small business management: entrepreneurship & beyond (12.82mb)

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Small Business Management:Entrepreneurship and Beyond,Fifth Edition

Timothy S. Hatten

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1Small Business: An Overview

CHA P T E R L E A R N I N G O U T C OM E S

After reading this chapter, you should be able to:

1. Describe the characteristics of small business.

2. Recognize the role of small business in the U.S. economy.

3. Understand the importance of diversity in the marketplace and the workplace.

4. Identify some of the opportunities available to small businesses.

5. Suggest ways to court success in a small business venture.

6. Name the most common causes of small business failure.

E ntrepreneurs are people who often think big…they occasionally end up makinga change in the world…and they usually have a lot of confidence. Elon Musk isa guy who does all of the above—and he’s still in his thirties.

Musk is co-founder and chairman of Tesla Motors, maker of the world’s onlypure electric, high-performance cars. Most alternative fuel vehicles are thought of as beingboth style and performance challenged. Not the Tesla. The initial model, a two-seater road-ster, goes from zero to 60 miles per hour in a screaming 3.7 seconds while producing zeroemissions. It also sports a very cool carbon-fiber body and will travel over 300 miles be-tween charges. The four-door family-oriented model still goes from zero to 60 in 5.7 seconds.Not bad for a grocery hauler.

In addition to Tesla Motors, Musk is chief technology officer for SpaceX, one of themost advanced private companies building rockets for space transportation—ultimatelyaiming to establish a colony on Mars. The U.S. government takes Musk seriously: as theNational Aeronautics and Space Administration (NASA) phases out the space shuttle pro-gram, it awarded SpaceX a $1.6 billion contract to haul cargo to the space station. Oh,and by the way, Musk is also building professionalism and efficiency into the home solarenergy systems with his company SolarCity.

How does a person accomplish so much so young? Musk has always been anentrepreneur. At 12 years of age, growing up in South Africa, Elon created a videogame titled Blaster and sold it to a computer magazine for the unheard of sum of$500. Later in life, after graduating with bachelor degrees in finance and physics, hewas headed for grad school at Stanford with $2,000, a car, a computer, and nofriends in the Bay Area. Instead of getting his PhD, he founded a company calledZip2, which he sold two years later for $307 million in cash to Compaq. Rather thanliving easy and large on the $22 million in his pocket, Musk looked at the problem ofgetting paid for transactions online. He created the company PayPal, changing the©

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way we pay for stuff for Internet purchases, and sold it to eBay a couple of years laterfor $1.5 billion.

Elon Musk is a shining example of a serial entrepreneur (starting business after busi-ness) who builds innovative businesses which begin small, grow in size and impact, createmuch-needed jobs, and change the way we live. His accomplishments earned him the titleAutomotive Executive of the Year Innovator Award for 2010.

Sources: Lee Hawkins, “Tesla’s Long Haul,” The Wall Street Journal, January 12, 2010; Ben Oliver, “CAR Meets the World’s CoolestGeek” CAR, March 5, 2010, 113; John O’Dell, “Tesla Roadster Logs New Record,” www.edmunds.com, October 27, 2009; Max Chafkin,“Entrepreneur of the Year—Elon Musk,” Inc., December 2007, 115–125; Michael Copeland, “Tesla’s Wild Ride,” Fortune, July 21, 2008,82–94; Ronald Grover, “To the Moon: Elon Musk’s High-Power Visions,” BusinessWeek Online, October 14, 2009, 18; and Dave Guilford,“Tesla’s Tiny—But CEO Is Full of Confidence,” Automotive News, October 21, 2009, 38.

What Is Small Business?As the driver of the free enterprise system, small business generates a great deal ofenergy, innovation, and profit for millions of Americans. While the names of huge For-tune 500 corporations may be household words pumped into our lives via a multitude ofmedia, small businesses have always been a central part of American life. In his 1835book Democracy in America, Alexis de Tocqueville commented, “What astonishes mein the United States is not so much the marvellous grandeur of some undertakings asthe innumerable multitude of small ones.” If de Tocqueville were alive today, asidefrom being more than 200 years old, he would probably still be amazed at the contribu-tions made by small businesses.

The U.S. Small Business Administration (SBA) Office of Advocacy estimates thatthere were 26.8 million businesses in the United States in 2006. Census data show that 22percent of those 26.8 million businesses have employees, and 78 percent do not.1 The IRSestimate may be overstated because one business can own other businesses, but all of the

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businesses are nevertheless counted separately. What a great time to be in (and be studying)small business! Check out the following facts. Did you realize that small businesses:

• Represent more than 99.7 percent of all employers?• Employ more than half of all private sector employees?• Pay 44 percent of total U.S. private payroll?• Created 64 percent of net new jobs over the past 15 years?• Represented 97.3 percent of all identified exporters and produced 30.2 percent of the

known export value in FY 2007?• Produce 13 times more patents per employee than large firms?• Create more than 50 percent of private gross domestic product (GDP)?• Hire 40 percent of high-tech workers (such as scientists, engineers, and computer

programmers)?• Are 52 percent home based and 2 percent franchises?2

Small businesses include everything from the stay-at-home parent who provides daycare for other children, to the factory worker who makes after-hours deliveries, to theowner of a chain of fast-food restaurants. The 26.8 million businesses identified by theSBA included more than 9 million Americans who operate “sideline” businesses, part-time enterprises that supplement the owner’s income.3 Another 12 million people makeowning and operating a small business their primary occupation. Seven million of thesebusiness owners employ only themselves—as carpenters, independent sales representatives,freelance writers, and other types of single-person businesses. The U.S. Census Bureautracks firms by number of employees. These data show that approximately 5.9 millionfirms hire employees, and 19.5 million firms exist with no employees.4 The firms includedin the census figures are those that have a tangible location and claim income on a taxreturn. Figure 1.1 shows that 61 percent of employer firms (established firms with employ-ees) have fewer than 5 employees. Slightly more than 100,000 businesses have 100 employeesor more. Most people are surprised to learn that of the millions of businesses in the UnitedStates, only approximately 17,000 businesses have 500 or more workers on their payroll.

Size DefinitionsThe definition of small business depends on the criteria for determining what is “small”and what qualifies as a “business.” The most common criterion used to distinguish

0 10 20 30 40

61%3,670,028 firms

18%1,060,787 firms

11%646,816 firms

9%535,865 firms

0–4 employees

5–9 employees

10–19 employees

20–99 employees

100–499 employees

500+ employees

2%90,560 firms

<1%18,071 firms

50 60 70

FIGURE 1-1

Almost AllEstablished FirmsAre SmallBusinesses

Source: U.S. Census Bureau, Statistics of the U.S, “Number of Firms, Number of Establishments, Employment, and AnnualPayroll by Employment Size of the Enterprise—Totals 2006,” www.census.gov/econ/susb.

small businessA business is generallyconsidered small if it isindependently owned,operated, and financed;has fewer than 100employees; and hasrelatively little impact onits industry.

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between large and small businesses is the number of employees. Other criteria includesales revenue, the total value of assets, and the value of owners’ equity. The SBA, a fed-erally funded agency that provides loans and assistance to small businesses, has estab-lished definitions of business size that vary by industry. These definitions are based onannual sales revenues or number of employees, and they vary by industry codes assignedby the North American Industrial Classification System (NAICS).

The SBA’s Size Policy Board makes recommendations of business size eligibilitybased on economic studies. In establishing and reviewing business size standards, it con-siders the following factors:

• Industry structure analysis• Degree of competition• Average firm size• Start-up cost• Entry barriers, distribution of sales, and employment by firm size• Effects of different size standard levels on the objectives of SBA programs• Comments from the public on notices of proposed rule making5

Small business size standards vary by the industry within which the businessoperates: construction, manufacturing, mining, transportation, wholesale trade, retailtrade, and service. In general, manufacturers with fewer than 500 employees are classified

TABLE 1-1

Small Business SizeStandards

RANGE OF SIZE STANDARDS BY INDUSTRY

Construction: General building and heavy construction contractors have a size standard of$31 million in average annual receipts. Special trade construction contractors have a sizestandard of $13 million.

Manufacturing: For approximately 75 percent of the manufacturing industries, the sizestandard is 500 employees. A small number have a 1,500-employee size standard, and thebalance have a size standard of either 750 or 1,000 employees.

Mining: All mining industries, except mining services, have a size standard of 500employees.

Retail Trade: Most retail trade industries have a size standard of $6.5 million in averageannual receipts. A few, such as grocery stores, department stores, motor vehicle dealers,and electrical appliance dealers, have higher size standards. None exceed $26.5 million inannual receipts.

Services: For the service industries, the most common size standard is $6.5 million in aver-age annual receipts. Computer programming, data processing, and systems design have asize standard of $23 million. Engineering and architectural services have different size stan-dards, as do a few other service industries. The highest annual receipts size standard in anyservice industry is $32.5 million. Research and development and environmental remediationservices are the only service industries with size standards stated in number of employees.

Wholesale Trade: For all wholesale trade industries, a size standard of 100 employees isapplicable for loans and other financial programs. When acting as a dealer on federal con-tracts set aside for small business or issued under the 8(a) program, the size standard is500 employees, and the firm must deliver the product of a small domestic manufacturer.

Other Industries: Other industry divisions include agriculture; transportation, communica-tions, electric, gas, and sanitary services; finance; insurance; and real estate. Because ofwide variations in the structures of the industries in these divisions, there is no commonpattern of size standards. For specific size standards, refer to the size regulations in 13 CFR§ 121.201 or the table of small business size standards.

Source: Small Business Administration, “Guide to SBA’s Definitions of Small Business—Summary of Size Standards byIndustry Division,” www.sba.gov/size/indexguide.html.



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as small, as are wholesalers with fewer than 100 employees, and retailers or services withless than $6 million in annual revenue. Table 1.1 details more specific size standards.

Why is it important to classify businesses as big or small? Aside from facilitatingacademic discussion of the contributions made by these businesses, the classificationsare important in that they determine whether a business may qualify for SBA assistanceand for government set-aside programs, which require a percentage of each governmentagency’s purchases to be made from small businesses.

Types of IndustriesSome industries lend themselves to small business operation more than others do. Inconstruction, for instance, 90 percent of companies in the industry are classified as smallby the SBA. Manufacturing and mining industries have long been associated with massemployment, as well as mass production, yet SBA data show that 30 percent of manufac-turers and mining companies are classified as small. More than 64 percent of all retailbusinesses are small, employing about 15 million people in selling goods to their ultimateconsumers. More than three out of every four arts, entertainment, and recreationalservice businesses are small.6

The industry that employs the largest number of people in small business, however,is services. Seventy-one percent of all service businesses are small. More than 28 millionpeople are employed by small businesses that provide a broad range of services from res-taurants to lawn care to telecommunications. As indicated by industry percentages andby sheer numbers of employees, small businesses are important to every industry sector(see Figure 1.2).

For purposes of discussion in this book, we will consider a business to be small if itmeets the following criteria:

• It is independently owned, operated, and financed. One or very few people run thebusiness.

