CH-12-15 Small Business Marketing: Product – Small Business Management: Entrepreneurship and Beyond : Book Guide

This Document Contains Chapters 12 to 15 Chapter 12 Small Business Marketing: Product Teaching Tips • Use the first section of the chapter to emphasize the importance of the different levels of product satisfaction. • Purchasing is a topic often overlooked. The ability to offer quality goods at competitive prices depends on one’s purchasing skills. • Figure 12.3, Vendor Audit Checklist, shows a great example of a checklist to analyze suppliers. Discuss with class. • Use the case, What Would You Do? to give students some practical experience planning and evaluating inventory systems on one of the three companies described. The intent of part two is to show that inventory systems and decisions are not static; things change and adjustments must be made. • This chapter closing case is on a hot current trend—blogging. Have students read the case before class. Then you can either begin class discussion with the whole group or break the class into groups of three or four and have them brainstorm strategies before opening discussion to all. After you hear students’ recommended strategies, read “The Decision” and “The Experts Weigh In” to share what really happened. Lecture Outline Opening Vignette: Professor Don Sadoway, Ambri What’s the Point? The point of this chapter opener is to illustrate an MIT chemistry professor who developed a new type of battery that could store alternative energy - then created a company with assistance of Bill Gates. Concept Module 12.1 Using Your Marketing Mix LO1 Discuss the different forms a product can take, and identify the five levels of product satisfaction. Collectively, product, place, price, and promotion are called a marketing mix. These are the tools a small business has to control. This chapter and the following two cover all four. Product: The Heart of the Marketing Mix A. Product means tangible goods, intangible services, or a combination of these. (See Figure 12.1, Spectrum of Goods and Services and Figure 12.2, Levels of Products, which depicts viewing a product as an “onion.”) Viewing products as a bundle of satisfaction: 1. Core benefit 2. Generic product 3. Expected product 4. Augmentations 5. Potential product Entre-Perspectives: Marketing Kings of Furniture Brothers Barry and Eliot Tatelman are third generation Jordan’s Furniture. This highlight box shows how a mundane business like furniture can become a destination. The video clip for this chapter about Jordan Furniture is a must-see. B. Developing New Products Many small businesses are created from new products that fall into one or more of these categories: 1. New-to-the-world products 2. New product lines 3. Additions to existing product lines 4. Improvements in, revisions of, or new uses for existing products 5. Repositioning 6. Cost reductions Reality Check: The Fairness of Slotting Fees This box illustrates one of the more controversial topics in small business management—slotting fees. Slotting fees are a payment or fee paid by a manufacturer to ensure that a retailer places its products on shelves. Good class discussion should come from the questions at the end of the box, questioning the fairness of the practice. C. The Inventor’s Paradox Inventors face a difficult situation once they have developed a new product. Students need to understand that few companies will even consider buying their product idea. Other options (apart from starting their own business) include licensing agreements and private-label manufacturing. D. The Importance of Product Competitive Advantage Included are criteria for core competencies and some best practices of successful small businesses. E. Packaging Think of packaging as the last five seconds of marketing. Good packaging can draw attention to a product in addition to protecting it. Concept Check Questions 1. What factors should be considered when purchasing for a small business? Factors include the quality of merchandise purchased (because it becomes what you sell), the quantities of each item needed, the amount of lead time needed to reorder, return policies, any purchasing discounts available, and holding costs vs. ordering costs. 2. Many small businesses are built around one product. What risks does this approach impose? How can small business owners minimize those risks? How can a small business develop new products? The risk of single-product small businesses is becoming a “one-trick pony” or doing only one thing well and having one source of revenue. If that one source dries up, the business will have trouble surviving. Small business owners need to constantly look for new customer problems to solve. Concept Module 12.2 Purchasing for Small Businesses LO2 Explain the importance of purchasing and describe its procedures. A. Purchasing is a critical activity for small businesses because the product the business purchases must be the exact quality and value that customers expect. B. Purchasing Guidelines Questions a small business owner should ask to evaluate purchasing and inventory control: 1. Are you using the proper sources of supply? 2. Are you taking advantage of all purchase discounts? 3. How do you determine minimum inventories and reorder points? 4. Have you run out of raw materials or finished goods? 5. What is the record of your current suppliers for quality, service, and price? 6. Are you using minimum quantities or economic ordering quantities? 7. What are your inventory holding costs? 8. Do you know your optimum average inventory? Does it guide your purchasing policy? 9. Could you improve your purchasing to increase profits? 10. What is your inventory turnover ratio? How does it compare with the industry average? C. Purchasing Basics 1. Recognize, describe, and transmit the need 2. Investigate and select suppliers and prepare a purchase order 3. Follow up on the order 4. Receive and inspect the order 5. Complete the order Selecting Suppliers A. Suppliers and vendors should be selected through a systematic process, not guesswork. B. Make-or-Buy Decision The choice of whether to produce parts and components or to purchase them from another company is an important one. The answer is based on speed, efficiency, and profitability. C. Investigating Potential Suppliers Because the products you purchase become the products you sell, you want to be sure that you are dealing with the best suppliers available. The Softub vendor survey is a useful tool for objective analysis. (See Figure 12.3, Vendor Audit Checklist.) Concept Check Questions 1. Purchasing products or materials is obviously an important part of running a small business. What are the pros and cons of developing a relationship with a single vendor from whom to purchase most of your products versus using multiple vendors and not depending on just one other company? By establishing a long-term relationship with one supplier, a small business may receive a higher level of service. Occasionally checking with other vendors may be advisable to assure that prices are competitive. Concept Module 12.3 Managing Inventory LO3 Calculate how much inventory you need and when. A. Inventory can mean the monetary value of goods, the number of units on hand, the process of counting goods, or a detailed list of goods. B. How Much Inventory Do You Need? 1. Managing inventory is a balancing act. You have to have goods on hand, but inventory represents money sitting on a shelf. 2. Retail Business—Remember the 80–20 rule and pay attention to the vital few, rather than the trivial many. 3. Service Industry—Supplies, equipment, and materials are just as important for a service business to manage as for their retail or manufacturing counterparts. 4. Manufacturing Business—Lead time and raw material acquisition are key to inventory control. Reality Check: Money on the Shelf Inventory represents money sitting idle on a shelf. Todd Heim, owner of Future Care, discusses his automated financial system to help him track inventory and cut products on hand by 25 percent. C. Costs of Carrying Inventory Inventory is expensive for several reasons. Shrinkage is the loss of goods held in inventory due to theft or spoilage. Obsolescence is when products become outdated. Holding costs are expenses related to keeping inventory on hand. Ordering costs are expenses related to procuring inventory. Concept Module 12.4. Controlling Inventory LO4 Describe seven methods of inventory control. A. This section describes several ways to maintain the supply of goods a small business keeps on hand. Inventory represents about 25 percent of a manufacturing business’s capital and up to 80 percent of a retailers’. B. Reorder Point and Quantity An inventory cycle is the period of time from when inventory is at its highest until it needs to be replenished. Lead time is the amount of time between placing an order and receipt of goods. (See Figure 12.4, Inventory Cycles.) C. Visual Control Many small businesses can operate by simply looking at shelves to determine how many products are on hand and what needs to be reordered. D. Economic Order Quantity (EOQ) EOQ is a means of calculating total inventory costs by balancing annual ordering and annual holding costs. (See Figure 12.5, Economic Order Quantity.) E. ABC Classification Items that generate high dollar volume are classified in the A category and should receive highest priority. Proportionately less attention will be given to moderate dollar volume goods in the B category and low dollar volume items in the C category. (See Table 12.1, ABC Inventory Investment Classification.) F. Electronic Data Interchange (EDI) EDI is an electronic means of inventory control made possible through bar coding. Equipment and software to utilize EDI is a capital investment that must be updated, but it can save a huge amount of time handling products coming into and flowing out of a business. G. Just-in-Time (JIT) JIT is an inventory system that has been used with varying degrees of success by businesses for several years. The key to JIT is assurance that products will arrive on time. Just-about-in-time is useless. (See Table 12.2, JIT and Traditional Inventory Comparison.) H. Materials Requirements Planning (MRP) MRP is a comprehensive automated process of inventory control to coordinate products, orders, raw materials, and sequence of production. It is based on the push of estimated demand. What Would You Do? Costume Specialists Inc., Catch the Wave, and Margaritaville Store 1. Select one of the companies described and write a short paper (no more than two pages) about the type of inventory control techniques that the business should use. Explain what would be an appropriate number of suppliers for this company and why you chose this number. For example, for Costume Specialists, the volume of costumes is so limited that a simple visual tracking system would likely suffice. With $600,000 in revenue and $3,000 average cost for each costume, assuming a 33 percent markup the company would only be selling about 150 costumes per year. This would be easy enough to track by looking at the materials on a shelf. With low volume, high margin materials, one would expect a low number of suppliers – maybe 3 or 4 primary suppliers and possibly twice that number of secondary suppliers. 2. Effective inventory management also means being ready to cope with problems. Divide into groups according to the companies you selected, and then discuss how you could design an inventory system that would adapt to such “shocks.” Being prepared for inventory problems generally means having more items on hand than absolutely necessary. Having back-up vendors and suppliers is a good idea also. Both may cost you more, but if that is what is needed to cope with inventory shocks then they are necessary “costs of doing business.” Concept Check Questions 1. Explain how the Pareto rule is important to a small business owner. The Pareto rule tells us that about 80 percent of a firm’s revenue will come from about 20 percent of the inventory. While the percentages may not be exact, it is a good reminder to pay attention to the vital few, rather than the trivial many. 2. How can shrinkage affect an inventory system? Shrinkage can be very important to your business if you deal in merchandise with a limited shelf life or which is susceptible to theft. The cost of items that are in your inventory but are not available for sale comes directly out of your profits. 