CH-11-12 Financing Your Business – Small Business: An Entrepreneurs Plan : Book Guide

This Document Contains Chapters 11 to 12 Chapter 11: Financing Your Business I. Business Plan Building Block (SLIDE 11-2) This chapter will help you get your own finances in order and will explain the informal and formal sources of funds available to you and the usual conditions for repayment. Since many businesses underestimate capital needs, you must demonstrate in your business plan that you have planned for all financial contingencies. It will also help you to prepare the financial section of your business plan. II. CHAPTER LEARNING OUTCOMES (SLIDE 11-3 and SLIDE 11-4) After reading this chapter, students should be able to: • Understand that you, the owner, will be the major source of start-up capital for your business. • Determine your credit situation. • Find out how much unsecured credit you can draw on. • Create a personal balance sheet (or statement of net worth). • Chart your personal money future—prepare a monthly budget. • Discover your risk tolerance. • Understand the inherent risks in borrowing from friends and family. • Partner with, and gain the most support possible from, your banker. • Investigate the lending arena, including government and venture capitalists, for money to fund your new business. • Identify the pros and cons of debt versus equity financing. • Determine the types of financing options best suited for your business. III. LECTURE OUTLINE 1. Introduction (SLIDE 11-5) Explain that every business, regardless of its size or stage of development, will need some sort of financing. Where do successful entrepreneurs find money to start their business? The answer seems to be “almost everywhere,” and persistence seems to be a key ingredient. However, as shown in Box 11.1, page 284; Table 11.1, page 287; and SLIDE 11-5, most start-up businesses will rely on informal or owner-based financing. Research shows that at least 50 percent of the small-and medium-sized businesses in Canada rely on banks and other financial institutions to provide them with some sort of financing (whether for start-up, expansion or ongoing funding). Personal guarantees on all business loans is almost always requested—especially for start-ups. Suggest that before they begin to shake the money tree, encourage them to check out their credit rating, calculate their available credit, come to grips with their personal financial situation, budget for their future financial needs and think about their risk tolerance. 2. Before You Shake the Money Tree (SLIDES 11-6 to 11-10) Explain that before they can make any decisions about start-up financing for their business, they are going to have to review their own personal financial situation. Suggest that they begin by asking them to check out their personal credit history. What is Your Credit History? (SLIDE 11-8). Explain that credit refers to the ability of an individual or company to borrow money. Explain that if they want to borrow money for a business loan or personal reasons, a lender will need to review their credit history and will probably request a credit report. Explain that the key factors for making a decision about an entrepreneur’s credit are: • How you pay your bills. • Amount of money you owe and the amount of available credit. • Length of credit history. • Mix of credit. • New credit applications. In Canada, there are three consumer credit reporting agencies—Equifax Canada Inc., Trans Union, and Northern Credit Bureaus Inc.— that assemble financial information into a credit file on each consumer. Explain that under the Consumer Reporting Act, these agencies are required to provide them with a copy of their credit report upon request. Strongly recommend that they get a credit report if they ever intend to borrow money. Explain tips for building a good credit rating and applying for credit are provided in Box 11.2, page 288 will help them improve their credit rating and Action Step 50, page 289, will help them to get a copy of their credit report. How much unsecured credit do you have? (SLIDE 11-9 and SLIDE 11-10). Explain that unsecured credit is credit extended to a borrower on the promise to repay the debt with no collateral required. Suggest that before they start their business they are encouraged to determine how much unsecured credit they have (see Table 11.2, page 290) and: • Check out your health and medical insurance needs. • Apply for additional credit cards or increased limits. • Apply for a personal line of credit—which will depend on the four C’s (capital, character, capacity, and collateral). • Explore the possibility of a home-equity loan or home-equity line of credit. Develop a personal balance sheet (SLIDE 11-11 and SLIDE 11-12). Explain that pulling together a personal balance sheet or financial statement is important because it tells them where they are with money now, and it will indicate their borrowing capability. Further explain that to prepare a personal balance sheet or statement of net worth, they will need to get a total of their personal assets and then subtract their personal liabilities. This will give them an estimate of their net worth or personal equity. The higher their net worth, the more they will be able to borrow. Table 11.3, page 306, and Action Step 51, page 290, will help them to get started. Chart your personal money future (SLIDE 11-13). Suggest that they look ahead into the next year. Suggest that they list their expenses. How much will they need to live on over the next year? The sites provided in Box 11.3, page 291, will help to list expenses. Assess your risk tolerance (SLIDE 11-13). Encourage them to ask themselves, “How much money am I willing to lose?” Encourage them to go back to Action Step 51 on page 290. Suggest that they do a reality check. They must also consider the risk-tolerance level of the members of their family and any persons they partner with. It might be time now for them to go back to Chapter 3, page 55, and revisit their values; “What are your family values?” Suggest that they talk with their family about the time and money sacrifices that may be involved in developing their new venture. Is their family on board? Suggest that your students decide what they and their family are ready to sacrifice. 3. Informal Sources of Financing (SLIDE 11-14) Self-financing (SLIDE 11-14). Explain that for start-ups, as emphasized, self-financing will be the most important and maybe their only source of funds. New businesses have to rely on savings, personal loans, personal lines of credit, and credit cards. Suggest that they review their personal balance sheet (Table 11.2, page 290) and their current financial credit sources (Box 11.2, page 288). Family and friends (SLIDE 14). Explain that having a banking relationship with their family and friends is fraught with potential problems. Mixing money and personal relationships is never easy and with family it tends to be even more emotional and volatile. Suggest that they consider their family and friends emotional tie to money. Be sure that a potential loss of money will not affect the lenders’ future or lifestyle. In addition to borrowing money directly from friends and family, entrepreneurs may consider asking them to co-sign loans. Remember, this will legally obligate them to the total debt. Suggest to your students that they remain at their job or get another job and save for another year before striking out on their own rather than risking the capital of those they love. Ask If they are still willing to borrow from friends and family, they can alleviate some of the difficulties (SLIDE 11-15): • Do not accept more money than your lender can afford to lose. • Put everything in writing. • Make it a business loan. • Include in the loan a provision for repayment. • Discuss thoroughly with the lenders the company’s goals and any potential problems. • Get independent advice. Borrowing from friends and family can be done successfully. But it’s hard work and takes exceptional people with good relationships who have no axes to grind. Tread lightly and carefully. Friends and family cannot be bought or replaced. 4. Formal Sources of Funding (SLIDE 11-16 and SLIDE 11-17) Banks and financial institutions (SLIDE 11-16). Explain that they will probably have to deal with a major commercial bank. Suggest that they don’t forget about the other financial institutions. Here are some possible strategies for dealing with bankers and lenders (pages 294–298): 1. Make your banker (or any lender) part of your team 2. Befriend a banker 3. Don’t surprise a banker 4. Invite your banker to visit your business 5. Have a backup banker 6. Respect the banker’s rules 7. Have an up-to-date plan 8. Get professional advice 9. Be in sync 10. Ask for enough 11. Get ready for personal guarantees 12. Negotiate the best deal you can 13. Understand the banker’s discretionary limits 14. You may require a spousal guarantee 15. Be prepared to pay premium rates 16. Most small business loans are demand loans 17. You will need collateral 18. Banks will require insurance 19. Your loan will be subject to legal conditions or covenants 20. You will probably have to pay user fees Keep a running list of questions to ask prospective bankers and lenders (page 298). Other sources of start-up capital (SLIDE 11-17). Now it is time to zero in on some other sources of start-up capital. These include: • angels • suppliers • customers • leasing • employees and employers • micro lending programs • government programs • venture capitalists • cooperative partnerships More information on these and other sources of financing are provided on pages 298–303, Box 11.4, page 298, Box 11.6, page 302, and Table 11.3, page 306. Encourage your students to complete Action Step 52, page 302, which asks them to list potential lenders and investors and to develop their persuasive arguments. In the final part of Action Step 52, they are encouraged to test their tactics on friends. 