Chapter 6 Managing Small Business Start-ups Group 2 Hazel G. De Mesa Gregorio M. Cudiamat Fritzie P. Tangkia-Fabricante Christopher L. De Jesus Ma. Dolorosa E. Ferrer Learning Objectives: 1. Define the personality characteristics of an entrepreneur. 2. Explain social entrepreneurship as a vital part of today’s small business environment. 3. Outline the necessary steps in launching a small business. 4. Describe 5 stages of growth for an entrepreneurial economy. 5. Explain relationship of management functions to a growing entrepreneurial company. What is Entrepreneurship? It is the process of initiating a business venture, organizing the necessary resources, and assuming the associated risks and rewards. What is an entrepreneur? *Someone who engages in entrepreneurship. *Recognizes a viable idea for a business or product. *Finds & assembles resources to undertake the business venture. *Assume financial, legal risks and reap the rewards thru profits. Small Business Categories Thrive on the challenge Of building a more profitable Business. Works on something new Creative, meaningful. Idealists 24% Optimizers 21% Get personal satisfaction From being business owners. Hard workers 20% Enjoy the act of balancing Work & personal life. Jugglers 20% Sustainers 20% Likes the chance a small Business gives them to handle everything themselves. Thrive on pressure of paying bills meeting deadlines and meeting Payroll. Statistics on World’s Most Entrepreneurial Countries Croatia 6.1 Latvia 6.6 7.2 Singapore 9.3 Canada Argentina 9.5 Iceland 10.7 10.9 Australia Chile 11.1 Brazil 11.3 USA 12.4 13.7 China Jamaica 17 New Zealand 17.6 Thailand 20.7 25 Venezuela 0 %of Individuals 5 10 15 20 25 30 Venezuela Thailand New Zealand Jamaica China USA Brazil Chile Australia Iceland Argentina Canada Singapore Latvia Croatia 25 20.7 17.6 17 13.7 12.4 11.3 11.1 10.9 10.7 9.5 9.3 7.2 6.6 6.1 %of Individuals The table shows % of individuals Age 18- 64 Active in Starting/Managing a Small Business. Reasons why small business is a dynamic part of today’s economy: 1. Economic Changes 2. Globalization & Increased Competition Economy is a fertile soil for entrepreneurs. It provides opportunities for small businesses because medium and large sized companies tend to outsource services to help them focus on operational aspects that provides greater impact for them. Entrepreneurs find bigger opportunities in Globalization in the sense that it demands an entrepreneurial behavior of flexibility and responsiveness. Small business are more resilient that even the largest companies can no longer dominate their industry. 3. Technology 4. New Opportunities/Market Niches Rapid advances and the affordability of computer technology has introduced new methods of producing and delivering goods which are within reach of even the smallest companies. Technology has enabled businesses to sell products & services improved productivity, communications & customer service and obtain information about competition & the market they are in. Small business also capitalize on the sustainability movement, tapping new business opportunities towards corporate social responsibility. Small Business Job Creation Innovation Research shows that the age of the company more than its size determine the number of job it creates. All new jobs in recent years were created by new companies. Statistics says that 55% of innovations in 362 different industries were traced to small and new companies. Small firms filing for patents has 13-14 times more patents than large firms. Impact of Small Business Personality Traits of Entrepreneurs i Internal Locus of Control High Energy Level Need to Achieve Self Confidence Awareness of Passing Time Tolerance for Ambiguity Is the belief that individuals that their future is within their control and that external forces have little influence. An external locus of Control is the belief that their future is not within their control but rather is influenced by external forces. Persistence and putting long hours of work despite the difficulties and struggles. starting up for entrepreneurs requires great effort and a level of energy to surpass all obstacles. Entrepreneurs are motivated to excel and pick situations in which success is likely. Here a SMART-C goal; Specific, Measurable, Attainable, Realistic, Time-bound and Challenging, are formulated. They could also be short term, medium term and long term goals. Confidence is a must in terms of mastering the day to day activities of managing the business, anticipating problems and handling these problems that involve customer relations and the technical details to keep the business moving. Coupled with the Confidence is the effective skill of decision making. Patience is not in their vocabulary. They always have a feeling of urgency. They create the momentum and seize it as if there is no tomorrow. They are not troubled by disorder and uncertainty. They have the courage to take both calculated and uncalculated risks. What