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

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Appendix A

the source of new business ideas. Note that 37 percent of business founders got their

idea from an in-depth understanding of the industry, primarily because of past job

experience. Interestingly, almost as many—36 percent—spotted a market niche that

wasn’t being  lled.

After Camille Young decided to develop a healthier lifestyle and

diet, she became frustrated trying to  nd organic food in Jersey City. Young explains,

“I had to go to Manhattan to  nd organic food. It was annoying that Jersey City

didn’t even have a juice bar. Then I started thinking, Why don’t I open one?” To  ll

this market niche, she opened two BaGua Juice stores that sell a variety of nutritious

smoothies to health-conscious consumers.

The trick for entrepreneurs is to blend their own skills and experience with a need

in the marketplace. Acting strictly on one’s own skills may produce something no

one wants to buy. On the other hand,  nding a market niche that one does not have

the ability to  ll doesn’t work either. Both personal skill and market need typically

must be present.

Writing the Business Plan

Once an entrepreneur is inspired by a new business idea, careful planning is crucial. A

business plan is a document specifying the business details prepared by an entrepre-

neur prior to opening a new business. Planning forces the entrepreneur to carefully think

through the issues and problems associated with starting and developing the business.

Most entrepreneurs have to borrow money, and a business plan is absolutely critical for

persuading lenders and investors to participate in the business. Studies show that small

businesses with a carefully thought-out, written business plan are much more likely to

succeed than those without one.

To attract the interest of venture capitalists or other

potential investors, the entrepreneur should keep the plan crisp and compelling.

The details of a business plan may vary, but successful business plans generally

share several characteristics:

▪ Demonstrate a clear, compelling vision that creates an air of excitement.

▪ Provide clear and realistic  nancial projections.

▪ Pro le potential customers and the target market.

▪ Include detailed information about the industry and competitors.

▪ Provide evidence of an effective entrepreneurial management team.

▪ Pay attention to good formatting and clear writing.

▪ Keep the plan short—no more than 50 pages.

▪ Highlight critical risks that may threaten business success.

▪ Spell out the sources and uses of start-up funds and operating funds.

▪ Capture the reader’s interest with a killer summary.

Choosing a Legal Structure

Before entrepreneurs begin a business, and perhaps again as it expands, they must

choose an appropriate legal structure for the company. The three basic choices are

proprietorship, partnership, or corporation.

Sole Proprietorship A sole proprietorship is de ned as an unincorporated busi-

ness owned by an individual for pro t. Proprietorships make up the majority of busi-

nesses in the United States. This form is popular because it is easy to start and has

few legal requirements. A proprietor has total ownership and control of the com-

pany and can make all decisions without consulting anyone. However, this type of

organization also has drawbacks. The owner has unlimited liability for the business,

meaning that if someone sues, the owner’s personal as well as business assets are at

risk. Also,  nancing can be harder to obtain because business success rests on one

person’s shoulders.

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iness plan

ocument

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det

ail

repar

y an entrepreneur

or to open

a new

ess

ole proprietorship

nincor

orated business

ned by an individual for

roﬁ t.

610

Appendix

Managing Small Business Start-Ups

Partnership A partnership is an unincorporated business owned by two or more

people. Partnerships, like proprietorships, are relatively easy to start. Two friends

may reach an agreement to start a graphic arts company. To avoid misunderstand-

ings and to make sure the business is well planned, it is wise to draw up and sign a

formal partnership agreement with the help of an attorney. The agreement speci es

how partners are to share responsibility and resources and how they will contribute

their expertise. The disadvantages of partnerships are the unlimited liability of the

partners and the disagreements that almost always occur among strong-minded

people. A poll by Inc. magazine illustrated the volatility of partnerships. Fifty-nine

percent of respondents considered partnerships a bad business move, citing rea-

sons such as partner problems and con icts. Partnerships often dissolve within

 ve years. Respondents who liked partnerships pointed to the equality of partners

(sharing of workload and emotional and  nancial burdens) as the key to a success-

ful partnership.

Corporation A corporation is an arti cial entity created by the state and exist-

ing apart from its owners. As a separate legal entity, the corporation is liable for its

actions and must pay taxes on its income. Unlike other forms of ownership, the cor-

poration has a legal life of its own; it continues to exist regardless of whether the

owners live or die. And the corporation, not the owners, is sued in the case of liability.

