233 Seventh Edition Essentials of Entrepreneurship and Small Business Management Global Edition Norman M. Scarborough /Presbyterian College PEARSON Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai' London Madrid Milan Munich Paris Montreal Toronto Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo I Contents Preface Corporate Dropouts 12 40 Retiring Baby Boomers SECTION I The Challenge of Entrepreneurship • 17 HANDS ON . . . HOW TO Launch a Successful Business While You Are Still In College Chapter 1 The Foundations of Entrepreneurship 17 The World of the Entrepreneur What Is an Entrepreneur? 40 18 42 Putting Failure into Perspective 43 How to Avoid the Pitfalls 20 41 The Power of "Small" Business 45 Know Your Business in Depth 45 The Benefits of Entrepreneurship 25 Develop a Solid Business Plan 45 Opportunity to Create Your Own Destiny 25 Manage Financial Resources Opportunity to Make a Difference Understand Financial Statements • 25 YOU BE THE CONSULTANT Where Do Ideas Come From? 26 Uncertainty of Income Risk of Losing Your Entire Investment 28 Complete Responsibility Conclusion 29 Chapter Summary by Learning Objective 48 • Discussion Questions 49 • Beyond the 50 • Endnotes Creativity, Innovation, and Entrepreneurship 56 • 30 YOU BE THE CONSULTANT The Ideal Place to Launch a Business 33 College: 60 YOU BE THE CONSULTANT Darwin Was Right 63 Barriers to Creativity • Women Entrepreneurs Minority Enterprises 35 Immigrant Entrepreneurs 37 78 Step 1. Preparation 78 •> Step 2. Investigation 79 Part-Time Entrepreneurs 37 Step 3. Transformation Home-Based Businesses 38 Step 4. Incubation Family Businesses Copreneurs 38 38 Corporate Castoffs 39 69 73 HANDS O N . . . HOW TO Be a Successful Innovator 77 The Creative Process 36 69 Enhancing Organizational Creativity Entrepreneurship 34 Charles 64 How to Enhance Creativity Enhancing Individual Creativity 34 58 60 The Cultural Diversity of Young Entrepreneurs 51 Inside the Entrepreneurial Mind: From Ideas to Reality 55 Creative Thinking 29 Entrepreneurial Fire 47 47 Can Creativity Be Taught? Behind the Boom: What's Feeding the • 47 Maintain a Positive Attitude Creativity—Essential to Survival High Levels of Stress 29 Discouragement Competition Chapter 2 Long Hours and Hard Work 28 Lower Quality of Life Until the Business Gets Established 29 46 Set Your Business Apart from the Classroom... 28 46 Learn to Manage People Effectively Opportunity to Reach Your Full Potential 26 Opportunity to Reap Impressive Profits 27 Opportunity to Contribute to Society and Be Recognized for Your Efforts 27 Opportunity to Do What You Enjoy and Have Fun at It 27 The Potential Drawbacks of Entrepreneurship 28 , 46 80 81 Step 5. Illumination 82 Step 6. Verification 82 Step 7. Implementation 82 " CONTENTS Techniques for Improving the Creative Step 8. Translate Strategic Plans into Action Process Plans 83 Brainstorming Step 9. Establish Accurate Controls 83 Mind Mapping Conclusion 85 Force-Field Analysis TRIZ 132 Chapter Summary by Learning 85 Objective 86 Rapid Prototyping 133 135 136 Questions 87 • 138 Classroom... Discussion • Beyond the 139 • Endnotes 140 Intellectual Property: Protecting Your Ideas 88 Patents • Chapter 4 Conducting a Feasibility Analysis and Crafting a Winning Business Plan 142 88 HANDS ON . . . HOW TO Protect Your Company's I n t e l l e c t u a l Property Copyrights Conducting a Feasibility Analysis 93 94 Protecting Intellectual Property Product or Service Feasibility Analysis 95 Chapter Summary by Learning Objective 95 Questions • 96 • Discussion • Classroom... Beyond the 97 • Endnotes 98 Building a Competitive Advantage The Strategic Management Process 149 Does Your Business Model GEL? 149 152 In-Home Trials 152 Financial Feasibility Analysis 153 Why Develop a Business Plan? 154 The Elements of a Business Plan • Designing a Competitive Business Model and Building a Solid Strategic Plan 102 Battle of the Plans Executive Summary 157 Company History 159 159 Vision and Mission Statement 107 156 