Professional Documents
Culture Documents
to negate barriers that stand in the way of using their innate traits
profitably," says one researcher of entrepreneurial behavior. 21
What conclusion can we draw from the volumes of research conducted on the
entrepreneurial personality? Entrepreneurs are not of one mold; no one set
of characteristics can predict who will become entrepreneurs or whether
they will succeed. Indeed, diversity seems to be a central characteristic
of entrepreneurs. As you can see from the examples in this chapter,
anyone¡ªregardless of age, race, gender, color, national origin, or any
other characteristic¡ªcan become an entrepreneur. There are no limitations
on this form of economic expression. Entrepreneurship is not a genetic
trait; it is a skill that is learned. The editors of Inc. magazine claim,
"Entrepreneurship is more mundane than it's sometimes portrayed. . . . You
don't need to be a person of mythical proportions to be very, very
successful in building a company." 22
¡¡
The Benefits of Owning a Small Business
Surveys show that owners of small businesses believe they work harder,
earn more money, and are happier than if they worked for a large company.
Before launching any business venture, every potential entrepreneur should
say, 'Gee, it must be really nice to turn your hobby into a business,'"
says Krech.29
¡¡
The Potential Drawbacks of Entrepreneurship
Although owning a business has many benefits and provides many
opportunities, anyone planning to enter the world of entrepreneurship
should be aware of its potential drawbacks. "If you aren't 100 percent
sure you want to own a business," says one business consultant, "there are
plenty of demands and mishaps along the way to dissuade you." 30
UNCERTAINTY OF INCOME
Opening and running a business provides no guarantees that an entrepreneur
will earn enough money to survive. Some small businesses barely earn
enough to provide the owner-manager with an adequate income. In the early
days of a business, the owner often has trouble meeting financial
obligations and may have to live on savings. The regularity of income that
comes with working for someone else is absent. The owner is always the
last one to be paid.
RISK OF LOSING YOUR ENTIRE INVESTED CAPITAL
The small business failure rate is relatively high. According to recent
research, 24 percent of new businesses fail within two years, and 51
percent shut down within four years. Within six years, 63 percent of new
businesses will have folded. Studies also show that when a company creates
at least one job in its early years, the probability of failure plummets
to 35 percent! 31
Before "reaching for the golden ring," entrepreneurs should ask
themselves if they can cope psychologically with the consequences of
failure. They should consider the risk-reward trade-off before putting
their personal assets and their mental well-being at risk:
¡ô What is the worst that could happen if I open my business and it fails?
¡ô How likely is the worst to happen? (Am I truly prepared to launch a
business?)
¡ô What can I do to lower the risk that my business will fail?
¡ô What is my contingency plan for coping if my business fails?
sites, the entrepreneurs behind these businesses know that they must
establish a presence on the Web now if they are to reap its benefits in
the future. These "netpreneurs" are using the Web to connect with their
existing customers and, eventually, to attract new ones. A few businesses,
however, are already generating impressive sales from their Web sites. In
fact, the world's largest bookstore, Amazon.com <http://www.amazon.com>,
has no physical location; it exists only on the Web! Founder Jeff Betas
left a lucrative Wall Street job to start Amazon.com after he became
intrigued by the World Wide Web and its sales potential. On the Web,
Bezos's creation has an unlimited amount of shelf space. Amazon.com lists
2.5 million titles (accessible by a search engine that allows customers to
track down any book, author, or topic), 15 times as many as the largest
brick-and-mortar chain bookstore. Customers not only get a much larger
selection of titles than they would from a typical bookstore, but they
also get low prices. Amazon discounts its 350,000 most popular books by 10
to 30 percent. The company's Web site includes book reviews by readers and
offers "meet the author" sessions on the Internet. Amazon even offers an
e-mail service that lets customers know when a new book by a favorite
author or on a particular subject is published. Sales are growing at a
rate of 34 percent per month, and Bezos' ultimate target is to become one
of the nation's three largest booksellers. 38
INTERNATIONAL OPPORTUNITIES
Small businesses are no longer limited to pursuing customers within their
own borders. The shift to a global economy has opened the door to
tremendous business opportunities for entrepreneurs who are willing to
reach across the globe. Although the United States is an attractive market
for entrepreneurs, approximately 95 percent of the world's population
lives outside its borders. Recent world events¡ªthe crumbling of the Berlin
Wall, the revolt of the Soviet Union's Baltic states, the breaking down of
trade barriers as a result of the European Union's 1993 Treaty of
Maastricht¡ªhave opened much of that world market to entrepreneurs. Still,
only 6 percent of U.S. small businesses currently export; however, those
small companies account for 30 percent of total exports. 39 International
opportunities for small businesses will continue to grow rapidly into the
twenty-first century.