Thus, continuity and limits on owners’ liability are two principal advantages of form-

ing a corporation. For example, a physician can form a corporation so that liability

for malpractice will not affect his or her personal assets. The major disadvantage of

the corporation is that it is expensive and complex to do the paperwork required to

incorporate the business and to keep the records required by law. When proprietor-

ships and partnerships are successful and grow large, they often incorporate to limit

liability and to raise funds through the sale of stock to investors.

Arranging Financing

Most entrepreneurs are particularly concerned with  nancing the business. A few

types of businesses can still be started with a few thousand dollars, but starting a

business usually requires coming up with a signi cant amount of initial funding. An

investment is required to acquire labor and raw materials and perhaps a building and

equipment. High-tech businesses, for example, typically need from $50,000 to $500,000

just to get through the  rst six months, even with the founder drawing no salary.

Many entrepreneurs rely on their own resources for initial funding, but they often

have to mortgage their homes, depend on credit cards, borrow money from a bank,

or give part of the business to a venture capitalist.

Exhibit A.7 summarizes the most

common sources of start-up capital for entrepreneurs. The  nancing decision initially

involves two options—whether to obtain loans that must be repaid (debt  nancing)

or whether to share ownership (equity  nancing).

Debt Financing Borrowing money that has to be repaid at a later date to start a

business is referred to as debt ﬁ nancing. One common source of debt  nancing for

a start-up is to borrow from family and friends. Increasingly, entrepreneurs are using

their personal credit cards as a form of debt  nancing. Another common source is a

bank loan. Banks provide some 25 percent of all  nancing for small business. Some-

times entrepreneurs can obtain money from a  nance company, wealthy individuals,

or potential customers. A typical source of funds for businesses with high potential

is through angel ﬁ nancing. Angels are wealthy individuals, typically with busi-

ness experience and contacts, who believe in the idea for the start-up and are willing

to invest their personal funds to help the business get started. Signi cantly, angels

also provide advice and assistance as the entrepreneur is developing the company.

The entrepreneur wants angels who can make business contacts, help  nd talented

employees, and serve as all-around advisors.

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611

Appendix A

Another form of loan  nancing is provided by the Small Business Administra-

tion (SBA). Staples, which started with one of ce supply store in Brighton, Mas-

sachusetts, in 1986, got its start toward rapid growth with the assistance of SBA

 nancing. Today, Staples is North America’s largest operator of of ce superstores,

with 1,738 retail outlets in the United States and Canada, a thriving international

presence in 27 countries, and $27 billion in sales.

SBA  nancing is especially

helpful for people without substantial assets, providing an opportunity for single

parents, minority group members, and others with a good idea but who might be

considered high-risk by a traditional bank. The percentage of SBA loans to women,

Hispanics, African Americans, and Asian Americans has increased signi cantly in

recent years.

Equity Financing Any money invested by owners or by those who purchase stock

in a corporation is considered equity funds. Equity ﬁ nancing consists of funds that

are invested in exchange for ownership in the company.

A venture capital ﬁ rm is a group of companies or individuals that invests

money in new or expanding businesses for ownership and potential pro ts. This

form of capital is a potential for businesses with high earning and growth possi-

bilities. Venture capitalists are particularly interested in high-tech businesses such

as biotechnology, innovative online ventures, or telecommunications because they

have the potential for high rates of return on investment.

The venture capital  rm

Lighthouse Capital Partners, for example, provided some of the early funding for

Net ix, the online DVD rental service.

Venture capitalists also usually provide assis-

tance, advice, and information to help the entrepreneur prosper. A growing num-

ber of minority-owned venture capital  rms, such as Provender Capital, founded by

African American entrepreneur Fred Terrell, are ensuring that minorities have a fair

shot at acquiring equity  nancing.

Tactics for Becoming a Business Owner

Aspiring entrepreneurs can become business owners in several different ways. They

can start a new business from scratch, buy an existing business, or start a franchise.

Another popular entrepreneurial tactic is to participate in a business incubator.

equ

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enture capita

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at invests money in ne

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otential

roﬁ t

EXHIBIT A.7

Sources of Start-up Capital

for Entrepreneurs

80%

60%

100%

40%

20%

Self financed

from savings or

credit cards

Loans from friends,

family, or business

associates

Bank loans

Lines of credit

Venture capital

SOURCE: Jim Melloan, “The Inc. 5000,” Inc. (September 1, 2006): 187.

