This Document Contains Chapters 1 to 4 Chapter 1 Small Business: An Overview Teaching Tips •Use this chapter to begin discussion about differences between large and small businesses. Emphasize the importance of small businesses to our economy. •Emphasize the symbiotic relationship between large and small businesses. •Point out that the failure rate of small businesses is difficult to calculate with accuracy, but proper preparation can help prevent students from becoming part of those statistics. •Use the vignette, What Would You Do? at the end of the chapter to launch class discussion on the potential for business failure and importance of creating competitive advantage in the restaurant business. Lecture Outline Opening Vignette: GoPro creator Nick Woodman Concept Module 1.1 What Is Small Business? LO1 Describe the characteristics of small business. A. Good question—since small businesses are the drivers of a free enterprise system. If you include sideline businesses with full-time businesses and the self-employed, almost 27 million small businesses exist in the United States. Compare that with only 18,000 businesses with 500 or more employees. (See Figure 1.1, Almost All Businesses Are Small Businesses.) B. Size Definitions 1. To be classified as “small,” Small Business Administration (SBA) guidelines vary by NAICS code based on revenue and number of employees. (See Table 1.1, Small Business Size Standards.) In general, retailers and services with less than $6.5M, wholesalers with fewer than 100 employees, and manufacturers with fewer than 500 employees are classified as small. 2. To be classified as a “business,” you must make a profit in 3 of 5 years, otherwise the IRS can say you have a hobby, not a business. C. Types of Industries 1. For the purposes of this book, we consider a small business one that is: independently owned and operated; has fewer than 100 employees; and has relatively little impact on its industry. 2. Service and retail industry sectors have the highest percentages of small businesses. (See Figure 1.2, Small Business Employment Share of NAICS Industries, showing percentages of work force and total numbers of firms by industry.) Concept Check Questions 1. How would you define small business? Small business is a business that is usually independently owned, operated, and financed; has fewer than 100 employees; and has relatively little impact on its industry. 2. Name a company that seems large but might be classified as small because it has relatively little impact on its industry. Boston Beer Company is considered a small business even though it has over 100 employees, has a relatively large sales revenue, and large total value of assets and value of owner’s equity. It has little effect on the overall industry of beer when compared to Coors, Anheuser-Busch, and Miller, so Boston Beer Company can be considered a small business. Concept Module 1.2. Small Business in the U.S. Economy LO2 Recognize the role of small business in the U.S. economy A. Until the Industrial Revolution, every business in the United States was small. Manufacturing to create economies of scale created huge businesses and whole new industries. Entrepreneurs took a back seat until the late 1950s and early 1960s. The burgeoning of the service and high-tech sectors has made symbiotic relationships between big and small businesses important in the economy of the twenty-first century. B. Recent Growth Trends 1. Business downsizing has provided opportunities for small businesses in two ways. They can provide the services and products that large corporations outsource. Many jettisoned employees can start small businesses or work for other small businesses. 2. Increased Business Startups—The rate of small business growth has doubled in the last 30 years. In 1970, 264,000 small businesses were started. By 1990, that number grew to 585,000, 574,000 in 2000, and 670,800 in 2006. 3. Increasing Interest at Colleges and Universities—Over 2,000 colleges/universities offer courses in SBM/ Entrepreneurship. Another 406 house centers for entrepreneurship and business incubators. Entre-perspectives - Elon Musk, founder of PayPal, Tesla Motors, SpaceX and Solar City. Musk is right up there as the ultimate in entrepreneurs when it comes to recognizing opportunity, creating businesses to solve problems, and thinking BIG. What’s the point? The point of this chapter opener is to illustrate an entrepreneur who thinks big with a capital ‘B.’ Discuss what make Musk unique – vision, passion and drive. Use the story of Musk to demonstrate the impact that a small business can have (have students think of how PayPal changed the face of online commerce – have them project how Tesla can change the automobile industry) Concept Check Questions 1. Large businesses depend on small businesses. Why? Small businesses are able to perform more efficiently than large businesses for several reasons. Large businesses may have an advantage in production due to their economies of scale, but smaller businesses are often better at distribution. Smaller businesses can link the large businesses to their consumers more efficiently. Large businesses often depend on small businesses to produce components. 2. Define outsourcing, and describe its impact on small business. Outsourcing is when a company hires another business to provide goods or services rather than producing them itself. Outsourcing has provided many opportunities for small businesses to provide specialized services that other businesses no longer perform themselves. Small businesses save larger businesses money and make a profit for themselves in the process. 3. How would you show that small business is becoming a more important part of the economy? Small firms accounted for 63 percent of the net new jobs created between 1993 and mid-2013 (14.3 million of the 22.9 million net new jobs). Nine new businesses are formed for every one that fails. Small businesses create new jobs and new products. Concept Module 1.3 Work Force Diversity and Small Business Ownership LO3 Understand the importance of diversity in the marketplace and workplace. A. Trends of an aging population, more minority representation, more attention to abilities than disabilities of workers, and more women entering the work force have changed the way our nation and workplace operate. Two reports by the SBA Office of Advocacy, “Dynamics of Minority-Owned Employer Establishments, 1997–2001” and “Women in Business, 2006,” provide the most current data available—summary findings are included in this section of the text. B. The Value of Diversity to Business Example of how Ernest Drew, CEO of Hoechst Celanese, learned how diversity is not important for the sake of diversity, but that diversity is a strength as it relates to problem solving. Concept Check Questions 1. Is workforce diversity as important to small businesses as it is to big businesses? Why or why not? This is more of a question based on students building a case for their answer than one based on empirical data or one 'correct' answer. Yes, workforce diversity is just as important to small businesses as it is to big businesses. Diversity brings different perspectives and ideas, which enhances problem-solving, creativity, and innovation. For small businesses, diversity can help tap into new markets and create a more inclusive environment, allowing them to better serve diverse customers. Additionally, it promotes adaptability and resilience, crucial for growth and competitiveness in today's marketplace. 2. From strictly a small business perspective (not social or emotional perspectives), why is diversity important? As the previous question, students build their perspective and should expect to have their perspective challenged. From a small business perspective, diversity is important because it enhances problem-solving by bringing different perspectives and experiences to the table, which leads to more innovative and creative solutions. It also helps small businesses tap into a broader customer base, making them better able to serve diverse markets. Additionally, diversity improves adaptability and responsiveness to changing market needs, making small businesses more competitive and sustainable in the long term. Moreover, a diverse workforce can increase access to different networks and resources, contributing to business growth and success. Concept Module 1.4 Secrets of Small Business Success LO4 Suggest ways to court success in a small business venture A. Small businesses have some inherent advantages over their large counterparts—if they define and understand their competitive advantage, remain flexible and innovative, cultivate a close relationship with customers, and strive for quality. B. Competitive Advantage A competitive advantage is the (at least) one thing that a business does better than every other business. If a business cannot point to the facet that they do better than everyone else, then why is that business needed? 1. Flexibility—Small businesses are able to change their products in order to react to new and quickly changing markets. 2. Innovation—Entrepreneurs have the economic incentive to create totally new, never been seen before products—product innovation. Larger businesses have more incentive to produce process innovation—making their products/services better incrementally. Creative destruction is the process identified by Joseph Schumpeter in which existing products, processes, and businesses are replaced with new and better ones. 3. Close Relationship to Customers—Small business owners get to know their customers and neighborhoods on a personal level. This fact can translate to better customer service C. Getting Started on the Right Foot Before starting a small business, a potential entrepreneur needs to make sure he/she has the tools needed for success. 