MANAGING ENTREPRENEURIAL VENTURES

ORGANIZIN
(LEC 9)

 Context of entrepreneurship. Examine entrepreneurship from the perspective of the four managerial functions: a. Planning, b. Organizing, c. Leading d. Controlling.

Our greatest glory is not in never failing, but in rising every time we fall.
(Confucius)

When there is no vision, people perish.

(Franklin D. Roosevelt)

Anyone who stops learning is old, whether at 20 or 80. Anyone who keeps learning stays young.
(Henry Ford, 1843 1947)

When you see a successful business, someone once made a courageous decision.
(Peter Drucker)

Entrepreneurship
The process of starting new businesses, generally in response to opportunities. Entrepreneurs pursue opportunities by changing, revolutionizing, transforming, or introducing new products or services.

 Entrepreneurial Ventures. Organizations that pursue opportunities, are characterized by innovative practices, and have growth and profitability as their main goals. A Small Business. A business that is independently owned, operated, and financed; has fewer than 100 employees; doesnt necessarily engage in any new or innovative practices, and has relatively little impact on its industry. - To be entrepreneurial means that the business must be innovative, seeking out new opportunities. - Entrepreneurial ventures may start small, but they pursue growth.

Importance of Entrepreneurship
Innovation. Process of changing, experimenting, transforming, and revolutionizing a key aspect entrepreneurial activity. Creative destruction. Process that characterizes innovation leads to technological changes and employment growth. Entrepreneurial firms act as agents of change. Number of new start-ups. The number of new start-ups has increased every year since 2002. An estimated 649,700 businesses were created in USA in 2006. Job Creation. Small businesses accounted for most of the new jobs entrepreneurial firms as job creators.

The Entrepreneurial Process

Four key steps: a. Exploring the entrepreneurial context. The context includes realities of todays economic, political/legal, social and work environment. They determine the rules of the game and which decisions and actions are likely to be successful. b. Identifying opportunities and possible competitive advantages c. Starting the venture. Researching the feasibility of venture, planning the venture, organizing the venture and launching the venture. d. Managing the venture. Managing process, managing people and managing growth.

What Entrepreneurs Do?

1. An entrepreneur is initially engaged in assessing the potential for the entrepreneurial venture and then dealing with the start-up issues. 2. Gathers information, identifies potential opportunities and pinpoints possible competitive advantages. 3. Researches ventures feasibility uncovering business ideas, looking at the competition and exploring financing options. 4. Plan the venture develop a viable organizational mission, explore organizational culture issues, creating a well-thought out business plan.

What Entrepreneurs Do? (Contd)

5. Organize the venture choose a legal form of business organization, addressing other legal issues such as patent or copyright searches, coming up with an appropriate organizational design for structuring how work is going to be done. 6. Launch the venture setting goals and strategies, establishing the technology operations, methods, marketing plans, information systems, financial accounting systems and cash flow management systems. 7. Managing the venture managing various processes decision making, establishing action plans, analyzing environment, performance, training, motivation, conflict, effective leader. 8. Manage growth strategies, crises, avenues, exiting.

Social Responsibility and Ethics Issues Facing Entrepreneurs

1. Developing a positive reputation and relationship in communities. 2. Corporate citizenship. 3. Skill development vs charity. 4. Protect environment. 5. Ethical consequence of what they do.

Start-up and Planning Issues For Entrepreneurial Venture

Identifying Environmental Opportunities and Competitive Advantage - Opportunities are positive trends in external environmental factors. - These trends provide unique and distinct possibilities for innovating and creating value. - Entrepreneurs be able to pin-point the pockets of opportunities that a changing context provides. - Organizations do not see opportunities, individuals do.

7 Potential Sources of Opportunities (Peter Drucker)

1. The Unexpected when situations and events are unanticipated, opportunities can be found. 2. The Incongruous when something is incongruous, there are inconsistencies and incompatibilities in the way it appears. When conventional wisdom doesnt work, there are opportunities to be captured. Willingness to think out of the box, to think beyond the confines of traditional and conventional approaches. (Fedex founder Fred Smith recognized in early 1970s the inefficiencies in the delivery of packages and documents). 3. The Process Need opportunities in the various stages of the process.

