ContentsIntroduction ................................................................................................................................... 5Topic 1 Perspectives on entrepreneurship...................................................................... 7 Introduction .................................................................................................................... 7 Beyond the literal meaning of entrepreneurship ............................................................ 8 An economic perspective on entrepreneurship .............................................................. 9 A psychological perspective on entrepreneurship ........................................................ 12 A sociological perspective on entrepreneurship ........................................................... 14 A management perspective on entrepreneurship .......................................................... 15 Schools of thought on entrepreneurship ....................................................................... 18 A process approach to entrepreneurship....................................................................... 18 Conclusion .................................................................................................................... 21Topic 2 Personal and sociological influences on entrepreneurship .................. 23 Introduction .................................................................................................................. 23 Psychological and personal influences on entrepreneurship ........................................ 24 Sociological influences on entrepreneurship ................................................................ 32 Female entrepreneurs ................................................................................................... 33 Ethnic entrepreneurs ..................................................................................................... 38 Typologies of entrepreneurs ......................................................................................... 42 Conclusion .................................................................................................................... 46Topic 3 Environmental influences on entrepreneurship.......................................... 47 Introduction .................................................................................................................. 47 Types of environmental influences on new venture creation ....................................... 48 Government influences on new venture creation in Australia...................................... 50 Socio-economic influences on new venture creation in Australia................................ 52 The influence of entrepreneurial and business skills on new venture creation in Australia ................................................................................................................... 54 The influence of financial assistance on new venture creation in Australia ................. 54 The influence of non-financial assistance on new venture creation in Australia.......... 55 Environmental influences on new venture creation in tourism and hospitality industries ...................................................................................................................... 56 Conclusion .................................................................................................................... 58 i
ii MNG00427 – Entrepreneurship in Tourism and Hospitality Topic 4 Opportunity recognition and evaluation......................................................... 61 Introduction .................................................................................................................. 61 Towards innovation ...................................................................................................... 62 From ideas to opportunities .......................................................................................... 63 Generating ideas ........................................................................................................... 64 Evaluating ideas and opportunities .............................................................................. 73 Screening opportunities ................................................................................................ 81 Conclusion .................................................................................................................... 81 Topic 5 Planning the new venture..................................................................................... 83 Introduction .................................................................................................................. 83 Use a business plan ...................................................................................................... 84 Outline of a business plan ............................................................................................ 85 Introductory page ......................................................................................................... 86 Executive summary ...................................................................................................... 87 Overview of the venture ............................................................................................... 87 Industry and market analysis ........................................................................................ 89 The production plan ..................................................................................................... 93 The marketing plan....................................................................................................... 94 The organisational plan ................................................................................................ 97 Schedule of operations ................................................................................................. 98 Critical risks and problems ........................................................................................... 99 The financial plan ......................................................................................................... 99 Appendices ................................................................................................................. 101 Conclusion .................................................................................................................. 102 Topic 6 Legal and financial issues during start-up .................................................. 103 Introduction ................................................................................................................ 103 Business structures ..................................................................................................... 104 Protecting your ideas .................................................................................................. 105 Insurance issues .......................................................................................................... 107 Planning issues ........................................................................................................... 108 Business premises leases ............................................................................................ 108 Employee issues at start-up ........................................................................................ 110 Other business relationships ....................................................................................... 112 Taxation ...................................................................................................................... 113 Financial issues .......................................................................................................... 113 Conclusion .................................................................................................................. 117
MNG00427 – Contents iiiTopic 7 Entry strategies for the new venture ............................................................. 119 Introduction ................................................................................................................ 119 Use of different business entry strategies ................................................................... 120 Establishing a new venture ......................................................................................... 121 Buying an existing business ....................................................................................... 124 Franchising a business ................................................................................................ 140 Conclusion .................................................................................................................. 143Topic 8 General management in the entrepreneurial venture........................... 145 Introduction ................................................................................................................ 145 The nature of management ......................................................................................... 146 The study of management .......................................................................................... 146 The management of different size organisations ........................................................ 147 The process of management ....................................................................................... 148 What makes an effective manager? ............................................................................ 149 The nature of managerial work .................................................................................. 149 The manager’s role ..................................................................................................... 150 The relationship between entrepreneurship, management and the organisational lifecycle ...................................................................................................................... 150 Success and failure of small business ........................................................................ 155 Conclusion .................................................................................................................. 159References ................................................................................................................................ 161
iv MNG00427 – Entrepreneurship in Tourism and Hospitality
IntroductionWelcome to MNG00427 Entrepreneurship in Tourism and Hospitality. In the unit,you will find eight topics. While not separated formally into separate modules, thesetopics can be grouped according to the stage of entrepreneurship they relate to – inputsto the entrepreneurial process, the process of new venture creation, and managing theentrepreneurial venture. A brief overview of each topic follows.Inputs to the entrepreneurial process:Antecedents to the entrepreneurial processAfter an introductory topic that provides some different perspectives onentrepreneurship, Topics 2 and 3 focus on antecedents to the entrepreneurialprocess. Topic 2 discusses personal and sociological influences on entrepreneurship,including common personality traits and social factors that appear to underpinthe entrepreneurial drive. In this topic, we also examine female and ethnicentrepreneurship to illustrate how contextual factors can contribute to a desire toestablish a new venture.Topic 3 then examines environmental influences on new venture creation by reviewinggovernment policies and procedures, socio-economic factors, entrepreneurial businessskills, and financial and non-financial assistance that influence entrepreneurship in theAustralian context. We also look at the industry context for tourism and hospitality toillustrate that, in addition to the general environment for business, opportunities forentrepreneurship depend to a large extent on the competitive attractiveness of differentindustries.The entrepreneurial process:Business planning and creationFour topics focus on creating a new venture. Topic 4 is concerned with opportunityrecognition and evaluation, in recognition that every successful entrepreneurialventure is underpinned by an attractive and well-defined opportunity that leads toinnovation. We tap into your creative potential here with many exercises designed togenerate and evaluate entrepreneurial ideas.Topic 5 gets down to the ‘nuts and bolts’ of business planning. We provide a step-by-step guide to developing a business plan, a requirement for any new businesswhich requires financing in the beginning. Also too, the business plan assists theentrepreneur to know why, where and how their business will proceed. Legal andfinancial issues of concern during the pre-start-up phase of venture creation are thefocus of Topic 6, while Topic 7 examines alternative entry strategies for entrepreneurs– starting a business ‘from scratch’, buying an existing business, and purchasing afranchised outlet.Outputs of the entrepreneurial process:Managing the entrepreneurial ventureTopic 8 completes the unit and focuses on the time period after new venture start-up. This topic examines general management in the entrepreneurial venture and itsaccompanying challenges and opportunities.So, without further ado, let’s get started! 5
6 MNG00427 – Entrepreneurship in Tourism and Hospitality
Topic 1 Perspectives on entrepreneurshipIntroduction The purpose of this introductory topic is to provide some answers to the questions ‘who are entrepreneurs’ and ‘what is entrepreneurship’? While these questions may seem fairly straightforward, you will soon discover that there are nearly as many answers to them as there are practising entrepreneurs and scholars who write on the topic. To some, entrepreneurs are people who found a new enterprise. Others restrict use of the term to creative innovators who seek and apply new ways of doing things. Still others view entrepreneurship as identification and exploitation of an opportunity, or the process of developing a strategy to capitalise on some niche in the market. Some definitions equate entrepreneurs to small business owner-managers, while others argue that entrepreneurship also can occur in large corporations. One reason for this diversity of definitions is that scholars have approached the study of entrepreneurship from different disciplinary perspectives, including economics, psychology, sociology and management. Thus, the economist might view entrepreneurship as the process of creating and distributing wealth; the psychologist sees the entrepreneur as distinguished by certain personal qualities like high need for achievement and creativity; the sociologist is interested in contextual factors that might encourage entrepreneurship such as its social value and acceptance, or the presence of appropriate role models; meanwhile, management theorists usually are most interested in how entrepreneurs establish, organise and manage a business and its resources, and assume risks for the sake of profit. One way of coming to terms with the many and varied views on entrepreneurship is to group them into a smaller number of categories reflecting the various disciplinary perspectives from which they emanate. While the disciplinary perspectives reviewed in this topic are not exhaustive, they do draw on the most influential ones in the field and their leading thinkers. An alternative, although complementary, categorisation is offered by reviewing various ‘schools of thought’ on entrepreneurship. In this topic, we look at one such categorisation. Finally in this topic, we offer a framework of the entrepreneurial process on which the remainder of this unit is structured. It follows a logical progression from focusing on antecedents to entrepreneurship, through opportunity recognition, business planning and creation, to managing the entrepreneurial venture at start-up and through growth. It is hoped through our discussion in this topic that you gain both an historical appreciation of the role of entrepreneurship over the last few centuries, and a firm basis for understanding the entrepreneurial process in contemporary times. 7
8 MNG00427 – Entrepreneurship in Tourism and Hospitality Objectives After completing this topic, you should be able to: • explain the key focus of economic, psychological, sociological and management perspectives on entrepreneurship • compare how prominent scholars have defined entrepreneurs and entrepreneurship • apply different schools of thought in entrepreneurship to case studies on the entrepreneurial process in tourism and hospitality • identify the key inputs, process and outputs of entrepreneurship. Textbook Schaper, M, Volery, T, Weber, P & Lewis, K 2011, Entrepreneurship and Small Business, 3rd Asia-Pacific edn, John Wiley and Sons, Australia. • Chapter 1, pp. 3–23. Readings 1.1 Filion, J 1998, ‘From Entrepreneurship to Entreprenology: The Emergence of a New Discipline’, Journal of Enterprising Culture, Vol. 6, No. 1, March, pp. 1–23. 1.2 Cunningham, JB & Lischeron, J 1991, ‘Defining Entrepreneurship’, Journal of Small Business Management, Vol. 29, No. 1, January, pp. 45–61. 1.3 Sasser, WE & Klug, J 1988, ‘Benihana of Tokyo’ in CH Lovelock (ed.), Managing Services: Marketing, Operations and Human Resources, 1st edn, Prentice-Hall International Inc., New Jersey, pp. 44–57. Beyond the literal meaning of entrepreneurship The words entrepreneurship and entrepreneur are derived from the French entreprendre, which literally means ‘to undertake’. When the word was first used in 17th century France, the term entrepreneur applied specifically to people who undertook to lead military expeditions (Cunningham & Lischeron, 1991, p. 50). However, contemporary usage of the terms entrepreneurship and entrepreneur differs substantially from their early derivation. Thus, some of this first topic is devoted to reviewing how the meanings of entrepreneurship and entrepreneur have evolved since then. This review has three broad purposes. First, defining these key terms is important to clarify the main phenomena we are going to study in this unit. If we are interested in who entrepreneurs are, why they become entrepreneurs and their distinguishing characteristics, and if we are to succeed in clarifying what the entrepreneurial process involves and how to do it well, then we need first to distinguish entrepreneurs from non-entrepreneurs, and entrepreneurship from other non-entrepreneurial activities. The second broad reason for reviewing how these terms have evolved is to provide an historical perspective on the role of entrepreneurs and entrepreneurship so we might better understand their place in modern society and in contemporary tourism and hospitality industries. A third rationale for reviewing how the concepts of entrepreneur and entrepreneurship have evolved is to draw your attention to the different disciplinary perspectives that have influenced the field. Recall the fable of the blind men and the elephant, where one man felt its trunk and described the elephant as a snake; another felt its knee and thought it resembled a tree; yet another felt its side and compared it to a wall; while another felt its tusk and described the elephant as a spear. The point is that usually
MNG00427 Topic 1 – Perspectives on entrepreneurship 9 we can only gain a complete understanding of a certain phenomena by understanding the whole. And in our quest to understand the whole ‘elephant’ of entrepreneurship, we need to understand its parts. That is, an elephant is more than a trunk, but we can hardly attempt to understand an elephant without some reference to its trunk. So it is in entrepreneurship. Various scholars have advanced theories and ideas that explain various parts of the ‘elephant’ of entrepreneurship, yet an overarching theory of its entirety does not exist. Still, we can learn from examining these parts in our attempt to explain the whole. Towards this end, we’ll be examining entrepreneurs and entrepreneurship from economic, psychological, sociological and management perspectives. Each of these perspectives can contribute to our understanding of entrepreneurship and of the key players in this process, the entrepreneurs. Before we proceed however, try the first activity to help you focus your thoughts.a Activity How would you define an entrepreneur and entrepreneurship?f Feedback If we could all compare our answers, I’m sure there would be a great deal of variation. For now, let’s proceed to see how economists, psychologists, sociologists and management scholars have defined entrepreneurs and entrepreneurship. At the end of our discussion, you will find it useful to revise your definitions.An economic perspective on entrepreneurship Much early interest in entrepreneurship stemmed from the field of economics. Economic theory is concerned with two major questions about society – how does a society create new wealth and how does a society distribute wealth (Kirchhoff 1997, p. 445)? Economists have thus viewed entrepreneurship as a major mechanism for ensuring both wealth creation and its distribution. The French economist Richard Cantillon is generally credited with giving the concept of entrepreneurship a central role in economics (Holt 1992, p. 3). He described an entrepreneur as a person who pays a certain price for a product to then resell it at an uncertain price, thereby making decisions about obtaining and using resources and so assuming the risk of enterprise (Cantillon 1755, in Higgs 1931). A critical point in Cantillon’s conception of entrepreneurs is that they consciously make decisions about resource allocations, and so seek the best opportunities for using these resources to yield the highest commercial benefit (Holt 1992, p. 3). Marco Polo can be considered an example of Cantillon’s interpretation. In establishing trade routes to the Far East, Marco Polo bought goods at a known price, to then resell them on his return in the hope of making a profit. Thus, Marco Polo clearly identified a commercial opportunity, obtained resources from financiers, allocated these and other resources to his journeys, and bore the associated risks of these ventures (Hisrich & Peters 1989, pp. 6–7). Cantillon’s view of the entrepreneur is illustrated by Thomas Cook’s development of packaged tours from the mid-1800s. Identifying a commercial opportunity arising from an expanding railway network and peoples’ growing desire to travel away for holidays, Thomas Cook organised the various components or resources for each tour, and then resold them as a package with the intention of making profits. Modern day tour operators perform a similar function. Some ten years after Cantillon’s writings and in a book credited with founding classical capitalist economic theory, The Wealth of Nations (1776), Adam Smith referred to the ‘enterpriser’ as an individual who undertook the formation of an
10 MNG00427 – Entrepreneurship in Tourism and Hospitality organisation for commercial purposes. He ascribed to the entrepreneur the role of industrialist, but also viewed entrepreneurs as people with unusual foresight who could recognise potential demand for goods and services. Thus, entrepreneurs transformed market demand for goods and services into the supply of those goods and services (Holt 1992, p. 3). Thomas Cook clearly possessed the foresight to recognise latent demand for packaged tours, and so created a commercial enterprise to cater for this demand. e Think … About Smith’s interpretation of an entrepreneur as reacting to market demand. Is this the whole story? Might entrepreneurs also play a more proactive role by creating market demand where none existed before? You might consider the Thomas Cook example in this light. Jean Baptiste Say was another early economist with an interest in entrepreneurship. Writing in the early 1800s, he regarded economic development as the result of venture creation (Filion 1998, p. 2). While he agreed with Cantillon that entrepreneurs are influenced by societal forces to recognise needs and to meet those needs though astute management of resources, Say also recognised that entrepreneurs ‘unite all means of production’ (1816, p. 28) and so influence society by creating new ventures (Holt 1992, p. 4). He observed that an entrepreneur must possess: … judgement, perseverance, and a knowledge of the world as well as of business. He is called upon to estimate, with tolerable accuracy, the importance of the specific product, the probable amount of the demand, and the means of its production: … he must possess the art of superintendence and administration. (Say 1803, p. 104) Thus, Say’s entrepreneur was a manager-entrepreneur (O’Neile 1989, p. 39). However, in identifying his entrepreneur, Say drew the important distinction between the entrepreneur and the capitalist, and between their profits, viewing entrepreneurs as innovators and agents of change (Filion 1998, p. 3). Bob Ansett’s establishment of Budget Rent-a-Car in Australia in the late 1970s and early 1980s was influenced by market demand for cheaper car rentals, but it also played a central role in shaping the car rental industry through breaking Avis’ monopoly for car rentals at Australian airports and through influencing the pricing structure of the car rental industry. Thus, Ansett’s actions could be considered entrepreneurial, being an agent of change driven by market opportunity. As hinted in the previous ‘think’ box, you might have considered Thomas Cook’s actions in this light as well. In 1848, John Stuart Mill elaborated on the necessity of entrepreneurship in private enterprise, and the term entrepreneur subsequently became a common descriptor for business founders (Holt 1992, p. 4). However, Mill’s view has been criticised as failing to distinguish between entrepreneurs and business managers (Schumpeter 1949, p. 48), although Mill did stress the risk-bearing role of business founders. However, under his definition, all founders of businesses in tourism and hospitality industries bear certain risks and so could be considered entrepreneurs, from Richard Branson who established Virgin Airlines (along with many other ventures) to the person owning and operating a hotdog stand in your local shopping centre. The rise of neoclassical economics at the turn of the century gave little attention to the entrepreneur. It was assumed that capitalism equitably distributes income within society through the operation of market forces, and it ignored the role of entrepreneurs in creating ‘new demand’ (Kirchhoff 1997, pp. 448–449). However, Joseph Schumpeter disagreed with neoclassical theory that the mechanism of wealth distribution was driven by competitive markets functioning to achieve equilibrium between supply and demand. Instead, he observed ‘chaotic markets’ driven by the
MNG00427 Topic 1 – Perspectives on entrepreneurship 11 regular appearance of entrepreneurs who enter the market bringing innovations that challenge established suppliers. He called this process ‘creative destruction’, because entrepreneurs create new wealth through the process of destroying existing market structures (Kirchhoff 1997, p. 450). Thus, Schumpeter viewed innovation as central to the role of entrepreneurs, and the essence of entrepreneurship as ‘the perception and exploitation of new opportunities in the realm of business’, using ‘new combinations’ of resources (in Filion 1998, p. 3). Because these innovations create new demand when entrepreneurs bring new innovations to the market, entrepreneurs are central to wealth creation and distribution (Kirchhoff 1997, p. 451). Thus, more is required of Schumpeter’s entrepreneur than previous perspectives of the entrepreneur as business founder or business manager. A well-known example that illustrates Schumpeter’s view of the entrepreneur was the McDonald brothers who revolutionised the hamburger industry, creating additional demand for hamburgers through using a new combination of resources to produce standardised, ready-to-eat, takeaway products. Capitalising on growing car ownership and demand for fast and convenience foods, the McDonald brothers took an innovative, productionline approach to hamburger preparation, and forever changed the market and industry structures for fast food. And the rest, as they say, is history. Later in the 20th century, a group of economists at Harvard University, under the leadership of Arthur Cole, retained Schumpeter’s focus on innovation in entrepreneurship, but extended this interpretation to include routine management functions as a component of the entrepreneurial role, along with adjustments to external circumstances (O’Neile 1989, pp. 15–16). Cole identified six ‘phases of entrepreneurial activity’ where there is a ‘constant need for decisions’ and where there is ‘opportunity for innovation, management, and the adjustment of external conditions’ (in O’Neile 1989, pp. 15–16): 1. determination of business objectives 2. development and maintenance of an organisation 3. securing of adequate financial resources 4. acquisition of efficient technological equipment 5. development of a market for the product 6. maintenance of good relations with public authorities. Thus, Cole’s writings on entrepreneurship embodied some of the essential elements which were subsequently extended and developed by numerous researchers in the following decades (O’Neile 1989, p. 47). However, it was in the fields of psychology, sociology and management, rather than economics, that much of this progress was made, as we’ll proceed to review. While economists certainly retain an interest in entrepreneurship, it has been observed that ‘the economics profession is now in a state of theoretical turmoil as the dominant neoclassical theory is experiencing increasing pressure to accommodate entrepreneurship … Much work is required to build a new theory’ (Kirchhoff 1997, p. 456).a Activity For each of the economists discussed above (Adam Smith, Jean Baptiste Say, John Stuart Mill, Joseph Schumpeter, Arthur Cole) jot down a few words that seem to best encapsulate their views on the distinguishing functions of entrepreneurs. (One example is given below.) Richard Cantillon: opportunist, risk-taker, resource allocator.
12 MNG00427 – Entrepreneurship in Tourism and Hospitality a Activity In the preceding discussion, we have identified five examples in tourism and hospitality industries – Thomas Cook, Bob Ansett, Richard Branson, the owner- operator of the hotdog stand and the McDonald brothers. Do you consider all these ventures to be entrepreneurial? Justify your answer in light of the distinguishing functions of entrepreneurs you identified in the preceding activity. f Feedback How did you go? I hope you thought about this before looking at the feedback! Remember that the value of activities are in the process of thinking through possible answers, rather than coming up with a ‘correct’ response. Probably the example above that gave you most concern was the owner-operator of the hotdog stand. While we might agree that the other examples indeed displayed innovation, risk-taking, opportunism, astute allocation of resources, superior management skills, adaptation to the external environment, and creation of new market demand, this is not so clear for the hotdog operator. Perhaps you thought his/ her actions completely non-entrepreneurial, or perhaps you are starting to think that there may be degrees of entrepreneurship. We take this up in a later topic when we look at different types of ventures commonly studied in entrepreneurship. a Activity The goal of economic activity is assumed by economists to be the pursuit of profits. Do you agree that entrepreneurs are driven primarily by profit? Justify your answer. f Feedback There is still debate in the literature over this question. Certainly many psychologists would disagree, arguing that profit is important to entrepreneurs as a measure or indicator of success, but that profit per se is not their primary motivation. For now, let’s read on and examine the types of motivations and personal qualities that psychologists have associated with entrepreneurs. a Activity The economic role of entrepreneurship is well illustrated in a history of the Gold Coast, entitled A Sunny Place for Shady People (Jones, 1986). Jones describes how entrepreneurs, Stanley Korman and Bruce Small, were largely responsible for sowing the seeds that transformed the area from ‘merely a place where Brisbane families could buy a cheap fibro or timber weekender’ in the 1950s to one of Australia’s premier tourist destinations. Korman’s pioneering developments included Lennon’s Broadbeach Hotel (opened in 1956), the Chevron Hotel (1957), and Chevron Island (1960) and he suggested changing the area’s name from the South Coast to Surfers Paradise. Small’s included numerous residential canal estates which attracted retirees from the south, and the introduction of the Gold Coast’s famous meter maids. Think about some other famous tourist destinations you are familiar with. What role have entrepreneurs played in their economic development? A psychological perspective on entrepreneurship From the 1960s, attention turned away from an economic interpretation of entrepreneurship to a psychological view that attempted to explain the personal characteristics of entrepreneurs. The major focus of psychology is the behaviour and mental processes of the individual. It is concerned with studying the actions, responses, thoughts and emotions of individuals in order to explain their behaviour,
MNG00427 Topic 1 – Perspectives on entrepreneurship 13so as to develop ways in which behaviour can be predicted, controlled or modifiedto improve the quality of life in everyday situations (Simons, Irwin & Drinnin 1987,p. 23).Thus, from the 1960s, psychologists considered that entrepreneurial success could beoptimised if they could describe, explain and predict the behaviour of entrepreneurs byidentifying the underlying needs, drives, attitudes, beliefs and values that are assumedto underpin behaviour. Psychologists assume that entrepreneurs project a particularpersonality type and researchers have attempted to extract those traits which might beconsidered uniquely entrepreneurial (Alizadeh 1999, p. 27).David McClelland was a pioneer in entrepreneurial research in his attempts todetermine whether entrepreneurs hold a certain psychological set (Brockhaus 1982,p. 41). He defined an entrepreneur as ‘someone who exercises control over productionthat is not just for his personal consumption’ (McClelland 1971). Thus, by his ownadmission, entrepreneurs could include not only business founders, but also ‘anexecutive in a steel-producing unit in the USSR’ (1971). What was important toMcClelland was not so much the type of venture an entrepreneur operated within, buthis or her psychological traits. In this context, entrepreneurial qualities may or maynot be a prerequisite to business ownership and indeed, some entrepreneurs couldconceivably find a non-business outlet for these traits. One psychological characteristicwhich McClelland contended is common amongst entrepreneurs is high need forachievement, that is a preference to be personally responsible for solving problems, forsetting goals and for reaching these goals through personal effort. From the results ofthree studies (1961, 1965, 1969), McClelland maintained that achievement motivationwas the single factor which drew an individual to the entrepreneurial role.Many other personality factors have been proposed as distinguishing entrepreneursfrom managers, small business owners and the general population. As well ashigh need for achievement, the factors most commonly considered to be typicallyentrepreneurial include beliefs about locus of control, a propensity to take calculatedrisks, a high tolerance of uncertainty and ambiguity, and a range of personal valuessuch as honesty, integrity, duty and responsibility (Alizadeh 1999, p. 28). Table 1.1provides some examples of research into personality traits that have been associatedwith entrepreneurs. We will be reviewing some of these more closely in a later topic.Table 1.1 Some personal characteristics of entrepreneurs• Recognise and take advantage of opportunities• Resourceful• Creative• Visionary• Independent thinker• Hard worker• Optimistic• Innovator• Risk taker• Leader Source: Kuratko & Hodgetts 2004Despite numerous efforts between about 1960 and 1980 to identify a set ofpsychological traits distinctive to entrepreneurs, a psychological model ofentrepreneurship has not been supported by research (Timmons 1990, p. 161). That
14 MNG00427 – Entrepreneurship in Tourism and Hospitality is, there is no established profile that allows us to identify potential entrepreneurs with any certainty (Filion 1998, p. 7). While many entrepreneurs do seem to share common personality traits, numerous studies have found these traits are not restricted to entrepreneurs alone. However, while research has not uncovered a central definitive model of personal characteristics unique to entrepreneurs, the traits identified above do have some value in describing the ‘entrepreneurial mind’. e Think … … about an entrepreneur you have known for a reasonable period of time. Are the characteristics in Table 1.1 a fair description of his or her personality? a Activity In a preceding activity, you were asked to consider whether profit is the main goal of entrepreneurship. Has your answer changed now that you have read a little on the psychological approach to the study of entrepreneurship? f Feedback While profit may be the main driving force for many entrepreneurs, the psychological perspective suggests that other factors may be equally or even more important. It seems that some entrepreneurs might be more driven by a need to achieve, to be in control, to gain independence, or to meet a challenge. As noted earlier, we’ll examine more closely the personal motivations and characteristics of entrepreneurs in a later topic. A sociological perspective on entrepreneurship With the failure of psychologists to provide a complete explanation for entrepreneurship, the concept began to attract the attention of sociologists from the 1980s, attempting to answer the question – what contextual factors influence entrepreneurship? Sociological perspectives on entrepreneurship are concerned with the social context within which entrepreneurship occurs, particularly the social stimulants to entrepreneurial activity (Alizadeh 1999, p. 29). These can be viewed at two broad levels: (1) societal factors that affect the acceptance and value of entrepreneurship and which hinder or facilitate entrepreneurial activity; and (2) social factors that influence the decisions of individuals to pursue an entrepreneurial career. A brief overview of these two perspectives is given here, with a more detailed treatment provided in a later topic. The first group of societal factors referred to above is concerned with historical, regional and cultural factors that influence the emergence of entrepreneurship (Shapero & Sokol 1982, p .73), through prevailing cultural values, role expectations and social sanctions. Such a view helps to explain why some ethnic groups, such as Jews, Lebanese and Chinese, tend to engage in entrepreneurial activity, while for other groups, their social and cultural environments remain largely antipathetic to entrepreneurship. Shapero and Sokol (1982, pp. 73–74) provide the example of European Medieval society as one not conducive to entrepreneurship. Social relationships were fixed, everyone identified with a particular group or class that had established roles in society and relationships to other groups, advertising was forbidden, innovation was prescribed by the guilds and social mobility was outlawed. In such societies, entrepreneurial activity was, by default, left to groups that did not fit into any of the established classes, such as Jews. These ‘outsiders’ could only survive by performing new roles, those considered to be outside or beneath the domain of established groups (Shapero & Sokol 1982, p. 74).
MNG00427 Topic 1 – Perspectives on entrepreneurship 15 Numerous other factors have been considered in this first sociological perspective on entrepreneurship. While some will be explored in more detail in a later topic, these include aspects of government policies, socio-economic conditions, the extent of entrepreneurial and business skills, and the availability of financial and non-financial assistance (Gnyawali & Fogel 1994). For example, entrepreneurial activity is likely to be discouraged or impossible where most people are in a serf or slave type relationship to larger economic organisations. Alternatively, economic wellbeing in regions or countries has been associated with greater entrepreneurial activity or emphasis (Reynolds 1991, pp. 56–57). Well-focused government policies in Italy and Japan support and encourage the establishment of small firms (Reynolds 1991, p. 58), while these would be absent in Communist countries. In countries where there are major financial or legal impediments to establishing a new business, a significant black market economy my be present, providing further avenues for entrepreneurial activity (Reynolds 1991, p. 61). Communities of entrepreneurial firms, such as Silicon Valley in the US, attract venture capitalists and help nurture a regional culture which further encourages entrepreneurship. The second broad set of sociological factors that has attracted research attention in entrepreneurship relates to social influences on the career choices of individuals. Again, these will be discussed in more detail later. Such factors include the influence of negative displacements (such as migration or job retrenchment), job dissatisfaction (as might be experienced by women who meet the ‘glass ceiling’), lack of career alternatives (for example, where ethnic refugees or migrants find their skills are not recognised in their new country or when they face language difficulties), and role models provided by family, peers or mentors. Age, education and experience seem to play a role in influencing an individual’s propensity to undertake the entrepreneurial role. An obvious example of the role of social factors in entrepreneurship in hospitality industries can be found in the restaurant sector, where migrants from various ethnic backgrounds have established their own businesses, often because of language difficulties in their new country and lack of alternative employment prospects.a Activity Talk to some small business operators in your local area and find out what their main reasons were for establishing their business. Can you identify any sociological reasons amongst their answers?f Feedback Chances are that some of the small business operators you talked to mentioned some sociological reasons underpinning their decision to start their business. These sociological factors influencing the entrepreneurial career decision are often categorised as push or pull factors. Push or negative displacement factors mentioned by your respondents may have included sudden loss of a job and income, or growing job dissatisfaction in their former employment. Pull or positive displacement factors can comprise encouragement from family, friends or a mentor, or a financial windfall for financing the venture.A management perspective on entrepreneurship About the same time that sociologists became interested in entrepreneurship, so too did management scholars. They were concerned with what entrepreneurs do, or the activities performed in entrepreneurship, particularly those involved in the process of creating a new enterprise. In fact, Gartner (1989) argues that ‘who is an entrepreneur?’ is an unfruitful question, leading scholars to assume that entrepreneurs are some kind of ‘special’ people, thus fuelling a search for their distinctive personal qualities. He
16 MNG00427 – Entrepreneurship in Tourism and Hospitality suggests a more productive approach is to examine ‘what individuals do to enable organizations to come into existence?’ (Gartner 1989, p. 63). Thus, some relevant questions that might be addressed from a management perspective on entrepreneurship are: • What is involved in perceiving opportunities effectively and efficiently? • What are the key tasks in successfully establishing new organisations? • How are these tasks different from those involved in successfully managing ongoing organisations? • What are the entrepreneur’s unique contributions to this process? (Bygrave & Hofer 1991, p. 16) Typical activities examined in management studies on entrepreneurship include recognising a business opportunity, establishing the feasibility of a potential venture, developing a business plan, gathering the necessary resources, and fulfilling legal and administrative requirements for venture creation. Once the venture is launched, management theorists might also be concerned with how the entrepreneur manages, markets, staffs and operates the new business and nurtures it through growth. Thus, a management perspective on entrepreneurship sees it as a process. For example, Hisrich, Peters and Shepherd (2008, p. 9) describe this process as finding, evaluating and developing opportunities by overcoming strong forces that resist the creation of something new. They depict the process as comprising four distinct phases with associated activities, as shown in Table 1.2. Table 1.2 Aspects of the entrepreneurial process Identify and evaluate Develop business Resources Manage the the opportunity plan required enterprise Creation & length of Characteristics & size Existing resources Management style opportunity of market segment of entrepreneur & structure Real & perceived Market plan Resource gaps & Key variables for value of opportunity Production available supplies success requirements Risks & returns of Financial plan & Access to needed Identify problems opportunity requirements resources & potential problems Opportunity vs Form of organisation Implement control personal skills & goals systems Competitive situation Positioning & strategy for entry Source: Hisrich, Peters & Shepherd 2008, p. 10 Similarly, Timmons (1990, p. 5) defines entrepreneurship as: the process of creating or seizing an opportunity and pursuing it regardless of the resources currently controlled. Entrepreneurship involves the definition, creation, and distribution of value and benefits to individuals, groups, organizations, and society. Entrepreneurship is very rarely a get-rich-quick proposition; rather, it is one of building long-term value and durable cash flow streams. William Bygrave (1997, p. 2) also sees entrepreneurship from a management perspective in defining it as a process which ‘involves all the functions, activities, and actions associated with perceiving opportunities and creating organizations to pursue them’.
MNG00427 Topic 1 – Perspectives on entrepreneurship 17 Thus, management scholars view entrepreneurship as a purposeful activity, and one whose chances of success can be enhanced through developing entrepreneurial and management skills. For example, in order to identify entrepreneurial opportunities (as noted in the above definitions by Hisrich, Peters & Shepherd, Timmons and Bygrave), potential entrepreneurs should nurture contacts with appropriate individuals, organisations and customers (Bird 1989). Similarly, competence in feasibility analysis, business planning and resource identification and acquisition can be gained through learning and practising. In this way, the chances of entrepreneurial success can be enhanced. A management perspective on entrepreneurship also allows greater attention to entrepreneurial activities in existing firms. That is, many management theorists do not view entrepreneurial activities as restricted to starting and managing a new venture. A key focus is on the management of innovation and change, as reflected in Peter Drucker’s (1986) views. He defined entrepreneurship as the effort to create purposeful, focused change in a firm’s economic or social potential, plus the application of distinct entrepreneurial strategies and entrepreneurial management. Entrepreneurship thus involves being alert to opportunities that often arise under conditions of constant change, and then acting on those particular opportunities likely to yield value. As Casson (1982) has noted, entrepreneurs’ abilities to exploit opportunities and cope with change depend on their ability to make decisions and judge the value of these decisions (in Alizadeh 1999, p. 32). This view of entrepreneurship thus recognises that entrepreneurial activities can occur within larger organisations and that business ownership is not a prerequisite to entrepreneurship. The terms ‘intrapreneurship’ and ‘corporate entrepreneurship’ were coined to describe entrepreneurship outside the owner-operated business. Intrapreneurship then is concerned with ways to enhance opportunity recognition and innovation in existing firms by encouraging ‘bureaucratic creativity’(Cunningham & Lischeron 1991, p. 54). As we mentioned earlier, a management perspective on entrepreneurship sees it as a process. There is a diversity of opinions, however, on when this process ends. When viewed as a lifecycle, enterprises are created and may then proceed through stages such as growth, maturity or decline. For some management scholars, such as Gartner (1989), the entrepreneurial process is complete once the new enterprise is created. For others, such as Hisrich, Peters and Shepherd (2008), entrepreneurship also is involved in managing the new business and nurturing it through early growth. This is often the perspective taken by those who study small business management. For those who study intrapreneurship, their focus is usually on the mature organisation facing or embracing change and its attendant opportunities. We’ll return to the notion of an enterprise lifecycle later in this topic when we develop a framework on which the rest of this unit is structured. For now, turn to the first article in your Book of Readings. It provides a useful summary of some of the disciplinary perspectives on entrepreneurship that we have been discussing.r Reading 1.1 Filion, LJ 1998, ‘From Entrepreneurship to Entreprenology: The Emergence of a New Discipline’, Journal of Enterprising Culture, Vol. 6, No. 1, March, pp. 1–23.
18 MNG00427 – Entrepreneurship in Tourism and Hospitality Schools of thought on entrepreneurship As noted in your first reading for this topic, the diverse perspectives on entrepreneurship have yielded various attempts to categorise these into different ‘schools of thought’. Your next reading provides one such categorisation. Reading this will help you fit together the various pieces in the ‘jigsaw’ of entrepreneurship. r Reading 1.2 Cunningham, JB & Lischeron, J 1991, ‘Defining Entrepreneurship’, Journal of Small Business Management, Vol. 29, No. 1, January, pp. 45–61. The previous article described six schools of thought in entrepreneurship. Let’s now examine another reading and complete an activity to show how each of these schools might be useful in understanding the entrepreneurial process. r Reading 1.3 Sasser, WE & Klug, J 1988, ‘Benihana of Tokyo’ in Lovelock, CH (ed.), Managing Services: Marketing, Operations and Human Resources, 1st edn, Prentice-Hall International Inc., New Jersey, pp. 44–57. a Activity Consider the Benihana case study in light of the six schools of thought in the Cunningham and Lischeron reading. Which of these schools helped you most in understanding the entrepreneurial success of Rocky Aoki in establishing and growing Benihana restaurants? f Feedback You have probably found that most of the schools of thought enhanced your understanding of contributors to Rocky’s success. He certainly had the intuition, vigour and persistence associated with the ‘great person’ school and appeared to have those qualities associated with the psychological school. The restaurant concept was also clearly innovative and creative (the classical school), and the article refers to Rocky’s attention to staffing and leading people (the leadership school). Perhaps the article pays most attention to those qualities associated with the management school in production planning, people organising, capitalisation and budgeting. A process approach to entrepreneurship Thus far in this topic we have presented numerous and often diverse perspectives on entrepreneurs and entrepreneurship. You are probably feeling somewhat confused and pondering how we might best make sense of this diversity. In this final section of this topic, we present a framework that incorporates many aspects of entrepreneurship that you have encountered so far. The purpose of this framework is both to help you fit the pieces of the entrepreneurial ‘jigsaw’ together, and to provide a basic structure around which the rest of this unit is organised. You should study this framework closely, and refer to it periodically throughout your studies. In developing this framework, we have taken into account some important characteristics of entrepreneurship identified by Bygrave and Hofer (1991, p. 17). These are that entrepreneurship: • is initiated by an act of human volition • occurs at the level of the individual firm • involves a change of state • involves discontinuity
MNG00427 Topic 1 – Perspectives on entrepreneurship 19 • is a holistic process • is a dynamic process • is unique • involves numerous antecedent variables • has outcomes that are extremely sensitive to the initial conditions of these variables. This list of characteristics recognises that entrepreneurship is a process with certain inputs and outputs. The inputs are the entrepreneur and other antecedents to the process of creating a new enterprise. This process then involves changing the external environment to one without the venture to another with the venture. It thus represents a basic discontinuity in the competitive structure of the industry involved. Sometimes, it even involves the creation of a new industry. In addition, it is holistic; that is, the creation of the venture and its probabilities of success can be described and evaluated only as part of the total industry structure. It is also dynamic, since both the venture and the industry evolve over time. It is also unique, since no other venture or competitive situation will be identical. Finally, the entire process is very sensitive to antecedents to the process, such as the number, strength and positioning of competitors, the qualities and capabilities of the entrepreneur, and the needs of current and future customers (Bygrave & Hofer 1991, p. 17). The output of the process is, of course, the organisation created. Thus, key variables in the process of entrepreneurship are: • the entrepreneur • the environment • the process • the organisation. We have also based our framework loosely on one developed by Carol Moore (1986), as shown in Figure 1.1. Moore’s model shows four phases comprising the entrepreneurial process – innovation, triggering event, implementation and growth – with numerous personal, environmental, sociological and organisational factors influencing each stage.Personal Personal Sociological Personal OrganisationalAchievement Risk taking Networks Entrepreneur TeamLocus of control Job dissatisfaction Teams Leader StrategyAmbiguity tolerance Job loss Parents Manager StructureRisk taking Education Family Commitment CulturePersonal values Age Role models Vision ProductsEducation CommitmentExperienceInnovation Triggering event Implementation Growth Environment Environment Environment Opportunities Competition Competitors Role models Resources Customers Creativity Incubator Suppliers Government policy Investors Bankers Lawyers Resources Government policy Figure 1.1 Moore’s model of the entrepreneurial process Source: Moore 1986, in Bygrave 1997, p. 3
20 MNG00427 – Entrepreneurship in Tourism and Hospitality Figure 1.2 presents our framework of the entrepreneurial process and the elements each of the topics in this unit examines. The framework recognises that there is no one ‘best’ perspective on entrepreneurship, but that much can be learnt through considering multiple perspectives on the ‘elephant of entrepreneurship’ that we referred to in the introduction to this topic. Because this unit is part of a business degree, we focus a good deal on the process of creating a new enterprise. However, we first recognise that this process does not occur in isolation, but also has inputs and outputs. Thus, our framework is divided into three phases which reflect a lifecycle model of organisational evolution, from pre-startup, to venture creation, to growth and stability: • Inputs. This first phase is concerned with antecedents to entrepreneurship, comprising the personal characteristics of the individual entrepreneur, the social stimulants he or she encounters, and the environment in which this occurs. • Process. The second phase is the process of entrepreneurship itself. Here we focus on opportunity recognition and the need to establish the feasibility of the proposed venture, planning the new venture, legal and financial requirements, and the range of entry strategies available. • Outputs. The third phase in our framework is concerned with the time period after venture creation. We examine management skills and competencies required in a new small venture and strategies used to optimise its growth. Personal & Sociological In uences on Entrepreneurship (Topic 2) INPUTS Antecedents to Entrepreneurship Environmental In uences on Entrepreneurship (Topic 3) Opportunity Recognition and Evaluation (Topic 4) Planning the New Venture (Topic 5) PROCESS Business Planning and Creation Legal and Financial Issues for the New Venture (Topic 6) Entry Strategies for the New Venture (Topic 7) General Management in the OUTPUTS Managing the Entrepreneurial Venture Entrepreneurial Venture (Topic 8) Source: Primary, developed for this unit Figure 1.2 A framework for examining the entrepreneurial process
MNG00427 Topic 1 – Perspectives on entrepreneurship 21Conclusion In this first topic, we have provided an overview of economic, psychological, sociological and management perspectives on entrepreneurship. This has helped to define the terms ‘entrepreneur’ and ‘entrepreneurship’ and provided a brief introduction to some of the elements that might influence the entrepreneurial process. After reviewing these perspectives and some schools of thought on entrepreneurship, we have concluded that entrepreneurship is most usefully viewed as a process, with various inputs and outputs. The process was presented as a framework which structures the remainder of this unit. Our next topic focuses on the first element of this framework – personal and sociological influences on entrepreneurship.a Discussion questions At the end of Chapter 1 from your textbook, answer the five discussion questions. I will place feedback from these questions on MySCU under Unit Documents in Week 2 of the study period.
