Silesian University in Opava
School of Business Administration in Karviná
ENTREPRENEURSHIP
IN SMALL AND MEDIUM SIZED BUSINESSES
For the full-time study form
Jarmila Šebestová
Karviná 2014
OP VK No. CZ.1.07/2.2.00/28.0017 Project „Innovation of study programmes at Silesian
university in Opava, School of Business Administration in Karvina“
Subject: Organization and Management.
Annotation: The Mission of each business is to effectively provide its services so as to meet customer
requirements and at the same time to contribute to the creation of value in the enterprise. The
textbook called "Entrepreneurship in Small and Medium Sized Businesses" represents
a comprehensive overview of the means needed to provide your own business with the
capability of creating plans, budgeting, preparing strategies along with their monitoring and
implementation within the scope of achieving targets. A business proprietor must often make
decisions about portfolio services and their pricing; he must be able to analyze the strengths and
weaknesses of each product on the basis of financial and non-financial indicators. One part of
the study is also dedicated to the creation of a business plan, which is a natural part of the startup
phase. This publication is a new textbook for the subject “Small and Medium Sized
Entrepreneurship” in the field of Economics and Management..
Key words: Entepreneurship, business plan, small business, management, strategies for success
© Doplní oddělení vědy a výzkumu.
Author:
Ing. Jarmila Šebestová, Ph.D.
Recenzenti: Doplňte jména a příjmení včetně titulů
ISBN Doplní oddělení vědy a výzkumu.
- 3 -
CONTENT
INTRODUCTION.................................................................................................................... 6
1 INTRODUCTION TO ENTREPRENEURSHIP ........................................................ 8
1.1 DEFINITION OF AN ENTREPRENEURSHIP................................................................................... 8
1.1.1 FORMS OF ENTREPRENEURSHIP ACTIVITY .................................................................. 8
1.2 DEFINITION OF AN ENTREPRENEUR.......................................................................................... 9
1.3 ENTREPRENEURIAL TRAITS .................................................................................................... 11
1.4 ENTREPRENEURSHIP AS A PROCESS ....................................................................................... 15
2 POSITION OF SMALL BUSINESSES IN THE ECONOMY................................. 19
2.1 OTHER DEFINITIONS............................................................................................................... 22
2.1.1 CONTRIBUTION TO THE ECONOMY............................................................................ 22
2.2 SME AND ENTREPRENEURSHIP POLICY................................................................................. 23
2.2.1 ENTREPRENEURSHIP POLICY PRIORITIES .................................................................. 25
3 DEVELOPING A WELL-CONCEIVED BUSINESS PLAN................................... 28
3.1 COMPONENTS OF A BUSINESS PLAN ...................................................................................... 33
3.1.1 THE BUSINESS SECTION OF THE PLAN ...................................................................... 35
3.1.2 FINANCIAL STATEMENTS .......................................................................................... 40
3.2 ADVANTAGES AND DISADVANTAGES OF OWNERSHIP............................................................ 42
4 ENVIRONMENTAL ASSESSMENT: PREPARATION FOR A NEW START-UP
........................................................................................................................................ 44
4.1 ANALYSING MACRO-ENVIRONMENT...................................................................................... 45
4.1.1 FORECASTING TECHNIQUES IN MACRO-ANALYSING................................................... 46
4.2 MESO-ENVIRONMENT ANALYSIS............................................................................................ 48
4.2.1 MARKET RESEARCH ................................................................................................. 49
4.3 MICRO ENVIRONMENTAL ANALYSIS ...................................................................................... 50
4.3.1 FINAL MODELLING FOR APPROPRIATE ACTION.......................................................... 51
5 MANAGING THE SMALL BUSINESS .................................................................... 60
5.1 MANAGEMENT FUNCTIONS .................................................................................................... 60
5.1.1 PLANNING................................................................................................................ 60
5.1.2 ORGANIZING ............................................................................................................ 63
5.1.3 MANAGING PEOPLE IN THE SMALL BUSINESS (DIRECTING) ...................................... 64
5.1.4 CONTROLLING ......................................................................................................... 64
5.1.5 DECISION MAKING AND DECISION TAKING................................................................ 68
5.2 A MANAGER AND CURRENT BUSINESS STAGE ....................................................................... 70
5.3 A MANAGER AND THE LEGAL FORM SELECTION .................................................................... 71
5.3.1 SOLE PROPRIETORSHIP ............................................................................................ 73
5.3.2 PARTNERSHIPS......................................................................................................... 74
