CH 07

CHAPTER 9
Managing Start-Ups and New Ventures

CHAPTER SUMMARY
This chapter deals with entrepreneurship and new venture formation. The chapter begins by exploring the
nature of start-ups and new ventures. The text then examines the role of start-ups and new ventures in the
business world and discusses strategies for start-ups and new venture organizations. The chapter
continues by describing the structure and performance of start-ups and new ventures.
LEARNING OBJECTIVES
After covering this chapter, students should be able to:
1. Discuss the nature of entrepreneurship.
2. Describe the role of entrepreneurship in society.
3. Understand the major issues involved in choosing strategies for small firms and the role of
international management in entrepreneurship.
4. Discuss the structural challenges unique to entrepreneurial firms.
5. Understand the determinants of the performance of small firms.
MANAGEMENT IN ACTION
Leaping to Construction
Project Frog (which stands for Flexible Response to Ongoing Growth), founded in 2006, is a San
Francisco-based builder of component structures designed for onsite assembly. Unlike current
component manufacturers, Project Frog buildings are customizable. Project Frog uses “smart
manufacturing” when designing and manufacturing the building components. The result is a building
requiring less construction, producing less waste and improving on energy efficiency standards.
Management Update: Goldman Sachs recognized Project Frog CEO Ann Hand as one of
the most 100 Most Intriguing Entrepreneurs of 2014.
LECTURE OUTLINE
I. THE MEANING OF ENTREPRENEURSHIP
A. Entrepreneurship is the process of planning, organizing, and assuming the risk of a business
venture.
B. An entrepreneur is someone who engages in entrepreneurship.
C. A small business is one that is privately owned by an individual or a small group of
individuals; its sales and assets are not large enough to influence its environment.
D. A start-up or new venture is a relatively new small business.
Teaching Tip: The definition of “small” depends on the industry. A small retail store may
employ only a few workers, while a small nuclear power plant employs hundreds.
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. 110
Management 12e by Ricky W. Griffin
Teaching Tip: Point out a sample of small businesses around campus—convenience

stores, dry cleaners, local restaurants, clothing shops, bookstores, and so forth.
Cross-Reference: In Chapter 3, we discussed how regulators are a key part of a firm’s

