Section I - The Challenges of Entrepreneurship



Section I. The Challenge of Entrepreneurship

Chapter 1 The Foundations of Entrepreneurship

Part 1: Learning Objectives

1. Define the role of the entrepreneur in business in the United States and around the world.

2. Describe the entrepreneurial profile and evaluate your potential as an entrepreneur.

3. Describe the benefits and drawbacks of entrepreneurship.

4. Explain the forces that are driving the growth in entrepreneurship.

5. Explain the cultural diversity of entrepreneurship.

6. Describe the important role small business plays in our nation’s economy.

7. Put failure into the proper perspective.

8. Explain how entrepreneurs can avoid becoming another failure statistic.

Part 2: Class Instruction

Introduction

Throughout the world growing numbers of people are realizing their dreams of owning and operating their own business. Entrepreneurship is thriving. The past two decades have seen record numbers of entrepreneurs launching new businesses each year.

The World of the Entrepreneur LO 1

A study by the Global Entrepreneurship Monitor (GEM) found that 12.3 percent, or one in eight people, of the adult population in the United States is working to start a business. North America, South America, and Latin America lead the world in entrepreneurial activity. Eastern European countries, China, Vietnam, and other nations whose economies were state–controlled and centrally planned now hold potential for entrepreneurs. Even war torn Afghanistan is benefitting. Entrepreneurship is impacting business around the world.

What is an Entrepreneur? LO 2

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.

While we may not be able to teach entrepreneurship, we can teach the skills of small business management. This is an important distinction to make to students.

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

1. Desire for responsibility

2. Preference for moderate risk (risk eliminators)

3. Confidence in their ability to succeed

4. Determination

5. Desire for immediate feedback

6. High level of energy

7. Future orientation (serial entrepreneurs)

8. Skill in organization

9. Value of achievement over money

Other characteristics of entrepreneurs include:

• High degree of commitment

• Tolerance for ambiguity

• Flexibility

• Tenacity

The Benefits of Entrepreneurship LO 3-A

The primary benefits entrepreneurs enjoy include the opportunity to:

• Opportunity to create their own destiny

• Opportunity to make a difference

• Opportunity to reach their full potential

• Opportunity to reap impressive profits

• Opportunity to contribute to society and be recognized for your efforts

• Opportunity to do what you enjoy and have fun at it

The Potential Drawbacks of Entrepreneurship LO 3-B

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

Behind the Boom: Feeding the Entrepreneurial Fire LO 4

The rapid increase in entrepreneurs has been a result of:

• Entrepreneurs as heroes

• Entrepreneurial education

• Demographic and economic factors

• Shift to a service economy

• Technological advancements

• Independent lifestyles

• The Internet and cloud computing

• International opportunities

The Cultural Diversity in Entrepreneurship LO 5

Entrepreneurs are found virtually every walk of life. This includes:

• Young Entrepreneurs

• Women Entrepreneurs

• Minority Enterprises

• Immigrant Entrepreneurs

• Part–time Entrepreneurs

• Home–Based Businesses

• Family Businesses

• Copreneurs

• Corporate Castoffs

• Corporate Dropouts

There is not a set “profile” for entrepreneurs. This is a group that is diverse in every way and appreciating these types of entrepreneurs illustrates this variety of people and lifestyles.

The Power of “Small” Business LO 6

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

The Committee for Economic Development states that a small business must meet at least two of the 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.

Putting Failure into Perspective LO 7

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.

The following material in this section is in addition to the text.

The Ten Deadly Mistakes of Entrepreneurship

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”

How to Avoid the Pitfalls LO 8

These same studies have indicated that entrepreneurs can increase their changes 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. Set your business apart from the competition.

7. Maintain a positive attitude.

Conclusion

Entrepreneurs are a key part of America’s free enterprise system, and as we will discover, are changing the business of the world as well. Their contributions are as many and as diverse as the businesses themselves. There are steps that entrepreneurs can take to enhance the probability of their success.

What to Expect from the Course Ahead

These five sections outline the steps to launch a successful business. This course emphasizes establishing a clear understanding of the entrepreneurial environment and using that information to build a sound business plan.

Part 3: Chapter Exercises

You Be the Consultant: “Where Do Ideas Come From?” page 10

1. Explain how these entrepreneurs exhibit the entrepreneurial spirit.

The entrepreneurial spirit is exhibited through Susan Gregg Kroger’s:

• Confidence

• Drive

• Tenacity

• Commitment

• Future orientation and vision

• Willingness to take calculated risks

2. Have you encountered a “stress point” recently or talked with someone who has? If so, is there a potential business opportunity present? How would you describe the opportunity?

Expect students to discuss an experience that illustrates a “stress point” similar to that of Kroger’s. Encourage them to assess the business potential behind that stress point and describe the potential opportunity.

3. What benefits do these entrepreneurs reap from owning their own businesses? What disadvantages do they face?

These entrepreneurs reap the benefits of creating their own destiny, the opportunity to realize their potential, and a chance to work at what they enjoy doing while reaping the profits from the business.

