Small Business Management Launching and Growing Entrepreneurial Ventures Justin G Longenecker Baylor University Carlos W Moore Baylor University 14e J William Petty Baylor University Leslie E Palich Baylor University Australia • Brazil • Canada • Mexico • Singapore • Spain • United Kingdom • United States Small Business Management: Launching and Growing Entrepreneurial Ventures, 14e Justin G Longenecker, Carlos W Moore, J William Petty, Leslie E Palich VP/Editorial Director: Jack W Calhoun Content Project Manager: Jacquelyn K Featherly Senior Art Director: Tippy McIntosh Editor-in-Chief: Melissa Acuna Technology Project Manager: Kristen Meere Cover and Internal Designer: Grannan Graphic Design Ltd Senior Acquisitions Editor: Michele Rhoades Senior Manufacturing Coordinator: Doug Wilke Senior Developmental Editor: Susanna C Smart Production House/Compositor: Lifland et al., Bookmakers/ ICC Macmillan Inc Cover Images: PhotoAlto Agency/Getty Images; Youngblood’s Books Editorial Assistant: Ruth Belanger Senior Marketing Manager: Clint Kernen/Kimberly Kanakes Senior Marketing Communications Manager: Jim Overly COPYRIGHT © 2008, 2006 Thomson South-Western, a part of The Thomson Corporation Thomson, the Star logo, and South-Western are trademarks used herein under license Printed in the United States of America 11 10 09 08 Student Edition Package ISBN 13: 978-0-324-56972-8 Student Edition Package ISBN 10: 0-324-56972-6 Student Edition ISBN 13: 978-0-324-58397-7 Student Edition ISBN 10: 0-324-58397-4 Instructor’s Edition Package ISBN 13: 978-0-324-57882-9 Instructor’s Edition Package ISBN 10: 0-324-57882-2 Instructor’s Edition ISBN 13: 978-0-324-58396-0 Instructor’s Edition ISBN 10: 0-324-58396-6 Copyeditor: Jeanne Yost Photography Manager: John Hill Photo Researcher: Rose Alcorn Printer: Transcontinental Beauceville, Quebec ALL RIGHTS RESERVED No part of this work covered by the copyright hereon may be reproduced or used in any form or by any means— graphic, electronic, or mechanical, including photocopying, recording, taping, Web distribution or information storage and retrieval systems, or in any other manner—without the written permission of the publisher For permission to use material from this text or product, submit a request online at http://www.thomsonrights.com Library of Congress Control Number: 2007938373 For more information about our products, contact us at: Thomson Learning Academic Resource Center 1-800-423-0563 Thomson Higher Education 5191 Natorp Boulevard Mason, OH 45040 USA In Remembrance Justin G Longenecker Professor Emeritus of Management Hankamer School of Business Baylor University May 4, 1917–September 14, 2005 Carlos W Moore Edwin Streetman Professor of Marketing Hankamer School of Business Baylor University February 3, 1943–May 27, 2007 It is with deep sadness that we inform you of the deaths of our two co-authors and dear friends We cannot put into words the loss we feel Their deaths cannot be measured by their absence in revising this book They were not only our colleagues, but also our confidants and mentors They were tremendous role models for us and for literally thousands of individuals who knew and loved them In this book, we encourage you to consider the legacy you will leave at the end of your entrepreneurial journey Justin and Carlos left a legacy that few can ever dream of leaving They will be missed for many years to come In working with Justin and Carlos for over a decade, we have developed a shared vision about the book So, while the specific responsibilities have changed for this edition, the dream of helping others become entrepreneurs lives on Be assured that we will continue to build on the great legacy of this textbook Justin and Carlos would be disappointed with anything less, and we are not about to let them down iii This page intentionally left blank Brief Contents Part Entrepreneurship: A World of Opportunity 1 THE ENTREPRENEURIAL LIFE 2 ENTREPRENEURIAL INTEGRITY AND ETHICS: A GATEWAY TO SMALL BUSINESS OPPORTUNITY 32 Part Starting from Scratch or Joining an Existing Business 61 GETTING STARTED 62 FRANCHISES AND BUYOUTS 94 THE FAMILY