Industry classified as small business (percentage)1000

71%

65%

64%

57%

43%

Wholesale/retail trade

Professional/technical/administrative

Health/social services

Educational services

30%

Other services

Construction

Manufacturing/mining

29%Finance/insurance

90%

76%

74%

Arts/entertainment/recreational services

Real estate/rental/leasing

10 20 30 40 50 60 70 80 90

FIGURE 1-2

Small BusinessEmployment Shareof NAICS Industries

Source: Small Business Administration, Office of Economic Research, “Research Publications—Small Business Share of NAICSIndustries,” Research Summary #218.



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• It has fewer than 100 employees. Although SBA standards allow 500 or more employeesfor some types of businesses to qualify as “small,” the most common limit is 100.

• It has relatively little impact on its industry. Tesla Motors, described in the chapteropener, had annual revenue of $200 million for 2009. Although this is an impressivefigure, the firm is still classified as a small business because it has little influence onToyota or General Motors, which had 2009 sales of $211 billion and $149 billion,respectively.7

Small Businesses in the U.S. EconomyUntil the early 1800s, all businesses were small in the way just described. Most goodswere produced one at a time by workers in their cottages or in small artisan studios.Much of the U.S. economy was based on agriculture. With the Industrial Revolution,however, mass production became possible. Innovations such as Samuel Slater’s textilemachinery, Eli Whitney’s cotton gin, and Samuel Colt’s use of interchangeable parts inproducing firearms changed the way business was conducted. Factories brought people,raw materials, and machinery together to produce large quantities of goods.

Although the early manufacturers were small, by the late 1800s businesses wereable to grow rapidly in industries that relied on economies of scale for their profit-ability. Economy of scale is the lowering of costs through production of larger quanti-ties: The more units you make, the less each costs. During this time, for example,Andrew Carnegie founded U.S. Steel, Henry Ford introduced the assembly line formanufacturing automobiles, and Cornelius Vanderbilt speculated in steamships andrailroads. Although these individuals had begun as entrepreneurs, their companies even-tually came to dominate their respective industries. The costs of competing with thembecame prohibitively high as the masses of capital they had accumulated formed a bar-rier to entry for newcomers to the industry. The subsequent industrialization of Amer-ica decreased the impact of new entrepreneurs over the first half of the twentiethcentury.8 Small businesses still existed during this period, of course, but the economicmomentum that large businesses had gathered kept small businesses in minor roles.

The decades following World War II also favored big business over small business.Industrial giants like General Motors and IBM, and retailers like Sears, Roebuck and Co.,flourished during this period by tapping into the expanding consumer economy.

In the late 1950s and early 1960s, another economic change began. Businesses beganpaying more attention to consumer wants and needs, rather than focusing solely on pro-duction. This paradigm shift was called the marketing concept—finding out what peoplewant and then producing that good or service, rather than making products and thentrying to convince people to buy them. With this shift came an increased importanceascribed to the service economy. The emphasis on customer service by businesses adopt-ing the marketing concept started to provide more opportunities for small business.Today, the service sector of our economy makes up about 60 percent of total U.S. jobs,producing services for customers rather than tangible products. The growth of this sectoris important to small businesses because they can compete effectively in it.

By the early 1970s, corporate profits had begun to decline, while these large firms’costs increased. Entrepreneurs such as Steve Jobs of Apple Computer and Bill Gates ofMicrosoft started small businesses and created entirely new industries that had neverbefore existed. Managers began to realize that bigger is not necessarily better and thateconomy of scale does not guarantee lower costs. Other start-ups, such as Walmart andThe Limited, both of which were founded in the 1960s, dealt serious blows to retailgiants like Sears in the 1970s. Because their organizational structures were flatter, thenewer companies could respond more quickly to customers’ changing desires, and theywere more flexible in changing their products and services.

marketing conceptThe business philosophyof discovering whatconsumers want and thenproviding the good orservice that will satisfytheir needs.

service sectorBusinesses that provideservices, rather thantangible goods.

“Managers beganto realize thatbigger is notnecessarily betterand that economyof scale does notguarantee lowercosts.”



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A new term entered the business vocabulary during the 1990s that continues to affectthe business world today—downsizing. Downsizing can involve the reduction of a busi-ness’s workforce to shore up dwindling profits. It can also stem from a business’s decisionto concentrate on what it does best. Any segment of a business in which its owner doesnot have special skills can be put up for sale, eliminated, or sent out for someone else todo (outsourced). The effects of downsizing and outsourcing on small business are twofold.First, many people who lose their jobs with large businesses start small businesses of theirown. Second, these new businesses often do the work that large businesses no longer per-form themselves—temporary employment, cleaning services, and independent contract-ing, for example. While downsizing and outsourcing are often painful to the displacedindividuals, they ultimately enhance the productivity and competitiveness of companies.9

The global economic crisis that began in 2007–2010 has had a tremendous impacton small business. Disruption of small business financing is significant due to the closeconnection between the business and owner—including home second mortgages andlines of credit, putting the small business owner’s home in play in case of loan default.Tactics for small business owners to deal with the credit squeeze revolve primarilyaround protecting cash flow to decrease dependence on external funding. As of mid-2010, small business funding has not eased.10 Tactics for small businesses to weatherthe economic storm will be found in several chapters of this new edition, including:

• Finding opportunities that are recession resistant• Jettisoning the bottom 10 percent of problem customers• Protecting cash—in multiple ways• Enhancing small business image• Building and enhancing relationships• Cross-training employees• Getting pricing correct

Increased Business Start-ups Indeed, the rate of small business growth has more thandoubled in the last 30 years. In 1970, 264,000 new businesses were started.11 In 1980, thatfigure had grown to 532,000; it reached 585,000 in 1990, 574,000 in 2000, and 670,100 in2006.12 Although a lot of attention tends to be paid to the failure rate of small businesses,many people continue going into business for themselves. New businesses compared withclosures are consistently close in number. For example, in 2005 there were 670,100 newstarts and 599,300 closures—each representing about 10 percent of the total.13

Increasing Interest at Colleges and Universities The growing economic importance ofsmall business has not escaped notice on college and university campuses. In 1971, only16 schools in the United States offered courses in entrepreneurship. By 2010 that numberhad grown to 2,000.14 Other evidence of increased interest in entrepreneurship educationat U.S. colleges and universities and those in other countries is the proliferation of cen-ters for entrepreneurship, student-run business incubators, and endowed faculty entre-preneurship positions—406 in the United States and 563 worldwide.15

What can explain this phenomenal growth of interest in small business at educa-tional institutions? For one thing, it parallels the explosion in small business formation.For another thing, since mistakes made in running a small business are expensive interms of both time and money, many prospective business owners attend school in orderto make those mistakes on paper and not in reality.

Some students don’t wait for graduation to take advantage of hot college trends—suchas Ryan Dickerson, a junior at Syracuse University, who found his dorm room to bemore than a little cramped. But the son of an interior designer knew he just needed a littlecreativity in optimizing the space. Dickerson created the “bed transforming pillow” to

downsizingThe practice of reducingthe size of a firm’sworkforce.

“In 1971, only 16schools in theUnited Statesoffered courses inentrepreneurship.By 2010 thatnumber hadgrown to 2,000.”



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convert his single bed into a couch during the day.Thus, Rylaxing was born in 2009. Both the three-foot-long halfback and the six-foot fullback comein a variety of colors (including cheetah print). Af-ter a year selling on his own campus, Ryan plans tosell at colleges across the country.16

Workforce Diversity andSmall Business OwnershipData from the Census Bureau Survey of BusinessOwners (SBO) and Bureau of Labor Statisticsshow that self-employment rose 12.2 percentfrom 1995 to 2004. Women’s self-employment in-creased 20 percent over the same period. Thetrend toward self-employment is reflected in allnonwhite categories by large percentage gains, al-though in 2004, white Americans still constitutedmost of the self-employed—88.3 percent.17 Trends

of an aging population, increasing birthrate of minority groups, more attention to theneeds and abilities of people with handicaps, and more women entering the workforce arechanging the way our nation and our businesses operate. The intent of most civil rightslaws (see Chapter 10) is to ensure that all groups are represented and that discriminationis not tolerated. Wheels of change tend to move slowly, and inequities persist for allgroups of people, but progress is being made, especially among the self-employed.

Within the SBA’s Office of Advocacy, the Office of Economic Research producesreports on the economic activity of small minority- and women-owned firms andassesses the effects of regulation on them. Its report “Dynamics of Minority-OwnedEmployer Establishments, 1997–2001” (see this report and “Women in Business, 2006”at www.sba.gov/advo/stats) reviewed the most recent available statistical information onminority-owned firms, their composition, industrial distribution, legal forms of owner-ship, growth, and turnover. It also looked at socioeconomic characteristics of minoritybusiness owners. The report suggested that although minority-owned businesses are vitalto the growth of the U.S. economy, significant issues continue to hamper their growth.Some statistics from the report follow:

• The number of minority-owned firms and their annual revenues were as follows:18

• Asian-owned firms totalled 1,103,587 and generated $326.7 billion annualrevenue.

• Black-owned firms totalled 1,197,567 and generated $88.6 billion annualrevenue.

• Hispanic-owned businesses totalled 1,573,464 and generated $222 billion annualrevenue.

• American Indian/Alaska Native-owned firms totalled 201,387 and generated$26.9 billion annual revenue.

• Native Hawaiian- and other Pacific Islander-owned firms totalled 28,948 andgenerated $4.3 billion annual revenue.

• Of all U.S. businesses, 5.8 percent were owned by Hispanic Americans, 4.4 percentby Asian Americans, 4.0 percent by African Americans, and 0.9 percent byAmerican Indians.

Small business ownership providessatisfaction and pride of ownershipregardless of background.

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• Of minority-owned businesses, 39.5 percent were Hispanic owned, 30.0 percentAsian owned, 27.1 percent African American owned, and 6.5 percent AmericanIndian owned.

• Business density—the number of individuals in the population divided by the num-ber of businesses in the population, with the lower the number indicating the higherthe density—was 10.1 for nonminorities, 11.7 for Asians and Pacific Islanders, 12.6for American Indians and Alaska Natives, 29.4 for Hispanics, and 42.1 for AfricanAmericans. Among Asians, Koreans had the highest business density, and “otherPacific Islanders” had the lowest. Among Hispanics, Spaniards had the highest, andPuerto Ricans the lowest.

• During 1997–2001, 27.4 percent of nonwhite businesses expanded their operations,compared with 34 percent of Hispanic-owned employer establishments, 32.1 percentof Asian/Pacific Islander-owned businesses, 27.8 percent of American Indian/AlaskaNative-owned establishments, and 25.7 percent of African American-ownedbusinesses.

• SBA data show that the four-year survival rate for nonminority-owned businesseswas 72.6 percent between 1997 and 2001. Those for minority-owned businesses were72.1 percent for Asian/Pacific Islander-owned businesses, 68.6 percent for Hispanic-owned businesses, 67 percent for American Indian/Native Alaskan-owned busi-nesses, and 61 percent for African American-owned businesses.19

Now consider some of the findings of businesses owned by women, summarized inseveral SBA Office of Advocacy reports:

• Various measures of the number of women-owned businesses exist, including mea-sures of self-employment and business tax returns. Women owned more than50 percent of 5.4 million businesses in 2001.

