What unmet need did Tina find that led her to start a business

greene_0538446145_FM, 1/18/8, 12:13, page: 1 greene_0538446145_FM, 1/15/8, 17:31, page: 2 * SOUTH-WESTERN t CENGAGE Learning Entrepreneurship: Ideas in Action, Fourth Edition Cynthia L. Greene Vice President of Editorial, Business: Jack W. Calhoun Vice President/Editor-in-Chief: Karen Schmohe Vice President/Marketing: Bill Hendee Executive Editor: Eve Lewis Sr. Developmental Editor: Enid Nagel Editorial Assistant: Virginia Wilson Marketing Manager: Mike Cloran Marketing Coordinator: Kelley Gilreath Content Project Manager: Darrell E. Frye Manager of Technology, Editorial: Liz Wilkes Technology Project Editor: Sally Nieman Website Project Manager: Ed Stubenrauch Manufacturing Coordinator: Kevin Kluck Production Service: Macmillan Publishing Solutions Art Director: Tippy McIntosh © 2009, 2006 South-Western, a part of Cengage Learning ALL RIGHTS RESERVED. 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The Career Clusters icons are being used with permission of the: Internal and Cover Designer: Grannan Design, Ltd States’ Career Clusters Initiative, 2007 , www.careerclusters.org Cover Images: Veer, PhotoAlto/Getty Photography Manager: John Hill © 2008 Cengage Learning. All Rights Reserved. Student Edition ISBN 13: 978-0-538-44614-3 Student Edition ISBN 10: 0-538-44614-5 Student Edition with CD ISBN 13: 978-0-538-44626-6 Student Edition with CD ISBN 10: 0-538-44626-9 South-Western Cengage Learning 5191 Natorp Boulevard Mason, OH 45040 USA Cengage Learning products are represented in Canada by Nelson Education, Ltd. For your course and learning solutions, visit school.cengage.com Printed in the United States of America 1 2 3 4 5 6 7 12 11 10 09 08 greene_0538446145_FM, 1/15/8, 17:31, page: 3 Tatyana Berkovich President and Founder Ivy Academia K-12 th grade Entrepreneurial Charter School Woodland Hills, California Becky Bernard Coordinator/Instructor, Small Business Vanguard Sentinel Adult Career Centers Fremont, Ohio Julie Carney Program Manager NFIB Young Entrepreneur Foundation Washington, DC Pat Edwards Instructor, Hospitality Management Fairfax County Public Schools Chantilly Academy Chantilly, Virginia Mary A. Fugate Business Education/OJT Instructor Grants High School Grants, New Mexico Roger H. Fulk Professor, Office Information Systems Wright State University—Fake Campus Celina, Ohio Arlene Gibson Director, Office of Career and Technical Education Career and Technical Education Detroit Public Schools Detroit, Michigan Michael Hackman Teacher, Business Department Columbus North High School Columbus, Indiana Catherine Hayes Teacher Culinary Arts & Entrepreneurship Albuquerque Public Schools Del Norte High School Albuquerque, New Mexico Linda Hughes Business Educator Rapides High School Lecompte, Louisiana Susan Krebsbach Teacher Broken Arrow High School Broken Arrow, Oklahoma Carol T. Majors Consultant Consortium for Entrepreneurship Education Lee’s Summit, Missouri Azzie L. Olds Business Instructor North Caddo Magnet High School Vivian, Louisiana Michael Vialpando Business Department Chair La Joya Community High School Phoenix, Arizona Kim Watson Marketing Teacher The Academy of Irving Irving, Texas Jasper L. Wilson Business Education Supervisor Prince George’s County Public Schools Upper Marlboro, Maryland Reviewers III greene_0538446145_FM, 1/15/8, 17:31, page: 4 Contents Should You Become an Entrepreneur? 2 Making Job Connections 3 ftfl All about Entrepreneurship 4 Is Entrepreneurship Right for You? 10 Exploring Ideas and Opportunities 16 Problem Solving for Entrepreneurs 21 Be Your Own Boss 19 Develop Your Reading Skills 5 Did You Know? 11 Famous Entrepreneur 7 Net Bookmark 17 Teamwork 9, 15, 20, 25 What Went Wrong? 13 Lesson Assessment 9, 15, 20, 25 Chapter Assessment 28 Build Your Business Plan Project 31 Sharpen Your Entrepreneurial Skills Effective Business Letters 26 Planning a Career in Human Services 32 Winning Edge BPA Presentation Management Team 33 Entrepreneurs in a Market Economy 34 S Web Site Design 35 8 Entrepreneurs Satisfy Needs and Wants 36 How Economic Decisions Are Made 42 What Affects Price? 49 Be Your Own Boss 47 Develop Your Reading Skills 37 Did You Know? 46 Famous Entrepreneur 44 Net Bookmark 38 Teamwork 41, 48, 54 What Went Wrong? 53 Lesson Assessment 41, 48, 54 Chapter Assessment 56 Build Your Business Plan Project 59 Sharpen Your Entrepreneurial Skills Effective Presentation Skills 55 Planning a Career in Property Management 60 Winning Edge FBLA Emerging Business Issues Event 61 Develop a Business Plan 62 Turning an Idea into a Business 63 « Why a Business Plan Is Important 64 What Goes into a Business Plan? 69 How to Create an Effective Business Plan 78 Be Your Own Boss 80 Develop Your Reading Skills 65 Did You Know? 79 Famous Entrepreneur 67 Net Bookmark 81 Teamwork 68, 77, 82 What Went Wrong? 72 Lesson Assessment 68, 77, 82 Chapter Assessment 84 Build Your Business Plan Project 87 Sharpen Your Entrepreneurial Skills Using Technology Tools 83 Planning a Career in Landscape Architecture 88 Winning Edge BPA Prepared Speech 89 IV Contents greene_0538446145_FM, 1/15/8, 17:31, page: 5 Identify and Meet a Market Need 90 Serving Customers' Needs 91 § Identify Your Market 92 Research the Market 97 Know Your Competition 104 Be Your Own Boss 107 Develop Your Reading Skills 93 Did You Know? 99 Famous Entrepreneur 98 Net Bookmark 101 Teamwork 96, 103, 110 What Went Wrong? 94 Lesson Assessment 96, 103, 110 Chapter Assessment 112 Build Your Business Plan Project 115 Sharpen Your Entrepreneurial Skills Using Spreadsheets to Analyze Data 111 Planning a Career in Marketing Research 116 Winning Edge FBLA Multimedia Presentation 117 Market Your Business 118 Turning Creative Fun into Dollars 119 kA Develop the Marketing Plan 120 The Marketing Mix—Product 126 km The Marketing Mix—Price 131 Be Your Own Boss 136 Develop Your Reading Skills 121 Did You Know? 127 Famous Entrepreneur 122 Net Bookmark 129 Teamwork 125, 130, 138 What Went Wrong? 128 Lesson Assessment 125, 130, 138 Chapter Assessment 140 Build Your Business Plan Project 143 Sharpen Your Entrepreneurial Skills Breakeven Point 139 Planning a Career in E-marketing 144 Winning Edge BPA Global Marketing Team Event 145 Distribution, Promotion, and Selling 146 Turning a Bad Experience into a Million Dollars 147 8 The Marketing Mix—Distribution 148 The Marketing Mix—Promotion 154 Selling and Promoting 164 Be Your Own Boss 150 Develop Your Reading Skills 149 Did You Know? 155 Famous Entrepreneur 167 Net Bookmark 157 Teamwork 153, 163, 168 What Went Wrong? 161 Lesson Assessment 153, 163, 168 Chapter Assessment 170 Build Your Business Plan Project 173 Sharpen Your Entrepreneurial Skills Marketing and the Web 169 Planning a Career in Public Safety 174 Winning Edge DECA Entrepreneurship Promotion Project 175 Contents V greene_0538446145_FM, 1/15/8, 18:13, page: 6 / Select a Type of Ownership 176 Capitalize on Youth Marketing 177 Decide to Purchase, Join, or Start a Business 178 Choose a Legal Form of Business 187 Legal Issues and Business Ownership 194 Be Your Own Boss 192 Develop Your Reading Skills 179 Did You Know? 184 Famous Entrepreneur 197 Net Bookmark 183 Teamwork 186, 193, 200 What Went Wrong? 190 Lesson Assessment 186, 193, 200 Chapter Assessment 202 Build Your Business Plan Project 205 Sharpen Your Entrepreneurial Skills Effective Telephone Conversations 201 Planning a Career in Franchising 206 Winning Edge DECA Business Law and Ethics Management Team Decision Making Event 207 Locate and Set Up Your Business 208 Ideas in Action A Neighborhood Business 209 § Choose a Location 210 Obtain Space and Design the Physical Layout 218 <2> Purchase Equipment, Supplies, and Inventory 224 Be Your Own Boss 227 Develop Your Reading Skills 211 Did You Know? 220 Famous Entrepreneur 221 Net Bookmark 222 Teamwork 217, 223, 228 What Went Wrong? 215 Lesson Assessment 217, 223, 228 Chapter Assessment 230 Build Your Business Plan Project 233 Sharpen Your Entrepreneurial Skills E-Mail Etiquette 229 Planning a Career in Architecture and Construction 234 Winning Edge DECA Buying and Merchandising Management Team Decision Making Event 235 Plan and Track Your Finances 236 | Electronic Safekeeping 237 Finance Your Business 238 Pro Forma Financial Statements 246 Recordkeeping for Businesses 253 Be Your Own Boss 259 Develop Your Reading Skills 239 Did You Know? 245 Famous Entrepreneur 243 Net Bookmark 244 Teamwork 245, 252, 260 What Went Wrong? 256 Lesson Assessment 245, 252, 260 Chapter Assessment 262 Build Your Business Plan Project 265 Sharpen Your Entrepreneurial Skills Prepare a Resume 261 Planning a Career in Finance 266 Winning Edge FBLA Business Financial Plan 267 VI Contents greene_0538446145_FM, 1/15/8, 17:31, page: 7 Operations Management 268 Entertaining and Planning 269 8 Operating Procedures 270 Inventory Management 276 Financial Management 283 Be Your Own Boss 278 Develop Your Reading Skills 271 Did You Know? 284 Famous Entrepreneur 281 Net Bookmark 272 Teamwork 275, 282, 290 What Went Wrong? 285 Lesson Assessment 275, 282, 290 Chapter Assessment 292 Build Your Business Plan Project 295 Sharpen Your Entrepreneurial Skills Leadership Skills 291 Planning a Career in Information Technology 296 Winning Edge FBLA Partnership with Business 297 Human Resource Management 298 Working for What You Believe In 299 f Identify Your Staffing Needs 300 Staff Your Business 307 Direct and Control Human Resources 315 Be Your Own Boss 316 Develop Your Reading Skills 301 Did You Know? 311 Famous Entrepreneur 312 Net Bookmark 304 Teamwork 306, 314, 322 What Went Wrong? 318 Lesson Assessment 306, 314, 322 Chapter Assessment 324 Build Your Business Plan Project 327 Sharpen Your Entrepreneurial Skills Promoting Teamwork 323 Planning a Career in Audio-Video Technology 328 Winning Edge FBLA Business Plan 329 Risk Management 330 Growth Is Risky 331 8 Business Risks 332 Insure Against Risks 338 Other Risks 345 Be Your Own Boss 336 Develop Your Reading Skills 333 Did You Know? 339 Famous Entrepreneur 351 Net Bookmark 335 Teamwork 337, 344, 352 What Went Wrong? 342 Lesson Assessment 337, 344, 352 Chapter Assessment 354 Build Your Business Plan Project 357 Sharpen Your Entrepreneurial Skills Respect Cultural Diversity 353 Planning a Career in Insurance 358 Winning Edge DECA Business Services Marketing Series Event 359 Contents VII greene_0538446145_FM, 1/15/8, 17:31, page: Management for the Future 360 Starting Young and Moving Up 361 Growth Strategies 362 Ethical and Social Issues 370 Global Trends and Opportunities 378 Be Your Own Boss 380 Develop Your Reading Skills 363 Did You Know? 375 Famous Entrepreneur 383 Net Bookmark 374 Teamwork 369, 377, 384 What Went Wrong? 364 Lesson Assessment 369, 377, 384 Chapter Assessment 386 Build Your Business Plan Project 389 Sharpen Your Entrepreneurial Skills Time Management 385 Planning a Career in Transportation 390 Winning Edge BPA Small Business Management Team Event 391 Glossary 392 Index 397 VIM Contents greene_0538446145_FM, 1/15/8, 17:31, page: 9 Cynthia L. Greene taught business education at the high school level for 25 years. She taught in the Fulton County School System in Atlanta, Georgia, and she was the program specialist for Business and Information Technology for the Georgia Department of Education for six years. She has been active in the National Business Education Association (NBEA), serving as NBEA President in 2005-2006 and on the Entrepreneurship Standards Committee as a writer and reviewer and as a writer for the Entrepreneurship Lesson Plans. About the Author IX greene_0538446145_FM, 1/15/8, 17:31, page: 10 Excellent Business Plan Coverage Entrepreneurship: Ideas in Action takes you step-by-step through the entire process of owning and managing a business. Business plan coverage has been moved earlier in the text and expanded. You learn what it takes to get an entrepreneurial venture off to a good start. BUILD YOUR n| Bu siness Plan ^ This activity will help you develop the business plan for your business idea. Identify the target market for your business Use secondary data sour¬ ces to help you assess demand for your product or service. Using the secondary research, develop a customer profile for you business. Which market segment of you industry are you targeting’ Be specific Conduct pnmary research for your business, using the steps outlined in Lesson 4.2. Develop a questionnaire that will give you the informa¬ tion you need. Ask at least 30 people in your target market to com¬ plete the survey. Analyze you results and determine what course of action you will take Determine who your competitors are, both direct and indirect. Using the Activity CD. open the activity 'Competitive Analysis.' Use the chart to prepare a competitive analysis for your business. Determine a strategy for dealing with each competitor What are your strategies for maintaining customer loyalty? Describe them and give reasons why you think each will work. Comprehensive Coverage of BPA, FBLA, and DECA Competitive Events Winning Edge features help you prepare for competitive events. BPA Presentation Management Team 33 FBLA Emerging Business Issues Event 61 BPA Prepared Speech 89 FBLA Multimedia Presentation 117 BPA Global Marketing Team Event 145 DECA Entrepreneurship Promotion Project 175 DECA Business Law and Ethics Management Team Decision Making Event 207 DECA Buying and Merchandising Management Team Decision Making Event 235 FBLA Business Financial Plan 267 FBLA Partnership with Business 297 FBLA Business Plan 329 DECA Business Services Marketing Series Event 359 BPA Small Business Management Team Event 391 Build Your Business Plan Project concludes each chapter and is designed to help you prepare a complete business plan by the end of the course. The Kmcrpng Rinincu I»uo hail provide* itudcut* »nh an uppar- ninny to lOUKb and ptevrn on emerging butane** The oeni w ill he completed by a leant coiMttntg of (wo cir three member*. FBLA provide* participant! a topic to mcarch. The team must I hen proem an atfirmnne or negatin' argument about the topic, hated upon random tclecimn tact! and working data thnuid be iccured hum reliable source*. Alter drawing an alBmutne at a negative argu mem, team* will hair five minute* to fuuh/c then preparaunt. hath presentation wtU 1 m no longer than hie minute* Following each oral pcocntatKm, the judge* haic three rramitc* to ad. quohont. TOPIC t lining the border with Mctku hat become a heated political ictue for the l'rated State*. Cammtakm, manufacTunng, agriculture, and horticulture are a lew of the tnduune* that depend luraiily on illegal immigrant* to fulhll labor need*. Some citi/cm and poliricura want the cuuimv to thin down the border and deport iBc gal immigrant* Other individuate want the jpitcmment to grant the current illegal immigrant* a worker'* permit and develop a ttrategy to enable them to become legal eitirenv One plan recommend* granting cm/cndup to more than 12 million illegal immigrant* behwc tighten mg up live border Other plan* vail (or fining huaanmo that lure illt gal immigrant*. Your team will be called upon to argue the alhmutnc igranting illegal rcwdcmi work pemutt and oti/emhipi or the nega tne nine employer* and tend illegal retulem* home). PERFORMANCE INDICATORS EVALUATED • L'ndcrtund liow a current uwe allect* the economy • Cvimmitnicilr an opinion hated upon fact* and figure*. • WkI a* a team to perwade the auvfcrncc to tupport a ccrtani • Manage time cllcctitcly lo rctcarch. outline, and proem a viewpoint. • Demonirrite ctirctne reamworh and align idea* into a pemiawv Go to tt* FBLA web the lor more detailed information Pwnk Critically 1 What are two achantagn o> aflmwng ifeq United Stale*? t Mr/ are hauireue* concerned about the <j illegal mrmjranci from Memo' 3 Why are poWmaoj conf-cted by the 1te9.1i d How can the United State* emcee that A* *ary wepi to obtaei injal otuemhp’ www.fbla.org x greene_0538446145_FM, 1/15/8, 17:31, page: 11 Excellent Organization! Each chapter is organized into lessons, making the text easy to use in all classroom environments. Each lesson begins with a list of terms and goals for the lesson to help you focus your reading. Each goal corresponds to a major heading. Loaded with activities, individual and group projects, and reinforcement opportunities, this text will get you ready to launch your business ideas! Lessons provide the appropriate amount of material for each lesson. Develop Your Reading Skills helps hone your reading skills. List all of the chapter key terms on the board. Have students write a definition for each key term before reading the chapter. When a key term is introduced in the chapter, have students compare the definition to the one they wrote and correct their definitions as needed. a Business 3.1 Why a Business Plan Is Important 3.2 What Goes Into a Business Plan? 3.3 How to Create an Effective Business Plan ichool.cengage.coin/entrcprencur/idevii Develop Plan Goals outline the main objectives of the lesson. Terms are the new terms defined in the lesson. Focus on Small Business provides a - motivating introduction to the lesson. Why a Business Plan Is Important \| Focus on Small Business Look before you leap Tony worked for a local automobile dealership at a tech ructan for over 20 yean He wet the ben tcchneian at th dealership, and he always received very high cuttomer vervco ratings. One day, Tony deeded that became he wat Midi a good technician, he could make more money working on hit own At a local pent and vrgnage shop. he had butinett cards printed and a ugn made that read 'Tony the Technioeiv * He quit bn job at the dealer on Friday, put hit vqn up on Sunday, and wat open for butinett on Monday. Work aa a Team Tony made hit doouon very tati and jumped right «ilo owning his own butanes* What do you think are Tony's chances for tuccott? Discuss what adwee you would have yven Tony if he had talked to you about his idea first The Business Plan Once you lute willed on a hutment idea, it st nine to start making plant It >r the business. A business plan i- a written document tfi.it dcunltt-t all ihc steps net c wary fur opening and operating a win cm fill Isuwiscst In this chapter, you will leant what goes into a hutment plan and begin the development of a businesa plan hie your btiunrst Idea. A business pkjn doe* the Mlmving • Describes whal sour him new will produce, how you will pnnliKC il, and who will buy yvmi product or tersicc • Explains who will run vosir business and who will stipple n with goods • StJtcs how your business wtU win mo customers from sumpetitors and what yuur business will do to keep sintomcrs xi greene_0538446145_FM, 1/15/8, 17:31, page: 12 Career Coverage! A variety of careers as an Entrepreneur are featured for various Career Clusters in the Planning a Career in... feature Human Services 32 Property Management 60 Landscape Architecture 88 Marketing Research 116 E-marketing 144 Public Safety 174 Franchising 206 Architecture and Construction 234 Finance 266 Information Technology 296 Audio-Video Technology 328 Insurance 358 Transportation 390 Planning a Career in Architecture and Construction At itcle i* inning mm out West He iv excited about the «ilar panel* he recently installed at hi* home. Hi* city provided a SI,000 rebate tor *olar panel installation. To obtain the rebate, tlic panel* need to annually di* place 1,500 kilowatt hour* of grid ha*cd power. My uncle'* utility bill* luxe gone down. 1 Ic alwi feel* good about doing hi* part tu improve the environment In drcrcaiing hi* dependence on the grid” How do individual* and organization* transition then energy resource* trim traditional vouico to environmentally friendly, renewable sources? Solar pxmer i* a renew able energy source that i» rapid!* incrcaung in popularity. Many coin|*ainc* are available to guide individual* and corporation* in utilizing xnlar energy and to assist in Hilar panel inttaliation EMPLOYMENT OUTLOOK • Solar energy comumprion i* expected to grow a* part of the overall growth of U.S, energy ci inuitn prion. • Worker* who are trained to participate in alternative energy muree* may experience good job protpeci* • Individual* with college course- work in high-end technology will have the best opportunities in the utilities industry'. JOB TITLES • Solar Installer • ( ooMibant, Solar Energy • Solar Energy Project Manager • Photovoltaic Lighting Ucvigner • Solar .System Design Engineer NEEDED SKILLS • A Bachelor'* Degree in Science, with an engineering major, » required for higher-level dcugn. production, and management jobs. • Eipcttw in a variety of area* including journeyman-level elec- tncal knowledge, plumbing, and mount racking system* i* needed tor tolar panel inttallcrs. What', ttfttlo work m Arctutoc haw and Construct m* Paige, a Halar panel installation contractor, ha* obtained installation contract* from a variety of companies The companies tlut contracted for Paige'* service* provide their client* with on site consulting. ranging (nan determining the optimal Idea lion of wilar panels, to the filing of paperwork f>« govcnimenl-lused rebate and tax credit programs, t.i providing a tix-month tiiBow-up visit to ensure proper functioning of panels A* Paige has been installing panel* for many scars, her expert ence i* broad bated. (Sven tlie breadth of her experience, the can install panel* at residential, com mcrcial, or industrial site* Paige is planning to attend a conference that will Incus on state and federal solar energy Incentive program*. Becoming more kmnvl edgeablc about tl»c*c i*Mic* t* pan of Paige'* continuing education plan to prepare her to start her own Hilar energy consulting What about you! Would sou like to help clean up the environ ment by actively converting energy consumers to renewable, "green” energy source*? Skills for Entrepreneurs! Sharpen Your (Entrepreneurial, Teamwork, Leadership, Technology) Skills features offer skill-building information and pose critical-thinking questions. Effective Business Letters 26 Effective Presentation Skills 55 Using Technology Tools 83 Using Spreadsheets to Analyze Data 111 Breakeven Point 139 Marketing and the Web 169 Effective Telephone Conversations 201 E-Mail Etiquette 229 Prepare a Resume 261 Leadership Skills 291 Promoting Teamwork 323 Respect Cultural Diversity 353 Time Management 385 Sharpen Your Entrepreneurial Skills Rotpoct Cultural DtwnKy lit today's global economy, sou will conic in contact with all kuids of people. Many of these people will be from culture* different from your own. You may work with people of different culture*. You may also buy from and tell to people of different culture*. A* an entrepre¬ neur, you need to appreciate different cultures lot the following reason* • You need tu be comfortable w ith your customer*. If you are open to other culture*, you can attract mote customer*. • I’coplc from different culture* may have differ¬ ent need* and want*. Gndcrsuitding thc*c can help you market sour business more effectively llow can you develop good relationship* with everyone you do btninc** with? 'I here are at least live thing* you can do to enhance thc*c relation ships: 1. Avoid stereotyping people. Don't assume that all people front a {mi1icuI.ii ethnic or cultural group Isold the same value* and opuiionv. behave the same way, or kkr the same thing*. 2. Focus on similarities rather than differences. Most people, rvgarslles* of their culture, want die same thing* in life 3. Learn about different cultures. Learning about a different culture will make you more comfortable around people from that culture Learn hoi* people in a different culture live and work. 4. Moke friends with someone from a different culture, llic friendship will help you begin to appreciate other cultures 5. Try' •'* understand and identify' with other people's feeling*. Try' to sec the world through the eye* of people from different cultures Tty to understand cultural view* that are different from your own. TRY IT OUT Before conducting business in another country, you will have to answer many question* to address the risk* Will your product sell well ui another country or wiD you have to make modifications to it? What aspects of the country's culture could affect your business’ How can you leotn about another country'* culture? L ung the .Activity CD, open the activity “Competing in the Global Economy “ Print a copy and complete the activity. XII greene_0538446145_FM, 1/15/8, 17:31, page: 13 Case Studies of Entrepreneurs! Ideas in Action presents stories of successful young Entrepreneurs. Making Job Connections 3 Michael Stahl, 4Teens Network Web Site Design 35 Scott Smigler, Exclusive Concepts Turning an Idea into a Business 63 Jeffrey Rodriguez and John Serrano, Latin Artist Serving Customers'’ Needs 91 Brian Hendricks, StartUpPC and VB Solutions Turning Creative Fun into Dollars 119 Sheri and Rich Schmelzer, Jibbitz Turning a Bad Experience into a Million Dollars 147 Jasmine Lawrence, Eden Body Works Capitalize on Youth Marketing 177 Tina Wells, The Buzz International Marketing Group A Neighborhood Business 209 Ryan Williams, Rapappy Electronic Safekeeping 237 Katelin Shea, GadgetSleeves Entertaining and Planning 269 Andrew Jensen, Jx2 Productions Working for What You Believe In 299 Omar Farulc, LogicLotus Growth is Risky 331 Scott Alterman, The Icebox Starting Young and Moving Up 361 Joseph Pascaretta, Alps Technology and Alps Lawn Company Famous Entrepreneurs features successful entrepreneurs throughout history. Madam C. J. Walker 7 Paul Revere 44 Walter Elias Disney 67 Thomas A. Edison 98 Sergey Brin and Larry Page 122 Anne Barge 167 Eli Whitney 197 Rachel Ray 221 The Wright Brothers 243 Ganz Family 281 J. K. Rowling 312 Merv Griffin 351 Johnny Pag 383 XIII greene_0538446145_FM, 1/15/8, 21:42, page: 14 Special Features Enhance Learning! What Went Wrong? highlights the pitfalls of real entrepreneurs and includes critical thinking questions to help students analyze the situations. WHAT WENT WRONG Partnership Woes Stan and Peter met while working at a video production company Stan was in charge of editorial and production Peter ran the sales force. Stan deeded to begin his own company and invited Peter to join him SP Communica¬ tions seemed like a perfect partnership. Peter would handle sales and administration, while Stan managed clients and directed production Things seemed to be going well until Peter decided he wanted to be a part of the creative process He spent most of his time producing videos rather than looking for new business Because of their friendship. Stan trusted that Peter was taking care of his side of the business. As it turned out. Peter wasn’t very good at the creative tasks he took on. He made mis¬ takes that reduced expected profits. In addi¬ tion. he wasn't making new sales contacts, which was supposed to be his mam job By the time Stan realized what was hap¬ pening to the business, it was too late There weren't any new sales. What Stan thought were profits were the result of Peter not paying their bills. Stan was left with more than $1 SO.000 in unpaid bills and other debts. Peter left the business. It took Stan three years to dig out of the financial mess and get his new company up and running successfully. Think Critically 1 How might Ova* your partners nsefy Stan and Peter have avoided the problems that led to the end of their partnership? 2. Why is this situation a good example of the difficulty in maintaining partnerships between fnends? 3 What types of things should be spelled out completely between partners at the begin¬ ning of the partnership? Did You Know? offers additional information that relates to chapter topics. did you KNOW? According to a recent report by IGD, » con ' sumer and droppe' research company. of shoppen visit only the airier which they believe have the >tem. they need. Thit mdr- cater the importance of placing new prod¬ ucts or promoted rtemr in key locationr to enrure good product exposure. Be Your Own Boss gives you the opportunity to complete the same types of activities that a real entrepreneur might do. OB BE YOUR OWN BOSS You are the owner and manager of a diner located along a busy interstate highway. You do a good business with travelers passing through as well as locals who eat with you regularly. Recently, there have been several robberies dur¬ ing operating hours in nearby businesses. Your local customers are beginning to get a little nervous about coming to your business. Outline a plan to minimize your risk of robbery. Include ways to make your customers feel safe. Net Bookmark incorporates Internet activities into every chapter. tsEl sookm ark What makes a memorable brand or product name? Access school.cengage.com/entrepreneur/ ideas and click on the link for Chapter 5. Author Phillip Davis provides some thoughts in his e-zine article. What does Davis consider the most common naming mistake? Do you agree with him that "Apple" is a better brand name than something like "United Computer Manufacturers" or "Quality Computer Corpo¬ ration"? Why or why not? Provide one exam¬ ple of a product or business that you think has a great name, and another that you think has a poor name. Explain your answers. school.cengage.com/entrepreneur/ideas o What Would You Do? ethics activities will help you think critically about ethical concepts. ■/ATldSLftHl DO?: You asked two of your employees to work extra hours over the week¬ end to perform a physical inventory. You are certain that there were three plasma television sets in stock prior to having the employees take inventory. However, when the inventory was completed, the list showed only two plasma television sets in stock. You checked the stockroom, and you found only two. You have always trusted your employees. What would you do? Will you confront the employees? If so, how will you approach them? Working with a partner, role play the conversations you will have with the employees. J xiv greene_0538446145_FM, 1/15/8, 17:31, page: 15 Ongoing Assessment! Ongoing review and assessment help you understand the material. Checkpoint enables you to test your _ understanding at key points in each lesson. Lesson Assessment contains activities to - help you apply what you have learned in the lesson. Activities CD contains exercises that help - you improve your entrepreneurial and economic skills. Teamwork provides you with opportunities to work with classmates on cooperative learning projects. i2 Assessment "► THINK ABOUT IT 1. Why do entrepreneurs n* *«d to conduct market research? 2. What are the llmiteboro of market research? 3. What Is the difference between primary and secondary data? 4. Why do you think short questionnaires are more effective than long ones? 5. Why is it important to define the question you want your mar¬ ket research to answer? »£*h TEAMWORK . MAKE ACADEMIC CONNECTIONS 6. MANAGEMENT Your family-owned business processes and sells orange juice to food distributors. In order to grow, the business needs to expand its product line Apply the six market research steps to help determine an additional product for your business 7. COMMUNICATION It is Important to evaluate the effectiveness of a survey. Using the Activity CD. open the activity ‘Market Research Evaluation.* Print a copy and complete the activity. Working with team members, come up with a new product that you think will be very useful for students in your school. Develop a ques¬ tionnaire for potential consumers of this product to gauge their interest. Have students from your school complete the questionnaire Tabulate the results and determine if the product is a good idea Chapter Assessment provides a summary of the main points and contains questions and activities to test your knowledge. Chapter 3 Assessment I. A buuiKu (tin a > tinmen dueumenr that dctvnbes ill Ike ittp* ncenory fur opcong uni iperiling i suctcidd tsamcn. Il eipimi ihe »Sei behind y*ir buunrw aid tpdb nut hrm Ivor fwoim r i* tenter *11 he pndixtd ml *uM II «ti <pc«fc nbjeeliw* aed drwnhc* him your buunew *111 khor them. 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Chmfcer it Ccnimrnre i Small Buuneu IVvekpnrm 1 enter d <1 if ihe ihm 17 Whkh «g ihe Mimug Jtvnhu »tn tuu ire ailing kg a Irua ad ska mu ptw in d» utth the ir»wq‘ a. w»er kna v. cxceuine ununm b. aacmeni if puipae d oek page It Morale* in md •hen prepunpg p«» turan jlin uielmb iB nstft a jnruing imndiUK Enaitial jMgevlira b nauuig nme un ie*eadi e. gjnmng the ti-mpcumai >1 fading; lu dclinc Ike target matcl APPLY WHAT YOU LEARNED 19 Okcan a umpk hininru pile Boxm the h— ni . jlai ml di» era •kether eg nu( llg the uaunun mimic* a •niui* a Ism *o» pin «m muled IVmdc leauga In Kpsei ««< dcuura 20 Tea pal io oprn i ilnchurdmg pui VSKn luid <f meavh ihodd p« ikf WVl nmn *iU tnu n*uuit k> u*a rocarvk 1 MAKE ACADEMIC CONNECTIONS 21 COMMUNICATION T.w ire piparu* i ku***.** pm c i mil uicagc lakh i U Steer In V<w at Ktjuaoig l S*5.«00 lain to bei ihe pit pm ad uiragc Inkers SVnie iV uxet kner id the hull Sun ifhnr aid i aamee if pupnie 22 RESEARCH Oioe a hra*. *eh mVh n« arc bmka Uaag dc Aetom CD, epen die atnlh ‘Trdc iWsuiom Roeavh ' Pirn a cop ad ecmplcu thr aeourt I* uoeg the Internet »* the lira* in mcasti rode iwieatinm dug uwM prende inchii inkumaom In the buunew 21 COMMUNICATION An emaperr^ . It*mr n ai epeiau ■uppvtuig Axumem hr i buunew pin II teki ihe readei aSwi the enmpencur'* ^ahkahra ft e turning die hare* Rocarsh mime SxmiDad sbucimc tha pw ifaml ■< ull he HUaUe kr XV greene_0538446145_chO 1, 12/21/7, 17:19, page: 2 an Entrepreneur? 1.1 All about Entrepreneurship 1.2 Is Entrepreneurship Right for You? 1.3 Exploring Ideas and Opportunities school.cengage.com/entrepreneur/ideas 1.4 Problem Solving for Entrepreneurs greene_0538446145_chO 1, 12/21/7, 17:19, page: 3 IDEAS !M ACTION! Michael Stahl, 4Teens Network, LLC Making Job Connections T he foundation of the U.S. economy is entrepreneur ship. Today's large corporations were yesterday's small businesses. Identifying a need and coming up with a product or service to meet it are what entre¬ preneurship is all about. Some famous entrepreneurs in history include Levi Strauss and Olive Ann Beech. More recent entrepreneurs include Bill Gates and Oprah Winfrey. You or someone you know could be a future successful entrepreneur. Prepare yourself to turn ideas into action and seize the opportunity when it comes! As a chapter president of Future Business Leaders of America (FBLA), Mike Stahl came across an idea for a business while coordinating a job fair for the Blue Valley School District in Kansas City, Missouri. Fie heard fellow students complain about not knowing where to look for jobs, and he heard employers express a need for qualified help. This inspired Mike to come up with the idea for 4Teens Network, LLC, which he ran with his partner, Ephren Taylor, Jr. Through an interactive web site featuring employer advertisements and registered job seekers, 4Teens Network matched employers and employees. Seeing the potential of this opportunity, Mike and Ephren tested the business model before seeking outside financing. Their testing included various web site designs, sales and marketing plans, and pricing structures. In the first five months of testing, the company returned 300 percent on its initial investment. This gain showed Mike, Ephren, and potential investors that this venture had great possibilities. The time and energy spent in plan¬ ning and testing their business model helped prepare 4Teens Network, LLC, for a successful future. The web site asked job seekers a set of questions and used answers to build a professional resume, which could be sent to job listings on the site. Users get an e-mail account to receive e-mail replies from prospective employers. Mike and Ephren plan to build their business across the United States and even internationally, but they aren't losing sight of their original mission—to provide a service for their community. What do you hnow? Who do you think was one of the most important entrepreneurs of the past? Who do you think is one of the most important entrepreneurs of the twenty-first century? Can you identify a need in your school or community that might be met by the creation of a new business? 3 greene_0538446145_ch01, 1/17/8, 13:57, page: 4 V Focus on Small Business Should you be your own boss? "I'm so tired of someone telling me what to do all the time," Delia said to her friend Gloria. "I know what you mean," Gloria answered, "because I get the same thing." "It seems like there should be some way we could be in charge," Delia said. "There's got to be a better way. I've got an idea," Gloria said, "let's be entrepreneurs." "Entrepe... what?" questioned Delia. "Entrepreneurs," Gloria answered. "Mr. Riviera talked about them in my business class last week. They are people who start and run their own businesses. We could do that!" "What would we have to do? Would we make a lot of money? Would it be fun? Would we get to do whatever we wanted?" Delia's mind was overflowing with questions. Gloria was getting very excited as she replied, "We could be our own bosses! If we were the owners, we would be in charge! We'd get to make all the decisions!" "This is starting to sound pretty good," Delia replied as she began to share Gloria's excitement. "We could decide when we work, what we do, and how we do it. And, we can make lots of money! I can't wait. When do we start?" Work as a Team Many people go into business just so they can be in charge and make lots of money. Do you think this is the most important reason to start your own business? Start-up companies stay alive with new technology. What Is an Entrepreneur? The U.S. economy includes thousands of small businesses. Many of these small businesses are owned and operated by men and women who created their own companies. Some of these individuals have become legends as you hear stories about their paths to success. But what makes someone an entrepreneur? What impact have entrepre¬ neurs had in history? What impact do they have today? 4 Chapter 1 Should You Become an Entrepreneur? Rubberball Productions greene_0538446145_chO 1, 12/21/7, 17:19, page: 5 People who own, operate, and take the risk of a business venture are called entrepreneurs. They are engaged in entrepreneurship, the process of running a business of one’s own. Entrepreneurs come from all types of backgrounds and create all kinds of businesses. Peo¬ ple of all ages choose to become entrepreneurs. Some own tiny craft shops, while others own huge construction companies. Entrepreneurs try to identify unmet needs in the marketplace. Then they provide a service or product to meet those needs. When they succeed, their businesses flourish, and profits are earned. But if their business idea is unsuccessful, they may lose the money invested in their business. Develop Your Reading Skills As you read this chapter, write down questions related to headings and photos. Share your ques¬ tions with the class. EMPLOYEES VS. ENTREPRENEURS Entrepreneurs assume risk. This makes them different from employees, who are people who work for someone else. Both may make decisions, but only the entrepreneur is direcdy affected by the consequences of those decisions. Sam Jones manages a record store owned by Felipe Santiago. Sam decides to keep the store open until midnight during the week. If the additional hours bring in customers and increase profits, Sam may be praised by Felipe. He may even get a raise. However, Sam won’t direcdy receive any of the profits because he is an employee. The additional earnings will flow to Felipe, the owner. WHY DO PEOPLE BECOME ENTREPRENEURS? People go into busi¬ ness for themselves for many reasons. Some want to leave the fast- paced corporate environment and set their own schedules. Others want to be at home but still earn an income. Still others want to pur¬ sue a personal dream. You might choose to become an entrepreneur for completely different reasons. Types of Entrepreneurial Businesses There are generally four types of businesses, and there are opportunities for entrepreneurs in each type. See the chart on page 6. Manufactur¬ ing businesses actually produce the products they sell. Using resources and supplies, they create everything from automobiles to paper. Whole¬ saling businesses sell products to other businesses rather than the final consumer. For example, a wholesaler supplies your local greeting card store with items such as cards and wrapping paper. Retailing businesses , such as a greeting card store, sell products direcdy to those who use or consume them. Service businesses sell services rather than products. They include hotels, hairdressers, and repair shops. OTHER BUSINESS AREAS Two other categories of businesses are (1) agricultural and (2) mining and extracting businesses. Agricultural businesses generate fresh produce and other farm products, such as wheat. Mining and extracting businesses take resources like coal out of the ground so they can be consumed. Checkpoint Describe different types of entrepreneurial businesses. 1.1 All about Entrepreneurship 5 greene_0538446145_chO 1, 12/21/7, 17:19, page: 6 TYPES OF BUSINESSES Manufacturing Wholesaling Retailing Service Apparel and other textile products Chemicals and related products Electronics and other electrical equipment Fabricated metal products Food products Industrial machinery and equipment Printing and publishing Rubber and miscellaneous plastic products Stone, clay, and glass products Apparel Electrical goods Groceries and related products Hardware, plumbing, and heating equipment Lumber and construction materials Machinery, equipment, and supplies Motor vehicles and automotive equipment Paper and paper products Petroleum and petroleum products Auto and home supply stores Building materials and supply stores Clothing stores Florists Furniture stores Gift, novelty, and souvenir stores Grocery stores Hardware stores Jewelry stores Retail bakeries Shoe stores Sporting goods and bicycle stores Appliance repair Automotive repair Babysitting Bookkeeping Consulting Dance instruction Electrical services Exterminators Flower decorating House cleaning Lawn care Painting Plumbing Translating Travel agency Tutoring Source: Small Business Administration Recognizing Opportunity Many of America’s most successful companies started with one person who recognized an opportunity and came up with an idea for a busi¬ ness in response to that opportunity. Entrepreneurs have played an important role in the history of America’s economy and will continue to shape our economy in the future. According to estimates from the U.S. Small Business Administra¬ tion’s Office of Advocacy, there were approximately 25.8 m ill ion busi¬ nesses in the United States in 2005. Recent census data show that there were 5.8 million firms with employees and 18.6 million without employees. Small firms with fewer than 500 employees represent 99.9 percent of the 25.8 mil li on businesses in the United States. Only 17,000 U.S. businesses are considered large. Small businesses contribute billions of dollars to the U.S. economy every year and employ more workers than all of the country’s large corporations combined. These small businesses are found in virtually every sector of the economy. Small companies can be more creative and take more risks than large companies. Their experimentation and innovation lead to tech¬ nological change and increased productivity. This makes small busi¬ ness a significant part of the American economy. Entrepreneurs Who Changed America Entrepreneurs change American business decade after decade. They establish new companies and fill unmet needs. They constandy change how things are done and contribute to the overall good of the nation. There are many businesses today that started small and have grown into large companies that are making a major impact in our economic system. 6 Chapter 1 Should You Become an Entrepreneur? greene_0538446145_chO 1, 12/21/7, 17:19, page: 7 STARBUCKS COFFEE COMPANY Starbucks Coffee Company was founded in 1971, opening its first location in Seattle’s Pike Place Market. Starbucks is named after the first mate in Herman Melville’s novel Moby Dick. It is the world’s leading brand of specialty coffee. Its stores receive more than 40 million customer visits per week at coffeehouses in North America, Europe, the Middle East, Latin America and the Pacific Rim. When Howard Schultz first joined the company in the early 1980s, Starbucks was already a highly respected local roaster and retailer of whole bean and ground coffees. A business trip to Italy, where he was impressed with the popularity of espresso bars in Milan, helped Schultz recognize an opportunity to develop a similar coffeehouse culture in Seatde. Espresso drinks became an essential element of Schultz’s vision. He purchased Starbucks with the support of local investors in 1987. In addition to its well-situated coffeehouses, Starbucks markets its coffee and tea products through its web site and through many national retail supermarkets. THE HOME DEPOT In 1979, Bernie Marcus and Arthur Blank opened the first The Home Depot stores in Atlanta, Georgia, forever changing the home improvement industry. The original stores stocked around 25,000 products. An average store today offers 40,000 prod¬ ucts in approximately 105,000 square feet. Marcus and Blank’s vision was of warehouse stores filled from floor to ceiling with a wide assort¬ ment of home improvement products at the lowest possible prices and with the best possible service. Within five years, The Home Famous Madam C. J. Walter You may have heard it said that "necessity is the mother of inven¬ tion." Many entrepreneurs got their start by creating something that they themselves needed and then sharing their product with others. That's exactly what made Madam C. J. Walker a millionaire. Walker, origi¬ nally known as Sarah Breedlove, suf¬ fered from a scalp ailment during the 1890s and began experimenting with homemade remedies. Her rem¬ edies worked well, so she began offering them to other African- American women. In 1905, she moved to Denver, married news¬ paperman Charles Joseph Walker, and started her own company. She sold her products door to door and bought ad space in newspapers. Walker later opened Lelia College, where she and her daughter trained other women to use and sell the product line, which had expanded to include items such as complexion soap and dental cream. At least 20 women completed the program every six weeks. Besides becoming a millionaire from the sales of her products, Walker made a huge con¬ tribution to the African-American community by empowering women to make their own mark in the business world. Think Critically Why is it important for entrepre¬ neurs to make contributions to their community in addition to offering a product or service? Why do you think Madam C. J. Walker became such a successful entrepreneur? 1.1 All about Entrepreneurship 7 © Digital Vision greene_0538446145_ch01, 12/21/7, 17:19, page: 8 Depot expanded from Georgia to Florida, Louisiana, Texas, and Alabama. Today, it has more than 2,100 stores throughout the United States, Canada, and Mexico. The company also runs EXPO Design Centers and The Home Depot Supply wholesale stores. HARPO PRODUCTIONS, INC. Oprah Winfrey’s love of acting and her desire to bring quality entertainment projects into production prompted her to form her own production company, HARPO Productions, Inc., in 1986. Today, HARPO is a formidable force in film and television production. Based in Chicago, HARPO Entertainment Group includes HARPO Productions, Inc., HARPO Films, and HARPO Video, Inc. In October 1988, HARPO Productions, Inc. acquired ownership and all production responsibilities for The Oprah Winfrey Show from Capitol Cities/ABC, making Oprah Winfrey the first woman in history to own and produce her own talk show. The following year, HARPO produced its first television miniseries, The Women of Brewster Place, with Oprah Winfrey as star and executive producer. Oprah also produced and appeared in the made-for-television movies There Are No Children Here (1993) and Before Women Had Wings (1997). In 1998, she starred in the feature film Beloved , based on the book by Nobel Prize-winning American author Toni Morrison. 1 Checkpoint Describe how one of the entrepreneurs discussed above recognized an opportunity to develop a successful business. Why do you think some people choose to start their own business? Business Success or Failure According to a recent study by the Small Business Administration’s Office of Advocacy, two-thirds of new businesses survive at least two years, and 44 percent survive at least four years. This means that over half of all new businesses do not survive beyond four years. These results are similar for different industries. Many people think that there is a higher failure rate for restaurants than other types of busi¬ nesses. However, leisure and hospitality establish¬ ments, which include restaurants, survive at rates only slightly below the average. Major factors in a firm’s success include having adequate capital, providing a product or service that meets customer needs the owner’s education level, and the owner’s reason for starting the firm in the first place, such as freedom for family life or wanting to be one’s own boss. The reason must sufficiently motivate the entrepreneur to have the perseverance to succeed. The owner’s business experience is a factor that contributes to the likelihood of success. Experienced businesspeople have an understanding 8 Chapter 1 Should You Become an Entrepreneur? greene_0538446145_chO 1, 1/17/8, 13:57, page: 9 of how to purchase products and services. They know how to plan, negotiate with suppliers, raise money, negotiate leases, sell and market their product or service, and manage finances. Many businesses fail because the owner lacks business knowledge. Someone may have an idea for a product or service but lack the necessary business skills he or she needs to run a successful business. There is a major difference in having expertise regarding a product or service and running a business with that product or service. Checkpoint What factors contribute in helping a business to succeed? Assessment THINK ABOUT IT 1. What are your reasons for wanting to become an entrepreneur? Do you think they are common to all entrepreneurs, or are some of your reasons unique? 2. Why do you think entrepreneurship is important to the U.S. economy? Provide specific examples of how entrepreneurs affect the economy. 3. What do you think is the most important thing an entrepreneur should do before starting a business? MAKE ACADEMIC CONNECTIONS 4. MATH Suppose there are exactly 5,812,000 small businesses in the economy today. Approximately 27 percent of those busi¬ nesses are service businesses. What is the number of service busi¬ nesses in the economy? 5. SOCIAL STUDIES Before Starbucks grew nationwide, there were few places that people could go to have coffee and meet with friends and business associates. Write at least one paragraph about how Starbucks and other coffee shops have changed the way people view coffee and its role in society. 6. COMMUNICATION Entrepreneurs can be of any age. Research a teen entrepreneur. Write a one-page paper about his or her business. Discuss whether or not you think the business idea is a good one. Make recommendations for expanding the business. TEAMWORK Gather in teams. List advantages and disadvantages of being an employee. List advantages and disadvantages of being an entrepre¬ neur. Compare and contrast the lists. 1.1 All about Entrepreneurship 9 greene_0538446145_chO 1, 1/17/8, 13:57, page: 10 Is Entrepreneurship Right for You? Identify the characteris¬ tics of successful entrepreneurs. Identify the characteristics of good team members. Assess whether you have what it takes to succeed in your own business. V I Focus on Small Business • self-assessment • aptitude Think it through! Gloria and Delia were excited about starting their own business, but as they continued their discussions, Gloria realized they needed to slow down and think through the process carefully. "You know, Delia, it's not really easy to start our own business. When we talked about this in class, Mr. Riviera said that there are a lot of things to consider before starting a business. First, we need to decide what we like to do and what we are good at. Then we have to do a lot of research and planning if we want to be successful." Thinking about what Mr. Riviera told her in class, Delia sighed. "This entrepreneur thing sounds like a lot of work. What do you think we should do?" Work as a Team Many people go into business without first taking time to examine their strengths and weak¬ nesses and what they really like to do. Do you think it's a good idea for Gloria and Delia to slow down and really examine their interests before Examine your strengths and weaknesses before starting the business? starting a business. Characteristics of Successful Entrepreneurs Many people dream of running their own businesses. They would like to become entrepreneurs. Entrepreneurship can be exciting, but many go into it not realizing how difficult it is to run their own business. In fact, statistics show that most new businesses will fail within a few years. These startup businesses fail because of the owner’s poor plan¬ ning, lack of business knowledge, lack of entrepreneurial characteristics, inability to work with others, or failure to choose the right business. 10 Chapter 1 Should You Become an Entrepreneur? Dorling Kindersley/Getty Images greene_0538446145_chO 1, 12/21/7, 17:19, page: 11 Researchers have identified several characteristics that distinguish successful entrepreneurs from those that fail. 1. Successful entrepreneurs are independent. They want to make their own decisions and do something they enjoy. 2. Successful entrepreneurs are self-confident. Entrepreneurs make all the decisions. They must have the confidence to make choices alone and bounce back from a poorly made decision. 3. Successful entrepreneurs have determination and perseverance. Entrepreneurs persist through hard times until goals are met. 4. Successful entrepreneurs are goal-oriented. They know what they want, and they are able to focus on achieving it. 5. Successful entrepreneurs have a need to achieve and to set high standards for themselves. They are motivated by setting and achieving challenging goals. 6. Successful entrepreneurs are creative. They think of new ways to market their businesses and are always looking for new solutions to problems. 7. Successful entrepreneurs are able to act quickly. They are not afraid to make quick decisions when necessary, which helps them beat their competitors. 8. Successful entrepreneurs keep up to date with technology. New technologies emerge that can help with many business activities. In order to run their business efficiently, entrepreneurs should always be on the lookout for new technology they can apply to their business. did you KNOW? *° " ,e Cento rar Women s Business Research, as of 2006 10.4 million firm, 7 Wd * "omen. ese employed more than U.8 million $1°9 P l e ir nd produced * 7 - 9 tn,, '°n in sales. u O O O sz CL <£ cn <o £ >h % © Why would it be important for the owner of an auto repair shop to keep up to date on the latest technology? # 1.2 Is Entrepreneurship Right for You? Getty Images/PhotoDisc greene_0538446145_ch01, 12/21/7, 17:19, page: 12 Ryan Nelson has many entrepreneurial characteristics. Since he was 14, Ryan played for his high school basketball team. Other boys his height—just 5'8"—would not have enjoyed competing with much taller boys. Ryan accepted that he would have to work harder to win. He needed to be creative in handling the ball. Most of all, he had to believe in himself. He did, and he became one of the top players on his team. If Ryan opened his own business, the characteristics he dis¬ played as a ball player might help him succeed. Checkpoint Name three important characteristics of entrepreneurs. Characteristics of Good Team Members How can participation on a sports team help prepare you to become an entrepreneur? Entrepreneurs realize that there are other stakeholders in their businesses—partners, investors, employees, suppliers, customers, creditors, and so forth. They must work with others to get their business up and running. They must have good team-building skills as well as be effective team members. Good team members display the following traits: 1. Commitment They are committed to team goals and willing to work hard to achieve the goals. 2. Competency They have the right set of skills needed to get the job done and to help accomplish the team’s goals. 3. Communication They have good communication skills and can share ideas with others in both oral and written form. 4. Cooperation They must work well with others and know that they will not always get their way. They are willing to accept the decision of the group for the good of the group. 5. Creativity They are able to look at things from differ¬ ent perspectives and suggest new ways of doing things. Ryan Nelson displayed these traits as a member of his basketball team. His experience will help him work effectively as part of a team in the business world. If Ryan becomes an entrepreneur, he could apply these skills when working with other people who will be impor¬ tant to his success. Checkpoint Why is it important for entrepreneurs to be good team members? 12 Chapter 1 Should You Become an Entrepreneur? greene_0538446145_chO 1, 1/15/8, 16:51, page: 13 Are You Right for Entrepreneurship? Entrepreneurship is not for everyone. Some people lack the qualities needed to become successful entrepreneurs. Others lack the aptitude needed to run a business. To determine if entrepreneurship is right for you, you first need to perform a self-assessment. A self-assessment is an evaluation of your strengths and weaknesses. You can do this in a number of ways. You can list what you believe to be your strengths and weaknesses on a sheet of paper. You can ask others what they believe your strengths are and where your weaknesses lie. There are also professional tests you can take to assess your abilities. Assess Your Interests Success as an entrepreneur requires a strong commitment to a busi¬ ness and a lot of energy. To be able to commit yourself fully to a business, you should choose a field that interests you and that will provide you with an experience you will enjoy. Many entrepreneurs WHAT WENT WRONG > Experience Needed Louise was a theatre performer who sang and danced in Broadway-style musicals. The work was not always steady, so she earned additional money working part time at a print shop. The elderly couple who owned the shop allowed Louise to work flexible hours so she could pursue a music career. Sadly, the husband died, and the wife decided to sell the business and move away. Louise was excited about the opportunity to purchase the business. The former owner helped Louise gather financial information and put together a business plan. Louise's uncle cosigned a bank loan, and she was in business. She modernized the decor of the shop. Louise contacted all the existing cus¬ tomers to assure equal or better service. Sales increased the first two months. But then . . . The former owner left town earlier than planned. Then Louise's chief printer quit. Using part-time employees, Louise was frantically trying to get large orders out on time. With no formal business training and no management experience, Louise couldn't begin to deal with all these problems—problems that even an experienced businessperson would find difficult. She ended up selling the business at a $50,000 loss. Think Critically 1. What characteristics did Louise possess that led her to become an entrepreneur? 2. What circumstances out of Louise's control led to the failure of this business? 3. What steps could Louise have taken to try to save her business? Get some business training before starting a business. # 1.2 Is Entrepreneurship Right for You? 13 Digital Vision greene_0538446145_chO 1, 12/21/7, 17:19, page: 14 center a business on an interest or hobby. Analyzing past experiences and jobs can also help. Building a business around jobs or experiences that you found fulfilling could lead to success. Assess Your Aptitude Different jobs require different job aptitudes. Aptitude is the ability to learn a particular kind of job. Auto mechanics must possess an apti¬ tude for solving mechanical problems. They must also be good with their hands. People who sell insurance must have good interpersonal skills. Answering questions like those in the Job Attributes Checklist can help you identify the kinds of entrepreneurial opportunities that might match your aptitudes and interests. Job Attributes Checklist □ 1. I enjoy working with numbers. □ 2. I enjoy working outdoors. □ 3. I enjoy working with my hands. □ 4. I enjoy selling. □ 5. I like working with people. □ 6. I prefer to work alone. □ 7. I like supervising other people. □ 8. I like knowing exactly what it is I am supposed to do. Assess the Advantages of Entrepreneurship Many people see significant advantages in owning their own busi¬ nesses. Some of the biggest advantages include the following: 1. Entrepreneurs are their own bosses. Nobody tells an entrepre¬ neur what to do. Entrepreneurs control their own destinies. 2. Entrepreneurs can choose a business that interests them. Entre¬ preneurs work in fields that interest them. Many combine hobbies and interests with business. 3. Entrepreneurs can be creative. Entrepreneurs are always imple¬ menting creative ideas they think of themselves. 4. Entrepreneurs can make large sums of money. Entrepreneurship involves risk, but if the business is successful, the business owner will reap the profits. Assess the Disadvantages of Entrepreneurship All prospective entrepreneurs must carefully weigh the advantages against the disadvantages before making the decision to start a busi¬ ness. Disadvantages include the following: 1. Entrepreneurship is risky. There is the possibility of losing money and going out of business. 14 Chapter 1 Should You Become an Entrepreneur? greene_0538446145_chO 1, 1/17/8, 13:57, page: 15 2. Entrepreneurs face uncertain and irregular incomes. Entrepre¬ neurs may make money one month and lose money the next. 3. Entrepreneurs work long hours. Entrepreneurs are never really finished with their jobs. They can work long, irregular hours. They receive no paid days off and often work evenings and weekends. 4. Entrepreneurs must make all decisions by themselves. Unless they have partners, entrepreneurs have the final responsibility for all decisions that are made regarding the business. Checkpoint What characteristics do you have that are best suited to entrepreneurship? 3 mi Assessment THINK ABOUT IT 1. Entrepreneurs can fail even if they are committed and have the characteristics needed to be successful. How can this happen? 2. What traits do good team members have? 3. Do you think the advantages of entrepreneurship outweigh the disadvantages? Why or why not? MAKE ACADEMIC CONNECTIONS 4. MATH One in three small companies begun this year will be out of business within the next two years. What percentage is this? Four years from now, only 44 percent of all businesses started will survive. Out of 90 new businesses, approximately how many will still be open in four years? 5. CAREER SUCCESS Choose a business idea that you think you would like. Using the Activity CD, open the activity "Job Attrib¬ utes Checklist." Print a copy and complete the activity. Compare your interests to your business idea. Is this a good choice for you? Why or why not? TEAMWORK Work in teams to choose a successful entrepreneur. List the traits and aptitudes this person has that have contributed to his or her success. Develop a presentation about the entrepreneur to give to the class. 1.2 Is Entrepreneurship Right for You? 1 5 greene_0538446145_ch01, 1/17/8, 13:57, page: 16 • • jS? m Exploring Ideas and Opportunities Identify sources for new business ideas. Recognize different busi¬ ness opportunities. Identify your own per¬ sonal goals. opportunities ideas trade shows 1 Focus on Small Business Find an idea Gloria and Delia realized that although there are many advantages of owning your own business, there are many responsibilities and chal¬ lenges that a business owner has to face. Gloria knew that she and Delia had their work cut out for them, but she had confi¬ dence they could do it if they put their minds to it. They also knew that before they started, they really needed to have a good idea and be sure that there were people who were willing to pay them for the product or service they wanted to sell. "How do we decide what kind of business we should have?" Delia asked Gloria. "There are so many businesses in our community," Gloria responded. "We've got to come up with just the right idea!" Work as a Team How do people come up with ideas for new businesses? How do you think they decide if the idea is r ,‘ ,., , J J Spend time determining a good idea for worth pursuing? your business. Look for Ideas Millions of entrepreneurs in the United States start their own busi¬ nesses. You may wonder how they decided what businesses to oper¬ ate. They may have acted on a new idea or an opportunity. An idea is different from an opportunity. Opportunities are possibilities that arise from existing conditions. Ideas are thoughts or concepts that come from creative thinking. Ideas can come from many different sources. HOBBIES AND INTERESTS Many people get business ideas from their hobbies or interests. Bill had always enjoyed working with his 16 Chapter 1 Should You Become an Entrepreneur? © Stockbyte greene_0538446145_chO 1, 12/21/7, 17:19, page: 17 grandfather on the farm and had helped to build and maintain many farm structures. He built a garage and added a sunroom to his own home. He also was able to make plumbing, electrical, and carpentry repairs around the house. He started doing this for others in his spare time. Soon he had so many people calling on him for these services that he decided to start a general contracting business. Making a list of hobbies and inter¬ ests can help you decide what business is right for you. bookmark PAST EXPERIENCES Analyzing past experi¬ ences and jobs can help you come up with ideas for a business you would enjoy owning. People who excel at their jobs have generally learned much about their profession and how to satisfy customer needs. They also see how successful marketing is conducted. Through their work, they can build a network of potential customers, suppliers, employees, and distributors. When they feel confident that they can offer a product or service to this market more effectively than their current employer, they can start a new business. Samantha Rodriguez worked as a computer network administra¬ tor for a large company. Recognizing that she could perform the same computer services for other companies, Sam started her own computer consulting service. She currently earns less money than she did working for a large company, but she enjoys working flexible hours and meeting new people. Many of America's most successful companies started with one person who recognized an opportunity and came up with an idea for a business in response to that opportunity. One of those people was Bill Gates, chairman of Microsoft, the largest software company in the world. Believe it or not, there was a day when even Microsoft was a small business. Access school.cengage.com/entrepreneur/ ideas and click on the link for Net Bookmark Chapter 1. Read the article "A Little Company Called Microsoft." When and where was Microsoft founded? Who was Bill Gates' original business partner? school.cengage.com/entrepreneur/ideas DISCOVERY OR INVENTION Sometimes a business opportunity arises from a discovery or invention. Someone may invent a new tool that works better than tools that are currently available. The next step would be to research and find out if the idea can be patented, who the competition is, what the manufacturing process would be, and who the target market is. David enjoyed working in his garden, but he did not like any of the tools he had for removing weeds from around the plants. He took one of his tools and made modifications to it and found that it worked perfectly. After several friends tried out the tool and liked it, David decided to investigate obtaining a patent for it. Checkpoint Where do new ideas for businesses come from? # 1.3 Exploring Ideas and Opportunities 17 greene_0538446145_chO 1, 12/21/7, 17:19, page: 18 Investigate Opportunities People often do research to determine what is missing in a particular market—what needs exist that are not being met. By conducting this research, they hope to find the perfect business opportunity. The Internet and the library have resources that can help you examine different opportunities. These include books on entrepre¬ neurship, magazines for entrepreneurs, trade magazines for certain businesses, and government publications. County Business Patterns is an annual series of publications providing economic profiles of coun¬ ties, states, and the country as a whole. Data include employment, payroll, and the number of establishments by industry. This is not the only place to investigate opportunities. The Small Business Administration (SBA) is an organization that exists to help small businesses and their owners. It publishes information that may be helpful. Talking to entrepreneurs and attending trade shows, which are special meetings where companies of the same or related industry display their products, can also be beneficial. Luanda Williams wanted to use her love of sports and dancing to create her own company. She found books and magazine articles at the library that gave her information on various kinds of businesses. She also talked to owners of gymnastic centers, health clubs, and dance studios. She discovered that there were not enough children’s fitness programs to meet the demand in her area. All of the existing children’s programs had long waiting lists. Her research revealed the many opportunities available in the children’s fitness industry. Compare Different Opportunities Once you find appealing business opportunities, you need to identify which ones have the best chance for success. Now is the time to assess each business opportunity by asking yourself the following questions: 1. Is there a market in my community for this land of business? Will people buy my product or service? 2. How much money would it take to start this business? Will I be able to borrow that much money? 3. How many hours a week is it likely to take to run this business? Am I willing to commit that much time? 4. What are the particular risks associated with this business? What is the rate of business failure? 5. Does my background prepare me to run this kind of business? Do most people who own this kind of business have more experience than I do? 6. How much money could I make running this business? Checkpoint How can you find out about various business opportunities? 18 Chapter 1 Should You Become an Entrepreneur? greene_0538446145_chO 1, 12/21/7, 17:19, page: 19 Setting Goals For everything you do in life, you set goals. Goals help you stay on track and follow through with your plans. The best goals are SMART. Smart goals provide more direction as shown below. SMART GOALS Specific Goals should be specific and answer "What?" "Why?" and "How?" Measurable Goals should establish ways to measure your progress Attainable Goals should not be too far out of reach Realistic Goals should represent things to which you are willing to commit Timely Goals should have a timeframe for achievement Goal I will learn more about starting my own business. SMART Goal I will learn more about starting my own catering business by obtaining information from the Small Business Administration and talking with the owners of three local catering businesses by the end of the month. As an entrepreneur, you will need to set many goals. Goals can be categorized as financial and nonfinancial. FINANCIAL GOALS Set specific financial goals before starting a busi¬ ness. Financial goals can include how much money you will earn and how quickly you will pay off debts. Make sure your goals are realistic. If one of your goals is to make large sums of money early on, you almost certainly will be disappointed. It usually takes time for busi¬ nesses to become well established and profitable. This means that, at first, an entrepreneur may earn less than he or she would have earned working as an employee. Goals should be measurable and easily attainable in the time allot¬ ted. Mo Yang wants to start a mail-order business for model trains, planes, and cars. His income goal is to earn $27,000 at the end of the first year. He estimates that after expenses he will earn $9 for each item he sells. At this rate of profit, he would have to sell 3,000 models to meet his income goal. Mo realizes that this is not realistic. He would have to lower his income goal or find another business idea. NONFINANCIAL GOALS Most peo¬ ple who own their own businesses do so for more than just monetary gain. They are looking for personal satisfaction. They may serve a com¬ munity need, do something they like, or enjoy the personal indepen¬ dence of being an entrepreneur. You will want to specify what nonfinan¬ cial goals you want to achieve by being an entrepreneur. Setting and meeting nonfinancial goals can help be your own boss You are interested in starting your own business, but you are not sure what kind of business it should be. To help you get started, think about something you do that you really enjoy. Now think about ways that you might be able to turn this activity into a business. Make a list of busi¬ nesses in your area that offer a related product or service. Write a paragraph explaining your business idea. How will your business be different from the existing businesses you listed? 1.3 Exploring Ideas and Opportunities 19 © PhotoDisc/Getty Images greene_0538446145_chO 1, 1/17/8, 13:57, page: 20 an entrepreneur live a more satisfying and fulfilling life. Entrepreneur- ship can benefit many aspects of life. Checkpoint Why are financial goals important? Name some nonfinancial goals an entrepreneur may have. i.3 Assessment THINK ABOUT IT 1. Think about a business opportunity that appeals to you. For this business, answer the six assessment questions listed in this lesson on a sheet of paper. Is this a realistic choice for you? Why or why not? 2. In terms of annual income, what financial goals have you set for yourself for five years after you graduate? What nonfinancial goals have you set that you might be able to fulfill by becoming an entrepreneur? Are financial or nonfinancial goals more important to you? Why? 3. Your friend has set the following goal: I plan to eat healthier. Is this a SMART goal? Explain why or why not. What suggestions would you make for improving it? MAKE ACADEMIC CONNECTIONS 4. MATH You live near the beach and have a passion for snorkeling. Your dream is to give snorkeling lessons. You estimate that after expenses, you can earn an average of $10 per lesson. Each lesson will be one hour long, and you plan to offer lessons five days a week. Your income goal is $15,000 per year. How many lessons do you need to give to achieve this goal? Is this goal realistic? 5. COMMUNICATION Write a letter to the Small Business Adminis¬ tration. In your letter, indicate your interest in starting a small business. Be specific about the type of business you wish to start. Ask what specific services the SBA provides to people who wish to start this type of business. Give your letter to your teacher. 6. SOCIAL STUDIES Write a personal nonfinancial goal involving your local community that you would like to achieve through entrepreneurship. Be sure the goal is SMART. Write an outline for a detailed plan you can follow to achieve this goal. Explain how it would benefit your community. TEAMWORK Working with classmates who have similar interests, come up with an idea for a business. Brainstorm a list of resources for finding informa¬ tion about similar businesses. 20 Chapter 1 Should You Become an Entrepreneur? greene_0538446145_chO 1, 12/21/7, 17:20, page: 21 Problem Solving for Entrepreneurs • List the six steps of the problem-solving model. • Describe ways to improve your problem¬ solving skills. • brainstorming Focus on Small Business Research your ideas Gloria and Delia spent time on the Internet and in the local library researching ideas for their new business. As a result, they had come up with several ideas. Now they had to decide what to do with these ideas. As they discussed their options, Gloria said, "You know, Delia, we can talk about these ideas, but we really need a sys¬ tem that we can use for solving problems. We want to be sure that we make the very best decisions for our business." "Yes," Delia responded, "You are right. I remember read¬ ing about a problem-solving model in one of the books we found at the library. Let's go back and find it and see if we can adapt it for our use!" Work as a Team How important do you think it is to use a system for solving problems? © Research will help you examine opportunities. Use the Problem-Solving Process As an entrepreneur, you will be faced with making decisions and solv¬ ing problems every day. Whether or not to become an entrepreneur is a big decision. Many entrepreneurs make decisions casually or base them on intuition. As a result, their decisions are based on faulty assumptions or illogical thinking. The best entrepreneurs use formal problem-solving models to gather information and evaluate different options. A formal problem-solving model helps people solve problems in a logical manner. The model consists of six steps: define the problem, gather information, identify various solutions, evaluate the alternatives and select the best option, take action, and evaluate the action taken. Step 1 Define the Problem Before you can solve a problem, you need to diagnose it. Write down what the problem is and why it is a problem. Try to quantify it too. 1.4 Problem Solving for Entrepreneurs 21 Digital Vision greene_0538446145_chO 1, 12/21/7, 17:20, page: 22 For example, you may be trying to decide whether to start your own business or work for another company. If you accept the job offer, your income would be $30,000 a year. If you reject the job offer, you would lose that income. Quantifying the problem helps you figure out how much it is worth to you to solve it. Dan Parker knows what his problem is: Should he start a web site design company? He took many computer courses throughout high school, and he is now attending college. He has worked in the food industry throughout high school and college to earn money to help pay for his college expenses. Dan enjoys working at res¬ taurants and has gained valuable customer service and management experience. In addition, he also volunteers his web design skills on projects for his university and local community programs. He will be graduating in the next few months with a degree in Computer Science. Dan is considering starting his own web site design business, but he is not sure whether that is the right choice for him. Step 2 Gather Information Once the problem has been defined, you need to gather information that could help solve it. Relevant information may be obtained from many sources, including company records, industry data, and trade magazines. It is also a good idea to interview other people in the industry to find out what their experiences have been and to learn how they have solved similar problems. In Dan’s case, it would be helpful for him to take a closer look at himself. He should do a self-assessment to determine his strengths and weaknesses. He also needs to consider his skills, experience, and interests. Does he have the characteristics of a successful entrepreneur? He also needs to examine the advantages and disadvantages of run¬ ning a web site design company. He should talk to other professionals in the business and read trade magazines to gather information about running a web site design business. Dan needs to thoroughly explore every aspect of starting and running a web site design company. Step 3 Identify Various Solutions Most problems can be solved in various ways. Identify all possibilities before you settle on a particular solution. Dan comes up with several possible solutions to his problem. 1. Work as an employee in a position that ut il izes his customer service skills and management experience. 2. Work as a web site designer for another company to gain more experience and then start his own business in three to five years. 22 Chapter 1 Should You Become an Entrepreneur? greene_0538446145_chO 1, 12/21/7, 17:20, page: 23 3. Pursue his interests in the food industry and open his own restaurant. 4. Start his own web site design company upon graduation. Step 4 Evaluate Alternatives and Select the Best Option The decision maker next needs to evaluate the alternatives to determine the best solution. In some cases, it may be possible to quantify the costs and benefits of each alternative. In other cases, quantifying each alternative may not be possible, and the decision maker may simply have to rank each alternative. Dan ranks option 1 the lowest because of his strong desire to be his own boss. All of the information that Dan gathered indicates that he has a strong chance of succeeding as an entre¬ preneur. He ranks option 3 next to lowest. Dan has considerable experience in the food industry and enjoys that type of work, but he .... , , . . . Why is it important to evaluate the decisions you make? decides he would rather pursue his mterests in web site design. He ranks option 2 second because he is already confident in his level of computer knowledge and experience. After evaluating all of his alternatives, Dan decides option 4 is the best solution. © Step 5 Take Action Once you have selected the best solution to the problem, you need to take action to implement it. Dan begins putting together a business plan and spreading the word about his new venture. Step 6 Evaluate the Action The problem-solving process is not complete until you evaluate your action since even a well-thought-out solution may not work. After being in business for six months, Dan evaluates whether he is achiev¬ ing his financial and nonfinancial goals. It seems that Dan made the right decision because his business is profitable and he is enjoying his work. He has been able to fulfill his dream of working for himself while providing a valuable service to others. Dan will continue to use the problem-solving model to make the most effective decisions for his new business. Checkpoint What are the six steps in the problem-solving process? # 1.4 Problem Solving for Entrepreneurs 23 Getty Images/PhotoDisc Digital Vision greene_0538446145_ch01, 12/21/7, 17:20, page: 24 Problem-Solving Skills The more often you use the problem-solving model, the better skilled at decision making you will become. It will become a valuable tool to you throughout your career. There are a few other things you can do to improve your problem-solving skills. Communicating Good communication is important in the problem-solving process. When trying to resolve problems and make decisions, you most likely will have to interact with others. You may have to ask questions, request information, and express your ideas and opinions. On such occasions, it is impor¬ tant that you communicate clearly and confi- dendy. You must also be a good listener. You must carefully listen to information, opinions, and suggestions from others. Listening to others’ input can help you make informative decisions. Kris is the owner of a small boutique and is looking for ways to increase sales. She decides to conduct a meeting with her employees to communicate her sales objectives. During the meeting, she listens to her employees’ thoughts and ideas for boosting sales. Through this communication process, Kris is able to gather lots of good information to help her solve her problem. How can communicating with others help you succeed in business? Brainstorming Brainstorming is a creative problem-solving technique that involves generating a large number of fresh ideas. Brainstorming is often done in a group setting, but it is a very useful activity for an individual as well. Think about the problem you are trying to solve. Brainstorm by writing down as many possible solutions to the problem as you can think of. Do not be afraid to write down any idea you have. The point of brainstorming is not to judge your ideas as good or bad but to come up with as many ideas as possible. Once you have made a list of ideas, you can use the problem-solving model to determine the best alternatives. Learning from Mistakes If you want to become an entrepreneur, you cannot be afraid to make mistakes. Mistakes are likely to happen, but a negative can be turned into a positive. You should view your mistakes as a learning experience. Mistakes can help you learn what to do or what not to do, which proves to be valuable in the problem-solving process. 24 Chapter 1 Should You Become an Entrepreneur? greene_0538446145_chO 1, 1/17/8, 13:57, page: 25 When you read about some of the nation’s most famous entre¬ preneurs, you will find that many of them failed before they came up with a winning idea. Colonel Sanders of KFC fame is a good example. He held many jobs and owned a motel chain, service stations, and other restaurants that were unsuccessful. While running his restaurant, he developed his secret recipe chicken. In 1952, at the age of 62, he began traveling by car across the country selling his chicken. By 1964, there were 600 KFC restaurants in the United States and Canada, and Colonel Sanders sold KFC for $2 mil li on. Checkpoint How can you improve your problem-solving skills? i 4 Assessment THINK ABOUT IT 1. Must the six steps in the problem-solving model be performed in the order described? Why or why not? 2. How do you think strong communication skills can improve the problem-solving process? Provide specific examples of how a business owner might use communication skills to resolve a problem. MAKE ACADEMIC CONNECTIONS 3 . MATH In the Identify Various Solutions stage of the problem¬ solving model, you list a variety of possible solutions to a problem. For the four options Dan Parker came up with on pages 22-23, assign a percentage weight to each based on Dan's reasoning. Give the decimal equivalent for each percent¬ age. What must the decimal value of the four options total? 4. PROBLEM SOLVING You own a successful shop that buys, sells, and services bicycles. In January, the owner of the building you now lease tells you that she has found a buyer for the property and plans to sell it in six months. Using the six-step problem¬ solving model, develop a plan for how to proceed. Working as a team, identify some benefits to using a formal problem¬ solving method that are not given in the text. Provide some examples of how entrepreneurs might use the problem-solving model in their business. 1.4 Problem Solving for Entrepreneurs 25 greene_0538446145_chO 1, 1/17/8, 17:35, page: 26 Sharpen Your Entrepreneurial Skills Effective Business Letters As an entrepreneur, you might write letters to communicate your business ideas, solicit business, respond to customer questions, negoti¬ ate purchases, or deal with suppliers. To do so effectively, you need to develop your business writing skills. Writing a business letter is dif¬ ferent from writing a letter to a friend. A certain level of formality is necessary, and certain standards must be followed. That doesn’t mean business writing should be difficult to understand. Good business writing communicates ideas clearly. It also gets results by being posi¬ tive and persuasive and by convincing readers that they should accept what the writer is communicating. Certain basic rules should be followed in writing business letters as outlined below and as shown in the letter on the next page. 1. Key all formal correspondence. Send handwritten letters only when they are intended as personal letters. 2. Spell all names correctly and have the correct address. No matter how well written your letter is, its effect will be dramati¬ cally reduced if you misspell the name of the person to whom you are writing or refer to his or her company by the wrong name. Addressing a letter incorrectly may cause it to arrive late or to be returned. 3. Always date your business correspondence. It may be necessary to refer to this date at a later time. 4. Use names and titles appropriately. Use the person’s first name if you know him or her well. If you do not know the person or the letter is very formal, use the person’s last name, along with the appropriate tide (Dr., Mr., Mrs., Ms., or Miss). 5. Be direct and positive. Always maintain a positive tone and por¬ tray your message in an optimistic light, even if your letter con¬ tains bad news. 6. Be persuasive and specific. Make sure the action or result you want from the reader is clear. Use nonthreatening language that will persuade the reader that this action or result is the most desirable. 7. Avoid using fancy language. Use straightforward language that says exactly what you mean. 8. Be polite. Deal with complaints in a businesslike fashion. Don’t whine or express outrage, and never become abusive or insulting. Be especially polite in writing rejection or bad news letters. 9. Use an appropriate closing. Make sure your closing corresponds to the content of the letter you have written. If you have written 26 Chapter 1 Should You Become an Entrepreneur? greene_0538446145_chO 1, 12/21/7, 17:20, page: 27 a letter to a supplier complaining about poor service, do not use “With warmest regards.” Common closings are “Sincerely” and “Sincerely yours.” 10. Proofread for spelling and grammatical errors. The most per¬ suasive and positive letter can be ruined by a single mistake. Creative Web Designs 10 E. 34th Street • Baltimore, MD 21218 (410)555-4321 April 11, 20- Ms. Chelsey Wright Advantage Marketers 692 Kemper Road Baltimore, MD 21209 Dear Ms. Wright Are you looking for new ways to energize your web site? If so, I would like to introduce myself and talk with you about my company. Creative Web Designs. As a recent graduate of Piedmont State University with an Associate degree in Computer Science, I am ready to put my skills to work for you. After providing web development services for the local university and for other local community programs for the past several years, I have decided to offer my services to other local businesses such as yours. Services provided include the following: Creation of visibly appealing and compelling web pages Revitalization of existing web sites Hyperlink development Technical support Please call for a free consultation to discuss how you can have a web site that works effectively for your company. Samples of my web site creations are available for you to review. References can be provided upon request. I look forward to hearing from you. Sincerely "Deut- T^a.nAe-1 Dan Parker Owner TRY IT OUT You own a shop that sells comic books. Write a business letter to your main supplier, a comic book wholesaler. Tell the supplier that you have not received the ship¬ ment you ordered of the most recent edition of a popu¬ lar comic. Be sure to follow the basic rules for writing business letters. Make up names for your business and your supplier’s business. Sharpen Your Entrepreneurial Skills 27 0538446145_ch01, 12/21/7, 17:20, page: 28 Chapter 1 Assessment SUMMARY 1.1 All About Entrepreneurship 1. Entrepreneurship is the process of running a business of one’s own. The person who owns, operates, and takes the risks of a business venture is called an entrepreneur. 2. More than 99.9 percent of the 25.8 million U.S. businesses are considered small companies. Small businesses contribute more to the U.S. economy than all large corporations combined. 3. Factors that contribute to a new business’s success or failure include having adequate capital, providing a product or service that meets customer needs, and the owner’s education level and business experience. 1.2 Is Entrepreneurship Right for You? 4. Successful entrepreneurs tend to be independent, self-confident, goal-oriented, and creative. 5. Entrepreneurs must have good team-building skills and be able to work well with others. 6. To determine whether entrepreneurship is for you, you will need to assess your strengths, weaknesses, interests, and aptitudes. 1.3 Exploring Ideas and Opportunities 7. Ideas for new businesses can come from many different sources, including your hobbies and interests, your past experiences, and from a discovery or invention. 8. You may investigate business opportunities through the Internet and public library, the Small Business Administration, trade shows, and other entrepreneurs. 9. Entrepreneurs should set SMART goals, which are specific, measur¬ able, attainable, realistic, and timely. 1.4 Problem Solving for Entrepreneurs 10. A problem-solving model consists of six steps: define the problem, gather information, identify various solutions, evaluate alternatives and select the best option, take action, and evaluate the action. 11. There are several ways to improve problem-solving skills, including communicating, brainstorming, and learning from mistakes. What do you fcnow now? Read Ideas in Action on page 3 again. Then answer the questions a second time. How have your responses changed? 28 Chapter 1 Should You Become an Entrepreneur? greene_0538446145_chO 1, 12/21/7, 17:20, page: 29 VOCABULARY BUILDER Match each statement with the term that best defines it. Some terms may not be used. 1. People who work for someone else 2. An evaluation of your strengths and weaknesses 3. A creative problem-solving technique that involves generating a large number of fresh ideas 4. Special meetings at which companies of the same or related indus¬ try display their products 5. People who own, operate, and take the risk of a business venture 6. Thoughts or concepts that come from creative thinking 7. The ability to learn a particular kind of job 8. The process of running a business of one’s own aptitude brainstorming employees entrepreneurs entrepreneurship ideas opportunities self-assessment trade shows REVIEW YOUR KNOWLEDGE 9. Barbara Wall had a great recipe for sweet bell pepper sauce. Her friend Lynne Wilson convinced her that they should go into busi¬ ness together and sell the sauce. They now ship J.T.’s Red Sauce to stores in 35 states. Wall and Wilson are examples of a. intrapreneurs c. employees b. entrepreneurs d. managers 10. Which of the following is not an example of an entrepreneur? a. Diane Molberg started By Request, a successful home bakery business. b. Donna Cook started a cleaning service 10 years ago. c. Gwen Morgan manages The Secret Garden, a business owned by her sister. d. Elmer Olsen created Bayfield Apple Jam and distributes the jam nationally. 11. Team members who have the right set of skills needed to get the job done are demonstrating —?—. 12. Jackson Hewitt Tax Service is an example of which type of business? a. manufacturing business c. retailing business b. wholesaling business d. service business 13. The plant where Goodyear tires are made is an example of which type of business? a. manufacturing business c. retailing business b. wholesaling business d. service business 14. According to the Small Business Administration’s Office of Advo¬ cacy, how many new businesses survive for at least two years? a. 67 percent c. 25 percent b. 44 percent d. 10 percent Chapter 1 Assessment 29 greene_0538446145_chO 1, 1/17/8, 19:12, page: 30 15. Which of the following is not an advantage of entrepreneurship? a. Entrepreneurs are their own bosses. b. Entrepreneurs can be creative. c. Entrepreneurs take all the risks involved with starting a business. d. Entrepreneurs can make large sums of money. 16. Which step of the problem-solving process involves performing research and interviewing customers, suppliers, and employees? a. Define the problem. c. Identify various solutions. b. Gather information. d. Evaluate alternatives. APPLY WHAT YOU LEARNED 17. The six categories of privately owned businesses include manufac¬ turing, wholesaling, retailing, service, agricultural, and mining and extracting. In small groups, compile a list of specific industries and companies that belong to each category of business. Share your results with the class. 18. Is your personality suited for becoming an entrepreneur? Using the Activity CD, open the activity “Entrepreneurship Aptitude Test.” Print a copy and complete the activity. What does the test indicate? MAKE ACADEMIC CONNECTIONS 19. MATH Ellen Greenberg loves to make and fly kites. Ellen is planning to open a shop that sells custom-made kites. She asks for your advice to help her set financial goals. Ellen estimates that after expenses, she can make a $15 profit on each kite she sells. If her annual income goal is $15,450, how many kites will she have to sell? Assuming she can make only three kites per day and will work five days a week year round, is this goal realistic? 20. HISTORY Find information on the life and career of a famous historical entrepreneur. Find out information such as birthplace, type of business started, and what effect the person had on the economy and history. Is the business still operating? Write a short report about your findings. 21. COMMUNICATION For the above History question, find a creative way to present your findings to the class. Use visual aids, skits, costumes, games, and so on. WHAT WOULD YOU DO? Nancy and Gayle had been best friends since elementary school. During their senior year, Nancy told Gayle about an idea she had for a busi¬ ness in the local community. She had done some research and thought that her idea had a good chance of turning into a profitable business. After high school graduation, Nancy went off to college and Gayle stayed home and went to the local community college. Since Nancy had not acted on her business idea before leaving for college, Gayle decided that she would try to open a business using Nancy's idea. What do you think about Gayle's actions? Is she doing the right thing? V_ ¥ 30 Chapter 1 Should You Become an Entrepreneur? greene_0538446145_chO 1, 1/15/8, 18:43, page: 31 BUILD YOUR Business Plan Project This activity will help you identify a business opportunity that may be right for you. You will use this business idea throughout the book. Divide a sheet of paper into two columns. In the first column list all your interests. In the second column, list business opportunities that relate to each interest. Make a list of your strengths and weaknesses. Compare this list with your list of business opportunities. For which business opportunities would your strengths most apply? For which business opportunities would your weaknesses hurt the most? Based on your strengths and weaknesses, cross out those business opportunities that no longer seem suitable for you. Assess your aptitude, using the checklist in Lesson 1.2. Put a check¬ mark next to the business opportunities that relate to your aptitudes. For the business opportunities remaining on your list, assess the advantages and disadvantages of each. Cross out any whose dis¬ advantages outweigh its advantages. Using the library or Internet, find and list sources of information that relate to the business opportunities that remain on your list. Locate at least one of these sources for each business opportunity and write a sentence stating the type of information contained in it. On your list, cross out business opportunities for which you could not find any information. Choose one of the business opportunities remaining on your list. Based on this business opportunity, answer the six questions listed in the Compare Different Opportunities section in Lesson 1.3. Set personal financial goals for a five-year period based on the busi¬ ness opportunity you chose. Demonstrate that your goals are SMART (Specific, Measurable, Attainable, Realistic, and Timely). Assume you will need to borrow money to get started. How much profit do you hope to make in one year? Three years? Five years? Next, set nonfi- nancial goals you hope to achieve with this business. Be sure to include specific activities for each goal. Write a letter to potential customers about the goods or services your business will provide. On paper, plan a telephone conversation you will use as a follow-up to the letter. Work with a classmate and do a mock phone conversation based on your plan. Plan ahead to prevent any problems that may arise in your business. Think of a problem that could occur and use the six-step problem¬ solving model to deal with it now. Brainstorm solutions on your own or with family members or friends. Chapter 1 Assessment 31 greene_0538446145_chO 1, 1/17/8, 19:10, page: 32 Planning a Career in Human Services U A - i new health club opened near my Grandma’s house, and she abso¬ lutely loves going there. The club is open 24/7. As Grandma was a bit intimidated by the high-tech exer¬ cise equipment at the club, she’s hired a personal trainer to help her learn how to use die equipment and to hold her accountable for her efforts. She says she feels much more energetic and relaxed than she used to. She’s even considering join¬ ing the volleyball team that’s been established for seniors.” In a high-tech, convenience- oriented society that often results in inactive lifestyles, how do indi¬ viduals maintain physical fitness? When the weather prohibits out¬ door activities, where can people go to exercise? Fitness facilities provide the location, equipment, and instruc¬ tion necessary for club members to exercise. Personal trainers help individual clients customize a workout plan that will help them achieve their personal fitness goals. EMPLOYMENT OUTLOOK • Faster than average growth is anticipated. • Aging baby boomers, who hope to maintain fitness in later life, are fueling the demand for fit¬ ness workers. • Parents’ desire to keep children fit as well as employers who encourage employees to stay in shape will contribute to the on¬ going need for fimess workers. JOB TITLES • Corporate Personal Trainer • Fitness Advisor • Certified Personal Trainer • Fitness Consultant • Personal Fitness Coach NEEDED SKILLS • A high school diploma and CPR certification are usually needed. • Fimess certification from a reputa¬ ble certification organization is required. • Continuing education is often mandatory. • Being physically fit and extro¬ verted and having strong inter¬ personal skills is necessary. What's it like to work in Human Services Nhu, a certified personal trainer, spent the weekend at a training seminar. The session was part of her ongoing training to stay current on developments in the personal training field. This morning Nhu taught a group exercise class at a large fimess center. She enjoyed leading a large group of people and helping them improve their fitness level. The class also gave her the opportunity to meet a large number of health club members. Some of the class attendees signed up for her personal training services at the club. Upon signing up for personal training, club members can work with Nhu on their individual fitness goals for an hourly fee. If they elect to buy a ten session pass, then the hourly fee is reduced. Over the years, Nhu has also established a private personal train¬ ing service. When she attends a client’s home for a training session, she charges a higher hourly rate for the training. Many clients with busy schedules are more than happy to pay the higher rate to save the time of going to a gym. What about you? Would you find it gratifying to help individuals improve their physical fitness levels? 32 Chapter 1 Should You Become an Entrepreneur? greene_0538446145_chO 1, 12/21/7, 17:20, page: 33 TEAM Participants in this event will use current desktop technologies and software to prepare and deliver an effective multimedia presentation. A team will consist of two to four members. The team shall design a computer-generated multimedia presentation on the assigned topic. A new topic is selected by BPA every year. A word processed copy, including cited works, must be submitted at the time of the presenta¬ tion. The team is to make effective use of current multimedia technol¬ ogy in the presentation (examples: sound, movement, digital video, and so forth). Space, color, and text should also be used effectively in the presentation. TOPIC: Business Professionals of America is a forward-thinking organization. Your team has been asked to research three growing entrepreneurship opportunities for the next decade. You will develop a presentation on these trends for the BPA Board of Trustees, includ¬ ing new competitions to measure skills in these areas. Participating teams will have from seven to ten minutes for oral presentations. Judges have an additional five minutes to ask questions about the presentation. PERFORMANCE INDICATORS EVALUATED • Evaluate and delegate responsibilities needed to perform required tasks. • Demonstrate effective teamwork skills needed to function in a business setting. • Demonstrate knowledge of multimedia software and components. • Demonstrate effective oral communication skills. • Apply technical skills to create a multimedia presentation which enhances the oral presentation. Go to the BPA web site for more detailed information. Think Critically 1. Why must entrepreneurs look at future trends when making business decisions? 2. Why should entrepreneurs look beyond current technology trends when making business decisions? 3. Why should statistics be used for this presentation? 4. How are entrepreneurs affected by a global economy? www.bpa.org Winning Edge 33 greene_0538446145_ch02, 12/21/7, 16:42, page: 34 Chapter 2 Entrepreneurs in a Market Economy 2.1 Entrepreneurs Satisfy Needs and Wants 2.2 How Economic Decisions Are Made 2.3 What Affects Price? school.cengage.com/entre ‘preneur/ideas 34 greene_0538446145_ch02, 12/21/7, 16:42, page: 35 IDEAS !M ACTIOM Scott Smigler, Exclusive Con¬ cepts founder and president Web Site Design H ave you ever wondered why certain web sites come up when you use a search engine such as Google or Yahoo? The results you get may be due to the work of Exclusive Concepts, Inc. Scott Smigler, Exclusive Concepts founder and president, balanced dual roles as a student and an entrepreneur through high school and college. His company provides pro¬ fessional web design and online marketing solutions by helping businesses design web sites that stand out when someone uses a search engine. Scott ran the company by himself in the beginning. Eventually, Scott moved from his home to his college dorm room to offices in Waltham, Massachusetts, and hired a staff of 15. The company's estimated sales for a recent year were $1,200,000. Today, Scott Smigler continues to serve as CEO of Exclusive Concepts, and the company has grown five-fold. Scott's ability to develop keyword strategies, write attention-getting keyword ad copy, create and optimize bidding strategies, and analyze results for continuous improvement helped him become a leader in the field. In addition to running the company, he maintained a 3.7 GPA as a finance major at Bentley College in Waltham, Massachusetts. He and Eric Golden, also a Bentley student, started the Bentley Entrepreneur Society to help other students with an interest in entrepreneurship. Some important lessons Scott has learned include these: • Perseverance Implementing dreams is not easy. You must be organ¬ ized and focused. • Mentorship Have a network of mentors to help you with problems. • Communication You need excellent communication skills, and written agreements between your company and clients are essential. • Capitalization Be prepared for everything to be more expensive than you think, and plan for unanticipated expenses. • Marketing Everyone is a potential customer or client. Work to acquire new relationships while continuing to build existing ones. Scott says that starting and running a business require focus, dedica¬ tion, and time, but it is important to remember that there is life outside the business. What do you fcnow? What type of interests do you think Scott had that helped him find success in this business? Which of the lessons that Scott has learned do you think is most important? Why do you think it is important to find a balance between work and play? 35 greene_0538446145_ch02, 1/17/8, 13:59, page: 36 • • Entrepreneurs Satisfy Needs and Wants l_ Goals HI • Distinguish between needs and wants. • Describe the types of economic resources. • Describe the role of entrepreneurs in the U.S. economy. • needs • wants • economic resources Focus on Economics Do you want it or need it? "Dad, I really need a new pair of shoes to wear to the Winter Dance," said Stephanie. "Do you need a new pair of shoes, or do you want a new pair of shoes?" her father responded. "Want or need—what's the difference?" Stephanie replied. Stephanie's father paused as he thought about the valuable lesson he could teach his daughter and then said, "That's a good question, Stephanie. Let's look at it this way. Do you really need the shoes in order to survive, or will having the new shoes make you feel better?" Stephanie thought about what her father asked and said, "Well, Dad, it won't keep me from going to the dance if I don't have the new shoes, but I'd sure like to have new shoes to go with my new dress. So, I guess I'd have to answer you by saying they would make me feel better." "Then you want the shoes, but you don't need them!" her father responded. That's what economics is all about!" "Oh, Dad, you always try to teach me something even when I just want a new pair of shoes!" Work as a Team Discuss needs and wants that you have. Do you sometimes have a difficult time telling the difference bet¬ ween a need and a want? Do you peer pressure makes it more difficult to it is often difficult to distinguish distinguish between a need and a want? between a want and need. Is It a Need or a Want? Think about your favorite piece of clothing. It may be a blouse, a favorite pair of jeans, or maybe the latest in designer shoes. First, you thought about what you wanted in clothing, and then you went out and found it. Maybe you looked at several articles of clothing and compared prices before you decided to spend your money. If someone else gave you clothing as a gift, then that person had to think about what you might like and then make a choice. Economics is all about making choices and satisfying the wants and needs of consumers. 36 Chapter 2 Entrepreneurs in a Market Economy Getty Images/PhotoDisc greene_0538446145_ch02, 12/21/7, 16:42, page: 37 Do you know the difference in your needs and wants? Your needs are things that you must have in order to survive. Needs include food, basic clothing, and a place to live. Your wants are those things that you think you must have in order to be satisfied. Wants add comfort and pleasure to your life. Wants would include things like CDs, com¬ puters, jewelry, and designer clothes. The role of business is to produce and distribute goods and services that people need and want. Needs People have many needs. Some are basic needs, while others are higher-level needs. Abraham Maslow was a psychologist who devel¬ oped a theory on the hierarchy of needs. It identifies five areas of needs—physiological, security, social, esteem, and self-actualization needs. The theory suggests that people’s basic physiological needs, such as food, clothing, and shelter, must be satisfied first before they can focus on higher-level needs. Once basic needs are met, they will try to satisfy their security needs. When this need is filled, individuals turn their attention to social needs, such as friendship. Esteem needs can be satisfied by gaining the respect and recognition of others. Self- actualization needs usually involve something that provides a sense of accomplishment, such as earning a college degree. Develop Your Reading Skills As you read this chapter, develop an outline of the main topics. Write a short summary for each topic after you read it. Self-Actualization (to realize your potential) Esteem (respect and recognition) Social (friends, love, belonging) Security (physical safety and economic security) Physiological (food, sleep, water, shelter, air) Maslow’s Hierarchy of Needs Pyramid Beyond basic needs, not all people have the same needs. Needs depend on a person’s situation. For example, you may live in a nice house in a gated community, so your security needs are met. Some¬ one who lives in a high-crime area still may be trying to meet his or her security needs. Wants Individuals have two different types of wants—economic wants and non¬ economic wants. Economic wants involve a desire for material goods and services. They are the basis of an economy. People want material goods, such as clothing, housing, and cars. They also want services, such as hair styling and medical care. No economy has the resources necessary to satisfy all of the wants of all people for all material goods and services. The goods and services that people want must be produced. Clothes must be made, houses built, and cars manufactured. Personal services must be supplied. 2.1 Entrepreneurs Satisfy Needs and Wants 37 greene_0538446145_ch02, 1/17/8, 13:59, page: 38 MET ; rikmark Over the past several years, gasoline prices in the United States have been very unstable, changing drastically from week to week or even from day to day. Web sites such as GasBuddy .com help consumers find the lowest gas prices in their communities. Access school.cengage .com/entrepreneur/ideas and click on the link for Chapter 2. Use the chart of average gaso¬ line prices to determine whether U.S. gas pri¬ ces have increased or decreased in the past week. How about the past month or year? Click some of the Recent News links. What accounts for recent changes in gasoline prices? school.cengage.com/entrepreneur/ideas People also have noneconomic wants, or the desire for nonmaterial things. These wants would include such things as sunshine, fresh air, exercise, friendship, and happiness. Needs and Wants Are Unlimited Your needs and wants never end. You are limited only by what your mind can think of and what businesses make available for sale. If you are going camping, you might need to buy a tent for shelter. One purchase often leads to another. After buying a tent, you might also want to buy other camping sup¬ plies. Then you might want a bigger back¬ pack to carry your new supplies. Checkpoint What is the difference between needs and wants? Economic Resources Economic resources are the means through which goods and services are produced. Goods are products you can see and touch. Services are activities that are consumed as they are produced. Entrepreneurs use eco¬ nomic resources to create the goods and services consumers use. Con¬ sumers satisfy needs and wants by purchasing and consuming goods and services. Goods are products you can purchase. A pair of shoes, a jacket, food, and cars are all examples of goods. Services must be provided to greene_0538446145_ch02, 12/21/7, 16:42, page: 39 you at the time you need them—they cannot be stored. A haircut, a pedi¬ cure, lawn mowing, and car detailing are all examples of services. Factors of Production In order to create useful goods and services, an entrepreneur may use three types of economic resources. These resources are called the fac¬ tors of production and include natural resources, human resources, and capital resources. NATURAL RESOURCES Raw materials supplied by nature are natural resources. The earth contains oil, minerals, and the nutrients needed to grow crops and timber. Rivers, lakes, and oceans are the sources of both food and water. All products you use begin with one or more natural resources. The supply of many natural resources is limited. Increased use of natural resources and damage to the environment threatens the continued availability of natural resources in many regions of the world. Conservation practices and the produc¬ tion of more efficient products help to preserve and renew resources. Compact fluorescent light bulbs (CFLs) cost more than old-style incandescent bulbs, but they last longer, use far less electricity, save consumers' money in the long run, and reduce greenhouse gases. When consumers switch to CFLs, they help preserve energy resources and the envi¬ ronment for future generations. One CFL keeps a half-ton of greenhouse gases (C02) out of the atmosphere. HUMAN RESOURCES The people who create goods and services are called human resources. They may work in agriculture, manufacturing, distribution, or retail businesses. As an entrepreneur, you would also be a human resource. Entrepreneurs have creative ideas and use these ideas to create new goods and services, which in turn give consumers more choices. CAPITAL RESOURCES The assets invested in the production of goods and services are called capital resources. Capital resources include build¬ ings, equipment, and supplies. They also include the money needed to build a factory, buy a delivery truck, and pay the employees needed to manufacture and distribute goods and services. Limited Resources All economic resources have a limited supply. Most resources can be used to produce several different products and services. If resources are used to produce one type of product, they may not be available for the production of another product. Individuals, businesses, and countries compete for access to and ownership of economic resources. 2.1 Entrepreneurs Satisfy Needs and Wants 39 How do compact fluorescent light bulbs save energy? greene_0538446145_ch02, 12/21/7, 16:43, page: 40 Those resources that are in very high demand or that have a limited supply will command high prices. Because there is a limited amount of natural resources, there will also be a limit to the amount of goods and services that can be produced. Control of oil fields in the Middle East has been an ongoing issue for many years. The United States has a large demand for oil but a limited supply of oil, so it is important to the United States to have access to oil from the Middle East. This high demand contributes to high gasoline prices. Checkpoint List the three types of economic resources and give an example of each. Role of Entrepreneurs in the U.S. Economy Entrepreneurs play an important role in the U.S. economy. Because all businesses that exist in the United States today began as an entre¬ preneurial idea, you could say that entrepreneurs are the backbone of the U.S. economy. The development and growth of small businesses help to ensure a strong economic future. Supply and Demand As business owners, entrepreneurs play an important role in supplying goods and services to meet the demands of consumers. They look for unmet needs or better ways to satisfy consumer needs and wants. They use resources and their knowledge of markets and business to efficiently produce goods and services that meet consumer needs and wants. 40 Chapter 2 Capital Investment and Job Creation In order to start businesses, entrepreneurs need money to finance their businesses. Sometimes they will use their own money. Other times, they will look to invest¬ ors and lenders to supply them with the money they need to get started. They may use the money to lease a build¬ ing, buy equip¬ ment, or hire employees. By doing so, entre¬ preneurs are investing in How do small businesses contribute to the local economy? Entrepreneurs in a Market Economy © Blend Images greene_0538446145_ch02, 1/17/8, 14:0, page: 41 their communities by contributing to the local economy and provid¬ ing jobs. Change Agents Many entrepreneurs create products that change the way people live and conduct business. When you learn about American history, you see that many entrepreneurs have shaped the U.S. economy. As entre¬ preneurs create more goods and services, consumers have more wants and needs. Entrepreneurs will always play an important role in the U.S. economy. . Checkpoint What are some things entrepreneurs contribute to the U.S. economy? 2.i Assessment THINK ABOUT IT 1. What role do needs and wants play in determining what is produced in an economy? 2. Think of something that you would describe as a "need" but your parents would describe as a "want." Provide reasons to support both sides of the argument. 3. How does the availability of economic resources affect decisions that entrepreneurs make? 4. Which of the contributions to the U.S economy that entrepreneurs make do you think is most important? Why? MAKE ACADEMIC CONNECTIONS 5. SOCIAL STUDIES Think of a business in your area. Make a list of the resources that the business uses for each factor of production. 6. COMMUNICATION Find information on the number of small businesses in the United States, the number of individuals employed by small businesses, the number of new businesses that open each year, and the number of business failures each year. Prepare a poster with this information and explain your findings to your classmates. Working in a team, make a list of the natural resources in your area. Using the Internet, almanacs, and other information about your com¬ munity, find out the impact these resources have on your local econ¬ omy. Which businesses use these natural resources? What financial contributions to your local economy do these businesses make? 2.1 Entrepreneurs Satisfy Needs and Wants 41 # greene_0538446145_ch02, 1/17/8, 14:0, page: 42 Choose between alternatives "Stephanie, weren't you thinking about buying a new MP3 player last week?" her dad asked. "Yes, Dad, I was," Stephanie replied, "but if I buy the new shoes I want for the Winter Dance, I won't have enough money to buy the MP3 player now." "You've just learned a lesson about opportunity cost," her dad said. "What's that?" Stephanie asked. Her dad explained that when you choose one item over another, the opportunity cost is the value of the item you give up—in this case, the MP3 player. "I understand, Dad. But if you took this opportunity to buy the shoes for me, then I wouldn't have any opportunity cost, would I?" Work as a Team Discuss choices that you have made recently. Did you realize that when you choose one item over another that there is an opportunity cost involved? j f You often have to choose one option over another. Economic Systems Different economic systems exist throughout the world. However, all economies must answer three basic questions. 1. What goods and services will be produced? 2. How will the goods and services be produced? 