Chapter 6 by b2oGBV


									Chapter 6 Small Business, Entrepreneurship, and Franchising


1. Define entrepreneurship and small business.
2. Investigate the importance of small business in the U.S. economy and why certain fields attract small
3. Specify the advantages of small-business ownership.
4. Summarize the disadvantages of small-business ownership and analyze why many small businesses fail.
5. Describe how you go about starting a small business and what resources are needed.
6. Evaluate the demographic, technological, and economic trends that are affecting the future of small
7. Explain why many large businesses are trying to “think small.”
8. Assess two entrepreneurs’ plans for starting a small business.


business plan                  A precise statement of the rationale for a business and a step-by-step
                               explanation of how it will achieve its goals.

entrepreneurship               The process of creating and managing a business to achieve desired

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

franchisee                     The purchaser of a franchise.

franchiser                     The company that sells a franchise.

intrapreneurs                  Individuals in large firms who take responsibility for the development of
                               innovations within the organizations.

small business                 Any independently owned and operated business that is not dominant in its
                               competitive area and does not employ more than 500 people.

Small Business                 An independent agency of the federal government that offers managerial
Administration (SBA)           and financial assistance to small businesses.

undercapitalization            The lack of funds to operate a business normally.

venture capitalists            Persons or organizations that agree to provide some funds for a new
                               business in exchange for an ownership interest or stock.

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(PPT notations below refer to the Premium Content slides.)

                 I.   Introduction
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                      A. Students have many options upon graduation. Some choose to start their own
                         businesses, some find employment in small businesses, or perhaps join a

                 II. The Nature of Entrepreneurship and Small Business
                      A. Entrepreneurship is the process of creating and managing a business to achieve
                         desired objectives. The entrepreneurship movement has been accelerating over the
                         past few years.

                      B. What Is a Small Business?
                          1. The textbook’s definition of small business is any independently owned
                             and operated business that is not dominant in its competitive area and
                             employs fewer than 500 people.
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                          2. This is similar to the definition used by the Small Business
                             Administration (SBA), an independent agency of the federal government
                             that offers managerial and financial assistance to small businesses.

                      C. The Impact of Small Business on the American Economy
                          1. Small businesses are vital to the soundness of the American economy.
                          2. Over ninety-nine percent of all U.S. firms are classified as small
                          3. Small businesses fuel job creation and innovation and provide significant
                             opportunities for minorities and women to succeed in business.
                          4. Job Creation. Small businesses are believed to generate 75 percent of all new
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                          5. Innovation. Small businesses contribute highly to innovation, and bring
                             significant changes and benefits to customers.

                      D. Industries That Attract Small Business

                          1. Small businesses are found in every industry, but some areas are especially
                             attractive because they are relatively easy to enter, require low initial
                             financing, and/or relatively easy to target a specific group of customers.
                          2. Retailing and Wholesaling
                             a. A retailer acquires goods from producers or wholesalers and sells them to
                                 consumers. Retailing is attractive to small-business owners because it is

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                             easy to gain experience and exposure in the field, and the financial cost
                             of opening a retail store is relatively low.
                          b. Wholesalers supply products to industrial, retail, and institutional users
                             for resale or for use in making other products. Small businesses are
                             successful in wholesaling activities because they are close to final
                             customers and know how to keep them satisfied.
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                      3. Services
                         a. Service providers work for others but do not actually produce tangible
                         b. Services represent the fastest growing sector of the United States
                         c. Many service providers are also retailers because they provide their
                             services to ultimate consumers.
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                      4. Manufacturing. Small businesses can often customize products to meet
                         specific customer needs and wants.
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                      5. High Technology. High-technology businesses depend heavily on advanced
                         scientific and engineering knowledge.

               III. Advantages of Small-Business Ownership
                  A. Independence
                     1. Independence and the opportunity to better themselves are leading reasons
                         entrepreneurs go into business for themselves.
                     2. Flexibility of time and place are desired by many small-business
                  B. Costs. Small businesses usually require less money to start and maintain than
                     large ones.
                  C. Flexibility
                     1. Small businesses have the flexibility to adapt to changing market demands.
                     2. With only one layer of management, decisions can be made quickly.
                  D. Focus. Small firms can focus their efforts on a precisely defined market niche or a
                     specific group of customers.
                  E. Reputation. Many small firms can develop reputations for quality and service,
                     demonstrating a commitment to customer satisfaction.

               IV. Disadvantages of Small-Business Ownership
                  A. High Stress Level
                     1. Worries about the business, competition, or changing market demand cause
                     2. Long work days and few vacations are the norm.
                  B. High Failure Rate
                     1. There is no guarantee of small business success.

