PART 2

Planning

CHAPTER 5

Entrepreneurship
and New Venture
Management
 Learning Objectives
After studying this chapter, you should be able to:
1. Describe the role of entrepreneurship in society.
2. Understand the major issues involved in choosing
strategies for small firms and the role of international
management in entrepreneurship.
3. Discuss the structural challenges unique to
entrepreneurial firms.
4. Understand the determinants of the performance of
small firms.

© 2019 Cengage. All rights reserved.

 Discussion Starter (1)

• Turkey-born, U.S. immigrant, Hamdi Ulukaya

launched Chobani (Turkish for shepherd), the
enormously successful Greek yogurt brand.
Ulukaya set up shop in an old Kraft Foods
yogurt plant in upstate New York and launched
his highly successful product.
– What ingredients led to Hamdi Ulukaya’s success
with Chobani?

© 2019 Cengage. All rights reserved.

 The Nature of Entrepreneurship

• Entrepreneurship
– The process of planning, organizing, operating, and
assuming the risk of a business venture
• Entrepreneur
– Someone who engages in entrepreneurship
• Small business
– A business that is privately owned by one individual
or a small group of individuals and has sales and
assets that are not large enough to meaningfully
influence its environment

© 2019 Cengage. All rights reserved.

5-1 The Role of Entrepreneurship in Society
(slide
(slide 11 of
of 2)
2)

• The majority of new businesses fail within the

first few years of founding.
• Most U.S. businesses employ fewer than 100
people, and most U.S. workers are employed
by small firms.
• The majority of small businesses are owner-
operated.

© 2019 Cengage. All rights reserved.

FIGURE
FIGURE 5.1
5.1 The
The Importance
Importance of
of Small
Small Business
Business in
in the
the United
United States
States

© 2019 Cengage. All rights reserved.

5-1 The Role of Entrepreneurship in Society
(slide
(slide 22 of
of 2)
2)

• Small business is a strong presence in mature

economies and will be quite important in
emerging economies.
• The contribution of small business can be
measured in terms of its effects on key aspects
of an economic system, including job creation,
innovation, and importance to big business.

© 2019 Cengage. All rights reserved.

 5-1a Job Creation (slide
(slide 11 of
of 2)
2)

• Small business—especially in certain industries

—is an important source of new (and often well-
paid) jobs in the United States.
– Seven of the ten industries that added the most new
jobs in 2015 were in sectors dominated by small
businesses.
– Small businesses currently account for over one-
third of all jobs in high-technology sectors of the
economy.

© 2019 Cengage. All rights reserved.

 Table
Table 5.1
5.1 Job
Job Creation
Creation by
by Recent
Recent Successful
Successful Start-Ups
Start-Ups and
and New
New Ventures
Ventures

Firm Year Started Number of Jobs 2016

Amazon.com 1994 180,000
Chobani 2005 2,000
Cinemark 1985 22,500
Dell Computer 1984 111,300
eBay 1997 33,500
Apple 1976 115,000
Facebook 2004 17,048
GameStop 1994 65,000
Google 1997 57,100
Whole Foods 1980 91,000
JetBlue 2000 20,000
LinkedIn 2003 3,458
Netflix 1997 3,500
Starbucks 1971 238,000
Twitter 2007 3,900
Whole Foods 1978 78,400

© 2019 Cengage. All rights reserved.

 5-1a Job Creation (slide
(slide 22 of
of 2)
2)

• Jobs are created by entrepreneurial companies

of all sizes, all of which hire workers and all of
which lay them off.
– Although small firms often hire at a faster rate than
large ones, they are also likely to eliminate jobs at a
far higher rate.
– Small firms are also usually the first to hire in times
of economic recovery, whereas large firms are
generally the last.

© 2019 Cengage. All rights reserved.

 5-1b Innovation

• Major innovations are as likely to come from

small businesses as from big businesses.
– Small businesses consistently supply over half of all
“innovations” introduced into the U.S. marketplace
each year.
• Much of what is created in the high-technology
sectors comes from start-up companies.