Mansueto Ventures LLC in the format Textbook via Copyright Clearance Center.

612

Appendix

Managing Small Business Start-Ups

Start a New Business One of the most common ways to become an entrepreneur

is to start a new business from scratch. This approach is exciting because the entre-

preneur sees a need for a product or service that has not been  lled before and then

sees the idea or dream become a reality. Ray Petro invested his $50,000 life savings

and took out a $25,000 loan to launch Ray’s Mountain Bike Indoor Park after learn-

ing from other mountain biking enthusiasts of their frustration with not being able

to ride during the winter months. Taryn Rose started her shoe company, Taryn Rose

International, after searching for stylish shoes that wouldn’t destroy her feet while

working long hours as an orthopedic surgeon.

The advantage of starting a business

is the ability to develop and design the business in the entrepreneur’s own way. The

entrepreneur is solely responsible for its success. A potential disadvantage is the long

time it can take to get the business off the ground and make it pro table. The uphill

battle is caused by the lack of established clientele and the many mistakes made by

someone new to the business. Moreover, no matter how much planning is done, a

start-up is risky, with no guarantee that the new idea will work. Some entrepreneurs,

especially in high-risk industries, develop partnerships with established companies

that can help the new company get established and grow. Others use the technique

of outsourcing—having some activities handled by outside contractors—to minimize

the costs and risks of doing everything in-house.

For example, Philip Chigos and

Mary Domenico are building their children’s pajama business from the basement of

their two-bedroom apartment, using manufacturers in China and Mexico to produce

the goods and partnering with a local  rm to receive shipments, handle quality con-

trol, and distribute  nished products.

Buy an Existing Business Because of the long start-up time and the inevitable

mistakes, some entrepreneurs prefer to reduce risk by purchasing an existing busi-

ness. This direction offers the advantage of a shorter time to get started and an exist-

ing track record. The entrepreneur may get a bargain price if the owner wishes to

retire or has other family considerations. Moreover, a new business may overwhelm

an entrepreneur with the amount of work to be done and procedures to be deter-

mined. An established business already has  ling systems, a payroll tax system, and

other operating procedures. Potential disadvantages are the need to pay for goodwill

that the owner believes exists and the possible existence of ill will toward the busi-

ness. In addition, the company may have bad habits and procedures or outdated

technology, which may be why the business is for sale.

Buy a Franchise Franchising is perhaps the most rapidly growing path to entre-

preneurship. The International Franchise Association reports that the country’s

909,253 franchise outlets account for about $2.3 trillion in annual sales and are the

source of 21 million jobs, 15.3 percent of all U.S. private-sector jobs.

Franchising

is an arrangement by which the owner of a product or service allows others to pur-

chase the right to distribute the product or service with help from the owner. The

franchisee invests his or her money and owns the business but does not have to

develop a new product, create a new company, or test the market. Franchises exist

for weight-loss clinics, pet-sitting services, sports photography, bakeries, janitorial

services, auto repair shops, real estate of ces, and numerous other types of busi-

nesses, in addition to the traditional fast-food outlets. Exhibit A.8 lists the top ten

fastest-growing franchises, including the type of business, the number of outlets,

and the initial franchise costs. Initial franchise fees don’t include the other start-up

costs the entrepreneur will have to cover.

The powerful advantage of a franchise is that management help is provided by

the owner. For example, Subway does not want a franchisee to fail. Subway has

regional development agents who do the research to  nd good locations for Sub-

way’s sandwich outlets. The Subway franchisor also provides two weeks of training

at company headquarters and ongoing operational and marketing support.

Fran-

chisors provide an established name and national advertising to stimulate demand

for the product or service. Potential disadvantages are the lack of control that occurs

fra

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613

614 Appendix A

when franchisors want every business managed in exactly the same way. In some

cases, franchisors require that franchise owners use certain contractors or suppliers

that might cost more than others would. In addition, franchises can be expensive, and

the high start-up costs are followed with monthly payments to the franchisor that can

run from 2 percent to 15 percent of gross sales.

Entrepreneurs who are considering buying a franchise should investigate the

company thoroughly. The prospective franchisee is legally entitled to a copy of

franchisor disclosure statements, which include information on 20 topics, including

litigation and bankruptcy history, identities of the directors and executive of cers,

 nancial information, identi cation of any products the franchisee is required to buy,

and from whom those purchases must be made. The entrepreneur also should talk

with as many franchise owners as possible, because they are among the best sources

of information about how the company really operates.

