Growing and Managing A Small Business: An Entrepreneurial Perspective

Growing and
Managing
a Small
Business
An Entrepreneurial
Perspective
Copyright Houghton Mifflin Company. All rights reserved.
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CHAPTER 1
Entrepreneurship and Small Business
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Learning Outcomes
Discuss the roles of entrepreneurship and
small business in the economy
Describe the global opportunity for
entrepreneurs
Explain the entrepreneurial mindset and how
entrepreneurs approach business ownership
List the various types of entrepreneurs
Discuss what must be considered before
deciding to become a business owner
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Chapter Outline
Who are Entrepreneurs?
Entrepreneurial
Ventures and Small
Business
The Entrepreneurial
Portrait
Making the Decision to
Own a Business
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Who Are Entrepreneurs?
People who start and/or operate a business
Individuals who discover market needs and launch
new firms to meet those needs
Risk-takers who provide an impetus for change,
innovation, and progress
Self-driven individuals who seek independence
and/or wealth
The driving force behind todays technological
advances and economic growth
All active owner-managers (hands-on managers)
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The Independent Entrepreneur
Source: John L. Hart FLP, and Creators Syndicate, Inc. Exhibit 1.1
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Distinguishing Between Entrepreneurial
Ventures and Small Businesses
Small Business
Objectives:

Stay small
Stay in traditional line
of business/industry
Copy Cat strategy
Provide a job/lifestyle
for themselves
Modest, but stable,
income
Little industry impact
Entrepreneurial Venture
Objectives:

Growth oriented
Focus on doing
something different
Innovative strategy
Create value & wealth
Harvest wealth after
operation is successful
Impact the industry

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What is a small business?
The Small Business Administration (SBA)
Independently owned and operated
Not dominant in its field of operation
< 500 employees

The Organization for Economic Cooperation
and Development (OECD) and the U.S.
Chamber of Commerce
Any firm employing fewer than 100 people

White House Conference on Small Business
< 500 employees
<$20 million in annual sales
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How we will define smallness
Fewer than 100 employees

Business operations limited to a local
geographic area or region

Business is small relative to larger
competitorsnot dominant in the industry

Financed by just one person or a small group
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Number of U.S. Firms by Size
[insert Table 1.1]
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Size of U.S. Firms
2002 U.S. CENSUS REPORT

FIRMS WITH N0 (0) EMPLOYEES 703,837
12.4 %
FIRMS WITH 1 99 EMPLOYEES 4,851,266
85.8 %
FIRMS WITH 100 499 EMPLOYEES 85,304
1.5 %
FIRMS WITH > 500 EMPLOYEES 17,367
0.3 %
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The Contributions of Small Business
Small Businesses:
Represent more than 99.7 percent of all employers.
Employ more than half of all private-sector employees.
Pay 44.5 percent of total U.S. private payrolls.
Generate 60 to 80 percent of net new jobs annually.
Produce 13 to 14 times more patents per employee than
do large patenting firms.
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Categories of Small Business
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Attractive Small Business vs a Gazelle
While small businesses comprise the largest
proportion of businesses globally, it is those small
business owners with intentions to grow that actually
provide the majority of net new jobs to the economy.

A Gazelle is a firm with at least $100,000 in
revenues that grows at a rate of 20% a year for four
years. (n ~ 350,000)

An Attractive Small Business is a firm that is highly
profitable, but may or may not exhibit much growth
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Small Businesses, Growth, and Profits
High-Potential Venture (Gazelle)
A small firm that has excellent prospects for growth and
expansion
Attractive Small Firm
A small firm that provides substantial profits to its owner
Lifestyle Business
A business that will permit the owner to maintain a desired
pattern of living
Microbusiness
A small firm that generates minimal profits for its owner
Hobby or Casual Business
A small firm that really isnt profitableusually generates
lossesIRS wont allow deductions for hobby losses
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Small Business by Industry
[insert Figure 1.2]
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Major Types of Small Businesses SCHWAB
CONCENTRATED
Agriculture
Construction
Real Estate
Retailing
Services
Wholesaling

SIGNIFICANT
Manufacturing
Mining
Transportation
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Types of Small Service Businesses
Health services (Physicians, nursing
facilities, at-home care, etc.)
Business services (advertising,
programming, personnel, etc.)
Professional services (engineering,
accounting, architecture, consulting, etc)
Personal services (janitorial, hair salons)
Membership organizations (non-profits, trade
associations, unions, etc)
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Developing Competitive Advantages for
Small/Entrepreneurial Firms LONGENECKER
Customer Focus
Attentive and responsive
to customer wishes (not
bureaucratic).
Quality Performance
Quality is not limited
to large firms.
Provide exceptional
service to the community.
Integrity and Responsibility
A solid reputation builds
loyal customers.
Known by everyone in the
community as fair/honest
Innovation
Small firms are the
leading source of
innovation.
Special Niche
Providing uniquely
specialized services
can be a powerful
competitive advantage.
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Success of Small Businesses
SCHWAB
Likely to Fail

