‫المملكة العربية السعودية‬ ‫وزارة التعليم‬ ‫الجامعة السعودية‬ ‫اإللكترونية‬ Kingdom of Saudi Arabia Ministry of Education Saudi Electronic University College of Administrative and Financial Sciences Assignment-1 MGT402 – Entrepreneurship and Small Business Deadline: 12/03/2022 @ 23:59 Course Name: Entrepreneurship and Small Student’s Name: Business Course Code: - MGT 402 Student’s ID Number: Semester: II CRN: Academic Year: 1443/1444 H For Instructor’s Use only Instructor’s Name: Students’ Grade: Level of Marks: Instructions – PLEASE READ THEM CAREFULLY • The Assignment must be submitted on Blackboard (WORD format only) via allocated folder. • Assignments submitted through email will not be accepted. • Students are advised to make their work clear and well presented, marks may be reduced for poor presentation. This includes filling your information on the cover page. • Students must mention question number clearly in their answer. • Read carefully Grading Rubric below for specific criteria: 0-5 Marks • Late submissions will NOT be accepted. • Avoid plagiarism, the work should be in your own words, copying from students or other resources without proper referencing will result in ZERO marks. No exceptions. • All answered must be typed using Times New Roman (size 12, double-spaced) font. No pictures containing text will be accepted and will be considered plagiarism). • Submissions without this cover page will NOT be accepted. Entrepreneurship and Small Business ASSIGNMENT -1 Submission Date by students: Before the end of Week- 7th Place of Submission: Students Grade Centre Weight: 10 Marks Learning Outcome: 1. Demonstrate a solid understanding of the potential of entrepreneur in today's competitive business world. (Lo 1.2) 2. Demonstrate ability to think independently and systematically on developing a viable business model (Lo 1.3 & 3.7). 3. Understand the place of small business in history and explore the strengths and weaknesses of small business. (Lo 1.1). Assignment Workload: This assignment is an individual assignment. An entrepreneur Start-up Business Plan A business plan is any simple plan, not only limited to the business start-up plan that helps the management to understand the current situation of the enterprises (strengths, weakness, opportunities and threats) and look forward into the future. A start-up plan is a business plan which consists of the mission, vision, objectives and action plans for the future of the new enterprises while the business plan drawn during the operation of the firm is vital for running the firm effectively, acquire new customers, partners, loans and so on. According to Fiore (2005), a business plan involves two dimensions; an organizing tool to simplify and clarify your business goals and strategy, the second one is a selling document that sells the business idea and shows that a product or a service can make a profit and attract funding and company resources. Imagine you started a new business as an entrepreneur in Saudi Arabia. Briefly mention the specific steps which you consider necessary to a successful business plan. Please, think and share information on the following items: 1. Owners, capital structure and company profile (1 Marks) a. Your Business Name, Address, E‐Mail b. Form of ownership: What is the legal structure? Sole proprietor, Partnership, Corporation…. C. Investment capital 2. Company Business Description (300 – 400 words) A. Scope and type of business (3 Marks) What business will you be in? What will you do? What market segment will you choose? • Business idea: what is your big idea? Is it a product or a service? What makes your idea different? • Mission Statement • Company’s short-term and long-term goals and objectives. • Target market and demographics: Who will your customers be? Where do they live? What is your target market passionate about? B. Business Philosophy (3 Marks) What is important to you in your business? • Describe your Industry: Is it a growth industry? What long-term or short-term changes do you foresee in the industry? How will your company take advantage of it? • Describe your most important company strengths and core competencies: What factors will make the company succeed? What do you think your major competitive strengths will be? What background experience, skills, and strengths do you personally bring to this new venture? • Risk Assessment: Evaluate the strengths and weaknesses of your business using SWOT. •Who is your competition and how do you beat them? 3. Products and Services (3Marks) a. Briefly discuss your products or services (Technical specification). b. Size of business: how many employees? How many offices and retail facilities? c. What factors will give you competitive advantages or disadvantages? Examples, include level of quality or unique or proprietary features. Entrepreneurship and Effective Small Business Management, 11/E Cases Case # 1 Entrepreneur & Company Name Michael Volpatt, Kate Larkin, and Crista Leudtke Big Bottom Market 2 Peter Justen MyBizHomepage 3 4 5 6 Chapter Reference Related Topics Industry: Restaurant, specialty food, and wine ● Bootstrap marketing and social media marketing ● Managing cash flow 9 15 Industry: Web-based financial services for small business owners 1 ● Entrepreneurship ● Buying/Selling a business ● E-commerce ● Sources of financing ● Human resources management: staffing 7 13 16 and 17 21 Jacqui Rosshandler Industry: All-natural breath-freshener Jacquii LLC ● Managing cash flow 15 ● Sources of equity financing 16 ● Sources of debt financing 17 Lucy Cardenas and Bill Coker Industry: Restaurant Red Iguana ● Buying/Selling a business 7 ● Sources of debt financing 17 ● Management succession 18 ● Choosing a location 22 Rachel Shein and Steve Pilarski Industry: Wholesale bakery Baked in the Sun ● Angela Crawford and Martin Rodriguez Industry: Pharmacy ● Healthcare insurance and the Affordable Care Act Financial analysis 22 14 Bluffton Pharmacy 7 Angela Crawford and Martin Rodriguez Industry: Pharmacy ● Managing cash flow 15 Bluffton Pharmacy – Part 2 8 9 10 Brian Linton Industry: Apparel United By Blue ● Ethics and social responsibility ● Strategic management ● Pricing 2 4 11 Aseem Badshah and Kevin Yu Industry: Social media services Socedo ● Entrepreneurship ● Sources of equity financing 1 16 Kelly Lester Industry: Lunchboxes EasyLunchboxes ● Bootstrap marketing and social media marketing ● E-commerce #149226 Cust: Pearson Au: Scarborough Pg. No. 2 Title: Entrepreneurship and Effective Small Business Management 11e 9 13 Server: C/M/Y/K Short / Normal DESIGN SERVICES OF S4CARLIsLE Publishing Services Eleventh Edition Entrepreneurship and Effective Small Business Management Norman M. Scarborough Presbyterian College Jeffrey R. Cornwall Belmont University Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi Mexico City São Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo # 149226   Cust: Pearson Education / NJ / B & E   Au: Scarborough  Pg. 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Manufactured in the United States of America. This publication is protected by Copyright, and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. To obtain permission(s) to use material from this work, please submit a written request to Pearson Education, Inc., Permissions Department, One Lake Street, Upper Saddle River, New Jersey 07458, or you may fax your request to 201-236-3290. Many of the designations by manufacturers and sellers to distinguish their products are claimed as trademarks. Where those designations appear in this book, and the publisher was aware of a trademark claim, the designations have been printed in initial caps or all caps. Library of Congress Cataloging-in-Publication Data Scarborough, Norman M.   Entrepreneurship and effective small business management/Norman Scarborough, Jeff Cornwall.—Eleventh Edition.     pages cm    Includes bibliographical references and index.   ISBN-13: 978-0-13-350632-7   ISBN-10: 0-13-350632-0   1. Small business—Management. 2. New business enterprises—Management. 3. Small business—United States—Management. 4. New business enterprises—United States—Management. I. Cornwall, Jeffrey. II. Title. HD62.7.S27 2013 657’.9042—dc23  2013039406 10 9 8 7 6 5 4 3 2 1 ISBN-10: 0-13-350632-0 ISBN-13: 978-0-13-350632-7 # 149226   Cust: Pearson Education / NJ / B & E   Au: Scarborough  Pg. No. ii Title: Entrepreneurship and Effective Small Business Management 11e   Server:          C/M/Y/K Short / Normal / Long DESIGN SERVICES OF S4carlisle Publishing Services Brief Contents SECTION I The Rewards and Challenges of Entrepreneurship 1 Chapter Chapter Chapter Chapter 1 2 3 4 SECTION II Chapter Chapter Chapter Chapter Launching a Venture: Entry Strategies 5 6 7 8 SECTION III SECTION IV SECTION V Chapter Chapter Chapter Chapter SECTION VI Chapter 23 581 Location, Layout, and Physical Facilities 581 Supply Chain Management 627 Managing Inventory 667 Staffing and Leading a Growing Company 703 Management Succession and Risk Management Strategies in the Family Business 741 The Legal Environment: Business Law and Government Regulation 781 The picturebooth co. 817 831 Endnotes Index Creating a Solid Financial Plan 453 Managing Cash Flow 489 Sources of Equity Financing 523 Sources of Debt Financing 551 Legal Aspects of Small Business: Succession, Ethics, and Government Regulation 741 Chapter 22 Cases 305 453 Building an Operating Plan 18 19 20 21 Appendix 273 Building a Bootstrap Marketing Plan 273 Creative Use of Advertising and Promotion Pricing and Credit Strategies 343 Global Marketing Strategies 375 E-Commerce and Entrepreneurship 413 Building a Financial Plan 14 15 16 17 137 Choosing a Form of Ownership 137 Franchising and the Entrepreneur 165 Buying an Existing Business 201 New Business Planning Process: Feasibility Analysis, Business Modeling, and Crafting a Winning Business Plan 235 Building a Marketing Plan Chapter 9 Chapter 10 Chapter 11 Chapter 12 Chapter 13 Chapter Chapter Chapter Chapter Entrepreneurs: The Driving Force Behind Small Business 1 Ethics and Social Responsibility: Doing the Right Thing 37 Creativity and Innovation: Keys to Entrepreneurial Success 71 Strategic Management and the Entrepreneur 105 846 884 iii # 149226   Cust: Pearson Education / NJ / B & E   Au: Scarborough  Pg. No. iii Title: Entrepreneurship and Effective Small Business Management 11e   Server:          C/M/Y/K Short / Normal / Long DESIGN SERVICES OF S4carlisle Publishing Services This page intentionally left blank     v •   •  Contents Preface xxiii Acknowledgments xxvi SECTION I Chapter 1 The Rewards and Challenges of Entrepreneurship 1 Entrepreneurs: The Driving Force Behind Small Business 1 The Role of the Entrepreneur 2 What Is an Entrepreneur? 5 ◼ ENTREPRENEURSHIP IN ACTION Frontier? 