3. What needs and wants will be satisfied with the goods and services produced? If all economies struggle with the same basic questions, what is it that makes economies different? The type of economic system that a country has will determine how these three economic questions are answered. Economies must choose a way to allocate, or distribute, the 42 Chapter 2 Entrepreneurs in a Market Economy Getty Images/PhotoDisc greene_0538446145_ch02, 12/21/7, 16:43, page: 43 goods and services that are available to the people who need or want them. These different allocation processes are what create different economies. Different economies have different ways of choosing which goods and services are produced, which needs are satisfied, and how many resources are used to satisfy those needs. Command Economy In a command economy , the government determines what, how, and for whom products and services are produced. Because the govern¬ ment is making the decisions, there is very little choice for consumers in what is available. The government may see no reason to have more than one type of the same item. This means individuals may not always be able to obtain exactly what they want. There will be shirts and pants, but there will not be many styles and colors from which to choose. Market Economy Market economies are about personal choice. In a market economy , individuals and businesses decide what, how, and for whom goods and services are produced. Entrepreneurship thrives in a market econ¬ omy. Decisions about production and consump¬ tion are made by mi lli ons of people, each acting alone. Individual choice creates the market, so there are many items available that are very simi¬ lar. If a good sells, it will remain on the market. If not, the good will not continue to be pro¬ duced. There will be many styles of shirts and pants to appeal to every taste, but a manufac¬ turer will not continue to produce a style that few or no people buy. Individual choice also exists in how items are produced. A furniture maker will make choices regarding the style, fabric, and durability of products made. In addition, products and services are always available to everyone who has the means to pay for them. Traditional Economy Before complex economic systems developed, simple economies operated according to tradition or custom. In a traditional economy , goods and services are produced the way they have always been produced. The traditional economy is used in countries that are less developed and are not yet participating in the global economy. Most of what is produced is consumed and what is left over is sold or traded with people who live in nearby communities. Traditional economies lack the formal structure found in more advanced eco¬ nomic systems and usually have limited capital resources available to improve their conditions. What effect does the economic system have on the product choices you have for clothing? 9 2.2 How Economic Decisions Are Made 43 Getty Images/PhotoDisc greene_0538446145_ch02, 1/17/8, 14:1, page: 44 Mixed Economy When elements of the command and market economies are com¬ bined, it is called a mixed economy. A mixed economy often results when a country shifts away from a command economy toward a mar¬ ket economy but still has government involvement in the marketplace. Many countries are making this shift. During the last decade, several European nations that used a command economy have made progress toward creating a mixed economy. Several of these countries recendy joined the European Union. For over 70 years, the Soviet Union operated under a command economic system called communism. During this time, a series of government-led plans directed resources toward economic growth. The government control resulted in limited choices and a shortage in supply of many consumer goods. The Soviet Union disbanded and became 15 independent states in the early 1990s, resulting in a move toward market economies. China operates under a different type of communist government that controls most of the resources and decisions. The economy of China is adopting elements of a market system for a growing number of economic decisions. China is fast becoming a world leader in goods and services produced. A competitive educational system in China pro¬ duces many skilled workers who are opening businesses daily. As many countries with traditional economies develop, they often adopt mixed economies. The government makes many of the deci¬ sions about how the country’s resources will be used to develop schools, hospitals, roads, and utilities. As people become educated, they are able to obtain jobs and earn money. Then they have the resources to purchase more goods and services. Often businesses from other countries will begin to sell products and services in the develop¬ ing country or open a business offering jobs to the citizens. Famous Paul H6V6r6 Paul Revere is best remembered as an American patriot who made a famous midnight ride, warning people that the British were com¬ ing. However, Paul Revere was also a successful entrepreneur. Trained as a silversmith, he used his engraving skills to create political cartoons to contribute to the movement for independence. He manufactured gunpowder, bullets, and cannons during the Revolu¬ tionary War. Afterwards, he devel¬ oped new methods for his trade and founded the Revere Copper Company in 1801. The original company evolved into Revere Copper and Brass, Inc., which today manufactures cookware that bears his name, a sure sign that his business lives on! Think Critically Paul Revere was able to use his silversmith skills when starting his business. How important do you think it is to have a skill that you can use when starting a business? Why do you think Paul Revere was a successful entrepreneur? 44 Chapter 2 Entrepreneurs in a Market Economy greene_0538446145_ch02, 12/21/7, 16:43, page: 45 Checkpoint How does the type of economy affect the way the basic economic questions are answered? 4 The U.S. Economic System What type of economic system do you think the United States has? To answer this question, you must look at who makes most of the decisions about what is produced and consumed. Since individual businesses and consumers make most of these decisions, the U.S. system is best described as a market economy. Capitalism, which is the private ownership of resources by individuals rather than by the government, is another name for the economic system in the United States. Another term often associated with the U.S. economy is free enterprise , due to the freedom of businesses and individuals to make production and consumption decisions. This individual freedom is vital to the success of the U.S. economy. The U.S. economic system is based on four basic principles: private property, freedom of choice, profit, and competition. PRIVATE PROPERTY As a U.S. citizen, you can own, use, or dispose of things of value. You are free to own anything you want, and you can decide what to do with it as long as you operate within the law. FREEDOM OF CHOICE You can make decisions independently and must accept the consequences of those decisions. Business owners are free to choose where to open a business, what to sell, and how to operate the company. Consumers are free to choose where to shop, what to buy, and how much they want to spend. Only when individual decisions will bring harm to others does the government regulate freedom of choice. PROFIT The difference between the revenues taken in by a business and the costs of operating the business is called profit. The opportu¬ nity to earn a profit is at the heart of the free-enterprise system. One of the main reasons entrepreneurs invest resources and take risks is to make a profit. No business is guaranteed to make a profit, so entre¬ preneurs are challenged to work hard, invest wisely, and produce goods and services that consumers are willing to buy. COMPETITION The rivalry among businesses to sell their goods and services is called competition. Consumers choose products and services based on the value they think they will receive. Competition forces businesses to improve products, keep costs low, provide good cus¬ tomer service, and search for new ideas so that consumers will choose their products or services. Checkpoint Describe the four basic principles of the U.S. economic system. 2.2 How Economic Decisions Are Made 45 greene_0538446145_ch02, 12/21/7, 16:43, page: 46 Economic Choices Individuals and businesses are faced with economic choices every day. Decisions about needs and wants must be made. Economic decision making is the process of choosing which needs and wants, among sev¬ eral, you will satisfy using the resources you have. Two factors commonly enter into economic decision making—scarcity and opportunity cost. did you KNOW? According to the World Water Council, by 2025, approximately 3 5 billion people will , ive in places where water is scarce or is becoming scarce. Scarcity In every economy, there are limited resources to produce goods and services. However, individuals have un li mited needs and wants. This produces the basic economic problem of scarcity. Scarcity occurs when people’s needs and wants are unlimited and the resources to produce the goods and services to meet those needs and wants are limited. For example, land is a scarce resource. Land is used for many purposes, such as for growing crops or as a site for a business or house. The same parcel of land cannot be used to meet all of these needs. A decision on how to use it must be made. Land derives its value from its scarcity. Decisions based on scarcity affect everyone. Individuals and fami¬ lies have many wants and needs. They must decide how to spread their income among all these wants and needs. City, state, and national governments collect taxes from their citizens. They must decide how to use the tax collections to provide all the services that citizens expect. In both cases, someone must make difficult choices. Scarcity forces you to make choices or decisions. Suppose you work a part-time job and earn $150 a week. If you decide to purchase a $75 concert ticket and you owe $75 for your monthly car insurance payment, you will not have any money left over to go out for pizza with your friends. Because you have only $150, you have limited resources. With limited resources, you cannot afford to buy everything you want. You may have to make a tradeoff by giving up something so that you can have something else. Opportunity Cost When trying to satisfy your wants and needs, you most likely will have many alternatives from which to choose. Economic decision making will force you to explore all of your alternatives. The problem¬ solving process can be used to help you select the best and most satisfying alternative from a set of choices. When examining all of your alternatives, you should consider the opportunity cost of each one. Opportunity cost is the value of the next-best alternative—the one you pass up. If your grandparents give you $300 for graduation, you have to decide what to do with it. If you decide to save the money for college, the opportunity cost would be the new iPod that you really wanted and could have purchased with the money. Diane Mayfield has $2,500 in extra cash that she wants to invest in her cake decorating business. Diane could use the money for adver¬ tising or she could purchase new equipment. If she decides to use the money for advertising, she will not be able to purchase new equipment. 46 Chapter 2 Entrepreneurs in a Market Economy greene_0538446145_ch02, 12/21/7, 16:43, page: 47 The opportunity cost of advertising will be the value of the new equipment—the next best alternative. Like all entrepreneurs, Diane will have to choose between various investment options. Checkpoint What factors affect economic choices? Functions of Business In a market economy, an entrepreneur is free to produce and offer to consumers any legal product or service. Knowledge of business activ¬ ities will help entrepreneurs satisfy customers and make a profit. These activities or functions of business include the following: • production • management • marketing • finance Each of these functions is dependent on the others in order for the business to be effective. Products can be produced, but if manage¬ ment is not functioning properly, if adequate financial records are not maintained, or if marketing is not getting the word out to consumers, the products probably will not be sold at a profit. PRODUCTION The primary reason a business exists in a market econ¬ omy is to provide products or services to consumers and to earn a profit. The production function creates or obtains products or services for sale. MARKETING All businesses in a market economy need to complete marketing activities in order to make their products and services avail¬ able to consumers. These activities make up the marketing mix , which includes the following: • product • price • distribution • promotion The goal is to attract as many customers as possible so that the prod¬ uct succeeds in the marketplace. MANAGEMENT It is necessary for all businesses in a market econ¬ omy to spend a great deal of time developing, implementing, and evaluating plans and activities. Set¬ ting goals, determining how goals can be met, and deciding how to respond to the actions of competi¬ tors is the role of management. Management also solves problems, manages the work of employees, and evaluates the activities of the business. be your own boss You are planning to open a sandwich shop. You begin to think about the four functions of business—production, marketing, management, and finance. Describe how each function will apply to your business. Explain how the functions will work together to ensure you run a successful sandwich shop. Be prepared to share your ideas with your classmates. 2.2 How Economic Decisions Are Made 47 greene_0538446145_ch02, 1/17/8, 14:1, page: 48 FINANCE One of the first responsibilities of finance is determining the amount of capital needed for the business and how the capital will be obtained. The finance function also involves planning and manag¬ ing the financial records of the business. Checkpoint What are the functions of business? 2.2 Assessment THINK ABOUT IT 1. Prepare a chart showing how the three basic economic questions are answered by a command, a market, and a traditional economy. 2. Explain the contributions of the four basic principles to the suc¬ cess of the U.S. economy. 3. Opportunity cost can affect you personally. Name an item you have wanted to purchase but have not bought because you wanted another item more. 4. Why is it important for all functions of business to work together? * MAKE ACADEMIC CONNECTIONS 5. MATH David Kalb started a pet-walking business in New York City. He charges $20 to walk one dog twice a day. He walks six dogs five days a week for four customers. He walks three dogs seven days a week for three other customers. How much money does David get from his customers each week? If his expenses each week total $350, how much profit is he making weekly? 6 . ECONOMICS Research the economic system of another country. Explain the type of economic system the country has and the effect it has on the lives of the people in the country. Describe how the economic system would affect entrepreneurs in the country. 7. PROBLEM SOLVING You worked for your grandmother doing odd jobs around her house. She paid you $75 for the work you did. You need $25 to fill your car with gasoline for the upcom¬ ing week, $10 for school lunch, $40 for prom tickets, and $30 for a deposit on your tuxedo/dress for the prom. How much money do you still need to cover all your expenses? Since your resources are limited, use the problem-solving process to decide how to spend the $75. Explain your choices. TEAMWORK Working in a team, choose a business with which you are familiar. For the business you choose, make a list of the activities that would take place involving each of the four functions of business. 48 Chapter 2 Entrepreneurs in a Market Economy greene_0538446145_ch02, 12/21/7, 16:43, page: 49 m What Affects Price? S r^ic -w- uoais l erms Explain how supply and demand interact to determine price. Describe how costs of doing business affect the price of a good or service. Explain the effect of differ¬ ent market structures on price. supply demand equilibrium price and quantity fixed costs variable costs marginal benefit marginal cost Focus on Economics Does supply match demand? "Well, Dad, I went to the mall today to buy my new shoes and nobody had the ones I wanted," Stephanie told her father. "Every store I went to said it had sold out of the shoes because they were on sale. The manufacturer is supposed to send another shipment of the shoes next week." "Oh," her father said, "so more people want the shoes because the price is lower. And the manufacturer is willing to make more shoes even at the lower price because it is still making a profit. This is the law of supply and demand at work." "Dad, there you go again—always trying to make a point!" Work as a Team In the U.S. economy, you have many choices, but sometimes you might not be able to find exactly what you want. Think of products that you have wanted to buy but could not find. Why Manufacturers must try to keep up do you think you could not find them? Wlth product demand. c o > 16 ’gi Q © How Much Is Enough? If a market economy is based on personal choice, why does there always seem to be just enough of everything? In a market economy, individual consumers make decisions about what to buy, and businesses make decisions about what to produce. Consumers are motivated to buy goods and services that they need or want. Business owners are driven by the desire to earn profits. These two groups, consumers and producers, together determine the quantities and prices of goods and services produced. Supply and Demand To understand how this works, you need to understand two impor¬ tant forces: supply and demand. Supply is how much of a good or service a producer is willing to produce at different prices. Imagine 2.3 What Affects Price? 49 greene_0538446145_ch02, 12/21/7, 16:43, page: 50 that you supply car detailing services. Suppose that at a rate of $40, you are willing to spend eight hours a week providing car detailing services. If your customers are willing to pay just $20 for a car detail, you might decide not to bother detailing cars at all. If, however, the rate for car detailing rose to $60, you would probably increase the number of cars you would detail. You might even try to get some friends to help you detail even more cars. As the price of car detailing services rises, suppliers are willing to provide more services. The quantity of car detailing services supplied rises as the price for car detailing services increases, as shown on the supply curve graph. Now consider the demand side of the market economy. Demand is an individual’s need or desire for a product or ser¬ vice at a given price. Suppose that you are interested in having your car detailed. At a rate of $40, you figure it is worth hav¬ ing your car detailed once a month. If, however, the rate fell to just $20, you might be willing to have your car detailed twice a month. As the price of the service or product decreases, consumers are willing to purchase more of the product or service. Demand rises as the price falls, as shown on the demand curve graph. When the demand of a product is affected by its price, this is referred to as demand elasticity. When a change in price creates a change in demand, you have elastic demand. When a change in price creates very little change in demand, you have inelastic demand. Demand is usually inelastic when • There are no acceptable substitutes for a product that con¬ sumers need • The change in price is small in relation to the income of the consumer, so consumers will continue to buy the prod¬ uct if they want it • The product is a basic need for consumers, rather than just a want Supply Curve 20 30 40 Quantity Suppliers are willing to supply more of a product or service at a higher price. Demand Curve 10 20 30 40 50 Quantity Individuals are willing to consume more of a product or service at a lower price. Supply and Demand Curves The point at which the supply and demand curves intersect indicates the eguilibrium price and quantity. The equilibrium price is $30 a unit, and 30 units will be produced. When Supply and Demand Meet How do the forces of supply and demand work together to determine price in a market economy? The point at which the supply and demand curves meet is what is known as the equilibrium price and quantity. This is the price at which supply equals demand. Above the equilibrium price, fewer people are interested in buying goods and services. At this point, suppliers will not be able to sell as much of their goods or services as they would like because they have priced them too high. Below the equilibrium price, the price is too low. Consumers would be very happy to purchase many of the goods or services at these prices, but suppliers would not be willing to produce enough to meet their demand. Only at the equilibrium price does the amount consumers want to buy exactly equal the amount producers want to supply. 50 Chapter 2 Entrepreneurs in a Market Economy greene_0538446145_ch02, 12/21/7, 16:44, page: 51 Checkpoint What effect do supply and demand have on the price of a good or service? Costs of Doing Business To determine how much profit they are earning, entrepreneurs need to know how much it costs to produce their goods or services. To do so, they must consider all the resources that go into producing the good or service to determine a price to charge. The Jewel Box, a small company that produces handmade jew¬ elry, requires office space, materials, labor, and equipment. All of these resources go into making a piece of jewelry, and all of them must be taken into account when figuring out the price. A company that prices its product based only on the cost of materials involved in producing it will lose money and go out of business very quickly. Fixed and Variable Costs Every business has fixed costs and variable costs. Fixed costs are costs that must be paid regardless of how much of a good or service is pro¬ duced. Fixed costs are also called sunk costs. Variable costs are costs that go up and down depending on the quantity of the good or ser¬ vice produced. To understand the difference between fixed and variable costs, consider The Bread and Bagel Shop, a small business owned by entrepreneur Michael Miller. Whether or not custom¬ ers buy his baked goods, Michael pays the same monthly rent, the same insurance fees, and the same interest on the loans taken out to finance his business. These are Michael’s fixed costs. He must pay them even if The Bread and Bagel Shop makes no sales. The store also has variable costs, including the expense of buying flour, sugar, and coffee. These expenses rise direcdy with the number of items sold. The more bagels, donuts, and cups of coffee the company sells, the more resources it must buy to make more goods. In contrast, when customers purchase fewer loaves of bread, Michael uses less flour and other ingredients. Understanding the difference between fixed and variable costs is important. A business with many fixed costs is a higher risk than a business with mostly variable costs, because fixed costs will be incurred regardless of the level of sales. If sales turn out to be much lower than expected, the business will be stuck with many bills to pay and little revenue to cover them. Marginal Benefit and Marginal Cost Entrepreneurs make business decisions based on the concepts of marginal benefit and marginal cost. Marginal benefit measures the advantages of producing one additional unit of a good or service. Marginal cost measures the disadvantages of producing one addi¬ tional unit of a good or service. 2.3 What Affects Price? 51 If bread sales increase at a bakery, how might this affect its variable costs? © Getty Images/PhotoDisc Digital Vision greene_0538446145_ch02, 12/21/7, 16:44, page: 52 Michael M il ler of The Bread and Bagel Shop wants to increase his sales. Michael is considering keeping the store open two extra hours every day. He estimates that during the last two hours of every day, he will sell an additional 150 baked goods and 30 cups of coffee, bringing in additional daily revenues of $100. This $100 represents the marginal benefit of keeping the store open an extra two hours a day. Should Michael stay open two extra hours each day? To figure out if staying open later makes economic sense, Michael needs to fig¬ ure out the marginal cost of staying open later. He will need to pur¬ chase additional ingredients to produce another 150 baked goods and 30 cups of coffee. He will have to pay overtime wages to at least two employees. He will also use more electricity. Adding up these costs, Michael estimates that staying open two extra hours will cost him $125 a day. Because the marginal cost of staying open ($125) exceeds the marginal benefit ($100), Michael decides not to change the store’s hours. Checkpoint How do the costs of doing business affect prices? Market Structure and Prices Market structure is determined by the nature and degree of competi¬ tion among businesses that operate in the same industry. The main criteria used to distinguish between different market structures are the number and size of sellers and buyers in the market, the type of goods and services being traded, and the barriers to entry into the market for sellers. There are four major market structures: perfect competition, monopolistic competition, oligopoly, and monopoly. Each market structure has an effect on the prices businesses can charge for their products or services. What kind of competition do you think a vacuum cleaner manufacturer faces? Perfect Competition A market with perfect competition consists of a very large number of businesses producing nearly identical products and has many buyers. Buyers are well-informed about the price, quality, and availability of products. Because consumers have so many choices of similar products, price is often the deciding factor, making it difficult for a single business to raise prices. This gives consumers more control of the market. Businesses can easily enter or leave this type of market. Examples of industries in perfect competition include gasoline suppliers and producers of agricultural products such as wheat and corn. 52 Chapter 2 Entrepreneurs in a Market Economy greene_0538446145_ch02, 12/21/7, 16:44, page: 53 Monopolistic Competition A market with monopolistic competition has a large number of inde¬ pendent businesses that produce goods and services that are some¬ what different. Each business has a very small portion of the market share. This is also called a competitive market. In a competitive mar¬ ket, many suppliers compete for business, and buyers shop around for the best deal they can find. In this kind of market, prices are said to be determined competitively. Products offered are not identical but very similar, so differentiating products becomes very important. Businesses can easily enter or leave a market that has monopolistic competition. Businesses in monopolistic competition include retail stores and restaurants. Oligopoly When a market is dominated by a small number of businesses that gain the majority of total sales revenue, it is called an oligopoly. Businesses in this market sell similar goods and services that are close substitutes, and they have influence over the price charged. With the dominance of a few businesses, it is not easy for new ones to enter the industry. Exam¬ ples of oligopolies include the automobile and airline industries. WHAT WENT WRONG > Avoid personal debt Dave McClure, a Silicon Valley entrepreneur with no previous business experience, took on a great amount of debt when he founded a Web and database services company. He founded Aslan Computing in 1995. He used his own personal savings and took out a sec¬ ond mortgage on his home to get the money he needed to get his business off the ground. At first, it appeared that Dave's venture was successful. He made $1.8 million in sales within two years. Upon closer examination of his financial records, however, things did not look as good. Although Dave's business generated a large amount of revenue, it did not generate much profit. Aslan Computing's costs exceeded its revenues, and it incurred a net loss of $50,000 the second year. On the brink of col¬ lapse, no bank would lend Dave additional funds. His credit card debt peaked at $120,000. Friends urged him to bail out before things got worse. He managed to sell the busi¬ ness for enough money to pay off his debts. Think Critically 1. Do you think it is wise for a business owner to take on a large amount of per¬ sonal debt when starting a business? 2. What other options does an entrepreneur have if no bank is willing to loan money to help finance the business? When starting your business, be sure to avoid personal debt. # 2.3 What Affects Price? 53 Digital Vision greene_0538446145_ch02, 1/17/8, 14:2, page: 54 Monopoly Where there is only one provider of a product or service, a monopoly exists. A company that has a monopoly is able to charge whatever price it wants, because consumers have nowhere else to go to find a better price. This is the opposite of a competitive market where consumers can simply switch to a lower-priced good or service offered by a com¬ petitor. The one provider can raise prices up to the point where con¬ sumers will choose to simply do without the product or service. Monopolies usually exist because of barriers that make it difficult for new businesses to enter the market. Examples of monopolies include local water and electric utility companies. Checkpoint How does the market structure affect the price of a good or service? M 2.3 Assessment THINK ABOUT IT 1. Have you ever wanted to buy something, but you couldn't find it? What role do you think supply and demand might have played? 2. Name three fixed costs in your life. How do you plan to pay them? Name three variable costs that you have. How can vari¬ able costs be like opportunity costs? 3. Think of an item you purchase often. If the price is similar at sev¬ eral stores, do you always buy at the same store? Why or why not? 4. Describe the important features of each of the market structures. 54 Chapter 2 MAKE ACADEMIC CONNECTIONS 5. COMMUNICATION Find advertisements for two competing products. Analyze the ads to see how the products are differen¬ tiated. Make a poster of the two ads and label the items that are different. 6. ECONOMICS Create a table with two columns. In the first column, list the four market structures. In the second column, list five to ten goods or services that would be available in each of the different market structures. Working in a team, brainstorm a list of businesses in your state and your local area. Discuss with your teammates the type of market structure in which you think each business operates. Give reasons for your choices. Share your list with your classmates. Entrepreneurs in a Market Economy greene_0538446145_ch02, 1/17/8, 14:2, page: 55 Sharpen Your Entrepreneurial Skills Effective Presentation Skills Much of your communication as a business owner will be conducted verbally. You may have to make a presentation to sell your business idea to potential investors, or you may have to make a presentation before potential customers to convince them to purchase your prod¬ uct or service. How you present yourself will have a big impact on the people with whom you deal. When preparing a presentation, you should be concise, but give adequate information to cover the topic being presented. An effective presentation has three parts. 1. Introduction You should begin your presentation with an attention-getting opener that introduces your topic. Asking a question or using a famous quote is a good way to get your audience focused on the topic. 2. Body of Presentation Try to limit your presentation to three main points. It is often helpful to provide a visual aid that lists your key points. Do not overwhelm your audience with too much detail. Use facts and other supporting information to rein¬ force your main points. Keep the presentation simple and avoid using complicated language. 3. Conclusion After presenting your main points, summarize what you have told your audience in a brief conclusion. TRY IT OUT To practice your presen¬ tation skills, research an entrepreneur who you believe has been a change agent. Prepare an effective presenta¬ tion for the class explaining the impact this entrepreneur has had on other people’s lives. Sharpen Your Entrepreneurial Skills 55 greene_0538446145_ch02, 12/21/7, 16:44, page: 56 Chapter 2 Assessment SUMMARY 2.1 Entrepreneurs Satisfy Needs and Wants 1. Economics is all about making choices and satisfying the needs and wants of consumers. Your needs are things you must have to survive. Your wants are things you think you must have to be satisfied. 2. Three kinds of economic resources are used by entrepreneurs to produce goods and services—natural resources, human resources, and capital resources. 3. Entrepreneurs play an important role in the U.S. economy. They supply goods and services, provide capital investment and job cre¬ ation, and serve as agents for change. 2.2 How Economic Decisions Are Made 4. There are four kinds of economic systems—command economy, market economy, mixed economy, and traditional economy. 5. The U.S. economic system is based on the principles of private property, freedom of choice, profit, and competition. 6. Economic choices are necessary because of our u nl imited desires and the scarcity of resources available to satisfy them. Every eco¬ nomic decision involves an opportunity cost. 7. The functions of business are production, marketing, management, and finance. Each function is dependent on the others. 2.3 What Affects Price? 8. Supply is how much of a good or service a producer is willing to produce at different prices. Demand is an individual’s need or desire for a product or service at a given price. The point at which supply equals demand is the equilibrium point. 9. Entrepreneurs must consider all the resources that go into produc¬ ing a good or service to determine a price. Fixed costs remain the same regardless of how much of a good or service is produced, while variable costs go up and down depending on the level of production. 10. Market structure is determined by the nature and degree of com¬ petition among businesses that operate in the same industry. The four major market structures are perfect competition, monopolistic competition, oligopoly, and monopoly. What do you Jcnow now? Read Ideas in Action on page 35 again. Then answer the questions a second time. How have your responses changed? 56 Chapter 2 Entrepreneurs in a Market Economy greene_0538446145_ch02, 12/21/7, 16:44, page: 57 VOCABULARY BUILDER Match each statement with the term that best defines it. Some terms may not be used. 1. Those things that you think you must have in order to be satisfied 2. The means through which goods and services are produced 3. Occurs when people’s needs and wants are un li mited and resour¬ ces are limited 4. The process of choosing which wants you will satisfy using the resources you have 5. The value of the next-best alternative—the one you must pass up 6. Point at which supply and demand meet 7. Measures the advantages of producing one additional unit of a good or service 8. Private ownership of resources by individuals 9. An individual’s need or desire for a product or service at a given price 10. Costs that go up and down depending on the quantity of the good or service produced J- k. l. m. n. o. capitalism demand economic decision making economic resources equilibrium price and quantity fixed costs marginal benefit marginal cost needs opportunity cost profit scarcity supply variable costs wants REVIEW YOUR KNOWLEDGE 11. An example of a noneconomic want is a. clothing c. friendship b. housing d. cars 12. Which of the following is not an example of a service? a. lawn care c. television b. car wash d. cable TV installation 13. If a product has inelastic demand, a price increase will cause a. consumers to buy more b. competitors to enter the market c. consumers to buy less d. litde or no change in the demand for the item 14. What determines the type of economic system a country has? a. the political beliefs of the country’s ruler b. the way the basic economic questions are answered c. the resources of the country d. the demands of the people 15. What are the three basic economic questions countries must answer? 16. Which of the following is not a role of entrepreneurs in the U.S. economy? a. supply goods and services to meet consumer needs and wants b. provide capital investment and job creation c. determine how to allocate natural resources d. serve as agents for change Chapter 2 Assessment 57 greene_0538446145_ch02, 1/17/8, 19:16, page: 58 Another name for economic resources is a. factors of production c. supply and demand b. goods and services d. command and market The four basic principles of the U.S. economic system are a. private property, freedom of choice, loss, competition b. taxed property, freedom of choice, profit, competition c. private property, freedom of choice, profit, competition d. private property, limited choice, profit, competition Which of the following is not a function of business? a. production c. legal environment b. marketing d. finance If you were going to start a small retail store selling gift items, which type of market structure would you most likely be entering? a. perfect competition c. oligopoly b. monopolistic competition d. monopoly The Ford Motor Company operates in which type of market structure? a. perfect competition c. oligopoly b. monopolistic competition d. monopoly APPLY WHAT YOU LEARNED 22. You plan to start a pet-sitting/dog-walking business. Analyze the possible demand for such a service by brainstorming answers to the following questions: Who is likely to hire a pet sitter? Who is likely to hire a dog walker? Besides caring for the pets, what other services could such a business perform? Discuss what other ques¬ tions you should consider before starting this type of business. 23. Susan Tran of Nails by Susan wants to increase her sales. Susan thinks about keeping the nail salon open two extra hours every day. She estimates that during the last two hours of every day, she and her staff could provide nail services to five more customers, bringing in additional revenues averaging $125 a night. Susan estimates that providing the services to five more customers each night would cost approximately $25 in supplies. Her operating expenses for electricity and water will increase by approximately $20 per night. She would also have to pay two employees to work the extra two hours at a cost of $30 each. What is the marginal benefit of keeping the nail salon open an extra two hours a day? What is the marginal cost of staying open two additional hours? Do you think Nails by Susan should stay open two extra hours each day? MAKE ACADEMIC CONNECTIONS 24. MATH You have a business baking and selling chocolate chip cookies. Using the Activity CD, open the activity “How Much Does It Cost?” Print a copy and complete the activity. What are the costs of doing business? Are these fixed costs or variable costs? 17. 18. 19. 20 . 21 . 58 Chapter 2 Entrepreneurs in a Market Economy greene_0538446145_ch02, 12/21/7, 16:44, page: 59 COMMUNICATION Marketing plays an important role as one of the functions of business. Research and write a report explaining how each of the other functions—production, manage¬ ment, and finance—depends on the marketing function. Present your report to the class. ECONOMICS Identify and research economies in the process of converting from a command to market economy. What events led to this change? What involvement, if any, do U.S. companies have in these countries’ economies? Discuss your findings with the class. WHAT WOULD VOU DO? You are excited when you receive your new iPod for your birthday. You also receive a $50 iTunes gift card. You sign onto iTunes and download many of your favorite songs and a movie. You spend the $50 quickly, but there are many additional songs you want. One of your computer-savvy friends tells you about some web sites where you can download all the music you want for free. You are anxious to try out these new web sites, but you decide to talk to your parents first. Your parents explain that iTunes is a legal site and that the music artists receive royalties (payments to the copyright holder) when you download from it. The web sites your friend told you about do not give the artists the royalties due to them. Your friend says the artists have already made enough money so it does not really matter that you are getting the music for free. What will you do? Will you continue to pay and use only iTunes or will you use the free web sites? Why? Recording artists are entrepreneurs. If you were an entrepreneur, how would you feel if you did not get the money that was owed to you? Y_ | _ ) 25. 26. BUILD YOUR Business Plan Using the Activity CD, open the activity "Supply and Demand Graph." Print a copy and complete the activity for at least one good or service your business will provide. Then use the graph to determine the price to charge for that good or service. Determine the fixed and variable costs for your business. Estimate how much money you will need to cover these costs. Make a chart showing these expenses. Do you need to adjust your original pricing for your business to make a profit? Consider adding another product or service to your business. What are the marginal costs and benefits of adding this new product or service? Is it a good or bad idea to add the item? Chapter 2 Assessment 59 greene_0538446145_ch02, 1/17/8, 19:14, page: 60 Planning a Career in Property Management iness , Management & Administration "A - ur softball coach threw an end of season party for team mem¬ bers and their families at the pool in his neighborhood. There are about 300 houses in the neighbor¬ hood. A pool, playground, tennis courts, and clubhouse are shared and maintained by the community. He said that although the commu¬ nity elected a board of residents to plan for the community, the day- to-day maintenance of the commu¬ nity was handled by a property management company.” Who changes the light bulbs in the common areas of private communities? How is the landscap¬ ing of common areas managed in private communities? Who takes care of routine maintenance at retail sites? Property management compa¬ nies assist a variety of businesses by managing their daily operations. Retail locations, office parks, and residential communities use their services. EMPLOYMENT OUTLOOK • Average job growth is expected. • Over half of property managers are self-employed. • As new home developments form neighborhood associations to manage common areas, the need for property managers should increase. JOB TITLES • Assistant Facility Manager • Commercial Property Assistant • Occupancy Specialist • Homeowners Association Field Manager • Community Association Manager • Portfolio Manager—Property Management NEEDED SKILLS • A Bachelor’s degree is recommended. • Strong information systems, financial, problem-solving, and multitasking skills are required. • A background in real estate or facilities management is helpful. What's it like to work in Property Management? Ari, the owner of a property management company, was posting the minutes of a neighborhood’s annual meeting on the neighborhood’s web site. Web site maintenance was just one of the many services the neighbor¬ hood had hired Ari’s company to perform. Ari’s next task was analyzing the bids that came in for the land¬ scaping contract for a condomin¬ ium community he was managing. He would prepare a report on the three most competitive bids and present them to the condominium’s board tomorrow evening at their monthly meeting. In addition to providing a financial summary of die bids, Ari would also provide information regarding the reliability of the various landscaping compa¬ nies. Because he managed several communities, Ari was able to obtain feedback on the effectiveness of a variety of landscaping companies. After lunch, Ari reviewed die time cards for the lifeguards at a neighborhood community pool. Because the neighborhood lacked the resources to manage employees, they paid Ari’s firm to handle the contract for their community’s lifeguards. What about you? Would you like to manage the day-to-day operations of a variety of commun¬ ities to help them run smoothly? 60 Chapter 2 Entrepreneurs in a Market Economy greene_0538446145_ch02, 12/21/7, 16:44, page: 61 li: II 11 H * EMEKGIWG “BUSINESS ISSUES EVEMT V he Emerging Business Issues Event provides students with an oppor¬ tunity to research and present an emerging business issue. The event will be completed by a team consisting of two or three members. FBLA provides participants a topic to research. The team must then present an affirmative or negative argument about the topic, based upon random selection. Facts and working data should be secured from reliable sources. After drawing an affirmative or a negative argu¬ ment, teams will have five minutes to finalize their preparations. Each presentation will last no longer than five minutes. Following each oral presentation, the judges have three minutes to ask questions. TOPIC Closing the border with Mexico has become a heated political issue for the United States. Construction, manufacturing, agriculture, and horticulture are a few of the industries that depend heavily on illegal immigrants to fulfill labor needs. Some citizens and politicians want the country to shut down the border and deport ille¬ gal immigrants. Other individuals want the government to grant the current illegal immigrants a worker’s permit and develop a strategy to enable them to become legal citizens. One plan recommends granting citizenship to more than 12 million illegal immigrants before tighten¬ ing up the border. Other plans call for fining businesses that hire ille¬ gal immigrants. Your team will be called upon to argue the affirmative (granting illegal residents work permits and citizenship) or the nega¬ tive (fine employers and send illegal residents home). PERFORMANCE INDICATORS EVALUATED • Understand how a current issue affects the economy. • Communicate an opinion based upon facts and figures. • Work as a team to persuade the audience to support a certain viewpoint. • Manage time effectively to research, outline, and present a viewpoint. • Demonstrate effective teamwork and align ideas into a persuasive argument. Go to the FBLA web site for more detailed information. Think Critically 1. What are two advantages of allowing illegal immigrants to stay in the United States? 2. Why are businesses concerned about the government's actions involving illegal immigrants from Mexico? 3. Why are politicians conflicted by the illegal immigrant issue? 4. How can the United States ensure that illegal immigrants take the neces¬ sary steps to obtain legal citizenship? www.fbla.org Winning Edge 61 school.cengage.com/entrepreneur/ideas J 62 3.1 Why a Business Plan Is Important 3.2 What Goes into a Business Plan? 3.3 How to Create an Effective Business Plan greene_0538446145_ch03, 12/21/7, 16:46, page: 63 IDEAS !M ACTION! •• tM Jeffrey Rodriquez and John Serrano, Latin Artist Turning an Idea into a Business I f you have an idea for a business, what do you do next? How can you raise money to get started? As Jeffrey Rodriguez and John Serrano of Brooklyn, New York, found out, a business plan is necessary to turn your idea into action. Using their business plan, Jeffrey and John turned graffiti from an act of vandalism into an art form. John developed a love of art from an early age working with his artist father. Jeffrey developed leadership skills through the Boy Scouts and ASPIRA, a leadership club encouraging students to take part in community service in Latin neigh¬ borhoods. Both John and Jeffrey experimented with graffiti art, and Jeffrey started airbrushing designs for friends, working from a family- owned business using equipment borrowed from a Scout leader. After he taught John how to airbrush, Latin Artist was born. Needing startup money, Jeffrey learned about Youth Venture, a program that awards grants to teens who start businesses emphasizing community service. Realizing that neighborhood youth needed a safe place to meet, Jeffrey applied for and got the grant. He and John used the money to fix up their store. They added a community service compo¬ nent to their airbrush designs business, offering free art lessons for neighborhood youth. Besides teaching them art, Jeffrey stresses the need to do something good for the community. Four months after they opened, Jeffrey created a business plan and entered a Fleet Bank contest. Latin Artist was named one of the top 20 youth businesses in the New York area. Jeffrey and John continue to work on a detailed business plan so they can apply for a bank loan and determine the future direction of their business. A detailed business plan is a must when talking to banks and other lending institutions. 1. Character Are you honest and dependable? 2. Capacity Can you earn enough money to pay back the loan? 3. Capital Do you have enough cash on hand to pay your bills? 4. Collateral Do you have anything of value to back up your loan? 5. Conditions Do you have the potential to continue earning money? What do you fcnow? What kind of plans do you think someone should make before opening a business? Where could you go to research a business idea? Why is it important to have a written business plan? greene_0538446145_ch03, 1/17/8, 14:33, page: 64 Look before you leap Tony worked for a local automobile dealership as a tech¬ nician for over 20 years. He was the best technician at the dealership, and he always received very high customer service ratings. One day, Tony decided that because he was such a good technician, he could make more money working on his own. At a local print and signage shop, he had business cards printed and a sign made that read "Tony the Technician." He quit his job at the dealer on Friday, put his sign up on Sunday, and was open for business on Monday. Work as a Team Tony made his decision very fast and jumped right into owning his own business. What do you think are Tony's chances for success? Discuss what advice you would have given Tony if he had talked to you about his idea first. Planning is the key when starting a business. The Business Plan Once you have settled on a business idea, it is time to start making plans for the business. A business plan is a written document that describes all the steps necessary for opening and operating a success¬ ful business. In this chapter, you will learn what goes into a business plan and begin the development of a business plan for your business idea. A business plan does the following: • Describes what your business will produce, how you will produce it, and who will buy your product or service • Explains who will run your business and who will supply it with goods • States how your business will win over customers from competitors and what your business will do to keep customers 64 Chapter 3 Develop a Business Plan greene_0538446145_ch03, 12/21/7, 16:46, page: 65 As you read this chapter, make a list of the items that you will need to develop and research for your business plan. Why would potential investors want to see your business plan? • Provides detailed financial information that shows how your busi¬ ness will succeed in earning a profit Writing a business plan is one of the most difficult and important things you will do as an entrepreneur. Writing a solid business plan is critical because the plan can make or break your business. Some people may tell you that you do not really need a business plan, but potential investors will want to know in what you are asking them to invest. The business plan will also serve as a guide for you as you get your business started. Purposes of a Business Plan The business plan serves three important purposes. 1. A business plan explains the idea behind your business and spells out how your product or service will be produced and sold. To convince investors that your business idea is solid, you will need a completely new product or service or one that is better or less expensive than products or services that already exist. You will need to identify your target customer and show how your company will be able to obtain and keep customers. 2. A business plan sets specific objectives and describes how your business expects to achieve them. A good business plan includes sales projections for the short term (the first year), the medium term (two to five years after startup), and the long term (five years in the future). It describes what products and services will be intro¬ duced over the next five years and sets forth future business plans, such as expansion of the business. 3. A business plan describes the backgrounds and experience of the people who will be running the business. Banks and investors make financing decisions based on how well they think 3.1 Why a Business Plan Is Important 65 greene_0538446145_ch03, 12/21/7, 16:46, page: 66 a company can meet its objectives. By providing the background and experience of the people who will be running your company, the bank or investor will be more likely to provide funding. Checkpoint What are the three main purposes of a business plan? Importance of a Business Plan Every new business must have a business plan. The business plan is important for several reasons. 1. A business plan makes you think about all aspects of your business. It will help you during the development and startup phases of the business. Stan Meyer began a graphic design business from his home. He spent many hours thinking about the business and thought he was ready to start it until he sat down to write his business plan. He had not made sales and profit projections. He had also not thought about the possibility that he might need to hire staff if the business grew too large for him to handle alone. Drafting a business plan helped Stan gain even more confidence in his business idea. It showed him that building a successful business based on his concept would be possible. Working on his business plan also helped Stan think through business strategies, recognize limits, and identify problems he might encounter. 2. A business plan may help you secure financing for your busi¬ ness. You may have a great idea, but very litde capital to invest in your business. You may need to go to a bank to obtain a loan How does creating a business plan help you see the "big picture"? 66 Chapter 3 Develop a Business Plan greene_0538446145_ch03, 12/21/7, 16:47, page: 67 or find other investors for your startup money. Lenders and investors require a business plan before they will consider financ¬ ing a business. A well-written business plan shows lenders and investors that you are serious about your business idea and have spent sufficient time in the planning process. The loan officer at Stan Meyer’s bank was very impressed with the work that Stan had put into his business plan. The plan showed her that Stan thoroughly understood all that was involved in starting his own graphic design business. She recommended that he be approved for a loan. 3. A business plan helps you communicate your ideas to others. By the time you write your business plan, you will have given much thought to the business you want to establish. You will pro¬ ceed believing that your business can succeed. If you communicate your ideas well on paper, you will also convince the readers that your business can succeed. It will give suppliers confidence in Famous Walter Elias Disney No one has entertained families more than the Walt Disney Corpo¬ ration. Who has not experienced the Disney brand by seeing a movie, visiting a theme park, stay¬ ing at a resort, buying merchan¬ dise, watching TV, or cheering on the Mighty Ducks of ice hockey? We have all been touched by the magic of Disney, the preeminent name in family entertainment. As a young child, Walt Disney had an interest in art. To improve his drawing skills, he took art courses in high school, and at night, attended the Academy of Fine Arts. The humble beginnings of his colossal corporation date back to 1923 when Walt arrived in California to peddle one of the cartoons he had made. Although the cartoon was not an initial success, Walt did not give up. He started working with his brother, Roy, in his uncle's garage. Success did not come quickly to the Disney brothers, but Walt's faith in him¬ self and others helped him to succeed. Mickey Mouse was created in 1928. Mickey made his screen debut in the world's first fully synchronized sound cartoon, Steamboat Willie. In the midst of the Great Depression of the 1930s, Disney took great risk and invested a then- unheard-of amount of $1.5 million to produce the first full-length animated musical feature, Snow White and the Seven Dwarfs. Disney began television production in 1954 and was among the first to present full-color pro¬ gramming with his Wonderful World of Color in 1961. Disney opened the first of many theme parks in 1955. The Disney Corporation continues with innovation and success today. Why do you think Walt Disney was a successful entrepreneur? Think Critically Do you think success comes quickly for most entrepreneurs? What do you think Walt Disney's first busi¬ ness plan included as his vision for the company? 3.1 Why a Business Plan Is Important 67 greene_0538446145_ch03, 1/17/8, 14:33, page: 68 extending credit to your company. Stan presented his business plan when he visited the local office supply company. With it, he con¬ vinced the company to sell him a computer system on credit. 4. A business plan can serve as a tool for managing your business. Once your business is up and running, you can use the business plan in your decision making. Stan Meyer regularly uses his busi¬ ness plan to help him manage his company, Designs for You. Stan’s plan laid out his vision of how the company would grow over time. By following the strategies in his plan, he has increased sales by offering innovative designs and reaching new clients. Checkpoint Why is a business plan important to an entrepreneur? 31 Assessment THINK ABOUT IT 1. Why do you think the quality of the business plan is so critical to an entrepreneur's success? 2. Melinda Rosati wants to purchase her uncle's barber shop. Because it is an ongoing business, Melinda doesn't think she needs to write a business plan. Do you agree or disagree with Melinda's opinion? Why or why not? 3. Putting your business plan in writing helps you communicate your ideas to others. Do you think discussing your business plan out loud in a meeting can also help get your ideas across? Why or why not? MAKE ACADEMIC CONNECTIONS 4. MANAGEMENT Andre Kitaevich uses the business plan he wrote to help him run day-to-day operations in his jewelry store. On what specific issues might Andre consult his plan? 5. COMMUNICATION You are starting a business in the home healthcare field. Write a paragraph explaining the idea behind the business. Be sure to spell out how you plan to market its services. TEAMWORK Working in a team, choose a well-known business in operation today. Research the history of the business. Find out who started the busi¬ ness, why the person had the idea to start the business, and when the business was started. Prepare a presentation for your class about the history of the business. 68 Chapter 3 Develop a Business Plan greene_0538446145_ch03, 12/21/7, 16:47, page: 69 r What Goes into a Business Plan? List and describe the basic elements of a business plan. Describe how to pull a business plan together. pro forma financial statement cover letter statement of purpose executive summary V Focus on Small Business Create interest in your business plan Having always had a strong interest in electronics and computers, Andy wanted to start a business building customized computers for business and personal use. He knew that he would need about $5,000 to get his business started. He had $2,000 in savings that he could use, but he was going to have to get a loan from family, friends, or the bank for the remaining $3,000. He sat down one night and threw together a few facts about his business and handwrote a list of items that he needed to purchase. The cost of the items on the list totaled $1,950. He showed the information he had compiled to his parents, his grandparents, his aunt and uncle, and his friend. No one was inter¬ ested in making an investment in his business. Work as a Team Discuss why you think Andy could not interest anyone in making an investment in his business. How do you think a formal business plan would improve his chances a formal business plan is the best way to share of finding lenders? your business idea. Basic Elements of a Business Plan Every new business should have a business plan, but not all business plans are alike. The content of a business plan for a small, home- based, single-owner business will differ from a business plan for a large corporation with offices in many cities. But regardless of the business, all business plans serve the same basic purposes. They should also contain the same three basic components—introductory elements, the main body, and the appendix. The main body of the business plan will contain the bulk of the information about the business idea. It provides details on how the business will succeed. A lot of time and effort will go into writing the 3.2 What Goes into Business Plan? 69 Getty Images/PhotoDisc greene_0538446145_ch03, 12/21/7, 16:47, page: 70 What kinds of information do you think investors would want to know about a new day care center? main body of the plan, and it should be compiled before the other components in the business plan. It should be organ¬ ized into the following sections, or elements: 1. Introduction 4. Operations 2. Marketing 5. Concluding Statement 3. Financial Management Nora Ellis and Samantha Richards are qualified child¬ care providers who have worked together at a day care cen¬ ter for many years. Because of the high demand for quality day care services, Nora and Samantha know they are well positioned to meet this need. They decide to create a busi¬ ness plan for opening their own center. Introduction The introduction section of a business plan contains many important details about the proposed business idea. The follow¬ ing information should be included in the introduction section. • A detailed description of the business and its goals • The ownership of the business and the legal structure • The skills and experience you bring to the business • The advantages you and your business have over your competitors DETAILED DESCRIPTION Something inspired the idea for your busi¬ ness. Describing how you came up with your idea can help lenders, investors, and others understand what your business is about. Your business plan should also ou tli ne your short-term (three months to one year), medium-term (two to five years), and long-term (more than five years) goals. This section describes your vision for the company’s future. Stating goals will help provide you with direction and focus for your business activities. Nora and Samantha know their short- and medium-term goals. In the first year of business, they want to get financing to lease or buy a facility, equip the facility, and staff it. By their third year of business, they want to invest in more equipment and expand their facility. They have not yet thought through what their objectives are for the long term. Writing a business plan will force them to think about future plans. OWNERSHIP AND LEGAL STRUCTURE In your business, you should have a section detailing your form of ownership. Will it be a sole proprie¬ torship (one owner), a partnership (two or more owners), or a corpora¬ tion (many owners that hold shares of stock in the business)? Provide information relevant to your form of business, such as who your partners are or how many shareholders you have. This section of the business plan is important because each legal form of business has an effect on how the business works and makes profits. 70 Chapter 3 Develop a Business Plan greene_0538446145_ch03, 12/21/7, 16:47, page: 71 SKILLS AND EXPERIENCE A written summary of your experience is an essential part of your business plan. This summary should empha¬ size all experience you have that relates to the business, including paid work experience, volunteer experience, and any hobbies you have that relate to your proposed business. The skills and experience of any managers or professional employees who will be hired will also be relevant. Nora and Samantha have Master’s degrees in early childhood education. Together, they have more than 35 years of experience in day care, including 15 years in management. To show that they are well qualified to run a center, they include copies of their resumes and letters of reference from satisfied parents. ADVANTAGES You should list your company’s advantages over the competition. These advantages may include the following: • Performance • Price • Quality • Promotion • Reliability • Public image or reputation • Distribution Marketing The marketing section of your business plan should describe the products and/or services you will offer, the market, the industry, and your location. Developing a marketing plan will be examined in more detail in Chapter 5. PRODUCTS/SERVICES Describe your products and services and explain how they differ from those already on the market. Highlight any unique features, and explain the benefits customers will receive by purchasing from your business. MARKET You will explain whom your prospective customers are, how large the market is for your product or service, and how you plan to enter that market. You should also explain how you plan to deal with competition. INDUSTRY You should describe the industry in which you will oper¬ ate. To find this information, you will need to perform research. Things you should include in this section are as follows: • External factors affecting your business, such as high competition or a lack of certain suppliers • Growth potential of the industry, including growth forecasts • Economic trends of the industry • Technology trends that may affect the industry LOCATION Describe the location of your business. Lenders and investors want to know exactly where your business will be, because the location of a business is often a critical factor to its success. 3.2 What Goes into Business Plan? 71 greene_0538446145_ch03, 1/15/8, 23:18, page: 72 Writing the marketing section of the business plan is easy for Nora and Samantha, because they have a clear idea of what they want to do. Their prospective customers are the parents of the 1,000 to 1,500 children between the ages of two and five who live in their area. Nora and Samantha determine that 90 percent of the fa mili es would be able to afford their center. They will advertise in local news¬ papers and send out fliers to families in their target market. When providing information on the industry in which they will operate, they include population data for their area. This information shows that demand for their service could grow over time. Nora and Samantha describe their plan to start the business in a prime location, in the heart of a suburb where most families have young children and both parents work outside the home. Financial Management The financial section of your business plan will help determine your financial needs. It forces you to look at financial risks and the costs and expenses of running your business. It consists of three elements. WHAT WENT WRONG * Do Market Research While working as a salesperson for a custom exhibit display company, Leo Hunt found a unique product not currently being marketed in the United States. It was a lightweight, porta¬ ble, full-color display that could be set up and dismantled quickly. A company in Sweden was the manufacturer of this display. Leo thought it was ideal for trade shows and conventions. Leo decided to become a distributor of the special displays. He quickly prepared a business plan focusing on the unique features of the product and the fact that there was no competition in the United States for the product. He estimated that he could generate over 5,000 sales in the first quarter of the year. He did very little research and assumed that everyone who exhibited at a trade show would be part of his target market. He placed a large order with the manufacturer and was ready to go! Within three months, Leo had taken only 250 orders for the product, had spent 95 percent of his startup capital, and found that many exhibitors had no need for his product. After six months, Leo had bills piling up, fewer than 100 orders, an overdrawn checking account, and some very unhappy employees. Leo decided it was best for him to close his business. Think Critically 1. What mistakes did Leo make when prepar¬ ing his business plan? 2. Do you think Leo should have ordered dis¬ plays from the manufacturer before he had orders from customers? 3. Are there steps Leo could have taken to try to save his business? Market research is critical to the success of a business. 72 Chapter 3 Develop a Business Plan greene_0538446145_ch03, 12/21/7, 16:47, page: 73 1. Identification of Risks Prospective lenders and investors will want to know what risks your business faces and how you plan to deal with them. Do not be afraid to list potential problems. Lend¬ ers know that every business faces risks. They will be reassured to see that you have clearly thought through the potential problems and have a plan for dealing with them. Risks typically faced by new businesses include competitors cutting prices, costs exceeding projections, and demand for your product or service declining. 2. Financial Statements A new business must include projected financial statements in its business plan. An existing business must include current as well as projected statements. A financial statement based on projected revenues and expenses is called a pro forma financial statement. 3. Funding Request and Return on Investment You must indicate how much you need to borrow and how you plan to use the money. You should give investors an idea of how much money they could expect to earn on their investment in your business. You should state how much money you are personally investing and provide a personal financial statement. Nora and Samantha have included pro forma financial statements for their business, which show how much money and profit they expect to earn. They require $140,000 to start their business. Together they are contributing $85,000 of their own money. This means they need a bank to loan them $55,000. They include this information in their plan as well. Operations The operation of your company is critical to its success. In this section of your business plan, you should explain how the business will be managed on a day-to-day basis and discuss hiring and personnel pro¬ cedures. You should also include information on insurance and lease or rental agreements. Describe the equipment that will be necessary for production of your products or services and how the products or services will be produced and delivered. As part of the operations section of their business plan, Nora and Samantha describe hiring plans to ensure their day care center is well- staffed. They also devote a section to health and safety and outline plans for dealing with emergencies. Concluding Statement In this section, you should summarize the goals and objectives you have for your business. You should also emphasize your commitment to the success of the business. Checkpoint List the elements of the main body of a business plan and explain why each one is important. 3.2 What Goes into a Business Plan? 73 greene_0538446145_ch03, 12/21/7, 16:47, page: 74 Complete the Business Plan After you have completed the main body of your business plan, you will need to focus your efforts on the other components—the intro¬ ductory elements and the appendix. Then you must pull all the com¬ ponents together into a well-organized, attractive document. Introductory Elements Every business plan should begin with a cover letter, a title page, a table of contents, a statement of purpose, and an executive summary. These elements help set the tone for the body of your business plan. COVER LETTER A letter that introduces and explains an accompany¬ ing document or set of documents is called a cover letter. The cover letter for your business plan should include your name, the name of your business, and your address and telephone number. It should briefly describe your business and its potential for success. It also needs to tell the reader how much capital you need. Nora and Samantha prepare the cover letter shown below. THE MT. W ASHINGTON C/ h i l <§L r c ri : ’ s CENTER 5813 NORTH AVENUE, BALTIMORE, MARYLAND 21205 (410) 555-4445 April 11, 20- Ms. Jane Stewart Vice President First National Bank E. 35th Street Baltimore, Maryland 21212 Dear Ms. Stewart Enclosed please find a copy of the business plan for the Mt. Washington Children’s Center, a proposed new day care center in northwest Baltimore that will serve approximately 50 young children. We believe that the acute shortage of high-quality day care in this part of the city will allow us to generate significant revenues for the center and that we will be earning a profit within a year of opening. To establish the kind of center we envision, we plan to put up $85,000 of our own capital. We will need additional financing of $55,000. As you will note from our pro forma financial statements, we plan to repay the loan within five years. Please let us know if there is any additional information you would like to receive. We look forward to hearing from you. Sincerely yours 'T'l&'Ut RicUfAV'AS Nora Ellis Samantha Richards 74 Chapter 3 Develop a Business Plan greene_0538446145_ch03, 12/21/7, 16:47, page: 75 TITLE PAGE Your business plan should have a tide page that indicates the name of your company, the date, the owner of the company, the tide of the owner, and the address and phone number of the company. TABLE OF CONTENTS A table of contents is a listing of the material included in a publication. It shows the reader what each page covers. It is similar to a table of contents in a textbook. It is important that your table of contents is accurate, so make sure the sections are listed in the proper order and the given page numbers are correct. STATEMENT OF PURPOSE A brief explanation of why you are asking for a loan and what you plan to do with the money is called a statement of purpose. It should be no more than one or two paragraphs. Nora and Samantha write the statement of purpose shown here. STATEMENT OF PURPOSE The Mt. Washington Children’s Center will operate as a private day care center serving approximately 50 children in northwest Baltimore. The Center will offer excellent supervision in a clean, safe, and intellectually stimulating environment. The project is requesting $55,000 in financing. This money will be used to: • rent and remodel 4,000 square feet of indoor space • prepare 18,000 square feet of outdoor space for use as a playground • purchase equipment such as swings, jungle gyms, sand¬ boxes, and supplies • pay salaries of eight employees until sufficient cash flow is generated to allow operating expenses to be covered EXECUTIVE SUMMARY Before get¬ ting into the detail of the main body of the business plan, readers will want to read an executive summary. An executive summary is a short restatement of the report. It should capture the interest of its readers and make them want to read more. If the executive summary is unconvinc¬ ing, a lender may decide not to read your entire business plan. This makes a strong executive summary critical to the success of your business. The executive summary should be no longer than one or two pages, and it should be written in a clear, simple style. Your executive sum¬ mary should do all of the following: • Describe your business concept and communicate what is unique about your idea • Include your projections for sales, costs, and profits • Identify your needs (inventory, land, building, equipment, etc.) • State the amount you are inter¬ ested in borrowing EXECUTIVE SUMMARY The Mt. Washington Children’s Center (MWCC) will be established as a partnership in Baltimore, Maryland. It will be owned and operated by Nora Ellis and Samantha Richards, highly respected child-care professionals with more than 35 years of experience in the field. Three experienced teachers and three teacher aides will supervise approximately 50 boys and girls between the ages of 2 and 5. In addition, a receptionist/bookkeeper and a cleaning/maintenance person will be hired. MWCC is being established in response to the shortage of high-quality child care in northwest Baltimore. Only two small day care centers now serve a population of 45,000 upper-middle- class professionals. In 75 percent of these households, both parents work outside the home. The accessible location of the Center will make it an extremely attractive day care option for parents in the area. When completed, its facilities, which will include four large outdoor play structures and eight personal computers, will repre¬ sent state-of-the-art day care. Its staff will comprise the finest day¬ care professionals in Baltimore, led by a management team that is recognized throughout the region. Market research indicates that the MWCC could expect to fill 90 to 100 percent of its student positions immediately upon opening and that the center would be profitable as early as the third year of operation. Expansion could begin in the third year. To finance the startup of the company, its owners are seeking $55,000 in financing, which they would expect to repay within five years. 3.2 What Goes into a Business Plan? 75 greene_0538446145_ch03, 12/21/7, 16:47, page: 76 Why do you think lenders and investors read the executive summary first? Although the executive summary appears before the body of the business plan, it should be written after the business plan has been completed. To write the executive summary, go through the business plan and find the most important and persuasive points you have made. Then draft an oudine of an executive summary based on these points. Once you have created a draft of your executive summary, ask people who do and do not understand your business to read the sum¬ mary. If readers do not come away with a clear sense of what you plan to do and why you will succeed in doing it, your executive sum¬ mary needs more work. Nora and Samantha’s executive summary is shown on the previous page. Appendix The appendix to the business plan includes supporting documents that provide additional information and back up statements made in the body of the report. To help you determine what supporting docu¬ ments to include, you should ask yourself what you would want to know about a business before you would lend it money. Documents that might be included in the appendix include the following: • Tax returns of the business owner for the past three years • Personal financial statement of the owner • Copy of proposed lease or purchase agreement for the building space • Copy of licenses and other legal documents • Copy of resume of the owner • Letters of recommendation • Copies of letters of intent from suppliers • Copies of any large sales contracts you have already negotiated 76 Chapter 3 Develop a Business Plan greene_0538446145_ch03, 1/17/8, 14:34, page: 77 Put It All Together Your business plan is your best opportunity to let other people know what you want to do with your company. It gives you the chance to convince them that your idea is sound and that you have the talent and resources to make your idea a successful business venture. To make the best of this opportunity, you will want to create an attrac¬ tive document that is neat, well organized, and inviting to read. Handwritten business plans are not acceptable. All business plans must be word processed and printed on standard-sized white paper. In addition, your business plan should follow a standard format con¬ taining the introductory elements, the main body, and the appendix. Checkpoint Why should you include supporting documents in your business plan? 5.2 Assessment THINK ABOUT IT 1. Why is it possible to write an executive summary only after you have written the main body of your business plan? Why might the executive summary be more important than the body of the plan? 2. Why do you think it is important to include management and staffing issues in the operations section of your business plan? 3. A group of investors is planning to open a new amusement park. What supporting documents will need to be included in their business plan? MAKE ACADEMIC CONNECTIONS 4. MATH You plan to start a corporation. You have $67,500 in sav¬ ings, but need $165,000 total to begin your business. How much money will you need from investors? What will be your percent¬ age of ownership? If you have four outside investors, how much will each investor need to invest? What percentage will each investor own? 5. COMMUNICATION Write short-, medium-, and long-term goals for an entrepreneur starting a new ice cream parlor. TEAMWORK Working with team members, choose a business in your local commu¬ nity. Make a list of the items you think this business would include in each component of its business plan—introductory elements, main body, and appendix. 3.2 What Goes into a Business Plan? 77 # greene_0538446145_ch03, 1/17/8, 14:34, page: 78 Where do I start? Michelle always loved working with children. All of the parents in her neighborhood wanted her to babysit for them. She was always thinking up fun games to play and creative activities for the children to do. She wondered if she could do even more with these activities to earn money for college. She talked with her mother and some of the parents and came up with an idea. She would run an ice cream parlor where she could host parties and let the children make their own ice cream sundaes, play games, and watch movies. Once Michelle came up with a business idea, she knew it was time to make a detailed plan. However, she did not really know how to get started on a plan. Work as a Team What kind of information do you think Michelle needs to gather? Where might Michelle find this information and whom might she talk with to learn more about starting a business? Your interests and hobbies can lead to a new business. Research the Business Plan Your business plan needs to convince readers that you have come up with a practical business idea. To do this, you must include informa¬ tion and data from objective sources to show that your idea is founded on solid evidence. Researching and writing a business plan takes time. In fact, most entrepreneurs spend 50 to 100 hours devel¬ oping their business plans. The process requires patience, research, thought, and a great deal of writing and editing. Pulling together the information you need for your business plan involves researching your business, from leasing space or equipment to what you will charge for your product or service to dealing with com¬ petitors. Researching will teach you a great deal about running a busi¬ ness and may provide you with specific ideas for starting a company. 78 Chapter 3 Develop a Business Plan PhotoDisc/Getty Images greene_0538446145_ch03, 12/21/7, 16:47, page: 79 Community, Government, and Professional Resources When writing a business plan, you will likely need to seek out advice from others. People from many organizations can help you with your business plan. Available resources include the SBA, the SBDC, SCORE, your local chamber of commerce, trade associations, and professional business consultants. THE SBA The U.S. Small Business Administration (SBA) is an independent agency of the federal government that was created to help Americans start, build, and grow businesses. The SBA also pro¬ vides aid, counsel, and assistance to protect the interests of small busi¬ ness concerns, to preserve free competitive enterprise, and to maintain and strengthen the overall economy of our nation. did you KNOW? Since 1964, 7.5 million entrepreneurs have been counseled by 5 COR e or attended SCORE workshops. THE SBDC The Office of Small Business Development Centers (SBDC) provides management assistance to current and prospective small business owners. Counselors from the SBDC provide free one- on-one assistance in developing a business plan. They also provide inex¬ pensive workshops on topics that may help you develop your plan. SBDCs have many resources in one place to assist individuals and small businesses. SBDCs were formed as a cooperative effort of the private sector, the educational community, and federal, state, and local govern¬ ments. They enhance economic development by providing small busi¬ nesses with training and technical assistance. Assistance from an SBDC is available to anyone who cannot afford the services of a private con¬ sultant and who is interested in beginning a small business for the first time or improving or expanding an existing small business. SCORE Another source of valuable assistance is SCORE. The Service Corps of Retired Executives (SCORE) is made up of more than 10,500 retired executives who volunteer their time to provide entrepre¬ neurs with real-world advice and know-how. They provide free confi¬ dential advice that could be helpful to you as you prepare your business plan. You can set up a meeting with a SCORE volunteer, or you can work with a SCORE volunteer over the Internet. SCORE also offers workshops that are a valuable way to learn more about doing business and a way to net¬ work with other business professionals who can help you succeed. The topics of the workshops focus on important small business issues, ranging from busi¬ ness planning and marketing to Web- based retailing. The SCORE counselors represent every business area. Some have worked as executives at Fortune 500 companies, while others were small business owners themselves. SCORE can provide assistance for you for just a few sessions or a number of years, based on your needs. Why is it a good idea to seek the help and advice of others when writing a business plan? 9 3.3 How to Create an Effective Business Plan 79 Digital Vision greene_0538446145_ch03, 12/21/7, 16:47, page: 80 CHAMBER OF COMMERCE In many communities, the local Chamber of Commerce offers assistance and infor¬ mation to entrepreneurs. It can provide information on trends affecting local businesses, local resources, and zoning and licensing information. TRADE ASSOCIATIONS Organizations made up of professionals in a specific industry are called trade associations. They exist to provide information, edu¬ cation, and networking opportunities to individuals in their industry. These associations can be valuable sources of information to entrepreneurs. PROFESSIONAL CONSULTANTS Some entrepreneurs hire experts to help them. Professional business consultants can be found in directories available in your library or on the Internet. FINANCIAL INSTITUTIONS Many entrepreneurs are not fa mi liar with the financial aspect of starting and running a business. When writing the financial section of your business plan, it may be beneficial to talk with a banker and an accountant. They can help answer your ques¬ tions about loans and financial statements. Be your own boss You want to start a plant nursery. You have taken horticulture classes in school and want to find a way to turn your acquired knowledge and love of plants into a profitable business. You start working on your business plan and realize that you need help. You decide to contact the Service Corps of Retired Executives (SCORE) for assistance. Prepare for your first meeting with the SCORE volunteer. Write a brief summary explain¬ ing your business idea, why you want to start the business, and what you hope to accomplish by starting the business. Compile a list of questions you want to ask the SCORE volunteer. Print Resources Information for your business plan can come from many print sources. Your public library will have many books on entrepreneurship that may provide you with valuable information on running your own business. In addition, books on marketing, financing, hiring and managing a staff, purchasing a business, and operating a franchise can be helpful. The library will also have books devoted specifically to writing a busi¬ ness plan that include sample business plans. Magazines may also prove helpful—especially magazines devoted to small business ownership and to the industry in which you will be competing. Ask your librarian to help you find magazines that contain information that may be relevant to your business plan. Government documents, including publications issued by the Small Business Administration (SBA) and other federal agencies, may provide you with useful information. The SBA district office nearest you will have many publications that can help you complete your business plan. Online Resources Much of the information you find in print resources is also available on the Internet. The SBA, SBDC, and SCORE web sites contain much of the same information that is provided in print. Many maga¬ zine articles that deal with entrepreneurial topics can be found o nl ine. 80 Chapter 3 Develop a Business Plan greene_0538446145_ch03, 1/21/8, 19:33, page: 81 In addition, there are many sites specifically for entrepreneurs and small businesses that may give you detailed information. Internet search engines can help you locate resources. Nora and Samantha, who are starting their own day care business, began research for their business plan by reading books from the library. They also read information on day care facilities that they received from the Small Business Administration. They found many samples of business plans on the Internet that they were able to adapt to meet their needs. Once they had an outline prepared for their business plan, they met with a counselor from their local Small Busi¬ ness Development Center to get feedback and advice for improving their business plan. The number of hours spent on research helped Nora and Samantha prepare an effective business plan. NH i^kmark Plenty of teenagers have started their own businesses. The most successful teen entre¬ preneurs have prepared business plans just like adults. Access school.cengage.com/ entrepreneur/ideas and click on the link for Chapter 3. Read the article, "Teen Entrepre¬ neurs Vie for Seed Money." What did the teen entrepreneurs include in their business plans? What do you think would be the most difficult part of a business plan to develop? Why? school.cengage.com/entrepreneur/ideas © Checkpoint What are some of the resources that are available to help you develop your business plan? Mistakes in Business Planning Many entrepreneurs will not take the necessary time to carefully plan their business and prepare their business plan. This can contribute to difficulties in getting their business started as well as business failure. To create an effective business plan, avoid making the following common mistakes: 1. Unrealistic Financial Projections Many investors will go straight to the financial section of the business plan, so it is very impor¬ tant for the projections in this section to be realistic. Projections should be based on solid evidence for the potential growth of the company. 2. An Undefined Target Market You must clearly define your mar¬ ket and give a clear picture of your potential customers. Clearly explain why these customers will buy your product. Be realistic about your market and do not assume that everyone will want to buy your product or service. 3. Poor Research Many potential business owners are anxious to get their business operating and do not spend the time necessary to do good research. Use up-to-date research information, and verily the facts and figures in your business plan. 3.3 How to Create an Effective Business Plan 81 greene_0538446145_ch03, 1/17/8, 14:34, page: 82 4. Ignored Competition Do not overlook the competition and do not focus only on what the competition has done wrong. Investors want to see who your competition is and how you plan to compete in the market. Outline how you will differentiate yourself from the competition. 5. Inconsistencies in the Business Plan It is important to review your final business plan and be sure that your plan is well written and formatted in an attractive style. Be sure that information pro¬ vided is consistent from section to section. It is a good idea to have an objective person review your final business plan before you show it to investors. Checkpoint List some common mistakes that are made in business planning. 3.3 Assessment THINK ABOUT IT 1. When writing a business plan, it is important to consider all of the resources available to help you through this process. Using the Activity CD, open the activity "Business Plan Resources." Print a copy and complete the activity. 2. Some elements of the business plan require outside source infor¬ mation. If your business manufactures cardboard boxes, what specific sources might you need to consult? 3. Why is it important for financial projections to be as realistic and as accurate as possible when writing your business plan? MAKE ACADEMIC CONNECTIONS 4. LANGUAGE ARTS Locate an article about entrepreneurship in the library or on the Internet. Write two paragraphs summariz¬ ing the main points of the article. 5. MATH If you intend to borrow 20 percent of the $174,500 you need to start a business, how much of your own funds are you investing? Working in a team, review a business plan that you obtained from the Internet or from a company in your community. Using the Activ¬ ity CD, open the activity "Business Plan Review." Print a copy and complete the activity by listing the features that you think are effec¬ tive and the features that need improvement. Make suggestions for improving the business plan. 82 Chapter 3 Develop a Business Plan greene_0538446145_ch03, 1/17/8, 14:34, page: 83 Sharpen Your Entrepreneurial Skills Using Technology Tools There are many software programs available for entrepreneurs to use when preparing a business plan. A recent Internet search showed over 345,000 matches for “business plan software.” Many entrepre¬ neurs use these programs because they provide an easy-to-use tem¬ plate. By plugging your specific information into the template, you get a professional-looking finished report. If you decide to use a software program to create your business plan, be sure it includes all of the essential elements. It is a good idea to evaluate several differ¬ ent programs before deciding which one to use. Your choice should best match the information you want to include and your desired style. And, of course, it should be one that you can use without difficulty. TRY IT OUT Using the Internet and advertisements from magazines and newspa¬ pers, find the names of at least three business plan software programs. Make a list of the features of each program and its cost. Evaluate the programs and decide which one you would select if you wanted to use a software program to prepare your business plan. Justify your decision. Sharpen Your Entrepreneurial Skills 83 greene_0538446145_ch03, 12/21/7, 16:47, page: 84 Chapter 3 Assessment SUMMARY 3.1 Why a Business Plan Is Important 1. A business plan is a written document that describes all the steps necessary for opening and operating a successful business. It explains the idea behind your business and spells out how your product or service will be produced and sold. It sets specific objectives and describes how your business will achieve them. It describes the backgrounds and experiences of the people who will be running the business. 2. Writing a business plan is important because it makes you think about all aspects of your business, helps you secure financing for your business, helps you communicate your ideas to others, and can serve as a tool for managing your business. 3.2 What Goes into a Business Plan? 3. The main body of the business plan should include the following sections: Introduction, Marketing, Financial Management, Opera¬ tions, and Concluding Statement. 4. To complete the business plan, you need to prepare introductory elements consisting of the cover letter, tide page, table of con¬ tents, statement of purpose, and executive summary. The execu¬ tive summary is the most important element and should not be written until the main body of the plan is complete. You also need to compile an appendix, which includes supporting documents that provide more information to the readers of the plan. 3.3 How to Create an Effective Business Plan 5. To show you have a practical business idea, you must include information and data from objective sources. People from many organizations—including the SBA, the SBDC, SCORE, your local chamber of commerce, trade associations, professional business consultants, and financial institutions—can help you with your business plan. Print resources can be obtained at the public library and through Government agencies. An extensive amount of infor¬ mation is also available on the Internet. 6. Common mistakes made in business planning include unrealistic financial projections, an undefined target market, poor research, ignored competition, and inconsistencies in the business plan. What do you fcnow now? Read Ideas in Action on page 63 again. Then answer the questions a second time. How have your responses changed? 84 Chapter 3 Develop a Business Plan greene_0538446145_ch03, 12/21/7, 16:47, page: 85 VOCABULARY BUILDER Match each statement with the term that best defines it. Some terms may not be used. 1. A written document that describes all the steps necessary for open¬ ing and operating a successful business 2. A financial statement based on projected revenues and expenses 3. A letter that introduces and explains an accompanying document or set of documents 4. A short restatement of a report 5. A brief explanation of why you are asking for a loan and what you plan to do with the money 6. An independent agency of the federal government created to help Americans start, build, and grow businesses 7. Organizations made up of professionals in a specific industry 8. Organization made up of more than 10,500 retired executives who volunteer their time to provide entrepreneurs with real-world advice and know-how REVIEW YOUR KNOWLEDGE business plan cover letter executive summary pro forma financial statement Service Corps of Retired Executives (SCORE) Small Business Administration (SBA) Small Business Development Centers (SBDC) statement of purpose trade associations 9. A business plan is not intended for a. your competition c. your bank b. potential investors d. any of the above 10. Purposes of a business plan include which of the following? a. it explains your idea for a product or service b. it sets specific objectives and describes how they will be achieved c. it describes the backgrounds and experiences of the people who will run the business d. all of the above 11. A business plan is important for a new business for all of the fol¬ lowing reasons except a. it makes you think about all aspects of your business b. it can help you communicate your ideas to others c. it guarantees you will get financing for your business d. it can serve as a tool for managing your business 12. The main body of a business plan includes which of the following elements? a. executive summary c. financial management b. statement of purpose d. supporting documents 13. Which of the following is not a true statement regarding risks? a. Identifying the possible risks your business faces will alarm lend¬ ers and investors and cause them to withhold funds. b. Potential investors and lenders want to know what risks your business faces and how you plan to deal with them. c. Lenders will appreciate the fact that you know what risks you face and have a plan for dealing with them. d. Lenders know that every business faces risks. Chapter 3 Assessment 85 greene_0538446145_ch03, 1/17/8, 19:18, page: 86 14. The purpose of including supporting documents in a business plan is to a. make the plan lengthy b. provide additional information c. give the readers more information than they might need d. explain your business idea 15. Writing a business plan a. is a quick and easy process b. is quick but difficult c. requires patience, research, thought, and time d. none of the above 16. Which of the following organizations can provide assistance when writing your business plan? a. bank b. Chamber of Commerce c. Small Business Development Center d. all of the above 17. Which of the following describes why you are asking for a loan and what you plan to do with the money? a. cover letter c. executive summary b. statement of purpose d. title page 18. Mistakes to avoid when preparing your business plan include all except a. providing unrealistic financial projections b. wasting time on research c. ignoring the competition d. failing to define the target market APPLY WHAT YOU LEARNED 19. Obtain a sample business plan. Review the business plan and dis¬ cuss whether or not the five common mistakes in writing a busi¬ ness plan were avoided. Provide reasons to support your decisions. 20. You plan to open a skateboarding park. What kind of research should you do? What sources will you consult for your research? MAKE ACADEMIC CONNECTIONS 21. COMMUNICATION You are preparing a business plan for a self-storage facility (U-Store-It). You are requesting a $75,000 loan to buy the property and storage lockers. Write the cover letter to the bank loan officer and a statement of purpose. 22. RESEARCH Choose a business with which you are familiar. Using the Activity CD, open the activity “Trade Association Research.” Print a copy and complete the activity by using the Internet or the library to research trade associations that could provide useful information to the business. 23. COMMUNICATION An entrepreneur’s resume is an important supporting document for a business plan. It tells the reader about the entrepreneur’s qualifications for running the business. Research resume formats and choose one that you think would be suitable for you. Prepare a resume outlining your experience for running a business. 86 Chapter 3 Develop a Business Plan greene_0538446145_ch03, 12/21/7, 16:47, page: 87 You have a great idea for a business you want to start. Because you are going to school full time and work nights and weekends, you really do not have the necessary time to spend preparing a business plan. However, you know you need a business plan to help you secure a loan to get the business started. While searching the Inter¬ net, you find a business plan for a company that is very similar to the one you want to start. It would save you time if you copied this plan, changed the business name, and added your personal informa¬ tion. What would you do? What problems might this cause? BUILD YOUR Business Plan Project This activity will help you get started on the development of a busi¬ ness plan for your business idea. Describe how you came up with the idea for your business project. Explain why there is a market/need for your product or service. Inter¬ view five or more people about your product or service. How many of them would buy it? Did any of them make suggestions? Prepare a one-page report that fully describes your product or service and how it differs from what is currently available. List your short-, medium-, and long-term goals. What steps do you need to take to achieve each of these goals? Do you foresee any obstacles in attaining them? If so, describe them and explain how you will overcome them? Contact the SBA, the SBDC, or SCORE and ask for information about your type of business. Use this information to write a paragraph about the industry in which you will be competing. What are the eco¬ nomic, technological, or growth trends in this industry? Is the location of your business a critical factor in its success? Why or why not? Begin the financial section of your business plan by writing a report that identifies the risks your business faces. Explain how you will over¬ come each risk. Provide examples from magazine articles about busi¬ nesspeople in your field who have succeeded when faced with similar problems. Present all of the information you have compiled to your teacher or representatives from your local business community. Explain why you made the choices you did. Be prepared to defend your choices. Chapter 3 Assessment 87 greene_0538446145_ch03, 1/17/8, 19:17, page: 88 Planning a Career in Landscape Architecture "11/ TV e got a great deal on out¬ house. Not only was the lawn in chaos, but there was also a prob¬ lem with storm water run-off. My stepdad hired a Landscape Archi¬ tect to reroute the storm water to comply with municipal regulations. Now our yard looks warm, healthy, and inviting.” Who balances the environ¬ mental, regulatory, and aesthetic outdoor needs of new develop¬ ments? Who figures out how to make the external part of com¬ mercial properties look more welcoming? Landscape Architects help municipalities, businesses, and resi¬ dential locations meet ecological, land use, regulatory, and aesthetic needs of outdoor areas. EMPLOYMENT OUTLOOK • Faster than average job growth is anticipated. • About one-quarter of Landscape Architects are self-employed. • New consu-uction and an increasing need to meet environ¬ mental regulations when plan¬ ning exteriors will increase demand for qualified employees. JOB TITLES • Landscape Consultant • Open Space Planner • Residential Landscape Architect • Project Designer • Historical Landscape Architect NEEDED SKILLS • A Bachelor’s degree is recom¬ mended; some positions require a Master’s degree. • Most states require licensing based on the Landscape Archi¬ tect Registration Examination. ntecture & Construction • Some states require state licens¬ ing, which focuses on state- specific environmental laws. What's it like to work in Land¬ scape Architecture? Givon, a self- employed Landscape Architecture Consultant, has just gotten off the phone with a client. The 300-home community planned by the client requires a community park, beautified entrances, attractive boulevards, and compliance with city zoning regulations. To develop a bid for this project, Givon needs to meet with the developer’s architects, visit the site, and meet with city officials regarding legal requirements. The final bid will include a phase-by- phase completion timeline and sketches reflecting the anticipated appearance of the neighborhood. After lunch, Givon meets with his city’s urban renewal team. The city is renovating a blighted residen¬ tial area. Givon’s input is needed to develop an attractive landscaping plan that will optimize the use of a small amount of land set aside for landscaping. After dinner, Givon prepares for his morning meeting with a retail developer. Givon’s recommenda¬ tions for the retail parking lot design include planting many trees and shrubs throughout the parking lot. This greenery not only improves the aesthetics of the parking lot, but it also helps lessen “heat buildup” that is a common problem during hot summer weather. What about you? Would you like to help develop landscaping plans that have a long-term beauti¬ fying effect on communities and businesses? 88 Chapter 3 Develop a Business Plan greene_0538446145_ch03, 12/21/7, 16:47, page: 89 iffective speaking skills are essential to success for entrepreneurs. As an entrepreneur you will be speaking to investors, customers, and suppliers. The Prepared Speech event lets you demonstrate your com¬ munication skills in securing, arranging, organizing, and presenting information orally. Contestants should select a topic related to business, entrepre¬ neurship, or Business Professionals of America and develop an oral presentation of no less than five and no more than seven minutes. This event emphasizes a scholarly approach to securing information and places emphasis on content and research. Facts and working data may be secured from any source. State and federal copyright laws must be followed in the preparation of the speech. Each contestant must do his or her own work in researching and preparing the speech. The contestant should consider the purpose of the speech, such as to inform, to educate, to motivate, or to persuade. Contestants should also keep in mind the three basic elements of an effective speech and presentation. These three basic elements include the introduction, the body, and the conclusion. Refer to the Sharpen Tour Entrepreneurial Skills feature in Chapter 2 for more detailed information about each of these three elements. During the speech, the contestant should be enthusiastic and use proper grammar. The speech will be given in front of a panel of judges and a time¬ keeper. Contestants will be given one minute to set up for their speech. A flip chart, posters, and/or props may be used during the speech. PERFORMANCE INDICATORS EVALUATED • Demonstrate effective communication skills. • Demonstrate skills in developing a speech using the three basic elements. • Utilize non-verbal gestures as needed. • Apply speaking techniques using appropriate tempo and pitch. • Secure facts and data from multiple sources, emphasizing research skills. Go to the BPA web site for more detailed information. Think Critically 1. How can good speaking skills benefit an entrepreneur? 2. Why is research important when preparing a speech? 3. Why should you follow copyright laws when preparing a speech? 4. How do the three elements of a speech contribute to its effectiveness? www.bpa.org Winning Edge 89 greene_0538446145_ch04, 12/21/7, 17:22, page: 90 Identify and Meet a Market Need school.cengage.com/entrepreneur/ideas 90 4.1 Identify Your Market 4.2 Research the Market 4.3 Know Your Competition greene_0538446145_ch04, 12/21/7, 17:22, page: 91 IDEAS !M ACTIOM Brian Hendricks, founder, Serving Customers' Needs B rian Hendricks was 17 years old when he started his first business. At that time, he was a student with a knack for building and fixing computers. The idea for his business came from his frustration with his slow, boring computer. So, he built his own com¬ puter and then began building computers for others. StartUpPc StartUpPC's focus is providing performance systems and quality service. Brian developed a computer program called E-Builder. With it, customers complete an electronic survey that is used to determine the best computer solution for their needs. E-Builder recommends compo¬ nents, software, and accessories with an explanation for each selection. It also provides the price and estimated building and shipping time. Brian observed the residents of his community spending 30 to 60 minutes taking their computers into local computer stores for repairs. They would then have to wait for days for their return along with a big repair bill. Brian decided to give customers another option. StartUpPC services computers in the homes and offices of the customers. No charge is made until the computer is repaired to the customer's satisfaction. The technicians are willing to walk customers through the repairs that they are making so the customers might be able to fix the problems them¬ selves should they occur again. Realizing how important computers are in the everyday lives of people, StartUpPC creates reliable and fast com¬ puters and also provides reliable and fast computer service. Brian also saw a need for quality web sites and founded VB Solu¬ tions, Inc. to address this need. VB Solutions develops and customizes web sites and message boards. It sets up advertising contracts and works with web site owners to improve their sites. The business has designed corporate ID kits, logos, and web sites for customers all over the world. Brian learned at a young age that "working for yourself is one of the best jobs available." He has identified a set of qualities that young entrepreneurs should possess, based on "The Five P's of Entrepreneur- ship." These include planning, persistence, patience, people, and profit. Brian does not believe in setting huge goals that require large invest¬ ments of money. His advice is to "start small and to just not give up." What do you fcnow? What customer need did Brian identify when he started StartUpPC? Why would StartUpPC be willing to show customers how to make their own repairs? What do you think about Brian's idea of starting small and not giving up? Freed Photography greene_0538446145_ch04, 1/17/8, 14:39, page: 92 Who is your customer? Roseanne and John had their own restaurant in Los Angeles, California, when their daughter was born. Deciding that they wanted a different lifestyle for their family, they began to think about relocating and start¬ ing a new restaurant in a small-town setting. They talked about the kind of restaurant they wanted to open and what type of customer they thought would eat at their restaurant. They decided that they would target middle- to upper-middle-class families who had a love for good food, were willing to drive up to 30 miles to get it, and were willing to pay $10 to $15 per meal. Work as a Team Roseanne and John put a great amount of thought into the type of customer they wanted to attract before they began to look for a location. Do you think this was a good idea or a waste of time? Think about the type of customer you want to attract. Target Market Entrepreneurs with exciting new ideas are sometimes so focused on their products or services that they forget about the customer. Coming up with a good idea for a business is not enough to guarantee success. Customers are the people or organizations who buy the products and services companies offer. Before establishing your new enterprise, you will have to determine who your primary customers are and whether these customers will be willing to buy your product or service. Market research is the key to finding out this information. The customer is your most important asset. As an entrepreneur, you will need to estimate demand for your products or services by identifying your target customers. The target market includes the individuals or companies that are interested in a particular product or service and are willing and able to pay for it. Identifying your target market helps you reach the people who desire 92 Chapter 4 Identify and Meet a Market Need Getty Images/PhotoDisc greene_0538446145_ch04, 12/21/7, 17:22, page: 93 your products and services. Target customers are the customers you would most like to attract. A car dealer selling moderately priced minivans would target middle-class families with children. A car dealer that offers expensive sports cars might target single people with higher incomes. If you concentrate your selling efforts on a certain type of indi¬ vidual, you will be likely to give those individuals exacdy what they want. Identify Your Target Market To identify the target market for your product or service, you will need to answer the following questions: 1. Who are my customers: individuals or companies? 2. If my customers are individuals, how old are they? How much money do they earn? Where do they live? How do they spend their time and money? 3. If my customers are companies, what industries are they in? Where are those industries located? 4. What needs or wants will my product or service satisfy? 5. How many potential customers live in the area in which I want to operate? 6. Where do these potential customers currently buy the products or services I want to sell them? 7. What price are they willing to pay for my products or services? 8. What can I do for my customers that other companies are not already doing for them? As an entrepreneur, you should put yourself in your customers’ shoes before you start your business. Afterwards, you should think about your customers’ needs and viewpoints everyday. By continually evaluat¬ ing your market, you will be ready to respond to changes in commun¬ ities, consumer tastes and buying habits, and competitors’ offerings. Develop Your Reading Skills As you read this chapter, develop questions for each section that you can use as a study guide for the chapter. greene_0538446145_ch04, 1/15/8, 17:17, page: 94 Checkpoint What questions should you ask when identifying your target market? Market Segments Groups of customers within a large market who share common char¬ acteristics are known as market segments. Market research can be used by a business to identify market segments. Segmenting, or divid¬ ing your target market into several small groups, can help you develop a product or service that will meet specific customer needs and wants. The process of market segmentation is important because most products and services appeal only to a small portion of the population. The leisure services market is a large market that includes many seg¬ ments, such as outdoor adventurers, people who vacation frequendy, couples who eat at restaurants, and more. Targeting the entire leisure market would not make sense. You would never be able to meet the needs of the entire market. Even the restaurant segment of the leisure WHAT WENT WRONG > * Price War U-Corp was the first company in the computer industry to offer removable hard disk drives for personal computers. For years, U-Corp had a unique position in the industry and had little direct competition. Eventually, the company was making $300 million in annual revenue. U-Corp's first competition came from A-Corp, which offered a product similar in price and performance. A-Corp spent heavily on advertising and ran frequent reduced-price promotions. As a result, A-Corp took a large amount of business from U-Corp. U-Corp decided to try to take back the market it had lost to A-Corp and launched a multimillion- dollar marketing campaign aimed at its target market. The two companies went head to head, selling disk drives at lower and lower prices. However, consumers do not generally need to buy multiple hard drives because of their large storage capacity. Only one company could win, and it was A-Corp. In less than two years, U-Corp suffered losses, and A-Corp bought it out. Think Critically 1. What was U-Corp's major disadvantage in competing with A-Corp? 2. What did each company fail to realize about its customers? 3. How might the price war for removable hard drives have been avoided? td u © U-Corp should have considered other strategies before engaging in a price war. 94 Chapter 4 Identify and Meet a Market Need greene_0538446145_ch04, 12/21/7, 17:23, page: 95 services market has subsegments. Some people eat fast food on a regular basis, while others like a sit-down meal at a nice restaurant. There are people who like Italian food and others who prefer seafood or Chinese food. Businesses can make decisions based on the information gathered on market segments. However, if the data are not analyzed correcdy, the product may not meet the needs of the customers or the business might ignore a segment of the market that would be very interested in the product. Customer Profile A market segment is made up of people with com¬ mon characteristics. The more you learn about them, the better strategy you can develop for reaching them. A very useful part of analyzing your data is the creation of a customer profile. A customer profile is a description of the characteristics of the person or company that is likely to purchase a product or ser¬ vice. A customer profile can help you understand what you need to do to meet customer demand. Customers may be profiled based on many types of data, including demographics, psychographics, use- based data, and geographic data. SAMPLE CUSTOMER PROFILE FOR A SPORTING GOODS STORE • Individual 23 to 52 years of age • Participates in sports • Wants good-quality sports equipment • Looks for good prices • Lives in city of Blanchester • Average household income: $42,000 per year DEMOGRAPHICS Data that describe a group of people in terms of their age, marital status, family size, ethnicity, gender, profession, edu¬ cation, and income are called demographics. Women business own¬ ers between the ages of 25-40 who earn at least $50,000 per year is an example of a market segment based on demographic data. PSYCHOGRAPHICS Data that describe a group of people in terms of their tastes, opinions, personality traits, and lifestyle habits are called psychographics. People who prefer to live in a downtown setting and whose musical preference is jazz is an example of a market segment based on psychographic data. USE-BASED DATA Data that helps you determine how often poten¬ tial customers use a particular service is called use-based data. If you were starting a travel agency, you would want to know how often your potential customers travel. GEOGRAPHIC DATA Data that helps you determine where your potential customers live and how far they will travel to do business with you is called geographic data. If you were thinking of opening a coffee shop, it would be important for you to know that people are not willing to drive more than one mile for coffee. Once you have analyzed your target market, you will be able to develop a marketing strategy. A marketing strategy identifies those customers that you can better serve than your competitors. It can help you determine the size of your market and how many 4.1 Identify Your Market 95 greene_0538446145_ch04, 1/17/8, 14:39, page: 96 people would be willing and able to purchase your product or service. You can design your products and services, set prices, and direct promotional efforts toward those customers. 1 Checkpoint Name four types of customer data that may be analyzed in develop¬ ing a customer profile. 4.i Assessment THINK ABOUT IT 1. Why is it so important to identify your target market? 2. How are market segments useful to an entrepreneur? 