Collins CH02

The Challengesof Starting a Business

C H A P T E R 2

1 Define entrepreneurship and identify the reasons someindividuals become entrepreneurs.

2 Describe the importance of small businesses to the U.S.economy and identify the industries in which smallbusinesses are concentrated.

3 Explain what it takes to start a business and summarizethe advantages and disadvantages of business ownership.

4 Evaluate the various small business ownership options—starting a new business, buying an existing business, orobtaining a franchise.

5 Discuss the importance of planning for your business andidentify the key sections of a business plan.

6 Discuss ways to succeed inmanaging abusiness andexplain why somebusinesses fail.

After studying thischapter, you will be

able to:

22

BUILD A BETTER BABY AND THEY WILL COME

In 1993, Mary and Rick Jurmain were watch-ing a TV program about teenage pregnancy.1

To simulate the challenge of caring for aninfant, teens on the program were carryingaround sacks of flour. Rick commented thatholding a sack of flour was a poor substitute for tak-ing care of a baby. Mary challenged him to use his engi-neering expertise to come up with a better baby substitute. Twoweeks later, he unveiled the prototype of the “Baby Think It Over” infant simulator—a cloth doll with an internal electronic box for making baby noises. Thus, BTIO EducationalProducts, Inc., was born.

Mary and Rick were willing to accept the risk of starting and running a company to pur-sue what they identified as a great business opportunity. They set up a manufacturing shop inthe garage and an office in the kitchen, and today, their idea has grown into a comprehensive

COLLMC02_0131403656.QXD 11/6/06 4:46 PM Page 22

entrepreneur

Individual who identifies a business opportunity andassumes the risk of creating and running a business totake advantage of it.

Small Business Administration (SBA)Government agency that helps prospective owners set upsmall businesses, obtain financing, and manage ongoingoperations.

What Is an Entrepreneur? 23

parenting-education program that teaches young people about the responsibilities of parent-ing, with the goal of reducing unwanted teenage pregnancies. Since 1993, more than a millionteens have gotten a glimpse of what it’s like to spend all their time feeding, burping, changing,and rocking simulated babies.

What Is anEntrepreneur?Like BTIO, many entrepreneurial venturesare based on innovative ideas. Others areimprovements on already existing goods orservices. Howard Shultz formed Starbucksto reinvent the coffee experience—to pro-vide customers with quality coffee in a tran-quil atmosphere. Michael Dell improved theprocess of selling computers by eliminatingdistributors and retail stores and sellingdirectly to the customer.

Do you ever wonder what it would belike to start your own business? Do you everthink that someday you might be an entre-preneur—maybe even an extremely success-ful entrepreneur like Tom Anderson or ChrisDeWolfe, founders of MySpace, the JuiceGuys (Nantucket Nectars founders TomScott and Tom First), or Pierre Omidyar, whostarted eBay? Have you thought about theimportance of small businesses to the U.S.economy? Would you like some answers toquestions like the following: Should I start abusiness? What are the advantages and dis-advantages of starting a business? Should Ibuild a business from scratch, buy an exist-ing business, or invest in a franchise? Howdo I come up with a business idea? How doI go about planning a business? What stepsare involved in developing a business plan?Where would I find help in getting my busi-ness started and operating it through thestart-up phase? How can I increase the like-lihood that I’ll succeed?

Answers to these questions can be foundin this chapter. Let’s start by answering aquestion that’s been implied in just abouteverything we’ve said so far: What is anentrepreneur? We’ll go with this definition:An entrepreneur is someone who identifiesa business opportunity and assumes the risk

of creating and running a business to takeadvantage of it.

WHY BECOME ANENTREPRENEUR?

Why do people start businesses? According tothe Small Business Administration (SBA), agovernment agency that provides assistanceto small businesses, the most common rea-sons for starting a business are as follows:2

• To be your own boss

• To achieve financial independence

• To enjoy creative freedom

• To use your skills and knowledge

What are entrepreneurs like? In general,they’re creative people who sometimesaccomplish extraordinary things becausethey’re passionate about what they’re doing.They are risk-taking optimists who committhemselves to working long hours to reachdesired goals. They take pride in whatthey’re doing and get satisfaction fromdoing something they enjoy. They also havethe flexibility to adjust to changing situa-tions in order to achieve their goals.

Entrepreneurs usually start small. Theybegin with limited resources and build theirbusinesses through personal effort. At the endof the day, their success will depend on theirability to manage and grow the organizationthat they created to implement their vision.

DISTINGUISHINGENTREPRENEURS FROM SMALLBUSINESS OWNERS

Although most entrepreneurial venturesbegin as small businesses, not all smallbusiness owners are entrepreneurs.


While graduate students at Stanford University, Larry Page and Sergey Brin cameup with a novel idea for a search engine that ranked Web sites according to thenumber of hits. They quit graduate school and founded Google in 1998. Theirentrepreneurial venture paid off big time—by 2006, both were worth about $13 billion.

24 CHAPTER 2 The Challenges of Starting a Business

Entrepreneurs are innovators who startcompanies to create new or improved prod-ucts. They strive to meet a need that’s notbeing met, and their goal is to grow thebusiness and eventually expand into othermarkets.

In contrast, many people either start orbuy small businesses for the sole purpose ofproviding an income for themselves andtheir families. They do not intend to be par-ticularly innovative, nor do they plan toexpand significantly. This desire to operateis what’s sometimes called a “lifestyle busi-ness.”3 The neighborhood pizza parlor orbeauty shop, the self-employed consultantwho works out of the home, even a localprinting company—all of these are typicallylifestyle businesses. In the next section, wediscuss the positive influences that bothlifestyle and entrepreneurial businesseshave on the U.S. economy.

Importance of SmallBusiness to the U.S.EconomyTo assess the value of small businesses to theU.S. economy, we first need to know whatconstitutes a small business. Let’s start bylooking at the criteria used by the SBA.According to the SBA, a small business is

one that is independently owned and oper-ated, exerts little influence in its industry,and (with a few exceptions) has fewer than500 employees.4

There are more than 20 million small busi-nesses in the United States, and these busi-nesses generate about 50 percent of our grossdomestic product.5 Clearly, they’re a majorforce in our economy. The millions of individ-uals who have started businesses in theUnited States have shaped the business worldas we know it today. Some small businessfounders like Henry Ford and Thomas Edisonhave even gained places in history. Others,including Bill Gates (Microsoft), Sam Walton(Wal-Mart), Steve Jobs (Apple Computer),Michael Dell (Dell, Inc.), and Steve Case(AOL), have changed the way business isdone today. Still millions of others have col-lectively contributed to our standard of living.

Small businesses are important to us for anumber of reasons. In particular, they createjobs, spark innovation, and provide oppor-tunities for many people, including womenand minorities, to achieve financial successand independence.6 In addition, small busi-nesses complement the economic activity oflarge organizations by providing them withcomponents, services, and distribution oftheir products. These contributions are dis-cussed later in the chapter.

JOB CREATION

Small businesses are a major source ofemployment. More than half of all U.S.adults are either self-employed or work forbusinesses with fewer than 500 employees.The majority of Americans made their firstentrance into the business world by work-ing for a small business.7 These enterprisesare constantly creating jobs and providingopportunities for a vast number of workers.Figure 2.1 shows just how many jobs werecreated by small (and very small) firmsbetween 1992 and 1996, the last year forwhich there are data. Note particularly theperformance of large companies (thosewith more than 500 employees) over thesame period.

INNOVATION

Given the financial resources available tolarge businesses, you’d expect them to intro-duce most of the new products that hit the


Importance of Small Business to the U.S. Economy 25

small businessAccording to the SBA, a business that is independentlyoperated, exerts little influence in its industry, andemploys fewer than 500 people.

market. But according to the SBA, 55 percentof all product innovations come from smallbusinesses.8 For example, the list of impor-tant innovations by small high-tech busi-nesses is impressive. It includes the airplane,personal computer, tape recorder, pace-maker, and soft contact lenses.9

Owners of small businesses are alsoresponsible for finding new ways of doingold things. In 1994, for example, a youngcomputer-science graduate working on WallStreet came up with the then-novel idea ofselling books over the Internet. During thefirst year of operations, sales at Jeff Bezos’snew company—Amazon.com—reached halfa million dollars. In less than 10 years,annual sales grew to more than $3 billion.Bezos’s innovative approach to online retail-ing not only made its founder very rich buthas become a model for the e-commerceindustry.

