Chapter 5 - Lecture notes 5 PDF

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The challenges of starting a business...

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Chapter 5: The Challenges of Starting A Business - Learning Objectives: 1. Define entrepreneurship, characteristics of entrepreneurs, and advantages of starting your own business. 

Entrepreneur o Someone who identifies with a business opportunity and assumes the risk of creating and running a business to take advantage of it

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Characteristics of Entrepreneurs o 1. Innovation: Entrepreneurship generally means offering a new product, applying a new technique or technology, opening a new market, or developing a new form of organization for the purpose of producing or enhancing a product. o 2. Running a business: Entrepreneurship means setting up a business to make a profit. o 3. Risk taking: The term risk means that the outcome of the entrepreneurial venture can’t be known. Entrepreneurs, therefore, are always working under a certain degree of uncertainty, and they can’t know the outcomes of many of the decisions that they have to make. Consequently, many of the steps they take are motivated mainly by their confidence in the innovation and in their understanding of the business environment in which they’re operating.

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Advantages of starting your own business o According to the Small Business Administration (SBA), a government agency that provides assistance to small businesses, the most common reasons for starting a business are the following  1. Be your own boss  2. Accommodate a desired lifestyle  3. Achieve financial independence  4. Enjoy creative freedom  5. Use your skills and knowledge.

2. Define small business, its importance for the U. S. economy, role of innovation in small business, and the relationship of small businesses to larger companies. 

Small Business o One that is independently owned and operated, exerts little influence in its industry, and (with a few exceptions) has fewer than 500 employees

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Its importance for the U.S. Economy o Generate about 50% of our gross domestic product o Create Jobs o Spark innovation  Airplane, Personal Computer, Tape Recorder, Pacemaker,

o Provide opportunities for many people, including women and minorities, to achieve financial success and independence o They also complement the economic activity of large organizations by providing them with components, services, and distributions of their products 

Small Business Advantages in Innovation o Attract Talent o Faster Decision Making o Focused Research o Compensation Incentives

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Relationship of small businesses to larger companies o Suppliers of Goods o Suppliers of Services  Accounting  Legal Work  Insurance o Outsourcing o Sales Agents

3. Describe the goods-producing and service-producing sectors of the economy and identify where small businesses are prevalent in the economy. 

Goods-producing sector o includes all businesses that produce tangible goods. Generally speaking, companies in this sector are involved in manufacturing, construction, and agriculture. o 20% = Goods-producing

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Service-producing sector o includes all businesses that provide services but don’t make tangible goods o They may be involved in retail and wholesale trade, transportation, finance, insurance, real estate, arts, entertainment, recreation, accommodations, food service, education, and such professional activities as technical services, health care, advertising, accounting, and personal services. o 80% = services;  Retailing = 25%, ; Wholesaling = 10%; Professional/Business services = 35%

4. Describe the advantages and disadvantages of small business ownership. 

Advantages: o Independence; Financial Rewards; Lifestyle o Learning Opportunities o Creative Freedom & Personal Satisfaction

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Disadvantages: o Financial Risk, Stress, Time Commitment, Undesirable Duties

5. Describe what it takes to start a business and explain the advantages and disadvantages of the various forms of small business ownership options--starting from scratch, buying a business, or obtaining a franchise. 

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Decisions for Starting a Business o Type of Business?  Manufacturer, retailer, wholesaler  Professional/Personal services  Home? o Business like others or innovate (new product/concept)?  Business Idea? Feasible?  New or existing business, franchise?  By myself or with others? o Must describe your future business in the form of a business plan = a document that identifies the goals of your proposed business and explains how these goals will be achieved  Questions Answered: (1) how will you build your business? (2) how do you intend to make it sturdy? (3) where will you get financing? Advantages and Disadvantages of the various forms of Ownership Options o Start from Scratch  This is the most common—and riskiest—option.  Advantage: You start with a clean slate and build the business the way you want  Disadvantage: It’s up to you to develop your customer base and build your reputation o Buy Existing Business  This option is not as risky as starting a business from scratch, but it has some drawbacks.  Advantages: You’ll already have a proven product, current customers, active suppliers, a known location, and trained employees.  Disadvantages: It’s hard to determine how much to pay for a business; perhaps the current owners have disappointed customers; maybe the location isn’t as good as it used to be. o Get a Franchise  Under a franchise setup, a franchiser (the company that sells the franchise) grants the franchisee (the buyer) the right to use a brand name and to sell its goods or services.  Advantages: You’ve bought a prepackaged, ready-to-go business that’s proven successful elsewhere; you also get ongoing support from the franchiser.  Disadvantages: The cost can be high; you have to play by the franchiser’s rules; and franchisers don’t always keep their promises.

6. Discuss the importance of planning in a small business, strategies necessary to succeed in business, and identify sources of small business assistance. 

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Business Plan o tells the story of your business concept, provides an overview of the industry in which you will operate, describes the goods or services you will provide, identifies your customers and proposed marketing activities, explains the qualifications of your management team, and states your projected income and borrowing needs Benefits of Business Plan o Forces You to Think Critically about your business o Encourages you to make strategic decisions o Reduces Risk of failure o Forces you to analyze your business concept and industry External Uses of Business Plan o Persuade investors to invest in your company.  Interested in quality of your business concept and ability of management to make venture successful o Obtain financing from bankers.  Determine if loans can get repaid Planning Strategic Decisions o Management o Operations o Marketing o Accounting o Finance Executive Summary o A one- to three-page overview of the business plan. o It’s actually the most important part of the business plan: it’s what the reader looks at first o Written after rest of plan is completed Description of Business o What will the business do? o What goods/services are provided? o Why is business unique? o Who are the customers? o How will products be sold? o Where will company be located? Industry Analysis o Size of industry and future expansion/contraction?

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o Opportunities/threats? o Overall Industry Outlook? o Competitors? o How does your product differ from those of competitors? Mission Statement and Core Values o Mission Statement - Purpose or mission of company (reason it exists) o Core Values—Fundamental beliefs about what is/is not appropriate in conducting business activities Management Plan o Qualifications of Management  Education, Experience, Expertise o Organization Structure o Legal Form of Organization  Sole Proprietorship, Partnership, Corporation Goods and Services o Description, Why better than competitors, Market needs, Competitive Advantage Development and Production o Obtain or make products? Product Design, Technology used to make products o Where will facilities be? Type of equipment used; Design/Layout of facilities o # of employees; # of unit’s products; How will you ensure high quality? Marketing o 1. Target market. Describe future customers and profile them according to age, gender, income, interests, and so forth. If your company will sell to other companies, describe your typical business customer o 2. Pricing. State the proposed price for each product. Compare your pricing strategy to that of competitors. o 3. Distribution. Explain how your goods or services will be distributed to customers. Indicate whether they’ll be sold directly to customers or through retail outlets. o 4. Promotion. Explain your promotion strategy, indicating what types of advertising you’ll be using. Global Issues o Will you buy, manufacture and/or sell in other countries? o Challenges you will face and how you will overcome them o Strategies for future entrance into global markets Financial Plan o Cash Needs  Start-up, Operations, Repay debt o Financial Projections  Expected Sales, Expected Costs, Projected Profit or Loss Appendices o Supplemental information that may be of interest to the reader = resumes; financial statements Strategies Necessary to Succeed in Business

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Know Your Business; Know Basics of Business Management Have Proper Attitude; Get Adequate Funding; Manage Money Effectively Manage Time Efficiently; Know How to Manage People; Satisfy Your Customers Know How to Compete...