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Section 1: The Challenge of Entrepreneurship

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Essentials of Entrepreneurship and Small Business Management

Ninth Edition

Chapter 1

The Foundations of Entrepreneurship

Welcome to Chapter 1: The Foundations of Entrepreneurship, of the ninth edition of Essentials of Entrepreneurship and Small Business Management by Norman M. Scarborough and Jeffrey R. Cornwall.

Learning Objectives (1 of 3)

1. Define the role of the entrepreneur in business in the United States and around the world.

2. Describe the entrepreneurial profile.

In this chapter, you will:

1. Define the role of the entrepreneur in business in the United States and around the world.

2. Describe the entrepreneurial profile.

Learning Objectives (2 of 3)

3-A. Describe the benefits of entrepreneurship.

3-B. Describe the drawbacks of entrepreneurship.

4. Explain the forces that are driving the growth of entrepreneurship.

5. Explain the cultural diversity of entrepreneurship.

6. Describe the important role that small businesses play in our nation’s economy.

In addition, you will:

3-A. Describe the benefits of entrepreneurship.

3-B. Describe the drawbacks of entrepreneurship.

4. Explain the forces that are driving the growth of entrepreneurship.

5. Explain the cultural diversity of entrepreneurship.

6. Describe the important role that small businesses play in our nation’s economy.

Learning Objectives (3 of 3)

7. Put failure into the proper perspective.

8. Explain how an entrepreneur can avoid becoming another failure statistic.

9. Discover how the skills of entrepreneurship, including critical thinking and problem solving, written and oral communication, teamwork and collaboration, leadership, creativity, and ethics and social responsibility, apply to every career choice and every avenue of life.

In addition, you will:

7. Put failure into the proper perspective.

8. Explain how an entrepreneur can avoid becoming another failure statistic.

The World of the Entrepreneur (1 of 2)

Every year U.S. entrepreneurs launch more than 6.6 million new businesses.

Entrepreneurial spirit - the most significant economic development in recent history.

Globally, nearly one in eight adults is actively engaged in launching a business.

Entrepreneurship is thriving in nearly every part of the world creating companies, jobs, wealth, and innovative solutions to some of the world’s most vexing problems.

Globally, the highest rates of entrepreneurial activity are among people between the ages of 25 and 34, but entrepreneurship is the desired career path for many people who are still in college.

Figure 1.1 Entrepreneurial Activity across the Globe

Source: Based on data from Donna Kelley, Slavica Singer, and Mike Herrington, Global Entrepreneurship Monitor 2016/17 Global Report, Global Entrepreneurship Monitor, 2017, pp. 39–102.

This figure shows entrepreneurial activity across the globe.

Table 1.1 Entrepreneurship-Friendly Nations

Which nations provide the best environment for cultivating entrepreneurship? A recent study ranked 137 countries on the quality of the entrepreneurial ecosystem in each nation using the Global Entrepreneurship and Development Index (GEDI), an index that includes a variety of factors that range from the availability of capital and workforce quality to attitudes toward entrepreneurs and technology available. The maximum GEDI score is 100.

GEDI Score, Top Ten Countries	GEDI Score, Bottom Ten Countries
1. United States 83.4	128. Venezuela 13.0
2. Switzerland 78.0	129. Nicaragua 12.7
3. Canada 75.6	130. Malawi 125
4. Sweden 75.5	131. Guinea 12.1
5. Denmark 74.1	132. Burkina Faso 11.9
6. Iceland 73.5	133. Bangladesh 11.8
7. Australia 72.5	134. Mauritania 11.6
8. United Kingdom 71.3	135. Sierra Leone 11.4
9. Ireland 71.0	136. Burundi 11.4
10. Netherlands 67.8	137. Chad 8.8

Source: Global Entrepreneurship Index, The Global Entrepreneurship and Development Institute, 2017, https://thegedi.org/global-entrepreneurship-and-development-index/.

