Starting and Developing a New Venture - Case Study Example

Starting and Developing a New Venture – everybody would do it if it was easy ID 19714 Order No. 294762 [Name] [University Name] [Course Name] [Supervisor] [Any other details] 06 May 2009 Table of Contents: Introduction: Michael Porter (1990) established an empirical generalization that the primary determinant of national competitive advantages of countries is the productivity of labour and innovativeness of companies. Innovative entrepreneurs, commonly known as “Schumpeterian entrepreneurs” (Schumpeter related entrepreneurship with innovation in his theory published around 1911) have been recognized as the most popular form of entrepreneurs because they develop new ideas and cause what is known as “creative destruction” of the existing products & services by executing new ideas through start-up firms that tend to break the monopoly of established large firms. Needless to state that Schumpeter was also trying to emphasize that the individuals that fail in the process of “creative destruction” quickly go out of the market. Schumpeter himself challenged his theory in 1945 stating that innovation is no longer related only with entrepreneurs but is now related to innovation professionals that work in R&D labs funded by large firms. What he was trying to indicate that the level of innovation required for creative destruction in the developing world is no longer possible for individuals with limited funds (Dejardin. 2000). Small firms fail grossly due to their failure to deliver products & services as per the customer needs – that is, they grossly lack in the required level of innovation as required by the markets. There can be many reasons to this. Watson & Hogarth-Scott (1998) carried out a research on the reasons of failed innovations by small firms and discovered that poor or irrelevant personal background & experience of the owner, improper or inadequate motivations & objectives of the running the start-up, lack of growth orientation & objectives of business development and insufficient level of training are key factors that contribute to exit of the firm from the marketplace. In this essay, the author presents the key factors of successfully starting & running a business and argues why this is not everyone’s cup of tea. Critiques of the nature of small business environment The European Commission defines small businesses as the once having 2 to 49 employees (Burns. 2001). Watson and Hogarth-Scott (1998) carried out a research on the factors that contribute to success of failure of small business and concluded that a lot depends upon the vision, motive and the small business environment. The environmental factors that impact small business firms negatively can be internal as well as external. The internal environment comprises of issues like mismanagement of accounting & finance, unable to cope up with liabilities (like office rent, salaries, etc.), poor marketing practices, lack of innovation, inappropriate management of people, loss of key people, ambiguity over ownership of management, and failure to tap opportunities or understand market needs. The external environmental factors affecting the small business firms are non-acceptance of their products & services due to lack of uniqueness, high bargaining power of both suppliers & customers, bogged down to lowest possible rates such that the business doesn’t remain profitable, industry facing stagnation, lack of influence in the market, lack of entrepreneurial training, legal & statutory changes affecting the business of small firms, etc. [Watson and Hogarth-Scott. 1998; Burns. 2001] Impact of small Business Sector on an Economy As per the report by the SBA Office of Advocacy, US (2004) the small business sector represent about 50% of US Economy and employ about 50% of the private sector workforce. The primary contributions by Small Businesses in US are – development of niche markets, innovations, increased competitiveness in the markets, etc. They indicated two types of small businesses – the ones in which the owners do not wish to grow but wants to remain focused in their thriving business and the ones that foster exponential growth. The latter results in a large impact on the US Economy as a whole. In the UK, as per the statistics published by the Department for Business Enterprise and Regulatory Reform in year 2007: (a) 99.9% of businesses in UK are the Small and Medium enterprises (b) These businesses employ about 59.2% of the total private sector workforce (c) The Small & Medium sector contribute about 50% of the gross value added output of UK The Global Entrepreneurship Monitor 2008 executive report presents the following statistics of Early Stage Entrepreneurship Activity (establishment of Small Businesses) in the world: Figure 12: Early Stage Entrepreneurial Activities in Countries compared with their GDP per Capita – 2008 report (Bosma and Acs et al. GEM Executive Report. 