Small & Family Business Mgmt

small business as a process:

idea generation --> opportunity evaluation --> planning --> company formation --> growth

Perseverance:

- Ability to stick with activity even under high uncertainty - Learn from failures and make adjustments for better results (Successful entrepreneurs view failure as a process that involves scanning for useful information and interpreting it to inform future action)

Rich:

- Accept outside equity investment - Less ownership of the company - Tap into large resource• - Can expect smaller share of a larger pie

Discipline 1: Base retention

- Activities a company uses to raise the number of repeated customers and increase the profitability of each existing customer - Allows extracting more value from existing customers

Step 1 - Goal setting - Fourth decision: Selecting the target market

- After you select the industry, you need to consider the scale and scope of the market - Scale: Size of the target market (or customers) (Mass vs. niche) - Scope: Geography of the target market (or customers)(Local vs. global)

Tactics that entrepreneurs use to survive during bootstrapping:

- Cash cycle exploitation - Minimize investment - Joint utilization

Step 3 - Determining value - Benefits

- Characteristics of a product or service that the target customers would consider worthwhile - Value benefits: The nature of the product or service itself which brings value to customers, e.g., quality, style, service, technology, and personalization - Cost benefits: Keeping costs low for producing products and thus offering low prices for customers (e.g., through economies of scale)

Ethical dilemma:

- Conflict of interest (Taking your full-time employer's customers) - Aggrandizing (Giving false impression about the business to others)

Human resource management in small businesses: Compensation and benefits

- Consider how competitors are paying their employees - Consider whether you are compensating for an employee's skills and performance

Value creation:

- Customer's willingness-to-pay minus total production cost - Firms try to create economic value as much as possible - Economic value

Why is losing employees so bad?

- Delays to customer services - Loss of productivity - Cost of re-hiring

Time management:

- Delegation (Let other employees do your job) - Outsource (Useful for task outside of your expertise)

Value creation can be achieved through:

- Differentiation strategy: by maximizing economic value created - Low-cost strategy: by minimizing the cost

Step 1 - Goal setting -Third decision: Imitate or innovate

- Easier and more feasible for startups to imitate competitors (Low development cost, Low set up cost. Stakeholders are familiar with what you are doing, Don't need to educate customers) - First-mover disadvantage - Incremental innovation (Replace, hopefully improve, few key features of the competitor's business)

Stage III-D: Success-Disengagement

- Economic health and sufficient size with profits Positive cash flow - Organization: Somewhat functional, formal, and hierarchical - Major strategy: Maintaining profitability - Separation between owner and business begins - If adapt to environmental changes, the company can remain profitable or move on the growth stage

How can new businesses overcome liability of newness?

- Establish appropriateness - may maintain distinctiveness

Appropriateness:

- Established and large - Customers will find features that appear to be just like every other established successful organization "appropriate"

High income:

- Expect to earn more money from owning their own businesses - The wealthiest households are more likely to comprise entrepreneurs than employees (Over 80% of the top 1% wealthiest households are entrepreneurs) - But not every entrepreneur is making a lot of money! (The distribution of income wealth is highly skewed)

Due diligence is critical..

- Expenses and costs to start the franchise - Is the business model and the product a proven concept? - No legal protection if the franchisor go broke

Hiring Cons

- Extra cost incurs (expense, training, coordination, etc.) - Value added > Costs not always guaranteed

Pecking order theory:

- Firms have strong preferences regarding choice of financing - Entrepreneurs prefer self-financing first, then external debt, and as a last resort, external equity - Entrepreneurs control the majority stake in the firm and often prefer to retain that control

Franchising:

- Franchisor allows another company, franchisee, to be operated using its name and business procedure - An agreement that the franchisee has a legal right to: engage in the business of offering, selling, or distributing goods or services; engage in business using a marketing plan or system provided by the franchisor; use a brand name and commercial symbol of the franchisor; Franchisee requires to pay a fee

Crowdfunding:

- Funding a project by raising money from a large number of people - Raising capital - Testing the demand for the products - Promotional purpose

Stage III-G: Success-Growth

- Getting ready for growth (Company consolidation and resource accumulation) - Organization: Somewhat functional, formal, and hierarchical - Major strategy: Growth (Using cash + debt capacity, Need to make sure the basic business stays profitable so that it will not outrun its source of cash) - Strategic planning is extensive - Owner is more engaging than in the Success-Disengagement stage

Cash cycle exploitation:

- Goal is to maintain a positive cash flow - Cash flow is a key metric at startup - Delaying payments and/or minimizing account receivables

Different ways to address the challenges:

- Have a team of founders - Have previous experience - Produce a product or service for which there is a proven demand - Build trust in your story

Things to consider before starting your own business:

- High risk but high reward - Different ways to address the challenges - Consider being a hybrid (part-time) entrepreneur

Joint utilization:

- Involves working with other institutions - Sharing employees, equipment, office space, and utilizing trade credit - Partnering with customers in ways that encourage them to cover part or all of a product or services development costs up front

Why hybrid entrepreneurship?

