The Challenges of Starting a Business

The Challenges of Starting a Business

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Description: Like BTIO, many entrepreneurial ventures are based on innovative ideas. Others are improvements on already existing goods or services. Howard Shultz formed Starbucks to reinvent the coffee experienceóto provide customers with quality coffee in a tranquil atmosphere.

Michael Dell improved the process of selling computers by eliminating distributors and retail stores and selling directly to the customer. Do you ever wonder what it would be like to start your own business? Do you ever think that someday you might be an entre-preneurómaybe even an extremely successful entrepreneur like Tom Anderson or Chris DeWolfe, founders of MySpace, the Juice Guys (Nantucket Nectars founders Tom Scott and Tom First), or Pierre Omidyar, who started eBay?.

 
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Contents:
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C H A P T E R

2

The Challenges
of Starting
a Business
After studying this
chapter, you will be
able to:

1 Define entrepreneurship and identify the reasons some
individuals become entrepreneurs.
2 Describe the importance of small businesses to the U.S.
economy and identify the industries in which small
businesses are concentrated.
3 Explain what it takes to start a business and summarize
the advantages and disadvantages of business ownership.
4 Evaluate the various small business ownership options—
starting a new business, buying an existing business, or
obtaining a franchise.
5 Discuss the importance of planning for your business and
identify the key sections of a business plan.
6 Discuss ways to succeed in
managing a
business and
explain why some
businesses fail.

BUILD A BETTER BABY
AND THEY WILL COME

22

In 1993, Mary and Rick Jurmain were watching a TV program about teenage pregnancy.1
To simulate the challenge of caring for an
infant, teens on the program were carrying
around sacks of flour. Rick commented that
holding a sack of flour was a poor substitute for taking care of a baby. Mary challenged him to use his engineering expertise to come up with a better baby substitute. Two
weeks later, he unveiled the prototype of the “Baby Think It Over” infant simulator—
a cloth doll with an internal electronic box for making baby noises. Thus, BTIO Educational
Products, Inc., was born.
Mary and Rick were willing to accept the risk of starting and running a company to pursue what they identified as a great business opportunity. They set up a manufacturing shop in
the garage and an office in the kitchen, and today, their idea has grown into a comprehensive

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What Is an Entrepreneur?

parenting-education program that teaches young people about the responsibilities of parenting, with the goal of reducing unwanted teenage pregnancies. Since 1993, more than a million
teens have gotten a glimpse of what it’s like to spend all their time feeding, burping, changing,
and rocking simulated babies.

What Is an
Entrepreneur?

of creating and running a business to take
advantage of it.

Like BTIO, many entrepreneurial ventures
are based on innovative ideas. Others are
improvements on already existing goods or
services. Howard Shultz formed Starbucks
to reinvent the coffee experience—to provide customers with quality coffee in a tranquil atmosphere. Michael Dell improved the
process of selling computers by eliminating
distributors and retail stores and selling
directly to the customer.
Do you ever wonder what it would be
like to start your own business? Do you ever
think that someday you might be an entrepreneur—maybe even an extremely successful entrepreneur like Tom Anderson or Chris
DeWolfe, founders of MySpace, the Juice
Guys (Nantucket Nectars founders Tom
Scott and Tom First), or Pierre Omidyar, who
started eBay? Have you thought about the
importance of small businesses to the U.S.
economy? Would you like some answers to
questions like the following: Should I start a
business? What are the advantages and disadvantages of starting a business? Should I
build a business from scratch, buy an existing business, or invest in a franchise? How
do I come up with a business idea? How do
I go about planning a business? What steps
are involved in developing a business plan?
Where would I find help in getting my business started and operating it through the
start-up phase? How can I increase the likelihood that I’ll succeed?
Answers to these questions can be found
in this chapter. Let’s start by answering a
question that’s been implied in just about
everything we’ve said so far: What is an
entrepreneur? We’ll go with this definition:
An entrepreneur is someone who identifies
a business opportunity and assumes the risk

WHY BECOME AN
ENTREPRENEUR?

entrepreneur
Individual who identifies a business opportunity and
assumes the risk of creating and running a business to
take advantage of it.

Why do people start businesses? According to
the Small Business Administration (SBA), a
government agency that provides assistance
to small businesses, the most common reasons for starting a business are as follows:2
• To be your own boss
• To achieve financial independence
• To enjoy creative freedom
• To use your skills and knowledge
What are entrepreneurs like? In general,
they’re creative people who sometimes
accomplish extraordinary things because
they’re passionate about what they’re doing.
They are risk-taking optimists who commit
themselves to working long hours to reach
desired goals. They take pride in what
they’re doing and get satisfaction from
doing something they enjoy. They also have
the flexibility to adjust to changing situations in order to achieve their goals.
Entrepreneurs usually start small. They
begin with limited resources and build their
businesses through personal effort. At the end
of the day, their success will depend on their
ability to manage and grow the organization
that they created to implement their vision.

DISTINGUISHING
ENTREPRENEURS FROM SMALL
BUSINESS OWNERS
Although most entrepreneurial ventures
begin as small businesses, not all small
business owners are entrepreneurs.

Small Business Administration (SBA)
Government agency that helps prospective owners set up
small businesses, obtain financing, and manage ongoing
operations.

23

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CHAPTER 2 The Challenges of Starting a Business

While graduate students at Stanford University, Larry Page and Sergey Brin came
up with a novel idea for a search engine that ranked Web sites according to the
number of hits. They quit graduate school and founded Google in 1998. Their
entrepreneurial venture paid off big time—by 2006, both were worth about
$13 billion.

Entrepreneurs are innovators who start
companies to create new or improved products. They strive to meet a need that’s not
being met, and their goal is to grow the
business and eventually expand into other
markets.
In contrast, many people either start or
buy small businesses for the sole purpose of
providing an income for themselves and
their families. They do not intend to be particularly innovative, nor do they plan to
expand significantly. This desire to operate
is what’s sometimes called a “lifestyle business.”3 The neighborhood pizza parlor or
beauty shop, the self-employed consultant
who works out of the home, even a local
printing company—all of these are typically
lifestyle businesses. In the next section, we
discuss the positive influences that both
lifestyle and entrepreneurial businesses
have on the U.S. economy.

Importance of Small
Business to the U.S.
Economy
To assess the value of small businesses to the
U.S. economy, we first need to know what
constitutes a small business. Let’s start by
looking at the criteria used by the SBA.
According to the SBA, a small business is

one that is independently owned and operated, exerts little influence in its industry,
and (with a few exceptions) has fewer than
500 employees.4
There are more than 20 million small businesses in the United States, and these businesses generate about 50 percent of our gross
domestic product.5 Clearly, they’re a major
force in our economy. The millions of individuals who have started businesses in the
United States have shaped the business world
as we know it today. Some small business
founders like Henry Ford and Thomas Edison
have even gained places in history. Others,
including Bill Gates (Microsoft), Sam Walton
(Wal-Mart), Steve Jobs (Apple Computer),
Michael Dell (Dell, Inc.), and Steve Case
(AOL), have changed the way business is
done today. Still millions of others have collectively contributed to our standard of living.
Small businesses are important to us for a
number of reasons. In particular, they create
jobs, spark innovation, and provide opportunities for many people, including women
and minorities, to achieve financial success
and independence.6 In addition, small businesses complement the economic activity of
large organizations by providing them with
components, services, and distribution of
their products. These contributions are discussed later in the chapter.

JOB CREATION
Small businesses are a major source of
employment. More than half of all U.S.
adults are either self-employed or work for
businesses with fewer than 500 employees.
The majority of Americans made their first
entrance into the business world by working for a small business.7 These enterprises
are constantly creating jobs and providing
opportunities for a vast number of workers.
Figure 2.1 shows just how many jobs were
created by small (and very small) firms
between 1992 and 1996, the last year for
which there are data. Note particularly the
performance of large companies (those
with more than 500 employees) over the
same period.