Although "going global" can be fraught with dangers and problems,
especially for small companies, many entrepreneurs are discovering that it
is not really that difficult. Small companies that successfully expand
into international markets tend to go slowly at first, targeting one
country in which to establish a presence, rather than blanketing several
foreign markets at once. Often, small companies form joint ventures with
foreign partners, who guide them through the maze of local customs and
help them navigate local markets.
For some small businesses, branching into global markets is a natural part
of growth. For instance, as a student at the University of West Florida,
Robert Bizzell started making tie-dyed T-shirts and selling them in local
stores. Soon, he and best friend, Scott Martin, were traveling around the
country, selling their shirts at Grateful Dead concerts. Within three
years, their company, Eye-Dye, took an order from a large retailer, and
production went from 150 shirts a day to 4,000 a day. Two years later, a
Japanese wholesaler saw Eye-Dye 's display at a Las Vegas trade show and
placed a $100,000 order. 40
The Cultural Diversity of Entrepreneurship
Diversity is one of entrepreneurship's greatest strengths. The
entrepreneurial sector of the United States consists of a rich blend of
women and men of all races, ages, backgrounds, and cultures.
WOMEN ENTREPRENEURS
Despite years of legislative effort, women still face discrimination in
the workforce. Small business has been a leader in offering women
opportunities for economic expression through employment and
entrepreneurship. Increasing numbers of women are discovering that the
best way to break the "glass ceiling" that prevents them from rising to
the top of many organizations is to start their own companies (see Figure
1.5). In fact, women are opening businesses at a rate two times that of
men, and they are launching businesses in fields that traditionally have
been male-dominated. Although 72 percent of all women-owned businesses are
concentrated in retailing and services, the hottest growth areas include
construction, transportation, communications, wholesale trade,
agribusiness, and manufacturing. 41 Women entrepreneurs have even broken
through the comic strip barrier. Dagwood's wife, Blondie Bumstead, long a
typical suburban housewife, now owns her own catering business with her
best friend and neighbor, Tootsie Woodly.
Although the businesses women start tend to be smaller than those men
start, their impact is anything but small. The 8 million women-owned
companies across the United States employ 18.5 million workers, 25 percent
of all company workers in the country. Women own about 37 percent of all
businesses, and these companies generate approximately $2.5 trillion in
sales¡ª16 percent of the nation's total¡ªeach year. 42
Some key differences exist between companies started by women and those
started by men. Women-owned businesses typically start smaller and grow
more slowly but more steadily. "They don't have the high growth spurts,
but they're also less likely to decline in size," explains Sharon Hadary
of the National Foundation for Women Business Owners. 43 Although they
tend to grow more slowly than those owned by men, women-owned businesses
have a higher survival rate than U.S. businesses overall. One recent study
found that
the three-year survival rate for companies owned by women was 72.2
percent, compared with 66.6 percent for all businesses .44 Another key
difference between men- and women-owned businesses is the barriers they
face when starting up. One of the most persistent barriers women
entrepreneurs must overcome is limited access to capital. Women are more
likely to rely on personal savings, credit cards, and family loans to
launch their companies than are men. Once in business, women tend to run
their companies differently than men. For example, they are more likely to
offer family-friendly benefits such as flextime and tuition reimbursement,
and they launch profit-sharing plans much earlier in the lives of their
businesses than do men .45
Carolee Friedlander ran headlong into the financing barrier when she
launched her costume jewelry and watch business in 1972. The bank where
she had applied for a business loan told her that she would have to have
her husband cosign the loan before it could accept her application.
Friedlander refused, choosing, instead, to borrow $5,000 from family
members and to slow the growth of her company, Carolee Designs.
Friedlander had become interested in designing jewelry when she was a
student studying architecture at Bennington College. Working from a how-to
book she taught herself how to cast pewter jewelry on her kitchen stove.
