ENTREPRENEURSHIP STARTING AND OPERATING A SMALL BUSINESS. Third Edition. Steve Mariotti Caroline Glackin PEARSON

Transcription

1 A -ZT^ 2~ 2 HrlO ENTREPRENEURSHIP STARTING AND OPERATING A SMALL BUSINESS Third Edition Steve Mariotti Caroline Glackin PEARSON Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo

2 UNIT 1 Entrepreneurial Pathways 1 Chapter 1 Entrepreneurs Recognize Opportunities 2 Entrepreneurship Defined 3 What Is an Entrepreneur? 3 The Economic Questions 4 Voluntary Exchange 5 Benefits and Challenges of Free Enterprise 5 What Is a Small Business? 6 Why Be an Entrepreneur? 6 The Desire to Make Money Is Not the Only Reason to Start a Business 8 Definitions of Success Monetary and Other 8 Taking the Long View 9 Benefits and Costs of Becoming an Entrepreneur 9 Cost/Benefit Analysis 10 Opportunity Cost 11 Avoiding Missteps 11 Entrepreneurial Options 13 / How Do Entrepreneurs Find Opportunities to Start New Businesses? 14 Entrepreneurs Creatively Exploit Changes in OurWorld 15 Where Others See Problems, Entrepreneurs Recognize Opportunities 15 Train Your Mind to Recognize Business Opportunities 16 Entrepreneurs Use Their Imaginations 16 An Idea Is Not Necessarily an Opportunity 16 Opportunity Is Situational 17 The Five Roots of Opportunity in the Marketplace 18 Integrating Internal and External Opportunities 18 Establishing Strategies 19 Paths to Small Business Ownership 20 Securing Franchise Rights 20 Buying an Existing Business 20 Licensing Technology 21 Do Not Take Unfair Advantage of Someone Else's Creativity 22 The Many Faces of Entrepreneurship 22 Chapter 2 Making the Business Work Personally and Professionally 24 A Business Must Make a Profit to Stay in Business 24 Profit Is the Sign That the Entrepreneur Is Adding Value 24 Profit Results from the Entrepreneur's Choices 24 Seven Rules for Building a Successful Business 25 The Team Approach 25 The Business Plan: Road Map to Success 36 Feasibility Analysis: Will My Idea Work? 38 Analyzing Product and/or Service Feasibility 38 Analyzing Market and Industry Feasibility 39 Analyzing Financial Feasibility 42 What Is a Business Plan? 42 Why Do You Need a Business Plan? 43 Writing a Business Plan Early Will Save You Time and Money 43 Your Business Plan Is the Key to Raising Capital 44 The Business Plan Is an Operations Guide 44 Business Plan Components 45 Cover Page and Table of Contents 46 Executive Summary: A Snapshot of Your Business 46 Mission and Culture: Your Dreams for the Organization 46 Company Description: Background and Track Record 47 Opportunity Analysis and Research: Testing Ideas 47 Marketing Strategy and Plan: Reaching Customers 48 Management and Operations: Making the Plan Happen 49 Financial Analysis and Projections: Translating Action into Money 51 Funding Request and Exit Strategy: The Ask and the Return 54 Appendices: Making the Case in Greater Detail 55 Business Plan Suggestions 55 Presenting Your Business Plan 57 Business Plan and Venture Competitions 58 III

