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Understanding Business, 6/e
William G. Nickels
James M. McHugh
Susan M. McHugh
Chapter 6: Entrepreneurship and Starting a Small Business
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The PROFILE at the beginning of this chapter is "Getting to Know Andy Wilson of BOSTON DUCK TOURS." ANDY WILSON has built a unique small business, water-based touring, into a successful enterprise.

  1. THE AGE OF THE ENTREPRENEUR.
    1. One poll of college seniors showed that 51% of the men and 31% of the women were attracted to STARTING THEIR OWN BUSINESSES rather than joining a corporationPower Point Presentation.
    2. Of the 5.6 million Americans going into business in 1996, almost a third were 30 or younger.
    3. Colleges are responding by offering more courses on the subject of entrepreneurship.
    4. An ENTREPRENEUR is an innovator who assumes the risks of starting and managing a businessPower Point Presentation.
  2. THE JOB-CREATING POWER OF ENTREPRENEURS IN THE UNITED STATES.
    1. One of the major issues in the U.S. today is the need to CREATE MORE JOBS.
    2. You can get some idea about the JOB CREATING POWER of entrepreneurs when you look at some of the great American entrepreneurs from the past and the present.Concept Check CONCEPT CHECK
    3. The text lists a number of examples including past entrepreneurs George Eastman of Kodak and Henry Ford of Ford Motor Company and contemporary entrepreneurs Steve Jobs, Michael Dell, and Ted Turner.
  3. WHY PEOPLE TAKE THE ENTREPRENEURIAL CHALLENGE.

    4. Explain why people are willing to take the risks of entrepreneurship; list the attributes of successful entrepreneurs; describe the benefits of entrepreneurial teams and intrapreneurs; and explain the growth of home-based and web-based businesses.

    1. Reasons why people are WILLING TO TAKE THE RISKS of business ownership include:
      1. OPPORTUNITY to share in the American dream.
      2. PROFIT.
      3. INDEPENDENCEPower Point Presentation.
        1. Many entrepreneurs do not enjoy working for someone else.
        2. Some have found more self-satisfaction in starting their own businesses.
      4. CHALLENGE.
        1. Some believe that entrepreneurs are excitement junkies who flourish on taking risks.
        2. Many contend that entrepreneurs take moderate, calculated risks.
        3. In general, entrepreneurs seek achievement more than power.
    2. WHAT DOES IT TAKE TO BE AN ENTREPRENEUR?
      1. The list of ENTREPRENEURIAL ATTRIBUTES includes:
        1. SELF-DIRECTED and SELF-DISCIPLINED.
        2. SELF-NURTURING, believing in your own ideas.
        3. ACTION-ORIENTED, a desire to build the dram into reality.
        4. HIGHLY ENERGETIC.
        5. TOLERANT OF UNCERTAINTY.
      2. More entrepreneurs don’t get the ideas for their products and services from some FLASH of inspiration—often the source of innovation is more like a FLASHLIGHT.
      3. An entrepreneurial test to determine if you have the entrepreneurial spirit is provided at the end of the chapter.
    3. ENTREPRENEURIAL TEAMS.
      1. An ENTREPRENEURIAL TEAM is a group of experienced people from different areas of business who join together to form a managerial team with the skills needed to develop, make, and market a new product.
      2. This gives the company the COMBINATION OF SKILLS need to get the new company off to a great start.
      3. The text uses the example of Compaq Computers.
    4. MICROPRENEURSConcept Check CONCEPT CHECK AND HOME-BASED BUSINESSES.
      1. Some business owners are MICROPRENEURS, owners interested in simply enjoying a better lifestyle and doing what they want.
      2. While entrepreneurs are committed to the quest for growth, micropreneurs can be happy with little expansion.
      3. Many micropreneurs are HOME-BASED BUSINESS OWNERS, nearly half in SERVICE INDUSTRIES.
      4. Many are owned by people who are trying to combine career and family.
      5. Other reasons for the growth of home-based businesses include:
        1. Computer technology has leveled the competitive playing field.
        2. Corporate downsizing has eroded job security.
        3. Social attitudes have changed to encourage home-based businesses.
        4. New tax laws have loosened the restrictions regarding deductions for home offices.
      6. Major challenges facing home-based businesses include:
        1. Getting new customers.
        2. Managing time.
        3. Keeping work and family tasks separate.
        4. Abiding by city ordinances.
        5. Managing risk.
      7. Home office entrepreneurs should focus on:
        1. Finding opportunity instead of accepting security.
        2. Getting results instead of following routines.
        3. Earning a profit instead of earning a paycheck.
        4. Trying new ideas instead of avoiding mistakes.
        5. Creating a long-term vision instead of seeking a short-term payoff.
    5. WEB-BASED BUSINESSESPower Point Presentation
      1. The web has sprouted a world of new small home-based businesses.
      2. By 2003 over 4 million small businesses will be using the Internet.
      3. There are numerous sites that help entrepreneurs set up online stores.
      4. Web-based businesses are not failure-proof.
    6. ENTREPRENEURSHIP WITHIN FIRMS.
      1. INTRAPRENEURS are creative people who work as entrepreneurs within corporations. Key Term
      2. By using company’s existing resources—human, financial, and physical, they launch new products and generate new profits.
      3. Examples in the text focus on 3M, Hewlett-Packard, and Lockheed Martin Corp.
  4. ENCOURAGING ENTREPRENEURSHIP—WHAT GOVERNMENT CAN DOPower Point Presentation.
    1. The government passed the IMMIGRATION ACT OF 1990 to encourage more entrepreneurs to come to the United States.
      1. It created a category of "INVESTOR VISAS" that allows 10,000 people to come to the United States each year if they invest $1 million in an enterprise that creates or preserves 10 jobs.
      2. Some believe that the more entrepreneurs that can be lured to the U.S., the more jobs will be created.
    2. One way to encourage entrepreneurship is through ENTERPRISE ZONES that feature low taxes and government support.
      1. The government could encourage entrepreneurship by offering investment TAX CREDITS to businesses that invest in creating jobs.
      2. The government could also institute a plan of public investment to REBUILD THE NATIONAL’S INFRASTRUCTURE.
    3. STATES ALSO PROVIDE SUPPORT FOR ENTREPRENEURS.
      1. State commerce departments serve as clearinghouses for these programs.
      2. States also create incubators and technology centers to reduce startup capital needs.
      3. INCUBATORS provide LOW-COST OFFICES with BASIC BUSINESS SERVICES such as accounting, legal advice and secretarial help. Key Term
      4. Incubators help companies survive because they provide assistance in the crucial early development stage.
  5. GETTING STARTED IN SMALL BUSINESS.

    6. Discuss the importance of small business to the American economy and summarize the major causes of small-business failure.

    1. The purpose of this part of the chapter is to explore small businesses, their role in the economy, and how they are started and managed.Concept Check CONCEPT CHECK
      1. You will learn that, in general, the same principles apply to both small and large companies.
      2. All organizations demand capital, good ideas, planning, information management, budgets, accounting, marketing, employee relations, and good overall management.
    2. SMALL VERSUS BIG BUSINESS.
      1. SMALL BUSINESS is defined by the SBA as A BUSINESS THAT IS:
        1. INDEPENDENTLY OWNED AND OPERATED.
        2. NOT DOMINANT IN ITS FIELD OF OPERATION.
        3. MEETS CERTAIN STANDARDS IN TERMS OF EMPLOYEES OR ANNUAL RECEIPTS (for example, less than $2 million a year for service companies).
      2. Small businesses account for over 40% OF THE GROSS DOMESTIC PRODUCT.
      3. The first jobs of about 80% of all Americans are in small business.
      4. The number of women owning small businesses has increased rapidly.
    3. IMPORTANCE OF SMALL BUSINESS.
      1. Seventy-five percent of the NATION’S NEW JOBS are in small businesses.
      2. ADVANTAGES SMALL BUSINESSES HAVE over big companies are their more personal customer service and their ability to respond quickly to opportunities.
      3. Big businesses don’t serve all the needs of the market—there is plenty of room for small businesses in niches.
    4. SMALL-BUSINESS SUCCESS AND FAILURE.
      1. FAILURE RATE.
        1. There is some debate about how many new small businesses fail each year.
        2. Conventional wisdom says that four out of five businesses (80%) fail in their first five years.
        3. Yet the SBA reports a 62% death rate within six years.
        4. However, a recent study by economist Bruce Kirchhoff shows that the failure rate is only 18% over the first eight years.
        5. It now seems that business failures are much lower than traditionally reported.
      2. Still nearly one out of five businesses that fails is left owing money to creditors.
      3. Many small businesses fail because of MANAGERIAL INCOMPETENCE and INADEQUATE FINANCIAL PLANNING.
      4. Choosing the RIGHT TYPE OF BUSINESS is critical to success.
        1. Many businesses with the lowest failure rates require advanced training to start.
        2. In general it seems that the easiest businesses to start are the ones that tend to have the least growth and the greatest failure rate.
        3. Technology-minded entrepreneurs often have the best shot at attracting start-up capital.
  6. LEARNING ABOUT SMALL-BUSINESS OPERATIONS.Power Point Presentation

    7. Summarize ways to learn about how small businesses operate.

    1. LEARN FROM OTHERS.
      1. Investigate local community colleges for small business classes.
      2. Talk to others who have already done it.
      3. Entrepreneurs will tell you than location is critical as is keeping good records and hiring a good accountant and lawyer before starting.
    2. GET SOME EXPERIENCE.
      1. Go to work for others and learn all you can.
      2. Forty-two percent of small-business owners got the idea for their business from their prior jobs.
      3. The general rule is: 3 years of experience in a comparable business.
      4. Many new entrepreneurs come from corporate management.
      5. Another way of gaining experience is running a small business part-time.
    3. TAKE OVER A SUCCESSFUL FIRM.
      1. After many years, some small business owners feel stuck in their businesses.
      2. The text describes a method of becoming successful small business managers.
        1. The first step is to find a businessperson running a successful small business.
        2. For another year or so, work hard to learn all about the business.
        3. At the end of two years, offer to become assistant manager.
        4. At the end of two years, offer to manage the business when the owner retires.
        5. You can establish a profit-sharing plan for yourself plus a salary.
        6. The owner benefits by keeping ownership and earning profits without working.
      3. If profit sharing doesn’t appeal to the owner, you may want to buy the business outright.
  7. MANAGING A SMALL BUSINESS.

    8. Analyze what it takes to start and run a small business.

    1. Ninety percent of all failures are a result of "POOR MANAGEMENT."
      1. This could mean poor planning, poor record keeping, poor inventory control, poor promotion, or poor employee relations.
      2. It could likely include poor capitalization.
      3. This section explores the major functions of business as they pertain to small business:
        1. PLANNING your business.
        2. FINANCING your business.
        3. KNOWING your customers (marketing.)
        4. MANAGING your employees (human resource development.)
        5. KEEPING RECORDS (accounting).
    2. BEGIN WITH PLANNINGConcept Check CONCEPT CHECK .
      1. A BUSINESS PLAN is a detailed written statement that describes the nature of the business, the target market, the advantages the business will have in relation to competition, and the resources and qualifications of the owner(s).
      2. A business plan forces potential small-business owners to be specific about the products and services they intend to offer.
      3. A business plan is mandatory for talking with bankers or other investors.
      4. Michael Celello, president of the People’s Commercial Bank, says that fewer than 10% of prospective borrowers come to a bank adequately prepared and offers several tips.
    3. WRITING A BUSINESS PLAN.
      1. A good business plan takes a long time to write.
      2. One of the most important parts of the business plan is the executive summary, which has to catch the reader’s interest.
      3. There are computer software programs now to help you get organized.
      4. Getting the completed business plan in the right hands is almost as important as getting the right information in.
      5. The time and effort invested before starting a business will pay off later.
    4. GETTING MONEY TO FUND A SMALL BUSINESSPower Point Presentation.
      1. New entrepreneurs have several SOURCES OF CAPITAL: personal savings, relatives, former employers, banks, finance companies, venture capital organizations, government agencies, and more.
      2. Potential suppliers may also be a funding source.
      3. Technology-minded entrepreneurs often have the best shot at attracting start-up capital.
      4. Other than personal savings, individual investors are the primary source of capital for most entrepreneurs.
      5. VENTURE CAPITALISTS may ask for a hefty stake (as much as 60%) in your company in exchange for the cash to start your business.
      6. According to the SBA, venture capitalists fund fewer than 2,000 ventures per year, so very small companies have less chance.
      7. These smaller companies have a better chance finding an angel investor.
      8. The Small Business Administration publishes a list of venture capitalists.
    5. THE SMALL BUSINESS ADMINISTRATION (SBA)
      1. The Small Business Administration is a valuable source of expertise on starting a new business.
      2. The SBA’s MICROLOAN PROGRAM awards loans on the basis of belief in the borrowers’ integrity and the soundness of their business idea.
      3. You may also want to consider requesting funds from SMALL BUSINESS INVESTMENT COMPANIES (SBICS). SBICs are private investment companies which the Small Business Administration licenses to lend money to small businesses.
      4. SMALL BUSINESS DEVELOPMENT CENTERS (SBDCs), funded jointly by the federal government and individual states, can help evaluate the feasibility of your idea, develop your business plan, and complete your funding application.
      5. The text gives several ways to contact the SBA.
      6. Obtaining money from banks, venture capitalists, and government sources is very difficult for most small businesses.
    6. KNOWING YOUR CUSTOMERS.
      1. A MARKET consists of people with: (1) unsatisfied WANTS AND NEEDS, (2) with the RESOURCES, and (3) the WILLINGNESS to buy.
      2. The goal of a businessperson is to FIND A NEED AND FILL IT.
      3. In order to fill these needs, one must FIRST IDENTIFY the WANTS AND NEEDS of potential customers.
      4. You will gain more insights about markets in Chapters 13 and 14.
    7. MANAGING EMPLOYEESConcept Check CONCEPT CHECK .
      1. It is not easy to FIND, HIRE, TRAIN, AND KEEP GOOD EMPLOYEES.
        1. Small businesses offer less money, fewer benefits, and less room for advancement than larger firms do.
        2. Nonetheless, employees of small companies are often MORE SATISFIED WITH THEIR JOBS than their counterparts in large companies.
        3. They find their jobs are MORE CHALLENGING, their ideas are MORE ACCEPTED, and their BOSSES TREAT THEM WITH MORE RESPECT.
      2. As the business grows, it becomes necessary to DELEGATE AUTHORITY.
        1. This is touchy especially in businesses with employees who have been with the company since its start.
        2. These long-term employees may not have the necessary managerial skills.
      3. Attitudes such as you "Can’t fire family" or you must promote someone because "They’re family" can hinder growth.
      4. You’ll learn more about managing employees in Chapters 7 through 12.
    8. KEEPING RECORDS.
      1. A businessperson who sets up an ACCOUNTING SYSTEM early will save much grief later.
      2. COMPUTERS make record keeping easier and let the business owner follow the progress of the business.
      3. A good accountant is invaluable in setting up record keeping systems and providing tax planning, financial forecasting, and choosing sources of financing.
      4. You will learn more about accounting in Chapter 18 focuses on accounting.
    9. LOOKING FOR HELP.
      1. Small businesspeople NEED HELP setting up their businesses early in the process.
      2. A necessary aide is a competent, experienced LAWYER who knows and understands small businesses.
      3. A MARKETING RESEARCH STUDY can help with marketing decisions.
      4. Your business will benefit from a presence on the Internet.
      5. Two other valuable experts are a commercial loan officer and an insurance agent.
      6. The SERVICE CORPS OF RETIRED EXECUTIVES (SCORE) consists of 13,000 volunteers who provide consulting services for small businesses free.
      7. The SBA also sponsors the ACTIVE CORPS OF EXECUTIVES (ACE), volunteers who counsel small businesses.
      8. Local college business professors may also advise small business owners for a fee.
  8. GOING INTERNATIONAL: SMALL-BUSINESS PROSPECTS

    9. Outline the advantages and disadvantages of small businesses entering global markets.

    1. The WORLD MARKET is potentially more lucrative market for small businesses that the U.S. alonePower Point Presentation.
      1. However, most small businesses still do not think internationally.
      2. Only 20% of small businesses executives say they export.
    2. Many potential international businesspeople DO NOT enter the global market BECAUSE:
      1. FINANCING IS OFTEN DIFFICULT to find.
      2. They DON’T KNOW HOW to get started.
      3. They DON’T UNDERSTAND THE CULTURAL DIFFERENCES of potential markets.
      4. The BUREAUCRATIC PAPERWORK can be overwhelming.
    3. There are many good REASONS FOR SMALL BUSINESS PEOPLE TO CONSIDER GOING INTERNATIONAL:
      1. MOST OF THE WORLD’S MARKET lies OUTSIDE THE U.S.
      2. Exporting can ABSORB EXCESS INVENTORY.
      3. It can SOFTEN DOWNTURNS IN THE U.S. MARKET.
      4. It can EXTEND THE LIFE OF PRODUCTS.
    4. Small businesses have several ADVANTAGES OVER LARGE BUSINESSES:
      1. Overseas buyers enjoy dealing with individuals rather than with large corporate bureaucracies.
      2. Small companies can usually begin shipping much faster.
      3. Small companies provide a wide variety of suppliers.
      4. Small companies can give more personal service and more attention.
    5. SOURCES OF INFORMATION about international business can be obtained from the Commerce Department and the SBA.
      6.




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