is Social Entrepreneurship? It combines the creativity, business smarts, passion and hard work of the traditional entrepreneur with a mission to change the world for the better. Who is a Social Entrepreneur? Social Entrepreneurs are leaders who are committed to both good business and positive social change. They create business that meet critical human needs and solve important problems that are unsolved by current economic & social institutions. Their primary goal is improving the society rather than maximizing profits, but they also emphasize solid business results, high performance standards and accountability. Launching an Entrepreneurial Start-up 1 Starting With the Idea 2 Writing the Business Plan 3 4 Choosing a Legal Structure Getting Financing In pursuing the entrepreneurial dream, it all starts with the idea. Planning comes next, then decisions on the legal structure should be made, followed by financing then finally drawing out the action plans needed to keep the business moving. 1 Starting With the Idea Entrepreneurs are inspired by new ideas. Others decide they want to run their own business And starts to look for ideas and opportunities. Some Reasons for Starting a Business 1. Joined Family Business – 41% 2. Control the Future – 36% 3. Be your own Boss – 27% 4. Fulfill a Dream – 25% 5. Downsized/Laid off – 5% Sources of New Business Ideas 1. In depth Understanding of Industry – 37% 2. Market Niche Spotted – 36% 3. Brainstorming – 7% 4. Copying Someone else – 4% 5. Hobby – 4% 6. Other reasons – 11% 2 Writing A Business Plan A Business Plan is a document specifying the business details prepared by an Entrepreneur prior to opening a business. Characteristics of a good Business Plan 1. Demonstrate a clear, compelling vision that creates an air of excitement. 2. Provide clear & realistic financial projections. 3. Profile potential customers & target market. 4. Include detailed information about industry and competitors 5. Provide evidence of an effective entrepreneurial management team. 6. Pay attention to good formatting and writing. 7. Keep the plan short- at the most 50 pages. 8. Highlight critical risks that may threaten business success. 9. Spell out the sources and uses of start-up funds and operating funds. 10. Capture the reader’s interest with a killer summary. Please click this link: http://www.dti.gov.ph/SME_Basics_BusinessPlanPreparation.php 2 Writing A Business Plan Business Plans are absolutely critical for lenders. Studies show that small businesses with a carefully thought-out written plan are much more likely to succeed than those without one. Vital Parts of the Business Plan I. The Executive Summary II. The Business Description Segment III. The Marketing Segment IV. Research, Design & Development Segment V. Manufacturing Segment VI. The Management Segment VII. The Critical Risks Segment VIII.The Financial Segment IX. The Milestone Schedule Segment http://www.chanrobles.com/legal5cc1.htm Before beginning a business, an Entrepreneur should choose an Appropriate legal structure for the Company. 1 Sole Proprietorship 2 Partnership 3 Corporation 3 Choosing a Legal Structure Sole Proprietorship is defined as an unincorporated business owned by an individual for profit. This is easy to start because it is easy and it has a few legal requirements. The drawback in this type is the limited liability for the business resulting to a higher risk. A partnership is an unincorporated business owned by two or more people. Partners share responsibility & resources & contribute their expertise. The disadvantage is the unlimited liability of the partners and possibility of disagreements that may somehow affect the business. A corporation is an artificial entity created by the state and existing apart from its owners. It is liable for its actions and must pay taxes on its income. It has a legal life of its own, and its liability is not limited to the owners, thus it continues to exist even if the owners live or die. Starting a business usually requires a significant amount of funding. An investment is required to acquire the manpower, materials and facilities needed to start the Business. Debt Financing Borrowing money that has to be repaid at a later date in order to start a business. Angel Financing Financing provided by a wealthy individual who believes in the idea for a start-up and provides personal funds and advice to help the Business get started. 