COMMUNITY COLLEGE OF GINGOOG CITY

GINGOOG CITY

TRACT 3 – ORGANIZATION AND MANAGEMENT OF

SMALL BUSINESS

Module 2: Entrepreneurs vs. Owner-Managers

Learning Objectives

After completing this chapter, you should be able to:

• Define the terms ‘enterprise’, ‘entrepreneur’ and ‘small business’.

• Understand the difference between entrepreneurs and owner-managers.

• Review models of new venture creation.

• Understand the ‘barriers’ and ‘triggers’ to new venture creation.

• Examine the process required to assist start-up firms.

The process of small business management needs to be understood within the

context of the overall enterprise environment that consists of micro, small and
mediumsized firms, within the entrepreneurial culture from which they are
formed, and within the support networks that allow them to get started.
Enterprise, entrepreneurship and small business management are closely
related concepts but are not identical. Entrepreneurship is about new entry,
new products or services, and the desire to grow a venture and maximize
profits Entrepreneurs is typically strategic in their outlook. Small business
management is about the operation of small ventures that may or may not
have entrepreneurial capacity. Owner-managers of small firms are often
focused on lifestyle. Many myths exist about entrepreneurs. Generally, they are
not as risk oriented, not high-tech, not experts in their fields, and not
strategically focused or supported by venture capital as is popularly believed.
Entrepreneurs typically identify opportunities, marshal the necessary
resources needed to launch their venture, and then build capability over time.
Most entrepreneurial ventures are led by one or two entrepreneurs who are
supported by a small development team and a wider constituency of customers
and employees. Small business start-ups are generally lacking in resources
and should be managed to achieve break-even quickly with low fixed costs and
a strong focus on cash flow.

The start-up process typically involves:

acquiring the motivation to start; identifying the idea and validating it through
market feasibility testing; acquiring the resources to launch; and then
launching.

Most nascent entrepreneurs are influenced by common barriers and triggers

when establishing their new ventures. These are a combination of internal and
external factors. While each individual is different, motivation and a desire to
follow personal goals or creative ideas may be the most powerful factors.

Key Lessons from the Chapter

• Entrepreneurship and small business management are frequently considered

as representing the same thing. This is not so, and it is important to identify
how these two concepts differs from the other. – On the one hand,
entrepreneurial studies focus on theoretical frameworks within which to
understand the entrepreneur and the various forces that create motivate and
sustain their behavior. – On the other, small business management is
frequently about process.

• The principal characteristics that define the entrepreneur tend to be a strong

drive to achieve and a sense of competitiveness. In an attempt to classify these
different entrepreneurs, academics have created numerous typologies and
taxonomies. These usually involve measures of the individual’s risk-taking
propensity, growth orientation or strategic vision.

• Several myths surround entrepreneurship. These include the notions that:

entrepreneurs are born not made; that anyone can start a business; that
entrepreneurs are gamblers who want to dominate the entire show;
entrepreneurs want to be independent, they should be young; they are only
motivated by the dollars to be earned; and if they have enough start-up capital
they cannot lose. All these notions are myths.

• The process of entrepreneurship has been likened to a three-step process that

is: Opportunity recognition: the process of identifying the business opportunity
and developing sufficient passion to want to drive it forward to a reality that
generates wealth. Marshaling of resources: the entrepreneur must seek people,
money, equipment and support in order to follow their vision. Developing
capability: the successful entrepreneur is able to marshal sufficient resources
to start a business and then learn how to develop the new venture’s
capabilities to achieve prolonged sustainable growth.

• An entrepreneur is an individual who establishes and manages a business for

the principal purpose of profit and growth. The entrepreneur is characterized
principally by innovative behavior, and will employ strategic management
practices in the business

• A small business owner is an individual who establishes and manages a

business for the principal purpose of furthering personal goals. These owner-
managers must not only carry out the productive work of the business, but
keep the books, pay wages, collect and pay GST, target new customers, service
existing customers, purchase their own materials, and do all the other
numerous things that comprise the functioning of a business venture.

• In the causation process, there is a clear sense of the variables that need to
be controlled in order to achieve a given outcome or end result. This implies
causeeffect logic in which investment of time and resources in a project will
lead to relatively predictable outcomes. This type of process is well suited to the
exploitation of known markets and established knowledge.