As she began selling her designs to local stores, she saw a market for
high-quality costume jewelry emerging. Soon, she had landed a large order
from Bloomingdale's, which allowed her to get a $50,000 bank loan to
expand the company. Today, Carolee Designs has 300 employees and generates
annual sales of more than $50 million. In addition to retail icons such as
Bloomingdale 's and Saks, Friedlander's customers include department
SMALL BUSINESS ACROSS THE GLOBE
A Rush to Entrepreneurship in Russia
Entrepreneurship is not a uniquely American phenomenon. The desire to
create businesses is taking root all across the globe, even in nations
whose economies were, for many years, centrally planned. In Russia, for
instance, small businesses are playing an important role in rebuilding an
economy that collapsed in the early 1990s. Small companies account for 12
percent of all of the goods produced in Russia, and that proportion is
growing rapidly. Because they make up 75 percent of Russia's unemployed,
women have become a dominant force in the blossoming entrepreneurial
movement. Women have received about half of the loans made by a $300
million European reconstruction and development fund. A venture capital
fund in London is targeting women-owned businesses across Central and
Eastern Europe, with a special emphasis on Russia. "We believe women are
much lower business risks and often run very promising companies that have
so far gone unnoticed," says the fund's founder.
Of course, many Russian start-ups, like those in any country, fail. Most
of the problems women entrepreneurs in Russia face, however, are exactly
the same ones men face. The obstacles entrepreneurs must overcome are
substantial. They must battle an especially onerous bureaucracy, cope with
taxes that can eat up more than 90 percent of their profits, and avoid
running afoul of organized crime, whose guns speak louder than laws. In
addition, the country's economic instability makes long-range planning
impossible.
Tatyana Zeleranskaya and Irina Koroleva, both former reporters for Soviet
state radio, were willing to brave the obstacles when they launched
Moscow's Radio Nadezhda. They decided to forgo the usual political shows
and popular music that are the mainstay of so many Russian radio stations,
opting instead for programs on topics such as family and health. The
station also features music by popular Russian bands [rather than American
rock stars] and was the first station to air call-in talk shows. Radio
Nadezhda is now Russia's eighth largest station, but its founders have
fought hard to bring it to this point. Zeleranskaya recalls the time a
private bank folded, taking the station's account with it. Taxes, she
says, are oppressive.
Olga Romashko is another entrepreneur who grew tired of a grueling state
job and left to start her own business. She quit her post as a researcher
at a top-secret biophysics lab to launch a company selling a line of
skin-care products. Her Olga line now carries 14 products, and sales are
coming in at $20,000 a month. She has earned enough to build a new house
and to help her daughter start a construction company "Everything we have
we earn from zero," she says. "But I also like that. I like tough
conditions, where you set yourself goals and overcome obstacles."
1. How do the entrepreneurial experiences described above differ from
those of the typical American enterprise? In what ways are they similar?
2. What impact do you predict the small business sector will have on the
Russian economy over the next 10 to 20 years?
3. What impact do you think entrepreneurship will have on Russia's women
over the next 10 to 20 years?
SOURCE: Adapted from Sophia Kishkovsky and Elizabeth Williamson
"Second-Class Comrades No More: Women Stoke Russia's Start-Up Boom,; Wall
Street Journal, January 30,1997, p. A12.
stores in Japan and London. She is now planning expansions into South
America and the Far East. 46
MINORITY ENTERPRISES
Minorities also are choosing entrepreneurship more than ever before, but
minority business ownership remains low. African Americans, for example,
make up 12.7 percent of the U.S. population; yet they own just 3.6 percent
of the nation's businesses, and those businesses a<H count for only 1
percent of total U.S. commercial revenues. 47 Like women, minorities cite
discrimination as a principal reason for their limited access to the world
of entrepreneurship. Asians, Hispanics, and blacks, in that order, are
most likely to become entrepreneurs.
Minority-owned businesses have come a long way in the past decade,
however. Increasingly, minorities are finding ways to overcome the
barriers to business ownership. For instance, the Census Bureau's latest
statistics show that the number of companies owned by African Americans
grew almost twice as fast as the total number of new business formations.