Why are small businesses so innovative?For one thing, they tend to offer environ-ments that appeal to individuals with thetalent to invent new products or improve theway things are being done. They tend tomake faster decisions, their research pro-grams tend to be focused, and their compen-sation structures tend to reward top per-formers.10 Supportive environments haveenabled small firms to turn out twice asmany product innovations per employee aslarge firms.11

The success of small businesses in foster-ing creativity has not gone unnoticed by bigbusinesses. In fact, many companies, such asGeneral Electric, have responded by downsiz-ing to act more like small companies.12 Somelarge organizations now have separate workunits whose purpose is to spark innovation.Individuals working on these teams can focustheir attention on creating new products thatcan then be developed by the company.

OPPORTUNITIES FOR WOMENAND MINORITIES

Small business is the portal through whichmany people enter the economic main-stream. Business ownership allows individ-

uals, including women and minorities, toachieve financial success as well as pride intheir accomplishments. Although the major-ity of small businesses are still owned bywhite males, the past two decades have seena substantial increase in the number of busi-nesses owned by women and minorities.Figure 2.2 gives you an idea of how manyAmerican businesses are owned by womenand minorities and indicates how much thenumbers grew between 1982 and 2002, thelast year for which there are reliable data.

4,000

5,000

3,000

2,000

1,000

01982

Women

Num

ber

of

firm

s (t

hou

san

ds)

6,000

7,000

8,000

Hispanic

Black

1992

Year

2002

Figure 2.2

Women- and Minority-Owned Businesses

Number of employees

4,000

5,000

6,000

3,000

2,000

1,000

0

–1,0000 1–4 5–19

Jobs

cre

ate

d20–99 100–499 500+

According to the most recent data,in one two-year period, small businessescreated three-quarters of all new jobs.

Figure 2.1

Net New Jobs by FirmSize



HOW SMALL BUSINESSES HELPLARGE BUSINESSES

Small firms complement large firms in anumber of ways. They supply many of thecomponents needed by big companies. Forexample, a substantial portion of the mind-boggling $90 billion paid annually byGeneral Motors to parts suppliers goes tosmall businesses. Small firms also providelarge ones with such services as accounting,legal, and insurance. Many small firms pro-vide outsourcing services to large firms—thatis, they hire themselves out to help with spe-cial projects or handle certain business func-tions. A large firm, for example, might hire asmall one to handle its billing or collectionservices or to manage its health care benefits.A large company might contract with asmall information technology firm to man-age its Web site or oversee softwareupgrades.

Small companies provide another valu-able service to large companies by acting assales agents for their products. For example,automobile dealerships, which are generallysmall businesses, sell vehicles for the big carmakers. Local sporting goods stores sell ath-letic shoes made by industry giants, such asAdidas and Nike. Your corner deli sellsproducts made by large companies likeCoca-Cola and Frito Lay.

What Industries AreSmall Businesses In?If you wanted to start a new business, thereare some types of businesses that you’dprobably reject. For example, it’s unlikelythat you’d decide to set up a new companyto make automobiles or aluminum. Suchventures require tremendous investmentsin property, plant, and equipment, andyou’d have no way to raise the neededfunds or attract the human capital you’dneed. But there are, of course, other typesof businesses that require low initial invest-ment. Not surprisingly, these types of com-panies are attractive as small businessopportunities.

INDUSTRIES BY SECTOR

To understand where small businessesare concentrated, we first need to dividebusinesses into two sectors: the goods-producing sector and the service-producingsector. The goods-producing sectorincludes all businesses that produce tangi-ble goods. Companies in this sector includethose involved in manufacturing, con-struction, and agriculture. The service-producing sector includes all businessesthat provide a service but do not make tan-gible goods. These include firms involvedin retail and wholesale trade, transporta-tion, communications, finance, insurance,real estate, and such professional servicesas health care, advertising, accounting, andpersonal services.

About 80 percent of small businesses inthe U.S. are concentrated in the service-producing sector. Of these, about 25 percentare in retailing, 10 percent in wholesaling,and 35 percent in professional and businessservices. The goods-producing sector is hometo only 20 percent of all small businesses.Nearly two-thirds of these are in construc-tion, the other one-third in manufacturing.13

The high concentration of small busi-nesses in the service-producing sectorreflects the makeup of the overall U.S. econ-omy. Over the past 40 years, the service-producing sector has been growing at animpressive rate. In 1960, the goods-producingsector accounted for 38 percent of grossdomestic product, the service-producingsector for 62 percent. By 2000, the goods-producing sector accounted for only 23 per-

After getting A’s in a correspondence course on ice cream making, Ben Cohen andJerry Greenfield (friends since the seventh grade) decided to enter the goods-producing sector by making ice cream. Ben & Jerry’s ice cream factory in Vermontchurns out 190,000 pints of ice cream daily (and lets each worker keep three pints),and enthusiastic employees tour the country giving away free scoops of ice cream.


What Industries Are Small Businesses In? 27

goods-producing sectorAll businesses whose primary purpose is to produce tan-gible goods.

service-producing sectorAll businesses whose primary purpose is to provide aservice rather than make tangible goods.

cent of GDP, while the service-producingsector had grown to 77 percent.14

Goods-Producing SectorThe largest areas of the goods-producing sec-tor are construction and manufacturing.Construction businesses are often started byskilled workers, such as electricians, painters,plumbers, and homebuilders. They tend tobe small and generally work on local projects.Although manufacturing is primarily thedomain of large businesses, there are excep-tions. For example, Jeffrey Berndt started acompany called Reveal Entertainment tomanufacture and distribute board games.The company began with its award-winninggame, Tripoly—a three-dimensional financeand real estate game in which players buyand build cities. The product line nowincludes dozens of board games.15

Service-Producing SectorMany small businesses in this sector areretailers—they buy goods from other firmsand sell them to consumers, either in stores,by phone, through direct mailings, or overthe Internet. Increasingly, entrepreneurs arestarting online ventures. This approach wastaken by Tony Roeder, who had a fascina-tion with the red Radio Flyer wagons thatmany of today’s adults had owned as chil-dren. In 1998, he started an online storethrough Yahoo! to sell red wagons from hishome. In three years, he turned his onlinestore into a million-dollar business.16

Internet entrepreneurship was also attrac-tive to Sean Lundgren and Todd Livdahl—two computer engineers who gave up suc-cessful careers at Disney to turn theirfascination with video games and DVDsinto an online business. To their delight, thesmall start-up venture, which they callSneetch.com, generated sales of $1.2 millionduring its first year of operation.17

Other small business owners in this sec-tor are wholesalers who sell products tobusinesses who buy them for resale or forcompany use. A local bakery is acting as awholesaler when it sells desserts to a restau-rant, which then sells them to its customers.A small business that buys flowers from a

local grower (the manufacturer) and sellsthem to a retail store (the retailer) is anotherexample of a wholesaler.

A high proportion of small businesses inthis sector provide professional, business, orpersonal services. Doctors and dentists arepart of the service industry, as are insuranceagents, accountants, and lawyers. So arebusinesses that provide personal services,such as dry cleaning and hairdressing.

David Marcks, for instance, entered theservice industry 14 years ago when helearned that his border collie enjoyed chas-ing geese at the golf course where heworked. Anyone who’s been on a golfcourse recently recognizes the problems cre-ated by geese. Although they are lovely tolook at, they leave behind an unwelcome lit-ter of droppings. That’s why frustratedcourse managers are happy to hire Marcks’company, Geese Police, to chase the geeseaway using specially trained dogs. Marcksnow has 27 trucks, 32 border collies, and5 offices. Golf courses are now only about5 percent of his business, as his dogs now

Taco Bell is part of the service-producing sector. Each year, close to 150,000 Taco Bell employees serve Mexican-inspired fast food to more than two billionconsumers. Annually, its 6,000 franchise and company-owned restaurants in theUnited States use 3.8 billion corn and flour tortillas, 120 million pounds of lettuce,62 million pounds of pinto beans, 295 million pounds of seasoned ground beef, and106 million pounds of cheese.



ness gives you a chance to make moremoney than if you were employed bysomeone else.