• The 6.5 million women-owned businesses generated $940.8 billion in revenues in2002, employed more than 7.1 million workers, and had nearly $173.7 billion inpayroll in 2002.

• In addition, another 2.7 million firms are owned equally by both women and men;these firms add another $731.4 billion in revenues and employ another 5.7 millionworkers.

• Women-owned businesses represented 28.2 percent of all nonfarm businesses in theUnited States.

• In 1998, of all U.S. sole proprietorships, 37 percent were operated by women.Women-operated businesses generated 18 percent of total business receipts and22 percent of net income.

• Women-owned businesses were concentrated in the wholesale and retail trade andmanufacturing industries.

• Women’s share of total self-employment increased from 22 percent in 1976 to33.6 percent in 2004.

• Compared with non-Hispanic white business owners, of whom 28 percent werewomen, minority groups in the United States had larger shares of women businessowners, ranging from 31 percent of Asian American to 46 percent of AfricanAmerican business owners.20

These data show that when faced with the choice of working for someone else orworking for themselves, people from widely varied backgrounds choose the latter.

Resources exist to specifically assist women- and minority-owned businesses. TheSBA 8(a) federal certification program promotes access for entrepreneurs who aresocially or economically disadvantaged to federal contracts. SBA 8(a) certification

“These data showthat when facedwith the choice ofworking forsomeone else orworking forthemselves, peoplefrom widely variedbackgroundschoose the latter.”



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provides women and minority business owners preference in bidding on federal and somestate contracts. Professional organizations such as the National Association of WomenBusiness Owners (nawbo.org) and Women’s Business Enterprise National Council(wbenc.org) provide networking, educational, and corporate contract information.21

The Value of Diversity to BusinessConsidering the number of problems that most small business owners face, perhapsmore of them will make the same discovery that Ernest Drew did in the following story:Diversity in the workplace can provide creative problem-solving ideas.

Ernest Drew, CEO of chemical producer Hoechst Celanese, learned the value of di-versity during a company conference. A group of 125 top company officials, primarilywhite men, was separated into groups with 50 women and minority employees. Someof the groups comprised a variety of races and genders; others were composed of whitemen only. The groups were asked to analyze a problem concerning corporate culture andsuggest ways to change it. According to Drew, the more diverse teams produced thebroadest solutions. “They had ideas I hadn’t even thought of,” he recalled. “For the firsttime, we realized that diversity is a strength as it relates to problem solving.”22 Drew’sconclusion that a varied workforce is needed at every level of an organization can beapplied to businesses of any size.

Secrets of Small Business SuccessWhen large and small businesses compete directly against one another, it might seemthat large businesses would always have a better chance of winning. In reality, smallbusinesses have certain inherent factors that work in their favor. You will improve yourchances of achieving success in running a small business if you identify your competitiveadvantage, remain flexible and innovative, cultivate a close relationship with your custo-mers, and strive for quality.

It may come as a surprise, but big businesses need small businesses—a symbioticrelationship exists between them. For instance, John Deere relies on hundreds of ven-dors, many of which are small, to produce component parts for its farm equipment.Deere’s extensive network of 3,400 independent dealers comprising small businesses pro-vides sales and service for its equipment. These relationships enable Deere, the world’slargest manufacturer of farm equipment, to focus on what it does best, while at thesame time creating economic opportunity for hundreds of individual entrepreneurs.

Small businesses perform more efficiently than larger ones in several areas. For ex-ample, although large manufacturers tend to enjoy a higher profit margin due to theireconomies of scale, small businesses are often better at distribution. Most wholesale andretail businesses are small, which serves to link large manufacturers more efficiently withthe millions of consumers spread all over the world.

Competitive AdvantageTo be successful in business, you have to offer your customers more value than yourcompetitors do. That value gives the business its competitive advantage. For example,suppose you are a printer whose competitors offer only black-and-white printing. An in-vestment in color printing equipment would give your business a competitive advantage,at least until your competitors purchased similar equipment. The stronger and more sus-tainable your competitive advantage, the better your chances are of winning and keepingcustomers. You must have a product or service that your business provides better than

“It may come as asurprise, but bigbusinesses needsmall businesses—asymbioticrelationship existsbetween them.”

competitive advantageThe facet of a businessthat is better than thecompetition’s. Acompetitive advantagecan be built from manydifferent factors.



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the competition, or the pressures of the marketplace may make your business obsolete(see Chapter 3).

Flexibility To take advantage of economies of scale, large businesses usually seek todevote resources to produce large quantities of products over long periods of time. Thiscommitment of resources limits their ability to react to new and quickly changing mar-kets as small businesses do. Imagine the difference between making a sharp turn in aloaded 18-wheel tractor trailer and a small pickup truck. Now apply the analogy to largeand small businesses turning in new directions. The big truck has a lot more capacity,but the pickup has more maneuverability in reaching customers.

Innovation Real innovation has come most often from independent inventors and smallbusinesses. The reason? The research and development departments of most large busi-nesses tend to concentrate on the improvement of the products their companies alreadymake. This practice makes sense for companies trying to profit from their large invest-ments in plant and equipment. At the same time, it tends to discourage the developmentof totally new ideas and products. For example, telecommunications giant AT&T has anincentive to improve its existing line of telephones and services to better serve its custo-mers. In contrast, the idea of inventing a product that would make telephones obsoletewould threaten its investment.

Small businesses have contributed many inventions that we use daily. The long listwould include zippers, air conditioners, helicopters, computers, instant cameras, audio-tape recorders, double-knit fabric, fiber-optic examining equipment, heart valves, opticalscanners, soft contact lenses, airplanes, and automobiles, most of which were later pro-duced by large manufacturers. In fact, many say that the greatest value of entrepreneurialcompanies is the way they force larger competitors to respond to innovation. Small busi-nesses innovate by introducing new technology and markets, creating new markets, de-veloping new products, and nurturing new ideas—actions that larger businesses have tocompete with, thereby requiring the larger businesses to change.

Manager’s NotesStraight from the Source

Rieva Lesonsky, editorial director of Entrepreneur magazine, shares a few of her favor-

ite inspirational quotes for entrepreneurs and small business owners:

• Only those who dare to fail miserably can achieve greatly—Robert Kennedy.

• Even if you’re on the right track, you’ll get run over if you just sit there—Will

Rogers.

• If everything seems under control, you’re just not going fast enough—Mario

Andretti.

• Creativity is allowing yourself to make mistakes. Art is knowing which ones to

keep—Scott Adams.

• People are always blaming their circumstances for what they are. I don’t believe

in circumstances. The people who succeed are the people who look for

circumstances they want. And if they can’t find them, they make them—George

Bernard Shaw.

What famous quotations can you find that relate to self-employment?

Source: Rieva Lesonsky, “Words to Live By,” Entrepreneur, March 2007, 10.



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Economist Joseph Schumpeter called the replacement of existing products, processes,ideas, and businesses with new and better ones creative destruction. It is not an easy process.Yet, although change can be threatening, it is vitally necessary in a capitalist system.23 Smallbusinesses are the driving force of change that leads to creative destruction, especially in thedevelopment of new technology.24

Small businesses play a major role in creating the innovation that Schumpeter dis-cussed. Four types of innovation that small businesses are most likely to produce include:

• Product innovation: Developing a new or improved product.• Service innovation: Offering a new or altered service for sale.• Process innovation: Inventing a new way to organize physical inputs to produce a

product or service.• Management innovation: Creating a new way to organize a business’s resources.

The most common types of innovation relate to services and products. Thirty-eightpercent of all innovations are service related, and 32 percent are product related. Inter-estingly, the SBA found that the majority of innovations originate from the smallest busi-nesses, those with 1 to 19 employees. More than three-fourths of service innovations aregenerated by very small businesses, which also generate 65 percent of both product andprocess innovations.25 Recent research reported to the SBA’s Office of Advocacy showedthat small patenting firms produce 13 to 14 times more patents per employee as largepatenting firms.26

The process of creative destruction is not limited to high-technology businesses or tothe largest companies. A small business owner who does not keep up with market innova-tions risks being left behind. Creative destruction occurs in mundane as well as exotic in-dustries, such as chains of beauty salons replacing barber shops. Knowledge is the key toinnovation and advancement. For this reason, it is important for you to keep current withbusiness literature by reading periodicals such as Inc., Fast Company, or Fortune Small Busi-ness that cover small business topics and any specialized trade journals that exist for yourtype of business. Many business schools also have executive education programs, whichrange from two days to a year or longer, specifically designed for small business owners.

Close Relationship to Customers Small business owners get to know their customersand neighborhood on a personal level. This closeness allows them to provide individual-ized service and gives them firsthand knowledge of customer wants and needs. By con-trast, large businesses get to “know” their customers only through limited samples ofmarketing research (which may be misleading). Knowing customers personally can allowsmall businesses to build a competitive advantage based on specialty products, personal-ized service, and quality, which enables them to compete with the bigger businesses’lower prices gained through mass production. For this reason, you should always re-member that the rapport you build with your customers is of vital importance—it iswhat makes them come back again and again.

Getting Started on the Right FootBefore starting your own business, you will want to make sure that you have the righttools to succeed. Look for a market large enough to generate a profit, sufficient capital,skilled employees, and accurate information.

Market Size and Definition Who will buy your product or service? Marketing techniqueshelp you find out what consumers want and in what quantity. Armed with this informa-tion, you can make an informed decision about the profitability of offering a particulargood or service. Once you conclude that a market is large enough to support your business,

creative destructionThe replacement ofexisting products,processes, ideas, andbusinesses with new andbetter ones.

“Small businessesare the drivingforce of change thatleads to creativedestruction,especially in thedevelopment ofnew technology.”



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you will want to learn what your customers have in common and how their likes anddislikes will affect your market, so as to serve them better and remain competitive.

Gathering Sufficient Capital All too often, entrepreneurs try to start a business withoutobtaining sufficient start-up capital. The lifeblood of any young business is cash; startingon a financial shoestring hurts your chances of success. Profit is the ultimate goal, butinadequate cash flow cuts off the blood supply (see Chapter 8).

You may need to be creative in finding start-up capital. A second mortgage, loansfrom friends or relatives, a line of credit from a bank or credit union, or a combinationof sources may be sufficient. Thorough planning will give you the best estimate of howmuch money you will need. Once you have made your best estimate, double it—or atleast get access to more capital. You’ll probably need it.

Finding and Keeping Effective Employees Maintaining a capable workforce is a never-ending task for small businesses. Frequently, small business owners get caught up in theurgency to “fill positions with warm bodies” without spending enough time on the selec-tion process. You should hire, train, and motivate your employees before opening forbusiness (see Chapter 17).