4 Getting Financing Equity Financing Venture Capital Firm Financing the consists of funds that are invested in exchange for ownership in the company. A group of companies or individuals that invests money in new or expanding business for ownership and potential profits. Sources of initial funding for small business start-ups. 3. Buy a Franchise 1. Start a New Business The entrepreneur sees a product or service that has not been done before. The advantage is the owner designs the Business based on how he liked it done. The disadvantage is there is longer time to realize profits due to lack of client base and the common mistakes new entrepreneurs make. Franchising allows others to purchase the right to distribute the Products and services with the help from the owner. The advantage is that management help is provided by the owner. Disadvantage is lack of control of the owner in terms of exploring other options to increase efficiency. Tactics for Becoming a Business Owner 2. Buy an existing business 4. Business Incubator An established business already has systems in place, operating procedure, existing customer base. The advantage is the shorter time to get the business running. The disadvantage is the need to pay goodwill and the flexibility in terms of introducing changes of to the system for improvement. A business incubator provides shared office, management support services & legal advice to entrepreneurs. The great value of this is the expertise of a mentor, who serves as advisor, model & ready access to a team of professionals. Five Stages of Growth for an Entrepreneurial Company Main Problems are producing the product or Service and obtaining customers. 1 Start-up 2 Survival 3 4 5 Success Take-off Resource Maturity The business demonstrates that it is a workable Business entity. It produces the product & service and it has sufficient customers. Concerns here include finances. The company is solidly based & profitable. Systems & procedures are in place. The owner could stay involved or turn the managing tasks to professional managers. Here the key problem is how to grow rapidly & finance the growth. The owner must learn to Delegate and the company must have sufficient Capital to sustain the growth. The company’s substantial financial Gains may come at the cost of losing Its advantages of small size, including Flexibility and the entrepreneurial Spirit. Four Managerial Functions in Relation to Small Business Start-Ups Planning is in the form of the Business Plan. One Planning concern is to be Web Savvy. Planning The driving force in a small business start ups is the leader’s vision. The leader can signal values of Service, efficiency, quality & Ethics. The leader must learn to motivate employees. Leading Organizing Managers must learn to delegate and decentralize authority. The organization must hire competent managers who could handle the fast growth rate of the organization. Controlling Financial control is important in the firm’s growth. Control is exercised by simple accounting records and by personal supervision. Operational budget are in place and a structured system must be implemented. Small & Medium Enterprises in the Philippines Small and medium enterprises (SMEs) comprise 99.6% of all registered business in the Philippines and employ 70% of the workforce Source : SMED in the Philippines Survey (Google) Recently, Republic Act No. 9178, otherwise known as the Barangay Micro Business Enterprise (BMBE) Act of 2002 has redefined the categories. Hence, the present structure, by law, is as follows : Micro Small Medium Large - up to 3,000,000 P3,000,001 - 15,000,000 P15,000,001 - 100,000,000 above P100,000,000 Current State of SMEs in the Philippine Economy Number of Establishments and Employees According to the statistics of business establishments published by the National Statistics Office, there are 811, 589 business establishments in the country. Of total, micro-enterprises account for 743,949 (97.1%), small enterprises 61,759 (7.6%), medium enterprises 2, 923 (.4%), and large enterprises 2,958 (0.3%). Geographic Distribution The analysis of geographic distribution of enterprises throughout the country indicates a high concentration in the National Capital Region (NCR), which accounts for 24.4% of all establishments and 40.1% of all employees. The five regions subject to the present study (NCR, Regions 3, 4, 7 and 11) hold a combined share of 65.0% of total establishments. Similarly, the regions account for 72.1% of total employees. As a result, around two-thirds of SMEs are concentrated in the five regions. Conclusion The government is keen on helping small to medium enterprises in terms of financial assistance and thru the power of education. Thru these initiatives, there is hope that the Philippines could create more entrepreneurs who are socially responsible & who will contribute to the growth of the country’s economy. Group 2-Case Chapter 6. Emma’s Parlor 1. At what business sage is Emma’s Parlor? As what stage is her Web-based organic tea business? What synergies exist between the two businesses? How critical do you think these synergies are to the success of each business? Emma’s Parlor is in Stage 3.The business already has a enough customers to make it profitable. And at point,, the owner, already has a choice to consider hiring professional managers/supervisors to take over the daily operations of the business. However, If Emma, the owner, decides not to pursue any expansion or diversification of her business, then , Emma’s Parlor is already