unit 4 entrepreneurship -...

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Professional Development Programme on Enriching Knowledge of the Business, Accounting and Financial Studies (BAFS) Curriculum

Technology Education Section, Curriculum Development InstituteEducation Bureau, HKSARG

August 2008

Unit 4 : Entrepreneurship

Course 2 : Contemporary Perspectives on Management

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Learning Objectives

On completion of this unit, participants should be able to:– appreciate the importance of entrepreneurship in

business development and economic growth; – describe the characteristics and aptitude of an

entrepreneur;– understand the entrepreneurship process;– appreciate the relationship between entrepreneurship

and SMEs.

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Unit OutlineWho is an Entrepreneur?

EntrepreneurshipEntrepreneurship vs Economic Development

Entrepreneurial Profile

Entrepreneurial Process

Opportunity

Resources and InformationInformation Gathering

Resources GatheringPartnership

Motivation to Excel

Business Life Cycle

Commitment and Determination

Leadership

Opportunity Obsession

Tolerance of Risk, Ambiguity and Uncertainty

Creativity, Self-reliance and Ability to Adapt

Business Plan

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Who is an entrepreneur?

An entrepreneur is one who creates a new business • in face of risk and uncertainty

• for the purpose of achieving profit and growth

• by identifying significant opportunities and assembling the necessary resources to capitalise on them.

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Is Alan an entrepreneur?

Alan is a programmer of a software company. He developed a new computer software which outperforms similar products in the market. The software company made a great profit from the software, and Alan got a half million dollar bonus as reward.

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Is Alan an entrepreneur? (ans)

Alan has identified the business opportunity, however he doesn’t start his own business to market the software.

He is probably an intrapreneur.

Intrapreneur creates something new inside an existing company rather than through the route of founding a new business.

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Is Betty an entrepreneur?

Betty, wife of Alan, is a housewife; she is good at baking cookies at home. She likes mix and match to blend new flavor of cookies and is praised by her friends. Moreover, she cares for the health of her family members, so she uses olive oil for her cookies.

She would like to start a business to make and sell her low cholesterol cookies.

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Is Betty an entrepreneur? (ans)

Betty possesses the necessary knowledge, techniques and resources, and identifies the business opportunities arising from the shift of customer taste.

She has the spirit of being an entrepreneur. If she starts her own business to capitalise on the opportunities, she will be an entrepreneur.

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Is Carol an entrepreneur?

Carol, daughter of Alan and Betty, likes to invent new things that can improve her lives. Her new invention is a lamp with a built-in sensor which detects any movement in darkness and switches on the lamp automatically.

She installs the lamp in her bedroom, her parents’bedroom and the kitchen.

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Carol creates something new, but she doesn’t try to convert her idea into a business.

She may not be an entrepreneur.

Is Carol an entrepreneur? (ans)

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Entrepreneurship

• Entrepreneurship requires to create or recognise a commercial application for something new.

• An entrepreneurial opportunity is a situation in which a person can exploit a new business idea that has the potential to generate a profit.

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Challenging Corner 1

Is there any correlation between the number of people to be an entrepreneur and the economic condition of a country?

How are they related?

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Challenging Corner 1 (solution) (1)

A coin has two sides!!

Argument 1: When the economy is strong, more people are willing to take the risk of becoming an entrepreneur because they think that they can find a new job easily even though their business ventures fail.

Argument 2: When the economy is weak and many people are unemployed, the opportunity costs for becoming an entrepreneur is relatively low. Thus, more people are pushed to take the risk to be an entrepreneur.

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In fact, both arguments are correct.

According to the Global Entrepreneurship Monitor report (2006), it is found that the level of entrepreneurial activities are closely related to the economic condition of a country.

A correlation exists between a country’s level of economic development and its level of entrepreneurial activity.

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Entrepreneurship vsEconomic Development (1)

In a country with lower level of per capita GDP, many people are forced into entrepreneurship because all other options for work are unavailable or unsatisfactory.

In 2006, the per capital GDP of China was about US$2000, and there were about 16% of the population aged between 18-64 involved in entrepreneurial activities.

The industrial structure is characterised by the dominance of many small enterprises.

Unit Outline [Source: International Monetary Fund (http://www.imf.org)]

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Benefited by the economic growth, relative role of the small enterprises decreases.

The increase in number of large enterprises is usually followed by a reduction in small new enterprises, since a growing number of people find stable employment in large enterprises.

In 2006, the per capital GDP of Singapore was about US$30000, and the percentage of the population aged between 18-64 involved in entrepreneurial activities was as low as 5% only.