1. Market Size and Definition—Is there a large enough market for your business to support itself and the owner? 2. Gathering Sufficient Capital—Have enough money lined up to survive until a positive cash flow is generated. 3. Finding and Keeping Effective Employees—Maintaining a capable work force is a never-ending task for small businesses. 4. Getting Accurate Information—Do you, as a small business owner, know everything you need to know before beginning a business? Concept Check Questions 1. Why are small businesses more likely than large businesses to be innovative? Small businesses are more likely to be innovative because large businesses are more concerned with improving their existing products rather than coming up with new ideas and technology for a product that does not yet exist. Large businesses have made huge capital investments to produce their existing products, and therefore do not have an economic incentive to make them obsolete. 2. Explain the term creative destruction. Creative destruction is the replacement of existing products, processes, ideas, and businesses with new and better ones. It is the necessary (but sometimes painful) process of replacing what is old with what is new. 3. How can being close to your customers give you a competitive advantage? If you are close to your customers you will know when products or services are on target or not. You can get first-hand knowledge of what your customers need and want. If you can satisfy your customers you will get repeat visits, and they will refer their friends to your business. 4. Is creative destruction just another economic theory for the foundation of capitalism? Build a case supporting your answer. Creative destruction is an important foundation of a free market system. Innovative, improved products and processes must replace less efficient ones. Individual companies and people do suffer during times of change, so creative destruction is not always a pretty process. The question should drive student to consider the 'big picture' impact of small business application on economic systems. 5. The chapter discussed the evolution of small business in the American economy. On the heels of the rapid growth in the popularity of Internet businesses in the late 1990s and the ensuing bust in 2000, and now the trend away from online and toward mobile connectivity what will be the next stage in small business's evolution? Is the Internet just another business tool, or will it re-create the way business is done again? The Internet and mobile apps are tools. But they are tools that are still evolving. Students should have some strong opinions of how they will re-create businesses. The next stage in small business evolution will likely focus on leveraging advanced technologies like artificial intelligence, blockchain, and augmented reality, alongside the growing dominance of mobile connectivity. The integration of these tools will allow small businesses to personalize customer experiences, automate operations, and enhance data security, further transforming business practices. While the Internet has become an essential business tool, its role will continue to evolve, driven by innovations in connectivity and e-commerce. Rather than just re-creating how business is done, the Internet will remain a key enabler of new digital platforms, reshaping interactions, marketing, and service delivery for small businesses. 6. How would the computer industry be different today if there were no businesses under 500 employees? Would personal computers exist? The purpose of this hypothetical question is to help students realize the contributions of small businesses. The businesses that have been instrumental in developing hardware and software for personal computers have been small. Concept Module 1.5. Understanding the Risks of Small Business Ownership LO5 Name the most common causes of small business failure A. The decision to start your own business should be made with a full understanding of the risks involved. Reality Check - Jim Koch of Boston Beer Company, maker of Samuel Adams beer Ask what makes Koch unique. Look for responses about his persistence, demonstrated by carrying his beer in a briefcase from bar to bar, sometimes up to 15 calls, in order to get a sale. Look for responses about his passion for quality. Students should be able to see Koch’s actions, traits, and the characteristics that make him a successful entrepreneur, competing against both huge breweries and many microbreweries. B. What Is Business Failure? A business failure is one that closes with a financial loss to a creditor or one that is involved in court action such as receivership or reorganization. An NFIB study showed that about 10 percent of businesses closed in less than one year. Twenty-five percent closed between one and two years. Another 20 percent closed between three and five years. Thirteen percent survived for more than 21 years. C. Causes of Business Failure The rates of failure vary greatly by industry and are affected by factors such as type of ownership, size of the business, and expertise of the owner. While Figure 1.3 shows economic or financial reasons as the most common causes of failure, make the point that less than stellar management can factor into each of those areas. 1. Inadequate Management—By definition, small business owners are generalists, but lack of knowledge or lack of attention to a critical area of running a business often spells failure. 2. Inadequate Financing—Failure can be caused by improper managerial control or shortage of capital. (See Figure 1.3, The Causes of Business Failures.) D. Business Termination A distinction needs to be drawn between business failure and business termination. As previously defined, a failure results in a financial loss to a creditor. A business termination is one that closes for any reason—and there are many. E. Failure Rate Controversy 1. A “myth that will not die” is the platitude that something like “90 percent of all new businesses fail within one year.” Part of the controversy comes down to the difference between a failure and a termination. A comparison between the business failure rate and divorce rates and college dropout rates is made. This is a discussion about what you should not do in starting a business. Items include not planning, underestimating the hard work required, not hiring employees soon enough, and inaccurately estimating cash flow and capital needs (or not estimating them at all). 2. Businesses do fail and there are risks involved, but a business owner who takes the precautions outlined throughout this book and this course will have a much better chance of survival. Fortunately, U.S. Startups Versus Failures shows that more businesses are created than fail. Concept Check Questions 1. The text compares the failure rate of small business with the divorce rate in marriage and student failure rate in college. Are these fair comparisons? Student answers will vary, but consider that all three are choices that we can make and involve the risk of significant loss. In all three you have to work hard, invest a lot of time, and devote the effort needed for success. Preparation, perseverance, and commitment are needed to be successful. 2. Describe four causes of small business failure. How does the quality of management relate to each of these causes? The four reasons for failure are not planning enough so that your business can get off the ground, not dedicating the right amount of time and effort to the business, not hiring enough or the right employees, and not getting enough money to cover all the costs or asking for too much money. To be a successful manager, you will need to know how to plan for the future, dedicate the amount of time and effort needed, hire enough employees with the right skills, and prepare a budget with a cushion in it for unexpected problems. 3. Describe the techniques that a business with which you are familiar has used to prevent business failure. Student answers will vary by specific businesses, but the techniques used to have a successful business are flexibility, quality product or service, customer appreciation, and feedback. A good manager must know how to handle and solve problems that arise in a wise and timely manner. 4. Predict the future of small business. In what industries will it be involved? What trends do you foresee? Will the failure rate go up or down? Will the importance of small business increase or decrease by the year 2020? The question calls for speculation, but the future for small businesses looks promising. As service and technology-based businesses grow and become larger parts of our economy, small businesses will continue to prosper. Students should be able to note several trends (such as downsizing and outsourcing) and speculate about the failure rate. Chapter Closing Case Small Business Lessons from the Movies This case should generate significant discussion as students talk about business lessons they have learned from movies. If time permits, Tucker is an outstanding movie to show to your class. It is based on a true story of an entrepreneur’s vision of improvements that could be made to automobiles and the challenges (financial, legal, political, and others) that he faced. Questions 1. What are your personal screen inspirations? What lessons do these or other movies provide in running a small business? Student answers will vary. Lessons may include examples of perseverance, creativity, or determination. 