• Lifestyle. Owning a small business givesyou certain lifestyle advantages.Because you’re in charge, you decidewhen and where you want to work. Ifyou want to spend more time on non-work activities or with your family, youdon’t have to ask for the time off. If it’simportant that you be with your familyall day, you might decide to run yourbusiness from your home. Given today’stechnology, it’s relatively easy to do.Moreover, it eliminates commuting time.

• Learning Opportunities. As a businessowner, you’ll be involved in all aspectsof your business. This situation createsnumerous opportunities to gain a thor-ough understanding of the various busi-ness functions.

• Creative Freedom and PersonalSatisfaction. As a business owner,you’ll be able to work in a field that youreally enjoy. You’ll be able to put yourskills and knowledge to use, and you’llget personal satisfaction from imple-menting your ideas, working directlywith customers, and watching yourbusiness succeed.

DISADVANTAGES OF SMALLBUSINESS OWNERSHIP

As the little boy said when he got off his firstroller-coaster ride: “I like the ups but not thedowns!” Here are some of the risks you runif you want to start a small business:

• Financial Risk. The financial resourcesneeded to start and grow a business canbe extensive. You may need to commitmost of your savings or even go into debtto get started. If things don’t go well,your financial loss can be great. In addi-tion, there’s no guaranteed income. Theremight be times, especially in the first fewyears, when the business isn’t generatingenough cash for you to live on.

• Stress. As a business owner, you are thebusiness. There’s a bewildering array ofthings to worry about—competition,employees, bills, equipment break-downs, customer problems. As theowner, you’re also responsible for thewell-being of your employees.

QUICK QUIZ 2.1

Before going to the next section of this chapter, take a fewminutes to test your knowledge of the material covered so far.

Go to www.exploringbusinessonline.com

Transportation, communications,public utilities 4%

Agricultural services 2%

Mining 0.4%

Services 40%

Construction 12%

Finance, insurance,real estate 8%

Wholesale trade 7.4 %

Manufacturing 6%

Retail trade 20%

Figure 2.3

Small Business byIndustry

patrol corporate parks and playgrounds aswell.18

Figure 2.3 provides a more detailedbreakdown of small businesses by industry.

Should You Start a Business?Do you want to be a business owner some-day? Before deciding, you might want toconsider the following advantages and dis-advantages of business ownership.19

ADVANTAGES OF SMALLBUSINESS OWNERSHIP

Being a business owner can be veryrewarding. Having the courage to take arisk and start a venture is part of theAmerican dream. Success brings with itmany advantages:

• Independence. As a business owner,you’re your own boss. You can’t getfired. More importantly, you have thefreedom to make the decisions that arecrucial to your own business success.

• Financial Rewards. In spite of highfinancial risk, running your own busi-


Starting a Business 29

business planFormal document describing a proposed business con-cept, management team, goods or services, competition,product-development process, production methods, andmarketing model, and stating financial projections.

• Time Commitment. People often startbusinesses so that they’ll have moretime to spend with their families.Unfortunately, running a business isextremely time-consuming. Eventhough you have the freedom to taketime off, you might not be able to getaway. In fact, you’ll probably have lessfree time than you’d have working forsomeone else. For many entrepreneursand small business owners, a 40-hourworkweek is a myth; see Figure 2.4.Vacations will be difficult to take andwill often be interrupted. In recentyears, the difficulty of getting awayfrom the job has been compounded bycell phones and e-mail, and many smallbusiness owners have come to regretthat they’re always reachable.

• Undesirable Duties. When you start up,you’ll undoubtedly be responsible foreither doing or overseeing just abouteverything that needs to be done. Youcan get bogged down in detail work thatyou don’t enjoy. As a business owner,you’ll probably have to perform someunpleasant tasks, like firing people.

In spite of these and other disadvantages,most small business owners are pleasedwith their decision to start a business. A sur-vey conducted by the Wall Street Journal andCicco and Associates indicates that smallbusiness owners and top-level corporateexecutives agree overwhelmingly that smallbusiness owners have a more satisfyingbusiness experience. The researchers hadanticipated that the small business ownerswould be happy with their positions, butthey were surprised at the number of corpo-rate executives who believed that the grasswas greener in the world of small businessownership.20

Starting a BusinessStarting a business takes talent, determina-tion, hard work, and persistence. It alsorequires a lot of research and planning.Before starting your business, you should

40–50 hours 18.9%

50–60 hours 36.6 %

1–39 hours 6.7%

60+ hours 37.8%

Figure 2.4

The Entrepreneur’sWork Week

appraise your strengths and weaknesses andassess your personal goals to determine ifbusiness ownership is for you.21

If you’re interested in starting a busi-ness, you need to make decisions, such asthe following:

• What type of business is right for you?Do you want to be a manufacturer, aretailer, or a wholesaler? Do you wantto provide professional or personalservices? Do you want to start a busi-ness that you can operate out of yourhome?

• Do you want to run a business that’ssimilar to many others, or do you wantto innovate—create a new product orapproach to doing business?

• What is your business idea? Is it feasible?

• Do you want to start a new business,buy an existing business, or buy afranchise?

• Do you want to start the business byyourself or with others?

• What form of business organization doyou want? Do you want to own thebusiness yourself, or do you want tohave other owners and operate as apartnership or a corporation?

After making these decisions, you’ll needto take the most important step in theprocess of starting a business. You mustdescribe your future business in the form ofa business plan, which is a document that



identifies the goals of your proposed com-pany and explains how they will beachieved. Think of a business plan as a blue-print for a proposed company: It shows howthe business will be built and how youintend to make sure that it’s sturdy. Yourfinal step before actually starting the busi-ness will be to get financing—the moneyfrom individuals, banks, or both that you’llneed to get started. If you have the neces-sary funds to finance the business, you canskip this last step.

THE BUSINESS IDEA

For some, coming up with a great businessidea is a gratifying adventure. For most, how-ever, it’s a daunting task. The key to comingup with a business idea is giving customerssomething they want—or, more importantly,filling an unmet need. The purpose of startinga business is to satisfy customers—the ulti-mate users of your goods or services. In com-ing up with a business idea, do not ask “Whatdo we want to sell?” but rather “What doesthe customer want to buy?”22

To come up with an innovative businessidea, you need to be creative. The idea itself

can come from various sources. Prior experi-ence accounts for the bulk of new businessideas. Many people generate ideas for indus-tries they’re already working in. Past experi-ence in an industry also increases yourchances of success. Take Sam Walton, the latefounder of Wal-Mart. He began his retailingcareer at J.C. Penney and then became a suc-cessful franchiser of a Ben Franklin five-and-dime store. In 1962, he came up with the ideaof opening large stores with low costs andheavy discounts in rural areas. He foundedhis first Wal-Mart store in 1962, and when hedied 30 years later, his family’s net worthwas $25 billion.23

Industry experience also gave HowardSchultz his breakthrough idea. In 1981,Schultz, a New York executive for a house-wares company, noticed that a small cus-tomer in Seattle, Starbucks Coffee, Tea andSpice, ordered more coffeemaker cone filtersthan Macy’s and a lot of other large cus-tomers. So he flew across the country to findout why. His meeting with the owner-operators of the original Starbucks CoffeeCo., which resulted in his becoming partowner of the company, changed his life andthe life of coffee lovers forever. Schultz’vision for the company far surpassed that ofits other owners. While they wantedStarbucks to remain small and local, Schultzsaw potential for a national business that notonly sold world-class quality coffee beans,but offered customers a European coffee-barexperience. After trying unsuccessfully toconvince his partners to try his experiment,Schultz left Starbucks and started his ownchain of coffee bars, which he called IlGiornale (after an Italian newspaper). Twoyears later, he bought out the original own-ers and reclaimed the name “Starbucks.”24

Other people come up with businessideas because of hobbies or personal inter-ests. This was the case with Nike founderPhil Knight, who was an avid runner. Hewas convinced that it was possible to makehigh-quality track shoes that cost less thanthe European shoes then dominating themarket. His track experience, coupled withhis knowledge of business (Knight holds anMBA from Stanford and worked as anaccountant), inspired him to start Nike.From a young age, Michael Dell wasobsessed with taking computers apart andputting them back together again, and itwas this personal interest that led to hisgreat business idea. At college, instead of

Dean Kamen has notrouble coming up withgreat business ideas.While an undergradu-ate, he invented thefirst wearable infusionpump to deliver pre-cise dosages of med-ications. He is well-known for two of hispeople-moving inven-tions. One, called theIndependence iBOTMobility System, is astair-climbing wheel-chair. The other, theSegway HumanTransporter, is a self-balancing personaltransportationmachine.