5. Will that be Debt or Equity? (SLIDE 11-18 and SLIDE 11-19) Explain that if they or others invest money in a business and expect, in return, a portion of the ownership, this is called an equity or ownership investment. Equity investors normally get repayment from the profits of the business. When someone lends money to a business, this is called debt financing. The business is required to repay the full amount of the debt (loan) in addition to any interest charges on the debt. Explain that Canadian small businesses rely far more on debt than on equity, with the banks playing a predominant role as a source of funds. There are pros and cons of debt and equity financing (pages 304–305). Explain that they should consider both methods of financing and choose what is best for them the owner, the business, and the market. 6. Primary Types of Debt and Equity Financing (SLIDE 11-20) Debt financing. The major types of debt financing for start-up businesses are: • Shareholders loans. Owner investment in the form of a loan. • Canada Small Business Financing (CSBF) Loans. Under the Canada Small Business Financing Act, the federal government guarantees small business loans through major financial institutions. The CSBF program has become a major funding source for start-up businesses. • Operating loans (line of credit). An operating loan (sometimes called a line of credit or revolving loan) is used by more than 75 percent of small business borrowers to finance their short-term business needs. Normally, these loans help finance inventory and accounts receivable. A line of credit or operating loan should not be used to finance the purchase of fixed assets. • Term loans. Term loans are used by close to one-half of small businesses and are the major source of medium-term (two to five years) and long-term (greater than five years) financing. In most cases, term loans are used to finance the purchase of fixed assets Other (secondary) types of debt financing and credit arrangements are provided in Table 11.3, page 306. Equity financing. The primary type of equity financing for a sole proprietorship or partnership is the owner(s) personal investment. If a business is incorporated, the main types of equity financing are: • Common shares. Common shares confer part ownership of a company and are frequently issued in exchange for a company’s initial capital. • Preferred shares. Preferred shares are equity investments that confer part ownership of a company, earn investors dividends at a fixed rate, and are safer than common shares. • Convertible debentures. Convertible debentures are loans that can be exchanged for common shares at a stated price, and are better protected than common and preferred shares. 7. Think Points for Success Review the following think points with your students: √ Your banker can provide a wealth of information. Maintain a good relationship with him or her. If your banker ever turns you down, there is usually a very good reason. Correct it. √ How well you buy is as important as how well you sell. √ Partner with your vendors or customers. It’s often the best way to get the best deals. √ In dealing with bankers, vendors, and lenders, use lots of open-ended questions like “What else can you do for me?” 8. Checklist Questions and Actions to Develop Your Business Plan (SLIDE 11-22) Review the following Checklist Questions and Actions to Develop Your Business: Financing your Business—Shaking the Money Tree √ What is the total amount of equity you need to establish and operate your business for the first year? Identify all the sources of funds. √ Identify your funding shortfall each month from the cash flow, and the funding sources and expected rate of interest. √ Are there any government, agency, or foundation funding (if you are a nonprofit organization) sources for your venture? √ How much, if anything, do you expect from a venture capitalist, and what ownership are you prepared to forego? Note: If working with a venture capitalist or other partners, what do you expect in a shareholders agreement? √ Who are your prime vendors? What type of purchase agreement do you have with them? √ What is your debt-to-equity ratio, and how does that compare to industry ratios? IV. SUGGESTIONS FOR GUEST SPEAKERS Some guest speakers to consider include: 1. A loan officer. You’ll need to find one who specializes in small businesses. Most of the major banks and financial institutions would be pleased to send a representative. Ask the loan officer to talk about the different types of loans (demand, operational, Canada Small Business Financing loans, etc.) and the criteria for evaluation of a business loan application. 2. A money-market representative. If you teach in an area where there are institutions that deal with money-market funds, invite a representative to talk about how these funds operate. Many of the major chartered accounting firms would be happy to help. 3. A financial planner. Have the planner talk about personal financial planning so that students can start saving money to start their own business. 4. An institutional investor representative. Insurance and pension fund companies have large pools of money to invest. Ask a representative from one of these institutions to talk about the possibilities of lending money to small businesses, and their company’s criteria for a loan. 5. A venture capitalist. Have the investor talk about what they like to see before investing in a venture, and what his or her role is in small businesses. V. CLASS PROJECTS 1. List people in the local area who know something about money. You can start with the “richest person in town” and move on from there. Make up interview questions to ask these money gurus. Examples: How do you feel about money? What does it mean to you? How did you make your money? What was your biggest mistake in business and in life? Where do you invest your money? Do you regard yourself as conservative with money or are you a high-flyer? Can you name two people who know more about money than you do? Ask your students to interview some of these money people and report back to the class. 2. List ways of establishing personal credit. Start with credit cards and move on to personal lines of credit. Have each student actually apply for personal credit. This tells the student how much he or she is worth and indicates what the student needs to do next. It also teaches students how the system works. 3. As a class, draw up a perfect vendor statement. Use one industry as a model. 4. Have each student do an outline or a checklist of what goes into his or her business plan. (It has been our experience that the money chapters encourage students to begin thinking about pulling the plan together. The reason is that the business plan is a requirement for getting a bank loan or persuading lenders to invest in the business.) VI. INTERNET EXERCISES 1. Canadian Youth Business Foundation (CYBF) (Box 11.6, page 302) Encourage students to visit the CYBF site at: http://www.cybf.ca/entrepreneurs/ Have them describe the seven-step application process for the CYBF Loan Program. Have students report their findings to the class. One of the main points they should discover here is that they must have a well-researched business plan. 2. Financial Information and Sources of Financing What financial information is available to help the students complete their business plan? What financial information do the major financial institutions require? What loan programs are available to small businesses and what are the interest rates? Draw your students’ attention to the sites provided in Box 11.4, page 298. Ask them to do a review of the finance-related information and/or sources of funds for small businesses that are available from at least three of the referenced Web sites. 3. How’s Your Credit Rating? Encourage students to check out their credit rating. Have them click on to the Canadian Lawyer Index: http://www.canlaw.com/credit/credit.htm Ask them to follow the steps to obtain a copy of their personal credit file. VII. SUGGESTED LESSON PLAN ACTIVITY 1: Review and Overview 1. Review Chapter 10 and answer any questions. (Show SLIDE 10-2, SLIDE 10-3, and SLIDE 10-21 of Chapter 10 if necessary.) 2. Introduce Chapter 11 and show and explain SLIDE 11-2, SLIDE 11-3 and SLIDE 11-4. Activity 2: Financing for Start-ups Show and briefly explain SLIDE 11-5. Activity 3: Personal and Unsecured Credit See NETA Lesson Plan #1 Activity 4: Develop a Personal Balance Sheet See NETA Lesson Plan #1 Activity 5: Your Personal Money Future and Risk Tolerance Show and briefly explain SLIDE 11-13. You may want to refer to the Instructor notes that accompany this slide. Activity 6: Self-financing and Financing from Family and Friends 1. You may want to begin by asking how many students intend to get family or friends to help finance their business. For those who say that family or friends will be involved, you might want to ask them to listen carefully. 