- Lack of resources to start the business - Lack of enough industry experience and knowledge - Faddish business or industry - When the demand of the products or service is unproven

Stage V: Resource maturity

- Main concern: Control the financial gain and retaining flexibility - Organization (Highly divisional and formal, With experienced and competent staffs) - Separation in the owner and the company - Advantage in size, financial resources, and managerial talent - Often lack entrepreneurial spirit: (Lack of innovative decision making and the avoidance of risks, The market share can be taken over by the competitors that notice the environmental changes first)

Stage IV: Take-off

- Main concern: How to grow rapidly and how to finance the growth (Delegation, Cash) - Organization: Decentralized and divisional - Many companies in stage fail because... (Try to grow too fast, Run out of cash, Unable to delegate effectively) - Succession takes place either voluntarily or involuntarily

Stage I: Existence

- Main problem: Customer base and product delivery No formal system - Major strategy: Remain alive - Owner does everything (Owner = Company) - Many of them fail when the start-up capital runs out

How to retain employees longer

- Make your employees feel appreciated - Give ownership (or incentivize) of business to staff - Don't grow too fast

E-commerce sites:

- Selling products online either directly or through platforms (e.g., eBay and Amazon) (E-commerce platforms are helpful to test products' demand, Can use them both simultaneously due to complementarity) - Downside of using the platforms: (Competition from the platform owners, Platform owners (e.g., Amazon) sell products on their own and compete with the entrepreneur)

Bootstrapping:

- Startup entrepreneurs operate (often in creative ways) their firms with no outside financial assistance - Keeping one's day job to invest salary, utilizing home-equity, using credit cards; operating from home, working long hours, loans and investments from family and friends, etc. - No utilization of debt or equity

Hiring Pros

- More work can be done and increases productivity - More free time for owners

Home-based business:

- Most prevalent form of part-time entrepreneurship - Cheap and quick - Zoning laws: limit having a business at home (Gather information about the law in your local area, Ask for a special exception or a variance - How to create an effective working space - Potential growth of the business

Minimize investment:

- Need to rely on only the resources at hand - Frugality becomes very important - Leasing equipment, living in the office, understaffing, foregoing attorneys and accountants by using software, etc

Effective hiring methods for small businesses

- Networking - Internet recruiting e.g., Glassdoor.com - Employee referral

King:

- No outside equity investment - Maintaining control of the company - Resource constraints - Can expect larger share of pie

Hybrid entrepreneur:

- One who mixes their time in both self-employment and wage work - A good way to test the "entrepreneurial" waters - Individuals who are risk averse and have low self-evaluation are more likely to enter hybrid entrepreneurship - Experience of being a hybrid entrepreneur help becoming a successful full-time entrepreneur (Learning effect)

Outsourcing vs hiring:

- Outsourcing can be more effective if you are resource constrained or don't need full time employee - Virtual employee: Independent entrepreneur working on a contractual basis, Work remotely - Guidelines for outsourcing to virtual employees: Employees should be disciplined and self-motivated, Develop a system of task lists, Maintain communication through different medium

Determine your compensation philosophy

- Pay leader in the industry? - Base salary vs variable pay

Promotion & Prevention:

- Promotion: paying particular attention to maximizing gain - Prevention: paying particular attention to minimizing loss (A successful entrepreneur balances promotion and prevention in a given situation)

Why franchising?

- Proven business model - Standardized operating procedures - Promotion and brand identification

Informational websites:

- Provide information and resources about the business - Cheap and easy way to set up - Promotion is critical: Multichannel marketing, Using search engines / search engine optimization

Stage II: Survival

- Reaching this stage means that the business works - Main problem: Cash flow - Simple organization with minimal formal system - Limited number of employees and managers Major strategy: Survival and grow - Earning marginal returns on invested capital and time - Stay with marginal gains, go broke, or move on to the next stage

Why do entrepreneurs bootstrap?

- They have to! (External financiers deny to provide financial capital, in other words, entrepreneurs have no choice but to bootstrap) - Funding gap (Lack of funding options for entrepreneurs) - Restrictive financial markets for small private businesses (Arbitrary valuation, Negotiation process) - Information asymmetry - Perseverance may be an important quality for entrepreneurs to earn external financing

Challenges of being a hybrid entrepreneur:

- Time management - Ethical dilemma

Providing performance incentives:

- To motivate employees to make the company more successful - Profit sharing plans - Stock options

Deliver far better value

- To outcompete the incumbents, provide value substantially better - How can companies deliver far better value: Operational excellence, Superior product quality, Customer intimacy, - In order to create value in these three disciplines: Innovation is the only way to achieve gain greater market share

Personal development:

- To push oneself out of her comfort zone - Value opportunities to learn new knowledge and skill sets from facing challenges

