MODULE 3

ENTREPRENEURIAL

STRATEGY

Business strategies for small entrepreneurial undertakings are quite different from strategies for large corporations. This difference is mainly because large corporations are able to change their environment to suit their needs, while small firms can only change themselves to fit into the environment.

The environment may or may not be unfavorable. It may be unfavorable because of the attitudes towards self employment or small business, or because of the transitional changes to the market economy. Be that as it may, any strategy for strengthening entrepreneurship involves three basic initiatives: (1) strategic objectives that follow the cycle of business; (2) effective coordination of functional efforts; and (3) the realization that entrepreneurial drive and commitment are needed for venture creation, but it is the professional management that helps to realize enterprise growth potential. Therefore, an entrepreneur must commit himself or herself to learning to share operational and decision-making responsibilities with others and to adopting more professional management along the firm’s growth cycle.

OBJECTIVES:

After studying this module, the student should be able to:

1.      Enumerate the different strategies appropriate for small and medium enterprises;

2.      Identify and discuss the entrepreneurial environment;

3.      Enumerate the discuss the strategic fundamentals for the small enterprise;

4.      Identify and formulate entrepreneurial objectives.

STRATEGY AND ENTREPRENEURIAL UNDERTAKINGS

“Strategy”, a word much used in business during recent decades, is a term whose many meanings are not easily captured in a single sentence. Derived from the Greek strategia (army leader or general), it means, in its literal sense, the management of an army in a campaign so as to impose on the enemy the time, place, and conditions for fighting one prefers. Businesses use it figuratively, sometimes exactly, sometimes more broadly to state a goal and general plans or methods for getting there.

One useful way of thinking about strategy is to distinguish various types. Experts identify three:

·         Corporate strategy, which is determined by decisions on the firm’s products and markets.

·         Fundamental strategy, which refers to the specialization and diversification of the type and intensity of relationships among different products.

·         Functional strategies, which refer to resource development with respect to R&D, finance, production, marketing structure, and personnel.

From numerous observations of small business strategic behavior, it is postulated that a small business strategy evolves around the notion of creating a profitable position in a specific product market segment that is defensible against competitors.

THE ENTREPRENEURIAL ENVIRONMENT

Other experts give us another definition of entrepreneurial strategy:

The means through which an organization establishes and re-establishes its fundamental set of relationships with its environments.

This formulation is interesting because it spells out what is implicit in many others: that strategy presumes a specific environment. Thus, we will consider the ambiguous environment that entrepreneurs face before turning, in later sections, to strategic considerations.

Entrepreneurship: The Economic Future

In recent years, the general public seems to have become convinced that small and medium enterprises and entrepreneurs are the backbone of economies. Many western nations are experiencing structural changes in their economies. These economies are no longer able to rely on large corporations to provide most of their jobs. It is smaller firms that are generating most of the new jobs, a trend that will likely continue for years to come. Moreover, small businesses also provide a method of redistribution of wealth, since self-employment is one of the few ways in which individuals can create greater wealth for themselves.

Not surprisingly, many Asian economies, in particular those in transition to market economies have responded by focusing on the need to foster the growth of entrepreneurship. Some significant measures include providing a pool of venture capital for small businesses and amending the laws and regulations that affect them so that conditions would be more favorable for coordination. In some countries, there are regular forums for policy makers and small business owners to interact, with regular meetings directed specifically at promoting the small business sector. Governments have put into place incentives and regulations to facilitate small and medium enterprise growth. With government encouragement, universities, polytechnics, and colleges are teaching entrepreneurship and small business within their regular and continuing education programs.

Concurrent with this growing government support for cultivating entrepreneurship and small business development is an emerging trend for people—especially increasing proportions of young people and women—to select entrepreneurship as a career choice. The growing emphasis is on this method of self-fulfillment and need satisfaction clearly signifies that we are relying on entrepreneurship to build our economic futures.

Attitudes Discouraging Entrepreneurship

Despite all these positive signals, there has been very little improvement in encouraging the development of entrepreneurship. Society is lagging badly in attitudes supportive of the new wave of venture startups. Consider the following realities.

