Business Idea Generation

5/6/2018 University of Phoenix: ENTREPRENEURSHIP: The Art, Science, and Process for Success

https://phoenix.vitalsource.com/#/books/1259720888/cfi/6/24!/4/4/230/46@0:64.3 1/23

Page 18

PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted.

5/6/2018 University of Phoenix: ENTREPRENEURSHIP: The Art, Science, and Process for Success

https://phoenix.vitalsource.com/#/books/1259720888/cfi/6/24!/4/4/230/46@0:64.3 2/23

5/6/2018 University of Phoenix: ENTREPRENEURSHIP: The Art, Science, and Process for Success

https://phoenix.vitalsource.com/#/books/1259720888/cfi/6/24!/4/4/230/46@0:64.3 3/23

Page 19

PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted.

Individual Leadership and Entrepreneurial Start-Ups

learning objectives After studying this chapter, you will be able to: LO1-1 Explain how entrepreneurial founders impact the business world as a whole. LO1-2 Discuss the importance of an entrepreneurial orientation. LO1-3 List the triggers that encourage new business formations. LO1-4 Compare and contrast various types of new business supports. LO1-5 Explain how you can evaluate those things that you enjoy the most and discover how they may lead to business

opportunities.

PHILLY PRETZEL AND DAN DIZIO

At 11 years old Dan DiZio had the opportunity to sell pretzels for a man who had more than he could sell that particular day. Dan sold the pretzels on the street corner of his neighborhood and that one-day job turned into a money-making activity he would continue all the way through his college career. After graduating from college, he became a stockbroker. Relatively quickly Dan and his roommate (a psychological counselor) realized that they were not happy with their professions. Remarkably, the two decided to quit their jobs, gather as much capital as they could from their credit cards, and start a business as a soft pretzel wholesaler. Despite their intent to be a wholesaler, they were surprised to find that people would line up outside their business and buy pretzels individually. Taking their cue from their customers’ actual behavior, Dan shifted the business from a wholesaler operation to a retail business. The demand for their pretzels was so strong that between 1998 and 2004 he and his partner were able to open eight retail stores. In 2005 they began to franchise their store concept and now there are more than 120 franchise and corporate locations of their pretzel business, employing 1,500 people.

DiZio clearly illustrates the risk taking that characterizes an entrepreneur. He quit his job and funded his venture initially with credit card debt. At different stages he illustrated leadership when he was willing to change first from a wholesaler to a retailer, and then to a franchiser. At each stage he has also been able to grow people to help him in the process. There are several pieces of advice that Dan offers to those who want to form a business: “Start-up money is valuable, so don’t waste it. We wasted a lot at first and ultimately had to end up redoing a lot of the

work. Really watch those dollars and know where the money is going.”

5/6/2018 University of Phoenix: ENTREPRENEURSHIP: The Art, Science, and Process for Success

https://phoenix.vitalsource.com/#/books/1259720888/cfi/6/24!/4/4/230/46@0:64.3 4/23

“As a business leader you have to understand your product and know the business. You need to be able to relay your thoughts and passion to others and train them.”

Questions 1. What is your assessment of using credit cards to start a new business? 2. How much knowledge of an industry is enough for you to be willing to start a new business? 3. How would you maintain the “feeling” of a business as it spreads to hundreds of locations?

Sources: E. Cassano, “Plot Twist,” Smart Business Philadelphia 7, no. 9 (May 2011), pp. 18–23; J. Bair, “Twisty Business,” Central Penn Business Journal 24, no. 49 (November 28, 2008), pp. 3–8; D. DiZio, “The Accidental Entrepreneur,” Smart Business Philadelphia8, no. 2 (October 2011), p. 5.

5/6/2018 University of Phoenix: ENTREPRENEURSHIP: The Art, Science, and Process for Success

https://phoenix.vitalsource.com/#/books/1259720888/cfi/6/24!/4/4/230/46@0:64.3 5/23

Page 20

PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted.

In large, well-established organizations, no one person is crucial to the survival of the business, even the president of the company. The lack of dependence of large organizations on any one individual is due to the strong structures in the large firm such as extensive written procedures, clear lines of responsibility, and the presence of other individuals or units to step in when some failure occurs. Large organizations also have wide dispersion of knowledge throughout the business; in other words, there are multiple people who know about any given aspect of the business. As a result, if any single person leaves the organization, it has the ability to continue with minimal interruption. Finally, large organizations have greater excess resources, including financial resources, which allow them to hire outside experts to fill any critical need that arises. These excess resources are referred to as organizational slack; they allow large organizations flexibility that is not available to the typical entrepreneurial venture.

organizational slack Excess resources in an organization that allow for redundancy and the quick deployment of personnel in crisis.

In contrast an entrepreneurial business is generally dependent on a single individual or a few individuals for the business to survive. A new entrepreneurial business starts as the brainchild of a single person or a small group of people, each of whom has an ownership stake in the business. The new business has few formal procedures, a concentration of knowledge in those individuals who start the business, and limited slack resources.1 The absence of slack financial resources means the new firm has limited flexibility in responding to emergency issues such as the need to hire replacements if the company loses key individuals. As a result, the founders of an entrepreneurial business and the leadership they provide play a far more critical role in the business’s success than does the senior leadership of the typical large organization. The importance of the individual in the founding and managing of a new business leads to the focus in this chapter on the individual who starts a business and his or her leadership.

This chapter includes a discussion of why individuals are so important to the success of a new business. It also provides ways for you to understand your own predisposition to start a business. The examination of your orientation includes an examination of your risk tolerance and the boundaries that may exist in your perception of events in the environment. It also includes an exercise to test your own entrepreneurial orientation.

Understanding and collaborating in small groups can be an essential part of new business success. What are some of the key characteristics you would look for in a partner?

Every individual brings a unique set of supports that can be used to help in the founding process; these supports are critical in the success of a new business. Therefore, we will examine those supports, the most important of which is the family. In some businesses the family is a more valuable support than in others as the family may all work in the firm. These businesses are referred to as family businesses. Family businesses have unique issues that extend beyond those of the normal new entrepreneurial business. We will address family businesses more at the end of this chapter.

family business A business in which ownership and employment are centered around the family.

