BUSNESS 1 Chapter 4 Small Business Entrepreneurship and

BUSİNESS 1

Chapter 4: Small Business, Entrepreneurship, and Franchises n n Small Business: A Profile A small business as “ one which is independently owned and operated for profit and is not dominant in its field. ” 2

n n n The People in Small Businesses: The Entrepreneur Small busineseses are typically managed by the people who started and own them. Owners of small businesses would rather take the risk of starting and operating their own firms, even if the money they make is less than the salaries they might otherwise earn. Researchers have suggested a variety of personal factors as reasons why individuals go into business. One that is often cited is the “entrepreneurial spirit” – the desire to create a new business. 3

n Other factors, such as independence, the desire to to determine one’s own destinty , and the willingness to find accept a challenge certainly play a part. Background may exert an influence as well. Researchers think that people whose families have been in business are most to apt to start and run their own businesses. Those who start their own businesses also tend to cluster around certain ages (24 -44 years old). 4

n There must be some motivation to start a business. A person may decide she has simply had enough of working and earning a profit for someone else. Another may lose his job for some reason and decide to start the business he has always wanted. Or the opportunity to go into business may arise suddenly, perhaps as a result of a hobby. 5

n n Why Small Businesses Fail Small business are prone to failure. Capital, management, and planning are the key ingredients in the survival of a small business and also the most common reasons for failure. Many entrepreneur lack the management skills required to run a business. Money, time, personnel, and inventory all need to be effectively managed if a small business is to succeed. And frequently entrepreneurs with successful small businesses make the mistake of overexpansion. 6

n n n The Importance of Small Businesses ın Our Economy Providing Technical Innovation Providing Employment Providing Competition Filling Needs of Society and Other Businesses 7

n n Providing Technical Innovation Invention and innovation are among the foundation of the economy. Studies show that the incidence of innovation among small-business workers is significantly higher than among workers in large businesses. Small firms produce two and a half times as many innovations as large firms, relative to the number of persons employed. 8

n n Providing Employment Small businesses employ approximately one-half of the nation’s private work force. Small businesses have thus contributed significantly to solving unemployment problems. 9

n n Providing Competition Small businesses challenge larger, established firms in many ways, causing them to become more efficient and more responsive to consumer needs. A small business cannot compete with a large firm in all respects. But a number of small firms, each competing in its own particular area, its own particular way. 10

n n Filling Needs of Society and Other Businesses By their nature, large firms must operate on a large scale. Many may be unwilling or unable to meet the special needs of smaller groups of consumers. Such groups create almost perfect markets for small companies, which can tailor their products to these groups and fill their needs profitably. 11

n n 1. The Pros and Cons of Smallness Advantages of Small Business Personel Relationships with Customers and Employees : Relationships between ownermanagers and employees tend to be closer in smaller businesses. To many employee, the owner is a friend and counselor as well as the boss. Personel relationships provide an important business advantage. The personal service small businesses offer to customers is a major competitive advantage. 12

2. Ability to Adapt to Change: Being his or her own boss, the owner-manager of a small business does not need anyone’s permission to adapt to change. Through personal relationships with customers, the owners of small businesses quickly become aware of changes in people’s needs and interests-as well as in the activities of competing firms. 13

3. 4. Simplified Recordkeeping: Many small firms need only a simple set of records. Recordkeeping might consist of a checkbook, a cash-receipts journal in which to record all sales, and a cashdisbursements journal in which to record all amounts that are paid out. Independence: Small-business owners don’t have to punch in and out, bid for vacation times, take orders from superiors, or worry about being fired or laid off. They are the masters of their own destinies. 14

5. Other Advantages: Small-business owners also enjoy a number of the advantages of sole proprietorship. These include being able to keep all profits, the ease and low cost of going into business and going out of business, and being able to keep information about one’s business secret. 15

n 1. 2. Disadvantages of Small Business Risk of Failure: Small businesses run a heavy risk of going out of business. Well-established but small firms can be hit hard by a business recession, mainly because they do not have the financial resources to weather a really difficult period. Limited Potential: Small businesses that survive do so with varying degrees of success. Many are simply the means of making a living for the owner and his or her family. Employees’ potential for advancement is limited. 16

