Introduction to Business PDF

This OpenStax ancillary resource is © Rice University under a CC BY 4.0 International license; it may be reproduced or modified but must be attributed to OpenStax, Rice University and any changes must be noted. CHAPTER FIVE Entrepreneurship: Starting and Managing Your Own Business CHAPTER SUMMARY En...

This OpenStax ancillary resource is © Rice University under a CC BY 4.0 International license; it may be reproduced or modified but must be attributed to OpenStax, Rice University and any changes must be noted. CHAPTER FIVE Entrepreneurship: Starting and Managing Your Own Business CHAPTER SUMMARY Entrepreneurship involves taking the risk of starting and managing a business to make a profit. People become entrepreneurs for various reasons; though successful entrepreneurs have a high need for achievement, good interpersonal and communication skills, and sound managerial skills and technological knowledge. Companies started by entrepreneurs and small-business owners make significant contributions to the U.S. and global economies. The desire to be one’s own boss cuts across all age, gender, and ethnic lines. The Small Business Administration (SBA) is the main federal agency serving small businesses, providing guarantees of private lender loans and management assistance services. When starting a new business, the small business owner identifies an unfilled market need, selects a form of business organization, develops a formal business plan, and obtains both debt and equity financing to get started. Trends in entrepreneurship and small business management include changes in demographics, society, and technology. LEARNING OUTCOMES 1. Why do people become entrepreneurs, and what are the different types of entrepreneurs? Entrepreneurs are innovators who take the risk of starting and managing a business to make a profit. Most want to develop a company that will grow into a major corporation. People become entrepreneurs for four main reasons: the opportunity for profit, independence, personal satisfaction, and lifestyle. Classic entrepreneurs may be micropreneurs; who plan to keep their businesses small, or growth-oriented entrepreneurs. Multipreneurs start multiple companies, while intrapreneurs work within large corporations. 2. Which characteristics do successful entrepreneurs share? Successful entrepreneurs are ambitious, independent, self-confident, creative, energetic, passionate, and committed. They have a high need for achievement and a willingness to take moderate risks. Good managerial, interpersonal, and communication skill, as well as technical knowledge are important for entrepreneurial success. 3. How do small businesses contribute to the U.S. economy? Small businesses play an important role in the economy. They account for over 99 percent of all employer firms and produce about half of U.S. economic output. Most new private-sector jobs created in the United States over the past decade were in small firms. The Small Business Administration defines a small business as independently owned and operated, with a local base of operations, and not dominant in its field. It also defines small business by size, according to its industry. Small businesses are found in every field; but they dominate the service, construction, wholesale, and retail categories. 4. What are the first steps to take if you are staring your own business? After finding an idea that satisfies a market need, the small-business owner should choose a form of business organization. Preparing a formal business plan helps the business owner analyze the feasibility of his or her idea. The written plan describes in detail the idea for the business and how it will be implemented and operated. The plan also helps the owner obtain both debt and equity financing for the new business. 5. Why does managing a small business present special challenges for the owner? At first, small-business owners are involved in all aspects of the firm’s operations. Hiring and retaining key employees and the wise use of outside consultants can free up an owner’s time to focus on planning, strategizing, and monitoring market conditions; in addition to overseeing day-to-day operations. Expanding into global markets can be a profitable growth strategy for a small business. 6. What are the advantages and disadvantages facing owners of small businesses? Because of their streamlined staffing and structure, small businesses can be efficiently operated. They have the flexibility to respond to changing market conditions. Small firms can serve specialized markets more profitably than large September 17, 2018 2 firms, and they provide a higher level of personal service. Disadvantages include limited managerial skill, difficulty in raising capital needed for start-up or expansion, the burden of complying with increasing levels of government regulation, and the major personal commitment that is required by the owner. 