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Chapter 5
Choosing a Form of
Business Ownership
Types of Business Structure
Sole ProprietorshipPartnershipsCorporations
Advantages & Disadvantages
Sole Proprietorship
Advantages DisadvantagesEasy to start & end Unlimited liabilityYou’re the boss (& the help) Limited financial resourcesOwnership Records/managementLeave a legacy Time commitmentRetain profits Few fringe benefitsNo special taxes Limited growth (must pay quarterly taxes) Limited life span
Partnerships
Advantages DisadvantagesMore financial resources Unlimited liabilityShared management Division of profitsLonger survival Disagreements amongNo special taxes partners
Difficulty of termination
CorporationsC corp = conventional corporation
Advantages DisadvantagesLimited liability Extensive paperworkMore $ for investment Double taxationSize Two tax returnsPerpetual life SizeEase of ownership change Difficulty of terminationEase of attracting talented Possible conflict with
employees stockholders &Separation of ownership board of directors
from management Initial cost
S Corporation
Have no more than 100 shareholdersall members of one family may be counted as 1 shareholder
Shareholders who are individual or estates are citizens or residents of the USA.
Only one class of outstanding stock
Preferred & common stock are only for C corps
No more than 25% of income from passive sources (rents, royalties, interest)
Limited Liability Companies
Advantages DisadvantagesLimited liability No stockChoice of taxation Limited life spanFlexible ownership rules Fewer incentivesFlexible profit or loss Taxes: paid on profit
distribution not just salariesOperating flexibility Paperwork less than corp.
But more than proprietorship
Types of Mergers
Vertical Soda Firm & Sweetener FirmAuto Maker & Tire Maker
Horizontal Mercedes Benz & ChryslerWachovia & 1st Union Bank
Conglomerate Philip Morris & Nabisco
LBO = Leveraged Buyout
Special forms of Ownership
Franchises - Advantages & DisadvantgesE-commerceHome-based
Cooperatives - Advantages & Disadvantges
Franchises
Advantages DisadvantagesManagement & marketing Large start-up costs
assistance Shared profitsPersonal ownership Management regulationNationally recognized name Coattail effectsFinancial advice & assistance Restrictions on sellingLower failure rate Fraudulent franchisors
Cooperatives
Advantages DisadvantagesOwned & controlled by users Who is minding the store? producers, customers, or Requires stable group workers user/ownersPool resources for mutual gain May require board of Buying power of larger groups directorsTaxes: not the same as corporations
Land O Lakes, Sunkist, Ocean Spray, Blue Diamond, Welch’s, Associated Press, Ace Hardware, True Value Hardware
Read pages 142-145
Vocabulary Terms:acquisition conglomerate merger conventional corporation cooperativecorporation franchise franchise agreement franchisee franchisorgeneral partner general partnership horizontal merger levered buyoutlimited liability LLC LLP limited partner limited partnershipmaster limited partner merger partnership S corporation sole proprietorship unlimited liability vertical merger
If you started a business, what type would it be & what goods or services would you provide.
Chapter 6 - Business Ownership
The Age of the EntrepreneurJob-Creating Power
DuPont: Started in 1802 by French immigrant; 18 investors put up $36,000 in start-up money.
Avon started in 1886: David McConnell borrowed $500 from a friend.
The Cash Flow QuadrantFour Ways to Make an Income
Employee Business Owner
Self-Employed Investor
From Robert Kiyosaki
More Business Stories
George Eastman launched Kodak in 1880 with $3,000
Procter and Gamble was formed in 1837 by William Procter and James Gamble with $7,000 in capital.
Ford Motors began with $28,000 by Henry Ford and 11 associates.
More Business Stories
Amazon.com started by Jeff Bezos’s family and friends. His parents invested $300,000, a huge part of their retirement assets, Today, they are billionaires.
Other entrepreneurs: Steve Jobs, Ross Perot, Michael Dell, Bill Gates, Howard Schultz, Scott Cook, Ted Turner…
Why be an Entrepreneur?
Risks & RewardsOpportunityProfitIndependenceChallenge
What does it take?
Self-directedSelf-nurturingAction-orientedHighly energeticTolerant of uncertainty
Take Questionnaire on page 153 (Homework)
Ways to make it happen.