The authors of the text have had extensive experience working with entrepreneurs as they start and run their businesses. Throughout this text you will find that many of these firms are used as examples. In particular, we will follow two specific start-up businesses throughout the text. The first one we will see in this chapter is Friends’ Home Health. This venture was the outcome of three friends’ discussions after work and the effort to find new opportunities for themselves.

5/6/2018 University of Phoenix: ENTREPRENEURSHIP: The Art, Science, and Process for Success

https://phoenix.vitalsource.com/#/books/1259720888/cfi/6/24!/4/4/230/46@0:64.3 6/23

Page 21

PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted.

In 2012 three friends who worked in the same nursing facility started talking about starting a business together. The three friends had known each other for a number of years. The friends include one registered nurse (RN) (Betty), and two licensed practical nurses (LPNs) (Joan and Bob). The RN typically is the supervising nurse on the ward and the LPNs do more of the direct care of individual patients. The friends observed the increasing numbers of elderly people in the hospital. As they talked with the family members of these patients they realized there was a need for a reliable home health firm in the area. Despite the existence of several operations in the area (one a national chain), the patients’ families were constantly talking about problems with the current group of home health firms. The families told stories about caregivers who did not show up, were not willing to do distasteful jobs, had poor training, and some who outright stole from the home.

Home health workers go to the homes of clients to help the individuals bathe and eat, and generally assist the elderly or otherwise physically impaired individuals in their homes. Often a family member provides this assistance but needs support to adequately care for the individual or to be able to take a break from their care-giving. Home health workers typically undergo far less training than do LPNs, and some operators provide very little oversight of the in-home workers.

The three friends (Betty, Joan, and Bob) wanted more control over their lives and the opportunity to be paid more for their efforts. Working in the health care facility involved long and odd hours where they might work all night and never see their families. They felt that in their current positions, they were working very hard but were receiving only limited direct rewards for that effort. These issues pushed the three to talk about starting a business. The discussions initially were little more than talk; however, in the past few months these discussions had become more serious. They were not sure how to make a home health business unique, but they knew they wanted to start one.

Joan’s uncle had founded several businesses and appeared to understand what it took to be successful in business. The three potential entrepreneurs had a conversation with the uncle; he advised them to spend a little more time investigating their motivations and personal risk orientation before they actually considered going into business together. He related the story of his first business, which he had started with his best friend. The two had been lifelong friends and thought they knew all there was to know about each other. Not only had they been friends since childhood, each had been the best man in the others’ wedding, and each was the godfather for the other’s oldest child. Although they thought they knew each other well, when it came to money and the level of risk they were capable of handling, they were substantially different people. Whereas the uncle was very frugal, his partner believed that money needed to be enjoyed today. Ultimately their business partnership fell apart. Although the financial loss was significant, even more devastating was the loss of the friendship between the two men and their families. He has always felt the experience was a significant failure and not one he wanted to repeat.

Joan’s uncle has had other businesses and partnerships since that initial failure. He now believes that although he needs to like a person in order to work closely with him or her, it is much more important that they agree on such key issues as money and risk.

Therefore, the uncle suggested the three friends prepare with some simple tasks:

QUESTIONS 1. Compare how each of them prepared his or her monthly family budget. 2. Discuss how much debt each was willing to take on credit cards. 3. Discuss whether each was willing to lend family members money, and the reasons for their answer. 4. Have each person answer this question: If you inherited $250,000, what would you do with it? The outcome of this exercise for our three potential business owners will be discussed after Exercise 1.

5/6/2018 University of Phoenix: ENTREPRENEURSHIP: The Art, Science, and Process for Success

https://phoenix.vitalsource.com/#/books/1259720888/cfi/6/24!/4/4/230/46@0:64.3 7/23

Page 22

PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted.

EXERCISE 1 1. Evaluate your own views on the issues raised in Friends’ Home Health. Discuss your results with others in your class. What is the

range of answers that were given? 2. Have you ever lent money to a relative? Or have you heard stories from others who have? Would it be different if it were a close

friend with whom you went into business?

The three potential entrepreneurs completed the exercise. Betty and Joan realized from the exercise they were far more frugal in their lives than Bob. From this insight Betty and Joan realized that they were more compatible as partners than either was with Bob. They realized that if they went into business with Bob they would soon have significant conflicts regarding both the approach to and the actual finances of the new business. The result would most likely be a loss of their friendship with him, and also the potential failure of the business. The discussions among the three friends also brought these issues home more clearly to Bob, who ultimately decided that a business was not for him. He realized that because of his current debt, if the business needed more money, he would not be able to put any more money into it; also, if the business failed, he had so few resources to fall back upon that he might have to file for bankruptcy.

LO2-1 Explain how entrepreneurial founders impact the business world as a whole.

Founders Are the Reason Why Entrepreneurial Businesses Work So Well New businesses have some significant advantages over large businesses. For example, the very fact that entrepreneurial businesses start out small means that these firms have greater flexibility. Smaller firms can also respond quickly to changes around them, whereas a large firm tends to use many committees or project teams to approve the work of other committees or project teams. This feature alone allows the smaller firm led by the aware entrepreneur to respond quickly to opportunities or threats as they arise. Entrepreneurial firms also fill niches that large firms simply cannot afford to fill. Large firms do have an advantage in those situations where there are economies of scale; that is, the large firms have the ability to produce a service or product more cheaply because it is done on a large scale.2 However, in small niches, the large firms’ systems are not able to do small volumes of a particular activity profitably because of their large fixed costs and overhead. These niches are ideal for new businesses.

agency theory A managerial theory that believes individuals act to maximize their own benefit. Thus, in settings where there is a split between ownership and control (as in most publicly traded corporations), the agents (managers) must be monitored or they will act to maximize their own benefit, not necessarily the benefit of those who own the firm (the shareholders).

