Jerome A. KatzSaint Louis University

Richard P. Green IITexas A&M University– San Antonio

Entrepreneurial Small Business


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Library of Congress Cataloging-in-Publication Data

Names: Katz, Jerome A., author. | Green, Richard P., author. Title: Entrepreneurial small business / Jerome Katz, Richard Green. Description: Sixth Edition. | Dubuque : McGraw-Hill Education, 2020. | Revised edition of the authors’ | Audience: Ages 18+ | Audience: Grades 10-12Identifiers: LCCN 2020008069 (print) | LCCN 2020008070 (ebook) | ISBN 9781260260540 (hardcover) | ISBN 9781260676754 (spiral bound) | ISBN 9781260676686 (ebook) Subjects: LCSH: New business enterprises—Management. | Entrepreneurship.Classification: LCC HD62.7 .K385 2020 (print) | LCC HD62.7 (ebook) | DDC 658.02/2—dc23LC record available at ebook record available at

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To our parents, who gave us inspiration.

To our children, who gave us motivation.

To our spouses, who gave us dedication.

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Jerome A. KatzJerome (Jerry) Katz is the Robert H. Brockhaus Endowed Chair in Entrepreneur-ship at the Richard A. Chaifetz School of Business, Saint Louis University. Prior to his coming to Saint Louis University he was an assistant professor of management at the Wharton School, University of Pennsylvania. Jerry holds a PhD in organiza-tional psychology from the University of Michigan, and other graduate degrees from Harvard and the University of Memphis.

Throughout the years he has worked in or advised his family’s businesses includ-ing stints working in the family’s discount department store, sporting goods whole-saling, pharmacies, auto parts jobbing, and secondary-market wholesaling of frozen food. As a professor he has served as adviser to over 500 business plans developed by students at Saint Louis University, whose Entrepreneurship Program (which Jerry leads) has been nationally ranked every year since 1994.

He was also the founder and director of Saint Louis University’s Billiken Angels Network, which was ranked by the HALO Report as one of the top angel groups in the United States. Ear-lier in his career he served as associate director for the Missouri State Small Business Develop-ment Centers. He has taught, trained, or consulted on entrepreneurship education and business development services in Germany, Spain, China, Portugal, Saudi Arabia, Korea, Sweden, Switzerland, the United Kingdom, Brazil, Singapore, Israel, Croatia, and the West Bank. His consulting firm, J. A. Katz & Associates, has a client list including the Soros, GE, Kauffman and Coleman Foundations, as well as the Korea Entrepreneurship Foundation, the Jerusalem Insti-tute for Israel Studies, Sweden’s Entrepreneurship and Small Business Research Institute, the International Labor Organization (ILO), RISEbusiness, the National Federation of Independent Business, the National Science Foundation, and the Committee of 200.

As a researcher, Jerry has done work on entrepreneurship, organizational emergence, oppor-tunity analysis, and the discipline and infrastructure of entrepreneurship education. Today 8 of his papers can be found in 11 different compendia of “classic” works in entrepreneurship and small business. He was a co-recipient of the 2013 Foundational Paper Award of the Entrepre-neurship Division of the Academy of Management, and Google Scholar reports Jerry’s papers have been cited over 11,000 times. Jerry founded and edited two book series, Advances in Entre-preneurship, Firm Emergence and Growth (published by Emerald) and Entrepreneurship and the Management of Growing Enterprises (published by Sage) and has edited over a dozen special is-sues. He sits on the editorial boards of 11 journals: Journal of Small Business Management, Entre-preneurship and Regional Development, International Journal of Entrepreneurship and Small Business, Journal of International Entrepreneurship, International Entrepreneurship and Manage-ment Journal, International Journal of Technoentrepreneurship, Experiential Entrepreneurship Exer-cises Journal, USASBE Annals of Entrepreneurship Education, Ekonomski Vjesnik Econviews, Journal of Entrepreneurship Education, and Entrepreneurship Education & Pedagogy.

Following his parents’ tradition of civic entrepreneurship, Jerry has served in a variety of roles including a governor of the Academy of Management, chair of the Entrepreneurship Divi-sion of the Academy of Management, and senior vice president for research and publications of the International Council for Small Business. He serves on a number of local, national, and in-ternational boards promoting entrepreneurship and entrepreneurship education and training for students and the general public.

For these efforts, he has been a recipient of more than a dozen major professional awards including Babson’s Appel Prize for Entrepreneurship Education, the Family Firm Institute’s LeVan Award for Interdisciplinary Contributions to Family Business, the Outstanding Lifetime Achievement Award given by the Academy of Management’s Entrepreneurship Division, as well as Mentorship Awards from the Entrepreneurship Division of the Academy of Management, and from Saint Louis University’s Graduate Student Association, and Saint Louis University’s Chaifetz School of Business Alumni Award for Outstanding Educator. He was elected the fiftieth fellow of the U.S. Association for Small Business and Entrepreneurship.

Courtesy of Jerome Katz

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Richard P. Green IIRichard Green is a successful serial entrepreneur who has started, built, and sold several busi-nesses across an extraordinarily wide range of industries. His first business was an electrical sign repair company, which he began while an undergraduate student. Since then, Richard has started two other sign companies, a structural steel business, a manufacturer of stainless steel products, a real estate brokerage, a tax return preparation service, and a bed-and-breakfast. During the “go-go banking” years he held controlling interest in a state-chartered bank. More recently, Richard, with his long-time associate Richard Carter, con-ducted the start-up of Lineas Aereas Azteca (Azteca Airlines); served as co-owner with his spouse of a San Antonio bed-and-breakfast, the Adams House; and served as chief financial officer for a high-tech start-up, Celldyne Biopharma LLC. As a corporate entrepreneur, Richard has worked on expansion plans for companies as diverse as the Mexican airline Aerolineas Internacionales, Minneapolis-based Land O’Lakes, Inc., and the Venezuelan dairy Criozuca, S.A.

Richard brings a similarly diverse set of skills to ESB, ranging from a pilot’s li-cense (he was a professional pilot, instructor, and check airman for TWA) to a CPA. A late-life PhD (from Saint Louis University), he has been an assistant and associate professor of accounting at the University of the Incarnate Word and Webster University, and is currently coordinator of the accounting program at Texas A&M University–San Antonio. His academic achievements are similarly impressive, with papers in the proceedings of North American Case Research Association (NACRA), American Accounting Association Midwest, the American Association for Accounting and Finance, and the Interna-tional Council for Small Business, as well as journals such as the Atlantic Economic Journal and Simulation & Gaming. Richard also authored more than three dozen articles in popular maga-zines on topics ranging from personal computers to financial decision making. Richard is co-developer (with Jerry) of the measures for financial sophistication in the Panel Study of Entrepreneurial Dynamics, and is senior author of Investigating Entrepreneurial Opportunities: A Practical Guide for Due Diligence (Sage). He has received research grants from Pharmacia Corpo-ration and the Kauffman Foundation.

Always active in professional and civic roles, Richard’s contributions have ranged from serv-ing as chair of the Airline Pilots Association’s grievance committee to serving on the City of San Antonio’s Air Transportation Advisory Committee. He is a member of the American Accounting Association, Academy of Management, United States Association for Small Business and Entrepreneurship, North American Case Writers Association, and the World Association for Case Method Research and Application.

About the Authors v

Courtesy of Richard P. Green II

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This book got its start with a simple question from my mother, “What is the difference between what you teach and what your father did for a living?”

We were sitting shiva (which is the ancient Jewish tradition of mourning), in this case after the death of my father, a Polish immigrant to the United States who had been a small business owner for almost 50 years at the time of his death in 2003. When sitting shiva the immediate family mostly sits and reflects and prays for a week, so my mother, sister, and I had plenty of time to talk. And talking as we did, the question came up.

I gathered my thoughts for a minute. First off, I realized that throughout his life my father had picked up on my comments about the very rare high-growth, high-tech businesses that came through my class. Somehow he thought that was who I had as my run-of-the-mill student. That was funny to me, because in teaching entrepreneurship for nearly 20 years, fewer than a dozen of the several hundred business plans I worked on involved high-growth, high-tech firms.

But thinking about what my father heard, I realized that I talk about two sets of rules, one for when I have a potentially high-growth business and another for the more conventional businesses that most of my students start and that my own father had mastered three times in his life. The answer to my mother came out this way:

Conventional Small Businesses High-Growth Ventures

Imitation Novelty

Autonomy Involve key others

Control as goal Growth as goal

Financial independence Wealth

Fund with your own money Fund with other people’s money

Cash flow as key Profits as key

Cash crunch? Tighten belt Cash crunch? Sell more

The list goes on, and you will have a chance to see it in Chapter 1. You will discover that the list exemplifies the prevention versus promotion focus discussed in Chapter 2, but this list gives you an idea of the difference. I told my mother that when I am teaching to students who have really big dreams, I try to get them to create businesses that would be innovative, using new tech-nologies or markets. These would be businesses that could grow to be big businesses, creating major wealth for their founders. The founders are in it for the wealth. They expect to go after others’ investment in the business and they expect to give away some of their autonomy along with their stock. My father’s businesses were imitative, businesses like those already existing. He did the businesses to have a comfortable income and wanted to limit his growth to what he could comfortably control personally. No investors, no one second-guessing him. When times got tough, my father would cut his expenses; in a high-growth business that’s when it needs to sell more. My father’s business was built on his personal reputation, while high-growth firms try to maximize the reputation of the firm or its products.

I kept talking, but as I listened to myself, I realized that I had never seen a book that talked about small business the way I described it. I have students who have started such businesses—in fact, the vast majority of my students have started businesses in their own ways much like my father’s three firms. I continue to help out those alums with advice, just as I did my father and his business. But in the end, what was important was that they were a different kind of business, and I felt that no book really addressed it that way anymore.

That was why I decided to write this book, and get Richard to join me in the effort. Why Richard? Because I knew a person with a story like his would make a great co-author for a book like this. His story goes like this:

When Jerry first asked me if I would be interested in co-authoring a new small business management text, I was a bit reluctant. Where would I create time for such a daunting task? I asked myself. But when he described his vision—a text about starting

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and managing the type of small businesses that we patronize every day—restaurants, beauty salons, plumbing companies, lawn care firms—I became enthusiastic. Yes, I definitely wanted to be part of a project that would deal with the 98 percent of businesses that start small and stay that way, not the 2 percent that become CNNs, Oracles, and Dells.

In many ways, I exemplify the type of entrepreneur for whom we wrote this book: people who start and operate the many ordinary enterprises with which you do business every day.

Unlike Jerry, I come from a family of employees. Neither of my grandfathers and none of my many uncles and aunts were ever business owners. My father began working as an employee while he was still in high school, and he continued as an employee until his retirement. I, on the other hand, started my first entrepreneurial enterprise the summer I was 12. I began my first “real” business the summer I was 18. In the years since, I have started several businesses and purchased three. In between businesses I have been, as my father and his father, an employee.

Not a single business that I have owned has ever been high tech, high growth, or even high innovation. I started every one either because I needed a source of income right then or because I expected to lose my current job very soon and didn’t want to live on unemployment. I have been an owner-manager in the electrical sign business, structural steel erection, light manufacturing, consumer electronics retailing, real estate brokerage, construction, farming, and lodging.

Why so many businesses, you may ask. My mother probably would say that I have a short attention span. However, the real answer is that each time I started a business I took the first opportunity available, not necessarily the best opportunity. And what was the result? Some, such as the Grandview Sign Service Co., went broke (but not before it paid for flying lessons). Signgraphics, Inc. was sold. Paul’s Sound Shop was a victim of recession. The real estate brokerage was financially very successful, but I hated the business. When my top-producing salesman finally passed his broker’s exam, I eagerly made a deal for him to buy the company. I am still actively engaged in construction and in the lodging industry.

My interest in entrepreneurship as a field of study stems from this varied experience. I asked myself many questions, including, Why did I just make a living in the sign business, while Ted Turner made himself a billionaire from the same beginnings? Why is it that Paul’s Sound Shop didn’t become a retail behemoth as Best Buy did, although both started about the same time? And am I a success because I made money in several different businesses, or a failure because none became big businesses? This book is largely the result of my search for answers to these questions.

Together, Richard and I crafted our approach for Entrepreneurial Small Business, and as we will point up in the business planning chapter, all plans start with a vision.

The ESB VisionIn Entrepreneurial Small Business, you will not find a lot on venture capital, and very little on strategic concepts like “first to market.” What you will find is a lot of coverage of the kinds of businesses most people (and especially most undergraduate and lifelong learning students) really do start—small businesses in traditional industries and markets. These businesses are vitally important—we will tell you why we think so in a moment—and helping them survive has long been an art. Today like never before that art is supplemented by science, and that is where your class—and this book—can help. In ESB we try to build a book that can combine the art of small business survival and the science of small business success. If you can get the benefit of both before you get into your business, you are likely to do better than those who have to get by with the advice they can catch on the fly as they get started.

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ESB takes its information from the nearly 150 journals in entrepreneurship (; generating new understanding of what it takes to be successful from national studies like the Panel Study of Entrepreneurial Dynamics (PSED) at, where we have the benefit of the experience and wisdom of Kelly Shaver (College of Charleston) to help generate many of the statistics we use in this volume. We also use the Kauffman Firm Study (, their Indicators of En-trepreneurship (, the surveys of the National Federation of Inde-pendent Business (; http://www; global studies like the Global Entrepreneurship Monitor (GEM) at www; the surveys conducted by the U.S. government (conveniently gathered together at; and the best of modern wisdom from experts in entrepreneurship from government, media, business, and the Internet. The point of ESB is to get that knowledge and make it available to you, the small business owner of today or tomorrow. You and your business deserve every break you can get, and our economy and society need you to survive and succeed.

Why is that so important? It turns out that small business is essential for big business; it is essential for high-technology, high-growth business; and it is essential to our communities. In a world of relentless cost cutting and global competition, big businesses outsource everything but their most critical tasks. Often the best expertise, the best service, or sometimes even the best price exists in small businesses. Whether it is janitorial services or new product development, big businesses increasingly depend on small businesses to get their jobs done.

Small business is essential to our communities in much the same way. If you come from a small town or a neighborhood that gets bypassed by the big chains, you know how important small busi-nesses can be. Without small businesses there might be no places to buy products or needed ser-vices. Big business and small communities depend on small business to get the job done.

For high-tech businesses the same argument can be made, but there is also another issue—that small business defines the community in important ways. If you work in IT, biotech, nanotech, medicine, media, or the like, when you finish your day in the lab or cubicle, where do you want to be? In a soulless, interchangeable town full of franchised outlets or a vibrant and diverse locale? These members of the “creative class,” as Richard Florida1 calls them, are demanding customers. They make their livings from their minds, and those minds crave stimulation, whether at work or at play. A big part of stimulation comes from being diverse, different, special, and that is where small businesses come into play. You can go to a dozen different small coffeebars and each is dis-tinctive. Go to a dozen Starbucks and they are all pretty much the same. There are times when we all crave the expected, but the creative class also often craves the unexpected, and that is much more likely in small businesses than chains and large firms. No high-tech center can survive as a place to live without the excitement and variety a population of small businesses can provide.

The fact is that every small business is important for two reasons: first, because we can never be sure which ones are unimportant (if you can believe there could be such a thing), and second, it takes a lot of small businesses to support and enable one billion-dollar business.

For us, one of the lessons of the Panel Study of Entrepreneurial Dynamics (PSED) was that while high tech might be the ship folks hope will come in, for it to work that ship needs to be supported by an ocean of small businesses. Billion-dollar high-tech companies are rare. Less than 1 in 100,000 start-ups achieves that billion-dollar level. The irony is that nobody knows which of the next 100,000 start-ups is going to be that next billion-dollar business. All we can do is try and start as many as possible, knowing the more that get started, the greater the chance of that one breakthrough success.

The fact is that nearly every big business got its start as a small business. Hewlett-Packard re-ally did start in a garage, and Walmart started small in rural Arkansas. They are giants today, but some part of their culture was defined in those early days when they were small businesses.

viii PrefAce

1R. L. Florida, The Rise of the Creative Class: And How It’s Transforming Work, Leisure, Community and Everyday Life (New York: Basic Books, 2002).

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When they started, none of their founders knew they were going to become billionaires, and neither did their investors, bankers, lawyers, or friends. You start your business, you take your chances, and the rest of us hope you make it.

In the meantime, however, those hundreds of thousands of start-ups literally help support big business and high-tech businesses. They do this by providing jobs and wages to half the country so people can buy things. They do this by providing products and services to big and high-tech busi-nesses, and they do this by training and preparing the next generation of workers and owners. Small businesses for the past 25 years have been the major source of new jobs created in the United States. While Fortune 500 businesses have cut their payrolls by millions, the slack created has been filled by small businesses and especially those that grow to multiple sites or multiple shifts.

When you start on the path to creating your own small business, you make life better for us all. Entrepreneurial Small Business is dedicated to giving you the specific help you need to get started and be successful.

The Sixth Edition of ESBIn each edition of Entrepreneurial Small Business we try to follow a theme. The sixth edition’s theme was “take it to the ‘net.” The Internet has made it possible for more people to share more ideas about entrepreneurship than ever before. For every major entrepreneurship magazine on-line, like or, there are hundreds of websites, blogs, and YouTube chan-nels created by entrepreneurs and business experts with a laser-sharp focus on a few issues that are key to them. The goal for this book was to link students to the best of what’s out there. Cura-tion plays a big role in making the sixth edition of ESB.

We’ve added almost three dozen Learn More Online (LMO) boxes which contain some of the best sites on the web to learn more about topics in the text, or find applications or online services embodying the kinds of actions you need to take as a start-up entrepreneur. We’ve added over 100 new sites in the narrative of the text, and updated URLs for all of the more than 750 websites mentioned throughout the text. Building on thought leaders in entrepreneurship from ESB’s fifth edition like Eric Ries, Alex Osterwalder, Steve Blank, and Alex Bruton, we have added new leading-edge ideas like the PESO Model of Media from Gini Dietrich, IDEO’s feasi-bility model, and Isaac Jeffries’s fitting of it to the business model canvas, Brad Feld’s vision of the structure of start-up communities, and Mike Moyer’s Slicing Pie approach to figuring out equity for start-up teams.

As is true for every edition, there are updates throughout—updated numbers, counts, and sta-tistics; updated URLs; updated and new examples; and updates on people from prior editions throughout this edition.

Instructors using ESB asked for even more skill modules and experiential exercises, and the sixth edition has 54 skill modules and 102 experiential exercises. Together these represent the largest number of behavioral activities ever gathered in a small business or entrepreneurship text.

We continue building on the great resources available to entrepreneurs from government and private sources. There include the blogs of, Justin Wilcox’s remarkable efforts to make seeking out customers and workable ideas using the latest techniques and tech-nology. But other examples abound, such as the canvases of, or the readily under-standable approach to valuing businesses that comes from We’ve added skill modules leveraging’s Audience Insights and the newly revamped data access web pages.

If you look closely at the materials from others we mention and include in the text, you may notice that while we use many of those ideas and techniques, we don’t always follow their ap-proach very closely. In the end, it comes from being true to our own philosophy. We started the preface by comparing traditional small businesses to high-growth firms. A lot of today’s models think first of firms in the Silicon Valley, the world’s greatest concentration of founders and inves-tors pursuing high-growth entrepreneurship. But there are so many people creating and investing

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that no one has time for a business plan—to write them or to read them. People in Silicon Valley proclaim “the business plan is dead!” To match their pace you create a pitch deck, a business model canvas, and a set of financials. Internet-driven businesses are the bread-and-butter of Silicon Valley’s industry.

But 99 percent of us starting businesses are not in Silicon Valley, and the vast majority of us are not starting Internet-driven or app businesses. We get funding from friends, family, and bank-ers, not venture capitalists roaming the coffeeshops. When regular people (and even most an-gels) in the rest of the country consider investing, they want to see a business plan. And for businesses that will take years to become successful—most manufacturing, most professions, most services, and even most retailing and wholesaling—you need to think through how you will operate and fund yourself for the years it will take until your business matures into its best self. An app can go from zero to operational in a weekend (that’s what and hack-athons are all about; look at the story of and live through 10 iterations within the first week. An accounting firm, or a restaurant, or a new backpack will take longer to get going and be made successful.

In Silicon Valley, entrepreneurs are thick on the ground. There is expertise everywhere, so you ask for it, or trade for it, or buy it. In Silicon Valley you are known by the team you’ve assembled. The team is the best indicator of your business’s capabilities. But in the rest of the country, the majority of businesses consist of only the entrepreneur, or the entrepreneur and one other per-son, and often while there are other entrepreneurs and help around, it takes a lot more effort to find them and get what you need. So an approach where you, the entrepreneur, have to be more self-reliant, more do-it-yourself, is essential to getting done the crucial jobs of starting a business everywhere but Silicon Valley. ESB talks about accounting, marketing, human resources, and a host of other topics in more depth than lean business practices or business model canvas ap-proaches typically do. In the end, lean business practices are often all about the high-growth (aka “scalable”) businesses, while ESB is focused on the traditional “main street” businesses that make up the bulk of our economy and our lives. Where lean approaches can help main street busi-nesses, we use them. But we stay true to our focus on the businesses you are most likely to start.

As you will see in the acknowledgments, we get feedback from many professors, instructors, and students. We work hard to use these insights to improve the coverage, flow, and usefulness of the text for students and faculty alike. This involves a few major changes among many small changes such as these:

Chapter 1: The chapter is updated in terms of the statistics on small business and the web-sites, people, and businesses profiled. We’ve added material on the entrepreneurial process to help better explain our approach to the start-up process, and help those familiar with lean busi-ness practices get a feel for the ESB approach. We’ve also included a host of new examples in this chapter: Robin Rath of Pixel Press as our opening vignette, Jim McKelvey of Square replacing Paul McCartney as the CSI entrepreneur, Snapchat’s founders replacing Jobs and Wozniak, and a new mini-case at the end of the chapter profiling Jolene Adams.

Chapter 2: This chapter talks about the personality of entrepreneurs, pretty much unchanged from the prior edition, except for the updating of stories, URLs, and statistics. We added a new opening vignette on Khalia Collier of the St. Louis Surge Women’s Basketball Team; Learn More Online boxes on personality, competencies, women and minority businesses, second career and veteran entrepreneurs, and teams and family businesses; and new terms like entrepreneurial mind-set and micro-commitments.

Chapter 3: This chapter is also updated in terms of the statistics on small business and the websites, people, and businesses profiled. We’ve updated the entrepreneurial environment model with the highly regarded work on entrepreneurial ecosystems by Brad Feld from his book Startup Communities. The chapter adds a skill module on using Flipboard for environmental scanning, and added Learn More Online boxes on daily news sources for entrepreneurs, finding help on using Facebook and Google advertising, and green/sustainable entrepreneurship. There is also a new Small Business Insight titled “The Dark Side of the Sharing Economy.”

x Preface

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Chapter 4: Given this chapter received a major revamp for the fifth edition, the fundamentals remained the same. That said, we replaced the opening vignette with one about the multi- talented entrepreneur Mary Elizabeth Coleman. The RBI model used in the fifth edition was replaced by the better-known IDEO model for assessing initial feasibility. This also led to the ad-dition of a new skill module applying the IDEO screen, and to some updates of the classic feasi-bility study outline. The chapter also added four Learn More Online boxes on creativity sites, customer-focused interviewing resources, online business model canvas resources, and landing page resources. New ideas included design thinking, retail arbitrage, customer job, and target market.

Chapter 5: Part-time businesses not only remain an important path to ownership, but are also increasing as a portion of all new business entrants. We replaced the opening vignette to tell the story of Carla Brauer and Dermestidarium Trophy Processing. This story is an exemplar of how a long-time avocation can change into a profitable business. Sections 5-1 and 5-2 were rewritten for clarity and better readability. We also added two Learn More Online boxes, one specifically relat-ing to side businesses as part-time businesses. In addition, we updated the graphs and tables on numbers and types of business establishments, as well as several photos throughout the chapter.

Chapter 6: This chapter has been extensively reworked and topic order has been reorganized for more logical progression. A new opening vignette features Paul Hedrick and his boot com-pany, Tecovas. The Small Business Insight was rewritten and uses Scratch Labs as an example of effectual reasoning. We have updated the text to include key terms bootstrapping, bricolage, and lean practice. Jasmine Adams and her start-up “Smudgies” is a new example for leveraging con-tingencies. Section 6-3, “Rewards and Pitfalls of Starting a New Business” has been revised and in addition, two Learn More Online boxes were added.

Chapter 7: In addition to general updating of statistics, stories, and websites mentioned, this chapter saw a new opening vignette, looking at the gift box company Greetabl (which will pop up in mentions in the rest of the book, up to the cover page of their design patent in Chap-ter 17). Perceptual mapping was replaced by “Mapping Your Distinctive Competence” which was originally step 1 from Skill Module 9.4 in ESB fifth edition. The skill modules, experiential exercises, and appendix in the chapter got revamped because of the change to Greetabl as well as changes in the U.S. Census’s major data source for business, now called Census Business Builder. Skill Module 7.5 saw the addition of a Google Maps procedure for displaying your competitors.

Chapter 8: As you might guess, this chapter also received the general updating of statistics, stories, and websites mentioned. The RBI screen was replaced by the IDEO screen, but the big-gest change was the replacement of the Colter Durham business plan with the plan from Red Jett Sweets, which first appeared in the fourth edition of ESB and was sorely missed by a lot of instructors. This version was completely rewritten to fit the 10+8 page model ESB now teaches. The chapter also added Learn More Online boxes on free online business planning programs, alternatives to PowerPoint for pitch decks and online résumé and cover letter builders, as well as terms like traction, micro-commitments, and offering circulars. A whole new section “Storytelling and the Art of the Pitch” tries to capture the art and science of getting your story out.

Chapter 9: In addition to the general updating of statistics, stories, and websites we’ve been doing for all the chapters, we worked to tighten up the customer section of this chapter, which received a major revision for the fifth edition. This included adding the section “Finding First Customers” along with changing the name of “The Perfect Customer” section to “Thinking about Customer Service” with a refocusing of some of the material in that section. This also led to adding a skill module on using Facebook Audience Insights. The “Segmenting Your Market” section from Chapter 10 (including the associated skill module “Identifying Target Market Seg-ments” which is now Experiential Exercise 12) was moved here and integrated with the other customer-centric material, as was another Chapter 10 skill module “Finding Demographic Infor-mation by Zip Code.” Some of the examples that were updated include 3-D printers and replac-ing MP3 players with Bluetooth speakers. The chapter includes new Learn More Online boxes

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on free online platforms for marketing surveys and free programs for 3-D model building. Skill Module 9.10 was retired in favor of Experiential Exercise 8.

Chapter 10: Structurally one of the biggest changes in ESB’s sixth edition was the rethinking of the promotion process of the 4 Ps of marketing. The field of marketing has coalesced around the PESO Model of Media developed by Gini Dietrich— reflecting paid, earned, shared, and owned forms of media, and their overlaps. The model really helps integrate traditional and social media and makes the options available to entrepreneurs and students much clearer than older models, so we replaced the earlier sections “Crafting Your Message” and “Conveying Your Mes-sage” with one section titled “Promotion Using the PESO Model.” We moved substantial mate-rial from Chapter 11 such as “Brand and Organizational Identity” and sections from “Distribution” including “Direct Marketing,” “Distribution Issues for Direct Marketing,” and “Nondirect Distribution” to Chapter 10, integrating that material in the appropriate sections of the PESO Model, most often in paid media. Given these changes, we removed the section “Strat-egizing for Promotion.” Learn More Online boxes included product review sites, affiliate market-ing sites, and free customer relationship management (CRM) online services. There were also minor changes to Discussion Question 5 and Experiential Exercise 5. Experiential Exercise 3 from the fifth edition was moved to Chapter 9, Exercise 2.

Chapter 11: Aside from the general updating of statistics, stories, and websites, the biggest changes to this chapter were increased coverage of fulfillment by Amazon and its competitors (in the section formerly called “Nondirect Distribution” now renamed “Fulfillment and Nondirect Distribution”), and the addition of four Learn More Online boxes on coupon sites, loyalty pro-gram management platforms, economic development sites, incubator/accelerator/co-working directory sites, and online floor plan builder sites.

Chapter 12: This chapter received an overhaul, beginning with a new opening vignette highlight-ing Justin Beegel of Infographic World, Inc. The section “Why Accounting Is Important for Small Business Success” was rewritten for clarity and content. In “The Concepts That Make Accounting Work” we added qualitative characteristics of useful financial information as well as added an ex-planation of the greater claim creditors have on assets and rewrote the accounting equation. All accounting illustrations and financial reports were updated and now feature Red Jett Sweets, the company first introduced in Chapter 8. The industry links are current live sites and the “Account-ing Systems for Small Business” section was rewritten to reflect current standards. We added a Learn More Online box with links specifically for tutorial sites for accounting purposes.

Chapter 13: This chapter, which deals with the issues of managing cash flows and completes the budget process, has been updated with a new vignette featuring the cautionary tale of Creata-cor, Inc. All the learning objectives in this chapter have been rewritten and reorganized. Based on adopter feedback, the bank reconciliation section was moved to a new Appendix. Data on cash inventory were updated to 2019. The “Importance of Cash Management” section was re-named to specify cash, not just money, and we included a new introductory paragraph giving justification for the topic. In “Money In/Money Out,” we updated data to reflect the most recent NFIB poll and also removed the dated Baby Einstein example. The “Managing Cash Flows” sec-tion offers a new explanation as to why this topic is important and a new exhibit from the Fed-eral Reserve is included. The Learn More Online box provides links to discussion of providing discounts for prompt payment.

Chapter 14: The new opening vignette of this chapter tells the story of, a moving company that began when a college student in Kansas, Ben Jackson, got the idea for a business app that he believed could be developed into a profitable business. A new The Thoughtful Entre-preneur box titled “Royalty Financing” was added. The section “Gifts via Crowdfunding” was rewritten to be more consistent with current law and regulations. And, of course, data were consistently updated throughout the chapter to include prevalent information.

Chapter 15: In the fifth edition, for this chapter we added a section on the importance and value of documenting business processes. In this edition, we see a new opening vignette discuss-ing inventory theft and the importance of protecting current assets, especially in small

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businesses. We added a relevant discussion on the risk of holding inventory. Skill Module 15.3 was removed along with the Small Business Insight “Outsourcing Blues.” In the “Managing Op-erations” section we added a Learn More Online box with valuable links to various outsourcing services and manufacturing.

Chapter 16: Changes to this chapter include a new opening vignette focusing on the threat to small business computer systems caused by cyber criminals. New content was added to offer in-sight in dealing with cyber threats. The Small Business Insight box featuring Clint Eastwood was removed and we simplified the discussion of compliance with regulations. We added a new chart on the sources of theft in retail businesses and also new discussions on protecting businesses from theft and managing risks inventory. Several photos were also updated to give this chapter a fresher look.

Chapter 17: Given the updates in this chapter for the fifth edition, relatively little was done this time around, aside from the usual updating of statistics, stories, and websites. Skill Module 17.1 was revised and refocused on instead of the website, and the knife sheath patent cover page from Hedgehog Leatherwork’s Paul Scheiter was replaced by the cover page for the design patent for Greetabl’s gift box developed by Joe Fischer. And in our discussion of intellectual property, we added how to register hashtags (e.g. #followme), along with updated instructions for USPTO’s TESS database in Skill Module 17.2

Chapter 18: Like Chapter 17, this chapter saw general updating in the fifth edition, and little beyond the usual updating of statistics, stories, and websites was needed. The opening vignette, “Jesse Mecham and You Need A Budget,” is new, as are the Learn More Online boxes added on job description websites and prehiring testing websites. A new section “Dividing Ownership in Nonfamily Start-Ups” was added after the section “Dividing Up Ownership and Dividends” which focuses on family firms. The new section builds on the work of Mike Moyer and his Slicing Pie model for allocating equity in bootstrapped start-ups.

When we look at the detailed list just discussed, for this edition about one-third of the ideas come from our own experience and discussions with our friends and colleagues at work. But it is important to recognize that the other two-thirds of the ideas, improvements, corrections, and revamps come from the suggestions of readers like you—faculty and students who are using Entrepreneurial Small Business to help them pursue their dreams of business ownership.

You are our target customer. Your satisfaction or dissatisfaction is central to our making this text work. Do you have a better idea about how to talk about something? Did we get something wrong? Is there something we’re missing that could help others in their entrepreneurial quests? Tell us. Richard’s email is and Jerome’s is We try to respond to all emails, and as you can see, we do try to improve the book based on your feedback.

The ESB PackageProfessors reading this are probably wondering how all this translates into helping them teach their courses. One way we hope to help is through providing “imitation with a twist,” which you will learn more about in Chapter 7. There are many other small business texts out there, and from an author’s perspective they can be intimidating because so many of them are so good. So how can ESB expect to get your attention? As you will find as you look through the book, all the major topics you expect to see are present—that’s the imitation that is basic to all mature indus-tries (such as small business education).

What adds value are those aspects of the book that are distinctive—our “twists.” We give the specifics on how to sell, how to negotiate, how to ask for help, and how to handle a crisis, building from the best of research and professional practice. You will see it in small touches in the chapters, like in our discussion of issues such as when you get or use gifts as a way to fund start-ups, or why an LLC should be your default legal form of organization. We tried hard to give students the easi-est introduction possible to the potentially frightening issues of accounting and financial reports.

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ESB is also the first book we know of that has devoted a chapter to the special needs and problems of part-time businesses. For this edition we have tried to cover the broadest possible range of writing projects used in small businesses—not just business plans, but feasibility analyses and industry analyses, and we’ve added business model canvases and IDEO screenings for rapid assessment of possibilities. We include real-life, high-quality student-written examples of the re-ports we expect students to work up as they start their business. And all the while we tried to keep the ESB vision in the forefront—asking ourselves what the absolutely critical things are for our students to know in order to start their small businesses and succeed in them despite a lot of competition. We have tried whenever possible to focus on providing only what is needed, and what would be relevant for the traditional small businesses our students most often start.

The ESB Role/Goal/CelebrationThis book started with a wife and mother’s simple question about the difference between the traditional small businesses her husband started and the high-growth ventures she heard about in her son’s stories. Today there is a groundswell of converging ideas in business, economic devel-opment, job creation, and government showing us that the revitalization of those traditional small businesses is a key component of reviving our economies and communities.

That revival is more important than ever. Economists have shown us that over the past 50 years the percentage of self-employed people has gone down. With the baby boomer genera-tion reaching retirement, even more small businesses will be closing in the next five years. At a time when entrepreneurship has never been more popular in the media and public thought, the number of people starting businesses seems to be steadily declining.

Some believe that it is too difficult to start the everyday sorts of small businesses. Some be-lieve potential entrepreneurs are turned off by the riskiness of going into business. We continue to work on this book because we believe, and say repeatedly in the text, that “help helps.” Re-search shows that entrepreneurs who get help do better and survive longer. They beat the odds and decrease the riskiness. The help can come from paid professionals, from free sources like the SBA, SBDCs, or SCORE, or from schools and training programs, or even books like this one. ESB is here to give you a start and point you to the other resources that can make your entrepre-neurial dreams work out and be successful.

In many ways it has never been easier to start businesses. You can have a professional-looking online business operating in a couple of hours. With the baby boomer retirements at hand, liter-ally millions of businesses would be available for purchase, with training thrown in by the founder and convenient terms to pay back the purchase from cash flow (doing it that way is preferable to shutting down a firm and letting employees and customers go). The same studies that show declines in everyday self-employment also say that high-growth businesses are growing in number. So the entrepreneurial world is full of opportunities, and books like this are intended as a gate-way and support to those efforts of yours.

For students, we want Entrepreneurial Small Business to be your handbook, lightning rod, and motivator. When you read this book in your hands or online, mark it up! If something is impor-tant to the way you plan to run your business, dog-ear the page or print a copy from the online version to keep it with you. Write how something applies to your proposed or existing business. If you have not started a journal for business ideas, start using the margins or end pages of this book to hold them. If you are serious about becoming an entrepreneur and we did our job right, then success is measured in the material you keep and use from our book. If you are serious and the book did not do the job for you, let us know what we need to do better. We got this far on the wisdom of a network of a lot of students and faculty, and as you go through this semester, you become part of the network, too.

For faculty, our job as educators is not just to know about the fortunes of small business, and not just to help make this work, but to celebrate this. Academics have the power to legitimize

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through their acceptance and support, and they have the power to propagate through their con-tacts with hundreds of students and businesses a year. But most of all, we have the power to ex-cite and to energize, most often through our own energy and support and occasionally even by the new opportunities and vistas we open for our students. You and all of us collectively have an important contribution to make to the revitalization of small business as a key component of the economy, just doing what you do every day.

We want to be a part of that effort with you—providing the examples to celebrate, the realities that help prepare our students for what they will face, and most of all the skills, knowledge, and resources that will prove to them that most critical of concepts in life and in small business success—“help helps.”

We are the authors behind Entrepreneurial Small Business. We want to help. Let us know how we could do so better in the future. Welcome!

Jerome A. KatzSaint Louis University

Richard P. Green IITexas A&M University—San Antonio

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Entrepreneurial Small Business provides students with a clear vision of small business as it really is today. It focuses on small businesses that stu-dents might actually start versus high-growth firms dependent on venture capital. It presents the realities small business owners face every day and strategies for those starting or maintaining a small business.

There are several chapters that emphasize the distinct focus of this book.


Chapter 5: Small Business Entry: Paths to Part-Time Entrepreneurship

Part-time businesses are tremendously important as they are a major portion of all current entrepreneurship, and it’s the way most people enter into self-employment. This chapter discusses the benefits—and challenges—of part-time entrepreneurship.SMALL BUSINESS REALITY: 75 percent of those starting a business already work full time for someone else and are pursuing their new business part time.

Chapter 10: Small Business Promotion: Capturing the Eyes of Your Market

The key to building a successful business is to discover and meet customer needs. With this in hand, promoting your offering and its value to prospective customers is essential to making sales. This chapter shows how to build customer profiles, conduct unbiased interviews, translate these findings into value statements, and promote your firm, products, and services using social and conventional media.SMALL BUSINESS REALITY: Today nearly all new start-ups rely on a social media strategy as an essential base on which to build their advertising, press relations, and public relations strategy.

Chapter 13: Cash: Lifeblood of the Business

All small businesses must understand how to manage the business’s cash flow. This chapter focuses on the basics of cash, budgets, shortages, and strategies to deal with cash flow problems.SMALL BUSINESS REALITY: About 55 percent of small businesses that fail do so because of cash flow problems.


Small Business Entry: Paths to Part-Time Entrepreneurship


● Carla Brauer moved from a hobby into a business of cleaning animal skulls and making wall mounts and jewelry items from the cleaned skulls. What business would you start if you want to work the business part time?Carla Brauer

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Small Business Promotion: Capturing the Eyes of Your Market


● Addie Swartz’s lifestyle brand, Beacon Street Girls, is aimed at two market audiences. What challenges are posed to this small business by its double-pronged approach? How might this approach work to Swartz’s advantage?Source: B*tween Productions, Inc.

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Cash: Lifeblood of the Business


● Thomas Lemery built Creatacor, Inc. from a spin-off of GE’s corporate exhibit operations. Between 1987 and 2015, the company grew from 8 employees to more than 50. Jean Hatalsky was one of the most senior of these, having been with the company for 27 years. Who would ever believe that this long-time, loyal employee would steal a half million dollars from its owners?Creatacor

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Finally . . . a book about the kinds of businesses your students are most likely to start!

Business Plans

Business model canvases and business plans are a part of every small business course. Even when a business plan may not be necessary to start your business, it remains critical to plan and understand your business in any circumstance.

Chapter 8 includes practical information helpful to any small business owner, such as:

● The elevator pitch—how to quickly get people interested in your business.

● How to translate business model canvases (from Chapter 4) into business plan sections.

● How to write your executive summary—a key component of the busi-ness plan.

● Seven types of business plans and what components they should include.

● Tips on presenting your plan, such as the 13 slides of a business plan presentation.

Chapter appendixes contain samples of important business plan components:

IDEO Fast Screener (in Chapter 4)Feasibility Plan (after Chapter 4)Industry Analysis (after Chapter 7)Cover Letter and Résumé (after Chapter 8)Full Business Plan (after Chapter 8)

Additional business plan supports include online examples of feasibility plans and business plans in the Connect Library. One online feasibility study and business plan focuses on the same company, allowing you to see how the business developed.

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Business Plans: Seeing Audiences and Your Business Clearly


● Krista Clement was a lifelong basketball player who enjoyed giving back to the communities in which she lived. When she came up with an idea to track student-athlete volunteering hours, she created a business plan that described the idea and the resulting business for investors and accelerators.Krista Clement and Helper Helper

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Red Jett Sweets Business PlanMay 2011

By: Natalie Gamez Meyer

This document contains confidential information belonging exclusively to Red Jett Sweets and its owners. Do not quote, copy, or distribute without permission.

[Note to students: The plan fits with the model presented in this chapter and came in at 4,081 words and 13 pages. That said, you will notice not every heading given in the textbook chapter is used here. If a section does not fit with your plan, it can be acceptable to leave it out. If you think moving a section will make the plan easier to read, that may work also. You should check with your instructor or an expert, though, to make sure you don’t leave out a section important in your industry or to your readers. The cupcakery was opened, and was a finalist in Food Network’s Cupcake Wars. You can see their original submission at and their competition at Red Jett Sweets closed in late 2013, as a walkaway (see Chapter 6) having no outstanding debts, with Natalie and Christina selling the firm’s assets and going onto other businesses. Natalie is now the general manager for the Dallas-Fort Worth restaurant group Terra Mediterranean. She went from an independent to a corporate entrepreneur.]

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ESB FeaturesPractical Advice and Experiential LearningTo help students learn more about the benefits of small business ownership, as well as the challenges many small business owners face, ESB is full of practical advice and examples from true small businesses in a variety of industries. Its focus is to give students the tools and knowledge they need to go out and start their small business.

Along with over 100 end-of-chapter experiential exercises, 54 skill modules throughout the text give students the hands-on experience they need to start and manage a small business. Together, these materials provide one of the largest collections of experiential learning techniques available from any text or online text alternative.

Skill Modules

Going beyond telling students what-to-do, ESB’s skill modules give detailed how-to information on performing the key actions of successful entrepreneurs. These are resources that students can use in the course and that they can continue to use as they plan or grow their small business.

Examples include:● Entrepreneurial Personality Overview● Checking Ideas on the Web● Short and Sweet Industry Analysis● The Art of Closing● Finding an Outsourcing Partner

Focus on Small Business

Each chapter opens with a vignette that highlights an entrepreneur and an aspect of a small business that relates to the chapter concepts. Discussion questions are included for students to consider as they read the chapter.

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176 PART 2 Small BuSineSS PathS and PlanS

Finding a Business for Sale

Although all businesses are for sale if the price is right, finding that one perfect business is a difficult and time-consuming task. As you will find out by completing this skill task, businesses for sale that are easy to find usually are unsuitable. Businesses that are right for you are downright elusive:

1. Decide what type of business you would be interested in buying. Write a profile of your ideal business to buy, specifying its industry, product or service, size, location, price, and financing.

2. Search the Yellow Pages and the Internet to find business brokers active in your area.a. Contact each broker and inquire about businesses that meet your criteria. Be honest in your ap-

proach. Do not represent yourself as a serious buyer, unless you are one.b. Obtain copies of the information that the broker has concerning the businesses.

3. Search your local newspaper, The Wall Street Journal, and Barron’s classified advertisements for the headings “business for sale” and “business opportunities.” On Google, search for “buy a business” to find websites that specialize in businesses for sale.

4. Make a list of businesses that seem to meet the requirements that you wrote down in step 1. 5. Contact the businesses that you have identified. Be honest in your approach. If you are doing this

solely as a classroom exercise, explicitly say so. Remember that while the owner of the business may want to sell it, he or she is undoubtedly very busy and may not want to discuss the business with a student when there is no chance of your actually buying it.

6. Visit a business that is engaged in the industry you have identified as being right for you. Find out the following things:a. The title and publisher of the journals dedicated to the industry. You can also check out

Skill Module 3.1.b. The primary businesses of this type operating in your geographic area.c. Conventional business practices:

i. Is business done on credit? ii. Who are the primary suppliers to the business? iii. What are the sales channels of the business (direct sales, catalog, etc.)? iv. How is technology changing in the business? v. Are there any industry rules of thumb for valuing businesses? vi. Does the owner know of any businesses that are for sale?

7. Obtain sample copies of the industry journals. Examine them for advertisements of businesses for sale. 8. Make an appointment with a loan officer in the commercial loan department of a bank in your area.

Describe what you are looking for in a business to buy.a. Ask if the loan officer knows of any businesses for sale in your area.b. Ask if the loan officer can introduce you to anyone who might be able to help you find a business

for sale.

Finally, write and present a report to your class that details the efforts and results of your research.

S K I L L M O D U L E6 .1

brokers to register by filing a simple form. Accusations of misrepresentation and fraud by bro-kers are common in the business press.

Networking is an excellent way to find businesses for sale. While most businesses are for sale at any time, for competitive reasons most owners do not want to say so explicitly. Because cus-tomers, vendors, and employees are likely to feel threatened, openly advertising a business for sale can lead to the loss of revenue, credit from vendors, and key employees. For these reasons, it is common for business owners to make their intention to sell known only to trusted confi-dants in the industry and in the community. Attorneys, bankers, accountants, and insurance agents all will provide you with information only if they know that they can trust your discretion. You can usually get solid leads just by telling other businesspeople that you’re interested in buy-ing a business.

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When Robin Rath was a kid, he was an avid player of video games like Metroid and Super Mario Brothers, and when he wasn’t playing he was designing new levels of his favorite games in his head and on paper. But he realized that video gaming was part art and part programming, and that helped him set his course. Following an undergraduate degree from Saint Louis University (SLU) bridging communications technology with fine and studio arts, he was positioned to realize his dream.

But game producers were thin on the ground in St. Louis, so Robin’s strategy was to find jobs to hone his programming skills during the day and create his own firm, Roundthird, to develop games as his side gig on nights and weekends. His main work included stints at increasingly re-sponsible and demanding positions at six different companies in the programming and marketing industries in St. Louis. Meanwhile, he and his Roundthird partner, Jon Gettys, released Radial 50 for IOS, a circular takeoff on the classic Breakout brick-breaking video game. Robin’s day and side gigs helped him develop the in-depth knowledge of programming, project planning, marketing, and networking which convinced him that given the right idea, he would be ready to go full time as an entrepreneur.

The idea that led to full-time entrepreneurship was Pixel Press, a piece of software for iPhones and iPads that would let regular people with no programming skills create playable games reminis-cent of Super Mario on their Apple devices. While the idea was ambitious, it was possible, and as he got word out, Pixel Press got favorable press from NBC News, CNET, Fast Company, and others. Building on this, Robin created a Kickstarter campaign to crowdfund his dream. You can see the campaign and watch the original pitch at The campaign was successful, topping $100,000. With that money and with what he had saved, Pixel Press made it to market. Within two years, Pixel Press announced a partnership with Cartoon Network (CN) resulting in the Adventure Time Game Wizard, which would let players create games with CN characters. From the success of that partnership, Pixel Press went on to release its next product that represented its first foray into toys and gaming, form-ing partnerships with Mattel and Disney to bring products to store shelves in the United States and internationally.

Focus on Small Business: Robin Rath, Pixel Press1








After you complete this chapter, you will be able to:

LO 1-1 Understand the scope of small business in the United States.

LO 1-2 Differentiate between small businesses and high-growth ventures.

LO 1-3 Dispel key myths about small businesses.

LO 1-4 Identify actions key to becoming a small business owner.

LO 1-5 Recognize how small businesses are important to our economy and your community.

LO 1-6 Recognize the seven key strategies of the entrepreneurial way.

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Small Business Insight Boxes

These boxes include “under the radar” advice from real small business owners and helpful statistics from small businesses around the country.

Learn More Online Boxes

Curating the best of the Internet, these boxes in every chapter provide links to more than 500 free online programs, sources of information, apps, and services that have been classroom-tested and found to be a help for student entrepreneurs and their businesses.

End-of-Chapter Materials

End-of-chapter materials include:

CHAPTER SUMMARYAn end-of-chapter summary is included, bulleted by chapter objectives, to help students review the chapter material and study for tests.

KEY TERMSImportant technical and professional terms are highlighted in the text and repeated here (and in the end-of-text Glossary) to help students identify and learn.

DISCUSSION QUESTIONSDiscussion questions are included in each chapter that can be given as assignments or that can be used for in-class discussion. Suggested answers are included in the Instructor’s Manual.

EXPERIENTIAL EXERCISESThe experiential exercises include brief activities students can complete to get more information on the chapter topic, to look for additional resources, and to help build their competencies in a certain aspect of small business ownership.

MINI-CASEA mini-case for each chapter is included as an additional opportunity for the student to apply the lessons of the chapter.

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20 PART 1 EntrEprEnEurs and IdEas: thE BasIs of small BusInEss

parents’ birth, or where he has prior experience. The key for such exporters is the personal ties that make exporting predictable and safe.54

Another approach that has grown dramatically in the past 15 years is using e-commerce, particularly sites like eBay and Amazon, to handle global trade. The formal title for this is virtual instant global entrepreneurship (VIGE).55 VIGE depends on using websites like Amazon or eBay (for products) or Upwork (for services) to quickly establish a global presence. Many of these VIGE sites offer procedures, services, and web page templates that incorporate best prac-tices for global trading. For example, eBay leads new sellers through the creation of seller and


GT Dave’s mom Laraine was battling breast cancer, and to help his mom at this awful time GT would make her kombucha tea (imagine a slightly bubbly bittersweet dark herbal tea) from the family’s recipe. They learned about it through their lifelong involvement in Eastern philosophies. Laraine beat the cancer, and GT decided to offer the tea commercially.

At 15 he started mixing larger quantities of his tea, offering it in bottles and selling it locally in health food stores in his hometown of Los Angeles. He slowly grew the business to other health food stores in his area using nothing but his own money, profits from the business, and a $10,000 loan from his mother. While he tried to stay in high school, it was a tough go, and he left but kept working to get his GED and take community college classes.

● Founder GT Dave proudly showing off his Synergy kombucha drink.

Ringo Chiu/ZUMA Wire/Alamy Live News/Alamy Stock Photo

Four years after he started the business, he got his two drink lines (Kombucha and a kombucha and fruit drink line called Synergy) into Whole Foods Stores across California. This watershed would move Kombucha to national distribution and the company took off from there. Today kombucha is a $600 million industry in the United States, with industry growth rates of nearly 20 percent a year. It is such an attractive market that Pepsi and Coke have bought some of GT’s competitors to enter the space with products called KeVita and MOJO, respectively. Amid all this competition GT’s company, GT’s Living Foods, remains a family-owned business. It is widely seen as the most innovative company in the industry, with over 30 types of kombucha offerings, kefirs (a probiotic milk drink), yogurts and adaptogenic teas, and the industry sales leader, with more than half of the market. You can hear GT tell his story at

succEss: Gt daVE and KomBucha53

e-commerceThe general term for conducting business on the Internet.

virtual instant global entrepreneurship (VIGE)A process that uses the Internet to quickly create businesses with a worldwide reach.

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small BusInEss: VarIEtIEs and Impacts CHAPTER 1 9

Dorsey, who had recently left the company he created, Twitter. Jim and Jack decided to pursue Jim’s idea of a fair payment system for small merchants, and called the new company Square. Square created a series of products focused on economic empowerment and by its 10th birthday was a public company valued at over $30 billion.

With Square up and running, McKelvey again turned his attention to another serious prob-lem: the perpetual shortage of programmers. His idea to combine guaranteed job placement with free education led him to found a nonprofit called LaunchCode. LaunchCode has trained and employed thousands of people and is opening centers around the nation.

As LaunchCode began to fulfill its mission, McKelvey again handed over the management to others and turned his focus to other social problems. He is now a director of the St. Louis Fed-eral Reserve, where Jim shares his entrepreneurial skills with the people running our economy. He is also involved in several projects to help rebuild St. Louis as a vibrant, welcoming city. “I have never really had a career,” McKelvey says, “just a series of problems that I care about in different areas of my life. Sometimes the solution is a for-profit company, sometimes a nonprofit charity, and sometimes it’s government. But in each case the tools of entrepreneurship create new solutions.”

Jim McKelvey’s story also shows the two kinds of motivation we often see driving most entrepreneurs. One type is based on entrepreneurs who are going into business to improve themselves financially or to launch an improved product or service into the market. This is called opportunity-driven entrepreneurship and is evident in Jim’s problem-solving efforts in starting Square and LaunchCode. The other type is where the person becomes an entrepre-neur because he or she does not see any workable prospects for getting employed by someone else. This is called necessity-driven entrepreneurship. For Jim when graduating college, getting jobs as a glassblower was difficult, so his best way to pursue that dream was to co-create Third Degree Glass.

opportunity-driven entrepreneurshipCreating a firm to improve one’s income or a product or service.

necessity-driven entrepreneurshipCreating a firm as an alternative to unemployment.


Learn more about the topics above at these sites:

Corporate entrepreneurship: Early To Rise,

Social entrepreneurship: Ashoka,

Independent entrepreneurship: Entrepreneur magazine,

Entrepreneurship ElsewhereAs important as entrepreneurship is in the United States, it is more important elsewhere. While in any given year about 10 percent of the workforce in the United States is self-employed or con-templating starting their own business, the rates in other parts of the world can be 50 percent or even 100 percent higher than in the United States. There is a pattern (see Figure 1.2) to which countries are likely to have high rates of entrepreneurship, and which will have lower rates.14

• In nations where there is little manufacturing, most industry relates to farming and extract-ing raw materials, such as mining and forestry. In these factor-driven economies such as Pakistan, Jamaica, and Venezuela, entrepreneurship is essential to helping build personal wealth and breaking the cycle of low-wage jobs, and entrepreneurship levels are very high.

• As economies develop and go beyond basic manufacturing to a more industrialized econ-omy as is seen in countries such as Russia, Brazil, and China, it is called an efficiency-driven economy. In these nations, entrepreneurship becomes a key way to build the middle class, and a growing retail and wholesale sector grows alongside businesses serving the needs of large industrial concerns. Entrepreneurship levels in such economies are in the middle range.

factor-driven economyA nation where the major forces for jobs, revenues, and taxes come from farming or extractive industries like forestry, mining, or oil production.

efficiency-driven economyA nation where industrialization is becoming the major force provid-ing jobs, revenues, and taxes, and where minimizing costs while maximizing productivity (i.e., efficiency) is a major goal.

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small BusInEss EntrEprEnEurs: CharaCtErIstICs and CompEtEnCIEs CHAPTER 2 53

2. Which entrepreneurial competencies do you possess? Be ready to provide examples and explain why you made these choices. You can use the result of Skill Module 2.2 to aid you in this.

3. Pick small businesses that others in the class are familiar with and analyze what level of professionalization they display. Be ready to explain the basis for your classification.

4. Select a local family business owner or female or minority entrepreneur whom you admire, and research the person’s business and professional background. Interview this person

if possible. What particular challenges did he or she face? What competencies did he or she use to overcome them?

5. Go through the list of reasons people give for going into self-employment, and identify which of the reasons seem to fit you. Explain why you identify with each reason.

6. Think about the list of reasons people give for becoming self-employed. If you can, interview local entrepreneurs about their reasons and see how your real-life examples fit with the national survey results.



When he stepped off the podium in front of Federal Hall in New York City on March 4, 1797, George Washington was probably thinking not about the presidency he just handed over to John Adams, but about his audacious plan to start a new career to rescue his Virginia farm, Mount Vernon, from bank-ruptcy. For Washington, farmer, surveyor, soldier, commander, legislator, and president, this new role might be called his seventh career, but it was necessary.

Washington had owned a plantation for much of his adult life, and he tried to get back to it be-tween stints as the nation’s top general and as president. By the time he could retire to Mount Vernon, he discovered the business was in trouble. The number of people for whom he was responsible had grown from 10 when he inherited the farm to 300 as he left the presidency. Unfortunately his land-holding size and productivity had not kept pace. He was facing bankruptcy.

Knowing this even as he was preparing to end his term, Washington picked up on the idea of a distillery when James Anderson, a Scottish immigrant to Virginia, pitched the idea. Washington had shown himself supportive of inventions, having developed new ways of training mules and preparing wheat for market. He had even received America’s third patent.

Anderson’s idea made financial sense. Taxes on imported rum were high, and this was putting a crimp in the average American’s drinking habits. Back in 1797, the average American was annually drinking 5 gallons of distilled spirits like rum and whiskey (today the average is 1.8 gallons). So there was a ready market.

So, working with Anderson, Washington started with two small stills in 1797 making a 110-proof rye whiskey. Production grew in 1799 to 11,000 gallons sold in two versions (50 cents per gallon for regular and $1 per gallon for premium whiskey) and a $7,500 profit was made, making Washington America’s leading distiller. While Anderson could handle the role of running the distillery itself, the business side was in Washington’s hands. Unfortunately, he failed to train a successor. Then Washington died on De-cember 14, 1799. The distillery passed into several hands but began a seemingly unstoppable decline and was closed for good in 1814.

For more information, see the Virginia Distillers Association page with video:; and the Business Insider video:


1. What advantages would George Washington bring to James Anderson’s idea for a Virginia distillery?

2. Washington’s farm was operating even as he got the distillery off the ground. What kind of problems could that raise for the ex-president?

3. At his death, Washington’s distillery was the largest in the United States. Did this make Washington a high-growth entrepreneur or a small business owner? Why?

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52 PART 1 EntrEprEnEurs and IdEas: thE BasIs of small BusInEss


cognition, 28

action, 28

passion, 28

stakeholder, 28

perseverance, 29

promotion focus, 29

prevention focus, 29

comprehensive planners, 29

critical-point planners, 30

opportunistic planners, 30

reactive planners, 30

habit-based planners, 30

professionalization, 30

standard business practice, 30

expert business professionalization, 30

specialized business professionalization, 30

minimalized business professionalization, 30

entrepreneurial mindset, 32

competencies, 32

key business functions, 33

industry-specific knowledge, 33

resource competencies, 33

determination competencies, 33

opportunity competencies, 33

set-asides, 37

certification, 37

second career entrepreneurs, 38

veteran entrepreneurs, 38

organizational culture, 42

family business, 42

role conflict, 43

time management, 43

succession, 44

business life cycle, 46

emergence (stage), 46

existence (stage), 46

liability of newness, 47

success (stage), 47

slack resources, 47

resource maturity (stage), 47

micro-commitment, 47

takeoff (stage), 48

growth rewards, 49

income rewards, 49

flexibility rewards, 49


1. What are the different aspects of the entrepreneurial personality?

2. What would be the likely impact on a start-up if the entrepreneur had a strong promotion focus and a weak prevention focus?

3. Could someone with good industry-specific knowledge but low competency in basic business skills be successful as an entrepreneur in that industry? Why or why not?

4. When does it make sense to create a business using a mini-malized approach to professionalization? Why is that so?

5. What are the stages of the small business life cycle? What stage do high-growth ventures go through that other forms of small business do not?

6. What are the strengths and weaknesses of a team?

7. What is the major challenge facing women- and minority-owned firms? How can this be solved?

8. What makes the situation of second career entrepreneurs problematic? What can they do to smooth their way?


1. Start by writing down which aspects of the entrepreneurial personality describe you the best. Then take the online Entrepreneurial Potential Self-Assessment at

Compare how you imagined yourself to what you observed on the online quiz. Which aspects do you agree with? Which do you disagree with? Are there skills you want to develop or refine based on the results?

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kat60542_fm_i-xxxvi.indd 19 18/03/20 6:49 PM

You’re in the driver’s seat.Want to build your own course? No problem. Prefer to use our turnkey, prebuilt course? Easy. Want to make changes throughout the semester? Sure. And you’ll save time with Connect’s auto-grading too.

Make it simple, make it affordable. Connect makes it easy with seamless integration using any of the major Learning Management Systems—Blackboard®, Canvas, and D2L, among others—to let you organize your course in one convenient location. Give your students access to digital materials at a discount with our inclusive access program. Ask your McGraw-Hill representative for more information.

Solutions for your challenges. A product isn’t a solution. Real solutions are affordable, reliable, and come with training and ongoing support when you need it and how you want it. Our Customer Experience Group can also help you troubleshoot tech problems—although Connect’s 99% uptime means you might not need to call them. See for yourself at

65%Less TimeGrading


They’ll thank you for it.Adaptive study resources like SmartBook® 2.0 help your students be better prepared in less time. You can transform your class time from dull definitions to dynamic debates. Find out more about the powerful personalized learning experience available in SmartBook 2.0 at

Laptop: McGraw-Hill; Woman/dog: George Doyle/Getty Images

Checkmark: Jobalou/Getty ImagesPadlock: Jobalou/Getty Images


kat60542_fm_i-xxxvi.indd 20 18/03/20 6:49 PM

Effective, efficient studying.Connect helps you be more productive with your study time and get better grades using tools like SmartBook 2.0, which highlights key concepts and creates a personalized study plan. Connect sets you up for success, so you walk into class with confidence and walk out with better grades.

No surprises. The Connect Calendar and Reports tools keep you on track with the work you need to get done and your assignment scores. Life gets busy; Connect tools help you keep learning through it all.

Learning for everyone. McGraw-Hill works directly with Accessibility Services Departments and faculty to meet the learning needs of all students. Please contact your Accessibility Services office and ask them to email, or visit for more information.

“I really liked this app—it made it easy to study when you don't have your text­book in front of you.”


– Jordan Cunningham, Eastern Washington University

Study anytime, anywhere.Download the free ReadAnywhere app and access your online eBook or SmartBook 2.0 assignments when it’s convenient, even if you’re offline. And since the app automatically syncs with your eBook and SmartBook 2.0 assignments in Connect, all of your work is available every time you open it. Find out more at

Top: Jenner Images/Getty Images, Left: Hero Images/Getty Images, Right: Hero Images/Getty Images

Calendar: owattaphotos/Getty Images

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xxii WAlkthrough

Instructor Library

The Connect Instructor Library is your repository for additional resources to improve student engagement in and out of class. You can select and use any asset that enhances your lecture. The Connect Instructor Library includes the resources listed below.


The Instructor’s Manual includes lecture outlines, chapter summaries, descriptions of the text features, answers to end-of-chapter materials, additional activities, and references to relevant articles.


The Test Bank includes multiple-choice, true–false, and short-answer questions, along with the correct answer and a rationale for the answer. The Test Bank is also available in a computerized version that allows you to add and edit questions.


PowerPoint presentations for each chapter are available to instructors and students on the Online Learning Center. Included are figures from the text, lecture outline material, figures that expand concepts in the books, and questions that can be used in class.

Manager’s Hot Seat

Now instructors can put students in the hot seat with access to an interactive program. Students watch real managers apply their years of experience when confronting unscripted issues. As the scenario unfolds, questions about how the manager is handling the situation pop up, forcing the student to make decisions along with the manager. At the end of the scenario, students watch a post-interview with the manager, view how their responses matched up to the manager’s decisions. The Manager’s Hot Seat videos are now available as assignments in Connect.

Additional Resources

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This section is the one sure to get longer as a textbook revisions add up. We don’t mind fighting for the space, because a text like Entrepreneurial Small Business could not be made without the contributions of a lot of people. Recognizing them here is a small recompense, but one we’ve valued in their works. It is also a lesson to you fledgling entrepreneurs out there—all ventures (and believe us, a textbook is a venture) require the support and advice of many other people to be successful. Here are the ones to whom we remain beholden.

Let’s start with our mentors, professors who, through their academic lives, have served as inspiration to us all about the enduring importance of small business: Frank Hoy (Worcester Polytechnic Institute), Charles Matthews (University of Cincinnati), George Solomon (George Washington University), as well as three pioneering Coleman chairs, Gerry Hills (retired from Bradley University), Bob Brockhaus (retired from Saint Louis University), and Gerry Gunderson (retired from Beloit College).

There is also a group of faculty who were essential to ESB as it was developed and revised. Some of these started as doctoral students or protégés and are now long-established profession-als and professors in their own right while others started as colleagues and remain friends long years later—Kathy Lund Dean (The Board of Trustees Distinguished Chair in Leadership and Ethics at Gustavus Adolphus College), Lisa Gundry (DePaul University), Janice Jackson ( University of the District of Columbia), Gregory Konz SJ (Fairfield University), Laurel Boone JD (Saint Louis University), Scott Safranksi (retired from Saint Louis University), and Susan Peters (Thomas Family Center For Entrepreneurship Distinguished Professor at University of North Carolina at Pembroke). These people contributed much of the specialized expertise on which the text is built. Of course, the errors we have introduced over the years are our fault, not theirs.

At Saint Louis University, we use ESB in many of our classes, and the feedback SLU’s Entre-preneurship Teaching Team provides us is invaluable. Over the past three years that team has included Professors Jintong Tang and Vince Volpe, and adjuncts Tim Hayden (Vivid Sky, FanzLive, Saint Louis University, and Stadia Ventures), Don Dent (Dent Consulting Group), Marian Nunn (Nunn Advisory Services), Steve Epner (The Start-up Within), Laura Burkemper (The Catalyst Center), Ron Roy (Wines That Rock), Rob Boyle (Saint Louis University), Beth Schulte (UHY LLP), Tim Murphy (Ziosk), Cyril Loum (Caring Ministries), Jason Bockman (Strange Donuts), Dave Finklang (Anders CPAs), Michael Black (Goliath Trucking), and Ken Herold (Thoughtware LLC and The Startup Within). We also benefit from a group of entrepre-neurship-minded Saint Louis University faculty from across our campus called Coleman Fellows sponsored by the Coleman Foundation: Alesia Slocum, Amrita Chaturvedi, Andy Hall, Ann Scarlett, Bonnie Wilson, Constance Wagner, Dana Malkus, Dan Brewer, Dannielle Davis, David Barnett, Dorota Skowyra, Greg Beabout, Huliyar (Malik)Mallikarjuna, Jan McIntire-Strasburg, Jenna Gorlewicz, Jim Burwinkel, Jin Huang, Joanne Thanavaro, Krishnaswamy (Ravi) Ravindra, Katie Devany, Martin Brief, Michael Korybut, Michael Markee, Michael Swartwout, Mildred Mattfeldt-Beman, Patricia Lee, Ray LeBeau, Rebecca Lorenz, Sanjay Jayaram, Sarah Coffin, Scott Sell, Sridhar Condoor, Srikanth Gururajan, Steve Wernet, Steve Jenkins, Steven Howard, Whitney Linsenmeyer, and Yvette Liebesman.

We also want to thank a remarkable group of students, who agreed to share their work with you. Every business plan, industry analysis, marketing plan, and feasibility study you see in this book or on our website was authored by a student. This gives you a very realistic idea of what students can do using the ideas and approaches in ESB. Our thanks go out to our students and alums of the Entrepreneurship Program at Saint Louis University (in alphabetical order): Summer Albarcha, Beatrice Emmanuel, Tim Hayden, Corey James, Lachlan Johnson, James P. Keating, and Dan Watkins. As you would expect with our network of colleagues, there is also a host of students at other schools who contributed to the materials you see in ESB. These include Shannon Sheehee (California Polytechnic University–Pomona), Yong Xu (California Polytech-nic University–Pomona), Mingkit “Jerry” Lai (California Polytechnic University–Pomona), and Laurel Ofstein (Western Michigan University). In particular we want to thank Natalie Gamez Meyer for her contribution of the Red Jett Sweets business plan that you will see in Chapter 8.

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xxiv AcknoWledgments

ESB also builds from an ongoing series of books and special issues edited or co-edited by Jerome Katz over the years, which includes the research series Advances in Entrepreneurship, Firm Emergence and Growth (published by Emerald), the text-supplement series Entrepreneurship and the Management of Growing Enterprises (published by Sage), and special issues of journals such as Entrepreneurship: Theory & Practice, Entrepreneurship & Regional Development, Academy of Management Learning & Education, and Simulation & Gaming. To the dozens of contributors, reviewers, and co-editors who made those publications possible and that information available, a collective thanks does not do justice, but is all that is possible. Theresa Welbourne (Alabama), Ron Mitchell (Texas Tech), Tom Lumpkin (Oklahoma), and Connie Marie Gaglio (San Francisco State) deserve special mention for their unique and repeated contributions to the informational underpinnings of ESB. Two names that deserves special mention, however, are Dean Shepherd (Notre Dame) and Andrew Corbett (Babson) whose work as authors and later as a co-editors of the Emerald series shaped many of the key ideas of ESB.

Evaluation is central to the professional approach, whether in small business or in publishing. One of McGraw-Hill’s strengths is its unwavering professionalism in the pursuit of publishing. At first, it is frankly daunting. It seems that every detail of every aspect of a textbook is subject to review—and that perception turns out to be accurate. Yet it serves a purpose. When McGraw-Hill releases a textbook, it has been reviewed, rewritten, and refined until it is a truly first-class prod-uct. It is a time-consuming, painstaking, and often underappreciated effort, but it produces text-books that you have to admire.

At the core of this effort are faculty. These faculty contributed feedback about chapters within the text, the text organization as a whole, and some reviewed the entire manuscript to help us develop the best product available for your small business course. For a text as complex and far ranging as ESB, a large, diverse, and committed set of faculty offering opinions and reviews is needed, and we were fortunate to have these dedicated colleagues willing to take time to help make this edition of ESB better. They have our thanks, and should have yours too, because with-out them, opening a book like ESB would be a game of chance. These faculty include:

Mary Ewanechko Monroe Community College

Jonathan KrabillColumbus State Community College

Terry LoweIllinois State University

Lisa McConnellOklahoma State University-Oklahoma City

Martin St. JohnWestmoreland County Community College

McGraw-Hill went to extraordinary lengths to get feedback for the first through fifth editions, and the more than 155 faculty who contributed reviews and insights were central to the creation of a text that was useful from the start. It is on their contributions that this sixth edition is built. Those reviewers in whose debt we remain include David Aiken, Mark Andreason, Dave Arseneau, Jay Azriel, Calvin Bacon, Barrett Baebler, Kunal Banerji, Kevin Banning, Mike Bark, Kenneth Becker, Verona K. Beguin, James Bell, Jim Benton, Phil Bessler, George Blanc, Kay Blasingame-Boike, David Borst, Susan Bosco, Don Bradley, Steven Bradley, Harvey Bronstein, Mark Brostoff, Ingvild Brown, Russell Brown, Rochelle Brunson, Bob Bryant, Robert J. Calvin, Teresa Campbell, Sheri Carder, Kevin Carlson, Martha Carney, Shawn Carraher, Carol Carter, Ed Cerny, Robert Chelle, Jewel B. Cherry, Felipe Chia, John Christesen, Rod Christian, Michael Cicero, William Clark, Ed Cole, J. Robert Collins, Roy Cook, Dan Creed, Wayne Michael Dejnak, Christine DeLaTorre, Cory L. Dobbs, Michael Dougherty, Mike Drafke, Glenda Eckert, Micki Eisenman, Robert Ericksen, Mary Ewanechko, Michael Fathi, Mark Fenton, Gil Feiertag, Brian Fink, Dana Fladhammer, Rusty Freed, Leatrice Freer, Janice Gates, David Gay, Richard Gentry, Jim Giordano, Vada Grantham, Clark Hallpike, David Hansen, Donald Hardwick, Joe Hartnett, Gene Hastings, Brad D. Hays, Linda Hefferin, David Hensley, Diane Henslow, Kirk Heriot, Abel Hernandez, Anne Hernandez, Dorothy Hetmer-Hinds, Bob Hill, Mark Hoelsher, Edward Huff, Fred Hughes, Samira Hussein, Ralph Jagodka, Ken Jones, Lou Jourdan, Rusty

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AcknoWledgments xxv

Juban, Linda Kice, Kelly Kilcrease, Jack Kirby, Larry Klatt, Mary Beth Klinger, Vicky Koonce, Jonathan Krabill, Scott Kunkel, William Laing, Ed Langlois, John Leaptrott, Les Ledger, Art Lekacos, Richard Lester, Paul James Londrigan, Terry Lowe, Luigi Lucaccini, Leyland Lucas, Shawna Mahaffey, Tim March, Greg McCann, Lisa McConnell, Joseph McDonnell, Pam McEl-ligott, Norman McElvany, Jeffrey E. McGee, Clarence McMaster, Todd Mick, David M. Miller, Angela Mitchell, Douglas Moesel, Greg Moore, Mehdi Moutahir, John Mullane, Terry Noel, Don A. Okhomina Sr., Glenda Orosco, Eric Palmer, Gerald Perry, Fred Pragasm, Mark Pruett, Jude Rathburn, Deana Ray, William Rech, Levi Richard, Darlington Richards, Kenneth C. Rob-inson, Benjamin, Rockmore, Mary Ellen Rosetti, Matt Rutherford, John Sagi, Martin St. John, Tammy Schakett, Duane Schecter, Jim Schroeder, Gregory Schultz, Gerald Segal, Tom Sever-ance, Owen Sevier, Martin St. John, Jack Sheeks, Cynthia Singer, Bernard Skown, Rick Smith, Bill Snider, Robert Sosna, Stuart Spero, William Steiden, Deborah Streeter, John Striebich, Ram Subramanian, James Swenson, Yvette Swint-Blakely, Vanessa Thomas, Sherry Tshibangu, Kathleen Voelker, Ken Walker, Frank Weidmann, Charles Wellens, Rebecca White, Jim Whitlock, Dennis Williams, Ira Wilsker, MaryLou Wilson, John Withey, Betty Wong, and Robert Zahrowski.

Penultimately, there is the team at McGraw-Hill. We had both written books before and thought we had some appreciation of the process of book publishing. However, publishing a textbook is a far cry from publishing text supplements or research tomes. In those cases, it is usu-ally just words, with an occasional figure. For a textbook, it is figures, pictures, tables, key terms, URLs, cases of all different lengths, examples, discussion questions, experiential exercises, skill-building exercises, endnotes, business plans, manuals, website components, and words. And like a car assembled at one point where dozens of items miraculously come together, the assembly of a modern textbook is a similar experience.

Jennifer Blankenship served as our developmental editor—the person who has to check all the elements and bring them together at the end. She took on an awesome amount of responsibility for ESB late in the project, and made sure we were able to get this book to you on time and up to the usual high standards of McGraw-Hill. The job of a portfolio manager in a revision is that of the corporate entrepreneur or product champion, assembling the resources to make it happen, and motivating everyone to keep his or her eyes on the timeline, budget, book outline, and, oh, yes, the market. For ESB 6e that role was ably held by Laura Spell, who quietly went about keeping it all on track. Lisa Granger is now our marketing manager and the person responsible for the selling effort that got ESB into your hands. As such, she comes onboard late in the process, but at the critical time for the book’s commercial success. In addition, there are people such as Mark Chris-tianson, our program manager, Beth Blech, our designer, Maria McGreal and Emily Windelborn, our content project managers, and Traci Vaske, our content licensing specialist, who made all this possible. To each and every one of these fine publishing professionals, we offer our deepest ap-preciation. One other former McGraw-Hill professional, Ryan Blankenship, continues to have a special place in our hearts. He was the person who recognized the value of ESB and sold McGraw-Hill on our idea, and sold us on McGraw-Hill. We remain in his debt. What is wonderful is that our tie to Ryan was renewed in this edition through the involvement of his wife, Jennifer, as a de-velopmental editor. We always feel our best when we know a Blankenship is looking after us.

Keeping with this networking idea, you will see that this book makes extensive use of several strategic partnerships. These include the Global Student Entrepreneur Awards program (, which celebrates collegiate entrepreneurs, and the Panel Study of Entrepreneurial Dynamics. As the Internet becomes a more integral part of education, we have benefited from partnerships with websites that have developed great material that we use and build on in ESB 6e. These include, which has a great free set of online templates of start-ups;, which makes available for free a broad range of business canvases; and, which offers a unique web-based model for computing business valuations.

In particular, there has been an outpouring of new insights on handling some of the toughest challenges in start-ups, and we’ve built on the works of several brilliant thinkers including Alex

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xxvi AcknoWledgments

Bruton (, whose model for linking feasibility analysis, business model canvases, and business plans we follow in this volume; Justin Wilcox (, whose approaches to customer research offered new insights; Eric Ries, Steve Blank, and Bob Dorf, whose work on lean business practices and, in particular, the customer development approach helped us improve our marketing sections; Alex Osterwalder and Yves Pigneur and Ash Muraya, who through their business canvas approaches helped inform our own work; and John Mullins and Dileep Rao and the other faculty at Mike Morris’s Experiential Classroom as well as Jerry’s colleagues at the Billiken Angel Network, whose insights helped us take our fi-nancing chapter to the next level. We are grateful for the continuing support of ESB from all of these people. From examples such as these we hope you will see the practical value of strategic partnerships, which we talk about in Chapters 3 and 7. The fact is that we can show you more about the world of small business because of our partnerships, and that makes the book, and your experience, better.

Finally, Entrepreneurial Small Business will pass its thirteenth year of existence with this edi-tion, and the thinking and talking about it stretches back almost 30 years, in classrooms, at meals, at social get-togethers, and over many, many phone calls, emails, presentations, and pa-pers. What started as a labor of learning among professors and protégés became a labor of love among colleagues. Often this labor was possible because of time contributed by (or stolen from) families and significant others. The number of meals missed, calls taken over the family phone, late nights spent over the computer, or weekends spent at work over the past 30 years are innu-merable. What those family members and significant others saw was the passion for discovery and the excitement of finding and telling others about a better way of doing things in small busi-nesses or explaining small business. For all of the network, and especially the authors, that sup-port was the critical enduring ingredient in making Entrepreneurial Small Business a reality. For that reason, we want to recognize the enormous emotional and motivational contributions made by Dave Peters, James F. Amrhein, Nora L. Peterson, Josh Katz, Lauren Katz, and Cheryl Nietfeldt.