3. You are thinking about offering golf lessons in your town. What types of data would you collect to create a customer profile? MAKE ACADEMIC CONNECTIONS 4. MATH Marcel wants to open a car wash after graduating from high school. For several days, he observed the cars being washed at a local car wash and recorded the information below. Day 1 Day 2 Day 3 Day 4 Day 5 Day 6 50 cars 45 cars 48 cars 26 cars 47 cars 55 cars What is the average number of cars washed each day? If the car wash were open only five days a week, how many cars might be washed per year? 5. GEOGRAPHY Think of a business you would like to open. Obtain a map of the area where you would like to locate the business. Mark the areas on the map that represent the farthest distance you believe customers would be willing to travel to do business with you. Draw a circle that encompasses the points where your customers live. 6. COMMUNICATION Interview a business owner. Ask the owner the eight questions listed in the chapter for identifying a busi¬ ness's target market. Write a report based on what you find out about the owner's target market. Working with team members, look through magazines and news¬ papers for an advertisement of a new product. Based on the type of publication and the material contained in the advertisement, answer the eight questions found on page 93 about identifying a target market. Can you determine who the target market is for the product? 96 Chapter 4 Identify and Meet a Market Need greene_0538446145_ch04, 12/21/7, 17:23, page: 97 market research primary data survey focus group secondary data V Focus on Small Business Get to know your market Roseanne and John decided that they would like to locate their business in South Carolina close to the areas where they grew up. They knew that it would be important for them to research the market in that area to be sure there was a market for the type of restaurant they wanted to open. They decided to interview groups of potential customers to gather their thoughts and opinions. They also developed a questionnaire and hired some local high school students to call residents in the community to collect more data. Work as a Team Do you think that Roseanne and John are using good methods to gather data? Can you suggest any other ways they could find out what their potential customers thought about the business idea? Interviews are just one way to gather market research. Role of Market Research For your business to succeed, you need to find out who your customers are, what they want or need, and how much they are willing to pay for your product or service. To collect this information about your cus¬ tomers, you will perform market research. Market research is a system for collecting, recording, and analyzing information about customers, competitors, goods, and services. Based on the findings of market research, a business will be able to determine which marketing strat¬ egies will be most effective and most profitable. Market research has its limits because it can be very expensive and time-consuming, but it is definitely worth doing when major decisions are being made. You will draw on primary data and secondary data as you gather your informa¬ tion. Both types of research will help you identify ways in which you can meet customer needs. 4.2 Research the Market 97 greene_0538446145_ch04, 1/17/8, 16:41, page: 98 Primary Data Most market researchers collect primary data. Information collected for the very first time to fit a specific purpose is primary data. A researcher collects primary data to help identify and understand the target market. There are a few different ways to collect primary data. SURVEY The most common type of primary market research is a questionnaire, or survey. A survey is a list of questions to ask your customers to find out demographic and psychographic information. A survey can be conducted by mail, over the phone, on the Internet, or in person. OBSERVATION Market research can also involve observation. If you are considering opening a juice bar in a shopping mall, you might want to see how many customers you could attract. You could go to the mall and count the number of people purchasing drinks at various food oudets. An entrepreneur interested in starting a motorcycle repair shop might count the number of motorcycles at a busy intersection. Famous Thomas A. Edison Could you do your homework at night if there was no light? Thanks to Thomas Edison, you can do your homework late at night! Thomas Edison is considered to be the greatest inventor in American history. Edison showed entrepreneurial characteristics at an early age. At the age of 12, he talked his parents into letting him go to work selling news¬ papers, snacks, and candy on the local railroad. Then he started an entirely separate business selling fruits and vegetables. When Edison was 14, the pre- Civil War debates between Lincoln and Douglas were taking place. He used his access to the associated news releases that were being teletyped into the rail¬ road station each day and published them in his own newspaper. Focusing on newsworthy "scoops," he quickly had over 300 commuters subscribing to his paper, The Weekly Herald. Edison turned on the lights for all of us with his invention of the electric light in 1879. As a young inventor with a curiosity about everything, he learned to invent only those things that peo¬ ple wanted. As one of the original founders of the General Electric Company, he tried to develop products that would work under ordinary conditions, would not easily malfunction, and could be easily repaired. Known as "The Wizard of Menlo Park," which was the home of Edison's research laboratory, Thomas Edison truly changed the world we live in! Think Critically Do you think it was important for Thomas Edison to try to invent items that people wanted? Do you think all inventors can become suc¬ cessful entrepreneurs? How do entrepreneurs change the way we live? 98 Chapter 4 Identify and Meet a Market Need greene_0538446145_ch04, 12/21/7, 17:23, page: 99 FOCUS GROUPS Another way in which you could find out about the market is by conducting interviews with small numbers of people. A focus group is an in-depth interview with a group of target cus¬ tomers who provide valuable ideas on products or services. You can ask the same kinds of questions in a focus group that you would ask in a sur¬ vey, but the group setting allows for more discussion and interaction regarding each question. Focus groups usually are led by a moderator, who asks questions about buying habits, likes and dislikes, and interest in particular products and services. The focus group session is recorded so that the comments can be reviewed carefully after the session is over. DISADVANTAGES OF PRIMARY DATA While primary data can provide the most up-to-date and useful information, collecting it can be time- consuming and more expensive to gather than secondary data. As an entrepreneur, you will need to determine how much primary and sec¬ ondary market research data you need to collect. did you KNOW? Many retail stores collect primary data though the use of scan- rs ' salesperson uT s ‘^ e / un * eBa, p r °d~ item [ UPC) ° n ^ item purchased. The st oreowner can then determine the best- and worst-selling items and adjust inventory accordingly. Secondary Data Entrepreneurs also research their target markets by using secondary data. Secondary data are found in already-published sources. Data on population, family size, household income, economic trends, industry forecasts, and other information can be found in secondary data resources. Places to find secondary data include the following: 1. Publications issued by government and community organizations, such as the U.S. Census Bureau, the Small Business Administration, and the Chamber of Commerce 2. Books about specific industries 3. Information on web sites for government and businesses 4. Books about other entrepreneurs who set up similar businesses 5. Trade magazines and journals 6. Newspaper articles and statistics Kisha Nichols wanted to expand her family-owned chain of retail shoe stores. She decided to perform some secondary data research and visited the local Chamber of Commerce web site. The site pro¬ vided her with demographics on population for her city and county and industry forecasts for communities in her area. This information allowed Kisha to identify the largest markets as well as the markets expected to grow the most over the next 10 years. She also found information in a book on the average income of retail shoe store owners in her state. Newspaper articles gave Kisha psychographic data on people’s lifestyles in her area. Most worked in professional office settings, which meant they had a need for comfortable dress shoes. Studying secondary data gave Kisha a good idea of which community might provide the best prospects for a new shoe store. Checkpoint What types of data do entrepreneurs collect through market research? # 4.2 Research the Market 99 greene_0538446145_ch04, 12/21/7, 17:23, page: 100 Six Steps of Market Research Collecting primary data can be time-consuming and expensive, but it is extremely valuable. It will tell you exactly what you want to know and uncover information you may not find through secondary sources. Conducting primary market research involves six steps as shown at the left. 1. Define the Question In the first step in the market research process, you need to define exactly what it is that you need to know. Entrepreneurs have many con¬ cerns and questions about the businesses they are planning. By determining what they need to know, they are defining the question that will be the focus of their research. Maggie Blandin is thinking about starting a dog-walking service. Before she invests in her business, Maggie needs to determine who would be most likely to use her service (her target customers). 2. Determine the Data Needed Once you have defined the market research question, you are ready to determine what data you need to collect to provide the answer to your question. Entrepreneurs need to be sure that the data they col¬ lect will be helpful. It would not be helpful for Maggie to know how many fa mi lies live in the area where she wants to have her dog-walking service. She needs to know how many people living in the area are dog owners who lack the time to walk their dogs. 3. Collect the Data Before you begin collecting data, you need to decide how you will go about gathering the data. Should you use a survey? Should you use an observation method? Is a focus group appropriate? The method you use will depend on what type of information you want to gather. For example, you can find out people’s opinions in a survey or focus group, but not by observation. You should perform some secondary market research first to familiarize yourself with your market. Demo¬ graphic and psychographic data, as well as information on economic trends and industry forecasts, will help you determine what kind of primary data research to perform. You can then choose the best research method for the information you want to gather. If you choose a survey, think carefully about how long it should be, what questions it should include, how it should be administered, and how many people you should survey. If you use observation to do your research, you need to determine where and when to get the best information. If a focus group is needed, you should think about what kinds of individuals to include and what questions to ask them. 100 Chapter 4 Identify and Meet a Market Need greene_0538446145_ch04, 1/21/8, 19:34, page: 101 Maggie decides that a survey is the best way for her to find answers about customer preferences for a dog-walking service. Through her secondary data research, Maggie learned that 60 percent of the households in her area owned one or more dogs and that aver¬ age annual household income was $75,000. Most households had one or more adults working in a professional field. She also found that dog ownership was on the rise in her area. Based on this informa¬ tion, Maggie put together the survey shown on the next page. The survey asks specific questions about the lifestyles, opinions, and choices of dog owners. DESIGN A SURVEY Making a good questionnaire is very important. Questionnaires should be kept to a page in length when read over the phone or mailed to respondents. Longer questionnaires can be used if an interview is face to face. Questions should be clear and easy to answer, and only the most important questions should be asked. If the response to a question serves no specific purpose, the question should not be used. 4. Analyze the Data Once you have collected all your primary and secondary data, you will need to analyze and interpret the information thoroughly. The analysis should be in a written format so you can refer to it later. Through the secondary data she obtained, Maggie found that 2,500 dogs live in her area. From her primary data research, she found that 30 percent of dog owners in her area would pay $20 to have their dogs walked for 30 minutes. Many would pay to have them walked two or three times a week. Maggie determines that she could easily have 750 dogs to walk each week. 5. Take Action Once you have analyzed and interpreted your data, you will need to determine how to use the data to make a decision. This is when you will develop a plan of action based on the information you found in your mar¬ ket research. Maggie Blandin’s market research has helped her conclude that her idea for a dog¬ walking service is profitable. From her mar¬ ket research, she has created a target cus¬ tomer profile of people aged 31 to 50, who travel often, work long hours, and earn $50,000 to $100,000 a year. She also knows the amount of money her target customers are willing to pay for her service and how much income she can expect to make. fiM>kmark Groups of customers within a large market who share common characteristics are known as market segments. Access school.cengage.com/ entrepreneur/ideas and click on the link for Chapter 4. The You Are Where You Live feature describes every U.S. neighborhood in terms of a wide variety of lifestyle types. Choose the PRIZM NE system and enter your own ZIP code. What results did you find? In which lifestyle type (if any) do you think you and your family fit? Now choose the Connexions system and enter your ZIP code. Do the results differ from those found under the PRIZM NE system? Explain. Which system do you think more accurately describes your neighborhood? school.cengage.com/entrepreneur/ideas d) 4.2 Research the Market 101 greene_0538446145_ch04, 12/21/7, 17:23, page: 102 Market Research Survey Thank you for participating in this market research survey. We appreciate your assistance in helping us identify the needs of pet owners in our community. PLEASE CHECK THE BOX THAT BEST DESCRIBES YOUR SITUATION. Age: under 18 □ 19- -30 □ 31-40 □ 41-50 □ 51-65 □ over 65 □ Gender: male □ female □ Number of pets: 0 □ i □ 2 □ 3a 4 OR MORE □ Kinds of pets: dog □ CAT □ FISH □ BIRD □ OTHER □ (PLEASE SPECIFY) IF YOU OWN A DOG, PLEASE ANSWER ALL OF THE FOLLOWING QUESTIONS. How often do you walk your dog? EVERY DAY □ A FEW TIMES A WEEK □ ONLY ON THE WEEKENDS □ NEVER □ Would you be willing to pay someone you trusted to take your dog for walks? YES □ POSSIBLY □ NO □ If you would be willing to pay someone to walk your dog, how many times a week would you utilize this service? EVERY DAY □ 2-3 TIMES A WEEK □ ONLY ON THE WEEKENDS □ How much would you be willing to pay to have your dog(s) walked for 30 minutes? $10 □ $15 □ $20 □ $25 □ I WOULD NOT PAY TO HAVE MY DOG WALKED □ How often do you travel out of town? ONCE A YEAR □ 2-3 TIMES A YEAR □ SEVERAL TIMES A YEAR □ NEVER □ Who takes care of your dog when you are out of town? KENNEL □ FRIEND □ NEIGHBOR □ OTHER □ Would you be interested in having someone you trust take care of your pets while you are away? YES □ POSSIBLY □ NO □ 102 Chapter 4 Identify and Meet a Market Need greene_0538446145_ch04, 1/17/8, 14:39, page: 103 In her first effort to get customers, Maggie plans to create a flyer aimed at her target market, which she will distribute in neigh¬ borhoods and veterinarian offices. She also plans to distribute the flyer downtown and in other business areas where many of her target customers work. 6. Evaluate the Results Evaluation is the last step in the market research process. It is not enough just to develop a plan of action. Entrepreneurs must regularly evaluate the actions they take as a result of the plan. Maggie will need to evaluate the effectiveness of her flyer. If she is getting a good response from her target market, she can assume that her plan of action is effective. However, if she is not getting a good response, then she will need to revise her plan of action. Checkpoint What are the six steps of market research? 4.2 Assessment THINK ABOUT IT 1. Why do entrepreneurs need to conduct market research? 2. What are the limitations of market research? 3. What is the difference between primary and secondary data? 4. Why do you think short questionnaires are more effective than long ones? 5. Why is it important to define the question you want your mar¬ ket research to answer? MAKE ACADEMIC CONNECTIONS 6. MANAGEMENT Your family-owned business processes and sells orange juice to food distributors. In order to grow, the business needs to expand its product line. Apply the six market research steps to help determine an additional product for your business. 7. COMMUNICATION It is important to evaluate the effectiveness of a survey. Using the Activity CD, open the activity "Market Research Evaluation." Print a copy and complete the activity. Working with team members, come up with a new product that you think will be very useful for students in your school. Develop a ques¬ tionnaire for potential consumers of this product to gauge their interest. Have students from your school complete the questionnaire. Tabulate the results and determine if the product is a good idea. 4.2 Research the Market 103 # greene_0538446145_ch04, 1/17/8, 14:39, page: 104 Explain the importance of understanding your competition. Determine types of competition. Prepare a competitive analysis. Describe strategies for maintaining customer loyalty. direct competition indirect competition competitive analysis V Focus on Small Business Who is your Competition? Roseanne and John needed to find out who their competition would be. They drove 30 minutes in ail directions from the location they chose for their restaurant and made a list of all the restaurants they saw on their trips. They also obtained menus of the restaurants to see what type of food they offered. They even ate at several of the restaurants and observed the restaurants' strengths and weaknesses. Roseanne and John determined that their restaurant would offer a different type of food than any of their competition and that the customers in their target market would be willing to try a new restaurant. Work as a Team How can Roseanne and John differentiate their restaurant from competing restaurants? How can /t is beneficial to check out the competition they keep customers coming back? in person. Impact of Competition The U.S. economic system is based on private property, freedom of choice, profit, and competition. Because consumers are free to buy whatever they want from whomever they want, companies compete for their business. Most new businesses face competitors —companies offering similar or identical products and services to the same group of target customers. As the owner of a new business, you will have to persuade customers to buy from you instead of your competitors. You must always watch the competition and be sure that you are offering products that are of equal or better quality at the same or lower prices. 104 Chapter 4 Identify and Meet a Market Need Getty Images/PhotoDisc greene_0538446145_ch04, 12/21/7, 17:23, page: 105 When personal computers first came on the market, Apple com¬ puters were the biggest sellers. Then IBM developed a personal com¬ puter, and soon there were many other manufacturers of personal computers. Today, customers have many choices for personal com¬ puters. All of the computer manufacturers work hard to convince customers to buy their product. Understand the Competition Knowing about your competition will also help you define your target market. Businesses typically enter into areas where there is competi¬ tion. To survive, they have to identify some special customer need or want that is not being met. Customers may be happy with the prod¬ ucts or services being offered, but they may be unhappy with the pri¬ ces being charged. Customers might be dissatisfied with the quality of a product or service and would be willing to pay more for better qual¬ ity. In either case, a customer need is going unmet by a competitor, indicating a possible opportunity for an entrepreneur. Checkpoint Why is it important for you to understand the competition your business faces? Types of Competition Competitors may be categorized as either direct or indirect competi¬ tion. You will need to find ways to identify and differentiate yourself from both types of competition. Direct Competition Direct competition comes from a business that makes most of its money selling the same or similar products or services to the same How could a small diner differentiate itself from larger restaurant chains? 4.3 Know Your Competition 105 greene_0538446145_ch04, 12/21/7, 17:23, page: 106 market as other businesses. Secondary data resources can give you information on your direct competition. Your direct competitors may be in the same geographic area as your business. The telephone direc¬ tory or an Internet search will help you find the number and locations of competing businesses. Your local Chamber of Commerce will also have information on competitors in your business field. Observation methods can help you learn more about your direct competitors. If you start a retail business, you can visit all of the malls, shopping centers, and retail outlets in your area. For some businesses, direct competitors may be located far away. Carmen Quinterro publishes a travel newsletter about Ireland. Carmen’s target customers live all over the United States. Her competitors include five other newsletters about Ireland as well as several travel web sites. Although Carmen’s competitors are located far from her home in Chicago, they compete with her for the same target customers. Indirect Competition Indirect competition comes from a business that makes only a small amount of money selling the same or similar products and services to the same market as other businesses. Locating your indirect competition is more difficult than finding direct competitors. You should first think of all of the possible businesses that can compete with you indirectly. A large department store may stock some of the most popular products carried by a privately owned specialty shop. The department store offers many other lines of merchandise as well. It makes only a small amount of money on the same items that the specialty shop offers. This makes the department store an indirect competitor to the specialty shop. greene_0538446145_ch04, 12/21/7, 17:23, page: 107 Large Retailers When a large retailer enters a community, it can be a source of direct and indirect competition for many other businesses. Large retailers like Wal-Mart bring lower prices and jobs to a community, but many small businesses find it hard to compete with them. Some of the smaller, locally owned retailers often are forced out of business. Some of the reasons that it is difficult for entrepreneurs to compete with large retailers include the following: 1. Large retailers usually are able to keep larger quantities of prod¬ ucts in stock. They can purchase inventory in bigger quantities because they have more revenue and larger storage areas. Bigger orders result in volume discounts, and the savings can be passed to consumers in the form of lower prices. 2. Large retail chains do not rely on a single product line. If one product line does poorly, a large retail store does not go out of business because it has other successful product lines. Small busi¬ nesses have risks associated with having only one product line. If its product falls out of favor with consumers, it has no other product lines to make up the difference. 3. Large companies usually have more resources to devote to advertising. A larger company makes more revenue and can hire advertising professionals to create effective advertising to attract more customers. Checkpoint What is the difference between direct and indirect competition? Competitive Analysis Identifying and examining the charac¬ teristics of a competing firm is called a competitive analysis. Analyzing the strengths and weaknesses of your com¬ petition will help you figure out what you can do to get customers to buy from your business. Follow these steps to begin your competitive analysis: 1. Make a list of your competitors. Using the Internet and The Yellow Pages and driving through the area in which you plan to locate your business are good ways to identify your compe¬ tition. You can also talk to potential customers to find out with whom they are currently doing business. Review trade magazines and news¬ papers to see who is advertising the product or service you plan to offer. Be your own boss You opened The Sweet Shop, a candy and ice cream store, on the grounds of a beach resort hotel. You get a steady stream of new customers as guests from the hotel visit your shop. However, you want to attract local residents from the community to your business to help grow a customer base year- round. You decide that a frequent-buyer program is one way to get customers to visit and return to your business. What type of frequent-buyer program would be good for The Sweet Shop? Design a flyer that would introduce the program to customers. Also, design a card that you would give customers to identify them as frequent buyers. 4.3 Know Your Competition 1 07 greene_0538446145_ch04, 12/21/7, 17:23, page: 108 2. Summarize the products and prices offered by your competi¬ tors. Investigate the products or services your competition offers for sale. How are they different from yours? Examine the price ranges of your competitors and determine how they compare to what you plan to charge. Are your prices higher or lower? 3. List each competitor’s strengths and weaknesses. What does the competitor do that no one else does, or what does it do better than everyone else? Where are your competitors located? Deter¬ mine if their location is better, worse, or about the same as the planned location for your business. Compare the competitions’ facilities to the planned facility for your business. Are their facilities better, worse, or about the same as yours? What attracts customers into your competitors’ facilities? How will you compete with these strengths? What are some of the weaknesses of your competition? How can you use these weaknesses to your advantage? 4. Find out the strategies and objectives of your competitors. A copy of your competitors’ annual report would have this information. 5. Determine the strength of the market. Is there an increase in demand for the product or service you plan to offer? Will there be enough cus¬ tomers for everyone in the market? What are the industry forecasts? Interjit Singh wants to start a premier car wash in an expensive suburb of Washington, D.C. He does a competitive analysis as shown below. He researches his direct and indirect competition. He finds that Royal Hand Wash is able to charge twice the price of the other competi¬ tors even though its location is not the best. Royal Hand Wash guaran¬ tees nonscratch car washes and waxes done by people, not machines. Because Interjit’s business will also offer car washes, waxes, and detailing done by hand, Royal Hand Wash is the direct competition. All other car wash businesses, including gas stations with automatic car wash machines, are his indirect competition. Royal Hand Wash’s location and prices are its biggest weaknesses, so Interjit plans to choose a prime location for his car wash and charge lower prices. Checkpoint What is the purpose of a competitive analysis? ANALYSIS OF COMPETITORS Competitor Price Location Facility Strength Weakness Strategy Standard Gas $6.00 Excellent Good Excellent location Car wash not easily accessible Target a different market Lakeland Car Wash $5.50 Fair Good Low price Location Target a different market Ray's Car Wash $5.00 Good Fair Low price Facility Target a different market Royal Hand Wash $11.50 Fair Excellent Excellent facility Location Offer lower prices, better service, more convenient location 108 Chapter 4 Identify and Meet a Market Need greene_0538446145_ch04, 12/21/7, 17:23, page: 109 Maintaining Customer Loyalty Getting customers to buy your products and services instead of com¬ petitors'’ is only one step in running a successful business. Once you get the customers, you must make sure they remain loyal to you and keep coming back. Listen and Respond to Feedback To retain customers, you will need to continually ask customers for their opinions about your business and respond to their feedback. Businesses that ignore customer concerns will not stay in business long. Businesses stay in touch with their customers’ needs in different ways. Some businesses may call customers after sales are made to ensure they are satisfied with their purchase. Many companies have a customer feedback box where customers can put complaints or posi¬ tive comments about the business. You can also design a survey for your customers to complete. Jason Rose’s business, the Metropolitan Athletic Club, closed because of his failure to respond to cus¬ tomer feedback. Club members had repeatedly complained about the lack of clean li ness in the locker rooms and the lack of avail¬ able weight machines dur¬ ing peak hours. Jason ignored his customers’ complaints, believing that the excellent location and low monthly fee would ensure his success. Jason learned from his mistake. When he opened his next athletic club, he immediately tried to find out what customers wanted by conducting a market research study. His study revealed, among other things, that he should offer more aerobics classes and put high-speed hair dryers in the locker rooms. Due to his focus on customer satisfaction, Jason’s club is doing very well and attracting new members all the time. How could a fitness club maintain loyalty among its clients? Other Strategies for Maintaining Loyalty To maintain customer loyalty, businesses use many strategies. The main purpose of these strategies is to keep customers happy so they will return to the business. Some of the most basic customer loyalty strategies businesses use include the following: • Superior service • More convenient hours than other businesses 4.3 Know Your Competition 109 Getty Images/PhotoDisc greene_0538446145_ch04, 1/17/8, 14:40, page: 110 • Easy return policies • Store-specific credit cards • Personal notes or cards for birthdays or as a way to say thanks for the business • Frequent-buyer programs Kathleen McGuire, the owner of Flower Markets, encourages shoppers to buy all of their flowers from her garden store by issuing them a frequent-buyer card, which she stamps every time a purchase of $10 or more is made. Once the card has been stamped 10 times, customers can redeem the card for a free bouquet of flowers. Checkpoint What are some strategies for maintaining customer loyalty? 4.3 Assessment THINK ABOUT IT 1. Why should entrepreneurs analyze both direct and indirect competitors? 2. Why is a competitive analysis important to an entrepreneur? 3. Why can customer feedback be considered a type of market research? Is this market research more or less valuable than other research you conduct? Explain your answer. MAKE ACADEMIC CONNECTIONS 4. MANAGEMENT Devise a plan to maintain customer loyalty for a hair salon. Create an advertisement to let your customers know about this plan. 5. COMMUNICATION Shontel Washington just opened an art gallery. He would like feedback from the people who visit the gallery. Develop a short questionnaire that would help Shontel learn more about his customers' feelings toward his business. 6. TECHNOLOGY Using the car wash data shown on page 108, enter the prices into a spreadsheet. Use the spreadsheet to create a bar graph that will help Interjit Singh analyze the data. Working with team members, choose a successful business in your area. Then choose three competing businesses. Using the Activity CD, open the activity "Competitive Analysis." Print a copy and complete the activ¬ ity by analyzing each business using the five steps listed in this lesson. 110 Chapter 4 Identify and Meet a Market Need greene_0538446145_ch04, 1/17/8, 14:40, page: 111 Sharpen Your Entrepreneurial Skills Using Spreadsheets to Analyze Data Spreadsheets are a powerful tool for analyzing, sharing, and managing numerical data. Entrepreneurs can use spreadsheets to analyze market research, prepare budgets, measure performance, and create financial statements. One of the most valuable uses of spreadsheets is creating charts and graphs. Charts and graphs can improve decision making by presenting data in an easy-to-read, understandable format. Line graphs, bar charts, and pie charts are among the most commonly used visual aids. Spreadsheets are especially useful in analyzing market research results. Gena has decided that she wants to open a coffee shop in her community. She wants to deter¬ mine the age of her target market. She surveys 25 people in each of the following age groups: 18-25; 26-30; 31-35; and 36-40. She enters her survey results into a spreadsheet and creates the follow¬ ing pie chart. The pie chart clearly shows that consumers between the ages of 18-25 are more likely to buy coffee on their way to work. Consumers Who Buy Coffee on Way to Work TRY IT OUT Maggie Blandin conducted research for her dog-walking business by surveying 2,500 dog owners. She asked what price owners would be willing to pay for a dog-walking service. She collected the following data: Number of People 500 250 750 500 500 Price $10 $15 $20 $25 $ 0 (not interested) Enter this data into a spreadsheet and create a pie chart to help Maggie determine the price she should charge for her dog-walking service. Experiment with the different kinds of charts and graphs you can create. Sharpen Your Entrepreneurial Skills 111 0538446145_ch04, 12/21/7, 17:23, page: 112 Chapter 4 Assessment SUMMARY 4.1 Identify Your Market 1. Before starting a new business, you must determine who your pri¬ mary customers are and whether they will be willing to buy your product or service. Understanding your customers and their needs and wants is one of the most important aspects of running a busi¬ ness. Market research is key to finding out this information. 2. You should develop a customer profile and decide which segment(s) of the market to target. Markets may be segmented based on many factors, including demographics, psychographics, use-based data, and geographic data. 4.2 Research the Market 3. Market research is important because it helps you find out what your customers need and want. It also helps you understand your competition. Primary data are collected for the very first time to fit a specific purpose. Primary data may be collected from surveys, focus groups, and observation. Secondary data are found in already- published sources. 4. The six steps of market research are: (1) define the question, (2) determine the data needed, (3) collect the data, (4) analyze the data, (5) take action, and (6) evaluate results. 4.3 Know Your Competition 5. Entrepreneurs must understand their competition to help identify any currendy unmet customer needs and wants. 6. All businesses have both direct and indirect competition. Direct competition comes from a business that makes most of its money selling the same or similar products and services to the same mar¬ ket. Indirect competition comes from a business that makes only a small amount of money selling the same or similar products to the same market. 7. Creating a competitive analysis involves the following steps: (1) make a list of competitors, (2) summarize products and prices offered by competitors, (3) list each competitor’s strengths and weaknesses, (4) find out strategies and objectives of competitors, and (5) determine the strength of the market. 8. There are many ways to maintain customer loyalty. You should ask for and respond to customer feedback. Offering frequent-buyer dis¬ counts and superior service also promote customer loyalty. What do you hnow now? Read Ideas in Action on page 91 again. Then answer the questions a second time. How have your responses changed? 112 Chapter Identify and Meet a Market Need greene_0538446145_ch04, 12/21/7, 17:23, page: 113 VOCABULARY BUILDER Match each statement with the term that best defines it. Some terms may not be used. 1. A description of the characteristics of the person or company that is likely to purchase a product or service 2. Data that describe a group of people in terms of their age, marital sta¬ tus, family size, ethnicity, gender, profession, education, and income 3. An in-depth interview with a group of target customers who provide valuable ideas on products or services 4. Information collected for the first time to fit a specific purpose 5. A system for collecting, recording, and analyzing information about customers, competitors, goods, and services 6. Data that describe a group of people in terms of their tastes, opinions, personality traits, and lifestyle habits 7. Data found in already published sources 8. A business that makes most of its money selling the same or simi¬ lar products or services to the same market as other businesses J k. L m. n. o. competitive analysis customer profile demographics direct competition focus group geographic data indirect competition market research market segments primary data psychographics secondary data survey target market use-based data REVIEW YOUR KNOWLEDGE 9. Which of the following is not a reason that entrepreneurs need to know who their customers are? a. customers are a business’s most important asset b. companies cannot remain in business without customers c. customers have no influence on product or services offered d. knowing who your customers are can help you estimate demand for products and services 10. To identify your target market, you need to know a. who your customers are b. how old your customers are c. where your potential customers currently shop d. all of the above 11. Data that helps you determine where your potential customers live and how far they will travel to do business with you are a. demographics c. use-based data b. psychographics d. geographic data 12. Which of the following is not an example of primary research? a. conducting a survey b. obtaining statistics from a government web site c. observing customer behavior d. all of the above are examples of primary data research 13. Sources of secondary data include all of the following except a. customer feedback from a survey b. publications issued by government and community organizations c. trade magazines and web sites d. newspaper articles Chapter 4 Assessment 113 greene_0538446145_ch04, 1/17/8, 19:19, page: 114 14. True or False? Two disadvantages of collecting primary data are the costs and time involved. 15. It is difficult for small businesses to compete with large retailers because a. large retailers are able to order and stock products in larger quantities b. large retail chains don’t rely on a single product line c. large companies have more resources to devote to advertising d. all of the above 16. Which of the following is not a step involved when preparing a competitive analysis? a. list all competing businesses in your immediate area b. create a customer profile c. list your competitors’ strengths and weaknesses d. summarize products and services offered by competitors 17. True or False? Businesses do not need to identify their target market in order to succeed. 18. Which of the following is not a good way to get customer feedback? a. check with your competition b. call customers the day after they make a purchase c. use a customer feedback box d. have customers complete a survey after shopping with you 19. Which of the following is a strategy for maintaining customer loyalty? a. keeping standard business hours b. adhering to strict return policies c. offering superior service d. none of the above 20. True or False? Longer questionnaires are always better because you can collect more information. APPLY WHAT YOU LEARNED 21. Set up an interview with a local entrepreneur to find out how he or she identified the target market, what kind of market research was conducted, what kind of competition the business faces, and how customer loyalty is maintained. Before conducting the inter¬ view, compile a list of questions to ask the owner. Present your findings to the class. 22. You want to start a computer service company that keys and prints professional-looking term papers and resumes for students in your school. Design a survey that would help you determine if there is a market for your company. Determine the best way to administer the survey. MAKE ACADEMIC CONNECTIONS 23. MATH You have collected primary data that indicates three- quarters of the people in your town would switch dry cleaners if they could save 50 percent on their dry cleaning. If the average resident in your town spends $7 a week on dry cleaning and the 114 Chapter Identify and Meet a Market Need greene_0538446145_ch04, 12/21/7, 17:23, page: 115 town has 5,000 residents, how much revenue could you expect to earn per year by opening a discount dry cleaner? 24. MANAGEMENT Maggie Blandin, who wants to open a dog¬ walking business in your town or city, has asked for your help in collecting data. Call your local Chamber of Commerce to gather demographics and psychographics for your community. Also ask for statistics on dog ownership in your area. 25. RESEARCH Use the Internet to find the names of four compa¬ nies that might be able to help you conduct market research. Record information such as how long the company has been in business and what kinds of market research the business does. Write your findings and compare them with the findings of other students. WHAT WOULD YOU DO? You are having a luncheon meeting with one of your suppliers at a local restaurant. You see the owner of a business that is your main competitor across the restaurant having lunch with someone you do not recognize. They finish eating, pay their check, and leave while you are still at your table. After they leave, you notice that a note¬ book was left in one of the chairs at their table. You go to the table and pick up the notebook and see that it is their marketing strategy for the upcoming year. What would you do? Would you consider it your lucky day and read their strategy or would you turn it in to someone at the restaurant? Why did you choose the action you did? BUILD YOUR Business Plan Project This activity will help you develop the business plan for your business idea. Identify the target market for your business. Use secondary data sour¬ ces to help you assess demand for your product or service. Using the secondary research, develop a customer profile for your business. Which market segment of your industry are you targeting? Be specific. Conduct primary research for your business, using the steps outlined in Lesson 4.2. Develop a questionnaire that will give you the informa¬ tion you need. Ask at least 30 people in your target market to com¬ plete the survey. Analyze your results and determine what course of action you will take. Determine who your competitors are, both direct and indirect. Using the Activity CD, open the activity "Competitive Analysis." Use the chart to prepare a competitive analysis for your business. Determine a strategy for dealing with each competitor. What are your strategies for maintaining customer loyalty? Describe them and give reasons why you think each will work. Chapter 4 Assessment 115 greene_0538446145_ch04, 1/17/8, 19:19, page: 116 Planning a Career in Marketing Research Sales & Service Afly little sister decided to start a babysitting service. To tailor her business to meet client needs, she asked neighbors with children to complete an online survey regarding their child care needs. The results she compiled from the free online survey helped her put together a service and fee schedule.” How do organizations deter¬ mine what services to offer? How do manufacturers determine which product features are the most important to include in a product? Marketing research helps companies and organizations decide how to best meet the needs of their clients. Marketing research surveys provide a targeted, concise method to collect and analyze mar¬ keting data. EMPLOYMENT OUTLOOK • Faster than average job growth is anticipated. • Globalization, an increasingly competitive marketplace, and better educated consumers all contribute to the increased need for marketing research. • Outsourcing will create opportu¬ nities at consulting and market¬ ing research firms. JOB TITLES • Market Research Analyst • Mobile Video Research Manager • Questionnaire Development Manager • Market Research Coordinator • Marketing Communications Specialist NEEDED SKILLS • A Bachelor’s degree is required. Advancement may require a Master’s degree or a Ph.D. • To keep up with technology changes, continuing education is necessary. • A blend of quantitative and qualitative coursework is helpful. What's it like to work in Market¬ ing Research Sales at a local gift shop have been lagging, and the owner has contracted with Tess, a self-employed Electronic Marketing Survey Writer, to create a market¬ ing research study. The store is an independent store with a limited budget, so Tess decides to use one of the free online survey services to gather data from existing custom¬ ers. The store’s mailing list will be used to send customers an elec¬ tronic invitation to participate in the survey. As an incentive, cus¬ tomers will be offered a 5 percent discount on their next purchase. During the afternoon, Tess works on preparing a summary report for a restaurant chain. The restaurant wanted to obtain feed¬ back on the service, the environ¬ ment, and the food quality while all were still fresh on customer’s minds. So Tess used a survey ser¬ vice that collected data via cell phones. Upon receiving their res¬ taurant bills, clients who had cell phones were instructed how to log on to a web site where they could answer a brief online survey about their dining experience. Customers were also looking forward to receiving a free dessert upon their next visit as a reward for survey participation. What about you? Would you like to help a variety of businesses improve their understanding of customer preferences by develop¬ ing marketing research surveys? 116 Chapter 4 Identify and Meet a Market Need greene_0538446145_ch04, 12/21/7, 17:23, page: 117 ultimedia presentations have become a common form of marketing for businesses and organizations. Individuals who demonstrate the ability to effectively use presentation technologies and software to deliver a message are in high demand for marketing positions. Each year FBLA will select a multimedia national topic for one, two, or three students to prepare. Multimedia presentations must be two to four minutes in length, and teams will be allowed nine minutes to describe the project. Five points will be deducted for any presentations over nine minutes in length. Judges have three minutes to ask questions about multimedia presentations. Entries for this category must include two DVDs and a read me file (300 words or less) noting software used, sources of infor¬ mation, and instructions on running the presentations. TOPIC Super Bowl sponsors are needed to help cover the high costs of this sporting event. Prepare a multimedia presentation that will act as a recruiting tool for corporate sponsors of the Super Bowl. Prepare a customer profile that lists the characteristics of the person likely to watch the Super Bowl. Then make a list of the companies that sell products or services that would appeal to the Super Bowl audience. Use this information to determine a target market for your presentation. Because the price for Super Bowl sponsorship is high, the presentation should emphasize the benefits to potential sponsors, such as increased exposure in large markets. PERFORMANCE INDICATORS EVALUATED • Develop a convincing multimedia presentation. • Recognize and respect copyright issues. • Develop and support a theme with a multimedia presentation. • Make use of and implement innovative technology in a multimedia presentation. • Set priorities and manage time to prepare and present an effective multimedia presentation. Go to the FBLA web site for more detailed information. Think Critically 1. Why must the Super Bowl use a multimedia presentation to attract new corporate sponsors? 2. What kind of music or visual images would be good for a Super Bowl multimedia presentation? 3. Why must the presentation emphasize the potential return on investment for corporate sponsors of the Super Bowl? 4. What is the value of being associated as a financier of the Super Bowl? www.fbla-pbl.org Winning Edge 117 greene_0538446145_ch05, 12/21/7, 17:26, page: 118 Chapter 5 Market Your Business 5.1 Develop the Marketing Plan 5.2 The Marketing Mix—Product 5.3 The Marketing Mix—Price school.cengage.com/entrepreneur/ideas 118 greene_0538446145_ch05, 12/21/7, 17:26, page: 119 IDEAS IM ACTIONJ Turning Creative Fun into Dollars S heri and Rich Schmelzer of Boulder, Colorado, are the founders of Jibbitz. What's a Jibbitz, you may ask? Several years ago, Sheri and Rich didn't know either. Sheri was a stay-at-home mom with three children. They always had at least 12 to 15 pairs of Crocs—a type of colorful, sandal-like footwear with ventilation holes—in a pile at their back door. One day, Sheri was having fun experimenting with % decorating the Crocs by sticking sheri and Rich Schmelzer, founders of Jibbitz decorative pieces in the holes of the shoes. She used buttons, rhinestones, and other things she had lying around the house. Showing the decorated shoes to Rich when he returned home from work, a "light bulb" went off. Using his business experience and knowledge, the business got its start. After experimenting with several different versions, Sheri and Rich found a secure way to attach the decorations so that they would fit snugly in the holes. Looking for a domain name for a web site, they thought about using the name Flibberty-Jibbet—a nickname Rich used for Sheri. Sheri liked the word but thought it was too long for a domain name, so she shortened it and Jibbitz was born. Once the web site was up and running, the Schmelzers were fea¬ tured in a short segment on the local news. Orders began to come in like crazy. Sheri's parents came to their house every weekend to help by gluing decorations together and getting orders ready for shipment. Once they realized how big the market for Jibbitz was, they needed to find a mass manufacturer. Along with individual orders to fill, many retailers wanted to buy their products in quantity. The Schmelzers used a home equity loan to finance their first order from a factory in China. A year later, the Schmelzers hit it really big when Crocs, Inc., acquired their business for $10 million. Sheri and Rich still run the company and now have 50 employees and over 4,000 retail outlets worldwide. They are very proud of the company they have built and plan to stay involved. Q o o JZ Q_ Q_ < © What do you fcnow? Why do you think Jibbitz are so popular? How important do you think the decision to market Jibbitz on the Internet was to the success of the company? What do you think is different for the Schmelzers since they sold Jibbitz to Crocs, Inc.? greene_0538446145_ch05, 1/17/8, 14:45, page: 120 Is a marketing plan always necessary? Wanda loved jewelry and had spent much time studying the work of famous jewelry designers. She also had taken some beading classes at the local recreation center. She decided that she wanted to open her own jewelry design business. She conducted market research and found that there was an interest in custom-designed jewelry in the target market she defined. Now she's ready to think about how to market her business. She knows that marketing is very important and wants to be sure that she spends the money she has budgeted for marketing wisely. She contacts the SBA, and it advises her to develop a marketing plan. She is not sure that this is a wise use of her time, but she sets out to learn more about a marketing plan. Work as a Team Because Wanda has already found that there is a market for her jewelry designs, discuss whether she would be wise to spend time developing a marketing plan. Should she just start making jewelry and see what hap¬ pens? Make a recommendation to Wanda and a marketing plan lays explain your reasoning. the foundation for success. What Is Marketing? As defined by the American Marketing Association, “marketing is an organizational function and a set of processes for creating, communi¬ cating, and delivering value to customers and for managing customer relationships in ways that benefit the organization and its stakeholders.” To simplify this definition, marketing is all of the processes—planning, pricing, promoting, distributing, and selling—used to determine and satisfy the needs of customers and the company. This definition demon¬ strates the importance of the customer. It is very important to conduct market research to discover what products or services customers want to buy. Using the primary and secondary data that is gathered through market research helps 120 Chapter 5 Market Your Business Getty Images/PhotoDisc greene_0538446145_ch05, 12/21/7, 17:27, page: 121 entrepreneurs develop a marketing concept for the business. The marketing concept uses the needs of customers as the primary focus during the planning, production, distribution, and promotion of a product or service. To use the marketing concept successfully, businesses must be able to: • Identify what will satisfy the customers’ needs and wants • Develop and market products or services that customers consider better than other choices Develop Your Reading Skills As you read this chapter, make a list of the marketing strategy components and the information you will include about each one in your marketing plan. • Operate profitably Marketing Mix An important part of imple¬ menting the marketing concept is developing a mar¬ keting mix that helps meet customer needs and enables the business to earn a profit. The marketing mix is a blending of the product, price, distribution, and pro¬ motion used to reach a target market. For example, once you have determined what product or service meets customers’ needs, you must determine the right price for it, make it available to the customers in the right places, and then let your target market know about it. How does the marketing mix for consumer products help meet consumer needs? C o > "to -M 'gi Q © Checkpoint Why is marketing important to a business? The Marketing Strategy As a business owner, you will need to outline the goals you want to accomplish through your marketing efforts. Once you have identified your goals, you will need to develop a marketing strategy, which is a plan that identifies how these goals will be achieved. In your startup marketing plan, your strategy should address: • Product introduction or innovation • Pricing • Distribution • Promotion • Projected profitability • Sales or market share It is important that your marketing strategy be consistent with the overall goals you have set for your business. Be sure that the strat¬ egy will actually work for you and is within the resources you have 5.1 Develop the Marketing Plan 121 # greene_0538446145_ch05, 1/17/8, 16:52, page: 122 available. Your marketing goals should be written following the SMART guidelines in Chapter 1. These goals should reflect your short-term, medium-term, and long-term plans for your business. What do you want your marketing efforts to achieve for your busi¬ ness? Do you want to offer additional products or services after one year? Perhaps in five years, you want to sell your product internation¬ ally. Establishing short-, medium-, and long-term marketing goals ensures that the marketing you do today fits in with the vision you have for your business tomorrow. Short-Term Goals Short-term goals are what you want your business to achieve in the next year. They can be stated in terms of number of customers, level of sales, level of profits, or other measures of success. Identifying your short-term goals will help you determine how to target your marketing. If your goal is to build a customer base, you may decide to keep prices low and spend more money on promotion. If your goal is to have a positive cash flow, you may decide to price your products or services higher. Luisa Ramirez, a 32-year-old entrepreneur, wants to open a gourmet food shop in her community. In the short-term, Luisa wants to generate traffic into her store. Because of that goal, her marketing Famous Qcrfeey 'Brin and Larry Page What would the Internet be like if there was no Google? Just what is a Google? Thanks to Sergey Brin and Larry Page, we have Google and an explanation of the name. "Googol" is the mathematical term for a 1 followed by 100 zeros. The term was coined by the nephew of Edward Kasner, an American mathematician. Brin and Page chose a variation of this term for their company. When they started their business, Brin and Page "set out to organize the world's information and make it universally accessible and useful!" Brin and Page developed a new approach to online searching while they were students at Stanford University. Using that approach, they launched Google in September of 1998 as a privately held company. Today, Google is one of the world's best-known brands. Most people have learned about Google by word of mouth from satisfied users. Google generates revenue by selling advertising space. Ads are dis¬ played on search results pages that are relevant to the content on the page. Google tracks customer traffic to measure the cost-effectiveness of the online advertising. Today, Brin and Page share a net worth of $16.6 billion. Google handles over 2.5 billion search inqui¬ ries daily. That's not bad for a data center that started in a dorm room! Think Critically Have you ever used Google? Why do you think people choose Google over other search engines? How has the Internet provided new opportunities for entrepreneurs? 122 Chapter 5 Market Your Business greene_0538446145_ch05, 12/21/7, 17:27, page: 123 Why is it important to have a marketing strategy for your business? strategy focuses on establishing a customer base. She creates a list of short-term goals based on product, price, distribution, and promotion. Medium-Term Goals Medium-term goals describe what you want your business to achieve in the next two to five years. Although your marketing strategy will be determined largely by your short-term goals, you will need to make sure that the strategy you are planning will make it possible for you to achieve your medium-term goals. Luisa wants her business to become the most successful gourmet shop in her community by increasing her customer base and her total sales. She hopes to expand the offerings in her store to include more international foods as well as specialty items from local suppliers. In addition to running her store, in five years Luisa hopes to expand her business to include catering. Long-Term Goals Long-term goals show where your business will be 5, 10, and even 20 years from now. Thinking about what you want the business to do in the long term can help you think about how to market your business today. Luisa eventually would like to establish a mail-order division of her business. She does not let her long-term plans for a mail-order division change her thinking about how to market her store today. Knowing what she wants in the long run, however, motivates her to work very hard to make her store a success so that she can use it as a foundation to develop a mail-order business. Checkpoint Why is goal setting important when developing a marketing strategy? 5.1 Develop the Marketing Plan 123 greene_0538446145_ch05, 12/21/7, 17:27, page: 124 Write Your Marketing Plan When your goals and marketing strategy have been determined, you will be ready to write your final marketing plan. The purpose of the marketing plan is to define your market, identify your customers and competitors, outline a strategy for attracting and keeping customers, and identify and anticipate change. A written marketing plan will help you determine whether it is solid and all parts are consistent. Your writ¬ ten plan becomes a guiding document as you operate your business. You can always review it later to determine if you need to change the way you are marketing your business. The marketing plan becomes a part of your business plan. Having a marketing plan as part of your business plan is essential when you seek financing for your business. Investors will expect your marketing plan to answer the following questions: • What product or service will I offer? • Who are my prospective customers? • Is there a constant demand for this product or service? • How many competitors are providing the same product or service? • Can I create a demand for the product or service I want to offer? • Can I compete effectively in price, quality, and delivery of my product or service? To answer these questions effectively, the marketing plan for your business must include information on the following topics: 1. Product or Service 5. Business Location 2. Target Market 6. Pricing Strategy 3. Competition 7. Promotional Strategy 4. Marketing Budget 8. Distribution Strategy What kinds of information do you think should be included in a marketing plan for a small, locally owned bike shop? 124 Chapter 5 Market Your Business greene_0538446145_ch05, 1/17/8, 14:45, page: 125 As part of your marketing plan, you should include performance standards that will help you measure your effectiveness. Researching industry norms and past performances will help you develop appropri¬ ate standards. After your marketing plan has been implemented, you should compare your actual results to your performance standards. It is helpful to examine your performance quarterly. Questions to ask yourself include: • Am I meeting sales forecasts? • Is my promotional campaign reaching the target market? • Is my company doing everything it can to meet customers’ needs? • Is it easy for my customers to locate my product and is it competi¬ tively priced? Checkpoint Why is it important to put your marketing plan in writing? f5 i Assessment THINK ABOUT IT 1. What is the marketing mix? 2. What is the relationship between short-term goals and medium- term goals? 3. What topics should be included in the marketing plan? MAKE ACADEMIC CONNECTIONS 4. MATH Akeo Goto has opened a pet grooming business. He esti¬ mates the annual sales of the pet grooming market in his commu¬ nity to be about $325,000. There are two pet grooming businesses in town already. If Akeo achieves his five-year goal of capturing 45 percent of the market, how much will he earn in his fifth year? 5. COMMUNICATION Think of a local business with which you are familiar. Make a list of questions you would like to ask the owner about the marketing plan for the business. Contact the business owner and make an appointment to discuss the questions. Report your findings to your classmates. TEAMWORK Working in a team, choose one of the following businesses: Mexican restaurant, wholesaler, health-food store, or advertising agency. Brainstorm a list of short-, medium-, and long-term goals for the busi¬ ness. Make a list of these goals and post them on the wall in your classroom. Discuss the goals your team set with your classmates. 5.1 Develop the Marketing Plan 125 # greene_0538446145_ch05, 1/17/8, 14:45, page: 126 Does location affect image? Chase has a strong interest in men's clothing. During high school and college, Chase worked at several upscale men's stores in the Seattle area. When he graduated from college with a degree in retail marketing, he decided that he wanted to open his own upscale clothing store for men. In deter¬ mining the startup costs for his business, he real¬ ized that the rent for the space in an upscale mall with specialty boutiques was too expensive. In looking for space he could afford, he found a site in a medium-sized strip mall. The other stores in the mall are discount stores, but he wants to promote his business as an "upscale, specialty store." Work as a Team Do you think the location of Chase's store will affect its image and ability to attract the target customer? What do you think Chase should do? Should he change the focus of his business for this location? Location can help you reach your target customers. The Marketing Concept and the Product Once you have determined what kind of business you will run, you will need to make decisions about the products that you will sell. To select your products, think carefully about which products and services most appeal to your target customers. If you can convince your customers that your products satisfy their needs better than any competitor’s prod¬ ucts, then your products become a marketing tool for your business. The marketing concept is the belief that the wants and needs of customers are the most important consideration when developing any product or marketing effort. Over the past 50 years, consumers have become more educated, and competition has increased to include the 126 Chapter 5 Market Your Business Getty images/PhotoDisc greene_0538446145_ch05, 12/21/7, 17:27, page: 127 global market. This has led to a change in the U.S. market, from being a product-driven market to one that is consumer-driven. The marketing concept can give small businesses an advantage over larger businesses. Small businesses can get to know their customers better than larger businesses. They can be more responsive and have more flexibility when trying to satisfy customer needs. In the newspaper in Luisa’s community, there was a recipe for a pasta dish using a special type of cheese that Luisa did not carry in her gourmet food store, and she knew none of the local grocery stores stocked it. However, she knew that many of her customers liked to try out the recipes from the paper, so she immediately got on the phone with a supplier to get the cheese in stock the next day. did you KNOW? ^Z din8 to Search dnd Markets, a leading source for international market research and market data U 5 compa„ /e! budget over ‘""'on annually f or marketing. Product Mix The different products and services a business sells are its product mix . In a consumer-driven economy, entrepreneurs realize that some¬ times they must include products in their mix as a convenience for customers even though they may not be profitable. This will give the appearance to customers that the store has everything they need. It has been found that often a small percentage of the product selection makes up the majority of the sales revenue. Luisa’s Gourmet Luxuries will sell hundreds of different packaged goods, from imported Italian olive oil and pastas to Mexican rice. Luisa will also offer a wide selection of fresh foods, including cheeses, fruits, vegetables, and baked goods. To determine her product mix, Luisa lists the various departments she plans to establish in her store. She then lists the products that each department will carry. Luisa knows that most people coming into her store are looking for gourmet foods, but she decides to carry a small selection of pasta-making machines and espresso coffee makers. Although these items will not be a large source of revenue for her, it will show customers she can meet all their needs. How does a business's product mix help to satisfy customers? 9 5.2 The Marketing Mix—Product *1 27 greene_0538446145_ch05, 1/15/8, 17:21, page: 128 Checkpoint How does the marketing concept affect decisions made about the product mix? Development of Features, Branding, and Positioning Consumers buy a product because it meets their needs. However, there is much more to a product than consumers may realize. The many aspects of a product that a business must spend time developing include its features, branding, packaging, labeling, and positioning. Selecting Product Features The total product includes its features, which are product characteris¬ tics that will satisfy customer needs. Features include such things as color, size, quality, hours, warranties, delivery, and installation. You will need to consider your target market when selecting product features. WHAT WENT WRONG * Packaging Matters Katharine had developed a new line of dog grooming shampoo. She spent a large amount of time researching what should go into the shampoo and had the product tested to be sure it met safety standards. Her next step was to choose a way to package the shampoo. She decided that instead of a bottle, she would have the shampoo packaged in individual foil packets. She boxed the packets six to a box and set the price. Her initial sales were good, but she was not getting repeat sales. After three months, her revenue decreased. She was unable to keep up with the expenses of running her business with no incoming revenue. She decided to survey her customers to find out why they were not ordering more shampoo. The first ten customers she talked to told her that while they liked the shampoo, they found the packaging inconvenient. They could not hold their dog in the tub while trying to open the foil packet and squeeze the sham¬ poo out. Katharine realized she had made a serious mistake in her choice of packaging, but now she had spent all her money and was 128 Chapter 5 Market Your Business stuck with a large inventory of shampoo in foil packets. She did not know what else to do, so she closed her business. Think Critically 1. What could Katharine have done to avoid her packaging mistake? 2. Is there anything Katharine could have done to avoid closing her business after she knew what the problem was? Research the target market before introducing a new product. greene_0538446145_ch05, 12/21/7, 17:27, page: 129 Every product has features. For instance, Luisa has many choices when she is deciding what types of olives to stock in her store. There are green and black olives and olives stuffed with pimentos, blue cheese, and almonds. There are olives that come in jars and in cans and fresh olives that are available loose. There are olives that are produced in the United States, in Italy, and in France. There are so many different types of olives that there is no way Luisa can offer every single type to her customers. She needs to decide how many types of olives she can carry and what kinds her target customer prefers. Why does Luisa need to offer a variety of cheeses and olives in her gourmet food store? u O O o _c CL aS cn 03 £ >* CD (D © Branding, Packaging, and Labeling Making your product stand out from all the others in the market is a challenging task. Branding is the name, symbol, or design used to identify your product. The package is the box, container, or wrapper in which the product is placed. The label is where information about the product is given on the package. The brand, package, and label that you choose for your product will help differentiate it from others on the market. The Nike “swoosh” has become a very recognizable brand. When you see the Nike symbol, you know about the quality of the product you have selected. Position Your Products or Services Different products and services within the same category serve different customer needs. For example, both Hyundai and Jaguar sell automobiles, but these two product lines are positioned very differently in the marketplace. Positioning is creating an image for a product in the customer’s mind. Businesses position a product in a certain market to get a desired customer response. Product features, price, and quality may be used for positioning. Jaguar’s pricey cars are positioned in the market to meet the needs of those consum¬ ers who desire high quality and status. Hyundai positions its products to satisfy a need for an inexpensive family automobile. Examining the competition’s positioning What makes a memorable brand or product name? Access school.cengage.com/entrepreneur/ ideas and click on the link for Chapter 5. Author Phillip Davis provides some thoughts in his e-zine article. What does Davis consider the most common naming mistake? Do you agree with him that "Apple" is a better brand name than something like "United Computer Manufacturers" or "Quality Computer Corpo¬ ration"? Why or why not? Provide one exam¬ ple of a product or business that you think has a great name, and another that you think has a poor name. Explain your answers. school.cengage.com/entrepreneur/ideas <b The Marketing Mix—Product 129 5.2 greene_0538446145_ch05, 1/17/8, 14:46, page: 130 strategy can help you determine the best positioning strategy for your target market. Luisa knows that the other gourmet store in town is perceived as snobbish because it caters to professional cooks. Because of this, Luisa decides to position her store as the friendly gourmet store for anyone who loves to cook. To do so, she plans to offer in-store cooking classes and free samples of food items. She knows that being cheerful and helpful to customers will create and maintain her desired image. Checkpoint I Why are product features, branding, and positioning important? 5.2 Assessment THINK ABOUT IT 1 . How can a small business use the marketing concept to its advantage over a larger business? 2. Choose one of your favorite products. Make a list of the features of the product. 3. In the blue jeans market, which brands are positioned to satisfy customers' need for high quality and status? Which brands are positioned to satisfy a need for inexpensive clothing? Describe the type of consumer who would buy each of the brands you name. % MAKE ACADEMIC CONNECTIONS 4. RESEARCH Choose a business in your community. Make a list of all the products and/or services it offers. Talk to the business owner about which of the products or services represent the largest revenue for the business. Find out which of the products or services are not profitable but are offered to customers as a convenience. Find out if the owner is thinking about adding any new products to the product mix or dropping some of the cur¬ rent products from the product mix and why. 5. COMMUNICATION You have created a new soft drink that is designed for students at your school. Design a label for the drink bottle that will brand the drink. You should incorporate your school's mascot in the design of the label. Working with team members, make a list of products and services you would offer if you were opening a desktop publishing business. Make a list of the features of your products and services. Write a positioning statement that differentiates your business from your competitors. 130 Chapter 5 Market Your Business greene_0538446145_ch05, 12/21/7, 17:27, page: 131 The Marketing Mix—Price *5 - TTT ' -p 1 uoais 1 erms • Identify pricing objec¬ tives for a business. • Calculate the price for products using various methods. • Discuss factors to con¬ sider when pricing services. • List and describe various pricing techniques. • return on investment • market share • demand-based pricing • cost-based pricing • competition-based pricing • psychological pricing • discount pricing Focus on Small Business What should I charge? Marie was excited about her new business, "Straighten It Out," which offered laundry services, such as washing and ironing clothes, for busy people. She would go to the homes of her clients once or twice a week and do all of their laundry for them. She liked the work and looked forward to the opportunity to make money while home from college. But, she was not sure how much she should charge for her services. She thought about charging a flat hourly rate. She realized that some of the tasks would take longer than others, and some would require extra care, such as having to treat stains, iron pleats, or handle delicates. An hourly rate might not be the fairest way to charge customers or the best way to earn money. Work as a Team What do you think Marie should do? How should she decide how much to charge? What will happen if she charges too much? What if she Determine the best price for your charges too little? P roduct or service - u 5 o o -C % <u CD (0 E % 'O © Set Pricing Objectives The price is the actual amount a customer pays for a product or ser¬ vice. Prices you charge must be low enough so that customers will buy from you, not from your competitors. To earn a profit, though, your prices need to be high enough so revenues exceed expenses. Before you can select a pricing strategy, you will need to establish objectives for your pricing program. What is the most important thing you want the price to do? Examples of pricing objectives include: • Maximize sales • Increase profits • Discourage competition • Attract customers • Establish an image 5.3 The Marketing Mix—Price 131 greene_0538446145_ch05, 12/21/7, 17:27, page: 132 Return on Investment When setting pricing objectives, you may want to consider your return on investment. Investment refers to the costs of making and marketing a product. The return on investment (ROI) is the amount earned as a result of the investment, usually expressed as a percentage. Entrepreneurs must identify the percentage return they want from their investment. The target percentage in the beginning may be lower than it will be as the business grows. If you invest $5,000 in your smoothie stand at a local park and you want a 15 percent return, you need to price your product so that you will earn $750, since $5,000 x 0.15 = $750. Market Share Market share is another consideration when setting pricing objectives. Market share is a business’s percentage of the total sales generated by all companies in the same market. The total market for a product must be known in order for a market share to be determined. For example, if people in Luisa’s community normally spend $1,750,000 a year on gourmet food products and Luisa’s store sells products amounting to sales of $192,500, her market share will be 11 percent, calculated as follows: Amount of sales -L Total market size = Market share $192,500 ^ $1,750,000 = 11% The chart below graphically illustrates Luisa’s market share along with the expected market shares of her competitors. Gourmet Market Share % Your market share will depend on the level of competition in your market. If you create a market for an entirely new product, your market share will be 100 percent because you will be the only supplier, at least for a period of time. If you enter a market with many competi¬ tors or one in which a few large companies dominate the market, your market share will be small at first. 132 Chapter 5 Market Your Business greene_0538446145_ch05, 12/21/7, 17:27, page: 133 How can networking contribute to a business's success? Companies in highly competitive environments must develop a plan to gain a higher market share. Companies can increase market share in many ways. One way is to lower prices. Advertising and pro¬ motion campaigns that attract more customers can help too. You can also network with potential customers. Networking involves establish¬ ing informal ties with people who can help your business grow. Attending trade association meetings and other gatherings can give you good opportunities to network and gain new customers. One of Luisa’s goals is to become the most successful gourmet shop in her community by having a market share of at least 40 percent and a 10 percent return on investment. If Luisa wants a market share of 40 percent, she will need to generate annual sales of at least $700,000. Based on this, Luisa sets her pricing objectives carefully. She decides to set her prices low to build customer traffic. Once Luisa has increased her market share, she may raise prices slightly to increase her return on investment. To help increase her market share, Luisa will seek out networking opportunities. As part of her networking efforts, Luisa will play softball in a local women’s league in the summer. She also plans to attend Chamber of Commerce meetings monthly. She hopes that through both settings she will meet people who will become customers. She also hopes to meet other business professionals, such as lawyers, financial advisers, and other business owners, who might offer advice on ways to run her business more efficiently, and in turn, increase her return on investment. Checkpoint Why is it important to determine pricing objectives before pricing goods and services? 5.3 The Marketing Mix—Price *133 greene_0538446145_ch05, 12/21/7, 17:27, page: 134 Determine a Price for a Product Once pricing objectives have been determined, the next step is to determine the possible prices for products. There will usually be more than one price that can be charged for a product. Pricing may be based on demand, cost, or the amount of competition. Demand-Based Pricing Pricing that is determined by how much customers are willing to pay for a product or service is called demand-based pricing. Potential customers are surveyed to find out what they would be willing to pay for the product. The highest price identified is the maximum price that can be charged. If the bakery at Luisa’s Gourmet Luxuries becomes widely recog¬ nized as the best in town, Luisa could begin charging higher prices for her baked goods. People will be willing to pay a higher price for a loaf of bread that they believe is the best available. % Cost-Based Pricing Cost-based pricing is determined by using the wholesale cost of an item as the basis for the price charged. A markup price is a price determined by adding a percentage amount to the wholesale cost of an item. A markdown price is a price determined by subtracting a percentage amount from the retail price of an item. Luisa buys artichoke hearts for $1.77 a can. To cover her operat¬ ing expenses and allow for a profit, she adds 40 percent to her whole¬ sale cost, or $0.71. The new price of $2.48 is her retail price. Wholesale cost X Percentage markup = Markup amount $1.77 X 0.40 = $0.71 Wholesale cost + Markup amount = Retail price $1.77 + $0.71 = $2.48 Sometimes business owners purchase too much of a particular item and want to sell more of it quickly. To do so, they mark down the retail price of the product. You should be careful not to mark down an item below its cost. You do not want to lose money. Luisa usually charges $10.50 for a large bottle of olive oil. To sell more, she decides to mark down its retail price by 20 percent. Retail price $10.50 Retail price $10.50 x x Percentage markdown 0.20 Markdown amount $ 2.10 Markdown amount $ 2.10 Markdown price $8.40 Competition-Based Pricing Pricing that is determined by considering what competitors charge for the same good or service is called competition-based pricing. Once you find out what your competition charges for an item, you must decide whether to charge the same price, slightly more, or slightly less. 134 Chapter 5 Market Your Business greene_0538446145_ch05, 12/21/7, 17:27, page: 135 What things should Luisa consider when competing against another grocer that is already well established in her community? Luisa’s business will compete with The Gourmet Grocery, which has been in her community for five years. She cannot charge more than her competitor for items that customers could purchase there. She decides initially to charge a few cents less than The Gourmet Grocery on all packaged goods. She will keep an eye on competitors to make sure she stays up to date on what they are charging for their products. Checkpoint List three methods for determining the price to charge for a product. Price a Service When setting the price for a service, it is important to consider not only the cost of any items used in providing the service, but also the amount of time and anything that is included with the service. Time-Based Pricing The price to charge for services can be determined by the amount of time it takes to complete the service. A plumber may charge $100 per hour. If the job takes IV 2 hours to complete, the labor charge would be $100 x 1.5 = $150. A service provider must decide whether there will be a separate charge for materials or whether the materials will be included. A hair stylist charges a set amount to highlight someone’s hair. The amount includes the hair stylist’s time as well as all of the supplies used for the highlighting. Some service providers will negotiate the price. This is often done with legal services and construction projects. One area in which Luisa would like to expand her business is catering. She will have to calculate prices based not only on the cost of the food but also on the time that it takes for her to prepare and deliver the food. If she is responsible for serving at a catered event, 5.3 The Marketing Mix—Price 135 greene_0538446145_ch05, 12/21/7, 17:27, page: 136 she will have to charge for her time and the time of any helpers she may hire to wait on the guests at the event. Bundling Services can be bundled , or combined under one price, rather than making the customer pay for each individual part of the service. Airlines use bundling when they charge a passenger for a ticket. The price includes not only the transportation, but also any food and beverages served, the services of the employees who check in passen¬ gers, and baggage handling. Checkpoint Which method would be the best for a housepainter to use to price services? Why? Pricing Techniques It is important to set the right price for your products and services. Pric¬ ing can make or break a business. When first introducing a product or service into the market, price skimming and penetration pricing techni¬ ques may be used. Afterwards, psychological pricing and discount pricing are two pricing techniques that you should examine and incorporate when establishing permanent pricing for your products and services. Introductory Pricing As a product is introduced into the market, sales will be low, marketing costs will be high, and litde if any profit will be made. Two pricing techniques that are often used in the introductory stage of a product are price skimming and penetration pricing. Price skimming is used when a product is new and unique. A high price is charged to recover the costs involved in developing the product. Then as more competi¬ tors enter the market with similar products, the price is dropped. Pene¬ tration pricing starts out with a low introductory price with the goal of build¬ ing a strong customer base. The low price also discourages competition. Psychological Pricing Psychological pricing is based on the belief that certain prices have an impact on how customers perceive a product. This type of pricing is most often used by retail businesses. Techniques used in psy¬ chological pricing include the following: • Prestige pricing is selling at a high price in order to create a feeling of superior quality and social status. Be your own boss You plan to open a pizza delivery service near the University of Florida in Gainesville. Your tar¬ get market includes students who live in dorms and houses on and near the main campus. You know that the price you charge is going to be critical to the success of your business as there are several restaurants in the area with which you will be competing. Develop a psychological pricing strategy for the pizza delivery service. 136 Chapter 5 Market Your Business greene_0538446145_ch05, 12/21/7, 17:27, page: 137 How does price affect your buying behavior? • Odd/even pricing suggests that buyers are more sensitive to certain ending numbers. Studies have shown that prices ending in odd numbers are perceived to be bargains while those ending in even numbers suggest higher quality. For example, $29.99 sounds like a bargain compared to an even $30.00. • Price lining involves offering different levels of prices for a specific category of product based on features and quality. A jeweler might offer three price lines of diamond necklaces and display them in dif¬ ferent cases so that shoppers can go straight to the price level they can afford. • Promotional pricing is offering lower prices for a limited time to increase sales. This type of pricing is temporary and prices will return to normal when the promotion ends. • Multiple-unit pricing involves pricing items in multiples, such as 10 for $10. This type of pricing suggests a bargain. People will buy more items than they would if they were priced individually. Discount Pricing Discount pricing offers customers a reduced price. Discount pricing is used to encourage customers to buy. Markdowns are a type of dis¬ count pricing. Other discount pricing strategies include the following: • Cash discounts are offered to customers to encourage early payment of invoices. When this is done, the terms of an invoice will include the amount of the discount, the number of days in the discount period, and when the invoice is due if the discount is not taken. For example, terms of “2/10, net 30” mean that a 2 percent dis¬ count may be taken if the invoice is paid within 10 days. If no dis¬ count is taken, the net or total amount of the invoice is due within 30 days of the date of the invoice. To find the last date available for the discount, add the number of days in the discount period to the date of the invoice. If the invoice is dated April 1, you would add 10, and the last day of the discount period would be April 11. 5-3 The Marketing Mix—Price 137 greene_0538446145_ch05, 1/17/8, 14:46, page: 138 • Quantity discounts are reductions in price based on the purchase of a large quantity. This is also called a volume discount. Sellers offer quantity discounts because it reduces their selling expenses. • Trade discounts are reductions on the list price granted by a manu¬ facturer or wholesaler to buyers in the same trade. • Seasonal discounts are used for selling seasonal merchandise out of season. Barbeque grills are in high demand in the spring and sum¬ mer months, but not in the fall and winter. Manufacturers offer discounts to customers who purchase grills out of season. * 1 Checkpoint Name two techniques used in psychological pricing and provide an example of each. 5.3 Assessment THINK ABOUT IT 1. What pricing objectives are most important to a new business? 2. What do you need to consider when pricing services? 3. Why is discount pricing used? MAKE ACADEMIC CONNECTIONS & 4. COMMUNICATION Look through advertisements in newspapers and magazines and find examples of psychological pricing. Prepare a poster of the advertisements and label each pricing technique. 5. MATH You have a large inventory of small appliances in your kitchen store that have not sold during the past year. You decide to mark them down by 30 percent each. Using the Activity CD, open the activity "Pricing Products." Calculate the markdown price for each item. After two weeks, you still have some of these items, so you decide to mark them down an additional 25 percent off. Find the new markdown price. TEAMWORK You and your teammates are going to open a home entertainment store. Using the Activity CD, open the activity "Home Entertainment Store." Print a copy and complete the activity. Locate distributors, wholesalers, and manufacturers of three products you would like to sell. Choose at least two brands for each item. Contact the distributor to obtain information about pricing and delivery. What is the wholesale price of each product? Find the same product in a local store. What is the retail price? What is the markup percentage? 138 Chapter 5 Market Your Business greene_0538446145_ch05, 1/17/8, 14:46, page: 139 Sharpen Your Entrepreneurial Skills Breakeven Point As an entrepreneur, you will have to make decisions about pricing your products. Knowing how to calculate the breakeven price will help you ensure you do not price products below your cost. You do not want to lose money! The lowest price identified in a price range is based on the costs of the product to the seller. All production, marketing, and adminis¬ trative costs should be considered when determining the minimum price. The minimum price can be calculated through breakeven analy¬ sis. The breakeven point is the point at which sales revenue equals the total cost of acquiring/producing and selling a product or service. At the breakeven point, a business has no profit and no loss—it simply breaks even. A business can use the breakeven point in units to ana¬ lyze whether it is charging an appropriate price. To calculate the breakeven point in units, a business must deter¬ mine the selling price, fixed costs, and variable costs for one unit. Then, total fixed costs are divided by the selling price minus the variable costs. Luisa’s Gourmet Luxuries sells stainless steel pasta pots. Luisa determines that her fixed costs are $35,000 a year and her variable costs per unit are $9. Luisa wants to determine how many pasta pots she would have to sell to break even if the price is set at $150. Her breakeven point for the pasta pots would be calculated as follows: Total fixed costs 4* (Selling price — Variable cost) = Breakeven point $35,000 -f- ($150 - $9) = 248.2 The breakeven point in units would be approximately 249 units. Luisa must determine if she can sell 249 pasta pots. If she can, she can set the price at $150. If she wants to make a profit on the pasta pots, she will have to sell more than 249 units. Luisa can make additional calcula¬ tions to determine the relationship between price and breakeven point. TRY IT OUT You own AAA Audio/Video Repair. You make service calls to customers’ homes to repair their audio/video equipment such as television sets and home theater sys¬ tems. Your fixed costs are $10,000 a year and your vari¬ able costs for each service call are $20. If you charge $75 for each service call, how many service calls will you have to make in order to break even? Sharpen Your Entrepreneurial Skills 1 39 Digital Vision 0538446145_ch05, 12/21/7, 17:27, page: 140 Chapter 5 Assessment SUMMARY 5. J Develop the Marketing Plan 1. Marketing is all of the processes—planning, pricing, promoting, dis¬ tributing, and selling—used to determine and satisfy the needs of customers and the company. Businesses that follow the marketing concept use the needs of customers as the primary focus. You must determine the right marketing mix—the blending of product, price, distribution, and promotion—to use to reach your target market. 2. A marketing strategy identifies how you will achieve your market¬ ing goals. For a new business, a marketing strategy should address, product inUoduction or innovation, pricing, distribution, promo¬ tion, sales or market share, and projected profitability. 3. A marketing plan should include information on the product or ser¬ vice, target market, competition, marketing budget, business loca¬ tion, pricing strategy, promotional suategy, and distribution suategy. Putting it in writing helps you determine whether your marketing plan is solid and all parts are consistent. 5.2 The Marketing Mix—Product 4. The different products and services a business offers are its product mix. The marketing concept keeps you focused on meeting the wants and needs of customers as you develop a product mix. 5. Product features are the characteristics of the product that will sat¬ isfy customer needs. Branding is the name, symbol, or design that identifies your product. The brand, package, and label will differ¬ entiate your product from others. Positioning is creating an image for a product in the customer’s mind. 5.3 The Marketing Mix—Price 6. A business may set pricing objectives aimed at maximizing sales, increasing profits, discouraging competition, attracting customers, or maintaining an image. 7. Pricing may be based on demand, cost, or competition. 8. Services may be priced based on time, materials used, and bundling. 9. Introductory pricing techniques include price skimming and penetration pricing. Psychological pricing techniques include prestige pricing, odd/even pricing, price lining, promotional pricing, and multiple-unit pricing. Discount pricing includes cash discounts for paying early, quantity discounts, trade discounts, and seasonal discounts. What do you fcnow now? Read Ideas in Action on page 119 again. Then answer the questions a second time. Flow have your responses changed? 140 Chapter 5 Market Your Business greene_0538446145_ch05, 12/21/7, 17:27, page: 141 VOCABULARY BUILDER Match each statement with the term that best defines it. Some terms may not be used. 1. All of the processes—planning, pricing, promoting, distributing, and selling—used to determine and satisfy the needs of customers and the company 2. Uses the needs of customers as the primary focus during the plan¬ ning, production, distribution, and promotion of a product or service 3. A blending of product, price, distribution, and promotion used to reach a target market 4. Identifies how marketing goals will be achieved 5. Amount earned as a result of an investment 6. Product characteristics that satisfy customer needs 7. The name, symbol, or design used to identify your product 8. A business’s percentage of total sales generated by all companies in the same market 9. Creating an image of a product in the customer’s mind 10. The different products and services a business sells 11. Pricing that is determined by how much customers are willing to pay for a product or service a. b. c. d. e. f. 9 - h. i. j- k. l. m. n. o. branding competition-based pricing cost-based pricing demand-based pricing discount pricing features market share marketing marketing concept marketing mix marketing plan marketing strategy positioning product mix psychological pricing return on investment 12. Pricing that is determined by using the wholesale cost of an item as the basis for the price charged 13. Pricing that is based on the belief that certain prices have an impact on how customers perceive a product 14. Pricing that offers customers a reduced price to encourage them to buy REVIEW YOUR KNOWLEDGE 15. To successfully use the marketing concept, a business must do which of the following? a. identify what will satisfy the customers’ needs and wants b. develop and market products or services that customers consider better than other choices c. operate profitably d. all of the above 16. List six elements that should be addressed in a company’s market¬ ing strategy. 17. A marketing strategy should be consistent with the business’s_?_ 18. True or False? Opening two more restaurants in other locations around the city would be an example of a short-term goal for the owner of a new restaurant. 19. Which of the following would be a good addition to the product mix for a health club? a. diamond rings c. fitness apparel b. chocolate-chip cookies d. photo print service Chapter 5 Assessment 141 greene_0538446145_ch05, 1/17/8, 19:21, page: 142 20. The branding, packaging, and labeling of your product should accomplish all of the following except a. identify your product b. describe the company’s product mix c. differentiate your product from others on the market d. provide information about the product 21. Which of the following is not a pricing objective? a. to maximize sales c. to attract customers b. to increase profits d. to decrease expenses 22. A new cellular phone that lets you watch television, surf the Internet, send and receive e-mail, take pictures, and listen to music has just been released. There are people who want this device so badly they are will¬ ing to pay any price for it. This telephone should be priced using a. demand-based pricing c. competition-based pricing b. cost-based pricing d. time-based pricing 23. During late summer, Nordstrom’s Department Store offers fall and winter clothes at a discounted price for a short period of time. After that time, the price of this clothing goes up and is not reduced again until the end-of-season clearance. This is an example of a. prestige pricing c. promotional pricing b. price lining d. multiple-unit pricing 24. You own an office supply store. You purchase desk lamps at a wholesale cost of $14 each. You use a markup of 45 percent to determine the retail price? At the end of season, you offer a dis¬ count price using a markdown of 20 percent of the retail price. The discount price for desk lamps is a. $20.30 c. $16.24 b. $17.50 d. $11.20 25. Which of the following pricing techniques is often used when introducing a new product into the market with the goal of devel¬ oping a strong customer base while discouraging competition? a. price skimming c. prestige pricing b. penetration pricing d. price lining APPLY WHAT YOU LEARNED 26. You want to open a gardening business. You plan to offer planting, weed pulling, and watering services to busy homeowners in your neighborhood. Write a positioning statement for your business. 27. Look for advertisements containing pricing information. Identify the pricing strategy you think is being used in each ad and explain why. MAKE ACADEMIC CONNECTIONS 28. MATH The annual sales of home entertainment equipment in your area is $23 mi llion. You want to capture 15 percent of the market. How much will you have to sell to achieve your goal? 29. COMMUNICATION Write a paragraph describing how psy¬ chological pricing has affected one of your purchasing decisions. 142 Chapter 5 Market Your Business greene_0538446145_ch05, 12/21/7, 17:27, page: 143 PROBLEM SOLVING Your sporting goods store sells fitness equipment. Included in your product mix is a treadmill that is not selling well, and you do not understand why. List some possible causes. Outline strategies for determining the reason behind low sales. MATH You want to download some special relaxation music that you will play in the nail salon you are going to open. The site that you download music from is offering a multiple-unit price on music downloads this month. For every 3 songs you download, you pay only $2.50. If you download only one or two songs, the price is $0.99 per song. You download 38 songs. How much will you have to pay for the downloads? WHAT WOULD VOU DO? You offer a math tutoring service for children at the elementary and middle schools in your neighborhood. You normally charge $15 per hour. You recently received a message from the mother of a fifth grader inquiring about your services and pricing. She got your name from the mother of another student you tutor. You recognize her name as being from a family who owns a very large business in your town. You would like to charge her more than $15 per hour because you know the family is wealthy. What would you do? Is it fair for you to raise your price just because you know the family has more money? What problems do you think you might experience if you charge customers different prices? Under what circumstances would you be justified in charging customers different prices? I_ I _ J 30. 31. build your Business Plan Project This activity will help you get started on the development of a mar¬ keting plan for your business idea. Define short-, medium-, and long-term marketing goals for your business. Determine the product mix for your business and the features of each product. How do you plan on positioning your products? Decide how you will develop brand recognition for your business. Design any logos, symbols, and/or product labeling and packaging you will use. Determine your pricing objectives and how you plan to achieve them. Develop a pricing strategy for your products and/or services. What price will you charge? How did you decide on this price? Calculate the breakeven point based on your selling price. Is your breakeven point realistic? Do you need to adjust the selling price? Chapter 5 Assessment 143 greene_0538446145_ch05, 1/17/8, 19:20, page: 144 Planning a Career in E-marketing IVIy boss gave me one hour to surf the Web to research a poten¬ tial business he might develop. The time limit was to encourage me to stay focused. Each web site had multiple links to other sites. Some sites had movie-quality commer¬ cials, some sites offered free prod¬ ucts, and some sites distracted me with banner ads and pop-ups. When the hour was up, my sum¬ mary report included the assigned topic and additional information about related topics.” Why do web sites contain links to other sites? Why are some web sites easier to navigate than others? E-marketing is an expanding field that helps companies reach consumers via the Internet. Web site designers help companies and organizations develop web sites that inform potential customers about products and services offered. EMPLOYMENT OUTLOOK • Faster than average growth is anticipated. • As businesses increase their dependence on the Internet for the efficient distribution of product and marketing informa¬ tion, demand for these jobs will continue to grow. JOB TITLES • Online Marketing and Outreach Coordinator • Web Site Template Designer • Web Page Developer • Portal Designer • Web Site Marketer NEEDED SKILLS • A Bachelor’s degree is recommended. • Strong problem-solving and analytical skills are required. • Computer science and business courses are helpful. • Experience in content manage¬ ment, HTML, and assorted web-related software is required. What's it like to work in E-marketing? This morning Lev, a freelance web site designer, is meeting with a small group of investors who want to build a dozen windmills on property bordering a huge lake. As part of a public relations campaign to encourage community support for the project, the investors want to develop a web site about the proj¬ ect. Lev has been contracted to develop a web site that will list all of the benefits of the windmill farm. The web site needs to include photos of the windmill farm’s proposed design, statistics on the amount of homes that can be powered from wind energy, and data reflecting flight patterns of local birds. The site also needs to provide links to similar small-scale projects that have been successful. In the afternoon, Lev will meet with a farmer’s association that wants to provide support via a web site for independent farmers who want to convert corn to ethanol. This meeting will focus on the site’s content and possible links to other informational sites. In addition, the group will be making design deci¬ sions related to color, icon graphics, and editorial style. Navigation mod¬ els will also be considered. To help make the project more appealing to farmers, Lev must ensure that the web site is easy to navigate. What about you? Would you like to design web sites that are informative, easy to navigate, and profitable for their sponsors? 144 Chapter 5 Market Your Business greene_0538446145_ch05, 12/21/7, 17:27, page: 145 I earns will develop a written international marketing plan that identi¬ fies the customer base. The participating team must demonstrate oral communication skills to market a new product. The written marketing plan must not exceed ten pages. The completed written plan must include the Tide Page; Table of Contents; Synopsis; Company Goals; Description of Customers and Their Needs; Description of Pricing Strategy; Competition; Marketing Mix; Economic, Social, Legal, and Technological Trends; Human Resource Requirements; Marketing Timeline; Methods of Measuring Success; and Supporting Documenta¬ tion. BPA selects a new topic for the Global Marketing Team Event every year. TOPIC You are the Marketing Director for Flower Power. Your flower farm, located in southern Texas, raises fresh, reasonably- priced flowers that are sold throughout the United States. Most of your customers are wholesalers and supermarkets. Research indicates that the global economy offers numerous markets for your fresh flow¬ ers. Your company has recently developed a revolutionary packaging system that will ensure the delivery of fresh flowers to international customers. The package also meets all international standards, making it more likely to clear another country’s customs, which are restrictions imposed on imported products. Your presentation must explain your marketing plan for conduct¬ ing business globally. PERFORMANCE INDICATORS EVALUATED • Demonstrate know ledge and understanding of management and inter¬ national business concepts. • Communicate research in a clear and concise manner, both orally and in writing. • Demonstrate teamwork skills needed to function in a global marketing environment. • Demonstrate successful price selection methods. • Demonstrate effective persuasive and informative communication and presentation skills. Go to the BPA web site for more detailed information. Think Critically 1. Why is the packaging so important for fresh-cut flowers? 2. Why is it important for the product to clear customs? 3. Why must Flower Power understand customs (cultural traditions) in other countries? 4. Why are the packaging costs important in this case? www.bpa.org Winning Edge 145 greene_0538446145_ch06, 12/21/7, 18:17, page: 146 6.1 The Marketing Mix—Distribution 6.2 The Marketing Mix—Promotion 6.3 Selling and Promoting school.cengage.com/entrepreneur/ideas 146 greene_0538446145_ch06, 12/21/7, 18:17, page: 147 IDEAS !M ACTIOM Jasmine Lawrence Eden Body Works Turning a Bad Experience into a Million Dollars C an you imagine being 15 years old and a guest on the Oprah Winfrey Show! Being featured on an ABC News Special ? Or being the CEO of your own company and well on your way to your first million dollars? That's exactly what has been going on in Jasmine Lawrence's life lately. Jasmine, from Mt. Laurel, New Jersey, is the CEO of Eden Body Works—a company she was inspired to create at 11 years of age because of a bad experience with a hair product. Jasmine used a chemical relaxer on her hair when she was 11 that caused her to lose much of her hair. She decided that she would never use harsh chemicals on her hair again and began conducting research on all-natural ingredients. She used the Internet and consulted with hair-care specialists to find out what it takes to keep hair healthy. She conducted multicultural focus groups made up of both men and women. Then she began experimenting with mixing her own hair oils, shampoos, and condi¬ tioners. Soon friends and family members were asking her for products. At the age of 12, Jasmine prepared for entrepreneurship by attend¬ ing a Biz Camp sponsored by the National Foundation for Teaching Entre¬ preneurship. During the next year, she developed a business plan, filed a trade name certification with the state of New Jersey, and opened her business. Jasmine's leadership has led to a tremendous amount of growth. As Eden Body Works has grown and increased its customer base, Jasmine's distribution channels have also changed. Initially she sold directly to customers and promoted products through a company web site. Gradually she began working through retailers as beauty/braiding salons and barbershops began to both use and carry her products for resale to their customers. Then some Whole Foods Stores began carrying her products. Most recently, Jasmine struck a deal with Wal-Mart to begin offering her products. Jasmine's motivation to start her own busi¬ ness was driven from her own needs. Today, she is the manufacturer, the wholesaler, as well as a consumer of her own products. What do you Icnow? Do you think Jasmine's research on the needs of healthy hair con¬ tributed to the success of Eden Body Works? Describe how using different distribution methods have helped Jasmine's business to grow. Do you think the publicity that Jasmine has received has contributed to the growth of Eden Body Works? Euan Henry greene_0538446145_ch06, 1/17/8, 14:50, page: 148 Distribution mixup Dustin owns a small hardware store in south Florida. During the winter, he placed an order for swimming pool supplies to be delivered in early spring. He knew that pool usage and maintenance needs would increase for his customers in the spring. He wanted to be sure he had everything they needed. His supplier processed the order and assured Dustin it would be delivered in late February. Imagine Dustin's surprise when he opened the box from the supplier and found a product used to melt snow on walkways and driveways! Work as a Team What do you think happened to Dustin's order? What is the problem here? How do you think Dustin should handle this situation? Distribution problems can negatively impact a business. Channels of Distribution Distribution is an important component of the marketing mix that involves the locations and methods used to make products available to customers. As you develop a distribution strategy for your business, you will determine how you will get your goods and services to your customers. You must be sure you have the right product in the right place at the right time. Luisa Ramirez, who is opening a gourmet food shop and catering business in her community, knows that she must consider distribution in the marketing of her business. She will need to consider how to get the goods to sell, as well as how to actually get them into the customers’ hands. Channels of distribution are the routes that products and services take from the time they are produced to the time they are consumed. Choosing the right channel of distribution for a product includes finding the most efficient way to ship it to desired locations. Using the right distribution channels means saved time and lower costs for both buyers and sellers. 148 Chapter 6 Distribution, Promotion, and Selling Digital Vision greene_0538446145_ch06, 12/21/7, 18:17, page: 149 Direct and Indirect Channels Channels are either direct or indirect. A direct channel moves the product directly from the manufacturer to the consumer. An indirect channel uses intermediaries —people or businesses that move prod¬ ucts between the manufacturer and the consumer. Agents and whole¬ salers serve as intermediaries. Getting a product to the market in a timely manner is an impor¬ tant component of the distribution phase. If a farmer in South Georgia grows strawberries, the value of the strawberries will be maximized if they can be moved to northern markets quickly while they are fresh. Because there is a lack of fresh strawberries in northern markets, they will command a better price based on higher demand. The strawberry farmer must determine whether to use a direct or indirect channel of distribution to get the product to customers. Channel Options Entrepreneurs should examine the different options for channels of distribution and choose the one that best meets the needs of their business. The four basic options are illustrated and described below. Channels of Distribution Manufacturer-► Consumer Manufacturer- *- Retailer-*- Consumer Manufacturer-*- Wholesaler -► Retailer-*- Consumer Manufacturer -► Agent -► Wholesaler -► Retailer-► Consumer 1. Manufacturer to Consumer The product can be sold by the manufacturer directly to the consumer through the Internet, direct mail, or television shopping channels. There are no intermediaries involved in this option, and it is the most cost-effective. However, sales opportunities are limited because it is more difficult for a man¬ ufacturer to reach the final consumer. 2. Manufacturer to Retailer to Consumer A sales force can sell manufactured goods to retail stores, and the retail stores can sell to the consumers. This is a more expensive option than selling directly from the manufacturer to the consumer, but it offers more sales opportunities. 3. Manufacturer to Wholesaler to Retailer to Consumer To reach a large market, the manufacturer can sell large quantities to a wholesaler who will then store and sell smaller quantities to many retailers. Even though more intermediaries are involved in this method, prices can be lower because the manufacturer is producing mass quantities of the product, resulting in lower production costs. Develop Your Reading Skills List all of the chapter key terms on the board. Have students write a definition for each key term before reading the chapter. When a key term is introduced in the chapter, have students compare the definition to the one they wrote and correct their definitions as needed. 6.1 The Marketing Mix—Distribution 149 greene_0538446145_ch06, 12/21/7, 18:17, page: 150 4. Manufacturer to Agent to Wholesaler to Retailer to Consumer With this option, the manufacturer does not get involved in selling. Selling is handled by an agent. This option is often chosen by manu¬ facturers involved in international marketing. Checkpoint What are the four basic options of channels of distribution? Distribute Goods and Services Retail businesses, service businesses, and manufacturing businesses will choose different channels of distribution based on the needs of their businesses. In addition, all types of businesses must carefully plan their distribution strategy to ensure customer satisfaction. Retail Businesses Retail businesses have many ways of selling products. As the owner of a retail business, you can distribute products in various ways. • Offer your product or service to consumers in a convenient loca¬ tion and during convenient hours. • Use catalogs, fliers, and other advertisements to reach customers who live outside the area. Take orders by phone or fax and ship them directly to customers. • Create a web site. People with access to the Internet can visit your web site to learn about your products and services and to make o nl ine purchases. Luisa’s food and catering shop is a neighborhood business that caters to local residents, so she does not think she would get much benefit from catalogs. As a convenience for customers, Luisa decides to stay open until 8:00 on weeknights and have hours from 10:00 until 4:00 on Saturdays and 12:00 to 4:00 on Sundays. She also creates a web site that contains product descriptions, menus, and order forms for customers wanting to place catering orders. Service Businesses Most entrepreneurs who own service businesses sell their services directly to customers. These businesses have a single, direct channel of distribution because the production and consump¬ tion of a service happens at the same time. For example, electricians, restau¬ rant owners, and lawyers deal directly with the people who purchase their services. It is important for a service be your own boss You plan to open a kite shop in a beach resort town. You will sell custom-made kites as well as kites you plan to import. You know that you will have customers during the spring and summer when families are visiting the beach, but you are looking for ways to increase sales during the off¬ season when there are very few visitors to the area. Describe ways that you could distribute your products that would increase sales during the off-season. 150 Chapter 6 Distribution, Promotion, and Selling greene_0538446145_ch06, 12/21/7, 18:17, page: 151 provider to offer the service when it is needed by the customer to maxi¬ mize the value of the service. If the service cannot be provided when needed, the customer will look for another provider. Some service busi¬ nesses, such as film developers, use retail stores to distribute their services. Manufacturing Businesses Manufacturers usually don’t sell direcdy to customers. Instead, they make their products and then sell the products to other businesses, such as retailers. The retail store then sells to the final consumer. Some manufacturers distribute their products very broadly and use all possible channels of distribution. Other manufacturers distrib¬ ute their products through selected outlets only. For example, high- priced cosmetics usually are sold in exclusive department stores. Inexpensive cosmetics are sold in discount stores and drugstores. Checkpoint Why are channels of distribution different for different types of businesses? Physical Distribution Physical distribution includes not only transportation but also storage, handling, and packaging of products within a channel of distribution. A product may move through several channel members by various forms of transportation to get it to the point where it will ultimately be sold to consumers. As the product is transported, it will be stored at various points along the channel as paperwork is processed and it is moved to the next channel member. It is important for storage facilities along the channel to be adequate and safe to protect the product. c o > "to Q © How can you determine the best method for Transportation transporting goods? There are many choices when transporting goods. Products can be moved by airplane, pipeline, railroad, ship, truck, or a combination of methods. You must determine which method is best and most cost- efficient for your products. Factors to consider in making a transporta¬ tion decision include what you are shipping and where it is being shipped. If you are shipping a small product to someone in your city, you would probably choose a parcel delivery service. If you are shipping a large item to another country, you would probably send the item by ship or 6.1 The Marketing Mix—Distribution 151 greene_0538446145_ch06, 12/21/7, 18:17, page: 152 air and use a truck to get the product to and from the shipyard or airport. If the product is perishable, you may need to choose a carrier that provides refrigeration or that can move the product very quickly to its destination. Product Storage and Handling Efficient storage allows channel members to balance supply and demand of products. However, this adds to the cost of the products and also adds the risk that products may be damaged or stolen while stored. Most products are stored in warehouses at various points through the channels of distribution. An automobile manufacturer in Japan selling autos in the United States stores them in Japan at the factory and at the shipyard until they are shipped. Once they arrive in the United States, they will be stored at the port until they can be loaded onto automobile carriers to be distributed to the dealers. Dealers have to provide storage for the automobiles until they are sold to the consumer. Packaging Packaging is designed to protect the product from the time it is pro¬ duced until it is consumed. If the product is not protected during the distribution phase, it could be damaged or destroyed, resulting in a loss of money to channel members. Packaging requirements will vary depending on the product, the way it is shipped, and where it is being shipped. The auto manufacturer in Japan packages a small accessory item being shipped to the United States differently than the autos it ships. Receiving Goods to Sell All types of businesses must receive goods from suppliers. Whether or not they sell goods to customers, all businesses need paper, com¬ puters, raw materials, and more to be able to function. Retailing busi¬ nesses need to obtain goods to sell. A service business that grooms pets needs to buy cat and dog shampoos and flea combs. A blanket manufacturer must buy cotton. Why does physical distribution play an important role for retail stores? 