Part 2

Starting and Growing Your Starting and Growing Your BusinessBusiness

Chapter 5

Options for Organizing Small and Large Businesses

Chapter Objectives1. Distinguish between small and large businesses and

identify the industries in which most small firms are established.

2. Discuss the economic and social contributions of small business.

3. Compare the advantages and disadvantages of small businesses.

4. Describe how the Small Business Administration assists small-business owners.

5. Explain how franchising can provide opportunities for both franchisors and franchisees.

6. Summarize the three basic forms of business ownership and the advantages and disadvantages of each form.

Chapter Objectives

7. Identify the levels of corporate management.8. Describe recent trends in mergers and

acquisitions.9. Differentiate among private ownership, public

ownership, and collective ownership (cooperatives).

Chapter Overview Variables affecting the organization of

your business include: How easily can you set up this type of

organization? How much financial liability can you afford

to accept? What financial resources do you have? What strengths and weaknesses do you see

in others? What are your own strengths and

weaknesses?

Most Businesses Are Small Businesses What is a Small Business?

A firm that is independently owned and operated, not dominant in its field, and meets industry-specific size standards for income or number of employees.

98 percent have fewer than 100 employees Over 14 million people in the U.S. are

earning business income without any employees

Almost half the sales in U.S. are made by small businesses

Most Businesses Are Small Businesses Most nonfarming small businesses have

been concentrated in retailing in the service industries

Typical Small-Business Ventures Dentists Home Builders Florists, etc

Almost half of small businesses in the U.S. are home based businesses (firms operated from the residence of the business owner)

David vs. Goliath: Business Sectors Most Dominated and Least Dominated by Small Firms

Major Industries Dominated by Small Businesses

Contributions or Small Businessto the Economy

Creating New Jobs

Creating New Industries

Attracting New Industries

Advantages of a Small Business Small businesses differ greatly in:

Forms of organization Market positions Staff capabilities Managerial styles Organizational structures Financial resources

These differences usually seem like advantages to small-business owners

Advantages of Small-Business Ownership

Advantages of a Small Business Innovation

Example: Start-up business to offer online bookstore shopping and delivery.

Typically develop twice as many product innovations per employee as larger firms

Also obtain the more patents per sales dollar than larger businesses

Key innovations developed by small businesses include the airplane, audio tape recorder, double-knit fabrics, optical scanner, PC, soft contact lenses, and the zipper

Advantages of a Small Business Lower Costs

Example: Small retailer who can prepare sales flyers on a PC.

Small firms may be able to provide goods and services at prices that large firms cannot match

Overhead costs are usually minimized Typically, organizations are lean -- with

the smallest staffs and few support personnel

Advantages of a Small Business Superior Customer Service

Example: Free alterations on clothing purchases from a small boutique.

Small firms can operate with greater flexibility

This allows tailoring of product lines and services to the needs of customers

Advantages of a Small Business Filling Isolated Niches

Example: Retail store that specializes in selling products designed for left-handed consumers.

Large businesses tend to focus on the large segments of the overall market

Growth prospects of market niches are too limited, and expenses involved in serving them to great, for large firms

This creates opportunity for small firms

Disadvantages of a Small Business In addition to being vulnerable to

economic downturns, primary disadvantages include: Management Shortcomings Inadequate Financing Government Regulation

Disadvantages of a Small Business Management Shortcomings

People often go into business with little, if any, business training

Owners often hesitate to turn to consultants for advice in areas were they lack knowledge or experience

Frequently struggle with “rose-colored-glasses syndrome”

Disadvantages of a Small Business Inadequate Financing

Too often, new business owners assume a that they will generate enough funds in the first few weeks or months to finance continuing operations

Provisions must be made for uneven cash flows Banks often very reluctant to make small

business loans

Sources of Small-Business Financing

Disadvantages of a Small Business Government Regulation

Small-business owners often complain bitterly of excessive government regulation and red tape

Paperwork costs account for billions of small-business dollars each year

Taxes are another burdensome expense for small businesses

Increasing the Likelihood ofBusiness Success

Creating a Business Plan Business plan—written document that provides

an orderly statement of a company’s goals, the methods by which it intends to achieve those goals, and standards by which it will measure achievements.

Typically includes following components: Executive summary Introduction Marketing Financials Resumes of principles

Increasing the Likelihood ofBusiness Success Small Business Administration

(SBA)—federal agency that assists small businesses by providing management training and consulting, financial advice, and support in securing government contracts.

Increasing the Likelihood ofBusiness Success Small Business Administration

Financial Assistance Guarantees loans

Other Specialized Assistance Government procurement set-aside programs Information and advice

Increasing the Likelihood ofBusiness Success Business Incubators

Business incubator—organization that provides low-cost, shared facilities on a temporary basis to small start-up ventures.

