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foundations of leadership exam 1
Terms in this set (106)
The United States Small Business Administration (SBA) provides
statistics to prove entrepreneurial businesses' importance
•99.9 percent of all businesses in the United States are small
•48 percent of private sector employees
•33.6 percent of known export value
madonnas entrepreneurial adaptation
oEmphasis on Adapting to the Environment: Like a Prayer, Evita, Motherhood, Yoga, Kabbalah, Investor
- oMadonna is involved in every aspect of the show's design and planning, including auditioning dancers and musicians, planning, costume design, and choice of themes.
every fortune 500 company started out as a small venture
•Not all new ventures will grow big, they are the foundation for businesses
new businesses are an essential
element in any economy.
According to SBA:
•99.9 percent of all businesses in the United States are small
•48 percent of private sector employees
•33.6 percent of known export value
critical elements and entrepreneur must solve for success
1.Effective sales generation model
2.Sustainable operating profit margins
3.Being properly financed
Entrepreneurs garner profits in markets that have been ignored
Starting one's own business means you can be your own boss
•Opportunity and responsibility to lead
stakeholders must be
•kept in mind / They can be the basis of innovation
entrepreneurship is a mindset that is
oOpportunity-focused/ Risk taking / Innovative /Growth-oriented (may or may not be present in small business)
Economic growth and job creation
1.Who am I? traits, tastes, and abilities
2.What do I know? education, training, expertise, and experience
3.Who do I know? their social and professional networks.
oPeople like us do things like these (Seth Godin)
venture capital start-ups are those formed as high-growth, often high-tech, ventures and can be characterized by the following descriptions:
•Well-funded by venture capital or angel investment- These are investors who provide capital to the start-up in exchange for ownership in the firm, may be as high as 50 percent of the company. Without the investors it is virtually impossible to begin this particular type of venture
•Formed with a harvest plan in place- this is a plan to exit the business allowing investors to take advantage of growth.
•Organized to grow quickly and are heavily laden with debt
•Have a developed organizational structure
•Hire an experienced president to grow the firm
•Tend to develop operations in multiple locations
•Inherently risky operations
•Employ a relatively large number of people
Beyond all the statistics about how many new businesses fail (and many of them do fail), research has found that there are three critical elements that an entrepreneur must solve for success:
1.An effective sales generation model: You must develop the ability to generate consistent and growing sales.
2.Sustainable operating profit margins: Profit margins are key to successful businesses.
3.Being properly financed: You must have sufficient resources to get the business to the point where it is self-funding.
The best way to survive and thrive is to thoroughly plan and lay a solid basis for the business
The second category of business, the more common type and the focus of this text, is the entrepreneurial firm, defined by these characteristics:
1.The start-up is self-funded or closely funded.
2.The development plan is oriented around positive cash flow.
3.The management structure is designed to take advantage of the skills of the founder(s).
4.The operation is designed in the image of the founder(s).
5.The business is oriented toward the personal goals of the founder(s).
6.The number of employees may be zero or as few as one, and typically would not be expected to grow to more than 50 to 100.
venture capital backed firm
•Business plan is used as a promotional tool
•Many hire consultants to develop their plans
•Plans may run 25 to 45 pages long
•Business plan is developed as a guide for running the business
•Most business owners develop their own plans
•Plans are 15 to 25 pages long
•Goals of the plan: To be a guide, to provide a self-evaluation, and to provide information necessary to evaluate the key criteria
the business plan for a new entrepreneurial business is developed with three goals in mind:
1.To be a guide to managing the business in its early development.
2.To provide a self-evaluation: putting the information down in writing allows for evaluation and honest analysis.
3.To provide potential closely held investors with the critical information necessary to evaluate the key criteria of the business: its cash flow, management team, and competitive advantage.
difference between an entrepreneurial business and a venture capital backed firm
is in the size and detail required in their initial business plans.
Whereas an entrepreneurial firm generally develops a business plan as a promotional tool to be sent to venture capitalists and other potential investors, an entrepreneurial business develops a business plan as a guide for the running of the business.
Many ventures hire professional consultants to develop their plans; in contrast, entrepreneurial business owners develop their own plans as part of a process.
A venture capital backed business plan runs from 25-45 pages and many are more than 100 pages.
