sbma01

Growing and Managing

a Small Business

An Entrepreneurial Perspective

Copyright © Houghton Mifflin Company. All rights reserved. 1 | 2

CHAPTER 1Entrepreneurship and Small Business


Learning Outcomes

• Discuss the roles of entrepreneurship and small business in the economy

• Describe the global opportunity for entrepreneurs

• Explain the entrepreneurial mindset and how entrepreneurs approach business ownership

• List the various types of entrepreneurs• Discuss what must be considered before

deciding to become a business owner


Chapter Outline

• Who are Entrepreneurs?• Entrepreneurial

Ventures and Small Business

• The Entrepreneurial Portrait

• Making the Decision to Own a Business


Who Are Entrepreneurs?

• People who start and/or operate a business• Individuals who discover market needs and launch

new firms to meet those needs• Risk-takers who provide an impetus for change,

innovation, and progress• Self-driven individuals who seek independence

and/or wealth• The driving force behind today’s technological

advances and economic growth• All active owner-managers (hands-on managers)


The Independent Entrepreneur

Source: John L. Hart FLP, and Creators Syndicate, Inc. Exhibit 1.1


Distinguishing Between Entrepreneurial Ventures and Small Businesses

Small Business Objectives:

• Stay small• Stay in traditional line

of business/industry• “Copy Cat” strategy• Provide a job/lifestyle

for themselves• Modest, but stable,

income• Little industry impact

Entrepreneurial Venture Objectives:

• Growth oriented• Focus on doing

something different• Innovative strategy• Create value & wealth• Harvest wealth after

operation is successful• Impact the industry


What is a “small” business?

• The Small Business Administration (SBA)– Independently owned and operated– Not dominant in its field of operation– < 500 employees

• The Organization for Economic Cooperation and Development (OECD) and the U.S. Chamber of Commerce – Any firm employing fewer than 100 people

• White House Conference on Small Business – < 500 employees– <$20 million in annual sales


How we will define “smallness”

• Fewer than 100 employees

• Business operations limited to a local geographic area or region

• Business is small relative to larger competitors…not dominant in the industry

• Financed by just one person or a small group


Number of U.S. Firms by Size

[insert Table 1.1]


Size of U.S. Firms

2002 U.S. CENSUS REPORT

• FIRMS WITH N0 (0) EMPLOYEES 703,837 12.4 %

• FIRMS WITH 1 – 99 EMPLOYEES 4,851,26685.8 %

• FIRMS WITH 100 – 499 EMPLOYEES 85,304

1.5 %

• FIRMS WITH > 500 EMPLOYEES 17,367

0.3 %


The Contributions of Small Business

Small Businesses:

– Represent more than 99.7 percent of all employers.

– Employ more than half of all private-sector employees.

– Pay 44.5 percent of total U.S. private payrolls.

– Generate 60 to 80 percent of net new jobs annually.

– Produce 13 to 14 times more patents per employee than do large patenting firms.


Categories of Small Business


Attractive Small Business vs a Gazelle

• While small businesses comprise the largest proportion of businesses globally, it is those small business owners with intentions to grow that actually provide the majority of net new jobs to the economy.

• A Gazelle is a firm with at least $100,000 in revenues that grows at a rate of 20% a year for four years. (n ~ 350,000)

• An Attractive Small Business is a firm that is highly profitable, but may or may not exhibit much growth


Small Businesses, Growth, and Profits

• High-Potential Venture (Gazelle)– A small firm that has excellent prospects for growth and

expansion

• Attractive Small Firm– A small firm that provides substantial profits to its owner

• Lifestyle Business– A business that will permit the owner to maintain a desired

pattern of living

• Microbusiness– A small firm that generates minimal profits for its owner

• “Hobby” or Casual Business– A small firm that really isn’t profitable…usually generates

losses…IRS won’t allow deductions for “hobby” losses


Small Business by Industry

[insert Figure 1.2]


Major Types of Small Businesses SCHWAB

CONCENTRATED• Agriculture• Construction• Real Estate• Retailing• Services• Wholesaling

SIGNIFICANT• Manufacturing• Mining• Transportation


Types of Small “Service” Businesses

• Health services (Physicians, nursing facilities, at-home care, etc.)

• Business services (advertising, programming, personnel, etc.)

• Professional services (engineering, accounting, architecture, consulting, etc)

• Personal services (janitorial, hair salons)• Membership organizations (non-profits, trade

associations, unions, etc)


Developing Competitive Advantages forSmall/Entrepreneurial Firms LONGENECKER

• Customer Focus– Attentive and responsive

to customer wishes (not bureaucratic).

