This Document Contains Chapters 15 to Appendix A CHAPTER 15 MANAGING QUALITY AND PERFORMANCE CHAPTER OUTLINE New Manager Self-Test: What Is Your Attitude Toward Organizational Regulation and Control? I. The Meaning of Control II. Feedback Control Model A. Steps of Feedback Control B. The Balanced Scorecard III. Budgetary Control A. Expense Budget B. Revenue Budget C. Cash Budget D. Capital Budget E. Zero-Based Budget IV. Financial Control A. Financial Statements B. Financial Analysis: Interpreting the Numbers V. The Changing Philosophy of Control A. Hierarchical versus Decentralized Approaches B. Open-Book Management VI. Total Quality Management A. TQM Techniques New Manager Self-Test: Improvement Attitude B. TQM Success Factors VII. Trends in Quality and Financial Control A. International Quality Standards B. Corporate Governance ANNOTATED LEARNING OUTCOMES After studying this chapter, students should be able to: 1. Define organizational control and explain why it is a key management function. Answer: Organizational control is defined as the systematic process through which managers regulate organizational activities to make them consistent with the expectations established in plans, targets, and standards of performance. Control, especially quality control, is an issue facing every manager in every organization today. Control is a key management function because it is the mechanism managers use to steer the organization toward its objectives. Organizational control is a process of ensuring that objectives are met and that resources are allocated in the best way to achieve those objectives. 2. Explain the four steps in the control process. Answer: Based on our definition of organizational control, a well-designed control system consists of the following four key steps: • Establish standards of performance. Managers define goals for organizational departments in specific, operational terms that comprise a standard of performance against which to compare organizational activities. • Measure actual performance. Managers develop quantitative measurements of performance that can be reviewed on a daily, weekly, or monthly basis. • Compare performance to standards. This is an explicit comparison of actual activities to performance standards. • Feedback. Corrective action is a change in work activities to bring them back to acceptable performance standards. 3. Explain the benefits of using the balanced scorecard to track the performance and control of the organization. Answer: The balanced scorecard is a comprehensive management control system that balances traditional financial measures with operational measures relating to a company’s critical success factors. A balanced scorecard contains four major perspectives: financial performance, customer service, internal business processes, and the organization’s capacity for learning and growth. 4. Discuss the use of financial statements, financial analysis, and budgeting as management controls. Answer: Budget and financial controls tell whether the organization is on sound financial footing and they can be useful indicators of other kinds of performance problems. Managers need to be able to evaluate financial reports that compare their organization’s performance with earlier data or industry norms. The most common financial analysis focuses on ratios. Liquidity ratios, activity ratios, profitability ratios, and leverage ratios are among the most common ratios. Budgets are a useful tool for planning an organization’s expenditures. Examples of types of budgets managers use are expense budgets, revenue budgets, cash budgets, and capital budgets. 5. Contrast the hierarchical and decentralized methods of control. Answer: An organization’s approaches to quality are based on its basic philosophy of control. With many organizations moving toward participation and employee empowerment, a choice must be made between hierarchical and decentralized approaches. Hierarchical control involves monitoring and influencing employee behavior through rules, policies, hierarchy of authority, written documentation, and reward systems. Hierarchical methods define explicit rules, policies, and procedures for employee behavior. Control relies on centralized authority, the formal hierarchy, and close personal supervision. Responsibility for quality control rests with quality control inspectors and supervisors rather than with employees. Hierarchical control techniques can enhance organizational efficiency and effectiveness. Decentralized control represents cultural values almost the opposite of bureaucratic control. Decentralized control relies on social values, traditions, shared beliefs, and trust to foster compliance with organizational goals. Employees are trusted, and managers believe employees are willing to perform correctly without extensive rules or supervision. Decentralized control is implemented through the corporate culture, peer groups, self control, and employee selection and socialization. 6. Identify the benefits of open-book management. Answer: Open-Book Management allows employees to see for themselves – through charts, computer printouts, meetings, and so forth – the financial condition of the company. Open-book management also shows the individual employee how his or her job fits into the big picture and affects the financial future of the organization. 7. Describe the concept of total quality management (TQM) and major TQM techniques, such as quality circles, benchmarking, Six Sigma principles, quality partnering, and continuous improvement. Answer: Total quality management (TQM) is a philosophy of organization-wide commitment to continuous improvement, with the focus on teamwork, increasing customer satisfaction, and lowering costs. TQM works through horizontal collaboration across functions and departments and extends to include customers and suppliers. Teams of workers are trained and empowered to make decisions that help the organization achieve high standards of quality. This is a revolution in management thinking because quality control departments and formal control systems no longer have primary control responsibility. Quality control thus becomes part of the day to day business of every employee. A quality circle is a group of six to 12 volunteer employees who meet regularly to discuss and solve problems affecting the quality of their work. They meet during work hours to identify problems and find solutions. The reason for using quality circles is to push decision making to a level at which recommendations can be made by those who do the job. Benchmarking is the continuous process of measuring products, services, and practices against the toughest competitors or those companies recognized as industry leaders. The key to successful benchmarking lies in analysis. A company must honestly analyze its current procedures and determine areas for improvement. A company carefully selects competitors worthy of copying and emulates their internal processes and procedures. Six Sigma is a highly ambitious quality standard that specifies a goal of no more than 3.4 defects per million parts. Six Sigma has become a generic term for a quality control approach that takes nothing for granted and emphasizes higher quality and lower costs. The discipline is based on DMAIC (Define, Measure, Analyze, Improve, and Control). This methodology provides a structured way for solving problems. Effectively implementing Six Sigma requires a major commitment from top management because widespread change is required. Cycle time refers to the steps taken to complete a company process, such as teaching a class, publishing a textbook, or designing a new car. The focus is on improved responsiveness and acceleration of activities into a shorter time. Reduction in cycle time improves overall company performance as well as quality. Continuous improvement is the implementation of a large number of small, incremental improvements in all areas of the organization on an on going basis. All employees are expected to contribute by initiating changes in their own job activities. There is no end to the process. Innovations can start simply, and employees can build on their success. 