The business plan for a small business should be relatively short,15-25, pages and should be developed in a manner that helps the small-business person understand the industry, the firm that he or shewishes to develop, and what will be needed to create success in that business
An entrepreneurial venture brings something novel and valuable to the marketplace
•Three primary characteristics:
2.Creates value to the customer
•Indicates that a start-up business will need to rapidly change
•Build a business that generates something that customers desire
•Seeks a model that is scalable
•Seeks to shorten the product or service cycles by quickly testing and experimentation of a product
•Suggests you must be flexible and adaptable to change, which will be the nature of the business
The business planning process developed in this text is a practical and logical guide for the establishment and initial management of a new business
1.No cookie-cutter business plan programs. There are plenty online, but the authors believe these actually inhibit the process of designing a business. A well-designed business plan helps the founders consider every aspect of the new business.
2.You should plan to develop the elements of your plan as you finish each chapter. The text is designed for you to have a full business plan crafted by the time you reach the end of the book. You will want to refine the plan after leaving the class, but you will have the tools to begin the process of forming your own business.
3.Do not be intimidated by the effort needed to bring forth a business. Since it is a daunting task, it should be done in pieces with each piece fitting into a whole picture. It is a process; take it step-by-step.
4.Craft a one-page pitch for your business. This provides a snapshot of the business at a point in time. There is an example on page 15 of the text.
large organizations vs entrepreneurial
In large, well-established organizations, no one person is crucial to the survival of the business, even the president of the company
-Large organizations also have wide dispersion of knowledge throughout the business; in essence, multiple people know about any given aspect of the business. So, if any single person leaves, there is minimal disruption to the organization.
-Large organizations have greater excess resources, including financial resources. These excess resources are referred to as organizational slack; they allow large organizations flexibility that is not available to the typical entrepreneurial venture
-In contrast, an entrepreneurial business is generally dependent on a single individual or a few individuals for the business to survive.
is one in which ownership and employment are centered around the family. Family businesses have unique issues
•No one person is crucial to the survival of the business
•Knowledge is widely dispersed
•Greater excess resources
•Dependent on individuals
•Concentration of knowledge
•Limited slack resources
collaboration in small groups is
an essential part of new business success
advantages for new businesses
•Owned and run by the same persons- greatest advantage
•Increased flexibility → ability to fill niches
•Effort to maximize the value of the business
governance advantage- agency theory
view that individuals act to maximize their own benefit
•In a large corporation, a manager may act to maximize his own benefit, not necessarily that of shareholders
•In an entrepreneurial business, the individual who owns the business will always act to maximize the value of the business
•The interest of the owner and that of the business are aligned
one of the greatest assets of the new business
is the owner of the business because of their personal involvement in, and dedication to, the business.
There are a number of issues that potential entrepreneurs need to consider about themselves as they look at starting a new business. These issues will shape the entrepreneur's analysis of the potential of any business idea. These include:
3.Personality orientation of the individual
•Entrepreneurs must evaluate:
•Whether they have the risk tolerance to start a new business
•Level of risk they will accept in a given business situation
•It takes time for the business to reach the break-even point
•Awareness of their risk tolerance and establish a business consistent with that tolerance
experiences, history, culture and family values
•Interpret the world → boundaries on what you consider for making decisions
•Establish what people consider to be both possible and practical
•Referred to as an individual's bounded rationality
personality orientation of the individual can be analyzed
•Myers-Briggs focuses on four pairs of variables
•Extroversion-introversion, sensing-intuiting, thinking-feeling, and judgment-perception
•Enneagram suggests that there are nine different types of personalities
•Big Five Test looks at five factors
•Open-mindedness, conscientiousness, agreeableness, emotional stability, and extroversion
Starting a new business is often the result of some particular event or condition within an individual's environment. The triggers in the formation of a new business can come
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.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, 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, and having a marketing background in a manufacturing business.
10.Graduating from college you may also see new opportunities that others have not seen.
Often, more than one of these triggers may be present at the same time.
•Come from the individuals themselves
•Strongest motivations available
-come from the individuals themselves and are the strongest motivations available. Entrepreneurs driven by personal motivators will tend to be more proactive and drive relentlessly toward their goals
•Result in a defensive positioning
-tend to result in more of a defensive positioning. This is an opportunistic start-up whose staying power is more determined by other competing opportunities.
The result of glass ceiling 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 is minority women owners; today one-third of all female businesses are headed by women of color.
•Practical reality that limits the level in the corporate hierarchy to which women are allowed to progress
•Women are starting new businesses when their career opportunities are blocked at larger corporations
According to the National Association of Women Business Owners, today there are more than
•11.6 million women-owned businesses in the U.S.
•Since 2007, the number of women-owned firms has grown at five times the national average, with 1,072 new women-owned firms starting every day.
•Fast-growing segment of entrepreneurs is minority women owners, with more than one-third of all female businesses headed by women of color
Supports and resources available to the entrepreneur →
no single support assures 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.