22 MNG00427 – Entrepreneurship in Tourism and Hospitality
Topic 2 Personal and sociologicalinfluences on entrepreneurshipIntroduction Central to the entrepreneurial process is, of course, the entrepreneur. As we noted in Topic 1, the psychology of entrepreneurs and their personal characteristics dominated research in the field from the 1960s to the 1980s. While no predictive profile unique to entrepreneurs has been discovered, there do seem to be some psychological, personal and sociological factors commonly found amongst them. We can view these factors as antecedents to the entrepreneurial process, as depicted in Figure 1.2 in Topic 1. That is, to embark on entrepreneurial activity first requires a certain entrepreneurial drive or spirit. In this topic, we explore what might underpin this entrepreneurial bent, firstly in terms of psychological and personal factors, then sociological factors. We then devote some attention to female and ethnic entrepreneurs to illustrate how contextual factors can contribute to entrepreneurship. Finally, in recognition that entrepreneurs are not a homogenous group, this topic reviews some typologies of entrepreneurs. Objectives After completing this topic, you should be able to: • discuss the personal and psychological factors usually associated with entrepreneurs • discuss the range of sociological factors that are common antecedents to entrepreneurship • assess the role of sociological factors in female and ethnic entrepreneurship • identify some different typologies of entrepreneurs • provide examples of the above in tourism and hospitality industries. Textbook Schaper, M, Volery, T, Weber, P & Lewis, K 2011, Entrepreneurship and Small Business, 3rd Asia-Pacific edn, John Wiley and Sons, Australia. • Chapter 2, pp. 30–48. Readings 2.1 Brockhaus, RH & Horwitz, PS 1986, ‘The Psychology of the Entrepreneur’, in Sexton, DL & Smilor, RW (eds), The Art and Science of Entrepreneurship, Ballinger Publishing, Cambridge MA, pp. 25–47. 2.2 Morrison, A, Rimmington, M & Williams, C 1999, Entrepreneurship in the Hospitality, Tourism and Leisure Industries, Butterworth-Heinemann, Oxford, pp. 35–52. 23
24 MNG00427 – Entrepreneurship in Tourism and Hospitality 2.3 Shapero, A & Sokol, L 1982, ‘The Social Dimensions of Entrepreneurship’, in Kent, C, Sexton, DL & Vesper, KH (eds), Encyclopedia of Entrepreneurship, Prentice-Hall Inc., Englewood Cliffs, New Jersey, pp. 72–90. 2.4 Sykes, T 1994, The Bold Riders: Behind Australia’s Corporate Collapses, Allen and Unwin, Sydney, pp. 186–210. 2.5 Greene, PG, Hart, MM, Gatewood, EJ, Brush CG & Carter, NM 2003, ‘Women Entrepreneurs: Moving Front and Center: An Overview of Research and Theory’, The Coleman White Paper Series, Coleman Foundation and US Association of Small Business and Entrepreneurship, pp. 1–46. 2.6 Aldrich, HE & Waldinger, R 1990, ‘Ethnicity and Entrepreneurship’, Annual Review of Sociology, Vol. 16, pp. 111–134. Psychological and personal influences on entrepreneurship Rather than provide extensive content in this section, we will refer to you two readings that summarise and provide some examples of the influence of psychological and personal factors on entrepreneurship. We’ll then complete some activities to help your comprehension of this material. But first, read the following prologue from Bob Ansett’s autobiography (Ansett & Pullan 1986, pp. 11–12). It gives us some preliminary insights into the entrepreneurial mind. The first time I visited my father in his office I read on a wall a framed quotation from Calvin Coolidge, President of the United States from 1923 to 1929: Nothing in the world can take the place of persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent. The slogan ‘press on’ has solved and always will solve the problems of the human race. Perhaps because I had just returned to Melbourne after 20 years in the United States I was particularly receptive to advice from an American President. I said to Reg Ansett: ‘That’s the best quotation I’ve ever seen.’ My father agreed, but he wasn’t interested in talking about it — in his early pioneering years the quotation had the essence of the way R. M. Ansett conducted his enterprises, but in the later years I think it had little meaning for him. In 1965 I thought it perfectly encapsulated my own philosophy, and 21 years later I still do. Persistence is the essence of success in business or anything else. I think I’m a good example of what Coolidge was talking about: I’m not an extraordinarily talented person, nor am I a genius. As for education, I have not gone beyond high school, and while there I wasn’t top of the class. My father wasn’t either — the only two pieces of paper he ever had proving he could do something were a knitting machine mechanic’s certificate and a pilot’s licence. At that meeting my father told me there was no place for Bob Ansett in his business empire, Ansett Transport Industries. The day I returned to Melbourne, No JOB FOR BOB was the page one headline in the Melbourne Herald. (The headline now adorns the stairwell in the Budget headquarters building in North Melbourne.) When I came back to Melbourne and started with Budget car rentals after my father’s rejection, I started with nothing. My job experience was limited to pumping petrol and driving a milk truck in Los Angeles and a bread truck in San Diego. I had three young children and a wife to support. But I had three things to offer. The first was the strong competitive sense I developed playing American football — in sport or in business I wanted to beat the hell out of the other guy. The second was my confidence in myself —
MNG00427 Topic 2 – Personal and sociological influences on entrepreneurship 25 I’ve always believed I have a charmed life and no matter what I do it will work out. The third was persistence, another lesson from football. I wasn’t a brilliant footballer — there were lots of fast bigger guys, guys with safer hands, but I discovered that I could start a game against a bigger, more talented opponent who was on top in the first plays, but if I kept at the task, just kept grinding away, I would get to him in the end. The Budget philosophy, which is the key to our success, evolved from my experience on gridiron fields in California and Japan, from my work on the gas pumps in Southern California, and from thousands of hours on bread and milk delivery runs. But I’m getting ahead myself … (Ansett & Pullan 1986, pp. 11–12) As the previous excerpt highlights, persistence seems to be a trademark characteristic of entrepreneurs. Consider the experiences of Walt Disney, who built his empire from cartoon production to films to theme parks. He had four failed businesses before success (Kuehl & Lambing 1990, pp. 633–637).r Reading 2.1 Brockhaus, RH & Horwitz, PS 1986, ‘The Psychology of the Entrepreneur’, in Sexton, DL & Smilor, RW (eds), The Art and Science of Entrepreneurship, Ballinger Publishing, Cambridge MA, pp. 25–47.r Reading 2.2 Morrison, A, Rimmington, M & Williams, C 1999, Entrepreneurship in the Hospitality, Tourism and Leisure Industries, Butterworth-Heinemann, Oxford, pp. 35–52.a Activity Refer back to Reading 1.3, where a case study on Benihana’s was presented. In light of Readings 2.1 and 2.2, what personal and psychological traits does Rocky Aoki appear to have that may have influenced his decision to establish Benihana’s?f Feedback Rocky appears to demonstrate many of those psychological traits identified by Brockhaus and Horwitz (1986). He moved to the United States because he felt there were better opportunities there for him to achieve success (high need for achievement). He clearly would not have put so much time and effort into his venture unless he felt he could influence its potential performance (internal locus of control). While he took risks in establishing his venture, his research and education were attempts to calculate and minimise the risks. Faced with problems at start-up and later with franchising, he sought to solve those problems.a Activity Do most small business founders you know in tourism and hospitality industries appear to have the personal qualities identified in the previous two readings?f Feedback Perhaps you found that the personal qualities identified in the previous two readings were more applicable to Rocky Aoki than to most small business owner-operators you know. In fact, in a review of the rather limited research into characteristics of owners of small tourism firms, Dewhurst and Horobin (1998) found that the majority are not motivated by a desire to maximise economic gain, but by social factors such as desire for semi-retirement and locational benefits. This suggests that pursuit of growth and business expansion are not high priorities. These findings led to the conclusion that the theoretical or conceptual qualities of entrepreneurship, including innovation, responding to uncertainty and adjusting to disequilibrium, are precisely the
26 MNG00427 – Entrepreneurship in Tourism and Hospitality qualities that appear to be poorly developed among small tourism firms. From these two activities, you may be beginning to appreciate that business founders are not a homogenous group – an issue we’ll return to later in this topic. Now, examine the following two excerpts. The first relates to Christopher Skase, another ‘infamous’ Australian entrepreneur with interests in luxury tourism accommodation, most notably the Mirage hotels on the Gold Coast and at Port Douglas, north of Cairns. The second is about Len Ainsworth who founded Aristocrat Leisure Industries, the $900 million company that Ainsworth transformed from a tiny 1950s Australian medical equipment manufacturer into the second largest maker of gaming machines in the world (Guilliatt 1999). Both these excerpts provide some insight into the personality traits of these two entrepreneurs. Young man in a hurry Who was this young man who had built an enormous empire from next to nothing in little more than a decade? He was a phenomenally hard worker. He reckoned that if he put 100 hours work into a week he could get through twenty years work in ten. He was definitely a young man in a hurry. ‘You’ve got to give it a go’ he would tell interviewers. ‘You’re only here once’. He had few outside interests. His working day could be anything up to fourteen hours and in one way or another he worked seven days a week. His only relaxation was swimming, but sometimes he had to hit the pool as early as 4.30a.m. if he were flying interstate that day. The Skases were a striking and elegant couple. Christopher was slim, olive- skinned and dark-haired, while the blonde Pixie could be both relaxed and stylish. She was a rock of support to him in a marriage that would stand great external stresses. Pixie was his business partner as well. She worked as his secretary, discussed strategies and ideas with him and added many of the stylish touches to the Mirage resorts. Pixie and Christopher were a dedicated couple, travelling everywhere together and sometimes holding hands in public. He treated her daughters as his own. Pixie’s unquenchable vivacity must have been a tonic for the hard-working Christopher. Skase was constantly moving from planes to hotels to office to chauffeured limousines and back to planes. He read masses of material while in transit and typically conducted several meetings a day. He almost certainly took too much on board. His days tended to get out of hand. The later in the day he had an appointment the more likely it was that he would be late. (I was once MC at a Sydney lunch where Skase was to be the main speaker and present some awards. At the time we started the lunch the Skases were just taking off from Brisbane. They arrived about half an hour late, but the lunch nevertheless was a success. Skase could be an inspirational speaker and the drama of his late arrival added to the sense of occasion). Decisions that should have been made and implemented in a day or two could stretch into weeks or months before he finally had time for them. His top half-dozen executives worked almost equally hard. Skase insisted that all homework be done and decisions taken within the group. No work was ever farmed out to merchant bankers or corporate advisors, so security was tight and executives were well informed. They all hoped to get rich on Qintex shares and options. One of his most perceptive interviewers noted several characteristics that made Skase tick. One was total commitment, in that he had no outside interests unless barracking for the Bears could be counted. Others were: having clear and concise business objectives; emphasis on specialisation and pre-eminence in the chosen field; use of long-term strategy, which he called ‘the Japanese factor’; avoiding fad industries; and a devotion to demographics, which told him where people were moving and how they were going to be spending their money. It was demographics, broadly defined, that had persuaded him to move into resorts.
MNG00427 Topic 2 – Personal and sociological influences on entrepreneurship 27At the Los Angeles Olympics in 1984 it first struck him that there was a trendtowards a larger proportion of adults in the populations, who increasingly wantedinformation, entertainment, travel and leisure.The hard-driving young entrepreneur had great style. He wore a blue pinstripesuit well, usually with a pink shirt, white collar and a handkerchief spillingfrom the breast pocket. As he became successful he developed a penchant forbig fat cigars, although they probably did his asthma no good. In Brisbane hisheadquarters was a luxuriously decorated penthouse at the top of Comalco Housein Creek Street.The décor was ice-blue. The foyer was littered with antiquities including anEgyptian cartonage mask (circa 1300 BC), a Roman male torso and a Greek vase(circa 320 BC). The entire office was paved with vivid blue and white variegatedquartzite mined in Brazil, polished in Italy and imported especially for Qintex.A receptionist answered the phones at one of two solid quartzite desks whileat the other a tiny waterfall cascaded from the desktop in a soothing murmur.Skase’s trappings oozed opulence, including a company yacht name MirageIII. The yacht’s drawing room had a gilt-edged, 18th century Rapousse mirrorat one end and a blue banquet table and matching silk banquette with pewterlamps from New York at the other. In one corner was a bridge table with Hermescards and Hermes ashtrays. Christopher and Pixie flew the world in a Falcon jetformerly owned by King Hussein of Jordan. Yet beneath his exterior Skase wasa plain-living man whose idea of a good meal was a hamburger or Pixie’s homecooking. There was no question that he enjoyed living and working in opulentsurroundings, but at least part of their purpose was to impress the world withhow far he had come and to impress financiers. A sumptuous office was almost aprerequisite for borrowing in the 1980’s and none of the corporate cowboys hada better sense of style than Skase.Nearly all the cowboys knew how to enjoy themselves, but Skase must havebeen the best party-giver of all. His philosophy was that he and his staffworked hard all year (they were forbidden to indulge in lunches), so he wasjustified in throwing a big bash at Christmas. After he moved to Queensland theparties became lavish. For Christmas 1985 he pitched a marquee alongside theQueensland Arts Centre and invited several hundred staff, associates and friendsto an all-night revel with top food, wine and entertainers. In the 37-degreeheat the marquee turned into a Turkish bath, but everyone enjoyed themselvesenormously and only party poopers left before 2 a.m. Guests, including spouses,were flown in from Melbourne and Sydney on a chartered Boeing 727, equippedwith antimacassars adorned with the ‘Q’ of the Qintex logo. From BrisbaneAirport chauffeured limousines ferried guests to the Sheraton. Premier JohBjelke-Petersen—triumphant at Qintex’s move to Queensland—was the guest ofhonour.For the official opening of the Mirage Hotels in 1988 some 200 guests weretaken by chartered jet and limousine to both the Gold Coast and Port Douglashotels. The party lasted three day, featuring everything from a fireworks display,which came uncomfortably close to burning down the Gold Coast hotel, to scubadiving on the Low Isles off Port Douglas. Normie Rowe and Johnny Farnhamsang at the dinners as those present drank unlimited supplies of 1984 St Henri.Guests returned home stunned at Skase’s hospitality. His fortieth birthday partyat his Hamilton home was even more impressive. Guests were driven there inlimousines and offered Krug as they arrived. A marquee was pitched on thetennis court and party-goers danced on a reflective floor (gentlemen spent a lotof time looking downwards) until the early hours. The birthday toast to Skasewas proposed by Robert Holmes a Court. Guests included Sally Kellerman (theoriginal Hotlips Houlihan from M.A.S.H.) and George Hamilton (star of Love atFirst Bite).
28 MNG00427 – Entrepreneurship in Tourism and Hospitality All entrepreneurs need to have faith in themselves: to be convinced they are right. Skase had ferocious faith in the rightness of whatever he was doing. Perhaps only such faith could have driven him so far from such an unpromising start. He was very impatient with criticism, whether well or badly directed. From his background in journalism, Skase well knew that much of the irritating detail demanded in corporate accounts and takeover documents had been placed there in an attempt to protect investors. Those who questioned the details of Skase’s affairs, however, were treated with scorn. When the Melbourne sharebroker Cortis & Carr queried the executive share allotments being made by Qintex, Skase said he was ‘perplexed’ at their objections. When the Victorian Corporate Affairs Commission made a string of doubtless annoying inquiries, he thundered: ‘During the course of the year, the inquiries appear to have become a wide ranging fishing expedition through our corporate registers, in the hope of turning up some error to justify the inquiries.’ When Deloitte qualified his accounts they were sacked as auditors. (In hindsight, Deloitte may have been better off if it had turned a blind eye to Qintex’s accounts and been sacked by AWA instead). When Australian Ratings released a critical report on Qintex in the middle of the company’s joust for AWA Skase accused the agency of ‘blatant bias’. Australian Ratings had questioned ‘the level of subordinated equity, cashflow support, weak coverage ratio and the capacity to absorb an acquisition of the size of AWA’. These questions would certainly be justified in a few years’ time. (Sykes 1994, pp. 304–307) The Ainsworth Saga … The internal dynamics of the Ainsworth dynasty – an autocratic father, seven sons spread across two marriages, an inheritance measured in nine figures and a swirl of unpleasant rumours and incessant investigations – were always highly combustible. But at the heart of the drama, according to those who knew the family, was the often vexed relationship between Ainsworth and his seven sons, a relationship shaped and defined by the patriarch’s obsessive workaholism. It says something about Len Ainsworth that last Christmas he gave each of his sons the same present – a copy of The Millionaire Next Door, a business tome that preaches the gospel of frugality and hard work. Business is Ainsworth’s life, his passion, his raison d’être. As an entrepreneur, he is in that special league of the crash-through-or-crash visionaries. When he inherited the family company from his dentist father in 1952, it made dental equipment from a little factory in Sydney’s western suburbs. In less than a decade he transformed it into the largest manufacturer of pokies in Australia and began exporting plane-loads of his chrome-plated Sheerline gambling machines to the clubs of England. Partly it was luck (pokies were fully legalised in NSW in 1956, not long after Ainsworth began making them) but mostly it was relentless hard work. Even today as he waddles through the back rooms of his new factory, Ainsworth exudes extraordinary vigour, slapping his workers on the back as he tosses off a capsule history of the pokies business from its disreputable years in the 1950s to the highly regulated casino industry of the 1990s. He’ll pull apart a machine to explain the inner workings of the money chute, the mathematical calibrations behind those spinning wheels, the psychology of those lurid designs. ‘I think it’s fair to say I’ve pioneered just about every worthwhile advance in poker machines for the past 40 years,’ he says unblushingly. Pokies, one-armed bandits, slots, fruit machines … whatever you call them, Len Ainsworth certainly had a genius for making and selling them. His fascination for their inner workings was matched by his eye for their garish facades – just the right combination of chrome, lights, bells, pulsating dollar signs and
MNG00427 Topic 2 – Personal and sociological influences on entrepreneurship 29 cartoon images (scantily clad women, racing cars, piles of gold coins) to lure the customer. Above all, Ainsworth was a salesman par excellence who slipped into the milieu of the RSL clubs and gaming rooms as if into a comfortable old slipper. In the early years he worked 16 hours a day, seven days a week, coming home as late as 2am and then getting up to start all over again. His children recall Sunday drives when their father would pull the car over to the side of the road and dash inside a club to make a quick sale. For much of the 1960s he more or less left his family to pursue business overseas. … Ainsworth bought the Aristocrat plant in 1959 for £85,000, and the innovations he dreamt up there changed the poker machine industry. … He would come up with these grand ideas and say ‘Let’s go to work – I’ll bet the business on it’ … … Ainsworth’s Depression-era frugality … in his case borders on the eccentric. Despite his generosity to others –he donated $1.5 million to the New Children’s Hospital in Sydney and he has quietly helped many individuals in the club industry – Ainsworth is a legendary tightwad. He has shocked acquaintances by requesting a senior’s discount when buying dinner and still brings his sandwich in a paper bag to work every day. … He has even been known to repair (his) cars himself using Araldite and polish rather than pay money to a panel beater. (Guilliatt 1999, pp. 17–18)a Activity Based on what you have read so far in this topic, complete the following quick quiz by answering true or false to each statement. Entrepreneurs are born, not made Anyone can start a business Entrepreneurs are gamblers Entrepreneurs want the whole show to themselves Entrepreneurs are their own bosses and are completely independent Entrepreneurs work harder and longer than managers do in big companies Entrepreneurs experience a great deal of stress & pay a high price Starting a business is risky & often ends in failure Money is the most important start-up ingredient Entrepreneurs should be young and energetic Entrepreneurs are motivated solely by the quest for the almighty dollar Entrepreneurs seek power and control over others If an entrepreneur is talented, success will happen in a year or two Any entrepreneur with a good idea can raise venture capital If an entrepreneur has enough start-up capital, he/she can’t miss (Adapted from Timmons 1990, pp. 20–21)
30 MNG00427 – Entrepreneurship in Tourism and Hospitality f Feedback The preceding activity has presented some enduring stereotypes of entrepreneurs. In rejecting all the above statements as false, Timmons (1990, pp. 20–21) provides the following explanation. Myths about Entrepreneurs Myth 1 Entrepreneurs are born not made. Reality While entrepreneurs are born with certain native intelligence, a flair for creating, and energy, by themselves these talents are like unmolded clay or an unpainted canvas. The making of an entrepreneur occurs by accumulating the relevant skills, know-how, experiences, and contacts over a period of ten years and includes large doses of self-development. The creative capacity to envision and then pursue an opportunity is a direct descendent of at least 10 or more years of experience that lead to pattern recognition. Myth 2 Anyone can start a business. Reality Entrepreneurs who recognize the difference between an idea and an opportunity, and who think big enough, start business that have a better change of succeeding. Luck, to the extent it is involved, requires good preparation. And the easiest part is starting up. What is hardest is surviving, sustaining and building a new venture so its founders can realize a “harvest”. Perhaps only one in 10 to 20 new businesses that survive five years or more result in a capital gain for the founders. Myth 3 Entrepreneurs are gamblers. Reality Successful entrepreneurs take very careful, calculated risks. They try to influence the odds, often by getting others to share risk with them and by avoiding or minimizing risks if they have the choice. Often they slice up the risk into smaller, quite digestible pieces; only then do they commit the time or resources to determine if that piece will work. The do not deliberately seek to take more risk or to take unnecessary risk, nor do they shy away from unavoidable risk. Myth 4 Entrepreneurs want the whole show to themselves. Reality Owning and running the whole show effectively puts a ceiling on growth. Solo entrepreneurs usually make a living. It is extremely difficult to grow a higher potential venture by working single-handedly. Higher potential entrepreneurs build a team, an organisation, and a company. Besides, 100 percent of nothing is nothing, so, rather that taking a large piece of the pie, they work to make the pie bigger. Myth 5 Entrepreneurs are their own bosses and completely independent. Reality Entrepreneurs are far from independent and have to serve many masters and constituencies. These stakeholders include partners, investors, customers, suppliers, creditors, employees, families, and those involved in social and community obligations. Entrepreneurs, however, can make free choices of whether, when and which they care to respond to. It is extremely difficult, and rare, to build a business beyond $1 million to $2 million in sales single-handedly. Myth 6 Entrepreneurs work longer and harder than managers in big companies. Reality There is no evidence that all entrepreneurs work more than their corporate counterparts. Some do, some do not. Some actually report that they work less. Myth 7 Entrepreneurs experience a great deal of stress and pay a high price. Reality No doubt about it: Being an entrepreneur is stressful and demanding. But, there is no evidence that it is any more stressful that numerous other highly demanding professional roles, and entrepreneurs find their jobs more satisfying. They have a high sense of accomplishment, are healthier, and are much less likely to retire than those who work for others. Three times as many entrepreneurs as corporate managers said they plan never to retire.
MNG00427 Topic 2 – Personal and sociological influences on entrepreneurship 31 Myth 8 Starting a business is risky and often ends in failure. Reality Talented and experienced entrepreneurs – because they pursue attractive opportunities and are able to attract the right people and necessary financial and other resources to make the venture work – often head successful ventures. Further, businesses fail, but entrepreneurs do not. Failure is often the fire that tempers the steel of an entrepreneur’s learning experience and street savvy. Myth 9 Money is the most important start-up ingredient. Reality If the other pieces and talents are there, the money will follow; but it does not follow that, if an entrepreneur has enough money, he or she will succeed. Money is one of the least important ingredients in new venture success. Money is to the entrepreneur what the paint and brush is to the artist – an inert tool, which, in the right hands, can create marvels. Money is also a way of keeping score, rather than just an end by itself. Entrepreneurs thrive on the thrill of the chase; and time and again, even after he or she has made a few million dollars or more, an entrepreneur will work incessantly on a new vision to build another company. Myth 10 Entrepreneurs should be young and energetic. Reality While these qualities may help, age is no barrier. The average age of entrepreneurs starting high potential businesses is in the mid-30’s, and there are numerous examples of entrepreneurs starting businesses in their 60’s. What is critical is possessing the relevant know-how, experience, and contacts that greatly facilitate recognizing and pursuing an opportunity. Myth 11 Entrepreneurs are motivated solely by the quest for the almighty dollar. Reality Entrepreneurs seeking high potential ventures are more driven by building enterprises and realizing long-term capital gaining long-term capital gains than by instant gratification through high salaries and perks. A sense of personal achievement and accomplishment, feeling in control of their own destinies, and realizing their vision and dreams are also powerful motivators. Money is viewed as a tool and a way of keeping score. Myth 12 Entrepreneurs seek power and control over others. Reality Successful entrepreneurs are driven by the quest for responsibility, achievement and results, rather than for power for its own sake. They thrive on a sense of accomplishment and of outperforming the competition, rather than a personal need for power expressed by dominating and controlling others. By virtue of their accomplishments, they may be powerful and influential, but these are more by-products of the entrepreneurial process than a driving force behind it. Myth 13 If an entrepreneur is talented, success will happen in a year or two. Reality An old maxim among venture capitalists says it all: The lemons ripen in two and a half years, but the pearls take seven or eight. Rarely is a new business established solidly in less than three or four years. Myth 14 Any entrepreneur with a good idea can raise venture capital. Reality Of the ventures of entrepreneurs with good ideas who seek out venture capital, only 1 to 3 out of 100 are funded. Myth 15 If an entrepreneur has enough start-up capital, he or she can’t miss. Reality The opposite is often true; that is, too much money at the outset often creates euphoria and a spoiled-child syndrome. The accompanying lack of discipline and impulsive spending usually leads to serious problems and to failure.a Activity Again based on what you have read so far, what might be some key distinguishing factors of successful entrepreneurs compared to successful managers?
32 MNG00427 – Entrepreneurship in Tourism and Hospitality f Feedback As the readings have pointed out, differences in the personal qualities of successful entrepreneurs and managers do not seem clear cut. That is, many of the traits associated with successful entrepreneurs appear also to be shared by successful managers, such as high need for achievement and an internal locus of control. However, a useful framework for distinguishing entrepreneurs from managers is provided by Timmons (1990, p. 23) and replicated below with his comments. High Inventor Entrepreneur Creativity and innovation Promoter Manager/administrator Low High General management skills, business know-how, and networks It seems that entrepreneurs who succeed possess not only a creative and innovative flair and other attitudes and behaviors but also solid management skills, business know-how, and sufficient contacts. (The figure above) demonstrates this relationship. Inventors, noted for their creativity, often lack the necessary management skills and business know-how. Promoters usually lack serious general management and business skills and true creativity. Administrators govern, police, and ensure the smooth operation of the status quo; their management skills, while high, are tuned to efficiency as well, and creativity is usually not required. Although the management skills of the manager and the entrepreneur overlap, the former is more driven by conservation of resources, and the latter is more opportunity driven. (Timmons 1990, p. 23) Sociological influences on entrepreneurship Again, we’ll direct you to a reading in this section and then follow this up with some activities. r Reading 2.3 Shapero, A & Sokol, L 1982, ‘The Social Dimensions of Entrepreneurship’, in Kent, C, Sexton, DL & Vesper, KH (eds), Encyclopedia of Entrepreneurship, Prentice-Hall Inc., Englewood Cliffs, New Jersey, pp. 72–90. a Activity Interview some business founders in your local area. Do their experiences fit with the social factors that encourage entrepreneurship, as identified in the previous reading and listed below? • Negative displacement • Family influence • Peer influence • Previous work experience • Ethnicity • Classmates, colleagues, mentors • Perceptions of feasibility
MNG00427 Topic 2 – Personal and sociological influences on entrepreneurship 33f Feedback While I don’t know what your interviews may have revealed, did you notice any trends amongst the business founders you interviewed from different sectors of hospitality and tourism? For example, negative displacement through migration and ethnicity are sociological factors that often lead people into the restaurant industry. Travel agents and restaurateurs often choose their venture based on prior work experience in the field. Adventure tourism operators have sometimes been encouraged by fellow enthusiasts to establish their venture. You may have additional examples. Now, turn to your next reading on one of Australia’s most infamous entrepreneurs – Alan Bond – whose key interests in tourism and hospitality included the America’s Cup and Bond Brewing. The excerpt provides a comprehensive insight into his personal characteristics, sociological influences and business ‘style’.r Reading 2.4 Sykes, T 1994, The Bold Riders: Behind Australia’s Corporate Collapses, Allen and Unwin, Sydney, pp. 186–210. Let’s now focus on two types of entrepreneurs where sociological factors seem to often have quite an influence – female and ethnic entrepreneurs. Another reason for focusing on these two groups is that most scholars in the field agree that the largest boom in entrepreneurship in recent years has occurred amongst these two groups (Alizadeh 1999, p. 70).Female entrepreneurs The number of women starting their own businesses has grown dramatically over the past two decades (Brush 1992, p. 5), with women starting new ventures at twice the rate of men in the United States (Allen 1999, p. 20). Historically, men have dominated small business ownership, but this is changing rapidly. In Australia, about one-third of business proprietors are women and their numbers have been growing more rapidly than self-employed men (English 1998, p. 10). This is largely a consequence of the shifting values of women and their role in society, as we’ll discuss later. In Australia, longitudinal research into thousands of small businesses by Williams since the 1970s has shown increased participation by women as owners and managers in the small business sector (in Reynolds, Savage & Williams 1994, p. 2). Figure 2.1 depicts the gender breakdown of small business proprietors in Australia from 1978 to 1992, as found in Williams’ research (1992).
34 MNG00427 – Entrepreneurship in Tourism and Hospitality Figure 2.1 Surviving sample enterprises at December 1978, 1984 and 1992, by gender of owner/managers Figure 2.1 shows the proportion of small enterprises which were owned and managed by males, by females, and by males and females jointly during the period 1978–92. It can be noted that of all the firms surveyed, the proportion of male-owned firms, and those owned or operated jointly by males and females steadily decreased since 1978, while the proportion of female-owned firms increased from 19% to 34% during the 14-year period (Williams 1992, in Reynolds, Savage & Williams 1994, p. 21). Reynolds, Savage and Williams (1994, pp. 20–24) note the following characteristics of female small business ownership in Australia, again drawn from Williams’ longitudinal research: • On average, Australian women starting in business are somewhat older than men – about 35 years for males and over 40 years for females. • Female owner/managers are more likely to be found in the retailing and services sectors, in which the required skills match the prior training and work experience of many females. • Female proprietors in small business show a strong preference for hiring female employees. • Research data suggests that female-owned small firms are likely to be as successful as those owned and operated by males. However, overseas research suggests that women may be achieving better success than men because they tend to keep debts and overheads low, prepare more thoroughly before going into business, and are more likely to seek professional assistance (English 1998, p. 11). • Of those women who have entered business ownership, over half have reported confronting serious and persistent discrimination in trying to procure start-up funding and other resources. a Activity Having read about the range of sociological factors that might encourage people to start a new venture, which ones do you think might be most applicable to women?
MNG00427 Topic 2 – Personal and sociological influences on entrepreneurship 35f Feedback Perhaps you came up with some of the following reasons. • The glass ceiling, where discrimination against females in some organisations precludes their promotion to positions that match their skills and experience. • Women, in general, are seeking more professional careers and challenging positions, and starting a business can provide this opportunity. • Sexual harassment at work might encourage women to work for themselves. • Women often find it difficult to secure employment after career interruptions due to children. • Divorce and separation sometimes mean that women have settlement money to invest in a business but few other career options. • Some businesses can be run part-time to fit in with family responsibilities. • Some businesses can be run from home and can provide employment with more flexible hours. In fact, ABS data for 1991 show that of all self-employed persons in the Australian labour force, 17% were running businesses from home. For women, this percentage was 34% while for men it was 9% (in Alizadeh 1999, p. 71). • Some women may start businesses as a statement of independence and to prove their capabilities. • With the boom in the services sector, there are growing opportunities for women to start ventures that might fit with their existing skills. Think about the services people are now buying in lieu of those women have traditionally performed at home, such as child care, cleaning and ironing. The reasons for increasing entrepreneurship by women provided in the feedback to the previous activity reflect underlying social changes over the last few decades that have changed the roles and expectations of women. Hisrich and Brush (1985) provide the following historical perspective on these changing roles and expectations.
36 MNG00427 – Entrepreneurship in Tourism and Hospitality Table 2.1 An historical perspective on the roles of women 25 Years Ago Today Trend Impact Trend Impact Education Women had liberal arts Women lacked business More women studying More women have training, education versus business, skills and technical business, engineering and confidence, and skills to engineering or technical. training. science. establish their own business. Family Women were expected to Women’s jobs were part Women’s movement Women have more marry and have children. time and secondary supportive husbands. to their husband’s in importance and wages. Women were caretakers of Women lived through Increased divorce, and Increase in surrogate their family and supporters their spouses’ job single parent families. parenting. of their husbands. experiences. Postponing of marriage Increase in women working and children full-time and having families late. Social Males were head of the Women lacked Partnership marriages and Self-employment is vehicle household while women experience in risk taking family responsibilities. for flexible work hours. were dependent financially and negotiating financial and emotionally. matters. Activities tended to be sex Women lack competitive More women are Women have more segregated (clubs and experience. independent and assertive. venturesome spirits. sports). Lessening of sex Women are more confident stereotypes. in male dominated areas. Occupation Occupational stereotypes Women had limited Fewer fields are closed More opportunity for women were common – physician chances for success in to women (legislated to gain experience in varied = male; nurse = female; the corporation and in changes). areas; science, medicine and president = male; technical fields. business. secretary = female. Few chances for women Women have entered Women are more readily to develop management medicine, corporate accepted in all fields. skills necessary in management, and entrepreneurship. technical fields for careers. Only areas acceptable for women entrepreneurs were retailing, secretarial, child care, or beauty parlors. Economic Manufacturing versus Limited areas where More service More opportunity for women service oriented economy women had experience oriented economy in areas where specialized – emphasis on producers or training. – high technology, labor skills are not required. of goods. communications, and research are popular. More flexible jobs and work rules. Opportunities for new businesses in technology and communications to experience high growth. Source: Hisrich & Brush 1985
MNG00427 Topic 2 – Personal and sociological influences on entrepreneurship 37 Now turn to your next reading for this topic, which summarises previous research on female business owners.r Reading 2.5 Greene, PG, Hart, MM, Gatewood, EJ, Brush CG & Carter NM 2003, ‘Women Entrepreneurs: Moving Front and Center: An Overview of Research and Theory’, The Coleman White Paper Series, Coleman Foundation and US Association of Small Business and Entrepreneurship, pp. 1–46.a Activity Summarise the key differences between male and female entrepreneurs from the previous reading. How do they compare with those identified below by Hisrich, Peters and Shepherd (2008) in Table 2.2? Hisrich and Peters (2008, pp. 64–65) comment that: While overall very similar, in some respects women entrepreneurs possess very different motivations, business skill levels, and occupational backgrounds than their male counterparts. Factors in the start-up process of a business for male entrepreneurs are also dissimilar to those of females especially in terms of support systems, sources of funds, and problems. These differences between male and female entrepreneurs are summarised [below in Table 2.2]. Table 2.2 Comparison between male and female entrepreneurs Characteristic Male entrepreneur Female entrepreneur Motivation Achievement – strive to make Achievement – things happen accomplishment of a goal Personal independence – self-image as it relates to status through their role in the corporation is unimportant Job satisfaction arising from Job satisfaction arising from previous job frustration the desire to be in control Departure point Dissatisfaction with present Job frustration job Interest in and recognition Sideline in college, sideline to of opportunity in the area present job, or outgrowth of Change in personal present job circumstances Discharge or layoff Opportunity for acquisition Sources of funds Personal assets and savings Personal assets and Bank financing savings Investors Personal loans Loans from friends or family Occupational background Experience in line of work Experience in area of Recognised specialist or one business who has gained a high level Middle-management of achievement in the field or administrative-level Competent in a variety of experience in the field business functions Service-related occupational background
38 MNG00427 – Entrepreneurship in Tourism and Hospitality Characteristic Male entrepreneur Female entrepreneur Personality characteristics Opinionated and persuasive Flexible and tolerant Goal-oriented Goal-oriented Innovative and idealistic Creative and realistic High level of self-confidence Medium level of self- Enthusiastic and energetic confidence Must be own boss Enthusiastic and energetic Ability to deal with social and economic environment Background Age when starting venture Age when starting venture 25–35 35–45 Father was self-employed Father was self-employed College educated—degree College educated—liberal in business or technical area arts degree (usually engineering) Firstborn child Firstborn child Support groups Friends; professional Close friends acquaintances (lawyers, accountants) Spouse Business associates Family Spouse Women’s professional groups Trade associations Type of business started Manufacturing or construction Service-related – educational services, consulting, or public relations Source: Hisrich, Peters & Shepherd 2008, p. 65 Ethnic entrepreneurs Migration has generally had a positive influence on global economic development. Further, Australia is one the most multicultural nations, with over 20% of the population born overseas in 1996 (Alizadeh 1999, p. 87). With many of these migrants establishing their own businesses, it is important to examine ethnic entrepreneurship. This also highlights the significance of sociological influences on new venture creation. a Activity From what you have read so far and from your own experiences and contacts, list some sociological factors that you think might encourage migrants into entrepreneurship. Before you read the feedback to this activity, consider the following description of Abe Goldberg, an Australian entrepreneur who had a brief fling as one of the country’s richest people, earning his fortune primarily from the textile trade. Abraham Goldberg stood only four foot ten inches and yearned to be a lot bigger. He was a warm, likeable little man, but he was never fully accepted by leading members of Melbourne’s Jewish fraternity, who had known each other’s families for generations and did not warm readily to outsiders even of their own religion. He made a fortune in the rag-trade but was bored by it. What really gave him a charge was mixing with bankers, brokers and corporate high-fliers …
MNG00427 Topic 2 – Personal and sociological influences on entrepreneurship 39 Goldberg was the classic Jewish immigrant boy made good. Before World War II the Goldberg family had been in the textile industry in Gawolin, Poland. After the German invasion of Poland the family had been herded by the Nazis into a ghetto, where they feared extinction. They bribed a farmer to hide them for a year and a half in a tiny, dark cowshed. ‘We were packed on top of each other and lying down’, Goldberg said later. ‘If one of us wanted to move, we all had to move. When we walked out we all had to learn to walk again, like babies. There was no light coming into the room except for a thin stream.’ One thing he learnt was the value of money. He said later that most of the people who hid Jews during these years had done so for money … (Sykes 1994, p. 327)f Feedback Did you consider the following factors in your answer to the previous activity? • Most sociologists place importance on the role of negative displacement in ethnic entrepreneurship, resulting from dissatisfaction with the economic or political environment in the country of origin of ethnic entrepreneurs. • Perhaps willingness to migrate reflects a greater willingness to take risks. That is, perhaps migrants disproportionately represent the more adventurous and enterprising members of a country’s population. • Many ethnic businesses have been born out of the adversity and frustration experienced by their owners in their home countries. For example, many Vietnamese Australians have fled persecution in their home country and are thus determined to ‘make a go of it’ in Australia. • Migrants may suffer discrimination in employment, and so start businesses out of sheer necessity to earn a living. Language problems contribute to this discrimination. • Migrants’ skills and qualifications are sometimes not recognised in their new country, so they need to find alternative sources of employment. However, additional explanations can be examined. You can also compare your answer to the factors identified below by Alizadeh (1999, pp. 92–96). Alizadeh (1999, pp. 92–96) states that prior research into ethnic entrepreneurship points to three groups of reasons why members of ethnic groups choose entrepreneurial careers, why particular ethnic groups are more likely to establish businesses than others, and why some do better than others. These are cultural, structural and situational factors. Cultural factors • Cultural predispositions. These may lead to business success where the cultural values of ethnic groups are positive towards entrepreneurship and are supplemented by ethnic business solidarity and families. In addition, ethnic groups that pool their resources and skills, such as family time and effort for little pay or access to finance and credit, might also be better able to establish and operate their own ventures successfully. • Acceptance of lower incomes, when compared to other residents. For some ethnic groups, the returns from a new venture and the long hours often required seem attractive when compared to previous experiences in their country of origin. • Access to ethnic resources. Case studies of Italian, Indian, Chinese and Greek entrepreneurs have revealed that ethnic resources, such as family, long hours, lower incomes, networks to supply capital and supplies, labour and clientele have been utilised to access business resources in order to satisfy the functional requirements of the business.
