Richard L. Daft - Management. 9th ed., 2010

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601Managing Small Business Start-Ups

Appendix

DO YOU THINK LIKE AN ENTREPRENEUR?

An entrepreneur faces many demands. Do you have the proclivity to start and build your

own business? To ﬁ nd out, consider the extent to which each of the following statements

characterizes your behavior. Please answer each of the following items as Mostly True or

Mostly False for you.

Mostly

True

Mostly

False

1. Give me a little information and I can come up with a lot of ideas.

2. I like pressure in order to focus.

3. I don’t easily get frustrated when things don’t go my way.

4. I identify how resources can be recombined to produce novel outcomes.

5. I enjoy competing against the clock to meet deadlines.

6. People in my life have to accept that nothing is more important than the

achievement of my school, my sport, or my career goals.

7. I serve as a role model for creativity.

8. I think “on my feet” when carrying out tasks.

9. I am determined and action-oriented.

SCORING AND INTERPRETATION: Each question pertains to some aspect of impro-

visation, which is a correlate of entrepreneurial intentions. Entrepreneurial improvisation

consists of three elements. Questions 1, 4, and 7 pertain to creativity/ingenuity, the ability

to produce novel solutions under constrained conditions. Questions 2, 5, and 8 pertain

to working under pressure/stress, the ability to excel under pressure-ﬁ lled circumstances.

Questions 3, 6, and 9 pertain to action/persistence, the determination to achieve goals

and solve problems in the moment. If you answered “Mostly True” to at least two of three

questions for each subscale or six of nine for all the questions, then consider yourself

an entrepreneur in the making, with the potential to manage your own business. If you

scored one or fewer “Mostly True” on each subscale or three or fewer for all nine ques-

tions, you might want to consider becoming a manager by working for someone else.

Many people dream of starting their own business. Some decide to start a business

because they’re inspired by a great idea or want the  exibility that comes from being

self-employed. Others decide to go into business for themselves after they get laid

off or  nd their opportunities limited in big companies. Interest in entrepreneur-

ship and small business is at an all-time high. At college campuses across the United

States, ambitious courses, programs, and centers teach the fundamentals of starting a

small business. Entrepreneurs have access to business incubators, support networks,

and online training courses. The enormous growth of franchising gives beginners an

escorted route into a new business. In addition, the Internet opens new avenues for

small business formation.

appendix A

Managing Small

Business Start-Ups

601

Appendix A

Today, the fastest growing segment of small business in both the United States and

Canada is in one-owner operations, or sole proprietorships.

Sole proprietorships in the

United States reached an all-time high of 19.5 million in 2004, the most recent year with

statistics available.

After the crash of the dot-com boom, many of these entrepreneurs

are  nding opportunities in low-tech businesses such as landscaping, child care, and

janitorial services. Overall, since the 1970s, the number of businesses in the United States

economy has been growing faster than the labor force.

However, running a small business is dif cult and risky. The Small Business Admin-

istration reports that about 30 percent of small businesses fail within two years of open-

ing and 56 percent fold after four years.

For high-tech businesses, the failure rate is even

higher. Research indicates that the chances are only 6 in 1 million that an idea for a high-

tech business eventually turns into a successful public company.

Yet despite the risks,

people are entering the world of entrepreneurship at an unprecedented rate. In 2006,

an estimated 649,700 new businesses were established in the United States, while an

estimated 564,700 closed their doors for good.

Small business formation is the primary

process by which an economy recreates and reinvents itself,

and the turbulence in the

small business environment is evidence of a shifting but thriving U.S. economy.

WHAT IS ENTREPRENEURSHIP?

Entrepreneurship is the process of initiating a business venture, organizing the neces-

sary resources, and assuming the associated risks and rewards.

An entrepreneur is

someone who engages in entrepreneurship. An entrepreneur recognizes a viable idea

for a business product or service and carries it out by  nding and assembling the neces-

sary resources—money, people, machinery, location—to undertake the business venture.

Entrepreneurs also assume the risks and reap the rewards of the business. They assume

the  nancial and legal risks of ownership and receive the business’s pro ts.

