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Mgmt 371Chapter Ten

Managing New Venture Formation and Entrepreneurship

Much of the slide content was created by Dr, Charlie Cook, Houghton Mifflin, Co.©

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The Nature of Entrepreneurship

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.

In most industries the Small Business Admin. Set the employee threshold at < 500.

For merchants it is usually < 100. SBA’s Table of Small Business Size Standards

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The Role of Entrepreneurship in Society 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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Figure 10.1: The Importance of Small Business in the United States

Source: U.S. Census Bureau, Statistical Abstract of the United States: 2002 (122nd Edition), Washington, D.C., 2002.

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The Role of Entrepreneurship in Society Small Businesses’ Role in Job Creation

Create 80% of the new jobs in the U.S. Dominate sectors that have added the most jobs. Account for 38% of all jobs in high-technology sectors

and for 96% 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.

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Representative Jobs Created and Lost by Big Business, 1993–2005

Net gain: 82,828

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The Role of Entrepreneurship in Society Small Business’s Importance to Large Businesses

Most products made by large manufacturers are sold to customers by small businesses.

Critical distribution role. 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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Strategy for Entrepreneurial Organizations Three Basic Strategic Challenges for small

businesses. Choosing an industry in which to compete. Emphasizing distinctive competencies. Writing a business plan.

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Small Businesses (Businesses With Fewer Than Twenty Employees) by Industry

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Strategy for Entrepreneurial Organizations Emphasizing Distinctive Competencies

Identifying “Niches” in Established Markets A segment of a market not currently being exploited

in an established market where several large firms compete.

A special area of demand for a product or service. A niche offers a competitive advantage to small

businesses. Identifying New Markets

Using the transfer of an existing product/service to explore a new market.

Creating new industries/products/services. First-Mover Advantage

Exploiting an opportunity before any other firm does.

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Strategy for Entrepreneurial Organizations 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.

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Strategy for Entrepreneurial Organizations

Entrepreneurship and International Management There is expansion and growth potential in foreign

markets. While there are risks, entering a foreign country’s

market can be a real catalyst for success.

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Structure of Entrepreneurial Organizations Starting the 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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Financing the New Business

Note, most small businesses fail due to undercapitalization!

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).

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Financing the New Business 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.

Small-Business Investment Companies (SBICs) 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.

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Financing the New Business SBA Financial Programs

The Small Business Administration has several financing programs (e.g., SBA-guaranteed loans) for small businesses that are unable to obtain private financing at reasonable terms.

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Franchising

Advantages

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).

Loss of independence due to imposed operational controls of franchiser.

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Business Start-up Successes and Failures

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Small Business Failure Rates

About 25% of new businesses fail within the first year and 36% fail within their second.

Education and health services have the highest survival rates.

Leisure and hospitality sectors (including restaurants) have the lowest. The failure rate of startup restaurants is

reported to be between 81% and 90% Study by Restaurant Start & Growth Magazine

puts the figure at 60%.

Knaup, A.E. ( May 2005) Survival and longevity in the business employment dynamics Data. Monthly Labor Review. Pp. 50-56.

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The Performance of Entrepreneurial Organizations 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

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The Growth of Online Commerce

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The Performance of Entrepreneurial Organizations Reasons for Success

Hard work, drive, and dedication by the entrepreneur. Sweat equity.

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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The Performance of Entrepreneurial Organizations Reasons for Failure – most fail in their

first two years. 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.