9 Space: The Next Entrepreneurial How to Spot Entrepreneurial Opportunities Monitor Trends and Exploit Them Early On 10 10 Travel—and Be Inspired 11 Take a Different Approach to an Existing Market Put a New Twist on an Old Idea 11 11 Look for Creative Ways to Use Existing Resources 12 Realize That Others Have the Same Problem You Do 12 Take Time to Play 12 Notice What Is Missing 12 The Benefits of Owning a Small Business 13 Opportunity to Gain Control over Your Own Destiny Opportunity to Make a Difference 13 13 Opportunity to Reach Your Full Potential Opportunity to Reap Impressive Profits 14 14 Opportunity to Contribute to Society and Be Recognized for Your Efforts 14 Opportunity to Do What You Enjoy Doing 15 The Potential Drawbacks of Entrepreneurship Uncertainty of Income 15 15 Risk of Losing Your Entire Invested Capital Long Hours and Hard Work 15 16 Lower Quality of Life Until the Business Gets Established High Levels of Stress 16 16 Complete Responsibility 17 Discouragement 17 Why the Boom: The Fuel Feeding the Entrepreneurial Fire 17 Entrepreneurs as Heroes 17 Entrepreneurial Education 17 Shift to a Service Economy 17 Technology Advancements 17 Outsourcing 18 Independent Lifestyle 18 E-Commerce, the Internet, and Mobile Computing International Opportunities 18 19 ◼ IN THE ENTREPRENEURIAL SPOTLIGHT Collegiate Entrepreneurs # 149226   Cust: Pearson Education / NJ / B & E   Au: Scarborough  Pg. No. v Title: Entrepreneurship and Effective Small Business Management 11e   Server:          19 C/M/Y/K Short / Normal / Long v DESIGN SERVICES OF S4carlisle Publishing Services vi    Contents The Cultural Diversity of Entrepreneurship 20 Young Entrepreneurs 20 Women Entrepreneurs Minority Enterprises 21 22 Immigrant Entrepreneurs 23 Part-Time Entrepreneurs 24 Home-Based Business Owners Family Business Owners Copreneurs 26 Corporate Castoffs 24 24 27 Corporate “Dropouts” 27 Retired Baby Boomers 28 The Contributions of Small Businesses 28 ◼ LESSONS FROM THE STREET-SMART ENTREPRENEUR Start-Up 30 Bulletproofing Your Putting Failure into Perspective 31 How to Avoid the Pitfalls 32 Know Your Business in Depth Prepare a Business Plan 32 33 Manage Financial Resources 33 Understand Financial Statements Learn to Manage People Effectively 33 34 Set Your Business Apart from the Competition 34 Maintain a Positive Attitude 34 Conclusion—and a Look Ahead 34 Chapter Review Chapter 2 35 • Discussion Questions 36 Ethics and Social Responsibility: Doing the Right Thing 37 An Ethical Perspective 39 Three Levels of Ethical Standards 40 Immoral, Amoral, and Moral Management The Benefits of Moral Management Establishing an Ethical Framework 41 42 43 Why Ethical Lapses Occur 44 An Unethical Employee 45 An Unethical Organizational Culture 45 Moral Blindness 45 Competitive Pressures 45 Opportunity Pressures 45 Globalization of Business 45 Establishing and Maintaining Ethical Standards 46 Establishing Ethical Standards 46 Maintaining Ethical Standards 46 ◼ ENTREPRENEURSHIP IN ACTION But Is It Safe? Social Entrepreneurship 49 49 ◼ IN THE ENTREPRENEURIAL SPOTLIGHT Making a Profit and Making a Difference 50 Social Responsibility 51 Business’s Responsibility to the Environment 52 Business’s Responsibility to Employees 53 Cultural Diversity in the Workplace 54 Drug Testing 57 # 149226   Cust: Pearson Education / NJ / B & E   Au: Scarborough  Pg. No. vi Title: Entrepreneurship and Effective Small Business Management 11e   Server:          C/M/Y/K Short / Normal / Long DESIGN SERVICES OF S4carlisle Publishing Services Contents    vii HIV/AIDS 58 Sexual Harassment 59 ◼ LESSONS FROM THE STREET-SMART ENTREPRENEUR How to Avoid Sexual Harassment Charges 62 Privacy 64 ◼ ENTREPRENEURSHIP IN ACTION on Facebook 64 Think Before You Hit “Post” Business’s Responsibility to Customers Right to Safety 65 Right to Know 66 Right to Be Heard 66 Right to Education Right to Choice 65 66 67 Business’s Responsibility to Investors 67 Business’s Responsibility to the Community 67 Conclusion 68 Chapter Review Chapter 3 68 • Discussion Questions 69 Creativity and Innovation: Keys to Entrepreneurial Success 71 Creativity, Innovation, and Entrepreneurship Creativity—Essential to Survival 76 Can Creativity Be Taught? Creative Thinking 72 78 78 ◼ IN THE ENTREPRENEURIAL SPOTLIGHT The Ingredients of Creativity Barriers to Creativity 79 81 ◼ LESSONS FROM THE STREET-SMART ENTREPRENEUR Questions to Spur the Imagination 85 How to Enhance Creativity 86 Enhancing Organizational Creativity 86 Enhancing Individual Creativity 91 ◼ IN THE ENTREPRENEURIAL SPOTLIGHT How to Create a Culture of Creativity and Innovation 96 The Creative Process Step 1. Preparation 97 97 Step 2. Investigation 98 Step 3. Transformation Step 4. Incubation 99 Step 5. Illumination 101 Step 6. Verification 101 Step 7. Implementation Conclusion 102 102 Chapter Review Chapter 4 98 103 • Discussion Questions 103 Strategic Management and the Entrepreneur 105 Building a Competitive Advantage 108 The Strategic Management Process 110 Step 1. Develop a Clear Vision and Translate It into a Meaningful Mission Statement 111 ◼ LESSONS FROM THE STREET-SMART ENTREPRENEUR Thriving on Change 113 Step 2. Assess the Company’s Strengths and Weaknesses 114 Step 3. Scan the Environment for Significant Opportunities and Threats Facing the Business 115 Step 4. Identify the Key Factors for Success in the Business 116 # 149226   Cust: Pearson Education / NJ / B & E   Au: Scarborough  Pg. No. vii Title: Entrepreneurship and Effective Small Business Management 11e   Server:          C/M/Y/K Short / Normal / Long DESIGN SERVICES OF S4carlisle Publishing Services viii    Contents Step 5. Analyze the Competition 118 Step 6. Create Company Goals and Objectives 122 ◼ ENTREPRENEURSHIP IN ACTION Vizio: Disrupting Another Market 124 Step 7. Formulate Strategic Options and Select the Appropriate Strategies 125 ◼ IN THE ENTREPRENEURIAL SPOTLIGHT Strategies for Success 130 Step 8. Translate Strategic Plans into Action Plans 131 Step 9. Establish Accurate Controls 132 Conclusion 134 Chapter Review 135 • Discussion Questions 136 SECTION II Launching a Venture: Entry Strategies 137 Chapter 5 Choosing a Form of Ownership The Sole Proprietorship 137 139 Advantages of a Sole Proprietorship 140 ◼ LESSONS FROM THE STREET-SMART ENTREPRENEUR Right! 141 Disadvantages of the Sole Proprietorship 142 ◼ ENTREPRENEURSHIP IN ACTION What’s in a Name? The Partnership Get That Name 143 144 The Uniform Partnership Act 146 Advantages of the Partnership 146 ◼ LESSONS FROM THE STREET-SMART ENTREPRENEUR a Business Divorce 148 Disadvantages of the Partnership How to Avoid 149 Limited Partnerships 150 Limited Liability Partnerships 151 The Corporation 151 Requirements for Incorporation 151 Advantages of the Corporation 152 Disadvantages of the Corporation Professional Corporations The S Corporation 154 155 155 Advantages of an S Corporation 156 Disadvantages of an S Corporation 157 When Is an S Corporation a Wise Choice? 157 The Limited Liability Company Social Enterprises 160 157 ◼ IN THE ENTREPRENEURIAL SPOTLIGHT From the Life on the Street to Running a Business 160 Chapter 6 Nonprofit Organizations 161 Chapter Review • 163 Discussion Questions 164 Franchising and the Entrepreneur What Is a Franchise? 167 Types of Franchising 168 The Benefits of Buying a Franchise A Business System 165 168 169 Management Training and Support 170 Brand-Name Appeal 171 Standardized Quality of Goods and Services 171 National Advertising Programs Financial Assistance 171 172 Proven Products and Business Formats # 149226   Cust: Pearson Education / NJ / B & E   Au: Scarborough  Pg. No. viii Title: Entrepreneurship and Effective Small Business Management 11e   Server:          173 C/M/Y/K Short / Normal / Long DESIGN SERVICES OF S4carlisle Publishing Services Contents    ix Centralized Buying Power 173 Site Selection and Territorial Protection Increased Chance for Success 173 174 Drawbacks of Buying a Franchise 175 Franchise Fees and Ongoing Royalties 175 Strict Adherence to Standardized Operations 176 Restrictions on Purchasing 176 Limited Product Line 177 Market Saturation 177 Limited Freedom 178 No Guarantee of Success 178 Franchising and the Law 178 ◼ ENTREPRENEURSHIP IN ACTION The Right Way to Buy a Franchise Evaluate Yourself After the Cheering Stops 181 182 183 Research the Market 183 Consider Your Franchise Options 184 Get a Copy of the FDD and Study It Talk to Existing Franchisees 184 185 Ask the Franchisor Some Tough Questions Make Your Choice 185 187 ◼ LESSONS FROM THE STREET-SMART ENTREPRENEUR Make Sure You Select the Right Franchise 187 Franchise Contracts Termination Renewal 188 190 190 Transfer and Buybacks 190 ◼ IN THE ENTREPRENEURIAL SPOTLIGHT The Allure of Franchising Trends in Franchising 190 191 Changing Face of Franchisees Multiple-Unit Franchising 191 192 International Opportunities 192 ◼ IN THE ENTREPRENEURIAL SPOTLIGHT The Middle East: A Hot Spot for Franchising 193 Smaller, Nontraditional Locations Conversion Franchising Refranchising 195 195 195 Area Development and Master Franchising Cobranding 195 196 Serving Dual-Career Couples and Aging Baby Boomers 197 Franchising as a Growth Strategy 197 Unique Concept 197 Replicable 197 Expansion Plan 198 Due Diligence 198 Legal Guidance 198 Support for Franchisees 198 Conclusion 198 Chapter Review Chapter 7 198 • Discussion Questions Buying an Existing Business Buying an Existing Business 199 201 203 Advantages of Buying an Existing Business 203 Disadvantages of Buying an Existing Business 205 # 149226   Cust: Pearson Education / NJ / B & E   Au: Scarborough  Pg. No. ix Title: Entrepreneurship and Effective Small Business Management 11e   Server:          C/M/Y/K Short / Normal / Long DESIGN SERVICES OF S4carlisle Publishing Services x    Contents The Search Stage Self-Inventory 208 208 Develop a List of Criteria Potential Candidates Investigation 209 209 210 ◼ LESSONS FROM THE STREET-SMART ENTREPRENEUR When You Buy a Business 212 The Deal Stage Don’t Get Burned 212 Methods for Determining the Value of a Business 213 ◼ IN THE ENTREPRENEURIAL SPOTLIGHT Bond Coffee 222 Negotiating the Deal 223 Letter of Intent 226 The Due Diligence Process 227 ◼ ENTREPRENEURSHIP IN ACTION What’s the Deal? The Transition Stage Chapter Review Chapter 8 233 231 232 • Discussion Questions 234 New Business Planning Process: Feasibility Analysis, Business Modeling, and Crafting a Winning Business Plan 235 Conducting a Feasibility Analysis 237 Industry and Market Feasibility Analysis 237 Product or Service Feasibility Analysis: Is There a Market? Financial Feasibility Analysis: Is There Enough Margin? Entrepreneur Feasibility: Is This Idea Right for Me? Developing and Testing a Business Model Value Proposition 245 247 247 Customer Segments 248 Customer Relationships Channels 242 243 248 248 Key Activities 248 Key Resources 248 Key Partners 248 Revenue Streams 249 Cost Structure 249 ◼ ENTREPRENEURSHIP IN ACTION The Evolution of CoolPeopleCare’s Business Model 250 The Benefits of Creating a Business Plan 251 Three Tests That Every Business Plan Must Pass Reality Test Competitive Test Value Test 252 252 252 252 ◼ IN THE ENTREPRENEURIAL SPOTLIGHT The Battle of the Plans 253 The Elements of a Business Plan 254 Title Page and Table of Contents 255 The Executive Summary 255 Mission and Vision Statement Company History 255 256 ◼ IN THE ENTREPRENEURIAL SPOTLIGHT A Business Plan: Don’t Launch Without It 256 Description of Firm’s Product or Service 257 Business and Industry Profile Goals and Objectives Business Strategy 258 258 258 # 149226   Cust: Pearson Education / NJ / B & E   Au: Scarborough  Pg. No. x Title: Entrepreneurship and Effective Small Business Management 11e   Server:          C/M/Y/K Short / Normal / Long DESIGN SERVICES OF S4carlisle Publishing Services Contents    xi Competitor Analysis Marketing Strategy 259 259 Visualizing a Venture’s Risks and Rewards 263 What Lenders and Investors Look for in a Business Plan Capital 265 265 Capacity 265 Collateral 265 Character 265 Conditions 265 The Pitch: Making the Business Plan Presentation Conclusion 268 Suggested Business Plan Elements 268 Chapter Review 271 • Discussion Questions SECTION III Building a Marketing Plan Chapter 9 266 272 273 Building a Bootstrap Marketing Plan 273 Creating a Bootstrap Marketing Plan 274 ◼ IN THE ENTREPRENEURIAL SPOTLIGHT Bootstrap Marketing in the New Music Industry 276 Market Diversity: Pinpointing the Target Market 277 Determining Customer Needs and Wants Through Market Research How to Conduct Market Research 280 278 ◼ IN THE ENTREPRENEURIAL SPOTLIGHT Bootstrap Marketing Using Databases 282 Plotting a Bootstrap Marketing Strategy: Building a Competitive Edge Find a Niche and Fill It 283 284 Retain Existing Customers 285 Concentration on Innovation 285 The Marketing Mix Product 288 288 Promotion 296 ◼ LESSONS FROM THE STREET-SMART ENTREPRENEUR Marketing to Millennials 298 Price 302 Place 303 Chapter Review 304 • Discussion Questions 304 Chapter 10 Creative Use of Advertising and Promotion 305 Define Your Company’s Unique Selling Proposition Creating a Promotional Strategy 307 306 Publicity 307 Personal Selling 309 ◼ ENTREPRENEURSHIP IN ACTION Should an Ambulance Service Hire Its First Sales Representative? 