GB 370 Unit 2 Notes The Nature of Entrepreneurship • Entrepreneurship: o The process of planning, organizing, operating, and assuming the risk of a business • Entrepreneur o Someone who engages in entrepreneurship • Small Business o A business that is privately owned by one individual or a small group of individuals; it Don't forget about the age old question of What does enthymeme mean?
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has sales and assets that are not large enough to influence its environment Predictable or Not • Some are natural o Michael Dell: (sold newspapers o Steve Jobs o Bill Gates • Some came later o Howard Schultz (essentially created/runs Starbucks) o Colonel Sanders (KFC business) • Some got lucky o Roxanne Quimby (Burt’s Bees) The Role of Entrepreneurship in Society: • Research Findings: o Most new businesses fail, those that survive often do so because the entrepreneur works for little income o More than 98% of US Businesses 100 employees or fewer o Most U.S. workers work for small businesses o The majority of small businesses are owner operated (person who started it still probably runs it today) o Small business is a strong presence in both mature and emerging economies o Small businesses have a strong effect on job creation, innovation, and are important to big businesses The Importance of SMBs in the United States: Most exports, and most new jobs come in the back of these SMBs - most SMBs in US are concerned with services Easy to get into retail if you’re a mom and pop boutique because Entrepreneurship’ s Role in Society • Small Businesses’ Role in Job Creation o Create many of the new jobs in the U.S. o Dominate sectors that have added the most jobs o Represent 92% of all U.S. exporters • Innovation o Major innovations are just as likely to come from SMBs as from large firms o Much of what is created in the high-technology sectors comes from start-up companies Representative Jobs Created and Lost between 2007-2008 Job Losses: Aetna Walmart Home Depot Verizon Communications, Sprint Nextel Corp Johnson & Johnson IBM Merck Pfizer Caterpillar Job Gains: Whole Foods Market Microsoft T-Mobile Google Nordstrom Cisco Systems Deloitte Accenture Edward Jones Entrepreneurship’s Role in Society (Cont’d) • Importance to Large Businesses o Most products made by large manufacturers are sold to customers by small businesses o SMBs as suppliers provide large firms with essential services, supplies, and raw materials o Large businesses outsource many routine business operations such as packaging, delivery, and distribution to SMB Small Businesses (Businesses with < 20 employees) By Industry:• Services are the fastest growing segment of small-business enterprise • continued job growth requires new firms What Questions are we answering today? 1. how do entrepreneurs get an idea? 2. Once i have an idea, how do I build a story around that business? 1. to attract customers 2. to attract financing 3. Do I need a totally original idea? 1. what is franchising? 4. What do I need to think about for legal structures? Chumming: get interest from someone to buy it then they will; example: Jimmy Johns handing out free sandwiches on UM campus Entrepreneurship is a process Pursuit of opportunity without regard to resources currently controlled: ❖ Approach 1: Get Lucky • Inspiration through an open mind and asking dumb questions • One day i opened a bottle of Snapple Element to drink and thought “why can’t Pine-Sol smell like this? What if this was a cleaning product?” ❖ Approach 2: Ask People • Ask people their opinions, thoughts, questions ❖ Approach 3: Brainstorming • Define your purpose • Choose participants • Choose a facilitator • Brainstorm spontaneously, copiously • No criticism, no negatives Getting into the Game: • Identifying a Genuine Business Opportunity: who are my customers? Where are they? In what quantities will they buy? At what price will they buy my product? Who are my competitors? How will my product differ from those of my competitors Problem: Customers Don’t know what they want! “If I had asked people what they wanted, they would have said faster horses” –Henry Ford (people are familiar with what they do all of the time) Writing a Business Plan • Business Plan: a document that summarizes the business strategy and structure. It should include: o Business goals and objectives o Strategies used to achieve these goals and objectives o A plan of how the entrepreneur will implement these strategies • Entrepreneurship and International Management o Expansion and growth potential in foreign markets o Entering a foreign country’s market can be an important catalyst for success Market Shift Markets start off very small; customers never know what they want! Process • Idea: becomes an opportunity that creates a lasting value o Market analysis o Customer analysis o Competitive analysis • Business Canvas Explanation of Business Model Canvas helps us create concept