Entrepreneurial Teams
Micropreneurs & Home-based Business
Computer technology, Corporate downsizing, Social attitudes, New tax laws
Challenges for new businesses
Getting new customersManaging timeKeeping work & family tasks separateAbiding by city ordinancesManaging risk
Intrapreneurs
Working for someone elseLaunch new products
Innovation and creativity
3MSkunkworks of Lockheed Martin
Encouraging New Businesses
Enterprise Zones
Incubators
Technology Centers
Small vs Big Business
20 million full or part-time home-based businesses in the U.S.
750,000 tax-paying, employee-hiring businesses are started every year.
Of non-farm business in U. S., 97% are small businesses (Small Business Administration)
Account for 50% of GDPU.S. employees of small businesses are more
than population of Canada & Australia
More about small businessesAbout 80% of U.S. employees get their first
job at a small business.75% of new jobs created by small businessesWomen own nearly 6 million small
businesses.Business ownership for Asians, Hispanics, and
African Americans have increased by 463%, 417% and 108% respectively
Why are Small Businesses Important?
75% of new jobs are created by small businessesMore personal approach to customer serviceQuicker response to customers wants
Fill a contain with pebbles and rock.Can anything else be squeezed into the full box? If pebbles are medium sized companies & rocks are giant corporations, there is still a lot of room for small firm (sand) in the box.
Success and Failure
SBA - 60% in first 6 years fail (not so fast)Conventional wisdom: 1/3 in first 4 years
Bruce Kirschhoff’s study showed: 18% in first 8 years failed.
Statistics on failures include closing one business to start a new business; changing from a partnership to corporation.
1 out of 5 firms that fail leave owing money to creditors.
Businesses with low failure ratesVeterinary ServicesDental PracticesMedical Practices
These don’t produce much growthbut provide more security
Growing for growth as in technology firms are not easy to start, and can be difficult to keep going. See page 162 – figure 6.4
Successes
See page 163 - figure 6.5Customers need a lot of personal attentionProduct is easy to obtain/makeMarket/neighborhood is not attractive to a large firm.Teaming with a giant/franchisingPay attention to new competitorsFind a growth or recession resistant industry
Learning about Small Business
Learning from others (who have succeeded)Get some experienceTake over a successful firm
1) what the business owns2) what the business earns3) what makes it unique
(An accountant can help you find what a business is worth.)
Managing a Small Business
Planning your businessFinancing your businessKnowing your customersManaging your employeesKeeping records
Planning: A Business Plana 25 to 50 page document
Cover LetterSection 1 – Executive SummarySection 2 – Company BackgroundSection 3 – Management TeamSection 4 – Financial PlanSection 5 – Capital RequiredSection 6 – Marketing PlanSection 7 – Location AnalysisSection 8 – Manufacturing PlanSection 9 – Appendix
Planning
Begin with a Business PlanWriting a Business Plan
Getting money to fund a small business -Would you lend a business money without a written business plan?
Marketing
Target marketagegroupneed/wantsresourceswillingness to buyprice and financingHow many sales per week are needed to keep your business
afloat? When will your efforts make this happen?What strategies & activity will it take?
Where can you get help?Money sources
personal savingsrelatives & friendsformer employersbanks/finance companiesventure capitalistsgovernment agencies: Small Business Administration
www.sba.govFarmers Home Administration, Economic Development Authority, Minority Business Development Agency, Small Business Investment Company Program, Small Business Development Center
Important Details
Know your customersManaging employee/independent contractorsKeeping recordsHelp:
Legal –SBA’s BusinessLaw.comSCORE –Service Corps of Retired ExecutivesLocal Chambers of CommerceBetter Business Bureau
Going International
Hurdles:FinancingKnow HowCultural DifferencesRed Tape = Bureaucratic Paperwork
Advantages:Overseas buyer prefer dealing with individualsFaster response time/shippingVariety of suppliers through one small firmBetter service
Chapter 7
Management, Leadership, & Employee Empowerment
Goals
1. Explain how the changes that are occurring in the business environment are affecting the management function.
2. Describe the four functions of management.3. Relate the planning process & decision making process to
the accomplishments of company goals.4. Describe the organizing function of management.5. Explain the difference between leaders & managers, &
describe the various leadership styles6. Summarize the top five steps of the control function of
management.
Management
The process used to accomplish organizational goals through planning, organizing, leading, and controlling people.
Rewrite: change to controlling outcomes/product or change controlling to motivating
This is a personal issue (for me). I do not believe in controlling through force & intimidation.
