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Chapter 1 Entrepreneurs Recognize Opportunities
Chapter 1 Content
This chapter is an introduction to the concept of entrepreneurship. Entrepreneurship is defined and the various advantages and disadvantages of conducting business as an entrepreneur are introduced. Some of the decisions that an entrepreneur faces are presented.
Entrepreneurship Defined
What Is an Entrepreneur?
The Economic Question
Voluntary Exchange
Benefits and Challenges of Free Enterprise
What Is a Small Business?
Why Be an Entrepreneur?
The Desire to Make Money Is Not the Only Reason to Start a Business
Definitions of Success-Monetary and Other
Taking the Long View
Benefits and Costs of Becoming an Entrepreneur
Cost/Benefit Analysis
Opportunity Cost
Seeking Advice and Information to Succeed
Entrepreneurship Options
How Do Entrepreneurs Find Opportunities to Start New Businesses?
Entrepreneurs Creatively Exploit Changes in Our World
Where Others See Problems, Entrepreneurs Recognize Opportunities
Train Your Mind to Recognize Business Opportunities
Entrepreneurs Use Their Imaginations
An Idea Is Not Necessarily an Opportunity
Opportunity Is Situational
The Five Roots of Opportunity in the Marketplace
Integrating Internal and External Opportunities
Establishing Strategies
Paths to Small Business Ownership
Securing Franchise Rights
Buying An Existing Business
Licensing Technology
Do Not Take Unfair Advantage of Someone Else’s Creativity
The Many Faces of Entrepreneurship
Making the Business Work Personally and Professionally
A Business Must Make a Profit to Stay in Business
Profit Is the Sign That the Entrepreneur Is Adding Value
Profit Results from Entrepreneur’s Choices
Seven Rules for Building a Successful Business
The Team Approach
Learning Objectives
1. Explain what entrepreneurs do.
2. Describe how free-enterprise economies work and how entrepreneurs fit into them.
3. Find and evaluate opportunities to start your own business.
4. Explain how profit works as a signal to the entrepreneur.
Chapter 1 Outline
Learning Objective 1: Explain what entrepreneurs do.
I. Entrepreneurship Defined
A. What is an Entrepreneur?
1. Entrepreneurs start their own businesses and work for themselves.
2. Entrepreneurs recognize opportunities to start businesses that other people may not have noticed.
3. The entrepreneur shifts economic resources from an area of lower productivity and into one of higher productivity and greater yield. By doing this, entrepreneurs add value to scarce (limited) resources.
B. The Economic Questions
Since the beginnings of human society, people have had to answer the same basic questions:
• What should be produced?
• When will it be produced?
• How will it be produced?
• Who will produce it?
• Who gets to have what is produced?
Learning Objective 2: Describe how free-enterprise economies work and how entrepreneurs fit into them.
A. Voluntary Exchange
1. The free-enterprise system is based on voluntary exchange. Voluntary exchange is a transaction between two parties who agree to trade money for a product or service. Both parties agree to the exchange because each benefits.
2. The free-enterprise system encourages entrepreneurs who use resources efficiently to satisfy consumer needs—by rewarding them with profit.
B. Benefits and Challenges of Free Enterprise
1. The public benefits from living in a free-enterprise system, because it discourages entrepreneurs who waste resources by driving them out of business.
C. What Is a Small Business?
1. Office of Advocacy as having fewer than 500 employees and selling less than $5 million worth of products or services annually.
II. Why Be an Entrepreneur?
1. Control over time.
2. Fulfillment.
3. Creation/ownership.
4. Control over compensation.
5. Control over working conditions.
A. The Desire to Make Money Is Not the Only Reason to Start a Business
1. The desire to make money, alone, is not a good enough reason to start one’s own business.
2. The financial rewards of owning your own business may not occur until you have put in years of hard work.
B. Definitions of Success-Monetary and Other
The Millennial Generation (born between 1977 and 1995) has redefined success. It is more individualized than the traditional concept and based on factors beyond those of income and wealth.
C. Taking the Long View
Because the daily tactical decisions they make will be affected by what they hope to
create in the short and long term, a clear vision is vital.