3 IV CONTENTS Chapter 3 Honest Tea Business Plan 63 Creating Business from Opportunity 90 Apple and the Personal Computer 91 Business Definition 92 What Sort of Organization Do You Want? 93 Your Company's Core Values 93 Your Company's Mission Is to Satisfy Customers 94 Your Company's Vision Is the Broader Perspective 95 Your Company's Culture Defines the Work Environment 95 Getting Information Directly from the Source: Primary Research 131 Getting Information Indirectly: Secondary Research 132 Market Research Helps You Know Your Customer 134 Do You Know 10 People Who Love Your Product? You May Have a Winner! 135 Customer Research 135 Industry Research: The 50,000-Foot Perspective 137 Make Market Research an Integral Part of Your Business 139 How Customers Decide to Buy 139 The Decision Process 96 Your Competitive Advantage 97 Owning a Perception in the Customer's Mind 140 Find Your Competitive Advantage by Determining,What Consumers Need and Want 98 You Have Unique Knowledge of Your Market 98 The Six Factors of Competitive Advantage 99 Is Your Competitive Advantage Strong Enough? 100 Checking Out the Competition 101 The Most Chocolate Cake Company 102 Competitive Strategy: Business Definition and Competitive Advantage 104 Features Create Benefits 140 Home Depot: Teaching Customers So They Will Return 141 Needs, Wants, and Demands 142 Which Segment of the Market Will You Target? 142 Successful Segmenting: The Body Shop 143 Applying Market Segmentation Methods 143 The Product Life Cycle 145 Is Your Market Saturated? 146 Strategy versus Tactics -105 Feasibility Revisited: The Economics of One Unit as a Litmus Test 105 Defining the Unit of Sale 106 Market Positioning: Drive Home Your Competitive Advantage 147 Developing a Marketing Plan 147 Uniti Cost of Goods Sold and Gross Profit 106 Your Business and the Economics of One Unit 107 The Cost of Direct Labor in the EOU 109 Hiring Others to Make the Unit of Sale 109 Going for Volume 110 Determining the Value of a Business 112 Entrepreneurial Pathways: Nicole Miller Company 122 Chapter 5 Developing the Right Marketing Mix and Plan 156 The Four Marketing Factors 158 Product: What Are You Selling? 158 Create Your Total Product or Service Concept 159 Focus Your Brand 159 Ford's Focus on Success: The Mustang 160 UNIT 2 Chapter 4 Integrated Marketing 127 Exploring Your Market 128 Markets and Marketing Defined 130 Howto Build Your Brand 160 Price: What It Says about Your Product 162 Strategies and Tactics for Effective Pricing 162 A Business That Markets versus a Market- Driven Business 130 Market Research Prepares You for Success 130 Research Your Market before You Open Your Business 130 Types and Methods of Research 131 Place: Location, Location, Location! 165 Key Factors in Deciding upon a Location 166 Promotion: Advertising + Publicity 166 Use Integrated Marketing Communications for Success 167 Reinforce the Company's Unique Selling Proposition 168

4 CONTENTS Chapter 6 Promotional Planning 168 Determine a Promotional Budget 168 The Advertising Advantage 170 Types of Advertising 170 Media Planning and Buying: Focus on Your Customer 171 Marketing Materials Should Reinforce Your Competitive Advantage 171 Sales Promotion Solutions 171 When to Use Promotional Tools 172 Advertising Specialties 173 Trade Show Exhibits 173 Mall Carts and Kiosks 173 Alternative Marketing 174 E-Active Marketing 175 Publicity Potential 179 Generating Publicity "179 Telling the Story 180 Sample Press Release 180 Follow Up a Press Release 182 Public Relations 182 The Fifth P: Philanthropy 182 Cause-Related Marketing 183 Gaining Goodwill 183 Not-for-Profit Organizations 183 Teach for America and Upromise 184 What Entrepreneurs Have Built 184 You Have Something to Contribute 184 Developing a Marketing Plan 185 Marketing Analysis 185 Marketing as a Fixed Cost 186 Calculate Your Breakeven Point 187 Smart Selling and Effective Customer Service 200 Selling Skills Are Essential to Business Success 201 Selling Is.a Great Source of Market Research 202 The Essence of Selling Is Teaching 202 The Principles of Selling 202 The Sales Call 204 Electronic Mail, Blogs, and Newsgroups 204 Prequalify Your Sales Calls 205 Focus on the Customer 205 The Eight-Step Sales Call 206 Three Call Behaviors of Successful Salespeople 208 Unit 2 UNIT 3 Chapter 7 Analyze Your Sales Calls to Become a Star Salesperson 208 Turning Objections into Advantages 209 Use Technology to Sell 209 The One-Minute Sales Call 210 Successful Businesses Need Customers Who Return 211 Customer Service Is Keeping Customers Happy 211 The Costs of Losing a Customer 213 Customer Complaints Are Valuable 213 The Better Business Bureau 213 Customer Relationship Marketing Systems 214 Why Does CRM Matter? 215 Components of CRM for the Small Business 216 How Technology Supports CRM 217 Integrated Marketing: Ken Done Studios 225 Show Me the Money: Finding, Securing, and Managing It 229 Understanding and Managing Start-Up, Fixed, and Variable Costs 230 What Does It Cost to Operate a Business? 231 Start-Up Investment 232 Brainstorm to Avoid Start-Up Surprises 232 Research the Costs 235 Keep a Reserve Equal to One-Half of Start-Up Investment 235 Predict the Payback Period 236 Estimate Value 236 Variable and Fixed Costs: Essential Building Blocks 236 Calculating Critical Costs 237 Calculating Total Gross Profit (Contribution Margin) 237 Calculating EOU When You Sell Multiple Products 238 Fixed Operating Costs 240 Fixed Operating Costs Do Change over Time 241 Allocate Your Fixed Operating Costs Where Possible 242 The Dangers of Fixed Costs 242

