L-6 Entrepreneurship

THE ENTREPRENEURSHIP ALTERNATIVE

What are the differences among entrepreneurs, small-business owners, and managers? What are the similarities?

An entrepreneur is a risk taker in the private enterprise system, someone who sets up his own business. However, you don’t have to start your business from scratch to be considered an entrepreneur. You can inherit a business or buy a business. Sam Walton, the founder of Wal-Mart, started by purchasing a small store, acquired one of the early discount retailers, and then launched his own store.

Although some small business owners try to make their business grow, others are simply looking for a steady income. Different to many small business owners, an entrepreneur tries to make his business grow. Entrepreneurs combine their ideas and drive with money, employees, and other resources to create a business that fills a market need.

Entrepreneurs are visionaries with the aim of creating wealth and adding jobs. There are also some similarities between managers and entrepreneurs. Both managers and entrepreneurs use the resources of their companies to achieve the goals of those organizations.

Studies of entrepreneurs have identified certain personality traits and behaviors common to them that differ from those required for managerial success. One of these traits is the willingness to assume the risks involved in starting a new venture. Some employees leave their jobs to start their own companies and become successful entrepreneurs. Others find that they lack the characteristics required to start and grow a business.

Categories of Entrepreneurs

The three categories of entrepreneurs are classic entrepreneurs, intra-preneurs, and change agents. A classic entrepreneur identifies a business opportunity and allocates available resources to tap that market. One example of a classic entrepreneur is Russell and Kimora Simmons. Russell Simmons founded a talent management company and soon expanded with a start-up music label (Def Jam Recordings). He also launched a men’s sportswear line that became successful, and followed up by launching, with his wife, a women’s clothing line, jewelry and cosmetics business.

An intra-preneur is an employee who develops a new idea or product within the context of an organizational position. For example, 3M Company continues to develop innovative products by encouraging intra-preneurship among its personnel. Some of 3M’s most successful products began as inspirations of intra-preneurs. Art Frey invented the Post-It Note, and intra-preneurs Connie Hubbard and Raymond Heyer invented the Scotch-Brite Never Rust soap pad – which has uses around the house in cleaning floors, walls and removing pet hairs from sofas and chairs.

A change agent, or turn-around entrepreneur, is a manager who tries to revitalize an existing firm that is having problems to make it a competitive success. Elisabeth Robert played this role at Vermont Teddy Bear Company. She found out that the company was following an unfocused strategy, which she changed into a more targeted one, to change the fortunes of the firm.

Reasons for becoming an entrepreneur

Over the past 20 years, a heightened interest in entrepreneurial careers has been observed, spurred in part by publicity celebrating the success of entrepreneurs like Virgin boss Richard Branson and Pierre Omidyar, who founded eBay and Oprah Winfrey, who has used her immensely popular television program as the springboard for ventures into magazine publishing and TV and film production, Michael Dell and Bill Gates.

The four main reasons are

·    desire to be own boss

·    to achieve financial success

·    to gain job security

·    to improve quality of life

Recent years has seen increased interest in starting a business, spurred on by the success of well-known entrepreneurs like Michael Dell, who started Dell computers, and Bill Gates of Microsoft.

People choose to become entrepreneurs for many different reasons. Some are motivated by dissatisfaction with the organizational work world, citing desires to escape unreasonable bosses or insufficient rewards and recognition as motives to start their own firms.

Many have the desire to be their own boss. Self-management is the motivation that drives many entrepreneurs. They want control over when, where, and how they work, such as Liz Lange, who started her own maternity wear firm after finding an opening in the market.

Entrepreneurs are motivated by the possibility of financial success. Entrepreneurs are wealth creators. They believe they won’t become rich by working for someone else. Research shows that self-employed Americans are four times as likely to accumulate a million dollars as those who work for someone else.

Another factor is job security, as large firms sought efficiency by downsizing (laying off workers) following recent events. Among the hardest hit are the youngest and least experienced workers. When the unemployment rate hit 6% in 2003, the jobless rate among 20-24 year olds was 9.7%. Even college graduates accepted contract positions to earn incomes.

Entrepreneurship is an attractive career option for people seeking to improve their quality of life. Starting a business gives the founder some choice over when, where, and how to work.

The Environment for Entrepreneurs

The environment for starting your own business has never been better. The status of entrepreneurship has been rising and there has been a movement of entrepreneurship toward the business mainstream. Today’s entrepreneurs are also benefiting from financial interest among investors and the applications made possible by new technology. The expanded opportunities for entrepreneurs are supported by four factors; globalization, education, information technology and demographic/economic trends.

