Creation of a Successful Entrepreneurial Venture - Essay Example

?Critical Appraisal of Business Plan Process Towards the creation of a successful entrepreneurial venture Introduction A business plan is “a detaileddefinition of a business idea and explains how the business of the potential company will be executed (Piotrowski, 2011, p. 174). The purpose of a business plan is flesh out the original business idea in substantial terms, that is, to concretely describe what the business aims to achieve and how it aims to achieve these goals. The business plan may be viewed as a blueprint of what the prospective business owner intends to do. Because it is contained in a tangible document, it is open to critical examination by important third parties such as possible co-investors, creditors, venture capitalists, or banks which may be considering extending a loan towards the business (BC Ministry of Small Business, 2011, p.2). Elements The business plan is comprised of several elements, which may be described as follows: Idea generation, while not a tangible part of the business plan proper, is a vital phase of the planning process. It is the germination of the business intention, the idea that combines a perceived need in the environment with a recognized capability in the business proponent. Idea generation is the most difficult stage of developing a new product or service, whether it be for a new or existing business (Crane, 2010, p. 104). This is because it involves the creative process and is not defined according to any established procedure, but often occurs as a flash of inspiration or unique insight as to how a particular need may be fulfilled. When an idea is first generated, there is usually no indication as to whether it will be successful or even feasible, thus embarking on a course of action on the bases of new ideas always involves a great deal of conviction and a leap of faith. Strategic objectives are set subsequent to the generation of the idea. Strategic objectives provide the overall mission or purpose of the business (i.e., a “philosophical” purpose, according to Piotrowski, 2011, p. 174), as against the operational objectives. Strategic objectives relate to the definition of four elements of the business profile, namely products, customer groups, market segments, and geographic markets (Robert, 1998, p. 234). As with all statements of intention, however, the statement of strategic objectives is always couched in general terms that may admit of many varied interpretations. As a guide, therefore, the strategic objectives are at best advisory, but cannot be held as definitive as promises or commitments for which the business may be held answerable. Therefore, the effectiveness of strategic objectives will only be as meaningful as the best intentions of the business proponents may hold them to be. Market analysis and research is the process of gathering information about the prospective market of the business and drawing important insights and observations about future prospects. Information about the market’s size, its location, its history, the competitive profile, and likely profitability, as well as its general strength and health, are described and assessed. The information gathered during this stage provides the foundation for forecasting sales volumes and revenues, for determining the capacity of the business, and consequently the amount of financing required (Ehmke & Akridge, 2005, p.3). Market research analysis has its limitations. Ideally, accurate knowledge of markets is very important, but such knowledge does not serve to reduce knowledge of the business into a single solution that solves all possible problems. It is a myth that a business cannot fail if it completely knows its market; this is because the market is just one aspect of the business, the others being the financial, technical operations, accounting control, and human resources aspects (Brown, 2008, p. 464). Furthermore, the market has too many factors that could not be forecast with certainty, that any feeling of possessing complete knowledge of the market is a certain indicator that the planner is being misled. Tastes and preferences may quickly shift with the fast-developing technology, and sudden economic downturns may take place, such as the 2008 financial crisis that took even the expert planners by surprise. Furthermore, any form of statistical market forecasting has imperfections such that significant probability of error always exists (p. 465). Understanding the competition involves a form of competitor assessment by which process the firm’s specific competitors are reviewed. This may be done in several different ways, depending upon the complexity of the industry, however the two most vital of these are: (1) identification and definition of the firm’s specific competitors, and (2) profiling these identified competitors. In competitor assessment, the main purpose is to understand the strengths and weaknesses of each competitor in comparison to the proponent’s own real or prospective business. It is important to gain a thorough understanding of the competition in order to guide one’s own business decisions to address them. Important things to consider in profiling competitors include the competitor’s market share, their relationship with customers, their advertising plan, price, distribution, and product/service features, their financial strengths and cost positions, and their length of time in the business (Ehmke & Akridge, 2005, p.5). Much as any strategist before joining a battle, it is necessary to understand the enemy