Chapter 5

Choosing a Form of

Business Ownership

Types of Business Structure

Sole ProprietorshipPartnershipsCorporations

Advantages & Disadvantages

Sole Proprietorship

Advantages DisadvantagesEasy to start & end Unlimited liabilityYou’re the boss (& the help) Limited financial resourcesOwnership Records/managementLeave a legacy Time commitmentRetain profits Few fringe benefitsNo special taxes Limited growth (must pay quarterly taxes) Limited life span

Partnerships

Advantages DisadvantagesMore financial resources Unlimited liabilityShared management Division of profitsLonger survival Disagreements amongNo special taxes partners

Difficulty of termination

CorporationsC corp = conventional corporation

Advantages DisadvantagesLimited liability Extensive paperworkMore $ for investment Double taxationSize Two tax returnsPerpetual life SizeEase of ownership change Difficulty of terminationEase of attracting talented Possible conflict with

employees stockholders &Separation of ownership board of directors

from management Initial cost

S Corporation

Have no more than 100 shareholdersall members of one family may be counted as 1 shareholder

Shareholders who are individual or estates are citizens or residents of the USA.

Only one class of outstanding stock

Preferred & common stock are only for C corps

No more than 25% of income from passive sources (rents, royalties, interest)

Limited Liability Companies

Advantages DisadvantagesLimited liability No stockChoice of taxation Limited life spanFlexible ownership rules Fewer incentivesFlexible profit or loss Taxes: paid on profit

distribution not just salariesOperating flexibility Paperwork less than corp.

But more than proprietorship

Types of Mergers

Vertical Soda Firm & Sweetener FirmAuto Maker & Tire Maker

Horizontal Mercedes Benz & ChryslerWachovia & 1st Union Bank

Conglomerate Philip Morris & Nabisco

LBO = Leveraged Buyout

Special forms of Ownership

Franchises - Advantages & DisadvantgesE-commerceHome-based

Cooperatives - Advantages & Disadvantges

Franchises

Advantages DisadvantagesManagement & marketing Large start-up costs

assistance Shared profitsPersonal ownership Management regulationNationally recognized name Coattail effectsFinancial advice & assistance Restrictions on sellingLower failure rate Fraudulent franchisors

Cooperatives

Advantages DisadvantagesOwned & controlled by users Who is minding the store? producers, customers, or Requires stable group workers user/ownersPool resources for mutual gain May require board of Buying power of larger groups directorsTaxes: not the same as corporations

Land O Lakes, Sunkist, Ocean Spray, Blue Diamond, Welch’s, Associated Press, Ace Hardware, True Value Hardware

Read pages 142-145

Vocabulary Terms:acquisition conglomerate merger conventional corporation cooperativecorporation franchise franchise agreement franchisee franchisorgeneral partner general partnership horizontal merger levered buyoutlimited liability LLC LLP limited partner limited partnershipmaster limited partner merger partnership S corporation sole proprietorship unlimited liability vertical merger

If you started a business, what type would it be & what goods or services would you provide.

Chapter 6 - Business Ownership

The Age of the EntrepreneurJob-Creating Power

DuPont: Started in 1802 by French immigrant; 18 investors put up $36,000 in start-up money.

Avon started in 1886: David McConnell borrowed $500 from a friend.

The Cash Flow QuadrantFour Ways to Make an Income

Employee Business Owner

Self-Employed Investor

From Robert Kiyosaki

More Business Stories

George Eastman launched Kodak in 1880 with $3,000

Procter and Gamble was formed in 1837 by William Procter and James Gamble with $7,000 in capital.

Ford Motors began with $28,000 by Henry Ford and 11 associates.

More Business Stories

Amazon.com started by Jeff Bezos’s family and friends. His parents invested $300,000, a huge part of their retirement assets, Today, they are billionaires.

Other entrepreneurs: Steve Jobs, Ross Perot, Michael Dell, Bill Gates, Howard Schultz, Scott Cook, Ted Turner…

Why be an Entrepreneur?

Risks & RewardsOpportunityProfitIndependenceChallenge

What does it take?

Self-directedSelf-nurturingAction-orientedHighly energeticTolerant of uncertainty

Take Questionnaire on page 153 (Homework)

Ways to make it happen.