Attitudes Toward Home-based Businesses. Homes can be seedbeds and natural incubators for new ventures. Many successful enterprises were once home-based small businesses.  Their presence is everywhere in our economic fiber. Yet they do not receive much support from society. People fear the operations of a business in their neighborhood lest it affect property values, create congestion, or otherwise infringe on the rights of residential property holders. Some governments actively try to smoke out thee underground businesses n order to regulate, tax, inspect and control them. The problem, of course, is that many new ventures cannot afford the rent charged for commercial and industrial properties. Also, formalization does not provide the flexibility many new entrepreneurs seek. To be fair we must point out that some economies are making an effort to create incubator space for new firms and few officials will take action against a home-base small enterprise if its neighbors file no complaint.

The You’ll-Never-Make-It Syndrome. Many textbooks say that would-be entrants to the marketplace face the barriers of the presence of superior products, established firms, advertising budgets, research and development commitments, and economies of scale. Yet the real obstacles to new venture formation are not these visible barriers but invisible ones: people’s negative attitudes toward new ventures preferences favoring large companies rather than small firms and the school systems’ built-in bias toward employment rather than self-employment. All contribute to an environment that discourages the founding of small ventures.

The negative mentality toward entrepreneurship stars at home and is continued through the educational system. A child trying to make a toy out of a piece of scarp is demonstrating the beginnings of technical entrepreneurship. Too often parents take the “garbage” away and buy a ready-made fancy toy. Similarly, our students have little exposure to design and product development. Their efforts are largely focused on the need to conform. The curriculum even in business schools is designed to reward solving problems, not identifying and pursuing opportunities. Granted that there are some education systems that include creative thinking as a part of the curricula, but this is a very recent development.

The Call-a-Professional Syndrome. One common piece of advice from self-styled experts is that the entrepreneur must have professional help: “If I were you, I would see a lawyer, an accountant, a marketing consultant, and a consulting engineer.” “Do it professionally: otherwise, don’t do it at all.”

What these advisers do not realize is that depending on professionals in this way is not necessarily a part of the entrepreneurial mindset. The issue is twofold. First, entrepreneurs are interested only in those professionals who will further the entrepreneurial process and certainly not in those who will slow it down, hinder it, or prevent progress. Second, although many entrepreneurs recognize that professional services can help to start up new ventures properly, young people with dreams, ideas and determination often cannot afford the fees that many professionals charge.

          Thus, many entrepreneurs find they are better off doing things for themselves. Following their own instincts, in situations where other people would obtain professional services. And when they truly require professional assistance, they often look for a provider who will offer their service for relatively low fees, or someone willing to do only what is needed, and for someone who is open to the entrepreneurial spirit.

The No-Track-Record Syndrome. Our present society does not expect success from an unproven person or way of doing things. This negative attitude s made clear in countless ways, explicit and implicit. Banks and other lending institutions will not lend money or give credit because a person has no track record. Very few people seem to remember that if we had always stayed with the safe, tried and true ways, we would all still be living in caves and hunting our food.

Reinforcing the Entrepreneurial Spirit

What is being singled out here is an ever-present danger: too many people lose their entrepreneurial because of the negative attitudes they encounter at home, in the community, in the educational system, and in their social situation. The reason for these attitudes is obvious: home, schools, and community are establishments, and the priority of any establishment is the orderly conduct of the individual—conformity. The problem is that an atmosphere of conformity does not create the best atmosphere for encouraging entrepreneurship and creativity. All creativity is spurred by the need for change.

The situations in the economies in the Asian Pacific region, the Philippines included are not different. The entrepreneurial spirit in some transitional economies may have been curtailed by the years spent as command economies where everything was planned. However, the spirit returned soon after the changes in economic policies were made, and as the environment changed. In some economies, there may be a dependence on foreign aid. While in others, the presence of multinational enterprises, the government and large corporations as the dominant employees may have endeared a preference for employment. In these instances, the entrepreneurial spirit may be affected by the social norm of being an employee. Whatever the situation, the challenge remains: how can an individual overcome society’s hurdles to entrepreneurship? What are your strategic options for breaking the invisible entry barriers?

One option is to create your own favorable environment by adapting some of the following entrepreneurial attitudes for your own use:

·         Adopt the mentality of “uninformed optimism.” Since there is no such thing as complete information, and entrepreneur must always be optimistic about the outcome of an opportunity. Remember that information is valuable but there are times when an entrepreneur must refuse to search out any more of it.