5.3.3 CORPORATIONS........................................................................................................ 76
5.3.4 KEYS FOR SUCCESS................................................................................................... 77
- 4 -
6 HUMAN RESOURCES IN THE SMALL BUSINESS............................................. 79
6.1 MANAGEMENT OF HUMAN RESOURCES (HR) IN GENERAL ..................................................... 79
6.1.1 SELECTION AND PLACEMENT (STAFFING)................................................................. 80
6.1.2 JOB DESIGN............................................................................................................. 83
6.1.3 COMPENSATION AND REWARDS................................................................................ 84
6.1.4 DIVERSITY MANAGEMENT ........................................................................................ 87
6.2 DEVELOPING A STAFFING PLAN ............................................................................................. 88
6.3 MANAGERS VERSUS LEADERS................................................................................................ 89
6.3.1 MANAGERIAL COMMUNICATION WITH EMPLOYEES ................................................... 90
7 MARKETING IN SMALL BUSINESS...................................................................... 92
7.1 MARKETING ENVIRONMENT .................................................................................................. 92
7.2 MARKETING RESEARCH ......................................................................................................... 93
7.2.1 MARKETING RESEARCH QUESTIONS ......................................................................... 95
7.2.2 THE MARKETING RESEARCH PROCESS ..................................................................... 96
7.2.3 MARKET SEGMENTATION.......................................................................................... 96
7.3 MARKETING MIX .................................................................................................................... 99
7.3.1 PRICE .................................................................................................................... 104
7.3.2 PLACE.................................................................................................................... 106
7.3.3 PROMOTION........................................................................................................... 108
7.4 MARKETING STRATEGY CONCEPT........................................................................................ 111
7.4.1 MARKETING OBJECTIVES ....................................................................................... 112
7.4.2 MARKETING PLAN .................................................................................................. 113
7.4.3 THE MARKETING STRATEGY .................................................................................... 114
8 BUSINESS MODELS AND STRATEGIES............................................................. 117
8.1 LEVELS OF STRATEGIES ....................................................................................................... 118
8.2 STRATEGIC MANAGEMENT PROCESS.................................................................................... 120
8.2.1 VALUE, VISION, STRATEGY AND TACTICS RELATIONSHIP .......................................... 120
8.2.2 COMPONENTS OF THE PROCESS ............................................................................. 121
8.3 STRATEGY FORMULATION ................................................................................................... 122
8.3.1 FORMULATING CORPORATE-LEVEL STRATEGY ........................................................ 123
8.3.2 THE PORTFOLIO CONCEPT ..................................................................................... 124
8.3.3 FORMULATING BUSINESS-LEVEL STRATEGY............................................................. 127
8.3.4 FORMULATING FUNCTIONAL-LEVEL STRATEGY ....................................................... 130
8.4 STRATEGY IMPLEMENTATION.............................................................................................. 130
8.5 BUSINESS MODELS............................................................................................................... 131
8.5.1 ELEMENTS OF A BUSINESS MODEL......................................................................... 132
8.5.2 BUSINESS MODEL PATTERNS.................................................................................. 141
8.6 STRATEGIES FOR COOPERATION .......................................................................................... 144
8.6.1 TYPES OF COOPERATION ........................................................................................ 145
8.7 EXIT STRATEGIES ................................................................................................................. 146
- 5 -
9 FINANCING SMALL BUSINESSES....................................................................... 152
9.1 THE BALANCE SHEET STATEMENT...................................................................................... 152
9.1.1 ASSETS EVALUATION............................................................................................... 152
9.1.2 LIABILITIES AND OWNER´S EQUITY STRUCTURE....................................................... 154
9.2 THE INCOME STATEMENT .................................................................................................... 156
9.3 THE CASH-FLOW STATEMENT ............................................................................................. 157
9.4 FINANCIAL RATIOS............................................................................................................... 159