These entrepreneurs face several potential disadvantages including uncertainty, financial risk, long work hours with minimal compensation, discouragement, and stress.

4. What career lessons can you learn from these entrepreneurs?

Career lessons from these entrepreneurial examples may include:

• Be creative

• Follow your passion

• Be persistent

• Assess the risk

• Know your market

You Be the Consultant: “College: The Ideal Place to Launch a Business” pages 17–18

1. In addition to the normal obstacles of starting a business, what other barriers do collegiate entrepreneurs face?

One of the most significant barriers college students face is their inexperience. The learning curve these college students face may be challenging. In addition, their youth may not be taken seriously when working with older business people and engaging in business transactions. Securing financing may prove to be an example of this.

2. What advantages do collegiate entrepreneurs have when launching a business?

These young entrepreneurs also have advantages. Many young entrepreneurs are technically proficient, are energetic, have an intimate understanding of their peer market, and may be highly creative in identifying market needs and solutions. This group also brings a fresh viewpoint and an ability to see beyond obstacles.

3. What advice would you offer a fellow college student about to start a business?

Areas of advice student may offer include:

• Take action to build credibility.

• Identify areas of need.

• Leverage resources to build understanding.

• Conduct thorough research and demonstrate an understanding of the critical needs of the market and the business.

• Seek counsel from more experienced entrepreneurs.

4. Work with a team of your classmates to develop ideas about what you college or university could do to create a culture of entrepreneurship on you campus or in your community.

Encourage students to list ideas that may help to build entrepreneurial resources. This list might include:

• Bring guest speakers to campus

• Create an entrepreneurial mentor program

• Establish an entrepreneur club

• Host a business plan competition

• Explore options to expand entrepreneur courses offered

Part 4: Chapter Discussion Questions

1. What forces have led to the boom in entrepreneurship in the U.S. and across the globe? (LO 4)

Forces that have influenced the U.S. entrepreneurial boom include:

• The dream of owning and operating a business

• The effect of downsizing

• The belief that “small is beautiful”

• The opportunity to enter profitable niche markets

• The growing international and e–commerce markets

2. What is an entrepreneur? Give a brief description of the entrepreneurial profile. (LO 2)

An entrepreneur is one who creates a new business in the face of risk and uncertainty for the purpose of achieving profits and growth by identifying opportunities and assembling the necessary resources to capitalize on them. The entrepreneur has a:

• Desire for responsibility

• Preference for moderate risk (risk eliminators)

• Confidence in their ability to succeed

• Determination

• Desire for immediate feedback

• High level of energy

• Future orientation (serial entrepreneurs)

• Skill in organization

• Value of achievement over money

In addition, other characteristics of an entrepreneurial profile include:

• High degree of commitment

• Tolerance for ambiguity

• Flexibility

• Tenacity

3. Inc. Magazine claims, “Entrepreneurship is more mundane than it’s sometimes portrayed … you don’t need to be a person of mythical proportions to be very, very successful in building a company.” Do you agree? Explain. (LO 2)

Anyone can become an entrepreneur. There are no limitations to this form of economic expression and the skills of entrepreneurship and innovation can be learned. There are thousands of examples where people have become highly successful with ordinary businesses. This combination of skills, desire, passion and drive and an understanding of the market opportunity may result in entrepreneurial success.

4. What are the major benefits of business ownership? (LO 3)

Major benefits of business ownership include the opportunity to:

• Gain control over your own destiny

• Make a difference

• Reach your full potential

• Realize unlimited profits

• Contribute to society and be recognized for your efforts

• Do what you enjoy

5. Which of the potential drawbacks to business ownership are most crucial?

(LO 3)

The most crucial drawbacks to business ownership may include the:

• Uncertainty of income

• Risk of losing invested capital

• Long hours and hard work without guarantee of return

• Quality of life until the business gets established

• High levels of stress

• Complete responsibility of the business – its success or failure

6. Briefly describe the role of the following groups in entrepreneurship: women, minorities, immigrants, part–timers, home–based business owners, family business owners, copreneurs, corporate castoffs and corporate dropouts. (LO 5)

These entrepreneurial groups may face challenges in the following areas:

• Young people can apply their knowledge and skills to take advantage of the Internet, new technology and market opportunities.

• Women often face discrimination in the workplace. Entrepreneurship offers women opportunities for economic growth.

• Minorities also face discrimination in the workplace and can benefit from entrepreneurship.

• Immigrant entrepreneurs arrive with more education and experience. Their dedication and desire to succeed enables them to achieve their dreams.

• Part–timers have the best of both worlds and can ease into a business without sacrificing a steady paycheck and benefits.

• Home–based businesses are booming. Technology and this “Homecoming” support nearly 44 percent of US households with some form of home office activity.

• Family businesses are an integral part of our economy. 90 percent of U.S businesses are family owned.

• Copreneurs are entrepreneurial couples that work together. They represent the fastest growing business sector.

• Corporate Castoffs have extensive on–the–job experience and are dislocated workers due primarily to corporate downsizing.

• Corporate Dropouts leave organizations to pursue a better way of life spearheaded by the “trust gap” over job security.