3. Assume that you are the owner of the sporting goods store used in the example of economic order quantity inventory control You typically sell 14,500 sweatshirts per year. Your ordering costs are $10 per order. Holding costs are $0.60 per sweatshirt per year. What is your EOQ for sweatshirts? How many sweatshirt orders would you place per year? You would need to make about 21 orders per year of about 700 sweatshirts in each order. 4. When would an ABC inventory system be appropriate? Student answers will vary, but they should focus on a type of business that stocks items in inventory with differing sales levels. For example, an auto parts store would classify items like spark plugs and auto polish in category A; items like water and fuel pumps would be category B; and items like a taillight assembly for a 1958 Studebaker would be category C. (OK, you probably wouldn’t keep Studebaker tail lights in inventory, but it makes the point.) 5. What factors should be considered when purchasing for a small business? The purchasing process basics recommended for small businesses are discussed on page 299, including: a)recognize, describe, and transmit the need; b) investigate and select suppliers and prepare a purchase order; c) follow up on the order; d) receiving and inspecting the order; e) completing the order. 6. Aside from reducing inventory levels, what does the just-in-time philosophy promote? JIT promotes efficiency in integrating all parts of a business. It also requires precise planning and knowledge of what and when items will be needed. It works well if all variables are known and can be controlled—if not, any interruption in supply can have serious consequences. 7. What is the difference between a pull system and a push system of inventory control? A push system of inventory control is based on estimated customer demand. A pull system is based on actual orders. 8. Consider the make-or-buy decision. Give three examples of situations when a business should make rather than buy. Give three examples of situations when a business should buy rather than make. Student examples will vary, but they should be based on cost of production and speed of delivery. Inventory Control Techniques for Costume Specialists Inc. Inventory Control Techniques For Costume Specialists Inc., an effective inventory control system should prioritize accuracy and efficiency, given the limited volume of costumes produced and sold. The following techniques are recommended: 1. Visual Inventory Tracking: Since the company sells approximately 150 costumes annually, a simple visual tracking system would suffice. Costumes can be organized and easily counted on shelves, allowing staff to monitor stock levels without complex technology. 2. Periodic Inventory Reviews: Implementing periodic reviews (monthly or quarterly) will help ensure that stock levels are sufficient for upcoming events and seasonal demands. This approach will allow the company to adjust inventory based on trends and avoid stockouts during peak periods. 3. Just-in-Time (JIT) Inventory: Adopting a JIT approach can help minimize holding costs by ordering materials and costumes only as needed. This technique will enable the company to maintain low inventory levels while ensuring that they can meet customer demand promptly. Supplier Management An appropriate number of suppliers for Costume Specialists would be 3 to 4 primary suppliers for costumes and materials, supplemented by 2 to 3 secondary suppliers. This selection allows for: • Reliability: A limited number of primary suppliers ensures consistent quality and dependable supply chains. • Flexibility: Having a few secondary suppliers provides backup options in case primary suppliers face disruptions, allowing the company to quickly adapt to changes in availability or quality. Designing an Adaptive Inventory System To cope with inventory shocks, Costume Specialists can implement the following strategies: 1. Safety Stock: Maintaining a safety stock of key costumes and materials will allow the company to fulfill orders during unexpected spikes in demand or delays from suppliers. 2. Diverse Supplier Network: Establishing relationships with multiple suppliers for each critical component will reduce reliance on any single source and ensure alternative options are available. 3. Real-Time Inventory Monitoring: Utilizing basic inventory management software can help track stock levels in real-time, allowing the business to respond quickly to any discrepancies or potential shortages. Make-or-Buy Decision Examples When to Make: 1. Customization: When a product requires unique features that align with the company's brand and cannot be sourced externally, such as specialized costume designs. 2. Cost Efficiency: If in-house production is more cost-effective due to lower labor or material costs, producing the item may be preferable. 3. Quality Control: When maintaining stringent quality standards is essential, producing the item in-house allows for better oversight. When to Buy: 1. Standardized Products: If a business requires common, standardized items (like basic costume accessories) that can be easily sourced at a low cost, buying may be more efficient. 2. Outsourcing Non-Core Activities: For items not central to the company’s mission (like packaging materials), purchasing allows the business to focus on core competencies. 3. Time Constraints: When time is critical, and production capabilities are limited, buying ready-made products ensures timely delivery to customers. Experience This…bonus student exercise Arrange with your instructor for your class to visit a local business (preferably a larger retail store, but still a small business or some type of manufacturing business that uses multiple materials or components). Check out their inventory system. How are items brought in (physically and paperwork-wise)? How is inventory stored and tracked? How are vendors selected and evaluated? How are products chosen for the business to sell? Students will probably be surprised by the relatively small excess inventory storage that most retail stores carry. The items visible to customers on shelves make up the bulk of retail inventory. Back rooms and warehouses are more for receiving items. Chapter Closing Case Healthy Grub for Man's Best Friend 1. Dogswell's marketing plans were ambitious, but were not working. What is their primary problem? As detailed later in The Decision, Dogswells biggest problem in the cost of the coupon campaign that in addition to being expensive on the front end, was not generating enough new sales of dog food after redemption. 2. Would money from the new investors solve the problem? What other options do they have? No, pumping more money into a flawed campaign is not a fix. Other options include scaling back the launch to regional, rather than national status and going back to marketing tactics that had made Dogswell a success from the beginning. 3. What do you recommend Giannini do to save the company? The answer here depends upon student answers to question 1...if they correctly identify the coupon campaign as the primary problem, then fixing it will be the first priority. The Decision Giannini, Officer, and other managers regrouped to determine where exactly they had gone wrong. The biggest culprit seemed to be the coupon program, which was costing the company $100,000 a month but wasn't generating repeat buyers fast enough. The company had also been neglecting its core business. In its rush to market dog food, Dogswell had stopped offering samples of treats, which turned out to have been a big mistake. Pet food was a bigger ring at the register, but there were fewer sales, and those sales were less profitable. Officer went back to her distributors to see where, if anywhere, the food launch had been successful. It turned out that sales had actually been growing in Southern California, New England, and Washington. "I think we were pushing when we should have let customers find it themselves," says Natalie Gershon, the company's marketing director. Giannini, for his part, dug up Dogswell's numbers from 2003. It led to a sobering realization. "I had forgotten where we came from," he says. "Yes, we did $500,000 in revenue in the first year, but revenue in our fourth month was only $9,000, and I thought we were going to have to close our doors." Throughout the process, Giannini and Officer were in near-daily contact with Jenny Baxter, TSG's vice president. She helped match them up with analysts to mine marketing data, and she shared tactics that other companies in TSG's stable had used. Giannini and Officer spent a week preparing their PowerPoint presentation for the board meeting with TSG. They rented a conference room in downtown Los Angeles rather than host it at Dogswell's offices, where quarters were cramped and the walls were thin. They had little idea of how the meeting would go. "We just didn't know what their reactions were going to be," says Officer. "They could have said, 'You idiots. You're out of here.' " But the new investors were surprisingly understanding. "The food category is really difficult to enter," says Baxter. "You have a lot of deep pockets with the incumbent brands. It's a challenge to get consumers to switch from one to another." TSG gave Dogswell the green light to try a more organic approach to rolling out the new products. "It was very clear that the path for us was to grow a strong treat brand, with food second," Giannini says. Dogswell ditched the coupon program and focused heavily on the most promising markets. "By June we were breathing happily, and by July it felt like the old Dogswell," says Officer. Sure, the company would have had more money in the bank if Giannini had behaved more like the young entrepreneur who founded Dogswell. But he seems almost grateful -- almost -- for the reminder. "With all the success, I had gotten cocky. It's like peer pressure from society that makes you feel like you have to have a cigarette or a drink. The same thing happens when you run a company." SOURCE: www.inc.com/magazine/20091201/case-study-lining-up-investors-for-a-turnaround.html Chapter 13 Small Business Marketing: Place Teaching Tips • This chapter is set up as a progressive funnel for making decisions related to choosing the location and layout for a business—starting broadly in evaluating first a region, then a state, city, specific site, and finally how to arrange a business. • Entrepreneur, Inc., and other small business-related magazines often run articles on good and bad cities in which to start a business. Find a recent article of this type to discuss in class. • Make the point that calculation of SCI is one of many tools that may be helpful in choosing a location. • Get the information packet your local chamber of commerce sends out to prospective businesses. It will provide good discussion material in class. • Arrange a field trip to a local business incubator. • This chapter closing case is a great one about Lance Fried developing an innovative waterproof MP3 player and his decision whether to sell it via big box stores or specialty retailers. Have students read the case before class. Then you can either begin class discussion with the whole group or break the class into groups of three or four and have them brainstorm strategies before opening discussion to all. After you hear students’ recommended strategies, read “The Decision” to share what really happened. Lecture Outline Opening Vignette: vending machine options What’s the Point? Technology in vending machine construction makes them a viable location option for a much wider variety of products than ever before. Concept Module 13. 