9.5 FINANCIAL PLAN .................................................................................................................. 162
9.5.1 STAGES OF FUNDING ............................................................................................. 162
9.5.2 BREAKEVEN ANALYSIS............................................................................................ 169
10 FAMILY BUSINESS.................................................................................................. 172
10.1 ADVANTAGES AND DISADVANTAGES OF A FAMILY FIRM.................................................... 172
10.2 CHALLENGES IN THE FAMILY BUSINESS............................................................................... 174
10.3 THE SUCCESSION PLAN........................................................................................................ 176
10.3.1 SOURCES OF CONFLICTS AND EXIT ......................................................................... 178
11 SOCIAL ENTREPRENEURSHIP............................................................................ 182
11.1 SOCIAL ENTERPRISE AND THE SOCIAL ECONOMY ................................................................ 182
11.2 TYPICAL BEHAVIOUR OF SE................................................................................................. 183
11.2.1 ENTREPRENEURIAL MODEL .................................................................................... 185
12 INNOVATIONS IN THE SMALL BUSINESS ....................................................... 190
12.1 PROTECTION OF INNOVATION .............................................................................................. 194
12.2 INNOVATION MANAGEMENT ................................................................................................ 197
SUMMARY........................................................................................................................... 198
THE LIST OF LITERATURE ........................................................................................... 199
ENCLOSURE NO. 1 DETERMINE YOUR EQ (ENTREPRENEURIAL QUOTIENT)
...................................................................................................................................... 203
ENCLOSURE NO. 2 BUSINESS PLAN TEMPLATE .................................................... 207
ENCLOSURE NO. 3 EXAMPLE OF REAL BUSINESS PLAN.................................... 209
ENCLOSURE NO. 4 BUSINESS MODEL CANVAS...................................................... 221
ENCLOSURE NO. 5 CANVAS MODEL STRUCTURE................................................. 222
- 6 -
INTRODUCTION
Create something that is unique … If you set up a company selling widgets like the
bloke down the road and the only difference is that yours are cheaper, you will make a living,
but that is all you will achieve. If you can be truly differentiated and unique, then you really
have something.
Martyn Dawes, founder of Coffee Nation
Entrepreneurship is seen as encouraging creativity and innovation in order to make
things happen. Most of the chapters are connected with real stories of successful small
businesses. This is about motivating you to develop your knowledge in the area of
management, marketing, accounting, finance, personnel management and strategy
development in the area of small business as the dominant form of business in the world
today.
In any small business, there is always plenty of work to be done. This work includes
physical labour as well as planning, organizing, and evaluating. What jobs need to be
performed? How are these jobs going to be designated? Who is responsible for what? If
problems or questions arise, who does a person go to for help or to get answers?
Someone will answer all of these questions and others about personnel. However, in
many cases, the answers are not explicitly stated. Often a problem arises, and a decision on
a solution is made without giving sufficient thought to the long-term implications of the
quick-fix solution or the message that the solution may be sending to other co-operating
family members or business employees.
In a practical sense, a “good” business idea has to become something more than just an
idea. If you are interested in generating income from your idea, you will probably need to turn
it into a product that satisfies a need so that you can market it. If you want to develop
a product, you will need some type of organisational system to coordinate the resources
necessary to turn it into reality (in other words, a business).
For the sake of argument, let us say that you would like to know a little more about
going into business for yourself, in which case, you will want some answers to questions such
as the following (Collins, 2008):
 Should I start a business?
 What are the advantages and disadvantages of starting a business?
 How do I come up with a business idea?
 Should I build a business from scratch, buy an existing business, or invest in
a franchise?
 How do I go about planning a business?
 What steps are involved in developing a business plan?
 Where would I find help in getting my business started and operating it through
the start-up phase?
 How can I increase the likelihood that I will succeed?
- 7 This
textbook is designed to motivate you to find your own way of developing your
entrepreneurial skills. These ideas are supported by examples of business plans, practical
activities and pro forma business plans in enclosures. After studying this textbook student will
be able to:
 Describe what entrepreneurship is and how it influences the economy.
 Recognise the risks and rewards of entrepreneurship.
 Understand the challenges and the motivations faced by an entrepreneur or an
entrepreneurial team.