INNOVATION
Given the financial resources available to
large businesses, you’d expect them to introduce most of the new products that hit the

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Importance of Small Business to the U.S. Economy

OPPORTUNITIES FOR WOMEN
AND MINORITIES
Small business is the portal through which
many people enter the economic mainstream. Business ownership allows individ-

small business
According to the SBA, a business that is independently
operated, exerts little influence in its industry, and
employs fewer than 500 people.

6,000
According to the most recent data,
in one two-year period, small businesses
created three-quarters of all new jobs.

5,000

Jobs created

4,000

3,000

2,000

1,000

0

–1,000

0

1–4

5–19
20–99
100–499
Number of employees

uals, including women and minorities, to
achieve financial success as well as pride in
their accomplishments. Although the majority of small businesses are still owned by
white males, the past two decades have seen
a substantial increase in the number of businesses owned by women and minorities.
Figure 2.2 gives you an idea of how many
American businesses are owned by women
and minorities and indicates how much the
numbers grew between 1982 and 2002, the
last year for which there are reliable data.

500+

Figure 2.1

Net New Jobs by Firm
Size

Figure 2.2

Women- and MinorityOwned Businesses

8,000
Women
7,000
Number of firms (thousands)

market. But according to the SBA, 55 percent
of all product innovations come from small
businesses.8 For example, the list of important innovations by small high-tech businesses is impressive. It includes the airplane,
personal computer, tape recorder, pacemaker, and soft contact lenses.9
Owners of small businesses are also
responsible for finding new ways of doing
old things. In 1994, for example, a young
computer-science graduate working on Wall
Street came up with the then-novel idea of
selling books over the Internet. During the
first year of operations, sales at Jeff Bezos’s
new company—Amazon.com—reached half
a million dollars. In less than 10 years,
annual sales grew to more than $3 billion.
Bezos’s innovative approach to online retailing not only made its founder very rich but
has become a model for the e-commerce
industry.
Why are small businesses so innovative?
For one thing, they tend to offer environments that appeal to individuals with the
talent to invent new products or improve the
way things are being done. They tend to
make faster decisions, their research programs tend to be focused, and their compensation structures tend to reward top performers.10 Supportive environments have
enabled small firms to turn out twice as
many product innovations per employee as
large firms.11
The success of small businesses in fostering creativity has not gone unnoticed by big
businesses. In fact, many companies, such as
General Electric, have responded by downsizing to act more like small companies.12 Some
large organizations now have separate work
units whose purpose is to spark innovation.
Individuals working on these teams can focus
their attention on creating new products that
can then be developed by the company.

25

6,000

Hispanic
Black

5,000
4,000
3,000
2,000
1,000
0
1982

1992
Year

2002

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CHAPTER 2 The Challenges of Starting a Business

HOW SMALL BUSINESSES HELP
LARGE BUSINESSES
Small firms complement large firms in a
number of ways. They supply many of the
components needed by big companies. For
example, a substantial portion of the mindboggling $90 billion paid annually by
General Motors to parts suppliers goes to
small businesses. Small firms also provide
large ones with such services as accounting,
legal, and insurance. Many small firms provide outsourcing services to large firms—that
is, they hire themselves out to help with special projects or handle certain business functions. A large firm, for example, might hire a
small one to handle its billing or collection
services or to manage its health care benefits.
A large company might contract with a
small information technology firm to manage its Web site or oversee software
upgrades.
Small companies provide another valuable service to large companies by acting as
sales agents for their products. For example,
automobile dealerships, which are generally
small businesses, sell vehicles for the big car
makers. Local sporting goods stores sell athletic shoes made by industry giants, such as
Adidas and Nike. Your corner deli sells
products made by large companies like
Coca-Cola and Frito Lay.

After getting A’s in a correspondence course on ice cream making, Ben Cohen and
Jerry Greenfield (friends since the seventh grade) decided to enter the goodsproducing sector by making ice cream. Ben & Jerry’s ice cream factory in Vermont
churns out 190,000 pints of ice cream daily (and lets each worker keep three pints),
and enthusiastic employees tour the country giving away free scoops of ice cream.

What Industries Are
Small Businesses In?
If you wanted to start a new business, there
are some types of businesses that you’d
probably reject. For example, it’s unlikely
that you’d decide to set up a new company
to make automobiles or aluminum. Such
ventures require tremendous investments
in property, plant, and equipment, and
you’d have no way to raise the needed
funds or attract the human capital you’d
need. But there are, of course, other types
of businesses that require low initial investment. Not surprisingly, these types of companies are attractive as small business
opportunities.

INDUSTRIES BY SECTOR
To understand where small businesses
are concentrated, we first need to divide
businesses into two sectors: the goodsproducing sector and the service-producing
sector. The goods-producing sector
includes all businesses that produce tangible goods. Companies in this sector include
those involved in manufacturing, construction, and agriculture. The serviceproducing sector includes all businesses
that provide a service but do not make tangible goods. These include firms involved
in retail and wholesale trade, transportation, communications, finance, insurance,
real estate, and such professional services
as health care, advertising, accounting, and
personal services.
About 80 percent of small businesses in
the U.S. are concentrated in the serviceproducing sector. Of these, about 25 percent
are in retailing, 10 percent in wholesaling,
and 35 percent in professional and business
services. The goods-producing sector is home
to only 20 percent of all small businesses.
Nearly two-thirds of these are in construction, the other one-third in manufacturing.13
The high concentration of small businesses in the service-producing sector
reflects the makeup of the overall U.S. economy. Over the past 40 years, the serviceproducing sector has been growing at an
impressive rate. In 1960, the goods-producing
sector accounted for 38 percent of gross
domestic product, the service-producing
sector for 62 percent. By 2000, the goodsproducing sector accounted for only 23 per-

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What Industries Are Small Businesses In?

cent of GDP, while the service-producing
sector had grown to 77 percent.14

Goods-Producing Sector
The largest areas of the goods-producing sector are construction and manufacturing.
Construction businesses are often started by
skilled workers, such as electricians, painters,
plumbers, and homebuilders. They tend to
be small and generally work on local projects.
Although manufacturing is primarily the
domain of large businesses, there are exceptions. For example, Jeffrey Berndt started a
company called Reveal Entertainment to
manufacture and distribute board games.
The company began with its award-winning
game, Tripoly—a three-dimensional finance
and real estate game in which players buy
and build cities. The product line now
includes dozens of board games.15
Service-Producing Sector
Many small businesses in this sector are
retailers—they buy goods from other firms
and sell them to consumers, either in stores,
by phone, through direct mailings, or over
the Internet. Increasingly, entrepreneurs are
starting online ventures. This approach was
taken by Tony Roeder, who had a fascination with the red Radio Flyer wagons that
many of today’s adults had owned as children. In 1998, he started an online store
through Yahoo! to sell red wagons from his
home. In three years, he turned his online
store into a million-dollar business.16
Internet entrepreneurship was also attractive to Sean Lundgren and Todd Livdahl—
two computer engineers who gave up successful careers at Disney to turn their
fascination with video games and DVDs
into an online business. To their delight, the
small start-up venture, which they call
Sneetch.com, generated sales of $1.2 million
during its first year of operation.17
Other small business owners in this sector are wholesalers who sell products to
businesses who buy them for resale or for
company use. A local bakery is acting as a
wholesaler when it sells desserts to a restaurant, which then sells them to its customers.
A small business that buys flowers from a

goods-producing sector
All businesses whose primary purpose is to produce tangible goods.

27

local grower (the manufacturer) and sells
them to a retail store (the retailer) is another
example of a wholesaler.
A high proportion of small businesses in
this sector provide professional, business, or
personal services. Doctors and dentists are
part of the service industry, as are insurance
agents, accountants, and lawyers. So are
businesses that provide personal services,
such as dry cleaning and hairdressing.
David Marcks, for instance, entered the
service industry 14 years ago when he
learned that his border collie enjoyed chasing geese at the golf course where he
worked. Anyone who’s been on a golf
course recently recognizes the problems created by geese. Although they are lovely to
look at, they leave behind an unwelcome litter of droppings. That’s why frustrated
course managers are happy to hire Marcks’
company, Geese Police, to chase the geese
away using specially trained dogs. Marcks
now has 27 trucks, 32 border collies, and
5 offices. Golf courses are now only about
5 percent of his business, as his dogs now

Taco Bell is part of the service-producing sector. Each year, close to 150,000
Taco Bell employees serve Mexican-inspired fast food to more than two billion
consumers. Annually, its 6,000 franchise and company-owned restaurants in the
United States use 3.8 billion corn and flour tortillas, 120 million pounds of lettuce,
62 million pounds of pinto beans, 295 million pounds of seasoned ground beef, and
106 million pounds of cheese.

service-producing sector
All businesses whose primary purpose is to provide a
service rather than make tangible goods.