[Source: International Monetary Fund (http://www.imf.org)]Unit Outline

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As the economy continuously grows, an increase in personal income is experienced. More people have the resources to go into business for themselves. They want to exploit a perceived business opportunity.The role played by entrepreneurial activities increases again.In 2006, the per capital GDP of United States was about US$44000, while the percentage of the population aged between 18-64 involved in entrepreneurial activities was 10%.


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In 2006, the per capital GDP of Hong Kong was about US$27000, however, there was only 3% of the population involved in entrepreneurial activity which is the least in the world.The low percentage could be explained by Hong Kong's high cost base and lack of entrepreneurial education.


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By continuous improvement of competitive advantages of new products and services, entrepreneurs contribute towards greater market efficiency.

Regardless of the economic conditions, entrepreneurial activity is a crucial engine of innovation and an essential building block of growth for the economy.

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Entrepreneurial Profile (1)

What are the general characteristics of being a successful entrepreneur?

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Timmons (1994) identified six general qualities of a successful entrepreneur should possess: – commitment and determination– leadership– opportunity obsession– tolerance of risk, ambiguity and uncertainty– creativity, self-reliance and ability to adapt – motivation to excel

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Commitment and Determination

• Entrepreneurs have to overcome seemingly insurmountable barriers to launch a company and to keep it growing. That requires commitment.

• Entrepreneurs are required to make timely decisions one after another, and not allowed to mull over tiny details before moving ahead.

• They must believe in their goals and be determined to succeed, even experiencing an initial thrash.

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Leadership

• Entrepreneurs know how to put the right people together to transform their vision into reality.

• Establishing a company from scratch requires an effective leader.

The differences are...

What are the differences between a manager and a leader?

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Manager vs Leader

does the right thingsdoes things right

counts on trustcounts on control

relies on peoplerelies on system

develops objectivesmaintains objectives

is an innovatoris an administer

LeaderManager

Below are the differences between a manager and a leader pointed out in the Fortune Magazine:

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Manager vs Entrepreneur

• Entrepreneurs have many of the same character traits as leaders.

• Managers and administrators are said to be more methodical and less prone to risk-taking.

• David McClelland (1961) described the entrepreneur as primarily motivated by an overwhelming need for achievement and strong urge to build.

• Collins and Moore (1970) commented the entrepreneurs are tough, pragmatic people driven by needs of independence and achievement. They are seldom willing to submit to authority.

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Opportunity Obsession

• Entrepreneurs understand clearly customers’ needs.

• They identify “value-added” opportunities, focus on problems and potential solutions.

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Tolerance of risk, ambiguity and uncertainty

• Entrepreneurs tend to have a high tolerance for ambiguous and ever changing environment in which their businesses operate.

• The ability to handle uncertainty is critical because they constantly make decisions using new, sometimes conflicting, information gathered from a variety of unfamiliar sources.

• However, they are not risk takers, they are “calculated risk” takers instead.

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Creativity, self-reliance and ability to adapt

• Entrepreneurs should be open-minded.

• They should possess unconventional thinking skills and an ability to learn quickly.

• They should also possess an ability to adapt to the changing demands of their customers and their businesses.

• In contrast, rigidity often leads to a failure in rapidly responding to the changing global economy.

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Motivation to Excel

• Entrepreneurs set high but realistic goals, and drive to achieve the goals.

• They are not driven wholly by monetary return, but by “achievement” instead.

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Bianchi (1993) also indicated some demographic characteristics that influence a person toward entrepreneurship: – being an offspring of self-employed parents; – being fired from more than one job; – being an immigrant or a child of immigrants; – previous employment in a firm with more than 100

people; – being the oldest child in the family; and – being a college graduate.

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Do you possess the characteristics of being a successful entrepreneur?

A short test “Entrepreneurial self-assessment”, designed by the Business Development Bank of Canada, helps you to measure your entrepreneurial potential.

Visit the site http://www.bdc.ca/en/business_tools/entrepreneurial_

self-Assessment/Entrepreneurial_self_assessment.htm for the test.

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Entrepreneurial Process (1)

In general, entrepreneurial process includes the following steps:

Unit Outline

Recognition of an opportunity

Assembling essential resources/information

Launching the new venture

Developing the business plan

Forming the team

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Entrepreneurial Process (2)

Timmons (1994) formulated the most important components of the entrepreneurial process in the following model:

Business Plan

Partnership

Opportunity Resources/Information

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Recognition of an opportunity (1)

Main sources of opportunities:

• Technological change is the most important source of valuable entrepreneurial opportunities.

• It enables people to do things in new and more productive ways.