Information, reason & incentives are more positive than attempts to control.
Function of Management
Planning Organizing
Leading Controlling(Motivating)
Planning
Creating a vision that inspires people.Based on shared values
Develop a mission statement1) Organization’s self-concept2) Firm’s philosophy & goals3) Long-term survival4) Customer needs5) Social Responsibility6) Nature of firm’s product or service
Planning: Short Term & Long Term
Goals: Long Term broad accomplishments/wishes
Objectives: Short Term specific, measurable outcomes
Strategies: Low price; quality service;
Tactics: Sale 4 time/year; customer surveys;
All planning is designed to…
… get you from point A to point B
Where are you now, where are your customers now, what do they need or want?
How will people find out about how you can help them?
What will it take to win customers that rave about you and your firm?
SWOT Analysis
StrengthsWeaknessesOpportunitiesThreats
Forms of Planning
Strategic Tacticallong range goals specific short rangeby top managers by lower level mgrs
Contingency OperationalBackup plans in case set work schedulesprimary plan fails & standards of
performance
Decision making
Find the best alternativeDevelop the situationDescribe & collect the needed informationDevelop alternatives/brainstormDevelop concensus among those involvedDecide which alternative is best/chooseDo what is indicated/implementDetermine whether decision was good/evaluate
Other ways of looking at this…
Problem SolvingPMI = Pluses/Minuses/ImplicationsSimilar to The Franklin Method of Decision Making
Organizational Chart
Top Management
Middle Management
Supervisory Management
Nonsupervisory/Employees
Organizing: to form a unified system
Levels of skills for managers
Top managers: Technical skills: less importantHuman Relations skillsConceptual skills: more important
Middle managers: Technical skillsHuman Relations skillsConceptual skills
First-line managers: Technical skills: more importantHuman Relations skillsConceptual skills: less important
Skills
Technical: discipline specific skills; software or marketing
Human Relations: communication & motivation; enabling, leading, coaching, moral building, delegating, training, assisting, developing competence
Conceptual: planning, vision, organizing, controlling, system development, problem analysis, decision making, coordinating, delegating
Stakeholder-oriented Organization
Less a matter of managers in controlMore influence of customers & others
Restructuring of large organizations into smallresponsive units
Recruitment & Beyond
Getting & Keeping the Right PeopleStaffing – Attracting quality people/workersOrientation – Training to get recruits off to a
positive startMotivating – Finding the best way to keep
improving the firm/its peopleRetaining – Rewarding those who get it
Leading
Providing Continuous Vision & ValuesLeaders versus Managers
Leaders help people see the reasons for change & create a Vision to followManagers strive to produce order & stability
Good leaders develop an environment for workers to motivate themselves, Good managers carry out the vision & accomplish the firms goals.
Leader Must…
Communicate a vision & rally others around that vision.
Establish corporate valuePromote corporate ethicsEmbrace change
Leadership Styles
Autocratic: decision making without consulting others; great in emergencies; direct the activities of many skilled workers
Participative: (TQM or TQL) work problem solving through teams; employee input may not improve efficiency, but may increase job satisfaction
Free-rein: setting objectives & letting employees have discretion on how to accomplish them
Empowering Workers
Giving explicit instructions versus authority to employees
Enabling employees to decision that managers used to make
Employees owning the responsibility of their choices
Requires clear communication, education, training, coaching and tools for employees when using greater discretion at work
Knowledge is Power
Managing knowledge: Getting the information to employees to better serve the customers
What is most important?How does your firm get this information?
What do I still not know?Who should I be asking?
How does your firm keep in touch with others?
Controlling: Making sure it worksEstablish clear standardsMonitor & Record performanceCompare results against standardsCommunicate resultsIf needed, take corrective actions
Are standards realistic?
Setting Clear Standards
The weakest link: setting standardsBetter quality is not preciseFaster response to customer contact
- not much better
Greet each customer within 15 seconds of entering the store, ask “How may I help you, today?” - This is a measurable goal & clear.
Customer Satisfaction
External Customers: dealers, general public
Internal Customers: employees, units within the firm, field sales people
Getting a good rating is not enough, how can you delight the customer so they rave about your firm to others.
Chapter 8
Adapting Organizations to Today’s Markets
Everyone is doing it…
Restructuring Notable FirmsXeroxFordGMToyotaIBMKraft FoodsSiemens
From the Bottom Up
Size does not change the fundamentals of organizing a business.