2. In addition to the movies cited in this case, think of other titles for business lessons such as Risky Business, Pirates of Silicon Valley, and Tucker. What lessons do they provide? Risky Business showed enterprising students who started a short-term business (even though it was an illegal one) to get themselves out of trouble. Pirates of Silicon Valley is a very accurate depiction of Steve Jobs and Bill Gates from their very early years through success at Apple and Microsoft. Tucker is the true story of an entrepreneur who had a vision to change the auto industry. 3. What movies portray leaders who think creatively, who keep their heads, who manage communication, and as for failure, well, that’s just not an option (a line from Apollo 13)? Student answers may include such films as Braveheart, The Godfather, or even Monsters, Inc. 4. Bearing in mind that the intent of movies is artistic, rather than educational, what movie lessons do you think illustrate the opposite of what a manager should do or say? Student answers may include such movies as The Devil Wears Prada, Office Space, or Trading Places. Chapter 2 Small Business Management, Entrepreneurship, and Ownership Teaching Tips • Use the progressive Figures (2.1, 2.2, and 2.3) of the entrepreneurship/small business management model to explain the differences and similarities between entrepreneurs and owners of small businesses. The person is separate from the process. Begin the class discussion by asking students to describe entrepreneurs they know or have read about. • Ask students why they want to go into business for themselves rather than work for someone else. Compare their responses to Figure 2.4. • Use Reality Check to illustrate the vast differences in ways businesses begin. • Ask students about traits or personal characteristics needed to be a successful entrepreneur. • Use the case, What Would You Do? No.1, to help students make the choice of form of ownership for Zoo Doo (great case!). • This chapter is a natural fit to have an entrepreneur visit class—have him/her discuss the different challenges/environments/ and problems faced at different stages of their business development (as seen in the model of Entrepreneurship/Small Business Management.) • The chapter closing case features small business owners who are struggling with problems regarding their business model. Have students read the case setup before class and have students make a commitment on what they recommend. 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. Lecture Outline Opening Vignette: Sara Blakely, founder of Spanx Sara looked for the solution to a personal problem (like most entrepreneurs do) and created flattering undergarments for females. Spanx now has a business valuation of $1Billion - and Blakely owns 100 percent of it. Concept Module 2.1 The Entrepreneur–Manager Relationship LO1 Articulate the differences between the small business manager and the entrepreneur While there is an overlap between entrepreneurship and small business management, there are enough differences to study each separately. Entrepreneurship and small business management are both processes, not isolated incidents. A. What Is an Entrepreneur? An entrepreneur is a person who sees an opportunity and assumes the risks (financial, material, and psychological) of starting a business to take advantage of an opportunity or idea. Behaviors generally associated with entrepreneurship are creation of a business; innovation of a new product, process, market, material, or organization; risk assumption; general management of the business and its resources; and performance intention of profit and/or growth. B. Entrepreneurship and the Small Business Manager Entrepreneurship involves the startup process. Small business management focuses on running a business over a long period of time. Entre-Perspectives Are You Ready? The point of this quiz is to begin discussion by comparing students’ responses with responses of entrepreneurs in general. The instrument used is not intended to be predictive of who will or can become an entrepreneur—it is a compilation of entrepreneurial tendencies. The questions are designed to be thought provoking and will provide some personal insight for class discussion. Concept Check Questions 1. What do entrepreneurs do that distinguishes them from any other person involved in business? Entrepreneurs assume the risk involved in starting businesses. The entrepreneur, unlike employees, is the one who puts forth the initial effort in creating a new business. 2. Imagine that the principal from the high school you attended (and graduated from) called to invite you to make a presentation to the newly founded entrepreneurship club. What would you tell this group of high school students about owning their own business as a career option? One could imagine talking about the commitment required for self-employment, about perseverance, about creativity and financial organization that are all needed at the same time. Concept Module 2.2 A Model of the Startup Process LO2 Discuss the steps in preparing for small business ownership The processes of entrepreneurship and small business management can be thought of as a spectrum with six distinct stages. The entrepreneurship process includes the innovation, triggering event, and implementation stages. The small business management process includes the growth, maturity, and harvest stages. (Figure 2.1, The Startup Process illustrates the six primary stages. Figure 2.2, Environmental Factors Affecting the Startup Process shows the stages plus the different environments faced in each. Figure 2.3, A Model of the Entrepreneurship/Small Business Management Process illustrates the stages, environments, and personal, organizational, and sociological characteristics that differ from stage to stage.) Concept Check Questions 1. Describe the significance of triggering events in entrepreneurship. Give examples. A triggering event is something that happens to the entrepreneur that causes him or her to bring an idea to reality. This is important to bring the organization to life (i.e., the loss of a job, extra income, education, job dissatisfaction)—otherwise ideas are not brought to fruition. 2. How is small business management different from entrepreneurship? Entrepreneurship involves the startup process of an organization. Small business management focuses on running a business over a long period of time. 3. Why would an entrepreneur be concerned about harvesting a business that has not yet been started? One of the keys to being effective in life is “beginning with the end in mind.” Entrepreneurs don’t want to start a business that is going to fail. By viewing the business as an investment and keeping in mind how to get out of it, an entrepreneur can better increase the value of a business and decrease chances of failure at the same time. Concept Module 2.3 Your Decision for Self Employment A. Preparation for owning a small business. B. Pros and Cons of Self Employment Advantages and disadvantages include: 1. Opportunity for Independence—Control over one’s life is an attraction to self-employment. (See Figure 2.4, Independence Is the Primary Reason Most People Go into Business.) 2. Opportunity for a Better Lifestyle—The ability and desire to use one’s own skills and enjoy life and work more is common motivation. 3. Opportunity for Profit—Few other occupations provide such a direct link between performance and compensation—strong motivation. 4. Risks of Self-Employment—Personal liability, uncertain income, long working hours, and frequently limited compensation are all risks. Reality Check Small Biz on Campus This box highlights students who are running their own businesses before their college graduation - good classroom discussion fodder. Ask your class if they believe this is a good idea or if they think that a student trying to go to college and start a business can’t do their best at either. For more examples see Inc.s newest Coolest Campus Startups at www.inc.com/coolest-college-start-ups-2011/index.html C. Traits of Some Successful Entrepreneurs While personal traits and characteristics are not predictive of who will be a successful entrepreneur, some commonality exists. Important characteristics include passion for the business, determination, knowledge of product and markets, a need to achieve, internal locus of control, tolerance for ambiguity, tolerance for risk, and incredible tenacity. 'Trep Connections Let's See It... John Goscha developing IdeaPaint What’s the point? Students will probably not recognize the company IdeaPaint, but it is an inspiring story of a successful company as a college freshman after recognizing an opportunity while working in a study group. The point of the story is entrepreneurial success with a business started while the owner was still in college. D. Preparing Yourself for Business Ownership 1. Experience and education are both needed to start and run a business, but the type and amount of each depends greatly on the business. Entrepreneurs and small business owners have higher education levels than the general public. (See Figure 2.5, Education Level of New Business Owners.) 2. A good question can be asked here: “Can entrepreneurship be taught?” Personal traits and characteristics cannot, but the analytical and relational skills needed can be. Concept Check Questions 1. Why might personality characteristics may be good predictors of who will be a successful entrepreneur? Personal characteristics and traits are not useful in predicting who will be a successful entrepreneur. However, personal characteristics such as a high tolerance for ambiguity, a strong need to achieve, and a willingness to accept risk are important throughout the entrepreneurship process. 