A good example of entrepreneurship is Jeff Fluhr, who dropped out of Stanford dur-

ing his  rst year of graduate school to launch StubHub, a leading Internet player in the

burgeoning market of ticket reselling, an industry which by some estimates is doing $10

billion a year in volume. Hardworking and persistent, Fluhr struggled to raise money

during the early days of the business, a time when many investors had been stung by

the dot-com crash. His tenacity paid off as he convinced executives from Viacom Inc.,

Home Box Of ce, and Madison Square Garden to invest in his plan to reinvent the online

ticket resale industry. StubHub gives consumers access to high-demand concert, theater,

and sporting events that are usually unavailable, because promoters now reserve large

blocks of tickets for fan club members, season ticket holders, and sponsors. StubHub

allows sellers to list tickets at StubHub—free of charge—and sell them either by auction

or at a  xed price. The company’s two call centers receive approximately 2,500 calls a

day and sell more than $200 million worth of tickets annually.

Fluhr, who comes from

a family of entrepreneurs, was willing to take the risks and is now reaping the rewards

of entrepreneurship.

Successful entrepreneurs have many different motivations, and they measure rewards

in different ways. One study classi ed small business owners in  ve different categories,

as illustrated in Exhibit A.1. Some people are idealists, who like the idea of working on

something that is new, creative, or personally meaningful. Optimizers are rewarded by

the personal satisfaction of being business owners. Entrepreneurs in the sustainer cat-

egory like the chance to balance work and personal life and often don’t want the busi-

ness to grow too large, while hard workers enjoy putting in the long hours and dedication

to build a larger, more pro table business. The juggler category includes entrepreneurs

who like the chance a small business gives them to handle everything themselves. These

high-energy people thrive on the pressure of paying bills, meeting deadlines, and mak-

ing payroll.

Compare the motivation of Paula Turpin to that of Greg Little eld. Turpin borrowed

a few thousand dollars to start a hair salon, Truly Blessed Styles, in Shirley, New York.

ent

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out.

602

Appendix

603Managing Small Business Start-Ups

She does all the cutting, styling, and coloring herself, while her mother helps sched-

ule appointments and keeps the books. Turpin likes the  exibility and freedom of

working for herself. Although she hopes to expand by adding beauty supplies, she

doesn’t want the headaches of managing a large business. Greg Little eld quit his

management job and started a cleaning service because he reasoned that it would

never lack customers. From the beginning, when he was working two part-time jobs

and cleaning buildings by himself at night, Little eld had plans for expansion. Within

a decade, Little eld’s  rm, Professional Facilities Management, grew into a 900-em-

ployee company providing a range of services including housekeeping, landscaping,

minor maintenance, and security services.

Greg Little eld re ects the motivation of

a hard worker, whereas Paula Turpin’s motivation is more that of a sustainer.

Sometimes people start new businesses when they lose their jobs due to corporate

downsizing. The major layoffs in the early 2000s provided just the push some latent

entrepreneurs needed to strike out on their own. Some experts think an economic

downturn is actually the best time to start a business. For one thing, a downturn

opens up lots of opportunities because people are looking for lower costs and better

ways of doing things. The economic climate also enables the new business to hire

good people, forces the entrepreneur to keep costs in line, and provides the time

needed to build something of lasting value rather than struggling to keep pace with

rapid growth.

ENTREPRENEURSHIP TODAY

Not so long ago, scholars and policy makers worried about the potential of small

business to survive. The turbulence in the technology sector and the demise of many

dot-com start-ups heightened concerns about whether small companies can com-

pete with big business. However, entrepreneurship and small business, including

high-tech start-ups, are vital, dynamic, and increasingly important parts of the U.S.

economy. Small businesses represent 99.7 percent of all  rms and employ about half

of all private sector employees. In addition, small businesses have generated 60 to 80

percent of new jobs annually over the last decade.

Entrepreneurship in other countries is also booming. The list of entrepreneurial

countries around the world, shown in Exhibit A.2, is intriguing. A project monitoring

entrepreneurial activity around the world reports that an estimated 47.4 percent of

adults age 18 to 64 in Thailand are either starting up or managing new enterprises.

The percentage in Peru is 39 percent; in Colombia, 33.6 percent. China and Argen-

tina also show higher rates of entrepreneurial activity than the U.S. rate of 14.1 per-

cent. China’s boost in entrepreneurial activity continues to increase due to the rapid

expansion of the Chinese economy, especially in the big cities.