1 52 Chapter 6 Distribution, Promotion, and Selling Lk4 greene_0538446145_ch06, 1/17/8, 14:51, page: 153 You can use various sources to locate distributors, wholesalers, and manufacturers. Your public library and the Internet will have research materials you can use. Some helpful sources include the following: • The American Wholesalers and Distributors Directory, which lists suppliers in a wide range of industries • The Thomas Register , which lists all manufacturing companies • Trade magazines that may include articles about or advertisements for suppliers in your industry Luisa needs to create relationships with wholesale distributors. She must find companies she can trust to deliver high-quality products quickly. Luisa will purchase products directly from companies that produce them and through distributors. Her pastries come from a local baker. Distributors will supply her with imported and domestic canned goods, as well as meat, fruits, and vegetables. Checkpoint What factors are important to consider in the physical distribution of products? s i Assessment THINK ABOUT IT 1. Which channel of distribution would be the best for a dairy farm with limited production of a few products to be sold to a small group of local customers? 2. How does distribution add value to goods, services, and ideas being sold? 3. How is it possible to add intermediaries to the distribution chan¬ nel and at the same time increase profits? MAKE ACADEMIC CONNECTIONS 4. GEOGRAPHY Think of a product that would have to be shipped from another country to the United States. Research the route that the product would follow while being shipped. Write a paragraph describing the places the product would pass through and describe the method of transportation that would be used for shipping. 5. COMMUNICATION Make a list of products that are sold directly to consumers by the manufacturer. Share the list with your classmates. TEAMWORK Working in a team, choose one of the following products: apples, MP3 players, magazines, milk, motor oil, t-shirts, CDs, or DVDs. Draw flow charts tracing all the channels of distribution possible for the product. 6.1 The Marketing Mix—Distribution 153 # greene_0538446145_ch06, 1/17/8, 14:51, page: 154 • • The Marketing Mix—Promotion List the many forms of advertising and discuss advantages and dis¬ advantages of each. Define publicity and describe ways to use publicity as a promo¬ tional tool. advertising publicity press release public relations V l Focus on Small Business The costs of promotion From the moment she got the idea to open her own spa, al Chachi could think about was Grand Opening Day! But she knew that there were many things to do before she was jr '^' ready to open. She took her time and worked through ..' all the details, preparing her business plan and securing s .. financing for the business. Now Chachi is ready to get TYYvtL I-.'I the word out to her target market. She wants to be sure that the information she shares gives customers a reason to want to visit the spa. She considers offering a free spa service with the purchase of a spa service on opening day. This promotion could cost her up to $120 per free service. Chachi has a staff of four, but | q only two of them are certified to perform certain spa services. So she knows she must consider any staffing problems that could occur on opening day as a result of the promotion. Work as a Team Do you think Chachi's idea for an 1 opening day promotion is a good one? Why or why j^ ere are many f ac tors to not? Can you suggest some alternative promotions consider when developing that Chachi might use? promotions. Promotion Strategies No matter how wonderful your products, distribution methods, and pricing, you will not succeed as an entrepreneur if customers do not know about your business. You will have to promote your business to make customers aware of the benefits of buying from you. Promotion takes many forms, including advertising, publicity, personal selling, and sales promotion. The strategy created by adopting a blend of some, if not all, of these techniques is called your promotional mix. Advertising Service industries, manufacturers, and retailers all advertise. Advertising is a paid form of communication sent out by a business about a product 1 54 Chapter 6 Distribution, Promotion, and Selling greene_0538446145_ch06, 12/21/7, 18:18, page: 155 or service. It keeps your product or service in the public’s eye by creat¬ ing a sense of awareness. Advertising should help a business convey a positive image. Advertising can be very important for small businesses, particu¬ larly new ones. Advertising helps you communicate with potential cus¬ tomers. It lets them know what kinds of products and services your company offers and why they should buy from you. Large companies generally use advertising agencies to create their advertisements. Using an advertising agency usually results in highly creative and effective ads, but it can be very costly. As an owner of a small business, you probably will handle your own advertising. CHOOSE YOUR MESSAGE Your advertising should clearly communi¬ cate the message and image you want. If, for example, your marketing strategy is to have low prices, advertisements highlighting your prices might be appropriate. If your aim is to target customers who are will¬ ing to pay higher prices for excellent service, advertising that describes your well-trained staff would fit your image. Once you choose a message, you will need to decide which advertising medium to use. To choose a medium, you will have to consider both cost and effectiveness in reaching your target audience. Online Advertising did you KNOW? In 2006 , the top W m^r spmt ° ver >18 bill,on combined The top 10 spenders ' ^ere as follows: * ^cter & Gamble General Motors AT&T Inc. Verizon Time Warner Inc. Ford Motor Co. V/alt Disney Co. Da/mlerChrys/er Johnson & Johnson News Corp. As Internet use has increased, online advertising has become widely used by businesses to promote their products and services. This is a cost-effective way for businesses to get information to potential cus¬ tomers. Ongoing changes and advancements in online advertising technology make it easier for customers to get the information they need. Potential customers can use keyword searches and browse through online catalogs by category to find information about avail¬ able products and services. Online technology lets businesses interact with customers through o nl ine chat rooms, blogs, and e-newsletters. A well-designed web site can enhance customers’ experience by giving them easy-to-navigate pages that contain up-to-date information on products and services. TYPES OF ONLINE ADVERTISING O nlin e advertising combines color, imagery, animation, and other elements to attract the reader’s atten¬ tion. Some common types of online advertising include the following: • Banner Ad A graphic image or animation displayed within a rect¬ angular box across the top or down the side of a web page • Floating Ad An ad which moves across the screen or floats above the page content • Wallpaper Ad An ad which changes the background of the page being viewed • Trick Banner A banner ad that looks like a dialog box with but¬ tons, often appearing like an error message or an alert • Pop-Up Ad A new window that opens in front of the current one, displaying an advertisement 6.2 The Marketing Mix- Promotion 155 © Getty Images/PhotoDisc greene_0538446145_ch06, 12/21/7, 18:18, page: 156 • Pop-Under Ad Similar to a pop-up ad except that it loads behind the current window and does not appear until the user closes one or more active windows PAYING FOR ONLINE ADVERTISING Determining the effectiveness of online advertising is more accurate than other forms of traditional advertising. As a result, new methods of charging for online advertising have been developed, based on the effectiveness of the ads. Three of the most common ways online advertising is purchased are as follows: • Cost per Mil (CPM) The charge to the advertiser is based on the exposure of the message to a specific audience. CPM costs are priced per thousand viewers reached with the message. • Cost per Click (CPC) The charge to the advertiser is based on the number of user clicks on the advertisement. This method offers an incentive to the publisher of the ad to target the ad correctly. It will come up when certain keywords are used in visitors’ searches that correspond with the content of the ad. Payment to the pub¬ lisher is dependent upon viewers actually responding to the ad by clicking on the hyperlink within the ad. • Cost per Action (CPA) The charge to the advertiser is based on the user completing a form, registering for a newsletter, or some other action that will lead to a sale. The publisher assumes all the risk in running this type of advertisement. Advertisers prefer this type of charge for banner advertisements. DISADVANTAGES OF ONLINE ADVERTISING Many marketers have abused the Internet and its ease of use with excessive spamming — sending mass mailings by e-mail to Internet users. Excessive use of pop-ups, flashy banners, and spam has caused people to use pop-up blockers, spam control, and spy- ware to block promotions from reaching their computers. Luisa creates a web site that provides information about her gourmet food shop and catering services. Because her customers are local, Luisa decides not to use any other forms of online advertising. Television Advertising Promotions on television reach millions of people every day. It is the best way to reach a large num¬ ber of people quickly. Television advertising usually comes in the form of commercials and paid advertisements. Commercials are usually less than a minute in length and are run during breaks in television programming. They 1 56 Chapter 6 Distribution, Promotion, and Selling Why do you think television advertising often targets teenagers? greene_0538446145_ch06, 12/21/7, 18:18, page: 157 are very short promotions about a product or business. Paid advertisements—also known as infomercials—can last a half hour or more and go into depth about the product being offered. Television promotion allows businesses to communicate through both sight and sound. It can be creative, entertaining, and informative. Television advertising expenses include the fee you have to pay the station to air the commercial. This fee is based on the amount of time your advertisement or commercial plays. In addition, you must also consider the costs of producing the commercial. If a one-minute commercial costs $25,000 to produce, you pay the television station $2,000 for each minute it airs, and you plan to have it aired 30 times, the cost per minute would be [$25,000 + ($2,000 x 30)] -y 30 = $2,833.33. DISADVANTAGES OF TELEVISION ADVERTISING Advertising on tele¬ vision is very expensive. Producing even a low-budget commercial can cost thousands of dollars. You will need to seek the help of video and production professionals when developing a television ad. In addition, you will have to pay a network or cable station to broadcast the commercial. Television reaches too broad an audience to be effective for most businesses. If, for example, only one percent of the viewing audience is interested in a particular product, advertising on television is not likely to be cost-effective. Because of the excessive costs and the fact that she may not reach her target customer very effectively, Luisa decides that television adver¬ tising is not right for her business. Radio Advertising Radio advertising can be effective for small businesses. It is less expen¬ sive than television promotion. You can also be more certain you are reaching your target market. Radio stations tend to attract a particular kind of listener. Pop rock stations target teen¬ agers and people in their twenties. Classical or talk radio stations usually attract older listen¬ ers. Selecting a station whose listeners share the same demographics as your target market can increase the effectiveness of your advertis¬ ing. You can contact stations and ask for a demographic profile of their listeners to make sure it fits your target market profile. The costs of radio advertising are deter¬ mined in the same way as the costs of televi¬ sion advertising. You must pay for air time and production costs. DISADVANTAGES OF RADIO ADVERTISING Radio is a purely audio message and can’t visually show your product. Radio listeners may not remember what they hear. They ... . In 1999, Advertising Age magazine recounted the history of the American advertising indus¬ try in the 20th century. Access school.cengage .com/entrepreneur/ideas and click on the link for Chapter 6. Read about some of the most famous and effective ad campaigns, jingles, slogans, and icons/spokespeople of the past 100 years. Then think about the current advertising slogans and spokespeople you see and hear every day. Do you believe any of them could be added to Advertising Age's "best-of" lists? Explain why or why not. school.cengage.com/entrepreneur/ideas 6.2 The Marketing Mix—Promotion 1 57 greene_0538446145_ch06, 12/21/7, 18:18, page: 158 may tune out or even “surf the airwaves” during the commercial spots. You may need professional help when developing a radio ad, which can be costly. Luisa is targeting middle-aged, upscale customers. To reach this audience, she decides to advertise on the classical music station in her community. She receives a demographic profile of the radio station’s listeners and determines that her business targets a similar type of person. Newspaper Advertising Newspapers have been the single largest form of advertising in the United States. However, as more people are looking to the Internet for news and information, newspaper circulation has dropped in many cities. Small businesses may choose to promote their products and services in the newspaper for the following reasons: • It is relatively inexpensive. • It targets a limited geographic area. • It reaches large numbers of people. Luisa decides to advertise in several local newspapers. She places quarter-page ads in the morning paper serving the citywide area. She also puts half-page ads in all of the free newspapers that serve her community. The community papers reach a much smaller audience than the large city newspaper, but they target the local audience Luisa is trying to reach. Advertising in newspapers represents a cost-effective way for Luisa to reach her target market. DISADVANTAGES OF NEWSPAPER ADVERTISING Newspapers reach a large audience, but much of that audience may not be interested in your business. If, for example, you own a small gift shop that caters to people only in your immediate area, advertising in a large city newspa¬ per with a wide circulation may not make sense. You would be paying to reach thousands of people who are outside of your target market. Another disadvantage of newspaper advertising is the fact that your advertisement will compete with many others. Newspapers carry so many advertisements that readers may overlook yours. Telephone Directory Advertising Telephone directories list the phone numbers of people and businesses in a certain area. Directory ads usually appear on a page close to the listing and phone number of the business placing the ad. Directory ads can be similar in appearance to newspaper ads. Customers look in telephone directories again and again, making them a good advertis¬ ing medium. A disadvantage of directory advertising is that people look in the directory only when they are already in search of a particular type of business. With directory advertising, it is not easy to persuade custom¬ ers to try your business instead of a competitor’s. But, knowing how important the phone book can be, Luisa decides to place a quarter- page ad in the commercial directory distributed in her area. 1 58 Chapter 6 Distribution, Promotion, and Selling greene_0538446145_ch06, 12/21/7, 18:18, page: 159 Direct-Mail Advertising Direct-mail advertising includes fliers, catalogs, letters, and other correspondence sent to target customers through the mail. Mailing lists for target markets are available for purchase. If your business sells hospital beds, you can purchase targeted mailing lists of people who would purchase your product. You can also get lists of people based on the geographic area. Companies that specialize in maintain¬ ing targeted mailing lists can provide almost any kind of list for any kind of business. Direct-mail advertising can be effective if people read it, but many people throw out direct-mail advertising, calling it “junlc mail.” If you use this method of advertising, you will want to come up with an attention- grabbing design or other means of making people want to read it. Luisa decides to use direct mail to target residents living in four ZIP code areas near her store. She creates an attractive brochure with a catchy slogan on the outside cover, and she mails it to residents in the neighborhoods she is targeting. Magazine Advertising Magazines are an excellent way to aim products and services at spe¬ cific markets. Fitness magazines are full of advertisements for athletic apparel and equipment. Magazines targeting teenage girls are full of advertisements for products that appeal to them, such as cosmetics and clothing. Most magazines are nationally distributed. This can make them inappropriate for businesses that sell in a limited geographic area. Some large cities have local magazines, which would be an effective way to target a certain area. greene_0538446145_ch06, 12/21/7, 18:18, page: 160 The city in which Luisa will be opening her gourmet store has two local magazines. One focuses heavily on restau¬ rants and entertaining. Luisa checks the demographics of the magazine’s readership and finds that it targets the same market she is trying to reach. She decides to advertise in the magazine every other month. Outdoor Advertising Outdoor advertising includes billboards and signs. Such advertising can be effective in keeping the name of your business in a place where many people can see it. But because people view such advertising quickly as they drive by, it cannot include much information. Also, outdoor advertising may not project the image you are trying to con¬ vey for your business. When do you think outdoor advertising is more effective than other forms of advertising? Transit Advertising Transit advertising consists of signs on public transportation. Transit advertising can provide more information than is typically seen on a billboard. Such advertising can be effective if the market you are try¬ ing to reach includes many people who use public transportation. Luisa’s target market lives in the suburbs and rarely uses public transportation. For this reason, she rules out transit advertising, which would not help her reach her target market. Budgeting for Promotion Once you determine your promotional mix, you must obtain the approximate costs for all forms of advertising media that you plan to use. Using the estimated costs, calculate a projected promotional bud¬ get. Compare this amount to your projected sales and decide what percentage of the budget promotion represents. Determine whether this budget is realistic for your business. Compare your percentage to the industry average, which you can obtain from trade associations, business publications, or business owners. Be sure your promotional budget is in line with similar businesses. Checkpoint Why is promotion important to a business? 160 Chapter 6 Distribution, Promotion, and Selling greene_0538446145_ch06, 12/21/7, 18:18, page: 161 Publicity Publicity is a nonpaid form of communication that calls attention to your business through media coverage. Publicity may be good or bad. Good publicity can be as helpful as advertising. Publicity is free, but staging an event or bringing in a celebrity to generate publicity usually is not. While there are things you can do to attract positive media attention, publicity is largely out of a business’s control. Publicity can be negative if the media coverage is unfavorable. For example, some community newspapers publish listings of restau¬ rants that have violated health code laws. Customers may see this publicity and stop eating at those restaurants. Luisa plans to have an open house to mark her first day in busi¬ ness. She hopes that the media will do a story on her grand opening. To increase this chance, Luisa hires a popular local jazz band to per¬ form. She also invites her community’s leaders and personalities. She writes and sends a press release to all of the local newspapers, maga¬ zines, and radio and television stations as well. A press release is a written statement meant to inform the media of an event or product. Luisa’s press release is shown on the next page. To keep her name in the news, Luisa volunteers to write a weekly cooking column for one of the free newspapers in her community. She WHAT WENT WRONG Dental Promotion Leaves Bad Taste Dr. George Nilsson, a periodontist, had built his practice by using dentist referrals and word-of- mouth promotions and by speaking at confer¬ ences. As a way to expand his business, he decided to develop a program for dentists that graphically tracked gum disease. It would take the guesswork out of whether or not a patient should go to a specialist. Dr. Nilsson designed a step-by-step program, including a video and printed guide. He started the PerioDent Com¬ pany, investing $150,000 in developing the program elements, another $40,000 for initial inventory, and $80,000 more for advertising and public relations. PerioDent sent out mailings to dentists, periodontists, and schools. Dr. Nilsson took out full-page ads in professional journals. Unfortu¬ nately, after six months, sales were not as expected. There was a backlash of bad press from Dr. Nilsson's peers. The majority of dentists resented the PerioDent program because they believed it questioned the way they had been diagnosing gum disease. Addi¬ tionally, dentists accused it of having a negative impact on their income because it prompted some patients to visit periodon¬ tists instead of dentists. At the same time, some periodontists accused George of blatant self¬ promotion and greed. t prompts i Think Critically 1. What could have been done differ¬ ently to advertise and promote the program? 2. How might publicity or public relations activities help im¬ prove PerioDent's image? 5 ft i. Plan your promotions carefully. # 6.2 The Marketing Mix—Promotion 161 Image Source greene_0538446145_ch06, 12/21/7, 18:18, page: 162 FOR IMMEDIATE RELEASE GALA OPENING OF LUISA’S GOURMET LUXURIES Come celebrate the opening of Luisa’s Gourmet Luxuries on Friday, September 20, at 8:00 P.M. Hors d’oeuvres, imported champagne, and French pastries will be served at the event. Music will be provided by Glendale’s leading jazz ensemble, Jazz Expressions. The opening of Luisa’s Gourmet Luxuries marks the realization of a dream by owner Luisa Ramirez. “As a specialty cook,” she says,“I could not always find the products I needed. And I was never happy with the selection of produce and baked goods in town.” Luisa decided to open a store that would offer the kinds of products she could not find elsewhere in town. Luisa’s Gourmet Luxuries offers an astounding selection of products, including 14 different kinds of olive oil, 12 different kinds of rice, and pasta products from several different countries. “Everyone’s taste is different,” says Luisa, “so I offer a large selection.” For more information contact: Luisa Ramirez, Proprietor Luisa’s Gourmet Luxuries 1610 Marbury Road, Glendale, CT (275) 555-3983 likes the opportunity to educate the public about gourmet cooking and to increase her store’s visibility as a seller of gourmet foods. Public Relations Public relations is the act of establishing a favorable relationship with customers and the general public. Public awareness and positive public relations can be generated for your business when you show your community that you are involved and committed to it. There are many ways to support your community, including the following: • Sponsor a community sports team. • Make a donation to a local charity or relief effort program. • Get involved with the work-based program at your local high school or community college. • Become active in the local chapters of the Big Brothers or Big Sisters organizations. • Organize community programs such as cleaning up neighborhood parks. 162 Chapter 6 Distribution, Promotion, and Selling greene_0538446145_ch06, 1/17/8, 14:51, page: 163 Self-Promotion A business should try to keep its name visible and in the forefront of people’s minds. Self-promotion is a good way to do this. It’s a simple way to generate “free” publicity. Self-promotion may include activities such as the following: • Giving away t-shirts and hats displaying your company name and logo. • Distributing pens, notepads, coffee mugs, and other useful items printed with the name, telephone number, web site address, and logo of your business. Checkpoint What are the advantages and disadvantages of publicity? 6.2 Assessment THINK ABOUT IT 1. Why is it important for a business to consider its target market when selecting an advertising medium? 2. Describe some public relations activities businesses in your area have performed. 3. How would you decide which method of advertising is the best and most cost-effective for your business? MAKE ACADEMIC CONNECTIONS 4. PROBLEM SOLVING You are opening a new gardening service business in your community. You will help your customers plan their flower and vegetable gardens and shop for the plants for them. You will also provide planting services if your customers need them. Use the six-step problem-solving method to deter¬ mine how to advertise the grand opening of your business. 5. MATH You have produced a one-minute television commercial for $20,000. You plan to air it on a local television station for a cost of $1,000 per minute. You plan to air the commercial 20 times. What is the advertising cost per minute? TEAMWORK Working with team members, plan the grand opening activities for Fit For U, a fitness center that provides personal trainers for all clients along with a personalized fitness plan. Describe all of the promo¬ tional activities that you will conduct for the business. Write a press release to inform the local media of the opening. 6.2 The Marketing Mix—Promotion 1 63 greene_0538446145_ch06, 1/17/8, 14:51, page: 164 • • ■ r —.1, H T ■ • Explain the role of sell- • personal selling ing in a business. • rational buying • Determine how to meet decisions customer needs and • emotional buying wants. decisions • Discuss other types of • sales promotion promotional activities. • rebate • telemarketing 1 Focus on Small Business V<c- Expanding the business JoJo started her dance studio five years ago. Over the years, many of her clients have expressed a desire for JoJo to sell dance attire and shoes at her studio. She looks into the idea of adding a clothing line and thinks that it would be a good addition to her business. She decides to hire Claire to run the clothing side of the business. Claire has worked in retail sales for over ten years and is very customer-oriented. By adding Claire to her staff, JoJo will be able to offer her clients another service to meet their needs. In addition to her dance clients, JoJo wants to make the clothing line available to the general public. Work as a Team Do you think that JoJo is making a good decision in adding a retail cloth¬ ing line to her dance studio? Why or why not? What kinds of promotions do you think JoJo should use to try to attract new customers? Businesses must create the right promotional mix to attract customers. Selling Good selling skills are important to an entrepreneur. You will be sell¬ ing your business ideas to potential investors in the beginning stages of developing your business, and you will be selling products or ser¬ vices to customers once you open your business. You might need to hire others to assist you with your business, and you will need to be sure that they also have good selling skills. To many customers, the salesperson is the business. This may be the only representative of the company the customers ever come in contact with, so it is important for the salesperson to create a positive image of the company. Selling is the way a business makes money, so a salesperson plays a very important role. 164 Chapter 6 Distribution, Promotion, and Selling greene_0538446145_ch06, 12/21/7, 18:18, page: 165 Why do you think personal selling is an important component in the success of retail stores, such as hardware stores? Personal Selling Personal selling is direct communication between a prospective buyer and a sales representative in which the sales representative attempts to influence the prospective buyer in a purchase situation. It is important for the salesperson to uncover and identify the customer’s needs, issues, and concerns so that they can be addressed throughout the sales process. Product Knowledge To be successful at selling a product or service, a salesperson must have thorough knowledge of the features and benefits of the product or service. Features are the physical characteristics or capabilities of the product or service. Benefits are the advantages that could result from those features. Customers are mainly interested in the benefits they will receive from purchasing a product or service. Many times a salesperson builds a sales presentation around the features alone. However, customers who see the benefits of purchasing the product or service will be less likely to object to the price of the item as the sales transaction progresses. It is important for a business to spend time training salespeople about the product or service being sold as well as the industry in which they are working and the market in which they are selling. They should also be familiar with their own company as well as their company’s com¬ petition. The more salespeople know about the internal and external environment in which they are working, the more effective they will be. Checkpoint Why is selling important to a business? 6.3 Selling and Promoting 165 greene_0538446145_ch06, 12/21/7, 18:18, page: 166 Determine Customer Needs and Wants Customers purchase goods and services in order to satisfy needs. The need may be as basic as food, water, or shelter. Or, it may be a more complex need, like the need for esteem. A salesperson must determine what need the customer is seeking to satisfy in order to sell a product or service to meet the need. Lower-level needs are not usually met through personal selling. Customers must purchase certain items to satisfy their basic needs and do not need the assistance of a salesperson. Selling skills become more important as customers are seeking to meet upper-level needs. Needs Assessment Customer needs within a target market can be identified through mar¬ keting research. The information helps a business decide what type of product or service to offer customers. When an individual customer goes shopping, it is up to the salesperson to find out as much as possi¬ ble about the customer’s situation by conducting a needs assessment. This involves interviewing the customer to determine his or her specific needs and wants. The salesperson can then help identify the range of options the customer has for satisfying those needs and wants. Some customers will know exactly what they want, and the fulfill¬ ment of their needs is referred to as need satisfying. Even though the customer knows what he or she wants, the salesperson must be flexi¬ ble and willing to commit company resources and selling time in order to better satisfy needs. When the need is not identified, the pro¬ cess of satisfying the need is called problem resolution. Problem resolu¬ tion requires the salesperson to adopt the customer’s point of view, ask questions to assess the nature of needs and specific requirements, and act as a consultant to assist the customer in solving the problem. Buying Decisions Customers are influenced by rational and emotional buying motives. Rational buying decisions are based on the logical reasoning of cus¬ tomers. Customers evaluate their options and make a purchase only after careful thought. Rational buying motives include safety, simplic¬ ity, quality, reliability, economy, convenience, service, durability, knowledge, money gain, and ease of operation. Emotional buying decisions are based on the desire to have a specific product or service. Feelings, beliefs, and attitudes can influence buying decisions. Often, little thought or time is spent making an emotional decision. Some emotional buying motives include fear, protection, appearance, recre¬ ation, improved health, comfort, recognition, pride of ownership, imi¬ tation, prestige, and popularity. Customer Decision-Making Process Following a problem-solving process is the best way to make a deci¬ sion. This is also true with customers when they are making a decision to purchase a product or service. The steps are to define the problem, gather information, identify various solutions, evaluate alternatives and 166 Chapter 6 Distribution, Promotion, and Selling greene_0538446145_ch06, 12/21/7, 18:18, page: 167 select the best option, take action, and evaluate the action. A sales¬ person can assist customers through this process by helping them define their need, showing them all the products or services that could meet the need, explaining the features and benefits of the various options, making the sale, and following up with the customer. 1 Checkpoint Why is it important to meet customer needs and wants in the selling process? Other Types of Promotion Advertising, publicity, and personal selling are not the only ways to draw attention to your business. You can also offer sales promotions or use telemarketing to promote your business. Famous Anne 'Bar^e Playing with paper dolls as a child led Anne Barge to her multimillion- dollar business selling bridal gowns. Internationally known as an expert in the field of bridal wear, her designs are rooted in research and inspired by vintage culture. Anne is involved in the development of each gown bearing her name and offers three distinctive brands that can satisfy any customer's taste and budget. Customer service is her top concern, and she helps each cus¬ tomer have a unique style for her special day. Anne began her career in the fashion field by working for others. In 1996, Richard Branson, owner of Virgin Records music label, asked Anne to set up a bridal store in London for him. As manager of Virgin Bride, she introduced British brides to a totally new look. Even the British tradition of having only children as attendants changed when Anne introduced adult bridesmaid gowns to the United Kingdom. In 1999, Anne decided to become an entrepreneur. She opened a bridal store in Atlanta, Georgia, and launched the Anne Barge Bridal Collection. Her col¬ lection combined classic designs in the finest of silks with museum- quality beading and embroidery, never seen before in the world¬ wide bridal market. Now her line is represented in over 100 of the finest stores in the United States, I _c the United Kingdom, Spain, and s Japan. The designing dreams of I a little girl have come true in a © big way! Think Critically How important is Anne's commit¬ ment to customer service to the success of her business? Why do you think brides would choose one of Anne's gowns over those of another designer? Do you think working for others before becoming an entrepreneur contributed to Anne's success? 6.3 Selling and Promoting 1 67 greene_0538446145_ch06, 1/17/8, 14:51, page: 168 A sales promotion is an incentive offered to customers in order to increase sales. Examples of sales promotions include: • contests • coupons • frequent-buyer • free samples • special events reward programs • rebates • gift certificates Some companies offer rebates. A rebate is a refund offered to people who purchase a product. Customers who purchase a $12 bot¬ tle of olive oil may be entided to a $2 rebate from the manufacturer. Telemarketing is using the phone to market your product or service. It can be an inexpensive, effective way to let people know about your business or about special offers. Keep in mind that some consumers consider telemarketing to be annoying and would rather not be contacted while they are relaxing at home. Checkpoint What is the purpose of sales promotions? Assessment THINK ABOUT IT 1. Why is personal selling used in a business? 2. What is the purpose of the needs assessment? 3. Name some sales promotions that an entrepreneur might use. Can you think of examples in addition to the ones listed in the lesson? MAKE ACADEMIC CONNECTIONS 4. MARKETING Customers are more likely to purchase a product if they clearly see its benefits. When selling products, you must learn to sell product benefits rather than product features. Using the Activity CD, open the activity, "Turn Features into Benefits." Print a copy and complete the activity. 5. COMMUNICATION You plan to use telemarketing to market your pressure-washing business to people in your local commu¬ nity. You can wash driveways, walkways, patios, decks, vinyl sid¬ ing, and lawn furniture. Write a script you will use when making the sales calls. TEAMWORK Working in a team, choose a business in your community. Make a list of all the marketing efforts that this business uses. Outline what you think the marketing plan for this business would look like. Chapter 6 Distribution, Promotion, and Selling greene_0538446145_ch06, 1/17/8, 14:51, page: 169 Sharpen Your Entrepreneurial Skills Marketing and the Web Many people believe that using the Internet for marketing a business is essential to its success. There are many electronic tools available, and you will need to analyze them to be sure you are using the right tools for your business. As an entrepreneur, it will be up to you to evaluate the best way to use the Web to market your business. Some of the advantages of using Web technology include: • Cost savings It is much cheaper to send an e-mail with market¬ ing information than it is to print and mail advertisements. • New customers A web site can attract new customers from all over the world to your business. • Networking Opportunities You can use blogs, message boards, and online discussion groups to network with many people. Some of the disadvantages of Web technology include: • Ineffective e-mails If someone does not already know about your business, e-mail might not be the best way to reach him or her. Many people delete mail from senders they do not know and use spam filters to keep such mail from reaching their inbox. • Loss of personal contact You lose the personal contact with your customers if you rely only on the Web to communicate with them. Many people hesitate to do business with someone that they have not met. TRY IT OUT You own a print shop that prints fliers, business cards, catalogs, and stationery for local businesses. You are considering creating a web site for your business. Make a list of purposes for which you might use the site. Then determine the advantages and disadvantages of using the web site for the purposes you listed. Evaluate whether the Web could be a valuable marketing tool for your business. Expense of maintaining web site Developing and maintaining an effective web site can be very expensive and time-consuming. Inefficient use of time Responding to numerous general inquiries from people using your web site can be very time- consuming. It would be more efficient to have a FAQs (Frequently Asked Questions) page on your web site that provides answers to commonly asked questions. Sharpen Your Entrepreneurial Skills 1 69 greene_0538446145_ch06, 12/21/7, 18:18, page: 170 Chapter 6 Assessment SUMMARY 6.1 The Marketing Mix—Distribution 1. The four basic options for channels of distribution are: (1) manu¬ facturer to consumer; (2) manufacturer to retailer to consumer; (3) manufacturer to wholesaler to retailer to consumer; and (4) manufacturer to agent to wholesaler to retailer to consumer. 2. Entrepreneurs should examine the different options for channels of distribution and choose the one that best meets the needs of their business and their customers. 3. Transportation, product storage and handling, and packaging needs are all factors that play an important role when choosing methods of physical distribution. 6.2 The Marketing Mix—Promotion 4. Advertising may be done on the Internet, on television, on radio, in the newspaper, in a telephone directory, through direct mail¬ ings, in magazines, and on billboards and signs. Each advertising medium has its own set of advantages and disadvantages. The best option for a business is the one that reaches the desired target market in the most cost-effective way. 5. Publicity is a nonpaid form of communication that calls attention to your business through media coverage. A business may capture media attention by submitting a press release and through public relations activities. 6.3 Selling and Promoting 6. Selling skills are important because sales are how a business makes money. A salesperson must identify the customer’s needs, issues, and concerns so that they can be addressed throughout the sales process. To be successful, a salesperson must have a thorough knowledge of the features and benefits of the product or service. 7. Needs assessment involves interviewing the customer to determine the customer’s specific needs and wants. Customers’ buying decisions may be rational (based on logic) or emotional (based on desire). Customers often use the problem-solving process to make buying decisions. The salesperson can assist customers during each step of this process. 8. Offering an incentive to customers in order to increase sales is called sales promotion. Examples include contests, frequent-buyer reward programs, rebates, free samples, special events, coupons, and gifts. Telemarketing is an effective way to let people know about your business and special offers. What do you hnow now? Read Ideas in Action on page 147 again. Then answer the questions a second time. How have your responses changed? 170 Chapter 6 Distribution, Promotion, and Selling greene_0538446145_ch06, 12/21/7, 18:18, page: 171 VOCABULARY BUILDER Match each statement with the term that best defines it. Some terms may not be used. 1. Routes that products and services take from the time they are pro¬ duced to the time they are consumed 2. Moves the product directly from the manufacturer to the consumer 3. Uses intermediaries that move products between the manufacturer and the consumer 4. A paid form of communication sent out by a business about a product or service 5. The act of establishing a favorable relationship with customers and the general public 6. Direct communication between a prospective buyer and a sales representative 7. Purchase decisions based on the logical reasoning of customers 8. An incentive offered to customers in order to increase sales 9. A nonpaid form of communication that calls attention to your business through media coverage 10. A written statement meant to inform the media of an event or product 11. Purchase decisions based on the desire to have a specific product or service m. n. o. advertising channels of distribution direct channel distribution emotional buying decisions indirect channel personal selling physical distribution press release public relations publicity rational buying decisions rebate sales promotion telemarketing 12. A refund offered to people who purchase a product REVIEW YOUR KNOWLEDGE 13. Which of the following type of business is least likely to distribute its products or services directly to consumers? a. retail business b. service business c. manufacturing business d. none of the above directly distribute products to consumers 14. Which channel of distribution would be best for someone who makes and sells pottery at his or her home? a. manufacturer to consumer b. manufacturer to retailer to consumer c. manufacturer to wholesaler to retailer to consumer d. manufacturer to agent to wholesaler to retailer to consumer 15. True or False: Agents and wholesalers are intermediaries that facili¬ tate the flow of goods through direct channels of distribution. 16. Goods that arrive at their destination damaged probably have a problem with the _?_ in the physical distribution process. 17. Examples of promotion include a. advertising c. sales promotion b. publicity d. all of the above 18. True or False? Publicity is always good for a business. Chapter 6 Assessment 171 greene_0538446145_ch06, 1/17/8, 19:22, page: 172 19. If you have a local business that offers a service to consumers in your neighborhood, which of the following would be the best way for you to advertise? a. a commercial aired during the Super Bowl b. an advertisement on satellite radio c. an advertisement in the local newspaper d. a billboard on a major interstate highway 20. An online ad that changes the background of the page being viewed is a a. banner ad c. wallpaper ad b. floating ad d. trick banner 21. Which of the following is the least important in the sales process? a. customer’s needs c. customer’s concerns b. customer’s issues d. customer’s income 22. Which of the following would be the best way for you to promote your pressure-washing business? a. free sample c. contest b. discount coupon d. gift with purchase 23. A salesperson who approaches all customers the same way is leav¬ ing out which important part of the sales process? a. needs assessment c. rational buying decisions b. product knowledge d. none of the above APPLY WHAT YOU LEARNED 24. You are a home improvement contractor. What role will channels of distribution play in your business? Which form of promotion will work best for you? Why? How can you assist your customers in their decision-making process? 25. You are going to open a retail store that will offer gifts and acces¬ sories. Your target market is 13- to 15-year-old girls. Describe the promotional mix you will use for your business. MAKE ACADEMIC CONNECTIONS 26. MARKETING When creating advertisements and promotions for your products, you must know who your target market is in order to create a message that will be effective. Using the Activity CD, open the activity, “Who Is the Target Audience?” Print a copy and complete the activity. 27. COMMUNICATION You are opening a health club and spa. Write a press release to local newspapers and radio and television stations. You are also buying time on a local radio station. Write the commercial that will air on the radio. List some public rela¬ tions activities that could promote your business. 28. RESEARCH Many companies have reward programs for their customers. Research the reward program of a company with which you are familiar. Prepare a presentation about the program, including information on who is eligible, how customers participate, and the rewards available to participants. How does the reward program help build customer loyalty? Present your findings to the class. 172 Chapter 6 Distribution, Promotion, and Selling greene_0538446145_ch06, 12/21/7, 18:18, page: 173 be charged using the CPA method at a rate of 50 cents per regis¬ tered visitor. During one week, your web site received 75,345 hits from visitors linking from the advertisement, 12,000 of those inquired about your product, and 7,432 of them registered their personal information with your web site. How much will you have to pay the publisher of your ad? WHAT WOULD VOU DO? You are the owner of Cookies For You. You have been selling your cookies in gift baskets designed for adults. Recently, you decided to start offering cookie gift baskets for children as well. You are think¬ ing about doing a promotional activity at a local day-care center in which you will give free cookies to all of the children. However, with all of the recent news reports and stories about childhood obesity, you are not sure that you should be promoting cookies to children. You are concerned that your marketing strategy will be viewed negatively. What would you do? Is it your responsibility to monitor the eating habits of children, or is this something for which only their parents should be responsible? How can you promote your cookie gift baskets in a positive way? V J build your JL W U IV - Business Plan Project This activity will help you complete the marketing plan for your busi¬ ness idea. Determine the channels of distribution that you will use for your busi¬ ness. Include information on how you will get products from your sup¬ pliers as well as how you will distribute your products or services to your customers. Develop selling strategies and company policies to ensure that the inter¬ nal environment of your business promotes good customer relations. Get advertising rates for a local radio station, television station, and newspaper. Also obtain rates for Internet advertising. Choose the medium that is best for your business and write an advertisement for that medium. To generate publicity, write a press release that you media. send to the After you have completed your marketing plan, review it to be sure that the questions listed on page 124 in Chapter 5 are answered. If necessary, revise your marketing plan as needed to ensure that all of these questions are addressed. Chapter 6 Assessment 173 greene_0538446145_ch06, 1/17/8, 19:22, page: 174 Planning a Career in Public Safety Public Safety, Corrections & Security UAI IVIy dad’s girlfriend is excited about starting a business with her new partner. Although she likes her prospective partner, she has hired a reputable private investiga¬ tor to do a complete background check. She wants to be sure diere’s nothing in this person’s back¬ ground that could impede the progress of their business.” How do individuals check the backgrounds of household employ¬ ees? How do corporations, widtin the confines of the law, determine their employees are honest? Private investigators provide a variety of services to individuals and corporations including child support investigations, employee background checks, and corporate asset protection. EMPLOYMENT OUTLOOK • Faster than average job growth is expected. • The need to protect confidential and proprietary information will drive an ongoing need for pri¬ vate investigators. • About one-quarter of private investigators are self-employed. JOB TITLES • Insurance Fraud Investigator • Surveillance Operative • Assets Protection Investigator • Loss Prevention Detective • Certified Legal Investigator • Hotel Detective to their investigative area of expertise. • A degree in criminal justice can be helpful. • Most states require licensing. What's it like to work in Public Safety Otto, a self-employed private investigator, has spent the early part of his day performing hidden surveillance. His client, an industrial manufacturing firm, suspected fraudulent filing of a workers’ compensation claim by an employee. The employee claimed that a recurring on-the-job back injury prohibited her from reporting to work. Otto had just finished his final surveillance of the employee. Today, she was playing tennis at a local park. Otto now had photos and video coverage of the employee in multiple scenarios performing physical activities that a back injury would prevent. Otto’s client will be able to prove fraudu¬ lent filing of workers’ compensa¬ tion claims. Otto is looking forward to dinner this evening as the client is buying! The client, who is the owner of a local restaurant chain, hired Otto to investigate potential employee theft. Otto has been collecting data through hidden video cameras. Tonight, as he dines at the restaurant, he will focus his observation on one of the servers who is suspected of undercharging friends and family for their meals. NEEDED SKILLS • Many private investigators are retired military or law enforce¬ ment professionals. • Investigators often have prior work experience in fields related What about you? Would you enjoy lawfully tracking down infor¬ mation that could help individuals and companies do a better job of protecting their rights? 174 Chapter 6 Distribution, Promotion, and Selling greene_0538446145_ch06, 12/21/7, 18:18, page: 175 : ill !!■ jr ENTREPRENEURSHIP PROMOTION PROJECT *rrrA 'mmgle/M V he Entrepreneurship Promotion Project provides students an oppor¬ tunity to demonstrate the skills needed in planning, organizing, imple¬ menting, and evaluating a campaign to educate chapter members and other individuals about entrepreneurship opportunities. Chapter mem¬ bers will utilize their knowledge of entrepreneurship and marketing skills to communicate the benefits of entrepreneurship to the target audience. Participants will share the information with a selected audi¬ ence in the community (examples: middle-school students, elementary students, civic organizations). This project can be completed by one to three students. It includes a written plan and oral presentation. Major sections in the body of the written plan include the Executive Summary; Introduc¬ tion; Management of Activities to Inform Chapter Members; Manage¬ ment of Activities Targeted at Outside Audience; Evaluation and Recommendations; Bibliography; and Appendix (optional). PERFORMANCE INDICATORS EVALUATED • Demonstrate knowledge and understanding of entrepreneurship. • Engage in activities that clarify and enhance understanding of entrepreneurship. • Plan and implement presentation/activities to educate and promote entrepreneurship to targeted groups. • Derive facts from data, findings from facts, conclusions from findings, and recommendations from conclusions. • Demonstrate critical-thinking skills. • Develop a concept from an idea to reality. • Plan, organize, and conduct a group project. • Determine priorities and set deadlines. • Evaluate group presentations. Go to the DECA web site for more detailed information. Think Critically 1. What are the benefits of presenting this project to elementary or middle- school students? 2. Why is it important to explain risks involved with entrepreneurship? 3. Who are popular examples of entrepreneurs? 4. What are three characteristics of successful entrepreneurs? www.deca.org Winning Edge 175 greene_0538446145_ch07, 12/21/7, 18:34, page: 176 7.1 Decide to Purchase, Join, or Start a Business 7.2 Choose a Legal Form of Business 7.3 Legal Issues and Business Ownership school.cengage.com/entrepreneur/ideas 176 greene_0538446145_ch07, 12/21/7, 18:34, page: 177 IDEAS !M ACTIOM Tina Wells, CEO of The Buzz Marketing Group, Inc. Capitalize on Youth Marketing T he corporations of today were started as small businesses—often with single owners—at some time in the past. Such is the case with The Buzz International Marketing Group, Inc. Tina Wells started The Buzz, her first business, when she was just 16-years old. Ten years later, she found herself named as one of Entrepreneur magazine's "Young Millionaires" and the CEO of The Buzz Marketing Group, Inc. Tina has been able to build a career doing what she loves. She always had a love for fashion and a fascination with pop culture. At 16, she began writing reviews for New Girl Times, a newspaper for young girls, of com¬ panies and their products that targeted teens. For her work, she received free products from more than 40 companies. After three months, she called on ten of her friends to help her, and they started The Buzz. Tina noticed that companies were not really connecting with the teens they were targeting as customers, so she began submitting her reviews directly to the companies. She was amazed by the positive response she received from the companies. A marketing director at one company told her that she had just paid someone $25,000 for the same type of information, but that Tina's report was better! This was when Tina realized she could get paid for doing what she loved. And so, the Buzz Marketing Group was born. She got her first paying client while she was a freshman in college. Tina went on to earn her B.A. in Communication Arts from Hood College. She felt that her degree gave her more credibility as a business¬ woman. Today the Buzz International Marketing Group, Inc. is head¬ quartered in New York City and employs ten people. In addition to the staff, over 9,000 teenage and young adult "buzzspotters" are out researching what their peers are thinking and doing. The buzzspotters help Tina stay in touch with what's happening. Tina realizes that the profits from her business must be reinvested in the business in order to keep it growing. Even though she loves to shop, she invests profits into training seminars for the "buzzspotters" and other things that will contribute to the success of her business. Today Tina speaks regularly to professional audiences across the country. She has been quoted and featured in numerous business publica¬ tions, including O Magazine, New York Times, Ebony, and Entrepreneur. What do you Icnow? What unmet need did Tina find that led to her first business? Tina set up her business as a corporation. What is a corporation? Name some of today's successful corporations that started out as a small business owned by one or two people. greene_0538446145_ch07, 1/17/8, 14:55, page: 178 Decide to Purchase, Join, or Start a Business • Discuss purchasing an existing business. • Describe how to evaluate a franchise opportunity. • List advantages and dis¬ advantages of joining a family business. • Determine whether to start a new business. Focus on Small Business • franchise • initial franchise fee • startup costs • royalty fees • advertising fees How can we get this dough rising? After graduating from the culinary arts institute, Midori and Crystal wanted to realize their dream of owning a bakery. Midori found an ad for a bakery that was for sale. "If we purchased it, we would have the equipment and supplies needed to get started right away," she told Crystal. "If that's the Holcombe family bakery, we'd better stay away," Crystal warned Midori. "I was in there last week, and Mrs. Holcombe and her daughter were fighting about something. No one was waiting on the customers, and everyone was getting upset. If we bought that bakery, we would have to do something to change people's opinions about the service." "We could always start our own bakery 'from scratch,'" Crystal suggested. "Very funny!" Midori replied. "But that could be hard too. We would have to find a location, buy every¬ thing we need, and build a customer base." "Well," Crystal said, "maybe we should buy a franchise. "That's a possibility, but we'd have to follow the rules and regulations set by the franchise company," Midori said. "Gosh, it's not easy to get the dough rising, is it?" Crystal replied. Work as a Team What do you think would be some of the advantages and disadvantages to Midori and Crystal of starting a business from scratch, buying an existing business, or buying a franchise? 4 > . .V There are many ways to begin a business venture. Purchase an Existing Business When most people consider going into business for themselves, they think about starting a new business. But purchasing an existing busi¬ ness could be a good option. Owners sell their businesses for a variety of reasons. Reasons can include insufficient sales or profits, new com¬ petition, fear of changing economic conditions, retirement, a dispute among partners, death or illness of a partner, and the owner’s desire to do something different. 178 Chapter 7 Select a Type of Ownership Getty Images/PhotoDisc greene_0538446145_ch07, 12/21/7, 18:34, page: 179 There are many ways to find businesses that are for sale. You may find advertisements in the classified section of the local news¬ paper. You might decide to use a business broker who sells businesses for a living. Other people in your industry might know of businesses for sale. You might also learn about available businesses through land¬ lords and leasing agents, lawyers and bankers, management consul¬ tants, the Small Business Administration, the Chamber of Commerce, and bankruptcy announcements. Advantages of Buying an Existing Business There are many advantages to buying an existing business. 1. The existing business already has the necessary equipment, sup¬ pliers, and procedures in place. It may also have built up good¬ will , or customer loyalty. You may want to change some of the policies and procedures established by the former owner, but fine- tuning existing systems is likely to be much easier than creating systems from scratch. 2. The seller of a business may train a new owner. The previous owner or experienced employees may be willing to help the new owner learn about the company. 3. There are prior records of revenues, expenses, and profits. This means that financial planning will be easier and more reliable than it would be for a completely new business. 4. Financial arrangements can be easier. The seller of the business may accept an initial partial payment and allow the rest to be paid off in monthly installments. This can reduce or eliminate the need for bank financing. If bank financing is needed, getting it may be easier because banks are more likely to lend to an established business. Develop Your Reading Skills Before reading the chapter, make a list of questions you have about the different types of business ownership and the legal issues facing business owners. Try to find answers to your questions as you read the chapter. Disadvantages of Buying an Existing Business Buying an existing business sounds like an easy way to become an entre¬ preneur, but it can be risky. There are disadvantages to buying a business. 1. Many businesses are for sale because they are not making a profit. Owners often try to sell businesses that are not financially profitable. 2. Serious problems may be inherited. Businesses can have poor reputations with customers, have trouble with suppliers, or be poorly located. 3. Capital is required. Many new entrepreneurs just do not have the money to purchase a mature business. Starting small may be their only option. Steps in Purchasing a Business Buying a business is a complicated process that requires serious thought. If you are considering buying a business, you will want to follow these steps: 1. Write specific objectives about the kind of business you want to buy, and identify businesses for sale that meet your objectives. This will help you find the right business for what you want to do. 7.1 Decide to Purchase, Join, or Start a Business 179 greene_0538446145_ch07, 12/21/7, 18:34, page: 180 2. Meet with business sellers or brokers to investigate specific opportunities. Ask about the history of the business, the reason for its sale, its financial performance, and the price the owner is asking for it. 3. Visit during business hours to observe the business in action. Inspect the facility closely to make sure that it meets your needs. Observe how the business operates when it is open to customers. 4. Ask the owner to provide you with a complete financial account¬ ing of operations for at least the past three years. Analyzing these reports will help you see how much profit you can make and how much you will probably be paying out in expenses. 5. Ask for important information in written form. Get a list of all assets to be transferred to the new owner, a statement about any past or pending legal action against the business, a copy of the business lease or mortgage, and a list of all the suppliers. Have an accountant and a lawyer help you review all of the material. Be suspicious if the owner refuses to provide all of the information you request. 6. Determine how you would finance the business. Contact lend¬ ing institutions, and ask the seller if he or she would be willing to finance part or all of the purchase. 7. Get expert help to determine a price to offer for the business. An accountant or a valuator —an expert on determining the value of a business—can help. Present the offer in writing to the seller. If an agreement is reached, have a lawyer draw up a sales contract. Checkpoint What are some of the advantages and disadvantages of buying an existing business? Franchise Ownership Purchasing a franchise is another route by which you can become an entrepreneur. A franchise is a legal agreement that gives an individual the right to market a company’s products or services in a particular area. A franchisee is the person who purchases a franchise agreement. A franchisor is the person or company that offers a franchise for purchase. More than 770,000 people in the United States own franchises, and the number is growing. Franchising opportunities are available in virtually every field, from motels to pet stores to video oudets. The Franchise Opportunities Handbook , a publication of the U.S. Depart¬ ment of Commerce, lists more than 1,400 franchise opportunities by category. It also provides information about the costs and capital requirements. Additional sources for finding out about franchise opportunities include the following: • A Consumer Guide to Buying a Franchise , published by the Federal Trade Commission • Books on franchising available at your public library 180 Chapter 7 Select a Type of Ownership greene_0538446145_ch07, 12/21/7, 18:34, page: 181 • The Wall Street Journal • Magazines such as Forbes, Barron’s, Business Start-Ups, Entrepreneur, and Inc Operating Costs of a Franchise If you decide to purchase a franchise, you will have to pay an initial franchise fee, startup costs, royalty fees, and advertising fees. The initial franchise fee is the amount the local franchise owner pays in return for the right to run the franchise. The fee can run anywhere from a few thousand to a few hundred thousand dollars. It is usually nonrefundable. Startup costs are the costs associated with begin¬ ning a business. They include the costs of renting a facility, equip¬ ping the outlet, and purchasing inventory. Royalty fees are weekly or monthly payments made by the local owner to the franchise company. These payments usually are a percentage of your franchise’s income. Advertising fees are paid to the franchise company to support televi¬ sion, magazine, or other advertising of the franchise as a whole. Jim Saurbrey purchased a Subway restaurant franchise. For the right to use the Subway name and logo, Jim paid a franchise fee of $12,500. In addition, Jim spent $70,000 renting restaurant space, purchasing equipment and supplies, and obtaining legal and account¬ ing services. During its first year, Jim’s franchise earned $36,000 in profits. He paid 8 percent, or $2,880, to Subway in royalty fees. During Jim’s second year in business, his restaurant earned $51,000, and he paid $4,080 in royalty fees. Investigate the Franchise Opportunity • Names, addresses, and telephone numbers of at least ten previous purchasers who live nearest to you • The fully audited financial statements of the seller • Background and experience of the business’s key executives • Cost of starting and maintaining the business • The responsibilities you and the seller will have once you have invested in the opportunity If the seller does not give you a disclosure docu¬ ment, you should ask why. Then verify the explana¬ tion with an attorney, a business advisor, or the FTC. © Why do you think cleaning service franchises are so popular? The Federal Trade Commission’s (FTC) Franchise and Business Opportunity Rule requires franchise and business opportunity sellers to give you specific information to help you make an informed deci¬ sion about your purchase. The seller must give you a detailed disclo¬ sure document at least ten business days before you pay any money or legally commit yourself to a purchase. You can use these disclosures to help answer your questions about the franchise or to compare it with other opportunities you are considering. The disclosure document should include the following: 7.1 Decide to Purchase, Join, or Start a Business 181 # Getty Images/PhotoDisc Getty Images/PhotoDisc greene_0538446145_ch07, 12/21/7, 18:34, page: 182 Evaluate a Franchise Some of the things you should do when evaluating a franchise include the following: 1. Study the disclosure document and proposed contract carefully. Make sure all of the information listed above is included in the dis¬ closure document. All costs and royalty fees should be provided. 2. Interview current owners listed in the disclosure document carefully. Ask them if the information in the disclosure document matches their experiences with the company. Be aware of shills, peo¬ ple listed in the document that are paid to give favorable reports. 3. Investigate the franchisor’s history and profitability. Deter¬ mine how long the franchisor has been in business and review its financial performance. 4. Investigate claims about your potential earnings. The company should provide you with the written basis for any claims made about potential earnings. Determine the pro¬ jected demand for the franchised product or service in the area where you will locate. Does the demand match the potential earnings? 5. Obtain from sellers in writing the num¬ ber and percentage of owners who have done as well as they claim you will. Sellers are required by law to provide this information. 6. Listen carefully to sales presentations. Be cautious of any sales presentation that pres¬ sures you to sign up immediately. A seller with a good offer does not use high- pressure sales tactics. Don’t fall for a promise of easy money. Remember that success usually requires hard work. Shop around. Compare franchises with other business opportuni¬ ties. Different companies offer different benefits. Choose franchises that interest you and request disclosure documents. Find out what services the franchisor offers. For example, will the franchisor help with marketing, merchandising, and site selection? Get the seller’s promises in writing. All promises made should be included in the written contract that you sign. Remember, the contract is a legally binding document. Determine what will happen if you want to cancel the franchise agreement. Buying a franchise is a major investment, so you should determine the financial risks of canceling the franchise agreement. Remember that it is okay to ask for advice from professionals. Lawyers, accountants, or business advisors can review the disclo¬ sure document and contract and give you their professional opin¬ ions about them. The money you spend for this service could save you from making a bad decision about investing in the franchise. 182 Chapter 7 Select a Type of Ownership Why is it important to research a franchise before you buy it? greene_0538446145_ch07, 12/21/7, 18:34, page: 183 Advantages of Owning a Franchise When deciding whether to buy a franchise, you should also consider the advantages and disadvantages of it. There are four main advantages. 1. An entrepreneur is provided with an established product or service. This allows entrepreneurs to compete with large, well- known companies. 2. Franchisors offer management, technical, and other assistance. This may include onsite training or classes, aid with starting the new business and handling daily operations, and tips on crisis man¬ agement. Some franchisors even offer help on everything from site selection and building design to equipment purchase and recipes. Most also maintain toll-free telephone numbers that franchisees can call for advice. 3. Equipment and supplies can be less expensive. A large franchise may be able to purchase in huge quantities. Some of the savings they enjoy as bulk purchasers are passed on to the franchisee. 4. A guarantee of consistency attracts customers. A franchise con¬ tract mandates a certain level of quality. Consumers know that they can walk into a franchise anywhere in the country and receive the same product or service. The cheeseburger sold at a Wendy’s in Long Beach, California, will be very similar to the cheeseburger sold in Toledo, Ohio. Disadvantages of Owning a Franchise Although franchising sounds like a great idea, there are some dis¬ advantages that you need to consider. 1. Franchise fees can be costly and cut down on profits. The initial capital needed to purchase a franchise business often is high. Also, some of the profits you earn as a franchise owner are returned to the franchisor as royalty fees. 2. Owners of franchises have less freedom to make decisions than other entrepreneurs. Many business decisions that entrepreneurs generally make themselves have already been made for franchisees. Franchisees must offer only certain products or services, and they must charge prices set by the fran¬ chisor. Many entrepreneurs object to this control because it inhibits the freedom they sought as independent business owners. 3. Franchisees are dependent on the per¬ formance of other franchisees in the chain. A franchisee can benefit from the successes of other franchisees. But if other franchisees run sloppy operations, customer opinions of the chain will decline. As a result, customers may stop going to a fran¬ chise, even if a particular store maintains high standards. school.cengage.com/entrepreneur/ideas PET ?kmark Breadsmith is a growing bakery franchise spe¬ cializing in European-style breads and rolls. Access school.cengage.com/entrepreneur/ ideas and click on the link for Chapter 7 to learn more about this franchise. When did the first Breadsmith franchise store open? What is the minimum amount a franchisee can expect to invest to open a Breadsmith store? How much of this is the franchise fee? What royalty fees must be paid to the franchisor? 7.1 Decide to Purchase, Join, or Start a Business 183 greene_0538446145_ch07, 12/21/7, 18:34, page: 184 4. The franchisor can terminate the franchise agreement. If the franchisee fails to pay royalty payments or meet other conditions, the investment in the franchise can be lost. Similarly, when the franchise expires, the franchisor can choose not to renew the agreement. Checkpoint What should you consider when evaluating a franchise opportunity? Enter a Family Business The U.S. economy is dominated by family businesses. According to some estimates, as many as 90 percent of all businesses, including the vast majority of small- and medium-sized companies, are owned by families. Many large companies, such as Wal-Mart and the Ford Motor Company, continue to be owned largely by people who are related to the company founder. Advantages of a Family Business did you KNOW? According to the Uni¬ versity of Southern Maine's Institute of Family-Owned Busi¬ nesses, 35 percent of Fortune 500 compan.es are family controlled. Family businesses account for 50 percent of U.s. gross domestic product. They generate 60 percent of U.S _ employment and /» percent of all new job Entrepreneurs who work for their family businesses enjoy the pride and sense of mission that comes with being part of a family enterprise. They also enjoy the fact that their businesses remain in the family for at least one more generation. Some enjoy working with relatives and knowing that their efforts are benefiting others whom they care about. Josh Morgan runs Morgan’s, a restaurant that has been in his family for three generations. In his grandfather’s time, Morgan’s was a simple coffee shop, catering to people in the neighborhood. Thanks to changes made by Josh’s mother, Mary, Morgan’s became a fash¬ ionable lunch spot for people from all over town. When Josh took over, he carried on some Morgan traditions and implemented some new ideas, such as a gourmet take-out department. Josh takes great pride in seeing how the restaurant has evolved. He enjoys the thought that one day his grandchildren may hang pictures of him on the walls of the restaurant that will then belong to them. Disadvantages of a Family Business Family businesses have several drawbacks. Family members, regardless of their ability, often hold senior management positions. This some¬ times means that poor business decisions are made. It also makes it difficult to retain good employees who are not members of the family. Family politics often enter into business decision making. Also, the distinction between business life and private life is blurred in family- owned businesses. As a result, business problems end up affecting family life as well. Entrepreneurs who do join their family business must be prepared to make compromises. Unlike individuals who start or buy their own companies, people who work for their families cannot make all decisions themselves. They may also be unable to set policies and procedures as they like. 184 Chapter 7 Select a Type of Ownership greene_0538446145_ch07, 12/21/7, 18:34, page: 185 Another challenge for a family-owned business is what to do when there is no family member to take over the business. This leaves the family with a decision to make regarding continuing the business or selling it to a nonfamily member. Checkpoint What are some of the advantages and disadvantages of entering a family business? Starting Your Own Business For one reason or another, joining a family business or operating a franchise may not be possible for you, or you might not be able to find a business to purchase. This means that to be an entrepreneur you will have to establish a business of your own. You need to consider the many advantages and disadvantages of starting your own business. Advantages of Starting Your Own Business Entrepreneurs who start their own business get to make decisions about everything from where to locate the business to how many employees to hire to what prices to charge. They are completely inde¬ pendent and create their own destinies. Many entrepreneurs find great satisfaction in starting their own businesses. Many are attracted to the challenge of creating something entirely new. They also get a feeling of triumph when their business turns a profit. Disadvantages of Starting Your Own Business There are many risks to consider when you start your own business. You must estimate demand for your product or service. There is no certainty that customers will purchase what you offer. Entrepreneurs who join family businesses, buy an existing business, or buy into franchises do not have this uncertainty because it is already known that customers will buy the product or service. Entrepreneurs who start their own business must also make decisions that other types of entrepreneurs need not make. These decisions include what product or service to offer, the location, what employees to hire, and so forth. What may seem to be good decisions at the time may not always have positive results. Lucy Donnelly realized how difficult it is to start a new business when she opened a kitchen accessories store. Lucy had considered purchasing a store franchise but had ruled it out because of the high franchise fee. Lucy’s problems began when she realized that her customers did not consider her location to be convenient. As a result, fewer custom¬ ers shopped in the store than Lucy had projected. What things should you take into consideration before you start a business? 1 Decide to Purchase, Join, or Start a Business 185 Getty Images/PhotoDisc greene_0538446145_ch07, 1/17/8, 14:56, page: 186 Contacting suppliers was more difficult than Lucy anticipated, and many of them proved unreliable. The high-priced items Lucy purchased in the hope of increasing profits did not sell well. Checkpoint Why is it more difficult to start a new business than to take over an existing business or purchase a franchise? 71 Assessment THINK ABOUT IT 1. When you purchase an existing business, why is it important to know the owner's reason for selling? 2. What extra expenses could you expect to pay when operating a franchise as compared to operating a nonfranchised company? Could you save money in expenses by operating a franchise? If so, how? 3. Your family owns a successful business that distributes flowers from around the world to local florists. Both of your parents work full time in the business. They have offered you a position in the company after you graduate from college. Will you accept their offer? Explain. 4. What would be the greatest advantage of starting a new busi¬ ness from scratch? What would be its greatest disadvantage? Do you think the advantages outweigh the disadvantages? Why or why not? 186 Chapter 7 MAKE ACADEMIC CONNECTIONS 5. COMMUNICATION Interview an owner of a family business. Find out how long the business has been in operation and how many family members are employed in the business. Ask the owner what the advantages and disadvantages are of own¬ ing a family business. Compare this list to the advantages and disadvantages discussed in the text. Write a report on your findings. 6. RESEARCH Identify a franchise that interests you. Research the franchise and evaluate it using the ten points given in this les¬ son. Write a short report on your findings and conclude with your opinion on whether this franchise is a good opportunity. Form teams. Brainstorm a list of reasons business owners may decide to sell their businesses. Put a check mark next to the reasons that could negatively affect the buyer's chance for success. Select a Type of Ownership greene_0538446145_ch07, 12/21/7, 18:35, page: 187 Choose a Legal Form of Business S r -i- uoais l erms List advantages and dis¬ advantages of a sole proprietorship. List advantages and disadvantages of a partnership. List advantages and disadvantages of a corporation. sole proprietorship partnership corporation share of stock board of directors dividends \l Focus on Small Business Establishing ownership Cheryl and Grayson are going to open a camp for dirt bike riders. It will be a place where people can come and ride their dirt bikes and camp out overnight. Their long-range plan includes building cabins on the property that can be rented to the bikers. Grayson asks Cheryl, "Do you think we should operate our business as a partnership or a corporation since we can't be a sole proprietorship?" Cheryl thought about it awhile and said, "You know, Grayson, there is a chance that someone could get hurt and we would be responsible if the accident was on our property. Let's choose the form of ownership that would help protect us and others too!" "Good idea, Cheryl. Let's start investigating and see what we can find!" Work as a Team Why do you think the possibility of someone getting hurt would be a big concern for Cheryl and Grayson? What other considerations do you think business owners should have when choosing a legal form for their business? There are several forms of business owner¬ ship to consider. Sole Proprietorship Once you decide to start your own business, you must decide what type of ownership the business will have. A business that is owned exclusively by one person is a sole proprietorship. Sole proprietor¬ ships enable one person to be in control of all business aspects. Sole proprietorships may be very small businesses with just a few employees, or they may be large businesses with hundreds of employees. Advantages of a Sole Proprietorship The government exercises very litde control over sole proprietorships, so such businesses can be established and run very simply. Accurate 7.2 Choose a Legal Form of Business 1 87 Getty Images/PhotoDisc greene_0538446145_ch07, 12/21/7, 18:35, page: 188 What might be some of the disadvantages of operating a restaurant as a sole proprietorship? tax records and certain employment laws must be met, but these are usually the only forms of govern¬ ment regulation for a sole proprietorship. For this rea¬ son, the sole proprietorship is the most common form of ownership in the United States. Disadvantages of a Sole Proprietorship It can be difficult to raise money for a sole proprie¬ torship. You are the only person investing money. You also bear the burden of all of the risks. If a sole proprietorship fails and debts remain, the entrepre¬ neur’s personal assets may be taken to pay what is owed. Rachel Gibson learned this lesson the hard way. Last year, her clothing store went out of business, leaving $42,000 in debt. Because Rachel had set up the business as a sole proprietorship, she had to sell some of her personal assets, including her car, to pay off the debt of the business. Checkpoint Why are sole proprietorships the most common form of business ownership? Partnership A business owned by two or more people is a partnership. Many entre¬ preneurs prefer to go into business with one or more partners so that they have someone with whom to share decision making and manage¬ ment responsibilities, as well as the risks involved with entrepreneurship. Advantages of a Partnership Running a business as a partnership means that you will not have to come up with all of the capital alone. It also means that any losses the business incurs will be shared by all of the partners. Like sole proprie¬ torships, partnerships face very litde government regulation. Disadvantages of a Partnership Some entrepreneurs do not like partnerships because they do not want to share responsibilities and profits with other people. They fear being held legally liable for the errors of their partners. Partnerships can also lead to disagreements and can end bitterly. Partnership Agreement When two or more entrepreneurs go into business together, they gener¬ ally sign a partnership agreement. The purpose of the partnership agree¬ ment is to set down in writing the rights and responsibilities of each of the owners. A sample partnership agreement is shown on the next page. 188 Chapter 7 Select a Type of Ownership greene_0538446145_ch07, 12/21/7, 18:35, page: 189 GENERAL PARTNERSHIP AGREEMENT FORMING “SUNNY SIDE UP” By agreement made this 21st day of September, 20—, we, Ana Ortiz, Keesha Gentry, and Thomas Chase, the undersigned, all of Palm Harbor, Florida, hereby join in general partnership to conduct a food service business and mutually agree to the following terms: 1. That the partnership shall be called “Sunny Side Up” and have its principal place of business at 2013 Sand Drive, Palm Harbor, Florida, at which address books containing the full and accurate records of partnership transactions shall be kept and be accessible to any partner at any reasonable time. 2. That the partnership shall continue in operation for an indefinite time until terminated by 90 days’ notice, provided by one or more of the partners indicating his, her, or their desire to withdraw. Upon such notice, an accounting shall be conducted and a division of the partnership assets made unless a partner wishes to acquire the whole business by paying a price determined by an arbitrator whose selection shall be agreed to by all three partners. Said price shall include goodwill, and the paying of same shall entitle the payor to continue the partnership business under the same name. 3. That each partner shall contribute to the partnership: $22,000 for initial working capital and the supplies and equipment. 4 . That in return for the capital contribution in item 3, each partner shall receive an undivided one-third interest in the partnership and its properties. 5 . That a fund of $75,000 be set up and retained from the profits of the partnership business as a reserve fund, it being agreed that this fund shall be constituted on not less than 15 percent of the monthly profits until said amount has been accumulated. 6. That the profits of the business shall be divided equally between the partners, that the losses shall be attributed according to the subsequent agreement, and that a determination of said profits and losses shall be made and profit shares paid to each partner on a monthly basis. 7 . That the partnership account shall be kept in the First Florida Bank and that all withdrawals from same shall be by check bearing the signature of at least one of the partners. 8. That each partner shall devote his or her full efforts to the partnership business and shall not engage in another business without the other partners’ permission. 9 . That no partner shall cause to issue any commercial paper or shall enter into any agreements representing the partnership outside the normal conduct of the food service business without notice to the remaining partners and the consent of at least one other partner, and further that all managerial and person¬ nel decisions not covered by another section of this agreement shall be made with the assent of at least two of the partners. IN AGREEMENT HERETO, WE ARE Ana Ortiz Keesha Gentry Thomas Chase ■And tfettt'ut. _ Chaise; 7.2 Choose a Legal Form of Business 1 89 greene_0538446145_ch07, 1/15/8, 17:23, page: 190 The sample partnership agreement identifies the following: 1. Name of the business or partnership 2. Names of the partners 3. Type and value of the investment each partner contributes 4. Managerial responsibilities to be handled by each partner 5. Accounting methods to be used 6. Rights of each partner to review and/or audit accounting documents 7. Division of profits and losses among the partners 8. Salaries to be withdrawn by the partners 9. Duration of the partnership 10. Conditions under which the partnership can be dissolved 11. Distribution of assets upon dissolution of the partnership Checkpoint Name some of the advantages and disadvantages of a partnership. WHAT WENT WRONG > * Partnership Woes Stan and Peter met while working at a video production company. Stan was in charge of editorial and production. Peter ran the sales force. Stan decided to begin his own company and invited Peter to join him. SP Communica¬ tions seemed like a perfect partnership. Peter would handle sales and administration, while Stan managed clients and directed production. Things seemed to be going well until Peter decided he wanted to be a part of the creative process. He spent most of his time producing videos rather than looking for new business. Because of their friendship, Stan trusted that Peter was taking care of his side of the business. As it turned out, Peter wasn't very good at the creative tasks he took on. He made mis¬ takes that reduced expected profits. In addi¬ tion, he wasn't making new sales contacts, which was supposed to be his main job. By the time Stan realized what was hap¬ pening to the business, it was too late. There weren't any new sales. What Stan thought were profits were the result of Peter not paying their bills. Stan was left with more than $150,000 in unpaid bills and other debts. Peter left the business. It took Stan three years to dig out of the financial mess and get his new company up and running successfully. Think Critically 1 How might Choose your partners wisely. Stan and Peter have avoided the problems that led to the end of their partnership? 2. Why is this situation a good example of the difficulty in maintaining partnerships between friends? 3. What types of things should be spelled out completely between partners at the begin¬ ning of the partnership? 190 Chapter 7 Select a Type of Ownership Getty Images/PhotoDisc greene_0538446145_ch07, 12/21/7, 18:35, page: 191 Corporation A corporation is a business that has the legal rights of a person but is independent of its owners. A share of stock is a unit of ownership in a corporation. There may be many owners, who are called share¬ holders or stockholders. The corporation, not the owners, pays taxes, enters into contracts, and may be held liable for negligence. Jim Munroe set up his company, Munroe Office Supply, as a corporation. He created 100 shares of stock worth $1,000 each. Jim then issued 15 shares to each of three outside investors, which means they gave $45,000 total to be shareholders in his company. Jim kept the remaining 55 shares himself. This means that Jim owns 55 percent of his company, while outside investors own a total of 45 percent of the company. The individual or group that owns the most shares maintains control of the company. Every corporation has a board of directors, which is a group of people who meet several times a year to make important decisions affecting the company. The board of directors is responsible for elect¬ ing the corporation’s officers, determining their salaries, and setting the corporation’s rules for conducting business. The board of direc¬ tors also decides how much the corporation should pay in dividends. Dividends are distributions of corporate profits to the shareholders. The company’s officers, not the board of directors, are responsible for the day-to-day management of the corporation. Disadvantages of a Corporation Setting up a corporation is more complicated than setting up a sole pro¬ prietorship or a partnership. To incorporate, you will need the assistance of a lawyer, who will help you file articles of incorporation with the state official responsible for chartering, or registering, corporations. Because of this, establishing a corporation can be costly. A business must be care¬ ful when it decides to incorporate. Articles of incorporation must be What role does the board of directors play in a corporation? 7.2 Choose a Legal Form of Business 191 greene_0538446145_ch07, 12/21/7, 18:35, page: 192 written that hilly detail the purpose of the business. If the articles are not written well, the corporation’s activities can be limited. Corporations are subject to much more government regulation than are sole proprietorships or partnerships. Another drawback of incorporation is that income is taxed twice. A corporation pays taxes on its income, and shareholders pay taxes on the dividends they receive from the corporation. This means that the corporation’s profits are taxed as corporate income and again as individual income. Advantages of Incorporation If the corporate form of ownership is complicated and cosdy, why do entrepreneurs set up corporations? Liability is the main reason. Liabil¬ ity is the amount owed to others. The shareholders’ risk is limited to the amount of money each shareholder invested in the company when he or she purchased stock. The personal assets of shareholders may not be taken to pay the debts of the corporation. Munroe’s Office Supply has gone bankrupt, leaving $150,000 in debt. Each shareholder can lose only the amount he or she invested in the corporation, so the outside people who invested $45,000 would lose their investment. Jim would also lose his investment of $55,000. If Jim had set up his business as a sole proprietorship, he would have been liable for the $150,000. If the business had been set up as a part¬ nership among Jim and his friends, all four partners would have been liable for the $150,000 debt. Incorporation allows businesses to raise money by selling stock. Lenders are more willing to lend money to corporations than to sole proprietorships or partnerships. Because shareholders do not directly affect the management of a corporation, the main shareholder of the company can change through the buying and selling of stock without disrupting the day-to-day business operations. S Corporation A small corporation can elect to be treated as an S corporation. An S corporation is a corporation organized under Subchapter S of the Internal Revenue Code. Unlike regular corporations, an S corporation is not taxed as a business. The individual shareholders are taxed on the profits they earn, as they would be in a partnership. Many companies establish themselves as S corporations because they lose money in their early years. The owners can use any losses suffered from the S cor¬ poration to offset other sources of personal income, and thus receive a tax break. Chanda Patel works full time at a large company where she earns $38,000 a year. She also runs Forever Yours, a wed¬ ding consultant business. Like many new businesses, Forever Yours lost money in its first year when its expenses exceeded its revenues by $12,000. Since Chanda had be your own boss You have decided that you are going to start a new business giving horseback riding lessons. You need to decide which legal form you will use for your business. Choose a sole proprietor¬ ship, partnership, or corporation. Write a para¬ graph explaining why you chose the legal form you did and the advantages and disadvantages of your choice. 192 Chapter 7 Select a Type of Ownership greene_0538446145_ch07, 1/17/8, 14:56, page: 193 set up her company as an S corporation, she was able to reduce her tax¬ able income by $12,000. Her taxable income for the year was thus $26,000 (the $38,000 salary less the $12,000 she lost on her business). Limited Liability Company A limited liability company (LLC) is a legal form of business that offers the limited liability protection of a corporation to its owners. The LLC is not subject to the rules for an S corporation and goes further than an S corporation in providing the benefits of partnership taxation and limited personal liability for all the owners of the busi¬ ness. The disadvantages of an LLC are that the type of businesses may be limited by state law, a single owner cannot establish an LLC, and many states limit the life of an LLC to 30 years. Checkpoint What is the main benefit of setting up your business as a corporation? Yt.-i Assessment THINK ABOUT IT 1. Which do you think is more risky: a sole proprietorship or a part¬ nership? Why? 2. What would be the advantages and disadvantages of forming a partnership with a friend? Would you consider forming a busi¬ ness this way? Why or why not? 3. Why do you think the government regulates corporations more closely than it does sole proprietorships or partnerships? MAKE ACADEMIC CONNECTIONS 4. MANAGEMENT You and a friend plan to open a business. Negotiate the terms of a partnership agreement. Using the Activity CD, open the activity "Partnership Agreement." Print a copy and complete the activity. 5. MATH Caren McHugh opened Best Foot Forward, a shoe store catering to women. To raise money, she organized her business as a corporation. She created 500 shares of stock, each worth $75. Caren held 260 of the shares for herself. She sold the rest in equal amounts to six investors. How many shares does each investor own? If Best Foot Forward fails and leaves $65,000 in debt, for how much would each investor be liable? TEAMWORK Working with teammates, create a chart listing all the forms of busi¬ ness ownership and the advantages and disadvantages of each one. 7.2 Choose a Legal Form of Business 193 # greene_0538446145_ch07, 1/17/8, 14:56, page: 194 Focus on Small Business Why are there regulations? James and Katie were starting an apparel company specializing in sportswear. They were trying to decide whal their company logo to look like. "Let's put a's^ logo like the one Nike uses," James suggested. "James, we can't use that logo. It's a Nike mark," Katie responded. "See the ™ symbol n« it. That means it's protected by a trademark an one else can use it." "Well, I guess we'd better keep thinking a what we want our trademark to be," answerec James. "That's a good idea," Katie said. "And while we're at it, we'd better look into all the rules and regulations we need to follow. We don't want to start off on the wrong foot by doing something illegal." Work as a Team Did you realize that businesses have to follow rules and regula¬ tions? Do you think it's fair for government Business owners must follow to regulate business? certain laws and regulations. Regulations That Promote Competition As an entrepreneur, there are laws that affect almost every aspect of your business. Even the competition that businesses face is regulated by the government. To make sure that competition is fair, the gov¬ ernment has enacted various laws to help protect businesses. Antitrust Legislation Beginning in 1890, laws were created that made monopolies in cer¬ tain industries illegal. A monopoly is also called a trust, so these laws were called antitrust laws. Antitrust laws also ban other types of busi¬ ness activities that do not promote competition. You should become familiar with these laws to determine how they affect your business. 194 Chapter 7 Select a Type of Ownership Getty Images/PhotoDisc greene_0538446145_ch07, 12/21/7, 18:36, page: 195 SHERMAN ACT This law makes it illegal for competitors to get together and set prices on the products or services they sell. This means that you and your competitors cannot together decide to keep prices at a certain level. Discus¬ sing prices with competitors is illegal. Pete Williams and Jose Pulido used to work together at Johnson Fencing, a business that installed residential fences. Each now owns his own fencing company. Last month Pete called Jose to see if he would raise his prices by the same amount Pete was planning to raise his prices. Jose told Pete he could not because fix¬ ing prices with a competitor is against the law. CLAYTON ACT This law states that it is illegal for a business to require a customer to buy exclusively from it or to purchase one good in order to be able to purchase another good. A distributor of com¬ puters, for example, cannot make customers purchase software when they purchase a computer. Customers must be free to buy only the products or services they want from whom they want. ROBINSON-PATMAN ACT This law protects small businesses from unfair pricing practices. It makes it illegal to discriminate by charging different prices to customers. A manufacturer, for example, may not sell its products at different prices to similar customers in similar situa¬ tions when the effect of such sales will reduce competition. Differ¬ ences in price may only be justified based on differences in quantities purchased (volume discounts), special distribution or legal requirements in different locations, or other economically sound reasons. If your business sells to other businesses, you must offer the same terms to all of those businesses. The law does not apply to retail stores where certain groups may be targeted by special promotions, such as giving discounts to senior citizens. WHEELER-LEA ACT This law bans unfair or deceptive actions or prac¬ tices by businesses that may cause an unfair competitive advantage. False advertising is an example. Under this act, businesses are also required to warn consumers about possible negative features of their products. Drug companies, for example, must let people know of any side effects they may experience from using a medication. Government Agencies that Protect Competition The Antitrust Division of the Justice Department and the Federal Trade Commission are two government agencies that work to make sure competition remains fair. Other agencies, such as the Federal Aviation Administration and the Food and Drug Administration, oversee business practices in particular industries. JUSTICE DEPARTMENT The Justice Department’s Antitrust Division takes legal action against any business it believes has tried to monopolize 7.3 Legal Issues and Business Ownership 195 # © Digital Vision greene_0538446145_ch07, 12/21/7, 18:36, page: 196 an industry. It also prosecutes businesses that violate antitrust laws, which can lead to large fines and jail sentences. FEDERAL TRADE COMMISSION The Federal Trade Commission (FTC) deals with issues that touch the economic life of every American. The FTC administers most of the laws dealing with fair competition and pursues vigorous and effective law enforcement. Some of the kinds of activities the FTC monitors include false or misleading advertising, price setting by competitors, price discrimination, and misrepresentation about the quality, composition, or place of origin of a product. It is the only federal agency with both consumer protection and competition jurisdiction in broad sectors of the economy. In addition, the FTC does the following: • Advances consumers’ interests by sharing its expertise with federal and state legislatures and U.S. and international government agencies • Develops policy and research tools through hearings, workshops, and conferences • Creates practical and plain-language educational programs for con¬ sumers and businesses in a global marketplace with constantly changing technologies Checkpoint How do laws promote competition? Intellectual Property Intellectual property is the original, creative work of an artist or inventor and may include such things as songs, novels, artistic designs, and inventions. Such works may be registered for special government protections—including patents, trademarks, trade names, and copyrights—that provide business owners with the exclusive use of the intellectual property in the United States and many foreign countries. Registration gives businesses or individuals the exclusive right to profit from what they have created. No one else can use their creations to make money. If you violate another person’s patent, copyright, or trademark, you could be sued. Patents A patent is the grant of a property right to an inventor to exclude others from making, using, or selling his or her invention. The intent of a patent is to give the developer of a new product time to recover the development costs without having to worry about competition. Patents are issued by the U.S. Patent and Trademark Office and last for 20 years. During this period, no business or individual can copy or use the patented invention without the patent holder’s permission. A provisional patent application allows an inventor one year to investi¬ gate the feasibility, marketability, and potential license interest of an invention before deciding to file a formal patent application. This gives the inventor the right to use the term patent pending and a head start on other inventors who may file for the same invention. 196 Chapter 7 Select a Type of Ownership greene_0538446145_ch07, 12/21/7, 18:36, page: 197 Copyrights A copyright is a form of intellectual property law that protects original works of authorship, including literary, dramatic, musical, and artistic works. Copyright law does not protect facts, ideas, systems, or methods of operation. All books must have a copyright. A copyright lists the publisher of the work and the year in which the work was published. Copyrights remain in effect for 70 years after the death of the author. Jessie Castille is a graphic artist who owns her own business. Jessie’s copyrighted designs appear on T-shirts and posters. Last year, she found that a T-shirt manufacturer in another city was illegally using her designs. She sued the manufacturer for violating her copyright. Trademarks A trademark is a name, symbol, or special mark used to identify a busi¬ ness or brand of product. Products that are trademarked are identified by the 1M or ® symbol. Examples include Band-Aid® and Kleenex®. You could not invent a new bandage and use the term Band-Aid in the product name. Nor could you use the “swoosh” mark that is trade- marked by Nike in any product or business promotion you conduct. Checkpoint How can entrepreneurs protect intellectual property rights? Famous Eli Whitney Eli Whitney is best known as the inventor of the cotton gin, but a problem with intellectual property rights kept him from making his fortune from this invention. Whitney obtained a patent for his invention but decided not to sell the machine to farmers. Instead, Whitney decided to install cotton gins throughout the south and charge farmers a hefty fee for processing the cotton himself. Resentful farmers made their own versions of the cotton gin and claimed they were "new" inven¬ tions. Due to a loophole in the 1793 patent act, Whitney was unable to win any lawsuits against the other cotton gin owners. Without exclusive rights to the cotton gin, Whitney built another factory and began to make muskets (guns) in a new way. Whitney invented tools and machines so that any worker could turn out uniform parts. The government was waiting for guns, and Whitney amazed everyone when he assembled guns from random piles of parts. Whitney had become the father of mass pro¬ duction in America! Eventually the arms factory made him rich, completing a success story for the boy who had shown mechan¬ ical aptitude by making a violin when he was 12 and selling handmade nails in his teens! What led to Eli Whitney's success as an entrepreneur? Think Critically What do you think would have happened if Eli Whitney had obtained a patent for the cotton gin before others copied his machine? 7.3 Legal Issues and Business Ownership 197 © Stock Montage/Getty Images Digital Vision greene_0538446145_ch07, 12/21/7, 18:36, page: 198 Laws that Protect Consumers The government also has regulations that protect consumers. Business owners should be aware of these laws. Licenses State and local governments require some businesses to have licenses. Beauty salons, restaurants, and health and fitness centers are just some of the companies that must carry licenses. If you own a business that requires a license, you and your employees may need to complete training requirements. You may also need to have regular inspections by state and local authorities. Failure to meet certain standards could mean the loss of your license and the closing of your business. What problems might occur if an office park is built in a residential area? Zoning Laws Local governments often establish zoning regu¬ lations that control what types of buildings can be built in what areas. In many communities, certain areas are zoned for residential use only. This means that business buildings may not be built in those areas. Other areas may be zoned as commercial for retail businesses, as industrial, as agricultural, as multipurpose, and so on. All businesses must obey zoning regulations. Before you choose a location for your business, you will have to make sure that the area you have selected allows your type of business to operate there. Zoning laws help keep neighbor¬ hoods safe for its residents. Consumer Protection Laws A variety of laws and government agencies protect the public against harmful products. You will have to make sure that the products you manufacture or sell meet all consumer protection standards. THE FEDERAL FOOD, DRUG, AND COSMETIC ACT OF 1938 This law bans the sale of impure, improperly labeled, falsely guaranteed, and unhealthful foods, drugs, and cosmetics. The Food and Drug Admin¬ istration (FDA) enforces this law. The FDA has the power to force producers to stop manufacturing products that are unsafe. THE CONSUMER PRODUCT SAFETY ACT OF 1972 This law sets safety standards for products other than food and drugs. When the Consumer Product Safety Commission determines that a product is unsafe, it can force businesses to recall the product and stop selling it. THE TRUTH-IN-LENDING ACT OF 1968 This law requires all banks to calculate credit costs in the same way. When a consumer gets a loan, the lender must provide two types of information about the loan’s cost—the finance charge and the annual percentage rate. The finance 198 Chapter 7 Select a Type of Ownership greene_0538446145_ch07, 12/21/7, 18:36, page: 199 charge is the total cost a borrower must pay for a loan, including all interest and fees. The annual percentage rate is the finance charge calculated as a percentage of the amount borrowed. These numbers help consumers evaluate alternatives and determine the best option. THE FAIR CREDIT BILLING ACT OF 1974 This law is part of the Truth-in-Lending Act and helps consumers correct credit card billing errors. Consumers who feel they have been incorrectly charged must write to the credit card issuer and explain why they think the charge is wrong. The company must reply within 30 days and resolve the dispute within 90 days. While the disputed charge is being investi¬ gated, it cannot accrue interest. This law also gives the consumer a method for resolving problems relating to product quality. The first step in dealing with a product of inferior quality bought with a credit card is to try to resolve the problem with the merchant. If it cannot be resolved, the consumer can withhold payment to the credit card company until the matter is setded. Checkpoint What laws protect the public? When to Get Legal Advice It is helpful to learn some basics about the laws affecting businesses so that you can handle minor legal issues yourself. Books and the Internet are good sources of information, or you could take a course in business law. However, there will be times when you will need to hire a lawyer for assistance. As an entrepreneur, you will need to decide when you should seek advice and when you can handle the situations on your own. Hire a Lawyer At some point, you probably will need to hire a lawyer. Your Chamber of Commerce may have a list of lawyers who specialize in small busi¬ nesses. Other community business owners may also be able to suggest a lawyer. Lawyers can help you with a variety of legal issues. HOW LAWYERS CAN HELP YOU Assist you in choosing a legal structure for your business Create documents such as leases, purchase agreements, and contracts Develop partnership agreements Inform you of regulations and licenses Give advice on insurance coverage Advise you on taxes Prepare and file patent applications Help you plan for your future (a will, retirement plans) Defend you in a lawsuit or file one on your behalf Contracts One of the most common reasons that a business hires a lawyer is to assist with contracts. A contract is a legally binding agreement between two or more persons or parties. As an entrepreneur, you will enter into 7.3 Legal Issues and Business Ownership 199 greene_0538446145_ch07, 1/17/8, 14:56, page: 200 contracts as you start and operate your business. Contracts can be with suppliers, landlords, clients, and government agencies. For a contract to be considered legally binding, certain elements must be included when the contract is created. These elements are agreement, consideration, capacity, and legality. Agreement occurs when one party offers or agrees to do some¬ thing and the other party accepts. Joni’s Jellies has offered to sell Andy’s Eatery two cases of homemade jelly each month for $100 for a one-year period. Andy’s Eatery responds by signing the offer and returning it to Joni’s Jellies. Agreement is reached. Consideration is what is exchanged for the promise. The $100 check Andy’s Eatery sends Joni’s Jellies is consideration and causes the contract to be binding. Capacity means the parties are legally able to enter into a binding agreement. Minors, intoxicated persons, and insane persons cannot enter into a binding contract. Legality means that a contract cannot have anything in it that is illegal or that would result in illegal activities. Checkpoint What kinds of services can lawyers provide? Assessment THINK ABOUT IT 1. Think of three examples of how a business might misrepresent a product it sells. Explain each example. 2. Besides Band-Aid, Kleenex, and Nike, name at least three other products that are trademarked. 3. Explain the elements of the Fair Credit Billing Act. Chapter 7 MAKE ACADEMIC CONNECTIONS 4. RESEARCH Use the Internet, the newspaper, or your local library to find information on the process for applying for a patent. Also, find out how much a patent costs, how many patents have been issued to date, and what the criteria are for obtaining a patent. Prepare a short report on your findings. 5. COMMUNICATION Create an advertisement for a product that demonstrates a violation of the Wheeler-Lea Act. TEAMWORK Gather in teams. Make up several business scenarios that involve violation of antitrust laws. Role play scenarios for the rest of the class and let them tell which antitrust law is being violated. Select a Type of Ownership greene_0538446145_ch07, 1/17/8, 14:56, page: 201 Effective Telephone Conversations As you research business opportunities, you will need to make tele phone calls to gather information. Once you become a business owner, you will conduct business over the telephone. The way you present yourself over the telephone will have a big impact on the people with whom you deal. It is also important to use good listening skills when talking on the telephone. Use the following tips to make the most of your telephone conversations. 1. Speak clearly and talk directly into the receiver. If you are using a headset, be sure that the microphone is in the correct position so that the person you are talking to will not have difficulty hearing you. 2. Be cheerful. Everyone prefers to deal with a happy person rather than someone who is sad or angry. 3. Always speak politely. Do not use foul or unprofessional language. Be respectful. 4. Think about what you are going to say before you make a call. Write down the questions you want to ask or the points you want to make. Consult your notes as you are talking to make sure you cover everything. 5. Focus your attention on the person with whom you are talk¬ ing. Concentrate exclusively on what the person is saying. Ask questions to confirm you correctly interpreted what is being said. 6. Eliminate all distractions. Background noises, such as the radio and other people talking, should be held to a minimum. 7. Take notes to summarize what you are hearing. You may for¬ get important details unless you write them down. TRY IT OUT You found an advertisement for a candy store business in a local mall that is for sale. You want to call the real estate broker to find out more information about the business. Make a list of all the questions that you want to ask the broker. Role play the phone call with a class¬ mate and make an appointment to visit the business and meet with the owner. Follow the tips listed above to ensure your telephone conversation is effective. Sharpen Your Entrepreneurial Skills 201 ' 9es/ PhotoDi. 0538446145_ch07, 12/21/7, 18:37, page: 202 Chapter 7 Assessment SUMMARY 7.1 Decide to Purchase, Join, or Start a Business 1. Aii existing business has an established customer base and relation¬ ships with suppliers. The seller may train you, and prior records can make financial planning easier. 2. When evaluating a franchise opportunity, study the disclosure doc¬ ument, interview current owners, investigate the franchisor’s his¬ tory, investigate potential earnings claims, compare opportunities, get promises in writing, learn the risks of canceling the franchise, and seek advice from professionals. 3. Joining a family business has advantages, such as pride in the busi¬ ness and enjoyment of working with relatives. However, family politics can negatively affect the business. 4. Entrepreneurs who start entirely new businesses are completely independent and create their own destinies. However, there is increased risk because there is no established demand for the product or service and you must make all the decisions. 7.2 Choose a Legal Form of Business 5. A sole proprietorship is the easiest form of business ownership, but the owner may have trouble raising money for the business. Per¬ sonal assets are at risk if the business fails. 6. A partnership is easy to start, faces little government regulation, and shares the risk with others. But a partner can be held legally liable for the actions of the other partner(s). 7. A corporation is more difficult to start, but it is easier to raise capital by issuing shares of stock. Owners’ personal assets are not at risk. 7.3 Legal Issues and Business Ownership 8. Antitrust laws were developed to promote fair competition in busi¬ ness. The Antitrust Division of the U.S. Justice Department and the Federal Trade Commission are government agencies that work to ensure fair competition. 9. Entrepreneurs can protect intellectual property by registering for patents, copyrights, and trademarks. 10. Laws that protect consumers include licensing, zoning, and con¬ sumer protection laws. 11. You should learn about laws and regulations that affect your busi¬ ness. Lawyers can help with a variety of legal issues. What do you fcnow now? Read Ideas in Action on page 177 again. Then answer the questions a second time. How have your responses changed? 202 Chapter 7 Select a Type of Ownership greene_0538446145_ch07, 12/21/7, 18:37, page: 203 VOCABULARY BUILDER Match each statement with the term that best defines it. Some terms may not be used. 1. The original, creative work of an artist or inventor 2. Paid to the franchise company to support television, magazine, or other advertising of the franchise as a whole 3. The grant of a property right to an inventor to exclude others from making, using, or selling his or her invention 4. A business that has the legal rights of a person but is independent of its owners 5. Distributions of corporate profits to shareholders 6. A legal agreement that gives an individual the right to market a company’s products or services in a particular area 7. The amount the local franchise owner pays in return for the right to run the franchise 8. A unit of ownership in a corporation 9. Weekly or monthly payments made by the local owner to the fran¬ chise company advertising fees board of directors contract copyright corporation dividends franchise initial franchise fee intellectual property partnership patent royalty fees share of stock sole proprietorship startup costs trademark J k I m n, o, 10. A form of intellectual property law that protects original works of authorship, including literary, musical, and artistic works 11. A business that is owned exclusively by one person 12. A business owned by two or more people 13. A name, symbol, or special mark used to identify a business or brand of product 14. The costs associated with beginning a business 15. A legally binding agreement between two or more persons REVIEW YOUR KNOWLEDGE 16. Which of the following is not an advantage of buying an existing business? a. existing customer base c. seller can provide training b. prior records are available d. capital is required 17. True or False? A franchise is an inexpensive way to get into business quickly. 18. The legal form of business that is the simplest to establish is the a. sole proprietorship c. S corporation b. partnership d. limited liability company 19. True or False? The board of directors of a corporation is responsible for the day-to-day management of the corporation. 20. You and several other business owners in your area agree to raise the price of the paint you sell. You are in violation of the a. Sherman Act c. Robinson-Patman Act b. Clayton Act d. Wheeler-Lea Act Chapter 7 Assessment 203 greene_0538446145_ch07, 1/17/8, 19:24, page: 204 21. You want to advertise a special price on a product that you do not have just to get customer traffic into your store. If you do so, you will be in violation of the a. Sherman Act b. Clayton Act c. Robinson-Patman Act d. Wheeler-Lea Act 22. For a contract to be legally binding, it must have which of the fol¬ lowing elements when it is created? a. agreement, cooperation, capacity, legality b. agreement, consideration, capacity, legality c. agreement, consideration, cooperation, and legality d. amendment, consideration, capacity, and legality 23. True or False? The U.S. Justice Department administers all of the laws dealing with fair competition. 