Entrepreneurial

Ventures and Small

Businesses

Definition of Small Business Firms

A small business firm is independently
owned and operated, is not dominant in
its field, and does not engage in
innovative practices.
One that employs fewer than 500 people and has sales
of < $20 million annually.

Definition of entrepreneurial ventures

An entrepreneurial venture is any business
whose primary goals are profitability and
growth and that can be characterized by
innovative strategic practices.

Entrepreneurial Venture vs.

Small Business Firms
Small Business Firms

Entrepreneurial Ventures

1. Independently
owned and
operated
2. Not dominant in
its field
3. Not engaged in
innovative
practices

1. Primary goals
profit and growth
2. Innovative
strategic practices

Entrepreneur as Strategist
An entrepreneur as a person who organizes
and manages a business undertaking and
who assumes risk for the sake of a profit.
He is known as the ultimate strategist.
He or she makes all the strategic as well as
operational decisions.
All three levels of strategy- corporate,
business, and functional-are the concerns
of this founder and owner-manager of a
company.
Entrepreneurs
are
strategic
planners
without realizing it.

Importance of Small Businesses and

Entrepreneurial Ventures
1. 22 million
2. >95% of all businesses
3. 85% new jobs created by small firms
4. 2X R&D dollars on fundamental
research compared to large firms
5. 50% of businesses found in any
given year, not in business w/i 5
years

Use of strategic planning and strategic

management
Strategic planning is strongly related to
small business financial performance.
The reason of not using strategic
planning and management in small
businesses and entrepreneurial ventures
are as follows.
1. Not enough time
2. Unfamiliar with strategic planning
3. Lack of skills
4. Lack of trust and openness

Degree of formality
Strategic planning will be more informal
than in large corporation in small
businesses and entrepreneurial ventures
Too much formalization also reduces
productivity of the organization
Strategic planning can be used by banks
and venture capitalists when the
entrepreneur is searching for capital
It is dysfunctional to small firms to make
structured plans and written document
because small firms are far more flexible

 As entrepreneurial firm matures, its

strategic planning process tends to
become more formal.
These firms use entrepreneurial
mode at very first stage then
planning mode at growth stage and
adaptive mode at a
established
stage to
choose stability over
growth.

Usefulness of the strategic

management model
Environmental

Strategy
Formulation

Scanning
External
Societal
Environment
General Forces
Task
Environment
Industry Analysis

Internal
Structure
Chain of Command
Culture
Beliefs, Expectations,
Values

Strategy
Implementation

Evaluation
and
Control
and Control

Mission
Reason for
existence

Objectives
What results
to
accomplish
by when

Strategies
Plan to
achieve the
mission &
objectives

Policies
Broad
guidelines for
decision
making

Programs
Activities
needed to
accomplish
a plan

Resources
Assets, Skills
Competencies,
Knowledge

Budgets
Cost of the
programs

Procedures
Sequence
of steps
needed to
do the job

Process
to monitor
performance
and take
corrective
action

Performance

Feedback/Learning

Informal Questions to Begin the

Strategic Management Process in
a
Small
Company
or
Formal
Informal
Entrepreneurial
Venture
Define mission
What do we stand for?
Set objectives

What are we trying to achieve?

Formulate strategy

How are we going to get there? How can we beat the

competition?

Determine policies

What sort of ground rules should we all be following

to get the job done right?

Establish programs

How should we organize this operation to get what

we want done as cheaply as possible with the
highest quality possible?

Prepare pro forma budgets

How much is it going to cost us and where can we

get the cash?

Specify procedures

In how much detail do we have to lay things out, so

that everybody knows what to do?

Determine performance measures

What are those few key things that will

determine whether we can make it? How can we
keep track of them?

Usefulness of strategic decision

making process

Strategic Decision-Making Process

1. Develop the basic business idea
A product and/or service having target customers and/or markets
2. Scan the external environment
Locate factors in the societal and task environments that pose
opportunities and threats
3. Scan the internal factors
Objectively consider personal assets, expertise, abilities, and experience
4. Analyze the strategic factors
SWOT and SFAS Table
5. Decide go or no go
Feasibility to go or further development
6. Generate a business plan
Specify how the idea will be transformed into reality/(Strategic audit)
Framework oriented toward future
7. Implement the business plan
Action plans and procedures
8. Evaluate the implemented business plan
Compare actual performance against projected performance results

Corporate Governance
1. Simpler in entrepreneurial firms
2. Owner as manager
3. No board unless incorporated
4. Closely-held firms have passive
boards
Advisory board
A group of external business people
voluntarily meeting with owner to
discuss strategic issues

Issues in Environmental Scanning and

Strategy Formulation
Environmental
scanning
in
small
businesses is much less sophisticated
than it is in large corporations
The business is too small to justify hiring
someone to do only environmental
scanning and strategic planning.
Top managers, especially if they are the
founders, tend to believe that they know
the business and can follow it better
than anyone else.

