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Management

Fifteenth Edition

Chapter 10

Entrepreneurial Ventures

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Learning Objectives

10.1 Define entrepreneurship and explain why it’s important.

10.2 Explain what entrepreneurs do in the planning process for new ventures.

10.3 Describe the six legal forms of organization and the choice of appropriate organizational structure.

10.4 Describe how entrepreneurs lead organizations.

10.5 Explain how managers control organizations and exit the venture.

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What is Entrepreneurship?

Entrepreneurship: the process of starting new businesses, generally in response to opportunities
Entrepreneurial ventures: organizations that pursue opportunities, are characterized by innovative practices, and have growth and profitability as their main goals

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Small Business Versus Entrepreneurship

A small business is an organization that is independently owned, operated, and financed.
Small business owners see risk where entrepreneurs see opportunity.
Entrepreneurs want to change the world and have a passion that goes beyond profits.
Small business owners want to make a living.

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Entrepreneurship Versus Self-Employment?

Self-employment: individuals who work for profit or fees in their own business, profession, trade, or farm.

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Why is Entrepreneurship Important?

Innovation
Economic growth
Job creation
Global entrepreneurship

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The Entrepreneurial Process

1. Explore the entrepreneurial context

2. Identify opportunities and possible competitive advantages

3. Start the venture

4. Manage the venture

Entrepreneurs must address four key steps as they start and manage their entrepreneurial ventures. The first is exploring the entrepreneurial context. The context includes the realities of today’s economic, political/legal, social, and work environment. It’s important to look at each of these aspects of the entrepreneurial context because they determine the “rules” of the game and which decisions and actions are likely to meet with success. The next step in the entrepreneurial process is starting the venture. Included in this phase are researching the feasibility of the venture, planning the venture, organizing the venture, and launching the venture.

Finally, once the entrepreneurial venture is up and running, the last step in the entrepreneurial process is managing the venture, which an entrepreneur does by managing processes, managing people, and managing growth.

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What Do Entrepreneurs Do?

No two entrepreneurs are exactly the same. Generally, they:

Create something new and different
Search for, respond to, and exploit change
Research feasibility
Launch and manage new ventures

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A Hybrid Path to Entrepreneurship

Over half of new-venture start-ups fail in the first four years.
One way to increase the odds of success is to keep your day job and start the venture on the side.

Lets you test ideas with less pressure to make a living.
It’s a lower risk path with higher survival rates.

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Identifying Environmental Opportunities and Competitive Advantage

Sources of opportunity:

The unexpected
The incongruous
The process need
Industry and market structures
Demographics
Changes in perception
New knowledge

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Researching the Venture’s Feasibility—Ideas

When exploring idea sources, entrepreneurs should look for:

Limitations of what is currently available
New and different approaches
Advances and breakthroughs
Unfilled niches
Trends and changes

It’s important for entrepreneurs to research the venture’s feasibility by generating and evaluating business ideas. Entrepreneurial ventures thrive on ideas. Generating ideas is an innovative, creative process. Where do ideas come from?

Studies of entrepreneurs have shown that the sources of their ideas are unique and varied. One survey found that “working in the same industry” was the major source of ideas for an entrepreneurial venture (60 percent of respondents). Other sources included personal interests or hobbies, looking at familiar and unfamiliar products and services, and opportunities in external environmental sectors (technological, sociocultural, demographics, economic, or legal-political).

What should entrepreneurs look for as they explore these idea sources? They should look for limitations of what’s currently available, new and different approaches, advances and breakthroughs, unfilled niches, or trends and changes.

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Exhibit 10.1 Evaluating Potential Ideas

Personal Considerations	Marketplace Considerations
Do you have the capabilities to do what you’ve selected?	Who are the potential customers for your idea: who, where, how many?
Are you ready to be an entrepreneur?	What similar or unique product features does your proposed idea have compared to what’s currently on the market?
Are you prepared emotionally to deal with the stresses and challenges of being an entrepreneur?	How and where will potential customers purchase your product?
Are you prepared to deal with rejection and failure?	Have you considered pricing issues and whether the price you’ll be able to charge will allow your venture to survive and prosper?
Are you ready to work hard?	Have you considered how you will need to promote and advertise your proposed entrepreneurial venture?
Do you have a realistic picture of the venture’s potential?
Have you educated yourself about financing issues?
Are you willing and prepared to do continual financial and other types of analyses?

