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Chapter Six

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Entrepreneurship and Starting a Small Business

McGraw-Hill/Irwin

Copyright 2010 by the McGraw-Hill Companies, Inc. All rights reserved.

Learning Outcomes
Explain why people take the risks of entrepreneurship; list the attributes of successful entrepreneurs; and describe entrepreneurial teams, intrapreneurs, and home- and Web-based businesses. Discuss the importance of small business to economy and summarize the major causes of small-business failure. Summarize ways to learn about how small businesses operate. Analyze what it takes to start and run a small business.

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WHAT is ENTREPRENEURSHIP?

The Job-Creating Power of Entrepreneurship in the U.S.

Entrepreneurship -- Accepting the risk of starting

and running a business.

-Process of add value to product or services

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NOTABLE ENTREPRENEURS

The Job-Creating Power of Entrepreneurship in the U.S.

French immigrant lruthre Irne du Pont de Nemours started Du Pont in 1802.

-Manufactures thousands of products under such brand names as Telfon and Lycra. David McConnell borrowed $500 from a friend to start Avon. George Eastman started Kodak with a $3,000 investment in 1880. Jeff Bezos started Amazon.com with investments 6-4 from his family and friends.

Successful Entrepreneurs in Malaysian

Robert Kuok- Kuok Group, Pacific Carriers Ltdassets worth US$ 7 billion, the richest man in south east Asia. Ananda Krishna- owner of Maxis Communication- Assets worth US$4.1 billion Teh Hong Piow - bank clerk open up a small bank in 1966- PUBLIC Bank. His assets worth US$2.1billion

Common part for all of these entrepreneurs

One of a couple of entrepreneurs had a good idea. Borrowed some money from friends and family. Employ thousands of people and helps the country prosper.

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WHY TAKE the RISK?

Why People Take the Entrepreneurial Challenge

LG1

Opportunity-become own boss, freedom, an idea Profit-extra income Independence-become decision maker Challenge-solve problem.

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Self-directed

WHAT DOES IT TAKE to be an ENTREPRENEUR?(characteristics)

Why People Take the Entrepreneurial Challenge

LG1

-They should be self-disciplined and comfortable with taking responsibility for success and failure.
Self-nurturing

-. Entrepreneurs must be able to believe in their own ideas even when others don't. (especially, they present their business plan to investors or bankers)
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 Action-oriented (proactive rather than wait)

WHAT DOES IT TAKE to be an ENTREPRENEUR?(characteristics)

-Entrepreneurs aren't satisfied with a dream, they want to make the dream a reality. (not only talk, take action.) Highly energetic

-They are willing to work hard to sustain their efforts over long hours.
Tolerant of uncertainty (many uncertainty factors) -Entrepreneurs can accept the risks and uncertainties inherent in running a business.

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An IDEA is a GOOD OPPORTUNITY IF
It fills customers needs.

Turning Your Passion and Problems into Opportunities

LG1

You have the skills and resources (network/knowledge/information/experience/$) to start a business. You can sell the product or service at a reasonable price and still profit. You can get your product or service to customers before the window of opportunity closes. You can keep the business going.
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ENTREPRENEURIAL TEAMS
Entrepreneurial team -- A
group of experienced people from different areas of business who join to form a managerial team with the skills to develop, make and market a new product.

Entrepreneurial Teams

LG1

An entrepreneurial team (Steve Jobs, Steve Wozniak and Mike Markkula) was key to Apples success.
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MICROPRENEURS

Micropreneurs and Home-Based Businesses

LG1

Micropreneur -- Entrepreneurs willing to accept the

risk of starting and managing a business that remains small, lets them do the work they want to do, and offers a balanced lifestyle.

Many micropreneurs are home-based business owners writers, consultants, video producers, architects, bookkeepers, etc. Nearly 60% of home-based micropreneurs are men.
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HOME-BASED BUSINESS GROWTH

Micropreneurs and Home-Based Businesses

Computer technology has leveled the playing field. (internet, facebook)

LG1

Corporate downsizing has led many to venture on their own. ( you are fired. The work of the downsized employees still needs to be done, and corporations are outsourcing much of it to smaller companies.) Social attitudes have changed. (work at home, more flexible)

New tax laws have loosened restrictions on deducting expenses for home offices.