Exhibit A.9 lists some spe-

ci c questions entrepreneurs should ask about themselves and the company when

considering buying a franchise. Answering such questions can improve the chances

for a successful career as a franchisee.

Participate in a Business Incubator An attractive option for entrepreneurs

who want to start a business from scratch is to join a business incubator. A business

incubator typically provides shared of ce space, management support services, and

EXHIBIT A.8

Top 10 Fastest-Growing

Franchises for 2008

Franchise Type of Business Number of Outlets Franchise Costs

7–11 Convenience store 5,580 Varies

Subway Submarine sandwich

restaurant

21,344 $15,000

Dunkin’ Donuts Doughnut shop 5,451 $40,000—80,000

Pizza Hut Pizza restaurant 4,757 $25,000

McDonald’s Hamburger restaurant 11,772 $45,000

Sonic Drive-in Restaurant Drive-in hamburger

restaurant

2,655 $45,000

KFC Corp. Fast food chicken

restaurant

4,287 $25,000

Intercontinental Hotels Middle market lodging 2,541 Varies

Dominos Pizza Pizza delivery 4,571 $25,000

RE/MAX Int’l Real estate agency 4,315 $12,500—25,000

SOURCE: International Franchise Association, http://www.entrepreneur.com/franzone/fastestgrowing/index.html (accessed June

23, 2008).

Questions about the Entrepreneur Questions about the Franchisor Before Signing the Dotted Line

1. Will I enjoy the day-to-day work of the

business?

1. What assistance does the company

provide in terms of selection of location,

setup costs, and securing credit; day-to-

day technical assistance; marketing; and

ongoing training and development?

1. Do I understand the risks associated

with this business, and am I willing to

assume them?

2. Do my background, experience, and

goals make this opportunity a good

choice for me?

2. How long does it take the typical fran-

chise owner to start making a proﬁ t?

2. Have I had an advisor review the disclo-

sure documents and franchise agreement?

3. Am I willing to work within the rules

and guidelines established by the

franchisor?

3. How many franchises changed owner-

ship within the past year, and why?

3. Do I understand the contract?

SOURCES: Based on Thomas Love, “The Perfect Franchisee,” Nation’s Business (April 1998): 59–65; and Roberta Maynard, “Choosing a Franchise,” Nation’s Business

(October 1996): 56–63.

EXHIBIT A.9 Sample Questions for Choosing a Franchise

bus

ess

cubato

ovation that

rovides shared

ﬁ ce space, mana

ement sup

ort services, and mana

emen

adv

ice to entre

neurs.

Appendix

615Managing Small Business Start-Ups

management and legal advice to entrepreneurs. Incubators also give entrepreneurs

a chance to share information with one another about local business,  nancial aid,

and market opportunities. A recent innovation is the virtual incubator, which does not

require that people set up on-site. These virtual organizations connect entrepreneurs

with a wide range of experts and mentors and offer lower overhead and cost savings

for cash-strapped small business owners. Christie Stone, co-founder of Ticobeans,

a coffee distributor in New Orleans, likes the virtual approach because it gives her

access to top-notch advice while allowing her to keep her of ce near her inventory.

The concept of business incubators arose about two decades ago to nurture

start-up companies. Business incubators have become a signi cant segment of the

small business economy, with approximately 1,400 in operation in North America

and an estimated 5,000 worldwide.

The incubators that are thriving are primarily

not-for-pro ts and those that cater to niches or focus on helping women or minor-

ity entrepreneurs. These incubators include those run by government agencies and

universities to boost the viability of small business and spur job creation. The great

value of an incubator is the expertise of a mentor, who serves as advisor, role model,

and cheerleader, and ready access to a team of lawyers, accountants, and other advi-

sors. Incubators also give budding entrepreneurs a chance to network and learn from

one another.

“The really cool thing about a business incubator is that when you get

entrepreneurial people in one place, there’s a synergistic effect,” said Tracy Kitts, vice

president and chief operating of cer of the national Business Incubation Association.

“Not only do they learn from staff, they learn tons from each other, and this really

contributes to their successes.”

Starting an Online Business

Many entrepreneurs are turning to the Internet to expand their small businesses

or launch a new venture. In fact, 12.1 percent of sole proprietors are engaging in

e-commerce, up from 9.4 percent in 2005, according to a survey of 1,235 businesses.

