CHAPTER 15
BASIC ENTREPRENEURIAL MANAGEMENT

IT HAS BEEN KNOWN that most of the new business failures can be ultimately attributed to the lack of vision and planning and to unfit management, even if it comes as a direct result of a specific factor such as inadequate capital or lack of professional skills. A significant part of the problem may go back to the paradox of doing versus thinking. Entrepreneurs are usually doers. They are enthusiastic, hardworking, and energetic people who can make a reality out of an idea and have a project up and running. They most often do not have the time, nor the ability, to sit and engage in any sort of strategic planning. Most of the time they do what they know; they try one way and see if it works and they learn as they go. However, that way is, most often, not the road to efficiency, especially in the midst of dramatic political, economic, and technological changes. In an environment of frequent and significant changes as we have been witnessing in the last few decades, it becomes imperative that an entrepreneur-owner has or obtains the ability to anticipate any changes, come up with creative remedies, initiate action, and follow up the results of the adaptation. In other words, there is a pressing need for a blueprint which a firm can follow toward achieving its vision and accomplishing its mission. That would be a need for strategic management.

For that reason, and unlike the common belief, the need of a small business to a clear strategy is more urgent and essential than the need of a large corporation, simply because a small business is more likely to face inadequate resources of all types such as money, time, energy, skills, and the like. This would automatically raise the value of management and make it a plausible route for effectiveness and efficiency. Any business has to deliver an economic value either in terms of goods, services, or both. These values are normally products of the major business function of production and distribution which require other essential financial and managerial functions. There should be a positive overlap between management and leadership in carrying out the five fundamental managerial functions of any business, which are:

Management would include the first three functions while leadership includes the last two functions. Management is the effective and efficient use of business resources to achieve certain objectives. Here, let us remind ourselves the difference between effectiveness and efficiency. Being effective is being able to do a certain job. Let us say the job is making a dining set. Being efficient is being able to do the same job but in the most economic way. This economic way can be translated as the least cost of material, money, time, and energy. The ultimate efficiency in this example is not only to secure the minimum cost but also to deliver the best quality. Leadership is the quality and capacity to make strategic decisions, oversee operations, and bring about the needed changes. It is to carry on both directing and controlling. Here is a brief description for each of these five fundamental managerial functions.

15.1 Planning

Planning is a systematic process that involves anticipating future events, analyzing their impact on the business performance, and designing the appropriate response to counteract that impact. It is a stochastic process in nature which includes objectives, goals, and strategies. It is, therefore, a process that is built based on forecasting a series of events and assessing their significance. That is why it depends on continuous inputs of new information to count for the dynamic reality and its changes. Let us distinguish among the basic concepts of planning and set their right order.

Concepts of Planning

Objective: An objective is a well-defined and normally feasible purpose to be pursued. It usually implies a short or intermediate term.
Goal: A goal is a measurable objective to be achieved in a certain manner and specified way. So, measurability is added here to the feasibility of an objective. Goals imply a longer term.
Plan: A plan is a comprehensive layout of a set of objectives and goals to be achieved in a certain time frame, and known resources. A plan usually requires a long term for implementation.
Strategy: A strategy is a high level plan to achieve a certain number of objectives, goals, and subgoals, especially under conditions of uncertainty and inadequate resources. It is to achieve and maintain a reasonably advantageous position over the odds.
Policy: A policy is a course of principles and rules that would form a general guideline for the firm's decision-making process in all aspects of business. According to Walker and Petty (1986), every small business should draw clear financial policies in determining
1. – volume of fixed capital;
2. – sources of funds;
3. – assets mix;
4. – debt–equity mix;
5. – debt mix;
6. – income distribution;
7. – credit and collection;
8. – investment in account receivable, cash, and inventories.
Procedures: This is where the policies are translated into action based on a set of instructions to do things, and protocols to govern the manners of doing.

A plan can be either strategic or tactical (functional). A strategic plan is concerned with formulating actions based on a vision for the future. It would allocate resources to serve the company's priorities and affirm where the company should be in a foreseeable future that extends beyond a year. The most common time horizon for strategic planning is 5 years and it could be connected to an overall vision that would go to 10, 15, 20, and even 25 years. On the other hand, tactical plans can support the strategic plan by being specific for a certain function. Suppose that a successful franchise owner wants to own 15 more branches in the next 10 years. All planned projects have to be in a specific order and priorities. Each has to have a certain allocation. Each has to have a certain allocation of resources: a capital plan, a personnel plan, an accounting plan, a marketing plan, and an operational plan. All of these individual plans are tactical or functional. They support each other and they work in accordance with the overall strategic plan.

