ENTREPRENEURSHIP AND SMALL FIRMS
DEAKINS AND FREEL
3RD EDITION
STUDENT’S ON-LINE LEARNING RESOURCE MATERIAL
CHAPTER 3: ISSUES IN BUSINESS START-UP
Introduction
This chapter examines in detail part of the entrepreneurship process; the sub-process
of business start-up. Although case studies are included in the text, additional case
material on-line has been included for this chapter. Like the first two chapters, the
material, in this chapter, forms a key foundation for other chapters later in the text. In
addition, it is complementary to the business planning chapter, even though the
material for business planning is not covered until chapter 12. However, some of the
issues in the process of business start-up will re-occur in other chapters, such as
raising finance in chapters 5 and 6 and idea generation and innovation in chapter 7.
The issue of the environment for entrepreneurship, which was discussed in chapters 1
and 2, is also covered in this chapter, in particular through a discussion of the nature of
rural environments and how these affect the start-up and entrepreneurship process.
Think Points 3.1: Suggested answers
1. Why is the environment important for creativity?
John Kao suggests that the environmental conditions influence our creative potential.
His specific business incubator, the Ideas Factory is designed to provide an
environment that encourages the development of ideas and hence creativity. Relating
this to work environments, it is often necessary stimulate creativity through a change
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in environment. Once into a routine at an office or factory environment, lateral
thinking is ‘blocked’ just by the normal process of carrying out routine tasks. To
stimulate creativity, new ideas and change it is often necessary to take people out of
their everyday environment. Hence, management techniques to stimulate creativity
focus on creating special and different environments, on ‘away days’ and on creating
environments to stimulate lateral thinking. Hence, the nature of such management
suggest that the nature of our environment is crucial to achieving potential creativity.
An additional aspect that is known to be important for creativity is our educational
and learning environment. Educational theory suggests that rote and task-based
learning stifles creativity. Changing the nature of learning and the environment
stimulates creativity, for example through different learning environments through
different tasks and providing freedom for expression of thought.
2. List barriers to creativity in your organisation/university.
We have indicated some of the barriers that might exist to stifle creative thinking and
idea generation, of course such barriers will vary from one organisation or university
to another, but might include:

Imposition of routine and administrative tasks

Routine and rote-style learning from lists of facts

Bureaucracy and regulations

Non-conducive learning environments (for example threatening or formal
environments).

Reporting systems that are rigid and limit creativity.

Lack of meeting space.
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
Meeting spaces may be non-conducive to creativity or not used for some reason.
There may be some combination in varying degrees of these barriers. In addition, the
general management style in organisation will also affect creativity, for example
whether management is autocratic or whether employess are empowered through
delegation of authority and resources.
3. How can group dynamics affect creativity?
The make-up of groups affects creativity through the influence of individual
personalities. For example, some individuals prefer to have passive roles in groups,
other will take a leadership role, others are not comfortable with ‘team’ approaches to
problem-solving. Ideally a group should contain a mixture of different individuals
prepared to take on different roles. In this way the group will function effectively in
problem-solving and creativity. If other the other hand, there are personality clashes
through say too many ‘leaders’, then the group will be dysfunctional. Energy will be
lost thorugh arguments, disputes instead of being channelled into creativity.
4. Give an example of an enterprise education initiative; why might an
emphasis on creativity be an important part of such an initiative?
There are a number of enterprise education initiatives including:
Enterprise Insight/Young Enterprise/Science Enterprise.
Creativity will be important because the initiatives depend on encouraging young
people to develop new ideas, to encourage new thinking and to encourage young
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people, in some cases, to consider entrepreneurship or self-employment as an
alternative career. An ability to be creative, will at least be important for the
generation of business ideas and the application of problem-solving. Advisers can then
work with individuals to properly plan for business development if that is appropriate.
Think Points 3.2: Suggested answers
1. What are the start-up stages we have covered so far before the market entry
and launch?
The pre-start stages discussed in the chapter have been:

idea formulation and the importance of creativity

opportunity recognition

pre-start planning and preparation.
2. Why should creativity be encouraged in young people with potential business
ideas?
From our earlier discussion on the nature of creativity, we have seen that a number of
factors can impinge on creativity, including the nature of the environment and the
inter-action of group dynamics. Developing lateral thinking is also important for
creativity, which is important for problem-solving. An important part of the
entrepreneurial process. It is also noticeable that successful entrepreneurs are often
portfolio and habitual entrepreneurs. The text gives the example of Stelios Haji- HajiIoannou for example, the founder of EasyJet, yet also the founder of a number of
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other businesses under the Easy Group name. Successful entrepreneurs appear to have
the ability to identify new opportunities through creativity, although in some cases
this can be merely copying business ideas that have worked successfully elsewhere,
but still recognising such potential through the application of different thinking and
creativity.
3. Discuss either individually or in a group whether the traditional education
system encourages creativity?
This is an open-ended discussion question but the nature of discussion should focus
on the following areas:

The nature of the learning process

The style of learning required, whether rote or based on problem-solving.

The nature of the learning environment.

The ‘freedom’ given to pursue problem-solving.

The nature of inter-group dynamics where these are involved, for example, are
different courses (engineering/art/business) encouraged to form groups?