Once established, you must understand that your most valuable assets walk out thedoor at closing time. In other words, your employees are your most valuable assets. It istheir skill, knowledge, and information that make your business successful. Theseintangible assets are called intellectual capital.

Getting Accurate Information Managers at any organization will tell you how difficult itis to make a decision before acquiring all the relevant information. This difficulty is com-pounded for the aspiring small business owner, who does not yet possess the expertise orexperience needed to oversee every functional area of the business, from accounting tosales. Consult a variety of sources of information, from self-help books in your locallibrary to experts in your nearest Small Business Development Center. A more accuratepicture can be drawn if you consider several vantage points.

Understanding the Risks of SmallBusiness OwnershipThe decision to start your own business should be made with a full understanding of therisks involved. If you go in with both eyes open, you will be able to anticipate problems,reduce the possibility of loss, and increase your chances of success. The prospect of fail-ure should serve as a warning to you. Many new businesses do not get past their secondor third years. Running a small business involves much more than simply getting anidea, hanging out a sign, and opening for business the next day. You need a vision, re-sources, and a plan to take advantage of the opportunity that exists.

What Is Business Failure?Even though business owners launch their ventures with the best of intentions and worklong, hard hours, some businesses inevitably fail. Dun & Bradstreet, a financial researchfirm, defines a business failure as a business that closes as a result of either (1) actionssuch as bankruptcy, foreclosure, or voluntary withdrawal from the business with a finan-cial loss to a creditor; or (2) a court action such as receivership (taken over involuntarily)or reorganization (receiving protection from creditors).27

How long do start-up businesses typically last? A recent study on business longevityby the National Federation of Independent Business (NFIB), titled “Business Starts and

intellectual capitalThe valuable skills andknowledge thatemployees of a businesspossess.

“Running a smallbusiness involvesmuch more thansimply getting anidea, hanging out asign, and openingfor business thenext day.”



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Stops,” found that slightly more than 10 percent of businesses ceased operations in lessthan one year. Twenty-five percent stopped business between one and two years, whileanother 20 percent closed their doors between their third and fifth anniversaries. Only 13percent lasted longer than 21 years.

EN T R E P R ENEU R I A L SNA P S HOT

Beer Entrepreneur

On Patriot’s Day

1985, Jim Koch (pro-

nounced “cook”)

started Boston Beer

Company. Koch bre-

wed his beer, called

Samuel Adams, ac-

cording to a family

recipe dating from

the 1870s. Although he had never been in the beer business

before, he became at age 37 a sixth-generation brewer.

Intending to compete directly with the best imports, Koch

advertised his beer with patriotic slogans like “Declare your

independence from foreignbeer.”Thenamesakeof thebeer

was a revolutionary war hero who had helped organize the

Boston Tea Party.

Like many entrepreneurs, Koch started his busi-

ness on a shoestring: $100,000 from personal savings

and $250,000 borrowed from family and friends—a

small amount for a brewery. To reduce overhead ex-

penses, he arranged to use the excess capacity of a

brewery in Pittsburgh. For the first several years, Koch

was the company’s only salesperson, traveling from

bar to bar enticing bartenders to taste samples of Sam-

uel Adams that he carried in his briefcase. Sometimes

as many as 15 calls were needed before he eventually

won the sale.

Samuel Adams was not made for the mass mar-

ket. At first it was brewed in batches of only 6,500 cases

each. Koch marketed the beer as being geared toward

people who were tired of drinking “ordinary” beer and

were willing to pay for premium quality. Koch enjoyed

saying that major breweries spill more beer in a minute

than he made in a year. Quality was his focus, not

quantity.

The company that started with one person and

one recipe has grown to have more than 250 employ-

ees and 17 different styles of beer that have won more

than 650 brewing awards—more than any other beer in

history has won. Koch was honored with the Beverage

Forum 2008 Lifetime Achievement Award. Koch has

never been satisfied to make the same beer as others.

He has even created a new category he calls “extreme

beer.” These new niche beers, like Triple Bock, Millen-

nium Ale, and Utopia, are very strong and compete

with the finest cognac, port, or sherry in blind taste

tests. For example, Utopia is about 25 percent alcohol

and sells for about $100 per 25-ounce bottle. Such bev-

erages are a product of Koch’s passion for quality. Ap-

propriately, Boston Beer Company’s ads stress product

and process—not image—by not featuring muscle-

bound men or bikini-clad women. Because Samuel

Adams was the first beer to have a freshness date

stamped on its label, Koch wrote a radio ad touting

that fact: “Maybe other beer commercials want you to

think that if you drink their beer, you’ll get lucky. But I

can guarantee with Samuel Adams, you’ll always get a

date.” Anheuser-Busch later mimicked the practice.

The company was the first to enter the chasm be-

tween micro brewery and major brewery. Boston Beer

has about a 0.6 percent share of the U.S. market (that is

about 1 of every 200 beers consumed). Its incredible

growth and success have come from its fanatical atten-

tion to quality, its use of marketing tools that no other

microbrewery had used—advertising, merchandising,

and hard selling—and the perseverance of its founder,

Jim Koch, an entrepreneur with a vision. “Just like

baby boomers adopted wine, their kids are adopting

beer, and the parallels are extraordinary and enor-

mous,” he says; “people want a better experience

with their beer.”

Sources: Adapted from “The World of Beer,” www.samueladams.com; John Holl,“Make Your Beer and Drink It, Too,” New York Times, February 28, 2010, 8; JulieSloane, “How We Got Started,” Fortune Small Business, September 2004; JennyMcCune, “Brewing Up Profits,” Management Review, April 1994, 16–20; James Koch,“Portrait of the CEO as Salesman,” Inc., March 1988, 44–46; Mike Beirne, “BrewerGoes to Extremes to Elevate Beer Segment,” Brandweek, August 8, 2005; and AdrienneCarter “Beer Takes Its Place at the Table,” BusinessWeek, June 19, 2006.

©Sam

uelA

dams/MCT/New

scom



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Causes of Business FailureThe rates of business failure vary greatly by industryand are affected by factors such as type of owner-ship, size of the business, and expertise of theowner. The causes of business failure are manyand complex; however, the most common causesare inadequate management and financing (seeFigure 1.3).

Although financial problems are listed as themost common cause of business failure, considermanagement’s role in controlling them. Could busi-ness failure due to industry weakness be linked topoor management? Yes, if the owner tried to enteran industry or market with no room for anothercompetitor or responded only slowly to industrychanges. High operating expenses and insufficientprofit margins also reflect ineffective management.Finally, business failure due to insufficient capitalsuggests inexperienced management.

Inadequate Management Business management is the efficient and effective use ofresources. For small business owners, management skills are especially desirable—andoften especially difficult to obtain. Lack of experience is one of their most pressingproblems. Small business owners must be generalists; they do not have the luxury ofspecialized management. On the one hand, they may not be able to afford to hire thefull-time experts who could help avert costly mistakes. On the other hand, their limitedresources will not permit them to make many mistakes and stay in business. As a small

Inexperience

Neglect

Other

Insufficientcapital

Heavy operatingexpenses

Burdensomedebt

Insufficientprofits

Industryweakness

Other

Economic,finance

FIGURE 1-3

Causes ofBusiness Failure

Source: Dun & Bradstreet Corporation, Business Failure Record, NFIB Foundation/VISA Business Card Primer, as shown inWilliam J. Dennis Jr., A Small Business Primer (Washington, DC: National Foundation of Independent Business, 1993), 23.Reprinted by permission of the National Federation of Independent Business.

©www.cartoon

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k.co

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business manager, you will probably have to make decisions in areas in which you havelittle expertise.

Entrepreneurs are generally correct in pointing to internal factors as the reasonfor the failure of their businesses; these factors are the cause of 89 percent of such fail-ures.28 Internal problems are those more directly under the control of the manager, suchas adequate capital, cash flow, facilities/equipment inventory control, human resources,leadership, organizational structure, and accounting systems.

The manager of a small business must be a leader, a planner, and a worker. Youmay be a “top gun” in sales, but that skill could work against you. You might be temptedto concentrate on sales while ignoring other equally important areas of the business, suchas record keeping, inventory, and customer service.

Inadequate Financing Business failure due to inadequate financing can be caused byimproper managerial control as well as shortage of capital. On the one hand, if youdon’t have adequate funds to begin with, you will not be able to afford the facilities orpersonnel you need to start up the business correctly. On the other hand, if you do pos-sess adequate capital but do not manage your resources wisely, you may be unable tomaintain adequate inventory or keep the balance needed to run the business.

There are a lot of ways to fail in business. You can extend too much credit. You canfail to plan for the future or not have strategic direction. You can overinvest in fixedassets or hire the wrong people. Identifying mistakes that can be made is merely onecomponent of the problem. Figuring out how to avoid them is the hard part.29

Business Termination versus FailureThere is a difference between a business termination and a business failure. A termina-tion occurs when a business no longer exists for any reason. A failure occurs when abusiness closes with a financial loss to a creditor. Reasons for a termination abound.The owner may have an opportunity to sell her business to someone else for a healthyprofit, or be ready to move on to a new business or to retire, or she may have simply lostinterest in the business. The market for the business’s product may have changed orbecome saturated. Perhaps the owner has decided it would be more appealing to workfor someone else. In other cases, businesses may change form. A partnership may berestructured as a corporation, or a business may move to a new location. Businessesthat undergo such changes are considered terminated even though they continue inanother form.

Mistakes Leading to Business FailureNo one likes to think about failing, yet many small business owners invite failure by ig-noring basic rules for success. One of the most common mistakes is to neglect to plan forthe future because planning seems too hard or time-consuming. Planning what you wantto do with your business, where you want it to go, and how you’re going to get there areprerequisites for a sound business. Of course, that doesn’t mean you can’t change yourplans as circumstances dictate. Your plan should provide a road map for your business,showing you both the expressways and the scenic routes—and the detours.

Another common mistake is failing to understand the commitment and hard workthat are required for turning a business into a success. Having to work long hours anddo things you don’t enjoy because no one else is available to do them are part and parcelof owning a small business. Yet, when you have the freedom of being your own boss, thehard work and long hours often don’t seem so demanding!

Still another mistake that small business owners make, particularly with rapidlygrowing businesses, is not hiring additional employees soon enough or not using existing

business terminationWhen a business ceasesoperation for any reason.

business failureWhen a business closeswith a financial loss to acreditor.



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employees effectively. There comes a point in the growth of a business when it is no lon-ger possible for the manager to do it all, but she resists delegation in the belief that itmeans she is giving up control. It is important to recognize that delegating tasks toothers isn’t giving up control—it’s giving up the execution of details.