1 Small Business Distribution LO1 Describe small business distribution and explain how "efficiencies" affect channels of distribution. For the second component of the marketing mix that we will discuss, distribution can be an important profit center for a small business by adding efficiency. (See Figure 13.1, The Channels of Distribution.) Concept Check Questions 1. How can a small business owner create competitive advantage with a channel of distribution? Choice of a channel of distribution can provide significant cost savings through increased efficiency. Lower costs can be passed on as lower prices to customers—the basis for a sustainable competitive advantage. Concept Module 13.2 Locating for the Long Run LO2 Explain how the location of your business can provide a competitive advantage. One of the most important decisions a small business owner can make is where to locate the business. (See Figure 13.2, Identification of Regional and Local Markets.) Examples of location criteria include: A. Price and availability of land and water B. Quality and quantity of labor pool C. Access to customers D. Proximity of suppliers E. Access to transportation F. Location of competition G. Public attitudes toward new businesses H. Laws, regulations, and taxes I. Your personal preference of where to live J. Financial incentives provided K. Quality of schools L. Quality of life Entre-Perspectives Buck Stops in Idaho The point of this story is to show how Buck Knives saved the business and created a competitive advantage by relocating the business from California to Idaho. State Selection A. An important fact to note is that the United States is a collection of local and regional markets rather than one huge, homogenous market. B. Sales and Marketing Management’s annual edition of Survey of Buying Power is a wealth of information for location decisions at the regional, state, county, and city levels. (See Table 13.1, Regional Summaries of Population, Effective Buying Income, and Retail Sales—“2005 Buying Power Index.”) City Selection A useful tool in city selection is the calculation of a Sales Conversion Index (SCI) inshopping vs. outshopping—which shows the extent to which customers come into or leave a city to purchase specific products. (See Table 13.2, Retail Sales by Store Group and EBI to Calculate SCI.) Concept Check Questions 1. Why should the small business owner consider the demographics of an area when choosing a location for opening a new business? Name some sources of demographic information that are valuable tools to use in this evaluation. Demographics of a neighborhood are important to the location of a small business because neighborhoods tend to be made up of people who are similar in many ways. These similarities can have a large impact on who patronizes your business. This is especially true when you combine demographics with ZIP + 4 codes as in PRIZM. Analyses of area demographics are more accessible now through Geographic Information Systems (GIS) like ArcView, ACORN, ClusterPLUS 2000, and others discussed in the Manager’s Notebook. 2. When choosing a location for a new business, what are the most important criteria for the entrepreneur to consider? Explain the connection between type of business and location. The most important criteria for a business depend on the type of business the entrepreneur is starting. For example, if customers must come to your store, convenient access to customers is critical. 3. Why would a small business flourish in one area of the United States but fail in another region? Although the United States is one nation, people’s tastes vary greatly from one region to another. Personal tastes, climate, and different needs change from one part of the country to another. For a small business to succeed, it must be based on its customers’ wants and needs. 4. What is the sales conversion index (SCI), and why should the small business owner become familiar with the way it is calculated and the information to be obtained from it? The sales conversion index of an area or a city shows retail consumers’ tendencies to purchase products within the given area. A high SCI shows that people stay in or come into the given area to purchase a type of product. SCI can be one of several tools a small business owner should use to analyze location within an area. 5. How can your business location affect customers’ image and perception of your business? Think of examples by exaggeration—a salvage yard located next to a four-star hotel/restaurant; tree nursery next to a chemical plant; Bible bookstore next to an adult bookstore. Concept Module 13.3 Site Selection LO3 Discuss the central issues in choosing a particular site within a city. A. Neighborhoods tend to be homogenous. People of similar income can afford similarly priced houses. Neighborhoods tend to contain clusters of similar age groups, religious groups, families, and cultural groups. These factors should influence business locations. B. Site Questions A site selection is influenced by many factors such as type of site, accessibility, legal considerations, and traffic flow. C. Traffic Flow The number of cars and pedestrians passing a site strongly affects its potential retail sales. The type of traffic is important, though. Speed and direction of traffic factor in. 'Trep Connections Uses such as business location information and logistics using Geographic Information Systems (GIS) are discussed. Also included are PiinPoint, a small business for location analytics D. Going Global Locating a business in another country requires information. Begin with the U.S. Department of State and the CIA World Factbook (www.odci.gov) for country information. Concept Check Questions 1. Explain the importance of knowing the legal requirements of an area before attempting to open a small business. Legal requirements that could affect your choice of location could include zoning regulations and tax requirements. 2. What are some considerations that should be taken into account if business is to be conducted in a foreign market? Of course, you must first determine that a market for your product exists in another country. Can your business profitably satisfy that market? It would be difficult to get too much information before choosing a foreign location. Concept Module 13.4 Location Types LO4 Compare the three basic types of locations. A. Service and retail businesses have three basic choices: central business districts, shopping centers, and stand-alone locations. B. Central Business Districts (CBD) 1. The central business district is usually the oldest section of a city. 2. Advantages of locating in a CBD are customer access to public transportation; variety of images, prices, and services; and many other businesses. Disadvantages include lack of parking availability; traffic congestion; possible high crime rate; older buildings; and disparity between neighborhoods. C. Shopping Centers 1. Advantages that shopping center locations offer include heavy foot traffic drawn by the wide variety of products available, closeness to population centers, cooperative planning and cost sharing, access to highways, ample parking, lower crime rate, and a clean, neat environment. 2. Disadvantages for locating in a shopping center include the inflexibility of store hours, higher rent than outside locations, possible merchandise restrictions by central management; required membership in the center’s merchant organization, possibility of having too much competition,and domination of smaller stores by anchor stores. D. Stand alone Locations 1. Since a stand-alone location makes a business a customer’s destination, competitive advantage must be clear to customers. Unique merchandise, large selections, low prices, exceptional service, or special promotions must get people in the door. 2. Advantages of stand-alone include the freedom to set own hours of operation, no direct competition may be nearby, more parking may be available, and rent may be lower than a comparable site in a shopping center. E. Service Locations If customers must visit a service business, then location is critical. Location can provide a differentiation that may be difficult to achieve otherwise. For service businesses that visit customers, location is not critical. F. Incubators Government agencies, universities, and private business groups create business incubators to help new businesses get started. Incubators offer rent below market prices, along with services and equipment that are difficult for startup businesses to provide on their own. Benefits include: 1. Support Services—Copy machines, computers, fax machines, and other equipment are available to share. Receptionists, secretarial support, and shipping and receiving services are also available. 2. Professional Assistance—Incubators often negotiate reduced rates with needed professionals like accountants, lawyers, and advisors. 3. Networking—A “family” atmosphere usually develops at incubators and assistance to problems can be obtained from people in other businesses who have faced similar situations. 4. Financing—Incubators often have revolving loan funds which provide funds at lower than market rates. Reality Check: Incubators Hatch Opportunities Nontraditional incubators provide the same services as traditional incubators, but to different markets like nonprofits and art groups. What Would You Do? Jodi’s location decision 1. From the information you have been provided and from the advantages and disadvantages of the different types of locations in the chapter, where would you recommend that Jodi locate? Provide justifications for your recommendation. Jodi’s location decision depends on the image she wants to create. If she wants to create a type of store with piles and shelves stacked full of books and bins of music where people would want to browse for long periods of time, a downtown location would be most appropriate. 2. What additional information would you want to have to make this location decision? In addition to the image Jodi wants to create, we would need to know information about her financial status—current capital available and projected monthly cash flow. Concept Check Questions 1. What are the three location types and their subcategories. Location types: Central Business District Shopping centers Stand-alone locations 2. Give an example of a type of small business that would have the greatest chance of succeeding in each location type. State your reason for selecting that particular business type by giving specific advantages. Students should be able to cite several examples of businesses for each type of location and justify their choices. Here are examples of small business types that would likely succeed in different location types, along with specific advantages: 1. Urban Area: Café or Coffee Shop • Reason: Urban areas typically have high foot traffic, a large working population, and a mix of students, professionals, and tourists. A café or coffee shop benefits from this demographic, as people in cities often seek out convenient places to work, relax, or meet up. • Advantages: • Access to a large and diverse customer base • Opportunities for repeat customers (e.g., professionals on daily commutes) • Proximity to office buildings, universities, and tourist attractions 2. Suburban Area: Daycare or Preschool • Reason: Suburban areas are often home to young families with working parents who need childcare services. A daycare or preschool caters directly to the needs of this demographic. • Advantages: • Growing demand for childcare services as more families move to suburbs • Less competition compared to urban centers • Loyal, long-term customer base (children attending regularly) 3. Rural Area: Farm-to-Table Restaurant or Grocery Store • Reason: Rural areas are often associated with agriculture and local food production. A farm-to-table restaurant or grocery store that emphasizes locally sourced products would align well with the region’s strengths. • Advantages: • Access to fresh, local produce at lower costs • Opportunity to attract locals as well as visitors seeking an authentic rural experience • Support from the community, as local sourcing benefits local farmers and suppliers 4. Tourist Destination: Gift Shop or Tour Service • Reason: Tourist destinations attract a constant flow of visitors who are looking for unique experiences and souvenirs. A gift shop that offers local crafts or a tour service that provides guided experiences would meet this demand. • Advantages: • High demand for tourist-centric goods and services • Seasonal peaks in sales during travel seasons • Opportunity to market online and draw tourists to physical stores or experiences Each of these businesses is designed to align with the specific needs and characteristics of its location, maximizing its chances of success. 