CHAPTER 6 Strategies for Entrepreneurship and Innovation

1. CHAPTER 6 Strategies for Entrepreneurship and Innovation

2. Learning Objectives • Understand the importance of entrepreneurship and organizational entrepreneurship • Be able to create a simple business plan • Understand the steps in the creation of an entrepreneurial venture • Know the pitfalls associated with new venture failures • Consider the various options for new venture funding • Select an appropriate structure for an internal venture • Be able to create a plan for fostering innovation in an existing firm

3. Entrepreneurship • Entrepreneurship is the creation of new business • Opportunity recognition or creation (entrepreneurial discovery is the intersection of a need and a solution) • Assembling resources to pursue the opportunity, including capital (typically associated with a business plan) • Managing activities that bring a new venture into existence • Some ventures are complete start-ups • Other ventures occur within existing firms • Organizational entrepreneurship or “intrapraneurship”

4. Entrepreneurs • Opportunists • Recognize and take advantage of opportunities • Resourceful • Creative • Visionary • Hardworking • Optimistic • Independent Thinkers • Excellent Leaders • Dreamers

5. What’s in a Business Plan? • Executive Summary • Business Description • Environmental Analysis (see next slide for details) • Resource Analysis (with a focus on the entrepreneur) • Functional Plans • Financial Projections • Implementation Schedule • End-game Strategy • Risk Analysis

6. What’s in the Environmental Analysis for a Business Plan? • Environmental Analysis • Market analysis • Existing competitor analysis • Supplier analysis • Evaluation of potential substitutes • Discussion of entry and exit barriers • Relevant government regulations and regulators • Financial condition of the industry • Availability of funding • Overall economic factors for the host country • Availability of technology

7. Sources of Capital for Entrepreneurs • Commercial Banks • Personal Contacts • Venture Capitalists • Corporate Partnerships • Business Angels • Initial Public Offerings

8. Initial Public (IPO) Offering Process Select Underwriter Draft Letter of Intent Assemble the Syndicate Determine Offering Price Place the Offering Revise & Print the Prospectus Draft Prospectus Present to Potential Investors Develop Business Plan Due Diligence Determine Offering Size Board Approval Time

9. First Year Agenda for Entrepreneurial Startups • Financial Management • Obtain initial capital • Establish systems to track revenues and expenses and control costs. • A record-keeping system must be established that will satisfy the demands of investors, creditors and the internal revenue service.

10. First Year Agenda for Entrepreneurial Startups • Marketing • Selection of initial product/service offering. • Selection of initial market. • Targeted advertising. • Product / service Development • Establishment of a system for collecting feedback from early customers. Continuous improvement is essential.

11. First Year Agenda for Entrepreneurial Startups • Resource Acquisition • Site selection and construction. • Acquisition of machinery, furnishings, information systems, utilities and supplies. • Contracts with suppliers. • Process Development • Focus is on production and operations management to ensure efficiency, quality and continuous improvement.

12. First Year Agenda for Entrepreneurial Startups • Management and Staffing • Recruitment of motivated, well-trained employees • Selection of managers. • Assignment of responsibilities • Establishment of personnel policies • Training • Compensation system, which may include benefits. • Supportive culture.

13. First Year Agenda for Entrepreneurial Startups • Legal Requirements • Legal form (sole proprietorship, partnership, corporation). • Other legal requirements and filing of forms. • Patents and trademarks if necessary.

14. Legal Forms of Business • Sole proprietorship • The entrepreneur is the owner and legally liable for the venture in its entirety

15. Legal Forms of Business • Partnership • Each of the partners contribute resources such as money, physical goods, services, knowledge and relationships • Limited partnership means that management responsibility and legal liability of partners are limited, except that one partner must be a general partner with unlimited liability

16. Legal Forms of Business • Corporation • Risk of a shareholder is limited to investment in stock • However, the tax advantages of a partnership are lost • S Corporations allow some partnership-type tax advantages, but they must meet restrictions and have few shareholders

17. External Problems Customer Contact (27.3%) Market Knowledge (19.3%) Market Planning (14.4%) Location (11.1%) Pricing (8.4%) Product Issues (7.6%) Competitors (6.3%) Expansion (5.5%) Internal Problems Adequate Capital (15.9%) Cash Flow (14.9%) Facilities / Equipment (12.6%) Inventory Control (12.3%) Human Resources (12.0%) Leadership (11.1%) Organizational Structure (10.8%) Accounting Systems (10.4%) Internal and External Problems Faced by Entrepreneurs