8. Identify current trends in quality and financial control, including ISO 9000 and corporate governance, and discuss their impact on organizations. Answer: International Quality Standards - Many countries have endorsed a universal framework for quality assurance called ISO 9000, a set of international standards for quality management adopted in the late 1980s by more than 50 nations, including the United States. These standards set uniform guidelines defining what manufacturing and service organizations should do to ensure their products conform to high-quality requirements. Economic Value Added (EVA) Systems - Hundreds of companies have set up economic value added (EVA) measurement systems as a new way to gauge financial performance. EVA is defined as a company’s net (after-tax) operating profit minus the cost of capital invested in the company’s tangible assets. Measuring performance in terms of EVA is intended to capture all the things a company can do to add value from its activities. Market Value Added (MVA) Systems adds another dimension because it measures the stock market’s estimate of the value of a company’s past and projected capital investment projects. A positive MVA usually goes hand-in-hand with a high EVA measurement. Activity-Based Costing (ABC) - Identifies various activities needed to provide a product and determines the cost of each of those activities. ABC allocates costs across business processes; it provides a more accurate picture of the cost of various products and services. In addition, it enables managers to evaluate whether more costs go to activities that add value or to activities that do not add value. Corporate governance refers to the system of governing an organization so that the interests of corporate shareholders are protected. The financial reporting systems and the roles of boards of directors are being scrutinized in organizations around the world to ensure that top leaders are keeping a close eye on the activities of lower-level managers and employees. LECTURE OUTLINE NEW MANAGER SELF-TEST: WHAT IS YOUR ATTITUDE TOWARD ORGANIZATION REGULATION AND CONTROL? Managers have to control people for organizations to survive, yet control should be the right amount and type. Companies are often less democratic than the society of which they are a part. Enthusiastic new managers may exercise too much of their new control and create a negative backlash. However, too little control may mean less accountability and productivity. The challenge for new managers is to strike the right balance for the job and people involved. This exercise helps students determine whether they prefer more centralized control and bureaucracy or more decentralized control. I. THE MEANING OF CONTROL Control, including quality control, also involves office productivity, such as improved customer service, elimination of bottlenecks, and reduction in paperwork mistakes. Lack of effective control can seriously damage an organization’s health and threaten its future. Organizational control is the systematic process through which managers regulate organizational activities to make them consistent with the expectations established in plans, targets, and standards of performance. To effectively control an organization, managers (or workers) require information about performance standards, actual performance, and actions to correct deviations from the standards. Most organizations measure and control performance using quantitative financial measures. Discussion Question #2: You’re a manager who employs a participative control approach. You’ve concluded that corrective action is necessary to improve customer satisfaction, but first you need to convince your employees that the problem exists. What kind of evidence do you think employees will find more compelling: quantitative measurements or anecdotes from your interactions with customers? Explain your answer. NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ II. FEEDBACK CONTROL MODEL Exhibit 15.1 A. Steps of Feedback Control 1. Establish Standards of Performance a. Within the organization’s overall strategic plan, managers define goals for organizational departments in specific, operational terms. These include standards of performance against which to compare organizational activities. b. To effectively evaluate and reward employees for the achievement of standards, managers need clear standards that reflect activities that contribute to the organization’s strategy. Standards should be defined clearly and precisely so employees know what they need to do and can determine whether their activities are on target. 2. Measure Actual Performance a. Most organizations prepare formal reports of quantitative performance measurements that managers review daily, weekly, or monthly. These measurements should be related to the standards set in the first step of the control process. Managers do not rely exclusively on quantitative measurements. Managers observe for themselves whether employees are participating in decision making and have opportunities to add to and share their knowledge. Managers also monitor real-time data that show the popularity of certain products in specific delivery zones and time slots. 3. Compare Performance to Standards a. The third step in the control process compares actual activities to performance standards. When performance deviates from a standard, managers must interpret the deviation. They must dig beneath the surface and find the cause of the problem. Effective management control involves subjective judgment and employee discussions, as well as objective analysis of performance data. 4. Take Corrective Action a. Managers also determine what changes are necessary; managers may encourage employees to work harder, redesign the production process, or fire employees. Managers in a participative control approach collaborate with employees to determine the corrective action necessary. Managers may take corrective action to change performance standards. Performance standards may need to be altered to make them realistic and provide motivation. Discussion Question #6: Think of a class that you’ve taken in the past. What standards of performance did your professor establish? How was your actual performance measured? How was your performance compared to the standards? Do you think the standards and methods of measurement were fair? Were they appropriate to your assigned work? Why or why not? NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ B. The Balanced Scorecard Exhibit 15.2 1. The balanced scorecard is a comprehensive management control system that balances traditional financial measures with operational measures relating to a company’s critical success factors. A balanced scorecard contains four major perspectives. a. The financial performance perspective reflects a concern that the organization’s activities contribute to improving short- and long-term financial performance. b. Customer service indicators measure such things as how customers view the organization, as well as customer retention and satisfaction. c. Internal business process indicators focus on production and operating statistics. d. Potential for learning and growth