3. The old adage of the importance of “location, location, location” applies as well in cyberspace as it does for brick-and-mortar businesses. How does an Internet-based business influence its “location”? Which of the principles of location discussed in this chapter apply to e-business? What other factors do they have to deal with? Location of online business is affected by how quickly and easily customers can find them by their URL or via search engines. Routing connection between complementing businesses is critical. Concept Module 13.5 Layout and Design LO5 Explain the types of layout you can choose. A. The next step after site selection is to lay out the interior of a business. Layout is important to the image and productivity of a business. B. Legal Requirements The Americans with Disabilities Act (ADA) specifies accommodations requirements: 1. Access ramps must be built where the floor level changes more than half an inch. 2. Elevators are required in buildings of three stories or more and in buildings with more than 3,000 square feet of floor space per story. 3. Checkout aisles must be at least 36 inches wide. 4. Carpets of accessible routes must be less than one-half inch in pile 5. Toilet facilities, water fountains, and telephones must be accessible to people in wheelchairs. 6. Self-service shelves, counters, and bars must be accessible to people in wheelchairs and to the visually impaired. C. Retail Three types of layouts are commonly used in retail stores: 1. Free-flow—works with smaller stores such as boutiques—no traffic patterns are established to encourage customers to browse. (See Figure 13.3, The Free Flow Layout.) 2. Grid—Counters and fixtures are placed at right angles. Tall shelves offer many shelf facings of merchandise. Supermarkets and drug stores typically use this layout. (See Figure 13.4, The Grid Layout.) 3. Loop—Customers are led efficiently through a store via wide aisles that connect different departments in which customers are encouraged to browse. (See Figure 13.5, The Loop Layout.) D. Service Layout is critical to maintain the speed and efficiency of service providers. The image of service businesses, such as restaurants, is greatly influenced by layout. E. Manufacturing The layout of a manufacturing business is arranged to provide a smooth flow of work. The correct layout depends on the type of product being produced, production process, space available, volume of goods produced, and amount of worker interaction needed. Three basic types of manufacturing layouts exist or may be combined: 1. Process Layout—Process layout groups all comparable equipment together in the same area. This layout provides flexibility to switch from one product to another, possibly with less equipment than would be needed with a product layout. (See Figure 13.6, Process Layout in a Restaurant Kitchen.) 2. Product Layout—Product layout arranges workers, equipment, and activities needed to produce a single product in a sequence of steps—as in an assembly line. This layout is best when producing many standardized products. (See Figure 13.7, Product Layout in a Pizza Kitchen.) 3. Fixed Layout—In a fixed layout, the product stays stationary while workers and equipment are brought to it. F. Home Office 1. Advantages: a) Flexibility in scheduling personal, family, and business obligations b) Low overhead expenses c) No commute time d) Independence e) No office distractions 2. Disadvantages: a) Interruptions b) Isolation c) Credibility d) Work space e) Zoning issues Concept Check Questions 1. What is the ADA, and what is its impact on the small business owner’s site layout and design plan? The Americans with Disabilities Act (ADA) of 1990 includes many provisions to regulate the physical facilities of businesses. Some of these provisions can be very expensive for a small business owner, such as installation of elevators, access ramps, and accessible shelving. 2. What are the main types of layout plans, and what should the entrepreneur focus on when designing the layout plan for a new business? Retail businesses may be laid out in a free-flow, grid, or loop layout. The type of business and products sold will determine which layout is appropriate. If the small business owner wants customers to linger and browse, a free-flow layout would be appropriate. Manufacturing-type businesses may use a process or a product layout. A process layout arranges equipment that is similar together, and is appropriate if many types of jobs are done and flexibility is needed. A product layout arranges equipment in a sequence to produce a specific product. A product layout adds efficiency to a production process for making a single product, but it is not very flexible. Concept Module 13.6 Lease, Buy, or Build? LO6 Present the circumstances under which leasing, buying, or building is an appropriate choice. A. Three choices of ownership exist for a chosen location—lease a facility, purchase an existing building, or build a new structure. B. Leasing “Before You Sign on the Dotted Line”—things to watch for before signing a lease: 1. How long will the lease run? 2. How much is the rent? Especially note net, net-net, and triple-net leases. 3. How much will the rent go up? 4. Can you sublease? 5. Can you renew? 6. What happens if your landlord goes broke? 7. Who is responsible for insurance? 8. What building services do you get? 9. Who else can move in? 10. Who pays for improvements? C. Purchasing Ownership of a building increases up-front expenses and the amount of capital needed for the business. Purchasing and remodeling can quickly drain already stretched resources from other business needs. More freedom to do as you wish with the building is a positive. But only depreciation on the building is tax deductible, as opposed to entire lease payments. D. Building Building a new facility to meet specifications may be necessary if the business has unique needs or if existing facilities are not located where needed. But this alternative should be approached with great financial care, since it increases fixed expenses. Concept Check Questions 1. Compare and contrast the advantages and disadvantages of buying, building, or leasing space for a small business. Buying—The advantage of buying a building is the security of knowing you can stay in that location as long as you wish. You can change and remodel as much as you wish. The downside of buying a building is the money you are tying up in real estate and building, which can significantly decrease your available working capital. Leasing—The advantage of leasing a building is having the money that you would use as a down payment on a building available to run your business. You can put your money to work in inventory, marketing, and personnel instead of buying bricks and mortar. The disadvantage of leasing can be compliance with terms and conditions of your lease. Building—The advantages and disadvantages of new construction are the same as purchasing a building. It may be necessary to construct if the needs of your business are very specific, or if a building is not available in a location suitable for your business. Experience This…bonus student exercise Choose a business you would like to start or own. If you are writing a business plan for this course, include this assignment in your business plan. Using graph paper (or simple architectural software if you have access to it), draw to scale the layout for your business. Include all office space, storage, restrooms, delivery, and so on, in addition to merchandise selling and working areas. Also include the exterior elevation, showing parking and customer entrances. Review Figures 13.3 through 13.7; in your layout you need to label what merchandise or work will be done in each area. Include a written description of why you are using your chosen layout. The experience of students taking the step in drawing the layout for their proposed business is a large one in making it real in their own minds. The mental process needed to think through all that is required is huge. It allows students to visualize three-dimensionally. It also helps them realize what is needed for their initial capitalization. For example, if a student is proposing a restaurant/bar, drawing a detailed layout will most likely bring up equipment or supplies (like kitchen equipment or coatracks) that they had not previously thought of. It also can help them understand how many square feet are needed and with that figure they can check local rates for real estate. (Most should be sitting down when they realize that the size building they want will cost THAT much!!!) Chapter Closing Case Big-Box or Specialty shop? Questions - 1. Can Fried really say "no" to the big-box retailers? Why or why not? He can, and to build brand recognition and stable growth for his new business, he probably should. Ramping up production to supply big-box stores would cause serious cash flow issues and building name cache with his target market would be difficult via large retailers. 2. What do you think Lance should do? Whichever way students recommend, make sure they build a case for their choice. Either specialty store or large retailer can be a viable option - students just need to understand how and why. The Decision reveals some alternatives that Houlgate (or probably students) even realized existed. The Decision Fried asked Houlgate to call his contacts at the big boxes and respectfully decline their offer. They were not easy calls to make. “I told them, ‘We have to push back from this wonderful opportunity. We’re not ready,’” Houlgate says. “So many people go into deals and overextend themselves. Then everyone is disappointed. Hopefully it was refreshing for buyers to hear ‘no’ from us, and that we’d come back later.” Instead, the Freestyle team focused on preparing for its big trade-show debut, creating a display that seemed certain to turn heads: The players would sit in the bottom of fish tanks, with the headphones dangling out so anyone could come by and have a listen. “We were swamped,” says Fried, who estimates that some 1,800 visitors stopped at the booth. About 40 small and midsize retail shops prebooked orders for the spring of 2005. Surfer magazine put the waterproof MP3 player at the top of its Christmas wish list, calling it “a dream come true.” In addition to retail buyers, marketing and licensing executives from some of the surf world’s biggest brands, including Quiksilver and Oakley, visited the booth. After sampling the player, the execs sought to explore cobranding opportunities—a source of revenue that Fried and his partners had not even considered. A deal with Liquid Force, a major manufacturer of wakeboards and accessories, is currently on the table; it could bring the MP3 player into more than 1,000 independent stores in 48 countries. The strategy of selling through specialty retailers and cobranding with bigger, better-known brands makes more sense than pursuing mass retailers, Fried and Brower say. Sitting on the shelf at a big box, Freestyle’s gadget could get lost among other MP3 players. But in surf shops, “we’re the only game in town,” Fried says, which will build credibility with finicky Gen-Y consumers. Even Houlgate, who negotiated