Chapter 6: Entrepreneurship and Small Business BOH4MI Business Leadership

Discussion Question What are the advantages to owning your own business? What are the disadvantages to owning your own business?

Day 1 - The Nature of Leadership Today’s dynamic environment demands that organizations and their managers adapt and renew themselves continually over time to succeed Success in a highly competitive business environment depends on entrepreneurship ___________________ is strategic thinking and risk-taking behavior that results in the creation of new opportunities for individuals and/or organizations Entrepreneurship

Who are the Entrepreneurs? __________________ are risk-taking individuals who take actions to pursue opportunities and situations others may fail to recognize or may view as problems or threats Entrepreneurs are … Founders of businesses that become large-scale enterprises People who: Buy a local franchise outlet Open a small retail shop Operate a self-employed service business People who introduce a new product or operational change in an existing organization

Characteristics of Entrepreneurs Entrepreneurs tend to share certain attitudes and personal characteristics seen below; _________________________ – entrepreneurs believe that they are in control of their own destiny; they are self-directing and like autonomy _______________________ – entrepreneurs are persistent, hard working, and willing to exert extraordinary efforts to succeed ____________________________– entrepreneurs are motivated to accomplish challenging goals; they thrive on performance feedback Internal Locus of Control High Energy Level High Need for Achievement

Characteristics of Entrepreneurs Con’t Tolerance for Ambiguity ________________________ – entrepreneurs are risk takers; they tolerate situations with high degrees of uncertainty _______________ – entrepreneurs feel competent, believe in themselves, and are willing to make decisions ___________________________ – entrepreneurs try to act ahead of problems; they want to get things done and not waste valuable time Self-Confidence Passion and Action-Orientation

Characteristics of Entrepreneurs Con’t ___________________________________ – entrepreneurs want independence; they are self reliant they want to be their own boss and not work for others _____________ – entrepreneurs are willing to admit problems and errors, and to change a course of action when plans aren’t working Self Reliance and Desire for Independence Flexibility

Personality Traits and Characteristics of Entrepreneurs

Backgrounds and Experiences Typical entrepreneurial backgrounds and experiences include: Parents were entrepreneurs or self-employed Families encouraged responsibility, initiative, and independence Have tried more than one business venture Have relevant personal or career experience Become entrepreneurs between 22 and 45 years of age Have strong interests in creative production and enterprise control Seek independence and sense of mastery

Challenging the Myths about Entrepreneurs Entrepreneurs are born, not made Not True! Talent gained and enhanced by experience is a foundation for entrepreneurial success Entrepreneurs are gamblers Not true! Entrepreneurs are risk takers, but the risks are informed and calculated Money is the key to entrepreneurial success Not true! Money is no guarantee of success: many entrepreneurs start with very little

Challenging the Myths about Entrepreneurs You have to be young to be an entrepreneur Not true! Age is no barrier to entrepreneurship; with age often comes experience, contacts, and other useful resources You have to have a degree in business to be an entrepreneur Not true! You may not need a degree at all; although a degree is not necessary, it helps to study and understand business fundamentals

Diversity and Entrepreneurship In comparison with other countries, women in Canada make up a larger share of the self employed population with over one third of the self employed Canadians in 2002 being women Reasons many women become entrepreneurs: Being motivated by a new idea Doing for themselves what they were already doing for other employers Seeking a pathway to opportunity

Entrepreneurship and Small Business Small businesses … Have 100 or fewer employees Are independently owned and operated 50 percent of the private labour force work in or for a small business Small businesses are established by: Starting a new business Buying an existing business Buying and running a franchise

Entrepreneurship and Small Business A _____________ is when one business owner sells to another the right to operate the same business in another location What motivates someone to become an entrepreneur? Wanting to be your own boss and controlling your future Going to work for a family owned business Seeking to fulfill a dream Franchise

Entrepreneurship and the Internet The Internet offers numerous entrepreneurial opportunities Online buying and selling Dot-com businesses Businesses today are limited only by personal creativity Business-to-Business (B2B) ventures are possible; using the Internet to link buyers and sellers