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CHAPTER 2 The Challenges of Starting a Business

ness gives you a chance to make more
money than if you were employed by
someone else.

Agricultural services 2%
Transportation, communications,
public utilities 4%

Mining 0.4%

Manufacturing 6%
Services 40%
Wholesale trade 7.4 %
Finance, insurance,
real estate 8%

Construction 12%

Retail trade 20%

Figure 2.3

Small Business by
Industry

patrol corporate parks and playgrounds as
well.18
Figure 2.3 provides a more detailed
breakdown of small businesses by industry.

QUICK QUIZ

2.1

Before going to the next section of this chapter, take a few
minutes to test your knowledge of the material covered so far.
Go to www.exploringbusinessonline.com

Should You Start
a Business?
Do you want to be a business owner someday? Before deciding, you might want to
consider the following advantages and disadvantages of business ownership.19

ADVANTAGES OF SMALL
BUSINESS OWNERSHIP
Being a business owner can be very
rewarding. Having the courage to take a
risk and start a venture is part of the
American dream. Success brings with it
many advantages:
• Independence. As a business owner,
you’re your own boss. You can’t get
fired. More importantly, you have the
freedom to make the decisions that are
crucial to your own business success.
• Financial Rewards. In spite of high
financial risk, running your own busi-

• Lifestyle. Owning a small business gives
you certain lifestyle advantages.
Because you’re in charge, you decide
when and where you want to work. If
you want to spend more time on nonwork activities or with your family, you
don’t have to ask for the time off. If it’s
important that you be with your family
all day, you might decide to run your
business from your home. Given today’s
technology, it’s relatively easy to do.
Moreover, it eliminates commuting time.
• Learning Opportunities. As a business
owner, you’ll be involved in all aspects
of your business. This situation creates
numerous opportunities to gain a thorough understanding of the various business functions.
• Creative Freedom and Personal
Satisfaction. As a business owner,
you’ll be able to work in a field that you
really enjoy. You’ll be able to put your
skills and knowledge to use, and you’ll
get personal satisfaction from implementing your ideas, working directly
with customers, and watching your
business succeed.

DISADVANTAGES OF SMALL
BUSINESS OWNERSHIP
As the little boy said when he got off his first
roller-coaster ride: “I like the ups but not the
downs!” Here are some of the risks you run
if you want to start a small business:
• Financial Risk. The financial resources
needed to start and grow a business can
be extensive. You may need to commit
most of your savings or even go into debt
to get started. If things don’t go well,
your financial loss can be great. In addition, there’s no guaranteed income. There
might be times, especially in the first few
years, when the business isn’t generating
enough cash for you to live on.
• Stress. As a business owner, you are the
business. There’s a bewildering array of
things to worry about—competition,
employees, bills, equipment breakdowns, customer problems. As the
owner, you’re also responsible for the
well-being of your employees.

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Starting a Business

• Time Commitment. People often start
businesses so that they’ll have more
time to spend with their families.
Unfortunately, running a business is
extremely time-consuming. Even
though you have the freedom to take
time off, you might not be able to get
away. In fact, you’ll probably have less
free time than you’d have working for
someone else. For many entrepreneurs
and small business owners, a 40-hour
workweek is a myth; see Figure 2.4.
Vacations will be difficult to take and
will often be interrupted. In recent
years, the difficulty of getting away
from the job has been compounded by
cell phones and e-mail, and many small
business owners have come to regret
that they’re always reachable.
• Undesirable Duties. When you start up,
you’ll undoubtedly be responsible for
either doing or overseeing just about
everything that needs to be done. You
can get bogged down in detail work that
you don’t enjoy. As a business owner,
you’ll probably have to perform some
unpleasant tasks, like firing people.
In spite of these and other disadvantages,
most small business owners are pleased
with their decision to start a business. A survey conducted by the Wall Street Journal and
Cicco and Associates indicates that small
business owners and top-level corporate
executives agree overwhelmingly that small
business owners have a more satisfying
business experience. The researchers had
anticipated that the small business owners
would be happy with their positions, but
they were surprised at the number of corporate executives who believed that the grass
was greener in the world of small business
ownership.20

Starting a Business
Starting a business takes talent, determination, hard work, and persistence. It also
requires a lot of research and planning.
Before starting your business, you should

business plan
Formal document describing a proposed business concept, management team, goods or services, competition,
product-development process, production methods, and
marketing model, and stating financial projections.

29

50–60 hours 36.6 %

60+ hours 37.8%

40–50 hours 18.9%

1–39 hours 6.7%

Figure 2.4

appraise your strengths and weaknesses and
assess your personal goals to determine if
business ownership is for you.21
If you’re interested in starting a business, you need to make decisions, such as
the following:
• What type of business is right for you?
Do you want to be a manufacturer, a
retailer, or a wholesaler? Do you want
to provide professional or personal
services? Do you want to start a business that you can operate out of your
home?
• Do you want to run a business that’s
similar to many others, or do you want
to innovate—create a new product or
approach to doing business?
• What is your business idea? Is it feasible?
• Do you want to start a new business,
buy an existing business, or buy a
franchise?
• Do you want to start the business by
yourself or with others?
• What form of business organization do
you want? Do you want to own the
business yourself, or do you want to
have other owners and operate as a
partnership or a corporation?
After making these decisions, you’ll need
to take the most important step in the
process of starting a business. You must
describe your future business in the form of
a business plan, which is a document that

The Entrepreneur’s
Work Week

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CHAPTER 2 The Challenges of Starting a Business

identifies the goals of your proposed company and explains how they will be
achieved. Think of a business plan as a blueprint for a proposed company: It shows how
the business will be built and how you
intend to make sure that it’s sturdy. Your
final step before actually starting the business will be to get financing—the money
from individuals, banks, or both that you’ll
need to get started. If you have the necessary funds to finance the business, you can
skip this last step.

THE BUSINESS IDEA
For some, coming up with a great business
idea is a gratifying adventure. For most, however, it’s a daunting task. The key to coming
up with a business idea is giving customers
something they want—or, more importantly,
filling an unmet need. The purpose of starting
a business is to satisfy customers—the ultimate users of your goods or services. In coming up with a business idea, do not ask “What
do we want to sell?” but rather “What does
the customer want to buy?”22
To come up with an innovative business
idea, you need to be creative. The idea itself

Dean Kamen has no
trouble coming up with
great business ideas.
While an undergraduate, he invented the
first wearable infusion
pump to deliver precise dosages of medications. He is wellknown for two of his
people-moving inventions. One, called the
Independence iBOT
Mobility System, is a
stair-climbing wheelchair. The other, the
Segway Human
Transporter, is a selfbalancing personal
transportation
machine.