with the big boxes and was hoping for a smash hit, agrees. Houlgate estimates that Freestyle could have grossed $20 million in 2004. “But it’s a huge expenditure to get that production moving,” he says. Ultimately, he hopes his partners will reconsider going mass market. But building credibility with hard-core enthusiasts, he says, “will give these chains greater success in selling to the masses when the time comes, if it ever does.” As for the 2004 holiday season, Freestyle opted to avoid retailers altogether and sell the MP3 players directly through its website. The devices proved so popular that the company ran out of them on December 23. Even with the small-store strategy, Fried expects 2005 sales to hit $10 million. “With 4.9 million surfers, 3 million wakeboarders, 8 million snowboarders, and 10 million water rafters and kayakers,” he says, “we’re looking at a lot of demand.” SOURCE: www.inc.com/magazine/20050401/case-study.html Lora Kolodny, “Case Study,” Inc., April 2005, 44–45 Chapter 14 Small Business Marketing: Price and Promotion Teaching Tips •Begin discussion by looking at pricing from three broad factors which influence price—demand for product, competition, and cost. Then you can move to specific pricing strategies. Finally ask students how they would like to be paid. If they say cash only, ask how many sales they would lose by not accepting checks or credit cards. •Use Reality Check, Recession or Not, Don't Give Away the Farm, to illustrate that raising prices is not always seen as a negative. •Use the case, What Would You Do? to get practical experience in setting pricing and credit policies. Be sure to have students justify why they chose the pricing strategies they did and what they are trying to accomplish with those strategies. The chapter closing case is about a website, eMusic, that is struggling to change its format and pricing structure. Have students read the case before class. Then you can either begin class discussion with the whole group or break the class into groups of three or four and have them brainstorm strategies before opening discussion to all. After you hear students’ recommended strategies, read “The Decision” to share what really happened. Lecture Outline Opening Vignette: Examples of Anchors, Bumps, and Charms - in Pricing terms What’s the Point? Anchors are price points that give consumers a comparison base on "correct" prices. Bumps provide insight into the quality level of a product. Charm pricing is a type of odd pricing tactic. Concept Module 14.1 The Economics of Pricing LO1 Identify the three main considerations in setting a price for a product. A. Price is different from the other three components of the marketing mix because the product, place, and promotion add value to the customer and costs to the business. Pricing lets the business recover those costs. The “right” price is actually more of a range between what the market will bear and what the product costs. Three economic forces impact what prices can be charged and set the parameters for the price range—competition, demand, and costs. B. Competition 1. The number and proximity of competitors set the ceiling of price range. The more direct competition a business faces, the less control that business has over its prices. 2. The key for small businesses competing with mass merchandisers is flexibility and differentiation. C. Demand The number of people who want to buy a product affects how much a business can charge. The elasticity of demand indicates how price sensitive the market is. Price elastic demand means a price-sensitive market. Price inelastic demand means that the market is not price sensitive. (See Figure 14.1, Demand Curves which illustrates elastic demand and inelastic demand curves.) Three factors influence the price elasticity of demand: 1. Product substitutes 2. Necessity of the product 3. The significance of the purchase to the consumer’s total budget D. Costs 1. While competition and demand set the ceiling for prices, costs set the floor. If a business cannot cover total costs and make a profit, it cannot stay in business. 2. Fixed costs remain constant no matter how many goods are sold. Variable costs rise and fall in direct proportion to sales. Reality Check Recession or Not, Don't Give Away the Farm Decreasing price is not necessarily a good idea when weathering an economic downturn. This box discusses better alternatives What Would You Do? 1. Working in teams of no more than three, choose one of the two examples to work on. Develop an outline for a comprehensive marketing strategy for the company and the product. Be specific in defining the product, place, price, and promotion aspects. One example would be if DAPATS product, Dr.’s Cream, is facing competition from a large, well-established competitor. In this situation, a small company has to identify a very specific market to reach in order to build some success and gain recognition. Hypothetically, DAPATS could go for a sports injury market to target. For the 4 P’s – Dr. Cream must have some product advantage to differentiate itself from Ben Gay. Given the small company’s limited budget, promotion money is short. A great way for a small business with a superior product to get noticed is through wide use of sampling – getting the product in customers hands so they can experience the advantage. DAPATS could send boxes of its product to college athletic trainers for use on athletes. A small business should not be afraid to set a higher price for its premium product – customers associate higher price with quality. 2. Once your team has developed its marketing strategy, find another team in the class that has worked on the same example. Take turns presenting your information to each other. Students can benefit comparing and contrasting their strategies – plus the competition improves performance. To successfully collaborate with another team after developing your marketing strategy, follow these steps: 1. Preparation: Ensure that your team has fully completed its marketing strategy, including key components such as target audience, positioning, promotion tactics, pricing strategy, and distribution plans. 2. Find Another Team: Locate another team in your class that worked on the same example or a closely related one. It could be a business in a similar industry, or one with similar target markets. 3. Presentation Format: • Each team should take turns presenting their marketing strategy. • Present Key Elements: Share your target market, value proposition, marketing channels, pricing strategies, and any promotional tactics. • Focus on Rationale: Discuss why you chose each element of your strategy, emphasizing the research, trends, or assumptions that guided your decisions. 4. Feedback Exchange: • After each presentation, the other team should ask questions, provide feedback, and offer suggestions for improvement. • Encourage open discussion on the strengths and weaknesses of each strategy. • Identify similarities and differences in your approaches and discuss why each team made different choices. 5. Refinement: • Use the feedback from the other team to refine your strategy. Consider adjusting areas where your peers raised questions or suggested alternative approaches. • Reflect on how their strategy inspired potential improvements in your plan. This process will allow you to gain insights from other perspectives, improving your marketing approach through collaborative learning. Concept Check Questions 1. What can happen if the price of a product does not fit with the three other Ps of the marketing mix? The marketing mix for a product needs to be uniform and consistent with customers’ expectations. If customers have high expectations of a product, the promotion for that product needs to emphasize quality. The channel of distribution needs to reflect quality—for example, people do not expect to find fine jewelry at a “dollar or less” store. Likewise, a higher price can be justified. 2. Should a small business owner’s judgment be used to determine prices if so many mathematical techniques have been developed for that purpose? The purpose of the question is to show that prices for any product fall within a range, rather than one specific, exactly correct number. That range is determined by competitor’s prices, demand for the product, and costs. A small business owner should use mathematical techniques to help determine prices, but, by all means, judgment and common sense should also be employed. Concept Module 14.2 Breakeven Analysis LO2 Explain what breakeven analysis is and why it is important for pricing is a small business. A. The point of sales volume at which total revenue equals total costs is the breakeven point. (See Figure 14.2, Breakeven Analysis.) B. For a small business owner, the most useful application of breakeven analysis is the calculation of breakeven point in dollars and units at several different price points. (See Figure 14.3, How Price Changes Affect the Breakeven Point.) Concept Module 14.3 Price Setting Techniques LO3 Present examples of customer-oriented and internal-oriented pricing. A. Selection of a price between the ceiling and floor will depend on the objectives and strategies a small business owner chooses to pursue. Pricing strategies fall into two broad categories—customer-oriented and internal-oriented. B. Customer Oriented Pricing Strategies Customer-oriented pricing strategies focus on target markets and factors that affect the demand for products. Pricing objectives may be to: 1. Increase sales. 2. Increase traffic through store. 3. Discourage competitors from entering market. C. Internal Oriented Pricing Strategies Internal-oriented price strategies are based on the financial needs of the business and costs, rather than the needs or wants of target markets. Examples include: 1. Cost-Plus Pricing 2. Target-Return Pricing D. Creativity in Pricing Entre-Perspectives Entrepreneurs Listen to Customers Tips on understanding current and prospective customers. Concept Check Questions 1. Of the pricing techniques described in this chapter, which one do you think is most commonly used by small business? Why? While customer perception is important to small business owners, they tend to be very pragmatic. Small business owners typically use cost-plus pricing by adding a set percentage onto the cost paid for products. It is simple and effective. 2. What strategies should be considered if a small business is setting prices for a product that is to be exported? How are these strategies different from those used in a domestic market? The strategy for pricing a product for export is commonly cost-plus pricing. The problem for most small businesses is knowing exactly what all their costs in exporting will be. Complications for pricing products intended for export include changing exchange rates, which will affect the price unexpectedly, and knowing the markup of each intermediary that handles the product along the way. Understanding the perceptions of consumers is also more difficult in exporting, yet they too affect the price that may be charged. 3. As the owner of a small, hometown drugstore, how would you prepare for a Wal-Mart being built in your area? Since companies like Wal-Mart have lowered their costs through volume purchasing and efficient distribution, you will not be able to compete on price with Wal-Mart on identical items. You must differentiate and deepen your product lines in order to offer goods or services to customers that they cannot get from your competitors. Severe price competition forces businesses to operate more efficiently. Concept Module 14.4 Getting Paid LO4 Explain factors affecting small businesses getting paid. A. Small business owners must choose how they want to get paid—cash, check, or credit. Accepting cash only would cut down on bad debts, but at what price? The main reason to extend credit is to make sales that would not otherwise have been made. B. Extending Credit to Your Customers 1. Consumer Credit—Consumer credit is extended to the ultimate user of a product. Trade credit is the sales terms that one business extends to another for purchasing goods. Acceptance of consumer credit cards may be a necessity for many types of products since 50 percent of consumer purchases are on plastic—but it comes at a cost. Small businesses must pay between 1.5 percent and 3 percent (possibly up to 6 percent) of a transaction to the credit card company. 