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                          2. Small businesses fail for many reasons.
                             a. Poor business management causes many failures.
                             b. Other causes include burdens imposed by government regulation,
                                  insufficient funds during slow sales periods, and competition from others.
                          3. Undercapitalization. The shortest path to failure in business is
                             undercapitalization—lacking sufficient funds needed to operate the business
                          4. Managerial Inexperience or Incompetence. Poor management is the cause of
                             many business failures: Just because an entrepreneur has a brilliant vision for
                             a small business does not mean he or she has the knowledge or experience to
                             manage a growing business effectively.
                          5. Inability to Cope with Growth. Growth requires specialized management
                             skills that the owner may not have nor have time to acquire.
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                 V. Starting a Small Business
                     A. The Business Plan
                        1. A business plan is a precise statement of the rationale for the business and a
                           step-by-step explanation of how it will achieve its goals.
                        2. It should include an explanation of the business, an analysis of the
                           competition, estimates of income and expenses, a strategy for acquiring
                           sufficient funds to keep the business going, and other information.
                        3. The business plan should act as a guide and reference document.
                        4. It should be revised periodically to ensure that the firm’s goals and strategies
                           can adapt to changes in the environment.
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                     B. Forms of Business Ownership. After developing a business plan, the entrepreneur
                        has to decide on an appropriate legal form of business ownership.

                     C. Financial Resources
                          1. To make money from a small business, the owner must provide or obtain
                             money (capital) to start the business and to keep it running smoothly.
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                          2. Equity Financing
                             a. Equity financing occurs when the owner uses real personal assets rather
                                than borrowing funds from outside sources to get started in a new
                             b. Small businesses can also obtain equity financing by finding investors for
                                their operations.
                                1) They may sell stock in the business to family members, friends,
                                     employees, or other investors.
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                                  2) Venture capitalists are persons or organizations that agree to
                                     provide some funds for a new business in exchange for an ownership
                                     interest or stock.
                                  3) This form of equity financing requires that the small business owner

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                              share the profits or the control of the business.
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                  3. Debt Financing
                     a. Banks are the main suppliers of external debt financing to small
                     b. The Small Business Administration offers financial assistance to
                        qualifying businesses.
                     c. Small business owners can look to family and friends as sources for loans
                        of long-term funds or other assets such as computers or automobiles that
                        are exchanged for an ownership interest in a business.
                     d. The amount a financial institution is willing to loan depends on its
                        assessment of the venture’s likelihood of success and of the
                        entrepreneur’s ability to repay the loan.
                        1) The owner is often required to put up collateral—a financial interest
                             in the property or fixtures of the business—to guarantee payment of
                             the debt.
                        2) The small business owner may also have to offer some personal
                             property as collateral, such as a home, in which case the loan is
                             called a mortgage.
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                      e. Financial institutions can also grant a small business a line of credit—an
                         agreement by which a financial institution promises to lend a business a
                         predetermined sum on demand.
                      f. Small businesses may also obtain funding from their suppliers in the
                         form of trade credit; suppliers allow the business to take possession of the
                         needed goods and services and pay for them at a later date or in
                      g. Occasionally, small businesses engage in bartering, trading their own
                         products for the goods and services offered by other businesses.
                      h. State and local agencies may guarantee loans, especially to minority
                         businesspeople or for development in certain areas.
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               D. Approaches to Starting a Small Business
                  1. Starting from Scratch Versus Buying an Existing Business
                     a. Buying an already existing business has the advantage of providing a
                         network of existing customers and suppliers.
                     b. However, the entrepreneur must deal with the problems the business
                         already has.

                  2. Franchising
                      a. A license to sell another’s products or to use another’s name in business,
                         or both, is a franchise.
                         1) The company that sells a franchise is the franchiser.
                         2) The purchaser of a franchise is called a franchisee.

