Chapter 6
I. THE AGE OF THE ENTREPRENEUR.
A. One poll of college seniors showed that 56% of them were attracted more to STARTING THEIR OWN BUSINESSES rather than joining a corporation.
B. Of the 5.0 million Americans going into business in 1996, almost a third were 30 or younger.
C. Colleges are responding by offering more courses on the subject of entrepreneurship.
D. ENTREPRENEURSHIP is accepting the risk of starting and running a business.
II. THE JOB-CREATING POWER OF ENTREPRENEURS IN THE UNITED STATES.
A. One of the major issues in the U.S. today is the need to CREATE MORE JOBS.
B. You can get some idea about the JOB-CREATING POWER of entrepreneurs when you look at some of the great American entrepreneurs from the past and the present.
C. The text lists examples including past entrepreneurs George Eastman (Kodak), David McConnell (Avon), and Henry Ford (Ford Motor Company.)
D. Contemporary entrepreneurial talent includes Jeff Bezos (Amazon.com), Steve Jobs (Apple Computer), and Howard Schultz (Starbucks.)
III. WHY PEOPLE TAKE THE ENTREPRENEURIAL CHALLENGE.
LEARNING GOAL 1
Explain why people are willing to take the risks of entrepreneurship; list the attributes of successful entrepreneurs; describe the benefits of entrepreneurial teams and intrapreneurs; and explain the growth of home-based and Web-based businesses.
A. Reasons why people are WILLING TO TAKE THE RISKS of business ownership include:
1. OPPORTUNITY to share in the American dream.
2. PROFIT.
a. Many people who don’t succeed in large organizations have the initiative and drive demanded by entrepreneurship.
b. Managers leaving corporate America and people with disabilities find opportunities in starting a business.
3. INDEPENDENCE.
a. Many entrepreneurs do not enjoy working for someone else.
b. Some have found more self-satisfac-tion in starting their own businesses.
4. CHALLENGE.
a. Some believe that entrepreneurs are excitement junkies who flourish on taking risks.
b. Many contend that entrepreneurs take moderate, calculated risks.
c. In general, entrepreneurs seek achievement more than power.
B. WHAT DOES IT TAKE TO BE AN ENTREPRENEUR?
1. The list of ENTREPRENEURIAL ATTRIBUTES includes:
a. SELF-DIRECTED and self-disciplined.
b. SELF-NURTURING, believing in your own ideas.
c. ACTION-ORIENTED, having a desire to build the dram into reality.
d. HIGHLY ENERGETIC. Entrepreneurs must work long hours to succeed.
e. TOLERANT OF UNCERTAINTY. Entrepreneurs must be able to take calculated risks.
2. Most entrepreneurs don’t get the ideas for their products and services from some FLASH of inspiration—often the source of innovation is more like a FLASHLIGHT.
3. An entrepreneurial test to determine if you have the entrepreneurial spirit is provided in the appendix at the end of the chapter.
C. ENTREPRENEURIAL TEAMS.
1. An ENTREPRENEURIAL TEAM is a group of experienced people from different areas of business who join together to form a managerial team with the skills needed to develop, make, and market a new product.
2. This gives the company the COMBINATION OF SKILLS need to get the new company off to a great start.
3. The text uses the example of the “smart team” of corporate entrepreneurs who founded Compaq Computers.
4. Entrepreneurs often turn their companies over to professional managers once the firm grows to a certain size.
D. MICROPRENEURS AND HOME-BASED BUSINESSES.
1. MICROPRENEURS are entrepreneurs willing to accept the risk of starting and managing the type of business that remains small, lets them do the kind of work they want to do, and offers them a balanced lifestyle.
2. While entrepreneurs are committed to the quest for growth, micropreneurs can be happy with little expansion.
3. Many micropreneurs are HOME-BASED BUSINESS OWNERS, nearly half in SERVICE INDUSTRIES.
4. Many are owned by people who are trying to combine career and family.
5. Other reasons for the growth of home-based businesses include:
a. Computer technology has leveled the competitive playing field.
b. Corporate downsizing has eroded job security.
c. Social attitudes have changed to encourage home-based businesses.
d. New tax laws have loosened the restrictions regarding deductions for home offices.
6. Major challenges facing home-based businesses include:
a. Getting new customers.
b. Managing time.
c. Keeping work and family tasks separate.
d. Abiding by city ordinances.
e. Managing risk.
7. Home office entrepreneurs should focus on:
a. Finding opportunity instead of accepting security.
b. Getting results instead of following routines.
c. Earning a profit instead of earning a paycheck.
d. Trying new ideas instead of avoiding mistakes.
e. Creating a long-term vision instead of seeking a short-term payoff.