© 2019 Cengage. All rights reserved.

 5-1c Importance to Big Business

• Most of the products made by big

manufacturers are sold to customers by small
businesses.
• Small businesses provide big businesses with
many of the services, supplies, and raw
materials they need.
• Large businesses outsource many routine
business operations such as packaging,
delivery, and distribution to smaller companies.

© 2019 Cengage. All rights reserved.

 5-2 Strategy for Entrepreneurial
Organizations

Basic Strategic
Challenges

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

© 2019 Cengage. All rights reserved.

 5-2a Choosing an Industry
• The major industry groups that include successful new ventures
and small businesses are:
– Services
– Retailing
– Construction
– Financial and insurance
– Wholesaling
– Transportation
– Manufacturing
• Each industry group differs in its requirements for employees,
money, materials, and machines.
– In general, the more resources an industry requires, the harder it is to
start a business and the less likely it is that the industry is dominated
by small firms.

© 2019 Cengage. All rights reserved.

FIGURE
FIGURE 5.2
5.2 Small
Small Business
Business (Businesses
(Businesses with
with Fewer
Fewer than
than 20
20 Employees)
Employees) by
by Industry
Industry

© 2019 Cengage. All rights reserved.

 Economies of Scale

• Research shows that manufacturing costs often

fall as the number of units produced by an
organization increases.
– This relationship between cost and production is
called an economy of scale.
• Small organizations usually cannot compete effectively on
the basis of economies of scale.
• Organizations with higher levels of production have a major
cost advantage over those with lower levels of production.
• When technology in an industry changes, it often shifts the
economies-of-scale curve, thereby creating opportunities for
smaller organizations.

© 2019 Cengage. All rights reserved.

FIGURE
FIGURE 5.3
5.3 Economies
Economies of
of Scale
Scale in
in Small-Business
Small-Business Organizations
Organizations

© 2019 Cengage. All rights reserved.

5-2b Emphasizing Distinctive Competencies

(slide
(slide 11 of
of 4)
4)
• The distinctive competencies of small
businesses usually fall into three areas:
1. The ability to identify new niches in established
markets
2. The ability to identify new markets
3. The ability to move quickly to take advantage of
new opportunities

© 2019 Cengage. All rights reserved.

5-2b Emphasizing Distinctive Competencies

(slide
(slide 22 of
of 4)
4)
• Identifying Niches in Established Markets
– Established market
• A market in which several large firms compete according to
relatively well-defined criteria
– Niche
• A segment of a market not currently being exploited
• To watch the short segment “How This Private Aviation
Startup Found Its Niche in the Luxury Market,” go to
YouTube (
https://www.youtube.com/watch?v=RXmnvYEYMJE).

© 2019 Cengage. All rights reserved.

5-2b Emphasizing Distinctive Competencies
(slide
(slide 33 of
of 4)
4)

• Identifying New Markets

– Discovery of new markets can happen in at least two
ways:
1. An entrepreneur can transfer a product or service that is
well established in one geographic market to a second
market.
2. Entrepreneurs can sometimes create entire industries.

© 2019 Cengage. All rights reserved.

5-2b Emphasizing Distinctive Competencies

(slide
(slide 44 of
of 4)
4)
• First-Mover Advantages
– First-mover advantage
• Any advantage that comes to a firm because it exploits an
opportunity before any other firm does

© 2019 Cengage. All rights reserved.

 5-2c Writing a Business Plan (slide
(slide 11 of
of 3)
3)

• Business plan
– A document that summarizes the business strategy
and structure
– The plan should describe the match between the
entrepreneur’s abilities and the requirements for
producing and marketing a particular product or
service.
– It should define strategies for production and
marketing, legal aspects and organization, and
accounting and finance.

© 2019 Cengage. All rights reserved.

