Chapter Learning Objectives After studying this chapter you

Chapter Learning Objectives After studying this chapter you should be able to: 1. Discuss the nature of entrepreneurship. 2. Describe the role of entrepreneurship in society. 3. Understand the major issues involved in choosing strategies for small firms and the role of international management in entrepreneurship. 4. Discuss the structural challenges unique to entrepreneurial firms. 5. Understand the determinants of the performance of small firms. © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5– 2

The Nature of Entrepreneurship • Entrepreneurship – The process of planning, organizing, operating, and assuming the risk of a business venture. • 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. © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–

The Role of Entrepreneurship in Society • Research Findings: – Most new businesses fail within the first few years of being founded. – More than 97% of 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. – Small business has a strong effect on job creation, innovation, and is important to big businesses. © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–

FIGURE 5. 1 The Importance of Small Business in the United States Approximately 86 percent of all U. S. businesses employ fewer than 20 people; another 11. 7 percent employ between 20 and 99 people. In contrast, only about 2. 1 percent employ between 100 and 400 workers, and another 0. 2 percent employ 500 or more. 24. 5 percent of all U. S. workers are employed by firms with fewer than 20 people; another 29. 6 percent work in firms that employ between 20 and 99 people. 25. 5 percent of U. S. workers are employed by firms with 100– 499 employees, and another 20. 3 percent work for businesses that employ 500 or more total employees. © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5– 5

Entrepreneurship’s Role in Society • Small Businesses’ Role in Job Creation – Create many of the new jobs in the U. S. – Dominate sectors that have added the most jobs. – Represent 92% of all U. S. exporters. • Innovation – 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. © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–

The Entrepreneur’s Challenge: Find a product or service that consumers want • • Begin as an idea in 1980 A hymnal page marker and a failed adhesive St. Paul, Minnesota Choir member Arthur Fry, an engineer at chemical company 3 M, joined forces with 3 M scientist Spencer Silver, inventor of a peculiar adhesive – failed adhesive. • Brand launched by 3 M in 1981 • Today, Post-it Notes - available in 27 sizes, 57 colors, and 20 fragrances - now generate some $1 billion annually and dominate the self-stick note market. • 3 M is among some 20 U. S. companies that produce the notes. © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5– 7

The Entrepreneur’s Challenge: The Valley of Death © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5– 8

FIGURE 5. 2 Representative Jobs Created and Lost in 2009 Aetna – 1, 240 Whole Foods Market +8, 570 Wal-Mart – 1, 450 Microsoft +7, 130 Home Depot Verizon Communications – 7, 000 – 8, 000 T-Mobile +3, 586 Google +3, 550 Sprint Nextel Corp. – 8, 000 Nordstrom +2, 421 Johnson & Johnson – 8, 900 Cisco Systems +2, 412 IBM – 10, 000 Deloitte +2, 311 Merck – 16, 000 Accenture +2, 176 Pfizer – 19, 500 Edward Jones +2, 1290 Caterpillar – 20, 000 JOB GAINS JOB LOSSES © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5– 9

Entrepreneurship’s Importance to Big Business • Most products made by large manufacturers are sold to customers by small businesses. • Small businesses as suppliers provide large firms with services, supplies, and raw materials. • Large businesses outsource many routine business operations such as packaging, delivery, and distribution to small businesses. © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5– 10

Strategy for Entrepreneurial Organizations Basic Strategic Challenges Choosing an industry in which to compete Emphasizing distinctive competencies © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Gaining first mover advantage 5– 11

FIGURE 5. 3 Small Business (businesses with fewer than 20 employees) by Industry Services are the fastest growing segment of smallbusiness enterprise. © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5– 12

FIGURE 5. 4 Economies of Scale in Small-Business Organizations © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5– 13

Strategically Utilizing Distinctive Competencies Seeking Competitive Advantage Identifying niches in current markets Identifying new markets Taking first-mover advantage © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5– 14

Emphasizing Distinctive Competencies • Identifying niches in an established market – Finding part of a market not currently being exploited can offer a competitive advantage. • Identifying new markets – Transferring an existing product/service to a new market can create new industries/products/services. • Taking first-mover advantage – Exploiting a market opportunity before any other firm does can result in a competitive advantage. • See “The Invisibib Woman”, page 128 -129. • What opportunity did she see in the market? • How did she find the opportunity? Is personal experience a valid way to find opportunity? © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–

