Going Into Business For Yourself
CH 1
Becoming an Entrepreneur
• Entrepreneur is an individual who undertakes
the creation, organization, and ownership of
an innovative business with potential growth.
– Accepts risks and responsibilities of business
ownership to earn profits, and achieve personal
satisfaction
– Creating and running a business venture requires
a variety of skills.
• Venture is a new business undertaking that involves
risk.
Small Business and Entrepreneurship
• Entrepreneurship is the process of recognizing
or creating an opportunity, testing it in the
market, and gathering the resources necessary
to go into business.
– 1 in 3 households someone is involved with a new
venture or small business.
– More than 90 percent of all businesses are small
businesses with fewer than 100 employees.
– 62% of those are home-based businesses
Entrepreneurship Today
• What changes in today’s society has affected
owning and operating a business today?
Entrepreneurship Today
• Global Marketplace and the Internet
– Brought new resources, opportunities, .markets,
competitors, and ideas.
• Computers, cell phones and other kinds of information
technology enable people to communicate instantly,
collaborate from a distance, and keep records more
efficiently.
• Customers demand that business transactions and
communications take place quickly
• Expect innovative products to come often and quickly
Entrepreneurship Today
• Economics: the study of how people choose to
allocate scarce resources to fulfill their
unlimited wants.
• Economic Systems: all try to answer these four
questions:
– What G/S should be produced?
– What quantity of G/S should be produced?
– How should G/S be produced?
– For whom should G/S be produced
The Free Enterprise System
• Also called capitalism or a market economy
• People have an important right to make
economic choices
The Free Enterprise System
• The Profit Motive
– It’s the primary incentive of free enterprise
– Profit: money that is kept after all expenses of
running a business have been deducted from the
income
– One way of measuring success
– Risk: Market Risk, Product Risk, and Financial Risk
• it encourages the production of quality products that
meet the needs of consumers
The Free Enterprise System
• The Role of Competition: one of the basic
characteristics of Free Enterprise System
– Provides choices for consumers
– Forces companies to improve quality and become
more efficient, it may lead to a surplus thus lowers
prices.
– In a mature industry price is usually a factor
because competitors offering the same G/S.
• Ex electronics
– Younger industries factors are quality, service, and
reputation
The Free Enterprise System
• Market Structures: the nature and degrees of
competition among businesses operating in the
same industry.
– Four different market structures: perfect competition,
monopolistic competition, monopoly, and oligopoly
– Perfect Competition: numerous buyers and sellers and
many products that are very similar so they can be
substitutes for consumers.
• It is easy for new companies to enter the market and prices
are generally determined by supply and demand.
The Free Enterprise System
• Market Structures:
– Monopolistic Competition: many sellers produce
similar but differentiated products.
• Substitution is not possible. Sellers have some power to
control the price of their products.
• Tries to dominate a small portion of the market.
– Monopoly: a particular commodity has only one
seller who has control over supply and demand
and can exert nearly total control over price.
• Government grants temporary monopoly in the form of
patents and copyrights to encourage innovation.
The Free Enterprise System
• Market Structures:
– Oligopoly: there are just a few competing firms.
• Several automobile companies have donimated the car
industry for decades.
– They are more efficient so they can sell cars at a lower price
than smaller companies.
– Under Antitrust Laws most forms of Monopoly
and some forms of Oligopoly are illegal
Basic Economic Concepts
• Goods and Services are products our
economic system produces to satisfy
consumers’ wants and needs.
– Goods- tangible
– Services- intangible
– Needs- basic requirements for survival
– Wants- something that you do not need for
survival but would like to have.
Basic Economic Concepts
• Factors of Production: resources businesses
use to produce the goods and services that
people want.
– Land, labor, capital, and entrepreneurship.
• Scarcity: demand exceeds supply
Basic Economic Concepts
• Supply and Demand Theory: price determined
in the marketplace. Sellers want to sell as high
as possible and buyers want to pay the least
as possible.
– Something in heavy demand but short supply
prices go up
– Something in plentiful supply but low demand
prices go down.
– Prices stabilize at the level where demand equals
supply
Basic Economic Concepts
• Demand: is the quantity of G/S that
consumers are willing and able to buy
• Elastic Demand: a change in price creates a
change in demand. Butter?
• Inelastic Demand: situations in which a
change in price has very little effect on
demand for products. Milk?
– No acceptable substitutes are available
– The price change is small relative to buyer income
– The product is a necessity customers need it
Basic Economic Concepts
• Diminishing Marginal Utility: price alone does
not determine demand.. When a products’
price is low, people will not keep buying it
indefinitely, they will not buy more than they
can reasonably use.
Basic Economic Concepts
• Supply: amount of G/S that producers are
willing to provide
Basic Economic Concepts
• Surplus, Shortage, and Equilibrium
– Supply and Demand are dynamic in marketplace
– EQUILIBRIUM – the point at which consumers buy
all of a product that is supplied.
– What happens to demand when interest
dwindles?
– What if there was an increase of supply?