311 Advertising 312 Selecting Advertising Media Media Options 316 314 ◼ LESSONS FROM THE STREET-SMART ENTREPRENEUR E-Mail Ads That Produce Results 322 How to Prepare an Advertising Budget 339 How to Advertise Big on a Small Budget 340 Cooperative Advertising 340 Shared Advertising 341 # 149226   Cust: Pearson Education / NJ / B & E   Au: Scarborough  Pg. No. xi Title: Entrepreneurship and Effective Small Business Management 11e   Server:          C/M/Y/K Short / Normal / Long DESIGN SERVICES OF S4carlisle Publishing Services xii    Contents Stealth Advertising 341 Other Ways to Save Chapter Review 341 341 • Discussion Questions Chapter 11 Pricing and Credit Strategies 342 343 Pricing: A Creative Blend of Art and Science 344 Three Powerful Pricing Forces: Image, Competition, and Value 348 Price Conveys Image 348 Competition and Prices 349 Focus on Value 350 Pricing Strategies and Tactics 351 New Product Pricing: Penetration, Skimming, or Sliding 352 Pricing Techniques for Established Products and Services 354 ◼ IN THE ENTREPRENEURIAL SPOTLIGHT How to Compete with Cheap Knockoffs of Your Successful Product 355 ◼ ENTREPRENEURSHIP IN ACTION Social Coupons: Beneficial—or Just Plain Bad—for Business? 359 ◼ LESSONS FROM THE STREET-SMART ENTREPRENEUR Enhancing Your Company’s Pricing Power 361 Pricing Techniques for Retailers 362 Markup 362 Pricing Techniques for Manufacturers 364 Direct Costing and Pricing 365 Computing a Break-Even Selling Price 365 Pricing Techniques for Service Businesses 367 The Impact of Credit on Pricing 369 ◼ ENTREPRENEURSHIP IN ACTION To Accept Credit Cards or Not: That Is the Question 369 Credit Cards Chapter Review 370 372 • Discussion Questions Chapter 12 Global Marketing Strategies 373 375 Why Go Global? 378 Going Global: Strategies for Small Businesses 381 Creating a Presence on the Web 381 ◼ IN THE ENTREPRENEURIAL SPOTLIGHT Going Global One Step at a Time 383 Relying on Trade Intermediaries 384 The Value of Using Trade Intermediaries Joint Ventures 385 387 Foreign Licensing 388 International Franchising 388 ◼ ENTREPRENEURSHIP IN ACTION Growing Beyond the Borders Countertrading and Bartering Exporting 391 392 392 ◼ LESSONS FROM THE STREET-SMART ENTREPRENEUR in the World 400 Establishing International Locations Finding Your Place 402 Importing and Outsourcing 402 Barriers to International Trade Domestic Barriers 404 404 International Barriers 405 Political Barriers 406 # 149226   Cust: Pearson Education / NJ / B & E   Au: Scarborough  Pg. No. xii Title: Entrepreneurship and Effective Small Business Management 11e   Server:          C/M/Y/K Short / Normal / Long DESIGN SERVICES OF S4carlisle Publishing Services Contents    xiii Business Barriers 406 Cultural Barriers 407 International Trade Agreements World Trade Organization 408 408 North American Free Trade Agreement 409 The Dominican Republic-Central America Free Trade Agreement 409 Conclusion 409 Chapter Review 411 • Discussion Questions 411 Chapter 13 E-Commerce and Entrepreneurship 413 Factors to Consider Before Launching into E-Commerce 416 Ten Myths of E-Commerce 418 Myth 1. If I Launch a Site, Customers Will Flock to It Myth 2. Online Customers Are Easy to Please 418 420 Myth 3. Making Money on the Web Is Easy 420 Myth 4. Privacy Is Not an Important Issue on the Web 420 Myth 5. “Strategy? I Don’t Need a Strategy to Sell on the Web! Just Give Me a Web Site, and the Rest Will Take Care of Itself” 421 Myth 6. The Most Important Part of Any E-Commerce Effort Is Technology 422 Myth 7. On the Web, Customer Service Is Not as Important as It Is in a Traditional Retail Store 422 Myth 8. Flashy Web Sites Are Better Than Simple Ones 423 Myth 9. It’s What’s Up Front That Counts 424 Myth 10. My Business Doesn’t Need a Web Site 424 Strategies for E-Success 425 Focus on a Niche in the Market 426 Develop a Community 426 Attract Visitors by Giving Away “Freebies” 427 Make Creative Use of E-Mail, but Avoid Becoming a “Spammer” 427 Sell the “Experience” 428 Make Sure Your Web Site Says “Credibility” 429 Make the Most of the Internet’s Global Reach 429 ◼ LESSONS FROM THE STREET-SMART ENTREPRENEUR How to Make Your Business Ready for Global E-Commerce 431 Go Mobile 432 Promote Your Web Site Online and Offline 433 Use Social Media Tools to Attract and Retain Customers ◼ ENTREPRENEURSHIP IN ACTION Media 434 Capture Local Traffic 433 Enhancing E-Commerce with Social 435 Develop an Effective Search Engine Optimization Strategy 435 Designing a Killer Web Site 438 Decide How to Bring Your Site to Life 439 Start with Your Target Customer 439 Give Customers What They Want 439 Select an Intuitive Domain Name 439 Make Your Web Site Easy to Navigate 441 Provide Customer Ratings and Reviews 442 Offer Suggestions for Related Products 442 Add Wish List Capability 442 Create a Gift Idea Center 442 Establish the Appropriate Call to Action on Each Page 442 # 149226   Cust: Pearson Education / NJ / B & E   Au: Scarborough  Pg. No. xiii Title: Entrepreneurship and Effective Small Business Management 11e   Server:          C/M/Y/K Short / Normal / Long DESIGN SERVICES OF S4carlisle Publishing Services xiv    Contents Build Loyalty by Giving Online Customers a Reason to Return to Your Web Site 442 Establish Hyperlinks with Other Businesses, Preferably Those Selling Products or Services That Complement Yours 442 Include an E-Mail Option, an Address, and a Telephone Number on Your Site Give Shoppers the Ability to Track Their Orders Online Offer Web-Only Specials 443 443 443 Use the Power of Social Media Use Customer Testimonials Follow a Simple Design 443 443 443 Assure Customers That Online Transactions Are Secure Post Shipping and Handling Charges Up Front 445 445 Create a Fast, Simple Checkout Process 445 Provide Customers Multiple Payment Options Confirm Transactions 445 445 Keep Your Site Fresh 445 Rely on Analytics to Improve Your Site 445 Test Your Site Often 445 Consider Hiring a Professional Designer 446 ◼ IN THE ENTREPRENEURIAL SPOTLIGHT Web Site Makeovers Tracking Web Results Software Solutions 446 447 447 Ensuring Web Privacy and Security 448 Privacy 448 Security 448 Chapter Review 451 • Discussion Questions 452 SECTION IV Building a Financial Plan 453 Chapter 14 Creating a Solid Financial Plan Basic Financial Reports The Balance Sheet 453 454 455 The Income Statement 456 The Statement of Cash Flows 458 Creating Projected Financial Statements 459 Projected Statements for the Small Business 459 Ratio Analysis 12 Key Ratios 465 466 ◼ IN THE ENTREPRENEURIAL SPOTLIGHT Pitcher Strikes Out While Trying to Hit a Home Run 475 Interpreting Business Ratios 476 What Do All These Numbers Mean? 479 ◼ LESSONS FROM THE STREET-SMART ENTREPRENEUR a Competitive Edge 481 Break-Even Analysis Gaining 482 Calculating the Break-Even Point 483 Adding a Profit 484 Break-Even Point in Units 484 Constructing a Break-Even Chart Using Break-Even Analysis 485 486 ◼ IN THE ENTREPRENEURIAL SPOTLIGHT Open Book Management 487 Chapter Review 488 • Discussion Questions 488 # 149226   Cust: Pearson Education / NJ / B & E   Au: Scarborough  Pg. No. xiv Title: Entrepreneurship and Effective Small Business Management 11e   Server:          C/M/Y/K Short / Normal / Long DESIGN SERVICES OF S4carlisle Publishing Services Contents    xv Chapter 15 Managing Cash Flow 489 Cash Management 490 Cash and Profits Are Not the Same 493 ◼ IN THE ENTREPRENEURIAL SPOTLIGHT Cash Flow and Pass-Through Entities 494 Preparing a Cash Budget 495 ◼ LESSONS FROM THE STREET-SMART ENTREPRENEUR A Short Season 496 Step 1: Determining an Adequate Minimum Cash Balance Step 2: Forecasting Sales 498 498 Step 3: Forecasting Cash Receipts 502 Step 4: Forecasting Cash Disbursements 502 Step 5: Estimating the End-of-Month Cash Balance ◼ ENTREPRENEURSHIP IN ACTION 504 Rowena’s Cash Budget 505 The “Big Three” of Cash Management 506 Accounts Receivable 506 Accounts Payable Inventory 510 512 ◼ IN THE ENTREPRENEURIAL SPOTLIGHT Be Ready for Inflation! Bootstrapping to Avoid the Cash Crunch Bootstrapping Overhead 516 Bootstrapping Employee Costs 518 Bootstrapping Operating Costs 518 Other Tools for Bootstrapping and Preserving Cash Conclusion 514 515 518 521 Chapter Review 521 • Discussion Questions Chapter 16 Sources of Equity Financing Planning for Capital Needs Fixed Capital 522 523 526 526 Working Capital 527 Sources of Equity Financing 527 Funding from Founders 528 ◼ IN THE ENTREPRENEURIAL SPOTLIGHT Bootstrapping a Technology Start-Up 530 Friends and Family Members Crowdfunding Accelerators 531 532 534 ◼ ENTREPRENEURSHIP IN ACTION Accelerator 535 Angels Launching a Business in a University 536 Strategic Investments Through Corporate Venture Capital 539 ◼ IN THE ENTREPRENEURIAL SPOTLIGHT Funding Does Not Ensure Success 540 Venture Capital Companies 541 Policies and Investment Strategies 542 Public Stock Sale (“Going Public”) 547 Chapter Review 549 • Discussion Questions Chapter 17 Sources of Debt Financing 550 551 ◼ IN THE ENTREPRENEURIAL SPOTLIGHT A Tale of Two Borrowers 554 Sources of Debt Capital Commercial Banks 555 555 # 149226   Cust: Pearson Education / NJ / B & E   Au: Scarborough  Pg. No. xv Title: Entrepreneurship and Effective Small Business Management 11e   Server:          C/M/Y/K Short / Normal / Long DESIGN SERVICES OF S4carlisle Publishing Services xvi    Contents Short-Term Loans 556 Intermediate- and Long-Term Loans 558 ◼ LESSONS FROM THE STREET-SMART ENTREPRENEUR a Positive Relationship with Your Banker 558 Nonbank Sources of Debt Capital Asset-Based Lenders How to Maintain 559 559 Trade Credit 561 Equipment Suppliers 562 Commercial Finance Companies Stock Brokerage Houses Insurance Companies Credit Unions Bonds 562 563 563 563 564 Private Placements 564 Small Business Investment Companies Federally Sponsored Programs 565 566 Economic Development Administration 566 Department of Housing and Urban Development 566 U.S. Department of Agriculture’s Rural Business and Cooperative Program and Business Program 567 Small Business Innovation Research Program 567 ◼ ENTREPRENEURSHIP IN ACTION Where Do We Turn Now? The Small Business Technology Transfer Program Small Business Administration SBA Express Loan Programs 568 568 568 569 SBA Loan Programs 569 State and Local Loan Development Programs 575 ◼ IN THE ENTREPRENEURIAL SPOTLIGHT Alternative Sources of Financing 575 Other Methods of Financing 576 Factoring Accounts Receivable Leasing 576 577 Cash Advances 577 Peer-to-Peer Loans Credit Cards 578 578 Where Not to Seek Funds Chapter Review 579 • 578 Discussion Questions 580 SECTION V Building an Operating Plan 581 Chapter 18 Location, Layout, and Physical Facilities 581 Stages in the Location Decision 582 Selecting the Region 583 Selecting the State 586 Selecting the City 589 The Final Site Selection 596 ◼ ENTREPRENEURSHIP IN ACTION The Ideal Spot 596 Location Criteria for Retail and Service Businesses 598 Trade Area Size 598 Customer Traffic 599 Adequate Parking Reputation Visibility 599 600 600 The Index of Retail Saturation 600 Reilly’s Law of Retail Gravitation # 149226   Cust: Pearson Education / NJ / B & E   Au: Scarborough  Pg. No. xvi Title: Entrepreneurship and Effective Small Business Management 