 Analyze the characteristics of a successful entrepreneur.
 Present an evaluation of an entrepreneurial activity.
 Outline a proposal for an entrepreneurial project.
1 Introduction to Entrepreneurship
- 8 -
1 INTRODUCTION TO ENTREPRENEURSHIP
Everywhere you turn; you will read or hear about entrepreneurs. If you open a current
newspaper or general news magazine or log on to one of the Internet’s news sites, chances are
that you will find at least one story about successful entrepreneur. However, what exactly is
it?
1.1 DEFINITION OF AN ENTREPRENEURSHIP
The modern interpretation of entrepreneurship derives from the French verb
entreprendre, which means ‘to undertake’. In this interpretation, the entrepreneur is
describing as a ‘go-between”.
Entrepreneurship we could simplify into the process whereby an individual or a group
of individuals uses organized effort to pursue opportunities to create value and grow by
fulfilling needs through uniqueness of products or services. Therefore, entrepreneurship is
about pursuing environmental trends and changes that no one else has seen or paid attention
to.
DEFINITION 1 ENTREPRENEURSHIP
Entrepreneurship is the process of creating something new, with value, by devoting the
necessary time and effort, assuming the accompanying financial, psychic, and social risks,
and receiving the resulting rewards of monetary and personal satisfaction and independence
(Hisrich and Peters, 2002).
This definition stresses four (4) basic concepts of entrepreneurship regardless of the
field:
 Entrepreneurship involves the creative process; creating something new of value.
The creation has to have value to the entrepreneur and value to the audience like
customers of which it is developed.
 Entrepreneurship requires the devotion of the necessary time and effort to create
something new and make it operational.
 Assuming the necessary risk. These risks concentrate on financial, psychological and
social areas.
 Rewards of being an entrepreneur. The most important of these is independence,
personal satisfaction and monetary rewards.
1.1.1 FORMS OF ENTREPRENEURSHIP ACTIVITY
Two major forms of entrepreneurial activities mainly discussed in literature, which are
(Pinchot, Pellman, 1999):
 Intrapreneurship
Intrapreneurship describes innovative processes within the context of existing
organizations; it would be private or public. The definition of intrapreneurship is similar to
that of entrepreneurship except that intrapreneurship takes place within an organization. The
major thrust of intrapreneuring, then, is to create or develop the entrepreneurial spirit within
corporate boundaries, thereby allowing an atmosphere of innovation to prosper.
The need for intrapreneurship has arisen in response to the rapidly growing number of
pressing problems organizations face, including a rapidly growing number of new and
sophisticated competitors, an exodus of some of the best and brightest people who are leaving
Jarmila Šebestová; Entrepreneurship
- 9 corporations
to become small – business entrepreneurs, downsizing of major corporations,
and an overall desire to improve efficiency and productivity. Finally, intrapreneurs are
employees who are willing to take risk, innovate, and provide open opportunities for others. It
is often more difficult to be an intrapreneur within an organization than an entrepreneur who
may develop his or her own small business. The intrapreneur or organizational champion is
seeing as not risking his / her own resources but those belonging to his company or firm.
Table 1 Comparison of Entrepreneurship and Intrapreneurship activities
Entrepreneurship Intrapreneurship
It is run and managed by individual(s); they are known
as entrepreneur(s).
Its evolution is by individual(s) known as intrapreneur(s).
This practice occurs outside a formal establishment
(firm).i.e. the entrepreneur forms a new business.
It happens within a formal establishment. For instance
coming out with an innovation in a firm which is not your
own.
The person/entrepreneur is credited with the
idea/concept both within and outside the business
establishment.
The person/intrapreneur is known to the firm as the
originator but not to the public.
The entrepreneur has full control over the idea. Intrapreneurs do not exercise full control over their ideas.
The person/entrepreneur enjoys the full benefit over
his/her initiatives as well as suffers the risk thereof.
Intrapreneur(s) do not enjoy the full benefit over initiatives
developed.
Source: Pinchot, Pellman, 1999, Stokes, Wilson, 2008
 Extrapreneurship
It is a venturing process where employees of a company spin-off from their former
employing company or place of work to establish a supplementary business. The business so
established is often in the same line as business from the former place of work, since that
individual has already acquired some experience in this line of business from the former place
of work.
