Chapter 9 - Global Entrepreneurship and Small Business Management

At the end of this Chapter, you must able to:

 Explain the importance of entrepreneurs in the development of an economy.

 Differentiate between the types of entrepreneurial businesses.

 Describe telecommuting and the effect of technology on home-based businesses.

 Evaluate self-employment as a career option.

 Describe the first three sections of a business plan.

 Outline the process of financing a small business.

 Identify the major business activities of a small business manager.

THE ECONOMIC IMPORTANCE OF ENTREPRENEURS

The world of business is constantly changing. No one knows this better than small business owners
in the United States. More than 15 million
people in the United States own their own small business. Each day foreign competition increases.
A store down the street now acquires items from manufacturers in Asia and Europe. Businesses of
every type and size are adapting to the global marketplace.
Nations do not start out highly industrialized with international airports, superhighways, and
computer networks. In every country, people get ideas and take action to make products better,
faster, and more available. This inventive effort is the basis for economic development and
improved quality of life.
INNOVATION AND THE ENTREPRENEURIAL SPIRIT
An entrepreneur is a risk taker who operates a business. Every business com- bines land, labor, and
capital to sell a product or service. An entrepreneur is the person who brings together those
resources for a company to get started and operate successfully.
Entrepreneurs may be people with a creative vision, such as David Filo and Jerry Wang, who
founded Yahoo!, or Lydia Moss Bradley, who made millions in real estate development and went
on to found Bradley University. A common trait of entrepreneurs is that they don’t listen to people
who say “It can’t be done!” These business innovators have an idea they believe in and dedicate their
time, money, and effort to its success.
ECONOMIC AND SOCIAL BENEFITS OF SMALL BUSINESS
Most entrepreneurs start small. Some have started in a basement or garage. Small companies are an
important part of every economy. A small business is an independently owned and operated
business that does not dominate an industry.
Small businesses are commonly categorized by number of employees. The U.S. Small Business
Administration defines a small business as one with fewer than 100 employees. About 95 percent
of all businesses in the United States have fewer than 50 employees. Of the 15 million businesses
in the European Union, fewer than 10 percent have more than nine employees.
Entrepreneurial efforts provide a nation with three main economic and social benefits.
1. Small businesses are major creators of new products. Entrepreneurs are willing to take risks
and try ideas that may be reject- ed by larger companies. Entrepreneurs have invented products
such as personal computers, ballpoint pens, video games, and fiberglass snow skis.
2. Small businesses are the major source of jobs. In recent years, the 500 largest companies in
the United States reduced their work forces by several million people, while small businesses
hired over 20 million employees. Business organizations with fewer than 500 employees
employ more than half of all U.S. workers and produce half of the country’s GDP.
3. Small businesses often provide personal service. In that way, they compete successfully
against larger companies to meet the individual needs of customers. A bank, for example, can
grant loans to people in its community who may be denied funding by larger financial
institutions. Small manufacturing companies can produce custom- made parts for foreign
companies, an activity that large businesses might not find profitable.