task environment. Though the purpose of the Small Business Administration is to assist
small business, it also has regulatory implications as well.
II. THE ROLE OF ENTREPRENEURS, START-UPS AND NEW VENTURES IN SOCIETY
Some entrepreneurs have been very successful and have accumulated vast fortunes from their
entrepreneurial efforts. Many more entrepreneurs, however, have lost a great deal of money.
Research suggests the majority of new businesses fail within the first few years after founding.
As Figure 9.1 shows, most U.S. businesses employ fewer than 100 people, and small firms employ
most U.S. workers.
The contribution of start-ups and new ventures can be measured in terms of its effects on key
aspects of an economic system. In the United States, these aspects include job creation, innovation,
and importance to big business.
A. Job Creation
1. Start-ups and new ventures – especially in certain industries – are an important source of
new jobs in the U.S.
2. Entrepreneurial companies of all sizes create jobs.
Discussion Starter: Ask if any of your students ever took a job with a new firm just as it
was starting out. Ask them to recount their experiences.
B. Innovation
Small businesses create many new innovative products and services. Examples include the
personal computer, air conditioning, and the instant photograph.
The Small Business Association (SBA) says start-ups and new ventures consistently supply
over half of all “innovations” introduced into the U.S. each year.
C. Importance to Big Business
Big businesses sell their products through small businesses and buy more of their inputs from
small businesses than from other big businesses.
Cross-Reference: Since small businesses are frequent suppliers for bigger businesses,
they are an important ingredient in the task environment, discussed in Chapter 3.
III. STRATEGY FOR START-UPS AND NEW VENTURES
A. Choosing an Industry
Cross-Reference: Porter’s five forces framework provides an effective model for
assessing industry attractiveness. We discussed that framework in Chapter 3.
Small businesses can be successful in any industry segment. Small businesses are especially
strong in certain industries, such as retailing and services, which have relatively low
investment costs.
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Chapter 9: Managing Start-Ups and New Ventures
1. Service organizations are the fastest growing segment of small business enterprise.
Primarily because they require few resources, offer a high return on time invested, and
appeal to the innovation typified by many new entrepreneurs.
2. Retailing businesses often focus on narrow market segments like golfers or college
students. There are hundreds of different kinds of retailers.
Teaching Tip: Point out the large number of small service and retail businesses that
likely exist around your campus.
3. Construction is limited by location. Small, local construction firms are ideal.
4. Finance and insurance businesses are likely to be affiliates of or sell products provided
by larger national firms.
5. Wholesale businesses buy products from large manufacturers and resell the products to
retailers. Per sales volume, they need fewer employees than other industries.
6. Transportation jobs include local taxi and limousine companies, charter airplane services,
tour operators, and maintenance employees for regional airlines.
7. Manufacturing more than any other industry, lends itself more to big businesses than
smaller businesses due to the large financial investment required. Manufacturing costs
fall as the number of units produced increases. This is knows as an economy of scale.
Changing technology in an industry may create opportunities for small business. Small
manufacturers may find success supplying larger manufacturers.
Teaching Tip: With the growing role of computers and other technology in the creation
of new products and product ideas, the disadvantages of manufacturing for small
businesses may become less significant. Use of technology can shift an industry’s
economies of scale, making it less expensive to produce products in small quantities.
B. Emphasizing Distinctive Competencies
New businesses also increase their chances of success if they can identify and emphasize their
distinctive competencies.
1. One way to succeed with a new business is to identify a niche in an established market.
a) A niche is a segment of a market not currently being exploited.
b) An established market is one in which several large firms compete according to
relatively well-defined criteria.
Extra Example: Many retailers sell women’s attire but Eddie Bauer was the first retailer
offering all of its women’s products in tall sizes. They found an unexploited niche.
2. Another way to succeed is to identify a new, emerging market.
a) This may involve transferring a successful product to another market.
b) This may also occur when an entirely new market or industry is created.
Extra Example: Ann Taylor achieved success when she identified a new market for
women’s business attire that is professional and feminine at the same time.
3. A new business may also be successful when it has first-mover advantage, that is, when
it exploits an opportunity before any other firm does. Large organizations may identify
new niches or markets at the same time as smaller organizations but are unable to move
as quickly.
112 © 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
Extra Example: Dell Computer thrives due to first-mover advantage in direct marketing
—selling online and shipping directly to consumers. Dell maintains its dominance in this
segment of the industry because of its head start.
C. Writing a Business Plan
Another key ingredient to entrepreneurial success is the preparation of a strong business plan.
The business plan should include a discussion of goals, strategies and implementation,
forecasts and financial statements, most importantly the cash budget.
Teaching Tip: The website www.bplans.com offers sample business plans. It is
interesting to look at the variety of businesses that are the subject matter of these plans.
Interesting Quote: “Whether the plan calls for fast growth or slow doesn’t matter much.
When you do a business plan, you’re forced to make your assumptions explicit and to
challenge them.” (Raymond Boggs, economist; quoted in Fortune, May 2, 1994, p. 84.)
Group Exercise: Have small groups of students sketch the basic issues they would need
to consider if they were going to start a specific type of new business.
D. Entrepreneurship and International Management
Though many people associate international management with big business, many smaller
companies are finding expansion and growth opportunities in foreign markets. Some
companies open locations in foreign countries while others find opportunities through
increased sales.
IV. STRUCTURE OF START-UPS AND NEW VENTURES
A. Starting the New Business