Table 1.1 shows which nations are most friendly to entrepreneurs.

The World of the Entrepreneur (2 of 2)

Global Entrepreneurship Monitor (GEM) study:

12.6% of the U.S. population aged 18 to 64 is engaged in entrepreneurial activity.

68% of working adults around the world perceive entrepreneurs as having high status.

Today, small business is “cool” and entrepreneurs are the rock stars of the business world.

What is an Entrepreneur?

Entrepreneur:

One who creates a new business in the face of risk and uncertainty for the purpose of achieving profit and growth by identifying opportunities and assembling the necessary resources to capitalize on them.

An entrepreneur is the one who creates a new business in the face of risk and uncertainty for the purpose of achieving profit and growth by identifying significant opportunities and assembling the necessary resources to capitalize on them.

Figure 1.2 Percentage of Start-Up Companies in the United States

Source: Business Dynamics Statistics Data Tables: Firm Age, U.S. Department of Commerce, U.S. Census Bureau, 2017, www.census.gov/ces/dataproducts/bds/data_firm.html.

Entrepreneurs are essential change agents in the global economy, but unfortunately, in the United States, the percentage of private companies that are start-ups has been declining since the 1970s.

Characteristics of Entrepreneurs (1 of 2)

Desire for responsibility

Preference for moderate levels of risk

Willingness to break the rules

Self-reliance

Confidence in their ability to succeed

Determination

Desire for immediate feedback

High level of energy

Competitive

Future orientation

Opportunity entrepreneurs

Necessity entrepreneurs

Serial entrepreneurs

Entrepreneurs tend to exhibit certain traits including:

Desire for responsibility

Preference for moderate levels of risk

Willingness to break the rules

Self-reliance

Confidence in their ability to succeed

Determination

Desire for immediate feedback

High level of energy

Competitive

Future orientation

Characteristics of Entrepreneurs (2 of 2)

Skilled at organizing

Value achievement over money

High degree of commitment

Tolerance for ambiguity

Creativity

Flexibility

Resourcefulness

Willingness to work hard

Tenacity

In addition, entrepreneurs:

Are skilled at organizing

Value achievement over money

Have a high degree of commitment

Have a tolerance for ambiguity

Are creative

Are flexible

Are resourceful

Have a willingness to work hard

Are tenacious

Figure 1.3 Most Important Qualities of an Entrepreneur

Source: Ryan Westwood, “What Traits Do We Need to Succeed as Entrepreneurs?” Forbes, September 4, 2015, www.forbes.com/sites/ryanwestwood/2015/09/04/what-traits-do-we-need-tosucceed-as-entrepreneurs/#4d7f537f8ff4.

No single set of characteristics describes successful entrepreneurs. Anyone can become an entrepreneur.

Entrepreneurship

One characteristic of entrepreneurs stands out: diversity!

Anyone – regardless of age, race, gender, color, national origin, or any other characteristic – can become an entrepreneur (although not everyone should).

Entrepreneurship is not a genetic trait; it is a skill that most people can learn.

Benefits of Entrepreneurship

The opportunity to:

Create your own destiny.

Make a difference.

Reach your full potential.

Reap impressive profits.

Contribute to society and to be recognized for your efforts.

Do what you enjoy and to have fun at it.

Some of the benfits of entrepreneurship are the opportunity to:

Create your own destiny.

Make a difference.

Reach your full potential.

Reap impressive profits.

Contribute to society and to be recognized for your efforts.

Do what you enjoy and to have fun at it.