indicators focus on how well resources and human capital are being managed for the company’s future. Managers focus on various elements of the scorecard to set targets, evaluate performance, and guide discussion about what further actions to take. The balanced scorecard is not right for every organization in every situation. The simplicity of the system causes managers to underestimate the time and commitment needed. A key to successful implementation of the balanced scorecard approach is a performance management orientation rather than a performance measurement orientation. Discussion Question #3: Describe the advantages of using a balanced scorecard to measure and control organizational performance. Suppose you created a balanced scorecard for Walmart. What specific customer service measures would you include? NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ III. BUDGETARY CONTROL 1. Budgetary control sets targets for an organization’s expenditures, monitors results, compares them to the budget, and makes changes as needed. As a control device, budgets are reports that list planned and actual expenditures for cash, assets, raw materials, salaries, and other resources. Budget reports usually list the variance between the budgeted and actual amounts for each item. A budget is created for every division or department within an organization so long as it performs a distinct project, program, or function. The fundamental unit of analysis for a budget control system is called a responsibility center. A responsibility center is any organizational department or unit under the supervision of a single person who is responsible for its activity. Types of budgets managers use include expense budgets, revenue budgets, and capital budgets. A. Expense budget. An expense budget includes anticipated and actual expenses for each responsibility center and for the total organization. It may show all expenses or focus on a particular category, such as materials or research and development expenses. When actual expenses exceed budgeted amounts, the difference signals the need for managers to identify whether a problem exists and if so, take action. B. Revenue budget. A revenue budget lists forecasted and actual revenues of the organization. Revenues below the budgeted amount signal a need to investigate the problem to see whether the organization can improve revenues. Revenues above the budget require determining whether the organization can obtain the resources to meet the higher demand for products. C. Cash budget. A cash budget estimates receipts and expenditures of money on a daily or weekly basis to ensure that an organization has sufficient cash to meet its obligations. It shows the level of funds flowing through the organization and the nature of cash disbursements. If the cash budget shows that the firm has more cash than necessary to meet its short-term needs, the company can invest the excess funds. If the cash budget shows a payroll expense that exceeds the amount of money in the bank, the organization must borrow cash to meet the payroll. D. Capital budget. A capital budget lists planned investments in major assets such as buildings, trucks, and heavy machinery, often involving expenditures over more than a year. A capital budget is necessary to plan the impact of these expenditures on cash flow and profitability. • Budgeting is an important part of organizational planning and control. Many traditional companies use top-down budgeting, meaning that the budgeted amounts for the coming year are imposed on middle- and lower-level managers. Others are beginning to adopt bottom-up budgeting, in which lower-level managers anticipate their departments’ resource needs and pass them up to top management for approval. E. Zero-Based budget. A zero-based budgeting is an approach to planning and decision making that requires a complete justification for every line-item in the budget, instead of carrying forward a prior budget and applying percentage change. A zero-based budget begins with a starting point of $0, and every dollar added to the budget is reflected by an actual, documented need. IV. FINANCIAL CONTROL A. Financial Statements Exhibit 15.3, Exhibit 15.4 1. Financial statements provide the basic information used for financial control of an organization. Two major financial statements—the balance sheet and the income statement—are the starting points for financial control. a. The balance sheet shows the firm’s financial position with respect to assets and liabilities at a specific point in time. It provides three types of information: assets—what the company owns—includes current assets and fixed assets; liabilities—the firm’s debts—includes both current debt and long-term debt; and owners’ equity—the difference between assets and liabilities—is the company’s net worth in stock and retained earnings. b. The income statement, also called a profit-and-loss statement or “P & L,” summarizes the firm’s financial performance for a given time interval, usually one year. The bottom line indicates the net income—profit or loss—for the given time period. Discussion Question #8: What types of analysis can managers perform to help them diagnose a company’s financial condition? How might a review of financial statements help managers diagnose other kinds of performance problems as well? NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ B. Financial Analysis: Interpreting the Numbers Exhibit 15.5 1. Financial analysis allows managers to be able to evaluate financial reports that compare their organization’s performance with earlier data or industry norms. The most common financial analysis focuses on ratios, which express the relationships between performance indicators such as profits and assets, sales, and inventory. Managers decide which ratios reveal the most important relationships for their businesses. a. A liquidity ratio indicates an organization’s ability to meet its current debt obligations. The current ratio (current assets divided by current liabilities) tells whether there are sufficient assets to convert into cash to pay off debts, if needed. Another liquidity ratio is the quick ratio, which is typically expressed as cash plus accounts receivable divided by current liabilities. b. An activity ratio measures internal performance with respect to key activities defined by management. Inventory turnover is calculated by dividing the total sales by average inventory; this tells how many times the inventory is used to meet the sales figure. The conversion ratio is purchase orders divided by customer inquiries; this ration indicates effectiveness in converting inquiries into sales. c. A profitability ratio states profits relative to a source of profits, such as sales or assets. The profit margin on sales is calculated as net income divided by total sales. The gross margin is the gross (before-tax) profit divided by total sales. • Another profitability measure is return on assets (ROA), a percentage representing company earnings from assets, computed as net income divided by total assets. ROA is a valuable yardstick for comparing a company’s ability to generate earnings with other investment opportunities. A company should earn more by using its assets than it could by putting its investment in the bank. d. Leverage refers to funding activities with borrowed money. A company uses leverage to make its assets produce more than they could on their own. Too much borrowing can put the organization at risk such that it will be unable to keep up with repayment of its debt. Managers track the debt ratio, or total debt divided by total assets, to make sure that it does not exceed a level they consider acceptable. V. THE CHANGING PHILOSOPHY OF CONTROL A. Hierarchical versus Decentralized Approaches Exhibit 15.6 1. Hierarchical control involves monitoring and influencing employee behavior through rules, policies, hierarchy of authority, written documentation, and reward systems. Hierarchical methods define explicit rules, policies, and procedures for employee behavior. Control relies on centralized authority, the formal hierarchy, and close personal supervision. Responsibility for quality control rests with quality control inspectors and supervisors rather than with employees. Hierarchical control techniques can enhance organizational efficiency and effectiveness. 