The Planning Process

Practically, the planning process would consist of the following steps to achieve any measure of success:

– Explore all potential opportunities in the next 1–5 years whether they are to develop the product, expand business, change technology, or serve customers with new products or new ways.
– Formulate a focused set of objectives to give a specific direction to the firm.
– Project the condition of business. This is basically to know, for example, the nature of market within the planning horizon, how will the competition be? What will the revenues, costs, and profits be? How about the supplies, consumer demand, and many other determinants?
– Identify and evaluate the most plausible course of action and select the best course to be pursued. The best here is the one with the highest expected payoff.
– Draw up a support plan to carry out the selected course of action. Such a plan can, for example, be a plan to provide the needed capital, or to increase the number of personnel, or expand the inventory, and so on.
– Finally, work out a reasonable budget to implement the plan.

It would be important here for the planner to remember that before setting a budget for any type of operational planning, policies and procedures have to be recognized. Policies refer to the firm's general guideline for managerial decisions and supervisory actions, while procedures are the systematic instructions for the plan implementation.

15.2 Organizing

Organizing is another managerial function by which the firm can develop an organizational structure or a hierarchy of functions to facilitate performance, minimize waste, and deliver an efficient way to implement the strategic and functional plans. The structure would basically determine what, when, where, how, and who executes any task in accordance with the company's vision and capabilities.

As the process of organizing comes down to assigning duties and coordinating the efforts of all employees in order to maximize the outcome in the plan implementation, it would become necessary to recognize the following factors.

Defining the Tasks

Although many small business managers and owners do not bother with writing up formal task definitions, it would be an essential step to be taken to help smooth out the process of organization. Sometimes verbal communication between the manager or supervisor and employees would do the job, especially for a very small number of employees with a limited number of tasks. As the firm grows in size and complication, it would become imperative to keep track of who is doing what and how, when, and for how long. A formal job description might be the way to track down all jobs.

Functional Departmentalization

Functional departmentalization is to organize the implementing staff into a number of departments and groups to facilitate the business performance and classify its functions into various sorts. The classic functional departmentalization is the structure that contains departments for production, finance, marketing, accounting, and the like. Another example of departmentalization is the structure by product line, which is common in the retail business such as the typical structure for the department stores that contain electronics, home products, sports hardware, men and women's wear, children, and so on. The best advantage of departmentalization is the specialization that would increase both efficiency and accountability.

Range of Control

Range of control is about organizing employees according to the firm's structure of supervision that would determine how many employees would fall under what supervisor. In a very small business, all employees, who are a few, usually fall under the supervision and control of one manager or owner who can also be an owner/manager/supervisor at the same time. As the company grows in size and function, a need would arise for organizing people into groups, each of which would report to a different supervisor. The extent of control would be related negatively to the size and complication of the firm and its function. The larger the size and more complicated the functions, the less the control over the employees and their performance, and vice versa.

Delegation of Authority

Delegation of authority refers to the case of transferring the right to act and make decisions from the superior to the subordinate within the administration structure. The matter of how much authority is delegated to employees by the owner-manager depends on many factors such as:

Nature and personality of the owner-manager or the person in charge. Some people are willing and able to distribute some of their responsibilities to others and some are not. Such a difference could be either the way these people are in their good intention, or it could be a matter of their trust in others.
Type of work. If the task is complicated, sensitive, or risky, delegation of authority to others becomes harder to do and probably not wise in certain cases. However, if work is simple and safe, there would be no point for an owner-manager to waste his time worrying about performing every part of it. Granting others who are qualified employees the right to do specific jobs would contribute to increasing the efficiency of the business performance in general.
The sheer size of structure, and the diversification of business tasks. The larger the company, the more the need for the owner-manager to delegate more authority to those subordinates who can efficiently exercise the authority, bear the responsibility, and do the job correctly.
Cost of the job and the level of risk involved. This is another factor that is related negatively to how much delegation of authority is being exercised in business. Naturally, the costlier and riskier the job, the less the delegation, and more the concentration of decision at the top.
Social and Cultural Norm. In some societies and cultures central control and concentration of power is expected and maybe desired, and in other societies and cultures, it would not be acceptable. Rather, it might be expected to share in the making of decisions, and to bear the collective responsibilities. These social and cultural norms would be directly reflected on the way business is run. This is the way we are witnessing in our world a wider delegation of authority is more acceptable in open democratic cultures, and a tight control is expected in authoritative cultures.