7. How does the Small Business Administration help small businesses? The Small Business Administration (SBA) is the main federal agency serving small businesses. It provides guarantees of private-lender loans for small businesses. The SBA also offers a wide range of management assistance services, including courses, publications, and consulting. It has special programs for women, minorities, and veterans. 8. What trends are shaping entrepreneurship and small-business ownership? Changes in demographics, society, and technology are shaping the future of entrepreneurship and small business in America. More than ever, opportunities exist for entrepreneurs of all ages and backgrounds. The numbers of women and minority business owners continues to rise, and older entrepreneurs are changing the small-business landscape. Catering to the needs of an older population and a surge in web-based companies fuel continued technology growth. Entrepreneurs typically follow the money and set up shop in places where there is venture capital money easily available. LECTURE OUTLINE I. Entrepreneurship Today > Learning Outcome 1 Today’s global economy rewards innovative, flexible companies that respond quickly to changes in the business environment. These companies are started by entrepreneurs; people with vision, drive, and creativity who are willing to take the risk of starting and managing a business to make a profit. September 5, 2018 3 Lecture Tidbit: Anne Beiler was raised as an Amish-Mennonite in Pennsylvania where at age 12 she was expected to bake 70 cakes and pies a week for her family to sell at area farmers’ markets. She married at age 19 and worked at a market concession stand to support her family. After their 19-month old daughter was run over and killed by a tractor, Anne sunk into depression for seven years. Finally, her husband Jonas convinced Anne to return to her baking days. Anne bought a concession stand at the farmers' market where she sold everything from pizza to ice cream; but it was the hand-rolled soft pretzels that customers gobbled up the fastest. Because of the demand, Anne dropped the rest of the products and concentrated on pretzels full time. From that modest start, Anne has become one of the nation's leading entrepreneurs. In 15 years, Auntie Anne’s has grown from a single outlet in Lancaster, Pennsylvania, to more than 1,600 worldwide. Auntie Anne's has franchisees in 30 countries, including such unlikely nations as Indonesia, Thailand, Venezuela, and Saudi Arabia. Source: “Humble Pretzel Roots.” Auntie Anne's, 2018, www.auntieannes.com/our-story. A. Entrepreneur or Small Business Owner? While entrepreneurs may be small business owners, not all small business owners are entrepreneurs. The two groups share some of the same characteristics, but entrepreneurs are less likely to accept the status quo and generally take a long-term view than the small business owner. Smallbusiness owners are managers or people with technical expertise who started a business or bought an existing business and made a conscious decision to stay small. B. Types of Entrepreneurs Entrepreneurs fall into several categories: classic entrepreneurs, multipreneurs, and intrapreneurs. 1. Classic Entrepreneurs. Classic entrepreneurs are risk takers who start their own companies based on innovative ideas. Some classic entrepreneurs are micropreneurs, who start small and plan to stay small. 2. Multipreneurs. Multipreneurs are entrepreneurs who start a series of companies. Lecture Tidbit: Sir. Richard Branson, founder of the Virgin Group, is an example of a multipreneur. His conglomerate of diverse companies includes the travel and leisure, telecommunications and media, music and entertainment, financial services, and health and wellness. Source: ““Find a Virgin Company.” Virgin, 2018, www.virgin.com/company. September 17, 2018 4 3. Intrapreneurs. Intrapreneurs are entrepreneurs who apply their creativity, vision, and risk taking within a large corporation, rather than starting a company of their own Lecture Tidbit: In the fall of 1978 Gifford and Elizabeth Pinchot wrote up their thoughts about the intra-corporate entrepreneurship while attending The School for Entrepreneurs in Tarrytown, New York. In April of 1982, in an article of The Economist, Norman Macrae gave credit to Gifford Pinchot as the inventor of the word “intrapreneur.” Source: Macrae, Norman (April 17, 1982). “Intrapreneurial Now.” The Economist. C. Why Become an Entrepreneur? The most common reason cited by CEOs of the Inc. 500, the magazine’s annual list of fastest growing private companies, is the challenge of building a business. Other reasons include desire to control their own destiny, financial independence, frustration of working for someone else, feeling personal satisfaction with your work, and creating the lifestyle that you prefer. II. Characteristics of Successful Entrepreneurs > Learning Outcome 2 Being an entrepreneur requires special drive, perseverance, passion, and a spirit of adventure in addition to managerial and technical ability. A. The Entrepreneurial