E. WEB-BASED BUSINESSES.
1. The Internet has sprouted a world of new small home-based businesses.
2. Online sales in 2001 were over $33 billion.
3. The text uses the example of KEH Camera Brokers’ success with online sales.
4. There are numerous sites that help entrepreneurs set up online stores, such as Hypermart.com and Microsoft’s LinkExchange.
5. Web-based businesses are not failure-proof.
F. ENTREPRENEURSHIP WITHIN FIRMS.
1. INTRAPRENEURS are creative people who work as entrepreneurs within corporations.
2. By using company’s existing resources—human, financial, and physical—they launch new products and generate new profits.
3. The text focuses on the development of Post-It Notes at 3M through the entrepreneurial efforts of Art Fry.
G. ENCOURAGING ENTREPRENEURSHIP—WHAT GOVERNMENT CAN DO.
1. The government passed the IMMIGRATION ACT OF 1990 to encourage more entrepreneurs to come to the United States.
a. It created a category of “INVESTOR VISAS” that allows 10,000 people to come to the U.S. each year if they invest $1 million in an enterprise that creates or preserves 10 jobs.
b. Some believe that the more entrepreneurs that can be lured to the U.S., the more jobs will be created.
2. One way to encourage entrepreneurship is through ENTERPRISE ZONES that feature low taxes and government support.
a. Enterprise zones are specific geographic areas to which government try to attract private business investment by offering lower taxes and other government support.
b. The government could encourage entrepreneurship by offering investment TAX CREDITS to businesses that invest in creating jobs.
3. States also provide support for entrepreneurs.
a. State commerce departments serve as clearinghouses for these programs.
b. States also create incubators and technology centers to reduce startup capital needs.
c. INCUBATORS are centers that offer LOW-COST OFFICES with BASIC BUSINESS SERVICES such as accounting, legal advice and secretarial help.
d. There are more than 1000 incubators in the U.S.
4. Incubators help companies survive because they provide assistance in the crucial early development stage.
IV. GETTING STARTED IN SMALL BUSINESS.
LEARNING GOAL 2
Discuss the importance of small business to the American economy and summarize the major causes of small-business failure.
A. The purpose of this part of the chapter is to explore small businesses, their role in the economy, and how they are started and managed.
1. In general, the same principles apply to small and large companies, government, and nonprofits.
2. All organizations demand capital, good ideas, planning, information management, budgets, accounting, marketing, employee relations, and good overall managerial know-how.
B. SMALL VERSUS BIG BUSINESS.
1. As defined by the SBA, SMALL BUSINESS:
a. Is independently owned and operated.
b. Is not dominant in its field of operation.
c. Meets certain standards in terms of employees or annual receipts (for example, less than $2 million a year for service companies).
2. Small business statistics.
a. There are about 20 million full- and part-time home-based businesses in the U.S.
b. Small businesses create 75% of the new jobs in the U.S.
c. Small businesses account for over 45% OF THE GROSS DOMESTIC PRODUCT.
d. The first jobs of about 80% of all Americans are in small business.
e. The number of women owning small businesses has increased rapidly.
C. IMPORTANCE OF SMALL BUSINESS.
1. Seventy-five percent of the NATION’S NEW JOBS are in small businesses.
2. ADVANTAGES SMALL BUSINESSES HAVE over big companies are their more personal customer service and their ability to respond quickly to opportunities.
3. Big businesses don’t serve all the needs of the market—there is plenty of room for small businesses in niches.
D. SMALL-BUSINESS SUCCESS AND FAILURE.
1. FAILURE RATE.
a. There is some debate about how many new small businesses fail each year.
b. Conventional wisdom says that half of businesses bail in their first five years.
c. The SBA reports a 60% death rate within six years.
d. However, a recent study by economist Bruce Kirchhoff shows that the failure rate is only 18% over the first eight years.
e. It now seems that business failures are much lower than traditionally reported.
2. Still nearly one out of five businesses that fails is left owing money to creditors.
3. Many small businesses fail because of MANAGERIAL INCOMPETENCE and INADEQUATE FINANCIAL PLANNING.
4. Choosing the RIGHT TYPE OF BUSINESS is critical to success.
a. Many businesses with the lowest failure rates require advanced training to start.
b. Often high-growth businesses are not easy to start and even more difficult to keep going.
c. In general it seems that the easiest businesses to start are the ones that tend to have the least growth and the greatest failure rate.
d. The ones that can make you rich are both hard to start and hard to keep going.