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Part OneEntrepreneurs and Ideas: The Basis of Small Business 1

1. Small Business: Varieties and Impacts 2

2. Small Business Entrepreneurs: Characteristics and Competencies 26

3. Small Business Environment: Managing External Relations 54

4. Small Business Ideas: Creativity, Opportunity, and Feasibility 84

Part TwoSmall Business Paths and Plans 117

5. Small Business Entry: Paths to Part-Time Entrepreneurship 118

6. Small Business Entry: Paths to Entrepreneurship 156

7. Small Business Strategies: Imitation with a Twist 192

8. Business Plans: Seeing Audiences and Your Business Clearly 224

Part ThreeMarketing in the Small Business 281

9. Small Business Marketing: Customers and Products 282

10. Small Business Promotion: Capturing the Eyes of Your Market 332

11. Small Business Pricing, Distribution, and Location 372

Part FourAccounting, Cash, and Finance in the Small Business 427

12. Small Business Accounting: Projecting and Evaluating Performance 428

13. Cash: Lifeblood of the Business 472

14. Small Business Finance: Using Equity, Debt, and Gifts 504

15. Assets: Inventory and Operations Management 538

16. Small Business Protection: Risk Management and Insurance 578

Part FiveManagement and Organization in the Small Business 607

17. Legal Issues: Recognizing Your Small Business Needs 608

18. Human Resource Management: Small Business Considerations 644

Personal Net Worth Calculation Template  P-1Glossary G-1End Notes EIndexes I

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Skill Module 2.2 Competency Self-Assessment 33

The Sociology of Entrepreneurs 35Women and Minorities in Small Business 35Second Career and Veteran Entrepreneurs 38

Entrepreneurship in Teams and Families 40Entrepreneurial Teams 40Family Businesses 42

The Entrepreneurial Life and Its Rewards 46The Entrepreneurial Life Cycle 46Rewards for Starting a Small Business 49

Chapter Summary ■ Key Terms ■ Discussion Questions ■ Experiential Exercises ■ Mini-Case

CHAPTER 3Small Business Environment: Managing External Relations 54

Focus on Small Business: Summer Albarcha and the Controversial Skirt 55

The Environment of Small Business 56The Elements of the Small Business

Environment 57Skill Module 3.1 Finding Your Trade or

Professional Association and Related Magazines 58

Environmental Scanning for Small Businesses 59

Skill Module 3.2 Finding Out How the Small Business Economy Is Doing 60

Skill Module 3.3 Scan Your Environment with the Flipboard App 61

Skills for Managing Relations with the Environment 62Building Legitimacy 62Developing Your Networks 64

Skill Module 3.4 Asking for Help 67Skill Module 3.5 Personal Networking

Skills 68Skills for Making the Right Decision 70

Handling a Crisis 70Achieving Sustainability 71Making Ethical Decisions 72

Chapter Summary ■ Key Terms ■ Discussion Questions ■ Experiential Exercises ■ Mini-Case

CHAPTER 1Small Business: Varieties and Impacts 2

Focus on Small Business: Robin Rath, Pixel Press 3

Starting an Entrepreneurial Small Business: Four Key Ideas 4

Skill Module 1.1 The Small Business Online Scavenger Hunt 5

Entrepreneurs Are Everywhere 5CSI: Entrepreneurship 7Entrepreneurship Elsewhere 9

The Many Types of Entrepreneurial Small Businesses 10Entrepreneurs and Firm Growth Strategies 11

Myths about Small Businesses 13Getting Started Now: Entry Competencies 15Skill Module 1.2 BRIE Self-Assessment 16Small Business and the Economy 17

New Jobs 17New Ideas 17New Opportunities 18New Markets 19Challenge and the Entrepreneurial Way 21

Chapter Summary ■ Key Terms ■ Discussion Questions ■ Experiential Exercises ■ Mini-Case

CHAPTER 2Small Business Entrepreneurs: Characteristics and Competencies 26

Focus on Small Business: Women’s Basketball Team Owner and General Manager Khalia Collier 27

The Psychology of Entrepreneurs 28The Five Ps of Entrepreneurial Behavior 28

Skill Module 2.1 Entrepreneurial Personality Overview 31Entrepreneurial Operational Competencies 32

Part OneEntrepreneurs and Ideas: The

Basis of Small Business 1

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contents xxix

Pop-Up Businesses 141Mobile Offices 142Virtual Offices, Executive Offices, and

Incubators 143Doing Business without a Business Organization:

using Consignments and Agents 143Key Considerations for Success in Part-Time

Entrepreneurship 144Success Factors for Part-Time Businesses 145

Boundary: Separating and Balancing Business and Home 145

Exchange: Dealing with Others 146Pricing and Costing 147

What Are the Challenges of Being an Entrepreneur Part Time? 147Delegation and Outsourcing 147Ethics and Part-Time Small Business 149Moving from Part-Time to Full-Time

Entrepreneurship 150

Chapter Summary ■ Key Terms ■ Discussion Questions ■ Experiential Exercises ■ Mini-Case

CHAPTER 6Small Business Entry: Paths to Entrepreneurship 156

Focus on Small Business: Paul Hedrick, How I Got into This Business 157

Planning a Path into Business 158The Five Paths to Business Ownership 163Starting a New Business 164

Advantages of Start-Ups 165Disadvantages of Start-Ups 165Starting a New Business in an Existing Field 165Increasing the Odds of Start-Up Success 166

Franchising a Business 170What Is Franchising? 170Advantages of Franchising 171Franchise Opportunities 172Legal Considerations 173

Buying an Existing Business 175Advantages of Purchasing an Existing Business 175Disadvantages of Purchasing an Existing Business 175Finding a Business to Buy 175

Skill Module 6.1 Finding a Business for Sale 176Investigating Entrepreneurial Opportunities:

Performing Due Diligence 177Determining the Value of the Business 179

CHAPTER 4Small Business Ideas: Creativity, Opportunity, and Feasibility 84

Focus on Small Business: Mary Elizabeth Coleman and the Feasibility Study 85

Ideas, Opportunities, and Businesses 86From Ideas to Opportunities through

Creativity 90Avoid Pitfalls 93Screen Ideas 94Skill Module 4.1 Checking Ideas on the Web 95Skill Module 4.2 Scoring Ideas in an IDEO

Screen 96Make Sure an Idea Is Feasible 98

The Business Model Canvas Approach 98The Classic Feasibility Study 101

Ways to Keep On Being Creative 105Skill Module 4.3 Great Ideas for Making Idea-

Prone Companies 105Chapter Summary ■ Key Terms ■ Discussion Questions ■ Experiential Exercises ■ Mini-CaseAppendix A Sample Feasibility Study  110

Part TwoSmall Business Paths

and Plans 117

CHAPTER 5Small Business Entry: Paths to Part-Time Entrepreneurship 118

Focus on Small Business: Carla Brauer  119Why Part-Time Businesses Are Important 120When to Consider Part-Time

Entrepreneurship 122What Kinds of Part-Time Entrepreneurship

Exist? 123Home-Based Businesses 124Internet Informational Websites 129E-commerce and eBay Websites 133

Skill Module 5.1 Checklist for Maximizing Success on eBay 137The Next Best Things to a Home-Based

Business 139

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Post Start-Up Tactics 214Chapter Summary ■ Key Terms ■ Discussion Questions ■ Experiential Exercises ■ Mini-CaseAppendix Five Steps to an Industry

Analysis 220

CHAPTER 8Business Plans: Seeing Audiences and Your Business Clearly 224

Focus on Small Business: Krista Clement and Helper Helper 225

Business Plan Background 226The Business Plan Story: Starting Small and

Building Up 229The Vision Statement 229The Elevator Pitch 230

Skill Module 8.1 How to Write Your Elevator Pitch 231The Executive Summary 232

The Business Plan 234Cover Letter 236Title Page 236Table of Contents 237Executive Summary 237Company, Product/Service, and Industry 237The Market 238The Organization 239The Financial Summary 241The Appendixes 241The Mechanics of a Business Plan 242

Focusing Your Business Plan 246The Most Common Critical Risks in a Plan 248Pitching Your Plan 252

Crafting Your Pitch Deck 254Storytelling and the Art of the Pitch 255The Mechanics of Pitching 256Closing Thoughts on Business Plans 258

Chapter Summary ■ Key Terms ■ Discussion Questions ■ Experiential Exercises ■ Mini-CaseAppendix A Example Cover Letter and

Résumé 262Skill Module 8.2 How to Write a Cover

Letter 262Skill Module 8.3 How to Write a Résumé 263Appendix B Red Jett Sweets

Business Plan 266

Skill Module 6.2 Estimating a Business’s Valuation on 180Structuring the Deal 182Buyouts 182Buy-Ins 183Key Resource Acquisitions 183Takeovers 183

Inheriting a Business 184Family Businesses Succession 184Developing a Formal Management Structure 184Succession Issues for the Founder 184Succession Issues for the Successor 185Ownership Transfer 186

Professional Management of Small Business 187How to Get Out of Your Business 187

Chapter Summary ■ Key Terms ■ Discussion Questions ■ Experiential Exercises ■ Mini-Case

CHAPTER 7Small Business Strategies: Imitation with a Twist 192

Focus on Small Business: Joe Fischer, Zoë Scharf, and the Strategy Behind Greetabl 193

Strategy in the Small Business 194Goals: The First Step of Strategic Planning 195

Owner Rewards 195Product/Service Idea and Industry 195

Skill Module 7.1 Finding Your Magic Number 196

Skill Module 7.2 Finding Your Firm’s Industry 198Imitation and Innovation 198To Whom Will You Sell? 200

Customers and Benefits: The Second Step of Strategic Planning 201Value and Cost Benefits 202

Skill Module 7.3 Checking Customer Opinions Online 203

Skill Module 7.4 Mapping Your Distinctive Competence 205

Industry Dynamics and Analysis: The Third Step of Strategic Planning 206Tool: Industry Analysis 207

Skill Module 7.5 Short and Sweet Industry Analysis 207

Strategy Selection: The Fourth Step in Strategic Planning 210

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Skill Module 9.11 Creating Your Idea Notebook 320Product Life Cycle 324Service Life Cycle 326Using the Product Life Cycle 327

Chapter Summary ■ Key Terms ■ Discussion Questions ■ Experiential Exercises ■ Mini-Case

CHAPTER 10Small Business Promotion: Capturing the Eyes of Your Market 332

Focus on Small Business: Addie Swartz and Accessories for Girls Who Are “between Toys and Boys” 333

The Need for Promotion 334Promotion Using the PESO Model 336

The PESO Model of the Media Landscape 337Skill Module 10.1 Creating Your Brand

Promise 339Skill Module 10.2 Getting Started with Google

Analytics 353Developing Your Promotion Strategy 356

The Process of Personal Selling 357Skill Module 10.3 The Art of Closing 359Customer Retention: Keeping and Growing

Customers after the Sale 360Handling Postsale Problems 360CRM in Two Steps 362Growing Customer Sales 364

Sales Forecasting 366Skill Module 10.4 Sales Forecasting from a Fixed

Inventory 367Chapter Summary ■ Key Terms ■ Discussion Questions ■ Experiential Exercises ■ Mini-Case

CHAPTER 11Small Business Pricing, Distribution, and Location 372

Focus on Small Business: Steve Niewulis and Tap It! 373

Pricing 374The Fundamentals of Pricing: Margin Pricing and

Elasticity 374The Fundamentals of Pricing: Value 377The Fundamentals of Pricing: Contextual

Factors 378The Pricing Toolbox 381

Part ThreeMarketing in the Small

Business 281

CHAPTER 9Small Business Marketing: Customers and Products 282

Focus on Small Business: Revisiting Greetabl 283The Marketing Process 284Understanding the Customer 286

Customer Roles 286Initial Customer Profiles 287

Skill Module 9.1 Interviewing Customers in an Unbiased Way 288

Skill Module 9.2 Creating a Basic Customer Profile 288Target Market 289

Segmenting Your Market 293A Segmentation Example 295

Skill Module 9.3 Finding Demographic Information by Zip Code 296

Marketing Research 299Primary Research 299

Skill Module 9.4 How to Conduct a Focus Group 301Secondary Research 304

Skill Module 9.5 Using Facebook Audience Insights 305

The Basics: Crafting Your Value Proposition 310Skill Module 9.6 Customer-Focused Value

Proposition Design 310Skill Module 9.7 Developing a Value Proposition 311Skill Module 9.8 Coordinating Your Distinctive

Competence and Value Proposition 312Planning for Marketing 313Product 315

Goods versus Services 315Skill Module 9.9 Facing Intangibility and

Perishability 317The Total Product Approach 317

Skill Module 9.10 Learning about the Total Product of You 318New Product Development Process 318

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Skill Module 12.1 Why Does Accounting Matter? 437Accounting Systems for Small Business 438

Setting Up an Accounting System 439Financial Reports 441

Income Statement 442Balance Sheet 444Cash Flow Statement 448

Skill Module 12.2 Applying for a Loan 448

Uses of Financial Accounting 451Reporting to Outsiders 452Record Keeping 452Taxation 452Control of Receivables 452Analysis of Business Operations 452

Uses of Managerial Accounting 453Cost-Volume-Profit Analysis 453

Preparing Pro Forma Financial Statements for Your Business Plan 456Planning/Budgeting 456The Process of Budgeting to Produce Pro Forma

Financial Statements 457Completing a Master Budget 458The Sales Budget 459The Purchases Budget 459The Cost of Goods Sold Budget 461The Inventory Budget 461The Labor Budget 461The Selling, General, and Administrative Expense

Budget 462Budgeted Income Statement 462Completing a Comprehensive Budget 463Controlling 463

Decision Making 464Chapter Summary ■ Key Terms ■ Discussion Questions ■ Experiential Exercises ■ Mini-Case

CHAPTER 13Cash: Lifeblood of the Business 472

Focus on Small Business: Creatacor, Inc.  473Money as the Key Idea 474Cash and Cash Equivalents 474The Importance of Cash Management 475Money In/Money Out—Just How Important

Is It? 476

Skill Module 11.1 Pricing Psychology 383Pricing in Practice 387Sales Promotions 390

Distribution 393Direct Marketing 394

Skill Module 11.2 Building a Mailing List 396

Skill Module 11.3 Making Mail Order Ads Work 397Distribution Issues for Direct Marketing 403International Strategies 405

Location 410Service Firms 411Manufacturers 412Site Selection 413Leasing 417Layout 420

Chapter Summary ■ Key Terms ■ Discussion Questions ■ Experiential Exercises ■ Mini-Case

Part FourAccounting, Cash, and Finance

in the Small Business 427

CHAPTER 12Small Business Accounting: Projecting and Evaluating Performance 428

Focus on Small Business: Justin Beegel of Infographic World, Inc. 429

Why Accounting Is Important for Small Business Success 430Financial Accounting 431Managerial Accounting 431Tax Accounting 431

The Concepts That Make Accounting Work 432Business Entity Concept 432Going Concern Concept 432Qualitative Characteristics of Useful Financial

Information 432The Greater Claim to Assets of Creditors 433The Accounting Equation 434The Balance Sheet 434Costs, Revenues, and Expenses 435Why Do Accounting? 437

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Skill Module 14.2 Obtaining Your Credit Report 520Customer Funding of Your Business 521

Financing with Gifts: Winning Grants for Your Business 523Institutional Gifts 523

Skill Module 14.3 Finding SBIR Grants 525Personal Gifts 525Gifts via Crowdfunding 527

What Type of Financing Is Right for Your Business? 528

Financial Management for the Life of Your Business 530Tools for Financial Management 530Financial Management for Start-Up 531Financial Management for Growth 531Financial Management for Operations 533Financial Management for Business Exit 533

Chapter Summary ■ Key Terms ■ Discussion Questions ■ Experiential Exercises ■ Mini-Case

CHAPTER 15Assets: Inventory and Operations Management 538

Focus on Small Business: Protecting Current Assets—Inventory Theft 539

Managing Short-Term Assets 540Accounts Receivable 540

The Pros and Cons of Offering Credit to Customers 540

The ABC’s of Extending Credit to Your Customers 541Use Your Accounts Receivable as a Source of

Financing 541Skill Module 15.1 Using Receivables to Raise

Immediate Cash 543Managing Inventory 544

Determining the Appropriate Level of Inventory 544Scheduling Ordering and Receipt of Inventory 545Just-in-Time Inventory Systems 546Other Approaches to Inventory Control 547

Value of Assets in Your Business 549Determining the Value of Your Operating

Assets 549Determining the Value of Inventory 551

Property, Plant, and Equipment 552Skill Module 15.2 Understanding Whole of Life

Costs for Capital Budgeting 553

Planning Cash Needs 479The Sales Budget: Forecasting Sales Receipts 479The Cash Receipts Budget 480Forecasting Cash Disbursements 482The Comprehensive Budget—the Pro Forma Cash

Flow Statement 484Skill Module 13.1 A Comprehensive

Budget 485Managing Cash Flows 485

Why Worry about Managing Cash Flows? 485Protecting Cash from Being Stolen 486

Preventing Cash Flow Problems 487Steps to Take for Effective Cash Flow

Management 487Techniques to Increase Cash Inflows 489Techniques to Decrease Cash Outflows 491

Controlling Cash Shortages 495In Review 496Chapter Summary ■ Key Terms ■ Discussion Questions ■ Experiential Exercises ■ Mini-CaseAppendix Reconciling Bank Balances with

Company Book Balances 501

CHAPTER 14Small Business Finance: Using Equity, Debt, and Gifts 504

Focus on Small Business: Bungii—a Pickup Truck on Demand 505

Sources of Financing for Small Businesses 506Understanding the Three Types of Capital

Funding 509Financing with Equity 509

Skill Module 14.1 Determining Personal Net Worth 509Financing with Debt 510Financing with Gifts 510

Financing with Equity: Getting Others to Invest in Your Business 511Equity Capital from the Investors’ View 511Hybrid Funding—Not Quite Equity, Not Quite a

Loan 512Methods to Obtain Equity Capital 512Angel Investors 517Equity Capital from the Owner’s View 518Why Use Equity Capital? 518

Financing with Debt: Getting a Loan for Your Business 519

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Managing Risk from Violations of Tax Regulations 592

Managing Risk from Employee Violation of Government Regulations 594

Using an Internal Audit as a Tool to Manage Risk 595

Insuring against Risks 596Using Insurance to Manage Risks 596Developing a Comprehensive Insurance

Program 596Insuring the Property of the Business 599

Sharing Risk 602Joint Ventures 602Industry Groups for Insurance Coverage 603Government Funding of Risky Ventures 603

Chapter Summary ■ Key Terms ■ Discussion Questions ■ Experiential Exercises ■ Mini-Case

Part FiveManagement and Organization

in the Small Business 607

CHAPTER 17Legal Issues: Recognizing Your Small Business Needs 608

Focus on Small Business: Brian “B-Money” Hughes 609

You and the Law 610You Need a Good Attorney 612Can I Do This for Free? 613Skill Module 17.1 Getting Started on Legal Issues

Online 615Small-Claims Court 616Choosing a Business Name 617Choosing a Business Form 618

Taxation Issues 622Nonprofits and Social Benefit Organizations 624

Everything Is Negotiable, and Negotiation Is Everything 624

Legal Liabilities 626Torts: Responsibility for Your Actions and the Actions

of Employees 626The Independent Contractor Argument 626The Scope of Authority Argument 628

The Capital Budgeting Decision 553Payback Period 554Rate of Return on Investment 555Net Present Value 556

Rent or Buy 556Advantages and Drawbacks of Renting 556Financing with Leases 556Fractional Ownership and Other Forms of Joint

Ventures 557Managing Operations 558

Inputs into Your Business 558Business Operations Comprise Converting

Time and Materials into Services and Products 558

Business Outputs 560Feedback 560Measuring and Improving Productivity 560Outsourcing to Improve Productivity 561Operations Management Challenges for Product-

Based Firms 563Operations Management Challenges for Service

Firms 563Documenting the Operations of Your

Business 564Chapter Summary ■ Key Terms ■ Discussion Questions ■ Experiential Exercises ■ Mini-CaseAppendix A Economic Order Quantity 571Appendix B Time Value of Money and Discounted

Cash Flow Analysis 573

CHAPTER 16Small Business Protection: Risk Management and Insurance 578

Focus on Small Business: The Threat to Small Business Computer Systems 579

Risk in Small Business 580Thinking about Risk 580Risks Associated with Specific Business

Operations 581Risks Related to the Property of the

Business 581Events Related to Personnel 581Events Related to Customers and Others 583

Managing Risks 584Managing Risk to Tangible Property 584Managing Risk to Intangible Property 590Managing Risk Resulting from Events Involving

Personnel 591

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contents xxxv

Skill Module 18.2 Writing Instructions and Procedures 659

Rewarding Employees 660Compensation, Benefits, and Perks 661Skill Module 18.3 Finding Local

Salaries and Benefits Information Online 662Bonuses and Long-Term Incentives 664Health Insurance 664Retirement Plans 664Perks 664

HRM at the Founder’s Level 666The Leadership You Provide 666The Advisers You Secure 667The Partners You Select 667

Human Resource Issues in the Family Business 668Nepotism, Meritocracy, and the Family

Business 668Managing Privilege 669Good Human Resource Practices for All

Businesses 670Dividing Up Ownership and Dividends 671

Chapter Summary ■ Key Terms ■ Discussion Questions ■ Experiential Exercises ■ Mini-Case


SOX and Dealing with Big Businesses 628What Is the Right Level of Paranoia? 629

Litigation versus Arbitration versus Mediation 630

Commonsense Ways to Avoid Torts 631Contracting 632

Subcontracting 633Internet Issues in Contracting 633

Intellectual Property 634Patents and Trade Secrets 636Copyright 639Trademarks 639

Skill Module 17.2 Checking Out Trademarks Online 640

Chapter Summary ■ Key Terms ■ Discussion Questions ■ Experiential Exercises ■ Mini-Case

CHAPTER 18Human Resource Management: Small Business Considerations 644

Focus on Small Business: Jesse Mecham and You Need A Budget 645

The Bigger Small Business: Hiring Employees 646

Attracting Employees 650Matching the Worker to the Work 652

Writing a Job Description 652Skill Module 18.1 Crafting a Job

Description 655Evaluating Job Prospects 656Selecting the Right Person 658

Training Your Employees 658Initial and Ongoing Training Methods 659Three Guidelines for Training 659

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Entrepreneurs and Ideas: The Basis of Small Business

1P A R T O N E

CHAPTER 1: Small Business: Varieties and Impacts

CHAPTER 2: Small Business Entrepreneurs: Characteristics and Competencies

CHAPTER 3: Small Business Environment: Managing External Relations

CHAPTER 4: Small Business Ideas: Creativity, Opportunity, and Feasibility

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Small Business: Varieties and Impacts



● Robin Rath of Pixel Press with kids drawing games to go into Pixel Press. How did he use his passion for video gaming to help him find his business idea? Pixel Press

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When Robin Rath was a kid, he was an avid player of video games like Metroid and Super Mario Brothers, and when he wasn’t playing he was designing new levels of his favorite games in his head and on paper. But he realized that video gaming was part art and part programming, and that helped him set his course. Following an undergraduate degree from Saint Louis University (SLU) bridging communications technology with fine and studio arts, he was positioned to realize his dream.

But game producers were thin on the ground in St. Louis, so Robin’s strategy was to find jobs to hone his programming skills during the day and create his own firm, Roundthird, to develop games as his side gig on nights and weekends. His main work included stints at increasingly re-sponsible and demanding positions at six different companies in the programming and marketing industries in St. Louis. Meanwhile, he and his Roundthird partner, Jon Gettys, released Radial 50 for IOS, a circular takeoff on the classic Breakout brick-breaking video game. Robin’s day and side gigs helped him develop the in-depth knowledge of programming, project planning, marketing, and networking which convinced him that given the right idea, he would be ready to go full time as an entrepreneur.

The idea that led to full-time entrepreneurship was Pixel Press, a piece of software for iPhones and iPads that would let regular people with no programming skills create playable games reminis-cent of Super Mario on their Apple devices. While the idea was ambitious, it was possible, and as he got word out, Pixel Press got favorable press from NBC News, CNET, Fast Company, and others. Building on this, Robin created a Kickstarter campaign to crowdfund his dream. You can see the campaign and watch the original pitch at The campaign was successful, topping $100,000. With that money and with what he had saved, Pixel Press made it to market. Within two years, Pixel Press announced a partnership with Cartoon Network (CN) resulting in the Adventure Time Game Wizard, which would let players create games with CN characters. From the success of that partnership, Pixel Press went on to release its next product that represented its first foray into toys and gaming, form-ing partnerships with Mattel and Disney to bring products to store shelves in the United States and internationally.

Focus on Small Business: Robin Rath, Pixel Press1








After you complete this chapter, you will be able to:

LO 1-1 Understand the scope of small business in the United States.

LO 1-2 Differentiate between small businesses and high-growth ventures.

LO 1-3 Dispel key myths about small businesses.

LO 1-4 Identify actions key to becoming a small business owner.

LO 1-5 Recognize how small businesses are important to our economy and your community.

LO 1-6 Recognize the seven key strategies of the entrepreneurial way.

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4 PART 1 EntrEprEnEurs and IdEas: thE BasIs of small BusInEss

In speaking with Robin, he credits a constant presence of an entrepreneurial spirit around him from a young age and throughout his education: “Both of my parents were entrepreneurs and encour-aged me early on in things like ‘baseball card shops’ not just in our basement but online as well, when making a website was still very hard. At SLU, I spent all four years as an intern in the Entrepreneurial Studies department and helped coordinate one of the country’s first entrepreneurial awards hosted by SLU—the Global Student Entrepreneur Awards (GSEA). Seeing college students win $10,000 to help their business start was inspiring.” Robin adds, “This also has motivated me to stay active with the Entrepreneurship Club at SLU, including all the work they do over the summer with high school students. Ultimately we are learning every day, and staying engaged at all levels helps me stay fresh and grounded.”

DISCUSSION QUESTIONS1. Do you think Robin was originally thinking about starting a business when he was working in pro-

gramming and marketing positions in other people’s companies?

2. What drove Robin to start a business of his own?

3. How important were contacts and connections to the growth of Robin’s business?

4. Do you think Robin would credit his step-by-step approach with the success of his business? What is your opinion?

Starting an Entrepreneurial Small Business: Four Key IdeasRobin’s story makes a simple point—you can start a small business, and there are ways to help you be a success at it. Consider the four key things that Robin did right:

1. Believethatyoucandothis: Robin’s belief in himself and what needed to be done to make Pixel Press’s app powered his efforts. That belief in yourself is called self-efficacy, and learning how to start a business in this class and from this book will help you build it for yourself.2 Those who believe in themselves and in the passion of their beliefs are more likely to keep at it until they succeed.

2. Planning+Action=Success: A plan without action is futile. Actions without plans are usually wasted. Success comes from having the right sort of plan to get you to the right actions as quickly as possible. Like Robin, those who plan and act are the ones who most often succeed.3

3. Helphelps: Successful entrepreneurs learn—from other entrepreneurs, from experts in their chosen field, from potential customers, or even from their professors!4 Skill Module 1.1 will help you find some of the best sources of help on the web. Remember, those who get help succeed bigger and more often.

4. Dowell.Dogood: In the long run, you will depend on partners, investors, employees, cus-tomers, and neighbors. If you always remember, as Robin has, to do good for others as you try to do well in your business, you’ll feel better about your business and life, and those around you will too.5

Entrepreneurial Small Business believes in the power of those four ideas, and we’ll help you un-derstand each of them and how to use them to make your entrepreneurial dreams come true. There are literally millions of those entrepreneurial dreams out there because there are so many ways to become an entrepreneur. Almost every year, while more than 400,000 new firms with employees are created, there can be 10 to 15 times that many new owner–only firms, so it is safe to say that there are 6 million new firms a year, and yours can be one of them.6

small businessInvolves 1–50 people and has its owner managing the business on a day-to-day basis.

self-efficacyA person’s belief in his or her ability to achieve a goal.

entrepreneurA person who owns or starts an organization, such as a business.

LO 1-1 Understand the scope of small business in the United States.

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small BusInEss: VarIEtIEs and Impacts CHAPTER 1 5

The vast majority of new firms go through similar start-up processes. The firms most likely to be successful follow a four-step process, shown in Figure 1.1.

• Feel: This is where the entrepreneur has a feeling—about maybe starting a business or maybe creating a particular product or service. This is what starts the founding process. We’ll talk about entrepreneurs and the feelings leading to their business in Chapter 2.

• Check: Smart entrepreneurs check the likelihood for success of their idea through feasibil-ity analyses (see Chapter 4) or customer development processes (see Chapter 9), repeating these until they have a winning and saleable idea.

• Plan: Getting from the idea to the business can be done by small-scale, part-time start-ups (see Chapter 5), lean business practices approaches (see Chapter 9), pilot testing (see Chapter 4), business modeling, or business plan creation (see Chapter 8).

• Do: Regardless of the type of planning approach you choose to implement your business activity, you will find that you need to refine your approach until you have a successful firm, including additional rounds of refinement and revising.

Entrepreneurs Are EverywhereIn addition to Robin Rath of Pixel Press, the United States had 15.5 million other full-time en-trepreneurs working in 2015, according to the U.S. Census Bureau.7 If we include people pursu-ing their entrepreneurial dreams on a part-time basis, we need to add another 50 million people.8 What were they doing? Just about everything! Entrepreneurs could be found in almost every type of work there is, literally in hundreds of occupations. In fact, there are occupations

occupationThe type of activity a person does regularly for pay.

S K I L L M O D U L E1 .1

The Small Business Online Scavenger Hunt

It can be mind-boggling to discover how much material is on the web ready to help aspiring entrepre-neurs. To help you get a feel for what is out there, we have put together a web scavenger hunt focusing on key information. In a few cases you may have to register, but all registrations for websites listed here are free. Along the way you will get to peruse some of the “best of the best” entrepreneurship information on the web.

1. If you wanted to find stories about business in Albuquerque (or run the name of a business from there to see what it has done), which site would give you the biggest selection of local stories?,,

2. Which of the following sites offers you a free online business plan maker?,,

3. Which site can connect you to free local help for starting and growing your business?,,

4. You can search for patents for free at or Which will also let you search for trademarks?

5. If you want to find out what the profit margins are for businesses in the restaurant industry, which site would give you the answer?,,

By the time you have checked out these sites, you will be up to speed on some of the largest and most cred-ible sets of free, high-quality small business information available today.

Feel Check Plan Do FIGURE 1.1

The Entrepreneurial Process

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6 PART 1 EntrEprEnEurs and IdEas: thE BasIs of small BusInEss

composed mostly of entrepreneurs. Table 1.1 shows the 10 occupations with the largest num-bers of entrepreneurs as well as the 10 occupations with the highest percentages of entrepre-neurs. Note that “owner-managers” are an occupation in their own right, but can appear in any other industry.

Notice that while there are entrepreneur-rich occupations that require college and even gradu-ate school, there are also occupations popular with entrepreneurs with very basic entry require-ments. What is most important here is finding something you want to do. When you decide on what your business is going to be, you are choosing your occupation. As the entrepreneur, you may be the owner of the business, but your occupation will depend on what type of goods or services you and your firm are producing. So the owner of an online store is a retailer, while the owner of a construction firm will be a construction manager. Robin Rath is an app maker be-cause Pixel Press makes apps that he sells online. Whatever you want to do, there is probably a way to do it as an entrepreneur.

Truly entrepreneurial businesses are characterized by novelty in their products, services, or business models. Small businesses, on the other hand, are imitative in nature, with most small firms doing what other firms do, with only slight variations. But when we think about the people who start firms, the situations they face are situations of novelty. So whether he or she starts the successor to or the pizzeria on the corner, the person who starts a business is living the life of the entrepreneur. We recognize this distinction and address the challenges facing entrepreneurs, while focusing on the small businesses they plan to cre-ate or enter.

In Entrepreneurial Small Business we use the popular broad definition of entrepreneur10— anyone who owns a business is an entrepreneur. This, of course, means anyone who is a small business owner is an entrepreneur.11 It also means that the self-employed, anyone who works for himself or herself instead of for others, is also an entrepreneur. As noted above, according to the Census Bureau, there were about 15.5 million full-time self-employed people in 2015. In-cluding entrepreneurs who worked part time in 2015 added over another 50 million people to the number. Within the population of entrepreneurs, it is sometimes useful to split out certain groups. One of these is founders, the people who start a business, whether it is one of their own devising or a franchise, which is a prepackaged business you buy or lease from a franchi-sor. Other groups consist of buyers, those who purchase an existing business, or of heirs, those who inherit or are given a stake in the family business. These roles deal with the entry stage of

The Top 10 Occupations for Entrepreneurs9TABLE 1.1

Top 10 Occupations with the Highest Number of Entrepreneurs

Top 10 Occupations with the Highest Percentage of Entrepreneurs

Owner-managers 1,694,434 Farmers and Ranchers 86.4%

Construction 1,043,176 Medical Practitioners 75.2

Farmers 1,019,727 Movie Projectionists 72.6

Retailers 683,623 Artists 70.2

Drivers 450,709 Entertainers and Athletes 66.8

Child Care Workers 402,267 Salespeople 56.9

Real Estate Agents 376,834 Landscape Managers 56.3

Wholesalers 373,099 Photographers 56.2

Maintenance Workers 342,689 Service Managers 53.6

Lawyers 310,390 Furniture Finishers 52.9

Source: U.S. Census Bureau, Current Population Survey, March 2015, custom computation using DataFerrett by Jerome Katz.

goods or servicesThe tangible things (goods) or intangible commodities (services) created for sale.

firmAn organization that sells to or trades with others.

noveltyCharacterized by being different or new.

imitativeCharacterized by being like or copying something that already exists.

self-employedWorking for yourself.

foundersPeople who create or start new businesses.

franchiseA prepackaged business bought, rented, or leased from a company called a franchisor.

buyersPeople who purchase an existing business.

heirA person who becomes an owner through inheriting or being given a stake in a family business.

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small BusInEss: VarIEtIEs and Impacts CHAPTER 1 7

● Entrepreneurs can be found in nearly every line of work there is. Into what occupation would your business put you?

ColorBlind Images/Blend Images LLCHero Images/Getty ImagesHero Images/Getty ImagesAndersen Ross/Blend Images LLC

the business from the perspective of the entrepreneur. After entry, another role emerges, that of the owner-manager, the role in which most entrepreneurs spend their working lives. Through-out this text the terms small business owner, entrepreneur, and self-employed are used interchange-ably. When founders or buyers or post-entry owner-managers are discussed, we specify which one is the focus.

CSI: EntrepreneurshipNotice that our definition of entrepreneur doesn’t specify if the business is for-profit or non-profit. The fact is that starting either type of organization involves the entrepreneurial process of founding. Self-employed founders of firms are involved in what we call independent entrepreneurship.

Founders of nonprofit organizations or for-profit social ventures are pursuing social entrepreneurship. These efforts involve creating new charitable and civic organizations that are financially self-sufficient like Bangladesh’s Grameen Bank (which won the 2006 Nobel Peace Prize for making banking services designed to help the poor manage their money bet-ter), or for-profit companies that use much of their profit to fund charities such as Tom’s Shoes with its “One for One” philosophy where for every pair of shoes you buy it donates a pair to children in need. Many people also include the founders of charities. When the social entrepreneur’s focus is more specifically on the planet and ecological issues, we call it sustainable entrepreneurship or green entrepreneurship.

independent entrepreneurshipThe form of entrepreneurship in which a person or group owns a for-profit business.

social venturesBusinesses that are organized as for-profit entities but are also solving or supporting solutions to social problems.

social entrepreneurshipThe form of entrepreneurship involving the creation of self- sustaining charitable and civic organizations, for-profit organiza-tions that invest significant profits in charitable activities, or the creators of nonprofit charitable or service organizations.

sustainable entrepreneurshipAn approach to operating a firm or a line of business that identi-fies, creates, and exploits oppor-tunities to make a profit in a way that can minimize the depletion of natural resources, maximize the use of a recycled material, or improve the environment.

green entrepreneurshipAnother term for sustainable en-trepreneurship taken from the popular belief that green is the color of a healthy environment, as in forests or fields.

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8 PART 1 EntrEprEnEurs and IdEas: thE BasIs of small BusInEss

Economists talk about yet another type of entrepreneur, innovative individuals who are em-ployed by others in existing companies. Such people are pursuing corporate entrepreneurship and estimates put the number of corporate entrepreneurs at about 80 percent that of self- employed entrepreneurs, or nearly 12 million Americans. In corporate entrepreneurship, the focus is typically on bringing new products or services to market, or opening up new markets for your firm. Famous examples of corporate entrepreneurship include the creation of new brands like Apple’s iPhone or GM’s green energy services. Companies rapidly expanding geographi-cally, like Panera Bread or Planet Fitness, would also be a visible example depending on corpo-rate entrepreneurs to open up new areas to their offerings.

Together, corporate, social, and independent entrepreneurship represent what might be called CSI entrepreneurship or the three forms of entrepreneurship12 and people move among the three forms more often than you might think. Consider Jim McKelvey, cofounder of Square.13 You’ve probably paid for something with your credit card and had it swiped through a Square device. But Square was just another step along a winding, entrepreneurial path. After McKelvey graduated college (degrees in economics and computer science), he launched Mira, a software company. But Mira didn’t make any money for its first five years, so McKelvey was forced to support himself by working as a glass artist. “Ironically, the only business I ever pursued primar-ily for the money was glassblowing.” McKelvey recalls, “I became a glass artist simply to pay the bills. All the other organizations were created to solve a problem. I have always found problems to be the best motivators.”

After Mira began to succeed, McKelvey was able to stop working in the studio just for the money, but continued to practice glassblowing as an artistic hobby. But glassblowing studios are rare and Jim was frustrated at the lack of access to both the tools and techniques. He resigned as CEO of Mira and cofounded Third Degree Glass Factory so he and others would have a place to create glass art in St. Louis. Third Degree pioneered the model combining education, produc-tion, and entertainment.

In 2006 Third Degree achieved international recognition after housing the Glass Art Soci-ety’s annual conference, but by this time McKelvey’s focus was on the problems of running a business and not making art. In 2008, Jim reconnected with one of Mira’s early employees, Jack

corporate entrepreneurshipThe form of entrepreneurship that takes place in existing businesses around new products, services, or markets.

CSI entrepreneurshipAcronym for the three forms of entrepreneurship: corporate, social, and independent.

forms of entrepreneurshipThe settings in which the entre-preneurial effort takes place.

● Jim McKelvey has demonstrated CSI entrepreneurship as a cofounder of Third Degree Glass Factory, a makerspace for artists. He was cofounder of Square, and the person who created the iconic Square credit card reader. After Square’s IPO, he served as a corporate entrepreneur. He also started LaunchCode, a nonprofit that teaches coding for free and helps graduates get jobs. His role there was as a social entrepreneur. You can see a video of McKelvey discussing this at

Carl Juste/Miami Herald/TNS/NewscomJim McKelveyDawn Majors/St. Louis Post-Dispatch/MCT/Newscom

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small BusInEss: VarIEtIEs and Impacts CHAPTER 1 9

Dorsey, who had recently left the company he created, Twitter. Jim and Jack decided to pursue Jim’s idea of a fair payment system for small merchants, and called the new company Square. Square created a series of products focused on economic empowerment and by its 10th birthday was a public company valued at over $30 billion.

With Square up and running, McKelvey again turned his attention to another serious prob-lem: the perpetual shortage of programmers. His idea to combine guaranteed job placement with free education led him to found a nonprofit called LaunchCode. LaunchCode has trained and employed thousands of people and is opening centers around the nation.

As LaunchCode began to fulfill its mission, McKelvey again handed over the management to others and turned his focus to other social problems. He is now a director of the St. Louis Fed-eral Reserve, where Jim shares his entrepreneurial skills with the people running our economy. He is also involved in several projects to help rebuild St. Louis as a vibrant, welcoming city. “I have never really had a career,” McKelvey says, “just a series of problems that I care about in different areas of my life. Sometimes the solution is a for-profit company, sometimes a nonprofit charity, and sometimes it’s government. But in each case the tools of entrepreneurship create new solutions.”

Jim McKelvey’s story also shows the two kinds of motivation we often see driving most entrepreneurs. One type is based on entrepreneurs who are going into business to improve themselves financially or to launch an improved product or service into the market. This is called opportunity-driven entrepreneurship and is evident in Jim’s problem-solving efforts in starting Square and LaunchCode. The other type is where the person becomes an entrepre-neur because he or she does not see any workable prospects for getting employed by someone else. This is called necessity-driven entrepreneurship. For Jim when graduating college, getting jobs as a glassblower was difficult, so his best way to pursue that dream was to co-create Third Degree Glass.

opportunity-driven entrepreneurshipCreating a firm to improve one’s income or a product or service.

necessity-driven entrepreneurshipCreating a firm as an alternative to unemployment.


Learn more about the topics above at these sites:

Corporate entrepreneurship: Early To Rise,

Social entrepreneurship: Ashoka,

Independent entrepreneurship: Entrepreneur magazine,

Entrepreneurship ElsewhereAs important as entrepreneurship is in the United States, it is more important elsewhere. While in any given year about 10 percent of the workforce in the United States is self-employed or con-templating starting their own business, the rates in other parts of the world can be 50 percent or even 100 percent higher than in the United States. There is a pattern (see Figure 1.2) to which countries are likely to have high rates of entrepreneurship, and which will have lower rates.14

• In nations where there is little manufacturing, most industry relates to farming and extract-ing raw materials, such as mining and forestry. In these factor-driven economies such as Pakistan, Jamaica, and Venezuela, entrepreneurship is essential to helping build personal wealth and breaking the cycle of low-wage jobs, and entrepreneurship levels are very high.

• As economies develop and go beyond basic manufacturing to a more industrialized econ-omy as is seen in countries such as Russia, Brazil, and China, it is called an efficiency-driven economy. In these nations, entrepreneurship becomes a key way to build the middle class, and a growing retail and wholesale sector grows alongside businesses serving the needs of large industrial concerns. Entrepreneurship levels in such economies are in the middle range.

factor-driven economyA nation where the major forces for jobs, revenues, and taxes come from farming or extractive industries like forestry, mining, or oil production.

efficiency-driven economyA nation where industrialization is becoming the major force provid-ing jobs, revenues, and taxes, and where minimizing costs while maximizing productivity (i.e., efficiency) is a major goal.

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10 PART 1 EntrEprEnEurs and IdEas: thE BasIs of small BusInEss

• Innovation-driven economies are focused on high-value-added manufacturing but are marked by a very large service sector providing high-end services to not only the resident population but also for export. Examples of such countries include Germany, the Republic of Korea, and the United States. Entrepreneurship levels in these countries average the lowest of the three types of economies.

The lesson here is that entrepreneurship is happening around the globe in virtually all types of economies, and as global trade (both face-to-face and web-based) increases, the impact of global entrepreneurship will be increasingly faced by entrepreneurs and their firms everywhere.

innovation-driven economyA nation where the major forces for jobs, revenues, and taxes come from high-value-added pro-duction based on new ideas and technologies and from profes-sional services based on higher education.


Adult Entrepreneurs as Percentage of the Workforce


















h Af


































Early-Stage Entrepreneurial Activity for 15 Nations in 2015, by Phase of Economic Development

Source: Custom tabulation of 2015–2016 GEM Global Report, Table 5, p. 130, by Jerome Katz and Richard Green.

LO 1-2 Differentiate between small businesses and high-growth ventures.


Learn more about the topics above at these sites:

Global entrepreneurship: Global Entrepreneurship Monitor,

Global entrepreneurship: Organization for Economic Cooperation and Development (OECD),

The Many Types of Entrepreneurial Small BusinessesYou might be surprised to know that even with 15.5 million entrepreneurs out there, the num-ber of firms is even greater—30.2 million in 2015!15 These firms are called many different things, such as small and medium enterprises (SMEs), independent small businesses, or owner-managed firms. However they are labeled, there are more firms than entrepreneurs because many entrepreneurs become serial entrepreneurs16 by starting additional businesses after their first one. As we will see a bit further into the chapter, this enormous population of

small and medium enterprise (SME)The international term for a small business.

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small BusInEss: VarIEtIEs and Impacts CHAPTER 1 11

small businesses is one of the major forces in the U.S. economy. But for now, just realize that you can pursue many dreams as an entrepreneur. No one is limiting you to just one. And after your first business, there is no telling how far you can go. Consider a nine-year-old Texan named Michael.

Michael started selling collectible stamps through the mail.17 He typed his catalog one key at a time since he had never learned to type, and he made $2,000. His next business was selling newspaper subscriptions by phone from home; he made $18,000 on this venture. His third busi-ness was reselling IBM PCs from his dorm room at the University of Texas at a time when IBM was trying to limit sales to official IBM dealers like Sears and IBM’s own personal computer stores.18 It was Michael’s fourth business, selling PCs, that we know today as Dell Inc. The nine-year-old was Michael Dell.

Michael Dell’s four businesses point up the difference between small businesses and high-growth ventures. Both may be small when they start. However, small businesses are usually in-tended to remain small, generally a size that the owner feels comfortable controlling personally. For Michael Dell, his stamp, newspaper, and IBM PC resale businesses were designed to be small-scale operations that he could handle alone. He did everything himself, and he worked when he wanted to. The businesses were fairly conventional, with dozens or even hundreds of competitors all imitating one another.

High-growth ventures start small but are intended to grow rapidly, often requiring a team of partners or managers to handle the growth. When Dell got serious about the upgraded PC busi-ness, he created a company and started hiring others to help out. He moved from his dorm room to a commercial location, kept open regular hours, and started thinking about putting together a much bigger operation. That much bigger operation is the Dell Inc. known world-wide today. While the computer business as a whole was established, Dell’s approach to assem-bly from highly standardized (and therefore low-cost) parts was fairly revolutionary, as was his use of mail-order and later telephone and web-based ordering. In his fourth business, Dell led the industry because of his innovativeness, and others imitated him.

The differences between small businesses and high-growth ventures aren’t just semantic, they’re fundamental, as shown in Table 1.2.

Entrepreneurs and Firm Growth StrategiesWhen creating his stamp business as a child and Dell Inc. as a young adult, Michael Dell had different goals and ambitions for each of these firms. As you can imagine, that kind of broad

innovativenessRefers to how important a role new ideas, products, services, processes, or markets play in an organization.

● Michael Dell is well known now as the CEO of Dell Inc., a major industry leader in PC production. Before his success, though, Dell spearheaded at least three other much smaller businesses. What factors do you think led to Dell’s decision to expand his earlier ventures and eventually to his successful capturing of the PC market?

Peter Silva/ZUMAPRESS/Newscom

independent small businessA business owned by an individ-ual or small group.

owner-managed firmA business run by the individual who owns it.

serial entrepreneurA person who opens multiple businesses throughout his or her career.

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12 PART 1 EntrEprEnEurs and IdEas: thE BasIs of small BusInEss

Small Businesses High-Growth Ventures

Preferred funding source Owner’s own money Other people’s money

When the firm’s in trouble Cut costs Sell more

What’s more important Sales Marketing

Personal control preference Retain autonomy Involve key others

Focus Efficiency Effectiveness

Meta-strategy Imitation Novelty

External control preference Control firm Control market

Grow When necessary When possible

Human resources Personalize Professionalize

Acceptance Personal validation External legitimacy

What limits growth Loss of control Market response

Delegation orientation Delegation is difficult Delegation is essential

TABLE 1.2 Differences between Small Businesses and High-Growth Ventures

approach, called the overall growth strategy, represents another driver of the variety of entrepreneurship. The overall growth strategy describes the kind of business the owner or owners would like to have, from the perspective of how fast and to what level they would like the firm to grow. There are four generic growth strategies that account for nearly all businesses:

• Lifestyle or part-time firms: These typically have sales of $25,000 a year or less, which provide enough profit or salary to supplement an income but usually not enough on which to live. These businesses start and stay very small, often operating seasonally or when the owner wants to work in the business. Growth in these firms tends to quickly level off after the owners operate long enough to learn the basics of making money in their industry and setting. About 53 percent of all small businesses fall into this category including Michael Dell’s first three businesses. (See Figure 1.3.)

• Traditional small businesses: These are the smallest full-time businesses, with schedules defined by customer, not owner, needs. Most often, these are one-site businesses with sales of between $25,000 and $100,000. Growth levels off after operations settle into a consis-tent, money-making pattern, generating enough income to provide a living for the owner and family. Around 22 percent of small businesses fall into this category.

• High-performing small businesses: These tend to level off after success defined by sales of between $100,000 and $1,000,000, depending on the industry. These firms grow at rates more like 5 to 15 percent a year, adding employees, and often growing through multiple locations and higher levels of professionalization in order to maximize their profitability over a long term while reaching a plateau that lets them remain manageably small. About 20 percent of businesses fall into this category, including Robin Rath’s business.

• High-growth ventures: These aim to achieve growth rates of 25 percent or more a year, with sales of more than $1 million. The firms aim to become big businesses and pursue high levels of professionalization and external funding. Such firms represent about 5 per-cent of all businesses. At the tip of this group are firms called unicorns, like Uber and Airbnb, that have valuations of $1 billion or more. In January 2016, there were 174 uni-corns in the United States.19

overall growth strategyOne of four general ways to posi-tion a business based on the rate and level of growth entrepreneurs anticipate for their firm.

lifestyle or part-time firmA small business primarily intended to provide partial or subsistence financial support for the existing lifestyle of the owner, most often through operations that fit the owner’s schedule and way of working.

traditional small businessA firm intended to provide a living income to the owner, and operat-ing in a manner and on a sched-ule consistent with other firms in the industry and market.

high-performing small businessA firm intended to provide the owner with a high income through sales or profits superior to those of the traditional small business.

high-growth ventureA firm started with the intent of eventually going public, following the pattern of growth and opera-tions of a big business.

unicornsThe most successful high-growth ventures, those with a valuation of $1 billion or more.

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small BusInEss: VarIEtIEs and Impacts CHAPTER 1 13


Types of Firms


(Less than $25,000)53%

Small businesses

Traditional SmallBusinesses

($25,000 to $99,999)22%

High-PerformingSmall Businesses

($100,000 to $999,999)20%

High-Growth Ventures($1,000,000 and up)


Small Business

LO 1-3 Dispel key myths about small businesses.


Learn more about the topics above at these sites:

Start-up businesses: Kauffman Indicators of Entrepreneurship,

Main street businesses: Kauffman Index of Main Street Entrepreneurship, (ended with 2017 data)

Data on small businesses: SBA’s statistics page,

Entrepreneurial Small Business focuses on the 95 percent of businesses outside the high-growth sector. These are what are often called main street businesses and include the lifestyle firms, the traditional small businesses, and the high-performing small businesses that represent the businesses most of us start and most of us deal with on a day-to-day basis.

main street businessesA popular term for small busi-nesses reflecting the idea that these are the kinds of firms you would expect to find on the main street of a typical American city, and are the opposite of big busi-ness or “Wall Street” businesses.

Myths about Small BusinessesHere is a sobering truth: Although 56 percent of U.S. youth 15–25 years old polled in 2010 expressed an interest in becoming entrepreneurs, only 14.7 percent were actually doing anything to get a business started by 2018.20 The challenges of small business scare off or derail people. For years potential entrepreneurs have mentioned problems like these:

• There’s not enough financing.• To make profits, you need to make something.• If you fail, you can never try again.• Students don’t have the skills to start a business.• Ninety percent of all new businesses fail within two years.Over the past 10 years small business experts in academia and government have studied small

business and potential entrepreneurs and learned that a lot of the challenges scaring people away from small business are the stuff of urban legends. Let’s look at these five problems with the lat-est information.

1. There’snotenoughfinancing: The SBA reported that in its last survey of business owners almost 40 percent of solo entrepreneurs started their businesses with less than $5,000.21 The SBA also reports that bank financing has been rising for 10 years, and the same is true for

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14 PART 1 EntrEprEnEurs and IdEas: thE BasIs of small BusInEss

funding from family, friends, and angels.22 New sources of financing like crowdfunding sites (which Robin Rath used in the vignette at the start of the chapter) and or P2P lending sites like or are providing alternatives to traditional banks.23 Today you can create websites, blogs, and drop-shipping businesses for free using platforms like Wix, Weebly, or Ucraft24 while bootstrapping25 techniques like making your local coffee shop into your virtual office are increasingly popu-lar as ways to get started without a lot of cash.

2. Tomakeprofits,youneedtomakesomething: From the recession in 2011 to 2015, Sageworks reported that of the 10 most profitable industries for small businesses, 9 were services like dentists, tax preparers, mining support services, credit counselors, insurance brokers, and legal and health practitioners. Whereas getting a DDS or MD degree takes years and tens of thousands of dollars, bookkeeping and credit counseling require little specialized training.26

3. Ifyoufail,youcannevertryagain: If you close a business and pay off your debts, you did not fail. If you learned how to do better next time, then you can honestly say you have paid (in dollars and hours) for another piece of your education. A large number of today’s successful entrepreneurs had failures along the way. Today vegetarians who frequent restaurants are thankful for Paul Wenner’s Gardenburgers, but few realize that Paul learned the food busi-ness by owning a restaurant that eventually went out of business. Other famous failures in-clude Ray Kroc (famous for McDonald’s, failed at real estate), Henry Ford (two failed auto companies before making Ford), and the founders of California Pizza Kitchens, Rick Rosen-field and Larry Flax, who previously failed at screenwriting, a regular Italian restaurant, and a mobile skateboard park.27

4. Students (or moms or some other group) don’t have the skills to start a business:28 It would be hard for an undergraduate to open a medical practice (watch Doogie Howser, MD, on if you want to see what this might have been like), but lots of students have useful business skills. If you are a student, you probably have a good idea what other students want to buy or have. That is the start of a retail business with a student market. If you have negotiating skills, the sky is the limit in retail and wholesaling, espe-cially for products you already understand (T-shirts, energy drinks, backpacks, text-books, etc.). In fact, you may have high-level but undocumented skills in developing websites or programming (like the founders of Facebook or Yahoo!). Competitions like the Global Student Entrepreneur Awards ( or other award programs (Google “young entrepreneur competition” to find them) showcase dozens of highly successful students who started and grew their businesses. Any mompreneur has man-aged a household, negotiated for family purchases, and solved thousands of problems ranging from broken equipment to angry family members. It was more than enough to get Mary Kay’s Mary Kay Ash, Body Shop’s Anita Roddick, or Baby Einstein’s Julie Aigner Clark started in small businesses that grew to be big ones. The same is true for any group—second career entrepreneurs include Josie Natori (investment banking to Natori lingerie), Jim Koch (consulting to brewing Samuel Adams beer), or George Fore-man (boxer to entrepreneur).

5. Ninetypercentofallnewbusinessesfailwithintwoyears: This statement is wrong in two major ways. First, the percentage is wrong. Studies show that 69 percent of businesses are still going after 2 years, 51 percent are still going at 5 years, 34 percent make it past 10 years, and 25 percent survive 15 years. Second, looking at the businesses that close, the vast major-ity close but don’t fail. Only one firm in three that closes was considered financially unsuc-cessful by its owner.29

Myths like these hold back many potential entrepreneurs. Knowing the truth is a powerful way to keep up your motivation for the undeniably tough work of starting your own business. When you encounter doomsayers, check out the facts at reputable sites like the U.S. Small Business Administration (SBA) at (especially its FAQs) or in entrepreneur- focused maga-zines like Inc., Fast Company, or Entrepreneur. There you will find the facts you need, and the support and advice that underlies the idea that help helps.

● George Foreman: boxer to entrepreneur.

Cathrin Mueller/Bongarts/Getty Images

crowdfundingFunding a business online through the collective involve-ment of others who provide dona-tions, loans, or investments.

P2P lendingLoans made from one or more in-dividuals to the entrepreneur, rather than through a conven-tional bank. This can be as simple as a loan to a friend, or formally handled through a dedicated P2P website.

drop-shippingA business in which you sell items in person or online, but you hold no inventory. You refer sales to a third party who handles the ship-ping, and very often the financial transaction, in your name.

bootstrappingUsing low-cost or free techniques to minimize your cost of doing business.

Small Business Administration (SBA)A part of the U.S. government that provides support and advocacy for small businesses.

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small BusInEss: VarIEtIEs and Impacts CHAPTER 1 15

LO 1-4 Identify actions key to becoming a small business owner.


Learn more about the topics above at these sites:

SBA’s small business FAQs:

SBA’s small business finance FAQs:

Google search for reviews of free website companies: builder&oq=free+websites+builder

Getting Started Now: Entry CompetenciesThere are a million things you could do to start a business, but which ones are best? Sometimes the answer will come to you in the form of an opportunity or offer, and sometimes you’ll need to take the first steps yourself. In order to start a business, you need four elements to come together—boundary, resources, intention, and exchange.30 This is referred to as the BRIE model, as shown in Figure 1.4.

A business needs the benefits of a boundary—something that sets it up as a firm, and sets it off from the buying or selling or bartering we all do occasionally. A boundary can be something as simple as a business name or government registration, a phone or email address dedicated to the business, or a specific location for the firm in a home, commercial space, or even on the Inter-net. Having a boundary gives you a place to locate and protect the resources you’ve gathered for the business. Resources include the product or service to be offered, informational resources on markets and running a business, financial resources, and human resources such as your own time to devote to the business or that of others working with you or for you.

Intention is the desire to start a business and is the most frequently occurring element of the BRIE model. Those 56 percent of young Americans who think about starting their own business are expressing their intentions. Exchange is also needed. This refers to moving resources, goods, or service to others in exchange for money or other resources. If the firm doesn’t exchange with its environment, there is no “business” taking place.

The BRIE model factors outline the activities that need to take place to get a firm going. Skill Module 1.2 is a self-assessment that can help you recognize what important steps you have taken to start your business, and what remains to be done.

The BRIE model can help you deal with one of the biggest hurdles to starting a business. Ac-cording to the experts, the biggest problem is simply inaction, as mentioned earlier. Stanford management professors Jeff Pfeffer and Bob Sutton31 say that even when people know taking action would be in their own best interests, most people tend to procrastinate, sticking with inac-tion or doing familiar things that have not worked. Pfeffer and Sutton recommend taking small steps toward a goal as an easy way to start. The BRIE checklist gives you the kind of small steps that can make all the difference. Consider coming back to this checklist periodically to help as-sess your preparations for business and determine what you still need to do. Taking lots of small steps is a sure way to achieve your goals.


Four Elements Needed to Get Your Business Started (BRIE)

BoundaryCreating a place for your business—in

location and in people’s minds

ResourcesThe money, product, knowledge, etc.

that make up the business

IntentionThe desire to start a business

ExchangeMoving resources/products/

services in exchange for money

Your Small Business

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16 PART 1 EntrEprEnEurs and IdEas: thE BasIs of small BusInEss

BRIE Self-Assessment

The BRIE (boundary-resources-intention-exchange) model is a proven32 and handy way to think about the activities necessary to get a business started. It also is a model that will come up again in later chapters of this book. How many of the items have you done so far to get your business started the right way? The complete list of BRIE activities is given in the following table. Look at the BRIE list and check off ac-tions you’ve taken already. Next to each item in parentheses are references that tell you in which chapter that topic is covered, in case you want to skip ahead to see how we suggest you do it. This exercise can help you think through which chapters are most important to you in preparing your business. The list can also be scored as a checklist. Go through the list and check off which items you have already done in starting a business. Then write in the first column how many items of each BRIE category you’ve done so far. Once you are finished, you can see how to score the BRIE checklist at the end of the skill module.

S K I L L M O D U L E1 . 2

BRIE Checklist

Boundary—creating a place for your business in space and in people’s minds

Number of boundary actions done

☐ Opening a bank account for the business (Ch. 13)

☐ Registering the business name with the state (Ch. 17)

☐ Creating business cards and/or stationery (Ch. 10)

☐ Purchasing a domain name (Ch. 10)

☐ Creating a business website (Ch. 10)

☐ Obtaining a business telephone line (Ch. 1)

☐ Identifying a place for the business at home or elsewhere (Ch. 11)

Resources—the things that make up the business, like money, products, knowledge, etc.

Number of resource actions done

☐ Organizing a start-up team (Ch. 18)

☐ Obtaining copyright, patents, trademarks (Ch. 17)

☐ Purchasing raw materials, inventory, supplies (Ch. 15)

☐ Acquiring major items (equipment, facilities, property) (Ch. 15)

☐ Hiring employees and managers (who do not share ownership) (Ch. 18)

☐ Participating in classes or workshops on starting a business (If you are taking a small business course, you can check this item.)

☐ Participating in programs that help new businesses get established like SIFE, CEO, or SBIDA

Number of intention actions taken

☐ Thinking about the business (Ch. 4, 5, & 6)

☐ Undertaking marketing and promotional efforts (Ch. 7 & 10)

☐ Developing your product or service (Ch. 4 & 9)

☐ Beginning your full-time commitment to the business (> 35 hrs/wk)

☐ Preparing a business plan (Ch. 8)

☐ Defining market opportunities (Ch. 4)

☐ Developing projected financial statements (Ch. 7, 12, & 13)

Intention—demonstrating a determination to get the business going and for it to be successful

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small BusInEss: VarIEtIEs and Impacts CHAPTER 1 17

Exchange—making investments in and sales from the business

Number of exchange actions done

☐ Generating sales revenue (Ch. 10)

☐ Arranging child care to work on business

☐ Establishing credit with a supplier (Ch. 14)

☐ Saving money to invest in the business (Ch. 12 & 14)

☐ Investing money in the business (Ch. 14)

☐ Seeking funds from financial institutions or others (Ch. 14)

☐ Seeking funds from spouse or household partner (Ch. 14)

☐ Seeking funds from current employer (Ch. 14)

The scoring is straightforward. At a minimum you need to have taken at least one action in each of the BRIE categories33 to successfully start and grow a business. Business survival rates increase with the num-ber of items checked across the different categories.34 So people who can check three or four items in each BRIE category are more likely to have surviving and growing firms than those who check only one item per category. Having a BRIE category with nothing checked indicates that it is likely that something major is being overlooked, so the business is likely to fail. It is also important to balance BRIE activities. For example, having lots of boundary activities done and only a few exchange ones is likely to lead to an unbalanced ap-proach to business and a lesser chance of survival.

Small Business and the EconomySmall business is vitally important to your community and even to our economy. Part of this comes from the new things small businesses contribute to the economy, particularly new jobs and innovations, as well as the basics that small businesses provide for all of us—jobs, taxes, and products or services.

New JobsSince the 1970s big business has cut tens of millions of jobs. In the meantime, small business has added tens of millions of jobs. In the latest statistics, small businesses created 65.9 per-cent of the new jobs created since 2000.35 When the Census Bureau looked more closely at the figures, it concluded that small business start-ups in the first two years of operation ac-counted for virtually all the net new jobs in America.36 Small business is the engine of job generation, but it is important for existing jobs, too. Small businesses employ more than half of all Americans, providing wages, salaries, and the taxes those working people pay the government.37

One reason small businesses are a key employer is because they are more willing than most large businesses to offer jobs to people with atypical work histories or needs, like people new to the workforce, people with uneven employment histories, and people looking for part-time work. These employment issues are at the core of what makes small business attractive to local and state governments.

New IdeasSmall business is a key element of every nation’s economy because it offers a very special environ-ment in which the new can come into being. Austrian economist Joseph Schumpeter labeled this process creative destruction.38 It refers to the way that newly created goods, services, or firms can hurt existing goods, services, or firms. For example, when a new restaurant opens in your neighbor-hood, people flock to it to find out what it’s like. This helps the new restaurant, but it also causes the

creative destructionThe way that newly created goods, services, or firms can hurt existing goods, services, or firms.

1-5 Recognize how small businesses are impor-tant to our economy and your community.


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18 PART 1 EntrEprEnEurs and IdEas: thE BasIs of small BusInEss

other restaurants in the area to lose business, at least temporarily. One of the most famous ex-amples of creative destruction is the personal computer, which started as a hobby that big business spurned.

Snapchat founders Evan Spiegel, Bobby Murphy, and Reggie Brown came up with one of the first apps that revolutionized how users interacted with their smartphones. Snapchat was designed to be used primarily on smart-phones, and made better and more extensive use of smartphone features than anything ever before. While social media websites like Facebook already existed, Snapchat got more users to post, share, and look at more items on mobile screens than anyone ever had be-fore. Instead of making posts permanent, they made posts vanish after being seen. Their in-novative uses of smartphone technology (like drawing on top of photos or using gestures for

nearly everything) changed how apps were designed, and increased user interaction with their mobile phones beyond what anyone had predicted.

Snapchat’s innovations redrew the lines of the entire smartphone app industry, and it also created tremendous new wealth, utility, and innovation. Big business often has trouble with in-novations that would eat away at existing business, but small, new businesses are more likely to see new revenues in innovations.

Why do so many innovations come from small business? Small business owners are freer of the judgments and social constraints of workers elsewhere.39 To give you an idea how much more powerful innovation is in small business, the U.S. Small Business Administration reports that among firms that hold one or more patents, small businesses generate 16 times the number of patents per employee than do big businesses. And the patents produced in those small busi-nesses are twice as likely to be among the top 1 percent of all patents cited by others.40 That cita-tion is a measure of the importance of the invention.

In the end, the freedom small business gives owners to pursue and perfect their dream creates the innovations from which we all benefit—not just major inventions like the personal computer, but whole classes of products such as snowboards (21-year-old Dimitrije Milovich in 1969),41 earmuffs (15-year-old Chester Greenwood in 1858),42 computer-controlled telephone systems (Krisztina Holly in 1992),43 date rape drug testing coasters (Brian Glover, 35, and Francisco Guerra, 34, in 2002),44 and Kitty Litter (Ed Lowe, 27, in 1947)45 that were developed by innovative small business owners.

Think of the innovative contributions of small businesses in general and student-started small businesses in particular. Each group has made a tremendous difference in our industries, our economies, and our lives. Table 1.3 shows examples from both groups in eight different situations.

New OpportunitiesPeople who own their own business are presented with tremendous opportunities—not only to improve their life and wealth, but also to help them move into and upward in the economy and society of the United States. The opportunities small business offers for getting into the eco-nomic mainstream of American life makes it attractive to people who foresee problems fitting into existing businesses—not only people with innovative ideas, but immigrants; people facing unusual schedules, demands, or limitations on their lives; and even people who need a second chance.47 For many such people, small business is the best business opportunity.

Small businesses offer communities another type of opportunity—the opportunity to enjoy goods and services. Imagine a neighborhood or town without a grocery store or a pharmacy. In

● Snapchat cofounders Evan Spiegel and Bobby Murphy developed Snapchat’s forerunner, Piccolo, while students at Stanford. They refined it and renamed it Snapchat, where it became the favorite social media platform of high schoolers and the industry leader for how to design mobile apps to be maximally involving. What kinds of innovations have you seen that make people say “I just gotta have it!”?

J. Emilio Flores/Corbis/Getty Images

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small BusInEss: VarIEtIEs and Impacts CHAPTER 1 19

important ways, the town would not seem like a real community. A small grocery store, drug-store, hardware store, or gas station might be able to use its low overhead and capacity to adapt to local needs (e.g., a grocery store stocking a lot of fishing supplies to appeal to visiting fishing enthusiasts) to make a profit where larger chain stores could not.48 For a small town or a neigh-borhood to be able to stand on its own, it needs a variety of businesses.49

Small businesses provide unexpected opportunities to large businesses and entrepreneurial high-growth firms. High-growth ventures and big businesses are like a giant boat, and where the boat sails, the economy sails along too. But for the boat to work, it has to be supported by deep water. The ocean supporting the boat consists of the tens of millions of small businesses. Without small busi-nesses offering supporting services or offering to subcontract at low cost to the high-growth ventures and big businesses or creating the kinds of communities where creative and entrepreneurial people like to live,50 those economic boats would lose their buoyancy or profitability and sink like stones. For example, industry giant Procter & Gamble outsourced the making of Ivory and other bar soaps to a small Canadian company, Trillium Health Care Products,51 saving millions of dollars a year. In addition, big business depends on small business as a source of key ideas for new products. You might think this means high-tech inventions, but there is a lot of money to be made from everyday inventions. Consider the recent drink sensation Kombucha in the following Small Business Insight.

New MarketsOne particular type of entrepreneurial opportunity comes from pursuing opportunities in other countries. Buying products or services outside your home country and selling them at home is called importing. Taking products and services made in your home country and selling them in other countries is called exporting.

Originally, small business was synonymous with local business. The vast majority of firms sold in their home communities, and it was a very rare firm that sold nationally. Through the beginning of the twentieth century, it was rare for small businesses to sell in any other country.

That is no longer true today. Small businesses account for 33.2 percent of the value of all goods and services exported from the United States, and represent 97.7 percent of all exporting firms. According to the U.S. government there were 280,229 small business exporters in 2016, and the average amount each firm exported was $1,530,891.52 Generally most of these firms ex-port on the basis of personal ties. An entrepreneur trades with the country of his birth, his

importingBuying products or services from a place not your home country, and selling them in your home country.

exportingTaking products or services made in your home country and selling them in other countries.

Where Innovation Is Used

Innovations from Small Businesses

Innovations from Student-Started Small Businesses

Medicine Heart valves (Demetre Nicoloff) Video laryngoscope (Aircraft Medical)

Business Processes Assembly lines (Olds) JIT PC assembly (Dell)

Computing Hardware Supercomputers (Cray) Home computers (Apple)

Computing Software Relational databases (Oracle) Social networking (Facebook)

Everyday Technology Photocopiers (Chester Carlson) Google

Leisure Outboard engines (Cameron Waterman)

Snowboards (Dimitrije Milovich)

Fashion GORE-TEX (W. L. Gore) Extreme custom nail polish (Dineh Mohajer)

Drinks Snapple (Arnold Greenberg) Kombucha (GT Dave)

Sources: The State of Small Business: A Report of the President, 1994 (Washington, DC: U.S. Government Printing Office, 1995); Meinie Reid, “How a Shop Assistant Saw the Light and Saved Lives,” The Times, July 17, 2008.

TABLE 1.3 Major Inventions from Small Businesses and Student-Started Businesses46

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20 PART 1 EntrEprEnEurs and IdEas: thE BasIs of small BusInEss

parents’ birth, or where he has prior experience. The key for such exporters is the personal ties that make exporting predictable and safe.54

Another approach that has grown dramatically in the past 15 years is using e-commerce, particularly sites like eBay and Amazon, to handle global trade. The formal title for this is virtual instant global entrepreneurship (VIGE).55 VIGE depends on using websites like Amazon or eBay (for products) or Upwork (for services) to quickly establish a global presence. Many of these VIGE sites offer procedures, services, and web page templates that incorporate best prac-tices for global trading. For example, eBay leads new sellers through the creation of seller and


GT Dave’s mom Laraine was battling breast cancer, and to help his mom at this awful time GT would make her kombucha tea (imagine a slightly bubbly bittersweet dark herbal tea) from the family’s recipe. They learned about it through their lifelong involvement in Eastern philosophies. Laraine beat the cancer, and GT decided to offer the tea commercially.

At 15 he started mixing larger quantities of his tea, offering it in bottles and selling it locally in health food stores in his hometown of Los Angeles. He slowly grew the business to other health food stores in his area using nothing but his own money, profits from the business, and a $10,000 loan from his mother. While he tried to stay in high school, it was a tough go, and he left but kept working to get his GED and take community college classes.

● Founder GT Dave proudly showing off his Synergy kombucha drink.

Ringo Chiu/ZUMA Wire/Alamy Live News/Alamy Stock Photo

Four years after he started the business, he got his two drink lines (Kombucha and a kombucha and fruit drink line called Synergy) into Whole Foods Stores across California. This watershed would move Kombucha to national distribution and the company took off from there. Today kombucha is a $600 million industry in the United States, with industry growth rates of nearly 20 percent a year. It is such an attractive market that Pepsi and Coke have bought some of GT’s competitors to enter the space with products called KeVita and MOJO, respectively. Amid all this competition GT’s company, GT’s Living Foods, remains a family-owned business. It is widely seen as the most innovative company in the industry, with over 30 types of kombucha offerings, kefirs (a probiotic milk drink), yogurts and adaptogenic teas, and the industry sales leader, with more than half of the market. You can hear GT tell his story at

succEss: Gt daVE and KomBucha53

e-commerceThe general term for conducting business on the Internet.

virtual instant global entrepreneurship (VIGE)A process that uses the Internet to quickly create businesses with a worldwide reach.

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small BusInEss: VarIEtIEs and Impacts CHAPTER 1 21

product descriptions found to be the most effective. Amazon, eBay, and Upwork also organize the sellers’ accounts to handle international payments, shipping, insurance, and basic customer service issues. VIGE sites provide the assurance of honesty on the part of buyers and sellers, us-ing rules, warrantees, and most of all, mutual ratings of buyers and sellers.


Learn more about the topics above at these sites:

Importing and exporting: SBA’s exporting page,

Importing and exporting: The U.S. government’s exporting page,

Challenge and the Entrepreneurial WayEntrepreneurs’ stories usually tell us about challenges faced and overcome. What is fascinating if you hear enough stories is that there are some strategies that are used again and again. Knowing these strategies can help you achieve your own entrepreneurial dreams. What are the strategies? Some of them you have heard all your life; others might be new:

• Ifyoudon’tsucceedthefirsttime,try,tryagain: This is called the strategy of perseverance, and has famous examples like Thomas Edison’s testing of more than 8,000 different materi-als to find one that would work correctly for his lightbulb. Like Edison, it works only if you try different people, products, or pitches.

• Scaleback: Maybe you have an idea but can’t get the resources to get it started. Try scaling it back to the level of resources you currently have available. If you can’t afford to open a restaurant, consider starting with a food truck or a catering service, or make yourself into a rent-a-chef service.

• Birdinthehand: Instead of planning a firm and then looking for resources, why not start with the resources you already have (knowledge, contacts, money, etc.) and think about what is the best use you can make of them? This is one of the strategies of the technique of effectuation, which will be covered in more detail in Chapter 6.56

• Pivot: Go ahead and start the business in any way you can and look for better opportunities as you go along. It happens all the time. William Wrigley Jr. started out selling soap and baking powder and, to get people’s attention, he gave away gum as a promotional item. Wrigley switched to selling gum when he realized how popular a product his Juicy Fruit gum was.57 This approach is also called the corridor principle because until you start going down the corridor (or in your case, doing your business) you can’t tell what opportunities you might find.58

• Takeitontheroad: Sometimes the place you live isn’t the best market for your product or service. Trying another market (in person or via the Internet) might help you find the trac-tion you need to succeed.

• Askforhelp: Today everyone can harness the wisdom of crowds, whether it is asking your personal and group connections on Facebook or LinkedIn for ideas, advice, opinions, or donations, or going to the many specialized websites out there for crowdsourcing such as (like Pixel Press did) or for funding or or for finding or testing product ideas.

• Plantoearn: Think through your capabilities, prospects, and passions to find the best idea for you, and then plan for action to make it happen.

In this chapter we have considered some of the key ideas and myths about small business. We have seen the work of founders of small businesses that stayed small and those that started small and grew larger. Either way, when small businesses are created, nearly every part of our society benefits—through new jobs, new ideas, and the new opportunities created for individuals, com-munities, and the economy. The key element in getting small businesses started is helping people who have the intention to start a business take the steps to get it done, and that is the goal of this text. If we can help you follow in the model of Robin Rath, you are certain to do well. He did.

corridor principleA theory in entrepreneurship and occupational theory that says that as you start pursuing one line of work or opportunity (which is like going down a corridor) you will encounter other opportunities.

crowdsourcingTechniques often based on Internet services to get opinions or ideas through the collective involvement of others.

1-6 Recognize the seven key strategies of the entrepreneurial way.


perseveranceThe behavior of continued effort to achieve a goal.

effectuationAn approach used to create alternatives in uncertain environments.

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22 PART 1 EntrEprEnEurs and IdEas: thE BasIs of small BusInEss

● Pixel Press, outlined in the vignette opening this chapter, obtained a lot of their startup funding from a crowdfunding campaign on, which is shown to the right. The materials you see here resulted in an oversubscription, raising $108,950 in a campaign seeking $100,000. People donating did not get equity, but gifts or consideration from Pixel Press. For example, a $1 donation got donors access to emailed updates and videos.

Pixel Press, “Kickstarter,”


Learn more about the topics above at these sites:

Inspirational images for entrepreneurs: Kauffman Foundation,

Inspirtational stories: Entrepreneur magazine,

Why firms fail:,


1-1 Understand the scope of small business in the United States.

● The entrepreneurial process consists of four steps: feel, check, plan, do.

● There were 15.5 million entrepreneurs in the United States in 2015.

● About 50 million Americans were part-time entrepreneurs at the same time.

● Start-up success comes from combining planning and action, as well as believing in yourself.

● Getting help helps your chances of business survival.

● Successful entrepreneurs not only do well, they do good for others.

● An entrepreneur (alias self-employed or owner or owner-manager or founder) is someone who owns a business.

● An entrepreneur can create a new business or buy an existing business or a franchise.

● The CSI model describes how entrepreneurship plays out in our society through corporate, social, and independent entrepreneurship (which includes small business).

1-2 Differentiate between small businesses and high-growth ventures.

● Small businesses form the economic core and largest segment of the economy.

● Small businesses range from low to moderate in innovativeness and growth rate.

● Small businesses are usually intended to remain small, generally a size that the owner feels comfortable controlling personally.

● High-growth ventures have high innovativeness and growth rates.



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small BusInEss: VarIEtIEs and Impacts CHAPTER 1 23

● Every owner has a chance to decide on his or her firm’s approach to growth.

● Lifestyle/part-time firms start and remain small and centered on the owner’s needs.

● Traditional small businesses are more customer-driven, but remain small and simple, providing an income for the owner.

● High-profit businesses add employees and locations in order to provide a substantial income to the owner.

● High-potential ventures attempt to grow enough to become a big business.

1-3 Dispel key myths about small businesses.

● Dispelling the myths is important to supporting one’s motivation to become an entrepreneur.

● Myth 1: There’s not enough financing to start businesses. While we all would like more money, the vast majority of people starting small businesses report finding funding is not a problem.

● Myth 2: To make profits, you need to make something. Today the most profitable small businesses are typically in the service sector.

● Myth 3: If you fail, you can never try again. Lots of successful entrepreneurs have one or more failures in their background. If you pay off your debts and learn from the experience, you are positioned to try again.

● Myth 4: Students (or moms or some other group) don’t have the skills to start a business. Facebook’s Mark Zuckerberg was a student, Mary Kay’s Mary Kay Ash a mother, and Samuel Adams’s Jim Koch a consultant when they started their businesses. You could too.

● Myth 5: Ninety percent of new businesses fail within two years. In reality, 69 percent of new businesses are still going after two years.

1-4 Identify actions key to becoming a small business owner.

● The BRIE (boundary-resources-intention-exchange) model describes the actions that need to take place for the business to be created in the earliest stage.



● The more BRIE activities that were pursued, the greater the likelihood of the new business surviving.

● The BRIE checklist gives easy-to-perform actions to help move prospective entrepreneurs from inaction to action.

● The BRIE actions also identify the competencies you need to master to get your business started.

1-5 Recognize how small businesses are important to our economy and your community.

● Small businesses are important because they are the major source of new jobs in our economy.

● Small businesses are also the major source of innovations in society.

● Small businesses offer many benefits to localities including employment, taxes, new revenue inflow, support for other businesses, and visibility.

● Small business is also the major source for new opportunities, such as moving up in the economy and society, the opportunity for customers and businesses large and small to obtain needed goods and services.

● Exporting through VIGE and traditional approaches is a major economic force for small businesses worldwide.

1-6 Recognize the seven key strategies of the entrepreneurial way.

● Persevere: When you don’t succeed the first time, try, try again.

● Scale back: Start smaller and build up.

● Bird in the hand: Do the best you can with what you already have.

● Pivot: Start up and keep your eyes open for better opportunities along the way, then pivot into them.

● Take it on the road: Go where there is a receptive market.

● Ask for help: Get help from friends, from crowds; getting help helps.

● Plan to earn: Plan now to map your actions.



small business, 4

self-efficacy, 4

entrepreneur, 4

occupation, 5

goods or services, 6

firm, 6

novelty, 6

imitative, 6

self-employed, 6

founders, 6

franchise, 6

buyers, 6


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24 PART 1 EntrEprEnEurs and IdEas: thE BasIs of small BusInEss


1. Describe the population of small businesses in America. How many firms are there and how many new firms are started each year?

2. Why do you think 56 percent of 15- to 25-year-olds say they would like to start a small business, but only about 15 per-cent who express an interest actually do anything?

3. What are the differences between small businesses and high-growth ventures?

4. Describe the BRIE model and how it applies to creating a firm.

5. Why are small businesses better at innovation than large businesses?

6. Why is the presence of small businesses important for large businesses?

7. Take 10 businesses that operate in your community and categorize them in the appropriate type of overall growth strategy. Why did you put them there?

8. Many people think of the United States as one of the most entrepreneurial countries in the world. Are there other coun-tries with higher levels of entrepreneurship? Name two and explain why their levels of entrepreneurship might be higher than that of the United States.

9. How does the story of Jim McKelvey reflect the key ethical idea of this chapter, “Do well. Do good”?


1. Put this search into Google to find entrepreneurs from your school: “entrepreneur and [your school name] site:” Look at the first 100 names and see if you notice any patterns about what kinds of businesses they run. Your instructor might give you other aspects of their lives to look for.

2. Can you find examples of corporate, social, and independent entrepreneurs in your town? Are there examples of people

who have done more than one type of entrepreneurship in their lives?

3. Check your state and locality’s website(s) for information on programs that support economic development through small business creation and job creation. You can get a start at’s State Business Resources page: Pick a state and make a list of programs that might be worth looking into as you develop your business idea.

heir, 6

independent entrepreneurship, 7

social ventures, 7

social entrepreneurship, 7

sustainable entrepreneurship, 7

green entrepreneurship, 7

corporate entrepreneurship, 8

CSI entrepreneurship, 8

forms of entrepreneurship, 8

opportunity-driven entrepreneurship, 9

necessity-driven entrepreneurship, 9

factor-driven economy, 9

efficiency-driven economy, 9

innovation-driven economy, 10

small and medium enterprise (SME), 10

independent small business, 11

owner-managed firm, 11

serial entrepreneur, 11

innovativeness, 11

overall growth strategy, 12

lifestyle or part-time firm, 12

traditional small business, 12

high-performing small business, 12

high-growth venture, 12

unicorns, 12

main street businesses, 13

crowdfunding, 14

P2P lending, 14

drop-shipping, 14

bootstrapping, 14

Small Business Administration (SBA), 14

creative destruction, 17

importing, 19

exporting, 19

e-commerce, 20

virtual instant global entrepreneurship (VIGE), 20

perseverance, 21

effectuation, 21

corridor principle, 21

crowdsourcing, 21

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Jolene Adams was a student with an interest in helping fight “food insecurity” in St. Louis. Food insecu-rity can occur when people aren’t getting enough food or are not sure they can afford or find enough food to feed their families, or when grocery stores are too far away for them to readily get to. Measured these ways, over 25 percent of the people in the city of St. Louis are food insecure or live in what are  called “food deserts.” You can check the USDA’s food insecurity map at for maps of food deserts at the neighborhood level.

Jolene wanted to help by creating a service to get low-cost or free food to people in neighbor-hoods with the highest food insecurity. She imagined a bus or truck fitted with shelves and bins contain-ing food, which they would drive to those neighborhoods so people can shop near their homes.

She was trying to decide the best way to organize their business. There already was St. Louis Metro Market, a seasonal bus-based market organized as a nonprofit. You can see a video at www So, Jolene could approach them about starting a second bus, or staffing a second shift on their current bus. This could make her a corporate entrepreneur and part of an existing organization. She could create a new nonprofit organization for her bus or truck, making her a social entrepreneur. Or if she wants to, she could organize as a for-profit business, hopefully with low prices to help her customers, making her an independent entrepreneur.

Since the need was known to exist and solutions to the problem also were known, the initial ques-tion for Jolene was, what is the best way to approach the business?

See this YouTube news video on food deserts for more information:

4. Look at the local newspaper’s website, or the bizjournals .com website for the paper in your region. Search the terms “entrepreneur” and “small business owner” to find articles about local entrepreneurs. From this, compile a list of pro-spective local small business heroes and heroines to serve as role models and prospectors for local sources of help.

5. For students in your class thinking about (or in the process of) starting their own businesses, find out which of the BRIE items they have completed. Ask them which items they expect they will complete or get help on by taking this class.


1. What do you think are the advantages and disadvantages of the corporate, social, and independent entrepreneurial approaches outlined in the case?

2. How would you feel about being a corporate entrepreneur who is part of an existing organiza-tion? How about as an independent or social entrepreneur starting your own organization from scratch?

3. All businesses need to break even financially to be seen as workable. For-profit businesses also typically measure how much profit they make as one metric of their success. But busi-nesses can also measure the impact they have on their communities, customers, economies, and environment. What kind of impact measure might it make sense to consider for the proposed market? Does it change depending on the kind of CSI entrepreneurship approach you choose?

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Small Business Entrepreneurs: Characteristics and Competencies


● Being open to new opportunities and being willing to take on challenges are essential qualities for entrepreneurs like Khalia Collier to fulfill their career and life goals while also helping their home communities. What other entrepreneurial skills and qualities enabled Khalia to grow her business into what it is today? Khalia Collier

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Focus on Small Business: Women’s Basketball Team Owner and General Manager Khalia Collier1

After you complete this chapter, you will be able to:

LO 2-1 Recognize the key aspects of the entrepreneurial personality.

LO 2-2 Assess the operational competencies of the successful entrepreneur.

LO 2-3 Identify the challenges women and minority business owners face.

LO 2-4 Describe the situation of people who become second career (or veteran) entrepreneurs.

LO 2-5 Recognize the special nature of entrepreneurial teams.

LO 2-6 Describe the challenges of family business owners.

LO 2-7 Recognize the stages of development entrepreneurs and their firms go through.

LO 2-8 Discover the rewards entrepreneurs can achieve through their businesses.

The City of St. Louis had been begging for a professional basketball team ever since the loss of the former ABA-NBA Spirits of St. Louis, back in 1976. Who knew that 35 years later a professional basket-ball team would once again reign in the city? Only this time, women’s basketball would become the talk of the town.

Khalia Collier, a St. Louis native and former player, became one of the youngest sport team owners in the country in May 2011 after the 23-year-old bought out the ownership of the St. Louis Surge profes-sional women’s basketball team. Khalia began playing basketball at the age of five and fell in love with the game. Her talents on the court prompted her to become one of the top players in the region, setting several impressive records during her time as a student-athlete. She ultimately decided to commit to Columbia College and later Missouri Baptist University, both smaller universities where she would be able to continue playing varsity basketball while simultaneously dedicating herself to graduating with a degree in communication studies.

After graduation, Khalia began working for a Fortune 500 company, but she continued to play basketball when she could. Doing this, she discovered a semiprofessional women’s basketball team, the St. Louis Surge. When Khalia thought about it a light bulb went off in her head as she instantly saw the potential the franchise had to thrive, and her natural ambition and grit took over. She felt her corpo-rate experience, along with her passion for basketball, her family’s entrepreneurial background, and her deep commitment to the city of St. Louis prepared her for the next phase of her life—becoming the owner and general manager of the St. Louis Surge.

In 2013 under Khalia’s leadership the Surge began rebranding: new logo, staff, coaches, and ros-ter. It was the beginning of a new chapter and a glimpse of what Khalia and the Surge would continue to build. She was determined to revolutionize the impact of sports in the community. To do so, Khalia took a creative approach by recruiting players that could serve as role models and mentors for the youth in the community. All players are required to obtain a college degree. Khalia thrust them into the community, arranging mandatory schedules for the players and herself to attend school appearances, host sports camps, provide community service, and participate in other local events. Building on this, Khalia secured several partnerships with local and national businesses to assist in brand expansion.








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Khalia’s strategy of growing the team by pursuing community engagement, promoting the devel-opment of leadership, and showing the importance of education embodies her personal philosophy and applies it to her team and community. Because of Khalia’s drive and the ideas for improving the team, attendance at Surge games has grown from 50 or 60 when Khalia took over in 2011 to thousands of fans per game today. And on the court Khalia’s Surge has won two national championships and has been four-time runner-ups in seven years. Her boundless energy and ability to see new opportunities keeps her charged up to continue making history.

For videos on Khalia Collier, see general-manager-st-louis-surge/ and

DISCUSSION QUESTIONS1. Why did Khalia Collier decide to become an entrepreneur?

2. What skills did she develop to become a successful entrepreneur?

3. What opportunities did Khalia find and pursue?

The Psychology of EntrepreneursIn the opening vignette, Khalia Collier displayed three of the key characteristics of successful entrepreneurs introduced in Chapter 1: She believed in herself and her ability to create a busi-ness that would let her do work she loved and help her community. She depended on help from family, friends, and associates to learn her business, and she persevered over several years until she achieved her goal. These are aspects of Khalia’s behavior, her way of looking at and thinking about herself and her world, that are called cognition, and her visible actions. Is Khalia’s pat-tern of entrepreneurial behavior the only type there is?

The answer is that there is no one pattern of entrepreneurial behavior or entrepreneurial type. In Chapter 1 we categorized the entrepreneurs around the world into opportunity-driven and necessity-driven types. We talked about entrepreneurs in corporate, social, and independent set-tings and how their focuses differed. We even discussed the four kinds of overall growth strate-gies entrepreneurs typically design their businesses around. There are literally hundreds of ways to think about entrepreneurial personalities. That is good because it means there can be more than one personality type that can lead to success, and it increases the likelihood that there is an approach to entrepreneurship that will fit with your interests and style.

Successful entrepreneurial behavior leads to the creation of a new firm that meets the goals of the entrepreneur. For some entrepreneurial behaviors such as selling (think hard sell vs. softer sell) there is more than one way to do the job right. For other behaviors, there can be only one right way to do it (e.g., applying for a loan, registering a business). In this chapter we will con-sider the ways people are different, the ways they are the same, and close with a look at the pat-terns leading to successful entrepreneurial behavior for several distinct groups of entrepreneurs.

The Five Ps of Entrepreneurial BehaviorThere are five aspects of behavior that most successful entrepreneurs display. These are not the only possible behaviors that you could consider, but they are behaviors that have been shown in the research to relate to success among entrepreneurs. The five behaviors include the following:

1. Passion: Passion is an intense positive feeling the entrepreneur has toward the business or even the idea behind the business. It comes from being actively involved in moving the busi-ness forward. Passion has multiple benefits, such as increasing your commitment to the business (which relates to perseverance), and inspiring key stakeholders like potential in-vestors, employees, or subcontractors. Passion is displayed in three ways: (1) by looking at the challenges of the business in a creative way, (2) by being persistently focused on the

LO 2-1 Recognize the key aspects of the entrepreneurial personality.

cognitionA person’s way of perceiving and thinking about his or her experience.

actionThe visible behavior a person takes.

passionAn intense positive feeling an entrepreneur has toward the business or the idea behind the business.

stakeholderA person, organization, or entity that has an interest or concern in a particular business or decision.

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business, and (3) by being absorbed by the tasks and concerns of the business.2 When we talk about entrepreneurs who “live for the business,” we’re talking about passion. When you see entrepreneurs get excited as they describe something about their business, we see and respond to their passion.

2. Perseverance: Perseverance is best thought of as a type of learned optimism,3 the ability to stick with some activity even when it takes a long time, and when a successful or unsuccess-ful outcome is not immediately known. It is one of the most powerful contributors to entre-preneurial success like that of J. J. Rosen who literally taught himself programming to make his business work (see the following Small Business Insight).4 In Chapter 1, we talked about the strategy of perseverance with the old expression “If you don’t succeed the first time, try, try again.” Trying again is the behavior behind perseverance, but requires thinking about what went wrong and what went right, and adjusting your next try to achieve a better result. Behind this thinking and behavior is the attitude of learned optimism, knowing that you can and will keep at this until you have mastered it.5 The danger is to keep trying the same ac-tion repeatedly without learning. That is a problem behavior called perseveration.

3. Promotion–Prevention Focus: Most of us have some mix of two internal focuses (also called our regulatory focus), a promotion focus intent on maximizing gains, which gives us a bias toward pursuing opportunities likely to lead to those gains, and a prevention focus intent on minimizing losses, with a bias toward inaction or protective action.6 Being a suc-cessful entrepreneur involves balancing the two focuses. In an established industry or a poor one, a prevention focus can work well, while a promotion focus can yield better results in richer, dynamic, uncertain environments or industries.7 A reckless pursuit of opportunity may bankrupt your company, while a protection-at-all-costs focus may mean you will miss the opportunities necessary to keep cash flowing into your firm. Successful entrepreneurs deal with preventing problems by planning ahead of time and creating actions to avoid or deal with problems. For J. J. Rosen, keeping his day job until his software business took off was one way to protect his family and business. Those same successful entrepreneurs also plan where to find opportunities and how to pursue them. But planning is rarely perfect; you have to be ready to act when the situation demands it. Your own promotion–prevention balance is likely to come into play in those quick decision situations. Trust your plans, and where the plans don’t have the answer, trust your “gut” or intuition. Entrepreneurs may have regrets about their choices, but they generally feel better having taken charge of the choice process.8

4. Planning Style: There is more than one way to plan. In fact, there are five ways.9 Compre-hensive planners take a long-term view, develop long-range plans for all aspects of the business, are comfortable with planning, and act based on the plans they’ve developed.

perseveranceThe ability to stick with some activity even when it takes a long time and its outcome is not imme-diately known.

promotion focusAn entrepreneur’s attention to maximizing gains and pursuing opportunities likely to lead to gains.

prevention focusAn entrepreneur’s attention to minimizing losses, with a bias to-ward inaction or protective action to prevent loss.

comprehensive plannersEntrepreneurs who develop long-range plans for all aspects of the business.

● Passion is an intense positive feeling about what you do, and this entrepreneur clearly has it. How do you display passion when you feel it?

Hero Images Inc./Alamy Stock Photo

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30 PART 1 EntrEprEnEurs and IdEas: thE BasIs of small BusInEss

Critical-point planners plan around the most important aspect of the business first, act on it, and then consider if additional plans are needed. It is not a very long-term approach to planning. Opportunistic planners generally start with a goal and look for opportuni-ties to achieve it. Once they find a good opportunity, even if it isn’t the one related to their original goal, they act on it, so it is very short term in orientation. Reactive planners are completely passive, waiting for cues from the environment to determine what actions to take. Their focus is entirely short term, and there is little in the way of goals driving their efforts. They can make the most of a situation because there is no other plan competing for their attention. Habit-based planners do not really plan at all because their actions are dictated by their routines. They do today what they did yesterday. They don’t plan, and they don’t even tend to react to changes in their environments. Simply put, results from small business owners in countries around the world have shown that in terms of getting a start-up launched, keeping it going, and making a living from it, comprehensive planners do the best, followed by critical-point planners, and opportunistic planning types.10 Reac-tive and habit planners generally do very poorly in business, even if they manage to get their firms started.