2. Decentralized control relies on shared values and goals to control employee behavior. Managers operate on the assumption that employees are trustworthy and willing to perform effectively without extensive rules and close supervision. The organization places great emphasis on the selection and socialization of employees to ensure that workers have the values needed to influence behavior which meets goals. With decentralized control, the culture is adaptive, and managers recognize the importance of culture for uniting individual, team, and organizational goals for greater overall control. B. Open-Book Management Exhibit 15. 7 1. Open-book management allows employees to see the financial condition of the company for themselves through charts, computer printouts, meetings, and so forth. Open-book management shows the individual employee how his or her job fits into the big picture and affects the financial future of the organization. In addition, it ties employee rewards to the company’s overall success. The goal of open-book management is to get every employee thinking and acting like a business owner rather than like a hired hand. 2. In some countries, managers have trouble running an open-book company because the prevailing attitudes and standards foster confidentiality and secrecy. Many business people in countries like China, Russia, and South Korea are not accustomed to publicly disclosing financial details. 3. The Opacity Index indicates the degree to which various countries are open regarding economic matters. The higher the rating, the more opaque, or hidden, is the economy. The U.S. has an opacity rating of 23, which is fairly low. In countries with higher ratings, financial figures are typically closely guarded and managers do not share information. Globalization has an impact on economic opacity by encouraging a convergence toward global accounting standards that support accurate collection, recording, and reporting of financial information. VI. TOTAL QUALITY MANAGEMENT (TQM) One popular approach based on decentralized control philosophy is total quality management (TQM). TQM infuses quality into every activity in a company through continuous improvement. The TQM philosophy focuses on teamwork, increasing customer satisfaction, and lowering costs. Organizations implement TQM by encouraging managers and employees to collaborate across functions and departments, as well as with customers and suppliers, to identify areas for improvement, no matter how small. Each quality improvement is a step toward perfection and meeting a goal of zero effects. A. TQM Techniques 1. Quality Circles a. A quality circle is a group of six to 12 volunteer employees who meet regularly to discuss and solve problems affecting the quality of their work. They meet during work hours to identify problems and find solutions. The reason for using quality circles is to push decision making to a level at which recommendations can be made by those who do the job. 2. Benchmarking Exhibit 15.8 a. Benchmarking is the continuous process of measuring products, services, and practices against the toughest competitors or those companies recognized as industry leaders. The key to successful benchmarking lies in analysis. A company must honestly analyze its current procedures and determine areas for improvement. A company carefully selects competitors worthy of copying and emulates their internal processes and procedures. 3. Six Sigma Exhibit 15.9 a. Six Sigma is a highly ambitious quality standard that specifies a goal of no more than 3.4 defects per million parts. That means being defect-free 99.9997 percent of the time. Six Sigma has become a generic term for a quality control approach that takes nothing for granted and emphasizes higher quality and lower costs. The discipline is based on DMAIC (Define, Measure, Analyze, Improve, and Control). This methodology provides a structured way for solving problems. Effectively implementing Six Sigma requires a major commitment from top management because widespread change is required. 4. Quality partnering a. Quality partnering involves assigning dedicated personnel with a particular functional area of the business. In this approach, the quality control personnel work alongside others within a functional area identifying opportunities for quality improvements throughout the work process. This integrated, partnering approach to quality makes it possible to detect and address defects early in the product life cycle, when they can be corrected most easily. 5. Continuous Improvement a. Continuous improvement is the implementation of a large number of small, incremental improvements in all areas of the organization on an on going basis. All employees are expected to contribute by initiating changes in their own job activities. There is no end to the process. Innovations can start simply, and employees can build on their success. NEW MANAGER SELF-TEST: IMPROVEMENT ATTITUDE In organizations, continuous improvement in quality sometimes competes with managerial desires for production efficiency. Efficiency can be maximized by eliminating changes and quality improvements. Continuous improvement, however, is an attitude that productivity can always get better, and each employee can take responsibility to improve it. This attitude is appropriate for quality conscious managers striving for continuous improvement. B. TQM Success Factors Exhibit 15.10 1. Many organizational contingency factors influence the success of a TQM program. Some of these factors include: a. Quality circles are most beneficial when employees have challenging jobs. b. TQM is most successful when it enriches jobs and improves employee motivation. c. When participation improves employees’ problem-solving skills, productivity is likely to increase. d. Quality programs have the greatest chance of success in corporate cultures that value quality and stress continuous improvement as a way of life. Discussion Question #8: Why is benchmarking an important component of TQM programs? Do you believe a company could have a successful TQM program without using benchmarking? NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ VII. TRENDS IN QUALITY AND FINANCIAL CONTROL A. International Quality Standards 1. The increasing significance of the global economy provides one impetus for total quality management in the United States. ISO 9000 standards are based on a set of international standards for quality management systems established by the International Standards Organization (ISO) in Geneva, Switzerland. Hundreds of thousands of organizations in 157 countries have been certified to demonstrate their commitment to quality. ISO certification has become the recognized standard for evaluating and comparing companies on a global basis, and more U.S. companies are feeling the pressure to participate in order to remain competitive in international markets. Many countries and companies require ISO certification before they will do business with an organization. B. Corporate Governance a. Corporate