Going Into Business For Yourself CH 1

Becoming an Entrepreneur Entrepreneur is an individual who undertakes the creation, organization, and ownership of an innovative business with potential growth. – Accepts risks and responsibilities of business ownership to earn profits, and achieve personal satisfaction – Creating and running a business venture requires a variety of skills. Venture is a new business undertaking that involves risk.

Small Business and Entrepreneurship Entrepreneurship is the process of recognizing or creating an opportunity, testing it in the market, and gathering the resources necessary to go into business. – 1 in 3 households someone is involved with a new venture or small business. – More than 90 percent of all businesses are small businesses with fewer than 100 employees. – 62% of those are home-based businesses

Entrepreneurship Today What changes in today’s society has affected owning and operating a business today?

Global Marketplace and the Internet – Brought new resources, opportunities,.markets, competitors, and ideas. Computers, cell phones and other kinds of information technology enable people to communicate instantly, collaborate from a distance, and keep records more efficiently. Customers demand that business transactions and communications take place quickly Expect innovative products to come often and quickly Entrepreneurship Today

Economics: the study of how people choose to allocate scarce resources to fulfill their unlimited wants. Economic Systems: all try to answer these four questions: – What G/S should be produced? – What quantity of G/S should be produced? – How should G/S be produced? – For whom should G/S be produced Entrepreneurship Today

The Free Enterprise System Also called capitalism or a market economy People have an important right to make economic choices

The Profit Motive – It’s the primary incentive of free enterprise – Profit: money that is kept after all expenses of running a business have been deducted from the income – One way of measuring success – Risk: Market Risk, Product Risk, and Financial Risk it encourages the production of quality products that meet the needs of consumers The Free Enterprise System

The Role of Competition: one of the basic characteristics of Free Enterprise System – Provides choices for consumers – Forces companies to improve quality and become more efficient, it may lead to a surplus thus lowers prices. – In a mature industry price is usually a factor because competitors offering the same G/S. Ex electronics – Younger industries factors are quality, service, and reputation The Free Enterprise System

Market Structures: the nature and degrees of competition among businesses operating in the same industry. – Four different market structures: perfect competition, monopolistic competition, monopoly, and oligopoly – Perfect Competition: numerous buyers and sellers and many products that are very similar so they can be substitutes for consumers. It is easy for new companies to enter the market and prices are generally determined by supply and demand. The Free Enterprise System

Market Structures: – Monopolistic Competition: many sellers produce similar but differentiated products. Substitution is not possible. Sellers have some power to control the price of their products. Tries to dominate a small portion of the market. – Monopoly: a particular commodity has only one seller who has control over supply and demand and can exert nearly total control over price. Government grants temporary monopoly in the form of patents and copyrights to encourage innovation. The Free Enterprise System

Market Structures: – Oligopoly: there are just a few competing firms. Several automobile companies have donimated the car industry for decades. – They are more efficient so they can sell cars at a lower price than smaller companies. – Under Antitrust Laws most forms of Monopoly and some forms of Oligopoly are illegal The Free Enterprise System

Basic Economic Concepts Goods and Services are products our economic system produces to satisfy consumers’ wants and needs. – Goods- tangible – Services- intangible – Needs- basic requirements for survival – Wants- something that you do not need for survival but would like to have.

Factors of Production: resources businesses use to produce the goods and services that people want. – Land, labor, capital, and entrepreneurship. Scarcity: demand exceeds supply Basic Economic Concepts

Supply and Demand Theory: price determined in the marketplace. Sellers want to sell as high as possible and buyers want to pay the least as possible. – Something in heavy demand but short supply prices go up – Something in plentiful supply but low demand prices go down. – Prices stabilize at the level where demand equals supply Basic Economic Concepts

Demand: is the quantity of G/S that consumers are willing and able to buy Elastic Demand: a change in price creates a change in demand. Butter? Inelastic Demand: situations in which a change in price has very little effect on demand for products. Milk? – No acceptable substitutes are available – The price change is small relative to buyer income – The product is a necessity customers need it Basic Economic Concepts

Diminishing Marginal Utility: price alone does not determine demand.. When a products’ price is low, people will not keep buying it indefinitely, they will not buy more than they can reasonably use. Basic Economic Concepts

Supply: amount of G/S that producers are willing to provide Basic Economic Concepts

Surplus, Shortage, and Equilibrium – Supply and Demand are dynamic in marketplace – EQUILIBRIUM – the point at which consumers buy all of a product that is supplied. – What happens to demand when interest dwindles? – What if there was an increase of supply? Basic Economic Concepts

Supply and Demand Curves Suppliers are willing to supply more of a product or service at a higher price. Individuals are willing to consume more of a product or service at a lower price. The point at which the supply and demand curves intersect indicates the equilibrium price and quantity.