Entrepreneurial Teams

Micropreneurs & Home-based Business

Computer technology, Corporate downsizing, Social attitudes, New tax laws

Challenges for new businesses

Getting new customersManaging timeKeeping work & family tasks separateAbiding by city ordinancesManaging risk

Intrapreneurs

Working for someone elseLaunch new products

Innovation and creativity

3MSkunkworks of Lockheed Martin

Encouraging New Businesses

Enterprise Zones

Incubators

Technology Centers

Small vs Big Business

20 million full or part-time home-based businesses in the U.S.

750,000 tax-paying, employee-hiring businesses are started every year.

Of non-farm business in U. S., 97% are small businesses (Small Business Administration)

Account for 50% of GDPU.S. employees of small businesses are more

than population of Canada & Australia

More about small businessesAbout 80% of U.S. employees get their first

job at a small business.75% of new jobs created by small businessesWomen own nearly 6 million small

businesses.Business ownership for Asians, Hispanics, and

African Americans have increased by 463%, 417% and 108% respectively

Why are Small Businesses Important?

75% of new jobs are created by small businessesMore personal approach to customer serviceQuicker response to customers wants

Fill a contain with pebbles and rock.Can anything else be squeezed into the full box? If pebbles are medium sized companies & rocks are giant corporations, there is still a lot of room for small firm (sand) in the box.

Success and Failure

SBA - 60% in first 6 years fail (not so fast)Conventional wisdom: 1/3 in first 4 years

Bruce Kirschhoff’s study showed: 18% in first 8 years failed.

Statistics on failures include closing one business to start a new business; changing from a partnership to corporation.

1 out of 5 firms that fail leave owing money to creditors.

Businesses with low failure ratesVeterinary ServicesDental PracticesMedical Practices

These don’t produce much growthbut provide more security

Growing for growth as in technology firms are not easy to start, and can be difficult to keep going. See page 162 – figure 6.4

Successes

See page 163 - figure 6.5Customers need a lot of personal attentionProduct is easy to obtain/makeMarket/neighborhood is not attractive to a large firm.Teaming with a giant/franchisingPay attention to new competitorsFind a growth or recession resistant industry

Learning about Small Business

Learning from others (who have succeeded)Get some experienceTake over a successful firm

1) what the business owns2) what the business earns3) what makes it unique

(An accountant can help you find what a business is worth.)

Managing a Small Business

Planning your businessFinancing your businessKnowing your customersManaging your employeesKeeping records

Planning: A Business Plana 25 to 50 page document

Cover LetterSection 1 – Executive SummarySection 2 – Company BackgroundSection 3 – Management TeamSection 4 – Financial PlanSection 5 – Capital RequiredSection 6 – Marketing PlanSection 7 – Location AnalysisSection 8 – Manufacturing PlanSection 9 – Appendix

Planning

Begin with a Business PlanWriting a Business Plan

Getting money to fund a small business -Would you lend a business money without a written business plan?

Marketing

Target marketagegroupneed/wantsresourceswillingness to buyprice and financingHow many sales per week are needed to keep your business

afloat? When will your efforts make this happen?What strategies & activity will it take?

Where can you get help?Money sources

personal savingsrelatives & friendsformer employersbanks/finance companiesventure capitalistsgovernment agencies: Small Business Administration

www.sba.govFarmers Home Administration, Economic Development Authority, Minority Business Development Agency, Small Business Investment Company Program, Small Business Development Center

Important Details

Know your customersManaging employee/independent contractorsKeeping recordsHelp:

Legal –SBA’s BusinessLaw.comSCORE –Service Corps of Retired ExecutivesLocal Chambers of CommerceBetter Business Bureau

Going International

Hurdles:FinancingKnow HowCultural DifferencesRed Tape = Bureaucratic Paperwork

Advantages:Overseas buyer prefer dealing with individualsFaster response time/shippingVariety of suppliers through one small firmBetter service

Chapter 7

Management, Leadership, & Employee Empowerment

Goals

1. Explain how the changes that are occurring in the business environment are affecting the management function.

2. Describe the four functions of management.3. Relate the planning process & decision making process to

the accomplishments of company goals.4. Describe the organizing function of management.5. Explain the difference between leaders & managers, &

describe the various leadership styles6. Summarize the top five steps of the control function of

management.

Management

The process used to accomplish organizational goals through planning, organizing, leading, and controlling people.

Rewrite: change to controlling outcomes/product or change controlling to motivating

This is a personal issue (for me). I do not believe in controlling through force & intimidation.