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Feasibility Study

Feasibility study: an analysis of the various aspects of a proposed entrepreneurial venture designed to determine its feasibility

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Researching the Venture’s Feasibility—Competitors

Potential questions include:

What types of products or services are competitors offering?
What are their products’ strengths and weaknesses?
How do they handle marketing, pricing, and distribution?
How do they attempt to do differently from other competitors?

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Researching the Venture’s Feasibility—Financing

Venture capitalists: external equity financing provided by professionally managed pools of investor money
Angel investors: a private investor (or group of private investors) who offers financial backing to an entrepreneurial venture in return for equity in the venture
Initial public offering (I P O): the first public registration and sale of a company’s stock

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Developing a Business Plan

Business plan: a written document that summarizes a business opportunity and defines and articulates how the identified opportunity is to be seized and exploited

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Business Plan—Major Areas

Executive summary
Analysis of opportunity
Analysis of the context
Description of the business
Financial data and projections
Supporting documentation

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Legal Forms of Organization (1 of 3)

Sole proprietorship: a form of legal organization in which the owner maintains sole and complete control over the business and is personally liable for business debts
General partnership: a form of legal organization in which two or more business owners share the management and risk of the business

The first organizing decision that an entrepreneur must make is a critical one. It’s the form of legal ownership for the venture. The two primary factors affecting this decision are taxes and legal liability. An entrepreneur wants to minimize the impact of both of these factors. The right choice can protect the entrepreneur from legal liability as well as save tax dollars, in both the short and long run.

What alternatives are available? The three basic ways to organize an entrepreneurial venture are sole proprietorship, partnership, and corporation. However, when you include the variations of these basic organizational alternatives, you end up with six possible choices, each with its own tax consequences, liability issues, and pros and cons.

A sole proprietorship is a form of legal organization in which the owner maintains sole and complete control over the business and is personally liable for business debts.

A general partnership is a form of legal organization in which two or more business owners share the management and risk of the business. Even though a partnership is possible without a written agreement, the potential and inevitable problems that arise in any partnership make a written partnership agreement drafted by legal counsel a highly recommended thing to do.

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Legal Forms of Organization (2 of 3)

Limited liability partnership (L L P): a form of legal organization consisting of general partner(s) and limited liability partner(s)
Corporation: a legal business entity that is separate from its owners and managers
Closely held corporation: a corporation owned by a limited number of people who do not trade the stock publicly

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Legal Forms of Organization (3 of 3)

S corporation: a specialized type of corporation that has the regular characteristics of a C corporation but is unique in that the owners are taxed as a partnership as long as certain criteria are met
Limited liability company (L L C): a form of legal organization that’s a hybrid between a partnership and a corporation
Operating agreement: the document that outlines the provisions governing the way an L L C will conduct business

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Exhibit 10.2 Legal Forms of Business Ownership (1 of 3)

Structure	Ownership requirements	Tax treatment	Liability	Advantages	Drawbacks
Sole proprietorship	One owner	Income and losses “pass through” to owner and are taxed at personal rate	Unlimited personal liability	Low start-up costs, freedom from most regulations, owner has direct control, all profits go to owner, easy to exit business	Unlimited personal liability, personal finances at risk, miss out on many business tax deductions, total responsibility, may be more difficult to raise financing
General partnership	Two or more owners	Income and losses “pass through” to partners and are taxed at personal rate; flexibility in profit-loss allocations to partners	Unlimited personal liability	Ease of formation, pooled talent, pooled resources, somewhat easier access to financing, some tax benefits	Unlimited personal liability, divided authority and decisions, potential for conflict, continuity of transfer of ownership

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Exhibit 10.2 Legal Forms of Business Ownership (2 of 3)

Structure	Ownershp requirements	Tax treatment	Liability	Advantages	Drawbacks
Limited liability partnership (LLP)	Two or more owners	Income and losses “pass through” to partners and are taxed at personal rate; flexibility in profit-loss allocations to partners	Limited, although one partner must retain unlimited liability	Good way to acquire capital from limited partners	Cost and complexity of forming can be high, limited partners can’t manage w/o losing liability protection
C Corporation	Unlimited number of shareholders, no limits on types of stock or voting arrangement	Dividend income taxed at corporate and personal shareholder levels, losses and deductions are corporate	Limited	Limited liability, transferable ownership, continuous existence, easier access to resources	Expensive to set up, closely regulated, double taxation, extensive record keeping, charter restrictions

