Chap. 5 Small Bus, Entrep, Franchising

High Technology

is a broad term used to describe businesses that depend heavily on advanced scientific and engineering knowledge.

High Stress Level

A small business is likely to provide a living for its owner, but not much more (although there are exceptions as some examples in this chapter have shown). There are ongoing worries about competition, employee problems, new equipment, expanding inventory, rent increases, or changing market demand. In addition to other stresses, small-business owners tend to be victims of physical and psychological stress. The small-business person is often the owner, manager, sales force, shipping and receiving clerk, bookkeeper, and custodian. Having to multitask can result in long hours for most small-business owners. Many creative persons fail, not because of their business concepts, but rather because of difficulties in managing their business.

Technological and Economic Trends

Advances in technology have opened up many new markets to small businesses. Undoubtedly, the Internet will continue to provide new opportunities for small businesses. Imgur is a photo-sharing hub filled with trivial and humorous photos. It has become popular as a meme site. The company generates income by posting display advertisements from movie studios and videogame publishers. Users do not have to register to show approval or disapproval of a photo. The company's users upload 1.5 million images every day and is becoming one of the most traveled to sites in the world.35 Technology has also enabled the substantial growth of entrepreneurs working out of their houses, known as home-based businesses. Many of today's largest businesses started from out of their homes, including Mary Kay, Ford, and Apple.

Starting from Scratch versus Buying an Existing Business

Although entrepreneurs often start new small businesses from scratch much the way we have discussed in this section, they may elect instead to buy an existing business. This has the advantage of providing a built-in network of customers, suppliers, and distributors and reducing some of the guesswork inherent in starting a new business from the ground up. However, an entrepreneur who buys an existing business also takes on any problems the business already has.

Demographic Trends

America's baby boom started in 1946 and ended in 1964. Many boomers are over 50, and in the next few years, millions more will pass that mark. The baby boomer generation represents 24 percent of Americans. This segment of the population is wealthy, but many small businesses do not actively pursue it. Some exceptions, however, include Gold Violin, which sells designer canes and other products online and through a catalog, and LifeSpring Nutrition, which delivers nutritional meals and snacks directly to the customer. Industries such as travel, financial planning, and health care will continue to grow as boomers age. Many experts believe that the boomer demographic is the market of the future. Another market with huge potential for small business is the echo boomers, also called millennials or Generation Y. Millennials number around 75 million and possess a number of unique characteristics. Born between the early 1980s and the early 2000s, this cohort is not solely concerned about money. Those who fall into this group are also concerned with advancement, recognition, and improved capabilities. They need direct, timely feedback and frequent encouragement and recognition. Millennials do well when training sessions combine entertainment with learning. Working remotely is more acceptable to this group than previous generations, and virtual communication may become as important as face-to-face meetings

Costs

As already mentioned, small businesses often require less money to start and maintain than do large ones. Obviously, a firm with just 25 people in a small factory spends less money on wages and salaries, rent, utilities, and other expenses than does a firm employing tens of thousands of people in several large facilities. Rather than maintain the expense of keeping separate departments for accounting, advertising, and legal counseling, small businesses often hire other firms (sometimes small businesses themselves) to supply these services as they are needed. Additionally, small-business owners can sometimes rely on friends and family members to help them save money by volunteering to work on a difficult project.

However, the franchisee must sacrifice some freedom to the franchiser. Some shortcomings experienced by franchisees include:

Franchise fees and profit sharing with the franchiser. Strict adherence to standardized operations. Restrictions on purchasing. Limited product line. Possible market saturation. Less freedom in business decisions

Independence

Independence is probably one of the leading reasons that entrepreneurs choose to go into business for themselves. Being a small-business owner means being your own boss. Many people start their own businesses because they believe they will do better for themselves than they could do by remaining with their current employer or by changing jobs. They may feel stuck on the corporate ladder and that no business would take them seriously enough to fund their ideas. Sometimes people who venture forth to start their own small business are those who simply cannot work for someone else. Such people may say that they just do not fit the "corporate mold."

franchise

Many small business owners find entry into the business world through franchising. A license to sell another's products or to use another's name in business, or both

MAKING BIG BUSINESSES ACT "SMALL"

More and more firms are emulating small businesses in an effort to improve their own bottom line. Beginning in the 1980s and continuing through the present, the buzzword in business has been to downsize or right-size to reduce management layers, corporate staff, and work tasks in order to make the firm more flexible, resourceful, and innovative. Many well-known U.S. companies, including IBM, Ford, Apple, General Electric, Xerox, and 3M, have downsized to improve their competitiveness, as have German, British, and Japanese firms. Other firms have sought to make their businesses "smaller" by making their operating units function more like independent small businesses, each responsible for its profits, losses, and resources. Of course, some large corporations, such as Southwest Airlines, have acted like small businesses from their inception, with great success. Trying to capitalize on small-business success in introducing innovative new products, more and more companies are attempting to instill a spirit of entrepreneurship into even the largest firms. In major corporations, intrapreneurs, like entrepreneurs, take responsibility for, or "champion," the development of innovations of any kind within the larger organization. Often, they use company resources and time to develop a new product for the company.