Personality In general, entrepreneurs are ambitious, independent, self-confident, risktaking, visionary, creative, energetic, passionate, and committed. B. Managerial Ability and Technical Knowledge A person with all the characteristics of an entrepreneur might still lack the business skills to run a successful business. Entrepreneurs need managerial ability to organize a company, develop operating strategies, obtain financing, and manage day-to-day activities. Good interpersonal and communication skills are also essential in dealing with employees, customers, and other businesspeople. III. Small Business: Driving America’s Growth > Learning Outcome 3 In recent years, small businesses have come to the forefront of the U.S. economy. Downsizings that accompany economic downturns have caused many September 5, 2018 5 people to look toward smaller companies for employment, and they have plenty to choose from. Small businesses play an important role in the U.S. economy, representing about half of U.S. economic output, employing about half the private sector workforce, and giving individuals from all walks of life a chance to succeed. A. What Is a Small Business? A small business is a business that is independently owned, is owned by an individual or a small group of investors, is based locally, and is not a dominant company in its industry. The Small Business Administration (SBA) established size standards to define whether a business entity is small and therefore eligible for government programs and preferences that are reserved for “small businesses.” Size standards are based on the types of economic activity or industry, generally matched to the North American Industry Classification System(NAICS). Small businesses in the United States can be found in almost every industry group. Established small businesses are defined as companies that have been in business at least five years and employ at least one, but less than 50, employees IV. Ready, Set, Start Your Small Business > Learning Outcome 4 Once you decide to go into business for yourself, what is the best way to go about it? You have many options to consider. A. Getting Started The first step in starting your own business is a self-assessment. What are some factors to consider when deciding whether to buy an existing business or start a new one? Some factors include the following: profitability, risk, reputation, real property and equipment, and personnel. An existing business may provide profits more quickly, but starting a new business means the entrepreneur does not have to pay anyone for past contributions. Source: Entrepreneur Media, Inc. “Should You Start a Business From Scratch or Buy an Existing Business?” Entrepreneur, Entrepreneur, 15 Jan. 2015, www.entrepreneur.com/article/240606. 1. Finding the Idea. It is not surprising that 80 percent of Inc. 500 executives got the idea for their company while working in the same or a related industry. An excellent way to keep up with small-business trends September 17, 2018 6 is by reading entrepreneurship and small-business magazines and visiting their Web sites. 2. Choosing a Form of Business Organization. A key decision is to decide what form of business ownership will be used. The decision will depend on the type of business, number of employees, capital requirements, tax considerations, and level of risk involved. 3. Developing the Business Plan. Once the basic concept for a product or service is developed, you must create a business plan. The business plan attracts appropriate loan financing, minimizes the risks involved, and is a critical determinant in whether a firm is succeeds or fails. A comprehensive business plan lets you run various “what if” analyses and operate your business as a dry run. Some business owners reject the idea of writing a formal business plan because they say that a plan doesn’t allow the company to adapt to the fast-paced environment. How would you respond to this comment? A business plan serves two important functions: it guides your company operations and outlines the company strategy for turning ideas into reality; and second, it helps persuade lenders and investors to finance your business. Plans must be monitored so you can adjust to changing conditions as necessary, but without a plan you have little direction or consistency in strategy. In many cases, investors won’t even grant you an interview. Source: Gregory, Alyssa. “Do You Need a Business Plan? Yes! Here Are 5 Reasons Why.” The Balance Small Business, The Balance Small Business, 29 Oct. 2017, www.thebalancesmb.com/do-you-really-need-a-businessplan-2951567. B. Financing the Business Once a business plan is complete, the next step is to obtain financing. Ninety four percent of business owners raise start-up funds from personal accounts, family and friends. The two forms of business financing are debt, borrowed funds that must be repaid with interest over a stated period; and equity, funds raised through the sale of stock (i.e., ownership) in the business. Those