Globalization has created many opportunities for entrepreneurs. Entrepreneurs are marketing their products abroad and hiring international talent. For example, William Heinecke moved to Thailand and started several businesses including franchising over there successfully. 40% of US small companies have international sales.

Also, in the education sector, there are many opportunities for entrepreneurship promotion by colleges by offering courses in entrepreneurship. Some business schools are helping their students start businesses.

The emergence in information technology (IT) has provided one of the biggest boosts for entrepreneurs. IT helps entrepreneurs work quickly and efficiently, provide attentive customer service, increase sales, and project professional images. One example is where the owner created a business plan with Excel spreadsheets, and set up payroll and tax systems using Quick Books. Advances in IT have created demand for new products, and entrepreneurs have risen to the challenge. The internet has also created opportunities for entrepreneurs.

Demographic changes also sometime also offer opportunities to entrepreneurs. In the States, the emergence of the Hispanic community and the growth of two-income families will open opportunities for new business ideas.

Comparing across countries, it can be seen that entrepreneurial activity is higher in North America than in Europe.

Ways entrepreneurs influence the overall economy

Entrepreneurs play a significant role in the economy as a major source of innovation and job creation. Entrepreneurship also provides many opportunities for women and minorities, who may encounter limits to their progress in established businesses. Entrepreneurs create new products, build new industries, and bring new life to old industries. ‘Gazelles’, fast-growing start-ups, create about two-thirds of the new jobs created overall in the US economy over the recent three year period. As discussed in earlier class, women and minorities are behind many of the new start-ups in business every year. Many large firms in the US are supporting these entrepreneurs by providing start-up capital (known as ‘seed’ capital).

Characteristics that are attributed to successful entrepreneurs.

Successful entrepreneurs share several typical traits, including:

·    vision

·    high energy levels

·    need to achieve

·    self-confidence and optimism

·    tolerance for failure

·    creativity

·    tolerance for ambiguity

·    Internal locus of control.

Entrepreneurs begin with a vision, an overall idea for how to make their business idea a success, and then they passionately pursue it. Bill Gates, for example, had a vision of their software running every computer, and they worked hard to make Microsoft the world’s largest marketer of computer software. One of the best inventors of the 21^st century is Dean Kamen, who invented the first portable insulin pump and also the heart stent. His latest creation is the Segway Human Transporter, a two-wheeled self-balancing electric-powered super scooter that allows people to zip along sidewalks at 10 miles per hour.

Entrepreneurs need to have a high energy level as starting and building a company requires enormous amount of hard work and long hours. A major reason entrepreneurship demands hard work is that start-up companies typically have a small staff and struggle to raise enough capital.

Entrepreneurs work hard because they want to excel. Their strong competitive drive helps them to enjoy the challenge of reaching difficult goals and promotes dedication to personal success.  Entrepreneurs believe in their ability to succeed, and they instill their optimism in others. Often, their optimism resembles fearlessness in the face of difficult odds. Entrepreneurs also have a tolerance for failure and view setbacks and failures as learning experiences. They’re not easily discouraged or disappointed when things don’t go as planned. Entrepreneurs typically conceive new ideas for goods or services and they succeed by making creative improvements. Dealing with unexpected events is the norm for most entrepreneurs, for some the endless variety of tasks and challenges is the fundamental allure. Entrepreneurs also believe that they control their own fates, which means they have an internal locus of control.

Selecting a Business Idea

In choosing an idea for your business, the two most important considerations are

(1) Finding something you love to do and are good at doing, and

(2) Determining whether your idea can satisfy a need in the marketplace.

People willingly work hard doing something they love, and the experience will bring personal fulfillment. The old sayings “Do what makes you happy” and “To thine own self be true” are the best guidelines for deciding on a business idea.

Success also depends on customers, so would-be entrepreneurs must also be sure that the idea they choose has interest in the marketplace. The most successful entrepreneurs tend to operate in industries where a great deal of change is taking place and in which customers have difficulty pinpointing their precise needs. These industries, including advanced technology and consulting, allow entrepreneurs to capitalize on their strengths, such as creativity, hard work, and tolerance of ambiguity, to build customer relationships.