as much as one can before joining the battle. However, there are also limitations in the usefulness of competitor assessments, because as with any analysis, the conclusions arrived at are as good only as the available data shall permit. Competitors will naturally not reveal the most important information about themselves to the general public where such competitors are not compelled to do so by the Securities and Exchange Commission (as in the case of publicly listed corporations), and even then, critical industry secrets and proprietary information are not revealed if they are critical to the survival of the business. Impressions derived from competitor assessments are thus to be regarded with great care in order not to be misled by wrong assessments, and caution should be exercised in deciding based on them. Understanding of financial numbers and projections involves, first and foremost, the preparation of projected financial statements including cash flow, profit and loss forecasts, balance sheet projections. Cash flow shows the sources and uses of cash and their timing, in order to determine any inadequacies that would require short-term funding needs. Profit and loss forecasts show the expected results of business operations, primarily determining the expected revenues and expenses and the resulting expected profit. Finally, the forecasted balance sheet indicates the financial condition of the company and the manner and adequacy of how borrowing and equity provide for the productive assets of the company (Keown, Martin, Petty & Scott, 2003, p. 426; Brigham & Houston, 2009, p.547). The principal drawbacks in forecasting financial accounts are that they are always either underestimated, or overestimated; the only question is, by how much. This is not always apparent to the reader of the business plan, however. By creating forecasts in the form of accounting reports, there is a tendency to mislead the unguarded because of the seeming accuracy of the numerical data. It is important for the proponent and third parties to remember that the five- or ten-year forecasted revenues and expenses are based on guesses which are themselves based on past performance. There is no assurance that the trends for the past decade will continue to be the trend for the next decade, as the economy is prone to shocks that are not foreseen (or even if foreseen as with the past financial crisis, is not paid attention to or acted upon). Forecasted financial statements tend to reflect the proponents’ desire to show the business as both liquid and profitable. For this reason, some of the more astute analysts create optimistic, pessimistic, and most likely forecasts, if only to drive home the point that the foreseen profitability is qualified upon future events. Competitive strategy and scenario analysis is a formulation of possible future occurrences. It is based on all the preceding stages of business planning, and involves the envisioning of positive, negative, and probable scenarios (as with financial forecasting). This step may be useful in assessing risks by taking cognizance of the possible scenarios, and devising the competitive strategy to respond to the various scenarios. There is as much a tendency to over-analyze as there is to under-analyze, and too much cost may be incurred just in the planning stage. Arriving at the competitive strategy may be devised through such tools as Ansoff matrices or Porter’s models, but the results are at best suggestive, because again of the tendency of market and industry conditions to change unexpectedly over time (McLoughlin & Aaker, 2010, p. 95). Summary Business planning is informed by many scientific methods of management, but there are at least two stages that cannot be thought through or analysed. The first is the generation of a business idea, which is a product of creative thinking, inspiration, and a, understanding of people; the second is the decision to undertake the business, which is a matter of conviction and a leap of faith. In every other element, there are possible pitfalls and missteps, thus a great deal of care and vigilance is needed in reposing faith in the results of a business plan. References Brigham, E F & Houston, J F 2009 Fundamentals of Financial Management, 12th edition. South-Western CENGAGE Learning, Mason, OH British Columbia Ministry of Small Business and Economic Development 2011 Business Planning and Financial Forecasting: a Start-Up Guide. Western Economic Diversification Canada. Brown., L O 2008 Market Research and Analysis. The Ronald Press Company. Crane, F G 2010 Marketing for Entrepreneurs: Concepts and Applications for New Ventures. SAGE Publications, Thousand Oaks. Ehmke, C & Akridge, J 2005 “The Elements of a Business Plan: First Steps for New Entrepreneurs.” Purdue Extension EC-735 Agricultural Innovation & Commercialization Center, Purdue University Keown, A J; Martin, J D; Petty, J W; & Scott, D F Jr. 2004 Foundations of Finance: The Logic and Practice of Financial Management. Pearson Education. Leverich, J 2007 “The business race.” Enterprise/Salt Lake City, 11/26/2007, Vol. 37 Issue 22, p14-15 McLoughlin, D & Aaker, D A 2010 Strategic Market Management: Global Perspectives. John Wiley & Sons, Ltd., Chichester, West Sussex Piotrowski, C M 2011 Professional Practice for Interior Designer. John Wiley & Sons, New York, NY Robert, M 1998 Strategy Pure and Simple: How Winning Companies Dominate Their Competitors. McGraw Hill, New York, NY Critique of Characteristics of an Entrepreneur Mainstream theory There are several different enumerations of characteristics