BUSINESS 120 Part Developing the New Venture Business Plan THE BUSINESS PLAN 150 THE MARKETING PLAN 180 THE ORGANIZATIONAL PLAN: TEAMS, LEGAL FORMS, AND STRATEGIC ALLIANCES 206 THE LOCATION PLAN 236 10 THE FINANCIAL PLAN: PROJECTING FINANCIAL REQUIREMENTS 11 A FIRM’S SOURCES OF FINANCING 298 12 THE HARVEST PLAN 326 Part 347 BUILDING CUSTOMER RELATIONSHIPS 348 PRODUCT AND SUPPLY CHAIN MANAGEMENT 370 PRICING AND CREDIT DECISIONS 396 PROMOTIONAL PLANNING 420 GLOBAL MARKETING 443 Managing Growth in the Small Business 18 19 20 21 Part 260 Focusing on the Customer: Marketing Growth Strategies 13 14 15 16 17 Part 149 PROFESSIONAL MANAGEMENT IN THE ENTREPRENEURIAL FIRM MANAGING HUMAN RESOURCES 500 MANAGING OPERATIONS 524 MANAGING RISK 550 Understanding What the Numbers Mean 22 MANAGING THE FIRM’S ASSETS 572 23 EVALUATING FINANCIAL PERFORMANCE Cases Appendix A Sample Business Plan Appendix B Valuing a Business 471 472 571 596 620 669 690 v Contents Preface About the Authors xv xxiii Part Entrepreneurship: A World of Opportunity THE ENTREPRENEURIAL LIFE In the Video Spotlight: Bridgecreek Entrepreneurial Opportunities Three Success Stories Evidence of Opportunities 4 6 Who Are the Entrepreneurs? What Is Small Business? LIVING THE DREAM In the Pink Make Money (Profit) Be Your Own Boss (Independence) Escape a Bad Situation (Freedom) Enjoy a Satisfying Life (Personal Satisfaction) LIVING THE DREAM Thinking Entrepreneurially Works for Any Kind of Startup The Many Varieties of Entrepreneurship Founder Entrepreneurs versus Other Business Owners and Franchisees High-Potential Ventures versus Attractive Small Firms and Microbusinesses Artisan versus Opportunistic Entrepreneurs LIVING THE DREAM The Guitar Man Women Entrepreneurs Entrepreneurial Teams The Winning Hand of Entrepreneurship Customer Focus vi 16 16 17 17 18 Entrepreneurship and Small Business The Payoff of Entrepreneurship Quality Performance Integrity and Responsibility LIVING THE DREAM A Customer-Oriented Body Shop Innovation Special Niche 9 10 10 11 12 12 12 13 14 14 15 15 16 Getting Started Age and Entrepreneurial Opportunity Characteristics of Successful Entrepreneurs LIVING THE DREAM Reading, Writing, Running a Company Taking the Plunge Finding “Go-To” Persons Growing and Managing the Business HOW THEY SEE IT The Go-To Team LIVING THE DREAM Don’t Go It Alone— Find Mentors 18 18 19 20 21 21 21 22 23 Success in Business and Success in Life 24 Looking Back at an Entrepreneurial Career Evaluating Accomplishments Winning the Wrong Game HOW THEY SEE IT On Mentoring Crafting a Worthy Legacy Beginning with the End in Mind 24 24 24 25 27 28 ENTREPRENEURIAL INTEGRITY AND ETHICS: A GATEWAY TO SMALL BUSINESS OPPORTUNITY In the Video Spotlight: Joseph’s Lite Cookies Integrity and Entrepreneurship What Is Integrity? HOW THEY SEE IT Doing the Right Thing Doing the Right Thing 32 32 33 35 35 36 Contents A Framework for Integrity Promoting the Owners’ Interests Respecting Customers Valuing Employees LIVING THE DREAM Ethics Training Is Good and Good for Business LIVING THE DREAM Clean and Green Social Responsibility and Small Business LIVING THE DREAM Skills-Based Volunteering— Help That Is Right on the Beat Governmental Laws and Regulations HOW THEY SEE IT An Ethical Dilemma The Challenges and Benefits of Acting Ethically The Vulnerability of Small Companies The Integrity Edge 36 38 39 39 40 41 42 43 44 45 46 Integrity in an Expanding Economy Integrity and the Internet International Issues of Integrity Building a Business with Integrity A Strong Foundation Leading with Integrity A Supportive Organizational Culture An Ethical Decision-Making Process Social Entrepreneurship: A Fast-Emerging Trend The Burden of Environmentalism The Potential of Environmentalism vii 47 48 49 49 50 50 51 53 54 55 56 46 47 Part Starting from Scratch or Joining an Existing Business 61 GETTING STARTED In the Video Spotlight: Cybex/Avocent 62 62 Identifying Startup Ideas 64 Creating a New Business from Scratch 65 HOW THEY SEE IT Getting Started Finding Startup Ideas Types of Startup Ideas Sources of Startup Ideas LIVING THE DREAM So You Think You Have a Great Business Idea? In