The following guidelines may help you to select an idea that represents a good entrepreneurial opportunity:

• List your interests and abilities. Include your values and beliefs, your goals and dreams, things you like and dislike doing
• Make a list of the types of businesses that match your interests and abilities
• Carefully evaluate existing goods and services, looking for ways you can improve them
• Conduct marketing research to determine whether your business idea will attract enough customers to earn a profit
• Learn as much as you can about the industry in which your new venture will operate, your merchandise or service, and your competition.

Benefits and risks involved in buying an existing business or a franchise?

Buying an existing business has some advantages, such as the following:

·    employees already in place serve established customers and deal with familiar suppliers

·    marketplace presence

·    necessary permits and licenses already secured

·    Getting finance is also easier for established firms than for new ones

A possible risk with buying a firm is that they may already have a way of doing things that they may not be flexible and able to change. There may be interpersonal problems with top management.

Most people want to buy a healthy business so that they can build on its success. In contrast, turnaround entrepreneurs enjoy the challenge of buying unprofitable firms and making enough improvement in their operations to generate new profits. Success with a turnaround strategy requires that the entrepreneur have definite and practical ideas about how to operate the business more profitably.

Buying a franchise offers a less risky way to begin a business than starting a new one. But as we discussed earlier, franchising also involves risks. You must do your homework, carefully analyzing the franchisor’s fees and capabilities for delivering the support it promises.

 

Why is creating a business plan an important step for an entrepreneur?

Traditionally, most entrepreneurs launched their ventures without creating formal business plans. Although, planning is an integral part of managing in the 21^st century, entrepreneurs typically seize opportunities as they arise and change course as necessary.

When businesspeople do not need a large amount of cash to start their businesses, they often do not need financing from outside sources – which usually requires a business plan. A plan is required when you need outside financing, but not if you are using your own money to start companies.

In a changing market, there is not enough credible information on competition to write a detailed business plan, such as rapidly changing technology sector. For example, when Bill gates started his business, he would not have known who the competitors were or do the classic comparison of strengths and weaknesses vis-à-vis the competition.

Different types of financing entrepreneurs may seek for their businesses

Seed Capital is defined as funds used to launch a company, and depends on the nature of your business and the type of facilities and equipment you need. However, the vast majority of entrepreneurs rely on personal savings, advances on credit cards, and money from partners, family members, and friends to fund their start-ups.

Debt financing is money borrowed that has to be repaid. Loans from banks, credit card companies, and family and friends are all sources that must be repaid. The drawback to using credit cards is the high interest rates they charge. As discussed earlier, the SBA helps some new firms obtain loans by providing guarantees.

To obtain equity financing, entrepreneurs exchange a share of ownership in their company for money supplied by one or more investors. Entrepreneurs invest their own money along with funds supplied by other people and firms that become co-owners of the new business. Equity funds do not have to be repaid. Rather, the investors share in the success of the business. Sources of equity finance include family and friends, business partners, venture capital firms, and private investors.

A disadvantage of equity financing is that investors may not agree on the future direction of the business, and in the case of partnerships, one partner may have to buy out the other to keep operating.

Venture capitalists are business organizations or group of private individuals that invest in new and growing firms. These investors typically expect high returns, not less than 30% per year over 5 years or less. In recent years, venture capitalists concentrated in technological and communication firms. However, only 10% of their investments are in new firms, 90% are in high tech firms.

Angel investors are more likely to invest in start-ups. These are wealthy individuals willing to invest money directly in new ventures in return for equity stakes. Angel investors invest in a wide variety of new ventures, from start-ups with socially responsible missions to women entrepreneurs. As discussed earlier, the SBA has an Angel Capital Electronic Network (ACE-Net) which provides online listings to connect investors with small businesses.

What is intra-preneurship? How does it differ from entrepreneurship?

Large, established companies try to retain the entrepreneurial spirit by encouraging intra-preneurship, the process of promoting innovation within their organizational structures. Companies support these activities in varied ways, such as giving employees personal freedom to explore new products and technologies. 3M is a large US firm that allows its researchers to spend 15% of their time working on their own ideas without approval from management. In addition to traditional product development, 3M implements two intra-preneurial approaches: skunkworks and pacing programs.

A skunkworks project is initiated by an employee who conceives an idea and then recruits resources from within 3M to turn it into a commercial product. Pacing programs are company-initiated projects that focus on a few products and technologies in which 3M sees potential for rapid marketplace winners. The company provides financing, equipment and people to support such pacing projects. Some companies recognize that entrepreneurial employees often leave to form their own firms, and actually encourage workers to take the plunge.