Reading for Class Exercise

SMALL BUSINESS MANAGEMENT & ENTREPRENEURSHIP

Overview

As small businesses are becoming more numerous and important in today’s world, this course begins by examine the unique challenges in owning and managing one of these businesses. This first session will help you decide whether pursuing a career in small business is the right road for you. You will learn about the growing role of small business and some reasons for entering small business and discover the growing opportunities in small firms for everyone—including women, older workers, and minorities.
It is an interesting time to be studying the dynamic role of small business. Such businesses now account for nearly half of all this country’s business activities and create most of the new jobs. Nearly 23 million business enterprises are classified as small, and they generate over one-half of our GNP. Because these concerns are so prevalent and perform such an important function in our economic system, students should benefit from studying the unique challenges involved in owning or managing such a business.
Companies such as Wal-Mart, Sears, McDonald’s, Dell Computer, Intel, and Microsoft were all started as small businesses by then-unknown entrepreneurs such as Sam Walton, Richard Sears, Ray Kroc, Michael Dell, Andrew Grove, and Bill Gates. By capitalizing on their imagination, imitative, courage, dedication, hard work, and—often—luck, they turned an idea into a small struggling business that became a large, successful one. Their success inspires entrepreneurs to open hundreds of thousands of new businesses each year.
While it is difficult to define small business, the chapter presents some considerations in determining whether a business is to be treated as small or not. Also, an effort is made to distinguish between the types of small business concerns, namely those that are small Mother and Father operations and those that are truly entrepreneurial ventures and can be expected to lead to larger businesses. Some unique contributions of small businesses are then discussed. Finally, some of the limitations of small businesses are presented for the students’ consideration.

Learning Objectives

By the end of this session you should be able to:

• Define what is mean by the term small business.
• Name some of the unique contributions of small businesses.
• Explain some current problems small businesses face.
• Discuss some current trends challenging entrepreneurs and small businesses owners.
• Explain why people start small businesses.
• Describe the characteristics of successful entrepreneurs.
• Describe where the opportunities are for small businesses.
• Identify some of the areas of concern for small business owners

Session Topics

The topics we will cover in this session are:

• Its an interesting time to be studying Small Business
• Defining Small Business
• Some Unique Contributions of Small Business
• Some Current problems Facing Small Business
• Some Current trends Challenging Small Business owners
• Why People Start Small Businesses
• Characteristics of Successful Entrepreneurs
• Summary

Session 1 - Starting Your Small Business

Acknowledgment:

The developer is grateful for the excellent support materials provided by McGraw-Hill Company for the text, Megginson, L.C. Byrd, M.J.  & Megginson, W.L. (2006) Small Business Management: An Entrepreneur’s Guidebook, (5th Ed.) New York. Substantial use has been made of these resources and the Instructors Manual.

Note to students
During this first session you will be introduced to a contemporary overview of the small business landscape. But first and foremost you must understand the road, which you will travel over the next 12 weeks, as you become adept at planning for success in small business.
Course Structure
The following Table 1.1 represents the structure by which the course is constructed. Your major task is to produce a thorough, accurate and convincing Business Plan that will give your business the best start possible. The course has been constructed with this in mind and supports the gradual and sequential production of the Business Plan.
The course developer recommends that you print the following table out in the size A3 and hang it on the wall above your desk. In this way you will always know what its is that your trying to achieve in this course, where you are from week to week and how it all fits in together.
Session Content
The session content for this course has been structured such that all the important information has been summarised and put in bullet point form for you (Don’t spend time doing this). This methodology requires that you read the textbook, then use the session material as a comprehensive summary for use when attacking the focus tasks and studying for exams. This structure facilitates the focus of your allocated time for this subject on completing focus tasks. Applying the theory in this way is not only interesting it is a proven winner when retaining the information for later use (In real life…and in Exams!). Enjoy!
Table 1.1