40 MNG00427 – Entrepreneurship in Tourism and Hospitality Structural factors • Middleman activities. In response to host country cultural antagonism and exclusion of minorities, some ethnic entrepreneurs can perform ‘middleman’ functions linking host society producers with ethnic consumers, and vice versa. For example, Asian grocers provide an important link between importers and market gardeners, and Asian restaurants and individual consumers. • Enclave position. The presence of ethnic enclaves, where ethnic groups are concentrated in particular geographic areas or where their dominant middleman functions lead to hostility, provides further opportunities for entrepreneurship. Ethnic enterprise may trade with each other, supplying goods and services to the ethnic community. Situational factors • Interactive factors. Entrepreneurial activity can proliferate where the structure of economic opportunity in the host country is conducive to the economic and cultural resources of an ethnic group. This approach to explaining ethnic entrepreneurship looks for congruence between the economic environment and the additive power of a variety of factors associated with the ethnic group. These include blocked alternative opportunities and their consequent concentration in fields that remain open, the use of cultural resources transmitted from the country of origin and the development of reactive resources, including skills, values and solidarities developed within the host country. Alizadeh provides the following diagram and explanation for ethnic entrepreneurship, based on the interaction of ethnic resources and the opportunity structure in the host community. ETHNIC RESOURCES OPPORTUNITY STRUCTURE business experience, formal networks, government occupational skills, family resources, co-ethnic programs and services resources ETHNIC ENTERPRISE DEVELOPMENT AND PERFORMANCE Source: Alizadeh 1999, p. 96 Figure 2.2 An interactive framework of ethnic entrepreneurship
MNG00427 Topic 2 – Personal and sociological influences on entrepreneurship 41 Alizadeh (1999, p. 95) explains his diagram as follows: [Figure 2.2] indicates that, according to interactive theory, a network of ethnic resources and the opportunity structure of the host country play a significant role in the development and subsequent survival of ethnic enterprises. Therefore, ethnic entrepreneurs’ ability to interact with these networks in order to gain access to business resources for the fulfilment of the core business functions should be included in the entrepreneurial studies of ethnic entrepreneurship. … The implication of networks for small ethnic enterprise development and performance within the context of interactive theory is illustrated by [Figure 2.2]. Now turn to your last reading for this topic, which provides a more detailed explanation of opportunity structures and ethnic resources that appear to encourage ethnic entrepreneurship.r Reading 2.6 Aldrich, HE & Waldinger, R 1990, ‘Ethnicity and Entrepreneurship’, Annual Review of Sociology, Vol. 16, pp. 111–134.a Activity Summarise the factors identified in the preceding discussion and reading which help to explain ethnic entrepreneurship. Now, interview some ethnic entrepreneurs you know and find out how important these factors were in their decision to start their own venture, and how significant the factors are to their continued success.a Activity Using ABS statistics, find out the following from the latest census: • the percentage of Australia’s population born overseas • whether this percentage has increased or declined since the previous census • the percentage of self-employed persons born overseas • whether this percentage has increased or declined since the previous census • whether the percentage of self-employed persons is higher or lower amongst non- English speaking Australians.f Feedback While we’ll leave you to access the statistics above, some general observations will be made here as feedback. As we noted earlier, Australia is one of the most ethnically diverse nations in the world, largely arising from sentiments of ‘populate or perish’ after the Second World War and the active program of planned immigration. Migrants and children of migrants make up around one-fifth of Australia’s population, a figure that approaches one-quarter in urban centres such as Sydney. Migrants have contributed in many ways to entrepreneurship, although ethnic enterprises tend to be small, like most other businesses in Australia (Alizadeh 1999, p. 100). Further, the number and percentage of Australians born overseas are increasing, with those born in the United Kingdom and Ireland declining while those from Africa, America, Europe and Asia are increasing. While the first wave of post-war immigrants tended to become employees, a more recent wave of immigration from non-English speaking countries has contributed significantly to self-employment. Self-employment amongst this group is disproportionately higher than amongst migrants born in English-speaking countries (Alizadeh 1999, pp. 103–105).
42 MNG00427 – Entrepreneurship in Tourism and Hospitality Typologies of entrepreneurs So far in this topic, we have examined some personal, psychological and sociological antecedents to entrepreneurship. What should be clear is that there is a diversity of views in the literature as to what factors propel an individual into the entrepreneurial role. Part of this disagreement stems from differing definitions of entrepreneurs, as reviewed in Topic 1. Does an individual have to produce something innovative to be an entrepreneur; is establishment of a new venture sufficient; and can entrepreneurship occur amongst employees in large corporations? Until questions such as these are resolved, it is hardly surprising that psychologists and sociologists have been unable to develop frameworks that accurately predict from personality traits and social factors whether someone will become an entrepreneur or not. In fact, a major criticism of entrepreneurial research is that studies have used diverse definitions of entrepreneurs and have tried to ‘compare apples with oranges’. That is, personal and sociological antecedents to someone establishing a hot-dog stand may well be different to those that influenced Thomas Cook in establishing a business that offered a truly unique service (at the time), and both of these may be different to factors that influenced Bob Ansett to take an entrepreneurial approach in managing an established business (Budget). Thus, researchers have developed various typologies of entrepreneurs that seek to categorise different types of entrepreneurs. For example, Smith and Miner (1983, p. 53) distinguish between the ‘craftsman entrepreneur’ and the ‘opportunistic entrepreneur’; Knight (1984) suggests that the degree of independence enjoyed by entrepreneurs could be expressed as a continuum with ‘solo self-employed individuals’ at the one extreme and ‘corporate entrepreneurs’ at the other; Hoy and Carland (1983, p. 157) drew distinctions between entrepreneurs and small business owners. Other examples of entrepreneurial classifications based on a variety of variables include: • managerial orientation and vocational attachment, such as traditional, technocentric, marketeers and isolationist (Goss 1991) • business format, such as craftsman, self-employed, small business and growing corporate venture (Smith 1967) • management style and behaviour, such as entrepreneur, quasi-entrepreneur, administrator and caretaker (Stevenson et al. 1989) • stage model relative to the stage of development of the business, such as start-up, post-start-up, established and professionally managed (Chell et al. 19991) • growth orientation, such as declining, plateauing, rejuvenating and expanding (Chell et al. 1991) • social variables, such as first generation, descendant of founder, social class, minority group, and female (Stanworth & Gray 1991) • degree of dependence on other firms, such as dependent, competitive dependent, old dependent, new dependent and franchise (Rainnie 1989). (Morrison, Rimmington & Williams 1999, p. 30) One of the most widely cited categorisations of entrepreneurs is that developed by Vesper (1990, pp. 2–8), outlined below: • solo self-employed individuals. These include ‘mom ’n pop’ operators, tradespersons, and professionals such as doctors and accountants who operate alone or with only a few employees and perform most of the work personally • deal-to-dealers. These comprise many small business owners who have had more than one enterprise, frequently in different lines of work
MNG00427 Topic 2 – Personal and sociological influences on entrepreneurship 43 • team builders. These are entrepreneurs who go on to build larger companies using hiring and delegation • independent innovators. These comprise inventors of new products or services who then establish businesses to develop, produce and sell their inventions • pattern multipliers. These are entrepreneurs who spot an effective business pattern, possibly originated by someone else, and multiply it to realise profits on additional such ventures • economy of scale exploiters. That unit costs tend to shrink as volume expands has been exploited by some entrepreneurs. Reducing prices through economies of scale attracts more volume that can help reduce prices further, making it difficult for competitors to enter the industry • capital aggregators. By pulling together a large financial stake either from one or several sources, it is possible to start ventures that require large amounts of upfront capital • acquirers. An independent business may be entered by starting a new one or by acquiring a going concern. Those who acquire have a variety of styles, such as ‘turnaround’ (from financial loss or marginality to profitability), ‘buy–sell artists’ (who make quick capital gains from ‘dressing up’ an acquisition to then sell it at a profit), ‘speculators’ (who invest in businesses they do not operate), ‘corporate raiders’ (who seek to acquire control of companies that can be broken up and sold in pieces for a higher total price), and ‘conglomerators’ (who build corporate empires by using the stock of one company to buy another, and then repeating this strategy a number of times).a Activity From the list above, which types of entrepreneurs appear most common in tourism and hospitality industries?f Feedback While there is no known supporting empirical evidence, observation suggests that solo self-employed individuals predominate in tourism and hospitality industries, such as in the restaurant, pub, hostel and travel agent industries. However, other types of entrepreneurs are evident. For example, deal-to-dealers may concentrate their activities in one geographic area, by owning and operating a number of pubs, as is the case on the North Coast of NSW. Pattern multipliers are best exemplified by franchise systems, such as those started by the McDonald brothers and Colonel Sanders. Capital aggregators also are evident – think about the interests of Kerry Packer in the gambling and communications industries or Keith Williams who established Seaworld, Hamilton Island resort and the Port Hinchenbook development. Many individuals also become business owners through acquisition. I’m sure examples of all Vesper’s categories could be found in tourism and hospitality industries. Another typology of entrepreneurship is presented by Morrison, Rimmington and Williams (1999, pp. 10–14). Their framework focuses on both the type of entrepreneurship and the context within which it occurs, as shown in Figure 2.3.
44 MNG00427 – Entrepreneurship in Tourism and Hospitality CONTEXTS OF ENTREPRENEURSHIP Corporate venture Entrepreneurial venture TYPOLOGIES OF Ethnic minority ENTREPRENEURSHIP Family ENTREPRENEURSHIP Franchise Gender INTRAPRENEURSHIP Home-based and craft Joint venture TEAM Life-style ENTREPRENEURSHIP Small business and self-employed Temporary or part-time Source: Morrison, Rimmington & Williams 1999, p. 11 Figure 2.3 Types and contexts of entrepreneurship Referring to Figure 2.3 above, entrepreneurial activity can occur via individual owner- managers, by employees in larger businesses, and through teamwork. Examine the following excerpt that explains the various entrepreneurial contexts in Figure 2.3 and provides some examples in tourism and hospitality industries. • Corporate venture: As the embryonic entrepreneurial firm grows, ownership is likely to become more diffused and entrepreneurship may become a group quality rather than confined to any one individual. For example, Whitbread PLC started as a family business and has grown into a major corporation with quite different ownership and management structures from those at its birth. • Entrepreneurial venture: A minority of firms in the UK may be classified as truly ‘entrepreneurial’. Their owners/managers will be driven by the managerial objective of growth realization, and maximization of the potential opportunities which can be developed from the original venture created. They are characterized by innovative strategies and practices. Virgin Management can be regarded as an entrepreneurial venture – there seems hardly to be a month go by without a new opportunity being realised and presented to the market place. • Ethnic minority: Entrepreneurship has been identified as a vehicle through which members of ethnic minority groups can overcome disadvantage and achieve personal success. Examples of such groups within the UK are represented by African-Caribbean, Indian, Pakistani, Bangladeshi, and Greek-Cypriot communities. According to Deakin (1996) ethnic entrepreneurs have been successful in developing market niches which are ‘ethnically protected’, in which to excel. An obvious example is the wealth of specialist ethnic restaurants which are now common features of the eating-out scene in the UK. • Family: A large percentage of smaller firms represent family enterprises. Very often the small hotel, visitor attraction, or activity centre will involve most of the family performing different roles. Within such firms, issues of importance are the social systems which exist and the question of succession. The family also has an important role to play in terms of being
MNG00427 Topic 2 – Personal and sociological influences on entrepreneurship 45 a supplier of resources, such as finance and labour. However, examples of large-firm family businesses can also be identified, such as Forte PLC before its take over by Granada. Ownership is generally shared by the family, and control exercised by the senior or founding member.• Franchise: The highly standardized nature of some products and services, and the strength of the brands involved, have resulted in franchising becoming a dominant feature of operations in the industry sector. Business format franchising entails the franchiser granting a licence to local operators (franchisees) to use the brand name, product, service and associated goodwill for a specific period of time. Franchisees are supplied with a complete, proven, business concept together with the unique know- how, thereby removing from the franchisee some of the uncertainties of setting up in business. Investment ranges from £2000 upwards, with average investment being £45 000. Industry examples are Uniglobe Travel, Rosemary Conley Diet and Fitness Clubs, Kentucky Fried Chicken, McDonalds Restaurants and Pizza Express.• Gender: It is often the high profile male entrepreneurs who are cast, and identified with, as role models. Consequently, there has been an increased emphasis on the encouragement of female entrepreneurship as statistics indicate a generally low business start-up rate within this group. For example, female self-employment increased from 20 per cent of total self-employment in 1981 to 26 per cent in 1994. (DfEE, 1996). The level of female activity in entrepreneurship is influenced by a complex set of social and economic factors, and the influence of these factors can vary across different industry sectors. There are few high-profile examples of female entrepreneurship within industry, however an excellent example is the achievement of Prue Leith in developing her catering enterprise, eventually sold to Eurest in 1994 for £17 million. Anita Roddick was also an entrepreneur in the hospitality industry, before creating Body Shop.• Home-based and craft: Within the hospitality, tourism and leisure industries, this represents a small, highly specialized segment. The restricted size is mainly due to the nature of the businesses in this sector with their fixity to the service provider’s home, rather than the location of the customers. However, as a result of information technology developments, new varieties of home-based businesses are emerging, such as Internet marketing support, central reservations services, and bespoke tourist itinerary planning.• Joint venture: This represents an arrangement whereby firms remain independent but set up a new organisation jointly owned by the parent firms. This type of quasi-merger arrangement can be seen in consortia firms such as Best Western, Consort, Virgin Collection, and Pride of Britain. They are typically focused on a particular venture, project, or activity. Each will vary in terms of formality, ranging from a loose voluntary agreement to one which involves financial shareholding.• Life-style: The majority of small firms within the UK can be termed life- style businesses. Their owners are likely to be concerned with survival, and maintaining sufficient income to ensure that the business provides them and their family with a satisfactory level of funds to enable enjoyment of their chosen life-style. Examples can be found in businesses such as the way-of- life hotel, and sports persons offering coaching or associated leisure activity packages. There is debate in the literature as to whether running such an organisation is really entrepreneurship.• Small business and self-employment: These businesses are often entirely dependent upon the talents and energies of the proprietors. Lacking in basic management skills, they tend to neglect market opportunities and instead choose to trade within a stable network of customers who will provide a regular and satisfactory return. They are not necessarily strongly profit- motivated and theories of rational economic calculation cannot satisfactorily
46 MNG00427 – Entrepreneurship in Tourism and Hospitality explain their behaviour. Many use unpaid family labour, and employ no staff on a regular basis. These entrepreneurs sell to customers their personal skills, for example bed and breakfast, tour guide, or craft souvenir vendor. It is their detailed knowledge of trading opportunities, within a particular locality, which is often their strength. • Temporary/part-time: This approach relates to entrepreneurship which is not a constant process, but one which can be applied as and when required. It emphasizes the temporal dimension, whereby an individual, or a firm, may be more or less entrepreneurial depending on the extent to which they have the inclination, or pressure upon them, to act entrepreneurially. This refers to management practices within permanent, established firms and to small-scale entrepreneurial activity. The latter is frequently evidenced in the submerged, or black economy, often associated with economic marginality rather than prosperity. Such firms often appear during periods of peak demand, such as the tourist season, and disappear into oblivion as the demand wanes. The dual segmentation approach to the definition of entrepreneurship, described above, serves to explode the subject, introducing a wealth of dimensions which clearly reflects the diversity of the process. As such, it more accurately represents the reality of entrepreneurship. These dimensions are not intended to be all inclusive, but they do serve to introduce many of the issues which will be discussed further in subsequent chapters. (Morrison, Rimmington & Williams 1999, pp. 12–14) Conclusion Well, we have covered a good deal of ground in this topic, where our focus has been on the main player in the entrepreneurial process – the entrepreneur. You have examined a range of personal, psychological and sociological antecedents to entrepreneurship, and have thus been exposed to a diversity of views and a general lack of consensus. While there is no unique personal, psychological and sociological profile that accurately distinguishes entrepreneurs from managers or the general population, there are some features that many entrepreneurs seem to have in common. In addition, we have examined two types of entrepreneurs that represent some of the fastest growing segments – female and ethnic entrepreneurs. Exploring some related research helped to emphasise the role of social factors in the decision to start a new venture. Finally, in recognition that entrepreneurs are not a homogenous group, and to help explain the diversity of views on antecedents to entrepreneurship, we reviewed some typologies of entrepreneurs. This review helped to draw your attention to the ways in which entrepreneurs may differ, particularly in terms of the various contexts in which such activities can occur. In the next topic, we examine the entrepreneurial context more closely, by examining how wider factors in the external environment can encourage or discourage new venture creation. a Discussion questions At the end of Chapter 2 from your textbook, answer the five discussion questions. I will place feedback from these questions on MySCU under Unit Documents in Week 3 of the study period. You might also like to look at the Review Question in the textbook also.
Topic 3 Environmental influences on entrepreneurshipIntroduction This topic is the second of two concerned with antecedents to the entrepreneurial process (Figure 1.2). While the last topic examined personal and sociological influences on entrepreneurship, this topic focuses on the influence of environmental factors, particularly those that facilitate new venture creation in tourism and hospitality industries. From observing the environments where new ventures seem to proliferate, it appears that much variation exists. However, the conduciveness of certain environments for new venture creation seems to hinge on certain economic, social, political, and competitive factors, as well as the support that exists for potential and practising entrepreneurs. This topic firstly examines environmental influences on new venture creation at a general level, by reviewing some factors theoretically proposed as encouraging entrepreneurship. We then apply this in the Australian context by reviewing government policies and procedures, socio-economic factors, entrepreneurial and business skills, and financial and non-financial assistance that influence new venture creation. We then narrow our focus to the industry context for tourism and hospitality, with particular attention to a management framework that assists in assessing the competitive environment facing potential entrepreneurs. We conclude that, in addition to the general external environment for business, opportunities for entrepreneurship depend to a large extent on the competitive attractiveness of particular industries. Objectives After completing this topic, you should be able to: • identify factors in the political, economic and social environment that influence new venture creation • identify how the existence of entrepreneurial and business skills and financial and non-financial assistance can influence new venture creation • discuss the current political, economic and social environment for entrepreneurship in Australia, particularly for tourism and hospitality ventures • describe and apply to tourism and hospitality industries a model that assesses the attractiveness of particular industries for entrepreneurial opportunities. 47
48 MNG00427 – Entrepreneurship in Tourism and Hospitality Textbook Schaper, M, Volery, T, Weber, P & Lewis, K 2011, Entrepreneurship and Small Business, 3rd Asia-Pacific edn, John Wiley and Sons, Australia. • Chapter 3, pp. 68–70 • Chapter 4, pp. 90–97. Readings 3.1 Gnyawali, DR & Fogel, DS 1994, ‘Environments for Entrepreneurship Development: Key Dimensions and Research Implications’, Entrepreneurship Theory and Practice, Vol. 18, No. 4, Summer, pp. 43–62. 3.2 Industry Task Force on Leadership and Management Skills 1995, Enterprising Nation: Renewing Australia’s Managers to Meet the Challenges of the Asia-Pacific Century, Australian Government Publishing Service, Canberra, pp. 106–114. 3.3 Porter, M 1996, ‘How Competitive Forces Shape Strategy’ in Mintzberg, H, Quinn, JB & Voyer, J (eds), The Strategy Process: Concepts, Contexts, Cases, 3rd edn, Prentice-Hall, pp. 75–83. 3.4 Russell, R & Faulkner, W 2004, ‘Entrepreneurship, Chaos and the Tourism Area Lifecycle’, Annals of Tourism Research, Vol. 31, No. 3, pp. 556–579. Types of environmental influences on new venture creation While the environments within which new ventures are created show a good deal of variation, one only has to observe the concentration of entrepreneurial activity in areas such as Silicon Valley and Boston in the United States, or Byron Bay in Australia, to appreciate that perhaps something about these environments make them particularly conducive to entrepreneurship. However, research on the environments for entrepreneurship has been limited when compared to other areas of research in the field. Entrepreneurial activity has been assumed to be an individual decision, driven by the motivations, personal traits and circumstances of the entrepreneur, as discussed in the preceding topic. However, while the personal characteristics of certain individuals may make them inclined towards entrepreneurship, the environment may well determine whether those intentions are translated into action. That is, we may have an entrepreneurial ‘spirit’, but we are unlikely to act on it if the environment provides no opportunities for innovation, if government policies make it extremely difficult to establish a new business, if entrepreneurship is not considered a legitimate career avenue, or if we are unable to attain the necessary business skills. Timmons (1994, p. 9) suggests that entrepreneurial activity can be nurtured by: … a culture that prizes entrepreneurship, an imperative to educate our population so that our entrepreneurial potential is second to none; and a government that generously supports pure and applied science, fosters entrepreneurship with enlightened policies, and enables schools to produce the best educated students in the world. Shapero (1972) contends that initial venture formation is dependent on: the ability of the founders to get financial support, to obtain technically skilled workers, to provide services not available in the area … and to bring the market to the company.
MNG00427 Topic 3 – Environmental influences on entrepreneurship 49 More specifically, other researchers have proposed sets of factors that constitute the environment for entrepreneurship. For example, Bruno and Tyebjee (1982, p. 293) observe that the most frequently cited ‘essential’ environmental factors for new venture creation are: • venture capital availability • presence of experienced entrepreneurs • technically skilled labour force • accessibility of suppliers • accessibility of customers or new markets • favourable government policies • proximity of universities • availability of land or facilities • accessibility to transportation • receptive population • availability of supporting services • attractive living conditions.a Activity Using the above list, assess how environmental factors have either encouraged or hindered entrepreneurial activity in tourism and hospitality industries in an area or town you are familiar with.f Feedback Here’s my example. I hope you were able to think of one. From observation, many of the conditions in the list above exist in Byron Bay, a small coastal town in northern New South Wales. With a resident population of about 4,000 people, the town is a vibrant centre dominated by small tourism and hospitality related businesses, many of them owner-operated and ‘created from scratch’. At last count, there were close to 100 food outlets, six backpacker hostels, dozens of motels, hotels and holiday units, over 20 bed and breakfast establishments, as well as numerous special interest tourism activities. It would appear that the local environment has been particularly welcoming for this type of business creation. Relating this to the list above, the town abounds in experienced entrepreneurs who provide role models for aspiring ones. Opportunities for new businesses are enhanced by the swarms of tourists and daytrippers who provide an accessible market. The local government has been largely pro-development and new retail and restaurant space is continually created. The local community has also been extremely vocal in opposing large-scale developments or those by multi-national companies such as Club Med and McDonald’s. There is an assumption that ‘small is beautiful’ when it comes to venture creation and the population is receptive to new businesses, particularly those offering something small- scale and innovative. The attractive living conditions in the area and its particular appeal to younger people mean there is a steady supply of hospitality staff who can gain ready access to additional training and education facilities. Having read and thought a little about environmental influences on business creation, let’s examine the first reading for this topic. It provides a useful framework for assessing environmental conditions in terms of government policies and procedures, socio-economic factors, entrepreneurial and business skills, and financial and non- financial assistance for new venture creation. Pay particular attention to the framework in Table 1 and the model in Figure 2. After you read this article, we’ll extract some issues it raises for further discussion.
50 MNG00427 – Entrepreneurship in Tourism and Hospitality r Reading 3.1 Gnyawali, DR & Fogel, DS 1994, ‘Environments for Entrepreneurship Development: Key Dimensions and Research Implications’, Entrepreneurship Theory and Practice, Vol. 18, No. 4, Summer, pp. 43–62. Let’s now use the preceding article as a basis for examining the environment for entrepreneurship in Australia. Consistent with the framework in Table 1 of the previous reading, we’ll divide our discussion into government policies and procedures, socio-economic factors, entrepreneurial and business skills, and financial and non- financial assistance for new venture creation. Government influences on new venture creation in Australia Let’s begin this section with some comments on, and examples of, some of the factors listed under government policies and procedures in Table 1 of the previous reading: • restrictions on imports and exports. Tourism is of course a major export industry in Australia and federal, state and local governments have provided various incentives for tourism industries and businesses. At a national level, successive federal governments have developed master tourism strategies to guide tourism development. The Australian Tourist Commission also works at the national level to promote Australia as a tourist destination in overseas countries. At a state level, perhaps the most contemporary example of government input into tourism is the Sydney 2000 Olympic Games, which presents numerous opportunities for entrepreneurial activity in the short-term (for the duration of the games), and also perhaps in the longer-term if overall tourism to Sydney and Australia is boosted by the games. At a regional level, local governments can also provide environments conducive to tourism and hospitality businesses, such as our earlier example of Byron Bay • provision of bankruptcy laws. Generous bankruptcy laws can encourage entrepreneurship because they provide an ‘out’ if the business and its owner cannot pay accrued debts. The courts may decide that the ‘failed’ entrepreneur is only liable for a small proportion of his or her debts to creditors, as was the case with Alan Bond in Western Australia. This means that the perceived risks of going into a new venture may be reduced, or it allows the entrepreneur to recover and launch a new venture more quickly • entry barriers. The federal government’s granting of monopoly rights to Avis to operate car rentals from Australian airports, and the state governments’ granting of a restricted number of licences for casino establishments are but two examples of how government policies can pose entry barriers to entrepreneurial activity in some sectors. We’ll take up this issue later when we look at Michael Porter’s framework for assessing competitive factors within particular industries • procedural requirements for registration and licensing; number of institutions for entrepreneurs to report to; rules and regulations governing entrepreneurial activities. Later in this section, we’ll examine some criticisms of the amount of ‘red tape’ required in Australia to establish and operate a new business, the duplication of reporting mechanisms, and the proliferation of rules and regulations for small businesses • laws to protect proprietary rights. These can vary from the existence and rigour of copyright, trademark and patent laws, to protection of licences. As an example of the latter, one of the issues Australian governments are now grappling with is the regulation of internet gambling. Australian casinos, which have paid substantial
MNG00427 Topic 3 – Environmental influences on entrepreneurship 51 sums for their exclusive operating licences in the various states, are concerned that current laws are inadequate to protect their monopoly rights to operate casino gaming in their jurisdictions. Now, turn to your next reading that reports on the challenges to entrepreneurship in Australia, as identified by research conducted for Enterprising Nation (Industry Task Force on Leadership and Management Skills, 1995), often referred to as The Karpin Report.r Reading 3.2 Industry Task Force on Leadership and Management Skills 1995, Enterprising Nation: Renewing Australia’s Managers to Meet the Challenges of the Asia-Pacific Century, Australian Government Publishing Service, Canberra, pp. 106–114.e Think … … about two of the assertions made in the previous reading. Do you agree that: • the generally ambivalent to negative attitude toward small enterprises in Australia is culturally based? • entrepreneurship can be taught? You might like to discuss these questions with colleagues, friends and family. If you do, my guess is that you’ll spark a lively debate. Another way to examine the influence of Australian government policies and procedures on entrepreneurship is to review recent policy developments affecting the small business sector. However, before you turn to the next reading, we need to clarify just what is meant by ‘small business’. The most commonly used definition of small business is the one adopted by the Australian Bureau of Statistics (ABS). The ABS defines a small business as all manufacturing businesses with less than 100 employees and all other non-agricultural businesses with less than 20 employees. The ABS also identifies very small businesses, which they refer to as micro businesses – those firms employing less than 5 people. It is generally agreed that small businesses tend to: • be independently owned and managed • be closely controlled by owner/managers who also contribute most, if not all, of the operating capital • have the principal decision making functions resting with the owner/manager • have operations (and sometimes markets) that tend to be locally based • be small relative to the size of the largest firm in the industry – generally speaking small firms don’t have much market power. http://www.dewrsb.gov.au/group_osb/smallbus/research.htma Activity Examine the following Federal Government publication, available online. Summarise the key small business policies put in place by the current Federal Government. Commonwealth of Australia, (2008). All About PM&C: What we do and how er do it, Federal Government, Canberra. http://www.pmc.gov.au/about_pmc/docs/about_pmc.doc – 1196k – [ doc ]
52 MNG00427 – Entrepreneurship in Tourism and Hospitality Socio-economic influences on new venture creation in Australia Again, let’s start this section by elaborating on some of the environmental factors influencing entrepreneurial activity listed in Table 1 of Reading 3.1, under the heading of socio-economic conditions: • public attitude toward entrepreneurship. The Australian culture and its general endorsement of ‘having a go’ contribute to favourable public attitudes towards entrepreneurship. While the activities of certain infamous entrepreneurs during the 1980s (e.g. Alan Bond, Christopher Skase), lack of concern for local cultures and environments by others during the 1990s (e.g. Keith Williams and the Hinchenbrook project in Queensland), and the questionable political power wielded by some (e.g. Kerry Packer through his interests in Crown Casino in Melbourne) may have dented our respect for ‘high-flying’ entrepreneurs, embarking on a new enterprise is generally considered a legitimate career option in Australia • presence of experienced entrepreneurs; successful role models. The presence of successful entrepreneurs may encourage further entrepreneurial activity through increasing the allure and confidence of potential entrepreneurs, or through direct mentoring processes. As discussed in Topic Two, role models can be influential in individuals’ decisions to embark on an entrepreneurial career • existence of persons with entrepreneurial characteristics. In the last topic, we examined personal qualities generally associated with entrepreneurs. Some of these qualities are ‘attainable’ and the numerous education and training programs in entrepreneurship and small business management in Australia help to develop these qualities in interested individuals. A comparatively educated population and opportunities for social mobility may also encourage an entrepreneurial bent • recognition of exemplary entrepreneurial performance. While our national heroes in Australia tend to be famous sportspersons and rebellious bushrangers, due recognition has also been accorded to successful entrepreneurs such as Poppy King and Dick Smith • proportion of small firms in the population of firms. Shortly, you’ll be completing an activity that highlights the predominance of small business in Australia • diversity of economic activities. Economic activity has certainly diversified in Australia over recent decades, from a reliance on primary production, to manufacturing, to services. The services sector provides numerous opportunities for entrepreneurial activity, because services offer additional scope for innovation and can successfully be operated on a smaller scale than, for example, manufacturing. This is one of the reasons why tourism and hospitality industries offer many opportunities for entrepreneurship • extent of economic growth. With low inflation and low interest rates, the current economic climate appears comparatively favourable for new venture creation in Australia. Our analysis above suggests that the socio-economic environment for entrepreneurship is largely favourable in Australia. As we’ve seen earlier in this topic, governments have been keen to nurture entrepreneurial activity in the small business sector because of the socio-economic contributions it makes. Meredith (1988, pp. 18–19) provides the following list of small business contributions to the economy and society:
MNG00427 Topic 3 – Environmental influences on entrepreneurship 53• employment. The establishment and expansion of new enterprises creates new industries and jobs, particularly in geographic locations where unemployment is high due to the lack of large industries. Small businesses are also responsible for a disproportionately large amount of part-time work. This is particularly so in tourism and hospitality enterprises• output and export. With increased national productivity due to the contribution of small businesses, there has also been an increase in national exports which helps the country’s balance of payments. Tourism, of course, plays a significant role in this• consumer service. Small businesses provide a wide range of products and services directly to consumers, contributing to living standards in the community. Small businesses are often the ‘transfer agents’ of products and services from big business to consumers. Thus, even in smaller towns, we usually find a range of hospitality and sometimes tourism services• specialist services and products. Because it is more economical for large businesses to standardise production, small businesses contribute to consumer living standards by providing more specialised goods and services, such as eco- friendly resorts, bed and breakfast establishments and backpacker hostels• ancillary products and services to large firms. Small firms can provide component products to large businesses, as is the case when small local operators provide a component of a larger tour operation• distribution outlets for big business. Because some functions, particularly distribution and supply, are more expertly performed by small businesses, large firms rely extensively on smaller firms to remain economically successful. For example, brewers depend on hotels for distribution, while airlines and hotels distribute their services through travel agents• avenues for independent innovation and entrepreneurial talent. Small business provides the means to achieve independence, which is highly valued in free enterprise communities. It provides an avenue for potential owners and innovators who wish to develop new products or services, and starting small allows entrepreneurs the opportunity to ‘learn on the job’ and to achieve their goals of independence and creativity without bureaucratic restraints. Further, while research departments of large organisations tend to encourage the improvement of existing products, records indicate that small businesses have been disproportionately responsible for many significant innovations• a breeding ground for new business ventures. Previous statistics have demonstrated that hundreds of thousands of new enterprises are established each year in most large countries, with government policies and programs assisting those who wish to establish a new business venture• creation of competition. Within the free enterprise system, competition is seen as a desirable means of making the most efficient use of resources, matching market demand and improving price and quality options for consumers. The competition both between individual small businesses and with large organisations has helped to maintain a competitive business environment. This is very obvious in the restaurant sector, which is highly competitive in most regions of Australia• contribution to decentralisation. Because many small businesses market their goods and services locally, they contribute to decentralisation by operating in areas too underpopulated or isolated for large businesses to thrive in. Thus, because the Hiltons and Sheratons may not find it economical to operate in small towns, this provides opportunities for smaller-scale accommodation ventures.The favourable socio-economic environment for small business is certainly reflectedin statistics on the small business sector, as you’ll discover in the next activity, whichhighlights the importance of small businesses to the Australian economy.
54 MNG00427 – Entrepreneurship in Tourism and Hospitality a Activity Go to http://www.abs.gov.au and examine some small business publications, such as 1321.0 Small Business in Australia 2001 and 8127.0 Characteristics of Small Businesses Australia 2006 to view data relating to the economic contribution of small business in Australia. Data on the number of businesses, employment and the characteristics of Australian small business operators, including their sex, age, location, hours worked and place of birth, can be found here. The influence of entrepreneurial and business skills on new venture creation in Australia Consistent with our approach to other environmental influences on new venture creation in Australia, let’s return to Table 1 in Reading 3.1 and provide some comments and examples for the list of factors under the heading entrepreneurial and business skills: • technical and vocational education and training programs. Through Australia’s TAFE system, numerous courses equip potential or existing entrepreneurs with the necessary trade qualifications such as a chef’s qualification, or with training such as a recently introduced tour guiding course • business education. Demand for business courses is burgeoning at both secondary and tertiary levels. These help to equip students with business management skills that enhance their chances of success in entrepreneurial ventures • entrepreneurial training programs. Both TAFE and universities in Australia offer specialist courses in entrepreneurship and small business management. These reflect student interest, and also attempts to nurture entrepreneurial activity • availability of information. Earlier in this topic, you read the Federal Government’s guide to More Time for Business (1997). One of its initiatives is to provide a ‘single entry point’ for those seeking information on small business establishment and management. If you are interested in the Business Entry Point the website for this is at http://www.business.gov.au. Incidentally, this site will be valuable for you if you are contemplating getting into business. The influence of financial assistance on new venture creation in Australia Let’s proceed through the points listed in Table 1 of Reading 3.1 relating to financial assistance for entrepreneurship: • venture capital. We’ll be examining sources of venture capital for new enterprises in a later topic. Suffice to note here that if the potential entrepreneur lacks sufficient funds or access to these from more traditional sources, then the availability of venture capital can determine whether the new business makes a start • alternative sources of financing. These may include family, friends or work colleagues, as well as lending institutions • low-cost loans. Governments can encourage new venture creation through low- cost loans. For example, the Australian Federal Government has such a scheme to assist the long-term unemployed to start new businesses • willingness of financial institutions to finance small entrepreneurs. The lending policies of banks, building societies, credit unions and the like also influence the amount of entrepreneurial activity in a community. For example, the liberal lending policies of the 1980s, where unsecured loans were comparatively
MNG00427 Topic 3 – Environmental influences on entrepreneurship 55 accessible, resulted in a period of heightened entrepreneurship. Normally however, unsecured small business financing is difficult to acquire, especially for a first venture • credit guarantee program for start-up enterprises. Even where individuals have sufficient funds to launch a new venture, cash-flow problems can occur, as we’ll discuss in a later topic. Banks will sometimes extend a line of credit to new businesses, although usually at very high interest rates • competition amongst financial institutions. We have witnessed this in Australia in recent times with housing loans, although it is not so prominent for business loans.a Activity Talk to some small business owners you know and find out how accessible they found financial assistance for their business.The influence of non-financial assistance on newventure creation in Australia The final section in Table 1 of Reading 3.1 identifies factors relating to non-financial assistance for entrepreneurship. Let’s have a closer look at some of these: • counselling and support services. A range of these are identified in the government’s Business Entry Point at http://www.business.gov.au • entrepreneurial networks; local and international information networks. Gaining access to resources and information is one of the many hurdles often faced by potential and practising entrepreneurs. One of the most efficient and powerful weapons used to gain access to resources is networking. This may take the form of relationships, interconnections and linkages amongst individuals, groups and organisations such as suppliers, partners, customers, employees, accountants, banks, solicitors, family, acquaintances, the community, trade associations, chambers of commerce, other organisations, banks, clubs or government support networks (Alizadeh 1999, pp. 49, 61) • incubator facilities. These may be established organisations where potential entrepreneurs can acquire managerial insights and technical expertise in their chosen area. For example, it is not uncommon in the restaurant industry for chefs to work in a number of organisations before launching into their own business. Incubator facilities can also take the form of low-cost business facilities for new ventures that qualify for assistance. These might provide common office facilities and services for all businesses in the complex to use • government support for research and development. In Australia, both the MICE (meetings, incentives, conventions and exhibitions) and backpacker industries have received a substantial amount of government support in research and development • tax incentives and exemptions. We’ve already read about some of the concerns small business operators in Australia have with the tax system and its requirements, and about how the current government is addressing these. You might also consider the implications of the GST for small business in terms of its requirements for collection and record-keeping.
56 MNG00427 – Entrepreneurship in Tourism and Hospitality Environmental influences on new venture creation in tourism and hospitality industries So far in this topic, we have been discussing environmental influences on entrepreneurship at a fairly general level, although we have provided some examples along the way in tourism and hospitality industries. Let’s now narrow our discussion to examine the external environment for new venture creation in tourism and hospitality industries. To aid our discussion, turn to the next reading. It is not specific to tourism and hospitality industries, but provides a framework by which we can examine them. The reading is a complex one, so take it slowly and give yourself time to absorb its main points. We’ll then complete some activities to help your comprehension. We should also note that we’ll be returning to this reading and some others that build on it in a later topic, so it’s important that you devote some attention to it now. (It is also a key reading in your unit on Strategic Management in Tourism and Hospitality Enterprises, so you gain some economies of effort here as well!) r Reading 3.3 Porter, M 1996, ‘How Competitive Forces Shape Strategy’, in Mintzberg, H, Quinn, JB & Voyer, J (eds), The Strategy Process: Concepts, Contexts, Cases, 3rd edn, Prentice-Hall, pp. 75–83. The key point of Porter’s article is stated in its first sentence, that ‘the essence of strategy formulation is coping with competition’. Porter, being an economist, focuses on competition as the main determinant of how attractive an industry is. For potential entrepreneurs, the attractiveness of the industry they are planning to enter, in terms of the state of competition that already exists, is (or at least should be) a key factor in deciding whether or not to launch the new venture. That is, the level of competition is an important environmental influence on new venture creation. Entrepreneurship is about identifying and acting on business opportunities. Thus, the level of competition in an industry affects the availability of entrepreneurial opportunities. However, note that Porter defines competition quite broadly. It doesn’t encompass just existing industry competitors (intra-industry rivalry), but also the threat of entry, the bargaining power of buyers and suppliers, and substitute products. Let’s complete a couple of activities to see how Porter’s ‘five forces model’ might be applied in some tourism and hospitality industries. We’ll concentrate here on two very different tourism and hospitality industries – airlines and whitewater rafting in Australia. If you have particular interest in other sectors, you can substitute those in the following activities. a Activity Using some of the points under each heading in Figure 1 of Reading 3.3, briefly describe the level of competition in the Australian airline industry in terms of entry barriers, bargaining power of buyers and rivalry determinants. (These points are explained more fully in the remainder of the article so you should refer to these if their meaning is unclear from the figure.) Entry barriers: • Economies of scale • Brand identity • Capital requirements • Access to distribution • Expected retaliation.