2. Show and briefly explain SLIDE 11-14. You may want to refer to the detailed notes that accompany these slides. Activity 7: Networking Break Encourage students to network and learn more about each other during the break. Activity 8: Formal Financing 1. Show and briefly explain SLIDE 11-16 and SLIDE 11-17. You may want to refer to the Instructor notes that accompany these slides. 2. More information on these other sources of financing are provided in Box 11.4, page 298, Box 11.6, page 302, and Table 11.3, page 306. 3. Action Step 52, page 302, asks you to list potential lenders and investors and to develop your persuasive arguments. Note that in the final part of Action Step 52, you are encouraged to test your tactics on friends. Optional guest speaker, class discussion exercise (40–60 minutes) 1. Invite a local banker to be a guest speaker. 2. Arrange to meet with your guest at least one week before he or she is scheduled to speak. Some instructors assign all the arrangements for a guest speaker to students. We have found this to be a useful learning experience for students. 3. Find out what resources your guest requires and make appropriate arrangements. 4. Brief the banker on the purpose and background of the course. Be sure to get the appropriate personal and business information to introduce and thank your guest. You could assign to a student(s) the task of introducing and thanking the speaker. 5. Indicate to your guest that the main purpose of this activity is to help students learn what a banker needs from a small business owner, and how to deal with a banker when asking for a loan. Also indicate that you will expect him or her to discuss the Canada Small Business Financing (CSBF) loan—a major financial program available to small businesses. However, you should be on the lookout for other student loans or new venture programs in your area, which the banker could address. 6. Your guest should be familiar with the section in the text entitled, “Banks and Financial Institutions,” pages 294. 7. Encourage your guest to try to stimulate discussion and leave time to answer questions. 8. When the guest has finished speaking, show SLIDE 11-16 and SLIDE 11-17 and ask him or her for additional advice. Activity 9: Debt Versus Equity Show and briefly explain SLIDE 11-18, SLIDE 11-19, and SLIDE 11-20. You may want to refer to the Instructor notes that accompany these slides. Activity 10: Summary, Q&A, and Preparing for Chapter 12 1. Recap the key points for each objective (using SLIDE 11-2 and SLIDE 11-3 if necessary). 2. Encourage students to complete the Business Plan Building Block on page 303. 3. Show SLIDE 11-22 and encourage students to complete the Checklist Questions and Actions to Develop Your Business Plan, page 312. You may also want to briefly review the Think Points for Success, page 310. 4. Show SLIDE 11-23 and encourage students to complete the case study questions. Answers to the case study questions are contained in Section IX below. 5. Respond to any questions that students may have. 6. Encourage students to go to the Nelson Small Business site: www.knowlescastillo6e.nelson.com. Click on to the Test Yourself link and complete the true or false/multiple choice, short answer, and matching exercise for Chapter 11. 7. Have students read Chapter 12 in preparation for the next lesson. Some instructors may want to encourage students to also prepare a mind map of key points contained in Chapter 12. IX. CASE STUDY: FINANCING YOUR BUSINESS, PART 2 A major part—if not all—of the funding for any new start-up, will come from you the owner. We want you to answer the following case study questions to help you to get ready to finance your business. Case Study Questions and Suggested Answers 1. What is your credit rating? Answer: If you want to borrow money for personal reasons such as buying a car or furniture, the loan officer at your bank will need to review your credit history to determine your credit rating. Your credit rating is also an issue when you apply for any type of business loan. What is your credit rating? Complete Action Step 50, page 288. Your credit rating is a numerical score that reflects your creditworthiness based on your credit history. It is determined by factors such as your payment history, debt levels, and credit utilization. A higher credit rating indicates better financial reliability, which can influence your ability to secure loans and favorable financing terms. Instructor Suggestions • Some students may comment that they have no credit rating because they have no money and no credit. Ask them to apply anyway. First, they will learn about the process of applying. Second, students will need to establish a good credit rating not only for their business but their personal lives. If they want to buy a car, pay for furniture, or buy a house, for example, a loan officer will need to review their credit history and will probably request a credit report. It is a standard practice for most loan officers to review a credit report—and if it doesn’t pass the litmus test, the borrower will very likely not get a loan. • You might want to briefly explain the standard FICO scoring (Action Step 50, page 281) and encourage students to ask for their FICO score. It costs about $20 but it is worth it. About 50 percent of Canadians have a FICO score of over 760. They can learn more about FICO by clicking on to the Equifax site: https://www.econsumer.equifax.ca/ca/main?forward=/view/common/template.jsp&body=/view/product_info/sp_detail.jsp# 2. How much unsecured credit do you have? List your current financial sources. Answer: Many start-ups have to rely heavily on unsecured credit such as Visa, MasterCard, and personal lines of credit. Complete Table 11.2, page 290. If you have no credit, we suggest you apply for at least two credit cards, but use them, with care. Make sure to pay credit card bills before the due date. This will help you improve your credit rating. Unsecured credit refers to loans or credit lines not backed by collateral. To determine how much you have, list all available unsecured credit sources such as credit cards, personal loans, and lines of credit. Include the total credit limits and current balances for each to assess your financial capacity. Instructor Suggestions: Information and tips to building a good credit history are shown in Box 11.2, page 288. Students can learn more about credit cards by clicking on to: • Industry Canada’s credit card costs calculator http://consumer.ic.gc.ca/epic/internet/inoca-bc.nsf/en/ca00459e.html and CBA’s “Taking a Closer Look”: http://www.cba.ca/en/viewDocument.asp?fl=6&sl=111&tl=&docid=246&pg=1. • You may want to encourage students to consider applying for a personal line of credit. Usually, depending on the Four Cs of credit (capital, character, capacity, and collateral), it is possible to obtain anywhere from $5,000 to $50,000 of unsecured credit at very attractive rates. 3. Chart your personal money future. Answer: Look ahead into the next year. List your expenses, such as those for shelter, food, medical bills, transportation, insurance, phone, school, clothes, and utilities. The worksheets in Box 11.3, page 291 will help you do this. Charting your personal money future involves creating a financial plan that outlines your income, expenses, savings, and investment goals over time. It includes projecting future cash flows, setting financial milestones, and planning for major life events or investments. This helps in managing your finances effectively and preparing for future financial needs. Instructor Suggestions: • You might want to highlight the importance of this exercise by getting students to go back to Chapter 10: Table 10.6—cash flow, pages 256–257, row 26—or Table 10.8—income statement, page 262, salaries—principal draw; for DISCovery. Get them to look at the management (owner) salaries. The owners are paying themselves $19,200 in the first year. A lender would want to know if $19,200 is enough. Why do they only need this amount? The lender might advise the owners to review their monthly expenses. • Many students may be living at home. Will they be living at home when they start their business? Encourage them to look at a monthly budget at a time when they are living on their own. Emphasize that this monthly expense sheet should reflect future living conditions. 