Market Research – For Businesses to respond to consumer demand they must know about it. – Information about supply and demand influences entrepreneurial activities Basic Economic Concepts

The BUSINESS CYCLE is the periodic random pattern of expansion and contraction that the economy goes through. – Expansion and Contraction: growth, prosperity, recession, depression. – Depression - the GDP declines by more than 10% Business Cycles

Federal Government publishes statistics that help entrepreneurs understand the state of the economy and predict possible changes. These statistics are called Economic Indicators: – Employment rate, consumer confidence and GDP. – Gross Domestic Product (GDP) – total market values of goods and services produced by a nation during a given period. Consists of G/S, investment, government expenditures, and net exports to other countries

Federal Reserve: controls the economy and regulates the nation’s money supply. – It tells banks that percentage of their money they can lend. – Controls interest rates, raising them to increase the cost of borrowing and reducing them to decrease the cost of borrowing – Buys and sells government securities to increase or decrease the money supply – It constantly evaluates economic conditions Business Cycles

Inflation: if the economy grows too quickly demand for products increases and an unhealthy jump in prices increases. The Fed may tighten up money supply (increase interest rates) to offset high demand and stable price increases Recession: If demand decreases the Fed may lower interest rates to increase money supply and encourage spending Business Cycles

What Entrepreneurs Contribute New companies are the driving force behind economic growth. Business Start-Ups generate employment and increase the production of goods and services. Create a market for venture capital Provide jobs Respond to society’s wants and end up changing society, Apple

Small Businesses and Entrepreneurial Ventures Small Business: often do it to create jobs for themselves. They want to create lifestyles that are satisfying and that meet their personal goals. Entrepreneurial Ventures: different motives for starting a business. Their goals are to innovate and grow the venture. Another goal is to create new value, and to expand to a regional, national or global level

The Entrepreneurial Process The History of Entrepreneurship: – Distinct feature of American culture since the American Revolution – Colonists found innovative ways to bring new products and services to market

Early Years to the 1980’s – 1960’s: large diversified companies were common. No competition from Japan and Europe, job security was high – 1970’s: volatile economic climate with high interest rates, international competition, and the beginnings of the technology revolution – 1980’s: more government regulation on business, large companies saw a drop in profits, and smaller entrepreneurial companies were emerging The Entrepreneurial Process

1990’s: no job security and fewer benefits. Move to a service-based economy influence heavily by the Internet and network technologies. 2000’s: markets are global; the Internet and other media technologies make it possible to do business anywhere and to serve customers anywhere in the world efficiently and at a relatively low cost The Entrepreneurial Process

The Entrepreneurial Start-Up Process 5 Key components 1.The Entrepreneur: driving force of the start- up process. – Recognizes opportunity and pulls together resources – Creates a company to execute opportunity – Brings life experiences and expertise – Calculated risk taker who has passion and persistence

2. The Environment: variables affect the new venture not controlled by the entrepreneur. four categories of environmental variables 1. nature of environment; is it uncertain, fast changing, stable, or highly competitive? 2. available resources 3. ways to realize value, favorable taxes, good markets, supportive government 4. incentives- enterprise zones The Entrepreneurial Start-Up Process

3. Opportunity: an idea that has commercial potential. Has value when customers are willing and able to buy. Idea + Market = Opportunity 4. Start-Up Resources: pull together the necessary people and capital. 5. The New Venture Organization: company is the foundation that supports all of the products, processes, and services of the new business. Create value to benefit the owners, employees, customers, and economy The Entrepreneurial Start-Up Process

MYTH: that most new businesses fail SBA: – report that 66% of small businesses survive the first 2 years 40% are still operating by 6 years Even when they close 1/3 does it successfully by selling, closing for retirement, or merging with another company New Business Success and Failure

The Facts About Business Failure A Business Failure is one that has stopped operating with a loss to creditors. Usually the entrepreneur files for bankruptcy. – Loses money for lenders and investors – No longer appears on the tax rolls Discontinuance business purposes discontinued by owner who wants to start a new one. Business may operate under a new name. – These are not failures – Their closings were planned and caused no harm to creditors New Business Success and Failure

How Entrepreneurs Can Succeed – Chances of a new business succeeding are excellent with effective planning and management. – Key to success Recognizing a need in the market Testing that opportunity in the marketplace Assembling a team with necessary expertise to execute the business concept New Business Success and Failure

Business Start Ups Failure Rate