2. Online Credit Checks 3. Trade Credit—Trade credit is offered in several forms: extended payment periods and terms; goods offered on consignment; payment not required until sold; or seasonal dating, which means that suppliers ship goods before the purchaser’s peak selling season. C. Collecting Overdue Accounts If you don’t collect on sales, they aren’t sales. If you extend credit to customers, you need an accounts receivable system to keep cash flowing into the business. (See Figure 14.4, Show Me the Money that shows the chances of collecting debts.) Concept Check Questions 1. Discuss the importance of remaining professional and friendly when trying to collect an unpaid bill. It is important to remain professional and friendly (as opposed to rude and nasty) to increase the chances of collecting an unpaid bill in the future. Coming across as a hardnose demanding payment this minute will probably create a customer attitude of even less desire to pay you. Even if you collect that bill, you have probably lost that customer for future purchases. Most people understand the need to pay their bills and will respond in a reasonable manner if you treat them reasonably. 2. What advantages and disadvantages are involved for a small business offering sales on credit? The advantage of extending credit should be increased sales and revenue over accepting cash only. If offering credit does not increase sales, why do it? The downside is the cost involved. If you accept credit cards, you will have to pay 1.5 percent to 3 percent (possibly as high as 6 percent) of those sales to the credit card companies—which could represent all or most of your profit margin. If you offer open accounts, you have your money tied up in accounts receivable—money that you could use in new inventory or other purposes. Concept Module 14.5 Promotion LO5 Describe the advertising, personal selling, public relations, and sales promotion tools that a small business owner uses to compile a promotional mix. A. The goal of a business’s promotional efforts is to communicate with target markets. There are four major tools to accomplish this—advertising, personal selling, public relations, and sales promotion. B. Advertising This is a list of types and percentages of media dollars spent 1. The habits of your target market will affect your choice of advertising media. What they watch, read, listen to, or what they do influence where to advertise. (See Table 14.2, Ad Dollars Spent by Business Type showing money spent on advertising as a percentage of sales.) 2. Advertising Objectives a) To inform b) To persuade c) To remind d) To change perception 3. Common advertising strategies include: a) Testimonials b) Humor c) Sensual or sexual messages d) Comparative messages e) Slice-of-life messages f) Fantasy messages 4. Techniques to measure ad effectiveness include: a) Response tracking b) Split ads c) In-store opinions d) Telephone surveys e) Statement questionnaires 5. Advertising Development 6. Advertising Agencies 7. Media Agencies 8. Art and Graphic Design Services 9. Other Sources Reality Check: Guppy in a Shark Tank: Small Business, Big Trade Shows Trade shows can be more effective at generating sales than many other sales strategies. Some tactics to improve success include: •Choose the right show. •Plan ahead. •Get a good spot. •Pool resources with others. •Use the right stuff. •Follow up on leads. C. Personal Selling 1. Preapproach 2. Approach 3. Questioning 4. Demonstration 5. Handling Objections 6. Closing the Deal 7. Suggestion Selling and follow-up D. Public Relations (PR) See Table 14.3, The Relationship Between Marketing and Public Relations. E. Sales Promotions See Figure 14.5, Short-Term Ratchet Effect of Sales Promotion. F. The Promotional Mix Concept Check Questions 1. What factors should be considered when a small business owner decides to advertise? A small business owner needs to determine what the advertising is trying to accomplish. Are you trying to inform customers about the existence of products? Are you trying to persuade them? Remind them of your existence? Change the perception that customers have of your business/product? Build goodwill? Sell a specific product? 2. Discuss the personality traits that a good salesperson should have. What traits would detract from the personal selling process? Answers will vary, but a good salesperson must have a good eye for detail, product knowledge, communication skills, consideration, and empathy. A good salesperson should have empathy, resilience, communication skills, confidence, curiosity, adaptability, and integrity. These traits help build trust, handle objections, and create long-term relationships. Traits that detract from the sales process include aggressiveness, inflexibility, dishonesty, lack of enthusiasm, impatience, overconfidence, and disorganization. These behaviors push customers away and damage the likelihood of closing sales. 3. Explain the ratchet effect on sales. The ratchet effect shows the cumulative effect of combining advertising, personal selling, and sales promotion. 4. How would promotional mix decisions change for a small business that is expanding into a foreign market? Choices for advertising mediums are very different in many foreign countries than those available in the United States. Because traveling is expensive for a sales force, the number of countries expanded into may be limited. Public relations is an important promotional tool used to create a favorable image for your business. 5. Much of the self-produced small business advertising is weak. Think of an example of a local small business that uses especially effective advertising. Why is it successful at communicating with its target market when so many are not? An example of a local small business with effective advertising could be a local bakery that uses social media, like Instagram, to showcase visually appealing images of fresh, seasonal products. It’s successful because: • Visual Appeal: High-quality images attract food lovers. • Engagement: Regular posts with customer reviews and behind-the-scenes content create a personal connection. • Targeted Offers: Promotions and discounts are tailored to local events or holidays, drawing in the community. This advertising works because it is visually engaging, interactive, and tailored to the needs and interests of its local audience, unlike generic or poorly targeted ads. Experience This…bonus student exercise In this exercise we will walk through the steps of creating a print advertisement. Step 1: Choose a Concept. The following words commonly appear in advertising copy. Choose three or four words that will convey the message you want to send. Step 2: Work Up the Copy. Take the words you chose in step 1 and write several sentences to describe or promote your business, product, or idea. Your ad copy should answer five basic questions: 1. Who are you (and why should you be believed)? 2. What is your product? 3. How will it benefit the customer? 4. What do you want the customer to do? 5. Where can customers find or contact your business? Analyze your sentences. Is your tone conversational? (It should be.) Are you targeting a specific market? Do you communicate your features, advantages, and benefits? Is your copy specific or general? (Specific is better.) Do you address your business’s competitive advantage? How can the copy be shortened? Step 3: Artwork. Not every print ad needs artwork, but based on the copy you have written in step 2, could a photo or drawing help customers visualize the point or the benefit you are providing? Sketch out your artwork. Step 4: Headline. Now you need to grab your potential customer’s attention. A good headline can do the following: •Ask a question. (Are you tired of scrubbing tile and grout?) •Offer a benefit. (Cut your yard work in half.) •Make a promise. (No need to ever change filters again.) •Identify a problem. (Using harsh chemicals can be dangerous.) •Set a scenario. (“They laughed when I sat down at the piano, until…”) Write some headlines that attract attention and engage the reader to continue reading the copy. Make sure the headline meaning is clear. Step 5: Pull It All Together. Combine all the elements you created in the first four steps. Be sure you don’t crowd too much in; white space draws attention. How does the finished product look? A good way for students to analyze and evaluate their print ad is for students to judge each other’s work based on the elements mentioned in step 5. Chapter Closing Case The Price is...Wrong? Questions - 1. Danny Stein faces several problems with eMusic, some with conflicting ends. What problems do you see? Stein faces a problem of alienating existing customers by adding Sony BMG list and changing price structure. But he did not believe that the current trajectory was sustainable. Student may identify the problem of free music alternatives online (whether legitimate sources or not) driving price curves down. 2. What possible alternative solutions exist to the problems identified in question 1? Consider the impact of each alternative on other areas of the business. If Stein believes that adding mainstream music to eMusic, then communication to current and future customers that the site could satisfy tastes of many groups is key. 3. What recommendation(s) do you make for Stein? Whatever problem and alternatives students raise, make sure they justify their reasoning with solid business fundamentals. The Decision On May 31, 2009, Stein announced the addition of the Sony catalog on eMusic's blog, 17 Dots, in a post with the cheerful heading "More of the Good Stuff." Touting the addition of artists including the Strokes, Bruce Springsteen, and Leonard Cohen, Stein focused on the imaginary divide between indie music and major labels. "People love all sorts of music," he wrote, "and our goal is to present all of it in a way that creates a community not only of music buyers but of music lovers." He did not, however, mention eMusic's new pricing. Customers learned about that later, via e-mail or through a subtle notice posted on the website's front page. The reaction was fast and fierce. Over the next couple of weeks, Stein received more than 1,500 comments. "Good luck with your new major label 'friends,' " read one. "They will teach you so much more about screwing your customers," offered another. Over the summer, eMusic staff members worked to cool down the message boards and promote added-value features of the new pricing plan, such as album pricing, which allows customers to buy many complete albums at a discount on the regular per-track rate. The company also dispensed a flurry of virtual Band-Aids -- giving customers "booster packs" of free downloads and offering them free songs in exchange for rating or reviewing albums. By fall, the dust appeared to have settled. Despite the uproar in the blogosphere, the site's subscription base held steady, rather than dipping slightly, through the traditionally slow summer months, and by year's end it was growing again. Among new subscribers, first-month turnover, or churn, was down 7 percent by early fall and has continued to decline. Stein is optimistic that higher prices and Sony-driven growth in the subscriber base will make the indie labels happy, too. Indeed, when final numbers are tallied, the price per download for the final quarter of 2009 looks to be the company's highest ever. "We're hoping for higher payouts," says Ryan Fox of Omaha-based label Saddle Creek, home to artists such as Bright Eyes and Cursive. Indeed, there has been no sign of indie labels bailing. Meanwhile, in mid-January, eMusic added more than 10,000 new albums from