5 VI CONTENTS Chapter 8 Chapter 9 How Inflation Can Hurt Small Business Owners 243 Using Accounting Records to Track Fixed and Variable Costs 244 Three Reasons to Keep Good Records Every Day 244 Suggestions for Keeping Good Records 244 Cash versus Accrual Accounting Methods 246 Recognizing Categories of Costs 246 Using Financial Statements to Guide a Business 256 Scorecards for the Entrepreneur: What Do Financial Statements Show? 257 Income Statements: Showing Profit and Loss over Time 258 Parts of an Income Statement 258 A Basic Income Statement 259 The Double Bottom Line 259 An Income Statement for a More Complex Business 261 The Balance Sheet: A Snapshot of Assets, Liabilities, and Equity at a Point in Time 262 Short- and Long-Term Assets 264 Current and Long-Term Liabilities 265 The Balance Sheet Equation 265 The Balance Sheet Shows Assets and Liabilities Obtained through Financing 265 The Balance Sheet Shows How a Business Is Financed 266 Analyzing a Balance Sheet 266 Depreciation 268 Financial Ratio Analysis: What Is It and What Does It Mean to You? 269 Income Statement Ratios 269 Return on Investment 269 Return on Sales 271 Common-Sized Statement Analysis 271 Balance-Sheet Analysis 272 Current and Quick Ratios 272 Debt Ratios: Showing the Relationship between Debt and Equity 273 Operating-Efficiency Ratios 274 Cash Flow and Taxes 294 Cash Flow: The Lifeblood of a Business 295 The Income Statement Does Not Show Available Cash 295 Rules to Keep Cash Flowing 297 Noncash Expenses Can Distort the Financial Picture 297 The Working Capital Cycle 297 The Cyclical and Seasonal Nature of Cash Flows 298 Reading a Cash Flow Statement 298 The Cash Flow Equation 300 Forecasting Cash Flow: The Cash Budget 301 Creating a Healthy Cash Flow 303 Managing Inventory to Manage Cash 304 Managing Receivables to Manage Cash 305 The Cash Effect of Accounts Receivable 305 The Life Cycle of Accounts Receivable 305 The Financing of Accounts Receivable 306 Managing Accounts Payable to Manage Cash 307 Negotiating Payment 307 Timing Payables 308 Capital Budgeting and Cash Flow 308 The Burn Rate 309 The Value of Money Changes over Time 310 The Future Value of Money 310 The Present Value of Money 311 Taxes 313 Cash and Taxes 313 Filing Tax Returns 313 Collecting Sales Tax 314 Tax Issues for Different Legal Structures 314 Make Tax Time Easier by Keeping Good Records 314 Chapter 10 Financing Strategy 324 Going It Alone versus Securing Financing 326 How Often Do Small Businesses Really Fail? 326 What Is the Best Type of Financing for You and Your Business? 327 Gifts and Grants 328 Debt Financing 328 Debt Financing: Pros and Cons 329 Equity Financing 330 Equity Financing: Pros and Cons 330 Where and How to Find Capital That Works for You 332