Even though these advantages can be substantial, the greatest advantage for an entrepreneurial business is that it is owned and run by the same person(s). Contrast this to most large corporations, where there is a division between owners and managers. The individuals who manage the operations of a large, established corporation do not typically have substantial ownership in the company. The managers (agents of the owners) may own some stock, but in a large business such as General Motors they own a very small percentage of the total stock.

Agency theory suggests that individuals act to maximize their own individual benefit.3 The result in a large corporation is that the manager of a business will tend to act to maximize his own benefit, not necessarily that of those who own the firm (typically the shareholders). This does not mean that the manager seeks to steal from the firm; instead, in subtle but pervasive ways, the manager will act for his or her own benefit. In contrast, the individual who owns the business will always act to maximize the value of the business, since the interest of the owner and that of the business itself are aligned: If the business makes money, the owner makes money.

5/6/2018 University of Phoenix: ENTREPRENEURSHIP: The Art, Science, and Process for Success

https://phoenix.vitalsource.com/#/books/1259720888/cfi/6/24!/4/4/230/46@0:64.3 8/23

Page 23

PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted.

To illustrate, the manager of a large firm can easily justify why it is important to fly nonstop, first class across the country for a meeting in New York City. That manager might argue the need to arrive fresh, with room to work, and rest on the flight. This trip may easily cost $6,000 if the ticket is bought on short notice. This comes out of the corporation’s income, money that really belongs to the shareholders (the owners).

The cost of luxuries such as first-class airfare is an extravagance few entrepreneurial businesses can afford. How would you, as an entrepreneur, decide what constitutes a luxury and what is a necessity?

Compare this with the typical behavior of an entrepreneur. Just as it is for a corporation, the airline ticket is an expense; however, in this case, every dollar spent comes directly out of the pocket of the entrepreneur. The entrepreneur is more likely to go on the Internet and find the cheapest ticket possible. Although the entrepreneur would also like to arrive fresh and be able to work during the flight, he or she is more likely to fly economy class and fly through a hub airport to save the $4,000 or more. If the large, established business is doing poorly, the manager still collects a salary and benefits, although the shareholders (owners) are getting few rewards. The manager will move on to another firm if the business collapses, having no significant stake in the financial failure of the previous company. In contrast, if an entrepreneurial business is doing poorly, the owner may ultimately have to close the business and be responsible for any debts that have accumulated. As a result, the entrepreneur will treat the costs of the business very differently than will the manager of a firm. (When we deal with the legal structure of entrepreneurial business in Chapter 7, we specify in greater detail if and when an entrepreneur is responsible for the debts of the business.) If the managers of a large business had to spend their own money or were responsible for the debt of the organization, agency theory would argue that the manager would behave in a thriftier manner.

Thus, one of the greatest assets of the new business is the owner of the business due to their personal involvement in, and dedication to, the business. It is because of the owner’s importance to the business that students need to consider their own abilities and resources early as they begin to look at building an entrepreneurial business.

EXERCISE 2 1. What will you do if the business fails? 2. How much time are you willing to dedicate to the success of the venture? 3. How much of your personal assets are you willing to put into the venture?

LO2-2 Discuss the importance of an entrepreneurial orientation.

Evaluating Your Entrepreneurial Orientation There are a number of issues that potential entrepreneurs need to consider about themselves as they look at starting a new business. Examined with some depth, these issues will shape the entrepreneur’s analysis of the potential of any business idea. These include (1) risk tolerance, (2) prior experience, and (3) personality orientation of the individual.

Risk Tolerance Potential entrepreneurs must determine their own individual level of tolerance to risk. You are probably familiar with the concept from dealing with your own financial expenditures. The typical advice provided to most individuals is to spend no more than your personal risk tolerance.4 Thus, if you have a low risk tolerance you need to spend less and save more for that proverbial rainy day. If you have a high risk tolerance, you will

5/6/2018 University of Phoenix: ENTREPRENEURSHIP: The Art, Science, and Process for Success

https://phoenix.vitalsource.com/#/books/1259720888/cfi/6/24!/4/4/230/46@0:64.3 9/23

Page 24

PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted.

spend more, assuming there will not be a rainy day. We use a similar concept here, but we use it more broadly, asking you to consider your tolerance to a wide range of potential risks that extend far beyond just financial considerations. Initially, you need to evaluate whether you have the risk tolerance to actually start a new business. The next step is to evaluate what level of risk you will accept in a given business situation.

Evel Knievel has become a cultural reference point for risk taking. An interesting counterpoint to this image was Knievel’s very vocal stand against the risks associated with taking drugs. This dichotomy illustrates that risk levels can vary, even within the same person.

To illustrate, if you work for a large corporation, there is relatively low individual financial risk. In a normal economic environment, even if a large corporation has a poor year and loses money, it will still meet payroll, pay the workers’ benefits, and not close its doors on short notice. On the other hand, the entrepreneur is faced with a substantially different situation. When starting a business, it takes time for the business to reach a level where the revenue coming into the firm is sufficient to cover expenses. (We examine this in significant detail in Chapter 6; the point where the revenue coming into the firm is sufficient to cover expenses is referred to as a break-even point.) However, the new business may quickly reach a point where the funds have run out and the business needs to close its doors quickly. If the business does close, then the entrepreneurs may find that they have to pay the debts of the firm that are left, as they had to sign personal guarantees for the loans of the business. Thus, the financial risk for the entrepreneur can be quite high. As a potential entrepreneur, you will need to consider how much debt you are willing to take on. In general, the greater the debt you are willing to take on to start your business, the higher your risk tolerance.

break-even point The time when a new business has reached a level where revenue coming into the firm is sufficient to cover expenses.

Potential new business owners need to determine their personal willingness to accept risk in a new business and let that information help decide which business to pursue.5 There is not one correct answer as to what level of risk tolerance new business owners should be willing to take on. Instead, the key is that individual entrepreneurs must be aware of their tolerance of risk and establish their business in a manner that is consistent with that tolerance. New business owners need to be sure that the level of risk is consistent with their background, values, and family situation. Evaluation of the risk profile for a particular type of business is more art than science.

