Pride/Hughes/Kapoor Business, 109Th Edition

Pride/Hughes/Kapoor Business, 109th Edition

Audio Review Transcript

Chapter 56 Small Business, Entrepreneurship, and Franchises

1. Define what a small business is and recognize the fields in which small businesses are concentrated

A small business is an independently owned and operated for-profit business that is not dominant in its field. The Small Business Administration has defined various boundaries that constitute smallness, based on particular industries. Generally, the guidelines revolve around number of employees or annual sales.

Most businesses start as small businesses. Some remain small, and others grow to be quite large. Unfortunately, statistics show that over 70% of new businesses fail within the first five years, primarily due to a lack of business know-how. As a result, the make-up of the small business sector is constantly changing. Generally speaking, however, industries that require a low initial investment and some special skills or knowledge tend to attract new businesses. The most common industries are the distribution, service, and production industries. Let’s look at each of these.

Distribution industries account for about one-third of all small businesses and include retailing, wholesaling, transportation, and communications. Service industries account for almost half of the small business sector. These include medical and dental care, electronics repair, and financial services, among others. Production industries include construction, mining, and manufacturing. These account for almost 20% of all small businesses. Some production industries require a relatively large initial investment, mainly due to specialized or heavy equipment. (LO 1 ends)

2. Identify the people who start small businesses and the reasons why some succeed and many fail

So what kinds of people start small businesses? As in most fields, it takes all kinds. But there are a few factors that seem to characterize small business owners. An entrepreneurial spirit, the desire to determine one’s own destiny, and the willingness to take on a challenge and a certain amount of risk are very important. So is family background, since many small business owners are from families who have also run small businesses. Even if you have all the factors going for you, along with the motivation and a good idea, it isn’t easy. Small businesses are prone to failure. Failure can result for several reasons, but the three most common are lack of capital, management, and planning.

Capital is an issue because it may take several years before a business shows a profit. As a result, cash flow becomes a problem and investor dollars dry up. From a management point of view, many entrepreneurs lack the wide range of managerial skills necessary to run a business. A successful business requires skills in managing money, time, personnel, and inventory, just to name a few. Planning problems frequently stem from the success that leads to fast growth and overexpansion. (LO 2 ends)

3. Assess the contributions of small businesses to our economy

Though many small businesses will fail, others will thrive. Many of these will form the foundation of tomorrow’s large corporations. But even while they are small, these small businesses contribute enormously to the community in many ways. One of these ways is innovation. As a country, we wouldn’t be where we are today without the innovations and inventions that have come from small business. We can hope for more in the future as well, thanks to funding provided by the Small Business Innovation Research Program. A second major contribution by small businesses is employment. Small businesses add more than their proportional share of new jobs to the economy. In fact, they provide about 70% of new jobs. Small businesses also generate competition, by challenging older, larger firms to become more efficient and responsive. Finally, small businesses fulfill the needs of society by providing products and services that fit small, profitable niches and help consumers in ways that big businesses can’t. (LO 3 ends)

4. Judge the advantages and disadvantages of operating a small business

As with other decisions that must be made about business, there are advantages and disadvantages of smallness. The five advantages include (1) the ability to form personal relationships with customers and employees, (2) the ability to adapt quickly to change, (3) simplified recordkeeping, (4) independence, and (5) the ability to make a profit and enjoy the advantages of a sole proprietorship. Of course, there are a few disadvantages as well. The three primary disadvantages are (1) the risk of failure, (2) the limited growth potential, and (3) the limited ability to raise capital.

As we mentioned earlier, planning is a key issue in the ultimate success of a business. The best way to avoid business failure is to develop a business plan. A business plan is a carefully constructed guide for the person starting a business. It is a tool with three primary purposes: communication, management, and planning. The business plan can also provide investors with a concise statement of the firm’s intentions and potential. A business plan should answer 4 questions: (1) What exactly is the nature and mission of the new venture? (2) Why is this new enterprise such a good idea? (3) What are the businessperson’s goals? And (4) how much will the new venture cost? To best answer these questions, the business plan should include 12 parts: an introduction, a 1-to-2 page executive summary, information on benefits to the community, the company background and industry analysis, a description of the management team, a manufacturing and operations plan, a description of the needed labor force, the marketing plan, the financial plan, an exit strategy or plan for the future, an evaluation of the critical risks and assumptions, and an appendix of supplementary information. (LO 4 ends)

5. Explain how the Small Business Administration helps small businesses

To help small business owners with all facets of their small business, Congress created the Small Business Administration. The SBA is a governmental agency that assists, counsels, and protects the interests of small businesses in the United States. The SBA provides both management assistance and financial assistance. To help with management issues, the SBA offers management courses and workshops that cover all the functions of a manager. It also oversees the activities of SCORE, the Service Corps of Retired Executives, a group of retired businesspeople who volunteer their services to small businesses through the SBA. The SBA makes special efforts to assist minority-owned businesses to develop and increase business opportunities for women and racial and ethnic minorities. The SBA also runs Small Business Institutes (SBIs), which are groups of senior and graduate students who provide management counseling to small businesses. The Small Business Development Centers (SBDCs) are university-based groups that provide individual counseling and practical training to owners of small businesses. Finally, the SBA offers publications dealing with management, marketing, and technical issues to potential business owners. From a financial point of view, the SBA offers regular business loans as well as venture capital through its small business investment centers. Venture capital is money that is invested in small and sometimes struggling firms that have the potential to become very successful. A Small Business Investment Company, or SBIC, is a privately owned firm that provides venture capital to small enterprises that meet its investment standards. (LO 5 ends)

6. Appraise the concept and types of franchising

Small businesses are a critical part of our economy, but you know that being a small business owner is not without its risks. Is there a way that you can enjoy the best of both worlds, where you can be your own boss and enjoy the advantages of business ownership, while also taking advantage of bigness? The answer is franchising. A franchise is a license to operate an individually owned business as though it were a part of a chain of outlets or stores. Franchising is the actual granting of a franchise. The individual or organization that grants a franchise is called the franchisor, and the person or organization who purchases the franchise is the franchisee. Franchising arrangements generally fall into three categories. In the first type, a manufacturer authorizes a number of retail stores to sell a certain brand-name item. This type of arrangement is commonly used to sell cars and trucks, farm equipment, shoes, paint, and gas. The second type involves a producer licensing distributors to sell a certain product to retailers. This is the arrangement most often used by soft-drink producers. The third and most common form today is when a franchisor supplies brand names, techniques, or other services instead of a complete product. (LO 6 ends)

7. Analyze the growth of franchising and franchising’s advantages and disadvantages

Franchising began during the time of the Civil War. After the turn of the century, it experienced steady growth. And since the mid 1970s, it has proliferated. Ownership of franchises by women and minorities has also taken off in this time period. Although franchising doesn’t guarantee success, it does seem to reduce some of the burdens of being a small business owner. A new and growing trend is that of dual-branded franchises, in which two franchisors offer their products together. The advantages to the franchisor include the ability to spread its products throughout a wide distribution area with a motivated business owner, and without having to build its own outlets, while still maintaining certain standards. The franchisee gets the chance to start a business with name recognition, using limited capital, and the accumulated business experience of others. Of course, the down side here for the franchisee is that the franchisor still retains a lot of control. The franchisor’s contract with the franchisee dictates every aspect of the business. The National Franchise Mediation Program was set up in 1993 to help settle contract disputes between franchisors and franchisees and has been quite successful in helping resolve issues. Franchises are also becoming more commonly available around the world. The SBA assists small-business owners in penetrating foreign markets. The next century will present unique challenges and opportunities for small-business owners. (LO 7 ends)