Bakeries
Car Washes
Infant Clothing Stores
Laundries
Machine Shops
Restaurants
Trucking Firms
Used Car Dealerships

2/3 Fail Within Five Years
Likely to Succeed

Auto Tires & Accessories
Building Material Stores
Computer/Office Supplies &
Equipment
Engineering/Scientific
Equipment Mfrs
Funeral Homes &
Crematories
Liquor Stores
Seed & Garden Supply
Stores
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Minimum Population Requirements to
Support a Retail Store SCHWAB
GROCERIES 700
RESTAURANTS 1200
DRUG STORES 3500
HARDWARE 6000
SHOES 7000
FLORISTS 9500
APPLIANCES 10000
SPORTING GOODS 15000
STATIONERY 25000
HOBBY/TOY 30000
DEPARTMENT STORE 40000
CAMERA/PHOTO SUPPLY 50000
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Greatest Small Business Operating Challenges
(our textbook surveyas reported, in order of importance) ALLEN
Property Taxes (real,
personal, or inventory)
Cash Flow
State Taxes on
Business Revenues
Unreasonable
Government
Regulations
Electricity Costs (rates)
Cost of Health
Insurance
Cost and Availability of
Liability Insurance
Workers
Compensation
Cost of Natural Gas,
Propane, Gasoline,
Diesel, Fuel Oil
State & Federal Taxes
on Business Income
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When a Small Business Ceases Operations
Discontinuances

Firms that cease operations
with no outstanding debts

Profitable, or break-even
operations ...no losses
incurred
Failures

Firms that go out of business
or reorganize, resulting in
losses to creditors

Assets have eroded or
disappearedsignificant
losses and/or bankruptcy
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Interesting facts about Small Business
failures and closures ALLEN
550,000 small businesses closed in 2000

The business failure rate for one-person businesses = 38.2 %

If the firm survives for two years, the chance of success starts
to go up for each additional year

Many of the failures are hobby or casual businesses

88.7 % of business failures are due to management mistakes

About 1/3 of closed businesses were successful at closure
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Small Business Risks
ALLEN
Overestimating the market
CONDUCT MARKET RESEARCH ON CUSTOMERS

Environmental uncertainty
DEVELOP A PLAN B IN CASE THE FORECAST IS INCORRECT

No salary for the owner
HAVE ADEQUATE SAVINGS TO DRAW ON FOR A YEAR OR TWO

Loss of investment capital (BORROWED FROM RELATIVES?)
ONLY TAKE MONEY FROM PEOPLE WHO CAN AFFORD TO LOSE IT

Long hours and high stress (60-80 HRS/WK)
EXPECT LONG HOURS AND DEVELOP STRESS-REDUCING ACTIVITIES

Disillusionment
STICK TO YOUR PLAN AND BE PATIENT
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Additional Worries for Small Businesses
SCHWAB
ADEQUATE CAPITAL
-- FINANCING ISNT ENOUGH, WE NEED MORE $$$$
ECONOMIC CONDITIONS AND CYCLES
-- CAN WE SURVIVE???
EXPERIENCE (More is needed)
-- IN THE INDUSTRY AND IN MANAGEMENT
GOVERNMENT REGULATION
-- HARDER FOR SMALL BUSINESSES TO COMPLY
GROWTH/MAINTAINING THE MARKET
-- KEEPING CUSTOMERS AND ATTRACTING NEW ONES
PERSONNEL
-- FINDING AND KEEPING EXPERIENCED, RELIABLE WORKERS
PROFITS
-- REINVESTED IN THE BUSINESS OR DRAWN BY THE OWNER?
STRUCTURAL EVOLUTION
-- LOSS OF CONTROL AS THE BUSINESS GROWS
TECHNICAL ADVANCES
-- HOW TO KEEP UP AND AVOID OBSOLESCENCE?
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Factors that Improve the Likelihood of
Business Survivability ALLEN
If the business is an employer
If the business has >$50,000 starting capital
If the owner has a college degree
If the business is started for personal reasons
If the owner has previous experience owning
and operating a business
If the business has a management team
If the owner starts the business from home
If the owner has developed a business plan
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10 Deadly Small Business Mistakes
Meir Liraz, President of BizMove
Sticking to a single idea too long
Not having a results-driven marketing plan
Not knowing your customers
Ignoring your cash position (working capital)
Ignoring your employees (morale)
Confusing likelihood with reality
Not having a sales plan
Being a Lone Ranger (learn to delegate)
No Mastermind (get an advisory group or mentor)
Giving Up
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The Entrepreneurial Portrait
Entrepreneurs have been
found to all have one
fundamental characteristic,
variously called:
fire in the belly
intense desire
the burning gut
Or, in essence, passion
Getty Images
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Taking the Plunge
Reluctant Entrepreneur
Becomes an entrepreneur to
escape an undesirable situation
(severe hardship, loss of job, etc)