• By contrast the effectuation process is more suitable where the variables –

and even the end state – are unknown or unpredictable. The focus is on the
control of things that might assist in articulating through the process into an
uncertain future. Effectuation assumes that the environment is dynamic,
nonlinear and ecological in nature. It can be useful in the creation of new
markets and products in which strategic alliances and collaborative strategies
are important for success.

• The four principles of effectuation theory are the following: affordable loss,
rather than expected returns; strategic alliances, rather than competitive
analyses; exploitation of contingencies, rather than pre-existing knowledge;
and control of an unpredictable future, rather than prediction of an uncertain
one.

• Several critical forces drive the creation of new business ventures.

These factors involve:

1. Opportunity – the entrepreneur needs to identify an opportunity that is

sufficiently attractive to warrant the expenditure of time or money.
 2. Leadership – the new venture is usually given its initial drive by the efforts
of a lead entrepreneur or entrepreneurial team.

3. Resource allocation and creativity  – the new venture requires the creative
allocation of resources, e.g. time, money and intellectual property.

4. Fit and balance – the entrepreneur needs to ensure that there is an

adequate relationship between the resources available, their fitness for the
purpose to which they are applied, and the capacity to balance frequently-
competing needs.

5. Integrated and holistic – management of the SME requires an integrated and

holistic approach in which everyone must learn to ‘muck-in’.

• The owner-manager who seeks to start the new business must consider: the
level of demand for their product or service within its market, and how
profitable the product will be. How quickly it might return their investment is
also an important consideration.

• Following checklist is important when seeking to employ ‘bootstrap’

financing: Implement proven market ideas, Look for a quick break-even, Look
for high gross profit, Sell directly, Keep the team lean, Control growth, Focus
on cash flow, and Cultivate banks early.

• The new venture is usually created in an environment of ambiguity and

uncertainty. The exogenous forces that are frequently beyond the control of the
entrepreneur and their team create market and financial constraints. How well
the entrepreneur manages to balance these elements is important to overall
success.

• Support agencies seeking to assist small business start-ups often place a

heavy emphasis on the formal business plan. However, as noted above, most
successful enterprise start-ups do not involve formal plan preparation.

• Until entrepreneurs have more experience of what they are seeking to achieve
and where they wish to take their business, formal business planning is likely
to be difficult to undertake with any confidence. Once the venture has been
launched, the entrepreneur will need to identify and marshal resources. If
money or people are involved, the entrepreneur may be required to prepare a
formal business plan.
 • The more complex or innovative the business idea, the more time it may take
between the emergence of the initial idea, its validation and resource
acquisition.

• The lack of suitable motivation and commitment, poor cash flow, lack of
profitability and personal problems experienced by the owner-manager(s) are
likely to be the greatest cause of small firms being abandoned during the start-
up phase

• The main causes of small business failure: – Underestimating the time

required bringing the business to the point of break-even. – Undercapitalization
of the business, particularly a lack of working capital to fund growth. –
Overestimation of the size of potential markets or sales growth. – Lack of
management/marketing skills by the owners. – No unique selling proposition
or point of differentiation forcing the venture to compete on price instead of
value-adding. – Low profitability caused by confusing high sales/turnover with
high profit margins. – Failing to retain profits in the business to fund future
growth. – Recruitment of the wrong people within the start-up team. – Poor or
inappropriate business location selection. – Failing to monitor the business
performance, particularly cash flow and profitability. • Key start-up trigger
factors appear to include: – The desire to invest; – The creativity drive; – The
desire for autonomy; – The desire to increase status within the community; –
The pursuit of a market opportunity; and – The desire to earn more money.

• Key barrier factors found were:

• The lack of start-up resources; – Compliance costs including the lack of

suitable labor; and – The hard reality of high risk and uncertainty. 2 Work
Book: Entrepreneurs vs. Owner-Managers17

• While the external environment cannot be discounted, research suggests that

the personality of the entrepreneur may play an essential role in the start-up
process. – Those that effectively set up a new business venture are those who
have an overriding drive to create. – Both starters and non-starters appear to
face similar types of barriers. – Some non-starters did all the ‘right things’ to
successfully launch a new business venture, that is, they saved money, drafted
a business plan, and sought the advice of government agencies. – However,
they abandoned the idea to start because they lacked the passion to carry out
their entrepreneurial dream.