11e   Server:          601 C/M/Y/K Short / Normal / Long DESIGN SERVICES OF S4carlisle Publishing Services Contents    xvii ◼ IN THE ENTREPRENEURIAL SPOTLIGHT Transformed Locations 601 Location Options for Retail and Service Businesses Central Business District 602 603 Neighborhood Locations 603 Shopping Centers and Malls Near Competitors Shared Spaces 603 606 607 Inside Large Retail Stores 607 Nontraditional Locations 607 Home-Based Businesses 607 On the Road 608 ◼ LESSONS FROM THE STREET-SMART ENTREPRENEUR How to Launch a Successful Pop-Up Shop 608 The Location Decision for Manufacturers Foreign Trade Zones 610 Business Incubators 611 Layout and Design Considerations Size and Adaptability 613 External Appearance 613 Entrances 612 614 The Americans with Disabilities Act Signs 610 614 615 Interiors 615 Drive-Through Windows 616 Sight, Sound, Scent, and Lighting 617 Sustainability and Environmentally Friendly Design 619 Layout: Maximizing Revenues, Increasing Efficiency, and Reducing Costs Layout for Retailers 619 619 ◼ IN THE ENTREPRENEURIAL SPOTLIGHT The Secrets of Successful Retail Layouts 621 Layout for Manufacturers Chapter Review 625 • 622 Discussion Questions 626 Chapter 19 Supply Chain Management 627 ◼ LESSONS FROM THE STREET-SMART ENTREPRENEUR How to Manage Supply Chain Risk 631 Creating a Purchasing Plan 632 Quality 634 Quantity: The Economic Order Quantity Cost of Units 639 641 Holding (Carrying) Costs Setup (Ordering) Costs 641 642 Solving for EOQ 642 EOQ with Usage Price 645 646 Trade Discounts 646 Quantity Discounts Cash Discounts 646 647 Timing—When to Order 649 Managing the Supply Chain: Vendor Analysis and Selection 654 ◼ IN THE ENTREPRENEURIAL SPOTLIGHT Integrating Local Suppliers into a Complex Supply Chain 655 Vendor Certification 657 The Final Decision 659 # 149226   Cust: Pearson Education / NJ / B & E   Au: Scarborough  Pg. No. xvii Title: Entrepreneurship and Effective Small Business Management 11e   Server:          C/M/Y/K Short / Normal / Long DESIGN SERVICES OF S4carlisle Publishing Services xviii    Contents ◼ IN THE ENTREPRENEURIAL SPOTLIGHT Back in the USA Legal Issues Affecting Purchasing Title 660 662 662 Risk of Loss 662 Insurable Interest 663 ◼ ENTREPRENEURSHIP IN ACTION Who Bears the Loss for a Shipment of Missing Watches? 663 Receiving Merchandise 664 Selling on Consignment Chapter Review 665 664 • Discussion Questions Chapter 20 Managing Inventory Inventory Control Systems 665 667 672 Perpetual Inventory Systems 672 ◼ IN THE ENTREPRENEURIAL SPOTLIGHT An Ideal Inventory Solution 674 Partial Inventory Control Systems Physical Inventory Count 674 678 Radio Frequency Identification Tags 678 ◼ LESSONS FROM THE STREET-SMART ENTREPRENEUR in Inventory Management 680 Best Practices Just-in-Time Inventory Control Techniques 681 Just-in-Time Techniques 681 Turning Slow-Moving Inventory into Cash Protecting Inventory from Theft 685 Employee Theft 683 685 ◼ ENTREPRENEURSHIP IN ACTION Misplaced Trust Shoplifting 691 692 ◼ ENTREPRENEURSHIP IN ACTION A Tale of Two Shoplifters Conclusion 696 700 Chapter Review 700 • Discussion Questions 701 Chapter 21 Staffing and Leading a Growing Company 703 The Entrepreneur’s Role as Leader 704 Hiring the Right Employees: The Company’s Future Depends on It 707 How to Hire Winners 708 ◼ ENTREPRENEURSHIP IN ACTION Facebook Interview Process 714 Conducting the Interview 715 ◼ ENTREPRENEURSHIP IN ACTION Building an Intentional Culture at Zappos 719 Building the Right Culture and Organizational Structure 720 Managing Growth and a Changing Culture 722 ◼ IN THE ENTREPRENEURIAL SPOTLIGHT What a Great Place to Work! 723 Team-Based Management 724 Communicating Effectively Improving Communication Listening 725 726 727 The Informal Communication Network: The “Grapevine” 728 The Challenge of Motivating Workers Empowerment Job Design 728 728 730 Rewards and Compensation 732 # 149226   Cust: Pearson Education / NJ / B & E   Au: Scarborough  Pg. No. xviii Title: Entrepreneurship and Effective Small Business Management 11e   Server:          C/M/Y/K Short / Normal / Long DESIGN SERVICES OF S4carlisle Publishing Services Contents    xix ◼ LESSONS FROM THE STREET-SMART ENTREPRENEUR Sabbaticals 735 Performance Feedback 736 Performance Appraisal 737 Chapter Review 739 • Discussion Questions 740 SECTION VI Legal Aspects of Small Business: Succession, Ethics, and Government Regulation 741 Chapter 22 Management Succession and Risk Management Strategies in the Family Business 741 Family Businesses 742 Benefits of Family Businesses 742 The Dark Side of Family Businesses 743 Characteristics of Successful Family Businesses Exit Strategies 745 748 Selling to Outsiders 749 Selling to Insiders 749 ◼ LESSONS FROM THE STREET-SMART ENTREPRENEUR How to Set Up an ESOP 751 Management Succession 752 ◼ IN THE ENTREPRENEURIAL SPOTLIGHT Can Your Family Business Survive for Centuries? 755 Developing a Management Succession Plan 756 Buy-Sell Agreement 760 Lifetime Gifting 761 Setting Up a Trust 761 Risk Management Strategies 763 The Basics of Insurance 765 Types of Insurance 766 ◼ IN THE ENTREPRENEURIAL SPOTLIGHT The Aftermath of a Storm 770 Controlling Insurance Costs Chapter Review 779 • 777 Discussion Questions 780 Chapter 23 The Legal Environment: Business Law and Government Regulation 781 The Law of Contracts Agreement Contractual Capacity Legality 783 783 786 787 Breach of Contract 788 The Uniform Commercial Code Sales and Sales Contracts 789 Breach of Sales Contracts 791 788 Sales Warranties and Product Liability 791 Protection of Intellectual Property Rights Patents 794 795 Trademarks 798 ◼ ENTREPRENEURSHIP IN ACTION Protecting Your Brand 799 Copyrights 800 Protecting Intellectual Property 800 The Law of Agency Bankruptcy 802 801 Forms of Bankruptcy 803 # 149226   Cust: Pearson Education / NJ / B & E   Au: Scarborough  Pg. No. xix Title: Entrepreneurship and Effective Small Business Management 11e   Server:          C/M/Y/K Short / Normal / Long DESIGN SERVICES OF S4carlisle Publishing Services xx    Contents ◼ IN THE ENTREPRENEURIAL SPOTLIGHT A Second Chance at Success Government Regulation 805 806 Trade Practices 807 Consumer Protection 809 ◼ LESSONS FROM THE STREET-SMART ENTREPRENEUR You Up for Trouble? 810 Consumer Credit Are Your Ads Setting 811 Environmental Law 812 ◼ ENTREPRENEURSHIP IN ACTION Small Businesses and Eminent Domain 813 The Affordable Care Act Chapter Review Appendix Cases 814 • The picturebooth co. Discussion Questions 816 817 831 Endnotes Index 815 846 884 # 149226   Cust: Pearson Education / NJ / B & E   Au: Scarborough  Pg. No. xx Title: Entrepreneurship and Effective Small Business Management 11e   Server:          C/M/Y/K Short / Normal / Long DESIGN SERVICES OF S4carlisle Publishing Services In memory of Lannie H. Thornley and Mildred T. Myers To Louise Scarborough and John Scarborough. Your love, support, and encouragement have made all the difference. —NMS To my grandchildren Lucy Kuyper, Ellie Cornwall, and Isaac Cornwall. —JRC # 149226   Cust: Pearson Education / NJ / B & E   Au: Scarborough  Pg. No. xxi Title: Entrepreneurship and Effective Small Business Management 11e   Server:          C/M/Y/K Short / Normal / Long DESIGN SERVICES OF S4carlisle Publishing Services This page intentionally left blank Preface The field of entrepreneurship is experiencing incredible rates of growth, not only in the United States but around the world as well. People of all ages, backgrounds, and nationalities are launching businesses of their own and, in the process, are reshaping the global economy. Entrepreneurs are discovering the natural advantages that result from their companies’ size—speed, agility, flexibility, sensitivity to customers’ needs, creativity, a spirit of innovation, and many others—give them the ability to compete successfully with companies many times their size and that have budgets to match. As large companies struggle to survive wrenching changes in competitive forces by downsizing, merging, and restructuring, the unseen army of small businesses continues to flourish and to carry the nation’s economy on its back. Entrepreneurs who are willing to assume the risks of the market to gain its rewards are the heart of capitalism. These men and women, with their bold entrepreneurial spirits, have led our nation into prosperity throughout its history. Entrepreneurship also plays a significant role in countries throughout the world. Across the globe, entrepreneurs are creating small companies that lead nations to higher standards of living and hope for the future. In the United States, we can be thankful for a strong small business sector. Small companies deliver the goods and services we use every day, provide jobs and training for millions of ­workers, and lead the way in creating the products and services that make our lives easier and more enjoyable. Small businesses were responsible for introducing to the world the elevator, the airplane, FM radio, the zipper, the personal computer, and a host of other marvelous inventions. The imaginations of the next generation of entrepreneurs of which you may be a part will determine other fantastic products and services that lie in our future! Whatever those ideas may be, we can be sure of one thing: Entrepreneurs will be there to make them happen. The purpose of this book is to open your mind to the possibilities, the challenges, and the rewards of owning your own business and to provide the tools you will need to be successful if you choose the path of the entrepreneur. It is not an easy road to follow, but the rewards—both tangible and intangible—are well worth the risks. Not only may you be rewarded financially for your business ideas, but also, like entrepreneurs the world over, you will be able to work at something you love! If you do not pursue a career as an entrepreneur, you still need to understand entrepreneurship because you most likely will be working in, doing business with, or competing against small businesses throughout your career. Now in its eleventh edition, Entrepreneurship and Effective Small Business Management has stood the test of time by bringing to generations of students the material they need to launch and manage a small business successfully in a hotly competitive environment. In writing this edition, we have worked hard to provide you with plenty of practical, “hands-on” tools and techniques to make your business ventures successful. Many people launch businesses every year, but only some of them succeed. This book provides the tools to help you learn the right way to launch and manage a small business with the staying power to succeed and grow. What’s New to This Edition? The first change you will notice is in the title of the book. We believe that the new title, ­Entrepreneurship and Effective Small Business Management, reflects this edition’s emphasis on the entrepreneurial process. When we started writing this book nearly 35 years ago, small ­business management was the topic of choice on college campuses; today, the emphasis of ­college courses is on entrepreneurship. This edition reflects that change by including enhanced coverage of the entrepreneurial process, including the creative process and developing a business model, while retaining thorough coverage of traditional topics that are required for entrepreneurial success, such as e-commerce, managing cash flow, selecting the right location and designing the proper layout, and supply chain management. Another important change is the addition of Jeff Cornwall as coauthor. Jeff, who holds the Jack C. Massey Chair of Entrepreneurship at Belmont University, is an experienced and successful xxiii # 149226   Cust: Pearson Education / NJ / B & E   Au: Scarborough  