MNG00427 Topic 3 – Environmental influences on entrepreneurship 57 Bargaining power of buyers: • Buyer volume • Buyer switching costs • Product differences • Brand identity • Decision makers’ incentives. Rivalry determinants: • Fixed costs • Intermittent overcapacity • Exit barriers.a Activity Now, complete the same exercise for whitewater rafting. Entry barriers: • Economies of scale • Brand identity • Capital requirements • Access to distribution • Expected retaliation. Bargaining power of buyers: • Buyer volume • Buyer switching costs • Product differences • Brand identity • Decision makers’ incentives. Rivalry determinants: • Fixed costs • Intermittent overcapacity • Exit barriers.f Feedback What did you discover from this exercise? If you were an entrepreneur wishing to launch a new venture and were tossing up between starting a new airline or a new whitewater rafting company, which industry looks most attractive? These of course are extreme examples, and do not take into account factors such as the entrepreneur’s own ambitions, capital, experience, etc. However, I hope these examples have illustrated the point that some industries are more difficult to become established and compete effectively in than others. More detailed feedback to this activity is provided at the end of this topic (but don’t look until you’ve completed it yourself!). In summary, Porter’s ‘five forces model’ can be used to assess the attractiveness of an industry and overall opportunities for entrepreneurial activity. Potential entrepreneurs should look for those industries where the five competitive forces are weak. This situation generally occurs in emerging industries, that is, those that are relatively new or where some technological breakthrough changes established industry structures.a Activity Identify some examples of emerging tourism and hospitality industries. Use Porter’s framework to do this, by considering industries where the five competitive forces are weak.
58 MNG00427 – Entrepreneurship in Tourism and Hospitality f Feedback How did you go? Many special interest tourism industries, such as eco-resorts, bungee jumping, Aboriginal tours operations, gourmet and educational tours, and adventure tourism could be classified as emerging with the following characteristics: Intra-industry rivalry is low, as market demand generally outweighs the supply of the product or service. As most businesses in these emerging industries are small, promotional activities, price cutting and other competitive strategies are not usually extensive. Entry barriers are low, requiring little capital investment to establish the venture, few economies of scale and unsophisticated distribution channels. Buyer power is low, as most are first-time or relatively inexperienced buyers. Thus, they are likely to be less discerning and demanding, less likely to shop around for a better deal, and less loyal to particular brands. Supplier power is low, as many of these industries offer services requiring few suppliers. Where supplies for the product or service are needed, these are generally sourced from small businesses whose bargaining power is low. Substitute products are few, as these industries offer unique or special experiences. As noted earlier, we’ll return to Porter’s five forces model in a later topic on strategic management of entrepreneurial ventures. Now, turn to your final reading for this topic, which details the role of entrepreneurs in the development of two tourist destinations in Australia and which highlights environmental factors which facilitated and impeded entrepreneurship. r Reading 3.4 Russell, R & Faulkner, W 2004, ‘Entrepreneurship, Chaos and the Tourism Area Lifecycle’, Annals of Tourism Research, Vol. 31, No. 3, pp. 556–579. Conclusion Well done! You’ve made it to the end of a fairly lengthy and complex topic. In this topic, we’ve reviewed general environmental factors that influence entrepreneurial activity and applied these factors to the environment facing potential and existing entrepreneurs and small business operators in Australia. We’ve also examined a framework that may assist entrepreneurs in determining the attractiveness of an industry and its potential for entrepreneurial opportunity. We then applied this framework in the context of some industries in tourism and hospitality. In the next topic, we start delving into the process of new venture creation. Having examined some antecedents to this process in these last few topics, we proceed to the ‘nuts and bolts’ of how to do it. Have a short break, and then continue to our next topic on venture opportunity recognition and evaluation.
MNG00427 Topic 3 – Environmental influences on entrepreneurship 59f Feedback Airline Whitewater raftingEntry barriersEconomies of scale High – as more planes, seats and routes Low – because whitewater rafting is are used, significantly lower costs are generally offered on a small scale, few incurred by the airline per customer. savings can be made by economies of This is because savings can be made scale. on administration, marketing, product development and the like.Brand identity Strong – brands in the airline industry Weak – brands in the whitewater are promoted heavily, with customers rafting industry are generally not well often having a preferred airline. established.Capital requirements High LowAccess to distribution Important – this was one of the major Not so important – people generally problems faced by Compass Airlines, access whitewater rafting services in contributing to its demise, as booking the area where it is offered. Thus, state, facilities for Compass flights were not national and international distribution widely available to travel agents. channels are not necessary for success.Expected retaliation Strong – again, the Compass Weak – the entry of a rival whitewater experience verifies this. Qantas and rating company into the industry would Australian Airlines embarked on a price probably result in much lesser retaliation war for fares, which Compass tried to than occurred in the Australian airline match but was unable to sustain industry.Bargaining power ofbuyersBuyer volume High – there are many frequent Low – most people buy whitewater flyers, particularly amongst business rafting services infrequently and in small passengers and for corporate accounts. volumes, thus decreasing the buyers’ In addition, tour wholesalers can negotiating power for lower prices. negotiate cheaper rates with airlines when buying in large volumes.Buyer switching costs High – with frequent flyer programs, Low – there are few or no costs for it is ‘expensive’ for buyers to fly with buyers to switch to alternate ‘brand’ of an airline not in the program. Unless whitewater rafting. the new venture can gain entry into the program, then buyers are likely to choose another participating airline.Product differences Low – airline seats and services are High – the whitewater ‘experience’ largely undifferentiated. This makes it can differentiate on personal service, difficult for a new entrant to gain market experience of the crew, provision of share, particularly if brand identity to meals, location, social factors, and the existing airlines is strong. like.Brand identity High – due to frequent flyer programs, Low- the market is generally corporate accounts and general inexperienced with whitewater rafting, so ‘suspicion’ of an unknown brand. brand identity is low.Decision makers’ High – through frequent flyer programs. Low – there is little incentive forincentives the decision maker to choose one whitewater rafting company over another.Rivalry determinantsFixed costs/intermittent High – flying a mostly empty plane is Lower – even though fixed costs areovercapacity expensive for airlines, so they have also incurred when they experience strategies for filling seats in low seasons undercapacity, the dollar amount is (discounts) and at the last minute substantially lower than for airlines. (standby rates).Exit barriers High – with such a large capital Low – capital investment is lower investment needed to launch an for whitewater rafting, so if trading airline, they are likely to ‘hang in’ for conditions are particularly difficult, they longer, even if trading conditions are are likely to be more willing to exit the unfavourable. industry.
60 MNG00427 – Entrepreneurship in Tourism and Hospitality
Topic 4 Opportunity recognition and evaluationIntroduction This topic is the first of four that examine the business planning and creation phase of the entrepreneurial process (Figure 1.2). The topic focuses on identifying and evaluating venture opportunities, a prerequisite to later stages of developing the business concept, assessing required resources, acquiring necessary resources, managing the venture, and harvesting and distributing value. However, while all these stages are important, every successful venture is underpinned by an attractive and well-defined opportunity. Thus recognising and evaluating opportunities deserve considerable attention in entrepreneurship. In Topic 1, we noted that many definitions of entrepreneurship consider innovation as a key distinguishing characteristic. And the first step in innovation is creativity. Thus, we commence this topic with some thoughts on innovation, by differentiating ideas from opportunities, and by examining some sources and mechanisms for generating ideas and harnessing the creative process from which opportunities can arise. Having generated creative ideas, the entrepreneur then needs to evaluate their potential as venture opportunities. We discuss the usefulness of considering various dimensions of the opportunity, its fit with the entrepreneur, and its apparent risks and rewards in this evaluation process. If the opportunity passes this preliminary evaluation, it then deserves closer refining as a business concept and careful screening. Some aspects of the proposed venture that should be screened include characteristics of the industry and market, financial risks and returns, competitive advantages, the management team and strategic differentiation. A thorough screening also provides the foundation for developing a business plan to establish the venture’s feasibility. Your main assignment in this unit is a business plan. Before you commence this topic, it would be useful to review the assignment question and begin thinking about the type of venture you will base your plan on. Many activities in this and later topics can then be completed with this venture in mind. Objectives After completing this topic, you should be able to: • explain the concept of innovation and its role in entrepreneurship • distinguish opportunities from ideas • explain the creative process and sources and mechanisms for nurturing creativity • explain how opportunities can be evaluated • identify various aspects of a venture opportunity that should be screened to help establish its potential feasibility • apply processes of ideas generation, opportunity evaluation and opportunity screening to examples in tourism and hospitality industries. 61
62 MNG00427 – Entrepreneurship in Tourism and Hospitality Textbook Schaper, M, Volery, T, Weber, P & Lewis, K 2011, Entrepreneurship and Small Business, 3rd Asia-Pacific edn, John Wiley and Sons, Australia. • Chapter 3, pp. 53–67. Readings 4.1 Dahles, H & Bras, K 1999, ‘Entrepreneurs in Romance: Tourism in Indonesia’, Annals of Tourism Research, Vol. 26, No. 2, pp. 274–280. 4.2 Hisrich, R, Peters, P & Shepherd, D 2008, ‘Creativity, The Business Idea, and Opportunity Analysis’, Entrepreneurship, 7th edn, McGraw-Hill Irwin, New York, pp. 152–154. 4.3 Timmons, JA 1997, ‘Opportunity Recognition’ in WD Bygrave (ed.), The Portable MBA in Entrepreneurship, John Wiley and Sons, New York, pp. 27–52. Towards innovation In an earlier topic, we reviewed some different types of entrepreneurs and entrepreneurial ventures, from conservative ‘mom ‘n pop’ operations to high-flying entrepreneurs. That is, some scholars identify different degrees of entrepreneurship. However, others contend that innovation is the very essence of entrepreneurship. As Drucker (1994, p. 27) says, entrepreneurs innovate. Thus, he contends that not every new small business is entrepreneurial or represents entrepreneurship. He uses the following examples to illustrate: The husband and wife who open another delicatessen store or another Mexican restaurant in the American suburbs surely take a risk. But are they entrepreneurs? All they do is what has been done many times before. They gamble on the increasing popularity of eating out in their area, but create neither a new satisfaction nor new consumer demand. Seen under this perspective they are surely not entrepreneurs even though theirs is a new venture. McDonald’s, however, was entrepreneurship. It did not invent anything, to be sure. Its final product was what any decent American restaurant had produced years ago. But by applying management concepts and management techniques (asking, What is ‘value’ to the customer?), standardizing the ‘product’, designing process and tools, and by basing training on the analysis of the work to be done and setting the standards it required, McDonald’s both drastically upgraded the yield from resources, and created a new market and a new customer. This is entrepreneurship. (Drucker 1994, p. 19) Thus, innovation, according to Drucker, is the specific tool of entrepreneurs, the means by which they exploit change as an opportunity for a different business or service. It is the act that endows resources with a new capacity to create wealth (1994, pp. 17, 27). One of the clearest examples of innovation in tourism and travel was Thomas Cook, as explained in the following excerpt. Thomas Cook More than any other individual, Thomas Cook is associated with the emergence of tourism as a modern, large-scale industry, even though it would take another 150 years for mass tourism to be realised on a global scale. A Baptist preacher who was concerned with the ‘declining morals’ of the English working class, Cook conceived the idea of chartering trains to take the workers to temperance meetings and bible camps in the countryside. The first of these excursions,
MNG00427 Topic 4 – Opportunity recognition and evaluation 63 provided as a day trip from Leicester to Loughborough on 5 July 1841, is sometimes described as the beginning of the contemporary era of tourism. Gradually, these excursions expanded in terms of the number of participants and the variety of destinations offered. At the same time, the reasons for taking excursions shifted almost entirely away from spiritual purposes to sightseeing and pleasure. By 1845 Cook (who had by then formed the famous travel business Thomas Cook & Son) was offering regular excursions from Leicester to London. In 1863 the first international excursion was undertaken (to the Swiss Alps), and in 1872 the first round-the-world excursion was organised with an itinerary that included the British colonies of Australia and New Zealand. The Cook excursions can thus be considered the beginning of international tourism in the latter two countries, although such trips were, of course, still very much the prerogative of the very wealthy. Cook’s arrangements for the Great Exhibition of 1851, held in London, illustrate the innovations that he introduced into the tourism sector. The 160,000 clients who purchased his company’s services were provided with: • An inclusive, pre-paid, one-fee structure that covered transportation, accommodation, guides, food and other goods and services • Organised itineraries based on rigid time schedules • Uniform products of a highly professional quality • Affordable prices, made possible by the economies of scale created through large customer volumes. The genius of Thomas Cook, essentially, was to apply the formal production principles of the Industrial Revolution to tourism, with standardised, precisely timed, commercialised and high volume tour packages heralding the ‘industrialisation’ of the sector. Thus, while the development of attractions and tourist destinations such as the seaside resorts was a mainly unplanned phenomenon, Thomas Cook can be described as an effective managerial pioneer of the industry that accommodated the demand for these products. The actual diffusion of tourism and the formalisation of tourism systems, however, were only made possible by the introduction of communications and transportation innovations such as the railway, the steamship and the telegraph, which Cook utilised to increase the efficiency of his business. As a result of such innovative applications, Thomas Cook exposed an unprecedented pool of potential travellers (i.e. an increased market) to an unprecedented number of destinations (i.e. an increased supply). Today, the package tour is one of the fundamental, taken-for- granted components of the modern tourism industry. (Weaver & Opperman 2000, pp. 64–65)From ideas to opportunities Let’s start this section with an activity.a Activity What is an opportunity? Is it different from an idea? How?f Feedback An opportunity might arise from an idea, but the two are not the same. Timmons (1997, p. 27) notes that: an opportunity has the qualities of being attractive, durable, and timely, and is anchored in a product or service which creates or adds value for its buyer or end user.
64 MNG00427 – Entrepreneurship in Tourism and Hospitality He continues that: for an opportunity to have these qualities, the ‘window of opportunity’ is opening and remains open long enough. Further, entry into a market with the right characteristics is feasible and the management team is able to achieve it. The venture has or is able to achieve a competitive advantage … Finally, the economics of the venture are rewarding and forgiving and allow significant profit and growth potential. Thus, an opportunity is more than an idea, as ideas may not be feasible in terms of creating a profitable new venture. Before an idea can be considered an opportunity it must be carefully screened and evaluated. This evaluation is perhaps the most critical phase of the entrepreneurial process, as it allows the entrepreneur to determine whether the specific product or service will provide the returns needed for the resources required (Hisrich & Peters 1989, pp. 31–32). While opportunities differ from ideas, the first step in finding opportunities is to generate ideas. Let’s consider this process more closely. Generating ideas Most good business ideas do not suddenly appear, but result from entrepreneurs being alert to possibilities or perhaps by using various mechanisms to identify potential opportunities (Hisrich & Peters 1989, p. 31). That is, entrepreneurs can take either a chance or a deliberate approach to finding business ideas. For most entrepreneurs, the ideas apparently arose by themselves, unanticipated and seemingly by chance from unforeseen events, from work, hobbies, acquaintances and everyday observations (Vesper 1994, p. 31). However, what distinguishes the entrepreneur is his or her ability to recognise ideas that might have potential business application – that is, entrepreneurs are alert to potential opportunities. Consider the following excerpts on how opportunities arising by chance, but seized upon for their potential, spawned Lonely Planet Publications (Lewis 1996) and Holiday Inns (Morrison & Thomas 1999). The Lonely Planet story The early years: Lonely Planet finds a niche. In 1972 a young and adventurous newly married English couple, Tony and Maureen Wheeler, then 26 and 22 years old respectively, walked, hitched and backpacked heir way to Australia across Asia from England. They arrived in Sydney on Boxing Day with precisely 27 cents in their pockets. In order to survive, Tony pawned his camera and Maureen got a job in a milk bar. Soon the numerous ‘how did you do it?’ inquiries from friends inspired them to write down their travel experiences. With virtually no publishing knowledge (although Tony had worked on a university newspaper in his student days) and working from a kitchen table in the basement of a Sydney flat, they converted their meticulously kept travel notes into a publication – a cut and paste job they called Across Asia on the Cheap. Tony Wheeler described those early days: We did everything. We wrote the books, we edited them, we sold them, and we delivered them. When ‘Across Asia’ was published, I took a day off work in Sydney to come sell it in Melbourne. I loaded up a suitcase with books, flew to Melbourne, took a bus to the city, put the books in the left luggage office at the train station, went around the book shops and sold the books, went back to the station, picked up the suitcase and then delivered them.
MNG00427 Topic 4 – Opportunity recognition and evaluation 65 Across Asia on the Cheap became an instant success, with the initial print run of 1500 copies becoming sold out in 10 days, it inspired thoughts of a second trip to Asia. Encouraged by their success and driven by their love of being ‘on the road’, they postponed their return to England and set out again for Southeast Asia. This trip resulted in Southeast Asia on a Shoestring. Cobbled together in a cheap Singapore hotel between fortnightly visits to the authorities to renew their visas, Southeast Asia on a Shoestring was published in 1973. Fifteen thousand copies were sold in Australia, New Zealand, Britain, the United States and Asia. Its meticulously researched information, communicated in a down-to-earth style, was to create an entirely new genre of travel-guide writing. Tony Wheeler, reflecting on this early success, observed: Now I can look back and think that was a really clever idea, but at the time I didn’t realise it. It was just a nice thing to do. As soon as we saw how well the first book went we thought, ‘Let’s do another.’ We grew very slowly at first. It took us five years to get to ten titles. (Lewis 1996, pp. 217–218)The Lonely Planet website describes the company’s operations today: Today there are nearly 300 Lonely Planet employees working in offices in Melbourne, Australia; Oakland, California; London, and Paris and a crew of experienced authors traveling and writing around the globe. While Lonely Planet initially covered far-flung destinations for budget travelers, its scope has widened to cover the most popular spots on earth and to offer good-value options for travelers of all ranges. The typical Lonely Planet reader is hard to define by age or income. Whether a student on a first trip to Europe, a trekker traversing the Himalaya or a business executive touching down for a few days in a new city, the traveler turns to Lonely Planet for solid, down-to-earth advice, accurate maps and enriching background information. Each year LP donates a percentage of its profits to organizations benefiting the people and places it covers. In the past, contributions have been made to famine relief organizations in Africa, health care cooperatives in Central and South America and environmental groups working to stop nuclear testing in the Pacific. In addition Lonely Planet encourages travelers to make a direct contribution to the countries they visit through the money they spend there and by learning about and respecting the cultures of each country. As Lonely Planet continues to grow, its emphasis remains on well-researched information written by experienced travelers. The Wheelers continue to spend much of their time on the road, writing new guidebooks and ensuring that their commitment to quality travel information is reflected in all Lonely Planet projects. (http://press.lonelyplanet.com) Holiday Inn Kemmons Wilson founded what is now called Holiday Inn Worldwide in 1952. In 1951 he and his family of five children decided to visit Washington on holiday. Everywhere they went they found that while a room cost $6 to $8 each child was to be charged $2 extra. This annoyed Wilson and he vowed to develop a chain of hotels where children could stay free as long as they slept in the same room as their parents. Wilson’s hotels would also feature free parking, air-conditioning, free in-room TV and swimming pool. By the late 1970s, Wilson
66 MNG00427 – Entrepreneurship in Tourism and Hospitality and his associates ran a hotel chain of more than 400,000 rooms. Wilson changed the rules of the ‘hotel game’, innovating in the development of a radically new concept. (Morrison & Thomas 1999, p. 151) Most entrepreneurs do not have formal mechanisms for identifying opportunities. Ideas may come from consumers, business associates, suppliers, distributors, or from personal experiences working on other projects at work or from using products at home (Hisrich & Peters 1989, p. 31). However, individuals can also use various mechanisms to deliberately seek out ideas that represent a potential business opportunity. Below we examine some of the sources of ideas and mechanisms used to generate them. Vesper (1994, pp. 31–32) contends that the most common source of business ideas is prior employment, where the employer fails to recognise or pursue an opportunity and the employee leaves to do so. Hobbies and other sources such as social encounters are the next most common, respectively. The limited empirical evidence available largely supports his contentions. For example, in a study of 82 entrepreneurs randomly selected from the telephone directory, Koller (1988, p. 194) found that most entrepreneurs: • recognised, rather than sought out, business opportunities • learned of opportunities from someone else – business associates, relatives and social contacts, in that order • and found them in fields where they had work experience. Especially frequent was the response that they were attracted to the opportunity because it offered a chance to apply their prior training. Similarly, a survey by the magazine Inc. of 500 rapidly growing companies in the United States found the following results when respondents were asked where they first got their venture ideas. Table 4.1 Where Inc. 500 founders got venture ideas Source % Got idea while working in the same industry 43 Got idea from hobby or a vocational interest 16 Saw someone else try, figure I could do better 15 Saw unfulfilled niche in consumer marketplace 11 Did systematic search for business opportunities 7 Can’t really explain it 5 Total 100 Source: Vesper 1994, p. 33 The author of the Inc. study summarised the findings thus: More common than the out of the blue inspirations were the explicable ones, the ideas that caught their creators by surprise, but in retrospect seem pretty logical … The mythology of entrepreneurship celebrates such serendipity, propagating an image of the lone company-inventor suddenly flashing on the idea of a lifetime – and sometimes it happens that way.
MNG00427 Topic 4 – Opportunity recognition and evaluation 67 Typically, though, the idea for a fast-growing business appears in much more pedestrian fashion. The structure of a marketplace shifts, maybe ever so slightly. A new niche opens up. And all at once people … who may never have expected to become entrepreneurs, are out on their own and amazed by their own success. (Case, in Vesper 1994, p. 32)Finally, a survey of Cooper et al. asked 2,994 members of the National Federation ofIndependent Businesses ‘where did you get the idea to go into this kind of business?’,with the following results.Table 4.2 Where NFIB founders got venture ideas Source %Prior job 43Hobby/personal interest 18Chance event 10Someone suggested it 8Education/courses 6Family business 6Activities of friends/relatives 5Other 5 Total 100 Source: Vesper 1994, p. 33While the above survey results indicate that ideas seem to ‘just come’ to manyentrepreneurs, there are some systematic ways of searching for and locating ideas.Ideas usually evolve through a creative process whereby imaginative people germinateideas, nurture them, and develop them successfully. Creativity, after all, is the firststep towards innovation, which, in turn, is an essential ingredient of entrepreneurship.While creativity is the ability to bring something new into existence, innovation isthe process of doing new things; it is the transformation of creative ideas into usefulapplications. Creativity is therefore a prerequisite to innovation, which in turn is aprerequisite to entrepreneurship. Alizadeh provides the following figure that clarifiesthe relationships, but differences, between creativity, innovation and entrepreneurship.As Figure 4.1 illustrates, ‘successful entrepreneurs are associated with a constantprocess that relies on creativity, innovation and the application of that innovation inthe marketplace’ (Alizadeh 1999, p. 51).
68 MNG00427 – Entrepreneurship in Tourism and Hospitality CREATIVITY Thinking new things INNOVATION Doing new things ENTREPRENEURSHIP Creating value in the marketplace Source: Alizadeh 1999, p. 52 Figure 4.1 Creativity, innovation and entrepreneurship Now, let’s return to the notion of creativity. By enhancing or drawing on their creativity, potential entrepreneurs can increase their chances of generating ideas for innovative products and services. Holt (1992, p. 33) describes five stages identified by social scientists in the creative process. These are depicted in Figure 4.2 and described below in Holt’s words. Idea germination: Preparation: Incubation: The seeding stage Conscious search Subconscious of for assimilation a new idea. knowledge. of information. Recognition Rationalization Fantasizing Illumination: Veri cation: Recognition of idea Application or test as to prove being feasible. idea has value. Realization Validation Source: Holt 1992, p. 33 Figure 4.2 The creative process Idea Germination: The germination process is a seeding process. It is not like planting seed as a farmer does to grow corn, but more like the natural seeding that occurs when pollinated flower seeds, scattered by the wind, find fertile ground to take root. Exactly how an idea is germinated is a mystery; it is not something that can be examined under a microscope. However, most creative ideas can be traced to an individual’s interest in or curiosity about a specific problem or area of study … Preparation. Once a seed of curiosity has taken form as a focused idea, creative people embark on a conscious search for answers. If it is a problem they are trying to solve … then they begin an intellectual journey, seeking information about the problem and how others have tried to resolve it. If it is an idea for a
MNG00427 Topic 4 – Opportunity recognition and evaluation 69 new product or service, the business equivalent is market research. Inventors will set up laboratory experiments, designers will begin engineering new product ideas, and marketers will study consumer buying habits. Any individual with an idea will consequently think about it, concentrating his or her energies on rational extensions of the idea and how it might produce results. More often, conscious deliberation will only overload the mind, but the effort is important in order to gather information and knowledge vital to an eventual solution. Incubation. Individuals sometimes concentrate intensely on an idea, but, more often, they simply allow ideas time to grow without intentional effort. We have all heard about the brilliant, sudden ‘flashes’ of genius – or more precisely, we have developed fables about them – but few great ideas come from thunderbolts of insight. Most evolve in the minds of creative people while they go about other activities. The idea, once seeded and given substance through preparation, is put on a back burner; the subconscious mind is allowed time to assimilate information … Illumination. The fourth stage, illumination, occurs when the idea resurfaces as a realistic creation. There will be a moment in time when the individual can say, “Oh, I see!” … Illumination may be triggered by an opportune incident. … The important point is that most creative people go through many cycles of preparation and incubation, searching for that incident as a catalyst to give their idea full meaning. When a cycle of creative behavior does not result in a catalytic event, the cycle is repeated until the idea blossoms or dies. This stage is critical for entrepreneurs because ideas, by themselves, have little meaning. Reaching the illumination stage separates daydreamers and tinkerers from creative people who find a way to transmute value. Verification. An idea once illuminated in the mind of an individual still has little meaning until verified as realistic and useful … Entrepreneurial effort is essential to translate an illuminated idea into a verified, realistic and useful application. Verification of the development stage of refining knowledge into application. This is often tedious and requires perseverance by an individual committed to finding a way to ‘harvest’ the practical results of his or her creation. During this stage, many ideas fall by the wayside as they prove to be impossible or to have little value. More often, a good idea has already been developed, or the aspiring entrepreneur finds that competitors already exist. (Holt 1992, pp. 32–36)The focus of the previous figure and excerpt is creativity, or the ‘ability to bringsomething new into existence’ (Holt 1992, p. 32). So how might creativity benurtured? Let’s address this question firstly by identifying some barriers to creativitythat individuals impose on themselves (Von Oech 1990, in Alizadeh 1999, pp. 54–55):• searching for the one ‘right’ answer• focusing on being logical• blindly following the rules• constantly being practical• viewing play as frivolous• becoming overly specialised• avoiding ambiguity• fearing looking foolish• fearing mistakes and failure• believing that ‘I’m not creative’.Asking the following questions can assist in overcoming such creative barriers to ideageneration:
70 MNG00427 – Entrepreneurship in Tourism and Hospitality • Is there a new way to do it? • Can you borrow or adapt it? • Can you give it a new twist? • Do you merely need more of the same? • Do you just need less of the same? • Is there a substitute? • Can the parts be rearranged? • What if we do just the opposite? • Can ideas be combined? • Can we put it to other uses? • What else could we make from this? • Are there other markets for it? (Alizadeh 1999, p. 55). a Activity Select any four questions from the above list and give an example how answering them has resulted in new products and services in tourism and hospitality industries. f Feedback Here are my examples. Is there a new way to do it? Terry Lillis of Centrebet in the Northern Territory found a new way of taking bets on sporting events – via the internet (as well as telephone). This allowed punters to access his service worldwide and created opportunities for taking bets on dozens of sporting events each day. Is there a substitute? Virtual reality technology is being used to simulate adventure rides in theme parks. For example, on a recent trip to Disneyland, I went on a virtual space shuttle ride, without ever leaving the room. What if we do just the opposite? While most hospitality businesses aspire to service excellence, some have become profitable and renowned for abusive service. Many years ago, I encountered a Fawlty Towers theme night at a local hotel, where actors/ bartenders from a specialised company were hired to verbally abuse the customers in Basil Fawlty fashion. This company was quite successful and in high demand. Can we put it to other uses? Homestays and farm stays are examples of where enterprising people have found alternative uses for spare bedrooms and other existing facilities. Another example is Boston Duck Tours. Its founder, Andrew Wilson, came across an amphibious military vehicle in 1992 from the Second World War era, known as the ‘duck’ while on a visit to Graceland in Memphis. The duck was being used there as a kind of tour bus. It occurred to Wilson that the amphibious nature of the vehicle was perfect for land and water based tours of Boston. By 1996, Boston Duck Tours owned 12 ducks, carried 250,000 passengers and had revenues of US$3.4 million (Allen 1999, pp. 24–25). Let’s now complete some activities to help you tap into your creative potential and to generate ideas which may be suitable for a new venture. a Activity Critique an existing tourism or hospitality product or service. List ways of improving on it that you might be able to sell. a Activity Think about your current job, or perhaps one you have had in the past. Could you do this job on your own instead of as an employee?
MNG00427 Topic 4 – Opportunity recognition and evaluation 71f Feedback As an educator, author and researcher, there are avenues I might explore to perform aspects of my job in my own business. For example, I could establish a tutoring service for students, hope to make a living from writing books, or become an independent consultant. What are the opportunities like in your line of business? An idea generator that is sometimes used is known as the morphological analysis. Examine the explanation in the excerpt below and then try the next activity. Morphological analysis This is an idea generator with tremendous potential. At its simplest, one prepares a grid with a number of elements on each axis. For example, suppose you are experienced in the cosmetics industry and have decided that you want to use that experience in starting your own business, you can use Morphological Analysis in the search for new products to market for yourself. IDEA GRID Age sold to 10 26 36 51 under to to to to over 18 25 35 50 65 65 Mascara Foundation cream Lipstick Possible products Eye shadow Fragrances Hair products Nail products Skin products You now have a grid containing 48 ideas. The first box on the first line would be to sell mascara to under eighteen-year-olds. The first box on the second line suggests that you sell foundation creams to the same group. The last box on the last line has the idea that you market skin products to the over sixty-five age group. You might feel that these ideas are insufficient on their own and need further refining. You might feel that you would need to consider, say, the customer’s profession, thus:
72 MNG00427 – Entrepreneurship in Tourism and Hospitality You now have a box containing 336 ideas (8 x 6 x 7). The largest number of these ideas will be useless to you. For example, one of the ideas in the box would have you marketing mascaras to managers under eighteen years old. It is not impossible, but there would probably be too few sales to be worth bothering with it. At this stage you are concerned with generating large numbers of ideas, not with their quality. That comes later. You are trying to get to the few feasible ideas but without generating large numbers of ideas first, the number of attractive ideas you end up with will be not just few, but very few. You can extend the number of ideas by adding a fourth axis (taking into account four-dimensional mathematics, were we to try to draw it). Suppose you feel that the nationality or ethnic background of the customer was important, your fourth dimension could be European, Afro-Caribbean, Asian, Chinese, Other. Here you would have a grid with 1680 ideas (8 x 6 x 7 x 5). You will probably need a computer to work out and list every permutation and combination. Add a fifth dimension. Perhaps the gender of your customer affects things: by adding the male/female dimension you double up to 3360 ideas. Perhaps it is a good thing that there are only two sexes, because you can see that as more dimensions are added it can get very unwieldy. This idea generation technique, like brainstorming, can be used with groups of people who would help you develop the dimensions and the elements within each dimension. Where you do generate more that three dimensions, you will have a problem in evaluating them because of the numbers of ideas which are generated. To handle this you could start with the first three dimensions, evaluating as you are going along. Here, the objective is to cut the first three dimensions down to two (or even one) before going on to add the fourth dimension. If you do this it allows the use of diagrammatical presentation (the grid and box) for all dimensions and this makes it easier for the participants in the process to conceptualize additional dimensions and elements, enhancing their creativity. (Saunders 1989, pp. 95–98)
MNG00427 Topic 4 – Opportunity recognition and evaluation 73a Activity Using idea grids and boxes as explained in the excerpt above, generate ideas for small group tours, or food outlets, or another product or service you are interested in relating to tourism or hospitality.Evaluating ideas and opportunities Regardless of where or how ideas for new products or services arise, they must be carefully evaluated to determine whether the specific products or services are likely to provide the returns needed for the resources required to produce them (Hisrich & Peters 1989, pp. 31–32). This may involve examining: • What has created the opportunity? Is it a result of technological change, changes in market preferences, government regulation or competition? This may determine the market size and how long the product or service is likely to be in demand. • Does the opportunity fit with the personal skills and goals of the entrepreneur? An entrepreneur must believe in the opportunity so much that his or her time and energy will be devoted to organisational success. • What are the risks and returns of the opportunity? This depends on market size, the likely length of product/service demand, the state of current and future competition, the amount of capital required, and many other factors. (Hisrich & Peters 1989, p. 32) Let’s have a closer look at the three points above. Source of the opportunity Holt (1992, pp. 41–49) observes that entrepreneurs tend to be ‘strategic thinkers’ who recognise changes and see opportunities where others do not. He identifies six types of change from which opportunities for new innovations or venture creation might arise: • scientific knowledge, such as new inventions like the steam engine that lead to train travel. Think back to our previous discussion of how Thomas Cook capitalised on this • process innovations, or the techniques and methods used to make knowledge or ideas useful, such as the application of productionline manufacturing to hamburger making. Interestingly, the food service industry has also witnessed a trend away from a productionline approach which has spawned a new breed of contemporary entrepreneurial chefs who Gillespie (1994) refers to as ‘gastrosophers’, people with professional expertise in gastronomy and hospitality. She maintains that the rise of nouvelle cuisine in the 1970s and 1980s provided the opportunity for many chefs to capitalise on the nouvelle style and establish their reputations by developing highly personalised, even customised variants on general culinary themes. Inherent to the rise of chef gastrosophers has been the partial rejection of the partie system of kitchen organisation. This was developed by Escoffier to streamline kitchen work practices to utilise talent more rationally by dividing work so that each kitchen employee had an assigned, well-defined role and operated within fixed parameters. However, while improving efficiency, the partie system can be viewed as constraining innovation in cuisine. This breakdown of traditional processes in kitchen work has allowed these celebrity chefs to create ‘a virtual revolution in culinary philosophy and practice, and spurred an eclectic profusion of concept cuisines’ (Gillespie 1994, p. 22) • industrial changes, through either natural events such as the discovery of oil or human events, such as airline deregulation. The latter was seized by Compass Airlines in Australia
74 MNG00427 – Entrepreneurship in Tourism and Hospitality • market changes, resulting in unmet demand. For example, Dominos Pizza was built on the recognition that many people ordered pizzas to take away. Similarly, travellers cheques were no great ‘invention’, being basically nothing more than letters of credit which have been around for years. However, with the post-World War Two period of mass travel, the market for travellers cheques was large enough to attract the attention of Thomas Cook and American Express, the two earliest travel agents. Because these companies were worldwide organisations, they had the necessary scope of agents and offices to allow people to cash the cheques conveniently, when few other organisations at the time had any reason to build such facilities. For many decades, these two companies had a virtual monopoly on travellers cheques, a highly profitable venture since the issuer has use of the money and keeps the interest earned on it until the purchaser cashes the cheque, sometimes months later (Drucker 1994, pp. 222–223) • demographic changes. Consider this example from Drucker (1994, pp. 86–87): The success of Club Med in the travel and resort business is squarely the result of exploiting demographic changes: the emergence of large numbers of young adults in Europe and the United States who are affluent and educated but only one generation away from working-class origins. Still quite unsure of themselves, still not confident as tourists, they are eager to have somebody with the know-how to organize their vacations, their travel, their fun – and yet they are not really comfortable either with their working-class parents or with older, middle-class people. Thus, they are ready-made customers for a new and ‘exotic’ version of the old teenage hangout. • Social and cultural changes. Again, let’s consider an example from Drucker (1994, p. 91) which underpins growth in the dining-out market: Traditionally, the way people feed themselves was very largely a matter of income group and class. Ordinary people ‘ate’; the rich ‘dined’. This perception has changed over the last twenty years. Now the same people both ‘eat’ and ‘dine’. One trend is towards ‘feeding’, which means getting down the necessary means of sustenance, in the easiest and simplest possible way: convenience foods, TV dinners McDonald’s hamburgers or Kentucky Fried Chicken, and so on. But the same consumers have also become gourmet cooks (and diners). Drucker (1994, p. 25) contends that entrepreneurs see change as ‘the norm’ and as healthy. Usually, they do not bring about the change themselves, but the entrepreneur always searches for change, responds to it, and exploits it as an opportunity. This, Drucker contends, is what defines the entrepreneur and entrepreneurship. a Activity Brainstorm some ideas for new tourism or hospitality related products or services that arise from the following changes: • interactive television • the Internet • virtual reality • growth in single-parent families • generation X • growing interest in gourmet food and ‘celebrity chefs’ • busier lifestyles • concern for environmental protection. Recall the definition of opportunity (Timmons 1997, p. 27) that was presented at the beginning of this topic. One of the qualities that distinguished an opportunity from an idea was that the former is timely. For ideas to become entrepreneurial opportunities, there needs to be a ‘window of opportunity’. This window is the time horizon during
MNG00427 Topic 4 – Opportunity recognition and evaluation 75 which the opportunity exists. For example, when a new change in technology occurs, intrepid innovators rush to become early industry leaders. However, as opportunities for success become known, more competitors enter the industry and the window of opportunity rapidly closes with market saturation (Holt 1992, p. 59). As Timmons (1997, p. 31) notes, for an entrepreneur to seize an opportunity requires that the window of opportunity be opening, not closing, and that it remains open long enough for the venture to be successful. Thus, the window of opportunity needs to be durable as well, as noted in Timmon’s definition (1997, p. 27). Now turn to your first reading for this topic, which details an unusual example of entrepreneurship. Then, complete the activity that follows.r Reading 4.1 Dahles, H & Bras, K 1999, ‘Entrepreneurs in Romance: Tourism in Indonesia’, Annals of Tourism Research, Vol. 26, No. 2, pp. 274–280.a Activity What types of changes provided the opportunity for the entrepreneurial activities described in Reading 4.1? How durable do you think this opportunity is? What factors might threaten its durability?e Think … about the role of networking in entrepreneurial activity. To what extent does the success of the ‘beach boys’ in the previous reading depend on networking? We’ll return to networking in entrepreneurship in a later topic. In the following excerpt, Van Slyke, Stevenson and Roberts (1992, pp. 82–84) identify five questions that can be asked to help evaluate opportunities. EVALUATING THE OPPORTUNITY An attractive, well-defined opportunity is the cornerstone of all successful ventures, but the way an opportunity is defined shapes how clearly it is understood. Several questions can help to evaluate an opportunity adequately. What are the dimensions of the “window of opportunity?” Any opportunity has several critical dimensions: its raw size, the time span over which it is projected to exist, and the rate at which it is expected to grow. The raw size of the market is naturally a critical dimension, because it has a direct bearing on potential sales volume and, thus, financial returns. All things being equal, of course, bigger is better. But, things are not always equal. Large markets often attract large, powerful competitors, making smaller niches more hospitable to the entrepreneur. Growth rate is also related to size, and new ventures often thrive in rapid-growth environments. By gaining – and holding onto – a piece of a small market and growing with that market, small ventures can become big businesses. Every opportunity exists only for a finite period of time, which varies greatly depending on the nature of the business. For example, in the popular music business, the opportunity for a new hit tune is usually only a few months long. In real estate, by contrast, opportunities for profiting from a single property
76 MNG00427 – Entrepreneurship in Tourism and Hospitality may span several decades. It is therefore important to understand both the time period and the economic life over which the opportunity will exist, and the time available for analyzing the opportunity. The two are not always the same. The risk and reward potential of any given opportunity is also likely to vary over time. At certain points in its economic life an opportunity may have greater potential that at others, and a careful analysis of the timing and magnitude of opportunities for harvesting may place time limits on analysis and plans. Using real estate as an example again, we note that syndication of tax shelters typically exploits only part of the total economic opportunity of an income-producing property over only a fraction of its total economic life. In other businesses too it may be advantageous to pursue an underlying opportunity for only part of its total existence. A key to exploiting an opportunity is understanding the forces that are creating it. Technological change, government regulation (or its relaxation), and shifts in consumer preferences and market demand can all create opportunity. By spotting patterns early, entrepreneurs can seize the initiative by creating ventures to exploit such changes. To do so they must identify the best period over which to pursue an opportunity and match their concepts of how value can be created with analyses of their own goals, skills, and time frame. Is the profit potential adequate to provide a satisfactory return? An opportunity must earn a sufficient return to justify taking an entrepreneurial risk. “Adequate” is a relative term and depends on the amount of capital invested, the time frame required to earn the return, the risks assumed in the process, and existing alternatives for both capital and time. Opportunities that demand substantial capital require long periods of time to mature, and have large risks usually make little sense unless enormous value is being created. In all too many cases, such opportunities create considerable value, but not for the original entrepreneurs. The numerous rounds of financing reduce the founders’ percentage of ownership to such an extent that, ultimately, there is little recompense for the effort and risk. Adequacy of return also depends on alternatives and opportunity costs, which vary with individuals, time, and circumstances. What may be attractive for one person may be unrealistic for another, due to the availability of better alternatives. Nonetheless, good opportunities are like to display the following financial characteristics: • Steady and rapid growth in sales during the first five to seven years in some well-defined market niche • A high percentage of recurring revenue; that is, once sold, customers become recurring sources of revenue • High potential for operating leverage with increased experience and scale of operations • Internally generated funds to finance and sustain growth • Growing capacity for debt supported by build-up of hard assets as collateral and/or increase in earnings and cash flow to service debt • Relatively short time frame during which significant value can be created and sustained – usually three to five years • Real harvest options to turn equity into after-tax cash or equivalents • Rate of return on investment of 40% or more (after taxes).