EXERCISE 3

5/6/2018 University of Phoenix: ENTREPRENEURSHIP: The Art, Science, and Process for Success

https://phoenix.vitalsource.com/#/books/1259720888/cfi/6/24!/4/4/230/46@0:64.3 10/23

To help you determine your own tolerance for risk, answer the following questions. 1. How much debt would you be willing to undertake to provide a foundation for your business idea? 2. How much of your personal savings would you be willing to risk on your business idea? 3. If you were the recipient of a $100,000 inheritance, what portion would you be willing to invest in your business?

Given your answers to the above questions, how would you rate your financial risk tolerance?

One well-known entrepreneur provides valuable advice on risk tolerance. He suggests that entrepreneurs never do anything that does not allow them to sleep at night. This rule of thumb can help businesspeople determine the risks with which they will be most comfortable. In future chapters we will return to the evaluation of risk as we look at specific risks, such as financial risks, strategic risks, and market retaliation risks.

Prior Experience The second element of entrepreneurial orientation is prior experience. Every individual brings to a new business his or her own view of the world. This view of the world places boundaries on what a decision maker will consider

5/6/2018 University of Phoenix: ENTREPRENEURSHIP: The Art, Science, and Process for Success

https://phoenix.vitalsource.com/#/books/1259720888/cfi/6/24!/4/4/230/46@0:64.3 11/23

Page 25

PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted.

as he or she makes decisions. These boundaries are set by experiences, history, culture, and family values, among other things. Boundaries help each of us make sense of the world. For example, in the United States, when you see a red octagonal sign at a corner, you typically assume it is a stop sign. You automatically assume that it is a stop sign because of your history and experience.

However, if you were in another country, such an octagonal sign may not be a stop sign; it might be another highway warning. Our experiences, history, culture, and values not only help us interpret the world, but they also place boundaries on how we see that world. Thus, our experiences, history, culture, and values also establish what we consider to be both possible and practical. This is referred to as the individual’s bounded rationality. It is the presence of bounded rationality that often leads young people to be pioneers in an area, as they are not limited by the restrictions of the past.

bounded rationality

Rational decision making that is constrained by the background and history of the person making the decision.

Bounded rationality is the reason individuals from outside an industry are able to establish a new business in a manner not previously considered. To illustrate, cattle processing historically was done by large, established firms in meat processing centers such as Chicago, Fort Worth, and Kansas City. The cattle were shipped there and processed by well-trained butchers from the moment of slaughter until they were ready for packaging. An entrepreneur had an idea for viewing the entire process differently. Rather than shipping cattle to a central location, why not process the cattle where they are raised? In addition, instead of hiring well-trained butchers, why not use individuals who make the same cut repeatedly, in an assembly-line manner? This new approach grew quickly, others copied the model, and today virtually all beef is processed this way. Those individuals who had grown up in the beef industry believed that cattle processing had to be done in a specific way. Others came from outside the industry and saw new ways to do things. Their analysis was not bounded by history in the industry.

In a similar vein we could consider the airline and industry maverick Southwest Airlines. Today it is a major employer, but it started as a new business with a few rented planes. At the time everyone in the airline industry believed that air travel was most efficiently handled with a hub and spoke system. That is, the planes would fly into a very large airport such as Chicago, Los Angeles, or Dallas Fort Worth (DFW) from all the airports in that region. Then, people from all of the feeder airports would be placed on the same flight to a given location. Southwest used a model that focused on many short-haul flights of less than an hour between airports. Herb Kelleher (one of the founders of Southwest) was trained as a lawyer and brought fresh insight on how to compete in the industry.

It is important for individuals to understand how their decision making is bounded by their own version of rationality. It is important to know your potential partners’ backgrounds and how their decision making is impacted by their history. These issues will impact how you and your partners act both as you run the firm, and as you analyze problems that arise in the development of the business.

Personality Orientation of the Individual The third element of entrepreneurial orientation is an examination of your own personality. There is a wide variety of personality tests available to assist individuals in analyzing their traits and tendencies. These tests should not be used, however, to determine whether you are capable of starting a new business. There are successful businesspeople in all personality categories. In general, you as an individual will probably score differently on the same test if you take it on different occasions.

Therefore, use these tests to help better understand yourself and your strengths, not as a guide for your career. In general, if you are very outgoing and extroverted, you may wish to focus on a business in which you have extensive interpersonal interactions. In contrast, if you are more introverted, you may wish to focus on a business, such as an Internet-based business, in which interpersonal interactions are more limited. In this section, we review some of the major personality tests that are available. If you enter the names of these tests into a search engine, you will find that there are numerous versions of the tests available online, often for free. Below we will highlight some of the more established and validated personality tests all of which you can take online.

5/6/2018 University of Phoenix: ENTREPRENEURSHIP: The Art, Science, and Process for Success

https://phoenix.vitalsource.com/#/books/1259720888/cfi/6/24!/4/4/230/46@0:64.3 12/23

Page 26

PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted.

There are varying aspects to everyone’s personalities. How might knowing your strengths and weaknesses impact business decisions?

Myers-Briggs. This is one of the most widely used tests for personality evaluations. It was developed by Katherine Briggs and her daughter Isabel Myers. The rationale for the test is drawn from Carl Jung, a Swiss psychoanalyst who sought to incorporate broader issues into his analysis than had Freud. The test focuses on four pairs of variables: extroversion-introversion (focus on outward world or internal); sensing-intuiting (how people gather information); thinking-feeling (how they make decisions); and judgment-perception (order vs. flexibility). The different potential arrangements of variables are believed to indicate the different ways that individuals deal with other people and their environments.

Enneagram. The underlying philosophy of this test is that a person is the result of all the experiences in his or her life. Thus, the factors in childhood are central in developing who we are today. A bias in this test is that adults will not change their personality over time as the assumption is that we form that personality as a child.

