrepreneur's own savings, bank loans, venture capitalists, angel investors, crowdfunding, and friends and family. It is important to consider the pros and cons of your financing options in relation to your resource needs in order to plan for short- and long-term needs.

Using the PEST Framework to Assess Resource Needs

Business owners need to know what resources they need before launching. The PEST framework can help you become aware of outside forces that affect the procurement of resources you need to succeed. PEST looks at the political, economic, sociocultural, and technological factors that affect resource costs and availability. Different businesses require different resources, so going through a checklist of basic needs, finding the associated costs, splitting them into one-time costs and ongoing costs, and adding them up will ensure the entrepreneur is aware and ready to document for an investor or bank the resources needed.

Managing Resources over the Venture Life Cycle

The life cycle of the business requires resource allocation and planning at each stage. These stages include the startup phase, growth phase, maturity phase, and decline/rebirth phase. There are instances where a business has failed because the owner failed to re-assess shifting resource needs caused by changes in the marketplace and the overall environment. Research is an ongoing process, and keeping an eye on the external environment allows a business to be able to shift on time.

Resource dependence theory (RDT) is a model that explores creating networks with other companies through mergers, vertical integration, and joint ventures. RDT can help counteract the effects of competing with each other by optimizing collaboration.

Human resources include the labor that produces a product or service, and provides administrative support and customer service. Having good employees adds value to the enterprise because they help generate sales and profit. Education in marketing, management, and leadership are important topics to engage in as a business owner as well as having personal support from mentors.