Supply and Demand Curves
Suppliers are willing to
supply more of a product
or service at a higher
price.
Individuals are willing to
consume more of a
product or service at a
lower price.
The point at which the
supply and demand
curves intersect indicates
the equilibrium price and
quantity.
Basic Economic Concepts
• Market Research
– For Businesses to respond to consumer demand
they must know about it.
– Information about supply and demand influences
entrepreneurial activities
Business Cycles
• The BUSINESS CYCLE is the periodic random
pattern of expansion and contraction that the
economy goes through.
– Expansion and Contraction: growth, prosperity,
recession, depression.
– Depression - the GDP declines by more than 10%
Business Cycles
• Federal Government publishes statistics that
help entrepreneurs understand the state of
the economy and predict possible changes.
• These statistics are called Economic Indicators:
– Employment rate, consumer confidence and GDP.
– Gross Domestic Product (GDP) – total market
values of goods and services produced by a nation
during a given period.
• Consists of G/S, investment, government expenditures,
and net exports to other countries
Business Cycles
• Federal Reserve: controls the economy and
regulates the nation’s money supply.
– It tells banks that percentage of their money they
can lend.
– Controls interest rates, raising them to increase
the cost of borrowing and reducing them to
decrease the cost of borrowing
– Buys and sells government securities to increase
or decrease the money supply
– It constantly evaluates economic conditions
Business Cycles
• Inflation: if the economy grows too quickly
demand for products increases and an
unhealthy jump in prices increases. The Fed
may tighten up money supply (increase
interest rates) to offset high demand and
stable price increases
• Recession: If demand decreases the Fed may
lower interest rates to increase money supply
and encourage spending
What Entrepreneurs Contribute
• New companies are the driving force behind
economic growth.
• Business Start-Ups generate employment and
increase the production of goods and services.
• Create a market for venture capital
• Provide jobs
• Respond to society’s wants and end up
changing society, Apple
Small Businesses and
Entrepreneurial Ventures
• Small Business: often do it to create jobs for
themselves. They want to create lifestyles that
are satisfying and that meet their personal
goals.
• Entrepreneurial Ventures: different motives
for starting a business. Their goals are to
innovate and grow the venture. Another goal
is to create new value, and to expand to a
regional, national or global level
The Entrepreneurial Process
• The History of Entrepreneurship:
– Distinct feature of American culture since the
American Revolution
– Colonists found innovative ways to bring new
products and services to market
The Entrepreneurial Process
• Early Years to the 1980’s
– 1960’s: large diversified companies were common.
No competition from Japan and Europe, job
security was high
– 1970’s: volatile economic climate with high
interest rates, international competition, and the
beginnings of the technology revolution
– 1980’s: more government regulation on business,
large companies saw a drop in profits, and smaller
entrepreneurial companies were emerging
The Entrepreneurial Process
• 1990’s: no job security and fewer benefits.
Move to a service-based economy influence
heavily by the Internet and network
technologies.
• 2000’s: markets are global; the Internet and
other media technologies make it possible to
do business anywhere and to serve customers
anywhere in the world efficiently and at a
relatively low cost
The Entrepreneurial Start-Up Process
• 5 Key components
1. The Entrepreneur: driving force of the startup process.
– Recognizes opportunity and pulls together
resources
– Creates a company to execute opportunity
– Brings life experiences and expertise
– Calculated risk taker who has passion and
persistence
The Entrepreneurial Start-Up Process
2. The Environment: variables affect the new
venture not controlled by the entrepreneur.
four categories of environmental variables
1. nature of environment; is it uncertain,
fast changing, stable, or highly
competitive?
2. available resources
3. ways to realize value, favorable taxes,
good markets, supportive government
4. incentives- enterprise zones
The Entrepreneurial Start-Up Process
3. Opportunity: an idea that has commercial
potential. Has value when customers are willing and
able to buy.
Idea + Market = Opportunity
4. Start-Up Resources: pull together the necessary
people and capital.
5. The New Venture Organization: company is the
foundation that supports all of the products, processes,
and services of the new business. Create value to
benefit the owners, employees, customers, and
economy
New Business Success and Failure
MYTH: that most new businesses fail
SBA: – report that
66% of small businesses survive the first 2
years
40% are still operating by 6 years
Even when they close 1/3 does it
successfully by selling, closing for
retirement, or merging with another
company
New Business Success and Failure
• The Facts About Business Failure
A Business Failure is one that has stopped
operating with a loss to creditors.
• Usually the entrepreneur files for bankruptcy.
– Loses money for lenders and investors
– No longer appears on the tax rolls
Discontinuance business purposes discontinued by
owner who wants to start a new one.
Business may operate under a new name.
–
–
These are not failures
Their closings were planned and caused no harm to creditors
New Business Success and Failure
• How Entrepreneurs Can Succeed
– Chances of a new business succeeding are
excellent with effective planning and
management.
– Key to success
• Recognizing a need in the market
• Testing that opportunity in the marketplace
• Assembling a team with necessary expertise to execute
the business concept
Business Start Ups Failure Rate