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Exhibit 10.2 Legal Forms of Business Ownership (3 of 3)

Structure	Ownership requirements	Tax treatment	Liability	Advantages	Drawbacks
S corporation	Up to 75 shareholders, no limits on types of stock or voting arrangement	Income and losses “pass through” to partners and are taxed at personal rate; flexibility in profit-loss allocations to partners	Limited	Easy to set up, limited liability and tax benefits of partnership, can have tax-exempt entity as shareholder	Must meet certain requirements, may limit future financing options
Limited liability company (LLC)	Unlimited number of “members,” flexible membership arrangements for voting rights and income	Income and losses “pass through” to partners and are taxed at personal rate; flexibility in profit-loss allocations to partners	Limited	Greater flexibility, not constrained by regulations on C and S corporations, taxed as partnership not corporation	Cost of switching from one form to this can be high, need legal and financial advice in forming operation agreement

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Organizational Design and Structure

Organizational design decisions in entrepreneurial decisions revolve around six key elements:

work specialization
departmentalization
chain of command
span of control
amount of centralization/decentralization
amount of formalization

The choice of an appropriate organizational structure is also an important decision when organizing an entrepreneurial venture. At some point, successful entrepreneurs find that they can’t do everything alone. More people are needed. The entrepreneur must then decide on the most appropriate structural arrangement for effectively and efficiently carrying out the organization’s activities. Without some suitable type of organizational structure, the entrepreneurial venture may soon find itself in a chaotic situation.

Organizational design decisions in entrepreneurial ventures revolve around the six key elements of organizational structure: work specialization, departmentalization, chain of command, span of control, amount of centralization/decentralization, and amount of formalization. Decisions about these six elements will determine whether an entrepreneur designs a more mechanistic or organic organizational structure.

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Human Resource Management

Employee recruitment
Employee retention

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Personality Characteristics of Entrepreneurs

Proactive personality: a personality trait that describes individuals who are more prone to take actions to influence their environments

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Motivating Employees Through Empowerment

Employee empowerment—giving employees the power to make decisions and take actions on their own to solve problems—is an important motivational approach.

Why? Because successful entrepreneurial ventures must be quick and nimble, ready to pursue opportunities and go off in new directions. Empowered employees can provide that flexibility and speed. When employees are empowered, they often display stronger work motivation, better work quality, higher job satisfaction, and lower turnover.

If an entrepreneur implements employee empowerment properly—that is, with complete and total commitment to the program and with appropriate employee training— results can be impressive for the entrepreneurial venture and for the empowered employees. The business can enjoy significant productivity gains, quality improvements, more satisfied customers, increased employee motivation, and improved morale. Employees can enjoy the opportunities to do a greater variety of work that is more interesting and challenging.

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The Entrepreneur as Leader

Leading the venture
Leading employee work teams

Today’s successful entrepreneur must be like the leader of a jazz ensemble known for its improvisation, innovation, and creativity. Max DePree, former head of Herman Miller, Inc., a leading office furniture manufacturer known for its innovative leadership approaches, said it best in his book, Leadership Jazz, “Jazz band leaders must choose the music, find the right musicians, and perform—in public. But the effect of the performance depends on so many things—the environment, the volunteers playing the band, the need for everybody to perform as individuals and as a group, the absolute dependence of the leader on the members of the band, the need for the followers to play well.…The leader of the jazz band has the beautiful opportunity to draw the best out of the other musicians. We have much to learn from jazz band leaders, for jazz, like leadership, combines the unpredictability of the future with the gifts of individuals.”

Employee work teams tend to be popular in entrepreneurial ventures. An Industry Week Census of Manufacturers showed that nearly 68 percent of survey respondents used teams to varying degrees. For team efforts to work, however, entrepreneurs must shift from the traditional command-and-control style to a coach-and-collaboration style.