governance refers to the system of governing an organization so that the interests of corporate shareholders are protected. The financial reporting systems and the roles of boards of directors are being scrutinized in organizations around the world to ensure that top leaders are keeping a close eye on the activities of lower-level managers and employees. b. Some corporate failures can be attributed to under control because top managers did not keep personal tabs on everything in a large, global organization. The Sarbanes-Oxley Act of 2002 requires several types of reforms, including better internal monitoring to reduce the risk of fraud, certification of financial reports by top leaders, improved measures for external auditing, and enhanced public financial disclosure. Some critics argue that Sarbanes-Oxley is creating a culture of overcontrol that is stifling innovation and growth. Discussion Question #10: What is ISO certification? Why would a global company like GE want ISO certification? NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ APPENDIX A MANAGING SMALL BUSINESS START-UPS APPENDIX OUTLINE New Manager Self-Test: Do You Think Like an Entrepreneur? I. What Is Entrepreneurship? II. Impact of Entrepreneurial Companies A. Entrepreneurship Internationally B. Entrepreneurship in the United States III. Who Are Entrepreneurs? A. Minority-Owned Businesses B. Women-Owned Businesses C. Traits of Entrepreneurs IV. Social Entrepreneurship V. Launching an Entrepreneurial Start-Up A. Starting with an Idea B. Writing the Business Plan C. Choosing a Legal Structure D. Arranging Financing New Manager Self-Test: Perceived Passion E. Tactics for Becoming a Business Owner F. Starting an Online Business VI. Managing a Growing Business A. Stages of Growth B. Planning C. Organizing D. Decision Making E. Controlling ANNOTATED LEARNING OUTCOMES After studying this chapter, students should be able to: 1. Define entrepreneurship and the four classifications of entrepreneurs. Entrepreneurship is the process of initiating a business venture, organizing the necessary resources, and assuming the associated risks and rewards. They can be classified into five categories. Answer: • Idealists who like the idea of working on something new, creative, and personally meaningful. • Optimizers who are rewarded by the personal satisfaction of being business owners. • Sustainers who like the chance to balance work and personal life and don’t want the business to grow too large. • Hard workers who enjoy putting in the long hours and dedication to build a larger, more profitable business. • Jugglers who like the chance a small business gives them to handle everything themselves. 2. Describe the importance of entrepreneurship to the global and U.S. economies. Answer: Globally, entrepreneurship has experienced a tremendous boost due to huge advances in technology and the rapid expansion of the middle class in developing nations. In the U.S., the impact of entrepreneurial companies is astonishing. Small businesses create two out of every three new jobs. They represent 98 percent of all businesses in the United States. Small businesses also represent 97 percent of America’s exporters and produce 30.2 percent of all export value. 3. Appreciate the impact of minority- and women-owned businesses. Answer: As the minority population of the United States has grown, so has the number of minority-owned businesses. The number of minority-owned businesses accounts to a total of 5.8 million firms, according to the most recent data available. The types of businesses launched by minority entrepreneurs are also increasingly sophisticated. Women are also embracing entrepreneurial opportunities in greater numbers. However, most businesses don’t grow as they do not hire people. Another challenge faced by women is the stark imbalance of the sexes in high-tech fields. 4. Define the personality characteristics of a typical entrepreneur. Answer: Seven personality traits associated with entrepreneurship have special importance. Autonomy. Entrepreneurs driven by the desire for autonomy cherish the freedom of making their own decisions about their business. Because of this desire, they consider flying solo, without partners or significant investors. It may affect the firm’s development. It is best for start-ups to forego autonomy and be managed by someone with a different set of managerial skills. Entrepreneurial Struggle. The ability to persevere and stay positive after long periods of struggle is another common trait among entrepreneurs. Power and Influence. Some entrepreneurs are driven by the desire for power and influence. When an entrepreneur is ahead of his competitors, he has the power to dictate terms in that market. High energy. Most entrepreneurs report struggle and hardship, but they persist and work incredibly hard. High levels of passion also help them overcome traumas and obstacles. Nearly half of small business owners work more than a regular 40 hours per week. Need to achieve. The need to achieve is a human quality linked to entrepreneurship that means people are motivated to excel and pick situations in which success is likely. People with high achievement needs like to set their own goals that are moderately difficult. Self confidence. People who start and run a business must act decisively and need confidence about their ability to master the day to day tasks of the business. Entrepreneurs have a general feeling of confidence that they can deal with any complex, unanticipated problems that may arise. Tolerance for ambiguity. Tolerance for ambiguity is the psychological characteristic that allows a person to be untroubled by disorder and uncertainty. This is important because few situations present more uncertainty than starting a new business. 5. Explain social entrepreneurship as a vital part of today’s small business environment. Answer: Social entrepreneurs are people who are committed to both good business and positive social change. They create new business models that meet critical human needs and solve important problems that remain unsolved by current economic and social institutions. Social entrepreneurship combines the creativity, business smarts, passion, and hard work of the traditional entrepreneur with a mission to change the world for the better. Though not new, social entrepreneurship has blossomed over the past 20 or so years. The innovative organizations created by social entrepreneurs are defying the traditional boundaries between business and welfare. 6. Outline the planning necessary to launch an entrepreneurial start-up. Answer: Starting with an Idea – skill and market need must both be present Writing the Business Plan – a document specifying the business details prepared by an entrepreneur prior to opening a new business Choosing a Legal Structure • Sole proprietorship – an unincorporated business owned by an individual for profit • Partnership – an unincorporated business owned by two or more people • Corporation – an artificial entity created by the state that exists apart from its owners Arranging Financing • Debt Financing – borrowing money that has to be repaid at a later date • Equity Financing – funds that are invested in exchange for ownership in the company either by owners or those who buy stock in the company 7. Describe the five stages of growth for an entrepreneurial company. Answer: Start-up. In the initial stage, the main problems are producing the product or service and funding the business. Key issues are attracting enough customers and money to survive. Survival. In this stage, the business demonstrates that it is a workable business entity that produces a product or service and has sufficient customers. Concerns are generating sufficient cash flow and making sure that revenues exceed expenses. Success. The company is solidly based and profitable at this stage. Systems and procedures are in place and they allow the owner to slow down if desired or consider turning the business over to professional managers. Takeoff. In the fourth stage, the problem is how to grow rapidly and finance that growth. The owner must learn to delegate, and the company must find sufficient capital to invest in major growth. Resource maturity. At this stage, the company has made substantial financial gains and has the staff and resources to develop detailed planning and control systems, but may lose the advantages of small size, including flexibility and the entrepreneurial spirit. 