Entrepreneurship and

New Venture Management

Chapter 5

Learning Objectives

After studying this chapter, you should be able to:

1. Discuss the nature of entrepreneurship.

2. Describe the roles of entrepreneurship in society.

3. Understand the major issues involved in choosing strategies for small firms and the role of international management in entrepreneurship.

4. Discuss the structural challenges unique to small firms.

5. Understand the determinants of the performance of entrepreneurial firms.

Chapter Outline

The Nature of Entrepreneurship The Role of Entrepreneurship in Society

Job Creation Innovation Importance to Large Businesses

Strategy for Entrepreneurial Organizations Choosing an Industry Emphasizing Distinctive Competencies Writing a Business Plan Entrepreneurship and International

Management

Chapter Outline (cont’d)

Structure of Entrepreneurial Organizations Starting the New Business Financing the New Business Sources of Management Advice Franchising

The Performance of Entrepreneurial Organizations Trends in Small-Business Start-ups Reasons for Failure Reasons for Success

The Nature of Entrepreneurship

Entrepreneurship The process of planning, organizing,

operating, and assuming the risk of a business venture.

Entrepreneur Someone who engages in

entrepreneurship. Small Business

A business that is privately owned by one individual or a small group of individuals.

It has sales and assets that are not large enough to influence its environment.

The Role ofEntrepreneurship in Society

Research Findings: Most new businesses fail within the first few years

of being founded. Those that survive often do so because the entrepreneur works for little income.

Most (more than 99%) U.S. businesses are small with fewer than 100 employees.

Most U.S. workers work for small businesses. The majority of small businesses are owner-

operated. Small business is a strong presence in both mature

and emerging economies. It has a strong effect on job creation, innovation, and is important to big businesses.

The Importance of Small Business in the United States

Representative Jobs Created and Lost by Big Business (1996-

2005)

The Role ofEntrepreneurship in Society

(cont’d)

Innovation Historically, major innovations are as likely to

come from small businesses as from large firms. Much of what is created in the high-technology

sectors comes from start-up companies.

The Role ofEntrepreneurship in Society

(cont’d)

Importance to Large Business Most products made by large

manufacturers are sold to customers by small businesses.

Small businesses as suppliers provide large firms with essential services, supplies, and raw materials.

Large businesses outsource many routine business operations such as packaging, delivery, and distribution to small businesses.

Strategy for Entrepreneurial Organizations

Three Basic Strategic Challenges Choosing an industry in which to

compete. Emphasizing distinctive

competencies. Writing a business plan.

Small Businesses (Businesses with Less Than Twenty Employees) by Industry

Economies of Scale inSmall Business Organizations

Strategy for Entrepreneurial Organizations (cont’d)

Emphasizing Distinctive Competencies Identifying a niche in an established market

Finding part of a market not currently being exploited that offers a competitive advantage to small businesses.

Identifying New Markets Using the transfer of an existing product/service

to a new market, entrepreneurs can create new industries, products, or services.

First-Mover Advantage Exploiting an opportunity before any other

firm does.

Strategy for Entrepreneurial Organizations (cont’d)

Writing a Business Plan A business plan is a document

that summarizes the business strategy and structure.

The plan should include: business goals and

objectives. strategies used to achieve

these goals and objectives. a plan of how the

entrepreneur will implement these strategies.

Strategy for Entrepreneurial Organizations (cont’d)

Entrepreneurship and International Management There is potential for

expansion and growth in foreign markets.

While there are risks, entering a foreign country’s market can be a real catalyst for success.

Structure of Entrepreneurial Organizations

Starting a New Business Buying an Existing Business

Business has a proven ability to drawcustomers and make a profit.

Networks (e.g., customers and suppliers)are already established.

Negative: New owners inherit any existing problems.

Starting from Scratch Avoids problems associated with previous

owners. Allows freedom to choose suppliers,

equipment, location, and workers. Negative: More business risk and

uncertainty.

Structure of Entrepreneurial Organizations (cont’d)

Identifying a Genuine Business Opportunity

Who are my Who are my customers?customers?

Where are they?Where are they?

At what price At what price will they buy my will they buy my

product?product?In what In what quantities will quantities will

they buy?they buy?

Who are my Who are my competitors?competitors?

How will my How will my product differ from product differ from

those of my those of my competitors?competitors?

Financing the New Business

Personal Resources Using your own money

and money borrowed from friends and relatives to finance the business.

Strategic Alliances Partnering with

established firms, such as suppliers in a mutually beneficial relationship.

Lenders Obtaining funding from

traditional lenders (e.g., banks, independent investors, and government loans).

Venture Capital Companies

Groups of small investors who provide capital funds to small, high-growth potential start-up firms in exchange for an equity position (stock) in the firms.

Financing the New Business (cont’d)

Small-Business Investment Companies (SBICs) SBICs are investor-owned companies that borrow

money from the SBA and, in turn, loan it to small business with high growth potential.

Minority Enterprise Small-Business Investment Companies (MESBICs) specialize in financing businesses owned by minorities.

SBA Financial Programs The Small Business Administration has several

financing programs (e.g., SBA-guaranteed loans) for small businesses that are unable to get private financing at reasonable terms.

Franchising

Franchising Agreement Operation of the franchised

business by the entrepreneur (the franchisee) under a license by a parent company (the franchiser).

The entrepreneur pays the parent company for use of trademarks, products, formulas, and business plans.

Franchising (cont’d)

Advantages of Franchising Reduced financial risk of new business

success through experience provided by franchiser.

Training, financial, and management support by franchiser.

Disadvantages Start-up fees to purchase franchise. Limitations of franchise (market area,

product, customers). Imposed operational controls of franchiser.

Business Start-Up Successes and Failures

The Performance ofEntrepreneurial Organizations

(cont’d)

Trends in New Business Start-Ups The emergence of E-commerce

Internet-based business Crossovers to small business by former

large-business employees Increased entrepreneurial opportunities

for minorities and women

Better survival rates for small businesses

The Growthof On-Line Commerce

Where Women Entrepreneurs Come From and What They Like About

Their Work

Source: Wall Street Journal, May 24, 1999, p. R12.

The Performance of Entrepreneurial Organizations

(cont’d)

Reasons for Failure Managerial incompetence/

inexperience of the entrepreneur.

Neglect in not devoting sufficient time and effort to the business.

Weak control systems that do not warn of impending problems.

Insufficient capital to sustain the business until it starts to turn a profit.

Reasons for Success Hard work, drive, and

dedication by the entrepreneur.

Careful analysis of market conditions provides insights about business conditions.

Managerial competence through training and experience contributes to success.

Luck sometimes plays a role.