The Role of Small Business in the American Economy

No matter how you define a small business, one fact is clear: They are vital to the American economy. As you can see in Table 5.2, more than 99 percent of all U.S. firms are classified as small businesses, and they employ about half of private workers. Small firms are also important as exporters, representing 98 percent of U.S. exporters of goods and contributing 31 percent of the value of exported goods.5 In addition, small businesses are largely responsible for fueling job creation and innovation. Small businesses also provide opportunities for minorities and women to succeed in business.

Retailing

Retailers acquire goods from producers or wholesalers and sell them to consumers. Main streets and shopping centers and malls are generally lined with independent music stores, sporting-goods stores, dry cleaners, boutiques, drugstores, restaurants, caterers, service stations, and hardware stores that sell directly to consumers. Retailing attracts entrepreneurs because gaining experience and exposure in retailing is relatively easy. Additionally, an entrepreneur opening a new retail store or establishing a website does not have to spend the large sums of money for the equipment and distribution systems that a manufacturing business requires. All that a new retailer needs is the ability to understand a market and provide a product that satisfies a need. However, it is important for entrepreneurs to anticipate the costs of opening a retail or wholesale business beforehand.

Debt Financing

Small businesses may obtain funding from their suppliers in the form of a trade credit—that is, suppliers allow the business to take possession of the needed goods and services and pay for them at a later date or in installments. Occasionally, small businesses engage in bartering—trading their own products for the goods and services offered by other businesses. For example, an accountant may offer accounting services to an office supply firm in exchange for office supplies and equipment.

Help for Small-Business Managers

The SBA offers many types of management assistance to small businesses, including counseling for firms in difficulty, consulting on improving operations, and training for owner/managers and their employees. Among its many programs, the SBA funds Small Business Development Centers (SBDCs). These are business clinics, usually located on college campuses, that provide counseling at no charge and training at only a nominal charge. SBDCs are often the SBA's principal means of providing direct management assistance.

STARTING A SMALL BUSINESS

a precise statement of the rationale for the business and a step-by-step explanation of how it will achieve its goals. The business plan should include an explanation of the business, an analysis of the competition, estimates of income and expenses, and other information. It should also establish a strategy for acquiring sufficient funds to keep the business going. Many financial institutions decide whether to loan a small business money based on its business plan. A good business plan should act as a guide and reference document—not a shackle that limits the business's flexibility and decision-making ability. The business plan must be revised periodically to ensure that the firm's goals and strategies adapt to changes in the environment. Business plans allow companies to assess market potential, determine price and manufacturing requirements, identify optimal distribution channels, and refine product selection.

business plan

a precise statement of the rationale for the business and a step-by-step explanation of how it will achieve its goals. The business plan should include an explanation of the business, an analysis of the competition, estimates of income and expenses, and other information. It should also establish a strategy for acquiring sufficient funds to keep the business going. Many financial institutions decide whether to loan a small business money based on its business plan. A good business plan should act as a guide and reference document—not a shackle that limits the business's flexibility and decision-making ability. The business plan must be revised periodically to ensure that the firm's goals and strategies adapt to changes in the environment. Business plans allow companies to assess market potential, determine price and manufacturing requirements, identify optimal distribution channels, and refine product selection.

Small Business Administration (SBA)

an independent agency of the federal government that offers managerial and financial assistance to small businesses. On its website, the SBA outlines the first steps in starting a small business and offers a wealth of information to current and potential small-business owners.

Persistent

Continuing in a certain action in spite of obstacles

Charismatic

Having the ability to inspire others behind a central vision

Risk-taker

Having the ability to pursue risky endeavors despite the possibility of failure

Managerial Inexperience or Incompetence

Poor management is the cause of many business failures. Just because an entrepreneur has a brilliant vision for a small business does not mean he or she has the knowledge or experience to manage a growing business effectively. A person who is good at creating great product ideas and marketing them may lack the skills and experience to make good management decisions in hiring, negotiating, finance, and control. Moreover, entrepreneurs may neglect those areas of management they know little about or find tedious, at the expense of the business's success.