Session 1 - Starting Your Small Business

It’s An Interesting Time To Be Studying Small Business

1. Importance of Entrepreneurs
1. Many entrepreneurs turned an idea into first a small business then into a large successful one.
2. Small firms are the backbone of the American economy.
3. Small businesses:
1. Employ 53% of the total private nonfarm work force.
2. Contribute 47% of all sales in the USA.
3. Are responsible for 51% of the gross domestic product (GDP.)
   Produce about two out of every three new jobs each year.
2. Interest in Small Business Is Increasing.
1. The number of small businesses is growing rapidly.
2. Small firms generate most new private employment.
3. The public favors small business.
4. There is increasing interest in small business entrepreneurship at high schools and colleges.
5. There is a growing trend toward self-employment.
6. Entrepreneurship is attractive to people of all ages.
3. The Number of Small Businesses Is Growing Rapidly.
1. The value of goods and services produced makes the small business sector one of the greatest economic powers in the world.
2. The SBA estimates that there are around 23 million small businesses in the U.S.
3. Small businesses create 75% of the new jobs and employ 50% of the country’s private workforce.
4. They also represent more than 99% of all employers and 97% of exporters.
5. The typical entrepreneur is young, male, between the ages of 25 and 34, with specialty expertise.
4. The Public Favors Small Business.
1. One survey found that half of the respondents expressed an interest in owning a small business.
2. Many publications are aimed at the small business market, such as Black Enterprise, Entrepreneurship, Hispanic Business, and Fortune Small Business.
3. Some journals are targeted at specific markets such as Family Business, Entrepreneurial Women, and Your Company.
5. Interest Increasing at High Schools, Colleges, and Universities
1. Courses of study in entrepreneurship are now offered at hundreds colleges.
2. Students are now more interested in entrepreneurship as a safer career route.
3. Many student organizations, such as the Association of Collegiate Entrepreneurs (ACE) and University Entrepreneurial Associates, have been formed to encourage entrepreneurship.
4. Courses for small business owners are offered at 90% of community colleges.
5. Providing training courses is one of the fastest-growing areas in community colleges.
6. Trend Toward Self-Employment
1. Small business grew rapidly from the mid-1980s to the mid-1990s.
2. A national poll found that 55% of us want to be our own boss.
3. Internet and biotechnology industries have attracted record amounts of venture capital financing.
7. Entrepreneurship Is Attractive to All Ages
1. Entrepreneurship knows no age limits.
2. The text gives an example of Laima Tazmin, a 15-year-old entrepreneur.
3. Because they offer the most opportunities and flexibility to retirees small businesses are attractive to older people
4. Younger entrepreneurs do not fear failure; rather view it as a learning opportunity.
5. Forty percent of those who form new businesses already have some management experience.
6. One warning: if your business is to succeed, you cannot shut down for holidays or vacations.

Session 1 - Starting Your Small Business

Defining Small Business - No Easy Task

1. What Is Small?
1. To be classified as “small,” a small business must have at least two of the following features:
1. Management is independent.
2. Capital is supplied and ownership is held by an individual or a few individuals.
3. The area of operations is primarily local.
4. The business is small in comparison with larger competitors in the industry.
2. The Small Business Act of 1953 states that “a small business is one that is independently owned and operated and is not dominant in its field of operation.”
3. The SBA, for loan purposes, uses different size criteria by industries.
2. Distinguishing Between Entrepreneurial Ventures and Small Businesses
1. In an entrepreneurial venture, the principal objectives of the entrepreneur are profitability and growth.
1. The business is characterized by innovative strategic practices and/or products.
2. The entrepreneurs are usually seeking rapid growth, immediate profits, and a quick sellout with large capital gains.
2. A small business, or a micro business, is independently owned and operated, is not dominant in its field, and does not engage in many innovative practices.
1. The owner may not want to grow the business.
2. They expect normal sales, profits, and growth.
3. Small business owners seek a certain degree of freedom and financial independence.
3. The small business owner establishes a business primarily to further personal goals, including making a profit.
4. The goals of an entrepreneur include growth, achieved through innovation and strategic management.