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                              b. The franchisee acquires the rights to a name, logo, methods of
                                 operation, national advertising, products, and other elements
                                 associated with the franchiser’s business in return for a financial
                                 commitment and the agreement to conduct business in accordance to
                                 the franchiser’s standard of operations.
                              c. Advantages of franchising:
                                 1) Franchising allows a franchisee the opportunity to set up a small
                                     business relatively quickly, and a franchise outlet often reaches the
                                     breakeven point faster than an independent business would
                                     because of its association with an established brand.
                                 2) Management training and support
                                 3) Brand-name appeal
                                 4) Standardized quality of goods and services
                                 5) National advertising programs
                                 6) Financial assistance
                                 7) Proven products and business formats
                                 8) Centralized buying power
                                 9) Site selection and territorial protection
                                 10) Greater chance for success.
                              d. Disadvantages of franchising:
                                 1) Franchise fees and profit sharing with the franchiser
                                 2) Strict adherence to standardized operations
                                 3) Restrictions on purchasing
                                 4) Limited product line
                                 5) Possible market saturation
                                 6) Less freedom in business decisions.
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                          3. Going Green
                             a. As energy price go up and scrutiny over environmental practices
                                increases, it is in many companies’ interest to go green
                             b. Eco-responsible companies utilize renewable energy and recycling to
                                create new products and services at a lower environmental cost than
                                traditional products
                             c. This approach can save companies money by making them more
                                efficient, reducing the amount of raw inputs needed, and cutting back on

                 VI. The Future for Small Business
                     A. Demographic Trends
                        1. The baby boom generation (those born between 1946 and 1964) is wealthy
                           and aging, but not actively pursued by most small businesses.
                        2. Another market with huge potential for small business is the echo boomers
                           (those born between 1977 and 1994; also called millennials or Generation Y),
                           who shop frequently and spend lavishly.
                        3. The growing number of immigrants living in the U.S. represents another

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                               potential market for small business.
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                      B. Technological and Economic Trends
                         1. Technological advances have opened many new markets to small business.
                         2. Small businesses can react quickly to changes in the economy.
                         3. Deregulation of the energy market and interest in alternative fuels and in fuel
                            conservation have spawned many small businesses.

                  VII. Making Big Businesses Act “Small”

                      A. The success and competitiveness of small businesses have led many large
                         corporations to take a closer look at what makes their smaller rivals tick.
                      B. Many large corporations are focusing on downsizing. This process involves the
                         reduction of management layers, corporate staff, and work tasks in order to make
                         the firm more flexible, resourceful, and innovative like a smaller business.
                      C. Many companies are trying to instill a spirit of entrepreneurship. In major
                         corporations, intrapreneurs, like entrepreneurs, are employees who take
                         responsibility for the development of innovations of any kind within the large


Consider Ethics and Social Responsibility: Dinosaur Fossils Incite Controversy and Enterprise

      1.      Why might ranchers continue their businesses as fossil hunters even after they have
              heard the reasons scientists have for being concerned about fossil hunting?

      Ranchers might continue to search for fossils because the business is very profitable. As long as
      they consider the monetary value of the fossils more important than their value as an historical or
      scientific object, they will continue to seek to profit off of the business.

      2.      How could the fossil hunters gain more control over their businesses and more
              market share?

      The ranchers in this example are all amateur fossil hunters. They have benefited from serendipitous
      discoveries on their land. They do not have a business plan, trained employees, or distribution
      channels. A better knowledge of the markets, their competitors, and potential target markets would
      allow them to leverage their position as owners of valuable fossils. Ranchers might be able to gain a
      greater degree of organization and more market share if they worked together—perhaps joining
      forces under a corporation, partnership, or joint venture arrangement.

      3.      Could incentives ever be aligned enough so that fossil hunters and scientists both get
              what they want?

      Answers will vary. Students must support their answers.

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Going Green: Would You Buy a Recycled Toothbrush?

    1.       What are the advantages for Recycline in partnering with Stonyfield Farm?

    Recycline gains a partner with a good reputation for being a socially responsible, ecologically
    friendly company. Even more importantly, the company is saving money on inputs by using another
    company’s refuse. Recycline reduces the energy it uses by not having to create or process new
    plastic—it receives the plastic that it needs from Stonyfield farms.

    2.       List some additional ways that Hudson could market his recycled-plastic
             toothbrushes and shavers.

    Student’s answers may vary. Some suggested responses follow. Getting products on television or
    in the movies is a good way of getting one’s product seen, and making a name for oneself, but there
    are other ways too. Recycline could emphasize quality or uniqueness in addition to the
    sustainability of its product production—to draw in the less environmentally conscious consumer,
    and therefore garner a wider consumer base, the company will need to emphasize other reasons
    why its products are better than the competition beyond that it is simply made of recycled materials.
    Recycline could partner with other more well-know products. For example, with the purchase of
    Tom’s of Main toothpaste consumers can send away for a free toothbrush. Recycline could use
    advertisements and promotions, such as giveaways on Earth Day.