8. Explain how the management activities of planning, organizing, decision making, and controlling apply to a growing entrepreneurial company. Answer: In the early start-up stage, formal planning tends to be nonexistent except for the business plan. The primary goal is to stay alive. Formal planning usually is not instituted until the success stage. The growing importance of e-business means entrepreneurs have to plan and allocate resources for Internet operations from the beginning and grow those plans as the company grows. In the first two stages of growth, the organization’s structure is very informal, with all employees reporting to the owner. At about the success stage, functional managers begin to evolve to manage finance, manufacturing, and marketing. During the takeoff and resource maturity stages, managers must learn to delegate and decentralize authority. As an organization grows, it may be characterized by greater use of rules, procedures, and written job descriptions. When managing a growing business, owners face masses of decisions that affect the performance of the organization. These decisions may include determining inventory levels, hiring new employees, choosing a domain name for a website, or expanding into a new market. Sometimes the decisions are easy to make. Every decision has the potential to alter the direction and success of the business. Financial control is important in each stage of a firm’s growth. In the start-up and survival stages, control is exercised by simple accounting records and personal supervision. By the success stage, operational budgets are in place and the owner should start implementing more structured control systems. During the takeoff stage, the company will need to make greater use of budgets, standard cost systems, and computers to provide statistical reports. These techniques will become more sophisticated during the resource maturity stage. LECTURE OUTLINE NEW MANAGER SELF-TEST: DO YOU THINK LIKE AN ENTREPRENEUR? Entrepreneurs face many demands. Improvisation is a correlate of entrepreneurial intentions. Entrepreneurial improvisation consists of three elements: the ability to produce novel solutions under constrained conditions; the ability to excel under pressure-filled circumstances; and the determination to achieve goals and solve problems in the moment. This exercise helps students determine whether they have the inclination to start and build their own businesses. I. WHAT IS ENTREPRENEURSHIP? Exhibit A. 1 Entrepreneurship is the process of initiating a business venture, organizing the necessary resources, and assuming the associated risks and rewards. An entrepreneur recognizes a viable idea for a business product or service and carries it out by finding and assembling the necessary resources—money, people, machinery, and location—to undertake the business venture. Entrepreneurs have many different motivations and measure rewards in different ways. They can be classified into five categories. • Idealists who like the idea of working on something new, creative, and personally meaningful. • Optimizers who are rewarded by the personal satisfaction of being business owners. • Sustainers who like the chance to balance work and personal life and don’t want the business to grow too large. • Hard workers who enjoy putting in the long hours and dedication to build a larger, more profitable business. • Jugglers who like the chance a small business gives them to handle everything themselves. Many people regard entrepreneurship as a better use of their time, talent, and energy. Women and minorities, who have found corporate opportunities more limited, often see entrepreneurship as the only way to go. NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ II. Impact of Entrepreneurial Companies Small businesses have been hit particularly hard by the global economic crisis and weak consumer demand. But rejuvenation in the economy is underway, and small businesses and entrepreneurs are the engine behind the rebound that’s occurring in many markets. A. Entrepreneurship Internationally 1. Globally, entrepreneurship has experienced a tremendous boost due to huge advances in technology and the rapid expansion of the middle class in countries such as China and India. Entrepreneurship in other countries is also booming. B. Entrepreneurship in the United States 1. The impact of entrepreneurial companies on the U.S. economy is astonishing. In the United States, small businesses create two out of every three jobs. Small businesses represent 98 percent of all businesses in the United States. Entrepreneurship and small businesses are the engines behind job creation and innovation. NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ III. WHO ARE ENTREPRENEURS? The heroes of American business—Henry Ford, Steve Jobs, Sam Walton, Bill Gates, Oprah Winfrey, and Mark Zuckerberg—are almost always entrepreneurs, but the image of entrepreneurs as bold pioneers is probably overly romantic. Most entrepreneurs can best be characterized as hardworking and practical, with great familiarity with their market and industry. A. Minority-Owned Businesses EXHIBIT A.2 1. As the minority population of the United States has grown, so has the number of minority-owned businesses. The number of minority-owned businesses increased by 45.6 percent between 2002 and 2007, to 5.8 million firms, according to the most recent data available. More minorities are looking to control their destiny by establishing themselves in the U.S. 2. The types of businesses launched by minority entrepreneurs are also increasingly sophisticated. The traditional retail stores or restaurants are replaced by firms in industries such as financial services, insurance, and online businesses. B. Women-Owned Businesses 1. Women are also embracing entrepreneurial opportunities in greater number in a range of industries like business services, health care, and communication. However, most businesses don’t grow as they do not hire people. Another challenge faced by women is the stark imbalance of the sexes in high-tech fields. Discussion Question: Why would small business ownership have great appeal to immigrants, women, and minorities? NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ C. Personality Traits Exhibit A.3 1. In general, entrepreneurs seem to want something different from life than do traditional managers. Seven personality traits associated with entrepreneurship have special importance. a. Autonomy. The desire for autonomy is reportedly the primary motivator for pursuing an entrepreneurial life. The freedom of making their own decisions about their business drives the desire for autonomy in entrepreneurs. Because of this desire, they consider flying solo, without partners or significant investors. It may affect the firm’s development. It is best for start-ups to forego autonomy and be managed by someone with a different set of