CHAPTER 10
Managing New Venture Formation and
Entrepreneurship
CHAPTER SUMMARY
This chapter deals with entrepreneurship and new venture formation. Planning and decision making are
LEARNING OBJECTIVES
After covering this chapter, students should be able to:
1. Discuss the nature of entrepreneurship.
2. Describe the role of entrepreneurship in society.
Michael Gleissner, a German entrepreneur who profited from the Internet, used the money that he made
by selling his early ventures to found Bigfoot Entertainment, a company that supports and finances
independent film makers. Bigfoot’s production facilities are in Philippines and the company has gone
into film distribution and training in an effort to be a major player in the entertainment industry.
LECTURE OUTLINE
I. THE NATURE OF ENTREPRENEURSHIP
A. Entrepreneurship is the process of planning, organizing, and assuming the risk of a business
venture.
Teaching Tip: Point out to students that the definition of “small” depends on the industry. A small
retail store may employ only two or three workers, while a small nuclear power plant employs
hundreds.
Teaching Tip: Point out to your students a sample of small businesses around campus—convenience
stores, dry cleaners, local restaurants, clothing shops, bookstores, and so forth.
II. THE ROLE OF ENTREPRENEURSHIP IN SOCIETY
A. Job Creation
2. Small businesses create many new jobs in the United States.
Discussion Starter: Ask if any of your students ever took a job with a new firm just as it was starting
out. Ask them to recount their experiences.
B. Innovation
Small businesses create many new innovative products and services. Examples include the
Cross-Reference: Given that small businesses are frequent suppliers for bigger businesses, they
constitute an important ingredient in the task environment, as discussed in Chapter 3.
III. STRATEGY FOR ENTREPRENEURIAL ORGANIZATIONS
A. Choosing an Industry
Cross-Reference: As noted in the text here, Porter’s five forces framework provides an effective model
for assessing industry attractiveness. We discussed that framework in Chapter 3.
Small businesses can be successful in any industry segment. Small businesses tend to be more
prevalent in industries in which resources requirements and economies of scale are low.
Teaching Tip: Point out the large number of small service and retail businesses that likely exist around
your campus.
3. Construction firms are often founded by skilled craftspeople and can focus on small,
local projects.
7. Manufacturing can be a very difficult industry for small businesses due to high
Teaching Tip: With the growing role of computers and other technology in the creation of new
products and product ideas, the disadvantages of manufacturing for small businesses may become less
significant. Use of technology can shift an industry’s economies of scale, making it less expensive to
produce products in small quantities.
B. Emphasizing Distinctive Competencies
New businesses also increase their chances of success if they can identify and emphasize their
distinctive competencies.
1. One way to succeed with a new business is to identify a niche in an established market.
Extra Example: Although there are many sellers of women’s attire, Eddie Bauer was the first retailer
to offer all of its products in sizes for tall women. This niche had been underserved for years.
2. Another way to succeed with a new business is to identify a new market that is just
emerging.
Extra Example: Ann Taylor achieved success when she identified a new market for women’s business
attire that is professional and feminine at the same time.
3. A new business may also be successful when it has first-mover advantages, that is, when
it exploits an opportunity before any other firm does.
Extra Example: Dell Computer has thrived as a result of its first-mover advantage in direct
C. Writing a Business Plan
Another key ingredient to entrepreneurial success is the preparation of a strong business plan.
Teaching Tip: The website www.bplans.com offers a number of sample business plans. It is
interesting to look at the variety of businesses that are the subject matter of these plans.
Group Exercise: Have small groups of students sketch the basic issues they would need to consider if
D. Entrepreneurship and International Management
International markets are becoming increasingly important to successful small businesses.
IV. STRUCTURE OF ENTREPRENEURIAL ORGANIZATIONS
A. Starting the New Business
1. Buying an existing business allows the entrepreneur to examine the business’s past
Teaching Tip: If possible, point out for your students examples of local firms that have been started
from scratch and examples in which a business has been sold to a new owner.
B. Financing the New Business
Personal resources are used for over half of the expenses of a new business, but other popular
methods of financing include strategic alliances, lenders, venture capitalists, small-business
investment companies, and SBA financial programs.
1. Personal resources—from the entrepreneurs, or their family or friends.
2. Strategic alliances—especially popular with dot.com companies who may subcontract
many of their functions to traditional wholesalers or shippers
C. Sources of Management Advice
In addition to financing, entrepreneurs typically need management advice as well as support
from legal, accounting, financial, and tax advisors.
1. Advisory boards provide experience and assistance.
Teaching Tip: It is often interesting to have a local speaker from the SBA, SCORE, or other program
visit class for a few minutes and discuss various new business assistance programs.
4. Networking, or meeting regularly with other business people to share ideas and advice, is
also popular. One example is The National Association of Women Business Owners.
D. Franchising
A franchising agreement is a contract between an entrepreneur (the franchisee) and a
Interesting Quote: “Hamburgers are a wonderful means to an end, a great way to be on the front line
Teaching Tip: Point out some local businesses, especially near campus, that are franchised.
Discussion Starter: The fastest-growing franchises in the U.S. are fast food companies, motels,
convenience stores, and janitorial services. Why are these types of firms popular choices for
franchising?