• For example, the development of Internet changed the ways of communication through letter, fax or phone to email

Opportunity

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• Regulatory change is another source which makes it possible to develop business idea to use existing resources in new ways.

• People who respond appropriately and quickly to the changes would make great profit.

• For example, the tightening of the environmental protection regulations stimulate the rapid growth of recycling businesses.

Opportunity

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• Social and demographic changes are also important sources.

• They alter demand for products and services due to changes in people’s preference and needs.

• For example, aging population generates opportunities for the entrepreneurs to provide products and services for the elderly.

Opportunity

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• Entrepreneurial opportunities do not only take the form of new products and services, they also take the form of new methods of production, new raw materials, new ways of organising, and new markets.

Opportunity

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New enterprises perform better in:

• R&D intensive industries since new technology inventions are a main source of opportunity for new business idea;

• rapidly growing markets because they can enter these markets to serve the needs of customers who are not adequately served by established firms;

• larger markets because they allows fixed cost of the enterprises to be absorbed by higher sales;

Opportunity

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New enterprises perform better in:

• segmented market because niche markets require organisations that can exploit opportunities in a smaller scale. The exploitation of niches requires quick and agile firms.

• young industries because demand grows more rapidly during the early stage of the industry life cycle.

Opportunity

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State three industries in which new enterprises perform worse.

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Challenging Corner 2 (solution)

New enterprises perform worse in:

• industries in which dominant design has been established.

• advertising-intensive industries because branding and advertising has effects that cumulate over time, it is more difficult to take customers from established firms.

• concentrated industries because established firms may drive new players out of business easier.

Opportunity

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Recognition of an opportunity -example (7)

Example:• Betty has blended more than twenty recipes for

cookies in different flavors. She invited all her friends to try, and all of them agreed that the cookies are delicious and should be accepted by the market.

• She also identifies the increasing demand of low cholesterol food due to the rising health awareness in the community.

• After a discussion with her family and friends, Betty recognises that this is a business opportunity for selling her homemade cookies.

Opportunity

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Assembling resources/information (1)

The main reason of failure of an entrepreneurship is that the entrepreneurs fail to acquire essential information before starting.

Resources/Information

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Information gathering:– Marketing information

• what your target customers really want

– Industrial information • competitors’ information

– Secondary information • demographic data, sales of competing product

– Government policies and regulations • Registration procedure, Tax policy, Supports and

requirements from the governmentResources/

Information

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Tax Policy

• Hong Kong taxes are among the lowest in the world, and the tax regime is simple.

• The profits tax rate is, same for foreign and local companies, 17.5 percent.

• The actual tax bill is often even less after various deductions and depreciation allowances.

• There is no capital gains tax in Hong Kong.

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Government Support (1)

• The Government of Hong Kong Special Administrative Region provides lots of information and supports for inviting investment.

• The SME Loan Guarantee Scheme aims to help small and medium enterprises secure loans from participating lending institutions.

• More information is available onhttp://www.smefund.tid.gov.hk/eng/sgs.html and http://www.investhk.gov.hk

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Government Support (2)

• The SME Mentorship Programme aims to support young entrepreneurs to learn entrepreneurship, to expand business network and to enhance their business competitiveness.http://www.success.tid.gov.hk/english/con_ser/sme_men_pro/mentorship07.html

• The Government of Hong Kong Special Administrative Region also provides a Practical Guide for setting up a business in Hong Kong.http://www.investhk.gov.hk/UploadFile/InvestHK_Investment_Guidebook1101.pdf

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Resources gathering:

– Estimating start-up capital• cost of buying equipments, renting an office plus

some working capital which is needed to run the business over the period when cash is flowing out and none is flowing in.

– Raising enough money, that must be more than the estimated start-up capital, is essential to allowing your venture to survive and to respond to unforeseen circumstances.


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Sources of capital: • Own Savings• Friends and Family• Business Angel/Venture Capitalist• Asset-based lenders• Banks, for examples:

– Hang Sang Bank: http://www.hangseng.com/e_business/loans/sme_loan.html

– Bank of China: http://www.bochk.com/web/common/multi_section.xml?section=corporate&level_2=smes_services&fldr_id=193

– HSBC: http://www.commercial.hsbc.com.hk/1/2/commercial/loans


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Business Angel/Venture Capitalist

• Business Angel

They are typically a former entrepreneur, and are less financially motivated. They invest in new companies to stay involved with the entrepreneurial process.

• Venture Capitalist

They work for organisations that raise money from large institutional investors and invest those funds in new firms.


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Assembling resources/information –example (5)

Example:• Betty identifies that her target market is the working

adults aged 20-50 in the district. She then conducts a survey about the population size, and the competitors’information in the district. Moreover, she invites 20 target customers to comment on her cookies and that of the competitors.