5. Professionalization: One hallmark of successful entrepreneurs is that they usually do at least one thing much better than average. That average is called a standard business prac-tice and every industry has them. Doing that level or better is what professionalization is all about. There are three levels of professionalization: expert business professionalization when most aspects of the business meet or exceed the industry’s standards, specialized business professionalization when one or two aspects of the business are at this level, or minimalized business professionalization when none of the aspects of the business achieve the industry standard. Consider the oldest professionalized firm in the world, the Zildjian Company. The company started in Turkey in 1623 with a formula for making an alloy ideal for cymbals. At this stage the company was specialized. In 1929, when Avedis

critical-point plannersEntrepreneurs who develop plans focused on the most important aspect of the business first.

opportunistic plannersEntrepreneurs who start with a goal instead of a plan and look for opportunities to achieve it.

reactive plannersEntrepreneurs with a passive approach, who wait for cues from the environment to determine what actions to take.

habit-based plannersEntrepreneurs who do not plan, preferring to let all actions be dictated by their routines.

professionalizationThe extent to which a firm meets or exceeds the standard business practices for its industry.

standard business practiceA business action that has been widely adopted within an industry or occupation.

expert business professionalizationA situation that occurs when all the major functions of a firm are conducted according to the standard business practices of its industry.

specialized business professionalizationA situation that occurs when businesses have founders or owners who are passionate about one or two of the key business functions, such as sales, opera-tions, accounting, finance, or human resources, and pursues those functions in a professional manner.

minimalized business professionalizationA situation that occurs when the entrepreneur does nearly every-thing in the simplest way possible, rather than in a professional way.


After graduating from Vanderbilt University in 1992 as a psychology major, J. J. Rosen landed his first job as a child-support coordinator for the Tennessee District Attorney General Conference, an administrative branch of the state’s court system. As he closely observed the work processes, he soon realized that much of the work performed by the state’s child-support collection agencies could be done more efficiently and effectively if it were computerized. There were just two problems—many of these agencies had no comput-ers, and no specialized computer software existed to handle the type of functions needed by the organiza-tions. J. J. set out to resolve this problem, fulfill a need, and take advantage of this potential business opportunity.

Here J. J. faced his third problem: While he had an idea for software, he did not know how to write a computer program. Driven to make his idea a reality, J. J. taught himself this skill. A few months later he had mastered programming well enough to create child-support services software that could track child-support payments and collection efforts. With this product, the Atiba Software and Consulting Company was born as a part-time venture. Promoting his software as a better idea and offering very low prices to get an initial customer base, he sold the software statewide. Soon his business was growing through word-of-mouth advertising, and he landed his first major client, Andersen Consulting, within a year of starting. Only then did J. J. quit his job in the district attorney’s office and embark on his own business full time. By 2019 Atiba ( had more than 800 clients. For J. J., the idea drove the business, carefully.

J. J. rosEn and atIBa softwarE and ConsultIng11

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S K I L L M O D U L E 2 .1

Entrepreneurial Personality Overview13

The complete assessment of each of the five Ps would require more than 100 questions, but you can get a very general sense of how you lean by answering and scoring the questions below. In the following questions, determine how strongly you agree with the statement from 1 (Strongly Dis-agree) to 5 (Strongly Agree). If you are not sure, make your best guess.

Strongly Disagree

Strongly Agree

1. I am better than my peers at being able to solve problems. 1 2 3 4 5

2. I am better than my peers at making money. 1 2 3 4 5

3. I am better than my peers at being creative. 1 2 3 4 5

4. I am better than my peers at getting people to agree with me. 1 2 3 4 5

5. I am really excited to be establishing a new company. 1 2 3 4 5

6. I am really energized by owning my company. 1 2 3 4 5

7. I am really in love with creating a new firm. 1 2 3 4 5

8. I am really excited to create something out of nothing. 1 2 3 4 5

9. I really enjoy nurturing a new business through its emerging success.

1 2 3 4 5

10. My personal philosophy is to do “whatever it takes” to establish my own business.

1 2 3 4 5

11. I would rather own my own business than earn a higher salary employed by someone else.

1 2 3 4 5

12. Owning my own business is more important than spending time with my family.

1 2 3 4 5

13. There is no limit to how long I would give a maximum effort to establish my business.

1 2 3 4 5

14. Overall, I am more oriented toward achieving success than preventing failure.

1 2 3 4 5

15. I often think about the person I would ideally like to be in the future.

1 2 3 4 5

16. I frequently think about how I can prevent failures in my life. 1 2 3 4 5

17. I am anxious that I will fall short of my responsibilities and obligations.

1 2 3 4 5

Zildjian inherited the company, he moved it to America and applied his marketing, finan-cial, and business knowledge to bring the firm up to the level of expert professionalization, where it remains today.12

Notice that these behaviors are relevant to more than starting a business. They are useful be-haviors in business in general and even in life. If you are an employee, your bosses will want you to show passion (often called engagement) in the business, be persevering, and strike a balance of promotion and prevention. The fact that these five ideas are behaviors means that you can learn how to display them, even if it is not the way you were behaving originally. That is what education, skill development, and practice are all about. Each of these types of behavior can be assessed formally using psychological questionnaires, but you can make a general assessment with items like those in Skill Module 2.1.

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One other approach to thinking about the entrepreneurial personality that has seen a lot of attention recently is the idea of the entrepreneurial mindset.15 In Google searches, it has eclipsed searches about entrepreneurial personality.16 But at this point, there are multiple models for explaining and measuring the entrepreneurial mindset, like those of the Network for Teach-ing Entrepreneurship (NFTE), the Keen Engineering Entrepreneurship Network, the Gallup Organization’s Builder Profile 10 (BP10), Eckerd College’s Entrepreneurial Mindset Profile, and’s MindCette Entrepreneurial Test. Most require you to pay a fee in order to see your full results.

A free approximation comes from the Canadian government’s Business Development Bank website. Google “bdc entrepreneurial self-assessment” to find it.17 Its dimensions are pretty representative of the different models, consisting of motivations (need for achievement, power/control appeal, ambition, self-sufficiency), aptitudes (perseverance, self-confidence, tolerance toward ambiguity, creativity), and attitudes (acting on your destiny, action orientation).

entrepreneurial mindsetThe motivations, cognitions, at-titudes, aptitudes, and behaviors that lead to a propensity to create solutions to problems or seek op-portunities to do something new or better.

For the next set of questions, rank them by putting a “1” by the statement that most closely fits your approach or belief, “2” by the next closest fit, and so on.

Rank (1–5)A. I am most comfortable when I have planned for everything.B. If I’ve taken care of the biggest challenge, I feel my job is done.C. I am always looking for the next big thing, and when I find it I go for it.D. If someone offers me a good opportunity, I’ll go for it.E. Whatever happens, I stick to what I have been doing all along.

For the next set of questions, rank them by putting a “1” by the statement that most closely fits your approach or belief, “2” by the next closest fit, and so on.

Rank (1–3)F. I feel best when everything I do is done the best way possible.G. I think it is important to be known for doing one thing extremely well.H. I believe it is more important to get the job done than to try and make it


Scoring of the Entrepreneurial Personality Overview can be found in endnote 14.14


Learn more about the topics above at these sites:

UK universities’ Entrepreneur Test (a relatively serious psychometric test):

Harvard Business Review’s entrepreneur test (gives you a general idea, not a full workup): 2010/02/should-you-be-an-entrepreneur

Entrepreneurial Operational CompetenciesAll the aspects of the entrepreneurial personality depend on hard work, but there are other spe-cific types of business-related expertise—called competencies—that appear repeatedly in suc-cessful entrepreneurs around the world.18 While there could be as many competencies as there are personality types, theories, like the BRIE (boundary-resources-intention-exchange) model introduced in Chapter 1, help us focus on those few competencies that are essential to

LO 2-2 Assess the opera-tional competencies of the successful entrepreneur.

competenciesForms of business-related expertise.

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successfully starting and running a business. After you have read about these entrepreneurial competencies, use Skill Module 2.2 to assess your competencies.

The competency suggested by boundary in BRIE theory relates to the organizational and busi-ness processes of a firm. This type of expertise can be called basic business competency.19 There are certain fundamental activities that all businesses must perform, which are called the key business functions, and include sales, operations (also called production), accounting, finance, and human resources. Getting organized and registered—which creates the boundary—is an ex-ample of an operations activity.

There is also industry-specific knowledge. A restaurant really is different from a mechan-ic’s shop or a computer store or a portrait studio. Each requires you to understand a particular industry and market, and each requires a very particular kind of skill. This was a large part of the reason that Khalia Collier, in the example at the start of this chapter, worked for others before going off on her own. Some of these skills focus on knowing your new business and its context (Chapters 5 and 6), having the kind of skills that fit the business, being able to diagnose your business’s health (Chapters 8, 12, 16, and 17), and being able to see future business opportuni-ties while doing your everyday work (Chapters 4 and 7).

Resources lead to specific resource competencies.20 For even the smallest part-time busi-ness, the entrepreneur needs to find or gain access to resources such as time, information, fi-nancing, space for the business, raw materials, and a variety of people (advisers, suppliers, service providers, customers). For J. J. Rosen of Atiba Software, getting the computer program-ming knowledge was critical. Knowing the best place to get raw materials or set up your opera-tion, finding better information than your competition on your market, or having enough financing to ride out downturns in sales are examples of resources that could give you an advan-tage. You’ll learn more about gathering resources in Chapters 5, 11, 13, 14, and 18.

Intention reflects your determination to start your business and make it a success. These de-termination-driven skills can be called determination competencies21 and are demonstrated by focusing on your business over other choices and being ready to find out about and do what it takes to pursue opportunities that will help get the business going. The entrepreneurs we have mentioned in this chapter—Collier and Rosen—displayed tremendous determination to do the work and stick with the business through thick and thin. Many of these determination competen-cies are essential to deciding if a business is feasible for you before you start a business, a topic that is covered in Chapter 4.

Exchange deals with the actual process of exploiting the opportunity for profit—which is a fancy way of saying “making sales.” The competencies that make this work are called opportunity competencies,22 which include identifying an opportunity, a product, or service idea that is likely to lead you to a profit and is ideally distinctive to your firm and, you hope, hard for others to copy. For Bill Gates when he developed Windows and J. J. Rosen when he developed Atiba, the opportunity each found was for creating software that would make life and work easier. You’ll learn more about the opportunity process and protecting opportunities through strategic planning in Chapters 4 and 7, where we will discuss the strategy of imitation with a twist.

key business functionsActivities common to all busi-nesses such as sales, operations (also called production), account-ing, finance, and human resources.

Industry-specific knowledgeActivities, knowledge, and skills specific to businesses in a particu-lar industry.

resource competenciesThe ability or skill of the entrepre-neur at finding expendable components necessary to the operation of the business such as time, information, location, financ-ing, raw materials, and expertise.

determination competenciesSkills identified with the energy and focus needed to bring a business into existence.

opportunity competenciesSkills necessary to identify and exploit elements of the business environment that can lead to a profitable and sustainable business.

S K I L L M O D U L E 2 . 2

Competency Self-Assessment

In this exercise, rank your skill or competency at different types of business activities. The goal is to see where you feel you have strengths and on which competencies you need to work. For each skill, think of a person or a company that does a really good job at that activity. Then compare your own performance to it using one of four levels of competency: needs development means that you still have to learn the skill; needs refinement means that you have the rudiments of the skill, but still need to practice it and carefully check your performance; competent means you can perform the activity consistently and without mistakes;

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excellent means you perform the activity as well as your role model, or nearly so. The categories of compe-tencies are built from those listed in the text.

Level of Competency




Refinement Competent Excellent

Key Business Functions


Operations (production)



Human resources

Industry-Specific Knowledge

Industry expertise

Industry skill

Market knowledge

Ability to diagnose

Ability to see opportunities

Resource Competencies

Business information

Business financing

Space for the business

Raw materials

Support people

Determination Competencies

Business as primary focus

Ability to manage time

Ability to find/get help

Ability to sustain relationships

Willingness to act

Opportunity Competencies

Found profitable idea

Idea imitates with a twist or is new, but tested

Idea is hard to copy

Entrepreneurs often find it useful to copy this list and ask people who know them well to fill it in with them in mind. Good examples can include business consultants or bankers, people who have worked with you, or even family members. Comparing what others see to what you see in yourself can help you put in perspec-tive which skills need further development or better demonstration to others. In big business, such an approach is called “360-degree feedback,” but it can also be applied in small businesses.

Research suggests that people can learn what they need to know to have adequate levels of expertise in all five competency areas. In fact, students who go through formal training or classes often score higher on the expertise tests than people running businesses.23 In addition to training

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or classes, you can get consulting assistance from public or private sources, or you can even buy expertise in package form by adopting industry standard techniques. You can use state-of-the-art services or you can franchise.

The presence and absence of certain skills makes a tremendous difference in distinguishing those who start businesses from those who don’t. But for those businesses that do get started, the amount of expertise is what distinguishes the more successful from the less successful firms. The concern about expertise leads to thinking about the level of professionalization you choose to use in your firm.


Learn more about the topics above at these sites:

Infusionsoft’s Entrepreneurial Type Test (a for-fun test): SBA’s Small Business Readiness Assessment (checks a lot of the key issues):

The Sociology of EntrepreneursEntrepreneurs can be as strongly affected by their social or sociological characteristics as by their personality characteristics.24 These sociological characteristics relate to the social groups to which they belong. Family, gender, race, nationality, religion, age, and other types of group mem-berships, such as being a member of a team or a veteran, are typical examples. Some of these memberships are important enough that they are protected from discrimination by federal laws, and government and companies dealing with the government make special efforts to support members of those groups. Others lack such protections but are still powerful influences on the individual entrepreneur. The challenges members of these groups face share some similarities, as do the programs designed to support them. To get an idea of how this works, the following sec-tion considers entrepreneurs in family businesses and teams, women entrepreneurs, and second career entrepreneurs. While there are lessons and advice given for each of the groups, the lessons can apply to everyone—for example, the techniques of time management, which are discussed in the “Family Businesses” section, or the methods for managing idea ownership, discussed in the “Entrepreneurial Teams” section.

Women and Minorities in Small BusinessWomen-owned businesses are one of the fastest-growing sectors of all U.S. businesses.25 Between 1997 and 2015, the number of private businesses with at least 51 percent female ownership increased by 74 percent, while the rate for firms overall was 51 percent.26 Around 40 percent of all businesses are majority owned by women, with another 8 percent equally owned by women and men.27

Although in 2018 there were an estimated 12.3 million businesses owned by women, women-owned firms accounted for only 4.3 percent of small business revenue nationally.28 Why the smaller impact? Generally it is explained by the kinds of occupations and industries women choose when starting their businesses. For example, Table 2.1 shows that more women choose service industries that tend to have lower average sales levels, while there are more men in con-struction and financial industries, which have higher average sales levels. Men also report more high-tech firms, as well as firms where technology is central to the business. Both are associated with higher firm sales.29

The entrepreneurs’ goals in starting the business might also play a role. For example, men more often mention making money as a motivation, while women more often mention having flexibility for personal and family life. The overall growth strategies discussed in Chapter 1 also differ, with more women choosing single-person lifestyle firms over the small business forms that employ others. Along these strategy lines, women prefer less-risky firms, which also tend to be the firms with lower returns.30 Another idea from Chapter 1 was whether the entrepreneur

LO 2-3 Identify the chal-lenges women and minority business owners face.

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chooses to start a business to pursue opportunity or out of necessity, here however American women and men report similar trends, with about 70 percent of each group mentioning opportunity.32

Representing approximately 29.3 percent of all U.S. businesses, the number of minority-owned firms has likewise grown explosively in recent years.33 While the total number of U.S. self-employed edged up by less than 10 percent between 2007 and 2012, minority-owned busi-nesses witnessed a remarkable 27 percent growth rate.34

What are the reasons for such phenomenal growth in the number of minority entrepre-neurs? The establishment of both public and private funding and networking initiatives have helped level the business playing field for minority entrepreneurs by offering information,

TABLE 2.1 Percentage of Women Entrepreneurs in Different Industries, 201231

Industries with More Women Than Average* Percentage

Industries with Fewer Women Than Average* Percentage

Health Care and Social Assistance (doctors, dentists, residential and child care)

52.8 Professional/Scientific/Technical Services (lawyers, CPAs, consulting)


Educational Services 44.9 Accommodation and Food Services 24.7

Personal Services (e.g., beauty salons, dry cleaners, auto repair, etc.)

41.6 Finance, Insurance, and Real Estate


Administrative Services 37.4 All Other Industries 18.9

Retail Trade 32.1 Construction 7.4

Arts, Entertainment, and Recreation 30.7

*The average percentage of women across all industries was 30 percent.

Source: American Express OPEN, The 2015 State of Women-Owned Businesses Report, May 2015,

● Women- and minority-owned businesses are rapidly increasing due to unprecedented educational and financial opportunities now available. What are some of the challenges you perceive still facing minority and women entrepreneurs?

LWA/Larry Williams/Blend Images LLC

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advice, and funding access. Another explanation lies in the growth of racial and ethnic groups within the U.S. population, a trend that is expected to continue. Hispanics represent 12 percent of all American business owners, Asians 7 percent, and African Americans 10 percent.35

Despite the growth in the number of women and minority entrepreneurs, both groups still face the challenge of access. Access refers to the simplest form of discrimination—often women- or minority-owned firms are simply excluded from the opportunities offered to firms owned by white males. This can result from the way that networks built from interpersonal relations in business exclude women and minorities. When business relationships build from shared hobbies, sports, or even college ties, social situations that are all male or largely white outside of work can lead to unintegrated business networks.

Access problems for women- and minority-owned small businesses crop up most often as discrimination in financing.36 This means that they may not be given the same access to funds37 or contracting opportunities38 that white male-owned firms are given. For example, a national survey of small business finances found that minority business loan applicants were denied at twice the rate of whites, even though application rates did not vary by race.39 The same study found that Asian and Hispanic business owners pay higher interest rates on their loans. These differences in loan denial rates and in interest rates occurred even when all business-related dif-ferences were considered.

There are two solutions for access-based challenges. One solution is institutional, when mi-nority and women-owned small businesses pursue dedicated contracting funds, known as set-asides, among big companies and government agencies. The good news is that governments at all levels have special contracting opportunities for small businesses that are owned and oper-ated by minorities or women. For example, the U.S. government allocated over $92 billion on set-aside-based contracts in 2015.40 Big companies and those with government contracts also have similar programs, typically with two to three times as much money as the federal govern-ment allocates.41 Qualification for set-asides requires certification as a business owned and oper-ated by a woman, a minority, or a veteran (or combination).42 For corporations, certification is handled by organizations that are not affiliated with the government or big business, such as the National Minority Supply and Diversity Council or the Women’s Business Enterprise National Council. Certification consists of proving that the business is truly owned and operated by a woman or minority. A similar process is used by the U.S. government, with the Small Business Administration certifying firms for the SBA’s 8(a) Business Development Program, whose de-tails are online at the SBA site. It is also good to know that the Commerce Department has the Minority Business Development Agency ( that can provide help, along with lo-cal SBA, Service Corps of Retired Executives (SCORE), and Small Business Development Cen-ter offices.

Certification is not for every women- or minority-owned small business. For example, the SBA 8(a) and most corporate certification programs require a business to be in operation at least two years. As is true for any program involving government or big business, the small busi-ness needs to put more energy and resources into record keeping than it might otherwise do, especially businesses that opt for minimalized or specialized levels of professionalization. How-ever, for those businesses that qualify, certification provides a ready means of access to opportu-nity and to networks of businesses and government agencies which can be leveraged to gain access to other sectors of business.

The second approach to solving problems of access is personal and involves making extra ef-forts to network. As discussed in Chapter 3, building a social network is central to business suc-cess. For minority- and women-owned businesses, networking is especially important because such firms need to network even more than other types of firms. While networking with other minority- or women-owned firms will feel comfortable, and lead to business within that group, the real gains in business require networking in more diverse and potentially less comfortable situations, such as industry and trade associations, chambers of commerce, and the like. Success comes from the number of different types of contacts one makes, and for a minority- or women-owned business, this requires having business contacts from other races, genders, ages, and sectors.

set-asidesGovernment contracting funds that are earmarked for particular kinds of firms, such as small businesses, minority-owned firms, women-owned firms, and the like.

certificationAn examination-based acknowl-edgment that the firm is owned and operated as specified.

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Second Career and Veteran EntrepreneursA special group of entrepreneurs are called second career entrepreneurs—people who begin their businesses after having left, retired, or resigned from work. A related example of this are veteran entrepreneurs, who elect to become self-employed after their military service. Other examples include work in other profit or nonprofit organizations, or even when parents are no longer tied to caring for others at home.43

As increasing number of corporations merge, downsize, reorganize, and/or close altogether, many firms are offering attractive retirement packages to encourage employees to voluntarily leave the organization.44 Workers are opting to accept generous offers to retire early (between ages 50 and 64). People’s decisions of whether to return to work depend on their individual level of wealth (retirement income and savings), their health, and their work experience, as well as general economic conditions.45 More older adults (62 and older) are becoming self-employed today than ever before. From 1988 to 2015 there was a 20 percent growth in entrepreneurship among seniors.46

About a third of the second career types younger than 62 who return to work decide to be-come self-employed.47 Those who do face two challenges—adjusting to the entrepreneurial life and keeping personal finances out of the business.

Working for others for most of their life, second career entrepreneurs are likely to have gotten used to having many of the daily chores of running a business done for them. Even for former managers, the mechanics of getting the location cleaned or the payroll checks written may have been things they could take for granted. As entrepreneurs, they have to do these things them-selves or arrange to have them done. All entrepreneurs have to get used to a do-it-yourself ap-proach, but this is a particular challenge for second career entrepreneurs at first.

LO 2-4 Describe the situ-ation of people who become second career (or veteran) entrepreneurs.

second career entrepreneurPerson who begins a business after having left, retired, or resigned from work. Can include veterans of the armed forces and civilians from a broad range of industries.

veteran entrepreneurIndividual who was formerly in military service who decides to become self-employed as a sub-sequent career. (Not to be con-fused with serial entrepreneur.)

● Second career entrepreneurs face distinctive challenges such as adjusting to the entrepreneurial life as they retrench themselves.

kali9/E+/Getty Images


Learn more about the topics above at these sites:

Small Business Administration’s Office of Women’s Business Ownership: headquarters/wbo

American Express’s Women’s Business Initiative:

National Association of Women Business Owners:

Fundera’s 15 Resources for Women Entrepreneurs: women-entrepreneurs

Federal Reserve Bank Entrepreneurship Help:

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The key for managing the demanding life of the entrepreneur is to get advice from people in your line of business, or from consultants (which can include the free consulting available through Small Business Development Centers, SCORE, or Veteran Business Centers) about the basic activities of the small business. Make sure you have all the demanding aspects of running a business covered. Pick one or two that are particularly hard or onerous and consider subcon-tracting those out in order to keep the early stage of the business manageable.

The second problem is keeping personal finances out of the business.48 Often when individuals are mustered out, laid off, or given early retirement, they can receive lump-sum financial settle-ments. Frequently, people intending to become late career entrepreneurs plan to use a substantial portion of these funds to start the new business. Sometimes this happens because second career entrepreneurs see their personal funds as “easy money,” funds that can be obtained quickly and without a lot of hassles. The problem is that many people who take the easy money are also taking the easy way out. They fail to carefully consider how they will invest the money in the business, and how it will be used. Taking the easy way out can often mean second career entrepreneurs un-derprepare for the rigors of business, and they are risking their retirement nest egg.

For second career entrepreneurs, the solution is to treat their own money as objectively as possible. Invest it only if you can make a strong case that the investment in the business is going to produce reasonable returns. Treat your own money as an outsider’s investment. Do a business plan and consider seeking outside funding from friends and family to help keep you honest about the chances for the business.

Depending on how you ended up facing a second career, it can be made worse because of a loss of confidence.49 This can come from being laid off, from the “up or out” rules for career military, from being outside the regular workforce for decades, or even from retirement. Regard-less of the source, the change can make a tremendous difference in a person’s level of confi-dence. Being given early retirement can be seen as a company’s effort to replace expensive (if capable) older talent with junior people who work for less. But being laid off or downsized sug-gests that the person was expendable at best, deadwood at worst. The difference in labeling makes a difference in the second career entrepreneur’s self-confidence.

When there are self-confidence issues, the first solution is to take some time to get over the shock to self-image. Counseling, whether job or psychological, can also help tremendously. When the person is ready, the solution often involves redefining one’s life. The goal is to describe life in ways that help the individual take control over it. A layoff or mustering out becomes an indication that it was time to move on. A downsizing becomes something that occurs to those best able to land on their feet. In taking control over the past, it can become easier to assert con-trol over the present and future.

The second self-confidence solution comes from networking. Entrepreneurs as a group are an energetic and optimistic group. Just talking to people you know, as Donna Herrle did (see the following Small Business Insight), or joining local entrepreneur organizations, such as the cham-ber of commerce or the local chapter of a trade or professional organization, can expose you to people full of energy and ideas. This is contagious, and as you hear the stories of persevering and overcoming challenges that abound among entrepreneurs, the possibilities for a successful entre-preneurial life seem to become more realistic.


Learn more about the topics above at these sites:

Small Business Administration’s veteran business page: business/veteran-owned-businesses

Veteran Entrepreneurs portal:

AARP’s Encore Entrepreneurs program:

SCORE’s 50+ Entrepreneurs portal:

Next Avenue start-up page:

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Imagine getting an invitation to a wine and cheese party for a new business, where the owner shows a “before” picture of herself in her corporate garb and an “after” picture of her in her home office, wearing pajamas and slippers, with the adage “change is good” over them both. That is what Donna Herrle sent to business acquaintances, friends, former co-workers, and family when she started her Pittsburgh graphic design business, Drawing Conclusions. A graphic designer and former sales manager of design and print services, she was out on her own after being laid off from corporate America at age 51. That layoff had set off alarm bells for Donna, who feared the loss of security a regular paycheck had brought her. At loose ends after the layoff, she also wondered what she should, or could, do.

Her turnaround and focus on starting Drawing Conclusions came about from talking to everyone she knew. She was surprised at how many others had been in or were facing the same situation, and the advice she got helped her make her own transition to self-employment. The advice she received again and again was to plan the business carefully and keep networking, and the work would come.

And the work came. One client brought a project to the wine and cheese party, based on Donna’s graphically impressive invitation. Five more projects came in within 10 days of the party. Within a year she had over 50 clients and gross sales in six figures.

donna hErrlE50

Entrepreneurship in Teams and FamiliesStories about entrepreneurs can talk about the individual and their challenges in getting their business started, but the world has even more stories of entrepreneurs who did not start alone. For many, entrepreneurship starts with finding the right person to partner with, or even starting the business within the family. We talk more about that below.

Entrepreneurial TeamsWhile the classic image of the entrepreneurial small business would involve the image of the solo entrepreneur, the modern reality is different. The majority of new businesses have a team of two or more co-owners, and the trend is toward even more businesses being developed by teams of entrepre-neurs. Figure 2.1 shows you the breakdown from the Panel Study of Entrepreneurial Dynamics.

Most teams are family related. In fact, 53 percent of teams are spouses or life partners work-ing together. Another 18 percent of the teams have different arrangements of family members working together, while only 15 percent of teams are composed of unrelated business associ-ates.51 That means about 400,000 new firms a year are started by teams, with about 320,000 started by family teams.52

Why so many teams? There are advantages to a team. When family members start a business, they start with already knowing and trusting each other. Teams are also likely to have more money, time, and expertise to put into a business. If the team members live together, they can save even more for the business.

When putting a team together it is important to work out key issues ahead of time. For ex-ample, team members might be putting different amounts of money or time into the business, but might be expecting identical returns, which creates an equity problem.53 A team can also face conflict over idea ownership (see the Small Business Insight), shared goals, and how to make decisions, especially when the team is evenly split on choices.54 Legal solutions to setting up partnerships are discussed in Chapter 17—being clear about responsibilities, trying to maintain boundaries between work and home, having outside advisers to help sort out thorny issues, as well as planning for how the firm might end or change55—work just as well for teams composed of unrelated individuals as they do for couple-based teams.

LO 2-5 Recognize the special nature of entrepre-neurial teams.


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Number of Owners Involved in Start-Ups from the Panel Study of Entrepreneurial Dynamics

Source: Original analysis using PSED 1 and PSED 2 data (covering 1998 and 2006, N = 1749) done by Kelly Shaver, College of Charleston, for Entrepreneurial Small Business, February 2019.



Team size 1Team size 2Team size 3Team size 4

Team size >5Team size 5

2% 1%




In an entrepreneurship class students were supposed to work on teams around an idea. Greg, a student in the class, had an idea for an iPad stand with embedded lights that would pulse in time to music. He did a quick look online and did not find any such products available yet. The professor approved the idea as a project possibility for the class.

Greg described the idea to the class, and two other students, Nancy and Jim, joined the team. They all worked on the project and did the presentation for a grade. After that, Greg said he wanted to concentrate on getting into law school and was planning to put the idea on hold. Nancy, however, wanted to go ahead with the idea and kept working on it. When Greg found out, he went ballistic. “She stole my idea!,” he would tell anyone who would listen.

The disputing alums came back to the professor. The first question was what was said to Nancy and Jim about ownership rights when they joined the team. It turns out Greg had not specified anything. In his own mind, however, Greg thought it should be obvious that the idea was his and that Jim and Nancy were con-tributing their labor for a grade. In Nancy’s mind, it was clear that she and Jim were Greg’s partners in the business, contributing their time, ideas, and sweat equity. Now they had to negotiate after the fact.

Ownership problems like this happen all the time in teams. The best way to handle it is to come out right at the start and specify or negotiate who owns what. There is no one “right” answer; it depends on how the group, and in this case their larger organization (the school), handles it. Some schools56 maintain that all ideas generated for school projects belong to the school. Others say the idea belongs to the student, but in that case, which student?

Where there are no school rules defining “ownership,” everything starts with the person who has the idea. If the person with the idea wants to keep absolute rights to the ownership, he or she should not take on other team members, or take on only members who agree (in writing) that the idea belongs to its inven-tor, even after noninventing students contribute their work to it. Why would students work without owner-ship? It can be for a grade or to save themselves from having to come up with their own idea for the class, or for the experience, or for the bragging rights of “I helped bring that to market.” On the other hand, the noninventing but contributing students can try to negotiate some ownership rights. But whatever is decided, the students involved should make sure everyone has a copy of the agreement. Emailing the agreement is a good way to show everyone was sent it at the same time.

managIng IdEa ownErshIp on a tEam

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Note that teams in start-up businesses are not limited to the owners. A small business with full-time or part-time employees or contractors is a team, and the owner or owners and their outside advisers or board of directors are yet another team. In picking teams, it is often better to pick people based on their passion for the business or the idea behind the business, and expect to train people to do the work the way you want. This produces a stronger organizational culture and a more positive attitude in the firm.57 The exception is when the firm needs special-ized expertise the founder doesn’t have. In that case, it still makes sense to hire the expert whose passion for the new business is the highest.

There is a special case of organizational culture for start-ups, called entrepreneurial culture. There are a variety of approaches to thinking about the specifics,58 but in the end there are five key elements:

• PassionfortheMission: The team needs to believe in the business, its goals, products, and services.

• PassionfortheTeam: Team members need to feel good about one another as people and professionals and want to help one another. It isn’t enough to avoid toxic employees.59

• PassionfortheCustomer: A team that is always thinking about the customer and how to make their experience better will in turn make customers passionate about the company.

• PassionforInnovation: If the team is always thinking about making things better for cus-tomers, one another, the firm, and its offerings, it will mean the best days are always ahead of all.

• PassionforFairness: At the bedrock, an organization that seeks to always be fair creates teams and individuals who emulate this, so that even when things don’t go as planned, people have a basis for making decisions and knowing what is ultimately important.

In Chapter 18, we will talk more about how to select individuals for your firm, but the specific way you go about defining and making real your entrepreneurial culture will be an essential in-gredient in picking and orienting the right people for your team and firm.

Family BusinessesWe think that the U.S. economy is built on an array of very large, publicly held companies— General Motors, Boeing, IBM, Bank of America, Exxon, and others—but this is only part of the picture. Many of America’s largest companies—Mars, Hallmark, Dell, Motorola, Nordstrom, Campbell Soup, fully one-third of the S&P 500 companies—are family owned and managed.60 Small and large, they make up over half the businesses in the United States historically and were the creators of well over half the new jobs in the United States.61 But our interests are in those small businesses that are also family businesses, and those represent 39 percent of American businesses, or about 10.8 million firms. Defined as firms with a majority family ownership and direct daily family involvement, family business is a major economic force, employing 58 percent of America’s total workforce.62

Small, family-owned businesses have many advantages. If the business is managed at the top by a group of tight-knit family members, communication-based integration can be more effective and decision making can be easier and quicker.63 A strong family bond can become a strong busi-ness culture, enabling members to make effective, coordinated decisions with little or no formal communication. Family members already have developed strong relationships and interact on a regular basis both in and outside the workplace. Families are a major source of funds and person-nel for new small businesses,64 providing a support network made up of people the entrepreneur knows and trusts. Family businesses are also a self-perpetuating source for future small busi-nesses. Many new entrepreneurs have been raised in families in which one or both parents or other relatives owned a family business,65 as you can see in the examples of the Ross and En-strom families in the following Small Business Insight. As children of family business owners, these individuals learned how business works by observing their family at work. They gained early experiences that helped them develop the skills, competencies, and self-confidence that contributed to later decisions to become entrepreneurs and to their ability to succeed.66 In fact, most entrepreneurs come from families of entrepreneurs.

organizational cultureA set of shared beliefs, basic as-sumptions, or common, accepted ways of dealing with problems and challenges within a company that demonstrate how things get done.

LO 2-6 Describe the challenges of family business owners.

family businessA firm in which one family owns a majority stake and is involved in the daily management of the business.

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There are two challenges typical to family businesses—role conflict and succession.68 Role conflict describes the kind of problem that arises when people have multiple responsibilities, such as parent and boss, and each makes different demands on them.69 As a boss, you might want your daughter to stay at the store and work, while as a parent you might want your daughter to take time off to be with her own children. Role conflict is at its worst when people fail to rec-ognize it. Often, reminding yourself and others that you face multiple, conflicting roles helps them understand the types of choices that must be made and the kinds of decisions that are most important.70 For family business, the most effective approach for avoiding role conflict is to keep family issues out of the family business, as you can see in the case of Boyd Coffee (see the follow-ing Small Business Insight). Whenever possible, try and make decisions based on business neces-sities. When making a decision from a family perspective, broaden it to apply equally to nonfamily as well as family members. For example, if family members in the business can take off for their children’s graduations, so should employees who are not part of the family.71

Role conflict breeds another unending problem—the shortage of time. Entrepreneurs are among the most rushed people in the workforce. Part of this comes from the responsibilities of ownership. Entrepreneurs are always working, even if it is just thinking about what to do next at work. Add family responsibilities, and schedule overload is almost a certainty. There are, how-ever, a collection of techniques for time management, which can help meet the challenges of schedule overload. Consider these basic methods:

• List—Whether you use apps like Wunderlist, Evernote, or Todoist, a pad of paper, a special-ized form like a Franklin Planner, or Microsoft Outlook’s Task function, the key to staying on top of your responsibilities is to list them as soon as you get them. Then as you finish them, you can enjoy crossing them off the list.

• 123Prioritize—As you look at your list, prioritize your tasks based on their importance to your business and their due date. The most important tasks due soonest get a priority of 1. Tasks with lesser importance or a longer time to completion get ranked 2, and your “back burner” concerns get ranked 3. If there are tasks (of any level) that can be lumped together, so much the better. How do you decide importance? If the task will not help your business or family, it is probably not a priority 1 task.

• Delegate—Look at your task list and see which tasks you can get others to do for you (for free or at a price). When you’re overloaded, getting more people on the job for you is a powerful way to get more done.

role conflictThe kind of problem that arises when people have multiple re-sponsibilities, such as parent and boss, and the different responsi-bilities make different demands on them.

time managementThe organizing process to help make the most efficient use of the day.


Ross’s Teal Lake Lodge and Teal Wing Golf Club is a family-owned business. Victoria Ross began helping wait tables at the Hayward, Wisconsin, resort when she was only 6 years old. By the time she was 18, she had moved into management positions. Having already earned her bachelor’s degree in business administration, she is now working on her master’s in global tourism. At 25, Victoria is ready to take over the family business.

Jamee Enstrom Simons took a different track to management of her family’s business, Enstrom’s Al-mond Toffee. She began working in the company when still a child, hand dipping chocolates after school. Jamee eventually became a registered nurse, but when her parents expressed interest in selling the com-pany, she and her husband bought it in 1993. Under her leadership, sales revenues for Enstrom’s Almond Toffee reached nearly $15 million in 2019.

Victoria Ross and Jamee Enstrom Simons both gained the confidence and skills they needed to succeed as small business owners from their early experiences in the families’ businesses.

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• Repeat—Take a few minutes every day to repeat the above steps. It will save you time later.• Strategize—Once a week, take a few minutes to look at the things you didn’t do this week

and check if you are overlooking something which could be important to your business, family, or yourself, but is getting overlooked in the short run. Entrepreneurs are notorious for overlooking their health and cheating themselves and their businesses out of time to think about the big picture and their firm’s future. Ten minutes a week spent this way can make a world of difference.73

Thirty-nine percent of U.S. family-owned businesses are expected to face the retirement or semi-retirement of their CEO within the next 10 years. This statistic grows in importance if you factor in the idea that only one-third of family-owned businesses survive beyond the first generation.74 Part of the problem can be an entrepreneur, like Rudy Boyd, who has difficulty letting go. Problems can arise when the owner cannot come to grips with retirement or envision someone else running the company.75 Owners often resist giving up control and undermine—consciously or unconsciously—potential successors.76 This is a problem because top managers at family firms tend to stay in their positions much longer than those at nonfamily firms. One study found that CEOs of family firms had an average tenure of 17 years as opposed to just 8 years for CEOs in other businesses.77

When the current owners are ready to think about what follows them, we get into succession—the process of intergenerational transfer of a business. Often the lack of a clear succession plan is the death knell for those family firms facing their first intergenerational transition.78 If the founder dies, becomes seriously ill, or is incapacitated before he or she can groom a successor, the new family leader may be suddenly thrust into the role before coming up to speed on vital company information and developing needed skills. Also, in the absence of a succession plan,

successionThe process of intergenerational transfer of a business.


Boyd Coffee, started in 1900 in Portland, Oregon, had survived its first transition from founder P. D. Boyd to heir Rudy Boyd. Rudy’s sons, David and Dick Boyd, grew up working in the family business. In 1975, Rudy officially retired, but he refused to leave the business. Even though David, the eldest son, became the CEO, Rudy stayed on as board chair and for many years he remained an active and influential presence around the company—often to the irritation of son David. A few years after Rudy’s “retirement,” the board of directors of Boyd Coffee—Rudy, his wife Ellen, David, and Dick, then president—voted 3–0 (with David abstaining) to remove David as CEO and name Dick the new CEO.

David and Dick believed the management change was based solely on members of the family taking sides in the David–Rudy conflict, rather than on sound business judgment. With the loss of the CEO position, David also wondered whether he had originally received the job because he had earned it through hard work and demonstrated ability or simply because of his name and family position as the eldest. Although after the awkward switch the brothers continued to work together for many years, their personal and pro-fessional relationships deteriorated to the point where they seldom communicated. The tension and lack of coordinated effort between the two inevitably led to the financial decline and instability of Boyd Coffee. Finally, in 1997, David threatened to dissolve the company. Only when faced with such a drastic possibility did the brothers begin the slow and difficult process of reconciliation.

With the assistance and guidance of outside advisers and consultants, the brothers have now made succession planning their top priority. They have established a family trust that allows younger family members the opportunity to leave home and develop their business skills and networks independently. The brothers also have encouraged their children to gain work experience outside the family business before deciding whether they want to return to work for the company, something the brothers never got to do.

Boyd CoffEE72

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private and public dissension among various factions of the family becomes more likely, nega-tively affecting operations within the firm, and may eventually cause the business to fail.79

As is true of so many things in a successful small business, the answer lies in taking a profes-sional approach to the problem. In this case the professional approach involves crafting a succes-sion plan like the one created by Boyd Coffee after Dick became president. Succession plans deal with the people who will take over, what roles they will fill, and what supports (such as training, outside assistance, voting power, resources control) they will receive.80 Problems arise when there are no successors available within the family. One study found that only 5 percent of all entrepreneurs were able to rely on family members to take over.81 Sometimes none of the children have an interest in the family business. The opposite problem arises in situations like that at Boyd Coffee when several family members believe they should take over the top spot and vie for the position to the detriment of both family and business. Problems like the Boyd Coffee competition remind us that it is important to plan how disputes will get resolved. Expect those disputes. The owners of a family business tend to be especially passionate about their enterprise, because they have a huge economic incentive to pay very close attention.82

One way to maximize communication in the succession process is to create a family council. A family council includes family members with immediate interests in the business (spouse, sis-ters and brothers, older children, etc.). The focus of council meetings is the business—family re-lationship. The meetings can also be a good forum for grappling with issues like role expectations, commitment, and personal responsibility.83

An advisory board, or a formal board of directors, can also contribute important skills and stra-tegic direction. At Helzberg Diamonds, Barnett Helzberg Jr. set up a board to confront planning issues and to “help bring order (read professionalization) to the seat-of-the-pants decision making” at the firm. The board was critical to succession planning at Helzberg when trusted board mem-bers convinced Helzberg that he needed to step aside as president. He brought in someone else who had the skills to lead day-to-day operations while keeping the chairmanship himself.84

The key difference between a family council and a board of directors is that the function of the family council is to keep the family involved while the board is focused on running the busi-ness. The board includes significant nonfamily membership.85 Careful use of a family council can also help by keeping family members involved in an appropriate way, allowing you more room to maintain a different balance with your board of directors.86

In addition, a good plan, like the one Boyd Coffee developed, also talks about the handling of the assets of the company in order to minimize the tax burden on the family and the firm and provide a suitable income for the former owner and his or her household. Because of the legal, tax, accounting, and leader development complexities, succession planning is best done with the advice of experts.87 For family councils and boards of advisers, it is often helpful to get

● Planning together for the future is key to the success of family businesses. What other factors are important?

Ariel Skelley/Blend Images/Getty Images

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professional advice at the start, and then continue on your own. One organization that tracks experts in family business is the Family Firm Institute.

One special situation of the family business is the case of a married couple who jointly own and manage their business.88 You need only consider the divorce rate in general to realize that marriage and business can be a volatile mixture. The problems of a lack of agreement, difficulty keeping business and family issues separate, and how to handle endings89 are very much in evi-dence in couples’ businesses, and the solutions are very much the same—being clear about re-sponsibilities, trying to maintain boundaries between work and home, having outside advisers to help sort out thorny issues, and planning for how the firm might end or change.90


Learn more about the topics above at these sites:

PricewaterhouseCooper’s Family Business Survey: services/library/family-business-survey.html

Family Firm Institute:’s Marriage and Entrepreneurs page:

The Entrepreneurial Life and Its RewardsSo far in this chapter we have talked about the entrepreneur and his or her psychology and social setting, we have not talked about the reasons people mention for going into business for them-selves and we also have not said anything about the life cycle of the firms entrepreneurs create, and that life cycle can have a profound influence on the life of the entrepreneur in their business. Both get covered below.

The Entrepreneurial Life CycleLike every person, every small business is unique. But just as we all go through childhood and adolescence on the way to adulthood, so do entrepreneurs’ small businesses. There is a lot of predictability in this growth process, and knowing the developmental stages of the business life cycle can help you better understand your business and your career as a small business owner. The small business life cycle is shown in Figure 2.2.

Several models exist for the life cycle of the small business firm.91 Each divides the stages a bit differently. But all models have the same general ideas: (1) there are multiple stages; (2) the key issues, actions, and lessons at each stage are different from the other stages; and (3) the level of risk the business faces changes from stage to stage.

For most small businesses, though, the usual sequence of stages is emergence, existence, sur-vival, success, and resource maturity. Let’s look at each of these stages to see what they involve for the small business and the key issue you can expect to face in each. These stages and business growth patterns are shown in Figure 2.2.92

Emergence is the stage in which a person thinks about and takes actions toward starting a firm. Typically a lot more people think about starting a firm than actually take steps to do so. For example, in 2010, 56 percent of youth aged 15–25 expressed an interest in owning their own firm. But by 2018, only 13.6 percent were actually taking steps to start a firm.93

Getting from entrepreneurial thinking to entrepreneurial action is the challenge of the emer-gence stage.94 Two techniques discussed in the book can help you move from thought to action. One is using the BRIE behaviors from Chapter 1 to start on the road to creating a firm. The other is to get into business part time (as discussed in Chapter 5) as a way to lay a foundation for future entrepreneurial action.

Existence is defined by having the business in operation, but not yet stable in terms of markets, operations, or finances. In 2017, according to the GEM studies, about 7.8 percent of Americans were involved with businesses in their existence stage. Existence is the second riskiest period after emergence. The reason risk is so high is that many business owners lack the key

LO 2-7 Recognize the stages of development entrepreneurs and their firms go through.

business life cycleThe sequence or pattern of devel-opmental stages any business goes through during its life span.

emergence stageThe first stage of the small busi-ness life cycle, where the entre-preneur moves from thinking about starting the business to actually starting the business.

existence stageThe second stage of the business life cycle marked by the business being in operation but not yet sta-ble in terms of markets, opera-tions, or finances.

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information or experiences they need in marketing, production, and management.95 The prob-lems of mastering these three areas form what are called the liabilities of newness for small businesses in their existence stage.

The solutions for liabilities of newness come from getting expertise as quickly as possible. For most owners of firms, personally getting more experience is risky because it takes too long. The safer way is to obtain help from others. As noted in Chapter 3, developing an extensive social network is essential for the success of any firm. Whether you use family, friends, industry con-tacts, or free or paid advisers, getting help helps you survive.

The success stage occurs once the firm is established in its market. Success stage firms show consistently growing financial performance, usually with slowly rising sales. Firms at this stage develop the information, skills, and most importantly the routines to grow the business’s profits. Those profits aren’t always taken in the form of money. Time off from work, a slower pace at work, or hiring additional personnel to take on more of the owner’s tasks are all ways that these profits can be used to make the owner’s life easier. Used that way, the extra profits are called slack resources by economists because they can be rechanneled into the business if needed. For most owners, though, these profits are called flexibility. All new businesses—from small busi-nesses to high-growth firms—go through this stage. For most small business owners, this is a stage that lasts a long time. For the owners of high-growth businesses, this is a chance to catch their breath and lay the groundwork for the period of takeoff.

The resource maturity stage will follow the success stage for most firms. This stage is char-acterized by a stable level of sales and profits over several years. At this stage, the functional ar-eas, the market, and the products or services are all being dealt with consistently and efficiently. The challenge of maturity is to avoid complacency. After years of consistency, customers and businesses can begin to take each other for granted. For your business, that can be deadly be-cause a competitor can come to your customer, show personal interest and competitive products or services or prices, and take your customer away. Since the rule of thumb is that getting a new customer costs five times as much as keeping an existing customer,96 every lost customer is im-portant. How do you avoid customer complacency?

Supersales executive Zig Ziglar says he learned from Australian psychologist Joseph Braysich the four key components for staving off customer complacency—recency, frequency, potency, and recommendation.97 Be in recent contact with your customers (recency), whether in person, by phone, or via the Internet. This is why you get so many emails and Facebook/Instagram noti-fications. Be in contact frequently (frequency); the more often they typically buy, the more fre-quently you want to touch base with them. When you do touch base with them, aim for something they will notice and remember (potency). This can be a personal connection or a message they can use or remember. The fourth is recommendation—either you recommending something to them or asking them to recommend your firm to others. This can include making micro- commitments such as favoriting or liking or retweeting a post.98

liability of newnessThe set of risks faced by firms early in their life cycles that comes from a lack of knowledge by the owners about the business they are in and by customers about the new business.

success stageThe third stage of the business life cycle marked by the firm being established in its market, operation, and finances.

slack resourcesProfits that are available to be used to satisfy the preferences of the owner in how the business is run.

resource maturityThe resource maturity stage is the most typical fourth stage of the small business. It is characterized by relatively stable or slowly rising sales and profits over several years. In a firm that has a takeoff stage following the success stage, the resource maturity stage occurs after takeoff.

micro-commitmentAn online action that is quick and easy to make and connects you to the message, but does not re-quire a substantial personal or financial commitment, such a liking or favoriting a post or reposting it to your own social media account.



ber o

f em





ns, o

r sal



Traditional Small Businesses

Resource Maturityfor High-Performing Small Businesses

Managerial RoleEntrepreneurial Role


Life Cycle Stage



Resource MaturityFor High-Growth Ventures

Pattern ofBusiness Growth

Traditional Part-Time or Lifestyle Business


The Small Firm Life Cycle

Sources: Neil C. Churchill and Virginia L. Lewis adapted Greiner’s model in “The Five Stages of Small Business Growth,” Harvard Business Review, May–June 1983; William J. Baumol, “Entrepreneurship in Economic Theory,” American Economic Review 58, no. 2 (May 1968), pp. 64–71; Gaylen Chandler and Steven H. Hanks, “Market Attractiveness, Resource-Based Capabilities: Venture Strategies and Venture Performance,” Journal of Business Venturing 9, no. 4 (1994), pp. 331–349; Jerome Katz and William B. Gartner, “Properties of Emerging Organizations,” Academy of Management Review 13, no. 3 (July 1988), pp. 429–441.

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48 PART 1 EntrEprEnEurs and IdEas: thE BasIs of small BusInEss

Although rare among small businesses, one possible variation is when the success stage leads into takeoff rather than resource maturity. The takeoff stage happens if a business embarks on a period of exceptional growth. For small businesses, it might come from landing an unexpect-edly gigantic contract, expanding into multiple locations, or just being in the right place at the right time, as was the case when Square (from Chapter 1), Snapchat, or Instagram took off.

The challenge firms face in the possible takeoff stage is to understand the nature and de-mands of growth and get some control over it. Managing takeoff involves working extensively with potential sources of funding and other key resources, as well as working with markets outside and employees within the firm. It also often entails relearning the processes that led to this level of success; a growth-oriented firm often needs to do things differently from one con-tent with maintaining a stable state. That was very much the case for the creator of the jack-o-lantern leaf bag (see the Small Business Insight). One example of this is outsourcing or

takeoffThis stage occurs after the suc-cess stage for a small percentage of businesses. It is characterized by rapid growth (5–10 percent a month or more). When this growth levels off, the firm enters the resource maturity stage.


Stuff-a-Pumpkins are the pumpkin-colored leaf bags you see on lawns around Halloween. You know the ones—they have a jack-o-lantern’s face on them. They were the brainchild of Anita Dembiczak and Ben Zinbarg. Ben’s company, Sun-Hill Industries, had been operating consistently for 17 years in Stamford, Con-necticut. When he came up with the idea, he spent his own money to get the first run of bags made. They sold out instantly at the discount stores where he tried them out. The stores clamored for more and de-manded immediate delivery! But Anita’s, Ben’s, and Sun-Hill’s finances were tapped out, and the discount stores were months away from paying for the bags they’d sold. Ben went to his business banker, who re-fused to extend credit, even though he had contracts from big retailers. Twenty-three other banks also turned down Ben. He got the money needed to get out the next order by investing all his remaining per-sonal money, securing a loan from a friend, and convincing suppliers and employees to delay receiving money owed them. He got the bags made and out to the retailers. But competitors meanwhile started to copy his bag, so he took the remaining money and started legal proceedings against these concept pi-rates.99 Eventually Ben succeeded in getting the pirates on the run, but he probably came to a new under-standing of why the Chinese term for crisis consists of the symbols for opportunity and danger.100

suCCEss = opportunIty + dangEr

Geri Lavrov/Photographer’s Choice RF/Getty Images

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subcontracting for the growth-oriented firm to let the firm stay focused on its own key compe-tencies. A growing nursery might subcontract out its bookkeeping and human resource func-tions so the managers at the nursery can focus on increasing sales and managing the expansion.

It is important to remember that most small businesses never go through the takeoff stage, and for those that do, the takeoff path often moves them into the high-growth firm model and away from small business. For firms that don’t reach a possible takeoff stage situation, the jump is from the success stage to the resource maturity stage.

The lesson of the life cycle model of business is that much of your firm’s development as a business is predictable within some broad terms. Knowing the stages of the life cycle and where your firm is among those stages can serve as a powerful reminder of the kinds of issues for which you need to watch. Knowing the different possible life cycle paths for the resource maturity stage makes it possible to clearly choose when to grow, and what to expect if a higher-growth approach is in the cards for your firm.

Rewards for Starting a Small BusinessWhy become an entrepreneur? If you said, “For the money,” or, “To do things my way,” you’d be right, but these are only a few of the reasons behind owning your own firm. We know that people go where they feel they have the best chance of getting the rewards they value most. The kinds of rewards people report are also fairly well known based on results reported from the Panel Study of Entrepreneurial Dynamics (PSED). The rewards mentioned by people in the process of start-ing their own firms are listed in Figure 2.3.

Nearly all entrepreneurs talk about three key rewards—flexibility, a livable income, and per-sonal growth. These are covered in more detail below. There are two other rewards—building great wealth and creating products, which entrepreneurs mention more often than working people in general. There are also rewards that entrepreneurs mention less often than working people in general. These are social rewards, like the respect or admiration of others, or power over others, and family rewards, like continuing a family tradition in business. Those items are marked with an asterisk (*) in Figure 2.3. These “go it alone” tendencies are probably a good thing, because they help entrepreneurs keep some distance from others and pursue what they think is right.

The three most popular types of rewards for small business owners are growth, flexibility, and income. Growth rewards are what people get from facing and beating or learning from chal-lenges. Self-professed computer nerd Marc Fleury’s first venture went under with the dot-com bust.101 His second business, The JBoss Group, was built around the challenges of going it alone financially while outperforming and outlasting his first venture. JBoss, which sells programming and support services, was successful from day one, and was eventually sold to Red Hat. Until then it was entirely self-funded.

Income rewards refer to the money made from owning your own business. For more than three-quarters of entrepreneurs, this means seeking to match or slightly better the income you had before you started your own business. Only one entrepreneur in four says that she or he is seeking high income through her or his business. But entrepreneurs are looking in the right place. More than 75 percent of the millionaires in the United States are entrepreneurs.102 Two-thirds of the millionaires are business owners, and one-third are self-employed professionals like doctors, lawyers, or therapists.

Flexibility rewards are perhaps the most rapidly growing type of reward. They refer to the ability of business owners to structure their lives in the way that best suits their needs. When Cyndi Crews was laid off from her work as an information technology resources manager of a large corporation, she bought a franchise of Schooley Mitchell Telecom Consultants. Today she advises companies on how to get the most from their telephone systems. She runs the business from her home in Lumberton, Texas, where she is able to set her own work sched-ule. This ensures her the f lexibility she needs to take time off to be with her young son and husband.103 Another variant of this is pursuing spiritual or religious goals through business. For example, Noah’s Ark, a Kosher deli with branches in Teaneck, New Jersey, and New York

LO 2-8 Discover the rewards entrepreneurs can achieve through their businesses.

growth rewardsWhat people get from facing and beating challenges.

income rewardsThe money made by owning one’s own business.

flexibility rewardsThe ability of business owners to structure life in the way that suits their needs best.

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50 PART 1 EntrEprEnEurs and IdEas: thE BasIs of small BusInEss

City, closes from 4 P.M. on Friday until 6:30 P.M. or so on Saturday night in observance of the Jewish Sabbath.

This chapter starts with the idea that while no single explanation can really cover all 15.5 mil-lion self-employed people in the United States, there are aspects of the entrepreneurial life that apply to many. Some of these are general ideas, such as the entrepreneurial career or the compe-tencies needed to be successful in small business. There are also types of entrepreneurs that de-scribe many, but not all, self-employed people. Whether we look at types like the lifestyle entrepreneur or high-performing small business owner, or if we look at demographic groups such as women or second career entrepreneurs, the more we know about people pursuing entrepre-neurship, the better it is for identifying important issues in their business and personal lives. Every entrepreneur’s story is uniquely his or her own, but across millions of entrepreneurs, there are some similarities, and these help make it easier to think about the entrepreneurial process and getting the right kind of help to entrepreneurs.

Wealth: Product:


To have a chanceto build great

wealth or a veryhigh income.

To develop anidea for a product.

*Items entrepreneurs mention much less often than people in general.

Recognition:* Admiration:* Power:* Family:*


To achievesomething andget recognition

for it.

To be respectedby my friends.

To lead andmotivate others.

To continue afamily tradition.

Flexibility: Income:


To have greaterflexibility for my

personal andfamily life.

To give myself,my spouse, and

my childrenfinancial security.

Growth:To continue togrow and learn

as a person.


Rewards New Entrepreneurs Seek through Small Business104

Source: Nancy M. Carter, William B. Gartner, and Kelly G. Shaver, “Career Reasons,” in William B. Gartner, Kelly G. Shaver, Nancy M. Carter, and Paul D. Reynolds (eds.), Handbook of Entrepreneurial Dynamics: The Process of Business Creation (Thousand Oaks, CA: Sage, 2004).

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2-1 Recognize the key aspects of the entrepreneurial personality.

● In addition to self-efficacy from Chapter 1, there are five other key behaviors for entrepreneurial success.

● Passion: The intensely positive feeling entrepreneurs have for their business.

● Perseverance: The ability to stick to activities over long periods, even in the face of setbacks.

● Promotion–Prevention Focus: The behaviors related to pursuing gains and preventing losses.

● Planning Style: Ranging from comprehensive to habit-based, this reflects how much and about what you ordinarily plan.

● Professionalization: The extent to which an entrepreneur and their firm meets or exceeds the standard business practices for the industry.

2-2 Assess the operational competencies of the successful entrepreneur.

● Forms of business-related expertise are called competencies.● To be successful, an entrepreneur needs competency in the

key business functions (e.g., sales, operations, etc.), industry-specific knowledge, resource competencies, determination competencies, and opportunity competencies.

2-3 Identify the challenges women and minority business owners face.

● Women-owned and minority-owned businesses are growing at rates faster than other types of businesses.

● The major challenge facing these businesses is gaining access to opportunity.

● Access is achieved through networking and set-asides.

2-4 Describe the situation of people who become second career (or veteran) entrepreneurs.

● Second career entrepreneurship happens when a person is laid off, downsized, given early retirement, leaves the military, or concludes taking care of family members in the home.

● The challenges facing second career entrepreneurs come from having to do everything themselves and using too much of their personal money too soon in the business.

● Having to do everything can be handled by identifying the tasks to be done ahead of time. Loss of confidence can be dealt with through taking time to heal and by networking with enthusiastic entrepreneurs. Second career entrepreneurs

should use their own money only when it makes sense for the business, usually proven through a business plan.

2-5 Recognize the special nature of entrepreneurial teams.

● The majority of businesses are started by teams.● Spouses or life partners are the most common form of team.● Couple teams can benefit from trust and financial flexibility.● Typical problems include lack of agreement, separation of

work and family issues, and handling of endings.

● Similar problems also crop up in non-spouse teams.

2-6 Describe the challenges of family business owners.

● Family businesses are one of the major forms of small business.● The major challenges facing the family business are role

conflict, time management, and succession.

● All three challenges can be met through careful planning.● Married couples and nonfamily partnerships face many of

the same problems and solutions.

2-7 Recognize the stages of development entrepreneurs and their firms go through.

● Every firm goes through a similar sequence of developmental stages.

● Emergence comes before the firm starts, followed by existence.● Survival happens to most firms, as does resource maturity.● Some firms experience the takeoff stage, but most do not.● Each stage poses a distinct challenge to the small business

and owner.

2-8 Discover the rewards entrepreneurs can achieve through their businesses

● Nearly all people starting small businesses have flexibility, income, and growth as reasons for starting those businesses

● Small business owners are less motivated by social reasons (recognition, admiration, power, or family tradition) than the general public.

● While providing a good income is important to three-quarters of entrepreneurs, only one in four says generating great wealth is important.









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52 PART 1 EntrEprEnEurs and IdEas: thE BasIs of small BusInEss


cognition, 28

action, 28

passion, 28

stakeholder, 28

perseverance, 29

promotion focus, 29

prevention focus, 29

comprehensive planners, 29

critical-point planners, 30

opportunistic planners, 30

reactive planners, 30

habit-based planners, 30

professionalization, 30

standard business practice, 30

expert business professionalization, 30

specialized business professionalization, 30

minimalized business professionalization, 30

entrepreneurial mindset, 32

competencies, 32

key business functions, 33

industry-specific knowledge, 33

resource competencies, 33

determination competencies, 33

opportunity competencies, 33

set-asides, 37

certification, 37

second career entrepreneurs, 38

veteran entrepreneurs, 38

organizational culture, 42

family business, 42

role conflict, 43

time management, 43

succession, 44

business life cycle, 46

emergence (stage), 46

existence (stage), 46

liability of newness, 47

success (stage), 47

slack resources, 47

resource maturity (stage), 47

micro-commitment, 47

takeoff (stage), 48

growth rewards, 49

income rewards, 49

flexibility rewards, 49


1. What are the different aspects of the entrepreneurial personality?

2. What would be the likely impact on a start-up if the entrepreneur had a strong promotion focus and a weak prevention focus?

3. Could someone with good industry-specific knowledge but low competency in basic business skills be successful as an entrepreneur in that industry? Why or why not?

4. When does it make sense to create a business using a mini-malized approach to professionalization? Why is that so?

5. What are the stages of the small business life cycle? What stage do high-growth ventures go through that other forms of small business do not?

6. What are the strengths and weaknesses of a team?

7. What is the major challenge facing women- and minority-owned firms? How can this be solved?

8. What makes the situation of second career entrepreneurs problematic? What can they do to smooth their way?


1. Start by writing down which aspects of the entrepreneurial personality describe you the best. Then take the online Entrepreneurial Potential Self-Assessment at

Compare how you imagined yourself to what you observed on the online quiz. Which aspects do you agree with? Which do you disagree with? Are there skills you want to develop or refine based on the results?

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2. Which entrepreneurial competencies do you possess? Be ready to provide examples and explain why you made these choices. You can use the result of Skill Module 2.2 to aid you in this.

3. Pick small businesses that others in the class are familiar with and analyze what level of professionalization they display. Be ready to explain the basis for your classification.

4. Select a local family business owner or female or minority entrepreneur whom you admire, and research the person’s business and professional background. Interview this person

if possible. What particular challenges did he or she face? What competencies did he or she use to overcome them?

5. Go through the list of reasons people give for going into self-employment, and identify which of the reasons seem to fit you. Explain why you identify with each reason.

6. Think about the list of reasons people give for becoming self-employed. If you can, interview local entrepreneurs about their reasons and see how your real-life examples fit with the national survey results.



When he stepped off the podium in front of Federal Hall in New York City on March 4, 1797, George Washington was probably thinking not about the presidency he just handed over to John Adams, but about his audacious plan to start a new career to rescue his Virginia farm, Mount Vernon, from bank-ruptcy. For Washington, farmer, surveyor, soldier, commander, legislator, and president, this new role might be called his seventh career, but it was necessary.

Washington had owned a plantation for much of his adult life, and he tried to get back to it be-tween stints as the nation’s top general and as president. By the time he could retire to Mount Vernon, he discovered the business was in trouble. The number of people for whom he was responsible had grown from 10 when he inherited the farm to 300 as he left the presidency. Unfortunately his land-holding size and productivity had not kept pace. He was facing bankruptcy.

Knowing this even as he was preparing to end his term, Washington picked up on the idea of a distillery when James Anderson, a Scottish immigrant to Virginia, pitched the idea. Washington had shown himself supportive of inventions, having developed new ways of training mules and preparing wheat for market. He had even received America’s third patent.

Anderson’s idea made financial sense. Taxes on imported rum were high, and this was putting a crimp in the average American’s drinking habits. Back in 1797, the average American was annually drinking 5 gallons of distilled spirits like rum and whiskey (today the average is 1.8 gallons). So there was a ready market.

So, working with Anderson, Washington started with two small stills in 1797 making a 110-proof rye whiskey. Production grew in 1799 to 11,000 gallons sold in two versions (50 cents per gallon for regular and $1 per gallon for premium whiskey) and a $7,500 profit was made, making Washington America’s leading distiller. While Anderson could handle the role of running the distillery itself, the business side was in Washington’s hands. Unfortunately, he failed to train a successor. Then Washington died on De-cember 14, 1799. The distillery passed into several hands but began a seemingly unstoppable decline and was closed for good in 1814.

For more information, see the Virginia Distillers Association page with video:; and the Business Insider video:


1. What advantages would George Washington bring to James Anderson’s idea for a Virginia distillery?

2. Washington’s farm was operating even as he got the distillery off the ground. What kind of problems could that raise for the ex-president?

3. At his death, Washington’s distillery was the largest in the United States. Did this make Washington a high-growth entrepreneur or a small business owner? Why?

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Small Business Environment: Managing External Relations



● Summer Albarcha became a fashion blogger to draw attention to stylish clothes for women who wanted to dress modestly. Fashion is just one area where there are personal, national, cultural, professional, and religious interests jostling for position in the environment. How can you better understand the environment to better understand the forces that can affect your business? Kamran Jebreili/AP Images

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Sixteen-year-old Summer Albarcha was frustrated by how hard it was to find clothing that was modest but stylish, as befits a devout but contemporary Muslim woman. She decided to post items she found to Instagram to make it easier for other women to find great style. Her page ( grew to over 40,000 followers worldwide by 2014.

The summer before Summer started studying at Saint Louis University, the founders of Mimu Maxi, a comparable Jewish site, sent Summer one of their signature items. As The Village Voice put it, “On July 12, the [Mimu Maxi] fashion line and the blogger decided to do a little collaboration. Albarcha posted a photo of herself to Instagram wearing a lime-green Mimu Maxi skirt, paired with a white col-lared shirt, a few simple accessories, and of course, her hijab. It looked smashing. Mimu Maxi re-posted it to its Facebook page and to Instagram.”2

That was when things got complicated. While many liked the look and the spirit of cooperation, a group of Mimu Maxi subscribers got tremendously upset that a Muslim was depicted on the site at a time when relations between Jews and Muslims in the Middle East were extremely strained. The Mimu Maxi sisters responded, defending the decision and talking about the shared desire for modesty in Jewish and Muslim traditions. The exchanges made not only The Village Voice, but Look magazine, The Atlantic, The Daily Mail, and a number of fashion blogs.

In the end, Summer saw the power of social media—for good or ill—and the need to be thoughtful about what she shares and how she shares it. The experience also reaffirmed for her the power of in-terfaith interaction, and the risk of facing opposition and even attack for doing something she believes in. But through the experience Summer also gained a new sense of empowerment, new Jewish follow-ers, and other new fans of her sense of style, so that by February 2019, Summer’s Instagram page had over 500,000 followers.

See Summer’s YouTube channel at To hear Summer talk about the Mimu Maxi story, see

DISCUSSION QUESTIONS1. How would you describe the different types of relationships between Mimu Maxi and Summer’s

Instagram page?

Focus on Small Business: Summer Albarcha and the Controversial Skirt1








After you complete this chapter, you will be able to:

LO 3-1 Describe the elements that make up the small business environment.

LO 3-2 Demonstrate your ability to scan the small business environment.

LO 3-3 Apply the techniques of building legitimacy for your organization.

LO 3-4 Navigate the techniques of social networking.

LO 3-5 Explain the basic skills for handling a crisis.

LO 3-6 Recognize how small businesses can achieve sustainability.

LO 3-7 Identify the major steps in making ethical decisions in small business.

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56 PART 1 EntrEprEnEurs and IdEas: thE BasIs of small BusInEss

2. Do you think the extremely negative reactions from a subset of customers or followers is a typical response? If not, what do you imagine is typical?

3. How would you have handled the reactions of the upset followers?

The Environment of Small BusinessThe moment that reaction to the skirt photo made Summer focus more intently on what was happening around her, she became aware of the environment—all of the forces outside the firm or in this case the individual entrepreneur (or entrepreneur-to-be). In Summer’s case, the envi-ronment was the source of her inspiration (if you recall the BRIE model from Chapter 1, the skirt would fall under resources), as well as the data from friends, family, co-workers, and the media giving her the background on the nature and scope of the problems with dressing mod-estly but stylishly in contemporary society.

Following the BRIE model in starting a business, the entrepreneur creates a boundary within the environment, setting his or her firm apart from the rest of the environment. In doing this, the entrepreneur gives the firm an organizational identity. Organizational identity is not just the name of a firm, but its basic description—what it does and where it does this. It can include formal elements like a registration with the state, or a website or email account with the firm’s name on it, or a telephone number in the firm’s name. But there are also important informal elements of identity. Often the firm and the entrepreneur are one and the same, but as the firm grows beyond the entrepreneur’s direct personal control, for example, by adding a part-time employee or run-ning an order-taking website 24/7, parts of the identity of the firm can grow beyond the entrepre-neur alone.3 And as the firm establishes a track record for performance, that performance along with the goods or services it creates become key elements of the firm’s and entrepreneur’s iden-tity. For example, it is hard to think of Famous Amos without thinking about his cookies.

A key element of this organizational identity is its organizational culture, a set of shared beliefs or basic assumptions that demonstrate how things get done. Organizational culture also includes common, accepted ways of dealing with problems and challenges within a company.4 For example, Brian and Lisa Jolles are the married co-owners of Jolles Insurance in Ellicott City, Maryland. They recognized that they needed to set an example of healthy living for their employees in order to promote wellness to their insurance customers. They did this by estab-lishing exercise as part of the organization’s culture. Employees are encouraged to walk during lunch to control stress and hunger. Wellness is so much a part of the culture that the Jolles run an adult exercise boot camp for employees, clients, neighbors, and friends three days a week, sponsor a website (, and even sponsor a Health and Wellness Day at a local park, which initially drew 500 participants and since then has become a community-wide annual event.5 Being a small business makes managing organizational culture easier than in larger businesses because, in a small business, there is a lot of f lexibility in terms of roles and expected behaviors, especially when the business is first getting started.

In creating a firm using the BRIE model, the entrepreneur gathers resources from the envi-ronment. These can include information on how to do the business or whom to sell to, funding to run the business, space for the business, and raw materials for the business to use to make goods or deliver services. If the environment is rich with resources as it is during economic boom times, it can be easy to gather what is needed. In tougher times, such as during economic recessions, gathering resources can be harder. As entrepreneurs face resource constraints, they often learn to get by with less, or substitute a more readily obtained resource, or ask to borrow, rent, or trade for the resource. These techniques are called bootstrapping (which is covered in detail in Chapter 6) and are part of the culture of most successful start-ups.

The environment is at the core of exchange in the BRIE model, since exchange is literally the firm or entrepreneur dealing with the environment—buying, selling, or trading across the

environmentThe sum of all the forces outside the firm or entrepreneur.

organizational identityPart of the BRIE model; com-posed of the name, descrip-tion, and distinctive elements of a firm, such as trademarks, uniforms, logos, characters, and stories.

organizational cultureA set of shared beliefs, basic as-sumptions, or common, accepted ways of dealing with problems and challenges within a company that demonstrate how things get done.

LO 3-1 Describe the elements that make up the small business environment.

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Small BuSineSS environment: managing external relationS CHAPTER 3 57

boundary of the firm. In the end, entrepreneurs carve a firm out of the environment by gathering resources, setting them up inside a boundary and trading or exchanging them across the bound-ary. In short, almost everything a firm does involves the environment. This chapter will help you understand more about the environment and its components, and how you can organize yourself and your firm to manage its relations with the environment.

The Elements of the Small Business EnvironmentEnvironment is a difficult concept to consider because it is so big. It literally includes the entire world outside yourself and your business. As an entrepreneur, or entrepreneur-to-be, how do you go about understanding it, much less using it to help focus and operate your business? The key is to have a model of the environment in mind, which can help you focus on a part of the world at a time.

You may have seen a diagram of the environment like the one in Figure 3.1 in your introduc-tory business or management text. The different entities are examples of the potential stakehold-ers in your business—people, groups, and organizations who have a concern about your business. It makes sense to the environment and stakeholders here to think about how this applies to small businesses.

The external environment consists of everything outside the firm’s boundary. When busi-nesspeople talk about “the environment” and they are not talking about air, land, or water, this is the environment they are discussing. The easiest way to think about this very large entity is to break it into two parts. Those parts of the environment that directly and consistently touch on the firm are called the task environment, because these are the components that directly relate to your firm performing its basic business tasks. This part of the environment is made up of those people your firm deals with every day—customers, suppliers, distributors, professional sup-porters like accountants and lawyers, subcontractors, allies and corporate partners, unions and lenders—as well as important groups you may deal with directly less often, but that are always on your mind, like competitors, government, media, interest groups such as trade and professional associations, consumer groups, environmental groups, and so forth.

external environmentThe forces, institutions, and peo-ple (i.e., the rest of the world) out-side the boundary of the firm.

task environmentA part of the external environment made up of those components that the firm deals with directly such as customers, suppliers, consultants, media, interest groups, and the like.


Groups in theseoverlapping

spaces could beconsidered as

internal orexternal to the

firm, dependingon how the


The GeneralEnvironment

The Task Environment







Demographic sector



UnionsUnionsBoards of directors


The Public





The BusinessCommunity



Prof. andtrade















Supporters*(e.g., accountants,lawyers, and otherpaid professionals

and trades)


The Organization’s Environment

Sources: Adapted from Angelo Kinicki and Brian K. Williams, Management: A Practical Introduction (New York: McGraw-Hill, 2009), p. 73; Brad Feld, Startup Communities: Building an Entrepreneurial Ecosystem in Your City (Hoboken, NJ: Wiley, 2012).

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The internal environment is defined by those people who are directly involved in the organi-zation and own or are employed by the firm. This includes the employees, but also the board of directors or advisory boards of the firm. Whether on the board of directors or not, your investors are part of the internal environment too. Contracted professionals like outside accountants or attorneys can be considered part of the internal or external environment, as can be subcontractors of the firm and firms with which you have formal contractual arrangements. Some companies will see customers as integral to the organization and count them in the internal environment, while other entrepreneurs will think of them as outside the firm. Similarly, in today’s highly networked world, your social networks and personal networks could also be considered part of the internal or external environment. For all of these “either/or” situations, the key is how you closely you want your business involved with and how much you want to consider the ideas of these different groups. As an owner, your first responsibility should be to “your business.” If these professionals, customers, and networks are groups to whom you feel responsibilities at a level similar to your employees, then you should think of them as part of your firm’s internal environment. Otherwise, they are part of your external environment.

It helps to organize them into related communities, represented by circles shown in Figure 3.1. One community we often think of as the public, which includes your customers, their social net-works, media, interest groups, and professional and trade associations. Because you deal with these groups on a consistent and ongoing basis, you may find yourself having trouble recognizing new trends or changes among these members of your task environment. One simple way to do this is to take some time to reflect on whether and how business and relations have changed with each group over the past 6 to 12 months. Another simple way is to look at the professional and trade magazines for their industries. You can find these publications using the techniques given in Skill Module 3.1. In particular, look for articles that include terms such as trends or fu-ture in the title. Another community is typically thought of as the business community, and in-cludes the firms you partner with, do business with, and compete with. It also includes the large

trade magazinesThe magazines that target specific industries and professions.

internal environmentThe people and groups within the boundary of a firm, including the owners, managers, employees, and board members of the firm.

board of directorsA formal group within a company that is legally responsible for the decisions and actions of the com-pany. The directors sit above the president or chief executive of-ficer of the company.

Finding Your Trade or Professional Association and Related Magazines

In this skill module we will start with finding your professional or trade organization, and with that information in hand, find that group’s publications. There are four ways to find the organizations:

1. With over 35,000 local, regional, national, and international associations listed, the Directory of Associations ( is a good place to start.

2. An industry portal is a website with capabilities for multiple groups like current members, potential members, media, and policy makers. Portals offer multiple services such as disseminating documents, chat rooms, discussion groups, registration services, databases, and the like. Wikipedia maintains a portal list at

3. If you are focused on consumer products, a list of associations and trade shows can be found at

4. If that does not work, most public and university libraries have Gale Publishing’s Directory of Associations, which lists tens of thousands of trade and professional groups.

If you cannot find your trade group or association, there are three ways you could find the magazines that target specific industries and professions (called trade magazines). Two use an online search. The best online sources are WebWire’s list at and Wikipedia’s at Or you can try a general search on Google. Enter the name of the product or service. If it takes multiple words, like “child care,” put the phrase in quotation marks. Add a comma and the word association. For this example, Google turns up groups such as the National Child Care Association and the National Association for Family Child Care. In addition, printed directories of publications by Bacon Publishing or Burrelle’s Infor-mation Services can be found on many libraries’ reference shelves.

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businesses and banks. A major part of that community are the paid professionals on whom you depend, like your ac-countants, lawyers, IT experts, and the like.

One part of the environment that is important for small business founders is called the entrepreneurial ecosystem.6 These are the elements that make up the settings most help-ful to promoting entrepreneurship. The specific parts of the environment of interest are the entrepreneurs in the commu-nity, the government, local universities, investors, mentors, service people (e.g., lawyers, accountants, etc.), and large companies. Having all these sources of help locally is the best, but using the Internet to link to mentors, university sup-ports, or out-of-town investors can work, too.

The other, even larger part of the environment is called the general environment. It represents the major forces on the lives of people and institutions like businesses, and even na-tions. Some components of this environment are easy to un-derstand and apply to small business. For example, the economic sector includes the trends and current conditions of the overall market for goods and services, the availability of equity and credit, and employment. The technological sector includes innovation, invention, and modernization. The sociocultural sector includes cultures often based on factors such as nationality or religion, and subcultures that are based on groups formed around shared interests within a larger culture. For example, think of the contributions of the hip-hop subculture to modern music and lifestyle marketing.

The demographic sector includes trends in the mix of ages, races, and gender in society. For example, Jim Allsup had experience handling claims for Social Security, so he decided to start a business of his own using that experience. He did some research and discovered that as the baby boom generation (born 1946–1964) aged, the disability services market would grow right along with the retiree services market. From his work experience, he already knew that the Social Se-curity Disability Insurance (SSDI) program was nearly impossible for people to deal with on their own, which delayed disability payments. He felt he could provide a valuable service to people to help them qualify faster for these payments, and in 1984 created Allsup, Inc. to do just that. Today, Allsup, Inc. is the nation’s largest and most successful SSDI claims-assistance com-pany, with over 300,000 claims processed.7

Another arena in the general environment is the political-legal sector. This sector reflects the broad trends affecting law, government, and politics, including changes in political parties and players, new legal and policy initiatives, and intersections of government, politics, or law with the other forces in the general environment. An example is when forces from the technological, eco-nomic, and international sectors led to the Affordable Care Act of 2010, a federally mandated changeover requiring everyone to have health insurance.

Finally, there is the ecosystem/infrastructure sector, which reflects the physical world in which we live. This sector includes the natural components such as raw materials, weather, and ecological forces, as well as created components such as cities, roads, and other elements of the infrastructure. Changes here are sometimes unpredictable, like the highly destructive Hurricane Florence of 2018, but sometimes more predictable, like the worldwide decrease in forested areas over the past 200 years.

Environmental Scanning for Small BusinessesBig corporations have whole departments focused on scanning the environment and the firm’s competitors. Most small businesses cannot afford to try that approach, but they can benefit tremendously from even a small amount of environmental scanning such as those shown in

● Hip-hop is a subculture that has made major impacts on fashion, design, language, and music. Part of the sociocultural sector, these subcultures shape new directions for entrepreneurship.

Comstock Images/SuperStock

entrepreneurial ecosystemA specific configuration of the en-vironment that reflects the com-ponents that are most central to developing a strong and active community of start-up businesses. The components are entrepre-neurs, government, universities, investors, service people, men-tors, and large organizations.

general environmentA part of the external environment made up of sectors of major forces that shape the people and institutions of the task and inter-nal environments, such as the economic sector or the demo-graphic sector.

LO 3-2 Demonstrate your ability to scan the small business environment.

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Skill Module 3.2. There are several low-cost and relatively fast ways to monitor the environ-ment.8 They include:

• Looking for trends and future-looking articles in the trade and professional press of your industry or those of members of your task environment (see Skill Module 3.1).

• Asking your customers, suppliers, banker, attorney, and accountants what they see on the horizon for business in general, for business in your community in general, or for your in-dustry or line of business in particular.

• Keeping notes on the things that bother you about the way work is done now, or what both-ers you about how something has changed (whether a product, service, or process you deal with), and periodically doing some fast research (typically searching on the web) on what causes it and how others feel about it. For opinion websites, see Google’s customer opin-ion websites and you’ll find up-to-date reviews of top sites.

• Use the Flipboard app (or go to to create a free custom feed of news from all sorts of brand-name sources including major magazines, newspapers, and tech-, science- and entrepreneur-related magazines. Flipboard will let you tag, save, and share things you like, as well as create custom feed based on your interests (like science, sports, politics, design, health, etc.).Skill Module 3.3 will show you how to do this.

Bill Gates is famous as a trend-spotter (although he has made some bad calls too), but one of the tricks he swears by is “Think Week,” where he goes away by himself and spends time thinking and researching to help him focus on what is coming and what is important to his business. Most of us can’t afford a week off, but putting aside three to four hours every three months to review what you have noticed and what notes you have made can do a lot to achieve the major benefits of environmental scanning, and still leave time to get your own work done. Between those occasions, you can help make yourself aware by using apps like Flipboard to keep you up on what’s happening in the world. Skill Module 3.3 shows you how to do this.

Do not be afraid to make a bad decision. The trick with all forward-looking choices is to use a “real options” approach.9 A real option is a choice you face to do or not do something. As an entrepreneur, you will often face situations like this. You may need to make a decision, but you often have time to research it or wait to see what happens. So to pursue a real options approach, you establish benchmarks to achieve, timetables for their achievement, and a formal review pro-cess to get you to make the tough “continue” or “stop” decisions. Microsoft initially dismissed the Internet, but it revisited its decision and changed course to make Internet Explorer the most used browser in the world.

“real options” approachAn idea in entrepreneurship popu-larized by Rita Gunther McGrath and Ian Macmillan that suggests thinking of entrepreneurial oppor-tunities (like start-ups) in terms similar to buying a stock option, putting a small amount of money down now to let you invest more at favorable rates later. This ap-proach minimizes the amount you can lose and gives you a chance to make a decision later, based on the start-up’s track record and prospects.

Finding Out How the Small Business Economy Is Doing

A key element in environmental scanning is assessing the overall environment and its trends. There are several ways to do this, from the simple to the complex. Simple approaches use a single or small set of numbers, like the Kauffman Indicators of Entrepreneurship ( or the National Federation of Independent Business’s Small Business Economic Trends (, which offers its monthly Index of Small Business Optimism. For these, your greatest concern is the trend, and whether it is rising or falling. At the other extreme, the Small Business Administration’s Office of Advocacy offers its Quarterly Bulletins ( with a compendium of measures and the SBA’s own analysis of them. One other key source of data for your state is the Office of Advocacy’s Small Business Profiles for the States and Territories (, but these report data from one or two years earlier. If you want to compare entrepreneurship in the United States to other countries, you can look at the annual Global Entrepreneurship Monitor’s global reports at

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S K I L L M O D U L E 3 . 3

Scan Your Environment with the Flipboard App

Flipboard is a smartphone app that gives you a constant feed of news—global, national, business, technol-ogy, cultural, and more. The app and the news it posts are free, and you can customize your personal newsfeed with topics of interest to you. The initial list of topics runs close to 150 of them, with examples like style, science, sustainability, skateboarding, Star Wars, sleep, and space (just to sample the s category). The steps to start are simple:

1. Download and install the app on your smartphone and create your account. 2. Select topics you want to include in your personal feed (which shows up as “For You” on Flipboard’s

front page. Grab a few to get started. You can always go back and scroll through the full list and edit your choices. (Useful topics include #Startups, #Entrepreneurship, #Trends.)

3. Try a few things: Search for the name of your locality (for local news), people, or causes or companies you want to be kept up-to-date about.

4. Tweak your settings in order to get notifications for news for your topics of interest. 5. Check Flipboard when you have time or want to explore the world. 6. Also use features like saving to “magazines” you create to keep track of things of interest.

Beyond trend-spotting, the other key scanning ability is to find the resources you need from the environment to build your business. The key to identifying resources comes from the acro-nym PROFIT, which stands for the six types of resources:10

• Property/Physical: Buildings, land, equipment, raw materials• Relational: Customers, networks, distributors, social capital• Organizational: Systems, structures, operational procedures• Financial: Money, lines of credit, crowdfunding, bartering• Intellectual (also known as Human): Employees, contractors, advisers, consultants, and the

skills the business needs or has

• Technological: Patents, trademarks, ideas, copyrights, licenses, access to technology or ex-pertise networks

To be successful, a start-up needs some of each of the six types of resources. You start by thinking about what resources you have. If you’re not sure, look at similar sorts of businesses and analyze their resources. You may not be able to see all of them, but it is a start, and as you ana-lyze more competitors, you’ll begin to see different types of resources. Then ask yourself what kinds would be useful for your business. From that list, go back to your environmental scanning and look for the resources you need in your internal, task, and general environments.

So now you know what the environment is, what its different components are, and how and where you might keep an eye on the environment to help you prepare for the future. That leaves open how you deal with the environment on a daily basis as you begin or run your business. In the next section we look at the major techniques for managing your relations with the environment.

social capitalCharacteristics of a business, such as trust, consistency, and networks, that represent potential social obligations that are assets of the firm or entrepreneur.


Learn more about the topics above at these sites:

Entrepreneur magazine (daily newsletter with general small business news): Daily newsletter (on entrepreneurship and innovation): newsletter (news with a minority focus):

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Skills for Managing Relations with the EnvironmentHaving learned about the different types and sectors of the environment, and the way to scan and analyze them, it only makes sense to look at how to apply that knowledge to help launch and grow your own small business. In this section we will introduce two approaches to managing rela-tions with the environment, what is called external relations:

• Building legitimacy• Developing your networksThe goal of any small business owner is to manage external relations in order to create social

capital. Social capital includes characteristics of a business, like trust, consistency, and networks, that help make business operations smooth and efficient. Small businesses high in social capital are more trusted, checked up on less, treated more fairly by regulators, and given the benefit of the doubt when problems occur.11 This social capital is capital in the same sense that cash or land can be. You can accumulate it or spend it, and the more of it you have, the greater the value of your firm. Social capital is the major component of what accountants call “goodwill,” and you can find it on a business’s balance sheet. Let us look at the techniques for managing external relations and building social capital.

Building LegitimacyLegitimacy means that a firm is worthy of consideration or doing business with because of the impressions or opinions of customers, suppliers, investors, or competitors.12 Gaining legiti-macy is one of the top challenges facing new small businesses, but it can be especially difficult for entrepreneurs seen as “different”—women, minorities, home-based businesses, businesses started by young people, entrepreneurs introducing a new technology, or people new to the area or industry. Achieving legitimacy is also a major goal of all new businesses or of existing businesses that have gone through a significant change such as getting new owners or chang-ing their product lines. Achieving legitimacy means building trust among customers and other key groups.

There are three general forms of legitimacy that you can develop—based on your people, based on your product, and based on your organization.13 Each is discussed in the following tables.