2. If a friend told you that entrepreneurs are high risk takers, how would you set the story straight? Although there are many risks involved in entrepreneurship, financial as well as emotional, there are factors that make those risks worth taking. These include the opportunity for independence, the chance for a better lifestyle, and the potential for significant profit. Entrepreneurs, contrary to popular opinion, do not take risks just for the sake of taking them. They carefully analyze what steps can be taken to decrease the risk to a moderate level (or at least to the point where it is worth taking). 3. Explain why people who own a small business may not enjoy pure independence. Pure independence equals total liability, and some people may not want to take this total responsibility. Owning your own business does not mean pure independence, since you still have to answer to many “bosses” like customers, employees, and regulators. 4. If personal characteristics or personality traits do not predict who will be a successful entrepreneur, why are they significant to the study of entrepreneurship or small business management? Which characteristics do you think are most important? Although there are not any characteristics or traits that predict who would be a successful entrepreneur, studies have found shared characteristics among individuals who tend to be at the top of any profession. The most important characteristics or traits are determination, knowledge of the field, and innovation. 5. Think of an activity that you love to do; it could be a personal interest or a hobby. How could you turn your passion for this activity into a business? What questions would you have to answer for yourself before you took this step? What triggering events in your personal life would it take for you to start this business? For example, a student who has the hobby of photography – it could be turned into a business by opening a portrait studio, by selling stock photos, or by taking fashion photographs for magazine or professional sports team. Questions to answers are “Do I have enough talent to create photos that enough people will pay to get?” or “Do I have the skills to sell my photos?” Concept Module 2.4 Forms of Business Organization LO4 Describe the three main forms of ownership - sole proprietorship, partnership, and corporation - and their unique features. A. One of the first decisions to be made in starting a business is choosing a form of ownership. There is no single best form of organization. The decision depends on individual needs and preferences, tax consequences, and liability concerns. (See the following figures: Figure 2.6, Ownership Forms of U.S. Businesses; Figure 2.7, Sales Revenue by Ownership Type; Figure 2.8, Net Income by Ownership Type; and Figure 2.9, Growth in the Business Population.) B. The Sole Proprietorship A sole proprietorship is a business that is owned and operated by one person. 1. Advantages—include independence, easy to set up and easy to close, and payment of taxes as an individual. 2. Disadvantages—include unlimited liability (you can lose more than you invest), limited resources and skills, and difficulty in continuity of the business. (See Table 2.1, Balancing the Advantages and Disadvantages of Sole Proprietorships.) What Would You Do? Zoo Doo, a Memphis, Tennessee-based company that sells composted animal manure to gardeners 1. Put yourself in Pierce Ledbetter’s shoes (and watch where you step)! Discuss the advantages and disadvantages of organizing Zoo Doo as a sole proprietorship, a partnership, or a corporation. Think of all the possible factors that might influence your choice. The advantages of Ledbetter staying a proprietorship are simplicity and stability. The disadvantage of staying a proprietorship is the biggest problem he faces (and may not even realize it) and that is of the potential liability if a customer contracted e-coli contamination from Zoo Doo (a long shot, but possible). The only advantage to bringing a partner into an existing business is if Pierce had some deficiency that only another person could provide. The disadvantage would be giving up equity and control that he had worked hard to build. The corporate advantage is providing the limited liability lacking in the proprietorship. The corporate downside is the added expense and complexity. 2. Now that you’ve looked at the various ways to organize Zoo Doo, it’s time to convince your management professor at Cornell University of your decision. Write a letter describing the approach you’ve decided to take in organizing your Zoo Doo business and why. Ledbetter would most likely organize by product line and distribution channel – such as mass merchandisers, specialty garden centers, and catalog/online sales channels. C. The Partnership A partnership is an association of two or more persons who are co-owners of a business. 1. Advantages—include pooled talent, access to more resources, relatively easy to form, and taxes paid as individuals. 2. Disadvantages—unlimited liability, potential for management conflict, less independence, and problems of continuity of the business. (See Table 2.2, Balancing the Advantages and Disadvantages of Partnerships.) 3. The Limited Partnership—a structure designed to increase investments and resources of a business where limited partners may retain limited liability as long as at least one general partner retains unlimited liability. 4. The Uniform Partnership Act (UPA)—legislation designed to settle problems that arise in partnerships. 5. Articles of Partnership—a contractual agreement that defines the terms and conditions, obligations, and responsibilities of partners. D. The Corporation A corporation is a business structure that creates an entity separate from its owners and managers. Many small businesses that incorporate form closely held corporations in which the stock is held by a relatively few people and is not available for sale to the general public. 1. Advantages—include limited liability (unfortunately, many small business owners must use their personal possessions as collateral for business loans, which effectively negates limited liability), increased access to resources, and ease of transfer of ownership. 2. Disadvantages—include the expense and complexity of starting and maintaining the corporation, and double taxation. (See Table 2.3, Balancing the Advantages and Disadvantages of Corporations.) 3. Forming a Corporation—Articles of incorporation must be filed with the Secretary of State in the state in which the business is formed. A board of directors must be appointed, bylaws adopted, officers elected, and stock issued. Discussion topic - The Buy-Sell Agreement One of the smartest documents for owners of multiple-owner businesses such as partnerships and corporations is a Buy-Sell Agreement. A buy-sell is useful if one or more of the owners wants out of the business, wants to retire, goes through personal bankruptcy, wants to sell his shares to someone else, goes through a divorce, or passes away. A good teaching moment is to do a Google search in order to bring in an example of such an agreement. E. Specialized Forms of Corporations A small business may form a C corporation, an S corporation, or a Limited Liability Company (LLC). A competent tax advisor should be consulted to assist this decision. 1. S Corporation—The primary advantage of an S corporation is that owners pay taxes as individuals rather than the corporation paying taxes separately. Income and expenses “flow through” to shareholders in proportion to the number of shares they own. Restrictions exist in the formation of an S corporation. 2. Limited Liability Company (LLC)—Owners of LLCs are taxed as partners and offer a more flexible structure than S corporations. 3. The Nonprofit Corporation—Nonprofit corporations are tax-exempt organizations formed for religious, charitable, literary, artistic, scientific, or educational purposes. Concept Check Questions 1. Sole proprietorships make up 76 percent of all U.S. businesses and generate 6 percent of all business revenue. Only 18 percent of all sole proprietorships are incorporated, but they generate 90 percent of all revenue. What do these statistics tell you about the two forms of ownership? Although most businesses are proprietorships, they are smaller than corporations. Fewer companies are incorporated, but they generate the most revenue. 2. Under what conditions would you consider joining a partnership? Why would you avoid becoming a partner? Answers will vary, but students may say that they would join a partnership if they needed extra funds, physical help, or specialized skills when starting up an organization. I would consider joining a partnership if there’s shared vision, complementary skills, and clear legal agreements on roles and profits. I would avoid becoming a partner if there’s potential for unequal responsibility or personal liability risks. 3. When would forming a limited-liability company be more advantageous than creating a C corporation or a partnership? A limited liability company provides more protection than a sole proprietorship and offers the advantage of compiling capital from outside sources without losing any control over management. You should choose an LLC if you need flexibility in your organization, yet still need liability protection and desire to be taxed at the partnership rate. Experience This…bonus student exercise Do you really know what it is like to start a business? Interview a person you consider an entrepreneur to get some insight. Because time is valuable, have a set of questions prepared before the interview. The following set may be a place for you to start: 1. How did you develop a vision for your business? 2. How long did you envision this business before you took action to start it? 3. What triggering event prompted you to take action to start this business? 4. What are the most important entrepreneurial characteristics that have helped you succeed? 5. What were your biggest challenges? 