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BENEFITS of HOME-BASED BUSINESSES

Micropreneurs and Home-Based Businesses

LG1

Ability to start your business immediately Minimal startup capital needed No rent or excessive set-up charges (use your own laptop and home) Comfortable working conditions (nobody observe you.)

Reduced wardrobe expenses (not much cabinet) No commuting (no need travel, save time) Tax benefits (IRB difficult check) Elimination of office politics (no colleagues conflict) Source: St. Louis Small Business Monthly, February, 2004. Low risk for trial and error. (less time & capital_

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DOWNSIDES of HOME-BASED BUSINESSES

Micropreneurs and Home-Based Businesses

LG1

Difficult to establish work habits (too flexible)

Limited support system (less people) Isolation (less connection-what employees doing?)

Work space may be limited (no stock? Customer cannot visit and try your product)
Disruption of personal life (you work at home)

Clients may be uncomfortable coming to your home

Zoning restrictions (not everywhere you can sell)

Source:Success is based2004. 100% on your efforts St. Louis Small Business Monthly, February,
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ONLINE BUSINESS
Web-based businesses have more unique products than most brick and mortar stores. Online sales reached $165.9 billion in 2007, 8% of all retail sales.

Web-Based Businesses
LG1

Affiliate Marketing -- An Internet-based marketing

strategy in which a business rewards individuals or other businesses for each visitor or customer the affiliate sends to its website. (seller pays you a commission)

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INTRAPRENEURS
Entrepreneurship Within Firms

LG1

Intrapreneur -- A creative person who works as an

entrepreneur within a corporation.

Intrapreneurs use a companys existing resources to launch new products for the company. Art Fry of 3M developed PostIts when he was trying to mark pages of his hymnal without damage.
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Differences between a businessman and an entrepreneur

Entrepreneur Would assume leadership Would engage in and commitment to business activities to support his living and expand his venture for self-fulfillment family A moderate risk taker and A low risk taker would take risk Would invest only in Would use his creativity to proven and tested venture into new areas markets that have not been tested Businessman

Advantages of Entrepreneurship
Ability to create own destiny Opportunity to make a difference Able to reach full potential Able to reap impressive Able to contribute to society and be recognized for their efforts Able to enjoy and have fun

Disadvantages of Entrepreneurship
Uncertainty of income (you can become millionaire, you can bankrupt) Risk of losing entire investment Long hours and hard work. High stress level Difficulty in obtaining customers nobody know you. Complete responsibility(to stakeholders) Difficulty in obtaining loans- less confidence.

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SMALL BUSINESSES

Small Versus Big Business

LG2

Small Business -- Independently owned and operated, not dominant in its field of operation and meets certain standards of size (such as under 2mil a year for service business).

Businesses are small in relationship to other businesses in their industries.

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ADVANTAGES of SMALL OVER BIG BUSINESS

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Importance of Small Business LG2

More personal customer service (there is plenty of room for small companies to make a profit filling those niches). The ability to respond quickly to opportunities(big business dont serve all the needs of the market).

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BUSINESS FAILURES are LOWER THAN the REPORTS BECAUSE

Owner closing a business to start another is reported as a failure.
Changing forms of ownership is reported as a failure. Retirement is reported as a failure.

*Small Business
Success & Failure LG2

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THEY DID WHAT?

Famous Business Failures

*Small Business
Success & Failure LG2

Tommy Hilfiger First store went bankrupt Milton Hershey First confectionary failed H.J. Heinz Company went bankrupt six years after start

Walt Disney First film company went bankrupt Henry Ford First two car companies failed

Source: World Features Syndicate, 2009.

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Reasons for Failure and Success (pg159)

Failure
Poor management (entrepreneurial team is important) Neglect (ignore problem? Solution: Pay attention to your business during each and every day.) Weak control systems (too much Empowerment to their employees) Insufficient capital (cash flow problem) (Solution: Cut back expenses, look at and focus only on your core business.) 2009 Pearson Education, Inc.