    3.       How will the company have to change as it grows larger?

    If Recycline grows faster than its supply of plastic, the company may need to look beyond
    donations from Stonyfield Farms for inputs. The company will also have to search out new
    distribution channels and will have to figure out ways to get its products noticed by wider
    audiences. As the company grows globally, it will have to gauge the level of environmental
    awareness in each market so that it can alter the advertisements accordingly. In a market that cares
    less about the fact that the products are made from recycled materials, Recycline should focus more
    on the quality of its products, for example.


When Expansion Can Lead to Failure

The textbook points out that one of the problems with small business is the inability to cope with growth.
The following lecture describes a small business expansion that is typical of the experience of other firms.

Matt Morgan was the manager of a variety store that was part of a large national chain. The variety store
was located in a small town of 10,000 in southern Florida. The small town was growing rapidly because
tourists from the North had discovered the town’s beautiful beach on the Atlantic.

Matt had arrived in town at the start of a slow-building boom and reasoned that now was an opportune time

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for him to go into business for himself. He left his job with the variety-store chain. Locating an empty store
space next to the variety store, Matt and his wife Nettie converted the area into an orange juice and hot dog
stand with a long counter and high bar stools. Fresh-squeezed orange juice on hot Florida days seemed to
hit the spot with locals and tourists alike. Matt put in a few tables and expanded the menu by adding some
beverages, hamburgers, and soft ice cream.

Because Matt and Nettie had engaging personalities and tried to know most of their regular customers by
name, their business blossomed. A very small breakfast menu was offered, and the business—called the
Orange Connection—was a financial bonanza for Matt and Nettie.

Matt opened up at 6:00 for breakfast. Many people on their way to work in the growing town stopped by for
coffee, juice, and a danish. Some retired people also stopped by for a plate of bacon and eggs. By 9:00,
shoppers and tourists stopped by seeking nothing more than a cold drink. Around 10:30 each morning, the
Orange Connection was jammed, with all seats taken and numerous people standing at the counter waiting
to be served.

At 11:00, Nettie would join Matt in serving quick, short-order lunches. Even though many of the orders
were to go, there was always a seating shortage for lunch, but crowds kept coming back.

In the afternoon, another wave of customers would come seeking just a cool drink. The evening hours saw a
slight increase in orders of hot dogs and hamburgers. Business dropped off by 7:00, and Matt would close
the Orange Connection at 7:30 p.m. The Orange Connection was closed on Sunday.

The town’s response to the Orange Connection had been overwhelming. The Orange Connection was
frequently overflowing, and some customers had to be turned away. Matt and Nettie began to think about
expanding to a larger facility. After a year of doing some simple surveying and talking with everyone who
would discuss the matter, the Morgans decided to knock out their south wall and develop a restaurant with
three times the space of the original Orange Connection. During the renovation and construction, crowds
continued at their normal peak level.

Finally, the new Orange Connection opened as a swanky restaurant with a staff of skilled chefs and a
complete menu. In the original facility, lunch consisted of a hamburger, sack of potato chips, orange juice,
and a frozen custard cone. In the new expanded facility, lunch consisted of a meal such as fried chicken,
mashed potatoes, green beans, tossed salad, chilled fruit sections, rolls and butter, iced tea, and apple pie a
la mode. With this new facility, Matt realized he would have to stay open until 11:00 in the evening and
serve three complete meals from a varied menu. Although the staff was larger, Matt and Nettie still worked
long hours and were there to greet their many friends and customers.

The only problem was that the friends and customers weren’t there for the Morgans to greet. Crowds at the
Orange Connection dropped off, and the evening meal was a strangely silent time. Matt devised all kinds of
promotional gimmicks to lure the crowds back, but nothing seemed to work. Apparently, expanding the
Orange Connection was not a success.

Eventually, the Morgans sold what remained of their business and moved to California. They never really
understood why the new Orange Connection was not a success. The Morgans and some business friends
had to conclude that whatever magic there was in the original Orange Connection did not carry over to the
large restaurant. In his later years, Matt Morgan was heard to say, “I guess I should never have knocked out

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that wall. Our little orange juice stand had a certain personality all its own. That mystique died when we
opened the restaurant.”

1. Why do you think the new expanded restaurant did not succeed?
2. What could the Morgans have done differently in their planning?


Are Small Businesses Dependent on the Presence of the Owner?

Many small businesses begin as one-person operations. Most small business owners put in extremely long
hours and seldom take vacations. Although such firms later employ other workers, the management style
and personality of the owner seem to be necessary to the survival of the firm. Here are some examples.