7 Potential Sources of Opportunities (Peter Drucker) (Contd)

4. Industry and market structures changes in technology, obsolescence, changes in social values. 5. Demographics characteristics of population. 6. Changes in perception changes in ones view of reality facts do not vary but their meanings do. Peoples psychographic profiles change what they value, believe and care about. 7. New knowledge significant source of entrepreneurship.

Researching a Ventures Feasibility (Generating and Evaluating Ideas)

Entrepreneurial ventures thrive on ideas. Generating Ideas: Sources of ideas unique and varied: a. Working in the same industry. b. Personal interests or hobbies. c. Familiar and unfamiliar products and services. d. Opportunities in external environmental sectors technological, socio-cultural, demographics, economic or legalpolitical. Entrepreneurs look for: a. Limitations of what is currently available. b. New and different approaches. c. Advances and breakthroughs. d. Unfilled niches. e. Trends and changes.

Evaluating Potential Ideas

Personal Considerations
Do you have capabilities to do what youve selected? Are you ready to be an entrepreneur? Are you prepared emotionally to deal with the stresses and challenges of being an entrepreneur? Are you prepared to deal with rejection and failure? Are you ready to work hard? Do you have a realistic picture of the ventures potential? Have you educated yourself about financing issues? Are you willing and prepared to do continual financial and other types of analyses?

Marketplace Considerations
Who are the potential customers for your idea: who, where, how many? What similar or unique product features does your proposed idea have compared to whats currently in the market? How and where will potential customers purchase your product? Have you considered pricing issues and whether the price youll be able to charge will allow your venture to survive and prosper? Have you considered how you will need to promote and advertise your proposed entrepreneurial venture?

Researching Competitors (Possible Questions)

1. What types of products or services are competitors offering? 2. What are the major characteristics of these products or services? 3. What are the strengths and weaknesses of the competitors products or services? 4. How do competitors handle marketing, pricing and distribution? 5. What do competitors attempt to do differently from other companies? 6. Do they appear to be successful at it? Why or why not? 7. What are they good at? 8. What competitive advantage(s) do they appear to have? 9. What are they not so good at? 10. What competitive disadvantage(s) do they appear to have? 11. How large and profitable are these competitors?

Feasibility Study
An analysis of the various aspects of a proposed entrepreneurial venture that is designed to determine the feasibility of a venture.

Feasibility Study
A. Introduction, historical background, description of product or service
1. Brief description of proposed entrepreneurial venture. 2. Brief history of the industry. 3. Information about the economy and important trends. 4. Current status of product or service. 5. How you intend to produce the product or service? 6. Complete list of goods or services to be provided. 7. Strengths and weaknesses of the business. 8. Ease of entry into the industry including competitor analysis.

B. Accounting considerations
1. Pro forma balance sheet. 2. Pro forma balance and loss statement. 3. Projected cash flow analysis.

C. Management considerations
1. Personal expertise strengths and weaknesses. 2. Proposed organizational design. 3. Potential staffing requirements. 4. Inventory management methods. 5. Production and operations management issues. 6. Equipment needs.

Feasibility Study (Contd)

D. Marketing considerations
1. Detailed product description. 2. Identify product market (who, where, how many). 3. Describe the place where the product will be distributed (location, traffic, size, channels, etc). 4. Price determination (competition, price lists etc). 5. Promotion plans (role of personal selling, advertising, sales promotion, etc).

E. Financial considerations
1. Start-up costs. 2. Working capital requirements. 3. Equity requirements. 4. Loans amount, type, conditions. 5. Breakeven analysis. 6. Collateral. 7. Credit references. 8. Equipment and building financing costs and methods.
1.