• Quality Performance– Quality is not limited

to large firms.– Provide exceptional

service to the community. • Integrity and Responsibility

– A solid reputation builds loyal customers.

– Known by everyone in the community as fair/honest

• Innovation– Small firms are the

leading source of innovation.

• Special Niche– Providing uniquely

specialized services can be a powerful competitive advantage.


Success of Small BusinessesSCHWAB

Likely to Fail

• Bakeries• Car Washes• Infant Clothing Stores• Laundries• Machine Shops• Restaurants• Trucking Firms• Used Car Dealerships

2/3 Fail Within Five Years

Likely to Succeed

• Auto Tires & Accessories• Building Material Stores• Computer/Office Supplies &

Equipment• Engineering/Scientific

Equipment Mfrs• Funeral Homes &

Crematories• Liquor Stores• Seed & Garden Supply

Stores


Minimum Population Requirements to Support a Retail Store SCHWAB

GROCERIES 700

RESTAURANTS 1200

DRUG STORES 3500

HARDWARE 6000

SHOES 7000

FLORISTS 9500

APPLIANCES 10000

SPORTING GOODS 15000

STATIONERY 25000

HOBBY/TOY 30000

DEPARTMENT STORE 40000

CAMERA/PHOTO SUPPLY 50000


Greatest Small Business Operating Challenges(our textbook survey…as reported, in order of importance) ALLEN

• Property Taxes (real, personal, or inventory)

• Cash Flow• State Taxes on

Business Revenues• Unreasonable

Government Regulations

• Electricity Costs (rates)

• Cost of Health Insurance

• Cost and Availability of Liability Insurance

• Workers’ Compensation

• Cost of Natural Gas, Propane, Gasoline, Diesel, Fuel Oil

• State & Federal Taxes on Business Income


When a Small Business Ceases Operations

Discontinuances

Firms that cease operations with no outstanding debts

Profitable, or break-even operations ...no losses incurred

Failures

Firms that go out of business or reorganize, resulting in losses to creditors

Assets have eroded or disappeared…significant losses and/or bankruptcy


Interesting facts about Small Business failures and closures ALLEN

550,000 small businesses closed in 2000

The business failure rate for one-person businesses = 38.2 %

If the firm survives for two years, the chance of success starts to go up for each additional year

Many of the failures are “hobby” or casual businesses

88.7 % of business failures are due to management mistakes About 1/3 of closed businesses were successful at closure


Small Business Risks

ALLEN

Overestimating the market – CONDUCT MARKET RESEARCH ON CUSTOMERS

Environmental uncertainty

– DEVELOP A PLAN “B” IN CASE THE FORECAST IS INCORRECT

No salary for the owner

– HAVE ADEQUATE SAVINGS TO DRAW ON FOR A YEAR OR TWO

Loss of investment capital (BORROWED FROM RELATIVES?)– ONLY TAKE MONEY FROM PEOPLE WHO CAN AFFORD TO LOSE IT

Long hours and high stress (60-80 HRS/WK) – EXPECT LONG HOURS AND DEVELOP STRESS-REDUCING ACTIVITIES

Disillusionment – STICK TO YOUR PLAN AND BE PATIENT


Additional Worries for Small BusinessesSCHWAB

ADEQUATE CAPITAL -- FINANCING ISN’T ENOUGH, WE NEED MORE $$$$

ECONOMIC CONDITIONS AND CYCLES -- CAN WE SURVIVE???

EXPERIENCE (More is needed) -- IN THE INDUSTRY AND IN MANAGEMENT

GOVERNMENT REGULATION -- HARDER FOR SMALL BUSINESSES TO COMPLY

GROWTH/MAINTAINING THE MARKET -- KEEPING CUSTOMERS AND ATTRACTING NEW ONES

PERSONNEL-- FINDING AND KEEPING EXPERIENCED, RELIABLE WORKERS

PROFITS -- REINVESTED IN THE BUSINESS OR DRAWN BY THE OWNER?

STRUCTURAL EVOLUTION -- LOSS OF CONTROL AS THE BUSINESS GROWS

TECHNICAL ADVANCES -- HOW TO KEEP UP AND AVOID OBSOLESCENCE?