can come from various sources. Prior experience accounts for the bulk of new business
ideas. Many people generate ideas for industries they’re already working in. Past experience in an industry also increases your
chances of success. Take Sam Walton, the late
founder of Wal-Mart. He began his retailing
career at J.C. Penney and then became a successful franchiser of a Ben Franklin five-anddime store. In 1962, he came up with the idea
of opening large stores with low costs and
heavy discounts in rural areas. He founded
his first Wal-Mart store in 1962, and when he
died 30 years later, his family’s net worth
was $25 billion.23
Industry experience also gave Howard
Schultz his breakthrough idea. In 1981,
Schultz, a New York executive for a housewares company, noticed that a small customer in Seattle, Starbucks Coffee, Tea and
Spice, ordered more coffeemaker cone filters
than Macy’s and a lot of other large customers. So he flew across the country to find
out why. His meeting with the owneroperators of the original Starbucks Coffee
Co., which resulted in his becoming part
owner of the company, changed his life and
the life of coffee lovers forever. Schultz’
vision for the company far surpassed that of
its other owners. While they wanted
Starbucks to remain small and local, Schultz
saw potential for a national business that not
only sold world-class quality coffee beans,
but offered customers a European coffee-bar
experience. After trying unsuccessfully to
convince his partners to try his experiment,
Schultz left Starbucks and started his own
chain of coffee bars, which he called Il
Giornale (after an Italian newspaper). Two
years later, he bought out the original owners and reclaimed the name “Starbucks.”24
Other people come up with business
ideas because of hobbies or personal interests. This was the case with Nike founder
Phil Knight, who was an avid runner. He
was convinced that it was possible to make
high-quality track shoes that cost less than
the European shoes then dominating the
market. His track experience, coupled with
his knowledge of business (Knight holds an
MBA from Stanford and worked as an
accountant), inspired him to start Nike.
From a young age, Michael Dell was
obsessed with taking computers apart and
putting them back together again, and it
was this personal interest that led to his
great business idea. At college, instead of

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Starting a Business

ABOUT NIKE

2.1

Before you begin your study of small business options and the preparation of a business plan, here’s a chance to read about how Nike was
started and how it survived during its early years.
Go to www.exploringbusinessonline.com

OWNERSHIP OPTIONS
As we have already seen, you can become a
small business owner in one of three ways:
by starting a new business, buying an existing business, or obtaining a franchise. Each
has its advantages and disadvantages.

Starting from Scratch
The most common—and the riskiest—
option is starting from scratch. This
approach lets you start with a clean slate
and allows you to build the business the
way you want. You select the goods or services to be offered, the location, and all your
employees, and it’s up to you to develop a
customer base and build a reputation.
Buying an Existing Business
If you decide to buy an existing business,
some things will be easier. You will already
have a proven product, customers, suppliers, a known location, and trained employees. It will also be much easier to predict the
future success of the business. But this route,
of course, comes with its own disadvantages. First, it’s hard to determine how much
you should pay for a business. You can easily determine how much things like buildings and equipment are worth, but how
much should you pay for the fact that the
business has steady customers?
In addition, a business, like a used car,
might have problems of which you are not
aware. Perhaps the current owners have
disappointed customers; maybe the location isn’t as good as it used to be. You

franchise
Form of business ownership in which a franchiser (a
seller) grants a franchisee (a buyer) the right to use a
brand name and to sell its products or services.

might inherit employees that you wouldn’t
have hired yourself. Finally, what if the
previous owners set up a competing business that draws away their former—and
your current—customers?

Getting a Franchise
Lastly, you can buy a franchise. Under this
set up, a franchiser (the company that sells
the franchise) grants the franchisee (the
buyer) the right to use a brand name and
to sell its goods or services. Franchises are
used to market products in a variety of
industries, including food, retail, hotels,
travel, real estate, business services, cleaning services, and even weight-loss centers
and wedding services. There are thousands of franchises, many of which are
quite familiar—SUBWAY®, McDonald’s,
7-Eleven, Holiday Inn, Budget Rent-A-Car,
Radio Shack, and Jiffy Lube.
As you can see from Figure 2.5, franchising has become an extremely popular way
to do business. A new franchise outlet opens
once every 8 minutes in the United States,
where 1 of 12 businesses is now a franchise.
Franchises employ 8 million people and
account for 40 percent of all retail sales in
this country.25
In addition to the right to use a company’s brand name and sell its products, the
franchisee gets help in picking a location,
starting and operating the business, and

Figure 2.5

The Growth of
Franchising, 1980–2004

350
300
Units (in thousands)

attending classes, he spent his time assembling computers and, eventually, founded
Dell Computers.

31

In 1980, franchisers had gross
total revenues of $350 billion; now it’s over
$1 trillion a year.

250
200
150
100
50
0
1980

1983

1988

1993
Year

1998

2003

2004

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CHAPTER 2 The Challenges of Starting a Business

advertising. In effect, you’ve bought a
prepackaged, ready-to-go business that’s
proven successful elsewhere. You also get
ongoing support from the franchiser, which
has a vested interest in your success.
All these advantages don’t come cheaply.
Franchises can be very expensive, usually
depending on the amount of business that a
location is expected to do. For example,
some McDonald’s franchises require an initial investment of $500,000 to $1.6 million.
This fee includes the cost of the property,
equipment, training, start-up costs, and the
franchise fee—a one-time charge for the right
to operate as a McDonald’s. A KFC outlet is
in the same price range. Subways are more
affordable, with expected initial investments
ranging from $70,000 to $220,000. If you
don’t want to deal in food, you might want
to buy a dating service. The Right One franchises go for an initial investment of $100,000
to $250,000, depending on location.26
In addition to your initial investment,
you’ll have to pay two other fees on a monthly
basis—a royalty fee (typically from 3 to 12 percent of sales) for continued support from the
franchiser and the right to keep using the
company’s trade name and an advertising fee to
cover your share of national and regional
advertising. You’ll also be expected to buy
your products from the franchiser.27
Why do would-be business owners like
franchises? For one thing, buying a franchise
lets you start up in a fairly safe environment, with a proven model for running a
company and an ongoing support team. You
can profit from name recognition without
having to develop your own image in the
marketplace, and you can be your own boss
(as long as you comply with the standards
set by the franchiser).
But there are disadvantages. The cost of
obtaining and running a franchise can be
high, and you have to play by the franchiser’s rules, even when you disagree with
them. Finally, franchisers don’t always keep
their promises. What do you do if promised
advertising doesn’t materialize? As with any
business venture, you need to do your
homework before investing in a franchise.

ify the qualifications of your management
team, describe your legal form of business
ownership, explain the goods or services
that you intend to sell, identify your customers and competitors, describe your product development and production methods
and marketing activities, and state your projected profit and borrowing needs.
The business plan is a blueprint for the
company, and it’s an indispensable tool in
attracting investors and/or obtaining loans.
Remember: The value of your business plan
is not limited to the planning stages of your
business and the process of finding start-up
money. Once you’ve acquired start-up capital, don’t just stuff your plan in a drawer.
Treat it as an ongoing guide to your business and a yardstick by which you can measure your performance. Keep it handy,
update it periodically, and use it to assess
your progress.
Preparing a business plan takes a lot of
time, but it’s time well spent. A business
plan forces you to think critically about your
proposed business and reduces your risk of
failure. It forces you to analyze your business concept and the industry in which
you’ll be operating, and it helps you determine how you can gain a percentage of sales
in that industry. In developing and writing a
business plan, you have to make strategic
decisions in the areas of management,
staffing, production, marketing, and
finance—in all the functional areas of business that we described in Chapter 1.
The most common use of a business plan
is persuading investors and/or lenders to
provide financing. These two groups look
for different things. Investors are particularly interested in the quality of the business
concept and the ability of management to
make the venture successful. Bankers are
primarily concerned with the company’s
ability to generate cash to repay loans. To
persuade investors and lenders to support
your business, you need a professional,
well-written business plan that paints a clear
picture of your proposed business.

The Business Plan

Although formats can vary, a business plan
generally includes the following sections:
executive summary, description of proposed
business, industry analysis, mission statement, management plan, goods and/or ser-

If you’re starting a business, it’s essential
that you prepare a business plan. It should
tell the story of your business concept, spec-

SECTIONS OF THE BUSINESS
PLAN

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The Business Plan

vices, development and production, marketing, global issues, and financial plan. Let’s
explore each of these sections in turn.