Starting a Business 31

franchiseForm of business ownership in which a franchiser (aseller) grants a franchisee (a buyer) the right to use abrand name and to sell its products or services.

might inherit employees that you wouldn’thave hired yourself. Finally, what if theprevious owners set up a competing busi-ness that draws away their former—andyour current—customers?

Getting a FranchiseLastly, you can buy a franchise. Under thisset up, a franchiser (the company that sellsthe franchise) grants the franchisee (thebuyer) the right to use a brand name andto sell its goods or services. Franchises areused to market products in a variety ofindustries, including food, retail, hotels,travel, real estate, business services, clean-ing services, and even weight-loss centersand wedding services. There are thou-sands of franchises, many of which arequite familiar—SUBWAY®, McDonald’s,7-Eleven, Holiday Inn, Budget Rent-A-Car,Radio Shack, and Jiffy Lube.

As you can see from Figure 2.5, franchis-ing has become an extremely popular wayto do business. A new franchise outlet opensonce every 8 minutes in the United States,where 1 of 12 businesses is now a franchise.Franchises employ 8 million people andaccount for 40 percent of all retail sales inthis country.25

In addition to the right to use a com-pany’s brand name and sell its products, thefranchisee gets help in picking a location,starting and operating the business, and

attending classes, he spent his time assem-bling computers and, eventually, foundedDell Computers.

250

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1980 1983 1988 1993 1998 2003 2004

In 1980, franchisers had grosstotal revenues of $350 billion; now it’s over

$1 trillion a year.

Figure 2.5

The Growth ofFranchising, 1980–2004

ABOUT NIKE 2.1

Before you begin your study of small business options and the prepa-ration of a business plan, here’s a chance to read about how Nike wasstarted and how it survived during its early years.


OWNERSHIP OPTIONS

As we have already seen, you can become asmall business owner in one of three ways:by starting a new business, buying an exist-ing business, or obtaining a franchise. Eachhas its advantages and disadvantages.

Starting from ScratchThe most common—and the riskiest—option is starting from scratch. Thisapproach lets you start with a clean slateand allows you to build the business theway you want. You select the goods or ser-vices to be offered, the location, and all youremployees, and it’s up to you to develop acustomer base and build a reputation.

Buying an Existing BusinessIf you decide to buy an existing business,some things will be easier. You will alreadyhave a proven product, customers, suppli-ers, a known location, and trained employ-ees. It will also be much easier to predict thefuture success of the business. But this route,of course, comes with its own disadvan-tages. First, it’s hard to determine how muchyou should pay for a business. You can eas-ily determine how much things like build-ings and equipment are worth, but howmuch should you pay for the fact that thebusiness has steady customers?

In addition, a business, like a used car,might have problems of which you are notaware. Perhaps the current owners havedisappointed customers; maybe the loca-tion isn’t as good as it used to be. You



advertising. In effect, you’ve bought aprepackaged, ready-to-go business that’sproven successful elsewhere. You also getongoing support from the franchiser, whichhas a vested interest in your success.

All these advantages don’t come cheaply.Franchises can be very expensive, usuallydepending on the amount of business that alocation is expected to do. For example,some McDonald’s franchises require an ini-tial investment of $500,000 to $1.6 million.This fee includes the cost of the property,equipment, training, start-up costs, and thefranchise fee—a one-time charge for the rightto operate as a McDonald’s. A KFC outlet isin the same price range. Subways are moreaffordable, with expected initial investmentsranging from $70,000 to $220,000. If youdon’t want to deal in food, you might wantto buy a dating service. The Right One fran-chises go for an initial investment of $100,000to $250,000, depending on location.26

In addition to your initial investment,you’ll have to pay two other fees on a monthlybasis—a royalty fee (typically from 3 to 12 per-cent of sales) for continued support from thefranchiser and the right to keep using thecompany’s trade name and an advertising fee tocover your share of national and regionaladvertising. You’ll also be expected to buyyour products from the franchiser.27

Why do would-be business owners likefranchises? For one thing, buying a franchiselets you start up in a fairly safe environ-ment, with a proven model for running acompany and an ongoing support team. Youcan profit from name recognition withouthaving to develop your own image in themarketplace, and you can be your own boss(as long as you comply with the standardsset by the franchiser).

But there are disadvantages. The cost ofobtaining and running a franchise can behigh, and you have to play by the fran-chiser’s rules, even when you disagree withthem. Finally, franchisers don’t always keeptheir promises. What do you do if promisedadvertising doesn’t materialize? As with anybusiness venture, you need to do yourhomework before investing in a franchise.

The Business PlanIf you’re starting a business, it’s essentialthat you prepare a business plan. It shouldtell the story of your business concept, spec-

ify the qualifications of your managementteam, describe your legal form of businessownership, explain the goods or servicesthat you intend to sell, identify your cus-tomers and competitors, describe your prod-uct development and production methodsand marketing activities, and state your pro-jected profit and borrowing needs.

The business plan is a blueprint for thecompany, and it’s an indispensable tool inattracting investors and/or obtaining loans.Remember: The value of your business planis not limited to the planning stages of yourbusiness and the process of finding start-upmoney. Once you’ve acquired start-up capi-tal, don’t just stuff your plan in a drawer.Treat it as an ongoing guide to your busi-ness and a yardstick by which you can mea-sure your performance. Keep it handy,update it periodically, and use it to assessyour progress.

Preparing a business plan takes a lot oftime, but it’s time well spent. A businessplan forces you to think critically about yourproposed business and reduces your risk offailure. It forces you to analyze your busi-ness concept and the industry in whichyou’ll be operating, and it helps you deter-mine how you can gain a percentage of salesin that industry. In developing and writing abusiness plan, you have to make strategicdecisions in the areas of management,staffing, production, marketing, andfinance—in all the functional areas of busi-ness that we described in Chapter 1.

The most common use of a business planis persuading investors and/or lenders toprovide financing. These two groups lookfor different things. Investors are particu-larly interested in the quality of the businessconcept and the ability of management tomake the venture successful. Bankers areprimarily concerned with the company’sability to generate cash to repay loans. Topersuade investors and lenders to supportyour business, you need a professional,well-written business plan that paints a clearpicture of your proposed business.

SECTIONS OF THE BUSINESSPLAN

Although formats can vary, a business plangenerally includes the following sections:executive summary, description of proposedbusiness, industry analysis, mission state-ment, management plan, goods and/or ser-


The Business Plan 33

executive summaryOverview emphasizing the key points of a business planin order to get the reader excited about the prospects ofthe business.

mission statementStatement describing an organization’s purpose ormission—its reason for existence—and telling stake-holders what the organization is committed to doing.

core valuesStatement of fundamental beliefs describing what isappropriate and important in conducting organizationalactivities and providing a guide for the behavior of orga-nization members.

vices, development and production, market-ing, global issues, and financial plan. Let’sexplore each of these sections in turn.

Executive SummaryThe executive summary is a one- to three-page overview of the business plan. It’sactually the most important part of the busi-ness plan: It’s what the reader looks at first,and if it doesn’t capture the reader’s atten-tion, it might be the only thing that he orshe looks at. It should therefore emphasizethe key points of the plan and get the readerexcited about the prospects of the business.

Even though the executive summary is thefirst thing read, it’s written after the other sec-tions of the plan are completed. An effectiveapproach in writing the executive summaryis to paraphrase key sentences from each sec-tion of the business plan. This process willensure that the key information of each sec-tion is included in the executive summary.