Hispanic-owned businesses grew at an even faster pace, expanding at almost
three times the rate of all businesses. 48 The new generation of minority
entrepreneurs is better educated, has more business experience, and is
better prepared for business ownership than their predecessors. For
example, Yla Eason, a Harvard business school graduate and a former editor
at Standard & Poor's, decided to start a business in response to her
three-year-old son's statement about a popular cartoon action figure. "He
said he wanted to be like He-Man," she recalls, "but he said he couldn't
because He-Man was white." After searching New York unsuccessfully for an
African American superhero doll, Eason decided to create her own. Within
months, she was meeting with toy suppliers to bring her creations, Sun Man
and his nemesis Pig Head, to life. Eason now runs Olmec Toys, a
$5-million-a-year business that sells more than 30 toys and dolls designed
for children of color. 49
IMMIGRANT ENTREPRENEURS
The United States has always been a melting pot of diverse cultures. Many
immigrants have been lured to this nation by its economic freedom, but
today's immigrants arrive with more education and experience than the
unskilled "huddled masses" of the past had. Although many of them come to
the United States with few assets, their dedication and desire to succeed
enable them to achieve their entrepreneurial dreams. Marty and Helen Shih,
immigrants from Taiwan, typify this new breed of immigrant entrepreneurs.
In 1979, the Shihs began selling flowers on a Los Angeles street corner
from a former cigarette stand they had borrowed. Their first day's sales
totaled $1.99, but the Shihs were determined to succeed. They found a
better location inside the lobby of a professional building, often working
16- and 18-hour days. Every time the Shihs made a sale, they collected
information about their customers and the occasions for which they were
buying flowers, painstakingly writing it down in notebooks. Using their
database, the Shihs began sending their customers personalized reminders
of upcoming birthdays, anniversaries, and other events. They also offered
speedy deliveries using mopeds, a significant advantage in car-choked Los
Angeles. Soon, they opened their first florist shop in Beverly Hills,
where Marty came up with the idea of offering standardized floral designs,
an idea he got from McDonald's approach to hamburgers and one that slashed
the labor cost of creating floral arrangements by 60 percent. In addition
to the chain of florist shops they own, the Shihs also created the Asian
American Association, which markets products to Asian Americans and helps
other companies do the same. Today, the Shihs sit atop a conglomerate that
sells more than $500 million in goods and services to the Asian American
community. 50
PART-TIME ENTREPRENEURS
Starting a part-time business is a popular gateway to entrepreneurship.
Part-timers have the best of both worlds. They can ease into a business
without sacrificing the security of a steady paycheck. Some 13 million
Americans are self-employed part-time. 51 A major advantage of going into
business part-time is the lower risk in case the venture flops. Many
part-timers are "testing the entrepreneurial waters" to see whether their
business ideas will work and whether they enjoy being self-employed. As
they grow, many part-time enterprises absorb more of the entrepreneur's
time until they become full-time businesses.
For more than a decade, Charles Manning Jr. ran a part-time business in an
unusual niche: accident investigation, a skill he learned while serving in
the Air Force during the Korean War. Manning investigated the causes of
everything from plane crashes and auto accidents to train derailments and
medical accidents. In 1980, Manning's son, Charles HI, convinced him to
make Accident Reconstruction Analysis a full-time business. Their company
has worked on such high-profile cases as the Challenger space shuttle and
ValuJet explosions and generates annual revenues of $3.6 million. 52
HOME-BASED BUSINESS OWNERS
Entrepreneurs operate 30.7 million businesses from their homes (a trend
dubbed HomeComing by marketing experts), and 14.9 million of those are
full-time businesses. 53 Their ranks are growing rapidly; on average, a
new home-based business pops up every 11 seconds! These companies generate
$383 billion in revenues and create an estimated 8,219 new jobs each day.
54 The biggest advantage home-based businesses offer entrepreneurs is the
cost savings of not having to lease or buy an external location. Figure
1.6 illustrates the growth in the number of home-based entrepreneurs in
recent years.
In the past, home-based businesses tended to be rather unexciting cottage
industries such as crafts or sewing. Today's home-based businesses are
more diverse; modern home-based entrepreneurs are likely to be running
high-tech or service companies with millions of dollars in sales. Scott
Adams, creator o/Dilbert, the daily comic strip about the hapless office
worker who suffers under the hand of a half-witted boss with a band of
bizarre coworkers, recently left his cubicle at giant Pacific Bell to
devote himself full-time to his home-based business. Adams runs the entire
Dilbert empire¡ªwhich includes the cartoon strip, books, licenses, and
other items¡ªfrom his home office. 55
major corporation after another has announced layoffs. Over the last
decade, major corporations have shed about 6 million jobs¡ªand not just
among blue-collar workers 67 Companies are cutting back their executive
ranks as well. "[Downsizing] is turning legions of blue- and white-collar
workers into dislocated refugees, the boat people of economic upheaval.