·         Be self-confident. No one knows your business as you do. Ask yourself whether it is what you want to do. If you are convinced that it is, go ahead and get on with it, ignoring anyone who tells you you cannot do it.

·         Be determined and persevere. No one should be able to change your mind for you. Consider all advice, negative or positive, as input. The decision, to go ahead or not, is yours. Once you make that decision, stay with it.

·         Be flexible. The key to the success of entrepreneurial undertakings lies not only in changing the environment to suit your needs but also in changing yourself to fit into the environment.

·         Do some planning. It can reduce costly errors, and it often involves no out-of-pocket cost other than your brain and time.

Because money means buying power that can be used to acquire resources, everyone knows it is important for starting a venture. What is often overlooked is that people themselves are resources. Putting one’s own energy and drive into an undertaking is as much an investment as putting in pesos. If entrepreneurs have no money to acquire needed professional assistance, they can always invest in themselves by acquiring education in areas in which moderate expertise can assist them in starting up a business.

STRATEGIC FUNDAMENTALS FOR THE SMALL ENTREPRENEUR

The following strategic fundamentals are appropriate to small entrepreneurial undertakings.

The Need for Flexibility

Large corporations are able to use financial and other resources to alter the environment to suit their needs. For instance, they often obtain government grants and protective policies when they confront strong competition from abroad. They can use persistent advertising to change public perceptions of their product, service, or image. And they can secure a dominant position by merging with or acquiring other firms, including the competition.

Such corporate strategies are absolutely out of reach for small businesses, particularly new ones. For a small new venture, the appropriate strategy is for the entrepreneur to find some way to change himself or herself to fit into the environment. Once the firm has gained a small amount of financial strength and more skillful management capability, it may be able to reposition itself in the marketplace to exert some very limited influence on its suppliers for such things as trade credit, better prices, and prompt delivery.

At the beginning of the venture and during its early development, an entrepreneur must make personal sacrifices. He or she may invest a large amount of personal savings, forgo family life, and/or incur an emotional cost in the business. If the enterprise is confronted with financial difficulties or cash flow problems, the alternative to going out of business is to work longer hours, have family members work for nothing, and negotiate with creditors for a longer period of grace—in other words, to change the enterprise to fit the environment—until the company is out of difficulty.

Because of this experience, small firms are often more flexible than large ones in their business dealings, more innovative in their products and services, and more concerned about their customer’s needs. Flexibility is considered the natural basis of strategies for small entrepreneurial undertakings. The professional approach used in most large firms emphasizes increasing sales by building overheads. That is a tried and true formula, but it ties the firm to high fixed costs, which can be difficult to manage. On the other hand, the entrepreneurial approach stresses keeping overheads low and the firm in a condition that permits rapid response to change.

Effectiveness Often More Important Than Efficiency

Many people tend not to distinguish between effectiveness and efficiency. Yet effectiveness stresses the need for actions to attain goals whereas efficiency relates input and output. If a company generates a large volume of sales it may be effective in using its capital investment—the measure is sales/capital investment—but it is profit, measured by profit/sales, that gives an indication of efficiency. It is important, however, for new ventures to generate sales first for without sales, there is no change of earning any profit. Without effective operations to keep the venture alive it will die before it can reach the promised land of profit.

For this reason, the focal point of an entrepreneurial strategy for a new venture often favors effectiveness rather than efficiency. To turn out the first product and to land the first sale are far more important to new venture founders than worrying about efficiency and profit.

Furthermore, it is important for owner/managers not to get hung up on organization and structure. Too many corporate-style thinkers try to lean on organization for the firms’ survival; their strategy then becomes survival not innovation. Entrepreneurial thinkers concentrate on getting things done.

Starting Simple

Most startup problems are financial and a significant number of them arise when the entrepreneur selects a capital-labor mix that depends on too much capital and not enough labor. Commitment to the use of capital equipment involves permanent costs that cannot be reduced if sales do not advance as rapidly as projected. Labor costs, on the other hand, can be varied according to current requirements. Workers can be hired or laid off more readily than capital equipment can be increased or decreased. Entrepreneurs, unlike large corporations, regard their workers and employees as members of their families. While labor cost is variable, entrepreneurs and entrepreneurial managers must never forget the lives of those they affect when they decide to lay off workers.