Anyone with an idea, a personal computer, access to the Internet, and the tools to

create a Web site can start an online business. These factors certainly fueled Ash-

ley Qualls’s desire to create a Web site that has become a destination for million of

teenage girls. Starting at age 15, Ashley launched Whateverlife.com with a clever

Web site, an $8 domain name, and a vision to provide free designs (hearts,  ow-

ers, celebrities) for MySpace pages. Her hobby exploded into a successful business

with advertising revenue of more than $1 million so far. Ashley’s motivation to start

Whateverlife.com was fueled by an opportunity to turn a rewarding hobby into a

thriving online business.

Additional incentives for starting an online business include low overhead and

the ability to work from home or any location. These are some of the incentives

that motivated Landy Ung to launch 8coupons.com, a business that sends discount

coupons directly to users’ mobile phones via text messages. She and her boyfriend

Wan His Yuan run the business from their 500-square-foot studio apartment, mean-

ing headquarters is, effectively, their couch. Ung and Yuan have put $30,000 into the

business, and operating costs remain low. The business demands many hours of hard

work and diligence, however, frequently keeping both up until 3 a.m.

Entrepreneurs who aspire to start online businesses follow the usual steps required

to start a traditional business: identify a pro table market niche, develop an inspiring

business plan, choose a legal structure, and determine  nancial backing. Beyond that,

they need to be unusually nimble, persistent in marketing, savvy with technology,

and skillful at building online relationships. Several steps required to start an online

business are highlighted here.

▪ Find a market niche. To succeed in the competitive online market, aspiring entre-

preneurs need to identify a market niche that isn’t being served by other compa-

nies. Online businesses experience success when they sell unique, customized, or

narrowly focused products or services to a well-de ned target audience.

616 Appendix A

▪ Create a professional Web site. Online shoppers have short attention spans, so

a Web site should entice them to linger. To improve customers’ online experi-

ence, Web sites should be easy to navigate, intuitive, and offer menus that are

easy to read and understand. Even “small-time” sites need “big-time” designs

and should avoid common mistakes such as typos, excessively large  les that are

slow to load, too much information, and sensory overload.

FragranceNet.com

competes with “big-time” competitors with a Web site that clearly communicates

its value proposition (designer brands at discount prices), easy navigation, and

superior customer service.

▪ Choose a domain name. A domain name gives a company an address on the Web

and a unique identity. Domain names should be chosen carefully and be easy to

remember, pronounce, and spell. How is a domain name selected? The options for

creating a domain name are many and include (1) using the company name (dell.

com); (2) creating a domain name that describes your product or service (1-800-

Flowers.com); or (3) choosing a domain name that doesn’t have a speci c mean-

ing and provides options for expanding (Google.com).

▪ Build online relationships. In a storefront business, business owners develop

loyal customer relationships through personal attention and friendly service. In

the virtual business world, however, business owners connect with customers

primarily through an online experience. Creating a positive, online relationship

with customers requires time and resources, as Marla Cilley, owner of FlyLady

.net, discovered. Cilley cultivated a cultlike following to her Internet business

by sharing personal encouragement and housecleaning advice to middle-aged

homemakers who call themselves FlyLadies. Her adoring customers send her

nearly 5,000 grateful messages each day. She hired a team of six offsite readers to

respond to each one. Through positive customer experiences and shared testimo-

nials, Cilley continues to grow her self-help empire.

This demanding process of

responding to thousands of e-mails helps FlyLady.com develop a loyal following

and strong customer relationships.

MANAGING A GROWING BUSINESS

Once an entrepreneurial business is up and running, how does the owner manage

it? Often the traits of self-con dence, creativity, and internal locus of control lead to

 nancial and personal grief as the enterprise grows. A hands-on entrepreneur who

gave birth to the organization loves perfecting every detail. But after the start-up,

continued growth requires a shift in management style. Those who fail to adjust to a

growing business can be the cause of the problems rather than the solution.

In this

section, we look at the stages through which entrepreneurial companies move and

then consider how managers should carry out their planning, organizing, leading,

and controlling.

Stages of Growth

Entrepreneurial businesses go through distinct stages of growth, with each stage

requiring different management skills. The  ve stages are illustrated in Exhibit A.10.