EXHIBIT A.1

Five Types of Small Business

Owners

SOURCE: Based on a study conducted by Yankelovich Partners for Pitney Bowes in Mark Henricks, “Type-

Cast,” Entrepreneur (March 2000): 14–16.

604 Appendix A

Deﬁ nition of Small Business

The U.S. Small Business Administration (SBA) de nes a small business as “one that

is independently owned and operated and which is not dominant in its  eld of

operation.”

Exhibit A.3 gives a few examples of how the SBA de nes small business

for a sample of industries.

However, the de nition of small business is currently under revision in response

to concerns from small business owners. After nationwide public hearings, the SBA

determined that standards should be changed in light of shifting economic and indus-

try conditions. Rede ning small business size standards is a daunting task, but SBA

leaders agree that the standards need to be more  exible in today’s world. The SBA’s

de nition has been revised a number of times over the years to re ect changing eco-

nomic conditions.

Exhibit A.3 also illustrates general categories of businesses most entrepreneurs

start: manufacturing, retail, and Internet services. Additional categories of small busi-

nesses are construction, hospitality, communications,  nance, and real estate.

EXHIBIT A.2

Entrepreneurial Countries

Around the World

Country Percentage of Individuals Age 18 to 64

Active in Starting or Managing a New Business, 2007

Thailand 47.4

Peru 39.0

Colombia 33.6

Venezuela 24.9

China 24.6

Argentina 24.1

Dominican Republic 23.2

Brazil 22.4

Chile 21.4

Iceland 19.8

Greece 18.7

Uruguay 18.5

Ireland 16.8

Portugal 15.4

Hong Kong 15.0

SOURCE: Table 1: Prevalence Rates of Entrepreneurial Activity Across Countries, 2007, in Niels Bosma, Kent Jones, Erkko

Autio and Jonathan Levie, Global Entrepreneurship Monitor 2007 Executive Report, Babson College and the London Business

School, March 14, 2008. Permission to reproduce this table has been kindly granted by the copyright holders. The GEM is an

international consortium comprising of 42 countries in 2007. Our thanks go to the authors, researchers, funding bodies and

other contributors who have made this possible.

EXHIBIT A.3

Examples of SBA Deﬁ nitions

of Small Business

ManufacturingManufacturing

Soft-drink manufacturing

Electronic computer manufacturing

Prerecorded CD, tape, and record producing

Number of employees does not exceed 500

Number of employees does not exceed 1,000

Number of employees does not exceed 750

Retail (Store and Nonstore)

Sporting goods stores

Electronic auctions

Convenience stores

Average annual receipts do not exceed $6.5 million

Average annual receipts do not exceed $23.0 million

Average annual receipts do not exceed $6.5 million

Miscellaneous Internet Services

Internet service providers

Web search portals

Internet publishing and broadcasting

Average annual receipts do not exceed $23.0 million

Average annual receipts do not exceed $6.5 million

Number of employees does not exceed 500

SOURCE: U.S. Small Business Administration, Table of Small Business Size Standards Matched to North American Industry

Classiﬁ cation System Codes, http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_tablepdf.pdf

(accessed June 23, 2008).

Appendix

605Managing Small Business Start-Ups

Impact of Entrepreneurial Companies

The impact of entrepreneurial companies on the U.S. economy is astonishing. Accord-

ing to the Small Business Administration, businesses with fewer than 500 employees

represent 99.7 percent of all  rms with employees in the United States, employ more

than 50 percent of the nation’s nonfarm private sector workers, and generate more than

50 percent of the nation’s nonfarm gross domestic product (GDP). In addition, small

businesses represent 97 percent of America’s exporters and produce 28.6 percent of all

export value.

In 2000, the status of the SBA administrator was elevated to a cabinet-

level position in recognition of the importance of small business in the U.S. economy.

Inspired by the growth of companies such as eBay, Google, and Amazon.com,

entrepreneurs are still  ocking to the Internet to start new businesses. In addition,

demographic and lifestyle trends create new opportunities in areas such as environ-

mental services, lawn care, computer maintenance, children’s markets,  tness, and

home health care. Entrepreneurship and small business in the United States is an

engine for job creation and innovation.

