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Managing New Venture Formation

and Entrepreneurship
Chapter 10
City University of Science and Information Technology Faisal Ghani

The Nature of Entrepreneurship

Entrepreneurship
The process of planning, organizing, operating, and
assuming the risk of a business.
Entrepreneur
Someone who engages in entrepreneurship.
Small Business
A business that is privately owned by one individual or a
small group of individuals; it
has sales and assets that are not large enough to
influence its environment.
Chapter 10 Managing New Venture Formation and Entrepreneurship 2
City University of Science and Information Technology Faisal Ghani

The Role of Entrepreneurship in the Society

Job Creation
 Small business creates majority of the new jobs in the
society.
 Industry sectors dominated by small business have
added the most jobs.
 Small business accounts for 38% of all jobs in high-
technology sectors and for 96% of all U.S. exporters.

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City University of Science and Information Technology Faisal Ghani

The Role of Entrepreneurship in the Society

Innovation
 Historically, major innovations are as likely to come
from small businesses as from large firms.
 Much of what is created in the high-technology
sectors comes from start-up companies.
 PC, Transistor Radio, Photocopying Machine, Jet
Engine, Instant Photograph.

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City University of Science and Information Technology Faisal Ghani

The Role of Entrepreneurship in the Society

Importance to Large Businesses


 Most products made by large manufacturers are sold
to customers by small businesses.
 Small businesses as suppliers provide large firms with
essential services, supplies, and raw materials.
 Large businesses outsource many routine business
operations such as packaging, delivery, and
distribution to small businesses.

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City University of Science and Information Technology Faisal Ghani

Strategy for Entrepreneurial Organizations

Three basic strategic challenges:


1. Choosing an Industry
2. Emphasizing Distinctive Competencies
3. Writing a Business Plan

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City University of Science and Information Technology Faisal Ghani

Strategy for Entrepreneurial Organizations


1. Choosing an Industry
Industries in which small business are strong
Industries in which small business are weak
 Services
 Retailing
 Construction
 Finance and Insurance
 Wholesaling
 Transportation
 Manufacturing
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City University of Science and Information Technology Faisal Ghani

Strategy for Entrepreneurial Organizations

2. Emphasizing Distinctive Competencies


 Identifying Niches in Established Markets
 Niche: A segment of a market not currently being exploited.
 Identifying New Markets
 New market is explored using the transfer of an existing
product/service to a new market.
 Entrepreneurs can create new industries/ products/ services.
 First-Mover Advantage
 Any advantage that comes to a firm because it exploits an
opportunity before any other firm does.

Chapter 10 Managing New Venture Formation and Entrepreneurship 8


City University of Science and Information Technology Faisal Ghani

Strategy for Entrepreneurial Organizations

3. Writing a Business Plan


A document that summarizes the business strategy and
structure. It should include:
 Business goals and objectives.
 Strategies used to achieve these goals and
objectives.
 A plan of how the entrepreneur will implement
these strategies.

Chapter 10 Managing New Venture Formation and Entrepreneurship 9


City University of Science and Information Technology Faisal Ghani

Structure of Entrepreneurial Organizations


Starting a New Business
 Buying an Existing Business
 Business has a proven ability to draw customers and make a
profit (the business is a going concern).
 Networks (e.g., customers and suppliers) are already established.
 Negative: New owners inherit any existing problems.
 Starting from Scratch
 Avoids problems associated with previous owners.
 Freedom to choose suppliers, equipment, location, and workers.
 Negative: More business risk and uncertainty.

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City University of Science and Information Technology Faisal Ghani

Structure of Entrepreneurial Organizations


Where are
Who are my they?
customers?
At what price
In what will they buy
quantities my product?
will they How will my
buy? product vary
from those of
Who are my
my
competitors
competitors?
?

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City University of Science and Information Technology Faisal Ghani

Structure of Entrepreneurial Organizations


Financing the New Business
 Personal Resources
Using your own money and money borrowed from
friends and relatives to finance the business.
 Strategic Alliances
Partnering with established firms such as suppliers in a
mutually beneficial relationship.
 Lenders
Obtaining funding from traditional lenders (e.g., banks,
independent investors, and government loans).
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City University of Science and Information Technology Faisal Ghani

Structure of Entrepreneurial Organizations


Franchising
Franchising Agreement
A contract between an entrepreneur (the franchisee) and a
parent company (the franchiser); the entrepreneur pays the
parent company for the use of the trademark, products,
formula, and business plans.

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City University of Science and Information Technology Faisal Ghani

Structure of Entrepreneurial Organizations


Franchising
Advantages Disadvantages
 Reduced financial risk  Start-up fees to purchase
of new business franchise.
success through  Limitations of franchise
experience provided by (market area, product,
franchiser. customers).
 Training, financial, and  Imposed operational
management support controls of franchiser.
by franchiser.
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City University of Science and Information Technology Faisal Ghani

The Performance of Entrepreneurial Organizations


Reasons of Failure
 Managerial incompetence/ inexperience of the
entrepreneur.
 Neglect in not devoting sufficient time and effort to the
business.
 Weak control systems that do not warn of impending
problems.
 Insufficient capital to sustain the business until it starts
to turn a profit.

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City University of Science and Information Technology Faisal Ghani

The Performance of Entrepreneurial Organizations


Reasons of Success
 Hard Work, Drive and Dedication
 Market Demand for Products or Services Provided
 Managerial Competence
 Luck?
 Strong Control Systems
 Sufficient Capitalization

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