managerial skills. b. Entrepreneurial Struggle. The ability to persevere and stay positive after long periods of struggle is another common trait among entrepreneurs. c. Power and Influence. Some entrepreneurs are driven by the desire for power and influence. When an entrepreneur’s influence grows, so does the entrepreneur’s power to dictate price, volume, delivery, packaging, and quality of many of its suppliers’ products. d. High energy. A business start-up requires great effort. Most entrepreneurs report struggle and hardship, but they persist and work incredibly hard despite traumas and obstacles. In a recent survey, it was found that 43 percent of small business owners work more than a regular 40-hour week, 31 percent reported working during holidays, and 13 percent said they regularly worked for more than 80 hours a week. Entrepreneurial passion in people can be recognized by their unwavering belief in a dream, intense focus, and unconventional risk taking. e. Need to achieve. The need to achieve is a human quality linked to entrepreneurship that means people are motivated to excel and pick situations in which success is likely. People with high achievement needs like to set their own goals that are moderately difficult. f. Self confidence. People who start and run a business must act decisively and need confidence about their ability to master the day to day tasks of the business. Entrepreneurs have a general feeling of confidence that they can deal with any complex, unanticipated problems that may arise. g. Tolerance for ambiguity. Tolerance for ambiguity is the psychological characteristic that allows a person to be untroubled by disorder and uncertainty. This is important because few situations present more uncertainty than starting a new business. Discussion Question: Consider the seven characteristics of entrepreneurs described in the chapter. Which two traits do you think are most like those of managers in large companies? Which two are least like those of managers in large companies? NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ IV. SOCIAL ENTREPRENEURSHIP Social entrepreneurs are people who are committed to both good business and positive social change. They create new business models that meet critical human needs and solve important problems that remain unsolved by current economic and social institutions. Social entrepreneurship combines the creativity, business smarts, passion, and work of the traditional entrepreneur with a mission to change the world for the better. Though not new, social entrepreneurship has blossomed over the past 20 or so years. The innovative organizations created by social entrepreneurs are defying the traditional boundaries between business and welfare. V. LAUNCHING AN ENTREPRENEURIAL START-UP A. Starting with an Idea Exhibit A.4 1. Some people are inspired to choose entrepreneurship by exciting ideas. Others decide to start their own businesses and go looking for an idea. The trick for entrepreneurs is to blend their own skills and experience with a need in the marketplace. Past job experiences also influence an entrepreneur to come up with new business ideas. Skill and market need must both be present. B. Writing the Business Plan 1. A business plan is a document specifying the business details prepared by an entrepreneur prior to opening a new business. Planning forces the entrepreneur to carefully think through the issues and problems associated with starting and developing the business. Small businesses with a carefully thought out, written business plan are much more likely to succeed than those without one. The details may vary, but successful business plans generally share several characteristics: a. Demonstrate a clear, compelling vision that creates an air of excitement. b. Provide clear and realistic financial projections. c. Profile potential customers and the target market. d. Include detailed information about the industry and competitors. e. Provide evidence of an effective entrepreneurial management team. f. Pay attention to good formatting and clear writing. g. Keep the plan short—no more than 50 pages. h. Highlight critical risks that may threaten business success. i. Spell out the sources and uses of start-up funds and operating funds. j. Capture the reader’s interest with a killer summary. Discussion Question: Many successful entrepreneurs say that they did little planning, perhaps scratching notes on a legal pad. How was it possible for them to do well, even so? NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ C. Choosing a Legal Structure 1. Sole Proprietorship a. A sole proprietorship is an unincorporated business owned by an individual for profit. Proprietorships make up the majority of businesses in the United States. This form is popular because the proprietor has total ownership and control of the company and there are few legal requirements; however, the owner also has unlimited liability for the business, placing the owner’s personal as well as business assets at risk. 2. Partnership a. A partnership is an unincorporated business owned by two or more people. Partnerships, like proprietorships, are relatively easy to start. Formal partnership agreements are a good idea to make sure the business is well planned and to avoid misunderstandings between the partners. Like sole proprietors, partners also have unlimited liability, putting their personal and business assets at risk. 3. Corporation a. A corporation is an artificial entity created by the state that exists apart from its owners. As a separate legal entity, the corporation is liable for its actions and must pay taxes on its income; it has a legal life of its own and continues to exist if the owners live or die. Personal assets of the owners are not at risk. However, it is expensive and complex to do the paperwork required to incorporate the business and to keep the records required by law. D. Arranging Financing Exhibit A.5 Most entrepreneurs are particularly concerned with financing the business. An investment is required to acquire labor and raw materials, and perhaps a building and equipment as well. The financing decision initially involves two options—whether to obtain loans that must be repaid (debt financing) or whether to share ownership (equity financing). 1. Debt Financing a. Borrowing money that has to be repaid at a later date to start a business is referred to as debt financing. Common sources of debt financing include borrowing money from family and friends, bank loans, and SBA loans. b. Angel financing refers to financing from wealthy individuals who believe in the idea for a start-up and are willing to invest their personal funds and provide advice and assistance to the entrepreneur to help the business get started. 2. Equity Financing a. Equity financing consists of funds that are invested in exchange for ownership in the company either by owners or those who buy stock in the company. b. A venture capital firm is a group of companies or individuals that invest money in new or expanding businesses for ownership and potential profits. Venture capitalists are interested in high-tech businesses such as biotechnology, innovative online ventures, or telecommunications because they have a potential for high rates of return on investment. c. Crowdfunding is a way of raising capital by receiving small amounts of money from a large number of investors, usually through social media and the Internet. NEW MANAGER SELF-TEST: PERCEIVED PASSION An entrepreneur starting a business often has to make a presentation to investors in order to raise money. This test measures the persuasiveness of presentations to venture capitalists by entrepreneurs in an effort to obtain investment money. Two aspects of the presentation measured are passion and preparedness. Preparedness has the most positive impact on decisions to invest money with entrepreneurs. Thus, a higher score on preparedness is more important to investors than a high score on presentation passion. E. Tactics for Becoming a Business Owner Aspiring entrepreneurs can become business owners in several different ways. They can start a new business from scratch, buy an existing business, start a franchise, or participate in a business incubator. 