Prentice Hall, Inc. © STRATEGIC MANAGEMENT & BUSINESS POLICY 10 TH EDITION THOMAS L. WHEELEN J. DAVID HUNGER CHAPTER 13 Strategic Issues in Entrepreneurial Ventures and Small Businesses

Prentice Hall, Inc. © Entrepreneurial Ventures & Small Businesses 99% of all businesses – –23 million small businesses. –60% -80% new jobs annually There is a strong correlation between national economic growth and the level of entrepreneurial activity in prior years –Small companies are roughly 13 times more innovative per employee than large firms –95% of “radical product developments originate from small companies BUT ;

Prentice Hall, Inc. © Entrepreneurial Ventures & Small Businesses 50% of the businesses founded in any one year are not in business four years later. (Some speculate that this rate is 80%)

Prentice Hall, Inc. © Entrepreneurial Ventures & Small Businesses Employs fewer than 500 people and sales of less than $20 million annually (KOBİ)

Prentice Hall, Inc. © Entrepreneurial Ventures & Small Businesses Small business firm – –Independently owned & operated –Not dominant in field –Not engaged in innovative practices Entrepreneurial venture – –Primary goals profitability and growth –Characterized by innovative strategic practices Differences – –Not in types of goods and services –Fundamental views on growth and innovation

Prentice Hall, Inc. © Entrepreneurial Ventures & Small Businesses An entrepreneur is the ultimate strategist A person who organizes and manages a business undertaking and who assumes risk for the sake of a profit. –All 3 levels Corporate Business Functional “ENTREPRENEURS ARE STRATEGIC PLANNERS WITHOUT REALIZING IT”

Prentice Hall, Inc. © Entrepreneurial Ventures & Small Businesses Strategic planning is strongly related to small-business financial performance. Than why it is rare ? … Lack of strategic planning in small business – –Not enough time –Unfamiliar with strategic planning –Lack of skills –Lack of trust and openness

Prentice Hall, Inc. © Entrepreneurial Ventures & Small Businesses Degree of formality – –Process far more informal in small companies than in large corporations “Too much formalization of the strategic planning process may actually result in reduced performance”

Prentice Hall, Inc. © Informal questions to begin strategic management process

Prentice Hall, Inc. © Entrepreneurial Ventures & Small Businesses Strategic decision-making process for entrepreneurial ventures – 1. Develop basis business idea Product/service with target market/customers 2. Scan external environment Locate factors of opportunity/threat

Prentice Hall, Inc. © Entrepreneurial Ventures & Small Businesses Strategic decision-making process for entrepreneurial ventures – 3. Scan internal factors Relevant to the new business 4. Analyze strategic factors Current situation using SWOT

Prentice Hall, Inc. © Entrepreneurial Ventures & Small Businesses Strategic decision-making process for entrepreneurial ventures – 5. Decide go or no go Opportunity to go 6. Generate business plan Transform idea into reality

Prentice Hall, Inc. © Entrepreneurial Ventures & Small Businesses Strategic decision-making process for entrepreneurial ventures – 7. Implement the business plan Use action plans and procedures 8. Evaluate actual performance against the projected performance results

Prentice Hall, Inc. © Entrepreneurial Ventures & Small Businesses

Prentice Hall, Inc. © Entrepreneurial Ventures & Small Businesses

Prentice Hall, Inc. © Entrepreneurial Ventures & Small Businesses

Prentice Hall, Inc. © Entrepreneurial Ventures & Small Businesses In entrepreneurial ventures usually, the owners and the managers are the same people. If the stock is closely held by family members (or their immediate families) “passive boards” exists. Advisory Boards –External business people – voluntary –Discuss strategic and other issues

Prentice Hall, Inc. © Entrepreneurial Ventures & Small Businesses On the other hand, if the firm financed by “venture capitalists” they possible have over active boards, who are highly involved in strategic management.