3. Limited Ability to Raise Capital: Small businesses typically have a limited ability to obtain capital. Personal loans from lending institutions provide only about one-fourth of the capital required by small businesses. 17

n n Developing A Business Planning is important to any business, large or small , and should never be overlooked or taken lightly. A business plan is a carefully constructed guide for the person starting a business. It also serves as a concise document that potential investors can examine to see if they would like to invest in or assist in financing a new venture. 18

Components of a Business Plan 1. Introduction 2. Executive Summary 3. Industry Analysis 4. Detailed description of the business 5. Production plan 6. Marketing plan 7. Organizational plan 8. Assessment of risk 9. Financial plan 10. Appendix n 19

In the business plan, the business person should be sure to answer the four questions that banking officials and investors are most interested in: I. What exactly is the nature and mission of the nwe venture? II. Why is this new enterprise a good idea? III. What are the business person’s goals? IV. How much will the new venture cost? n 20

n n Franchising A franchise is a license to operate an individually owned business as if it were part of a chain of outlets or stores. Often the business itself is also called a franchise. Among the most familiar franchises are Mc. Donald’s, H&R Block. 21

n n What is Franchising? Franchising is the actual granting of a franchise. A franchisor is an individual or organization granting a franchise. A franchisee is a person or organization purchasing a franchise. The franchisor supplies a known and advertised business name, management skills, the required training and materials, and a method of doing business. The franchisee supplies labor and capital, operates the franchised business , and agrees to abide by the provisions of the franchise agreement. 22

n n Types of Franchising Arrangements Franchising arrangements fall into three general categories. In the first approach, a manufacturer authorizes a number of retail stores to sell a certain brand name item. In the second type of franchising arrangement, a producer licenses distributors to sell a given product to retailers (Coca-cola Company). In a third form of franchising, a franchisor supplies brand names, techniques, or other services, instead of a complete product (Mc. Donald’s, KFC). 23

n n The Growth of Franchising has been used since the early 1900 s, primarily for filling stations and car dealerships. However, it has experienced enormous growth since the mid-1960 s. This growth has generally paralled the expansion of the fast food industry-the industry in which franchising is used to the greatest extent. 24

n n Are Franchises Successful? Franchising is designed to provide a tested formula for success, along with ongoing advice and training. The success rate for businesses owned and operated by franchisees is significantly higher than the success rate for other independently owned small businesses. Nevertheless, franchising is not a guarantee of success for either franchisees or franchisors. Too rapid expansion, inadequate capital or management skills, and a host of other problems can cause failure for both. 25

n n Advantages of Franchising To the Franchisor: The franchisor gains fast and selective distrubitions of its products without incurring the high costs of constructing and operating its own outlets. The franchisor thus has more capital available to expand production and to use for advertising. 26

n To the Franchisee: The franchisee gets the opportunity to start a business with limited capital and to make use of the business experience of others. Moreover, an outlet with nationally advertised name; Mc. Donald’s; has guaranteed customers as soon as it opens. The franchisee also receives materials to use in local advertising and can take part in national promotional campaigns sponsored by the franchisor. 27

n n n Disadvantages of Franchising The disadvantages of franchising mainly affect of the franchisee because the franchisor retains a great deal of control. Some franchisees claim that contracts are unfairly tilted towards the franchisors. Some franchisees have charged that they lost their franchise and investment because their franchisor would not approve the sale of the business when they found a buyer. 28

n Franchise operators work hard. They often put in ten -and twelve-hour days, six days a week. And in some fields, franchise agreements are not uniform: One franchisee may pay more than another for the same services. 29

n n Global Perspectives in Small Business International trade will become more important to small-business owners as they face unique challenges in the new century. Small businesses, must be prepared to adapt to significant international demographic and economic changes in the world marketplace. 30