• Social Entrepreneurs address social problem and apply entrepreneurial principles to organize, create and manage a social venture to achieve a desired social change to further broaden social, cultural, and environmental goals.

• Retired Baby Boomers are often experienced business people and remain active and the level of entrepreneurial activity among people ages 55 to 64 is higher that people between 20 to 34.

7. What is a small business? What contributions do they make to our economy? (LO 6)

A small business is “one which is independently owned and operated and not dominant in its field of operation.” One of the most common measure of small business is the number of employees on a firm’s payroll. The White House Conference on Small Business definition for small business is: “A firm employing 500 people or fewer.”

The Committee for Economic Development states that a small business must meet at least two of the 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.

There are 28 million businesses in the United States and 99.7 percent of these ventures are considered small businesses. The economic contribution of small business is significant. Small businesses:

• Produce 51 percent of the country’s private GDP

• Account for 44.5 percent of business sales

• Represent 65 percent of new jobs between 1993 and 2009

• Create 13 times more patents per employee than large companies.

8. Describe the small business failure rate. (LO 7)

Many small businesses have inexperienced management and lack financial stability. These businesses suffer a mortality rate significantly higher than that of larger, more established businesses because of managerial inexperience and the limited resources available to support the business when it is in need of cash.

9. Outline the causes of small business failure. Which issues cause most business failures? (LO 7)

• Poor operations management – The manager lacks the ability to operate a small business.

• Lack of experience – Many owners start businesses in industries in which they have no experience.

• Poor financial management – Many owners start with too little money and with little or no understanding of financial spreadsheet applications.

• Over–investing in fixed assets – Owners who over–invest in fixed assets may find themselves with no access to funds for working capital or expansion.

• Poor credit practices – Owners often sell on credit to meet (or beat) the competition and find that they lack the additional working capital required or the ability to collect on accounts.

• Failure to plan – The lack of a strategic plan to guide the business in the long run.

• Unplanned and uncontrolled growth – Growth is natural and healthy, but unplanned growth can be fatal to a business.

• Inappropriate location – Owners who choose a business location without proper analysis, investigation, and planning often fail. Too often, owners seek “cheap” sites and locate themselves straight into failure.

• Lack of inventory control – Although inventory is typically the largest investment for the owner, inventory control is one of the most neglected duties.

• Inability to make the “Entrepreneurial Transition” – Can we learn to empower others to make decisions and act independently?

10. How does the typical entrepreneur view the possibility of business failure?

(LO 7)

Although failure is a possibility, it is not a deterrent to the entrepreneur. The entrepreneur views failure as the unacceptable results of actions taken that provide a valuable lesson for the future.

11. How can the small business owner avoid the common pitfalls that lead to business failure? (LO 8)

A small business owner can avoid common pitfalls by:

• Knowing the business in depth

• Developing a solid business plan

• Managing financial resources

• Understanding financial statements

• Learning to manage people effectively

12. Why is it important to study the small business failure rate and the causes of small business failures? (LO 8)

It is important to know what the major causes of small business failures are so that the prospective entrepreneur can avoid those pitfalls. Understanding these causes of failure may enable entrepreneurs to learn and avoid these mistakes and improve their chance for business success.

13. Explain the typical entrepreneur’s attitude toward risk. (LO 8)

Risk is inherent to all future actions. Entrepreneurs are not necessarily high–risk takers, but rather prefer, and are willing to accept and manage, low–to–moderate risk situations. Some consider entrepreneurs as “calculated” risk takers.

14. Are you interested in launching a small business? If so, when? What kind of business? Describe it. What can you do to ensure its success? (LO 8)

This set of questions may provide an opportunity for dialog with students in your class. Encourage them to talk about their business concept and insights they gained from the chapter to improve the opportunity for success.

Part 5: Case Studies

The following text cases complement lecture and assignments for the topics presented in this chapter.

• Case 1: Promethean Power Systems

• Case 2: Mixed Chicks

• Case 3: True Body Products

• Case 10: Studio-310

• Case 11: Ann Bevans Collective

Part 6: Online Videos and Podcasts

These online videos may enhance class discussion and provide additional insight for the chapter topics. You may consider searching “entrepreneur,” “small business” along with more specific topics.

• Eye to Eye: Richard Branson 7:10 minutes



• Growing a Woman’s Security Biz 3:40 minutes



• Profiles of Success 6:01 minutes



• Real American Stories – Fireworks 10:15 minutes



• Richard Branson on Business: Advice to Entrepreneurs 1:06 minutes

–hub/topics/the–world/video/branson–on–business–advice–to–entrepreneurs–inside–the–entrepreneurial–mind–series

• Teen 24 – Young Entrepreneurs 4:23 minutes



• Teen Millionaires … How did they do it? 8:11 minutes



• The American Dream 1:25 minutes

–hub/topics/the–world/video/cardmember–profile–olga–adler–interiors–share–your–story

• Top 10 Mistakes Made by Entrepreneurs 1:06 minutes



Links to additional online resources are available on the companion Web site at scarborough.

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