Entrepreneurship and Small-Business Ownership
Business in Action: Thriving in the Digital Enterprise - Chapter 6: Entrepreneurship and Small-Business Ownership
Learning Objectives (1 of 2)
6.1 Highlight the contributions small businesses make to the U.S. economy.
6.2 List the most common reasons people start their own companies and identify the common traits of successful entrepreneurs.
6.3 Explain the importance of planning a new business and outline the key elements in a business plan.
6.4 Identify the major causes of business failures and identify sources of advice and support for struggling business owners.
Learning Objectives (2 of 2)
6.5 Discuss the principal sources of small-business private financing.
6.6 Explain the advantages and disadvantages of franchising.
6.7 Define machine learning and deep learning, and describe their importance to contemporary business.
The Big World of Small Business
Definition of Small Business: A small business is defined as a company that is independently owned and operated, is not dominant in its field, and employs fewer than 500 people (though this number may vary by industry).
Economic Roles of Small Business
Job Creation: Small businesses serve as significant employers in the economy.
Innovation: They introduce new products to the market.
Support to Larger Organizations: Small businesses fulfill the needs of larger organizations through specialized services and products.
Economic Contribution: They inject a considerable amount of money into the economy, circulating funds in various sectors.
Risk Taking: Small businesses often take on risks that larger companies avoid, fostering innovation and entrepreneurship.
Specialization: They provide specialized goods and services tailored to specific markets or local demands.
Characteristics of Small Businesses
Focused Operations: Most small firms have a narrow market focus, addressing specific niches.
Limited Resources: Small businesses typically operate with fewer resources than larger companies, affecting their operational strategies.
Innovation Flexibility: They often have more freedom to innovate and adapt due to less bureaucratic pressure.
Decision-Making Agility: Entrepreneurial firms are typically able to make quick decisions and respond swiftly to market changes.
The Entrepreneurial Spirit
Definition: The entrepreneurial spirit refers to the positive, forward-thinking desire to create profitable and sustainable business enterprises.
Reasons People Start Their Own Companies
Control Over the Future: Individuals often seek more control over their professional futures.
Desire for Independence: Many entrepreneurs are tired of working for someone else and seek to establish their own ventures.
Passion for New Ideas: Entrepreneurs possess a passion for bringing new product ideas to market.
Personal Goals: They pursue business objectives that hold personal significance.
Employment Challenges: Many start businesses due to an inability to find attractive employment opportunities in the traditional job market.
Qualities of Successful Entrepreneurs
Traits Include: Resilience, creativity, risk tolerance, vision, and strong organizational skills.
Sources: Includes research from Norman M. Scarborough and Jeffrey R. Cornwall, and articles from Sujan Patel and Nina Zipkin.
Business Start-Up Options
General Considerations
Start-Up Strategy: Different start-up strategies vary in financial outlay, funding possibilities, and operational freedom.
Creating a New Business:
Financial Outlay: Varies significantly based on the type of business; some require minimal capital while others, especially in manufacturing, require substantial investment.
Funding: Generally very limited; requires evidence of potential revenue for lenders to provide funding.
Owner's Freedom: High, but financial constraints may limit maneuverability.
Business Processes: Must be developed from scratch, which is time-consuming and costly.
Networks: Owner selects suppliers and partners, tailoring their network to specific needs.
Workforce: Must be recruited and trained by the owner, incurring startup costs.
Customer Base: Needs to be built from the ground up, impacting initial cash flow.
Alternatives to Starting a Business
Buying an Existing Business:
Financial Outlay: Can be considerable; some sell for multiples of their annual revenue.
Funding: Easier since banks prefer lending to existing operations with established cash flow.
Owner's Freedom: Less than starting from scratch; existing operations may limit creativity.
Business Processes: Already in place; upgrades may be necessary.
Workforce: Staff is often already established, easing onboarding challenges.
Customer Base: Existing customer clientele may provide immediate revenue streams.
Buying into a Franchise:
Financial Outlay: Varies widely; initial costs can run into hundreds of thousands.
Funding: Many franchisors restrict borrowing for franchise purchases; owners need to have adequate capital.
Owner's Freedom: Low to very low due to rigid adherence to franchisor policies.
Business Processes: An established system aids in operations, which is a primary benefit.
Networks: Franchisors may dictate certain supplier relationships.
Workforce: Hiring and training is still necessary, although franchisors typically provide training support.
Customer Base: Franchise benefits from existing brand recognition, aiding in building a steady customer base.
Blueprint for an Effective Business Plan
Definition: A business plan is a document summarizing a proposed business venture, its goals, and the plans to achieve those goals.
Key Elements of a Business Plan:
Summary: An overview of the business concept and plan.
Mission and Objectives: The purpose and measurable goals of the business.
Company Overview: Description of the business and its structure.
Products and Services: Details about what the business offers.
Management and Key Personnel: Information about leadership and staff roles.
