1. Managing New Venture Formation and Entrepreneurship
CHAPTER 10
Managing New Venture Formation and Entrepreneurship
PowerPoint Presentation by Charlie Cook
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2. 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.
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3. 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
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4. 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.
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5. 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.
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6. The Importance of Small Business in the United States80 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
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7. 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.
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8. 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
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9. 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.
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10. Strategy for Entrepreneurial Organizations
Three Basic Strategic Challenges
Choosing an industry in which to compete.
Emphasizing distinctive competencies.
Writing a business plan.
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11. 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
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12. 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
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13. 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.
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14. 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.
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15. 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.
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16. 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?
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17. 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.
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18. 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.
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19. Sources of Management Advice
Advisory Boards
Management Consultants
The Small Business Administration
Networking
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20. 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.
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21. 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
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22. 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
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23. 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.
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