Types of Organizational Structures

Here we refer only to the three most common types of organizational structures.

The informal organization can exist only for small businesses and those that are most likely to be local or family-owned and managed. No formal structure is followed other than what the owner-manager exercises based on his experience and his spontaneity at certain moments. Often, there would be some individuals who are trusted to perform any job or to lead as well as to exercise their judgment on other aspects of the business and its employees, as it may sound. This type may not necessarily be inefficient. Sometimes, and for certain settings, and with specific personalities, this structure can be quite successful.
The formal organization, which can be either line organization or pyramid organization.
1. Line Organization is a vertical pattern of communication in which each employee would report to one supervisor. The decision-making is linear and starting at the top of the line to create a chain of command. This structure would most likely be within the very small businesses. Otherwise, it would not be practical to hold such a structure in a large firm.
2. Pyramid Organization is the most common structure for medium size firms and large corporations. It is a pattern of communication that starts from the top and goes down to a wider and wider base. Those bases would most often represent various departments and sections which also follow the same pyramid structure within their own. The delegation of power and authority can work easily in this type of organization, and accountability can be better tracked down.

15.3 Staffing

Staffing is an integrative function to organizing. A staffing plan is solely concerned with “who” would implement the other plans and their multitude of tasks. It would start with detailing any task requirement and finding the appropriate person with the right qualifications to do it. Practically, this plan is about recruiting, interviewing, hiring, training, promotion, and firing. It would also include the issues of compensation and employee benefits such as health care, safety, and retirement. Those are human resources issues, which will be discussed fully later on in the management of human resources chapter.

15.4 Directing

Directing is the most distinct responsibility of leadership. It is to provide clear directions to all of those involved in the planning and implementation of business work toward accomplishing the ultimate mission of the firm. Leaders have to be up to the task of setting the rules and showing the example. They should prove that they first go by the golden rule before expecting or demanding from others to uphold the high standards.

Since the owner-manager would not only give directions but also needs to have some feedback from his subordinates, directing can actually be considered a form of communication in addition to being a leadership aspect. Communication can have some problems that may cause its breakdown sometimes. Examples of these problems would be people's perceptions, assumptions, and use of words. In this respect, we recognize that an important message is sometimes needed to be communicated between a superior and subordinates, and for such communication to be effective, the following hints are recommended:

– The message should be delivered by the superior directly and as clearly as possible, including the communication of its degree of urgency, the willingness to receive feedbacks, as well as how, when, and where the feedback should be delivered.
– The subordinates should fully and carefully listen as the message is being delivered.
– The messenger should check if the message has reached its target. In other words, if it has been understood the way it should be. This sometimes would literally need the messenger to ask the audience to recite what has just been delivered. This is an opportunity to explore the extent of misunderstanding and the differences in perception.
– The messenger must correct any misunderstanding and make sure there is no confusion about any part of that message. The messenger must also request an acceptance and agreement to the whole message and declare the need for the subordinates to abide by it and conform to all of its requirements.
– The messenger finally must explain the consequences of not obeying the message and not working according to its requirements. The messenger should also reiterate the willingness to listen to any disagreement.
– After the message has been fully understood, the subordinates should be given two choices. Only one of them shall be taken at will and in good conscience. They either fully accept the message and faithfully confirm it, or reject it and bear the consequences. There should be no compromise as to put one foot on acceptance and the other on not conforming or jeopardizing the execution of the message.

Leadership and Leaders

Leadership, in its essence, is all about the influence that leaders have on their subordinates in the direction to achieve the firm's goals, and follow its policies. Although there are many characteristics for leaders, they are truly defined by the extent of authority they exercise, and how much freedom and tolerance they are willing to allow for their subordinates within the context of working toward the firm's mission. In this sense, three major types of leaders can be identified.