24. True or False? A patent grants property rights to an inventor for 70 years. 25. Intellectual property rights can be protected by all of the following except a a. copyright c. patent b. license d. trademark APPLY WHAT YOU LEARNED 26. You are meeting with the owner of an ice cream shop you would like to purchase. What specific questions are you going to ask her? What documents do you want to see? How will you evaluate whether or not to purchase this business? 27. You decide to start a business selling a new video game you have developed. You plan to sell the game over the Internet. What intellectual property right issues should you consider? 28. You want to purchase a cleaning service franchise. The franchise fee is $19,500 and startup costs are $15,200. Advertising fees are $1,500. The royalty fee is 8 percent. If your estimated sales for the first year of operation are $56,500, how much is your profit after paying all costs and the royalty fee? MAKE ACADEMIC CONNECTIONS 29. MATH Marta Vasquez is one of three partners in a car dealership. The division of profits and losses as specified in the partnership agree¬ ment is 60 percent for Marta, 25 percent for the second partner, and 15 percent for the third partner. The dealership has recently lost a lawsuit and must pay damages of $1,200,000. What is Marta’s liability? What is the liability of each of the other two partners? 30. COMMUNICATION You are the owner of a coffee shop fran¬ chise. The franchise agreement specifies that the franchisee must sub¬ mit all advertising plans for approval. Write a memo to the franchisor outlining your plan to market the franchise’s new bagels. 31. RESEARCH Use the Internet, newspaper, magazines, and other materials to research business opportunities. Find two businesses for sale that interest you. Using the Activity CD, open the activity “Businesses for Sale.” Print a copy and complete the activity. 204 Chapter 7 Select a Type of Ownership greene_0538446145_ch07, 12/21/7, 18:37, page: 205 Which business would be the better investment? Write a paragraph to explain your decision. HISTORY Research one of the antitrust laws listed in Lesson 7.3. Write a brief history of what led to the passage of the law. Describe any amendments that have been made to the law since its original passage. GEOGRAPHY China is a major source of intellectual property theft. Many counterfeit products are produced in China. Research the extent of this problem and learn how U.S. businesses can bet¬ ter protect themselves. Write a two-page report on your findings. lA/HAT WOULD VOU DO? You have purchased a copy of the newest version of the Windows operating systems for the computers in your office. It was expensive for you to update your systems, but you felt it was important to keep your equipment up to date. Your friend, Jeff, who is a sole proprietor and is struggling to get his business going, really needs the new version of Windows, but he does not have the cash to pay for it. He asks you if you would mind sharing your software license with him. What would you do? V_ I _ w 32. 33. BUILD YOUR Business Plan Project This activity will help you continue with the development of a busi¬ ness plan for your business idea. Contact your state and local governments and obtain information about licensing and zoning regulations. How will these regulations affect your business? To expand your business, you have decided to purchase similar businesses in your area. List the businesses in your area that compete with you. Write the reasons you would or would not consider buying each business. Find franchise opportunities available in your business field. Investi¬ gate one of these opportunities and gather information about it, such as franchise fees, royalties, projected earnings, and operating costs. You have a friend who is interested in being your business partner. Write the partnership agreement for the two of you. Make a list of all the advantages and disadvantages of organizing your business as a corporation. Determine how much stock to sell and the value of each share. How will you become an entrepreneur? Will you buy an existing busi¬ ness, enter a family business, purchase a franchise, or start your busi¬ ness from scratch? Determine which form of business organization you will use—sole proprietorship, partnership, corporation, S corporation, or limited liability company. Write the ownership and legal structure section of your business plan as described in Chapter 3. Chapter 7 Assessment 205 greene_0538446145_ch07, 1/17/8, 19:23, page: 206 Planning a Career in Franchising iness , Management & Administration U T I his weekend my family was really startled when we walked into a new restaurant to order sub sand¬ wiches for lunch. Our former baby¬ sitter was behind the counter. She had bought the restaurant from a franchisor. The franchisor taught her how to run the restaurant. They provided the training and support materials she needed to successfully run her business. She said that, although the hours were long, the work was gratifying and profitable.” Why do people decide to purchase a franchise? How do they decide which type of franchise is best for them? By helping individuals evalu¬ ate their personal and professional goals, franchise coaches help potential franchisees determine which franchise will best meet their needs. Coaches are usually compensated by the franchisors after a franchise is purchased by one of the coach’s clients. EMPLOYMENT OUTLOOK • Faster than average growth is expected. • Career changes, as a result of an evolving business environment and downsizing, will increase the need for business counselors. JOB TITLES • Franchise Business Coach • New Business Sales Leader • Franchise Business Consultant • Franchise Performance Coach NEEDED SKILLS • A Bachelor’s degree is recommended. • Strong interpersonal and prob¬ lem solving skills are needed. • Prior management experience in training or sales is helpful. • A desire to help others and an ability to gain their trust is important. What's it like to work in Franchis¬ ing? Jasmine, a Franchise Consul¬ tant, was speaking with a prospective new client who was eager to pur¬ chase a franchise. Jasmine was explaining the coaching process to her. By collecting data through informational interviews, assess¬ ments, and coaching sessions, Jasmine could help the client match her business objectives to an appropriate franchise. Jasmine’s next two phone calls were to two different wind¬ shield repair franchisors. Jasmine had a client whose testing results revealed that a windshield repair franchise was a strong match for his interests and business objec¬ tives. Jasmine was setting up a meeting between the franchisors and her client. After her client talked with both franchisors, Jasmine would coach him through the decision-making process. Jasmine would receive compensa¬ tion from the franchisor her client selected. On the way home from work. Jasmine stopped by a tutoring fran¬ chise that she helped one of her clients establish. She had a brief chat with the franchise owner to see if there were any business issues she could help resolve. By staying in touch with clients, Jasmine could help ensure the ongoing success of their franchise. What about you? Would you like to provide structured testing and coaching to clients to help them match their interests, goals, and resources with an appropriate franchising opportunity? 206 Chapter 7 Select a Type of Ownership greene_0538446145_ch07, 12/21/7, 18:37, page: 207 II flH * HBUSIMESS LAW AMD ETHICS MAMAGEMEMT TEAM DECISION! MAKIMG EVEMT # OECA_ 1 he Team Decision Making Event requires participants to analyze one or a combination of elements essential to the effective operation of a business. This event will require students to understand copyright laws, trademarks, and royalties paid to protected entities. Your team has decided to open a sporting goods/gift shop in a popular university city. You want to sell merchandise that bears the emblem, logo, mascot, and name of the university. You have sched¬ uled a meeting with the university’s attorney (judge) to present your proposal for selling the merchandise. Your team must explain the pric¬ ing strategy for merchandise and demonstrate an understanding of royalties from merchandise sales to the university, college conference, and the National Collegiate Athletic Association (NCAA). You must also explain how your merchandise is different from university mer¬ chandise sold by competitors. You must convince the attorney that your business offers competitive advantages that will result in strong sales and good royalties for the university. PERFORMANCE INDICATORS EVALUATED • Explain the nature of business law. • Describe legal issues affecting businesses. • Describe strategies used to protect a business’s copyrights. • Explain legal strategies used to protect trademarks. • Make an effective oral presentation. • Explain legal considerations for pricing. • Explain business ethics in product/service management. Go to the DECA web site for more detailed information. Think Critically 1. Why is it important to consider copyright and trademark laws when sell¬ ing merchandise? 2. Why are copyright and trademark laws hard to enforce in other countries? 3. How can you determine the royalty percentage to be paid to a university for use of its emblem, logo, or mascot? 4. Why does a university need an attorney who specializes in copyright laws? www.deca.org Winning Edge 207 Locate and Set Up Your Business 8.1 Choose a Location 8.2 Obtain Space and Design the Physical Layout 8.3 Purchase Equipment, Supplies, and Inventory school.cengage.com/entre ‘preneur/ideas 208 greene_0538446145_ch08, 12/21/7, 18:46, page: 209 IDEAS IM ACTION! A Neighborhood Business C hoosing where to locate is an important step in opening a business. Often the best place is in your own neighborhood. When Ryan Williams was a 15-year-old student at Ossining High School in New York, he noticed that many neighbors wore headbands and wristbands with well- known logos. Ryan conducted an informal survey of his friends and found that many were interested in these products with a personal touch. He turned that idea into Rapappy, Inc., Personalized Headbands and Wristbands. Ryan Williams, Rapappy, Inc. Because of his outstanding business plan and excellent communica¬ tion skills, Ryan received a first-place award in the Entrepreneurship Business Plan Competition at the National Foundation of Teaching Entrepreneurship's (NFTE's) 2003 Summer BizCamp at the Fashion Insti¬ tute of Technology. He also won the overall award for best technology use from the Goldman Sachs Foundation. Its Youth Entrepreneurship Expo is open to select students from around the country who excel in student entrepreneurship programs. At the Expo, students present their business plans and ventures to an audience of business professionals, parents, teachers, and judges. Ryan credits his EXPO participation with increasing his confidence and improving his speaking skills. The events helped Ryan realize that with planning and hard work, anyone can start and run a business. Ryan appreciates the efforts of all the volunteers who gave of their time throughout his journey. Now a student at Harvard, Ryan realizes that these individuals helped nourish the entrepreneur within him. Ryan advises other young people who want to start a business to choose an area in which they are interested. He stresses the importance of taking risks, keeping good records, and persevering no matter how hard things seem. What do you hnow? Can you think of a good business opportunity for your neighbor¬ hood? Explain your ideas. How did Ryan's participation in events help improve his entrepre¬ neurial skills? Why is the ability to persevere an important quality for an entrepreneur? 209 greene_0538446145_ch08, 1/17/8, 15:1, page: 210 Good locations come at a price Gail worked very hard to get just the right product mix for her company, Fitness For You, which offers creative branding strategies and products to the fitness industry. Business was good, but profits were still not at the level she wanted. She examined her expenses and realized that a large portion of her monthly expenses was for rental of her office space. She was located in an upscale office complex in Palm Beach, Florida. When she started looking at her customer base, she realized that most of her cus¬ tomer interaction was by phone or e-mail and at trade shows and busi¬ ness meetings held away from her office. Many of her customers were located in other states. Work as a Team Flow important do you think Gail's location is to the success of her business? What would you advise her to do about her location? Carefully consider your location needs. Locating a Retail Business Making your product available in the right location to reach your target customer is very important. If you want to open a retail business, choos¬ ing the location for it will be one of the most important decisions you will make as an entrepreneur. The wrong location could spell disaster, but the right location will help your business succeed from the start. The right location for your business depends on the kind of business you plan to operate and the type of customer you want to reach. Downtown Areas In some communities, the downtown area represents an easily accessi¬ ble, central location. Workers from downtown offices and professional 210 Chapter 8 Locate and Set Up Your Business PhotoDisc/Getty Images greene_0538446145_ch08, 12/21/7, 18:46, page: 211 What are the advantages and disadvantages of locating a business downtown? Develop Your Reading Skills As you read, make a chart showing the advantages and disadvantages of each type of location for retail, ser¬ vice, and home-based businesses. businesses may shop at your business on their breaks or on their way to and from work. Rents vary widely from city to city, so you will want to do some research if you are thinking of using a downtown location. Some downtown areas have lost business to neighborhood, com¬ munity, and regional shopping centers. But many cities are revitalizing their downtown shopping districts and are offering incentives to attract businesses back into the area. Issues faced in many downtown areas include a higher crime rate, traffic jams, lack of free or convenient parking, and a lack of customers in the evening. Neighborhood Shopping Centers Neighborhood shopping centers are small shopping centers that serve a certain neighborhood. They are often called strip malls and consist of 3 to 15 stores. They are typically anchored by a supermarket, which is supported by other stores offering convenience goods (food, pharma¬ ceuticals, and sundries) and personal services. Examples of supporting stores include drugstores, dollar stores, and dry cleaners. Neighborhood centers represent good locations for stores selling goods or services that people need to purchase frequently. Rent is usually low in these centers, making them ideal for small businesses. Customers of neighborhood shopping centers are mainly residents of the surrounding area who shop at these centers because of their con¬ venience. However, it could be a disadvantage for your business if the only customers you have come from the immediate area. Community Shopping Centers Community shopping centers have more square footage than neighbor¬ hood centers and are designed to serve residents from many neighbor¬ hoods. Apparel, furniture, toy, sporting goods, and electronic stores are often located in community shopping centers. Community centers 8.1 Choose a Location 211 greene_0538446145_ch08, 12/21/7, 18:46, page: 212 usually have one or two major anchor stores. Anchor stores can include the following: • small department stores (Kohl’s, JC Penney) • discount department stores (Wal-Mart, Kmart, Target) • large supermarkets (Kroger, Food Lion, Safeway, PublLx) • super drugstores (Walgreens, Rite Aid, CVS) • home improvement stores (Home Depot, Lowes) Although rent in community shopping centers is generally higher than in neighborhood shopping centers, it is usually still affordable. And stores in community shopping centers can earn higher profits. Anchor stores advertise heavily and attract customers from throughout the com¬ munity. Other businesses in the shopping center typically benefit from the advertising. Customers shop at the anchor store and then may browse and buy at the smaller stores located in the shopping center as well. Regional Shopping Centers Regional shopping centers are designed to attract customers from an entire region. These large shopping areas usually have 40 to 100 stores and are anchored by one or more large department stores, such as Macy’s and Nordstrom’s. The majority of the stores sell apparel. Many regional shopping centers are malls. Regional shopping centers offer depth and variety of products and services. If your business requires a large amount of wallt-in traffic to be successful, you may want to locate in a regional shopping center. Rents at these centers are high, however, making it more difficult to earn profits. Also, the distance to the shop may be too great for some consumers. For convenience, they may decide to patronize businesses closer to their homes. Super-Regional Shopping Centers Super-regional shopping centers are the largest classification of shop¬ ping centers. They house more than 100 stores that offer an extensive variety of merchandise and services. They are typically anchored by three or more large department stores. They serve a larger population base than the other types of shopping centers. Two of the largest super- regional centers are the West Edmonton Mall in Edmonton, Canada (with over 800 stores), and the Mall of America in Bloomington, Minnesota (with over 500 stores). Most tenants in these centers are large chain stores that can afford the very high rents charged. If convenience is a factor for your target market, customers may not be willing to travel a great distance to come to your store. Such centers usually are not recommended for new business owners because of the competition that exists among many similar businesses. Stand-Alone Stores Stand-alone stores can be located just outside of shopping centers or far away from other businesses. These stores often depend on drive-by traffic. They must have plenty of parking, good signs, and effective lighting if they are to be successful. 212 Chapter 8 Locate and Set Up Your Business greene_0538446145_ch08, 12/21/7, 18:46, page: 213 Businesses locate in stand-alone locations because rent is often less expensive than it is elsewhere. Also, a competing business is less likely to be right next door. Advertising is often necessary to earn a profit because people must have a reason to come specifically to your busi¬ ness. Large jewelers, auto parts stores, and flower and garden centers are often operated as stand-alone stores. A recent trend shows that department stores and large drugstores are opening up stand-alone stores. Warehouses Some retail stores, such as appliance dealers or furniture sellers, operate in warehouses. Ware¬ houses are generally one of the cheapest rental facilities because they are of basic construction with few frills inside or out. Locating your busi¬ ness in a low-rent warehouse may allow you to charge lower prices than your competitors. However, locating away from other retailers can also mean that potential customers will not notice or be aware of you. For this reason, businesses that operate out of warehouses generally advertise heavily. Why might an appliance store locate in a warehouse? Checkpoint What are the main options for locating a retail business? Locating a Nonretail Business Location can be very important for nonretail businesses, which include service, wholesale, and manufacturing businesses. Owners of these types of businesses face different considerations when choosing a location. Service Businesses For some service businesses, such as restaurants and hair salons, loca¬ tion considerations are the same as for many retail businesses. Owners of these types of businesses have to be very careful when choosing a location. Convenience can be an important factor for the business’s customers. Location is much less important for other types of service busi¬ nesses. Customers never actually visit some service businesses, such as plumbing or carpet-cleaning companies. Locating these kinds of busi¬ nesses in expensive areas does not make sense. Being close to custom¬ ers may be important, however, because customers are more likely to call a company located nearby. 8.1 Choose a Location 213 Digital Vision/Getty Images PhotoDisc/Getty Images greene_0538446145_ch08, 12/21/7, 18:46, page: 214 Eileen Whitman runs a small computer-repair service. Because most of her customers are businesses, Eileen chose a downtown loca¬ tion for her company. Being close to her customers means that she can quickly respond to emergencies and have clients’ computers back in service the same day. Industrial Businesses Industrial businesses, such as manufacturing and wholesale companies, ship their products direcdy to their customers. This means customers rarely see their facilities. Operating in an upscale location that attracts lots of consumer traffic is not necessary for an industrial business. Availability of good employees and low cost are the key factors in determining where an industrial business locates. Nonretail businesses sometimes locate in industrial parks. An industrial park is a section of land that is zoned for industrial busi¬ nesses only. They are usually located where space is less expensive, away from housing developments and downtown areas. Communities sometimes subsidize rents in industrial parks in order to attract indus¬ trial businesses. Tim Morrison’s company specializes in preparing bulk mailings for large companies. Tim’s corporate customers have their freshly printed catalogs and direct-mail advertisements sent directly to him from the printing companies. Using mailing lists provided by the customers, he prepares and ships the bulk mailings from his shop. All of Tim’s contact with his customers takes place over the phone or via e-mail. There is no reason for him to locate his business in a prestigious part of town. Home-Based Businesses In recent years, there has been an increase in the number of home- based businesses. Some of the rea¬ sons that entrepreneurs decide to locate their business in their home include the following: • Cost savings Separate rent, utility costs, and maintenance fees for the business are eliminated, so there is more capital available for promotional activities and the purchase of inventory. ENTERPRISE ZONES Industrial businesses may locate in enterprise zones. Enterprise zones are areas that suffer from lack of employ¬ ment opportunities. Entrepreneurs who set up businesses in these areas may be eligible for favorable tax treatment based on the number of jobs their businesses create. Some businesses may find the tax benefits offered by enterprise zones attractive. Others, however, may find that these benefits do not make up for the lack of an appropriate customer base or the increased risk of crime in those areas. Why do you think the number of home-based businesses is growing? 214 Chapter 8 Locate and Set Up Your Business greene_0538446145_ch08, 12/21/7, 18:46, page: 215 • More freedom Home-based business owners do not have to sign a lease agreement for the business, so they are not subject to the restrictions and obligations of a lease. • Convenience The owner can work more flexible hours and does not have to commute to and from another location. Locating their business at home is how many entrepreneurs get started. It is a great way to save money when starting a business. If the business outgrows its space, the owner can begin to look for an appropriate location outside the home. Although it is cheaper to operate a business from home, there are some disadvantages to operating a home-based business. Lack of space can limit the expansion of the business. It may also be hard to keep your business and family life separate. Many home business own¬ ers feel isolated from the business community and miss opportunities to interact and network with colleagues. Janet Lawson of The Healing Center began her therapeutic mas¬ sage business in the basement of her home. As demand for her services increased, she needed more space for new equipment and employees. She leased space in her community and moved her business. Checkpoint What are some of the factors to consider when selecting a location for a nonretail business? WHAT WENT WRONG * Right Space, Wrong Place Jim Teal opened Jimmy T's Rib House, and within the first ten months, he was making profits. One day a commercial realtor advised Jim that a res¬ taurant four times the size of his current space was on the market. The realtor said he could get Jim a good deal on the lease if he liked it. Jim knew that the city where the building was located had no other barbecue rib restau¬ rant. He researched and verified the population numbers and demographics for the geographi¬ cal area. It was in a good neighborhood, on a main road, just off the freeway. He even did a traffic-flow study, and the numbers were terrific. The grand opening week went well, but then business began to drop off. Although there was plenty of traffic, Jimmy T's was on the wrong side of the street. Custom¬ ers coming west from the freeway exit could not cross the center island, and there was a "No U-Turn" sign at the corner. When Jim tried to improve his visibility and signs to attract more freeway traffic, he found that city regulations prevented it. After six months, Jim took his loss and closed the new restaurant. Think Critically 1. What questions about location should Jim have asked the realtor before assuming the lease? Consider the pros and cons of a location. 8.1 Choose a Location 215 © PhotoDisc/Getty Images greene_0538446145_ch08, 12/21/7, 18:46, page: 216 Select Your Site Given all of the possible types of locations for different types of busi¬ nesses, how do you decide where to locate? One way of identifying your options is to buy a map of your area and mark the trade area. The trade area is the area from which you expect to attract custom¬ ers. Indicate on the map all of the locations that might be appropriate for your business. Also indicate the location of all of your competitors. Using a different color marker or symbol, mark the locations of busi¬ nesses that do not directly compete with your business but may attract the same land of customer. For example, if you want to open a poster store that will attract mostly teens, mark the locations of other stores that also appeal to this target market, such as trendy clothing stores and music stores. Location Type and Availability The next step is to identify which type of location is right for your business. Do you want to locate in a community shopping center? A stand-alone store? Downtown? At home? Determining which type of location you want will help narrow your search. After deciding on the type of location, you must determine what spaces of this type are available in your trade area. The classified sec¬ tion of your local paper will list available sites. You can also find loca¬ tions simply by driving around your trade area. Signs advertising an available building will often be hung in the front window or placed on the front lawn of the property. Web sites and search engines may also be helpful in determining what options are open to you. Mark each possible location you find on your trade area map. Evaluate the Location After getting a list of possible locations, inspect each location to assess its appeal. Is the location safe? Is it attractive? Does it seem to attract greene_0538446145_ch08, 1/17/8, 15:1, page: 217 the kind of customers your business will be targeting? Is it easy to reach? Is parking adequate? Do businesses in the vicinity seem to be thriving? After answering these questions you should be able to nar¬ row down your choices to only one or two viable business locations. Michele Kim is planning to open a fabric store. Convinced that there is a market for her product, Michele proceeds to identify the best location for her store. She rules out a downtown location because of the lack of parking and the fact that many shoppers are not willing to go downtown in the evenings. After thorough research, she setdes on a community shopping center because of the low rent, the good parking, and the relative safety of the area. Checkpoint What are some of the factors you should consider when selecting a site for your business? 8.i Assessment THINK ABOUT IT 1. Why do you think rents are lower in neighborhood shopping centers than in community and regional centers? 2. Do you think advances in technology have played a part in some new business owners' decision to operate from their homes? Why or why not? 3. When marking the trade area for your business, why should you indicate the locations of your competitors? MAKE ACADEMIC CONNECTIONS 4. PROBLEM SOLVING Using a map of your area, mark the poten¬ tial trade area for a new furniture superstore. Then use the six-step problem-solving model to help determine at least two appropriate locations. 5. COMMUNICATION As a downtown business owner, you actively work to recruit other businesses to the area. Write a letter to the editor of your local newspaper about the advantages of locating a business downtown. TEAMWORK Gather in teams. Brainstorm a list of rules a home-based entrepreneur might make in order to be as effective and productive as possible while working at home. When sharing your rules with the class, ask one person from your group to write your rules on the board. 8.1 Choose a Location 217 # greene_0538446145_ch08, 1/17/8, 15:1, page: 218 • • • Compare purchase and • tenant lease options. • landlord • Describe layout consid- • gross lease erations for different • net lease types of businesses. • percentage lease 1 Focus on Small Business Walking inventory Trying to create a fun, relaxing atmosphere in his clothing and accessories store, Justin decided to move the cash reg¬ ister into the far back corner of his store. That gave him more space for displays and merchandise up front. He was really excited about all he could do with the space. Due to slow traffic in the store at times, there was often only one employee on duty. The next thing Justin knew, his inventory was "walking right out the door," and it wasn't with paying customers. Justin had created a perfect layout for shoplifters. He knew he had to make some changes. Work as a Team What did Justin do wrong in changing the layout of his store? If Justin wants to keep the same layout, what suggestions can you make that would cut down on shoplifting? The layout should meet the needs of the business and its customers. Lease or Buy Space Unless you operate your business out of your home, you will have to lease or buy business property. There are advantages to buying space. Owning property offers a bigger tax advantage than leasing. Owning the building that houses your business allows you a tax deduction on the interest you pay on your loan. And a loan payment on the build¬ ing may be no more than a lease payment. However, most entrepreneurs lack the money to purchase property for their businesses. Even entrepreneurs who can afford to purchase property generally prefer not to be locked into a particular location. Some leases require the owner of the building, not the owner of the business, to pay certain expenses, such as upkeep and maintenance of the building’s exterior. For these reasons, most businesses lease space. Commercial Leases When leasing property, a contract is needed. In a lease contract, there is a tenant and a landlord. The tenant is the person who pays rent to occupy 218 Chapter 8 Locate and Set Up Your Business PhotoDisc/Getty Images greene_0538446145_ch08, 12/21/7, 18:46, page: 219 space owned by someone else. The landlord is the person who owns and rents out buildings or space. There are three kinds of commercial leases. 1. In a gross lease, the tenant pays rent each month for the space occupied, and the landlord covers all property expenses for that space. Expenses such as property taxes, insurance on the building, and building maintenance are paid by the landlord. 2. A net lease occurs when the landlord pays building insur¬ ance, and the tenant pays rent, taxes, and any other expenses. 3. With a percentage lease, the tenant pays a base rent each month, and the landlord also receives a percentage of the tenant’s revenue each month. The percentage lease is most common for prime retail locations. This type of lease can be beneficial for both the landlord and tenant. The landlord shares in the business’s profits, and the ten¬ ant has the advantage of a lower base rent, which can why is ,f im P° rtant t0 have a contract when make rent more affordable during slow sales periods. leasing property. Commercial lease agreements are usually long and complex. You should never sign one without consulting an attorney. Your attorney will review your lease to make sure that it covers all conditions and costs, including the basic rent, maintenance fees, utility costs, insur¬ ance costs, and other items. Compare Costs of Doing Business Once you have selected some possible locations for your business, you need to compare the costs and benefits of leasing property at each location. To do so, you need to calculate how much rent you will be paying per customer. Juan Martinez plans to open a music store. He looks for a location that is convenient, far from other music stores, and safe for customers. He finds two locations that meet his needs—one in a neighborhood shopping center and the other in the downtown area. CALCULATING RENT PER CUSTOMER To decide which location he should select, Juan determines the amount of rent he would pay and the number of projected customers for each location. Juan divides the amount of rent by the number of projected customers to determine the rent per customer. Downtown Shopping Center Rent per month $ 925 $ 1,100 Projected customer traffic per month -^8,500 -M2,000 Rent per customer $ 0.11 $ 0.09 From his calculations, Juan determines that, although the total rent will be liigher, he will be paying a lower rent per customer at the shopping center. Juan leases space at the shopping center. Checkpoint Name three kinds of commercial leases. # 8.2 Obtain Space and Design the Physical Layout 219 Digital Vision/Getty Images greene_0538446145_ch08, 12/21/7, 18:47, page: 220 did you KNOW? According to a recent report by IGD, a con sumer and shopper research company, 3!>/o of shoppers visit only t he aisles which they believe have the items they need. This indi¬ cates the importance of placing new prod¬ ucts or promoted items in key locations to ensure good product exposure. Design the Layout of Your Business After you have leased or purchased a facility, you will need to design your layout, or floor plan. Your layout must include enough space for employees, customers, merchandise, and equipment. It must also have space for restrooms, stockrooms, storage, and offices. Create the Floor Plan You will need to prepare a scale drawing of the layout. Graph paper will help you draw your layout to scale. To create a scale drawing, let 1 inch represent 1 foot of actual space. For example, a 4-foot-by- 3-foot closet would be represented by a 4-inch-by-3-inch rectangle. Indicate the planned use of each area. Also indicate the location of furniture, display cabinets, shelves, fixtures, and equipment. Your drawing will help you identify potential problems in your layout. It will also help you communicate with the people who may be helping you organize your space. Sample Floor Plan Supplies Dressing rooms and Inventory Decide on a layout, an outside sign, and window displays that match your image. If you sell expensive jewelry, you will probably decide on a sophisticated outside sign and an elegant inside design that will appeal to your target customer. If you sell outdoor equip¬ ment, you will select a very different design for your store. Layout of a Retail Business For a retail business, appearance is very important. A store with inviting window displays and creatively displayed merchandise sends a positive message. A store with crowded aisles and piles of sale items does not. The goal of your layout should be twofold. It should attract customers to your store and keep them coming back, and it should meet the needs of your business. 220 Chapter 8 Locate and Set Up Your Business Window display Window display greene_0538446145_ch08, 12/21/7, 18:47, page: 221 Here are some ways you can send a positive message about your store. 1. Choose lighting that is appropriate for the kind of merchandise you sell. Good lighting is important for any business where cus¬ tomers inspect merchandise closely. Avoid fluorescent lighting, which creates an unattractive glare. 2. Think carefully about window displays. Use them as a way to display new merchandise or seasonal items. 3. Make the entrance inviting. An entrance that is welcoming will draw customers into the store. 4. Use common sense when organizing the merchandise in your store. Customers should always easily find what they want. Inventory and supplies should also be well organized so that you can find things faster and serve your customers better. 5. Leave at least four feet of aisle space. This makes it easy to move around in your store. 6. Create attractive in-store displays. Customers are drawn to dis¬ played merchandise. Famous Rachael Hay Sometimes success comes from being in the right place at the right time. And it always helps to be prepared! Just ask Rachael Ray, who says her life has been "a very happy, wonderful accident that I didn't and couldn't have planned." The truth behind that state¬ ment is that Ray had extensive training in the food service industry before she became a TV star. Start¬ ing at the candy counter of Macy's, she was promoted to manager of the Fresh Foods Department. She then helped to open and was store manager and buyer for Agata & Valentina, the prestigious New York gourmet marketplace. She was discovered by the local CBS station while working for Cowan & Lobel, a large gourmet market in Albany, NY. She had begun a series of cooking classes to increase sales dur¬ ing the holidays. The classes were so popu¬ lar, the station signed her on to do a weekly "30 Minute Meals" segment for the evening news. She sold 10,000 copies locally of a compan¬ ion book. The Food Net¬ work soon came call¬ ing and the Rachael Ray Show began in September 2006. FHer personality and quick, tasty recipes fit modern lifestyles. How did Rachael Ray build upon her early success? Think Critically Even though Rachael Ray says the way her life has turned out has been accidental, what steps did she take in her life that prepared her for her current position? 8.2 Obtain Space and Design the Physical Layout 221 greene_0538446145_ch08, 12/21/7, 18:47, page: 222 ;33kmark Appearance is very important for a retail business. Effective store layouts maximize the available space and create a natural flow of traffic through the store to encourage addi¬ tional spending. Access school.cengage.com/ entrepreneur/ideas and click on the link for Chapter 8. Read the article on types of store layouts. According to the article, what three factors must a retailer consider when devel¬ oping a floor plan/store layout? Name the five types of store layouts described in the article. Then think of a retail store you visit frequently. Which type of layout design does the store use? school.cengage.com/entrepreneur/ideas 7. Use wall space wisely. Wall space may be too high for customers to reach, but it can be used to display merchandise. 8. Place the cash register in a central loca¬ tion. Customers should not have to search for a cashier. Layout of a Service Business Service businesses can be divided into two categories. • Service businesses where people come to the business location to receive a service (restaurants, hair salons, automobile repair services) • Service businesses that travel to the cus¬ tomer’s location and perform the service on-site (exterminators, plumbers, cleaning services) The layout of the first type of service business should be consid¬ ered just as carefully as that of a retail business. However, on-site service businesses are never visited by their customers, so an attrac¬ tive layout is not important. Organization should be a major consid¬ eration of on-site service businesses so that supplies and other items are easy to find. Layout of a Wholesale Business Customers of wholesale businesses are concerned with price and quality, not physical appearance. For this reason, a wholesale business needs only to be well organized. Wholesalers are constandy receiving and shipping large volumes of products. Wholesale businesses can do the following to facilitate shipping and receiving: 1. Locate in a one-story warehouse. 2. Keep merchandise close to the shipping dock. This minimizes the distance it will have to be moved when it is brought into and taken out of the warehouse. 3. Store the most popular items in the most accessible locations. 4. Have areas that can accommodate merchandise of all sizes. 5. Keep walkways free of merchandise so that employees can exit the building quickly in the event of an emergency. 6. Store items safely. For instance, do not stack too many boxes on top of one another because they may fall if they become unsteady. Layout of a Manufacturing Business For manufacturing businesses, efficiency, not attractiveness, is what counts. Other important considerations include the following: 1. Work teams should be situated close together. 222 Chapter 8 Locate and Set Up Your Business greene_0538446145_ch08, 1/17/8, 15:1, page: 223 2. Supervisors should be able to easily observe the people they super¬ vise. Their office should be located near the employees. 3. Exits should be clearly marked and easily accessible so that employees can quickly leave in the event of an emergency. 4. Any hazardous materials should be stored safely. 5. Equipment and machinery should be positioned in a way that reduces the chance of an accident. 1 Checkpoint What are the major considerations for choosing a layout for a business? rs.2 Assessment THINK ABOUT IT 1. What are the differences between a gross lease, a net lease, and a percentage lease? Which type of lease would you prefer? Explain why. 2. Why do you think it is important to draw a floor plan of your business before you begin setting up shop? 3. For a service business that serves customers at the place of busi¬ ness, why are layout considerations similar to those for a retail store? MAKE ACADEMIC CONNECTIONS 4. RESEARCH You are thinking about opening a bicycle sales and repair shop. Research layouts of other bicycle shops and deter¬ mine what type of equipment and supplies would be included in the layout for this shop. 5. MATH Determine the rent per customer for the following: Rent per Location Month Downtown $1,200 Community shopping $2,800 center Stand-alone store $1,050 Projected Customer Rent per Traffic per Month Customer 9,500 ? 18,000 ? 7,400 ? Working with a team, choose a business with which you are familiar. Using the Activity CD, open the activity "Evaluate the Layout of a Business." Print a copy and complete the activity to rate the effective¬ ness of the business's layout. 8.2 Obtain Space and Design the Physical Layout 223 # greene_0538446145_ch08, 1/17/8, 15:1, page: 224 Setting up shop Karen had operated Bear Creek Embroidery and Altera¬ tions as a home-based business for several years. Her business had grown to the point that she needed more space for equipment and new employees. She shopped around for space and found a good location near her neighborhood. While planning the move, Karen realized that in addition to rent, she would have many other expenses now that she would no longer be operating out of her home. As she began to add up the cost of all the furnishings, equipment, supplies, and other expenses that she would incur by moving out of her home and expanding her business, she began to wonder if she could afford the move. Work as a Team What additional expenses will Karen be paying if she moves her business out of her home? Before deciding to move her business, what should Karen have done to be sure she could afford the move? Consider all of the expenses involved in Obtain Equipment and Supplies Every business needs equipment and supplies. Many businesses also need inventory. Machinery, computers, cash registers, and furniture are types of equipment. Supplies include things like paper, pens, and pencils. Inventory is the merchandise a business sells to its customers. Without these things, a business cannot function properly. If there is no inventory, what will you sell? If there is no paper, how will you send a letter? Suppliers or vendors can provide your business with everything you need to function. To determine the equipment and supplies you need to start your business, make a list of what you think you will need. All businesses need standard items such as furniture, lamps, and office supplies. Busi¬ nesses also need special items specific to the type of business. For 224 Chapter 8 Locate and Set Up Your Business PhotoDisc/Getty Images greene_0538446145_ch08, 12/21/7, 18:48, page: 225 example, lawn-care companies and landscaping firms would need lawn fertilizer as part of their supplies and lawn mowers as part of their equipment. Your list should include standard items needed by all businesses as shown in the table below. It should also include items specific to your particular business. Once you have listed all of the items you need, indicate how much of each item you require. Be sure to list the minimum quantity you need right now, not the amount you might need if your business succeeds. Being overly optimistic could leave you with many bills that will be difficult to pay if your sales fall short of your projections. STANDARD EQUIPMENT AND SUPPLY NEEDS FOR MOST BUSINESSES Type Items Furniture Desks, chairs, bookcases, filing cabinets, tables, computer stands Fixtures Lamps, overhead lights Office Equipment Computers, routers, modems, fax machines, telephones, printers, copiers Office Supplies Stationery, pens and pencils, scissors, tape, staplers, paper clips, binder clips, folders, calendars Maintenance Supplies Toilet paper, paper towels, hand soap, cleaning supplies Kitchen Supplies Coffee maker, small refrigerator, soft drinks, coffee, tea Identify Suppliers To fill the standard and special needs of your business, you will need to research vendors. Vendors are companies that sell products and services to businesses. Vendors are also called suppliers. Valuable sources of vendor information include the following: • Telephone directory advertising section • Trade magazines (specialized magazines devoted to a particular industry), which carry vendor advertising • Trade associations • The Internet • Other companies in your industry Shira Silberg wants to open an assisted-living center for senior citizens. To find suppliers of furniture, linens, and many other items, Shira looks through copies of trade magazines for advertisements from companies that target the nursing-home industry. Shira also locates vendor web sites for additional information. Finally, she contacts other assisted-living centers to find out which vendors they use. Evaluate Proposals Most of the items you will need to start your business will be available from a variety of vendors. How will you decide among them? Before you make a purchase, contact several vendors and ask them to quote you 8.3 Purchase Equipment, Supplies, and Inventory 225 greene_0538446145_ch08, 12/21/7, 18:48, page: 226 Why is it important to have a reliable vendor? a price for the merchandise you are interested in purchasing. A quote is an estimate for how much you will pay for the merchandise or service. Also ask vendors about the quality of their merchandise, their financing terms, quantity discounts, and shipping and handling charges. Once you have all the information you need, compare the various proposals. Choose the vendor that provides the best combination of products at a cost that fits your budget. Shira selects her suppliers by asking for proposals from the ven¬ dors that appeal to her the most. She then compares price quotes, ser¬ vice, quality of merchandise, and discount options. Shira knows that the lowest price is not always the best option if paying a litde more means receiving better quality and service. She decides on a higher- priced linen business because it offers additional services that meet the needs of her business the best. Checkpoint What should you consider when selecting vendors for your business? Purchase Inventory Retailing, wholesaling, and manufacturing businesses must purchase inventory before they can open for business. For retail and wholesale businesses, inventory is merchandise purchased with the intent of reselling it to customers. For manufacturing businesses, inventory also consists of the parts that will go into producing the business’s product as well as its finished goods. Purchase Inventory for a Startup Business Determining the amount of inventory to keep in stock is difficult for all business owners. It is particularly difficult for owners of new busi¬ nesses, who do not yet know what their level of sales will be. 226 Chapter 8 Locate and Set Up Your Business greene_0538446145_ch08, 12/21/7, 18:48, page: 227 Chris Keating wants to open an art supplies store. He wants to have enough inventory that his shelves look hill. He also wants to be able to offer his customers a hill line of art supplies. Not knowing how high or low his sales will be at first, Chris doesn’t want to purchase too much inventory. He doesn’t want to tie up his cash in inventory if he can’t sell it quickly. Chris is also worried about finding space to store the inventory. Because of these concerns, Chris purchases just enough stock to fill his shelves. Purchase Inventory for an Ongoing Business Once your business is up and run¬ ning, you will have a better idea of how much inventory you need. To make sure that you do not run out of stock unexpectedly, you can establish reorder points for each product you sell. The reorder point is a predetermined level of inventory that signals when new stock should be ordered. How low you set the reorder point depends on how long it takes your supplier to get merchandise to you, how many units of the item you sell each month, and how important it is for you not to be out of stock. Chris sells 150 erasers a month. Because he never wants to be out of stock, he sets his reorder point at 30. Every time his inventory of erasers falls at or below 30 units, he places an order to renew his stock of this item. Be your own boss You own a toy store. You specialize in collectible dolls and stuffed animals. Some of the stuffed animals that you carry have become very popular with children, and you cannot keep them in stock. In the past, your reorder point was three and you never ran out of the animals, but now you are losing sales because of empty shelves. You know you could sell more stuffed animals if you had them. Outline a plan that will meet your business's inventory needs as well as your cus¬ tomers' needs. Checkpoint How do you determine the amount of inventory to keep in stock? Why should you keep track of your inventory? # 8.3 Purchase Equipment, Supplies, and Inventory 227 greene_0538446145_ch08, 1/17/8, 15:1, page: 228 8.3 Assessment THINK ABOUT IT 1. Why should you make a list of all the equipment and supplies you need to start your business? 2. Why is it important to obtain price quotes from several different vendors before selecting a vendor? What questions should you ask potential vendors? 3. What issues should a business owner consider when purchasing inventory for the business? Explain the relationship between inventory and customer service. MAKE ACADEMIC CONNECTIONS 4. COMMUNICATION You are a wholesale distributor of party supplies. A new store. Party Express, has asked you to submit a proposal for supplying its paper goods inventory. In order to prepare for a meeting with the Party Express management, make a list of questions you will ask them in order to get enough information for your proposal. Role play the meeting with a classmate. 5. MATH Using the Activity CD, open the activity "Equip Your Business." Print a copy and complete the activity to calculate the cost of the equipment and supplies you would need to start your own fitness training business. 6. RESEARCH Use the Internet, trade magazines, newspapers, and other sources to search for suppliers of house paint for profes¬ sional painters. Report your research in a short document which could be used by a painter to help select a vendor. TEAMWORK Lee Torres is opening a retail pet store. The store will carry high-quality pet foods, leashes, collars, coats, carriers, beds, toys, treats, grooming supplies, and flea products for both dogs and cats. Lee does not plan to sell puppies or kittens but will have a large assortment of birds, tropical fish, and small animals (hamsters, guinea pigs, etc.) and the foods and accessories needed for them. The store will carry an assort¬ ment of books about selecting, training, breeding, and caring for pets. In addition, Lee will also offer grooming services for pets. Working with teammates, make a list of all of the equipment and supplies Lee will need for his business. Use the Internet to com¬ pile a list of several vendors that sell pet products and supplies. Cre¬ ate a list of questions that Lee should ask the vendors to help him select the best vendor. Finally, consider Lee's inventory needs. Decide which products Lee should order in large or small quantities and explain why. Compile a report with all of the information you have gathered to present to Lee. 228 Chapter 8 Locate and Set Up Your Business greene_0538446145_ch08, 1/17/8, 15:1, page: 229 E-Mail Etiquette As you deal with vendors and suppliers, you will have the opportunity to communicate using e-mail on a regular basis. Today, many business deals are made by e-mail without the parties ever meeting or talking over the telephone. E-mail is preferred over regular mail, fax machines, and telephones as being quicker and less intrusive than a phone call. With e-mail, you can key your message into the computer, and with one stroke, your message is delivered instandy. Although it may not be as formal, the same care should be given to e-mail as to the preparation of a business fetter. You should always proofread your e-mail for spelling and grammar before sending it. Other guidelines to remember when sending e-mails include the following: 1. Cover only one topic per e-mail. If you have several topics to discuss, send them in separate e-mails. 2. Use an appropriate subject line. The subject line should appropriately describe the message. Also, because people receive numerous e-mails, try to use a subject line that will catch their attention. 3. Your message should be brief. Use short sentences and para¬ graphs. Long e-mails often go unread. 4. Be courteous and professional in your message. Remember, once the e-mail is sent, you cannot get it back. 5. Remember that business e-mail is not private. E-mail is subject to being monitored in many companies. Also, any e-mail you send can easily be forwarded to someone else. Do not send any¬ thing that you would not want to be made public. 6. Limit the number and size of attachments. Large files can take too much time to open and can fill up the recipient’s mailbox. When it comes to e-mail, the best habit to have is to use e-mail etiquette that will display your professionalism to others. Be sure your e-mail is worthy of a response. TRY IT OUT You want to send an e-mail to a potential vendor asking for a quote for office supplies that you need for your new business. Compose the e-mail that you would send, using the guidelines given above. Sharpen Your Entrepreneurial Skills 229 ' etty lmag es 0538446145_ch08, 12/21/7, 18:49, page: 230 Chapter 8 Assessment SUMMARY 8.1 Choose a Location 1. Options for locating retail businesses include downtown areas, neighborhood shopping centers, community shopping centers, regional shopping centers, super-regional shopping centers, stand¬ alone stores, and warehouses. 2. Location factors to consider include parking, traffic, convenience, cost, demographics, draw of nearby stores, and competition. 3. When choosing a location for service businesses that customers visit, the same factors must be considered as for retail businesses. For ser¬ vice businesses where the service is performed at the customer’s home or business, the business location is not as important. 4. For industrial businesses, availability of good employees and low cost are key factors in choosing a location. 5. Operating a small business out of the home can save on costs, but it may make it difficult to separate personal and business life. 6. Mapping your trade area with possible locations, the locations of competitors, and the locations of businesses that draw the same target customers can help you narrow your location options. 8.2 Obtain Space and Design the Physical Layout 7. To evaluate leases, compare the costs and expected benefits of var¬ ious locations and the types of leases—gross, net, or percentage— offered. Calculating the rent per customer can help you determine which location is most cost effective. 8. The layout of a business depends on the type of business. For retail businesses, the aim of a layout is to attract and keep custom¬ ers. For wholesale businesses, the aim of a layout is to store inven¬ tory in the most efficient manner. For manufacturing businesses, the aim of a layout is to facilitate the production process. 8.3 Purchase Equipment, Supplies, and Inventory 9. Once you determine your equipment and supply needs, you will need to identify and evaluate a number of vendors by obtaining quotes and asking about quality, financing terms, quantity dis¬ counts, and shipping and handling charges. 10. To determine the amount of inventory to keep in stock and the reorder point, consider the amount of expected sales, the time it takes your supplier to get merchandise to you, and how important it is for you not to be out of stock for the item. What do you fcnow now? Read Ideas in Action on page 209 again. Then answer the questions a second time. Flow have your responses changed? 230 Chapter 8 Locate and Set Up Your Business greene_0538446145_ch08, 12/21/7, 18:49, page: 231 VOCABULARY BUILDER Match each statement with the term that best defines it. Some terms may not be used. 1. A section of land that is zoned for industrial businesses only 2. Companies that sell products and services to businesses 3. The area from which a business expects to attract customers 4. An estimate for how much you will pay for merchandise or services 5. The person who owns and rents out buildings or space 6. A lease in which the tenant pays rent each month for the space occu¬ pied, and the landlord covers all property expenses for that space 7. A lease in which the landlord pays building insurance, and the tenant pays rent, taxes, and any other expenses 8. Areas that suffer from lack of employment opportunities 9. The person who pays rent to occupy space owned by someone else 10. A predetermined level of inventory that signals when new stock should be ordered a. b. c. d. e. f. g h. enterprise zones gross lease industrial park inventory landlord net lease percentage lease quote reorder point tenant trade area vendors REVIEW YOUR KNOWLEDGE 11. Which of the following is not a location option for a retail business? a. downtown area b. industrial park c. community shopping center d. warehouse 12. Which of the following service businesses would consider the same location factors as a retail business? a. exterminating company b. lawn service c. hair salon d. on-site computer repair service 13. Which of the following is not a good reason to locate a business in the home? a. cost savings c. limited space b. more freedom d. convenience 14. True or False? Availability of parking would be an important consideration for the location of a coffee shop. 15. True or False? Most entrepreneurs start out by purchasing the site where their business will be located. 16. In which type of lease does a landlord receive a portion of the ten¬ ant’s revenue each month in addition to a base rent? a. gross lease b. net lease c. percentage lease d. tenant-landlord lease Chapter 8 Assessment 231 greene_0538446145_ch08, 1/18/8, 10:47, page: 232 17. Which of the following is the least important consideration when organizing the layout of a retail business? a. lighting c. aisle space b. window displays d. organization of supplies 18. Which of the following is the least important consideration for the layout of a manufacturing business? a. organization c. safety b. efficiency of workflow d. attractiveness 19. True or False? When purchasing supplies, equipment, and inven¬ tory, it is always best to purchase from the lowest-cost vendor. 20. Which of the following is not considered inventory? a. dolls for a toy store b. component parts of a product c. vacuum cleaners owned by a maid service d. all of the above are considered inventory 21. Which of the following is the least important factor in determining the reorder point for a sale item in your store? a. the size of the item b. the time it takes to receive merchandise from your supplier c. how many units you sell each month d. how important it is to you to not run out of stock APPLY WHAT YOU LEARNED 22. You are planning to open a card and gift shop. Identify the trade area. What types of locations are available in your community? List the advantages and disadvantages of each. Are there competing card and/or gift shops in any of these locations? Are there other businesses that do not compete directly but attract the same kind of customer? What are these businesses? Why do you think these businesses chose this particular location? 23. You are going to open a gift shop that offers photo gifts such as photo keychains and mugs. You will take the photos yourself and assemble the products. Consider all of the location options for your business: downtown, shopping centers, stand-alone store, or a warehouse. Where would you locate your business and why? MAKE ACADEMIC CONNECTIONS 24. RESEARCH Interview the owners or managers of three to five local businesses. What does each of these business owners see as advantages and disadvantages of their locations? Are these businesses successful? 25. COMMUNICATION Design the layout of a fitness club. Cre¬ ate a scale drawing of the space and show the placement of all of the equipment. You may want to use pictures from catalogs or magazines to show the type of equipment you have selected. Pres¬ ent your plan to the class and explain why you think your layout will make your business successful. 26. MATH You are choosing between a neighborhood shopping center and a stand-alone store for your shoe store. The monthly 232 Chapter 8 Locate and Set Up Your Business greene_0538446145_ch08, 12/21/7, 18:49, page: 233 stand-alone location is $2,500. The projected monthly customer traffic at the shopping center is 6,500 and the projected monthly traffic at the stand-alone location is 5,100. Which location will you choose and why? What other factors might you consider before choosing a location? WHAT WOULD YOU DO? You are looking for a vendor to supply your new business with a computer, a printer, and a copy machine. You have contacted sev¬ eral vendors for quotes. One of the vendors recently contacted you to offer you a "special" deal, but you had to agree to it before the end of the day. In addition to a competitive price for the equip¬ ment, he is offering you tickets to an NFL game in a private stadium suite. He wants you to agree to the deal without signing a contract and has asked that you pay him in cash. What would you do? BUILD YOUR ,-,1 Business Plan Project This activity will help you choose a location and vendors for your business idea. Choose the location area that is best for your business. Why is it the best choice? Record your reasons on paper. Using a local map, mark the trade area for your business. Mark the possible locations for your business and the locations of your competi¬ tors. Are there any businesses in the trade area that do not directly compete but attract a similar type of customer? If so, mark those on the map. For each area, write an evaluation that outlines why this would or would not be a good location for your business. Determine if it will be more cost-effective for you to buy or lease space or to run your business from home. Consider rent-per-customer projections. Write a short paper justifying your decision. Design the physical layout of your business. Create a scale drawing of the space and show the placement of all of the furniture, fixtures, and equipment. Indicate the planned use of each area. How does this lay¬ out meet your goals? Calculate the square footage requirements for the entire layout. Make a list of the equipment and supplies you will need to start your business. Using the telephone book, trade magazines, the Internet, and other sources, locate five vendors. Contact the vendors to obtain information about their products, pricing, financial terms, and quantity discounts. Using the prices from each vendor, calculate the total cost of all equipment and supplies you will need. How do the vendors compare? Which one will you select? Why? Chapter 8 Assessment 233 greene_0538446145_ch08, 1/18/8, 10:46, page: 234 Planning a Career in Architecture and Construction utecture & Construction Hli IVIy uncle is visiting from out West. He is excited about the solar panels he recentiy installed at his home. His city provided a $1,000 rebate for solar panel installation. To obtain the rebate, the panels need to annually dis¬ place 1,500 kilowatt hours of grid- based power. My uncle’s utility bills have gone down. He also feels good about doing his part to improve the environment by decreasing his dependence on the grid.” How do individuals and organizations transition their energy resources from traditional sources to environmentally friendly, renewable sources? Solar power is a renewable energy source that is rapidly increasing in popularity. Many companies are available to guide individuals and corporations in utilizing solar energy and to assist in solar panel installation. EMPLOYMENT OUTLOOK • Solar energy consumption is expected to grow as part of the overall growth of U.S. energy consumption. • Workers who are trained to participate in alternative energy sources may experience good job prospects. • Individuals with college course- work in high-end technology will have the best opportunities in the utilities industry. JOB TITLES • Solar Installer • Consultant, Solar Energy • Solar Energy Project Manager • Photovoltaic Lighting Designer • Solar System Design Engineer NEEDED SKILLS • A Bachelor’s Degree in Science, with an engineering major, is required for higher-level design, production, and management jobs. • Expertise in a variety of areas including journeyman-level elec¬ trical knowledge, plumbing, and mount racking systems is needed for solar panel installers. What's it like to work in Architec¬ ture and Construction Paige, a solar panel installation contractor, has obtained installation contracts from a variety of companies. The companies that contracted for Paige’s services provide their clients with on-site consulting, ranging from determining the optimal loca¬ tion of solar panels, to the filing of paperwork for government-based rebate and tax credit programs, to providing a six-month follow-up visit to ensure proper functioning of panels. As Paige has been installing panels for many years, her experi¬ ence is broad-based. Given the breadth of her experience, she can install panels at residential, com¬ mercial, or industrial sites. Paige is planning to attend a conference that will focus on state and federal solar energy incentive programs. Becoming more knowl¬ edgeable about these issues is part of Paige’s continuing education plan to prepare her to start her own solar energy consulting business. What about you? Would you like to help clean up the environ¬ ment by' actively converting energy consumers to renewable, “green” energy sources? 234 Chapter 8 Locate and Set Up Your Business greene_0538446145_ch08, 12/21/7, 18:49, page: 235 I ill i!5 * 'BUV1MG ANJD MEECHAMDISIMG MAMAGEMENJT TEAM DECISION! MAKINJG EVENJT # DECA_ _ our team is in charge of buying merchandise and clothing bearing the university’s name, logo, and trademark for a large university book¬ store on a campus that has 54,000 students. The university has a highly successful football and baseball team, attracting numerous fans to the campus on game days. Your team must understand product mix, product life cycles, seasonal markdown schedules, pricing strat¬ egies, target markets, and special promotional events. You will meet with the bookstore managers to explain your proposed product mix, markdown schedule for seasonal merchandise, and special sales events to sell merchandise. Your merchandising strategy must consider the fluctuating student population during the year. You must also explain a strategy to increase Internet merchandise sales. Your team has 30 minutes to study a business situation and organize your analysis, using a management decision-making format. Participants have ten minutes to describe the team’s analysis of the situation. The judge has five minutes to ask questions about the presentation. PERFORMANCE INDICATORS EVALUATED • Identify product opportunities. • Describe the use of technology in the selling function. • Explain the nature and scope of the product/service management function. • Identify the impact of product life cycles on marketing decisions. • Develop strategies to position the product/business. • Identify products to fill customer needs. • Explain the nature of sales management. Go to the DECA web site for more detailed information. Think Critically 1. Why must the clothing at the bookstore be unique from clothing carried in department stores and other retail outlets? 2. Why are scheduled merchandise markdowns important for retailers? 3. What types of special promotions could increase sales from fans and alumni attending football and baseball games? 4. Why should the bookstore consider Internet merchandise sales? www.deca.org Winning Edge 235 greene_0538446145_ch09, 12/21/7, 18:50, page: 236 Chapter °\ r Plan and Track Your Finances 9.1 Finance Your Business 9.2 Pro Forma Financial Statements Recordkeeping for businesses school.cengage.com/entrepreneur/ideas 236 greene_0538446145_ch09, 12/21/7, 18:50, page: 237 IDEAS IM ACTION! Katelin Shea, Owner/Founder of GadgetSleeves Electronic Safekeeping M embers of Generation Y, more so than previous generations, are increasingly reliant on the daily use of portable electronics. When Katelin Shea began her freshman year at New York University, she had her new lap¬ top in tow. She needed a carrying case that would both fit her personal style and protect her expensive gadget from drops, bumps, and scratches. After an extensive search, she came up empty handed and decided to create a custom carrying case of her own. Using her mother's sewing machine and materials from a local craft store, she made her first colorful, custom-sized, protective sleeve. Before long, friends and family were offering to pay for cases of their own. From this, GadgetSleeves was born! Today, GadgetSleeves designs and produces functional, stylish, and fun protective sleeves for laptops, iPods, cell phones, cameras, and more. Katelin did not start out with a formal business plan, but she wrote one out a few months later when taking an Entrepreneurship course. She entered her plan in the 2006 DollarDiva Business Plan Competition hosted by Independent Means, Inc., and she won! She has found that the research, statistics, and ideas she put into the plan have been extremely helpful to her as she runs GadgetSleeves. Working from home, Katelin started GadgetSleeves with $750 from her own savings. She used $150 to buy a new sewing machine, $200 for her first order of materials, and $50 for promotional items. Later, she paid a tech-savvy classmate $350 to create her web site. Katelin encourages other aspiring entrepreneurs to use the Internet to its full advantage. Researching competitors, negotiating with suppliers, and even shipping products is much easier with the use of the Internet. Katelin also advises others not to go into business just to make money. "Although financial rewards are nice, you should go into business to solve a problem, fill a gap in the market, or expand on a hobby. If you do what you love and you do it well, the money will follow." What do you fcnow? Can you think of a need that you have that is not being met? What could you do to meet that need? If Katelin had not had the money she needed to start her business, what do you think she could have done? Why do you think a web site opens up options for a business? Katelin Shea greene_0538446145_ch09, 1/17/8, 15:4, page: 238 Line up your financing Monty was excited about starting his own meeting planning business. He had learned much about meeting planning when serving as a state officer for his state's Future Business Leaders of America chapter. He couldn't wait to get started. Monty started a list of all the things that he would need to buy for his business. He realized that he was going to need some financial assistance as he did not have enough money saved to purchase everything he needed. He called his friend Sarah for some advice. "Sarah, I need some help financing my new business. Who do you think I should ask?" Sarah had taken some business courses in school and remembered that there were many different avenues for funding a business. "Why don't you start with your friends and family and see if any of them are interested in investing in your business," Sarah suggested. "If not, I've got lots more ideas!" Work as a Team Do you think your friends and family members would be willing to loan money or invest in your business? If not, who else could you approach for funding? Determine if you need financial assistance. Assess Your Financial Needs As you start a business, you will have many decisions to make regard¬ ing its financing. Your financial needs will vary depending on the size and type of business you start. If you are starting a very small busi¬ ness, you may be able to provide all the startup money you will need. If your business will be large or require special equipment, you may need to look to others for help raising the startup money. Before you can approach a lender or investor about financing your business, you will have to prepare some financial documents. To begin, you should estimate your startup costs and create a personal financial statement. Then you will prepare pro forma financial state¬ ments of the cash flow statement, income statement, and balance sheet. 238 Chapter 9 Plan and Track Your Finances PhotoDisc/Getty Images greene_0538446145_ch09, 12/21/7, 18:50, page: 239 Financial statements based on projections are known as pro forma financial statements. You will learn more about pro forma financial statements in the next lesson. These items allow potential lenders and investors to determine if your business is viable. They also help lend¬ ers decide whether the financing you are requesting is reasonable. Startup Costs Itemizing your startup costs is an important part of determining how much money you need to start your business. You will want to be sure you have accounted for all of the items you will need. Common startup items to be purchased include the following: • Equipment and supplies, such as computers, telephones, and fax machines • Furniture and fixtures, such as desks and chairs • Vehicles, such as delivery trucks • Remodeling, such as electrical and plumbing expenses • Legal and accounting fees • Licensing fees Felicia Walters plans to start a lighting fixture store. To help her determine how much money she will need to borrow, she calculates her startup costs. She must include her estimate of startup costs with the other documents she provides to lenders. Personal Financial Statement In order to determine if you have the resources you need to finance your business, begin by assess¬ ing your net worth. Net worth is the difference in what you own, called assets, and what you owe, called liabilities. Net worth is also referred to as equity. To calculate your net worth, you should prepare a personal financial statement. On the left side, list all of your assets with their value. Include cash, investments, and any property. Total the worth of these items. On the right side, list your liabilities and total the amount that you owe. Then subtract your total liabilities from your total assets to determine your net worth. Felicia Walters prepares a personal financial statement to help her determine whether she is able to finance her new business. She finds that her net worth is $27,800 as shown on the next page. After com¬ paring her startup costs to her net worth, Felicia determines that she will need to seek additional financial resources for her business. Felicia will share her personal financial statement and startup cost estimates with potential lenders and investors when she seeks financing for her business. Develop Your Reading Skills As you read this chapter, list all of the key terms. Then write a sentence using the key term to demonstrate comprehension of the term. STARTUP COSTS Walters Electric Estimated Item Cost Equipment and supplies Computers (3 @ $1,500) $ 4,500 Scanner 175 Cash registers (2 @ $1,800) 3,600 Fax machine 400 Supplies 300 Subtotal $ 8,975 Furniture and fixtures Desks (4 @ $400) $ 1,600 Chairs (8 @ $75) 600 Subtotal $ 2,200 Vehicles Delivery truck $10,000 Automobile 8,000 Subtotal $18,000 Remodeling Drywall replacement $ 1,000 Electrical work 2,500 Paint 1,000 Carpet 3,000 Subtotal $ 7,500 Legal and accounting fees $ 3,000 Total $39,675 9.1 Finance Your Business 239 greene_0538446145_ch09, 12/21/7, 18:50, page: 240 PERSONAL FINANCIAL STATEMENT Felicia Walters Assets Liabilities Cash $ 5,000 Car loan $ 6,900 Checking account 13,500 College loan 4,000 Certificate of Deposit 6,000 Credit cards 1,300 Stock 10,000 Computer equipment 3,000 Coin collection 2,500 Total assets $40,000 Total liabilities $12,200 Total assets - Total liabilities = Net worth $40,000 - $12,200 = $27,800 Checkpoint Why is the net worth of an entrepreneur important to potential investors in the business? Equity Capital There are two types of financing available for your business—equity and debt financing. You must consider your company’s debt-to-equity ratio, or the relation between the dollars you have borrowed and the dollars you have invested in your business. Lenders and investors look at this ratio to assess risk. The higher percentage of your own money that you have invested, the easier it will be for you to get others to invest. If your company has a low ratio of debt to equity, you should probably look for debt financing. If your company has a high ratio of debt to equity, you should work to increase equity in your business. Having the right mix of debt and equity will help ensure your busi¬ ness’s sound financial future. Equity capital is money invested in a business in return for a share in the profits of the business. Entrepreneurs may seek equity capital when they do not qualify for other types of financing and are not able to fully finance their businesses out of their own savings. Equity cap¬ ital can also supplement other money that is borrowed. You may provide much of the equity for your business yourself. You may also obtain equity through people you know or through venture capitalists. Personal Contributions Many entrepreneurs use their personal savings to finance the start of their businesses. Investing personal finances can help you get a loan from a bank. By investing your own money, you demonstrate to the bank that you have faith that your business will succeed. 240 Chapter 9 Plan and Track Your Finances greene_0538446145_ch09, 12/21/7, 18:50, page: 241 Friends and Relatives Friends and relatives can be a good source of equity capital. They will already be familiar with your business idea and know whether you are trustworthy and a good risk. They may be willing to invest more money in your business than other sources in return for a share of the business profits. What are the pros and cons of borrowing money from family and friends? Venture Capitalists Some privately owned companies get financing through venture capital¬ ists. Venture capitalists are individuals or companies that make a living investing in startup companies. They carefully research opportunities that they believe will make above-average profits. They are usually interested in companies that have the potential of earning hundreds of millions of dollars within a few years. The prospect of a company going public by publicly offering shares of stock for sale also attracts venture capitalists. Because of the desired criteria, many small businesses would have trouble attracting the interest of venture capitalists. Checkpoint What are some of the ways entrepreneurs can get equity capital? Debt Capital Debt capital is money loaned to a business with the understanding that the money will be repaid, usually with interest. You can borrow money from friends, relatives, and banks. Bank loans may be secured or unsecured. Friends and Relatives If friends and relatives are not interested in investing in your business with equity capital, they may be willing to loan you money. Before borrowing from friends or relatives, consider how the loan may affect your relationship with them. Those who loan you money might also feel that they can give you advice along with their money. Since you are using their money, they might not understand if you do not take their advice. You may decide that the risk of losing a friend if you are unable to pay back the borrowed funds is not worth taking. If you take a loan from friends or relatives, you should prepare a for¬ mal agreement that spells out the terms of the loan. You and everyone 9.1 Finance Your Business 241 greene_0538446145_ch09, 12/21/7, 18:50, page: 242 involved in the loan should sign the agreement. Be sure both you and the individuals loaning the money understand exacdy how much interest and principal you will pay each month. Also specify what your obligations are to pay back the loan if your business is not successful. Commercial Bank Loans Most businesses take out loans from banks. Entrepreneurs usually have an established relationship with a bank and begin looking for funds there. When a loan is taken out, it must be repaid with interest in a certain time period. There are different types of loans that banks offer their customers. SECURED LOANS Loans that are backed by collateral are called secured loans. Collateral is property that the borrower forfeits if he or she defaults on the loan. Banks demand collateral so that they have some recourse if the borrower fails to repay the loan. Suppose you take out a $25,000 business loan and use your home as collateral. If you fail to repay the loan, the bank has the right to take ownership of your home and sell it to collect the money you owe. Banks accept different forms of collateral, including real estate, savings accounts, life insurance policies, stocks, and bonds. Types of secured loans include the following: 1. Line of credit An agreement by a bank to lend up to a certain amount of money whenever the borrower needs it is called a line of credit. Banks will charge a fee for this program whether or not money is actually borrowed. In addition, they will charge interest on the bor¬ rowed funds. Most businesses establish lines of credit so that funds are readily available to help them make purchases when necessary. 2. Long-term loan A loan payable over a period longer than a year is a lon£i-term loan. Long-term loans are generally made to help a business make improvements that will boost profits. Nicole Brenner, owner of a small neighborhood coffee shop, took out a $50,000, five-year loan so that she could increase the size of her shop. She will repay the loan with the extra money she will earn by serving more customers in her expanded dining room. 3. Accounts receivable financing Many businesses allow their cus¬ tomers to charge merchandise and services and pay later. The cus¬ tomers’ owed balances are called the business’s accounts receivable. A bank will loan a business up to 85 percent of the total value of its accounts receivable if it feels that the business’s customers are What kinds of information might be requested on a loan application? 242 Chapter 9 Plan and Track Your Finances greene_0538446145_ch09, 1/15/8, 17:37, page: 243 good credit risks. As the receivables are paid, the payments are forwarded to the bank. The interest rate for accounts receivable financing is often higher than for other types of loans. 4. Inventory financing When banks use the inventory held by a business as collateral for a loan, it is called inventory financing. Banks usually require that the value of the inventory be at least double the amount of the loan, and the business must have already paid its vendors for the inventory in full. Banks are often not eager to make this kind of loan. If the business defaults, the bank ends up with inventory it may have trouble reselling. UNSECURED LOANS Loans that are not guaranteed with collateral are unsecured loans. These loans are made only to the bank’s most creditworthy customers. Unsecured loans are usually made for very spe¬ cific purposes. They are usually short-term loans that have to be repaid within a year. A business may obtain a short-term loan to help with temporary cash flow problems during slow or seasonal periods. Un¬ secured lines of credit are also available for those who have good credit. REASONS A BANK MAY NOT LEND MONEY Banks use various guidelines to determine whether borrowers are a good risk. They reject applications that do not meet their criteria. Some of the main reasons banks turn down loan applicants include the following: 1. The business is a startup. Banks are often reluctant to lend money to startup businesses because new businesses have no record of Famous The Wright 'Brothers When you think of the Wright Brothers, you probably think of them as the first men to fly. But before they were flying a plane at Kitty Hawk, they were entrepre¬ neurs in Dayton, Ohio. As children, Wilbur and Orville loved fixing and experimenting with machines. They sold kites to other children in their neighborhood for extra money. Wilbur invented a machine to fold papers for mailing when he was a teenager. Orville and a friend set up a small printing firm when Orville was 14 years old. Orville and Wilbur went on to publish their own news¬ paper, West Side News, in 1889. Cycling was a growing sport at that time. Because of their ability to repair things, people were always asking the Wrights to repair their bicycles. So in their early twenties, Wilbur and Orville opened the | Wright Cycle Company. 1 Using the profits from f their bicycle shop, they | began to study flight £ and experiment with s gliders and kites. These -o experiments led them © to the powered flying machine they flew success¬ fully on December 17, 1903. Why do entrepreneurs often have more than one business venture? Think Critically Do you think Wilbur and Orville would have been able to finance their flight experiments if they had not had income from their own business? 9.1 Finance Your Business 243 greene_0538446145_ch09, 12/21/7, 18:51, page: 244 repaying loans. They are more likely to default on their loans than established companies. 2. Lack of a solid business plan. Banks evaluate businesses based on their business plans. A company with a poorly written or poorly con¬ ceived business plan will not be able to obtain financing from a bank. 3. Lack of adequate experience. Banks want to be sure that the people setting up or running a business know what they are doing. You will have to show that you are familiar with the industry and have the management experience to run your own business. 4. Lack of confidence in the borrower. Even if your business plan looks solid and you have adequate experience, you may fail to qualify for financing if you make a bad impression on your banker. Make sure you dress and behave professionally. Show up on time for appointments, and provide all information your banker requests. 5. Inadequate investment in the business. Banks are suspicious of entrepreneurs who do not invest their own money in their busi¬ nesses. You will have to commit a significant amount of your own money if you are to receive financing from a bank. Obtaining bank financing for a startup business is difficult but not impossible if you can show that you are confident, well prepared, and able to repay the loan. Being aware of banks’ most common objections can help you prepare for the application process. For instance, you can properly prepare your business plan, wear a business suit to bank appointments, and arrive on time to make a good impression. Other Sources of Loans In addition to commercial banks, there are many government agencies that can assist you with debt capital loans. 1. Small Business Administration The SBA aids about 1 m il lion entrepreneurs every year, most often by guaranteeing loans made by commercial banks. This means if you default on the loan, the SBA will pay a certain percentage of the loan to the bank. This helps banks feel more comfortable about lending money. The SBA also makes funds available to non-profit organizations that, in turn, make loans to eligible borrowers. PET frOTkmark The Small Business Administration (SBA) offers many loan programs to assist small businesses. Its programs offer many benefits, such as longer payment terms and larger loan amounts than might be available through a conventional commercial bank loan. Access school.cengage.com/entrepreneur/ideas and click on the link for Chapter 9. Read about the various SBA loan programs and describe three of them. school.cengage.com/entrepreneur/ideas <b 2. Small Business Investment Companies SBICs are licensed by the SBA to make loans to and invest capital with entrepreneurs. 3. Minority Enterprise Small Business Investment Companies MESBICs are special kinds of SBICs that lend money to small businesses owned by members of ethnic minorities. 4. Department of Housing and Urban Development HUD provides grants to cities to help improve impoverished areas. Cities use these grants to make loans to 244 Chapter 9 Plan and Track Your Finances greene_0538446145_ch09, 1/17/8, 15:4, page: 245 private developers who must use the loans to finance projects in needy areas. 5. The Economic Development Administration The EDA is a division of the U.S. Department of Commerce that lends money to businesses that operate in and benefit economically distressed parts of the country. Borrowing from the EDA is similar to borrowing from the SBA, but the application is more complicated and the restrictions are tighter. 6. State Govermnents Government assistance may also be available at the state level. Almost all states have economic development agencies and finance authorities that make or guarantee loans to small businesses. 7. Local and Municipal Governments City, county, or municipal governments sometimes make loans to local businesses. The loans are usually small—$10,000 or less. did you KNOW? The , SBA b the largest * ,n g'e financial backer ^ the nation's small businesses. It has a port- olio of business loans '° an & uara ntees, and ' disaster loans worth more D Z $45 billion, in add/! 1 ° a ver >ture capital portfolio of $13 billion. Checkpoint Where can entrepreneurs look for debt financing? 9.i Assessment THINK ABOUT IT 1. What are some of the challenges you might encounter if you get equity financing from friends and/or family members? 2. Why is a secured loan easier to get than an unsecured loan? 3. Why would a bank be more willing to grant an SBA-guaranteed loan to a new business owner? MAKE ACADEMIC CONNECTIONS 4. MATH Tisha Appleton obtained an SBA-guaranteed loan from her bank for $45,000 for her new business. The SBA guaranteed 75 percent of the loan. How much has the bank risked losing if Tisha's business fails? 5. COMMUNICATION When applying for a loan, most lenders will want to see a personal financial statement. Using the Activity CD, open the activity "Personal Financial Statement." Print a copy and complete the personal financial statement required by the SBA. TEAMWORK Work in small groups. You want to start a home remodeling business. You need money to purchase remodeling equipment and a new truck. Identify sources of financing for the business. Role play a scenario in which you are meeting with a potential investor. Explain your business idea and your need for funds, and make a request for funding. 9.1 Finance Your Business 245 # greene_0538446145_ch09, 1/17/8, 15:4, page: 246 cash flow statement income statement balance sheet Prepare pro forma balance sheet. V Focus on Small Business Show me the money! "So, Monty," asked Sarah, "how much money do you think your business will make?" "And I'm supposed to know that how?" Monty replied. "Well, take a look at your pro forma financial statements," Sarah answered. "Well, Sarah, once again you are showing me how much I don't know!" "Boy, you'd be in a mess if I wasn't your friend," Sarah responded. "There are financial statements you should prepare to help you estimate the finances of your business. The pro forma income statement estimates how much money will come in, how much you will spend, and the amount of any projected profit or loss. Some people even call it a profit/loss statement." "Wow, it sounds like a pro forma income statement would be help¬ ful in trying to obtain a loan," Monty replied. "What other financial statements do I need?" "Come on, Monty, we've got work to do. There's also a pro forma cash flow statement and balance sheet. Let's get started!" Work as a Team Discuss the reasons you think it is important to prepare pro forma financial statements. What types of information do you think that a business owner can get from these financial statements? Why do you think pro forma financial statements should be included Financial statements show how well your as part of a business plan? business is doing. Cash Flow Statement Financial statements are important when you are trying to raise capital for your business. The financial statements you prepare for your busi¬ ness plan are pro forma financial statements and are based on projec¬ tions. The cash flow statement, income statement, and balance sheet all tell you something different about the condition of your business. For many, the cash flow statement is the most important financial statement. A cash flow statement is an accounting report that describes 246 Chapter 9 Plan and Track Your Finances Getty Images/PhotoDisc greene_0538446145_ch09, 12/21/7, 18:51, page: 247 the way cash flows into and out of your business over a period of time. Because it deals with actual cash coming in and going out of a busi¬ ness, it shows how much money you have available to pay your bills. Forecast Receipts and Disbursements To create a pro forma cash flow statement, you will need to estimate your monthly cash receipts and monthly cash disbursements. Cash receipts include cash sales, collected account receivables, tax refunds, and funds from bank loans and investors. When you forecast the amount of your cash receipts, you need to analyze the demand for each of your products and services. You also need to know the price you will charge for each item. Felicia Walters estimates her total cash sales by multiplying the quantity of each type of product she expects to sell by the price she has set for each item. In addition, Felicia estimates her other monthly cash receipts as shown below. FORECASTED RECEIPTS Walters Electric January 20 — Cash sales Quantity Sold Price Total CFL bulbs 20 $ 15 $ 300 Indoor light fixtures 10 155 1,550 Outdoor lights 6 175 1,050 Subtotal $2,900 Accounts receivable $ 300 Bank loan $1,000 Total $ 4,200 Cash disbursements may include payments for cost of goods (what you pay manufacturers or wholesalers to get products and services to sell), accounts payable (credit accounts with suppliers), rent, salaries, taxes, office supplies, utilities, insurance, advertising, loans, and other expenses. Felicia’s estimated monthly cash disbursements are shown in the table to the right. Prepare the Cash Flow Statement After making projections of cash receipts and cash dis¬ bursements, you are ready to prepare your cash flow statement. You should create monthly pro forma cash flow statements for the first year of operation and annual statements for the second and third years to give your lender an accurate picture of your cash flow over time. Net cash flow is the difference between cash receipts and disbursements. Cash receipts — Cash disbursements = Net cash flow FORECASTED DISBURSEMENTS Walters Electric January 20 — Disbursement Amount Cost of goods $2,400 Rent 900 Utilities 100 Salaries 2,000 Advertising 700 Supplies 100 Insurance 75 Payroll taxes 175 Other 50 Total $6,500 9.2 Pro Forma Financial Statements 247 greene_0538446145_ch09, 12/21/7, 18:51, page: 248 PRO FORMA CASH FLOW STATEMENT Walters Electric January-June 20— Jan Feb Mar Apr May June Cash receipts Cash disbursements $4,200 $5,410 $5,750 $6,320 $7,375 $8,130 Cost of goods $2,400 $2,520 2,520 2,640 3,300 3,480 Rent 900 900 900 900 900 900 Utilities 100 100 100 100 100 100 Salaries 2,000 2,000 2,000 2,000 2,000 2,000 Advertising 700 700 700 700 700 700 Supplies 100 115 130 150 150 150 Insurance 75 75 75 75 75 75 Payroll taxes 175 175 175 175 175 175 Other 50 50 50 50 50 50 Total disbursements $6,500 $6,635 $6,650 $6,790 $7,450 $7,630 Cash Flow -$2,300 -$1,225 -$ 900 -$ 470 -$ 75 $ 500 If cash receipts total more than disbursements, your business has a positive cash flow. You can put this money in the bank, pay down debt, or use it to expand your business. If disbursements total more than cash receipts, your business has a negative cash flow. You may have to borrow money or ask your creditors to give you more time to pay. Preparing pro forma statements helps you to anticipate when negative cash flows will occur, so you can plan for how you will han¬ dle or avoid them. Felicia Walter’s pro forma cash flow statement is shown above. Many entrepreneurs create two types of cash flow statements based on a worst-case scenario and a best-case scenario. For a worst- case scenario, you should project lower cash receipts and higher cash disbursements than you think you will have. For a best-case scenario, you should project the highest cash receipts and lowest cash disburse¬ ments your business is likely to have. Economic Effects on Cash Flow Changes in the economy can have a dramatic effect on the cash flow of a business. During the good economic times of the 1990s, many businesses saw large amounts of cash flowing into their companies and experienced positive cash flows. However, the economic slow¬ down that resulted after September 11, 2001, caused many businesses to experience unexpected negative cash flows. When making projec¬ tions, business owners should look at economic forecasts and make conservative estimates. Remembering that changing economic condi¬ tions can affect cash flows, it is best to err on the side of caution. Checkpoint What does a cash flow statement show? 248 Chapter 9 Plan and Track Your Finances greene_0538446145_ch09, 12/21/7, 18:51, page: 249 Income Statement An income statement shows the business’s revenues and expenses incurred over a period of time and the resulting profit or loss. For this reason, it is sometimes called the profit/loss statement. An income statement can help you do the following: 1. Examine how sales, expenses, and income are changing over time. 2. Forecast how well your business can expect to perform in the future. 3. Analyze your costs to determine where you may need to cut back. 4. Identify categories of expenditures you may want to increase or decrease, such as advertising. While the cash flow statement deals with actual cash coming in and going out, the income statement shows revenues that you have not yet received and expenses that you have not yet paid. Suppose Walters Electric sells $5,000 worth of lighting in June. The company’s monthly income statement would show income of $5,000. Felicia may not actually have received $5,000, because some customers may have paid on credit. They will not make payments until July or August. Further, some credit customers may fail to ever pay their bills. Customers are not the only people who defer payments. Felicia may purchase $1,500 worth of merchandise to sell but wait 30 days to pay the invoice. Because no cash has been paid for this purchase, it will not appear on the cash flow statement. In contrast, the income statement will show that Felicia incurred an expense of $1,500. Prepare a Pro Forma Income Statement Preparing a pro forma income statement for a number of years will help lenders see the long-term growth of your business. The pro forma income statement consists of the following parts: O) CD ro E £ c? c o > "fD Q Why should a business estimate the amount of revenue it expects to earn? # 9.2 Pro Forma Financial Statements 249 greene_0538446145_ch09, 12/21/7, 21:4, page: 250 • Revenue The dollar value of the goods or services a business sells to customers is called revenue. • Cost of goods sold The cost of the inventory a business sells during a particular period is called cost of goods sold. Only businesses that have inventory will have this item on their income statements. It is listed sepa¬ rately from the other expenses. • Gross profit The difference between revenue and cost of goods sold is the gross profit. • Operating expenses The expenses necessary to operate a business are the operating expenses. They include salaries, rent, utilities, advertising, insur¬ ance, supplies, and other expenses. All businesses pay operating expenses. • Net income before taxes Net income before taxes is the amount remaining after cost of goods sold and operating expenses are sub¬ tracted from revenue. It shows how much you earned before taxes. • Taxes Taxes are usually listed separately from other expenses. • Net income/loss after taxes After taxes are subtracted, the result is the net income or loss for the period. PRO FORMA INCOME STATEMENT Walters Electric, 20— Year 2 Year 3 Revenue $115,000 $125,000 Cost of goods sold 55,400 60,000 Gross profit $ 59,600 $ 65,000 Operating expenses Salaries $ 26,705 $ 27,315 Rent 10,800 10,800 Utilities 1,230 1,260 Advertising 1,200 1,200 Insurance 900 900 Supplies 600 615 Other 615 615 Total operating expenses $ 42,050 $ 42,705 Net income before taxes $ 17,550 $ 22,295 Taxes 7,020 8,918 Net income/loss after taxes $ 10,530 $ 13,377 Checkpoint What does an income statement show? Balance Sheet A balance sheet is a financial statement that lists what a business owns, what it owes, and how much it is worth at a particular point in time. It does so by identifying the assets, liabilities, and owner’s equity of the business. It is based on the accounting equation: Assets = Liabilities + Owner’s Equity Assets are items of value owned by a business. They include items such as cash, equipment, and inventory. Liabilities are amounts that a business owes to others. They include loans and outstanding invoices. Owner’s equity is the amount remaining after the value of all liabilities is subtracted from the value of all assets. A business that has more assets than liabilities has positive net worth. A business that has more liabilities than assets has negative net worth. 250 Chapter 9 Plan and Track Your Finances greene_0538446145_ch09, 12/21/7, 18:51, page: 251 Prepare a Pro Forma Balance Sheet You must estimate the amount of assets, liabilities, uncollectible accounts, and asset depreciation when preparing a pro forma balance sheet for your business. Felicia Walters’ pro forma balance sheet for her business is shown below. TYPES OF ASSETS Businesses usually separate assets into fixed assets and current assets. Fixed assets are those that will be used for many years. They include buildings, furniture, and computers. Current assets are cash, other assets that can be converted into cash, and items that are used up in normal business operations. One asset that can be con¬ verted into cash is inventory. Assets that are used up in business oper¬ ations are supplies. Another special type of current asset is accounts receivable. Accounts receivable are the amounts owed to a business by its credit customers. When they are collected, they are converted into cash. TYPES OF LIABILITIES Businesses usually separate liabilities into long¬ term liabilities and current liabilities. Long-term liabilities are debts that are payable over a year or longer. A mortgage is a type of long¬ term liability. Current liabilities are debts that are due to be paid in full in less than a year. A special kind of current liability is accounts payable. Accounts payable are amounts owed to vendors for merchan¬ dise purchased on credit. Businesses can usually choose to pay later for merchandise they receive now. Because a business generally pays invoices from vendors within 30 to 90 days, accounts payable is a current liability. ASSET REDUCTIONS Some customers will fail to pay for the merchan¬ dise they purchased on credit. The amount a company estimates it will PRO FORMA BALANCE SHEET Walters Electric December 31, 20— Assets Liabilities Current assets Current liabilities Cash $ 1,000 Accounts payable $12,000 Accounts receivable 8,000 Less allowance for uncollectible accts. -500 Long-term liabilities Inventory 14,000 Loans payable $17,900 Total current assets $22,500 Total liabilities $29,900 Fixed assets Equipment $ 8,975 Less depreciation -1,795 Furniture 2,200 Less depreciation -220 Vehicles 18,000 Owner's Equity Less depreciation -3,600 Felicia Walters $16,160 Total fixed assets $23,560 Total liabilities and Total assets $46,060 owner's equity $46,060 9.2 Pro Forma Financial Statements 251 greene_0538446145_ch09, 1/17/8, 15:4, page: 252 not receive from customers is known as the allowance for uncollectible accounts. This amount should be subtracted from the assets. Business equipment will lose value over time just as a car loses value as it gets older. The lowering of an asset’s value to reflect its current worth is called depreciation. Estimates for uncollectible accounts and depreciation should be included to ensure that the balance sheet provides an accurate picture of the business’s net worth. Checkpoint Name one example each of a current liability, a long-term liability, a current asset, and a fixed asset. 9.2 Assessment THINK ABOUT IT 1. Why would you prepare both a best-case and a worst-case pro forma cash flow statement? 2. Green Golf Course has a positive cash flow only six months of the year. What should the owner do with the extra cash during these months? 3. When making financial projections, why must a business owner consider economic conditions? MAKE ACADEMIC CONNECTIONS 4. PROBLEM SOLVING Create a pro forma cash flow statement to project your cash receipts and disbursements over the next six-month period. Do you project a positive cash flow? If not, how can you improve your cash flow? 5. MATH In May, Yoder's Bookstore had sales of $5,000, cost of goods sold of $3,000, operating expenses of $800, and taxes of $400. Calculate Yoder's gross profit and final net income or loss. 6. MATH At the end of its first year of operations, Berganstein Sportswear had current assets of $13,000, fixed assets of $25,000, current liabilities of $7,000, and long-term liabilities of $14,000. What is the amount of owner's equity? Working in a small group, research the state of the U.S. economy today and future forecasts of the economy. Prepare a brief presenta¬ tion to share what you have learned. Based on your findings, predict how today's economy could affect the cash flow of a new business. Then, based on future forecasts, predict how the economy will affect the cash flow of a business in coming years. 252 Chapter 9 Plan and Track Your Finances greene_0538446145_ch09, 12/21/7, 18:51, page: 253 Recordkeeping for Businesses Describe the use of jour nals and ledgers in a recordkeeping system. Explain the importance of keeping accurate and up-to-date bank, payroll and tax records. • transaction • journals • account • check register • payroll Focus on Small Business Keeping it all straight After securing financing for his business, Monty was ready to get started. He purchased all of his equipment and supplies, sent out some advertising fliers, and set up meetings with potential clients. Two months into his busi¬ ness, he was very surprised to find a notice from his bank informing him that he had written checks from a bank account that had no funds. "How did this happen?" he asked Sarah. "Did you reconcile your bank statement last month?" Sarah responded. "Reconcile what?" Monty replied. "Oh, Monty, don't tell me you don't know how to reconcile your bank statement! But you do know how to journalize your transactions don't you?" "Well, Sarah, I guess I wasn't as prepared as I thought. I have no idea what you are talking about!" Sarah realized that Monty needed some serious help if he was going to make a go of his business. "Monty, financial recordkeeping is one of the most important things you do as a business owner. We need to get you some help from an accountant. In the mean¬ time, I'll give you a few lessons in basic recordkeeping!" Work as a Team Why do you think financial recordkeeping is essential to the success of a business? What types of records do you think business owners need to keep? What types of trouble could Good recordkeeping keeps everything in result from poor recordkeeping? balance. a> CD CU E § Recording Transactions A transaction is any business activity that changes assets, liabilities, or net worth. Accurate recordkeeping of your business transactions will help you keep track of how much money you have earned, how much you have spent, how much money you owe, and how much customers 9-3 Recordkeeping for Businesses 253 greene_0538446145_ch09, 12/21/7, 18:51, page: 254 Why is it important to keep track of business transactions? owe you. It will also help you create financial statements to determine your business’s net worth and how much profit you have made. Journals Journals are accounting records of the transactions you make. There are five different journals that businesses use to record their transactions. 1. Sales journal This is used to record only sales of merchandise on account. Merchandise sold on account means that customers receive goods or services now that they will pay for later. 2. Cash payments journal This is used to record only cash payment transactions. Any cash, check, or electronic payment a business makes is recorded in this journal. 3. Cash receipts journal This is used to record only cash receipt transactions. Cash sales and cash payments received from customers on their credit accounts are recorded in this journal. 4. Purchases journal This is used to record only purchases of mer¬ chandise on account. If you receive merchandise today but pay for it later, you should record this in the purchases journal. 5. General journal This is used to record any kind of transaction. Some businesses use only a general journal. Businesses that use the four special journals described above record transactions that do not fit in the other four journals in the general journal. Ledgers Businesses also use a general ledger that is made up of accounts. An account is an accounting record that provides financial detail for a particular business item, such as for cash, sales, rent, and utilities. The general ledger will have an account for every type of asset, liability, revenue, expense, and so forth. Transactions entered into the journals are posted, or transferred, to the general ledger accounts affected by the transactions. Posting is generally done every one to two days to 254 Chapter 9 Plan and Track Your Finances greene_0538446145_ch09, 12/21/7, 21:4, page: 255 keep the ledger current. The balances in the accounts will help you in the preparation of the financial statements you will need to run your business effectively. SUBSIDIARY LEDGERS Some businesses choose to keep a more detailed record of certain general ledger accounts in a separate, sup¬ porting subsidiary ledger. A sub¬ sidiary ledger is commonly used for accounts payable to show in detail the transactions with each vendor from whom merchandise is purchased on account. Each vendor will have its own account showing transaction history and the current balance owed. A subsidiary ledger is also commonly used for accounts receivable with separate accounts showing each customer’s transaction history and current balance due. Kim Smith is the owner of Photo Memories. She wants to use subsidiary ledgers for accounts payable and accounts receivable to keep detailed records of transactions with her suppliers and custom¬ ers. The detailed information in these subsidiary ledgers will be summarized and transferred to the accounts payable and accounts receivable accounts in the general ledger. The subsidiary ledgers make it easy for Kim to see at a glance her transactions with suppli¬ ers and customers. AGING TABLES An aging table is a recordkeeping tool for tracking accounts receivable. It shows a business how long it is taking customers to pay their bills. Kim can see by her aging table that one customer is more than 61 days past due on a bill. She decides that she should not ship this customer any more merchandise until he has paid the out¬ standing bill. Customer Amount 0-30 days 31-60 days over 61 days E. Kwon $175.23 $175.23 P. Mossett $106.20 $106.20 M. Stern $82.34 $82.34 Totals $363.77 $175.23 $106.20 $82.34 Percent of total 100% 48% 29% 23% Checkpoint What is the difference between a journal and a ledger? 9-3 Recordkeeping for Businesses 255 greene_0538446145_ch09, 1/15/8, 17:39, page: 256 Business Records Good recordkeeping can help you make smart business decisions. Incomplete or inaccurate records can cause you to mismanage your business or can cause serious legal problems. You will need to keep accurate banking, payroll, and tax records. These records may be kept manually or electronically. Banking Records You will need to open a checking account for your business. You will use your business account for all deposits and withdrawals related to your business. If you already have a personal checking account, you will still need a separate one for your business. When you open your checking account, you will receive a set of checks and a check register. A check register is a booklet in which you record the dates and amounts of the checks as well as the names of people or businesses to whom you have written the checks. You can also maintain a check register electronically using computer software. WHAT WENT WRONG > ALL Your Eggs in One Basket After working for six years at a Toyota dealer¬ ship, Billy Wong borrowed money from his family and started Japanese Car Parts Distribu¬ tors (JCP). The business grew, and in ten years it had 12 employees, thousands of parts in inventory, and hundreds of customers across the country. Billy kept handwritten records for the busi¬ ness. Before long, his 18-year-old, computer- whiz son, Tommy, wouldn't let him ignore the advantages of computerizing his record¬ keeping. So Billy gave Tommy the task of set¬ ting up a computer system and transferring the accounts, inventory, and financial information from his paper records to the new electronic format. Within a year, Billy stopped keeping handwritten records in favor of Tommy's com¬ puterized system, and in the next year, the business ran more smoothly than ever. Tragedy struck the business one December night when Tommy found robbers in the busi¬ ness office. Tommy was badly injured by the thieves and was rushed to the hospital. Sadly, he died on the way. If this wasn't enough for Billy to handle, the thieves also stole the office computer. Billy had left all the electronic recordkeep¬ ing to his son, and he had no idea whether Tommy had made backup copies of all the files that had been stored on the stolen computer. Billy found that it would take months and a large amount of money to set up a new com¬ puterized recordkeeping system. Think Critically 1. Was Billy wrong to trust his young son with so much responsibility? 2. Would JCP's problems have been solved if they had found the computer? Backing up computer files can prevent problems. 256 Chapter 9 Plan and Track Your Finances greene_0538446145_ch09, 12/21/7, 18:51, page: 257 CD CD ro E CL) a o o -£= Q_ How can you balance your checking account? BALANCE YOUR ACCOUNT Every time you write a check or make a deposit, you should balance your check register. Balancing your check register is very important because it will prevent you from accidentally writing checks when you do not have enough money in your account to cover them. Writing bad checks is illegal! If your checks do not clear, your suppliers may stop shipping merchandise to you. Businesses and banks will charge you fees for having to deal with the bad checks. RECONCILE YOUR ACCOUNT Every month you will receive a bank statement that shows all of your deposits, checks paid, and bank fees. When you receive your bank statement, you should reconcile the bank statement with your check register. The bank statement balance will not be the same as your check register balance because of checks that you have written that have not cleared the bank and deposits that you made after the bank statement was prepared. The steps in reconciling your account are as follows: 1. Compare the bank statement with your check register. Place a checkmark in your check register by the checks that you have writ¬ ten that have cleared the bank. Also checkmark the deposits that you have made that have cleared the bank. Any remaining checks or deposits that are not listed on the bank statement are classified as outstanding. 2. Using the account reconciliation form on the back of your bank statement, enter the amount of your bank statement balance. 3. List outstanding deposits and add them to the bank statement balance. 4. List outstanding checks and deduct them from the bank statement balance. 5. Record the checkbook balance in the space provided. 9-3 Recordkeeping for Businesses 257 greene_0538446145_ch09, 12/21/7, 18:51, page: 258 6. If there were any deposits on your statement that you forgot to write in your check register, list them and add them to the check¬ book balance. 7. Record any fees that the bank has charged your account and sub¬ tract them from the checkbook balance. 8. If your account earns interest from the bank, record the amount of interest earned and add it to the checkbook balance. 9. The bank statement balance and the checkbook balance should now be equal. Be sure to record any fees charged or interest earned in your checkbook. If your balances do not match, double check your math first. Then review your records to see if all checks and deposits have been recorded in your checkbook and processed by the bank correctly. BANK RECONCILIATION Bank statement balance $2,151.00 Balance from checkbook $2,501.15 Add outstanding deposits 660.00 Add deposit not recorded 0.00 Subtotal $2,811.00 Subtotal $2,501.15 Deduct outstanding checks: Deduct bank fees 12.00 #345 $ 60.00 #366 105.60 Balance less fees $2,489.15 #369 150.00 Total outstanding checks 315.60 Add interest earned 6.25 Adjusted bank balance $2,495.40 Adjusted checkbook balance $2,495.40 Payroll Records If you have employees working for you, you will have to maintain payroll records. A payroll is a list of people who receive salary or wage payments from a business. The payroll records will show how much your employees have earned during each pay period. They will also show deductions that may have been made from those earnings for taxes and benefits. There are many computer software packages that can help you maintain these records. There are also many payroll service companies that you can contract with to handle payroll process¬ ing for you. You will need to complete a payroll register for every pay period. The register will include the following information for each employee: • Employee name • Number of hours worked • Regular and overtime earnings • Federal, state, and local taxes deducted • Social security and Medicare contributions deducted • Deductions for benefits, such as health insurance, life insurance, and retirement savings plans 258 Chapter 9 Plan and Track Your Finances greene_0538446145_ch09, 12/21/7, 18:51, page: 259 O) CD ns E S' QJ o o o -C Q_ Why is it important for a business to carefully estimate its income taxes? After you create the payroll register, you will prepare payroll checks. Most businesses use voucher checks for their payrolls. Voucher checks have a statement of earnings and deductions attached to them. The statement shows employees how their pay was calculated. Tax Records You will have to make several d ifferent kinds of tax payments as a busi¬ ness owner. These include income taxes, payroll taxes, and sales taxes. INCOME TAX Businesses that earn profits must pay income tax. These taxes are paid quarterly, or every three months. Income tax must be prepaid at the beginning of a quarter, so you will need to estimate your income taxes. If you fail to make these payments or you underestimate how much tax is due, you may have to pay a penalty. You could also be subject to criminal penalties for tax fraud. PAYROLL TAXES AND DEDUCTIONS deduct taxes from your employees’ paychecks and submit these taxes to the government. As an employer, you are also required to pay unemployment insurance taxes and a portion of Social Security taxes based on the earnings of your employees. Your employees may ask you to take voluntary deduc¬ tions from their earnings to cover health or dental insurance. If you deduct this money from employees’ earnings, you are required to send it to the companies that are provid¬ ing the insurance coverage. By law, you are required to be your own boss You own a home remodeling business in your community. You have one full-time employee working for you. Research the types of federal, state, and local taxes you will need to withhold from your employee's paycheck. Create a table listing the types of taxes to withhold. For each one, describe how you would determine the amount of taxes to withhold. 