Learning Outcomes

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.

© 2016 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–2
 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.
–It has sales and assets that are not large enough to
influence its environment.

© 2016 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–3
 The Role of Entrepreneurship in Society

• Research Findings:
–Most new businesses fail within the first few years of
being founded.
–86 percent of U.S. firms employ fewer than 20 people.
–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.
–Small business has a strong effect on job creation,
innovation, and is important to big businesses.

© 2016 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–4
FIGURE 5.1 The Importance of Small Business in the United States

Approximately 86 percent of all U.S. businesses employ fewer 24.5 percent of all U.S. workers are employed by firms with
than 20 people; another 11.7 percent employ between 20 and fewer than 20 people; another 29.6 percent work in firms that
99 people. In contrast, only about 2.1 percent employ between employ between 20 and 99 people. 25.5 percent of U.S.
100 and 400 workers, and another 0.2 percent employ 500 or workers are employed by firms with 100–499 employees, and
more. another 20.3 percent work for businesses that employ 500 or
more total employees.
© 2016 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–5
 Entrepreneurship’s Role in Society

• Small Businesses’ Role in Job Creation

–Create many of the new jobs in the U.S.
–Dominate sectors that have added the most jobs.
–Represent 33.5% 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.

© 2016 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–6
FIGURE 5.2 Representative Jobs Created and Lost in 2013

JOB GAINS

Barclays –12,000 Kroger +7,000

Merck & Co. –8,500 Toys R Us +6,750
JP Morgan –8,000 Caterpillar +2,000
Wells Fargo –6,000 AT&T +1,200
Bank of America –4,200 Amazon.com +3,000
IBM –3,020 Motorola +2,500
Aetna –3,000 CarMax +3,500
Eli Lilly –1,600 Ford +1,200
AIG –1,500 Nissan +1,000

JOB LOSSES

© 2016 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–7
 Entrepreneurship’s Importance
to Big Business
• Most products made by large manufacturers
are sold to customers by small businesses.
• Small businesses as suppliers provide large
firms with services, supplies, and raw materials.
• Large businesses outsource many routine
business operations such as packaging,
delivery, and distribution to small businesses.

© 2016 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–8
 Strategy for Entrepreneurial Organizations

Basic Strategic
Challenges

Choosing an Emphasizing Gaining

industry in which distinctive first mover
to compete competencies advantage

© 2016 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–9
FIGURE 5.3 Small Business (Businesses with Fewer than 20 employees)
by Industry

© 2016 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–10
FIGURE 5.4 Economies of Scale in Small-Business Organizations

© 2016 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–11
 Strategically Utilizing
Distinctive Competencies

Seeking Competitive
Advantage

Identifying niches Identifying new Taking first-mover

in current markets markets advantage

© 2016 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–12
 Emphasizing Distinctive Competencies

• Identifying niches in an established market

–Finding part of a market not currently being exploited
can offer a competitive advantage.
• Identifying new markets
–Transferring an existing product/service to a new
market can create new industries/products/services.
• Taking first-mover advantage
–Exploiting a market opportunity before any other firm
does can result in a competitive advantage.

© 2016 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–13
 Management Challenge Question

• What would you caution an entrepreneur about

the dangers of taking first-mover advantage?

© 2016 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–14
 Writing a Business Plan

• Business Plan
–Is a document that summarizes
business strategy and structure.
–Should include:
• Business goals and objectives.
• Strategies used to achieve these
goals and objectives.
• A plan of how the entrepreneur
will implement these strategies.

© 2016 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–15
 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.

© 2016 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–16
 Starting a New Business

• Buying an Existing Business

–Business has a proven ability to draw customers and
make a profit.
–Networks are already established.
–Negative: New owners inherit existing problems.
• Starting from Scratch
–Avoids problems associated with previous owners.
–Allows freedom to choose suppliers, equipment,
location, and workers.
–Negative: More business risk and uncertainty.

© 2016 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–17
 Identifying a Business Opportunity

Where are they?

Who are my
customers?

At what price
will they buy my
In what product?
quantities will
they buy?
How will my
product differ from
Who are my those of my
competitors? competitors?

© 2016 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–18
 Financing the New Business

Personal Venture Capital

Resources Companies

Sources of Small-Business
Strategic
New Business Investment
Alliances
Financing Companies

SBA Financial
Lenders Programs

© 2016 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–19
 Financing the New Business

• Personal Resources • Lenders

– Using own money and – Obtaining funding from
money borrowed from traditional lenders
friends and relatives to (e.g., 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.

© 2016 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–20
 Financing the New Business (cont’d)

• Small-Business Investment Companies (SBICs)

–Are 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
–Provide assistance (e.g., SBA-guaranteed loans) for
small businesses unable to get private financing at
reasonable terms.

© 2016 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–21
 Seeking New Business Advice

Advisory Boards

Management Consultants
Sources of
Management
Advice
Small Business Administration

Networking with Others

© 2016 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–22
 Sources of Help for Entrepreneurs

Outside Help

Management Help Professional Help

• Boards of directors • Accountants

• Management consultants • Bankers
• SBA • Lawyers
• Trade associations • Insurance agents
• Small-business networks • Computer consultants
• Pooling

© 2016 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–23
 Franchising

• Franchising Agreement
–Operation of the franchised business
by the entrepreneur (the franchisee)
under a license by a parent firm (the
franchiser).
–The entrepreneur pays the parent firm
for use of trademarks, products,
formulas, and business plans.

© 2016 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–24
 Franchising (cont’d)

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

© 2016 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–25
 Management Challenge Questions

• “Business is about relationships”

–What personal characteristics of a franchisee would
an entrepreneur/franchisor likely find most attractive?
most unattractive?
–What personal characteristics of a franchisor would an
entrepreneur/potential franchisee likely find most
attractive? most unattractive?

© 2016 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–26
FIGURE 5.5 Business Start-Up Successes and Failures

© 2016 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–27
 The Performance of
Entrepreneurial Organizations

Crossovers to small business

The emergence
by former large-business
of E-commerce
employees

Trends in New Business Start-Ups

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

© 2016 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–28
 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 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.

© 2016 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5–29