The nature of assessments used and whether these allow for problem-solving and
creativity.
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4.
Why does change affect the formation of business ideas? Can this explain the
minor explosion of dotcom business ideas with the growth of Internet use and
trading?
Change can occur in a number of ways:
Technological: such change creates opportunities for new business ideas just by the
nature of new technology, new possibilities are created for trade, for production and
for the development of new services.
Economic: such change can create additional opportunities through growth in the
economy, through increased affluence and through extra purchasing power.
Social: changing attitudes and cultural tastes create opportunities for new products
and new services.
Technological change explains partly the minor explosion that took place with the
‘Internet Bubble’. E-business had promised to revolutionise the way that people did
business and certainly new opportunities were created for business start-ups through
dotcoms. However, many of the new dotcoms were short-lived and the main
beneficiaries from the ‘Internet Bubble’ turned out to be traditional businesses that
could exploit the Internet.
Partly, the growth in dotcom start-ups was also due to changing social attitudes and
preferences, these encouraged and providing the initial capital for such businesses. At
first society was prepared to support high valuations, it was only later that the reality
of the trading conditions for such firms caused a rationalisation of values, of a
realisation of the nature of opportunities and a re-assessment eventually of business
values.
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5. What are research and search procedures necessary in the pre-start and
planning stage?
To develop a potential business idea into market reality requires careful research and
search activity. Ideally, if time allows such research should involve the following
areas:
Market research through interviews or surveys of potential customers.
Competitor research into the nature and identification of potential competitors
operation and the identification of the competitive edge of the business idea.
Search procedures into areas that may affect the development of the business idea, for
example through regulations, licence requirements and planning permissions.
If a technological product then it may be necessary to undertake patent searches, or
register trade marks and copyright and design rights.
Think Points 3.3: Suggested answers
1. Suggest ways in which new start entrepreneurs can overcome the credibility
problem?
There are a number of policies that a new start entrepreneur may reduce if not entirely
mitigate the problem of credibility.
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If operating for home, it may be worth renting meeting places if as temporary office
space for meetings with clients.

Trading over the internet and e-mail correspondence can mitigate perceptions of
credibility.

Web-sites are relatively inexpensive to set up and create an impression of a viable
and growing business.

Dealing with customers generally is an area where small attention to detail can
pay dividends e.g., through wearing a company logo on sweatshirts to give a
professional impression.

Opening a business bank account for dealing with suppliers and customers. Banks
often have incentives for new business customers or reduced banking charges.

Paying attention to the nature of any advertising material. For example, although
there can be advantages in stressing that a service is ‘new’ it may better to avoid
reference to a ‘new company’.

Operating as a limited company rather than a sole trader.

Ensuring that any staff employed have a professional approach to dealing with
customers and suppliers.
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2. What is the difference between an MBO and an MBI? Could you consider
MBOs and MBIs as valid entrepreneurial activity?
MBO: Management Buy-Out involving the existing management of company buying
the equity so that they ‘buy-out the existing shareholders.
MBI: Management Buy-In involving an outside management team buying equity
from the existing shareholders.
Both MBOs and MBIs are valid examples of entrepreneurial activity since, although
they do not create a new company they provide examples of change and the
exploitation of opportunity. They may involve many if not all of the processes of
business start-up and entrepreneurship including idea formulation, creativity,
opportunity recognition and pre-start planning and preparation,
3. Why can timing be crucial to the business entry decision?
Timing has to be important in any business entry decision. Good business ideas
usually have a window of opportunity which will need to be exploited before the
window closes or is taken by an alternative. Examples can be given from the cases
that are described in the main text. EasyJet is one example which involved entry while
there was a window of opportunity in the short-haul European air travel market.
Although competitors have since entered, for example Go, it would be very difficult
to start a new airline today. If we take the case of Ace Cleaning again there was only a
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limited opportunity for Mary Anderson to start the company, through purchase of the
company technically as an MBO.
4. Describe why a rural or urban environment can affect the business creation
process.
The nature of the environment will affect the full business start-up process. Breaking
this down into the stages identified in the chapter we can examine each of them in
turn.
Idea formulation: although ideas stem from individuals, the nature of creativity will
be affected by the environment. This will affect learning, education and inter-action.
The nature of urban and rural environments will be different in this context. For
example, networking is more difficult in rural environments and this may limit
creativity and idea generation.
Opportunity recognition: a similar situation applies to opportunity recognition. The
isolation that exists in rural environments may limit opportunities, when coupled with
the influence of the environment on creativity we can see that rural environments may
be less ‘rich’ in creativity, ideas and opportunities.
Pre-start planning and preparation: although this process is relatively independent of
the environment, nevertheless, the environment will still affect the nature of the
process, through market research through competitor analysis and through access to
resources.
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Entry and launch: the nature of planning for launch and subsequent development will
also be affected. The environment can affect marketing, which we note in the text is a
neglected area, strategy adopted and business development.
5. How might mentors/business advisers help new start-up entrepreneurs?
Mentors/business advisers can play a crucial role in the start-up process for new
entrepreneurs. They bring experience and direct advice. However, more important
they act as a sounding board for decision-making, they remove the isolation atht can
occur with anew start entrepreneur, they can provide advice on credibility and they reassure the entrepreneur in the decision-making process. All of these are crucial
functions. They need to be handled sensitively, without too much direct intervention
since the new entrepreneur still has to learn, this may mean making mistakes but the
mentor/business adviser can reinforce the learning process through sensitive
interventions.
Research evidence suggests that such interventions from advisers/mentors makes a
big difference to the survival rate and performance of new start entrepreneurs. Some
research findings are given in the text illustrating the value of interventions, but other
studies also indicate that such roles are important at an early stage.
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6. What start-up assistance is provided in your locality for new start-up
entrepreneurs
The answer to this will depend on the local provision in your area. In England and
Wales this will be through Personal Business Advisers operating from Business Links.
In additional sources of information and advice will also be provided through the
Business Links. Precise details should be available from your local Business Link. In
some areas you may find that local Enterprise Agencies still operate but will provide
additional of complementary advice for the Business Link. In Scotland, business
advice should be available through the local office of the national Small Business
Gateway, they are equivalent to the Business Links of England and Wales.
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