1. Buying an existing business allows the entrepreneur to examine the business’s past
history and thus to better understand what he or she is getting into.
2. Starting from scratch allows the entrepreneur to avoid inheriting the mistakes of the past
owner. The risks are greater for those starting from scratch.
Teaching Tip: If possible, point out examples of local firms that have been started from
scratch and examples in which a business has been sold to a new owner.
B. Financing the New Business
1. Personal resources account for over two-thirds of all money invested in start-ups and new
ventures and one-half of that invested in the purchase of existing businesses.
2. Strategic alliances are becoming a popular method, especially popular with dot.com
companies who often subcontract many functions to traditional wholesalers or shippers
3. Traditional lenders include banks, independent investors, and government loans. Banks
and investors require a formal business plan and there are often strict eligibility
guidelines on government loans.
4. Venture capital companies are small groups of investors seeking to make profits on
companies with rapid growth potential. They invest capital in return for stock.
5. Small-business investment companies (SBICs) are federally licensed to borrow money
from the Small Business Administration (SBA) and invest in start-ups and new ventures.
6. SBA financial programs are federal loans for those who cannot get private financing on
reasonable terms. The company must meet stringent requirements.
7. Crowdfunding emerged as a source of funding for start-ups and new ventures.
C. Sources of Management Advice

1. Advisory boards provide experience, advice, and assistance.
2. The quality varies and the price may be high, but consultants bring an objective and
trained outlook to problems and provide logical recommendations.
3. The Small Business Administration plays a role in helping new business owners improve
their management skills.
The SBA provides advice from retired business people under its SCORE program. They
also use volunteer consultants, college students, and university faculty to provide
assistance. It also offers training programs and workshops through its Small Business
Development Center.
Teaching Tip: It is often interesting to have a local speaker from the SBA, SCORE, or
other program visit class and discuss various new business assistance programs.
4. Networking, or meeting regularly with other business people to share ideas and advice, is
also popular. One example is joining the local chamber of commerce.
D. Franchising
A franchising agreement is a contract between an entrepreneur (the franchisee) and a
parent company (called the franchiser). The franchisee pays the franchiser for the use of
its trademarks, products, formulas, and business plans.
The franchiser provides managerial and financial help, marketing expertise, and a
national image.
Franchising potentially reduces the entrepreneur’s risks, but it also entails significant
start-up costs, less control and profit potential. Though franchises minimize risk, they do
not guarantee success. The entrepreneur may fail or the franchise itself may collapse.
Interesting Quote: “Hamburgers are a wonderful means to an end, a great way to be on
the front line of society, a great way to earn a good living.” (McDonald’s franchisee,
quoted in The Wall Street Journal, June 3, 1998, p. A1). Use this quote for a discussion
as to whether hamburgers are a good investment in today’s health conscious world!
Teaching Tip: Point out some local businesses, near campus, that are franchised.
Discussion Starter: The fastest-growing franchises in the U.S. are fast food companies,
motels, convenience stores, and janitorial services. Why are these types of firms popular
choices for franchising?
V. THE PERFORMANCE OFSTART-UPS AND NEW VENTURES
A. Trends in Start-Ups and New Ventures

1. Emergence of e-commerce, through the Internet, has led to an increased ability for small
firms to start a business and / or grow a national clientele.
2. Many individuals are opting out of the corporate rat race, and recent corporate layoffs
add to the number of people considering entrepreneurship.
3. Woman- and minority-owned small businesses are experiencing high growth.
4. The failure rate is declining and the success rate is the best it has been in 50 years.
B. Reasons for Failure

1. Managerial incompetence or inexperience results when entrepreneurs have little or no
management experience or training.
2. Neglect is a threat, and some entrepreneurs don’t realize how much time is involved in
owning your own business.
3. Weak control systems can allow a firm to flounder without a clear sense of what needs
improvement.
4. Insufficient capital means that there isn’t enough reserve to sustain the firm through the
expensive start-up period or subsequent lean times.
C. Reasons for Success

1. Hard work, drive, and dedication on the part of the entrepreneur are all key to success.
Long hours and independent work are also required.
Teaching Tip: Stress for students that not everyone is cut out to be an entrepreneur.
Indeed, many people who try it end up going back to work for someone else.
Discussion Starter: Ask students if they have an interest in being an entrepreneur or if

they intend to go to work for someone else.
2. Market demand for its products or services provided is imperative for a business to succeed.
3. Managerial competence on the part of the entrepreneur is important.
4. Luck plays at least a small part in every successful business.
END OF CHAPTER QUESTIONS
Questions for Review