Ted and Ralph formed a partnership to operate a service station in a large midwestern city. Both were on
the premises from 7 a.m. until closing at 8 p.m. Both were skilled at greeting the public, and they made
many friends as business boomed. Although they maintained ownership of the station, Ted and Ralph
began to spend time away from work, leaving capable subordinates in charge. But the firm just wasn’t the
same without Ted and Ralph on hand, and business dropped. Ted and Ralph realized that to keep the
station highly successful, they both had to be on the premises.

For many years, Mabel and Theo Harker operated Harker’s Cafe in a large city in the Southwest. Theo was
the chief cook, and Mabel waited on customers who sat at the counter. Although they hired several other
cooks and waitresses, Mabel and Theo were the stable core of the business. The two worked long hours,
and business seemed to go more smoothly when the owners were there. Realizing how important they were
personally to the success of the cafe, the Harkers never took a vacation and never left the cafe in the hands
of the hired staff. Instead, in late summer and around Christmas, the Harkers closed down the entire cafe for
a week at a time. Customers agreed that the place would not be Harker’s Cafe without Mabel and Theo.

1. Why does it seem to be necessary for the owner(s) to be on the premises all the time?
2. Can there be personality cults in small business? Is it possible for customers to create a personality cult
   around the owners of a business?
3. How might the owner go about reducing customers’ dependency upon the presence and/or personality
   of the owner and leading customers to depend more on the business itself?


    1.       Based on the information given, what type of business organization do you think
             Cato Corner Farm uses?

    Answers may vary, but students must support their answers. Students may guess that the business is
    a partnership because it is relatively small, and because the owners are a mother and son team.
    However, students might also guess that this is a limited liability corporation—therefore protecting
    Elizabeth and Mark’s personal assets from business liabilities.

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      2.      Do you think Cato Corner competes with big cheese companies like Kraft or

      No because Cato Corner is a much smaller operation. It does not use the same distribution channels
      either. Kraft is available at a low price at almost any supermarket in the country. Cato Corner, on
      the other hand, is an artisan product and therefore sells for a higher price and has much more
      limited distribution channels.

      3.      What is Cato Corner’s target market?

      The target markets is “foodies,” people who are looking for high-quality, high-end, often organic
      food products that taste great and are not widely available. Cato Corner caters to consumers who
      are looking to buy a unique product that provides a more satisfying eating experience than cheaper,
      more widely available cheeses.


1. Why are small businesses so important to the U.S. economy?

      More than 99 percent of all U.S. firms are classified as small businesses. Small businesses are fueling
      job creation and innovation.

2. Which fields tend to attract entrepreneurs the most? Why?

      The fields of retailing, services, and high technology tend to attract small businesses because these
      fields (except for high technology) are relatively inexpensive to enter. They generally do not require a
      large initial investment or a lot of experience.

3. What are the advantages of starting a small business? The disadvantages?

      Advantages of small business ownership include independence and flexibility in terms of the location
      and opening hours of the business. Additional advantages include lower costs, flexibility to adapt to
      changing market conditions, focus on a limited market niche, and reputation. Among the disadvantages
      of small businesses are the high stress level and the high failure rate.

4. What are the principal reasons for the high failure rate among small businesses?

      The main reasons for the high rate of failure among small businesses are undercapitalization, inability
      to cope with growth, poor business management, overoptimism, burdens imposed by government
      regulation, insufficient reserves to withstand slow sales, and vulnerability to competition.

5. What decisions must an entrepreneur make when starting a small business?

      When starting a small business, an entrepreneur must first conceive a business plan. He or she must
      then select a specific form of business ownership, and secure sufficient financial resources.

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6. What types of financing do small entrepreneurs typically use? What are some of the pros and
   cons of each?
   Few small-business owners have the funds necessary to start a business. Small-business owners can
   obtain financing from friends and family. However, the relationship may suffer if the business fails.
   Small businesses may seek financing from banks or other financial institutions. A bank may require
   collateral or a mortgage, and the bank can repossess the property if the business fails to repay the loan.

    A financial institution may grant a line of credit, an agreement by which the financial institution
    promises to lend the business a predetermined sum of money on demand.

    Other sources of financing include local and state agencies, the Small Business Administration, and
    venture capitalists.

7. List the types of management and financial assistance that the Small Business Administration

       counseling for firms in difficulty
       consulting on operations improvements
       training for owner/managers and employees
       business clinics
       advice from SCORE and ACE
       loan programs

8. Describe the franchising relationship.

    Franchisees purchase a franchise for a fee, plus start-up costs. Franchisees may also pay a fee, based on
    a percentage of sales, for advertising and promotion.