Factors that Improve the Likelihood of Business Survivability ALLEN

• If the business is an employer• If the business has >$50,000 starting capital• If the owner has a college degree• If the business is started for personal reasons • If the owner has previous experience owning

and operating a business• If the business has a management team• If the owner starts the business from home• If the owner has developed a business plan


10 Deadly Small Business MistakesMeir Liraz, President of BizMove

• Sticking to a single idea too long• Not having a results-driven marketing plan• Not knowing your customers• Ignoring your cash position (working capital)• Ignoring your employees (morale)• Confusing likelihood with reality• Not having a sales plan• Being a Lone Ranger (learn to delegate)• No Mastermind (get an advisory group or mentor)• Giving Up


The Entrepreneurial Portrait

• Entrepreneurs have been found to all have one fundamental characteristic, variously called: – “fire in the belly”– “intense desire”– “the burning gut”

• Or, in essence, passion Getty Images


Taking the Plunge

• Reluctant Entrepreneur– Becomes an entrepreneur to

escape an undesirable situation (severe hardship, loss of job, etc)

• Optimistic Entrepreneur– Believe they have the skills to be

successful on their own. Feels self-confident and secure. Seeks

fulfillment and satisfaction


Entrepreneurial Incentives

Exhibit 1.3


Benefits of Small Business Ownership

• Control of One’s Destiny

• Wealth Creation

• Fun While Working

• Doing Good While Doing Well


Reasons for Starting a New Business

RECENT SURVEY RESULTS• 29% TO CREATE SOMETHING NEW, OR TO DO/MAKE IT

BETTER• 24% TO HAVE MORE CONTROL OVER MY LIFE• 14% TO BE MY OWN BOSS• 14% TO MAKE MONEY• 10% TO PROVE I COULD DO IT• 08% FRUSTRATION IN A LARGE COMPANY• 02% OTHER

Source of Your New Business Idea– 37% In-depth understanding of industry/profession– 36% Market niche spotted– 7% Brainstorm– 4% Copied somebody else– 4% Hobby that grew– 11% Other


Characteristics ofSuccessful Entrepreneurs

• Good knowledge of the business and how the customer thinks

• Strong commitment to the business(tenacity)

• Strong internal locus of control (self-reliant)

• Moderate risk takers(financial, career, psychic risks)


Entrepreneurial Characteristics(Timmons and Spinelli)

• Commitment and determination– Tenacious, decisive, and

persistent in problem solving

• Leadership– Self-starters and team

builders who focus on honesty in their business relationships

• Opportunity obsession – Aware of market and

customer needs• Tolerance of risk, ambiguity,

and uncertainty– Risk takers, risk

minimizers, and uncertainty tolerators

• Creativity, self-reliance, and adaptability– Open-minded, flexible,

uncomfortable with the status quo, and quick learners

• Motivation to excel– Goal oriented and aware

of their weaknesses and strengths


Manifest Needs Theory Murray (38) McClelland (65)

ASSUMPTIONSTHERE IS NO NEED HIERARCHY...THEY CAN BE LEARNED, AND ONCE ACQUIRED, THESE NEEDS ARE NEVER COMPLETELY SATISFIED...PEOPLE REMAIN OBSESSED WITH EACH NEED

(N ACH) ACHIEVEMENTDESIRES TO REALLY EXCEL AT SOMETHING....SETS SERIOUS GOALS FOR HIMSELF/HERSELFASSUMES PERSONAL RESPONSIBILITY....WILLING TO TAKE RISKSDESIRES IMMEDIATE, CONCRETE FEEDBACK ON HOW S/HE IS DOINGFOCUSED ON (AND PREOCCUPIED WITH) TASKS & ACCOMPLISHMENTS

(N AFF) AFFILIATIONDESIRES APPROVAL AND REASSURANCE FROM OTHERSWANTS TO HAVE CONTACT WITH OTHERS AND BOND WITH THEMCONFORMS TO WISHES AND NORMS OF OTHERSCONCERNED WITH FEELINGS AND SOCIAL RELATIONSHIPS

(N AUT) AUTONOMYDESIRES TO BE HIS/HER OWN BOSSWANTS TO DO THINGS “THEIR WAY”DOESN’T REALLY WANT TO WORK WITH OTHER PEOPLE

(N DOM) DOMINANCE/POWER/INFLUENCE SENSITIVE TO PERCEIVE WHEN THINGS CAN BE DONE BETTER (...LOGICAL? ...MORE EFFICIENTLY?)HAS A STRONG SENSE OF ORDER WITHIN THE HIERARCHY OR SYSTEM IS GOOD AT ORGANIZING THINGS AND PEOPLEDESIRES TO INFLUENCE OTHERS...LIKES TO GIVE ADVICE AND GUIDANCE DESIRES TO BE IN-CONTROL OF THE SITUATION


Manifest Needs Theory Murray (38) McClelland (65)

MANIFEST NEEDS QUESTIONNAIRE (MNQ)

(N ACH) Need for Achievement (N AFF) Need for Affiliation(N AUT) Need for Autonomy (N DOM) Need for Dominance/Power

BE SURE TO REVERSE-SCORE ANY ITEM DESIGNATED WITH “R”

SCORE RANGE FOR EACH DIMENSION IS:

5 15 25LOW MIDPOINT HIGH


The “Locus of Control”

Locus of control refers to the degree to which people believe events in their lives are within their control—as opposed to being under the control of external forces.