III. Benefits and Costs of Becoming an Entrepreneur
Benefits include:
1. Independence/autonomy
2. Satisfaction.
3. Financial reward
4. Self-esteem
5. Contribution to society
Costs include:
1. Business failure
2. Obstacles
3. Loneliness
4. Financial insecurity
5. Long hours/hard work.
6. Strain on personal relationships
A. Cost/Benefit Analysis. Using a comparison of benefits and costs to make a decision is called cost/benefit analysis.
B. Opportunity Cost. Cost/benefit analysis is incomplete without considering opportunity cost. This is the cost of your “next-best investment.”
C. Seeking Advice and Information to Succeed. Preparation and planning are key to avoid making mistakes. Thoughtful consideration of the entrepreneurship option is an excellent starting point. Thorough research and taking advantage of training and/or technical
assistance to bridge gaps in your preparation can make a world of difference.
Two of the best resources for keeping on track are mentors and advisors. A mentor is a trusted advisor with whom a person forms a developmental partnership through which information, insight, skills, and knowledge are shared to promote personal and/or professional growth.
IV. Entrepreneurship Options
Social entrepreneurship: a for-profit enterprise with the dual goals of achieving
profitability and attaining social returns.
Social business: a company created to achieve a social objective while generating
a modest profit to expand its reach, improve the product or service, and subsidize the
social mission.
Venture philanthropy: a subset or segment of social entrepreneurship wherein
financial and human capital is invested in not-for-profits by individuals and for-profit
enterprises, with the intention of generating social rather than financial returns on their
investments.
Green entrepreneurship: business activities that avoid harm to the environment or
help to protect it in some way.
Learning Objective 3: Find and evaluate opportunities to start your own business.
A. Entrepreneurs Creatively Exploit Changes in Our World
B. Where Others See Problems, Entrepreneurs Recognize Opportunities
C. Train Your Mind to Recognize Business Opportunities
D. Entrepreneurs Use Their Imaginations
V. An Idea Is Not Necessarily an Opportunity: Not every business idea you may have or invention you may explore is an opportunity. In fact, most ideas are not viable business possibilities.
Use SWOT analysis to evaluate a business opportunity.
Strengths: All of the capabilities and positive points that the entrepreneur has, from experience to contacts. These are internal to the organization.
Weaknesses: All of the negatives that the entrepreneur faces, such as lack of capital or training, or failure to set up a workable accounting system. These are internal to the organization.
Opportunities: Any positive external event or circumstance (including lucky breaks) that can help the entrepreneur get ahead of the competition.
Threats: Any external factor, event, or circumstance that can harm the business, such as competitors, legal issues, or a declining economy.
A. Opportunity Is Situational
B. The five roots of opportunity:
1. Problems that your business can solve
2. Changes in laws, situations, or trends
3. Inventions of totally new products or services
4. Competitive advantage in price, location, quality, reputation, reliability,
speed, or other attributes of importance to customers
5. Technological Advances. Scientists may invent new technology, but entrepreneurs figure out how to sell it.
C. Integrating Internal and External Opportunities
D. Establishing Strategies
A strategy is a plan for how a business intends to go about its own performance and outdo that of its competition.
VI. Paths to Small Business Ownership
A. Securing Franchise Rights
B. Buying an Existing Business
C. Licensing Technology
D. Do Not Take Unfair Advantage of Someone Else’s Creativity
E. The Many Faces of Entrepreneurship
1. Gazelle a company that achieves an annual growth rate of 20 percent or greater,
typically measured by the increase of sales revenue.
2. Microenterprise a firm with five or fewer employees, initial capitalization requirements of under $50,000, and the regular operational involvement of the
owner.
3. Lifestyle business a microenterprise that permits its owners to follow a desired
pattern of living, such as supporting college costs or taking vacations.
VII. Making the Business Work Personally and Professionally
Learning Objective 4: Explain how profit works as a signal to the entrepreneur.
A. Business Must Make a Profit to Stay in Business
B. Profit is the sign that an entrepreneur has added value to the scarce resources he or she is using.
C. Profit Results from the Entrepreneur’s Choices
Not making a profit is a sign that the entrepreneur is not using resources very well and is not adding value to them.
D. Seven Rules for Building a Successful Business
1. Recognize an opportunity.
2. Evaluate it with critical thinking.
3. Build a team.
4. Write.
5. Gather resources.
6. Decide ownership.
E. The Team Approach
Teaching Notes
Class Discussion Ideas:
1. Write on the board or pose aloud the following: What are three things you think others would say that you can “do” particularly well?
