Unit 1 Test PowerPoints

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Chapter One

Exploring the World of Business and Economics


The Organized Effort of Individuals

Combining Resources


The Relationship Between Sales Revenue and Profit

• Profit is what remains after all business expenses have been deducted from sales revenue. A loss (negative profit) results when a firm’s expenses are greater than its revenues.


Business Profit

• The purposes of profit– To reward business owners for producing goods

and services consumers want– As payment for business owners assuming the

risks of ownership• Stakeholders

– All of the different people or groups or people who are affected by the policies and decisions made by an organization


Economic Systems (cont’d)

• Factors of production– Land and natural

resources– Labor– Capital– Entrepreneurship

• Entrepreneur– A person who risks time, effort, and money

to start and operate a business


Economic Systems (cont’d)

• Differences in economic systems – How they answer the four basic economic questions

• What goods and services will be produced?• How will they be produced?• For whom will they be produced?• Who owns and controls the major factors of

production?


Types of Economic Systems

• Capitalism– An economic system in which individuals own and

operate the majority of businesses that provide goods and services

– Derived from Adam Smith’s laissez-faire capitalism in which a society’s best interests are served by individuals pursuing their own self-interest• Creation of wealth is the concern of private individuals• Resources used to create wealth must be privately

owned• Economic freedom ensures the existence of a free

market economy– Businesses and individuals decide what to produce and

buy; the market determines quantities sold and prices• Limited role of government


Types of Economic Systems (cont’d)

• Capitalism in the United States– Mixed economy with elements of capitalism and

socialism– Households

• Consumers of goods and services• Resource owners of some factors of production

– Businesses• Produce goods and services to exchange for revenues

(money)• Use revenues to purchase factors of production

– Governments• In exchange for taxes, governments provide public

services that would not be provided by business or would be produced only for those who could afford them


The Circular Flow in Our Mixed Economy


Types of Economies (cont’d)

• Command economies– Economic systems in which the government

decides what will be produced, how it will be produced, who gets what is produced, and who owns and controls the major factors of production

– Socialism• Key industries (e.g., transportation, utilities, and banking)

are owned and controlled by the government• Small-scale private businesses may be permitted and

workers may choose their own occupations• Production is based on national goals, and distribution is

controlled by the state• Intent is the equitable distribution of income, elimination

of poverty, social services to all who need them, elimination of the economic waste of capitalistic competition


Types of Economies (cont’d)

• Command economies (cont’d)– Communism

• All factors of production are owned and controlled by the government as proxy for ownership by all citizens

• Production is based on centralized state planning to meet the needs of the state and not necessarily the needs of its citizens

• The state dictates occupational choices and sets prices and wages

• Intent is to create Karl Marx’s concept of a classless society where all contribute according to their ability and receive benefits according to their needs.


Measuring Economic Performance

• Productivity– The average level of output per worker per

hour• Economic indicators

– Gross domestic product (GDP)• The total value of all goods and services

produced by all people within the boundaries of a country during a one-year period

– Inflation• A general rise in the level of prices


The Business Cycle

• The recurrence of periods of growth and recession in a nation’s economic activity– Recession

• Two consecutive three-month periods of decline in a country’s gross domestic product

– Depression• A severe recession that lasts longer than a

recession– Monetary policies

• Federal Reserve decisions that determine the size of the supply of money in the nation and the level of interest rates


The Business Cycle (cont’d)

• Fiscal policy– Government influence on the amount of

savings and expenditures; accomplished by altering the tax structure and by changing the levels of government spending

• Federal deficit– A shortfall created when the federal

government spends more in a fiscal year than it receives

• National debt– The total of all federal deficits


Types of Competition

• Rivalry among businesses for sales to potential customers

• Perfect (or pure) competition– The market situation in which there are many

buyers and sellers of a product, and no single buyer or seller is powerful enough to affect the price of that product• Supply: The quantity of a product that producers are

willing to sell at each of various prices• Demand: The quantity of a product that buyers are

willing to purchase at each of various prices• Market Price (Equilibrium): The price at which the

quantity demanded is exactly equal to the quantity supplied


Types of Competition (cont’d)

• Monopolistic competition– A market situation where there are many

buyers along with a relatively larger number of sellers who differentiate their products from the products of competitors

– Product differentiation• The process of developing and promoting

differences between one’s products and all similar products



• Oligopoly– A market situation (or industry) in which there are few

sellers• E.g., automobile manufacturers, car rental agencies, and farm

implement industries– Sizable investments are required to enter into the

market– Each seller has considerable control over price– The market actions of one seller can have a strong

effect on competitors



• Monopoly– A market (or industry) with only one seller– Natural monopoly

• An industry requiring huge investments in capital and within which duplication of facilities would be wasteful and thus not in the public interest

– Legal monopoly (limited monopoly)• A monopoly created when the federal

government issues a copyright, patent, or trademark protecting the owners of written materials, ideas, or product brands from unauthorized use by competitors


Chapter Two

Being Ethical and Socially Responsible

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Business Ethics Defined

• Ethics– The study of right and wrong and of the

morality of the choices individuals make– An ethical decision is one that is “right”

according to some standard of behavior• Business ethics

– The application of moral standards to business situations


Ethical Issues

• Fairness and honesty– Businesspeople are expected to refrain from knowingly

deceiving, misrepresenting, or intimidating others• Organizational relationships

– A businessperson should put the welfare of others and that of the organization above their own personal welfare

• Conflict of interest– Issues arise when a businessperson takes advantage

of a situation for personal gain rather than for the employer’s interest

• Communications– Business communications that are false, misleading, or

deceptive are both illegal and unethical


Factors Affecting Ethical Behavior

• Three general sets of factors appear to influence the standards of behavior in an organization– Individual factors

• Individual knowledge of an issue• Personal values• Personal goals

– Social factors• Cultural norms• Coworkers• Significant others• Use of the Internet

– Opportunity• Presence of opportunity• Ethical codes• Enforcement


Guidelines for Making Ethical Decisions

1. Listen and learn. Recognize the problem or opportunity; be sure you understand others.

2. Identify the ethical issues.

Examine how others are affected by the situation; understand the viewpoint of those involved in the decision or its consequences.

3. Create and analyze options.

Put aside strong feelings; come up with alternatives; assess which options offer the best results.

4. Identify the best option from your point of view.

Consider the option and test it against criteria such as respect, understanding, caring, fairness, honesty, and openness.

5. Explain your decision and resolve any differences that arise.

May involve arbitration or additional proposals.


Social Responsibility

• The recognition that business activities have an impact on society and the consideration of that impact in business decision making– Social responsibility costs money but is also good

business– How socially responsible a firm acts may affect the

decisions of customers to do or continue to do business with the firm.


Two Views of Social Responsibility

• Economic model– The view that society will benefit most when business

is left alone to produce and market profitable products that society needs

– Managerial attitude: social responsibility is someone else’s job; the firm’s primary responsibility is to make a profit for its shareholders

– Firms are assumed to fulfill their social responsibility indirectly by paying the taxes that are used to meet the needs of society

– Social responsibility is the problem of government, environmental groups, and charitable foundations


Two Views of Social Responsibility (cont’d)

• Socioeconomic model– The concept that business should

emphasize not only profits but also the impact of its decisions on society

– The corporation is a creation of society and it must act as any responsible citizen would

– Firms take pride in their social responsibility obligations

– It is in the best interest of firms to take the initiative in social responsibility matters


The Pros and Cons of Social Responsibility

Arguments for increased social responsibility:1) Because business is part of our society, it

cannot ignore social issues.2) Business has the technical, financial, and

managerial resources needed to tackle today’s complex social issues.

3) By helping resolve social issues, business can create a more stable environment for long-term profitability.

4) Socially responsible decision making by firms can prevent increased government intervention, which would force businesses to do what they fail to do voluntarily.


The Pros and Cons of Social Responsibility (cont’d)

Arguments against increased social responsibility1) Business managers are primarily responsible to

stockholders, so management must be concerned with providing a return on owners’ investments.

2) Corporate time, money, and talent should be used to maximize profits, not to solve society’s problems.

3) Social problems affect society in general, so individual businesses should not be expected to solve these problems.

4) Social issues are the responsibility of government officials who are elected for that purpose and who are accountable to the voters for their decisions.


Consumerism (cont’d)

The Six Basic Rights of ConsumersConsumer Rights

The Right to Safety The products consumers purchase must be safe for their intended use, must include thorough and explicit directions for proper use, and must be tested by the manufacturer for product quality and reliability.

The Right to Be Informed Consumers must have access to complete information about a product before they buy it.

The Right to Choose Consumers must have a choice of products, offered by different manufacturers and sellers, to satisfy a particular need.

The Right to Be Heard Someone must be available who will listen and take appropriate action when customers complain.

The Right to Consumer Education People are entitled to be fully informed about their rights as consumers.

The Right to Courteous Service Consumers are entitled to convenience, courtesy, and respon-siveness from manufacturers and sellers.


Concern for the Environment

• Pollution– The contamination of water, air, or land through the

actions of people in an industrialized society• Environmental Protection Agency (EPA)

– The federal agency charged with enforcing laws affecting the environment

• Safeguarding the environment requires– Environmental legislation– Voluntary compliance– EPA enforcement actions


Concern for the Environment (cont’d)

• Water pollution– Water quality has improved in recent years, but

high levels of toxic pollutants are still found in some waters

– Pollutants threaten the health of both people and wildlife

– Cleanup is complicated and costly because of runoff and toxic contamination

– Acid rain from sulfur emissions of industrial smokestacks is contributing to the deterioration of coastal waters, lakes, and marine life



• Air pollution– Aviation emissions of carbon dioxide

in the upper atmosphere are contributing to global warming

– Carbon monoxide and hydrocarbons emitted by motor vehicles and smoke and other pollutants emitted by manufacturing plants can be partially eliminated through pollution-control devices

– Weather and geography can contribute to air pollution



• Land pollution– Fundamental issues are how to restore damaged or

contaminated land and how to protect unpolluted land from future damage

– Problem is worsening because technology produces chemical and radioactive waste

– There is a shortage of landfill space for waste disposal– Incinerators help solve the landfill shortage problem,

but they produce toxic ash– Other causes of land pollution include strip-mining,

nonselective cutting of forests, development of agriculture land for housing and industry

– The EPA has been criticized for its handling of the $1.6 billion Superfund created in 1980 by Congress



• Noise pollution– Excessive noise can do physical harm– Ways to reduce noise levels

• Isolating the source of the noise• Modifying machinery and equipment

– If noise cannot be reduced, workers can be protected by wearing noise-reduction gear

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Chapter Three

Exploring Global

Business


The Basis for International Business

• International business– All business activities that involve exchanges across

national boundaries• Some countries are better equipped than others to

produce particular goods or services– Absolute advantage

• The ability to produce a specific product more efficiently than any other nation

– Comparative advantage• The ability to produce a specific product more efficiently

than any other product• Goods and services are produced more efficiently

when each country specializes in the products for which is has a comparative advantage


The Basis for International Business (cont’d)

• Countries trade when they each have a surplus of the product they specialize in and want a product the other country specializes in

• Exporting– Selling and shipping raw materials or products to

other nations• Importing

– Purchasing raw materials or products in other nations and bringing them into one’s own country


The Basis for International Business (cont’d)

• Balance of trade– The total value of a nation’s exports minus

the total value of its imports over some period of time

• Trade deficit– A negative (unfavorable) balance of trade

—imports exceed exports in value• Balance of payments

– The total flow of money into a country minus the total flow of money out of that country over a period of time


U.S. International Trade in Goods

Source: U.S. Department of Commerce, International Trade Administration, U.S. Bureau of Economic Analysis, http://bea.gov/international/bp_web/simple.cfm?anon=78260&table_id=1&area_id=3, accessed September 18, 2008.


Types of Trade Restrictions

• Import duty (tariff)– A tax levied on a particular foreign product

entering a country• Revenue tariffs are imposed to generate

income for the government• Protective tariffs are imposed to protect a

domestic industry by keeping the prices of imports at or above the price of domestic products

• Dumping– The exportation of large quantities of a

product at a price lower than that of the same product in the home market


Types of Trade Restrictions (cont’d)

• Nontariff barriers– Nontax measures imposed by a government to

favor domestic over foreign suppliers– Import quota—a limit on the amount of a

particular good that may be imported during a given time

– Embargo—a complete halt to trading with a particular nation or in a particular product

– Foreign exchange control—restriction on amount of foreign currency that can be purchased or sold


Types of Trade Restrictions (cont’d)

• Nontariff barriers (cont’d)– Currency devaluation—the reduction of the

value of a nation’s currency relative to the currencies of other nations

– Bureaucratic red tape—a subtle form of trade restriction that imposes unnecessarily burdensome and complex standards and requirements for imported goods

– Cultural attitudes—can impede acceptance of products in foreign countries


Reasons for and Against Trade Restrictions

FOR– To equalize a nation’s

balance of payments– To protect new or weak

industries– To protect national

security– To protect the health of

citizens– To retaliate for another

country’s trade restrictions

– To protect domestic jobs

AGAINST – Higher prices for

consumers– Restriction of consumers’

choices– Misallocation of

international resources– Loss of jobs


Value of U.S. Merchandise Exports and Imports, 2007

Source: U.S. Department of Commerce, International Trade Administration, http://www.census.gov/foreign-trade/statistics/highlights/top/top0712.html, accessed September 22, 2008.


The General Agreement on Tariffs and Trade and the World Trade Organization

• General Agreement on Tariffs and Trade (GATT)– International organization of 153 nations dedicated to

reducing or eliminating tariffs and other trade barriers– Most-favored-nation status (MFN)—Each member of

GATT was to be treated equally by all other members– Kennedy Round, Tokyo Round, Uruguay Round, Doha

Round• World Trade Organization (WTO)

– Created in the Uruguay Round of GATT negotiation as a successor to GATT

– WTO oversees GATT provisions, has judicial powers to meditate trade disputes arising from GATT rules and exerts more binding authority than GATT

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Methods of Entering International Business

• Licensing– A contractual agreement in which one firm permits

another to produce and market its product and use its brand name in return for a royalty or other compensation

– Advantage• It allows expansion into foreign markets with

little or no direct investment– Disadvantages

• The product image may be damaged if standards are not upheld

• The original producer does not gain foreign marketing experience

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Methods of Entering International Business (cont’d)

• Joint ventures– A partnership formed to achieve a specific

goal or to operate for a specific period of time

– Advantages• Immediate market knowledge and access• Reduced risk• Control over the product attributes

– Disadvantages• Complexity of establishing agreements across

national borders• High level of commitment required of all parties

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• Totally owned facilities– Production and marketing facilities in one

or more foreign nations– Advantage

• Direct investment provides complete control over operations

– Disadvantage• Risk is greater than that of a joint venture

– Two forms• Building new facilities in the foreign country• Purchasing an existing firm in the foreign

country


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• Strategic alliances– Partnerships formed to create competitive

advantage on a worldwide basis• Trading companies

– Firm that provide a link between buyers and sellers in different countries

– Take title to products and perform all the activities necessary to move the products from one country to another


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• Countertrade– An international barter transaction– Avoids restrictions on converting domestic

currency to foreign currency• Multinational enterprise

– A firm that operates on a worldwide scale without ties to any specific nation or region



Financing International Business

• The Export-Import Bank of the United States (Eximbank)– An independent agency of the U.S. government whose

function it is to assist in financing the exports of American firms

• Multilateral Development Bank (MDB)– An internationally supported bank that provides loans to

developing countries to help them grow• World Bank, Inter-American Development Bank (IDB),

Asian Development Bank (ADB), African Development Bank (AFDB), European Bank for Reconstruction and Development (EBRD)

• The International Monetary Fund (IMF)– An international bank with 185 member nations that makes

short-term loans to developing countries experiencing balance-of-payment deficits


Chapter Four

Choosing a Form of

Business Ownership


Sole Proprietorships

• A business that is owned (and usually operated) by one person

• The simplest form of business ownership and the easiest to start

• Many large businesses began as a small struggling sole proprietorships

• The most widespread form of business ownership


Relative Percentages of Sole Proprietorships, Partnerships, and Corporations in the U.S.

• Sole proprietorships are most common in retailing, agriculture, and the service industries

Source: U.S. Bureau of the Census, Statistical Abstract of the United States, Washington, D.C., 2008, p. 487 (www.census.gov).


Advantages and Disadvantages of Sole Proprietorships

ADVANTAGES– Ease of start-up and

closure– Pride of ownership– Retention of all profits– Flexibility of being your

own boss– No special

taxes

DISADVANTAGES– Unlimited liability

• A legal concept that holds a business owner personally responsible for all the debts of the business

– Lack of continuity– Lack of money– Limited management

skills– Difficulty in hiring

employees

• A voluntary association of two or more persons to act as co-owners of business for profit

• Less common form of ownership than sole proprietorship or corporation

• No legal limit on the maximum number of partners; most have only 2

• Large accounting, law, and advertising partnerships have multiple partners

• Partnerships are usually a pooling of special talents or the result of a sole proprietor taking on a partner


Partnerships


Types of Partners

• General partner– A person who assumes full or shared responsibility for

operating a business– General partnership: a business co-owned by two or more

general partners who are liable for everything the business does

• Limited partner– A person who contribute capital to a business but has no

management responsibility or liability for losses beyond the amount he or she invested in the partnership

– Limited partnership: a business co-owned by one or more general partners who manage the business and limited partners who invest money in it

– Master limited partnership (MLP): a business partnership that is owned and managed like a corporation but taxed like a partnership


Advantages and Disadvantages of Partnerships

ADVANTAGES – Ease of start-up– Availability of capital and

credit– Personal interest– Combined business skills

and knowledge– Retention of profits – No special taxes

DISADVANTAGES– Unlimited liability– Management

disagreements– Lack of continuity– Frozen investment


Corporations

• An artificial person created by law with most of the legal rights of a real person, including the rights to start and operate a business, to buy or sell property, to borrow money, to sue or be sued, and to enter into binding contracts

• There are 5.6 million corporations in the U.S.• They comprise only 20% of all businesses, but they

account for 83.8 % of sales revenues


Corporate Ownership

• Corporate ownership– Stock

• The shares of ownership of a corporation– Stockholder

• A person who owns a corporation’s stock– Closed corporation

• A corporation whose stock is owned by relatively few people and is not sold to the general public

– Open corporation• A corporation whose stock is bought and sold on

security exchanges and can be purchased by any individual


Forming a Corporation

• Incorporation– The process of forming a corporation

• Most experts recommend consulting a lawyer


Forming a Corporation (cont’d)

• Where to incorporate– Businesses can incorporate in any state they choose– Some states offer fewer restrictions, lower taxes, and

other benefits to attract new firms– Domestic corporation

• A corporation in the state in which it is incorporated– Foreign corporation

• A corporation in any state in which it does business except the one it which it is incorporated

– Alien corporation• A corporation chartered by a foreign government and

conducting business in the U.S.



• Articles of incorporation – A contract between the corporation and the state in

which the state recognizes the formation of the artificial person that is the corporation

– Articles of incorporation includes• Firm’s name and address• Incorporators’ names and addresses• Purpose of the corporation• Maximum amount of stock and types of stock to be

issued• Rights and privileges of stockholders• Length of time the corporation is to exist



• Stockholders’ rights– Common stock

• Stock owned by individuals or firms who may vote on corporate matters but whose claims on profit and assets are subordinate to the claims of others

– Preferred stock• Stock owned by individuals or firms who usually do not

have voting rights but whose claims on dividends are paid before those of common-stock holders

– Dividend• A distribution of earnings to the stockholders of a

corporation– Proxy

• A legal form listing issues to be decided at a stockholders’ meeting and enabling stockholders to transfer their voting rights to some other individual or individuals



• Organizational meeting– The last step in forming a corporation

• The incorporators and original stockholders meet to elect their first board of directors

– Board members are directly responsible to stockholders for how they operate the firm


Corporate Structure

• Board of directors– The top governing body of a corporation,

the members of which are elected by the stockholders

– Responsible for setting corporate goals, developing strategic plans to meet those goals, and the firm’s overall operation

– Outside directors: experienced managers or entrepreneurs from outside the corporation who have specific talents

– Inside directors: top managers from within the corporation


Corporate Structure (cont’d)

• Corporate officers– The chairman of the board, president,

executive vice presidents, corporate secretary, treasurer, and any other top executive appointed by the board

– Implement the chosen strategy and direct the work of the corporation, periodically reporting results to the board and stockholders


Hierarchy of Corporate Structure

• Stockholders exercise a great deal of influence through their right to elect the board of directors


Advantages and Disadvantages of Corporations

ADVANTAGES – Limited liability

• Each owner’s financial liability is limited to the amount of money that he or she has paid for the corporation’s stock

– Ease of raising capital– Ease of transfer of

ownership– Perpetual life– Specialized management

DISADVANTAGES– Difficulty and expense of

formation– Government regulation

and increased paperwork

– Conflict within the corporation

– Double taxation– Lack of secrecy


Advantages and Disadvantages

• S-corporations– A corporation that is taxed as though it were a

partnership (income is taxed only as the personal income of stockholders)

– Advantages• Avoids double taxation of a corporation• Retains the corporation’s legal benefit of limited liability

– S-corporation criteria• No more than 100 stockholders allowed• Stockholders must be individuals, estates, or exempt

organizations• There can be only one class of outstanding stock• The firm must be a domestic corporation• There can be no nonresident-alien stockholders• All stockholders must agree to the decision to form an S-

corporation


Special Types of Business Ownership


Special Types of Business Ownership (cont’d)

• Limited-liability company (LLC)– A form of business ownership that provides

limited-liability protection and is taxed like a partnership

– Advantages• Avoids double taxation of a corporation• Retains the corporation’s legal benefit of limited

liability• Provides more management flexibility

– Difference between LLC and S-corporation• LLCs not restricted to 100 stockholders• LLCs have fewer restrictions on who can be a

stockholder


Advantages and Disadvantages



• Government-owned corporations– A corporation owned and operated by a local,

state, or federal government– Purpose

• To ensure that a public service is available– Examples

• Tennessee Valley Authority (TVA), the National Aeronautics and Space Administration (NASA), and the Federal Deposit Insurance Corporation (FDIC)



• Not-for-profit corporations– Corporations organized to provide social,

educational, religious, or other services, rather than to earn a profit

– Charities, museums, private schools, and colleges are organized as not-for-profits primarily to ensure limited liability


Cooperatives, Joint Ventures, Syndicates

• Cooperatives– Associations of individuals or firms whose

purpose is to perform some business function for its members

– Members benefit from the efficiencies of the cooperatives’ activities, such as reducing unit costs by making bulk purchases and coordinating services such as transportation, processing, and marketing products


Cooperatives, Joint Ventures, Syndicates (cont’d)

• Joint ventures– Agreements between two or more groups to form a

business entity in order to achieve a specific goal or to operate for a specific period of time

– Example: Wal-Mart and India’s Bharti Enterprises• Syndicates

– Temporary associations of individuals or firms organized to perform a specific task that requires a large amount of capital

– Most commonly used to underwrite large insurance policies, loans, and investments


Corporate Growth

• Growth from within– Introducing new products– Entering new markets

• Growth through mergers and acquisitions– Merger: the purchase of one corporation by another;

essentially the same as an acquisition– Hostile takeover: a situation in which the management

and board of directors of the firm targeted for acquisition disapprove of the merger

– Tender offer: an offer to purchase the stock of a firm targeted for acquisition at a price just high enough to tempt stockholders to sell their shares

– Proxy fight: a technique used to gather enough stockholder votes to control the targeted company


Three Types of Growth by Merger


Chapter Five

Small Business, Entrepreneurship,

and Franchises


Small Business: A Profile

• A business that is independently owned and operated for profit and is not dominant in its field

• SBA “smallness” guidelines– Manufacturing—500 employees– Wholesale trade—100 employees– Agriculture—$750,000 – Retail trade—$6.5 million– General and heavy construction—$31 million– Dredging—$18.5 million– Special trade construction—$13 million– Travel agencies—$3.5 million (commissions & other income)– Business and personal services—$6.5 million

• Architectural, engineering, surveying, etc.—$4.5 million• Dry cleaning, carpet cleaning—$4.5 million


Small Business: A Profile (cont’d)

• Small-business sector– There are about 27.2 million businesses in the U.S.– Just over 17,000 employ more than 500 workers– In the last decade, the number of small businesses

increased 49 percent– Part-time entrepreneurs have increase fivefold and account

for one-third of all small businesses– Two-thirds of new businesses survive at least two years, 44

percent survive at least four years, and 31 percent survive at least seven years

– The primary reason for these failures is due to poor management stemming from a lack of business know-how

– Small businesses provide over 50% of the jobs in the U.S.


Industry Group-Size Standards

Source: http://www.sba.gov/services/contractingopportunities/sizestandardstopics/summarywhatis/, accessed October 3, 2008.


The People in Small Businesses: The Entrepreneurs

• Why people go into business for themselves– The “entrepreneurial spirit”– The desire for independence– The desire to determine one’s own destiny– The willingness to find and accept a challenge– Personal background– Age– “Had enough” of working for someone else– High-tech opportunities, especially for teens– Losing a job and deciding to start a business– An idea for a new product– An opportunity presents itself


How Old Is the Average Entrepreneur?

Source: Data developed from and provided by the National Federation of Independent Business Foundation and sponsored by the American Express Travel Related Services Company, Inc.


Why Some Entrepreneurs and Small Businesses Fail

• Lack of capital and cash-flow problems• Lack of management skills• Overexpansion


The Importance of Small Businesses in Our Economy

• Providing technological innovation– Innovation among small-business workers is

higher than among workers in large businesses– Small firms produce 2.5 times as many

innovations as large firms relative to the number of persons employed

– More than half of the major technological advances of the 20th century originated with individual inventors and small businesses

– Inventions may spark new industries or contribute to established industries


The Importance of Small Business in Our Economy (cont’d)

• Providing employment– Small firms hire a larger proportion of

younger workers, older workers, women, and part-time workers

– Small businesses provide 67% of workers with their first job and initial job skills

– Small businesses represent 99.7% of all employers and employ about 50% of the private work force

– Small businesses provide 2/3 of the net new jobs added to the economy


The Importance of Small Business in Our Economy (cont’d)

• Providing competition– Small firms can compete with large firms,

forcing the larger firm to become more efficient and responsive to customer needs

• Filling needs of society and other businesses– Small firms can meet the special needs of

smaller groups of customers– Small firms can act as specialized suppliers

of goods and services to larger businesses


The Pro and Cons of Smallness

ADVANTAGES• Personal relationships with

customers and employees• Ability to adapt to change• Simplified recordkeeping• Independence• Advantages of sole

proprietorships– Keeping all profits– Ease and low cost of

going into business– Keeping business

information secret

DISADVANTAGES• Risk of failure• Limited potential• Limited ability to raise

capital


Sources of Capital for Entrepreneurs

Source: Data developed from and provided by the National Federation of Independent Business Foundation and sponsored by the American Express Travel Related Services Company, Inc.


Developing a Business Plan

• Business plan—A carefully constructed guide for the person starting a business

• Three basic purposes – Communication– Management– Planning

• Accuracy and realistic expectations are crucial


The Small Business Administration

• A governmental agency that assists, counsels, and protects the interests of small business in the U.S.

• SBA management assistance

– Management courses and workshops

– Service Core of Retired Executives (SCORE)– Help for minority-owned small businesses– Small-business institutes– Small-business development centers– SBA publications


The Small Business Administration (cont’d)

• SBA financial assistance– Regular business loans

• Loans are made by private banks but are partially guaranteed by the SBA

– Small-business investment companies• Venture capital: money invested in small firms

that have the potential to become very successful

• Small business investment companies: privately owned firms that provide venture capital to small enterprises that meet their investment standards


Franchising

• Franchise– A license to operate an individually owned

business as though it were part of a chain of outlets or stores

• Franchising– The actual granting of a franchise

• Franchisor– An individual or organization granting the

franchise• Franchisee

– A person or organization purchasing a franchise


Types of Franchises

• A manufacturer authorizes retailers to sell a certain brand-name item

• A producer licenses distributors to sell a product to retailers

• A franchisor supplies brand names, techniques, or services instead of a complete product


Franchising (cont’d)

• Are franchises successful?– The success rate for franchises is higher than

that for other small businesses– 94 percent of franchise owners report that

they are successful– Too rapid expansion, inadequate capital or

management skills, or other problems can cause franchises to fail


Advantages of Franchising

TO THE FRANCHISOR– Fast and well controlled distribution of its products– No need to construct and operate its own outlets– More working capital available for expanded production

and advertising– Franchising agreements maintain product and quality

standards– Motivated work force of franchisees

TO THE FRANCHISEE– Opportunity to start a proven business with limited capital– Guaranteed customers– Franchisor available for advice and guidance– Materials for local promotional campaigns and

participation in national campaigns– Cost savings when purchasing in cooperation with other

franchisees


Disadvantages of Franchising

TO THE FRANCHISOR– Failure of the franchisee to operate franchise properly– Disputes with and lawsuits by franchisees over the terms

of the franchise

TO THE FRANCHISEE– Franchisor retains a large amount of control over the

franchisee’s activities– Franchisor opening competing franchises within the

franchisee’s market