The last type of mistake discussed here involves finances. Inaccurate estimates ofcash flow and capital requirements can swamp a business quickly. Figuring the correctamount of money needed for starting a business is a tough balancing act: Asking fortoo little may hinder growth and actually jeopardize survival, whereas asking for toomuch might cause lenders or investors to hesitate. An important rule to remember interms of arranging financing or calculating cash-flow projections is to figure the unex-pected into your financial plans. In this way, you can have more of a cushion to fallback on if things don’t go exactly according to plan. After all, without the right amountof capital, it’s impossible to succeed.30

Business failure, then, is a serious reality. How can a small business owner avoid it?Difficult changes may be needed, and change requires leaders to overcome all sorts ofhuman dynamics, like inertia, tradition, and head-in-the-sand hoping that things willget better. Strategic moments require courage, or at least a lack of sentimentality, whichis rare. It is in these moments that the best leaders find a mirror and ask themselves thedefining question that the late, great Peter Drucker posed nearly 40 years ago: “If youweren’t already in your business, would you enter it today?” If the answer is no, Druckersaid, you need to face a second tough question: “What are you going to do about it?”Every leader should heed this good advice and, if need be, follow it through to its con-clusion, whether that will be to fix, sell, or close the business.31

Failure Rate ControversyAlmost everyone has heard the story about the supposedly high rate of failure for smallbusinesses. “Did you know that 90 percent of all new businesses fail within one year?”the story usually begins, as if to confirm one’s worst fears about business ownership.For educators and business people, this piece of modern folklore is known as “the myththat would not die.” Actually, only about 18 percent of all new businesses are forced toclose their doors with a loss to creditors.32 The rest either close voluntarily or are still inbusiness. Over the past several decades, the number of new businesses that have openedhas approached or exceeded the number that have closed. Table 1.2 shows a net increasein business formations (more businesses were started than stopped operations).

Sometimes researchers include business terminations in their failure-rate calcula-tions, resulting in an artificially high number of failures. Economic consultantDavid Birch describes the misinterpretation of economic data as “like being at the end

TABLE 1-2

U.S. BusinessStart-Ups, Closures,and Bankruptcies

NEW CLOSURES BANKRUPTCIES

2008 627,200 595,600 43,546

2005 644,122 565,745 39,201

2003 612,296 540,658 35,037

2000 574,300 542,831 35,472

1995 594,369 497,246 50,516

1990 584,892 531,892 63,912

Source: Small Business Administration, Office of Advocacy, “Frequently Asked Questions,” www.sba.gov/advo, March 2010.

“Inaccurateestimates of cashflow and capitalrequirements canswamp a businessquickly.”



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of a whisper chain. It’s a myth everyone agrees to.”33 Fortunately for small business own-ers, this high number of failures is indeed a myth, not a fact.

Analysis of business closure data as part of the recent U.S. Census Bureau’s Charac-teristics of Business Owners (CBO) reveals some interesting findings—including thefinding that about one-third of closed businesses were successful at the time of their clo-sure. The study represented a universe of about 17 million businesses with a sample of78,147 businesses. It was one of the first major studies to include “closing while success-ful” as a possible outcome (see Figure 1.4). That option could well challenge the failuremyth, or the view that business closure is always negative. Entrepreneurs certainly deviseexit strategies to close or sell a business before losses accumulate or to move on to otheropportunities.34

Starting a business does involve risk, but the assumption of risk is part of life. In2007, the divorce rate was 3.7 per 1,000.35 Of every 10,000 students who start college,about 52 percent fail to graduate.36 Would you decide not to get married because thedivorce rate is too high? Were you afraid to go to college because of the dropout rate?The point to remember is that if you have a clear vision, know your product and yourmarket, and devote the time and effort needed, your small business, like many others,can succeed.

Is Government Intervention the Answer?With the U.S. unemployment rate above 10 percent and parts of Europe pushing20 percent, policymakers around the world are looking to promote entrepreneurship.Governments can play an integral role in private job creation—specifically, creating in-frastructure like utilities, transportation, and higher education. But when it comes tospecifics like becoming venture capitalists and deciding which companies survive ordie, government intervention has a much poorer track record,37 for example Dubai’sentrepreneurial hub floating in red ink and the European Union’s European Invest-ment Fund’s failure to turn 2 billion euros ($1.8 billion at the time) in 2001 intobusinesses.

Two recent books shed light upon what governments have done well and what theycan do better in supporting entrepreneurship: Josh Lerner, Boulevard of Broken Dreams:Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed—andWhat to Do about It; and Dan Senor and Saul Singer, Start-Up Nation: The Story ofIsrael’s Economic Miracle. These authors point to factors such as ignoring competitiveadvantages of countries and the temptation to spread wealth to every region ratherthan let entrepreneurial clusters develop.

Surviving

Closedand Successful

Closed and Unsuccessful

FIGURE 1-4

Analysis ofBusiness Closure

Business Success as aPercentage of NewEmployer Firms afterFour Years of Existence.

Source: With kind permission from Springer Science+Business Media. Small Business Economics, 21 (1). August 2003, 51–61.Brian Headd, “Redefining Business Success: Distinguishing Between Closure and Failure.”



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Summary

1. Describe the characteristics of small business.

Small businesses include a wide variety of businesstypes that are independently owned, operated, andfinanced. Although specific size definitions existfor each type of business, manufacturers withfewer than 500 employees, wholesalers with fewerthan 100 employees, and retailers or serviceswith annual revenues less than $3.5 million aretypically considered small. By itself, each individ-ual small business has relatively little impact in itsindustry.

2. Recognize the role of small business inthe U.S. economy.

Small businesses provided the economic founda-tion on which the U.S. economy was built. Todaythese businesses are creating new jobs even as largebusinesses continue eliminating jobs. Small busi-nesses are more flexible than large ones in the pro-ducts and services they offer. Most real productinnovations come from small businesses.

3. Understand the importance of diversity inthe marketplace and the workplace.

As the population becomes more diverse, the own-ers and employees of small businesses are likewisebecoming more diverse. Businesses owned bywomen and minorities are growing at a faster ratethan the overall rate of business growth. Diversityis important in small business because a wide rangeof viewpoints and personal backgrounds can im-prove problem solving.

4. Identify some of the opportunities available tosmall businesses.

Small and large businesses need each other tosurvive—they have a symbiotic relationship. Thisrelationship provides opportunities to small busi-nesses in that they can supply needed parts to largemanufacturers and can distribute manufacturedgoods. Moreover, small businesses often pick upfunctions that large businesses outsource. Otheropportunities exist for small businesses wherethey enjoy the advantage of being able to profitablyserve smaller niches than can their larger counter-parts. For all these reasons, small businesses arerapidly becoming important players in interna-tional trade.

5. Suggest ways to court success in a smallbusiness venture.

To prevent your small business from becoming an-other casualty noted in business failure statistics, youmust begin with a clearly defined competitive advan-tage. You must offer a product or service that peoplewant and are willing to buy. You must do somethingsubstantially better than your competition does it.You must remain flexible and innovative, stay closeto your customers, and strive for quality.

6. Name the most common causes of smallbusiness failure.

Ineffective and inefficient management, whichshows up in many ways, is the number one causeof business failure. Inadequate financing, industryweakness, inexperience, and neglect are othermajor causes.

Questions for Review and Discussion

1. How would you define small business?2. Name a company that seems large but might be

classified as small because it has relatively littleimpact on its industry.

3. Large businesses depend on small businesses.Why?

4. Define outsourcing, and describe its impact onsmall business.

5. Why are small businesses more likely than largebusinesses to be innovative?

6. Explain the term creative destruction.7. How can being close to your customers give you

a competitive advantage?8. How would you show that small business is be-

coming a more important part of the economy?9. The text compares the failure rate for small

businesses with the divorce rate in marriage andthe student failure rate in college. Are these faircomparisons?



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10. Describe four causes of small business failure.How does the quality of management relate toeach of these causes?

11. Describe the techniques that a business withwhich you are familiar has used to prevent itsfailure.

12. How would the computer industry be differenttoday if there were no businesses with fewer

than 500 employees? Would personal computersexist?

13. Predict the future of small business. In what in-dustries will it be most involved? What trends doyou foresee? Will the failure rate go up or down?Will the importance of small business increase ordecrease by the year 2020?

Questions for Critical Thinking

1. This chapter discussed the evolution of smallbusiness in the U.S. economy. On the heels of therapid growth in the popularity of Internet busi-nesses in the late 1990s and the ensuing bust in2000, what will be the next stage in small busi-ness’s evolution? Is the Internet just another

business tool, or will it re-create the way businessis done?

2. Is creative destruction just another economictheory for the foundation of capitalism? Build acase supporting your answer.

What Would You Do?

Everyone likes to eat…you love food…why not open arestaurant? It may not be quite that easy. Kenny Lao,30, knew he better be unique when he started his NewYork City Rickshaw Dumpling Bar in 2006. But Laosays, “If you have a strong concept and have your exe-cution and operation strategies down pat, any time is agood time to open a restaurant—even now.” Lao builthis dumpling empire on six varieties of dumplings (in-cluding a chocolate dessert dumpling) and simple add-ons like Asian salad, noodle soup, and green-tea milk-shakes. It takes approximately 2.5 minutes from orderto delivery. Rickshaw sells about 1.4 million dumplingsper year for $1.3 million in revenue.

Source: Eileen Figure Sandlin, “The Main Ingredients,” Entrepreneur, March 2007,100–108.

Questions

1. Evaluate the business idea of Kenny Lao’s busi-ness. Dumplings are his signature menu item onhis cool website www.rickshawdumplings.com. Ifyou were to venture into the restaurant business,what would be your signature item? What wouldbe your competitive advantage?

2. Look at Figure 1.4, “Causes of Business Failure.”If a restaurant business goes under, what do youthink are the most likely reasons?

Chapter Closing Case

Small Business Lessonsfrom the MoviesMovies are magical. They take us to new places, theyspark our imagination, and they entertain us. Lessonsfrom movies are open to interpretation that may differfrom what the filmmaker ever intended. Spielberg andLucas may have never intended to teach people how torun businesses, but let’s step back, open our minds, andconsider what we have seen that may solve problems inbusiness. With some thought, we can come up with storiesof communication, branding, ethics, customer service, andleadership applicable to starting and running a smallbusiness.

Here’s some examples to get you started. Popcornplease…

It’s a Wonderful Life (1946) OK, so we equate this onewith Christmas, but consider the lesson of leading by ex-ample that Capra shows. It comes down to a confronta-tion between two businesspeople—Mr. Potter (LionelBarrymore) wants to turn Bedford Falls into Pottersville,while George Bailey (James Stewart) puts his customers,employees, and family interest first by taking personalresponsibility.

The Godfather I and II (1972, 1974) Not the most savoryof mission statements, but these movies are about familybusiness. There are lessons about loyalty and consequences.



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Many quotes are still used often in the business world—“goto the mattresses…,” “I’m gonna make him an offer he can’trefuse,” “My father taught me many things…keep yourfriends close, but your enemies closer.”

Jerry Maquire (1996) After being jettisoned from a largefirm, the title character (Tom Cruise) becomes a reluctantentrepreneur that brilliantly captures the manic-depressive roller-coaster ride of starting a business. Withone employee and one client, Maquire literally has all hiseggs in one basket to show that fewer clients and morepersonal attention are a good business strategy.

Wall Street (1987) This study of values compares andcontrasts the differences between a father and a son. Thesmall business lesson can be that “there are no short cuts”in life or business. Just because you can visualize whereyou want to be does not mean that you can get therewithout paying dues.