2. Ask the students to visualize: What kind of life do I want? How can I make my community a better place?
3. Write on the board or project on an overhead the following quote, and ask the students to rewrite or explain it in their own words and/or give an example of it: “The people who get on in this world are those who get out and look for the circumstances they want and, if they can’t find them, make them.”
4. Inform the students that “entrepreneur” is not a social or financial category but a state of mind that focuses on seeking out opportunities, taking action, and finding ways to solve other people’s problems in a profitable way. Ask students to think about and name entrepreneurs they know, such as small businesspeople in the neighborhood. Can they think of ways these local entrepreneurs saw problems as opportunities and solved those problems in a profitable way? Can students think of a time when they were entrepreneurial in this way?
5. Elicit from students meanings of the word free. Stress that, in the case of the term “free enterprise,” it means that anyone may start, own, or sell a business (“enterprise”); may sell goods and services for whatever price they can get for them; and may spend their money and invest their assets as they choose. Invite students to share opinions about a free-enterprise economy, both the advantages (such as freedom to succeed, reward for initiative, no interference from others) and disadvantages (such as financial risk and personal responsibility).
6. Ask students for their definitions of opportunity. How is an opportunity different from a problem? (An opportunity is viewed more positively than a problem and considered a situation an individual can do something about. Opportunity is more a matter of attitude toward potential problems than the scenario itself.)
7. Ask what opportunities an employee generally has. (Examples: training, promotions, raises—but all decided by someone else.) Ask what opportunities an entrepreneur has. (Examples: growing the business, learning skills, meeting new people, creating wealth based on his/her own and/or the market’s goals and needs.) Ask what an employee owns in his/her job. Ask what an entrepreneur owns.
8. Summarize the differences between ownership, as it implies that something belongs to you, and tenancy, which implies you can use something belonging to others with their permission. Use examples to make this difference more concrete. Create a two-column chart on the board comparing different aspects of home ownership vs. renting, and business ownership vs. employment. Emphasize the point that ownership often means that you delay rewards until some point in the future (e.g., you don’t get paid for your efforts right away, the way you do with employment) but that the rewards are often bigger (e.g., you get the company’s profits, not a salary or wages, and can perhaps sell the company for a lot more money than you could’ve earned in wages as an employee).
Lecture Enhancers
PPT Lecture Slides for Chapter 1
Outside the Classroom:
www.sbaonline.sba.gov: The Small Business Administration (SBA) is a government agency that supports and promotes entrepreneurs. The SBA offers free or inexpensive pamphlets on a variety of business subjects. Some local offices offer counseling to small business owners through SCORE or the SBDC system.
www.eonetwork.org: Entrepreneurs Organization provides learning and networking opportunities worldwide for young entrepreneurs.
www.zeromillion.com: This site, run by Zero to One Million author Ryan Allis, provides resources for young entrepreneurs, a networking list of contacts called The Entrepreneurship Directory, discussion forums, and links to articles and courses.
Entrepreneur magazine
Subscriptions: www.entrepreneur.com
MIT Entrepreneurship Center
http://entrepreneurship.mit.edu
The Concise Encyclopedia of Economics
http://www.econlib.org/library/Enc/Entrepreneurship.html
Key Terms
acquisition 20
capital 5
capitalism 5
commission 7
cost/benefit analysis 10
dividend 7
entrepreneurship 3
franchise 20
free-enterprise system 4
gazelle 22
green entrepreneurship 14
lifestyle business 22
mentor 11
microenterprise 22
opportunity cost 11
product 3
profit 23
salary 7
service 3
social entrepreneurship 13
strategy 19
trade-off 23
venture philanthropy 14
voluntary exchange 5
wage 7
Class Activity Ideas and Group Exercises
1. Direct students individually or in small groups to brainstorm problems they see in society, their neighborhoods, the school, or their own lives. After a few minutes, ask each student or group to choose one problem. How could it be turned into an opportunity—a product or service that might help solve the problem? Have students/groups present their ideas to the class.
2. Ask each student to come up with one profession or occupation he or she is considering as a career. Group students based on jobs/businesses that are in similar interest groupings or in a comparable industries: for example, working with numbers (accounting, insurance), or in entertainment (actor, musician), or scientific careers. Give each group a few minutes to brainstorm ways to turn the career into a business opportunity so that students could work for themselves. How might they think about their interests in terms of entrepreneurship? Have each group briefly share its ideas.