The test suggests that there are nine different types of personalities. Through a series of questions, the test assigns you to one of these primary types. These nine types and a few of the characteristics of each type of individual are as follows: reformer (idealist/perfectionist); helper (caring/good interpersonal skills); achiever (competent/driven); individualist (sensitive/dramatic); investigator (cerebral/focused); loyalist (committed/ pessimistic); enthusiast (fun-loving/impatient); challenger (action oriented/ cynical); and peacemaker (easygoing/passive aggressive).

Big Five Test. The Big Five is a popular personality test in universities. It is composed of five factors: open- mindedness, conscientiousness, agreeableness, emotional stability, and extroversion (the factor names vary a little

5/6/2018 University of Phoenix: ENTREPRENEURSHIP: The Art, Science, and Process for Success

https://phoenix.vitalsource.com/#/books/1259720888/cfi/6/24!/4/4/230/46@0:64.3 13/23

Page 27

PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted.

among authors). These are considered by many researchers to be the five key components of an individual’s personality.

The Big Five test was developed by two independent research teams. These researchers asked thousands of people hundreds of questions and then analyzed the data statistically. The researchers did not set out to identify the five factors; instead, the factors emerged from their analyses of the data.

ETHICAL CHALLENGE One of the important choices that everyone has to deal with is what they may take with them when they leave a company. This becomes more critical when the person leaving is starting her own new business. Whether it is voluntary or involuntary, leaving a job can be frustrating, and sometimes individuals are frustrated enough to wish to do harm to the firm they are leaving. Beyond that, there is a question as to where the line between personal and business information exists. If the person leaving does something that harms the prior business, then the prior employer may be able to sue the former employee. The impact of such a lawsuit on a fledgling business can be substantial.

To illustrate, consider an employee who has worked for a large plumbing or electrical firm. In his former position, this employee had the opportunity to obtain the firm’s customer list. However, if he takes that list and uses it to generate a customer base for the new business, the former employer might be able to sue the new business for the revenue lost.

There is a broader question that an entrepreneur must also consider—if you know you are leaving your current employer to start your own business, is it fair to your employer to do so while still being paid by your employer? Even though the budding entrepreneur may not consciously plan to take customers from the employer, how significant are those contacts to the future business? At what stage does such a setting cross an ethical line?

QUESTIONS 1. What are some ways you can build a customer base when you leave a business without running into problems with

your former employer? 2. Beyond the customer list, what other things could you potentially take from a firm that would present an ethical

problem?

LO2-3 List the triggers that encourage new business formations.

Triggers for Starting a Business Starting a new business is often the result of some particular event or condition within an individual’s environment. These triggers encourage the forming of new businesses, as they encourage individuals to think creatively. Individuals get comfortable with their lives, and it takes a trigger to force them to think in new ways. You may not be faced with such triggers as motivations, and still decide to start a new business. However, many people do start their businesses when one of these triggers is present, and therefore it is useful for you to understand them. The triggers in the formation of a new business can come from either positive or negative stimulus that occurs in an individual’s life. Some typical triggers include the following:

1. Being laid off from established employment. 2. Being approached by one or more people with a new business idea. 3. Reaching a point financially where the risk–return level of a proposed new business is tolerable. 4. Having very little to lose financially by a failure.

5/6/2018 University of Phoenix: ENTREPRENEURSHIP: The Art, Science, and Process for Success

https://phoenix.vitalsource.com/#/books/1259720888/cfi/6/24!/4/4/230/46@0:64.3 14/23

Page 28

PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted.

5. Receiving evidence that an idea is not only doable, but there is a concrete way to improve on a given problem.

6. Being spurred to action by attending a seminar, reading a book, or talking with successful entrepreneurs. 7. Experiencing a midlife (or early-life, or even late-life) crisis. 8. Observing the establishment of an incubator, accelerator, or business development effort within the community. 9. Experiencing the inability to climb the corporate ladder due to circumstances beyond one’s control. These might include

not having graduated from the “correct” school, being female in a male-dominated business, having a marketing background in a manufacturing business.

Often, more than one of these triggers may be present at the same time. For discussion purposes, we segment these triggers into two categories: personal motivations and circumstance motivations. Although the exact dividing line between these two categories is somewhat fuzzy, this categorization will allow for the examination of the various issues involved in starting a business.

Personal motivations come from the individuals themselves, and as such are the strongest motivations available. Personal motivations drive people to make career and life-altering moves irrespective of “practical” advice. Entrepreneurs driven by personal motivators will tend to be more proactive, and drive relentlessly toward their goals.

Circumstance motivators tend to result in more of a defensive positioning. The environment and environmental changes make opportunities available to potential business owners, but the motivation is substantially different. This is an opportunistic start-up whose staying power is more determined by other competing opportunities.

To illustrate personal triggers, consider that today one of the fastest-growing groups of entrepreneurs are women. In large part, women are starting new businesses when their career opportunities are blocked at larger corporations. The barrier is often referred to as the “glass ceiling.” It involves not formal rules, but the practical reality that in some organizations there are limits to the level in the corporate hierarchy to which women are allowed to progress. If you question the presence of such ceilings, simply note how many women are in senior management positions at most major corporations. The result is that women-led businesses are formed at a rate 50 percent greater than that of men-led businesses. A particularly fast-growing segment of entrepreneurs are minority women owners; today one-third of all female businesses are headed by women of color.6

Human nature is such that most people get comfortable with their current status and financial position. When they are laid off, are demoted, are forced to take reduced pay, or even survive a layoff, they are forced to think about new opportunities that they never would have considered previously. As we pointed out in Chapter 1, research has found that when a factory or military base closes, there is a blossoming of new businesses in that area.7

Our opening story of Friends’ Home Health illustrates how personal and circumstance motivations merge. The three nurses who considered establishing their new venture wanted to have more flexibility in their lives for their families. These individuals all had small children, and they wanted to provide a better standard of living for them. In this case, the three potential business founders not only had one of the strongest personal motivators available to individuals—that of their families—they also had a strong desire to change their overall circumstances.