6. What would you do differently the next time you start a business? Answers to this exercise will vary based on students’ findings during their interviews Chapter Closing Case 1. We read in this chapter that entrepreneurs try to build competitive advantages for their businesses by being unique. How will these partners know if their Fluzzle Tube idea will stand out, or sink? Ultimately the measure of a product is if people will actually purchase it. The partners can take sequential steps to build sales like participating in trade shows to find distributors, wholesalers, and retailers to sell their Fluzzle Tubes. Of course price is always a factor for products such as Fluzzle Tubes so the partners need to look for ways in decrease their production and operating costs in order to efficiently use the revenue generated from sales. 2. Put yourself in the position of Whitehead and De Arkos. What should these partners to next? Student responses will vary but there should be no shortage of approaches they come up with. Lead class discussion about channels of distribution, pricing, additional product lines. Chapter 3 Social Responsibility, Ethics, and Strategic Planning Teaching Tips • The primary point of this chapter is to illustrate how the values and vision of a small business owner become the values and direction of the business. • Spend some time describing the different levels of social responsibility shown in Figure 3.1 and how they relate to small businesses. • Bring the Profile in Entrepreneurship box to life by showing the video clip on Gary and Meg Hirshberg running Stonyfield Farm. • Address the importance of a mission statement and strategic planning to small businesses, even though we normally associate those things with large business. • Use the case, What Would You Do? No.1, to integrate social responsibility, ethics, and strategic planning in bringing a gambling casino to a rural town in Iowa. • The end of chapter case focuses on a small business considering the need for a new strategy. Loan Bright is an online mortgage company that had a target market of high-end home buyers, but may need a different focus. Read the case setup to your class from the beginning to “The Decision,” and feedback from a panel of experts is available at the end of this section. 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: Tom Szaky—TerraCycle What’s the point? The point of this chapter opener Concept Module 3.1 The Relationship Between Social Responsibility, Ethics, and Strategic Planning LO1 Explain the relationship between social responsibility, ethics, and strategic planning This combination of topics was chosen to be covered together in one chapter because, in small business management, it is impossible to separate the business from the owner. Concept Check Questions 1. Write a brief summary of the connection between social responsibility, ethics, and strategic planning in a small business setting. The values and morals of a small business owner become the values of the business. Including ethics and social responsibility in the employee handbook ensures that they will become part of the organization. Strategic planning is where a business is going and how it will get there. Concept Module 3.2 Social Responsibilities of Small Business LO2 Name the levels of social responsibility A. Social responsibility is the managerial obligation to take action to protect and improve society as a whole, while also achieving the goals of the business. 1. Small business owners who understand what is important to themselves, their businesses, and to society (social responsibility) can better decide how to accomplish what needs to be done (strategic planning). 2. Social responsibility is demonstrated in four levels. (See Figure 3.1, The Pyramid of Social Responsibility.) a) Philanthropic goodwill—to improve the quality of life of one’s community b) Ethical responsibility—to do what is right c) Legal obligation—to obey laws and rules d) Economic responsibility—a business that does not make a profit cannot stay in business and provide higher levels. B. Economic Responsibility 1. In a free enterprise system, a business not only has the right to make a profit, but it has a responsibility to do so. If a business does not make a profit, it cannot stay in business to provide the products customers need, the jobs employees need, or other responsibilities to the larger society. 2. Economist Milton Friedman states that the only responsibility a business has is to make a profit, and businesses essentially don’t know how to solve social problems. Friedman’s stance should provide considerable classroom discussion. C. Legal Obligations Laws are society’s code of what is right and what is wrong. They provide a minimum level of expectations for businesses and individuals. D. Ethical Responsibility Ethics are the rules of moral values that guide decision making by groups and individuals. Ethics are an internal line that is drawn between right and wrong. E. Philanthropic Goodwill 1. The highest level illustrated on the social responsibility pyramid is philanthropic goodwill. At this level, businesses do good for the sake of helping others without an expectation of anything in return. 2. Philanthropy is not limited to the very wealthy like Bill Gates. Small business also can make a difference to their local communities. Something as minor as sponsoring a Little League team or donating products or services to a local charity has a big impact. What Would You Do? Grand Casinos, Minneapolis strategic planning You’re in charge of strategic planning for Grand Casinos. The company wants to open and manage a casino in rural Iowa. Community residents have asked you and your strategic planning team to attend a town meeting to discuss the casino. You’ll need to prepare a description of how your company is fulfilling its social responsibilities. (Use Figure 3.1 as a guide.) Other members of the class will act as community residents. As a resident, prepare your questions and concerns for confronting the Grand Casinos team. To begin, you can describe how a new casino can provide economic responsibility. The revenue generated will add to the tax base of the community not only from the local, property and sales taxes paid by the business, but also providing employment via new jobs. The casino will want to adhere to all legal responsibilities by obtaining all required licenses and complying with all gaming regulations (even if some lobbying for regulatory changes are needed). Ethical responsibilities can be demonstrated by Grand Casino’s establishing treatment centers for people with gambling addictions. Philanthropic responsibilities can be strategically proposed by sharing how the Grand Casino will be a good citizen by providing resources for community needs, like building playgrounds, recreation centers, etc. Concept Check Questions 1. Discuss the four groups of laws that generally regulate business activity in this country, and give some historical background on the major laws that affect all entrepreneurs today. The four groups of law are: • Consumer: Consumer protection became popular with Ralph Nader in the 1960s. Some government agencies that protect consumers are the Food and Drug Administration (FDA) and the Consumer Product Safety Commission. • Competition: This includes such acts as the Sherman Antitrust Act of 1890 and also the Federal Trade Commission (FTC) set up to prevent unfair trade practices and prevent monopolies from occurring. • Environment: The Environmental Protection Agency (EPA) was created to enforce and deal with the complex environmental laws. • Employees: The Civil Rights Act of 1964 was started to deal with many different kinds of discrimination. There is also the ADEA and American with Disabilities Act (ADA) to deal with disabilities and age discrimination. Some of the control agencies are the Equal Employment Opportunity Commission (EEOC), dealing with equality, and OSHA, dealing with issues of health and safety. 2. Explain how cultural differences between countries can have either a positive or negative effect on an entrepreneur who is pursuing a contract either outside the United States or with persons of different ethnic backgrounds in the United States. Positive Effects: Diversity is a significant topic—both socially and legally. The more different and creative inputs an organization receives, the better it is able to achieve a complete outlook and choose the most effective path. Negative Effects: People fear what they do not know or understand. Opposites do not always attract, so diversity in the workplace can cause some problems that must be resolved. Even though diversity can create huge hurdles to overcome, education and understanding can help. 3. How can a small business show that it is socially responsible? Think of evidence of social responsibility (like sponsoring a Little League team) that a small business can demonstrate. Being socially responsible does not necessarily mean spending a big budget. Students should think of ways small business owners can “give back” to their communities (like adopting a section of highway to keep clean) and other areas shown on Figure 3.1, Pyramid of Social Responsibility. Concept Module 3.3 Ethics and Business Strategy LO3 Discuss how to establish a code of ethics for your business. A. The American public has some serious concerns about the ethical standards of the people and companies they deal with. Figure 3.2, What Is Unacceptable Conduct? illustrates that the public believes that small business owners have higher ethical standards than large business managers. B. Codes of Ethics A code of ethics is a formal statement of what your business expects in terms of employee behavior. A code of ethics for a small business is a reflection of the ethics of its owner. It needs to be concise in order to be