MNG00427 Topic 4 – Opportunity recognition and evaluation 77 Does the opportunity open up additional options for expansion, diversification, or integration? Good opportunities create additional options in a variety of different ways. Since the future is usually unknown, it is critical not to be locked into a single, unvarying course. Good opportunities allow for mid-course corrections; poorer opportunities foreclose or limit future options. Opportunities that consume resources, eliminate alliances, or narrow technological options are inferior to those with built-in flexibility. Will the profit stream be durable in the face of probable obstacles? One thing is certain: circumstances will change over time, particularly if the venture is successful. Success creates all sorts of pressures on performance including imitative competitors, product substitutions, changing technology, shifts in customer preferences, personnel turnover, and changing relationships with both suppliers and buyers. It is absolutely essential, therefore, to evaluate whether the venture may become vulnerable to erosion of its profit stream. This requires identifying and combating potentially fatal vulnerabilities, recognising that some, such as personnel turnover, are internal to the venture, while others, such as competitive reactions, are external. Does the product or service meet a real need? The provision of real value is fundamental to any new venture. Successful products meet a real need in terms of functionality, price, distribution, durability, and/or perceived quality. Except in pure trading or promotion activities, the creation of value ultimately depends on the ability to convince potential customers of the need and the benefits of its products and services in a reasonable period of time and at an affordable marketing and selling cost. Entrepreneurs surprisingly often fail to understand whether their products and services meet a customer’s real needs and generally underestimate the time and marketing expense required to achieve high-volume distribution, particularly at the national level.Fit with the entrepreneurTimmon’s definition of opportunity (1997, p. 27) also notes that an idea has to beattractive to represent an opportunity. Naturally, the opportunity needs to be attractiveto the market, but also to the entrepreneur. That is, it needs to fit with skills and goalsof the key person or entrepreneurial team.Patterns of success in entrepreneurship highlight the fact that technical capability cansometimes be an important, if not all-important, factor in pursuing venture success.However, in some cases, the potential or existing entrepreneur can hire employeeswith the necessary technical capabilities or go into business with a partner whopossesses these skills (Vesper 1994, p. 70).Other aspects of congruence between the entrepreneur and the opportunity are alsoimportant. Depending on the type of opportunity, potential success of the venturemight also rely on having appropriate contacts, qualifications, training, experience andreputation, to name a few.However, it is sometimes not enough to be able to simply perform the work of theproposed business. Venturing often requires that it be performed exceptionally well,with passion, enthusiasm, and commitment. The attractiveness of the opportunity tothe entrepreneur plays an important role in determining his or her ability to excel.
78 MNG00427 – Entrepreneurship in Tourism and Hospitality Let’s now complete an activity to help you identify what types of entrepreneurial opportunities you are likely to find attractive. Once you develop a list of things you are looking for in a business and elements you would want to avoid, you can evaluate entrepreneurial opportunities against this. a Activity Make a list of elements you are looking for in a business and things that you would want to avoid. Some examples follow as a guide. Looking for (examples) Avoiding (examples) Something I can be proud of Gimmicks and fads A business I can sell High capital requirements A business that will utilise my talents Art/design business Challenging and interesting Night work Flexible work hours 7 days a week Environmentally friendly Can be run by others in my absence Involves meeting people Opportunity for expansion The preceding activity assumes that you have not yet found an entrepreneurial opportunity, but are still in the searching phase. Let’s now complete one that would help you assess whether a particular entrepreneurial idea you are contemplating would fit with your skills and goals. a Activity In relation to a business in tourism and hospitality that you might consider establishing: • List the capabilities, qualifications and resources needed to establish and run the business. • List your own personal capabilities, qualifications and resources. • Compare these two lists. What complementary talents might it be wise to develop or recruit? • How easy or difficult would it be to recruit these talents? Name some people you might approach. • List people who might be interested in competing with your proposed venture. How do their capabilities, qualifications and resources compare with yours? r Reading 4.2 Hisrich, R, Peters, P & Shepherd, D 2008, ‘Creativity, The Business Idea, and Opportunity Analysis’, Entrepreneurship, 7th edn, McGraw-Hill Irwin, New York, pp. 152–154. This reading will assist you in completing your second assignment. Risks and returns: A quick appraisal The third aspect of an opportunity that needs evaluating is its potential risks and returns. While the next topic will provide some guidelines on conducting a detailed feasibility analysis for a business opportunity, let’s examine here how you might do a quick appraisal before you expend what might turn out to be unnecessary time and energy.
MNG00427 Topic 4 – Opportunity recognition and evaluation 79 A first step is to develop a concept statement for the proposed venture. This should identify the product or service, customers, benefits and distribution as explained in the next activity.a Activity Develop a concept statement for a proposed business you are interested in establishing by answering the following questions: • What is the product or service being offered? • Who is the customer? • What are the benefits to the customer? • How do we get the product or service to the customer?f Feedback An example follows for a restaurant intranet business (an intranet is a closed Internet accessible only by companies that own it): • What is the product or service being offered? A service that will link all areas of a restaurant business via an intranet. • Who is the customer? The restaurant or restaurant chain. • What are the benefits to the customer? The company (restaurant) will be constantly linked to all its sites; management and employees will be able to share information in real time; it will be easier to plan and conduct meetings and deal with suppliers. • How do we get the product or service to the customer? We will do on-site planning, installation and training (Allen 1999, pp. 31–32). Van Slyke, Stevenson and Roberts (1992) pose four questions in the following excerpt that help to clarify the strategic choices made in developing a business concept. DEVELOPING THE BUSINESS CONCEPT Having undertaken an analysis of the opportunity, it is necessary to develop a business concept—or strategy—that fully exploits the opportunity. The forces that drive the development of the business strategy include both external-market focus and the economics of various approaches to serving that market. For instance, if we believed that there existed an extraordinary opportunity in the retailing of freshly baked breads, we would still need a strategy to address a maze of choices: • Franchising versus company-owned stores; • Mall versus free-standing sites; • On-premise preparation and baking versus central preparation and frequent delivery; and • Specific geographic region versus national rollout. CAN BARRIERS TO ENTRY BE CREATED? Barriers to entry help sustain superior returns and can be created based on cost, distribution power, patents, trade secrets, and product differentiation. Given a good idea, a real advantage, and success, a venture will, in fact, have only a finite lead-time. Competition will always emerge. Frequently, the first competitors will enter the market with a “copy and cut” strategy for products and pricing. We must, therefore, anticipate competitive threats and devise measure to protect our lead-time and competitive advantages. An often fatal error of new firms is the failure to plan for competitive reactions and, therefore, for the renewal through new products or services that must occur if advantages are to be durable.
80 MNG00427 – Entrepreneurship in Tourism and Hospitality ARE CUSTOMERS IDENTIFIABLE, REACHABLE, AND OPEN TO CHANGE? Opportunities that postulate the existence of a generalised market are almost always less successful than those based on knowledge of specific customers and how to reach them. Effective distribution planning requires the entrepreneur to identify specific groups of potential customers within markets and compare the benefits they receive with the products and services offered to them. Customers must not only be identifiable and reachable, they must be willing to abandon investments they have made in other firms’ people, procedures, facilities, or equipment. A new venture’s success may depend on the ability to sell change to the customers. This typically requires the latter to change spending patterns and, perhaps, the way the do the business. Becoming integrated into the customers’ procedures in this way is often the most effective barrier to the entry of competition. Unfortunately, it is also the major resistance a new product or process must overcome. It is essential therefore, that the change being sold (1) be affordable to the customer, and (2) yield a clearly visible benefit. WILL SUPPLIERS CONTROL CRITICAL RESOURCES AND CAPTURE INNOVATIVE RENTS OR PROFITS? As a result of make-or-buy analyses and the desire to be “lean and mean,” new companies frequently delay investment in facilities or technology on which their venture depends. In such cases, the new firm may become dependent on its suppliers, who could be in a position to squeeze extra profits from the venture through control of critical resources. Often relationships, either contractual or personal, are used to mitigate these risks. Once the business concept has been developed, there are some quick appraisals that can be done to determine whether a full-blown feasibility study is warranted. Allen (1997, pp. 32–33) suggests the following: • Talk with some trusted friends and get initial feedback on the idea. (However, don’t be discouraged or dismiss the idea if your friends tell you that it’s crazy – after all, the Beatles were told by the record company they first approached that they would never amount to anything!) • Do a quick checklist of the forces working for your idea and the forces working against it. How does the idea stack up? Are there stronger forces in favour than against it? • Ask yourself, ‘am I really interested in this business opportunity?’ If you develop this concept, it’s going to take a great deal of time and energy, so it’s important that you like it. • Ask yourself and others, ‘is anyone else interested?’ You can’t have a business without customers, and you may need investors, so you’d better be sure that others are interested in what you have to offer. • Ask yourself and others, ‘will people actually pay for what I am offering?’ If people are not willing to pay what you believe your product or service is worth, you may need to rethink the idea. If your business concept can pass this quick test, then it’s time for the next level of investigation – a more thorough screening of the opportunity.
MNG00427 Topic 4 – Opportunity recognition and evaluation 81Screening opportunities An attractive, well-defined opportunity is the foundation of all successful ventures and so deserves careful screening. Let’s turn to the final reading for this topic to examine how this can be done.r Reading 4.3 Timmons, JA 1997, ‘Opportunity Recognition’, in Bygrave, WD (ed.), The Portable MBA in Entrepreneurship, John Wiley and Sons, New York, pp. 27–52.Conclusion The previous reading represents an appropriate point at which to conclude this topic, by consolidating much of the material we have covered in this topic, yet moving our focus forward to begin examining the ‘nuts and bolts’ of business planning. The criteria it identifies for evaluating venture opportunities are issues that should be considered in developing a business plan for a new venture to establish its feasibility. And this is the focus of our next topic, Topic 5. Thus, having examined the foundation for all successful ventures – an attractive and well-defined opportunity that has been evaluated and screened – we turn now to planning the new venture.a Discussion questions At the end of Chapter 3 from your textbook, answer the five discussion questions. I will place feedback from these questions on MySCU under Unit Documents in Week 5 of the study period.
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Topic 5 Planning the new ventureIntroduction It has been suggested that few areas of business attract as much attention as new ventures, and that few aspects of new venture creation attract as much attention as the business plan (Sahlman 1999, p. 30). While many new ventures commence without a formal business plan, it is fair comment that developing one usually increases the chances of new venture success. Thus, we devote this topic to planning the new venture, using the business plan as a focus for that planning. We commence by examining some uses of business plans. You’ll find that they are not just advocated by enthusiastic university lecturers wishing to set a testing assignment for their students, but that they have a number of real world applications and benefits. We then proceed to identify common elements in a business plan, and provide some readings as guidelines. Along the way, we also develop, step by step, elements of a business plan for a new small restaurant. This is simply to provide an example of the planning process. The business plan in the Appendix of Chapter 7 of your textbook is another example of what a business plan can resemble however, although this follows the basis of the textbook it still lacks some detail which you need to discover for your major assignment. Thus, we suggest that you use or adapt the activities posed in this topic for and answer the questions provided for the assignment. Objectives After completing this topic, you should be able to: • identify various uses of business plans • recognise the importance of a business plan in maximising a new venture’s potential and in minimising business risks • evaluate the components of a comprehensive business plan for a new venture. Textbook Schaper, M, Volery, T, Weber, P & Lewis, K 2011, Entrepreneurship and Small Business, 3rd Asia-Pacific edn, John Wiley and Sons, Australia. • Chapter 7 and the Appendix pp. 155–169. Readings Online Timmons, JA, Zacharakis, A & Spinelli, S 2004, Business Plans That Work: A Guide for Small Business, McGraw-Hill, New York (available online through the Southern Cross University Library Catalogue). 83
84 MNG00427 – Entrepreneurship in Tourism and Hospitality Use a business plan An analysis of past business failures reveals that, too often, entrepreneurs launch a new venture without undertaking a thorough and detailed study of the problems and prospects likely to be experienced. Research into small business performance in particular, indicates that many of the most common causes of business failure, such as inadequate cash flow, financial mismanagement, sales and marketing problems and staffing problems, could have been avoided or at least minimised by sound business planning. Thus, it is extremely useful for entrepreneurs to develop and use a comprehensive business plan if they are to minimise risks and maximise business potential. Gumpert (1997, p. 120) states that a good definition of a business plan is ‘a document that convincingly demonstrates the ability of your business to sell enough of its product or service to make a satisfactory profit and be attractive to potential backers.’ However, he contends that a better definition is ‘a selling document that conveys the excitement and promise of your business to any potential backers or stakeholders’ (emphasis in original). This is not to say that a business plan should contain lots of ‘hype’ or exaggeration – rather it should convey your enthusiasm and confidence for the business, while supporting its potential with evidence from solid research and investigation. Vesper (1994, p. 80) identifies the following reasons for writing a business plan: • as an exercise for learning about entrepreneurship • as a test of reasoning about the venture design • as a scenario against which founders can test their ‘fit’ • as a device for obtaining counsel from others • as a portrait of the venture as a basis for improving its design • as a touchstone for guidance should events become hectic • to obtain a bank loan • to help in thinking through a start-up idea • to obtain credit from a supplier • to obtain capital from an investor • to recruit business partners • to recruit key employees • to provide guidelines to work from for founders and employees • to convince a wanted customer that the venture will deliver • to anticipate long lead times required for some action • to set benchmarks for tracking performance. In addition, English (1988, p. 119) contends that a well developed business plan encourages the entrepreneur to: • be realistic rather than over-optimistic about the future of the business • recognise the need for outside advice and assistance • recognise the need to adapt to changing markets and consumer needs • control the growth of the business so that capital needs can be planned and provided for in advance • be results-oriented by establishing goals and standards against which performance can be monitored.
MNG00427 Topic 5 – Planning the new venture 85 No two business plans are presented in exactly the same way. This is because the depth and detail contained in the plan depends largely on the type, size and scope of the proposed venture. For example, the plan for a business which intends to manufacture and market an entirely new invention may need to be more comprehensive than a plan for one which intends to distribute a tried and proven product. Whether the product or service is a consumer or industrial good, the size of the market, potential for growth and the nature of the competition all affect the scope and detail of the business plan. However, whatever the nature of the proposed business, the business plan should be detailed enough to provide any potential investor with a complete understanding of the new venture and to clarify future business problems and prospects for the owner. The purpose of a business plan may also influence its structure and emphasis. For example, most business plans are written to obtain finance, so this places greater emphasis on the financial projections in the plan. However, bear in mind that a financier will also be looking for evidence that the entrepreneur has thought through all the relevant details of the new venture, so an emphasis on financial projections should not be at the expense of other vital aspects of the business.Outline of a business plan While there is no single correct format for a business plan, a systematic approach is needed for approaching the project. The following outline identifies some common elements contained in most business plans. This outline can, of course, be modified to suit an individual venture’s needs. Sample business plan outline 1. Cover Page 2. Executive Summary 3. Overview of the Venture 3.1 The Business’s Mission or Overall Strategy 3.2 Product 3.3 Services 3.4 Location and Size 3.5 Founder or company 4. Industry and Market Analysis 4.1 Industry Outlook and Trends 4.2 The Target Market 4.3 Market Size and Trends 4.4 Estimated Market Value 4.5 Analysis of Competitors 4.6 Market Share and Sales 5. Production Plan 5.1 Production Process 5.2 Facilities Requirements 5.3 Inventory Control Measures
86 MNG00427 – Entrepreneurship in Tourism and Hospitality 6. Marketing Plan 6.1 Situation Analysis 6.2 Marketing Goals or Objectives 6.3 Marketing Strategies 6.4 Promotional Budget 7. Organisational Plan 7.1 The Organisational Structure 7.2 The Management Team 7.3 Roles & Responsibilities of Organisational Members 7.4 Legal Structure 8. Schedule of Operations 9. Critical Risks and Problems 9.1 Assessment of Risk 9.2 Contingency Plans 10. Financial Plan 10.1 Start-up Expenses 10.2 Pro-Forma Monthly Income Statement Year 1 10.3 Pro-Forma Income Statement 3 Year Summary 10.4 Pro-Forma Monthly Cashflow Budget Year 1 10.5 Pro-Forma Cashflow Budget 3 Year Summary 10.6 Pro-Forma Balance Sheet 3 Year Summary 10.7 Break-Even Analysis 11. Appendices We will devote the rest of this topic to examining in detail each of the components contained in this business plan outline. As a ‘companion’ reading, access the following Online Reading through the Southern Cross University Library Catalogue (you might have to install the Ebrary Reader) and examine it in tandem with our explanations, activities and examples. As a start, read Chapter Three, then examine each chapter in the reading as we discuss that component of the business plan. r Online reading Timmons, JA, Zacharakis, A & Spinelli, S 2004, Business Plans That Work: A Guide for Small Business, McGraw-Hill, New York. (Available online through the Southern Cross University Library Catalogue.) Introductory page The introductory page is the title or cover page of the business plan. It provides a brief summary of what is contained in the business plan and is important to investors since they do not have to read through the entire plan to determine the amount of investment required. Key elements of the introductory or title page are the business’s name and address, contact details, a statement describing the venture, financing details and a statement of confidentiality (if required).
MNG00427 Topic 5 – Planning the new venture 87 A sample introductory page is shown below. THE ASIAN AFFAIR RESTAURANT Pacific Parade Lennox Head NSW 2478 +61 2 66 87 3461 Co-Owners: Mary Smith and Joe Bloggs Description of the Business The Asian Affair is a proposed BYO restaurant that will offer a wide range of traditional cuisine from Thailand, Malaysia, Indonesia, Singapore and China. In particular, the restaurant will specialise in the use of fresh local seafood in the preparation of these dishes. The restaurant is to be established on the upper floor of a new complex in Lennox Head and will seat approximately 50 people inside and another 30 on the adjoining balcony. Financing Initial financing required is a $10,000 loan to be paid off over 3 years to be used in conjunction with $40,000 of the principals’ personal savings. This finance will be used to purchase equipment, furniture, fixtures advertising and supplies, as well as providing initial working capital for the business. This report is confidential and is the property of the co-owners listed above. It is intended for use only by the chosen investors and any reproduction or divulgence of its contents without the prior written consent of the company is prohibited.Executive summary The executive summary is the last section of the business plan to prepare after the total plan is written. It is usually one or two pages in length and should clearly articulate the key points in the business plan—the nature of the business, key personnel, financing required, market potential, business strategies and competitive advantages. The main aim of the executive summary is to stimulate the interest of the lenders or investors in an appealing, concise and convincing manner. It therefore deserves plenty of time and attention in its preparation. Gumpert (1997, p. 131) refers to the executive summary as a ‘guiding light’. He elaborates further by stating that the executive summary: is not an abstract, an introduction, a preface, or a random collection of highlights. It is much more than those things. Quite simply, it is the business plan in miniature. As such, it should stand alone as a document, almost as a kind of ‘business plan within the business plan.’ It should capture the excitement and essence of the business. Someone who has finished reading your executive summary should be able to say, ‘So that’s what these people are up to’.Overview of the venture This section of the business plan should provide an overview of the new venture. This might include describing: • the business’s mission or overall strategy • the product • services offered • the location and size of the business • the founders or company.
88 MNG00427 – Entrepreneurship in Tourism and Hospitality Note that the order of these items may vary, depending on what the venture’s strengths are. For example, if the experience and expertise of the business founders are a strong point, these may be highlighted first. Alternatively, if the management team or key employees are particularly strong or have unique skills, then sections maybe included on this. The business’s mission or overall strategy This should be a statement of your venture’s overall proposed approach to producing and selling its product or service. For example, some strategies that are often used in the restaurant industry include cost leadership (offering products at lower prices than competitors), differentiation (offering something different from competitors) and focus (focusing on a particular market niche). The product A potential investor will clearly be extremely interested in what you are going to sell, the opportunities and possible drawbacks of your products and any product protection, such as patents and copyrights, which you might have. Any unique features of the product should be described as well as any competitive advantages. Photographs or diagrams should support this product description where appropriate. Services offered Describe here all the services that you will offer, such as delivery, installation, repairs, hire purchase, warranties, or money back guarantees. a Activity List some product and service features that you would include in the business plan for a tourism or hospitality establishment or service that you have used. f Feedback As an example, some product and service features for a small restaurant might include: • type of food and drinks served, including a copy of the menu and beverage list • type of decor and atmosphere • style of service offered • take-away meals that can be ordered by phone • catering for private functions and parties • al fresco dining • theme, banquet or other special nights • house specialties • entertainment. The location and size of the business In this section of the business plan, you should describe where the business is to be located, the condition of the building, its area in square metres, future expansion possibilities, lease conditions and rental payments. It should be emphasised why the chosen location and premises are most suitable for your business. Any opportunities and constraints posed by the location should be identified. These may include advantages and disadvantages of the site in terms of proximity to customers and suppliers, access to public transport, labour availability, or aesthetic appeal, for example.
MNG00427 Topic 5 – Planning the new venture 89 The founders or company The purpose of this section is to highlight to potential lenders or investors any special skills, experience and expertise which the entrepreneurs have in the line of business. Discuss the business background of the entrepreneurs, any management experience, personal data such as age, education, special abilities and interests, reasons for going into the venture and why you think you have the personal qualities needed for success. Resumes can be included in an appendix as support. The key issue to address is whether the people proposing to run the venture have what it takes to enable it to fulfil its strategy. Professional investors are fond of saying they would rather invest in a business with a mediocre product and top people than the reverse (Gumpert 1997, p. 133).Industry and market analysis This section of the business plan is usually one of the most difficult and time consuming to prepare. The purpose of the industry and market analysis is to illustrate to the lender/investor and the business owners that the venture has sufficient sales potential in the marketplace to prosper in the face of competition. Generally, comprehensive market research is necessary to gather sufficient data on which to base realistic sales forecasts, market share and industry trends. Comprehensive industry and market research and analysis is crucial to the rest of the business plan, as the production, marketing, organisational and financial plans all depend on the sales estimates prepared in this section of the report. Industry outlook and trends Data should be presented here to illustrate the current status, significant trends and future prospects of the industry that your business is planning to enter. Any industry trends or developments that could provide opportunities or constraints to your business should be discussed. Recall in Topic Four that we noted that opportunities can arise from new scientific knowledge, process innovations, industrial changes, market shifts, demographic trends, and social and cultural changes. Equally, certain changes in these areas can also pose constraints to the new venture.a Activity If you were preparing a business plan for a new small restaurant, what information might you seek to determine prospects and trends in the restaurant industry?f Feedback Some information that would be useful in assessing prospects and trends in the restaurant industry would be: • growth or decline of certain restaurant segments • the performance of small foodservice businesses compared to large • the number of people in Australia per foodservice establishment • trends in average turnover and profit per foodservice establishment • trends in consumer expenditure on meals away from home • growth or decline in the number of restaurants • changing needs and expectations of consumers of meals away from home • changing demographic and psychographic factors that will affect the demand for meals away from home • past record of business success and failure in the restaurant industry • average life span of restaurants.
90 MNG00427 – Entrepreneurship in Tourism and Hospitality The target market The purpose of this section is to provide a clear profile of your potential customers. It is highly unlikely that your product or service will appeal to everyone, so market segmentation is a useful method of defining the common characteristics of that segment of the market you are trying to attract. You can segment your customers according to their demographic characteristics (e.g. age, income, educational level, occupation, family group); their psychographic characteristics (e.g. lifestyle, attitudes, tastes and the reasons behind their purchase decisions, such as price, quality, service); and their geographic characteristics (e.g. proximity to the business, residents or tourists). You should identify the reasons why you think that your product or service has particular appeal to the market segment(s) and explain if and how your customer profile differs from those of competitors. Market size and trends Now that you have defined your target market, perhaps in terms of demographic, psychographic and geographic variables, you can proceed to calculate the total market size and trends for your product or service. This is usually done for the forthcoming three years. If you intend to sell in one particular region, which is often the case in many hospitality businesses, you should calculate the total market size and trends for that region – that is for your venture’s trading area. The total market size can be calculated by using available secondary data to determine the number of consumers in your region who have the characteristics that you have identified in the previous section. Useful sources of data include the ABS, local government authorities, Chambers of Commerce and appropriate trade publications. The calculation of total market size is best illustrated by an example. Let’s pretend that we want to establish a restaurant in a small community that has a seasonal influx of tourists. We have determined that this type of restaurant will attract tourists in the town as well as residents aged between 25 and 54 years with an annual income in excess of $25,000. From collecting secondary data, we know that: • the population of the town is projected to be 17,830 in 2007, increasing to 19,680 by 2008 and 21,521 by 2009 • 39% of the town’s population are aged between 25 and 54 • 41.7% of people in this age group in the town earn over $25,000 per year • tourists to the town are expected to be 43,814 in 2007 • the number of tourists is expected to increase by 1.54% per annum. This means that tourist numbers are projected to increase to 44,489 by 2008 and 45,174 by 2009. Therefore, the total projected market size for food outlets in this town can be calculated as shown in the following table: 2007 2008 2009 Total population 17,830 19,680 21,521 Population 25–54 years 6,954 7,675 8,393 Income > $25,000 p.a. 2,900 3,200 3,500 Tourists 43,814 44,489 45,174 Total market size 46,714 47,689 48,674 In this way, the total projected market size for our restaurant has been calculated and a trend of significant growth has been identified which is due to the projected increase in resident population and tourist numbers.
MNG00427 Topic 5 – Planning the new venture 91Note that the method described above to calculate market size is most appropriatewhen the venture has a reasonably well defined trading area and when the marketcan be segmented along demographic lines, for which ABS statistics can be sourced.However, for other types of ventures, alternative methods may be more suitable.For example, a travel agency might access data on flights, bus and train travel in thetrading region to estimate the market size. For other businesses, primary researchmight be used to gather information.Estimated market valueNow that we have calculated the total market size for our product or service, we mustattempt to put a value on that total market. Further research is necessary to determinethe amount that people spend on our product. Let’s refer back to the previous exampleto illustrate how we can estimate the total market value.From secondary sources, we might find that:• the average household in this area currently spends $18.87 per week on meals away from home and average expenditure increases at a rate of 6.68% per year. This represents an average household expenditure of $981.24 per year in 2007, $1,046.79 in 2008 and $1,116.71 in 2009• the average number of people per household is 2.2 in this shire• tourist expenditure on meals away from home in this area averages $5.00 per day• the average length of stay for tourists in the town is 3.88 nights.Therefore the total market value can be calculated as shown in the following table: 2007 2008 2009 Total population in target market 2,900 3,200 3,500 No. of households 1,318 1,455 1,591 Local expenditure on eating out p.a. $1,293,274 $1,523,079 $1,776,686 No. of tourists p.a. 43,814 44,489 45,174 No. of visitor nights p.a. 169,998 172,617 175,275 Tourist expenditure on eating out p.a. $849,990 $863,085 $876,375 Total market value $2,143,264 $2,386,164 $2,653,061We have now determined a dollar value for the total market in the town for mealsaway from home. Note that the methods used here for estimating the total marketvalue for meals away from home in this area are not the only ones you can use. Othermethods include applying data on the average percentage of income that peoplespend on eating out or by using statistics on the percentage of the average food dollarspent on dining away from home. The method chosen to calculate total market valueusually depends on the type, accuracy and most recent of information available. Often,more than one method is used in order to give an optimistic, medium and pessimisticoutlook, or to verify the figures obtained.Before we proceed to estimating what share of this market we are likely to capture inour example, we must first examine our competitors.Analysis of competitorsIn this section, you will need to make a realistic assessment of the strengths andweaknesses of your major competitors in terms of products, price, quality, service,location, and other pertinent features. You will also need to discuss why yourcompetitors may be failing to meet the needs of the market and why you think you
92 MNG00427 – Entrepreneurship in Tourism and Hospitality can capture a share of their market. Discuss why the most profitable competitors are so successful and try to ascertain the reasons for past competitors’ failures. After examining your main competition, you should be able to highlight how your product will capture a share of their market – for example, will you offer something different, unique, more conveniently, of higher quality or at a cheaper price? a Activity What do you think are some of the features of competing restaurants that should be assessed in a business plan for a new food outlet? f Feedback Competitors’ strengths and weaknesses in the restaurant industry could be discussed in terms of their: • price • quality • performance • service • atmosphere • decor • location • seating capacity • accessibility • hours of trade • cleanliness. Market share and sales This section contains your estimation of the market share and sales your venture is likely to attain over the next three years based on your analysis of industry trends, the target market, the total market size and trends, the estimated total market value and the strengths and weaknesses of your competition. Care must be taken that your estimation of market share and sales is realistic. The level of sales indicated in this section of the report is critical to your financial forecasts in later sections. You should clearly state any assumptions that you have made in your estimation of market share and sales. There is no easy or completely reliable way to estimate your market share with complete accuracy. Probably the most reliable method is to conduct some primary research. For a restaurant, this might involve a telephone survey or quick personal interviews with local residents to find out how often they would patronise it and how much they would spend there. That is you need to estimate what percentage of the total market value your restaurant is likely to attract and its worth in dollars. Referring back to our previous example, we may have found from primary research that our new restaurant is likely to capture a one-seventh, or 14.3% share of the market. Therefore, our estimated market share and sales can be calculated as shown in the following table: 2007 2008 2009 Total market value $2,143,264 $2,386,164 $2,653,061 14.3% share $306,487 $341,221 $379,388
MNG00427 Topic 5 – Planning the new venture 93The production plan Sometimes called the operations plan, the main issues to be addressed in this section of the business plan are the production processes, facilities requirements, inventory control measures and sources of supplies that are necessary to produce the venture’s products or services. The production process You should discuss here the actual production process necessary to convert the purchased raw ingredients into the finished product. For a restaurant, key issues to be addressed in this section would include: • whether all ingredients will be purchased raw or fresh or whether the business will purchase pre-prepared foods for resale. Justify any ‘make-or-buy’ decisions that you have made regarding the production of menu items—is it cheaper to purchase pre-prepared items, does your business lack the staff, equipment or expertise to produce certain items from their raw state? • what methods will be used to forecast production needs to meet the demands of different meal periods or seasons? • what measures will be taken to avoid unnecessary food wastage? • how will yield testing, standard recipes and portion control will be used to control food cost? • what methods will be used to maintain quality control of menu items? • will the production methods used be cooked to order, continuous, interrupted, small, large or bulk-batch production. The above points could be supported with examples to demonstrate that you have thought through the production processes carefully. Facilities requirements In this section you should describe the facilities, space, plant and equipment necessary to run the business. Discuss how and when these facilities will be acquired, whether they are to be new or used, leased or purchased. Indicate also the cost and timing of these acquisitions and how much of the proposed financing will be used for plant and equipment. Describe also the layout of the facility and indicate how this layout will maximise the use of space and contribute to a safe and efficient workflow and/or a facility attractive to customers. A floorplan may be a useful inclusion in an appendix. Inventory control measures Key issues to be discussed include: • purchasing policies and procedures to be used • sources of supplies of raw materials • selection criteria of suppliers • receiving and issuing of supplies • storage requirements • inventory or stock control measures that ensure an economic level of inventory is maintained • documentation which will be used to keep track of the flow of inventory through the production system.
94 MNG00427 – Entrepreneurship in Tourism and Hospitality The sections in the production plan described above can be adapted where the venture is a pure service, with no raw materials as such. However, this section still needs to convince the reader that you have planned the logistics of providing that service. The marketing plan The marketing plan for a new venture is a critical element in ensuring the long-term success of the venture. It prescribes how the forecasted sales projections will be attained and essentially answers three questions – Where are we now? Where do we want to go? How do we get there? A marketing plan therefore consists of three main sections that provide a response to these questions. They are: • situation analysis • marketing goals and objectives • marketing strategies. Once these three sections have been completed, a promotional budget should be developed. Promotional expenses will later be included in the financial section of the business plan. Situation analysis Also known as an environmental analysis, this section of the marketing plan examines elements of both the external and internal environment which are likely to have an impact on the business. This section of the plan is often presented in the form of a SWOT analysis, where the internal strengths and weaknesses of the venture and the opportunities and threats of the external environment are highlighted. It is advisable to conduct the external analysis first, so that the venture’s internal strengths and weaknesses can be assessed in terms of its ability to capitalise on external opportunities and avoid or overcome external threats. Even though the external environment cannot be controlled by the entrepreneur, an awareness of these factors can prevent serious marketing mistakes and contribute to profitability by identifying opportunities the venture might capitalise on. Common factors to be examined in the external environment are represented by the acronym PEST: • political factors • economic factors • social factors • technological factors. a Activity List some political, economic, social and technological opportunities and threats in the external environment that you think might be discussed in the situation analysis of a marketing plan for a small a la carte restaurant.
MNG00427 Topic 5 – Planning the new venture 95f Feedback Some examples of PEST factors that might be relevant to a small a la carte restaurant include: Political factors: Opportunities and competitive threats posed by recent legislation allowing restaurants in NSW with less than 50 seats to obtain a liquor licence. Opportunities and competitive threats posed by availability of drink or dine licences where up to 30% of a restaurant’s seats can be used by patrons who wish to drink but not dine. Economic Factors: Opportunity to access low interest rates for venture financing. Trends in disposable income and dining our expenditure that might pose opportunities or threats for the restaurant. Social Factors: Increased propensity to dine out due to dual income families, smaller families, growth in single households, etc. Busier lifestyles where fast food may be preferred over extended a la carte dining. Technological Opportunities presented by new product developments, better factors: equipment or methods of food preservation. Opportunities and threats posed by genetically modified foods and consumer resistance to these. An alternative framework for assessing the external environment was presented in Topic 3 – Porter’s ‘five forces model’. Threats and opportunities posed by direct competition, buyers, suppliers, substitute products and new entrants could be identified. Having assessed opportunities and threats in the external environment, you are now in a position to identify your venture’s strengths and weaknesses in relation to these. The internal environment includes those factors over which the business owner has some control. Some internal factors that might be considered include: • financial resources, including the owner’s contribution and the ability to attract investment or debt capital • the management team, including appropriate experience, expertise and reputation • suppliers, including their reliability, proximity and lines of credit available • the location and any advantages or disadvantages associated with the site • the product or service, any unique features and competitive advantages. Marketing goals or objectives Prior to developing marketing strategies for the business, the owner needs to establish marketing goals or objectives. These are often based around the elements of the marketing mix. Some examples of the areas that marketing goals and objectives might focus on include: • creating awareness of the product or service in the target market(s) • positioning the product as cheaper, better, or more flexible than its competitors • distributing the product or service more conveniently for customers than competitors do • creating a high percentage of repeat business • building brand equity
96 MNG00427 – Entrepreneurship in Tourism and Hospitality • pricing the product or service in a way that deters new competition or that adds to the product’s image • promoting the product or service in targeted media • developing new products. Marketing strategies Once marketing goals or objectives have been set for the business, marketing strategies can then be devised which will achieve these aims. Generally, a strategy is needed to achieve each goal or objective. Again, these are based on elements in the marketing mix. Now might be a good time to revisit the online reading (Timmons et al., 2004) for more details on a marketing plan. Promotional budget Once the promotional strategy for the business has been developed, it should be easy to quantify the costs of these activities and determine the promotional budget for the business. Naturally, the promotional activities selected will also be constrained by the limits of the promotional budget. Promotional expenses will later be included in the financial section of the business plan. An example of a simple promotional budget for a small restaurant is shown below. Note that the costs have been divided into up-front and ongoing costs. As with most businesses, a food outlet may need to outlay a greater promotional expenditure initially to create customer awareness. Sample promotional budget Up-front costs $ 2 page feature article in Northern Star (a) 796 Outdoor signs 1,500 2LM Lightning Lunchroll (b) 280 Introductory flyers – production & distribution 115 Sports T-shirts for 2 teams 240 Accessories – business cards, matches, etc. 300 Yellow Pages Listing 200 Total up-front costs 3,431 Ongoing costs $pa Northern Star display ad & restaurant directory 2,350 52 x 30 second commercials on 2LM (c) 700 NRTV Entertainment Scene once a week 1,820 Combined TV advertisement on NRTV (d) 700 Sponsorship prizes of 2 dinners per month 240 Total ongoing costs 5,810 Total promotional costs $9,241 (a) The owner must contribute 140 cm of advertising, supported by 180 cms of advertising by suppliers, builders, etc. (b) This package includes 2 x 30 second commercials over 5 days between 12 midday and 1 pm.