Your Dreams! Applying Innovative Thinking to Business Ideas HOW THEY SEE IT Build on Your Strengths LIVING THE DREAM A Three-Word Revolution: “Buy It Used” Using Internal and External Analyses to Evaluate an Opportunity Outside-In Analysis Inside-Out Analysis Integrating Internal and External Analyses LIVING THE DREAM When a Side Business Hits the Skids, It Might Be Time to “Bag It” Selecting Strategies That Capture Opportunities Putting It All Together 88 FRANCHISES AND BUYOUTS 94 In the Spotlight: Firehouse Subs The Pros and Cons of Franchising Advantages of Franchising LIVING THE DREAM Got Junk? LIVING THE DREAM Are You Ready to Work? Limitations of Franchising 94 95 96 97 98 99 67 67 Franchising Options and the Structure of the Franchising Industry 101 67 68 Franchising Options The Structure of the Franchising Industry 101 102 70 72 73 75 75 76 79 80 82 83 Broad-Based Strategy Options 83 Focus Strategies 84 LIVING THE DREAM A Part-Time Focus Strategy, but a Full-Time Challenge 86 Evaluating Franchise Opportunities Selecting a Franchise Investigating the Potential Franchise HOW THEY SEE IT Buying a Franchise LIVING THE DREAM Get into the Wing Zone Finding Global Franchising Opportunities Considering Legal Issues in Franchising Buying an Existing Business Reasons for Buying an Existing Business Finding a Business to Buy Investigating and Evaluating Available Businesses LIVING THE DREAM Do Your Homework Valuing the Business Nonquantitative Factors in Valuing a Business Negotiating and Closing the Deal 103 103 103 103 106 108 109 109 110 111 111 111 113 113 114 viii Contents THE FAMILY BUSINESS 120 In the Spotlight: Aquascape, Inc 120 The Family Business: A Unique Institution 121 What Is a Family Business? Family and Business Overlap Competition Between Business and Family Advantages of a Family Business 122 122 123 124 Family Business Momentum 126 The Founder’s Imprint on the Family Business Culture The Commitment of Family Members Why Should Anyone Care About Commitment? Breaking with the Past 126 127 128 128 Family Roles and Relationships 129 Mom or Dad, the Founder 130 Husband–Wife Teams 130 Sons and Daughters 130 LIVING THE DREAM A Marriage That Is Always in Fashion 131 Sibling Cooperation, Sibling Rivalry 132 LIVING THE DREAM Having Babies Gives Birth to a Business In-Laws In and Out of the Business The Entrepreneur’s Spouse HOW THEY SEE IT An “Out-Law’s” Perspective Professional Management of the Family Firm The Need for Good Management Nonfamily Employees in a Family Firm Family Retreats Family Councils Family Business Constitutions The Process of Leadership Succession Available Family Talent LIVING THE DREAM An Entrepreneur with a Special Place for Mom in His Heart and Business Stages in the Process of Succession Reluctant Parents and Ambitious Children Transfer of Ownership HOW THEY SEE IT Plan Early 133 134 134 135 136 136 136 137 138 138 138 139 140 141 142 142 143 Part Developing the New Venture Business Plan THE MARKETING PLAN 149 In the Video Spotlight: eHarmony What Is Small Business Marketing? THE BUSINESS PLAN In the Spotlight: Luxe Jewels An Overview of the Business Plan The Purpose of a Business Plan Do You Really Need a Business Plan? HOW THEY SEE IT Getting Started How Much Planning? LIVING THE DREAM Will Your Plan Win a Prize? Preparing a Business Plan The Content and Format of a Business Plan Making an Effective Written Presentation LIVING THE DREAM Dealing with Startup Change Presenting the Business Plan to Investors The Investor’s Short Attention Span Business Plan Features That Attract or Repel Investors Resources for Business Plan Preparation Computer-Aided Business Planning Professional Assistance in Business Planning Keeping the Right Perspective HOW THEY SEE IT Stay Focused 150 150 151 151 152 154 155 155 156 156 164 166 167 167 168 169 169 170 170 170 Marketing Philosophies Make a Difference A Consumer Orientation—The Right Choice The Formal Marketing Plan Market Analysis The Competition Marketing Strategy HOW THEY SEE IT Choosing a Product Name LIVING THE DREAM Distressed Jeans Artist Marketing Research for the New Venture 180 180 182 183 183 