Warner, Atlantic, Rhino, and several other labels. The company also was said to be in merger talks with Best Buy and Rhapsody -- rumors that Stein dismissed. "There is no impending sale," he said. Despite the occasional unpleasant moments -- "It doesn't feel good to be called names," he says -- Stein has no regrets. "Whenever you make big changes, there are lessons to be learned," he says. "We've learned that transparency is good and to try to get out there and to try to explain as much as possible -- for the next time that we have to go through this." SOURCE: www.inc.com/magazine/20100301/coping-with-fury-at-a-price-hike.html Chapter 15 International Small Business Teaching Tips • Use the chapter opener to show that small businesses can be, and are, successfully involved in international trade. • Show that the four choices of expansion into other countries—exporting, licensing, joint venture, and direct investment—represent increasing levels of commitment to international trade. • Use Figures 15.3, 15.4, and 15.5 to show some basic information about the countries most likely to be trading partners with small U.S. businesses. A better source for discussion would be to look up the original source documents at the CIA World Factbook online. • Use the case, What Would You Do? to have students brainstorm questions they would want to know about expansion into Mexico if they owned Motion Neon. After they have come up with questions, have them identify where they could get answers to those questions. • This chapter closing case is about Richard Ha's struggle to keep his family-owned banana farm viable against international competition. Read the case setup to your class from the beginning to “The Decision” (it is available at www.inc.com). Then you can either begin class discussion with the whole group or break the class into groups of three or four and have them brainstorm strategies before opening discussion to all. After you hear students’ recommended strategies, read “The Decision” and “The Experts Weigh In” to share what really happened Lecture Outline Opening Vignette: multiple small business examples involving international trade What’s the Point? To begin discussion how small businesses can engage successfully in many facets of international trade . Concept Module 15.1 Preparing to Go International LO1 List factors to consider when preparing an international business plan. A. Research shows that the size of a business is not a barrier to entry into international markets—it only limits the number of markets it can serve. The same competitive advantages that make a business successful in a local market can create the same advantages in foreign markets. B. Growth of Small Business Small businesses can not only compete successfully in other countries, they are increasing their export rate much faster than large businesses. (See Figure 15.1, Small Business Globalization by the Numbers to view interesting facts about international small business activity.) C. International Business Plan An international business plan begins with everything included in a domestic plan (discussed in Chapter 4) plus: 1. Commitment to international trade 2. Export pricing strategy 3. Reason for exporting 4. Most attractive potential export markets and customers 5. Methods of entering foreign markets 6. Exporting costs and projected revenues 7. Financing alternatives to allow you to export 8. Any legal requirements that must be met 9. Appropriate transportation method 10. Overseas partnership contacts D. Take the Global Test 1. The “good reason” test 2. Do you have the right stuff to pull this off? 3. Are you flexible? 4. Can you find a good distributor? 5. Can you cope with all the complexity? 6. Can you brave the nonlegal barriers? 7. Are you willing to extend credit or deal with currency turmoil? 8. Are you ready to run a much different kind of company? 9. Do the rewards outweigh the costs? Concept Module 15.2 Establishing Business in Another Country LO2 Name fie ways for small businesses to conduct international trade. A. A vast majority of international small business activity is limited to importing and exporting, but higher levels of commitment exist. B. Exporting—covered in more detail below C. Importing—covered in more detail below D. International Licensing This is assigning the rights to your patents, trademarks, copyrights, processes, or products to another company in exchange for a fee or royalty. Licensing is similar to domestic franchising. E. International Joint Ventures and Strategic Alliances Joint ventures are partnerships between businesses in different countries. Strategic alliances are less formal than joint ventures. F. Direct Investment Opening an office, factory, or store in a foreign land is the highest level of international commitment. Reality Check: Outsourcing-Key Factors for Success Small businesses have alternatives finding suppliers and outlets abroad. This box illustrates some options. Entre-Perspectives: Tony and Maureen Wheeler of Lonely Planet The point of this box is to illustrate how a small business started by serendipity can become known worldwide. What Would You Do? Refer back to the highlight box on Lonely Planet. You remember the story of the Wheelers’ building the business of describing travel in many countries around the globe. In the process, they have created a website (www.lonelyplanet.com) that offers an incredible wealth of information for entrepreneurs. Choose a country that you believe has potential to be a market for the small business you wish to own. Working in teams of two, use Lonely Planet online to become “experts” on this country. Use all their resources, like Worldguide, Theme Guides, The Thorn Tree, and The Scoop. Once you have gathered this valuable information on Iceland, Singapore, or anywhere in between, prepare a two-page executive summary on the opportunities you find for your chosen country, and present your findings to your class. The point of this exercise is for students to “learn how to learn” about a new market. Lonely Planet is a good beginning point, but students can quickly branch out. Concept Check Questions 1. Why would a small business choose to license its products in other countries? Licensing is a good vehicle for entering other countries because it requires little investment. Licensing is similar to selling a franchise. The downside is the loss of control over product and process and enforcing terms of the agreement. Concept Module 15.3 Small Business Exporting and Importing LO3 Analyze factors for small businesses to consider when exporting and importing Exporting A. Exporting is selling goods or services in another country. 1. Advantages include: a) Increased total sales and profit b) Access to a share of the global market c) Reduced dependence on existing markets d) Enhanced domestic competitiveness e) Chance to exploit technology and expertise in places where they are needed f) Extension of product life cycle g) Stabilization of seasonal sales fluctuations h) Opportunity to sell excess production capacity i) Chance to gain information about foreign competition 2. Disadvantages include possible requirements to: a) Develop new promotions material suitable for foreign customers b) Forego short-term profits in the interest of long-term gains c) Incur added administrative costs d) Allocate funds and personnel for travel e) Wait longer for payments than with your domestic accounts f) Modify product or packaging g) Acquire additional financing h) Obtain special export licenses B. Indirect Exporting Indirect exporting involves the use of intermediaries to assist in the export process. These intermediaries include: 1. Agents and Brokers—connect a small business with foreign buyers and provide advice on shipping, packaging, and documentation. 2. Export Management Companies (EMCs)—act as a small business’s export department providing a full range of services without taking title of goods. 3. Export Trade Companies (ETCs)—similar to EMCs, but take title of goods. 4. Piggyback Exporting—coordination of exporting efforts with another noncompeting company. 5. Foreign-Based Distributors or Agents—intermediaries based in a foreign country, rather than a company’s home country. They can provide the advantage of cultural and local knowledge unattainable otherwise. Reality Check: China-Here We Come...or Not Small businesses sourcing production, suppliers, or selling to China may want to think two or three times before making their decision. This box points out some key considerations. C. Direct Exporting Direct exporting provides more control, greater profit potential, and direct contact with customers by not using intermediaries. For a small business owner to have his or her attention diverted to all the possible complexities of exporting increases risk, expense, and difficulty. Before considering direct exporting, rather than indirect, the small business owner must decide if saving service fees and commissions would be worth the additional work and hassle. D. Identifying Potential Export Markets 1. Find Countries with Attractive, Penetrable Markets. (See the following graphics: Figure 15.2, Top Ten Trading Partners of the United States; Figure 15.3, Canada at a Glance which gives information about the largest trading partner of the United States; Figure 15.4, Mexico at a Glance which gives information about the second largest U.S. trading partner; and Figure 15.5, China at a Glance for information about the third largest U.S. trading partner.) 2. Define Export Markets that Match Your Product—Some questions to ask include: a) How does the quality of products in the foreign country compare with your products? b) Will your prices be competitive? c) Can you segment customers? d) Are there political risks in the country you are considering? e) Will your products need any modifications? f) Will tariffs or nontariff barriers prevent entry? 3. Export Product Classification—To gather information about markets from government sources, a small business must know the Standard Industrial Classification (SIC), the Standard International Trade Classification (SITC), and the product’s Harmonized System (HS) classification number. Importing Compared to exporting, the focus of importing shifts from supplying to sourcing. Factors to consider when choosing a foreign supplier include its reliability in having products available, the consistency of product or service quality, and the delivery time needed to get products. Concept Check Questions 1. Discuss the difference between and the advantages and disadvantages of indirect and direct exporting. The difference between indirect and direct exporting is that indirect involves the use of intermediaries while direct does not. Advantages of hiring an export service company or other intermediary are that this method is the most cost effective, reduces risks, and can help a small business market its products abroad. A disadvantage is the loss of control for the small business. An advantage of direct exporting is the control, but it is riskier, much more work, and more expensive. 2. What is the advantage of a strategic alliance over direct investment when entering a foreign market? A strategic alliance is advantageous to both a large company and a small business working together. A major advantage of strategic alliances is access to markets, which have high trade barriers (tariffs or others) without the expense of direct investment. 3. What information should a small business owner gather before deciding to export products? The first thing to determine is if a market for the product or service exists in the country and if the small business can serve that market. Small businesses need to gather information about the cultures they will be dealing with. Owners need to also be up-to-date on trade agreements and ensure their quality with international standards. 