Entrepreneurial businesses often turn to international business to expand their markets. Exporting is
promoted by the
U.S. Department of Commerce, Small Business Administration, World Trade Centers, and state
departments of economic development. These agencies and organizations help entrepreneurs plan
and execute international business activities.
Entrepreneurs may invent ways to adapt products and services to meet the economic, cultural, and
legal needs of customers in other countries. The activities of small businesses in Europe and Asia
have energized economic development. Thailand started as an agricultural society with a system of
landlords and peasants. Chinese influence in the late 1800s helped change the economic emphasis
of Thailand. By the 1970s, over 30 major companies were based in the country. Entrepreneurial
activities stimulated economic development. Today Thailand is one of the largest and fastest-
growing economies in the world.
 TYPES OF ENTREPRENEURIAL BUSINESSES
Types of entrepreneurial enterprises are as varied as types of large corporations. Entrepreneurial
businesses can be grouped into five major categories: extracting companies, manufacturing
companies, wholesalers, retailers, and service companies.
Agricultural, Mining, and Extracting Companies Diamond- mining companies in South Africa,
oil companies in Saudi Arabia, and flower growers in California are all examples of extractors.
These enterprises grow products or take raw materials from nature. Extracting companies
include businesses involved in agriculture, fishing, forestry, and mining.
Manufacturing Companies Manufacturing involves changing raw materials and parts into usable
products. Entrepreneurs in this category range from computer manufacturers with many employees
to basket weavers with just a few workers.
Wholesalers Products must get from producers to consumers. If clothing manufactured in Taiwan
is not shipped to appropriate selling locations, the garments have little value. A wholesaler is a
business that buys from a manufacturer and sells to other businesses. Wholesalers are commonly
called intermediaries because they are links between producers and sellers of products.
Retailers A retailer is a business that sells directly to consumers. In a typical week, you probably
go to several stores. You may also buy from mail- order companies or vending machines. These are
examples of retailing businesses. Online retailers are retailers that operate over the Internet.
Service Companies How often does someone in your household have clothes cleaned, get the car
washed, use a telephone, have film developed, or rent a video? These are all examples of services.
Consumer services include businesses such as law offices, doctors’ offices, dentists’ offices, hair
salons, daycare centers, Internet service providers, repair shops, travel agencies, and music schools.

HOME-BASED BUSINESSES
Years ago most people worked from their homes as farmers, weavers, and toolmakers. These home-
based businesses are still present in many countries, including the Philippines, Pakistan, Chad,
Liberia, Kenya, and Peru.
In major population areas of industrialized countries, however, most work moved to factories,
stores, and offices during the industrialization process. However, technology is currently pro-
viding the opportunity for many workers to return to their homes to work. Today over 5 million
people in the United States and more than 2 million in Canada operate business- es from their
homes.
Other types of com- mon home businesses include real estate brokers, insurance agents,
construction contractors, repair shops, hair stylists, pet groomers, childcare providers, accountants,
and tax preparers. Also, home-based Internet businesses have expanded to include almost any type
of business, such as retailers, auto parts suppliers, online greeting cards, grocery stores, and
flower delivery services.
Telecommuting In addition to running their own businesses from home, many people also are
working for another company by telecommuting. Telecommuting involves using a computer and
other technology to work at home instead of in a company office or factory. Telecommuting is
best suited to jobs that do not require regular in-person contact with others and may be done
through computer networks and other telecommunications equipment. This employment
arrangement is most common for writers, editors, researchers, economists, accounting clerks,
information processing workers, database supervisors, and computer programmers.
Employers who use telecommuting report several benefits.
 Businesses save money since they do not need as much office space.
 Companies are able to keep talented employees who may not want to work in a structured
environment.
 Workers save time and energy since they do not travel to a place of employment.
Many home-based entrepreneurs and telecommuters select working at home so they can have more
time with their families and save money on childcare.

SELF-EMPLOYMENT AS A CAREER
ADVANTAGES OF SELF-EMPLOYMENT
The two main advantages of owning a business are independence and pride of ownership. A small
business owner makes the company decisions and is at the center of action. Because of political and
legal restrictions, however, this same independence may not be available to entrepreneurs in all
countries.
As entrepreneurs achieve success, they usually gain a feeling of accomplishment. They gain
confidence in their ability to organize resources, make decisions, and manage business activities.
Serving customers, employing workers, and contributing to the economic growth of a
community or nation can also provide a sense of satisfaction for entrepreneurs.
DISADVANTAGES OF SELF-EMPLOYMENT