Do you control your own destiny? ...or are you at the mercy of your environment?

Entrepreneurs typically have a high internal locus of control.

LOCUS OF CONTROL QUESTIONNAIRE

SCORING RANGE

0 5 10

External Mixed Internal

Locus Locus Locus


More Entrepreneurial Characteristics

• High Need for Achievement– Ambitious, likes to set own goals

• Internal Locus of Control– In control of own destiny, desire for independence

• Self-Confident– Decisive and methodical

• Self-Sacrificing and hard-working– High energy level

• Tolerant of Ambiguity and Uncertainty• Future-oriented• Good interpersonal skills• Technically knowledgeable


Characteristics of Successful Small Business Managers Meir Liraz - BizMove

• Drive– Initiative, Persistence, Responsibility

• Thinking Ability– Original, Creative, Critical, Analytical

• Competency in Human Relations– Emotional Stability, Consideration, Cooperation,

Tactfulness• Communication Skills

– Oral Comprehension and Expression, Writing Ability• Technical Knowledge

– Thorough Knowledge of the Product/Service, and Customer


Interesting Demographic Factors

First-born within your family?

Were your parents entrepreneurs?

Are you a child of an immigrant?

Was your father absent during a part of your childhood?

Eight of every ten are over 40 years old


Some Entrepreneurial Types

• The Home-based Entrepreneur– Works from home (34-36 million businesses)

• The Traditional Entrepreneur– Starts own business from scratch…original/unique ideas

• The Serial Entrepreneur– Builds a company, but doesn’t like running it

• The Corporate Venturer– Works within a large organization, develops new ventures,

doesn’t risk own money

• The Opportunistic Entrepreneur– Wants results FAST! Uses acquisitions/mergers or

franchising to get into business.


Varieties of Entrepreneurship

• Founder (“Pure” Entrepreneur)– A person who brings a new firm into existence

• Administrative Entrepreneur– An entrepreneur who oversees the operations of a

ongoing business (hired hand or 2nd generation)• Franchisee

– An entrepreneur whose power is limited by the contractual relationship with a franchising organization

• Entrepreneurial Team– Two or more people who work together as

entrepreneurs


Artisan Entrepreneurs

• Artisan Entrepreneur– A person with primarily technical skills and little

business knowledge who starts a business

• Characteristics– Technical training– Reluctance to delegate– Narrow view of strategy– Personal sales effort– Short planning horizon– Simple record keeping


Opportunistic Entrepreneurs

• Opportunistic Entrepreneur– A person with sophisticated managerial skills and less

technical knowledge who starts a business

• Characteristics– Broad-based education– Scientific approach to problems– Willing to delegate– Broad view of strategy– Diversified marketing approach– Longer planning horizon– Sophisticated accounting

and financial control


The Many Faces of Entrepreneurs

Women Business Ownership• Nearly half of all privately held

businesses in the U.S. are owned 50% or more by women

Minority Business Ownership• Fifteen percent of all U.S.

businesses are owned by ethnic minorities

Older Entrepreneurs• Persons over the age of 50 are

more likely to start their own businesses than their youthful counterpartsGetty Images


Making the Decision to Own Your Own Business

• Examine your reasons for opening a business

• Explore feelings about security and ambiguity

• Evaluate your lifestyle needs

Median earnings for a small business = $30,000/yr

How many times can you “afford to fail?”


Ask Yourself these Important Questions

Where do you stand on:• Using debt or having a highly leveraged business?• Unions and the use of union workers?• Hiring employees and your ability to manage them?• How your religious beliefs and values will affect your

business, your employees, and your customers?• Government regulation and paperwork requirements?• Dealing with people from other places & cultures?• Getting involved in the local community?• Your willingness to share ownership with an investor or

other persons/partners?• Working 60-80 hours a week and being away from home?


FINAGLE A BAGEL VIDEO

QUESTIONS• What entrepreneural characteristics do Alan and Laura exhibit?

Give examples of creativity, innovation, risk assumption, general management and performance intentions.

• Laura says many business can be expanded globally. Do you think this applies to Finagle a Bagel? Why or why not?

• What form of ownership would be most appropriate for Alan and Laura? Why?

• What is Finagle a Bagel’s competitive advantage?


End of Chapter 1

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