1. Describe the similarities and differences between entrepreneurial firms and large firms in
terms of their job creation and innovation.
Since 1990, entrepreneurial firms and large firms have both added new jobs to the economy. Large
firms have eliminated jobs, but at the same time, they have acted as entrepreneurs in moving into
new products and markets, creating new jobs. Both entrepreneurial and large firms are innovative
and have developed new products.
2. What characteristics make an industry attractive to entrepreneurs? Based on these
characteristics, which industries are most attractive to entrepreneurs?
Many entrepreneurs are starting their businesses with limited resources, and therefore, attractive
industries are those in which a small start-up investment is sufficient. Another attractive
characteristic is an industry in which a few large firms dominate, because that typically creates
market niches that entrepreneurs can successfully fill. Yet another attractive quality is the low
economies of scale, highly specialized skills and customization required by some crafts and trades.
These trades are often uneconomical for large firms but can be profitable for small ones. Thus,
services, retailing, and construction are popular choices for entrepreneurs, while manufacturing
tends to be dominated by large firms.
3. Describe recent trends in new business start-ups.
The Internet aids small businesses in reaching a wider market inexpensively, as well as creating
opportunities for new types of firms such as web design firms. Workers opting to leave their jobs at
large firms for self-employment is another important trend as is increased entrepreneurial
opportunities for women and minorities. Small business failure rates have been declining recently,
encouraging entrepreneurship.
4. What are the different sources of advice for entrepreneurs? What type of information would an
entrepreneur be likely to get from each source? What are the drawbacks or limitations for each
source?
Entrepreneurs may get advice from advisory boards, management consultants, the SBA, and from
networking with peers. Advice can cover a variety of topics from marketing to financing to human
resources. The advice obtained from advisory boards is only as good as the members of the board.
The same holds true for management consultants who also may charge high fees. The SBA provides
advice for free, but again, quality varies depending on the expertise of the volunteer advisors.
Networking can be one of the most effective sources of advice because the advice is practical and
relevant.
Questions for Analysis

5. Entrepreneurs and start-ups and new ventures play a variety of important roles in society. If
these roles are so important, do you think that the government should do more to encourage
the development of start-ups and new ventures? Why or why not?
This is an opinion question with no absolutely right or wrong answer. Instead, the quality of an
answer depends on how well it is justified. At present, the government already has numerous
programs in place to help new businesses. This chapter, for example, noted such programs as the
SBA and SCORE. In addition, most state and local governments also have new business
development programs. The real issue, then, is whether current programs are sufficient or if more
are needed.
6. Consider the four major reasons for new business failure. What actions can entrepreneurs
take to minimize or avoid each cause of failure?
Incompetence or inexperience can be counteracted by business training and education as well as by
experience working in that type of business. Neglect can be avoided by a more serious time
commitment. Weak control systems are avoidable if owners pay closer attention to potential and
developing problems. Insufficient capital or overly optimistic financial projections can be solved if
entrepreneurs work with experts to determine a realistic budget and to obtain the necessary funds in
advance.
7. The U.S. automotive industry is well established, with several large and many small
competitors. Describe the unexploited niches in the U.S. auto industry and tell how
entrepreneurs could offer products that fill those niches.
Students’ answers will vary. They might point out that there are few automobiles for very modest
prices, such as the $10,000 range. They might also note the sameness of the sedans, SUVs, and
trucks that most Americans buy. There might be an opportunity for a completely different type of
vehicle or for the revival of old favorites, such as the station wagon.
Questions for Application