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Exhibit 10.3 Strengths of Entrepreneurs

Risk: Can manage high-risk situations; mitigating risk rather than seeking it

Knowledge: Strives to acquire in-depth information about the industry

Independence: Can manage every aspect of his/her organization

Confidence: Believes in oneself and his/her ability to succeed

Delegation: Unafraid to assign tasks to others

Determination: Strong work ethic; undeterred by failure

Relationships: Able to build mutually beneficial relationships

Selling: Speaks boldly on behalf of the organization; can influence others

Profitability: Sets clear goals; measures progress; good judge of opportunities

Disruption: Constantly has new ideas for products and services

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Venture Stages and Leadership Needs

Start-up stage: The entrepreneur is the heart and soul of the business. The firm is informal, flexible, and ambiguous.
Transition stage: The venture moves from an informal organization to one that is more structured. The entrepreneur must learn to delegate in this stage.
Scaling stage: The uniqueness of entrepreneurship is gone, and the concepts of management become generalizable.

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Potential Control Problems and Actions

Entrepreneurs need to develop controls in these areas:

Keep a close eye on the numbers: Monitor expenses, cash flow, inventory, etc.
Monitor the competition: Competitive intelligence is key to long-term success.
Maintain regular contact with customers: Make sure your customers are still satisfied with your product.
Monitor employee performance: Are employees continuing to work as expected. Do they need training?
Monitor employee workloads: Are key people trying to do too much?

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Exiting the Venture

Harvesting: exiting a venture when an entrepreneur hopes to capitalize financially on the investment in the venture

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Five Exit Options

Merger or acquisition
Selling to a friendly buyer
Initiate an I P O
Treat it as a cash cow
Liquidation

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Business Valuation Methods

Asset valuations
Earnings valuations
Cash-flow valuations

Setting a value on a business can be a little tricky. In many cases, the entrepreneur has sacrificed much for the business and sees it as his or her “baby.” Calculating the value of the baby based on objective standards such as cash flow or some multiple of net profits can sometimes be a shock. That’s why it’s important for an entrepreneur who wishes to exit the venture to get a comprehensive business valuation prepared by professionals.

Although the hardest part of preparing to exit a venture is valuing it, other factors also should be considered. These factors include being prepared, deciding who will sell the business, considering the tax implications, screening potential buyers, and deciding whether to tell employees before or after the sale. The process of exiting the entrepreneurial venture should be approached as carefully as the process of launching it. If the entrepreneur is selling the venture on a positive note, he or she wants to realize the value built up in the business. If the venture is being exited because of declining performance, the entrepreneur wants to maximize the potential return.

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Review Learning Objective 10.1

Define entrepreneurship and explain why it’s important.

Entrepreneurial ventures are characterized by innovative practices and have growth and profitability as their main goals
Entrepreneurship is important because it brings forward innovative ideas, creates new start-up firms, and creates jobs.

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Review Learning Objective 10.2

Explain what entrepreneurs do in the planning process for new ventures.

Entrepreneurs must identify environmental opportunities and competitive advantage
They must research a venture’s feasibility, first generating and then evaluating ideas
Feasibility study
Business plan

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Review Learning Objective 10.3

Describe the six legal forms of organization and the choice of appropriate organizational structure.

Two primary factors that affect the decision about how to organize a business are taxes and legal liability:

Sole proprietorship
General partnership
Limited liability partnership (L L P)
Corporation
S corporation
Limited liability corporation (L L C)

In a sole proprietorship, the owner maintains sole and complete control over the business and is personally liable for business debts.

In a general partnership, two or more owners share the management and risk of the business.

A limited liability partnership is formed by general partner(s) and limited partner(s).

A corporation (C corporation) is a legal business entity that is separate from its owners and managers. It is a closely held corporation when it is owned by a limited number of people who do not trade the stock publicly.

An S corporation is a corporation that is unique because the owners are taxed as a partnership as long as certain criteria are met.

A limited liability company (LLC) is a hybrid between a partnership and a corporation.

As an organization grows, the entrepreneur must decide on an appropriate structure for the organization. The entrepreneur must also face human resource management issues such as employee recruitment and employee retention. Entrepreneurs must be open to initiating change and must also continue to innovate.

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Review Learning Objective 10.4

Describe how entrepreneurs lead organizations.

Personality traits:

High level of motivation
Abundance of self-confidence
Ability to be involved for the long term
High energy level

Proactive personality trait

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Review Learning Objective 10.5

Explain how managers control organizations and exit the venture.

Managing growth:

Planning for growth
Organizing for growth
Controlling growth

Managing downturns
Exiting the venture:

Harvesting
Valuation methods

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