9.3 Recordkeeping for Businesses 259 greene_0538446145_ch09, 1/17/8, 15:4, page: 260 SALES TAX Retail businesses are required to charge sales taxes on goods or services. If you own a business that collects sales tax, every month you will have to deposit the tax you collect into a special bank account that belongs to the government. Sales taxes are based on a percentage of sales. The actual percentage charged varies from state to state and can vary within a state if the local county or city also assesses a sales tax. Checkpoint What kinds of bank, payroll, and tax records do you have to keep? 9.3 Assessment THINK ABOUT IT 1. Eliza Conner owns a small clothing boutique. Eliza uses her per¬ sonal checking account for both business and personal needs. How would you convince Eliza that she should open a separate bank account for her business? 2. Why is it important to keep accurate and up-to-date bank, pay¬ roll, and tax records? MAKE ACADEMIC CONNECTIONS MATH As a business owner, you should reconcile your bank statement each month when you receive it. Using the Activity CD, open the activity "Bank Reconciliation." Print a copy and complete the activity. MATH Scott Belville, owner of Flowers on Main, completed an aging table for his accounts receivable. The column totals are shown below. Complete the percent of total row for Scott. Customer Amount 0-30 Days 31-60 Days Over 60 Days Totals $6,500 $2,300 $3,100 $1,100 Percent of total _? _? _? _? COMMUNICATION Assume you are Kim Smith, the owner of Photo Memories. Look at the aging table on page 255. You have decided that no more orders will be filled for Mark Stern until his account balance is paid in full. Write a letter to Mr. Stern to inform him of your decision. Provide payment options to help Mr. Stern pay off his account balance. TEAMWORK Working with team members, discuss the pros and cons of maintain¬ ing electronic records versus manual records for your business. What are some ways to resolve the cons of maintaining electronic records? Which way do you think is best? Why? 260 Chapter 9 Plan and Track Your Finances greene_0538446145_ch09, 1/17/8, 15:4, page: 261 Prepare a Resume Along with your personal financial statement, a resume should be part of your business plan’s appendix of supporting documents. Potential lend¬ ers and investors will want to know about you, the entrepreneur. Know¬ ing about your skills, experience, and character will help them M , decide whether or not investing in your business is a good _ idea. A personal resume describes your skills and experience to help prove you have the ability to own and manage a business. Your resume should demonstrate that your background is suit¬ able for the business you wish to start and should convey to readers your career goal, self-image, communication skills, ability to achieve results, and personal character. A well-written resume includes the following information: 1. Name, address, telephone number, and e-mail address. 2. A statement describing your career objective and why you are qualified to reach the objective. 3. A list of your work experience arranged by date with the most recent work experience listed first. Include a brief descrip¬ tion of responsibilities and accomplishments for each position. 4. A description of your education and any other training programs in which you have participated. 5. A list of personal activities that demonstrate that you are reliable and ambitious. Include community service activities, any hobbies you have that relate to your business, and any awards or honors you have received. 6. The names and contact information of three references who can verily the information on your resume. When preparing your resume, try to keep it to one page in length. Be sure that it is well organized and includes only significant informa¬ tion that gives evidence of your abilities. Proofread your resume care¬ fully to ensure that your spelling and grammar are 100 percent correct. TRY IT OUT Using the Activity CD, open the activity “Prepare a Resume.” Print a copy of the sample resume and review it. Then complete the question¬ naire to help you compile your own resume for the business idea you have been working on in the Build Tour Business Plan Project. Your resume should communicate your ability to start, run, and manage the business. Include your resume in the appendix of your business plan. Sharpen Your Entrepreneurial Skills 261 ’ n/Ge tty ima, 0538446145_ch09, 12/21/7, 18:51, page: 262 Chapter 9 Assessment SUMMARY 9.1 Finance Your Business 1. As an entrepreneur, you must prepare a list of startup costs to determine how much money you will need to start your business. You should also prepare a personal financial statement based on the formula: Total assets — Total liabilities = Net worth. 2. Equity capital is money invested in a business in return for a share in the profits of the business. Sources of equity capital include per¬ sonal contributions, friends and relatives, and venture capitalists. 3. Debt capital is money loaned to a business with the understanding that the money will be repaid. Sources of debt capital include friends and relatives, commercial banks, and government agencies such as the SBA. 9.2 Pro Forma Financial Statements 4. The cash flow statement describes the way that cash flows in and out of your business and uses the following basic formula: Cash receipts - Cash disbursements = Net cash flow. 5. The income statement shows the business’s revenues and expenses incurred over a period of time and the resulting profit or loss. It can help you forecast how well your business can expect to per¬ form in the future. 6. The balance sheet is a financial statement that lists what a business owns, what it owes, and how much it is worth, using the account¬ ing equation: Assets = Liabilities + Owner’s Equity. 9.3 Recordkeeping for Businesses 7. Businesses initially record transactions in journals. The transactions are then posted to accounts in the general ledger. More detailed records of certain general ledger accounts, such as accounts receiv¬ able, are kept in a subsidiary ledger. 8. You will need to keep accurate and up-to-date bank, payroll, and tax records. You must keep your bank records balanced and pre¬ pare a bank reconciliation each month. If you have employees, you will need to prepare a payroll register for every pay period. You will also have to track and pay income, payroll, and sales taxes at regular intervals. What do you fcnow now? Read Ideas in Action on page 237 again. Then answer the questions a second time. How have your responses changed? 262 Chapter 9 Plan and Track Your Finances greene_0538446145_ch09, 12/21/7, 18:51, page: 263 VOCABULARY BUILDER Match each statement with the term that best defines it. Some terms may not be used. 1. The difference in what you own and what you owe 2. A financial statement that shows a business’s revenues and expenses incurred over a period of time 3. Money invested in a business in return for a share in the profits of the business 4. A list of people who receive salary or wage payments from a business 5. A financial statement that describes the way that cash flows into and out of your business 6. Any business activity that changes assets, liabilities, or net worth 7. Property that the borrower forfeits if he or she defaults on a loan 8. Accounting records of the business transactions you make 9. Money loaned to a business with the understanding that the money will be repaid a. b. c. d. e. f. g- h. J k. l. m. n. account balance sheet cash flow statement check register collateral debt capital debt-to-equity ratio equity capital income statement journals net worth payroll transaction venture capitalists 10. The relation between the dollars you have borrowed and the dollars you have invested in your business 11. Individuals or companies that make a living investing in startup companies 12. A financial statement that lists what a business owns, what it owes, and how much it is worth at a particular point in time REVIEW YOUR KNOWLEDGE 13. Which of the following would be a startup cost? a. computer for the business c. monthly rent expense b. monthly utility bill d. weekly payroll 14. Loans that are guaranteed with property are called_?_. 15. You have decided to try to finance your business with equity financing. Who should you approach to invest in your business? a. local bank b. Small Business Administration c. friends and family d. Department of Housing and Urban Development 16. Which of the following would most likely be accepted as collateral for a secured loan for $25,000? a. $32,000 automobile that is paid in full b. $12,000 of home equity c. $2,500 computer system d. apartment that you rent 17. Which of the following is not a reason that a bank may reject your loan application? a. business is a startup c. business plan is sloppy b. owner invested $30,000 d. owner has no experience Chapter 9 Assessment 263 greene_0538446145_ch09, 1/21/8, 19:26, page: 264 18. True or False? The Small Business Administration offers loans to businesses in the same way that a commercial bank does. 19. Which of the following would not be included on a cash flow statement? a. Sale to customer on account b. Payment received from a customer on account c. Payment made to a vendor for new equipment d. Funds of $4,000 received from bank loan 20. You are using five separate journals to record your business trans¬ actions. In which journal would you record a sale of merchandise if the customer pays you cash at the time of the sale? a. sales journal c. cash receipts journal b. cash payments journal d. purchases journal 21. True or False? Taxes that you withhold from employees’ pay- checks are deposited into your bank account until the employee files an income tax return. 22. True or False? If your cash receipts are less than your cash dis¬ bursements, your business has a negative cash flow. 23. A potential investor or bank would want to see all of the following financial documents except a. cash flow statement c. personal financial statement b. startup costs d. journal APPLY WHAT YOU LEARNED 24. You plan to open a retail sportswear store. You will hire several employees to help run the store. What types of journals do you need to keep for such a business? Why? What kinds of bank, pay¬ roll, and tax records will you have to maintain? How could you use a computer to help you keep and manage your records? 25. You plan on opening Rashida’s Beauty Salon. You have listed your projected monthly revenues, expenses, and taxes below. Prepare a pro forma income statement based on this information. Revenues $15,000 Insurance $ 750 Cost of goods 2,550 Rent 1,000 Supplies 1,100 Utilities 650 Salaries 4,800 Taxes 1050 MAKE ACADEMIC CONNECTIONS 26. MATH You own a store that sells video games. You owe $25,000 to video game vendors; you have a ten-year bank loan of $50,000; your bank account balance is $13,000; you own inventory worth $57,000; you have $2,000 in account receivables; and fixed assets are $22,000. What are your total assets, liabilities, and owner’s equity? 27. COMMUNICATION Conduct a phone interview with the manager of a local bank to find out what kinds of loans they offer to small businesses. Specifically, ask them about their secured loans, unsecured loans, and SBA-backed loans. Write a one-page report on your findings. 264 Chapter 9 Plan and Track Your Finances greene_0538446145_ch09, 12/21/7, 18:51, page: 265 You are working on your resume for your business plan. After listing your experience, you think it might appear as if you do not have the adequate experience and skills to successfully start and run your business. You consider enhancing your resume by adding some addi¬ tional job experiences that you haven't had in order to make it look better for potential investors and lenders. Do you think it will mat¬ ter? Do you think anyone will ever actually check your experiences or references? What might be the result if they do check? What would you do? _ J build your Business Plan Project This activity will help you continue with the development of a busi¬ ness plan for your business idea. Estimate your startup costs for your business and prepare a personal financial statement to determine your net worth. Determine how much money you need to begin your business. Decide if you will obtain equity and/or debt financing. Will you use personal contributions or borrow from friends and relatives, venture capitalists, a commercial bank, the SBA or other government agency, or a combi¬ nation of these resources? Write why you think one or more of these financing methods will work for your business. Determine your projected cash receipts and cash disbursements for the first year of your business. Prepare a pro forma cash flow statement. After doing so, prepare pro forma cash flow statements based on worst-case and best-case scenarios. Determine your projected revenue and operating expenses for the first year of your business. Estimate the amount of income taxes you will have to pay. Prepare a pro forma income statement. Make a list of your assets and liabilities. Prepare a pro forma balance sheet. Determine what types of journals you will keep for your business. For each type, give an example of a transaction that will be recorded in that journal. What accounts will your business have? Contact two local banks and obtain information about commercial checking accounts. What are the rates? What types of special services or products are offered to small business owners? Create a payroll register for your business. Contact your state and/or local government to find out what taxes must be deducted from employees' pay. Find out how the taxes are calculated. Are there any other deductions that will be made? If your business collects sales tax, find out what the rate is in your state or county. Chapter 9 Assessment 265 greene_0538446145_ch09, 1/18/8, 10:49, page: 266 Planning a Finance Career in hai IVIy brother Boyd, an accoun¬ tant, got tired of the demanding hours required while working at a large accounting firm. Tax season was particularly demanding on his family. His wife is an attorney with her own strenuous workload. They decided he should stay home with the kids and start a part-time busi¬ ness as an accountant for small businesses.” How do small businesses manage their finances to comply with legal requirements? How can a small business understand how changes in financial reporting laws affect them? Accountants help individuals and corporations prudently manage their finances. Asset management, design of accounting information management systems, and tax preparation are some of the serv¬ ices provided by accountants. EMPLOYMENT OUTLOOK • Faster than average job growth is anticipated. • Changes in accounting-related legislation will fuel demand for accountants to help corporations meet regulatory requirements. • Accountants will be needed to help prevent and circumvent financial fraud. JOB TITLES • Accounting Manager • Controller • Financial Auditor • Certified Public Accountant (CPA) • Cost Accountant • Financial Reporting Accountant NEEDED SKILLS • A Bachelor’s Degree with a major in accounting, finance, or business administration is required. • Advancement may require a Master’s Degree in accounting or an MBA. • Professional certifications in vari¬ ous accounting specialties for certain positions. • Continuing education is required in most states. What's it like to work in Finance Boyd, an independent Certified Public Accountant, had a variety of clients. Today, he was in a monthly meeting with the owner of a home decor boutique store. Evaluating the financial components of the business, including inventory levels, expenditures, payroll, accounts receivable, and taxes was a critical part of the meeting. Boyd also helped his client assess the value of various promo¬ tions the store ran periodically throughout the year. Analyzing the success of promotions by compar¬ ing promotional costs to incremen¬ tal revenue increases helped the boutique owner understand which promotions were profitable. At the conclusion of the meeting, the client asked Boyd to look into whether it would be financially wise to buy a building to house the boutique or whether the store should remain in its cur¬ rent rented location. What about you? Would you like to help businesses improve their financial performance by help¬ ing them manage the financial side of their business? 266 Chapter 9 Plan and Track Your Finances greene_0538446145_ch09, 12/21/7, 18:51, page: 267 J-k financial plan is essential to the success of any business enterprise. You and your teammates are challenged to establish and develop a complete financial plan for a successful business that wants to expand into two surrounding communities. The financial plan must be eco¬ nomically and financially sound within a realistic time frame. You will prepare a synopsis of 500 words or less that summarizes the loan needed to expand a successful local business into two sur¬ rounding communities. Plans must not exceed 15 pages and will include the following content: Synopsis; Company Description (legal form of business, company mission, company governance, company locations, long- and short-term goals); Operations and Management (business facilities, management personnel, workforce); Target Market (current target market and future sales potential); Financial Institution (name of financial institution and rationale for choosing the financial institution); Loan Request (purpose, amount, planned expenditures, planned repayment for the loan and projected future stability of the company); and Supporting Documents. You will have seven minutes to present your plan, and the judge(s) will have three minutes to ask questions. PERFORMANCE INDICATORS EVALUATED • Explain the opportunity for business expansion. • Present convincing rationale for expanding a business into two sur¬ rounding communities. • Develop a complete financial plan for a business venture. • Request a business loan from a financial institution. • Present financial information to obtain a loan from a financial institution. • Organize a financial proposal for a growing business. • Manage time and information for an effective presentation. Go to the FBLA web site for more detailed information. Think Critically 1. Why does a financial institution want to know the future sales potential of the business's target market? 2. What does a business's workforce have to do with a business loan? 3. Why should the business project how quickly a loan will be repaid? 4. Why must the team describe the target market demographics for the two new proposed locations for the business? www.fbla.org Winning Edge 267 greene_0538446145_ch 10, 12/21/7, 19:24, page: 268 10.1 Operating Procedures school.cengage.com/entrepreneur/ideas 268 10.2 Inventory Management 0.3 Financial Management greene_0538446145_chlO, 12/21/7, 19:24, page: 269 n -i IDEAS !M ACTION! Andrew Jensen, President & CEO, Jx2 Productions Entertaining and Planning T win brothers, Erik and Andrew Jensen, wanted some special entertainment for their parent's twenty-fifth wedding anniversary party. They were not able to find anyone to provide what they wanted, so they decided to DJ the party themselves, using a mix of equipment they had both purchased and rented. Soon guests from the party started requesting their services, and Twin Spin DJ and Entertainment was started! To accommodate changes in the business over the next year, they changed the name to Jx2 Productions. As the business continued to grow and change from a hobby to a career, the brothers found a need to develop a formal business plan. Eventually, Andrew bought out his brother's share of the business and changed the form of ownership to a limited liability corporation. The business expanded to offer video ser¬ vices, event planning, and bookings for hypnotists, comedians, jugglers, and other live entertainers. As the services offered expanded, Andrew found a need for a better way of presenting the business on paper and on the Web. So, he hired a pro¬ fessional graphic design company to create a company logo to display in advertisements and on the company web site. The logo presents a consistent, professional look and has been important to the image of Jx2 Productions. Andrew uses the teamwork approach in running his business. He serves as the team leader and holds monthly and sometimes weekly meetings with his staff of three to keep everyone informed and on the same page. They work together to come up with new marketing ideas. He feels that this is important because his DJ's are also his salespeople. It is very important for them to have the right information to communi¬ cate to potential clients when they are out on assignments. Jx2 Productions has been located in the Student Business Incubator (SBI) at Springfield Technical Community College for the past two years. This loca¬ tion has offered Andrew opportunities to grow the business. In addition to offering space and a convenient location, the SBI offers networking and training sessions on finances, advertising, teamwork, and time management. Andrew encourages other students to start their own business if they feel it is right for them. His advice is to follow your dreams, your heart, and whatever drives you to get up every day. What do you Icnow? What is the advantage to Andrew of forming Jx2 Productions as a limited liability corporation? Do you think the image of a company is important? What do you think of Andrew's teamwork approach to running his business? 269 greene_0538446145_ch 10, 12/21/7, 19:24, page: 270 From entrepreneur to manager Avery had been running her alterations business alone for almost six months. The business grew, and Avery hired three employees. With others to help operate the business, Avery decided to take a vacation. Two days into her vacation, her cell phone began ringing nonstop. The three employees were fighting among themselves about who was supposed to do what. No one wanted to answer the phone, and customers were becoming frustrated trying to find out when their clothing alterations would be completed. Avery had to return home to get her business under control! Work as a Team Discuss with your teammates the shift that must be made from entrepreneur to manager when the business hires employees. Do you think all entrepreneurs make good managers? What skills do you think good managers should Managers are responsible have? for business operations. Management Functions Once you open your business and have people working for you, you become a manager. A manager is the person responsible for plan¬ ning, organizing, staffing, implementing, and controlling the opera¬ tions of a business. These are functions that all managers must perform, no matter the size or type of business that they manage. Management is the process of achieving goals by establishing operat¬ ing procedures that make effective use of people and other resources. All functions of management work together and are continuous. Planning Planning involves analyzing information, setting goals, and making decisions about what needs to be done to move the business forward. 270 Chapter 10 Operations Management PhotoDisc/Getty Images greene_0538446145_ch 10, 12/21/7, 19:25, page: 271 The planning activities must be performed in a timely manner. In busi¬ ness you often hear the saying, “time is money.” If you waste time in the planning process, you can lose money for your business. There are three types of planning that should take place in any organization. • Strategic planning Setting broad, long-range objectives to achieve the long-term goals of your business is called strategic plan¬ ning. You should think three to five years ahead when doing strate¬ gic planning. Envision where you want your business to be at that time and what it will take to get you there. • Intermediate-range planning Preparing detailed plans and strat¬ egies for achieving goals within a one-year period is intermediate- range planning. You should include target dates for the completion of the tasks that will lead to the accomplishment of your goals. • Short-term planning Planning for the day-to-day operations of the business to achieve the goals and objectives set in intermediate- range planning is called short-term planning. Rules, policies, proce¬ dures, and budgets are important components of short-term planning. Develop Your Reading Skills Before you begin reading, skim the chapter and note the headings and boldface words. Think about what you will be learning as you read the chapter. Planning is an ongoing process. Entrepreneurs frequently refer back to their business plan for guidance. Likewise, the planning that you do once your business is up and running will help you maintain focus and keep your business on track. Once plans are in place, it does not mean they must be followed exactly. Plans can be revised as needs change. Organizing Organizing is identifying and arranging the work and resources needed to achieve the goals that have been set for your business. Included in the organizing function are the following: • Assignment of tasks You will need to decide which employee will be responsible for which tasks in the business. As you start your business, you will have to determine how many employees you will need and what their duties will be. • Grouping of tasks into departments As your business grows, you will need to organize departments. You will have to decide which tasks are closely related and group them accordingly. Some of the department titles that businesses use include Accounting, Marketing, and Human Resources. • Organizational structure As your company grows, you will need an organizational structure. An organizational structure is a plan that shows how the various jobs in a company relate to one another. It is often represented in a chart and indicates the working relation¬ ships within the business. • Allocation of resources across the organization There will never be enough resources for all the needs and wants of everyone in your business. There must be a plan for distributing the available resources for their most efficient use across the company. This is done by creating budgets based on requests from the departments within the company. 10.1 Operating Procedures 271 greene_0538446145_ch 10, 12/21/7, 19:25, page: 272 Staffing Staffing includes all of the activities involved in obtaining, training, and compensating the employees of a business. Because a company is only as good as the people who work for it, the staffing function is critical to the success of a business. Implementing Implementing involves directing and leading people to accomplish the goals of the organization. Implementing is accomplished through communicating directions, assignments, and instructions to your employees. In order to effectively implement the work of the organi¬ zation, managers must develop a management style that will motivate employees to perform at a high level. Management style is the way a manager behaves toward and works with employees. Managers use different styles based on the characteristics of the employees being managed, the type of work assignment, and the importance of the work being performed. An experienced and effective manager can change the style as needed. AUTHORITATIVE MANAGEMENT A management style in which the manager is directive and controlling is called authoritative management. This style is also called directing or autocratic management. The manager makes the major decisions and closely monitors the work of the employees to be sure the work is done correctly. This management style is often used in a crisis situation when there is not enough time to let the group partici¬ pate in the decision-making process. It is also appropriate when working with a new group of employees who do not have previous experience in the type of work being performed. DEMOCRATIC MANAGEMENT A manage¬ ment style in which employees are involved in decision making and the manager pro¬ vides less direction is called democratic management. This style is also called partic¬ ipatory management. A manager of a group of experienced employees who work well together does not have to be directive and controlling. Employees like to be involved in the planning and decision making that affects their work. MIXED MANAGEMENT Combining author¬ itative and democratic management styles is called mixed management. Different employees prefer different management styles. Some employees prefer to be told what to do and want someone else to do the day-to-day decision making. Others feel that if they are not involved in the decision¬ making process, the manager does not trust NH ^okmark There are many other categories of manage¬ ment styles besides the traditional ones described in your textbook. Corporate perfor¬ mance expert Dr. Ichak Adizes has identified four different managerial styles: producer, administrator, entrepreneur, and integrator. Access school.cengage.com/entrepreneur/ ideas and click on the link for Chapter 10. Take the test on the Management Vitality web site to determine your personal style. Do the results seem accurate? Why or why not? Which of Adizes' styles would fall under the category of authoritative management? Dem¬ ocratic management? Do any of Adizes' styles seem to incorporate elements of mixed management? school.cengage.com/entrepreneur/ideas 272 Chapter 10 Operations Management greene_0538446145_ch 10, 12/21/7, 19:25, page: 273 them. An effective manager should be prepared to use mixed manage¬ ment in order to meet the needs of the business and its employees. Controlling Controlling is the process of setting standards for the operation of a business and ensuring those standards are met. Some of the ways that you can determine if standards are being met are as follows: • Compare actual revenues and expenses with what was projected • Observe business operations and determine if they are running effectively • Inspect products and services to ensure they are meeting perfor¬ mance standards If standards are not being met, it will be necessary for managers to make changes. Changes may include hiring new employees, upgrading to higher-quality production materials, or increasing the budget for a specific area. You may also decide to change operating procedures such as work processes and work flow. As part of the control function, you will routinely review your plans and make adjustments. Checkpoint What are the functions of management? Operations Manual As your business grows, you will find that a detailed operations manual is an essential tool for operating your business effectively and efficiently. An operations manual contains all of the rules, policies, and procedures that a business should follow in order to function effectively. You can also have a separate company or employee handbook that details the rules, policies, and procedures that apply to employees. Just as you spent time developing your business plan, it is important to spend time detailing the operations of your business. Your operations manual should include the rules, policies, and procedures that guide your business practices. Rules outline the appropriate behavior and actions of those that work for you. All employees should be treated the same way when it comes to rules. Policies serve as a guideline for daily operations. They are estab¬ lished to make the business run efficiently and may apply to both employees and customers. Procedures are a series of steps and actions that employees must follow to complete an activity. They are instructions on how to perform a job task correctly. Procedures are more specific than rules. Why does a business need a company handbook? 10.1 Operating Procedures 273 Photo Disc/Getty Images PhotoDisc/Getty Images greene_0538446145_ch 10, 12/21/7, 19:25, page: 274 Rules, policies, and procedures are established to make the busi¬ ness run efficiendy. As a business owner, it is important for you to remember that sometimes you have to make exceptions to rules, poli¬ cies, and procedures because not all situations are the same. Operating Policies Policies related to hours of opera¬ tion should be established. You should set daily operating hours that are convenient for your cus¬ tomers. For many years, banks were open Monday through Friday from 9 a.m. to 4 p.m. when most people were working. In order to meet the needs of their working customers, many banks have extended hours to 6 p.m. or 7 p.m. and are open on Saturdays. Customer Service Policies Customer satisfaction is one of the main goals of any business. It is important to have a policy for customers who need to return a product or have a follow-up service. Products do not always meet the expectations of customers, and a service might not be per¬ formed to the customer’s satisfaction the first time. A policy for replacements, refunds, or repairs will help maintain goodwill. Other customer service policies can include payment options regarding cash, check, and credit cards. Rich’s Department Store, a long-time Atlanta business, operated under the philosophy that all people are inherently honest and that going the extra mile for customers would benefit the company in the long run. Rich’s was known to provide refunds on merchandise not carried by its stores and to provide full refunds on noticeably used items—no questions asked. Why is it important for a business to establish customer service policies? Delivery Policies Some businesses provide delivery services along with the sale of their products. Delivery may be required because of product size or out of convenience for the customer. A customer might be more likely to purchase a large appliance from a company that offers delivery, since most people cannot put a refrigerator or washing machine in their vehicles. Many restaurants offer delivery service for food as a conve¬ nience to their customers. You will need to determine whether you will offer delivery services for the products you sell, whether you will charge a delivery fee, and whether you will guarantee delivery within a certain timeframe. 274 Chapter 10 Operations Management greene_0538446145_ch 10, 1/17/8, 15:7, page: 275 Safety Policies It is important that you have policies in place that provide for a safe environment for your customers and employees. Instruction in safety procedures should be part of employee training. Employees should know how to operate equipment safely and be required to wear the necessary protection gear. Employees should also be briefed on emer¬ gency plans for fires, tornadoes, and other disasters. Signs should be placed in strategic locations reminding employees of safety procedures in the workplace. You should also provide warnings to customers so that they do not enter employee-only areas. Caution cones can be placed where unsafe conditions exist. Checkpoint What type of information should be included in an operations manual? io.i Assessment THINK ABOUT IT 1. Why do you think it might be difficult for some entrepreneurs to become managers? 2. Why do you think it is important to develop an operations man¬ ual for a business? MAKE ACADEMIC CONNECTIONS 3. PROBLEM SOLVING You have been named manager of the children's department of a retail clothing store. Sales are down in the department. You have five employees in your department. Two have been working in the department for three years. The other three are new to the store and have no retail experience. Describe the management style you will use to lead the depart¬ ment and increase sales. 4. COMMUNICATION Good customer service policies are essential to the success of a business. Think about the customer service provided by businesses in your area. Choose a business and write a paragraph describing what is good about the customer service provided and another paragraph with suggestions for improving customer service. TEAMWORK Working in a small group, describe the traits of the perfect manager. Explain why each trait is important. 10.1 Operating Procedures 275 # greene_0538446145_ch 10, 1/17/8, 15:7, page: 276 Prepare a purchasing plan for inventory. Describe the perpetual and periodic inventory methods. Determine how much inventory to keep in stock. perpetual inventory method stock card point-of-sale (POS) software system periodic inventory method stock turnover rate V Focus on Small Business How much to buy? Matthew was starting his own frame store, Matt's Frames. He had previ¬ ously worked part time in a framing store and had learned a great deal about the business. Matthew considered how much inventory he would need initially. He knew from his previous experience that the first few months of the year would be slow but that business would pick up as Mother's Day and graduations approached. Because people purchase frames as wedding gifts, Matthew knew his business would pick up in the summer during the height of the wedding season. Another sales peak would occur during the holiday season. Because he was opening his store in February, Matthew decided he would start out with a small inventory of basic framing supplies and focus on specialty frames for Valentine's Day. Then he would increase his inventory for the spring and summer seasons. Work as a Team Do you think that Matthew is doing the right thing by starting out with only basic framing supplies? Why do you think he intends to increase his supplies as spring and summer approach? Business owners must carefully plan to meet inventory needs. Meet Inventory Needs Inventory is the stock of goods a business has for sale. Successful inven¬ tory management involves balancing the costs of inventory with the ben¬ efits of having inventory in stock. Maintaining inventory is cosdy to a business, and it must be well managed if you are going to make a profit. Direct costs of inventory include storage, insurance, and taxes, in addi¬ tion to the purchase price of the inventory. Some of the concerns about inventory that managers must address include the following: 276 Chapter 10 Operations Management PhotoDisc/Getty Images greene_0538446145_ch 10, 12/21/7, 19:25, page: 277 • Maintaining a wide assortment of stock, but keeping adequate quantities of fast-moving items • Increasing inventory turnover, but maintaining a high level of service • Keeping stock levels as low as possible without sacrificing service or performance as a result of stockouts • Obtaining lower prices by making bulk purchases, but not ending up with slow-moving inventory • Having adequate inventory on hand, but not ending up with out-of-date items How can a store meet both its inventory needs and its customers' needs? Purchasing Plan The most important aspect of inventory management is having items in stock when they are needed. This involves planning ahead to determine inventory needs, placing purchase orders for the items in advance, and scheduling deliveries to arrive at the point in time when you need the items. Inventory management also involves determining when you need the most inventory in stock, when reorders should be placed, and when you should discontinue stock¬ ing an item. The amount of inventory you need to purchase can be calculated from the sales forecast. You must look at how many units you need to add to the inventory you already have in stock to reach your sales objective. The formula for calculating inventory needs is: Beginning inventory + Purchases - Sales = Ending inventory Alan has a beginning inventory worth $40,000 in his automobile parts store and expects to sell $80,000 over a period of six months. He wants to have $25,000 of inventory at the end of the six-month period. Alan uses the formula to calculate his purchases. Beginning inventory + Purchases - Sales $40,000 + ? -$80,000 ? - $40,000 ? ? Ending inventory $25,000 $25,000 $25,000 + $40,000 $65,000 Alan must purchase $65,000 in inventory during the six-month period. He now needs to plan for the purchase and delivery of the inventory. He does not want to purchase the entire inventory and have it delivered at the same time because he does not have the cash to pay for it all at once, nor does he have the storage space. Alan decides to make his major purchases in the spring when people are beginning to get their cars ready for vacations and summer 10.2 Inventory Management 277 PhotoDisc/Getty Images greene_0538446145_ch 10, 12/21/7, 19:25, page: 278 travel. He knows from past experience that he will sell more from March through June and that January and February are slower months. Based on this information, Alan prepares a detailed pur¬ chase plan to show how much inventory he will purchase each month during the six-month period. PURCHASE PLAN FOR AUTOMOBILE PARTS January February March April May June Total Beginning inventory $40,000 $33,500 $29,500 $25,300 $25,600 $25,050 + Purchases 4,500 4,500 10,800 16,800 14,200 14,200 $65,000 - Sales (11,000) (8,500) (15,000) (16,500) (14,750) (14,250) $80,000 = Ending inventory $33,500 $29,500 $25,300 $25,600 $25,050 $25,000 Checkpoint What are some of the concerns managers have regarding inventory? Track Your Inventory Most businesses have to keep the products they sell in stock as a con¬ venience to their customers. To avoid running out of items your cus¬ tomers want, you will need to keep track of your inventory levels. You will also need to determine how much you can afford to keep in stock at any given time. Tracking your inventory can be done in two different ways. You can use the perpetual inventory method or the periodic inventory method. Regardless of the inventory method you use, you will need to take a physical inventory at least once or twice a year. Be your own boss You own a small hardware store located on the Gulf Coast. Weather forecasters are predicting higher-than-average hurricane activity in your region for the upcoming season. You know that if a hurricane comes to your area, there will be a high demand for plywood, generators, batteries, and other hurricane preparedness supplies. You have limited storage space and limited funds to invest in inventory, but you realize the chance to increase sales and profits. Outline a plan for managing your inventory needs. Explain your decisions. Perpetual Inventory Method The perpetual inventory method keeps track of inventory levels on a daily basis. This method can make your business more efficient. It can also ensure that you never run out of stock. This method uses stock cards or a com¬ puter to keep track of the inventory you have. A stock card is a paper inventory record for a single item. Regardless of whether you use stock cards or maintain electronic inventory records, you should record the following items: 278 Chapter 10 Operations Management greene_0538446145_ch 10, 12/21/7, 19:25, page: 279 • A description of the item • A stock number for identification purposes • Any receipt of inventory, the number of units received, and the date of the transaction • Any sale of inventory, the number of units sold, and the date of the transaction • The amount of inventory you currently have • The minimum amount you want to keep in inventory, often referred to as the reorder point because it indicates when you should place an order to receive more units • The maximum amount you want in inventory at any time Lei Woo owns a toy store. Lei uses her computer to track inventory levels on a daily basis. She creates a low stock report, which shows the items she needs to reorder. It also shows how many units of each item Lei needs to order so that she can restock to the maximum level. USE A COMPUTER Businesses that sell hundreds of items usually track inventory electronically. Inventory soft¬ ware programs let you track usage, monitor changes in unit dollar costs, calculate when you need to reorder, and analyze inventory levels on an item-by-item basis. Many retail businesses use cash registers with a point-of-sale (POS) software system that updates inventory records as each sale happens. Bar-code scanners and credit card authorization systems can be integrated into the POS system. With the POS system, you will always have an up-to-date inventory balance. You will also get detailed information on sales that will assist you in the decision-making process for inventory management. You can analyze the sales data, determine how well each item you have in stock is selling, and adjust your pur¬ chasing accordingly. LOW STOCK REPORT ITEM STOCK NUMBER MAXIMUM REORDER POINT NEED TO ORDER Building blocks Q323 IS 7 8 Doll houses K393 4 2 2 Playing cards S222 25 12 13 Stickers S494 50 20 30 Periodic Inventory Method Some businesses use the periodic inventory method, which involves taking a physical count of your merchandise at regular intervals, such as weekly or monthly. This method will tell you how many units of each item remain in stock. You can then compare your inventory counts to your established reorder points to determine which items need to be restocked. This method is commonly used by small busi¬ nesses with limited inventory. Take a Physical Inventory Even with the perpetual inventory method, you will need to take a physical inventory at least once or twice a year. Your actual inventory may differ from that listed in your perpetual inventory system. The 10.2 Inventory Management 279 Digital Vision/Getty Images greene_0538446145_ch 10, 12/21/7, 19:25, page: 280 Why should businesses take a physical inventory periodically? t ■ difference can be caused by many things, such as theft, damage to merchandise, or fail¬ ure to record sales. Taking a physical inven¬ tory means counting the number of items you have in stock. You will need to record the date on which you are taking the inventory, the stock number of each item, a description of each item, and the actual number of units in stock. At least two people should be involved in taking a physical inventory. One person should count the items on hand while the other records the information found. This informa¬ tion can later be entered into a spreadsheet for easy use. Checkpoint How does the perpetual inventory method differ from the periodic inventory method? Manage Your Inventory The level of inventory you keep in stock depends on three factors: • The costs of carrying inventory • The costs of lost sales due to stockouts • Your stock turnover rate Costs of Carrying Inventory Holding inventory can be very cosdy. These costs are known as carry¬ ing costs. A business with inventory will always have carrying costs. Carrying costs can become too high if you have too much inventory. Costs can increase for many reasons. • Obsolescence Inventory can be held too long and become old and outdated. People do not want to buy a computer made two years ago. You may be stuck with merchandise you cannot sell. • Deterioration Inventory can deteriorate, forcing you to throw it away or sell it at a discount. If you own a garden store, some plants will need to be sold within a few weeks because they will begin to die. • Interest fees Vendors charge interest on money due to them. If you cannot pay your vendors until you sell your inventory, you will incur an extra expense. • Insurance You will need to carry insurance against theft, fire, and other disasters. Insurance premiums increase as the value of the inventory insured increases. • Storage Inventory takes up space—space that you may be leasing on a square-footage basis. If you run out of room, you will need to lease additional space. 280 Chapter 10 Operations Management greene_0538446145_ch 10, 12/21/7, 19:25, page: 281 Costs of Being Out of Stock Being out of stock can cost you money. If you are out of the items your customers want, you will lose sales. If customers repeatedly fail to find what they are seeking at your business, you could also lose customer loyalty. You must weigh the costs of being out of stock against the costs of carrying more inventory. Stock Turnover Rate A supermarket might sell hundreds of cans of soft drinks every day but only 12 jars of marmalade. The stock turnover rate is the rate at which the inventory of a product is sold and replaced with new inven¬ tory. It shows how many times a year you sell all of your merchandise. A store that purchases inventory four times a year and sells all of its inventory in that same year has a stock turnover rate of 4. Famous Ganz Family What do a stuffed animal toy and the Internet have in common? Plenty, if you are in the Ganz family business. They have taken the stuffed animals children play with and made them a portal to the Internet and the Webkinz World. Shortly after World War II, Samuel Ganz came to the United States from Romania and settled in New York. At about the same time, his sons Sam and Jack settled in Toronto, Canada. In 1950, Samuel went to visit his sons and took along a prototype for a doll. Sam and Jack asked some local toy stores if they would be willing to sell the dolls. After making a few contacts and holding family discus¬ sions, Ganz Toys began business! In the 1980s, Ganz Toys began to focus on gift retailers and added a line of plush gift toys. Under the direction of Howard Ganz, Samuel's grandson, the privately held family company became the top toy com¬ pany in Canada. Today, the company is known simply as Ganz. In 2005, Ganz introduced the Webkinz, which quickly became a big hit. The lovable plush pets come with a unique secret code on the label. The code allows entrance into Why do you think Webkinz are so successful? the Webkinz World on the Internet. There, an electronic version of the pet can be adopted for virtual inter¬ action. More than two million units have been sold and one million users have registered on the Web¬ kinz web site. The Ganz family busi¬ ness is committed to a future filled with excitement and innovation. Think Critically What inventory challenges do you think the success of Webkinz brought to Ganz? 10.2 Inventory Management 281 greene_0538446145_ch 10, 1/17/8, 15:7, page: 282 Stock turnover rates vary from industry to industry. You should contact the trade association for your industry or talk to other entrepre¬ neurs in your field to find out the turnover rate for the items you carry. Turnover rates can help you determine how much inventory to keep in stock. To find out how many months of inventory you should keep in stock, divide 12 (the number of months in a year) by the stock turnover rate. Brad Wilson owns a retail store. The stock turnover rate in his industry is 6. This means that he needs to keep two months worth of inventory in stock at all times. Months in year -r Stock turnover rate = Months of inventory to stock 12 -r 6 2 1 Checkpoint What three factors determine the amount of inventory you keep in stock? io.2 Assessment THINK ABOUT IT 1. Why do you think a purchasing plan is essential to good inven¬ tory management? 2. What do you think are the benefits of using the periodic inven¬ tory method? The perpetual method? 3. Do you think you could still manage your inventory well if you did not know the turnover rate for a product? Why or why not? MAKE ACADEMIC CONNECTIONS 4. COMMUNICATION Using the perpetual inventory method, cre¬ ate an inventory tracking report on the computer for at least five inventory items a grocery store would carry. 5. MATH Using the Activity CD, open the activity "Inventory Man¬ agement." Print a copy and complete the activity to help evalu¬ ate the inventory needs of Elizabeth's Kitchen Warehouse. TEAMWORK Working with teammates, make a list of items that you would sell in a hobby store that caters to teenagers. This is a new business with no inventory on hand. Decide how many of each item you think you could sell in a six-month period. Based on this information, make a purchasing plan for the hobby store showing how much inventory you would pur¬ chase each month. 282 Chapter 10 Operations Management greene_0538446145_ch 10, 12/21/7, 19:25, page: 283 cash budget gross sales net sales V Focus on Small Business Cash flows in and out Lars is an independent contractor in the construction business. He has recently completed two big contracts and is eagerly awaiting his next. Lars realizes that demand for his ser¬ vices will be less in the winter months and could also decrease as a result of changes in the economy. Realizing that there could be months when he does not have money coming in, Lars begins to think about his finances. Although he has cash in the bank today, he knows he has to plan for tomorrow. He needs to manage his cash flow to ensure he can cover his expenses during slower months. Lars understands that he needs to set aside money for a time when he doesn't have any contracts lined up. Work as a Team Why do you think cash flow is important to a business owner? List the kinds of businesses that you think might have cash _ ... „ ... , . , . Seasonal businesses must plan flow issues similar to those in Lars business. their cash flow Manage Your Cash Flow As the owner of your own business, you will need to make sure that you have enough cash to make purchases and pay expenses. To do so, you will have to create a cash budget. You will also have to learn how to manage your cash flow. Create a Cash Budget A cash budget should show the projections of your cash coming in and going out. To ensure accuracy, it should be based on actual past revenues and operating expenses. A cash budget looks very similar to a cash flow statement, but it has slight differences. Three columns are used to show the estimated cash flow, the actual cash flow, and the difference between the two. This information can help you budget your financial resources. If your cash budget shows you will be short 10.3 Financial Management 283 greene_0538446145_ch 10, 12/21/7, 19:25, page: 284 did you KNOW? According to the National Federation of oSgrt****** : 1 foe of the ton ten concerns o f small- coTT 5 7 ners re,ate to osts. Leading the list is the cost of health insur- ap ce, followed by the cost and availability of ^b'hfy durance work¬ ers compensation costs energy costs (natural ga ; gasoline, propane, diesel and fuel oil), and elec- ' tnc/ty rates. of cash in six months, you can begin arranging financing or generat¬ ing capital now. If your cash budget shows you will have a surplus of cash two years from now, you might use that information in planning how to expand your business. Many companies use spreadsheets to prepare their cash budgets. The spreadsheet will automatically perform calculations on the amounts you provide. This allows you to instandy see the outcomes of changes in your cash flow. Mark Matson owns a snow removal business that he runs from his home. He uses a spreadsheet to create a budget for the first three months of the coming year, which is shown below. In his first month, Mark’s receipts were higher than he anticipated, but so were his expenses. Even so, Mark came out ahead in his overall net cash amount. CASH BUDGET MARK'S SNOW REMOVAL SERVICE Month One, 20— A B C D Estimated Actual Difference 1 Cash receipts 2 Cash sales $2,000 $4,000 $2,000 3 Accounts receivable payments $11,150 $13,150 $2,000 4 Tax refund $850 $850 $0 5 Total cash receipts $14,000 $18,000 $4,000 6 Cash disbursements 7 Salaries $4,500 $5,500 -$1,000 8 Gasoline $2,500 $3,125 -$625 9 Vehicle maintenance $350 $400 — $50 10 Utilities $50 $50 $0 11 Advertising $150 $300 -$150 12 Insurance $500 $500 $0 13 Other $250 $250 $0 14 Total cash disbursements $8,300 $10,125 -$1,825 15 Net cash increase/decrease $5,700 $7,875 $2,175 Improve Your Cash Flow Two businesses with the same level of sales and expenses may have very different cash flows. One business may have a positive cash flow while the other may have a negative cash flow and be unable to cover its expenses. The difference may reflect a different pattern of cash receipts and disbursements. If your cash receipts will not cover required cash disbursements, you will need to take action to improve your cash flow. You can increase cash receipts, decrease cash disbursements, or perform both actions. INCREASE CASH RECEIPTS One way to improve your cash receipts is to decrease your accounts receivable by getting customers who owe you money to pay more quickly. To encourage faster payment, you can do the following: 284 Chapter 10 Operations Management greene_0538446145_ch 10, 12/21/7, 19:25, page: 285 • Offer discounts on bills paid right away. • Establish tighter credit policies (decrease the amount of time your customers have to pay their bills from 60 days to 30 days). • Establish a follow-up system for collecting unpaid accounts receiv¬ able. Consider hiring a collection agency to track down customers who are considerably late with their payments. • Hold shipments to customers with large unpaid bills or insist that such orders be paid in advance. Businesses can have cash flow problems if they start off with too little capital. If your cash flow is inadequate, you may want to increase cash receipts by obtaining more capital. This means securing a loan, investing more of your own money in the business, or finding invest¬ ors who will provide you with capital in return for a share of your future profits. WHAT WENT WRONG Too Big, Too Fast Webvan was founded in the late 1990s by Louis Borders. Webvan was an online grocery ordering and delivery service. It promised cus¬ tomers delivery in a 30-minute window of time. Initially, customers were excited about this service that was offered in nine U.S. mar¬ kets: San Francisco Bay Area, San Diego, Los Angeles, Chicago, Seattle, Portland, Atlanta, Sacramento, and Orange County, CA. The company's long-range plans included expansion into 26 cities. The company started with hun¬ dreds of millions of dollars from private invest¬ ors and then raised $375 million in its initial public offering of stock. At one time, Webvan was worth $1.2 billion. But all was not good in the Webvan world. Customers did not sign up as founders hoped they would. But the biggest problem Webvan faced was rapidly disappearing cash reserves. It placed a $1-billion order with engi¬ neering company Bechtel to build high-tech warehouses, bought a fleet of delivery trucks, and purchased state-of-the-art computer sys¬ tems. The management team of Webvan did not have anyone with any experience in the grocery market, and it tried to get too big, too fast. Even though customers were not happy with long lines and the quality of products in traditional supermarkets, they did not flock to the online grocery store. In less than two years after its successful initial public offering, Webvan announced it was closing. Think Critically 1. What are some of the problems Webvan faced during its short-lived operation? 2. Webvan started with a large amount of cash reserves. What caused Webvan to end up with cash flow problems? 3. What changes in operations do you think Webvan could have made that might have helped it be successful? Too many cash disbursements can lead to business failure. # 10.3 Financial Management 285 greene_0538446145_ch 10, 12/21/7, 19:25, page: 286 DECREASE CASH DISBURSEMENTS Another way of improving the cash flow of your business is to reduce your disbursements. This can be done by gaining better control over your inventory and payroll, slowing the rate at which you pay your bills, or reducing your expenses. Inventory is a large business expense over which you have some control. Reducing this expense will improve your cash flow. You know that carrying inventory is cosdy. If your business has cash flow problems, check to make sure that you are not holding too much inventory. Reducing your inventory will reduce your accounts payable because you will not be purchasing as much. Payroll is another large category of expense for businesses. Reducing your payroll can improve your cash flow. Payroll expenses can be decreased by reducing the size of your workforce or reducing the number of hours employees work. It is important to determine your workforce needs before making reductions in this area. Most of your suppliers will offer credit terms and accept payment at a later date if you pay interest charges. Depending on your cash flow needs, you may want to take advantage of the longest possible credit terms or use a credit card for purchases. Mark Matson usually pays cash for gasoline and oil for his snow¬ plow trucks. At the beginning of the winter season in December, his expenses are particularly high and cash receipts low, so he charges his expenses to his credit card. By delaying payment until the following month, Mark improves his cash flow in December. When the credit card bill comes in January, he will have received payment from his customers for the work he did in December and will not have a prob¬ lem paying the bill. Other expenses, such as rent, are fixed, so you cannot reduce them. But you can reduce variable expenses, such as advertising, to help improve your cash flow. Checkpoint I What are some ways you can improve your cash flow? Prepare and Analyze Financial Statements To run your own business, you have to be able to understand and analyze financial statements to determine how well your business is performing. Businesses keep many kinds of records and create differ¬ ent kinds of financial statements. Your records and statements can help you analyze your profits as well as set and meet profit goals. Prepare Financial Statements When you are starting a business you will prepare pro forma financial statements based on projections. Once your business is up and run¬ ning, you will prepare financial statements that show actual financial 286 Chapter 10 Operations Management greene_0538446145_ch 10, 12/21/7, 19:25, page: 287 performance. These financial statements will contain more detailed financial information than the pro forma statements because the business’s finances will change as the business grows. The three most important elements of a com¬ pany’s financial strength are its assets, liabilities, and owner’s equity. The value of assets, liabilities, and owner’s equity on a specific date are reported on the balance sheet. The balance sheet is usually prepared monthly and at year-end. The income statement reports revenues, expenses, and the net income or loss over a specific period of time, such as a month, a quarter, or a year. Many businesses will prepare an income state¬ ment monthly in order to closely monitor revenues and expenses. The cash flow statement shows the cash inflows (receipts) and cash outflows (disbursements) for a business during a specific period of time. This statement shows the actual cash a business receives and how that cash is used. Unlike the income statement, which reports revenues not yet received and expenses not yet paid, the cash flow statement reports actual amounts, making it the most valuable financial statement for many business owners. Would you categorize office equipment as assets, liabilities, or owner's equity? Why? Analyze Sales You must know how to use the information in your financial state¬ ments to determine the level of sales you need to achieve to earn a profit. Your sales records show sales trends and patterns. You can use these records to forecast future sales and make good business decisions. ANALYZE SALES BY PRODUCT Analyzing your sales by product can help you make decisions about the kind of inventory to stock. It can help you increase sales and profits. Emily Lee owns a garden and patio store. Her store has four departments: out¬ door furniture, out¬ door grills, plants, and garden tools. Emily’s sales figures show that almost 57 percent of her annual sales come from the outdoor furniture depart¬ ment, as calculated below. Sales of outdoor furniture -r Total sales = Percent of sales $110,000 -r $194,000 = 56.7% DEPARTMENTAL SALES • LEE GARDEN AND PATIO Department Sales Percent of total* Outdoor furniture $110,000 56.7 Outdoor grills 37,000 19.0 Plants 24,000 12.4 Garden tools 23,000 11.9 Total $194,000 100.0 *Rounded 10.3 Financial Management 287 PhotoDisc/Getty Images greene_0538446145_ch 10, 12/21/7, 19:25, page: 288 The plants department accounts for only a litde over 12 percent of sales. Based on these data, Emily decides to reduce the size of the plants department and increase her inventory of outdoor furniture. Analyze Net Profit on Sales Your income statement shows whether or not your business is earning a profit. It also tells you how profitable your business is. This informa¬ tion can be very useful in helping you set and meet profit goals. The rate of profit a business earns is often shown as the ratio of its net profit to its sales. This ratio is calculated by dividing net income after taxes by net sales. Net income after taxes -r Net sales = Net profit on sales In order to calculate net profit on sales, a business must first per¬ form math calculations to determine net income after taxes and net sales. All of these calculations are found on the income statement. CALCULATE NET SALES Jack Hendrick owns a retail store that sells automotive supplies. He wants to find out his net-profit-on-sales. First he must determine his gross sales and net sales. Gross sales is the dollar amount of all sales. Net sales is the dollar amount of all sales with any returns subtracted. Jack sold $235,000 worth of merchan¬ dise and had $3,200 worth of merchandise returned. Therefore, his net sales amount is $231,800. Gross sales - Returns = Net sales $235,000 - $3,200 = $231,800 CALCULATE NET INCOME AFTER TAXES Three calculations must be performed to determine your net income after taxes. You must calcu¬ late the following: • Gross profit • Net income from operations • Net income before taxes Gross profit is profit before operating expenses are deducted. Last year, Jack spent $150,000 for merchandise that he sold. This amount represents his cost of goods sold. Jack subtracts his cost of goods sold from his net sales to find his gross profit. Net sales - Cost of goods sold = Gross profit $231,800 - $150,000 = $81,800 Jack’s operating expenses include rent, salaries, and similar business expenses. Last year his operating costs were $39,900. Gross profit minus operating expenses equals net income from operations. Gross Operating Net income profit - expenses = from operations $81,800 - $39,900 = $41,900 To calculate net income before taxes, Jack has to subtract one more expense that has not yet been taken into account: interest on loans he has obtained. Last year, Jack paid $2,400 in interest. He subtracts this 288 Chapter 10 Operations Management greene_0538446145_ch 10, 12/21/7, 19:25, page: 289 from his net income from operations to get his net income before taxes. If a company has no addi¬ tional expenses, such as interest expense, the net income from operations equals the net income before taxes. Net income from Interest Net income operations - expense = before taxes $41,900 - $2,400 = $39,500 To compute his after-tax income, Jack subtracts the amount he paid in income tax last year, $12,245, from his net income before taxes. This gives him his net income after taxes for his automotive supply business. Net income Income Net income before taxes - tax paid = after taxes $39,500 - $12,245 = $27,255 WHY NET PROFIT ON SALES IS IMPORTANT After all of the above calculations have been performed, the net-profit-on-sales ratio can be calculated. This calculation helps determine how profitable your business is. Jack determines that his profits repre¬ sent 11.8 percent of his net sales. Net income Net Net profit after taxes sales = on sales $27,255 -r $231,800 = 11.8% Jack can use this figure to assess his profits in two ways. First, he can compare his profit ratio this year with his profit ratio in previ¬ ous years. If his profit ratio has declined, his business has become less profitable. If the ratio has increased, his business has become more profitable. Jack can also compare his profit ratio with aver¬ age profit ratios in his industry. If his ratio is lower than the industry average, he may want to figure out what he can do to improve his profitability. Set and Meet Profit Goals To run your business effectively, you will need to set profit goals. These goals will reflect the amount of profit you hope to earn from your business during a particular year. Jack Hendrick would like to increase his profit ratio to 15 per¬ cent. He decides to try to increase his sales and reduce his expenses He begins a frequent-buyer program and offers discounts on bulk purchases. Jack will talk to suppliers with the hope of reducing his cost of goods sold. Jack would like to increase his profits even more by opening several more stores. He hopes that purchasing his inventory in large quantities will lower his costs significantly. INCOME STATEMENT Hendrick's Auto Supplies, 20— Revenue from sales Gross sales $235,000 Returns 3,200 Net sales $231,800 Cost of goods sold 150,000 Gross profit $ 81,800 Operating expenses Salaries $ 26,200 Rent 8,400 Utilities 1,500 Advertising 1,100 Insurance 1,000 Supplies 700 Other 1,000 Total operating expenses $ 39,900 Net income from operations $ 41,900 Interest expense 2,400 Net income before taxes $ 39,500 Taxes 12,245 Net income/loss after taxes $ 27,255 10.3 Financial Management 289 Total Costs and Revenues greene_0538446145_ch 10, 1/17/8, 15:7, page: 290 Units Sold Breakeven Analysis As you learned in Chapter 5, breakeven analysis is a useful tool for determining how increases in sales will affect your profits. The breakeven point is the volume of sales that must be made to cover all of the expenses of a business. Below the breakeven point, your expenses will exceed your revenues and you will be losing money. Once you reach the breakeven point, your sales will equal all of your expenses. This means that at this level of sales, you will neither make nor lose money. Once you exceed the breakeven point, you will begin to earn profits as shown in the graph. Checkpoint Why is it important for an entrepreneur to analyze the financial statements of the business? io.3 Assessment THINK ABOUT IT 1. How will constructing a cash budget using an electronic spread¬ sheet make this financial report more helpful? 2. What would be the benefit of preparing an income statement monthly instead of once a year? 3. Which goals do you think are more important to meet: sales goals or profit goals? Explain your answer. MAKE ACADEMIC CONNECTIONS 4. PROBLEM SOLVING If your business were experiencing a nega¬ tive cash flow, how might you use the six-step problem-solving model to help you? 5. MATH Using the Activity CD, open the activity "Cash Budget." Print a copy and complete the activity by preparing a cash bud¬ get for your school store and determining ways to increase cash flow. Working in a small group, use the Internet or library to locate a copy of an annual report for a business. Review all of the financial state¬ ments that are included in the annual report. Write a paragraph describing the financial statements you have reviewed and include an analysis of the financial condition of the business. 290 Chapter 10 Operations Management greene_0538446145_ch 10, 1/17/8, 15:7, page: 291 Leadership Skills As an entrepreneur and a manager, you need to demonstrate good leadership skills. If you want your business to grow, you must be able to lead and influence others to help you carry out your business vision. A manager who can get individual employees and groups to work well together to accomplish objectives is considered to be an effective leader. Being a good leader is more than just being nice to people. Characteristics of effective leaders include the following: 1. Understanding Respect the feelings and needs of fellow workers. 2. Initiative Have the ambition and motivation to see a project through to the end. 3. Dependability Follow through on commit¬ ments made to employees. 4. Judgment Make decisions carefully, objectively, and fairly. 5. Objectivity Look at all sides of an issue before making a decision. 6. Confidence Make decisions and take responsi¬ bility for the results. 7. Consistency Do not be too emotional or unpredictable. 8. Cooperation Work well with others. 9. Honesty Behave ethically and be truthful. 10. Courage Be willing to take reasonable risks and make unpopu¬ lar decisions. 11. Communication Listen, speak, and write effectively. 12. Intelligence Have the knowledge, understanding, and skills needed to perform well. TRY IT OUT Leadership styles vary from person to person. Choose two individuals who have played leadership roles in history and research their leader¬ ship styles. Prepare a report that illustrates how they exhibited each of the characteristics described above. Sharpen Your Entrepreneurial Skills 291 Digital Vision/Getty Images 0538446145_ch 10, 12/21/7, 19:26, page: 292 Chapter 10 Assessment SUMMARY 10.1 Operating Procedures 1. When entrepreneurs become managers, they must utilize a different set of skills. Managers are responsible for planning, organizing, staffing, implementing, and controlling the operations of a business. 2. A detailed operations manual is essential for a business’s success. It should include rules, policies, and procedures. Policies may include operating policies, customer service policies, delivery policies, and safety policies. 10.2 Inventory Management 3. A purchasing plan will assist with inventory management by ensur¬ ing you have items in stock when they are needed. It helps you calculate ending inventory needs based on beginning inventory, purchases, and sales. 4. You can track inventory using the perpetual or periodic inventory methods. The perpetual inventory method tracks inventory levels on a daily basis. The periodic inventory method involves taking a physical count of merchandise at weekly or monthly intervals. 5. The level of inventory you keep in stock depends on three factors: the costs of carrying inventory, the costs of losing sales due to stockouts, and your stock turnover rate. 10.3 Financial Management 6. To manage cash flow, begin by creating a cash budget. If cash receipts are less than cash disbursements, you will need to improve your cash flow. You can increase cash receipts by offering credit customers dis¬ counts for prompt payment, establishing tighter credit policies, estab¬ lishing a follow-up system for collecting unpaid accounts receivable, and obtaining additional capital for your business. You can decrease cash dis¬ bursements by gaining better control over inventory and payroll, slow¬ ing the rate at which you pay your bills, and reducing your expenses. 7. When starting a business, you prepare pro forma statements based on projections. Once your business is operating, you will prepare financial statements based on actual performance. The three finan¬ cial statements most commonly prepared by businesses are the bal¬ ance sheet, income statement, and cash flows statement. 8. Analyzing financial statements can help you understand how well your business is doing. You can examine your finances by analyz¬ ing your sales by product, calculating your net profit on sales, and performing a breakeven analysis. What do you hnow now? Read Ideas in Action on page 269 again. Then answer the questions a second time. How have your responses changed? 292 Chapter 10 Operations Management greene_0538446145_ch 10, 12/21/7, 19:26, page: 293 VOCABULARY BUILDER Match each statement with the term that best defines it. Some terms may not be used. 1. The process of achieving goals by establishing operating proce¬ dures that make effective use of people and other resources 2. The rate at which inventory of a product is sold and replaced with new inventory 3. A management style in which the manager is directive and controlling 4. The dollar amount of all sales with any returns subtracted 5. A plan that shows how the various jobs in a company relate to one another 6. Keeps track of inventory levels on a daily basis 7. Involves taking a physical count of your merchandise at regular intervals, such as weekly or monthly 8. A management style in which employees are involved in decision making 9. Shows the projections of your cash coming in and going out 10. Contains all of the rules, policies, and procedures that a business should follow in order to function effectively 11. A system that updates inventory records as each sale happens 12. The person responsible for planning, organizing, staffing, imple¬ menting, and controlling the operations of a business REVIEW YOUR KNOWLEDGE 13. Which of the following functions of management would apply when grouping tasks into departments? a. planning b. organizing c. implementing d. controlling 14. Jorge is supervising new employees with no experience in food service at a concession stand in an amusement park. Which man¬ agement style should he use? a. authoritative management b. democratic management c. mixed management d. participatory management 15. True or False? The organizational structure outlines all of the rules, policies, and procedures that a business must follow. 16. Preparing detailed plans that will provide strategies for achieving goals and objectives in a one-year period is a. strategic planning b. intermediate-range planning c. short-term planning d. none of the above authoritative management cash budget democratic management gross sales management manager net sales operations manual organizational structure periodic inventory method perpetual inventory method point-of-sale (POS) software system stock card stock turnover rate Chapter 10 Assessment 293 greene_0538446145_ch 10, 1/18/8, 10:52, page: 294 17. A small specialty store that has a very limited inventory is more likely to use the_?_inventory method. 18. The level of inventory you keep in stock depends on all except a. the costs of carrying inventory b. the costs of lost sales due to stockouts c. your stock turnover rate d. your net-profit-on-sales ratio 19. True or False? A point-of-sale inventory system makes it easier to analyze your inventory records at the end of the day. 20. True or False? Generally, employees do not like to be involved in the planning and decision-making process. 21. If you want to improve your cash flow by increasing cash receipts, which of the following strategies could you try? a. offer discounts on bills paid right away b. establish tighter credit policies c. hold shipments to customers with large unpaid bills d. all of the above APPLY WHAT YOU LEARNED 22. You received a $500 payment from one of your customers in the form of a check. You deposited the check into your bank account. Several days later, you received a notice from your bank that the check was returned because your customer’s checking account did not have the funds to cover it. You were counting on that money to help you cover your monthly rent. What will you do? 23. You want to analyze your sales by product for your hardware store. Your total sales are $140,750. The sales of each department in your store are given below. What percent of sales does each department generate for your store? Seasonal merchandise $25,525 Lumber 40,211 Tools 38,524 Lighting 15,235 Kitchen cabinets 21,255 MAKE ACADEMIC CONNECTIONS 24. MATH You own a bookstore. The stock turnover rate in the bookstore business is four. How many months worth of inventory must you keep on hand? 25. COMMUNICATION You and a partner own a kitchen equip¬ ment store. You would like to implement a point-of-sale inventory system using a computerized cash register, but your partner is not convinced this is the best method for your business. Write a letter to persuade your partner to implement a new POS inventory system. Identify advantages of using a POS system. 26. MATH You own a pet-supply business. Last year, you sold $42,000 in dog food and $53,000 in cat food. Returns totaled $5,000. The cost of goods sold on the dog food was $13,000, and the cost of goods sold on the cat food was $14,000. 294 Chapter 10 Operations Management greene_0538446145_ch 10, 12/21/7, 19:26, page: 295 $4,500 for rent, $1,200 for insurance, $1,000 for utilities, $900 for advertising, and $600 for other. Taxes were $10,500. What is your net income after taxes? What is your net-profit-on-sales ratio? 27. PROBLEM SOLVING Managers are faced with decisions to be made in all areas of business operation. Using the Activity CD, open the activity “Management Problem Solving.” Print a copy and work with a partner to come up with solutions for Katrina’s management issues. WHAT WOULD VOU DO? You asked two of your employees to work extra hours over the week¬ end to perform a physical inventory. You are certain that there were three plasma television sets in stock prior to having the employees take inventory. However, when the inventory was completed, the list showed only two plasma television sets in stock. You checked the stockroom, and you found only two. You have always trusted your employees. What would you do? Will you confront the employees? If so, how will you approach them? Working with a partner, role play the conversations you will have with the employees. v_ I _ I _ w build your Business Plan Project This activity will help you plan the operations management of your business. Describe the management style you will use for managing your business. Will you always use the same style? How will you determine when to use a different style? Locate and contact two professionals in your area who specialize in strategic planning. What are their credentials? What are their fees? Do you think it would be helpful to utilize the services of a strategic plan¬ ner? Why or why not? Develop an operating procedures manual for your business. Include the rules, policies, and procedures that your business will follow to run effectively. If your business has an inventory, list all of the items you will have in inventory and your cost for each. Create a purchasing plan for your inventory. Set up inventory records for your business using either a paper system or an electronic system. Be sure to list all of the items discussed in Lesson 10.2. How did you determine your reorder point? What inven¬ tory carrying costs are relevant to your business? How can you reduce your carrying costs? Analyze your sales by creating a table that lists each of your products and the total sales (or estimated sales) for each. What is the percent¬ age of total sales for each product? Based on this information, will you make any changes to your inventory? Chapter 10 Assessment 295 greene_0538446145_ch 10, 1/18/8, 10:51, page: 296 Planning a Career in Information Technology rmatwn Technology uw IVIy stepsister, who is a high school senior this year, has become our household computer expert. She recendy attended a summer technology camp sponsored by a national computer retailer that pro¬ vides a variety of computer support services. The camp was established as a way to help f u l fill future labor needs. After completing camp, she’s become the household ‘go to’ person for any high-tech gadget issues.” How do individuals and small businesses solve computer-related technology problems? Computer service specialists, who make on-site visits to homes and businesses, help resolve a vari¬ ety of complex technological issues that affect computer efficiency and reliability. As computers and per¬ sonal gadgets have become more complex, the need for these service specialists has increased. EMPLOYMENT OUTLOOK • Faster than average growth is anticipated. • The continued expansion of highly sophisticated mobile devi¬ ces will help fuel demand. • Growing demand for computer specialists will be somewhat off¬ set by the trend to outsource computer support to foreign countries with lower labor costs. JOB TITLES • Software Support Specialist • Help Desk Analyst • Application Specialist • Technical Support Associate • MIS Support Technician NEEDED SKILLS • Degree requirements vary between an Associates Degree and a Bachelor’s Degree in computer-related areas. • Sometimes relevant computer experience or professional certifi¬ cation can serve in lieu of a degree. • Strong analytical, problem¬ solving and interpersonal skills are needed to resolve technical issues among a wide user group. What's it like to work in Informa¬ tion Technology Milo is a self- employed PC service specialist who helps his customers solve their computer problems. Today, Milo is updating the rates on his company web site. These rates include the trip charge to arrive at a client’s home or place of business, the one-hour mini¬ mum labor charge, and the addi¬ tional fees for a partial hour beyond the one-hour minimum. After receiving a call from a frantic client, Milo dashes off to the client’s home. The client, who has a home-based consulting business, has a hard drive that is failing. Because the client had accidentally dropped his flash drive in a cup of coffee, he had no backup for his files. Conse¬ quently, he needed help retrieving critical files from his hard drive. After saving the files to a new flash drive, Milo suggests to his cli¬ ent that he consider investing in an automated data backup service. For a monthly fee, designated data would be automatically saved to a personalized web site that would be password accessible for security purposes. What about you? Would you like to help a variety of individuals and businesses solve their com¬ puter technology problems? 296 Chapter 10 Operations Management greene_0538446145_ch 10, 12/21/7, 19:26, page: 297 The Partnership with Business Project is based upon developing and implementing the most innovative, creative, and effective partnerships between the FBLA chapter and businesses. The purpose of this proj¬ ect is to learn about a business through communication and interac¬ tion with the business community. This project can be completed by one to three students. A report will be prepared that describes activities designed to bring business leaders and FBLA members together in a positive working rela¬ tionship through innovative programs. The event should not involve fundraising for the FBLA chapter. The report should include the fol¬ lowing sections: Development (description of the partnership goals, description of planning activities used to build a partnership, roles of business leaders and chapter members in developing the partnership); Implementation (description of activities, level of involvement from business leaders, roles of business leaders and chapter members); Results (description of concepts learned from the project and the impact of the project); Degree of Involvement (hours spent and contacts made); and Evidence of Publicity (description of the recognition received as a result of the partnership). Participating teams will be given seven minutes for oral presentations to describe the project and the results. The judge has three minutes to ask questions about the presentation. PERFORMANCE INDICATORS EVALUATED • Develop a partnership with business by describing partnership goals, planning activities, and roles of business and FBLA leaders. • Implement the project by describing activities, defining roles of partic¬ ipants, and encouraging involvement from business leaders. • Describe the results from the business partnership project. • Acquire knowledge of business operation by implementing an active business partnership. • Develop a stronger understanding and relationship between school and the business community. Go to the FBLA web site for more detailed information. Think Critically 1. How can a business benefit from participating in the partnership? 2. How can the FBLA chapter benefit from the partnership? 3. Why is publicity so important for this project? 4. What is one strategy that could be used to increase involvement of more businesses in this project? www.fbla.org Winning Edge 297 greene_0538446145_chl 1, 12/21/7, 19:55, page: 298 Chapter 11 11.1 Identify Your Staffing Needs 11.2 Staff Your Business 11.3 Direct and Control Human Resources school.cengage.com/entrepreneur/ideas 298 greene_0538446145_chl 1, 12/21/7, 19:55, page: 299 IDEAS IM ACTIONJ Working for What You Believe In I n 1997, when Omar Faruk was 9 years old, he emigrated with his family from Bangladesh to the United States. He started working after school to earn money for clothes and school trips. At age 14, he started his first business as a web site offer¬ ing one product for sale. The business did not turn out to be very successful for Omar, but he gained experience in setting up the web site. Omar knew that there were many potential customers who could use his web skills. While a senior at Independence High School in New York City, Omar started building web sites for nonprofit organizations, and his business, Blue- Stream, was born. Omar won several awards for his business, including the National Foundation for Teaching Entrepreneurship's 2006 Entrepre¬ neur of the Year, Bank of America's Young Entrepreneur of the Year, and Ernst & Young's Entrepreneur of the Year, of which he became the youngest recipient. Omar has a strong interest in social causes and now operates his busi¬ ness under the name LogicLotus. LogicLotus is focused on providing services for nonprofits, social causes, and small businesses. He began with a business plan but today manages his business through experiences and trying out new ideas. Today, Omar employs two individuals to assist him. He has found some challenges in managing younger workers but feels that they are willing to help carry out his vision for the business. He uses profit sharing as the method of paying the employees, so the harder they work, the more they earn. Omar realizes that the key to growth is selling. Dreams are important, but you have to take a good look at what you do and sell it to others. Omar's "top tips" for aspiring entrepreneurs are as follows: Omar Faruk, LogicLotus • Failure is part of the process. Take life as an opportunity. • Don't be afraid to ask for help. There are many people and organiza¬ tions willing to help you. • Always carry paper and pen—ideas don't just come one at a time! What do you hnow? Although Omar started with a business plan, he does not use one now. Do you think it would help Omar to have a current business plan? Do you think paying employees with a profit sharing plan is an effec¬ tive payment method? What do you think of Omar's top tips? % • • 299 greene_0538446145_ch 11, 1/17/8, 15:16, page: 300 • • Goals HI mi.i Identify Your Staffing Needs Explain how to deter¬ mine staffing needs for a business. Describe options for recruiting employees. Identify alternatives to hiring permanent employees. staffing job description job analysis chain of command recruit freelancers interns V Focus on Small Business Help wanted Emanuelle started his contracting business six months ago. He specialized in bobcat work and had more business than he could handle. He decided he needed help and posted a "Help Wanted" sign along with his phone number in front of his business. People began calling and stopping by, con¬ tinually interrupting his work. They wanted to know what type of work he had and how much it would pay. Emanuelle didn't really know what to tell them. He had not thought through the details of the posted position. In his business, Emanuelle had a large amount of paperwork to do and more bobcat work than he could keep up with. He realized that if he had help with the administrative tasks, he would have more time to devote to the bobcat work. But he could also use some¬ one else with bobcat experience to help out as well. Emanuelle took down his sign to determine exactly what type of help he needed. Work as a Team What do you think Emanuelle should have done before posting the "Help Wanted" sign? What types of positions could Emanuelle add? Do you think using a sign in front of his business is the best way for Emanuelle to attract Think through your staffing needs before qualified job applicants? posting a help wanted sign. Staffing The management functions of staffing, implementing, and controlling can be directly applied to the people who work for your business. The people who work for your business are your human resources. You may not need to hire employees when you first start your business. But as your business grows, you will find the need for employees. Good employees and a well-run human resource management program are as important to your business as are capital, equipment, and inventory. 300 Chapter 11 Human Resource Management PhotoDisc/Getty Images greene_0538446145_chl 1, 12/21/7, 19:55, page: 301 Staffing involves deter¬ mining the number of employ¬ ees you need and defining a process for hiring them. To find out your staffing needs, ask yourself these questions: • What kind of employees do I need? • What skills am I missing? • What skills do I need daily? • What skills do I need occasionally? To answer these ques¬ tions, list all the duties in your business. Then try to identify how much time is needed to perform each of these duties. Your list should help you iden¬ tify whether you need part-time, full-time, or temporary workers. You can also determine whether you need managers or assistants and how many employees you need. CD CD ro E >s % Q O O -C Q. © Develop Your Reading Skills Make an interactive note¬ book for this chapter. Before you read, divide your paper into two columns. In the left-hand column re¬ cord notes about what you are reading. In the right- hand column, write notes that will help you relate what you are reading to your everyday life. Job Descriptions A job is a collection of tasks and duties that an employee is responsible for completing. A task is a specific work activity that is performed, such as answering the telephone or answering e-mail. Many positions include a variety of tasks that are sometimes referred to as functions. A job description is a written statement listing the tasks and responsibilities of a position. Job descriptions also include to whom the position reports, educational and professional experience required, and salary range. Job descriptions are written after conducting a job analysis, which is the process of determining the tasks and sequence of tasks necessary to SAMPLE JOB DESCRIPTION Title: Account Executive Tasks and Responsibilities: Plans, coordinates, and directs advertising campaigns for clients of advertising agency. Works with client to determine advertising requirements and budgetary limitations. Coordinates activities of workers engaged in marketing research, writing copy, laying out artwork, purchasing media time and space, developing special displays and promotional items, and performing other media-production activities. Qualifications: College degree with courses in marketing, leadership, communication, business, and advertising; sales experience; interpersonal and written communication skills; neat professional appearance; characteristics of self-motivation, organization, persistence, and independence Reports to: Marketing Manager Salary Range: $30,000 to $50,000, depending on experience 11.1 Identify Your Staffing Needs 301 greene_0538446145_chl 1, 12/21/7, 19:56, page: 302 perform a job. You will need to understand exacdy what every job involves so that you can determine how much money to offer job appli¬ cants. A detailed job description will make clear the job responsibilities. If a sales assistant objects to answering phones, you can refer that employee to the job description that lists this task as part of the job. Job descrip¬ tions also can be used to measure how well an employee performs a job. Organizational Structure Once your company has several employees, you will need an organiza¬ tional structure. An organizational structure is a plan that shows how the various jobs in a company relate to one another. Many businesses use a chart to represent the organizational structure. The organizational chart can also help you analyze your stalling needs. Using the chart dur¬ ing planning can help you identify the number and types of employees you need. When planning, you can list positions and primary responsibil¬ ities of each. Then as employees are hired, you can fill in the names. The organizational chart shows who reports to whom in the company, or the chain of command. In a small business, all employ¬ ees may report directly to the company owner. In large companies, lower-level employees usually report to a supervisor. This kind of organizational structure ensures that the owner is not called upon to deal with relatively unimportant issues that could be handled more efficiently by a lower-level manager. Sandra Wilson owns Northcliffe Publishing. Sandra has an organi¬ zational structure where the heads of the four departments report to NORTHCLIFFE PUBLISHING, ORGANIZATIONAL CHART 302 Chapter 11 Human Resource Management greene_0538446145_chl 1, 12/21/7, 19:56, page: 303 Do you think a want ad in a newspaper is a good way to find job candidates? Why or why not? the vice president, Robert Gotting. Robert in turn reports direcdy to Sandra. This structure helps Sandra devote her time to long-term issues, such as expanding the company into new areas or increasing sales and market share. Checkpoint How do you determine staffing needs Recruiting To recruit is to look for people to hire and attract them to the business. As the owner of a small business, it may be difficult for you to attract experienced employees to work for your business. They may have oppor¬ tunities to work for larger, established businesses that can offer them higher pay and better benefits. You can use a variety of resources for recruiting, including classified advertisements, online career and employ¬ ment sites, employment agencies, college placement centers, in-store advertising, and referrals. Classified Advertisements Using the local newspaper for advertising is a good way to attract a large number of applicants. The advertisement that you place in the newspaper is called a want ad. It should briefly describe the position and the education and experience requirements. It should also identify any special job requirements, such as willingness to travel or to work evenings. You should request resumes and cover letters from appli¬ cants interested in the position. Sometimes employers ask for specific information in the cover letter, such as salary requirements, date of availability, or other useful information. If you do not want to give the name of your business in the ad, newspapers have PO boxes to which applications can be sent. You should screen the resumes to determine which applicants you want to interview. 11.1 Identify Your Staffing Needs 303 greene_0538446145_chl 1, 12/21/7, 19:56, page: 304 Why are online career web sites becoming a popular way to recruit employees ? Online Career and Employment Sites Many people now use the Internet to look for a job, so many employ¬ ers are advertising with online career and employment sites. Most online employment services allow you to post a job and then search the resumes that are sent in response to the posting. Some on li ne employment services have a database of resumes that you can review when you are looking for someone to fill a specific job. According to Monster.com, job seekers post over 27,000 new resumes and conduct 3.9 mil lion job searches on its site every day. O nli ne recruiting can be very expensive, so you should compare alternatives and be sure that this is the best method for your business. bookmark Manpower, Inc., provides workforce manage¬ ment services to customers through 4,400 offices in 73 countries. The firm annually provides employment to more than 4 million people. Access school.cengage.com/entrepreneur/ ideas and click on the link for Chapter 11 to learn more about Manpower's services. Why might a small business owner turn to companies like Manpower to recruit employ¬ ees? Name one possible drawback a small entrepreneur might face when using an employment agency for recruiting. school.cengage.com/entrepreneur/ideas Employment Agencies Employment agencies find employees for businesses and other institu¬ tions. These firms try to match people looking for jobs with businesses looking for employees. They charge businesses and/or the job seekers a fee when they are successful in making a match. Seeking applicants through an employ¬ ment agency saves time for the employer in screening applicants, but the cost is higher than a classified advertisement. College Placement Centers Most colleges and universities operate job place¬ ment centers. These offices collect information on career and employment opportunities, which they make available to their students and gradu¬ ates. Generally, they do not charge a fee for their services. If college students or graduate sUidents might be suitable for your business, contact local colleges and universities and ask them what you need to do to have your busi¬ ness listed with their placement center. 304 Chapter 11 Human Resource Management greene_0538446145_chl 1, 12/21/7, 19:56, page: 305 In-Store Advertising Have you ever walked into a store and seen a sign that says “Help Wanted” or “Now Hiring”? This is another method of recruiting that businesses use. When you post a sign, interested applicants will come into your business and fill out an application form. Before placing a sign in the window, be sure you will have time to deal with the many people who may stop to inquire about the position. You can interview them at that time or set up an interview at another time. If you inter¬ view everyone who comes in, you need to realize that this will be very time-consuming. Referrals One of the best ways entrepreneurs find employees is by acting on referrals from friends, acquaintances, or employees. If you consider the person making the recommendation reliable, a referral may require very little screening. However, many business owners do not like to hire friends or relatives of current employees because it can sometimes create other problems. Checkpoint What resources can you use for recruiting employees? Alternatives to Adding Staff Adding employees to your payroll is costly. It takes time and money to recruit staff and to track, report, and pay their salaries, benefits, and tax withholdings. In many cases, you may need help but not have sufficient work to keep a permanent, full-time employee busy. For these reasons, you may want to consider alternatives to permanent employees, such as hiring freelancers, interns, and temporary workers. Freelancers Freelancers are people who provide specialty services to businesses on an hourly basis or by the job. Examples of freelancers include bookkeepers, accountants, lawyers, graphic designers, window display artists, and advertising copywriters. Business owners use freelancers when they need to have a job done but do not have enough of the required type of work to warrant hiring a permanent employee. Interns Interns are students who will work for little or no pay in order to gain experience in a particular field. To find out whether interns are available in your community, contact local colleges and high schools. If you hire an intern, you will most likely have to work with a college or high school intern coordinator to ensure certain program require¬ ments are fulfilled. It is your responsibility to provide a valuable learn¬ ing experience for the intern. 11.1 Identify Your Staffing Needs 305 greene_0538446145_chl 1, 1/17/8, 15:16, page: 306 Temporary Workers Businesses that need additional help often use temporary work¬ ers. Some temporary workers are seasonal employees. Other tem¬ porary workers are substitutes for employees who are sick or on a leave of absence. Tempo¬ rary employment agencies pro¬ vide trained workers for various kinds of businesses. A business that uses a temporary employee pays a fee to the agency. The agency in turn manages the worker’s salary and benefits. Why would a business hire a temporary worker? Checkpoint What are some alternatives to hiring permanent employees? Ti.i Assessment THINK ABOUT IT 1. Why is it important for a company to have an organizational structure that allows the owner to focus on long-term issues? 2. List some advantages of using an employment agency. 3. What would be some disadvantages of hiring freelancers and temporary workers? 306 Chapter 11 MAKE ACADEMIC CONNECTIONS 4. PROBLEM SOLVING Create an organizational structure for a 30-person local package delivery service. First, determine all the types of employees the business would have. Then create the chart based on your decisions. 5. RESEARCH Create a resource guide containing online career and employment web sites, employment agencies, and college placement centers that could be used to help meet staffing needs. Include contact information for each resource. Form teams. Choose a business in your community. Decide what the best method would be for it to recruit new employees. Design an advertisement that could be used for the method you select. If you select referrals as the best method, design a referral request form that could be sent to friends, acquaintances, and current employees. Human Resource Management PhotoDisc/Getty Images greene_0538446145_ch 11, 12/21/7, 19:56, page: 307 wages salary bonus profit sharing commission benefits V Focus on Small Business Whom to hire? Emanuelle took a good look at his business needs and decided that he would hire an administrative assistant to help him. If he had someone in the office to answer the phone, schedule work, and handle the billing, it would allow him to spend more time at job sites. He put an ad in the local newspaper and had several candidates contact him. Now he had to decide who to interview. Emanuelle's sister, JoAnna, had run her own business for several years, so he went to her for advice. JoAnna recommended that he have candidates complete an application form. He could review the provided infor¬ mation and check with their references to determine who is really qualified for the job. Then he could set up interviews with the best candidates. "So, JoAnna," Emanuelle asked, "do you have an application form lying around here anywhere?" Work as a Team Do you think that JoAnna gave Emanuelle good advice about selecting candidates to interview? Why do you think it is important to review and verify the informa- consider the skills needed to tion that applicants provide? improve your business. The Hiring Process Hiring employees is often difficult because it requires making very important decisions based on fairly limited information. How should you decide whom to hire? The four-step hiring process involves (1) screening candidates, (2) reviewing and verifying job applications, (3) interviewing the best candidates, and (4) making a job offer. Screen Candidates The first step in the hiring process is to screen candidates to remove people who are not right for the job. This allows you to focus on the most quali¬ fied candidates. The job description identifies the specific requirements needed to perform a particular job. You need to match the job candidate’s 11.2 Staff Your Business 307 greene_0538446145_chl 1, 12/21/7, 19:56, page: 308 experience and skills with the job description. You should also look for personal characteristics that would make a person a desirable employee. Michael Johnson, owner of Johnson’s Medical Supply, ran a want ad in the local newspaper. He was looking for a person with at least five years of experience selling medical equipment. He received more than 150 responses to his ad. However, 120 of the resumes he received were from people with no experience in the field. Michael immediately removed those from the stack of possibilities. Next, he carefully examined each resume and cover letter and selected ten can¬ didates to interview based on their experience. Review and Verify Job Applications You will need to have potential candidates complete an application. There are standard application forms that you can use, or you can design one that will meet your specific needs. The application allows you to gather information that might not be included on a resume. If you decide to design your own application, you can use the job description as a guide to gather the information you need about the candidate’s experience. Once you have applications and resumes from candidates, you need to verify that the information provided is correct. The first thing you should do is check references. Call previous employers to make sure the applicant held the positions listed on the resume. Ask what they can tell you about the person. Describe the job opening, and ask the previous employers if the candidate would perform well in such a position. Other questions can revolve around the personal qualities of the candidate, such as interpersonal skills and punctuality. Request that the candidate provide an official transcript from schools they attended to verify education and training. Interview the Best Candidates The job interview provides you with the opportunity to determine whether a prospective employee would improve your ability to meet customer needs. It is also your chance to make your small business appealing to a prospective employee. Making the most of the job interview is as important for you as it is for the job candidate. SELL YOUR BUSINESS During the interview, make your small busi¬ ness appear inviting and appealing to prospective employees. Share your values and plans for the business. Help the applicant understand your vision for the business. Talk about the significance of working in a new business. Empha¬ size the importance of the contributions the applicant would make in the development and growth of a new business. Explain the atmosphere in which the candidate would work. Make sure the applicant understands that a small business can foster an environment of flexibility and caring. Some people would rather work in a small business that is not as structured as a large corporation. Describe your bonus system. With a small startup business, you may not be able to pay a large salary, but you can offer an attractive 308 Chapter 11 Human Resource Management greene_0538446145_chl 1, 12/21/7, 19:56, page: 309 bonus or benefits package. Explain that if the business does well, you will share some of the profits with those who help you succeed. MAKE THE INTERVIEW EFFECTIVE To ensure that you use your time during the interview effectively, follow these basic rules: 1. Be prepared. Make a list of open-ended questions you want to ask. Review the job candidate’s resume and applica¬ tion again just before the inter¬ view begins. 2. Be courteous. Do not be late for the interview. Avoid taking phone calls during the interview. Try to put job candidates at ease by offering them something to drink. Make them feel welcome in your office. 3. Avoid dominating the interview. Remember that the interview is your opportunity to get to know the job candidate. To do so, be sure to allow the applicant plenty of time to speak. 4. Take notes. Throughout the interview, jot down your impressions of the candidate as well as any interesting information he or she reveals. 5. Look for warning signs. Signs that a person may not be a good worker include frequent job changes, unexplained gaps in employ¬ ment, and critical comments about previous employers. 6. Don’t make snap judgments. Don’t rule out a candidate until the interview is over. 7. Remain pleasant and positive throughout the interview. At the end of the interview, thank the candidate for coming and let him or her know when you plan to make a decision. 8. Write a summary of your impressions of the candidate. Write your summary immediately after the interview while your thoughts are still fresh. Put this document in the candidate’s file. SAMPLE INTERVIEW QUESTIONS 1. What interests you about the job? 2. How can your skills and experience benefit the company? 3. What are your career plans? How does this job fit in with those plans? 4. What other positions have you held? What did you like and dislike about those positions? 5. What were your achievements at your previous jobs? 6. Why did you leave your last job? 7. How do you think your education has prepared you for this job? 8. What kind of work do you enjoy most? What makes a job enjoyable for you? 9. Describe a situation where you had to manage conflicting priorities. Make a Job Offer When you have decided to make a job offer, contact the person by phone. Let the person know you were impressed with his or her cre¬ dentials. Be sure to emphasize how much you would like the appli¬ cant to join your company. Clearly state the starting salary, benefits, and terms of employment. If the first applicant declines your offer, extend the offer to your second choice and then to your third choice, if necessary. Once a candidate accepts your offer, contact the remaining candi¬ dates. Thank them for interviewing with your business, and politely let them know that you have given the job to another applicant. 11.2 Staff Your Business 309 Digital Vision/Getty Images greene_0538446145_chl 1, 12/21/7, 19:56, page: 310 Checkpoint What are the four steps in the hiring process? Compensation Package As an entrepreneur with paid employees, you will need to create a compensation package. The package will include some type of pay and may also provide a variety of benefits. The benefits package can influence a candidate’s decision on whether or not to take a position with a company. Types of Pay There are many ways you can choose to pay your employees. The terms “wages” and “salary” are often used interchangeably, but there is a difference. Wages are payments for labor or services that are made on an hourly, daily, or per-unit basis. The paycheck for a person earn¬ ing a wage will vary depending on how many hours are worked or how many units are manu¬ factured. A salary is an amount paid for a job position stated on an annual basis. Regardless of the number of hours the person filling the position works, the amount of money the salaried employee is paid does not vary. Wages and salaries can be paid weekly, biweekly, or monthly. Employees may also receive a bonus, which is a financial reward made in addition to a regular wage or salary. Bonuses usually hinge on reaching an established goal. Profit sharing is another compensation arrangement in which employees are paid a portion of the company’s profits. Some employees are on commission-based salary plans. A commission is a percentage of a sale paid to a salesperson. A commission-based salary varies from month to month depending on sales. Those receiving this type of salary may be paid using a commission-only plan or a combination plan. Why are many salespeople paid using a commission plan? COMMISSION-ONLY PLAN Some employees, especially those in sales, receive all of their salaries in commission. Commission-only plans are good for employers, because commissions are paid only when sales are made. Some employees may not want to accept a commission-only position, because they are not comfortable with the uncertainty of not knowing what their actual pay will be from pay period to pay period. Lyn Kovacs works entirely on commission. Last year, Lyn sold $490,000 worth of electronic devices. She received ten percent of her sales as commission. Her annual salary was $49,000, as calculated below. Amount sold x Percent of commission = Amount of commission $490,000 x 0.10 = $49,000 310 Chapter 11 Human Resource Management greene_0538446145_chl 1, 12/21/7, 19:57, page: 311 COMBINATION PLAN An employee may be paid based on a combi¬ nation plan. A combination plan includes a base salary plus commis¬ sion. Employees may feel more comfortable accepting a position that offers this type of payment plan. Hector Marquez sells men’s clothing at a local department store. He earns $6.75 an hour, plus ten percent of whatever he sells. Last month, Hector worked 158 hours and sold $11,500 worth of clothing His total monthly compensation was $2,216.50, calculated as follows: Base Pay (Hours x Hourly wage) (158 x $6.75) $1,066.50 + Commission + (10% x Sales) + (0.10 x $11,500) + $1,150.00 Total Pay Total Pay Total Pay $2,216.50 did you KNOW? c minimum W 3 S e law was first enacted i n 1933 the established minimum »*ge was just 25 cents Per hour. PAY COMPETITIVELY In most markets, wages and salaries are com¬ petitively determined. This means that an employer who offers much less than the going wage or salary rate is not likely to find qualified workers. To offer competitive wages or salaries, you will have to find out how much similar businesses in your area are paying their employ¬ ees. You should also find out what people are earning in jobs with similar qualifications. Once you know the going wage or salary rate, you will have to decide whether you want to offer more than, less than, or about the same as other businesses. Offering more than other businesses will attract the best employees. Bob Aylward owns a limousine service. He knows that finding and keeping good drivers is difficult. To make sure his compensation package is attractive, he regularly finds out what other limousine com¬ panies are offering. He then sets a starting salary that is three percent higher. He also offers a few more days of paid vacation than his com¬ petitors. Bob hopes that these things will attract drivers that will stay with his company for many years. Benefits Benefits are employment rewards for service in addition to salary. They may include paid leave, insurance, and a pension plan. PAID LEAVE Almost all employers offer paid vacation and sick time. Both kinds of leave represent costs to employers, because employees are paid while they are not working. Be aware that some employees may abuse paid leave. You or someone in your business should keep a record of the paid leave employees take and watch for patterns that might indicate abuse. Businesses handle vacation in various ways. Many offer one or two weeks of paid vacation a year to new employees. Employees usually gain more vacation time the longer they work at a business. Some businesses let employees carry over unused vacation days from year to year while others require employees to use their vacation time each year. Sometimes your employees will not be able to work because of illness. The number of days of sick leave provided varies from business to business. Some businesses offer only five sick days a year. Others allow employees unlimited sick leave. You will have to develop a sick leave policy that is fair to your employees but not excessively costly to you. 11.2 Staff Your Business 311 greene_0538446145_chl 1, 1/18/8, 12:0, page: 312 INSURANCE Many businesses offer health insurance as a benefit to full-time employees. The cost to small businesses to provide insurance coverage can be quite high. Large businesses receive discounted group rates but may still require employees who opt for this benefit to pay a portion of the cost. Businesses may also offer other kinds of insurance such as dental insurance, life insurance, and accident insurance. RETIREMENT PLANS Some businesses help employees save for retire¬ ment by offering 401(k) plans. Employees that participate in 401(k) plans have a percentage of their earned income withheld by the employer to be deposited into a professionally managed investment account. Some employers will match employee’s 401(k) contributions as much as 50 cents per dollar invested. The funds will continue to grow tax-free until they are withdrawn by the retiree upon reaching retirement age. Pension plans are another type of employer-sponsored retirement savings plan, but they are not as common because they are more costly to a company. Checkpoint What may be included in a compensation package for employees? Famous J. K. 'Rowling Ask successful people how to succeed, and they will always tell you to do what you love. For a fortunate few, that formula works. Such is the case with J. K. Rowling, creator of Harry Potter and one of the most successful writers in the world today. Rowling always wanted to be a writer and eventually became one, but before Harry and success came a young adulthood full of indecision. Her favorite subject in school was English, and she liked studying lan¬ guages too. Rowling went to Exeter University and studied French. Her parents thought languages would lead to a career as a bilingual secretary. She discovered that she liked nothing about being a secretary and spent time working on stories at the com¬ puter when she thought no one was looking. Such misbehavior eventually got her fired, so Rowling went abroad to teach English as a foreign lan¬ guage in Portugal. With her morn¬ ings free, she began work on her third novel after giving up on two others when she realized how bad they were. When she left Portugal, her suitcase was filled with stories about Harry Potter. She settled in Edinburgh and decided to finish the novel and try to get it pub¬ lished before starting work as a French teacher. A publisher bought the book one year after it was finished. The road to success for J. K. Rowling had begun! Think Criticallv What can you learn about , „ _ .. r y . entrepreneurship from J. K. Rowling found great success as j K Rowling's experiences? a writer, but her experience as an employee was not very successful. Why do you think this is often the case with entrepreneurs? 