remembered. It needs to be written clearly and apply equally to all employees (yes, including the owner). C. Ethics Under Pressure Ethics are one thing to talk about in a classroom. Are they something else when they affect the bottom line of a struggling small business? In this section, several scenarios are presented to show what small business owners did in different situations. Other scenarios are presented to prompt student thought and discussion. Entre-Perspectives Competitive Intelligence Competitive Intelligence is the process of track of competing businesses within an industry. Discuss with students key sources of information and steps of the process. Reality Check Green Can Be Gold Environmental concerns are not only good for the environment. Green Marketing as a small business marketing program generates profit and connection with target markets. Concept Check Questions 1. Define the purpose of a code of ethics, and write a brief code that would be suitable for a small business. A code of ethics is a formal statement of what your business expects in terms of ethical behavior. A sample code of ethics for a small business would be: (a) customers come first; (b) quality is excellence in everything and everyone; (c) no voice is too small to be heard; and (d) all employees are responsible for understanding discrimination laws. 2. Although a certain practice may be widely accepted in the business community and be perfectly legal, does that necessarily mean it is always moral? Qualify your answer with examples. Even though a practice is widely accepted, that does not mean it is moral. An example would be the practice of the retail clothing industry prebilling. In prebilling, the firm will include in one quarter sales that will not actually be shipped until the next quarter. This increases sales on the books and makes them look better than they actually are. This practice is not illegal, but one could question the morality of it. Concept Module 3.4 Strategic Planning LO3 Describe each step in the strategic planning process, and explain the importance of competitive advantage. A. A strategic plan is a long-term planning tool that provides an overview of a business and all the factors that may affect it in coming years. B. The Strategic Planning Process The six-step sequential process of strategic planning includes 1) formulating a mission statement; 2) completing an environmental analysis; 3) performing a competitive analysis; 4) analyzing your strategic alternatives; 5) setting goals and objectives, and 6) setting up a control system. (See Figure 3.3, The Strategic Planning Process.) 1. Mission Statement 2. Environmental Analysis 3. External Analysis Economic Legal/regulatory Sociocultural Technological Competitive 4. Internal Analysis 5. Competitive Analysis/Competitive Advantage Most of us tend to see competitors as a little slower, a little less intelligent, and a little less attractive than we are. The exercise described in this section and illustrated in Figure 3.4 is a powerful tool for small business owners to inject more objectivity into the process of competitive analysis. 6. Defining Your Competitive Advantage. 7. Five Basic Forces of Competition. Figure 3.5, Porter’s 5 Forces of Competition Modes, demonstrates the factors that influence how competition differs in each industry. A small business owner needs to identify which of these five forces have the strongest impact on their chosen industry. 8. Importance of Competitive Advantage. 9. Benefits of Competitive Advantage. A small business that creates a competitive advantage sets up a cycle of generating profits and garnering resources that can further increase profits, as seen in Figure 3.6. 10. How to Create Competitive Advantage. 11. Strategic Alternatives Manager’s Notebook Playing Hardball This highlight box shows how a small business can follow the Hardball Manifesto outlined in Harvard Business Review. Hardball players are tough competitors who are tough to beat, but they don’t cheat—like successful entrepreneurs. 12. Goal Setting and Strategies Figure 3.7, Levels of Goals illustrates how functional strategies are in place to accomplish functional goals, which, in turn, accomplish the goals of the business, thus accomplishing the mission of the business. 13. Control Systems C. Strategic Planning in Action 1. Strategic plans are different from business plans. Strategic plans address strategic growth—where the business is going. Business plans address operational growth—how to get there. Both are needed and neither is usually fun to write. The most important kind of plan is one that will be used. 2. The biggest value of strategic planning is not the document that is produced—it is the strategic thinking that goes into the creation of the plan. V. Establishing a Business Culture Organizational culture is the set of values, beliefs, goals, norms, and rituals that members of an organization share. Every time they create a new business, entrepreneurs create a new culture from their personal values, beliefs, ethics, etc. Concept Check Questions 1. Write a mission statement for a small business that not only functions as a strategic planning guide but also incorporates the company’s philosophy of social responsibility and ethical standards. Mission Statement: Company X is committed to the excellence of our product or service while maintaining the highest standard of quality. We support not only our work environment but the environment that surrounds us as well. We will always remain committed to our customers’ wants and needs, striving for their satisfaction. 2. Why is environmental analysis more crucial to the small business owner than to larger corporations? A small business has less margin for error than does a large corporation. It is to the benefit of the small business to know its own strengths and weaknesses, as well as those of its competitors. Small businesses have fewer resources to risk, so mistakes that could cause a large corporation to see a decline in quarterly earnings could be fatal to a small business. 3. You are an entrepreneur and wish to perform a “self-evaluation” of your business environment. How would you go about this task? Be specific about what you hope to discover through the evaluation of your employees, product, management, and so on. You would hope to discover that your employees knew the mission statement, company goals, and were striving to achieve them; that they were aware of your strengths and weaknesses, as well as those of your competitors; that your products were quality products and satisfying your customers; that the company had a strategic plan; and that you had a control plan in action to help get back on track if you derail. 4. What is the value of competitive analysis to the small business owner? What sorts of things should you know about your competition, and what analytical methods can you use to find out this information? By doing a competitive analysis, you can find out your competitors’ weaknesses. Once you know their weaknesses, you can do it “better,” giving your business the competitive advantage. You should find out as much as possible about your competitors and keep current. Some of the methods to use are the Dun & Bradstreet credit bureau, trade publications, and customer comments. 5. Goal setting is a major part of the entrepreneur’s business plan. Outline specific methods for setting goals that are realistic, fit into the overall mission of the company, and can be related to the strategic planning process that is in place at the organization. The goal should state exactly what the company wants or where the company wants to be. The overall plan should outline the specific tactics used to meet the goal. The steps should build on each other—each level goal should be part of accomplishing the next higher level goal, and all goals should build upon accomplishing the mission of the business. It is also important to have a way to follow up to make sure goals are achieved. 6. What does strategic planning mean to the small business owner? How does the size of the organization affect the strategic planning process, and how much input should be sought from outside sources while outlining the strategic plan? Strategic planning helps direct the company in growth; it looks toward the future. All businesses need strategic planning, but it is very important for a small business, which may experience tremendous growth and need a general path to follow. It is best to get as much advice from as many outside sources as possible. Experience This…bonus student exercise You have small businesses in the area where you live making impacts on your local society for both good and ill. Identify two local companies—one that is a good citizen and one that is not. Find newspaper and magazine articles to support your classifications (so that you are dealing with as many data and as little opinion as possible). Write a two- to three-page paper explaining the possible strategic business implications of their actions. Will either small business need to change in the near future as a consequence of past behavior? Chapter Closing Case Not Easy Being Indie Kent Wagner spent years building his music store. Major changes in the music business have made it difficult to stay in business. This case is a good illustration for students to develop strategy in a very dynamic business. Questions - 1. Using the strategic planning process discussed in this chapter, what was the core problem to be solved by Millennium? What are all of the potential alternative solutions to that problem? The core problem in this case was the fundamental change in the way that people buy music - from CDs to digital. For Millennium to continue to focus on CDs, it would have to adjust to more of a niche strategy for the smaller market who continued to purchase in that format, or develop a way to capitalize of digital. 