4. Complete a personal balance sheet or financial statement Answer: Complete a personal balance sheet or financial statement. Complete Table 11.3. First, record everything you own. The things that you own, such as furniture, cars, registered retirement savings plans (RRSPs), and even cash in the bank, are called personal assets. Next, list those things that you owe. These are your financial obligations, or personal liabilities, such as personal loans, credit card debts, and mortgages. Finally, we want you to subtract the total dollar amount of what you own (your personal assets) from the dollar value of what you owe (your personal liabilities). This net value of everything you own is called your personal net worth, or personal equity. Your ability to finance a business or borrow money will depend, to a large degree, on your personal equity or personal net worth. If you need to borrow money—for whatever reason—your lender will want to know how much you are prepared to “guarantee” personally on your loan. To a large extent, this decision will depend on your personal equity. Instructor Suggestions: • You may want to encourage students to review Action Step 51, page 290. • If a student intends on dealing with one specific financial institution, encourage him/her to go online and use that institution’s template. For example a personal financial statement from the CIBC can be found by linking on to: http://www.cibc.com/ca/pdf/small-business-planningguide-part-C-4.pdf • You might want to ask students how much they think they can invest in the business based on their personal balance sheet. • If some balance sheets show more debt (esp. given student loans) than equity, you might want to discuss ways they can improve their own financial situation before they start their business. Chapter 12: Building and Managing a Winning Team I. Business Plan Building Block (SLIDE 12-2) Chapter 12 will help you develop your leadership strategy; chart your organizational structure; prepare to organize and manage your business; and develop a team that shares your vision and enthusiasm. It will also help you to prepare the management and personnel sections of your business plan. II. CHAPTER LEARNING OUTCOMES (SLIDE 12-3 and SLIDE 12-4) After reading this chapter, students should be able to: • Understand the basic management functions of leading and organizing. • Chart your organizational structure. • Consider the benefits of a virtual or network organization. • Evaluate the skills that you and the members of your founding team possess. • Understand the value of an advisory board and external advisors. • Take another look at yourself and identify your strengths, weaknesses, and business needs. • Use the idea of balance to brainstorm your ideal team and scout potential team members. • Develop an action plan with your new team before you open the doors. • Consider the merits of the just-in-time team, partnerships, leased employees, and the independent contractor or associate. • Recognize the need for a mentor. • Learn how to hire your first employee. III. LECTURE OUTLINE 1. The Basics of Managing Your Team (SLIDE 12-5 to SLIDE 12-13) Explain that our new changing economy has created the management need for people to work together to constantly generate new ideas. Explain that an important key to their small business survival is how they build and manage their team. As learned from Charlene Webb, page 315, business success is all about working with people that your students trust and respect to accomplish their personal and business goals and objectives. We begin with the basics of managing an entrepreneur’s team. Leading (SLIDE 12-5). In the new economy, leadership has to be earned. Leadership is about creating the work climate that motivates people to do what is expected of them because they believe in what you are doing and share your vision. Explain that studies show that a “transformational” style of leadership inspires exceptional performance. Leaders who inspire exceptional performance are: • Visioning • Inspiring • Stimulating • Coaching • Team-building Organizing (SLIDE 12-6 to SLIDE 12-13) Explain to your students that they are going to have to come to grips with such organizing questions as: What tasks are there to be done? Who does them? How are the tasks to be grouped? Who reports to whom? Where are decisions made? (SLIDE 12-6) Also explain that they are also going to have to think about a team and an organizational framework that will help them accomplish their business objectives. The key to developing an organizational structure or framework for their business is to remember that we are deeply entrenched in a business environment that demands innovation and risk-taking (slide 12-7). Explain that this means that they are going to have to think about the benefits of an “organic “ type structure. SLIDE 12-8 and SLIDE 12-9 (Table 12.1, page 319) show the basic differences between the old mechanistic or bureaucratic structure and the new organic structure. Explain that traditionally, most small business structures have been organized on the basis of function (SLIDE 12-10), geography (SLIDE 12-11), or type of customer (SLIDE 12-12). Examples of these traditional types of structures are also shown in Figure 12.1, page 320. Today, however, organizational structures are becoming “organic” and many small businesses are working in teams. Thus, we want your students to consider a new "virtual" or "network” type of organizational structure. Key characteristics of the virtual structure are (SLIDE 12-13): • customer-driven • flexible • relies on mutual trust and teamwork • promotes supplier competition • delegates selling duties to selling agents not staff • offers a web of associates or partners • relies on outside expertise Explain that in this type of organizational structure, the core business functions (such as sales, accounting, retail, and manufacturing) are separated from the main business by small businesses or independent teams, often called strategic business units. What this means is that a business no longer has to compete under one roof. Jobs like human resources, advertising, maintenance, and sales can be contracted out to small businesses on an as-needed basis or handled by remote employees. An example of a virtual or network organization is shown in Figure 12.2, page 312.2. The Founding Team (SLIDE 12-14) Explain that a business is only as strong as the people who breathe life into it. Therefore, it is important to think about the skills that they and the members of their founding team possess and how these skills will help bring their product or service to market. Three areas they should focus on are: 1. Management team profiles and ownership structure. Identify the people who are capable of assuming management roles when necessary. It is not necessary to fill each position with a different person. You should, however, be able to identify the people who are capable of assuming roles when necessary, whether it be yourself or someone else. You should be able to describe how each person will add to the team’s success. Board of directors or advisory board. Think about forming a board of advisors that provides true guidance and advice to your company. If you have decided to incorporate, now is the time to give some serious thought to your board of directors. If you have decided not to incorporate, you can also draw on the power of teamwork and advisors. Some forward-thinking entrepreneurs, like Charlene Webb in the opening caption, have created what is termed an “advisory board” with a rather formalized structure. Others, like Mike McCarron and Robert Murray of MSM (case study at the end of the chapter, pages 322 and 323, have created a less formalized advisory team approach.3. Human resources requirements. Think about employees or independent associates your business may need and what their functions will be. Many small business owners make the mistake of hiring only for their immediate needs. We encourage you to think about the future. You will need to give some thought to our human resources checklist shown in Box 12.2, page 323. These are the types of issues we are going to work through over this latter part of the chapter. 3. Building Balance into Your Team (SLIDE 12-15) Explain that the day of the lone-wolf operator is quickly coming to an end. Explain that your students can no longer do everything themselves. As learned from the MSM case study at the end of the chapter, page 331, balance—not sameness—is essential in a winning team. Explain that the key here is not to clone them. They will need to surround themselves with people who can complement their skills. Explain that this is good time for a thorough self-assessment and the kinds of people they are going to need to create their team. Encourage your students to complete Action Step 53, page 324. Then encourage them to take one or more of the personality tests listed in Box 12.3, page 324 or Appendix 12.1, page 340. Encourage them to also revisit their entrepreneurial assessments (Chapter 1, Box 1.2, page 12) and their values (Chapter 3, Action Step 16, page 62). 4. The “Just-in-Time” Team (SLIDE 12-16) Explain to your students that we want them to consider the merits of the just-in-time team—a group of individuals who are hired on a contract or “as needed” basis to perform a specific function (Action Step 54, page 325). Explain that they should be on the lookout for people who complement their personality/skills and characteristics and compensate for their weaknesses. The just-in-time team needs to be customer-driven and opportunity-focused. There must also be agreement and a shared vision among all participants. Their just-in-time team might exist for a few weeks or a year or more. Then, when the opportunity has been fully exploited, the team must be prepared to disband quickly and move on to the next opportunity. A just-in-time team could include: Partnerships. Businesses usually form partnerships or associations in two fundamental ways: joint venture and strategic alliance: • Joint venture. A partnership formed for a specific undertaking resulting in the formation of a new legal entity. • Strategic alliance. A goal-oriented partnership formed between companies to create a competitive advantage. Independent contractor or associate. If you pay by the job and not by the hour, and if most of the work takes place away from your office using the worker’s resources, then you may have an independent contractor or associate relationship. A strong word of caution is in order. You need to be careful about the legal ins and outs of hiring on contract (see Box 12.5, page 334). Employee leasing. Employee leasing is another way to reduce administrative costs, paperwork hassles, legal issues, and costly benefits. In this instance you will be leasing people (employees) whose leasing organization handles payroll and most, if not all, of the human resources functions. 