1. Start-up. In this stage, the main problems are producing the product or service and

obtaining customers. Several key issues facing managers are: Can we get enough

customers? Will we survive? Do we have enough money? Burt’s Bees was in the

start-up stage when Roxanne Quimby was hand-making candles and personal

care products from the beeswax of Burt Shavitz’s bees and selling them at craft

fairs in Maine.

2. Survival. At this stage, the business demonstrates that it is a workable business

entity. It produces a product or service and has suf cient customers. Concerns

here involve  nances—generating suf cient cash  ow to run the business and

Appendix

617Managing Small Business Start-Ups

making sure revenues exceed expenses. The organization will grow in size and

pro tability during this period. Burt’s Bees reached $3 million in sales by 1993,

and Quimby moved the business from Maine to North Carolina to take advantage

of state policies that helped her keep costs in line.

3. Success. At this point, the company is solidly based and pro table. Systems and

procedures are in place to allow the owner to slow down if desired. The owner

can stay involved or consider turning the business over to professional managers.

Quimby chose to stay closely involved with Burt’s Bees, admitting that she’s a bit

of a control freak about the business.

4. Takeoff. Here the key problem is how to grow rapidly and  nance that growth.

The owner must learn to delegate, and the company must  nd suf cient capital

to invest in major growth. This period is pivotal in an entrepreneurial compa-

ny’s life. Properly managed, the company can become a big business. However,

another problem for companies at this stage is how to maintain the advantages

of “smallness” as the company grows. In 2003, Quimby sold 80 percent of Burt’s

Bees to AEA Investors, a private equity  rm, for more than $175 million. She con-

tinued as CEO and focuses on continuing to grow the business.

5. Resource maturity. At this stage, the company’s substantial  nancial gains may come

at the cost of losing its advantages of small size, including  exibility and the entre-

preneurial spirit. A company in this stage has the staff and  nancial resources to

begin acting like a mature company with detailed planning and control systems.

Planning

In the early start-up stage, formal planning tends to be nonexistent except for the

business plan described earlier in this chapter. The primary goal is simply to remain

alive. As the organization grows, formal planning usually is not instituted until the

success stage. Recall from Chapter 1 that planning means de ning goals and decid-

ing on the tasks and use of resources needed to attain them. Chapters 6, 7, and 8

describe how entrepreneurs can de ne goals and implement strategies and plans to

meet them. It is important that entrepreneurs view their original business plan as a

living document that evolves as the company grows or the market changes.

One planning concern for today’s small businesses is the need to be Web-savvy.

For many small companies today, their Web operations are just as critical as traditional

EXHIBIT A.10

Five Stages of Growth for an

Entrepreneurial Company

SOURCE: Based on Neil C. Churchill and Virginia L. Lewis, “The Five Stages of Small Business Growth,”

Harvard Business Review (May–June 1993): 30–50.

618 Appendix A

warehouse management or customer service operations. The growing importance of

e-business means entrepreneurs have to plan and allocate resources for Internet oper-

ations from the beginning and grow those plans as the company grows. Of the small

companies that have Web sites, more than half say the site has broken even or paid for

itself in greater ef ciency, improved customer relationships, or increased business.

Organizing

In the  rst two stages of growth, the organization’s structure is typically informal, with

all employees reporting to the owner. At about stage 3—success—functional managers

often are hired to take over duties performed by the owner. A functional organization

structure will begin to evolve with managers in charge of  nance, manufacturing, and

marketing. Another organizational approach is to use outsourcing, as described earlier.

Method, a company launched by two 20-something entrepreneurs to develop a line of

nontoxic cleaning products in fresh scents and stylish packaging, contracted with an

industrial designer for the unique dish soap bottle and uses contract manufacturers in

every region of the country to rapidly make products and get them to stores.

During the latter stages of entrepreneurial growth, managers must learn to del-

egate and decentralize authority. If the business has multiple product lines, the owner

may consider creating teams or divisions responsible for each line. The organization

must hire competent managers and have suf cient management talent to handle fast

growth and eliminate problems caused by increasing size. As an organization grows,

it might also be characterized by greater use of rules, procedures, and written job

descriptions. For example, Tara Cronbaugh started a small coffeehouse in a college

town, but its success quickly led to the opening of three additional houses. With the

rapid growth, Cronbaugh found that she needed a way to ensure consistency across

operations. She put together an operations manual with detailed rules, procedures,

and job descriptions so managers and employees at each coffeehouse would be fol-

lowing the same pattern.