Finally, we would say that entrepreneurship (E) is a function of entrepreneurs (e)
(Rwigema, 2008, p.7).
𝑬 = 𝒇 (𝒆) 1-1
1.2 DEFINITION OF AN ENTREPRENEUR
The entrepreneur we would define from many points of view. There are four main ways,
how to deal with this phenomenon (Stokes, Wilson, 2010):
 Economists define an entrepreneur as one who brings resources, labour, raw material
and other assets into combinations that increase their value.
 Psychologists define an entrepreneur as a person, who is driven by some forces, which
create a desire to obtain or attain something.
 Sociologists define ‘entrepreneur’ as a person whose actions would determine his
social status and who contributes to the development of society.
 Management experts define ‘entrepreneur’ as a person who has a vision and
generates an action plan to achieve it.
Filion (2011) interrogates the origin and development of the term ‘entrepreneur’,
revealing that it acquired its meaning in the 17th century, with Richard Cantillon being the
first to offer a clear conception of the entrepreneurial function and its relation to innovation.
1 Introduction to Entrepreneurship
- 10 Entrepreneurs
have existed throughout history. At various times, individuals spotted an
opportunity and set up a structure to exploit it. They mobilised resources and traded or
manufactured something for profit (Rwigema, 2008). According to the definition of
entrepreneur, the model should include at least those six elements (see fig. 1).
Figure 1 Elements of an Entrepreneur
Source: Fillion, 201, p.49
Following this, an entrepreneur is an actor who innovates by recognizing opportunities;
he or she makes moderately risky decisions that lead into actions requiring the efficient use of
resources and contributing a benefit.
SOLVED EXERCISE 1 AM I AN ENTREPRENEUR?
Evaluate your own skills and make judgments about whether you are ready to own your
own business. The following list of personal characteristics is designed to help you to analyse
if you have what it requires being a successful entrepreneur. Analyze yourself carefully and
honestly as you answer each question (Winston, 1979, p.34-35, Pickle, Abrahamson, 1990,
p.656-657). The following questions are designed to help you analyse whether or not you
have what it takes to be an entrepreneur. There are no right or wrong answers. You just need
to be honest with yourself when answering the questions.
The results will give you an indication of whether you share the typical traits of an
entrepreneur and allow you decide whether self-employment is the best route for you.
Imagine yourself in these situations and answer “Yes” if you are agree with the
statement and “No” if you do not agree.
1. Do I really have the desire to be my own boss rather than work for someone else?
2. Am I a self-starter?
3. Do I have management skills (managing finances, employees, and other aspects of the
business)?
4. Do I have experience in the type of business I am interested in owning and operating?
5. Can I accept the responsibility of seeing things through the end?
6. Am I a well-organized person?
7. Do I have the desire to lead and direct others?
8. Can I make decisions quickly if I have to?
9. Do I have good health and the high level of energy necessary to be an entrepreneur?
10. Do I have the financial resources, as well as future credit resources I need to begin?
11. Can I sustain my business through the early, formative years?
12. Can people (customers and employees) trust what I say?
13. Do I have the need to set and achieve difficult goals and move on to other challenges?
14. Do I have the desire to be innovative and creative?
Jarmila Šebestová; Entrepreneurship
- 11 -
15. Do I prefer having a plan of action (business plan) before I begin an activity?
16. Are my partner and / or family supportive of my plan?
17. Am I on time for appointments?
18. Am I willing to work the long hours it takes to be an entrepreneur?
19. Do I have the desire to stick with the business even in troubled times?
20. Am I willing to do all the tasks necessary for the successful operation of the business?
21. Even though it is scary to try something new, am I the kind who tries it?
22. If I want something, do I ask for it rather than wait for someone to notice and just give
it to me?
23. Even though people tell me it cannot be done, do I have to find out for myself?
24. I want to be financially independent.
25. I will speak up for an unpopular cause if I believe in it.
26. Can I take risks with money, that is, invest, and not know the outcome?
27. Have I taken a risk in the last 6 months?
28. Do I like trying new food, new places, and very new experiences?
29. Can I walk up to a total stranger and strike up a conversation?
30. Have I ever intentionally travelled on an unfamiliar route?
Result:
However, if most of your answers are yes, you probably have what it takes to become
an entrepreneur. If you answered no to about half of the questions, you may need assistance to
reinforce the areas where you are weak. If the majority of your answers are no, then
entrepreneurship is likely not for you.