▪ Job Creation. Researchers disagree over what percentage of new jobs is created

by small business. Research indicates that the age of a company, more than its

size, determines the number of jobs it creates. That is, virtually all new jobs in

recent years have come from new companies, which include not only small com-

panies but also new branches of huge, multinational organizations.

However,

small companies still are thought to create a large percentage of new jobs in the

United States. The SBA reports that small businesses create 65 percent or more of

America’s new jobs. Jobs created by small businesses give the United States an

economic vitality no other country can claim. However, as re ected in Exhibit A.2

earlier in the chapter, entrepreneurial economic activity is dramatically expand-

ing in other countries as well.

▪ Innovation. According to Cognetics, Inc., a research  rm run by David Birch that

traces the employment and sales records of some 9 million companies, new and

smaller  rms have been responsible for 55 percent of the innovations in 362 differ-

ent industries and 95 percent of all radical innovations. In addition, fast-growing

businesses, which Birch calls gazelles, produce twice as many product innovations

per employee as do larger  rms. Small  rms that  le for patents typically produce

13 to 14 times more patents per employee than large patenting  rms.

Among the

notable products for which small businesses can be credited are WD-40, the jet

engine, and the shopping cart.

WHO ARE ENTREPRENEURS?

The heroes of American business—Henry Ford, Steve Jobs, Sam Walton, Bill Gates,

Oprah Winfrey, Larry Page, Sergey Brin—are almost always entrepreneurs. Entre-

preneurs start with a vision. Often they are unhappy with their current jobs and see

an opportunity to bring together the resources needed for a new venture. However,

the image of entrepreneurs as bold pioneers probably is overly romantic. A survey

of the CEOs of the nation’s fastest-growing small  rms found that these entrepre-

neurs could be best characterized as hardworking and practical, with great familiar-

ity with their market and industry.

For example, Jason Goldberg, T-Mobile USA’s

former strategic planning director, grew frustrated with the  ood of unquali ed can-

didates he received from popular job boards so he created Jobster as a new approach

to online recruiting. Jobster takes advantage of the referring power of a social net-

work, meaning that every job candidate is recommended by a trusted reference. Job

recruiters reduce their risk of hiring an unknown candidate when they hire someone

who comes with a referral. Striking a nerve with the hiring community, Jobster has

signed 475 corporate clients since its launch in 2005, and its roster of clients is grow-

ing 30 percent every year.

606 Appendix A

Diversity of Entrepreneurs

Entrepreneurs often have backgrounds and demographic characteristics that dis-

tinguish them from other people. Entrepreneurs are more likely to be the  rst-born

within their families, and their parents are more likely to have been entrepreneurs.

In addition, immigrants are more likely to start small businesses than native-born

Americans.

Consider former veterinarian Salvador Guzman, who moved from

Mexico to become a busboy in a friend’s Mexican restaurant in Nashville, Tennes-

see. Energized by the opportunities to succeed in the United States as an entre-

preneur, Guzman started his own restaurant with three partners and a savings

of $18,000, joining more than 2.4 million self-employed immigrants in the United

States. Now he owns 14 restaurants and the  rst Spanish-language radio station

in Tennessee.

Entrepreneurship offers opportunities for individuals who may feel blocked in

established corporations. Women-owned and minority-owned businesses may be

the emerging growth companies of the next decade. In 2005, women owned 6.5 mil-

lion U.S. businesses that generated $950.6 billion in revenues and employed more

than 7 million workers. In Canada as well, women entrepreneurs are thriving. Since

1989, the rate of small businesses started by women in Canada grew 60 percent faster

than the growth in the number of small businesses started by men.

Statistics for

minorities in the United States are also impressive, with minorities owning 4.1 mil-

lion  rms that generated $694 billion in revenues and employed 4.8 million people.

The number of new  rms launched by minorities is growing about 17 percent a year,

with African American businesses growing at a rate of about 26 percent a year. Afri-

can American males between the ages of 25 and 35 start more businesses than any

other group in the country. Moreover, the face of entrepreneurship for the future will

be increasingly diverse. When Junior Achievement (an organization that educates

young people about business) conducted a poll of teenagers ages 13 to 18, it found a

much greater interest among minorities than whites in starting a business, as shown

in Exhibit A.4.

