Chapter Ten

Managing New
Venture Formation
and Entrepreneurship
Slide content created by Charlie Cook, The University of West Alabama
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 Learning Objectives
After studying this chapter, you 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.

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 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.

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 The Role of Entrepreneurship
in Society (cont’d)
• Research Findings:
– Most new businesses fail within the first three years of
founding. 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 and has a strong effect on job
creation, innovation, and are important to big
businesses.

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 Figure 10.1: The Importance of Small
Business in the United States

Source: U.S. Census Bureau, Statistical Abstract of the United States: 2002 (122nd Edition), Washington, D.C., 2002.
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 The Role of Entrepreneurship
in Society (cont’d)
• Small Businesses’ Role in Job Creation
– Create 80% of the new jobs in the U.S.
– Dominate sectors that have added the most jobs.
– Account for 38% of all jobs in high-technology
sectors and for 96% of all U.S. exporters.
• Innovation
– 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.

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Figure 10.2: Representative Jobs Created
and Lost by Big Business, 1993–2005

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 The Role of Entrepreneurship
in Society (cont’d)
• Importance to Large Businesses
– 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.

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 Strategy for Entrepreneurial
Organizations
• Three Basic Strategic Challenges
– Choosing an industry in which to compete.
– Emphasizing distinctive competencies.
– Writing a business plan.

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 Figure 10.3: Small Businesses
(Businesses With Fewer Than Twenty
Employees) by Industry

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Figure 10.4: Economies of Scale in
Small-business Organizations

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 Strategy for Entrepreneurial
Organizations
• Emphasizing Distinctive Competencies
– Identifying Niches in Established Markets
• A segment of a market not currently being exploited in an
established market where several large firms compete.
• A niche offers a competitive advantage to small
businesses.
– Identifying New Markets
• Using the transfer of an existing product/service to explore
a new market.
• Creating new industries/products/services.
– First-Mover Advantage
• Exploiting an opportunity before any other firm does.

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 Strategy for Entrepreneurial
Organizations (cont’d)
• Writing a Business Plan
– A business plan is a document that summarizes the
business strategy and structure. It should include:
• business goals and objectives.
• strategies used to achieve these goals and objectives.
• a plan of how the entrepreneur will implement these strategies.
• Entrepreneurship and International Management
– There is expansion and growth potential in foreign
markets.
– While there are risks, entering a foreign country’s
market can be a real catalyst for success.

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 Structure of Entrepreneurial
Organizations
• Starting the New Business
– Buying an Existing Business
• Business has a proven ability to draw customers and
make a profit (the business is a going concern).
• 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.

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 Financing the New Business
• 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 who provide capital funds to small
high-growth potential start-up firms in exchange for an equity
position (stock) in the firms.

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 Financing the
New Business (cont’d)
• Small-Business Investment Companies (SBICs)
– Investor-owned companies that borrow money from
the SBA to loan 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 obtain private
financing at reasonable terms.

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 Franchising
• Advantages • Disadvantages
– Reduced financial – Start-up fees to purchase
risk of new business franchise.
success through
– Limitations of franchise
experience provided
(market area, product,
by franchiser.
customers).
– Training, financial,
– Loss of independence
and management
due to imposed
support by
operational controls of
franchiser.
franchiser.

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 Figure 10.5: Business Start-up
Successes and Failures

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 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

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 Figure 10.6:
The Growth of
Online
Commerce

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 The Performance of Entrepreneurial
Organizations (cont’d)
• Reasons for Failure • Reasons for Success
– Managerial – Hard work, drive, and
incompetence/inexperien dedication by the
ce of the entrepreneur. entrepreneur.
– Neglect in not devoting – Careful analysis of market
sufficient time and effort conditions provides
to the business. insights about business
conditions.
– Weak control systems
that do not warn of – Managerial competence
through training and
impending problems.
experience contributes to
– Insufficient capital to success.
sustain the business until – Luck sometimes plays a
it starts to turn a profit. role.

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 Key Terms
• entrepreneurship
• entrepreneur
• small business
• established market
• niche
• first-mover advantage
• business plan
• venture capital company
• franchisee
• franchisor
• franchising agreement

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