F. Legal considerations
Proposed business structure (type; conditions, terms, liability, responsibility; insurance needs; buyout and succession issues). Contracts, licenses, and other legal documents.

2.

G. Tax considerations: sales/property/employee; federal, state and local. H. Appendix: charts/graphs, diagrams, layout, rsums, etc.

Possible Financing Options (Research into Options)

Entrepreneur s personal resources personal savings, home equity, personal loans, credit cards, etc. Financial institutions banks, savings and loans institutions, government-guaranteed loans, credit unions, etc. Venture capitalists external equity financing provided by professionally managed pools of investor money. Angel investors a private investor (or group of private investors) who offers financial backing to an entrepreneurial venture in return for equity in the venture. Initial public offering (IPO) the first public registration and sale of a companys stock. National, state and local governmental business development programs Unusual sources television, shows, judged competitions, etc.

Planning a Venture
Developing a Business Plan: Done after the ventures feasibility has been researched. Business Plan: A written document that summarizes a business opportunity and defines and articulates how the identified opportunity is to be seized and exploited. - Business Plan requires careful planning and creative thinking. - Business plan serves as a blueprint and road map for operating the business, living document, guides organizational decisions, and actions throughout life of business. - Information in feasibility study provides much of the basis for the business plan. Business Plan has six major sections.

Business Plan (6 Major Sections)

1. Executive Summary a. Summarizes key points about proposed entrepreneurial venture. b. May include brief mission statement, primary goals, brief history of the entrepreneurial venture (timeline), key people involves in the venture, the nature of the business, concise product or service descriptions, brief explanations of market niche, competitors and competitive advantage, proposed strategies and selected key financial information. 2. Analysis of Opportunity. Present details of the perceived opportunity: a. Sizing up the market by describing the demographics of the target market. b. Describing and evaluating industry trends. c. Identifying and evaluating competitors.

Business Plan (6 Major Sections) (Contd)

3. Analysis of the context. Whereas the opportunity analysis focuses on the opportunity in a specific industry and market, the context analysis takes a much broader perspective. Describes the broad external changes and trends taking place in the economic, political-legal, technological and global environments.

Business Plan (6 Major Sections) (Contd)

4. Description of the Business. Describes how the entrepreneurial venture is going to be organized, launched and managed. a. Mission Statement. b. Description of desired organizational culture. c. Marketing plan including overall marketing strategy, pricing, sales tactics, service warranty policies, and advertising and promotion tactics. d. Product development plan an explanation of development status, tasks, difficulties and risks and anticipated costs. e. Operational plans including geographic location, facilities, and needed improvements, equipment and workflow. f. Human Resource Plans including a description of key management persons, composition of board of directors, including their background experience/skills, current and future staffing needs, compensation, and benefits and training needs. g. An overall schedule and timetable of events.

Business Plan (6 Major Sections) (Contd)

5. Financial Data Projections. Financial plans should cover at least three years and contain projected income statements, pro forma cash flow analysis (monthly for the first year and quarterly for the next two), pro forma balance sheets, break even analysis and cost controls. In case of major equipment or other capital purchases, the items, costs, and available collateral be listed. Give explanatory notes where data seems contradictory or questionable. 6. Supporting Documentation. Important component of a business plan. Back up descriptions with charts, graphs, tables, photographs or other visual tools. Useful to include information (personal or work related) about the key participants in the entrepreneurial venture.

 Venture Capitalist. Individuals who provide external equity financing through professionally managed pools of investors money.
Angel Investors. A private investor (or group of private investors) who offer financial backing to an entrepreneurial venture in return for equity in the venture. Initial Public Offering (IPO). The first public registration and sale of a companys stock.

Issues in Organizing Entrepreneurial Venture

1. 2. 3. 4. 5. The legal forms of organization. Organizational design and structure. HRM. How to stimulate and make changes. Continuing importance of Innovation.

Legal Forms of Organization

Critical decision to determine the form of legal ownership for the venture.
Two Factors
a. Taxes b. Legal liability

Three basic ways to Organize

a. Sole proprietorship. b. Partnership. c. Corporation.