Neither they nor the survivors and witnesses are likely to put their
loyalties into a corporation that deals with people as interchangeable
digits," says one business article. 68
These "corporate castoffs" have become an important source of
entrepreneurial activity . The proportion of discharged corporate managers
who have become entrepreneur! doubled to 15 percent since 1994, and many
of those left behind in corporate American like to join them. 69 A recent
study by Accountemps found that nearly half of the executives surveyed
believed that their peers would take the entrepreneurial plunge if they
had money to do so. Four years before, just one-third of corporate
executives were inclined start their own companies. 70
Many corporate castoffs are deciding that the best defense against future
job inset. is an entrepreneurial offense. Armed with years of experience,
a tidy severance package; working knowledge of their industries, and a
network of connections, former m; setting out to start companies of their
own. After spending 18 years as the head of worldwide research for
pharmaceutical giant Burroughs Wellcome, David Barry found himself the
company's downsizing initiative. Rather than going to work for another
large Barry launched Triangle Pharmaceuticals, a company developing drugs
to fight AIDS, hepatitis,, and other serious diseases. The start-up
business already has 15 employees, whom worked with Barry at Burroughs
Wellcome. "Most of us¡ªand I'll be the first to this¡ªprobably wouldn't have
[launched a company] voluntarily," says Barry. Now, like many corporate
castoffs, Barry finds that the entrepreneurial experience suits offering
more security, satisfaction, and stimulation than his corporate job ever
did! 71
CORPORATE DROPOUTS
The downsizing of corporate America has created another effect among the
employees; after restructuring: a trust gap. The result of this trust gap
is a growing number of "dropouts from the corporate structure who then
become entrepreneurs. Although their workdays grow longer and their
incomes may shrink, those who strike out on their own often find work more
rewarding and more satisfying because they are doing what they enjoy and
are in control. When one dropout left his corporate post, he invited his
former coworkers bonfire in the parking lot¡ªfueled by a pile of his
expensive business suits! He happily passed out marshmallows to everyone
who came. Today, he and his wife run an artists¡‾ gallery in California's
wine country. 72
Because they have college degrees, a working knowledge of business, and
yen management experience, both corporate dropouts and castoffs may
ultimately increase e the small business survival rate. A recent survey by
Richard O'Sullivan found that 64 percent people starting businesses have
some college education, and 16 percent have advanced degrees. 73 Better
trained, more experienced entrepreneurs are less likely to fail. The Nat
Federation of Independent Businesses reports that 77 percent of new
companies for since the mid-eighties were still in operation three years
later. 74
¡¡
The Contributions of Small Businesses
Of the 22.4 million businesses in the United States today, approximately
22.1 million or 98.5 percent, can be considered small. They thrive in
virtually every industry, although majority of small companies are
concentrated in the retail and service industries (see Ft 1.7). Their
contributions to the economy are as numerous as the businesses themselves
example, small companies employ 53 percent of the nation's private-sector
workforce,! though they possess less than one-fourth of total business
assets. And, because they are primarily labor-intensive, small businesses
actually create more jobs than do big business the mid-1990s, for
instance, small companies created 75 percent of the nation's new jobs. 75
David Birch, president of the research firm Cognetics, says that the
ability to create jobs is
the difference between failure and success. One West Coast entrepreneur
had always wanted to own a restaurant, but he had no experience in the
restaurant business. He later admitted that he had thought that running a
restaurant consisted primarily of dressing up in black tie, greeting his
regular customers at the door, and showing them to his best tables. He
invested $150,000 of his own money and found a partner to put up more
capital and to help manage the restaurant. They opened and immediately ran
into trouble because they knew nothing about running a restaurant. In
desperation, the restaurateurs came up with an idea to attract business:
Why not become the first topless restaurant in the area? The gimmick
worked for a while, and then business dropped off. Then they decided to
become the first bottomless restaurant. Again, business picked up briefly,
but the novelty soon wore off, and sales slipped. Eventually, the
restaurant closed, and the partners lost their original investments, their
homes, and their cars; they also spent the next several years paying off
back taxes.*1 Ideally, a prospective entrepreneur should have adequate
technical ability; a working knowledge of the physical operations of the
business; sufficient conceptual ability; the power to visualize,
coordinate, and integrate the various operations of the business into a
synergistic whole; and the skill to manage the people in the organization
and motivate them to higher levels of performance.