International Business Entrepreneurship Provides strategic opportunities for small businesses Expanded markets Additional financing Access to quality and lower cost resources Access to labour and technical expertise Locations for low-cost manufacturing Creates exporting and importing opportunities Supported through appropriate governmental and non-governmental organizations

Family Businesses Family businesses are owned and financially controlled by family members Family businesses makeup the largest percentage of businesses worldwide Problems unique to family businesses: ________________________ – members of the family get into disagreements about work responsibilities, business strategy, operating approaches, finances, and other members _______________________ – transferring leadership from one generation to the next. Business advisors recommend a succession plan: a formal statement that describes how the leadership transition and related financial matters will be handled when the time for changeover arrives Family Business Feud Succession Problem

Why Many Small Businesses Fail __________________ – not having sufficient know how to run a business in the chosen market or area _________________ – not having expertise in the essentials of business; including finance, purchasing, selling and production ______________________________________ – not taking time to craft a vision and mission, or formulate and properly implement strategy Lack of Experience Lack of Expertise Lack of Strategy and Strategic Leadership

Why Many Small Businesses Fail _______________________ – not keeping track of the numbers and failure to control business finances __________________ – not taking time to consolidate a position, fine tune the organization, and systematically meet the challenges of growth ________________________ – not devoting enough time to the requirements of running a competitive business ________________ – falling prey to temptations of fraud, deception and embezzlement Poor Financial Control Growing Too Fast Insufficient Commitment Ethical Failure

Eight Reasons Why Many Small Businesses Fail

Day 1 Assigned Work Read the Why Small Businesses Fail article (posted on ClassNet) and answer the questions on the handout provided

Discussion Question Based on your previous knowledge, what stage of the business life cycle (birth, breakthrough or maturity) do you believe is the most challenging for a new business? Why?

Day 2 – New Venture Creation Important issues in new venture creation: Does the entrepreneur have good ideas and the courage to give them a chance? Is the entrepreneur prepared to meet and master the test of strategy and competitive advantage? Can the entrepreneur identify a market niche that is being missed by other established firms? Can the entrepreneur identify a new market that has not yet been discovered by existing firms? Can the entrepreneur generate _____________________ by being the first to exploit a niche or enter a market? First Mover Advantage

Questions that Keep a New Venture Focused on it’s Customers Who is your customer? How will you reach key customer market segments? What determines customer choices to buy or not buy your product/service? Why is your product/service a compelling choice for the customer? How will you price your product/service for the customer? How much does it cost to make and deliver your product/service? How much does it cost to attract a customer? How much does it cost to support and retain a customer?

Life Cycles of Entrepreneurial Firms Stage 1: ________________ The entrepreneur struggles to get the new venture established and survive long enough to test the viability of the underlying business model in the market place Stage 2: _______________________ The business model begins to work well, growth is experienced, and the complexity of managing the business operation expands significantly Stage 3: _____________________ The entrepreneur experiences the advantages of market success and financial stability, while facing the continuous challenge of remaining competitive in a changing environment Birth Stage Breakthrough Stage Maturity Stage

Stages in the Life Cycle of an Entrepreneurial Firm

Writing a Business Plan When people start a new business, they can greatly benefit from a good _____________: this is a plan that describes the direction for the new business and the financing needed to operate it Bankers and investors will want to see the business plan before they loan money or invest in a new venture “If you fail to plan, you plan to fail” Business Plan

Business Plan: Items to Include __________________ – overview of the business purpose and highlights key elements of the plan __________________ – nature of the industry, including economic trends, legal and regulatory issues and potential issues ____________________ – mission, owners and legal form of ownership __________________________ – explanation of goods and/or services, with a special focus on uniqueness, as compared to the competition Executive Summary Industry Analysis Company Description Product/Service Descriptions

Business Plan: Items to Include __________________ – size of market, competitor strengths and weaknesses, 5 year sales goals __________________ – product characteristics, distribution, promotion, pricing and market research _____________________ – manufacturing or service methods, supplies and suppliers, and control procedures ___________________ – management and staffing skills needed, compensation, human resource system Market Description Marketing Strategy Operations Description Staffing Description

Business Plan: Items to Include ____________________ – cash flow projections for one to five years, break-even points, and phased investment capital _______________ – amount of funds needed to run the business, amount available, amount requested from new sources ___________ – a timetable of dates showing when key stages of the new venture will be completed Financial Projection Capital Needs Milestones