Pg. No. xxiii Title: Entrepreneurship and Effective Small Business Management 11e   Server:          C/M/Y/K Short / Normal / Long DESIGN SERVICES OF S4carlisle Publishing Services xxiv    Preface entrepreneur, a dedicated teacher, a respected author, and an acknowledged expert in the field of entrepreneurship. The United States Association for Small Business and ­Entrepreneurship has honored Jeff on numerous occasions for his contributions to the field of entrepreneurship, n­ aming him a Longnecker/USASBE Fellow in 2006 and awarding the Center for E ­ ntrepreneurship that he headed at Belmont University the USASBE National Model Undergraduate Program of the Year Award in 2008. USASBE also recognized Jeff in 2013 with the prestigious Outstanding Educator of the Year award. He served as USASBE’s president in 2010. Jeff’s blog, The ­Entrepreneurial Mind, is one of the most popular small business blogs on the Internet, named by Forbes as a “Best of the Web” selection. This edition of Entrepreneurship and Effective Small Business Management also includes many new pedagogical features that reflect the dynamic and exciting field of entrepreneurship. ● ● ● ● ● ● ● ● ● The addition of a chapter on the creative process that explores how the entrepreneurial mind works. This innovative chapter also explains how entrepreneurs can stimulate their own creativity and the creativity of the people in their organizations. Because your generation is keenly interested in ethics and social responsibility, we placed the updated chapter on ethics and social responsibility right up front (Chapter 2). This thought-provoking chapter gives you the opportunity to wrestle with some of the ethical dilemmas that entrepreneurs face every day in business. Encouraging you to think about and discuss these issues now prepares you for making the right business decisions later. We also have included more extensive coverage of social entrepreneurship in this edition, including new forms of ownership designed specifically for social entrepreneurs. This edition includes enhanced coverage of social media, such as Facebook, ­Twitter, ­Pinterest, YouTube, and others, throughout the entire book, including ways to use ­social media as a powerful bootstrap marketing technique; a fund-raising tool; a quick, ­inexpensive way to test business models; and many others. We have included more material on bootstrapping throughout the book because today’s young entrepreneurs must be prepared to launch their ventures with limited resources and little access to outside funding. We have updated the chapters on financing small businesses to reflect the current state of financial markets. Included in these updates is discussion of the newest form of financing known as crowdfunding. We have revised the chapter on creating a business plan to reflect the modern view of the business planning process. In addition to retaining extensive coverage of how to write a business plan, we have expanded the section on conducting a feasibility analysis and added a section on using the business model canvas to develop a viable business model. This chapter also shows how to take the ideas that pass the feasibility analysis, build a business model around them, and create a business plan that serves as a guide to a successful launch. Almost all of the real-world examples in this edition are new and are easy to spot ­because they are highlighted by in-margin markers. These examples allow you to see how ­entrepreneurs are putting into practice the concepts that you are learning in the book and in class. The examples are designed to help you to remember the key concepts in the course. The business founders in these examples also reflect the diversity that makes ­entrepreneurship a vital part of the global economy. To emphasize the practical nature of this book, every chapter includes a new or updated “Lessons from the Street-Smart Entrepreneur” feature that focuses on a key concept and offers practical advice about how you can put it to practice in your own business. These features include topics such as “Questions to Spur the Imagination,” “Thriving on Change,” “How to Make Your Business Ready for Global E-Commerce,” “E-Mail Ads That Produce Results,” “How to Set Up an ESOP,” and many others. We have updated all of the “Entrepreneurship in Action” features that have proved to be so popular with both students and professors. Every chapter contains at least one of these short cases that describes a decision that an entrepreneur faces and asks you to assume the role of consultant and advise the entrepreneur on the best course of action. # 149226   Cust: Pearson Education / NJ / B & E   Au: Scarborough  Pg. No. xxiv Title: Entrepreneurship and Effective Small Business Management 11e   Server:          C/M/Y/K Short / Normal / Long DESIGN SERVICES OF S4carlisle Publishing Services Preface    xxv This feature includes the fascinating stories of entrepreneurs who see space as the next ­entrepreneurial frontier (including Elon Musk’s SpaceX and Richard Branson’s Virgin Galactic), ­professional athletes who have become successful franchisees (including Jamal Mashburn, Drew Brees, and Angelo Crowell), and using bootstrap marketing techniques to build a name in the music industry (Erin Anderson, founder of Olivia Management). Each one poses a problem or an opportunity, includes questions that focus your attention on key issues, and helps you hone your analytical and critical thinking skills. ● ● ● ● ● This edition includes 10 new brief cases that cover a variety of topics (see the Case ­Matrix that appears on the inside cover). All of the cases are about small companies, and most are real companies that you can research online. These cases challenge you to think ­critically about a variety of topics that are covered in the book—from managing cash flow in a ­seasonal business and choosing a location for a restaurant’s second branch to deciding how to deal with the Affordable Care Act and setting prices for a social entrepreneur’s ­eco-friendly apparel. Almost all of the “In the Entrepreneurial Spotlight” features are new to this edition as well. These inspirational true stories invite you to explore the inner workings of ­entrepreneurship by advising entrepreneurs who face a variety of real-world business issues. Topics ­addressed in these “Spotlights” include college students applying the entrepreneurial skills they are learning in their classes by starting businesses while they are still in school, ­entrepreneurs who discover that for them franchising is the ideal path to entrepreneurship, a television makeup artist who launched her own line of makeup and faces decisions about promoting it, entrepreneurs who are enhancing their companies’ e-commerce efforts with social media, and many others. The content of every chapter reflects the most recent statistics, studies, surveys, and ­research about entrepreneurship and small business management. Theory, of course, is important, but this book explains how entrepreneurs are applying the theory of ­entrepreneurship every day. You will learn how to launch and manage a business the right way by studying the most current concepts in entrepreneurship and small business management. A sample business plan for The Picturebooth Company serves as a model for you as you create plans for your own business ideas. Ross Hill wrote this plan for a business that sells and rents portable photo booths while he was a student and used it to launch his ­business. Not only has Ross used this plan to guide his successful company, but he also has used it to raise more than $70,000 in start-up capital. Hill’s plan won three business plan competitions, including the national competition sponsored by Collegiate DECA. This edition features an updated, attractive, full-color design and layout that is designed to be user-friendly. Each chapter begins with learning objectives, which are repeated as inmargin markers within the chapter to guide you as you study. Policymakers across the world are discovering that economic growth and prosperity lie in the hands of entrepreneurs—those dynamic, driven men and women who are committed to achieving success by creating and marketing innovative, customer-focused new products and services. Not only are these entrepreneurs creating economic prosperity, but many of them are also striving to make the world a better place in which to live by using their businesses to solve social problems. Those who possess this spirit of entrepreneurial leadership continue to lead the economic ­revolution that has proved repeatedly its ability to raise the standard of living for people everywhere. We hope that by using this book in your small business management or entrepreneurship class, you will join this economic revolution to bring about lasting, positive changes in your community and around the world. If your goal is to launch a successful business of your own, Entrepreneurship and Effective Small Business Management is the ideal book for you! This eleventh edition of Entrepreneurship and Effective Small Business Management provides you with the knowledge you need to launch a business that has the greatest chance for success. One of the hallmarks of every edition of this book has been a very practical, “hands-on” approach to entrepreneurship. Our goal is to equip you with the tools you need for entrepreneurial success. By combining this textbook with your professor’s expertise and enthusiasm, we believe that you will be equipped to follow your dreams of becoming a successful entrepreneur. # 149226   Cust: Pearson Education / NJ / B & E   Au: Scarborough  Pg. No. xxv Title: Entrepreneurship and Effective Small Business Management 11e   Server:          C/M/Y/K Short / Normal / Long DESIGN SERVICES OF S4carlisle Publishing Services xxvi    Preface CourseSmart eTextbook CourseSmart eTextbooks were developed for students looking to save on required or recommended textbooks. Students simply select their eText by title or author and purchase immediate access to the content for the duration of the course using any major credit card. With a ­CourseSmart eText, students can search for specific keywords or page numbers, take notes ­online, print out reading assignments that incorporate lecture notes, and bookmark important passages for later review. For more information or to purchase a CourseSmart eTextbook, visit www.coursesmart.com. Acknowledgments Supporting every author is a staff of professionals who work extremely hard to bring a book to life. They handle the thousands of details involved in transforming a rough manuscript into the finished product you see before you. Their contributions are immeasurable, and I a­ ppreciate all they do to make this book successful. We have been blessed to work with the following ­outstanding publishing professionals: ● ● ● ● Claudia Fernandes, our exceptionally capable program manager, who was always just an e-mail away when we needed her help with a seemingly endless number of details. She always does a masterful job of coordinating the many aspects of this project. Her ability to juggle the demands of multiple projects at once is amazing! Ann Pulido, project manager who skillfully guided the book through the long and ­sometimes difficult production process with wonderful “can-do” attitude. Ann is capable, experienced, and reliable, and we appreciate her hard work. Cordes Hoffman, photo researcher, who took our ideas for photos and transformed them into the meaningful images you see on these pages. Her job demands many hours of research and hard work. Erin Gardner, marketing manager, whose input helped focus this edition on an evolving market. We also extend a big “Thank You” to