Management Challenge Question • What would you caution an entrepreneur about the dangers of taking first-mover advantage? © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–

Got an idea? Write a Business Plan • Business Plan – Is a document that summarizes business strategy and structure. – Should include: • Business goals and objectives. • Strategies used to achieve these goals and objectives. • A plan of how the entrepreneur will implement these strategies. © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–

Starting a New Business • Buying an Existing Business – Business has a proven ability to draw customers and make a profit. – Networks are already established. – Negative: New owners inherit existing problems. • Starting from Scratch – Avoids problems associated with previous owners. – Allows freedom to choose suppliers, equipment, location, and workers. – Negative: More business risk and uncertainty. © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–

Identifying a Business Opportunity Who are my customers? Where are they? At what price will they buy my product? In what quantities will they buy? Who are my competitors? How will my product differ from those of my competitors? © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5– 19

Sources of Innovative Ideas • Trends – shifts in thinking of society. Societal, technology, economic and governmental. – Can a bad economy really serve as a source of innovative ideas ? – What about increasing government regulation? • Unexpected occurrences • Incongruities – gaps in expectations and reality. What do we need?

Financing the New Business Personal Resources Strategic Alliances Venture Capital Companies Sources of New Business Financing Lenders © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Small-Business Investment Companies SBA Financial Programs 5–

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Financing the New Business • Personal Resources – Using 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. © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5– 23

Financing the New Business (cont’d) • Small-Business Investment Companies (SBICs) – Are investor-owned companies that borrow money from the SBA to loan to small business with high growth potential. – Minority Enterprise Small-Business Investment Companies (MESBICs) specialize in financing businesses owned by minorities. • SBA Financial Programs – Provide assistance (e. g. , SBA-guaranteed loans) for small businesses unable to get private financing at reasonable terms. © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–

Sources of New Venture Funding by Phase IPO: Initial Public Offering. Often considered a great success for new ventures. Why? 5– 25

Seeking New Business Advice Who should serve on your advisory board? Advisory Boards Sources of Management Advice Management Consultants Small Business Administration Networking with Others © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–

Sources of Help for Entrepreneurs Outside Help Management Help • • • Boards of directors Management consultants SBA Trade associations Small-business networks Pooling Professional Help • • • Accountants Bankers Lawyers Insurance agents Computer consultants © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5– 27

Franchising • Franchising Agreement – Operation of the franchised business by the entrepreneur (the franchisee) under a license by a parent firm (the franchiser). – The entrepreneur pays the parent firm for use of trademarks, products, formulas, and business plans. © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–

Franchising (cont’d) • Advantages • Disadvantages – Reduced financial risk of new business success through experience provided by franchiser. – Start-up fees to purchase franchise. – Training, financial, and management support by franchiser. – Loss of independence due to imposed operational controls of franchiser. – Limitations of franchise (market area, product, customers). © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5– 29

Management Challenge Questions • What characteristics of a franchisee would an entrepreneur/franchisor likely find most attractive? • What aspects of this relationship could be detrimental to either party? © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–

FIGURE 5. 5 Business Start-Up Successes and Failures © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5– 31

The Performance of Entrepreneurial Organizations The emergence of E-commerce Crossovers to small business by former large-business employees Trends in New Business Start-Ups Increased entrepreneurial opportunities for minorities and women Better survival rates for small businesses © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5– 32

Entrepreneurial Success and Failure • 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. © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5– 33

Entrepreneurship: Creating New Ventures 1. How does managing and entrepreneurial start-up (new venture) differ from managing in a large, establishing firm? 2. Entrepreneur’s take risk. Why? 3. #1 source of funding for new ventures? 4. What is an IPO? 5. If you have a good idea for a new venture, what should you do? Sources of local assistance: 1. Office of Entrepreneurship and Tech Transfer http: //www. oett. msstate. edu/ 2. Small Business Development Center http: //business. msstate. edu/research/sbdc/ 3. Join the MSU E-Club © 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5– 34