The types of businesses launched by minority entrepreneurs are also increasingly

sophisticated. The traditional minority-owned mom-and-pop retail store or restau-

rant is being replaced by  rms in industries such as  nancial services, insurance, and

media. For example, Pat Winans, an African American who grew up in a Chicago

ghetto, started Magna Securities, a successful institutional brokerage  rm in New

York City, with just $5,000. Ed Chin, a third-generation Chinese American, founded

AIS Corporation to offer small and midsized companies the kind of sophisticated

EXHIBIT A.4

A Glimpse of Tomorrow’s

Entrepreneurs

SOURCE: Junior Achievement Survey results reported in Cora Daniels, “Minority

Rule,” FSB (December 2003–January 2004): 65–66.

Appendix

Managing Small Business Start-Ups

insurance packages usually available only to large companies. Chin originally found

a niche by catering to the Asian marketplace, but word-of-mouth has helped his com-

pany expand beyond that market.

Personality Traits

A number of studies have investigated the personality characteristics of entrepre-

neurs and how they differ from successful managers in established organizations.

Some suggest that entrepreneurs in general want something different from life than

do traditional managers. Entrepreneurs seem to place high importance on being free

to achieve and maximize their potential. Some 40 traits are identi ed as being associ-

ated with entrepreneurship, but 6 have special importance.

These characteristics are

illustrated in Exhibit A.5.

Internal Locus of Control The task of starting and running a new business

requires the belief that you can make things come out the way you want. The entre-

preneur not only has a vision but also must be able to plan to achieve that vision

and believe it will happen. An internal locus of control is the belief by individu-

als that their future is within their control and that external forces have little in u-

ence. For entrepreneurs, reaching the future is seen as being in the hands of the

individual. Many people, however, feel that the world is highly uncertain and that

they are unable to make things come out the way they want. An external locus

of control is the belief by individuals that their future is not within their control

but rather is in uenced by external forces. Entrepreneurs are individuals who are

convinced they can make the difference between success and failure; hence, they

are motivated to take the steps needed to achieve the goal of setting up and running

a new business.

High Energy Level A business start-up requires great effort. Most entrepreneurs

report struggle and hardship. They persist and work incredibly hard despite traumas

and obstacles. A survey of business owners reported that half worked 60 hours or

more per week. Another reported that entrepreneurs worked long hours, but that

beyond 70 hours little bene t was gained. New business owners work long hours,

with only 23 percent working fewer than 50 hours, which is close to a normal work-

week for managers in established businesses.

Need to Achieve Another human quality closely linked to entrepreneurship is the

need to achieve, which means that people are motivated to excel and pick situations

in which success is likely.

People who have high achievement needs like to set their

own goals, which are moderately dif cult. Easy goals present no challenge; unreal-

istically dif cult goals cannot be achieved. Intermediate goals are challenging and

provide great satisfaction when achieved. High achievers also like to pursue goals for

which they can obtain feedback about their success.

Self-Conﬁ dence People who start and run a business must act decisively. They

need con dence about their ability to master the day-to-day tasks of the business.

They must feel sure about their ability to win customers, handle the technical details,

and keep the business moving. Entrepreneurs also have a general feeling of con -

dence that they can deal with anything in the future; complex, unanticipated prob-

lems can be handled as they arise.

Awareness of Passing Time Entrepreneurs tend to be impatient; they feel a sense

of urgency. They want things to progress as if there is no tomorrow. They want things

moving immediately and seldom procrastinate. Entrepreneurs seize the moment.

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607

Appendix A

Tolerance for Ambiguity Many people need work situations characterized

by clear structure, speci c instructions, and complete information. Tolerance for

ambiguity is the psychological characteristic that allows a person to be untroubled

by disorder and uncertainty. This trait is important, because few situations present

more uncertainty than starting a new business. Decisions are made without clear

understanding of options or certainty about which option will succeed.

These personality traits and the demographic characteristics discussed earlier

offer an insightful but imprecise picture of the entrepreneur. Successful entrepre-

neurs come in all ages, from all backgrounds, and may have a combination of per-

sonality traits. No one should be discouraged from starting a business because he or

she doesn’t  t a speci c pro le. One review of small business suggests that the three

most important traits of successful entrepreneurs, particularly in a turbulent environ-

ment, are realism,  exibility, and passion. Even the most realistic entrepreneurs tend

to underestimate the dif culties of building a business, so they need  exibility and a

passion for their idea to survive the hurdles.

