MIE CH5: Small Business, Entrepreneurship, and Franchising

franchise

A license to sell another's products or to use another's name in business, or both

Disadvantages of franchising

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

Advantages of franchising

Franchising allows a franchisee the opportunity to set up a small business relatively quickly, and because of its association with an established brand, a franchise outlet often reaches the break-even point faster than an independent business would. Franchisees commonly report the following advantages: Management training and support. Brand-name appeal. Standardized quality of goods and services. National and local advertising programs. Financial assistance. Proven products and business formats. Centralized buying power. Site selection and territorial protection. Greater chance for success

franchiser

The company that sells a franchise

franchisee

The purchaser of a franchise

entrepreneurship

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

downsize (right-size)

to reduce management layers, corporate staff, and work tasks in order to make the firm more flexible, resourceful, and innovative.

bartering

trading their own products for the goods and services offered by other businesses.

The Role of Small Business in the American Economy

vital to the American economy. 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 33 percent of the value of exported goods.6 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. Women own more than 9 million businesses nationwide, with great success in the professional services, retail, communication, and administrative services areas.

Advantages of Small Business Ownership

-Independence (leading reasons that entrepreneurs choose to go into business for themselves, being your own boss) -Costs (often require less money to start and maintain than do large ones) -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.) -Focus (can focus their efforts on a specific group of customers) -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)

Approaches to Starting a Small Business

-Starting from Scratch versus Buying an Existing Business (advantage of buying existing business is that it may already have established customer base) -Franchising

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. -The Service Corps of Retired Executives (SCORE) and the Active Corps of Executives (ACE) are volunteer agencies funded by the SBA to provide advice for owners of small firms. Both are staffed by experienced managers whose talents and knowledge the small firms could not ordinarily afford. SCORE has more than 11,000 volunteers at over 320 locations across the country and shares mentor expertise from more than 60 industries.45 The SBA also has organized Small Business Institutes (SBIs) on almost 500 university and college campuses in the United States. Seniors, graduate students, and faculty at each SBI provide onsite management counseling -small-business owner can obtain advice from other small-business owners, suppliers, and even customers. -Networking—building relationships and sharing information with colleagues—is vital for any businessperson, whether you work for a huge corporation or run your own small business. Incubators, or organizations created to accelerate the development and success of startup organizations, often provide network opportunities and potential capital to jumpstart a business.

Financial resources of small businesses

-equity financing (owner uses real personal assets rather than borrowing funds from outside sources to get started in a new business.) -debt financing (New businesses can borrow more as they become established. Banks are the main suppliers of external financing to small businesses. They can also look to family and friends as sources for long-term loans or other assets, such as computers or an automobile, that are exchanged for an ownership interest in a business)

Disadvantages of Small Business Ownership

-high stress level (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.) -high failure rate (Despite the importance of small businesses to our economy, there is no guarantee of success. Half of all businesses fail within the first five years.

Industries that attract small businesses

-retailing (Retailers acquire goods from producers or wholesalers and sell them to consumers ex.Main streets, 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. -wholesaling (Wholesalers provide both goods and services to producers and retailers; can assist their customers with almost every business function; supply products to industrial, retail, and institutional users for resale or for use in making other products. Wholesaling activities range from planning and negotiating for supplies, promoting, and distributing (warehousing and transporting) to providing management and merchandising assistance to clients -services (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. 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 beauticians, morticians, jewelers, doctors, and veterinarians—whose skills are not usually required by large firms. -manufacturing (Small businesses sometimes have an advantage over large firms because they can customize products to meet specific customer needs and wants) -technology (High technology is a broad term used to describe businesses that depend heavily on advanced scientific and engineering knowledge.)

entrepreneur

a person who risks his or her wealth, time, and effort to develop for profit an innovative product or way of doing something

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. allow companies to assess market potential, determine price and manufacturing requirements, identify optimal distribution channels, and refine product selection

line of credit

an agreement by which a financial institution promises to lend a business a predetermined sum on demand.

sharing economy

an economic model involving the sharing of underutilized resources.

Small Business Administration (SBA)

an independent agency of the federal government that offers managerial and financial assistance to small businesses.

small business

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

collateral

bank will often require the entrepreneur to put up collateral, a financial interest in the property or fixtures of the business, to guarantee payment of the debt.

microentrepreneurs

entrepreneurs who develop businesses w/ 5 or less employees

immigrants in workforce

growing number of immigrants living in the United States, who now represent over 17 percent, or 27.6 million, of the total U.S. workforce. The largest employer of legal immigrants is retail, followed by educational services and non-hospital health care services. This vast group provides still another greatly untapped market for small businesses. Retailers who specialize in ethnic products, and service providers who offer bi- or multilingual employees, will find a large amount of business potential in this market

intrapraneurs

individuals in large firms who take responsibility for the development of innovations within the organizations

social entrepreneurs

individuals who use entrepreneurship to address social problems.

nonstore retailing

involves selling products outside of a retail facility. There are two types of nonstore retailing: direct marketing—which uses the telephone, catalogs, and other media to give consumers an opportunity to place orders by mail, telephone, or the Internet—and direct selling. -wholesaling (Wholesalers provide both goods and services to producers and retailers; can assist their customers with almost every business function; upply products to industrial, retail, and institutional users for resale or for use in making other products. Wholesaling activities range from planning and negotiating for supplies, promoting, and distributing (warehousing and transporting) to providing management and merchandising assistance to clients -services

direct selling

involves the marketing of products to ultimate consumers through face-to-face sales presentations at home, in the workplace, and in party environments.

venture capitalists

persons or organizations that agree to provide some funds for a new business in exchange for an ownership interest or stock.

Reasons for business failure

poor business concept, the burdens imposed by government regulation, insufficient funds to withstand slow sales, and vulnerability to competition from larger companies. Three major causes of small-business failure deserve a close look: -undercapitalization (lack of funds to operate a business normally) -managerial inexperience or incompetence -inability to cope with growth.

mortage

small-business owner may have to provide personal property as collateral, such as his or her home, in which case the loan is called a mortgage

trade credit

suppliers allow the business to take possession of the needed goods and services and pay for them at a later date or in installments.