 5-2c Writing a Business Plan (slide
(slide 22 of
of 3)
3)

• A business plan should answer three questions:

1. What are the entrepreneur’s goals and objectives?
2. What strategies will the entrepreneur use to obtain
these goals and objectives?
3. How will the entrepreneur implement these
strategies?

© 2019 Cengage. All rights reserved.

 5-2c Writing a Business Plan (slide
(slide 33 of
of 3)
3)

• An important component of the overall business

plan is financial planning, which translates all
other activities into dollars.
– Generally, the financial plan is made up of:
• A cash budget (tells entrepreneurs how much money they
need before they open for business and how much money
they need to keep the business operating)
• An income statement
• Balance sheets
• A break-even chart

© 2019 Cengage. All rights reserved.

 5-2d Entrepreneurship and
International Management
• Many smaller companies are finding expansion
and growth opportunities in foreign countries.
– Although such ventures are accompanied by
considerable risks, they give entrepreneurs new
opportunities and can be a real catalyst for success.

© 2019 Cengage. All rights reserved.

 Discussion Starter (2)

• What are the basic reasons why small

businesses succeed and what are the basic
reasons they fail?

© 2019 Cengage. All rights reserved.

 5-3a Starting the New Business (slide
(slide 11 of
of 5)
5)

• After choosing a product and making sure that

the choice fits their own skills and interests,
entrepreneurs must decide whether to buy an
existing business or to start from scratch.
– Consultants often recommend the first approach
because the odds are better.

© 2019 Cengage. All rights reserved.

 5-3a Starting the New Business (slide
(slide 22 of
of 5)
5)

• Buying an Existing Business

– If successful, an existing business has already
proved its ability to draw customers at a profit.
– It has established working relationships with lenders,
suppliers, and the community.
– The track record of an existing business gives
potential buyers a much clearer picture of what to
expect than any estimate of a new business’s
prospects.

© 2019 Cengage. All rights reserved.

 5-3a Starting the New Business (slide
(slide 33 of
of 5)
5)

• Starting from Scratch

– A new business does not suffer the ill effects of a
prior owner’s errors.
– The start-up owner is free to choose lenders,
equipment, inventories, locations, suppliers, and
workers, unbound by a predecessor’s commitments
and policies.

© 2019 Cengage. All rights reserved.

 5-3a Starting the New Business (slide
(slide 44 of
of 5)
5)

• Starting from Scratch

– The risks of starting a business from scratch are
greater than those of buying an existing firm.
– Success or failure depends heavily on identifying a
genuine business opportunity—a product for which
many customers will pay well but which is currently
unavailable to them.

© 2019 Cengage. All rights reserved.

 5-3a Starting the New Business (slide
(slide 55 of
of 5)
5)

• Starting from Scratch

– To find openings, entrepreneurs must study markets
and answer the following questions:
• Who are my customers?
• Where are they?
• At what price will they buy my product?
• In what quantities will they buy?
• Who are my competitors?
• How will my product differ from those of my competitors?

© 2019 Cengage. All rights reserved.

 5-3b Financing the New Business (slide
(slide 11 of
of 2)
2)

• 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)
• Venture capital companies
– Groups of small investors seeking to make profits on companies with
rapid growth potential
– Most of these firms do not lend money: They invest it, supplying
capital in return for stock.

© 2019 Cengage. All rights reserved.

5-3b Financing the New Business (slide
(slide 22 of
of 2)
2)

• Small-Business Investment Companies (SBICs)

– Investor-owned companies that borrow money from
the Small Business Administration (SBA) to loan to
small businesses with potential for rapid growth
– Minority enterprise small-business investment
companies (MESBICs) specialize in financing
businesses that owned and operated by minorities.
• SBA Financial Programs
– Provide assistance (e.g., SBA-guaranteed loans) for
small businesses unable to get private financing at
reasonable terms

© 2019 Cengage. All rights reserved.

