Course 1

Learning Objectives
Understanding the roots of entrepreneurship.
Understanding the entrepreneurial process.
Understanding that entrepreneurial

opportunities exist for a number of reasons.

Understanding many of the benefits to being
an entrepreneur, and that the benefits come
with risks.
Understanding that this class is designed to
help protect against those risks.

What is Entrepreneurship?
Scott Shane (Case Western) Entrepreneurship is
Some
Modern Definitions
an activity that involves the discovery, evaluation
and exploitation of opportunities to introduce new
goods and services, ways of organizing, markets,
processes, and new materials through organizing
efforts that previously had not existed.

Howard Stevenson (Harvard) .. The pursuit of

opportunity without regard to resources currently

controlled.

W. Gibb Dyer, Jr. (BYU) The founding of new

businesses is the essence of entrepreneurial

activity.

What is
Entrepreneurship?
Capacity to take risks
Ability to own and organize
Desire and capability to

innovate and diversify

What is
Entrepreneurship?
Cantillon (1700s)
Say (1803)
Knight (1921)
Schumpeter (1934)
Kirzner (1973)
Gartner (1988)

Richard Cantillon (16971734)

The entrepreneur is a specialist in taking on
risk
He insures workers by buying their products
(or labor services) for resale before consumers
have indicated how much they are willing to
pay.

Frank Knight (1885-1972)

Entrepreneur has a two-fold function
Exercising responsible control (directing the work of

others)
Securing the owners of productive services against
uncertainty and fluctuations in their incomes

Distinguished between risk, which is insurable,

and uncertainty, which is not

Uncertainty includes things like changes affecting

the marketing of consumer products (e.g., fashion

trends)

Profit compensates entrepreneur for bearing

uncertainty

Joseph Schumpeter
(1934) - implements change (creative
(1883-1950)

destruction) within markets through the

carrying out of new combinations.
(1942) The entrepreneurial function does
not essentially consist in either inventing
anything or otherwise creating the
conditions which the enterprise exploits. It
consists in getting things done.
A lot of what an entrepreneur does on a
day-to-day basis is not entrepreneurial

Israel Kirzner
Entrepreneur is an arbitrageur
He or she discovers previously

unknown market opportunities

Key characteristic is
entrepreneurial alertness

Synthesis of Entrepreneurship
In general, even entrepreneurship researchers

cant agree on what the best definition of

entrepreneurship is
Two main camps
Discovery, evaluation, and exploitation of

opportunities
Starting new businesses

Synthesis of Entrepreneurship
Previous economists do a nice job defining

entrepreneurship

Concerned with decisions surrounding new

profit opportunities
Concerned with assembling resources
All in the midst of uncertainty

But they dont address who is likely to be an

entrepreneur, or even more important, a

successful entrepreneur

Why entrepreneurship?
Process of creating something different, with

value, by devoting necessary time and effort,

by assuming the accompanying financial,
psychological, and social risks, and receiving
the resulting rewards of monetary and
personal satisfaction (Bowen and Hisrich,
1986).

12

Role of the Entrepreneur

An innovator who combines technical

innovations and financial finesses.

Important role in producing competitive
products, processes, and services.
Generation of new employment
Local and regional economic development
Improved allocation of resources and
transfer of technologies
13

Entrepreneur as an
Economic
Pioneer

Introduction of new goods and products

Introduction of new processes and methods of
production
Opening up of new markets
Opening up of new sources of supply
Industrial re-organization

14

Entrepreneurship and Small

Businesses
Entrepreneurship is especially critical in

small businesses because:

Important sources of competition for large
firms; challenge their economic power
Offer a wide range of choice to consumers
Sources of innovation and creativity
Good career opportunities to work in an
unstructured environment of a small
company
15

access to
resources

other job
opportunities

ability to
organize
resources

specialized
skills

knowledge

entrepreneurship
orientation
Expected
Performance

Performance
Threshold

Source: Gimeno, Folta, Cooper, & Woo (1997). Survival of the fittest? Entrepreneurial human capital and the persistence of
underperforming firms. Administrative Science Quarterly, 42: 750-783.