POOR FINANCIAL CONTROL
Sound management is the key to a small company's success, and effective
managers realize that any successful business venture requires proper
financial control. The margin for error in managing finances is especially
small for most small businesses, and neglecting to install proper
financial controls is a recipe for disaster. For instance, while working
at Apple Computers, Mark Kvamme saw an opportunity to sell non-English
computer keyboards to foreign computer users in the United States.
Kvamme's company reached $3 million in sales but ultimately folded because
of sloppy financial controls. "We were so busy plugging along that we
didn't track how much money we were making or spending," says Kvamme, now
head of his own advertising agency.2
LACK OF STRATEGIC MANAGEMENT
Too many small business managers neglect the process of strategic
management because they think it is something that benefits only large
companies. "I don't have the time" or "We're too small to develop a
strategic plan," they rationalize. Failure to plan, however, usually
results in failure to survive. Without a clearly defined strategy, a
business has no sustain-able basis for creating and maintaining a
competitive edge in the marketplace. James Salter and Tim Pogue, founders
of Ride, Inc., a snowboard equipment company, made this mistake, and their
company barely survived. Riding the popularity of snowboarding, the
company went public, and its stock price skyrocketed. The young
entrepreneurs became instant millionaires, but, without a clear strategy,
Ride soon ran into serious problems. Both founders resigned from the
company, and the board brought in an experienced manager, Robert Hall, to
try to turn the ailing company around. According to Hall, the biggest
problem the company faced was a lack of strategic management. "They didn't
even have a business plan when I arrived," he says. 83
Building a strategic plan forces an entrepreneur to assess realistically
the proposed business's potential. Is it something customers are willing
and able to purchase? Who is the target customer? How will the business
attract and keep those customers? What is the company's basis for serving
customers' needs better than existing companies? We will explore these and
other vital issues in chapter 2.
UNCONTROLLED GROWTH
Growth is a natural, healthy, and desirable part of any business
enterprise, but it must be planned and controlled. Management expert Peter
Drucker says that start-up companies can expect to outgrow their capital
bases each time sales increase 40 to 50 percent. 84 Ideally, expansion
should be financed by retained earnings or by capital contributions from
the owner, but most businesses wind up borrowing at least a portion of the
capital investment.
Expansion usually requires major changes in organizational structure,
business practices such as inventory and financial control procedures,
personnel assignments, and other areas. But the most important change
occurs in managerial expertise. As the business increases in size and
complexity, problems tend to increase in proportion, and the manager must
learn to deal with them. Sometimes entrepreneurs encourage rapid growth,
and the business outstrips their ability to manage it. Shortly after
Maryles Casto started Casto Travel, a corporate travel agency, sales
exploded. Her customers were fast-growing companies such as Intel and
Apple Computer. But Casto soon saw the dark side of growth. The quality of
her customer service plummeted, and she was losing clients because of it.
She realized that uncontrolled growth was sending her business spinning
out of control. "Business was coming in so fast I couldn't handle it," she
recalls. That's when Casto made a dramatic move: She put the business in a
holding pattern, taking on no new clients until she could get
the company in a position to handle them. It paid off. Today, Casto Travel
has five offices, 155 employees, and $70 million in annual sales.85
INAPPROPRIATE LOCATION
For any business, choosing the right location is partly an art and partly
a science. Too often, business locations are selected without proper
investigation and planning. Some beginning owners choose a particular
location just because they notice a vacant building. But the location
question is much too critical to leave to chance. Especially for
retailers, the lifeblood of the business¡ªsales¡ªis influenced heavily by
choice of location. One small merchandiser located in a rural area was
heavily dependent on the customers of a nearby restaurant for her
clientele. Because of the inconvenience of this location, sales suffered
and the business failed.
Another factor to consider in selecting location is the rental rate.
Although it is prudent not to pay an excessive amount for rent, business
owners should weigh the cost against the location's effect on sales.