who provide equity funds get a share of the business’s profits. Two sources of equity financing for young companies are angel investors and venture-capital firms. Angel investors are individual investors or groups of experienced investors who provide financing for start-up businesses by investing their own money, often referred to as “seed capital.” Venture September 5, 2018 7 capital is financing obtained from venture capitalists, investment firms that specialize in financing small, high-growth companies. C. Buying a Small Business Another route to small-business ownership is busying an existing business. This approach may be less risky, but many of the same steps for starting a business from scratch still apply. You should prepare a business plan that thoroughly analyzes all aspects of the business. D. Risky Business About half a million small businesses fail every year, according to data from the Small Business Administration and the Census Bureau. Businesses close for many reasons—and not all are failures. Some common causes of business closure include the following: V. Economic factors Financial causes Lack of experience Personal reasons Managing a Small Business > Learning Outcome 5 Whether you start a business from scratch or buy an existing one, you must be able to keep it going. The main job of the small business owner is to carry out the business plan through all areas of the business – from personnel to production and maintenance. A. Using Outside Consultants One way to ease the burden of managing a business is to hire outside consultants. Nearly all small businesses need a good certified public accountant (CPA) who can help with financial record keeping, tax planning, and decision making. An attorney who knows about small business law can provide legal advice and draw up essential documents. Consultants in other areas, such as marketing, employee benefits, and insurance, can be hired if needed. September 17, 2018 8 B. Hiring and Retaining Employees Some small companies may have to be creative to find new employees and to convince applicants to join their firm. Attracting good employees can be hard for a small firm; which may not be able to match the salaries, benefits, and advancement potential offered by larger firms. C. Going Global With Exporting More and more small businesses are discovering the benefits of looking beyond the United States for markets. The global marketplace represents a huge opportunity for U.S. businesses, both large and small. Many small businesses hire international trade specialists to get started selling overseas. For fees of 5 to 15 percent, export management companies (EMCs) handle all aspects of exporting; including finding customers, billing, shipping, and helping the company comply with foreign regulations. Many online resources are also available to identify potential markets for your goods and services, as well as to decipher the complexities involved in preparing to sell in a foreign country. VI. Small Business, Large Impact > Learning Outcome 6 Small businesses continue to thrive in the United States for a variety of reasons. 1. Independence and a better lifestyle 2. Personal satisfaction from work 3. Best route to success 4. Rapidly changing technology 5. Major corporate restructuring and downsizing 6. Outsourcing 7. Small businesses are resilient September 5, 2018 9 What are some of the major economic contributions made by small businesses? Small businesses contribute the following: 99.7 percent of U.S. employer firms 64 percent of net new private-sector jobs 49.2 percent of private-sector employment 42.9 percent of private-sector payroll 46 percent of private-sector output 43 percent of high-tech employment 98 percent of firms exporting goods 33 percent of exporting value Source: SBA Office of Advocacy. (September 2012). Retrieved August 5, 2018, from https://www.sba.gov/sites/default/files/FAQ_Sept_2012.pdf. A. Why Stay Small? Owners of small businesses recognize that being small offers special advantages. Greater flexibility and an uncomplicated company structure allow small businesses to react more quickly to changing market forces. However, being small is not always an asset. The founders may have limited managerial skills or encounter difficulties obtaining adequate financing. VII. The Small Business Administration Learning Outcome 7 The Small Business Administration (SBA) is a government agency that helps people start and manage small businesses, helps small business owners win federal contracts, and speaks on behalf of small business. Lecture Tidbit: The Small Business Administration turned 65 in 2018. Its latest initiatives include aiding veterans, providing disaster relieve to small business owners, and offering financial assistance to businesses in rural areas. By law 23 percent of all government contracts must be awarded to small businesses. Source: SBA Contracting Guide.2018. https://www.sba.gov/federal-contracting/contracting-guide. A. Financial Assistance Programs The SBA offers