The Laissez-Faire Leader

Laissez-faire Leader is the leader who would allow the maximum level of freedom to his subordinates. He or she would not get involved in the affairs of employees as they do their job according to a general common understanding and recognized protocol. This can happen on two contradicting possibilities on the leader's part: it is either a result of weakness and incompetency, or a product of high level intelligence, competence, and superior confidence. Therefore, this type can be either a complete failure or a complete success. The type of firm and nature of work would also play a major role in the failure or success of leadership here. For example, it has been observed that this type of leaders can be very successful with highly skilled, motivated, and creative type of employees, such as artists and scientists, who are often self-reliant, driven, and responsible enough not to need any direction and pushing. At the same time, they are the type of employees who very highly value their own independence, and adore those who appreciate and respect their independence.

The Democratic Leader

A democratic leader is the one who can balance between his authority and the freedom and flexibility of his subordinates, as they make decisions and deal with problems. In other words, this leader would delegate power to his main subordinates and let them work the way they see fit, but in the same time he can follow up, and stays close and reserves the right to make the final decision, especially on strategic matters. It is the case of controlled freedom as opposed to loose freedom. Controlled freedom requires both sides to understand it and appreciate it. Upon understanding and appreciating the value of this type of leadership, firms that apply it correctly would most likely become very successful.

The Authoritarian Leader

An authoritarian Leader usually separates between work and people who do the work focusing more on work and the manner it is done, especially its timing and specifications. The big drawback of this style of leadership is that these required work manners and specifications are most likely set according to the leader's own views and perspectives, with no feedback or suggestions from others. Authoritarian leaders know and want their own way of doing things, and would not accept any other ways. This type of leadership would either end up as a total failure or a total success. It depends on the conditions in which it would be applied. In times of crises and chaos, authoritarian leadership might be the only way to bring law and order. In those difficult circumstances, fairness, and freedom can be sacrificed for other values that are deemed to be more urgent.

Now, we know that the authoritarian leadership is characterized by very high focus on work, and very low focus on people who do the work, which takes us to a relevant way of categorizing leaders. It is based on the dynamics of work and people in their perspectives. We can classify leaders according to how they distribute their concentration between their employees and the work required from those employees. Figure 15.1 shows four types of leadership.

Cell No. 1 (LE - LW): Low concentration on both employees and work.
Cell No. 2 (HE - LW): High concentration on employees but low concentration on work.
Cell No. 3 (LE - HW): Low concentration on employees but high concentration on work.
Cell No. 4 (HE - HW): High concentration on both employees and work.

images — **Figure 15.1** Types of Leadership

15.5 Controlling

Controlling is the complementary function to Directing among the responsibilities of business leaders. It is all about coordinating the following dynamics:

– Designing and establishing a certain comprehensive standard of performance.
– Continuously comparing and assessing the actual performance against the established standard.
– Devising corrective procedures to bring the actual performance up to the established standard.

If it turns out that the predetermined standard cannot be implemented, there must be a thorough examination and analysis to find out the reasons. Based on the finding, a new modified standard may be developed to reflect the realities more accurately. This may call for a replanning to bring about sure success in the light of the latest failure. The newly achieved success may help establish a better and more applicable standard.

The best example of how the control system works is the franchise operations. Franchise firms usually have a manual that spells out the franchise standard in every aspect of the business operations. There are also inspectors to monitor how the actual performance matches the standards in every branch of the franchise. They would also implement certain corrective actions in case the actual performance lags behind the expected performance according to the recognized standards.

The control dynamics can also find itself in good application in cases of determining the budget, the break-even point, and in what is called the best practices. Best practices refer to the method by which a firm would borrow the processes, tools, and techniques of other firms that have been successful.

15.6 Business Strategies

A business strategy is often drawn in a competitive environment and most likely requires substantial commitment to the company's creativity and resources. The following three business strategies have been commonly practiced in the real world of business.

Product Differentiation

In the face of fierce competition, a firm has to stand tall to secure its market share and keep attracting customers to its goods and services. Consumer loyalty can be gained and maintained if the company offers a unique product that other competitors are not offering or cannot offer. It has to be a character of competition other than the product price such as the quality or style of the product, or an added service like convenience or flexibility. The market is full of examples of unique characters that were introduced to a product or service for differentiation but soon was imitated by other competitors which would naturally write off the uniqueness and reduce its value. Think of some valuable features that some automakers introduced first and immediately became a bright point to attract customers such as the built-in children seats, multiple airbags, and folded back seats. Also, some examples from the department stores and grocery stores which offered the in-store bank services or ATM machines, or those that offered free babysitting and coffee lounge to their customers. Imitation by other competitors is the big threat to any differentiation, which means that the creativity march must continue in a never ending race. The challenge, of course, would remain to be striking the balance between keeping the introduction of new differentiation strategies and preventing the cost burden from transferring to customers.