312 Chapter 11 Human Resource Management greene_0538446145_chl 1, 12/21/7, 19:57, page: 313 Regulations that Protect Employees There are many laws designed to prevent discrimination and promote health and safety in relation to employment. It is important to con¬ sider these regulations as you develop your staffing plan. Fair Labor Standards Act (FLSA) of 1938 The FLSA establishes the maximum number of hours employees can work. It includes rules for children under the age of 16 who work and pay rates for overtime work. The act also outlines the national minimum wage. Civil Rights Act of 1964 Title VII of the Civil Rights Act prohibits discrimination on the basis of race, color, religion, sex, or national origin in hiring, promotion, discharge, pay, fringe benefits, job training, classification, referral, and other aspects of employment. This law is enforced by the Equal Employment Opportunity Commission (EEOC), a government agency established by Congress in 1972 to regulate labor laws. Age Discrimination in Employment Act of 1967 The purpose of this act is to promote employment of older persons (40 and over) based on their ability rather than their age. It prohibits arbitrary age discrimination in employment and helps employers and workers find ways of resolving issues that arise from the impact of age on employment. Occupational Safety and Health Act (OSH Act) of 1970 The OSH Act requires that employers maintain safe working conditions for their employees. To comply with the act’s regulations, you must keep records that show the steps you have taken to protect the welfare of your workers and to keep your workplace safe. If employees have to work with dangerous equipment or substances, you must provide them with special training. If the Occupational Safety and Health Administra¬ tion (OSHA) suspects that your business has unsafe practices, its inspec¬ tors will examine your facility and may require you to make changes. Immigration Reform and Control Act of 1986 This act requires that employers check the identification of employees hired after 1986 to ensure that they are legal citizens of the United States. It also established the Office of Special Counsel for Immigration- Related Unfair Employment Practices to enforce antidiscrimination provisions. Americans with Disabilities Act (ADA) of 1990 The ADA bans discrimination against employees based on disabilities. It requires businesses with 15 or more employees to accommodate the needs of employees with disabilities, even if the firms currently do not have disabled employees. The intent of the ADA is to protect job applicants and employees who are legally disabled but are qualified for a specific job. An employee is qualified if he or she can carry out 11.2 Staff Your Business 313 greene_0538446145_chl 1, 1/17/8, 15:17, page: 314 the necessary functions of the job with some type of reasonable accommodation. Family Medical Leave Act of 1993 This act requires businesses with more than 50 employees to provide employees up to three months of unpaid leave if a serious health con¬ dition affects the employee, the employee’s child, or the employee’s parent or spouse. This act also makes it possible for male and female employees to take leave in the event of a birth or adoption of a child. Checkpoint Why do we need laws to help protect the rights of employees? ii.2 Assessment THINK ABOUT IT 1. Why is it important for an employer to check the information and references provided by a job applicant? 2. Why is the compensation package important to potential employees? 3. Why is it important for small business owners to have an under¬ standing of the laws designed to protect employees? MAKE ACADEMIC CONNECTIONS 4. RESEARCH Find and compare three advertisements for the same type of job. Are the qualifications requested the same? How are they different? Is any mention of compensation made? If so, how is it structured? Research the going wage for this posi¬ tion. What do you think is a fair wage for this job? 5. MATH You have an open sales position in your company that pays a salary of $21,000 per year. You discover that another company with a similar sales position offers a combination plan of $12,000 per year plus a commission of 15 percent of sales. Average sales are $90,000. Which job has the potential for higher earnings? Do you need to adjust your salary? Why or why not? TEAMWORK When interviewing job candidates, there are questions you cannot legally ask. Using the Activity CD, open the activity "What Can You Ask in an Interview?" and print a copy. Working with a partner, review the list of interview question guidelines. Then, think of a posi¬ tion in a company and make a list of interview questions adhering to the guidelines. Role play an interview for the position. 314 Chapter 11 Human Resource Management greene_0538446145_ch 11, 12/21/7, 19:57, page: 315 ■ Goals •'1 m Direct and Control Human Resources Explain what should be included in the imple¬ mentation of your staff¬ ing plan. Discuss ways to moti¬ vate your employees. Describe the control function of management as it applies to human resources. I Terms delegate performance evaluation \l Focus on Small Business You've hired someone, now what? Emanuelle carefully screened the applicants for administrative assistant, interviewed a couple of candidates, and offered the position to Vivian. Vivian reported to work bright and early on a Monday morning. Emanuelle reviewed her job description with her, showed her how the phone system worked, and then headed out to do some bobcat work. He hadn't been gone 20 minutes when his cell phone started ringing. It was Vivian. She was in a panic because she had received several calls about bobcat services. Customers wanted to know the costs and when they could be scheduled for service. Vivian didn't know what to tell them, and some customers became impatient and demanding. Emanuelle quickly turned his truck around and headed back to his shop. On the way there, he tried to figure out what to do. Work as a Team What mistakes do you think Emanuelle made after hiring Vivian? What does he need to do now? Well-trained employees help a business succeed. 0 » CD 03 E a> § a o o -C a_ © Implement Your Staffing Plan Once you have people working for you, you become a manager. This means that you will no longer focus all of your efforts on doing your own job. You will be implementing , which involves directing and lead¬ ing people to accomplish the goals of the organization. As a manager, you will have to exhibit leadership and motivate your employees. To manage your staff effectively, you need to understand the levels of management and develop good leadership qualities. This will help you create a workforce that is dedicated to meeting customer needs and increasing sales. 11.3 Direct and Control Human Resources 315 greene_0538446145_chl 1, 12/21/7, 19:57, page: 316 Understand the Levels of Management There are three basic levels of management: supervisory level, middle level, and top-management level. The amount of responsibility varies with the level of management. As the manager moves up, the amount of responsibility increases. The number of managers at each level will vary depending on the size of the company. In a new business venture, the entrepreneur may serve in all levels of management. A large corpo¬ ration may have many individuals working as middle and supervisory- level managers. Supervisory-level managers work directly with the workers on the job and are responsible for implementing the plans of middle manage¬ ment. Middle managers serve as a liaison between the supervisory-level and the top-level managers. They are responsible for implementing the goals of top management. Top management has the highest level of responsibility and is responsible for establishing the vision for the company. Apply Leadership Styles As you learned in Chapter 10, managers will develop a style or way of working with those whom they supervise. Leadership styles have changed over the years as the workplace has changed. Successful managers today often empower their employees and give them the authority to make decisions without supervisory approval. Empowerment gives employees a sense of responsibility and pride in accomplishment. It also reduces delays in the flow of work and reduces the workload of the manager. However, not all managers use this style. There are many differ¬ ent leadership styles. Some managers use fear and intimidation and manage their employees as if they are lazy and cannot be trusted. They are called Theory X managers and use the authoritative management style. Other managers trust and respect their employees and value their contributions. They are called Theory T managers and use the democratic management style. Some managers reward employees for good work. In your working career, you will encounter many different leadership styles. When you become a manager, incorporate the qualities you like in other leaders into your leadership style. Enforce As the owner of your own business, you will establish policies concerning vacations, holidays, hours, acceptable dress, and other issues affecting your workers. You will need to make sure that all of your employees are familiar with these policies. You may need to gently remind employ¬ ees of policies if they fail to follow them. Employee Policies be your own boss You own a floral design studio. Last year, you promoted Philip, one of your designers, to man¬ ager of the studio. Philip had shown excellent design skills and was eager to take on new responsibilities. Recently, Philip has become increasingly possessive of information about what is going on in the day-to-day management of the floral shop. Several major problems with important customers have surfaced that Philip knew about but had not shared with you. Business from two of these customers has decreased during the last quarter. Also, several staff members have come to you privately with complaints about Philip's management practices. Tina, who has worked for you for over ten years, is threatening to quit. Use the six-step problem-solving method to deter¬ mine how you will handle the issues with Philip. 316 Chapter 11 Human Resource Management greene_0538446145_chl 1, 12/21/7, 19:57, page: 317 Many companies communicate policies to staff by creating an employee handbook. These handbooks can be just a few pages long or they can fill a small binder, depending on the size of the company and the number of policies. Train Your Employees You will need to develop a training program for your new employees. This program should begin as soon as they are hired. Training should not end when the employee learns how things are done. Continuous training ensures that employees are always knowledgeable and up to date on changes affecting the business. There are many ways to provide training to employees. You may use different techniques for different job responsibilities. You will need to decide which is best for you, your business, and the employee. • On-the-job training Employees learn new responsibilities by actually performing them at their place of business. • Coaching Employees receive feedback and instruction from their manager on a constant basis. • Mentoring One employee teams up with another more experi¬ enced employee to learn a job. • Conferences and seminars Employees attend conferences and seminars to learn about new techniques and trends from an expert in the field. These are usually held off-site. After training, you need to make sure employees are using that training and that the training was effective. Justin Reynolds needs to train his employees on the new computerized inventory system he wants to use. He brings in a representative from the software company to provide a training session. Justin will know the training was effective if employees understand the software and are able to use it. Why are conferences and seminars valuable training methods? 11.3 Direct and Control Human Resources 317 greene_0538446145_chl 1, 1/15/8, 17:41, page: 318 Checkpoint What should be included in the implementation of a staffing plan? Motivate Your Employees To get the most out of your employees, you will have to motivate them. You can do so in several ways. 1. Pay employees well. When employees feel they are compensated well, they will be happier. They will perform to the best of their ability. 2. Treat employees fairly. Everyone wants to be treated well. Be sure to treat everyone the same. 3. Recognize employees for the work they do. Offer public recog¬ nition for a job well done. Praise employees frequently. 4. Give employees adequate responsibility. Employees who are allowed to make decisions on their own often work harder. They take pride in the fact that their input makes a difference. WHAT WENT WRONG * Whom Do You Trust? Sandy Warren formed Motiva International, a sales motivation and consulting company. Sandy felt it was very important to involve her employees in all business operations. At weekly meetings, she shared and discussed confidential company details with the com¬ pany's 18 employees. Sandy soon learned that there were some things that should not be shared. The company was experiencing some cash flow problems, and Sandy discussed this with the employees. Employees became concerned that they would not get paid, which distracted them from their job duties. Because work wasn't getting done, customer relations suf¬ fered. At another meeting, Sandy told her employees about a deal she was about to close with a new client. One excited employee told someone outside the company about the new client. This leak of information enabled a com¬ petitor to develop a stronger proposal and steal away the new client. Losing that deal forced Sandy to lay off employees, go deeper into debt, and finally dissolve the company. Think Critically 1. How do you determine what company information should be reserved for man¬ agement and withheld from employees? 2. Would you have fired the employee who leaked the information regarding the potential new client? Why or why not? Carefully consider what information to share with employees. 318 Chapter 11 Human Resource Management greene_0538446145_chl 1, 12/21/7, 19:57, page: 319 Why should a manager encourage employees to share their opinions and ideas? Delegate Responsibility Many entrepreneurs have difficulty delegating responsibility. To delegate is to let other people share workloads and responsibilities. Employees who are given more responsibility are better motivated and contribute more to the company. Delegating responsibility to them allows you to make the most of their experience, talents, and skills. As a business owner, delegating allows you to focus on important items, such as expanding into new markets or offering new products. Assigning paperwork and other duties that can be performed by some¬ one else will free up your time. Finally, delegating responsibility is essential if a company is to grow. When your business is small, you may be able to handle all areas of its management. If the company is to expand, you will have to let managers take on more and more responsibility. Listen to Employees Some entrepreneurs fail to listen to their employees. In doing so, they miss out on an opportunity to take advantage of valuable ideas and resources that can help them increase profits. The people who work for you are very familiar with your busi¬ ness and may be able to offer fresh ideas. Listening to new points of view may help you come up with new, creative solutions. If you value the opinions of your employees, they will feel they are a valuable asset to your company. This feeling of importance will keep them moti¬ vated to do a good job for you. Checkpoint How can you motivate employees? 11.3 Direct and Control Human Resources 319 PhotoDisc/Getty Images greene_0538446145_chl 1, 12/21/7, 19:57, page: 320 Control Human Resources The controlling function of management involves setting standards for the operation of a business and ensuring those standards are met. In the area of human resources, it is necessary to establish perfor¬ mance standards for employees and then evaluate employees periodi¬ cally to be sure they are meeting the performance standards. This process can help you identify outstanding employees who should be promoted and problem employees who should be dismissed. Evaluate Employees Most businesses perform an employee review once or twice a year in which they analyze each employee’s performance and determine the increase in the employee’s salary. The job description should be used when evaluating how well an employee has fulfilled all of his or her job responsibilities. Some of the items that are usually evaluated include dependability, punc¬ tuality, attitude toward job and coworkers, and success in achieving predetermined objectives. A performance evaluation serves as a management control tool that helps determine whether the objectives for a particular job are being met. The evaluation process is also useful to the employee. It helps the employee recog¬ nize strengths and see where there is room for improvement. As part of the process, plans for mentoring, training, and practice should be put in place to help improve the employee’s perfor¬ mance in areas where needed. During the performance review, the reviewer should focus on the positive aspects of the employee’s performance. Productivity should be reviewed, and the employee and reviewer should work together to set new objectives for the upcoming period. The review should be recorded on an appraisal form. The form should include the employee’s name and job title, as well as the manager’s name, the date range the review covers, job responsibilities and attributes, places for comments, goals for the next year, and a section outlining plans for employee development. A ranking method can be used to easily mark how well the employee has performed. Performance reviews should be conducted face to face. A written summary of the review should be kept in the employee’s file. Promote Employees Promoting good employees will help ensure that they remain inter¬ ested in working for your business. Employees often compete with one another, so promoting one over the other may cause problems. Be sure you make all decisions fairly. Base your decisions on solid reasons, such as volume of sales and quality of customer service. Why are performance evaluations important to both the employer and employee ? 320 Chapter 11 Human Resource Management greene_0538446145_chl 1, 12/21/7, 19:57, page: 321 PERFORMANCE APPRAISAL DATE: January 21, 20- NAME: Daniel Tisdale Reports To: Laureen Stiles JOB TITLE: Marketing Director Review Period: 1/1 to 12/31 Attribute Well Above Standard Above Standard Standard Below Standard Far Below Standard Quantity of work / Knowledge of work / Ability to organize / Ability to meet deadlines / Dependability / Judgment / Initiative / Communication / Management of others / Teamwork / Comments You have done an outstanding job of increasing sales. Your hard work, dependability, and initiative are very much appreciated. Areas for Improvement: 1. Increase technical knowledge to improve the quality and quantity of work. 2. Improve written communication skills by enrolling in a business writing course. 3. Improve management skills, in particular by delegating more responsibility to your marketing assistants. 4. Increase ability to participate as part of team. Goals for Coming Year: 1. Increase store sales 12 percent. 2. Oversee completion of company web site. 3. Generate online sales of $75,000. Employee: Daniel Tisdale Manager: Laureen Stiles Dgwgl TIsA<70e _ ‘rfllg'Z _ 11.3 Direct and Control Human Resources 321 greene_0538446145_chl 1, 1/17/8, 15:17, page: 322 Dismiss Employees Some employees may not work out. In fact, they may end up hurting your business. How will you handle such situations? As soon as you notice an employee not performing well or causing problems, discuss the situation with him or her. If performance does not improve, issue a written warning. If there is still no improvement, you will need to dismiss that employee. Record the reasons for the dismissal. Checkpoint Why is it important to conduct employee performance evaluations at regular intervals? ii.3 Assessment THINK ABOUT IT 1. What is the difference in a Theory X and a Theory Y manager? Which leadership style do you think is more effective? Why? 2. Why do many entrepreneurs find it difficult to delegate? 3. Why do you think it is important to keep a written summary of a performance evaluation? MAKE ACADEMIC CONNECTIONS 4. COMMUNICATION Barry Sandler, owner of Sandler's Custom Computers, has decided to change the way sales associates are paid. Salaries are by commission only—hourly wages are not paid. Barry wants to get suggestions from his sales team. Your teacher will role play Barry Sandler. You and other students will role play the sales associates. As a class, decide on a new com¬ pensation method. 5. COMMUNICATION Using the Activity CD, open the activity "Per¬ formance Evaluation." Print a copy. With a partner, role play an employee and employer participating in a performance review. Assume the employee is a good worker who deserves a promo¬ tion. Make up the employer and job. Complete the performance evaluation form. TEAMWORK You manage a department in a business that is in the midst of change. Your employees have heard many rumors about job changes, possible layoffs, and pay reductions. Morale in the department is at an all-time low. Working with teammates, develop a plan to moti¬ vate your employees to achieve high performance standards and keep a good attitude in the midst of all the changes. Share your motivational plan with the rest of the class. 322 Chapter 11 Human Resource Management greene_0538446145_chl 1, 1/17/8, 15:17, page: 323 Sharpen Your Entrepreneurial Skills Promoting Teamwork In many activities, the ability to work together as a team determines whether or not a group’s efforts will be successful. A sports team can¬ not win if its players do not work well together. Astronauts working on the space station cannot complete their mission if crew members do not cooperate. Teamwork is important in many businesses. Employees who work as a team are usually very committed. They are more likely to work harder and to come up with cre¬ ative ideas for increasing profits. You will want your business to have an environment in which employees feel part of a team and work toward common goals. Respecting, communicating with, and getting along with coworkers are all important team behaviors. Creating this type of atmosphere can be a challenge. As the owner of the business, it will be up to you to provide the leadership that will allow your employees to work together as a team. To be an effective team leader, you will need to do the following. • Establish trust among team members and gain their trust. • Make sure that all team members understand the goals you have set for the business. • Encourage team members to be creative and innovative. • Make team members feel like partners in your business. • Help team members learn from their mistakes. • Build the team’s commitment to achieving the goals you have set. TRY IT OUT Effective teams not only need good leadership but also require com¬ mitted team members. Working in teams, brainstorm a list of personal qualities that effective team members should possess. Provide exam¬ ples of teamwork that you have observed and how the team used these qualities to achieve a common goal. Sharpen Your Entrepreneurial Skills 323 0538446145_chll, 12/21/7, 19:58, page: 324 Chapter 11 Assessment SUMMARY 11.1 Identify Your Staffing Needs 1. To determine staffing needs, list all the duties in your business, identify how much time is needed to perform each one, determine the skills and qualifications employees need, and write job descrip¬ tions that list the specific responsibilities of each position. You should also create an organizational structure to show the relation¬ ships between the various jobs in the company. 2. To recruit new employees, you may use classified advertisements, online career and employment sites, employment agencies, college placement centers, in-store advertising, and referrals. 3. In addition to hiring permanent employees, you can also hire free¬ lancers, interns, or temporary workers. 11.2 Staff Your Business 4. The four steps in the hiring process include (1) screen candidates, (2) review and verify job applications, (3) interview the best candi¬ dates, and (4) make a job offer. 5. A compensation package should include a method of pay and may provide a variety of benefits. Methods of pay include wages, salary, commission only, or a combination of salary plus commission. Bonuses and profit sharing are other compensation methods. Benefits may include paid leave for vacation and sickness; medical, dental, life, and accident insurance; and retirement plans. 6. Employers must follow all laws and regulations that are created to protect employees from unfair labor practices. 11.3 Direct and Control Human Resources 7. Implementing your staffing plan effectively requires that you have good management and leadership qualities. By enforcing policies and offering training, you will help your employees perform better. 8. There are several ways to motivate employees, including paying them well, treating them fairly, recognizing them for good work, and giving them adequate responsibility. 9. You should create a procedure for evaluating employees. Out¬ standing employees should be promoted when opportunities become available, and problem employees should be dismissed. What do you fcnow now? Read Ideas in Action on page 299 again. Then answer the questions a second time. How have your responses changed? 324 Chapter 11 Human Resource Management greene_0538446145_chl 1, 12/21/7, 19:58, page: 325 VOCABULARY BUILDER Match each statement with the term that best defines it. Some terms may not be used. 1. A written statement listing the tasks and responsibilities of a position 2. The process of determining the tasks and sequence of tasks neces¬ sary to perform a job 3. A management control tool that determines whether objectives for a job are being met 4. To look for people to hire and attract them to the business 5. People who provide specialty services to businesses on an hourly basis or by the job 6. Payments for labor or services that are made on an hourly, daily, or per-unit basis 7. An amount paid for a job position stated on an annual basis 8. A percentage of a sale paid to a salesperson 9. Financial reward for employment service in addition to salary 10. To let other people share workloads and responsibilities benefits bonus chain of command commission delegate freelancers interns job analysis job description performance evaluation profit sharing recruit salary staffing o. wages g- h. j- i. REVIEW YOUR KNOWLEDGE 11. True or False? Good employees and a well-run human resource management program are as important to your business as are capital, equipment, and inventory. 12. A collection of tasks and responsibilities that an employee is responsible to conduct is a a. job c. job analysis b. job description d. duties and task list 13. Which of the following is not a way to motivate employees? a. pay them well b. treat them fairly c. recognize them for good work d. make all decisions for them 14. True or False? The job analysis helps people in a company understand who reports to whom. 15. Which of the following would not be included in a job offer? a. job analysis c. terms of employment b. starting salary d. benefits package 16. True or False? During the screening process, you determine which candidates are most qualified for the position you are trying to fill. 17. If you live in a very small community with a limited pool of avail¬ able workers, what would be the best way to recruit employees from nearby communities? a. online advertisement b. in-store advertising c. classified ad in the local paper d. college placement center for a university 300 miles away Chapter 11 Assessment 325 greene_0538446145_chl 1, 1/18/8, 10:54, page: 326 18. You interviewed a candidate for a sales position you have in your swimming pool sales and installation business. Sales are usually high in the spring and summer and then drop off in the fall and winter. The candidate has a family and needs a steady income but likes the idea of earning more pay if he makes a large number of sales. Which payment method do you think he would prefer? a. wage c. commission only b. salary d. combination plan 19. Offering an employee the opportunity to participate in your group health insurance plan is an example of a a. wage c. bonus b. salary d. benefit 20. True or False? The Occupational Safety and Health Act estab¬ lishes the maximum number of hours employees can work. 21. True or False? The Family Medical Leave Act makes it possible for both men and women to take leave in the event of a birth or adoption of a child. 22. A_?._manager works directly with the workers on the job and is responsible for implementing the plans of middle management. 23. True or False? As long as a job candidate has the appropriate skills needed, it is not necessary to check his or her references. 24. Which of the following would be the most effective training method to use for an employee who needs to learn about the latest technology trends for today’s modern office? a. on-the-job training b. coaching c. mentoring d. conference or seminar APPLY WHAT YOU LEARNED 25. You have decided to hire three people to help in your custom drapery business: an administrative assistant, an interior designer/ salesperson, and a sewer. What qualifications and skills must each of these employees possess? Write a job description for each posi¬ tion. Also, establish a compensation package for each position describing the type of pay and the benefits included. 26. For each of the positions you have established in your custom drap¬ ery business above, describe how you will recruit these employees. Create a want ad and prepare a list of interview questions for each position. MAKE ACADEMIC CONNECTIONS 27. MATH Jayne Smith sells vacuum cleaners and is compensated under a combination plan. She earns $9.25 per hour plus 15 percent of whatever she sells. Last month, Jayne worked 160 hours and sold 9 vacuum cleaners. Five of the vacuum cleaners were top-of-the-line models with a price of $1,100 each. The remaining vacuum cleaners were $450 each. What is Jayne’s compensation for last month? 326 Chapter 11 Human Resource Management greene_0538446145_chl 1, 12/21/7, 19:58, page: 327 28. PROBLEM SOLVING One of your employees is upset that another employee received a promotion. She thinks she should have gotten the job because she has been there longer and has always had good performance evaluations. What are some reasons that a newer employee would receive the promotion? How will you handle the situation? WHAT WOULD YOU DO? You want to hire a new sales assistant for your company. You checked with the local college placement office, and it sent several qualified applicants for an interview. You are really impressed with one of the candidates, and you want to hire him for the position. Before making the job offer, you decide to check the Internet to see if the candidate has a personal web page that might provide you with more informa¬ tion regarding his background and interests. By performing an Internet search, you quickly find his personal web page. You are shocked at some of the pictures he has posted and at some of the activities in which he has participated. What would you do? Would you hire him anyway or would this change your impression of him? This activity will help you determine staffing needs for your business. This information will help you develop the Operations section of your business plan. Assume your business will grow over the next year and you will need to add employees. Make a list of at least five jobs that need to be filled. Is each job a full-time job, part-time job, or temporary work? For each job, write a detailed job description. Create an organizational chart for your business based on these new positions. Write a classified advertisement for each of the jobs you will need to fill. What employee characteristics and qualifications are you seeking? Write the interview questions that you will ask the candidates for each position. Write a list of questions you will ask their references. For each position, create a complete compensation package that out¬ lines wages or salary and any nonsalary benefits. Explain why you have structured the compensation package as such. Add policies concerning vacation, holidays, hours, acceptable dress, and any other issues that affect your employees to the operating procedures manual you previously created in Chapter 10. Create a sample performance appraisal form for your employees. Will you use the same form for each position? Why or why not? Determine the ways you plan to motivate your employees. Create at least one method of publicly acknowledging employees for good work. Record your ideas. In what ways will you train new and existing employees for your business? What aspects of your business require training, and what type of training is the best for each aspect? Write a short report about your decisions. greene_0538446145_chl 1, 1/18/8, 10:53, page: 328 Planning a Career in Audio-Video Technology A/V Technology & Communications UW IVIy aunt got married last weekend and the wedding was a blast. Both a photographer and a videographer were at the wedding. During the reception, the photo¬ grapher set up a laptop on a table that had photos of the ceremony streaming on screen. It was really fun to see pictures of the ceremony while we were still celebrating the wedding.” How do people determine the best way to record significant events in their lives? How do com¬ panies develop portfolios of their products for use in printed catalogs or on web sites? Photographers take pictures of people, events, and products. Photographers often specialize by topic. Areas of specialization include news, commercial, fine arts, por¬ trait, or special event photography'. EMPLOYMENT OUTLOOK • Average growth is anticipated. • Competition for positions is fierce as many people find diis field appealing. • Individuals who keep current with technological changes in equipment and processing will have the most opportunities. JOB TITLES • News Photographer • Children’s Photographer • Soft Goods Photographer • Online Photographer • Event Photographer • Strong interpersonal skills are required—especially for portrait photographers who work with a diverse client base. • Independent photographers should be Internet savvy to facil¬ itate direct marketing to clients. • Strong computer skills are needed for digital photo manipulation. What's it like to work in Audio- Video Technology On Sunday afternoon, Keisha, a self-employed freelance photographer, went to a local park to take a combination of candid and posed pictures for a family reunion. Sunday evening Keisha loaded the family reunion photos on her web site. Although Keisha charged a fee for taking photos at the reunion, she was able to generate additional revenue when family members purchased either individual photos or custom¬ ized albums. Monday morning Keisha met with a newly engaged couple who were potential clients. After discus¬ sing the logistical details of the wedding, Keisha showed the cou¬ ple a few albums from prior wed¬ dings. She then walked the couple through her web site. By providing digital copies of the photos online, categorized by various stages of the wedding, it was easy for cou¬ ples to review photos. Album view¬ ers could simply click a tab like “Ceremony” or “Reception” to view the photos of most interest. • Portrait Photographer NEEDED SKILLS • Creativity and a solid under¬ standing of the photographic process are essential. What about you? Would you like to help a variety of individuals record special events through the use of photography? 328 Chapter 11 Human Resource Management greene_0538446145_chl 1, 12/21/7, 19:58, page: 329 Business plans are an effective tool for evaluating, organizing, and selling a new business concept. A well-developed business plan can be a key component for a successful business startup. Participants must demonstrate an understanding and mastery of the process required in developing and implementing a new business venture. The project may be completed by teams of two to three members. The business plan must include the following sections: Executive Summary, Com¬ pany Description, Industry Analysis, Target Market, Competitive Analysis, Marketing Plan and Sales Strategy, Operations, Management and Organization, Long-Term Development, and Financials. Many business plans also include copies of key supporting documents, such as certifications, licenses, tax requirements, and codes, in an appendix. Proposals may describe a proposed business venture or a current business operation. The business idea must be currently viable and realistic. The Build Tour Business Plan Project that you have been working on could be used in this competitive event. Teams have seven minutes to present their business plan and to describe the project and results obtained. Visual aids and samples specifically related to the proj¬ ect may be used in the presentation. Judges have three minutes to ask questions following the presentation. PERFORMANCE INDICATORS EVALUATED • Design and conduct a marketing research study. • Prepare a written proposal for a new business based on the research. • Request financing for the proposal from a venture capitalist. • Demonstrate effective communication skills. • Derive facts from data, findings from facts, conclusions from findings, and recommendations from conclusions. • Demonstrate critical thinking/problem-solving skills. • Prioritize time and meet deadlines. • Identify the target market and the competition within the market area. • Demonstrate die ability to be an effective team participant. • Develop a concept from an idea to an actual proposal. Go to the FBLA web site for more detailed information. Think Critically 1. Why must the business proposal cover possible risks? 2. What target market demographics are important to research? 3. Why must the team present a strong work ethic? 4. Why should the team conduct marketing research before making the presentation? www.fbla.org Winning Edge 329 greene_0538446145_ch 12, 12/21/7, 20:10, page: 330 12.1 Business Risks school.cengage.com/entre ‘preneur/i'deas 330 12.2 Insure Against Risks greene_0538446145_ch 12, 12/21/7, 20:10, page: 331 IDEAS IM ACTIONJ Growth Is Risky S cott Alterman earned money at an early age by starting several small businesses in high school. After college, Scott joined his brother, Greg, who was running Gagwear, a small company in Atlanta that served the corporate market with customized apparel. The Alterman brothers began manufacturing edgier and higher-quality apparel than what was typically offered in their target market. They started Scott Alterman, The Icebox with caps that included their own label with a phone number on them. They took a risk by importing thousands of caps before they had sold one. Their customers took notice. Ironically, they had many inquiries from competitors wanting to buy the blank hats, so they decided to start a "blanks" division. This was the beginning of Alternative Apparel, the wholesale division. Scott concentrated his efforts on Gagwear, while Greg developed Alternative Apparel. Gagwear's customer base was small to medium-sized corporate cus¬ tomers. Scott wanted to grow Gagwear by calling on retailers and larger customers. So another company, The Icebox, a full-service advertising- specialty company serving small to medium-sized companies, was born. The Alterman brothers brought in a partner, Jordy Gamson, to run The Icebox. Later, Scott and Jordy decided to merge Gagwear and The Icebox divisions and operate both under The Icebox name. Greg is now running Alternative Apparel while Scott and Jordy run The Icebox. Meanwhile, Alternative Apparel had begun to experience serious growth. The decision was made to completely separate Alternative Apparel and The Icebox to let them grow properly. The businesses quit sharing employees, and each got financing to evolve on their own. The growth of The Icebox did not come without risks. With a $2 million note for his new building along with a $1.2 million line of credit, Scott faces financial risk. He also faces risks by extending credit to cus¬ tomers. Because he wants to be customer-friendly, Scott sometimes extends credit to customers other businesses would consider too risky. On the other hand, now that The Icebox is a separate company, Scott has eliminated some of the risks associated with the production side of his business. Rather than incur the financial risks of buying and repairing equipment and hiring production employees, The Icebox uses contract companies for screenprinting and embroidery. What do you hnow? What unmet need did the Alterman brothers uncover? How is Scott taking a risk by extending credit to customers? Why is contracted work less risky for The Icebox? Scott Alterman greene_0538446145_ch 12, 1/17/8, 15:20, page: 332 What if disaster strikes? "Kristin," Ty asked his partner, "what do you think would happen to our web hosting business if our computers or computer data were stolen or hacked into?" "Wow, Ty, we've never really thought about that. We just come in every day and do our work. We do back up our work periodically, but we just put the CDs in our file cabinet." "I know," Ty responded, "I started thinking about it after I read about a business that had all of its computers stolen one night. And I realized we have no emergency plan in place." "We sure don't, but I bet we will have something figured out by tomorrow!" Kristin said. Work as a Team What risks do you think Ty and Kristin would face if all their computers were destroyed or computer data were compromised? What steps do _ you think they should take to be prepared Businesses must address computer in case this should happen? security risks. Dealing with Business Risks As an independent businessperson, you will face many risks. Risk is the possibility of some kind of loss. Risks can be categorized as human risk, natural risk, and economic risk. Risk management is taking action to prevent or reduce the possibility of loss to your business. You can avoid risk, assume risk, or transfer risk. Identifying Risks Human risks are those caused by the actions of individuals, such as employees or customers. Examples include shoplifting, employee theft, robbery, credit card fraud, and bounced checks. Natural risks are caused by acts of nature. Examples are storms, fires, floods, and earthquakes. The occurrence of any of these could bring about tremendous loss to a business. Economic risks occur because of changes in business conditions. 332 Chapter 12 Risk Management PhotoDisc/Getty Images greene_0538446145_ch 12, 12/21/7, 20:10, page: 333 Preparing to Face Risks As an entrepreneur, you must be prepared to face all kinds of risks. You will need to decide the best strategy for dealing with risks. You may decide to avoid the risk. For example, if you think a product you are developing will not meet market needs, you may decide to avoid financial risks caused by low sales by halting production of the product. You may decide to assume the risk if you determine the risk is low. If your market research indicates the product you are developing will be successful with your target market, you will most likely pro¬ duce and sell the product even though there is still a chance of lower sales than expected. Transferring the risk is another option. You will be able to protect yourself against the financial losses from some risks by purchasing insur¬ ance. Insurance transfers the risk of financial loss to the insurance company. You never know when a loss may occur, but you should have a plan of action in place when it does. When Hurricane Katrina struck New Orleans in 2005, many business owners were not prepared for the loss of property and income that occurred. You need a plan in place so that if something does happen, you can recover and restart business operations quickly. To prepare for risks, you should do the following: 1. Determine what can go wrong. 2. Develop a plan. 3. Communicate your plan. Develop Your Reading Skills As you read, use the SQ3R method: • Survey the chapter to get an idea of what you will be reading. • Make a list of Questions about the chapter that come to mind as you survey. • Read the chapter. • Recall what you have read. • Review the material by discussing it with a classmate. DETERMINE WHAT CAN GO WRONG As a business owner, the first thing you need to do is conduct a risk assessment. A risk assessment involves looking at all aspects of your business and determining the risks you face. During this assessment, you should: • Learn the risks your business faces. • Decide how the risks would affect your business. • Prioritize the risks by the impact they will have on your business. DEVELOP A PLAN Once you have identified the risks that could affect your business, you should develop a written plan for dealing with them. When developing a risk management plan, you may have to comply with certain laws. For example, OSHA (Occupational Safety and Health Administration) requires businesses to have an evacuation plan for emer¬ gencies. There are many good sources available to help you establish an effective risk management plan. If you are developing an emergency action plan, the National Safety Council, a nongovernmental organiza¬ tion that promotes safety, is a good source. It recommends that the following items be included in your emergency action plan. • Chain of command information including names and job titles of the people responsible for making decisions, monitoring response actions, and recovering back-to-normal operations • The names of individuals responsible for assessing the degree of risk to life and property and who should be notified for different types of emergencies 12.1 Business Risks 333 greene_0538446145_ch 12, 12/21/7, 20:10, page: 334 Why is it important to have a plan for handling risks? % • Preferred method for reporting fires and other emergencies • Specific instructions for shutting down equipment and other busi¬ ness activities and procedures for employees who must shut down equipment before they evacuate the facility • Facility evacuation procedures including maps showing the best and alternate exit routes • Specific training for those responsible for responding to emergencies Be sure to have a recovery plan in place if you suffer a setback. A recovery plan will enable you to get back to business as quickly as possible. If you suffer a loss due to a fire, have a plan for temporarily relocating, getting replacement equipment, and retrieving lost data. If one of your suppliers is out of stock of a component needed in the production of your product, have another supplier lined up. A recov¬ ery plan will help you continue to meet your customers’ needs. COMMUNICATE YOUR PLAN Let your managers and employees know about your plan for handling risks. To ensure your plan is carried out properly, assign activities and responsibilities to the appropriate people. For example, to protect against the risk of a faulty product, assign the production manager the task of checking the quality of the finished product. If you plan to run an advertise¬ ment for an upcoming sale, make sure someone is responsible for placing the ad in the appropriate media at the appropriate time to avoid the risk of lost sales. If you want to protect your computer system from the risks of viruses and computer hackers, you can work with a computer security expert. To address the risks related to emer¬ gencies, provide training for all employees to show them what to do in the event of any type of emergency. Work with your managers and employees to be sure all risks are addressed. 334 Chapter 12 Risk Management greene_0538446145_ch 12, 12/21/7, 20:10, page: 335 Checkpoint What should you do to prepare for business risks? Types of Theft One of the biggest risks that businesses face is theft. Shoplifters and employees may steal your merchandise. Burglars may break into your business and steal your equipment. Customers may use stolen credit cards or write checks when they don’t have money in their account. Once you have identified the theft risks you face, you can determine what security precautions you need to take. Shoplifting Shoplifting is the act of knowingly taking items from a business with¬ out paying. Customers shoplift millions of dollars in merchandise every year. The problem exists in virtually every type of retail business. If you own a retail business, you will have to take steps to prevent or reduce shoplifting. Some of the things you can do include the following: 1. Instruct your employees to watch for customers who appear suspicious. 2. Hire security guards or off-duty police officers to patrol your store. 3. Post signs indicating that you prosecute shoplifters. 4. Ask incoming customers to leave their bags behind the counter. 5. Install electronic devices, such as mounted video cameras, electronic merchandise tags, and point-of-exit sensors, to detect shoplifters. Employee Theft Most employees are hard working and hon¬ est, but there are a few who will take things from your business, such as office supplies, equipment, merchandise, and even money. These employees can negatively impact your business financially. As an entrepreneur, you need to be aware of the possibility of employee theft. You need to take steps to prevent the prob¬ lem from occurring. You also need to know how to detect the problem and to handle it once it is detected. Some businesses, such as restaurants and retail stores, are more vulnerable to employee theft than others. If you own such a business, you may need to adopt the following procedures: 1. Prevent dishonest employees from join¬ ing your company. Screen job applicants very carefully. Consider using a company that specializes in verifying job applicants’ PET ^)kmark More than 135,000 convenience stores oper¬ ate in the United States. About 6 percent of all U.S. robberies occur at convenience stores. The Association for Convenience and Petro¬ leum Retailing is a trade association for convenience store operators. The group has created some robbery awareness/deterrence tips for members to use in their stores. Access school.cengage.com/entrepreneur/ ideas and click on the link for Chapter 12 to learn more about these tips. Which of the tips do you think would be most effective in deterring robbers? Explain. Why do you think greeting and paying attention to every cus¬ tomer who enters the store is an effective deterrent to crime? Do you think stores that stay open 24 hours a day are at greater risk for robbery? Why or why not? school.cengage.com/entrepreneur/ideas <b 12.1 Business Risks 335 greene_0538446145_ch 12, 12/21/7, 20:10, page: 336 2 . 3. 4. educational backgrounds and search¬ ing their criminal records, driver’s license reports, civil court records, and credit reports. Install surveillance systems. Often the mere knowledge that they are being monitored by a video camera deters employees from stealing. Establish a tough company policy regarding employee theft. Your company policy should detail the consequences of employee theft. Make sure that all employees are aware of the policy. How can a business owner prevent shoplifting? Be on the lookout. Watch for cash discrepancies, missing merchandise or supplies, vehicles parked close to loading areas, and other signs that something may be wrong. Keep an eye on employees who seem to work at odd hours, perform their jobs poorly, or complain unrea¬ sonably. Make inquiries if an employee has an unexplained close relationship with a supplier or customer or has a personal lifestyle that seems inconsistent with his or her salary. Robbery Almost all businesses are vulnerable to robberies. You can choose what is considered a safe area of town to locate your business to guard against being robbed. You can also install dead-bolt locks and burglar alarms. To limit losses in the event of a robbery, many businesses keep a minimum amount of cash in the cash register. Once more than a cer¬ tain amount is received, the cash is transferred to a safe. Some busi¬ nesses also use surveillance cameras, which deter prospective robbers from entering the business in the first place. Be aware that you may be _ robbed regardless of the number of pre¬ ventative measures you take. It is simply a risk of being open for business. Be your own boss You are the owner and manager of a diner located along a busy interstate highway. You do a good business with travelers passing through as well as locals who eat with you regularly. Recently, there have been several robberies dur¬ ing operating hours in nearby businesses. Your local customers are beginning to get a little nervous about coming to your business. Outline a plan to minimize your risk of robbery. Include ways to make your customers feel safe. Credit Card Fraud Business owners lose m ill ions of dollars every year because of stolen credit cards. If a purchase is made on a stolen credit card, a business may not be able to collect the money. To prevent stolen credit cards from being used to purchase goods, you can install an electronic credit authorizer. This machine checks to see if a credit card is valid. If the card has been reported stolen or if the cardholder has exceeded the credit limit, authorization will not be granted. 336 Chapter 12 Risk Management PhotoDisc/Getty Images greene_0538446145_ch 12, 1/17/8, 15:20, page: 337 Bounced Checks A bounced check is a check that is returned to you by the bank because the customer’s checking account has insufficient funds to cover the check amount. Bounced checks are also called bad checks. Preventing losses from bad checks is difficult. To minimize losses, you can establish a policy of accepting checks drawn on in-state banks only. You can also charge a fee if a customer writes a bad check to your business. Asking for identification, such as a driver’s license, can help you track down a person who writes you a bad check so that you can collect the money due. If bad checks are a serious problem in your area, you may decide not to accept checks at all. Checkpoint How can you protect your business from theft? p2.i Assessment THINK ABOUT IT 1. What are the categories of business risk? Provide three examples of each. 2. What are some steps that you can take to minimize employee theft? 3. You own a pizza shop. You suspect that one of your delivery peo¬ ple is charging customers more than what they actually owe and keeping the difference. How would you handle this situation? MAKE ACADEMIC CONNECTIONS 4. MATH At closing, the Old World Cafe's cash register receipts totaled $884. The cash in the register equaled $534, and the credit card slips equaled $237. How much of the proceeds are not accounted for? What might explain the difference? 5. COMMUNICATION Think about your school as if it were a busi¬ ness. How can your school identify and deal with the risks it faces? Using the Activity CD, open the activity "Risk Manage¬ ment Plan." Print a copy and complete the activity. Share your plan with the class. TEAMWORK Last year, the holiday season profits at Ray's Sporting Goods were reduced significantly because of shoplifting. Form teams and brain¬ storm ways to approach the problem this year. Put together a proposal containing your recommendations for Ray. Share your recommendations with the rest of the class. 12.1 Business Risks 337 greene_0538446145_ch 12, 1/17/8, 15:20, page: 338 A river runs through it Carlos thought he had found the perfect location for his new restaurant. He wanted to have a large outdoor patio with a great view, and this location had exactly what he wanted. The patio looked out over a river, and there were many beautiful shade trees. Carlos decided to talk to the former owner of the previous restaurant that had occupied the site. He told Carlos that the restaurant had flourished until the river flooded and caused extensive water damage. The pre¬ vious owner made the repairs but was never able to recover financially, so he went out of business. This concerned Carlos and made him wonder if this was really the ideal spot. Work as a Team What do you think Carlos should do? If he decides to locate here, what can he do to protect his Without taking precautions, some investment? businesses may be forced to close. Classification of Risk As a business owner, you are at risk from more than just criminal activity. A fire could destroy your building. An accident could injure an employee. A broken water pipe could ruin your inventory. A precaution you can take to protect against financial loss is to purchase insurance. A payment made to an insurance company to cover the cost of insurance is a premium. It is the price paid to cover a specified risk for a specific period of time. Business owners face many types of risk. The classifications of risk are based on the result of the risk, controllability of the risk, and insurability of the risk. Result of the Risk A pure risk presents the chance of loss but no opportunity for gain. If you have a vehicle that is used in your business, every time it goes 338 Chapter 12 Risk Management PhotoDisc/Getty Images greene_0538446145_ch 12, 12/21/7, 20:10, page: 339 did you KNOW? What are some ways that a jewelry store could control the risks it faces ? out on the road there is the risk of an accident. If there is an accident, loss will likely be suffered. However, if an accident is avoided, there is no opportunity for gain. A speculative risk offers you the chance to gain as well as lose from the event or activity. Investing in the stock market is a good example of a speculative risk. When you invest money, you have the chance to make money if the stock price rises. However, if the stock price falls, you risk the chance of losing money. Controllability of the Risk A controllable risk is one that can be reduced or possibly even avoided by actions you take. Installing a security system in your business could lessen the risk of your business being robbed. An uncontrollable risk is one on which actions have no effect. The weather cannot be controlled, but it can have a tremendous effect on some businesses. If a hurricane hits a resort town, a dramatic decrease in business and loss of profit will result. But if the weather is sunny and warm, tourism will flourish and business owners may make a profit. Insurability of the Risk A risk is an insurable risk if it is a pure risk faced by a large number of people and the amount of the loss can be predicted. Buildings that house businesses are susceptible to fire. Nearly all businesses face this risk, and past statistics can help insurance companies predict the amount of loss and percentage of businesses that will suffer fire losses annually. Insurance companies can sell fire insurance to help cover losses. The premiums of all those insured are pooled and used to help those who incur losses. If there is a risk that a loss will occur and the amount of the loss cannot be predicted, the risk is uninsumble. An insurance company would have no way of determining the premiums to charge or the amount of funds to pool to cover unpredictable losses. A business may 12.2 Insure Against Risks 339 greene_0538446145_ch 12, 12/21/7, 20:11, page: 340 move to a new location, and customers may not follow. The loss of income that could result cannot be predicted and, thus, is not insurable. Checkpoint What is the difference between a pure risk and a speculative risk? Uninsurable Risks Sometimes things happen in the business world that are not covered by insurance, which can be very cosdy to a business. Insurance does not cover risks that cannot be reasonably predicted or for which the financial loss to the business cannot be calculated. These risks are tied to economic conditions, consumer demand, competitors’ actions, technology changes, local factors, and business operations. Economic Conditions Managers must constandy study economic conditions. Changes in economic conditions can result from an increase or decrease in com¬ petition, shifts in population, inflation or recession, and government regulations. World events can also result in economic changes. The events of September 11, 2001, caused a dramatic downturn in the U.S. economy, resulting in major cutbacks and layoffs by businesses. This decreased the amount of disposable income for many Americans, which resulted in many entrepreneurs losing their businesses. When the economy takes a downward turn, a business must respond quickly by cutting production and expenses. Consumer Demand Competitors' Actions Business is competitive. As a business owner, you must be aware of your competitors and their actions. A major advertising campaign or a drop in price by your competitors may result in a change in your volume of sales. You must be ready to respond to actions by your competitors to minimize the risk to your business. © How might the actions of one computer manufacturer pose a risk to another computer manufacturer? Businesses produce products and services that they think consumers want to buy. Before going into business, business owners must research consumer needs and wants. If they can predict a change in demand, they may be able to profit by produc¬ ing and selling a new product or ser¬ vice. However, if consumer demands change suddenly, the company may end up with products in their inven¬ tory that they cannot sell for a profit. 340 Chapter 12 Risk Management Digital Vision/Getty Images greene_0538446145_ch 12, 12/21/7, 20:11, page: 341 Technology Changes Changes in technology bring about changes in business. As a business owner, you need to stay up to date on technology trends. Evaluate new technology and see if it can help your business. Updates to tech¬ nology can be a major expense but can alternatively provide efficiencies and help you serve customers better. If customers view your business as outdated, you may lose customer loyalty and sales to your competition. Local Factors Businesses can suffer due to activities that occur in their local commu¬ nity. If there is an increase in local taxes or a change in local business regulations, it can affect your business. If a local government makes an improvement to the infrastructure, such as a road or utility improve¬ ment, it can help your business in the long term. In the short term, it may result in a loss of business because ongoing construction could cause customers to detour around your business. Business Operations The management of a business contributes directly to the success or failure of the business. A business that is poorly managed can have high employee turnover, poor customer service, higher expenses, and other problems. Poorly trained employees can also cause operational problems. Managers and employees must work together to ensure the success of the business. Checkpoint Why are some risks uninsurable? Types of Insurance Purchasing insurance is one of the best ways you can prepare for the unexpected. There are many options for insurance. You will have to examine the risks you identify and their potential impact on your busi¬ ness to determine if you need to insure against the risk. Business Insurance Insurance companies selling business insurance offer policies that com¬ bine protection against all major property and liability risks in one pack¬ age. These coverages are also sold separately. Package policies are created for businesses that generally face the same kind and degree of risk. Large companies might purchase a commercial package policy or customize their policies to meet the special risks they face. Many small and mid¬ sized businesses purchase a package known as a business owner’s policy (BOP). Business owner’s policies typically include the following: • Property insurance This type of insurance provides coverage for damage to buildings and the contents inside the buildings, such as furniture, fixtures, equipment, and merchandise owned by the business. 12.2 Insure Against Risks 341 greene_0538446145_ch 12, 1/15/8, 17:42, page: 342 * • Business interruption insurance This type of insurance covers the loss of income resulting from a fire or other catastrophe that disrupts the operation of the business. It can also cover the extra expense of operating out of a temporary location. • Liability protection This type of insurance covers your company’s legal responsibility for the harm it may cause to others as a result of what you and your employees do or fail to do in your business opera¬ tions. Harm may involve bodily injury or property damage due to defective products, faulty installations, and enors in services provided. BOP’s do not cover auto insurance, workers’ compensation, or health and disability insurance. They also do not cover professional liability, which involves claims of negligent actions by business profes¬ sionals such as doctors. You will need separate insurance policies to cover these items. Life Insurance Life insurance is paid in the event of the death of the insured. It is intended to provide financial support for families should the income earner die. A business owner may buy life insurance so that his or her heirs have enough money to continue the business. Other Kinds of Insurance Other types of insurance that you may want to purchase include flood, crime, and renter’s insurance. Flood protection is not standard with property insurance, so you may have to purchase it separately. Crime WHAT WENT WRONG * Goodbye, Gorgeous! Edie opened her beauty salon "Hello, Gorgeous!" by taking out a $40,000 loan to help pay for the renovations and equipment she needed to pur¬ chase. She had two hair stylists working in the salon as contract employees. They paid her monthly rent to use space in the salon. The com¬ bined rent they were paying helped cover about 50 percent of the monthly operating expenses. Edie took out a business owner's insurance policy for $20,000 worth of coverage. Edie was making enough money to pay her monthly expenses, but not enough to save at this point. After six months of being in business, there was a fire in the salon. Hello, Gorgeous! was com¬ pletely destroyed. The cause of the fire was a curling iron that Edie left on over the weekend. Edie still owed over $35,000 on the business loan she obtained. Her contracted employees immediately moved to another salon. Suddenly, Edie was all alone without any income or sav¬ ings and not enough insurance to cover her loan. She was forced to close Hello, Gorgeous! and take a job working at another salon to pay off her debt. Think Critically 1. Do you think Edie was prepared to deal with business risks? 2. What mistake did Edie make when purchasing insurance? Don't trim costs by buying less insurance coverage than you need. 342 Chapter 12 Risk Management PhotoDisc/Getty Images greene_0538446145_ch 12, 12/21/7, 20:11, page: 343 insurance protects against losses resulting from crime, such as robbery, computer fraud, or employee theft. Renter’s insurance covers the con¬ tents owned by the renter inside the leased space. The actual owner of the building would purchase insurance for the building. Depending on your business and its location, you may or may not decide to purchase these additional kinds of protection. Checkpoint What types of insurance can you purchase for your business? Buy Insurance Buying insurance can be complicated. Is it pos¬ sible to have too much or too little insurance? A good insurance agent can help you make decisions about insurance coverage. Choose an Insurance Agent Insurance is sold by agents. An agent can be independent and represent many different insur¬ ance companies or work for a single insurance company. Before selecting an insurance provider, talk to an agent who represents more than one insurer or ask representatives of several different companies to talk with you about their policies. The market for insurance is competitive, so many agents will be eager to sell you insurance. To get the best price, contact a few agents and compare prices and policies. Then consider how you feel about the agents. Remember that the person who sells you the policy will be involved in processing your claim should you ever need to collect on your policy. It is therefore important to choose someone whom you trust. You may already have an agent you trust with your car insurance or other types of insurance. That agent can be a good starting point in your research. Why is it important to "shop around" for an insurance agent? Determine How Much Coverage You Need To determine the kinds and amounts of coverage you need, start by mak¬ ing a list of the property you own. Include equipment, inventory, vehicles, and other significant assets, and put a value next to each. Then think about the kinds of risk you would like to insure against. If, for example, your business is located near a river that could flood, you may want to purchase flood insurance. If you live in a low-crime area, you may decide against purchasing insurance that covers break-ins. Understand, however, the implications of not having insurance if something should happen. The next step is determining how much coverage you need. Be sure you have enough insurance to cover any and all debts you may have incurred while starting your business. Li-Li Tang, owner of Computer Systems, has a $50,000 bank loan on her business, as well as two small 12.2 Insure Against Risks 343 # PhotoDisc/Getty Images greene_0538446145_ch 12, 1/17/8, 15:20, page: 344 loans for $5,000 each. She wants to get at least $60,000 worth of prop¬ erty insurance to cover these outstanding debts in the event of a problem. Insurance agents earn commissions on the amount of coverage they sell. To make sure you need all the coverage your agent suggests, talk to other business owners in your area or counselors from SCORE or the SBA. Checkpoint How can you determine how much insurance you need? THINK ABOUT IT 1. What factors determine the classifications of risk? 2. Provide three examples of risks that are uninsurable? 3. Tim Stanton has just opened a surf shop on the beach in South Florida. He has purchased property insurance to cover possible losses against his building, fixtures, equipment, merchandise, and other assets. Against what additional risks should he con¬ sider insuring his business? 4. What factors should you consider when choosing an insurance agent? MAKE ACADEMIC CONNECTIONS 5. MATH You have taken out a loan for $50,000 to start your busi¬ ness. As a condition of the loan, your bank requires you to carry property insurance for at least the amount of the loan. Your property is valued at a total of $100,000. Your agent recommends you carry property insurance covering at least 80 percent of your property's value. If annual insurance premiums are $15 per $1,000 of coverage, how much will you pay for insurance to satisfy your bank loan requirement? How much will you pay if you follow your agent's recommendation? 6. COMMUNICATION You have just opened an insurance agency that specializes in insuring businesses. Write a sales letter to prospective customers introducing yourself and your services. Choose a partner. One partner should assume the role of an entrepre¬ neur who just took out a loan to open a roller skating rink. The other should play the role of an insurance agent who must educate the new owner about the types of insurance available. Working together, use the Internet and other resources to research information about the types of insurance a skating rink should carry. Then role play the con¬ versation between the insurance agent and the business owner. 344 Chapter 12 Risk Management greene_0538446145_ch 12, 12/21/7, 20:11, page: 345 Focus on Small Business • Identify risks associated • trade credit with credit. • consumer credit • Explain how to manage • Federal Employees' risks at work. Compensation Act • Describe strategies to (FECA) reduce the risks of doing business internationally. Risks are everywhere! Dale realized that there were many risks he would face as a business owner. He wanted to learn as much as he could about risks before he opened his new sporting goods business. So, he called his friend Monica for some advice. Monica had been in business for almost two years and had gained valuable business experience. "Dale, it's good that you came to me," Monica replied. "I've got lots of information for you. I know you have - , learned about insurable and uninsurable risks, but there are some hidden risks you might not think about. I thought I could increase sales and provide customers a convenient service by offering them a store credit account, but you wouldn't believe how many people never paid the first bill! Then, my maintenance employee fell off of a ladder while painting. He had to spend two weeks in the hospital. I could go on and on." "Yes, Monica, I think you have given me plenty to think about. There are many more risks to con¬ sider than I was aware of!" Dale replied. Work as a Team What do you think Dale can learn from Monica's experiences? What should Dale do to minimize the risks Monica mentioned? Beware of hidden risks. Risks of Credit As a business begins operation, there will be costs that will be too expensive for the entrepreneur to pay all at once. Credit makes it possible for the entrepreneur to make these costly purchases. The business owner will also have to make decisions about extending credit to customers. Extending credit can help increase sales. How¬ ever, a business will need to decide if extending credit will result in an overall increase in income. Although credit is useful to a business when buying or selling, there are risks involved. It is important for you as an entrepreneur to understand these risks. 12.3 Other Risks 345 greene_0538446145_ch 12, 12/21/7, 20:11, page: 346 Why would a business offer a credit card if it risks not getting paid? Types of Credit Credit can be categorized according to whom the credit is offered. Like bank loans, the credit a business offers its customers can be secured or unsecured. TRADE CREDIT When one business allows another business to buy now and pay later, it is offering trade credit. Many purchases a busi¬ ness owner will make from other businesses will be made with trade credit. The negotiated price of products purchased on trade credit will often be higher than the cash price. This is necessary because there is a lapse of time that occurs from when the sale is negotiated to when the products are actually delivered. Because of this delay in receiving payment, the supplier charges a higher price. As the business owner, you will need to be sure that you have the money to cover your expenses when they are due in order to protect your credit record. On March 29, Raul Gomez places an order with Bear Creek Embroidery for three-dozen golf shirts with his company logo embroi¬ dered on them. On April 1, Bear Creek Embroidery negotiates the pur¬ chase of three-dozen shirts from Alternative Apparel on credit. The shirts are delivered to Bear Creek on April 15. Two weeks later, Bear Creek ships the shirts with the logos to Raul. It takes one week for the shirts to arrive and one week for Raul to process and pay Bear Creek’s invoice. The trade credit that Alternative Apparel extends to Bear Creek allows 60 days for payment. This enables Bear Creek to receive the shirts, add the logo, ship the shirts, and receive payment from Raul in time to send payment to Alternative Apparel. CONSUMER CREDIT When a retail business allows its customers to buy merchandise now and pay for it later, it is offering consumer credit. Consumer credit is offered in two basic forms: loans and credit cards. A loan gives the individual a lump sum of money to spend and pay back 346 Chapter 12 Risk Management greene_0538446145_ch 12, 12/21/7, 20:11, page: 347 over time with interest. If a loan is secured, it is backed by something of value that can be taken and sold if the loan is not repaid. One type of secured loan offered by retail establishments is an installment loan that is paid back with interest in monthly equal amounts over a specified period of time. Many cars and home appliances are financed with installment loans with the financed item serving as the collateral. An unsecured loan is granted based on the credit history of the individual. This type of loan is not backed by collateral. Most credit cards are considered unsecured loans. When a business offers its own credit card to customers, it will not receive payment for a month or more after the sale is made. Therefore, the business will need to make other arrangements to ensure it has money to cover expenses associ¬ ated with the sale of the merchandise. If the customer does not pay, then the business owner can attempt to collect the money or take back the goods that were purchased. Collection difficulties are one reason a business chooses to accept credit cards that are issued by banks or credit card companies, such as Visa, Discover, or MasterCard. The credit card company will pay the business for the amount of the purchase. The business is charged a fee by the credit card company that is a percentage of total credit sales. The credit card company is then responsible for collecting the amount charged from the customer. If Raul Gomez offers a credit card to his customers, then Raul is responsible for collecting payment from the customer. However, if the customer pays with a Discover card, Mark gets his money from Discover, and Discover bears the burden of collecting payment from the customer. Credit Policies Once an entrepreneur decides to offer credit, policies must be estab¬ lished to help reduce risks. Policies should specify to whom credit will be extended, what products may be purchased on credit, and what the terms of the credit will be. The terms include the amount of credit, the rate of interest charged, and the length of time before payment is required. It will be very important for the entrepreneur to determine what type of customer will be approved for credit. Most businesses offering credit cards have customers complete a credit application to determine whether they are creditworthy , or able to pay. If credit is extended to individuals who are not able to pay, the business loses all the money invested in the product. If the product is recovered, money will still be lost because used merchandise cannot be resold at the original sell¬ ing price. Some things to consider in determining who is creditworthy include the following: • Previous credit history • Employment record • Assets owned • Money available for making payments (checking and savings accounts) • Financial references 12.3 Other Risks 347 © PhotoDisc/Getty Images greene_0538446145_ch 12, 12/21/7, 20:11, page: 348 Collection procedures must be established and followed carefully. This will ensure that customers are billed on time. Procedures should state how to handle customers who do not pay on time or do not pay at all. UNCOLLECTIBLE ACCOUNTS Businesses and credit card companies usually charge the customer interest on the balance due to cover the cost of the credit service. When accounts are paid on time, the inter¬ est is income for the business. However, even though a business is careful about deciding which customers are creditworthy, there is still the risk that some customers will not pay their account balances. These uncollectible accounts are an expense to the business and decrease net income. Checkpoint How can a business owner reduce the risks of offering credit? Risks in the Workplace Different occupations have different risks associated with them. Due to the nature of the work that is performed, some workplaces are con¬ sidered to be dangerous. Some of the most dangerous occupations in America include timber cutters and loggers, commercial pilots, con¬ struction and iron workers, refuse collectors, farmers and ranchers, roofers, electrical power line installers, and cab drivers. Other occupa¬ tions, although not classified as dangerous, do have risks associated with them. Individuals who work in hospitals can be exposed to viruses and bacteria that can cause disease or infection. Night clerks can be a target for a robbery. Even using a computer for long stretches of time can cause injury. Repetitive stress injuries result from performing the same activity repeatedly for long periods of time. They can be very painful and cause disabling injuries. With some exceptions, any harm suffered by employees at the workplace is considered to be a work- related injury. Why are employers responsible for carrying insurance on their employees? Federal Employees' Compensation Act The Federal Employees’ Compensation Act (FECA) is a law that provides benefits to employees who have suffered work-related injuries or occupational diseases. These benefits include payment of medical expenses and com¬ pensation for lost wages. The FECA also pro¬ vides for payment of benefits to dependents of employees who die from work-related injuries or diseases. Employers are required by law to carry insurance to protect against these risks. This insurance is called workers’ compensation. The 348 Chapter 12 Risk Management greene_0538446145_ch 12, 12/21/7, 20:12, page: 349 expense for this insurance is entirely the employer’s responsibility. No part of this insurance expense is paid by an employee. Workers' Compensation Workers’ compensation laws vary from state to state but generally provide for the payment of medical bills, a percentage of lost wages, and vocational retraining if an employee is unable to resume his or her former job. Workers’ compensation will also pay a death benefit to compensate survivors if an on-the-job injury results in the death of a worker. Once employees accept workers’ compensation benefits, they cannot sue their employer unless there is proof that the employer knew about the unsafe condition causing the accident and did not do anything to fix it. In some states, small businesses are exempt from workers’ com¬ pensation requirements, and employees working for them are not covered. Also, business owners, independent contractors, occasional workers, domestic workers in private homes, agricultural workers, and unpaid volunteers are not covered by workers’ compensation in some states. Employers must notify employees of their right to compensation for work-related injuries and diseases. Employees must also be notified that they cannot be fired for filing a claim and that workers’ compen¬ sation premiums cannot be deducted from their pay. Most employers display a poster in the workplace containing this information. COVERAGE PROVIDED BY WORKERS' COMPENSATION Medical expenses for employees injured on the job should be covered by workers’ compensation. If an employee is out of work for more than a few days, a percentage of lost wages may also be covered. Lost wage payments are usually about two-thirds of the employee’s income, not to exceed state limits. If an employee is left permanendy disabled from a work-related injury, the employee may be eligible for a lump-sum payment or long-term benefits. This depends on whether the employee can perform other work that pays as well as the former position. If a worker cannot earn as much as before, the worker may be eligible for a long-term payment. If the worker is completely and permanendy disabled, the worker may be eligible for Social Security benefits. INJURIES NOT COVERED Although laws vary from state to state, generally, the following injuries would not be covered by workers’ compensation insurance: • Injuries individuals afflict on themselves • Injuries suffered under the influence of alcohol or illegal drugs • Injuries suffered during a fight that the injured employee started • Injuries suffered while disobeying orders or violating employer policy • Injuries suffered while committing a crime • Injuries suffered while not on the job 12.3 Other Risks 349 greene_0538446145_ch 12, 12/21/7, 20:12, page: 350 FILING A CLAIM There are certain steps that must be followed in the event of an injury or illness at the workplace. Be sure that you are fam il iar with these steps so that you know what you and your employee should do in the event of an accident at your business. 1. The injured employee must notify the employer. The employer must be notified immediately after the accident. Check your state law to determine the time limit that employees have for reporting an accident or illness. 2. The employee must follow doctor’s orders. If the employee does not follow the doctor’s orders, it could be grounds for denying work¬ ers’ compensation coverage. The doctor should put any special require¬ ments for the employee in writing. Be sure the employee goes to the doctor that handles the workers’ compensation cases for your business. 3. The employee must file the claim. The employer must provide the employee with the proper forms, but it is the employee’s responsibility to file the claim. Checkpoint What is the purpose of workers' compensation insurance? Risks in International Business When you start working with businesses and customers in other coun¬ tries, there are other risks that you face. If you ship an order without receiving payment first, you risk never being paid for the order. It will be much more difficult for you to collect the payment from a business in another country. Businesses in other countries may want to pay you with their country’s currency. You will have to consider the sta¬ bility of the value of their currency against the American dollar before agreeing to payment terms. Doing business in a foreign country can be difficult. You will encounter problems that you probably have not run into in the United States. These new challenges will arise for several reasons. 1. You may not speak the language of the countries you are tar¬ geting. If you cannot communicate with buyers or consumers, how can you sell your service or product? Misunderstandings are likely to occur. 2. You may not be familiar with the laws, customs, and cultures of foreign countries. In the United States, looking direcdy at people while speaking to them is a sign of respect. In some other countries, it is a sign of disrespect. If you fail to recognize these differences, you risk offending those with whom you are trying to do business. 3. You may have to change your products or services to meet the needs of new markets. Consumers abroad have different needs and wants than do consumers in the United States. What sells in this country will not necessarily appeal to foreign customers. You will need to consider this when you sell products or services in other countries. 350 Chapter 12 Risk Management greene_0538446145_ch 12, 12/21/7, 20:12, page: 351 4. Your travel and shipping expenses may be high. International flights can be very expensive. Sending or receiving packages over¬ seas can also be cosdy. Strategies for Dealing with Global Risks If you decide to conduct business globally, you should develop a plan that oudines your goals and identifies your risks. Analyze the foreign target market and perform research to learn more about the risks of doing business abroad. Strategies recommended for dealing with the risks of international business include the following: 1. Seek government assistance to answer your questions about international business. Government agencies such as the Small Business Administration and the International Trade Administration can provide counseling, locate buyers overseas, and promote U.S. products and services. 2. Conduct business in many different countries. If you are doing business in only one country and something happens in that coun¬ try, such as political upheaval, you run the risk of losing all sales and profits. Famous M cr\/ Griffin A legend in his own time, the late, great Mervyn Edward Griffin Jr. has left his mark on the world. Griffin was not afraid to take risks during his career. He built a very success¬ ful empire because of the chances he took. Wheel of Fortune and Jeopardy are the creations of Merv Griffin. He even wrote the Jeopardy theme song. Griffin was multitalented as a singer, musician, actor, and televi¬ sion talk-show host. His game- show empire landed him on the Forbes list of the richest Americans. When he sold the rights to his shows to Columbia Pictures Televi¬ sion for $250 million, he was not interested in retiring. He went into real estate and other ventures to escape boredom. Griffin's talents were evident early in his life. His Aunt Claudia taught him to play piano at age 4. Soon he was staging shows on the back porch of the family home. He had a show every Saturday, recruiting the neighborhood kids to join him. He thought of him¬ self as a producer even then, assigning them to be stage¬ hands, actors, the audience, or all three! He quit college and got a $100-per-week job as a singer on the radio. His career in the entertainment field began there. He was introduced to game shows in New York and hosted several. Merv continued working until he died in August 2007. His son Tony summed up his life by saying, "He loved business and continued his many projects and holdings even while hospitalized." Why do you think creativity is an important attribute for entrepreneurs? Think Critically What moves in Griffin's career do you think were risky for him? 12.3 Other Risks 351 greene_0538446145_ch 12, 1/17/8, 15:20, page: 352 3. Work with local business partners. If you partner with a company that is located in the country you are targeting, your company will be better received by locals in that country. 4. Employ local management. If you hire managers from the country you are targeting, they will have a better understanding of the cul¬ tural and political scene of the country. They will be able to assist you in any product modifications or changes in business practices you need to make to work with the foreign market. 5. Learn about the other country’s culture. Research the country’s cultural customs and beliefs. Develop cultural sensitivity. Checkpoint I What are some of the challenges of competing internationally? i2.3 Assessment THINK ABOUT IT 1. What are the risks involved in using and extending credit? 2. Why are some workplace injuries not covered by workers' compensation insurance? 3. What are some strategies you can use to reduce the risks involved with international business? 352 Chapter 12 MAKE ACADEMIC CONNECTIONS 4. COMMUNICATION You witnessed a serious accident at your business. You need a detailed description of the accident for your insurance company. Write an account of the accident using clear, concise language. You must be objective about the accident and should not include your opinion about what happened. 5. MANAGEMENT You are planning to open a retail store that will sell home appliances and furnishings. Decide what type of consumer credit you will offer and develop a credit policy. Present your decisions to the class. Discuss the following. Many employers think workers abuse workers' compensation insurance. They may hire people to investigate workers who are on medical leave to determine if they are conducting them¬ selves in any way that is not consistent with the injuries they have claimed. Suppose a worker claims he has hurt his back and cannot work. If he is seen lifting heavy objects or climbing a ladder at his home, then the employer may have a case for discontinuing the employee's workers' compensation claim. Do you think it is ethical for employers to spy on employees? What can be done to keep workers from abusing workers' compensation insurance? Risk Management greene_0538446145_ch 12, 1/17/8, 15:20, page: 353 i ( Respect Cultural Diversity In today’s global economy, you will come in contact with all kinds of people. Many of these people will be from cultures different from your own. You may work with people of different cultures. You may also buy from and sell to people of different cultures. As an entrepre¬ neur, you need to appreciate different cultures for the following reasons: • You need to be comfortable with your customers. If you are open to other cultures, you can attract more customers. • People from different cultures may have differ¬ ent needs and wants. Understanding these can help you market your business more effectively. How can you develop good relationships with everyone you do business with? There are at least five things you can do to enhance these relationships: 1. Avoid stereotyping people. Don’t assume that all people from a particular ethnic or cultural group hold the same values and opinions, behave the same way, or like the same things. 2. Focus on similarities rather than differences. Most people, regardless of their culture, want the same things in life. 3. Learn about different cultures. Learning about a different culture will make you more comfortable around people from that culture. Learn how people in a different culture live and work. 4. Make friends with someone from a different culture. The friendship will help you begin to appreciate other cultures. 5. Try to understand and identify with other people’s feelings. Try to see the world through the eyes of people from different cultures. Try to understand cultural views that are different from your own. TRY IT OUT Before conducting business in another country, you will have to answer many questions to address the risks. Will your product sell well in another country or will you have to make modifications to it? What aspects of the country’s culture could affect your business? How can you learn about another country’s culture? Using the Activity CD, open the activity “Competing in the Global Economy.” Print a copy and complete the activity. Sharpen Your Entrepreneurial Skills 353 PhotoDisc/Getty Images 0538446145_ch 12, 12/21/7, 20:12, page: 354 Chapter 12 Assessment SUMMARY 12.1 Business Risk 1. To prepare for risks, you should (1) determine what can go wrong, (2) develop a plan, and (3) communicate your plan to employees and first responders. 2. Theft is one of the biggest risks faced by business owners. Types of theft include shoplifting, employee theft, robbery, credit card fraud, and bounced checks. Business owners can take precautions to prevent these risks. 12.2 Insure Against Risks 3. Classifications of risk faced by businesses are based on the result of the risk (pure or speculative), controllability of the risk (control¬ lable or uncontrollable), and the insurability of the risk (insurable or uninsurable). 4. Insurance does not cover risks that cannot be reasonably predicted or if the financial loss cannot be calculated. Uninsurable risks are tied to economic conditions, consumer demand, competitors’ actions, technology changes, local factors, and business operations. 5. You will have to analyze the risks your business faces to determine the types of insurance you should purchase. A typical business own¬ er’s policy (BOP) covers property damage, business interruption, and liability. Depending on your situation, you may also want to purchase life, flood, crime, or renter’s insurance. 6. Before committing to an insurance purchase, compare prices and policies and seek advice from experienced business owners. 12.3 Other Risks 7. Although useful to you as a business owner and your customers, credit has risks associated with its use. You must analyze the potential risks of credit to determine if it is wise for you to use and/or accept it. 8. Workers’ compensation insurance covers employees’ medical expenses and lost wages incurred as a result of workplace injuries and occupational illnesses. 9. To reduce international business risks, companies should seek government assistance, conduct business in many countries, involve local business partners, employ local management, and learn about the culture. What do you hnow now? Read Ideas in Action on page 331 again. Then answer the questions a second time. How have your responses changed? 354 Chapter 12 Risk Management greene_0538446145_ch 12, 12/21/7, 20:12, page: 355 VOCABULARY BUILDER Match each statement with the term that best defines it. Some terms may not be used. 1. The possibility of some kind of loss 2. Taking action to prevent or reduce the possibility of loss to your business 3. Looking at all aspects of your business and determining the risks you face 4. The act of knowingly taking items from a business without paying 5. A payment to cover the cost of insurance 6. A risk that presents the chance of loss but no opportunity for gain 7. A risk on which actions have no effect 8. A pure risk faced by a large number of people and for which the amount of loss can be predicted 9. When one business allows another business to buy now and pay later 10. A law that provides for benefits to employees who have suffered work-related injuries or occupational diseases 11. A risk that can be reduced or possibly even avoided by actions you take 12. A risk that presents the chance to gain as well as lose from an event or activity bounced check consumer credit controllable risk Federal Employees' Compensation Act (FECA) insurable risk premium pure risk risk risk assessment risk management shoplifting speculative risk trade credit uncontrollable risk REVIEW YOUR KNOWLEDGE 13. True or False? Businesses can avoid all possible risks by purchas¬ ing insurance. 14. Conducting a risk assessment involves all the following actions except a. learn the risks your business faces b. decide how risks will affect your business c. prioritize the risks by the impact they will have on your business d. communicate your plan 15. True or False? Credit card fraud is an example of an economic risk. 16. If there is a risk that a loss will occur and the amount of the loss cannot be predicted, the risk is_?._. 17. True or False? A credit card offered by a home furnishings cen¬ ter is an example of an installment loan. 18. Which of the following is not a risk associated with doing business in another country? a. language barriers b. different laws, customs, and cultures c. high travel and shipping costs d. all of the above are risks 19. A_?_plan will enable you to get back to business as quickly as possible after a disaster and help you continue to meet customer needs. Chapter 12 Assessment 355 greene_0538446145_ch 12, 1/18/8, 10:55, page: 356 20. Which of the following types of insurance would cover the cost to repair your office building if it were damaged by fire? a. property insurance b. business interruption insurance c. liability protection d. life insurance 21. A change in the way web sites are accessed that requires new, expensive computer equipment is an example of a risk related to a. economic conditions c. competitors’ actions b. consumer demand d. technology changes 22. Which of the following types of insurance would cover losses your business incurred as a result of selling a faulty product that injured someone? a. property insurance b. business interruption insurance c. liability protection d. life insurance 23. True or False? A speculative risk is classified as uninsurable. 24. True or False? The credit that a retail business extends to custom¬ ers is called trade credit because they are trading money for goods. 25. True or False? When you extend credit to a customer, you are guaranteed that you will receive payment for the goods or services sold. 26. True or False? All injuries that occur at work are covered by workers’ compensation insurance. 27. Which of the following is not a strategy for dealing with a global risk? a. conduct business in only one country to minimize the risk b. seek government assistance c. work with local business partners d. employ local management 28. True or False? If you are leasing a building for your business, you do not need to carry renter’s insurance because the owner of the building is required to carry insurance. APPLY WHAT YOU LEARNED 29. You plan to open a horseback riding training center with a horse boarding facility. Make a chart and list the types of risk you will face. Categorize the risks as human, natural, or economic. Classify risks as controllable or uncontrollable and insurable or uninsurable. If the risk is insurable, list the type of insurance that you could purchase to protect against the risk. 30. Make a list of accidents and injuries that workers in a hospital could experience. Write “yes” next to the accidents and injuries that will be covered by workers’ compensation insurance. Write “no” next to those that would not be covered. 31. You own a clothing boutique and have recendy expanded into catalog sales. Many of your products will be sold abroad. What cultural issues are relevant to your business? 356 Chapter 12 Risk Management greene_0538446145_ch 12, 12/21/7, 20:12, page: 357 MAKE ACADEMIC CONNECTIONS 32. MATH You are trying to decide whether to purchase security equipment for your business or hire a security guard. You research the cost of the security equipment you will need and find that it will cost $15,000 and has a useful fife of 3 years. You have looked into hiring a security guard through an agency and find that it will cost you $50 per hour to hire a guard for 3 hours per day. Calcu¬ late and compare the annual cost of each and decide which will be the most cost-effective for your business. 33. COMMUNICATION Interview a business owner in your com¬ munity to find out what type of controls the owner has in place for handling cash to minimize losses due to theft. Prepare a pre¬ sentation and share your findings with the class. WHAT WOULD VOU DO? Your business is growing and you recently hired five new employees. Your business has been exempt from paying workers' compensation insurance premiums, but with the addition of new employees, you will no longer be exempt. You do not agree with the workers' com¬ pensation program because of the added expense to your business. 1^. You are thinking about not paying the premiums. Would this be fair to your employees? What would happen if one of your employees had a serious injury on the job and you did not have workers' com¬ pensation insurance? V_ w build your Business Plan Project This activity will help you continue with the development of a busi¬ ness plan by outlining your risk management plan. Identify risks faced by your business and establish a plan for dealing with them. Describe how the business will prevent shoplifting, employee theft, robberies, credit card fraud, and bad checks. Research how much it will cost to buy special security equipment or hire a guard. Present your proposal to the class. Prepare to defend your strategies. Contact an insurance agent to obtain information on insuring your business. What types of insurance do you need? How much coverage should you buy? Research workers' compensation laws for your state. Explain how you will meet your responsibilities for these laws. What are some other cultures you will be exposed to in your busi¬ ness? Research one of these cultures and find out information about the lifestyle and business practices associated with this culture. What cultural issues will affect your business? How will you market your product or service to this and other cultures? Chapter 12 Assessment 357 greene_0538446145_ch 12, 1/18/8, 10:54, page: 358 Planning a Insurance Career in "A #nifter returning from the grocery, our neighbor came home to a big mess. The laundry he had tossed into the machine prior to leaving the house had been off- balance. During the spin cycle the water hose became loose and caused a huge water leak. Although he did his best to dry out the floors, he ultimately had to replace the hardwood flooring in the rooms bordering the laundry room. Fortunately his homeowners insurance covered the costs.” How do individuals and busi¬ nesses protect their assets from unexpected mishaps that result in financial expenses? How is insur¬ ance coverage matched to particu¬ lar levels of need? Insurance agents sell and ser¬ vice insurance policies. The agent is an intermediary between the insurance provider and the insur¬ ance buyer. Agents are responsible for explaining policies to clients and helping them obtain appropri¬ ate coverage for specific situations. EMPLOYMENT OUTLOOK • Slower than average growth is anticipated. • As insurance is a basic societal requirement, there will be a steady need for agents. • Agents who utilize both Internet efficiencies and automated claims processing should be able to expand their client base. JOB TITLES • Career Agent • Financial Services Agent • Licensed Sales Professional • Agency Specialist • Property & Casualty Underwriter • Strategy Director, Protection Business NEEDED SKILLS • As insurance policies are complex, a Bachelor’s degree, with a busi¬ ness or mathematics focus, is often required. • A state license is required to sell insurance. • Professional certification is avail¬ able to demonstrate competency in specialized areas. • Continuing education is often mandatory. What's it like to work in Insurance Narelle, an independent insurance agent, is comparing automotive insurance policies from a variety of policy providers for her new client—a young driver. As an inde¬ pendent agent, Narelle matches the needs of her clients to the policies that provide the best combination of rates and coverage. Narelle knows that by providing her young client with economical, effective coverage as well as courteous ser¬ vice, she can probably secure him as a new long-term client. After lunch, Narelle finishes the handouts she is preparing for tomorrow’s lunch seminar at a local Small Business Administration meeting. She is planning to discuss the appropriate types of coverage for each stage of business develop¬ ment. Narelle has learned that par¬ ticipation in professional meetings often results in valuable sales leads. As an independent agent, develop¬ ing new clients is essential to her ongoing success. What about you? Would you like to help individuals and businesses identify their risks and help them obtain the appropriate insurance coverage to protect their assets? 35B Chapter 12 Risk Management greene_0538446145_ch 12, 12/21/7, 20:12, page: 359 : ill !!■ jr RUSIMESS SERVICES MARKET1MG *OECA 'mmgle/M SERIES EVEMT Lincoln is a national award winning city that takes great pride in its landscaping. Beautiful Spaces is a landscaping company owned by one of the Lincoln city council members (Chris). Beautiful Spaces has con¬ tracted with Lincoln for the past several years to plant, mow, water, and maintain the medians. The company has a $400,000 annual con¬ tract for its landscaping services. Lincoln residents have not been happy with the work performed by Beautiful Spaces. The medians are not maintained, and many proj¬ ects are incomplete. Beautiful Spaces has blamed its delays on bad weather, a low supply of water, and a shortage of flowering plants. You are the city manager for Lincoln. You must meet with Chris to let him know that the city will not honor the contract with Beauti¬ ful Spaces because the company has not fulfilled its commitment. You must also work out an acceptable financial agreement that takes into account the inadequate and incomplete work. Based on the schedule outlined in the contract, Beautiful Spaces should have completed the project 60 days ago. The contract states that a $100 fine will be charged for each day of incompletion. Beautiful Spaces has been paid $150,000 for completion of one-fourth of the total project. You will meet with Chris to discuss an acceptable agreement for ending the contract and paying the city fines for incomplete work. You have ten minutes to determine your plan of action and ten minutes to explain your plan to the owner of Beautiful Spaces. Chris (the judge) can ask questions about your plan of action following your presentation. PERFORMANCE INDICATORS EVALUATED • Describe legal issues affecting businesses. • Describe the nature of legally binding contracts. • Demonstrate responsible behavior. • Demonstrate honesty and integrity. • Explain business ethics in product/service management. Go to the DECA web site for more detailed information. Think Critically 1. What is the conflict of interest in this case? 2. Why should Beautiful Spaces pay the city of Lincoln? 3. What compromise could the city propose to reduce the fines? 4. How can the city avoid this situation in the future? www.deca.org Winning Edge 359 greene_0538446145_ch 13, 12/21/7, 20:13, page: 360 for the Future 13.1 Growth Strategies school.cengage.com/entrepreneur/ideas 360 13.2 Ethical and Social Issues 13.3 Global Trends and Opportunities greene_0538446145_chl3, 12/21/7, 20:13, page: 361 n i IDEAS IM ACTION! Joseph Pascaretta, Alps Techno¬ logy and Alps Lawn Company Starting Young and Moving Up J oseph Pascaretta is a motivational speaker, private pilot, college student, and successful entrepreneur. He started his first business at the age of 11. Because of his young age, he faced many obstacles in establishing professional relationships. Members of the business community did not want to take him seriously. His first business was a web design company that he started with his friend, Aaron Dowen, who was the web designer. Joseph sold the web services to local businesses, including a car dealership, and Aaron built the web sites. The business grew steadily until 2003, when the market for web design services changed. So, Joseph changed the business and began to offer database integration services. His company, Alps Technology, purchased 3-million gigabytes of database service space and began offering its clients full-service database integra¬ tion, including IT support, database space, software consulting, and hard¬ ware integration. Today, Alps Technology employs 44 people, and most of these are college students who work from home. Joseph learned at an early age that success is about what you do differently. In 2002, Joseph was looking for a way to invest revenue from Alps Technology into another profitable business. He purchased a commercial lawnmower and began to offer landscaping services. Today, Alps Lawn Company has a client base of 60 residents and 21 businesses and has plans to expand into three other states. To visually show clients what their landscape project will look like, Joseph uses computer-aided design landscape software. He integrates his interest in flying into the business by offering aerial photography of the landscaping projects. Joseph attends the University of Michigan while continuing to run his two businesses. With two successful businesses already up and run¬ ning, Joseph could have decided to skip college, but he realized that a college degree is a valuable asset in today's business world. After college graduation, he plans to evaluate his options and see what opportunities are available. As an entrepreneur, he is always looking for new, innova¬ tive ways to reestablish himself in the business world. What do you fcnow? How do you think Joseph knew when to add new services to his web design business? Why is it important for Joseph to continue to offer new services to his customers? Why do you think business owners need to be aware of what is going on in the business world and be willing to change when necessary? 361 greene_0538446145_ch 13, 1/17/8, 15:26, page: 362 • market penetration • market development • product life cycle • prototype Know when to grow Mary Ardapple, owner of Apple's Bakery in Peoria, Illinois, has moved her business three times since she opened it in 1989. Her menu has expanded and now has three times its original offerings. She even makes her baked goods available to those outside the Peoria area through an online store. Mary is not content to conduct business as usual and is always looking for new opportunities. Currently, she is planning to add a health-conscious line of baked goods to her offerings. Throughout all the moves and expansions, Mary and her team have not forgotten the company's original motto, "Where smiles are made from scratch!" Work as a Team How do you think Mary has known when her business was ready to expand? Do you think it is important for Mary and her team to always remember their original motto? Determine When to Expand Sooner or later, you will consider expanding your business. Some businesses have difficulty growing. Others expand too quickly. To expand successfully, you will need to determine both when and how to expand. You will also need to control your growth. Before deciding to grow your business, be sure that all of your operations are functioning well. Unresolved operational issues will only get bigger and cause more problems when the business gets larger. You also need to be sure that you take care of your current customers when you begin growing your business. Remember, they helped you get where you are. You want them to feel comfortable 362 Chapter 13 Management for the Future PhotoDisc/Getty Images greene_0538446145_ch 13, 12/21/7, 20:13, page: 363 with the changes, knowing that their needs will continue to be met. Determining when to expand depends on two main factors: the condition of your business and the economic conditions in the market in which your business competes. Consider the Condition of Your Business How do you determine when it is time to expand your business? Some of the signs you should look for include the following: • Your business is recognized by your community and industry. • Your sales are rising. • You have a customer base that regularly buys from you. • You are hiring more employees and now have managers. • You need more space. Develop Your Reading Skills While reading, write notes highlighting the main ideas. At the end of each section, review what you have writ¬ ten and fill in any gaps. Focus on the important points, and support them with relevant details. Assess Economic Conditions If the condition of your business shows that you should expand, you should next analyze the economic climate that controls the business. You should ask the following questions: 1. How is the national economy doing? Are people worried about spending money, or are they spending freely? 2. What are the economic conditions in your industry or region? 3. Have the demographics of your market changed? 4. Is demand for your product or service expected to remain strong? 5. Does your business face new competition? Checkpoint What factors should you consider before deciding to expand your business? 4 Control Your Growth Growing rapidly may sound like a great thing for a business, but uncontrolled growth may be just as bad as no growth at all. Busi¬ nesses that grow too quickly often find that they don’t have the resources to support their growth. They can lack money, employees, supplies, and more. As a result, they often overextend themselves. Sometimes they are even forced to go out of business. Joshua King owned a successful bookshop, Pegasus Books. Excited over his success, Joshua opened a second shop, but he underestimated the costs involved in running a second store. The stress of managing two stores was overwhelming, and Joshua found he could no longer provide the personal service his customers wanted. After nine months, Joshua had to close his second bookstore. 13.1 Growth Strategies 363 greene_0538446145_ch 13, 1/15/8, 17:48, page: 364 Create a Plan for Growth To make sure that your business expands successfully, you will have to control its growth. This means you will need to come up with a plan for expansion that should include strategies for the following: • attaining measurable objectives and goals (examples are reaching sales goals, increasing your customer base, and opening another store) • hiring managers and supervisors • financing expansion • obtaining resources for expansion (capital, equipment, inventory, materials, and supplies) Checkpoint Why is it important to control the growth of your business? Choose a Growth Strategy You can expand your business in various ways. You can get more people to buy your products or services. You can expand into other geographic areas. You can also find new products and services to sell. WHAT WENT WRONG * Makeup Test Sarah-Jane Stevens founded Charisma Cosmet¬ ics. Her company targeted professional cosmet¬ ics dealers serving makeup artists in the film, TV, and theater industries. Charisma Cosmetics had an excellent reputation as a high-quality manufacturer, a loyal customer base, and a major share of the market. However, competi¬ tors were slowly chipping away at Charisma's customer base. To remain competitive, Sarah- Jane rolled out a new brand, Picture-Perfect by Charisma, in the fall of 1999. This brand was specifically designed to be sold in department stores. The new strategy angered the professional cosmetics dealers who were the core customers of Charisma Cosmetics. Their competitive advan¬ tage had been to provide better products that were not available elsewhere. With Charisma's Picture-Perfect brand on the market, they no longer had the same competitive edge. "We were determined to grow, and we strayed from our root value of 'don't be bigger, be better,'" Sarah-Jane said. Just eight months after getting into the department store market, Sarah-Jane got out. The company ended up los¬ ing hundreds of thousands of dollars in develop¬ ing and marketing the Picture-Perfect brand. Think Critically 1. What problems were created by the "Picture- Perfect by Charisma" brand? 2. How might Sarah-Jane have expanded without anger¬ ing her dealers? 0) cn to E a> § O o o -C Q_ © Consider the risks when growing your business. 364 Chapter 13 Management for the Future greene_0538446145_ch 13, 12/21/7, 20:13, page: 365 Penetrate the Market Market penetration is increasing market share for a product or ser¬ vice within a given market in a given area. If total sales for your target market are $500,000 and your business attracts 5 percent of that market, your sales will be $25,000. If you raise your market share to 15 percent, your sales will be $75,000. You can increase your market share by doing the following: • Increase your advertising. • Offer customers special deals, such as frequent-buyer cards, incentives to purchase, and discounts. • Offer superior customer service. Taking these actions will cost you money. You may spend more on advertising or incur the cost of giveaway items. But spending money now can pay off with larger profits in the future. Expand Geographically Geographic expansion occurs when you decide to market your service or product in another town, city, county, state, or country. Sheila Velez owns a business that builds sunrooms in the northern part of her state. To increase sales, Sheila recently began advertising through¬ out the entire state. She has already received calls from consumers 100 miles away who are interested in her product. Diversify with New Products or Services Market development is a strategy for expanding the target market of a business. A business expands its target market by diversifying, which means selling new products or services in addition to what it already offers. Sue Ann Rader owns a musical instrument store. Three years ago, she added a sheet music department. She reduced the inventory of instruments to make room for the inventory for the new depart¬ ment. Sheet music now contributes 25 percent of her annual profits. Businesses can fail if they diversify into the wrong areas. Use the fol¬ lowing guidelines to make sure that your business diversifies successfully. • Do not go into areas that you know nothing about. • Choose a product or service that complements what you already sell. • Avoid investing too much capital in new areas before you know if they will be profitable. • Don’t neglect your original product or service line. Sue Ann would like to open a cafe in her store. She would have to make room in her store to do so. Her lack of experience in run¬ ning a cafe and her concern about the effect on her main business convince her not to open it. . Checkpoint What are some ways you can expand your business? 13.1 Growth Strategies 365 greene_0538446145_ch 13, 12/21/7, 20:13, page: 366 Product Life Cycle and Development A business must constantly monitor the sales of products and develop new products. Consumer interest in most products will decline over time. A business must keep developing new products in order to maintain a presence in the market. Stages of a Product Life Cycle The stages a product goes through from the time it is introduced to when it is no longer sold is called its product life cycle. A product goes through four stages in its life cycle: introduction, growth, matu¬ rity, and decline. The stage of the life cycle can be determined by the type of competition the product is facing. INTRODUCTION The first stage of the product life cycle is the intro¬ duction of a new product into the market. At this stage, the product is quite different from existing products, so customers are not aware of it or how it can satisfy their needs. The price may be high during this stage as the company tries to cover the expenses of developing the product. The competition, if any, for the product at this stage consists of older, established products. GROWTH If a product is successful in the introductory phase, it will attract more customers and enter the growth stage as sales begin to increase. The product will be distributed more widely as more con¬ sumers start to buy it. Competitors will see the opportunity for sales and introduce their own product. A competitor’s product needs to have different features and options so that it can be positioned in the market as a better product. There will be a wider range of prices for the product during this stage due to competition. MATURITY During the maturity stage of the life cycle, sales peak and profits begin to decline. The product is in high demand and many companies offer it, so competition is very intense. Pricing becomes an important factor at this stage, since customers view products on the market as being similar. Businesses will offer discounts or sale prices to encourage customers to buy their brand. Companies make sure their product is easy for customers to find. During the maturity stage, a great deal of money will be spent on promotion, because companies want to keep their brand of the product on the minds of customers. DECLINE The decline stage occurs when consumers decide that a product is no longer meeting their needs or when they discover new and better products. Sales will begin to drop rapidly, and profits will drop. During this stage, there is little opportunity for product improvement. Since the product is not contributing a profit, no more money will be invested in it. Distribution is cut to only areas where the product is still profitable. Many times the price is cut dur¬ ing the decline stage. Promotion is decreased and targeted specifi¬ cally to loyal customers in an effort to keep them as long as possible. 