Being an owner-operator of a company also has disadvantages. The draw- backs of self-
employment are the time commitment, uncertain income, and possible loss of investment. Every
small business owner can tell you about the time involved. More than half of all small business
owners who sell their companies do so because of boredom or burnout.
As a business owner, income is uncertain. In the first few years of owning a business, it is possible
that the owner will not earn enough to get a salary. Business experts recommend that money be set
aside for personal living expenses before starting a new business. Even after the business has
been operating for awhile, poor economic conditions can reduce sales and profits.
Each year more than 50,000 businesses fail in the United States, with owners and other investors
losing millions of dollars. In that same time frame, however, more than 600,000 new businesses
start in the United States. After three years, statistics show that three out of four new companies will
still be operating. Business failure is commonly caused by limited cash, poor management
decisions, and a weak economy.
QUALITIES OF SUCCESSFUL ENTREPRENEURS
What are successful entrepreneurs like? Most entrepreneurs have a desire for adventure. They are
risk takers who are willing to give up a secure job in exchange for the chance to
own and operate a business. Global entrepreneurs must consider the added risk of potential
cultural, social, political, and legal barriers.
Is there some activity you participate in and perform well? Being self-confident is another quality
of successful entrepreneurs. Successful entrepreneurs believe in themselves and believe they can
get others to get things done. Remember that it may mean getting things done in different ways
in foreign markets. People in different cultures have different attitudes and behaviors regarding
work and business relationships.
Entrepreneurs spend almost all their time either on the job or thinking about their business.
Hard-working people have the potential for being the most successful. Are you someone who is
willing to put in extra time and effort for your business?
Someone once said that if you don’t know where you are going, you might end up somewhere else
and not even know it. A goal-oriented person has a clear direction for the company, stated in the
business plan. Goals should be clear and realistic. Goals also should have a time limit for
achievement and should be measurable in some numeric way. For example, a business goal may
be to have ten new customers in Greece within the next three months.
A new product idea or an old idea presented in a new way can both be paths for entrepreneurial
success. Creativity is a key to entrepreneurial success. Think about ways that existing products can
be improved, or create a business that can make the lives of busy people a little easier.
Finally, knowing about the world of business is important for success as an entrepreneur. Business
knowledge involves having an understanding of eco- nomics, organizational structure, decision
making, selling, advertising, finance, and technology. Business knowledge for the global
entrepreneur should include information about foreign cultures, exchange rates, shipping
methods, product labeling, and more.

CREATING A BUSINESS PLAN

Before you start any business, you should first develop a business plan. This document will guide
you through the complex process of establishing, financing, and running a business.
THE BUSINESS PLAN
Every driver planning a trip, every team, and every company needs a plan to achieve its goal. A
business plan is a guide used to start and operate a business. Every small business needs a plan to
guide it to success. A business plan has two main uses. First, this document may be used to attract
new investors or to convince a bank to lend money to the company. Second, the business plan
provides a blueprint for company activities.
Business Description The introductory section of a business plan covers three topics. First, the
legal name and location of the company is identified. Second, a brief description of the
background and experience of the owners and main employees is provided. Third, a description
of the company’s product or service, potential customers, and competition is presented
Organizational Structure Most businesses are organized as sole proprietorships, partnerships,
or corporations. A company’s organizational structure, covered in the second section of the
business plan, will be based on its size, number of owners, and method of financing. Companies
involved in international trade and exporting would present information about their foreign
business partners. This section would include an explanation of any joint ventures, licensing
agreements, distributor contracts, and supplier relationships.
Marketing Activities Two vital activities for every business, communicating with and serving
customers, are discussed in the third section of the business plan. Marketing includes the
business activities necessary to get goods and services from the producer to the consumer.
Marketing activities include product or service planning, risk management, marketing
information management, promotion, pricing, financing, distribution, purchasing, and selling.
Many companies organize this phase of their business with a marketing plan. A marketing plan
is a document that details the marketing activities of an organization. A marketing plan includes
information about customer needs, social factors, competition, target markets, economic trends, the
political environment, and the marketing mix. Global marketing for companies involved in
exporting and other international business activities will also take into account the geography,
history, culture, and trade barriers of other countries.