Executive Summary
The executive summary is a one- to threepage overview of the business plan. It’s
actually the most important part of the business plan: It’s what the reader looks at first,
and if it doesn’t capture the reader’s attention, it might be the only thing that he or
she looks at. It should therefore emphasize
the key points of the plan and get the reader
excited about the prospects of the business.
Even though the executive summary is the
first thing read, it’s written after the other sections of the plan are completed. An effective
approach in writing the executive summary
is to paraphrase key sentences from each section of the business plan. This process will
ensure that the key information of each section is included in the executive summary.
Description of Proposed Business
Here, you present a brief description of the
company and answer the following questions:
• What will your proposed company do?
Will it be a manufacturer, a retailer, or a
service provider?
• What goods or services will it provide?
• Why are your goods or services unique?
• Who will be your main customers?
• How will your goods or services be sold?
• Where will your business be located?
Because later parts of the plan will provide more detailed discussions of many of
these issues, this section needs to provide
only an overview of these topics.

Industry Analysis
This section provides a brief introduction to
the industry in which you propose to operate.
It describes both the current situation in the
industry as well as future possibilities and
addresses such questions as the following:
• Who are the players in the industry?
• What is the outlook for the industry?

executive summary
Overview emphasizing the key points of a business plan
in order to get the reader excited about the prospects of
the business.

33

• What are the total projected sales for the
industry? Is it growing or shrinking?
• What factors will influence future
expansion or contraction?
• How will predicted future economic
conditions affect the industry?

Mission Statement and Core Values
This portion of the business plan states the
company’s mission statement and core values.
The mission statement describes the purpose or mission of your organization—its
reason for existence. It tells the reader what
the organization is committed to doing. The
mission statement can be concise, like the
one from Merck Pharmaceutical: “To preserve and improve human life.” Or, it can be
more detailed, like the one from Southwest
Airlines: “The mission of Southwest Airlines
is dedication to the highest quality of customer service delivered with a sense of
warmth, friendliness, individual pride, and
company spirit.”
Core values are fundamental beliefs
about what is and is not appropriate and
what is important in conducting company
activities. Core values are not about profits
but rather about ideals. They will help
guide the behavior of individuals in the
organization. For example, Coca-Cola
reports that its core values—honesty,
integrity, diversity, quality, respect,
responsibility, and accountability—help
employees know what behaviors are
acceptable.
Management Plan
It isn’t enough just to have a good business
idea: You need a talented management team
that can turn your concept into a profitable
venture. The management plan section provides information about the qualifications of
each member of the management team. Its
purpose is to convince the reader that the
company will be run by well-qualified, experienced managers. It describes each individual’s education, experience, and expertise, as
well as each person’s responsibilities. This
section also specifies the proposed legal

mission statement
Statement describing an organization’s purpose or
mission—its reason for existence—and telling stakeholders what the organization is committed to doing.

core values
Statement of fundamental beliefs describing what is
appropriate and important in conducting organizational
activities and providing a guide for the behavior of organization members.

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CHAPTER 2 The Challenges of Starting a Business

form of the organization: sole proprietorship
(personal ownership), partnership (ownership shared with one or more partners), or
corporation (ownership through shares of
stock).

Goods and/or Services
To succeed in attracting investors and
lenders, you must be able to describe your
goods or services clearly (and enthusiastically). Here, you describe all the goods and
services that you will provide the marketplace. This section explains why your proposed offerings are better than those of
competitors and indicates what market
needs will be met by your goods or services.
It addresses a key question: What
competitive advantage will the company have
over similar goods or services now on the
market?
Development and Production
This section indicates how you plan to
obtain or make your products. Naturally,
the write-up will vary depending on
whether you’re proposing a service company, a retailer, or a manufacturer. If it’s a
service company, describe the process of
providing services. If it’s a retail company,
tell the reader where you will purchase
products for resale.
If you’re going to be a manufacturer, you
must furnish information on product
design, development, and production
process. You must address questions like
the following:
• How will products be designed?
• What technology will be needed to
design and manufacture products?
• Will the company run its own production facilities, or will its products be
manufactured by someone else?
• Where will production facilities be
located?
• What type of equipment will be used?
• What are the design and layout of the
facilities?
• How many workers will be employed in
the production process?
• How many units will be produced?
• How will the company ensure that
products are of high quality?

Marketing
This critical section focuses on four marketing-related areas—target market, pricing,
distribution, and promotion:
1. Target Market. Describe future customers and provide a profile of them
based on age, gender, income, interests,
and so forth. If your company will sell
to other companies, describe your typical business customer.
2. Pricing. State the proposed price for
each product. Compare your pricing
strategy to that of competitors.
3. Distribution. Explain how your goods
or services will be distributed to customers. Indicate whether they will be
sold directly to customers or through
retail outlets.
4. Promotion. Identify a promotion strategy, indicating what types of advertising you’ll be using.

Global Issues
Indicate whether you’ll be involved in international markets, either by buying or selling
in other countries. If you’re going to operate
across borders, identify the challenges you’ll
face in your global environment and explain
how you’ll overcome them. If you don’t
plan initially to be involved in international
markets, state what strategies, if any, you’ll
use to move into international markets at a
later date.
Financial Plan
In preparing the financial section of your
business plan, specify the company’s cash
needs and explain how you’ll be able to
repay debt. This information is vital in
obtaining financing. It presents financial
projections, including expected sales, costs,
and profits (or losses). It refers to a set of
financial statements included in an appendix to the business plan. It reports the
amount of cash needed by the company for
start-up and initial operations and provides an overview of proposed funding
sources.
Appendices
Here you furnish supplemental information
that may be of interest to the reader. For
example, you might attach the résumés of

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How to Succeed in Managing a Business

your management team and a set of financial statements.

and make a strong personal commitment to your business.

How to Succeed in
Managing a Business

• Get Adequate Funding. It takes a lot of
money to start a business and guide it
through the start-up phase (which can
last for over a year). You can have the
most brilliant idea in the world, the
best marketing approach, and a talented management team, but if you run
out of cash, your career as a business
owner could be very brief. Plan for the
long term and work with lenders and
investors to ensure that you’ll have sufficient funds to get open, stay open
during the start-up phase, and, ultimately, expand.

Being successful as a business owner
requires more than coming up with a brilliant idea and working hard. You need to
learn how to manage and grow your business. As an owner, you’ll face numerous
challenges, a number of which have been
identified through focus groups of business
owners.28 Your ability to meet challenges
like those discussed next will be a major factor in your success (or failure) as a business
owner.

• Manage Your Money Effectively. As a
business owner, you’ll be under constant
pressure to come up with the money to
meet payroll and pay your other bills.
That’s why you need to pay attention to
cash flow—money coming in and money
going out. You need to control costs and
to collect money that’s owed you, and
generally, you need to know how to
gather the financial information that you
need to run your business.

• Know Your Business. It seems obvious,
but it’s worth stating: Successful businesspeople know what they’re doing.
They’re knowledgeable about the industry in which they operate (both as it
stands today and where it’s headed in
the future), and they know who their
competitors are. They know how to
attract customers and who the best suppliers and distributors are, and they
understand the impact of technology on
their business.

• Manage Your Time Efficiently. A new
business owner can expect to work 60
hours a week. If you want to grow a
business and have some type of nonwork life at the same time, you’ll need
to give up some control—to let others
take over some of the work. Thus, you
must develop time-management skills
and learn how to delegate responsibility.

QUICK QUIZ

2.2

Before reading the next section on how to succeed in managing a
business, take a moment to test your understanding of how to
start a business and write a business plan.
Go to www.exploringbusinessonline.com

• Know the Basics of Business
Management. You might be able to start a
business on the basis of a great idea, but
to manage it, you need to understand the
functional areas of business—accounting,
finance, management, marketing, production. You need to be a salesperson as
well as a decision maker and planner.
• Have the Proper Attitude. When you
own a business, you are the business. If
you’re going to devote the time and
energy needed to transform an idea
into a successful business, you need to
have a passion for your work. You
should believe in what you’re doing

• Know How to Manage People. Hiring,
keeping, and managing good people are
crucial to business success. As your business grows, you’ll depend more on your
employees. You need to develop a positive working relationship with them,
train them properly, and motivate them
to provide quality goods or services.
• Satisfy Your Customers. You might
attract customers through impressive
advertising campaigns, but you’ll keep
them only by providing quality goods or
services. Commit yourself to satisfying—or even exceeding—customer
needs.
• Know How to Compete. Find your
niche in the marketplace, keep an eye on
your competitors, and be prepared to

35

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CHAPTER 2 The Challenges of Starting a Business

react to changes in the marketplace. The
history of business (and much of life)
can be summed up in three words:
“Adapt or perish.”