•Offer support, guidance, suggestions, and potential funding
•So critical that many ventures end up being family businesses
•High level of commitment that accompanies family employees
•Negative long-term issues include personal feelings that make it difficult to fire family members
support: social networks
•Key support in an individual's life that provide legitimacy, feedback and advice
Online networking → rich source of advice on forming a business and sources of funding
•Comm. support can lower the overall risk for a new business in the community → incubators that house new firms and provide services and office functions such as office space at subsidized rates
•Most communities have Small Business Assistance Centers that advise new businesses
•Each community has its own unique supports
•Entrepreneurs must fully understand the cost-benefit of business
•Don't underestimate the financial resources required in starting and running a new business
•Regardless of the type of business, it is critical to obtain the necessary funding
the greatest contributor to your success
is that you are doing something you enjoy
-An entrepreneur will need to spend considerable time at the business for it to be successful. You will be spending the greatest amount of your time either sleeping or working, so you need to enjoy what you do.
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.
-•Positions in the retail industry are very social
•The more workers can make conversation with potential customers often times more sales opportunities can result
suggested approach to developing a quality business idea
1.List and evaluate your own personal skill sets
2.Carefully analyze the market and look for gaps or some unmet need
3.Compare the ability to fill those gaps with the opportunities available
Necessary (idiosyncratic) skills + depth of understanding → long-term advantage in the market
Connection between the entrepreneur's skills, understanding of an industry, and the ability to create a competitive advantage such that the sum of the parts of the new business is greater than the individual parts alone
specific areas for skill identification include
questions about hobbies the potential business owner should probably ask include:
•What hobbies or activities do you pursue on an active, perhaps daily basis?
•What hobbies or activities have you pursued in any manner over your lifetime, whether or not you were serious about them?
•What is it about your hobbies or activities that really excites you?
•What were the specific skills that these hobbies or activities required?
•What have your experiences in the hobbies or activities taught you that could help others?
What products and services did you use in these hobbies or activities
impact how you approach business ventures
An opportunity that uses your education,
formal or informal, is another source of a business. The technological skills developed during the entrepreneur's education can be particularly valuable.
another source of skills
for a new business comes from your work experience.
In each job, individuals build up skills that they take with them when they start a new business
your family can be
a great help in developing a business.
What are some of the risks and rewards that you associate with the idea of working with your family?
-often-overlooked source of skills for a new business
Relatively simple process of systematically examining the difference, or gap, between what is expected and what occurs
Type: Opportunity analysis
•Examines opportunities in the marketplace side-by-side with the individual's ability to address those gaps
ways to identify gaps
•Interview key successful local entrepreneurs
•Discuss ideas with family members
•Look for environmental changes that create opportunities
•Look at daily frustrations
•Examine patent files: U. S. Patent Office
choosing a business
•Generation of ideas along the way to selecting a business is a process that takes time and frequent interaction
Potential entrepreneurs often have several ideas but need to identify one to analyze
•In-depth analysis may lead to scrapping the idea and starting over
Analysis requires focus, time, and financial investment
One means to identify which business to pursue is through a Gap Analysis
1.How do you decide that a sufficient business opportunity exists and that you have the resources necessary to take advantage of that opportunity?
2.Using your list of three to five ideas, develop a chart that examines the issues that might impact success
form to compare business ideas
The three business ideas generated by the small business founder discussed in the previous section have been filled into the first column, but you would use this form for your own business ideas.
In the second column, list each category you will use to analyze the idea. Consider one at a time. Consider at least these five categories, which are crucial to the founding and successful running of a business: finances, time, nonfinancial resources, risk, and competitors. We will discuss these in the next section.
In the third column, you should provide a realistic estimation of personal resources.
In the fourth column, you should list your estimates of what resources are required for success.
For the last column, you should qualitatively compare your skills and resources with the perceived requirements of that particular business, and record the perceived deficit or gap.
Then you can answer an important question: Is that deficit surmountable, or is it one that kills the idea?