 5-3c Sources of Management Advice
(slide
(slide 11 of
of 3)
3)

• Advisory Boards
– Provide advice and assistance
• Management Consultants
– Experts who charge fees to help managers solve
problems
– Often specialize in one area, such as international
business or small business
– Can be quite expensive

© 2019 Cengage. All rights reserved.

 5-3c Sources of Management Advice
(slide
(slide 22 of
of 3)
3)

• The Small Business Administration

– Service Corps of Retired Executives (SCORE)
– Active Corps of Executives (ACE)
– Small Business Institute (SBI)
– Small Business Development Centers (SBICs)
• Networking
– Meeting regularly with one another to discuss
common problems and opportunities and, perhaps
most important, to pool resources

© 2019 Cengage. All rights reserved.

 5-3c Sources of Management Advice
(slide
(slide 33 of
of 3)
3)

• Divide into small groups. Sketch the basic

issues you would need to consider if you were
going to start a specific type of new business.

© 2019 Cengage. All rights reserved.

 5-3d Franchising (slide
(slide 11 of
of 3)
3)

• Franchising agreement
– A contract between an entrepreneur (the franchisee)
and a parent company (the franchiser); the
entrepreneur pays the parent company for the use of
its trademarks, products, formulas, and business
plans

© 2019 Cengage. All rights reserved.

 5-3d Franchising (slide
(slide 22 of
of 3)
3)

• Advantages • Disadvantages
– Franchisers benefit from – Some franchises have a
the ability to grow rapidly significant start-up cost.
by using the investment – There is loss of
money provided by independence for the
franchisees. franchisee due to the
– The franchisee does not imposed operational
have to build the business controls of the franchiser.
step by step; it is virtually – Many franchise
established overnight. agreements are difficult to
– Because each franchise terminate.
outlet is a carbon copy of
every other outlet, the
chances of failure are
reduced.

© 2019 Cengage. All rights reserved.

 5-3d Franchising (slide
(slide 33 of
of 3)
3)

• John Schnatter started what is now a billion-

dollar pizza franchise in a broom closet. Now,
there are 4,500 Papa John's restaurants
located across the globe. To see a brief
interview with Schnatter, visit Entrepreneur (
https://www.entrepreneur.com/video/235200).

© 2019 Cengage. All rights reserved.

 5-4 The Performance of
Entrepreneurial Organizations
Crossovers to small business
The emergence
of e-commerce by former large-business
employees

Trends in Small-Business Start-Ups

Increased entrepreneurial
Better survival rates for
opportunities for minorities
small businesses
and women

© 2019 Cengage. All rights reserved.

 Entrepreneurial Success and Failure

• Reasons for Failure • Reasons for Success

– Managerial incompetence/ – Hard work, drive, and
inexperience of the dedication by the
entrepreneur entrepreneur
– Neglect in not devoting – Careful analysis of market
sufficient time and effort to conditions that provides
the business insights about business
– Weak control systems that conditions
do not warn of impending – Acquisition of managerial
problems competence through
– Insufficient capital to training or experience or
sustain the business until by using the expertise of
it starts to turn a profit others

© 2019 Cengage. All rights reserved.

FIGURE
FIGURE 5.4
5.4 Common
Common Causes
Causes of
of Business
Business Failure
Failure Include
Include Managerial
Managerial Incompetence,
Incompetence,
Neglect,
Neglect, Weak
Weak Control
Control Systems,
Systems, and
and Insufficient
Insufficient Capital
Capital

© 2019 Cengage. All rights reserved.

 Discussion Starter (3)

• Entrepreneur Magazine publishes an annual list

of the fastest-growing franchises in the United
States each year. Visit Entrepreneur (
www.entrepreneur.com/franchises/fastestgrowi
ng
) and explore the list with students.
– In what industries are the fastest-growing franchises
located in? Why are these types of firms popular
choices for franchising?

© 2019 Cengage. All rights reserved.