Week 1 Lecture Notes

Chapter 1: The Foundations of Entrepreneurship

An entrepreneur is one who creates a new business in the face of risk and uncertainty for achieving profit and growth opportunities and assembles the necessary resources to capitalize on those opportunities.

Noted psychologist David McClelland characterized high achievers/entrepreneurs as possessing these traits:

• Desire for responsibility

• Preference for moderate risk (risk eliminators)

• Confidence in their ability to succeed

• Desire for immediate feedback

• High level of energy

• Future orientation (serial entrepreneurs)

• Skill in organization

• Value of achievement over money

Other characteristics of entrepreneurs include:

• High degree of commitment

• Willingness to accept risk, work hard and take action

• Flexibility

The primary benefits entrepreneurs enjoy include the opportunity to:

• Create their own destiny

• Make a difference

• Reach their full potential

• Generate impressive profits

• Contribute to society and be recognized for their efforts

• Do what they enjoy and have fun at it!

With these potential rewards, Entrepreneurship also presents risk and uncertainty. Entrepreneurs may experience:

• Uncertainty of income –"The entrepreneur is the last one to be paid."

• Risk of losing their entire investment

• Long hours and hard work

• Lower quality of life until the business gets established

• High levels of stress

• Complete responsibility

• Discouragement

The rapid increase in entrepreneurs has been a result of:

• Considering entrepreneurs as heroes

• Entrepreneurial education

• Demographic and economic factors

• Shift to a service economy

• Technological advancements

• Independent lifestyles

• Commerce and the Internet

• Additional international opportunities

Entrepreneurs are found in virtually every walk of life including:

• Young Entrepreneurs

• Women Entrepreneurs

• Minority Enterprises

• Immigrant Entrepreneurs

• Part-time Entrepreneurs

• Home-Based Businesses

• Family Businesses

• Copreneurs

• Corporate Castoffs

• Corporate Dropouts

Because big business is more visible than small business, most people underestimate the role of the small firm in the U.S. economy.

The definition of a "Small Business" is:

1. One which is independently owned and operated and not dominant in its field.

2. Eligibility requirements are based on the specific industry.

• Retailing – annual sales/receipts not exceeding $3.5 to $13.5 million.

• Services – annual receipts not exceeding $2.5 to $14.5 million.

• Wholesaling – yearly sales must not be over $9.5 to $22 million.

• Agriculture – annual receipts not exceeding $1.0 to $3.5 million.

• Construction – General construction with annual receipts not exceeding $17 million.

• Special Trade Construction – annual receipts not exceeding $7 million.

• Manufacturing – maximum number of employees may range from 500 to 1,500 depending on the industry.

The most commonly used measure of small business is the number of employees on a firm’s payroll. The White House Conference on Small Business definition is: A firm employing 500 people or fewer.

The Committee for Economic Development states that a small business must meet two of four stated criteria:

1. Management is independent.

2. Capital is supplied and ownership is held by an individual or a small group.

3. Area of operation is mainly local; markets need not be local.

4. Size is small when compared to the biggest unit in the field.

Studies have indicated that there are common reasons for new business ventures to fail. These causes of small business failure may include:

1. Management mistakes

2. Lack of experience

3. Poor financial control

4. Weak marketing efforts

5. Failure to develop a strategic plan

6. Uncontrolled growth

7. Poor location

8. Improper inventory control

9. Incorrect pricing

10. Inability to make the "entrepreneurial transition"

Entrepreneurs don’t fail—the venture fails.

• There are no such things as failures, only results.

• Always look to turn a negative situation into a positive opportunity.

• Have no fear of failure and be sure to have a contingency plan.

• The only people who never fail are those who never do anything or never attempt anything new.

The successful entrepreneur understands the meaning of these clichés and knows how to deal with adversity in a proactive and positive manner.

These same studies have indicated that entrepreneurs can increase their chances for success if they:

1. Know their business in depth.

2. Develop a solid business plan in writing.

3. Manage financial resources.

4. Understand financial statements.

5. Learn to manage people effectively.

6. Keep in tune with who they are.

Developing a strategic plan allows a company to create a competitive advantage—an aggregation of factors that sets a company apart from its competitors and gives it a unique position in the market. No business can be everything to everyone. Creating a strategic plan prevents a small business from failing to differentiate itself from its competitors.