Session 1 - Starting Your Small Business

Some Unique Contributions Of Small Business

1. Encourage Innovation and Flexibility
1. Small businesses are sources of new ideas or services that the larger firms may be unable to provide.
2. Small firms produce 55% of all innovations.
3. Small businesses are responsible for most innovations in the computer field.
2. Maintain Close Relationships with Customers and Community
1. Small businesses can be more individualized than big firms can, attracting customers on bases other than price.
2. An atmosphere of friendliness makes customers feel good about patronizing the business.
3. Main Street programs encourage community revitalization, economic development, historic preservation, and downtown revitalization.
3. Keep Larger Firms Competitive
1. Small businesses encourage competition with the introduction of new products and services.
4. Provide Employees with Comprehensive Learning Experience
1. Employees in small businesses have a variety of learning experiences and more freedom to make decisions.
2. Small businesses train people to become better leaders and managers.
3. Employees get more responsibility more quickly.
5. Develop Risk Takers
1. Small business owners have relative freedom to succeed or fail.
2. To reduce the risk of failure, planning and study is necessary.
6. Generate New Employment
1. Small businesses generate employment by creating job opportunities.
2. Such businesses also serve as a training ground for employees who go on to work for larger businesses.
7. Provide Greater Job Satisfaction
1. Employees in smaller workplaces have higher job satisfaction than those in larger firms.
2. But the greatest satisfaction comes to those who own their own workplaces.

Session 1 - Starting Your Small Business

Some Current Problems Facing Small Businesses

1. Special Problems
1. Small businesses face special problems that can result in:
1. limited profitability and growth
2. the decision to voluntarily close the business
3. financial failure
2. There is confusing data on the failure rate of small businesses.
3. The biggest worries facing small businesses owners are:
1. recession/current economic issues
2. retirement or transition
3. capital or financing issues
4. unexpected growth
5. succession
2. The major problems facing small business owners are:
1. Inadequate financing
   a. The shortage of capital is the greatest problem facing small business owners.
   b. Without adequate funds, business owners aren’t able to acquire facilities, hire employees, produce and market a product.
2. Inadequate management
1. Another problem is limited business knowledge, poor management, inadequate planning, and inexperience.
2. Many owners are reluctant to vary from the pattern of one-person management.
3. Managers of small firms must be generalists rather than specialists.
4. Because the business’ resources are limited, the owner can’t afford to pay for managerial assistance to prevent bad decisions.
3. Burdensome government regulations and paperwork
1. At one time, smaller firms were exempt from many federal regulations.
2. Now they are subject to many of the same regulations as large firms are.
3. Entrepreneurs often find these regulations complex and contradictory.

Session 1 - Starting Your Small Business

Some Current Trends Challenging Small Business Owners

1. Small firms must be prepared to cope with trends which will challenge their performance.
2. Exploding Technology
1. Few jobs in small firms are unaffected by improvements in communications and computer technology.
2. Exploding technology will improve the selection and training of workers and overcome their own resistance to change.
3. Occupation and Industry Shifts
1. There is a declining emphasis on traditional “smokestack” industries with a shift toward more people-oriented activities.
2. One shift, reinvention, is the fundamental redesign of a business, often resulting in reduction in size and markets.
3. Reinvention has led to fewer job opportunities for those who are less well trained and educated.
4. Many larger companies have reengineered, redesigning operations from scratch.
5. These activities resulted in downsizing, (sometimes called rightsizing) reducing the number of employees in order to efficiency.
6. This movement is giving people more responsibility, but they must work harder and are under more pressure.
7. These shifts help smaller firms, as many highly skilled workers and managers leave to join the ranks of small business owners and managers.
4. Global Challenges
1. The trend is for small businesses to become more active in global activities.
2. Up to one-half of all today’s college graduates will work in some type of global activity in the future.
3. One result is the large number of large and small U.S. businesses that are foreign owned.