Information, reason & incentives are more positive than attempts to control.

Function of Management

Planning Organizing

Leading Controlling(Motivating)

Planning

Creating a vision that inspires people.Based on shared values

Develop a mission statement1) Organization’s self-concept2) Firm’s philosophy & goals3) Long-term survival4) Customer needs5) Social Responsibility6) Nature of firm’s product or service

Planning: Short Term & Long Term

Goals: Long Term broad accomplishments/wishes

Objectives: Short Term specific, measurable outcomes

Strategies: Low price; quality service;

Tactics: Sale 4 time/year; customer surveys;

All planning is designed to…

… get you from point A to point B

Where are you now, where are your customers now, what do they need or want?

How will people find out about how you can help them?

What will it take to win customers that rave about you and your firm?

SWOT Analysis

StrengthsWeaknessesOpportunitiesThreats

Forms of Planning

Strategic Tacticallong range goals specific short rangeby top managers by lower level mgrs

Contingency OperationalBackup plans in case set work schedulesprimary plan fails & standards of

performance

Decision making

Find the best alternativeDevelop the situationDescribe & collect the needed informationDevelop alternatives/brainstormDevelop concensus among those involvedDecide which alternative is best/chooseDo what is indicated/implementDetermine whether decision was good/evaluate

Other ways of looking at this…

Problem SolvingPMI = Pluses/Minuses/ImplicationsSimilar to The Franklin Method of Decision Making

Organizational Chart

Top Management

Middle Management

Supervisory Management

Nonsupervisory/Employees

Organizing: to form a unified system

Levels of skills for managers

Top managers: Technical skills: less importantHuman Relations skillsConceptual skills: more important

Middle managers: Technical skillsHuman Relations skillsConceptual skills

First-line managers: Technical skills: more importantHuman Relations skillsConceptual skills: less important

Skills

Technical: discipline specific skills; software or marketing

Human Relations: communication & motivation; enabling, leading, coaching, moral building, delegating, training, assisting, developing competence

Conceptual: planning, vision, organizing, controlling, system development, problem analysis, decision making, coordinating, delegating

Stakeholder-oriented Organization

Less a matter of managers in controlMore influence of customers & others

Restructuring of large organizations into smallresponsive units

Recruitment & Beyond

Getting & Keeping the Right PeopleStaffing – Attracting quality people/workersOrientation – Training to get recruits off to a

positive startMotivating – Finding the best way to keep

improving the firm/its peopleRetaining – Rewarding those who get it

Leading

Providing Continuous Vision & ValuesLeaders versus Managers

Leaders help people see the reasons for change & create a Vision to followManagers strive to produce order & stability

Good leaders develop an environment for workers to motivate themselves, Good managers carry out the vision & accomplish the firms goals.

Leader Must…

Communicate a vision & rally others around that vision.

Establish corporate valuePromote corporate ethicsEmbrace change

Leadership Styles

Autocratic: decision making without consulting others; great in emergencies; direct the activities of many skilled workers

Participative: (TQM or TQL) work problem solving through teams; employee input may not improve efficiency, but may increase job satisfaction

Free-rein: setting objectives & letting employees have discretion on how to accomplish them

Empowering Workers

Giving explicit instructions versus authority to employees

Enabling employees to decision that managers used to make

Employees owning the responsibility of their choices

Requires clear communication, education, training, coaching and tools for employees when using greater discretion at work

Knowledge is Power

Managing knowledge: Getting the information to employees to better serve the customers

What is most important?How does your firm get this information?

What do I still not know?Who should I be asking?

How does your firm keep in touch with others?

Controlling: Making sure it worksEstablish clear standardsMonitor & Record performanceCompare results against standardsCommunicate resultsIf needed, take corrective actions

Are standards realistic?

Setting Clear Standards

The weakest link: setting standardsBetter quality is not preciseFaster response to customer contact

- not much better

Greet each customer within 15 seconds of entering the store, ask “How may I help you, today?” - This is a measurable goal & clear.

Customer Satisfaction

External Customers: dealers, general public

Internal Customers: employees, units within the firm, field sales people

Getting a good rating is not enough, how can you delight the customer so they rave about your firm to others.

Chapter 8

Adapting Organizations to Today’s Markets

Everyone is doing it…

Restructuring Notable FirmsXeroxFordGMToyotaIBMKraft FoodsSiemens

From the Bottom Up

Size does not change the fundamentals of organizing a business.