MNG00427 Topic 5 – Planning the new venture 97 Sample promotional budget (c) This rate allows commercials to be run in selected sessions, namely breakfast, morning and drive times (d) Includes $200 production costs and $800 air time for 16 spots, divided between 3 other participating businesses, to be shown once a week.The organisational plan The organisational plan requires some major decisions that can affect the long- term profitability of the venture. The success of any venture is highly dependent on the strength and commitment of the management team, their abilities, experience and compatibility. In addition, the business’s efficiency requires that the roles and responsibilities of other organisational members be clearly defined. Once the organisational structure and roles have been defined, the entrepreneur must then decide on the legal structure of the business while bearing in mind the advantages and disadvantages associated with each of the three main alternative structures. The organisational plan for the venture should therefore address four main areas: • organisational structure • management team • roles and responsibilities of organisational members • legal structure of the business. The organisational structure The organisational structure defines the positions of each organisational member and the relationships between them. Generally, the organisational structure of a new venture will be simple, with the entrepreneur performing multiple functions. If the organisation grows however, the organisational structure will need to expand to include additional employees, often with more specialised duties. The management team It has been stated that ‘the management team is the key to turning a good idea into a successful business’ (Timmons 1990). As we’ll discover later in this unit, one of the major causes of small business failure is management incompetence. This is why potential investors in a business will critically evaluate the management team to ensure that they possess the ability and commitment needed to manage the business and that they have the right balance of managerial, technical and business skills. Therefore, this section of the business plan should clearly articulate the particular strengths of the management team – previous managerial experience, past accomplishments which indicate their ability to perform their assigned roles, previous situations where management personnel have worked compatibly together, experience in the line of business, past success in meeting schedules, budgets and desired profit, and so forth. Resumes should be included in the appendix of the business plan to support this. Roles and responsibilities of organisational members Having described the organisational structure, preferably depicted in an organisational chart, the roles and responsibilities of each member of the management team and key employees should be defined. Describe the exact duties of each member of the management team and state why you think they are suited to their assigned responsibilities. You could also clarify the duties of key employees by preparing a
98 MNG00427 – Entrepreneurship in Tourism and Hospitality job description for each position that indicates duties to be performed and any special skills required. Other human resource issues might also be included in this section if deemed relevant. For example, if excellent customer service is a key element of the venture’s strategy, you might explain how this will be achieved through recruitment methods, selection criteria, orientation, training, appraisals, or reward systems. If outside consultants or sub-contractors are to be used in the business, these should also be named, their roles clarified and their capabilities indicated. Nearly every business will need the services of a banker, solicitor and accountant from time to time. It is important that the entrepreneur seeks out the best possible advisors and involves them at an early stage in the business venture. Legal structure There are three main forms of legal structure available to the entrepreneur – sole trader or proprietorship, partnership, and company or corporation. It is important that the entrepreneur is aware of the opportunities and constraints offered by these different forms of legal structure in order to choose one that offers the most business advantages. You should explain in your business plan why a particular structure is preferred. The legal structure of the business will have many implications for the business owner(s). These include the liability of the owners, costs of starting the business, continuity of the business, transferability of interest, capital requirements, management control, distribution of profits and losses, attractiveness for raising capital and tax implications. You have already discussed the advantages and disadvantages of different forms of legal structure in previous units and we review this briefly in Topic 6. Schedule of operations The schedule of operations is essentially a timeline that shows the timing and inter-relationship of the main events involved in establishing the new venture. It is important that this schedule be realistic and recognises potential delays that may threaten the business and tie up capital for periods of time. Potential investors are going to be vitally interested in the length of time it will take your business to produce income from the use of their capital and in the various intervening events on which producing this income depends. a Activity What might be some major events that should be included in the schedule of operations for a new food outlet? f Feedback The schedule of operations for a small food outlet might include: • formation and registration of the business • receipt of council approval • signing the lease or ownership papers for the business premises • acquisition of all equipment, furniture and fixtures • completion of menu design and printing • completion of interior redesign and decorating • hiring employees • order materials in production quantities
MNG00427 Topic 5 – Planning the new venture 99 • advertising campaign • opening night and receipt of first cash payments. You may like to review Section IX in the online reading (Timmons et al., 2004) for some additional feedback on this activity.Critical risks and problems No new business is established without some risk to the owners and investors. While it is impossible to avoid all business risks, it is important that the owners are aware of such risks and have taken sufficient precautions to minimise them and develop contingency plans to deal with them. Major risks to a new business may involve product obsolescence due to technological developments, reactions from competitors or weaknesses in the marketing, production or management team. Review Section X in the online reading (Timmons et al. 2004) for some guidelines on compiling this section of your plan. This section of your plan can also identify the types of insurance the venture needs as a protection against some of the risks identified. In Topic Six, we examine the types of insurance commonly taken out by businesses.The financial plan The financial plan is an extremely important section of the business plan because it determines the amount of investment required to finance the new venture and indicates whether the business is economically feasible. Usually, five financial areas are discussed and presented in this section of the plan. These are: • start-up expenses • pro-forma income statements • pro-forma cash-flow budget • pro-forma balance sheets • Break-even analysis. Start-up expenses List here all expenses incurred in starting the business – that is, all costs that must be met before the business opens its doors to trade. For a restaurant, these might include: • capital expenses, such as equipment, furniture and fixtures, key money, cutlery, crockery, land, renovations, etc. • preliminary expenses, such as council fees, bank loan establishment fees, utilities connection, consulting fees, etc. • pre-paid expenses, such as rent in advance, workers’ compensation, insurance, etc. • inventory, of food, beverage and supplies. Remember that your equity plus any loan, minus your start-up expenses becomes your opening cash balance for the business. Pro-forma income statement The pro-forma income statement summarises the forecasted sales, expenses and profit for the business. The sales projections made in the industry and market analysis should be used here and matched against forecasted expenses. These expenses may
100 MNG00427 – Entrepreneurship in Tourism and Hospitality be fixed or variable. Variable expenses can be calculated by using industry averages to determine what percentage of sales they usually represent, while fixed expenses should be based on actual figures, such as the cost of rent, insurance, interest and salaries. A pro-forma income statement should be prepared monthly for the first year and then at least yearly for the next two years. a Activity When preparing your income statement, it is very important to explain how you calculated major items. Below is a list of typical revenue and expense items for a restaurant. How do you think these figures should be calculated? Sales COGS Salaries Wages Advertising Repairs & Main. Laundry Insurance Admin expenses Supplies Utilities Rent Depreciation Liquor licence Entertainment Equipment lease Interest f Feedback Some ways to calculate the items below are: Sales from the sales projections in the industry and market analysis. COGS from the pricing policy for menu items. Salaries by adding salaries of all full-time staff. These might be based on the relevant award or you may elect to pay above award rates. Wages by multiplying the number of hours by the pay rate for all casual employees. Advertising from the promotional budget developed earlier. Repairs & Main. from industry averages or a ‘guesstimation’. Insurance quote from insurance company. Admin from industry averages or a ‘guesstimation’. expenses Supplies from industry averages. Utilities from industry averages. Rent quote from the real estate or owner of the premises. Depreciation based on the method chosen, e.g.: 10% straight-line. Liquor licence as a percentage of liquor purchases as prescribed by legislation. Interest from bank rates applied to the amount borrowed.
MNG00427 Topic 5 – Planning the new venture 101 Pro-forma cash-flow budget The cash flow budget reflects the difference between cash actually received by the business and cash actually disbursed. Because sales and cash receipts from customers may be irregular and because bills have to be paid at different times, even a profitable business may suffer a shortage of cash at various times. It is essential that a business ensures it has sufficient cash resources to meet current debts. The cash flow budget enables the small business owner to predict cash shortages and to make arrangements for borrowing extra funds, while cash surpluses may be deposited in short-term, interest bearing deposits until needed. A cash-flow budget should be prepared monthly for the first year and then at least yearly for the next two years. Pro-forma balance sheet The balance sheet shows the financial condition of the business at a specific point in time. It provides a summary of the assets, liabilities and proprietorship of the business. The pro-forma balance sheet should be prepared at least yearly for the first three years. Break-even analysis The break-even point for a business can be determined from the income projected in the pro-forma income statement and is the point where the total revenue equals the total cost. Break-even point can be expressed both as the number of units to be sold or as sales volume to be achieved. It can also be illustrated by a graph. The formula for determining the break-even point is as follows: Break-even point = Total Fixed Costs 100% – Variable Costs as a % of Sales Because you will have already examined several examples and exercises on financial statements in your accounting units, I will simply refer you to a reading for revision. It provides you with a guide for developing pro-forma income statements, cash-flow budgets, balance sheets and break-even analysis for use in a business plan. You may also like to refer back to the relevant chapter of the online reading (Timmons et al. 2004) for further explanation of this material. Note also that Topic 6 provides further material on financial issues relevant to business start-up.Appendices The appendix of the business plan contains any supporting material that is not necessary in the text of the plan itself.a Activity From what you have learnt of the contents of a business plan, list some material that you think could be usefully included in the appendix of a business plan for a small food outlet.f Feedback The appendix of a business plan for a small food outlet is likely to contain some of the following: • Resumes of the management team • Primary or secondary research data • A copy of the menu
102 MNG00427 – Entrepreneurship in Tourism and Hospitality • Price lists from suppliers • A copy of the lease and its provisions • Floorplan of the facility • Insurance quotes for the business • Copies of development applications and council approvals • Copies of licences or permits, such as a liquor licence • A list of capital equipment needed and its cost. a Activity It should be clear by now that developing a business plan requires you to seek information from a range of sources. Who are some of the organisations and individuals you might contact to gather information for your plan? f Feedback Some sources of information you might use include: • statistics from the ABS, Bureau of Tourism Research, Domestic Tourism Monitor, local councils • local business information from business enterprise centres and chambers of commerce • industry averages from ABS statistics, industry associations and other publications • suppliers for inventory and price lists • equipment suppliers for quotes • real estate agents or business brokers for lease details • advertising agency for advertising quotes • insurance agency or broker for insurance quotes • awards for pay rates. Conclusion In this topic, we have highlighted the importance and value of developing a comprehensive business plan to help the entrepreneur maximise the potential and minimise the risks of a new venture and to attract loans or investment funds. After identifying and discussing the usual elements of a business plan, you should now be ready to answer the questions outlined in your assignment. We should also note that, while we have presented a selection of readings in this topic to assist you, many texts and websites on entrepreneurship and small business management contain comprehensive guidelines on developing business plans. In the next topic, we remained focused on the pre-start-up phase of a new venture and examine legal and financial issues. a Discussion questions At the end of Chapter 7 from your textbook, answer the three discussion questions. I will place feedback from these questions on MySCU under Unit Documents in Week 6 of the study period.
Topic 6 Legal and financial issues during start-upIntroduction In the previous topic, we focused on developing a business plan for a new venture. In this topic, we expand on some of the legal and financial issues that need to be taken into account during this planning stage. We commence by identifying alternative business structures and their advantages and disadvantages. We then focus in turn on other important legal issues that confront the entrepreneur prior to start-up. These include mechanisms to protect business ideas, insurance and planning issues, terms and conditions of business premises leases, obligations encountered in employer-employee and other types of business relationships, and taxation obligations. Later in the topic, we turn our attention to the financial arena. Our main concerns here are the uses of funds during venture start- up, and selecting and obtaining financing. Note that much of this topic is directed at providing information that should assist you in developing a business plan for a new venture. Because the law is subject to ongoing changes, a useful website to assist you in gaining the most current legal information for small businesses is at http://sblegal.industry.gov.au/. Objectives On completion of this topic, you should be able to: • distinguish key differences between sole traders, partnerships, companies and trusts • discuss ways in which business ideas can be protected • identify common types of business insurance • identify when planning laws might apply to a business • discuss key terms and conditions contained in business premises leases • discuss the main legal issues relating to employees at business start-up • distinguish key differences between various kinds of business relationships • outline the types of taxes applied to businesses • identify various uses and sources of funds for financing a new venture. Textbook Schaper, M, Volery, T, Weber, P & Lewis, K 2011, Entrepreneurship and Small Business, 3rd Asia-Pacific edn, John Wiley and Sons, Australia. • Chapter 8, pp. 195–215. • Chapter 9, pp. 219–238. • Chapter 13, pp. 315–336. 103
104 MNG00427 – Entrepreneurship in Tourism and Hospitality Readings 6.1 Anon 1993/94, ‘Choosing a Business Structure’, Australian Small Business and Investing, September, pp. 25–26. 6.2 Reynolds, W, Savage, W & Williams, A 1994, Your Own Business: A Practical Guide to Success, Thomas Nelson, Melbourne, pp. 217–235. Business structures There are four alternative business structures that a new venture can choose to adopt, each briefly described below. Company A company or corporation is a separate legal entity. It can enter into agreements in its own name. If a company breaches an agreement it is generally solely liable. This is unless there is some misconduct by the directors or officers such as misrepresentation or misleading or deceptive conduct. A company: • can take legal action against others for loss it has suffered • is made up of shareholder(s) and officers (usually one or two directors and a secretary). The directors and secretary have certain obligations and owe particular duties to the company • has a particular reporting and accounting requirement. Thus, a company is a legally separate entity from its owners. To form a company, the entrepreneur can start ‘from scratch’, drawing up the memorandum and articles of association, registering the business name, appointing directors and lodging all documentation with the Australian Securities and Investments Commission (ASIC). Alternatively, the entrepreneur can buy a shelf-company. A shelf company is a ready-made structure where usually only a change of name and amendments to the memorandum and articles of association are needed. It is a cheaper and easier approach to company formation. Partnership A partnership is a relationship or association between two or more persons with a view to profit. The persons may be individuals or companies. Unlike a company the partnership is not incorporated. The rights of the partnership are governed by a partnership agreement that may be made in writing, verbally or by implication. It is also governed by the Partnership Act. A partnership enters into an agreement in the name of its partners. Usually each partner is jointly liable for the obligations under the agreement. A partnership can have two to twenty owners. Under the Partnership Act, written evidence of the partnership is required, usually a partnership agreement providing details of the partners, nature of the business, etc. However, the partnership is not a separate entity from its owners, who remain jointly and individually liable for the actions of the business.
MNG00427 Topic 6 – Legal and financial issues during start-up 105 Sole trader A sole trader is an individual who sets up and operates a business in his or her own name e.g. Sally Smith Catering Services. There are no partners or co-owners. The sole trader deals directly with other parties and is the party that enters into any agreements. Consequently, the sole trader is individually and personally liable. A sole trader can choose to trade under his or her own name or else register a business name. However, registering a business name does not make the sole trader a separate legal entity. That is, the law does not make any distinction between the sole trader as a business and the sole trader as a person. The sole trader’s assets are at risk for any action taken against the business. Trust A trust is a relationship or association between two or more persons whereby one party holds property on trust for the other. The first party is vested with property. The holder of the property is called the trustee. The other party (for whom the property is held) is called the beneficiary. Trusts may be made expressly in writing or implied from the circumstances. (Legal Issues Guide for Small Business, Department of Workplace Relations and Small Business 1999). To assist in deciding the most appropriate legal structure for a new venture, examine the next reading. It should be noted, however, that legal advice should always be sought when establishing a new business so that recent changes in legislation and tax policies can be taken into consideration.r Reading 6.1 Anon 1993/94, ‘Choosing a Business Structure’, Australian Small Business and Investing, September, pp. 25–26.Protecting your ideas In this section, we review the Department of Workplace Relations and Small Business’s advice (1999) on mechanisms to protect ideas associated with a business. The most applicable for new ventures are patents, trademarks, and registering the business name. Patents The general procedure for registering a patent involves first lodging a provisional application with the Patents Office. The provisional application will set out in general what the invention involves and has the effect of giving the applicants a period within which they can conduct further experiments and lodge applications in other countries in relation to the same invention. On the lapsing of the provisional application, the applicant should then lodge a more detailed application setting out the invention in full. Fees will have to be paid on lodging a provisional application, on lodging a further application and also upon final registration. Registration will run for a period of some years and can be renewed. Applicants should note that the applications lodged must contain enough information for the Patents Office to consider the nature and inventiveness of the invention. Often, a great deal of information will have to be provided to the Patents Office to assist it in its examination process. It is also important that applicants avoid experimenting in public or publishing any material in relation to their works. Once an invention is released or made known to the public or a section of the public, it may not be patented.
106 MNG00427 – Entrepreneurship in Tourism and Hospitality After registration, patent protection lasts for a maximum of twenty years. It is also possible to apply for a ‘innovation’ patent in relation to minor inventions. Innovation patent applications are less rigorous and only provide a protection period of eight years. Trade marks A number of conditions need to be fulfilled for a trade mark to be registered: • the mark must be a ‘sign’ which includes words, brand names, numbers, shapes and even in some cases colours, scents and sounds • the mark must be distinctive which means it is not identical or similar to any existing trade marks • the mark must be used or intended to be used. This means that a person or a business may not register a mark unless they intend to use that mark in trade • the mark must be capable of being recorded graphically. The types of marks that can be registered as trade marks are very broad. There are certain types of marks that are not registerable but generally, as long as the above conditions are fulfilled, a mark will be acceptable as a trade mark. In order to register a trade mark, an application must be made to the Office of Trade Marks. When applying, the applicant must provide certain information: • the trade mark for which registration is sought • the purpose or industry in which the trade mark is proposed to be used and details of the proposed use; often this may involve specifying a particular type of good or service in relation to which the trade mark is proposed to be used • details of the applicant. Often information will have to be provided in the form of a statutory declaration. Application and registration fees will also have to be paid. The registration period is 10 years and may be renewed every 10 years thereafter. Business names and business numbers The Australian Securities and Investments Commission (ASIC) maintain a national business names register for companies as does the Department of Fair Trading. However, business names are registered in the state or territory in which the business is intended to be run and business names are administered under state law by state authorities. For a business name to be registered, a number of conditions need to be fulfilled: • the name may not be the same or deceptively similar to any other name used by any one else in the state • the business name may not use words or phrases that are prohibited for use in a business name • there may be a restriction on the registration of a business name if the words or phrases used are offensive or suggest a connection with the government. (Legal Issues Guide for Small Business, Department of Workplace Relations and Small Business 1999). The Business Names Act 1962, makes it compulsory to register the name of a business if it differs from the name(s) of the proprietor(s). For example, the registration of ‘Mary Smith’ is optional, but the registration of ‘Mary’s Bistro’ is compulsory. The purpose of this requirement is to enable the public to identify the people responsible for individual businesses. A lodgement fee must accompany an application for
MNG00427 Topic 6 – Legal and financial issues during start-up 107 registering a business name. However, registering your business name does not give you the exclusive right to use that name. That is, it does not protect you from the existing or future use of the name by another business unless either of you have registered the name as a trade mark with the Australian Government’s Patents, Trade Marks and Design Office. Australian business number (ABN) is a single identifier for all businesses whether it is a sole trader, partnership or company and fits the definition of an enterprise. The Australian Taxation Office (ATO) requires an enterprise to register for an ABN either electronically or by filling out an application form. Registration for an ABN is available on the ATO website at www.ato.gov.au where not only can you apply for an ABN here, but also you can register for the Goods and Services Tax (GST). If your gross turnover is more than $75,000 per annum then you must register for GST and if your turnover is less than that then registering for the GST is optional. Failing to register for GST will mean that one eleventh of your income belongs to the ATO as part of the GST. The ATO can also automatically register you if they feel you should be registered which means that you owe the ATO one eleventh of your gross income.Insurance issues As well as protecting ideas, as discussed in the preceding section, the entrepreneur will need various types of insurance to protect the business, its assets and its owners. We briefly mentioned business insurance in Topic 6. Here, let’s have a closer look at some usual types of business-related insurance. By law, only two types of insurance are compulsory: • third party insurance on vehicles. This may be relevant where the business has a delivery vehicle or owns vehicles for use by management or employees • workers compensation insurance. If an employee suffers a work-related injury they may be able to claim compensation from their employer. Employers are required to obtain adequate insurance to cover employee injuries. Other types of insurance may also be highly desirable. These might include the following: • public liability insurance is not compulsory, but is a vital component of insurance cover. It covers the business for claims for property damage or personal injury or death to third parties • fire insurance against damage or loss of buildings, stock and contents. This may also cover water damage caused when fighting the fire and payment of rent while the premises is being repaired • business interruption insurance against loss of takings during the time needed to reopen the business following a fire, vandalism, or other disaster • burglary insurance against loss of stock and equipment. This may also cover insurance against damage caused during the break-in • money insurance against loss of cash while in transit or on the premises. This may also include insurance against damage to safes and strongrooms as a result of a robbery • glass insurance against breakages of store-front windows and doors • stock spoilage insurance against loss or damage due to refrigeration breakdowns, etc. • personal disability insurance against loss of earnings due to ill-health, accident or injury. This insurance is designed to allow business owners to employ replacement staff if they cannot themselves work
108 MNG00427 – Entrepreneurship in Tourism and Hospitality • partnership insurance against death of a business partner. The purpose of this type of insurance is to give the surviving partner protection against the demands of the deceased partner’s estate • key person insurance against the incapacitation or death of an employee who is vital to your business, such as the chef. This insurance helps the business with the cost of finding a suitable replacement • machinery insurance against breakdown and repair and resulting stock losses. a Activity Talk to some business owners you know and find out what types of insurance they have. Does it appear adequate in terms of the types of insurance discussed above? Planning issues All land is subject to some form of classification for zoning or approval. Businesses need to be aware of what their land may be lawfully used for and how it is allowed to be used. If land is under lease then the lessees should check with the lessor to find out whether the land is approved for the use to which it is being put. Lessors should make sure the lessee is not using land in a way that is not permitted. If land is being used in breach of the terms of an approval or in breach of planning regulations, both the lessor and lessee may be held responsible. It is important for businesses to ensure they have all the necessary licences and approvals before commencing business. In some cases this will involve checking to see how their land is zoned; in other cases it may involve checking to see whether the activities that are proposed to be carried on require a permit or licence. If you are unsure whether there is a particular condition or restriction on your land, you should consult with your local authority – such as a local Council. Generally, the authority responsible for issuing approvals relating to the use of land will be the local Council. An approval or licence is often issued subject to certain conditions or restrictions and may only apply in relation to a particular type of activity or run for a limited period. Remember that obtaining an approval may require you to provide the authority with certain information about your business and the proposed use of land and it may take some time before an approval or licence is actually issued. There may also be a fee that has to be paid with the application (Legal Issues Guide for Small Business, Department of Workplace Relations and Small Business 1999). Business premises leases Many an entrepreneur setting up a business for the first time comes to the conclusion that business premises leases are a pain in the neck! The ironic thing is that most terms and conditions in a lease only ever become important if a dispute arises between the lessee and the lessor. It is all too easy to ignore the fine print in a business premises lease in the enthusiasm to get the business up and running. The lessor’s solicitors will provide a lengthy document, sometimes up to 30 pages in length, which will contain many clauses not discussed. Often, the lessor’s solicitor will try to insist that no amendments are to be made to the lease that is, that they are non-negotiable, although they are often just trying to ‘call your bluff’. The exception to this is if you are leasing space in a large shopping centre, where the terms and conditions tend to be very inflexible. There is really no such thing as a standard lease and many terms and conditions are open to negotiation. So, let’s examine some important factors you should consider before signing a lease.
MNG00427 Topic 6 – Legal and financial issues during start-up 109 • The method used to calculate rental payments. Most people concentrate on getting a good deal with the rent. Rent can be calculated in a number of ways – a base rent calculated on a cost per square metre basis; a base rent plus a percentage of gross sales; or total rent as a percentage of gross sales. The last two options are common in shopping complexes. • Rental increases. What is often ignored in the enthusiasm to get a good rental deal is that the rent will increase year by year. There are two types of rental review: One is based on consumer price index (CPI) which keeps up with inflation; the other is based on a market review, which brings the rent in line with other rental values for similar premises in the area. This can be serious, because it means that even if your rent is particularly reasonable in the first year, a subsequent market review only 12 months later might well destroy the benefits. • Outgoings. As well as rental payments, you will also have to pay outgoings, e.g. water, electricity, etc. Make sure you identify the cost of these and the basis for any increase. • The term of the lease and options for renewal. Under the Retail Leases Act 1994, new leases must be offered for at least 5 years with a 5-year option for renewal. Before this, a 3x3 lease was very common. However, if you’re buying an existing business, the length of time left on the lease and the option to renew the lease for a decent length of time is crucially important. I have acquaintances who, when their business lease ran out, were refused renewal by the landlord. This meant they could neither continue to operate the business, nor sell the business. That is, the business had no value, except what the owners could sell the second hand equipment for. • Right to sell or assign the lease. It is important that you have the right to sell or assign the lease. If you decide to sell the business, you need to be able to transfer the lease to the new owner. • Permitted uses of the premises. This defines the kinds of business activities you are permitted to carry on. Make sure these are broad enough to allow any changes you want to make in the way you run the business. • Restrictions to hours of trade and access to the building. For example, this may occur in shared complexes, such as premises in a shopping centre. Make sure that these are compatible with your current and future requirements. • Protection from other tenants creating nuisances, disturbances or damage• Parking provisions. Do they meet council regulations? If not, who is going to pay for extra parking spaces? While this is not usually an issue if you are buying an existing business, it may be a major obstacle if you are establishing a new one. • Maintenance of the building and of common areas such as foyers, walkways, and toilets. Whose responsibility is this and how well has it been done to date? • Waste disposal provisions. Are they adequate for your business?a Activity Visit a local real estate or business broker and ask for a copy of a business premises lease. Are the areas identified above covered in the lease? Talk to some business owners you know about how satisfied they are with their lease conditions. Get their advice on factors to consider before signing a business premises lease.
110 MNG00427 – Entrepreneurship in Tourism and Hospitality Employee issues at start-up It is not the intention here to cover all the legal issues relating to workplace relations, but just to draw your attention to those most relevant to the start-up period of a new business venture. Thus, we distinguish between employees and contractors, then proceed to review legal obligations relevant to hiring employees, employee contracts, industrial awards, Australian Workplace Agreements, and Enterprise Agreements. The following details have been extracted from the Legal Issues Guide for Small Business (Department of Workplace Relations and Small Business, 1999). Employee or independent contractor? There is an important distinction between employees and independent contractors. This distinction is a very important one. Employment law in Australia imposes certain duties and obligations on employers towards employees but not in relation to independent contractors. An employee is someone over whom the employer has a right to control the manner in which they work and the work they do. Employees are a part of an employer’s business. An independent contractor is someone who has his or her own business and who is contracted by another party to work on a particular project or for a period of time to provide specific goods or services. Independent contractors are not employees as their ‘employer’ does not have the right to control the way they work. The relationship is one in which the independent contractor agrees to provide services without actually becoming a part of the employer’s organisation. You also need to be aware of ‘deemed employees’. These are workers who are strictly independent contractors but are deemed to be employees in particular situations. These persons will be entitled to all the rights and benefits of employees that arise out of the situation in which they are ‘deemed’ to be an employee. When determining whether a person is an employee or an independent contractor, factors will be considered such as the whether the employer can control the manner in which work is done, whether the person has their own business and the nature of the relationship with the employer. Hiring employees Employers should exercise care when hiring employees. One or more of the following may govern the terms of employment: • a State or Federal Award • State or Federal legislation • Employment contract. A failure by an employer to comply with any relevant contract or regulation may expose it to legal action by an employee. The employee may be able to claim reinstatement and/or damages. While most of the law relating to employment issues covers both the period of employment and termination procedures, there are some issues relating to the hiring process that employers should be aware of. When advertising for positions and interviewing candidates, employers should be mindful of representations made and questions asked of prospective employees. Things which are said and promises made during the employment contract negotiation
MNG00427 Topic 6 – Legal and financial issues during start-up 111process may create an expectation in the applicant that they will be provided withcertain things during the period of employment. It is important that prospectiveemployees are not asked questions which may contravene Equal Opportunitylegislation or which discriminate against applicants on grounds such as race, age, sexor disability.AwardsThe main function of awards is to set minimum standards for employer/employeerelationships. Awards are usually lengthy documents setting out in detail the minimumterms and conditions that apply to the employees covered by the award. Typically, anaward will address issues such as salary, allowances, hours of work and terminationprocedure.Federal awards generally bind only those parties named in the award whereas Stateawards apply to all employees and employers in the industry to which the awardrelates. It is important that businesses find out whether their employees are the subjectof an award. A good place to start would be to access the Department of IndustrialRelations website at www.dir.nsw.gov.au where you will find numerous awards andconditions.Employment contractAn employment contract is an agreement between an employer and employee inwhich the employee agrees to work for the employer. This is different from a contractfor services in which a person agrees to provide services in relation to a particulartask or for a particular period—no employment relationship arises out of such anarrangement.Most employment contracts will cover basic issues such as:• a description of the position a person is being employed for• their responsibilities in that position• their working hours• salary and other benefits (such as superannuation)• leave entitlements• procedures for terminating the employment contract.The law may imply certain terms into an employment contract, even though it does notactually appear as a term of the contract. It is important that businesses are aware of allthe written terms in their employees’ contracts of employment as well as those impliedby law.Enterprise agreementAn enterprise agreement is an agreement that sets out the rights and obligations ofemployers and employees engaged in particular types of work. It may be negotiatedbetween an employer and either the employees concerned or a union on behalf ofthose employees. The terms of an enterprise agreement override any inconsistentaward provisions but will be subject to Federal and State laws.Every enterprise agreement must be in writing and signed by or on behalf ofthe employer and employee. The parties to the agreement must be named andthe agreement must state the employees who will be covered by the agreement.
112 MNG00427 – Entrepreneurship in Tourism and Hospitality Generally, all enterprise agreements are for a fixed term of between one and three years. However, an enterprise agreement continues in force beyond that term until terminated. Other business relationships Apart from the employer-employee relationship, there are a number of others that might need consideration at business start-up. Contracting/sub-contracting Contracting and sub-contracting are ways of doing business. The head contractor enters into a contract with the contractor to perform certain work, part of which is then contracted by the contractor to a sub-contractor. Although this form of relationship is traditionally most commonly found in the building industry, it is now also more common in other industries as corporations outsource jobs which were previously undertaken by employees. For example, some hospitality businesses contract out cleaning and catering. An example of the latter is when a hotel or club contracts their kitchen facilities to a contract caterer. Both the contractor and sub-contractor should make sure that the agreement is clear and in writing and that they are, as far as possible, protected against the actions of other parties. Franchising Franchising is another method of doing business. It generally involves the grant by one person (called the franchisor) to another person (called the franchisee) the right to market or distribute products or services under a name and system in return for a fee. In tourism and hospitality industries, franchising is most commonly found amongst fast food, although such systems also operate amongst hotels and travel agencies. We’ll discuss franchising in more detail in Topic Seven. Distribution/licensing Distribution and licensing are also methods of doing business. They generally involve the grant by one person (called the distributor/licensor) to another person (called the agent/licensee) the right to market or distribute certain products or services under a name. Unlike franchising there is no business system. The licensee or agent may either buy the goods or receive them on consignment, or the licensor keeps ownership of them. Principals and agents An agency relationship is created where one party (known as a principal) appoints another party (known as an agent) to act on its behalf. The agent may be appointed to act generally on behalf of the principal or to just do particular things. So long as agents are acting within the scope of their authority, their acts usually bind the principal. As a result, an agreement entered into by the agent with another party may bind the principal. An agency relationship can be created by: • the granting of actual authority either in writing or by implication from the circumstances • as a result of apparent authority where a person is reasonably lead to believe that the agent has authority.
MNG00427 Topic 6 – Legal and financial issues during start-up 113 Agents have duties to principals, and may be liable for their actions. In return, agents have rights to indemnity and payment by principals. Agency-principal agreements are usual between travel agents who act as agents for principals such as airlines, accommodation providers and other establishments who distribute their products and services through the travel agent. (Department of Workplace Relations and Small Business 1999).Taxation There are several kinds of tax that may arise during the course of operating a business: • income tax – this refers to the general tax payable on a business’s income. The way income tax is calculated will depend on the legal structure of a business. Companies, trusts, partnerships and individuals are all required to complete tax returns and are subject to assessment. Depending upon the particular business, tax deductions or rebates may be able to be claimed and the business may be able to offset losses against assessable income. • capital gains tax (CGT) – this refers to tax payable on profits made on the disposal of assets. • fringe benefits tax (FBT) – this tax applies in relation to benefits provided to employees. • stamp duty – this is a state tax which is imposed on documents and transactions. The types of documents and transactions on which stamp duty must be paid are extensive and include conveyances of any property, setting up of trusts, leases, loan documents, insurance policies, and transfers of shares in a company. • the GST is a broad-based tax of 10 per cent on most supplies of goods and services consumed in Australia. If you are registered for GST you are able to claim back any GST you pay as part of your business (unless it relates to input taxed supplies). Consumers are be able to claim back any GST they have paid, but they will receive personal income tax cuts and other compensation to offset any rise in prices. Please note that there are other kinds of taxes that may apply such as land tax. However, the above forms of taxation will affect a great majority of businesses (Department of Workplace Relations and Small Business 1999).Financial issues The purpose of this section is to identify the usual types of start-up capital that might be sourced by an entrepreneur and to highlight some important financial issues that an entrepreneur should consider before venture start-up. It does not intend to unnecessarily duplicate material that you have covered in your accounting units. There are many excellent texts available to those of you who may want to know more about financial management for new ventures, such as how to set up accounting books and records, or manage business debt and credit. It should be noted, however, that our relatively minor attention here to financial issues for start-up businesses is not a reflection of their importance. It is self-evident that any business that is forced to close down generally does so as a result of financial difficulty, and a bankrupt business, by definition, is one that cannot meet its financial obligations (Meredith 1988, p. 100). Consequently, financial issues are extremely important for the entrepreneur, but many of these have been covered adequately elsewhere in your course.
114 MNG00427 – Entrepreneurship in Tourism and Hospitality The ATO also has some publications available free of charge for small business operators in what records to keep, how to set up your books and they also provide a CD which you can use to record your business records. Uses of funds in starting the new venture Funds required by a new venture generally can be categorised according to four types of uses: • Capital expenses. These are expenses incurred in buying the fixed assets of a business, including buildings, equipment, vehicles, furniture, fixtures and the like. This applies whether a person buys an existing business or starts one ‘from scratch’. These funds are invested on a long-term basis on the assumption that they will return a reward to the entrepreneur for many years to come (Meredith 1988, p. 101). • Preliminary expenses. These are ‘one-off’ expenses associated with launching the new venture. Some examples include funds spent on pre-opening promotion, financial and legal planning, and fees, taxes and consulting assistance. • Pre-paid expenses. These are recurring expenses that are paid in advance at start of year. Some examples are rent in advance and insurance. • Working capital. These are funds required on a day-to-day basis to pay expenses, pay creditors, finance debtors, meet tax payments, and so on. The name ‘working capital’ makes it clear that funds are to be used regularly and efficiently – they should not be allowed to stand idle, but must be reinvested in additional stock that is then sold on credit or for cash. Profits are earned as working capital is put to use in this buying and selling process. A typical cycle is for working capital in the form of cash to be converted into inventory, which is then converted to debtors (or accounts receivable), and so back to cash (Meredith 1988, p. 101). a Activity Identify the types of capital, preliminary and pre-paid expenses that a business is likely to incur prior to start-up. Financing options One of the major contributors to business failure is high financial leverage. In their enthusiasm to start a business, many owners are too ready to take on an excessive, highly priced debt burden. They then become trapped in a downward spiral, distracted from running their business effectively by becoming preoccupied with their bills and their struggle to meet the loan repayments, as well as other expenses of the business. This often leads to a focus on cutting costs, rather than focusing on attracting and maintaining a solid customer base. Eventually, caught in this spiral, businesses lose their competitive positions and face closure. Many of you have probably witnessed this downward spiral. For example, small supermarkets struggling to pay their bills often cut the range and amount of stock on the shelves. This then means customers start going to alternative supermarkets to do their weekly shopping, because the small ones don’t always have everything they need. This loss of trade then adds to the small supermarket’s problems, with less revenue coming in. Much the same can happen in restaurants. For example, if struggling to pay bills or loan repayments, restaurants sometimes reduce the number of staff to save on labour costs. This then leads to a decline in service quality, which leads to customer loss and decreased revenue.
MNG00427 Topic 6 – Legal and financial issues during start-up 115 Thus, to avoid this cycle, it is essential that the owner is not over-burdened with debt to begin with. Ideally, the entrepreneur will need to borrow no more than 50% of the total initial investment needed to acquire the business and commence operations. That is, the owner should be able to contribute at least 50% of the initial investment. There are a number of financing options which the entrepreneur might consider. Your next reading identifies possible sources of funds for capital, preliminary, pre-paid and working capital expenses of the venture. It also contains some tips on preparing a submission for finance. As you read, complete the activity below to aid your comprehension.r Reading 6.2 Reynolds, W, Savage, W & Williams, A 1994, Your Own Business: A Practical Guide to Success, Thomas Nelson, Melbourne, pp. 217–235.a Activity Answer the following questions from Reading 6.2: • what is the difference between equity and debt financing? • which types of financing retain most control of the business in the owner’s hands? • identify the most appropriate uses for finance sourced from each of the options discussed in the chapter • list the types of initial and ongoing costs of finance.a Activity From what you have read, list the main advantages and disadvantages of four forms of business financing – borrowing, leasing, equity financing and internal financing? Types of Financing Advantages Disadvantages Borrowing Leasing Equity Internal
116 MNG00427 – Entrepreneurship in Tourism and Hospitality f Feedback Types of financing Advantages Disadvantages Borrowing May be short or long term Interest rates may be high Frees up capital for other Failure to repay risks, loss of purposes collateral or bankruptcy Leasing No capital outlay No capital gain on property Frees up capital for other leased purposes Tax advantages Do not need collateral Allows for updating of equipment easily Equity Can raise large amounts capital Owner relinquishes a share of ownership, profits and decision- making rights Internal No interest charged Ties up capital which may be Retain ownership of the better invested elsewhere business No risk to assets or collateral a Activity Talk to some small business owners that you know. What sources of finance did they use to start their ventures? f Feedback A typical small business is likely to rely on three main sources of financing: 1. equity from the owner(s) 2. long-term finance, usually as a bank loan 3. working capital finance, usually in the form of an overdraft from the bank to meet short-term cash needs. Approaching a financial institution How do you deal with the financial institution in a way that will maximise your chances of getting a loan for a new venture? The following advice comes from a colleague of mine who has a good deal of entrepreneurial experience and once operated as a business broker. • Deal with the bank manager, not the loans officer, the accounts clerk or anyone else. You’re better off trying to sell your proposal directly to the bank manager, than to the loans officer who will only present your proposal to the bank manager anyway, and probably with less conviction than you will. • Make use of as many contacts as you can, in terms of letters of referral, etc. This might include past lenders you have dealt with, friends, relatives, or work colleagues. Treat the appointment with the bank manager like a job interview— it’s important to inspire confidence in your abilities and references are one way to do this. • Take along:
MNG00427 Topic 6 – Legal and financial issues during start-up 117 your CV with all your personal details (name, address, age, marital status, etc.), education, work history, work references, character references, etc. The bank manager will be very interested in your own capabilities to manage the business, so it’s important to build as strong a case as possible. your business plan, including detailed financial forecasts. Details on your financial status. You will need a statement of your own assets and liabilities. Assets might include a car, house, furniture, jewellery, life insurance, or bank savings. Liabilities might include car repayments or a home mortgage. • Complete your presentation with a summary of the business, its products, its financial requirements and projected results.a Activity How do the tips contained in the section on ‘Preparing a Submission’ in Reading 6.2 compare to the advice given above?Conclusion Well done … you have reached the end of a rather ‘dry’ topic and we hope that you are not suffering from ‘information overload’! In this topic we have been concerned with important legal and financial issues that need to be considered prior to the start- up of a new venture. The legal topics we have covered comprise business structures, protecting ideas, insurance and planning issues, business premises leases, obligations encountered in employer-employee and other types of business relationships, and taxation issues. In the financial area, we have focused on uses of funds, and selecting and obtaining financing. Our next topic concludes our current focus on the business planning and creation phase of entrepreneurship (Figure 1.2). It is concerned with entry strategies for the new venture.a Discussion questions At the end of Chapter 8 from your textbook, answer the four discussion questions. I will place feedback from these questions on MySCU under Unit Documents in Week 7 of the study period. As well as the discussion questions have a look at the Case Study on pages 216–217 and answer the questions at the end of the case study. At the end of Chapter 9 answer the five discussion questions. I will place feedback from these questions on MySCU under Unit Documents in Week 7 of the study period. At the end of Chapter 13 answer the three discussion questions. I will place feedback from these questions on MySCU under Unit Documents in Week 8 of the study period.
118 MNG00427 – Entrepreneurship in Tourism and Hospitality
Topic 7 Entry strategies for the new ventureIntroduction This is the last topic of four concerned with examining the business planning and creation phase of the entrepreneurial process (Figure 1.2). So far, we have examined opportunity recognition and evaluation, business planning, and legal and financial issues, as three important considerations in the pre-start-up phase of venture creation. This topic is also concerned with the pre-start-up phase and focuses primarily on three common types of entry strategies for new ventures – establishing a new venture ‘from scratch’, buying an existing business and purchasing a franchised outlet. Naturally, consideration of an appropriate entry strategy for a new venture should occur concurrently with the other areas in the business planning and creation stage. We commence this topic by examining the proportion of Australian businesses that use each type of entry strategy and their success and failure rates. We then focus on starting a business ‘from scratch’ in terms of its advantages, disadvantages and critical success factors. A detailed coverage of purchasing an existing business is provided, from its pros and cons to evaluating its potential success. We conclude the topic by examining franchising as a means to small business ownership. Here, we focus on its advantages and disadvantages, critical success factors, success and failure rates and contributors to a mutually beneficial franchise relationship. Objectives After completing this topic, you should be able to: • evaluate advantages and disadvantages associated with establishing a new business, buying an existing business and franchising a business outlet • identify critical success factors involved in alternative methods of business start- up • outline key steps involved in evaluating the potential viability of an existing business • discuss factors that optimise business success in franchising • apply the knowledge gained from this topic to tourism and hospitality enterprises. Textbook Schaper, M, Volery, T, Weber, P & Lewis, K 2011, Entrepreneurship and Small Business, 3rd Asia-Pacific edn, John Wiley and Sons, Australia. • Chapters 4 and 5 revised. • Chapter 14 would assist with understanding financial aspects of businesses. 119
120 MNG00427 – Entrepreneurship in Tourism and Hospitality Readings 7.1 Webberley, T 1992/93, ‘Established vs New’, Australian Small Business and Investing, September, pp. 22–23. 7.2 Anon 1992/93, ‘The Seven Steps to Starting Your Own Business’, Australian Small Business and Investing, September, pp. 12–15, 21. 7.3 Ken James and Associates 2009, Checklist for Purchasing/Starting a Business available online at http://www.kenjamesandassociates.com.au/docs/ CHECKLIST%20-%20Purchasing,%20Starting%20a%20Business.pdf 7.4 McOrist, W 1993/94, ‘Buyer Beware’, Australian Small Business and Investing, September, pp. 20–21. 7.5 English, J 1998, How to Organise and Operate Small Business in Australia, 7th edition, Allen and Unwin, Melbourne, pp. 118–132. 7.6 Frazer, L, Weaven, S & Wright, O 2008, Franchising Australia Survey 2008, sponsored by Franchising Council of Australia, Griffith University, Queensland, pp. 1–67. 7.7 Hing, N 1996, ‘Maximising Franchisee Satisfaction in the Restaurant Industry’, International Journal of Contemporary Hospitality Management, Vol. 8, No. 3, pp. 24–31. 7.8 Pickle, HB & Abrahamson, RL 1984, Small Business Management, John Wiley and Sons, New York, pp. 93–94. 7.9 Giles, S 2008, ‘Australian Regulatory Changes: The Consequences,’ Franchising World, May 2008, Vol. 40, No. 5, pp. 73–76. Use of different business entry strategies Many people going into business for the first time ponder whether it is better to start a new business ‘from scratch’ or to purchase an existing business as a going concern. Let’s begin our discussion with a graph that shows the various start-up methods used in Australia. The findings are drawn from Williams’ study of over 33,000 businesses in Australia (1991). Other Buy-ins and buy- restructuring/new outs ownership of 1.3% previously failed Inherited business business 0.2% 3.5% Purchase of existing firm 25.8% Starting from scratch 69.3% Source: Derived from Reynolds, Savage & Williams 1994, p. 148 Figure 7.1 Start-up business methods used in Australia 1973–1990
MNG00427 Topic 7 – Entry strategies for the new venture 121 It is often presumed that starting a business from scratch is the most risky way of getting into business. However, this presumption does not bear up under research. In fact, Williams study of over 33,000 businesses (1991) showed that this was the least risky option, as shown in the next graph. Other restructuring/new ownership of 68.0% previously failed business Buy-ins and buy-outs 65.3% Inherited business 76.1% 71.1% Purchase of existing firm 64.9% Starting from scratch 50 55 60 65 70 75 80 Source: Compiled from Williams 1991, in Reynolds, Savage & Williams 1994, p. 150 Figure 7.2 Failures by business start-up methoda Activity Why might businesses that are started from scratch show the best survival rate? Why might inherited businesses show the worst survival rate?f Feedback The answers to the above questions should come to light as we progress through this topic. For now, read on for our discussion of the advantages and disadvantages of various common business start-up methods.Establishing a new venture Probably the most challenging way to get into business is to start from scratch—to plan and create a business venture where none existed before, from the idea stage through to actually owning and operating the new venture. Establishing a new business is sometimes a risky option that can be fraught with uncertainties and requires extensive investigation and analysis if the business is to have the best chances of success. Bad judgement and lack of planning can be costly and may ultimately result in business failure. On the other hand, where a new business can meet or create market demand, the rewards can be extremely gratifying. Let’s examine some of the advantages and disadvantages associated with establishing a new business. The following brief article provides an easy-to-read introduction to this topic by identifying some of the pros and cons of establishing a new business, compared to buying an existing one. There are also numerous websites which compare establishing a new business as against to starting from scratch, one quick one that I found was at www. smallbusinesshq.com.au which also has quite a few factsheets to peruse.r Reading 7.1 Webberley, T 1992/93, ‘Established vs New’, Australian Small Business and Investing, September, pp. 22–23.
