Managing New Venture Formation and Entrepreneurship CHAPTER 10 Managing New Venture Formation and Entrepreneurship PowerPoint Presentation by Charlie Cook Copyright © by Houghton Mifflin Company. All rights reserved.

Learning Objectives After studying this chapter, you should be able to: Discuss the nature of entrepreneurship. Describe the roles of entrepreneurs in society. Understand the major issues involved in choosing strategies for small firms and the roles of international management in entrepreneurship. Discuss the structural challenges unique to entrepreneurial firms. Understand the determinants of the performance of small firms. Copyright © by Houghton Mifflin Company. All rights reserved.

Chapter Outline The Nature of Entrepreneurship The Role of Entrepreneurship 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 Structure of Entrepreneurial Organizations Starting the New Business Financing the New Business Sources of Management Advice Franchising The Performance of Entrepreneurial Organizations Trends in New Business Start-ups Reasons for Failure Reason for Success Copyright © by Houghton Mifflin Company. All rights reserved.

The Nature of Entrepreneurship The process of planning, organizing, operating, and assuming the risk of a business. 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. Copyright © by Houghton Mifflin Company. All rights reserved.

The Role of Entrepreneurship in Society (cont’d) Research Findings: Most new businesses fail within the first three years of founding. 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 and has a strong effect on job creation, innovation, and are important to big businesses. Copyright © by Houghton Mifflin Company. All rights reserved.

The Importance of Small Business in the United States 80 40 20 60 90 50 30 10 70 100 Under – 499 500 999 99 Number of Employees 1,000 or more (a) Percentage of Businesses 80 40 20 60 90 50 30 10 70 100 Under – 499 500 999 99 Number of Employees 1,000 or more Percentage of All U.S. Workers (b) Source: U.S. Census Bureau, Statistical Abstract of the United States: 1999 (119th Edition) Washington, D.C., 1999. Figure 10.1 Copyright © by Houghton Mifflin Company. All rights reserved.

The Role of Entrepreneurship in Society (cont’d) Job Creation Small business creates 80% of the new jobs in the U.S. Industry sectors dominated by small business have added the most jobs. Small business accounts for 38% of all jobs in high-technology sectors and for 96% of all U.S. exporters. 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. Copyright © by Houghton Mifflin Company. All rights reserved.

Representative Jobs Created and Lost by Big Business 1990–1999 +100,000 + 639,000 +45,000 +36,270 +29,000 +22,900 +21,631 +12,100 JOB GAINS America Online Conagra Dell Corporation Wal-Mart Barnes and Noble Circuit City Albertson ’ s Dayton Hudson JOB LOSSES – 116,000 PepsiCo 92,153 IBM 86,578 General Mills 86,475 Kmart 181,100 3,400 16,340 Quaker Oats 21,100 National Semi- Conductor Motors Toys “ ” Us Figure 10.2 Copyright © by Houghton Mifflin Company. All rights reserved.

The Role of Entrepreneurship in Society (cont’d) Importance to Large Businesses 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. Copyright © by Houghton Mifflin Company. All rights reserved.

Strategy for Entrepreneurial Organizations Three Basic Strategic Challenges Choosing an industry in which to compete. Emphasizing distinctive competencies. Writing a business plan. Copyright © by Houghton Mifflin Company. All rights reserved.

Small Businesses (Businesses with Less Than Twenty Employees) by Industry Construction Transportation Wholesale Financial and Insurance Manufacturing Other Services Retailing 10% 22.7% 37.6% 1.7 5% 8% Services are the fastest growing segment of small-business enterprise. Source: U.S. Census Bureau, Statistical Abstract of the United States: 1999 (119th Edition) Washington, D.C., 1999. Figure 10.3 Copyright © by Houghton Mifflin Company. All rights reserved.

Economies of Scale in Small Business Organizations Number of units produced (a) Standard economies-of-scale curve Cost of production per unit($) B Number of units produced (b) Change in technology that shifts economies of scale and may make small business production possible A Original economies of scale New economies of scale Cost of production per unit($) Figure 10.4 Copyright © by Houghton Mifflin Company. All rights reserved.

Strategy for Entrepreneurial Organizations Emphasizing Distinctive Competencies Identifying Niches in Established Markets A niche is a segment of a market not currently being exploited in an established market where several large firms compete. A niche offers a competitive advantage to small businesses. Identifying New Markets New market is explored using the transfer of an existing product/service to a new market. Entrepreneurs can create new industries/products/services. First-Mover Advantage Exploiting an opportunity before any other firm does. Copyright © by Houghton Mifflin Company. All rights reserved.

Strategy for Entrepreneurial Organizations (cont’d) Writing a Business Plan A business plan is a document that summarizes the business strategy and structure. It should include: business goals and objectives. strategies used to achieve these goals and objectives. a plan of how the entrepreneur will implement these strategies. 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. Copyright © by Houghton Mifflin Company. All rights reserved.

Structure of Entrepreneurial Organizations Starting a New Business Buying an Existing Business Business has a proven ability to draw customers and make a profit (the business is a going concern). 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. Freedom to choose suppliers, equipment, location, and workers. Negative: More business risk and uncertainty. Copyright © by Houghton Mifflin Company. All rights reserved.

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 vary from those of my competitors? Who are my competitors? Copyright © by Houghton Mifflin Company. All rights reserved.

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. Copyright © by Houghton Mifflin Company. All rights reserved.

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. Copyright © by Houghton Mifflin Company. All rights reserved.

Sources of Management Advice Advisory Boards Management Consultants The Small Business Administration Networking Copyright © by Houghton Mifflin Company. All rights reserved.

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. 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. Copyright © by Houghton Mifflin Company. All rights reserved.

The Performance of Entrepreneurial Organizations Business Start-Up Successes and Failures 50,000 100,000 150,000 200,000 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Year Business Start-Ups Business Closures Source: U.S. Census Bureau, Statistical Abstract of the United States: 1999 (119th Edition) Washington, D.C., 1999. Figure 10.5 Copyright © by Houghton Mifflin Company. All rights reserved.

The Performance of Entrepreneurial Organizations (cont’d) Trends in New Business Start-Ups The emergence of E-commerce Crossovers to small business by former large-business employees Increased entrepreneurial opportunities for minorities and women Better survival rates for small businesses 10,000 12,000 14,000 20,000 Year 2,000 4,000 6,000 8,000 16,000 18,000 1997 1998 1999 2000 2001 Billions of Dollars The Growth of On-Line Commerce Source: U.S. Census Bureau, Statistical Abstract of the United States: 1999 (119th Edition) Washington, D.C., 1999. Figure 10.6 Copyright © by Houghton Mifflin Company. All rights reserved.

The Performance of Entrepreneurial Organizations (cont’d) 63% of all new businesses fail before the end of their sixth year of operation. 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. Copyright © by Houghton Mifflin Company. All rights reserved.