financial assistance in the form of guaranteed loans through private lenders to qualified small businesses that cannot obtain financing on reasonable terms through normal lending channels. This assistance takes the form of guarantees on loans made by private lenders. More than 300 SBA- September 17, 2018 10 licensed Small Business Investment Companies (SBICs)provide about $6 billion each year in long-term financing for small businesses. B. SCORE-ing with Management Assistance Programs The SBA also provides a wide range of management advice. Its Business Development Library has publications on most business topics. The SBA also offers free management consulting through two volunteer groups, the Service Corps of Retired Executives (SCORE) and the Active Corps of Executives (ACE). Executives in these programs use their business backgrounds to help small business owners. The SBA offers free online resources and courses for small business owners. C. Assistance for Women and Minorities The SBA offers a minority small-business program, micro-loans, and the publication of Spanish-language informational materials. It is committed to helping women and minorities increase their business participation. The SBA also makes a special effort to help veterans to into business for themselves. Lecture Tidbit: America's 9.1 million women-owned businesses employ 27.5 million people and contribute $3.6 trillion to the economy. Source: “Despite Smaller Size, Women-Owned Businesses Have a Significant Economic Impact | The U.S. Small Business Administration.” Small Business Administration, 31 May 2017, www.sba.gov/advocacy/despite-smaller-size-women-owned-businesses-have-significant-economicimpact. VIII. Trends in Entrepreneurship and Small-Business Ownership > Learning Outcome 8 Demographic, social, and technological trends, combined with the challenge of operating in a fast-paced business climate, have changed the face of entrepreneurship and small business ownership. A. Into the Future: Start-Ups Drive the Economy More and more people are choosing to start their own businesses. Small business activity continues to contribute to a strong economy. The highest rate of growth is coming from women-owned firms, which continues to rise at rates higher than the national average—and with even stronger growth rates since the recession. It has become very clear that encouraging smallbusiness activity leads to continued strong overall economic growth. September 5, 2018 11 B. Changing Demographics Create Entrepreneurial Diversity The growing number of baby boomer entrepreneurs has prompted some companies to recognize business opportunities. Minorities are also adding to the entrepreneurial mix in greater numbers than ever before. C. How Far Will You Go to Get Rich? You can get rich almost anywhere in the United States, but there are some places where the chances of getting venture capital money are greater. In general, venture capitals tend to invest in companies near by. They focus on access to an educated local workforce, proximity to a major university or research center, and an analysis of the number of local billionaires in the area. Winning areas include e San Francisco, New York Metro, Silicon Valley, and New England. PREPARING FOR TOMORROW’S WORKPLACE Student responses will vary. ETHICS ACTIVITY Minority group membership includes United States citizens who are Asian, Black, Hispanic and Native American. The business must be at least 51 percent owned by the minority group members to be considered a minority business. Since the company does not meet the 51 percent criterion, it is illegal as well as unethical for the owner to apply for the supplier diversity program. WORKING THE NET Student responses will vary. CRITICAL THINKING CASE: Fostering Entrepreneurship in Unlikely Places CRITICAL THINKING CASE: Fostering Entrepreneurship in Unlikely Places 1. What characteristics made Vic Ahmed a successful entrepreneur? Ahmed is clearly ambitious and creative, having founded 15-20 start -ps. He’s also passionate and committed, having founded a start-up for start-ups. Ahmed has shown he is willing to take reasonable risks as he continues to invest in startup businesses. September 17, 2018 12 2. How did Ahmed and Steven Case's partnership and shared vision of "Rise of the Rest" serve their business goals? Like Ahmed, Case’s “Rise of the Rest” invested in local start-ups in 33 cities across the country. Case hosts a pitch competition with the best start-ups in each city, and one lucky winner receives a $100,000 investment from Case. 3. Is focusing on smaller cities rather than areas like Silicon Valley a good strategy, why? While media attention has focused on the entrepreneurial engines of America’s coastal cities, Ahmed and Case have a more expansive entrepreneurial vision. They believe smaller cities throughout the nation rise up alongside larger, start-up hot spots. It seems to be working for them This file is copyright 2018, Rice University. All Rights Reserved. September 5, 2018 13