1. Start a New Business a. This approach is exciting to an entrepreneur who sees a need for a product or service that has not been filled before and then sees the idea or dream become a reality. The advantage is the ability to design and develop the business the way the owner wants it to be. The disadvantage is the time, money, and effort necessary to make the business profitable. 2. Buy an Existing Business a. Purchasing an existing business offers the advantage of a shorter time to get started and an existing track record. An established business already has filing systems, a payroll tax system, and other operating procedures. The disadvantages are the need to pay for goodwill the owner believes exists and the possible existence of ill will toward the business, bad practices, or outdated technology. a. Buy a Franchise Exhibits A.6 and A.7 b. Franchising is perhaps the most rapidly growing path to entrepreneurship. Franchising is a business arrangement where a firm collects upfront and ongoing fees in exchange for other firms to offer products and services under its brand name and using its processes. The franchisee invests his or her own money and owns the business but does not have to develop a new product, create a new company, or test the market. The big advantage of a franchise is that management help is provided by the franchisor. The biggest disadvantages are potential high start-up costs followed by monthly payments to the franchisor and limited freedom for the franchisee to manage in his or her own way. Discussion Question: How would you go about deciding whether you wanted to start a business from scratch, buy an existing business, or buy into a franchise? What information would you collect and analyze? NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ 3. Participate in a Business Incubator a. A business incubator typically provides shared office space, management support services, and management and legal advice to entrepreneurs. Incubators also give entrepreneurs a chance to share information with one another about local business, financial aid, and market opportunities. Virtual incubators do not require entrepreneurs to set up on-site. They connect entrepreneurs with a wide range of experts and mentors and offer lower overhead and cost savings for cash-strapped small business owners. F. Starting an Online Business 1. Many entrepreneurs are turning to the Internet to expand their small businesses or launch new ventures. Anyone with an idea, a personal computer, access to the Internet, and the tools to create a website can start an online business. Two incentives for starting an online business include low overhead and the ability to work from home or any location. Several steps required to start an online business are highlighted below. a. Find a market niche. To succeed in the competitive online market, aspiring entrepreneurs need to identify a market niche that isn’t being served by other companies. b. Create a professional website. To improve customers’ online experience, websites should be easy to navigate, intuitive, and offer menus that are easy to read and understand. c. Choose a domain name. Domain names should be chosen carefully and be easy to remember, pronounce, and spell. d. Use social media. Social media sites have the potential to be powerful tools for small business owners. The advantages include gaining valuable feedback on products and services, building communities of loyal followers, and promoting special events and pricing. VI. MANAGING A GROWING BUSINESS Often the traits of self-confidence, creativity, and internal locus of control lead to financial and personal grief as the enterprise grows. We will now look at the stages through which entrepreneurial companies move and then consider how managers should carry out their planning, organizing, decision making, and controlling. A. Stages of Growth Exhibit A.8 1. Businesses go through distinct stages of growth, with each stage requiring different management skills. a. Start-up. In the initial stage, the main problems are funding the business, and producing the product or service. Key issues are attracting enough customers and money to survive. b. Survival. In this stage, the business demonstrates that it is a workable business entity that produces a product or service and has sufficient customers. Concerns are generating sufficient cash flow and making sure that revenues exceed expenses. c. Success. The company is solidly based and profitable at this stage. Systems and procedures are in place and they allow the owner to slow down if desired or consider turning the business over to managers. d. Takeoff. In the fourth stage, the problem is how to grow rapidly and finance that growth. The owner must learn to delegate, and the company must find sufficient capital to invest in major growth. e. Resource maturity. At this stage, the company has made substantial financial gains and has the staff and resources to develop detailed planning and control systems, but may lose the advantages of small size, including flexibility and the entrepreneurial spirit. B. Planning 1. In the early start-up stage, formal planning tends to be nonexistent except for the business plan. The primary goal is to stay alive. Formal planning usually is not instituted until the success stage. The growing importance of e-business means entrepreneurs have to plan and allocate resources for Internet operations from the beginning and grow those plans as the company grows. C. Organizing 1. In the first two stages of growth, the organization’s structure is very informal, with all employees reporting to the owner. At about the success stage, functional managers begin to evolve to manage finance, manufacturing, and marketing. During the takeoff and resource maturity stages, managers must learn to delegate and decentralize authority. As an organization grows, it may be characterized by greater use of rules, procedures, and written job descriptions. D. Decision Making 1. When managing a growing business, owners face masses of decisions that affect the performance of the organization. These decisions may include determining inventory levels, hiring new employees, choosing a domain name for a website, or expanding into a new market. Sometimes the decisions are easy to make. Every decision has the potential to alter the direction and success of the business. E. Controlling 1. Financial control is important in each stage of a firm’s growth. In the start-up and survival stages, control is exercised by simple accounting records and personal supervision. By the success stage, operational budgets are in place and the owner should start implementing more structured control systems. During the takeoff stage, the company will need to make greater use of budgets, standard cost systems, and computers to provide statistical reports. These techniques will become more sophisticated during the resource maturity stage. NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ Instructor Manual for Understanding Management Dorothy Marcic, Richard L. Daft 9781285421230, 9781305313347
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