Reasons for Failure and Success Failure

Plunging in without first testing the waters on a small scale. Underpricing /overpricing goods & Services.

Reasons for success Success

Hard work, drive, and dedication. Many small business owners spend 12 to 15 hours a day in the initial stages of their new business start up working to market, manage and promote their offerings. (Malaysia employees 8 hours based)

Market demand (growth industry) -You need to have a market to whom you can sell your product or service, and you need to add value to your product or service for it to be accepted in the marketplace.
Managerial competence (management should set a target and achieve it. Provide reward to those employees as a motivation)

Pay attention to competitors(what strategy and business model they use and how we can respond?) Luck!!!

LEARNING ABOUT SMALL BUSINESS

Learning About Small Business Operations

LG3

Learn from Others Investigate your local

colleges for classes on small business and entrepreneurship; talk to and work for successful local entrepreneurs. (to understand why they can success) Get Some Experience Gain three years experience in the field; then start a part-time small business. Take Over a Successful Firm Serve as an apprentice and eventually take over once the owner steps down.
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MAJOR BUSINESS FUNCTIONS

Managing a Small Business LG4

Planning Financing Knowing customers Managing employees

Keeping records

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BUSINESS PLANS
Begin with Planning
LG4

Business Plan -- A detailed written statement that describes the nature of the business, the target market, the advantages (competitive advantages)the business will have over competition (how you can win?), and the resources ( manpower, idea , capital , network)and owners qualifications.

A business plan forces potential owners to be specific about what they will offer.
A business plan is mandatory for talking with bankers or investors. (get financial support)
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WRITING a BUSINESS PLAN
A good plan takes a long time to prepare.
A good executive summary catches interest and tempts potential investors to read on. (1-2 pgs) Getting the plan into the right hands is almost as important as getting the right information in it.
Writing a Business Plan
LG4

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SOURCES of CAPITAL
Personal savings Relatives Former employers (all employers contribute) Banks & finance companies Government agencies Angel investors

*Getting Money
to Fund a Small Business LG4

Venture capitalists -- Individuals or companies that invest in new businesses in exchange for partial ownership. Many well known businesses such as Google, Zappos and Apple received a first round of funding from venture capitalists.

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The MARKET
Knowing Your Customers LG4

Market -- Consumers with unsatisfied wants and

needs who have both resources and willingness to buy.

Set out to fill the markets needs by offering top quality and great service at a fair price.
One of the great advantages of small businesses is the ability to know the market and quickly adapt to market needs.
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MANAGING EMPLOYEES

Managing Employees
LG4

Hiring, training and motivating employees is critical.

Employees of small companies are often more satisfied with their jobs they feel challenged and respected. (if not, turnover might be happen)

Entrepreneurs best serve themselves and the business if they recruit and groom employees for management positions.
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ACCOUNTING ASSISTANCE
Keeping Records

Computers simplify the process by helping with inventory control, customer records and payroll (to employees). A good accountant can help in:
Deciding whether to buy or lease equipment. Deciding whether to own or rent a building. Tax planning. Financial forecasting.(future estimation) Choosing sources of financing. (bank loan? Offer share?) Writing requests for funds. (to government? Bank?)

LG4

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LEGAL HELP
Looking for Help LG4

Owners need outside consulting advice early in the process.

Small and medium-sized firms cannot afford to hire experts as employees.

A competent lawyer can help with:
Leases (Rent) Contracts Partnership agreements Protection against liabilities
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MARKETING RESEARCH
Looking for Help LG4

Marketing decisions need to be made long before introducing a product or opening a store.
A marketing research study can help you:
Determine where to locate. (match with external environment such as culture, government policy,..) Whom to select as your target market. What is an effective strategy for reaching the market. (advertising? promotion?)
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PROGRESS ASSESSMENT
Why are people willing to take the risks of entrepreneurship?

Progress Assessment

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What are the advantages of entrepreneurial teams?

What are some opportunities and risks of webbased businesses?

Can you describe at least five sections of a business plan?

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