ABOUT NIKE

2.2

Take a few minutes to learn about some of the most notable successes
in the history of Nike, as well as some of the crucial challenges that it
faced in a period of sustained growth. We’ll explore both the successes
and the challenges in more detail in subsequent chapters.
Go to www.exploringbusinessonline.com

HELP FROM THE SBA

Figure 2.6

SBA Loan Guarantees,
1976–2004

12

Small business owners can get a wealth
of assistance from the Small Business
Administration (SBA). The SBA bills itself
as “America’s Small Business Resource”29
because it offers an array of programs to
help small business owners and prospective
business owners. Services include assistance
in developing a business plan, starting a
business, obtaining financing, and managing an organization.
Through various programs, for example,
the SBA is responsible for seeing that small
business owners get more than $60 billion a
year in financing from lenders and investors.
Each year, the SBA 7(a) loan guarantee program helps some 43,000 small businesspeople get loans from private lenders, and as
you can see from Figure 2.6, the amount of

Between 2002 and 2003, SBA-guaranteed loans to African
Americans increased 61%; loans to Hispanics increased 39%;
loans to women increased by 33%.

Billions of $

10

8

6

money guaranteed by the program has risen
considerably in the last 30 years.30
The SBA also offers management and
technical-services training. This assistance
is available through a number of channels,
including the SBA’s extensive Web site,
online courses, and training programs. A full
array of individualized services is also available through SBA programs. The Small
Business Development Center (SBDC)31
assists current and prospective small business owners with business problems and
provides free training and technical information on all aspects of small business management. These services are available at approximately 1,000 locations around the country,
many housed at colleges and universities.
If you need individualized advice from
experienced executives, you can get it
through the Service Corps of Retired
Executives (SCORE).32 Under the SCORE
program, a businessperson needing advice
is matched with a team of retired executives
who work on a volunteer basis. Together,
the SBDC and SCORE help more than
900,000 small businesspersons every year.

WHY DO BUSINESSES FAIL?
By definition, starting a business is risky.
Although many businesses succeed, a large
proportion fail. For example, one-third of
small businesses that have employees go out
of business within the first two years. By the
four-year mark, 55 percent have gone out of
business.33
If you’ve paid any attention to the occupancy of shopping malls over a few years,
time, you’ve noticed that some retailers
close and new ones open up constantly. The
same thing happens with restaurants—
indeed, with all kinds of small businesses.
There are many and varied reasons why
businesses fail, but many experts agree
that the vast majority of failures results
from some combination of the following
problems:
• Bad Business Idea. If you got the idea of
selling snowblowers in Hawaii, you
wouldn’t have much competition, but
you’d still be doomed to failure.

4

2

0
1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Year

• Cash Problems. Too many new businesses are underfunded. The owner borrows enough money to set up the business but doesn’t have enough extra cash
to operate during the start-up phase,

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Where We’re Headed

37

when very little money is coming in but
a lot is being spent.
• Managerial Inexperience or Incompetence.
Many new business owners have no
experience in running a business; many
have limited management skills. Maybe
an owner knows how to make or market
a product but doesn’t know how to manage people. Maybe an owner can’t attract
and keep talented employees. Maybe an
owner has poor leadership skills and isn’t
willing to plan ahead.
• Lack of Customer Focus. A major advantage of a small business is the ability
to provide special attention to customers. But some small businesses fail
to seize this advantage. Maybe the
owner doesn’t anticipate customers’
needs or keep up with changing markets or keep an eye on the customerfocused practices of competitors.
• Inability to Handle Growth. You’d think
that a sales increase would be a good
thing. Often it is, but sometimes it can be a
major problem. When a company grows,
the owner’s role changes. The owner
needs to delegate work to others and
build a business structure that can handle
the increase in volume. Some owners
don’t make the shift and find themselves
overwhelmed. Things don’t get done,
customers become unhappy, and expansion actually damages the company.

QUICK QUIZ

2.3

Before you leave this chapter, take a moment to test your
understanding of the last few sections by giving yourself a final
“Quick Quiz.”
Go to www.exploringbusinessonline.com

Where We’re Headed
This chapter introduced you to the challenges of starting and growing a business.
You gained an understanding of the impor-

Small Business Development Center (SBDC)
SBA program in which centers housed at colleges and
other locations provide free training and technical information to current and prospective small business owners.

This couple has been running a candy store for three years. Because they now
want to add two full-time employees, they need to know more about calculating
payroll deductions and filing payroll records. Where can they go to get free
advice? They could contact the Small Business Development Center (SBDC),
which provides free training on all aspects of small business management. If they
log on to the SBDC Web site, they could learn about a video-based course called
By the Numbers, which helps businesspeople with the basic mathematical issues
that they face every day.

tance of small businesses to the U.S. economy. You explored issues related to starting
and managing a company. Perhaps most
importantly, you learned about the value of
developing a business plan. You found that
a business plan is not only an indispensable
tool in planning a business, but is necessary
to obtain financing for your venture. The
remaining chapters of the text will provide
you with the knowledge needed to prepare
a business plan.

Service Corps of Retired Executives (SCORE)
SBA program in which a businessperson needing advice
is matched with a team of retired executives working on
a volunteer basis.

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CHAPTER 2 The Challenges of Starting a Business

Summary of Learning Objectives
1. Define entrepreneurship and identify the
reasons some individuals become
entrepreneurs.
An entrepreneur is someone who identifies a business opportunity and assumes the risk of creating
and running a business to take advantage of it.
Commonly cited reasons for becoming an entrepreneur are being your own boss, achieving financial
independence, enjoying creative freedom, and
using your skills and knowledge.
2. Describe the importance of small
businesses to the U. S. economy and
identify the industries in which small
businesses are concentrated.
The Small Business Administration (SBA), a government agency that offers an array of programs to
help prospective business owners, defines a small
business as one that is independently owned and
operated, exerts little influence in its industry, and
has fewer than 500 employees. Small businesses
are essential to the U.S. economy because they create jobs, spark innovation, and provide opportunities for many people, including women and
minorities, to achieve financial independence.
Small businesses also complement the economic
activity of large organizations by providing them
with components and services and distributing
their products.
About 80 percent of small businesses in the U.S.
are in the service-producing sector. Within this sector, the heaviest concentration of small businesses
are in retail and professional and business services.
The goods-producing sector is home to only about
20 percent of all small businesses, nearly two-thirds
in construction.
3. Explain what it takes to start a business
and summarize the advantages and
disadvantages of business ownership.
Starting a business takes talent, determination, hard
work, and persistence. It also requires a lot of
research and planning. Small business ownership
brings with it a number of advantages, including
independence, the potential for financial rewards,
the possibility of an improved lifestyle, learning
opportunities, creative freedom, and personal satisfaction. Small business ownership also comes with
some disadvantages, including financial risk,
increased stress, substantial time commitment, and
the necessity of performing some unpleasant tasks,
like firing people. It also entails the risk of failure.

4. Evaluate the various small business
ownership options—starting a new
business, buying an existing business, or
obtaining a franchise.
Each of these common options for starting a small
business has advantages and disadvantages. The
riskiest (though most common) choice is starting
from scratch. Although this approach lets you build
the business the way you want, you have to do
everything yourself—come up with a product, location, customer base, and employees—and it’s up to
you to build a reputation. Buying an existing business is somewhat easier: You already have a proven
product, a known location, customers, and trained
employees. On the downside, it’s hard to determine
an appropriate price to pay for an existing business.
You might also inherit problems that you don’t want
or didn’t count on, such as disappointed customers,
employees that you wouldn’t have hired yourself,
and competition from the previous owner (who
might set up a similar business at a new location).
The third option, buying a franchise, also has
advantages and disadvantages. When you buy a
franchise, you obtain the right to use a brand name
and to sell the franchiser’s goods or services. You can
choose from products in a variety of industries,
including food, retail, travel, and real estate, and
you’re getting a prepackaged, ready-to-go business
that’s proven successful elsewhere. You get help
from the franchiser (the company that sells the franchise) in picking a location, starting and operating
the business, and advertising. As a franchisee, you
profit from the franchiser’s name recognition without having to develop your image in the marketplace. But all this help does not come cheaply. Both
initial investment costs and operating costs are high,
and you have to play by the franchiser’s rules even if
you disagree with them. Even though you run your
own business, you’re not entirely your own boss.
5. Discuss the importance of planning for your
business and identify the key sections of a
business plan.
If you’re interested in starting a business, you need
to make a lot of decisions: What type of business is
best for you? What is your business idea? Do you
want to create a new product or approach to doing
business or start a business that is similar to others?
Do you want to start a new business, buy an existing
business, or buy a franchise? What form of business
organization do you want? Do you want to own the
business yourself or share ownership with others?