Location has two important features: what it costs and what it generates
in sales volume.
LACK OF INVENTORY CONTROL
Normally, the largest investment the small business manager must make is
in inventory; yet, inventory control is one of the most neglected of all
the managerial responsibilities. Insufficient inventory levels result in
shortages and stockouts that cause customers to become disillusioned and
not return. A more common situation is that the manager not only has too
much inventory but also has too much of the wrong type of inventory. Many
small firms have an excessive amount of working capital tied up in an
accumulation of needless inventory. We will discuss both purchasing and
inventory control techniques in section VII.
INABILITY TO MAKE THE "ENTREPRENEURIAL TRANSITION"
If a business fails, it is most likely to do so in its first five years
(see Figure 1.8). Making it over the "entrepreneurial start-up hump,"
however, is no guarantee of business success. After the start-up, growth
usually requires a radically different style of leadership and management.
Ted Waitt, founder of the highly successful direct-mail computer retailer
Gateway 2000 says, "Over the last ten years, although I've been doing the
same job, it has probably been six or seven completely different jobs as
the company has grown." 86
The very abilities that make an entrepreneur successful often lead to
managerial ineffectiveness. Growth requires entrepreneurs to delegate
authority and to relinquish hands-on control of daily operations¡ªsomething
many entrepreneurs simply cannot do. Their companies¡‾
success requires that they avoid micromanaging and become preservers and
promoters of their companies' vision, values, and culture.
Table 1.3 offers some interesting insights into the 10 stages in a
company's life cycle.
¡¡
Putting Failure into Perspective
Because they are building businesses in an environment filled with
uncertainty and shaped by rapid change, entrepreneurs recognize that
failure is likely to be a part of their lives, but they are not paralyzed
by that fear. "The excitement of building a new business from scratch is
far greater than the fear of failure," says one entrepreneur who failed in
business several times before finally succeeding. 87 Instead, they use
their failures as a rallying point and as a means of defining their
companies' reason for being more clearly. They see failure for what it
really is: an opportunity to learn what does not work! Successful
entrepreneurs have the attitude that failures are simply stepping stones
along the path to success. Walt Disney was fired from a newspaper job
because, according to his boss, he "lacked ideas." Disney also went
bankrupt several times before he created Disneyland.
Failure is a natural part of the creative process. The only people who
never fail are those who never do anything or never attempt anything new.
Baseball fans know that Babe Ruth held the record for career home runs
(714) for many years, but how many know that he also held the record for
strikeouts (1,330)? Successful entrepreneurs realize that hitting an
entrepreneurial home run requires a few strikeouts along the way, and they
are willing to accept them. Lillian Vernon, who started her mail-order
company with $2,000 in wedding present money, says, "Everybody stumbles. .
. . The true test is how well you pick yourself up and move on, and
whether you're willing to learn from that." 88 Indeed, one hallmark of
successful entrepreneurs is the ability to fail intelligently, learning
why they failed so that they can avoid making the same mistake again. They
know that business success does not depend on their ability to avoid
making mistakes but to be open to the lessons each mistake brings. They
learn from their failures and use them as fuel to push themselves closer
to their ultimate target. Entrepreneurs are less worried about what they
might lose if they try something and fail than about what they will miss
if they fail to try.
Entrepreneurial success requires both persistence and resilience, the
ability to bounce back from failures. Thomas Edison discovered about 1,800
ways not to build a lightbulb before hitting upon a design that worked.
Entrepreneur Bryn Kaufman explains this "never say die" attitude: "If you
are truly an entrepreneur, giving up is not an option." 89 Kaufman started
Computer Market Place at age 19, selling computer accessories from his
parents' home. Within five years, the company's sales had grown to $1.7
million, and Kaufman opened a retail computer store. Unfortunately, the
store couldn't compete with retail giants CompUSA and Circuit City, who
had gotten into the computer retail business, and Kaufman shut it down
after just 10 months. Undaunted, he began supplying computers and
components to two computer retail outlets, one in Russia and one in
Armenia, in late 1991. Sales dried up when the Russian economy collapsed
and the two stores closed, forcing Kaufman to reduce his staff from 12 to
two. "I had to cut costs and do whatever it took to keep the company
alive," he recalls. The turning point for Computer Market Place came when
Kaufman hired a young woman who knew how to sell to government agencies.