attributed to entrepreneurs that seek to explain their behaviour and attitudes. Some lists are as long as 30, some as few as five. Chosen for discussion here is McDaniel’s enumeration which describes 10 character traits, which strikes a balance between the lists that are too long and too short. They shall be explained in a manner consistent with the source document (McDaniel, 2002, pp.68-71) Self-esteem/self-confidence – This is the belief in oneself. Entrepreneurs are sure of their abilities to succeed in the task they have set for themselves. Far from arrogance, it is the conviction that if they work hard enough, they will eventually attain their objective; success is not regarded as spectacular or extraordinary, but as the reward for an honest effort (p.68). Determination to finish a task and succeed – This implies a single-minded focus on the completion of the task and the exertion of diligence until it is attained. It may require shutting off outside distractions (i.e., things and people not considered contributory to the attainment of the goal). This trait is occasionally mistaken as rudeness, self-centeredness, unfriendliness, or anti-socialism (p.69). Persistence/diligence to keep trying – Entrepreneurs have the tendency to not give up until they succeed. They are convinced that they will tend to fail in the first few attempts, and must simply persist because success is inevitable (p.69). Willingness and ability to take calculated risks – Entrepreneurship aims to create change, and change may only be created if the risk of failure is assumed by the change initiator (the entrepreneur). Entrepreneurs do not take on risks irresponsibly. They are by nature risk averse, and where risks may be reduced entrepreneurs will take this extra measure. Where the risk does not appear insurmountable and they believe they are equipped to address it, entrepreneurs will possess the will to take on the challenge in order to attain the goal, and shall not unnecessarily worry of failure (p.69). Optimism about success of efforts – Optimism is the belief that one’s actions will eventually lead to the best possible outcome. For entrepreneurs, optimism is coupled with hard work and singleness of purpose; they see failed attempts as “temporary setbacks” and problems as “opportunities” all leading to success (p.70). Creativity: Ability to see a need and end result of efforts – Creativity is the single most frequently cited characteristic of entrepreneurs, according to McDaniel. It is the ability to see things differently than the way others do, to conceive of the end result of a process that is yet to happen, and to realize how this result may serve a latent demand. The insight or creativity enables entrepreneurs to devise the successful product ahead of anybody else (p.70). Focus: Orientation to Continuously Pursue a Goal – Entrepreneurs maintain a high level of eagerness and conviction that the idea they conceive of will succeed, and will continue to focus on the attainment of this goal without their drive and enthusiasm waning (p.70). Foresight/insight: Ability to see the future as it might be – Entrepreneurs possess the ability to view the possibilities that may be created by their product. The ability to envision a future event and the process that makes it a reality is a trait entrepreneurs must have, because it is the vision that provides the drive to accomplish the task and make the vision a reality (p.71). Unwillingness to accept failure and the ability to learn from mistakes – This is the characteristic of entrepreneurs that enables them to regard failure as part of the learning process in the attainment of success. The failed process provides entrepreneurs the opportunity to analyse what shortcoming was encountered, and to remedy that shortcoming so that it ceases to be a cause for failure. This process of failure and resolution is repeated until at the end there is no longer any cause for failure, and thus success is achieved. Correcting prior mistakes becomes a steppingstone to eventually complete the process to yield the desired effect (p.71). Responsibility/ability to accept control and willingness to accept results – Entrepreneurs do not shirk from responsibility, or pass the buck when problems arise. The reason is that they are not interested in blame or finding fault, but are motivated by the desire to see the end result. This could only be done by assuming a pro-active attitude to adverse results, and moving forward to overcoming it and proceeding beyond it at the soonest possible time (p.71). Alternative theory vis-a-vis mainstream theory In comparison with the foregoing character traits, academic studies have shown that there are a host of other considerations that influence the behaviour, attitudes, and characteristics of entrepreneurs. A study conducted by Ekpe, Mat and Razak (2011) examined the effect of individual attributes and business environment factors on entrepreneurial activity of women entrepreneurs. The impact of individual traits such as education, work experience, and the willingness to take risks were compared to environmental factors such as economic constraints (i.e., lack of credit due to lack of asset collaterals), socio-cultural barriers, low household income, and lack of labour skills. The empirical study found that environmental factors tended to exert a higher degree of influence on the women’s entrepreneurial activity than their individual attributes. Another study found that there is a significantly higher incidence of dyslexia among entrepreneurs than among corporate management and