18. Most Common Sources of Entrepreneurial Failure • Poor Management Skills • Lack of Adequate Capitalization • Product/Service Problems • External Market Conditions

19. Factors Encouraging or Discouraging Innovation • Factors Encouraging Innovation • Vision and culture that support innovation, personal growth and risk taking • Top management support and organizational champions • Teamwork and collaboration; a flat management hierarchy • Decentralized approval process • The ideas of every employee are considered valuable • Excellent communications • Innovation grants and time off to pursue projects • Large rewards for successful entrepreneurs • Focus on learning

20. Factors Encouraging or Discouraging Innovation • Factors Discouraging Innovation • Rigid bureaucracy and conservatism in decision making • Absence of management support or champions • Authoritarian leadership and traditional hierarchy • Difficult approval process • Only the ideas of certain people (researchers or managers) are given attention • Closed-door offices • Inadequate resources devoted to entrepreneurial activities • Harsh penalties for failure • Exclusive emphasis on measurable outcomes

21. Designs for Corporate Entrepreneurship Special Business Units Complete Spin-off Unrelated Related Operational Relatedness Nurturing and Contracting Direct Integration Important Not Important Strategic Importance Adapted from R.A. Burgelman, “Designs for Corporate Entrepreneurship in Established Firms,” California Management Review,26: 3 (1984) used with permission.

22. E-Commerce • Business dealings that are electronically based • E-tailing (retailing through the Internet) • Exchanging data • Business-to-business buying and selling • E-mail communications • Dot-Coms • Internet-based businesses • Early race to attract “eye balls” • Many of the failures were due to inadequate business models for sustaining revenues and producing profits • Internet is an increasingly important business tool • Retail sales are dramatically increasing • A wide variety of applications • Investors have become wary of hollow promises • Information technologies continue to change

23. Common Growth Tactics • Internal Growth Tactics • Market Penetration: Increase market share in current business • Market Development: Repositioning a product or service to appeal to a new market or markets. • Product or Service Development: Firms modify existing products and services or develop new ones for existing or new market segments. • Growth Tactic That May Be Internal or External • Vertical Integration: The firm moves forward towards its customers or backwards towards its suppliers on its industry’s vertical supply chain.

24. Common Growth Tactics • External Growth Tactics • Horizontal Acquisition: Purchase a company in the same line of business. • Related Acquisition: Purchase a company with common or complementary products, services, markets, or technologies. • Unrelated Acquisition: Purchase a company with no commonality or complementarity between products, services, markets, or technologies. • Joint Venture: Cooperative endeavor resulting in a new, jointly-owned firm.

25. Stability Strategies • A “no growth” philosophy is hard to defend for public corporations • However, such a philosophy is acceptable if: • All relevant stakeholders agree, as in a small family business • A growth strategy is ineffective, such as in a mature or declining market with high exit barriers • The firm is restructuring (however, future growth is anticipated after the restructuring is complete)

26. Major Concepts in Chapter 6 • Entrepreneurships involves the creation of new business • Entrepreneurship can involve a new start-up or organizational entrepreneurship, the creation of new business within an existing firm • Entrepreneurial tasks include opportunity recognition or creation, assembling resources, and managing the activities that bring the venture into existence • Entrepreneurial discovery is the intersection of a need and a solution

27. Major Concepts in Chapter 6 • A business plan is at the center of an entrepreneurial venture. It forces the entrepreneur to think through the details of the venture and determine its feasibility • A business plan includes an executive summary, a description of the proposed venture, an analysis of the environment, a resource analysis (with special emphasis on the entrepreneur), functional plans such as marketing and operations, financial projections, a schedule for major events, an endgame strategy and an analysis of risks

28. Major Concepts in Chapter 6 • Obtaining start-up capital is one of the most difficult problems facing an entrepreneur • Lack of management skills is a primary source of failure of entrepreneurial ventures • Firms that foster organizational entrepreneurship tend to have a vision, culture and top management that support innovation, organizational champions, teamwork and collaboration, a flat management hierarchy, a decentralized approval process, respect for ideas, excellent communications, resources for entrepreneurial activities, rewards that encourage innovation and a focus on learning

29. Major Concepts in Chapter 6 • The optimal design for an internal venture depends on the strategic importance of the venture and how closely related it is to current activities • Organizations can pursue internal growth strategies, external growth strategies or a combination. Internal growth strategies provide more control but they tend to be slower