YOU BE THE CONSULTANT Title Page and Table of Contents 104 144 YOU BE THE CONSULTANT Prototypes SECTION II Building the Business Plan: Beginning Considerations 102 Chapter 3 144 Industry and Market Feasibility Analysis 160 160 Business and Industry Profile 160 Step 1. Develop a Clear Vision and Translate It into a Meaningful Mission Statement Goals and Objectives Vision Description of the Company's Product or 108 Step 2. Assess the Company's Strengths and Weaknesses 111 Business Strategy Service 160 161 161 Marketing Strategy 162 Step 3. Scan the Environment for Significant Opportunities and Threats Facing Documenting Market Claims the Business Showing Customer Interest • • 111 YOU BE THE CONSULTANT The Best Competitor Analysis 163 163 165 Little Pizza Chain No One Description of the Management Team Ever Heard Of Plan of Operation 114 HANDS ON . . . HOW TO Big Guys Beat t h e 115 166 Pro Forma (Projected) Financial Statements 166 Step 4. Identify the Key Factors for Success in The Loan or Investment Proposal the Business • 117 Step 5. Analyze the Competition 119 Objectives • 123 Business Plan • 124 Capital 170 170 Collateral 170 Engineering's Triple Bottom Character 170 Line Conditions Cascade 125 170 Making the Business Plan YOU BE THE CONSULTANT Strategies Etched in Chocolate 169 170 Capacity ETHICS AND ENTREPRENEURSHIP 167 Launch a What Lenders and Investors Look for in a Step 7. Formulate Strategic Options and Select the Appropriate Strategies HANDS ON . . . HOW TO Lean S t a r t - u p Step 6. Create Company Goals and 165 131 Presentation 172 CONTENTS Conclusion 172 • Business Plan Format Chapter Summary by Chapter The Drawbacks of Buying a Objective 175 • Discussion Franchise Questions 176 • Beyond the Classroom... 177 • 178 Endnotes Operations 185 186 Evaluate Yourself 190 193 Talk to Existing Franchisees 194 232 232 Changing Face of Franchisees 199 • 201 232 HANDS O N . . . HOW TO 201 International Opportunities 203 The Professional Corporation • Which 204 234 Russia: A Rising Star for Franchisors 236 Conversion Franchising 205 237 Multiple-Unit Franchising Objective 207 Area Development and Master Questions 207 •> Discussion Beyond the • Endnotes 209 ' 214 Questions Chapter 7 240 • Discussion • Beyond the 241 • Endnotes 242 Buying an Existing Business 246 247 The Advantages of Buying an Existing '216 Business Business 218 Site Selection and Territorial Protection 218 247 Disadvantages of Buying an Existing 217 Greater Chance for Success 240 Buying an Existing Business 216 Proven Products, Processes, and Business Centralized Buying Power 239 Classroom... 214 215 National Advertising Programs Formats Objective 214 215 Financial Assistance 239 Chapter Summary by Learning Standardized Quality of Goods and Services 239 Conclusion 212 Management Training and Support Brand-Name Appeal 238 Boomers The Benefits of Buying a Franchise A Business System Franchising Cobranding 237 Serving Dual-Career Couples and Aging Baby Franchising and the Entrepreneur 210 Types of Franchising 235 YOU BE THE CONSULTANT Chapter Summary by Learning 208 233 Smaller, Nontraditional Locations 204 YOU BE THE CONSULTANT Classroom... Select t h e Ideal Franchise—-For You\ The Limited Liability Company 229 230 Trends Shaping Franchising 197 The Disadvantages of the Corporation • 229 232 Make Your Choice 195 The Advantages of the Corporation The Joint Venture y Ask the Franchisor Some Tough Questions Other Forms of Ownership 227 Get a Copy of the Franchisor's UFDD Making 195 Form Is Best? 228 Consider Your Franchise Options Limited Liability Partnerships The S Corporation 223 227 Research Your Market 192 How to Incorporate 223 223 Franchising and the Law 189 YOU BE THE CONSULTANT a Partnership Work • Less Freedom 223 The RightVJay to Buy a Franchise The Disadvantages of the Partnership Corporations 222 Unsatisfactory Training Programs 187 Limited Partnerships 222 222 Contract Terms and Renewal Market Saturation The Advantages of the Partnership • Limited Product Line 185 The Disadvantages of a Proprietorship 220 221 Restrictions on Purchasing The Advantages of a Proprietorship The Partnership 220 Strict Adherence to Standardized a HANDS ON . . . HOW TO Come Up with the Perfect Moniker for Your Business 183 The Sole Proprietorship Would 219 Franchise Fees and Ongoing Royalties Chapter 5 Forms of Business Ownership 180 Chapter 6 YOU BE THE CONSULTANT You Buy This Franchise? 