Session 1 - Starting Your Small Business

Why People Start Small Businesses

1. There are as many reasons for starting small businesses as there are small business owners.
2. To Satisfy Personal Objectives
1. Owning a small business tends to satisfy most of our work goals.
1. One study found that the best things about owning a small business are independence, control, satisfaction, and other factors.
2. The primary objectives of small business owners are to:
1. Achieve independence
2. Obtain additional income
3. Help their families
4. Provide products not available elsewhere
3. The personal objectives of owners of small businesses differ from those of managers of larger firms.
1. Managers of large companies tend to seek security, place, power, prestige, high income, and benefits.
2. The primary objectives of small business owners are more achievement oriented.
4. The personal objectives of small business owners tend to be achievement oriented as opposed to those of managers at large firms, who tend to be power and prestige oriented.
2. The owner’s primary motive in owning a business is usually to achieve independence.
1. Small business owners tend to want autonomy to exercise their initiative and ambition.
2. This freedom often results in innovations and leads to greater flexibility.
3. To obtain additional income
1. The need for income varies with different people.
2. Owning a business can have tax advantages.
3. Not all small business owners make a lot of money, nor do they will intend to.
4. A person may start a small business after being unable to find employment elsewhere.
4. To help their families
1. Small business owners are motivated as much by personal and family considerations as by the desire for profit.
5. To provide products not available elsewhere
1. Most American economic development is the result of innovations born in small firms.
2. Small firms produce two-and-one-half times as many new ideas and products as large firms do.
3. Many breakthroughs, such as the automobile, airplane, helicopter, heart pacemaker, and zipper resulted from the creativity of small companies.
3. To Achieve Business Objectives
1. An important business function is setting objectives, which are the goals toward which the business’s activities are directed.
2. Growth depends on attaining both profit and social objectives, which are not necessarily incompatible.
3. Service objective
1. The objective of a business is to produce and sell goods or services at a cost that will ensure a fair price to the consumer and adequate profits for the owners.
2. A small business must set service as the primary objective—but seek profit as a natural consequence.
4. Profit objective
1. Profit is the revenue received by a business in excess of the expenses paid.
2. The profit motive is expecting to make a profit as the reward for taking the risk of starting and running a business.
3. Goods or services must be produced at a cost:
   (1) low enough that the firm makes a profit
   (2) while charging customers a price they are willing and able to pay.
4. Profits are the reward for accepting business risks and performing an economic service.
5. Social objective
1. Successful small businesses must have social objectives, which are goals regarding assisting groups in the community and protecting the environment.
2. Even small firms have a responsibility to protect the interests of all parties as well as to make a profit.
6. Small firm owners should select a growth objective based on personal goals.
4. Need to Mesh Objectives
1. Personal and business objectives can be integrated in small business.
2. The chances of success are increased when the objectives of the business are meshed with owner’s personal objectives.

Session 1 - Starting Your Small Business

Characteristics of Successful Entrepreneurs

1. The abilities and personal characteristics of the owner influence the success of a small company.
1. A recent study found that almost one-third of all U.S. millionaires are entrepreneurs or business owners.
2. Another characteristic is persistence—16% of new business owners had been in business before.
3. In 2000 nearly one out of every 10 Americans tried to start a business during the year.
4. Successful small business owners tend to have the following characteristics.
2. Desire Independence
1. People who start small businesses seek independence and want to be free of outside control.
3. Have a Strong Sense of Initiative
1. They desire to use their ideas, abilities, and aspirations to the greatest degree possible.
2. They are able to conceive, plan, and carry ideas for a new product to some successful conclusion.
3. Also, they are willing to work long, hard hours to reach their goals.
4. Are Motivated by Personal and Family Considerations
1. Small business owners often start and operate their businesses to help their family.
2. There is now a trend toward children helping their parents by putting them on the payroll.
5. Expect Quick and Concrete Results
1. Small business owners expect quick and concrete results from their investment of time and capital.
2. They seek a quick return on their capital and become impatient and discouraged when the results are slow in coming.
6. Are Able to React Quickly
1. One advantage small business owners have is the ability to react more quickly to changes inside or outside the company.
2. Because they are small, small businesses are vulnerable to technological and environmental changes.
3. A small business owner must have the ability to react quickly to these changes.
7. Are Dedicated to Their Business
1. With so much of their time, money, and energy devoted to the business, small business owners tend to have more zeal and devotion than managers of big companies.
8. Enter Business as Much by Chance as by Design
1. They frequently ask for management training and development assistance.
2. These owners differ from those who attend college with the ambition to become professional managers.

Session 1 - Starting Your Small Business

What Leads to Success in Managing a Small Business?