Choosing the Form of Ownership ___________________ An individual pursuing business for a profit Advantages: easy to start, run and terminate Disadvantages: the business owner is personally liable for business debts and claims E.g. Tina Lopez Designs, Dr. Stephen Morrison, Dentist, etc. Sole Proprietorship

Choosing the Form of Ownership ____________ Formed when two or more people agree to contribute resources to start and operate a business together A business partnership is typically backed by a legal and written partnership agreement where the partners agree upon the contribution of resources and skills to the new venture and the sharing of profits and losses Partnership

Choosing the Form of Ownership Partnership continued There are main 3 types of partnership: _______________________ The simplest and most common form where the partners also share the management responsibilities Consists of a general partner and one or more “limited” partners who do not participate in the day to day management _______________________________ Common among professionals such as accountants Limits the liability of the one partner from the neglect of the other General Partnership Limited Partnership Limited Liability Partnerships

Choosing the Form of Ownership ___________________ A legal entity that that exists separately from its owners Commonly identified by the “Inc.” in the name The corporation can be for profit, e.g. Microsoft, or not for profit, e.g. Canadian Red Cross Society Advantages: It grants the organization certain legal rights (e.g. to enter into contracts) The corporation becomes responsible for its own liabilities. This separates the owners from personal liability and gives the firm a life of its own that can be extended beyond that of its owners Disadvantages: Costly to incorporate Complexity of documentation to be completed Corporation

Choosing the Form of Ownership _________________________________ A hybrid business form combining advantages of the sole, partnership and corporation For liability purposes it functions like a corporation, protecting the assets of owners against claims made against the company For tax purposes it functions as a partnership in the case of multiple owners and as a sole proprietor in the case of a single owner Limited Liability Corporation (LLC)

Financing the New Venture Starting a new venture takes money and that money must often be raised, as the cost of start-up will most likely exceed the amount available from personal sources The two major ways that entrepreneurs can obtain financing are … ___________________ – involves borrowing money that must be repaid over time with interest ___________________ – involves exchanging ownership shares for outside investment money. This money doesn’t need to be paid back and the investor assumes the risk for potential gains and losses Debt Financing Equity Financing

Financing the New Venture Equity Financing Alternatives _______________________ are companies that pool capital and make investments in new ventures in return for equity stake in the company They make large investments and usually take a management role in order to grow the business and add value as soon as possible An _______________________ is when shares of stock in the business are first sold to the public and then begin trading on a major stock exchange An __________________ is a wealthy individual willing to make an investment in return for equity in the new business The presence of angel investors can help raise the confidence and interest of other venture capitalists and attract additional funding Venture Capitalists Initial Public Offering Angel Investor

Entrepreneurship in Large Organizations ____________________ is entrepreneurial behaviour displayed by people or subunits within a larger organization Through the efforts of intrapreneurs organizations are able to turn new ideas into profitable new products, services and business ventures Managers often find that gaining a competitive advantage and success through intrapreneurship depends on the ability of large organizations to act like small ones. To do this they often create small subunits called ________________; in which teams are allowed to work together in a unique setting that is highly creative and free from operating restrictions Intrapreneurship Skunkworks

Business Incubation Individual entrepreneurs who start their own business face many challenges One way that motivation towards entrepreneurship can be maintained is through the support of a ____________________ This is special facility that offers space, a variety of administrative services, and management advice to help small businesses get started Incubators share the common goal of helping to build successful new businesses that create jobs and improve economic development They nurture businesses in incubators to help them grow quickly and become healthy enough to survive on their own Business Incubator

Small Business Development Centres With small businesses playing such an important economic role, a variety of resources are available to promote their development ________________________________________ offer guidance to entrepreneurs and small business owners – actual and prospective – in how to set up and successfully run business operations Often these centres are associated with universities or colleges They offer opportunities for students to become involved as consultants and learn first hand the nature of small business and entrepreneurship Small Business Development Centres (SBDCs)

Day 2 Assigned Work MC Questions #1 – 15 on pages 165 & 166 Complete Self-Assessment #10: Entrepreneurship Orientation on page W89