Prentice Hall, Inc. © Entrepreneurial Ventures & Small Businesses Sarbanes-Oxley –Compliance costs Going Dark –In 2003 alone, 198 firms “went dark” by delisting their stock from stock exchange

Prentice Hall, Inc. © Entrepreneurial Ventures & Small Businesses A fundamental reason for differences in strategy formulation between large and small entrepreneurial companies lies in the relationship between owners and managers. –No agency theory –No need to balance stakeholders, but the personal and/or family needs

Prentice Hall, Inc. © Entrepreneurial Ventures & Small Businesses Large companies usually choose growth strategy, But, A small company may choose a stability strategy because; –To generate employment for family members –Providing the family a decent living –Being the boss of a small firm instead of loosing control

Prentice Hall, Inc. © Entrepreneurial Ventures & Small Businesses Internal assessment of a new venture’s strengths and weaknesses focuses on the founder’s personal characteristics – his or her assets, expertise, and experience. Just as an entrepreneur’s strengths can be the key to company success, personal weaknesses can be a primary cause of failure.

Prentice Hall, Inc. © Entrepreneurial Ventures & Small Businesses Sources of Innovation – –The unexpected –The incongruity –Innovation based on process need –Changes in industry or market structure –Demographics –Changes in perception, mood, meaning –New knowledge

Prentice Hall, Inc. © Entrepreneurial Ventures & Small Businesses Factors affecting new venture success – 1.Structure of industry 2.Business strategy of new venture 3.Behavioral characteristics of entrepreneur

Prentice Hall, Inc. © Entrepreneurial Ventures & Small Businesses Factors affecting new venture success – 1.Structure of industry - Prospects are better in industries that are in the early high growth stages of development - Most new ventures enter industries that have a low degree of industry concentration (no dominant competitors) BUT; Industry concentration is not necessarily bad. It may create market niches being ignored by large firms. To avoid direct competition with a major rival, the new venture can focus on a market segment that is being ignored

Prentice Hall, Inc. © Entrepreneurial Ventures & Small Businesses Industry product characteristics also have a significant impact on a new venture’s success; First: success is more likely in a heterogeneous (different) products market than homogeneous (similar) products. Second: success is more likely if the product is relatively unimportant to the customer’s total purchasing needs.

Prentice Hall, Inc. © Entrepreneurial Ventures & Small Businesses Factors affecting new venture success – 2.Business strategy of new venture Chances are increasing if; - differentiate - focus on a niche

Prentice Hall, Inc. © Entrepreneurial Ventures & Small Businesses Factors affecting new venture success – 3.Behavioral characteristics of entrepreneur –Identify opportunities better –Sense of urgency—action oriented –Detailed knowledge-physical stamina –Access to outside help

Prentice Hall, Inc. © Entrepreneurial Ventures & Small Businesses Transfer of Power in Family Businesses Only 30% of family firms survive to the second generation, and just 15% survive to the third generation “The first generation creates, the second generation inherits, and the third generation destroys”

Prentice Hall, Inc. © Entrepreneurial Ventures & Small Businesses Transfer of Power in Family Businesses WHY ? 1.Inherited wealth destroys entrepreneurial drive, 2.The entrepreneur doesn’t allow change 3.Neglecting family, 4.Over spending, 5.Family members are not prepared to run a business, 6.The business becomes an arena for family conflict.

Prentice Hall, Inc. © Entrepreneurial Ventures & Small Businesses Transfer of Power in Family Businesses Remedy : 1.Owner Managed Business, 2.Training and Development of New Generation 3.Partnership Between Generations, 4.Transfer of Power,

Prentice Hall, Inc. © Entrepreneurial Ventures & Small Businesses Sub-stages of small business development –Existence –Survival –Success –Take-off –Resource maturity

Prentice Hall, Inc. © Entrepreneurial Ventures & Small Businesses Evaluation and Control – –Line between debt and equity blurred –Lifestyle part of financial statements –Standard financial formulas don’t apply –Personal preference –Banks combine personal and business wealth