 Most
small
business
ownermanagers rely more on internal as
opposed to external sources of
information.
Five forces of competition analysis is
impossible because small local
business do not analyze the
competitors remained in wider
geographic scope.
Small business owner or managers
personal and family needs strongly
affect a small businesss mission and

 A small company choose a stability strategy

because the entrepreneur is interested
mostly in
1. Generating employment for family members
2. Providing the family a decent living
3. Being the boss of a firm small enough that
he or she can manage it comfortably.
.Some business owners dont like a growth
strategy because of loss of control or bank
debt or sale of stock to the public
.Some managers believe that the company
will buyout by competitors if it goes to the
public

 SWOT analysis will be more focused

on
towards
entrepreneurs
characteristics-his
or
her
assets,expertise,abilities,and
experiences.
The success and growth of the
business
are
assumed
on
competencies,
motivations
and
connections etc.
Intangible
assets
such
as
leadership,strategy,human
and
intellectual
capital
are
more

Sources of innovation
Peter Drucker proposes seven sources for
innovation that should be monitored in
starting an entrepreneurial venture.
1. The unexpected
.An unexpected success, an unexpected
failure, or an unexpected outside event can
be a symptom of a unique opportunity
2. The incongruity /unease
.A discrepancy between reality and what
everyone assumes it to be or between
what is and what ought to be can create an
opportunity for innovation.

3. Innovation based on process need

.When a weak link is evident in a
particular process but people work
around it instead of doing something
about it an opportunity is present for
the person or company willing to
build a stronger one
4. Changes in industry or market
structure
.A business is ready for an innovative
product,service,or approach to the
business
when
the
underlying

5. Demographics
. Changes in the populations size, age structure,
composition, employment, level of education,
and income can create opportunities for
innovation.
6. Changes in perception,mood,and meaning
. Opportunities for innovation can develop when a
societys
general
assumptions,attitudes,and
beliefs change.
7. New knowledge
. Advances
in
scientific
and
nonscientific
knowledge can create new products and new
markets
. Advances in two different areas can sometimes
be integrated to form the basis of a new product.

Factors affecting a new ventures

success
Three factors have a substantial
impact
on
a
new
ventures
performance.
These are
1. The structure of the industry entered
2. The new ventures business strategy
3. Behavioral characteristics of the
entrepreneur

Industry structure
The chances for success are more in
rapidly changing industries than
stable industries.
Prospects are better in early, high
growth stages of development.
Competition is often less intense
Fast growth market also provides the
mistakes without serious penalty.
The patents does not provide
competitive advantage in a high
tech or in hypercompetitive industry.

 Most ventures enter into industries where

low degree of industry concentration is
present/no dominant competitors.
New venture will success with heterogeneous
products than homogeneous products.
In heterogeneous market the venture can
differentiate
its
products
with
its
competitors.
The venture will be successful when the
product is unimportant to the customers
total purchasing need.
Because the customer will test the product in
low cost manner.

Business strategy
The keys to success for most new ventures
are
1. To differentiate the product from those of
other competitors in the areas of quality
and service
2. To focus the product on customer needs in a
segment of the market in order to achieve a
dominant share of that part of the market.
.Adopting guerrilla warfare tactics, these
companies go after opportunities in market
niches too small or too localized to justify
retaliation/reject from the market leaders.

A
new venture analyzes its
competitors to assess their likely
response to the companys entry
into the market.
To continue its growth once it has
found a niche, an entrepreneurial
firm can emphasize continued
innovation and pursue natural
growth in its current markets.
The firm can also expand into
related markets in which the
companys core skills, resources,
and facilities offer the keys to

Entrepreneurial Characteristics
The
followings
are
the
entrepreneurial characteristics to a
new venture success
1. The ability to identify potential
venture opportunities better than
most people
.Focus on opportunities not on
problems
.Try to learn from failures
.Goal oriented
.Visionary

2. A sense of urgency that makes them

action oriented
.High need for achievement
.Motivation
.Internal locus of control
.Capacity to tolerate ambiguity and stress
.Strong need for control
3. A detailed knowledge of the keys to
success in the industry and the physical
stamina to make their work their lives
.Better than average education
.Significant work experience on industry

4. Access
to
outside
help
to
supplement
their
skills,knowledge,and abilities
.Networking, making friends who
have key skills and knowledge
.Close
relationships
with
investors,partners,creditors,and
employees.

Some Guidelines for New Venture

Success
Focus on industries facing substantial technological or regulatory changes,
especially those with recent exits by established competitors.
Seek industries whose smaller firms have relatively weak competitive positions.
Seek industries that are in early, high-growth stages of evolution.
Seek industries in which it is possible to create high barriers to subsequent entry.
Seek industries with heterogeneous products that are relatively unimportant to the
customers overall success.
Seek to differentiate your products from those of your competitors in ways that are
meaningful to your customers.
Focus such differentiation efforts on product quality, marketing approaches, and
customer serviceand charge enough to cover the costs of doing so.
Seek to dominate the market segments in which you compete. If necessary, either
segment the market differently or change the nature and focus of your
differentiation efforts to increase your domination of the segments you serve.
Stress innovation, especially new product innovation, that is built on existing
organizational capabilities.
Seek natural, organic growth through flexibility and opportunism that builds on
existing organizational strengths.

