Chapter 5: Entrepreneurship and Small Business Management What is entrepreneurship? - Strategic thinking and risk-taking behaviour that results in

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1 Chapter 5: Entrepreneurship and Small Business Management What is entrepreneurship? - Strategic thinking and risk-taking behaviur that results in the creatin f new pprtunities fr individuals and/r rganizatins Wh are entrepreneurs? - Risk-taking individuals wh take actins t pursue pprtunities and situatins thers may ail t recgnize r may view as prblems r threats - Entrepreneurs are... Funders f businesses that becme large-scale enterprises Peple wh: buy lcal franchise utlet, pen a small retail shp, perate a self-emplyed service business Peple wh intrduce a new prduct r peratinal change in an existing rganizatin (Intrapreneurs) Ken Kurtargi: Inventr f the Playstatin Typical Characteristics f Entrepreneurs - Internal lcus f cntrl Believe that they are in cntrl f their wn destiny They are self-directing and like autnmy - High energy level Innvative Risk takers Persistent, hardwrking, and willing t exert extrardinary effrts t succeed - High need fr achievement Excel in what they are ding; driven by exceeding their tasks Achieve a certain gal and attain certain prfit Mtivated t accmplish challenging gals They thrive n perfrmance feedback - Tlerance fr ambiguity They d nt give up that fast They g thrugh a lt f ups and dwns Must adapt t highly cmpetitive envirnment High degrees f uncertainty - Self-Cnfidence Believe that the venture will wrk Feel cmpetent Willing t make decisins - Passin and actin-riented Willing t wrk hard and implement the passin int actin Act ahead f prblems Want t get things dne and nt waste valuable time - Self-reliance and desire fr independence Want independency Self-reliant Want t be their wn bsses and nt wrk fr thers

2 - Flexibility: Are willing t admit prblems and errrs Willing t change a curse f actin when plans are nt wrking Typical Entrepreneurial backgrunds and experience - Parents were entrepreneurs r self-emplyed - Families encuraged respnsibility, initiative, and independence - Have tried mre than ne business venture - Have relevant persnal r career experience - Becme entrepreneurs between 22 and 45 years f age - Have strng interests in creative prductin and enterprise cntrl - Seek independence and sense f mastery Diversity and Entrepreneurship - Necessity-based entrepreneurship: Takes place because ther emplyment ptins d nt exist - Smetimes these are wmen and member f visible minrities wh have suffered the glass-ceiling effect and have fund career drs clsed - Offers wmen and member f visible minrities pprtunities t strike ut n their wn and gain ecnmic independence, prviding a pathway fr career success that may be blcked therwise - Cmmn myths abut entrepreneurs: Entrepreneurs are brn, nt made. Entrepreneurs are gamblers. Mney is the key t entrepreneurial success. Yu have t be yung t be an entrepreneur. Yu must have a degree in business t be an entrepreneur. What are small and medium-sized businesses? - Small businesses: Fr gds prducing firms, with 100 r fewer emplyees Fr service firms, with 50 r fewer emplyees Micr-enterprises fewer than 5 emplyees Hme based businesses - Medium Businesses Fr gds prducing firms - Frm emplyees 50 % f the private labur frce wrks in small businesses - Large Businesses Fr gds prducing firms mre than 500 emplyees Hw can they be established? - Starting a new business - Buying an existing business - Buying and running a franchise Statistics n Canadian small businesses (data frm Industry Canada, 2005) - What percentage d small firms (emplying less than 100) make up f all gds-prducing emplyer businesses in Canada? 97% - What percentage fr small service firms (emplying less than 50) make up f all service-prducing emplyer businesses in Canada? 95% - Frm 1991 t 2002

3 Average number f new small and medium businesses set-up: Average number f small and medium businesses clsing dwn: Net Average f new small and medium businesses every year: Fr 2004 What percentages f all small businesses d wmen wn? 33% Percentage grwth f self-emplyed Wmen ver the last 10 years? 23% Percentage f self-emplyed Men ver the last 10 years? 20% - Fr 2002 What percentage f all Canadian exprters were small businesses? 85% What percentage f ttal exprts were accunted by small businesses? 20% Determinants f Small Firm Grwth General Backgrund - Hypthesis #1: Male-wned businesses exhibit higher grwth than female-wned businesses N impact They are as likely t d well as female-wned businesses - Hypthesis #2: Grwth is higher fr business wners wh are less than 30 years ld N impact - Hypthesis #3: Immigrant-wned businesses exhibit lwer grwth than businesses wned by Canadian citizens N impact - Hypthesis #4: Businesses whse wners d nt have a high schl diplma exhibit lwer grwth than businesses whse wners d Yes Prvides a certain skills set that wuld help the firm succeed - Hypthesis #5: Businesses whse wners agree with statement I am prepared t risk my majr persnal assets (such as my huse) if that is what it takes t make my business grw exhibit higher grwth than businesses whse wners disagree with this statement Yes - Hypthesis #6: Grwth is higher fr businesses whse wners started the venture t be their wn bss N impact Guess the type f business? - Sme 35% f Frtune 500 cmpanies are f this type - Accunt fr 50% f US grss dmestic prduct - Generate 60 % f US emplyment and 78% f all new jb creatin Examples: Wal Mart, Frd, New Crpratin They are family wned businesses Family Businesses - Owned and financially cntrlled by family members - Largest percentage f businesses wrldwide - Can prvide an ideal business situatin - They help generate enterprises - Prblems unique t family businesses:

4 Successin prblem is the issue f wh will run the business when the current head leaves Family business feud ccurs when family members have majr disagreements ver hw the business shuld be run Members f the cntrlling family get int disagreements abut wrk respnsibilities, business strategy, perating appraches, finances, r ther matters Recmmend successin plan describes hw the leadership transitin and related financial matters will be handled Shuld include at least prcedures fr chsing r designating the firm s new leadership, legal aspects f any wnership transfer, and financial and estate plans relating t the transfer Reasns fr small business failures: - Lack f experience nt having sufficient knw-hw t run a business in the chsen market r area - Lack f expertise nt having expertise in the essentials f business peratins, including finance, purchasing, selling, and prductin - Lack f strategy and strategic leadership nt taking the time t craft a visin and missin, nt t frmulate and prperly implement a strategy - Pr financial cntrl nt keeping track f the numbers, and failure t cntrl business finances - Grwing t fast nt taking the time t cnslidate a psitin, fine-tune the rganizatin, and systematically meet the challenges f grwth - Insufficient cmmitment nt devting enugh time t the requirements f running a cmpetitive business - Ethical failure falling prey t the temptatin f fraud, deceptin, and embezzlement Frms f legal wnership - Sle Prprietrship where an individual pursues a prfit - Partnership where tw r mre peple agree t cntribute resurces t start and perate a business tgether General partnership- the simplest and cmmn frm, they als share management respnsibilities Limited partnership cnsists f a general partner and ne r mre limited partners wh d nt participate in day-t-day business management Limited liability partnership cmmn amng prfessinal such as accuntants and lawyers, limits the liability f ne partner fr the negligence f anther - Crpratin is a legal entity that exists separately frm its wners It grants the rganizatin certain legal rights The crpratin becmes respnsible fr its wn liabilities

5 Limited liability crpratin is a hybrid business frm cmbining advantages f the sle prprietrship, partnership, and crpratin New Venture Creatin - First-mver advantage Cmes frm being first t explit a niche r enter a market - Life cycle f entrepreneurial firms Birth stage where the entrepreneur struggles t get the new venture established and survive lng enugh t test viability f the underlying business mdel in the marketplace Breakthrugh stage where the business mdel begins t wrk well, grwth is experienced and the cmplexity f managing the business peratin expands significantly Maturity stage where the entrepreneur experiences the advantages f market success and financial stability, while als facing the cntinuing management challenge f remaining cmpetitive in a changing envirnment Writing the Business Plan - Business plan describes the directin fr a new business and the financing needed t perate it - Banks and ther financiers want t see a business plan befre they lan mney r invest in a new venture - Senir managers want t see a business plan befre they allcate scarce rganizatinal resurces t supprt a new entrepreneurial prject - Detailed thinking required t prepare a business plan can cntribute t the success f the new initiative - Frces entrepreneurs t think thrugh imprtant issues and challenges befre starting ut - If yu fail t plan, yu plan t fail - Basic items that shuld be included in a business plan: Executive summary verview f the business purpse and highlight f key elements f the plan Industry analysis nature f the industry, including ecnmic trends, imprtant legal r regulatry issues, and ptential risks Cmpany descriptin missin, wners, and legal frm Prduct and services descriptin majr gds and services, with cmpetitive uniqueness Market descriptin size f market, cmpetitr strengths and weaknesses, five-year sales gal Marketing strategy prduct characteristics, distributin, prmtin, pricing, and market research Operatins descriptin manufacturing r service methds, supplies and suppliers, and cntrl prcedures Staffing descriptin management and staffing skills needed and available, cmpensatin, and human resurce system Financial prjectin cash flw prjectins fr n t five years, break-even pints, and phased investment capital Capital needs amunt f funds needed t run the business, amunt available and amunt requested frm new surces Milestnes a timetable f dates shwing when key stages f the new venture will be cmpleted

6 Financing the new venture - Surces f utside financing Debt Financing invlves brrwing mney that must be repaid ver times, with interest brrw mney frm banks r ther surces Once yu brrw the mney then yu have a liability t pay them back Yu d nt give up the wnership; yu wn the business 100% Equity Financing invlves exchanging wnership shares fr utside investment mnies If yu want t becme a part f a firm, yu have t purchase shares Yu d nt have t repay the amunt Yu give up yur wnership If the firm ges bankrupt - yu have t pay the debt hlders and then lastly pay ff the Equity sharehlders Smetimes they d nt pay the sharehlders - Equity financing alternatives Venture Capitalists make large investments in new ventures in return fr an equity stake in the business Initial public fferings r IPO, is an initial selling f shares f stck t the public at large Angel Investrs is a wealthy individual willing t invest in a new venture in return fr equity in a new venture Internet Entrepreneurship The Internet ffers numerus entrepreneurial pprtunities. Nearly 85% f small businesses are cnducting business ver the internet.