the corps of Pearson Education sales representatives, who work so hard to get our books into customers’ hands and who represent the front line in our effort to serve our customers’ needs. They are the unsung heroes of the publishing industry. Special thanks go to the following academic reviewers, whose ideas, suggestions, and thoughtprovoking input have helped to shape this edition and previous editions of ­Entrepreneurship and Effective Small Business Management. We always welcome feedback from our customers! Joseph Adamo, Cazenovia College H. Lon Addams, Weber State University Mainuddin Afza, Bloomsburg University of Pennsylvania Corinne Asher, Henry Ford Community College Calvin Bacon, University of South Alabama Judy Beebe, Western Oregon University Tony Bledsoe, Meredith College Jim Bloodgood, Kansas State University Steven Bradley, Austin Community College Kimberly Brown-King, Southeast Arkansas College James H. Browne, University of Southern Colorado Judy Dietert, Southwest Texas State University Brian Dyk, Heritage College Todd Finkle, University of Akron Olene Fuller, San Jacinto College North Pat Galitz, Southeast Community College–Lincoln # 149226   Cust: Pearson Education / NJ / B & E   Au: Scarborough  Pg. No. xxvi Title: Entrepreneurship and Effective Small Business Management 11e   Server:          Joyce Gallagher, Maysville Community and Technical College Bill Godair, Landmark College Mark Hagenbuch, University of North Carolina–Greensboro Ronald Hagler, California Lutheran University Jeff Hornsby, Ball State University Chris Howell, New Mexico Junior College Eddie Hufft, Alcorn State University Ralph Jagodka, Mt. San Antonio College Richard Judd, University of Illinois at Springfield Kyoung-Nan Kwon, Michigan State University Stephen Lovejoy, University of Maine at Augusta John F. McMahon, Mississippi County Community College John Moonen, Daytona Beach Community College C/M/Y/K Short / Normal / Long DESIGN SERVICES OF S4carlisle Publishing Services Preface    xxvii Joseph Neptune, St. Leo University Linda M. Newell, Saddleback College Randy Nichols, Sullivan University Marcella Norwood, University of Houston David Orozco, Michigan Technological University Ben Powell, University of Alabama Khaled Sartawi, Fort Valley State University Jack Sheeks, Broward Community College Herbert Sherman, Southampton College–LIU Lindsay Sholdar, Art Institute of California, San Diego Howard Stroud, LeTourneau University Ram Subramanian, Montclair State University Charles N. Toftoy, George Washington University Steve Varga-Sinka, Saint Leo University Tony Warren, Pennsylvania State University Tanisha Washington, Wade College Willie Williams, Tidewater Community College Bill Wise, Metropolitan State College of Denver We also are grateful to our colleagues who support us in the often grueling process of ­writing a book: Foard Tarbert, Sam Howell, Jerry Slice, Suzanne Smith, Jody Lipford, Tobin Turner, Cindy Lucking, and Talisa Koon of Presbyterian College and Mark Schenkel, Mark Phillips, and Jose Gonzalez of Belmont University. Finally, we thank Cindy Scarborough and Ann Cornwall for their love, support, and understanding while we worked many long hours to complete this book. For them, this project represents a labor of love. Norman M. Scarborough William H. Scott III Associate Professor of Entreprenuership Presbyterian College Clinton, South Carolina nmscarb@presby.edu Jeffrey R. Cornwall Jack C. Massey Chair in Entrepreneurship Belmont University Nashville, Tennessee jeff.cornwall@belmont.edu # 149226   Cust: Pearson Education / NJ / B & E   Au: Scarborough  Pg. No. xxvii Title: Entrepreneurship and Effective Small Business Management 11e   Server:          C/M/Y/K Short / Normal / Long DESIGN SERVICES OF S4carlisle Publishing Services This page intentionally left blank SECTION I The Rewards and Challenges of Entrepreneurship CHAPTER 1 Entrepreneurs: The Driving Force Behind Small Business Learning Objectives Upon completion of this chapter, you will be able to: 1. Define the role of the entrepreneur in the U.S. economy. 2. Describe the entrepreneurial profile. 3. Explain how entrepreneurs spot business opportunities. 4. Describe the benefits of owning a small business. 5. Describe the potential drawbacks of owning a small business. 6. Explain the forces that are driving the growth of entrepreneurship. 7. Discuss the role of diversity in small business and entrepreneurship. 8. Describe the contributions small businesses make to the U.S. economy. 9. Put business failure into the proper perspective. 10. Explain how small business owners can avoid the major pitfalls of running a business. All our dreams can come true, if we have the courage to pursue them. —Walt Disney Success is the prize given to those who try and fail willingly. —Jeffrey Bryant 1 1 #149226 Cust: Pearson Au: Scarborough Pg. No. 1 Title: Entrepreneurship and Effective Small Business Management 11e Server: C/M/Y/K Short / Normal DESIGN SERVICES OF S4carlisle Publishing Services 2    Section I  • The Rewards and Challenges of Entrepreneurship The Role of the Entrepreneur 1. Define the role of the entrepreneur in the U.S. economy. Welcome to the world of the entrepreneur! Every year, entrepreneurs in the United States alone launch more than 6.5 million businesses.1 These people, who come from diverse ­backgrounds, are striving to realize that Great American Dream of owning and operating their own ­businesses. Some of them have chosen to leave the security of the corporate hierarchy in search of ­independence, others have been forced out of large corporations as a result of downsizing, and still others have from the start chosen the autonomy that owning a business offers. The ­impact of these entrepreneurs on the nation’s economy goes far beyond their numbers, however. The r­ esurgence of the entrepreneurial spirit they are spearheading is the most significant economic development in recent business history. These heroes of the business world are introducing i­ nnovative products and services, pushing back technological frontiers, creating new jobs, o­ pening foreign markets, and, in the process, sparking the U.S. economy. Entrepreneurs, once shunned as people who could not handle a “real” job in the corporate world, now are the celebrities of the global economy. They create companies, jobs, wealth, and innovative solutions to some of the world’s most vexing problems, from relief for sore feet to renewable energy sources. “The story of entrepreneurship entails a never ending search for new and imaginative ways to combine the factors of production into new methods, processes, technologies, products, or services,” says one government economist who has conducted extensive research on entrepreneurship’s impact.2 In short, small business is “cool,” and entrepreneurs are the rock stars of the business world. The last several decades have seen record numbers of entrepreneurs launching businesses. One important indicator of the popularity of entrepreneurship is the keen interest expressed by ­students in creating their own businesses. According to a recent Gallup survey, 77 percent of students in grades 5 through 12 say that they “want to be their own bosses.”3 Growing numbers of young people are choosing entrepreneurship as a career (some of them while they are still in school) rather than joining the ranks of the pin-striped masses in major corporations. A recent poll by the Young ­Entrepreneur Council reports that 21 percent of recent college graduates started businesses out of necessity because they could not find jobs elsewhere.4 Many others choose to start their own ­companies because they prefer the autonomy of entrepreneurship to the hierarchy of ­corporate America. In fact, when many young people hear the phrase “corporate America,” they do not think of career opportunities; instead, images of the film Office Space come to mind. In short, the ­probability that you will become an entrepreneur at some point in your life has never been higher! Research suggests that entrepreneurial activity remains vibrant not only in the United States but around the world as well. According to the Global Entrepreneurship Monitor, a study of ­entrepreneurial activity across the globe, 13 percent of the U.S. population aged 18 to 64, more than one in eight adults, is engaged in entrepreneurial activity. The level of entrepreneurial a­ ctivity in the United States is the same as the global average of 13.0 percent and above the ­average (7.1 percent) for innovation-driven economies (see Figure 1.1).5 Entrepreneurship has been part of the fabric of the United States since its earliest days. Many of the nation’s founding fathers were entrepreneurs. Thomas Jefferson started a nailery (a business that transformed iron into nails) in 1794 and purchased high-tech (at the time) nail-making m ­ achinery in 1796 to increase his company’s production. Benjamin Franklin was an inventor and in 1729 at the age of 21, convinced several friends to finance his purchase of a newspaper that he renamed The Pennsylvania Gazette, a business that made him quite wealthy.6 That same entrepreneurial spirit remains strong today as it does in other countries. Entrepreneurs in every corner of the world are launching businesses thanks to technology that provides easy access to both local and global ­markets at start-up. Even countries that traditionally are not known as hotbeds of e­ ntrepreneurial activity are home to promising start-up companies. Despite decades of economic problems, ­Zimbabwe’s economy is growing once again, and small businesses are driving much of its growth. Entrepreneurial Profile: Divine Ndhlukula: Securio One of Zimbabwe’s most ­successful entrepreneurs is Divine Ndhlukula, who in 1998 started a small security company, Securico, in her home with a modest investment and just four employees. Ndhlukula says that she dreamed of an entrepreneurial career while she was a student studying accounting. After brief stints in farming, broadcasting, and insurance, she saw an opportunity in the security services business and #149226 Cust: Pearson Au: Scarborough Pg. No. 2 Title: Entrepreneurship and Effective Small Business Management 11e Server: C/M/Y/K Short / Normal DESIGN SERVICES OF S4carlisle Publishing Services CHAPTER 1 • Entrepreneurs: The Driving Force Behind Small Business    3 Persons per 100 adults, 18–64 years old engaged in entrepreneurial activity 45 TEA index Total entrepreneurial activity (TEA) index 40 Global TEA average 35 30 Global average = 13.0 25 20 15 10 5 Algeria Angola Botswana Egypt Ethiopia Ghana Iran Malawi Nigeria Pakistan Palistine Uganda Zambia Argentina Barbados Bosnia/Herzegovina Brazil Chile China Colombia Costa Rica Croatia Ecuador El Salvador Estonia Hungary Latvia Lithuania Macedonia Malaysia Mexico Namibia Panama Peru Poland Romania Russia South Africa Thailand Trinidad/Tobago Tunisia Turkey Uruguay Austria Belgium Denmark Finland France Germany Greece Ireland Israel Italy Japan Rep of Korea Netherlands Norway Portugal Singapore Slovakia Slovenia Spain Sweden Switzerland Taiwan United Kingdom United States 0 Factor-driven economies Efficiency-driven economies Innovation-driven economies Country FIGURE 1.1 Entrepreneurial Activity Across the Globe Source: Based on Siri Roland Xavier, Donna Kelley, Jacqui Kew, Mike Herrington, and Arne Vorderwülbecke, Global Entrepreneurship Monitor 2012 Global Report, Babson College, Universidad del Desarrollo, Universiti Tun Abdul Razak, and Global Entrepreneurship Research Consortium, 2012, pp. 58–59. started Securico, which targets multinational companies operating in Zimbabwe. “People who aspire to be in business think that you have to have lots of