6 CONTENTS VII Unit 3 Having an Excellent Business Plan Goes a Long Way 332 How Capital Sources Read Your Business Plan 332 Family and Friends 332 Financial Institutions and Dimensions of Credit 335 Community Development Financial Institutions 336 Venture Capitalists 338 Angels 338 Insurance Companies 339 Vendor Financing 339 Federally Supported Investment Companies 340 Financing for Rural/Agricultural Businesses 340 Youth Financing 340 Youth Entrepreneur Funding Sources 341 Self-Funding: Bootstrap Financing 341 Accessing Sources through Online Networking 341 Useful Sites 342 Investors Want Their Money to Grow: Can You Make It Happen? 342 How Stocks Work 343 How Bonds Work 344 Show Me the Money: Finding, Securing, and Managing It: Fastsigns 355 UNIT 4 Operating a Small Business Effectively 359 Chapter 11 Addressing Legal Issues and Managing Risk 360 Business Legal Structures 361 Sole Proprietorship 361 Partnership 363 Corporation 364 Tips for Entrepreneurs Who Want to Start a Nonprofit Organization 366 Contracts: The Building Blocks of Business 369 Working with an Attorney 369 Drafting a Contract 370 Letter of Agreement 371 Breach of Contract 371 Small Claims Court 371 Arbitration 371 A Contract Is No Substitute for Trust 371 The Uniform Commercial Code (UGG) 372 The Law of Agency 372 Bankruptcy 373 Protecting Intangible Assets: Intellectual Property 375 Trademarks and Service Marks 375 Copyright 377 Electronic Rights 377 Patents 378 Protecting Tangible Assets: Risk Management 379 Insurance Protects Your Business from Disaster 379 Basic Coverage for Small Business 380 How Insurance Companies Make Money 381 Protect Your Computer and Data 382 Disaster Recovery Plans 382 Licenses, Permits, and Certificates 383 Chapter 12 Operating for Success 392 Operations Permit Businesses to Deliver on Their Promises 394 The Production-Distribution Chain 394 Supply Chain Management 395 Finding Suppliers 395 Managing Inventory 396 Facilities Location and Design 398 Key Factors in Deciding upon a Location 399 Facilities Design and Layout 403 Special Considerations for Home-Based Businesses 404 Special Considerations for Web-Based- Businesses 406 Defining Quality: It Is a Matter of Market Positioning 406 Profits Follow Quality 406 Organization-Wide Quality Initiatives 407 Benchmarking 408 ISO Six Sigma 409 Total Quality Management 409 Malcolm Baldrige Award 410 Using Technology to Your Advantage 410

7 VIII CONTENTS Computer Access Is Essential 411 Capture the Potential of the Telephone 411 Identify Market-Specific Software and Technology 412 Electronic Storefront (Web Site) 412 Chapter 13 Management, Leadership, & Ethical Practices 424 The Entrepreneur as Leader 425 Leadership Styles That Work 426 How Entrepreneurs Pay Themselves 426 Manage Your Time Wisely 427 Business Management: Building a Team 429 What Do Managers Do? 429 Adding Employees to Your Business 430 Growing Your Team 436 Creating and Managing Organizational Culture 436 Determining Organizational Structure 437 Getting the Best Out of Your Employees 438 Human Resources Fundamentals 438 Performance Management 440 Firing and Laying Off Employees 442 Ethical Leadership and Ethical Organizations 443 An Ethical Perspective 443 Establishing Ethical Standards 443 Corporate Ethical Scandals 444 Doing the Right Thing in Addition to Doing Things Right 445 Balancing the Needs of Owners, Customers, and Employees 446 Social Responsibility and Ethics 446 Leading with Integrity and Examples 447 Encourage Your Employees to Be Socially Responsible 447 Unit 4 Operating a Small Business Effectively: Mo's Chowder 459 UNIT 5 Cashing in the Brand 463 Chapter 14 Franchising, Licensing, & Harvesting: Cashing in Your Brand 464 What Do You Want from Your Business? 465 Continuing the Business for the Family 466 Growth through Diversification 466 Growth through Licensing and Franchising 467 Focus Your Brand 467 When Licensing Can Be Effective 467 Franchising Revisited from the Franchisor Perspective 468 How a McDonald's Franchise Works 468 Do Your Research before You Franchise 469 Harvesting and Exiting Options 469 When to Harvest Your Business 469 How to Value a Business 470 The Science of Valuation 471 Creating Wealth by Selling a Profitable Business 471 Harvesting Options 472 Exit Strategy Options 474 Investors Will Care about Your Exit Strategy, Too 475 Unit 5 Cashing in the Brand: Avocent Corporation 484 Appendix 1 The Daily Perc 489 Appendix 2 Sample Student Business Plan 527 Appendix 3 BizBuilder Business Plan 556 Appendices 4-8 available online Index 564