Remember that often the owner is the business in many people’s minds. So, he or she is the most important element of social capital to customers and supporters of a business, such as bankers, lawyers, and suppliers. Having people in the organization—an owner, employees, or even media spokespeople—whom customers know and respect increases the firm’s legitimacy. Making sure the people of your business always work in the best, friendliest, and most professional way also helps build the business. Some of the major examples of people-based legitimacy are given in Table 3.1.

Also, many small business owners think that the most important source of legitimacy comes from an understanding of the product or service offered.14 If customers do not under-stand it, the company is unlikely to get any customer attention because customers may not trust it. Fortunately, most small businesses offer products or services that customers are al-ready familiar with (what we will call an “imitative strategy” in Chapter 7). The goal then becomes making sure the customer knows about the details of the product—its high quality and environmental friendliness, its competitive advantage, how to use it—and has the assur-ance that it will be backed up by the firm. Table 3.2 describes many forms of product-based legitimacy.

If the customer understands the product, the final key legitimacy factor is promoting knowl-edge about the organization itself. This might focus on telling about the history or visibility the firm already enjoys. It might come from published information that makes sure your firm looks like a substantial and professional business. Whatever gives customers confidence in the quality

external relationsThe general description for the processes and skills used in the management of a firm’s interac-tions with people, organizations, and institutions outside of its boundary.

legitimacyThe belief that a firm is worthy of consideration or doing business with because of the impressions or opinions of customers, suppli-ers, investors, or competitors.

LO 3-3 Apply the tech-niques of building legitimacy for your organization.

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People-Based Legitimacy IndicatorsTABLE 3.1

People More Legitimate Less Legitimate

Goodwill Have well-known or well-regarded owners, employees, supporters, or spokespeople

Lack well-known or well-regarded owners, employees, supporters, or spokespeople

Public recognition Firm, owner, or employees receive awards (e.g., “Small Business of the Year”) or make notable achievements outside the business (e.g., president of the PTA or BBB)

Have little or no public recognition

Product/service name recognition

Sell brand-name merchandise or services

Sell non-brand-name merchandise or services

Public reviews Have more reviews and more stars on Yelp, Google, or other rating sites

Have fewer reviews and fewer stars on rating sites

Business network membership

Have membership in trade (e.g., National Restaurant Association) and business (e.g., BBB, NFIB, chamber of commerce) organizations

Have no memberships in trade and business organizations

Organizational size Have employees Have no employees

Attire Wear uniforms or business attire

Wear casual attire

and survivability of the firm helps the selling process and in turn increases the all-important trust factor. Table 3.3 gives the key factors for organizational legitimacy.

Another approach to building organization-based legitimacy, which has grown in popularity since the original list was crafted, is the creation and display of a company code of ethics. In practice, good codes of ethics reflect the passions of the founder, the culture of the firm, and three classes of ethical standards found in research on existing codes of ethics.15 These three classes are:

• Employees Should Be Dependable Organizational Citizens (e.g., finish your work, follow rules and orders, be on time, do not swear, dress appropriately, etc.)

• Do Not Do Anything That Will Harm the Organization (e.g., protect confidential informa-tion, do not take drugs, kickbacks, or company property, etc.)

• Be Good to Customers (e.g., be truthful, be helpful, listen attentively, etc.)Across these three types of legitimacy indicators there are 30 characteristics, and few small

businesses incorporate all these elements. Most of the time the small business owner will pick 2 or 3 legitimacy-building features from each of the product, organizational, and people indicator listings and then work to implement them. Once implemented, they should be locked in. Part of legitimacy and building trust comes from the consistency of a firm’s actions over time. Repeat-ing one legitimacy characteristic daily does more to build your social capital than changing the legitimacy characteristics stressed by the firm in hopes of finding the perfect mix of characteristics.16

LO 3-4 Navigate the tech-niques of social networking.

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Developing Your NetworksAnother basis for building social capital is through building your network. There are two overlap-ping forms of network. Your personal network are people you have encountered in your everyday life—family, friends, classmates, workmates, and others you interact with in the physical world. Your social network are the people you know online.17 Many of the people in your personal net-work may well be part of your social network, but you may know many more people through your social network than you might from your personal network. Knowing how to grow and sustain each is a key skill for any entrepreneur.

Both forms of networking are ways to work trust, reciprocity, and long-term relationships into your day-to-day business operations. They are ways to build your company’s expertise by convincing others to share their skills and knowledge with your firm. The most successful own-ers are those who recognize that others have the expertise needed and establish relationships that give them the benefits of that expertise. In many of the stories of small business owners in this book you will see how success hinges on getting others to help you. You might be new to your business, industry, or locality, but, with the right expertise, your business can improve its chances of succeeding. The key is building a network of people who trust you and are willing to help you,18 and who can depend on you for help and advice in return. Through this mutuality, social networking helps build long-lasting relationships.

Product-Based Legitimacy IndicatorsTABLE 3.2

Product More Legitimate Less Legitimate

Customer assurance

Have publicly stated guarantees, bonding, try-before-you-buy policies and return policies, etc.

Have no publicly stated guarantees or return policies, etc.

Experiential supports

Offer documentation or demonstration Do not offer documentation or demonstration

Customer service

Provide customer service live or online Do not provide customer service live or online

Quality standards

Meet or exceed industry standards for quality

Fail to meet industry standards for quality

Environmental friendliness

Use recyclable materials, demonstrate green design, or have a low carbon footprint.

Show no concern for the environment or natural resources

Certifications Are certified for ISO, Baldrige Award, minority or women-owned business, professional licensing

Are self-certified only

Testimonials Present testimonials from customers satisfied with the product

Provide no information from users

Intellectual property

Have trademarks, service marks, patents, or copyrights

Have no trademarks, service marks, patents, or copyrights

Industry leadership

Set technological or service standards adopted by competitors

Use or provide common technologies or services

Media product/service visibility

Achieve visibility for products/services through interviews, articles, placements, or columns in print or electronic media

Provide little or no visibility about products/services in print or electronic media

ISOStands for the International Orga-nization for Standardization, and refers to certification for having met a standard of quality that is consistently evaluated around the world (see

Baldrige AwardThe Malcolm Baldrige National Quality Award is given by the U.S. government to businesses and nonprofit organizations that have been judged outstanding in seven measures of quality leadership; strategic planning; customer and market focus; measurement, anal-ysis, and knowledge manage-ment; human resource focus; process management; and results (see

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Organization-Based Legitimacy IndicatorsTABLE 3.3

Product More Legitimate Less Legitimate

Internet presence Are on several platforms: website, Facebook, Instagram, Twitter, LinkedIn

Are on few or no Internet platforms

Firm name The firm owns and uses its name as its domain name, e.g. Rabbitears Corp. is online as,, etc.

Media organization visibility

Achieve visibility through interviews, articles, or columns in print or electronic media about the organization

Receive little or no attention in print or electronic media about the organization

History Have been in operation for a long time

Are new

Time commitment Are a full-time organization Are a part-time organization

Hours of operation 9–5, 9–9, 24/7 1–5, 6–9

Days of operation M–F, 7 days a week One day, weekends only

Phone line Dedicated to business Shared with home

Legal form Corporation or LLC Sole proprietorship or partnership

Physical setting Commercial site like a store, office building, or mall

Home-based business; a business with no physical location; a business run out of a post office mailbox

Public listings Google, Yelp, Yellow Pages, Dun & Bradstreet Business Profile, business directories

White Pages or none

Internet identity Use business name (e.g.,

Use generic name (e.g.,

Graphic design (business cards, stationery, websites, etc.)

Professionally done Personally done

Partnering Partners with known businesses Partners with unknown businesses or no partnering

Dealer network membership

Authorized dealer or agent Unauthorized, gray, or black market dealer or agent

Code of ethics Adopt your industry’s code of ethics, create one of your own, display the code

No code of ethics adopted

In both types of networking, you seek to build your reputation because reputation will have an impact on your community; if it is positive, it will increase trust and create a culture that enables people to make good decisions. Both forms of networking help all those aspects of small business by building your reputation as giving the most expert business goods or services and as being an impor-tant community resource. Effective networking of both types can help your long-term reputation as a business owner by showing others who you are19—a consistently top-notch community player.

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Sources for Network ConnectionsTABLE 3.4

Family: Start here, and ask your parents, grandparents, and extended family. Include in-laws.Friends and neighbors: Include your friends, and friends of friends.Kids: Think about the people you’ve met through your children at their school and in their extracurricular activities.

Bank: You probably have a bank account, possibly several. Get to know your bankers and ask them for introductions or referrals.

Customer contacts: You are a customer, patient, or client to doctors, dentists, insurance agents, lawyers, and small business owners of all sorts. They know you and because they’re in business, they may have the kind of contacts you need.

School: Think about students, faculty, and support organizations where you or your family have gone to school. Many colleges have alumni offices and entrepreneurship or small business development centers, and these can put you in touch with helpful others.

Hobbies: Hobbies often bring together people with diverse backgrounds. That makes them a great place for finding different sorts of contacts.

Business associations: Most communities have some form of chamber of commerce. Most industries and professions have associations. People join these in order to network. Ask the officers of the chamber of commerce or the association for referrals. Be willing to assist others who ask for your help.

Other organizations: Religious, civic, community, and political organizations often publish member lists. Go over these to see if you recall people who have the business ties or expertise you need.

Work: Consider co-workers, bosses, customers, suppliers, and people in other firms with whom you deal. Note that work contacts can be problematic. Check company rules or expectations first. Many firms consider such contacts a conflict of interest.

Small business support organizations: There are always organizations dedicated to small business such as the National Federation of Independent Business, National Small Business United, and the National Association for the Self-Employed. You can get lists of these by searching Google’s directory for “small business associations.” Many of these organizations have local chapters, and all encourage members to contact and help one another.

Developing Your Personal NetworksSo, look at the contact list on your cell phone. Who is on it? What is your relationship with each person or organization? Those numbers are the easiest way to start thinking about and analyze your personal network. Table 3.4 talks about the major categories of your personal network. As you realize the types of personal network connections, you can better think about how to grow your personal networks.

What should you expect in terms of your personal network? Social psychologists tell us some basics, many of which we know from experience.20 Not all contacts are equal. There are our closest friends, which can include family, and often number up to 5 people. Adding to this is the next layer of close friends, which might number as high as 10 to 15 people. General friends might number up to 50 people, and acquaintances up to 150. The more extroverted you are, the more likely you are to approximate these numbers; the more introverted, the smaller your circles will be at each level. The amount of time you spend will typically decrease as you go from inner to outer circles of friends. You may spend a few minutes each week, or even every day, with your closest friends, and connect with acquaintances by phone, email or social media only every month or two.

This sort of pattern was evident for entrepreneurs surveyed as part of the Panel Study of Entre-preneurial Dynamics (PSED). In the PSED, most prospective and early stage entrepreneurs re-ported having one or two people in their helping network, and they typically reported around three contacts a month across their whole network of folks providing help.21 Information is the number

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one type of help sought from others, followed by introductions to others. Occasionally sought were requests for specific sorts of help—financing, business services, personal services, or resources.

Keep in mind the most powerful way to connect is face-to-face (about 34 times more powerful than email22). Phone is next and works best when the tone and context of your message needs to be heard. Email works if you’re looking for a reaction or reply and the topic needs some explaining. If you need a reply but the thought is easily expressed, texting can work. Social media are the channels people view most irregularly, and they are also the channels that get the least consistent responses from recipients; so they are the least powerful way to ensure a connection to another person.23

Knowing whom to ask, what to ask for, and which channel to use when asking is only part of the story. The other part involves building the relationships and encouraging others to help you. One of the key parts of social networking is actually seeking the help or advice of others. Asking for help well is a skill. A little advance thinking and preparation can dramatically produce positive results. Skill Module 3.4 shows you one of the most successful methods for asking others for help.

Asking for Help

The best people to ask for help are often the people who are the busiest. Knowing this, some small busi-ness owners shy away from imposing. In reality, there is no substitute for expertise, and getting it from others is one of the most efficient and effective ways to do it. Building on the ideas of Paula Caproni,24 here is an eight-step approach to asking others for help:

● Request from people you trust: Either ask people who already know you, or establish a relationship with the people you want to ask before seeking help from them. This can be as little as a few minutes of talk to find common ground or common friends at a chamber of commerce reception, but it is an im-portant foundation for the relationship.

● Ask for specific behavior: Your request is more likely to fit someone’s schedule if it is specific and something that has a definite end. So, asking “How can I get an introduction to someone in purchasing at BigCorp?” is more likely to get a positive response than, “What can I do to sell more?”

● Do not be defensive: When explaining what you need, do not blame others for your needing help. And when asked questions by potential helpers, do not get upset or accusatory. Often they need to know what you have tried, how you did it, and how it worked out. They also often need to know what you are capable of doing, or what expertise you bring to the situation. Give concise answers and show your willingness to answer more. After all, they need the information to help you.

● Do not overreact or underreact: Think of your regular conversations with good customers or friends. That kind of give-and-take and that kind of emotional level is what a good asking-for-help exchange sounds like. While being brief is good—after all, time is money—if you sound like you are holding back or are unwilling to talk, it does not help build the relationship. On the other hand, going overboard with praise and informa-tion can come across as phony or irritating. Think of regular conversations, and try to emulate them here.

● Summarize what was said to ensure understanding: When your conversation is nearing the end, repeat what you understood as the advice. It is fine to put it in your own words. The goal here is for you and the person helping you to know that each of you understood the other. If you are going to try the advice on your own, you want to be certain you understand what to do, how to do it, and maybe even why to do it that way. Summarizing is a great way to confirm all that and show how attentive you have been.

● Explain what you are going to do about feedback: People you approach as experts often take part of their satisfaction from knowing that their expertise has made a difference—especially in your busi-ness, but at least in your thinking. If you can tell such people how you will use their help, it can provide them with an immediate reward. If you are not sure what action you will take, be honest about this, but also point to the new things you have learned or discovered from the help they offered.

● Thank the person for the input: This is in part providing an immediate payout to the person helping you, but also laying a foundation for future contact. Provide a simple thanks and mention how you hope to re-turn the favor or help someday. A good handshake and a smile, and you are ready to get back to business.

S K I L L M O D U L E 3 . 4

(Continued )

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● Follow through: It is always a good idea to inform people who tried to help you about how your ef-forts came out. Tell them how you solved your business problem in general terms. If their help was used, mention this. Thank them for their help (whether you used it or not). Finish with a mention of your appreciation of their help and your willingness to help them in the future.

Remember, social networking makes a difference in how you’ll conduct business every day. It means asking for help when you need it, respecting the other person’s time and expertise, and most importantly being willing to reciprocate if asked. Mutuality is the idea and action of each person helping the other. Part of building social capital with social networking comes from the help people in the network can provide one another. Why help? Reasons may be making a new friend or making a friendship stronger, creating a relationship that can lead to future business or friendship, having a chance to demonstrate expertise, incurring a debt for future repayment, or even just wanting to help others. Helping others means you understand the idea of positive com-munity impact, trust, and relationships—critical success factors in building an ethical business.

Building social capital through social networking involves giving information, letting people know they belong, and providing social support and approval. You have to take the time to build and keep up your relationships with others in your network. This is called personal networking, which means small business owners interacting with others in order to build relationships useful to the business. Key skills for effective small business personal networking are given in Skill Module 3.5.

mutualityThe action of each person helping another.

networkingInteracting with others in order to build relationships useful to a business.

Personal Networking Skills

Personal networking is a skill like any other. In business you often know the kind of situation you are about to go into or are likely to face. Knowing this, you can take several steps to prepare yourself to socialize with others as a basis for establishing a business relationship. Below are top suggestions of successful alums of our entrepreneurship program and the advice of experts. Emily Muhoberac, COO of Sapper Consulting and Adjunct Faculty at Saint Louis University

● Go with a friend. While I think everyone should experience going to a networking event alone, you can ease your anxiety by attending your first event with a friend or colleague. Not only will this help you at the event, but it will also hold you accountable to actually attend (like a gym buddy).

● Remember that networking might not help you now. It’s like investing time or money into most things that are worthwhile–you’re not likely to see an immediate return. Many of the opportunities I’ve received came months or years after initially meeting the contact at an event.

● Admit you don’t know all the buzzwords and jargon. Pretending to know what’s going on won’t make you look smarter, and won’t help you out in the end. You’ll end up either admitting you don’t know at an inopportune time, or miss out on valuable knowledge that would have helped you grow.

● Check the RSVP list to pre-network. Most networking events have public RSVP lists where you can see who will be attending. Make connections before you get there, reaching out to guests that you’d like to talk to or have common interests via LinkedIn. Make a list for the meeting to help focus and remind you who you want to meet and why.

Byron Abrigg, Cofounder and COO at Mission Control GG

● Play your student card. There are very few executives or professionals who are not willing to give some time over a cup of coffee to offer some career advice and life lessons . . . because you’re a student. As soon as you graduate, you are now a fellow professional out looking for something (a job, a promotion, etc.). Use your student card to get in as many conversations as possible while you can before it expires!

● Ask for money, get advice; ask for advice, get money. When networking, the only thing you should be looking for is advice. When you genuinely ask for input and advice, you build relationships and make others feel welcome and appreciated. It’s only when you do this—build genuine relationships up front—that you can truly reap the dividends later. We raised our first $100K and lined up a dozen industry advisers for our first start-up simply off of genuine relationships we had built with people over the years where we never asked for anything but advice.

S K I L L M O D U L E 3 . 5

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Advice from networking experts:25

● Know who you are. Craft a 30-second spot about yourself and your firm, and practice it until it sounds like a natural expression of your interests. This is often called an elevator pitch, and Chapter 8 (Business Plans) gives details on putting together a winning one.

● Bone up on small talk. What do you say after hello? A good place to start is to give your elevator pitch and close with why you were looking forward to meeting the person. If you think your business can help the other person’s, talk about that. If the other person wants to limit the conversation to social topics, go with that. To help with chitchat in those situations, make sure you look at the local newspa-per (sports section included) on the day of the event, and take a look at The Wall Street Journal or USA Today front page or your Flipboard feed if you can.

● Do not forget why you’re there. People tend to gather in groups of like-minded folks. This can mean that all the golf players are together talking strokes, but it can be deadly if it means that all the women entrepreneurs are gathered together and not networking with the male business owners. If you are at a networking event and you start feeling comfortable, check to make sure it is not because you have actually stopped networking.

● Make the connection. The key to making networking work is to make the personal connection. Business-people expect to be approached by others at events. Do not be shy. Just walk up and say hello. If neces-sary, ask a friend or an event organizer to make the introduction, but, however you do it, meet the people.

● Follow up. After you meet someone at a networking event, periodically keep up the contact through emails, phone, mail, or personal contact. If you can offer help or information, that is the best reason to stay in touch.

Remember that the place to start thinking about your personal network is your cell phone contact list. A basic one is built into your phone, and it can connect to even more powerful ver-sions in the cloud. If you use an Android phone, the cloud version is Google Contacts. For iPhone users it is Contacts on iCloud. If you have a version of Microsoft Office, you can use Outlook. The cell phone contact list can directly connect to programs that can help you build and manage your list, such as Camcard which scans business cards and adds them to your con-tact list, or full-fledged customer relationship management (CRM) software platforms like Zoho CRM, SuiteCRM or HubSpot which can let you organize your lists, get reminders when to re-contact someone, and create mailing labels.26 Also note that your cell phone contact list can be connected to social networking apps like LinkedIn to help add more information to your regular contacts.

The goal is to make sure you keep track of your social and business contacts. The best approaches help you identify whom you need to contact to keep relationships fresh. This is because networking is one of the key skills for all business owners, female and male, minority and majority, high tech and no tech. Because in the end, business is all about making the sale and the sale depends on making a connection with customers, and that connection is what networking is all about.

Developing Your Social NetworksIn personal networking most people probably top out around 150 or so friends and acquain-tances. The power of social networking, however, becomes readily apparent because if all 150 friends and acquaintances are on a social media platform like LinkedIn or Facebook, and they have their 150 connections, you may be 1 connection away from 22,500 people! And broadcast-ing your interests to thousands, even millions, of people is much easier, faster and cheaper on social media platforms than in the world of personal networking. The challenge for entrepre-neurs considering developing their social network is to decide which networks to pursue, and what is the best strategy to use.

The key factor for the small business owner is realizing where their target customers are. If you are looking to sell to consumers (a B2C business), then Facebook, YouTube, or Instagram are crucial to your strategy because they each have 1 billion users or more globally. YouTube is key if you generate videos, Instagram for photo-driven messaging, and Facebook handles both as well as textual messages. If your competitors have company pages on those platforms, you might want to consider setting up shop there too. If you are focused on selling to businesses (yours is

customer relationship management (CRM)The process of tracking the cus-tomer’s different contacts with the firm, and using these data to help improve sales as well as the cus-tomer’s experience.

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then a B2B business), LinkedIn is the top platform. Note there are also dozens of specialized social media platforms that typically have smaller numbers of more highly active users, like Buzznet for music, Q&A platforms like Thumb or, or business platforms like Xing. Google “social media channels” to find the latest articles on different social media platforms.

A lot of entrepreneurs have their business on multiple platforms and many find Facebook, LinkedIn, and Twitter to be the “Big 3” of social networking. A number of businesses have a company or product page on Facebook and LinkedIn pages for the company, the owner, and even key employees. Today there are all sorts of free and freemium platforms to help you manage your message on multiple social media sites, such as and These plat-forms let you create, schedule, and post one message on all your platforms, simplifying your ability to see and track what you are doing.

Regardless of the site or sites you use, there are four best practices that can help any online so-cial networking effort become more successful (whether you are pursuing it online or in person):

• Make it easy for people to contact you (this often means giving one of your email or social network addresses).

• Take the initiative to ask others on the network (including colleagues from school and work, and friends and family) to link with you and then help them out online.

• Find and link up with network mavens—people who like to gather and share their enor-mous networks—and help out whenever you can.27

• Keep at it—successful online networking requires consistent involvement. It can be weekly, but it needs to be every week.

Electronic social networks are usually fast and easy to develop, as well as often free. Face-to-face social networks often have membership costs, but offer the all-important personal touch as well as those all-important local connections. When either type of social network works, it can produce results from unexpected sources. While the personal connection from face-to-face net-working is always a great thing to have, if you cannot easily develop a large face-to-face network in your community, industry, or market, electronic social networking is the best way to go.


Learn more about the topics above at these sites:

Facebook for Business advice search: on Google advice search: on LinkedIn advice search:

Skills for Making the Right DecisionAs an entrepreneur you will make all sorts of decisions, from right now as you are thinking about the kind of business you want to start and how it will operate, and into the future as your busi-ness launches, grows, and hits the high and low points all businesses—and people—face. Thinking ahead of time about those decisions and situations can help you prepare yourself and your firm for the future. There are three areas where this is particularly important:

• Handling a crisis• Achieving sustainability• Making ethical decisions

Handling a CrisisWhile some challenges come slowly and give the small business owner a chance to think about how to choose, all businesses sooner or later face some sort of crisis. A crisis is a situation that poses a major problem for the business or its people, in which the survival of the business is at

LO 3-5 Explain the basic skills for handling a crisis.

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stake, and immediate action is necessary.28 For owners, knowing what to do during a crisis is a very specialized and emotionally demanding form of deci-sion making. Small business owners are optimists about their businesses, and it can be wrenching when something goes wrong. When the crisis is in full swing, knowing what to do is critical. The gold standard for crisis leader-ship comes from Norman Augustine,29 former president of Lockheed Martin—a Fortune 500 company. Although originally given for large busi-nesses, the six steps to follow can be readily adapted to small ones.30

The steps are:

1. Admit you’re in trouble—quickly. It is better to say “If there is a problem, I will find it and fix it” than to delay an admission until fact-finding is done.

2. Get to the scene as soon as possible. Your job? Show caring and accountability.

3. Communicate facts you know (and those you don’t) to employees, cus-tomers, and suppliers.

4. Have one person serve as the firm’s spokesperson. It is best if it can be the owner, but an articulate employee, family member, or outside profes-sional (e.g., lawyer) can stand in.

5. Separate crisis management from the everyday management of the firm. If you are doing both, try to take time to do each separately. Delegate as much as possible of the everyday management to employees or family while you concentrate on dealing with the crisis.

6. Deal with the crisis quickly. Take steps to solve the problem, and make the process of dealing with the problem as open as possible.

Managing crisis is a difficult but necessary skill. Obviously, anticipating problems and avoid-ing them or handling them before they become major is a better approach, but only 1 business in 10 has a disaster or crisis plan.31 To help small businesses with crisis planning the federal govern-ment has created a new website ( to bring all these resources together in one lo-cation. The government recommends a three-step process for preparing for disasters:

1. Plan to stay in business (use a disaster plan like the SBA’s from

2. Talk to your people (plan with co-workers, practice your plans, and have a crisis communi-cations approach in place). Include preparing a “dark website” with key information that you activate only during an emergency.32

3. Protect your investment (use insurance—see Chapter 16, backup procedures and supplies, etc.).

In the end, the best way to manage a crisis is to plan ahead, but in the middle of a crisis, the key for a small business owner is to keep calm, take care of the people involved, and keep people informed.

Achieving SustainabilityResearchers are finding human trash at the bottom of the oceans. Plastic grocery bags get caught on fences miles from cities. We are all seeing the problem of too much garbage and not enough recycling. Sustainable entrepreneurship is an approach to the operation of the firm, the line of business of the firm, or both, which identifies or creates and then exploits opportunities to make a profit in a manner that minimizes the depletion of natural resources, maximizes the use of re-cycled material, improves the environment, or achieves any combination of these outcomes. Positive outcomes along these lines are described as “greener,” so the approach is also some-times called green entrepreneurship.

As a nation, we have increased our greenness over the past 20 years through a variety of ac-tions. We drive more fuel-efficient cars today because of government-mandated fuel efficiency standards. Companies and individuals do more recycling of trash. The latest effort to replace regular light bulbs with compact fluorescent and LED lights is another green effort.

● For a small business, an accident like this can become a crisis. Knowing what to do can help minimize its impact on your firm, customers, and employees.

Denise McCullough

LO 3-6 Recognize how small businesses can achieve sustainability.

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Entrepreneurs can do quite a lot to manage their firm’s impact on the environment. Recycling is one approach many businesses use. According to the National Federation of Independent Business (NFIB) poll, recycling among small businesses varies, depending on what is being re-cycled. Recycling rates for the major types of trash are given in Table 3.5.

A great way to start thinking about minimizing waste and environmental degradation is to run your thoughts about your business through a “green audit” like the one developed by the U.S. Environmental Protection Agency ( or those de-veloped to obtain ISO 14001 certification for environmental management systems (try search-ing for “ISO 14001 checklist” to find out more). Minimizing paper use, using telecommuting and electronic communication, replacing paper copies with web-based documents, and buying prod-ucts for the business made from recycled materials or products that can be recycled are all ways to create a more sustainable enterprise.

The business itself can focus on ways to enhance others’ sustainability efforts and make a profit doing it. Have you read about buildings in your area being LEED certified? It stands for Leadership in Energy and Environmental Design and is a certification standard from the U.S. Green Building Council for buildings that are more environmentally friendly ( Construction companies have found this area to be a new source of sales and profits, as new buildings are designed to be more energy efficient and recyclable, and older buildings get retrofitted for energy savings and healthier internal environments. Similarly, green retailing, sell-ing products that have a better environmental footprint, is a growing segment. Whether talking about greening your own business or making a profit from helping others get greener, sustainable entrepreneurship is another method for managing external relations with customers, govern-ments, and the physical environment.

ISO 14001 certificationA certification awarded to organi-zations for creating and imple-menting an environmental management system that meets the requirement of the Interna-tional Organization for Standardization.

NFIB Poll Question: Does your business recycle the following?

Paper 45% recycle

Cans 45% recycle

Plastics 35% recycle

Glass 27% recycle

Source: National Federation of Independent Business, Small Business Poll, Waste and Hazardous Materials 7, no. 2 (2007). The U.S. Environmental Protection Agency believes the rates continue to rise.

Recycling RatesTABLE 3.5


Learn more about the topics above at these sites:

The EU’s Green Entrepreneurship website: greentproject.euWorld Bank’s green entrepreneurship page:’s list of green business blogs and websites:

Making Ethical DecisionsToday so many of the issues that people have with business are ones with an ethical or moral ele-ment. Think about when you discovered Facebook was selling your personal data to companies for advertising purposes, or that some apps track your every swipe, or that a food company uses additives that lead to high blood pressure, or that a drug company uses animals for testing new products. How would you feel about a Coke machine that charges you more the hotter the out-door temperature is?

LO 3-7 Identify the major steps in making ethical deci-sions in small business.

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Ethics comprise a system of values people use to determine whether actions are right or wrong. We consider ethics in determining whether a decision we are about to make is good or bad. And, we make judgments about actions—something is good or bad; someone is right or wrong—based on our own personal ethics. An ethical dilemma occurs when a person’s values are in conflict, making it unclear whether a decision we’re thinking about making is right or not.33 An ethical dilemma also occurs when there are several different options for a decision we have to make and the best choice isn’t clear. Of the many environment managing techniques discussed in this section, making ethical decisions is undoubtedly the hardest. Part of it is be-cause the ethical problems that keep entrepreneurs up at night are ones for which there is not a satisfying yes or no answer.

LaRue Hosmer was initially a professor of entrepreneurship who came from a family log-ging business. He later turned his eye toward the challenge of making ethical decisions in busi-ness. He came up with a model widely used today, but it is focused more on big businesses than small ones. Adapting his approach34 to small business, making ethical decisions involves three steps:

1. Define: Define the moral problem. 2. Generate: Generate alternatives that could meet the ethical, legal, and economic goals every

business must balance. 3. Implement: Pick the best alternative you and your business can live with and implement it.

The model is given in Figure 3.2. As you might expect, although the steps sound easy, doing them well requires working through some complicated issues. Let us look at each step in turn.

Define the Moral Problem: To determine the moral dimension of a problem, you need to care-fully think through the problem. For small businesses, there are typically four questions used to define the moral problem under consideration:

1. Who will be hurt (and how much)? Obviously more hurt is worse, but you also need to consider how likely recovery is and how long will it take to recover.

2. Who will benefit (and how much)? A tiny benefit for many is often of little use—think of those class action lawsuits that end up giving each of millions of claimants a few dollars off their next purchase. The overall size of the benefit needs to be weighed against the number who benefit, and balanced against the costs of the harm done to others by the solution.

3. What do you (or your firm) owe others? When you make a decision, it should reflect your real or presumed obligations to people and institutions in your firm and in its task environ-ment. How you act under pressure is seen by many as the acid test of who you are and what your firm is about.

4. What do others owe you (or your firm)? Just as you and your firm make a commitment to others, they make commitments to you and your firm. Depending on the decision, there may be obligations from others or forms of support you can expect that help make doing the ethical thing easier on you or the other party involved.

ethicsA system of values that people consider in determining whether actions are right or wrong.

ethical dilemmaA situation that occurs when a person’s values are in conflict, making it unclear whether a par-ticular decision is the right thing to do.



Generatealternativesthat meetyour ethical,legal, andeconomicgoals

Implementthe bestsolutionand monitorthe situation


The Ethical Decision-Making Model for Small BusinessSource: Adapted from LaRue T. Hosmer, The Ethics of Management, 6th ed. (Boston: McGraw-Hill/Irwin, 2008).

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Generate Alternatives That Meet Your Ethical, Legal, and Economic Goals: Once you have defined the moral problem you face, you need to generate a variety of alternatives to handle it. These alternatives need to be evaluated to find the best one. At this stage, it makes sense to compare the alternatives to the ethical, legal, and economic standards of your firm, industry, and community.

Start with economic standards. Often economic dilemmas crop up in business because the answer sought by the other person would cost your business money. Sometimes the amount of money is more important symbolically than in reality. Have you seen a friend who will drive several miles to save a penny on a gallon of gas? Do the math. A typical gas tank size is 15 gallons and the average gas mileage of cars in the United States is 27.5 miles per gallon. If gas is $2.50 a gallon, then each mile costs 9 cents, and saving a penny a gallon makes eco-nomic sense only if the round-trip to the cheaper gas station is under 1.66 miles. Still, many people will pay more rather than feel they were taken advantage of.

That sense of being taken advantage of is a tough emotion to set aside, but in the end, part of being a professional in business, and part of being an honest decision maker requires that people do that. There is no easy way. It takes courage to do the right thing, and self-control to quash the emotional desire to lash out or get even.

Legal standards seem easy at first. If the answer is against the law, simply do not do it. But in reality, everyone’s compliance with the law is less than perfect. Think about your class-mates. How many occasionally drive above the speed limit? How many have a couple of pi-rated songs on their smartphone or iPod? Could one of your classmates with a part-time business have claimed more business expenses on a tax return than could be documented? Realize that even generally law-abiding people have their lapses. If the stakes or emotions are high enough, or the risk of being caught or being prosecuted is relatively low, people you would consider law-abiding could make a decision to do something illegal.

There are times when doing what is legally supported may not be the optimal solution. Consider EntreQuest (now called Shift –, a Baltimore training firm with a famous example. When starting out, the two cofounders, Joe Mechlinski and Jason Pappas, heard through the grapevine that their first, biggest, and at that time only client was going to break its contract with EntreQuest. If that happened, Joe and Jason could take the client to court—but it would cost money, and even if they won, how would the client (or pro-spective clients) feel about EntreQuest? Jason and Joe had the law on their side, but decided to be proactive and meet with the client to find a better solution. It worked, and the resulting new contract made EntreQuest even bigger profits than before.35

So, when thinking through the legal standards, recognize that having the law on your side may feel good, but may not be workable as a solution. You can find yourself in the legal “right” but still unable to make a viable business decision by pursuing legal recourse. Still, the simple advice that you should not break the law knowingly and willfully makes a lot of sense as a legal standard for making moral decisions.

That leaves the ethical standard. Most professions (e.g., social workers, MDs, pharmacists, lawyers, etc.) and many occupation-specific organizations (e.g., Realtors®, Society of Profes-sional Journalists, Association for Computing Machinery, etc.) have codes of ethics to help clarify their standards to members and the public. But there are several areas in business that do not have explicit standards, or that have standards but cannot enforce them on all mem-bers of an occupation.

You can still see an occasional entrepreneur, corporate magnate, or economic pundit invoke the old Latin phrase caveat emptor, let the buyer beware. It gets repeated because it has popped up in legal cases, and the Latin makes it sound impressive, but as a legal principle, it has been routinely discredited.36 Caveat emptor is often the first line of defense by rip-off artists, frauds, and producers of shoddy merchandise. Using it as a defense puts the entrepreneur who uses it, and, usually by association, the whole small business community, in a negative light. If you find businesses using caveat emptor as a principle, avoid them. If you have to deal with them, get everything in writing and watch them like a hawk. If they ask you if you trust them, use another famous line, from former president Ronald Reagan, “Trust, but verify.”

caveat emptorA Latin expression that means “let the buyer beware,” which has been made into a philosophy sometimes used by businesses to put the burden for consumer pro-tection onto the customer.

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Assuming you realize the caveat emptor approach is not the way to go, you may still need to make a decision you believe is ethical. Here are four proven philosophies to try when you are thinking through alternatives to help you determine how ethical the choices are.

• Am I treating others the way I would want to be treated? You’ve probably heard of this one before. It’s the Golden Rule, and almost every major religious tradition in the world has some version of it. Dumping toxic waste in someone’s pond would be acceptable behavior if he or she could dump toxic waste in your pond. An unlikely example, but the point is that you need to think how you’d feel if someone took the same action toward you that you’re thinking about taking. The Golden Rule can be one of the easiest ways to think about ethical dilemmas and potential solutions. It’s a simple question: Would I want to be treated in the way I am thinking about treating someone else?

• Is my solution the best thing for the most people over the long term? You may have heard of an idea called utilitarianism. Basically, it means that the action resulting in the greatest good for the greatest number of people is the right action to take. This idea has a strong community focus. One of the most important aspects of it is that you have to consider how your actions will affect other people. It’s not about what’s fun or quick in the short term but asks you to think about people’s best interests down the road. If your solution means that many people will benefit from your actions, with acceptable costs to you, it’s probably a good solution.

• What if everyone did what I want to do? What kind of world would it be? Those questions in a nutshell are the idea of universalism, a code of right and wrong that everyone can see and follow. You may have read about universalism in philosophy class, since it’s the brainchild of the German philosopher Immanuel Kant. You may have also heard it expanded by mothers everywhere. You get your ideas of right and wrong from your family, religion, education, and community. You can hear an example of this sort of thinking in real life in a lecture at Stan-ford by Heidi Roizen,

• What if my decision were advertised on a billboard? If you have tried ways to think this through and still can’t decide whether what you plan to do is ethical, try the billboard principle. As the name implies, this asks whether you’d be comfortable having your deci-sion (with your name, of course) advertised on a billboard for everyone you know to see. Picture it in your mind! Would you be proud to see your potential course of action up there in giant letters? Would you be ashamed? Would others think worse of you if they knew what you had done to resolve your ethical dilemma? Those questions are the heart of the billboard principle. Kim Polese explains this in a real-life example at https://ecorner

Golden RuleAn ethical model that suggests you treat others in the manner you wish to be treated.

utilitarianismAn ethical model that supports seeking the greatest good for the greatest number of people.

universalismAn ethical model that suggests that there is a code of right and wrong that everyone can see and follow.

billboard principleAn ethical model that asks whether someone would be com-fortable having his or her decision and name advertised on a bill-board for the public to see.

● The 40th president of the United States, Ronald Reagan, popularized the translation of a Soviet-era proverb “Trust, but verify.” He used it on USSR premier Mikhail Gorbachev to get a workable deal banning intermediate range nuclear missiles. When looking for a workable deal of your own and getting hit with caveat emptor (let the buyer beware), hit back with Reagan’s equally punchy “Trust, but verify,” and follow your advice. Don’t get caught unaware.

Dirck Halstead/The LIFE Images Collection/Getty Images

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There are other ideas, which we have touched on earlier that can help, such as applying economic, legal, or ethical standards or trying to create win–win solutions. A lot of ethical behavior is about taking care of your employees, your customers, your community, your nation, your environment. You and your business are involved with each of these, and you look to each for something, so it is only fair to recognize that each of these entities may have expectations of what you will or should do.

Implement the Best Solution and Monitor the Situation: After running your list of alternative solutions through the philosophies and standards in the prior section, were you able to cross any off the list? You probably were. The four philosophies won’t automatically give you the best solu-tion to your dilemma, but they’re where the rubber hits the road. If your potential solution can’t pass and meet at least a couple of these philosophies, you need to rethink what you’re about to do.

Occasionally you will be able to make a decision entirely on your own, with minimal emo-tional fallout, and make it stick for your firm. Saying no to a salesperson who suggests a kickback for extra discounts could be such a situation. Often, though, you will need to work through a so-lution with someone else.

In such ethically charged situations, the best outcome is a situation where both sides feel satis-fied about (or at least about the same with) the result. In presenting your solution,37 it works best to focus on what the customer or other party wanted and why. You should then make sure the other party accepts that basic review. Add what you were seeking and take questions if the other party has any. Then introduce your solution along with why you think it would fill both parties’ needs. If the other side rejects it, rather than asking for an explanation of why, ask instead what part needs to be adjusted, and how the other party would recommend adjusting your offer. Do not be afraid to question the other side’s reasoning, and be willing to suggest adjustments.

If you get a response that seems to reject the entire proposal, ask if there is any point to start from so that you can build a better version. Bring up a point you took from the prior requests or sugges-tions, or one the other party seemed to approve of during your presentation. Starting from a small patch of common ground is not uncommon in negotiating sessions. If this does not work, be ready to talk about your BATNA, or Best Alternative to a Negotiated Agreement, and ask for his or hers. Often, the alternative to negotiating together can be “lumping it” (suffering with what aggravated you or the other party, possibly with loud complaints to others) if the amounts are small, or under-taking legal action if the amounts warrant legal fees or the hassles of enforcing small claims court decisions. When compared to the BATNA’s of both parties, finding a solution together often makes more sense. If you’d like to learn more about the details of BATNA and how to apply it, you can check out a good video from Levesque and Associates at

In cases like EntreQuest (Shift), the result is a win–win, with both sides happier for all the emotional trauma of the confrontation and discussions. But it is important to monitor the situa-tion. In a world of smartphone users seeking reviews of nearly everything they might buy, the impact of a few bad reviews cannot be underestimated. And if the review goes viral, watch out! See the Small Business Insight on the following page about a video that went viral.

The idea of adding monitoring takes a page from decision-making theory, which usually in-cludes a feedback loop to link the solution to the original problem. In the real world, often the first solution is not optimal, and you need to keep tracking it and revising it until it works well. In ethical decision making, the same thinking makes sense.

It is important to understand why acting in an ethical fashion is important. There are costs to firms for their illegal and even unethical behaviors. Research by Thomas, Schermerhorn, and Dienhart has shown that managers tend to focus on government fines and penalties, which have real but relatively small costs to the firm. What managers tend to underplay are results that are quieter, spread out over a longer term, and actually more damaging to the firm’s reputation and finances, as seen in Figure 3.3. There is every reason to think that these results are as descriptive of small business owners as they are of managers in larger firms.

Before leaving the method for ethical decision making, it is worthwhile to look at one very spe-cial situation close to the heart of many small businesses—the problem of inventing a product or service too far ahead of its time. Small businesses are often the first to try something innovative.

Innovation is the creation of something new or trying something for the first time. Innova-tion also suggests that you’re not sure how a new idea is going to turn out. Taking advantage of an innovative idea is often the reason small business owners start their business in the first place.39 Sometimes small businesses become very successful at doing new things better than

BATNAAn acronym for Best Alternative to a Negotiated Agreement in which the second-best outcome is iden-tified by the parties in a negotia-tion to help clarify the value of achieving a successful negotiation.

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Small BuSineSS environment: managing external relationS CHAPTER 3 77

Dave Carroll is a Canadian guitarist who leads the band Sons of Maxwell. He was flying on United Airlines from Halifax to Omaha in 2008 and checked his guitar as baggage (imagine trying to get it under the seat?). At the change of planes in Chicago, Dave heard passengers talking about guitars being tossed around out-side, and his was one of them. When he picked it up in Omaha, it was so severely damaged it was unplay-able. The repairs would cost $1,200, but by the time he had the estimate, United said he was too late to file it, and for months the airline refused all claims.

Frustrated, Dave ended up writing a song about his experience called “United Breaks Guitars” and the band posted a YouTube video about it ( It went viral with 150,000 views within the first day, topping 500,000 within 3 days, 5 million within 60 days, and in August 2019 it had over 19 million views.

Unnerved by this, United tried to settle, but the damage was done. Initial sentiment was 50 to 1 in favor of Dave and his video, and today stands at about 60 to 1. The best United could do is show the video as part of inter-nal training for its people on how not to do customer service. American Express reports that Millennials on aver-age tell 15 people about their negative experience, while older groups will tell 11, so bad news will get around.

Today with Internet opinion sites like Google Maps and, and dedicated complaint sites like or even the good-old Better Business Bureau, it can be hard to track all the ways and places people can be talking about you. Only about a third of small businesses monitor their ratings. What do you think you will do?

viral Horror: tHe BuSted guitar38


Less damagingcosts, get more

executive attention

More damagingcosts, get lessexecutive attention

Administrative and auditLegal and investigative

Remedial educationCorrective actions

Government oversight

Customer defectionsLoss of reputationEmployee cynicism

Lost employee moraleEmployee turnover

Government cynicismGovernment regulation

Government finesand penalties

Level 1 Costs

Level 2 Costs

Level 3 Costs FIGURE 3.3

The Business Costs of Ethical FailuresSource: T. Thomas, J. Schermerhorn Jr., and J. Dienhart, “Strategic Leadership of Ethical Behavior in Business,” Academy of Management Executive (May 2004), p. 58.

anyone else—and along the way may get into ethical hot water because of it, as sharing economy services like Uber and Airbnb have. See the Small Business Insight on the following page.

Ethical decision making probably represents one of the most complex and difficult kinds of external relations management situations you will have to face. Often the stakes may be as high as your reputation or even your entire business. You may feel under a lot of pressure. The ap-proach we’ve shown you is considered one of the best ways to manage the procedure for finding an ethical solution.

You can also minimize the need for high-pressure ethical decision-making situations by inte-grating the lessons of legitimacy, networking, customer service, crisis management, sustainability, and ethical decision making into your everyday activities and into the structure of your business. How do you do this on an everyday basis? There are several approaches that can help:

1. Craft codes for legitimacy, networking, customer service, sustainability, crisis management, and ethical decision making that reflect the personal values you can live with and live up to. Don’t get bogged down in details of what to permit or prohibit. Think about the general

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78 PART 1 EntrEprEnEurs and IdEas: thE BasIs of small BusInEss

explanation of what you consider important in positively managing your firm’s external rela-tions. A real-life example of an ethical training effort at the high-tech start-up E.piphany can be found in a Stanford video at

2. When hiring employees, subcontractors, or service providers, make sure you discuss with them your expectations about mutual responsibilities, ethics, and service levels.

3. When external relations lapses occur, if they are not so major that legal action or the demise of the firm is at stake, try to use them as learning experiences for the rest of the firm by talking openly about the issues. They make good opportunities to bring up your expectations again.

4. When counseling around external relations issues, try to use the following approach to help the learning occur:

a. Do not get emotional. Talk through the issues calmly, even when it is hard.

“Gypsy cabs” conjure up images of people using their cars illegally to transport people where they need to go. Gypsy cabs are not licensed by their locality. Their drivers aren’t vetted by the cab authority or police. Nobody knows if their cars are safe. They aren’t paying licensing fees to their localities, or abiding by the rules taxis have to follow, such as picking up everyone who asks for service. Today millions of Americans are self-employed as drivers with ride-sharing service platforms like Uber and Lyft. They don’t think of them-selves as illegal gypsy cabs, but despite the cute app, many of them have been.

Both ride-sharing companies use a policy of going into new markets unofficially at first, recruiting drivers on-line, and using locally targeted Facebook, Google, and other online ads to get people in that new market to download and use the app. During this “silent phase” for ride-sharing platforms, they are running a massive gypsy cab operation in those new markets. When localities notice and start legal action, the ride-sharing plat-forms alert riders and drivers to lobby to legalize the ride-sharing service locally. In some cities, like San Francisco and St. Louis, this worked in Uber’s favor. In Austin and Anchorage, ride-sharing services were kicked out.40

Disrupting old models of doing business can lead to better services at lower prices, but that process of disrupting business can also disrupt our laws and communities. Part of entrepreneurs’ responsibility is to think about what they are proposing to do and how.

Roman Tiraspolsky/Shutterstock

thE dark sIdE of thE sharIng Economy


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small BusInEss EnvIronmEnt: managIng ExtErnal rElatIons CHAPTER 3 79

b. Be specific about what the problem is and why it violates the way things are supposed to be done in the firm. Have the other person reason out loud why his or her behavior was a lapse to make sure he or she understands.

c. Once he or she understands, work on what future behavior should be (and why), as well as what needs to be done to make things right from the lapse.

d. Be consistent. Make sure everyone who has a lapse faces this process, and where conse-quences need to happen, they should be appropriate to the severity of the problem, spe-cific to the problem, and the same for everyone who had that level of lapse.

5. Remember, you are the role model for ethics, social networking, and legitimacy. Employees, subcontractors, and even customers look at your approach as the role model for the way your business will approach these issues of managing external relations.41

Our goal in this section of the chapter is to give you some tools you can use to examine your problems and come to decisions you can be proud of. To accomplish that we have looked at the environment in which business operates, what makes it up, and how to analyze it and manage your external relations with it. The environment is critical to business—every business depends on the environment and a workable set of environmental conditions to get started, and from then on, many of the challenges, crises, and opportunities a firm faces come from the environment. But the lesson of this chapter is that while no one can really control the environment, it is pos-sible to become better able to understand it. And through efforts such as developing social capi-tal and planning ahead of time, small business owners can give themselves and their firms an edge when dealing with external environment.


3-1 Describe the elements that make up the small business environment.

● Everything outside the business is its environment.

● The internal environment consists of everyone within the firm.

● The task environment comprises those institutions the firm deals with directly.

● The general environment is the sectors shaping the larger world.

● Small businesses are constantly interacting with and being affected by the environment

3-2 Demonstrate your ability to scan the small business environment.

● It is important for entrepreneurs to take time to scan the environment for trends and changes that could affect the business.

● Even simple environmental scanning approaches can achieve good results.

3-3 Apply the techniques of building legitimacy for your organization.

● Legitimacy is others’ belief that your firm is worthy of their business.

● Legitimacy can come from the way your firm deals with people, from the products or services you sell, and from the way you run your firm.

● Legitimacy (like social networking, crisis management, sustainability, and ethical decision making) is a way to build social capital with your environment.

3-4 Navigate the techniques of social networking.

● Networking involves building relationships via mutual contact and help.

● You can connect through personal networking as well as social networking over the Internet.

● For personal networking, there are ways to optimize your inquiries for help.

● Personal networking is a skill you can practice and improve.

● Social media networking depends on your learning and leveraging the social networks where your customers already go.

3-5 Explain the basic skills for handling a crisis.

● Crises are problems that risk a business’s existence and require immediate action.

● There is a six-step process for handling a crisis taken from big business.






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80 PART 1 EntrEprEnEurs and IdEas: thE BasIs of small BusInEss

● Being honest and open is a big part of handling crises.

● The three steps of disaster preparedness are planning, talking to your people, and protecting your investment.

3-6 Recognize how small businesses can achieve sustainability.

● Sustainable entrepreneurship seeks to run the business in a way that minimizes its impact on the environment.

● One way to minimize impact is through recycling.

● Another way is by creating green products or services.

● Using audits and certifications can help the firm be greener.

3-7 Identify the major steps in making ethical decisions in small business.

● Ethics is a system of values that people use to determine whether actions are right or wrong.

● The three steps of ethical decision making are define the moral problem, generate alternatives, and implement the best solution.

● Workable solutions are those that meet your ethical, legal, and economic goals.

● The four philosophies you can use to check solutions are the Golden Rule, utilitarianism, universalism, and the billboard principle.

● Remember that innovations can lead to potentially risky ethical situations.



environment, 56

organizational identity, 56

organizational culture, 56

external environment, 57

task environment, 57

internal environment, 58

board of directors, 58

trade magazines, 58

entrepreneurial ecosystem, 59

general environment, 59

“real options” approach, 60

social capital, 61

external relations, 62

legitimacy, 62

ISO, 64

Baldrige Award, 64

mutuality, 68

networking, 68

customer relationship management, 69

ISO 14001 certification, 72

ethics, 73

ethical dilemma, 73

caveat emptor, 74

Golden Rule, 75

utilitarianism, 75

universalism, 75

billboard principle, 75




 1. What is the difference between the general environment and the task environment? Is it possible to say one is more important to a small business than the other?

 2. In doing environmental scanning, the chapter mentions look-ing at the trade press and magazines outside your area of business, as well as asking customers, suppliers, your attor-ney, and your accountant for ideas about what is happening and what is coming next. If you have employees in your small business, should you ask them too? Why or why not?

 3. What are the three general forms of legitimacy? Give two ex-amples of ways to build legitimacy in each general form.

 4. Why is a social network important for a small business?

 5. Do you think that a small business could get by if it only did social networking using online sites like Facebook or

LinkedIn? What would it miss by using this approach, and do you think it is important?

 6. What are the three keys to success in building your network using a social networking website?

 7. What are the six steps of handling a crisis?

 8. How do the six steps of handling a crisis compare to the U.S. government’s three-step approach to planning for disasters?

 9. Why should small businesses make stronger efforts to achieve sustainability?

10. What are the three steps of ethical decision making?

11. What are the four philosophies you can use to evaluate alter-natives you have generated to solve an ethical problem?

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1. Pick an existing business, or use one you own or are thinking about developing. For that business, identify at least two key players in at least two areas of its task environment (e.g., media and competitors). How did you determine which organizations fit? If you can, partner with another student to do the work on the same business and compare results.

2. Decide on three areas of the general environment you do not usually consider. Put together a profile of sources (on-line, print, or both) that you would use to do environmental scanning in those three areas, say every month during this class. One good source for each area is fine. Compare your general environment areas and sources to two others in the class. Arrange to compare findings after your first run-through of sources. In particular, what did you find that was “news” to you? What “news” did your classmates come up with for you?

3. Evaluate a franchise using the tables for the three forms of legitimacy. Go to the franchise’s local operation to look around and check out the franchisor’s website (e.g., for that chain). What forms of legitimacy are evident from your research? How positive a feeling does this give you about the firm?

4. Go to the websites of Facebook and Linkedln. From what you can learn from the websites, how do these two social networking sites differ? Consider the market to which they are aiming, their relative sizes, and the kinds of methods they offer for online social networking. For a small business considering online social networking, which would you rec-ommend first, and why?

5. Here are a set of challenging situations small business owners might find themselves facing. How would you han-dle them? Compare your solution to those of others in your class. When differences occur in the answers, what causes them?

a.  You own a dress shop specializing in prom dresses. A customer brings back a prom dress the week after her high school’s prom. She swears she never wore the dress, but it seems to you that there were places where the dress shows wear or spots having been cleaned off. You have a “No Return” policy on the receipts and posted on the wall, but the customer says she will tell all her friends you were unfair if you do not refund her money.

b.  Last week one of your best employees asked to leave an hour early to take her spouse to the doctor. You said it was okay. Now another employee, who is an average but not great worker, is citing what happened last week and asking to be let go an hour early to go to “an appointment.” The employee will not tell you what it is for.

c.  You need to buy office supplies. Do you go to Walmart with its visibly lower prices or the local office supply store, a small business like yours? Would it make a differ-ence if the local office supply store bought from you?

6. When talking about codes of ethics, you were encouraged to do a Google search. One of the sites that may have turned up is the Center for the Study of Ethics in Professions at the Illinois Institute of Technology. Check out the site’s collection of Codes of Ethics. Select one in an area that matches your small business interests (e.g., business, management, real estate, service, etc.) and look at one of the codes for that area. What do you need to do to prepare yourself to under-stand and follow that code when you enter your business?

7. You can complete and discuss the self-assessment below.

Is your behavior ethical?

For this exercise, you will be using the same set of state-ments twice. The first time you answer them, focus on your own behavior and the frequency with which you use it for each question. On the line before the question number, place number 1–4 that represents how often you did, do, or would do the behavior if you had the chance. These num-bers will allow you to determine your level of ethics. You can be honest without fear of having to tell others in class of your score. Sharing ethics scores is not part of the exercise. The scale is:

Frequently 1 2 3 4 Never

The second time you use the same statements, focus on other people in an organization that you work for or have worked for. Place an O on the line after the number if you observed someone exhibiting this behavior. Also place an R on the line if you reported this behavior either within the or-ganization or externally to some other person or organization.

1–4 O–R


1. Cheating on homework assignments.

2. Cheating on exams.

3. Turning in papers as your own work that were completed by someone else.

4. Helping someone do any of the above.


5. Lying to others to get what you want or stay out of trouble.

6. Coming to work late and getting paid for it.

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82 PART 1 EntrEprEnEurs and IdEas: thE BasIs of small BusInEss

7. Leaving work early and getting paid for it.

8. Taking long breaks or lunches and getting paid for it.

9. Calling in sick to get a day off, when you are not sick.

10. Socializing rather than doing the work that should be done.

11. Doing personal work on company time.

12. Using the organization’s phone to make per-sonal calls.

13. Using the organization’s computer and Inter-net access for personal use.

14. Using the company copier for personal use.

15. Using the company car for personal use.

16. Mailing personal things through the company mail.

17. Taking home company supplies and keeping them, or taking home company tools or equip-ment without permission for personal use and then returning them.

18. Giving company supplies or merchandise to friends or allowing them to take them without saying anything.

19. Putting in for reimbursement for meals and travel or other expenses that weren’t actually eaten or taken.

20. Taking a spouse or friends out to eat and charging it to the company’s expense account.

21. Taking a spouse or friend on business trips and charging the expense to the company.

22. Accepting gifts from customers or suppliers in exchange for giving them business.

23. Being pressured, or pressuring others, to sign documents containing false information.

24. Being pressured, or pressuring others, to sign documents you haven’t read, knowing they may contain information or decisions that might be considered not in your or their best interest.

25. If you were to give this assessment to a per-son you work with whom you don’t get along with very well, would she or he agree with your answers? Use a scale of 1–4 on the line before number 25.

Note to students: This self-assessment is not meant to be a pre-cise measure of your ethical behavior. It is designed to get you thinking about ethics and your behavior and that of others from an ethical perspective. It is also designed to help you see situa-tions in which you might have to think twice about your decision, because there is an ethical part to it. There is no right or wrong score. Another ethical issue of this exercise is your honesty when rating how often you might do these things—how honest were you?

Scoring: To determine your score, add the numbers from the 1–4 column for College and Job. Your total will be between 25 and 100. Place the number here and on the continuum below that represents your score. The lower your score, the more you need to be thinking about the types of behavior you are doing in your organization.

Needs some thought A role model

25 30 40 50 60 70 80 90 100

Discussion Questions:

1. For the college items 1–4, who is harmed and who benefits from these behaviors?

2. For job items 5–24, select the three (circle their numbers) that you consider the most severe unethical behavior. Who is harmed and who benefits from these behaviors? Would it matter if they were in a small business or a big company? Why?

3. If you observed unethical behavior but didn’t report it, why not? If you did report it, why? What was the result? Was it worth it to you to report the behavior?

4. As a small business manager, you know unethical behavior can threaten the company’s existence. If you know some of the employees are stealing from the company, would you tell the owner? Why or why not?

5. If you were a small business owner and you caught your em-ployee, who is also your friend, doing any of the three be-haviors you circled in Question 2 (most severe), what would you do?


1. What did I learn from this exercise?

2. How might I use this self-understanding in the future if I own my own or manage a small business?

3. As a small business owner, what can I do to prevent unethi-cal behavior?

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Rami Casarda was a graduate student at Coastal University and the nominal head of a group of other grad students renting a house near the university’s stadium, which has over 75,000 seats. With that capacity, you can imagine what gamedays at Coastal are like. The stadium is routinely sold out. Tailgate parties are everywhere. Porch parties from rental and owned houses spill out into front yards, and occasionally the street.

Hotels in the town of 35,000 are sold out months in advance, and at their top prices of the year. The challenge for many has been finding a place to stay. Person-to-person (P2P) providers like Airbnb and specialty football weekend competitors like offer renters and owners a chance to make a little extra money offering a bed or room in their place. For Rami’s house, one room rented for the 7 two-night stays of the home games would provide the house $11,200 after fees, or four months of house rent.

But they face challenges in two forms. One is legal. P2P ride services and overnight room rentals aren’t legal in Coastal City. Police have ticketed Lyft and Uber drivers found on the road, but don’t seem to have ticketed P2P rentals so far. But that said, there are only a few local listings on the P2P rental websites at this point.

The other challenge is more local. It involves worst-case guests, known in the business as “game-day moochers.” They don’t have gameday tickets and instead go around to tailgate and porch parties, grabbing free beer and food for hours on end. When the moochers return, they’re often very drunk and very rowdy. Some sites let you add a security deposit to the rental fees, and other sites offer additional insurance, but there remains the hassle of proving the case and dealing with the guest during the prob-lem period.

There is also a back-of-the-mind fear that rowdy guests returning late at night will draw the ire of neighbors in what is usually, even on gamedays, a relatively quiet residential neighborhood. This could lead to strained relations with neighbors, or at the worst, neighbors calling the police, and ensuring a ticket for illegal room rentals.

Rami and the housemates need to decide whether to list or not.See related videos at

mans-home-trashed-by-renters and

CASE DISCUSSION QUESTIONS1. What advice do the four philosophies (Golden Rule, utilitarianism, universalism, billboard

principle) offer for Rami’s thinking?

2. What is your thinking about how the legal and local challenges noted above drive the decision? Which should take precedence and why?

3. When entrepreneurship is disruptive, it often runs ahead of existing laws. If you were the entrepreneur behind a new P2P rental site, should you operate everywhere? Should you not accept new rental locations in areas where their service is illegal? Do you think you can figure out where it is legal and where it is not? Should you depend on those offering rentals to know if what they are doing is legal? What do the four questions defining a moral prob-lem tell you?

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Small Business Ideas: Creativity, Opportunity, and Feasibility


● Mary Elizabeth Coleman learned how to do feasibility analyses in her undergraduate entrepreneurship class. Years later, as a lawyer in private practice, she had an opportunity to revisit the skill for one of the largest law firms in St. Louis. How did Mary Elizabeth’s experiences and education make her the right person for this entrepreneurial role? Mary Elizabeth Coleman

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Focus on Small Business: Mary Elizabeth Coleman and the Feasibility Study1

After you complete this chapter, you will be able to:

LO 4-1 Identify strategies for innovation in your business.

LO 4-2 Recognize the sources of opportunity entrepreneurs draw on to get business ideas.

LO 4-3 Understand how creativity methods can help business owners recognize new opportunities.

LO 4-4 Understand the five pitfalls that hinder innovation.

LO 4-5 Identify how to screen ideas for business potential.

LO 4-6 Describe how to construct a business model canvas to assess the feasibility of your business idea.

LO 4-7 Describe how to conduct a comprehensive feasibility study for your business ideas.

LO 4-8 Recognize the value of building a creative culture in your business.

Mary Elizabeth Coleman had her first business at 11, selling flower subscriptions to judges and attorneys in the courthouse of her hometown of Georgetown, Texas. She found out she needed an agricultural license to buy flowers wholesale, and thereby make a reasonable profit, but she couldn’t afford it. Un-daunted, she wrote Texas’s agricultural commissioner, Rick Perry (later the governor of Texas, a presi-dential hopeful, and the secretary of energy) about the problem, and he personally paid for her license. Mary Elizabeth was growing into a person who gets thing done.

In her entrepreneurship classes at Saint Louis University she learned how to do feasibility studies as well as business plans, but her heart was still in those courthouses, so after college she married (her college sweetheart) and went to law school. From there she worked in law firms and then indepen-dently in her own law firm, doing business and taxable estate planning law.

Her old entrepreneurship professor2 made her an interesting offer. He had been approached by the managing partner of Lewis Rice, one of the oldest and largest law firms in St. Louis, to recommend someone to do a feasibility study for a specialized law firm focused on estate planning. Clearly a lawyer who had done estate planning and had learned how to do feasibility studies would be the perfect per-son, and the professor recommended Mary Elizabeth. The two lawyers met, liked each other, and both liked the idea. As a result Mary Elizabeth had a consulting contract on top of her legal practice.

She performed what we call in this chapter a “classic feasibility analysis.” She modeled a law office specializing in estate planning, looked at the market in St. Louis to determine the best locations to at-tract customers, and priced out what the offices, marketing efforts, and other costs would be. She used historical data to estimate revenues, and looked at the expertise and special services needed for such a business. She also studied how specialty legal clinics, like those for divorce or traffic tickets, were most professionally and profitably organized. She presented the ideas to the lawyer who hired her, and then to the partners. They were impressed, and decided to go ahead with the project, which they called TuckerAllen, and opened with five locations and the prospect for more.

Mary Elizabeth was also invited to serve as TuckerAllen’s first CEO. She took the offer and became a corporate entrepreneur of this wholly owned subsidiary of the law firm. She was already a social entrepreneur. As a member of the Arnold, Missouri, city council, she was the driving force behind the creation of a co-working space called Corridor 55 (, which








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was Missouri’s first municipally owned co-working space. In whatever setting she finds herself, Mary Elizabeth keeps on coming up with new ideas. She is a great example of CSI entrepreneurship. With her latest role, as a member of the Missouri House of Representatives, there are sure to be some more new ideas coming out.

DISCUSSION QUESTIONS1. How did Mary Elizabeth’s education and experience help prepare her for this project?

2. What did Mary Elizabeth consider when performing her feasibility analysis of the estate law firm?

3. What other topics might you want to look into if you were doing the feasibility analysis?

Ideas, Opportunities, and BusinessesTo many people, entrepreneurship is the pursuit of opportunity. What is an opportunity? There are literally dozens of definitions,3 but they boil down to actions that you do or imagine doing in order to achieve some kind of business outcome. This can be creating a new product or service, or delivering an existing product or service where people will buy it or use it. Opportunities can be found (such as when an entrepreneur came across the bubbling spring that became Perrier water) or made (seeing someone toss a pie tin and making the toy version called the Frisbee). That search and capture of new ideas is called opportunity recognition, which researchers believe might be the most basic and important entrepreneurial behavior.4

The exact reasons why entrepreneurs seem to be better able to find ideas that work are un-clear. The notion of entrepreneurial alertness is one that has captured the attention of schol-ars in the field. This phrase means that entrepreneurs have a special set of observational and thinking skills that helps them identify good opportunities. Some scholars have suggested that entrepreneurs are able to notice things that have been overlooked, without actually launching a formal search for opportunities.5 Others suggest that we also consider the motivations of entre-preneurs to search for new ideas.6

For example, Gaglio and Katz7 found that serial entrepreneurs could come up with new ideas given nearly any situation. Sitting at an airport, these entrepreneurs might begin to look where lines are forming and wonder how to make money off that. Others could look at a collection of everyday items and in a few minutes they are thinking up ways to combine them to make a profit. Their use of the opportunity identification process tells us that being creative can become a way of life.

Gaglio and Katz found that these experienced entrepreneurs thought of different types of business ideas depending on the situation. Called the opportunity identification process (see Fig-ure 4.1), it describes how the entrepreneur assesses whether the situation faced is one that is the same as it has been traditionally or if it is changing. Strategies that involve doing the same thing, or pursuing an imitative strategy (which is covered in detail in Chapter 7), or pursuing an incremental strategy make a lot of sense when the business or economy is continuing on a fairly steady course. Sometimes during these periods of stability, trying innovative ideas might help win more business from rivals, and “shake up” the industry, perhaps giving the innovator an advantage. During times of great change—whether from technological, political, economic, or cultural change—the potential for steady business declines, and the attractiveness of innovations increases. At times of great change, people become more willing to try extreme new ideas, so it becomes a great time to introduce extremely innovative ideas, also known as pursuing a radical innovation strategy.

Recall the four steps of the entrepreneurial process from Chapter 1—feel, check, plan, do. What entrepreneurs feel are the possibilities we call opportunities; it is their entrepreneurial alertness at work. Some are ones they see in front of them, like a new fashion that hasn’t come to their com-munity yet, and some they imagine, like when they have an idea for a product to solve a problem. When you think of it that way, you might conclude that there could be a lot of opportunities.

LO 4-1 Identify strategies for innovation in your business.

entrepreneurial alertnessA special set of observational and thinking skills that help entrepre-neurs identify good opportunities; the ability to notice things that have been overlooked, without actually launching a formal search for opportunities, and the motiva-tion to look for opportunities.

imitative strategyAn overall strategic approach in which the entrepreneur does more or less what others are al-ready doing.

incremental strategyTaking an idea and offering a way to do something slightly better than it is done presently.

radical innovation strategyRejecting existing ideas, and pre-senting a way to do things differently.

LO 4-2 Recognize the sources of opportunity entrepreneurs draw on to get business ideas.

opportunity recognitionSearching and capturing new ideas that lead to business opportunities. This process often involves cre-ative thinking that leads to discov-ery of new and useful ideas.

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And not all opportunities are created equal. Trying to decide which opportunity to pursue can be tough. In big business, the rule of thumb is that it takes 3,000 initial ideas (or opportuni-ties) to come up with one commercially successful product.8 The secret of making this work is taking a second look at the opportunities to figure out which are best. Here is where the second stage—checking—comes in. In big business, doing some basic research on the idea eliminates 90 percent of the opportunities. Testing the remaining ideas in a very simple way eliminates 60 percent of those second-stage opportunities.

While the numbers for entrepreneurs haven’t been tested yet, no one is suggesting an entre-preneur needs to think of 3,000 ideas to start. But any opportunity would benefit from being checked out. In this chapter, we will focus on finding and making opportunities and checking them out, so that when you get down to planning and doing, you’re using your best idea.

There are two ways to think about opportunities and business creation:

1. One is the effectuation model of entrepreneurship mentioned in Chapter 1. In it you start with what you have—your skills, knowledge, and networks, and what needs you see that you can meet by using what you have. You talk to the people you know to find out if they can commit to your idea. If not, find out what they need, and which of those needs you can do something about.

If this approach sounds familiar, it is because that is probably the way your friends in high school got into business for themselves. Once they decided to earn some money, they took stock of what they knew (e.g., taking care of kids or yards) and checked to see if they could sell that to neighbors. But it’s not just for high schoolers. It turns out that at least a subset of very successful serial entrepreneurs think the same way, but on a bigger scale, and you can too.9 Using the four-step model, here is what happens:

• Feel: Recognize you want to do or make something through a business.• Check: Assess what you know and who you know to determine your product or service and

your customers.

• Plan: Offer your product or service to your customers and see if you get any sales.• Do: If you get enough sales, keep going. If not, go back to the check step.

2. The second way to think about opportunities and business creation depends on your dreams or ideas about new or not-yet-created products or services. This is called the causal model of entrepreneurship. In this approach you think about what you need to do to cause your new product or service to come into existence. That may mean you have to learn new skills or find others to help you achieve your end, and doing that will probably take some addi-tional time, perhaps some additional funding, and overcoming two risks—the risk that your

causal model of entrepreneurshipOne of two approaches to think-ing about entrepreneurship (the other is effectuation). The causal approach is one in which you want to create a particular product or service that does not yet exist, and to achieve that end, you have to cause the product or service to exist. This can mean you will have to learn new skills, or find others to help you achieve your end.

Thingsappear tobe usual,as expected

What'sgoing onhere?


How doesit a�ect- industry- society- market rules


Something maybe unusual,unexpected, or anomalous

Market situationor event


Continue as is

Imitative strategies

Incremental strategiesDiscount

Maintainstatus quoorexistingmeans-endsframework


Opportunity Identification ProcessSource: Adapted from C. M. Gaglio and J. A. Katz, “The Psychological Basis of Opportunity Identification: Entrepreneurial Alertness,” Small Business Economics 16, no. 2, (March 2001), p. 99.

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new product or service can’t be created and even if it is created, that it isn’t something that customers are willing to buy. Both of those risks can be decreased by thoroughly planning before you act, so the four-step process looks like this:

• Feel: Decide you have a great idea and want to go into business to make it happen.• Check: Assess your ability to understand it and create it yourself. Get help if needed. Then

assess the technical feasibility of the idea.

• Plan: If the idea is feasible, plan for making and selling it, checking with potential custom-ers to make sure they will buy it. If you get enough interest, keep going. If not, got back to the check step.

• Do: Make the product or service and the company to sell it and get it into the market.The model is shown graphically in Figure 4.2. The goal is to start with lots of ideas and nar-

row them down to a few ideas that you will test with techniques introduced in this chapter called an IDEO screen (the overlapping circles), business model canvas (the multicolored rectangles), or a feasibility plan (FP) until you find one that seems most promising, for which you do a busi-ness plan (BP). This approach gives you the best chance to think through the ideas, quickly evaluate them, and settle on the most promising one before starting the business.

We know that the effectual and causal approaches happen in real life. In the nationwide Panel Study of Entrepreneurial Dynamics (PSED),10 a sample of 1,754 entrepreneurs were asked whether the decision or desire to start some kind of business (the effectuation approach) or the business idea (the causal approach) came first or if they combined the two. See the results in Table 4.1.

Given that effectual approaches depend on what and who you know, the path to business comes from self-analysis, but if you’re taking a more causal approach, you might want to think about where you can look for ideas. Exhibit 4.1 gives you a set of sources anyone can immediately use.

These sources really do work. In the PSED, 480 entrepreneurs were asked “What led to your business idea?” Figure 4.3 presents the results of this question. Work experience in a particular industry or market was the most frequently mentioned source of ideas, followed by discussion with family and friends.






sCheck Plan Do



3 2


10 8 4 5 1

11 7



Cost Structure Revenue Streams

Key ActivitiesKey Partners

Key Resources Channels





TechnicalFeasibility *



The Screening Process in the Causal Model of Entrepreneurship

TABLE 4.1 What Came First for New Businesses

Source: Original analysis using PSED 1 and PSED 2 data (covering 1998 and 2006, N = 1,767) done by Kelly Shaver, College of Charleston, for Entrepreneurial Small Business, February 2019.

Business idea (causal) 36%

Decision/desire to start a business (effectual) 23%

Idea and decision were simultaneous (combined) 41%

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Ten Sources of Business Ideas

1. Work and personal experience: Realizing frustrations or unfulfilled wishes from your life working or being a consumer.

2. A similar business: Seeing something new to you or your area, and thinking about importing or copying it.

A.  Chance: “Being in the right place at the right time.” A lot of this can be retail arbitrage, buying closeouts at your local stores and selling at full price online11 or buying up umbrellas and selling them on the street during rainstorms, or reselling tickets to sporting events or concerts.

3. Family and friends: Getting a great idea from family or friends.4. Education or expertise: Applying what you’ve learned in school or developed on your


5. Magazines: Googling “top business ideas” or “new business ideas” to find articles and blogs talking about cool new business possibilities. and do these lists yearly.

6. Idea sites: Checking for ideas at,, or, or searching online for “idea sites.”

7. Side gigs: Driving for Uber or Lyft, renting rooms on Airbnb, selling your services on or or to customers in your neighborhood or locally on

8. Make and sell: Making something and selling it locally, online (think, or at a market.

9. Going online: Seeing what is trending on social media, asking your online connections for ideas or needs, checking what’s hot on Amazon or your favorite sites and seeing if there are ways to make a buck from that.

retail arbitrageAn approach to business where the entrepreneur buys something at a severely reduced retail price (like clearance or closeout mer-chandise from a retailer) and then resells it (most typically online) at a price closer to the typical retail price.









0 5 10 15 20 25 30

Idea from non startup

Idea from family

Separate business


Current work

Previous work

Idea from startup



Total N = 1207


What Led to Your Business Idea?Source: Original analysis using PSED 2 data (covering 2006, N = 1,207) done by Kelly Shaver, College of Charleston, for Entrepreneurial Small Business, February 2019.

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Other powerful but rarely used sources of ideas are universities and government agencies. Both develop a tremendous range of new technologies or refinements of existing technologies, but never do anything with them! Major universities and government agencies, like NASA and the Departments of Agriculture and Defense, offer technological inventions for free to small busi-nesses to develop. There are even government programs to help fund such efforts. The best place to start is Federal Labs (, the centralized location for over 700 federal government technology producing programs. If you have a university nearby that has government-funded research, you can contact the technology transfer office and find out about inventions available for commercialization in your own backyard, or check out the website of the Associa-tion of University Technology Managers at, or the multiuniversity iBridge Network at

What these organizations will offer you is an arrangement called licensing. A license is a le-gal agreement granting you rights to use a particular piece of intellectual property (for example, a technology). In return, you (the licensee) are required to pay the owner of the license (the licensor). These payments can consist of an up-front or annual flat licensing fee or a royalty, which is a payment per item sold. Often the licensor will provide access to the idea’s creator to help make the move to market as successful as possible. Examples of licensed products you see every day include Dolby noise reduction, or Gatorade, or anything with a Disney or Coca-Cola or sports team logo on it, as well as products with famous characters from television shows, com-ics, or movies.

From Ideas to Opportunities through CreativityYou might have a viable business idea, but is it the best one to pursue? Are you sure you have the right approach for making the most of the idea? Very often the first good idea an entrepreneur has is not necessarily the best one he or she will have. Before committing yourself to one viable idea, it is a good practice to take some time and see if you can take that viable idea and innovate on it to create an even better—more profitable, more distinctive, harder to copy—idea.

Why worry about being innovative in your approach? Consider the ease with which you can get data over the Internet on industries and markets, such as your competition, and how small business research and how-to articles are at your fingertips with many journals and magazines available over the web. Of course, everybody else who is thinking about starting a business simi-lar to yours has this same information at his or her fingertips also.

There are, however, some very creative methods you can use to help you generate ideas and opportunities that take you beyond what everybody else already knows. This is what can give you the innovative edge in business ownership, whether you are looking for ideas that are just a little bit different from the competition, or a world apart from what everybody else is doing or not even doing yet. These strategies are discussed later in the chapter. Figure 4.4 provides one tool you can use to help you identify new opportunities. It is based on the work of Alex Osborne, a pioneer in the field of creativity, who first coined the word brainstorming where a group tries to list as many ideas as possible, without critiquing or commenting. This other tool is known as SCAMPER, and it is an acronym for a set of cues that trigger new ideas for your business.

Substitute: Think of what you might substitute for something else to form a new idea. A feature that allows your customers to order directly from a website rather than visiting your store or ordering by mail is an example of substitution. Sometimes solutions derived through SCAMPER cues are very “way out” and lead people to some creative ideas for solving annoying problems. One city in the Netherlands, for example, was experiencing a growing litter problem (not unlike your own town or city, no doubt), and the civic leaders tried all the usual ways of fixing the problem: They increased the number of trash bins around the city, they posted signs reminding people not to litter, and they fined people

licenseA legal agreement granting you rights to use a particular piece of intellectual property.

LicenseeThe person or firm that is obtain-ing the rights to use a particular piece of intellectual property.

LicensorThe person or organization that is offering the rights to use a particular piece of intellectual property.

royaltyA payment to a licensor based on the number or value of licensed items sold.

creativityA process producing an idea or opportunity that is novel and use-ful, frequently derived from mak-ing connections among distinct ideas or opportunities.

brainstormingA group thinking technique where you ask participants about a situa-tion or a product or service. You ask them to tell you all the things that come to mind when they think of that situation, product, or service. You can ask for specifics, like ways to make something better, or ways to create new versions, or ways to imagine how it would be used at other times or in other situations. In this group discussion, criticism is suspended in order to generate the maximum number of ideas.

LO 4-3 Understand how creativity methods can help business owners recognize new opportunities.

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for littering. Nothing seemed to help. Then they got a breakthrough idea: A tiny record-ing device was installed inside trash bins, and every time someone pushed the lid to deposit litter, a joke would play from the recorder! Not surprisingly, it was not too long before the litter problem declined.12

Idea Trigger: What opportunities can you think of that come as a result of substituting or replacing something that already exists?

Combine: Think of possible combinations you can make that result in something entirely different. Not long ago, if you wanted to buy a book you went to a store that typically carried only books, and if you wanted to buy a cup of coffee you went to a coffee shop, and if you wanted to hear music you went to a club or theater. Today, you can have all three under one roof at many establishments, including big ones such as Barnes & Noble, but also some smaller businesses such as Tattered Cover Book Stores in Denver, Colorado. Also, when you buy gasoline at the service station, you most likely can pick up some groceries along with basic auto supplies.

Idea Trigger: What separate products, services, or whole businesses can you put together to create another distinct business?

Adapt: Think about what could be adapted from products or services that already exist. Many successful businesses are founded on the concept of adaptation. It’s a popular innovation strategy that can be just as effective, and much more likely in the real world, than business opportunities that are the result of radical innovations such as inventions. You may remember the original Book-of-the-Month Club that sent members a different book every month. What adaptations can you find? How about beer-of-the-month, pasta-of-the-month, and many other variations? Did you know that one day a manufacturer of toilet tissue received a shipment of paper that was too thick to use? The manufacturer could have thrown it out, but instead the manufacturer improvised, and paper towels were introduced! Sometimes adaptations occur when entrepreneurs try their best to work with scarce resources.

Idea Trigger: What could you adapt from other industries or fields to your business?

Magnify or modify: Taking an existing product and changing its appearance or adding more features or increasing the hours your store is open or making its advertising more dramatic are some ways you could magnify or modify your idea. For example, Ally Bank is a relatively small, new, online financial services company that is currently expanding nationally using ads proclaiming this in some very dramatic and humorous ways, poking fun at the traditional fees that banks and other financial service companies charge for checking accounts, for example. The goal is for such messages to be remembered by potential customers, and the effect is to make the business stick out among its competitors. There is much a small business can do to create memorable images and advertising for itself, and it does not need expensive television ads to do it. The letter M also can cue you to “minimize” something. The microchip industry was born, for example, when someone asked the question, “What if we shrunk them?”

Idea Trigger: What could I make more noticeable or dramatic, or different in some way from my competitors? It need not be in the product itself, but it could be the way you advertise or treat the customer during the transaction that becomes memorable.

Put to other uses: Think of ways you could generate a high number of opportunities for your product or service beyond what it is traditionally used for. A few years ago, Arm & Hammer Baking Soda was known as a product customers used by the teaspoonful every few weeks when they baked a batch of cookies or a cake. The problem for Arm & Hammer was that it wasn’t selling a lot of boxes of the stuff since it tended to sit in people’s kitchen cupboards for years. At 59 cents a box, that doesn’t bring tremendous sales rev-enues. One day, the company brought together a group of employees and gave them the challenge to think of all the uses for baking soda (besides baking) that they could. Ideas took off, and today the company produces an entire line of baking soda–related products

R – Rearrange

E – Eliminate

P – Put to other uses

M – Magnify or modify

A – Adapt

C – Combine

S – Substitute


Using SCAMPER to Recognize Business Opportunities13

Source: Michael Michalko, Thinkertoys: A Handbook of Business Creativity (Berkeley, CA: Ten Speed Press, 1991).

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that bring a handsome return in profits. Can you think of some? (Hint: Washing clothes, refrigerators that smell fresh, a product cats use, etc.)

Antoine Feuchtwanger sold frankfurters at the Chicago Exposition over 100 years ago, and his customers complained that they burnt their fingers when holding them. Fuerchtwanger tried gloves, but customers kept walking off with them. Finally, he took some rolls that a baker had made, cut them in half down the middle, and placed the frankfurters inside them. Hotdogs met buns, and today it’s hard to imagine one without the other.

Idea Trigger: Suppose you learned that all the traditional uses for your product had disappeared and that you have trailer truckloads out back with tons of product. What other uses might there be? Aim for quantity, and allow outrageous ideas to flow along with more mundane ones. Who knows what new applications you may find.

Eliminate: Search for opportunities that arise when you get rid of something or stop doing something. What products or services emerged when these questions were asked: What if people didn’t have to leave their houses to go grocery shopping? What if you could buy something (or do bank transactions) without leaving your car?

Idea Trigger: What could I get rid of or reduce that would eliminate something my customer has to do, and as a result give the customer more than he or she expected?

Rearrange or reverse: A generator is the reverse of a motor. Uber and ride-sharing services rearranged the process of getting a taxi, so instead of searching for a taxi stand or a taxi on the streets, you use your app to order one. Other examples include using reverse psychology or paradox to challenge old ways of thinking, for example, using stimulants to calm hyperactive children.

Idea Trigger: What can you rearrange or reorder in the way your product or service appears, or the way businesses in your industry usually look or are decorated or located?

SCAMPER is a very effective method for helping business owners and their employees come up with alternative solutions and opportunities. The method works because it helps you step outside the usual way you look at opportunities or try to solve problems. It offers cues that push you outside your traditional areas of expertise, to consider what interesting new forms might be out there that you could try.

Thinking of other ways to be creative, note that creative business owners similarly question and challenge the way things appear, to see if they can find a new way of doing things. When you see a highly innovative business, don’t think that there is something especially magical or lucky about the entrepreneur or the situation. It’s more likely that the person or team behind the

● Arm & Hammer Baking Soda was put to another use when employees came up with absorbing refrigerator odors. What other uses can you imagine?


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business has been using a process for organizing creative thinking developed by Graham Wallas14 consisting of four steps:

1. Preparation—Exploring the problem or opportunity from all directions. 2. Incubation—Thinking about the problem or opportunity in a “not-conscious” way, putting it

on the back burner, so to speak. 3. Illumination—Bringing ideas together to spark new insights. 4. Verification—Testing the idea and reducing it to its most exact form.15

This process is very useful when you want to explore a business problem, such as why you lost a customer, or when you want to identify further opportunities for your business, such as new markets or features for your product line. If you can pinpoint what stage of the creative process you are in, you can guide yourself through to an innovative solution by looking at things from different perspectives and allowing the issue to simmer in the background for a bit. This tech-nique has worked for many famous creative people—from Leonardo da Vinci to Albert Einstein.

Another variant of this approach is to turn the brainstorming process mentioned above on its ear. In painstorming, instead of asking for new ideas, ask people for pains or aggravations they face in a situation you choose. Even if people don’t have ideas for what they want that’s new, it is relatively easy to get almost anyone to tell you things that could be better in any situation. In starting with pains, you may be able to quickly come up with new ways to improve or even re-place existing products and processes.

painstormingA group thinking technique where you ask participants about a situa-tion, product, or service they ex-perienced. You ask them to tell you all the things about that expe-rience that were suboptimal—what was wrong, what didn’t work well, what caused pain or discomfort, what could have been better. Their results can help de-scribe how to improve the prod-uct, service, or situation, or possibly even provide alternatives to the original.


Learn more about the topics above at these sites:

Brainstorming techniques: techniques: storming-80cd1fc50d4bBrainstorming with SCAMPER and related techniques:

Avoid PitfallsIn your quest for new business ideas, from time to time you may catch yourself rejecting ideas or jumping on the first good idea you get because you are excited and there is no time to lose.

There are five major pitfalls16 that business owners can become victim to when trying to be-come more innovative. See if you recognize the ones that apply to you and your business, so that you can sidestep them at every opportunity:

1. Identifying the wrong problem: When a problem doesn’t stay solved or an opportunity doesn’t pan out as expected, it could be that the wrong problem was defined. For example, a synthetic-fiber producer brought a group of employees together to help find ways to re-duce the manufacturing costs of a particular product. After spending a few days brainstorm-ing and finding that the problem was not leading them to any interesting or useful solutions, the employees turned the problem around and began developing ways to increase the sales of a highly profitable part of the product line. How were they able to change their focus in this way? They simply examined the problem within the broader context of profitability (instead of costs) and discovered that the real problem was low profits.

2. Judging ideas too quickly: At many business meetings when someone suggests a new idea or approach, often the first reaction you hear is, “We’ve tried that before and it didn’t work,” “The boss will never go for it,” “It’s not in the budget,” or the frequently heard, “Yes, but . . .” People tend to judge ideas prematurely, before they take the time to ask, “What’s right about this idea?” or “How could this idea be made better?”

LO 4-4 Understand the five pitfalls that hinder innovation.

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3. Stopping with the first good idea: The first good idea you come up with is rarely the best. That’s because it was the easiest to think of, and so there is little doubt that your competi-tors have already thought of it, too. Thinking of the 3,000 ideas for a successful product mentioned at the beginning of the chapter, it is easy to imagine that the very best ideas come a little later, after the ideas that are on the top of your mind come out. Using a tool such as SCAMPER, for example, encourages you to explore things more deeply than just rattling off the first thing you can think of and then doing that.