Variations
a. Sole proprietorship. b. General Partnership. c. Limited liability Partnership (LLP). d. C Corporation. e. S Corporation. f. Limited Liability Company (LLC) *Each with unique tax consequences, liability issues and pros and cons.

* Entrepreneur wants to minimize the impact of both factors.

Sole Proprietorship
A form of legal organization in which owner maintains sole and complete control over the business. Is personally liable for business debts. No legal requirements for establishing a sole proprietorship other than obtaining local business licenses and permits. Income and loss pass through to the owner and are taxed at the owners personal income tax rate. Drawback --- unlimited personal liability for any and all debts of the business.

General Partnership
A form of legal organization in which two or more business owners share the management and risk of the business. Income and losses pass through to partners and are taxed at personal rate, flexibility of profit loss allocations to partners. Ease of formation pooled talent, pooled resources, somewhat easier access to financing, some tax benefits. Unlimited personal liability, divided authority, and decisions, potential for conflict, continuity of transfer of ownership.

Limited Liability Partnership (LLP)

A form of legal organization in which there are general partners and limited partners. General partners actually operate and manage the business. They have unlimited liability. Must be atleast one general partner in LLP. Can be any number of limited partners. They are passive investors, can give management suggestions to general partners. Also, have right to inspect business and make copies of business records. Limited partners are entitled to share of profits as per partnership agreement. Limited partners risk limited to investment in LLP. Good way to acquire capital from limited partners. Cost and complexity of forming high. Limited partners cant participate in management of business without losing liability protection. Income / losses pass through; taxed at personal rate.

C Corporation
Most complex to form. A legal business entity that is separate from its owners and managers. Many entrepreneurial ventures held as closely held corporations; are corporations owned by a limited number of people who do not trade the stock publically. Easier access to resources. Corporation functions as distinct entity and can make contracts, engage in business activities, own property, sue and be sued, and pay taxes. Must operate in accordance with its charter and laws of the state. Liability limited. Dividend income taxed at corporate and personal shareholder levels, losses and deductions corporate. Extensive record keeping, charter restrictions.

S Corporation (Also called Subchapter S Corporation)

A specialized type of corporation that has the regular characteristics of a corporation but is unique in that the owners taxed as a partnership, as long as certain criteria are met. The classic organizing approach for getting the limited liability of a corporate structure without incurring corporate tax. Upto 75 shareholders; no limits on type of stock or voting arrangements. Income and loss pass through to partners, and are taxed at personal rate; flexibility in profit-loss allocation to partners. Easy to set up, enjoy limited liability protection and tax benefits of partnership. Can have a tax-exempt entity as a shareholder. Must meet certain strict requirements. May limit future financing options.

Limited Liability Company (LLC)

A relatively new form of business organization; a hybrid between a partnership and a corporation. LLC offers liability protection of a corporation, tax benefits of a partnership, and fewer restrictions than an S Corporation. Quite complex and expensive to set-up. Needs legal and financial advice to form LLCs operating agreement, a document outlining provisions governing its conduct of business. Unlimited number of members, flexible membership arrangements for voting rights and income. Income and losses pass through to partners and are taxed at personal rate, flexibility in profit and loss allocation to partners. Greater flexibility, not constrained by regulations on C and S Corporations; taxed as partnership, not as corporation. Cost of switching from one form to this can be high.

Organizational Design and Structure

Choice of an organizations structure an important decision. Structure problems complicate as entrepreneurial ventures grow. Having structured organization doesnt mean giving up flexibility (of small company), adaptability and freedom. Structural design maybe fluid, yet have the rigidity it needs to operate efficiently. Organizational design decisions in entrepreneurial venture revolves around six key elements of organizational structure: a. Work specialization. b. Departmentalization. c. Chain of command. d. Span of control. e. Amount of centralization or de-centralization. f. Amount of formalization. Above six key elements will determine a design--- more mechanistic or organic.