9. What demographic, technological, and economic trends are influencing the future of small

    Aging baby boomers, echo boomers, and an increasing number of immigrants living in the U.S.
    represent potentially huge markets for small business. Technological advances have opened many new
    markets to small business. Small businesses can adapt to changing trends faster than large corporations.

10. Why do large corporations want to become more like small businesses?

    The continuous success of small businesses, their capacity to innovate, their flexibility, and ability to
    adapt quickly to market changes are some of the reasons why large corporations want to become more
    like small businesses.

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1. Interview a local small-business owner. Why did he or she start the business? What factors have led to
   the business’s success? What problems has the owner experienced? What advice would he or she offer
   a potential entrepreneur?

2. Using business journals, find an example of a company that is trying to emulate the factors that make
   small businesses flexible and more responsive. Describe and evaluate the company’s activities. Have
   they been successful? Why or why not?

3. Using the business plan outline in Appendix B, create a business plan for a business idea that you have.
   (A man named Frederick Smith once did a similar project for a business class at Yale. His paper
   became the basis for the business he later founded: Federal Express!)


Michelangelo, the great Renaissance artist and creative genius, best known for his Sistine Chapel ceiling
frescoes and his colossal 18-foot marble sculpture of David, is supposed to have said that he didn’t create
his sculptures. He only uncovered what was already there. And that’s exactly what creativity is—
uncovering what’s already there.

Here are some ideas for giving your students some help in developing their creativity skills:

1. Between now and the next class session, ask students to select three items from the list of mental
   aerobic exercises presented below.

2. At the next class session, have them report in one of the following formats the results of your creativity
   a. Write a 2-3 paragraph paper for your instructor where you highlight some positive/negative results
       of your “mental workouts.”
   b. Take a few minutes at the beginning of class and ask several students to describe the results of
       these mental conditioning exercises.
   c. Break into groups of 3-4 students and share some outcomes of your participation in this exercise.

Mental Aerobic Exercises

     If you’re right-handed, try using your left hand to do things. If you’re left-handed, switch to your right
      for a while.
     Do a jigsaw or crossword puzzle.
     Try a new way of expressing your creativity (cook something you’ve never made before, paint a
      picture, write a poem, throw a party that has an interesting theme).
     Guess at measurements rather than using a ruler, tape measure, or measuring cup. Then measure and
      see how close you were.
     Watch three-quarters of a movie on video, stop the tape, and think of your own ending.
     Stretch your thinking beyond what might be your typical approach to solving problems. See if you can

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    solve one of these brain teasers (answers provided below):
    1. Arrange the letters below into one word:
                                           NEW DOOR
    2. Change the roman numeral that represents the number 9 (IX) into a 6 by using only one line.
    3. Determine in what order the numbers below are arranged:
                                      8, 5, 4, 9, 1, 7, 6, 3, 2, 0

   Go to the library and look up an article or find a biography about a famous creative person (Thomas
    Edison, Walt Disney, Steven Spielberg, etc.) and spend 20 minutes skimming the book or reading the
    article, looking for insights into the creative process. For example, Thomas Edison is considered to be
    the most prolific inventor the world has ever seen. Among his inventions are the incandescent light, the
    phonograph, and the motion picture projector. One quotation attributed to Edison is “[Creative] genius
    is 99% perspiration and 1% inspiration.”
   Go to a day-care center and spend a half hour observing 2-, 3-, and 4-year olds at play. Jot down any
    “creative” things you observe the children doing. (“Tests show that a child’s creativity plummets 90
    percent between ages 5 and 7. By the age of 40, most adults are about 2 percent as creative as they were
    at 5.”1)

Answers to brain teasers: (If no one gets the answer for any of these brain teasers, you may want to give
the hint provided in parentheses before giving the answer.)
1.       ONE WORD (HINT: Are you taking the instructions very literally?)
2.       SIX (HINT: The instructions did not say it had to be a Roman numeral six)
3.       Alphabetically (HINT: Is there another way to think of these numbers besides as figures?)

1. Emily T. Smith, “Are You Creative?” Business Week, September 30, 1985, p. 81.


What is one of the most common reasons people become entrepreneurs?

Independence is one of the main reasons why people turn to entrepreneurship. People who do not do well in
an office setting and who prefer to set their own hours and have more freedom tend to prefer


Intuitively, students turn to the internet for their information first. While this is a good idea, you don’t want
them to neglect what resources are available to them locally. The Chamber of Commerce, Economic
Development Authority, and City Planning Office are all possible sources for information on the
community. Perhaps you might want to invite a local employee of one of these organizations to class as a
guest lecturer.

