Entrepreneurship and New Venture Management Chapter 5 Entrepreneurship and New Venture Management

Learning Objectives After studying this chapter, you should be able to: Discuss the nature of entrepreneurship. Describe the roles of entrepreneurship in society. Understand the major issues involved in choosing strategies for small firms and the role of international management in entrepreneurship. Discuss the structural challenges unique to small firms. 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 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 of Entrepreneurship 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 of Entrepreneurship 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 of Entrepreneurship 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 in Small 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 draw customers 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 Where are they? Who are my customers? At what price will they buy my product? In what quantities will they buy? How will my product differ from those of my competitors? Who are my competitors?

Financing the New Business 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. 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.

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 Disadvantages 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 of Entrepreneurial 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 Growth of On-Line Commerce

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