5. Get a Mentor (SLIDE 12-17) Explain that much of what is learned in business comes from mentoring. For independent business, mentoring is a mutually beneficial partnership between a more experienced entrepreneur or businessperson, and an entrepreneur who is in the infant or start-up phase of a venture. A mentor is someone who can give entrepreneurs start-up advice and encouragement. Essential qualities of an effective small business mentor include, page 327: • a desire to help • past positive experience • a good business reputation • time and energy to help • up-to-date knowledge in the field • a learning attitude • demonstrated managerial and mentoring skills The most frequent problems with a mentoring relationship include: • personality mismatch • unrealistic expectations • breaches of confidentiality • lack of commitment The characteristics of good mentors are shown in table 12.2, page 328. Encourage your students to complete Action Step 55, page 327, which will help them to find a mentor. 6. Hiring Your First Employee (SLIDE 12-18, SLIDE 12-19 and SLIDE 12-20) Explain that if they hire new employees, they are going to have to rely on new management skills such as administrating, delegating, organizing, communicating, and teamwork. As learned in the opening caption, this was a major downfall for charlene webb’s first business. Encourage your students to do some self- analysis (slide 12-15). Encourage them to complete the online self-evaluation tests, box 12.3, page 324. Also encourage them to revisit their values, action step 16, chapter 3, page 62. Basic Steps. Explain that hiring employees will require them to consider the following basic steps (SLIDE 12-19): 1. Job analysis. First you will have to determine the jobs or functions that need to be done to achieve your businesses goals. Here, we suggest you revisit your cash flow and income statement (Chapter 10). How will these new functions improve output and contribute to the cash flow and profit? 2. Job qualifications. You will need to consider, what skills/knowledge are required to do the job? What are the qualifications, traits and characteristics considered to be essential for a person(s) to successfully carry out the job requirements? 3. Job requirements. Next, you have to figure out who is going to do the work. If the just-in-time team is not an option, you will then have to consider the advantages and disadvantages of staffing—hiring employees on a part-time or full-time basis. We want you to begin by considering the part-time employment option. 4. Staffing decisions Should you decide to hire your staff, either part-time or full-time, you have make four basic staffing decisions on: i. Recruitment. In the process of finding the right staff, you will be confronted with two basic recruitment options—internal recruitment and external recruitment. In Box 12.4, page 330, we have provided you with the most common recruitment methods for small business. The pros and cons of these two options are provided on page 330. ii. Selection. This is the process of determining which persons in the applicant pool possess the qualifications necessary to be successful on the job. You will have to follow an employee selection process such as that provided on page 331. A critical stage in the selection process is the interview. Here we encourage you to stay out of trouble and ask the right questions, page 331. iii. Training/development. Once you decide to hire staff, you will have to put into place a program to train your new staff and then determine how much this will cost? iv. Compensation. There are two general types of financial compensation—direct and indirect. We also want you to consider non-financial compensation. 1. Direct compensation is the wage or salary received by the employee. 2. Indirect compensation (sometimes referred to as employee or fringe benefits) refers to the employee benefits and services that are given entirely or partly at the expense of the company. Federal and provincial laws govern many benefits. There are four major mandatory programs that require contributions by both employers and employees: 1. Canada and Quebec pension plans—for retirement, disability, and survivors’ and death benefits 2. Workers’ compensation—for disability benefits and spouses’ and dependants’ pensions 3. Vacation and holiday pay 4. Employment insurance 3. Non-financial compensation. Many small business owners have initiated non-financial compensation initiatives in their workplace, and have done so out of a conviction that providing such benefits can substantially improve productivity, revenues, and employee retention and commitment. Some of these non-financial forms of compensation include: challenging jobs, recognition, flexible work hours, compressed workweek (working 20 hrs a day for four days, for example), job sharing and home-based work. What do employees really cost? Explain that if they plan on hiring employees, consider all the costs associated with hiring, training, and retaining employees. Each employee can cost at least 60 percent of his or her salary. Employees in an entrepreneurial venture need to pull more than their own weight. So our best advice—Select Wisely (SLIDE 12-20). More information on hiring and other human resources planning issues is provided in Box 12.5, page 334. 7. Think Points for Success Review the following think points with your students: √ People tend to “hire themselves.” How many more people like you can the business take? √ A winning team is lurking in your network. √ Look to your competitors and vendors for team members. √ Your company is people. √ Balance the people on your team. √ Have each team member write objectives for his or her responsibilities within the business. √ You can’t grow until you have the right people. √ How much of your team can be built of part-timers and moonlighters? √ How virtual can you make your business structure? √ Can you form a joint venture or a strategic alliance? √ Do you know what your legal responsibilities are? √ What is your job selection process? 8. Checklist Questions and Actions to Develop Your Business Plan (SLIDE 12-22) Review the following Checklist Questions and Actions to Develop Your Business: √ What major human resource issues does your business face, and how do you plan to address these issues? √ Have you included an employment schedule in your appendix and corresponding wage costs for your staff and yourself? √ Have you allowed for benefits? At a minimum to comply with legal statutory requirements, you need to consider at least 20 percent of your wage and salary costs for benefits. √ Do you have job descriptions in place and plans to conduct an annual performance appraisal? √ Do your wage rates fit within the industry norm, and do you pay more than the industry if you are planning to be a “top draw” company? √ Outline your leadership style, and your strengths and weaknesses as an entrepreneur. √ How might a “virtual organization” work for you? √ If you are starting out just with yourself, at what point in sales or other volume indicator will you add a second or a third person? IV. SUGGESTIONS FOR GUEST SPEAKERS Some guest speakers to consider include: 1. A local entrepreneur. Ask this guest to discuss start-ups; management; raising money; teamwork; if he or she enjoys working for someone else, and whether or not he or she would consider being a mentor. 2. The president of a small firm (up to 20 employees). Invite the president to talk about teamwork, how important each person is, hiring decisions, and how these decisions are made. Ask him or her to talk about mentoring, or about the rationale for the business organizational structure. 3. A management consultant. Have this speaker talk about leadership versus management and how he/she motivates employees. V. CLASS PROJECTS Class Project 1: Class Analysis Have students do a self-analysis in class. What are their skills? Have them list strengths and weaknesses. Ask them to elaborate on what they like to do and what they really hate to do. Select one self-analysis at random and note key characteristics on the board. Have the class analyze the potential for entrepreneurial energy, and then have them brainstorm ways to “balance” this person. You may need to refer to some of the qualities listed in Appendix 12.1, page 340. Class Project 2: Self-Analysis Have the class complete the personality analysis in Appendix 12.1, page 340. Get each student to select his or her most dominant personality traitanalytical, driver, amiable, or expressive. See if you can divide the class into balanced groups according to these personality types. Encourage students to complete Box 12.3, page 324, and Action Step 53, page 324. Class Project 3: Primary Research Have students interview a local small businessperson. Have them describe how the small businessperson manages, leads, and organizes the business. How does this owner motivate his/her employees? Get students to share their results in the classroom. Class Project 4: Mentoring Ask if any of your students have a mentor. Encourage them to share with the class the important characteristics of their mentor. Compare these results with the list shown on page 326, and Table 12-2, page 328. For those who do not have a mentor, encourage them to complete Action Step 55, page 322. Class Project 5: The Job Interview 1. Have the class get into groups (4–7 students). Get each group to prepare 10 interview questions. 