Target Market: Identification of the specific customer base.
Marketing Strategy: How the business will attract and retain customers.
Design and Development Plans: Blueprint for product and service creation.
Operations Plan: Outline of daily operations and systems in place.
Start-up Schedule: Timeline for launching the business.
Major Risk Factors: Potential challenges and how they will be addressed.
Financial Projections: Expected economic performance over time.
Exit Strategy: Plans for closure or transfer of ownership when necessary.
Causes of Business Failures
Strategic Issues:
Little or no demand for provided products/services.
Lack of strategic planning, preventing a viable business model from forming.
Failing to pivot or exploit better opportunities when presented.
Overpowered by competition with superior offerings.
Leadership Issues:
Managerial incompetence; inability to lead effectively.
Lack of relevant experience in necessary markets or technologies.
Transition difficulties from an employee mindset to an entrepreneurial one causing burnout.
Marketing and Sales Issues:
Challenges in gaining recognition amidst crowded marketplaces.
Uncontrolled growth leading to operational chaos or bankruptcy.
Poor location hampering sales potential.
Customer neglect affecting retention and satisfaction.
Financial Issues:
Inadequate funding restrictions impacting growth.
Poor cash management, with excessive spending on non-essential items.
High overhead costs not aligned with revenue generating activities.
Poor inventory control causing unmanageable costs or unmet demand.
Sources of Advice and Support for Struggling Business Owners
Government Organizations and Non-Profits:
U.S. Small Business Administration (SBA)
Minority Business Development Agency
SCORE (Service Corps of Retired Executives)
U.S. Chamber of Commerce
Mentors and Advisory Boards
Advisory Board: A team of experts who assist business owners with strategic decisions and operational review.
Business Incubators
Definition: Facilities that provide support services and housing for small businesses during their early growth phases.
Financing Options for Small Businesses (1 of 4)
Seed Money: The initial capital investment required to start a business.
Micro Lenders: Organizations that offer small loans to entrepreneurs who may not qualify for traditional bank financing.
Financing Options for Small Businesses (2 of 4)
Venture Capitalists (VCs): Investors who provide funding to startups in exchange for equity, with an aim to profit from selling their stake in the future.
Financing Options for Small Businesses (3 of 4)
Angel Investors: Individuals who invest their own money in early-stage businesses, generally in smaller amounts compared to VCs.
Initial Public Offering (IPO): The first sale of company shares to the public.
Financing Options for Small Businesses (4 of 4)
Crowd Funding: A method of raising capital by soliciting investment from the general public via online platforms.
The Franchise Alternative (1 of 2)
Franchise: A business arrangement where a franchisee acquires rights to sell products and utilize the business system of a franchisor.
The Franchise Alternative (2 of 2)
Franchisee: The business owner who pays for the rights related to the franchisor’s operations.
Franchisor: The established business that grants operational rights to franchisees.
Advantages of Franchising
Combines autonomy with the benefits of being part of a larger organization.
Access to name recognition, national advertising, standardized quality, and proven business formulas.
Disadvantages of Franchising
Franchisees must adhere to the franchisor's business format.
Limited control over decisions made by the franchisor that affect the entire franchise system.
Inability to independently alter business strategies in response to market changes.
Key Questions to Ask Before Signing a Franchise Agreement (1 of 2)
What are the total start-up costs?
What does the initial franchise fee cover?
Who pays for employee training?
How are the periodic royalties calculated?
Who pays for advertising and promotional efforts?
Are trademarks and names legally protected?
Who approves the business location?
Are there restrictions on goods and services sold?
Key Questions to Ask Before Signing a Franchise Agreement (2 of 2)
Are online sales allowed?
How much daily operational control do you have?
Is there an exclusive territory for the franchise?
Does the franchisee have the right of first refusal for nearby locations?
Are there requirements to purchase supplies from the franchisor?
Under what conditions can the agreement be terminated?
Can the franchise be inherited?
Machine Learning and Deep Learning
Machine Learning: The general capability of computers to learn from data and improve their performance over time without being explicitly programmed.
Deep Learning: A specialized subset of machine learning that utilizes neural networks with multiple layers to process and analyze data, enhancing the accuracy of recognition tasks.
Process of Deep Learning:
A system is trained on vast datasets, adjusting neural layers for precision.
An object is introduced to the system to be identified or classified.
Each network layer analyzes progressively detailed features of the input, from broad aspects to fine details.
Summary and Application of Learnings (1 of 2)
Analyze and highlight the contributions of small businesses to the U.S. economy.
Identify common motivations and traits shared among successful entrepreneurs.
Explore the significance of new business planning and its fundamental components.
Recognize significant causes of business failures and locate resources for business owner support.
Summary and Application of Learnings (2 of 2)
Examine principal sources of small business financing options.
Discuss advantages and disadvantages associated with franchising.
Define and explain the implications of machine learning and deep learning within contemporary business practices.