1.3 ENTREPRENEURIAL TRAITS
Entrepreneurial situations like those described in the test above attract individuals who
possess attributes that are adapted to their challenges. People who possess these attributes are
comfortable with, and have the qualities to succeed in, entrepreneurial situations. These
attributes are commonly referred to as “traits,” “personality” or “mindset.” They consist of
values, beliefs, attitudes, and behaviours that are functional within entrepreneurial contexts.
Individually, non-entrepreneurs may possess many of these traits (see examples in the table
2).
Table 2 Examples of Entrepreneurial Traits
Area of Experience,
knowledge
Examples of Traits
Opportunity focused Inquisitiveness, opportunity-recognition, action-orientation (pro-active), need for
achievement
Unstructured, uncertain Tolerance of ambiguity, uncertainty, independence, self-starting, internal locus of
control, individualism, risk propensity, creativity, innovative
Scarce resources Networking, coalition building, teamwork, hero making, belief in personal efficacy,
niche-craft, persistence, determination.
Dynamic, turbulent, fluid Improvisation, empirical, pragmatic experimental, muddle through
Source: Pendergast, 2003, p.41
Remember, that entrepreneurs think differently than non-entrepreneurs. It could be seen
from the work of Stokes and Wilson (2010), who present two sources of motivation to start
own business:
 Pull influences
• desire for independence,
• desire to exploit an opportunity,
1 Introduction to Entrepreneurship
- 12 •
turning a hobby or previous work experience into a business,
• financial incentive.
 Push influences
• redundancy,
• threat of unemployment,
• disagreement with previous employer.
It seems that for start you would need to find the “need for achievement”, for
independence, ability to control the environment, risk taking propensity and self-efficacy, it
means belief in your ability to undertake and accomplish some particular task or activity
(compare the table 2 with the table 3).
Table 3 Activities and characteristics often attributed to entrepreneurs
1. Learning Experience of a sector; memorized information; use of feedback.
2. Choosing a sector Interest; motivation; assessment of potential benefit for the future.
3. Identifying a niche Care; analytical capacities; precision; target.
4. Recognizing and developing an
entrepreneurial opportunity
Originality; differentiation; creativity; intuition; initiative; culture
that value innovation.
5. Visualizing protectively
Ability to dream realistically; conceptual skills; systemic
thinking; anticipation; foresight; ability to set goals and
objectives; visioning.
6. Managing risk
Thriftiness; security; conservatism; moderate risk-taker; ability to
tolerate uncertainty and ambiguity; independence.
7. Designing (products, services, organizations) Imagination; problem-solving skills.
8. Committing to action
Self-confidence related to clearly defined identity; long-term
commitment; hard-worker; energy; result-orientation; decisionmaking;
passion; locus-of-control; determination; perseverance;
tenacity.
9. Using resources Resourcefulness; coordination; control.
10.Building relations systems
Networking skills; flexibility; empathy; listening and
communication skills; use of mentors; vision.
11.Managing – sales; negotiations; people – and
delegating
Versatility; adaptability; capacity to design tasks; ability to trust.
12.Developing Leadership; seeks challenges.
Source: Fillion, 2011 p.47
SOLVED EXERCISE 2 ENTREPRENEURIAL SELF-ASSESSMENT TEST
This survey is for your personal information1
. Please answer each of the following
questions as honestly as possible. Use following scale 5 to 1, when 5 is Strongly Agree, four
is Mostly Agree, three is Somewhat Agree, two is Mostly Disagree and one is Strongly
Disagree. Total the numbers you placed before the statements and enter the total in the space
provided. Compare your results with other test in the Enclosure no.1 – What is your
Entrepreneurial Quotient (EQ).