184 184 185 185 187 188 188 The Nature of Marketing Research Steps in the Marketing Research Process 188 189 Understanding Potential Target Markets 192 Market Segmentation and Its Variables Marketing Strategies Based on Segmentation Considerations LIVING THE DREAM A Battery of Setbacks Estimating Market Potential The Sales Forecast Limitations to Forecasting The Forecasting Process 193 194 196 197 197 198 199 Contents THE ORGANIZATIONAL PLAN: TEAMS, LEGAL FORMS, AND STRATEGIC ALLIANCES 206 In the Video Spotlight: Biosite, Inc Building a Management Team Achieving Balance LIVING THE DREAM Three Men and a Restaurant Expanding Social Networks Specifying Structure Choosing a Legal Form of Organization The Sole Proprietorship Option The Partnership Option HOW THEY SEE IT Finding the Right Partner The C Corporation Option LIVING THE DREAM Pals in Partnership Criteria for Choosing an Organizational Form Specialized Forms of Organization Forming Strategic Alliances Strategic Alliances with Large Companies HOW THEY SEE IT Forming a Strategic Alliance Strategic Alliances with Small Companies LIVING THE DREAM Kosher.com and Amazon.com: A Marriage Made in Heaven Setting Up and Maintaining Successful Strategic Alliances 206 208 208 209 209 210 211 211 212 214 216 217 219 222 224 225 225 226 227 228 Contributions of Directors Selection of Directors Compensation of Directors An Alternative: An Advisory Council 228 229 230 230 In the Spotlight: An eBay Success Story What Is E-Commerce? Benefits of E-Commerce to Startups E-Commerce Business Models LIVING THE DREAM Student Entrepreneur Turns to Blogging 236 236 237 238 242 Designing and Equipping the Physical Facilities 242 LIVING THE DREAM Incubating a Cure for Hospital Infections Challenges in Designing the Physical Facilities Challenges in Equipping the Physical Facilities Building Image 243 243 243 245 The Attraction of Home-Based Businesses HOW THEY SEE IT Our Virtual Location The Challenges of Home-Based Businesses Technology and Home-Based Businesses 253 In the Spotlight: Planning for Growth Understanding Financial Statements HOW THEY SEE IT Better Know Your Numbers The Income Statement LIVING THE DREAM Everyone’s a CFO The Balance Sheet The Cash Flow Statement Interpreting the Cash Flow Statement LIVING THE DREAM Collect Early and Pay Later 260 261 262 262 266 267 272 274 275 Financial Forecasting HOW THEY SEE IT Know Where You Stand Forecasting Profitability Forecasting Asset and Financing Requirements and Cash Flows 276 277 278 279 Good Forecasting Requires Good Judgment 285 Appendix 10A: Computing Cash Flows for Trimble & Associates Leasing, Inc 293 Appendix 10B: Cash Flow Statements for C&G Products, Inc 297 11 A FIRM’S SOURCES OF FINANCING 298 298 237 The Importance of the Location Decision Key Factors in Selecting a Good Location LIVING THE DREAM Staying Home Locating the Startup in the Entrepreneur’s Home 248 249 249 10 THE FINANCIAL PLAN: PROJECTING FINANCIAL REQUIREMENTS 260 In the Spotlight: Vizio, Inc Locating the Brick-and-Mortar Startup 248 224 Making the Most of a Board of Directors THE LOCATION PLAN Locating the Startup on the Internet ix The Nature of a Firm and Its Financing Sources A Firm’s Economic Potential Company Size and Maturity Types of Assets Owner Preferences for Debt or Equity Debt or Equity Financing? Potential Profitability LIVING THE DREAM Managing Your Debt Financial Risk Voting Control 299 299 300 300 300 300 300 302 303 305 245 245 246 247 248 Sources of Financing Sources Close to Home Bank Financing 305 306 308 ... the optional Small Business and Entrepreneurship Resource Center package Small Business School Videos Available in DVD format, selections from the popular television series Small Business School... Institution 121 What Is a Family Business? Family and Business Overlap Competition Between Business and Family Advantages of a Family Business 122 122 123 124 Family Business Momentum 126 The Founder’s... New Venture Business Plan THE MARKETING PLAN 149 In the Video Spotlight: eHarmony What Is Small Business Marketing? THE BUSINESS PLAN In the Spotlight: Luxe Jewels An Overview of the Business Plan