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Questions and Problems

After making these decisions, you’ll need to
take the most important step in the process of starting a business: planning for it. You should describe
your future business in the form of a business plan,
which is a formal document describing the company that you want to start. The business plan is a
blueprint for your company, and it’s an essential
tool in attracting investors and/or obtaining loans.
It’s also valuable as an ongoing guide to your business and a yardstick by which you can measure
your performance. Preparing a business plan takes
a lot of time, but it’s worth the effort. It forces you
to think critically about your proposed business and
reduces your risk of failure.
Although formats vary, a business plan generally includes the following sections: an executive
summary, which describes the proposed business
and analyzes the industry in which it’s going to
compete; a mission statement and statement of
core values; a management plan; a description of
goods and/or services; a description of development and production processes; and marketing and
financial plans.

39

taking, but you increase the likelihood of success if
you understand the basics of business management and know your business and its industry;
have a positive attitude and believe in what you’re
doing; get adequate funding to start and continue
operating your business; manage your money
effectively; make efficient use of your time; understand how to motivate people and develop positive
working relationships with your employees; satisfy your customers; and know how to compete in
the marketplace.
You can get help in starting and growing a business from the SBA. The SBA also helps small business owners obtain financing, and it offers training
and management assistance through a number of
programs. The Small Business Development
Center (SBDC) provides free training and technical
information on all aspects of small business management at over 1,000 locations throughout the
country. For individualized advice from experienced executives, business owners can call on the
Service Corps of Retired Executives (SCORE),
which matches business owners with retired executives who volunteer their services.
Despite all the available assistance, the failure
rate for small businesses is high. Some of the reasons
for small business failure include bad business ideas,
managerial inexperience or incompetence, lack of
customer focus, and inability to handle growth.

6. Discuss ways to succeed in managing a
business and explain why some
businesses fail.
As a business owner, you’ll need to be able to manage and grow your business. It’s a difficult under-

Questions and Problems
1.

AACSB



Do you have what it takes to be an entrepreneur? To
find out, review the attributes mentioned in the text
that can be used to characterize entrepreneurs. Next,
use the following three-point scale to indicate the
extent to which each of the attributes characterizes you:
(1) doesn’t sound like me, (2) sounds like me to a certain extent, or (3) sounds a lot like me. Based on your
responses, do you think that you have the attributes of
an entrepreneur? Do you think you could be a successful entrepreneur? Why or why not?
2.

AACSB



What financial risks should you consider in making
your decision? What are your chances of succeeding
with your plan? Are you willing to take the financial
risk needed to start a business? Why or why not? Are
you likely to make more money running your own
business than working for someone else?

Analysis

Analysis

Because you’re convinced that the best way to get rich
is to work for yourself, you’re thinking about starting
your own business. You have an idea and $100,000 that
you just inherited from a great aunt. You even have a
location: Palo Alto, California, which (according to a
May 2004 Forbes magazine article by Betsy Schiffman)
is the best place in the United States to get rich. But,
there’s a downside: To move to California and start
your own business, you’ll have to drop out of college.

3. How “small” is a small business? If a substantial portion of small businesses in the United States suddenly
closed, what would be the impact on the U.S. economy? How would all these closings affect workers,
consumers, and other businesses?
4. Why are most small businesses found in the serviceproducing sector? Identify five small service-producing businesses that you patronize frequently. What
kinds of small businesses are found in the goodsproducing sector? What small goods-producing firms
do you do business with regularly?
5.

AACSB



Analysis

First, identify five advantages of small-business ownership. Next, rank these advantages according to their

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CHAPTER 2 The Challenges of Starting a Business

importance to you. Why did you rank them as you did?
What factors discourage individuals from small-business ownership? Indicate which of these factors might
discourage you from starting a business. Explain why.
6.

AACSB



Analysis

It’s the same old story: You want to start a small business but don’t have much money. Go to www.
prenhall.com/collins to link to the About.com Web site
and read the article, “Business on a Budget.” Identify
some businesses that you can start for $20 or less (that’s
right—$20 or less). Select one of these opportunities
that interests you. Why did you select this business?
Why does the idea interest you? What would you do to
ensure the business was a success? If you needed assistance starting up or operating your business, where
could you find help, and what type of assistance would
be available?
7.

AACSB



Analysis

If business ownership interests you, you can start a new
business, buy an existing business, or obtain a franchise.
Evaluate the advantages and disadvantages of each
option. Which option do you find most appealing and
why? Describe the business you would probably start.
8. Why do some businesses succeed while others fail?
Identify three factors that you believe to be the most
critical to business success. Why did you select these
factors? Identify three factors that you believe to be primarily responsible for business failures, and indicate
why you selected these factors.
9.

AACSB



Analysis

Let’s start with three givens: (1) college students love
chocolate chip cookies, (2) you have a special talent for
baking cookies, and (3) you’re always broke. Given
these three conditions, you’ve come up with the idea of
starting an on-campus business—selling chocolate chip
cookies to fellow students. As a business major, you
want to start out right by preparing a business plan. To
get started, you identified a number of specifics about
your proposed business. Now, you need to put these
various pieces of information into the relevant section
of your business plan. Using the business plan format
described in this chapter, indicate the section of the
business plan into which you’d put each of the following pieces of information:
a. You’ll bake the cookies in the kitchen of a friend’s
apartment.
b. You’ll charge $1 each or $10 a dozen.
c. Your purpose is to make the best cookies on campus
and deliver them fresh. You value integrity, consideration of others, and quality.
d. Each cookie will have 10 chocolate chips and will
be superior to those sold in nearby bakeries and
other stores.

e. You expect sales of $6,000 for the first year.
f. Chocolate chip cookies are irresistible to college students. There’s a lot of competition from local bakeries, but your cookies will be superior and popular
with college students. You’ll make them close to
campus using only fresh ingredients and sell them
for $1 each. Your management team is excellent.
You’ll market your product by placing ads in the
school paper. You expect first-year sales of $6,000
and net income of $1,500. You estimate start-up
costs at $600.
g. You’ll place ads for your product in the college
newspaper.
h. You’ll hire a vice president at a salary of $100 a
week.
i. You can ship cookies anywhere in the United States
and in Canada.
j. You need $600 in cash to start the business.
k. There are six bakeries within walking distance of
the college.
l. You’ll bake nothing but cookies and sell them to college students. You’ll make them in an apartment
near campus and deliver them fresh.
10. AACSB ᭤ Analysis
How would you like to spend your summer collecting
trash in a used pickup? Doesn’t sound very appealing,
does it? Would you quit college to do it full time?
Probably not. But that’s exactly what Brian Scudamore
did. And he got very rich doing it. His summer job
turned into the company known as 1-800-GOT-JUNK,
one of the fastest-growing franchises in the United States
and Canada. Go to www.exploringbusinessonline.com
to link to the 1-800-GOT-JUNK Web site and learn more
about the company. After looking at the site, answer the
following questions:
a. What is the company’s business model? What does
it do? Where does it do it?
b. Are you the kind of person the company wants to
attract as a franchise partner?
c. How much would it cost you to buy a franchise?
How much total capital would you need?
d. What kinds of support and services would you
receive from the company?
e. Assuming that you had enough money, would you
buy a franchise? Why or why not?
As a reward for working hard, take a break and
click on the Junk Genie icon on the Web site’s home
page. Can you figure out the trick? Pass it along to
your friends.