V. LEARNING ABOUT SMALL-BUSINESS
OPERATIONS.
LEARNING GOAL 3
Summarize ways to learn about how small businesses operate.
A. LEARN FROM OTHERS.
1. Investigate local community colleges for entrepreneur programs and classes.
2. Talk to entrepreneurs who have already done it.
3. Entrepreneurs will tell you that location is critical as are keeping good records and hiring a good accountant and lawyer before starting.
B. GET SOME EXPERIENCE.
1. Go to work for others and learn all you can.
2. The general rule is: three years of experience in a comparable business.
3. Many small-business owners got the idea for their business from their prior jobs.
4. Many new entrepreneurs come from corporate management.
5. Another way of gaining experience is running a small business part-time.
C. TAKE OVER A SUCCESSFUL FIRM.
1. After many years, some small business owners feel stuck in their businesses.
2. The text describes a method of becoming successful small business managers.
a. The first step is to find a businessperson running a successful small business.
b. Ask to serve an apprenticeship, a one-year training program.
c. For another year or so, working hard to learn all about the business.
d. At the end of two years, offer to become assistant manager.
e. At the end of two years, offer to manage the business when the owner retires.
f. You can establish a profit-sharing plan for yourself plus a salary.
3. The owner benefits by keeping ownership and earning profits without working.
4. If profit sharing doesn’t appeal to the owner, you may want to buy the business outright, basing the price of the business on:
a. What the business owns.
b. What it earns.
c. What makes it unique.
VI. MANAGING A SMALL BUSINESS.
LEARNING GOAL 4
Analyze what it takes to start and run a small business.
A. According to the SBA, 90% of all failures are a result of “POOR MANAGEMENT.”
1. This could mean poor planning, poor record keeping, poor inventory control, poor promotion, or poor employee relations.
2. It could likely include poor capitalization.
3. This section explores the major functions of business as they pertain to small business:
a. PLANNING your business.
b. FINANCING your business.
c. KNOWING your customers (marketing.)
d. MANAGING your employees (human resource development.)
e. KEEPING RECORDS (accounting).
B. BEGIN WITH PLANNING.
1. Small businesses start with an idea that can be developed.
2. A BUSINESS PLAN is a detailed written statement that describes the nature of the business, the target market, the advantages the business will have in relation to competition, and the resources and qualifications of the owner(s).
3. A business plan forces potential small-business owners to be specific about the products and services they intend to offer.
4. A business plan is mandatory for talking with bankers or other investors.
5. Michael Celello, president of the People’s Commercial Bank, says that fewer than 10% of prospective borrowers come to a bank adequately prepared and offers several tips.
C. WRITING A BUSINESS PLAN.
1. A good business plan takes a long time to write.
2. One of the most important parts of the business plan is the executive summary, which has to catch the reader’s interest.
3. There are computer software programs now to help you get organized.
4. Getting the completed business plan in the right hands is almost as important as getting the right information in it.
5. The time and effort invested before starting a business will pay off later.
D. GETTING MONEY TO FUND A SMALL BUSINESS.
1. New entrepreneurs have several SOURCES OF CAPITAL: personal savings, relatives, former employers, banks, finance companies, venture capital organizations, government agencies, and more.
2. Potential suppliers may also be a funding source.
3. Other than personal savings, individual investors are the primary source of capital for most entrepreneurs.
4. Angel investors are private individuals who invest their own money in new business with potential.
5. VENTURE CAPITALISTS are individuals or companies that invest in new businesses in exchange for partial ownership of those businesses.
a. Venture capitalists may ask for a hefty stake (as much as 60%) in your company in exchange for the cash to start your business.
b. Since the dot.com bubble burst, venture capitalists slowed their investments.
6. Smaller companies have a better chance finding an angel investor.
7. The Small Business Administration publishes a list of venture capitalists.
E. THE SMALL BUSINESS ADMINISTRATION (SBA).
1. The Small Business Administration (SBA) is a U.S. government agency that advises and assists small businesses by providing management training and financial advice and loans.
2. The SBA’s MICROLOAN PROGRAM awards loans on the basis of belief in the borrowers’ integrity and the soundness of their business idea.
3. You may also want to consider requesting funds from SMALL BUSINESS INVESTMENT COMPANIES (SBICS).
a. The Small Business Investment company program (SBIC) is a program through which private investment companies licensed by the Small Business Administration lend money to small businesses.
b. An SBIC loans to or invests in small businesses that meet its criteria.
4. SMALL BUSINESS DEVELOPMENT CENTERS (SBDCs), funded jointly by the federal government and individual states, can help evaluate the feasibility of your idea, develop your business plan, and complete your funding application.