Optimistic Entrepreneur
Believe they have the skills to be
successful on their own. Feels
self-confident and secure. Seeks
fulfillment and satisfaction
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Entrepreneurial Incentives
Exhibit 1.3
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Benefits of Small Business Ownership
Control of Ones Destiny
Wealth Creation
Fun While Working
Doing Good While Doing Well

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Reasons for Starting a New Business
RECENT SURVEY RESULTS
29% TO CREATE SOMETHING NEW, OR TO DO/MAKE IT BETTER
24% TO HAVE MORE CONTROL OVER MY LIFE
14% TO BE MY OWN BOSS
14% TO MAKE MONEY
10% TO PROVE I COULD DO IT
08% FRUSTRATION IN A LARGE COMPANY
02% OTHER

Source of Your New Business Idea
37% In-depth understanding of industry/profession
36% Market niche spotted
7% Brainstorm
4% Copied somebody else
4% Hobby that grew
11% Other
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Characteristics of
Successful Entrepreneurs
Good knowledge of the business and how the
customer thinks
Strong commitment to the business
(tenacity)
Strong internal locus of control
(self-reliant)
Moderate risk takers
(financial, career, psychic risks)

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Entrepreneurial Characteristics
(Timmons and Spinelli)
Commitment and
determination
Tenacious, decisive, and
persistent in problem
solving
Leadership
Self-starters and team
builders who focus on
honesty in their business
relationships
Opportunity obsession
Aware of market and
customer needs
Tolerance of risk, ambiguity,
and uncertainty
Risk takers, risk
minimizers, and
uncertainty tolerators
Creativity, self-reliance, and
adaptability
Open-minded, flexible,
uncomfortable with the
status quo, and quick
learners
Motivation to excel
Goal oriented and aware
of their weaknesses and
strengths

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Manifest Needs Theory Murray (38) McClelland (65)
ASSUMPTIONS
THERE IS NO NEED HIERARCHY...THEY CAN BE LEARNED, AND ONCE ACQUIRED, THESE NEEDS
ARE NEVER COMPLETELY SATISFIED...PEOPLE REMAIN OBSESSED WITH EACH NEED

(N ACH) ACHIEVEMENT
DESIRES TO REALLY EXCEL AT SOMETHING....SETS SERIOUS GOALS FOR HIMSELF/HERSELF
ASSUMES PERSONAL RESPONSIBILITY....WILLING TO TAKE RISKS
DESIRES IMMEDIATE, CONCRETE FEEDBACK ON HOW S/HE IS DOING
FOCUSED ON (AND PREOCCUPIED WITH) TASKS & ACCOMPLISHMENTS

(N AFF) AFFILIATION
DESIRES APPROVAL AND REASSURANCE FROM OTHERS
WANTS TO HAVE CONTACT WITH OTHERS AND BOND WITH THEM
CONFORMS TO WISHES AND NORMS OF OTHERS
CONCERNED WITH FEELINGS AND SOCIAL RELATIONSHIPS

(N AUT) AUTONOMY
DESIRES TO BE HIS/HER OWN BOSS
WANTS TO DO THINGS THEIR WAY
DOESNT REALLY WANT TO WORK WITH OTHER PEOPLE

(N DOM) DOMINANCE/POWER/INFLUENCE
SENSITIVE TO PERCEIVE WHEN THINGS CAN BE DONE BETTER (...LOGICAL? ...MORE EFFICIENTLY?)
HAS A STRONG SENSE OF ORDER WITHIN THE HIERARCHY OR SYSTEM
IS GOOD AT ORGANIZING THINGS AND PEOPLE
DESIRES TO INFLUENCE OTHERS...LIKES TO GIVE ADVICE AND GUIDANCE
DESIRES TO BE IN-CONTROL OF THE SITUATION
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Manifest Needs Theory Murray (38) McClelland (65)
MANIFEST NEEDS QUESTIONNAIRE (MNQ)

(N ACH) Need for Achievement
(N AFF) Need for Affiliation
(N AUT) Need for Autonomy
(N DOM) Need for Dominance/Power

BE SURE TO REVERSE-SCORE ANY ITEM DESIGNATED WITH R

SCORE RANGE FOR EACH DIMENSION IS:

5 15 25
LOW MIDPOINT HIGH

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The Locus of Control
Locus of control refers to the degree to which people believe
events in their lives are within their controlas opposed to
being under the control of external forces.
Do you control your own destiny? ...or are you at the mercy of your
environment?
Entrepreneurs typically have a high internal locus of control.