5/6/2018 University of Phoenix: ENTREPRENEURSHIP: The Art, Science, and Process for Success

https://phoenix.vitalsource.com/#/books/1259720888/cfi/6/24!/4/4/230/46@0:64.3 15/23

Page 29

PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted.

LO2-4 Compare and contrast various types of new business supports.

Supports This chapter focuses on the individual who starts the business. It has been stressed in the chapter that this individual, and his or her leadership, is central to the entrepreneurial firm’s success. Generally, the founder is far more important than a single individual in a large firm.

This does not mean that an individual, or team of individuals, creates a successful business without help. There are supports and resources available to the entrepreneur. No one of these supports or resources assures success, but the new business-person should evaluate which resources and supports he or she has access to in an effort to increase the chances of success.

The supports and resources available are typically unique to the entrepreneur and where he or she lives. Not all individuals come to the process of founding the business with equal endowments or supports. The entrepreneur should seek to understand all the supports possible to make the entrepreneurial effort successful. The support and resource areas the entrepreneur might examine include (1) family, (2) social networks, (3) community, and (4) financial resources.

Like a classic architecture, a solid business is built upon a variety of support systems.

Family Few people know you—including both your abilities and shortcomings— like your family. These individuals are a resource for support, guidance, suggestions, and potential funding for a new business. A spouse who is willing to handle the financial burden while you begin a new venture, a parent who will contribute time and money, an uncle who has been in the industry and is willing to review your plan and advise you so that you might avoid basic pitfalls are all immensely valuable to the new entrepreneur. We advise potential new entrepreneurs to work with their family members not only for their advice and potential funding, but also as a reality check and support structure. Family members are in a unique position to provide you with key insights when you may be pursuing the wrong approach to an issue. Too many other individuals will not be willing to tell you when you may be wrong. Most individuals will tell you only positive things. In addition, you will need your family’s support to push you forward to success, as there will be times that you will have to deal with significant discouragements.

To fully utilize your family resources, we suggest you list those family members with whom you have regular contact, and also list the capabilities those individuals possess that might provide support to the new business. The benefit of such an activity is that it will allow you as a new business founder to think systematically through the items that need to be discussed with various family members. You need to make sure you obtain the resources desired from family members without wasting the time and effort of these individuals.

The role of family is so critical to the success of a new business that many new ventures end up being what are referred to as family businesses. In such firms, the principal staff members of the business are family members.

5/6/2018 University of Phoenix: ENTREPRENEURSHIP: The Art, Science, and Process for Success

https://phoenix.vitalsource.com/#/books/1259720888/cfi/6/24!/4/4/230/46@0:64.3 16/23

Page 30

PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted.

There may be other employees in the firm, but typically, family members hold the key managerial decision- making positions.

The long-term management of family businesses is unique when compared to that of nonfamily-owned businesses. In the initial stages of formation, the support of the family can help the entrepreneur overcome many difficulties that might cause the failure of nonfamily-supported new businesses. For example, when family members are the principal staff, a month in which payroll cannot fully be met by the company is more acceptable. These individuals’ level of commitment to the founder may be high enough that they are willing to take only a partial or no salary that month. These individuals also are often willing to work at times and in conditions that other employees would not accept. For example, Christmas season is critical to all retailers, but paid staff may not be willing to work the extra hours needed at this time, whereas family will. It is this level of commitment that has produced success for many immigrant families. In these settings, the reliance on family is a key reason the firms are able to survive and prosper.

However, there are also potential negative long-term issues that accompany a family business. While family members have a greater commitment to you as an entrepreneur because of your close relationships, those close relationships make issues such as firing family members difficult. If a family member is not a good employee, how will you fire that person, or even reprimand them, without rupturing the close relationships in the family? One business founder who did fire a relative described Thanksgiving that year as horrible and silent. Similarly, since family members know each other so well, they are willing to say negative things to an entrepreneur that a regular employee would never say. These negative statements may have no connection to work, but might be issues that are simmering in the family. The negative comments can be particularly caustic in the firm because the owner may be hesitant to fire the family member, and the situation can eventually rupture all relationships with the individual and other extended family members. Finally, the presence of family in the firm can cause difficulties with other employees who are not family members. As will be discussed in Chapter 10, human resource management is one of the most important and contentious issues in a firm. Unfortunately, if it appears there are different expectations and rewards for workers depending on whether they are related to you, it can cause turmoil among employees and make holding onto key nonfamily employees all the more difficult.

Family is usually an important resource for a new business. The new entrepreneur needs to consider the balance of benefits and drawbacks to building a family-based business.

Networks Beyond your family, another key support is the network of individuals in your life. These networks may be formed from former employers, individuals you know from a fraternal organization such as the Rotary Club, friends at school, or individuals you know from another organization including a church or synagogue. Individuals in your network can be particularly helpful in providing some legitimacy to your business, in addition to providing feedback and advice to you.

There is a rich pool of resources for networking online. For example, many communities have formed blogs and chat rooms aimed at individuals interested in forming local businesses. These online communities can be a rich source of advice on forming a business and potential sources of funding. There are also numerous crowd sourcing sites including Kickstarter.com and Crowdfunder.com. These websites allow a firm to reach out to a wide community online to get funding and often advice in the process of raising those funds.8

5/6/2018 University of Phoenix: ENTREPRENEURSHIP: The Art, Science, and Process for Success

https://phoenix.vitalsource.com/#/books/1259720888/cfi/6/24!/4/4/230/46@0:64.3 17/23

Page 31

PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted.

To illustrate, a start-up manufacturing business would be considered high risk until it developed a steady flow of customers and revenue. Established businesses are often hesitant to buy from a start-up business, because it is not clear if the new business will be able to fulfill an order or service the product in the future. Thus, many firms will initially buy only small amounts from a new business in an effort to observe the quality and reliability of the new firm. Similar effects are also experienced with suppliers, such that the new firm may not be able to obtain credit from a supplier for some time. Only after a history of prompt payment is built up might the supplier allow the new business to carry credit. A network can help overcome some of these debilitating issues early in the life of the business by providing a level of legitimacy. Support from companies in your network cannot only provide revenue but can also help to indicate to others your seriousness and staying power.