This chart can be completed with minimal or no research. The authors of this text suggest that at this stage of investigation, a gut-level, reasonably quick analysis is needed to see if the business passes an initial test.
entrepreneurs must examine
Amount of money required to start and operate a business
Their own resources and business needs
It takes time to start a business
Each type of business will require different time frames
Entrepreneurs must look at their own resources and those needed by the business
A new business requires resources beyond financing and time commitment
These resources include:
Special contacts with suppliers or customer groups
Physical location of the business
-An entrepreneur should exercise some creativity in the analysis of the situation and the needs of the business
Direct competitors selling similar products or services within a geographic radius that is consistent with a customer's willingness to travel to purchase those products or services
external analysis goals
•Define industry broadly enough to include potential competitors (but not too broad)
•Be clear about the practical level of actual competition
•What is a reasonable geographic customer draw for a new business?
ways to gather information and insight
•Online search/ Industry magazine or journals /Industry associations
•Find Your N A I C S Code (North American Industry Classification System) Provides data on the industry at a national level, which may differ locally
first part of external analysis
is to determine the industry within which the new business will compete, as well as the general makeup of the industry. In doing so the entrepreneur should seek to be as specific as possible.
industry associations are another prime source of this type of data
. Industry associations for virtually any industry you can think of probably exist at the national level, and many have local or state organizations as well.
Entrepreneurs should define the industry in which they will compete broadly enough to be inclusive of all potential competitors, but not so broadly as to be overwhelming.
Even more important, the entrepreneur must be clear about the practical level of actual competition.
An entrepreneur should ask, what is a reasonable geographic customer draw for a new business?
Drawing a practical radius around your potential new business location will also help target the customers who are most likely to patronize your business.
strategy: what, who, how
•Define a narrow group of individuals whom they believe will be their most likely customers
•Be diligent in the effort to be as accurate as possible
helps the new business
•Focus on its core customer
•Maintain a strategic distance from its competitors
once the industry is broadly defined
then the exact nature of the customer should be developed. It is important to define a narrower group of individuals whom you believe will constitute your most likely customers.
Where are they located? Where do they currently obtain their product or service?
in defining the customer the entrepreneur should be
diligent in the effort to be as accurate as possible
-This approach helps the entrepreneurial business clearly focus on its core customer.
It also helps the business maintain a strategic distance between itself and its competitors, as the firm is not trying to do what everyone else may do
-Finally, a clear understanding of the business's customers assists the owners in controlling expenses, as the business does not try to be everything to everybody and the inventory can be much more focused than if the entrepreneur tries to be everything to everyone
At this point, you should have defined the industry that interests you, determined who your potential customers might be and why they might want to buy from your business, and gathered some information on these domains.
The next issue is to
to identify the exact competitors within that industry. These competitors are those firms that directly compete for the same set of ideal customers as your proposed business.
Developing the Information for the External Analysis of Competitors
Identifying competitors who directly compete for the same set of ideal customers.
•Gain invaluable insight
•Become an expert
•Plan a business with a competitive advantage
Know your market
•When planning new development (e.g., golf course), knowing your market is crucial
•What activities would you want to control personally when developing your business?
Effective industry analysis starts by identifying every potential competitor within a reasonable distance of the location
•First step: Defining a radius from which one will draw his or her customers
•Example: 20 minutes driving in traffic
•Second step: Examining each of your potential competitors within that radius
most firms compete in fragmented markets
•Fragmented markets: Markets in which no one competitor has a substantial share of the market and the means of competition vary widely within the same market space
Analytical tool used to organize information about direct competitors on all points of competition
-Products that perform a similar function or achieve the same result, but are not precise imitations
•Need to be aware of potential substitutes and their impacts
•Recognize that at some price trade-off point, customers will switch to substitutes
-substitutes can help form a ceiling on the price that can be charged for the product or service
elasticity of demand
•Consumers' response to price changes
•For example, as the prices of luxury items increase, demand usually declines as these goods are not essential and their purchase can be delayed
•Conversely, items such as gas for a car typically have relatively inelastic demand as one will not stop using it as the price increases
•Barriers, such as investment in capital assets, that keeps a firm from leaving an industry
Ease of entering and exiting is critical:
Closing a clothing store has a high exit barrier
•Sharp discounts are in order
Closing a golf course has a low exit barrier
•The land can be converted to a housing tract
Ability to exit a business easily tends to:
•Limit the intensity of competition in the industry
•Reduce the threat posed by a new entry
•Working with and learning from a company outside of one's industry that has a particular skill that is potentially critical to one's operation
•Benchmarking a business that is successful in a particular area but that does not compete in one's own industry can be considered to strengthen areas of competitive advantage
•Most companies will share knowledge as long as one is not a competitor
Shape the long-term prospects of the industry
•The United States is moving to a self-service economy
-Companies that can move that process forward or take advantage of this movement appear to have an opportunity for success
•Healthy, mid-price-range restaurant sales have been increasing dramatically
-Restaurant that enters an emerging market may be able to create a niche and gain a competitive advantage
•Edge over competing businesses based on resources, capabilities and activities that the organization performs better than anyone else
•Reason why customers go to one particular business and not to one of its competitors
sources for competitive edge
vActivity of the firm: type of service or product it provides
vStructure: high-quality location
normal or ordinary competitive factor
•Areas of a business that are simply standard practice in the industry and are necessary for the business to be a player
unusual or unique competitive factor
•Unique areas when compared to the standard practices of the industry, and that provide the opportunity for the business to gain value over and above the ordinary returns in the industry
•Theoretical approach and practical methodology
•Examines the functioning of a business in terms of whether a product or service simultaneously meets certain criteria
To develop into a competitive advantage, unusual products or services must meet the following criteria:
oCostly to Imitate (Durable)
oRelatively non-substitutable / Value capturing
a brief statement that summarizes how and where the firm will compete.