Another avenue for a small business seeking a competitive advantage is customer intimacy, focusing on the goods and services that customers want and value. When it comes to developing a strategic plan, small companies have a variety of natural advantages over their larger competitors: fewer product lines, a better-defined customer base, a specific geographical area, and closer customer contact.

No business can be everything to everyone. The goal of developing a strategic plan is to create a competitive advantage for the small business—the aggregation of factors that sets the small business apart from its competitors and gives it a unique position in the market.

Strategic management includes developing a game plan to guide a company as it strives to accomplish its vision, goals, and objectives and to keep it from straying off its course.

Strategic planning should include:

• Both a short- and long-term planning horizon

• Company goals and objectives

• Complete industry and other relevant information

• Customer and employee input

• Customer focus

Strategic planning can position a business to build a sustainable competitive advantage.

Strategic planning is a continuous process that consists of nine steps:

• Step 1 Develop a clear vision and translate it into a meaningful mission statement: A vision is the entrepreneur’s dream of something that does not yet exist. It provides direction, a basis for decision making and a source of motivation. A company’s vision statement incorporates the values of its owner and is about more than just making money. A clearly defined vision leads to a company’s mission statement that includes a description of the business, its products, its markets and customers, its competitive distinction, and its effects on the community at large.

• Step 2 Assess the company’s strengths and weaknesses: Strengths are positive internal factors that a company can use to accomplish its mission. Weaknesses are potentially negative factors that could inhibit those efforts. This on-paper analysis allows the entrepreneur to have a better perspective of the overall venture, to establish a foundation to build on (strengths), and to meet and remove the challenges and obstacles standing in the way of success (weaknesses).

• Step 3 Scan the environment for significant opportunities and threats facing the business: With the internal inventory complete, the firm now searches for external opportunities such as specific market niches that match up well with internal resources. The key to success is to take action and to stay a step ahead of the competition. External threats may come from competitors, government agencies, rising interest rates, and so on. The firm must have a plan for shielding itself from those threats.

• Step 4 Identify the key factors for success in the business: Every business has a certain degree of control over key variables such as production capabilities, market opportunities, its labor force, access to raw materials, inventory, and so on. Success comes from the ability to recognize and to capitalize on those opportunities, and to maximize revenues and/or minimize costs accordingly.

• Step 5 Analyze the competition: Analyzing all forms of competition must be a never-ending process for all companies. Markets and competitors come and go very quickly. Reaction time is often relatively slow, so the entrepreneur must have the ability to anticipate changes in the marketplace. There is an abundance of information available through many sources (public information, Web sites, and market researchers). Knowledge management is the process of collecting information, analyzing it, and taking action in an effective manner.

• Step 6 Create company goals and objectives: A company (or person for that matter) with no goals wanders aimlessly into the future. Setting goals provides focus and direction for a company and its people. Objectives are the specific targets of performance required to achieve goals, such as production, marketing, financing, and profit standards. Goals and objectives should be measurable, reachable, and in writing.

• Step 7 Formulate strategic options and select the appropriate strategies: A strategy is a road map of the actions an entrepreneur draws up to fulfill a company’s mission, goals, and objectives. A strategy is the master plan that incorporates all of the parts (marketing, finance, personnel, and operations) to make up the whole.

• Step 8 Translate strategic plans into action plans: Entrepreneurs must convert strategic plans into operating (tactical) plans that guide their companies on a daily basis. Involving and empowering employees throughout the entire process is often a key to successful outcomes. If an organization’s people have a vision for the future direction and goals of a company, and if they are given a stake in the company, they are more likely to work in unison to achieve those goals.

• Step 9: Establish accurate controls: With a vision, mission statement, strategic and tactical plan now in place, managers must constantly measure and assess the actual production, sales, costs, and other performances of their departments and people, and effect any changes necessary to stay on schedule and on budget.

The strategic planning process is never ending. It provides structure and discipline and requires the entrepreneur to pay close attention to the details of both the internal and external factors that determine success.

• Read and submit syllabus

• Read Chapters 1 & 3

• View PowerPoint Presentations

• Read Lecture notes

• Take Quiz 1 (20 points)

• Participate in Class Discussion