4. Failing to act: A colleague was passionate about Jamba Juice, a national chain that hadn’t come to St. Louis yet. Anytime we traveled together, if there was a Jamba Juice, he’d find it and sit around talking about it. Knowing it was a franchise chain, I encouraged him to be-come the St. Louis franchisee. Although he was passionate about the product, he kept find-ing reasons not to try for the franchise. Ironically, another local found himself at loose ends when he lost his job as a top beer executive and ended up becoming the nation’s largest Jamba Juice franchisee. Good opportunities have a way of coming into existence. It might be up to you to bring it to the market.

5. Obeying rules that don’t exist: We sometimes put obstacles in front of ourselves because we think we can’t do something, when in fact there is no reason we can’t. Are you assuming that as the business owner you need to do all the work, or make all the sales calls, or solve everybody’s problems (including your employees’ or partners’ problems)? Before you as-sume that you do, challenge the assumption.

Screen IdeasIn the previous section we examined various ways you can search for your business idea or for ideas that improve existing products, services, or business processes. But recall that in big busi-nesses, it can take 3,000 ideas to yield 1 commercially viable product. To increase their odds of finding a good idea, they take all the thoughts they came up with from the “feel” step of the en-trepreneurial process, and put them through a “check.” In this section we’ll show you ways to do that checking for your ideas and opportunities.

We begin with some fundamental questions. Later in this chapter you will learn how to con-duct a comprehensive feasibility analysis for your idea, a formal approach to assessing whether your idea is sound and could lead to a viable business. For now we offer a simple approach to help you quickly screen ideas.

In many cases you might be thinking about opening a service locally or starting a website or creating a basic consumer product. In all of these cases, it is likely that you can quickly and easily check out what is already out in the marketplace. The techniques are given in Skill Module 4.1. The fact that your idea is already out there is not necessarily a bad thing for you. You can check out what your competitors are doing and think about if you can do better. This can be by making a better product or service, or by doing a better job at marketing their product or service through some kind of contracting arrangement. If they’ve got something good, you might consider ap-proaching them to become a distributor or agent selling their product or service in your locale. You could be in business tomorrow!

One of the simplest and fastest ways to screen ideas is what we will call the IDEO screen. IDEO is a consulting organization that is one of the creators of the approach called design thinking, which is a customer-focused approach to creating products and services that truly solve customers’ problems. They recommend looking for ideas that are high in three elements, which are represented by the asterisk (*) in Figure 4.5:17

1. Market Desirability: Do people (your customers) really want the solution being offered? 2. Technical Feasibility: Can the solution really solve the problem, and can we make it? 3. Business Viability: Can we make the solution and make money doing it?

The questions can be answered in only a few words (think one Post-it Note per question), enough so someone can get a general idea of the answer. The IDEO screen for Pet Élan, whose feasibility study is shown later in the chapter, is included in Figure 4.5. Note that it was only one of many ideas entrepreneur Randy Miller came up with on the path to deciding on a business opportunity.

LO 4-5 Identify how to screen ideas for business potential.

IDEO screenA technique for conducting a fast initial analysis of ideas for their potential. An IDEO screen looks at three elements—market desirabil-ity, technical feasibility, and orga-nizational viability.

design thinkingA customer-focused approach us-ing interviews, observation, and exercises to create products and services that provide demon-strated evidence of solving cus-tomers’ problems.

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S K I L L M O D U L E 4 .1

Checking Ideas on the Web

When we think of a new idea, we generally assume that if it is new to us, it is new to the world. With the help of the Internet, we can now do a much better job of making sure that’s true. Take the example of a book holder on an adjustable spring-loaded arm, like some types of desk lamps. It would let you read in bed at a comfortable angle without tiring your arms. Because you have not seen one before, it seems like it could be a new product idea. Start your browser, point it to, and type the product description “book holder for bed”:

Google Inc.

In this case, the idea is popular enough that before we could type “bed,” Google pulled it up as one of the more popular product searches. Going to the page will give you an idea of what kinds of holders already exist. Note that you might have to try several different ways to describe your product. For example, if you tried typing “spring-loaded book holder” you could get a different mix of products. So try to think of differ-ent ways to describe the product. Realize that the existence of products like the one you imagined gives you a fast path to starting your business. Instead of manufacturing something (which will take your time and money), you can select the products you think would best fit your customers’ needs, obtain the products from a wholesaler (or become a reseller with the manufacturer or wholesaler), and start selling overnight, with minimal up-front expendi-ture. If you can arrange to have the wholesaler or manufacturer or a third-party like Fulfillment by Amazon handle the drop-shipping, you can operate in an almost totally hands-off fashion. If you are considering a service, like dog walking, the same basic approach applies. Bring up and put in the service and the zip code or locality where you would like to deliver the service. It should show you where potential competitors are located. Remember that many services are local, so if there is no one in your immediate vicinity, that may be enough space in which to get started.


TechnicalFeasibility *


Experience in theindustry and area andhave a passion for pets.Risks manageable,profit margins good.

Market of 30,000 petowners in Lakeview, ILwith interest in high-endpet products high andlittle direct localcompetition.

High-end products canbe readily obtained.Comparable-level servicescan be done. Limitedcompetition for high-endcurated good and services.


The Initial IDEO Screen for Pet Élan

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Scoring Ideas in an IDEO Screen

The goal in screening (see Figure 4.2) is to narrow down the many ideas you have generated, make an initial assessment of them, and then do a more in-depth analysis of this smaller set of ideas using the busi-ness model canvas or classic feasibility study. Using the scoring matrix below is a three-step process:

Step 1: Score each idea on the 12 items in the table below. For each item, the score can be 1, 2, or 3, depending on which is the closest description of the idea at this time. If in doubt, use the lower score (this is a way to be conservative in your assessments).

Step 2: Total the scores from questions 1–4 to get the market impact score, which measures the acceptance and scale of your idea with potential buyers. Do the same for questions 5–12 to get the possibility score for that idea. The possibility score measures how possible the idea is given its complexity and your firm’s capabilities.

Market Desirability Score 1 Score 2 Score 3

1. Frequency of purchase Buys it once Return buyer for new versions

Repeat buyer for original purchase

2. Intensity of desire Likes it Loves it Raving fan

3. Sales per week 100s of units 1,000s of units 10,000s of units

4. Customer testing Real customers—directly asked about idea (family and friends asked do not count)

Real customers—given “customer job” interviews

> 20 real customers—given customer job interviews

Technical Feasibility

5. Product Would need to be built from scratch

Only needs customization or can be built using existing components

Already exists

6. Deployment Requires new sales channels or efforts

Uses existing real-world channels and efforts

Uses existing Internet channels and efforts

7. Distinctive competence Seen as “as good as the competition”

Seen as “better than the competition”

Seen as “the best choice by far”

8. Value proposition Solves a part of the customer job

Solves majority of customer job

Directly and completely solves customer job

Business Viability

9. Team You need help with one or more of technical, sales, financial, or operations

You’re “okay” at it all— technical, sales, financial, and operations

You’re great at it all —technical, sales, financial, and operations

10. Risks (insurance, legal, technical, moral)

Risks not fully explored or managed

Major risks known and manageable

All risks known and manageable

11. Your passion for this It is an option for you It is what you want to do

It is a burning need for you to do this

12. Profits by year 2 Will cover firm’s operating annual budget

Will cover 5 times annual budget

Will cover 10 times annual budget

Market Impact Score (Questions 1–4) (maximum = 12) Score =

Possibility Score (Questions 5–12) (maximum = 24) Score =

customer jobThe term given to what a potential customer is trying to do—perform or complete some sort of task, solve some problem, or try to achieve some outcome. The target of the job is often the key to what a proposed product or service is intended to help.

S K I L L M O D U L E 4 . 2

However, if you are considering multiple ideas at the start of your screening process, it might help to put numbers to the analysis. Skill Module 4.2 provides a simple way to score initial ideas.

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When Randy Miller scored his idea using the 12 questions his possibility scores were 1 + 3 + 2 + 2 + 1 + 2 + 2 + 2 = 15 (out of 24) and his market impact scores were 3 + 2 + 1 + 1 = 7 (out of 12), so he fell outside the blue high-impact area in the graph, but actually quite close to it, so the idea seemed worth considering, and perhaps worth doing some additional preliminary work to improve his customer interviews, making sure his risks are managed and help the idea work even better.

You might have noticed that the interviews getting the highest score in Skill Module 4.2 are “customer job” interviews. This style of interviewing has been developed by IDEO and several others, and it consists of your asking potential customers (family or friends don’t work for this) about the problem they have, how they they have tried to solve it so far, and what are the good and bad aspects of that solution. Your goals are to find potential customers, learn their needs, how they meet their needs right now, and what they see as better potential solutions. In this ap-proach, you do not tell them your idea for a product or service. You learn about their problems and the solutions tried first. If you offer your solution, there is too great a chance that they will tell you what they think you want to hear. At this point, you need some true leads more than reaf-firmation of your own idea, if you want to have solid opportunities when you are done. You can learn about how to do such interviews in Skill Module 9.1. If you want even more suggestions for how to develop this key skill, look at the suggestions in the Learn More Online box below.

Step 3: Plot the scores on the accompanying graph (or make your own with a 24 × 12 graph space).18 The closer to the upper right the idea (the blue area), the better it is because of its high scores for possibility and market impact. Feel free to rethink or retool your ideas and rescore them to achieve an improved product or service. This is a very common practice, and one behind many of the best ideas. Of the things you can do, pursuing more customer interviews is often the key to making better solutions.














Market Impact Score



ty S



Learn more about the topic above at these sites:

Talking to Humans free PDF ebook: www.talkingtohumans.comJustin Wilcox’s interviewing approach: Interviewing advice from the home of the business model canvas:

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When you are down to what you might think of as your leading idea, it is time to make your first deep-dive check. How best to do that depends on the type of idea.

Make Sure an Idea Is FeasibleDid you notice that the screening process doesn’t ask you anything about money, like costs or sales? That is because trying to think through the finances is one of the more complex things to assess when thinking about a start-up. You need to do it eventually, but it is better to come up with interesting and potentially great ideas and then work through those “next-stage” sorts of is-sues, like financing.

In general, that next-step process after the IDEO screen is called testing the idea for its feasibility. Feasibility means the extent to which the idea is viable and realistic and the extent to which you are aware of internal (to your business) and external (industry, market, and regulatory environment) forces that could affect your business. In this section we will talk about the two major approaches to checking feasibility—the business model canvas process (also known as the online pilot test or the lean business practice), and the classic feasibility study.

The Business Model Canvas ApproachBusiness models are ways to identify and organize key information on organizations and how they achieve their goals. There are literally hundreds of business models, both as analytic tools and as ways to do business. For example, the “razor and blades” business model explained how Gillette made money by selling razors cheaply but charging a lot more for razor blades—a model we all live with today. Think of how little you pay for your printer or smartphone up front, but how much you have to spend on printer ink or data plans to keep it useful!

For our purposes, though, the focus is on the business model as an analytic tool. Figure 4.6 shows a variant of the popular business model canvas developed by Osterwalder and Pigneur with the IDEO overlay developed by Isaac Jeffries.19 The business model canvas explores the 11 most important factors in developing a start-up that would appeal to customers, compete well, and gener-ate a profit. The blue boxes within the canvas build on answers related to market desirability which you developed in your IDEO screen earlier in the process. The answers related to the technical feasibility you developed for the screen are applied in the red boxes, while the answers to the busi-ness viability items relate to the green boxes below. Let’s consider each of the 11 boxes in the most likely order you would think about or encounter them,20 which are the red numbers in Figure 4.6.

LO 4-6 Describe how to construct a business model canvas to assess the feasibil-ity of your business idea.

business modelA way to identify and organize key information on a business and how it achieves its goals. Business models can be analytic tools (like a business model canvas) or a way to do business (like the “ razor and blade” business model).





3 2


10 8 4 5 1

11 7



Cost Structure Revenue Streams

Key ActivitiesKey Partners

Key Resources Channels





How the Business Model Canvas Builds from the IDEO Screen’s Market Desirability (in blue), Technical Feasibility (in red), and Business Viability (in green)21

feasibilityThe extent to which an idea is vi-able and realistic and the extent to which you are aware of internal (to your business) and external (in-dustry, market, and regulatory en-vironment) forces that could affect your business.

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1. Customer Segments: This builds from your customer workup in the screening process. Note there is often more than one type of customer (e.g., individuals vs. big corporations, athletes vs. nonathletes). Each type is called a customer segment, and each will have a different problem and need a solution and value proposition that fits his or her situation. So you are likely to end up having multiple copies of the canvas—one for each customer segment.

2. Problem: What problem (also called a pain) is faced by customers that you are seeking to solve? A variant of a pain is your customers’ dreams of better ways or things, which we call a gain.

3. Solution: Here is where your offering goes—how you plan to handle the problem-solving pains or create gains for your customers.

4. Value proposition also comes from the screening, and will differ for each customer seg-ment. What will make your solution the best available fit (i.e., the most valuable available alternative) to what the customer wants or needs? When you think of how your solution fits with the customer’s job for each segment, you’re considering issues related to market desir-ability. When you think how your solution value gives your firm a distinctive competence over competitors, you’re considering issues related to technical feasibility.

5. Channels: How will you get your product or service to the customer? Selling directly is great (you control the process), but is often expensive or hard to get going. So if you’re selling through others, how do you arrange to be heard and seen by your customers? Think of small hotels that use their websites (direct selling) but also sell through Expedia, Trivago, AAA, AARP, and others to get you to buy a room.

6. Customer Relationships: The best customers are ones that buy again and again and recom-mend you to their friends. The product or service is part of it, but most often it is the way you treat and take care of your customers that makes the greatest difference. How will you take the best care of your most important resource—your customer?

7. Revenues: How do you make money solving the problem and selling to your customers? How many different ways can you get revenues? Freemium models give you something and let you buy add-ons. Subscription models have ongoing streams. Big-ticket items like cars offer additional services such as financing, extended warranties, and dealer service to get more of your car dollars.

8. Key Resources: What great thing do you or your firm have that no one else does? Exclusive rights to the name of the latest rap star or the work of a rising manga artist? A lock on the only source of morel mushrooms in driving distance? A salesperson loved by everyone? A to-die-for clothing designer? The perfect location for your type of business? The best app programmer around? Remember from Chapter 3 the six types of resources? Any of them can give your firm its edge against the competition, and those resources are the key ones.

9. Key Activities: What will be the most important activities in your business—the ones most cen-tral to your doing the job right and making the firm successful? Take the value proposition and ask yourself what has to happen to deliver the value you’re promising your customers. For a restaurant with a food focus, it means the food has to be the best it can be. For a restaurant that wants to be “the place to be,” décor and location may be the keys to delivering on the promise.

10. Key Partners: Your team is the starting point for your partners. Your staff are key to the ba-sic work of your business (they are in the green part of the box). But few start-ups can do everything themselves, so ask which individuals and organizations can help make you suc-cessful and able to deliver on the promise in your value proposition. Well-regarded suppliers of your raw materials, corporate partners that inspire confidence (e.g., IBM, Amazon), a well-connected attorney or accountant, an advisory board member known and respected by all—these are potential examples of key partners (in the red part of the box). Even a one-person business can have a village of key partners.

11. Costs: Many of the other boxes require actions or purchases to achieve their ends. When we consider all of those costs, and the other general costs of any start-up (salaries, filing fees, inventory or manufacturing costs, etc.), what are the costs? We compare these costs to the revenues and make our initial assessment of the profit potential of the business.

Figure 4.7 gives Pet Élan’s business model canvas. To analyze feasibility using the canvas, we first compare the fit by customer segment to the value proposition, problem, and solution. The four should strongly reflect one another and reflect something customers in the segment will love

customer segmentA group or subgroup of potential purchasers that can be approached in a coherent manner.

painAny sort of problem, annoyance, source of aggravation, shortcom-ing, or suboptimal situation cus-tomers or potential customers face. It is one of two driving forces of creating new products or services, with the other driving force being gain.

gainAny sort of outcome (a product, service, outcome, or situation) customers or potential customers would like to encounter or be able to depend on. It is one of two driving forces of creating new products or services, with the other driving force being pain.

value propositionSmall business owners’ unique selling points (also known as benefits) that customers can ex-pect from your goods or services, including benefits that differenti-ate your offering from those of the competition.

freemiumAn approach to pricing, and a business model, that connects free and premium products or services. Typically a free version is offered and users have the option to pay to move up to pre-mium features. Popular examples include Dropbox (5 GB of space for free, with more space or services at a price) and Angry Birds (free ad-supported version; paid version removes ads).

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and buy. If the customers do love it, we analyze the market factors, everything from value proposi-tion to the right edge of the canvas, for their fit—are we doing everything we need to in order to connect with, sell to, satisfy, and keep the customer? For Pet Élan, the elements seem to fit, but it would be crucial to check with potential customers to make sure the concept is on track.

Then we look at the fit of the organizational factors (from the value proposition to the left edge of the canvas)—are we doing the right things in the best way possible with the best team and lowest cost to make the business itself a success? Again the fit seems to work, but making sure the key activities and solution fit what the customers want (seen in the Value Proposition box) needs checking with potential customers.

In reality, it is rare that a first-time canvas is seen as feasible right off the bat. That is all right. Canvases are made to be revised (use Post-it Notes at first—really!) so be ready to do it for every seg-ment you have. Feel free to drop, add, or change segments. For Pet Élan, another segment consisted of customers who will do an occasional splurge on their pet—a reasonable market, but a less consis-tent source of revenues than the pet pamperers. Doing something great for one segment may be enough to make a good living and change your customers’ worlds for the better. When you have a solid idea based on the business model canvas, the next step in the entrepreneurial process outlined in Chapter 1 is to create a business plan to map out and get control of the details of the business.22

Solution Problem

Cost Structure Revenue Streams

Key ActivitiesKey Partners

Key Resources Channels




A more appealing Lakeview petstore o�ering upscale services,products (food, toys, and accessories),and pet community supports.

Local pet serviceproviders(e.g., trainers).Local pet supportorganizations (e.g.,Humane Society).SBDC or collegefor marketing help.High-end productsuppliers.

Sell the rightproducts withpersonalizedservice. Deliverhigh-end in-storeservices.

Personal/localknowledge andconnections. Anexcellent locationand attractive store.

Storefront.Equipment.Inventory.Owner does all.

~$50,000 to $80,000

Product sales; in-house services;referral services; 50% plusmargins, 6 days a week.Sales projections needed.

We will be theplace thatpampers pets withupscale productsand services, andsupportscommunity petinitiatives.

Owners serves you.Personal attentionand recognition.Pet-friendly store.Active in local petcauses.

Pet Pamperers:Higher income(>$50,000), inLakeview, buypet fashions,supportpet-relatedcauses.Store in Lakeview

shopping area.Informational web-site. Partner referralsand mentions.

Pet owners who want to givetheir pets the very best can’treadily or easily do so inLakeview.


Pet Élan’s Business Model Canvas


Learn more about the topics above at these sites:

Business model canvas starter video: (Strategyzer has more training videos on its channel)

Disney’s business model canvas: Jeffries IDEO screen and business model canvas:’s free online business model canvas:’s free online business model canvas:

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An interactive way to test the fit of the solution and value proposition to the customers is using a low-cost, low-risk approach for testing feasibility called an online pilot test, shown in Figure 4.8. In this approach, you deploy a basic informational website describing the products or services you want to offer, and start advertising it. You track the number of people who check out the site, where they came from, their demographics, and in particular the number who give their email address to be informed when the product or service is available (this is called the conversion rate). Typically two or more versions are run (called A/B testing).23

Based on the feedback from customers and visitors, you quickly fix (revise) what does not work and reinforce and promote those things that seem to work best. These changes are done quickly, usually over a few days, although if response is strong enough, over a few hours. This process gets repeated continuously until a highly accepted version of the idea emerges, or it becomes evident that the idea does not make a viable business regardless of the revisions tried. The strategy for using the online pilot test approach is to show potential partners, investors, or bankers that the idea can generate sales. In the spirit of “the proof is in the pudding,” showing customer interest in potentially obtaining the actual product or service, and being able to say how many visitors became customers—the conversion rate— are powerful ways to prove your idea is potentially feasible. For small-scale ideas or those that lend themselves to a web-based approach, the online pilot test model can give powerful results quickly and painlessly.

pilot testA preliminary run of a business, sales effort, program, or website with the goal of assessing how well the overall approach works and what problems it might have.

conversion rateThe measure of how many visitors to your website (or people who click on your online advertise-ment) are actually willing to make a commitment to the product or service promoted on the site.

A/B testingA way to check customer reaction to websites describing your product or service. Two versions (version “A” and version “B”) of the site are posted and are served up randomly to prospective customers. The version of the website that gets the most commitments from customers is the one kept and the less attrac-tive site is revised and the two versions tested until one revision gets consistently superior customer reactions.


Learn more about the topics above at these sites:

CXL’s guide to A/B testing (and a free ebook): Academy’s landing page advice: (Wix offers free websites for landing pages)Unbounce’s A/B testing advice page:


Track ReviseDeploy FIGURE 4.8

Online Pilot Testing Procedure

If you plan to go from an IDEO screen to a business model canvas to a business plan, you need to know that there is a lot more information in a classic feasibility study than in the busi-ness model canvas discussed above. But there is an expanded version of the canvas, called the business model environment, which captures and positions a lot of the data needed to build on in preparation for a business plan. Figure 4.9 shows the forces external to the firm that have an impact on the firm described in the canvas. The key trends and macroeconomic forces are intro-duced in Chapter 3. Industry and competitive analyses you’ll learn more about in Chapter 7, while market forces will be considered in Chapter 10. You’ll also see how these get handled in the business plan in Chapter 8.

The Classic Feasibility StudyThe other typical approach for evaluating ideas that survive your IDEO screen is called the feasibility study. Feasibility studies consist of careful investigation of five primary areas: the overall business idea, the product/service, the industry and market, financial projections (profitability), and the plan for future action. Within each of these areas you will examine the strengths and weaknesses (advantages and disadvantages) of your business opportunity. Exhibit 4.2 shows a descriptive out-line of a feasibility study,24 which includes a brief explanation of the areas that will help you decide whether your idea or opportunity can be a feasible business. A complete feasibility plan for Pet Élan is included in the appendix at the end of this chapter so you can see what it looks like in practice.

LO 4-7 Describe how to conduct a comprehensive feasibility study for your business ideas.

feasibility studyEvaluates the potential of a busi-ness opportunity by studying five primary areas in depth: the overall business idea, the product/ service, the industry and market, financial projections (profitability), and the plan for future action.

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ForcesEconomic infrastructure

Commodities and other resources

Global market conditions

Capital markets




Market A








Socioeconomic trends

Societal and cultural trends

Technology trends

Regulatory trends


Market segments

Revenue attractiveness

Switching costs

Needs and demands

Market issuesIndustryForces

Suppliers and othervalue chain actors

Substitute productsand services

New entrants(Insurgents)







The Business Model EnvironmentSource: Strategyzer,

I. The Business Idea● Description of Your Business What business are you really in? Describe your

product or service in the most concise way you can, and think beyond the characteristics of the product or service to the experience that you hope the customer receives from buying the product or service.

●  Your Customers Who are your customers? Demographic information tells you all about your customers’ personal characteristics such as where they live, how much household income they have, and how many children they have. You can find very specific information in your library or online using zip code resource sites like,, or What are your customers’ preferences, values, and attitudes that relate to your business? How will you find out what your customers think or intend to buy? How can you find out what problems they have, what they need, or what they want that they don’t know yet! Use your creativity to learn as much as you can about your potential customers. If you have more than one target market, do this for each market segment. It’s important to note the different benefits and limitations for each customer group. This is developed from the Market Desirability section in your IDEO screen.

●  Trends Related to the Product or Service How will you keep your finger on the pulse of change in your product or service area? What trends are likely to occur in the way the product is used, or what features it offers, for example?

II. The Product/Service●  Product/Service Description What exactly are you offering? What are the unique

features of the product or service? How do these features meet your customers’ needs or preferences? Describe your product or service very simply, and use photos or drawings to illustrate how it works. This is developed from the Technical Feasibility in your IDEO screen.

●  The Competition Who are your primary competitors, and what are their distinct advantages and disadvantages? Consider not only your direct competitors, but also

target marketA marketing term (also called ser-viceable obtainable market, or SOM ) that refers to the group of customers in the area you plan to serve who would be likely to be interested in your product, or those of competitors. Target mar-kets can refer to individuals or market groups called segments.


The Feasibility Study Outline

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your indirect ones who might be selling a substitute for your product or service or bundling your product with something else they provide.

●  Competitive Advantage After considering your competition, your offering, and your fit to the customer, what are your competitive advantages? Why do you believe they exist, and why do you think these will help you succeed in the marketplace?

●  Market Penetration How will you reach your target customers? Will you be producing or subcontracting out the manufacturing or delivery of your product or service? List all the costs, including labor, supplies, shipping, repairs, and so forth. What forms of distribution or selling will you use? How will your potential customers become aware of your business? How will you advertise? What would your selling process look like in the different channels you have? What will your customer service look like?

III. The Business●  Description of the Entrepreneur (or Team) What do you bring to this idea or

business? How well does this product or service fit with your knowledge, skills, abilities, networks, and experience? How determined are you to bring this product or service to market? If you are already in business, how does this idea fit with the other products or services you sell? This is developed from the Technical Feasibility and Business Viability sections in your IDEO screen.

●  Stage of Development Is the product still in the idea stage, or is there a model or working prototype available? Have any samples been manufactured? If it is still in the idea or prototype stage, what is the time frame for getting it ready for production?

●  Legal Issues List any patents, copyrights, trademarks, licenses, or domain names that apply to your product or service. If you are entering into a franchise agreement, partnerships, distributorships, and so on, these should be discussed in this section. Seek the assistance of patent attorneys or intellectual copyright specialists for assistance. Also list the government regulations you must adhere to, such as the FDA, EOA, OSHA, IRS, secretary of state, and research zoning restrictions carefully. If you will be home-based and your clients will be coming to your house, will this be impacted by your neighborhood’s zoning restrictions? Note your legal form of organization and state of registry.

●  Insurance Requirements Research the liability of your product or service and consult an insurance specialist to be sure you are protected adequately. This will depend on the nature of your business. A flower shop that sells floral arrangements is in a different liability situation than a pet grooming business, for example. If you have employees, you will need insurance to protect them from harm also, along with any insurance benefits you want to provide your staff.

IV. Future Action Plan●  Summary Feasibility Evaluation Considering everything you have discovered

above, do you see this idea as holding enough possibility to be workable and successful that it warrants next steps? What is your basis for making this judgment? Likely outcomes are either confirming the idea as feasible, holding off concluding until you learn more, or realizing the idea is not feasible in its current form (which might prompt you to change your approach, try something else, or drop thinking about a business for now).

●  Next Steps The direction this takes depends on the Summary Feasibility Evaluation above. If the idea is feasible, you will probably need to start working on a business plan and other start-up actions. If there are questions, you must list the research

(Continued )

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you need to undertake to get answers. Pivoting your idea or thinking of new ideas or locations represent a different type of research. For all of these issues, list the individuals or groups you could consult for advice, or add an advisory board consisting of people with experience in your industry and professionals from other industries.

●  Start-Up Capital If you see the business as feasible a key question is, how much money do you need to start the business? In addition to the cost of goods sold that you calculated and your marketing and administrative expenses, what additional costs do you have such as renting space, utility expenses, and salaries?

●  Sources of Start-Up Capital Where can you obtain the money you need to start the business? Consider all the sources available to you such as personal savings, family and friends, bank loans, investors, and so on.

V. The Financial Projections●  Assumptions Put together a list of all the assumptions on which you are basing

your financials—start-up and ongoing costs (also called operating expenses), pricing, sales projections and how you arrive at them, and how profits are computed. Do a breakeven analysis (see Chapter 13) somewhere in your financials, and also be sure to note somewhere what are your fixed and variable costs.

●  Summary Financial Table Develop a basic three-year summary of your financials. The typical rows are: Revenues, Cost of Good Sold, Gross Margin, Operating Expenses, Net Profit (or loss) [which is figured pretax]. The development of these projections is detailed in Chapter 13.

●  Three-Year Detailed Financials These are the detailed financials from which the three-year summary given above are based. The typical format is detailed in Chapter 13. Typically you will give monthly numbers for the first year and cumulative numbers for years 2 and 3.

●  Start-Up Budget This listing gives the costs you will incur starting up your business, including legal costs and other professional fees, initial inventory or manufacturing costs, building and fixture costs, and technology costs.

In crafting a feasibility study, such as Pet Élan in the appendix at the end of this chapter, the goal is to assess if the idea can be profitably brought to market. The traditional problems facing new ideas are (1) the idea cannot be economically made into a product or service; (2) the result-ing product or service works, but does not appeal to a large enough market (or is not worth enough to them) to make the effort profitable; and (3) the product or service works, has a mar-ket, and could be profitable, but you need to get additional people, funding, or other resources to make the idea into a business. Notice that each problem builds on the solution of the prior problem. As with idea screenings, having no solution for one of these problems may not spell the end of the process if you can use creative solution approaches like SCAMPER (introduced ear-lier in this chapter) to come up with a new way to resolve or sidestep problems.

As you can see, the business model canvas and the classic feasibility study produce very dif-ferent results. The canvas can be made much more quickly, but if the idea proves feasible, the resulting business plan will require more work, especially on details like legal issues and the fi-nancials. But if you are considering a couple of ideas, a canvas can help you decide more quickly than a classic feasibility study and with a better overall assessment than the IDEO screen. When you have one idea, there is no substitute for the classic feasibility study, since it will get you to consider a much broader range of business issues and point you to the kinds of issues you will have to deal with in the business plan itself, saving you time when you do your plan. From the entrepreneurial process model in Chapter 1, either of these help you think about your business

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idea and both position you for your plan, so whichever approach you use, you’ll be preparing yourself for the next step in the process of launching your start-up.

Often a feasibility study will lead to a decision either to keep pursuing the opportunity or to wait for a better time to move forward with the decision (perhaps in a better economy, or when the market matures, or after you get additional experience or training), or to stop working on the idea and look for something else. When you decide in a feasibility analysis to go with the idea, very often the next step is to begin working on a full business plan, which capitalizes on many of the things you have written about in the feasibility study. Business plans are more involved than feasibility analyses, and in Chapter 8 you will see not only how to create a business plan but also how business plans and feasibility studies relate to one another.

Ways to Keep On Being CreativeOnce you have generated your business ideas, screened them, and evaluated a few of them to find one that is feasible, you have completed the opportunity identification and evaluation pro-cess. But this process never really ends. Even after you are well on your way to starting a busi-ness and even after your business is successful and you have met your initial goals, the nature of entrepreneurship and small business is that you will always be on the lookout for new opportu-nities. Successful business owners never rest on their laurels and assume that, since they have achieved success, it will always be there. One of the pitfalls small business owners can fall into is to fail to build a company culture—a way of thinking and behaving—that encourages new ideas and embraces change. This is especially important if you employ or plan to employ other peo-ple. There is nothing as discouraging as working for someone who feels there is nothing new you can possibly contribute to the business. You would be surprised to learn how many busi-ness owners have this mentality. Here are some ways you can avoid this and build a company that is “idea prone.” You will find that you can attract more creative employees and get more useful ideas out of them that affect your business’s bottom line by following the recommenda-tions given in Skill Module 4.3.

LO 4-8 Recognize the value of building a creative culture in your business.

S K I L L M O D U L E 4 . 3

Great Ideas for Making Idea-Prone Companies

1. Give yourself and your employees time to think of ideas. While it can seem that there is never enough time to get everything done and deadlines are always looming, you can’t afford not to take the time to come up with new ideas. Allow even just a few minutes every day to discover what your customers or employees are thinking and what problems or frustrations they may be experiencing. Ask your employees what they are working on, where there may be problems, and what ideas they have for solving them.

2. Positively reinforce ideas25—avoid the automatic no. As discussed earlier, don’t rush to judge ideas. It’s the process of coming up with ideas that needs to be reinforced, not whether the idea is good. Evaluation can come later.

3. Look to unlikely sources of opportunities. You never know where creativity and innovation will emerge. Think beyond your age group, socioeconomic status, and education.

4. Get a room with a view. Give your employees—and yourself—varied experiences. Get away from the of-fice, go visit customers, allow employees to learn one another’s jobs, and so on. It enables people to get a different perspective, and it is when we can change our routine that breakthrough ideas often can be discovered.

An innovative company does not automatically develop out of an innovative business idea. You have to de-liberately set your expectations and communicate them to your employees. Remember that recognition is fuel—it fans the fires of creativity and helps your business reach potentials that you may never have antici-pated. Einstein said, “Creativity is contagious . . . pass it on.” As the business owner, you are in a unique position to make sure that people’s brains don’t stop at your company’s door.

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Even if you are a solo small business owner, you can take steps to keep yourself in an innova-tive frame of mind.26 Here are some techniques you can try as you practice the business of in-novation on your own:

• Read magazines or trade journals outside your area.• Invite someone you never included before to a meeting at which you are solving a problem

or searching for a new opportunity. Try a supplier or a friend who works in a different field.

• Have a “scan the environment” day in which you discuss trends and happenings that could impact your business.

• Try a mini-internship. Ask a colleague or friend if you can spend a day at his or her busi-ness to see what you can learn that may be applicable to yours.

• Instead of trying to simply sell your product or service to customers, put yourself in their shoes and ask them what frustrates them most or what problems they cannot seem to solve that relate to your business.

• Redesign your work environment. Get a room with a view.27 This doesn’t have to cost a bundle in remodeling or even redecorating costs. Try to bring in some items from nature and add color and inspirational objects or quotations.

Innovation is at the heart of entrepreneurship because every time people start a business or become the owner of one, it is a new start and often a new experience for them. Some businesses are themselves built on new ideas or new twists on existing ideas. For these kinds of situations, taking some time before committing your money to think about which ideas make the most sense as a profit-maker can save a lot of grief later on. That is where the opportunity identifica-tion process, the idea screening process, and feasibility analysis come in to play. It is also true that one of the greatest challenges facing a business is getting control over the process of change—knowing when and how to change and try something new. Sometimes even thinking in new ways can be difficult, and that is when techniques like SCAMPER can make all the difference. The point is that while many people think innovation is a bolt from the blue, unpredictable and un-controllable, in reality it is anything but that. That is good news because it means that one of the most powerful techniques for building your business is under your control.


4-1 Identify strategies for innovation in your business.

● Opportunity recognition is one of the most basic entrepreneurial behaviors.

● Entrepreneurial alertness means that entrepreneurs have a special set of observational and thinking skills that help them identify good opportunities.

● There are three innovative strategies small business owners can select:

● Imitative strategies take an idea that somebody else has already discovered and build a business around that idea.

● Incremental strategies take an idea and offer a way to do something better than it is done now.

● Radical innovation strategies reject existing ideas and present a way to do things differently.

4-2 Recognize the sources of opportunity entrepreneurs draw on to get business ideas.

● In terms of the entrepreneurial process (feel, check, plan, do), entrepreneurs sense or feel the presence of opportunities as they begin the start-up process.

● It can take many ideas to find a potentially successful one. Big businesses need 3,000 ideas to get one successful product.

● Opportunities can be pursued in an effectual or causal way.● Ideas for new businesses come from a great variety of

sources. These include work and personal experience, imitation of a similar business, a chance happening, discussions with family and friends, education and experience, and online searches for “idea sites.”



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4-3 Understand how creativity methods can help business owners recognize new opportunities.

● Creative methods help you identify opportunities beyond what everybody else already knows.

● SCAMPER is a tool you can use to trigger new opportunities for your business.

● The creative process has four stages: preparation, incubation, illumination, and verification.

4-4 Understand the five pitfalls that hinder innovation.

● Identifying the wrong problem.● Judging ideas and opportunities too quickly.● Stopping with the first good idea.● Failing to act.● Obeying rules that don’t exist.

4-5 Identify how to screen ideas for business potential.

● The goal of the screening process is to quickly evaluate large numbers of ideas to eliminate those less likely to work for you.

● In assessing the potential viability of your business idea, there are three sets of questions to answer as part of an IDEO screen:

● Market desirability: Do people (your customers) really want the solution being offered?

● Technical feasibility: Can the solution really solve the problem, and can we make it?

● Business viability: Can we make the solution and make money doing it?

● These questions can be evaluated qualitatively, quantitatively, or both.

● One of the keys to test these ideas is to perform customer job interviews with actual potential customers.

4-6 Describe how to construct a business model canvas to assess the feasibility of your business idea.

● Business models are ways to identify and organize key information on organizations and how they achieve their goals.

● The business model canvas builds on an IDEO screen to generate a more in-depth look at the elements of the business and how they fit together.

● The goal of a canvas is to identify an opportunity that would appeal to customers, compete well, and generate a profit.

● Business model canvases are evaluated by the concreteness of their answers and the fit between subsets of the 11 boxes.

● For Internet-based sales and service businesses, it is possible to pilot test the idea online.

● An expansion of the canvas, called the business model environment, can help bridge the information from the canvas to that needed for business plans.

4-7 Describe how to conduct a comprehensive feasibility study for your business ideas.

● Conduct an analysis to determine whether or not your business idea is feasible.

● Start with the business idea—your general business description, its customers, and the trends affecting customers now and into the future.

● Follow with the product or service: describe it in detail, tell us about the competition, what is your competitive advantage over them, and how you will go about marketing and selling your product or service.

● Next describe your business: Start with you and your team, the firm’s stage of development, and the legal issues and insurance requirements you face.

● Conclude the narrative with your future action plan: Give your summary feasibility evaluation, your next steps, the start-up capital needed (if you intend to go ahead), and the sources for the capital.

● At the end put the financials: Start with the assumptions on which you are basing your financials, include a breakeven analysis and details of your fixed and variable costs, then include a summary of the three-year financials, and provide a spreadsheet with the detailed costs and revenues for the projected firm. This should be monthly for the first year, with aggregate totals for years 2 and 3. The financials should also include the start-up budget listing expenditures to get the business to opening day.

4-8 Recognize the value of building a creative culture in your business.

● Build a company culture that values new ideas and embraces change.

● Create slack time to enable employees to think of new ideas.● Positively reinforce ideas others bring to you.● Look to unlikely sources of opportunities.● Get a room with a view and establish an environment that

stimulates innovation.

● Use techniques to help you get into an innovative frame of mind. Read outside your area, invite a “wild card” to a business meeting, have a “scan the environment” day, arrange a mini-internship, solve your customer’s problem rather than selling a product, and redesign your work environment to stimulate your innovative skills.







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opportunity recognition, 86

entrepreneurial alertness, 86

imitative strategy, 86

incremental strategy, 86

radical innovation strategy, 86

causal model of entrepreneurship, 87

retail arbitrage, 89

license, 90

licensee, 90

licensor, 90

royalty, 90

creativity, 90

brainstorming, 90

painstorming, 93

IDEO screen, 94

design thinking, 94

customer job, 96

feasibility, 98

business model, 98

customer segment, 99

pain, 99

gain, 99

value proposition, 99

freemium, 99

pilot test, 101

conversion rate, 101

A/B testing, 101

feasibility study, 101

target market, 102


  1. How do entrepreneurs recognize new ideas for their business?

  2. What are some common ways you can search for new busi-ness opportunities?

  3. What are the differences among imitation, incremental, and radical innovation strategies? How can you assess which one is right for your business?

  4. How can entrepreneurs quickly screen large numbers of new ideas?

  5. What is a business model canvas, and how do you use it to assess the potential of a business?

  6. What should a good feasibility study contain? What ques-tions can it help you answer to determine if your business idea is a sound one?

  7. What pitfalls should you watch out for as you are searching for new opportunities?

  8. How can entrepreneurs ensure that their business stays in-novative and fresh? Why do you think some small businesses lose their creative edge as the business grows?


1. As you go on errands or walk around your campus, notice all the things that you could improve. Make a list of things that frustrate you or things that could be made even better. Does your list surprise you in terms of how much you noticed? This is a variation of the painstorming technique.

2. List 15 new uses for a popular product or service. Try paper clips, or coffee mugs, or home delivery. Use SCAMPER to generate new uses and make connections to other uses.

3. Interview a local business owner and ask how he or she thought of the idea behind the business. How does the business develop new ideas now?

4. Do some research on innovative companies in your area. What sets them apart? How are they designed to take advantage of the innovativeness of their staffs?

5. Next time you are working on a problem or looking for new ideas (Your major in college? Where to move on campus? What do to this weekend?), go to a museum, a park, or anywhere outside the ordinary places you frequent. Were any new ideas suggested to you?

6. Keep a journal in which you can record your ideas as they come. Sometimes we get breakthrough ideas while our brain is incubating as we sleep. By the time we wake up in the morning we have lost them, so keep your journal near your bed.

7. Pick a business idea and research its industry and market. What did you learn? What are some creative questions you might ask about contemporary trends in this business? How could you find out the answers?

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Tim Hayden had been an avowed “sports fanatic” all his life. Friends could set their clocks by Tim. He was always watching games in the stands or on TV. Of all sports, he loved baseball the most. Sitting in the bleachers at the home of the St. Louis Cardinals, Busch Stadium, what he was sensing there dis-tressed him. It seemed that fewer people were in the stands than in earlier years. He wished he could do something about it.

The final push to action for Tim came in 1998 when Mark McGwire crushed his 70th home run on his way to a baseball record. Tim and his father were sitting in the stands that historic night. However, they missed seeing the home run because they were standing in line at the concession stand.

As McGwire rounded the bases, Tim’s friends at home were watching numerous instant replays from every conceivable camera angle while listening to the commentators talk about inside stories. In addition, they could see the exact positions of each pitch location and the in-depth scouting report on McGwire’s home runs.

But here he was in the stadium, where he had paid good money for the ticket. And yet the best seat in the stadium was at home in front of his big-screen TV.

At that moment in 1998, Tim realized that others might be thinking the same way. He thought he finally knew one of the reasons why attendance was down. Sitting at home with a large-screen TV, the refrigerator nearby, the bathroom a few steps away, the seat comfortable and the room air-conditioned, how could the stadium compete? Television baseball had become so much more detailed and informa-tive than the in-stadium variety, with last pitch graphics, hit location graphics, and detailed stats on all the players constantly shown on the big screen at home. The “best seat in the stadium” had indeed shifted to home, and the fans with it.

Tim sensed a business opportunity in that shift. Sports teams had to bring fans back to the stadiums, where teams make their most profit. He also realized that for a fan, there was an undeniable energy be-ing among tens of thousands of fellow fans with the chance to personally see that once-in-a-lifetime play.

Being digitally savvy, he knew that combining a fan’s personal cell phone, Wi-Fi, and a web-based application, he could bring the at-home experience into the stadium. Fans sitting in the stands could see any instant replay from dozens of camera angles, as well as all the cool graphics that you see on TV, with the ability to order food and drink to their seat, and maybe connect with other fans in the stadium. And even better, it could all be on-demand.

From his own pain, the feelings of other baseball fans, and over the next four years a careful study of the trends in the various sports leagues and televised sports, Tim Hayden realized that the enhanced digital experiences (they weren’t as prevalent in 2002) and new TV graphic techniques of sports broadcasters had fundamentally changed the environment for sports watching. It also opened up a business opportunity.

CASE DISCUSSION QUESTIONS1. Was the opportunity Tim was thinking about an imitative, incremental, or radical innovation strategy?2. For Tim, which seemed to come first—thinking about creating a business, thinking about a

business idea, or both at once?

3. Using the ideas in Exhibit 4.1, what were the sources of Tim’s business idea?4. What do you think was key to Tim’s making the jump from a problem to a business opportunity?

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A Sample Feasibility Study Pet Élan

I. THE BUSINESS IDEADescription of Your BusinessIn recent years, there has been an increase in the number of households that have pets, especially dogs and cats. Further, there is emerging a steadily growing group of pet owners that is willing to purchase upscale, unique products for these im-portant members of their family. Pet Élan is an upscale bou-tique for these discriminating pet owners in Lakeview, Illinois (zip code 60657). Pet Élan will offer high-quality pet prod-ucts to discerning individuals who wish their pets to enjoy a healthy, fun, and elegant lifestyle while being pampered. By carefully selecting luxurious accessories made with superior materials, Pet Élan will provide an elite product line that cel-ebrates the uniqueness of each animal’s personality.

Your CustomersAccording to the American Pet Products Association (APPA; formerly called the American Pet Products Manu-facturers Association), 68 percent of households in the United States own a pet, and 46 percent of households own more than one pet.29 As income increases, the per-centage of households with a dog increases as well.30 In fact, 75 percent of the households with dogs have a com-bined income of greater than $35,000. This is consistent with the specific market profile of the clientele Pet Élan plans to target in the 60657 zip code.

There are 39,846 households in zip code 60657, with a median household income of $55,647.31 Applying the APPA statistics, this means an estimate of 27,095 house-holds with pets as our overall market, with 77.8 percent or 21,079 pet-owning households with an income greater than $35,000 as Pet Élan’s target market, which is graphi-cally shown in the pie chart.32

Trends Related to the Product or ServiceSeveral studies show that pet ownership is at an all-time high and that people are taking better care of their pets and spending more money on them than previously. As a result, the pet products industry is booming. Americans spent a to-tal of $34.4 billion on pet food, care, and supplies in 2004, and the industry is estimated to increase to $35.9 billion in 2005. Sixty-five percent of this estimated total was spent on food and supplies alone (supplies also included medicine).33

The upscale pet services industry was named as a hot market by Entrepreneur magazine in its annual prediction of the hottest business ideas for both 2004 and 2005.34 The APPA also cites luxury, natural, and hygiene products as the top three among its top ten trends in pet gifts.35 In fact, the APPA further notes that high-tech and high-end products such as tech-enabled dog collars are showing the most growth.36 Similar to the human food industry, pet food trends are moving toward more organic and natural products. The Organic Trade Association reported that organic pet food sales are up by 63 percent from last year and are growing at almost three times the rate of human organic food sales.37

Despite this promising growth and if the economy con-tracts, customers may have less disposable income. The percentage they intended to spend on their cat or dog may be diverted for necessity purchases. However, according to pet industry analyst Julia Dvorko, “Owners tend to pam-per their pets even when they have to cut back on [house-hold] spending. After all, even during economic downturns, people give gifts to family members and buy special treats for their children.”38

II. THE PRODUCT/SERVICEProduct/Service DescriptionPet Élan will offer carefully selected premium products that promote a healthy, fun, and elegant lifestyle for dogs and cats. Our products are grouped into four primary cat-egories: dietary products (pet foods by Newman’s Own Or-ganics,39 Natura Pet Products,40 Organix,41 and snacks and treats from Old Mother Hubbard,42 Three Dog Bakery,43 Flint River Ranch,44 and Howling Hound Bakery45) ; play-time products (dog toys for chewing, retrieving, tugging, and chasing, and cat toys for chasing and fetching from Happy Dog Toys,46 KONG Toys,47 and Fat Cat, Inc.48); travel accessories (leashes, collars, and travel bags); and


Less than 15K15K–25K25K–35K35K–50K50K+

Household Income for Lakeview Residents






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home accessories (food and water bowls, pet furniture and pillows, and pet clothing from The Small Dog Company,49 Dogz Togz,50 and Ruff Ruff and Meow51).

The CompetitionPet Élan plans to open in the 60657 zip code area of Chicago, Illinois, locally known as Lakeview. There are 23 pet-related businesses in this zip code: 9 are veterinarians, 3 are pet sitting/walking services, 3 are pet grooming services, 3 are large chain pet stores (1 PetSmart, 2 Petco), 2 combi-nation pet grooming/accessories stores, 1 combination boarding/training store, 1 pet adoption/accessories store, and 1 boutique called “Sam & Willy’s: A Bow Meow Boutique.”

While not competing directly in the 60657 area code market, national companies including Paul Mitchell and Origins are now offering lines of pet products ranging from dog shampoo, pet attire, and name-brand toys to gourmet treats and food.52 Although these companies have recognizable brand identities, they do not specialize in the pet retail market. They do not carry a full line of pet products as Pet Élan will, and they cater more to impulse buyers rather than discerning pet owners.

The following table compares the strengths and weak-nesses of a subset of the competitor pet stores in the 60657 zip code, as well as online retailers, and highlights the differentiating features of Pet Élan.

Online StoresOne of the largest threats to the luxury pet accessory indus-try is the presence of online stores. Pet Élan will compete with these online retailers, as well as other local pet stores. Consumers have the opportunity to comparison shop on the Internet, so Pet Élan will need to carefully determine the pricing strategy for each line of accessories to remain competitive. However, it is likely that pet owners will want to sample and view unique products we carry and will be willing to come to our store for its one-of-a-kind shopping experience—and bring their pets with them.

The rise of larger chain pet stores, like Petco and PetSmart, has made it much easier for pet owners to sat isfy all their pet needs in one place. These stores are now offer-ing pet apparel, pet furniture, and natural pet food. Pet Élan will offer a higher-quality, but more expensive, prod-uct mix that may overlap with these stores in some ar eas. To counter this, Pet Élan will showcase the products we carry that cannot be obtained at the larger retailers.

Competitive AdvantagePet Élan’s competitive advantage is quality and the ability to provide customers with the feeling that pampering their pets is an integral part of a healthy, fun, and contempo-rary lifestyle. Pet Élan must establish this reputation

Competitive Analysis of Pet Stores

Competitor Pet Stores in Zip Code Strengths Weaknesses

Differentiating Features of Pet Élan

Area pet grooming/accessories stores

• Customers shop while pets are groomed

• Limited selection

• Pet grooming, not product sales, is core competency

• Core competency is selling luxury pet products and accessories

Petco53 • Brand identity

• All-in-one stores

• Wide selection

• Online shopping

• Limited number of brands in pet clothing and accessories

• Inexperienced sales associates

• Products are high end for discerning pet owners

• Pet Élan builds personal relationships with customers

PetSmart54 • Brand identity

• All-in-one stores

• Wide selection

• Online shopping

• More pet clothing and accessories brands than Petco, but not high-end brands

• Inexperienced sales associates

• Products are high-end for discerning pet owners

• Pet Élan builds personal relationships with customers

Sam & Willy’s: A Bow Meow Boutique55

• Accessories and gifts in a boutique setting

• Provides variety of organic pet food brands

• Static website

• Sponsors local animal shelters but doesn’t have social entrepreneurial mission

• Website provides tips and trends for hip pet owners

• Five percent of pretax profits goes to a local no-kill animal shelter

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through high-quality products and selective advertising and through exceptional customer service.

Market PenetrationPet Élan will serve customers in a boutique setting where pets are welcome to browse along with their owners. The store will operate with a social entrepreneurial mission and will do-nate 5 percent of pretax profits to a local no-kill animal shel-ter. Consistent with this socially responsible mission, Pet Élan will work with other area pet-related businesses to form a network of highly qualified veterinarians, as well as well- established boarding, grooming, in-home sitting, and training service providers. By connecting Pet Élan customers with re-liable service providers, Pet Élan will also benefit from the reciprocal referrals from these service providers.

Pet Élan will also maintain a website, but initially only to provide the location and hours of operation. As the business grows, the website could include tips and trends information for current and future consumers to keep up with the latest in pet fashion accessories. Pet Élan will seek assistance from a local college or Small Business Development Center for the website and marketing research assistance.

When the Pet Élan storefront opens, we plan to adver-tise by hosting a series of pet fashion shows, combined with an adoption event with local pet shelters. The events will raise awareness among clientele and would help a good cause. Until Pet Élan breaks even, the store will rely on the advertising and public relations from partnering with other service providers to draw customers into the store.

III. THE BUSINESSDescription of the Entrepreneur (or Team)Randy Miller will be the owner of Pet Élan. Randy has been interested in pets since childhood, and has worked for vet clinics, the Humane Society, and a local zoo in pet care. Randy is currently employed full time at a local discount re-tailer. Randy’s other retail experience includes work in local pet stores in animal care and sales, as well as retail experi-ence at PetSmart. Randy’s self-employment experience started as a teen, with child care and yard care businesses. Randy’s education includes a BA in entrepreneurship from DePaul University. Although employed full time, Randy will leave to give 100 percent effort to the start-up of Pet Élan.

The owner will be the primary employee of Pet Élan for the first three months of operation. Beginning in the fourth month of operation, Pet Élan will hire one full-time sales associate. As the business grows, Pet Élan anticipates hiring a second full-time sales associate during the second year of operation. The full-time sales associates will assist the owner with customer service and other retail functions.

Stage of DevelopmentPet Élan is currently in the idea stage. This feasibility study is the first step in exploring the market potential for

a luxury pet store. The current time frame for introducing Pet Élan is one year. Pet Élan has set the following mile-stones to accomplish prior to launch:

• Complete feasibility study: month 1.• Begin and complete business plan and identify

location: months 2–4.

• Pursue start-up capital: months 5–6.• Receive start-up capital: month 7.• Secure store location and secure appropriate

permits: months 7–8.

• Plan and order inventory: month 9.• Receive inventory and set up store: months 10–11.• Store launch: month 12.

Legal IssuesPet Élan will operate as a Sub-Chapter S Corporation to ensure limited personal liability and for tax advantages. Pet Élan will have one owner, who will have day-to-day re-sponsibility for running the business. The corporation will receive all income generated by the business and pay the owner a salary and/or reinvest in the store. A board of di-rectors will be appointed by the owner. The company will register its name with the state of Illinois, and buy the domain name (or if it is not available,

Insurance RequirementsPet Élan will purchase property and liability insurance policies to protect the corporation’s assets.56 As an em-ployer, Pet Élan will also need to secure workers’ compen-sation insurance and unemployment insurance.57

IV. FUTURE ACTION PLANSummary Feasibility EvaluationOverall, the idea for Pet Élan seems feasible. Statistically, the Lakeview area should have a large number of high- income households with pets, and national market indica-tions suggest these people would appreciate a premium pet products store like Pet Élan. Randy Miller has the req-uisite experience in retail and with pets to make this store workable, and the general model for such retailers is well established. Assuming he can get the bank loan (most likely as a personal loan), he should be able to start and make a go of the business.

Next StepsTo ensure the successful opening of Pet Élan, we must have a deeper understanding of the customer needs in the area. Conducting marketing research in the 60657 zip code area, using techniques such as surveys and/or focus groups of cus-tomers in Pet Élan’s target market, could assess these needs. Pet Élan should also begin to approach other pet service providers in the area to explore potential partnership

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small BusInEss IdEas: CrEatIvIty, opportunIty, and fEasIBIlIty CHAPTER 4 113

opportunities that could help raise awareness about both Pet Élan and the partnering business. This would also allow the owner of Pet Élan to form a network within the local pet products and services industry. With these steps completed, creating a business plan would be necessary to secure the loan and investors noted below. Pet Élan will review the ini-tial draft of the business plan with a volunteer from the Ser-vice Corps of Retired Executives (SCORE) or the local Small Business Development Center.

Start-Up CapitalTo start the business, Pet Élan will need to have enough start-up capital to cover leasing costs to secure the store-front location. The start-up capital will also need to cover insurance and operating expenses including appropriate licensing, store utilities, and professional services such as legal and accounting assistance. Initial inventory, as well as retail equipment needs (such as a cash register) will re-quire a large initial investment. These needs will be funded through the start-up capital that Pet Élan secures prior to opening. The amount needed is estimated to be $70,000.

Sources of Start-Up CapitalThe start-up capital of $70,000 is composed of 45 percent (or $31,500) of the owner’s personal savings, 25 percent (or $17,500) of a bank loan, in addition to two equity investors (one family member of the owner and one local veterinarian), each with a 15 percent stake (or $10,500) in the company.

V. THE FINANCIAL PROJECTIONSAssumptionsPet Élan made the following assumptions in putting to-gether the sales revenue forecast for the first three years of operations:

• Pet Élan will sign a three-year rental agreement for a 2,000-square-foot storefront location. The rental

property will be priced at $35 per square foot, with an additional real estate tax of $9.50 per square foot per annum.

• Pet Élan will be open for business six days a week (Monday through Saturday) from ten o’clock in the morning until seven o’clock in the evening. The store will be closed on Sunday.

• The owner will be the primary employee of Pet Élan for the first three months of operation. Beginning in the fourth month of operation, Pet Élan will hire one full-time sales associate. As the business grows, Pet Élan anticipates hiring a second full-time sales associate during the second year of operation. The full-time sales associates will assist the owner with customer service and other retail functions.

• It is estimated that the average Pet Élan customer will spend $18 per visit and will visit the store, on average, two times per month.

• For purposes of this feasibility study, Pet Élan will assume a 54 percent margin on goods sold.

• As the customer base grows, Pet Élan will need to have a significantly higher amount of inventory on hand to support increased demand.

• Pet Élan will contribute 5 percent of pretax profits to a local no-kill animal shelter on a quarterly basis. This contribution has been accounted for in the pretax net profit (loss) forecast.

• Operational expenses include items such as rent, utilities, advertising costs, and professional services assistance.

Summary Financial TableThe Financials—Summary table below shows a detailed monthly spreadsheet for year 1 and aggregated spread-sheets for years 2 and 3.


Year 1 Year 2 Year 3

Revenue $296,740 $404,448 $458,304

Cost of goods sold 137,120 186,880 211,730

Gross margin 159,620 217,568 246,574

Operating expenses $147,907 $190,881 $201,744

Net profit (loss) pretax $ 11,713 $ 26,687 $ 44,830

Net profit (loss) pretax and post contribution (5%) $   11,127 $ 5,345 $ 42,589

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114 PART 1 EntrEprEnEurs and IdEas: thE BasIs of small BusInEss

Financials—Years 1–3

Month 1 September

Month 2 October

Month 3 November

Month 4 December

Month 5 January

Month 6 February

Month 7 March

Month 8 April

Month 9 May

Month 10 June

Month 11 July

Month 12 August

Total – Year 1

Total – Year 2

Total – Year 3

Sales $11,620 $16,900 $ 20,060 $27,460 $ 20,060 $21,120 $24,290 $26,400 $28,510 $31,680 $35,900 $32,740 $296,740 $404,448 $458,304

Less cost of goods sold $  5,370 $ 7,810 $   9,270 $ 12,690 $   9,270 $  9,760 $ 11,220 $ 2,200 $13,170 $14,640 $16,590 $15,130 $137,120 $186,880 $211,730

Gross margin $  6,250 $ 9,090 $10,790 $14,770 $10,790 $11,360 $ 13,070 $14,200 $15,340 $17,040 $19,310 $17,610 $159,620 $217,568 $246,574

Operating expenses

Utilities 185 160 165 180 200 200 180 170 165 185 185 185 2,160 2,280 2,400

Salaries 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 30,000 30,000 33,000

Labor — — — 2,125 2,125 2,125 2,125 2,125 2,125 2,125 2,125 2,125 19,125 51,000 56,088

Payroll taxes and benefits 313 313 313 578 578 578 578 578 578 578 578 578 6,141 10,125 11,136

Advertising 300 300 300 300 300 300 300 300 300 300 300 300 3,600 4,800 4,800

Website 20 20 20 20 20 20 20 20 20 20 20 20 240 360 384

Office supplies 150 75 50 50 50 50 50 50 50 50 50 50 725 1,200 1,440

Insurance 250 250 250 400 400 400 400 400 400 400 400 400 4,350 6,600 6,840

Maintenance and cleaning

50 50 50 50 50 50 50 50 50 50 50 50 600 720 840

Legal and accounting 350 350 350 350 350 350 350 350 350 350 350 350 4,200 4,800 5,280

Licenses 300 — — — — — — — — — — — 300 300 300

Bags, paper, etc. 150 150 200 250 250 250 300 300 300 300 300 300 3,050 4,800 5,040

Telephone 85 85 85 85 85 85 85 85 85 85 85 85 1,020 1,200 1,500

Miscellaneous 200 200 200 200 200 200 200 200 200 200 200 200 2,400 2,700 2,700

Rent 5,833 5,833 5,833 5,833 5,833 5,833 5,833 5,833 5,833 5,833 5,833 5,833 69,996 69,996 69,996

Total operating expenses (fixed costs): 10,686 10,286 10,316 12,921 12,941 12,941 12,971 12,961 12,956 12,976 12,976 12,976 147,907 190,881 201,744

Gross profit (loss) (4,436) (1,196) 475 1,849 (2,151) (1,581) 99 1,239 2,384 4,064 6,334 4,634 11,713 26,687 44,830

Contribution to charity (5% of net): — — 24 92 — — 5

62 119 203 317 232 586 1,334 2,242

Net profit (loss) pretax: (4,436) (1,196) 451 1,756 (2,151) (1,581) 94 1,177 2,265 3,861 6,017 4,402 $ 11,127 $ 25,345 $ 42,589

First year fixed costs (FC) $ 147,910

Contribution margin ratio (CMR) (sales – cogs)/sales) 53.8%

Annual breakeven sales (FC/CMR) $274,970

Average monthly breakeven sales $22,910      

Three-Year Detailed Financials

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small BusInEss IdEas: CrEatIvIty, opportunIty, and fEasIBIlIty CHAPTER 4 115

Financials—Years 1–3

Month 1 September

Month 2 October

Month 3 November

Month 4 December

Month 5 January

Month 6 February

Month 7 March

Month 8 April

Month 9 May

Month 10 June

Month 11 July

Month 12 August

Total – Year 1

Total – Year 2

Total – Year 3

Sales $11,620 $16,900 $ 20,060 $27,460 $ 20,060 $21,120 $24,290 $26,400 $28,510 $31,680 $35,900 $32,740 $296,740 $404,448 $458,304

Less cost of goods sold $  5,370 $ 7,810 $   9,270 $ 12,690 $   9,270 $  9,760 $ 11,220 $ 2,200 $13,170 $14,640 $16,590 $15,130 $137,120 $186,880 $211,730

Gross margin $  6,250 $ 9,090 $10,790 $14,770 $10,790 $11,360 $ 13,070 $14,200 $15,340 $17,040 $19,310 $17,610 $159,620 $217,568 $246,574

Operating expenses

Utilities 185 160 165 180 200 200 180 170 165 185 185 185 2,160 2,280 2,400

Salaries 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 30,000 30,000 33,000

Labor — — — 2,125 2,125 2,125 2,125 2,125 2,125 2,125 2,125 2,125 19,125 51,000 56,088

Payroll taxes and benefits 313 313 313 578 578 578 578 578 578 578 578 578 6,141 10,125 11,136

Advertising 300 300 300 300 300 300 300 300 300 300 300 300 3,600 4,800 4,800

Website 20 20 20 20 20 20 20 20 20 20 20 20 240 360 384

Office supplies 150 75 50 50 50 50 50 50 50 50 50 50 725 1,200 1,440

Insurance 250 250 250 400 400 400 400 400 400 400 400 400 4,350 6,600 6,840

Maintenance and cleaning

50 50 50 50 50 50 50 50 50 50 50 50 600 720 840

Legal and accounting 350 350 350 350 350 350 350 350 350 350 350 350 4,200 4,800 5,280

Licenses 300 — — — — — — — — — — — 300 300 300

Bags, paper, etc. 150 150 200 250 250 250 300 300 300 300 300 300 3,050 4,800 5,040

Telephone 85 85 85 85 85 85 85 85 85 85 85 85 1,020 1,200 1,500

Miscellaneous 200 200 200 200 200 200 200 200 200 200 200 200 2,400 2,700 2,700

Rent 5,833 5,833 5,833 5,833 5,833 5,833 5,833 5,833 5,833 5,833 5,833 5,833 69,996 69,996 69,996

Total operating expenses (fixed costs): 10,686 10,286 10,316 12,921 12,941 12,941 12,971 12,961 12,956 12,976 12,976 12,976 147,907 190,881 201,744

Gross profit (loss) (4,436) (1,196) 475 1,849 (2,151) (1,581) 99 1,239 2,384 4,064 6,334 4,634 11,713 26,687 44,830

Contribution to charity (5% of net): — — 24 92 — — 5

62 119 203 317 232 586 1,334 2,242

Net profit (loss) pretax: (4,436) (1,196) 451 1,756 (2,151) (1,581) 94 1,177 2,265 3,861 6,017 4,402 $ 11,127 $ 25,345 $ 42,589

First year fixed costs (FC) $ 147,910

Contribution margin ratio (CMR) (sales – cogs)/sales) 53.8%

Annual breakeven sales (FC/CMR) $274,970

Average monthly breakeven sales $22,910      

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116 PART 1 EntrEprEnEurs and IdEas: thE BasIs of small BusInEss

Start-Up Budget

Initial Calculations

Cost Assumptions First Year of Operations

Fixed costs (FC) Monthly Annually

Lease payment ($35/sq. ft.) $ 5,833 $ 70,000

Utilities 200 2,400

Insurance 833 10,000

Salary of owner 2,500 30,000

Salary of sales assistant 2,125 25,500

Advertising 200 2,400

General supplies 300 3,600

Professional services 667 8,000

Miscellaneous expenses 417 5,000

Website 20 240

Total 13,095 157,140

Variable costs (VC) Monthly Annually

Cost of goods sold 11,427 137,120

Total 28,250 339,000

Breakeven amount Monthly Annually

Contribution margin ratio (CMR) 53.8% 53.8%

Breakeven (FC/CMR) $24,340 $292,082

  Daily Monthly Annually

Breakeven number of customers 45 1,352 486,803


Rental location will be 2,000 sq. ft.  

Average customer spends $18 per visit and comes to the store on average twice per month.

One-time start-up costs

Licensing and permits $ 300

Decorating $ 800

Signage $ 5,000

Beginning inventory $ 40,000

Fixtures and equipment $ 6,000

Professional fees (accountant, attorney) $ 5,000

Total  $ 57,100

Source: This feasibility study, including text, art, and tables, was developed by Laurel Ofstein, a student at DePaul University in May 2005, under the direction of Professor Lisa Gundry of DePaul University. Reprinted with permission. It was revised in 2019 by Jerome Katz to reflect updated headings that fit better with the IDEO screen and business plan outline. Wherever possible, the text and numbers are the same as from the origi-nal study.

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Small Business Paths and Plans

2P A R T T W O

CHAPTER 5: Small Business Entry: Paths to Part-Time Entrepreneurship

CHAPTER 6: Small Business Entry: Paths to Full-Time Entrepreneurship

CHAPTER 7: Small Business Strategies: Imitation with a Twist

CHAPTER 8: Business Plans: Seeing Audiences and Your Business Clearly

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Small Business Entry: Paths to Part-Time Entrepreneurship


● Carla Brauer moved from a hobby into a business of cleaning animal skulls and making wall mounts and jewelry items from the cleaned skulls. What business would you start if you want to work the business part time?Carla Brauer

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Focus on Small Business: Carla Brauer 

After you complete this chapter, you will be able to:

LO 5-1 Describe when and why part-time businesses are important.

LO 5-2 Describe the conditions that make part-time entrepreneurship a good decision.

LO 5-3 Describe the kinds of part-time entrepreneurship that exist.

LO 5-4 Describe the key factors to making a decision to go into part-time entrepreneurship.

LO 5-5 Use the BRIE model to describe what it takes to be successful in part-time entrepreneurship.

LO 5-6 Describe the advantages and pitfalls of delegating and outsourcing.

LO 5-7 Identify the ethical challenges of part-time entrepreneurship.

LO 5-8 Describe the challenges of moving from part-time to full-time entrepreneurship.

In a way, it all began with a goat’s head. Carla Brauer grew up in the city, but always dreamed of a country life. After college, she found work as a copy editor to be tedious, so she left the city for the boonies and found work on small farms. There, among other skills, she learned to humanely butcher animals grown specifically for that purpose. On a day dedicated to slaughtering some goats, one animal in particular had impressive large, symmetrical horns. Although, by her own admission, she really did not know how to go about it, she determined to de-flesh that goat’s head, clean and bleach the bone, and turn it into a wall mount. She had absolutely no idea that she had just taken the first step in entering into a small business of making mounts of the heads of trophy animals.

Her approach to this process was to put the head into an unused fenced animal pen so that large scavengers could not carry it away, and then just wait for nature to take its course. This experiment soon had elements of a horror movie. Carla had vultures perching on top of the cage, and the rotting skull was covered in flies and developing maggots. The stench was nearly intolerable.








● Goat skull with large symmetrical horns

Carla Brauer


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120 PART 2 Small BuSineSS PathS and PlanS

But Carla persisted. She experimented with burying a head in an ant colony. Didn’t work. No mat-ter how energetic the ants, the results were unsatisfactory. So she tried boiling a head to soften the meat and sinews which she then tediously scraped from the skull. This process was both stinky and very messy. Carla soon realized if she was to continue this hobby, she had to find a better way.

One evening in an episode of the TV series Bones the leading character, Temperance Brennan, a forensic anthropologist, proceeded to clean skeletal remains by placing them into a terrarium with a bunch of dermestid beetles. Intrigued, Carla began conducting research into whether or not such an approach would actually work. Soon she discovered that not only were dermestid beetles commonly used for cleaning skeletal remains, but there is an active market for the beetles.

Soon she was equipped with a terrarium and a starter batch of beetles. Her first project for her new “employees” was to clean the head of a quail which had been farm raised and then butchered for its meat. This quail head was followed by the heads of a variety of animals. As her skill grew, so did her reputation. Friends asked her to make wall mounts of the special animals: a young person’s first deer, a hunter’s largest bull elk, even a bereaved owner’s beloved pet. And so the business Dermestidarium was created.

After years of cleaning skulls and making mounts first as a hobby and later as a side hustle, Carla now maintains a part-time job in town and runs her skull-cleaning business as her primary enterprise.

DISCUSSION QUESTIONS1. How would you handle the conflicting demands of being a loyal employee while at the same time

running your own part time business?

2. What are the ethical concerns when you are working full time for one company and part time for yourself? How would you recommend managing these issues?

3. Carla Brauer currently is busiest during the fall and winter months of the hunting season. How might she obtain work to better utilize the time available during the rest of the year?


Learn more about the topics above at these sites:

Dermestid beetles at work: hustles: and 2019/01/28/how-to-finally-turn-your-side-hustle-into-a-full-time-business/#69280250f139

Why Part-Time Businesses Are ImportantCarla Brauer’s experience is a common one. She graduated from college and proceeded to work for various businesses in her field. Later, while working a full-time job, she became dissatisfied and began to consider other opportunities. She found employment working on a small farm where she developed skills in horticulture and animal husbandry. This employment led her to become interested in a topic that was completely new to her: preserving animal parts as trophies. The interest became a hobby and the hobby became a part-time business which is now evolving into a successful full-time business.

When we talk about businesspeople like Brauer, we often use the terms part-time employment and full-time employment, which are usually understood to mean working 35 or fewer hours a week and working more than 35 hours a week, respectively. However, these terms do not cover the many patterns of employment available to entrepreneurs. In addition to working a specified number of hours each week, entrepreneurs may work on an occasional basis. Consider the peo-ple who buy and resell items on eBay, Etsy, or Craig’s List websites. These entrepreneurs may not have regular “e-stores” but may sell items as the opportunity provides. And there are many artisans who sell their services or products only when they choose to. These are certainly not

LO 5-1 Describe when and why part-time busi-nesses are important.

part-time employmentWorking 35 or fewer hours a week.

full-time employmentWorking more than 35 hours a week.

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Small BuSineSS entry: PathS to Part-time entrePreneurShiP CHAPTER 5 121

considered full-time businesses, but because they’re not working regular hours they don’t really fit the definition of either.

The great variety of ways people choose to conduct business makes it necessary to use addi-tional terms to describe employment patterns. Businesses such as “pop-up” restaurants and pop-up retailers are often called episodic businesses. This is because the same business is run at differing locations and at differing times without having any permanent location or hours of operation. Episodic businesses offer many different services and products. For example, the col-lege student who paints houses in the summer, the gardener who opens a produce stand during harvest, the hustler who sets up a fireworks stand each June, the vendor who follows a summer schedule of state and local fairs, or the skier who offers skiing lessons during the winter are all examples of episodic businesses.

Or, how would you describe an entrepreneur who keeps a job as an employee, but not neces-sarily a full-time job, while starting and running a business at the same time? In this case, the entrepreneur may work more than 35 hours per week in each job. Is this “double-time” employment?

No, a different name is needed.Some are calling such employment patterns hybrid entrepreneurship.1 If a person keeps a

constant job as an employee and at the same time works at his or her own business, that person is a hybrid entrepreneur. But the number of hours worked at either is not what defines hybrid entrepreneurship.

For this book, we will adopt the term part-time business to describe all the previously men-tioned employment patterns. What matters in this definition is that the entrepreneur is not work-ing full time at his or her own business but instead is working fewer than 35 hours per week, only a few days per month, or only during certain seasons. The person may or may not be keeping a full- or part-time position as an employee while running a part-time business.

When you enter businesses as an entrepreneur, you are not required to work full time. There is no rule that says you must make your living from the business. You get to decide what is right for you. You may “go for broke” and risk all your resources on a full-time business. Or, you may just “hedge your bet” by keeping your day job while you feel your way into the business on a part-time basis.

Today, Carla Brauer keeps a part-time job, but also cleans and mounts animal skulls and other skeletal parts. As she is keeping a job for wages and at the same time working fewer than 35 hours a week at Dermestidarium, it is considered to be a part-time business.

This chapter focuses on part-time approaches to business. Why does it deserve a whole chap-ter? There are two reasons. First, most entrepreneurs start out working part time on their new business. According to the Panel Study of Entrepreneurial Dynamics (PSED), three-quarters of new businesses start on a part-time basis.2 This includes the businesses shown in Table 5.1. The ease and low cost of entry and exit make part-time entrepreneurship a great way to try a variety of different businesses without “betting the farm” each time a new business is started.

hybrid entrepreneurshipThe process of initiating a busi-ness while simultaneously remain-ing employed for wages or salary.

part-time businessA business in which the owner either participates fewer than 35 hours per week or operates on a temporary or seasonal basis while maintaining employment elsewhere for wages or salary.

pop-up businessA temporary business that offers services or products in a variety of locations for a brief period at a time. What characterizes a pop-up business from any other is its temporary nature.

episodic businessA temporary, project-based, or sporadically operating business.

Famous Organizations Started by Part-Time Entrepreneurs3


Accion Friendster

American Information Systems Lionel Trains

Apple Mary Kay Cosmetics

Dell Microsoft

Facebook Netscape

Ford Modeling Agency Yahoo!

Sources: Joseph J. Fucini and Suzy Fucini, Entrepreneurs: The Men and Women behind Famous Brand Names and How They Made It (Boston: G. K. Hall, 1985); Brendan Howard, “Making Time: Not Ready for the Burden of a Full-Time Business? How Do Your Evenings and Weekends Look?,” Entrepreneur, June 2000; Adam Cohen, The Perfect Store: Inside eBay (Boston: Back Bay Books, 2003).

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122 PART 2 Small BuSineSS PathS and PlanS

Second, the sheer number of part-time businesses makes them a major force in our economy, even if it is one we do not always recognize. Officially, of the 25.9 million small businesses in the United States in 2012, almost half (10.8 million) were part-time businesses.4 However, that un-derstates the situation. Many people jump into and out of self-employment (a change called volatility by economists) for a few weeks at a time, perhaps because they do project-based work like taking on a single consulting project in their spare time, or doing someone’s taxes, or selling an item or two on eBay or at a garage sale. These very short-term projects get missed in the count of new business start-ups. The U.S. Census Bureau reported that during the first three quarters of 2018 approximately 300,000 new businesses were created each month.5 This is about 3.5 mil-lion businesses per year—way more than the 1 million new starts counted by the Small Business Administration (SBA). The Business Formation Statistics (BFS) may itself underestimate the true number of annual business starts because it is based on the number of requests for new Employer Identification Numbers (EIN) from the IRS, and many episodic entrepreneurs, such as those selling products on, simply report tax information using their own personal Social Security numbers.

When to Consider Part-Time EntrepreneurshipMany people assume that the one best way to go into business is to first write a detailed business plan, second raise capital, and third go into business full time from the start. In fact, this is ex-actly how most college courses in entrepreneurship present the process. There are good argu-ments for this approach to business entry, including the amount of thought and planning required to write a business plan, and the importance that angel investors, venture capitalists, banks, and other investors attach to a well-prepared business plan. However, starting or buying a full-time business entails a major commitment and is not always the best way to go about becom-ing an entrepreneur. And if you are not going to start a full-time business or ask other people for funding, a traditional business plan may not be needed.

There are four types of situations in which it makes good sense to first undertake a part-time business (see Figure 5.1). The first situation is where you are new to business in general and need to gain basic experience. If you have not been involved in pricing, buying, and selling, learning how to do such things makes a lot of sense before launching the business of your dreams. You might want to obtain other types of experience before starting a full-scale business or writing a business plan. These can include experience in the industry, in the line of business, in the local-ity of the specific market you plan to serve, in managing cash, or in managing yourself in self-employment.

volatilityThe frequency of business starts and stops.

LO 5-2 Describe the conditions that make part-time entrepreneurship a good decision.


When to Consider a Part-Time Business

Do I have enoughresources?

Do I understandhow the business


How longwill this

opportunity last?

Do I reallywant to do this

full time?

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What Kinds of Part-Time Entrepreneurship Exist?In this section we will look at the kinds of part-time small business that exist in most industries—retailing, wholesaling, most services, and even manufacturing (because most part-time manufac-turing is based on either an artisan’s small-scale production of products or on subcontracted manufacturing). How do we know what are the most popular industries? Knowing that small businesses range from 97 to 99 percent of nearly every industry, a quick look at the number of firms in each can give us an idea. We can see a listing by industry in Table 5.2.

As you can see from Table 5-2 it is possible to have a part-time business in any industry, from accounting to zookeeping. Certainly, part time is more common in some industries, such as re-tail sales, than it is in others, such as mining or quarrying operations. Because of this, the rest of the chapter will be concerned with the common forms of part-time business, and not with spe-cific industries. The most common forms of part-time businesses are:

• Home based.• Internet informational websites.• E-commerce and eBay websites.• Home retail (home party, door-to-door selling, network marketing, stands).• Pop-up.• Mobile offices.• Virtual offices, executive offices, and incubators.• Consignments and agents.

LO 5-3 Describe the kinds of part-time entrepre-neurship that exist.

A second type of situation is one in which you lack the resources necessary to pursue a full-scale business or create a business plan. Time is probably the ultimate resource, and starting a business can tax it heavily. Estimates suggest that developing a business plan may take anywhere from 50 to 200 hours or more if you are new to business and working on your own.6 Starting a full-time business can easily take 70 hours a week or more in its early stages. You might not be able to commit the time to work that many hours, so taking an easier path makes a lot of sense. Start-ups and purchases of full-time businesses also require substantial financial resources. When money is limited, starting out part time can greatly stretch those resources.

The third type of situation is a narrow window of opportunity. For example, when teams are announced for tournaments like the NCAA Men’s Basketball Tournament, there is suddenly a veritable flood on eBay of logo clothing and memorabilia from the selected teams. These eBay entrepreneurs are capitalizing on the increased interest in the newly announced teams. Within a few weeks, most of the selected teams will have lost and left the tournament, but in the mean-time, they (and anything with their logo on it) are hot properties.

Part-time businesses can generally be created quickly. When the business situation does not allow enough time to do a business plan, pursuing a part-time business is often the only profit-able way to seize the opportunity.

The fourth situation arises when you are uncertain about the demands of going into a full-time business. You may be concerned about whether or not you will actually like doing the activity as a business. As an example, Carla Brauer ultimately decided that she preferred being her own boss and creating a business was preferable to continuing to work as an employee. For her, the rewards of being in business make the demands of the business worthwhile.


Learn more about the topics above at these sites:

Quitting Your Job to Start a Business: Your Day Job or Keeping It:

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NAICS* Industry No. of Establishments Percentage

54–55–56 Professional & Business Services 1,739,828 19.1%

61–62 Education and Health Care 1,593,913 16.9

44–45 Retail Trade 1,047,401 11.5

81 Other Services (except Public Admin.) 829,262 9.1

71–72 Leisure and Hospitality 810,186 8.9

23 Construction 770,310 8.5

42 Wholesale Trade 624,052 6.9

52 Finance & Insurance 479,761 5.3

53 Real Estate, Rental, Leasing 369,802 4.1

48–49 Transportation & Warehousing 238,619 2.3

31–33 Manufacturing 342,991 3.8

51 Information 154,006 4.1

11 Agriculture, Forestry, Fishing, and Hunting

102,293 1.1

21 Mining, Quarrying, and Oil & Gas Extraction

35,942 0.4

22 Utilities 17,595 0.2

Total 9,101,961 ≈100%

*NAICS = North American Industry Classification System. 

Source: U.S. Department of Labor, Bureau of Labor Statistics, “Industries at a Glance,” (accessed March 18, 2016). Special tabulation of the preliminary data third quarter by Richard Green.

Size of U.S. Industries by Major Sector, Preliminary Data Third Quarter, 2015


Home-Based BusinessesMost part-time businesses start where you live—your home or dorm room—so home-based busi-ness is where we will start. The nature of part-time start-ups has changed in the past few years. Not so long ago, home businesses were strongly discouraged, if not outright banned in most towns and cities. The perception was that the increased traffic of a home-based business lowered the livability of residential areas. But this has changed because of increased use of the Internet as a source of information and as a method of communication. Today if you are trying to market beyond your immediate family, neighborhood, or circle of friends, you need to start your busi-ness with a web presence. Some businesses can in fact be done entirely on the web, and informa-tional and e-commerce websites are the second and third business forms we will consider. The fourth start-up approach is a collection of other fast, low-cost approaches that can be helpful in a variety of situations. If you are looking for more ideas about the ways you can get started, con-sider jumping ahead to Chapter 11 which discusses some of the more involved techniques such as direct mail, telemarketing, and direct response advertising that can be used in particular situ-ations for a part-time business.

Home might be where the heart is, but it is also where the part-time business starts. If yours is a retailing or wholesaling business, home is where you store your goods. If you are making furniture, toys, clothing, or food, it is probably where your work area is. And if you are in a ser-vice, it is where you retire to in order to get your work done. For nearly everyone, home is where you keep your office records, do your bookkeeping and taxes, and where you probably first receive your firm’s mail. You may work away from home: In a section on location in Chapter 11

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we consider service firms where you do part of your work at the client’s loca-tion or at remote locations, but unless you get an office or other location from which you will base your business, you will probably start from home.

There were about 9.0 million home-based businesses in the United States in 2012,7 and they represented 33 percent of all firms. The reason for these large numbers is that the home-based business meets at least two of the three criteria for start-up. It is inexpensive, since you are already living somewhere and you can quickly get your business going where you live. Although home-based businesses do not always give customers the strongest sense of legiti-macy, the idea that a customer knows where the entrepreneur lives can be a point in favor of trusting in the potential permanence of the firm.

That said, with so great a number of firms, there are not many hard-and-fast rules that apply to everyone, but there are a few key ideas to keep in mind.8 First and foremost is the location of your home-based business. Although the dining room table may be infrequently used, is it the best place for you to work? Even though anything can work, the following suggestions come from home-based entrepreneurs and are likely to make your life a lot easier.

According to home-based entrepreneurs, the greatest problems they face come when there are zoning challenges or family challenges to the business. Cities, counties, neighborhoods, apartment complexes, and dorms pass regu-lations that limit the ways residents can use or modify their space. The gov-ernment restrictions are called zoning laws, while the ones set up by other organizations are called covenants. Unfortunately there is no comprehen-sive free online national listing of zoning regulations,9 but there are public records, and these can often be found online on your city’s or county’s gov-ernment website. Otherwise, the local chamber of commerce or the local library may have the basic information.

It is best to carefully check out the zoning and covenant situation before fully committing yourself to a home-based business. Most of us live in areas zoned as residential areas. Typically, it is not legal to have a home-based business in a residential area—even an online business.10 It may be tempting to simply ignore such restrictions. Doing so, however, raises ethical issues and may cause the imposition of fines and penalties on your new business.

Usually people get into trouble only if a neighbor, landlord, or dorm staffer complains or it becomes apparent to police or other public service employees that “something” is going on at your home. In either situation, what causes the problem, and makes it stick, are aspects of your business that “change the residential character of the neighborhood” through increased traffic, noise, parked cars, or smells.

To minimize problems, there are several alternatives.11 If you are not concerned about the ethical implications, you can generally keep the web- and phone-based aspects of your business at home without neighbors becoming aware of (or disturbed by) your business—but be sure not to tell them you work from home! The way to handle large amounts of mail and packages is through the use of private mailboxes (from a company like PakMail, Mailboxes Etc., or Postal-Annex) and self-storage facilities (like Public Storage U-Haul, Storage USA, or similar local companies), rather than having them delivered to your home. Use the private mailbox address for your business on the web and on your stationery.

Another approach is to get permission—called a variance—to have your business operating from out of your home. Often there are local lawyers who specialize in real estate and zoning law, and they can advise you if a variance is a workable solution. While you can request a vari-ance on your own, having a lawyer advocate for you can cost from hundreds to thousands of dollars, so this approach is only for those with determination and money.12 The best way to find such a lawyer is through referrals from friends or businesspeople whose judgment you trust. If that does not work, or you want to check into the lawyers suggested to you, you can use an online directory such as or to find and learn more about local lawyers.

zoning lawsGovernment specifications for acceptable use of land and buildings in particular areas.

covenantThe limitations imposed on an individual’s property by the neighborhood group.

variancePermission from a government organization to act differently that the laws state.

● This is close to an ideal setup for a home office. There is space for files and equipment. The owner has the equipment needed to do her work, and there is a door to provide some quiet and privacy, but the glass lets her see what is going on at home, and lets her family know she is around.

Brand X/JupiterImages/Getty Images

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Once zoning is handled, think about issues inside your home. The following list touches on many of the issues home-based entrepreneurs find most important to running their business:

• Choose a work location inside your home that is away from noise, distractions, and family traffic. It helps you concentrate and sound businesslike when on the phone.

• Be realistic about the amount of space you’ll need for your equipment.• An office door can keep business separate from family and the rest of life.• Try out your location for a day or two to check out noise, traffic patterns, lighting needs,

and distractions.

• Don’t overload on hours of work, or on snacks from the refrigerator down the hall.• Set up your workday to minimize distractions from household or family chores and, as

much as possible, stick to the plan.

• Consider hiring help to handle household or family chores to free up your time.• Set the ground rules early and stick with them. Watch out for family, friends, and visitors

who don’t understand home-based businesses. When you run a home-based business you will find that working-outside-the-home parents, siblings, children, and friends don’t under-stand that they can’t drop off their ill or vacationing children so that they don’t miss work. You’ll be asked to do extra school or sports carpools, wait for service people, or other such things because of your at-home status.

Exhibit 5.1 summarizes the five most important issues that you should think about before you set up a home-based business.