2. Apply Porter's Five Forces Model to this case. The Threat of Substitute Products or Services is the primary force working against Millennium Music 3. What would you have done if you were in Wagner and Woodson's place at this decision point? Students may advocate keeping retail stores open, but diversifying product lines to concentrate on lines other than music. The Decision www.inc.com/magazine/20090601/an-indie-record-store-fights-for-survival.html Early in 2008, Wagner and Woodson finally agreed to pull the plug. The store closed that summer when its lease ran out. The pair would relaunch the online business as a standalone operation. With a blue marker, the duo wrote out possible names on a windowpane in Wagner's office and hit on AbundaTrade. Says Woodson: "We wanted people to get it the first time they heard it." A few weeks before closing, Wagner hosted a goodbye party for Millennium's customers. The Charleston community turned out in droves. There were students from the College of Charleston and cadets from the nearby Citadel military academy. Symphony lovers filled the store's massive classical section, sipping champagne. Salesclerks and their friends shared beer and hamburgers. It was a bittersweet moment. The transition has been swift. A business with origins as a cozy cultural retreat is now high-tech, methodical -- and profitable. AbundaTrade, like Feed Your Player, takes used CDs, DVDs, and books in exchange for electronics, including iPods, flat-screen TVs, and camcorders. Or customers can opt for cash -- an average of $2 per CD. The company also gets used discs from wholesalers and defunct record stores. It relies on sophisticated software that scans the Web to determine a fair price for the used products. Then the company offers the merchandise for resale on the Web, again relying on software to undercut other sellers on Amazon, eBay, and elsewhere. "The online world is so much easier in a lot of ways," says Woodson. "If you're not the cheapest, you're not selling." The transition hasn't always been easy. Wagner and Woodson were able to move 12 of Millennium's final 30 employees into new roles at AbundaTrade. But it's an entirely different world. AbundaTrade operates a lot like a logistics or order-fulfillment firm. In its 6,000-square-foot warehouse, half of the company's 20 employees review incoming items, checking for scratches or defects. Shipping occurs around the clock. Customer service is entirely online. Former record-store employees like Robert Bondurant are happy to have jobs but sometimes long for the good old days. Bondurant is again product manager, but he is now also in charge of inventory management. "It was tough from an emotional standpoint," he says. "We're no longer selling our appreciation of music -- it's all about moving product out the door now." Early results are encouraging. AbundaTrade receives about 15,000 used products a week. About a third of its used-product sales are to overseas customers. (Japanese customers buy lots of heavy metal.) Revenue is on pace to hit $3 million in 2009, about 50 percent more than Millennium Music's flagship store ever pulled in. If it's a little bit ironic that a company that once boasted the latest new releases now sells secondhand music in an outdated format, Wagner and Woodson don't seem to mind. The partners have their sights on extending AbundaTrade's business into other used products. "Clayton and I have learned that one of our strengths is adaptability," says Wagner. Adds Woodson, "I think the future is a really wide-open question." SOURCE: www.inc.com/magazine/20090601/an-indie-record-store-fights-for-survival.html Chapter 4 The Business Plan Teaching Tips • In this chapter, get students into thinking about the real “nuts and bolts” of starting their own business. Show why writing a business plan is such an important starting point for the process. • Bring in examples of business plans to show students what will be required if they are writing a plan of their own for this course. Two business plans (written by undergraduate business students) are included in an appendix of the text with more on the text web page. • Use the case, What Would You Do? No.1, to help students begin the business planning process by writing executive summaries in small groups. Have them present their business ideas to a group posing as potential lenders. • The chapter closing case is an interesting story about entrepreneurs who are struggling with their startup company, Flocabulary. The decision is whether to walk away or make major changes in the business. Have students read the case setup before class, and have students make a commitment on what they recommend before you share “The Decision” (it is available at the end of this section). 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: Roni and Ken Di Lullo, creators of Doggles What’s the Point? The point of this chapter opener is to highlight a new business idea to stimulate discussion of entrepreneurship. The final product from writing a business plan varies somewhat depending upon the business and industry, but the process is very similar. Ask students what they would need to know about Doggles before investing in the company. Concept Module 1.1 Every Business Needs a Plan LO1 Explain the purpose and importance of the business plan A. Beginning a business is like going on vacation—you don’t reach your destination by accident. You must plan where you want to go and how you are going to get there. A business plan is a document that describes the proposed and current operations of a business. B. The Plan Business plans describe the who, what, when, where, and why of a business opportunity. C. The Purpose 1. Proving Feasibility 2. Attracting Capital 3. Providing Direction D. The Practice: Guidelines for Writing a Business Plan Rigid formulas do not really exist to create business plans for every business. Still, some general guidelines include: 1. Consider Your Audience 2. Keep It Brief 3. Point of View 4. Create a Professional Image 5. Where to Get Help Reality Check: Good, Bad, and Ugly Business Plans The examples from this box continue throughout the next couple of pages. The first plan (the good one) is for Cameo’s Fine Jewelry & Timepieces. This executive summary is concise, orderly, and presents an overview of the entire plan. The executive summary that is both bad and ugly was actually turned in as part of a course assignment—complete with coffee stains, paper tears, and marked-out words. Concept Check Questions 1. Why wouldn’t a 100-page business plan be four times better than a 25-page business plan? A 100-page business plan wouldn’t be four times better than a 25-page business plan because a plan needs to be concise. If your plan is over 100 pages, it reflects a need to sharpen your idea. Twenty-five to forty pages should be enough detail to communicate the important points of your business. 2. Should you write a business plan even if you do not need outside financing? Why or why not? Yes, you should write a business plan even if you do not need outside financing for at least two reasons—a business plan provides direction after your business is in operation, and the process of writing a plan helps you test the feasibility of your business idea. 3. Who should write the business plan? The person who wants to start the business should write the business plan—with the possible assistance of a lawyer, accountant, consultant, and/or business plan software. 4. If successful companies like Pizza Hut have been started without a business plan, why does the author claim they are so important? If successful companies like Pizza Hut have been started without business plans, many more businesses without plans have failed. Plans are important because lenders will (almost always) insist on one. They are also valuable in helping you remember your ideas and testing their feasibility; these ideas could be easily lost or forgotten. Plans help you get organized when starting a business. 5. Why do entrepreneurs have trouble remaining objective when writing their business plans? Entrepreneurs have trouble remaining objective when writing their business plans because they have the dreams and aspirations that may blur the reality. A business plan puts your idea in perspective. 6. Why do some prospective business owners refuse to plan? Some prospective business owners refuse to plan because they don’t have a goal or direction. Another common reason given for not planning is the mistaken idea that since the future cannot be accurately predicted, one should not even try. 7. When you reach the point of your career when you are ready to start your own business (or your next one), will you write a business plan before beginning? Why or why not? If you would choose to start a business without a business plan, what would be a better alternative for testing feasibility? I would write a business plan to map out objectives, market research, and financial forecasts, ensuring a clear roadmap for success. However, if I opted not to, I’d use a lean startup method, conducting small tests like minimum viable products (MVPs) and gathering real-time customer feedback to assess feasibility. This approach allows for faster pivots and less upfront risk. Concept Module 4.2 Business Plan Contents LO2 Describe the components of a business plan A. The bulk of this chapter describes the sections that combine to make up a business plan. Not every business will need every one of these sections. For example, a service business will not need a section on manufacturing, but it can still benefit from a description of its layout and a location strategy. B. Cover Page Information on this page should include the name, address, and contact information for the business owner so the lender/investor can reply with questions or a check. C. Table of Contents Business plans are typically not read like a novel, with the reader beginning on page one and continuing through till the end. Readers of business plans are typically looking for specific information—financials, market data, management team backgrounds, etc. Since they want to go directly to such information points, include a table of contents with page numbers. D. Executive Summary This one- to two-page summary is the most important section of the entire plan because if it does not capture the readers’ attention, they won’t read anything else. E. Company and Industry This section should include background, legal structure, and the reasons why the business exists. F. Products or Services Describe competitive advantages as well as features and benefits of product lines. Discuss future product augmentations as the product moves through its life cycle. G. Marketing Research and Evaluation 1. This critical section of the business plan contains proof of the size and nature of the business’ target markets. Sales forecasts are the foundation on which the rest of the plan depends. Explain this with a description of the research methodology used to make projections. 