As noted previously we will follow two small firms throughout the text to illustrate the concepts in the text. The first one we have looked at is Friends’ Home Health. The second firm we will follow in each chapter is Flow Right Brewery & Bar.

Chris Flow had long wanted to be his own boss. Working for one of the bigger banks in the area, he sat in a cubicle processing mortgage applications. Although there was always something different in each application, he had the process down to a science. He was so good at his work that his boss gave him the unenviable task of handling mortgage workouts for people who had fallen behind in their payments. By 2014 he could see the writing on the wall. Virtually anyone involved in the mortgage processing business was eligible to be laid off as the mortgage crisis had subsided. Several of the nation’s largest banks had rounds of layoffs in their mortgage divisions that amounted to thousands of employees.

Since graduating from college, Chris had a fascination with brewing beer. He worked at a microbrewery in Boulder, Colorado, during his college years and had taken a number of classes on making beer. He was a member of the local brewing club and regularly won the club awards for the beer he brewed at home. What’s more is that Chris’s passion to brew beer had taken over his two-car garage much to the consternation of his wife. He regularly worked with new club members to learn what he considered a craft.

On his way home from work one day he was shocked to see that one of his favorite restaurants had closed. The location was very good, but there was never much of a crowd. Chris personally knew the owner, although he was only peripherally aware that the owner had been in the heat of a divorce. Once the divorce was final the owner planned to move from the area, but there was not sufficient cash flow generated in the business to entice anyone to buy it. Thus, he had decided simply to close the business.

That night Chris and his wife talked at length about Chris taking over that location and turning it into a brew pub where aficionados of brewing could gather and enjoy locally brewed beers. He and his wife had saved up over $100,000, which they were willing to commit to the venture, and he was confident that he could bring in a set of partners who would also invest in the business. There were a lot of things to do over the next few weeks if this was going to be a reality, but Chris was truly excited about business for the first time in years.

The next day Chris contacted a real estate agent and found out that the previous owner of the restaurant had broken a 10- year lease that still had 6 years left on it but no personal guarantee. The owner of the property was anxious to get the property leased again and was willing to throw in everything inside the restaurant for no extra monthly charge if Chris would sign a new 10-year lease that Chris would personally guarantee. Even though the lease payments seemed quite reasonable—especially given that all of the kitchen equipment, tables, chairs, counters were his for free—it was nevertheless a big financial commitment as Chris would have to still pay for the lease even if the business was not a success. Chris and his wife decided to take the plunge and Flow Right Brewery & Bar was born.

* The names and small details have been changed in this running case. We will use this case throughout the text to illustrate concepts raised in each chapter and how this particular firm addressed them as they built the business.

5/6/2018 University of Phoenix: ENTREPRENEURSHIP: The Art, Science, and Process for Success

https://phoenix.vitalsource.com/#/books/1259720888/cfi/6/24!/4/4/230/46@0:64.3 18/23

Page 32

PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted.

Community There are also more formal community supports that can lower the overall risk for a new business in the community.9 For example, many communities have business incubators10 that house new businesses and provide many critical services for the entrepreneurial businesses. An incubator will typically provide all of the office machines, basic furniture, internet connections, telephones, fax, copying equipment, and maintenance necessary for a business to begin operations. As we have noted, one of the difficulties for a new business is the establishment of some level of legitimacy. Those businesses that look as if they are ongoing businesses may have more opportunities. Most new businesses cannot afford a receptionist, whereas in a business incubator there is a common receptionist. This individual is typically trained to answer phone calls from a central location, using the firm’s own name. The impression made by such simple things can be significant. In contrast to an answering machine, the ability to have a message taken by a receptionist can help build credibility.

incubator A facility that houses new businesses and provides many critical services for the new ventures. New businesses are expected to develop and typically leave the facility often within 18 months of founding.

A business incubator also offers its space to tenant firms at subsidized rates in order to stabilize cash flow. There are professionals such as accountants and lawyers available to help the new businesses. Local community leaders hope that all this aid will lead to businesses that are more likely to succeed than unsupported new business start-ups. Thus, if an entrepreneur can locate the business in an incubator, then the firm’s risk of failure drops. Business incubators work best with office-based service firms, scientific-based firms requiring lab space, or small, clean manufacturing firms. Clearly, a business incubator cannot effectively house a restaurant: A restaurant needs to be located somewhere near a flow of people. However, even for such a firm there are still supports available. In most communities there are Small Business Assistance Centers. These centers are funded by the Small Business Administration and advise individuals who intend to start new businesses. The supports vary widely but usually include research aids such as information on funding sources in the area for new businesses. There are other services available, such as counseling provided by the Service Corps of Retired Executives (SCORE). These retired executives work with new businesses as advisors on a wide range of issues. Still other supports are available at centers tailored to aid women or minority entrepreneurs. One specialized program is the Minority Enterprise Development Program. There are also programs targeted to veterans or those firms that are geared to export.

Small Business Assistance Centers Centers funded by the Small Business Administration that provide free advice to individuals wishing to start new businesses.

Each community has its own unique set of resources. The federal government provides some of the funds, but it encourages the local administrators and government entities to tailor the services to what is needed locally. Therefore, each potential entrepreneur needs to survey what services are available. A quick look online for local Economic Development will provide a strong list of these services. The potential entrepreneur would be well served to take an hour or two to visit the offices identified and obtain information about their services. The potential entrepreneur should also ask these entities for leads on other agencies that have services for the start-up business. Almost all such agencies work with each other and want entrepreneurs to take advantage of all resources available, whether from them or from other agencies.