Description of Proposed BusinessHere, you present a brief description of thecompany and answer the following questions:

• What will your proposed company do?Will it be a manufacturer, a retailer, or aservice provider?

• What goods or services will it provide?

• Why are your goods or services unique?

• Who will be your main customers?

• How will your goods or services be sold?

• Where will your business be located?

Because later parts of the plan will pro-vide more detailed discussions of many ofthese issues, this section needs to provideonly an overview of these topics.

Industry AnalysisThis section provides a brief introduction tothe industry in which you propose to operate.It describes both the current situation in theindustry as well as future possibilities andaddresses such questions as the following:

• Who are the players in the industry?

• What is the outlook for the industry?

• What are the total projected sales for theindustry? Is it growing or shrinking?

• What factors will influence futureexpansion or contraction?

• How will predicted future economicconditions affect the industry?

Mission Statement and Core ValuesThis portion of the business plan states thecompany’s mission statement and core values.The mission statement describes the pur-pose or mission of your organization—itsreason for existence. It tells the reader whatthe organization is committed to doing. Themission statement can be concise, like theone from Merck Pharmaceutical: “To pre-serve and improve human life.” Or, it can bemore detailed, like the one from SouthwestAirlines: “The mission of Southwest Airlinesis dedication to the highest quality of cus-tomer service delivered with a sense ofwarmth, friendliness, individual pride, andcompany spirit.”

Core values are fundamental beliefsabout what is and is not appropriate andwhat is important in conducting companyactivities. Core values are not about profitsbut rather about ideals. They will helpguide the behavior of individuals in theorganization. For example, Coca-Colareports that its core values—honesty,integrity, diversity, quality, respect,responsibility, and accountability—helpemployees know what behaviors areacceptable.

Management PlanIt isn’t enough just to have a good businessidea: You need a talented management teamthat can turn your concept into a profitableventure. The management plan section pro-vides information about the qualifications ofeach member of the management team. Itspurpose is to convince the reader that thecompany will be run by well-qualified, expe-rienced managers. It describes each individ-ual’s education, experience, and expertise, aswell as each person’s responsibilities. Thissection also specifies the proposed legal



form of the organization: sole proprietorship(personal ownership), partnership (owner-ship shared with one or more partners), orcorporation (ownership through shares ofstock).

Goods and/or ServicesTo succeed in attracting investors andlenders, you must be able to describe yourgoods or services clearly (and enthusiasti-cally). Here, you describe all the goods andservices that you will provide the market-place. This section explains why your pro-posed offerings are better than those ofcompetitors and indicates what marketneeds will be met by your goods or services.It addresses a key question: Whatcompetitive advantage will the company haveover similar goods or services now on themarket?

Development and ProductionThis section indicates how you plan toobtain or make your products. Naturally,the write-up will vary depending onwhether you’re proposing a service com-pany, a retailer, or a manufacturer. If it’s aservice company, describe the process ofproviding services. If it’s a retail company,tell the reader where you will purchaseproducts for resale.

If you’re going to be a manufacturer, youmust furnish information on productdesign, development, and productionprocess. You must address questions likethe following:

• How will products be designed?

• What technology will be needed todesign and manufacture products?

• Will the company run its own produc-tion facilities, or will its products bemanufactured by someone else?

• Where will production facilities belocated?

• What type of equipment will be used?

• What are the design and layout of thefacilities?

• How many workers will be employed inthe production process?

• How many units will be produced?

• How will the company ensure thatproducts are of high quality?

MarketingThis critical section focuses on four market-ing-related areas—target market, pricing,distribution, and promotion:

1. Target Market. Describe future cus-tomers and provide a profile of thembased on age, gender, income, interests,and so forth. If your company will sellto other companies, describe your typi-cal business customer.

2. Pricing. State the proposed price foreach product. Compare your pricingstrategy to that of competitors.

3. Distribution. Explain how your goodsor services will be distributed to cus-tomers. Indicate whether they will besold directly to customers or throughretail outlets.

4. Promotion. Identify a promotion strat-egy, indicating what types of advertis-ing you’ll be using.

Global IssuesIndicate whether you’ll be involved in inter-national markets, either by buying or sellingin other countries. If you’re going to operateacross borders, identify the challenges you’llface in your global environment and explainhow you’ll overcome them. If you don’tplan initially to be involved in internationalmarkets, state what strategies, if any, you’lluse to move into international markets at alater date.

Financial PlanIn preparing the financial section of yourbusiness plan, specify the company’s cashneeds and explain how you’ll be able torepay debt. This information is vital inobtaining financing. It presents financialprojections, including expected sales, costs,and profits (or losses). It refers to a set offinancial statements included in an appen-dix to the business plan. It reports theamount of cash needed by the company forstart-up and initial operations and pro-vides an overview of proposed fundingsources.

AppendicesHere you furnish supplemental informationthat may be of interest to the reader. Forexample, you might attach the résumés of


How to Succeed in Managing a Business 35

your management team and a set of finan-cial statements.

and make a strong personal commit-ment to your business.

• Get Adequate Funding. It takes a lot ofmoney to start a business and guide itthrough the start-up phase (which canlast for over a year). You can have themost brilliant idea in the world, thebest marketing approach, and a tal-ented management team, but if you runout of cash, your career as a businessowner could be very brief. Plan for thelong term and work with lenders andinvestors to ensure that you’ll have suf-ficient funds to get open, stay openduring the start-up phase, and, ulti-mately, expand.

• Manage Your Money Effectively. As abusiness owner, you’ll be under constantpressure to come up with the money tomeet payroll and pay your other bills.That’s why you need to pay attention tocash flow—money coming in and moneygoing out. You need to control costs andto collect money that’s owed you, andgenerally, you need to know how togather the financial information that youneed to run your business.

• Manage Your Time Efficiently. A newbusiness owner can expect to work 60hours a week. If you want to grow abusiness and have some type of non-work life at the same time, you’ll needto give up some control—to let otherstake over some of the work. Thus, youmust develop time-management skillsand learn how to delegate responsibility.

• Know How to Manage People. Hiring,keeping, and managing good people arecrucial to business success. As your busi-ness grows, you’ll depend more on youremployees. You need to develop a posi-tive working relationship with them,train them properly, and motivate themto provide quality goods or services.

• Satisfy Your Customers. You mightattract customers through impressiveadvertising campaigns, but you’ll keepthem only by providing quality goods orservices. Commit yourself to satisfy-ing—or even exceeding—customerneeds.

• Know How to Compete. Find yourniche in the marketplace, keep an eye onyour competitors, and be prepared to

QUICK QUIZ 2.2

Before reading the next section on how to succeed in managing abusiness, take a moment to test your understanding of how tostart a business and write a business plan.


How to Succeed inManaging a BusinessBeing successful as a business ownerrequires more than coming up with a bril-liant idea and working hard. You need tolearn how to manage and grow your busi-ness. As an owner, you’ll face numerouschallenges, a number of which have beenidentified through focus groups of businessowners.28 Your ability to meet challengeslike those discussed next will be a major fac-tor in your success (or failure) as a businessowner.

• Know Your Business. It seems obvious,but it’s worth stating: Successful busi-nesspeople know what they’re doing.They’re knowledgeable about the indus-try in which they operate (both as itstands today and where it’s headed inthe future), and they know who theircompetitors are. They know how toattract customers and who the best sup-pliers and distributors are, and theyunderstand the impact of technology ontheir business.

• Know the Basics of BusinessManagement. You might be able to start abusiness on the basis of a great idea, butto manage it, you need to understand thefunctional areas of business—accounting,finance, management, marketing, pro-duction. You need to be a salesperson aswell as a decision maker and planner.

• Have the Proper Attitude. When youown a business, you are the business. Ifyou’re going to devote the time andenergy needed to transform an ideainto a successful business, you need tohave a passion for your work. Youshould believe in what you’re doing



react to changes in the marketplace. Thehistory of business (and much of life)can be summed up in three words:“Adapt or perish.”

money guaranteed by the program has risenconsiderably in the last 30 years.30

The SBA also offers management andtechnical-services training. This assistance is available through a number of channels,including the SBA’s extensive Web site,online courses, and training programs. A fullarray of individualized services is also avail-able through SBA programs. The SmallBusiness Development Center (SBDC)31

assists current and prospective small busi-ness owners with business problems andprovides free training and technical informa-tion on all aspects of small business manage-ment. These services are available at approxi-mately 1,000 locations around the country,many housed at colleges and universities.