in Stage 5. Because , at this stage, the business already has financial stability, manpower resources and a solid customer base. The three factors determines if a company is matured or not. Emma’s Web-Based Organic Tea Business is also in Stage 3. It has a solid customer base and a level of sales that would make it financially stable. The Web-Based Organic Tea Business of Emma Lathbury, does not only reach customers who are interested in buying Emma’s product but also reached those who wants to avail of the services that Emma’s Parlor has. Web Based Organic Tea Business of Emma is also a means to gather customer feedback. Feedbacks are important to gauge customer satisfaction. Some, if not most of these customers, would look for a venue/place where these special products are served. Emma’s Parlor becomes a place where , not only can these customers experience, freshly made tea, but also , a venue for other activities. The Web Based Tea Business of Emma, does not only market the Tea itself, but also the venue where these product are served. This is quite similar to a coffee shop business. In the food business, where competition is stiff, the entrepreneur should find innovative ways of reaching out to customers. Faced with an ever increasing cost of doing business, having an substantial number of customers is a factor to determine growth and stability. 2. How does Emma Lathbury fit the profile of the typical entrepreneurs? Which of those traits are likely to continue to serve her all, and which might be counterproductive at this stage of her business? An entrepreneur is someone who initiates a business venture, organized the available resources and assumes the risks and rewards. An entrepreneur exudes internal locus of control, high energy level, need to achieve, self-confidence, awareness of passing time, and tolerance for ambiguity. Emma Lathbury had an idea of making and serving tea. Her successs was mainly due to her own efforts from choosing a location, putting up her tea house, blending different tea and marketing these through her Web-Based Tea Business. At this point, the trait that has always been a factor for her success is would behaving a high energy level,awareness of the risk involved and an internal locus of control. During the formative years of a business, the entrepreneur needs to work for extended hours . This would not be possible if a person has a low energy level which can effect their interest, motivation and resourcefulness , factors that a starting up business heavily relies on. Awareness of the risk and the obstacles involved in starting a business is one advantage of an entrepreneur may have. Identifying the risk involved in starting small business is a lot better than relying on instincts. Some entrepreneurs ,even before the actual start of business operation , are discouraged if they see that the risks are too great. But an entreprenur with an internal locus of control, a belief that an individual has control of their future, would think otherwise. In any other case, a business plan is usually the most useful guide to operating a business. Tolerance for Ambiguity might be a counterproductive trait of an entrepreneur. Tolerance for ambiguity or uncertainty during the formative years is different compared to when the business is already established. Once a business becomes stable or matures, the entrepreneur might overlooked some important factors or environmental conditions that has an effect on the business. Factors like pricing, franchising, wholesale and retail agreements, competition, labor laws, availability or scarcity of materials can change the status of a business. So the entrepreneur has to always prepare alternatives courses of action in preparation for uncertainties in the future. 3. After listing the pros and cons for each of Emma’s options and considering her personality, which course of action would you recommend? I think the best options for Emma is to delegate some of her responsibility to a professional supervisor or manager. The food business is a very competitive and physically demanding . As business grows, there needs to be additional manpower to cater for present and future customers. In addition to this, the number of employees, strict compliance for government agencies like the FDA and Department of Health ,IRS may require a lot of tedious leg work. If these requirements coincides with the daily routine of supervising the tea house, it will be very difficult for Emma to meet all of these requirements alone . If Emma would hire a professional manager, she could find better ways to serve the customer, meet compliance requirements of the government which I believe has stringent penalties, deal with suppliers and creditors properly and some more task which would eventually result in the conti continued success of the business. Knowing Emma, she would always like to have a hand on the daily operation of the business. She still could. This options is the best for her.