Once you’ve chosen your location, you’ll need equipment. You’ll need a comfortable, usable desk and chair and adequate lighting. Consider the tasks you’ll perform most frequently and check out the ergonomic options that will serve you the best. Although you can store files in cardboard boxes, an inexpensive filing cabinet would be so much simpler. Think about the layout of the furniture for access to proper lighting, phone jacks, and electrical outlets. You may need to supplement some or all of these.

Tools typically include a telephone (these days most often a cell phone), high-capacity Inter-net service (like cable or DSL or 5G Wi-Fi service for your laptop), a business email account, a high-speed desktop computer, a fax machine, a copier, and appropriate software (see Table 5.3 for high-quality free programs and services). These days many multipurpose devices combine a printer, copier, fax machine, and scanner into one piece of equipment, which reduces the amount of space you’ll need. Consider the layout of the equipment and how you’ll use each piece. You don’t want to reach around your computer monitor to pick up the telephone or race across the room to catch printer pages.

● One of the greatest challenges to making a home office work is getting family and friends to give you the privacy and time alone to do the work you need to do. How could this father have avoided this situation?

JupiterImages/Getty Images

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1. If you intend to deduct the expenses of your home office, can you comply with the regulatory standards?∙ Home office space must be regularly and exclusively used for business—no letting

your preteen daughter use it for a weekend sleepover!∙ The home office must be your principal place of business, unless it is a freestanding

structure such as a detached studio or a shed.∙ To be allowed to deduct home office expenses you must keep detailed records as

listed in IRS Publication 587, Business Use of Your Home.2. If you are going to use a home office, can you meet state, county, and municipal

regulations?∙ Zoning must allow for home-based businesses.∙ If you use your home for producing, storing, or distributing any food or medicinal

products you must conform to health, environmental (temperature and humidity), and safety regulations.

∙ You will need to meet minimum standards for handicap accessibility, fire prevention, and liability insurance.

∙ Home-based business are subject to the same licensing and inspection rules that apply if you have a remote location.

3. If you choose to have a home office, can you be productive in that space?∙ Interruptions from family members, neighbors, and pets must be kept to a minimum.∙ Distractions such as windows that overlook areas of high activity, television programs

playing in other rooms, and squabbles among your children should be avoided.∙ You will need comfortable and sufficient work space such as a desk or a table.∙ You will need adequate storage, such as a fireproof file cabinet, for records and other

documents.∙ In today’s business world secure high-speed Internet access is essential. Dial-up will

not do.∙ You may need space for an administrative assistant or other full-time help.

4. Will you be able to deal with clients, vendors, or employees in your home office?∙ A home-based business that deals with clients, such as an accounting, counseling, or

therapy practice, should have a separate entrance from the one your family uses.∙ Unless you are 100 percent efficient in scheduling appointments, you will need an

area where business visitors may wait comfortably.∙ If your home-based business requires team effort, you will need provision and space

to hold meetings.∙ You must be able to meet minimum parking space regulations. Many cities stringently

restrict on-street parking.5. Will you be able to separate home and business life?∙ Home offices provide great temptation to devote all your time to work because they

are “right there.”∙ It can be very difficult to discipline yourself to keep regular office hours.∙ Spouses, children, and friends all have difficulty realizing that when you work in your

home office, you really are working.


Essential Questions to Answer for a Home Office

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Essential Free Software and Web Services for Small Businesses


Open Source* Web Based

Basic business suite (like Microsoft Office); (has CRM and other modules)

Project management (like Microsoft Project)

Email (like Outlook) Mozilla Thunderbird

Knowledge management (like PeopleSoft)

Customer relationship management (CRM)

Social networking

Financial projection creation Exl-Plan Free,

Accounting program (like QuickBooks)

PDF file creation (like Adobe Acrobat) OpenOffice or PDFCreator,;

Desktop publishing (like Adobe PageMaker)

Paint program (like Adobe Photoshop);

*All open source software offers versions that will run under Microsoft Windows. Many offer support for Macs and other platforms.

You’ll want to have a separate business telephone line with an answering machine, voice mail, or virtual PBX service so that you can get those important calls after hours. Make sure your voice-mail message sounds businesslike and not like the message on your home answering ma-chine. Consider a second phone line if you are limited to a modem-based Internet connection. Ideally, this space and its tools will be used only for your home-based office. In addition, totally separate space and equipment make tax deduction preparation much simpler.

When does a home-based business outgrow the home? For some companies, the answer is never. Some entrepreneurs opt for charging higher prices for their goods or services or limiting their sales so as not to outgrow the space available; being a home-based business is just too im-portant to them to change. Others reinvest their profits into additions to their homes to accom-modate their business growth or to upgrade to a roomier house with the extra space they need. Some die-hard home-based entrepreneurs faced with this decision have found creative ways of housing their staff and other operations in an outside office while continuing to telecommute as much as possible.13

More typically, a business will find the need for meeting rooms and employee accommoda-tions or zoning restrictions will force the change. In other cases, family situations just aren’t favorable to a home-based business. Some entrepreneurs find they aren’t cut out for the solitude of working by themselves or find household chores, family, or other distractions disturb them too easily.

Home-based business is the easiest and fastest way to start a business, and the easiest and fastest type of business to move or close down. This ease of deployment, moving, and closing

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● Sometimes the success of a home-based business is what makes it necessary to move. This part-time entrepreneur’s business completely overwhelmed the downstairs den. What started as a home office in the corner grew until it became an office warehouse and shipping center. How do you think her family is responding?


make the home-based business one of the volatile forms of part-time business. Even so, it is the core and greatest common factor in business start-ups.

Internet Informational Websites14Perhaps the biggest change in part-time self-employment in the past five years has been the growth of the Internet as a major method for conducting business. Most of us have bought some-thing online, which is what is called e-commerce. But another type of website, the informational website, is an even more important type of site that informs possible customers about your firm. For a part-time entrepreneur, a website can become a 24-hour-a-day, 7-day-a-week source of information and prospects, if not sales.

To get some idea about the power of the Internet for information and for e-commerce, con-sider this. Google now reports that it receives 40,00015 searches per second worldwide. This calculates to over 1.3 trillion searches per year. Another way to look at this astounding number is it is equivalent to 187 searches made for each person: women, men, girls, and boys living to-day! The U.S. Census reported that e-commerce sales in 2018 were about $504 billion. This is more than 9 percent of the total retail sales reported.16 But even this figure understates the real level of e-commerce sales. As David Evans et al. report, because of the way the Census Bureau calculates e-commerce totals, actual online retail sales are most likely understated, but by an amount that cannot be reliably estimated.17

Products like music and cell phones are examples of the kind of goods we buy as individuals. That type of e-commerce is called business-to-consumer (B2C). There is another type called business-to-business (B2B) sales where one firm sells to another firm. While our personal ex-perience is in the B2C marketplace, all of those sales on iTunes, eBay, Amazon, and the thou-sands of other online merchants account for only about 10 percent of all retail sales in the United States. For most of us, the B2B market is invisible, but when businesses buy, they buy big. In 2013, over 61 percent of all manufacturing sales were handled online as well as almost 47 percent of all wholesale trade between businesses.18 You can see the difference, and the growth of these forms of e-commerce, in Figure 5.2. The moral of this story? B2C e-commerce is large, B2B e-commerce is larger, but using an informational website to inform customers—whether they are individuals or businesses—is huge and getting ever bigger! We can only guess what the percentages may be today.

The Internet’s power comes from its being a very cost-effective and efficient way to contact your customers. With the Internet, a small, part-time, one-person operation can compete with a billion-dollar-a-year multinational. Whether your customers are other businesses or other consumers, getting a website together is essential.

e-commerceThe general term for conducting business on the Internet.

informational websiteAn Internet site designed to introduce and explain a business to others.

business-to-consumer (B2C)Business-to-consumer transactions using e-commerce.

business-to-business (B2B)Business-to-business transactions using e-commerce.

consumerA private individual or household that is the end user of (the entity that “consumes”) a product or service.

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Most small businesses—even part time ones—need to have a website regardless of whether they use it for actual sales. First of all, potential customers will use it to find you. Second, if they’ve heard about you from something other than the Internet, they will use your site to find out more information about you and to decide if they want to actually contact you. Letrah Inter-national, a firm specializing in international consulting for design and engineering projects, knew it should have a website, but it was a low priority and was worked on only when something else did not come up. Dave Peters, the firm’s vice president at that time, asked a firm in the United Arab Emirates if there was anything he could do to help convince the firm to accept Letrah’s bid. The firm expressed concern that Letrah was not a real company because it didn’t have a website, and “everybody knew real U.S. firms had websites.” The website was running the following day.19

Letrah was able to develop and deploy an informational website in a matter of hours. That is not uncommon. The basics of an informational website can be set up within an hour. There are a number of very low-cost vendors, such as 1&1 IONIS (,, and, as well as the major web presence providers like Yahoo! and Google sites (just search Google for “cheap websites”).

What you are looking for in a basic informational website package is a domain name of your own. Ideally you want your business’s name in the domain name of your site. If you want to call your company Beachcomber Shoes, you would ideally look for the domain name If the dot-com version is not available, using .net or .biz, or .us might work for you. Otherwise you can tweak the domain name—for example, or You want a name that reinforces your firm’s name or your product’s name, or something highly memorable, like Note that the price of domain names varies. An unregistered name is about $35 a year retail, but most of the discount website providers will charge as little as $10 a year, and some will include it for free when you buy a website (what they usually call a “hosting”) package.

A hosting package for an informational site should include at least 1 gigabyte of traffic a month (this refers to people downloading your pages into their browser). It should give you at














2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Business-to-consumer Business-to-business

ManufacturingMerchant wholesale tradeRetail trade


E-commerce as Percentage of Total Sales 2002–2013

Source: U.S. Census Bureau, “U.S. Census Bureau 2012 E-commerce Multi-sector Data Tables,” released May 22, 2014.

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least 10 web pages of space to tell your story. It should also include templates to help you de-velop a website that has a professional look and an online website editor so you can make changes to your site without buying web-authoring software. The hosting package should also include at least five email accounts using your domain name (e.g.,,,, etc.). While using (which is a free email service from Google) is good, having is even better.

The material for your website can come from promotional material you have written. Every page should have the company name, your contact information (or a link to it), a site map link (which shows a directory of all your pages—don’t worry, the template should generate this auto-matically), and a link back to the home page. Typically your home page (the first page people see when they type in your domain name) gives a quick (one or two paragraphs) introduction of the company and should prominently display your product or service. Other typical pages include:

• “About Us,” which gives a brief background on the company and you.• Product or service pages, which give a more detailed description of what you sell or what

you do.

• Support page, which gives customers or potential customers information on how, and reassurance that, their problems with your product or service will get solved.

• Resources page, which typically gives general information (e.g., “Five things you should know about buying _____”).

• Press or media page if you have received notice in the media.Today many informational websites include the capability to add a blog, which is a web page

in which entries are posted in reverse chronological order (i.e., the most recent at the top of the page). Many blogs let readers respond online, so the entrepreneur and the potential customers can interact directly. Today website packages include the ability to push content, like your blog, out to customers who register at your site. Some sites do this by using an RSS feed. RSS stands for “really simple syndication” and an RSS feed pushes or sends whatever web material you specify to subscribers to that feed. RSS feeds can be read in many browsers or with special readers.

A similar approach uses an email mailing list to send emails or online newsletters (sometimes called e-newsletters) to people on your subscriber list. To read these, subscribers have to use an email program or a browser. Many web hosting packages offer a mailing list program as part of the package, but there are also for-fee specialized mailing list programs with more features, such as The latest variation on push technology is Twitter is a free service that lets a person send a 140-character-or-less message or tweet to people who subscribe to the person’s Twitter account. You can see what Oprah is up to, or check out, which uses tweets to inform members about up-to-the-second trends in the stock market.

Realize that while you can design your own site, there are also a lot of people who can do it for you, from your “techno-geek” teenage nephew who will do it for the cost of the latest com-puter game to firms that will not only design but also maintain your website for you—at a cost, of course. You can also hire professionals to set up and manage a site for you. Do a Google search for “managed e-commerce solutions.”

There are volumes and volumes written about what things to consider when building your website. You probably have your own list of pet peeves about things some websites do that drive you crazy. That list is what you need to make sure your website does not have those elements, which probably include:

• Slow-loading graphics or pages.• Too many layers of screens to get to what you want.• Dead links within the website (when you see a “404 error”).• Hard-to-fill-in online forms.• Pop-up ads.• Pages that look or work “right” only in one type of browser.

blogA web page in which entries are posted in reverse chronological order (i.e., the most recent at the top of the page).

RSS feedAn Internet messaging service that pushes (sends) whatever web material you specify to subscrib-ers to that feed.

tweetA 140-character-or-less message sent using the Twitter web service.

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But you are likely to have many other complaints. The trick is to think of them before you deploy your website, and you’ll make your customers and prospective customers happier.

Once you’ve got your website up and running and it is a masterpiece in design, how do you get your customers to find it? The first way is multichannel marketing. Have your website listed on your business cards and every piece of paper, advertising, and the like. The second and equally important way is to get linked to other web pages. If you were in the target market for your prod-uct, what web pages would you visit? Figure out what these are and establish reciprocal links. In a reciprocal link, you display a link to another website and that website displays a similar link to yours. Scan chat rooms and other electronic message boards to see if people are looking for your type of product or service and post your website. Discover what sorts of electronic newsletters they might read and get a mention in them.20

The third way is online searching. Searching online is how about 85 percent of Internet users find websites, but users will seldom go beyond the first couple of pages of a search.21 There are several ways to get your site positioned so that a person searching is likely to see it. The tech-nique, which is free, is called search engine optimization (SEO)  and refers to designing a website so that search engines like Google, Bing, and Yahoo! are likely to rank your site high (closer to the first listing). Many web hosting packages include programs to help you edit your website to improve your ranking. There are also books on SEO and websites like,, and that are devoted to telling you the hundreds of secrets to mastering SEO.

If you are willing to put up some money, you can pay for sponsored links (guaranteeing you a particular placement on the first page of a search) from the search engines at a manageable cost. Google and Yahoo! ask you what word you want to use and how much you are willing to pay (our suggestion is start with a low number). You then find out how often the word is used, and how often a searcher clicks on any sponsored link. Paying more will get your sponsored link closer to the top of the page. You can make multiple offers until you find one you can live with.22 The problem you might face comes from what you sell. If you are a bookstore, the word “books” might come to mind, but that’s true for lots of other bookstores, publishers, and other compa-nies. Maybe “first editions” is more appropriate, if that is indeed what you sell.

On the other hand, if you sell something a bit more unusual like yo-yos, buying a sponsored link for “yo-yo” is likely to get you on a page with limited competition.23 Watch for jargon; think of what the average searcher might enter. Your hosting service’s SEO program or your own web page designer will understand where to place the keywords you select and can help you get listed on the major search engines. There are literally hundreds of search engines, but there are five major ones—Google, Microsoft Bing, Yahoo!, Ask Network, and AOL. The next six largest search engines share less than 1 percent of the searches. You can see their relative shares of the search business in Figure 5.3.

multichannel marketingThe use of several different chan-nels to reach your customers; for example, a website, direct mail, and traditional retailing.

reciprocal linkA listed, live connection to a different website, which in turn displays a similar link to the first website.

search engine optimization (SEO)A general approach to website design intended to result in the site being displayed toward the beginning of a search engine’s (e.g., Google, Yahoo!, etc.) listing for that term.

sponsored linkA form of paid advertising that gets your company’s website at the top of a search list.

Google sites

Search Engine Ranking

Microsoft sitesYahoo! sitesAsk NetworkAOL, Inc.






Search Engine Rankings—February 2016

Source: Data from comScore Releases, February 2016, U.S. Desktop Search Engine Rankings.

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With all of these details revolving around making a truly effective informational website, you may wonder if it makes sense to do it yourself. As we have discussed, many $10-a-month web hosting packages will give you access to the tools to create a basic template-driven website and do the work necessary to perform SEO and will push your information to others via emails, RSS feeds, or Twitter tweets. The advantage is that you can deploy the site within hours and the cost is very low. The downside of template-based sites is that they can look similar to one another. On the other hand, having an e-commerce website created for you can be a $5,000 to $10,000 effort, and is likely to take a couple of weeks as you and your designer talk through draft versions of the site. One way to strike a balance between these two extremes is to commission custom graphics to use at the top of your online store’s pages, and as a background. Another approach is to seek bids for your e-commerce store design on sites like or from local web designers.

For many part-time firms, an informational website is the essential starting point to get word out to the public, and to make your firm visible to those Internet search engines so many people use to find companies, goods, and services these days. Often, as the firm and its offerings mature, there is a benefit to moving beyond providing information via the web, and making it possible for customers to actually place their orders online. That takes you to the next step, e-commerce.

E-commerce and eBay WebsitesHow big is e-commerce and how fast is it growing? As noted earlier, there is a growing use of the Internet for e-commerce. The number of e-commerce sites, shown in Figure 5.4, passed 1 mil-lion in January 2009 and is estimated to be greater than 2.5 million today. Figure 5.2 showed how e-commerce sales were growing at a steady pace for B2C retail and wholesale sales, and growing at a much faster rate for B2B wholesale and manufacturing sales. E-commerce in 2013 was more than a $5.6 trillion sector of U.S. business.24 So the answer is that e-commerce is big and getting bigger.

For part-time entrepreneurs, the lure of an e-commerce site is undeniable. Consider listing your products on the top two sites. There is no official count of eBay sellers, but Savanna Dance wrote in a user group posting that active eBay sellers number between 6.7 and 9.3 million in the United States alone.25 Seven out of every eight sellers work on eBay only part time. The cost of

01996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Number of SSL Certificates on the Web by Year



















Growth of E-commerce Sites

Source: Numbers of Secure Sockets Layer (SSL) certificates issued since 2009 calculated by Richard Green from graph of percentage increase: 2015/05/13/counting-ssl-certificates.html (accessed March 12, 2016).

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listing a $25 item on eBay is $1, plus an additional 8.75 percent of $25 if the item sells. The cost to open an eBay account? Nothing.26 eBay’s biggest competitor, Amazon, offers a similar deal with slightly different terms. Between the two sites, nearly a half-billion computer users visit one site or another during the year.

With numbers like those it is no wonder that e-commerce on the Internet is an attractive ap-proach for entrepreneurs looking to create a business. This is especially true for part-time entre-preneurs. For part-time entrepreneurs the online approach makes a highly attractive opportunity because it offers the advantages of a large market, 24/7 availability of your products, and a start-up that is quickly done and potentially inexpensive. For many part-timers, the online approach provides a great way to learn the business and the market, establish your reputation and business track record, and lay a foundation for a full-time business. For entrepreneurs looking to prospect for the right type of business, the online sales approach makes it possible to try out a range of industries quickly and with minimal risk. For entrepreneurs with highly specialized products, the idea that low-cost listings on two sites could reach half of 1.1 billion Internet users worldwide27 opens up sales possibilities like never before.

There are two major approaches to online selling. One is using Amazon, eBay, or another online site to showcase your goods and handle the selling and payment process. The other is to do this through a website of your own. The two approaches can be complementary. You can use eBay to introduce your product to a large audience, to find an initial selling price, and to learn more about customers and competitors. Once you are comfortable with how you must market your product, you can set up your own website as the primary point of sale and continue to use eBay to market to new customers.

Everything we have said so far about informational websites applies to a website enabled for e-commerce. Most of the hosting companies mentioned in this chapter can also provide you with an e-commerce site. In fact if you already have an informational site, they can set it up so everything you have posted to the web moves directly into the new, more capable site. What e-commerce sites add is the ability to create and maintain an online catalog of prod-ucts, create new database entries for orders, and handle the payment for products or services. The more tools and services you need and the larger the catalogs you post, the more you will end up paying. It is worth doing some serious comparison shopping for hosting services. Conduct a Google search for “cheap e-commerce” and “free shopping cart” (a shopping cart is the electronic version of a catalog with an ordering system) to find a large number of pos-sibilities. Many offer do-it-yourself software to make the design of websites and shopping carts easy.

In addition to the keys to designing an effective informational website covered previously, there are also two important financial issues to consider for entrepreneurs who create their own e-commerce websites: payments and chargebacks.

• Payments: Most online transactions use a credit card or an online payment system like PayPal (which originated as a division of eBay). There are fees for the transaction itself, and there are often fees for currency conversions, or guaranteed payments. Unless you as the seller buy a payment guarantee at the time of the transaction, services will also make a chargeback (see the next bullet point). Many online e-commerce packages come with a service that handles these transactions for a fee. Where you can specify another vendor, you may be able to get one that charges less. But as important as the fees charged is the service’s handling of customer service. When problems crop up in payments, both buyers and sellers want to talk to a person immediately. Services with fast response rates and help-ful people on the phone are valuable.

• Chargebacks: This is a fee the service charges you for any of a variety of problems related to the sale—for example, a lost, stolen, or fraudulent card was used, the customer reports nothing was received, the product was not the one promised, or there were problems with the product. While chargebacks in stores are around 0.1 percent of sales, online charge-back rates can be as much as five times higher.28 Techniques to control this include using the Address Verification Service or verifying phone numbers or addresses yourself, getting proof of delivery from the carrier, and making sure your return policy is known by the customer before the sale is finalized.

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eBay is a site offering a variety of ways to sell goods and services. To give you an idea of how varied are eBay’s offerings, consider these ways eBay supports entrepreneurial efforts:

• For many interested in selling only a few items and moving to something else, eBay is like the largest consignment store or garage sale in the world. You can list a single item for sale without creating a website or a company to support your effort.

• You can create an online store within eBay complete with your own online catalog and ordering systems.

• eBay has 34 major categories of goods ranging from “collectibles,” which includes the Pez containers many erroneously believe were eBay’s first items, to “Business & Industrial,” where you can buy 75-ton construction cranes.

• You can sell services through ranging from web design to business plans, ac-counting to translation, training to CAD projects, in a reverse auction format. In a reverse auction29 the low bid gets the business. adapts the eBay model to services. Businesses post projects, review bids, use the message boards to keep up-to-date, and can even pay online, all for a small fee Upwork collects once the provider is paid. Service providers are able to post information about their expertise and experience as well. Cheri Rychlee Tracy was looking for a web designer. Local companies wanted between $1,500 and $7,500. She was able to find a freelance designer on Upwork from the Ukraine for $750.30

While this section concentrates on eBay, it is important to know that there are competitors for every type of service eBay offers. Their traffic numbers may not match eBay’s, but they may have a better audience for your purposes. For example, has a strong program-ming and online art focus, and is a site often used by people in the e-commerce industry. Com-peting sites include:

• For Upwork:,• For eBay’s B2C auction services:,,• For eBay’s B2B auction services:• For eBay’s online store services:, e-commerce services like eBay or Upwork can provide access to a wider range of ven-

dors or service providers than most people would normally have. And many of the online ser-vices like eBay, Upwork, and Amazon provide detailed feedback and ratings from prior customers, so as a buyer you can have a higher level of assurance that the online company you are dealing with is on the up and up—but problems can crop up. Two of the greatest ones for vendors—chargebacks and payment problems—were mentioned. A customer can also face trou-ble, as seen in the following Small Business Insight.

reverse auctionAn auction in which the low bid gets the business or wins.

● This entrepreneur is taking no risks with her product sales on eBay. Not only is she checking her product’s listing for prospective buyers, she is also checking how her eBay online store is showing up in social media like Yahoo!’s groups and a set of photos of products she has uploaded to Flickr.

John Flournoy/McGraw-Hill Education

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People who sell on eBay or competing auction site stores strongly suggest using the auction feature; after all, that is what most people think of when they go to the site. Sherry Chase of Fancy That! started an eBay store as a means of getting rid of excess merchandise from her store. She had tried her own website with virtually no luck at first. She found that eBay sales exceeded her expectations. She also found that by auctioning items and including her link in the auction description, she got people to her eBay store.31

eBay auctions themselves are legendary. On any day 12 million items are available with nearly 2 million new postings a day.32 There are 150 new items for sale listed every minute, and 500 bids placed during that same minute. There are 69 million eBay users who spend $59 million a day.33 The eBay method means you pay a fee for posting your product and a sales fee based on the final bid price when the item sells. You have the option of setting a bottom offer you will accept, a reserve price (if the bidding does not exceed the price, the sale will not go through), and the number of days the auction will run (out of several choices). Your posting can include pictures of the product and links to more data (like your website).

eBay allows you a bit of anonymity—all buyers and sellers have screen names. Email addresses and limited personal information are given out only in certain circumstances. (Obviously, if you are a successful bidder, the seller needs to know to whom and where to send the merchandise.) eBay sellers may take checks, money orders, or credit cards, or accept payments through PayPal, eBay’s own electronic payment system, reducing sellers’ risk. eBay also allows buyers and sellers to post feedback about their transactions which produces a score that’s displayed by the buyers’ and sellers’ screen names and allows others to get a feel for how reputable a certain buyer or seller is. This feedback is also available for the public to read. (See Skill Module 5.1 for more tips.)

reserve priceA minimum acceptable selling price in an auction. If the bidding does not exceed the price, the sale will not go through.


Henry Richardson was a professor at a small college and had an active consulting business. A lot of the materials he created for individual clients he rewrote in a more general form and sold as pamphlets, short reports, and self-published trade books. He had an informational website, but as the technology advanced he realized he could cut his production costs dramatically by selling his pamphlets, reports, and books as downloadable PDF files. To control this process he needed a different type of online store—one specialized for the electronic publishing industry. Such programs not only handle the order, but also control the down-loading of files so that only bona fide customers can obtain the download. Not finding any electronic pub-lishing sales packages he liked, he decided to have one custom designed. Henry went onto (now called and put in a request for bids for his project. From the 23 responses (ranging from $11,800 to $450), Henry narrowed the field by looking at the customer ratings, track records, and portfolios of the companies. His chosen company had an American sales office and a team of programmers in India. Henry thought this would help provide better coordination for the project. The final negotiated price was $1,800. Although the project was supposed to be completed in three weeks, Henry never heard from the U.S. or Indian offices, a definite bad sign. Henry got a call from the U.S. sales office in week 4 stating that the proj-ect was behind schedule but would be finished “soon.” Excuses piled on for two more months. At the end of month 3, Henry sent an ultimatum to the vendor—finish the project or return the money. This initiated a call from the Indian office. The company’s manager said because they had done “work” on the project, they would refund $1,200, but only if Henry would give a positive review for the firm on Elance! When Henry asked what would happen if he gave an honest rating, the manager said he did not know how his programmers would take such an insult. They might just destroy Henry’s existing informa-tional website out of anger. Not wanting to spend his days protecting his website, Henry agreed. He later had a local programmer do the site for $4,000.

my PeoPle might deStroy your WeBSite

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S K I L L M O D U L E 5 .1

Checklist for Maximizing Success on eBay34

There are whole books written on how to do well on eBay, but what are the basics that can make the big-gest difference? As you prepare for selling via eBay, test your ad and your approach to eBay selling against the checklist below.

DESCRIPTION 1. Detailed Description? Use detailed descriptions so that the buyer isn’t expecting something different

from what you are selling. 2. Typpppos? Watch out for misspellings and typos. Experienced eBay buyers use the search engine

to find specific things and it won’t find your misspelling. Besides, it doesn’t look very professional. 3. Factual Bad News Up Front? Be honest and factual. Don’t say “slight damage.” Instead state that

there is an 8-inch chip on the upper right-hand corner and a faint scratch along one side. The buyer can make an informed decision, and there are no surprises.

4. Got a Positive Feedback Rating? Since most buyers are somewhat reluctant about buying from a seller with no feedback, try buying for a while; your feedback rating will grow, and since there is no differentiation between buyer and seller feedback, this puts you in a better position as a seller.

PHOTOS 5. Photo Present? A picture is worth a thousand words. 6. Photo Pretty? Make sure the photo is not too dark or too light. Does it adequately display your prod-

uct? Check out backgrounds, too. They can detract from the subject and might even show things you’d rather not display on the Internet.

7. Photo Fast? Don’t use huge slow-to-download files. 8. Photo Real? Showing a photo of a box of commercial software is fine if that is what you are selling.

If it is only the CD, without the box and the items included in it (like manuals, jewel cases, registration cards, etc.), it is better to take a photo of what exactly you are selling and include it on the eBay page.

COMPETITIVE ISSUES 9. Price-Matched the Competition? Check what the competition is doing to see if you even want to try

eBay auctions. If your product (or something fairly similar) is selling on eBay for less than you need to meet your profit goals, find another way to get to your customers.

10. Shipping Not a Rip-Off? Be honest and up front about shipping. It is acceptable to charge for post-age and a reasonable amount for shipping materials. If you are using recycled boxes, don’t charge for them. Some sellers like to use a flat fee for all shipping charges (e.g., $5 per paperback book). Experi-enced eBay buyers will know that for regular U.S. media mail, that price is way out of line. If you’re the only one selling that item, consumers may pay; but if there are a dozen others, they will shop around or reflect their concerns in the top bid they place.

11. Terms Match the Competition? When you find similar products being offered by competitors, make sure you have the same terms on your product page, so people searching on those terms find your page when they find your competitors’.

12. Time Matches the Competition? If you are using auctions, try to time your auctions to end after your competitors’. Remember that most people will lose in an auction. If you are offering a similar product, which comes up on the same search with similar costs and closing right after an auction from a popu-lar seller, many buyers will bid on your offering.

SALES-RELATED SERVICES 13. Email Ready? If buyers have a question, they’ll email you. Respond as soon as possible, at least

within 24 hours. Don’t post auction items just prior to going on vacation. 14. Shipping Promptly? Package well. Notify your buyers when things have been shipped. If you need to

wait for a check to clear and you’ll be gone a few days during that time, let them know. Most buyers are prepared to be reasonable if they know what’s going on.


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There are restrictions on the types of products that may be sold—for example, anything that is considered fraudulent, illegal, or harmful, as well as anything that infringes on patent or trade-mark rules. eBay does enforce this policy. For more detailed information about doing business on eBay, check the website or look at one of the numerous books about eBay, such as eBay for Dummies.

Although the web traffic counts for eBay and Amazon are extremely high, a wise entrepreneur (even a part-time one) does not rely on customer searches on these sites alone to bring in busi-ness. The most successful web entrepreneurs keep using the multichannel marketing approach introduced earlier. Getting the name of your online store into newsletters (electronic or printed), newspapers, trade journals, blogs, or on mass media (local can be just as powerful as national) can help you promote your site to potential customers. Increasingly, entrepreneurs are using the social networking sites mentioned in Chapter 3, like Facebook, Instagram, and LinkedIn, to get the word out to friends of your firm as well as potential customers interested in what you or your firm has to say. A quick listing of the other places to promote your site is given in Figure 5.5.

15. Quick Customer Response? Customer service is very important. You want positive feedback. Dissat-isfied buyers may either leave negative feedback or leave no feedback at all on your transaction.

16. Gave Feedback Promptly? Give feedback to your buyers, too. First, it helps them when making further purchases. Second, if you expect feedback yourself, do it for them. If they see you’ve posted positive feedback, they are more likely to do so themselves.

SCORINGScore 1 for each Yes answer and 0 for each No answer, then add up each category. 4 in a category is “Excellent,” 3 is “Adequate,” and 2 means “Needs Improvement.” A score of 1 or zero in any category is “Not Ready for eBay,” and you should hold off selling on eBay until you have raised your score in this category.

Reciprocal Links

Home-BasedBusiness &




Commentingon Others’




NationalNewspapers &




Opinion Sites:ePinions, etc.


SEO Optimization


Video Sites:YouTube, etc.

Firm Pages onSocial




Print Directories &Online Directories

LocalNewspapers &


Push Services:E-mail

E-newslettersRSS Feeds

Twitter Tweets

BookmarkingSites: Digg,


Business Promotion Multichannels

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Figure 5.5 mentions a few other types of sites we have not discussed so far. These include free sites like the video site where you can post a video for free; bookmarking sites like or where you can identify websites and get these voted on or adopted by readers; and opinion sites where customers can post opinions about firms, products, and ser-vices. There is also a free way to get your name (and your business) known, and that is by making informed comments on blogs and discussion forums related to your business.

There are also several advertising channels that come with costs. Obviously, the traditional approaches to advertising, like business cards, stationery, printed newsletters, and brochures, cost money (although these days you can print just the quantity you need on a good color printer). There are also old media approaches that are still important. Local and national news-papers (like The Wall Street Journal) also have online versions (and online ads). The phone company’s local directories also often come with an online version. There are also many special-ized online directories, such as those of the Better Business Bureau (

Given the cost of getting into e-commerce, especially with sites like eBay, you can’t argue with the resulting success stories. Mark and Robin LeVine sell more than $1 million per year of bub-ble wrap and other packing materials. Sarah Davis sells over $4 million annually of designer handbags. Although “eBay millionaires” are a minority of eBay sellers, these two examples are by no means unusual.35 eBay is also successful for business-to-business selling, although it no longer maintains its business-specific pages.36 Farmer Joel Holstad purchased a tractor, a combine, and a cherry picker for about half of what he expected to pay.

Home-based business and Internet business are the two core methods of getting started for part-time entrepreneurs. They can cover a wide variety of retail, wholesale, service, and even simple manufacturing situations (like artisans’ work or custom electronics), but there are other approaches that offer quickly deployed, low-cost ways to start part-time businesses. Sometimes these approaches are next steps for home-based or Internet businesses, but in other cases, these approaches can be the first step for a part-time firm.

The Next Best Things to a Home-Based BusinessOften, business success depends on getting close to the customer—close enough so the customer can see you, the entrepreneur, your product, or you delivering your service. As you’ll learn in Chapter 11, you can go to your customer (as in the case of a repair service which works at the customer’s site) or you can go to a mutually accessible location, like a store. There are several approaches closely identified with part-time businesses. Historically, two methods have been mentioned most often—home retail (which consists of home parties, door-to-door selling, and network marketing) and stands or kiosks.

Home RetailAt a home party the entrepreneur arranges a get-together at someone’s home where participants can socialize and get acquainted with the entrepreneur and the products or services offered. Home party selling was pioneered (if not actually invented) by Frank Stanley Beveridge and Norman W. Squires who began selling Stanley Home Products by enticing homemakers to invite a small group of family, friends, and neighbors into their homes for a party.37 At the party, the salesperson would demonstrate products and take orders for future delivery. Today this is a widely used technique with dozens of franchised sales operations for products such as Mary Kay Cosmetics and Tupperware.

The advantages of home retail businesses are the speed and ease of setup, the low cost of getting started, and the ability to do the work away from your home and employer, thus minimizing poten-tial conflicts. The disadvantages come from always working “on the road,” lacking a base from which you can organize and work, having a highly variable income, and finding ways for customers to get in touch with you (although cell phones and email have made a major difference).

You can arrange sales parties without selling a franchised product. One of the ways to make arrangements with minimal setup is to have the party at someone else’s home. This person in return gets a portion of the proceeds in product discounts, products, or cash. You and the host work up a guest list, and the arrangements for refreshments and participation presents are agreed to in the early stages of the negotiation. Picking hosts with good contacts and a pleasant home is

home party A business model in which the entrepreneur arranges a customer to host a party, inviting friends, family, and neighbors. During the party, the entrepreneur demon-strates products and accepts orders for future delivery.

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the key factor in party success. Often the opportunity for repeat customers and customers host-ing later parties presents itself, and it’s a great way to keep sales growing.

In door-to-door selling, the retailer goes to the home to demonstrate and sell the product. Matching the product to the community is a key factor. For example, it is hard to find good pros-pects for buyers of seeds if you are working an apartment community. Think about the income and lifestyle of the community with respect to your product.

The fundamental success factor in door-to-door selling is closing the sale. Closing means get-ting the customers to agree to buy. Amazingly, asking the customers to buy is often all that is needed. If the answer is no, the natural comeback is to ask customers what they need to know or have in order to buy. If they tell you something they need, your job becomes trying to meet that need. Meanwhile you continue to ask if they are ready to buy. Only if you cannot meet a need of a particular customer do you give up and go to the next customer.38

Another variation on the home model is network marketing efforts, also called multilevel mar-keting or MLM. These are organized through a parent organization; agents sell in part using in-home parties and person-to-person sales. The added twist is that current salespeople are invited to recruit additional new salespeople. The recruiter gets a commission from the sales made by his or her re-cruits. Everything mentioned previously also applies in network marketing, with the added need to carefully check into the parent organization and the terms of the recruiting. The extra caution is necessary because illegal pyramid schemes are often made to look like legal MLMs. For example, where the fees paid by newly recruited network members are paid directly to more senior network members, there is a good chance you are seeing an illegal pyramid scheme. You can check with the Federal Trade Commission ( and the Better Business Bureau (

Stand RetailStand retailing—the roadside, flea market, farmers’ market, or craft fair business—is one of the most ancient forms of small business. It is mentioned in the Bible, and marketplaces full of stands have been found in virtually all archeological digs. Today, stands tend to be either semi-permanent ones that remain in one place and are built to be sturdy, like a farmer’s roadside stand, or movable ones that can be quickly assembled and disassembled for use in farmers’ mar-kets, flea markets, and craft fairs. To get started inexpensively, people often start selling from the back of their cars or using a folding table or blanket laid out with wares.

The advantage of stand businesses is that you can start with little investment. Stands can be a box or ground cloth. They also do not require a lot of investment in inventory. There are a variety of locations where a stand can be set up, such as flea markets. Stands can also be quickly estab-lished and easily ended as a business. Stands vary widely in the products they sell. The disadvan-tages of stands are the variable income they provide; the difficulty of making sure your stand and

door-to-door sellingDoor-to-door selling is the prac-tice of taking product directly to the homes or places of business of potential customers and attempting to sell the product immediately.

network marketingAn approach to selling in which the salesperson recruits custom-ers to become distributors of the product or service to others.

● This part-time business worker has his finger on the pulse of a niche market, capitalizing on the limitations experienced by people on the streets of New York who are hungry for a snack. His signs and position on a street corner create visibility and boost market desire for his products. His stand allows him to easily move elsewhere as he perceives needs. If you were positioning in a downtown for lunch and dinner traffic, how would you decide where to move your cart?

Jennifer Santolla/Alamy Stock Photo

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business meet legal requirements such as compliance with registering, licensing, and zoning (for help with this look at the section “Exchange: Dealing with Others” later in the chapter); the prob-lem of knowing how to price goods; and the building up of a customer base for your stand.

While stands can be among the least expensive ways to set up a shop, a high-end version exists too. It is the mall cart, if it is on wheels, or kiosk, when it is in a fixed location. Carts and kiosks cost between $2,000 and $10,000,40 although carts can be rented from many malls. Carts and kiosks are often among the most expensive locations in the mall in terms of rent per square foot. A cart in a high-end mall like the Mall of America in Bloomington, Minnesota, can go for $2,300 or 15 percent of sales a month in rent.41 Costs include rent (usually a percentage of sales with a base monthly rental), mall member fees, and cart design costs. On the other hand, carts can be rented for specific periods (holiday seasons, weekends). The advantage of carts and kiosks is that your products can be seen by more than 100,000 people a week as they walk through the mall. One idea to minimize rents is to consider placing your cart or kiosk away from the high-traffic locations, but near specific stores where your most likely customers would come from—for example, putting a trading card kiosk near a mall arcade or sporting goods store.42

The key success factor for a stand is having a location where there is enough foot or vehicle traffic to sustain the business. High traffic concentrations are why flea markets, farmers’ mar-kets, and craft fairs are popular locales for stands. However, even these locations will have traffic levels that vary. Try to locate on or near a major walkway, or near the food, entertainment, or major vendor areas to get the most traffic. Always make sure to keep your documentation (e.g., vendor’s permits, licenses, tax numbers, etc.) handy for checks by police and venue officials.

The other success factor is inventory. You might be selling products you make yourself. The next best thing is to start with what you know. If you have seen someone’s work and think it would sell, ask if you can be an agent or reseller. If you are looking for others’ products to sell, there are a host of sources (like wholesalers and or you can go online to search for products or services to resell at the Industrial Resource Network, or at Thomas Regis-ter’s online site, which has a print version available in many libraries. You can also do a search online for the manufacturers of particular products.43

Pop-Up BusinessesOne trend that we see increasing across the United States, Europe, New Zealand, and Australia is that of pop-ups. We see pop-up retail shops, pop-up restaurants, pop-up festivals, pop-up art galleries—the list seems endless. But what are these pop-ups that seem to be so much the trend today? According to Wikipedia (every college student’s first-choice research tool): “Pop-up retail, also known as pop-up store (or pop-up shop in the UK, Australia, and Ireland), or flash retailing, is [the practice] of opening short-term sales spaces.”44

● Pop-up store in London, England.


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What makes a pop-up a “pop-up” is that its venue is temporary—here today, but gone tomor-row. The space where a pop-up business is selling classic vinyl records today may well be the space where Halloween costumes are being sold tomorrow. Pop-up shops and restaurants are typically small, sometimes as small as a single shipping container.

One of the most interesting things about the pop-up fad is who is getting into it. It is not just individual entrepreneurs. City governments, colleges, arts alliances, charities, and many, many more organizations are either opening their own pop-up businesses or sponsoring venues in which entrepreneurs may open pop-up businesses. Cities as diverse as Leland, Mississippi, and San Antonio, Texas, sponsor pop-up business events. Leland, for example, holds an indoor pop-up event three times a year in conjunction with established festivals such as the “Frog Fest”45 which is held annually in October to honor hometown artist Jim Henson, who created the Muppets. San Antonio’s Center City Development and Operations Department (CCDO) of-fers no-cost short-term leases in various vacant downtown properties for pop-up businesses. The city also sponsors seasonal pop-ups along designated city streets and in neighborhoods popular with tourists.46 The American Culinary Institute sponsors pop-up restaurants at all three of its campuses in Hyde Park, New York; Greystone, California; and San Antonio, Texas. The restaurants vary in cuisine, showing off the skills that students have mastered in their courses of study.47 The Walker Art Center in Minneapolis, Minnesota, sponsored a pop-up art sale with items ranging from $2 to $12,000. The proceeds were split between the artists and the Art Center gift shop.48 Goodwill Industries opens dozens of pop-up stores each year in cities all across America.

In a very real sense, the pop-up phenomenon is not new at all. In fact, it is very much like the stand retail discussed in the previous section. However, it is very much a part-time business. For part-timers the big advantage to a pop-up business is its extreme flexibility:

• Pop-ups do not have a fixed place of business.• Pop-ups exist for only a short time—a few hours, a day, or a few weeks.• Pop-ups are designed to be easy to set up and take down.• Pop-ups can easily be set up in new locations.• Pop-ups must be special, distinct from other permanent businesses.

Mobile OfficesOne recent survey suggested that one in six working Americans works from their cars or trucks. The kinds of jobs that involve face-to-face selling and client services are the ones most likely to be done from a car or truck. There are advantages to this approach. There is no rent, and car expenses can be deducted from tax returns. It places the entrepreneur close to the customer, and typically close to the entrepreneur’s printed materials or tools.

The key to a mobile office is a cell phone and a laptop with Internet ac-cess and a printer (especially one that can be run from a USB port on the laptop). To keep everything powered, getting a power converter with a lighter plug will usually do the trick. What many mobile teleworkers initially forget is how important it is to have a comfortable place to write and mark up writ-ten reports—working behind the wheel gets old fast. Berny Coffee was an early entrepreneurial leader in teleworking. A yacht broker in Alexandria Bay, New York, Berny manages a network of 35 brokers from his car. The key for getting his work done is his cell phone, and a Wave Board wireless router, which connects him to Verizon’s EvDO wireless network from wher-ever he is located. He runs it through a power converter plugged into his cigarette lighter. With the router working, he can even ditch his cell phone and call around the world for free using Skype. With this approach, Berny was even able to stay in business from Florida during a hurricane when peo-ple had no electricity and few cell phones worked.49 These days, if you have a 3G or 4G cell phone or one of the 3G/4G wireless modems for your laptop, you should be able to mimic Berny’s feat.

venueA place where something takes place. For example, a theater is the venue for a play; a stadium is the venue for a football game.

● Today cell phones and laptops with wireless modems make it possible to run your business from your car. For a one-person, part-time business that wants to get close to customers, there is no better arrangement. What kind of features would you want in a car if you were going to use it as your primary office?

Comstock/Stockbyte/Getty Images

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In terms of the car or truck, make sure it can accommodate you, all your equipment and files, and your telework equipment (and can handle the drain on the car’s battery over the long term). It is also important that it provide adequate and comfortable accommodations for passengers. You may not drive them often, but you are likely to have them in the car for business discussions.

Virtual Offices, Executive Offices, and IncubatorsWhen stresses in the home are making the home office problematic, but your business is not ready for a full-time rental, one approach is to look at outsourcing your office. A virtual office is actually the next step to most business web hosting packages. In addition to handling your emails and newsletters, a virtual office typically gives you access to your files, as well as web-based fax services and, most typically, full business telephone services including phone trees, voice-mail services, and often additional phone-based services such as reminders, and call forwarding based on the time of day. Major players include,, and

Executive offices provide small amounts of short-term space for an office or work area. They can be furnished or unfurnished, and provide basic utilities. They often have preferred vendor arrangements for phone services (which may not always be the best deal—keep using your cell phone) and low-cost shared services such as copying and telephone answering by a live recep-tionist. Regus and HQ also offer such services, as do and A variant of these are called coworking spaces, which generally include a large open office space where you pay a daily, weekly, or monthly fee for access, and usually include all the Wi-Fi and coffee you can use, along with printers and copiers you can buy time on and bookable spaces for meetings. Google “coworking space directory” to start your search for one near you.

Another solution you might find interesting is to see if you can rent space in an incubator. Incubators are community-based organizations designed to help small businesses. For-profit in-cubators are very similar to executive office operations, although usually with somewhat lower prices. Nonprofit incubators are often sponsored by universities, economic development agen-cies, or localities themselves. They tend to offer heavily subsidized space, shared services like executive offices, and almost always offer on-site expert advice about running small businesses. The key online directory for incubators is run by the National Business Incubator Association at

Doing Business without a Business Organization: using Consignments and AgentsArtists, artisans, authors, inventors, small-scale manufacturers, and collectors of antiques or other collectibles all have one thing in common: They possess something they would benefit from selling. Often, these people start small part-time businesses to do that. With the advent of general selling platforms like and specialty platforms like, selling your work has never been easier. For inventors or makers, as they are known today, crowdsourcing plat-forms like for idea generation and refinement or or for funding make it easier than ever to get your product together, both figuratively and literally.

However, many others prefer to stick to their creating or discovering and let someone else handle the selling process. The kind of businesses that do this are called a variety of names such as consignment shops, auctioneers, or sales agents. Regardless of the name, the basic business model remains the same. The agent (we will use this term for the person running the consign-ment businesses) will take on the product of the creating or discovering or manufacturing part-time entrepreneur. Some agents charge a basic fee up front to cover initial expenses; some do not. All agents make an effort to sell the product they were given. When sold, the agent gets a portion of the sale price, with the remainder going to the part-time entrepreneur who employed the agent.

Let’s look at two different types of consignment situations—eBay consignment shops and intel-lectual property agents. An eBay consignment shop starts with you dropping off your item. The consignment shop photographs the item, prepares a description, and posts it on eBay. When the item is sold, the shop ships it to the buyer and sends you your share of the sale price. There are several national franchise chains offering drop-off consignment services such as

incubatorA facility that offers subsidized space and business advice to companies in their earliest stages of operation.

makerA modern term for an inventor, in particular, an inventor who uses modern techniques like 3-D software and 3-D printers or do-it-yourself electronics to create new items.

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or There are also hundreds of small, independent local consignment stores. An excellent listing of eBay drop-off stores can be found at Although there is wide variation in pricing, the eBay consignment stores generally charge a percentage (around 40 percent for the smallest items, with less for larger sales) for their work.

Intellectual property (IP) refers to original works like inventions, visual and performing art works, books, and computer programs. We will learn about the many ways to legally protect IP in Chapter 17, but for now just think about how you might get money for some IP you have cre-ated. There are a variety of agents who specialize in different types of IP. Experts (often lawyers by training) called IP agents usually focus on placing inventions, computer programs, and manu-factured products with companies willing to pay to add to their complement of new products. Sometimes companies will buy competing IP to prevent their competitors from getting it.

For works of art, there are a variety of specialized art agents. You have probably heard of book agents (also called literary or publishing agents), and there are similar types of agents for designs and paintings. Aaron McGruder created a comic strip called The Boondocks. Once he learned how hard it was to place a cartoon strip with newspapers and get a good deal doing so, he found the best artist agent he could to find the most motivated seller possible to help him structure a deal that got him the money, ownership, and editorial control he wanted.

Regardless of the type, you can find listings of agents through a Google search using the terms given previously. Finding the right agent for you requires some additional research. While an agent close to where you live means you would be able to meet face-to-face, local agents may lack the contacts in the major corporate, manufacturing, media, or artistic centers where your work could get its best offer. Some suggestions for how to find a good agent include:

• Check out the agent’s biography and track record, as well as searching for articles confirm-ing his or her accomplishments.

• Often there are a couple of local lawyers in the nearest big city who have experience deal-ing with agents from the major cities. It may be possible to get referrals from them.

• Don’t be afraid to write someone in your field whom you respect and ask for his or her recommendation. The individual knows a bit about the business and may be able to give you some direction.

• Often faculty in your college or university may have experience with, or connections to, agents. Look for faculty who have done any mass media work (best-selling books, national TV, movies or radio, nationally sold designs or works of art, and faculty with patents, etc.).

In all forms of consignment relationships there are a few things you should always consider. For any consignment, make sure there is a written contract outlining what the consignment agent will do to sell your product, what the costs and fees are, and how they get paid (some will come out of the selling price, whereas others may be paid up front). It is also crucial to have a clear description of the product and any variations, parts, pieces, and manuals included. For physical products and works of art, the description should mention the condition of the items and any blemishes—photos help.51

The advantage of consignment approaches is that they permit full-time sales with only a part-time involvement from you, low setup cost, a low risk level, and the flexibility that comes from the variety of consignment agents and agencies available to you. The disadvantages can include little effort being put forth to sell your product, high potential for competing offerings, long amount of time before payouts, and lower profitability because of agent’s fees.

Key Considerations for Success in Part-Time EntrepreneurshipWhen you decide to pursue part-time entrepreneurship, there are usually two major questions: What kind of product or service do you want to offer, and how do you want to organize your part-time business? Chapter 4 discussed the process for coming up with a good (and maybe even a creative) idea for your business. In this chapter we will focus more on how you would get that business started part time.

intellectual property (IP)Property coming from some sort of original thought; for example, patents, trade secrets, trade-marks, and copyrights.

LO 5-4 Describe the key factors to making a decision to go into part-time entrepreneurship.

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For the second question, about how to organize your business, there are usually three key considerations for part-time small business start-ups:

• The cost to start up your new part-time business.• The time to start up your business.• The permanence of the business you are creating.For part-time businesses, you want a low cost of start-up, since you probably will not have a

lot of money to invest, and may not get great returns to pay off expensive start-up efforts. Time to start up is also best when shortest, since you are looking for a basic idea of what

might and might not work. The more time and energy you spend preparing for a small-scale part-time business, the longer it takes to make a profit. The good news is that in most cases, the cost to start up and the time to market are closely related.

Permanence is related to the concept of legitimacy discussed in Chapter 3. For a small-scale, part-time firm, it may be hard to have a lot of the indicators of legitimacy. What customers want to know is that the firm is likely to be around for a while, to provide customer service and future sales. That is the fundamental idea of permanence. The three considerations are at the heart of most people’s decisions about their mode of entry to part-time entrepreneurship.

Success Factors for Part-Time BusinessesResearch indicates that most service and retail firms typically start out as a hobby.52 There are many different ways to start a part-time business. Consider, for example, the way Courtney Hen-nessey Hopson got Codi Jewelry going (see the Small Business Insight). The BRIE model intro-duced in Chapter 1 points out many of the key factors you need to think about. Intention is usually where part-time businesses start in the BRIE process, and we talked about key resources—such as inventory or competencies—earlier. Let’s go further to address the two other aspects of the model for part-time businesses: boundary and exchange.

Boundary: Separating and Balancing Business and HomeTime is central to balancing home and business. It is important to organize a business around a schedule that makes sense for you. Internet-based businesses let you work anytime that is conve-nient for you. For Courtney, having time during Christmas break was critical. Operating on weekends at roadside stands or at flea markets or farmers’ markets is the best way to structure time that is convenient for you and your customers.

Either way, time management, as discussed in Chapter 2, is the crucial skill for juggling your part-time business and the rest of your life. The key device for managing time is the to-do list. To be effective, the list needs to be with you at all times. You can get by with a small notepad, or can go for preprinted organizers, such as those from Day-Timer or Franklin Covey. Your smartphone almost certainly has a calendar that usually includes a way to post reminders or to-do lists. There are also free apps like Toodledo, Google Tasks, Remember The Milk, and others, often with smartphone and web versions so your list can always be a click away.

When using a to-do list, be sure to list the key information such as due dates and contact in-formation if it applies. Most entrepreneurs find that it also helps to prioritize the list. One of the simplest ways to do this is 1-2-3 ordering. Those activities that are absolutely essential to your business or life are coded 1. Those that are current but of lesser importance or that can be re-scheduled if necessary are assigned a 2. Activities that you want to do when you have some extra time or that have due dates far in the future get coded as 3. Typically, owners keep a to-do list of 6 to 20 items per week, and they reprioritize on a daily basis.53

For people with a part-time business, the to-do list includes items from business and personal life. For students, tests are probably a 1 priority. For parents, children’s extracurricular activities are also 1s. Often family and personal lives make demands that put business and the rest of life in conflict.

cost to start upThe amount of money it takes to start a new business.

time to start upHow long it takes to start a new business.

permananceThe impression of long-term continuity a business gives others.

LO 5-5 Use the BRIE model to describe what it takes to be successful in part-time entrepreneurship.

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Having some general rules to help sort out these conflicting demands helps. Fred Kiesner, an entrepreneurship professor at Loyola Marymount College, suggests six key ideas:55

1. Do not waste time complaining; do something about a problem. 2. Do not aim for perfection; “good enough” really is good enough. 3. Do not dwell on the past; just plan to do better next time. 4. Minimize your time spent in meetings, or schedule meetings to be short. 5. Schedule and protect quality time with your family. 6. Schedule and protect some time for yourself to have fun.

The majority of part-time businesses are based in the home. The business takes space, uses resources the family also uses, and generally places stress on the household. Keeping a clean boundary, like an area known as the “business corner,” helps make sure that family and business are protected from each other.

Exchange: Dealing with OthersThere are two key groups outside your business with whom you must deal—government and cus-tomers. Even part-time businesses have to deal with government, and three issues pop up repeat-edly: registration or licensing, taxes, and zoning which was discussed earlier in this chapter. For businesses run from a home or commercial venue like a fair or consignment shop, most states and


Courtney Hennessey Hopson of did not intend to go into the jewelry business. It just grew. During Christmas break of her junior year at Saint Louis University, Courtney decided to make stretchy crystal bracelets for her friends as holiday presents. When she left the bead store, she had another problem—she had spent $400 on beads and string, and she needed to make the money back before her father found out. Courtney became a walking ad for her bracelets and sold them throughout the holiday, including at a family wake. Eventually the business grew to have in-person and online retail sales as well as wholesaling to stores, including Neiman Marcus. Eventually Courtney won a Global Student Entrepreneur Award for innovative thinking.

Courtney henneSSey hoPSon and Codi JeWelry54

● Courtney Hennessey Hopson, the founder of Codi Jewelry, began her small business part time out of the necessity to recover her Christmas gift-making costs. Like many others highlighted in this chapter, her part-time business afforded her the chance to earn a reasonable profit while carrying on with her other life priorities.

Courtney Hennessey Hopson

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localities require some form of registration, but the requirements vary so it is important to check. The U.S. government has a web page with links to state registration information at On the site, click on the menu item “Register your business.” Note you might need to register your business name and possibly register your business with particular state agencies depending on your industry or occupation.56 This is often called licensing. For example, home-based hairstylists need state licensing, and in many states home-based day-care providers need to get special registration and, in some cases, licensing.

Even when you do not have to register a business, you need to keep track of your sales in or-der to pay your income taxes later. Although taxes are discussed in Chapter 13, it is useful to mention here that you want to keep track of your costs, too, because if you itemize your deduc-tions on Schedule C, you can deduct your costs from your income (and a lower income means lower taxes). In many states and localities you must also pay sales taxes, and these often need to be kept in a separate bank account and tracked as well. Often, flea markets and craft fairs in-clude temporary local tax numbers in the booth rentals, but it is important to check.

Pricing and CostingBecause exchange is the way businesses make profits, it is important to price your goods or ser-vices to make profits likely. Folks working part time can be prone to underestimate their costs. Using things found around the house or neighborhood or not adequately considering the cost of the time you contribute are typically what lead to underestimating the cost of a product or ser-vice. Taking some time to think through the real cost of your product or service is critical to your success. Central to figuring the real cost is recognizing that your own time has value. When you price your product or service to pay yourself what you could get working part time for someone else, then you have achieved a real milestone on the road to growing your business.

Pricing is also often seen as a challenge by part-time businesses. Even if the business is part time, that does not mean the prices have to be cut-rate. One good way to get an idea of realistic pricing is to price competitors’ offerings. Doing some window-shopping in person, via catalog, or on the Internet is the classic way. Once you know the kind of price your product or service can get and once you know your costs, then you are in a great position to know the kind of profit it’s possible to make in your business.

What Are the Challenges of Being an Entrepreneur Part Time?Four aspects of part-time entrepreneurship are very different from full-time business. Gaining legitimacy and trust among customers is discussed in Chapter 3. Three other key aspects remain: determining what you are able to delegate, the special ethical challenge that comes from juggling part-time entrepreneurship and other work, and the challenge you face when you try to move from part-time to full-time entrepreneurship.

Delegation and OutsourcingFor part-time entrepreneurs, time is the ultimate resource. While the most successful entrepre-neurs in high-growth ventures are those who learn to get and leverage other people’s money (OPM), for entrepreneurs in part-time businesses the key is leveraging other people’s time (OPT). There are two major ways to do this—delegation and outsourcing. Delegation happens when you assign work to those over whom you have power, usually people you employ, those volunteering to help you out, or family members. When you employ outsiders who are not your employees to handle all or part of a functional area of your business, it is known as outsourcing.

Delegation makes sense in two situations. The first is when others can do things better than you. For example, an entrepreneur who is a wizard at sales may be totally lost doing the books. The second is when you want your business to operate when you are not present, or operate in two places at once. If you have two people working in a store, you could be selling to two custom-ers at once. Done well, delegation frees the owner to pursue those things that make the biggest

registrationInformation provided to the gov-ernment concerning the existence of, name of, nature of, and contact information for your business.

licensingDocumented permission from the government to run your business.

LO 5-6 Describe the advantages and pitfalls of delegating and outsourcing.

delegationThe assignment of work to others over whom you have power.

outsourcingContracting with people or com-panies outside your business to do work for your business.

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difference in the business—key sales, strategic thinking, negotiating, or inventing. It is a powerful concept, and there are several tips that can help make any delegation effort more successful.57

• Start delegation with simple tasks to get you and your employees used to the process.• Match the task to the person with the best skills and attitude for it.• Solicit questions from your employees about the delegated work.• Attach a motivating outcome to the delegated work—a chance to learn new skills or dem-

onstrate leadership, increased visibility, or an opportunity to see more of the business or its customers.

• Allow time for the employees to learn the task and correct the inevitable early mistakes.• Give employees feedback about their performance soon after they start.• Hope for perfection in performance, but be satisfied with good enough.• Once delegated, do not take back responsibilities. When problems arise, remedy them,

rethink your approach, and retrain the employee.

Delegation is not for everyone and every situation. It makes the most sense when you have people who are good at their jobs and trustworthy, but with some additional steps, delegation can work in less than optimal situations. Even with these tips, being able to delegate depends on the owner’s ability to trust others and on the quality of the people to whom the owner can dele-gate. When delegation is essential but it is hard to trust employees, checking up on an unpredict-able schedule helps keep the employees on their toes and provides maximum assurance to the owner. When trust is high but employees lack skills, the owner should allow time to train them and monitor their work—frequently at first, but less often as they prove they know their jobs.

As noted earlier, when you employ outsiders who are not your employees to handle all or part of a functional area of your business, it is known as outsourcing. The most popular types of out-sourcing among small businesses are shown in Figure 5.6.

Customer service


Database management

Public relations

Finding new customers

Bookkeeping and accounting

Recruiting and hiring

Employee benefits administration

Payroll services

Financial advice and management

Accounts payable

Accounts receivables

Website design

Computer technical support

Website hosting

Legal issues

Search engine optimization

Advertising and marketing





















0% 10% 20% 30% 40% 50% 60% 70% 90%80%


Functions That Small Businesses Often Outsource

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In the nineteenth and twentieth centuries, the idea behind automation was to save time. If you can get a computer program or another company to do work instead of you, you save time and that is good. Figure 5.6 shows that the most technical aspects of a business—issues such as law, computers, or financial records—are the areas in which outsourcing is most likely to occur. This provides some insight into how to think about outsourcing. In areas in which expertise is hard to come by, changes frequently, or is an important support to the functioning of the firm, it makes sense to outsource. The other key idea for outsourcing is to never outsource what defines your distinctive competence, what you think makes your business unique. Consider the example of Gourmet Gatherings in the Small Business Insight.

Gourmet Gatherings’s “symphony of specialists” suggests the kind of careful involvement and oversight needed to make outsourcing work. Activities that are central to the strategy of the busi-ness, like cooking and running the cooking groups for Gourmet Gatherings, stay inside the firm. Activities that are not strategically critical are outsourced, especially when they can be done bet-ter or more cheaply by outside firms.

Ethics and Part-Time Small BusinessIt is impossible to gain legitimacy for your small business if your ethics are in question. There are two situations in which part-time entrepreneurs are particularly at risk: moonlighting and aggrandizing.

MoonlightingOften, the most successful small businesses build from the business expertise and personal con-tacts of the entrepreneur. However, managing this without offending your current employer, or getting into legal or contractual trouble, is not easy. Working on your own part time after your regular job is called moonlighting, and it poses particular risks.

The major concerns are conflict of interest, cannibalizing sales, and poisoning the well. Con-flict of interest crops up when people do work for their part-time business while they are at their full-time job, blurring the boundary between them. Conflicts of interest happen when what is best for your part-time business is different from what is best for your full-time employer or when people cannot be sure which of the two firms you represent. The key is to keep your full-time and part-time jobs clearly separate. For example, do not contact customers of your part-time business when you are at your full-time job.

LO 5-7 Identify the ethical challenges of part-time entrepreneurship.

moonlightingWorking on your own part time after your regular job.

conflict of interestA situation in which a person faces two or more competing standards or goals.


Bibby Gignilliat has bounced from job to job. She was a programmer, bookseller, travel agent, bike tour guide leader, public relations representative, and marketing manager before she started as a cook teaching for HomeChef and later on San Francisco television. Her prior skills equipped her for a special project, using cooking as part of a team-building exercise for a group of lawyers, and later for a group of 40 business-people. This led to the idea for Gourmet Gatherings, which provides culinary entertainment “designed to inspire conviviality, camaraderie and confidence in people who appreciate good food.”

Armed with a strong network of contacts, Bibby partnered with longtime friend Shannan Bishop (their fathers were partners in a brokerage business). Bibby’s varied experience had an interesting side effect—she knew all the kinds of work she did not want to do. So she and Shannan outsourced every function of the business except the recipes and menus and leading the gatherings. Their financial, marketing, legal, and web work were all outsourced. They describe their role as “conducting a symphony of specialists” and ar-gue that they could never have grown if they had to do everything themselves. Besides, it was the cooking that was fun, not the bookkeeping.

gourmet gatheringS58

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Cannibalizing means taking business away from your employer. This can come from your taking sales away from your employer or taking working hours away to do your own business. This is a real problem if your part-time business is similar to your full-time occupation; for ex-ample, if you are a painter for a building contractor in your day job and do similar sorts of paint-ing as your part-time moonlighting enterprise. In such cases, the usual course is to get your employer’s approval at the start. This, however, may be easiest to get when the kinds of work you are doing, or the kind of clients you have, are not like those at your day job. In fact, it is often possible to get your boss to refer customers to you when they fit your type of schedule, pricing, or type of work a little better than that of the bigger enterprise.

Poisoning the well refers to creating a negative impression among your employers’ custom-ers. If you use your business contacts through your day job as the basis for your part-time self-employment, you will inevitably find some customers who do not want to hear your sales pitch. If, because of this, they tell your employer they are less likely to buy from him or her, your part-time business has hurt the full-time one. The traditional work-around for this is to develop a sepa-rate customer list without names from your full-time job and then wait for your employers’ customers to ask you about this other business they hear you’ve started.

AggrandizingFor a part-time small business, achieving legitimacy and business respect can become a driving force. Occasionally, the entrepreneur sees an opportunity that is possible, but a stretch. If it looks like a stretch to the customers, the entrepreneur may start thinking about making the firm seem bigger, more substantial, or more capable than it really is. This misleading impression, called aggrandizing, can spell the death of a firm if discovered at an inconvenient time. As dis-cussed in the following Small Business Insight, this was the lesson Jeremy Barbera encountered in the early days of his business.

Jeremy “got away with it.” He lied quickly and easily, no one checked up on his firm, and he was able to meet his obligations. However, if his aggrandizing had been exposed before he could prove himself, he would have lost all credibility. Jeremy says that an entrepreneur has to take risks to get ahead. When he started his firm, checking up on a firm required time-consuming in-vestigations or credit reports, so Jeremy’s risk was perhaps not so great. Today, with credit re-ports and business directories available online in seconds, the potential for being found out is much higher, and the risk is greater.

The most typical form of aggrandizement is implying that a firm is full time when it is only part time. Recall from Chapter 3 that it is hard for a part-time firm to achieve the legitimacy of a full-time firm, and there can be a strong temptation to make the firm sound like it is a regular nine-to-five business. Remember that in the end, however, the biggest risk is that of losing the trust of your current and potential customers. In a small business, especially a part-time one, the owner is the business. If you cannot trust the owner, you cannot trust the firm.

Moving from Part-Time to Full-Time EntrepreneurshipSome people start their businesses part time with hopes of moving to full-time operations when the time is right. For them, landing a major contract or sale may be the financial and marketing indicator of the right time. Others start part time and want to stay that way, and they can face challenges when they achieve success. The strains of producing goods or services for a voracious market can make staying part time difficult.

In deciding whether to make the move to full time, the key question is usually financial. If you are already employed full time somewhere else, the move to full-time entrepreneurship means taking a close look at your financial situation. Can you afford to go on your own? This means having enough to cover personal and family expenses (typically for six months), as well as busi-ness expenses (see the following Small Business Insight). There may also be new costs, as you scramble to replace employer-provided health insurance.

The way to determine the financial situation of a business is through crafting a business plan such as the one you will learn about in Chapter 8. Having a business plan helps you work out all

cannibalizingTaking business away from your employer.

poisoning the wellCreating a negative impression among your employers’ customers.

aggrandizingAttempting to make your business or yourself seem more accom-plished or grander than reality.

LO 5-8 Describe the challenges of moving from part-time to full-time entrepreneurship.

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the major details of the business and how you plan to organize it as you are growing it. For ex-ample, Nancy Bombace of Mill Valley, California, took the time to do a business plan before taking her part-time honeymoon registry service, HoneyLuna, full time. By doing the plan, she learned she needed to keep her full-time job and run HoneyLuna on the side to make ends meet.60 In addition, bankers, lawyers, big corporate customers, consultants, and potential inves-tors will ask you for your business plan, so it makes sense to do one to show you have done your homework in starting a full-time business.

There are several ideas to keep in mind to help in this transition. First, it often makes sense to wait until there is a solid income likely for the business before moving over to full time. Second, make use of any transition services your former employer offers, such as COBRA health cover-age (look at to get information on this from the U.S. government). Third, recognize that initially at least you will spend nearly all your time run-ning and marketing the business, so it makes sense to change over when your family and per-sonal obligations are at their lowest and support from family and friends is at its highest.

Often people move into full-time entrepreneurship by building their part-time work to longer hours, until they have, in effect, two full-time jobs. Done this way, sleep, family, and personal time take a hit, but as a financially secure way to operate, the two jobs approach is great when done for short periods.61

Like the work of Nancy Bombace, Jeremy Barbera, or Courtney Hennessey Hopson, part-time entrepreneurship is around you all the time. Millions of people are working at part-time businesses of their own. Whether in retail or wholesale, selling services or products, they or their wares are in our stores and our markets, on our streets, and in our homes. Part-time entrepre-neurship is important because it gives people a chance to learn the ropes in business and to test out their ideas. It also is often the only way people can engage in entrepreneurship amid their other responsibilities. Part-time entrepreneurship is important as a test bed for starting full-time, larger firms and as a means of self-reliance and self-expression. However, as long as a few min-utes online or simply saying “I can do that for you” to a neighbor is all it takes to start a part-time business, it will remain an option that lots of potential entrepreneurs are certain not to overlook.


Trained as a physicist and employed by the National Aeronautics and Space Administration (NASA), Jeremy Barbera started Metro Services Group Inc. as a part-time business at his kitchen table with his “partner,” his mutt Luka. Of the $900 he invested in the business, $200 went to rent a Madison Avenue mailing ad-dress at a local incubator to help his business look more professional. Selling direct marketing services to financial and entertainment firms, Jeremy was a one-person operation, but he consistently stretched the truth. For example, he used “we” and “us” when talking about the firm. He would promise a prospective client to have his secretary type up the proposal and courier it over before 5 p.m., but it was Jeremy who did both.

This once came close to backfiring. Jeremy had delivered the proposal in the afternoon, dressed as a delivery person, and reappeared the next morning for the follow-up meeting with the CEO, this time attired in suit and tie. An alert security guard informed the CEO’s office that the delivery man claims to have a meet-ing with the CEO. Jeremy told the guard and CEO that the delivery man was his brother, down on his luck. Jeremy’s favorite line was, “It all depends on the light you portray yourselves in.” Jeremy made MSGI look bigger than it was until it landed its first contract—with American Express.

metro ServiCeS grouP inC.59

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5-1 Describe when and why part-time businesses are important.

● Part-time businesses are important because the majority of new business start as part-time businesses.

● They are important because almost half of operating businesses are part time enterprises.

5-2 Describe the conditions that make part-time entrepreneurship a good decision.

● It is a good decision when you need to gain basic experience.● It is a good decision when you lack the resources for a full-

time business.● It is a good decision when you face a narrow window of

opportunity.● It is a good decision when you are concerned about the

demands of going into full-time business.

5-3 Describe the kinds of part-time entrepreneurship that exist.

● Businesses may be operated part time in any industry from accounting to zookeeping.

● Many part-time businesses are conducted from the entrepreneur’s home.

● Most home retail businesses, such as home parties or network selling are operated on a part-time basis.

● Many other part-time businesses work from mobile offices, virtual offices, executive offices, and business incubators.

● Websites providing information or entertainment may be part-time businesses.

● E-commerce, including eBay and Amazon sellers, is often a part-time business.

● Pop-up businesses are usually part time.● Services such as sales agents may be done on a part-time basis.● Stand-based businesses, such as roadside stands, flea

markets, farmers’ markets, and fairs, are normally operated part time.

5-4 Describe the key factors to making a decision to go into part-time entrepreneurship. 

● You should consider the cost that will be required to start a part-time business.

● You should consider the amount of your time needed to start up your part-time business.

● You should consider the permanence of the business you are creating.

5-5 Use the BRIE model to describe what it takes to be successful in part-time entrepreneurship.

● Use the BRIE model to help identify key boundary and exchange issues.

● Boundary—you need to manage your time carefully and keep business and home separate.

● Exchange—you will need to register with the government, pay your taxes, and comply with zoning regulations. You will also need to keep careful track of your costs including the cost of your own time.

5-6 Describe the advantages and pitfalls of delegating and outsourcing.

● Delegation is getting others to do your work. It can help an entrepreneur get more done.

● Managing the delegated work and the people performing it is a key challenge for the entrepreneur.

● Outsourcing is paying experts to take on the functional tasks of your business.

● You may outsource to experts anything but the tasks that make your firm unique.

5-7 Identify the ethical challenges of part-time entrepreneurship.

● The two ethical challenges of part-time businesses are moonlighting and aggrandizing.

● Moonlighting can result in cannibalizing sales from your employer or poisoning the well by making your employer’s customers angry.

● Aggrandizing can happen when a part-time firm tries to present itself as a full-time one or a bigger one than it really is.

5-8 Describe the challenges of moving from part-time to full-time entrepreneurship.

● The key challenges of moving to full-time self-employment are mainly financial.

● Do a business plan to assess your financial situation in the new business.

● When you make the move, do it when support from your family and previous employer are at their strongest.

● Consider increasing part-time work hours until you are working two full-time jobs, and then quit to devote your time to your full-time business.









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part-time employment, 120

full-time employment, 120

pop-up business, 121

episodic business, 121

hybrid entrepreneurship, 121

part-time business, 121

volatility, 122

zoning laws, 125

covenant, 125

variance, 125

e-commerce, 129

informational website, 129

business-to-consumer (B2C), 129

business-to-business (B2B), 129

consumer, 129

blog, 131

RSS feed, 131

tweet, 131

multichannel marketing, 132

reciprocal link, 132

search engine optimization (SEO), 132

sponsored link, 132

reverse auction, 135

reserve price, 136

home party, 139

door-to-door selling, 140

network marketing, 140

venue, 142

incubator, 143

maker, 143

intellectual property (IP), 144

cost to start up, 145

time to start up, 145

permanence, 145

registration, 147

licensing, 147

delegation, 147

outsourcing, 147

moonlighting, 149

conflict of interest, 149

cannibalizing, 150

poisoning the well, 150

aggrandizing, 150


1. What are the three situations in which it might make more sense to go into business part time rather than full time?

2. If you were going to start a home-based consulting business in a dorm room, what do you think would be the greatest challenge to face? What about if you were starting the same business from home?

3. The two major types of business websites are informational and e-commerce. What are the differences between them?

4. Is it possible to sell products on eBay without having an online store? What would be the advantages and disadvantages of doing so?

5. How would you use multichannel marketing to promote your part-time businesses? If you had to use one of the non-free approaches, which would you choose and why?

6. What are the differences between home party and door-to-door retailing?

7. When managing your time using a to-do list, how do you go about prioritizing the list? Why?

8. What kinds of tasks do small businesses most often outsource? Why do you think they are popular tasks to give to others?

9. Of the two ethical problems prevalent to part-time small businesses (moonlighting and aggrandizing), which do you think is the biggest problem for entrepreneurs? Why?

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In the four years since missing St. Louis Cardinal Mark McGwire’s 70th home run in St. Louis’s Busch Stadium in 1998, Tim Hayden had been toying with the idea of creating some sort of electronic device to let people attending a sports event enjoy the same sort of video and informational graphics that people who watch the game at home enjoyed. He even figured out the technology needed. He would use a PDA with Wi-Fi capabilities, “hardened” through its construction and tough case to be able to withstand liquids and the kind of rough handling you would expect among spectators at a sporting event. He would call it SkyBOX. In his spare time, he pursued the SkyBOX idea with sports managers, advertisers, computer people, and with everyone he met.

A tech-savvy marketing manager by trade, Tim knew what the user interface would look like. Hav-ing no budget for his part-time business, he had to talk friends into putting together a flash graphic of what his service would look like. He had also thought about how he could make money with SkyBOX, and how he could get the major sports leagues to support the product.

Meanwhile, he continued his day job as the director of marketing and sales for a local advertis-ing firm. He knew to make SkyBOX work he would need to leave his employer, but he wasn’t sure how to decide. He was making good money and liked his work, but he was also likely to get moved from straight salary to more of a commission basis to help grow the business. He had a girlfriend. A lifelong St. Louisan, he had an active social life with his friends. He was close to his family, and they lived nearby.


1. Search for art fairs in your area using Google Maps. In the search box type “art fair” (leave off the quotes when you type) and the city and state you are checking on. When you look at the results, try the links for category searches to see if you get a narrower set.

2. Check the kind of licensing you need for a part-time busi-ness in your state. Go to business-licenses-permits. Note that there are several different types of permits, licenses, and certifications needed from nearly every level of government. So start by looking at “Federal licenses and permits.” See what require-ments (if any), your type of firm has. Then click on “State licenses and permits” and select your state. The SBA site has links to the state office in charge of business licensing.

3. Research pricing your product or service electronically. Go to (if you are selling a product) or (if you are selling a service) and enter the term for your product or service. From the resulting list, note the offerings that most

closely match yours and check the prices posted. If possible, look for recent sales or contracts for your offering to see what people paid for the goods or services.

4. Create your own first-pass customer base. List family mem-bers; friends; people you know from religious, fraternal, civic, and school organizations; and people who provide you goods and services. Look at the list again and select five people who you think are most likely to know the kind of person you would imagine would make your best customer.

5. Create a to-do list for the upcoming week using the tech-nique described in the chapter. Prioritize your tasks using the 1-2-3 method, and use the list for a week. Ask yourself if you felt having the list helped you remember better what you had to do and if it helped you better decide what to do and when to do it.

6. Do a Google search for “pop-up business guides.” See if you can find a guide for your city or state. If not, what kind of help do you find?

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The moment of truth came during a vacation Tim and his parents took in the summer of 2002 to visit family in Florida. Trading introductions around a pool, the man to Tim’s right turned out to be the entrepre-neur who founded the multimillion-dollar Val-Pak mailer business, Terry Loebel. Hearing about SkyBOX from Tim, Terry was relentless: “What’s your business model?” “What’s in it for the league and teams?” “Are you the right person to carry this off?” Under the hot sun, beers in hand, Tim and Terry went back and forth. In the end, Terry gave Tim a look that said, “You done good kid.” A little while later, Terry left.

For the rest of the afternoon, Tim kept thinking, “I did it. I really did it!” He held his own and showed off his business well enough to impress a very successful entrepreneur. He knew his business, and he knew his stuff. Maybe he was ready to go for it full time.

Over dinner, he mentioned his experience to his parents—a corporate entrepreneur and a self-employed HR consultant. Suddenly a raft of questions hit him he wasn’t prepared for, questions like “What will you live on?” and “What about your girlfriend?” With a lot more difficulty than that afternoon, Tim started answering questions. As he got more into it, he felt maybe he was on top of the personal dimension of the prospect of going full time.


1. People talk about entrepreneurs depending on luck. Tim saw Terry Loebel only that one time. Their conversation was one of the factors leading Tim to decide to go full time, starting his business as “Vivid Sky” with the initial product, “SkyBOX.” Was it luck on Tim’s part? Was there anything Tim was doing to improve his luck?

2. Tim had concentrated on mastering the business and technology angles of the SkyBOX, but was slightly taken aback when asked about how his personal life would change if he went into entrepreneurship full time. If you were contemplating a full-time entrepreneurial career, what are some of the personal considerations you think might be important?

3. Why would Tim’s employer’s plan to change business directions make becoming a full-time entrepreneur more attractive?

4. Tim felt he needed to go full time to take the SkyBOX “to the next level.” Can you think of ways he could have continued building up the SkyBOX while sticking with a part-time ap-proach? What would have been the downfalls?

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Small Business Entry: Paths to Entrepreneurship



● Paul Hedrick, born and reared in Texas, used his Harvard economics degree and skills learned at McKinsey & Co. and L Catterton Partners to create a new model business for providing high-quality cowboy boots at moderate prices. Paul Hedrick’s Tecovas offers a selection of cowboy boot styles for men and women. Hero Images/Getty Images

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After graduating from Harvard, Paul Hedrick took the conventional route for economics majors and ac-cepted a job on Wall Street. After a while, he moved back to Texas where he was a management con-sultant. This led him to work for a private equity firm which took him back to New York. He was still dissatisfied, however, and soon was considering ways that he could go into business for himself.

The defining moment was the result of treating himself to a pair of high-quality cowboy boots. He was shocked at the price. They were the most expensive single item of clothing that he owned. He real-ized that there was a competitive opportunity to offer high-quality boots at a much lower price. With this realization Paul quit the job in New York and moved to Austin, Texas, and began planning for his new venture.

After several months of investigating the possibilities for direct-to-consumer selling of boots through vending at fairs, expos, trunk shows, and, of course, online he decided to take the plunge. His extensive research had disclosed that the leather and bootmaking capital is Léon, Mexico. He made an arrangement with an artisanal bootmaker and Tecovas, Inc. was in business.

For the next four years, Paul ran Tecovas as a one-person shop. Most of his sales were made on-line, but he also worked filling his car with boxes of boots and selling direct to customers at various events and weekend markets. At first he provided all capital for his start-up from his personal savings. But, as his business grew, more capital than he could provide became necessary to allow the business to succeed. In the fall of 2017, Paul received an investment of $2.6 million from an angel investor in or-der to expand his operations and to hire the necessary employees.

Today, Paul has expanded his product line to include men’s jeans, leather luggage, and accessory items. All sales are direct-to-customer and made online.

DISCUSSION QUESTIONS1. How did Paul Hedrick discover his entrepreneurial opportunity?

2. Would Tecovas have become successful more quickly if Paul had used angel and venture capital earlier?

Focus on Small Business: Paul Hedrick, How I Got into This Business








After you complete this chapter, you will be able to:

LO 6-1 Describe the strategies for going into an entrepreneurial business on a full-time basis.

LO 6-2 Describe five ways that people get into small business ownership.

LO 6-3 Compare the rewards with the pitfalls of starting a new business.

LO 6-4 Compare the advantages and disadvantages of purchasing a business franchise

LO 6-5 Compare the advantages and disadvantages of purchasing an existing business.

LO 6-6 Explain four methods for purchasing an existing business.

LO 6-7 Explain the issues of inheriting a family-owned business.

LO 6-8 Describe how hired managers become owners of small businesses.

LO 6-9 Identify the choices for exiting a business.

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3. Why does it make sense for a seller of high-quality boots to use online selling, exclusively?

4. What advice would you give to Paul Hedrick?

Planning a Path into BusinessLet’s start with the assumption that you have decided to go into business for yourself.

OK, how will you accomplish this? What business do you want to enter? If you are a licensed electrician, becoming an independent subcontractor makes sense. If you are an accomplished cook and love preparing for and serving people, perhaps you might want to be in the restaurant business. If you are an experienced coder, it may be that creating a new app is your opportunity. Whichever set of talent, skills, and expertise you have, the path forward seems pretty clear: (1) choose your industry, (2) create a product or service, (3) test its feasibility, (4) determine the market, and (5) forecast sales and costs and from these specify the resources that you will need to turn your dream into reality.

As we described in Chapter 4, this form of planning is called causal or predictive reasoning. Causal reasoning has been the strategy for starting innumerable businesses and it is the method taught in almost every entrepreneurship class around the world. Causal reasoning is used to create a business plan. It is the type of reasoning that is used by business managers daily for making many business decisions, including such decisions as whether to buy or to make a product, enter or leave a particular market, and hire full-time or temporary employees. One great advantage of this type of reasoning is that it can be used in either case of going into business—that is, predictive reasoning is a useful technique regardless of whether you want to do business part time or full time.

But we know that business school entrepreneurship is not the only way to get into a successful business. As we also discussed in Chapter 4, many successful entrepreneurs have shown that they use a “backward” reasoning that was named effectual reasoning by Saras Sarasvathy of the University of Virginia.1 Effectual reasoning begins with a consideration of what resources are avail-able and what restraints there are on those resources. See the following Small Business Insight.

If you think back to the PROFIT model in Chapter 3, you will realize that all entrepreneurs have at least four sets of resources immediately available to them: (1) financial—access to capital, (2) organizational—their own skills and abilities, (3) technological—their own knowledge, and (4) relational—their network of friends and business associates. An entrepreneur is using effec-tual reasoning when he or she begins to imagine what can be accomplished with the resources at hand. Ideas are evaluated for viability, often in a very small way that presents little risk of finan-cial loss. Ideas that work lead to better ideas, plans, and goals. Ideas that fail are improved or thrown away. As the entrepreneur learns from experience and from interaction with customers, vendors, and mentors, it all comes together as a compelling story that serves to enlist others, create buzz, and bring the business to life.

Saras Sarasvathy has defined three principles that are critical in the process of effectual reasoning:

• Affordable loss• Strategic partnerships• Leveraging of contingenciesAffordable loss is the practice of bringing your product or your service to market with the

minimum expenditure of capital, effort, and time. As Allen Lim and Ian MacGregor did, entre-preneurs who practice effectual reasoning will attempt to sell a product or service to some cus-tomer before it is even complete. They reason that if someone will buy it now, it must be at least potentially viable. Also, they will learn from both the selling process and the use that the cus-tomer has for the product. If the idea is a bomb, then the entrepreneur can walk away with very little loss and go on to the next idea without losing more than can be afforded.

causal (predictive) reasoningThe process of setting a goal and then determining the strategy and resources required to attain the goal.

effectual reasoningA logical process in which one analyzes the resources available and restraints on the use of resources to create an attainable goal.

affordable lossThe minimum possible expenditure of capital and other resources in order to bring an entrepreneurial idea to market.

LO 6-1 Describe the strategies for going into an entrepreneurial business on a full-time basis.

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While Allen Lim, who holds a PhD in exercise physiology, was working with professional bikers as the team physiologist for Team RadioShack, he noticed that many of the riders complained about the sports drinks being used making them sick. When he found that diluting the drinks did not alleviate the problem, he be-gan adding Alka-Seltzer Gold tabs (basically sodium citrate) to the diluted drinks. This did improve the situ-ation, and Allen decided to do some further experimenting.

● Allen Lim, cofounder and owner, and Ian MacGregor, cofounder and CEO of Skratch Labs.

Mary Mecklenburg

He teamed with Ian MacGregor, a retired American road racer with two Under 23 bicycling National Road Race championship wins. Together, they began to experiment with creating their own sports drink mix, aiming to create a recipe that first was an effective hydrator, second tasted good, and third did not make users ill.

Soon they had a formula that did all three, and they began making and distributing the mix. Initially, they used food-grade plastic buckets and a borrowed paint agitator to make the mix. This manual process was not sufficient to meet growing demand for the product, but neither could they find a commercial producer who would make the product for them in the relatively small quantity that they could sell.

This quandary was answered by a bit of good luck. Lim happened to meet Andy Rodriguez, president of All American Seasonings who just happened to be a bicycling enthusiast. Although Skratch Labs needed quantities that were not large enough to be economical for All American Seasonings to make, Rodriguez agreed to a trial contract, with Lim throwing in a deal sweetener in the form of a yellow jersey from the 2006 Tour de France autographed by Floyd Landis.

With the guarantee of sufficient product, Lim and McGregor continued their guerrilla marketing, going as far as handing out samples to bicyclers heading north out of Boulder, Colorado, on training rides.