If you need individualized advice fromexperienced executives, you can get itthrough the Service Corps of RetiredExecutives (SCORE).32 Under the SCOREprogram, a businessperson needing adviceis matched with a team of retired executiveswho work on a volunteer basis. Together,the SBDC and SCORE help more than900,000 small businesspersons every year.

WHY DO BUSINESSES FAIL?

By definition, starting a business is risky.Although many businesses succeed, a largeproportion fail. For example, one-third ofsmall businesses that have employees go outof business within the first two years. By thefour-year mark, 55 percent have gone out ofbusiness.33

If you’ve paid any attention to the occu-pancy of shopping malls over a few years,time, you’ve noticed that some retailersclose and new ones open up constantly. Thesame thing happens with restaurants—indeed, with all kinds of small businesses.

There are many and varied reasons whybusinesses fail, but many experts agreethat the vast majority of failures resultsfrom some combination of the followingproblems:

• Bad Business Idea. If you got the idea ofselling snowblowers in Hawaii, youwouldn’t have much competition, butyou’d still be doomed to failure.

• Cash Problems. Too many new busi-nesses are underfunded. The owner bor-rows enough money to set up the busi-ness but doesn’t have enough extra cashto operate during the start-up phase,

ABOUT NIKE 2.2

Take a few minutes to learn about some of the most notable successesin the history of Nike, as well as some of the crucial challenges that itfaced in a period of sustained growth. We’ll explore both the successesand the challenges in more detail in subsequent chapters.


HELP FROM THE SBA

Small business owners can get a wealth of assistance from the Small BusinessAdministration (SBA). The SBA bills itself as “America’s Small Business Resource”29

because it offers an array of programs tohelp small business owners and prospectivebusiness owners. Services include assistancein developing a business plan, starting abusiness, obtaining financing, and manag-ing an organization.

Through various programs, for example,the SBA is responsible for seeing that smallbusiness owners get more than $60 billion ayear in financing from lenders and investors.Each year, the SBA 7(a) loan guarantee pro-gram helps some 43,000 small businesspeo-ple get loans from private lenders, and asyou can see from Figure 2.6, the amount of

10

12

8

6

4

0

Bill

ions

of

$

2

1976 1978 1980 1982 1984 1986 1988 1990

Year

1992 1994 1996 1998 2000 2002 2004

Between 2002 and 2003, SBA-guaranteed loans to AfricanAmericans increased 61%; loans to Hispanics increased 39%;

loans to women increased by 33%.

Figure 2.6

SBA Loan Guarantees,1976–2004


Where We’re Headed 37

Small Business Development Center (SBDC)SBA program in which centers housed at colleges andother locations provide free training and technical infor-mation to current and prospective small business owners.

Service Corps of Retired Executives (SCORE)SBA program in which a businessperson needing adviceis matched with a team of retired executives working ona volunteer basis.

when very little money is coming in buta lot is being spent.

• Managerial Inexperience or Incompetence.Many new business owners have noexperience in running a business; manyhave limited management skills. Maybean owner knows how to make or marketa product but doesn’t know how to man-age people. Maybe an owner can’t attractand keep talented employees. Maybe anowner has poor leadership skills and isn’twilling to plan ahead.

• Lack of Customer Focus. A major advan-tage of a small business is the ability to provide special attention to cus-tomers. But some small businesses failto seize this advantage. Maybe theowner doesn’t anticipate customers’needs or keep up with changing mar-kets or keep an eye on the customer-focused practices of competitors.

• Inability to Handle Growth. You’d thinkthat a sales increase would be a goodthing. Often it is, but sometimes it can be amajor problem. When a company grows,the owner’s role changes. The ownerneeds to delegate work to others andbuild a business structure that can handlethe increase in volume. Some ownersdon’t make the shift and find themselvesoverwhelmed. Things don’t get done,customers become unhappy, and expan-sion actually damages the company.

This couple has been running a candy store for three years. Because they nowwant to add two full-time employees, they need to know more about calculatingpayroll deductions and filing payroll records. Where can they go to get freeadvice? They could contact the Small Business Development Center (SBDC),which provides free training on all aspects of small business management. If theylog on to the SBDC Web site, they could learn about a video-based course calledBy the Numbers, which helps businesspeople with the basic mathematical issuesthat they face every day.

tance of small businesses to the U.S. econ-omy. You explored issues related to startingand managing a company. Perhaps mostimportantly, you learned about the value ofdeveloping a business plan. You found thata business plan is not only an indispensabletool in planning a business, but is necessaryto obtain financing for your venture. Theremaining chapters of the text will provideyou with the knowledge needed to preparea business plan.

QUICK QUIZ 2.3

Before you leave this chapter, take a moment to test yourunderstanding of the last few sections by giving yourself a final“Quick Quiz.”


Where We’re HeadedThis chapter introduced you to the chal-lenges of starting and growing a business.You gained an understanding of the impor-



Summary of Learning Objectives

1. Define entrepreneurship and identify thereasons some individuals becomeentrepreneurs.

An entrepreneur is someone who identifies a busi-ness opportunity and assumes the risk of creatingand running a business to take advantage of it.Commonly cited reasons for becoming an entrepre-neur are being your own boss, achieving financialindependence, enjoying creative freedom, andusing your skills and knowledge.

2. Describe the importance of smallbusinesses to the U. S. economy andidentify the industries in which smallbusinesses are concentrated.

The Small Business Administration (SBA), a gov-ernment agency that offers an array of programs tohelp prospective business owners, defines a smallbusiness as one that is independently owned andoperated, exerts little influence in its industry, andhas fewer than 500 employees. Small businessesare essential to the U.S. economy because they cre-ate jobs, spark innovation, and provide opportuni-ties for many people, including women andminorities, to achieve financial independence.Small businesses also complement the economicactivity of large organizations by providing themwith components and services and distributingtheir products.

About 80 percent of small businesses in the U.S.are in the service-producing sector. Within this sec-tor, the heaviest concentration of small businessesare in retail and professional and business services.The goods-producing sector is home to only about20 percent of all small businesses, nearly two-thirdsin construction.

3. Explain what it takes to start a businessand summarize the advantages anddisadvantages of business ownership.

Starting a business takes talent, determination, hardwork, and persistence. It also requires a lot ofresearch and planning. Small business ownershipbrings with it a number of advantages, includingindependence, the potential for financial rewards,the possibility of an improved lifestyle, learningopportunities, creative freedom, and personal satis-faction. Small business ownership also comes withsome disadvantages, including financial risk,increased stress, substantial time commitment, andthe necessity of performing some unpleasant tasks,like firing people. It also entails the risk of failure.

4. Evaluate the various small businessownership options—starting a newbusiness, buying an existing business, orobtaining a franchise.

Each of these common options for starting a smallbusiness has advantages and disadvantages. Theriskiest (though most common) choice is startingfrom scratch. Although this approach lets you buildthe business the way you want, you have to doeverything yourself—come up with a product, loca-tion, customer base, and employees—and it’s up toyou to build a reputation. Buying an existing busi-ness is somewhat easier: You already have a provenproduct, a known location, customers, and trainedemployees. On the downside, it’s hard to determinean appropriate price to pay for an existing business.You might also inherit problems that you don’t wantor didn’t count on, such as disappointed customers,employees that you wouldn’t have hired yourself,and competition from the previous owner (whomight set up a similar business at a new location).

The third option, buying a franchise, also hasadvantages and disadvantages. When you buy afranchise, you obtain the right to use a brand nameand to sell the franchiser’s goods or services. You canchoose from products in a variety of industries,including food, retail, travel, and real estate, andyou’re getting a prepackaged, ready-to-go businessthat’s proven successful elsewhere. You get helpfrom the franchiser (the company that sells the fran-chise) in picking a location, starting and operatingthe business, and advertising. As a franchisee, youprofit from the franchiser’s name recognition with-out having to develop your image in the market-place. But all this help does not come cheaply. Bothinitial investment costs and operating costs are high,and you have to play by the franchiser’s rules even ifyou disagree with them. Even though you run yourown business, you’re not entirely your own boss.