Reputation

Reputation, or how a firm is perceived by its various stakeholders, is highly significant to an organization's success. Small firms, because of their capacity to focus on narrow niches, can develop enviable reputations for quality and service. A good example of a small business with a formidable reputation is W. Atlee Burpee and Co., which has the country's premier bulb and seed catalog. Burpee has an unqualified returns policy (complete satisfaction or your money back) that demonstrates a strong commitment to customer satisfaction.

Industries That Attract Small Business

Small businesses are found in nearly every industry, but retailing and wholesaling, services, manufacturing, and high technology are especially attractive to entrepreneurs. These fields are relatively easy to enter and require low initial financing. Small-business owners in these industries also find it easier to focus on specific groups of consumers; new firms in these industries initially suffer less from heavy competition than do established firms.

Focus

Small firms can focus their efforts on a precisely defined market niche—that is, a specific group of customers. Many large corporations must compete in the mass market or for large market segments. Smaller firms can develop products for particular groups of customers or to satisfy a need that other companies have not addressed. For example, Hampton Creek, based in San Francisco, focuses on using technology to produce sustainable protein products. The company developed a new type of egg substitute made from plant materials. This concept is likely to attract vegetarians and consumers concerned with sustainability, but founder and CEO Josh Tetrick has bigger plans. His concept is not to focus solely on a niche industry; he believes the solutions discovered at Hampton Creek will eventually help solve food shortages through alternatives that do not place a strain on the environment.21 By targeting small niches or product needs, businesses can sometimes avoid competition from larger firms, helping them grow into stronger companies.

franchiser

The company that sells a franchise

Equity Financing

The most important source of funds for any new business is the owner. Many owners include among their personal resources ownership of a home, the accumulated value in a life-insurance policy, or a savings account. A new business owner may sell or borrow against the value of such assets to obtain funds to operate a business. Additionally, the owner may bring useful personal assets—such as a computer, desks and other furniture, a car or truck—as part of his or her ownership interest in the firm. Such financing is referred to as equity financing because the owner uses real personal assets rather than borrowing funds from outside sources to get started in a new business. The owner can also provide working capital by reinvesting profits into the business or simply by not drawing a full salary.

franchisee

The purchaser of a franchise.

Services

The service sector includes businesses that do not actually produce tangible goods. Services include intangible products that involve a performance, inauguration, or any effort to provide something of value that cannot be physically possessed. Services can also be part of the wholesale market and involve any product that is intangible and therefore cannot be touched. The service sector accounts for 80 percent of U.S. jobs, excluding farmworkers. Real estate, insurance and personnel agencies, barbershops, banks, television and computer repair shops, copy centers, dry cleaners, and accounting firms are all service businesses. Services also attract individuals—such as hairstylists and barbers, morticians, jewelers, doctors, and veterinarians—whose skills are not usually required by large firms. Many of these service providers are retailers who provide their services to ultimate consumers. An example of a growing service sector is home sourcing, where individuals are involved in customer contact jobs such as call centers.

Intuitive

Using one's intuition to derive what's true without conscious reasoning

Flexibility

With small size comes the flexibility to adapt to changing market demands. Small businesses usually have only one layer of management—the owners. Decisions therefore can be made and executed quickly. In larger firms, decisions about even routine matters can take weeks because they must pass through multiple levels of management before action is authorized.

Social entrepreneurs

are individuals who use entrepreneurship to address social problems

Venture capitalists

are persons or organizations that agree to provide some funds for a new business in exchange for an ownership interest or stock. Venture capitalists hope to purchase the stock of a small business at a low price and then sell the stock for a profit after the business has grown successful. Although these forms of equity financing have helped many small businesses, they require that the small-business owner share the profits of the business—and sometimes control, as well—with the investors.

small business

as any independently owned and operated business that is not dominant in its competitive area and does not employ more than 500 people.

Independence

is probably one of the leading reasons that entrepreneurs choose to go into business for themselves. Being a small-business owner means being your own boss. Many people start their own businesses because they believe they will do better for themselves than they could do by remaining with their current employer or by changing jobs.

undercapitalization

the lack of funds to operate a business normally. Too many entrepreneurs think that all they need is enough money to get started, that the business can survive on cash generated from sales soon thereafter.

Innovative

Being able to come up with new and creative ideas

Productive

Being able to produce large amounts of something during a specific time period

Resourceful

Understanding how to use and spend resources wisely

Entrepreneurship

is the process of creating and managing a business to achieve desired objectives