Students need to understand the demographics and needs of their community. On a macro level, ask them
about the economic forecast for their area. Have them determine the level (number and quality) of new
businesses entering the area.

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SEE FOR YOURSELF VIDEOCASE: Not Just Tupperware Or Avon Anymore

Case Overview

This case pertains to direct selling, an increasingly popular means of doing business and selling products.
Direct selling is a huge business, with over $32 billion in annual sales. Direct selling is popular among
people who prefer to be their own boss, or who are looking for flexible hours, such as mothers of young
children. The case uses Doncaster, Longaberger and Pampered Chef as examples. Doncaster is a direct
selling retail of high-end women’s clothing. The business was started as a way to raise money for Junior
League, but the idea was so successful it became a full-time business. Longaberger sells home accessories
such as baskets and wrought iron furniture via home shows. The company currently employs around 45,000
sellers. Pampered Chef sells cooking tools by holding cooking demonstrations. The company boasts over
12 million customers. Nearly any product can be sold through direct selling, and start up is fairly simple.
As long as people continue to be dissatisfied with more traditional workplaces, direct selling will have a
strong following.

Questions for Discussion

      1. Why are more people turning to direct selling as a means of making a living, and as a
         means of purchasing the goods they need?

      Direct selling appeals to individuals for a number of reasons. Many are looking for part-time
      income, flexible hours, and the ability to be one’s own boss. People who are not satisfied working a
      traditional 8 to 5 office job might find the flexibility and autonomy of direct selling appealing.
      Women, in particular, use direct selling as a way of making a living because it allows them the
      flexibility to work when is most convenient for them. Reasons for purchasing goods via direct
      selling involve the personal touch afforded by having a salesperson come to your door, and the
      appeal of being able to touch and try out products before you buy them.

      2. Are any goods or services not suited for the direct selling method, or could it be adapted
         to all products and services?

      Commodities such as flour, sugar, bread, low value goods that do not warrant the extra attention,
      and large items such as furniture or cars are all goods that would not be well suited for direct
      selling. Students may develop their own varied answers.

      3. What personal characteristics would help a person to become a good direct salesperson?

      A good direct salesperson is a good listener, is receptive to the desires of the consumer, and is
      accommodating and friendly. Successful direct salespeople will be hard working and undeterred by
      rejection, and will excel at networking in order to build up new channels of distribution.

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Chapter 6 Small Business, Entrepreneurship, and Franchising


These topics could be assigned as individual or collaborative projects:
1. The Small Business Administration: Past and Present
2. A Study of a Successful Franchiser
3. Why Women Entrepreneurs Are Attracted to Small Business


1. A representative of the Small Business Administration, the Small Business Development Centers, or
   Small Business Institutes to speak about the functions of the organization.
2. A small-business owner to speak about start-up, management, advantages, and disadvantages of going
   into business for himself or herself.
3. A local franchisee to speak about the start-up, operation, advantages, and disadvantages of obtaining a


1. Vary the sequence of classes for the sake of variety.

2. For a writing exercise, begin by asking students to write for approximately five minutes on the topic of:

    What Are the Advantages of Franchises for the Small-Business Owner?

    (Stop students at the end of the allotted time. Now have students give their writing to a student sitting
    next to them; have them compare answers. Do they agree? Talk about answers in class.)

3. Give a lecture in class. Depending on time, the instructor may wish to use the “Supplemental Lecture”
   and/or the “Controversial Issue.” Both present situations regarding small business problems.

4. Go over the practice quiz provided. Discuss answers in class.

5. Again, depending on time available, instructors may wish to review the additional boxed material by
   using the discussion questions provided in this Instructor’s Manual.

6. Spend a short amount of time by going over the answers to the questions for the video case. Students
   should have read these cases, and they should have either written the answers or have considered the
   answers. Call upon volunteers for answers.

(The Destination CEO Videos can be found on the OLC at

Robert Johnson

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Robert Johnson may not be a household name, but his accomplishments are widely known. He is the first
African American billionaire, and the first Black majority owner of a professional sports team; actually two
teams. Who is Robert Johnson and how did he become so successful?

Johnson was born in rural Mississippi to a very poor family. So poor in fact, that there are no photographs
of his childhood. Not surprisingly, he was the first in his family to attend and graduate from college, and
the first to achieve outstanding financial success.

Johnson began his business career by using his modest savings and some financial backing to create the
first cable television channel for the African American community, Black Entertainment Television (BET).
 Johnson founded the company, fostered its growth, and assured its long term success. He then sold the
channel to Viacom for $3.3 billion in 2001. He remained BET’s CEO until recently.