-•Must be concise and understood by everyone
•Related to vision, overall strategy, goals, simple rules, and statement of purpose
•Keeps the focus of new businesses on activities that offer competitive advantage
-Defining the new business's mission is one of the most difficult and critical elements in the success of any business.
Firm mission should leverage on
•How you combine resources to allow a firm do things better than its competitors
•Key aspect to success of a firm
•Resources of the firm are constrained
•New business should focus the resources on areas with the potential to maximize its success
features of a good mission statement
Keep it short
•Understandable and memorable
-Must speak to customers, suppliers, and others, though primarily written to guide employees
•Short and direct, designed to guide the organization each and every day
•Clear, succinct, memorable, and widely known by all in the firm
Keep it simple
•Unshared mission statement is of little value
•Key to communicating a mission easily is that the statement must be simple, direct, and appropriate
•Words and concepts in the statement must be straightforward and with clear meaning
Make it Applicable
•Everyone can effectively utilize the mission statement if it is directly applicable
•Mission should be so specific that it tells everyone what not to do
•Limitations, if any, should be clear to everyone
•Strong focus on the mission statement keeps everyone striving toward the goals of the owners
•Evaluate whether the firm is meeting stated goals
•Direct measure of the business's mission
•Judge if the mission is being accomplished
•Best established at the founding of the business and are evaluated on a recurring basis → Apple Watch
1.are those that are tied to the financial or strategic goals of the organization and are easily measured
are those that are tied to the strategic goals of the organization but have more to do with the "feel" of the organization
sustainable competitive advantage
•Advantage that others cannot immediately copy
•Building a sustainable business is critical to long-term success
•All individual competitive advantages tend to disappear as industries change and competitors adapt
•Key to building competitive advantage is in having a deep understanding of customers' needs
•Personal relationships with customers can be a great source of sustainable advantage - gaining deep insights (e.g., demand school)
•Business must understand its competitive advantages before developing a mission statement
Identifying a Sustainable Competitive Advantage
vStep 1: Develop a list of your business's assets and capabilities, either existing or proposed
vStep 2: Break that list into two groups: standard and unique
vStep 3: Evaluate the uniqueness of resources and capabilities
The owner, or founding team, needs to develop a complete list of all the physical and intangible assets that the company will have at its founding.
•Tangible assets: Hard assets such as equipment or a location
•Intangible assets: Things that are not physical but are just as critical to success, such as a relationship with a key supplier, like skills of staff
-Inventory process is critical to the later steps though it may seem mundane
List will be long and should include everything the company has now or will have at its opening
split the list into standard and unique assets
Most assets listed are standard for the industry
•Office, computer systems, telephones, etcetera
Most capabilities or skills of founders and employees also tend to be standard for the industry
•Excellent customer service is a customer expectation
Entrepreneurs will possess unique assets and capabilities that can provide competitive advantages
•Creativity, experience, personal networks, education, drive, leadership skills, location, knowledge, relationships with suppliers.
Competitive advantage must be defensible and must not be easily substituted or matched by competitors
first mover advantage
•Benefit of gaining customer loyalty by being the first firm to market
Firms that enter a market after the first mover
new firms must examine the unique resources list
-Some capabilities on the list may not be the best on which to center a new business
-Focus efforts on areas that have the potential in the market to provide the greatest competitive advantage to the business
Used by strategists to analyze the list of competitive advantages
develop and implement a strategy
•Step 1: Mission specifies where and how the firm is to compete
•Step 2: Strategic plan showing capabilities to meet our mission and strategy
•Step 3: Assessing if capabilities will be defendable for some length of time and provide returns above the industry average
•Step 4: Strategy needs to be constantly re-evaluated
) three broad strategies that can be combined
Most new firms pursue a combination of the three, a 'value' strategy
Implementing a strategy is about fit and alignment within the business
•Business must be built on a consistent set of activities around its mission and strategy - helps focus on strengths and opportunities
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