2008) The impact of early stage entrepreneurial activity on per capita GDP is phenomenal as shown in the chart. The developed countries possess relatively lesser early stage entrepreneurial activity than developing countries but the impact on GDP per capita by early stage entrepreneurship activity is much more in developed countries than the developing countries. [Bosma and Acs et al. 2008] Motives for establishing a start-up Entrepreneurs need to play the role of change agent. In a competitive market where every customer enjoys the option of availing products & services by multiple established firms, an entrepreneur cannot just become one of them and find a market share within the limited space. Customers will not even look at the new firms if they do not see “something new & exciting” coming from them. Beaver & Prince (2002) argue that entrepreneurs need to possess the ability to think, implement and manage innovative ideas. They argue that commitment & motivation of key individuals, detailing & imbibing of key managerial activities, positive attitude and effective orientation to industry, market & environment change should be key factors that the entrepreneurs should take into account before starting the firm. With these factors firmly taken into account, the entrepreneur needs to establish the characteristics of innovation that qualifies for funding by banks or venture capitalists. The characteristics of innovations need to be a perfect fit into the type & business model of the firm & industry. For example, Laforet and Tann (2006) presented that innovations in small manufacturing firms need to be more around developing new ways of working than new product development. Gartner (1988) presented a theory that entrepreneur is not an individual who is looking forward to new ways of working but is the innovator who undertakes the complicated & intricate process of creating an organization by having – a vision & mission statement, identified opportunities in hand, calculated risks & return analytics, technical competencies, innovations to be implemented, business & marketing plan, people plan, processes for running the business, revenue targets, etc. Hence, Entrepreneurship should be viewed as the career option for bright & energetic individuals that are capable of generating, implementing & sustaining innovative business ideas. Henderson and Robertson (2000) presented that entrepreneurship should be promoted as a career option by educational institutions by undertaking courses on entrepreneurship education broadly comprising of – general perspectives on entrepreneurship, start-up education, small business education, workshops on business skills, etc. Challenges in the growth of startup firms A very large contribution to economic growth of UK has been from the micro & small business sector generating more than 50% of employment. As argued by Fielden & Davidson (2000), the new businesses face many barriers to success especially from the aspects of lack of motivation, lack of appropriate innovation (that will work in the existing markets), lack of financial support, availability of mentors, lack of market knowledge, lack of knowledge of important technological aspects like IT, problems in recruiting good & cost effective employees, lack of training and above all unrealistic expectations by the owners. The authors argue that the most prominent success factor in the start up is – the personality, knowledge & experience of the individual who is starting the business. The person should have the potential to take forward the new firm by virtue of industry knowledge, product knowledge, gaps in the markets, customer expectations, etc. such that the right & most appropriate strategy can for formulated. For example, Hogarth-Scott & Watson (1996) argue that the marketing strategy of the start-up needs to be carefully customized and need not be the same as that of established firms in the same industry. It should be kept in mind that customers will not look at the products & services of start-up firms that easily and when they look (after sincere marketing efforts), they will look forward to unique innovations and “special & personalized treatment” that is not extended by the established firms. If the start-up firm fails to deliver against such expectations, they will lose customers in due course thus leading to failure. Churchill & Lewis (1983) presented the stages of growth & challenges in small firms as existence, survival, success, take off and resource maturity. The existence & survival are two crucial phases that is not sustained by many Small firms thus leading to closure. As per the authors, the primary factors leading to success of small firms in these two stages are – creativity, leadership, direction & autonomy. Beaver and Jennings (2005) presented that the empirical theories of competitive advantages of firms cannot be readily applied to small firms as they largely are successful because of their owners & key players depending upon – their attitude, their innovativeness, their customer relationship management skills, their tolerance & flexibility, their people retention capabilities, etc. Another important challenge in growth of small firms is their capital finance. Most small firms prefer debt financing for which the entrepreneur may have to fund through personal savings, family support or mortgage of personal properties. Hussain & Millman (2006) carried out surveys in UK & China to conclude that owners of start-up firms largely prefer funding by their immediate families. They found that lack of funding is one of the major reasons for early shutdown of start-up firms. Why the Small Businesses fail after a finite time The GEM 2008 report presented a new type of key performance indicator called “Innovation Confidence Index”. The following chart reveals that the countries that are perceived to be source of global innovations – like Japan, US, UK, etc. – have reported lower confidence in innovation than the countries that have been largely the users & followers of their innovations. Figure 1: Innovation Confidence Index of Countries (GEM Executive Report. 2008) The innovation confidence index primarily reports the willingness of customers in the countries in trying new products & services. These statistics reveal that the countries like US & UK are largely loosing demand for new & innovative products & services – primarily because of stagnation such that entrepreneurs are finding it difficult to offer something “innovative” that can excite the end customers. Another new metric that GEM reported in 2008 is poor availability of entrepreneurship trainings & support for early stage entrepreneurship activities. The following chart shows that very less people have gone through such a training (except a few countries): Figure 2: Percentage of People surveyed that have undergone on-line entrepreneurship training (GEM Executive Report. 2008) In 2008 GEM report the countries are broadly classified into three types – Factor Driven Economies, Efficiency Driven Economies and Innovation Driven Economies. The report presented that factor driven economies possess the highest rate of closure of small firms and innovation driven economies possess the lowest rate of closure of small firms. The report also suggests that many businesses that are discontinued are not failed businesses. Many entrepreneurs that end the businesses do not end their entrepreneurship career as well. In fact they are equipped with knowledge & experience to run the start-up and also have clear visibility into the factors that lead to failure and hence can deal with them more confidently in future ventures. Stokes & Blackburn (2002) argued that “The majority of owners leave business ownership through a evolving door rather than a one way exit. Most return to start the entrepreneurship process again”. As per the report, 55% of businesses are discontinued due to financial distress but the rate is lower in innovation driven countries than factor driven countries. The following figure shows the overall reason for closure of businesses: Figure 3: Percentage reasons of closure of companies (GEM Executive Report. 2008) The report shows that a substantial number of respondents have reported that the business was closed because it was non-profitable. A careful look at this factor will reveal that earning good profits need to be the outcome of high quality innovations. If the companies have largely closed due to lack of profitability, then somewhere the owners might have attempted to adopt existing practices & business model in a stagnant market – like a market facing immense price war. Hence, to summarize the small businesses fail after a finite time due to the following (Beaver & Jennings. 2005): (a) Inadequate background, skills, experience & industry relationships of the leader(s) of the firm (b) Lack of promising innovation (c) Poor or nil entrepreneurial training (d) Poor management practices, strategies, planning, policies, etc. (e) Misleading business objectives & goals (f) Unreasonable expectations of the firm owners (g) Lack of required marketing skills (h) Lack of adequate orientation with customer needs (i) Stagnancy of the market and the firm (j) Failure to grab opportunities (k) Lack of funds (l) Poor Profitability (m) Poor Risk Management (n) Inappropriate Role play by the leadership team – one or more out of the seven roles defined by Beaver & Jennings. (2005) (o) Fraud, disaster, sabotage, etc. (p) Poor cash flow management (q) Poor location Conclusions: Entrepreneurship is one of the toughest roles in