Organizational Design and Structure (Contd)

A Mechanistic Structure. Would be preferable when cost efficiencies are critical to the ventures competitive advantage, when more control over employees work activities is important, if the venture produces standardized products in a routine fashion and when the external environment is relatively stable and certain. An Organic Structure. Would be the most appropriate when innovation is critical to the organizations competitive advantage, for smaller organizations where rigid approaches to dividing and coordinating work arent necessary, if the organization produces customized products in a flexible setting, and where the external environment is dynamic, complex and uncertain.

HRM Issues in Entrepreneurial Ventures

Two issues: a. Employee Recruitment. b. Employee Retention. Recruitment: - Recruitment of appropriate employees important. - Entrepreneurs look for: a. High potential people who can perform multiple roles during various stages of venture growth. b. Individuals having passion for business. c. Unlike corporate counterparts who often focus on filling a job by matching a person to job requirements, entrepreneurs look to fill critical skills gap. d. People who are exceptionally capable, self-motivated , flexible and multi-skilled, who can help grow the venture.

HRM Issues in Entrepreneurial Ventures (Contd)

Whereas corporate managers tend to focus on using traditional HRM practices and techniques, entrepreneurs are more concerned with matching characteristics of the person to the values and culture of the organization, i.e. they focus on matching the person to the organization. Employee Retention: - Entrepreneur wants to keep people hired and trained. - Compensation issues. - Smaller entrepreneurial firms likely to view compensation from a total rewards perspective (not just the base pay, incentives/benefits). - Compensation for them encompasses psychological rewards, learning opportunities and recognition in addition to monetary rewards (base pay, incentives)

How to Stimulate and Make Changes

Entrepreneurs face dynamic change. Entrepreneur wears the hat of change agent; recognizes need for change and acts as catalyst, coach, cheerleader and chief change consultant. Organizational change of any type can be disruptive and scary. Entrepreneur must explain change to employees, encourage change efforts by supporting employees, getting them excited about change, building them up and motivating them to put forth their best efforts. Entrepreneur may have to guide actual change process as changes in strategy, technology, products, structure or people are implemented. Entrepreneur answers questions, makes suggestions, gets needed resources, facilitates conflict and does whatever necessary to implement changes.

Continuing Importance of Innovation

Innovation is a key characteristic of entrepreneurial venture what makes an entrepreneurial venture entrepreneurial. Innovation supportive culture in the organization is crucial. Employees must perceive that supervisory support and organizational reward systems are consistent with a commitment to innovation. Employees-- not perceive their work load pressures as being excessive or unreasonable.

Leading An Entrepreneurial Venture

As entrepreneurial venture grows leading becomes crucial. Personality characteristics of Entrepreneurs a. List 1. Abundance of self-confidence, high level of motivation, ability to be involved for the long term, high energy level, persistent problem solving, high degree of initiative, ability to set goals, moderate risk taking. b. List 2. High energy level, great persistence, resourcefulness, desire and ability to be self-directed, relatively high need for autonomy. Proactive Personality. A personality trait that describes individuals who are prone to take actions to influence their environments. Items on Proactive Scale. Being male, education, having entrepreneurial parent, proactive personality, greater risk propensity with primary goal of growth rather than family income only.

Motivating Employees through Empowerment

Having motivated employees an important goal for entrepreneurs. Employee empowerment giving employees the power to make decisions and take actions at their own. Successful entrepreneurial ventures must be quick, nimble, ready to pursue opportunities and go off in the right direction. Empowered employees can provide that flexibility and speed. Empowered employees display stronger work motivation, better work quality, higher job satisfaction, lower turnover. Steps for empowerment a. Participative decision making. b. Delegation. c. Fully empowering to do work effectively and efficiently by using their creativity, imagination, knowledge and skills.

