MGMT 3000 - Chapter 5

The major industry groups that include successful new ventures and small businesses are...

services, retailing, construction, financial and insurance, wholesaling, transportation, and manufacturing

4 Reasons for Business Failure

1. Managerial incompetence or inexperience 2. Neglect 3. Weak control systems 4. Insufficient capital

Management consultants

Management consultants are experts who charge fees to help managers solve problems.

Construction

Many construction firms are begun by skilled craftspeople who start out working for someone else and subsequently decide to work themselves.

Entrepreneurship

the process of planning, organizing, operating, and assuming the risk of a business venture

Finance and Insurance

These businesses either are affiliates of or sell products provided by larger national firms.

The contribution of small business can be measured in terms of its effects on key aspects of a economic system, including...

job creation, innovation, and importance to big business

Choosing an Industry

The more resources an industry requires, the harder it is to start a business and the less likely it is that the industry is dominated by small firms.

4 sources of Management Advice

- Advisory boards - Management consultants - The SBA - Networking

Entrepreneurship and International Management

Although many people associate international management with big business, many smaller companies are finding expansion and growth opportunities in foreign countries.

Innovation

History has shown that major innovations are as likely to come from small businesses (or individuals) as from big businesses.

More on first-mover advantages,

Large firms discover niches within existing markets or new markets at just about the same time as small entrepreneurial firms but are not able to move as quickly as small companies to take advantage of these opportunities.

Manufacturing

More than any other industry, manufacturing lends itself to big business. Because of the investment normally required to equipment, energy, and raw materials, a good deal of money is usually needed to start a manufacturing business.

More on venture capital companies,

Most of these firms do not lend money: They invest it, supplying capital in return for stock.

Services

Primarily because they require fewer resources, service businesses are the fastest-growing segment of small-business enterprise.

Economy of Scale

Research has shown that manufacturing costs often fall as the number of units produced by an organization increases. When technology in an industry changes, it often shifts the economies-of-scale curve, thereby creating opportunities for smaller organizations.

Advisory Boards

Some small businesses create boards to provide advice and assistance.

Venture capital companies

a group of small investors seeking to make profits on companies with rapid growth potential

Niche

a segment of a market that is not currently being exploited

First-mover advantage

any advantage that comes to a firm because it exploits an opportunity before any other firm

Entrepreneur

someone who engages in an entrepreneurship

Advantages of Starting from Scratch

- A new business does not suffer the ill effects of a prior owner's errors. - The start-up owner is also free to choose lenders, equipment, inventories, locations, suppliers, and workers, unbound by a predecessor's commitments and policies.

The distinctive competencies of small businesses usually fall into three areas...

- Ability to identify new niches in established markets - Ability to identify new markets - Ability to move quickly to take advantage of new opportunities

Identifying new markets can happen in two ways...

- An entrepreneur can transfer a product or service that is well established in one geographic market to a second market. - Entrepreneurs can sometimes create entire industries.

The three strategic challenges facing small firms, in turn, are...

- Choosing an industry in which to compete - Emphasizing Distinctive Competencies - Writing a Business Plan

Advantages of Franchises

- Franchisers benefit from the ability to grow rapidly by using the investment money provided by franchisees. - For the franchisee, the arrangement combines the incentive of owning a business with the advantage of access to big-business management skills.

Disadvantages of Franchises

- Large start-up costs - Franchisees many have continued obligations to contribute percentages of sales to the parent corporation. - The small business-owner sacrifices some independence. - Franchisees cannot create an individual identity in their community. - Many franchise agreements are difficult to terminate. - Although franchises minimize risk, they do not guarantee success.

Three ways a new business owner can get necessary information...

- The best way to gain knowledge about a market is to work in it before going into business in it. - A quick scan of the Yellow Pages or an Internet search will reveal many potential competitors, as will advertisements in trade journals. - Studying magazines, books, and websites aimed specifically at small business can be of help, as can hiring professionals to survey the market for you.

Starting the New Business

- The first step in starting a new business is the individual's commitment to becoming a business owner. Next, comes choosing a product and making sure that the choice fits their own skills and interests. - Then, entrepreneurs must decide whether to buy an existing business or to start from scratch.

4 Reasons for Business Success

1. Combination of hard work, drive, and dedication 2. Careful analysis of market conditions 3. Managerial competence 4. Luck

4 Trends in Small-Business Start-Ups

1. Emergence of E-commerce 2. Crossovers from Big Business 3. Opportunities for Minorities and Women 4. Better Survival Rates

Business Plan - 3 questions

1. What are the entrepreneur's goals and objectives? 2. What strategies will the entrepreneur use to obtain these goals and objectives? 3. How will the entrepreneur implement these strategies? *Business plans should also account for the sequential nature of much strategic decision making in small businesses. *Another important component of the overall business plan is financial planning, which translates all other activities into dollars.

SBA - Management Assistance

4 Management-Counseling programs: 1. Service Corps of Retired Executives (SCORE) - Under this program, the SBA matches the expert to the need. 2. Active Corps of Executives (ACE) - This program is designed to help small businesses that can't afford consultants. 3. Small Business Institute (SBI) - Under the guidance of seasoned professors of business administration, students seeking advanced degrees work closely with small-business owners to help solve specific problems. 4. Small Business Development Center (SBDC) - This program is designed to consolidate information from various disciplines and institutions, then make such knowledge available to new and existing small businesses.

Small business

A business that is privately owned by one individual or a small group of individuals and has sales and assets that are not large enough to influence its environment

Franchising agreements

A contract between an entrepreneur (the franchisee) and a parent company (the franchiser); the entrepreneur pays the parent company for the use of its trademarks, products, formulas, and business plans

Business plan

A document that summarizes the business strategy and structure

Established market

A market in which several large firms compete according to relatively well-defined criteria

Retailing

A retail business sells directly to consumers products manufactured by other firms. People who start small businesses favor specialty shops, which let them focus limited resources on narrow market segments.

Wholesaling

A wholesale business buys products from manufacturers or other producers and then sells them to retailers. Wholesalers usually buy goods in bulk and store them in quantity at locations that are convenient for retailers.

Financing the New Business

Among the more common sources for funding are family and friends, personal savings, banks and similar lending institutions, investors, and government agencies. Lending institutions are more likely to help finance the purchase of an existing business than a new business because the risks are better understood. Individuals starting up new businesses, on the other hand, are more likely to have to rely on their personal resources.

More on lenders,

Banks and private investors usually want to see formal business plans - detailed outlines of proposed businesses and markets, owners' backgrounds, and other sources of funding.

Importance to Big Business

Most of the products made by big manufacturers are sold to consumers by small businesses. Small businesses provide big businesses with many of the services, supplies, and raw materials they need.

Small-Business Investment Companies (SBICs)

SBICs are investor-owned companies that borrow money from the SBA and, in turn, loan it to small business with high growth potential. -Minority Enterprise Small-Business Investment Companies (MESBICs) specialize in financing businesses owned by minorities.

Job Creation

Small businesses are responsible for a large percentage of job creation in the United States. Entrepreneurial business success, more than business size, accounts for most new job creation. All businesses create and eliminate jobs.

Transportation

Such firms include local taxi and limousine companies, charter airplane services, and tour operators. In addition, in many smaller markets, bus companies and regional airlines subcontract local equipment maintenance to small businesses.

SBA Financial Programs

The SBA provides assistance for small businesses unable to get private financing at reasonable terms. Under the local development companies (LDCs) program, the SBA works with a corporation founded by local citizens who want to boost the local economy.

Networking

meeting regularly with one another to discuss common problems and opportunities and perhaps, most importantly, to pool resources