A League of Their Own (1992) Just the tagline for themovie sets it up with a small business lesson: “To achievethe incredible you have to attempt the impossible.” Mem-orable quotes include “There’s no crying in baseball,” and“Of course this is hard.” No matter how it appears—everybusiness is hard. Don’t complain.

Hustle & Flow (2005) Once again, the viewer needs tolook past some seedy images on screen to see that youcan be successful no matter where you come from. Smallbusiness lessons abound including the following: (1) Youare in charge of your business, (2) relationships are pow-erful, and (3) marketing pays.

Tucker: The Man and His Dream (1988) I, your author,admit personal bias on this one—I believe this is the bestbusiness movie ever! The best part is that the whole storyis true. It’s about an inventor who sets out to revolutionizethe auto industry during WWII. It’s got it all—businessstarted in a barn, naysayers, faithful followers, time-crunched prototypes, creative technology advances, giant

corporate adversaries, and failure. If you are in a class onsmall business/entrepreneurship—watch this one.

You get the idea by now and yes, some of these weremade before most students were born, but they are avail-able as rentals. Some other contenders to consider include:

Apollo 13 (1995)The Bridge on the River Kwai (1957)Dead Poets Society (1989)Elizabeth (1998)Glengarry Glen Ross (1992)Norma Rae (1979)One Flew over the Cuckoo’s Nest (1975)Twelve Angry Men (1957)Twelve O’Clock High (1949)

Sources: Lori Grant “The 10 Best Business Movies,” www.smartlemming.com/2009/05/the-10-best-business-movies, May 21, 2009; Mike Hofman “Everything I Knowabout Leadership, I Learned from the Movies,” Inc., March 2000, 58–70; Leigh Buchanan,“Cinema for the Enterprising,” Inc., February 2007, 75–77. For more on this topic, see anew book by Coupe and Sansolo titled The Big Picture: Essential Business Lessons fromthe Movies (2010) from Brigantine Media.

Questions

1. What are your personal screen inspirations? What les-sons do these or other movies provide in running asmall business?

2. In addition to the movies cited in this case, think ofother titles for business lessons such as Risky Business,Pirates of Silicon Valley, and Office Space. What lessonsdo they provide?

3. What movies portray leaders who think creatively, whokeep their heads, who manage communication, and, asfor failure, well, that’s just not an option (a line fromApollo 13)?

4. Bearing in mind that the intent of movies is artistic,rather than educational, what movie lessons do youthink illustrate the opposite of what a manager shoulddo or say?



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Notes

Chapter 11. Small Business Administration, Of-

fice of Advocacy, “Firm Size Data,”March 2010, www.sba.gov/advo.

2. Small Business Administration,Advocacy Small Business Statisticsand Research “FAQs,”March 2010.

3. Small Business Administration,Office of Advocacy, “SmallBusiness Economic Indicators,”June 2006, www.sba.gov/advo.

4. Small Business Administration,Office of Advocacy, “FrequentlyAsked Questions,” June 2006,www.sba.gov/advo.

5. Small Business Administration,“Guide to SBA’s Definition ofSmall Business,” September 28,2006, www.sba.gov/size/indexguide.html.

6. Small Business Administration,Office of Advocacy, “SmallBusiness Economic Indicators,”January 2010.

7. www.hoover.com, March 22, 2010.8. John A. Byrne, “How Entrepre-

neurs Are Reshaping the Economyand What Big Companies CanLearn,” Business Week, EnterpriseEdition, October 1993, 12–18.

9. Laura D’Andrea Tyson,“Outsourcing: Who’s SafeAnymore?” Business Week,February 23, 2004, 26.

10. Randall W. Forsyth, “HappyAnniversary for Finance, Not

Small Business,” Barron’s, March10, 2010.

11. Small Business Administration,Office of Advocacy, “FrequentlyAsked Questions,” November 3,2006, www.sba.gov/advo.

12. Statistical Abstract of the UnitedStates (Washington, DC: U.S.Government Printing Office,2010), 494–495.

13. Small Business Administration,Office of Advocacy, “FrequentlyAsked Questions,” March 23,2010, www.sba.gov/advo.

14. Judith Cone, “TeachingEntrepreneurship in Colleges andUniversities: How (and Why) aNew Academic Field Is BeingBuilt,” January 2010, KauffmanFoundation, www.kauffman.org/entrepreneurship/teaching.

15. Small Business Administration,Office of Advocacy, The SmallBusiness Economy: A Report to thePresident (Washington, DC: U.S.Government Printing Office, 2009).

16. Lauren Folino, “Fast Earners: CoolCollege Start-Ups 2010,” Inc.,March 2010, 88.

17. Nichole L. Torres, “Leader ofthePack,”Entrepreneur,March2006.

18. Small Business Profile: UnitedStates, December 2006, www.sba.gov/advo.

19. Ying Lowery, “Dynamics ofMinority-Owned Employer

Establishments, 1997–2001,”Small Business Research SummaryNo. 251, February 2005.

20. Ying Lowery, “Women inBusiness: A Demographic Reviewof Women’s Business Ownership,”Small Business Research SummaryNo. 280, August 2006.

21. Amy Choi, “How Minority-Owned Businesses Can Catch aBreak,” BusinessWeekOnline,December 7, 2009, 24.

22. Faye Rice, “How to MakeDiversity Pay,” Fortune, 8 August1994, 79–86.

23. J. A. Schumpeter, Capitalism,Socialism, and Democracy (NewYork: Harper & Row, 1943).

24. Joshua S. Gans, David H. Hsu, andScott Stern, “When Does Start-UpInnovation Spur the Gale ofCreative Destruction?” RANDJournal of Economics, Winter2002, 571–586.

25. “Report Examines Small BusinessInnovative Activity,” The SmallBusiness Advocate, December1993, 10.

26. “Small Serial Innovators: TheSmall Firm Contribution toTechnical Change,” February 27,2003, www.sba.gov/advo.

27. Dun & Bradstreet Corporation,Business Failure Record, asreported in “Business Failuresby Industry: 1990 to 1998,”

480Copyright 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).

Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Licensed to:

Statistical Abstract of the UnitedStates (Washington, DC: U.S.Government Printing Office,2001), 561.

28. Andrew L. Zacharakis, G. DaleMeyer, and Julio DeCastro,“Differing Perceptions of NewVenture Failure: A MatchedExploratory Study of VentureCapitalists and Entrepreneurs,”Journal of Small BusinessManagement, July 1999, 1–14.

29. “Avoiding the Pitfalls,”Wall StreetJournal Report on Small Business,May 22, 1995, R1.

30. Richard Monk, “Why SmallBusinesses Fail,” CMAManagement, July/August 2000,12–13; Udayan Gupta, “HowMuch?” Wall Street Journal, May22, 1995, R7; and Stephanie N.Mehta, “Small Talk: An Interviewwith Wendell E. Dunn,” WallStreet Journal, May 22, 1995.

31. Jack Welch and Suzy Welch, “TheDanger of Doing Nothing,”Business Week, July 10, 2006.

32. John Case, “The WonderlandEconomy,” The State ofSmall Business,March 16, 1995, 29.

33. James Aley, “Debunking theFailure Fallacy,” Fortune,September 6, 1993, 21.

34. Brian Headd, “RedefiningBusiness Success: Distinguishingbetween Closure and Failure,”Small Business Economics, vol. 21,2003, 51.

35. “Marriages and Divorces Numberand Rate by State: 1990–2007,”Statistical Abstract of the UnitedStates, 129th ed. 94.

36. Steven Burd, “Graduation Ratesand Student Mobility,” Chronicleof Higher Education, April 2, 2004,A22.

37. “Fish out of Water,” Economist,October 31, 2009, 78.

Chapter 21. Robert Hisrich, “Entrepreneur-

ship/Intrapreneurship,” AmericanPsychologist, February 1990, 209.

2. P. VanderWerf and C. Brush,“Toward Agreement on the Focus

of Entrepreneurship Research:Progress without Definition,”Proceedings of the National Acad-emy of Management Conference,Washington, DC, 1989.

3. Denis Gregoire, Martin Noel,Richard Dery, and Jean-PierreBechard, “Is There ConceptualConvergence in EntrepreneurshipResearch? A Co-Citation Analysisof Frontiers of EntrepreneurshipResearch, 1981–2004,” Entre-preneurship Theory and Practice,May 2006, 333–372.

4. Carol Moore, “UnderstandingEntrepreneurial Behavior: A Defi-nition and Model,” in Academy ofManagement Best Paper Proceed-ings, edited by J. A. Pearce II andR. B. Robinson, Jr., 46th AnnualMeeting of the Academy of Man-agement, Chicago, 1989, 66–70.See also William Bygrave, “TheEntrepreneurial Paradigm (I): APhilosophical Look at Its ResearchMethodologies,” Entrepreneurship:Theory and Practice, Fall 1989,7–25; and William Bygrave andCharles Hofer, “Theorizing aboutEntrepreneurship,” Entrepreneurship:Theory and Practice, Winter 1991,13–22.

5. A. Shapiro and L. Sokol, “TheSocial Dimensions of Entre-preneurship,” in Encyclopedia ofEntrepreneurship, edited by J. A.Kent, D. L. Sexton, and K. H.Vesper (Englewood Cliffs, NJ:Prentice-Hall, 1992).

6. J. A. Schumpeter, History of Eco-nomic Analysis (New York: Ox-ford University Press, 1934).

7. William Gartner, “ ‘Who Is anEntrepreneur?’ Is the WrongQuestion,” Entrepreneurship: The-ory and Practice, Summer 1989,47. See also J. W. Carland, F. Hoy,W. R. Boulton, and J. A. C. Car-land, “Differentiating Entrepre-neurs from Small BusinessOwners: A Conceptualization,”Academy of Management Review,1984, 354–359; William Gartner,“What Are We Talking aboutWhen We Talk about Entre-

preneurship?” Journal of BusinessVenturing, 1990, 15–28.

8. Steven Covey, The Seven Habitsof Highly Effective People (NewYork: Simon & Schuster,1989), 95.

9. Peter Drucker, Innovation andEntrepreneurship: Practice andPrinciples (New York: Harper &Row, 1985).

10. Jess McCuan, “It’s Good to BeKing,” Inc., December 2003, 32.

11. Sanjay Goel and Ranjan Karri,“Entrepreneurs, Effectual Logic,and Over-Trust,” Entrepreneur-ship Theory and Practice, July2006, 480.

12. Jon Goodman, “What Makes anEntrepreneur?” Inc., October1994, 29.

13. David C. McClelland, TheAchieving Society (New York: VanNostrand Reinhold, 1961). Seealso David C. McClelland,“Achievement Motivation Can BeDeveloped,” Harvard BusinessReview, November/December1965; David Miron and DavidMcClelland, “The Impact ofAchievement Motivation Trainingon Small Business,” CaliforniaManagement Review, Summer1979, 13–28.