8. Assume that you are opening a new business in your town. What are your financing options?
Which option or options are you likely to choose, and why?
Financing options include personal resources, strategic alliances, lenders such as banks and the
federal government, venture capital, small business investment companies, and the SBA. Students’
will vary in their preferences and their justification.
9. List five entrepreneur-owned businesses in your community. In which industry does each
business compete? Based on the industry, how do you rate each business’s long-term chances
for success? Explain your answers.
Students’ will choose different companies, of course. They should correctly identify the industry.
Then, they should predict that firms in services and retailing will be successful while manufacturing
firms will not. However, factors such as low economies of scale and the existence of unfilled market
niches are more important in determining success than is choice of industry.
10. Using the information about managing start-ups and new ventures presented in this chapter,
analyze whether you would like to work in a start-up or new venture—either as an employee
or as a founder. Given your personality, background, and experience, does working in or
starting a new business appeal to you? What are the reasons for your opinion?
This makes an excellent outside-of-class assignment. There will likely be a wide variety of answers.
(For a more detailed look at this question, see the Diagnostic Skills and the Interpersonal Skills
exercises for this chapter. They are especially useful for students who are interested in exploring an
entrepreneurial career.)
END OF CHAPTER EXERCISES
Building Effective interpersonal Skills

I. Purpose
This exercise helps students assess their networking skills to find out if these skills are well
developed already or likely to be developed over time.
II. Format
This exercise is designed to be completed by individual students outside of class. It involves
students responding to a 16-item questionnaire and adding up their score on these questions.
III. Follow-Up
A. The scores range from 16 (ineffective networking) to 80 (effective networking).
Building Effective Conceptual Skills

I. Purpose
This exercise encourages students to think through the factors that lead to start-up and new venture
success and to apply those ideas to their situation.
II. Format
The conceptual skills exercise is a two-step activity with Step 1 done individually and Step 2 in
groups. The entire exercise will take about 20 minutes.
III. Follow-Up
A. Form a small group of four or five classmates and discuss your respective lists. Look for instances
in which the same type of business appears either on (1) both of your lists or (2) on one of your
lists and one of a classmate’s lists. Also, look for cases in which the same business appears on
more than one list with either similar or dissimilar prospects for success.
Differences in students’ interests and knowledge of local market conditions will lead to
different answers to this question.
B. At this point, how important do you regard personal interest as a factor in small-business
success?
Students might point out that without personal interest, entrepreneurs are unlikely to invest the
significant amount of time and energy that a small business requires. However, personal
interest alone isn’t enough to create a viable enterprise.
C. How important do you regard market potential as a factor in small-business success?
Market potential is critical to small business success. Without it, even the most dedicated
entrepreneur will not succeed. However, personal interest creates energy and enthusiasm,
which is also a necessary component of success. Students will probably agree that both
personal interest and market potential are absolutely vital.
MANAGEMENT AT WORK
Taxi Dancing around the Question of Regulation