Today Skratch Labs has a full line of hydration products, energy bars and chews, recovery mix, and of course, tee shirts, a cookbook, and gear for serious athletes.2

the Scratch laBS Story: effectual reaSoning at Work

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Strategic partnerships can be either formal or informal relationships with other busi-nesses and individuals who can provide support to your efforts at getting into business for yourself. Creating such partnerships early in the entrepreneurial process is often the key to ultimate success. These partnerships may be created intentionally or through serendipity. Lim and MacGregor provide an example of a strategic partnership that was formed at the point that luck and common sense came together. They were lucky to have met the president of American Seasonings who provided both advice and the f irst commercial-level production.

Leveraging contingencies is another way of saying “recognizing and using opportunities.” While still in high school, Jasmine Adams just happened upon the nugget of her successful busi-ness. As she told the story, because she was a competitive swimmer, she usually had swimsuits lying around in her room. One morning she messed up applying her makeup. In a hurry, she grabbed the closest thing to wipe off the makeup and to clean her hands. That just happened to be an old swimsuit. It proved surprisingly effective, so she took some old swimsuits, cut them into pieces, and sewed the pieces into a double-sided square makeup cleaning cloth. Later she entered a business plan competition and her plan won a $10,000 prize. Today she has a business making the wipes while she attends college in Irving, Texas.3

Jasmine saw an opportunity, and she used materials (old swimsuits) and borrowed machinery (her mother’s sewing machine) to start her business.

There are three other important ideas that fit into both the causal and the effectual approaches to entrepreneurship. These are bootstrapping, bricolage, and lean business practices. Boot-strapping got its name from an old description of a person who began poor and through persis-tence and self-reliance achieved unlikely success. Bricolage, which comes from a French word that means “to putter around,” is the practice of making something from whatever you have at hand. In many ways, bricolage resembles the strategy of effectuation in that it means carefully considering the resources available, and then making something from them. Lean business prac-tices refer to systematically eliminating waste of time, materials, and money throughout a busi-ness. The term lean first appeared in a 1990 book based on the Massachusetts Institute of Technology’s 1980s study on the future of the automobile.4

Bootstrapping—finding a low-cost or no-cost way to do something—is especially important for firms early in their lives because one of the major threats to the survival of new firms is under-capitalization.5 Businesses often run out of money before they become self-supporting. This can happen from a shortage of cash in the business or even from a shortage of cash in the owner’s personal life, because for small businesses starting out the business and its owner are often draw-ing from the same resources.

strategic partnershipsFormal or informal relationships with customers, vendors, or men-tors to ensure the success of an entrepreneurial venture.

leveraging contingenciesThe practice of and ability to seize upon novel opportunities that become apparent during the conduct of business.

bootstrappingUsing low-cost or free techniques to minimize your cost of doing business.

bricolageA word derived from the French verb bricoler (“to tinker”). In entrepreneurial usage bricolage refers to the process of analyzing the resources available and creat-ing a product or service from them.

lean business practicesAn application created by Eric Ries that addresses the specifics of new business creation, particu-larly Internet-based businesses, where rapid experimentation and constant monitoring of viewers’ choices are possible.

● Jasmine Adams’s business plan for her start-up, Smudgies, wins her $10,000.

©Margaret Fox

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Lean business practices include a set of tried-and-true methods that can lessen capital require-ments and reduce cash outflows from the business. This reduces the financial risk of start-up and early operations when cash is often scarce. Lean and bootstrapping are similar in that both methods stress finding ways to achieve desired business goals and objectives when start-up capi-tal is limited. Both lean operations and bootstrapping are based on and share three underlying ideas:

1. Waste not, want not.6 That this thought appears in a 1546 book published 18 years before Shakespeare was born tells you just how old this “newest” fashion is. Avoiding waste is one obvious way to achieve this, but so is borrowing something rather than renting it, and rent-ing rather than buying. Making do with an older but free laptop would be another example, as would saving every penny you can.

2. Create, standardize, repeat. About the same time as Shakespeare was writing his famous plays, shipbuilders in Venice were creating ships made of standard parts. Using standard parts made building subsequent ships much faster and easier. You do this when you make a form letter to solicit customers, when you create a cell phone app that thousands of people can download, or when you buy in bulk to save money. Standardization of business pro-cesses leads to significant cost savings, increased competitiveness, and greater customer satisfaction.

3. Keep in touch. Central to lean business practices is being close to your customer. It helps you know if your product or service is doing its job. It alerts you to problems earlier so you can correct them, and it is just a good business practice in general. Customers and their needs change, and to keep up, you need to keep in touch. As you learn what is needed, ad-just your product or service to optimally fit needs. Most cell phone apps get updated every few weeks. This is because as the app makers find out about bugs or glitches, they can fix them and get the fixed version out to users.

But bootstrapping and lean methods are not identical in either how people think about them or in how people actually put them to use. So it is a good idea to examine each method in some detail. We will discuss bootstrapping first. The key ideas of bootstrapping are simple:7

• Do without as long as you can.• Cut your personal and business expenses to the bone (e.g., take no salary, work from


• If you need something, see if you can get it for free (like help from SCORE or former pro-fessors). If you cannot get it free, then borrow it, barter your time for it, rent it, or lease it before you buy it.

• If you need to buy outside services, consider offering equity instead of money, but be stingy with this.

• Before you buy anything, see if you can find a lower-cost alternative (e.g., a printing calcu-lator and a lockbox instead of a cash register).

• When you do buy an asset, buy it used or at a deep discount, and always ask if you can stretch out your payments to minimize cash flow.

• If you need money, borrow it from yourself first, then from family, then friends, and after that, borrow from banks, or take credit card advances. Borrow from credit companies only if they are the sole place you can get money.

• Capture the capital tied up in your house by making first or second mortgages to get money for the business. Of course, you should do this only if you are comfortable risking your house.

• Minimize debt by using a cash card like American Express, which requires repayment in 30 days, instead of a credit card.

• Limit credit card purchases and keep your credit balance as clear as possible. Pay off the balance every month, if at all possible.

• And always, always keep track of your cash!The key to making bootstrapping work is maximizing the value of low costs by obtaining free

expertise. One way to do this is to set up an advisory board. Zoë Scharf and Joe Fischer,

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cofounders of Greetabl (see Chapter 7 opening vignette), recognized the value of finding advis-ers and were surprised at how easy it could be to find experts interested in helping a fledgling business. They were able to obtain lots of help from advisers while keeping their business small.

There are many people from whom you can get free expertise for your business, such as bank-ers, insurance agents, trade and professional association officers, former or retired entrepre-neurs, and public business development organizations such as your local SCORE or Small Business Development Center.

One area of bootstrapping that is growing quickly is the availability of high-quality free software useful for small businesses. For example,, which has now grown into,8 got started using free open source programs to build applications such as a project management program, which they offered for free over the Internet. Today, a small start-up can get even more of the tools it needs for free.Table 5.3 in the previous chapter lists several examples of such free programs. Note that in many cases you can use web-based pro-grams (using an Internet connection) or have the free programs reside on your personal computer.9

For more free software explore the Free Software Directory project ( and Note that free programs and websites often have limited support. However, many offer help files and discussion groups, and some offer email support if you can wait a day or more. If you choose a free program, consider picking one that offers pay-as-you-go sup-port as an option, or better yet, bootstrap help by picking software or websites already used by friends.

What are now called lean methods were developed in Japan in the aftermath of World War II. Because consumer demand was very low in the war-ravaged country, manufacturers could not count on obtaining economy of scale through mass production. Nor could the cost of having high levels of inventory be tolerated. In response to these challenges, an engineer at the Toyota Motor Corporation, Taiichi Ohno, developed what came to be called the “Toyota Production System,” or TPS. When the principles of TPS were brought to the United States, they were re-named “lean.”

The critical insight of lean business practices is the recognition that customers are not willing to pay for everything a company does. If one supplier is wasteful in its production and distribu-tion and attempts to be profitable by pricing its product and service high enough to cover these wasteful costs, other suppliers who are more frugal are given a critical competitive advantage in that they can be profitable at prices lower than those of their wasteful competition.

Those things that people are willing to pay for are called “value added.” Things that custom-ers will not pay for are subsequently referred to as “non-value added.” It is just the nature of things that non-value-added practices eat up resources without providing any return for the own-ers of a business. Thus they are waste.

Lean principles started with a statement of seven areas of manufacturing in which non-value-added activities can take place. There are seven sources of the waste that lean management seeks to prevent (see Figure 6.1).

Although lean business practices have been applied to every phase of business operations, the set that you will find most interesting was developed and published by Eric Ries in his 2011 book The Lean Startup. The primary focus is to quickly produce what Ries calls a “minimum viable product.” Of course, this approach applies to services as well as physical product. The minimum viable product is an early version that allows you to very quickly determine if there is a sustaining level of demand for your product. You collect feedback from your early customers, gaining “vali-dated learning” about the business in its earliest days.

Ries provides the example of Zappos, the world’s largest online shoe retailer. He tells how the founder, Nick Swinmurn, began with a very small experiment to find out if people were willing to buy shoes online. Swinmurn took pictures of shoes in local shoe stores. He then posted these photos online. When a customer ordered a pair of shoes, he went to the local shoe store, pur-chased the shoes at full retail price, and shipped them to the buyer. In this way, Swinmurn vali-dated the viability of his vision for a business at very little cost and risk to himself.10

Because most beginning entrepreneurial businesses have limited resources, including cash, time, and experience, it is important that the resources that they do have be used very carefully.

minimum viable productA concept central to lean business practices where you make a mini-mum product, but one that can be sold. By selling to customers and collecting feedback, an entrepre-neur can develop a product at minimum cost.

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Defectstime, material, and otherresources used to inspect forand to repair defective product

Overprocessingperforming work unnecessarilybecause of deficient processes,tools, or product design

Overproductionmaking product in quantitiesthat exceeds demand

Waitingpeople or machines idlebecause next step in processis not ready to begin

Motionpeople or equipment movingwhen not necessary to performthe process

Inventoryexcess materials, partswork in process, finished goods

Transportmoving parts or productnot required for the process


Lean Business Practices: Seven Sources of Waste

You can help ensure that you will have enough resources for success by carefully planning how you are going into business, then following the proven techniques of effectual planning, boot-strapping, bricolage, and lean business processes.


You can learn more about the topics above at these sites:

Reasons for bootstrapping:

Introduction to lean, six sigma, and lean six sigma:

The Five Paths to Business OwnershipDespite the many unique stories that people tell about how they entered into business, when we examine enough of their stories it becomes evident that there are commonalities among them. In general, we find that every story of business entry can be placed into one of five general paths:

1. The entrepreneur started a completely new business. 2. Purchased franchise rights to an existing business. 3. Bought an already operating business. 4. Worked in a small business and eventually gained ownership. 5. Inherited a business from a family member.

But, of course, this is not the whole story. Starting a business, franchising a business, and buy-ing a business may be done as either a part-time or full-time enterprise. The decision of whether

6-2 Describe five ways that people get into small business ownership.


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to jump in full time, or to dip your toes in the water by deliberately keeping your business small to start will require making many different decisions—how to plan for the business; how to fi-nance it; what its physical location should be; how you will market it, and many more.

So, let’s examine the basics of each of these five paths, then take a look at the pros and cons of starting on a part-time basis, or jumping in full time from the get-go.

Starting a New BusinessStarting a new business is at once the riskiest path into business and the path that promises the greatest rewards for success. The success rate of start-up businesses is a matter of some contro-versy. As we note in Chapter 1, numerous rigorous studies have found that fully 69 percent of businesses are still going after 2 years, 51 percent are still going after 5 years, 34 percent after 10 years, and 25 percent are still operating after 15 years.

Also, studies show that those businesses that get help last even longer. Eighty-seven percent of start-ups that begin in business incubators are still in operation 5 years later,11 and the sur-vival rates for students from entrepreneurship programs and entrepreneurs seeking help from Small Business Development Centers are about twice that of businesses in general.12 Even for those who get help in starting their business, one must admire the courage and optimism of a person who chooses to start a new business (see Figure 6.2). Despite the rather high failure rate,

start-upA new business that is started from scratch.

ACE Hardware: Jill Braaten/McGraw-Hill Education





6-3 Compare the rewards with the pitfalls of starting a new business.




34%10 years

15 years

5 years

2 years


s si



g St





20% 40% 60% 80%Percentage of Businesses Surviving


Survival Rate of Start-Up Businesses

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creating a start-up is not, as some maintain, a triumph of hope over reality. Many businesses that end do so not because they failed, but because the owner took advantage of a better opportu-nity.13 The rewards, both financial and personal, of starting a successful new business can be most impressive.

Advantages of Start-UpsThere are many reasons that people choose to start a new business rather than purchasing an existing business, franchising, or being an employee:

• When you start a new business, you can “do it your way.” There are no existing rules, pro-cesses, or culture that will be difficult to change.

• You will begin with a “clean slate.” There are no existing employee problems, debts, law-suits, contracts, or other legal commitments that must be satisfied.

• You have the opportunity to use the most up-to-date technologies. There are no “legacy” locations, buildings, equipment, or software that can hamper productivity.

• You can provide new, unique products or services that are not available from existing busi-nesses or franchises. Existing businesses and franchises exist because of their success in providing proven products and services.

• You can deliberately keep the business small to limit the size of possible financial losses.• You may take time to perfect your product, services, and processes.

Disadvantages of Start-UpsOffsetting the advantages of starting a new business are several disadvantages (see the Small Business Insight):

• Your start-up business will have no initial name recognition. The lack of an accepted brand can put off potential customers.

• A start-up will require significant time to become established and provide positive cash flows.

• A start-up can be very difficult to finance. A new business will not have the existing assets, sales, and cash inflows that can be used to obtain financing for the business.

• A start-up usually cannot easily gain revolving credit from suppliers and financial institutions.

• A start-up may not have experienced managers and workers.• Your start-up business will be faced with training employees and obtaining management


Starting a New Business in an Existing FieldThe vast majority of start-up businesses are “me-too” enterprises. The business idea is simply to cre-ate another occurrence of a common business: a hair salon, restaurant, bar or lounge, rock band, sign company, plumbing service, yard care, and so on. Starting a copycat business provides some protection from business failure. It is not necessary to define the business to the market because everyone knows what a hair salon, restaurant, or lounge provides.

On the other hand, this type of start-up can be very difficult to differentiate from other similar businesses. Often, the only competitive advantage may be the location of the start-up. This is why owners of common businesses go to so much effort to try to make a difference between their business and other, essentially identical, firms. An example is how Morton’s of Chicago and Ruth’s Chris Steak House operate. Careful sampling of each firm’s steaks reveals no significant difference in price, quality, tenderness, size, or taste. The restaurants have similar menus and wine lists. Each, however, has distinctive interior decorating and presentation of its meals. Morton’s brings a selection of huge uncooked steaks to each table for patrons to make their choices. The cooked steaks are served on oversized china plates. Ruth’s Chris provides equally large steaks, selected from a printed menu, served on plates that are heated to a high tempera-ture and coated in butter to create the trademark “sizzle.”

assetSomething the business owns that is expected to have economic value in the future.

revolving creditA credit agreement that allows the borrower to pay all or part of the balance at any time; as the loan balance is paid off, it becomes available to be borrowed again.

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The specific concept that leads to a start-up business usually comes from the experience of the person starting the business. Two-thirds of all start-ups are based on ideas from prior work experience, hobbies, and family businesses.18 These businesses are generally more likely to succeed than are businesses based on ideas from other sources. Research into the indicators of successful start-ups shows that one of the best predictors of success is the level of experience of the founders. Random events, suggestions from friends and associates, and specific educa-tion courses are the sources of only a relatively few start-up ideas.

Increasing the Odds of Start-Up SuccessThe probability of creating a successful start-up is increased greatly when the founder has certain attributes and when the founder takes certain actions. Doing the following things has been shown to be the most effective route to success (see Exhibit 6.1).

• Start the business in a business incubator or accelerator: Business incubators and accel-erators are organizations that provides financial, technical, and managerial help to start-up businesses. Most incubators are associated with economic development agencies, don’t take equity in your business and are integrated into the community. Most accelerators take an equity stake in your business in return for a small amount of your stock, and are pri-vately owned. Both connect entrepreneurs to angel investors, public grants for seed money, and technology support.

Business incubators and accelerators are created to strengthen the local economy by helping create jobs through the establishment of successful small businesses. But incuba-tors do much more than just create new jobs. They aid in the commercialization of new technologies, the revitalization of distressed neighborhoods, and the creation of wealth. The best incubators provide inexpensive office space with full-time on-site managers who

foundersPeople who create or start new businesses.

While still in college, Josh Fraser and his roommate, Rob Johnson, were contracted to develop a social networking app for a single business conference. The resulting product used information from the attend-ees’ registration, thus achieving 100 percent inclusion for the conference.14 Information included profile pictures, biographical information, and tags to allow users to sort on common interests, sessions to attend, and so on.

The partners put together a presentation of proposed features and were accepted by Techstars which provided mentoring and seed capital in the amount of $10,000. One of the mentors, Noah Kagan, agreed to use the product in an upcoming conference that he was producing. This led to a successful angel funding round in which approximately $500,000 was raised.15

EventVue was on its way.But sales did not materialize. The product, as designed, worked only among registered attendees of any

specific conference. Although the app was popular with conference attendees, it did not provide confer-ence organizers any financial advantage. Rob Johnson wrote:

Instead of investing in the production features to [enable] EventVue directly driving people to events (hindsight: mistake), we immediately went out and tried to sell the social network tool to conference organizers.16

The firm was rapidly running out of capital. Josh and Rob made a last-minute Hail Mary pass by attempting to address the issue of proving that the app had value for conference organizers who were the actual paying customers. Development proved to be much more difficult than the partners expected. Again they attempted to sell the app “as is,” only to see sales remain elusive. As Rob wrote, “It really is too little, too late.”17

a failed Start-uP—eventvue


acceleratorAn organization that supports start-ups, typically of a particular type (e.g., Internet, biotech, fash-ion, sports, women-owned firms, etc.) with a financial investment, free or inexpensive office space, mentoring, a variety of free or low-cost support services, and other resources. The goal of an accelerator is to accelerate a start-up from its early stages to being ready to pitch for invest-ment. Most accelerators take an equity stake in the companies they help.

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1. Start the business in a business incubator or accelerator. 2. Take part in a mentoring program. 3. Have a detailed start-up budget. 4. Produce a product or service for which there is a proven demand. 5. Secure outside investment. 6. Start with more than one founder. 7. Have experience managing small firms. 8. Have industry experience. 9. Have previous experience in creating a start-up business. 10. Choose a business that produces high margins. 11. Start the business with established customers. 12. Build trust in your “story.”


Top 12 Indicators of Start-Up Success

can assist the entrepreneur in many ways. Incubator participants share common office services, such as telephone answering, and production and copying of documents. Perhaps most important, incubators provide legitimacy by furnishing the business with a location and with established business processes.

• Take part in a mentoring program: Successful business owners and corporate executives do well by doing good. They can, by helping others, in a way repay the many people who helped them achieve success. Executive volunteers contribute their time and energy to as-sisting start-up and struggling small businesses as a public service. Because of their experi-ence, mentors can help you avoid mistakes and make good business decisions.

• Have a detailed start-up budget: The start-up phase is usually the most difficult time you will have in business. You are required to make myriad decisions concerning location, product, target market, promotion, sales, and all the facets of starting and operating a busi-ness. And you must juggle all these demands while simultaneously seeing that you have enough cash. A detailed start-up budget provides a road map for necessary spending dur-ing the startup phase, when cash inflows are likely to be small or nonexistent. Companies that carefully plan their start-up activities and avoid any unnecessary spending are much more likely to succeed.

• Produce a product or service for which there is a proven demand: It is an unfortunate fact that most new products and services fail to gain acceptance. NewProductWorks of Ann Arbor, Michigan, maintains a “failed product museum” that contains samples of over 73,000 items, all of which were commercial failures. During the dot-com bubble of 1998–2001, many businesses started with novel and completely untested products and services. Examples are, which was started to facilitate Internet transactions; and, both of which sold groceries online for home delivery; and, which offered online purchasing of U.S. postage, to be printed on the user’s printer. All four of these businesses failed to gain success with their products. None of these businesses survived the dot-com bust of 2001, although the domain and patents of were purchased by the currently operating company

Large corporations, such as Procter & Gamble or Sony, spend millions of dollars annu-ally testing the market acceptance of new products. Despite their huge resources and years of experience, they regularly introduce products that fail. (Are you old enough to remem-ber “New Coke”?) Your start-up business will not have either the experience or the re-sources to absorb the loss from product failure. By producing a product or service for which there is a proven demand, the risk of product failure can be reduced or eliminated.

• Secure outside investment: Securing outside investment accomplishes two things: First, the process of obtaining investment funds means that your business will be critically examined by outsiders who have no vested interest in your idea, product, or service. Second, the fact

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that you were able to convince outsiders to invest in your business indicates a level of belief in the business and you that provides legitimacy.

• Start with more than one founder: Starting with more than one founder provides the busi-ness with more experience, skills, and resources than can be furnished by a single individ-ual. Having more founders in the business also provides an opportunity for synergy, in which the business results are greater than the sum of the input. Multiple founders can also provide a forum for examining ideas, evaluating information, and making good business decisions.

• Have experience managing small firms: Managing a small business requires attention very much like that displayed by a person spinning plates on sticks. As a performer must move quickly from plate to plate, many demands of small business management require that you have the ability to quickly move from task to task, without allowing any task to ultimately go uncompleted. The process can be overwhelming for inexperienced managers. Those entrepreneurs who have experience in small business management are more likely to be able to meet the many simultaneous demands of guiding a successful start-up than would a person new to small business.

• Have industry experience: Each industry has its own peculiarities. Only through experi-ence can you learn the methods, sources, and markets for any specific one. Even simple tasks, such as buying necessary material, can be nearly impossible without industry knowledge. For example, suppose that you plan to start a quality steak house, similar to Ruth’s Chris or Morton’s of Chicago. Where do you buy prime beef of the required cut and quality? How do you cook the meat? Or, consider making high-tech, lightweight bi-cycles. Where can you buy titanium tubing? What does it cost? What do you need to cut, shape, and weld it? Are bicycles sold through wholesalers? Are they sold directly to bicycle shops? The less you know about something, the easier it appears to be. A true expert makes a task seem effortless. Watching Tiger Woods play golf might lead you to believe that it is an incredibly easy game. Just stand up, hit the ball, and watch it fly to the green. Sure it’s easy: So why do fewer than 2 percent of golfers ever make a course par? The same is true of business. Businesspeople, such as Michael Dell, Scott McNealy, and Warren Buffett, make the process of succeeding in business seem effortless. But if you have been in the business, you know better. Being experienced won’t make your start-up easy, but at least you have firsthand knowledge of how your industry works that will make your task easier.

• Have previous experience in creating a start-up business: “Nothing succeeds like success.” In the 150 years since Dumas made this famous statement, it has come to be an unques-tioned part of our language. It is just succinct enough, just truthful enough, to seem like a universal truth. For entrepreneurs, it is fortunate that the statement is also not completely true. Although one may learn from successes, most learners acquire expertise through a process of repetition, which only occasionally results in successes. One study of entrepre-neurs who had successfully created a start-up business found that on average an entrepre-neur suffered three start-up failures before achieving success. Thus it is more nearly correct to state that no entrepreneur succeeds without having prior experience in failing.

• Choose a business that produces high margins: High margins, the amount by which sales prices exceed product costs, provide a buffer for lots of mistakes. The single greatest hurdle to a successful start-up is obtaining and maintaining sufficient cash to support both opera-tions and growth. When margins are low, loss of any one sale or customer has an immedi-ate effect. However, the problem of replacing the lost margin is much easier if you have to make only one or two sales or get one or two new customers to make up for the lost business.

• Start the business with established customers: When you start with established customers, you know that you will immediately have cash inflows. There are basically three ways that you can go about obtaining committed customers prior to start-up: (1) You can start your new business as a spin-off from your current employer’s business, (2) you can start a busi-ness to specifically go into competition with your employer, or (3) you can start a business to subcontract services to your employer or to other established businesses.

synergyA combination in which the whole is greater than the sum of its component parts.

spin-offA business that is created by separating part of an operating business into a separate entity.

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Creating a spin-off is a regular business practice that is done by businesses of all sizes and at all stages of development. Some spin-offs are created to get rid of “non-core” activi-ties. By disposing of the non-core activity, the parent firm reduces capital requirements and provides a tighter focus for management on the remaining businesses. Other spin-offs are created when the parent lacks either the interest or the resources to pursue the oppor-tunity. By being spun off, the start-up can gain access to resources other than those of the parent.

Going into competition with your current employer is also a common practice. Of course, this almost always results in resentments and often ends in lawsuits over issues of trade secrets, rights to intellectual property, and abridgment of contractual provisions. You will have to make difficult ethical decisions. From a legal point of view, the contract between employer and employee is satisfied when all wages and other benefits have been paid in return for you accomplishing the tasks for which you were hired. Absent a specific contract providing otherwise, neither party, employer nor employee, is obligated beyond this ex-change. However, not so easily answered are the questions: (1) Is it ethical to use your employment to build relationships with customers that subsequently can be used to start a new business? and (2) Is it ethical for you to use knowledge and skill received through training and education furnished by your employer to go into business competing with your employer?

Subcontracting services to an existing business is somewhere between doing a spin-off and starting a competing business. Services that are often contracted include sales, janito-rial services, accounting, research, and product development. It is a common, accepted practice for the contractual relationship to be created prior to starting a business.

• Build trust in your “story”: Building trust is essential to the success of all start-ups. You must be able to convince suppliers, employees, and, most importantly, customers that the business is now successful and will be in the future. Not only is there an understandable reluctance for people to be associated with a potential “loser,” but customers, vendors, and employees all take risks by doing business with an unknown and unproven start-up.

Suppliers are often reluctant to deal with start-ups, even if you make your purchases in cash. Most new businesses are small compared to established businesses in the same industry. There is a good reason why you, as the owner of a new business, would prefer to make numerous orders of small quantities of the goods and services you need. Doing so reduces cash flow requirements and reduces the risk of your being stuck with old or obsolete inventory. For the vendor, however, accepting your frequent small orders greatly increases the cost of providing goods and services to you. Most vendors, especially wholesalers, work on very small margins. The cost of accepting and filling numerous or-ders for a new customer may well make such business unprofitable. It is therefore essen-tial that the vendor believes in your eventual success and that you will become a valuable customer in the future.

Employees take on significant risks when they go to work for a start-up business. Not only may the start-up fail, but frequently the cash flow problems of start-ups cause pay-ments for wages to be late or missed entirely. This is one reason why so many start-ups offer stock options and stock bonuses to employees. The start-up doesn’t have enough cash to pay high wages right now, but if it’s successful, employees will share the rewards in the future.

Customers can similarly be at risk when purchasing from a start-up business. In the event that the start-up fails, there is no recourse for warranty problems, for maintenance, or for upgrades to the product. This risk is especially acute when the product or service of the start-up affects the core business of its customers. For example, the San Antonio Bed & Breakfast Association contracted with a start-up business to develop and maintain a web-based availability and reservation service for the association’s members. The start-up failed during the dot-com bust of 2001. When problems with the system subsequently developed, there was no one to fix them. The system was complex and the source code incomprehensible. As a result, the association lost a core service that provided value to its members.

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The issue of building trust in your story is a catch-22. If customers, vendors, and em-ployees do not have trust in the entrepreneur and in the business, quite simply, there is no business. However, there must be a business, or you don’t need customers, vendors, and employees. There are several ways for a start-up business to build trust and legitimacy, and these are detailed in Chapter 3. Specific examples for the kinds of businesses discussed in this chapter include obtaining a performance bond that will pay vendors and customers if your business fails. Restaurants, lodging establishments, barbers, hair salons, and other businesses that deal with issues of cleanliness as a business requirement can obtain li-censes and join industry groups that perform inspections. Displaying licenses and certifi-cates of inspection provides assurance that you are at least meeting minimum standards. Manufacturing businesses and construction businesses may hire engineers to certify design and construction details. Warranty service can be contracted to an independent company that specializes in providing such services. Rigorously maintaining business procedures that ensure on-time delivery of products and services and on-time payment of bills, wages, and loan payments will, in time, result in the start-up being trusted.


Learn more about the topics above at this site:

U.S. Small Business Administration offers several free online courses about starting and growing a business:

6-4 Compare the advantages and disadvan-tages of purchasing a busi-ness franchise

LOFranchising a BusinessWhat Is Franchising?Franchising is a legal agreement that allows one business to be operated using the name and business procedures of another. The most ubiquitous franchise worldwide is McDonald’s, which has over 30,000 restaurants in more than 100 countries. Approximately 85 percent of McDonald’s restaurants are owned by independent businesspeople who operate them in a fran-chise relationship. The remainder are company stores, that is, stores that are owned and operated by the McDonald’s Corporation.19 Most franchisors are large businesses, most franchisees small: McDonald’s Corporation is a large business; McDonald’s franchisees are small businesses.

Franchises are agreements between two entities, (1) the franchisor who sets conditions and standards and who grants operating permissions, and (2) the franchisee, who pays a fee for the rights, and who agrees to abide by the conditions and standards.

Four elements are essential for an agreement to constitute a franchise:

1. The agreement provides the franchisee with a legal right to engage in the business of offer-ing, selling, or distributing goods or services.

2. The agreement provides that the franchisee may engage in business using a marketing plan or system provided by the franchisor.

3. The agreement grants the franchisee use of a brand name, trademark, service mark, logo, or other commercial symbol that designates the franchisee as an affiliate of the franchisor.

4. The agreement requires the franchisee to pay a fee for the right to enter into the business.

The value of a franchise is determined by (1) the rights granted and (2) the cash flow poten-tial to the franchisee. Each of these factors can be highly variable from one franchise to another. There are four basic forms of franchising:

1. Trade name franchising is an agreement that provides only the rights to use the franchi-sor’s trade name and/or trademarks. Two examples of this are True Value Hardware and Associated Grocers, Inc.

franchiseA prepackaged business bought, rented, or leased from a company called a franchisor.

trade name franchisingAn agreement that provides to the franchisee only the rights to use the franchisor’s trade name and/or trademarks.

product distribution franchisingAn agreement that provides spe-cific brand-name products that are resold by the franchisee in a specified territory.

conversion franchisingAn agreement that provides an organization through which inde-pendent businesses may combine recourses.

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2. Product distribution franchising provides the franchisee with specific brand named products, which are resold by the franchisee in a specified territory. Two examples of this type of franchising are Snap-On Tools and auto dealerships.

3. Conversion franchising provides an organization through which inde-pendent businesses may combine resources. An example is Century 21 Real Estate. Individual real estate businesses combine to create a nationwide brand name and enhanced advertising effectiveness.

4. Business format franchising is exemplified by the McDonald’s Corpo-ration. A McDonald’s franchise includes the right to use McDonald’s many trade names, specifications of the product to be sold, operating methods, marketing plan, and national advertising. Franchisees pay to the franchisor both an up-front fee to obtain the franchise rights and a percentage of gross sales.

In addition, some franchisors, such as Subway (sandwich shops), sell master franchises that require opening multiple stores within a specified area. Subway describes these franchisees as being “development agents.” Master franchisees are required to open a minimum number of stores within a speci-fied time period, which they may do by selling subfranchises within the devel-opment area.

Franchising has become the predominant method by which entrepre-neurs open new businesses. Depending on who is doing the counting, some-where between 1 in 10 and 1 in 8 businesses currently operating in the United States are franchised operations. Today, in addition to fast food, nearly every product or service from accounting to zoology is available from franchised businesses (see the Small Business Insight).

The most important reason that franchising has become such a successful way of doing busi-ness is that a well-run franchise offers a win–win situation for both the franchiser and the fran-chisee. Franchisers have the opportunity to experience high growth and rapid market penetration without having the requirement to raise capital in huge amounts and to obtain skilled, experi-enced managers in large numbers. Franchisees are able to partner with an established business that has proven success.

Franchising provides an entrepreneur with the opportunity to own a small business quickly while avoiding the high risks of a start-up. As we have discussed, starting a new business from zero is very expensive in terms of demands on the entrepreneur. Most start-ups have limited capital resources and very little room to make business mistakes while learning what is needed to make the business succeed. Franchisers have survived their own start-up phase of business and have determined the “recipe” for success. For this reason, franchises (on aver-age) have lower failure rates and shorter times to achieve positive cash f lows and business profits.

Advantages of FranchisingLet’s take a look at the specific characteristics of franchises that offer such advantages to would-be entrepreneurs.

Having a Fully Developed System of Doing BusinessPerhaps the single greatest advantage of a franchise is that it comes with a complete business system. Many franchises are actually “turnkey.” That is, the franchiser oversees (or even man-ages) the selection of location, the construction of facilities, the acquisition and installation of necessary equipment, and the initial inventory with which to open business. Many franchises come complete with computer software for budgeting inventory control, ordering, point-of-sale computerized cash register, and complete accounting application. So, what does the franchisee do? First, the franchisee must, in one manner or another, pay for all these services. Second, the

● Buying one of the top franchises, such as Ace Hardware or Jimmy John’s Sandwiches, may be the right avenue for starting your own business if you want to lower some of the risks involved. Many franchised firms have been in business for a long time. Ace began business in 1924 and Jimmy John’s in 1983. Franchising gives you the opportunity to cash in on an already developed product that has a proven market. However, drawbacks include having less creative control and greater reliance on your parent company’s financial status. Does franchising appeal to you? Why or why not?

Jill Braaten/McGraw-Hill Education

business format franchisingAn agreement that provides a complete business format, includ-ing trade name, operational pro-cedures, marketing, and products or services to sell.

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franchisee will be required to complete training to become intimate with the details of the fran-chise business system. Third, the franchisee will be required to take an active part in opening and operating the franchise business.

Franchise OpportunitiesThere are more franchises available than you can count. Unlike finding a small business to buy, finding a franchise is easy. Every issue of Entrepreneur magazine contains the advertisements of dozens of franchisors eager to sell their franchises to you., the magazine’s website, lists the top 500 franchises. The franchises are listed in rank by the number of new

James J. Liautaud (Jimmy John) started a sandwich shop in Elgin, Illinois, when he was only 19 years old. He had recently graduated from high school, and in his own words, “I graduated second to last in my high school class, so my options for college were slim to none.” His father, an army veteran of the Korean War, wanted Jimmy to enlist. But Jimmy had other plans. He wanted to open a business. Finally, his father made him a deal: Dad would put up $25,000 to start a business. If Jimmy did not make a profit in his first year, then it would be the Army for him.

● Jimmy’s first restaurant

Courtesy Jimmy John’s Franchise, LLC

Jimmy found a garage that had been remodeled for a pizza joint. The building was in Charleston, Illinois, in an area full of bars. Jimmy reasoned that the site was perfect. Charleston is a college town, home of Eastern Illinois University. College students drink in bars. When they drink they get hungry and there was Jimmy—selling gourmet subs.

Jimmy made that first-year profit and soon bought out his dad’s share of the business. A few years later he had 160 sandwich shops, most of them franchised. In 2019, Jimmy John’s was ranked 11th on the Entre-preneur Franchise 500 list and there are more than 2,800 Jimmy John’s Sandwich Shops, with the number continuing to rise.20

EntrEprEnEur’S franchiSe 500: numBer 11 in 2019


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locations opened in the last year. The list of franchises is also broken down into more categories, including:

• Fastest-Growing Franchises• Top New Franchises• Best of the Best• Top 10 Lists• Top Home-Based Franchises• Top Low-Cost Franchises• Top Global FranchisesIt is interesting that 8 of the top 10 franchises overall are in the service industry. The other

two, which happen to be numbers one and two on the Entrepreneur Franchise 500 list, are the fast-food restaurants McDonald’s and Dunkin’.21

If you don’t find one you like in Entrepreneur, the Internet contains thousands of resources for identifying franchise opportunities. A Google search of the web using the terms “franchise opportunity” returned 132,000,000 pages.22 Several of the highest listed pages were the sites of services that offer information concerning franchises of all types. Some offer free services; some charge a fee for information.

Among the 132,000,000 sites listed by Google are two U.S. government agencies, the Federal Trade Commission (FTC) and the Small Business Administration (SBA), a British government site, Business Link (, and an Australian site ( Similar government sources are available around the world.

Franchising’s industry association, the International Franchise Association (IFA) (www . maintains a website that contains a database of over 800 franchises. The compa-nies listed range from old familiars such as 7–Eleven stores to the really obscure such as Jetblack and Pop-A-Lock.

Once you’ve identified a potential franchise, you should perform due diligence, just as if you were buying an operating business. What you are most interested in with franchises is the stabil-ity, integrity, and financial performance of the franchisor. You really should interview current franchisees, and you should talk to competing franchisors and their franchisees. If you buy a franchise, you will invest thousands of hours and thousands of dollars. Be sure that it is really an opportunity for you and not just for the franchisor.

Legal ConsiderationsBefore you sign on the dotted line, you should personally study two key documents you always receive from a franchisor—the uniform franchise offering circular (UFOC) and the franchise agreement. The UFOC is a standard document franchises use to explain their operations, re-quirements, and costs to potential franchisees. You can get a guide to help interpret the UFOC at the Federal Trade Commission site. The franchise agreement is the specific contract signed, often incorporating the information included in the UFOC. Both documents are complex. To make sure you have all your bases covered, it is important to get the opinion of an experienced franchise lawyer. You want to know several things, including (1) if and how you can transfer the franchise license to someone else, (2) how you may terminate the contract, (3) how the franchi-sor may terminate the contract, and (4) what disclosures you are required to make.

If the contract restricts or prohibits you from transferring the franchise to another or if it re-quires that you achieve unrealistic results to be able to renew, an unscrupulous franchisor has an opportunity to take over your successful business at a bargain price. Your blood, sweat, tears, and life savings will have gone for naught.

The contract must specify the conditions under which it may be terminated. There have been lawsuits and allegations of fraud against some franchisors because of contract provisions that prohibit the franchisee from terminating the contract, but give the franchisor permission to cancel without specifying cause or giving advance notice. If you can’t terminate the contract in the case that the franchisor goes bankrupt, most likely you will also be forced out of busi-ness. See the Small Business Insight for an example of what can happen when a franchisor goes bankrupt.

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Franchising has a long history of unscrupulous and fraudulent operations. Because of the many abuses, the U.S. government and the governments of all 50 states have passed regulatory legislation for franchisors. The minimum disclosure standards that a franchisor must meet are specified by Rule 436 of the Federal Trade Commission. Despite this law, however, abuses and frauds are still being perpetrated. In fact, the third item listed on the SBA’s Hot List site is a document that details how to avoid being victimized by scam artists. In college terms, do your homework—know what the opportunity is and who the franchisors are. As is true of purchasing an operating business, caveat emptor.

Burt Benepal had just received a most unwelcome call. A business colleague reported that American Hospi-tality Concepts, Inc. had just declared bankruptcy. This news was delivered Friday the 13th, 2004, just be-fore Benepal was to have opened his first-ever Ground Round Grill and Bar restaurant.

Because of the filing, American Hospitality had ordered all company-owned stores closed immediately. Tim-ing could not have been worse for a restaurant. The announcement was delivered just as the Friday evening rush began. Diners were sent home with half-eaten meals in doggie bags. Over 3,000 employees were dis-missed without any notice or severance pay. Their final paychecks bounced when they attempted to cash them.

Because he was a franchisee, Benepal did not necessarily have to stop work on his restaurant. However, he was under no illusion about the magnitude of the task facing him if he were to stay in business. He al-ready had committed to a capital investment of $1 million. Would customers come to a restaurant that was involved in a bankruptcy?

“What should I do,” he wondered.In the subsequent weeks, struggling to stay in business, the franchisees organized. They formed a co-

op, renegotiated contracts with suppliers, and even introduced a new low-carb menu to capitalize on the Atkins Diet fad. Soon they realized that they were not so bad off. They no longer had to pay royalties or toe the line to meet franchisor requirements. Soon they developed a plan to buy Ground Round out of bank-ruptcy. On July 7, 2004, their offer to the bankruptcy court was accepted. The franchisees were now the proud owners of Ground Round Grill and Bar, Inc.

What about Burt Benepal?He finally opened his restaurant in Richmond, California. He opened five months later than he had

planned, but at least it was open and successful. Benepal stated that he expected his first full year of sales to be almost $2 million. He was actively searching for a location for his next Ground Round to be opened in 2005. He had plans to open five more before the end of 2006.

In many ways, Benepal was incredibly fortunate. Often when franchisors go bankrupt, franchisees soon follow. Even in the Ground Round case, not all franchisees fared so well. Mike Metz, owner of three Ground Round restaurants in Pennsylvania, had a sales decrease of 20 percent. According to attorney Craig Tractenberg, several franchisees were forced into involuntary bankruptcy. Similar stories of failed franchi-sors abound. Have you ever heard of Chi-Chi’s, Arthur Treacher’s Fish and Chips, 50 Flavors in a Tub, Spud Nuts, or Minnie Pearl’s Fried Chicken? Probably not, but they represent just a tiny fraction of the scores of failed franchisors who not only went out of business but who took hundreds of franchisees along with them.

When your franchiSor goeS Broke23



Learn more about the topics above at these sites:

Entrepreneur’s Franchise Hub:

Traits needed to be a franchise owner: it-takes-to-be-a-great-franchise-owner/#5f12d42e534d

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Buying an Existing BusinessThe second most common way to enter small business management is to purchase an existing business. Buying an existing business has important advantages over creating a start-up. How-ever, purchasing a business has its own unique set of risks.

Advantages of Purchasing an Existing BusinessThere are some advantages to buying an existing business:

• Established customers provide immediate sales and cash inflows. Because the business is already successful, it has proven that there is sufficient demand for its products and ser-vices to operate profitably.

• Business processes are already in place in an existing, operating business. This eliminates the need to hire employees, find vendors, set up accounting systems, and establish produc-tion processes.

• Purchasing a business often requires less cash outlay than does creating a start-up. The seller will often provide financing that makes it possible for you to buy the business.

Disadvantages of Purchasing an Existing BusinessDisadvantages to buying an existing business include:

• Finding a successful business for sale that is appropriate for your experience, skills, and education is difficult and time-consuming.

• It is very difficult to determine what a small business is worth. The value of a small busi-ness can never be known with certainty. You must rely on analyses, comparisons, and estimates.

• Existing managers and employees may resist change. It can be very difficult to convince employees to adapt to new business methods, procedures, and processes that can provide increased profits.

• The reputation of the business may be a hindrance to future success. Sellers are usually reluctant to tell you about problems that the business has. Business owners are especially sensitive about discussing past disputes and lawsuits with vendors and customers.

• The business may be declining because of changes in technology.• The facilities and equipment may be obsolete or in need of major repair.

Finding a Business to BuyThe first problem you must solve is finding a business for sale. Of course, you aren’t looking for just any business. You are looking for one that is right for your own experience, education, and skills. The things that make a business appropriate for you are like those things that help create a successful start-up. The business should be in an industry in which you have experience. It should be producing a product or providing service that is in demand and that has high margins. Perhaps, most importantly, it should have adequate financing available so you can continue op-erations and make the business grow.

You will greatly increase your chances of finding the right business by using multiple sources. Make some calls: Contact business brokers and ply your own network. You should be actively reading advertising of businesses for sale in newspapers and magazines and on the Internet. You might consider asking your employer if his or her business is for sale. Keep in mind that every business is for sale at a high enough price. If you hear of a business that is interesting, contact the owners and ask what it would take to buy it.

Brokers advertise and facilitate the sale of businesses for a fee, usually a percentage of the ultimate selling price. Most states have laws that require brokers to work solely for the interest of the seller and to obtain the highest selling price possible. This creates a conflict of interest between the broker and you. The broker is trying to get the highest price. You’re trying to get the lowest.

The quality of broker services ranges from excellent to outright rip-offs. Only a few states have any education or licensing requirements, although some, such as Illinois, do require business

6-5 Compare the advantages and disadvan-tages of purchasing an existing business.


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Finding a Business for Sale

Although all businesses are for sale if the price is right, finding that one perfect business is a difficult and time-consuming task. As you will find out by completing this skill task, businesses for sale that are easy to find usually are unsuitable. Businesses that are right for you are downright elusive:

1. Decide what type of business you would be interested in buying. Write a profile of your ideal business to buy, specifying its industry, product or service, size, location, price, and financing.

2. Search the Yellow Pages and the Internet to find business brokers active in your area.a. Contact each broker and inquire about businesses that meet your criteria. Be honest in your ap-

proach. Do not represent yourself as a serious buyer, unless you are one.b. Obtain copies of the information that the broker has concerning the businesses.

3. Search your local newspaper, The Wall Street Journal, and Barron’s classified advertisements for the headings “business for sale” and “business opportunities.” On Google, search for “buy a business” to find websites that specialize in businesses for sale.

4. Make a list of businesses that seem to meet the requirements that you wrote down in step 1. 5. Contact the businesses that you have identified. Be honest in your approach. If you are doing this

solely as a classroom exercise, explicitly say so. Remember that while the owner of the business may want to sell it, he or she is undoubtedly very busy and may not want to discuss the business with a student when there is no chance of your actually buying it.

6. Visit a business that is engaged in the industry you have identified as being right for you. Find out the following things:a. The title and publisher of the journals dedicated to the industry. You can also check out

Skill Module 3.1.b. The primary businesses of this type operating in your geographic area.c. Conventional business practices:

i. Is business done on credit? ii. Who are the primary suppliers to the business? iii. What are the sales channels of the business (direct sales, catalog, etc.)? iv. How is technology changing in the business? v. Are there any industry rules of thumb for valuing businesses? vi. Does the owner know of any businesses that are for sale?

7. Obtain sample copies of the industry journals. Examine them for advertisements of businesses for sale. 8. Make an appointment with a loan officer in the commercial loan department of a bank in your area.

Describe what you are looking for in a business to buy.a. Ask if the loan officer knows of any businesses for sale in your area.b. Ask if the loan officer can introduce you to anyone who might be able to help you find a business

for sale.

Finally, write and present a report to your class that details the efforts and results of your research.

S K I L L M O D U L E6 .1

brokers to register by filing a simple form. Accusations of misrepresentation and fraud by bro-kers are common in the business press.

Networking is an excellent way to find businesses for sale. While most businesses are for sale at any time, for competitive reasons most owners do not want to say so explicitly. Because cus-tomers, vendors, and employees are likely to feel threatened, openly advertising a business for sale can lead to the loss of revenue, credit from vendors, and key employees. For these reasons, it is common for business owners to make their intention to sell known only to trusted confi-dants in the industry and in the community. Attorneys, bankers, accountants, and insurance agents all will provide you with information only if they know that they can trust your discretion. You can usually get solid leads just by telling other businesspeople that you’re interested in buy-ing a business.

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There is a trade journal for every industry that exists. The replacement window industry looks through Fenestration Review. The electric sign in-dustry is energized by Signs of the Times. People in the mortuary business bone up with Embalmer and American Funeral Director. The folks who process dead and decomposing animals into us-able products digest Render magazine. The con-struction industry digs Rock and Dirt. No matter what type of business you might be considering, there is a magazine for it. They all have advertise-ments of businesses for sale. Skill Module 3.1 details how to find professional associations and trade magazines.

The Internet also has numerous sites that ad-vertise businesses for sale. A search using Google with the keyword “business” and the phrase “for sale” resulted in over 700 million pages listed. None of the advertisements that were inspected during the research for this book provided the name or the exact location of the advertised busi-ness. Rather, the sites have various ways you can obtain additional information. Some provide a link by which you can request more information. A very few listed phone numbers you can call. Others require becoming a member and paying a fee for access.

Your current employer is probably a ready source of information about businesses for sale in your industry. Most managers of small businesses are members of formal and informal groups of businesspeople, for example, the chamber of commerce, Rotary, Kiwanis, and other groups that have meetings and provide resources. Also, your employer probably has information about com-petitors and vendors in the area.

Investigating Entrepreneurial Opportunities: Performing Due DiligenceSuppose you’ve actually found a business you’d like to buy. Your job has just begun. Finding an appropriate business is merely the first, and easiest, step in the process. Buying a business is a lot like getting married—it is easy to get into, but if it turns out bad, it’s very hard to get out. Now that you’ve found that “perfect” business, you must make an exhaustive investigation to tell if it is really suitable. Unlike residential real estate, which is highly regulated in the United States, sellers of businesses are not legally required to make disclosures of impairments or deficiencies. If you are outside the United States, your laws may be different. For example, in Canada, sales of businesses for a price less than $200,000 are tightly regulated. Sales for amounts greater than $200,000 are not regulated at all. As in the United States, it is your responsibility to fully investi-gate the business and to come to your own independent evaluation of its value.

Due diligence is the process of investigating to determine the full and complete implications of buying a business. During the process of due diligence every aspect of the business is exam-ined in exacting detail. Nothing is taken for granted. No statement is accepted without evidence. Evidence is, itself, substantiated with sources external to the company. Properly performing due diligence minimizes the risk of failure and maximizes the probability of success by identifying the strengths and weaknesses of the business.

When a business is to be acquired, there is a clear order of steps that should be followed:

1. Conduct extensive interviews with the sellers of the business. 2. Study the financial reports and other records of the business.

due diligenceThe process of investigating a business to determine its value and potential for investment.

● There is a trade journal for every industry.

Sources: Signs of the Times April; Funeral Business Advisor; Fenestration Review.

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3. Make a personal examination of the site (or sites) of the business. 4. Interview customers and suppliers of the business. 5. Develop a detailed business plan for the acquisition. 6. Negotiate an appropriate price for the business, based on the business plan projections. 7. Obtain sufficient capital to purchase and operate the business.

The first five steps together make up the process of due diligence.24

A basic tenet of business law is caveat emptor, or “let the buyer beware.” This does not mean that a seller can freely lie to you about the business. Deliberate misrepresentations can lead to lawsuits and may be prosecuted as fraud. However, except for specific representations by the seller, you are responsible for understanding the condition and the facts of the business. It’s kind of a “don’t ask—don’t tell.” If you don’t ask the right questions, the seller has no obligation to tell you the right answers. Thus, as the buyer, you must determine how the business is cur-rently being operated, and you must substantiate (or disprove) representations made by the seller regarding the existence and value of assets, liabilities, financial performance, and the condition of the business.

Due diligence has two primary goals. First, you are attempting to find any wrongdoing: (1) fraud committed by the owners or managers; (2) misrepresentations of the sellers, such as improperly recognized revenues or expenses; and (3) missing information, including pending or threatened litigation, technological obsolescence of equipment, processes, product, or service, and unpaid taxes. Second, you are trying to find any inefficiencies, unnoticed opportunities, waste, and mismanagement. The first goal is information that greatly affects the value of the business and the advisability of purchasing it. The second goal is how you, as a new owner, can make changes to increase its value. Both goals can give you a negotiating advantage.

The first information that you get is usually a set of financial statements. There are four rea-sons why this is so: (1) the seller usually has financial statements available and incurs little added cost in providing them, (2) you, as a businessperson, are most likely familiar with finan-cial statements and can extract useful information from them, (3) financial statements are ac-cepted as representative of the business by bankers and investors, and (4) financial statements are considered to be indicators of future business results.

Financial statements should include (1) a balance sheet, (2) an income statement, and (3) a statement of cash flows. You should also examine the federal and state tax returns for at least the last five years. Information forms for partnerships, corporations, or limited liability companies should be examined also. Any financial statement prepared by or for the seller must be treated with skepticism. Some financial statements that you see will have been subjected to rigorous ex-amination by professionals outside the business; some will have been dashed off by the owner at midnight on April 15. To be believable, the statements must be substantiated by external sources.

When you examine the income statement, you should focus on corroborating the amount and timing of revenues and expenses. Be aware that the income statements of small businesses are commonly misstated. To avoid taxes, owners often charge personal expenses to the business, such as cars, country club memberships, travel, and even home office expenses. On the other hand, when preparing to sell the business, owners are motivated to overstate revenues and under-state expenses to show the highest profit.

Balance sheet items that are likely to be misstated are intangibles, that is, things that have no physical existence, but rather are legal rights and obligations. Intangibles include accounts receivable, patents, licenses, and liabilities. Assets claimed on the balance sheet must be exam-ined to ensure that they exist and that the stated value is reasonable. Because liabilities are legal requirements to give up economic value in the future, such as debts for borrowed money or merchandise purchased on account, your risk is that there will be liabilities that are not dis-closed. Your problem is that you are attempting to prove the absence of something. Once the examination is complete, you should adjust the amounts, contents, and format of the statements to reflect what you have discovered through due diligence.

During due diligence you should also try to answer many nonfinancial questions. Why is the business for sale? Who are key employees? What is the extent of obsolescence of equipment and key technologies? What are the prospects for the firm’s products and services? What opportuni-ties can the firm reasonably expect to have in the near future?

caveat emptorA Latin expression that means “let the buyer beware,” which has been made into a philosophy sometimes used by businesses to put the burden for consumer protection onto the customer.

intangiblesAssets, such as patents or trademarks, and liabilities, such as accounts payable, that have no physical existence.

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Determining the Value of the BusinessAfter you have completed a thorough and exacting investigation, you need to analyze all the in-formation you have gathered. This is the time to consult with your business, financial, and legal advisers to arrive at an estimate of the value of the business. Outside advisers are impartial and are more likely to see the bad things about the business than are you. You should make a deci-sion to actually attempt to buy the business only after the evaluation process is complete.

It is very difficult to place a value on a small business. The most theoretically rigorous method of valuing an ongoing business, using discounted cash flows, is based on estimates of future cash outflows and inflows, given the change in ownership. Making such estimates is highly problematic. Because of these difficulties, it is common to use other, less rigorous methods to place a value on a business, such as asset valuation, comparable sales, financial ratios, or industry heuristics.

Discounted Cash Flow MethodologyDiscounted cash flow analysis is based on the concept that the longer you have to wait to receive money, the less valuable it is right now. The application of discounted cash flows to business valuation is similar to having an annuity. An annuity consists of some amount of money which is invested to earn interest. The interest that is earned and a portion of the capital invested is then paid back to the holder of the annuity in a series of equal cash payments. In a similar way, when one buys a business, an investment is made. The business then should provide a return sufficient to repay the investment and also provide a return on that investment.

A detailed explanation of the use and calculation of discounted cash flows is presented in the appendix to Chapter 15.

Asset Valuation MethodologyAsset valuation methods are based on the assumption that a business is worth the value of its assets minus the value of any liabilities. There are two major problems with using asset valuation methodologies. First, such estimates do not consider the value of an ongoing firm over the value of its identifiable assets; for example, the value of an established restaurant over the value of the building, signage, equipment, and fixtures. Second, it is very difficult and time consuming to separately identify and estimate the values of all the assets of a business—imagine a hardware store with tens of thousands of items.

There are three methods commonly used to estimate the value of a firm’s assets, book value, net realizable value, and replacement value.

Book value is the original acquisition cost of the asset, minus all depreciation expense recog-nized to date. There are three major problems with using book value:

1. The original cost of an asset might bear no relation to its current value—for example, a com-puter bought five years ago may be worth next to nothing today.

2. Depreciation is an arbitrary, although systematic, method of transferring asset value to expense. Depreciation makes no attempt to measure actual loss of value of an asset. For example, for income tax purposes, a new car is depreciated over a five-year period, where in fact it loses 40 percent of its value when you drive it off the lot, but may well have significant cash value at the end of the depreciation period.

3. Internally developed assets, such as patents, trademarks, and trade secrets, do not have book value. For an example, consider the Coca-Cola Company. Its single greatest asset is its rights to the names “Coca-Cola” and “Coke.” However, if you examine the annual statement of the company, you will discover that no value for this right is shown in the balance sheet. To address such problems, you must make adjustments to the value of assets that are obvi-ously worth more or less than their book values.

Net realizable value is an estimate of the amount for which an asset would sell, less the costs of selling it. If you were selling a building, the cost of selling would be the money spent on the real estate agent, advertising, and preparing the building for display.

Replacement value is an estimate of what an identical asset would cost to be acquired and readied for service. Net realizable value is usually significantly less than the replacement value of any specific asset.

discounted cash flowsCash flows that have been re-duced in value because they are to be received in the future.

book valueThe difference between the original acquisition cost and the amount of accumulated depreciation.

net realizable valueThe amount for which an asset will sell, less the costs of selling.

replacement valueThe cost to acquire an essentially identical asset.

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Comparable SalesComparable sales of other firms in the same industry are commonly used to estimate the value of a business. This method has two major problems. First, no two firms are exactly alike. Second, there are often no recent sales to use for comparison. But there are online sites like and, or check if your library has access to DealStats (formerly Pratt’s Stats) or BIZCOMPS database.

Financial RatiosFinancial ratios are often used to place a value on businesses because industry ratios are inde-pendent of the size of the business. For example, the percentage food cost for the entire Pizza Hut chain is essentially the same as that of an independent pizza restaurant. Using financial ra-tios requires that you have an estimate of future income and tax flows. Businesses are never identical. At the minimum they occupy different locations. At the other extreme, they may be different in all measurable aspects: location, size, gross sales, profitability, condition of markets, and physical assets. The best source of industry financial ratios is from data collected by indus-try associations or industry statistic providers, such as Bizminer or

Some of the commonly used ratios are:

The earnings multiple ratio is simply firm value divided by actual or expected annual earn-ings. Multiplying forecast earnings by the earnings multiple provides a quick estimate of firm value. You can try using this approach with the valuation calculator at or see how it is used for computing Private Company Comparables in the Skill Module 6.2.

earnings multipleThe ratio of the value of a firm to its annual earnings.

Estimating a Business’s Valuation on is a free website that lets you create a valuation report for any sort of business. Getting started requires only three pieces of information: the business’s industry, its annual sales for the latest year, and a general idea of the growth rate of the business. You’ll need to create a free account first. For this ex-ample, imagine an online retailing business selling $50,000 worth of products last year, with pretty stable sales. Typing “online sales” into the “What does your company do?” brings up a number of options. For our business, the closest is “Electronic Shopping and Mail-Order Houses.” We’ll pick “Stable Company” for the growth rate, so the initial screen looks like this:

S K I L L M O D U L E6 . 2

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Choose “View Report.” On the resulting report, you can see options for the discounted cash flow (DCF) model described above as well as two versions of the comparable sales approach. Given we are talking about small businesses, we’ll choose the “Private Company Comparables” tab, which gives a suggested valuation of $18,422. This number is higher than’s computed estimate of $12,000 because of differences in the data sources. Note that you can adjust the descriptions for your firm with the sliders toward the top of the page for profit margins and estimated annual growth rates.

These Private Company Comparables are based on actual sales of existing companies. There isn’t a straightforward way to assess the valuation of a new start-up. But an imperfect workaround is to take the numbers from year 3 of your business plan’s financial projections, and use those to get an idea of the valu-ation of your proposed business, if you reach your projected sales, profit, and growth levels and you don’t have any other major problems facing the firm.

Pretax return on assets (ROA) is calculated by dividing earnings before income tax by asset value. Multiplying forecast earnings by the pretax ROA gives an estimate of net asset value, or total asset value minus liabilities.Net income to equity is determined by dividing income by the equity owners have in the busi-ness. To estimate firm value, you must multiply your estimate of future earnings by the ratio. This ratio, however, can seriously understate firm value because it does not include the value of borrowed capital.Net income to (equity + debt) is an extension of net income to equity that explicitly includes the value of borrowed capital as a component of firm value.

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Income capitalization is calculated by dividing projected net income excluding depreciation, inter-est, and owner draws, by the best return that you could expect to obtain in other investments. For example, if you are forecasting that you will have a net income of $66,000 and your cost of capital is 11 percent then the estimated value of the business would be $600,000 ($66,000/0.11).

Industry HeuristicsIndustry heuristics are simply rules of thumb that are commonly used to estimate firm value in relation to some easily observable characteristic of the business. Industry heuristics are similar to comparable sales in that they represent the combined experience of people active in the indus-try. For example, in the bed and breakfast and small inn industry, two heuristics are often used to estimate the value of an operating inn. The first is that an inn should sell for approximately $100,000 per rental room. The second is that an inn should sell for approximately four times its annual gross revenue.

Industry heuristics can be amazingly accurate. In a recent survey of 300 inns, the Professional Association of Innkeepers International found that the average selling prices of inns between 2000 and 2002 was $99,300 per guest room. The average gross revenue multiplier was 4.3.25 Similar heuristics exist for nearly all industries and are usually available from the group’s trade association. You’ve seen how to find associations in Chapter 3. You can also look at online sources like or Business Valuation Resources ( for selected heuristics.

A useful website for making basic valuation efforts is, which prepares free re-ports on a business’s valuation based on key information you input (sales, growth rate, and in-dustry).Skill Module 6.2 shows you how to create and interpret those reports.

Structuring the DealA buyer and seller get together to negotiate the final price for a business. The buyer should have performed the due diligence procedure and be confident about the assessment of the condition and value of the business. Along the way you, as the buyer, should have decided on the absolute highest price that you would be willing to pay. That highest price is called your point of indifference27 in the negotiation process. The term comes from the idea that once that price is reached, you should be indifferent as to whether or not a deal is made.

Of course, you’ll open negotiations with a price substantially lower than your point of indiffer-ence. The purpose of opening low is twofold: (1) you want to make the purchase at the lowest price possible, and (2) you recognize that the seller assumes that any opening offer is less than what you are actually willing to pay. A low opening bid allows both parties room to reach a com-promise satisfactory to both.

In addition to negotiating for price, you also negotiate about the terms of the sale. When you are buying a business, everything is negotiable, not just the price. In fact, the terms of the acquisi-tion, such as seller financing, payment periods, noncompete agreements, and the exact details of what is being acquired, all interact to affect the price that you are willing to pay and that the seller will accept. There are four basic ways that a business may be bought: (1) you may buy out the seller’s interest in the business; (2) you may buy in by acquiring some, but not all, of the ownership; (3) you may buy only the key assets of the business such as the inventory or equip-ment of the business, and not the business itself; and (4) you may take over a public business by buying a controlling interest of its stock.

BuyoutsBuyouts are restricted to businesses that have a formal legal form of organization, including cor-porations, limited liability companies, and some partnerships. Legal business organizations are artificial entities that exist separately from the owners. Buyouts are accomplished through pur-chasing the ownership interest in the entity. Technically, partnerships and sole proprietorships do not exist separately from the owners and thus cannot be purchased. Rather, the assets of the busi-ness must be purchased and the liabilities assumed in a process called key resource acquisition or bulk asset sale. The subsequent business is considered to be a new entity different from the selling entity. In practice, partnerships can continue in existence despite a change in ownership. Sole proprietorships cannot.

heuristicA commonsense rule; a rule of thumb.

6-6 Explain four methods for purchasing an existing business.


point of indifferenceThe price at which a buyer is indif-ferent about buying or not buying the business.

buy-inThe purchase of substantially less than 100 percent of a business.

takeoverThe seizing of control of a busi-ness by purchasing its stock to be able to select the board of directors.

buyoutThe purchase of substantially all of an existing business.

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The primary advantage to a buyout is simplicity. The seller must only transfer his or her stock to the purchaser to complete the transaction. The business continues as an entity, owning its as-sets and maintaining responsibility for its liabilities. The primary disadvantage to a buyout is that all liabilities are transferred, including potential lawsuits that arise from actions and transactions that took place prior to the change in ownership. This has, as in the case of the widespread class-action suits concerning asbestos, led to bankruptcy for the purchaser.

A buyout may take place all at once, with all stock being transferred at a single point in time. Sometimes buyouts are made with ownership being transferred over some agreed-upon time range. Buyouts made by employees are examples of changes of ownership over time. Employee buyouts were made legal in 1974 when employee stock ownership plan regulations were codified into law. An employee buyout occurs when the owners of a company sell a majority of stock to the employ-ees through an employee stock ownership plan (ESOP) as was provided in the 1974 legislation. ESOPs are complicated transactions that require highly skilled professionals to implement them.

Buy-InsA buy-in results when someone acquires only part of the ownership of an existing business. Any amount of ownership may be considered a buy-in, as long as less than 100 percent of the owner-ship is transferred. Buy-ins can be made in any form of business. Technically, if one buys into a sole proprietorship, it becomes a partnership. Corporations and limited liability companies may continue without a change of the form of entity.

There are two advantages to making a buy-in: (1) a buy-in allows the purchaser to leverage inside knowledge, and (2) it aids in keeping key employees. The seller and the managers of a suc-cessful business, by definition, have experience in operating that business profitably. The buyer, no matter how expert, does not have the same depth of knowledge of the business being pur-chased. One great threat to the buyer of a business is that employees who are key to its opera-tions will leave the business. Keeping the current owner as an active participant of the business reassures employees that large changes are not likely to occur.

The disadvantages of a buy-in are the same as the advantages: the prior owner and manage-ment remain with the business. This often causes friction when the new owner wishes to make changes, and the old owner and managers do not.

Key Resource AcquisitionsKey resource acquisitions, also called bulk asset purchases, are the only way a sole proprietorship may be purchased. This technique may also be used with any other form of business. As the name implies, key resource acquisitions comprise purchasing only the assets of the business. Usually, the seller will keep any cash and receivables and will retain responsibility for some short-term liabilities such as notes payable.

As we saw earlier, the most difficult issue in purchasing a business using this method is assign-ing a value to the intangible assets, such as the value of the business name, the value of having an ongoing business, the value of established relationships, and so forth. The value of the business in excess of the value of the identifiable assets is called goodwill. You should attempt to recognize a minimum amount of goodwill. One advantage of business ownership is the ability to shelter in-come by using noncash deductions to reduce income taxes. Prior to 2002, a business could re-duce income taxes by deducting goodwill over a period of years. However, businesses purchased after December 15, 2002, are prohibited from deducting for goodwill.28 Thus the more of the business’s value that is recognized as goodwill, the less income can be sheltered from income tax.

Key resource allocation provides one important advantage. Because only the assets are ac-quired, the subsequent business, regardless of its legal form, is not responsible for any of the acts or transactions made prior to purchasing the business. Although this does not completely relieve the successor business from all prior liabilities, it does protect it from action concerning any noncollateralized liabilities, such as a line of credit or a personal loan of the seller.

TakeoversTakeovers are possible only in businesses that have stock that is freely transferable without the permission of management or other owners. In other words, only corporations and certain part-nerships can, under any circumstance, be acquired in a takeover process. A takeover comprises

employee stock ownership plan (ESOP)A formalized legal method to transfer some or all of the owner-ship of a business to its employees.

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purchasing enough of the target business’s stock to gain control of the board of directors of the business. In a takeover, the buyer (often called a raider) seizes control of the business without the permission of all owners. Sometimes only a few owners are involved, as takeovers can often be accomplished by purchasing or even borrowing a relatively small percentage of outstanding stock.

Takeovers are hostile events. There is the threat that current management will be replaced. Occasionally, the raider will explicitly state that the intention of the takeover is to sell off por-tions of the business, or even to liquidate it completely. In these circumstances, current manage-ment is likely to make strenuous efforts to prevent the takeover from occurring.

Because of the requirement that stock be freely transferable, only a few small businesses are vulnerable to hostile takeovers. Accomplishing a takeover of a small business is likely to result in the loss of key employees and the resentment and resistance of those employees who remain. As a result of these limitations and problems, takeovers are usually done on medium to large busi-nesses. Only rarely does anyone acquire a small business through a hostile takeover.

Inheriting a BusinessUnless your parents or grandparents are small business owners, you might think that this section does not apply to you. However, the fact that you are taking this course indicates that you have some interest in becoming a business owner yourself. Thus, someday you may well find yourself on the other end of the inheritance process: You may be the founder who wishes to pass your business to your heirs. Whether you are inheriting a business or bequeathing a business, you face the same problems of passing ownership. Only your point of view changes.

In Chapter 2, we introduced the topic of family businesses. As we pointed out there, family-owned businesses make up a huge percentage of all businesses in the United States. In fact, this pattern holds throughout the world. Ownership of all these millions of businesses can potentially be passed through family succession, for example, by being inherited in one form or another.

Family Businesses SuccessionInheritance is not restricted to parent–child or grandparent–grandchild. Family businesses can be, and often are, passed from the current owner-manager to nieces, nephews, cousins, or in-laws.

One of the most difficult things that you will ever have to do is make a successful ownership transition. Turning over management authority is not easy for most founders, nor is it easy for the heir of the founder to assume the authority. However, if the firm is to prosper, you’ve got to find a way to do it. Research shows that family-owned businesses usually fail after the death or retirement of the founder. Fewer than 30 percent are successfully transferred to a second genera-tion. Fewer than 13 percent succeed long enough to be inherited by the third.29 Family busi-nesses that successfully make the transition do so by taking specific actions to organize the business and ensure that it can run profitably when the founder is gone.

Developing a Formal Management StructureTo make the transition, you will have to establish a formal management structure. You will need to develop a comprehensive business plan that states clear goals and objectives. Most difficult, you must be able to clearly see the strengths and weaknesses of family members who will remain in the business.30 You must then hire professional managers to run those functions that family members cannot. Once successors have been selected, they must be educated in all parts of the family business to develop experience and skills.

Whether you are the founder or the successor, you face an overwhelming task. The founder must impart his or her unique knowledge, skill, and experience that has made the business suc-cessful. The successor must learn all these things. While this is happening the founder and suc-cessor will have to work closely together.31 There always will be issues of who is in charge. No matter the skills and experience of the successor, as long as the founder is active in the business, many people will automatically turn to him or her for decisions.

Succession Issues for the FounderTo ensure that your business survives after you’re gone, you must be proactive in bringing selected family members into the business as soon as you can.32 The issue that must be faced in this process

6-7 Explain the issues of inheriting a family-owned business.


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is selecting the appropriate family members. All members of the family business, whether being active in management roles or simply being silent owners, should have an open and ongoing dialog about the strategy, goals, and operations of the business. If you, as the founder-manager, take part in family dialogs about the business, you will gain insight into their values, ideas, and goals. Although family members usually share a set of basic values, there is inevitably some di-versity in motivations and personal goals. This diversity can be a positive advantage when it brings new thinking to the management of your business. On the other hand, it can be a source of divisiveness that can lead to a failure to cooperate or even to angry confrontations to the point of mutual lawsuits among family members. Handling conflict in families is a topic covered in Chapter 18.

To avoid having the diversity of values, goals, and motivators from becoming the source of such intrafamily strife, you and the other family business members should respect one another’s differences by:

• Being certain that all family members know and accept that they are not forced to enter the management of the business if they don’t want to.

• Providing each member of the family business with the opportunity to obtain education and experience outside the business. Working in other businesses will provide knowledge and skills that cannot be provided solely from within the family business.

• Allowing each family member who does wish to enter the business to find out and do those functions and activities that he or she does best.

• Not assuming that the leadership of the business must come from within the family. Being part of the family does not guarantee business leadership skills.

Once you have brought a family member into the firm, you must provide opportunities for learning and growth. This is achieved by deliberately and methodically sharing both responsibil-ity and authority. Often, the founder of a small business finds it very difficult to give up decision-making authority to family members, especially to children and grandchildren. Regardless, you have to “let go” and allow family members that you bring into the business to use their knowl-edge, skills, and experience to make decisions in the areas where they have special competence. It is only by doing that you and your heirs can develop stronger management skills necessary to ensure the future success of the business.

Successfully bringing family members into the firm, allowing them to find their areas of spe-cial abilities, and sharing both responsibility and authority for management decision making is an essential first step. Next, you need to set up specific avenues of access among family members to be able to share their ideas and challenges. One way to achieve this goal is to set up regular “family board” meetings—meetings where each family member listens carefully to the others, and each has a chance to express specific concerns. Openness and regularity in intrafamily commu-nications ensure that you will develop your family managers into a learning community that will benefit from each other’s mistakes and successes.

You should write out your specific decisions and desires concerning who inherits what. You should then personally inform everyone who is affected by your decisions. You must also explicitly state the reasons for selecting any one family member over another when there is competition for a specific job in the business. All too commonly the heir not selected challenges the succession after the founder dies. When this happens, the business often fails, and only the lawyers win.33

Succession Issues for the SuccessorTo ensure that the business thrives after you’ve taken over, you must be able to gain the loyalty of other family members, professional managers, and employees. You will be treading a fine line between acceding to the wishes of the founder, and making changes as all dynamic businesses require. When changes are necessary, you should take the time to involve as many of those af-fected as possible in the decision process. It is important that you neither allow the business to become fossilized—a monument to the founder—nor present yourself in such way that you are perceived as an “upstart”—determined to erase all signs of the founder.

In the best of all possible worlds, you will have started working in the family business while you were quite young. As you aged and matured, you would have been given increasingly more difficult and important tasks to complete. You would have worked in all parts of the company,

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from the most menial to the most demanding. As you learned these tasks, you would have been provided the same performance evaluations, training, and mentoring as would be provided to any employee being groomed for greater responsibilities.

Such a gradual and growing role in the business goes a long way toward reducing suspicion and resentment of workers that the “boss’s kid” is being given the position despite any lack of competency. (Assuming, of course, that you are actually competent.) As you, the successor-to-be, gain greater responsibility and authority you will also gain experience and skills in the multiple activities and functions of the firm. Although the responsibility for teaching and grooming the successor lies with the founder, you, the successor, have a responsibility to know and to master the areas that are essential to the success of the business.

These essential skills include (but are not limited to):

• Technical knowledge—You must understand the science, technology, and methodology of the industry of which the business is part.

• Financial knowledge—You must understand the financial needs and resources of the busi-ness and industry, and be competent to negotiate with lenders, investors, vendors, and customers.

• People skills—You must be able to effectively deal with people, with other family members in the business, with employees, suppliers, regulators, and, most importantly, with customers.

• Leadership skills—You must be able to communicate your vision for the company to family members and to employees, getting them to “buy in” and make the business goals their goals.

• Knowledge of your own limitations—Nobody can know and be expert at everything. You must know your weaknesses, and be quick to obtain assistance in those areas.

Finally, you must determine just how final authority will be passed to you. Business succession is not always the result of the death of the founder. Often the founder simply realizes that it is time to “pass the torch” to the next generation. Your problem, as the successor, is to understand and to be comfortable with the role, if any, that the founder is to play in the business once you take over. Often, the founder takes an executive position, such as board chair, while the successor becomes chief executive officer. Sometimes, however, strong-willed founders just can’t keep from meddling. When this is the situation it is probably best that the founder leave the business altogether and allow the successor space to create his or her own management style in the business.

Ownership TransferWhether you are the founder or the successor, you certainly do not want to wait until the founder dies to transfer ownership. If you are the founder, once you’re dead, your desires become irrele-vant. If you are the successor, once the founder is dead, there is no authority figure who can help with issues of control and strategy. Rather than waiting for the founder to die, you should assist in completing a comprehensive estate-planning process while the founder is still healthy and in charge.34 In most cases, a gradual transfer of ownership is preferable to a single inheritance.35 This strategy may not be appropriate, however, if there are multiple heirs. Of greatest importance is determining who gets voting stock. If the heirs who are not involved in management receive voting stock, issues of who is in control can arise because of jealousy and intrafamily rivalries.

There is no easy answer to these issues. In fact, the transfer of ownership is highly complex and is unique to each family business. The larger and more successful your business is, the more complex and difficult the problem becomes. Using experts in law, accounting, and business can help identify the potential problems and help organize solutions. For family business succession plans, using specialists is essential. For family business experts, the major professional associa-tion is the Family Firm Institute. There are several organizations for business brokers; you can find them in the Google directory by entering “business broker association.” In any case, it al-ways pays to ask other entrepreneurs and advisers such as lawyers and accountants if they have recommendations and personal experience with these experts. Involving specialists also sends a clear message to creditors and suppliers that both old and new owners are determined to make a success of the transition.

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Professional Management of Small BusinessAs small businesses grow, the requirements of managing them increase proportionately. If a busi-ness grows large enough, no matter how experienced or talented a business owner is, eventually the demands of managing will become too great to be handled alone. At this point, one of two things happens: (1) the business starts to decline, or (2) professional managers are hired to share the management load.

In the terms of small business, professional management is not an issue of education, titles, or credentials. A professional manager of a small business is one who has the experience and skills to use a systematic approach to analyzing and solving business problems.

These kinds of people are not easy to find. You may have to look to other businesses in your industry for experienced managers who are seeking new challenges and opportunities. You may find such people working for your vendors or your customers. In an ideal world these people would already be working among your employees, people who, because of their individual drive, personal-ity, and skills, have learned your business quickly, and have taken on responsibility and authority.

An opportunity for you to get into small business while avoiding the many risks of start-ups or franchises, and at the same time avoid the difficulties of raising capital to buy an existing busi-ness, is to go to work for the business as a hired manager. If you have the skills and experience of a professional manager that will allow you to be hired, taking the position will provide a unique perspective of the business from the inside. Should the business prove to be one that you want to own, you are in a position to understand the business’s worth and to negotiate terms that make it possible for you to acquire it.

Employee managers of small firms are often would-be entrepreneurs. The set of management skills needed to be an effective manager of small business is very similar, if not identical, to the set needed to be an effective business founder or owner. Because of this, it is common for a manager to become an owner—either of your business or of a competing business. Entry into ownership is accomplished through all the ways discussed in this chapter, including leaving employment to start up a new busi-ness, buying out or buying into an existing business, or contracting a franchise relationship.

There are only five paths of entry into small business management, although the details of how any one person gets started are unique. You may start a business, franchise a business, buy an existing business, inherit a business, or be employed as a manager in a business. Getting into business, for all its difficulties and problems, however, is the easiest part of small business man-agement. Making the business successful and finding a graceful and appropriate way to get out is the true challenge, and that is what we look at in later chapters.

How to Get Out of Your BusinessHere is the flip side of starting a business, that of getting out of the business when the time comes. We briefly discussed some issues that entrepreneurs face when they bequeath a business to their heirs, but in fact, there are even more ways to get out of business than there are to get in. Many small businesses are just “put to sleep” by their owners when a better opportunity occurs. Others are sold—to outside investors, other entrepreneurs, employees, other existing businesses. It is unfortunate that a few go through formal bankruptcy and liquidation.

Figure 6.3 shows the range of outcomes from best to worst. Succession is one of a range of alternatives for transferring or terminating a firm. In any year, there are roughly 900,000 fam-ily business successions taking place. In addition to succession, the other way to benefit from the transfer is to sell the business to someone else. There are roughly 1 million business sales each year. In addition to the profitable types of business sales, when the purchase price represents only a token amount, the transfer is called a sell off, and where the old owner gets no payment, in effect giving the firm away, it is called a pass off. These approaches accounted for nearly 40 percent of family business transfers.36

Terminations represent about 1.8 million firms a year.37 Closing the business with no out-standing debts is referred to as a walkaway. More than one-third of the closing firms annually take this approach.38 As the owner who is closing the business faces more debts, the typical

6-8 Describe how hired managers become owners of small businesses.


6-9 Identify the choices for exiting a business.


transferAn endgame strategy in which ownership is moved from one person or group to another.

terminationAn endgame strategy in which the owner closes down a business.

sell offA type of business transfer where the seller gets only a fraction of the value of the business. This is most often done to maintain em-ployment for the staff and service for the customers, but the busi-ness can generate only a small amount of profit with which the original owner can be paid, or the new owner does not have much money to buy the business.

pass offA type of business transfer where the owner gives the business to someone else without a payment. This is most often done to main-tain employment for the staff and service for the customers, but the business is not profitable enough to give the original owner any revenue.

walkawayBusiness termination in which the entrepreneur ends the business with its obligations met.

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approach is to arrange a workout, where the owner takes another job and pays offs the remain-ing debts of the business. More than one-half of all business closings are workouts.39 In the worst case, the owner of a failed business, with too much debt to realistically pay back, faces the pros-pect of bankruptcy, a legal method for closing a business and paying off creditors in extreme situations. Bankruptcy will be covered in Chapters 13 and 14, and it is very rare with only 22,245 businesses filing for bankruptcy in 2018.40

The smartest entrepreneurs will think about exit strategies from the start, especially those seeking angel or venture capital, because those investors will want an exit to get back their invest-ments and profits. In reality, though, most entrepreneurs don’t take outside investment, and for them, exiting the business comes up late in the process. But even starting late, it is possible to plan and take steps to improve your chances of selling the firm.41 Of the 4 million firms that will change hands or close down this year, almost half will make the entrepreneurs richer, through sale and succession. Another quarter of the entrepreneurs will have benefited from their busi-nesses, and walk away ready to start their next firm. And start them they do. There is a special term for those owners who start multiple businesses in their careers—serial entrepreneurs.

Become Rich from the Firm Business Saleor FamilyBusinessSuccession

Sell O�





Typical Technique

Pass O�Walkaway



Get a Continuing Income from the Firm

Leave the Firm with a Nest Egg

Leave the Firm with No Debts

Leave the Firm in Bankruptcy

Leave the Firm with Debts I CanQuickly Pay O�

Leave the Firm with Debts I CanEventually Pay O�

Leave the Firm and Myself inBankruptcy

Leave the Firm a Little Better ThanWhen I Started


The Hierarchy of Business Outcomes

workoutA form of business termination in which the firm’s legal or financial obligations are not fully met at closing.

bankruptcyAn extreme form of business ter-mination that uses a legal method for closing a business and paying off creditors when debts are sub-stantially greater than assets.

serial entrepreneurA person who opens multiple businesses throughout his or her career.


6-1 Describe the strategies for going into an entrepreneurial business on a full-time basis.

● People may set a goal for a business and then determine the resources that will be required to reach the goal. This is referred to as “causal or predictive reasoning.”

● People may assess the assets available to them and the limits under which they must operate to establish the goal to be obtained and the methods of reaching the goal. This is referred to as “effectuation.”

6-2 Describe five ways that people get into small business ownership.

● You may start a new business.● You may franchise a business. ● You may buy an existing business.

● You may inherit a business.

● You may be hired to be the professional manager of a small business.

6-3 Compare the rewards with the pitfalls of starting a new business.

● Advantages:

● A start-up begins with a clean slate and provides the owner with the opportunity to use the most up-to-date technologies and new unique products or services.

● It can be deliberately kept small to limit possible losses.

● Disadvantages:

● A start-up business has no initial name recognition and will require significant time to become established.

● It can be very difficult to finance.● It cannot easily gain credit.● It may not have experienced managers and workers.




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● Starting a new business from scratch can be made easier by using methods to reduce initial capital requirements and to gain access to business and industry experience, such as starting a business in your home to reduce start-up costs, having a partner to share capital, and making an alliance with your current employer to gain access to industry sources.

6-4 Compare the advantages and disadvantages of purchasing a business franchise.

● Franchising is a legal agreement that allows a business to be operated using the name and business procedures of another firm.

● There are four basic forms of franchising:● Trade name● Product distribution● Conversion● Business format

● Master franchises require opening multiple stores within a specified area.

● Advantages: ● A franchise has a proven successful business model. ● A franchise includes training and management support. ● You face less risk than in starting a new business or

acquiring an operating business.

● Disadvantages: ● You have little control of business marketing and


● Your success is determined to a large extent by the success of the franchisor.

6-5 Compare the advantages and disadvantages of purchasing an existing business.

● Advantages:

● Established customers provide immediate sales and cash inflows.

● Business processes are already in place in an existing business.

● Purchasing a business often requires less cash outlay than does creating a start-up.

● Disadvantages:

● It is very difficult to determine the value of a small business.

● Existing managers and employees may resist change.● The reputation of the business may be a hindrance to

future success.● The business may be declining because of changes in


● The facilities of the business may be obsolete or in need or major repair.

● There are multiple sources to help find businesses for sale, including:

● Business brokers● Networking in the industry of interest● Advertising of businesses for sale● Your current employer’s business

● You must do an exhaustive investigation to determine a business’s suitability and value.

6-6 Explain four methods for purchasing an existing business.

● Buyouts are restricted to businesses that have a formal legal form of organization, including corporations, limited liability companies, and partnerships.

● A buy-in involves acquiring only part of the ownership of an existing business.

● Key resource acquisitions, also called bulk asset purchases, are the only manner in which a sole proprietorship may be purchased.

● A takeover involves purchasing enough of the target business’s stock to gain control of the board of directors of the business.

6-7 Explain the issues of inheriting a family-owned business.

● Family-owned businesses tend to fail after the death or retirement of the founder.

● Those family businesses that make the transition from the founder to the next generation take specific actions to organize the business.

6-8 Describe how hired managers become owners of small businesses.

● Entry into ownership by employee managers may be accomplished in three ways: leaving present employment to start up a new business, buying out or buying into a business, or contracting a franchise relationship.

6-9 Identify the choices for exiting the business.

● Exit strategies include terminations and transfers.

● Strategies like walkaways and pass offs don’t produce financial outcomes for the original owners.

● Other types of business exit produce revenue for owners.

● Owners may work out outstanding debts or face bankruptcy.

● Smart owners plan ahead for their exit.







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190 PART 2 Small BuSineSS PathS and PlanS

causal (predictive) reasoning, 158

effectual reasoning, 158

affordable loss, 158

strategic partnerships, 160

leverage contingencies, 160

bootstrapping, 160

bricolage, 160

lean business practices, 160

minimum viable product, 162

start-up, 164

asset, 165

revolving credit, 165

founders, 166

accelerator, 166

synergy, 168

spin-off, 168

franchise, 170

trade name franchising, 170

product distribution franchising, 170

conversion franchising, 170

business format franchising, 171

due diligence, 177

caveat emptor, 178

intangibles, 178

discounted cash flows, 179

book value, 179

net realizable value, 179

replacement value, 179

earnings multiple, 180

heuristic, 182

point of indifference, 182

buy-in, 182

takeover, 182

buyout, 182

employee stock ownership plan (ESOP), 183

transfer, 187

termination, 187

sell off, 187

pass off, 187

walkaway, 187

workout, 188

bankruptcy, 188

serial entrepreneur, 188



1. What is the best way to get into business? Why do you think so?

2. If you were able to enter into any small business that you desired, what things would you look for in the business?

3. Suppose you had arranged enough capital so that you could either buy into an existing Outback Steak House or could start your own independent steak house restaurant. What are the advantages and disadvantages of each alternative? Which would you prefer and why?

4. Suppose that you have developed an idea for a new busi-ness service. You have limited capital and you do not want to drop out of college. How might you successfully start up a new business using your idea?

5. One evening when you went to pick up your child at the KinderKare, the owner mentioned to you that she would like to sell the business. You have always wanted to run a day-care facility and would like to try to buy her business. What facts should you consider in making this decision?

6. After discussing the KinderKare purchase with your banker, you decide to make a determined effort to purchase the business. To make a good decision, what information must you have, and how will you get it?

7. Based on the information you developed, you have decided that the maximum value of the KinderKare including the building and lot is $350,000. You have $35,000 that you inherited from your favorite great aunt. Your parents have promised to invest $35,000. Based on the $70,000 that you have available, the bank has promised to make you an SBA guaranteed loan of $70,000. What are your options if you wish to pursue this opportunity?