14. Robert Brochhaus and Pamela S.Horwitz, “The Psychology of theEntrepreneur,” in The Art andScience of Entrepreneurship, editedby Donald Sexton and RaymondW. Smilor (Cambridge, MA:Ballinger, 1986), 25–48.

15. T. S. Hatten, “Student Entrepre-neurial Characteristics andAttitude Change towardEntrepreneurship as Affected byParticipation in an SBI Program,”Journal of Education for Business,March/April 1995, 224–228.

16. Michael O’Neal, “JustWhat Is anEntrepreneur?” BusinessWeek (En-terprise Edition), 1993, 104–112.

17. NFIB Foundation/AmericanExpress Travel, A Small BusinessPrimer, (2003).

18. Jerome Katz, “The Institution andInfrastructureofEntrepreneurship,”

Notes 481


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Entrepreneurship: Theory andPractice, Spring 1991, 85–102.

19. Judith Cone, “Teaching Entre-preneurship in Colleges and Uni-versities: How (and Why) a NewAcademic Field Is Being Built,”January 2010, Kauffman Founda-tion, www.kauffman.org/entrepreneurship/teaching.

20. “Best Schools for Entrepreneurs—Top 25 Undergrad Programs –2009” April 1, 2010,Entrepreneur.com.

21. Fred Steingold, Legal Guide forStarting and Running a SmallBusiness, 11th ed. (Berkeley, CA:Nolo Press, 2009).

22. James W. Reynolds and StevenFrost, “Uniform LLP Amend-ments Make Welcome Changes toRevised Uniform PartnershipAct,” Journal of Limited LiabilityCompanies, Spring 1997, 189;James Hopson and Patricia Hop-son, “Helping Clients Choose theLegal Form for a Small Business,”The Practical Accountant, October1990, 67–84.

23. Steingold.24. “Legal Structure and Registration,”

The Colorado Business ResourceGuide (Denver, CO: SBA andColorado Office of EconomicDevelopment and InternationalTrade, 2001). www.coloradosbdc.org, 15.

25. Thomas Stemmy, “BusinessStructure Basics,” Entrepreneur,June 2010, www.entrepreneur.com/startingabusiness/startupbasics

26. Society of Nonprofit Organiza-tions “Setting Up a NonprofitOrganization,” June 2010, www.snpo.org/resources/startup.php.

Chapter 31. For a more complete discussion of

corporate social responsibility, seeR. Griffin, Management, 10th ed.(Mason, OH: South-Western/Cengage Learning, 2011). See also,Archer Carroll, “The Pyramid ofCorporate Social Responsibility:Toward the Moral Management of

Organizational Stakeholders,”Business Horizons, July/August1991, 39–48; and RichardRodewald, “The Corporate SocialResponsibility Debate: Unan-swered Questions about the Con-sequences of Moral Reform,”American Business Law Journal,Fall 1987, 443–466.

2. Gopal Kanji and Parvesh Chopra,“Corporate Social Responsibilityin a Global Economy, TotalQuality Management, February2010, 119–143.

3. Milton Friedman and RoseFriedman Free to Choose (NewYork: Harcourt Brace Jovanovich,1980);MiltonFriedman,Capitalismand Freedom (Chicago: Universityof Chicago Press, 1963), 133.

4. “Social Responsibility: ‘Funda-mentally Subversive’?” interviewwith Milton Friedman, August 15,1006, www.businessweek.com.Online Extra.

5. Milton Zall, “Small Businessand the EEOC: An Overview,”Fleet Equipment, March 2000,BIZM4.

6. Jack Gordon, “Rethinking Diver-sity,” Training, January 1992, 23.

7. Cait Murphy, “Keeping SmallBusiness Off the Street,” FortuneSmall Business, November 2003, 18.

8. Ken Rankin, “SEC Seeks to EaseSection 404 Burden,” AccountingToday, November 27, 2006, 1, 33.

9. Mary-Kathryn Zachary, “AnotherBlonde, Another Situation, An-other Outcome,” Supervision,November 2003, 21.

10. 29 CFR 1604.11(a).11. Jan Bohren, “Six Myths of Sexual

Harassment,” Management Re-view, May 1993, 61–63.

12. Ellyn Spragins, Maggie Overfelt,and Julie Sloane, “DangerousLiaisons,” Fortune Small Business,February 2004, 62.

13. Ibid.14. Stuart Dawson, John Breen, and

Lata Satyen, “The Ethical Outlookof Micro Business Operators,”Journal of Small Business Man-agement, October 2002, 302–313.

15. Jeannine Reilly, “CharitableWorks Sells at a Number ofFirms,” Arizona Daily Star,September 11, 2000, 16.

16. “Social Capitalists,” Fast Com-pany, April 2010, www.fastcompany.com.

17. Anne Murphy, “The Seven(Almost) Deadly Sins of High-Minded Entrepreneurs,” Inc., July1994, 47–51.

18. Steve Bates, “Survey: BusinessEthics Improved during Reces-sion,” November 24, 2009,www.shrm.org.

19. Ferrell and Fraedrich, 10.20. Josh Spiro, “How to Write a Code

of Ethics for Business,” Inc., Feb-ruary 24, 2010, www.inc.com.

21. Heledd Jenkins, “A ‘Business Op-portunity’ Model of CorporateSocial Resopnsibility for Small-and Meduim-sized Entreprises,”Business Ethics: A European Re-view, January 2009, 21–36.

22. Karen Klein, “A Push for ‘EthicalInnovation,’ ” BusinessWeek On-line, February 3, 2010, 12.

23. George Manning and Kent Curtis,Ethics at Work: Fire in a DarkWorld (Cincinnati: South-Western Publishing) 77.

24. David H. Freeman, “The Tech-noethics Trap,” Inc., March 2006,69–70.

25. Scott Baca and Erin Nickerson,“Ethical Problems, Conflicts, andBeliefs of Small Business Profes-sionals,” Journal of BusinessEthics, November 2000, 15–24.

26. Richard Kaleba, “Strategic Plan-ning: Getting from Here toThere,” Healthcare FinancialManagement, November 2006,74–78.

27. Charles Toftoy and JoydeepChatterjee, “Mission Statementsand Small Business,” BusinessStrategy Review, November 2004,41–44.

28. Tom Peters, Thriving on Chaos(New York: Knopf, 1988).

29. Robert Linnman and John Stan-ton, “Mining for Niches,” BusinessHorizons, May/June 1992, 43–51.

482 Notes


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30. Fran Tarkenton and Joseph Boyett,“Taking Care of Business,” Entre-preneur, February 1990, 18–23.

31. Anil Gupta, “Business-Unit Strat-egy: Managing the Single Busi-ness,” in The Portable MBA inStrategy, edited by Liam Faheyand Robert Randall (New York:Wiley, 1994), 84–107.

32. Michael Porter, “KnowYourPlace,”Inc., September 1991, 90–95.

33. David Cravens and ShannonShipp, “Market-Driven Strategiesfor Competitive Advantage,”Business Horizons, January/February 1991, 90–95.

34. Porter, op cit.35. Robert Hartley, Marketing Mis-

takes, 9th ed. (New York: Wiley,2004), 2.

36. Brad Stone and Leslie Cauley, “ForApple, Expectations Run High,”The New York Times, March 29,2010, B1.

37. David Menzies, “The Museum ofMortal Marketing Mistakes,”Marketing, April 23, 2001, 9.

38. O. C. Ferrell and Michail Hartline,Marketing Strategy, 5th ed(Mason, Ohio: Cengage, 2011).

39. Fred Amofa Yamoah, “Sources ofCompetitive Advantage: Differen-tial and Catalytic Dimensions,”Journal of American Academy ofBusiness, March 2004, 223–227.

40. Michael Porter, Competitive Ad-vantage: Creating and SustainingSuperior Performance (New York:Free Press, 1985).

41. Jenny McCune, “In the Shadow ofWal-Mart,” Management Review,December 1994, 10–16.

42. Stephanie Clifford, “It’s 2006!Whatchagonna Do About It?—You Can’t Out Wal-Mart Wal-Mart,” Inc., January 2006, 84.

43. Aodheen O’Donnell, Audrey Gil-more, David Carson, and DarrylCummins, “Competitive Advan-tage in Small to Medium-SizedEnterprises,” Journal of StrategicMarketing, October 2002, 205–223.

44. Oren Harari, “The Secret Com-petitive Advantage,” ManagementReview, January 1994, 45–47.

45. M. A. Lyles, J. S. Baird, J. B. Orris,and D. E. Kuratko, “FormalizedPlanning in Small BusinessIncreasing Strategic Choices,”Journal of Small Business Man-agement, April 1993, 38–50.

46. Ferrell and Hartline, op cit.

Chapter 41. William A. Sahlman, How to

Write a Great Business Plan(Cambridge, MA: Harvard Busi-ness School Press, 2008).

2. Norm Brodsky and Bo Burling-ham, The Knack: How Street-Smart Entrepreneurs Learn toHandle Whatever Comes Up(Boston, MA: Portfolio Hard-cover, 2008).

3. Mark Henrichs, “Do You ReallyNeed a Business Plan?” Entrepre-neur, March 2008, 104.

4. Nicole Gull, “Plan B (and C and Dand …),” Inc., March 2004, 40.

5. Rosalind Resnick, “Are BusinessPlans a Waste of Time?” WallStreet Journal, www.wsj.com,March 24, 2010.

6. Andrea Cooper, “Serial Starter,”Entrepreneur, April 2008, 28.

7. Guidelines for Entrepreneurs,pamphlet, Colorado Small Busi-ness Development Center.

8. Michael V. Copeland, “How toMake Your Business Plan thePerfect Pitch,” Business 2.0,September 2005, 88.

9. Kayte Vanscoy, “UnconventionalWisdom,” Smart Business for theNew Economy, October 2000, 78–88.

10. William Sahlman, “How to Writea Great Business Plan,” HarvardBusiness Review, July/August1997, 101.

11. Nicole Gull, “Plan B (and C andD …),” Inc., March 2004, 40.

12. Ralph Alterowitz and JonZonderman, “Financing YourNew or Growing Business,”Entrepreneur Mentor Series(Irvine, CA: Entrepreneur Press,2002), 113.

13. Guy Kawasaki, The Art of the Start(Boston, MA: Portfolio Hard-cover, 2004), 188; Scott Clark,

“Great Business Plan Is Key toRaising Venture Capital,” Port-land Business Journal, March 31,2000, 36; and Dee Power andBrian Hill, “Six Critical BusinessPlan Mistakes,” Business Horizons,July/August 2003, 83.

Chapter 51. Thomas Dicke, Franchising in

America: The Development of aBusiness Method, 1840–1990(Chapel Hill, NC: University ofNorth Carolina Press, 1992), 13.

2. PricewaterhouseCoopers, “2010Franchise Business EconomicOutlook,” study for the Interna-tional Franchise AssociationEducational Foundation, 2009,www.franchise.org/edufound/researchef.asp.

3. “Franchise How-to Guide,” www.entrepreneur.com/franzone/guide,accessed May 2010.