122 MNG00427 – Entrepreneurship in Tourism and Hospitality a Activity From your own general knowledge and the previous reading, list what you consider to be the main advantages and disadvantages of establishing a new business. Compare your answer to the points raised on the following pages. Advantages of establishing a new business The advantages of starting a new business compared to buying an existing one include the following: • Location is often one of the most critical factors in many small businesses. Sometimes, the only way to obtain the best location is to start a new business. This may be the case when new shopping centres, residential subdivisions, factories, offices or tourist attractions are built, thus creating a ready market for a new hospitality or tourism outlet. We only need to look at the location chosen by some of the larger chain food outlets to see why this is really important. For example, Pizza Hut, KFC, McDonald’s, Hungry Jacks and others try to get highway locations, or locate outlets where heavy pedestrian traffic already exists, such as in shopping centres, next to cinemas or at airports. • Physical facilities can be designed and built to accommodate the most efficient workflow without wasting space or purchasing unnecessary equipment. When you buy an existing business, you usually don’t get a choice about which of the business’s equipment you want to purchase – in fact, all their equipment is usually included in the purchase price, although the previous owners may be willing to negotiate. With a new business, you can purchase only the equipment you need and design the facility in the most appropriate manner for the needs of the venture. • Innovation is easier due to complete flexibility to select the target market, types of products and service, competitive strategy, location and facilities. On the other hand, if you buy an existing business, it is often very difficult to change its market image to target a different market and change the competitive strategy. Even though many newly purchased businesses display a sign saying ‘under new management’, the old image is sometimes difficult to shake. • Sometimes, a new business can be established for less money than buying an existing business as payment for goodwill is avoided. (We will discuss the concept of goodwill later in this topic.) • There is no risk of inheriting any existing ill will of customers, suppliers, creditors and employees. Alternatively, if you buy an existing business, you may inherit a poor image, customers may avoid it due to prior bad experiences, lenders may be unwilling to extend finance if the business had a poor financial record in the past, or potential employees may see the business as another fly-by-night operation if this has occurred before. • All policies and procedures of the business can be established and employees trained accordingly. That is, you will not inherit a business where shoddy work practices are the ‘norm’ or where you may have the unenviable task of breaking the bad habits of existing staff or dismissing them. • Establishing a new business allows the owners to orient it towards their own personal goals (English 1988, p. 139).
MNG00427 Topic 7 – Entry strategies for the new venture 123 Disadvantages of establishing a new business The main disadvantages of establishing a new business compared to buying or franchising an existing business include the following: • There is a high risk factor due to the uncertainty of market demand. In comparison, if you buy an existing business, you will have some idea of the demand for the product or service, and if you franchise a business, the franchisor will usually provide you with an estimate of potential sales for your outlet. However, if you establish a new business, any estimates of market demand or sales are purely that – educated guesswork at best. • It usually takes considerable time and energy to build customer patronage, create a desirable image, regulate work procedures and reach a break-even level of sales. Naturally, building customer patronage and creating a desirable image can be expedited through extensive advertising, but this, of course, comes at considerable expense. Regulating work procedures can be planned in advance, but will nearly always need some fine-tuning, with a degree of trial and error involved. • Start-up capital is usually more difficult to obtain for a new business. This is because it will have no proven history of success. Conversely, a successfully established business or a franchised outlet has past financial records to support an application for finance. • Lines of credit and supply must be established, suitable employees found and a marketing strategy implemented. None of this is impossible – it just takes time and resources. • The time lag between investment and cash flow may be too long to be sustained by the entrepreneur’s cash reserves. Many small businesses fail because they simply run out of money. Even if the business will be profitable in the long-term, this does not help if you run out of money to meet your short-term debts from suppliers or to pay employee wages. • The absence of past sales, expenditure and profit records to help project future profits adds to the new venture’s risk. A certain amount of guesswork is inevitable in budgeting for expenses, deciding the level of inventory required, and the amount of working capital needed (English 1988, pp. 139–140).a Activity Talk to some small business owners you know who have started their business from scratch. Why did they choose this entry method over others? Critical factors for new businesses Establishing a new business from scratch requires particular attention to critical start- up factors. By this, we mean investigating all the factors that must be considered when starting a new business. We have reviewed the most important of these in Topic 5. That is, developing a business plan for the new venture involves attention to all those factors identified below (English 1988, p. 140; Reynolds, Savage & Williams 1994, pp. 151–152): • assess your suitability for establishing, owning and operating a new business • identify a target market segment and its basic needs • assess the size of the target market and its ability to sustain a profitable business • determine the amount and availability of start-up capital • devise a product strategy that matches the target market • devise a competitive strategy that can gain and protect a share of the market
124 MNG00427 – Entrepreneurship in Tourism and Hospitality • develop methods and procedures to enable the business to function e.g. ordering procedures, inventory management methods, service procedures, workflows • find a suitable location and premises • develop a business plan incorporating the above considerations • obtain the necessary financing • select and train staff • obtain equipment, fixtures and supplies • determine and meet legal obligations, including attention to the legal form of the business, registering the business name, insurance, leases, tax requirements, shops and factories regulations, contracts for hiring staff, registration with the Australian Taxation Office as a group employer, and other licences and permits such as a liquor licence or development approvals • set up accounting books and records. Now turn to another brief article that identifies key steps in starting a new business. r Reading 7.2 Anon 1992/93, ‘The Seven Steps to Starting Your Own Business’, Australian Small Business and Investing, September, pp. 12–15, 21. r Reading 7.3 Ken James and Associates 2009, ‘Checklist for Purchasing/Starting a Business’, pp. 1–15. Available online at http://www.kenjamesandassociates.com.au/docs/ CHECKLIST%20-%20Purchasing,%20Starting%20a%20Business.pdf Buying an existing business Buying an existing business as a going concern (which means it is in ‘working order’) usually entails buying the following items. However, exactly what is purchased in the deal will be negotiated between the buyer and seller, as will the values of each item: • physical facilities (such as equipment, furniture and fixtures) • the business lease • inventories • contractual rights and legal rights (such as patents, trademarks and the business name) • goodwill • sometimes, contracts with customers and employees are also bought as part of the business. Because of this, buying an existing business makes it easier for the buyer to become established in business. However, if the seller’s original decision to start the business was wrong, the buyer might be purchasing another person’s disaster. This is why it is imperative that the buyer fully weighs up the advantages and disadvantages of buying an existing business and thoroughly investigates numerous critical factors associated with that business. As Reynolds, Savage and Williams note, ‘buying a going concern might seem the easy way into business – but it is easy to buy a “lemon”’.
MNG00427 Topic 7 – Entry strategies for the new venture 125 Advantages of buying an existing business The advantages of buying an existing business may be summarised as follows: • Risk of failure may be reduced. This is because a financially sound business history, which can be assessed from the business’s records prior to purchase, increases the likelihood of future success and profitability. • It is usually easier to obtain finance. This is because a proven operation will have a solid track record that will help in an application for finance. • Income will be generated immediately from sales to existing customers and because the business is usually operable immediately. In contrast, when you establish a new business, it is often some time before the business opens, due to time spent installing equipment, furniture, fixtures and the like. Often, when establishing a new business, a loan needs to be taken up well before the business opens to finance furniture, fittings, equipment, key money, etc. but it may be some months or even longer before the business actually starts generating any cash. However, you will still need to meet the repayments on the loan in the interim. • The business is usually already stocked, suppliers have already been located and their suitability assessed. Sometimes, suppliers are willing to extend lines of credit immediately to the new owner, particularly if the business has a good track record of prompt payment. New businesses, on the other hand, often have to pay in cash until lines of credit with suppliers can be established. • The business may have well established customer goodwill. Depending on the nature of the business, many existing customers may remain unaware or unconcerned that the business has changed hands and will continue to patronise it, or will do so anyway because of its good reputation. • Employees, if they agree to stay, have already been hired and trained and are experienced in their jobs. • It is sometimes cheaper to purchase an entire business than to establish the same business from scratch. In any case, the total cost is agreed and certain, whereas when you start from scratch, start-up costs and capital needs for the first six months are often difficult to estimate accurately (English 1988, p. 140; Reynolds, Savage & Williams 1994, p. 153).a Activity Check out your local paper for small tourism and hospitality businesses for sale. It’s interesting to note that many businesses are for sale at a price which appears to be well below replacement cost of their assets. Why is this the case? Later in this topic, we’ll be examining some reasons why people sell businesses to help explain this. Disadvantages of buying an existing business The disadvantages of buying an existing business may be summarised as follows: • The previous owner’s bad decisions are inherited. For example, equipment may be outmoded, stock may be unsaleable, the location may be poor or the employees unsuitable. The seller is not going to tell you this, but it’s up to you to find out. • The business may be offered for sale because it is unprofitable, has a bad image or is going downhill. Like second-hand cars, there is always the risk of buying a lemon for reasons you may not have been able to foresee. • Customer, supplier and creditor ill will may be inherited. • Innovation may be difficult owing to the present facilities. For example, changing the menu in an acquired restaurant to include items that will boost sales but which require additional equipment may be difficult. You may have the capital for new equipment, but not the space.
126 MNG00427 – Entrepreneurship in Tourism and Hospitality • The business may be too expensive due to over-valuation of its assets or goodwill. There is sometimes the problem of negotiating a selling price that is acceptable to both buyer and seller. You need to make sure that the business’s assets and its goodwill have been fairly valued. • Past success of the business may have relied on the previous owner’s special talents, such as rapport with customers, their personality or special skills. In this case, is goodwill really worth paying for? (English 1988, pp. 140–141; Reynolds, Savage & Williams 1994, p. 153). Critical factors for buying an existing business There are a number of critical factors that should be thoroughly investigated when buying an existing business. Pickle and Abraham (1984, pp. 100–107) identify the following: • why the owner wants to sell the business • the physical condition of the business • the market in which the business exists • the financial condition of the business • the legal aspects of the purchase. All these factors must be analysed in order to make an informed decision about purchasing the business and to arrive at its true value. Let’s now expand on the factors that should be considered when purchasing a business and to detail a step-by-step guide to how this might be approached. We’ll start with an activity. a Activity Brainstorm some reasons: • why people sell businesses • why people buy businesses. f Feedback Here are some ideas, although both of these lists below could conceivably be endless. Why people sell businesses Why people buy businesses The business is unprofitable Make profits They need the money Make capital gain Retirement Employment for self or family Poor health Independence Better business/employment opportunity Lifestyle Partnership/divorce problems Tax reasons Trend of downhill sales Investment New competition Security Change in the immediate environment, such Expand a current business as a new by-pass which will divert passing Buy out a competitor trade Legal problems such as the need to renew equipment to meet health regulations The business may be too demanding for the level of profit produced The owners have found a buyer prepared to pay more than the business is worth
MNG00427 Topic 7 – Entry strategies for the new venture 127So you want to buy a small business? Your success or failure in the long term willbe partially determined by the way you go about evaluating, selecting, financing andpurchasing that business, as much as how well you manage the business once you ownit. Below, we discuss steps in purchasing a business, including formulating businessacquisition criteria, locating businesses for sale, evaluating the business, valuing thebusiness, and other common terms and conditions of the sale.Formulating your acquisition criteriaAssuming that you’ve undertaken sufficient self-examination to ensure you are ready,willing and able to take on your own business, the first step is to formulate youracquisition criteria. This means narrowing down the type of business you are lookingto buy. You should be able to define the type of business you are looking for in termsof:• your own capabilities and preferences. Essentially, the business should be one which you will enjoy, which you can manage, that will earn you sufficient income, and one you can afford to purchase• business activity (e.g. retail, service, distribution)• industry (e.g. restaurant, hotel, tour operations)• size or sales volume (e.g. a 40 seat or 300 seat restaurant, a five room bed and breakfast or a 50 room motel)• geographic area• financial condition (e.g. run-down, potential for growth or turnaround, booming)• price range.If you can’t define these things – if you are as willing to buy a service station asreadily as a restaurant, or a business in Tamworth as readily as in Byron Bay – youhave probably not thought long and hard enough about what is required to operate thebusiness.Locating businesses for saleOnce you have refined your ideas about the type of business you want to buy, there arevarious avenues available to locate a suitable business:• newspapers. Look under headings such as ‘Businesses for Sale’, ‘Business Investments’, ‘Business Opportunities’, even ‘Auctions’. Business brokers and real estate agents place most advertisements, although owners sometimes do place their own advertisements, especially for very small businesses that cannot justify the commission a broker will charge• trade associations and trade journals. These are particularly useful if you are looking to buy a business in a specific industry• business listing magazines. These are publications devoted specifically to selling businesses, often compiled by business brokers, particularly national chains. They are particularly useful if you are seeking a business in a location away from where you currently live• cold canvass. Many people do not consider directly approaching the owners of businesses they are interested in, but this is precisely how brokers get their listings. Direct mail, personal visits, phone calls or an advertisement in the paper can uncover prospects• business brokers. There are several types of business brokers with whom a potential business buyer can deal:
128 MNG00427 – Entrepreneurship in Tourism and Hospitality larger accounting firms often have a specialist department assisting clients to negotiate the sale of all or parts of their business. general business brokers are usually formed by qualified accountants who wish to specialise in business sales. They generally deal with larger companies as clients, who have perhaps over $500,000 to invest. They will provide a detailed and confidential profile of the business for sale, including full financial analysis, lease parameters, staff analysis, property descriptions, how the sales price was arrived at, and the like. real estate agents often have a specialist business department or staff. Small, and fairly simple businesses, such as small food outlets and retail outlets can be adequately handled by these. However, if the business involves many debtors, importing or exporting, work in progress or long-term client contracts, this may be beyond the experience of this type of broker. specialist business brokers who concentrate on certain types of businesses, such as hotels, motels, or franchises. On contacting a broker, he or she will usually ask you a series of questions to assess your area of interest (i.e. your acquisition criteria). They then search their files and present you with a range of businesses to evaluate. Essentially, a business broker is a ‘matchmaker’ between the businesses for sale and potential buyers. A series of meetings would then ensue to discuss these propositions. Remember when dealing with any type of business broker that they are really the seller’s agent and their fee is usually based on a percentage of the selling price. Thus the broker will be keen to sell the business and at the highest price possible. Evaluating a business: a preliminary assessment There are a multitude of factors about a business which a potential buyer should thoroughly investigate. Clearly, the more information the better, and the buyer needs to be prepared to devote adequate time to this exercise if he/she expects to make the wisest choice. The following advice comes from a colleague of mine, a former business broker and ‘serial’ entrepreneur. Before you visit the business for the first time: • Assess the location before you even enter the business premises. This might include its accessibility, parking, visibility, passing trade, traffic flow, public transport, lighting at night, aesthetics, complementary businesses, whether it’s on the sunny or shady side of street or on the inner or outer circuit of the block. Much information can be gathered by simple observation, before you even inspect inside the business. A lot can be gained by simply watching both pedestrian and vehicular traffic around the business for a few hours. • Also, before you visit, talk to as many people as possible about the business to get a feel for its reputation. These might include customers, people working in nearby businesses, and suppliers. On the first inspection of the business, ask the business owner(s) about: • why the business is for sale. Of course, they will never say they are selling because the business is unprofitable or is too much work for the return. But some judgement is needed about whether their reasons seem plausible and genuine • annual turnover, not just for the current year, but over the life of the business. Is it increasing or declining? Of course, at this stage you are still taking the owner’s word for this, but you can check the details later • sales by month. Check for seasonality. Can you survive the off-season?
MNG00427 Topic 7 – Entry strategies for the new venture 129• net profit. Again you are going on trust, but if what the owners tell you later doesn’t add up, you know to be extra cautious about believing them.• leasing arrangements. How much time is left on the lease, what is the rent, how is rent reviewed (according to consumer price index or by a set percentage per year)?• outgoings, such as rates, excess water rates, electricity, phone, etc.• staffing. Are they likely to be willing to stay? What are their working conditions like? Do they seem happy?• stock at valuation (SAV). How much is there? What condition is it in? This is an added expense for the buyer, or can be negotiated later. It’s still good to get a feel for this early on.If you are still interested in the business, you should gather the following details soyou can have your solicitor and accountant review them:• list of suppliers, so you can ring them and ask them about the business, whether the current owners manage to pay all bills on time, and the amount of stock purchased• bank statements, to check that the owners’ reported turnover equals their bank deposits• list of furniture and fixtures, plant and equipment, individually listed and priced at written down value (WDV), that is, after depreciation• copy of the lease. You may need to get this from the owner of the premises or the agent, to check out finer details• financial accounts, particularly the profit and loss statement and the balance sheet.If you are still interested after the first visit to the business, you should then find out asmuch as possible about a myriad of other factors:• premises, for example its suitability, condition, need for renovations or alterations, adherence to health standards, and room for expansion• the products/services currently offered. Which products are most profitable? Is there opportunity to introduce new products? Are some products seasonal?• the customers. What are the current markets and their characteristics? Are these segments expanding or contracting? Will they be likely to remain loyal to a new buyer? How important is repeat business?• pricing structure. How are prices currently set? Are the prices competitive? How often are prices reviewed? Will they cover business overheads? How do they compare to industry averages?• promotion and advertising. Is there a clearly defined promotional strategy? What promotional methods are currently used? Are current promotions cost effective?• staff levels and competency. Are staff levels appropriate? Is morale high or low? Are staff competent and qualified? Are they paid award wages? How much holiday and sick pay is owed to current staff? Does the business support family members unnecessarily?• management. What is the organisational structure? Will key management personnel stay? What are their pay levels, perks and responsibilities?• competition. Who are the major competitors? What are their strengths and weaknesses? What is the business’s competitive advantage? What future competitive changes are foreseeable?• inventory and purchasing. Who are the suppliers? What trade terms are given? Are alternative suppliers available? What additional inventories are needed to bring business to full potential? What type of inventory management system is used?
130 MNG00427 – Entrepreneurship in Tourism and Hospitality Many of the above factors are similar to those you would consider in writing a business plan for a new venture. Therefore, we’ve covered them fairly briefly here. What needs more attention however, is actually evaluating the financial accounts of the business. Evaluating the business: examining its financial accounts It is important to remember that the financial accounts of the business in question reflect only what has happened in the past and are not completely representative of what may happen in the future. Even ignoring changes in external factors which may affect the business (such as changes in the market, new competitors, changes in economic conditions, or new legislation), if you buy the business it may improve due to new innovations or superior management practices, or it may decline if the business currently relies on the reputation of the current owner or staff who may not stay. Nevertheless, the past financial accounts are the only indicator you have of the financial potential of the business, and it is important you substantiate claims the seller has made about sales, expenses and profit. With the help of an accountant, it is important to take the accounts apart and remove any items specific to the seller or to his or her business structure. For example, you may need to add back any personal expenses the current owner was claiming as a business expense (e.g. personal vehicle, telephone bills). Similarly, while the current owner may claim that, in addition to the stated profits, there is an amount of cash sales (which s/he has not claimed to the tax department and has therefore pocketed), you cannot substantiate these claims and so should not let them influence your decision about purchasing the business. Certainly, any lender will ignore them in extending finance for the business. Tax avoidance is common in small business, so claims about cash sales are also common. However, you cannot base your purchase decision on unsubstantiated claims or illegal business practices. Be very careful if you are purchasing a company, because if you take on the established structure, you accept past business practices as well. In the event of a tax investigation, you would become liable for any back taxes and fines. When the vendor presents you with a set of accounts, try to identify whether the accounts were prepared by a registered accountant and get the name of the firm. If they were not prepared by an accountant external to the business, treat them with some scepticism. Your own accountant will need to verify these accounts in greater detail and this will add to your costs of purchase. The best way to substantiate the validity of the financial accounts is to check the profitability figures with the owner’s tax returns – if the owner was willing to pay tax on a claimed profit figure, it is likely that the business actually did make that much profit. The accounts you should view are the balance sheet, or at least a statement of assets and liabilities, and the profit and loss statement. Ideally, you should obtain these for the entire life of the business, but at least three years is essential to gain an understanding of how the business has grown and performed. If the seller is unwilling to provide these, it is likely that s/he has had an unusually profitable year and is hoping to sell while things are looking rosy. Let’s now look at the different items which should concern you on these various financial statements, starting with the balance sheet. The following information is sourced from Stefannelli (1990).
MNG00427 Topic 7 – Entry strategies for the new venture 131 Balance sheet analysis You are really only interested in dissecting the current balance sheet as this contains the assets and liabilities you are going to purchase. If you are not provided with the balance sheet, it may be because it contains items not relevant to the business (e.g. in family trusts, it may contain the family residence) or because the owner has not prepared one. In any case, you need to ask for sufficient information to construct the balance sheet yourself.a Activity Obtain a balance sheet for a small business, either through operators you know or from an accounting text, and refer to it while you read about the following items you should pay particular attention to when evaluating the accounts of a business for sale. Fixed assets The important point here is to try to determine as accurately as possible the actual depreciated value (written down value [WDV]) of the furniture, fixtures, and equipment (FFE). The vendor will try to rely on replacement or market value of these assets, which would of course be higher. To work out the depreciated values, ideally you need to know their purchase cost and their age. However, the vendor is unlikely to provide these honestly and accurately. Therefore, you may need to enlist the help of the manufacturers or suppliers of these or similar assets to arrive at a true depreciated value, or employ a professional valuer if large amounts are involved. Another important point is to ensure that the vendor is not trying to sell you assets s/he does not own. In many hospitality establishments, some FFE may be leased, or rent- to-own. If this is the case, you need to ensure that the vendor is going to pay off any outstanding balances and that these items have not been included in the FFE for sale as part of the business. You also need to be alert to any assets that are on equipment programs. For example, cappuccino machines and soft drink dispensers are often owned by their suppliers. The buyer can continue to use these items, but must agree to keep using the suppliers’ coffee or soft drinks. If the new owner wishes to change brands, the previous suppliers will remove their equipment. If the business has FFE which you feel are not necessary or which you don’t want to purchase, you should try to get the vendor to keep these items. If s/he is not prepared to do this, then you should value them at what you would get at an auction or from second-hand dealers. Inventories The buyer will be faced with the requirement to purchase existing inventories. It is traditional for the buyer to purchase all unopened stock. However, while this is tradition, the buyer can refuse to purchase unreasonably large amounts of stock. Sometimes, the vendor will take advantage of quantity discounts and increase the stock dramatically just before settlement, to capitalise on selling the stock to the buyer at the undiscounted price. Therefore, the buyer should insert in the sales contract a ceiling on the amount of inventory to be purchased. Of course, the buyer can refuse to buy any inventories if they won’t be used. However, if there is more than one buyer interested in the business, the vendor will likely sell to the one who will also purchase the inventories. It is probably best to purchase all or most of the inventories – the suppliers will often take goods back for a refund or credit, so the buyer is unlikely to lose out anyway. Once you have a list of the inventories to be purchased as part of the business, you need to cost these. Check with suppliers to ensure the vendor’s costing is accurate.
132 MNG00427 – Entrepreneurship in Tourism and Hospitality Receivables If there are large amounts of accounts receivable, this indicates that the current owner generates considerable revenue by granting favourable credit terms to customers. If this is unusual in a business of this kind, it may indicate that much of the revenue is based on the personal relationship of the vendor with his or her customers. The potential buyer should assume that s/he will not enjoy this patronage unless similar credit terms are extended. That is, the buyer will probably lose the house account trade if a more restrictive credit policy is introduced. If there are considerable accounts receivable, the buyer should ensure that these are not valued as part of the assets of the business, and should leave the vendor to collect them him/herself. Prepaid expenses It is best to separate these from the business’s sales price and then value them on a pro-rata basis from the date of settlement. Cash balance Naturally, the new buyer is not purchasing the cash balance as part of the business sale, but nonetheless it can provide an indication of the past health of the business. Beware the business teetering on the edge of liquidity problems for sustained or recurrent periods of time. Liabilities Usually, the existing accounts payable and other liabilities must be discharged by the vendor before ownership of the business can change hands. Be careful of accrued payroll expenses – make sure the owner pays these up on settlement, or else factor these into the sales price. While the buyer should not inherit the vendor’s liabilities, examining these can help assess the health of the business. For example, if the accounts payable are large and/or old (outstanding bills for a long time) this does not bode well for the business being able to cover all its expenses comfortably. Net worth Net worth is the value of total assets, or alternatively liabilities plus equity. The potential buyer examines the net worth of the business mainly to determine whether the vendor has needed to ‘feed’ the business with extra paid-in capital. Again, this is not a good sign. Income statement analysis After all is said and done, a business’s sales price is based, more than anything else, on its previously demonstrated ability to generate a sufficient profit for the investor (buyer). Thus, a careful analysis of the profit and loss statement is extremely important. The potential buyer should: • examine both current and past profit and loss statements • reconstruct the current income statement to reflect the amount of income the business might have earned if s/he had operated the business • generate a pro-forma income statement for at least the coming year and preferably for three years. We’ll examine each of these activities in turn.
MNG00427 Topic 7 – Entry strategies for the new venture 133a Activity Obtain a profit and loss statement for a small business, either through operators you know or from an accounting text, and refer to it while you read about the following items you should pay particular attention to when evaluating the accounts of a business for sale. Examining current and past statements Examining current and past profit and loss statements should involve attention to at least the following areas. Sales volume Determine what influences sales volume and whether it has changed over the years. For example, if sales volume shows a large increase from one year to the next, you would want to know why – is it due to new markets, better advertising, or withdrawal of a competitor from the marketplace? The idea is to assess whether these sales are likely to be maintained in the future, or drop back to previous levels. Remember that it is common for the vendor to tell you that s/he makes an amount of cash sales, not recorded on the profit and loss statement. However, because you cannot substantiate this, the opportunity to boost the reported sales volume by cash sales should not enter into your purchase decision. Beware also of the vendor who points out the future potential for greatly increased sales volume in the future. After all, if the potential is so good, why didn’t the vendor do this him/herself? You might be able to see a potential increase in sales volume due to marketing strategies you might introduce, but this is not what you are paying the current owner for. Other sales-related information which is useful includes average sale per customer, customer counts, popularity and profitability of individual items, and percentage of repeat customers, if this is available. Cost of sales Examine how the cost of goods sold (COGS) compares to industry averages, although of course individual establishments vary significantly around this average. If the COGS has varied greatly from year to year, you would want to find out why—is it due to increased costs of supplies without a corresponding increase in prices, or perhaps a lowering of prices to counter new competition?. Again, you should try to get a feel for whether the current COGS can be maintained. Look also at how the COGS figure was calculated. If, for example, the opening or closing stock is a nice round figure (e.g. $10,000), this suggests that stock has not been valued accurately and is likely to be an estimation which maximises the net profit figure. In this case, you may pay too much for the business if the net profit has been overstated. Labour costs Again, it is useful to compare labour costs to industry averages. Labour costs are often the biggest expense in service businesses. Again, if these have varied greatly over the years, you would want to find out why. For example, if the labour expense has dropped markedly, the owner may claim that this was due to improved work practices and/or greater productivity. However, while this may be true, it may also be that the owner has taken lower wages her/himself, to make the business look more profitable and more attractive to potential buyers.
134 MNG00427 – Entrepreneurship in Tourism and Hospitality You also need to be clear on whether the wages/salary expense includes the current owner’s salary, or whether s/he has simply drawn off the profits. This is so that you have a true picture of the profitability of the business. Reconstructing the current statement Having examined past and current income statements, it is then wise to reconstruct the current statement to reflect the amount of income the business might have earned if you had operated the business. The net income that the business could have produced is the most crucial figure to compute. As potential buyer, you should then determine whether that income is sufficient to satisfy personal salary demands and to provide an acceptable return on investment for the business. Some adjustments may be made to any of the items mentioned above. For example, a market survey might reveal good reasons to assume that sales will increase with extra advertising, a change in the nature of the product or perhaps targeting a market previously ignored. Similarly, the COGS figure may be adjusted according to costing and pricing of new products or services to be offered, or by cheaper supplies available to the buyer. Also, the labour expense may be significantly different if, for example, the current owner hires staff to do what the potential buyer intends doing him/herself (e.g. bookwork or cleaning). Constructing pro-forma statements Finally, you should generate a pro-forma income statement for at least the coming year and preferably for three years. (This is often necessary to satisfy a lender’s requirements.) As you will have plenty of practice doing this for your business plan, little detail needed here! Remember in an earlier topic that we examined how you might forecast the sales volume and the various expenses on the profit and loss statement for a new business. Much the same exercise is required here, but at least when buying an existing business, you have the past statements to base your estimations on, adjusted for the potential buyer’s circumstances. Valuing the business Essentially, the value of a business has two components – the value of the FFE (at WDV) and the value of goodwill. An additional expense in the purchase price will also be stock at valuation (SAV). We have already looked at valuing the FFE and SAV, so let’s concentrate here on valuing the goodwill of the business. Goodwill is a rather amorphous concept which is difficult to even define, let alone place an accurate value on. It has been defined as the amount of money paid for a business operation in excess of the value of the physical assets (Stefanelli, 1990: 36). However, this definition does not help us to put a figure on the value of goodwill. A more useful definition is: the excess of earning capacity over and above the fair or average rate of return that ordinarily would be earned on the company’s tangible assets. (Stefanelli 1990, p. 35) For example, if you were to invest $100,000 in the bank at say 10% p.a. interest, after one year you would get back your original $100,000 plus $10,000 in interest. However, if you invested your $100,000 in a business instead, you would expect to get back your original $100,000, plus a fair or average rate of return on that investment, say the $10,000 offered by the bank (at no risk), plus an additional return for the risk involved. This excess in return above and beyond what you would earn on $100,000 in the bank would be attributable to goodwill.
MNG00427 Topic 7 – Entry strategies for the new venture 135Thus, goodwill reflects the earning potential of the business above and beyond theaverage return on investment. In a way, it takes into account the reputation of thebusiness, its customer base, and other intangible assets of the business. Because itessentially represents the business’s earning potential, the value of goodwill should bebased on the current profit and loss statement for the business.There are a number of (rather complicated!) methods for working out the value ofgoodwill. However, for our discussion, some general rules will suffice, as no doubtyou would employ the services of an accountant to help you here. In the final analysishowever, goodwill will be largely a matter of what you, or another buyer, are preparedto pay, regardless of what the vendor has calculated. No vendor can be seriously tryingto sell a business if the value of goodwill is not negotiable.Now, read the following excerpt for an explanation of two commonly used methodsfor valuing a small business. Valuation When you buy an existing business, the price you pay should be based on its potential to earn a profit. The first step in assessing the profit potential of a business is for you and your accountant to analyse past financial statements and income tax records. Have sales and profits been increasing or decreasing? What has been the rate of return on the owner’s equity? If possible, obtain an industry profile for this type of business. A comparison of the seller’s figures with an industry profile will uncover any material discrepancies that you will want explained. This also helps you to discover any operating problems that may affect your decision to but the business or how much you are willing to pay for it. There are two basic methods used to determine the value of a business. The first method is based on expectations of future profit and return on investment. It is called the capitalised value method. The second method is valuing the business on the basis of the appraised value of the assets. Capitalised value Capitalised value is the amount of money that you would need to invest at a specified rate of interest in order to earn an income equal to the profit potential of the business. The interest rate used is called the capitalisation rate. The capitalised value can be found by dividing the annual profit by the capitalisation rate. For example, suppose you have projected that a business is capable of earning $25 000 per year after paying all of its expenses, including you own salary. If the investment in this business is as safe as a bank term deposit, you could use the term deposit rate of about 5 per cent to capitalise the profits and arrive at the following value for the business. Capitalised value = $25 000 = $500 000 5% No small business, however is as safe as a bank term deposit. Capitalisation rates ranging from 20 per cent to 50 per cent are more realistic. If we use a capitalisation rate of 25 per cent for this business, its capitalised value drops to $100 000. Two factors are important in determining capitalised value. First, it is very sensitive to the capitalisation rate used. Be sure that you use a capitalisation rate that fully reflects the amount of risk involved. Second, keep in mind that
136 MNG00427 – Entrepreneurship in Tourism and Hospitality you are valuing long-term profits. If there is a chance that the profits will not be sustained over the long term, then you need to increase your capitalisation rate to compensate for this risk. Appraised value Many small business purchases are based on the net value of the assets to be transferred. The process consists of establishing what assets are going to be transferred and appraising their current market value. Generally, the assets to be transferred are stock, sales and office supplies, fixtures and equipment, and goodwill. If the business sells on credit, you will have to consider whether or not you want to take over the debtors. Since none of the assets are likely to be new, you will need to take their remaining useful life into consideration when you value them. It is important to be sure that stock is saleable and debtors are collectable. If the asking price is greater than the value of the assets, the difference is an intangible asset called goodwill. Goodwill represents the ability of the business to earn greater profits that if you started the same business from scratch. The value of goodwill should not be any greater than the difference between capitalised value and the value of the assets. Since few small businesses that are put up for sale are genuinely producing extraordinary profits, the problem of valuing goodwill is not usually a pressing one. (English 1998, pp. 26–28) a Activity Examine the case study presented in Reading 7.3 in your textbook on page 129 and answer the question on page 130. I will provide the answers to these in the following week along with the Discussion solutions for this topic. Other terms and conditions of the sale Now that we have examined how a business might be valued, let’s change hats for a moment and assume the role of the seller of the business to see how you might proceed in getting what the business is worth. Again, this information is sourced from Stefanelli (1990). The seller should realise that what s/he thinks the business is worth may not equal what buyers are willing to pay for it. For this reason, it is usual for sellers to pad the asking price, terms and conditions of the sale, so that they leave some room for negotiation and compromise. It is human nature to love a ‘bargain’ so it pays to overprice the business marginally at first, being prepared to let the buyer bargain you down a little. As it is necessary for the seller to prepare a list of the preferred sales price, terms and conditions, the assistance of a solicitor at this point is essential. Let’s now look briefly at these three items in a little more detail – asking price, terms of sale and conditions of sale. Asking price The asking price is based, of course, on the value of the business’s FFE and the value of goodwill, as previously discussed. However, the seller must ask more than what is expected because buyers will always offer less than they are willing to pay. This is the ‘game’ that is played. Both parties to the transaction must feel that there is room to manoeuvre. Furthermore, by inflating the sales price, the seller may be able to recoup some or all of the expenses incurred in selling the business. These include brokerage fees, solicitor’s fees, and financial fees, for example. Moreover, buyers will usually factor into their offer the costs that they incur, so it is wise for the seller to do likewise.
MNG00427 Topic 7 – Entry strategies for the new venture 137 The manoeuvring that occurs between sellers and buyers reaching an agreement on a sales price acceptable to both should also be facilitated by some flexibility in the terms and conditions of the sale. Generally, there is an inverse relationship between the sales price and these terms and conditions. For example, a seller offered exceptionally attractive terms and conditions will usually accept a lower sales price, and vice versa. The seller therefore needs to have somewhat flexible demands. Terms of the sale The terms represent the procedures used by the buyer to pay the seller for the business. This is only applicable if the seller is providing vendor financing to the buyer. What then needs to be negotiated is the deposit paid in cash, and the length and interest rate of vendor financing. A seller might lower the sales price if the buyer is willing to provide a large cash deposit. Conditions of the sale In addition to the terms of the sale, there are several conditions which the seller and buyer will want to attach to the sales contract, including: • conclusion of sale. The seller will want to conclude the sale as quickly as possible, as time delays might cause the buyer to change his/her mind, or the seller might have other reasons to want ‘out’ from the business as soon as possible. Thus, it is usual to set a time period to conclude the sale • buyer access. The seller usually prefers minimal contact with the buyer until after the sales transaction is completed. Any take-over assistance provided by the seller to the buyer should occur after the sale is completed • buyer’s credit history. Because the seller wants to be sure the buyer is serious and has the financial ability to purchase the business, it is fairly standard procedure for the buyer to present to the seller a personal financial statement and permission to order a credit report • non-compete clause. It is quite common for a buyer to insist and the seller to agree that the seller will not open a competing business within a given radius of the business within a given time frame from the sales transaction. Clearly, the buyer does not want the vendor to open a similar business nearby. The conditions of sale must clearly stipulate the types of businesses covered by this clause (e.g. any food service business, or just coffee shops?), the time frame (often 12 months) and the geographical radius (e.g. 10 km) (Stefanelli 1990). Your next reading for this topic provides a brief summary of factors to take note of when purchasing a small business.r Reading 7.4 McOrist, W 1993/94, ‘Buyer Beware’, Australian Small Business and Investing, September, pp. 20–21. Let’s round off our discussion on buying a business with the following excerpt from the Department of Small Business which identifies some ‘tires to kick’ when purchasing a business. Basics of buying a business Buying an existing business can be a much less risky and more quickly profitable venture than starting your own business from scratch. But it’s not entirely risk free and your success will depend heavily on how wisely you choose and evaluate the business you buy.
138 MNG00427 – Entrepreneurship in Tourism and Hospitality Here are the ‘tires to kick’ as you begin investigating a prospective business purchase. These items are not meant to substitute for an in-depth evaluation— which you will want to conduct once you’ve gone through this first step …. Financial statements Look at both financial statements and tax returns from the past 3–5 years to judge both the current fiscal health and financial trends. Make sure you see figures that are accompanied by an audit letter from a reputable CPA firm. Don’t accept a simple financial review or a compilation, because those are based on figures supplied by the company. Is the business in sound financial condition? Do financial statements match tax returns? Are sales and operating ratios in line with the industry average? Your accountant can help you analyse these figures to determine the net worth of your company. Payables and receivables Check the dates on invoices to see the business is keeping up with its bills. Normal payment times vary from industry to industry, but generally 30 to 60 days is standard. If bills are being paid 90 or more days past the invoice date, the owner may be struggling with cash flow. Also find out whether any liens have been placed against the business because of unpaid bills. Inspect the accounts receivable with a sceptical eye; often their stated value is somewhat inflated. Take a close look at the dates on them to determine how many are delinquent and by how long. This is important because the older the receivable, the lower its value and the greater the chance that it will never be paid. While you’re at it, make a list of the business’s top ten accounts and run a credit check on them. If the majority of customers or clients are creditworthy but late to pay, you may be able to solve the problem with a more rigorous collections policy. If the clientele is financially unstable, start looking for another business. Employees Key personnel are an important asset to many businesses. You need to determine how critical the employees are to the success of the business. You also need to look at their work habits to determine if these are people that you can work with. How long have these key employees been with the company? Will these people remain with the company after a change of ownership? What incentives will you have to provide to get them to stay? Can any key employees be easily replaced? What are their relationships with customers, and would customers follow any of these employees if they were to leave? Also look at the role the current owner plays in the company. Is this a role you want to play? Are there any current employees who can take over those responsibilities if necessary? Customers These are the most important assets you may be buying with the business. Make sure they’re as solid as the other tangible assets you’ll be acquiring. Does the clientele have a special relationship with the current owner (long-time friends or relatives)? How long have these accounts been with the business and what percentage of the income do they represent? Will they leave or stay when the business passes to new hands? Does the current owner or manager seem to have good relationships with the customers? Is there a written policy for handling customer complaints, returns, disputes, etc.? Has the owner supported the local community or the industry?