2. Get a group spokesperson to present these questions to the class with a justification for each question. 3. You may want to review the do’s and don’ts of interviewing, page 331. VI. INTERNET EXERCISES 1. Your Personality Profile (Box 12.3, page 324) Encourage students to learn more about themselves. Have them link onto the following sites and complete the instructions: • Find out who you really are haleonline.com/psychtest/ This is the HaleOnline adaptation of the world's most popular psychology test, the Myers-Briggs Type Indicator® personality test. It will cost you 99 cents, but we think it is worth it. • The Keirsey Temperament Sorter II (AdvisorTeam) www.advisorteam.com/user/ktsintro.asp This online personality inventory, which tells you if you’re an Artisan, a Guardian, a Rational, or an Idealist, is used in career development programs at Fortune 500 companies and in counselling centres and career placement centres at major universities. • The Big 5 Personality Test www.outofservice.com/bigfive/ This test measures what many psychologists consider to be the five fundamental dimensions of personality. • The Leadership Motivation Assessment Mind tools: www.mindtools.com/pages/article/newLDR_01.htm Are you motivated to lead? This assessment helps you find the answer. 2. Virtual Mentoring Encourage students to use the Internet as a starting point for learning more about finding a mentor. Ask your students to visit any one of the sites below. Have them do a report on their findings and present the results in your next class on the following sites: • The “Mentors link ” of the Canadian Youth Business Foundation: http://www.cybf.ca/ • The peer membership link of Young Entrepreneurs Association: www.yea.ca. VII. SUGGESTED LESSON PLAN VIII. SUGGESTED ACTIVITIES ACTIVITY 1: Review and Overview 1. Review Chapter 11 and answer any questions. (Show SLIDE 11-2 and SLIDE 11-3 and SLIDE 11-18 of Chapter 11 if necessary.) 2. Ask students to recall the experience of Charlene Webb in the opening caption, page 383. Why did her first business fail? Answer: She lacked the skills to manage full-time employees. 3. Show and explain SLIDE 12-2, SLIDE 12-3, and SLIDE 12-4. Activity 2: A Good Manager Is… See NETA Lesson Plan #1 Activity 3: Leadership See NETA Lesson Plan #2 Activity 4: Organizing Show and briefly explain SLIDES 12-6 to 12-13. You may also want to refer to the suggested Instructor notes that accompany these slides. Activity 5: Networking Break Encourage students to network and learn more about each other during the break. Activity 6: Teamwork The Founding Team. Explain that a business is only as strong as the people who breathe life into it. Therefore, it is important to think about the required skills of the founding team. Show and explain SLIDE 12-14. You may want to refer to the Instructor notes that accompany this slide. Building Balance into your Team. Explain that the day of the lone-wolf operator is quickly coming to an end. Small business owners can no longer do everything themselves. Show and explain SLIDE 12-15. The Just-In-Time Team. Encourage students to consider the just-in-time team. Encourage students to think outside the box when considering their founding team. Show and explain SLIDE 12-16. Optional individual, class exercise. (30–45 minutes) 1. Explain that the purpose of this exercise is to help them start thinking about their strengths and weaknesses and the kinds of people they will need to create a balanced team. 2. Show and briefly explain SLIDE 12-14, SLIDE 12-15 and SLIDE 12-16. 3. Explain that four main personality traits are discussed in Appendix 12.1, pages 340. These are: 1. The Analytical (or thinker). Analyticals fear being embarrassed or losing face. They also tend to be introverted and to hide their emotions from others. 2. The Amiable (people person). Amiables fear losing trust or having disagreements with others. While somewhat introverted, they also tend to display their emotions. 3. The Driver (action person). Drivers fear giving up control. They tend to be extroverts, but do not like showing their emotions to others. 4. Expressive or impulse. Expressives fear being rejected. They are extroverts and usually show their emotions to others. 4. Have the class complete the personality analysis in Appendix 12.1, pages 340-343 (Action Step 53, page 324). The key point here is to have each student understand his or her most dominant personality trait—analytical, driver, amiable, or expressive, and that their founding team will need to be balanced. 5. You may want to select a self-analysis from one student and note key characteristics on the board. Have the class brainstorm ways to “balance” this person’s team. 6. You may also want to use this exercise to get the class into “balanced” groups. Have students get into groups containing at least one personality trait. Activity 7: Get a Mentor Show and briefly explain SLIDE 12-17. You may want to refer to the Instructor notes that accompany this Slide. Activity 8: Your First Employee Show and briefly explain SLIDE 12-18, SLIDE 12-19, and SLIDE 12-20. You may want to refer to the Instructor notes that accompany these Slides. Activity 9: Summary, Q&A, and Preparing for Chapter 13 1. Recap the key points for each objective (using SLIDE 12-2, SLIDE 12-3 and SLIDE 12-4 if necessary). 2. Encourage students to complete the Business Plan Building Block on page 335. 3. Show SLIDE 12-22 and encourage students to complete the Checklist Questions and Actions to Develop Your Business Plan, page 336. You may also want to briefly review the Think Points for Success, page 335. 4. Show SLIDE 12-23 and encourage students to complete the case study questions. Answers to the case study questions are contained in Section IX below. 5. Respond to any questions that students may have. 6. Encourage students to go to the Nelson Small Business site: www.knowlescastillo6e.nelson.com. Click on to the Test Yourself link and complete the true or false/multiple choice, short answer, and matching exercise for Chapter 12. 7. Have students read Chapter 13 in preparation for the next lesson. Some instructors may want to encourage students to also prepare a mind map of key points contained in Chapter 13. IX. CASE STUDY Case Background Robert Murray and Mike McCarron are two of the founding partners of MSM Transportation Incorporated. When they started the company back in the late 1980s, they knew they were combining two different types of management expertise, plus two very different personalities. Mike, the company’s managing partner and primary marketer, was enthusiastic, outgoing, passionate, and—as he admits—impulsive. Robert, Mike’s partner and MSM’s president, trained originally as a credit manager and came across as quiet, diplomatic, and thoughtful, and more of a long-term thinker. Oil and water? Of course. Robert recalled that the duo’s strength lay in the fact that they could disagree, argue feverishly, work it out, and move on. Their vision was to become a dominant player in the Canadian transportation industry. Because the two partners shared a similar vision for the company, if not the same temperament, debate became a positive force that generated new ideas and better decisions. In an industry notorious for its lack of marketing and financial skills, MSM benefited from both personalities, because they questioned each other’s assumptions and strategies. Noted Robert, “My partner has made me much more effective and, I believe, much better at what I do.” Since its humble beginnings in the late 1980s, MSM has grown into a recognized leader in the Canadian transportation industry. In 2005, for example, MSM Transportation ranked highest in customer satisfaction among Canadian shippers—according to the readers of Canadian Transportation & Logistics magazine. It has become a multimillion-dollar Canadian success story. MSM Transportation is now a group of six interrelated companies—MSM Group of Companies Incorporated—that employs close to 200 people, owns and operates over 300 pieces of equipment, and handles more than 50,000 shipments per year. MSM even owns a Junior A Hockey team. In 2006, MSM earned membership into the Platinum Club of Canada’s 50 Best-Managed Companies (https://www.canadas50best.com). To become a member of this élite group, MSM had to sustain a consistent profitability and growth and maintain its designation as one of this country’s best-managed companies for a minimum of six consecutive years. To a large extent, the day-in and day-out success of this company relates to the teamwork, leadership, and management skills of the two founding partners. At MSM, McCarron and Murray have established an enthusiastic workplace culture and have ensured that all employees believe in and strive toward the MSM mission: Customer Satisfaction through On-Time-Delivery is