Entrepreneurship and New Venture Creation (NP Gandhi)

Entrepreneurship and New Venture Management
PRESENDED BY: NAYAN PRAKASH GANDHI

Chapter Outline
• The Nature of Entrepreneurship
• The Role of Entrepreneurship
– Job Creation
– Innovation
– Importance to Large Businesses
• Strategy for Entrepreneurial Organizations
– Choosing an Industry
– Emphasizing Distinctive Competencies
– Writing a Business Plan
– Entrepreneurship and International Management
PRESENDED BY: NAYAN PRAKASH GANDHI 5–2

Chapter Outline (cont’d)
• Structure of Entrepreneurial Organizations
– Starting the New Business
– Financing the New Business
– Sources of Management Advice
– Franchising
• The Performance of Entrepreneurial Organizations
– Trends in New Business Start-ups
– Reasons for Failure
– Reason for Success
5–3
Learning Objectives
• After studying this chapter, you should be able
to:
– Discuss the nature of entrepreneurship.
– Describe the roles of entrepreneurs in society.
– 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
entrepreneurial firms.
– Understand the determinants of the performance of
entrepreneurial firms.

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.
Copyright © by Houghton Mifflin Company. All rights reserved. 5–5

The Role of Entrepreneurship in Society
• Research Findings:
– Most new businesses fail within the 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
100 100
90 90
Percentage of All U.S. Workers

80 80
Percentage of Businesses
70 70
60 60
50 50
40 40
30 30
20 20
10 10
0 0
Under 20–99 100–499 500–999 1,000 Under 20–99100–499 500–999 1,000
20 or more 20 or more
Number of Employees Number of Employees
(a) (b)
Source: U.S. Census Bureau, Statistical Abstract of the

United States: 1999 (119th Edition) Washington, D.C., 1999. Figure 5.1
(cont’d)
• Job Creation
– Small business creates 80% of new jobs in the U.S.
– Industry sectors dominated by small business have
added the most jobs.
– Small business accounts for 38%
of all jobs in high-technology
sectors and for 96% of all
U.S. exporters.
5–8
(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.
5–9
Representative Jobs Created and Lost by
Big Business, 1990–1999
JOB GAINS
Toys “ ” –3,400
Us
Quaker –16,340 Wal-Mart + 639,000
Oats
Dayton +100,000
National –21,100 Hudson
Semi-
Conductor Albertson ’s +45,000
Kmart –86,475 Circuit +36,270

City
General –86,578
Barnes +29,000
Mills
and
IBM –92,153 Noble
PepsiCo –116,000 Dell +22,900

Corporation
General –181,100 Conagra +21,631
Motors
America +12,100
Online
JOB LOSSES Figure 5.2
5–10
(cont’d)
• Importance to Large Business
– 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.
5–11
Strategy for
Entrepreneurial Organizations
• Three Basic Strategic Challenges

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

Small Businesses (Businesses with Less Than
Twenty Employees) by Industry
Construction Retailing
Transportation 10% 22.7%

Services are the
5% fastest growing
segment of
Wholesale
8% small-business
enterprise.
Financial
and 10% 37.6%
Insurance
5% Services
Manufacturing
Other 1.7

5–13
Economies of Scale in
Small Business Organizations
Cost of production per unit($)

Cost of production per unit($)
Original economies of scale
New economies of scale
B A
Number of units produced Number of units produced
(a) Standard economies-of-scale curve (b) Change in technology that shifts economies of
scale and may make small business production
possible
Figure 5.4
5–14
Strategy for Entrepreneurial Organizations
• Emphasizing Distinctive Competencies
– Identifying a niche in an established 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.
5–15
(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.
5–16
(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.
5–17
Structure of Entrepreneurial Organizations
• Starting a New Business
–Buying an Existing Business
• 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
• Avoids problems associated with previous owners.
• Freedom to choose suppliers, equipment, location, and
workers.
• Negative: More business risk and uncertainty.
5–18
Structure of Entrepreneurial Organizations
(cont’d)
• Identifying a Genuine Business Opportunity
Where are they?
Who are my
customers?
At what price
will they buy my
In what product?
quantities will
they buy?
Who are my How will my

competitors? product vary from
those of my
competitors?
Financing the New Business
• Personal Resources • Lenders
– Using your own money and – Obtaining funding from
money borrowed from traditional lenders (e.g.,
friends and relatives to banks, independent
finance the business. investors, and government
• Strategic Alliances loans).
– Partnering with established • Venture Capital
firms such as suppliers in a Companies
mutually beneficial – Groups of small investors
relationship. who provide capital funds to
small high-growth potential
start-up firms in exchange
for an equity position (stock)
in the firms.
5–20
Financing the New Business (cont’d)
• Small-Business Investment Companies (SBICs)
– 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.
5–21
Sources of Management Advice
Advisory Boards
Management
Consultants
The Small Business

Administration
Networking
5–22
Sources of Help for Entrepreneurs
Source: Siropolis, Nicholas C., Small Business Management, Fifth Edition. Copyright © 1994 by Houghton Mifflin Company. Used with permission.
5–23
Franchising
• Franchising Agreement
– 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.
5–24
Franchising (cont’d)
• Advantages of franchising
– 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.
5–25
The Performance of
Entrepreneurial Organizations
• Business 200,000
Start-Up
Business Start-Ups
150,000
Successes
and 100,000
Failures
50,000
0
Business Closures
50,000
100,000
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Year
5–26
The Performance of Entrepreneurial
Organizations (cont’d)
• 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
5–27
Where Women Entrepreneurs Come From
and What They Like About Work
Background of Women What Women Entrepreneurs Say They
Entrepreneurs in Previous Jobs Like Best About Business Ownership*
Engineering/
Manufacturing
Marketing 4% Human Decision making Achieving goals
6% Resources 15% 10%
3%
Accounting/ Being her

Finance own boss
18% Independence
Management 20%
16%
25%
Sales Pleasing
Setting own
21% customers
Other Control- hours
16%
23% ling destiny 17%
17%
Source: Wall Street Journal, May 24, 1999, p. R12. *Multiple responses allowed Figure 5.6
5–28
The Performance of Entrepreneurial
Organizations (cont’d)
• Reasons for Failure • Reasons for Success
– Managerial – Hard work, drive, and
incompetence/inexperience dedication by the
of the entrepreneur. entrepreneur.
– Neglect in not devoting – Careful analysis of market
sufficient time and effort to conditions provides insights
the business. about business conditions.
– Weak control systems that – Managerial competence
do not warn of impending through training and
problems. experience contributes to
– Insufficient capital to sustain success.
the business until it starts to – Luck sometimes plays a
turn a profit. role.
5–29

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Entrepreneurship and New Venture Management

PRESENDED BY: NAYAN PRAKASH GANDHI

PRESENDED BY: NAYAN PRAKASH GANDHI 5–2

PRESENDED BY: NAYAN PRAKASH GANDHI 5–4

Copyright © by Houghton Mifflin Company. All rights reserved. 5–5

PRESENDED BY: NAYAN PRAKASH GANDHI 5–6

Percentage of All U.S. Workers

Source: U.S. Census Bureau, Statistical Abstract of the

Kmart –86,475 Circuit +36,270

PepsiCo –116,000 Dell +22,900

• Three Basic Strategic Challenges

PRESENDED BY: NAYAN PRAKASH GANDHI 5–12

Transportation 10% 22.7%

Source: U.S. Census Bureau, Statistical Abstract of the

Cost of production per unit($)

Original economies of scale

New economies of scale

• Writing a Business Plan

• Entrepreneurship and International Management

Who are my How will my

The Small Business

Accounting/ Being her

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