Drawbacks of Entrepreneurship

Uncertainty of income

Risk of losing your entire investment

Long hours and hard work

Lower quality of life until the business gets established

High levels of stress

Discouragement

Some of the drawbacks of entrepreneurship are:

Uncertainty of income

Risk of losing your entire investment

Long hours and hard work

Lower quality of life until the business gets established

High levels of stress

Discouragement

Feeding the Entrepreneurial Fire (1 of 3)

Entrepreneurs as heroes

Entrepreneurial education

Demographic factors

To understand the growth in entrepreneurship, consider:

Entrepreneurs as heroes

Entrepreneurial education

Demographic factors

Figure 1.4 Global Entrepreneurial Activity by Age Group

Source: Based on Zoltán J. Ács, László Szerb, and Erkko Autio, Global Entrepreneurship Index, 2016, Global Entrepreneurship and Development Institute, p. 2.

Globally, the rate of entrepreneurial activity is highest among people between the ages of 25 and 44 .

Feeding the Entrepreneurial Fire (2 of 3)

Entrepreneurs as heroes

Entrepreneurial education

Demographic factors

Shift to a service economy

Technology advancements

Independent lifestyle

The Internet, cloud computing, and mobile marketing

In addition, consider:

Shift to a service economy

Technology advancements

Independent lifestyle

The Internet, cloud computing, and mobile marketing

Figure 1.5 U.S. Online Retail Sales

Source: Based on data from Forrester Research, 2016.

Currently, about 54% of small business have Web sites.

Feeding the Entrepreneurial Fire (3 of 3)

Entrepreneurs as heroes

Entrepreneurial education

Demographic and economic factors

Shift to a service economy

Technology advancements

Independent lifestyle

The Internet, cloud computing, and mobile marketing

International opportunities – micromultinationals

Finally, consider:

International opportunities – micromultinationals

The Cultural Diversity of Entrepreneurship (1 of 4)

Young entrepreneurs

Women entrepreneurs

Virtually, anyone has the potential to become an entrepreneur.

Figure 1.6 Characteristics of Women-Owned Businesses

Source: Based on data from the 2016 State of Women-Owned Businesses Report, American Express OPEN, 2016, p. 3.

For many women, the best way to break the “glass ceiling” is through entrepreneurship. The number of women-owned businesses is growing 1.5 times faster than the national average.

The Cultural Diversity of Entrepreneurship (2 of 4)

Young entrepreneurs

Women entrepreneurs

Minority-owned enterprises

Like women, minorities also are choosing entrepreneurship more often than ever before. Hispanics, African Americans, and Asians are most likely to become entrepreneurs.

Growth of New Entrepreneurs by Minority Group

Figure 1.7 Percentage of New Entrepreneurs in the U.S. by Minority Group, 1996 and 2016

Source: Based on data from Robert Fairlie, Arnobio Morelix, and Inara Tareque, The Kauffman Index of Startup Activity, Kauffman Foundation, August 2017, p. 31.

Minority-owned businesses have grown significantly over the last two decades, but still have a long way to go.

The Cultural Diversity of Entrepreneurship (3 of 4)

Young entrepreneurs

Women entrepreneurs

Minority-owned enterprises

Immigrant entrepreneurs

Part-time entrepreneurs

Immigrants or their children started more than 40% of Fortune 500 companies.

Many part-timers are “testing the entrepreneurial waters” to see whether their business ideas will work, whether there is sufficient demand for their products and services, and whether they enjoy being self-employed.

The Cultural Diversity of Entrepreneurship (4 of 4)

Home-based businesses

Family businesses

Family-owned business

Copreneurs

Corporate castoffs

Encore entrepreneurs

Retiring baby boomers

Twenty percent of home-based businesses generate between $100,000 and $500,000 in annual revenue.

A family-owned business is a business that includes two or more members of a family who have financial control of the company. Family-owned businesses account for 70 to 90% of global GDP.

Copreneurs are entrepreneurial couples who work together as co-owners of their businesses.

Some 20% of discharged corporate managers have become entrepreneurs, and many of those left behind in corporate America would like to join them.

Encore entrepreneurs people who drop out of the corporate world to become entrepreneurs.