8. You took a job bagging coffee for a business that purchases directly from Guatemalan farmers, thereby getting the coffee at a bargain price, while still paying the farmers above mar-ket for the coffee. Working with all that caffeine has you charged up about going into business for yourself. The owner is only 60 years old, but he has told you that he’d like to slow down. He has offered to sell you all or part of the business. What things should you consider in making a decision about what to do?

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Small BuSineSS entry: PathS to entrePreneurShiP CHAPTER 6 191


1. Using the resources of your library, find the name and address of an active business broker in your area. Arrange an interview with the broker. Write a report detailing what methods the broker uses to place a value on a business for sale.

2. Find out how the owner of the business where you are employed got into business.

3. Visit the Small Business Administration website franchising page at Using the links on that site, find a franchise business that you believe might be successful were you to buy it. Contact the franchisor, explain your interest, and find out the specifics of the franchise opportunity. Report your findings to your class.



Gwendolyn Bonnefille, a single mother, is barely scraping by. Although she earns a fair salary working in the accounts receivable department of a local business, she has to pay for child care for her two children, Samantha who is five and Merlin who is three. While surfing the web, under a listing titled “businesses that can be moved,” she found for sale a business that makes a great hot sauce called Caterwauling Coyote, with the slogan, “You’ll howl at the moon!” The sauce is made in the owner’s kitchen, bottled, labeled, and then delivered to gift and specialty shops in southern Texas. The equip-ment to make the sauce is commercial quality and appears to be in good condition.

The business financial statements and the owner’s 1040 Schedule C business tax returns do not agree. The financial statements show that in the most recent year the business earned $60,000 on sales of $200,000. The 1040 Schedule C shows a profit of only $10,000, and a zero tax liability because of deducting losses suffered in prior years. The sellers are asking $240,000 for the business. They are willing to finance $190,000 at 10 percent for 15 years.

When Gwendolyn sat down with the owner, Sylvester Gatos, he attempted to explain the discrep-ancy between the accounting and the tax returns.

“You see,” Sly said, “there are two things. First, some of the expenses on the schedule C aren’t really business expenses, if you know what I mean. Second, when we did the income statement, we took out depreciation, interest, property tax, and the money that we used from the business because a buyer will not have those expenses.”


1. What do you think about Sly’s explanation of the differences between his income statement and his 1040 Schedule C?

2. Suppose that the income statement is reasonably accurate. What do you think about the purchase price?

3. What information should Gwendolyn obtain before making a decision to purchase the business?

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Small Business Strategies: Imitation with a Twist

7C H A P T E R

● Joe Fischer and Zoë Scharf took time to understand the industry they were planning to go into as well as their market. How did this thorough analysis lead to their success in a market dominated by big companies? Greetabl

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“We help people make people smile”—Zoë Scharf, Greetabl cofounderFor most of his 20s and early 30s, Joe Fischer found himself in recurring situations—a friend’s

wedding for example. He found he had this need for something that would make his gift of money stand out from the pile of physical greeting cards, online e-cards, and social media wishes his friend was go-ing to get. He imagined a small box with beautiful designs and places you can write your message, into which he could put his gift.

Joe started shopping craft stores for tools and materials to make box prototypes and started look-ing into the greeting card industry. He found IBISWorld’s report on the greeting card industry.2 It re-ported that small new specialty greeting card companies were taking share away from Hallmark and American Greetings, as were digital card companies.

Joe imagined his distinctive competence. As he put it, “Relationships matter, and how we cele-brate important events in our loved ones’ lives matters too. Our fondest memories didn’t occur in the digital world, and neither should our best friends’ celebrations.” The IBISWorld report argued there were opportunities for greeting card manufacturers whose products were innovative, high-quality, and customizable. That was the opportunity he would pursue.

Joe had been working by himself on the idea, even to the point of cutting out the corner of a used Honey Nut Cheerios box to make a prototype of the gift box he imagined. Knowing this, around this time friends connected him to Zoë Scharf, a graphic designer. Together they built on Joe’s initial idea and the industry research he found to create the original Greetabl, an attractive box in the $5–$7 range, which could contain a present or gift card, and gave the buyer room to write personal messages to the recipi-ent. You would order them online or get them in gift shops. You would fill in the custom messages, fold it together, and send the Greetabl in its own mailing box. Together Joe and Zoë launched Greetabl and the product, joining other small niche start-ups challenging giants Hallmark and American Greetings, whose combined revenues were over $4 billion.

The first version of Greetabl made it to market as a customizable gift box. You could order it online or buy it in gift, card, and specialty stores, fill it with your gift, write out your message on the box, and

Focus on Small Business: Joe Fischer, Zoë Scharf, and the Strategy Behind Greetabl1

After you complete this chapter, you will be able to:

LO 7-1 Describe the decisions needed to establish a foundation for strategic planning.

LO 7-2 Identify the forms of imitative and innovative businesses.

LO 7-3 Articulate the benefits that win over customers.

LO 7-4 Assess how industry changes affect strategy.

LO 7-5 Explain the major strategies of business—differentiation, cost, and focus.

LO 7-6 Determine how to sustain competitive advantage through attracting customers and discouraging competition. L







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194 PART 2 Small BuSineSS PathS and PlanS

mail or give it to the recipient. Customer response was good, but founders Joe and Zoë felt it could be better, so they talked to customers. They found out purchasers didn’t want to take their boxes to the post office to get the right postage. They found out some buyers had trouble putting the box together, and many wanted help on what to put into the box.

So, they revamped Greetabl to be a one-stop shop that was entirely online. Joe and Zoë’s second version of Greetabl would handle everything including writing the message and mailing. They were expanding their offerings, adding services to the products they launched, and finding more ways to differentiate themselves from the big card companies and their niche competitors.

See the Greetabl video at

DISCUSSION QUESTIONS1. Did Joe start with the idea for his business or with the goal of starting a business?

2. What was the role of the IBISWorld industry analysis in the creation of Greetabl?

3. What kind of strategy did Joe and Zoë plan for Greetabl?

Strategy in the Small BusinessStrategy is the idea and actions that explain how a firm will make its profit. Whether you know it or not, all small businesses have a strategy. The strategy may be a blueprint for planning or a standard to compare actions against. Either way, strategy defines for you, your customers, and your competition how your business operates.

Good strategy leads to greater chances for survival and higher profits for a small business. What makes a strategy good is its fit to the particulars of your business and the resources you can bring to it. In this chapter, we consider how strategy can be created and applied to help your business be its best.

Strategy in small business is special because most small businesses are more imitative than innovative. If you are opening a home day-care center, a machine shop, an Italian restaurant, or an online collectible figurine store, these types of businesses already exist. You can find examples, books, and often even magazines to study, as well as trade and professional asso-ciations to join. There are special strategies that aim to help imitative businesses be successful.

Getting to the useful strategies for a small business is a four-step process. Figure 7.1 shows the strategic planning process for small businesses. The first step involves reviewing and confirming the goals that define your firm and knowing your magic number. The second step is where you consider your customers and the benefits you want to offer them and plot these out against com-petitors in a procedure called distinctive competence. The third step is to study the dynamics and trends of your industry using a technique called industry analysis in order to identify the best way and time to enter business. The fourth step involves building on the prior three steps to deter-mine the best strategic direction and strategy for the firm. After this four-step process, there is a continuing effort called post start-up which aims to refine your firm’s strategies and tactics in order to maintain a competitive advantage.

As you can see in Figure 7.1, strategy builds on four key types of decisions you make about your firm. These may be made formally or informally in your opportunity analysis or feasibility analysis. These decisions are:

1. The major goals you set for your firm. 2. The types of customers you seek and what benefits you plan to offer them. 3. The stage and trend of your chosen industry. 4. The specific generic and supra-strategies you choose to pursue.

LO 7-1 Describe the decisions needed to establish a foundation for strategic planning.

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Small BuSineSS StrategieS: imitation with a twiSt CHAPTER 7 195

Goals: The First Step of Strategic PlanningBefore getting into industry analysis, you as the entrepreneur need to make some very basic deci-sions about your goals for your prospective business—you, your idea, and your firm. These goal decisions will set the stage for the kind of business you will have and are the foundation for fur-ther analyses. There are five initial key goal decisions:

1. As owner, what do you expect out of the business? 2. What is your product or service idea (and its industry)? 3. For your product or service, how innovative or imitative will you be? 4. Scale: Whom do you plan to sell to—everyone or targeted markets? 5. Scope: Where do you plan to sell—locally, regionally, nationally, globally?

Owner RewardsFor a small business that is starting out, all strategy starts with the owner. As owner, what do you want out of your business? In Chapter 2 we introduced the rewards sought by entrepreneurs from their businesses. Some, like flexibility, personal growth, and a solid personal income, were pretty universal. Skill Module 7.1 looks at how you can determine your magic number, which is the income you personally seek from the business. Knowing that number from the start, you are better able to evaluate if your proposed business can deliver on that very basic need that every-one reports needing. Other rewards like great wealth and developing a new product or service are mentioned occasionally, while recognition, admiration, power, and family tradition get men-tioned least often of all rewards. For Greetabl, the original reward was to generate a product that would solve a problem Joe Fischer repeatedly experienced and felt others shared.

Whatever the reward or rewards you seek—it is fine to want more than one—it should be central to your creating the business. In a very real sense, what you want from the business is the core of your and your firm’s strategy. It is the “why” that drives the process of entrepreneurship.

Product/Service Idea and IndustryAlong with this pursuit of rewards, there is often an idea for the business. Recall in Chapter 4 we saw that 36 percent of businesses start with an idea that energizes the entrepreneur to start a firm. For 23 percent, the desire to start their own business comes first, while for 41 percent, the idea and the desire to start a business are simultaneous.3 Greetabl was one of those cases where the idea (the box) came first. Whichever applies in your case, the fact is that the idea for a

goalAn intended outcome for your business.

magic numberThe posttax income the entrepre-neur personally seeks from the business.


The Small Business Strategy Process


Owner Rewards

Product/Service – Industry – Imitation/ Innovation

Markets – Scale – Scope

Customers& Benefits

Value Benefits

Cost Benefits

IndustryDynamics& Analysis

Industry LifeCycle

Industry Trends



GenericStrategies – Di�erentiation – Cost – Focus – Combination

Post Start-UpTactics

CompetitiveAdvantage – Strategic Actions – Tactical Actions






Supra-StrategiesEntry Wedges

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196 PART 2 Small BuSineSS PathS and PlanS

product or service and the idea to start a business to earn rewards make up the core of strategy—what you plan to do and why you are doing that. The process for evaluating ideas, called the feasibility study, was detailed in Chapter 4. For the purposes of this chapter, we will assume you know your idea is feasible.

Some entrepreneurs may start a firm to get the product or service out, while others may cre-ate the product or service and have agents find firms to use it, which is the consignment process described in Chapter 5. Either way, the idea gets made real as a product (something physical a customer buys) or a service (activities undertaken on a customer’s behalf). It is possible to com-bine products and services, like a GM auto that comes with the OnStar cell phone service. You can learn more about that in Chapter 9.

If you have in mind a product or service, you also have an industry. Industry is the general name for the line of product or service being sold. Examples include the restaurant industry, the computer consulting industry, and the collectible doll industry. In addition to a name, industries have numeric codes, North American Industry Classification System (NAICS) codes,4 which are discussed below. Industry is vitally important to your core strategy decisions because simply put, there are industries that are more profitable than others.

industryThe general name for the line of product or service being sold, or the firms in that line of business.

Finding Your Magic Number

One key decision all prospective entrepreneurs face is how much they want to make from the business. That’s the entrepreneur’s “magic number.” For full-time entrepreneurs, that number should cover your monthly personal expenses and give you some leftover money to invest, save, and add to your enjoyment of life. If you have ever made a budget, you know how to arrive at that number. For this example, assume you would like to take home $24,000 a year, after taxes. How much would your business need to pay you? A quick way to figure combined federal, state, and city taxes is to check the numbers related to Tax Freedom Day from the Tax Foundation ( For 2019, the rate was 29 percent, so the pre-tax computation would look like:

Pretax income = (Your desired posttax income)/(1 − Tax Freedom Day percentage rate)

For our example, it would look like this:

Pretax income = $24,000 / (1 − 0.29) = $33,802

That is what you would receive before the business taxes are paid. In your feasibility analysis you probably got an idea of what the costs are for your particular type of business. Let’s say they are around 75 percent, not including any salary for you. At that level, for you to be able to take home $33,802, your firm would need to sell the amount in the equation (which is the same type of computation as we did on pretax income) below:

Company sales = $33,802 / (1 − 0.75) = $135,208

Now you have a starting goal. Here are some basic ideas on what it would take to achieve those sales:

Business Unit Sale Number of Units Number per Day

Web design $50/hour 2,704 hours 11 hours/day

Greetabl box $5/unit 27,042 units 108 units/day

The Number per Day gives you an idea of what you need to accomplish each day. For the web design busi-ness, we are looking at 250 days a year (5 days a week for 50 weeks). For the original Greetabl box, we are figuring while an online store is open year-round, fulfilling orders is done on a 5-day-a-week basis (so 250 working days again). As you can see from this analysis, the web designer is clearly facing a challenge. She will need to scale back her financial goals, or increase her prices, or rethink her approach in other ways, since few people want to work 11 hours every day. But that is fine; if a few minutes with a pencil and paper can help you get a sense of the task in front of you, it is time well spent. What is your magic number?

S K I L L M O D U L E 7.1

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Small BuSineSS StrategieS: imitation with a twiSt CHAPTER 7 197

In fact, picking the right industry is key to the success of your small business. Stanley and Danko,5 in The Millionaire Next Door, point out that two-thirds of all millionaires are self- employed. They say that the key to being successful is selecting an industry that offers good po-tential for making a profit and attractive opportunities to work with a minimum of risk and competition. These industries are described as having high industry attractiveness. Stanley and Danko were surprised to discover that most millionaires who owned businesses are in industries like scrap metal, coal mining, and dry cleaning. It turns out that industries that are attractive from a profit-making sense may not be the industries thought of as attractive places to work. But choosing one of these attractive industries can do a lot to help your firm survive and you to be successful.

Industries that do well in good times and poor historically include financial firms tied to banking, health-related firms, insurance firms (especially related to health), and business con-sulting.6 When talking about the small business myths in Chapter 1, other occupations that came up included bookkeeping, credit counseling, and tax preparation.7 Figure 7.2 gives information about a number of industry sectors and some popular individual businesses to help you get an idea of the relative attractiveness of industries (based on their profitability), and the expected level of sales.

If you know the industry’s code number (see Skill Module 7.2 to find out how to do this), you can find out a tremendous amount of information about the industry. This is because most infor-mation is coded using the industry number. From the work done by marketing researchers Stanley and Danko8 as well as and others, we know there are between 15,000 to 30,000 different industries in the United States.

There are two major classification systems that code industries: the new NAICS and the better-known SIC. SIC codes have four digits; NAICS have six. NAICS covers more industries and more of the newer types of industries. Skill Module 7.2 gives you help in finding the NAICS and SIC codes for the industry for your business.

The key to finding information about industries is knowing how to check the information, and NAICS codes are essential to that. It is also important to know that there are no “safe” in-dustries. In much the same way that families and societies are living things—things that are born, mature, and can die—industries can be considered living too. When you were in kindergarten, coffee shops were a dead industry in most of the country. However, today, with Starbucks, Panera Bread, Seattle’s Best, and a host of independent coffee shops blanketing the country, the industry has been revived through franchises, company-owned stores, and innovative independents.


Couriers BakeriesRetail

Florists Amusement &Recreation







Ad AgenciesInsurance Consultants


B2B Sales

FinancialServices Professional

ServicesExpensiveB2C Sales

InexpensiveB2C Sales



Wood Mfrs.


Used CarDealers








Attractiveness of Selected Industries and Lines of BusinessNote: Industries shown in blue are the most profitable, while industries shown in red are the least profitable. Averages for major industrial sectors are shown in black.

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198 PART 2 Small BuSineSS PathS and PlanS

Imitation and InnovationThis chapter’s subtitle is “Imitation with a Twist.” The idea reflects the fact that for most small businesses, the owner wants to be a lot like others in the industry, but not exactly like them. Owners who elect to imitate their competitors still want to have something that distinguishes them from the others—something that makes the owner’s firm special and better. That special and better element—that innovation amid a lot of imitation—gives us the kind of entrepreneurial thinking behind the chapter title.

The choice between imitation and innovation is truly important and often overlooked. Businesses, especially new firms, can do more or less what others are already doing—an imitative strategy—or they can start doing something that is very different from what others do—an innovative strategy. Imitation is the classic small business strategy. We know from the PSED that almost two-thirds of people starting businesses today plan to use imitation as their approach.9

There are several advantages to using an imitative strategy.10 You benefit from being able to buy existing technologies, such as industrial grade washing machines for a laundromat, web servers for a hosting service, or calligraphy pens for greeting card publishing. Architects, build-ers, real estate agents, zoning boards, equipment manufacturers, equipment servicing companies, and banks are more likely to understand the industry and what is expected. Because of this, they can give you firm estimates of costs and schedules. With imitative approaches, there is also the possibility to buy existing businesses.

LO 7-2 Identify the forms of imitative and innovative businesses.

competitorAny other business in the same industry as yours.

imitative strategyAn overall strategic approach in which the entrepreneur does more or less what others are already doing.

innovative strategyAn overall strategic approach in which a firm seeks to do something that is very different from what others in the industry are doing.

Finding Your Firm’s Industry

The government organizes firms by their industry and gives each industry a formal name and numerical code. That coding system is called the North American Industry Classification System: United States, 2012 (NAICS, 2012). Knowing the formal name and NAICS number can help you find a wealth of government data on your target industry. It’s easiest to search online using the Census Business Builder. Go to and find the text box that says “or Search for your type of business.” Enter the name of your industry. For today’s example, think about opening a hamburger and fries sort of restaurant to compete with McDonald’s in your little corner of Texas. For our example, you could start typing “restaurant” and you’ll begin to see all sorts of industries with those letters in the name. Scroll down and you will see “Limited-service restaurants,” which is what we’re seeking. Its NAICS code is 722513. In this case, Limited Service Restaurants are what the government calls fast-food restaurants. Click on the hot link, and you’ll find yourself looking at a hotlink saying “You selected; Fast Food.” If you look to the right, there is question 2. Where are you considering locating the business?” Here you can type in the location of interest to you and generate a map or report with information on that industry in the locality you pick. Let’s type San Antonio and choose “San Antonio city, Texas.” Then pick “Create Report.” The resulting report will have a section “My Potential Customers” (the people of San Antonio), a section called the “ Business Summary” about the fast-food sector in San Antonio, and a section titled “Consumer Spending” which includes the section “Consumer expenditures per household on Dining out (food away from home).” The Business Summary includes information on businesses with employees (and if there are owner-only businesses, called nonemployer businesses, they get listed separately), business revenues, exports, and workforce data. Depending on the industry and locality, some sections of the report may be empty. For example, in this report San Antonio, Texas, had 1,136 fast-food restaurants (establishments), employ-ing 25,608 people, or 23 employees per establishment, who were paid on average $12,807. You can check out the population per restaurant, the range of sizes of restaurants, and their legal form of organization. You can even compare your proposed business to the state and national statistics by checking the graphs that accompany this table. The latest data reported were from 2016. Armed with the NAICS codes, you can go to library and online sources listed later in the chapter in Table 7.1 to find more detailed information about the industry you’re thinking of entering.

S K I L L M O D U L E 7. 2

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Small BuSineSS StrategieS: imitation with a twiSt CHAPTER 7 199

Perhaps the key benefit of an imitative strategy comes from your customers. Chances are they already know about the kind of product or service you are offering. This means your marketing efforts can focus on the benefits you offer instead of explaining the product itself.

When you elect an innovative strategy, you have the benefit of making your business precisely fit your own ideas and preferences. Take the example of snowboards. When Dimitrije Milovich built the first modern snowboard in 1969, he not only had to have the product available for pur-chase, but he also had to inform the customers that such a product existed and how it could be used. With highly innovative businesses, there is often not much opportunity to sell the business, and the owner spends a lot of energy in creating the processes and markets as well as informing suppliers, resellers, and investors about the new product or service.

In practice, most firms use imitation plus or minus one degree of similarity. Imitation mi-nus one degree of similarity would be the business equivalent of cloning. It is franchising, first discussed in Chapter 6, in which you purchase a precise and complete copy of an existing busi-ness from the franchisor. Imitation itself involves patterning a business on existing firms and processes. Your imitation is not likely to match the precision or completeness of copying seen in franchising, since you are unlikely to have all the information about the model businesses or processes. You may also adapt your business to fit local situations or your current situation. You might pattern your new Italian restaurant after the Olive Garden, but you end up buying your equipment and food from different sources and add local favorites, such as toasted ravioli in St. Louis, barbeque pizza in Memphis, or deep-dish pizza in Chicago. This approach is called parallel competition.

Imitation plus one degree of similarity is where you look at existing businesses and pattern yourself after them, with the exception of one or two key areas in which you seek to do things in a new, and hopefully better, way. This is called incremental innovation and is second only to parallel competition in frequency. You have seen it in the fast-food business where Burger King told customers “have it your way.” This approach was bettered by Wendy’s, which offered custom-built hamburgers that were, in addition, “hot and juicy.” Hardee’s moved into the fray with supersized custom burgers. Each company makes custom-built hamburgers, but each added a small innovation to differentiate it from its competition. Small businesses do the same thing, whether they are offering haircuts or golf clubs.

The last type is pure innovation, also called a blue ocean strategy, which results in a new product or service. These situations are rare. Typically with a new product or service, you also have a unique setting. For example, consider Cirque du Soleil, which started as a French Cana-dian circus, but transformed itself into what it calls a “contemporary circus.” This means that each show is a theatrical performance, building each program on a unique theme and musical score. While the human acts common to circuses, like acrobats, clowns, and aerialists, are pres-ent, there are no animals. Instead of targeting children and families, Cirque aims for adults and corporate clients looking for a unique, live entertainment experience for which they are prepared

degree of similarityThe extent to which a product or service is like another.

parallel competitionAn imitative business that com-petes locally with others in the same industry.

incremental innovationAn overall strategic approach in which a firm patterns itself on other firms, with the exception of one or two key areas.

pure innovationThe process of creating new prod-ucts or services, which results in a previously unseen product or service.

blue ocean strategyA strategy based on creating a new product or service that has no competitors.

● Cirque du Soleil upended the classic idea of a circus with a more theatrical, themed and musical experience. What kinds of marketing challenges might a pure innovation product or service pose to a small business owner?

PA Images/Alamy Stock Photo

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200 PART 2 Small BuSineSS PathS and PlanS

to pay several times more per ticket than traditional circuses. At a time when traditional circuses are deteriorating (with Ringling Brothers Barnum and Bailey closing in 2017 after 148 years), in 2019 Cirque du Soleil is running 10 different shows around the world, and inspiring a new gen-eration of contemporary circuses like Circus Smirkus or the Pickle Family Circus. It has achieved this by getting out of a crowded, eat-your-competitor “red ocean” and aiming for a “blue ocean” of uncontested market space.11

These ideas lead to a simple set of strategic moves that can help you think about how to com-pete better as an imitator. Think of the case of the upstart Netflix, which became a major player in the video rental business, but was a relative latecomer.12

• Parallel innovation• Use the standard-setter’s approach for lower start-up costs: Blockbuster set the stan-

dard, so the software and basic inventory for video rental existed.

• Don’t make the mistakes the leader is making: Blockbuster customers complained about lack of selection and out-of-stock movies, so Netflix had a larger selection and arranged to avoid stock-outs.

• Incremental innovation• Take it to the next level: Pick one area important to customers to do much better than

the pioneer. You can be easier, cheaper, or offer higher quality. Netflix offered avid movie renters a better financial deal and better selection.

• Borrow from outside: If another industry has a solution that works (and people know about and like), imitate that idea in your home industry. Netflix married the book clubs’ use of mail and the video rental model of Blockbuster.

Remember that a lot of research shows that imitators do better than pioneers in the long run.13 For example, we know Boeing, Microsoft, and Google, but these are all imitative compa-nies. The pioneers in their industries were companies like Wright or Curtis (airplanes), Digital Research (PC operating systems), Wandex (web searching), and Overture (keyword ad sales). When you do imitation well, it can do well by you.

To Whom Will You Sell?A market is the business term for the population of customers for your product or service. If you know your market inside and out, you are likely to know much of the key information for how to be successful in your line of business. Many of the decisions related to markets will be covered in Part 3 of this textbook. But there are two strategic decisions about your market in general that you need to make early in the process of going into business. One of these is the scale of the market, which is the size of the market—whether you plan to aim for a mass market or a niche market. The other is the scope of the market, which defines the geographic range covered by the market—from local to global.

Scale: Mass or NicheWhen you think about the market for your product or service, you typically have two choices. A mass market is a market that involves large portions of the population—all men, all women, all teens, all elderly, all families, all manufacturers, all restaurants. Mass markets are broad, and a mass-market approach targets the entire market.

A niche market is a narrowly defined segment of the population that is likely to share inter-ests or concerns—25- to 34-year-old women, families with twins, student athletes, Italian restau-rants, manufacturers in your city. Niche markets are specific and narrow, and in a niche market approach, you try to target only customers in the niche.

Most industries have both mass and niche markets. For example, the greeting card industry has mass-market giants like Hallmark and American Greetings, which advertise nationally on TV (a sure sign of a mass marketer). However, the industry is also full of niche markets. For exam-ple, Maria Peevey and Lisa Bicker started SimplyShe with greeting cards targeting women going through trying life experiences such as breakups, motherhood, or weddings. Having identified their niche and its needs, they market their cards through specialty fashion boutiques such as Henri Bendel, as well as online.14

marketThe business term for the popula-tion of customers for your product or service.

scaleA characteristic of a market that describes the size of the market—a mass market or a niche market.

scopeA characteristic of a market that defines the geographic range covered by the market—from local to global.

mass marketA customer group that involves large portions of the population.

niche marketA narrowly defined segment of the population that is likely to share interests or concerns.

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Scope: Local to GlobalMarket scope is related to market scale. Market scope refers to the geography of your target mar-ket. It can be local (like a neighborhood or a city), regional (e.g., a metropolitan area or a state), national, international (usually meaning two to a few countries), or global (meaning every-where). Owners of the businesses studied in the PSED15 were asked how much of their business they thought would come from each of the geographic categories. Overall, they estimated that 58 percent of sales would be local (within 20 miles), 30 percent would be regional (from 21 to 100 miles), 22 percent would be national (from 100 miles out to the rest of the United States), and only 4 percent would be international (outside the United States).

Market scope is important for two reasons. First, knowing your market scope helps you de-cide where to focus your sales and advertising efforts. The second benefit is that knowing your target market gives you a way to determine which potential competitors you need to worry about most, namely those also in your market scope.

In the goal step, the key is to bring together the decisions that underlie the business you hope to own. This starts with you and the rewards you seek; the product or service you plan to offer for sale to achieve those rewards; and the industry and markets with which you and your firm will plan to deal. Armed with this basic understanding of your firm, you are ready to begin developing a strategy to achieve your goals. Very often, it starts with a closer consideration of your potential customers and what you can do with your product or service to best catch their attention.

Customers and Benefits: The Second Step of Strategic PlanningStrategy and marketing are closely connected in the planning and everyday operation of any busi-ness because together they define the who, how, and why of the business’s operations. As noted earlier, strategy is the idea and actions that explain how a business makes its profits, while marketing is the actions of a business related to promoting and selling goods or services. Both strategy and marketing are defined in large part by the specific products or services being sold, but they focus on different aspects. As Figure 7.3 shows, marketing focuses on the customers with the key being the goods’ or services’ value proposition, while strategy focuses on the competition, with the key being the goods’, services’, or firm’s competitive advantage over the other firms.

This chapter concentrates on building the right side of Figure 7.3, while the chapters in Part 3 will focus on the left side of the figure. But to figure out the competitive advantage, we need to look at something central to the market and the strategy—the benefits the goods or services offer.

So, in this second step of the strategic planning process, the focus is on the kinds of custom-ers you want to sell to and the benefits that will attract them. Just as there are industries that offer better and worse opportunities, there are customers whom entrepreneurs prefer. Customers who offer the kinds of rewards you are seeking are generally those you are most likely to view positively. If you are interested in great wealth, having customers who are themselves wealthy and not very sensitive to price issues would be seen as rewarding. If growth is your goal, having customers from whom you can learn and who expect things to be constantly new and improved will help you meet your goal. There are also some types of customers often seen as particularly attractive. These include:

• Corporate customers: Look at Figure 7.2 and compare the B2B (wholesale) to B2C (retail) sales. Selling to other businesses may produce greater profits.

• Loyal customers: Loyal customers return and are already presold, making your life easier. They also refer friends, another source of revenue.

• Local customers: This was originally true because as the owner you could keep tabs on the satis-faction of local customers more easily than distant ones; but in the digital age, it is less about geographic proximity than about you taking the time to stay in touch with your customers.

• Passionate customers: People who are not just loyal but are likely to rave about your busi-ness are likely to generate more potential customers than any other type.

LO 7-3 Articulate the benefits that win over customers.

marketingThe actions of a business related to promoting and selling products or services.

value propositionSmall business owners’ unique selling points (also known as ben-efits) that customers can expect from your goods or services, in-cluding benefits that differentiate your offering from those of the competition.

competitive advantageThe particular way a firm imple-ments customer benefits that keeps the firm ahead of other firms in the industry.

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There are literally dozens of beliefs about the best customers. Most of them have at least a germ of truth about them. You can learn about the types of customers in your intended line of business by talking to other entrepreneurs already in the business, and by researching the busi-ness in the trade press (to find these, refer back to Skill Module 3.1). Look for terms like “cus-tomer profile” and “preferred customers” as well as articles about “loyalty programs” and “repeat customers.” These articles are most likely to have information about the most prized customers in your proposed line of business.

The point is that thinking ahead about the kinds of customers with whom you want to deal is the best way to orient your strategic planning process toward finding those customers when you get to picking a strategy. As you decide on the types of customers you want to encounter, your next step is thinking about the kind of benefits you can offer them to help meet their needs with your product or service.

Value and Cost BenefitsBenefits are characteristics of a product or service that the target customers would consider worthwhile, such as low cost or high quality. The best way to identify desirable benefits is through potential customers. You can do this directly through interviews, focus groups, or ques-tionnaires (see Chapter 9 for more details on how to do this), or indirectly through reviewing websites using the techniques given in Skill Module 7.3. Ratings and complaints for products and companies can give you valuable information on what benefits people want, and might want more of. Usually the benefits focus on value added to the product or service or on the cost of the product or service.

Benefits are usually characterized as value benefits or cost benefits. A value benefit displays characteristics related to the nature of the product or service itself. Things like quality, fashion, and reputation are elements that give a product or service value in the eyes of the customer. A complete list is given in Exhibit 7.1 on value and cost benefits.17 Value benefits are important because they are almost always what lead to higher prices and higher profits. For example, McDonald’s Big Mac often costs $2 more than its double cheeseburger. The difference between them are some sesame seeds, a third piece of bun between the top and bottom patty, the “special” Big Mac sauce, and some lettuce. Both have two all-beef patties, two buns, and cheese, which you would figure (correctly) are the major costs of the sandwiches. But people pay far more for the Big Mac and pay it far more often. Next time, ask your friends why they do that. The answers you will get will tell you a lot about value benefits, and how much people will pay for them.






COMPONENTS:Usually Focus,


Entry Wedges,Four Typical Modes









How Strategy and Marketing Relate

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S K I L L M O D U L E 7. 3

Checking Customer Opinions Online

Today there are many ways to quickly assemble information about products or services from customers from online sources. For this exercise, imagine you would like to produce and market a new iPhone case. The following list will point you to online sources you can use to build a profile of customers and their opinions. The list starts with the most direct ways to find opinions, and shows more complex ways to find opinions as you work your way down the list.

1. should be your first stop because it does an outstanding job of soliciting and displaying large numbers of customer ratings on a wide range of products. Competitors like or can also be worth checking.

2. When you have a particular product or service in mind, try to start with a website that specializes in it (or type the product name into Google).

3. You can go to the major customer opinion sites to see if they have anything on iPhone cases. Googling “top customer opinion websites” will get you articles giving lists and reviews of the best such websites.,, and are also important sources for customer opinions about services.

4. Most manufacturers provide a customer opinion web page and from that you can learn a wealth of information about your competitors’ products.

5. Finally, you can look for blogs on the subject. Typing “iPhone case blogs” into Google or Yahoo! will point to blogs with individuals passionate about a variety of topics and who along the way mention iPhone cases.

With these reviews, you look for themes about what satisfies and dissatisfies customers. What these re-views miss are potential customers—people who did not buy. On the other hand, those who provide reviews tend to be the more passionate customers—pro or con. You can get a wealth of information from dozens of people for free in a matter of minutes. Beware that one problem is the “fake review,” often gushingly positive reviews that turn out to have been written by the manufacturer or reseller. That is why it is important to get reviews and comments from different sites and keep an eye out for similar-sounding reviews. You can get help assessing reviews using sites like When presenting your results, list the sites you visited and the number of customer reviews you analyzed. You can use the value benefits list to categorize your findings, or make a set of categories that fit the special features of your product or service. Finding online reviews can be fast and easy, but it helps when you supplement this with in-person reviews of users to get a better “feel” for how consumers think about the product. We will talk more about this sort of research in Part 3 of the text.

● These two burgers have very similar costs for raw materials and preparation, but one costs $2 more than the other because of the value benefits it offers.

(left): Ingram Publishing/SuperStock; (right): P Maxwell/Shutterstock

While value benefits refer to what the customer senses in the product or service, cost benefits refer to the ways by which a firm can keep costs low for the customer. These include scale and scope savings. It is often important for customers to know one of these cost benefit reasons why a product or service has a low price so that they do not erroneously conclude that your firm has cut price by cutting quality.

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Value and Cost Benefits

1. Value BenefitsQuality: Offering a quality level others do not. It can be the highest quality, just enough quality to meet the basic need, or a bit more quality than is typical for the price. Offering guarantees and warranties also reflects quality benefits.

Style: Items that are beautiful, fashionable, popular, or otherwise aesthetically pleasing.Delivery: Sometimes simply offering delivery is enough, but other times you may need to deliver quickly, on schedule, or where others do not.

Service: Examples include the go-the-extra-mile sort, the personalized know-your-customer’s-name sort, the we-serve-you-in-one-minute sort, or even the service-after-the-sale sort.

Technology: You can offer state-of-the-art or leading-edge technology, technology that others do not have, or technology that automates or simplifies tasks or that meets industry standards. Offering complementary technology such as voice mail or answering machines to people with telephones also fits in here.

Shopping ease: Providing one-stop shopping; having all of a product line; making ordering, returning, or upgrading easy for the customer are all benefits.

Personalization: This can come in building custom products or services, or personalizing the customer experience.

Assurance: Offering guarantees, warranties, or service that takes the risk out of buying your product or service.

Place: Being conveniently local is one example. Being willing to sell and deliver where others do not is another.

Credit: One key benefit small businesses offer customers can be extending credit where larger firms and chain stores will not.

Brand/reputation: This can come from the products or services that you offer, or from your own firm’s reputation.

Belonging: Some products confer value because they make the customer part of a larger group, such as a member of a club or an online gaming community.

Altruism: If your product helps the community, a group, the environment, or the world, it is a benefit.

2. Cost BenefitsLower costs: Operating from your home, getting family members to contribute their time for free, or selling something you’ve already gotten your value out of are all examples of ways small businesses keep their costs low.

Scale savings: Buying in volume usually produces savings, so some firms buy in bulk and sell or repackage in smaller amounts, passing along some of the cost savings.

Scope savings: A multifunction printer has a broad scope—it combines a printer, a scanner, and a fax machine into one box. This is because they can share parts, and this sharing results in lower costs.

Learning: As a firm gets more experience, it can often work with fewer mistakes and greater efficiencies, thereby lowering costs.

Organizational practices: Possibly a small business has automated or professionalized or mastered a product or service to the extent it can do it more cheaply than others.

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Benefits are central to how you appeal to your target customer base. Picking benefits cus-tomers find attractive makes your firm attractive to them. Picking customer-desired benefits that your competitors do not offer is a powerful way to make your firm stand out from the competition. Benefits drive your firm’s offering to its customers and inf luence every part of the strategy process. As we will see later, benefits can be combined to offer themed strategic packages.

Offering the benefits your customers want opens up the possibility of your being able to charge a premium price and make higher profits, since people are willing to pay for value-based benefits they desire. Having cost-based benefits can also increase profits by lowering your cost of doing business, and thereby increasing your margin relative to your competition’s. Therefore, it is easy to see how benefits help you select a strategy that improves your firm’s profitability.

As you decide what benefits to offer, you open up the possibility of using a powerful stra-tegic analysis tool called a distinctive competence map. Distinctive competence maps are a graphic display of your firm’s product or service, compared to that of your competitors. You map the features and benefits you offer, and your competitors offer. It often helps to use the value and cost-related ideas from the list in Exhibit 7.1 to get started, but feel free to in-clude ideas you come up with and also the ideas you hear from customers or prospective customers.

Core competencies are those skills that you and pretty much all of your competitors have. Every fast-food burger place you know about has similar core competencies around making burg-ers, fries, and shakes, serving you quickly, and handling dine-in, drive-through, and online order-ing. But they also have features that differentiate them. As we noted, this becomes Burger King’s “have it your way” model for customization, or Wendy’s “hot and juicy” burgers, or Hardee’s supersized burgers, or McDonald’s value menu. Those differentiating features are how the firms describe their distinctive competence, or specialty. To stand out in any industry, you need to meet the core competencies of your competitors, but also offer something distinctive that you do well. Here is where “imitation with a twist” meets “distinctive competence.” Skill Module 7.4 takes you through developing a distinctive competence map.

distinctive competence mapA graphic display that compares your company’s product or ser-vice to that of your competitors, in order to identify your core (shared) competencies and those unique to you and to your competitor.

distinctive competenceThose features, benefits, or as-pect of your business that are unique to your firm, or more strongly identified with your firm than with your competitors. This is the specialty for which your firm is best known.

core competencyThe main work of a firm in a particular line of business.

S K I L L M O D U L E 7. 4

Mapping Your Distinctive Competence

Mapping your distinctive competence is done in comparison to your competitors. Mapping it works best with sticky notes or pencil or chalk. You will be moving things around. Start with the two overlapping circles, you and your competitors’ firms:


Your Firm’sDistinctive





● Start with the “YOU” circle, listing the features and benefits of the product or service you are considering. You can use examples from Exhibit 7.1 and add-in other features and benefits in your own

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In the end, the set of benefits you offer your customers will probably look a lot like what your competitors offer. The key is to have one or more benefits that are important to your customers that your competitors don’t offer. Those benefits represent your competitive advantage, which we will come back to at the end of the chapter.

Industry Dynamics and Analysis: The Third Step of Strategic PlanningIndustry refers not only to your product or service, but also to all the firms selling that product or service; in other words, your competitors. In setting strategy you need to look at your competi-tors in order to best position your firm, but you also want to look at the changes in competitors, sales, and profits in your industry—what are called the industry dynamics—to make sure it is a good time to enter it.

It turns out the fortunes of industries move in a predictable way. Figure 7.4 shows the two ways the number of firms in an industry change.18 Most industries’ introduction stage starts with only a few firms. These firms elected to be innovative in their approach, making a new product or offering a new service. The number of firms typically grows slowly at first. Sales are probably small, and most customers are largely unaware of the offering. When enough customers have bought the product so that it begins to draw the attention of the general public, there are two possibilities for the growth stage. Most products and services tend to grow at a regular rate, one at which the growth in the number of firms more or less meets customer demand. However, some products or services turn out to be extremely popular or “hot” and grow very rapidly. In

LO 7-4 Assess how industry changes affect strategy.

industry dynamicsChanges in competitors, sales, and profits in an industry over time.

introduction stageThe life cycle stage in which the product or service is being in-vented and initially developed.

growth stageAn industry life cycle stage in which customer purchases increase at a dramatic rate.

words, or those of customers or prospective customers. Repeat this in the “YOUR COMPETITORS” cir-cle for competitors’ similar offerings. It may help to focus if you start by considering only the competitor you think will be the most likely choice of your customers.

● Move entries for features you both have into the overlapping area for now. That area represents the core competency of firms in your industry, the basic features or benefits or actions that anyone in your industry must have to be successful.

● What is left in each circle are the distinctive competencies of your firm and your competitors’. The distinctive competencies in your circle are the key factors in describing the competitive advantage you offer your customers.

● Save your results because you will use them again in Skill Module 9.8 “Coordinating Your Distinctive Competence and Value Proposition.”



ber o

f firm


LowIntroduction Growth



Shake-out Maturity Decline Death orretrenchment



The Industry Life Cycle

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these cases, the original firms are unable to keep up with consumer demand. Other firms jump in to take advantage of the growth; this stage is often called the boom. Firms begin to compete on features and price, and there may seem to be an explosion of choices. Eventually, all such booms come to an end, and there is a stage called the shake-out in which many of the firms close down. This phase ends as the rapid die-off of firms stops.

Whether through slow and steady growth or a boom and shake-out cycle, the industry eventu-ally reaches a relatively stable number of firms, with minor variations and a slow drop in num-bers. This is called the maturity stage. Eventually mature industries begin a decline stage. Some industries face death, while others find new life in a process called retrenchment. We will look at those stages later in this chapter.

Starting early is not always a guarantee of eventual success. Consider cars—the original car companies were small businesses. Charles and Frank Duryea, brothers who created a family busi-ness, made the first production car in the United States in 1893. Firms from the start-up stage included Duryea, Winton, and Studebaker as well as Olds, Cadillac, and Ford. The boom started in 1905 and went to 1915 with over 75 auto manufacturers, many of them still small businesses. In the shake-out during World War I, the number dropped into the teens, settling into the maturity phase of the Big 3 (GM, Ford, and Fiat Chrysler) who survived into the twenty-first century.

Industry dynamics are important in telling you and potential partners or investors about the prospects for the industry as a whole. Obviously it is easier to sell people on your business when the whole industry is growing. If the industry is not growing there are still ways to be successful, but as a start-up you need to have worked through these ahead of time. After the 9/11 attacks, many airlines gave up routes due to the downturn in air travel. This market relinquishment opened up opportunities for new small airlines in the cities abandoned by the major airlines. Remember, there are small businesses started in every industry at every stage of the industry life cycle. Know-ing where your industry is in the life cycle helps you craft the best strategy for success.

Tool: Industry AnalysisArmed with the concepts and preliminary information about the product/service and the market, you are ready to do a preliminary industry analysis. Industry analysis (IA) is a research process that provides the entrepreneur with key information about the industry, such as its current situa-tion and trends. Most entrepreneurs initially do an IA to find out what the profits are in an indus-try in order to better estimate possible financial returns. Taking this one step further, finding out how those profits are generated often makes the difference between success and failure. Armed with this information, the entrepreneur can tell if the industry is growing, stable, or in decline and what the degree of competition is. Skill Module 7.5 provides a how-to description for gathering the key types of information needed to perform an industry analysis. It also explains how the in-formation is useful. For a complete example of an industry analysis, see this chapter’s appendix.

boomA type of life cycle growth stage marked by a very rapid increase in sales in a relatively short time.

shake-outA type of life cycle stage following a boom in which there is a rapid decrease in the number of firms in an industry.

maturity stageThe third life cycle stage, marked by a stabilization of demand, with firms in the industry moving to stabilize or improve profits through cost strategies.

decline stageA life cycle stage in which sales and profits of the firm begin a fall-ing trend.

retrenchmentAn organizational life cycle stage in which established firms must find new approaches to improve the business and its chances for survival.

industry analysis (IA)A research process that provides the entrepreneur with key infor-mation about the industry, such as its current situation and trends.

S K I L L M O D U L E 7. 5

Short and Sweet Industry Analysis

The basics of industry analysis (IA) consist of knowing seven pieces of information:

1. NAICS number and description (online): Getting this information is detailed in Skill Module 7.2. It is important to know this number in order to search for other information about the firm.

2. Industry size over time (online): Getting this information is detailed in Skill Module 7.2 for 2016 data for San Antonio, but the Census Business Builder can also generate data for any industry across all of the United States. These numbers tell you the overall trend (growing, stable, declining).

3. Profitability: Profits are key. You can get the basic information for a wide variety of industries from the website under “Sole Proprietor.” Select the description of your business (you will find restaurants listed under “Accommodation-Food services-Drinking Places” and then “Food Services-Drinking Places”). Look for gross profit (what is left after deducting the cost of goods sold) and

gross profitFunds left over after deducting the cost of goods sold.

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What are you looking for in your industry analysis? You want a business that can help you meet the magic number you determined earlier in the chapter. In looking at the other numbers in the industry analysis, you may see ways to cut costs, or leverage friends or expertise or other resources available to you to make your business more profitable than the average one. That can be a tremendously useful finding.

Knowing the stage and trend in the industry is important to thinking about how you will enter the industry. Going into an established industry means it is easy to find locations, equip-ment, and experienced people (think pizza parlors). Going into an industry early may mean you have to spend more time and money doing things for yourself. It is better to know these things early. If the analysis tells you that you are facing a lot of competition, you want to pay particular attention in building or rebuilding your perceptual map to find a set of benefits that

net profit (what is left after deducting the operating expenses of the business). You can get more detailed reports for more individual industries for a fee from the Risk Management Association (RMA) or Bizminer websites, or you can check if your school or local library has a copy of the RMA’s Annual Statement Studies: Financial Ratio Benchmarks. One valuable number you can find in the RMA report is the profit before taxes, which represents the amount of money the owners take out of the firm annually and on which they pay taxes. When the business can sustain it, owners tend to put their sala-ries in the operating expense category. However, if the firm cannot afford the owners’ salaries, the only income is the profit before taxes.

4. How profits are made (interview or articles): Armed with the previously listed information, you can look for the last piece of the puzzle—how profits are made. It isn’t always obvious. McDonald’s single biggest source of profit is real estate; GM’s is financing! Toy stores make almost all their profit during the Christmas shopping season. There are usually four activities to evaluate. One is what can be done to generate more sales. Second is a judgment of whether it is possible to charge a premium for a product or service. Third is how to keep the cost of goods or services below the industry’s average. Fourth is looking at ways to keep operating expenses below industry averages. Small businesses may use one or more of these approaches. Finding out which get used and the specifics of how they are used generally requires either talking to people in the industry or checking out the industry press. Skill Module 3.1 talks about where to find the trade and professional press for particular industries. If you go the interview route, you can talk to people at companies in the industry. Among the owners most willing to talk are those who have been officers in trade and professional associations or owners of businesses who would not see you as competition, such as owners in other cities. Whenever pos-sible, try to get at least five different sources to make sure you know what is really going on.

5. Target market competitor concentration (directory checking): By looking at the listings for local and commercial directories, companies’ websites, and map searches such as, you can get an idea of the market scope and scale of the businesses with whom you’ll be competing. For example, keeping with our fast-food theme, type into Google Maps “fast food restaurants near San Antonio, TX 78205.” You’ll see a map and listing of restaurants, which you can use to count those places you see as competitors. By getting the number that matches your firm in scale and scope, you can get a clear idea of the concentration of competitors in your segment of the industry—and whom you will need to keep an eye on.

6. Analysis: In general, the data you have gathered are put into a report, which helps readers under-stand what the numbers mean for the industry under consideration. When analyzing the industry, give an overview of the industry (e.g., growing, stable, declining, does it have any major segments like fine-dining versus quick-service restaurants) in words and numbers, its size and profitability (as well as the trends for each over the past three to five years), and the major strategies by which businesses in the industry make money (e.g., cost or differentiation strategies; see the section “Strategy Selection: The Fourth Step in Strategic Planning” later in this chapter).

7. Sources: Let readers know where you obtained your information (e.g., books, websites, or personal interviews). It is important to assure them of the quality of your work. Without sources, you could be accused of plagiarism.

net profitThe amount of money left after operating expenses are deducted from the business.

profit before taxesThe amount of profit earned by a business before calculating the amount of income tax owed.

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will help your firm stand out. All in all, an industry analysis is central to your plotting of your firm’s strategy.

Table 7.1 provides a listing of many of the key databases used in assembling industry analyses. Some are online, while others are in book form and available in local libraries. Armed with the information from your industry analysis, you are in a better position to decide if the industry

Sources of Data for Industry AnalysisTABLE 7.1

Free Online—Offers profit and cost information for about 100 industries dominated by small businesses. Also has balance sheets and income statements as well as a calculator to project financials from the firm’s sales and legal form of organization. BizStats has a for-fee companion called Bizminer (see below).

Bureau of Labor Statistics Consumer Expenditure Survey (—One of the few databases that tracks buying habits (expenditures) of American consumers (families and individuals). Useful for determining market size. Also includes income and demographic information on consumers. Note that these data are now included in the Census Business Builder reports.

Census Business Builder (—We’ve already mentioned this in Skill Module 7.2. To see output, look at the appendix at the end of this chapter.—Scroll down and click on the industry you are considering under “Industry and NAICS codes.” You’ll see a list of data types you can explore including tables, maps, and pages. The pages show the latest statistics available from the government.—A free resource from Harvard and the U.S. government’s Economic Development Administration. Learn more about it in Experiential Exercise 5 at the end of this chapter.

Sources Likely to Be Found in a LibraryStandard and Poor’s Industry Surveys—These give you the overall trend in narrative and statistical terms for 52 major industries.

Encyclopedia of American Industries—Provides detailed rundowns on major industries. Names leaders and gives upcoming trends as well as historic ones. Has two volumes, one for manufacturing and one for all other industries. (Also available online as the Gale Business Insights database.)

Industry Norms and Key Business Ratios and RMA Annual Statement Studies—Each of these two competing products offers a rundown of the financials for hundreds of industries, along with the key ratios (see Chapter 15 for more detail on this).

Market Share Reporter—Compiles market share data on products and services for public and private (i.e., small business) companies.

For-Fee (Not Free) Online Sources (many school and local libraries already have access to these databases, so check with yours)—Bizminer covers over 15,000 industries including those most dominated by small business. For example, Bizminer has reports on more than a dozen types of restaurants and has similar coverage in other industries. In addition to financials, Bizminer offers market reports for thousands of industries in hundreds of U.S. communities.

Gale Business Insights—Database with an extensive listing of industries (along with industry reports), companies, and news articles linked to specific firms. Listings of small businesses give names, locations, and in some cases sales figures. Competing databases with similar types of data (but in less organized form) include Lexis and ABI/Inform. Your library may have the hard copy version of this, the Encyclopedia of American Industries.IBISWorld—Covers 700 industries in the United States and provides industry strategies, along with economic and big-picture market projections.

Mintel Reports—Covers United States and Europe with an emphasis on marketing research (versus industry analysis), such as giving consumer segments and purchasing habits in covered lines of business.

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210 PART 2 Small BuSineSS PathS and PlanS

meets your needs for income (which comes from profits and operating revenues), financial growth (depending on the trend of the industry as a whole), and competitive challenge (depend-ing on the number and concentration of competitors). It can also help you determine if you have or can get the expertise needed to run a profitable business (comparing how profits are made to how you would run your business if you started now). If the IA outcomes do not look promising, there are thousands of other industries to try, and it is time to think about what you can offer to attract customers to your business.

Strategy Selection: The Fourth Step in Strategic PlanningThere are three classic strategies for businesses of all types—differentiation, cost, and focus.19 Because they are so widely applicable, they are called generic strategies. Differentiation strategies are aimed at mass markets—situations in which nearly everyone might buy your product or service. With this strategy, you try to show how your firm offers some combination of value benefits that is different from and better for the customer than those offered by competitors.

Relatively few small businesses use differentiation strategies because it is hard for small businesses to have the resources to pursue mass markets. It happens most often when a small business offers a mass-market product or service locally. For example, a gas station offers a mass-market service, but its sales are naturally limited to a particular location. This business reality sets boundaries for where the firm competes, which help target advertising and pricing.

Cost strategies are also aimed at mass markets. In a cost strategy, you try to show how your firm offers a combination of cost benefits that appeal to the customer. Small businesses in a va-riety of industries make use of mass-market cost strategies. Typically, this comes when the small business can pursue a very low cost operation. For example, one gravel supplier in Memphis, Tennessee, was the undisputed low-cost provider. His secret? A farmer by trade, he discovered gravel under one of his farm fields. He sold directly to the users, cutting out intermediaries and their costs.

Focus strategies target a portion of the market, called a segment or niche. Instead of selling mass-market gravel for everyone, a focus strategy might target people seeking decorative gravel. For example, Scott Stone Company in Mebane, North Carolina, offers 20 different types of gravel that differ in color, stone size, and durability. By ensuring the quality and consistency of the gravel and knowing which types work best in specialized settings, such as oriental gardens or waterscapes, Scott Stone offers customers products and expertise not readily available elsewhere.

Small businesses often use a combination strategy that can use aspects of differentiation or cost approaches that are reformulated for the niche market. You identify a focus or combination strategy by figuring out what benefits your market most wants. This can be done by asking cus-tomers outright, through surveys, or by looking at what is working among your competitors locally or in more advanced markets. Often you will find that your market seems to want several benefits at once.

Building from this, strategy researchers such as Dean Shepherd and Mark Shanley as well as Michael Porter have identified classic benefit combinations that they call supra-strategies20 which are given in Exhibit 7.2. All are designed to work where there are many small businesses in an industry, along with a few larger firms.

Tightly managed decentralization can also work in more conventional firms too. The Men-love family mastered the auto business in southern Utah with a Dodge dealership that started in 1962. Family members opened a Toyota dealership in 1986, and a Mitsubishi–Subaru dealership in 2002. Each one was highly rated in customer satisfaction and sales volume. Part of the under-lying reason for their success was their ability to transplant the skills they mastered in the first

LO 7-5 Explain the major strategies of business— differentiation, cost, and focus.

generic strategiesThree widely applicable classic strategies for businesses of all types—differentiation, cost, and focus.

differentiation strategyA type of generic strategy aimed at clarifying how one product is unlike another in a mass market.

cost strategyA generic strategy aimed at mass markets in which a firm offers a combination of cost benefits that appeals to the customer.

focus strategyA generic strategy that targets a portion of the market, called a segment or niche.

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Small BuSineSS StrategieS: imitation with a twiSt CHAPTER 7 211

Craftsmanship: Specialized product, localized business operations, high levels of craftsmanship (versus competitors with scale economies).

Customization: Short delivery times, custom features, short production runs, high quality (versus products that are mass produced).

Supersupport: Extensive, intensive, and personalized after-sales service.Serving the underserved/interstices: Targeting markets forgotten by larger competitors.Elite: High-quality products with high prices, backed up by high expenditures for advertising and R&D (versus mass-market products).

Single-mindedness: Developing and demonstrating exceptional expertise in one product or service (versus competitors with broad approaches or product lines).

Comprehensiveness: Offering one-stop shopping with complete inventory, immediate delivery, knowledgeable staff, and the major supporting services in one location.

Formula facilities: Use a prepackaged business (like a McDonald’s franchise or a preconfigured restaurant package from Sysco) to offer a better or more consistent product or service.

Bare bones or no-frills: Keep prices super low by cutting back on décor (think warehouse stores), hours (think weekends only or flea markets), or employees.

Cutting out the intermediary: Today farmers at their roadside stands and bands selling their own tracks online are able to sell at lower prices and still make more money by eliminating wholesalers’ and retailers’ markups.21

Tightly manage decentralization: Once you know how to efficiently run one type of business, it often becomes easier to open related firms. This is especially common for Internet businesses.


11 Small Business Supra-Strategies

dealership. The quality of the operations and customer reactions were fundamental to the selling of the chain of dealerships in 2011.22

Armed with these strategic choices, it is possible to profile the most typical modes for new businesses. Table 7.2 shows four types of start-ups and outlines how they align with the scope, generic strategies, imitation–innovation choice, and supra-strategies discussed earlier.

It might help to think about how Table 7.2 applies in a particular industry. Let’s look at Italian restaurants (part of NAICS 72211). There are probably several Italian restaurants where you live or go to school. If you think about it, the vast majority offer the same sorts of dishes. They are fundamentally imitators of one another. Most of them differentiate themselves based on one or two menu items (one has cannoli, another has Italian wedding cake, etc.). That is their crafts-manship. Another may differentiate on the basis of atmosphere (i.e., best place to take a date) or location (close enough to walk to from class). They probably have nearly identical kitchens and bought most of their furniture and serving ware from the same restaurant supply store. That is their formula facility. Together, these restaurants are classic imitators.

There is also probably another Italian restaurant known as the place to go toward the end of the month, when money is tight. The menu has the same sort of items, but the quality of the in-gredients may be less (e.g., more like institutional food) or the décor may be nothing to look at, but the prices are always low. That restaurant is your classic cost leader.

Last, think about the Italian restaurant that has the most different menu. It may be hard to find a marinara sauce on the menu. The décor may look more at home in a Scandinavian restau-rant, and the menu may change with the season and what looks good locally. Here you have a firm pursuing an innovator strategy. It may appeal only to a few individuals. Because the food

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212 PART 2 Small BuSineSS PathS and PlanS

varies so much, they are more willing to tweak recipes to fit the customer’s wishes. Some of the equipment in the kitchen or the seating area will probably be different from what the other local Italian restaurants have. That too is part of the innovator strategy. Innovators either grow enough to become mainstream, or they die out fairly quickly.

Innovators may also come along as drivers of the retrenchment of an industry. The growth of northern Italian cuisine (think Italian without red sauce) revitalized the Italian restaurant indus-try by expanding the menu and reenergizing bored customers to come back and learn about new dishes. The growth of the wine industry in the United States also led to a revitalization of Italian eating. The Internet version of the Italian restaurant is the online ordering system pioneered by big chains like Pizza Hut, but is now available for small restaurants everywhere. The food is the same. The prices are the same, but the difference is the ability to order online. For some other businesses, the online inventory may be larger than the one at the store, because the entrepre-neur can fill an online order through their supplier, without adding to their own inventory. So it is possible to be more comprehensive online than in the store.

Most of the time your preferences for a particular type of business or industry and the indus-try analysis you perform are closely tied together. But there are times when opportunities pop up unexpectedly, and suddenly you can find yourself trying to decide if the opportunity is the right business and industry for you. This ability to quickly pivot is one of the classic strengths of the entrepreneur. Retired entrepreneurship professor Karl Vesper23 named these opportunities entry wedges, and he identified seven that come up again and again:

• Supply shortages: Supply shortages occur when a new product is in demand. The target audience is leading-edge buyers who are willing to pay a premium to be the first to have the product. This is a short-term market and one that changes rapidly. The key benefits are delivery, shopping ease, and style.

• Unutilized resources: Unutilized resources can be a physical resource like gravel in a farm field or even entire inner cities (see the following Small Business Insight). It can also be a human resource. Tax Resources, Inc. was started in 1988 by people experienced in dealing with the IRS in order to advise taxpayers on legal strategies to minimize their taxes or handle audits.24 The key benefits are lower costs, scale savings, or organizational practices.

• Customer contracting: Customer contracting occurs when a customer, most often a busi-ness, is willing to sign a contract with a small business to ensure a product or service. Be-cause big businesses frequently downsize, they have ongoing needs to outsource work. Former employees are often the preferred source for independent subcontractors. The key

entry wedgeAn opportunity that makes it pos-sible for a new business to gain a foothold in a market.

Typical Modes for Small Business Start-UpsTABLE 7.2

Classic Imitator Internet Imitator Classic Cost Leader Classic Innovator

Market Scope Niche Niche or mass Niche Niche

Optimal Strategy Focus (differentiation) Focus (differentiation or cost) Focus (cost) Focus (differentiation)


Imitation Imitation Imitation Innovation

Organizational Goal

Match competition with one element different

Match competition but be online Lowest price Master technology

Supra-Strategy Craftsmanship; formula facilities

Comprehensiveness (inventory); cutting out the intermediary; serving the underserved

Bare bones; cutting out the intermediary; single-mindedness (cost)

Elite; single-mindedness; supersupport

Attractiveness Moderate to low Moderate to low Low Moderate to high

Life Cycle Stage All All All except introduction Introduction, growth, or retrenchment

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Small BuSineSS StrategieS: imitation with a twiSt CHAPTER 7 213

benefits are quality, delivery, technology, shopping ease, brand/reputation, and assurance. Style and personalization are often factors too.

• Second sourcing: Second sourcing seeks out customers who are already being serviced by another firm. The strategy is to offer customers a second place to obtain goods or services. Often the advantage the small business offers is being locally based. Second sourcing pro-vides the customer with greater certainty of supplies or services, and at its best provides a competitive pressure to keep both suppliers providing the best service and prices. Like customer contracting, the key benefits are quality, delivery, technology, shopping ease, brand/reputation, and assurance.

• Market relinquishment: Market relinquishment occurs when business firms leave a market. As the need for the major airlines to fill every seat on every flight has grown, those airlines have pulled out of markets where they can’t fill a full-sized plane. For small commuter air-lines, these market relinquishments have been opportunities to expand and provide ongo-ing service to smaller airports with their smaller planes. Key benefits are place, shopping ease, quality, delivery, and service.

• Favored purchasing: Favored purchasing occurs because government agencies, government-sponsored commercial contracts, and many big businesses have policies that provide for set-asides or quotas for purchases from small businesses, minority businesses, and disad-vantaged businesses (see the Small Business Insight below). You can find out more at the SBA’s online government contracting site ( Key benefits are quality, delivery, service, assurance, place, and belonging.

• Government rules: Rule changes by the government can help small firms compete. For ex-ample, when the Environmental Protection Agency let small construction firms out of some of the water pollution treatment requirements that large firms must face, it gave the small businesses a savings of $1.5 billion, which made them more competitive. The Regulatory Flexibility Act of 1980 drives many of these rule changes in government.25 Key benefits here are technology, service, personalization, lower costs, and organizational practices.

The industry analysis helps confirm that you have chosen the right industry, and also where your competitors are and the current industry stage. That and your own decisions earlier about the scope of your business and whether you plan to pursue an imitative or innovative strategy give you the fundamentals for deciding the type of small business strategy that makes the most sense for your start-up. With that information in mind, it is time to think about how you will set up your firm to implement the strategy.

initiative for a ComPetitive inner City (iCiC)

Joe Vazquez’s undergrad degree was in accounting, and he spent years as an auditor in the construction industry.26 He burned out on 80-hour weeks, and joined his father-in-law’s construction firm, but in 2008, during the recession, he decided to start his own construction company, Vazquez Commercial Construction (VCC). He leveraged government contracting and certification opportunities he learned about from Missouri’s Procurement Technical Assistance Centers (most states have similar organizations) including HUBZone, SBA 8(a), Minority Business Enterprise, Disadvantaged Business Enterprise, and Small Disadvan-taged Business certifications—all of which give his firm increased opportunities to land government con-tracts. This meant that he went from $38,000 in 2008, to 25 federal projects worth $1.3 million in 2013, to $30 million and a spot as the number six fastest-growing minority business in America in Fortune maga-zine’s ICIC Inner City 100 list for 2018.


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214 PART 2 Small BuSineSS PathS and PlanS

Post Start-Up TacticsThe goal of strategy after the start-up stage is to maximize profits (or any other reward you specify as meeting your criteria for success) and protect your business from the competition. To secure success, there is a step you need to take past picking and implementing the right strategy. It is the step of securing competitive advantage. Competitive advantage is the particular way you implement your customer benefits that keeps your firm ahead of other firms in your industry or market. Competitive advantage is your firm’s edge in meeting and beating the competition.

It can be harder than it looks. Why? In part because most small businesses face a lot more forms of competition than they initially realize. Strategy guru Michael Porter27 identifies five different sources of competition for any business (see Figure 7.5). One set of sources come from the supply chain you face, literally where you get your raw materials and where your finished goods or services go, namely, your customers. The other set of sources come from within your industry, from existing competitors (rivals), other start-ups like your business, and the alterna-tives and substitutes your customers have been using instead of your product so far.

Imagine you plan to start a web development firm in Pocatello, Idaho. The first place to look at for competitive threats are existing firms in your industry. Pretty much all the other web devel-opers in the Pocatello vicinity pose the threat of rivalry. Since web development is even being taught in high schools, another potential competitive threat will be potential or new entrants, other web development firms that open after yours. If you think about why people come to a web developer, you realize that there is a very broad threat of substitutes with which you compete. Prepackaged website templates are offered by many hosting services, companies like, and sell whole e-commerce sites already laid out using templates, and people can buy their own templates from companies on the Internet like or even But customers can substitute whole other approaches, so you com-pete with free blogs from and, and the growing possibility of run-ning a company site from and other social networking sites.

Part of what will make your web development firm special might be the advanced services you offer. Perhaps you licensed one of the large archives of photos to include in your customers’ web-sites. If your supplier of photos raises prices, your profits could take a hit. Similarly, if your customers have done their homework and checked out what other local developers offer and are charging.

These five—rivals, entrants, substitutes, suppliers, and customers—are aspects of your industry that can change your profitability and give an edge to any of the many types of competitors you face. The major ways you cope with these competitive pressures is by undertaking some combi-nation of strategic actions and tactical actions. Exhibit 7.3 shows some of the best-known ex-amples of each type. Generally strategic actions require more time, money, and specialized expertise (which collectively are known as your firm’s resources) than most tactical actions. That means a tactical response is most often your first response, with strategic actions building behind the scenes.

LO 7-6 Determine how to sustain competitive advan-tage through attracting cus-tomers and discouraging competition.

suppy chainA way to think about the line of distribution of a product from its start as materials outside the target firm, to its handling in the target firm, to its handling by sellers, with placement into the hands of customers.

strategic actionsCompetitive responses requiring a major commitment of resources.

tactical actionsCompetitive responses with low resource requirements.


New Entrants


Your Firm’sProduct or


Supply ChainSources of


IndustrySources of


Rivals(Direct Competition)

Substitutes &Alternatives

(Indirect Competition)


Porter’s Five-Forces Model of Industry Competition

Source: Adapted by the authors from Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter. (New York: Free Press, 1988).

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Small BuSineSS StrategieS: imitation with a twiSt CHAPTER 7 215

Specific Actions Examples

Strategic actions

Entering new markets

Make geographic expansions Go global directly, by agents or by joint ventures Expand into neglected markets Target rivals’ markets Target new demographics Expand Internet markets

New product introductions

Imitate rivals’ products Address gaps in quality Leverage new technologies Leverage brand name with related products Protect innovation with patents or trademarks Offer stripped-down versions as loss leaders Introduce older products in less sophisticated markets

Changing production capacity

Create overcapacity Option others’ capacity to keep it out of competitors’ hands Tie up raw materials sources Tie up preferred suppliers and distributors Stimulate demand by limiting capacity Seek production certifications (e.g., ISO 9000)

Mergers/alliances Acquire/partner with competitors to reduce competition Flank your primary competitor by connecting with their competitors in other industries Tie up key supplies through alliances Obtain new technology/intellectual property Facilitate new market entry Seek protective legislation Seek favorable standards

Tactical actions

Price cutting (or increases)

Maintain low price dominance Offer discounts and rebates Offer incentives (e.g., frequent flyer miles) Enhance offering to move upscale

Product/service enhancements

Address gaps in service Expand warrantiesMake incremental product improvementsCo-package your product with related ones Bundle multiple products together Add online components or expansions for the product

Increased marketing efforts

Use guerrilla marketing Conduct selective attacks Change product packaging Use new marketing channels Promote stories of customer and employees Offer altruistic benefits—going greener, charity contributions, etc. Tie customers in via social media

New distribution channels

Access suppliers directly Access customers directly Develop multiple points of contact with customers Expand Internet presence


Strategic and Tactical Competitive Actions

Sources: Adapted from G. Dess, A. Eisner, G. McNamara, Strategic Management: Text and Cases, 10th. ed. (McGraw-Hill, 2019), Exhibit 8.2, p. 300; M. J. Chen and D. C. Hambrick, “Speed, Stealth, and Selective Attack: How Small Firms Differ from Large Firms in Competitive Behavior,” Academy of Management Journal 38, no. 2 (April 1, 1995), pp. 453–482; M. Davies, “Sales Promotions as a Competitive Strategy,” Management Decision 30, no. 7 (December 31, 1992), articleid=864603&show=abstract (accessed June 20, 2012); W. J. Ferrier, K. G. Smith, and C. M. Grimm, “The Role of Competitive Action in Market Share Erosion and Industry Dethronement: A Study of Industry Leaders and Challengers,” Academy of Management Journal 42, no. 4 (1999), pp. 372–388; R. A. Garda, “Use Tactical Pricing to Uncover Hidden Profits,” Journal of Business Strategy 12, no. 5 (December 31, 1991), pp. 17–23.

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216 PART 2 Small BuSineSS PathS and PlanS

From all this, you can see that strategy represents the way by which an entrepreneur plots a path to success. For strategy to work, it needs to draw on most of the elements discussed in the chapter. When Joe and Zoë were putting together the idea for, they were try-ing to strategize the right way. You know by now that they did an industry analysis that led them to see that Greetabl had a chance in the greeting card market at the small firm side of it where distinctiveness and customization were important. So when it came to imitative–innovative, they went more innovative—when they thought about Porter’s strategy types they went with focus, with more of a differentiation approach. While there wasn’t an entry wedge to leverage, their supra-strategy was customization (of messages and graphics and later adding pictures) and a single-minded approach. This positioned them as using the typical mode of a classic imi-tator. And they continued to refine their strategy based on how their product did, what cus-tomers did and said, and how their competitors and the rest of their industry changed.

Long term or short, every small business has a strategy, and successful small businesses have strategies that fit their industry, market, and resources. Strategy is one of those areas in which you can take charge and think through the options available to you and your firm. For all the ideas on which strategy touches, in the end there are some straightforward ways to help you de-cide on strategies, such as industry analyses and perceptual maps. These analysis techniques can help you narrow down your choices to a model of strategy that can help you succeed. For the vast majority of small businesses, the most powerful technique is to pursue an imitative strategy. By following the industry standard practices, with only one or two innovations to differentiate your firm from others, you can gain many of the benefits of established businesses and industries and still benefit from the power of innovation along smaller lines, which can make a real differ-ence for your customers. For many owners, strategy is the grand game of business, but it is a game in which winning can make a major difference in the success of your firm and your life.


7-1 Describe the decisions needed to establish a foundation for strategic planning.

● Strategy is the idea and actions that explain how the firm will make its profit.

● Strategic planning for small business is a four-step process.

● Consider the rewards you seek from your business when crafting and evaluating strategies.

● Choose whether your firm will focus on a mass or niche scale and a scope ranging from local to global.

7-2 Identify the forms of imitative and innovative businesses.

● Imitation is the classic strategy of small businesses.

● An imitative approach lets you build on existing products, services, and markets.

● An innovative approach lets you build a business in your own unique way.

7-3 Articulate the benefits that win over customers.

● Industry focuses on competing firms. Marketing focuses on your customers.

● Benefits are desirable characteristics of a product or service.

● Benefits can target value, such as quality or style, as well as cost.

● Situations and benefits can help clarify entry wedges that can offer exceptional profits.

7-4 Assess how industry changes affect strategy.

● A successful start-up depends on knowing the industry’s stage.

● Access to support depends on the industry’s performance trend.

● An industry analysis combines trend, stage, and profit data to assess the firm’s chances in a particular industry at a particular time.





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Small BuSineSS StrategieS: imitation with a twiSt CHAPTER 7 217

7-5 Explain the major strategies of business—differentiation, cost, and focus.

● There are three generic business strategies—differentiation, cost, and focus.

● Most small businesses use a focus strategy, targeting a niche by combining cost or differentiation approaches.

● Particular combinations of benefits are called supra-strategies.

7-6 Determine how to sustain competitive advantage through attracting customers and discouraging competition.

● Competitive advantage is your firm’s edge in meeting and beating the competition.

● Operating businesses deal with competition through a combination of strategic actions and tactical actions.



goal, 195

magic number, 195

industry, 196

competitor, 198

imitative strategy, 198

innovative strategy, 198

degree of similarity, 199

parallel competition, 199

incremental innovation, 199

pure innovation, 199

blue ocean strategy, 199

market, 200

scale, 200

scope, 200

mass market, 200

niche market, 200

marketing, 201

value proposition, 201

competitive advantage, 201

distinctive competence map, 205

distinctive competence, 205

core competency, 205

industry dynamics, 206

introduction stage, 206

growth stage, 206

boom, 207

shake-out, 207

maturity stage, 207

decline stage, 207

retrenchment, 207

industry analysis (IA), 207

gross profit, 208

net profit, 208

profit before taxes, 208

generic strategies, 210

differentiation strategy, 210

cost strategy, 210

focus strategy, 210

entry wedge, 212

supply chain, 214

strategic actions, 214

tactical actions, 214


  1. The book asserts that “All strategy starts with the owner.” Many of the gurus of strategy say strategy starts with the environment outside the firm. Which do you think is true? Be ready to back it up.

  2. A lot of famous entrepreneurs brag how innovative their prod-uct is, when it is fundamentally like the competition, although better in one way or another. How do you classify such entre-preneurs in terms of the imitation–innovation balance?

 3. Imagine you have developed a new two-way GPS system for trucks and their dispatchers. Trucking companies are all over the country. So are you looking at a mass market? Why or why not?

  4. What are the differences between imitative and innovative strategies? Which is more likely to be something a small business can pursue?

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218 PART 2 Small BuSineSS PathS and PlanS

  5. Pick a small business with which all of the class is familiar. Discuss what are the customer benefits that business is try-ing to offer. Could they do a better job if they chose some other benefit?

  6. Small businesses that pursue a cost (or cost focus) strategy often do so by using a location in a very low-rent district, with the store itself made up of used furniture, no

decorations, and a no-frills atmosphere. What is the problem with such an approach? Can you think of other ways to achieve low cost without encountering similar problems?

  7. What is the competitive advantage of a business, and how does it lead to success?

  8. In the life cycle of an industry, how can you tell when it has left the introductory stage and entered the growth stage?


1. Get the industry statistics you need from the government. Go to Census Business Builder page ( and look up “Lawn and Garden Equipment and Supplies Stores” (NAICS 4442). Our goal is to get the info on stores in Vermont. So type “Vermont” in the “State, County, City/Town or ZIP Code” box on the right and then click “Create Report” to see the statewide numbers. How many stores with employees were there statewide at the last count?

2. Look at local hamburger restaurants. How do they pursue im-itative strategies, and where do they offer their innovations?

3. Pick five online businesses in the same industry. From their websites, see if you can identify what they think is their com-petitive advantage. Do you agree with their assessment? Why or why not?

4. Think of the life cycle of an industry. Give examples of indus-tries that are at the different stages, and be ready to defend your classification.

5. You can get an overview of a lot of US industries at www For example, imagine you’re interested

in selling something online. If you put “commerce” into the search box at the top right corner of the site, you can choose from several forms of “Distribution and Electronic Commerce” from the drop-down box that appears. Pick the item for “Electronic and Catalog Shopping.” You can pick an economic region from the map. For this example, pick Omaha, NE, and then click on “Go to Region Dashboard” and scroll down until you find the link to “Dive into This Region’s Clusters.” On the resulting page you will find employment in different industries. Look for “Distribution and Electronic Commerce” in the bar chart of “Private, Non- Agricultural Employment.” Click on the bar for “Distribution and Electronic Commerce” and you will see local employment in that industry. You can get employment figures for earlier years by changing the year on the time bar above the bar chart. You can also find out wages for people in the industry by clicking on “Wages” above the time bar (there are also options to learn about job creation and other characteristics of the different industries in the Omaha region). You can try this site with just about any industry that interests you, for example restaurants (which come up as “Hospitality Establishments”).



Ronnie Scales had his heart set on an Internet consulting business specializing in search engine optimi-zation (SEO), which involves designing websites with characteristics that help them appear high up in search result displays. Being on the first screen that people see can be worth a lot to a company selling on the web.

Ronnie had a strong background, with a bachelor’s degree in management information systems (MIS) with a marketing minor from a university in his hometown of Dallas. He had worked in the univer-sity’s lab, and had done web design and SEO for campus organizations, local nonprofits, and a few students with online businesses. When he tried a distinctive competence map with the features and benefits he and his competitors offered, such as expertise, his firm did not do well. After all, he was new to the industry so his experience was not as great as a lot of his competitors. Also, since SEO can be

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done remotely, he was competing with firms in India and eastern Europe who charged less than he did. He felt there had to be some advantages of being physically near the customers, but he was not sure how to leverage it.

What sort of tactics could he use to better position his SEO business for success in such a crowded industry?

CASE DISCUSSION QUESTIONS1. Considering the Porter model, from what sectors would Ronnie’s competitors be coming?

What kinds of threats do they pose to his business?

2. Pick two tactics from the list in Exhibit 7.3 and explain how they could be applied to Ronnie’s business. Explain why you think those tactics would work.

3. Industry experts say that SEO is an industry on the rise. What are the implications for Ronnie as he plans to run his business?

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HOW-TO’SStep 1: The Right Data for Your IndustryThe first order of business is to find the NAICS code and Census Business Builder for your industry of interest. This is done by going to the website Plug in your keyword, in this case “shoe store,” and you will see shoe stores in general are NAICS code 4482. Usually the longer the number, the narrower the slice of an industry, and the fewer the number of firms, but these may be a closer match to your goal. The numbers and graphics you will see when you do this might look different from those in this Appendix. This is most likely to be because the government is using newer data.

Step 2: Industry SizeThe Business Builder tells us there were 24,693 establishments (aka firms) in the United States in 2017.

Type “St. Louis” in the location box and choose “St. Louis city” and then click “Create Report.” In the re-port, scroll down to the “Business Summary” section. You’ll see there were 19 employer establishments in 2017.

Double-click on the “Employer establishments” box (which has a blue background in the graphic below) and the graphic to the right will change to reflect the number of employer establishments from 2013 to 2017. If you click on a column in the graph, it will show you the number for that year, for example, 16 stores in 2013. That change from 16 to 19 stores from 2013 to 2017 gives us one mea-sure of industry size trend. You can repeat this process with any of the measures.

Five Steps to an Industry AnalysisRetail Shoe Store

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Step 3: ProfitabilityStep 3 starts with going to the website and clicking “Sole Proprietor” from the top line menu. On the list of industries, select “Retail.” In this case, a retail shoe store would fall under the category “Clothing-Accessories.” Click on the link and you will be taken to the report.

The BizStat report in March 2019 showed numbers from 2016 of gross profit 51.62 percent, total expenses 46.61 percent, leaving a net profit of 5.01 percent. It then also gives you a line “Direct Labor and NP” (net profit), which ref lects that a sole proprietor might be paying themselves a salary in addition to the profits made. That number is 14.62 percent.

Remember that these BizStat numbers give you an av-erage based on a variety of different types of clothing stores. So it still makes sense to get specific numbers for shoe stores (including corporations, partnerships, and sole proprietorships), and you should still get the BizMiner or Risk Management Association data.

Go to the library to find information about the profit-ability of the retail shoe industry next. Using the RMA’s Annual Statement Studies: Financial Ratio Benchmarks, the following information was gathered for the smallest stores,

with zero to $500,000 in sales in 2018–2019, in NAICS code 448210.

Gross profit 42.9 percent

Operating expenses 41.2 percent

Operating profit 1.7 percent

All other expenses 1.1 percent

Profit before taxes 0.7 percent

Note that the RMA numbers are more specific to the shoe store segment than the numbers; also the numbers are more pessimistic. The rule of thumb in business is to use the most conservative or most pessimis-tic figures. In this case, the most conservative figures come from RMA, and are specific to your industry. From this you would conclude that the profit picture for the shoe store industry is potentially problematic. When look-ing at the RMA data, look at the financials for the larger shoe stores. You’ll quickly see that the largest stores ($10–$50 million in sales) are more profitable. Note that the BizStats numbers suggest there might be some other type of clothing store that is posting superior profits, and looking for that type of business might make sense.

If you scroll down the page in the Census Business Builder, you will see a section titled “Business Revenue,” another way to say “sales.” The default configuration shows the “Average revenue per employer” for 2007 and 2012 (the latest two Economic Census results available at that time). Again, clicking on the graphs gives you the

actual numbers, $814,000 in 2007 and $844,000 in 2012. These numbers give you another measure of industry size and its trend. The graph in the lower right even gives you the 2012 comparable numbers for Missouri and the United States as a whole.

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222 PART 2 Small BuSineSS PathS and PlanS

Step 4: Ways to Make ProfitsInformation about making profits can be found by looking at trade articles and information or doing actual interviews. The following information came from two sources: One source is a trade site, National Shoe Retail Association (to find its material, Google “profitability site:”—by the way, this technique can work for all sorts of organiza-tions whose website address you know), and the other is from the home business site The answers to four key questions on profitability are as follows:

• First is the question, What can be done to generate more sales?

• Excellent service.• Courteous and well-trained staff.• Diversity in product selection.• Competitive pricing.• Functional store design.• Location, location, location (more heavily

populated cities have greater demands for shoes).

• Second is a judgment of whether it is possible to charge a premium for a product or service.

• Depends on the market that you are catering to. If it is high end, then your target customer has the means to spend more money on more expensive (brand-name) shoes. Also, if the store is located where families have higher discretionary income, the demand for brand-name shoes will be higher.

• Third is how to keep the cost of goods or services below the industry’s average.

• Put adequate stock control in place to reduce inventory costs and increase stock turns. Loss prevention is critical in any retail establishment, as theft and shrinkage represent lost dollars for the retailer. Have systematized procedures for doing physical counts of your inventory as well as clear policies on employee theft. It is also important to choose styles that are hot to the consumer to avoid inventory costs.

• Another cost-saving tactic is to use “in store” completion dates on all orders (i.e. when you require the order to be on your premises). Start negotiating on everything received past completion date.

• Fourth is to look at ways to keep operating expenses below industry averages.

• Always check your freight expenses against the freight charge on the packing slip. It is usually different. Charge the difference back to the vendor.

• Join forces with other same brand concept stores for savings on your direct mail advertising. In direct mail, the higher the quantity printed, the lower the cost per unit. There are additional savings to be realized in the cost of mailing if all pieces are sent from the same location. Savings can be substantial.

• Use co-op dollars to reduce costs. Use some of your co-op dollars to co-brand with suppliers on things like business cards, shopping bags, and so on.

• If you’re doing a profit and loss statement monthly, consider doing it quarterly. Chances are you are simply putting it in a file anyway and are not adjusting the operating budget that often. This can trim the accounting bill considerably.

• Negotiating better terms and rates with your bankers and other service providers can really save on fees. For example, go to other banks to get competitive rates and then renegotiate with your bank or change banks. For a bank, this applies to bank transaction fees as well as interest and credit terms.

• Bid or get multiple estimates for things like construction/repair projects, insurance, contract services (i.e., refuse removal), and so forth.

Step 5: Competitor ConcentrationThe last step is using a directory provider to find out how many competitors there are in an area. Using the Census Business Builder mentioned above, there were 130 stores in St. Louis County in 2016. Alternatively you can use’s online yellow pages directory or Google maps to find shoe stores. reported there are 208 retail shoe establishments in the St. Louis metro-politan area (which is larger than just St. Louis County alone).

ANALYSISOverviewIt seems as though the retail shoe industry is growing slowly. From 2013 to 2017 the number of stores in the industry increased by 19 percent. The RMA statistics suggest that small shoe stores are at a particular disad-vantage in the industry, trailing the largest stores in sales and profits. We can conclude that the retail shoe indus-try is very competitive, and for small start-ups, it is es-sential to be able to distinguish themselves in a mature market.

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ProfitabilityWhile the gross profit for this industry looks very good compared to other similar businesses (at 42.9 percent), operating profit and profit before taxes are low. Therefore, to be successful in this industry it is important to differen-tiate and focus on customer service and other approaches which add value. Also, an owner should do everything possible to cut the cost of goods sold and expenses. Taken together, these strategies might result in a profitable firm, but it will be a highly risky venture.

Differentiation and CostThere are several ways to differentiate in the retail shoe business. There are many different categories for retail shoes. An owner could choose to focus on men’s or wom-en’s shoes, kids’ shoes, or athletic shoes or include all these categories in one store. Then within these catego-ries, there is low end, one price and discount, mass de-signer, and high end. Again, the shoe business is very competitive, so it is important to choose an image and stick to this image to establish and build a reputation with customers.

Once the image is established, there are six areas that must be covered to be successful and maintain a foothold in the industry. They are as follows:

• Excellent service—many a customer is won over by receiving great service.

• Courteous, honest, and well-trained staff.• Diversity in product selection—offer a wide range

of shoes appropriate for the surrounding environment. For example, if the location is near a

beach, be sure to include plenty of sandals, thongs, and flip-flops in the inventory.

• Competitive pricing—be competitive with other stores in the area to maintain a loyal customer base.

• Functional store design so that customers may move around with ease.

• Location, location, location—locations in or near heavily populated cities tend to have higher sales.

Incorporating these elements well, along with a differ-entiating image, will help an owner have strong place-ment and be most able to compete effectively in the industry. It would seem that with a solid business plan, a marketing edge, and great location, while a retail shoe business could be risky, it could also be viable and rewarding.

SOURCES“Bright Ideas” from National Shoe Retailers Asso-ciation’s February 2005 Conference, Fulbright, Starting a Shoe Retail Store, www. shoe-store-retail-business.htm (accessed April 10, 2016).Risk Management Association, “RMAU Online: An-nual Statement Studies—Industry Data 448210—Shoe Stores,” indCode=448210&leftnavmenuid=3 (accessed March 25, 2019).U.S. Census, Census Business Builder (NAICS 44821), (accessed March 25, 2019).

Note: This industry analysis was originally written by Beatrice Emmanuel of Saint Louis University under the direction of Professor Jerome Katz. It was updated in April 2019 by Professor Katz to reflect the latest data and new Census data sources.

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Business Plans: Seeing Audiences and Your Business Clearly


● Krista Clement was a lifelong basketball player who enjoyed giving back to the communities in which she lived. When she came up with an idea to track student-athlete volunteering hours, she created a business plan that described the idea and the resulting business for investors and accelerators.Krista Clement and Helper Helper

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Focus on Small Business: Krista Clement and Helper Helper1

After you complete this chapter, you will be able to:

LO 8-1 Understand why and when to develop a business plan.

LO 8-2 Know how to tell the business plan story.

LO 8-3 Learn the major sections of the business plan.

LO 8-4 Focus business plan sections to meet specific needs.

LO 8-5 Identify the major risks to business plan success.

LO 8-6 Master pitching your business plan to others.

For Krista Clement, basketball was life. A player since she was four, she grew up in a small town in northern Michigan and got a basketball scholarship to the University of Michigan after winning a state championship and being awar