MNG00427 Topic 7 – Entry strategies for the new venture 139 Location This is especially important if you are buying a retail business. How important is location to the success of the business? How good is the location of this particular business? Is there sufficient parking to make it easy for customers to visit? How dependent is the business on walk-in trade? What does the future hold for the area? Is it in the process of rapid change from new residential or business complexes on the way? Will the location become more or less desirable because of contemplated changes in the neighbourhood? Appearance of facilities The environment in which a company operates can tell you a lot about it. Take some time to eyeball the company’s physical location. How does this place look to you? Did you have a good first impression when you entered? How well is it maintained? Is there any outstanding maintenance work to be done—leaky roof, peeling paint, and poor signage? Is the place well organised out front and in the back where inventory is kept? Competitors When you’re buying a business, you need to understand the competitive environment in which it operates. Pay attention to industry trends, and how they might affect the company you’re considering. How competitive is this industry? Who are your competitors and what are their tactics? Are price wars common in this business? How has the competitive environment changed recently? Have any competitors gone out of business? Why? You can track this information by contacting an industry association or reading trade publications. Registrations, licences, zoning Make sure that key business licenses and other legal documents can be easily transferred. Determine what the process for transfer would be, and what it would cost, by contacting the proper state and local authorities or your local Business Licence Information Service. If a company is a corporation, what state is it incorporated in? Is it operating as a foreign corporation in its home state? Image How a company is perceived can be a serious asset or a liability that can’t be judged from a balance sheet. There are a wide range of intangibles that you need to consider when you’re evaluating a company—everything from the way it services its customers to how it answers the phones to whether or not it supports the community or the industry. This category is often referred to as ‘goodwill.’ Talk to customers, suppliers, competitors, banks, and owners of other businesses in the area to learn more about this firm’s reputation. Remember that it is very difficult to change a negative perception. (http://www.business.gov.au/documents/dir55/doc500255.htm)a Activity Talk to some small business owner-operators in your community who purchased their businesses as going concerns. Discuss with them how they searched for and selected the business, valued it, and negotiated the sale.
140 MNG00427 – Entrepreneurship in Tourism and Hospitality Franchising a business The franchising industry is a significant component of Australian business. There are approximately 71,400 franchisees in Australia with a total annual turnover estimated at $130 billion (Professor Michael Powell, Griffith University 2008). In tourism and hospitality industries, franchising predominates in fast food and is becoming more common in the hotel and travel agent sectors. Franchising may be defined as: a continuing relationship in which the franchisor provides a licensed privilege to do business, plus assistance in organising, training, merchandising, and management in return for a consideration from the franchisee. (The International Franchising Association) That is, franchising is a method whereby the supplier (franchisor) gives affiliated dealers (franchisees) the right to sell, distribute or market the franchisor’s product or service using the franchisor’s name, reputation and selling techniques. The next reading presents an overview of the franchising concept, its advantages and disadvantages, emerging trends and factors to consider in evaluating a franchise. r Reading 7.5 English, J 1998, How to Organise and Operate Small Business in Australia, 7th edn, Allen and Unwin, Melbourne, pp. 118–132. From the previous reading, a number of obvious questions arise, such as: Do franchised small businesses have a higher success rate than independent small businesses? And what factors contribute to a satisfactory franchise relationship? To address the first of these questions, consider the following reading which details the findings of some empirical research into the success and failure rate of franchised outlets in Australia. It also investigates various reasons behind the failures, while providing some interesting comparisons with independent small businesses. r Reading 7.6 Frazer, L, Weaven, S & Wright, O 2008, Franchising Australia Survey 2008, sponsored by Franchising Council of Australia, Griffith University, Queensland, pp. 1–67. To investigate the second question posed earlier – what factors contribute to a satisfactory franchise relationship? – let’s have a look at some of the contributors to franchisee satisfaction identified in the next reading. It reports on a study of ten Australian restaurant franchise systems and 127 of their franchisees (Hing 1996). r Reading 7.7 Hing, N 1996, ‘Maximising franchisee satisfaction in the restaurant industry’, International Journal of Contemporary Hospitality Management, Vol. 8, No. 3, pp. 4–31. a Activity Summarise the factors found to enhance franchisee satisfaction in the study reported in the previous reading.
MNG00427 Topic 7 – Entry strategies for the new venture 141f Feedback In the sample of restaurant franchisees in Reading 7.7, franchisee satisfaction was found to be enhanced by: • the level of need for achievement of franchisees • the number and helpfulness of external advisors consulted by franchisees prior to the purchase of their franchised outlet • the amount of disclosure documentation provided by their franchisor prior to purchase • the number of types of franchisee assessment methods used by their franchisor to assess the suitability of potential franchisees • the range and quality of initial franchisee support services provided by their franchisor • the range and quality of ongoing franchisee support services provided by their franchisor.a Activity Select a specific franchise in the tourism or hospitality sectors and write to the company requesting the franchisor to send you his or her information. Then evaluate: • your own capabilities for running the business • the franchise operation • the product or service • the location and territory • the equipment and fixtures • the marketing arrangements • the franchise agreement • training and assistance given.f Feedback While I cannot provide you with specific feedback for the franchise you have evaluated, you can compare your answer to the checklist given in Reading 7.5 for evaluating a franchise opportunity.a Activity I would now like you to apply some of the knowledge you have gained from the readings in this section by answering the following questions relating to the case study contained in Reading 7.8 in your Book of Readings. 1. Based on the information given in the case study, what do you feel was the principal reason for the Wilsons’ disenchantment with their franchise? 2. How compatible was the Wilsons’ background with the type of business they entered? 3. What precautions do you think the Wilsons should have taken prior to purchasing the franchise to lessen their problems?r Reading 7.8 Pickle, HB & Abrahamson, RL 1984, Small Business Management, John Wiley and Sons, New York, pp. 93–94. 1. The main reason for the Wilsons’ disenchantment with their franchise was obviously the modest return they were getting for their long hours and hard work. It seems the only way they could manage the business was to employ hired help, but their financial situation precluded this solution.
142 MNG00427 – Entrepreneurship in Tourism and Hospitality 2. The Wilsons’ background was extremely unsuitable for the type of business they entered. Mrs Wilson had never worked before and Mr Wilson had become accustomed to his comfortable 40-hour week. They could not cope with the changes involved in managing a food business involving long, irregular hours which included nights and weekends. In addition, neither of the Wilsons had any previous experience in the restaurant business or in management of any kind. 3. The Wilsons could have eased a lot of their problems had they more thoroughly investigated what was involved in managing their franchise, such as: how many hours they would need to work every week the cost of hiring additional employees if they could comfortably afford the investment repayments if they could restructure the investment repayments to suit their ability to repay them if they had the personal characteristics necessary to running a small business. While some franchisees may become dissatisfied with their business due to personal reasons, such as in the case of the Wilsons, another major cause of disenchantment is the imbalance of power between franchisor and franchisee. Even though both parties rely on each other for success, the franchisee, having often invested his or her life savings in the franchise, often does not anticipate the problems that can arise, foreseeing only success. Because of this, it is imperative that the franchisee understands the extent and nature of the authority the franchisor derives from the contractual relationship. To provide more protection of franchisees’ rights, the Federal Government introduced a mandatory Franchising Code of Practice, as described in the except below. The Code was updated in 2005 and is in the process of yet another update, see Reading 7.9. Some other useful websites on franchising are: Franchise Council of Australia www.franchise.org.au Intellectual Property www.ipaustralia.gov.au/smartstart/franchising.htm Franchising code of conduct New arrangements for franchises and similar business structures On 1 July 1998 the Franchising Code of Conduct, which protects the rights of franchisees and sets out the obligations on franchisors, came into effect. A key element of the Government’s small business reform agenda, this Code is a mandatory code of conduct. This means all franchise businesses are required by law to comply with the Code. By improving the disclosure requirements of franchisors and prohibiting ‘unfair’ conduct through a mandatory code of conduct, the Government will bring about significant cultural change in the way business is conducted in the franchising sector. The Code has been prescribed under the Trade Practices Act 1974 and, hence, has the force of law. The Australian Competition and Consumer Commission (ACCC) has the responsibility to enforce the Franchising Code of Conduct. All businesses, therefore, that are covered by the Code, including franchisors and franchisees, need to be aware of their rights and obligations under the Code. The Franchising Code of Conduct sets out requirements for franchisors with respect to disclosure, cooling off periods, copy of lease, association of franchisees, general releases from liability, marketing and cooperative funds,
MNG00427 Topic 7 – Entry strategies for the new venture 143 and transfer and termination of franchise agreements. The Code also provides mediation procedures where disputes cannot be resolved within the franchise system. In 1998 the Government established a Franchising Policy Council composed of representatives of the sector to advise on franchising policy issues. The Code was developed by this Council after extensive consultation with interested parties. (http://www.dewrsb.gov.au/group_osb/smallbus/fairtrad/franchis.doc)r Reading 7.9 Giles, S 2008, ‘Australian Regulatory Changes: The Consequences’, Franchising World, May, Vol. 40, No. 5, pp. 73–76.Conclusion In this topic, we have concentrated on three alternative ways in which an individual can enter into his or her own business – by establishing a new business, by buying an existing business or by entering into a franchise arrangement. While each of these alternatives has specific advantages and disadvantages, they all entail thorough investigation and planning to optimise chances of success and satisfaction. While critical factors in starting a new business were examined in an earlier topic on business planning, we have devoted considerable attention in this topic to critical factors in purchasing an existing business and in franchising a business outlet. Have a break, and then move on to the last topic. This topic will focus on managing the entrepreneurial venture.a Discussion questions At the end of Chapter 5 from your textbook, answer the three discussion questions. I will place feedback from these questions on MySCU under Unit Documents in Week 9 of the study period.
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Topic 8 General management in the entrepreneurial ventureIntroduction The emphasis within this topic is to discuss the linkage between the entrepreneur and the role of management within a developing organisation. The identification of different stages of development and the changing role an entrepreneur plays is essential in determining the success or failure of an organisation. We initially revisit some of our previous ideas on management and then extend them by examining how the entrepreneur uses specific traits in managing both individuals and the organisation. Throughout the topic we refer to and examine the role of small businesses in this process. This aspect and view of the small business is then used to conclude the topic by addressing some of the reasons for business failure and why this is so prevalent in tourism and hospitality industries. Objectives After completing this topic, you should be able to: • identify management traits and entrepreneurial traits • discuss the relationship between entrepreneurship and management • recognise the different stages in an organisational lifecycle • discuss the changes in management and entrepreneurial approaches at different stages in the organisational lifecycle • explain contributing factors to small business success and failure and the importance of management in this relationship. Textbook Schaper, M, Volery, T, Weber, P & Lewis, K 2011, Entrepreneurship and Small Business, 3rd Asia-Pacific edn, John Wiley and Sons, Australia. • Chapter 15. Readings Book of Readings 8.1 Longenecker, CO, Simonetti, JL & Sharkey, TW 1999, ‘Why Organisations Fail: the View from the Front-Line’, Management Decision, Vol.37, No. 6, pp. 503–513. Online 8.2 Bickerdyke, I, Lattimore, R & Madge, A 2000, Business Failure and Change: An Australian Perspective, Productivity Commission Staff Research Paper, AusInfo, Canberra, available at: http://www.pc.gov.au/research/staffres/bfacaap/bfacaap.pdf 145
146 MNG00427 – Entrepreneurship in Tourism and Hospitality The nature of management Organisations are successful by effectively coordinating their resources – both physical and human resources. The key to this success is often the manager. Managers are located at key positions within the organisation. Their role is often to coordinate the organisational activities to ensure that the overall objectives of the organisation are achieved. Therefore managers undertake key roles in an effort to integrate the diverse activities of the organisation and assist in achieving the common purpose set out in the organisation’s mission statement. Although managers may approach these activities in different ways, what is identifiable is the usual nature of managerial work. The study of management The study of management is comparatively recent (about the last 100–150 years) when compared to other disciplines such as science, economics, medicine and engineering. Although new, it has in its short life span generated a host of literature devoted to discussing the concept of management and its impacts on organisations. Just as entrepreneurship has been studied from different aspects (economic, psychological, sociological) so too has management a number of perspectives. These perspectives are identifiable in the definitions used to describe the term ‘management’. Management is often described using some or all of the following perspectives: • getting things done through other people, mainly employees or subordinates; this maybe a simplistic view but a very common explanation • the art or science of making the best use of resources (physical, human and financial) to meet the objectives of the organisation; management is often discussed in terms of whether or not it is an art, a science, or both • a process which ensures the effective and efficient use of resources in economic terms so that the enterprise can successfully fulfil a given purpose or task. It involves decision-making, controlling, monitoring and some re-evaluation of practices. It may also include some interpersonal tasks such as mentoring, motivating, supervising, and overall leadership of employees to reach the set objectives • a process of achieving stated organisational objectives through the functional activities of planning, organising, and coordinating the physical and human resources of the organisation. All of the above perspectives have similarities and differences but essentially they highlight three basic areas – managing resources (physical and financial), managing people (communication and motivation), and managing objectives (individual and collective). a Activity 1. 2. The above definitions highlight certain ideas or perspectives in relation to management. Can you identify common themes? What do the themes you have identified indicate to you about the nature of managerial work? 3. Which definition relates to your experience of management, either from past or current work experience?
MNG00427 Topic 8 – General management in the entrepreneurial venture 147f Feedback Some issues that you may have identified may include, but should not be restricted to, the following: • management involves a wide variety of tasks ranging from administrative through to financial • management is concerned with the development of staff and requires strong communication skills • depending on your background and experiences, your perspective of management will vary. Some students may identify with the financial and budget constraints of management while others will relate to the humanistic side of staff development and motivation. Both will appreciate the importance of achieving goals and objectives, both for the individual and the team as a whole • management is extremely varied; therefore is it possible to be ‘good’ at everything? One of the important aspects is to be aware of your weaknesses to ensure that these are not ignored but addressed through other strategies.The management of different size organisations When one examines a country’s economy it can be seen that it will be made up of a variety of different types of organisations – in different industry sectors, at different stages of production, and the size of organisations. If we focus on the size of organisations, we can divide this into three main types – small, medium and large. For each type, the management process will require different skills, characteristics and traits. This relates to the different stages that an organisation will proceed through in its development and incorporates the entrepreneurial process that occurs within organisations. We will briefly examine the small business aspect and the entrepreneur along with management processes. The small business sector is vital to the economy of most countries. In Australia the majority of businesses can be identified in this sector and they are extremely significant in their contribution to the overall success of the economy. These businesses can be found in many different sectors but predominantly they are located in the wholesale, retail and service industries. Their importance lies in their high use of labour, ease of entry and their ability to provide specialist products and services. When trying to define small businesses there is no one universally accepted definition. Most definitions identify certain management, economic, and performance criteria as a way of distinguishing small businesses from medium and large businesses. These include the number of employees, sales turnover, market share, ownership structure, level of sales, and management involvement. In Australia, the Wiltshire Committee Report has emphasised the importance of management characteristics by defining a small business as one in which: one or two persons are required to make all the critical management decisions – finance, accounting, personnel, purchasing, processing or servicing, marketing, selling – without the aid of internal specialists and with specific knowledge in only one or two functional areas. (Johns et al. 1983) The Committee agreed that this definition would encompass the majority of businesses in Australia with less than 100 employees in manufacturing firms and less than 20 employees in all others. This includes owner-managers. The ABS uses this size grouping to differentiate small businesses from large ones.
148 MNG00427 – Entrepreneurship in Tourism and Hospitality Morrison et al. (1999, p. 13) identify small businesses as ‘those that are often entirely dependent upon the talents and energies of the proprietors’. Both definitions identify the significance placed on the ability of managers to carry out all of the necessary tasks that a business requires to operate. The importance placed on owner/operators to be proficient in a range of management tasks, marketing, finance, human resource management, purchasing etc. is one of the major reasons why many small businesses fail within their first eighteen months of operation and highlights the importance of the manager-entrepreneur in small businesses. We’ll return to small business success and failure later in this topic. The process of management Our discussion of management so far has raised a number of common themes. What is important is that management can be seen as a process that all organisations participate in, at all levels, and in all departments. Writing in the 1930s, Henri Fayol identified the following activities as comprising the management process – planning, organising, command/monitoring, coordination, and control/evaluating (in Quinn et al. 1996). The assumption is that there is a ‘single best way’ to manage an organisation. The organisation is thought of in terms of its purpose and formal structure. A clear understanding of the purpose of an organisation is seen as essential to understanding how the organisation works and how its methods of working can be improved. Many writers have been criticised generally for not taking sufficient account of personality factors, and for creating an organisation structure in which people can exercise only limited control over their work environment. This is especially true of the early writers in management and is highlighted in the development of management theory. A brief recap is offered below. Classical Human relations Systems Contingency Emphasis is on a Emphasis is on social This approach sets This identifies that formal structure, interaction in the out to combine the two there is no one best highly technical. workplace, groups and previous approaches approach. Different leadership. but stresses the approaches are used external environment. in given situations. After re-examining your understanding of management (MN440 Introduction to Management), a general philosophy may be emerging. However management is approached, it must be seen that knowledge and understanding of management theory will help with the complexities of management in modern organisations. No single approach to organisation and management provides all of the answers (Quinn et al. 1996). It is a blending of different approaches for different situations, which will yield benefits to the manager. There are so many aspects to management. There are no simple solutions, no one best way to manage. What potential managers have is a set of ‘tools’ at their disposal to use in the best interests of the organisation in assisting it to achieve its overall objectives. r Suggested Reading Timmons, JA 1994, New Venture Creation: Entrepreneurship for the 21st Century, 4th edn, Irwin, Burr Ridge, Illinois, pp. 207–222.
MNG00427 Topic 8 – General management in the entrepreneurial venture 149What makes an effective manager? Theorists have identified three key areas of managerial competence: • technical competence • social and human skills • conceptual ability.a Activity What key competencies would you identify under each of these headings if you were to be an effective manager? You may wish to return to Quinn et al. (1996) initially.f Feedback Some issues that you may have identified may include, but should not be restricted to, the following: Technical • Operational, in terms, of understanding the product or service – how it is made or delivered – stages of production • Financial, in terms, of budgets, cash flow, types of finance, cost control • Marketing, in terms, of location, market research, forecasting, competitor analysis • This level of skill will depend on where and at what level the individual is expected to manage. Social and human skills • Motivation, communication, empathy, listening skills • Delegation of responsibilities, directing staff, conflict resolution • Mentoring and developing staff, leadership skills. Conceptual ability • Problem solving and decision making ability – able to see the ‘whole picture’ • Innovative capacity, developing new ideas or ways of approaching situations • Alertness to opportunities and ability to change and instigate change.The nature of managerial work We now have an understanding and appreciation of some of the issues involved with the study of managerial work and also how the common terms ‘management’ and ‘manager’ are often confused and misused. In order to develop programs to improve managerial effectiveness, it is important for organisations to identify the actual role of the manager and his or her involvement in an organisation. Henry Mintzberg classifies the activities of a manager into roles or an organised set of behaviour associated with position, derived from the formal authority and status which is evident in a manager’s job: • interpersonal roles – these relate to the network of interpersonal contacts a manager has. It is the most basic and simple of managerial roles but is also extremely important. Roles identified – Figurehead, Leader, and Liaison • informational roles – these relate to the dissemination of information to the organisation. Sources and communication of information from the manager’s interpersonal roles. Roles identified – Monitor, Disseminator, and Spokesperson
150 MNG00427 – Entrepreneurship in Tourism and Hospitality • decisional roles – these relate to the decision-making based upon a manager’s position, authority, and access to information. Roles identified – Entrepreneur, Disturbance handler, Resource Allocator, and Negotiator. Mintzberg emphasises that the ten roles identified within the three main groups are not easily isolated in practice but form an integrated whole. Therefore if any role is removed from the whole, this in turn affects the effectiveness of the manager’s overall performance. The manager’s role Being an effective manager may be simplified as being aware of what managerial work involves. An extremely generalised view as to the purpose of management is to ensure that the results of the organisation are achieved. Therefore to understand what needs to be done to achieve results, managers must: • develop insights into what their work involves • identify what tasks they are expected to perform • appreciate the skills and attitude needed to assist them working both effectively and efficiently. a Activity Identify a list of ten functions and or skills that a manager might be expected to have, develop or undertake. f Feedback Some issues that you may have identified may include: • planning and leading in order to achieve organisational objectives • organising – organisation structures and work groups • directing and supervising individuals and departments • coordinating activities, between internal and external parties • controlling activities, measuring progress, taking corrective action • information gathering and dissemination • conflict resolution and negotiation skills • communication, persuasion and presentation skills • foresight and creative skills. The relationship between entrepreneurship, management and the organisational lifecycle We have identified and discussed the role of management and its constituent parts. The emphasis now focuses on the entrepreneur and how this relates to the concept of management, the manager, and the organisational lifecycle. Henry Mintzberg (1995) identified four roles or classes of decisions that managers make depending on the role they are playing. It is essentially this ability to make decisions and achieve outcomes that sets managers apart from the rest. The four roles are: • entrepreneur • disturbance handler • resource allocator • negotiator.
MNG00427 Topic 8 – General management in the entrepreneurial venture 151Let’s have a closer look at the first of these roles – the manager as entrepreneur.As entrepreneurs, managers make decisions about changing what is happening in anorganisation. This may be either through introducing change or acting with others indeciding what changes are to take place. It is this involvement in the change processthat is important when examining entrepreneurs and management.Entrepreneurs have been identified as having a number of pertinent characteristics:• a high need for achievement or success• a strong enthusiasm to tackle and solve problems• a drive to influence their own destiny• an understanding and a willingness to accept some form of risk.Morrison et al. (1999:29) identify entrepreneurs as ‘ … individuals with visionand, importantly, the commitment to turn that vision into a reality’. Their definitionhighlights the ability to grasp opportunities and create a commercial venture from thisinitial starting point.Table 8.1 shows the ‘inputs’ and ‘outputs’ of this entrepreneurial role. Table 8.1 Entrepreneurial characteristics and properties Inputs • ambition • innovation • creativity • management capabilities • dedication • risk-taking • initiative • positive state of mind • vision Outputs • fun/pain • success/failure • rewards/losses • satisfaction/unworthiness Source: Morrison et al. 1999, p. 30A number of characteristics can be attributed to entrepreneurs, as discussed in earliertopics. Table 8.1 (Morrison et al. 1999, p. 30) identifies a number of entrepreneurialtraits that have been identified from researching the literature and an extremely wideset of attributes that encompass the role of an entrepreneur. Table 8.1 also highlightssome outputs, which reinforce these inputs both positively and negatively.When one discusses an entrepreneur, certain characteristics come to mind – zest,imagination, foresight, opportunistic ability, energy, high motivation. All of these seemto direct the idea that entrepreneurs and entrepreneurship may be evident at certainstages of an organisation’s life cycle. That is, they all seem to reflect the innovationor creation stages of new ventures or businesses, or new changes or ideas. We canpropose that this is true to a certain extent, but entrepreneurs are also found in largerand more established firms, as we’ll discuss in Topics 9 and 10.When discussing an ‘organisation’ lifecycle, an initial comparison can be madewith a more familiar lifecycle – the ‘product’ lifecycle. The product lifecycle goesthrough four distinct phases – inception, growth, maturity and decline. Similarly anorganisation goes through a number of stages, start-up, high growth, maturity andstability, and is often shown with a smooth ‘S’ curve, as shown in Figure 8.1. It isthe identification of these stages and the interaction of the entrepreneur in terms ofmanagement characteristics and style at certain stages that we wish to examine.
152 MNG00427 – Entrepreneurship in Tourism and Hospitality $100 million + $50 million Sales $25 million Start-up High growth Maturity Stability $8 million $1 million 0 3–4 10 15 Time (years) Crucial transitions: Sales 0–$3 million$2–$10 million $7.5 million+ Employees 0 to 20–25 25–75 75–100+ Core Management Doing Managing Managing managers mode Source: Timmons 1994, p. 211 Figure 8.1 The organisational lifecycle Figure 8.1 suggests that entrepreneurs fulfil different roles within an organisation at different stages of the organisation’s lifecycle. What is important is identification of whether or not all of the characteristics, traits, and skills associated with entrepreneurs are important at certain stages of an organisation’s lifecycle. We need to consider whether the characteristics needed at the start-up and inception stage are the same as those required to build and manage a growing business. Entrepreneurs and managers need to change over time, as both are not static roles. The role of the entrepreneur, during the first few years of a business, will move from that of ‘doing’ to ‘managing’ to ‘managing managers’ as the business grows. Reynolds, Savage and Williams (1989, p. 283) state that ‘one thing that is often overlooked is the need to plan for your own growth and change’. Morrison et al. (1999) supports this by stating that ‘in many cases the entrepreneur is not able to make the transition from a small organisation to one that is growing in size and complexity’. At each stage of the organisational lifecycle, a business will grow in size and complexity, and in turn, the nature of the business and the problems it faces will also change. We have previously stated that it follows a smooth ‘S’ curve. This is for simplicity; in reality the curve would have many ups and downs within each stage of its development, reflecting the true nature and operation of a new business venture. a Activity One way of gaining a better understanding of these changes in management roles and/or problems is to view the business through the organisational lifecycle. Identify some of the management skills or competencies you consider important for each of the two business stages. i) Start-up/inception/creation stage ii) Growth/take-off stage
MNG00427 Topic 8 – General management in the entrepreneurial venture 153f Feedback Some management skills and competencies that you may have identified may include the following: Start-up • drive, ambition, determination, owner does everything. • autonomy, strong negotiation skills, simple organisation structure – highly centralised, direct supervision of staff, generally informal. • vision, strong business technical knowledge. Growth • employing new staff, delegation – roles and responsibilities, collaboration – involving others in the decision-making process, relationship development, tightening controls on staff, coordination of resources. • planning and goal setting, strategic development. • strong communication skills, motivation of staff. The two stages above, inception and growth, are the periods that contain a high degree of change and turbulence; and are the two most important stages for the entrepreneur. Let’s examine these a little more closely. Introduction/inception/creation stage Reynolds, Savage and Williams (1989, p. 287) refer to this stage as ‘ … the startup, initiation or entrepreneurial stage – birth and infancy’. It usually covers the first two to three years of the business venture. It is the time where the creator or entrepreneur has identified the opportunity or ‘gap in the market’ and has set about fulfilling the need of the market, either through a service or product. During this period sales tend to be relatively slow and profits tend to be low, if at all. Many businesses during the their first year have identified that the owner/creator may take no salary at all, instead ploughing money back into the business or alternatively just paying bills to keep costs down and maintain a workable cash flow. It is by far the most perilous stage and is characterised by long hours, huge amounts of drive and determination, where true entrepreneurial traits are active. It is often a period whereby the business will be judged extensively by others. Timmons (1994, p. 210) suggests ‘Here, the critical mass of people, market and financial results and competitive resiliency are established, while investor, banker, and customer confidence is earned’. The entrepreneur will be totally responsible for all decisions and will maintain complete control over all aspects of the business. The organisational structure, at this stage, tends to be completely centralised as the business may be a ‘one-person’ show or have a small number of employees. With so much importance and power attributed to the entrepreneur, many organisational traits will reflect the individual’s ideologies – culture, ethos, and style. Therefore, the initial stages of the organisation will be extremely influenced by the entrepreneur and this will be evident in the small group of employees. Morrison et al. (1999, p. 147) explain that ‘employees will be hired who best fit with the entrepreneur’s personality and philosophy’. This initial stage in the lifecycle would suggest that, due to the size and nature of the organisation, the operation will have little complexity and a select few employees, who are closely monitored by the owner/ operator of the new organisation, and who will perform the major functions of the operation. This closeness suggests a relatively informal relationship between the members but the ultimate responsibility remains with the entrepreneur.
154 MNG00427 – Entrepreneurship in Tourism and Hospitality Growth/take-off stage The movement from one organisational lifecycle stage to the next is not a clearly defined occurrence. There are no particular milestones that signify the passage; often the transition is only realised after the event. The magnitude of change and amount of growth will vary from one organisation to the next. However this is an extremely volatile period for any organisation and is often the period where most failures occur. The importance of this stage is paramount to the survival of the organisation, how the entrepreneur manages this stage is extremely important. It is often a period where the entrepreneur has to let go of some power and control over the key decisions, which previously were his or her sole responsibility. The significance of this stage is the movement from ‘entrepreneurial power’ to that of ‘personal power’. That is, the emphasis is placed on managing others, communicating with others, and interacting with others on a much larger scale; and with individuals who were employed for their expertise in specific areas. The ability to ‘step-back’ and reflect and allow others to make major decisions is in strong contrast to the entrepreneur’s role in the set-up stage of the organisational lifecycle model. The management responsibility at this stage is also different from that of management at further stages in the lifecycle – maturity and stability. Often in the later stages, one’s authority equals one’s responsibility; however during times of rapid change and growth one often finds managers with responsibility that far outweighs their actual level of authority. This second stage within the organisational lifecycle is often identified with periods of rapid growth in sales and the delegation of some responsibility to specifically employed managers. Morrison et al. (1999, p. 148) describe this period by explaining that ‘the new, growing firm operates in an uncertain, unpredictable, and often ambiguous environment’. During this stage, the entrepreneurial spirit is still there but there now becomes an added dimension where emphasis is placed on team development. Emphasis shifts, somewhat, from the entrepreneur to the management team, who will exhibit skills in specific business areas – marketing, accounting, human resources and even strategic management. Some form of standardisation will be evident, usually in the operational procedures of the business, and the organisation will begin to increase in complexity. The over-riding aim of the entrepreneur and the team, at this stage, is to increase the organisation as a whole. It is the total contribution and support from all those involved for both the achievement of individual goals, and the achievement of others’ goals that become significant. At this stage one of the most important traits of the entrepreneur is the ability to influence others without formal power. The ability to persuade, to resolve conflict, to allow concessions and to exact them, and to promote the organisational goals become the key management characteristics and traits of the entrepreneur. The organisation moves into a high growth period and is now made up of many different individuals, personalities and fiefdoms, all of which need to be managed successfully if the organisation is to continue to grow and be successful. It is formalisation of operations during the growth stage that sometimes causes entrepreneurs to re-evaluate their role or purpose within the organisation as often they become constrained by their own creation. Therefore it is vitally important for entrepreneurs to continue to grow and develop their skills. These skills need to be implemented and refined for new challenges being faced in the growth stage of the organisational lifecycle.
MNG00427 Topic 8 – General management in the entrepreneurial venture 155 Maturity stage In this stage, again the emphasis shifts to a more formalised situation, where financial control and promotion of sales become major areas for managers to address. Sales tend to be fairly stable or in some instances declining as other competitors and similar products are available and competing for market share. This may be the opportunity for a resurgence of the entrepreneurial spirit that initially started the organisation as new avenues and opportunities need to be identified. Reynolds et al. (1989:289) identify a number of factors, which contribute to a reduction in sales when an organisation reaches the maturity stage: • actions by competitors, such as price cutting • actions by competitors, such as selling better quality products • market saturation, too many firms competing for the buyers’ dollars • changes in technology making the product or service obsolete • changes in fashion, style, tastes and consumer preferences • poor location • lack of attention to marketing by the firm, resulting in poor promotion or packaging, or an inferior product. As sales slow down, in comparison to earlier stages, it is important for organisations to plan for this occurrence and to initiate steps to prevent or delay this event. Good business acumen dictates that one’s product or service will not sell continuously, forever. Therefore before the organisation reaches this stage the entrepreneurial spirit will be looking to build, develop and promote other avenues to support current activities.Success and failure of small business I strongly believe that there is often more to be learned from failure than there is from success if we but take the time to do so. (Henry Ford) Henry Ford is credited as bringing the automobile to the ‘common people’. However, his success story is not as straightforward as history may indicate. Prior to the success of the Ford Motor Company, his previous venture, the Detroit Automobile Company, failed. If one asks why an organisation fails, the response can be extremely varied depending on one’s perspective – for example, the manager’s perspective, an employee’s perspective, or an investor’s perspective. There is not one single concrete definition of businesses failure. Rather there are various contributing factors that influence this degree of failure. Business failure can be based on financial data, market share or growth, viability, not returning expected returns, through to actual bankruptcy. For these reasons there are no official statistics which specifically measure business failure rates. The majority of failure rates identified are based on the number of business bankruptcies, as shown in Table 8.2, which also identifies a number of reasons for these bankruptcies.
156 MNG00427 – Entrepreneurship in Tourism and Hospitality Table 8.2 Causes of business bankruptcies in Australia Major cause attributed 1983–84 1994–95 1995–6 1996–97 1998–99 % % % % % Lack of capital 3 9 9 10 10 Lack of business ability 33 19 17 11 12 Failure to keep proper 1 1 1 2 2 records Economic conditions 24 25 26 15 15 Seasonal conditions 3 1 2 2 7 Excessive interest 4 5 9 7 4 Inability to collect debts 3 3 4 3 4 Excessive drawings 4 5 4. 3 47 Gambling or speculation 1 1 1 1 Personal reasons 6 9 9 9 Other reasons 8 21 20 38.7 Source: 1998–99 Annual report by the Attorney-General on the operation of Bankruptcy Act 1966 What Table 8.2 shows is the variety of contributing factors, which may lead to some form of business failure or bankruptcy. Morrison et al. (1999) identify that many entrepreneurial characteristics are evident as reasons for business failure, such as lack of insight, inflexibility, and an emphasis on technical skills – the anti-thesis of traits of entrepreneurs. Often it is the very determined, totally driven mind set of the entrepreneur which becomes the problem. That is, their actions and attitudes towards others create the problem and not their lack of technical skills. It is also important to accept that often the reasons for failure may be influenced by non-business reasons, such as personal circumstances of the owners. In hindsight, when considering business failure, there is rarely one main cause that contributes to business failure; it is generally a combination of factors that contribute to its demise. The following table identifies a number of causes of small business failure (Morrison et al. 1999, p. 152). Table 8.3 Some causes of small business failure Percentage Cause of failure Explanation 44% Incompetence Lack of fitness to run a business – physical, moral, or intellectual 17% Lack of managerial Little, if any, experience managing employees experience and other resources before going into business 16% Unbalanced experience Not well rounded in marketing, finance, purchasing, and production 15% Inexperience in line Little, if any, experience in the product or service before going into business 1% Neglect Too little attention to the business, resulting from bad habits, poor health, or marital difficulties 1% Fraud or disaster Fraud; misleading name, false financial statements, premeditated overbuy, or irregular disposal of assets 6% Unknown Disaster; fire, flood, burglary, employees’ fraud, or strike (some disasters could have been insured against) Source: Morrison et al. 1999, p. 152
MNG00427 Topic 8 – General management in the entrepreneurial venture 157What the information in Table 8.3 signifies is that almost 50% of business failurescan be attributed to a lack of knowledge or limited understanding of the role thatmanagement plays and contributes to the success of an organisation. However, thisis not surprising when we revisit the small business and its reliance on the ability ofthe owner/operator to carry out all of the managerial tasks – accounting, marketing,planning, human resource management, purchasing, etc.When trying to ascertain reasons for business failure one will always find acquiringthe information difficult. Individuals are naturally reluctant to discuss reasons whyfailure has occurred, as it often involves traumas or a realisation of their own lack ofability – the fact they know or understand little about certain management areas, thatthey relied on intuition and emotion in the decision-making process and their owninflexibility; after all it is their business and their idea which started the whole process.That they are to blame for the failure of the business is not something individuals aregenerally willing to admit.Specifically within hospitality industries, we often find individuals who wish toexpand an interest or a hobby into a business, with little or no business acumen, onlya love of the activity. This often is the start of the failure as their ‘heart’ and not their‘head’ drives their ideas. This ease of entry into a specific industry will continuallymake it attractive to potential owner/operators, but is also a strong factor in the highnumber of business failures.In a major study of small business failures in Australia, Williams (1991) lists thefollowing reasons given by respondents, as shown in Table 8.4.Table 8.4 Reasons for small business failures in Australia Reason % of failed firms Lack of business/management experience, skill & ability 60.5 Inadequate, inaccurate or non-existent books & records 55.4 Inflation & inability to operate with fluctuating costs 38.8 Union ‘interference’ & problems 27.9 Excessive private drawings 22.3 Under-capitalisation (especially at start-up) 21.4 Bad use of credit (bad debts & slow collections) 20.6 Inventory problems (slow stock, dead stock, records, ordering) 20.4 Inability to understand/use financial reports & statements 17.8 Inadequate sales (too few customers for too many 17.5 competitors) Rapid rate of technological change 17.1 Lack of financial planning (no budgets, inadequate cash, tax) 16.6 Industry-wide downturns 14.4 Problems with staff supervision, motivation & productivity 12.6 Failure to seek & use external advice 12.1 Inability to get & keep good staff 11.1 Lack of product development & market analysis 9.1 Inability to borrow needed funds 8.3 Insufficient knowledge of competition 7.4
158 MNG00427 – Entrepreneurship in Tourism and Hospitality Reason % of failed firms Unproductive use of assets (over-capitalisation) 7.3 Poor promotion & dubious image 6.8 Premature expansion (cash flow problems) 4.9 Reliance on too few customers 4.8 Poor location 3.0 Inability to cope with seasonal fluctuations 2.9 Poor time management 2.8 Acting without adequate risk assessment 2.7 Over-reliance on borrowing 2.1 Interpersonal problems among Owner/Managers 2.0 Inability to assess risk of expansion, new investment 1.5 Uninsured disasters (fire, partner’s death, embezzlement, etc.) 0.7 Source: Williams 1991 Williams (1991), who asked managers to identify five reasons why their businesses failed, generated the above results from research; their reasons were then grouped into the thirty responses found above. If this were further refined and examined, two broad categories may be identified: 1. those reasons related to how well the business is managed – that is, factors internal to the business 2. the reasons related to the external environment, such as economic conditions, inflation, legislative changes, etc. Generally most problems concerning small business failure are attributed to internal problems, such as management incompetence or inefficiency. Further, in the US, the economic analysis department of the Dun and Bradstreet Corporation consistently states that over 90% of all business failures are associated with managerial inexperience and incompetence. The next reading deals with business failure and highlights the main causes of business failure. r Reading 8.1 Longenecker, CO, Simonetti, JL & Sharkey, TW 1999, ‘Why Organisations Fail: the View from the Front-Line, Management Decision, Vol. 37, No. 6, pp. 503–513. a Activity Can you identify similarities or related categories between Morrison’s et al.’s (1999) reasons for business failure and William’s (1991) reasons? f Feedback Common themes between the two may be seen in the following areas: • financial management and liquidity problems • management experience and incompetence • problems coping with inflation and other external conditions • poor or non-existent books and records
MNG00427 Topic 8 – General management in the entrepreneurial venture 159 • sales and marketing problems • staffing problems • difficulties with unions • failure to seek and use external advice. A final reading for this topic (available online) reports on a major study into business failure in Australia. Just read the ‘Key Messages’ and the ‘Overview’ to gain some knowledge on this issue.r Online reading Bickerdyke, I, Lattimore, R & Madge, A 2000, Business Failure and Change: An Australian Perspective, Productivity Commission Staff Research Paper, AusInfo, Canberra, available at: http://www.pc.gov.au/research/staffres/bfacaap/bfacaap.pdfConclusion By now you should have identified a strong relationship between the role an entrepreneur plays and the management of his or her organisation. Identifying entrepreneurial traits and how they need to change as a business develops is an important step in understanding good management practice. Starting with an idea and trying to put this idea into action is not a straightforward process – there are many dangers in not being prepared. The overwhelming aspect of this topic is the importance placed on good management practices. Coupled with this is that when business failure is investigated, the critical issue is that the majority of business failures are due to controllable factors that stem from management deficiencies rather than outside influences. Well done! You have now completed the study materials for Entrepreneurship in Tourism and Hospitality. We hope that you have found this unit to be both enjoyable and rewarding. We also hope that you are now better equipped to contribute to the ‘entrepreneurial revolution’ currently driving change and innovation in many tourism and hospitality industries.a Discussion questions At the end of Chapter 15 from your textbook, answer the five discussion questions. I will place feedback from these questions on MySCU under Unit Documents in Week 11 of the study period.
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