• After that, she estimates the start-up capital should be $500,000, and looks for financial supports from her family and banks.


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Partnership (1)

Forming the team of partners:– Choosing partners and developing good working

relationships with them are essential for the success of an enterprise.

Partnership

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Partnership (2)

Should entrepreneurs choose partners who are similar or who are complementary to themselves?

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Partnership (3)

When partners are alike on various aspects, like educational and working experience,

– they feel that they know each other, more comfortable in each other’s presence;

– they are more confident that they will be able to predict each other’s future reactions and behavior; and

– they believe that smooth working relationship can be attained.

Partnership

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Partnership (4)

However, another meaning of similarity is redundancy.

The more similar the partners are, the greater the degree to which their knowledge, training skills and aptitudes overlap.

They have overlapping social network too. This limits the range of contacts from whom they can obtain needed resources.

Partnership

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Partnership (5)

A wide range of knowledge, skills and experience among the partners is definitely advantageous toward the success of a new enterprise. Therefore, finding somebody complementary , instead of similar, is a more useful strategy of selecting partners.

Partnership

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Partnership - example (6)

Example:

• Betty is a housewife, she knows only how to make delicious cookies, but she has no experience in doing business.

• She wants to form a team with expertise in marketing and accounting to complement her to plan and run the business.

Partnership

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What should Betty do next? (1)

• Based on the results of her survey, Betty believes that her cookies should have definite competitive advantage over that of other competitors, and there is an increasing demand of low cholesterol food, she has identified that it is a good business opportunity for selling her homemade cookies.

• She called two of her friends, a marketer and an accountant, telling them her idea, and asking them if they are interested in the business. Both of them are eager to join Betty’s business!

• What’s next?

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What should Betty do next? (2)

• As Betty and her partners do not have enough money as the start-up capital, they need to find financial support from banks.

• She goes to a bank which offers small business loan, and presents her idea to the branch manager. Do you think Betty can get the money from the bank?

Business Plan

• Of course NOT!

• Why?

• She needs a ………….

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Business Plan (1)

Careful planning is fundamental to success. A business plan should contain information which is needed to decide whether the business can pursue a goal.

More details of the business plan, more understanding of the proposed business environment, thus, more chance of the business being success.

Business PlanUnit Outline

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Business Plan (2)

Moreover, a business plan is necessary for raising finance from banks.

Business Plan is a document that evaluates the business opportunity, explains management plans, describes the market, identifies and evaluates risks.

Although there is no fixed content for a business plan, a good business plan should include the areas shown in next slide.


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A good business plan should include :

Business Plan (3)

• Market Segmentation• Target Market Segment• Industry Analysis

• Objectives • Mission • Keys to Success

• Company Ownership

• Start-up Summary • Company Locations and Facilities

• Product Description • Competitive Comparison• Sourcing

• Management Team• Personnel Plan

• Assumptions• Key Financial Indicators• Break-even Analysis• Projected Profit and Loss

- Executive Summary

- Company Summary

- Products Summary

- Market Analysis Summary

- Strategy and Implementation Summary

- Management Summary

- Financial Plan

• Marketing Strategy• Sales Strategy


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Betty starts her business (1)

Once Betty gets the finance, she and her partners start their business; renting and decorating shop, buying furniture, equipments and raw materials, promoting the business, and recruiting waiters.

The business life cycle starts!

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Business Life Cycle (1)

There are five phases in the life cycle of a business: Start, Growth, Maturation, Decline, and Exit.

Unit Outline

A large amount of effort is again required to achieve small improvements in performance. Entrepreneur may consider an exit strategy.

Start

Growth

Maturation

Decline

Exit

A large amount of effort is required to achieve small improvements.

Performance accelerates with a small amount of effort leading to large improvements in performance;

Businesses invest more in equipment and manpower in order to meet the increasing demand of their products.

Reduction in market demand leads to a declination of profit, businesses take every possible actions to stop their profits from further declining.

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Transition from “Start” to “Growth” is extremely important for entrepreneurs. Ways to cross the gap:– Build a complete solution to customer needs in the

Start stage;– Reduce the product scope to focus on a single niche;– Communicate information about the products to

customers in a clear and effective way.

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The success of a startup business depends on the entrepreneurial skills of the founders, whose human capital represents the most valuable asset of the enterprise. (Boyko and Gottesman, 2004)

According to Katz and Green (2007), the majority of new small business start-ups involve teams of two or more entrepreneurs.– Three young entrepreneurs founded YouTube, Inc. in

2005 to convert the idea of online destination to watch and share original videos into a profitable business.