business especially when the individual is transitioning from a comfortable employment to an uncertain future of start-up firm. At such a stage the only assets that supports the individual is personal background, knowledge, experience, contacts and above all, a sound & promising innovation. When the individual finally takes the step forward, the strategic framework of running the business need to be very carefully defined – like what is so different offered by the firm, why would customers prefer the start-up firm against established firms, Firms fail due to multiple factors but the most prominent ones are – poor innovation, lack of appropriate knowledge & experience of the owner(s), lack of entrepreneurship skills, poor customer & market orientation, non-adaptive to market changes, lack of training and lack of funds. The owner(s) of the firm would have to very clearly lay out the vision & mission, strategic framework, policies & plans, etc. to attack the markets in the most appropriate way and achieve profitable business, build assets and future growth path. Given the complexity of this entire process, it is concluded that an expert with immense determination, innovative ideas and wish for higher levels of recognition. It is not everyone’s’ cup of tea. Reference List: Beaver Graham & Jennings Peter (2005) “Competitive advantage and entrepreneurial power –the dark side of entrepreneurship”, Journal of Small business and Enterprise Development 12(1): 9-23 Beaver Graham & Prince Christopher (2002) “Innovation, entrepreneurship and competitive advantage in the entrepreneurial venture”, Journal of Small business and Enterprise Development 9(1): 28-37 Bosma, Neils and ACS, Zoltan J. et al. (2009). Global Entrepreneurship Monitor – 2008 Executive Report. Global Entrepreneurship Research Consortium (GERA): 4-52 Burns, Paul. (2001). Entrepreneurship and Small Business. London: Palgrave Macmillan. Churchill, Neil C. and Lewis, Virginia L. (1983). The Five Stages of Small Business Growth. Growing Concerns. Ed. Gumpert, David E. Harvard Business Review. 31-32. Dejardin, Marcus. (2000). Entrepreneurship and Economic Growth – An Obvious Conjunction. Institute for Development Strategies. University of Namur. Belgium: 1-7. Department for Business Enterprise and Regulatory Reform. (2008). Enterprise and Small Business – Supporting British Business in the current economic climate. Available from http://www.berr.gov.uk/whatwedo/enterprise/enterprisesmes/index.html (Accessed 06 May 2009) Fielden Sandra L., Davidson Marilyn J. & Makin Peter J. (2000) “ Barriers encountered during micro and small business start-up in North-West England”, Journal of Small Business and Enterprise Development Vol.7(4): 295-304 Hussain, Javed and Millman, Cindy et al. (2006). SME financing in the UK and China: A comparative perspective. Journal of Small Business & Enterprise Development. 13(4): 595-596. Gartner William B. (1988). “Who is an Entrepreneur is a Wrong Question”. University of Baltimore Educational Foundation. Entrepreneurship Theory and Practice. 62-64.. Henderson Roger & Robertson Martyn (2000) “Who wants to be an entrepreneur? Young adult attitudes to entrepreneurship as a career”, Career Development International 5/6: 279-287 Hitt Michael A., Ireland R. Duane & Hoskisson Robert E. (2003) Strategic Management: competitiveness and globalization – concepts and cases (5th edition). Ohio, USA: Thomson /South-Western. Hogarth-Scott, Sandra & Watson, Kathryn et al. (1996). Do small businesses have to practice marketing to survive and grow. MCB University Press. Marketing Intelligence & Planning. 14(1): 9-15. Johnson Gerry, Scholes, Kevan & Whittington Richard (2005) Exploring Corporate Strategy (7th edition). Essex, England: Pearson Education Limited Neupert, Kent E., Baughn C. Christopher & DAO, Thi Thanh Lam (2006) “SME exporting challenges in transitional and developed economies”, Journal of Small Business and enterprise Development 13(4): 535-545 Porter, Michael E. (1990). The Competitive Advantages of Nations. Harvard Business Review. 74-83. Raposo Mario, Paco Arminda Do & Ferreira Joao (2008) “Entrepreneur’s profile” a taxonomy of attributes and motivations of university students”, Journal of Small Business and Enterprise Development 15(2): 405-418 SBA Office of Advocacy. (2004). The Small Business Economy. A Report to the President. United States Government Printing Office. Washington D.C.: 5-10. Stokes, David And Blackburn, Robert. (2002). Learning the hard way the lessons of owner-managers who have closed their businesses. Journal of Small Business & Enterprise Development. 9(1): 17. Watson Kathryn, Hogarth-Scott Sandra & Wilson Nicholas (1998) “Small business start-ups: success factors and support implications”, International Journal of Entrepreneurial Behaviour & Research 4(3): 217-238 End of Document Read More