FINANCING A SMALL BUSINESS

The most important part of the business plan may be the financial planning section. Money is
needed for many purposes when starting and running a business. Funds are needed to buy
advertising, to pay employees, to purchase supplies, and to acquire equipment. A budget is a
financial tool that estimates a company’s funds and its plan for spending those funds. One of the
most common causes of business failure is lack of money to pay company expenses. Constantly
changing exchange rates are an additional problem for small companies involved in international
business. The process of financing a business starts with calculating operating costs and
determining how to acquire the funds to pay those costs.
ANALYZING COSTS
One of the most difficult tasks when starting a new business is determining how much money will be
needed to get started and continue operations.
Start-up costs are those expenses that occur when a company is new. Start-up costs include equipment
purchases, remodeling costs, legal fees, utility company deposits, and beginning inventory expenses.
Continuing expenses are business operating costs that occur on an on-going basis. Continuing expenses
include rent, utilities, insurance, salaries, advertising costs, employee training costs, taxes, and
interest on loans.
Variable costs are business expenses that change in proportion to the level of production. For
example, the cost of materials and parts to make radios depends on the number of radios that are
produced. If parts and materials cost $8 per radio, the variable costs for making 100 radios would
be $800. The variable costs for making 10 radios would be $80.
Fixed costs are expenses that do not change as the level of production changes. For example, rent
of $1,000 a month and a manager’s salary of $3,200 a month will be the same whether the
company makes 10 or 100 radios.
BREAKEVEN POINT
A comparison of variable and fixed costs with sales revenue will tell a company the amount of
profit or loss. The breakeven point is the number of units a business must sell to make a profit
of zero. Sales below the breakeven point will result in a loss for a business. Sales above the
breakeven point will result in a profit for a business.
Calculating the breakeven point involves two steps. First, you must find the gross profit on each
item you sell. The gross profit, or gross margin, is the difference between the cost of an item for a
business and the price for which the business can sell that item. For example, a company can make
a radio for $8 and then sell it for $12. So the gross profit on one radio is $4.
Cost — Selling price =Gross profit per unit
$12 —$8 = $4
Next, you must calculate how many items you must sell to cover all the fixed costs for a business,
the breakeven point. To do this, you divide the total fixed costs for a business by the gross profit per
unit. In the example above, the manufacturer has fixed costs of $44,000. That company must then
sell 11,000 units to cover all its fixed costs.
Total fixed costs ÷ Profit per unit =Breakeven units
$44,000 ÷ $4 per unit =11,000 units
SOURCES OF FUNDS
Where do companies get the money to finance the start-up costs and continuing expenses? This
funding can be secured in one of two ways, either through equity or through debt. Equity funds
are business funds obtained from the owners of the business. Equity is the money the owners of a
business have invested from their personal accounts. Debt funds are business funds obtained by
borrowing. The amounts owed by a business are called the debts of the company. Loans from
financial institutions also help to finance companies and are debt funds.
FINANCIAL RECORDS OF SMALL BUSINESSES
The financial records of a company are like the scoreboard for a sporting event. Financial record
keeping helps a business keep track of its financial status, just like a scoreboard helps fans keep
track of how the teams on the field are doing. A balance sheet is the document that reports a
company’s assets (items of value), liabilities (amounts owed to others), and owner’s equity (net worth).
Assets include cash and anything that could be sold for cash, such as equipment, land, and
inventory. The relationship among the items on a balance sheet is
Assets — Liabilities = Owner’s equity
For example, if a company has $4 million of assets
and $1.5 million in liabilities, the owner’s equity is
$2.5 million.
$4 million — $1.5 million = $2.5 million
An income statement is a document that summarizes a company’s revenue from sales and its
expenses over a period of time, usually one year. On the income statement, a business will total all
of the revenues it brings in as well as all of its expenses. It will then subtract the expenses from
the revenues to find its profit or loss. For example, a company had sales revenue of $670,000 and
$430,000 in operating expenses. Its profit would be $240,000.
The continuing costs of a business are usually paid for with current cash flows. Cash flow is the
inflow and outflow of cash. The major sources of cash inflows are cash sales and money collected
from customers that is owed on account. Occasionally, a company will require additional cash
inflows due to slow sales or a need to buy expensive equipment. When this happens, the business
will need to borrow or get additional investments from owners.
The main cash outflows of a business are for current operat- ing expenses, new equipment, debt
payments, and taxes. A cash flow statement reports the current sources and amounts of cash
inflows and outflows.