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An entrepreneur always starts with a small business.

– With continuous development of innovative products and services, the small business keeps growing to be medium and large enterprise;

Or

– Without continuous development of innovative products and services, the small business reaches its mature and then decline stages within a couple of years. It explains the high failure rate of small businesses.

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Betty has been operating her cookies retail store for 2 years, and obtained only breakeven sales during the period. She is eager for an expansion of her business, however, she is afraid that she has no more ideas in creating new flavor of cookies. A very famous and successful cookies chain shop is now inviting franchisees. Betty believes that she will definitely earn more if she buys into the franchise. If Betty buys into the franchise, is she still an entrepreneur?

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• Betty might gain more profit if she buys into the franchise, but she will be no longer an entrepreneur.

• The franchiser who developed the franchise package is the entrepreneur, and not the franchisees.

• The franchisee who operates the business is only a small business owner, unless he/she adds his/her “insight” which improves the business model of the franchise.

• However, it might violate the terms of the franchise.

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• Betty is suggested to dig into the existing business model and to exploit new opportunities.

• Traditionally, homemade cookie is considered as a kind of snack food for tea time.

• Betty may try to design and offer the cookies in new packages, for examples gift cookies baskets, Mother’s Day cookie, corporate gift baskets, Thank You cookies, wedding gifts & treats, and etc.

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Conclusion

Besides contributing to the volume of output of goods and services in the economy, entrepreneurial ventures create employment, form a springboard from which large firms leap, stimulate competition, feed large firms with raw materials, semi-finished goods, parts, etc. and distribute their products, and so on.

They play vital roles in every economy.

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Summary

Now, you have come to the end of the unit. You should be able to:

– appreciate the importance of entrepreneurship in business development and economic growth;

– describe the characteristics and aptitude of an entrepreneur;

– understand the entrepreneurship process;

– appreciate the relationship between entrepreneurship and SMEs.

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References

• Bianchi A. (1993), Who’s most likely to go it alone? Inc.comAvailable on URL: http://www.inc.com/magazine/19930501/3537.html

• Boyko S. and Gottesman A. (2004), Understanding Entrepreneurs, National Interest, Vol 3 Issue 13, The National Interest and The Nixon Center

• Collins, J. and Moore, D. (1970), The Organisation Makers, Appleton-Century-Crofts, New York.

• Entrepreneurial Self-Assessment, Business Development Bank of CanadaAvailable on URL: http://www.bdc.ca/en/business_tools/entrepreneurial_self-Assessment/Entrepreneurial_self_assessment.htm

• Global Entrepreneurship Monitor, GEM 2006 Summary ResultsAvailable on URL: http://www.gemconsortium.org/

• Katz J. A. and Green R. P. (2007), Entrepreneurial Small Business, McGraw Hill, International Edition. New York.

• McClelland David (1961), The Achieving Society, Van Nostrand, Pricetone University Press.

• Timmons, J.A. (1994), New Venture Creation: Entrepreneurship for the 21st Century, 4th

edition. Irwin Press, Burr Ridge, IL.

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Further Readings

• The World Factbook, Central Intelligence AgencyAvailable on URL: http://www.cia.gov/cia/publications/factbook/rankorder/2004rank.html

• Challenges in Entrepreneurship and SME Research, 2nd Inter-RENT Online Publication, European Council for Small Business and EntrepreneurshipAvailable on URL: http://www.ecsb.org/doc/Inter-ENT%202005%20final%20document.pdf

• Lisa K. Gundry and Jill R. Kickul (2006), Entrepreneurship Strategy: Changing Patterns in New Venture Creation, Growth, and Reinvention, Sage Publications

• Baron & Shane (2005), Entrepreneurship: A Process Perspective, Thomson

• CUHK's Study on Entrepreneurship in Hong Kong and Shenzhen Finds Alternative Financing as Key Resources for New EntrepreneursyAvailable on URL: http://www.cuhk.edu.hk/ipro/pressrelease/050523e.htm

• 蔡敬聰 (2003), 創業成功學, 廣東旅遊出版社

• 創業管理,中國商務出版社, 2004

• 創業興家的秘訣,香港春風出版社

• Peter F. Drucker (1998), 創新與創業精神:管理大師談創新實務與策略, (蕭富峰.李田樹譯) 麥田出版有限公司

• 創業精神, 中國人民大學出版社

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End of the Unit

EndEnd--ofof--unit Assessmentunit AssessmentThis is the end of Unit 4.

Please go to the Unit Assessment before attempting the next unit.

unit 4 entrepreneurship -...

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