To reduce the paperwork in his dealings with the agencies, Kaufman began
to use the Internet to submit bids and specifications. He quickly realized
that the Internet was an ideal way to sell computers and accessories to
anyone anywhere without the problems of running an actual retail store.
The company's Web site now generates more than $500,000 in sales each
month, about half of Computer Market Place's total sales. 90
First-time entrepreneurs about to launch businesses often wonder what
sequence of start-up activities they should follow. The results of one
study indicate that there is no single "correct" sequence of start-up
activities; the activities depend on the individual entrepreneur and on
the particular venture. Researcher Paul Reynolds compares the process of
starting a business to learning to swim:
In swimming, first you get over your fear of the water. Once you jump into
the shallow end of the pool, you may start by getting your head wet, or
you may try floating or exhaling underwater. Whatever the sequence, in the
end, you may learn to stay afloat in the deep end and actually get from
one side to the other. Some people take to swimming in no time; others
take much longer. Some never quite get the hang of it and climb out of the
pool. . . . just as there is no one way to learn to swim, there is no one
way to start a business. On the other hand, all swimmers must master the
basics, and all the new businesses eventually got around to most of the
basic [start-up] activities.
Reynolds's study suggests that entrepreneurs typically launch businesses
after about one year of concentrated effort. Once they are in business,
what can these entrepreneurs expect? Researcher Ichak Adizes says that
companies, like living organisms, go through normal stages of development,
simply stepping stones along the path to success. 10 Analyze the major
pitfalls involved in managing a small business and understand how the
small business owner can avoid them.
¡ô There are several general tactics the small business owner can use to
avoid failure. The entrepreneur should know the business in depth, develop
a solid business plan, manage financial resources effectively, understand
financial statements, learn to manage people effectively, set the business
apart from the competition, and keep in tune with himself.
Discussion Questions
1. What forces have led to the boom in entrepreneurship in the United
States and across the globe?
2. What is an entrepreneur? Give a brief description of the
entrepreneurial profile.
3. Inc. magazine claims, "Entrepreneurship is more mundane than it's
sometimes portrayed. . . . You don't need to be a person of mythical
proportions to be very, very successful in building a company." Do you
agree? Explain.
4. What are the major benefits of business ownership?
5. Which of the potential drawbacks to business ownership are most
critical?
6. Briefly describe the role of the following groups in entrepreneurship:
women, minorities, immigrants, "part-timers," home-based business owners,
family business owners, copreneurs, corporate castoffs, and corporate
dropouts.
7. What contributions do small businesses make to our economy?
8. Describe the small business failure rate.
9. Outline the causes of business failure. Which problems cause most
business failures?
10. How can the small business owner avoid the common pitfalls that often
lead to business failures?
11. Why is it important to study the small business failure rate?
12. Explain the typical entrepreneur's attitude toward failure.
13. One entrepreneur says that too many people "don't see that by spending
their lives afraid of failure, they become failures. But when you go out
there and risk as I have, you'll have failures along the way, but
eventually the result is great success if you are willing to keep
risking.. . . For every big yes in life, there will be 199 nos." Do you
agree? Explain.
14. What advice would you offer an entrepreneurial friend who has just
suffered a business failure?
Step into the Real World
1. Choose an entrepreneur in your community and interview him or her.
What's the "story" behind the business? What advantages and disadvantages
does the owner see in owning a business? What advice would he or she offer
to someone considering launching a business?
2. Search through recent business publications (especially those focusing
on small companies such as Inc., Entrepreneur, Business Start-Ups,
Nation's Business, or Your Company) and find an example of an
entrepreneur¡ªpast or present¡ªwho exhibits the entrepreneurial spirit of
striving for success in the face of failure as Gail Borden did. Prepare a
brief report for your class.
3. Select one of the categories under the section "The Diversity of
Entrepreneurship" in this chapter and research it in more detail. Find
examples of the entrepreneurial profile. Prepare a brief report for your
class.
4. Interview a local banker who has experience lending to small companies.
What factors does he or she believe are important to a small company's
success? What factors has he or she seen to cause business failures? What
does the lender want to see in a business start-up before agreeing to lend
any money?
Take It to the Net
Visit the Scarborough/Zimmer home page at www. prewnhall. com/scarbzim
for updated information, on-line resources, and Web-based exercises.
¡¡
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