Financial Support Another key element for a new business is the financial support it develops. The detailed evaluation of financial resources will be covered in Chapter 7 where we will examine the financing issues related to starting a firm. However, a few points need to be made briefly here. Potential

5/6/2018 University of Phoenix: ENTREPRENEURSHIP: The Art, Science, and Process for Success

https://phoenix.vitalsource.com/#/books/1259720888/cfi/6/24!/4/4/230/46@0:64.3 19/23

Page 33

PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted.

entrepreneurs need to have a full understanding of the cost–benefit of the business.11 In particular, the entrepreneur needs to account for the financial resources that may be required in starting and running a new business. It is simply good business practice to ensure that sufficient financial resources are available prior to the start of that business. It may be a waste of effort to go forward if the goals of an individual are widely divergent from the financial resources that are available. The development of the new business is not “blue sky” thinking. The processes detailed in this book are a practical and applied effort to make this a reality.

From an individual evaluation of capability, nothing more is required at this point other than a realistic vision of what resources are needed and available. If, for instance, a potential entrepreneur is considering starting a restaurant, there needs to be recognition that the equipment and setup for even a very small, modest carry-out restaurant may exceed $150,000. This cost goes up dramatically if the potential entrepreneur buys new equipment. If used equipment is purchased, that cost can be cut by over half depending on the quality of what is obtained. Regardless of the type of business contemplated, it is critical that the entrepreneur be able to fund that business or obtain the necessary funding. Therefore, the potential entrepreneur needs to have a broad understanding of what financial resources are available and a realistic idea of what will be needed to expend. Chapter 6, entitled “Cash Flow,”devotes an entire section to this exact issue.

EXERCISE 4 Using the chart below, begin to fill in the supports and resources you might be able to call on. Describe briefly the support and resource that you list. Fill in the chart as much as you can now.

LO2-5 Explain how you can evaluate those things that you enjoy the most and discover how they may lead to business opportunities.

Form a Business Doing What You Like This chapter has emphasized that new businesses are so often successful because the entrepreneur both owns and runs the business. You bring to the business a focus that simply does not exist in large businesses. You also bring unique supports that can help make the venture successful. Ultimately, the greatest contributor to your success is that you are doing something you enjoy.

5/6/2018 University of Phoenix: ENTREPRENEURSHIP: The Art, Science, and Process for Success

https://phoenix.vitalsource.com/#/books/1259720888/cfi/6/24!/4/4/230/46@0:64.3 20/23

Positions in the retail industry are very social. The more workers can make conversation with potential customers often times more sales opportunities can result.

An entrepreneur will need to spend considerable time at the business for it to be successful.12 In fact, the entrepreneur will likely spend more time starting and running the business than doing anything else in life. Consider that in a typical day you have 24 hours, out of which you might typically sleep 7 hours. If you work 8 to 10 hours at a minimum in a business for five days, plus half a day each weekend, you will be spending the greatest amount of your time either sleeping or working. You need to enjoy what you do. If you do not enjoy weather extremes, do not seek to establish a heating and air-conditioning business that requires you to work on broken air conditioners and heaters (which always seem to need repair in the extremes

5/6/2018 University of Phoenix: ENTREPRENEURSHIP: The Art, Science, and Process for Success

https://phoenix.vitalsource.com/#/books/1259720888/cfi/6/24!/4/4/230/46@0:64.3 21/23

Page 34

PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted.

of weather). If you do not enjoy working with people, do not establish a retail shop where you must work with the wide variety of individuals who walk in the door. On the other hand, if you like people and find conversation easy, a retail business would make much more sense than an Internet business where you see very few people and primarily work alone. It is quite possible for someone to see great potential in a new business idea; however, if the new business is not something that the entrepreneur has a passion for, history suggests that the business is not likely to be successful.

EXERCISE 5 1. List up to five businesses you potentially could happily work at every day. 2. List up to five businesses you potentially would not enjoy running every day.

If you are considering starting a business you also need to clearly recognize the trade-off between the time commitment and the return you expect. While clearly part of the equation, the time–reward relationship in a new business involves more than simply financial reward. We will deal more with profitability as we consider the finances of the firm in Chapters 6, 7, and 8. However, your time is your most valuable asset and should be treated as such. This text is designed to help you think through the start-up business process in a formal manner and provide you with the tools necessary to be successful.

SUMMARY The most critical resource in a new venture is the entrepreneur or entrepreneurial team. The founder(s) are the reason that a new business is so successful. In forming a start-up, the entrepreneur’s choice of business needs to be consistent with his or her own individual risk tolerances. The entrepreneur also needs to be aware that one’s own biases and bounded rationality will shape the interpretation of opportunities.

The thought process associated with developing the new business needs to be consistent with the actual resources that are present. The process of developing the business is both time consuming and rewarding. There are many supports available to anyone wishing to pursue this course of action in business. The potential entrepreneur should look to family, networks, and communities for assistance and honest feedback.

KEY TERMS agency theory bounded rationality break-even point family business incubator organizational slack Small Business Assistance Centers

REVIEW QUESTIONS 1. How does the lack of “slack” resources impact new ventures? 2. Why is founder involvement in a new venture so critical to its success? 3. Is there some minimum level of risk tolerance required to start a business? Explain. 4. How does bounded rationality affect the way an entrepreneur determines what type of business to start? 5. How do you think personality differences matter in the starting of a business? 6. List some triggers that push people into starting a new business. 7. Have you experienced any of these triggers? Did it cause you to consider starting your own business? 8. Which supports do you believe you might rely on the most if you started your own business?

BUSINESS PLAN DEVELOPMENT QUESTIONS 1. How would you evaluate risk tolerance?

5/6/2018 University of Phoenix: ENTREPRENEURSHIP: The Art, Science, and Process for Success

https://phoenix.vitalsource.com/#/books/1259720888/cfi/6/24!/4/4/230/46@0:64.3 22/23

2. What is your risk tolerance? Why? 3. Have you formed a team before in a class or other setting? What criteria did you use? 4. If you have not formed a team, what are the criteria you think you should rely on? Are the criteria for the class teams

in questions 3 and 4 the same you would use for your business teams?

5/6/2018 University of Phoenix: ENTREPRENEURSHIP: The Art, Science, and Process for Success

https://phoenix.vitalsource.com/#/books/1259720888/cfi/6/24!/4/4/230/46@0:64.3 23/23

Page 35

PRINTED BY: [email protected]. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted.