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FERRELL | HIRT | FERRELL

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

PART 2

• CHAPTER 4 Options for Organizing Business

• CHAPTER 5 Small Business, Entrepreneurship, and Franchising

5-2

Entrepreneurship

The process of creating and managing a business to achieved desired objectives

5-3

What is Small Business?

“Smallness” is relative

Small business is any independently owned and operated business, not dominant in its competitive area

Employs less than 500 people

5-4

Impact of Small Businesses

5-5

Small Businesses Represent

64% of new net jobs, annually, created in the last 15 years

99.7% of all businesses employ fewer than 500 people

89% of businesses employ fewer than 19 people

5-6

Small Business Innovation

Small businesses represent 55% of all innovations Airplane

Audio tape recorder

Double-knit fabric

Fiber-optic examining equipment

Heart valve

Optical scanner

Personal computer

Soft contact lenses

Zipper … and much more

5-7

Traits of Successful Entrepreneurs

5-8

Popular Industries for Small Business

Especially attractive industries to entrepreneurs:

Retailing and wholesaling

Services

Manufacturing

High technology

5-9

Retailing and Wholesaling

Selling directly to consumers

Music stores

Sporting-goods shops

Dry cleaners

Boutiques

Drugstores

Restaurants

Hardware stores

5-10

Services and Manufacturing

Services Service sector is 80% of U.S. jobs

Attracts individuals whose skills are not required by large firms

Manufacturing Small manufacturers excel at customization

The Malcolm Baldridge National Quality Award rewards innovative small manufacturing firms

5-11

High Technology

Businesses that depend heavily on advanced scientific and engineering knowledge.

40% of high-tech jobs are with small businesses

The government offers small business grants for high-tech companies

5-12

Small Business Ownership

Advantages Disadvantages

Independence High stress level

Costs High failure rate50% of all new businesses fail within the first 5 years

Flexibility Undercapitalization

Lack of funds to operate normally

Focus Managerial inexperience or incompetence

Reputation Inability to cope with growth

5-13

Starting a Business

Start with a concept or general idea

Create a business plan

Devise a strategy to guide planning & development

Make decisions•Form of ownership

•Financing

•Acquire existing business or start new business?

•Buy a franchise

5-14

The Business Plan

A precise statement of the rationale for the business and a step-by-step explanation of how it will achieve its goals. Acts as a guide and reference document.

Explanation of the business

Analysis of competition

Income/Expense estimates

5-15

Forms of Business Ownership

Sole ProprietorshipPartnershipCorporation

5-16

Financial Resources

Provide your own personal capital

Cash money

Obtain capital

Financing options

Loans

Stocks

Equity financing

5-17

Equity Financing

Selling or borrowing against the value of an asset such as an (automobile, insurance policy, savings account) to obtain funds to operate a business

5-18

Venture Capitalists

Persons/organizations that agree to provide funding for a new business in exchange for an ownership interest or stock. Usually requires a sharing of ownership/control

5-19

Debt Financing

Borrowing financial resources typically from a bank or lending institution– often collateral is needed

5-20

Line of Credit

An agreement by which a financial institution promises to lend a business a predetermined sum on demand

5-21

Starting from Scratch vs. Buying an Existing Business

Starting from scratch can be expensive and will require a lot of promotional efforts to familiarize customers with the business

Existing businesses have the advantage of a built-in network of customers, suppliers and distributors

Reduces guesswork

Involves taking on any problems the business already had

5-22

Franchising

A license to sell another’s products or to use another’s name in business, or both

Franchiser The company that sells a franchise

Franchisee The purchaser of a franchise

5-23

Franchises

Advantages Disadvantages

Training & support Fees and profit sharing

Brand name appeal Standardized operations

National advertising Restrictions on purchasing

Financial assistance Limited product line

Proven products Possible market saturation

Greater chance for success Less freedom in decisions

5-24

Help for Small Business Managers

Organizations and programs exist to help small businesses

Small Business AdministrationSmall Business Development Centers

Service Corps of Retired Executives

Active Corps of Executives

Small Business Institutes

U.S. and Local Departments of Commerce

Other small businesses

5-25

The Future for Small Business

Demographic Trends The Baby Boomers

Generation Y (Millennials)

Immigrants and shifting demographics

…continued on next page5-26

The Future for Small Business

Technological & Economic Trends Internet usage continues to increase

Increase in service exports

Economic turbulence

Deregulation of the energy market & alternative fuels

5-27

Big Businesses Acting Small

Common Approaches

Large firms emulate smaller ones to improve bottom line

Downsizing (Rightsizing)

•Acting small from inception – Southwest Airlines

Intrapreneurs

• Individuals in large firms who take responsibility for the development of innovations within the organization

5-28