Entrepreneurship is a Multi-step
Process
Recognize
Opportunities

Evaluate

Exploit

Market
Attractiveness

Industry
Attractiveness

Mission
Aspiration
Propensity for Risk

Ability to Execute
On CSFs

Target Segment
Value Created

Sustainable
Advantage

Value Chain
Connectedness

Marketing Management
Demand variables:
Demographic, social, economic, political, and

competitive factors in market environment

Psychological, social, and economic patterns in
customer motivations
Market segmentation
Customer behavior
Only partially under the control of the
entrepreneur
All other autonomous factors
19

Marketing Management
Decision Variables:
Product characteristics and pricing
Distribution and personal selling
Advertising policies
Mostly under the control of the entrepreneur

20

Marketing Management
The essential entrepreneurial function in

marketing management is to design an

integrated marketing plan, where the demand
and semi-demand variables of the market are
related to the product and decision variables
of the firm.

21

Market Research
Marketing success depends on design of a

distinctive marketing plan

A small entrepreneur should not try to
compete on a product-to-product basis
with large firms (same goods to same
customers thru same channels at same
prices !!)
Instead, try to do something
different.
22

Operations Management
Process of designing and utilizing the physical

resources of the firm to maximize the

operational capabilities of the company
Product/ service design
Process design
Job design
Job standards

23

Operations Management
The entrepreneurs smaller firm generally has

to provide specialized, few-of-a-kind products

and personalized services, without the
benefits of mass production and mass
distribution

24

Financial Management
1. Effective utilization of the assets- current
(short-term) and capital (long-term)
2. Provision of funds to support those assets
3. Use of current liabilities, intermediate
loans, and capital debt or equity
4. Difficult for smaller companies to
compete, in finance, with larger firms,
simply because they lack money.
25

Financial Management
Finances needed for:
1. New investments in product development
2. Expansion of markets
3. Process improvements, etc.
Conserve available funds by preparing
detailed financial plans, e.g. cash budgets,
capital investment analysis, short-term
plans
26

Financial Management
Finding additional funds from sources as
1. Current liabilities
2. Bank loans
3. Equity investments
4. Retained earnings
5. Venture capital proposals
6. Angel funding proposals

27

Product Development
Improvements in design of existing

product
Inventions of new products
Lack resources for full R&D facility
Must use available capabilities efficiently
Outsourcing of R&D and innovation
Technical feasibility, market feasibility,
development time and cost, manufacturing
capability, and strategic fit
28

Organizational
Management and
Control
Smaller companies go thru identifiable stages

of growth
Increased specializations in tasks of staff
Increased delegation on part of founder
Increased systematization and formalization
of information reporting and accounting
procedures

29

Formation and Growth

Formal and legal procedures of formation-

memoranda and articles of association

Sole proprietorship
Partnership
Private limited
Public listing
Cooperative

30

Formation and Growth

Purchase of a small company- identify, screen,

evaluate, negotiate, and structure payments

Consolidation of a new company- intense
conservation of cash, firm limitations on
expenses, continual examination of
companys strategy.

31

Why should you be

Many young people have succeeded:
interested?

Michael Dell - Dell Computers

Frank Carney - Pizza Hut
Paul Orfalea - Kinkos
Fred DeLuca - Subway.
Kristy Taylor - SkinCareRx.com

Opportunity to reap large profits

Why should you be interested ?

(cont.)
Invulnerability of Youth
Confident, resilient, and ignorant
Minimum exposure to failure

Limited Responsibility
Marriage, children, car, home, etc. suggest

higher opportunity costs if failure

Physical and Emotional Strength

Better ability to burn the candle at both ends

Why should you be interested?

(cont.)
Available Resources

Many are waiting for you to ask for help.

Take advantage of your harmless appearance

Opportunity to control own destiny

Opportunity to reach your full potential
Opportunity to make a difference
With employees Jim Dodson, The Dodson Group
With social concerns Steve Row, Sun Garden

Furniture

Source: Dun & Bradstreet 19th Annual Small Business Survey, 2000

Sources: National Federation of Independent Business and Wells Fargo Bank

Why NOT to be an Entrepreneur

Uncertainty of income
Risk of losing entire invested capital
Lower quality of life until business gets

established
High levels of stress
Complete responsibility

New Firm Survival Rates

According to Dun & Bradstreet study of businesses between 1989-

1992:
66% of businesses remain open at least 2 years.
50% remain open at least 4 years.
40% remain open at least 6 years.

Study of Canadian firms found roughly the same:

Conclusions
Entrepreneurship is a challenging and

rewarding profession
Need to concentrate on market analysis,
financial resources, and technology
management
Cannot compete directly with the big
guys, so need to be ingenious and
innovative in all entrepreneurial functions

39