SOCIAL ENTREPRENEURSHIP: AN INNOVATIVE

APPROACH TO SMALL BUSINESS

In today’s shifting business and social environment, a new breed of entrepreneur has

emerged—the social entrepreneur. Social entrepreneurs are leaders who are com-

mitted to both good business and positive social change. They create new business

models that meet critical human needs and solve important problems that remain

unsolved by current economic and social institutions.

Consider Earl Martin Phalen,

who founded BELL (Building Educated Leaders for Life) out of his Boston living

room in 1992 to provide after-school and summer support services to low-income

students in grades K–6. As an African American growing up in the state’s foster care

system, Bell understood  rsthand how the right kind of support can change lives and

communities. “To know that [somebody] supported me, and all of a sudden, it took

my life from going to jail to going to Yale,” he says of his motivation to start BELL. All

20 of the students in BELL’s  rst class went on to college.

Social entrepreneurship combines the creativity, business smarts, passion, and hard

work of the traditional entrepreneur with a mission to change the world for the better.

One writer referred to this new breed as a cross between Richard Branson, the high-

powered CEO of Virgin Airlines, and Mother Teresa, a Catholic nun who dedicated

her life to serving the poor.

Social entrepreneurs have a primary goal of improving

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608

EXHIBIT A.5 Characteristics of Entrepreneurs

SOURCE: Adapted from Charles R. Kuehl and Peggy A. Lambing, Small Business: Planning and Management (Ft. Worth, TX: The Dryden Press, 1994): 45.

Appendix

609Managing Small Business Start-Ups

society rather than maximizing pro ts, but they also emphasize solid business results,

high performance standards, and accountability for results. The organizations created

by social entrepreneurs may or may not make a pro t, but the bottom line for these

companies is always social betterment rather than economic return. For entrepreneur

Peter Thum, founder of Ethos Water, the purpose of his business was to sell expensive

bottled water in the West in stores like Starbucks and donate part of the pro ts to clean-

water initiatives in developing countries such as Honduras and Kenya. By 2010, Ethos

will give more than $10 million a year to nonpro ts that fund safe-water projects.

Social entrepreneurship is not new, but the phenomenon blossomed over the past

20 or so years. Exact  gures for the number of social entrepreneurs are dif cult to

verify, but estimates number in the tens of thousands working around the world.

The innovative organizations created by social entrepreneurs are defying the tradi-

tional boundaries between business and welfare.

One good illustration is Homeboy

Industries, a company that started 12 years ago in a converted warehouse in Los

Angeles. With 18 employees, Homeboy emphasizes rehabilitation of former gang

members over revenue. The silk-screening part of the business generated $1.1 million

last year, and the bakery produced another $3 million in revenue. Jesuit priest and

founder Reverend Gregory Boyle explains that the “cash-producing part of the busi-

ness brings in enough to pay for the free services.” These services include therapy for

former gang members, housing assistance, job development, counseling, and tattoo

removal treatments. Boyle’s goal is to hire and train the neighborhood’s young men

to break the cycle of gangs, crime, and imprisonment.

LAUNCHING AN ENTREPRENEURIAL START-UP

Whether one starts a socially oriented company or a traditional for-pro t small busi-

ness, the  rst step in pursuing an entrepreneurial dream is to come up with a viable

idea and then plan like crazy. Once someone has a new idea in mind, a business plan

must be drawn and decisions must be made about legal structure,  nancing, and

basic tactics, such as whether to start the business from scratch and whether to pur-

sue international opportunities from the start.

Starting with the Idea

To some people, the idea for a new business is the easy part. They do not even con-

sider entrepreneurship until they are inspired by an exciting idea. Other people decide

they want to run their own business and set about looking for an idea or opportunity.

Exhibit A.6 shows the most important reasons that people start a new business and

EXHIBIT A.6 Sources of Entrepreneurial Motivation and New Business Ideas

SOURCES: John Case, “The Rewards,” Inc. (May 15, 2001): 50–51; and Leslie Brokaw, “How to Start an Inc. 500 Company,” Inc. (October 15, 1994): 51–65.

Center.