money to start,” Ndhlukula says. “It’s not that. It’s really the passion.” Today Securico, which now provides a full range of security services, employs more than 3,500 people, generates sales of more than $16 million, and was recently was recognized by Africa Awards for Entrepreneurship.7 In recent years, large companies in the United States and around the world have engaged in massive downsizing campaigns, dramatically cutting the number of managers and workers on their payrolls. This flurry of “pink slips” has spawned a new population of entrepreneurs—“castoffs” from large corporations (many of whom thought they would be lifetime ladder climbers in their companies) with solid management experience and many productive years left before retirement. One casualty of this downsizing has been the long-standing notion of job security in large corporations, which all but destroyed the notion of loyalty and has made workers much more mobile. In the 1960s, the typical employee had worked for an average of four employers by the time he or she reached age 65; today, the average employee has had eight employers by the time he or she is 30.8 Members of Generation X (those born between 1965 and 1980) and ­Generation Y (those born between 1981 and 1995), in particular, no longer see launching a business as being a risky career path. Having witnessed large companies lay off their parents after many years of service, these young people see entrepreneurship as the ideal way to create their own job security and career success! They are eager to control their own destinies. This downsizing trend among large companies also has created a more significant philosophical change. It has ushered in an age in which “small is beautiful.” Thirty years ago, competitive #149226 Cust: Pearson Au: Scarborough Pg. No. 3 Title: Entrepreneurship and Effective Small Business Management 11e Server: C/M/Y/K Short / Normal DESIGN SERVICES OF S4carlisle Publishing Services 4    Section I  • The Rewards and Challenges of Entrepreneurship conditions favored large companies with their hierarchies and layers of management; today, with the pace of change constantly accelerating, fleet-footed, agile, small companies have the competitive advantage. These nimble competitors dart into and out of niche markets as they emerge and recede, they move faster to exploit opportunities the market presents, and they use modern technology to create within a matter of weeks or months products and services that once took years and all of the resources a giant corporation could muster. The balance has tipped in favor of small entrepreneurial companies. Entrepreneurship also has become mainstream. Although launching a business is never easy, the resources available today make the job much simpler today than ever before. Thousands of colleges and universities offer courses in entrepreneurship, the Internet hosts a sea of information on launching a business, sources of capital that did not exist just a few years ago are now available, and business incubators hatch companies at impressive rates. Once looked down on as a choice for people unable to hold a corporate job, entrepreneurship is now an accepted and respected part of our culture. Another significant shift in the bedrock of our nation’s economic structure is influencing this swing in favor of small companies. The nation is rapidly moving away from an industrial economy to a knowledge-based one. What matters now is not so much the traditional factors of production but knowledge and information. The final impact of this shift will be as dramatic as the move from an agricultural economy to an industrial one that occurred more than 200 years ago in the United States. A knowledge-based economy favors small businesses because the cost of managing and transmitting knowledge and information is very low, and computer and information technologies are driving these costs lower still. No matter why they start their businesses, entrepreneurs continue to embark on one of the most exhilarating—and one of the most frightening—adventures ever known: launching a business. It’s never easy, but it can be incredibly rewarding, both financially and emotionally. One successful business owner claims that an entrepreneur is “anyone who wants to experience the deep, dark canyons of uncertainty and ambiguity and wants to walk the breathtaking highlands of success. But I caution: Do not plan to walk the latter until you have experienced the former.”9 True entrepreneurs see owning a business as the real measure of success. Indeed, entrepreneurship often provides the only avenue for success to those who otherwise might have been denied the opportunity. Who are these entrepreneurs, and what drives them to work so hard with no guarantee of success? What forces lead them to risk so much and to make so many sacrifices in an attempt to achieve an ideal? Why are they willing to give up the security of a steady paycheck working for someone else to become the last person to be paid in their own companies? This chapter will examine the entrepreneur, the driving force behind the American economy. Source: CartoonStock. #149226 Cust: Pearson Au: Scarborough Pg. No. 4 Title: Entrepreneurship and Effective Small Business Management 11e Server: C/M/Y/K Short / Normal DESIGN SERVICES OF S4carlisle Publishing Services CHAPTER 1 • Entrepreneurs: The Driving Force Behind Small Business    5 What Is an Entrepreneur? Adapted from the French verb entreprendre, which means “to undertake” or “to attempt,” the word “entrepreneur” was introduced in 1755 in economist Richard Cantillon’s book Essay on the Nature of Trade in General. Cantillon defined an entrepreneur as a producer with nonfixed ­income and uncertain returns.10 At any given time, an estimated 9 million adults in the United States are engaged in launching a business, traveling down the path of entrepreneurship that Cantillon first wrote about more than 250 years ago.11 An entrepreneur is one who creates a new business in the face of risk and uncertainty for the purpose of achieving profit and growth by identifying opportunities and assembling the necessary resources to capitalize on those opportunities. Entrepreneurs usually start with nothing more than an idea—often a simple one—and then find and organize the resources necessary to transform that idea into a sustainable business. H ­ arvard Business School professor Howard Stevenson says that entrepreneurs “see an opportunity and don’t feel constrained from pursuing it because they lack resources. They’re used to making do without resources.”12 In essence, entrepreneurs are disrupters, upsetting the traditional way of doing things by creating new ways to do them. What entrepreneurs have in common is the ability to spot opportunities and the willingness to capitalize on them. Entrepreneurial Profile: Ted Southern and Nikolay Moiseev: Final Frontier ­Design Ted Southern, an artist and designer, and Nikolay Moiseev, a mechanical engineer, launched Final Frontier Design, when they saw the opportunity to create functional, affordable space suits for the burgeoning commercial space flight industry (see the accompanying “Entrepreneurship in Action” feature on page 9). “We recognized a new market in the suborbital space flight industry,” says Southern. Their Brooklyn, New York–based start-up makes space suits that are more flexible than the traditional space suits designed by NASA and include ergonomic designs, clever reinforcements, and innovative joints that allow space travelers (the suits are designed for use inside spacecraft, not for space walks) to move more easily and fluidly. Existing space suits are “expensive, heavy, and not very functional,” says Southern. “We think we can offer real improvements in both performance and cost.” Moiseev designed space suits for the Russian Space Agency for nearly 20 years before moving to the United States, where he and Southern, who was best known for designing wings for the models in Victoria’s Secret runway shows, teamed up to design gloves for astronauts in a competition sponsored by NASA. (They won a $100,000 prize that they used to launch Final Frontier Design.) After raising more than $27,000 on crowdfunding site Kickstarter, the entrepreneurs have enough capital to create a prototype of their “3G” spacesuit that they say will sell for as little as $50,000, far below the $12 million cost for a traditional space suit.13 Although many people dream of owning a business, most of them never actually launch a company. Those who do take the entrepreneurial plunge, however, will experience the thrill of creating something grand from nothing; they will also discover the challenges and the difficulties of building a business “from scratch.” Whatever their reasons for choosing entrepreneurship, many recognize that true satisfaction comes only from running their own businesses the way they choose. Researchers have invested a great deal of time and effort over the last decade studying these entrepreneurs and trying to paint a clear picture of the entrepreneurial personality. Not surprisingly, the desire for autonomy is the single most important factor motivating entrepreneurs to start businesses (see Table 1.1). Although these studies have produced several characteristics that entrepreneurs tend to exhibit, none of them has isolated a set of traits required for success. We now turn to a brief summary of the entrepreneurial profile.14 2. Describe the e­ ntrepreneurial profile. Nikolay Moiseev (left) and Ted Southern (right), cofounders of Final Frontier Design. Source: Final Frontier Design, LLC. 1. Desire and willingness to take initiative. Entrepreneurs feel a personal responsibility for the outcome of ventures they start. They prefer to be in control of their resources and to use those resources to achieve self-determined goals. They are willing to step forward and build businesses based on their creative ideas. 2. Preference for moderate risk. Entrepreneurs are not wild risk takers but are instead calculating risk takers. Unlike “high-rolling, riverboat gamblers,” they rarely gamble. Entrepreneurs often have a different perception of the risk involve in a business situation. The goal may appear to be high—even impossible—from others’ perspective, but entrepreneurs typically have thought through the situation and believe that their goals are reasonable and attainable. Entrepreneurs #149226 Cust: Pearson Au: Scarborough Pg. No. 5 Title: Entrepreneurship and Effective Small Business Management 11e Server: C/M/Y/K Short / Normal DESIGN SERVICES OF S4carlisle Publishing Services 6    Section I  • The Rewards and Challenges of Entrepreneurship TABLE 1.1 Why Entrepreneurs Start Businesses Noam Wasserman and Timothy Butler of the Harvard Business School surveyed nearly 2,000 entrepreneurs about their motivations for starting their businesses, analyzed the results by gender and age, and compared them to thousands of nonentrepreneurs. The primary motivator for entrepreneurs is autonomy, but security and a congenial work environment top the list for nonentrepreneurs. Entrepreneurs’ source of motivation shifts slightly as they age, more so for women than for men. The following tables summarize the researchers’ findings: Men by Age 20s 30s 40s Autonomy Power and Influence Managing People Financial Gain Autonomy Power and Influence Managing People Financial Gain Autonomy Power and Influence Altruism Variety Women by Age 20s 30s 40s Autonomy Power and Influence Managing People Altruism Autonomy Power and Influence Variety Altruism Autonomy Intellectual Challenge Variety Altruism Source: Adapted from Leigh Buchanan, “The Motivation Matrix,” Inc., March 2012, pp. 60–62. launched many