of customers, what we need to provide value, fast, not as restrictive 9 basic building blocks tool that helps you map, discuss, design new business models each segment has specific value proposition key partnerships, key resources, key activities, customer relationships, cost structure, channels, customer segments, etc. gets you to focus on talking to and identifying customers right away in a way that is clever and cheap example: Man Men the secretaries type a lot of letters; secretary pool primarily concerned with copying stuff (no copiers back then); if you are trying to sell a copier and you go to sell it, the man would say “why do i need a copy machine i already have secretaries”; nobody wanted to pay $$$$ Xerox company wants to put it in a way they know it creates value with little up front cost---what should they do? Lease it to them instead of selling it to them. No one actually owns a Xerox machine except for Xerox Xerox by never allowing anyone to own a copy machine protected their property and made them money conclusion: Canvas Definitions: • Infrastructure o Key activities, resources (we need to have these things) • Offering o What value is offered (that customers cant get from someone else) • Customers o Segments, channels, relationships -require special attention -individual customers and businesses as customers • Finances o Costs & revenue Linked In: (example of Business Model Canvas) • Key Partners Data Centers Content producers • Key activities built platform • key resources linked in platform • value proposition: help people build a professional identify help companies reach and identify talent help marketers identify target audiences • customer relationships network effects between customers networks between companies • Channels AppWebpage In-Office Selling • Customer Segments Internet users Recruiters Advertisers & marketers • Cost structure web hosting marketing product development administration/overhead • revenue streams free offerings and premium upgrades hiring solutions marketing solutions Lean Start-up: • very hot right now • focus is experimentation and creating a framework to change strategy • borrows deeply from “crossing the Chasm” by Gordon Moore and Clayton Christensen on innovation • Scientific Management for the 20-teens o The Lean Startup o Startup Owner’s Manual Three Parts: PART 1: • Vision: what is the idea and how are you defining it? • Experiment: o What is the most basic premise of your idea? (not as easy as it sounds) o Pay attention o Netflix ▪ ➢ MVPs: Minimum Viable Product o Put down something that is close o Strip out all essential features (- MVP for Netflix: DVD rental store online) • Brand Name? o Get customers on board with the beta version ▪ they do understand (crossing the chasm) o don’t use your name if you’re scared !• Mr. Gentry’s favorite: SmoekScreen –there is not actual product but we gauge interest by selling like there is (6-8 weeks for delivery_ PART 2: • Steer o Do not hypothesize the customer o Avoid castles in the sky (hockey stick curves, delays) • Measuring o Scientific management requires incredible amounts of data o Take every opportunity to experiment (split halves, short duration) o For example, Amazon with monthly Prime pricing (experiment lasted 10 days in November of 2012) • Harder when you’re big • CUT BAIT if it doesn’t work, stop doing it PART 3: • Accelerate o Similar to the “Nail it then Scale it” premise o Keep production batches small (even if it is a service) ▪ No, you will not scale but you’re placing less at risk ▪ The ability to learn faster from customers is the essential competitive advantage that startups MUST possess (pg. 193) • “Startups move from failure to failure; they are not small versions of large companies” – Steve Blank • We have to embrace that rather than build a bullet proof business plan Structure of Entrepreneurial Organizations: ❖ Starting the New Business • Buying an Existing Business ( go through a “business broker”) o Business has a proven ability to draw customers and make a profit (the business is a going concern). o Networks (e.g. customers and suppliers) are established o Negative: New owners inherit any existing problems • Starting from Scratch o Avoids problems associated with previous ownerso Freedom to choose suppliers, equipment, location, and workers o Negative: more business risk and uncertainty; (expensive, a lot of up front costs, high chance of failure due to the unknown) Someone else might have thought of it – Franchising: • The Franchising Agreement o Governs the operation of a franchise business by the entrepreneur (the franchisee) under a license by a parent company (the franchiser) o The entrepreneur pays the parent company for use of trademarks, products, formulas, and business plans • Franchising Advantages: o Reduced financial risk of new business success through experience provided by franchiser o Training, financial, and management support by franchiser • Franchising Disadvantages: o Start-up fees to purchase franchise o Limitations of franchise (market area, product, customers); restrict how far you can grow as a franchise o Loss of independence due to imposed operational controls of franchiser Picking a Franchise • Entrepreneur magazine has a long and awesome list • Current winners: o Hampton Inn by Hilton o Anytime Fitness ($60k-400k) o Subway ($110k-250k) • Supercuts o Net Worth of $500k o Liquid cash of $150k o Franchise fee $30k o Royalty - 6% Getting Started: Legal Structures: • Sole Proprietorship o Easy!!! • Partnership • Corporationo C Corp o S Corp o LLC ➢ Sole Proprietorship • The simplest structure, with usually one individual who owns and operates the enterprise • A good choice if you want to work alone • The tax aspects are appealing because it is included on your personal income tax return • The disadvantages: o Personally responsible for your company’s liabilities o Raising the money could be difficult ➢ Partnership • Two Kinds: general and limited partnerships • In a general partnership, the partners manage the company and assume responsibility for the partnership’s debts and other obligations • A limited partnership has both general and limited partners. The general partners own and operate the business and assume liability, while the limited partners act as investors only o Limited Partner can do nothing with the business • A major advantage of partnership is the tax treatment • Personal liability is a major concern of a general partnership. They also require more legal and accounting services • if you use a partnership, be sure to draft a document detailing how business decisions are made, how disputes are resolved, and how to handle a buyout ➢ Corporation • This is more complex and expensive than other business structures • It is an independent legal entity, separate from its owners, requiring more regulations and tax requirements • The business owner benefits by the liability protection • Another plus of a corporation is the ability to raise money, sell stock, and continue indefinitely • Corporations are formed under the laws of each state with its own set of regulations • Downsides/Disadvantages of corporations: o Higher costso More complex regulations than a partnership or sole proprietorship o Requires more accounting and tax preparation services o Owners of the corporation pay a double tax on the business’s earnings view page 44 of unit 2 lecture slides for Tax Structures ❖ S Corporation • More attractive to SMBs owners than a regular corp. due to appealing tax benefits while still providing business owners liability protection • Owners of S corporations who don’t have inventory can use the cash method of accounting, which is simpler than the accrual method • They have up to 100 shareholders, making it possible to have more investors and attract more capital • Gets a little shady –the 100 shareholder rules mean that you can get through a lot • Downsides: o High legal and tax services costs o Must file articles of incorporation, hold directors and shareholders meetings, keep corporate minutes, and allow shareholders to vote on major corporate decisions • Differences in S and C: o S Corporations only issue one class of stock o S corporations can only be owned by individuals, estates, and certain types of trusts What you will ultimately do Setting up an LLC: • If limited liability is not a concern, you could begin as a sole proprietorship or a partnership • After you have profits, you may want to consider another legal structure • To start an LLC, file articles of organization with the secretary of state where you plan to do business and plan accordingly if you plan to do business in multiple states Financing the New Business: ➢ Sources of New Business Financing: o Personal resources o Strategic alliances o Lenderso Venture capital companies o SMB Investment companies o SBA Financial Programs The Performance of Entrepreneurial Organizations: • Trends in New Business Start- Ups Gig Economy (down); increased entrepreneurial opportunities for minorities and women (up) crossovers to SMB by former large-business employees (down) better survival rates for small businesses (up) Success in Entrepreneurial Organizations: Reasons for Failure: 1. Managerial incompetence/ inexperience of the entrepreneur. 2. neglect in not devoting sufficient time and effort to the business 3. weak control systems that do not warn of impending problems 4. insufficient capital to sustain the business until it starts to turn a profit New Hotness Right Now: • Internet of things • Autonomous Vehicles • Additive manufacturing • FinTech • Tracking customers/making data Reasons for Success: 1. Hard work, drive and dedication by the entrepreneur 2. Careful analysis of mkt. conditions provides insights about business conditions 3. Managerial competence through training and experience contributes to success 4. Luck sometimes plays a role