Entrepreneurship Ch. 1

1. Entrepreneurship Ch. 1 What is Entrepreneurship

2. Becoming an Entrepreneur • Entrepreneur – Individual who undertakes the creation, and ownership of an innovative business with potential for growth • Accepts the risks and responsibilities of business ownership to earn profits, create wealth, and achieve personal satisfaction. • Creating and running a business venture (new business undertaking that involves risk) requires a variety of skills

3. Becoming an Entrepreneur • Entrepreneurship – Process of recognizing or creating an opportunity, testing it in the market, and gathering the resources necessary to go into business • More than 90% of all businesses are small businesses with fewer than 100 employees • 62% of those are home-based businesses

4. Becoming an Entrepreneur • Owning and operating a business is very different today than it was in the past • Customers now demand that business transactions and communication take place quickly

5. How Entrepreneurs and Customers Interact • Economics – Study of how people choose to allocate scarce resources to fulfill their unlimited wants

6. Economic System • Economic System includes a set of laws, institutions, and activities that guide economic decision making. • Answer the following questions: • What goods and services should be produced? • What quantity should be produced? • How should they be produced? • For Whom should they be produced for?

7. Economic Systems • Traditional Economic System – Relies on farming and simple barter • Pure Market System – Based on supply and demand with little government control • Command Economic System – Run by strong centralized government • Mixed Economic System – Combination of market and command systems

8. Free Enterprise System • People have an important right to make economic choices: • People can choose what products to buy • People can choose to own private property • People can choose to start a business and compete with other businesses • Also called: • Market Economy • Capitalism

9. Free Enterprise System • Profit Motive • Making a profit (Money that is kept after all expenses of running a business have been deducted from the income) is a primary incentive • The only way to measure success • There is a risk of failure • It encourages the production of quality product that truly meets the needs of consumers

10. Free Enterprise System • Role of Competition • Competition is one of the basic characteristics of a free enterprise system • Good for consumers because it provides choices, it forces companies to improve quality and become more efficient, and it lead to a surplus, which brings down the prices • Prices, Quality, Service, Reputation

11. Free Enterprise System • Market Structures • Nature and degree of competition among businesses operating in the same industry • Affect market prices • Four different market structures: • Perfect Competition • Monopolistic Competition • Monopoly • Oligopolies

12. Free Enterprise system • Perfect Competition • Numerous buyers and sellers and many products that are very similar so they can be substituted for consumers • No difference in quality • Easy for new companies to enter the market • Prices are determined by supply and demand

13. Free Enterprise system • Monopolistic Competition • Many sellers produce similar but differentiated products • Substitution is not always possible • Through differentiation, sellers have some power to control the price of their product • By making its product slightly different, the monopolistic competitor tries to dominate a small portion of the market

14. Free Enterprise system • Monopolies • Particular commodity has only one seller who has control over supply and can exert nearly total control over prices • Discouraged in free market however they are sometimes in the publics best interest

15. Free Enterprise system • Oligopoly • Structure in which there are just a few competing firms • Example: Auto industry – several large companies can sell their automobiles at a lower price than small manufacturers

16. Basic Economic Concept • Goods and Services • Products that our economic system produces to satisfy consumers’ wants and needs • Goods – tangible (physical) products • Services – intangible (Non-physical) products • Need – Basic requirements for survival • Wants – Something that you do not have to have for survival but would like to have

17. Basic Economic Concept • Factors of Production • Resources businesses use to produce the goods and services that people want • Four Factor or Production • Land • Labor • Capital • Entrepreneurship

18. Basic Economic Concept • Scarcity • Demand exceeds supply • Because resources are in limited supply, to have one thing may mean that you have to give up something else

19. Basic Economic Concept • Supply and Demand Theory • Sellers want to sell at the highest price and Buyers want to buy at the lowest price • Supply and Demand interact to determine prices customers are willing to pay for the number of products producers are willing to make

20. Basic Economic Concept • Three basic tenets of supply and demand theory • If something is in heavy demand but in short supply, prices will go up. Rise in price will lower demand. • If something is in plentiful supply but demand is lacking, prices will go down. Decline in price will expand demand and contract supply • Prices tend to stabilize at the level where demand equals supply

21. Basic Economic Concept • Demand • Quantity of goods or services that consumers are willing and able to buy. • Demand Elasticity • Degree to which demand for a product affected by its price • Elastic Demand • Situation in which a change in price creates a change in demand • Lower-priced substitutes • Inelastic Demand • Change in price has very little effect on demand • No acceptable substitutes, product is a necessity