After leaving BET, Johnson embarked on a new mission to achieve his primary goal, create wealth. His
entrepreneurial spirit motivates him to pursue new challenges using, what he calls, the same business model
that led to BET’s success. Today, Johnson is the majority owner of the third new NBA team, the Charlotte
Bobcats as well as the WNBA’s Charlotte Sting. In addition, he has acquired a large block of Marriott and
Hilton hotels under his minority holding company and has established equity and hedge funds primarily
focused on underserved markets. That, in essence, is the foundation of his entrepreneurial business model:
 to fulfill needs in traditionally underserved minority markets, establish strategic partnerships, and work
with financial institutions that are willing to invest in minority communities.

Most of Johnson’s entrepreneurial ventures have common threads running through them: big money, big
stars, and agents. While his goal is wealth creation, his ventures have uplifted the black community and
demonstrate the progress that African American business owners have realized. For Johnson, successful
entrepreneurship means doing well and doing good.

Discussion Questions:
     1. How does Johnson’s BET Channel exemplify innovation as an important entrepreneurial factor?
Answer: Black Entertainment Television is the first of its kind. It is innovative by definition and uses a
fundamentally unique business model. Like any new small business venture, there is significant risk.
However, in BET’s case, successful leadership, identifying and serving the market’s needs, and effective
strategy mitigated the risk and led to the eventual sale of BET for $3.3 billion.

    2. Potentially, what may be the most important disadvantage for an entrepreneur like Johnson?
Answer: Starting a small business or engaging in an entrepreneurial venture has more disadvantages,
potentially, than advantages. In fact, the vast majority of small businesses fail within a relatively short time
from their inception. As an entrepreneur, Johnson most significant potential disadvantage could have been
undercapitalization. As we know, Johnson had modest personal savings that he put at risk and some
financial backing. If the venture, BET, had not been capitalized appropriately, it could have failed. Most
entrepreneurs face undercapitalization as a significant disadvantage.

    3. What are the essential elements of Johnson’s business plan or business model?
Answer: A key element of business success is a business plan. It is a precise statement of the rationale for
the business as well as a detailed explanation of how the business will achieve its goals. The common
elements that run through all of Johnson’s successful business ventures are a focus on big stars, big money,

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entertainment, focus on underserved markets, and strategic partnerships.

Additional Discussion Questions:
    1. Rather than sell BET, could Johnson have developed a different model where he would profit
        from the firm but not have to be involved in the day to day operation?
Answer: He may have considered establishing BET’s programming as a franchise operation or a licensed
operation. While not the “channel per se” but its programming could be franchised or licensed to air on
other cable stations. This would generate revenue but would not require active management of the
franchised or licensed products.

    2. What are some of the advantages that accrue to Johnson as a small business owner?
Answer: Small business ownership does offer personal advantages to Johnson. These include
independence, flexibility, and the chance to develop a reputation for quality and innovation. When you
consider Johnson’s success, these advantages are clearly illustrated in his businesses that include: BET, the
NBA and WNBA sports teams, hotels, and equity funds.

Multiple Choice Questions for Students found on the OLC:

    1.  If Johnson did not have sufficient financial resources to operate his BET cable channel
       successfully, we would say that his business was:
   a. Undercapitalized
   b. Structurally flawed
   c. Entrepreneurially overwrought
   d. small business stock failure
   e. none of the above
Answer: a. undercapitalized

    2.  Johnson argues that serving underserved markets, strategic partnerships, and financial investment
       in minority communities are common elements of his successful ___________
   a. Business venture
   b. Entrepreneurial spirit
   c. Business plan
   d. SBA
   e. Strategic plan
Answer: c. Business plan.

    3.  Robert Johnson created Black Entertainment Television (BET), the first cable channel to serve the
       African American market. The process of creating and managing this business was to achieve his
       desired objectives to:
   a. Become entrepreneurial
   b. contribute to culture of the black community
   c. create personal wealth
   d. demonstrate his ability to innovate
   e. Create jobs for his family members
Answer: c. create personal wealth

    4.   Of the following, which is not a trait that is considered necessary to succeed in entrepreneurship?

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   a. Neuroticism
   b. Extroversion
   c. Conscientiousness
   d. Agreeableness
   e. All of the above are necessary traits
Answer: e. All of the above are necessary traits.

      5.In a small business, the ability to adapt to changing market demands is an advantage. This is
       usually referred to as:
   a. Cost containment
   b. Management by objectives
   c. Innovation management
   d. Flexibility
   e. Entrepreneurship
Answer: d. Flexibility

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