Chapters 9 through 12 discuss organizing in detail.

Leading

The driving force in the early stages of development is the leader’s vision. This vision,

combined with the leader’s personality, shapes corporate culture. The leader can sig-

nal cultural values of service, ef ciency, quality, or ethics. Often entrepreneurs do

not have good people skills but do have excellent task skills in either manufacturing

or marketing. By the success stage of growth, the owner must either learn to moti-

vate employees or bring in managers who can. Rapid takeoff is not likely to happen

without employee cooperation. The president of Foreign Candy Company of Hull,

Iowa, saw his company grow rapidly when he concentrated more on employee needs

and less on  nancial results. He made an effort to communicate with employees,

conducted surveys to learn how they were feeling about the company, and found

ways to involve them in decision making. His shift in leadership style allowed the

company to enter the takeoff stage with the right corporate culture and employee

attitudes to sustain rapid growth.

Leadership also is important because many small  rms have a hard time hir-

ing quali ed employees. Labor shortages often hurt small  rms that grow rapidly.

A healthy corporate culture can help attract and retain good people.

Chapters 13

through 17 present the dynamics of leadership.

Controlling

Financial control is important in each stage of the entrepreneurial  rm’s growth. In

the initial stages, control is exercised by simple accounting records and by personal

supervision. By stage 3—success—operational budgets are in place, and the owner

should start implementing more structured control systems. During the takeoff stage,

the company will need to make greater use of budgets and standard cost systems and

Appendix

619Managing Small Business Start-Ups

use computer systems to provide statistical reports. These control techniques will

become more sophisticated during the resource maturity stage.

As Amazon.com grew and expanded internationally, for example, entrepreneur

and CEO Jeff Bezos needed increasingly sophisticated control mechanisms. Bezos

hired a computer systems expert to develop a system to track and control all of the

company’s operations.

Control is discussed in Chapters 18 and 19.

A MANAGER’S ESSENTIALS: WHAT DID WE LEARN?

▪ Entrepreneurship is the process of initiating a business, organizing the necessary

resources, and assuming the associated risks and rewards. Entrepreneurship

plays an important role in the economy by stimulating job creation, innovation,

and opportunities for minorities and women. An entrepreneur recognizes a via-

ble idea for a business product or service and combines the necessary resources

to carry it out. Entrepreneurs may be classi ed as idealists, optimizers, sustainers,

hard workers, or jugglers.

▪ The Small Business Administration de nes a small business as “one that is inde-

pendently owned and operated and which is not dominant in its  eld of opera-

tion.” The U.S. economy is ripe for entrepreneurial ventures, but entrepreneurial

activity is also booming in other countries, with some of the highest rates in

developing nations.

▪ Entrepreneurs place high importance on being free to achieve and maximize their

potential. An entrepreneurial personality includes the traits of internal locus of

control, high energy level, need to achieve, tolerance for ambiguity, awareness of

passing time, and self-con dence.

▪ A new breed of entrepreneur, the social entrepreneur, is committed to both good

business and positive social change. Social entrepreneurs sometime blur the line

between business and social activism because they combine the creativity, busi-

ness smarts, passion, and hard work of the traditional entrepreneur with a mis-

sion to improve the world.

▪ A business plan is a document specifying the business details prepared by an

entrepreneur prior to opening a new business. Businesses with carefully written

business plans are more likely to succeed than those without one. Small busi-

nesses may be organized as sole proprietorships, partnerships, or corporations.

Initial funding for a small business may come from debt  nancing, borrow-

ing money that has to be repaid, or equity  nancing, funds that are invested in

exchange for ownership.

▪ Small businesses generally proceed through  ve stages of growth: start-up, sur-

vival, success, takeoff, and resource maturity. The management functions of plan-

ning, organizing, leading, and controlling should be tailored to each stage of growth.

DISCUSSION QUESTIONS

1. You are interested in being your own boss and have

the chance to buy a franchise of ce supply store

that is for sale in your city. You will need outside

investors to help pay the franchise fees and other

start up costs. How will you determine if this is a

good entrepreneurial opportunity and make your

decision about buying the store?

2. Over the past 20 years, entrepreneurship has been

the fastest-growing course of study on campuses

throughout the country. However, debate contin-

ues about whether you can teach someone to be an

entrepreneur. Do you think entrepreneurship can

be taught? Why or why not?