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Ethics Angle

Learning on the Web

41

AACSB

Would You Like to Own a Sub Shop?
How would you like to own your own sandwich shop? You
could start one on your own or buy one that’s already in
business, but an easier way might be buying a franchise
from Subway, the largest fast food franchise in the world
(even bigger than McDonald’s). Subway began in 1965
when 17-year-old Fred DeLuca opened a tiny sandwich
shop in Bridgeport, Connecticut, hoping to put himself
through college. As it turns out, his venture did much more
than that. By 1974, DeLuca was franchising his business
concept, and today, there are more than 15,000 Subway
franchisees in more than 75 countries.
Go to www.exploringbusinessonline.com to link to the
Subway Web site and learn more about franchise opportu-

nities with the company. After reviewing the information
provided on the company’s Web site, answer the following
questions:
1. What do you have to do to get a Subway franchise?
2. How much would it cost to open a Subway shop?
3. What training and support would you receive from
Subway?
4. What advantages do you see in buying a Subway franchise rather than starting a business from scratch?
What disadvantages do you see?

Career Opportunities
Do You Want to Be an Entrepreneur?
Want to learn what it’s like to be an entrepreneur? To help you
decide if life as an entrepreneur might be for you, go to
www.exploringbusinessonline.com to link to the WetFeet Web
site and review the entrepreneur profiles. Select two entrepreneurs who interest you and for each, do the following:

After reading the interviews with these two entrepreneurs, answer the following questions:

1. Describe the company that he or she founded.

2. What’s the downside of being an entrepreneur?

2. Explain the reasons why he or she became an
entrepreneur.

3. What challenges do entrepreneurs face?

1. What aspects of being an entrepreneur are particularly rewarding?

4. Is entrepreneurship for you? Why or why not?

3. Explain what qualities and/or background prepared
the individual to start a business.

Ethics Angle

AACSB

Term Papers for Sale
You and some fellow classmates are sitting around over pizza
one night when someone comes up with an idea for a business. All of you have old term papers and essays lying around,
and a couple of you know how to set up a Web page. What if
you combine these two assets and start a business selling term
papers over the Internet? Over time, you could collect or buy
additional inventory from other students, and since some of
you are good at research and others are good writers, you
could even offer “clients” the option of customized papers
researched and written just for them. You figure that you can
charge $15 for an “off-the-rack” paper, and for customized
jobs, $10 per double-spaced page seems reasonable.
You all agree that the idea is promising, and you and a
partner volunteer to put together a business plan. You have
no difficulty with the section describing your proposed business: You know what your business will do, what products
it will offer, who your customers will be, how your products
will be sold, and where you’ll be located. So far, so good.

Let’s pause at this point to consider the following
questions:
1. Does selling term papers over the Internet make business sense? Is it a good business idea?
2. Could the venture be profitable?
Let’s continue and find out how the business plan
proceeds.
Now, you’re ready for your section on industry analysis. The first question you need to answer is: Who are the
players in the industry? To get some answers, you go
online, log on to Google, and enter the search term “term
papers for sale.” Much to your surprise, up pop dozens of
links to companies that have beaten you to market. The first
company you investigate claims that it has 250,000 papers
in stock, plus a team of graduate students on hand to write
papers for anyone needing specialized work.

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CHAPTER 2 The Challenges of Starting a Business

There’s also a statement that says, “Our term papers
and essays are designed only to help students prepare their
own work. Students using our term papers and essays are
responsible for writing their own papers, and our work
should be cited by these students.”
But back to your business plan. You realize that you’re
facing not only stiff competition but an issue which, so far,
you and your partners have preferred to ignore: Is this an
ethical business that you have in mind? It occurs to you that
you could probably find the answer to this question in at
least 1 of the 8,484 term papers on ethics available on your
competitor’s Web site, but you decide that it would be more
efficient to give the question some thoughts of your own.
Let’s pause again to state the question that you’re going
to ask yourself:

Team-Building Skills

2. Do you need to consider the ethics of what other people do with your product? Explain your reasoning.
When you report on the problem that you’ve uncovered,
your would-be partners are pretty discouraged, some by the
prospect of competition and some by the nagging ethical issue.
Just as you’re about to dissolve the partnership, one person
speaks up: “How about selling software that lets faculty search
to see if students have plagiarized material on the Web?”
“Sorry,” says someone else. “It’s already out there. Two
students at Berkeley have software that compares papers to
a hundred million Web pages.”

AACSB

Knowing how to be an effective team member is a vital lifetime skill. It will help you in your academic career, in the
business world, and in non-work activities. It takes time
and effort to learn how to work in a team. Part of the challenge is learning how to adjust your behavior to the needs
of the group. Another part is learning how to motivate
members of a group. A well-functioning team allows members to combine knowledge and skills, and this reliance on
diverse backgrounds and strengths often results in team
decisions that are superior to those made by individuals
working alone.
1. Are You a Team Player?
As a first step, you should do a self-assessment to evaluate whether you possess characteristics that will help you
be a successful team member. You can do this by taking a
“Team Player” quiz available at the career Web site on

The Global View

1. Is the sole purpose of running a business to make a
profit, or do you need to be concerned about what your
products will be used for? Explain your reasoning.

Monster.com. Go to www.exploringbusinessonline.com
to link to this site. You’ll get feedback that helps you identify the characteristics you need to work on if you want to
improve your teamwork skills.
2. Working Together as a Team
The best approach to specifying appropriate behavior
for team members is to have the team come up with
some ground rules. Get together with three other students selected by your instructor and establish working
guidelines for your team. Prepare a team report in
which you identify the following:
a. Five things that team members can do to increase
the likelihood of group success.
b. Five things that team members can do to jeopardize
group success.

AACSB

Global Versions of MySpace.com
When Chris DeWolfe and Tom Anderson founded
MySpace.com in July 2003, they had no idea that they were
headed for an overnight success. Well, almost overnight.
Two and one-half years after their entrepreneurial venture
had been launched, MySpace.com had nearly 50 million
users in the United States, where 1 out of every 10 ads
viewed on the Internet was seen on the site. Its popularity
caught the attention of news and entertainment mogul
Rupert Murdoch, whose News Corporation dished out
$580 million for MySpace.com while allowing its founders
to stay on as CEO and president.
What’s ahead for MySpace.com? Can its business
model be exported outside the United States? Murdoch
thinks so; he immediately launched a British version
of the site. If you were in charge of global expansion
for MySpace.com, what country would you enter next?
What country would you avoid? To identify promis-

ing and not-so-promising foreign markets, go to www.
exploringbusinessonline.com to link to the Country Profiles Web site maintained by BBC News. Study the economic and political profiles of possible candidates and
answer the following questions:
1. Why do you think MySpace.com has been so successful
in the United States? Cite some examples of the challenges that it faces.
2. If you were in charge of global expansion at
MySpace.com, which country would you enter next?
Why do you think the MySpace.com business concept
will succeed in this country? What challenges will the
company face?
3. What country would you avoid? Why is it incompatible with the MySpace.com business concept?

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Business Plan Project

43

Business Plan Project
Group Report: Your Great Business Idea
INITIAL REPORT

REASONABLE CONTRIBUTIONS

The selection of a business idea is the most important choice
that your team will make in this course. Give it some
thought, and make your choice carefully. If you need some
further advice or guidance on coming up with a great business idea (and most students do), go to Appendix A at the
back of this book, entitled “Introducing Your Business
Plan,” and consult the section headed “Type of Company.”
The team should submit a written report identifying its
great business idea and explaining its choice. The report
should be about two double-spaced typed pages. The name
of your proposed business and the names of all team members should appear on the report.

All members of the team who make a reasonable contribution to the report should sign it. If any team member does
not work on the report, his or her name should not appear
on it. If a student who has made a contribution is unable to
sign the report (because of sickness or some other valid reason), the team can sign his/her name. To indicate that a
name was signed by the team on a member’s behalf, be sure
to attach a note to the signature.