5. The text gives several ways to contact the SBA, including the SBA website (www.sba.gov).
6. Obtaining money from banks, venture capitalists, and government sources is very difficult for most small businesses.
7. The following sections discuss important factors for success.
F. KNOWING YOUR CUSTOMERS.
1. A MARKET consists of people with unsatisfied WANTS AND NEEDS who have both the resources and the willingness to buy.
2. In order to fill these needs, one must first identify the WANTS AND NEEDS of potential customers.
3. The goal of a businessperson is to FIND A NEED AND FILL IT.
4. Once you have customers, you need to keep them through excellent service.
G. MANAGING EMPLOYEES.
1. It is not easy to FIND, HIRE, TRAIN, AND KEEP GOOD EMPLOYEES.
a. Small businesses offer less money, fewer benefits, and less room for advancement than larger firms do.
b. Nonetheless, employees of small companies are often MORE SATISFIED WITH THEIR JOBS than their counterparts in large companies.
c. They find their jobs are MORE CHALLENGING, their ideas are MORE ACCEPTED, and their BOSSES TREAT THEM WITH MORE RESPECT.
2. As the business grows, it becomes necessary to DELEGATE AUTHORITY.
a. This is touchy especially in businesses with employees who have been with the company since its start.
b. These long-term employees may not have the necessary managerial skills.
3. Attitudes such as “you can’t fire family” or you must promote someone because “they’re family” can hinder growth.
4. You’ll learn more about managing employees in Chapters 7 through 12.
H. KEEPING RECORDS.
1. A businessperson who sets up an ACCOUNTING SYSTEM early will save much grief later.
2. COMPUTERS simplify record keeping and enable the business owner to follow the progress of the business.
3. A good accountant is invaluable in setting up record keeping systems and providing tax planning, financial forecasting, and choosing sources of financing.
4. You will learn more about accounting in Chapter 18 which focuses on accounting.
I. LOOKING FOR HELP.
1. Small businesspeople NEED HELP setting up their businesses early in the process.
2. A necessary aide is a competent, experienced LAWYER who knows and understands small businesses.
a. A prepaid legal plan may be cost effective.
b. There are also legal services online.
3. A MARKETING RESEARCH STUDY can help with key marketing decisions.
4. Your business will benefit from a presence on the Internet; the text uses the example of how Brandt’s, a small restaurant, uses its website.
5. Two other valuable experts are a commercial loan officer and an insurance agent.
6. The SERVICE CORPS OF RETIRED EXECUTIVES (SCORE) is an SBA office with volunteers from industry, trade associations, and education who counsel small businesses at no cost (except for expenses.)
7. Local college business professors may also advise small business owners for a fee.
8. You should also talk with other small business owners, local chambers of commerce, the Better Business Bureau, national and local trade associations, and others.
VIII. GOING INTERNATIONAL: SMALL-BUSINESS PROSPECTS.
LEARNING GOAL 5
Outline the advantages and disadvantages of small businesses entering global markets.
A. The WORLD MARKET is potentially more lucrative market for small businesses that the U.S. alone.
1. However, most small businesses still do not think internationally.
2. Only a small percentage of small businesses export, although the number that do is increasing rapidly.
B. Many potential international businesspeople DO NOT enter the global market BECAUSE:
1. FINANCING IS OFTEN DIFFICULT to find.
2. They DON’T KNOW HOW to get started.
3. They DON’T UNDERSTAND THE CULTURAL DIFFERENCES of potential markets.
4. The BUREAUCRATIC PAPERWORK can be overwhelming.
C. There are many good reasons for small business people to CONSIDER GOING INTERNATIONAL:
1. Most of the world’s market lies OUTSIDE THE U.S.
2. Exporting can ABSORB EXCESS INVENTORY.
3. It can SOFTEN DOWNTURNS IN THE U.S. MARKET.
4. It can EXTEND THE LIFE OF PRODUCTS.
D. Small businesses have several ADVANTAGES OVER LARGE BUSINESSES:
1. Overseas buyers enjoy dealing with individuals rather than with large corporate bureaucracies.
2. Small companies can usually begin shipping much faster.
3. Small companies provide a wide variety of suppliers.
4. Small companies can give more personal service and more attention.
E. The text uses the example of successful exporter CPI Process Systems, Inc. and Wizard Vending.
F. SOURCES OF INFORMATION about international business.
1. Department of Commerce’s Bureau of Industry and Security (www.bxa.doc.gov).
2. SBA’s international business resources (www.sba.gov/hotlist/internat.html).