Chapter 5
Entrepreneurship and
New Venture
Management
Learning Objectives
After studying this chapter, you should be able to:
1.
Discuss the nature of entrepreneurship.
2.
Describe the roles of entrepreneurship in society.
3.
4.
5.
Understand the major issues involved in choosing
strategies for small firms and the role of international
management in entrepreneurship.
Discuss the structural challenges unique to small firms.
Understand the determinants of the performance of
entrepreneurial firms.
Chapter Outline
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The Nature of Entrepreneurship
The Role of Entrepreneurship in Society
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Job Creation
Innovation
Importance to Large Businesses
Strategy for Entrepreneurial Organizations
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Choosing an Industry
Emphasizing Distinctive Competencies
Writing a Business Plan
Entrepreneurship and International Management
Chapter Outline (cont’d)
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Structure of Entrepreneurial Organizations
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Starting the New Business
Financing the New Business
Sources of Management Advice
Franchising
The Performance of Entrepreneurial
Organizations
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Trends in Small-Business Start-ups
Reasons for Failure
Reasons for Success
The Nature of Entrepreneurship

Entrepreneurship


Entrepreneur

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The process of planning, organizing,
operating, and assuming the risk of a
business venture.
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.
The Role of
Entrepreneurship in Society

Research Findings:
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Most new businesses fail within the first few years of
being founded. 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. It has a strong effect on job
creation, innovation, and is important to big businesses.
The Importance of Small Business
in the United States
Representative Jobs Created and Lost
by Big Business (1996-2005)
The Role of
Entrepreneurship in Society (cont’d)

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.
The Role of
Entrepreneurship in Society (cont’d)

Importance to Large Business
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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.
Strategy for
Entrepreneurial Organizations

Three Basic Strategic Challenges
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Choosing an industry in which to compete.
Emphasizing distinctive competencies.
Writing a business plan.
Small Businesses (Businesses with Less
Than Twenty Employees) by Industry
Economies of Scale in
Small Business Organizations
Strategy for Entrepreneurial
Organizations (cont’d)

Emphasizing Distinctive Competencies



Identifying a niche in an established market
 Finding part of a market not currently being
exploited that offers a competitive advantage to
small businesses.
Identifying New Markets
 Using the transfer of an existing product/service
to a new market, entrepreneurs can create new
industries, products, or services.
First-Mover Advantage
 Exploiting an opportunity before any other
firm does.
Strategy for Entrepreneurial
Organizations (cont’d)

Writing a Business Plan


A business plan is a document
that summarizes the business
strategy and structure.
The plan should include:
 business goals and
objectives.
 strategies used to achieve
these goals and objectives.
 a plan of how the
entrepreneur will
implement these strategies.
Strategy for Entrepreneurial
Organizations (cont’d)

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.
Structure of Entrepreneurial
Organizations

Starting a New Business

Buying an Existing Business
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Business has a proven ability to draw
customers and make a profit.
Networks (e.g., customers and suppliers)
are already established.
Negative: New owners inherit any existing
problems.
Starting from Scratch


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Avoids problems associated with previous
owners.
Allows freedom to choose suppliers,
equipment, location, and workers.
Negative: More business risk and uncertainty.
Structure of Entrepreneurial
Organizations (cont’d)

Identifying a Genuine Business
Opportunity
Where are they?
Who are my
customers?
In what
quantities will
they buy?
Who are my
competitors?
At what price
will they buy my
product?
How will my
product differ from
those of my
competitors?
Financing the New Business

Lenders

Obtaining funding from
traditional lenders (e.g.,
banks, independent investors,
and government loans).

Personal Resources

Using your own money
and money borrowed from
friends and relatives to
 Venture Capital Companies
finance the business.
 Groups of small investors who
Strategic Alliances
provide capital funds to small,
 Partnering with established
high-growth potential start-up
firms, such as suppliers in
firms in exchange for an
a mutually beneficial
equity position (stock) in the
relationship.
firms.

Financing the New Business (cont’d)

Small-Business Investment Companies
(SBICs)
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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.
Franchising

Franchising Agreement

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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.
Franchising (cont’d)

Advantages of Franchising
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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.
Business Start-Up Successes and
Failures
The Performance of
Entrepreneurial Organizations (cont’d)

Trends in New Business Start-Ups

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The emergence of E-commerce
 Internet-based business
Crossovers to small business by former largebusiness employees
Increased entrepreneurial opportunities for
minorities
and women
Better survival rates for small businesses
The Growth
of On-Line Commerce
Where Women Entrepreneurs Come From
and What They Like About Their Work
Source: Wall Street Journal, May 24, 1999, p. R12.
The Performance of Entrepreneurial
Organizations (cont’d)

Reasons for Failure

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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

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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.