173 • 218 249 YOU BE THE CONSULTANT Saga of Selling M y Business: Part 1 252 The CONTENTS The Steps in Acquiring a Business 253 Analyze Your Skills, Abilities, and Interests The Value of Market Research How to Conduct Market Research 253 254 How to Build a Prepare a List of Potential Candidates 254 Competitive Edge 298 Investigate and Evaluate Potential Companies: Guerrilla Marketing Principles The Due Diligence Process 254 • Explore Financing Options 255 Ensure a Smooth Transition 256 307 HANDS O N . . . HOW TO M a k e Social YOU BE THE CONSULTANT Company With Soul Conclusion 312 A 317 324 Chapter Summary by Learning Objective 259 324 Questions 260 Financial Condition • • 256 258 Market Potential Tweet M e d i a W o r k f o r Your Business 258 Asset Valuation YOU BE THE CONSULTANT Book • Evaluating an Existing Business: The Due Diligence Process 298 Pie: The World's Shortest Recipe Negotiate a Reasonable Deal with the Owner 255 Legal Issues 295 Plotting a Guerrilla Marketing Strategy. Develop a List of Criteria Motivation 293 Classroom... 261 YOU BE THE CONSULTANT The Saga of Selling My Business: Part 2 264 • Discussion 325, • Beyond the 327 • Endnotes 327 Chapter 9 E-Commerce and the Entrepreneur 331 Methods for Determining the Value of a Factors to Consider before Launching Business into E-Commerce 265 Balance Sheet Techniques: Net Worth = Assets - Liabilities Earnings Approach Market Approach • Ten Myths of E-Commerce Myth 1. If I Launch a Site, Customers Will Flock 269 to It 335 273 Myth 2. Online Customers Are Easy to The Saga of Selling M y Business: Part 3 Understanding the Seller's Side Structuring the Deal 274 Please 337 Myth 3. Making Money on the Web Is Easy 275 • 276 338 YOU BE THE CONSULTANT on the Go 277 Negotiating the Deal HANDS ON . . . HOW TO Become a Successful N e g o t i a t o r 281 Questions 282 283 Classroom... • • 284 and the Rest Will Take Care of Itself" Discussion 340 Myth 6. The Most Important Part of Any Beyond the • 340 Myth 5. "Strategy? I Don't Need a Strategy to Sell on the Web! Just Give Me a Web Site, Chapter Summary by Learning Objective Selling 339 Myth 4. Privacy Is Not an Important Issue on 279 the Web D 335 266 YOU BE THE CONSULTANT Exit Strategies 333 E-Commerce Effort Is Technology Endnotes 284 341 Myth 7. Customer Service Is Not as Important Online as It Is in a Traditional Retail Store SECTION III Building the Business Plan: Marketing and Financial Considerations 286 Chapter 8 Building a Powerful Guerrilla Marketing Plan 286 Building a Guerrilla Marketing Plan Pinpointing the Target Market Simple Ones • 343 Myth 9. It's What's Up Front That Counts . 343 Myth 10. It's Too Late to Get into E-Commerce 344 Strategies for E-Success • 289 291 344 YOU BE THE CONSULTANT 287 Determining Customer Needs and Wants through Market Research Fulfillment Complete 345 Designing a Killer Web Site • 354 YOU BE THE CONSULTANT Makeover A Total 355 YOU BE THE CONSULTANT Tracking Web Results Learnvest: Giving Women Control Ensuring Web Privacy and Security of Their Financial Lives 292 342 Myth 8. Flashy Web Sites Are Better Than Privacy 364 363 364 CONTENTS Security • 364 Projected Financial Statements for a Small HANDS O N . . . HOW TO Increase Your Web Site's Conversion Rate 365 Chapter Summary by Learning • Objective 367 Questions 369 Classroom... Discussion • Beyond the • • 370 • 375 YOU BE THE CONSULTANT Focus on Value 376 • 383 Part 2 Is the 384 386 ENTREPRENEURSHIP Deal—Or Not? 437 438 YOU BE THE CONSULTANT Where Do W e Break Even? A Good Using Break-Even Analysis 439 439 Chapter Summary by Learning 