MANAGING THE SMALL BUSINESS

In a large company, a manager is usually responsible for only one area of the business, such as
marketing or finance. In a small business, however, the owner may be responsible for several or all
areas of management. The five major management areas of every business are shown in Figure 9-
4. These areas, along with a description of the business and the organization of the business, are
all covered in the business plan.

Marketing Finance Production Human Information

Resources Systems

PRODUCTION MANAGEMENT
The factors of production are combined to create goods and services. Every business must produce
something to sell. That something may not always be too obvious. For example, what does a school
produce? Or what does a retail store produce? The production department of a company may
involve a factory with machinery or an office with computers. In both situations, production takes
place. Production methods are influenced by the cultural and economic situation of a nation. A
country with few machines will use more manual activities than automated methods.

HUMAN RESOURCES MANAGEMENT

Labor is probably the most important factor of production. Without people, highly automated
equipment could not be built, operated, or repaired. Every business owner and manager must rec-
ognize this fact. Human resources are one of the most important components of every
organization. Human resources management involves activities needed to obtain, train, and retain
qualified employees.
First, a human resources manager must hire needed employees. A description that lists the
qualifications for a job is advertised to prospective employees. Hiring involves screening applicants,
interviewing candidates, and selecting the most qualified people for available positions.
A second major duty of human resources man- agers is training employees. Training does not
occur only when a person starts a job. It is a continuous process. Technology, the economy, and
legal rulings often have an effect on the job skills employees need in order to be productive.
Continued training is important for all workers.
The final duty of human resources managers is to maintain employee satisfaction. Workers must
be paid adequately so they do not become discouraged or leave the company. Most businesses also
provide employee benefits such as paid holidays and vacations, medical insurance, retirement
plans, and dis- counts for company products. Human resources managers also motivate
employees with awards, bonuses, and prizes for productivity, customer serv- ice, safety, and ideas
that save the company money.
INFORMATION MANAGEMENT
Information is something companies have always needed but usually didn’t think about too much.
In recent years, computers and other technology have made information easier, faster, and cheaper
to obtain. The main areas of information needed by every business include data about finances,
production and inventory, marketing, and human resources.
A management information system (MIS) is an organized method of processing and reporting data
for business decisions. An MIS involves a plan for all of the following.
 Identifying a company’s information needs
 Obtaining the information
 Organizing the information in a useful manner
 Distributing reports to those who make decisions
Updating data files as needed Management information systems
have created many new career opportunities: computer operators, programmers, systems
analysts, database man- agers, computer service technicians, and information systems managers.
 CHAPTER SUMMARY

9-1 ENTREPRENEURIAL ENTERPRISES

A Entrepreneurs are important in the development of
an economy because they create new products
and services, create new jobs, and provide per-
sonal service.
B The main types of entrepreneurial businesses are
extracting companies, manufacturing companies,
wholesalers, retailers, and service companies.
C Telecommuting involves using a computer and other
technology to work at home instead of in a
company office or factory.

9-2 THE BUSINESS PLAN AND SELF-EMPLOYMENT

A The advantages of self-employment as a career
option are independence and pride of ownership.
The disadvantages are the time commitment,
uncertain income, and possible loss of
investment.
B The first three sections of a business plan are the
business description, organizational structure, and
marketing activities.

9-3 OPERATING AN ENTREPRENEURIAL ENTERPRISE

A Financing a small business involves determining
variable and fixed costs while obtaining the use of
equity and debt funds.
B The major business activities of a small business
manager involve market- ing, finance, production,
human resources, and information systems.
Review Questions:
 What actions could a government take to encourage the start up of new businesses?
 How would differences in cultures affect the operation of a small business in various countries?
 When you work from home, you need to be especially well disciplined. You also may miss interacting with
other people. How could you overcome these disadvantages of working at home?
 What are the advantages of owning your own business? What are the dis- advantages?
 What are the two main uses of a business plan?
 What kinds of marketing activities should be included in a marketing plan?
 How do variable costs differ from fixed costs?
 What are the three major activities of human resources management?
 What is a management information system?

Source: International Business 4th Edition Les Dlabay, James Calvert Scott