now famous businesses, including Burger King, Microsoft, FedEx, Disney, CNN, MTV, Hewlett Packard, and others, during economic recessions when many people believed their ideas and their timing to be foolhardy. Entrepreneurial Profile: Nicholas Pelis: Denizen Rum While working for SKYY Vodka, Nicholas Pelis spotted an opportunity to create a new blend of rum, a product that had been “sanitized” by the mass-production mind-set of large modern distilleries. Pelis and his wife sold their house in San Francisco to return to his native New York and used the proceeds of the sale and $300,000 raised from family and friends to launch Denizen Rum, a company whose distilled spirits blend the mixability of white rum with the bold, smooth flavors of traditional dark rum from Amsterdam, where rum blending has been a tradition since the 1700s. Introduced in 2011, Denizen Rum quickly won critical acclaim, which allowed the Pelis’s young company to sign a national distribution contract with one of the largest wine and spirits distributors in the United States. Although some people criticized Pelis for the risk that he took, his industry experience and market research convinced him that his idea was sound and that his company would be successful.15 This attitude explains why so many successful entrepreneurs failed many times before f­inally achieving their dreams. For instance, Milton Hershey, founder of one of the world’s largest and most successful chocolate makers, started four candy businesses, all of which failed, before he launched the chocolate business that would make him famous. The director of an entrepreneurship center says that entrepreneurs “are not crazy, wild-eyed risk takers. Successful entrepreneurs understand the risks [of starting a business] and figure out how to manage them.”16 Good entrepreneurs become risk reducers, and one of the best ways to minimize the risk in any entrepreneurial venture is to conduct a feasibility study and create a sound business plan, which is the topic of Chapter 8. 3. Confidence in their ability to succeed. Entrepreneurs typically have an abundance of confidence in their ability to succeed, and they tend to be optimistic about their chances for business success. Entrepreneurs face many barriers when starting and running their companies, and a healthy dose of optimism can be an important component in their ultimate success. “Entrepreneurs believe they can do anything,” says one researcher.17 4. Self-reliance. Entrepreneurs do not shy away from the responsibility for making their businesses succeed. Perhaps that is why many entrepreneurs persist in building businesses even when others ridicule their ideas as follies. Against the advice of his father, a fifth-generation brew­master, entrepreneur Jim Koch left his high-paying job as a management consultant to start #149226 Cust: Pearson Au: Scarborough Pg. No. 6 Title: Entrepreneurship and Effective Small Business Management 11e Server: C/M/Y/K Short / Normal DESIGN SERVICES OF S4carlisle Publishing Services CHAPTER 1 • Entrepreneurs: The Driving Force Behind Small Business    7 Boston Beer Company from his kitchen using his family’s beer recipe. Koch recalls thinking, “I’m on this path, and it doesn’t lead anywhere I want to go.” He made the decision to launch his business to “own my life and make decisions that are not the result of other people’s plans or expectations.” Today, Boston Beer Company sells 32 types of beer, has 800 employees, and generates sales of $371 million.18 5. Perseverance. Even when things don’t work out as they planned, entrepreneurs don’t give up. They simply keep trying. Real entrepreneurs follow the advice contained in the Japanese proverb, “Fall seven times; stand up eight.” Entrepreneurial Profile: Gail Borden: Borden Inc. Entrepreneur Gail Borden ­(1801–1874) was a prolific inventor, but most of his inventions, including the terraqueous wagon (a type of prairie schooner that could travel on land or water) and a meat biscuit (a mixture of dehydrated meat and flour that would last for months), never achieved commercial success. After witnessing a small child die from contaminated milk, Borden set out to devise a method for condensing milk to make it safer for human consumption in the days before refrigeration. For two years he tried a variety of methods, but every one of them failed. Finally, Borden developed a successful ­vacuum condensation process, won a patent for it, and built a company around the product. It failed, but Borden persevered. He launched another condensed milk business, this time with a stronger capital base, and it succeeded, eventually becoming Borden Inc., a multi-billion-dollar conglomerate that still makes condensed milk using the process Borden developed 150 years ago. When he died, Borden was buried beneath a tombstone that reads, “I tried and failed. I tried again and succeeded.”19 6. Desire for immediate feedback. Entrepreneurs like to know how they are doing and are constantly looking for reinforcement. Tricia Fox, founder of Fox Day Schools, Inc., claims, “I like being independent and successful. Nothing gives you feedback like your own business.”20 7. High level of energy. Entrepreneurs are more energetic than the average person. That energy may be a critical factor given the incredible effort required to launch a start-up company. Long hours—often 60 to 80 hours a week—and hard work are the rule rather than the exception. Building a successful business requires a great deal of stamina and dedication. “Entrepreneurs have zero sense of balance,” says serial entrepreneur Jeff Stibel, CEO of Dun & Bradstreet Credibility Corporation. “We’re all in all the time. It doesn’t matter if it’s day or night, weekday or weekend. Each of us focuses on our vision with a single-minded passion. We’d probably work in our sleep if we could.”21 8. Competitiveness. Entrepreneurs tend to exhibit competitive behavior, often early in life. They enjoy competitive games and sports and always want to keep score. 9. Future orientation. Entrepreneurs tend to dream big and then formulate plans to transform those dreams into reality. They have a well-defined sense of searching for opportunities. They look ahead and are less concerned with what they accomplished yesterday than what they can do tomorrow. Ever vigilant for new business opportunities, entrepreneurs observe the same events other people do, but they see something different. “Entrepreneurial brains are full-time pattern recognizers,” says Steve Blank, professor of entrepreneurship at Stanford University.22 Taking this trait to the extreme are serial entrepreneurs, those who create multiple ­companies, often running more than one business simultaneously. These entrepreneurs take ­multitasking to the extreme. Serial entrepreneurs get a charge from taking an idea, transforming it into a ­business, and repeating the process. Entrepreneurial Profile: Paul Hurley: ideeli At age 12, Paul Hurley purchased the equipment to start a lawn care business with the profits he earned investing in small oil company stocks. (He came up with the investment strategy after reading his father’s copies of Forbes.) Hurley’s first hire was a kid who had a driver’s license because he was too young to drive the company truck. While attending Yale University, Hurley started a series of companies, learning the ­fundamentals of developing a workable business model, importing, mastering direct mail, and other business skills. After college, he and his brother started Aveo, a communications software company that attracted investments from venture capital firms before folding. “I was completely wiped out,” ­he recalls. From 2001 to 2006, the serial entrepreneur launched seven businesses in quick succession before devoting his full energy to ideeli, a shopping Web site that runs weekly flash sales that feature thousands of clothing, household, and accessory items from brand-name companies at discounts of up to 80 percent. “We put up a new store every day,” says Hurley. The site, with more than 4.5 million members, has more than 1,000 suppliers and has raised $70 million in capital from top venture #149226 Cust: Pearson Au: Scarborough Pg. No. 7 Title: Entrepreneurship and Effective Small Business Management 11e Server: C/M/Y/K Short / Normal DESIGN SERVICES OF S4carlisle Publishing Services 8    Section I  • The Rewards and Challenges of Entrepreneurship c­ apital companies. Just three years after its launch, ideeli’s annual sales reached nearly $78 million, but Hurley’s vision is much grander. “We’re going to build something big and have a meaningful impact,” he says.23 10. Skill at organizing. Building a company “from scratch” is much like piecing together a giant jigsaw puzzle. Entrepreneurs know how to put the right people and resources together to accomplish a task. Effectively combining talent and resources enables entrepreneurs to bring their visions to reality. 11. Value of achievement over money. One of the most common misconceptions about entrepreneurs is that they are driven wholly by the desire to make money. To the contrary, achievement seems to be one of the primary motivating forces behind entrepreneurs; money is simply a way of “keeping score” of accomplishments—a symbol of achievement. “Money is not the driving motive of most entrepreneurs,” says Nick Grouf, founder of a high-tech company. “It’s just a very nice by-product of the process.”24 Other characteristics entrepreneurs exhibit include the following: High degree of commitment. Launching a company successfully requires total ­commitment from the entrepreneur. Business founders often immerse themselves completely in their ­businesses. “The commitment you have to make is tremendous; entrepreneurs usually put everything on the line,” says one expert.25 That commitment helps overcome business-­ ­ threatening mistakes, obstacles, and pessimism from naysayers, however. Entrepreneurs’ commitment to their ideas and the businesses those ideas spawn determine how successful their companies ultimately become. ● Tolerance for ambiguity. Entrepreneurs tend to have a high tolerance for ambiguous, everchanging situations—the environment in which they most often operate. This ability to handle uncertainty is critical because these business builders constantly make decisions using new, sometimes conflicting information gleaned from a variety of unfamiliar sources. ● Flexibility. One hallmark of true entrepreneurs is their ability to adapt to the changing demands of their customers and their businesses. In this rapidly changing world economy, rigidity often leads to failure. As society, its people, and their tastes change, entrepreneurs also must be willing to adapt their businesses to meet those changes. Successful entrepreneurs are willing to allow their business models to evolve as market conditions warrant. ● Tenacity. Obstacles, obstructions, and defeat typically do not dissuade entrepreneurs from doggedly pursuing their visions. Successful entrepreneurs have the willpower to conquer the barriers that stand in the way of their success. “[Entrepreneurship] is about staying focused on the summit,” explains Jim Koch, founder of Boston Beer. “No one climbs a mountain to get to the middle. You don’t focus on the difficulties. You take it one step at a time, knowing that you’re going to get to the top.”26 ● What conclusion can we draw from the volumes of research conducted on the entrepreneurial personality? Entrepreneurs are not of one mold; no one set of characteristics can predict who will become entrepreneurs and whether they will succeed. Indeed, diversity seems to be a central characteristic of entrepr...
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