Uber is a ridesharing service introduced in San Francisco in 2009 and quickly expanded to 140 U.S. cities
and 40 foreign countries. Customers “e-hail” a ride through an app on their smartphone and a ride is
there within minutes. The service is cheaper than a typical taxi and there is no cash involved as the
charges come straight from the customer’s credit card. The service has its detractors, including cab
services and some dissatisfied customers.
Management Update: Add drivers to the list of possible Uber detractors. In September
2015, a California judge granted class-action status to an employee status lawsuit filed
against the company. The suit is open to all Uber drivers in California. The lawsuit
claims Uber misclassified its employees as contract workers. It alleges Uber treats
drivers like employees without providing the requisite benefits. Uber plans to appeal the
decision saying there really is no “typical” driver, the key question at issue. If the suit is
successful, it could mean the end of Uber.
1. Case Question 1: What are Uber’s distinctive competencies – the aspects of the business of
transporting passengers that it appears to perform better than its competitors? In what ways has
Uber successfully emphasized its distinctive competencies?
Uber’s distinctive competencies are its low costs, ease of use and cashless pay system. Uber keeps
costs low by having few employees and using contracted drivers who get a portion of the ride
payment but provide all other costs of use, upkeep and ownership of the actual vehicle. Uber passes
the lower cost on to the customer who receives a ride for less than typical cab fare. Uber’s “e-hail”
app appears easy to use and powerful enough to complete the process with only a few clicks from
the customer. No cash needed as payment comes directly from customer’s credit card. Uber
successfully emphasized their distinctive competencies through identifying a new niche in an
existing market and acting quickly to take advantage of the opportunity. Using contracted drivers
not only keeps costs low but side-steps lengthy and costly regulations. Uber has effectively created
its own niche. If the business plan holds up to scrutiny, and now lawsuits, Uber is in a good position
to have a sustained competitive advantage due to its early entry in the market.
2. Case Question 2: Uber operates specifically in the taxi and limousine industry, in which cars
transport passengers according to various dispatch and fare systems. In a broader sense, however, it
also participates in certain “major industry groups” (see the chapter section on “Choosing an
Industry”). What are the relevant “industry groups”? In what ways do the demands of competing
within these groups overlap with or impact the demands of competing in the taxi and limousine
industry? In particular, how might these demands influence Uber’s entrepreneurial strategies?
The major industry groups are services and transportation. A new business offering services
generally requires fewer resources and provides a higher return on time invested. The transportation
industry is a bit different as it requires a heftier investment in vehicles and this industry has more
regulations attached. Uber is seeking to get the best of both the services industry with a high rate of
return while offering transportation services. Uber uses its business model of contracted drivers to
bypass regulations and remove vehicle expenses from its budget line.
3. Case Question 3: “Innovation and regulation simply don’t work together.” So says Larry Downes,
the victim of the cab ride described at the outset of the case and formerly of the Northwestern
University School of Law and the University of California-Berkeley’s Haas School of Business.
Assuming that he’s right, why is this so? Why is regulation often incompatible with innovation?
Why do we regulate most industries in the first place? In your opinion, what sort of tradeoffs should
we seek when we try to balance the opposing advantages of regulation and innovation?
Answers will vary. Students should offer some comparison of the flexibility needed for innovation
opposed to the strictness of regulations. If an innovation comes along making an industry better, it
may not be “allowed” under current regulations. Regulations are generally in place for the safety of
workers and the general public. Answers to the final question will vary but one idea is an outlet for
trying new innovations that reside outside the bounds of current regulations.
4. Case Question 4: The case defines regulatory capture as the process whereby regulators and
regulated industries eventually develop a mutual vested interest in maintaining the regulatory
system. The regulator, as Downes puts it, “becomes the industry’s cheerleader, and regulations shift
subtly from protecting the public interest to protecting the status quo.” Think of a couple of
industries with which you do business. Does the process of regulatory capture appear to be at work
in these industries? In what ways do you think the system of regulatory capture adversely affects
the relationship between a given industry and its customers?
Student’s answer will vary. There may be examples given of transportation companies such as
taxis, or airlines. Other examples include the FDA and items from the grocery store. Regulatory
capture adversely affects the relationship between a given industry and its customers due to
suspicion and lack of trust.

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CHAPTER 9

Managing Start-Ups and New Ventures

I. THE MEANING OF ENTREPRENEURSHIP

Teaching Tip: Point out a sample of small businesses around campus—convenience

Cross-Reference: In Chapter 3, we discussed how regulators are a key part of a firm’s

II. THE ROLE OF ENTREPRENEURS, START-UPS AND NEW VENTURES IN SOCIETY

III. STRATEGY FOR START-UPS AND NEW VENTURES

IV. STRUCTURE OF START-UPS AND NEW VENTURES

A. Starting the New Business

C. Sources of Management Advice

V. THE PERFORMANCE OFSTART-UPS AND NEW VENTURES

A. Trends in Start-Ups and New Ventures

B. Reasons for Failure

C. Reasons for Success

Discussion Starter: Ask students if they have an interest in being an entrepreneur or if

END OF CHAPTER QUESTIONS

Questions for Review

Questions for Analysis

Questions for Application

END OF CHAPTER EXERCISES

Building Effective interpersonal Skills

Building Effective Conceptual Skills

Taxi Dancing around the Question of Regulation

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