_____1. I am willing to work 50 hours or more per week regularly.
_____2. My family will support my going into business.
_____3. I am willing to accept both financial and career risks when necessary.
_____4. I do not need all the fringe benefits provided by conventional employment.
_____5. I would like to take full responsibility for the successes and failures of my business.
_____6. I would experience more financial success by operating my own business.
_____7. I feel a great deal of pride when I complete a project successfully.
1
Entrepreneurial Self-Assessment Test [online]. [Accessed: 17 Jan 2013]. Available at:
http://www.wrdf.org/assets/docs/Entrepreneur%20Self-Assessment%20Survey.pdf
Jarmila Šebestová; Entrepreneurship
- 13 _____8.
I have a high energy level that can be maintained over a long time.
_____9. I enjoy controlling my own work assignments & making all decisions affecting my
work.
____10. I believe that I am primarily responsible for my own successes and failures.
____11. I have a strong desire to achieve positive results even when it requires a great deal of
additional effort.
____12. I have a good understanding of how to manage a business.
____13. I can function in ambiguous situations.
____14. One or both of my parents were entrepreneurs.
____15. I believe that my abilities and skills are greater than those of most of my co-workers
are.
____16. People trust me and consider me honest and reliable.
____17. I always try to complete every project I start, regardless of obstacles and difficulties.
____18. I am willing to do something even when other people laugh or belittle me for doing
it.
____19. I can make decisions quickly.
____20. I have a good network of friends, professionals, and business acquaintances.
TOTAL: _____
Score Assessment (points)
80 - 100
You have outstanding ability to be an entrepreneur.
60 - 79
You have satisfactory ability to be an entrepreneur.
40 - 59
Self-employment may not be an appropriate career for you.
0 - 39
You should probably avoid entrepreneurship.
Characteristics of an Entrepreneur
The following list describes some common characteristics of an entrepreneur. The
number(s) after each characteristic indicates the related statement(s) in the assessment form.
This list interprets the form qualitatively. Note that arriving at a conclusive portrait of
a typical entrepreneur is very difficult. Therefore, you may score low on the assessment and
still succeed as an entrepreneur.
Works Hard (Statements 1 & 8)
Self-employment requires a great deal of time and effort. The entrepreneur must
perform a wide variety of time-consuming tasks. 77 % of all entrepreneurs report working 50
hours or more per week, and 54% say that they work more than 60 hours per week. Such
a time commitment requires that you have a high energy level.
Is Energetic (Statements 1 & 8)
Self-employment requires long work hours. You will frequently be unable to control the
number of hours required to fulfil all the necessary tasks. The entrepreneur must have a high
energy level to respond to the job's demands
Has Family Support (Statement 2)
A successful entrepreneur needs family support. If you are married, your spouse must
believe in your business because it will require that both of you sacrifice time and money. The
stress may create disruptions in family relationships. If you have children, they will need
encouragement in understanding your need to spend so much time away from the family. The
more positive support you receive from your family, the more you can concentrate on making
the business a success.
1 Introduction to Entrepreneurship
- 14 Takes
Risks (Statement 3)
Entrepreneurs are risk takers. They risk their careers, time and money in order to make
a success of their businesses. To be successful in self-employment, you should feel
comfortable taking reasonable risks.
Sacrifices Employment Benefits (Statement 4)
One of the major realities of self-employment is that you will not receive a regular
paycheck. You pay for your own fringe benefits. A nice office, secretarial assistance,
equipment and other features of employment you have grown to expect are no longer
available unless you provide them for yourself.
Is Independent (Statements 5 & 9)
Entrepreneurs like to be independent and take in control of situations. Many people who
become self- employed consider the opportunity to be their own boss as one of the major
benefits of self-.employment. Although being independent may not be a major concern for
you, it is certainly an aspect of self-employment that you need to feel comfortable. If you
cannot afford to hire other employees when you begin your business, you may be at first
lonely as a self-employed person.
Wants Financial Success (Statement 6)
A primary reason that most entrepreneurs have for going into business is to achieve financial
success. If you want to be an entrepreneur, you need to establish a reasonable financial goal
that you want to achieve through self-employment. This goal will help you measure how well
you are doing in fulfilling your personal needs through an entrepreneurial career.
Has a Need to Achieve (Statements 7 & 11)
Entrepreneurs have a strong need for achievement. They strive to excel and accomplish
quite high objectives. You should be willing to set high goals for yourself and enjoy striving
to achieve those goals.