general US and UK populations, traceable to the coping mechanisms developed by dyslexics (such as task delegation) that are useful in business (Logan, 2009). Also found by empirical study is the importance of relational attributes and the employment of networks in mitigating entrepreneurial risks and therefore influencing the outcome of an entrepreneurial venture; thus, the ability to relate to others and create networks is a vital attribute of an entrepreneur (Christopoulos, 2006). Additionally, other individual traits not mentioned in Western literature but found relevant in Asian studies include agreeableness, openness, and business and management education (Nga & Shamuganathan, 2010). These studies appear to indicate that economic and cultural background (the Ekpe and Nga studies), skills brought about by adverse personal circumstances (the Logan study) and the social environment (the Christopolous study) may strongly influence entrepreneurial success, and which were not considered in the mainstream literature. Aside from personality traits, studies have also shown that gender differences, risk aversion, and even sociopathy are relevant in explaining entrepreneurial abilities and performance, according to Read and Sarasvathy (2005) (citing Carter et al, 2003, Miner, Smith & Bracker, 1994, and Winslow and Solomon, 1987, respectively). This same study (Read & Sarasvathy) added that effectuation is another vital consideration as an entrepreneurial trait. Effectuation is seen as the direct inversion of rational choice and causal rationality, in that while causal rationality is goal driven, effectuation is means driven. While causal rationality is logically premised on prediction, effectuation is logically premised upon non-predictive control (i.e., “to the extent we can control the future, we do not need to predict it”). “Effectuation is enactive and exaptive where causation is reactive and adaptive” (Read & Sarasvathy, 2005, p.50). Traditional literature is evidently founded on rational choice and causal rationality, whereas effectuation theory is alternative and presents, in many cases, a real-life view of entrepreneurship activity. Another factor only glancingly referred to in mainstream literature as “belief in oneself” but increasingly gaining interest now as a theory in its own right is self-efficacy, or more specifically, entrepreneurial self-efficacy (ESE). “ESE has to do with the self-belief, willingness, and persistence to overcome the initial anxiety that a new start-up process delivers” (Galbraith & Stiles, 2006, p.385). Implicit in ESE is the sum total of an individual’s behaviour, environment, and cognitive factors, which all impact upon that person’s motivation and drive. ESE may be evident in the person’s persistence at a task, the length of time he or she is willing to devote to it, and the level of risk and adversity he or she is willing to endure to accomplish it. When forming self-efficacy judgments, a person draws upon or is influenced by past experiences, vicarious experiences, social persuasion, and his/her physiological and emotional state. It is a better grounded premise that these factors work together to influence an individual’s ESE and, therefore, his/her likelihood of becoming a successful entrepreneur, than it is to suppose that individuals’ entrepreneurial traits are inborn as mainstream theory suggests. In summation, mainstream theory, consistent with most trait theories in various business applications, centres on specific observable and discrete character traits which, traditional theory suggests, if possessed by an individual would in all likelihood lead to his/her success as an entrepreneur. Traditional theory is goal driven, prediction dependent, and reactive. On the other hand, there are numerous factors not pertaining to personal traits (e.g. economic and social circumstances) that tend to impact more significantly on entrepreneurial success. Alternative theories, such as effectuation and self-efficacy, attempt to draw in these other factors and view them in the context of real-world situations as an integrated approach to studying entrepreneurship. These new paradigms deserve our sincere attention and deliberation. Bibliography Christopoulos, D C 2006 “Relational attributes of political entrepreneurs: a network perspective.” Journal of European Public Policy, Aug 2006, Vol. 13 Issue 5, p757-778; DOI: 10.1080/13501760600808964 Ekpe, I; Mat, N; & Razak, R C. 2011 “Attributes, Environment Factors and Women Entrepreneurial Activity: A Literature Review.” Asian Social Science, Sep2011, Vol. 7 Issue 9, p124-130; DOI: 10.5539/ass.v7n9p124 Galbraith, C & Stiles, C H 2006 Developmental Entrepreneurship: Adversity, Risk and Isolation. Emerald Group Publishing Koe Hwee Nga, J & Shamuganathan, G 2010 “The Influence of Personality Traits and Demographic Factors on Social Entrepreneurship Start Up Intentions.” Journal of Business Ethics, Aug 2010, Vol. 95 Issue 2, p259-282; DOI: 10.1007/s10551-009-0358-8 Logan, J (2009) “Dyslexic entrepreneurs: the incidence; their coping strategies and their business skills.” Dyslexia (10769242), Nov 2009, Vol. 15 Issue 4, p328-34; DOI: 10.1002/dys.388 McDaniel, B A 2002 Entrepreneurship and Innovation: An Economic Approach. M.E. Sharpe, Armonk, NY Read, S & Sarasvathy, S D “Knowing What to Do and Doing What You Know: Effectuation as a Form of Entrepreneurial Expertise.” Journal of Private Equity, Winter 2005, Vol. 9 Issue 1, p45-62 Sarasvathy, S D 2008 Effectuation: Elements of Entrepreneurial Expertise. Edward Elgar Publishing. Cheltenham, Glos, UK Read More