390 Pricing Strategies and Methods for 392 Objective 440 Questions 441 • Classroom... • Discussion Beyond the 442 • Endnotes 442 392 Pricing Concepts for Manufacturers Direct Costing and Pricing 394 Chapter 12 Managing Cash Flow 444 Cash Management 394 Computing the Break-Even Selling Price D 436 437 Break-Even Point in Units 388 YOU BE THE CONSULTANT Markup Adding a Profit • The Ethics of Dynamic Pricing All Is 435 Constructing a Break-Even Chart ETHICS AND Retailers 434 YOU BE THE CONSULTANT Calculating the Break-Even Point YOU BE THE CONSULTANT 432 Not Paradise in Eden's Garden: 383 Pricing Established Goods and Services • All Is 429 Break-Even Analysis 377 Introducing a New Product • Part 1 376 379 Price Right? 428 YOU BE THE CONSULTANT What Do All of These Numbers Mean? Pricing Strategies and Tactics • 423 Not Paradise in Eden's Garden: The Benefits of Premium Pricing Competition and Prices 420 YOU BE THE CONSULTANT Interpreting Business Ratios • Price Conveys Image 417 YOU BE THE CONSULTANT The Perils of Debt: Part 2 Three Potent Forces: Image, Competition, • 416 The Perils of Debt: Part 1 Endnotes Chapter 10 Pricing Strategies 373 and Value 412 Twelve Key Ratios • 370 Business Ratio Analysis HANDS ON . . . HOW TO 395 Calculate 445 Cash and Profits Are Not the Same The Cash Budget 448 449 Your Company's Pocket Price Step 1: Determining an Adequate Minimum Band 397 Cash Balance 451 Pricing Strategies and Methods for Step 2: Forecasting Sales Service Firms Step 3: Forecasting Cash Receipts 398 The Impact of Credit on Pricing Credit Cards 399 Trade Credit 402 Balance • 402 • Discussion Questions 403 • Beyond the 404 Endnotes Chapter 11 Creating a Successful Financial Plan 406 Basic Financial Statements 407 407 The Income Statement Creating Projected Financial 458 YOU BE THE CONSULTANT In Search of a Cash Flow Forecast 404 The "Big T h r e e " of Cash Management 461 Accounts Receivable Accounts Payable • 461 466 HANDS ON . . . HOW TO Control Your Company's Accounts 409 The Statement of Cash Flows 412 457 Step 5: Estimating the End-of-Month Cash Objective Statements 454 Step 4: Forecasting Cash Disbursements 402 Chapter Summary by Learning The Balance Sheet 453 YOU BE THE CONSULTANT A Short Season 400 Installment Credit Classroom . . . • 452 Receivable 411 Inventory 467 469 Avoiding the Cash Crunch Barter 472 472 459 10 CONTENTS Trim Overhead Costs 472 Negotiate Fixed Loan Payments to Coincide with Your Company's Cash Flow Cycle 475 Establish an Internal Security and Control System 475 • Develop a System to Battle Check Fraud 475 Change Your Shipping Terms 475 Start Selling Gift Cards 475 Switch to Zero-Based Budgeting 476 Be on the Lookout for Shoplifting and Nonbank Sources of Debt Capital 512 Small Business Lending Companies 516 Federally Sponsored Programs 516 Economic Development Administration Department of Housing and Urban Development 516 U.S. Department of Agriculture's Rural Business-Cooperative Service 517 Small Business Innovation Research Program 517 Invest Surplus Cash 476 Small Business Technology Transfer Program 518 The Small Business Administration (SBA) • • Employee Theft 476 Build a Cash Cushion 476 YOU BE THE CONSULTANT Foul Play 477 Keep Your Business Plan Current • 478 Conclusion 478 479 Chapter Summary by Objective 479 • Questions 480 • Classroom... 481 Learning Discussion Beyond the • Endnotes Leasing SECTION IV Putting the Business Plan to Work: Sources of Funds 484 Chapter 13 Sources of Financing: Equity and Debt 484 Planning for Capital Needs 487 Equity Capital versus Debt Capital 487 Sources of Equity Financing 488 Crowd Funding Angels • 489 490 490 HANDS O N . . . HOW TO Structure Family and Friendship Financing Deals 491 Partners Corporate Venture Capital Location: A Source of Competitive Advantage 536 Choosing the Region 499 YOU BE THE CONSULTANT In Search of Growth Capital 506 The Nature of Debt Financing 506 Sources of Debt Capital 507 Choosing the City 543 Choosing the Site 549 Location Criteria for