2. Target Markets and Market Segmentation 3. Market Trends 4. Competition 5. Market Share 6. Marketing Plan 7. Pricing as part of Marketing Plan 8. Promotion as part of Marketing Plan 9. Place as part of Marketing Plan 10. Service Polices as part of Marketing Plan H. Manufacturing and Operations Plan 1. Geographic Location 2. Facilities 3. Make-or-Buy Policy 4. Control Systems 5. Labor Force I. Management Team Highlight the management team’s balance of technical skills, business skills, and experience. J. Timeline A description of the sequential steps that the startup will go through shows lenders that the entrepreneur has thought the entire process through. K. Critical Risks and Assumptions This section of the business plan illustrates alternate plans in case the unexpected happens. L. Benefits to the Community Describe the potential benefits to the community that the formation of the business can provide. M. Exit Strategy Devote some attention to a succession plan. Entre-Perspectives Bring it on This profile leads students to Business Plan competitions. N. Financial Plan Financial projections include best estimates of future operations. (Existing businesses will use historical data, while startups will have only pro forma projections.) Lenders typically need to analyze the following: 1. Sources and Uses of Funds—See Figure 4.2, The Sources and Uses of Funds Worksheet. 2. Cash Flow Statement—See Figure 4.3, Sample Components of a Cash Flow Statement. 3. Balance Sheet—See Figure 4.4, Balance Sheet. 4. Profit-and-Loss Statement—See Figure 4.5, Profit-and-Loss Projection. 5. Breakeven Analysis—See Figure 4.6, Breakeven Analysis. O. Appendix This section includes all supplemental information and documents that would be “nice to know” but are not necessarily “need to know.” Résumés, sample advertising, brochures, organization charts, or floor plans may all be included. Reality Check Feasible, Viable, Good Idea? A full-blown business plan may not be necessary in all cases. This box introduces students to the differences between business planning and feasibility study. Concept Check Questions 1. Why is the executive summary the most important section of the business plan? The executive summary is the most important section of the business plan because it provides the essential facts that will get the reader’s (usually a lender) attention and increase his or her chances of reading the rest of the plan. It captures the essence of the plan. Concept Module 4.3 Review Process LO3 Recognize the importance of reviewing your business plan. Writing a business plan is a long series of interrelated steps. Use Figure 4.7, Business Plan to walk students through the process. A. Business Plan Mistakes Students can possibly keep their plan out of a lender’s reject pile by avoiding these mistakes. Entre-Perspectives: How Does Your Plan Rate? Students can use this form to evaluate their own plans before submitting them to a banker or professor for a real “grade.” What Would You Do? The student is asked what information they would present and how they would present it if they had to teach this chapter. Students answers will vary. Concept Check Questions 1. Talk to the owner of a small business. Did he or she write a business plan? A strategic plan? If he or she received any assistance, where did it come from? Answers will vary. One student reported that, “After speaking with M.S. Enterprises, I discovered that a business plan for their business was written when they got started, and three months later a strategic plan was talked about. They received assistance from personal experience, the library, and business friends.” 2. You are an investor in small businesses, and you have three business plans on your desk. Which of the following potential business owners do you think would be the best bet for an investment (if you could pick only one)? a. A recent college grad, full of energy and ideas, but short on expertise b. A middle-management corporate refugee desiring a business of her own after frustration with bureaucratic red tape c. A serial entrepreneur who has previously started seven businesses (three of which were huge successes, whereas four failed, losing entire investments) Experience This…bonus student exercise Do a keyword Internet search for “business plans.” When you find a sample business plan that interests you, complete a thorough analysis of it. How do the section headings compare with the headings described in this chapter? Have any sections been added or deleted? Does the executive summary make you say, “Wow, this is a great idea!”? Review the business plan you found using Figure 4.7 and The Manager’s Notebook, How Does Your Plan Rate? Does the plan appear to be a feasible idea for a business? Do you find any “holes” in the plan? If this were a plan for your business, would you proceed? Why or why not? If you were an investor approached for financing this plan, would you put your money into this business without being able to run it? Why or why not? Students answers will vary. Chapter Closing Case Memory by Music Questions – 1. If you were in Rappaport and Harrison’s situation, how would you change your business plan for the future? Students tend to underestimate how difficult it is to spread the word about a new business. Harrison and Rappaport are learning that the school market is difficult one to crack. Therefore, that is the area of the business plan that needs first attention. 2. Is Flocabulary’s problem a) the wrong target market, b) a bad product, c) too few products, or d) something else? What are their alternative solutions to their problem? A case could be made for each of these potential problems, but when you share the decision that the partners made, they believed that they had the correct target market, a good product and turned the corner by adding WordUp! Coax as many possible alternatives out of student discussion before sharing decision. The Decision www.inc.com/magazine/20090501/how-flocabulary-a-study-guide-publisher-reinvented-itself.html A few days after arriving home from Toronto, they decided they had invested too much in Flocabulary to walk away. Rather than giving up, they doubled down, creating a new product line called WordUp!, a series of vocabulary and reading guides based on standardized tests administered to students in grades 3 to 8. The duo returned to their old investors as well as found some new ones and managed to cobble together $110,000. By cold calling and networking at educational events, they rounded up 30 sales reps willing to peddle Flocabulary's products on commission. In September 2007, Word Up! hit the market. The following March, Flocabulary landed its biggest sale: getting Word Up! into the 19 middle schools of the Jersey City school district. That helped them bring in revenue of $600,000 in 2008, more than double what they made in 2007. Amy Brewer, a fifth-grade teacher at Jefferson Elementary School in Norman, Oklahoma, won a grant to supply her classroom with Word Up!, and so far she says she has witnessed "astounding" results. Not only are students excited about their lessons, she says, but "they're internalizing the meaning of the words. Last week in creative writing class, two of my students used the words inept and collaborated in their poetry." Word Up! materials are now used by teachers in about 100 school districts. And that exposure has kick-started retail sales. Cider Mill reprinted both of its Flocabulary titles in January, and Whalen attributes the increase in bookstore sales largely to the work Rappaport and Harrison are doing in schools. Flocabulary also commissioned a study that found that Word Up! boosted students' vocabulary proficiency more than 20 percent. Though Flocabulary seems to be on track, the founders haven't figured out what's next. "We've been growing for the past four months," Rappaport says, "but we won't have an explosion without some new idea." And despite the increase in education spending proposed in the recent Obama budget, the market is tough -- Flocabulary must compete with publishers that are larger and better connected. "The idea is the strength of this company," Rappaport says. "It's what we do in the future that is uncertain." SOURCE: www.inc.com/magazine/20090501/how-flocabulary-a-study-guide-publisher-reinvented-itself.html Solution Manual for Small Business Management: Entrepreneurship and Beyond Timothy S. Hatten 9781285866383
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