Organize your business – Where to start?!What does your business do now?

Who does what tasks? Division of LaborJob Specialization – Which workers are best

at each task?Growing your business: Attracting & retaining

quality workersWhat opportunities are suitable additions?

Setting up Team or Departments

Specialization of task leads to development of groups that work together for a common goal.

Production Accounting

Marketing Recruiting/Training

Organizational Design

Fayol’s principles of Organization1. Unity of Command2. Hierarchy of Authority3. Division of Labor4. Subordination5. Authority6. Degree of Centralization7. Clear Communication Channels8. Order9. Equity10. Esprit de corps

Max Weber – Organizational Theory

The Theory of Social and Economic Organizations

Pyramid Structure of OrganizationsBelieved that firms would do well if worker just did what

they were told.This may be reasonable if you had workers that were

relatively uneducated or untrained.

Job descriptionsWritten rules, decision guidelines & detailed recordsConsistent procedures, regulations & policiesStaffing & promotion based on qualifications

Principles into Design

Fayol – 1919 Weber – 1940’sChain of Command

Hierarchy = a system of levels of command where each individual

has only one direct supervisorPresident

Manager A Manager B Manager C

First –Line Supervisors First –Line Supervisors First –Line Supervisors

Workers

AuthorityCentralized or Decentralized

CentralizedAuthority & decision making centered in the top level of management = Centralized

Aristocrats/Nobility/Ruling Class vs Workers

Limitations:less responsive to current demandsless empowerment/rigid rulesclash between levellower morale

AuthorityCentralized or Decentralized

DecentralizedAuthority & decision making spread out over the levels of management.

The United States Government is a prime example of separate levels of authority.

Federalism reserved all powers of decision making to the people and the states that are not delineated as responsibilities of the Federal or central government. Local decisions are more responsive to the wishes of the people.

Choosing a span of control

How many subordinates should/can a manager supervise?

At lower levels, where work is more standardized 15 to 40 workers is possible.

At higher levels this span shrinks to 3 to 12 people per supervisor.

Tall versus Flat Orgaizations

Tall = Many layers of management

Flat = One person or group makes all the decisions

Departmentalization

Advantages DisadvantagesDepth of skill development Lack of communicationto mastery feedback missingEconomies of scale run Fragmentation of loyaltyby experts Group thinkCoordination & control Slow response to externalby top management changes

Trained people become narrowly specialized

Alternatives to Departmentalization

Function: Production, Finance, MarketingProduct: GM – Chevy, Buick, GMC, etc.Market: Consumer market, Business to business,

Government contractsGeographic: Regional/CulturalHybrids

Line Organizations & others

Line organization: direct, two-way lines of responsibility & communication from top to bottom with people reporting to only one supervisor.McDonald’s

Line-and-Staff organization: Line personnel are part of the chain of command; Staff assist & advise line personnel in meeting their goals.

Olympic College

Matrix-Style Organizations

Project completion require specialist from different parts of the organization. Borrowing from different departments for temporary association for design & development of a new product.

Cross-Functional Self-Managed Teams

Similar to matrix organizations, but longer connection and direction of new ideas/products without apppproval of upper management. Interdepartmental or interfirm collaboration

Managing Among Firms

Customers, Suppliers, Distributors, Governmentsnetworking: real time communication

(internet & other forms of telecommunication)

Transparency & IntegrationVirtual Corporation

Benchmarking

Comparing an organization’s practices, processes & products against the best in the world.

Dalbar Award – Customer Service & TechnologyJ.D. Powers Award- QualityCar & Track – Car of the YearBroad Prize – Best Inner City School System

Core Competencies

Things that must be done well by the firm

If outside the firm a better process, or more efficient way to accomplish a task is found …

outsourcing can improve the bottom line

IBM outsources its software development to Microsoft

Adapting to Change

Stuck in a rut? How do you climb out?

Managers find change the most difficult challenges.

New ways of thinking; tracking progress; evaluating everything

Kmart & Polaroid

Restructuring for Empowerment

Inverted Organization (Service oriented firm)Front-line workers = Key People

(not managers)

Front-Line Workers

Support Personnel

TopMgmt

Focus on the Customer

What does the customer want?-not what are we selling/making.

Creating a Change-oriented Organizational Culture

Atmosphere & Actions

Informal Organization = People working together