our prime goal, and MSM customers are paramount in our daily decisions and successes. Case Resources • MSM Group of Companies, home page: http://www.shipmsm.com/index.html • Mike McCarron, Street Smarts, “Moving Targets”: http://www.shipmsm.com/Articles/SS200211%20-%20Moving%20Targets.pdf • Legacee,“Different Types of Leadership Styles”: http://www.legacee.com/Info/Leadership/LeadershipStyles.html • Ray Jutkins, “The Situational Leader”: http://www.rayjutkins.com/ezine/20030812.html • Mike McCarron, Street Smarts, “Why Partnerships Fail”: http://www.shipmsm.com/Articles/SS200206%20-%20Why%20Partnerships%20Fail.pdf • Mike McCarron, Streets Smarts, “Personnel Best”: http://www.shipmsm.com/ Articles/SS200201%20-%20Personnel%20Best.pdf Case Study Questions and Answers 1. Personality types a. In Appendix 12.1, we describe four personality types—analytical, driver, amiable, and expressive. What were the dominant personality types of Robert Murray and Mike McCarron? According to Robert Murray, how did these two different personality types contribute to the success of the company? Answer: The dominant personality type of Mike McCarron, was the expressive. Mike, the company’s managing partner and primary marketer, was enthusiastic, outgoing, passionate, and—as he admits—impulsive. Robert’s personality type was analytical. He was trained originally as a credit manager. He valued numbers and statistics and came across as quiet, diplomatic, thoughtful, and more of a long-term thinker. Robert recalled that the duo’s strength lay in the fact that they could disagree, argue feverishly, work it out, and move on. Their vision was to become a dominant player in the Canadian transportation industry. With two partners who shared a similar vision for the company, debate became a positive force that generated new ideas and better decisions. MSM benefited from both personalities because they questioned each other’s assumptions and strategies. Noted Robert, “My partner has made me much more effective and, I believe, much better at what I do.” b. What is your personality type? Take a few minutes and conduct the personality analysis provided in Appendix 12.1, pages 340–343. Answer: Your personality type can be assessed using the analysis provided in Appendix 12.1, which typically involves a series of questions or scenarios to identify traits and preferences. This analysis helps determine whether you are more introverted or extroverted, analytical or creative, and how these traits influence your approach to business and decision-making. Note: This is drawn from Action Step 53, page 324. Other personality tests are provided in Box 12.3, page 324. The purpose of this question is to get students to start thinking about their own personality types and begin to understand that others may very well have different and seemingly conflicting personalities. Some students may show a blend of personality types (both analytical and driver, for example). For this exercise, get them to think about their most dominant trait. When students have completed their self-analysis, you may want to organize the class into the four different categories. (i.e., put all the analyticals together and so on) Then get each student to go out and choose a four-member team, each member with a different personality type. Encourage them to work in this new team over the next few weeks so that they can begin to understand the differences. 2. Transformational leadership a. The primary focus of transformational leadership is to make change happen—or “transform” as the name implies. According to the text, people with this leadership style exhibit five basic types of behaviour. Briefly describe these five behavioural traits. Answer: 1. Visioning. A key trait is vision—a mental picture of where you want to be at some point in the future. The transformational leader communicates a compelling vision of the future that is widely shared by the organization’s members. 2. Inspiring. The leader “walks the talk” and communicates the vision with passion, energy, and conviction. 3. Stimulating. The leader arouses interest in new ideas and approaches, and enables employees to think through problems in new ways. 4. Coaching. The transformational leader truly cares. The leader coaches, advises and provides hands-on help for employees to develop their capabilities and improve their performance. 5. Team building. He or she increases team confidence and commitment by giving positive feedback, sharing information, utilizing individuals’ skills, and removing obstacles to team performance. b. Over the past several years, MSM has had a successful track record in managing a “remote” location in Los Angeles. McCarron’s transformational leadership style has had a lot to do with this success. Link on to the Street Smarts article entitled “Moving Targets” written by McCarron: www.shipmsm.com/Articles/SS200211%20-%20Moving%20Targets.pdf. List four ways that McCarron inspires and stimulates his team. Answer: In the article “Moving Targets,” McCarron inspires and stimulates his team through the following methods: 1. Visionary Leadership: He sets a clear and compelling vision that motivates the team towards shared goals. 2. Empowerment: He gives team members autonomy and trust, encouraging innovation and ownership. 3. Recognition: McCarron acknowledges and rewards individual and team achievements, boosting morale. 4. Communication: He maintains open, transparent communication, fostering trust and collaboration within the team. Note: You might want to suggest to students that, in many ways, managing a remote location is no different than managing a small business locally. The same basic leadership principles apply. Based on the article written by McCarron, possible answers could include: • Share the pie. MSM provides their key managers with a vested interest in the business. “Our strategy was to make two of our managers partners—we offered them equity in the business,” says McCarron. • Actively listen. Seek the view of your staff—“while researching this article, I contacted the managers at our Los Angeles terminal to get their views,” says McCarron. • Set goals. Communicate purpose and measure performance. • Understand cultural differences. According to McCarron, “People on the Left Coast are quite different than Canadians from Southern Ontario.” Once MSM recognized this, the owners managed accordingly. • Be sensitive to the needs of others. For example, McCarron says “don’t schedule a conference call for 8 a.m. Eastern time with your operations in Vancouver. • Visit often. Stress the importance of personal relationships. According to McCarron, “nothing replaces face-to-face time.” • Keep learning and improving. “In researching this article I realized how far we have come and how far we have to go,” says McCarron. 3. Other leadership styles a. The transformational style of leadership is particularly appealing and effective for many entrepreneurs since its major focus is to make change happen. However, there are other leadership styles. For example, three classical styles are: laissez faire (free rein); autocratic; and participative. Link onto the Legacee “Different types of Leadership Styles” site: www.legacee.com/Info/Leadership/LeadershipStyles.html. Briefly explain these three classic leadership styles. Answer: The three classical leadership styles are: 1. Laissez-Faire (Free Rein): Leaders provide minimal direction and allow team members to make decisions independently, promoting autonomy and creativity. 2. Autocratic: Leaders make decisions unilaterally, with little input from team members, focusing on control and directive decision-making. 3. Participative: Leaders involve team members in decision-making processes, valuing their input and fostering collaboration and shared responsibility. Note: This site provides a brief introduction to the three classical views on leadership. It concludes that no single best style of leadership exists. Leaders must adjust their leadership style to the situation as well as to the people being led. The three classical leadership styles are: 1. The laissez faire or free rein leadership style: This “free rein” style is largely a "hands off" view that tends to minimize the amount of direction, supervision, and face time required. 2. The autocratic leadership style: This is a controlling (micro managing) style. The autocratic leader reaches a decision and communicates it to his/her subordinates. 3. The participative leadership style: The style presents a happy medium between the hands off free rein style and the controlling autocratic style b. Situational leadership is another style that has gained a great deal of popularity over the last 40 years. It’s a “different strokes for different folks” approach. Because people and tasks are different, the leadership approach will depend on the situation. This approach involves a combination of four different styles. Link on to “The Situational Leader”: http://www.rayjutkins.com/ezine/20030812.html. What are the four “S” styles or options available to the situational leader? Answer: According to this site the four style options available to a situational leader are: • S1 = Telling—giving specific instructions with close supervision. • S2 = Selling—explaining your decisions, providing clarification ... and letting go. • S3 = Participating—sharing ideas and facilitating in decision-making and then implementation. • S4 = Delegating—turning over decision-making and implementation ... and walking away. c. Given these various leadership styles, what type of leadership do you plan to use when you open your business? How will this style help you to achieve your goals and objectives? You may want to begin by linking on to the leadership E-exercises provided in Box 12.3, page 324. Answer: When opening your business, you might choose a transformational leadership style, which emphasizes inspiring and motivating your team towards a shared vision. This style can help you achieve goals by fostering innovation, driving change, and engaging employees fully. It supports adaptability and a strong organizational culture, essential for meeting dynamic business objectives. Note: Students should learn that there is no one “best” leadership strategy. Answers will differ, depending on the people and tasks and the situation. 