366 Chapter 13 Management for the Future greene_0538446145_ch 13, 12/21/7, 20:13, page: 367 New Product Development In order to stay competitive in the market, a business must develop new products or services to offer to customers. When a business decides to develop a new product, it takes steps to be sure that it develops a product that is likely to be successful. The business wants to find out early in the development process whether the product is likely to be successful before investing too much money in it. It is also important for the business to determine that the product meets an important market need, can be pro¬ duced well and at a reasonable cost, and will be competitive with other products in the market. Soft drink companies introduced more new prod¬ ucts during 2000-2002 than were introduced during the entire decade of the 1990s. New soft drink products continue to be introduced each year. SOFT DRINKS INTRODUCED SINCE 2000 Drink Company Drink Company Introduced in 2007 Introduced in 2002 Diet Pepsi Max Pepsi Cola Vanilla Coke Coca-Cola Diet Vanilla Coke Coca-Cola Introduced in 2006 Dr Pepper Red Fusion Dr Pepper/7 UP Coca-Cola BlaK Coca-Cola dnL Dr Pepper/7 UP Pepsi Blue Pepsi-Cola Introduced in 2005 Diet Mountain Dew Code Red Pepsi-Cola Coca-Cola Zero Coca-Cola Sobe Mr. Green Pepsi-Cola Coca-Cola with Lime Coca-Cola Mountain Dew MDX Pepsi-Cola Introduced in 2001 Pepsi Lime Pepsi-Cola Diet Coke with Lemon Coca-Cola Fanta (reintroduced in U.S.) Coca-Cola Introduced in 2004 Diet Sierra Mist Pepsi-Cola Diet Coke with Lime Coca-Cola Mountain Dew Code Red Pepsi-Cola Coca-Cola C2 Coca-Cola Mountain Dew AMP Pepsi-Cola Introduced in 2003 Introduced in 2000 Mountain Dew Livewire Pepsi Cola Pepsi Twist Pepsi-Cola Diet Pepsi Twist Pepsi-Cola Sierra Mist Pepsi-Cola Red Flash Coca-Cola Product development involves the following steps: (1) idea develop¬ ment, (2) idea screening, (3) strategy development, (4) financial analysis, (5) product development and testing, and (6) product marketing. IDEA DEVELOPMENT The first, and often the most difficult, step in product development is finding ideas for new products. Employees or customers can generate ideas. Many times salespeople will hear wishes and complaints from customers about what they would like to see and not see in products. If the salesperson shares this information with the development department, this can help with ideas for new products. IDEA SCREENING Once ideas have been developed, they are screened to select the ones that have the greatest chance of being successful. Ques¬ tions to be answered during the screening process include the following: • Has a market been identified for the product? • Is the competition in the market reasonable? 13.1 Growth Strategies 367 greene_0538446145_ch 13, 12/21/7, 20:13, page: 368 • Are resources available to produce the product? • Is the product legal and safe? • Can a quality product be produced at a reasonable cost? STRATEGY DEVELOPMENT Once an idea has been determined to be reasonable, the business will create and test a sample marketing strat¬ egy. The business performs research to identify the appropriate target market and to be sure that there are customers with adequate income who are looking to satisfy a need that the product meets. Questions asked during this stage include: • What is the likely demand for the product? • How would the introduction of the product affect existing products? Would the new product take away market share from existing prod¬ ucts the company produces? • Would current customers benefit from the product? • Would the product enhance the image of the company’s overall product mix? FINANCIAL ANALYSIS If a new product idea is determined to meet a market need and can be developed, the company will perform a finan¬ cial analysis. Spreadsheet programs are often used in this step. Costs of production and marketing, sales projections for the target market, and resulting profits are calculated. Questions to be answered at this stage include the following: • What impact could the new product have on total sales, profits, market share, and return on investment? • Would the new product affect current employees in any way? For example, would it require people with different skills, the hiring of more people, or a reduction in the size of the workforce? • What new facilities, if any, would be needed? • How might competitors respond? • What is the risk of failure? Is the company willing to take the risk? PRODUCT DEVELOPMENT AND TESTING When a manufacturer sees a market opportunity and decides to develop a new product, it makes a prototype, which is a full-scale model of a new product. After testing the prototype in the laboratory and making final adjustments, the company designs the production process, obtains needed equipment and materials, and trains production personnel. The product is then test-marketed in selected areas. If it receives a positive response, the manufacturer places the product into full production. If not, the manufacturer drops it. Why is it necessary to perform a financial analysis when developing a new product? 368 Chapter 13 Management for the Future PhotoDisc/Getty Images greene_0538446145_ch 13, 1/17/8, 15:26, page: 369 PRODUCT MARKETING Introduction of the product into the target market is the last step in the product development cycle and the first step of the product’s life cycle. Before this takes place, many other things must be done. The marketing mix elements must be carefully planned, and there must be an adequate supply of the product on hand to meet the needs of the target market. Once the product has been introduced into the market, the com¬ pany will have to monitor its life cycle. Many new products fail even though the product development steps have been followed carefully. Products may not match the needs of customers, or customers may not see what differentiates the product from other products on the market. The product may be priced too high or too low, poorly dis¬ tributed, or improperly promoted. Checkpoint Why must a business be concerned with the life cycle of a product and with new product development? 4 i3.i Assessment THINK ABOUT IT 1. What are the negative consequences, if any, of not allowing your business to grow? 2. What are some ways you can control the growth of your business? 3. Your friend owns a successful hair salon. She wants to expand and asks for your advice on a growth strategy. What will your advice be? 4. List the stages of the product life cycle, and provide an example of a product in each stage. MAKE ACADEMIC CONNECTIONS 5. MATH Tony Balducci owns a deli and sandwich shop. Total sales for his target market are $1.75 million per year. If he attracts 12 percent of the market, what will his sales be? What will sales be if he increases market share to 18 percent? 6. MATH Luis Zapata owns a sports center with an indoor track, driving range, and basketball courts. He has recently installed two batting cages at the facility. Last year, his total sales were $325,500. If the batting cages take up 5 percent of the space and add 4 percent to total sales, how much will each batting cage contribute to total sales? Form teams. List examples of business growth that you have seen. Classify the examples as market penetration, geographic expansion, or market development. 13.1 Growth Strategies 369 # greene_0538446145_ch 13, 1/17/8, 15:26, page: 370 Focus on Small Business Making a difference Perhaps you own a "Life is Good" shirt or some other item with Jake's smiley-face stick figure on it. Bert and John Jacobs, founders of the casual clothing company Life is Good, have found the slogan to be true and want to share that feeling with others. As they started the business and it began to grow, they had to make decisions about how to grow their company while staying true to their belief in the simple pleasures of life. When it came time to decide on an advertising campaign for the company, Bert and John decided to forego the traditional advertising route and instead invest the money to help those in need. Today the company works with a number of charitable organizations and holds a series of festivals each year in the New England area. Although it started out as a differ¬ ent way to spend marketing dollars, today, charitable work has become a major focus for the company. Work as a Team What do you think about Bert and John's decision to spend their advertising dollars doing good for the community? Do you think this decision has helped their company to grow more than it would have with a conventional advertising campaign? Businesses have a social responsibility. What is Ethics? Ethics is the study of moral choices and values. It involves choosing between right and wrong. Behaving ethically means behaving in an honest and fair manner. As the owner of a business, you will have to make ethical decisions about the way you want to run your business. Thinking about ethical issues in advance will help you handle conflicts when they arise. Culture and Ethics Different cultures define ethical behavior differendy. In some countries, it is considered unethical to take bribes. In other countries, paying bribes 370 Chapter 13 Management for the Future Digital Vision/Getty Images greene_0538446145_ch 13, 12/21/7, 20:13, page: 371 Why is it important for a business owner to be aware of culture and ethics when conducting business internationally? may be an accepted business practice. In some countries, employers may treat employees badly. In other countries, employees have established rights that employers are expected to respect. Codes of Ethics Even within the same culture, individuals develop different standards, or codes, of ethics. A code of ethics is a set of standards or rules that outlines the ethical behavior demanded by an individual, a business, or a culture. Some individuals have very high standards of ethics and do what is right in every situation. Other individuals do not develop a standard of ethics at all. They act without thinking whether their actions are right or wrong. Jan Sommers has a high personal code of ethics. Last week, she received a duplicate refund check from one of her suppliers. Jan knew that the check had been sent to her by mistake. She immediately called the supplier to report the error. Checkpoint What does it mean to have a high code of ethics? Ethics and Business Ethical questions arise in every type of business. Large corporations, small companies, and home-based businesses all deal with ethical dilem¬ mas at one time or another. Business ethics is the application of the principles of right and wrong to issues that come up in the workplace. Set High Standards Business and ethics used to be considered unrelated to each other. Over the past hundred years, this view has changed dramatically. Busi¬ nesses today recognize that they must behave in an ethical manner. 13.2 Ethical and Social Issues 371 greene_0538446145_ch 13, 12/21/7, 20:13, page: 372 MYTHS ABOUT BUSINESS AND ETHICS Some people believe that entrepreneurs need not concern themselves with ethical issues. They believe that their only goal should be increasing profits. They may treat someone or another business unfairly and use the excuse that “it is just business.” They might think that acting ethically can hurt their profits. But in fact, using ethics in business can help you avoid disas¬ ters. It can also make customers and suppliers more willing to do business with you. CONSUMER AWARENESS Both consumers and business owners are sensitive to business ethics. Because consumers are so aware of ethical issues, businesses find ways to show customers that they practice ethics in their daily operations. Manufacturers of some shampoos and cosmetics print on their packaging that they do not test their products on animals. Consumers who have strong opinions about animal rights may be more willing to purchase such products. Establish an Ethical Workplace As the owner of your business, it will be up to you to inspire your employees to behave ethically. You will want to establish an ethical workplace for several reasons. 1. You want to do the right thing. 2. You want to serve as a role model to others. 3. You want to be proud of the way you conduct yourself, and you want others to be proud of you. 4. Ethical behavior is good for business because it gains the trust of customers. 5. Employees are more likely to act ethically if they see the business owner acting in an ethical manner. 6. Acting ethically reduces the possibility of being sued. CREATE A WRITTEN CODE OF ETHICS One way that you can com¬ municate your ethical beliefs to the people who work for you is by creating a written code of ethics. Such guidelines will help you and your employees make ethical decisions. You should create a code of ethics as soon as you begin your business. Even if you are your business’s only employee, you should create a written code of ethics. You should also establish company policies and procedures to let you and your employees know how to behave in certain situations. Would you be more likely to buy products that are less harmful to the environment? Why or why not? 372 Chapter 13 Management for the Future PhotoDisc/Getty Images greene_0538446145_ch 13, 12/21/7, 20:13, page: 373 To create an ethical code for your business, think about ethical dilemmas that may arise and come up with solutions for dealing with them. Talk to other business owners to see what kinds of ethical problems they have encountered. Jackie Rand owns a large discount store. Every month, sales¬ people from various manufacturing companies come to his company to sell their services or products. They meet with the head of the purchasing department, Ellen Chao. Last month, a manufacturing representative offered Ellen a free vacation. Not sure whether she should accept the gift, Ellen checked the code of ethics outlined in the company handbook. It clearly stated that gifts worth more than $100 should never be accepted from manufacturing representatives. Accepting large gifts from a vendor may make an employee feel obligated to purchase from that vendor when it may not be the best choice to meet the business’s needs. The guidelines helped Ellen solve an ethical dilemma. Checkpoint Why is it important for entrepreneurs to establish and write a code of ethics? Social Responsibilities As an individual, you have personal responsibilities to yourself, to your family, and to your friends. Entrepreneurs also have personal responsibilities to the people they work and deal with, to the com¬ munities in which they are located, and even to the environment. What are these responsibilities, and how can you meet them? Why do businesses have a responsibility to their communities? 13.2 Ethical and Social Issues 373 greene_0538446145_ch 13, 12/21/7, 20:13, page: 374 Responsibilities to Customers Your customers are your most important asset. You will need to treat them properly, or they will no longer use your services or buy your products. When dealing with customers, you should do the following: 1. Treat all customers with respect. No one likes to be treated badly. 2. Be honest. Never take unfair advantage of customers who do not know everything about the product or service they want to buy. Help your customers make good pur¬ chasing decisions. How does a business benefit from treating customers fairly? 3. Avoid exaggerating the merits of your products or services. Remember that customers who are not happy with what they pur¬ chase will not do business with you again. 4. Inform customers of possible dangers of the products you sell. Remember that this is also a legal requirement. 5. Handle all disputes fairly. Try to see the customer’s side of an issue when there is a disagreement. Responsibilities to Suppliers You depend on your suppliers to provide you with the goods you need to manufacture or sell your products. To make sure that you maintain good relationships with them, you will need to: bookmark Target Corporation is an example of a com¬ pany that places a high value on meeting its social responsibilities. Access school.cengage .com/entrepreneur/ideas and click on the link for Chapter 13. Browse through Target's Community pages and answer the following: What is the 5% Giving program? How much money does Target give to community organ¬ izations every week? Identify two environ¬ mentally friendly measures Target has taken recently. school.cengage.com/entrepreneur/ideas <b 374 Chapter 13 Management for the Future 1. Treat all suppliers with respect. If you respect them, they will respect you. 2. Avoid spreading rumors or incorrect information about suppliers. Do not discuss information that is not factual with others. Rumors can damage a busi¬ ness’s reputation. 3. Give suppliers time to fill your order. Try not to wait until the last minute to ask for merchandise. 4. Handle all disputes fairly. Try to see both sides of the issue and work out a solution that is fair to both you and the supplier. Digital Vision/Getty Images greene_0538446145_ch 13, 12/21/7, 20:13, page: 375 Why does a business have a responsibility to its suppliers? 5. Let your current supplier know the reason for your decision if you change suppliers. This is a courtesy to the supplier as well as a good business practice. The supplier will appreciate the feedback to use in developing future competitive strategies. Responsibilities to Creditors and Investors Creditors and investors have shown faith in your ability to succeed. To repay them for their confidence in you, you should rim your business as effectively as possible. You should also let creditors and investors know when things are not going well. Never conceal risks you are facing. did you KNOW? According to the National Philanthropic Trust, in 2006 the five y, eSt borate grant- makers were: Wal-Mart F oun - dati on, $154.5 million Aventis Pharma¬ ceutical Health Foundation, $114.7 million of America Foundation, $80.7 million Ford Motor Company Fund $77.9 million The Wells-Fargo Foundation, $65.0 million Responsibilities to Your Community Business owners have a special responsibility to contribute to their communities. They can do so in various ways, including donating money, products, and services. They can also get involved in commu¬ nity issues or activities. CONTRIBUTE MONEY Business owners should donate money to charities, cultural institutions, and causes in which they believe. It is their responsibility to give something back to the community. Not all business owners can make large contributions, but any donation is welcomed. DONATE PRODUCTS OR SERVICES Some businesses donate the products or services their business sells. Used clothing stores donate unsold clothes to charities. Computer companies sometimes send technicians to community agencies to help the staffs learn about computers. Carrie Rios owns a restaurant. She used to discard all the leftover food every evening. But now, Carrie donates this food to the local soup kitchen. Food that Carrie would have thrown away is enjoyed by dozens of people who otherwise might not have eaten a good meal. 13.2 Ethical and Social Issues 375 greene_0538446145_ch 13, 12/21/7, 20:13, page: 376 GET INVOLVED You can contribute to your community in other ways as well. Some entrepreneurs get involved in issues affecting their local governments, such as changes in zoning laws and the establish¬ ment of local parks. Others get involved by sponsoring local events or organizations, such as a school sports team. Checkpoint What are some responsibilities entrepreneurs have to suppliers, customers, and the community? Respect the Environment Damage to the environment comes from many different sources. The burning of coal and oil for energy pollutes the air. Release of toxic chemicals pollutes the ground, air, and water. Disposal of bi ll ions of tons of garbage every year also creates environmental problems. Businesses have a major impact on the environment. As an entre¬ preneur, you will have an obligation to do as little harm as possible to your surroundings. To meet your environmental responsibilities, you should do the following: 1. Protect the environment from pollutants. Don’t knowingly dump hazardous material on the ground or in lakes and rivers. 2. Conserve nonrenewable resources, such as coal and oil, by using them efficiently. Nonrenewable resources are not easily replaced once they are gone. It takes hundreds of years to regenerate a nonrenewable resource. Use alternative resources when available. 3. Reduce waste and dispose of waste responsibly. Recycle materials such as paper, plastic, aluminum, glass, and steel. 4. Use environmentally safe and sustainable energy sources to meet your business needs. Electricity is a good example. It can be replaced quickly and is not a major source of pollution. Would you be more likely to shop at a store that Is environmentally responsible? Why or why not? 376 Chapter 13 Management for the Future greene_0538446145_ch 13, 1/17/8, 15:26, page: 377 5. Sell products that cause as little damage to the environment as possible. For example, don’t sell a car-wash solution that harms plant life. LAWS GOVERNING THE ENVIRONMENT In 1970, the federal gov¬ ernment created an agency to enforce the laws governing the environ¬ ment. The Environmental Protection Agency (EPA) enforces federal laws concerning clean air and water. If your business handles hazard¬ ous materials, you will need to become familiar with these laws. 4 Checkpoint As a business owner, what are some things you can do to protect the environment? M3.2 Assessment THINK ABOUT IT 1. All employees should practice ethical behavior. Think of some ethical dilemmas that a convenience store clerk might encounter. Then, describe how the clerk could handle these situations. 2. Is it important for entrepreneurs to always act in an ethical man¬ ner? Why or why not? 3. Explain the concept of personal responsibility. 4. At what point do you think a business owner should tell cred¬ itors and investors of a new risk the business is facing? Why? MAKE ACADEMIC CONNECTIONS 5. COMMUNICATION Using the Activity CD, open the activity "Business Ethics." Print out the case studies and work with a partner to decide the best way to handle each situation. 6. MATH Jade Yorida will donate 12 percent of her company's net income to the community if she makes her profit projections of a 5 percent increase over the previous year's net income of $235,000. Assuming Jade's income does increase by 5 percent, how much will she donate? 7. RESEARCH There have been many cases in recent years of busi¬ nesses and individuals who have not practiced ethical behavior. Research a business or individual who has been caught practicing unethical behavior and prepare a report on your findings. Working with teammates, brainstorm five ethical dilemmas that entre¬ preneurs might face. Then, determine what decisions you would make if you were faced with these problems. Share your thoughts with the class. 13-2 Ethical and Social Issues 377 # greene_0538446145_ch 13, 1/17/8, 15:26, page: 378 International markets Monika had worked and grown her candy business for three years. She sold chocolate and mint candies that were very popular in her store and with her Internet customers. She recently visited friends in Vienna, Austria, and took them some of her candy as a gift. They loved her candy as did their friends. Monika began to wonder if there would be a market for her candy in other countries. She went to her friend Lazio for advice because he has experience selling antiques in the United States and other countries. Work as a Team What advice do you think Lazio might give Monika? What things should Monika research before deciding to sell her candy outside of Selling globally can be a way to grow your the United States? business. Exports and Imports The global marketplace has dramatically changed the way businesses operate. It has made business more competitive, and it has opened new opportunities for companies, including small entrepreneurial busi¬ nesses. As the global marketplace continues to expand, entrepreneurs can take advantage of even more opportunities. International trade is one way you can become part of the global marketplace. This means you would export or import the products or services you sell or use in your business. Exporting Products and services that are produced in one country and sent to another country to be sold are exports. The United States exports agricultural products, automobiles, machinery, computers, and more. These products are shipped to countries all over the world. 378 Chapter 13 Management for the Future PhotoDisc/Getty Images greene_0538446145_ch 13, 12/21/7, 20:14, page: 379 DIRECT EXPORTING You can find buyers or distributors in foreign markets and ship your products to them. This is called direct exporting. For direct exporting, you may need to hire salespeople who live in or travel to the foreign countries. Tiffany Wilson owns a mid¬ sized printing company. Last year, Tiffany decided to expand her busi¬ ness internationally. She hired a Dutch sales representative, Mieta Van Praag, to market her business in Europe. Mieta calls on customers in the Netherlands and France. Why might direct exporting be more difficult than indirect exporting? INDIRECT EXPORTING It can be difficult to make contacts with buyers in other countries. Some businesses use commissioned agents who act as brokers to find foreign buyers for products and services. Exporting through commissioned agents is indirect exporting. © SELLING WORLDWIDE THROUGH THE WEB Another way to get involved in exporting is through the World Wide Web. Businesses translate and modify their web sites to appeal to foreign customers. They fill individual orders and ship them directly to the foreign cus¬ tomer’s address. Shahid Mahmoud’s business manufactures puzzles. He recently began promoting his products abroad over the World Wide Web because research showed that Japanese buyers like puzzles. To target that market, he created an e-commerce web site written in Japanese. Importing Products and services that are brought in from another country to be sold are imports. The United States imports many products such as automobiles from Europe, Japan, and Korea and oil from the Middle East. Entrepreneurs may decide to import products to sell or to use in the production of their product. Price and quality are usually factors in their decision to import. Consumers like low prices and demand high quality. James Sutton owns a business that makes African-style clothing. He imports all of his fabrics from West Africa because of their unique colors, designs, and textures. James’s customers appreciate his atten¬ tion to detail in creating authentic African clothing. Checkpoint Why do entrepreneurs choose to participate in the global market¬ place by exporting and importing products and services? # 13-3 Global Trends and Opportunities 379 PhotoDisc/Getty Images greene_0538446145_ch 13, 12/21/7, 20:14, page: 380 Is International Business Right for You? Not every business can succeed internationally. You need to consider the pros and cons of competing globally. Then, you must determine whether there is a market for your business in other countries and write an international business plan. Reasons for Competing Globally As discussed in Chapter 12, there are many risks associated with compet¬ ing in the global marketplace. There are also many benefits that interna¬ tional business can provide, including increased profits. There are at least three good reasons to expand into other countries: 1. Increased sales You will attract new buyers and broaden your customer base. You may also import unique products that local customers can buy. 2. Reduced costs Manufacturers in other countries can produce goods less expensively because of low labor costs or availability of raw materials. This can mean a savings for you in the form of a lower price. 3. Decreased dependence on current markets and suppliers If economic conditions in the United States suddenly worsen, foreign markets and suppliers might help keep your profits high. Selling products and services abroad can also help you stabilize seasonal market fluctuations. Analyze the Market Analyzing whether there is an international market for your product will be very similar to how you analyzed your current target market and target customers. But in addition to the land of analysis you learned about in Chapter 4, you will need to consider other factors, including political, economic, social, and cultural issues. Additional taxes and regulations are also things to research and consider. Various resources are available that can help you learn about doing business abroad. Be your own boss You manufacture toys for small children. You have found a manufacturer overseas who will make your toys for less than half of what you pay to have them manufactured in the United States. You are considering using the overseas manufacturer, but you want to be sure it uses quality materials, provides safe working condi¬ tions, and does not use child labor. Use the six- step problem-solving model to determine if you will use the overseas manufacturer. Trade fairs and seminars sponsored by the U.S. Department of Commerce Dun and Bradstreet’s Exporter’s Encyclopedia Trade statistics from the Bureau of the Census and the Small Business Administration Federal or state government market studies on your industry’s potential abroad 380 Chapter 13 Management for the Future greene_0538446145_ch 13, 12/21/7, 20:14, page: 381 Why should business owners analyze the foreign markets in which they want to do business? Mark Milowski owns a business that processes payroll records. He recently met with several Hong Kong business owners who wanted Mark’s company to handle their payrolls. Mark liked the idea of expanding globally, but he had many questions. He contacted the Department of Commerce to get information on doing business in Hong Kong. In addition, he referenced the Exporter’s Encyclopedia to learn about the regulations he would face. Write an International Business Plan An international business plan is an extension of your business plan. It sets forth your goals for international expansion and defines the strat¬ egies for achieving those goals. Your plan should indicate the following: • Why you want to expand your business into the global marketplace • Which foreign markets you plan to enter and why • What revenues your venture is expected to earn • How you plan to finance your global expansion • What costs (travel, shipping, marketing) you expect to have • How you plan to market and sell your products or services abroad • How you plan to deliver your products or services to foreign markets • What legal requirements you will need to meet to sell your prod¬ ucts or services abroad Checkpoint What are some sources of information that can help you learn about doing business abroad? # 13-3 Global Trends and Opportunities 381 greene_0538446145_ch 13, 12/21/7, 20:14, page: 382 Government Regulation of International Trade Some governments establish trade barriers, which are methods for keep¬ ing foreign businesses from competing with domestic producers. Quotas, tariffs, and qualitative restrictions are trade barriers. You will need to research the existing trade barriers that may affect your global expansion. Quotas A quota is a limit on the amount of a product that can be imported into a country over a particular period of time. Japan places quotas on the number of foreign automobiles that can be imported. These quotas protect Japanese car makers from losing business to foreign competitors. Tariffs A tariff is a tax on imports. Governments use tariffs to protect domestic manufacturers of products that compete with imports. The United States places a tariff on imported sugar. Foreign companies that sell their sugar in the United States must pay a tax. This makes their product more expensive and less competitive with sugar produced in the United States. Qualitative Restrictions A qualitative restriction is a standard of quality an imported product must meet before it can be sold. A qualitative restriction can keep for¬ eign businesses from competing with domestic producers. It is also used to protect consumers. For example, the United States insists that all meat sold in this country meet certain sanitary regulations and that imported toys meet U.S. safety requirements. What problems might occur if imported products did not have to meet qualitative restrictions? 382 Chapter 13 Management for the Future greene_0538446145_ch 13, 1/15/8, 17:53, page: 383 The North American Free Trade Agreement Implementation of the North American Free Trade Agreement (NAFTA) began January 1, 1994. This agreement removed most barriers to trade and investment among the United States, Mexico, and Canada. This means that U.S. businesses can sell their products and services in Canada and Mexico just as they would in the United States. It also means that the United States imposes no quotas or tariffs on imports from Canada and Mexico. NAFTA makes it much easier to export and import products and services within North America. Government Assistance to Companies Operating Abroad Dozens of different government agencies are available to answer your questions about doing business overseas. They include the following: • The Office of International Trade of the Small Business Administration The mission of this agency is to enhance the ability of small businesses to compete in the global marketplace. It works to facilitate access to capital to support international trade and to ensure that the interests of small businesses are considered and reflected in trade negotiations. Famous Johnny Vag The Johnny Pag Company manu¬ factures a motorcycle line in China that is affordable for the average American. Johnny Pag has designed and built custom motorcycles for the past 30 years in Corona, California. He is well respected among his peers and has a keen eye for quality and style. He was commissioned by his son JR, the owner of Johnny Pag, to head up the design and building of the com¬ plete JohnnyPag.com line of motor¬ cycles. He went overseas, taking his own designs, molds, and tools. He then guided the Wenzhou, Chinese welders and assemblers on how to build the Spyder bike line on their equipment and machines. The Chinese have built top-quality motor¬ cycles for the European market for the past 25 years. By manufacturing the bikes in China, the retail cost is one-third the cost of motorcycles manufactured in the United States due to labor rates and regulations. Think Critically Manufacturing costs are lower in Asian countries than in the United States. Some people view this as taking jobs away from Americans. Others see it as a way of making a better product that is more afford¬ able for Americans. What do you think about outsourcing manufac¬ turing overseas? In 2006, Johnny Pag < entered into a joint partner- \ ship with his Chinese con- { tacts. State-of-the-art 1 t equipment was installed in ° the new Chinese production J facility. Quality standards ) were established to create a j bike that gives the customer ; personal pride as well as « safety assurance. With the Johnny Pag name on each motorcycle, the company stands by its product and places an emphasis on customer service. How did the Johnny Pag Company grow its business? 13.3 Global Trends and Opportunities 383 greene_0538446145_ch 13, 1/17/8, 15:26, page: 384 • The International Trade Administration This bureau of the U.S. Department of Commerce promotes trading and investing, strengthens industry competitiveness, and ensures fair trade. • Bureau of Industry and Security The Bureau of Industry and Security is another bureau of the U.S. Department of Commerce. Its mission is to advance U.S. national security, foreign policy, and economic objectives. It works to ensure an effective export control and treaty compliance system and promotes continued U.S. strategic technology leadership. In addition to these agencies, the federal government offers many programs that help U.S. businesses operate in foreign markets. The pro¬ grams include export counseling, export financing, and technical assistance. % Checkpoint Name three methods that governments use to regulate international trade. i3.3 Assessment THINK ABOUT IT 1. As an entrepreneur, what do you think are the pros of competing globally? What do you think are the cons of competing globally? 2. Do you think it is in our country's best interest to have U.S. com¬ panies engage in international trade? Why or why not? 3. What do you think would happen to the U.S. economy if there were no quotas on imported goods? MAKE ACADEMIC CONNECTIONS 4. MATH A government in an Asian country applies a 20 percent tariff to all electronic goods imported to the country. If it collects $24 million in tariffs for these goods, what was their total value? 5. RESEARCH Research the North American Free Trade Agreement (NAFTA) and write a one-page report on what you learn. State your opinion on whether or not NAFTA is beneficial to the United States. You own a clothing boutique and have recently expanded into cata¬ log sales to sell your products abroad. Select a country in which you want to sell. Working with team members, determine what method of exporting you will use. Discuss some of the government regula¬ tions that will affect your business. Think about how you might obtain further information about these regulations. Share your team's ideas with the rest of the class. 384 Chapter 13 Management for the Future greene_0538446145_ch 13, 1/17/8, 15:26, page: 385 Sharpen Your Entrepreneurial Skills Time Management You have learned that an entre¬ preneur has many responsibilities. You are probably wondering how you can fit everything into one day! Good time management skills are essential to the success of your business. In learning to manage your time, the first thing you should do is establish a plan. A plan forces you to think ahead, which helps you manage your time more effectively. A plan should list all of the routine tasks of your busi¬ ness as well as those tasks related to growing your business. After creating a plan, you should prepare a “to do” list containing all of the tasks out¬ lined in your plan. Prioritize the tasks from high priority to low priority. Assign due dates to each task. Review your list at the begin¬ ning of each day and again at the end of the day. Cross off tasks that have been completed, add new tasks that have come up, and repriori¬ tize your list of tasks as necessary. Do not be afraid to ask for help as you grow your business. You may get to the point where you will not be able to do it all. There may also be tasks that you do not have the expertise to complete. To make effective use of your time, look for others who you can contract with or hire to perform these tasks. For example, you may contract with an accountant to do your financial recordkeeping and reporting. Remember to allow for personal time. Take breaks occasionally. If you are working too much and overly stressed, you will not be an effective leader. Take time out for physical activities and to spend time with friends and family. TRY IT OUT Before you can schedule your time, you need to understand how you use your time. Using the Activity CD, open the activity “Time Log.” Print out a copy and complete the activity log by keeping track of your daily activities over a certain period of time. Sharpen Your Entrepreneurial Skills 385 0538446145_ch 13, 12/21/7, 20:14, page: 386 Chapter 13 Assessment SUMMARY 13.1 Growth Strategies 1. Determining when to expand your business depends on two main factors: the condition of your business and the economic condi¬ tions in the market in which your business competes. 2. Businesses that experience uncontrolled growth may find them¬ selves overextended with inadequate resources to support the new level of business. You will want to create a plan for growth. 3. Growth strategies include market penetration, geographic expan¬ sion, and market development. 4. The stages of the product life cycle include introduction, growth, maturity, and decline. Steps in new product development include idea development, idea screening, strategy development, financial analysis, product development and testing, and product marketing. 13.2 Ethical and Social Issues 5. Ethics is the study of moral choices and values. 6. Entrepreneurs should create a code of ethics to establish appropri¬ ate behavior in the workplace. 7. An entrepreneur has social responsibilities involving customers, suppliers, creditors and investors, and the community. 8. Ways to meet your business’s environmental responsibilities include to conserve resources, reduce waste by recycling, dispose of waste responsibly, and sell environmentally friendly products and services. 13.3 Global Trends and Opportunities 9. Entrepreneurs participate in the global marketplace through direct and indirect exporting, importing, and selling through the Web. 10. To determine if international business is right for you, consider the pros and cons of competing globally and write an international business plan. 11. Trade regulations that will affect your international business include quotas, tariffs, and qualitative restrictions established by the coun¬ tries in which you will be doing business. What do you fcnow now? Read Ideas in Action on page 361 again. Then answer the questions a second time. How have your responses changed? 386 Chapter 13 Management for the Future greene_0538446145_ch 13, 12/21/7, 20:14, page: 387 VOCABULARY BUILDER Match each statement with the term that best defines it. Some terms may not be used. 1. The application of the principles of right and wrong to issues that come up in the workplace 2. A strategy for expanding the target market of a business 3. A limit on the amount of a product that can be imported into a country over a particular period of time 4. Products and services that are brought in from another country to be sold 5. The study of moral choices and values 6. Increasing market share for a product or service within a given market in a given area 7. Products and services that are produced in one country and sent to another country to be sold 8. A set of standards or rules that outlines the ethical behavior demanded by an individual, a business, or a culture 9. Methods for keeping foreign businesses from competing with domestic producers 10. The stages a product goes through from the time it is introduced to when it is no longer sold 11. A tax on imports 12. A standard of quality an imported product must meet before it can be sold a. b. c. d. e. f. !. m. business ethics code of ethics ethics exports imports market development market penetration product life cycle prototype qualitative restriction quota tariff trade barriers REVIEW YOUR KNOWLEDGE 13. True or False? The condition of your business and the eco¬ nomic conditions of the market in which you compete help deter¬ mine when you should expand your business. 14. Which of the following is not a factor to consider when analyzing the economic climate that controls your business? a. condition of national economy c. demographic changes b. new competition d. prices you charge 15. A prototype of a product is created during which stage of new product development? a. idea screening c. product development and testing b. strategy development d. product marketing 16. True or False? During the introduction stage of a product’s life cycle, people are familiar with the product and what it can do for them. 17. Increasing your advertising and improving your customer service are examples of growing your business through a. market penetration c. market development b. geographic expansion d. none of the above Chapter 13 Assessment 387 greene_0538446145_ch 13, 1/18/8, 10:56, page: 388 18. True or False? Culture has no effect on the ethics of an individual. 19. True or False? Ethical behavior is good for business because it gains the trust of customers. 20. True or False? For a business to successfully diversify, it needs to develop products that are unrelated to the products it already sells. 21. The North American Free Trade Agreement (NAFTA) removed most barriers to trade and investment among the United States and a. China and Japan c. Mexico and Canada b. Mexico and Cuba d. Canada and Korea 22. Which of the following is not an example of fulfilling environmen¬ tal responsibilities? a. using solar energy to power your heating and cooling systems b. disposing of paper used by your business in the dumpster c. selling a laundry detergent with stain-removing enzymes that do not harm water ecosystems d. following federal guidelines for disposing of hazardous waste 23. True or False? Global competition has had no impact on the way businesses operate. 24. Selling in foreign markets through commissioned agents is known as_?_. 25. True or False? Any business can have success competing internationally. 26. As an entrepreneur, you have a personal responsibility to all of the following except a. your community c. your creditors and investors b. your customers d. your competitors APPLY WHAT YOU LEARNED 27. You publish a cooking magazine that is circulated in your local metro area. How can you expand your business? What growth strategy will you employ? Write a plan for growth that includes setting and achieving measurable objectives, hiring managers, financing the expansion, and obtaining resources for expansion. 28. You have opened a delicatessen in your town. What are some of the responsibilities you have to your customers? In what ways can your business benefit the community? How do you think fulfilling these responsibilities will help your business? MAKE ACADEMIC CONNECTIONS 29. COMMUNICATION Use the Internet, newspapers, and maga¬ zines to find examples of two companies that are environmentally responsible and one company that has violated environmental laws. Give a presentation to the class that details the companies’ actions and their impact on society. 30. MATH You have a business selling concrete to contractors. One of your suppliers in South America has quoted a price of $4.00 per 50-pound bag. Your U.S. supplier is charging $4.50 per 50-pound bag. Both suppliers have agreed to cover shipping costs, but the foreign 388 Chapter 13 Management for the Future greene_0538446145_ch 13, 12/21/7, 20:14, page: 389 pass that cost on to you. Which supplier will you buy from and why? 31. RESEARCH Choose a business that has recendy introduced a new product to the market. Research the company and find out what other products it had on the market before the introduction of the new product. Was the new product introduced to replace an existing product or to capture a new market? WHAT WOULD VOU DO? You are an independent contractor hired by the state to inspect pav¬ ing work done on a highway. The paving company had to complete the job on time or pay a fine to the state. In order to meet the deadline, the paving company did not follow all of the specifications in the contract. The president of the company has asked you to approve the job in exchange for a large sum of money. What are the ethical issues you face? What do you think would be the best way to resolve the issue? Who will be affected by your decisions? V J BUILD YOUR Business Plan Project This activity will help you think about growing your business, con¬ ducting business ethically, and expanding your business globally. You will also finalize the business plan that you have been working on throughout the book. What will indicate that you are ready to expand your business? Give specific examples, such as your sales growing by 20 percent or your business outgrowing its current location. What effect can the present economy have on your business? Write a growth plan that includes strategies for attaining measurable objectives, hir¬ ing managers, financing expansion, and obtaining resources for expansion. Write a code of ethics for your business that includes company policies and procedures for dealing with particular situations. What are some situations that are specific to your type of business that may pose an ethical dilemma? Write an environmental policy for your business. What are some of the actions your business will take to protect the environment? Are these actions required by law? If not, why will you incorporate them into your policy? What global opportunities exist for your business? Determine the best country in which your business could expand. List the specific benefits and risks of global expansion for your business. Put it all together! Now that you have researched the different aspects of starting your own business, you are ready to use the information you have gathered in the Build Your Business Plan Project to compile your business plan. Using the Activity CD, open the activity "Business Plan Template" to help you complete your final business plan. Chapter 13 Assessment 389 greene_0538446145_ch 13, 1/18/8, 10:56, page: 390 Planning a Career in Transportation nsportation , Distribution & Logistics HW IVIy mom’s husband has a job that requires travel to a lot of big cities. He often arranges to have a limousine pick him up at the airport and take him to his destination. It saves him a great deal of time to have the limo driver waiting for him when he arrives. At his level in the organization, it makes sense finan¬ cially to pay a bit more for his trans¬ portation and get him to his meetings as quickly as possible.” How do people traveling to various cities get from the airport to their destination easily? How do people who have a physical disabil¬ ity that prohibits them from driv¬ ing get to their appointments? Chauffeurs are individuals who provide transportation to clients on a prearranged basis. Chauffeurs may be employed by an individual, family or business. Some chauffeurs may have multiple duties for an employer. Additional duties might include personal security, household help, or administrative assistance. EMPLOYMENT OUTLOOK • Faster than average growth is anticipated. • About a quarter of chauffeurs are self-employed. • Large, thriving cities will offer the best opportunities. JOB TITLES • Luxury Vehicle Chauffeur • Driver/ Chauffeur • Chauffeur/Houseman • Chauffeur/Professional Driver • Chauffeur/Executive Protection • Personal Chauffeur NEEDED SKILLS • A high school diploma is preferred. • A good driving record is necessary. • In addition to a regular driver’s license, a chauffeur’s license is required. Licensing requirements vary by state. • Good interpersonal skills to han¬ dle a variety of customer person¬ alities are important. • Familiarity with the local terrain and good map-reading skills are helpful. • The minimum age requirement is often 21. What's it like to work in Transpor¬ tation? Pedro has been leasing his limousine for two years. Paying a monthly fee to the limousine company entitles Pedro to full use of the vehicle, even when he isn’t working. His monthly payment also covers routine vehicle mainte¬ nance and insurance fees. Pedro is saving money for a down payment on his own limousine. Tonight Pedro is scheduled to drive a bride and groom from their wedding ceremony to their recep¬ tion. After the reception, he will drive them to their hotel. For the first three days of next week, Pedro is scheduled to provide transportation for a repeat client. The client, an executive who visits Pedro’s city each month, often books Pedro’s time for a series of days. When Pedro isn’t driving the client to a destination, he often runs errands for the client. At the end of next week, Pedro is sched¬ uled to drive a visually impaired client on a variety of errands. What about you? Would you enjoy driving an array of clients on a variety of trips throughout your city? 390 Chapter 13 Management for the Future greene_0538446145_ch 13, 12/21/7, 20:14, page: 391 TEAM EVENJT V he Small Business Management Team Event requires participants to provide advice to a startup business. Three early-retiree teachers want to start their own business, Head of the Class, that will provide training to new teachers. They have noticed that the number of teacher education programs has declined, and many new teachers are not fully equipped to successfully handle classroom management. The business will work directly with school districts and universities that have reduced teacher-training pro¬ grams. The three retired teachers have set up an appointment to meet with the Small Business Forum to seek assistance and financing in open¬ ing this business operation. The three entrepreneurs have $10,000 each in savings that they plan to use for their startup business. Your team of two to four members will serve as consultants to the three entrepreneurs. You will provide them with information that they need for their presentation to the Small Business Forum. You must be aware of the location, competition, and the budget needed to successfully operate this business. You will help the entrepreneurs determine what makes their business unique and give them ideas to convince the Small Business Forum to provide financial assistance. You must also suggest ideas for growing the business. Prepare an oral presentation that addresses the questions that follow. You will have ten minutes to make your presentation and an additional ten minutes to answer the judge’s questions. PERFORMANCE INDICATORS EVALUATED • Evaluate and delegate responsibilities needed to perform required tasks. • Demonstrate teamwork skills needed to function in a business setting. • Demonstrate self-esteem, self- and team-management, and integrity. • Demonstrate a working knowledge of business management concepts. • Demonstrate critical thinking skills to make decisions and solve problems. • Demonstrate a working knowledge of entrepreneurial concepts. Go to the BPA web site for more detailed information. Think Critically 1. How can the proposed business save school districts money? 2. What statistics can be used to prove the need for this business? 3. What is the potential growth for this business? 4. Why should school districts use the services offered by this business? www.bpa.org Winning Edge 391 greene_0538446145_Glossary, 1/15/8, 20:52, page: 392 Account An accounting record that provides financial detail for a particular business item, such as for cash, sales, rent, and utilities Advertising A paid form of com¬ munication sent out by a business about a product or service; it keeps a product or service in the public’s eye by creating a sense of awareness and helps convey a posi¬ tive image Advertising fees Fees paid to a franchise company to support tele¬ vision, magazine, or other adver¬ tising of the franchise as a whole Aptitude The ability to learn a particular kind of job Authoritative management Management style in which the manager is directive and controlling B Balance sheet A financial state¬ ment that lists what a business owns, what it owes, and how much it is worth at a particular point in time Benefits Employment rewards for service in addition to salary; rewards may include paid leave, insurance, and a pension plan Board of directors Group of people who meet several times a year to make important decisions affecting the company Bonus Financial rewards made in addition to a regular wage or sal¬ ary that usually hinge on reaching an established goal Bounced check Check that is returned to a business by the bank because the customer’s checking account has insufficient funds to cover the check amount Brainstorming A creative prob¬ lem-solving technique that involves generating a large number of fresh ideas Branding The name, symbol, or design used to identify a product Business ethics Application of the principles of right and wrong to issues that come up in the workplace Business plan A written docu¬ ment that describes all the steps necessary for opening and operat¬ ing a successful business Capitalism The private ownership of resources by individuals rather than by the government Cash budget Show the projec¬ tions of cash coming in and going out of a business Cash flow statement An accounting report that describes the way cash flows into and out of a business over a period of time Channels of distribution Routes that products and services take from the time they are produced to the time they are consumed Check register Booklet in which an account holder records the dates and amounts of the checks as well as the names of people or businesses to whom he or she has written the checks Code of ethics A set of standards or rules that outline the ethical behavior demanded by an individ¬ ual, business, or culture Collateral Property that a bor¬ rower forfeits to the bank provid¬ ing the loan if he or she defaults on the loan Commission A percentage of a sale paid to a salesperson Competition-based pricing Pric¬ ing that is determined by consid¬ ering what competitors charge Competitive analysis Identifying and examining the characteristics of a competing firm Consumer credit Offered when a retail business allows its customers to buy merchandise now and pay for it later Contract Legally binding agree¬ ment between two or more per¬ sons or parties Controllable risk Risk that can be reduced or possibly even avoided by actions the insured takes Copyright Form of intellectual property law that protects original works of authorship, including lit¬ erary, dramatic, musical, and artis¬ tic works Corporation Business that has the legal rights of a person but is inde¬ pendent of its owners Cost-based pricing Pricing deter¬ mined by using the wholesale cost of an item as the basis for the price charged Cover letter Letter that introdu¬ ces and explains an accompanying document or set of documents 392 Glossary greene_0538446145_Glossary, 1/15/8, 20:52, page: 393 Customer profile Description of the characteristics of the person or company that is likely to purchase a product or service D Debt capital Money loaned to a business with the understanding that the money will be repaid, usually with interest Debt-to-equity ratio The relation between the dollars borrowed and the dollars invested in a business Delegate To allow other people to share workloads and responsibilities Demand Individual’s need or desire for a product or service at a given price Demand-based pricing Pricing that is determined by how much customers are willing to pay for a product or service Democratic management Man¬ agement style in which employees are involved in decision making and the manager provides less direction Demographics Data that describe a group of people in terms of their age, marital status, family size, ethnicity, gender, profession, education, and income Direct channel Moves the prod¬ uct directly from the manufacturer to the consumer Direct competition Comes from a business that makes most of its market as other businesses Discount pricing Offers custom¬ ers a reduced price encouraging them to buy Distribution An important com¬ ponent of the marketing mix that involves the locations and meth¬ ods used to make products avail¬ able to customers Dividends distributions of corpo¬ rate profits to the shareholders E Economic decision making The process of choosing which needs and wants, among several, will be satisfied using the resources on hand Economic resources Means through which goods and services are produced Emotional buying decisions Based on the desire to have a specific product or service; feel¬ ings, beliefs, and attitudes influ¬ ence a consumer’s buying decisions, who often spends little thought or time in making the decision Employees People who work for someone else Enterprise zones Areas that suf¬ fer from lack of employment opportunities Entrepreneurs People who own, operate, and take the risk of a business venture Entrepreneurship Process of running a business of one’s own Equilibrium price and quantity Point at which the supply and demand curves meet Equity capital Money invested in a business in return for a share in the profits of the business Ethics The study of moral choices and values; involves choosing between tight and wrong Executive summary A short restatement of the report portion of a business plan Exports Products and services that are produced in one country and sent to another country to be sold F Federal Employees’ Compensa¬ tion Act (FECA) Law that pro¬ vides benefits to employees who have suffered work-related injuries or occupational diseases; benefits include payment of medical expenses, compensation for lost wages, and payment of benefits to dependents of employees who die from work-related injuries or diseases Fixed costs Costs that must be paid regardless of how much of a good or service is produced Focus group In-depth interview with a group of target customers who provide valuable ideas on products or services for the same good or service Franchise Legal agreement that gives an individual the right to market a company’s products or services in a particular area Freelancers People who provide specialty services to businesses on an hourly basis or by the job G Geographic data Data that helps a business determine where its potential customers live and how far they will travel to visit the business Gross lease Occurs when the tenant pays rent each month for the space occupied, and the land¬ lord covers all property expenses for that space Gross sales The dollar amount of all sales I Ideas Thoughts or concepts that come from creative thinking Imports Products and services that are brought from one country into another country to be sold Income statement Shows the business’s revenues and expenses incurred over a period of time and the resulting profit or loss Indirect channel Distribution channel that uses intermediaries to move products between the man¬ ufacturer and the consumer, such as agents and wholesalers Indirect competition Comes from a business that makes only a small amount of money selling the same or similar products and serv¬ ices to the same market as other businesses Industrial park Section of land that is zoned for industrial busi¬ nesses only; usually located where space is less expensive, away from housing developments and down¬ town areas Glossary 393 greene_0538446145_Glossary, 1/15/8, 20:52, page: 394 Initial franchise fee Amount the local franchise owner pays in return for the right to run the franchise; fee can run anywhere from a few thousand to a few hundred thousand dollars It is usually nonrefundable Intellectual property The origi¬ nal, creative work of an artist or inventor and may include such things as songs, novels, artistic designs, and inventions Interns Students who will work for little or no pay in order to gain experience in a particular field Inventory The merchandise a business sells to its customers J Job analysis Process of determin¬ ing the tasks and sequence of tasks necessary to perform a job Job description Written state¬ ment listing the tasks and respon¬ sibilities of a position; also covers to whom the position reports, educational and professional expe¬ rience required, and salary range Journals Accounting records of the transactions you make; there are five different journals that businesses use to record their transactions L Landlord Person who owns and rents out buildings or space M Management Process of achieving goals by establishing operating procedures that make effective use of people and other resources Manager Person responsible for planning, organizing, staffing, implementing, and controlling the operations of a business Marginal benefit Measures the advantages of producing one addi¬ tional unit of a good or service Marginal cost Measures the dis¬ advantages of producing one addi¬ tional unit of a good or service Market development Strategy for expanding the target market of a business Marketing All of the processes used to determine and satisfy the needs of customers and the company Marketing concept Uses the needs of customers as the primary focus during the planning, pro¬ duction, distribution, and promo¬ tion of a product or service Marketing mix Blending of the product, price, distribution, and promotion used to reach a target market Marketing plan Defines market, identifies customers and competi¬ tors, outlines a strategy for attract¬ ing and keeping customers, and identifies and anticipates change Marketing strategy Plan that identifies how marketing goals will be achieved; a startup marketing plan should address: product introduction or innovation, pric¬ ing, distribution, promotion, pro¬ jected profitability, and sales or market share Market penetration Increasing market share for a product or ser¬ vice within a given market in a given area Market research System for col¬ lecting, recording, and analyzing information about customers, competitors, goods, and services Market segments Groups of cus¬ tomers within a large market who share common characteristics Market share Business’s percent¬ age of the total sales generated by all companies in the same market N Needs Those things that a person must have in order to survive Net lease Occurs when the land¬ lord pays building insurance, and the tenant pays rent, taxes, and any other expenses Net sales The dollar amount of all sales with any returns subtracted Net worth Difference in what is owned, called assets, and what is owed, called liabilities o Operations manual Contains all of the rules, policies, and proce¬ dures that a business should follow in order to function effectively Opportunities Possibilities that arise from existing conditions Opportunity cost Value of the next-best alternative Organizational chart Shows who reports to whom in the company, or the chain of command Organizational structure Plan that shows how the various jobs in a company relate to one another; often represented in a chart and indicates the working relationships within the business P Partnership Business owned by two or more people Patent The grant of a property right to an inventor to exclude others from making, using, or sell¬ ing his or her invention; intent of a patent is to give the developer of a new product time to recover the development costs without having to worry about competition Payroll List of people who receive salary or wage payments from a business Percentage lease Tenant pays a base rent each month, and the landlord also receives a percentage of the tenant’s revenue each month Performance evaluation Man¬ agement control tool that helps determine whether the objectives for a particular job are being met Periodic inventory method Involves taking a physical count of your merchandise at regular inter¬ vals, such as weekly or monthly Perpetual inventory Method keeps track of inventory levels on a daily basis; can make a business more efficient and ensure that it never runs out of stock 394 Glossary greene_0538446145_Glossary, 1/15/8, 20:52, page: 395 Personal selling Direct commu¬ nication between a prospective buyer and a sales representative in which the sales representative attempts to influence the prospec¬ tive buyer in a purchase situation Physical distribution Includes transportation, storage, handling, and packaging of products within a channel of distribution Point-of-sale system Cash regis¬ ters with a software system that updates inventory records as each sale happens; bar-code scanners and credit card authorization sys¬ tems can be integrated into the POS system Positioning Creating an image for a product in the customer’s mind Premium Payment that is made to an insurance company to cover the cost of insurance; price paid to cover a specified risk for a specific period of time Press release Written statement meant to inform the media of an event or product Primary data Information col¬ lected or the very first time to fit a specific purpose Pro forma financial statement Financial statement based on pro¬ jected revenues and expenses Product life cycle Stages a prod¬ uct goes through from the time it is introduced to when it is no lon¬ ger sold; a product goes through four stages in its life cycle: intro¬ duction, growth, maturity, and decline Product mix Different products and services a business sells Profit sharing Compensation arrangement in which employees are paid a portion of the com¬ pany’s profits Profit Difference between the rev¬ enues taken in by a business and the costs of operating the business Prototype full-scale model of a new product Psychographics Data that describe a group of people in terms of their tastes, opinions, per¬ sonality traits, and lifestyle habits Psychological pricing Pricing method based on the belief that certain prices have an impact on how customers perceive a product Public relations Act of establish¬ ing a favorable relationship with customers and the general public Publicity Nonpaid form of com¬ munication that calls attention to a business or event through media coverage Pure risk Insurable risk that is faced by a large number of people and the amount of the loss can be predicted; presents the chance of loss but no opportunity for gain Q Qualitative restriction Standard of quality an imported product must meet before it can be sold; it can keep foreign businesses from competing with domestic producers and protect consumers from dangerous foreign products Quota Limit on the amount of a product that can be imported into a country over a particular period of time Quote An estimate for how much will paid for merchandise or service R Rational buying decisions Based on the logical reasoning of customers Rebate Refund offered to people who purchase a product Recruit To look for people to hire and attract them to the business Reorder point Predetermined level of inventory that signals when new stock should be ordered Return on investment (ROI) Amount earned as a result of the investment, usually expressed as a percentage Risk assessment Involves looldng at all aspects of a business and determining the risks it faces Risk management Involves tak¬ ing action to prevent or reduce the possibility of loss to a business Risk Possibility of some kind of loss; categorized as human risk, natural risk, and economic risk Royalty fees Weekly or monthly payments made by the local owner to the franchise company; these payments usually are a percentage of a franchise’s income s Salary Amount paid for a job position stated on an annual basis Sales promotion Incentive offered to customers in order to increase sales; examples include contests, free samples, rebates, coupons, special events, gift certifi¬ cates, and frequent-buyer reward programs Scarcity Occurs when people’s needs and wants are unlimited and the resources to produce the goods and services to meet those needs and wants are limited Secondary data Data found in already-published sources Self-assessment Evaluation of your strengths and weaknesses Service Corps of Retired Execu¬ tives (SCORE!) Group made up of more than 10,500 retired execu¬ tives who volunteer their time to provide entrepreneurs with real- world advice and know-how Share of stock Unit of ownership in a corporation Shoplifting Act of knowingly tak¬ ing items from a business without paying Small Business Administration (SBA) Independent agency of the federal government that was cre¬ ated to help Americans start, build, and grow businesses Small Business Development Centers (SBDC) Provides man¬ agement assistance to current and prospective small business owners Sole proprietorship Business that is owned exclusively by one person; enables one person to be in control of all aspects of the business Glossary 395 greene_0538446145_Glossary, 1/15/8, 20:52, page: 396 Speculative risk Risk which offers the insured the chance to gain as well as lose from the event or activity Staffing Involves determining the number of employees a company needs and defining a process for hiring them Startup costs Costs associated with beginning a business includ¬ ing the costs of renting a facility, equipping the outlet, and purchas¬ ing inventory Statement of purpose Brief explanation of why the writer of a business plan is asking for a loan and an explanation of what he or she plans to do with the money Stock card Paper inventory rec¬ ord for a single item Stock turnover rate Rate at which the inventory of a product is sold and replaced with new inventory Supply How much of a good or service a producer is willing to produce at different prices Survey List of questions to ask customers to find out demo¬ graphic and psychographic infor¬ mation; can be conducted by mail, over the phone, on the Internet, or in person T Target market Includes the indi¬ viduals or companies that are interested in a particular product or service and are willing and able to pay for it Tariff Tax on imports that gov¬ ernments use to protect domestic manufacturers of products that compete with imports Tenant Person who pays rent to occupy space owned by someone else Total product Product character¬ istics that will satisfy customer needs, including such things as color, size, quality, hours, warran¬ ties, delivery, and installation Trade area Area from which a business expects to attract customers Trade associations Organiza¬ tions made up of professionals in a specific industry Trade barriers Methods for keeping foreign businesses from competing with domestic producers Trade credit Offered when one business allows another business to buy now and pay later Trademark Name, symbol, or special mark used to identify a business or brand of product Trade shows Special meetings where companies of the same or related industry display their prod¬ ucts, can also be beneficial Transaction Any business activity that changes assets, liabilities, or net worth u Uncontrollable risk Risk on which actions have no effect, such as the weather Use-based data Data that helps a business determine how often potential customers use a particu¬ lar service V Variable costs Costs that go up and down depending on the quan¬ tity of the good or service produced Vendors Companies that sell products and services to businesses Venture capitalists Individuals or companies that make a profit investing in startup companies w Wages Payments for labor or services that are made on an hourly, daily, or per-unit basis Wants Those things that a person thinks he or she must have in order to be satisfied 396 Glossary greene_0538446145_Index, 1/15/8, 21:20, page: 397 A Accident insurance, 312 Account, 254-255 Accountant, 180 Accounting. See Financial statements Accounting equation, 250 Accounts payable as current liabilities, 251 defined, 251 ledger, 255 Accounts receivable as current assets, 251 defined, 251 ledger, 255 Accounts receivable financing, 242-243 A-Corp, 94 ADA. See Americans with Disabilities Act (ADA) Adizes, Ichak, 272 Advertising classified, 303 defined, 154-155 direct-mail, 159 dollars spent on, 155 fees (franchise), 181 in-store, 305 magazine, 159-160 message choice, 155 newspaper, 158 online, 155-156 outdoor, 160 promotion budget, 160 radio, 157-158 telephone directory, 158, 225 television, 156-157 transit, 160 want ads, 303 See also Promotion; Publicity Advertising Age, 157 Age Discrimination in Employment Act, 313 Agents, as intermediaries, 149 Aging tables, 255 Agreement, 200 Agricultural businesses, 5 Allowance for uncollectible accounts, 252 Alps Lawn Company, 361 Alps Technology, 361 Alterman, Scott and Greg, 331 Alternative Apparel, 331 Americans with Disabilities Act (ADA), 313-314 American Wholesalers and Distributors Directory, The, 153 Annual percentage rate, 198-199 Antidiscrimination laws, 313-314 Antitrust legislation, 194-195 Appearance, of business plan, 77 Appendix, of business plan, 76 Apple Computers, 105 Apply What You Learned, 30, 58, 86, 114, 142, 172, 204, 232, 264, 294, 326,356,388 Aptitude, 14 Architecture, careers in, 234 Articles of incorporation, 191-192 Aslan Computing, 53 ASPIRA, 63 Assessment. See Self-assessment, for entrepreneurship Assets current, 251 defined, 250 fixed, 251 Assignment of tasks, in organizing, 271 Association for Convenience and Petroleum Retailing, 335 AT&T, 155 Attorneys. See Lawyers Audio-video technology, careers in, 328 Authoritative management style, 272 Autocratic management style, 272 Aventis Pharmaceutical Health Care Foundation, 375 Index 397 greene_0538446145_Index, 1/15/8, 21:20, page: 398 i B Balance, between work and play, 35 Balance sheet, 250-252 Banking records, 256-258 Bank loans, 242-244 Bank of America Foundation, 375 Bank reconciliation, 257-258 Bank statement, 257-258 Banner ad, 155 Bar-code scanners, 279 Barron’s magazine, 181 Beech, Olive Ann, 3 Benefits employee, 311-312 of products, in selling, 165 Bentley Entrepreneur Society, 35 Be Your Own Boss competitive analysis, 107 distribution, 150 employee taxes, 259 functions of business, 47 interests, as business idea, 19 inventory, 227, 278 legal form of business, 192 management practices, 316 overseas manufacturing, 380 psychological pricing, 136 robbery, 336 SCORE counseling, 80 Biz Camp, 147, 209 Blank, Arthur, 7 BlueStream, 299 Blue Valley School District (Kansas City, Missouri), 3 Board of directors, 191 Bonus, 310 Borders, Louis, 285 Borrowing, discussed in business plan, 73 Bounced checks, 337 Brainstorming, 24 Branding, 129 Breadsmith, 183 Breakeven analysis, 290 Breakeven point, 139, 290 Brin, Sergey, 122 Budgeting, for promotion, 160 Build Your Business Plan Project, 31, 59, 87, 115, 143, 173, 205, 233, 265, 295, 327, 357, 389 Bundling, 136 Bureau of Industry and Security, 384 Bureau of the Census, 380 Business activities in a market economy, 47-48 Business broker, 179, 180 Businesses agricultural, 5 competition, regulatory promotion of, 194-196 consumer-protection laws, 198-199 family, 184-185 financing for, 240-245 franchises, 180-184 functions of, 47-48 intellectual property and, 196-197 legal advice for, 199-200 manufacturing, 5, 6 mining and extracting, 5 number of, in 2005, 6 purchasing existing, 178-180 purchasing, steps in, 179-180 retailing, 5, 6 service, 5, 6 starting your own, 185-186 success or failure, 8-9 wholesaling, 5, 6 women-owned, 11 See also Competition; International business; Legal forms of business Business ethics defined, 371 establishing in the workplace, 372-373 setting standards, 371-372 written code, 372-373 See also Social responsibilities Business insurance, 341-342 Business interruption insurance, 342 Business letters, 26-27 Business model, 3 Business operations, as uninsurable risk, 341 Business owner’s policy (BOP), 341-342 Business plans advantages over competition, 71 appearance of, 77 appendix, 76 backgrounds and experience of people, 65-66 completing, 74-77 concluding statement, 73 cover letter, 74 defined, 64-65 description, detailed, 70 elements, 69-73 executive summary, 75-76 financial management information, 72-73 ideas turned into, 63, 65, 70 importance of, 66-68 inconsistencies in, 82 international, 381 introduction, 70-71 398 Index greene_0538446145_Index, 1/15/8, 21:20, page: 399 introductory elements, 74-76 lack of, as reason for loan refusal, 244 main body, 69-70 marketing information, 71-72 mistakes in, 81-82 objectives of, 65 operations information, 73 ownership and legal structure, 70 parts of, 69-76 purposes of, 65-66 research for, 78-81 skills and experience, 71 software for, 83 statement of purpose, 75 table of contents, 75 title page, 75 See also Build Your Business Plan Project Business Professionals of America (BPA). See WinningEdge Business records. See Records Business risks. See Risk Business Start-Ups magazine, 181 Buying decisions about business space, 218-219 rational and emotional, 166 Buying space, 218-219 Buzz International Marketing Group, Inc., 177 C Canada, NAFTA and, 383 Capacity in a contract, 200 in Five Cs of Credit, 63 Capital, in Five Cs of Credit, 63 Capital investment, by entrepreneurs, 40-41 Capitalism, 45 Capitalization, 35 Capital resources, 39 Carrying costs, 280 Cash budget, 283-284 Cash disbursements, decreasing, 285 Cash discounts, 137 Cash flow cash budget, creating, 283-284 cash disbursements, decreasing, 285 economic effects on, 248 improving, 284-286 increasing cash receipts, 284-285 managing, 283-286 positive or negative, 248 Cash flow statement, 287 defined, 246-247 economic effects on cash flow, 248 forecasting receipts and disbursements, 247 income statement vs., 249 preparing, 247-248 Cash payments journal, 254 Cash receipts, increasing, 284-285 Cash receipts journal, 254 Center for Women’s Business Research, 11 Cham of command, 302, 333 Chamber of Commerce, 79, 80, 99, 106, 199 Change agents, 41 Channels of distribution defined, 148 direct, 149 indirect, 149 options, 149-150 See also Distribution Character, in Five Cs of Credit, 63 Charisma Cosmetics, 364 Check, bounced, 337 Check register, 256 Child labor laws, 313 China, economy of, 44 Choice, 45 Civil Rights Act of 1964, 313 Classified advertisements, for job openings, 303 Clayton Act, 195 Coaching, of employees, 317 Codes of ethics defined, 371 written, 372-373 Collateral defined, 242 in Five Cs of Credit, 63 unsecured loans and, 347 Collection, of debt, 347, 348 College placement centers, 304 Combination pay plan, 311 Command economy, 43 Commercial bank loans, 242-244 Commercial leases, 218-219 Commercials, 156-157 Commission, 310 Commission-based salary, 310 Commissioned agents, in exporting, 379 Commission-only pay plan, 310 Commitment, 12 Communication, 12, 35 Communication skills, in problem-solving, 24 Communism, 44 Community, responsibilities to, 375-376 Community shopping centers, 211-212 Compensation package benefits, 311-312 types of pay, 310-311 Competency, 12 Index 399 I greene_0538446145_Index, 1/15/8, 21:20, page: 400 Competition antitrust legislation and, 194-195 customer loyalty and, 109-110 defined, 45, 104 direct, 105-106 global, 350-352, 380 ignoring, 82 impact of, 104-105 increasing market share and, 132-133 indirect, 106 large retailers as, 107 positioning and, 129-130 protection of, by government agencies, 195-196 regulations that promote, 194-196 understanding, 105 Competition-based pricing, 134-135 Competitive analysis, 107-108 Competitive market, 53 Competitive wages, 311 Competitor’s actions, as uninsurable risk, 340 Computers, for tracking inventory, 279. See also Technology Concluding statement, of business plan, 73 Conditions, in Five Cs of Credit, 63 Conferences, as employee training, 317 Consideration, 200 Construction, careers in, 234 Consumer credit, 346-347 Consumer demand, as uninsurable risk, 340 Consumer Guide to Buying a Franchise, A, 180 Consumer Product Safety Act of 1972, 198 Consumer Product Safety Commission, 198 Consumers awareness of business ethics, 372 channels of distribution and, 149-150 laws protecting, 198-199 See also Customers Contracts defined, 199 elements, 200 franchise agreements and, 182 See also Partnership agreement Controllable risk, 339 Controlling, in organizing, 273 Cooperation, 12 Copyrights, 197 Corporation advantages, 192 defined, 70, 191 disadvantages, 191-192 limited liability company (LLC), 193 reasons for becoming, 192 S corporation, 192-193 terms used in, 191 Cost-based pricing, 134 Cost of goods sold, 250 Cost per Action (CPA), 156 Cost per Click (CPC), 156 Cost per Mil (CPM), 156 Costs breakeven point and, 139, 290 of carrying inventory, 280 of doing business, 51-52 fixed, 51 franchise operating, 181 marginal, 51-52 marginal benefit and, 51-52 opportunity, 46-48 startup, 181, 239 of stock outages, 281 variable, 51 County Business Patterns, 18 Cover letter, for business plan, 74 Creativity, 11, 12 Credit consumer, 346-347 creditworthiness, 347 loans vs., 346-347 policies, 347-348 risks of, 345-348 terms, 347 trade, 346 types of, 346-347 uncollectible accounts, 348 Credit card authorization systems, 279 Credit card fraud, 336 Creditors, responsibilities to, 375 Credit terms, 286 Creditworthiness, 347 Crime insurance, 342-343 Crocs, Inc., 119 Cultural diversity, 353 Culture, ethics and, 370-371 Current assets, 251 Current liabilities, 251 Customer loyalty, 109-110 Customer profile, 95-96 Customers calculating rent per, 219 decision-making by, 166-167 defined, 92 determining needs and wants of, 166-167 of existing business, 179 location and, 210-213, 216-217 maintaining loyalty of, 109-110 responsibilities to, 374 See also Consumers; Needs; Wants Customer service policies, 274 400 Index greene_0538446145_Index, 1/15/8, 21:20, page: 401 D DaimlerChrysler, 155 Data analysis in market research, 101 with spreadsheets, 111 Data collection, 100-101 Davis, Phillip, 129 Debt, personal, avoiding, 53 Debt capital, 241-245 Debt-to-equity ratio, 240 DECA (Delta Epsilon Chi). See WinningEdgc Decision making by customers, 166-167 in different economic systems, 42-44 See also Economic decision making; Problem solving Decline stage, of product life cycle, 366 Delegation of responsibility, 319 Delivery policies, 274 Demand curve, 50 defined, 50 See also Supply and demand Demand-based pricing, 134 Demand elasticity, 50 Democratic management style, 272 Demographics, 95 Dental insurance, 312 Department of Housing and Urban Development (HUD), 244-245 Department stores, 212 Depreciation, 252 Deterioration, of inventory, 280 Determination, 11 Develop Your Reading Skills, 5, 37, 65, 93, 121, 149, 179, 211, 239, 271, 301, 333, 363 Did You Know? advertising dollars, 155 annual marketing budget, 127 cost concerns of businesses, 284 cost of Hurricane Katrina, 339 family-controlled businesses, 184 grant-making corporations, 375 layout design, 220 minimum wage law, 311 primary data collection, 99 scarcity, 46 SCORE counseling, 79 Small Business Ad mini stration (SBA) loans, 245 women-owned businesses, 11 Direct channel of distribution, 149 Direct competition, 105-106 Direct exporting, 379 Directing management style, 272 Direct-mail advertising, 159 Disabled people, protection for, 313-314 Disaster planning, 333-334 Disbursements, 247 Disclosure statement, for franchises, 181-182 Discount pricing, 137-138 Discount stores, 212 Discoveries, 17 Discrimination, workplace, 313-314 Dismissal, of employees, 322 Disney, Walter Elias, 67 Distribution defined, 148 of goods and services, 150-151 manufacturing businesses, 151 retail businesses, 150 service businesses, 150-151 Web sites and, 150 See also Channels of distribution; Physical distribution Diversification, of products and services, 365 Diversity, cultural, 353 Dividends (stock), 191 DollarDiva Business Plan Competition, 237 Dowen, Aaron, 361 Downtown location, 210-211 Drugstores, 212 Dun and Bradstreet, Exporter’s Encyclopedia , 380, 381 E E-Builder, 91 Economic conditions, as uninsurable risk, 340 Economic decision making in different economic systems, 42-44 functions of business and, 47-48 opportunity cost and, 46-47 scarcity and, 46 U.S. economic system and, 45 Economic Development Administration (EDA), 245 Economic resources defined, 38 factors of production, 39 goods and services, 38-39 limited resources, 39-40 Economic risks, 332 Economic systems, 42 command economy, 43 market economy, 43 mixed economy, 44 traditional economy, 43 U.S., 45, 104 Index 401 greene_0538446145_Index, 1/15/8, 21:20, page: 402 Economy assessing conditions for growth strategy, 363 needs and wants, 36-38 scarcity in, 46 See also U.S. economy EDA. See Economic Development Administration (EDA) Eden Body Works, 147 Edison, Thomas A., 98 EEOC. See Equal Employment Opportunity Commission (EEOC) Elastic demand, 50 E-mail etiquette, 229 E-marketing, careers in, 144 Emergency planning, 333-334 Emotional buying decisions, 166 Employee compensation benefits, 311-312 wages and salary, 310-311 Employees alternatives to adding, 305-306 compensation package, 310-312 defined, 5 dishonest, 335-336 dismissal of, 322 entrepreneurs vs., 5 evaluating, 320, 321 hiring, 307-309 listening to, 319 managing, 315-322 motivation of, 318-319 need for, 300-301 performance evaluation, 320, 321 policy enforcement for, 316-317 promotion of, 320 recruiting, 303-305 regulations that protect, 313-314 training, 317-318 Employee theft, 335-336 Employment agencies, 304 Employment outlook, 32, 60, 88, 116, 144, 173, 206, 234, 266, 296, 328, 358, 390 Empowerment management style, 316 Enterprise zones, 214 Entrepreneur magazine, 181 Entrepreneurs, 2 as change agents, 41 defined, 5 employees vs., 5 present and past, 6-8 problem-solving process for, 21-23 reasons for becoming, 5 role of, in the U.S. economy, 40-41 successful, characteristics of, 10-12 tips for, 299 See also Planning a Career; What Went Wrong? Entrepreneurship advantages, 14 aptitude, assessing, 14 are you right for?, 13-15 defined, 5 disadvantages, 14-15 goal setting, 19-20 ideas, looking for, 16-17 interests, assessing, 13-14 investigate opportunities, 18 real-life lessons learned, 35 self-assessment for, 13-15 U.S. economy and, 3, 4 See also Businesses Entrepreneurship Business Plan Competition, 209 Environment laws governing, 377 respecting, 376-377 Environmental Protection Agency (EPA), 377 EPA. See Environmental Protection Agency (EPA) Equal Employment Opportunity Commission (EEOC), 313 Equilibrium price and quantity, 50 Equipment, obtaining, 224-226 Equity, 239 Equity capital, 240-241 Esteem needs, 37 Ethics codes of, 371, 372-373 culture and, 370-371 defined, 370 See also Business ethics Exclusive Concepts, 35 Executive summary, of business plan, 75-76 Existing business family business, 184-185 purchasing, 178-180 See also Franchise Expansion. See Growth strategies Experience lack of, as reason for loan refusal, 244 as source of business ideas, 17 summarized in business plan, 71 Exporter’s Encyclopedia (Dunn and Bradstreet), 380, 381 Exporting, 378-379 F Factors of production, 39 Failure, factors in, 9 402 Index greene_0538446145_Index, 1/15/8, 21:20, page: 403 Fair Credit Billing Act, 199 Fair Labor Standards Act (FLSA), 313 Family business, 184-185 Family Medical Leave Act (FMLA), 314 Famous Entrepreneur Barge, Anne, 167 Brin, Sergey, 122 Disney, Walter Elias, 67 Edison, Thomas A., 98 Ganz Family, 281 Griffin, Merv, 351 Pag, Johnny, 383 Page, Larry, 122 Ray, Rachel, 221 Revere, Paul, 44 Rowling, J.K., 312 Walker, Madam C.J., 7 Whitney, Eli, 197 Wright Brothers, 243 Faruk, Omar, 299 FBLA. See Future Business Leaders of America (FBLA) FDA. See Food and Drug Administration (FDA) Features. See Product features Federal Food, Drug, and Cosmetic Act, 198 Federal Trade Commission (FTC) Franchise and Business Opportunity Rule, 181 protection of competition by, 195-196 Feedback, customer loyalty and, 109 Finance careers in, 266 function of business, 48 Finance charge, 198-199 Financial analysis, in new product development, 368 Financial goals, 19 Financial institutions, 80 Financial management, information in business plan, 72-73. See also Financial statements Financial projections, 81 Financial statements analyzing, 286-290 breakeven analysis, 290 in business plan, 73 cash flow, 287 income, 287 net profit on sales analysis, 288-289 preparing, 286-287 profit goals, 289 sales analysis, 287-288 See also Pro forma financial statement Financing assess your financial needs, 238-240 business plan as aid in, 66-67, 73 commercial bank loans, 242-244 debt capital, 241-245 equity capital, 240-241 friends and relatives, 241-242 government agency loans, 244-245 personal contributions, 240 personal financial statement, 239-240 startup costs, 239 venture capitalists, 241 Five Cs of Credit (character, capacity, capital, collateral, conditions), 63 Five P’s of entrepreneurship (planning, persistence, patience, people, profit), 91 Fixed assets, 251 Fixed costs, 51 Floating ad, 155 Flood insurance, 341 Floor plan, 220 FLSA. See Fair Labor Standards Act (FLSA) FMLA. See Family Medical Leave Act (FMLA) Focus groups, market research through, 99 Focus on Economics, 36, 42, 49 Focus on Small Business, 4, 10, 16, 21, 64, 69, 78, 92, 97, 104, 120, 126, 131, 148, 154, 164, 178, 187, 194, 210, 218, 224, 238, 246, 253, 270, 276, 283, 300, 307, 315, 332, 338, 345, 362, 370, 378 Food and Drug Administration (FDA), 198 Forbes magazine, 181 Ford Motor Co., 155, 184 Ford Motor Company Fund, 375 Forecasted receipts and disbursements, 247 401(k) plans, 312 4Teens Network, LLC, 3 Franchise advantages, 183 advertising fees, 181 careers in, 206 defined, 180 disadvantages, 183-184 disclosure documents, 181-182 evaluating, 182 initial fee, 181 investigating, 181 operating costs, 181 ownership of, 180-184 royalty fees, 181 start-up costs, 181 Franchisee, 180 Franchise Opportunities Handbook, The, 180 Franchisor, 180, 182, 183, 184 Fraud, credit card, 336 Freedom of choice, 45 Free enterprise, 45 Index 403 greene_0538446145_Index, 1/15/8, 21:20, page: 404 Freelancers, 305 Friends, as source of business financing, 241-242 FTC. See Federal Trade Commission (FTC) Functions, job tasks, 301 Functions of business, 47-48 Funding, discussed in business plan, 73 Future Business Leaders of America (FBLA). See WinningEdge G GadgetSleeves, 237 Gagwear, 331 Gamson, Jordy, 331 Ganz, Samuel, 281 Ganz Toys, 281 GasBuddy.com, 38 Gates, Bill, 3, 17 General journal, 254 General Motors, 155 Geographic data, 95 Geographic expansion, 365 Global trends and opportunities. See International business Goals, 11 in business plan, 70 financial, 19 long-term, 123 marketing strategy and, 121-123 medium-term, 123 nonfinancial, 19-20 profit, setting and meeting, 289 setting, 19-20 short-term, 122-123 SMART (specific, measurable, attainable, realistic, timely), 19 Goods defined, 38-39 receiving, to sell, 152-153 retail channels of distribution, 150 transportation of, 151-152 See also Products Goodwill, 179 Google, 122 Government agencies loans from, 244-245 protection of competition by, 195-196 Government regulation/protections of competition, 195-196 of employees, 313-314 of environment, 377 of intellectual property, 196-197 of international trade, 382-384 Grants, from corporations, 375 Griffin, Merv, 351 Gross lease, 219 Gross profit, 250 Gross sales, 288 Growth stage, of product life cycle, 366 Growth strategies choosing a strategy, 364-365 controlling your growth, 363-364 determining when to expand, 362-363 product life cycle and development, 366-369 H Handling (of products), 152 Harpo Productions, Inc., 8 Health insurance, 312 Hendricks, Brian, 91 Hierarchy of needs (Maslow), 37 Hiring interviewing candidates, 308-309 making a job offer, 309 reviewing and verifying job applications, 308 screening candidates, 307-308 See also Compensation package Hobbies, 16-17 Home-based businesses, 214-215 Home Depot, The, 7-8 HUD. See Department of Housing and Urban Development (HUD) grants Human resources alternatives to adding staff, 305-306 applying leadership styles, 316 compensation package, 310-312 controlling, 320-322 defined, 39, 300 delegating responsibility, 319 directing, 315-318 dismissing employees, 322 enforcing employee policies, 316-317 evaluating employees, 320, 321 hiring, 307-309 implementing your staffing plan, 315-318 listening to employees, 319 motivating employees, 318-319 promoting employees, 320 recruiting, 303-305 regulations that protect employees, 313-314 staffing, 300-303 training employees, 317-318 understanding management levels, 316 Human risks, 332 Human services careers, 32 Hunt, Leo, 72 Hurricane Katrina, 333, 339 404 Index greene_0538446145_Index, 1/15/8, 21:20, page: 405 I IBM, 105 Icebox, The, 331 Ideas businesses bom from, 63, 65, 70 defined, 16 development of, 367 screening of, 367-368 where to find, 16-17 Ideas in Action Capitalize on Youth Marketing, 177 Electronic Safekeeping, 237 Entertaining and Planning, 269 Growth is Risky, 331 Making Job Connections, 3 A Neighborhood Business, 209 Serving Customers’ Needs, 91 Starting Young and Moving Up, 361 Turning a Bad Experience into a M illi on Dollars, 147 Turning an Idea into a Business, 63 Turning Creative Fun into Dollars, 119 Web Site Design, 35 Working for What You Believe In, 299 IGD company, 220 Immigration Reform and Control Act, 313 Implementing, in organizing, 272-273 Importing, 379 Inc. magazine, 181 Income, irregular, 14 Income statement, 249-250, 287, 289 Income tax, 259 Incorporate, 191-192 Independence, 11 Indirect channel of distribution, 149 Indirect competition, 106 Indirect exporting, 379 Industrial businesses, location of, 214 Industrial park, 214 Industry, description in business plan, 71 Inelastic demand, 50 Infomercials, 157 Information gathering, 22 Information technology, careers in, 296 Initial franchise fee, 181 Installment loan, 347 In-store advertising, 305 Insurable risk, 339 Insurance accident, 312 business, 341-342 business interruption, 342 business owner’s policy (BOP), 341-342 buying, 343-344 careers in, 358 choosing an agent, 343 coverage, 343-344 crime, 342-343 dental, 312 as employee benefit, 312 flood, 342 health, 312 on inventory, 280 as job benefit, 312 liability protection, 342 life, 312, 342 property, 341 renter’s, 343 workers’ compensation, 349-350 Intellectual property, 196-197 Interest, on unsold inventory, 280 Interests assessing, 13-14 as source of business ideas, 16-17 Intermediaries, 149 Intermediate-range planning, 271 Internal Revenue Code, S corporation organization under, 192 International business business plan for, 381 cultural diversity and, 353 exporting, 378-379 government assistance for, 383-384 government regulation for, 382-384 importing, 379 market analysis, 380-381 pros and cons, 350-352, 380 risks in, 350-352 selling worldwide through the Web, 379 International Trade Administration, 384 Internet business plan information on, 80-81 distribution through, 150 for investigation of opportunities, 18 marketing though, 169 selling worldwide through the Web, 379 supplier identification through, 225 See also World Wide Web Interns, 305 Interviews of job candidates, 308-309 rules for, 309 sample questions, 309 Introduction, to business plan, 70-71 Introduction stage, of product life cycle, 366 Introductory elements, of business plan, 74-76 Introductory pricing, 136 Inventions, 17 Index 405 greene_0538446145_Index, 1/15/8, 21:20, page: 406 Inventory carrying costs, 280 costs of being out of stock, 281 defined, 224, 276 determining, 282 interest on, 280 management concerns, 276-277 managing, 280-282 for ongoing businesses, 227 periodic method, 279 perpetual method, 278-279 physical, 279-280 purchasing, 226-227 purchasing plan, 277-278 for startup business, 226-227 stock turnover rate, 281-282 tracking, 278-280 Inventory financing, 243 J Jensen, Erik and Andrew, 269 Jibbitz, 119 Job, 301 Job analysis, 301-302 Job applicants interviewing, 308-309 offering job to, 309 screening, 307-308 Job attributes checklist, 14 Job creation, by entrepreneurs, 40-41 Job description, 301-302 Job interview, 308-309 Job offer, 309 Johnson & Johnson, 155 Journals, 254 Justice Department, 195-196 Jx2 Productions, 269 K Kasner, Edward, 122 KFC, 25 L Labeling, 129 Landlord, 219 Landscape architecture, careers in, 88 Latin Artist, 63 Lawrence, Jasmine, 147 Lawyers, 199-200 Layout floor plan, 220 manufacturing business, 222-223 retail business, 220-222 406 service business, 222 wholesale business, 222 Leadership skills, 291 Leadership styles, 316 Lease of business space, 218-219 commercial, 218-219 costs and benefits of, 219 gross, 219 net, 219 percentage, 219 Ledgers, 254-255 Legal forms of business corporation, 191-193 limited liability company (LLC), 193 partnership, 188-190 S corporation, 192-193 sole proprietorship, 187-188 Legality, of a contract, 200 Legal structure, in business plan, 70 Lelia College, 7 Letters business, 26-27 cover letter for business plan, 74 Liabilities/liability current, 251 defined, 239, 250 long-term, 251 Liability insurance, 342 Library, for investigation of opportunities, 18 Licenses, 198 Life insurance, 312, 342 Lighting, retail business, 221 Limited liability company (LLC), 193 Line of credit, 242 Listening to employees, 319 for maintaining customer loyalty, 109 during telephone conversation, 201 Loans commercial bank, 242-244 from friends and relatives, 241-242 government agency, 244-245 installment, 347 long-term, 242 reasons for refusal of, 243-244 secured, 242-243, 347 Small Business Administration (SBA), 244, 245 unsecured, 243, 347 Local factors, as uninsurable risk, 341 Local governments, loans from, 245 Location community shopping centers, 211-212 description in business plan, 71 Index greene_0538446145_Index, 1/15/8, 21:20, page: 407 downtown, 210-211 evaluation of, 216-217 home-based businesses, 214-215 industrial businesses, 214 neighborhood shopping centers, 211 nonretail business, 213-215 regional shopping centers, 212 retail business, 210-213 service businesses, 213-214 site selection, 216-217 stand-alone stores, 212-213 super-regional shopping centers, 212 warehouses, 213 LogicLotus, 299 Long-term goals, 123 Long-term liabilities, 251 Long-term loan, 242 M Magazine advertising, 159-160 Make Academic Connections Career Success, 15 Communication, 9, 20, 30, 41, 54, 59, 68, 77, 86, 96, 103, 110, 125, 130, 138, 142, 153, 168, 172, 186, 200, 204, 217, 228, 232, 245, 260, 264, 275, 282, 294, 322, 337, 344, 352, 357, 377, 388 Economics, 48, 54, 59 Geography, 96, 153, 205 History, 30, 205 Language Arts, 82 Management, 68, 103, 110, 115, 193, 352 Marketing, 168, 172 Math, 9, 15, 20, 25, 30, 48, 58, 77, 82, 96, 114-115, 125, 138, 142, 143, 163, 173, 193, 204, 223, 228, 232-233, 245, 252, 260, 264, 282, 290, 294-295, 314, 326, 337, 344, 357, 369, 377, 384, 388-389 Problem Solving, 25, 48, 143, 163, 217, 252, 275, 290, 295, 306, 327 Research, 86, 115, 130, 172, 186, 200, 204-205, 223, 228, 232, 306, 314, 377, 384, 389 Social Studies, 9, 20, 41 Technology, 110 Mall of America, 212 Management defined, 270 as function of business, 47 levels of, 316 Management styles, 272-273 Manager, 270 Manpower, Inc., 304 Manufacturing businesses, 5, 6 channels of distribution for, 149-151 defined, 5 layout design, 222-223 types of, 6 Marcus, Bernie, 7 Marginal benefit, 51-52 Marginal cost, 51-52 Markdown price, 134, 137 Market competitive, 53 customer profile and, 95-96 identifying, 92-96 prices and structure of, 52-54 researching, 97-103 target, 81, 92-93 See also Competition Market analysis, international, 380-381 Market development, 365 Market economy defined, 43 functions of business in, 47-48 Marketing defined, 120 as function of business, 47 information in business plan, 71-72 of new products, 369 real-life lesson about, 35 Marketing concept defined, 121, 126 product and, 126-127 Marketing goals long-term, 123 marketing plan and, 124-125 medium-term, 123 short-term, 122-123 Marketing mix defined, 47, 121 distribution, 148-153 price, 131-138 product, 126-130 promotion, 154-163 Marketing plan, 124-125 Marketing strategy defined, 121 dollars spent annually, 127 long-term goals, 123 medium-term goals, 123 requirements of, 121-122 short-term goals, 122-123 Market penetration, 365 Market research careers in, 116 defined, 97 greene_0538446145_Index, 1/15/8, 21:20, page: 408 / Market research ( Continued ) disadvantages of primary data, 99 focus groups in, 99 observation in, 98 primary data in, 97-99 secondary data, 99 steps in, 100-103 surveys in, 98 Market segments customer profile and, 95-96 defined, 94 importance of, 94-95 Market share defined, 132 as pricing objective, 132-133 Market structure defined, 52 monopolistic competition, 53 monopoly, 54 oligopoly, 53 perfect competition, 52 prices and, 52-54 Markup price, 134 Maslow, Abraham, 37 Maslow’s Hierarchy of Needs Pyramid, 37 Mass production, 197 Maturity stage, of product life cycle, 366 McClure, Dave, 53 Medical insurance. See Health insurance Medium-term goals, 123 Mentoring, 317 Mentorship, 35 MESBICs. See Minority Enterprise Small Business Investment Companies (MESBICs) Mexico, NAFTA and, 383 Microsoft, 17 Middle-management level, 316 Minimum wage, 311, 313 Mining and extracting businesses, 5 Minority Enterprise Small Business Investment Companies (MESBICs), 244 Mistakes, learning from, 24-25 Mixed economy, 44 Mixed management style, 272-273 Monopolistic competition, 53 Monopoly, 54 Monster.com, 304 Motiva International, 318 Motivation of employees, 318-319 of entrepreneurs, 11 Multimedia presentations, 117 Multiple-unit pricing, 137 Municipal governments, loans from, 245 N NAFTA. See North American Free Trade Agreement (NAFTA) National Federation of Independent Businesses (NFIB), 284 National Foundation for Teaching Entrepreneurship (NFTE), 147, 209, 299 National Philanthropic Trust, 375 National Safety Council, 333 Natural resources, 39 Natural risks, 332 Needs about, 36-38 of customers, serving, 91 determining, in selling, 166-167 Needs assessment, 166 Need satisfying, 166 Neighborhood shopping centers, 211 NET Bookmark advertising history, 157 brand or product name, 129 franchises, 183 gasoline prices, Web sites for, 38 management styles, 272 Manpower, Inc., employment agency, 304 market segmentation, 101 recognizing opportunity, 17 robbery awareness, 335 Small Business Administration (SBA) loans, 244 social responsibilities, 374 store layouts, 222 teen entrepreneurs, 81 Net cash flow, 247 Net income after taxes, 288-289 Net income before taxes, 250 Net income from operations, 288-289 Net income/loss after taxes, 250 Net lease, 219 Net profit on sales analyzing, 288-289 importance of, 289 Net sales, 288 Networking, 133 Net worth, 239, 250, 252 New product development. See Product development News Corp., 155 Newspaper advertising, 158 NFIB. See National Federation of Independent Businesses (NFIB) 408 Index greene_0538446145_Index, 1/15/8, 21:20, page: 409 NFTE. See National Foundation for Teaching Entrepreneurship (NFTE) Nike, 129 Nilsson, George, 161 No nfin ancial goals, 19-20 Nonretail businesses, location of, 213-215 North American Free Trade Agreement (NAFTA), 383 O Objectives, of business plan, 65 Observation, market research through, 98 Obsolescence, 280 Occupational Safety and Health Act (OSH Act) of 1970, 313 Occupational Safety and Health Administration (OSHA), 313, 333 Odd/even pricing, 137 Office of International Trade of the Small Business Administration, 383-384 Office of Special Counsel for Immigration- Related Unfair Employment Practices, 313 Oligopoly, 53 Online advertising disadvantages of, 156 paying for, 156 types of, 155-156 Online career and employment sites, 304 O nl ine resources, for research, 80-81 On-the-job training, 317 Operating costs, franchise, 181. See also Operating expenses Operating expenses, 250 Operating policies, 274 Operating procedures controlling, 273 customer service policies, 274 delivery policies, 274 implementing, 272-273 management functions, 270-273 operating policies, 274 operations manual, 273-275 organizing, 271 planning, 270-271 safety policies, 275 staffing, 272 Operations, information in business plan, 73 Operations management financial management, 283-290 inventory management, 276-282 operating procedures, 270-275 See also individual topics Operations manual customer service policies, 274 defined, 273 delivery policies, 274 operating policies, 274 rules, policies, and procedures, 273 safety policies, 275 Opportunities comparing, 18 defined, 16 investigating, 18 recognizing, 6-8 Opportunity cost, 46-47 Organizational chart, 271, 302 Organizational structure, 271, 302-303 Organizing, 271 OSHA. See Occupational Safety and Health Administration (OSHA) Outdoor advertising, 160 Outstanding checks, 257-258 Overtime work, 313 Owner’s equity, 250 Ownership style, in business plan, 70. See also Legal forms of business P Packaging, 128, 129, 152 Pag, Johnny, 383 Page, Larry, 122 Paid advertisements, 157 Paid leave, 311 Participatory management, 272 Partnership, 70 advantages, 188 defined, 188 disadvantages, 188 Partnership agreement, 188-190 Pascaretta, Joseph, 361 Patent pending, 196 Patents, 196 Pay, types of, 310-311 Payroll defined, 258 records for, 258-259 reducing, 286 register, 258-259 Payroll, as business expense, 286 Payroll deductions, 259 Payroll taxes, 259 Penetration pricing, 136 Pension plans, 312 Percentage lease, 219 Perfect competition, 52 Performance evaluation, 320, 321 Index 409 greene_0538446145_Index, 1/15/8, 21:20, page: 410 ■ H PerioDent Company, 161 Periodic inventory method, 279 Perpetual inventory method, 278-279 Perseverance, 11, 35 Personal contributions, in business financing, 240 Personal debt, avoiding, 53 Personal financial statement, 239-240 Personal selling defined, 165 product knowledge, 165 Physical distribution defined, 151 packaging, 152 product storage and handling, 152 receiving goods to sell, 152-153 transportation, 151-152 Physical inventory, 279-280 Physiological needs, 37 Picture-Perfect cosmetics, 364 Planning, 270-271 Planning a Career architecture and construction, 234 audio-video technology, 328 e-marketing, 144 finance, 266 franchising, 206 human services, 32 information technology, 296 insurance, 358 landscape architecture, 88 marketing researcher, 116 property management, 60 public safety, 174 transportation, 390 Point-of-sale (POS) software system, 279 Policies, 273 Pop-under ad, 156 Pop-up ad, 155 Positioning, 129-130 Posting, 254-255 Premium, insurance, 338 Presentation skills, 55 Press release, 161 Prestige pricing, 136 Price lining, 137 Prices ■ defined, 131 determining, for a product, 134-135 determining, for a service, 135-136 equilibrium, quantity and, 50 markdown, 134, 137 market structure and, 52-54 markup, 134 410 Index ■ price wars, 94 See also Pricing Price skimming, 136 Pricing breakeven point, 139 bundling of services and, 136 competition-based, 134-135 cost-based, 134 demand-based, 134 discount, 137-138 introductory, 136 market share and, 132-133 objectives, setting, 131-133 psychological, 136 return on investment (ROI) and, 132 time-based, 135-136 See also Price Primary data defined, 97 disadvantages of, 99 types, 98-99 Print resources, for research, 80 Private property, 45 Problem resolution, in selling, 166 Problem solving process for, 21-23 skills for, 24-25 Procedures, 273 Procter & Gamble, 155 Product development financial analysis, 368 idea development, 367 idea screening, 367-368 marketing, 369 prototype and testing, 368 strategy development, 368 See also Product life cycle and development Product features, 128-129, 165 Production factors of, 39 as function of business, 47 Product knowledge, 165 Product life cycle and development decline stage, 366 growth stage, 366 introduction stage, 366 maturity stage, 366 new product development, 367-369 See also Product development Product mix, 127 Products analyzing sales by, 287-288 description in business plan, 71 diversification and, 365 greene_0538446145_Index, 1/15/8, 21:20, page: 411 knowledge of, 165 marketing concept and, 126-127 marketing mix and, 126-130 positioning and, 129-130 selecting features of, 128-129 Product storage, 152 Professional consultants, 80 Profit, 45 Profit/loss statement. See Income statement Profit sharing, 310 Pro forma financial statements, 73 balance sheet, 250-252 cash flow statement, 246-248 defined, 239 income statement, 249-250 See also Financial statements Promotional mix, 154 Promotional pricing, 137 Promotion, of employees, 320 Promotion, of products and services advertising, 154-160 consumer needs and wants, 166-167 personal selling, 165 publicity, 161-163 rebate, 168 sales promotion, 168 telemarketing, 168 See also individual topics Property insurance, 341 Property management, careers in, 60 Proposals, from vendors, 225-226 Prototype, 368 Provisional patent application, 196 Psychographics, 95 Psychological pricing, 136 Publicity defined, 161 press release, 161 public relations, 162 self-promotion, 163 Public relations, 162 Public safety, careers in, 174 Purchases journal, 254 Purchasing equipment and supplies, 224-226 inventory, 226-227 Purchasing plan, inventory and, 277-278 Pure risk, 338-339 Q Qualitative restriction, 382 Quantity, 50 Quantity discounts, 138 Quota, 382 Quote, as purchase estimate, 226 R Radio advertising, 157-158 Rapappy, Inc., Personalized Headbands and Wristbands, 209 Rational buying decisions, 166 Ray, Rachel, 221 Rebate, 168 Receipts, 247 Receiving goods to sell, 152-153 Reconciling a bank statement, 257-258 Recordkeeping, 253-260. See also Records Records aging tables, 255 banking, 256-258 journals, 254 ledgers, 254-255 payroll, 258-259 subsidiary ledgers, 255 tax, 259-260 Recovery plan, 333 Recruiting, for job positions classified advertisements, 303 college placement centers, 304 defined, 303 employment agencies, 304 in-store advertising, 305 online career and employment sites, 304 referrals, 305 Referrals, for jobs, 305 Regional shopping centers, 212 Regulation, government. See Government regulation /protections Relatives, as source of business financing, 241-242 Rent, calculating, per customer, 219 Renter’s insurance, 343 Reorder point, 227, 279 Repetitive stress injuries, 348 Research for business plan, 72, 78-81 insufficient, 81 of international market, 380-381 Resource allocation, 271 Resources capital, 39 economic, 38-40 limited, 39-40 natural, 39 See also Human resources Resume, 261 Index 411 greene_0538446145_Index, 1/15/8, 21:20, page: 412 Retailing businesses channels of distribution for, 149-150 competition and, 107 defined, 5 layout design, 220-222 location of, 210-213 types of, 6 Retail price, 134-135 Retirement plans, 312 Return on investment (ROI) defined, 132 discussed in business plan, 73 as pricing objective, 132 Revenue, 249 Revere, Paul, 44 Revere Copper and Brass, Inc., 44 Review Your Knowledge, 29-30, 57-58, 85-86, 113-114, 141-142, 171-172, 203-204, 231-232, 263-264, 293-294, 325-326, 355-356, 387-388 Risk classification of, 338-340 controllable, 339 of credit, 345-348 defined, 332 discussed in business plan, 73 economic, 332 on entrepreneurship, 14 human, 332 identifying, 332 insurable, 339-340 in international business, 350-352 natural, 332 preparing to face, 333-334 pure, 338-339 speculative, 339 theft as, 335-337 uncontrollable, 339 uninsurable, 339-341 at work, 348-350 Risk assessment, 333 Risk management, 332. See also Insurance; Theft Robbery, 335, 336 Robinson-Patman Act, 195 Rodriguez, Jeffrey, 63 Rowling, J.K., 312 Royalty fees, for a franchise, 181 Rules, 273 S Safety policies, 275 Safe working conditions, 313 Salary, 310. See also Wages Sales analyzing, 287-288 breakeven analysis and, 290 gross, 288 net, 288 net profit on, 288-289 Sales journal, 254 Sales promotion, 168 Sales tax, 260 Sanders, Colonel, 25 SBA. See Small Business Administration (SBA) SBDCs. See Small Business Development Centers (SBDCs) Scanners, 99 Scarcity, 46 Schmelzer, Sheri and Rich, 119 Schultz, Howard, 7 SCORE. See Service Corps of Retired Executives (SCORE) S corporation, 192-193 Screening, of job candidates, 307-308 Seasonal discounts, 138 Secondary data, 99, 106 Secured loans, 242-243, 347 Security needs, 37 Self-actualization needs, 37 Self-assessment, for entrepreneurship, 13-15 Self-confidence, 11 Self-promotion, 163 Selling, 164-165. See also Personal selling Seminars, as employee training, 317 September 11, 2001, 340 Serrano, John, 63 Service businesses channels of distribution for, 150-151 defined, 5 layout design, 222 location of, 213-214 types of, 6 Service Corps of Retired Executives (SCORE), 79, 80 Service, customer loyalty and, 109-110 Services bundling, 136 defined, 38-39 description in business plan, 71 diversification and, 365 positioning, 129-130 pricing, 135-136 Shareholders, 191, 192 Share of stock, 191 Sharpen Your Entrepreneurial Skills breakeven point, 139 business letters, 26-27 412 Index greene_0538446145_Index, 1/15/8, 21:20, page: 413 cultural diversity, 353 data analysis with spreadsheets. 111 e-mail etiquette, 229 leadership skills, 291 marketing and the Web, 169 presentation skills, 55 resume, 261 teamwork, 323 telephone conversations, 201 time management, 385 using technology tools, 83 Shea, Ivatelin, 237 Sherman Act, 195 Shills, 182 Shoplifting, 335 Shopping centers community, 211-212 neighborhood, 211 regional, 212 super-regional, 212 Short-term goals, 122-123 Short-term planning, 271 Sick leave, 311 Site selection, 216-217 Skills leadership, 291 presentation, 55 problem-solving, 24-25 speaking, 89 summarized in business plan, 71 See also Sharpen Your Entrepreneurial Skills Small Business Administration (SBA) as business research source, 79 entrepreneurial business chart, 6 information published by, 80 international trade statistics from, 380 for investigation of opportunities, 18 loans from, 244, 245 Office of Advocacy, 6, 8 Office of International Trade, 383-384 secondary data from, 99 Small Business Development Centers (SBDCs), 79 Small Business Investment Companies (SBICs), 244 SMART (specific, measurable, attainable, realistic, timely) goals, 19, 122 Smigler, Scott, 35 Social needs, 37 Social responsibilities to community, 375-376 to creditors, 375 to customers, 374 to investors, 375 personal, 373 to suppliers, 374-375 Software for business plan, 83 point-of-sale, 279 Sole proprietorship, 70 advantages, 187-188 defined, 187 disadvantages, 188 Solutions, identifying, 22-23 Soviet Union, 44 Space, lease or buy, 218-219 Spamming, 156 Speaking skills, 89 Speculative risk, 339 Spreadsheets, 111, 284 SQ3R (survey, question, read, recall, review) method, 333 Staff. See Employees Staffing alternatives to adding staff, 305-306 defined, 272, 301 implementing your plan, 315-318 job descriptions, 301-302 organizational structure, 302-303 recruiting, 303-305 See also Hiring Stahl, Mike, 3 Stand-alone stores, 212-213 Starbucks Coffee Company, 7 Startup businesses inventory for, 226-227 loans declined for, 243-244 Startup costs, 181, 239 StartUpPC, 91 State governments, loans from, 245 Statement of purpose, in business plan, 75 Stereotyping, 353 Stevens, Sarah-Jane, 364 Stock, corporate, 191 Stock card, 278-279 Stockholders, 191, 192 Stock turnover rate, 281-282 Storage of inventory, 280 Strategic planning, 271 Strauss, Levi, 3 Subsidiary ledgers, 255 Success entrepreneurial characteristics for, 10-12 factors in, 8-9 Supermarkets, 212 Super-regional shopping centers, 212 Supervisory management level, 316 Index 413 greene_0538446145_Index, 1/15/8, 21:20, page: 414 Suppliers credit terms, 286 of existing business, 179 identifying, 225 responsibilities to, 374-375 See also Vendors Supplies, obtaining, 224-226 Supply curve, 50 defined, 49-50 Supply and demand, 40 curves, 50 demand, defined, 50 equilibrium price, quantity, and, 50 supply, defined, 49-50 Survey design of, 101 for market research, 98 sample, 102 T Table of contents, of business plan, 75 Target Corporation, 374 Target markets competition and, 105 customer profile and, 95-96 defined, 92 defining, 81 identifying, 93 Tariff, 382 Task assignment, 271 Taxes net income after, 288-289 net income before, 250 net income/loss after, 250 sales, 260 Tax records, 259-260 Taylor, Ephren, Jr., 3 Teams, member characteristics, 12 Teamwork, 323 Technology for business plan, 83 changes in, as uninsurable risk, 341 e-mail etiquette, 229 for inventory tracking, 279 keeping up with, 11 marketing and the Web, 169 o nli ne career and employment sites, 304 selling worldwide through the Web, 379 spreadsheets. 111, 284 See also Internet; Web sites; World Wide Web Teen entrepreneurs, 81, 91 Telemarketing, 168 Telephone conversations, effective, 201 Telephone directory advertising, 158, 225 Television advertising, 156-157 Temporary workers, 306 Tenant, 218-219 Theft bounced checks, 337 credit card fraud, 336 by employees, 335-336 robbery, 336 shoplifting, 335 Theory X managers, 316 Theory Y managers, 316 Think About It, 9, 15, 20, 25, 41, 48, 54, 68, 77, 82, 96, 103, 110, 125, 130, 138, 153, 163, 168, 186, 193, 200, 217, 223, 228, 245, 252, 260, 275, 282, 290, 306, 314, 322, 337, 344, 352, 369, 377, 384 Thomas Register, The, 153 Time-based pricing, 135-136 Time management, 385 Time Warner Inc., 155 Title page, of business plan, 75 Top-management level, 316 Trade area, 216 Trade associations, 80, 225 Trade barrier, 382 Trade credit, 346 Trade discounts, 138 Trade fairs, 380 Trade magazines, 153, 225 Trademarks, 197 Tradeoff, 46 Trade shows, 18 Traditional economy, 43 Training, 317-318 Transaction, financial, 253-254 Transit advertising, 160 Transportation careers in, 390 in channel of distribution, 151-152 Trick banner, 155 Trust, 194 Truth-in-Lending Act of 1968, 198-199 Turnover rates, of inventory, 281 Twin Spin DJ and Entertainment, 269 U U-Corp, 94 Uncollectible accounts, 251-252, 348 Uncontrollable risk, 339 Uninsurable risk, 339-341 414 Index greene_0538446145_Index, 1/15/8, 21:20, page: 415 Universal product code (UPC), 99 Unsecured loans, 243, 347 U.S. Census secondary data from, 99 trade statistics from, 380 U.S. Department of Commerce, 380, 384 Bureau of Industry and Security, 384 Economic Development Administration (EDA) of, 245 Franchise Opportunities Handbook, The, 180 International Trade Administration, 384 trade fairs and seminars, 380 U.S. Department of Housing and Urban Development (HUD), 244-245 Use-based data, 95 U.S. economic system, 45, 104 U.S. economy entrepreneurship and, 3, 4 entrepreneurs’ role in, 40-41 family businesses in, 184 U.S. Justice Department Antitrust Division, 195-196 U.S. Occupational Health and Safety Administration. See Occupational Safety and Health Administration (OSHA) U.S. Patent and Trademark Office, 196 U.S. Small Business Administration. See Small Business Administration (SBA) V Vacations, employee, 311 Valuator, 180 Variable costs, 51 Vendors, 225-226. See also Suppliers Venture capitalists, 241 Verizon, 155 Vocabulary Builder, 29, 57, 85, 113, 141, 171, 203, 231, 263, 293, 325, 355, 387 W Wages competitive, 311 defined, 310 laws governing, 313 types of pay, 310-311 Walker, Charles Joseph, 7 Walker, Madam C.J., 7 Wallpaper ad, 155 Wall Street Journal, 181 Wal-Mart, 107, 147, 184 Wal-Mart Foundation, 375 Walt Disney Corporation, 67, 155 Want ad, 303 Wants about, 36-38 determining, in selling, 166-167 Warehouses retail store, 213 wholesale business in, 222 Warren, Sandy, 318 Web marketing, 169 Web site design, 35 Web sites gasoline prices on, 38 for research, 80-81 Webvan, 285 Wells, Tina, 177 Wells-Fargo Foundation, 375 West Edmonton Mall, 212 What Went Wrong? All Your Eggs in One Basket, 256 Avoid Personal Debt, 53 Dental Promotion Leaves Bad Taste, 161 Do Market Research, 72 Experience Needed, 13 Goodbye, Gorgeous!, 342 Makeup Test, 364 Packaging Matters, 128 Partnership Woes, 190 Price War, 94 Right Space, Wrong Place, 215 Too Big, Too Fast, 285 Whom Do You Trust?, 318 What Would You Do?, 30, 59, 87, 115, 143, 173, 205, 233, 265, 295, 327, 357, 389 Wheeler-Lea Act, 195 Whitney, Eli, 197 Whole Foods, 147 Wholesalers, as intermediaries, 149 Wholesaling businesses defined, 5 layout design, 222 types of, 6 Williams, Ryan, 209 Window displays, 221 Winfrey, Oprah, 3, 8 WinningEdge Business Professionals of America (BPA) Global Marketing Team Event, 145 Prepared Speech Event, 89 Presentation Management Team Event, 33 Small Business Management Team Event, 391 DECA (Delta Epsilon Chi) Business Law and Ethics Management Team Decision Making Event, 207 Index 415 greene_0538446145_Index, 1/15/8, 21:20, page: 416 WinningEdge (C ontinued ) Business Services Marketing Series Event, 359 Buying and Merchandising Management Team Decision Making Event, 235 Entrepreneurship Promotion Project, 175 Future Business Leaders of America (FBLA) Business Financial Plan, 267 Business Plan, 329 Emerging Business Issues Event, 61 Multimedia Presentation, 117 Partnership with Business, 297 Women, as business owners, 11 Workers’ compensation, 349-350 Workplace antidiscrimination laws, 313-314 ethical, 372-373 Workplace safety, 313 Work risks Federal Employee’s Compensation Act (FECA), 348-349 types of, 348 workers’ compensation, 349-350 World Water Council, 46 World Wide Web distribution and, 150 exporting through, 379 recruiting employees with, 304 See also Internet Wright, Wilbur and Orville, 243 Y Youth Entrepreneurship Expo, 209 Youth Venture, 63 Z Zoning laws, 198 416 Index greene_0538446145_Index, 1/15/8, 21:20, page: 417 greene_0538446145_Index, 1/15/8, 21:20, page: 418