LOCUS OF CONTROL QUESTIONNAIRE
SCORING RANGE

0 5 10
External Mixed Internal
Locus Locus Locus
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More Entrepreneurial Characteristics

High Need for Achievement
Ambitious, likes to set own goals
Internal Locus of Control
In control of own destiny, desire for independence
Self-Confident
Decisive and methodical
Self-Sacrificing and hard-working
High energy level
Tolerant of Ambiguity and Uncertainty
Future-oriented
Good interpersonal skills
Technically knowledgeable
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Characteristics of Successful
Small Business Managers Meir Liraz - BizMove
Drive
Initiative, Persistence, Responsibility
Thinking Ability
Original, Creative, Critical, Analytical
Competency in Human Relations
Emotional Stability, Consideration, Cooperation,
Tactfulness
Communication Skills
Oral Comprehension and Expression, Writing Ability
Technical Knowledge
Thorough Knowledge of the Product/Service, and
Customer
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Interesting Demographic Factors
First-born within your family?

Were your parents entrepreneurs?

Are you a child of an immigrant?

Was your father absent during a part of your childhood?

Eight of every ten are over 40 years old
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Some Entrepreneurial Types
The Home-based Entrepreneur
Works from home (34-36 million businesses)
The Traditional Entrepreneur
Starts own business from scratchoriginal/unique ideas
The Serial Entrepreneur
Builds a company, but doesnt like running it
The Corporate Venturer
Works within a large organization, develops new ventures,
doesnt risk own money
The Opportunistic Entrepreneur
Wants results FAST! Uses acquisitions/mergers or
franchising to get into business.
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Varieties of Entrepreneurship
Founder (Pure Entrepreneur)
A person who brings a new firm into existence
Administrative Entrepreneur
An entrepreneur who oversees the operations of a
ongoing business (hired hand or 2
nd
generation)
Franchisee
An entrepreneur whose power is limited by the
contractual relationship with a franchising
organization
Entrepreneurial Team
Two or more people who work together as
entrepreneurs
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Artisan Entrepreneurs
Artisan Entrepreneur
A person with primarily technical skills and little
business knowledge who starts a business

Characteristics
Technical training
Reluctance to delegate
Narrow view of strategy
Personal sales effort
Short planning horizon
Simple record keeping
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Opportunistic Entrepreneurs
Opportunistic Entrepreneur
A person with sophisticated managerial skills and less
technical knowledge who starts a business

Characteristics
Broad-based education
Scientific approach to problems
Willing to delegate
Broad view of strategy
Diversified marketing approach
Longer planning horizon
Sophisticated accounting
and financial control
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The Many Faces of Entrepreneurs
Women Business Ownership
Nearly half of all privately held
businesses in the U.S. are
owned 50% or more by women
Minority Business Ownership
Fifteen percent of all U.S.
businesses are owned by ethnic
minorities
Older Entrepreneurs
Persons over the age of 50 are
more likely to start their own
businesses than their youthful
counterparts
Getty Images
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Making the Decision to
Own Your Own Business
Examine your reasons for opening a
business
Explore feelings about security and
ambiguity
Evaluate your lifestyle needs

Median earnings for a small business = $30,000/yr
How many times can you afford to fail?
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Ask Yourself these Important Questions
Where do you stand on:
Using debt or having a highly leveraged business?
Unions and the use of union workers?
Hiring employees and your ability to manage them?
How your religious beliefs and values will affect your
business, your employees, and your customers?
Government regulation and paperwork requirements?
Dealing with people from other places & cultures?
Getting involved in the local community?
Your willingness to share ownership with an investor or
other persons/partners?
Working 60-80 hours a week and being away from home?
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FINAGLE A BAGEL VIDEO
QUESTIONS
What entrepreneural characteristics do Alan and Laura exhibit?
Give examples of creativity, innovation, risk assumption,
general management and performance intentions.

Laura says many business can be expanded globally. Do you
think this applies to Finagle a Bagel? Why or why not?

What form of ownership would be most appropriate for Alan
and Laura? Why?

What is Finagle a Bagels competitive advantage?

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End of Chapter 1

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