Members of the Baby Boom Generation (born between 1946 and 1964) are retiring, but many of them are not idle; instead, they are launching businesses of their own.

Figure 1.8 Entrepreneurial Activity in the U.S. by Age Group

Source: Based on data from Robert W. Fairlie and Inara Tareque, 2017 Kauffman Index of Startup Activity, Kauffman Foundation, 2017, p. 34.

One advantage that older entrepreneurs have is the wisdom that comes from experience.

The Power of Small Businesses (1 of 2)

Small businesses:

Make up 99.7% of the 28.8 million businesses in the United States

Employ 48% of the nation’s private sector workforce

Create more jobs than big businesses

Created 63% of net new jobs over the last decade

5% of small companies create 67% of net new jobs in the economy

Gazelles

A small business is a business that employs fewer than 100 people.

Gazelles are small companies that are growing at 20% or more per year with at least $100,000 in annual sales; they create 70% of net new jobs in the economy.

Figure 1.9 Small Businesses by Industry

Source: Based on data from “Statistics of U.S. Businesses, U.S. and States, NAICS Sectors, Small Employment Sizes,” United States Census Bureau, 2013, www.census.gov/econ/susb/.

The majority of small businesses are concentrated in the service, construction, and retail industries.

The Power of Small Businesses (2 of 2)

Small businesses:

Produce 48.5% of the nation’s private GDP.

Account for 47% of business sales.

Create 16 times more patents per employees than large companies.

Zipper, FM radio, the laser, air conditioning, the escalator, the lightbulb, the personal computer, automatic transmission, and many more!

Traditionally, small businesses have played a vital role in innovation, and they continue to do so today.

Putting Failure into Perspective

Entrepreneurs are not paralyzed by the prospect of failure.

Failure: a natural part of the creative process.

Successful entrepreneurs learn to fail intelligently.

Successful entrepreneurs have the attitude that failures are simply stepping-stones along the path to success.

Figure 1.10 Small Business Failure Rate

Source: Based on data from “Survival Rates of Establishments, by Year Started and Number of Years Since Starting, 1994–2016,” Business Employment Dynamics, U.S. Bureau of Labor Statistics, www.bls.gov/bdm/entrepreneurship/bdm_chart3.htm.

Failure isn’t necessarily bad! New companies that replace old ones with better ideas, market approaches, and products are a sign of a healthy entrepreneurial economy.

Avoiding the Pitfalls of Small Business Failure (1 of 2)

Know your business in-depth

Build a viable business model – and test it

Use lean start-up principles

Know when to pivot

Develop a solid business plan

Understand financial statements

To avoid business failure:

Know your business in-depth

Build a viable business model – and test it

Use lean start-up principles

Know when to pivot

Develop a solid business plan

Understand financial statements

Avoiding the Pitfalls of Small Business Failure (2 of 2)

Manage financial resources

Understand financial statements

Build the right team

Learn to manage people effectively

Set your business apart from the competition

Maintain a positive attitude

In addition,

Manage financial resources

Understand financial statements

Build the right team

Learn to manage people effectively

Set your business apart from the competition

Maintain a positive attitude

Developing Career Skills

Critical thinking and problem solving

Written and oral communication

Teamwork and collaboration

Leadership

Creativity

Ethics and social responsibility

Whether you choose to start your own business or work for someone else in either a for-profit or non-profit organization, the skills you will learn in this course with the help of this book will be extremely valuable to you.

Conclusion

Entrepreneurs:

Are an important part of the free enterprise system

Are a diverse and talented group of people

Represent a cross-section of society as a whole

Are able to enhance the profitability of their businesses through acquiring additional knowledge and experience

As you can see, the journey down the road of entrepreneurship will be a fascinating and exciting one. Let’s get started!

What is Ahead?

Chapter 2 Ethics and Social Responsibility

Section 2 The Entrepreneurial Journey Begins

Section 3 Launching the Business

Section 4 Putting the Business Plan to Work