Entrepreneur As A Leader
Leading the venture ability to articulate a coherent, inspiring and attractive vision of the future. Visionary companies outperformed non-visionaries by 6 times. Using employee work teams to perform organizational tasks, create new ideas and resolve problems. Empowered teams, self-directed teams and crossfunctional teams. Developing, using teams necessary. For team efforts to work, entrepreneurs must shift from traditional command-and-control style to a coach-andcollaboration style.

Controlling Entrepreneurial Ventures

1. Managing Growth. Successfully pursuing growth typically requires an entrepreneur to manage all challenges associated with growth. 2. Planning for Growth. Best growth strategy is well planned one. Rapid growth without planning can be disastrous. - Availability of capital for growth. - Having a proper financial structure and plan for funding growth. - Achieving a supportive growth-oriented culture. 3. Controlling for Growth - Reinforce already established organizational controls. - Maintain good financial records and financial controls over cash flow, inventory, customer data, sales orders, receivables, payables, and costs. - Have established procedures, protocols and processes.

Achieving a Supportive GrowthOriented Culture

Key Messages
Keep the lines of communication open inform employees about major issues.

Establish trust by being honest, open, and forthright about the challenges and rewards of being a growing organization. Be a good listener find out what employees are thinking and facing. Be willing to delegate duties. Be flexible be willing to change your plans if necessary. Provide consistent and regular feedback by letting employees know the outcome good and bad. Reinforce the contributions of each person by recognizing employees efforts. Continually train employees to enhance their capabilities and skills. Maintain the focus on the ventures mission even as it grows. Establish and reinforce a we spirit since a successful growing venture takes the coordinated efforts of all the employees.

Managing Downturns
What happens when things do not go as planned? Nobody likes to fail, especially entrepreneurs. What can be done? Recognizing Crisis Situations: - Be alert to warning signs. - Some signals inadequate or negative cash flows, excess number of employees, unnecessary and cumbersome administrative procedures, fear of conflict and taking risks, tolerance of work incompetence, lack of a clear mission or goals, and ineffective or poor communication within the organization.

Managing Downturns (Contd)

Boiled Frog Phenomenon. A perspective on recognizing performance declines that suggests watching out for subtly declining situations. - A classic psychological response experiment. In one case, a live frog dropped into a pan of boiling water reacts instantaneously and jumps out of the pan. In the second case, a live frog dropped into a pan of mild hot water, gradually heated to boiling point fails to react and dies. - Similarly, an entrepreneur may not recognize the water heating up, i.e. a subtly declining situation. - Entrepreneur needs to be alert to signals. - Do not wait until the water has reached the boiling point before you react!

Managing Downturns (Contd)

Dealing with Downturns, Declines and Crises - Think about it before it happens. - Have an upto-date plan for covering crises, like mapping exit routes from your home in case of fire. - Plan should focus on providing specific details for controlling most fundamental and critical aspects of running the venture cash flow, accounts, receivables, costs and debt. - Identify specific strategies for cutting costs and restructuring the venture.

Exiting the Venture

Harvesting: Exiting a venture when an entrepreneur hopes to capitalize financially on the investment in the venture. Exiting issues: a. Business Valuation Methods: - Assets valuations. - Earnings valuations. - Cash flow valuations. b. Have comprehensive business valuation prepared by professionals. Other considerations: a. Being prepared. b. Deciding who will sell the business. c. Tax implications. d. Screening potential buyers. e. Telling employees before or after sale.

Managing Personal Life Choices and Challenges

Entrepreneurs are a special group. They are focused, persistent, hardworking and intelligent. They must balance their work and personal lives. Things entrepreneurs can do: a. Become good time managers. b. Seek professional advice in areas of business where needed. c. Deal with conflicts as they arise. Never let the communications break down. d. Develop a network of trusted friends and peers (to talk to for support and encouragement). e. Recognize when his or her stress levels are too high. Do something about it!

Intrapreneurship
An intrapreneur who takes hands-on responsibility for creating innovation of any kind within an organization. Intrapreneur maybe the creator or the inventor but it is always the dreamer who figures out how to turn an idea into a profitable reality. Intrapreneurship takes place within an organization.