V. THE PERFORMANCE OF ENTREPRENEURIAL ORGANIZATIONS
A. Trends in New Business Start-Ups
1. Emergence of e-commerce and the Internet explosion has led to an increased ability for
B. Reasons for Failure
1. Managerial incompetence or inexperience results when entrepreneurs have little or no
management experience or training.
C. Reasons for Success
1. Hard work, drive, and dedication on the part of the entrepreneur are all key to success.
Long hours and independent work are also required.
Teaching Tip: Stress for students that not everyone is cut out to be an entrepreneur. Indeed, many
people who try it end up going back to work for someone else.
Discussion Starter: Ask students if they have an interest in being an entrepreneur or if they intend to
go to work for someone else.
2. Market demand for its products or services provided is imperative for a business to succeed.
END OF CHAPTER QUESTIONS
Questions for Review
1. Describe the similarities and differences between entrepreneurial firms and large firms in terms of
their job creation and innovation.
Since 1990, entrepreneurial firms and large firms have both added new jobs to the economy. Large
2. What characteristics make an industry attractive to entrepreneurs? Based on these characteristics,
which industries are most attractive to entrepreneurs?
Many entrepreneurs are starting their businesses with limited resources, and therefore, attractive
3. Describe recent trends in new business startups.
The Internet aids small businesses in reaching a wider market inexpensively, as well as creating
4. What are the different sources of advice for entrepreneurs? What type of information would an
entrepreneur be likely to get from each source? What are the drawbacks or limitations for each source?
Entrepreneurs may get advice from advisory boards, management consultants, the SBA, and from
Questions for Analysis
5. Entrepreneurs and small businesses play a variety of important roles in society. If these roles are so
important, do you think that the government should do more to encourage the development of small
business? Why or why not?
This is an opinion question with no absolutely right or wrong answer. Instead, the quality of an
6. Consider the four major reasons for new business failure. What actions can entrepreneurs take to
minimize or avoid each cause of failure?
Incompetence or inexperience can be counteracted by business training and education as well as by
7. The U.S. automotive industry is well established, with several large and many small competitors.
Describe the unexploited niches in the U.S. auto industry and tell how entrepreneurs could offer
products that fill those niches.
Students’ answers will vary. They might point out that there are few automobiles for very modest
Questions for Application
8. Assume that you are opening a small business in your town. What are your financing options?
Which option or options are you likely to choose, and why?
Financing options include personal resources, strategic alliances, lenders such as banks and the
9. List five entrepreneur-owned businesses in your community. In which industry does each business
compete? Based on the industry, how do you rate each business’s long-term chances for success?
Explain your answers.
Students’ will choose different companies, of course. They should correctly identify the industry.
10. Using the information about managing a small business presented in this chapter, analyze whether
you would like to work in a small business—either as an employee or as a founder. Given your
personality, background, and experience, does working in or starting a new business appeal to you?
What are the reasons for your opinion?
END OF CHAPTER EXERCISES
Building Effective interpersonal Skills
I. Purpose
This exercise helps students assess their interpersonal skills to find out if these skills are well
developed already or likely to be developed over time.
II. Format
III. Follow-Up
A. The scores range from 16 (ineffective networking) to 80 (effective networking).
Building Effective Conceptual Skills
I. Purpose
This exercise encourages students to think through the factors that lead to small business success
and to apply those ideas to their situation.
II. Format
The conceptual skills exercise is a two-step activity with Step 1 done individually and Step 2 in
groups. The entire exercise will take about 20 minutes.
III. Follow-Up
A. Form a small group of four or five classmates and discuss your respective lists. Look for instances
B. At this point, how important do you regard personal interest as a factor in small-business
success?
interest alone isn’t enough to create a viable enterprise.
C. How important do you regard market potential as a factor in small-business success?
Market potential is critical to small business success. Without it, even the most dedicated
MANAGEMENT AT WORK
FACEBOOK TAKES CREDITS WHERE CREDITS ARE DUE
Mark Zuckerberg, a Harvard sophomore, founded Facebook in 2004 and in two years has become the
second most visited website (after Google) by college students. Facebook allows college students to
communicate to each other and socialize. The website gets revenues from advertising. The company
hopes to public soon but there are questions if it can maintain its growth rate in the future.
1. Case Question 1: If you use Facebook (or any other social networking site), which of its features
are most attractive to you? If you don’t use any social networking site, what features are most likely
to cause you to try one?
Responses will vary depending on each person’s interest in Facebook’s many features. If there are
2. Case Question 2: Explain Facebook’s distinctive competencies in as much detail as you can. If you
use Facebook, you can obviously draw on your own experience. If you don’t use the site, talk to a
few people who do.
Facebook’s distinctive competence is its user network. It has 600 million users – meaning that if
3. Case Question 3: Its click-through rate measures the number of visitors to a website who actually
click on the ads. Industrywide, it’s not good, and in 2010, Facebook’s click-through rate was below
the industry average. What about you – do you click-through? What does it take for you to venture
away – even temporarily – from a host site when you’re online? What can a company like
Facebook do to improve its click-through – and its advertising revenues?
While responses may vary, it is likely that relevance and credibility are important criteria for click–
4. Case Question 4: According to one popular technology blog, its current policy on users’ privacy
means that “your name, your profile, gender, current city, networks, Friends, List, and all the pages
you subscribe to are now publicly available information on Facebook. This means everyone on the
web can see it, it is searchable.” Is this okay with you? Why or why not?
Privacy is a major issue for social networking sites. It is likely that the majority of students will