Retail and Service Businesses 550 • YOU BE THE CONSULTANT "Pop" Goes the Store 552 Transportation Network Short-Term Loans 508 HANDS ON . . . HOW TO Get a Bank to Say "Yes" to Your Loan Application 510 552 Visibility 553 554 Physical and Psychological Barriers Customer Traffic Reputation 509 552 Reilly's Law of Retail Gravitation Adequate Parking • 551 552 The Index of Retail Saturation Commercial Banks 507 Intermediate- and Long-Term Loans 537 540 Degree of Competition 499 530 Chapter 14 Choosing the Right Location and Layout 535 Retail Compatibility 495 Public Stock Sale ("Going Public") • Credit Cards 527 Chapter Summary by Learning Objective 527 • Discussion Questions 528 • Beyond the Classroom... 530 • Endnotes Trade Area Size 494 Venture Capital Companies 526 526 Choosing the State Personal Savings 488 Friends and Family Members 520 State and Local Loan Development Programs 524 Other Methods of Financing 526 Factoring Accounts Receivable 481 518 YOU BE THE CONSULTANT The Never-Ending Hunt for Financing 519 Other SBA Loan Programs YOU BE THE CONSULTANT The Challenges of Cash Flow 516 554 554 554 555 555 Location Options for Retail and Service Businesses 555 Central Business District 555 CONTENTS Neighborhood Locations 556 Shopping Centers and Malls Near Competitors ,' Political Barriers 556 Cultural Barriers 560 . Nontraditional Locations 561 Home-Based Businesses 561 On the Road 561 The Location Decision for Manufacturers ' 562 Foreign Trade Zones 562 Business Incubators 563 Layout and Design Considerations • 563 International Trade Agreements 616 Conclusion 617 Chapter Summary by Learning Objective '618 • Discussion Questions 619 • Beyond the Classroom... 620 • Endnotes 620 Leadership in the New Economy 624 Building an Entrepreneurial Team: Hiring the Right Employees 630 565 Construction and External Appearance Entrances How to Hire Winners 631 Create Practical Job Descriptions and Job Specifications 635 566 567 The Americans with Disabilities Act 614 Chapter 16 Building a New Venture Team and Planning for the Next Generation 623 YOU BE THE CONSULTANT Business Incubators: A Nurturing Environment for Small Companies 564 Size 613 Business Barriers 613 560 Inside Large Retail Stores 567 Plan an Effective Interview Signs •> 568 • 636 ETHICS AND ENTREPRENEURSHIP 568 Honesty in Job Descriptions Sight, Sound, Scent, and Lighting 569 Sustainability and Environmentally Friendly Design 570 Conduct the Interview 639 Contact References and Conduct a Background Check 641 Building Interiors Layout for Retailers 571, • Culture Create the • YOU BE THE CONSULTANT Fired over Facebook 647 Motivating Employees to Higher Levels of Performance: Rewards and Compensation 649 A Fresh Layout for Manufacturers 576 Factors in Manufacturing Layout 576 Types of Manufacturing Layouts 576 Chapter Summary by Learning Objective 578 • Discussion Questions 579 • Beyond the Classroom .. . 580 • Endnotes 581 Management Succession: Passing the Torch of Leadership 652 • Chapter 15 Global Aspects of Entrepreneurship 585 YOU BE THE CONSULTANT Going Global from the Outset • YOU BE THE CONSULTANT A Really Bright Future 599 • YOU BE THE CONSULTANT A Small Company Goes Global Barriers to International Trade Domestic Barriers • HANDS O N . . . HOW TO International Barriers 611 Selling to Insiders Chapter Summary by Objective 661 • Questions 662 • Classroom... 663 590 609 609 Successful Global Company Build a 610 660 Selling to Outsiders 588 • HANDS ON . . . HOW TO Make Your Small Business a Great Place to Work 653 Exit Strategies 586 Strategies for Going Global 642 Job Design 646 YOU BE THE CONSULTANT New Look 575 Why Go Global? 637 Creating an Organizational Culture That Encourages Employee Motivation and Retention 642 Layout: Maximizing Revenues, Increasing Efficiency, or Reducing Costs 571 • HANDS ON . . . HOW TO Ideal Layout 572 11 660 660 Learning Discussion Beyond the • Endnotes Appendix: The Daily Perc Business Plan 607 Cases 689 Name Index Subject Index 704 713 664 667