4. www.franchisehandbook.com.5. U.S. Department of Commerce.6. Andrew Caffey, “Hey, Get a Clue!”

Entrepreneur, January 2004,112–118.

7. Mark Seibert, “How to FranchiseYour Business,” Entrepreneur, May2010, www.entrepreneur.com.

8. Ibid.9. David Kaufmann, “The Big Bang,”

Entrepreneur, January 2004, 86.10. Ibid.11. International Franchise Associa-

tion “Key Legal Questions to Ask,”www.franchise.org, accessed May2010.

12. “Best in Show,” BusinessFranchise, May 2010, 15–16.

13. Thomas Dambrine, “Less IsMore,” Franchising World, April2004, 14.

14. Derek Sankey, “U.S. FranchisorsEye Canada for Growth, FirstStage of International ExpansionStrategies, The Gazette (Mon-treal), November 17, 2009, B6.

15. June Wang Zhiqiong, MingxiaZhu, and Andrew Terry, “TheDevelopment of Franchising inChina,” Journal of MarketingChannels, 2008, 167–184.

Notes 483


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Chapter 61. Ed Pendarvis, “What to Consider

Before Buying a Business,” Entre-preneur, August 1, 2008, www.entrepreneur.com/startingabusiness/startupbasics.

2. Bill Broocke, “Buy—Don’t Start—Your Own Business,” Entrepre-neur Magazine Online, March 22,2004, www.entrepreneur.com/your_business.

3. Darren Dahl, “How to Find aBusiness to Buy,” Inc., March 11,2009, www.inc.com.

4. “How to Buy a Business,” Entre-preneur Starting a Business series,www.entrepreneur.com/startingabusiness/startupbasics/article/79638.html.

5. Ryan McCarthy, “Valuation Guide2009—A Buyer’s Market,” Inc.,June 2009, 82–90.

6. Peter McFarlane and DeborahGold, “Do the Due,” CAmagazine,August 2003, 37–42.

7. “For Business Buyers andSellers: A Guide,” http://www.businessesforsale.com/us,accessed May 28, 2010.

8. Dalia Fahmy, “Deal Jitters?” Inc.,October 2005, 48.

9. Bill Broocke, “Buy—Don’t Start—Your Own Business,” Entrepre-neur Magazine Online, March 22,2004, www.entrepreneur.com/your_business.

10. RMA Annual Statement Studies(Philadelphia: Robert MorrisAssociates).

11. Ryan McCarthy, “Valuation Guide2009 – A Buyer’s Market,” Inc.,June 2009, 82–90.

12. Fred Steingold, Legal Guide forStarting and Running a SmallBusiness, 11th ed. (Berkeley, CA:Nolo Press, 2009), 9–17.

13. John Johansen, “How to Buy orSell a Business,” Small BusinessAdministration ManagementAid, No. 2.029 (Washington, DC:U.S. Small Business Administra-tion, Office of BusinessDevelopment).

14. Lola Sim, “What Is It Worth?”CAmagazine, April 2010, 39–41.

15. Ryan McCarthy, “Valuation Guide2009 – A Buyer’s Market,” Inc.,June 2009, 82–90.

16. Danielle Fugazy, “ThrowingDarts,” Mergers & Acquisitions:The Dealmakers Journal,November 2009, 42–61.

17. Darren Dahl, “How to Close theDeal When Buying a Business,Inc., March 11, 2009, www.inc.com/guides/buy_biz.

18. Family Firm Institute, “FamilyBusiness in the U.S.,” www.ffi.org.

19. David Port, “The Family Business:Making Sure Both Stay Intact,”Entrepreneur, March 24, 2010,www.entrepreneur.com/management/familybusiness.

20. Christine Lagorio, “How to Run aFamily Business,” Inc., March 5,2010, www.inc.com/guides/running-family-business.

21. Ibid.22. Matthew Fogel, “A More Perfect

Business,” Inc., August 2003, 44.23. Jason Kwiatkowski, “Six Essential

Elements of an Effective Exit,”CMA Management, April 2010,16–17.

24. Christine Lagorio, “How to Run aFamily Business,” Inc., March 5,2010, www.inc.com/guides/running-family-business.

25. David Bork, “If Family MembersAsk for a Job,” Nation’s Business,April 1992, 50–52.

Chapter 71. John Tozzi, “Revisiting the Face of

‘Necessity Entrepreneurship,”Bloomberg Businessweek, March 9,2010, www.businessweek.com.

2. “The State of Small Business Re-port,” The Small Business SuccessIndex, August 2009, www.growsmartbusiness.com.

3. “The Ultimate Business Tune-Up,” Inc., February 2009, 70–77.

4. “E-Stats,” U.S. Census Bureau,May 27, 2010, www.census.gov/estats.

5. Nada Hashmi and Jean PierreNshimyimana, “From Campus toCommerce,” Fast Company, April2010, 51–56.

6. Amy Choi, “Entrepreneurs WhoThrive on Risky Business,” Bloom-berg Businessweek, December 4,2009, www.businessweek.com.

7. Max Chafkin, “The Case, and thePlan, for the Virtual Company,”Inc., April 2010, 62–73.

8. Jason Daley, “The EntrepreneurEconomy,” Entrepreneur, Decem-ber 2009, 53–57.

9. American Association of Home-Based Businesses, www.aahbb.com.

10. “Homepreneurs: A Vital Eco-nomic Force,” The Small BusinessSuccess Index, October 2009,www.growsmartbusiness.com.

11. Maya Payne Smart, “There’s NoPlace Like Home,” Black Enter-prise, February 2009, 79–81.

12. David Bangs and Linda Pinson,The Real World Entrepreneur FieldGuide (Chicago: Upstart Publish-ing, 1999), 474.

13. John Tozzi, “The Rise of theHomepreneur,” Bloomberg Busi-nessweek, October 23, 2009, www.businessweek.com.

14. “Homepreneurs: A Vital Eco-nomic Force,” The Small BusinessSuccess Index, October 2009, www.growsmartbusiness.com.

15. Sari Crevin, “How to Grow a$1 Million Side Biz,” Women-Entrepreneur, May 17, 2010, www.womenentrepreneur.com.

16. All data on Inc. 500 companiescome from Inc. Special Issue,September 2009.

17. Jason Snell, “Test Driving theiPad,” Macworld, June 2010;Diane Goldner, “Ahead of theCurve,” The Wall Street JournalSmall Business Edition, May 22,1995, R16.

18. John Case, “Why 20 Million ofYou Can’t Be Wrong,” Inc., April2004, 102.

19. “The State of Small Business Re-port,” The Small Business SuccessIndex, January 2010, www.growsmartbusiness.com.

20. David Kopcso, Robert Ronstady,and William Rybolt, “The Corri-dor Principle: Independent

484 Notes


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Entrepreneurs versus CorporateEntrepreneurs,” in Frontiersof Entrepreneurship Research(Wellesley, MA: Babson College,1987), 259–271.

21. Tim Blumerntritt, “Does Smalland Mature Have to Mean Dull?Defying the Ho-Hum at SMEs,”Journal of Business Strategy, 25(1),2004, 27–33.

22. Phaedra Hise, “Where GreatBusiness Ideas Come From,” Inc.,September 1993, 59–60.

23. Neil A. Martin, “Invincible Spirit,”Success, October 1994, 24.

24. Michael Treacy and Fred Wie-sema, “How Market Leaders KeepTheir Edge,” Fortune, February 6,1995, 88–98.

25. David Freedman, “The Secret ofTheir Success,” Inc., April 2010,92–93.

Chapter 81. David Wallace, “Sarbanes-Oxley

Sets Standard for Small Compa-nies,” Rural Telecommunications,March/April 2004, 68–73.

2. “Bye, Bye, SOX?”, InformationManagement, Vol. 44, Issue 2,March/April 2010, p. 11.Sarbanes-Oxley Section 404 AGuide for Small Business, re-trieved from www.sec.gov, May30, 2010.

3. Karen Klein, “Where AccountingIsn’t a Dirty Word,” BusinessWeek Online, July 30, 2002, www.businessweek.com.

4. Carly Bohach, “CPAs Get CreditFlowing to Cash-Starved SMBs,”Accounting Today, December 14,2009, 30.

5. Kathy Yakal, “Do You Need Ac-counting Software?” PC Magazine,March 2009, 1.

6. “Making Sense of Your Dollars,”Home Office Computing, Novem-ber 1993, 79–88.

7. Allen Beck, “The Cash Method forSmall Business,” Tax Advisor,October 2002, 623.

8. For an overview of FASB, see CraigSchneider, “Who Rules Account-ing?” CFO, August 2003, 34–40.

9. Rick Telberg, “Mom and PopShops,” Journal of Accountancy,July 2003, 49.

10. Lyn Fraser and Aileen Ormiston,Understanding Financial State-ments, 9th ed (Upper SaddleRiver, NJ: Prentice Hall, 2010).

11. Jay Finegan, “Corporate CostCutters,” Inc., August 1995, 28.

12. C. J. Prince, “Catch Your Cash,”Entrepreneur, June 2004, 57.

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4. “Does Small Biz Want Immigra-tion Reform?” Business Week On-line, May 10, 2006, 4.

5. Ibid., 19–20.6. Justin Martin and Matthew Phan,

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10. 29 USC 651 (b).11. Fred Steingold, Legal Guide for

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12. Alan Zeiger, “Bankruptcy CanAlso Mean Smart Investment,”Management Review, May 1992,36–39.

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15. David Pressman, Patent It Your-self, 14th ed. (Berkeley, CA: NoloPress, 2009).

16. Ibid.17. Gabe Fried, “IP: A Reason to Ex-

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18. Tim Studt, “Protecting Your In-tellectual Property,” R&D Maga-zine, April 2004, 22.

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Chapter 111. Peter Drucker, People and Perfor-

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2. Ibid., 91.3. Jennifer Wang, “Entrepreneur’s

Annual 100 Brilliant Ideas—Reboot, Sonny,” Entrepreneur,June 2010, 68.

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2. James Clawson, Level ThreeLeadership, (Upper Saddle River,NJ: Prentice-Hall/Pearson, 2009),452–453.

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Chapter 171. Karen Klein, “When to Make

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29. Christine Lagorio, “How to MakeHealthCareReformWork forYourBusiness,” Inc.com, April 21, 2010.

30. Burton Goldfield, “A Cost-Effective Retirement BenefitsPackage,” Entrepreneur.com,April 27, 2010.

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32. Fran Durekas, “Companies andTheir Employees Realize Valuethrough Employee-SponsoredChild Care Benefits,” EmployeeBenefit Plan Review, October2009.

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39. Material adapted from D. Day,“Training 101: Help for DisciplineDodgers,” Training and Develop-ment, May 1993, 19–22.

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17. Ibid., 303.18. Karman Moosa and Ali Sajid,

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25. Steven Ashley, “NondestructiveEvaluation with Laser Ultra-sound,” Mechanical Engineering,October 1994, 63–66.

26. Alan Brown, “Manufacturing atthe Crossroads,” Mechanical En-gineering, June 2010.

490 Notes


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