1. Serving an Adequate and Well-Defined Market
2. Acquiring Sufficient Capital
3. Recruiting and Using Human Resources Effectively
4. Obtaining and Using Timely Information
5. Coping Effectively with Government Regulations
6. Having Expertise in the Field
7. Being Flexible

Session 1 - Starting Your Small Business

Doing An Introspective Personal Analysis

1. A personal evaluation can help determine whether you have the combination of qualities needed to succeed.
2. Analyzing Your Values
3. Analyzing Your Mental Abilities
4. Analyzing Your Attitudes

Session 1 - Starting Your Small Business

Where are the Opportunities for Small Businesses?

1. What Are the Fastest-Growing Industries?
1. No industry is growing faster than services.
2. Most of the growing industries are dominated by small private companies.
3. Service industries will account for 20.8 million new jobs by 2012.
4. Hot growth areas: education, health care, and social assistance.
2. Factors Affecting the Future of an Industry or a Business
1. Changes can cause slow-growing industries to speed up or fast-growing ones to slow down.
2. One study found that the more professional technicians or knowledge workers an industry has, the greater the chance it will create new jobs.
3. High-knowledge industries are those in which 40% or more of human resources are professionals, technicians, or other “knowledge workers.”
4. A change that provides an opportunity for one industry or business may pose a threat to others.
3. Some Practical Ideas for Small Businesses
1. Around 71% of future employment in the fastest-growing industries will likely come from small businesses.
2. Innovative ideas for tomorrow’s businesses include:
1. career counseling
2. catering
3. computer and office machine repair
4. day care, educational services and products
5. financial planning
6. home health care
7. marketing, promotion, and public relations
8. senior fitness and recreation
9. specialized delivery services

Session 1 - Starting Your Small Business

Some Areas Of Concern For Small Business Owners

1. The success of small firms tends to be limited by such factors as:
1. inadequate management
2. shortages of capital
3. government regulation and paperwork
4. lack of proper record keeping
2. Poorly Planned Growth
1. Poorly planned growth appears to be a built-in obstacle facing many small businesses.
1. If the owners are incapable, their businesses may flounder and eventually fail.
2. However, even if the owners are efficient and capable, their organizations may grow in a poorly planned way.
3. As small businesses succeed, their owners feel like prisoners of long hours and hard work.
4. Core symptoms of “trapped owner” syndrome:
   (1) despair over the loss of closeness in important personal relationships
   (2) unshakable anxiety despite accomplishments
   (3) anger toward family, employees, and customers
   (4) frustration that the lack of significant current progress is preventing forward movement
   (5) the paradox itself: You own your business, yet you don’t enjoy it
2. Loss of independence or control
1. With growth, owners must please more people, including employees, customers, and the public.
2. However, many creative entrepreneurs are poor managers.
3. If the firm becomes large enough to require outside capital, the owner may lose control over the company.
3. Typical growth pattern
1. During Stage 1, owners manage the business and do all the work.
2. In Stage 2, the owners still manage the company but hire employees to help.
3. In Stage 3, the owners hire managers to run the firms.
4. Often owners must give managers a financial interest in the firm in order to hold them.
5. The business then may face the same problems as a large business does.
3. Threat of Failure
1. A discontinuance is a voluntary decision to terminate a business resulting from any of several factors, such as health problems.
2. A failure results from an inability to succeed in running a business.
1. Formal failures are failures ending in court with some kind of loss to the creditors.
2. In personal (informal) failures, the owner who cannot succeed voluntarily terminates the business.
3. Personal failures are more common than formal failures.
3. Studies of the behavior of people in small business show that failure often results from:
1. too much left to chance
2. too many decisions were based on hunch or intuition
3. crucial obstacles went unnoticed for too long
4. the amount of time and effort demanded were not recognized and planned for
5. the amount of capital needed was either not estimated or grossly underestimated
4. The latest available information seems to indicate that failure rates are decreasing.
5. Many hobbyists, mom-and-pop ventures, and other small undertakings open and close every day without any documentation.

Session 1 - Starting Your Small Business

Summary

During this session we covered the meaning of small business and some of the unique contributions small business make to the community. We identified the problems and current trends challenging entrepreneurs and small business owners. We examined why people start small businesses and the characteristics of successful entrepreneurs. Finally we looked at the opportunities and concerns for small businesses and their owners.