Some capital requirement is essential: retailing concerns need store fixtures and cash registers; manufacturing firms must have production machinery; nearly all firms need a personal computer these days. It is generally preferable however to subcontract capital-intensive aspects of the production process to other firms.

Yet firms also need to keep labor costs down. Unlike a large corporation, a new firm should try not to hire permanent employees. Doing so involves bookkeeping, filing government reports on employment, paying premiums for unemployment insurance and workers’ compensation, and adhering to the laws of statutory holidays and termination of employment. The startup entrepreneur is generally better off contracting with other firms for many services and hiring workers on renewable short-term contracts.

The idea of starting simple is applicable to all aspects of small business startup and operation. Consider the product mix. Since most new ventures have very few resources, the entrepreneur can use them most effectively by concentrating on a few products or services rather than spreading them thinly over a variety of offerings.

ENTREPRENEURIAL OBJECTIVES

Throughout the life of a firm, effective enterprise development begins with the formulation of strategic objectives. These objectives must follow the cycle of enterprise growth. An entrepreneur’s long-term goal may be to become rich and famous, but that goal is not attainable at the startup phase and is therefore not a suitable strategic objective at that point. The strategic objective for a small new venture is not even profit maximization but something like making the first sale—an attainable objective. The following exhibit 3.1 illustrates strategic objectives for enterprise development at various stages of growth.

Once this sort of objectives is specified, the entrepreneur can formulate a strategic plan that can be implemented. And then he or she acts upon it.

Exhibit 3.1 – Strategic Objectives for Enterprise Development

Strategic Efforts and the Importance of Coordination

The entrepreneurial strategy is a total strategy. Business courses often encourages students to think about their subject in organized compartments: marketing, operations, finance, labor relations, and so on. In the process of enterprise development, however, the focal point is the total enterprise. No area is viewed as an isolated function. All decisions and actions must be coordinated.

Management Development and Professional Management

Entrepreneurs are encouraged to follow their instincts, to trust their inclinations, and to make a firm commitment to pursuing what they perceive can be done. However, there are two very important matters that are less favorable to many people who have an entrepreneurial mentality: writing up business plans and delegating management.

Business plans will be discussed later in another module, however, when we talk about strategy, we have to talk about management. Look back at Exhibit 3.1. At every stage from development onward, the owner/manager may prove unwilling or unable to adopt the more professional type of management required, to delegate responsibility to others. Unable to meet competitive pressure with the needed management capability, the firm may face a period of decline or even be forced out of business.

Delegation

As an enterprise moves along from one stage of growth to another, the most important strategic action the entrepreneur can take is to make a commitment to developing management capability. Such commitment is meaningless, however, if he or she insists on making all business decisions and is unwilling to delegate some operating and decision-making responsibility to others.

Professional Management. Professional management is simply a process to ensure that resources are used effectively and efficiently to achieve eh firm’s objectives, making it possible for the firm to compete in the marketplace.

The entrepreneur’s motivation and commitment make the founding of a new venture possible, but spirit and drive have limitations. Any firm attempting to develop its potential must gradually adopt a professional management style. The complications of size alone make this shift inevitable. An owner/manager cannot be everywhere at once, and he or she may not have certain kinds of expertise or be temperamentally suited to all management tasks.

It is necessary, however, for the entrepreneur to be aware that great emphasis on professionalism may erode entrepreneurial spirit in the organization. The challenge is to move from a hands-on entrepreneurial operation to more professional management while preserving and even developing the entrepreneurial spirit.

QUESTIONS TO ANSWER:

1.      Assume you are starting a specific business of your own, describe it briefly and formulate a startup strategy. Explain why you prefer effectiveness to efficiency. Or, if you feel you must strive for efficiency under any circumstances, explain why.

2.      Could the family, educational institutions and society identify entrepreneurs earlier and make it possible for their talents to flourish? How could university and college curricula in business, technology and other professionally related programs be revamped to facilitate entrepreneurship development?

3.      Name the three basic initiatives needed to strengthen entrepreneurship. Explain each.

4.      Differentiate effectiveness from efficiency. Cite examples.

5.      Enumerate the different attitudes discouraging entrepreneurship. Have you experienced any of these? Elaborate on the experience/s.