4. Why is finding financial assistance for international expansion more difficult than finding such help for domestic expansion? Many financial sources do not like the time it takes to get paid from foreign countries. If a small business is selling goods abroad, the buyer will usually require a letter of credit for which U.S. banks often require cash backing. This puts a strain on a small business’s finances. Concept Module 15.4 Financial Mechanisms for Going International LO4 Explain how small businesses can manage their finances in international trade. A. Financial challenges for small businesses include how to finance expansion, how to pay debts and get paid, and where to find information and assistance. B. International Finance Additional working capital may be needed to fund international sales expansion. Conventional financing, venture capital, and prepayment from buyers are possible sources. 1. The Export-Import Bank (Eximbank)—Eximbank is an independent federal agency with a program that covers 100 percent of working capital for a commercial loan. 2. The Small Business Administration—The SBA has several financial services for exporters (refer to www.sba.gov). C. Managing International Accounts Making a sale is one thing, getting paid may be another. (See Figure 15.6 International Payment Terms.) Methods of payment, ranked from most to least secure, include: 1. Payment in Advance—great if you can get it—at least a percentage. 2. Letter of Credit—internationally recognized instrument issued by a bank on behalf of its client. 3. Documentary Collection (Drafts)—documents that require the buyer to pay the seller the face amount either when the product arrives (called a “sight draft”) or at a specified time in the future (called a “time draft”). 4. Consignment—advancing a product to an intermediary who tries to sell it to the final user. This is risky because there is no way to know when, if ever, the goods will be sold. 5. Open Account—delivery of goods before payment is arranged is very risky for international sales. D. Countertrade and Barter 1. Countertrade can take several forms, but it is basically substituting a product for money as part of the transaction. Although it is not a long-term solution, it may be a tool to make deals that could not be made otherwise. 2. The key to making money with countertrade is to have somewhere to sell the goods you receive before you make the trade. E. Information Assistance Check with your state export office and www.sba.gov. Concept Check Questions 1. Name a form of countertrade and when it would be an appropriate strategy. A type of countertrade might be trading used personal computers from the United States with a company in Mexico for leather briefcases. This type of trade would help the exchange due to the volatility of the peso. 2. Discuss the differences and similarities between domestic- and foreign-based intermediaries. With a domestic-based intermediary, you may be able to track distributors and their actions; what they do reflects upon your product. If they are foreign-based, they may not be pushing to sell as much as you would like. Foreign-based intermediaries are responsible for processing more forms and paperwork in order to clear your products through customs and other regulations. . 3. What does the Eximbank do for potential exporters? For importers? The Eximbank offers guaranteed working capital loans to qualified exporters. The Eximbank and the SBA also have a program to coguarantee 85 percent of loans ranging from $200,000 to $1 million. It also protects exporters in case a foreign buyer defaults on payments. The Eximbank also has provisions to provide insurance programs through the Foreign Credit Insurance Association to cover buyer nonpayment (credit) and country (political) risks. Concept Module 15.5 The International Challenge LO5 Articulate the cultural and economic challenges of international small business activity. A. Many challenges exist for small businesses entering other countries—a few are highlighted here, such as custom and language problems and the impact of trade regions. B. Understanding Other Cultures Sensitivity to cultural beliefs that vary from country to country is critical. Not understanding norms can lead to embarrassment for you at the least, to completely blowing the deal at the worst. (See Figure 15.7, The Cultural Iceberg.) C. International Trading Regions 1. A trade region is established through agreements to create economic and political ties among nations usually located within a close geographic area. These agreements reduce trade barriers among countries within the region and standardize barriers with countries outside the region. (See Table 15.2, Major Regional Trade Associations, on page 443.) 2. NAFTA—NAFTA joins the United States, Mexico, and Canada in a free trade area. To take advantage of preferential NAFTA duty rates, you first need to determine if products are originating goods. Four primary ways for goods to qualify: a) Goods wholly obtained or produced in a NAFTA country. b) Goods made up entirely of components and materials that qualify. c) Goods that are specifically cited in an article of the agreement (very few products are cited). d) Goods that are covered under specific rules or origin for that product, as listed in NAFTA Annex 401. This is the most common way to qualify. 3. World Trade Organization (WTO)—WTO has evolved from the General Agreement on Tariffs and Trade (GATT) and provides a negotiation forum for tariff and nontariff barriers to trade. Manager's Notes: Always a Handshake and a Smile, Right? Cultural differences vary widely across borders. This box highlights some of those differences. D. ISO 9000 1. The International Standards Organization (ISO) has established quality standards to show industrial customers that manufacturers’ methods of product development and achieving quality standards are designed to ensure quality. 2. ISO 9000 standards relate to quality. ISO 14000 standards relate to environmental issues. ISO 9001:2000 standards maintain a greater focus on customer satisfaction, user needs, and continuous improvement of quality management systems. Concept Check Questions 1. Choose three foreign markets and find the customs and courtesies for greetings in those countries (possibly using the Internet as a source). Students should be able to find a wealth of examples of cultural differences that small business owners considering that country should know. 1. Japan: • Custom: A bow is the traditional greeting. The depth and duration of the bow indicate respect. • Courtesy: Handshakes may also be used but should be gentle and accompanied by a slight nod. 2. Germany: • Custom: A firm handshake with direct eye contact is standard. • Courtesy: Titles (Herr/Frau) followed by the last name are used until invited to use first names. 3. Brazil: • Custom: Warm and physical greetings, such as handshakes or cheek kisses (depending on gender and relationship). • Courtesy: Personal space is smaller, and maintaining eye contact is important during interactions. 2. Imagine that you own a small manufacturing business. Identify the product that you produce and a foreign market that appears to represent an opportunity. What country would pose a risk? Student answers will vary. The question can be tied to the What Would You Do? No. 1 on Motion Neon at the end of the chapter and examples expanded to other products and countries. If I owned a small furniture manufacturing business, I might see Germany as an opportunity due to its high demand for quality furniture and design innovation. However, entering Argentina could pose a risk because of fluctuating currency values and economic instability, which could affect profitability and business operations. 3. What countries are riskier markets for small businesses to enter? Why? Where would you find information regarding political stability, financial risks, and cultural differences? The riskiest markets are those that the small business does not know well. The CIA World Factbook (the source for Figures 15.3, 15.4, and 15.5) at www.cia.gov is a great source. Countries like Venezuela, Afghanistan, and North Korea are riskier markets for small businesses due to political instability, economic sanctions, and unreliable legal frameworks. Information on political stability, financial risks, and cultural differences can be found through sources like the World Bank, IMF, CIA World Factbook, and the U.S. Department of State reports. Additionally, the World Economic Forum and Heritage Foundation provide insights into business risks in foreign markets. Experience This…bonus student experience Locate a small business in your area that conducts business in another country (you may be surprised to find who local global players are). Ask the owner what the greatest challenge has been in doing business across borders. Share your story with the class. Every business owner who has experience abroad has a story to share. It could be from a transportation holdup in customs or incorrect products being shipped because of a language glitch. Students love “war stories” and can benefit from them if they are put in proper context. Chapter Closing Case Employees Fight to Save the Farm Questions - 1. Put yourself in Ha's situation, and analyze the pros and cons of his workers' proposition. Pros would include - further motivating an already engaged workforce; providing employment for longtime employees and family in a profitable manner. Cons would include the financial and emotional risks should the plan not materialize projected results. Emotions would lead one to root for the workers' plan, but a point that has been made repeatedly in this text - don't let emotions cloud business decisions. In this case though, their plan has solid business foundations. 2. Since Hawaii is so isolated and Ha sells bananas locally, why is he affected by international competition? Students should point out that while this case is unique due to Hawaii's geographic isolation, just about every small business is affected by international competition. Fuel prices, established trade relationships, and substitute products affect competition everywhere. 3. What would you recommend the family running the Hamakua Springs Country Farms do? Again, students need to build a case for the core problem that they identify - probably paying employees in face of stiff competition and fluctuating banana prices. Then they should identify all alternatives - ones identified in the case and any other possibilities and finally justify their recommendation. The Decision A day later, Ha reversed his decision and announced that Hamakua Springs would continue shipping its bananas to supermarket shelves on the Big Island, Maui, and Oahu. Ha knew if his banana gamble didn't work, he might tip his farm into the red and put a strain on other parts of his business and his family. In the end, though, he decided to follow his heart -- sticking with the banana crop and keeping his staff intact. "Nobody told us it would be the end of cheap bananas," says Ha. "We had to decide that for ourselves. Had the world really changed that much? I knew it would be a big risk." Still, if it hadn't been for the workers' insistence, he doubts he would still be growing bananas today. "They really wanted to make it happen," Ha says. "They said they would work hard. I felt I had to meet their commitment." The team members immediately put their shoulders into transforming the operations, pulling out apple banana trees and preparing the 100 acres to be leased to other farmers. Since the decision, oil prices have climbed to nearly $140 per barrel -- and plenty of experts think they are headed much higher, which would be good news for Hawaii's homegrown bananas. Ha is now pricing his crop slightly below the imports and still expects to hit his profit targets. "As long as we do a good job, we'll hold our own," he says. "We would really like to supply our island, and everything seems to be pointing toward this being a good strategy." SOURCE: www.inc.com/magazine/20080801/he-thought-it-was-time-to-shut-down.html Solution Manual for Small Business Management: Entrepreneurship and Beyond Timothy S. Hatten 9781285866383