4. Organizational structures a. In this chapter, we described three types of traditional organizational structures used by small business. Briefly describe each of these types of classical organizational structures. Answer: The three traditional organizational structures provided in Figure 12.1, page 320 are: 1. Functional. The functional approach to an organizational structure is one of the most widely used forms in small business. Teams are grouped in accordance with the duties or functions they perform, such as accounting, service, or sales. 2. Geographic. Some independent business owners may decide to organize on the basis of geography. Provided in Figure 12.1 is an example of a “flat” service-type of organization chart that has a structure based on territory or geography. 3. Customer Driven. Some independent business owners organize their company on the basis of type of customer. After all, it is the customer who drives the business. A simple example of a small research and development organization that has a “customer-driven” organizational structure is provided in Figure 12.1. b. In the early 2000s, MSM launched an aggressive expansion policy. It expanded its freight forwarding, logistics, and distribution services. MSM even bought a Junior A hockey team. What type of organization structure did it create to handle this expansion? What are the five major benefits of this type of structure? (Hint: you might want to link onto the MSM, “Our Services” link: www.shipmsm.com/corp_services1.html.) Answer: MSM grew its business through a virtual or network organization model. It expanded into a multimillion-dollar group of five transportation companies or strategic business units offering a wide range of transportation services to the North American market. Each of these business units is operated under the same strict set of documented operating systems and customer service policies. It also created a sixth non-transportation business unit when it purchased the St Michael’s Buzzers. According to the text, page 321, benefits of this type of organization include: • It is customer driven. • It is flexible. • It relies on mutual trust and teamwork. • It is based on outsourcing. • It promotes supplier competition. • It delegates selling duties to selling agents, not staff. • It offers a web of associates or partners. • It relies on outside expertise. 5. Strategic partnerships Strategic partnerships with customers, suppliers, and even employees have been critical to the success of MSM. Link on to Street Smarts, “Why Partnerships Fail”: (www.shipmsm.com/Articles/SS200206%20-%20Why%20Partnerships%20Fail.pdf ). According to Mike McCarron, what are five ways in which you can improve your partnership relationships? Answer: According to Mike McCarron in his Street Smarts article, “Why Partnerships Fail”: (www.shipmsm.com/Articles/SS200206%20-%20Why%20Partnerships%20Fail.pdf ), partnerships fail for five reasons: 1. Someone wins. A partnership must be mutually beneficial. It must lead to a win-win situation. 2. People problems. Try not to rely on one-person partnerships. Establish relationships with more than one decision maker. 3. Too close for comfort. Make it clear. What right does each part have to proprietary information both inside and outside the scope of the deal. 4. Partnerships on the fly. It is professional relationship you are trying to establish. Try not to make it personal. Keep everyone in the loop. 5. Broken trust. Tell the truth. Lead by example. Trust but verify. 6. Human resource requirements a. In this chapter, we encouraged you to consider the “just-in-time” team and three specific human resource options (pages 323–324). Briefly describe these three alternatives to hiring staff. Answer: According to the text, three alternative options to hiring staff are: 1. Partnerships. Consider as partners those firms or individuals with special capabilities that will share your risk in bringing a product or service to market. Businesses usually form partnerships or associations in two fundamental ways: • joint venture—a partnership formed for a specific undertaking. It results in the formation of a new legal entity. • strategic alliance (business network)—a goal-oriented cooperation among two or more businesses, based on formal agreements and a business plan. In contrast to a joint venture, however, it usually does not involve the establishment of a separate or new organization. 2. Independent contractors or associates. Think about contracting out your human resource needs on a contract basis. If you pay by the job, on contract, you can increase your flexibility and save on administrative costs. 3. Employee leasing. Consider employee leasing as a way to reduce administrative costs, paperwork hassles, legal issues, and costly benefits. In this instance you will be leasing people (employees) from a professional employer organization (PEO), which handles most, if not all, of the human resources functions such as payroll, sick leave, vacation pay, and so on. b. According to Mike McCarron at MSM, “the quality of service our people deliver is the only competitive advantage any of us has.” What advice does he offer when it comes time to hire a new staff member? (See Streets Smarts, “Personnel Best, ”www.shipmsm.com/Articles/SS200201%20- %20Personnel%20Best.pdf.) Answer: Mike McCarron advises that when hiring a new staff member, you should focus on finding individuals who align with the company's core values and exhibit a strong commitment to service quality. He emphasizes selecting candidates who demonstrate not just the required skills but also a passion for delivering exceptional service, as this is crucial for maintaining a competitive advantage. Note: Some students may have now decided that the self-employment route is not for them. Others may have decided to get a job before they start their business. Some may even have decided to “moonlight”—operate a small business and work at the same time. Answers to this question may help these students develop a job search strategy to improve their chances of finding a suitable job after they graduate. According to McCarron, his advice when it comes time to hire a new employee is: • Scout your existing staff—think about promoting from within. This policy builds morale and creates employee incentive. When you are hiring your first employee, you should think “someday, will I be able to promote this person?” • Prospect for people. Network with your customers, suppliers and so on. Check out your competitors (a good sources is the “key contacts” link of their web page). • Newspaper. If you must, use a newspaper ad, only choose those candidates that follow instructions—did they include a reference contact, for example? • Focus on job history. People are likely to do in the future what they have done in the past. Focus on what they have done. • Follow a script. For your interviews, have a written series of questions. • What did they ask? Candidates should show that they have researched you and your company. They should come armed with lots of questions about your company—if available. • Check out your references—not their references. Ask for the names of people you might know that they have dealt with. • After you hire. Watch their performance for the first 90 days. If you are not satisfied, admit your mistake, and start again. c. After considering your alternative options, you decide to hire a new staff member on a ‘full-time basis’. According to the text, what are the basic steps you should follow to improve your chances of getting the ‘right’ person for your business? (page 328). Answer: According to the text, pages 328–329, the four basic steps are: 1. Job analysis. First you will have to determine the jobs or functions that need to be done to achieve your businesses goals. 2. Job qualifications. You will need to consider what skills/knowledge are required to do the work. What are the qualifications, traits, and characteristics considered to be essential? 3. Determine who will do the job requirements. Once you determine what jobs and the corresponding skills are required, then you have to figure out who is going to do the work. 4. Staffing decisions and recruitment. Should you decide to hire staff, either part-time or full-time, you have to make four basic staffing decisions: i. recruitment; ii. selection; iii. training/development; and iv. compensation. Solution Manual for Small Business: An Entrepreneurs Plan Ron Knowles, Chris Castillo 9780176501808, 9780176252403