Organize your business – Where to start?!What does your business do now?
Who does what tasks? Division of LaborJob Specialization – Which workers are best
at each task?Growing your business: Attracting & retaining
quality workersWhat opportunities are suitable additions?
Setting up Team or Departments
Specialization of task leads to development of groups that work together for a common goal.
Production Accounting
Marketing Recruiting/Training
Organizational Design
Fayol’s principles of Organization1. Unity of Command2. Hierarchy of Authority3. Division of Labor4. Subordination5. Authority6. Degree of Centralization7. Clear Communication Channels8. Order9. Equity10. Esprit de corps
Max Weber – Organizational Theory
The Theory of Social and Economic Organizations
Pyramid Structure of OrganizationsBelieved that firms would do well if worker just did what
they were told.This may be reasonable if you had workers that were
relatively uneducated or untrained.
Job descriptionsWritten rules, decision guidelines & detailed recordsConsistent procedures, regulations & policiesStaffing & promotion based on qualifications
Principles into Design
Fayol – 1919 Weber – 1940’sChain of Command
Hierarchy = a system of levels of command where each individual
has only one direct supervisorPresident
Manager A Manager B Manager C
First –Line Supervisors First –Line Supervisors First –Line Supervisors
Workers
AuthorityCentralized or Decentralized
CentralizedAuthority & decision making centered in the top level of management = Centralized
Aristocrats/Nobility/Ruling Class vs Workers
Limitations:less responsive to current demandsless empowerment/rigid rulesclash between levellower morale
AuthorityCentralized or Decentralized
DecentralizedAuthority & decision making spread out over the levels of management.
The United States Government is a prime example of separate levels of authority.
Federalism reserved all powers of decision making to the people and the states that are not delineated as responsibilities of the Federal or central government. Local decisions are more responsive to the wishes of the people.
Choosing a span of control
How many subordinates should/can a manager supervise?
At lower levels, where work is more standardized 15 to 40 workers is possible.
At higher levels this span shrinks to 3 to 12 people per supervisor.
Tall versus Flat Orgaizations
Tall = Many layers of management
Flat = One person or group makes all the decisions
Departmentalization
Advantages DisadvantagesDepth of skill development Lack of communicationto mastery feedback missingEconomies of scale run Fragmentation of loyaltyby experts Group thinkCoordination & control Slow response to externalby top management changes
Trained people become narrowly specialized
Alternatives to Departmentalization
Function: Production, Finance, MarketingProduct: GM – Chevy, Buick, GMC, etc.Market: Consumer market, Business to business,
Government contractsGeographic: Regional/CulturalHybrids
Line Organizations & others
Line organization: direct, two-way lines of responsibility & communication from top to bottom with people reporting to only one supervisor.McDonald’s
Line-and-Staff organization: Line personnel are part of the chain of command; Staff assist & advise line personnel in meeting their goals.
Olympic College
Matrix-Style Organizations
Project completion require specialist from different parts of the organization. Borrowing from different departments for temporary association for design & development of a new product.
Cross-Functional Self-Managed Teams
Similar to matrix organizations, but longer connection and direction of new ideas/products without apppproval of upper management. Interdepartmental or interfirm collaboration
Managing Among Firms
Customers, Suppliers, Distributors, Governmentsnetworking: real time communication
(internet & other forms of telecommunication)
Transparency & IntegrationVirtual Corporation
Benchmarking
Comparing an organization’s practices, processes & products against the best in the world.
Dalbar Award – Customer Service & TechnologyJ.D. Powers Award- QualityCar & Track – Car of the YearBroad Prize – Best Inner City School System
Core Competencies
Things that must be done well by the firm
If outside the firm a better process, or more efficient way to accomplish a task is found …
outsourcing can improve the bottom line
IBM outsources its software development to Microsoft
Adapting to Change
Stuck in a rut? How do you climb out?
Managers find change the most difficult challenges.
New ways of thinking; tracking progress; evaluating everything
Kmart & Polaroid
Restructuring for Empowerment
Inverted Organization (Service oriented firm)Front-line workers = Key People
(not managers)
Front-Line Workers
Support Personnel
TopMgmt
Focus on the Customer
What does the customer want?-not what are we selling/making.
Creating a Change-oriented Organizational Culture
Atmosphere & Actions
Informal Organization = People working together
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