22. Basic Economic Concept • Demand • Diminishing Marginal Utility • Price alone does not determine demand • Other factors play a role: • Income – Taste – the amount of the product already owned

23. Basic Economic Concept • Supply • The amount of a good or service that producers are willing to provide • Producers are willing to supply more when prices are high • Market prices provide an incentive to produce goods or service • As price goes up, the quantity supplied goes up

24. Basic Economic Concept • Surplus, Shortage, Equilibrium • Surplus – more supplies than needed • Shortage – fewer supplies than needed • Equilibrium – Point at which consumer buy all of a product that is supplied • Neither a shortage or surplus

25. Business cycle • Economic Indicators • Statistics published by the federal government that helps the entrepreneurs understand the state of the economy and predict possible changes

26. Business cycle • Economic Indicators • Some examples are: Employment Rate, consumer confidence, and the GDP • Gross Domestic Product – total market value of goods and services produced by a nation during a given period. • Consists of the consumption of goods and services, investment, government expenditures, and net exports to other countries

27. Business cycle • The Federal Reserve • Government agency that controls the economy and regulates the nations money supply • Tells the banks the percentage of their money it can lend • Controls interest rates, raising them to increase the cost of borrowing and reducing them to decrease the cost of borrowing • Buys and sells government securities to increase or decrease the money supply • Head of Federal Reserve is: • Ben S. Bernanke

28. Business cycle • Expansion and Contraction • Expansion – Period of growth and prosperity • Contraction – Slow down in growth

29. Business cycle • Inflation • Growing to fast • Unhealthy jump is prices that slows consumer and business spending • Companies reduce production and lay off workers • Higher unemployment

30. What Entrepreneurs contribute • New companies are the driving force behind economic growth • Business start-ups are beneficial because they generate employment and increase the production of goods and services

31. History of Entrepreneurship • Early years to 1980’s • Small businesses were the norm • Supplied basic needs • 1960 – Huge companies were common • No international competition • Job security • 1970 – High levels of inflation • Companies were facing competition • Introduction of microprocessor and personal computer – Information Age

32. History of Entrepreneurship • 1980s to Present • Large companies suffering • New, smaller companies were responding to the changing market • Known as “Decade of Entrepreneurship” • Entrepreneurs had increasing impact on the economy and economic growth • 1990s – advent of Internet • Spurred new entrepreneurial ventures • Recent – Advent of new media technology • Made it possible to do business anywhere

33. Entrepreneurial Start-up process • 5 key components • The Entrepreneur • The Environment • The Opportunity • Start-up Resources • The New Venture Organization

34. Entrepreneurial Start-up process The Entrepreneur • Driving force of the start-up process • Recognizes opportunity and pulls together the resources • Creates company to execute opportunity • Brings all life experiences and expertise • Calculated Risk Taker

35. Entrepreneurial Start-up process The Environment • Includes variables that affect the venture but are not controlled by the entrepreneur • 4 Categories of environmental variables

36. Entrepreneurial Start-up process The Environment • 4 Categories of environmental variables • The nature of the environment, whether it is uncertain, fast-changing, stable, or highly competitive • The availability of resources, such as skilled labor, start-up capital, and sources of assistance • Ways to realize value, such as favorable taxes, good markets, and supportive government policies • Incentives to create new businesses – Enterprise Zones – Designated area of the community that provide tax benefits and grants for new product development

37. Entrepreneurial Start-up process The Opportunity • Is an idea that has commercial potential • Opportunity has value only when customers are ready and willing to buy • Idea + Market = Opportunity • New businesses are founded on recognized and created opportunities

38. Entrepreneurial Start-up process Start-up Resources • When ready to execute a new business, creative talent is needed to pull together the necessary people and capital. • Includes – Capital, Skilled Labor, Equipment, Management Expertise, Legal and Financial Advice, facility and customer

39. Entrepreneurial Start-up process New Venture Organization • Company • Foundation that supports all of the products, processes, and services of the new business

40. New Business success and failure • More businesses succeed than fail • 66% of small businesses survive the first two years. • 40% by six years

41. New Business success and failure • Business Failure – business that has stopped operating with a loss to creditors • Usually files for bankruptcy • Discontinuance – Business that was purposely discontinued by an owner who wanted to start a new one • Closing planned and caused no harm