Cost Minimization

By definition, every firm tries its best to cut down on its costs in order to increase its profit margin. However, cost minimization strategy is specifically about becoming the firm that can lower its cost more than any other competitor so that it can be recognized as the one that can consistently offer the lowest prices. This would require a clever and committed plan to explore where and how much the cuts in costs should be. It requires bringing about the highest efficiency in operation of the business from the location, facility, labor, inventory, transportation, marketing, to all other functions of the business that can bear a certain percentage of cost cutting. Discount stores offer the best example of being able to cut cost and transfer this advantage to consumers by offering the lowest prices. Aldi, the German chain in grocery retail, can be cited as a very successful example of being able to demonstrate what a firm's cost minimization strategy is all about.

Niche Creation

Niche creation strategy is first and foremost about recognizing the diversity of the market, and secondly, trying to find a special corner of the market to satisfy. It is a strategy for the business to focus on one aspect and make it a point of specialization in order to secure a guaranteed market share. The special focus could be on many things such as producing goods and services for children, the elderly, or men as segments of customers. The focus could also be on a specific character of a product or service such as salon products and services for the curly hair only. The product or service can also be season-related or region-related such as swimming suits or skiing equipment. It can also be a niche in furniture making using only mahogany wood, and so on and so forth.

The aforementioned strategies are only examples of so many business strategies that a firm can adopt to provide tangible value to consumers, and to achieve a reasonable margin of profit. A firm is said to have a competitive value if it succeeds in taking its own ideas and opportunities to a level in which it can compete and win over its rival businesses in capturing an adequate market share, and ultimately a good profit margin. Such a competitive advantage is especially true when the firm's product is seen by customers as better than the products by competitors. This would occur when the firm is able to gain a certain consumer loyalty. Figure 15.2 shows how each strategy would fit according to the market and the firm capacity to differentiate itself from competitors whether to produce a unique product or to maintain a low cost and ultimately offer a low price.

15.7 Summary

This chapter opened up the last part of the book entitled entrepreneurial management and control. It was to lay out the basic principles of the management process through going over the five fundamental functions: planning, organizing, staffing, directing, and controlling. An important point was made on dividing those functions between what falls under management and what falls under leadership. This allowed to clarify the two concepts and distinguish them from each other. As for planning, the chapter went over the different aspects and concepts of planning such as an objective, goal, plan, strategy, and policy. Also, the strategic and tactical plans were explained, and the planning process steps were outlined. Organizing function addressed job description, functional departmentalization, range of control, delegation of authority, and types of organizational structures. Staffing referred to the later chapter where all human resource management would be discussed. Directing covered some important hints of communication between a superior and subordinates, and types of leaders, along with an illustrating matrix that depicted different leaders as they are characterized by the way they treat work versus people who do the work. The last fundamental function was controlling, which covered the three major steps of establishing a general comprehensive standard, making sure it is to be followed. Finally, the chapter concluded with business strategies, where three major strategies were discussed: product differentiation, cost minimization, and niche creation. At the end, an illustrative matrix was introduced to show how a firm balances between those strategies.

Key Concepts

Management: Leadership Effectiveness Efficiency
Planning: Organizing Controlling Directing Staffing
Objective: Goal Plan Strategy Tactic Policy
Procedure: Functional departmentalization Delegation of authority
Formal organization: Informal organization Linear organization
Pyramid organization: Laissez-faire leader Democratic leader
Authoritarian leader: Product of differentiation Cost minimization
Niche creation

Discussion Questions

What is the difference between management and leadership, and what managerial functions would fall under each?
What is the difference between effectiveness and efficiency? Illustrate your definitions with some examples.
Put the following constructs in the right order after giving each a proper definition: plan, policy, goal objective, strategy, and procedure.
What are the systematic steps that should be taken for a proper planning process?
List and explain the important factors that should be considered in the organizing process.
List and briefly explain the types of organizational structure.
List and briefly explain the helpful hints that should be considered for the right communication state between a superior and subordinates?
What are the major types of leaders? List and briefly explain.
What would the function of control really entail? Explain briefly.
List and explain the major business strategies.