On-the-job training

- Training delivered to employees while they perform their regular jobs - Think of training as an investment

Performance review:

- Typically once a year - Review employee's job satisfaction and overall performance - Identify employee's strengths and set her goals for the future

Perceived value:

- Utility that customers enjoy from the product or service - Customer's "willingness-to-pay" the monetary term of value

High risk but high reward:

- You can be your own boss - Can adopt the most up-to-date innovation - No traction no legitimacy - Lack of time and resources

Passion:

- an intense positive feeling the entrepreneur has toward the business - Increases the entrepreneur's commitment to the business and inspire key stakeholders

new firms need to keep in mind:

- don't have outsiders that are primary support - need to fight competitors - suffer from "liability of newness" (disability of being young & small)

Step 2 - Understanding industry

- in terms of how the market changes, profit potentials - A good analysis of industry will help you determine opportunities and appropriate strategies

Five behaviors that successful entrepreneurs display:

- passion - perseverance - promotion & Prevention - planning - professionalization

two definitions for entrepreneurship in this course:

- small family business - innovation driver

Four steps of strategic planning:

1. Goal setting 2. Understanding industry 3. Determining Value 4. Strategy Selection

Three key competencies for entrepreneurship:

1. Industry specific knowledge 2. Access to resources 3. Opportunity competencies

An entrepreneur needs four elements when starting a business:

1. boundary (in location & people's minds) 2. resources (money, product, knowledge) 3. intention (desire to start a business) 4. exchange (moving resources in exchange for money)

Human resource management in small businesses: Employee retention

Retaining employees is actually harder than hiring them

Full-time entrepreneur:

An owner-manager of an establishment as one's full-time job

Buy market share outright

Can simply buy the competitors and their customers

Discipline 2: Market share gain

Competition is inevitable: - Companies fight to win greater market share - Market share growth is about giving the competitors a base retention problem

Make the services sticky

Create complex relationships between products and services to that the switching costs become high

Tailor the offering

Customize the value criteria for individual customers

Planning:

Entrepreneurs developing long-range plans tend to performance the best

Step 4 - Strategy selection

Four generic strategies for business: cost leadership, differentiation, focused cost leadership, focused differentiation * Pivoting in strategy can also be necessary; Especially when entry wedges emerge

How can an individual pursue entrepreneurship?

Full-time entrepreneur vs. hybrid entrepreneur

Step 1 - Goal setting - Goal

General statement of what the company wants to achieve

Industry specific knowledge:

Good understanding of industry and market

Step 1 - Goal setting - Second decision: Idea

Idea about the product, service, industry

Information asymmetry:

Information gap between startup management and potential investors: - Startup managers have much better and more information about their companies than investors - Information gap creates information asymmetry - This makes it very difficult to judge the quality of such a business - Investors will invest in legitimate firms over new businesses

Access to resources:

Information, financing, physical facilities, etc. necessary to run the business

King-vs-Rich dilemma:

It is difficult to achieve both!

Opportunity competencies:

Knowledge necessary to identify and exploit the given environment

Compensation plan to award labor input is needed

Salary, bonuses, incentives, commissions, etc.

Professionalization:

Meet or exceed standard in the most aspects of the industry's standard

Bootstrapping is very common:

More than 75 percent of new businesses used bootstrapping

King-vs-Rich dilemma gives implication about external financing..

Need to make an assessment whether you and your company is going to be better off if you become a king or rich. When should you receive external financing/is it even necessary

Newly employed might not have all the necessary skills..

On-the-job training may be implemented

Step 2 - Understanding industry - Industry profit potentials

Porter's five forces analysis

Preempt customer defection

Predict and respond to defections quickly

Five Stages of Growth:

Stage 1: Existence Stage 2: Survival Stage 3: Success Stage 4: Take-Off Stage 5: Resource Maturity

Step 2 - Understanding industry - Industry dynamics

The changes in competitors, sales, and profits

Other reasons entrepreneurs bootstrap?

They want to - The whole idea of entrepreneurship is to be their own bosses and they perceive that accepting external funds threatens this autonomy

Step 3 - Determining value

Think about what kind of benefits that you will bring to your customers

Flexibility:

To structure their lives in their own way

Base retention:

Use emotion to bond with customers

Step 1 - Goal setting - First decision: Rewards

What do you want out of your business (e.g., monetary, problem solving, etc.)

Base retention is thus the question of

creating more economic value through the company's relationship with customers for a long period of time

Second viewpoint of entrepreneurship:

entrepreneur, innovation, growth, uniqueness

Three popular reasons people choose to be entrepreneurs:

personal development, income, flexibility

Apple's advantage is based on

superior differentiation leading to higher perceived value

Entrepreneurship

the activity of setting up a business or businesses, taking on financial risks in the hope of profit

First viewpoint of entrepreneurship:

value creation, profit, owner-manager