Issues in strategy implementation

1. Organizing and staffing the growing
company
2. Transferring ownership of the company to
the next generation
Organizing and staffing the growing company
(sub stages of small business development)
.Implementation issues arises when small
business changes as the company grows
and develops over time.
.The managerial problems arises when
companies grow from one stage to the next
stage.

 How a company can move through the

entrepreneurial stage I into a functionally
oriented, professionally managed stage II
Stage A : Existence
An entrepreneurial venture faces the
problems of obtaining customers and
delivering the promised product or service.
The organization culture is simple
The entrepreneur does everything and
directly supervises subordinates
Systems are minimal
The owner is the business

Stage B : Survival
Those ventures able to satisfy a sufficient
number of customers enter in this stage
The rest close when their owners run out
of startup capital.
Those reaching out this stage are
concerned about generating cash flow
needed to repair and replace capital
assets.
They are concerned to finance the growth
to continue satisfying the market segment
they have found
The organization structure is simple

 The major problem is finding a

manager
in
the
absence
of
entrepreneur at a modest salary
The entrepreneur will search family
member instead of hiring someone
from outside
Because we cannot found the
dedication
or
outsiders
as
entrepreneurs.
We also called lifestyle company in
this stage
Because the firm will run as per the

Stage C : Success
The firm is not only profitable but has
sufficient cash flow to reinvest in itself.
The issue in this stage is whether the
company should be used as a platform
for growth or as a means of support for
the owners.
The company will transformed into
functional organization
The entrepreneur still will have full
control over the firm
The two options are

1. Disengagement
.The company will follow stability strategy
.The company will remain in this stage
forever
.The environmental changes does not
destroy its niche
.Poor management reduce its competitive
abilities
.The company will be incorporated
.The BODs will be rubber stamp
.The strategic management decisions are
based on personal desires and the
founders background

2. Growth
.The entrepreneur risks all available cash
and borrowings to finance further growth
.Strategic and operational planning are
extensive and deeply involve the owner
.Visionary managers are hired
.The firm wants to remain at fortune 500
lists
.The company will follow team work rather
than entrepreneurs personal desires
.The personal values and philosophy of the
founder are transformed to the culture.

Stage D : Take off

The key problem in this stage are how to
grow rapidly and to finance the growth
The firm is incorporated and has sold for or
is planning to sell stock in its company via
an IPO.
The company
will formed professional
team to manage top level management
Operational and strategic planning greatly
involve the hired managers, but the
company is still dominated by the
entrepreneurs presence and stock control.

 The big issue is whether the entrepreneur will

have full control even he has lack of managerial
skills
The succession plan will be developed so as to
replace the current managers
Stage E: Resource maturity
In
this
stage
the
firm
adopted
some
characteristics of large one.
It is small and SMEs and recognized as an
important force in the industry and possible
candidate for Fortune 500.
The main problem is to incorporate the
entrepreneurial spirit of the entrepreneur in the
organization.
The firm will enter into Stage II

Transfer of power and wealth in family

business
The small businesses will have
problem when they
transfer
managerial control to the outsiders.
The outside managers will charge
more amount than the company
expected.
The founder will handover the
ownership to the family.
Some
of
the
reasons
family
businesses may fail to successfully

1. Inherited wealth destroys entrepreneurial drive

2. The entrepreneur does not allow for a
changing firm
3. Emphasis on business means the family is
neglected
4. The business financial growth cant keep up
with rising family lifestyles
5. Family members are not prepared to turn a
business
6. The business becomes an arena for family
conflicts
7. The succession planning will not succeed due
to siblings rivalry, familys refusal etc.

Transfer of power in family business

1. Phase I : Owner Managed Business
.The founder and the business are one
2. Phase II : Training and Development of New
Generation
.The family begins to identify itself with the business
3. Phase III : Partnership Between Generations
.A son or daughter of the founder will involved in
key managerial and business decisions
4. Phase 4 : Transfer of Power
.The founder will sell the company to its family
members
.The founder will be Chairman and son or daughter
will be CEO

Issues in Evaluation and Control

1. Line between debt and equity is blurred
. The retained earning column will not be shown in the
balance sheet because it will be used to acquire fixed
assets so as to reduce the burden of tax.
2. Lifestyle is part of financial statements
. Some assets are used by the family
3. Standard financial formulas dont always apply
. Short term debt is used to finance fixed assets
4. Personal preference determines financial policies
. Dividend policies are based on personal desires and
lifestyles
5. Banks combine personal and business wealth
. Personal assets are put as collateral by the bank
. If collateral is not available the owner has to pay high
interest rate.

The End