Increasing the Likelihood ofBusiness Success Large Corporations Assisting Small

Businesses Corporations often devise special programs

aimed at solving small-business problems Recognition of the size of the small-business

market, its growth rate and buying power, and the financial rewards of supporting small businesses

Small-Business Opportunities forWomen and Minorities Women-Owned Businesses Minority-Owned Businesses

Women-owned and minority-owned businesses are growing much faster than the overall growth in U.S. businesses

Small-Business Opportunities forWomen and Minorities Women-Owned Businesses

Over 9 million women-owned firms Almost 40 percent of U.S. businesses Provide employment for almost 28 million

people 1 of every 8 owned by minority women

Small-Business Opportunities forWomen and Minorities

Minority-Owned Businesses Growth in number of businesses owned via a

African-Americans, Hispanics, and Asian Americans has far out past the growth in number of U.S. businesses overall recently

Types of Businesses Owned by Racial and Ethnic Minorities

The Franchising Alternative The Franchising Sector

Franchising—contractual agreement that specifies the methods by which a dealer can produce and market a supplier’s good or service.

Franchising growing rapidly U.S. franchises generate $1 trillion in sales

annually and employing over 8 million people

Franchising is also popular overseas

The Franchising Alternative Franchising Agreements

Franchisee: small business owner who contracts to sell the goods or service of the franchisor in exchange for some payment

Franchisor: owner of the franchise Franchisor typically provides name

recognition, building plans, site selection help, accounting systems, and other services

The Franchising Alternative Benefits and Problems of Franchising Advantages include:

A prior performance record Recognizable company name Business model that has proven successful Tested management program Business training

The Franchising Alternative Benefits and Problems of Franchising Disadvantages include:

Expensive franchise fees and future payments The fact that the franchisee is linked to the

reputation and management of the franchise The potential unsuitability of the franchisee

The Latest Trends in Franchising by Industry

Small Business Goes Global

Global Environment for Entrepreneurs Growth Strategies

Global reach of the Internet allows companies to reach international markets quickly

Alternatives for Organizing a Business Forms of Business Ownership

Comparing the Three Major Forms of Private Ownership

Alternatives for Organizing a Business Sole Proprietorships

Sole proprietor—form of business ownership in which the company is owned and operated by one person.

Alternatives for Organizing a Business Partnerships

Partnership—form of business ownership in which the company is operated by two or more people who are co-owners by voluntary legal agreement.

Alternatives for Organizing a Business Corporations

Corporations—business that stands as a legal entity with assets and liabilities separate from those of its owner(s).

S corporations

Double Taxation: A Disadvantage of the Corporate Form of Organization

Alternatives for Organizing a Business Changing Legal Structures to Meet

Changing Needs Considerations of the appropriate legal

structure include: Personal financial situations and the need

for additional funds Management skills and limitations Management styles and capabilities for

working with others Concerns about exposure to personal

liability

Organizing and Operating a Corporation Types of Corporations

Domestic—A firm is considered a domestic corporation in the state where it is incorporated

Foreign—When company does business in a state other than the one where it has filed incorporation papers, it is registered as a foreign corporation in each of those states

Alien—A firm incorporated in one nation that operates in another is known as an alien corporation where it operates

Organizing and Operating a Corporation The Incorporation Process

Where to Incorporate The Corporate Charter Articles of Incorporation

Levels of Management in a Corporation

Organizing and Operating a Corporation Corporate Management

Stockholders—person or organization who has bought shares of stock in a corporation and is entitled to some of its profits.

Closed or Closely Held Publicly Held

Organizing and Operating a Corporation

Corporate Management Stock Ownership and Stockholder Rights

Preferred stock owners have limited voting rights; receive dividends before others

Common stock owners have voting rights but only residual claims on assets and are the last to receive any income distributions

Organizing and Operating a Corporation Corporate Management

Board or Directors—elected governing body of a corporation.

Sets policy, authorizes major transactions, and hires and supervises the CEO

Corporate Officers and Managers Make most major corporate decisions

Organizing and Operating a Corporation Employee-Owned Corporations

Employee ownership: where workers buy shares of stock in the company that employees them

Corporate organization stays the same Most stockholders are also employees

Organizing and Operating a Corporation Not-for-Profit Corporations

Organizations that pursue objectives other than returning profits to owners

Include: Museums Libraries Religious and human-service organizations Zoos Thousands of other groups

When Businesses Join Forces Mergers and Acquisitions (M&A)

Merger—combination of two or more firms to form one company.

Acquisition—procedure in which one firm purchases the property and assumes the obligations of another.

Vertical Merger Horizontal Merger Conglomerate Merger

When Businesses Join Forces

Joint Ventures: Specialized Partnerships Joint Venture: a partnership between

companies formed for a specific undertaking

Public and Collective Ownership Public Ownership

When a unit or agency of government owns and operates an organization

Government-Owned Corporations Used When:

Private investors are not willing to invest in high-risk projects

When private ownership has failed Operating public companies can be used to foster

competition

Public and Collective Ownership Customer-Owned Businesses:

Cooperatives Cooperative: an organization whose owners

join forces to collectively operate all or part of the functions in their industry