5. Discuss the importance of planning for yourbusiness and identify the key sections of abusiness plan.

If you’re interested in starting a business, you needto make a lot of decisions: What type of business isbest for you? What is your business idea? Do youwant to create a new product or approach to doingbusiness or start a business that is similar to others?Do you want to start a new business, buy an existingbusiness, or buy a franchise? What form of businessorganization do you want? Do you want to own thebusiness yourself or share ownership with others?


After making these decisions, you’ll need totake the most important step in the process of start-ing a business: planning for it. You should describeyour future business in the form of a business plan,which is a formal document describing the com-pany that you want to start. The business plan is ablueprint for your company, and it’s an essentialtool in attracting investors and/or obtaining loans.It’s also valuable as an ongoing guide to your busi-ness and a yardstick by which you can measureyour performance. Preparing a business plan takesa lot of time, but it’s worth the effort. It forces youto think critically about your proposed business andreduces your risk of failure.

Although formats vary, a business plan gener-ally includes the following sections: an executivesummary, which describes the proposed businessand analyzes the industry in which it’s going tocompete; a mission statement and statement ofcore values; a management plan; a description ofgoods and/or services; a description of develop-ment and production processes; and marketing andfinancial plans.

6. Discuss ways to succeed in managing abusiness and explain why somebusinesses fail.

As a business owner, you’ll need to be able to man-age and grow your business. It’s a difficult under-

taking, but you increase the likelihood of success ifyou understand the basics of business manage-ment and know your business and its industry;have a positive attitude and believe in what you’redoing; get adequate funding to start and continueoperating your business; manage your moneyeffectively; make efficient use of your time; under-stand how to motivate people and develop positiveworking relationships with your employees; sat-isfy your customers; and know how to compete inthe marketplace.

You can get help in starting and growing a busi-ness from the SBA. The SBA also helps small busi-ness owners obtain financing, and it offers trainingand management assistance through a number ofprograms. The Small Business DevelopmentCenter (SBDC) provides free training and technicalinformation on all aspects of small business man-agement at over 1,000 locations throughout thecountry. For individualized advice from experi-enced executives, business owners can call on theService Corps of Retired Executives (SCORE),which matches business owners with retired execu-tives who volunteer their services.

Despite all the available assistance, the failurerate for small businesses is high. Some of the reasonsfor small business failure include bad business ideas,managerial inexperience or incompetence, lack ofcustomer focus, and inability to handle growth.

Questions and Problems 39

Questions and Problems

1. AACSB � AnalysisDo you have what it takes to be an entrepreneur? Tofind out, review the attributes mentioned in the textthat can be used to characterize entrepreneurs. Next,use the following three-point scale to indicate theextent to which each of the attributes characterizes you:(1) doesn’t sound like me, (2) sounds like me to a cer-tain extent, or (3) sounds a lot like me. Based on yourresponses, do you think that you have the attributes ofan entrepreneur? Do you think you could be a success-ful entrepreneur? Why or why not?

2. AACSB � AnalysisBecause you’re convinced that the best way to get richis to work for yourself, you’re thinking about startingyour own business. You have an idea and $100,000 thatyou just inherited from a great aunt. You even have alocation: Palo Alto, California, which (according to aMay 2004 Forbes magazine article by Betsy Schiffman)is the best place in the United States to get rich. But,there’s a downside: To move to California and startyour own business, you’ll have to drop out of college.

What financial risks should you consider in makingyour decision? What are your chances of succeedingwith your plan? Are you willing to take the financialrisk needed to start a business? Why or why not? Areyou likely to make more money running your ownbusiness than working for someone else?

3. How “small” is a small business? If a substantial por-tion of small businesses in the United States suddenlyclosed, what would be the impact on the U.S. econ-omy? How would all these closings affect workers,consumers, and other businesses?

4. Why are most small businesses found in the service-producing sector? Identify five small service-produc-ing businesses that you patronize frequently. Whatkinds of small businesses are found in the goods-producing sector? What small goods-producing firmsdo you do business with regularly?

5. AACSB � AnalysisFirst, identify five advantages of small-business owner-ship. Next, rank these advantages according to their


importance to you. Why did you rank them as you did?What factors discourage individuals from small-busi-ness ownership? Indicate which of these factors mightdiscourage you from starting a business. Explain why.

6. AACSB � AnalysisIt’s the same old story: You want to start a small busi-ness but don’t have much money. Go to www.prenhall.com/collins to link to the About.com Web siteand read the article, “Business on a Budget.” Identifysome businesses that you can start for $20 or less (that’sright—$20 or less). Select one of these opportunitiesthat interests you. Why did you select this business?Why does the idea interest you? What would you do toensure the business was a success? If you needed assis-tance starting up or operating your business, wherecould you find help, and what type of assistance wouldbe available?

7. AACSB � AnalysisIf business ownership interests you, you can start a newbusiness, buy an existing business, or obtain a franchise.Evaluate the advantages and disadvantages of eachoption. Which option do you find most appealing andwhy? Describe the business you would probably start.

8. Why do some businesses succeed while others fail?Identify three factors that you believe to be the mostcritical to business success. Why did you select thesefactors? Identify three factors that you believe to be pri-marily responsible for business failures, and indicatewhy you selected these factors.

9. AACSB � AnalysisLet’s start with three givens: (1) college students lovechocolate chip cookies, (2) you have a special talent forbaking cookies, and (3) you’re always broke. Giventhese three conditions, you’ve come up with the idea ofstarting an on-campus business—selling chocolate chipcookies to fellow students. As a business major, youwant to start out right by preparing a business plan. Toget started, you identified a number of specifics aboutyour proposed business. Now, you need to put thesevarious pieces of information into the relevant sectionof your business plan. Using the business plan formatdescribed in this chapter, indicate the section of thebusiness plan into which you’d put each of the follow-ing pieces of information:

a. You’ll bake the cookies in the kitchen of a friend’sapartment.

b. You’ll charge $1 each or $10 a dozen.

c. Your purpose is to make the best cookies on campusand deliver them fresh. You value integrity, consid-eration of others, and quality.

d. Each cookie will have 10 chocolate chips and willbe superior to those sold in nearby bakeries andother stores.

e. You expect sales of $6,000 for the first year.

f. Chocolate chip cookies are irresistible to college stu-dents. There’s a lot of competition from local bak-eries, but your cookies will be superior and popularwith college students. You’ll make them close tocampus using only fresh ingredients and sell themfor $1 each. Your management team is excellent.You’ll market your product by placing ads in theschool paper. You expect first-year sales of $6,000and net income of $1,500. You estimate start-upcosts at $600.

g. You’ll place ads for your product in the collegenewspaper.

h. You’ll hire a vice president at a salary of $100 aweek.

i. You can ship cookies anywhere in the United Statesand in Canada.

j. You need $600 in cash to start the business.

k. There are six bakeries within walking distance ofthe college.

l. You’ll bake nothing but cookies and sell them to col-lege students. You’ll make them in an apartmentnear campus and deliver them fresh.

10. AACSB � AnalysisHow would you like to spend your summer collectingtrash in a used pickup? Doesn’t sound very appealing,does it? Would you quit college to do it full time?Probably not. But that’s exactly what Brian Scudamoredid. And he got very rich doing it. His summer jobturned into the company known as 1-800-GOT-JUNK,one of the fastest-growing franchises in the United Statesand Canada. Go to www.exploringbusinessonline.comto link to the 1-800-GOT-JUNK Web site and learn moreabout the company. After looking at the site, answer thefollowing questions:

a. What is the company’s business model? What doesit do? Where does it do it?

b. Are you the kind of person the company wants toattract as a franchise partner?

c. How much would it cost you to buy a franchise?How much total capital would you need?

d. What kinds of support and services would youreceive from the company?

e. Assuming that you had enough money, would youbuy a franchise? Why or why not?

As a reward for working hard, take a break andclick on the Junk Genie icon on the Web site’s homepage. Can you figure out the trick? Pass it along toyour friends.



Ethics Angle 41

Learning on the Web AACSB

Would You Like to Own a Sub Shop?How would you like to own your own sandwich shop? Youcould start one on your own or buy one that’s already inbusiness, but an easier way might be buying a franchisefrom Subway, the largest fast food franchise in the world(even bigger than McDonald’s). Subway began in 1965when 17-year-old Fred DeLuca opened a tiny sandwichshop in Bridgeport, Connecticut, hoping to put himselfthrough college. As it turns out, his venture did much morethan that. By 1974, DeLuca was franchising his businessconcept, and today, there are more than 15,000 Subwayfranchisees in more than 75 countries.

Go to www.exploringbusinessonline.com to link to theSubway Web site and learn more about franchise opportu-

nities with the company. After reviewing the informationprovided on the company’s Web site, answer the followingquestions:

1. What do you have to do to get a Subway franchise?

2. How much would it cost to open a Subway shop?

3. What training and support would you receive fromSubway?

4. What advantages do you see in buying a Subway fran-chise rather than starting a business from scratch?What disadvantages do you see?

Career Opportunities

Do You Want to Be an Entrepreneur?Want to learn what it’s like to be an entrepreneur? To help youdecide if life as an entrepreneur might be for you, go towww.exploringbusinessonline.com to link to the WetFeet Website and review the entrepreneur profiles. Select two entrepre-neurs who interest you and for each, do the following:

1. Describe the company that he or she founded.

2. Explain the reasons why he or she became an entrepreneur.

3. Explain what qualities and/or background preparedthe individual to start a business.

After reading the interviews with these two entrepre-neurs, answer the following questions:

1. What aspects of being an entrepreneur are particu-larly rewarding?

2. What’s the downside of being an entrepreneur?

3. What challenges do entrepreneurs face?

4. Is entrepreneurship for you? Why or why not?

Ethics Angle AACSB

Term Papers for SaleYou and some fellow classmates are sitting around over pizzaone night when someone comes up with an idea for a busi-ness. All of you have old term papers and essays lying around,and a couple of you know how to set up a Web page. What ifyou combine these two assets and start a business selling termpapers over the Internet? Over time, you could collect or buyadditional inventory from other students, and since some ofyou are good at research and others are good writers, youcould even offer “clients” the option of customized papersresearched and written just for them. You figure that you cancharge $15 for an “off-the-rack” paper, and for customizedjobs, $10 per double-spaced page seems reasonable.

You all agree that the idea is promising, and you and apartner volunteer to put together a business plan. You haveno difficulty with the section describing your proposed busi-ness: You know what your business will do, what productsit will offer, who your customers will be, how your productswill be sold, and where you’ll be located. So far, so good.

Let’s pause at this point to consider the followingquestions:

1. Does selling term papers over the Internet make busi-ness sense? Is it a good business idea?

2. Could the venture be profitable?

Let’s continue and find out how the business planproceeds.

Now, you’re ready for your section on industry analy-sis. The first question you need to answer is: Who are theplayers in the industry? To get some answers, you goonline, log on to Google, and enter the search term “termpapers for sale.” Much to your surprise, up pop dozens oflinks to companies that have beaten you to market. The firstcompany you investigate claims that it has 250,000 papersin stock, plus a team of graduate students on hand to writepapers for anyone needing specialized work.



There’s also a statement that says, “Our term papersand essays are designed only to help students prepare theirown work. Students using our term papers and essays areresponsible for writing their own papers, and our workshould be cited by these students.”

But back to your business plan. You realize that you’refacing not only stiff competition but an issue which, so far,you and your partners have preferred to ignore: Is this anethical business that you have in mind? It occurs to you thatyou could probably find the answer to this question in atleast 1 of the 8,484 term papers on ethics available on yourcompetitor’s Web site, but you decide that it would be moreefficient to give the question some thoughts of your own.

Let’s pause again to state the question that you’re goingto ask yourself:

1. Is the sole purpose of running a business to make aprofit, or do you need to be concerned about what yourproducts will be used for? Explain your reasoning.

2. Do you need to consider the ethics of what other peo-ple do with your product? Explain your reasoning.

When you report on the problem that you’ve uncovered,your would-be partners are pretty discouraged, some by theprospect of competition and some by the nagging ethical issue.Just as you’re about to dissolve the partnership, one personspeaks up: “How about selling software that lets faculty searchto see if students have plagiarized material on the Web?”

“Sorry,” says someone else. “It’s already out there. Twostudents at Berkeley have software that compares papers toa hundred million Web pages.”

Team-Building Skills AACSB

Knowing how to be an effective team member is a vital life-time skill. It will help you in your academic career, in thebusiness world, and in non-work activities. It takes timeand effort to learn how to work in a team. Part of the chal-lenge is learning how to adjust your behavior to the needsof the group. Another part is learning how to motivatemembers of a group. A well-functioning team allows mem-bers to combine knowledge and skills, and this reliance ondiverse backgrounds and strengths often results in teamdecisions that are superior to those made by individualsworking alone.

1. Are You a Team Player?As a first step, you should do a self-assessment to evalu-ate whether you possess characteristics that will help yoube a successful team member. You can do this by taking a“Team Player” quiz available at the career Web site on

Monster.com. Go to www.exploringbusinessonline.comto link to this site. You’ll get feedback that helps you iden-tify the characteristics you need to work on if you want toimprove your teamwork skills.

2. Working Together as a TeamThe best approach to specifying appropriate behaviorfor team members is to have the team come up withsome ground rules. Get together with three other stu-dents selected by your instructor and establish workingguidelines for your team. Prepare a team report inwhich you identify the following:

a. Five things that team members can do to increasethe likelihood of group success.

b. Five things that team members can do to jeopardizegroup success.

The Global View AACSB

Global Versions of MySpace.comWhen Chris DeWolfe and Tom Anderson foundedMySpace.com in July 2003, they had no idea that they wereheaded for an overnight success. Well, almost overnight.Two and one-half years after their entrepreneurial venturehad been launched, MySpace.com had nearly 50 millionusers in the United States, where 1 out of every 10 adsviewed on the Internet was seen on the site. Its popularitycaught the attention of news and entertainment mogulRupert Murdoch, whose News Corporation dished out$580 million for MySpace.com while allowing its foundersto stay on as CEO and president.

What’s ahead for MySpace.com? Can its businessmodel be exported outside the United States? Murdochthinks so; he immediately launched a British version of the site. If you were in charge of global expansion for MySpace.com, what country would you enter next?What country would you avoid? To identify promis-

ing and not-so-promising foreign markets, go to www.exploringbusinessonline.com to link to the Country Pro-files Web site maintained by BBC News. Study the eco-nomic and political profiles of possible candidates andanswer the following questions:

1. Why do you think MySpace.com has been so successfulin the United States? Cite some examples of the chal-lenges that it faces.

2. If you were in charge of global expansion atMySpace.com, which country would you enter next?Why do you think the MySpace.com business conceptwill succeed in this country? What challenges will thecompany face?

3. What country would you avoid? Why is it incompati-ble with the MySpace.com business concept?


Business Plan Project 43

Business Plan ProjectGroup Report: Your Great Business Idea

INITIAL REPORTThe selection of a business idea is the most important choicethat your team will make in this course. Give it somethought, and make your choice carefully. If you need somefurther advice or guidance on coming up with a great busi-ness idea (and most students do), go to Appendix A at theback of this book, entitled “Introducing Your BusinessPlan,” and consult the section headed “Type of Company.”The team should submit a written report identifying itsgreat business idea and explaining its choice. The reportshould be about two double-spaced typed pages. The nameof your proposed business and the names of all team mem-bers should appear on the report.

REASONABLE CONTRIBUTIONSAll members of the team who make a reasonable contribu-tion to the report should sign it. If any team member doesnot work on the report, his or her name should not appearon it. If a student who has made a contribution is unable tosign the report (because of sickness or some other valid rea-son), the team can sign his/her name. To indicate that aname was signed by the team on a member’s behalf, be sureto attach a note to the signature.


Documents

Collins CH02