Has an Internal “Locus of Control” (Statement 10)
Successful entrepreneurs have an internal locus of control or inner sense of
responsibility for the outcome of adventure. To be an entrepreneur, you should have a strong
sense of being a "victor" who is responsible for your actions. If, however, you often consider
yourself a "victim" and blame other people, bad luck, or difficult circumstances for your
failures, entrepreneurship might not be the right career move for you.
Has Self-confidence (Statements 10, 15, and 18)
An important characteristic of entrepreneurs is self-confidence. This factor is
particularly important when you face major challenges and difficulties with your business.
You need to believe in yourself. Your belief will help you overcome the problems that
inevitably affect all self-employed persons at some point in their careers.
Has Business Experience (Statement 12)
An entrepreneur should have extensive business experience to be successful. General
management experience is beneficial because an entrepreneur should know something about
all types of management. Formal training and education in management also are helpful
Adapts to Change (Statement 13 and 19)
A new business changes rapidly, so an entrepreneur must be able to adapt to change.
Two primary skills are required for adaptation to change the capacity to solve problems, and
the ability to make quick decisions. Another skill is the ability to learn from your mistakes.
Has a Self-employed Parent as a Role Model (Statement 14)
Research has shown that entrepreneurs are more likely to have a parent, who is selfemployed.
A parent's inspiration and knowledge about operating a business can contribute to
an entrepreneur's success.
Jarmila Šebestová; Entrepreneurship
- 15 Has
Integrity (Statement 16)
People often cite honesty and integrity as characteristics of entrepreneurs. Customers do
not want to deal with business owners who are dishonest and unethical. You should feel
positive about your ethical treatment of people and be committed to conducting your business
with the utmost integrity.
Has Determination (Statement 17)
One of the most important characteristics of entrepreneurs is determination. This trait is
closely related to self-confidence. The more you believe in yourself, the more likely you are
to continue to struggle for success when faced with tremendous obstacles. You need
determination in order to overcome the problems that beset every new venture.
Has a Good Network of Professionals (Statement 20)
An entrepreneur has a good network of professionals. This network provides access to
those who can be consulted for advice, information, and referrals. You should have an
extensive network of professionals to whom you can turn for assistance.
1.4 ENTREPRENEURSHIP AS A PROCESS
The best way, how to start a business is to understand it as a process. This process
involves finding, developing and evaluating an opportunity (based on customer´s needs) by
overcoming the strong forces that might bring the creation of something new.
Figure 2 Start-up decision
Source: Hisrich and Peters, 2002
Hisrich and Peters (2002) explain the entrepreneurial process as follows:
 Identifying and evaluating the opportunity
Entrepreneurs use both formal and informal mechanisms for identifying business
opportunity while formal mechanism are generally found within macro established
companies, most entrepreneurs use informal sources for their ideas. This behaviour include
also being sensitive to complains and listening to comments from friends and families offer an
opportunity, or what is frequently called assessment analysis, is undertaken to establish the
feasibility of an opportunity.
 Developing a Business Plan
A good plan must be developed in order to exploit the opportunity defined, because is
not only important in developing the opportunity, but is also essential in determining the
1 Introduction to Entrepreneurship
- 16 resources
required, obtaining those resources, and successfully managing the resulting
venture.
 Requiring Resources
The resources needed for the opportunity must be assessed. This process starts with an
appraisal of the entrepreneur’s present resources. Then, any resources, which are critical, must
be distinguished from those that are just helpful. Care must be taken not to underestimate the
amount and variety of resources needed. The downside risks associated with insufficient
resources should also be assessed.
 Managing The Enterprise
After resources are acquired, the entrepreneur must employ them through
implementation of the business plan. The operational problems of the growing enterprise must
be dealt with. This involves implementing a management style and structure as well as
determining the key variable for success. A control system must be identified so that any
problem areas can be carefully monitored.
According this knowledge, we are able to connect entrepreneurial process with the real
business stage development (see fig. 3).
Figure 3 Entrepreneurial process
Source: Hisrich and Peters, 2002, p.48
If we look a little more closely at the definition of entrepreneurship, we can identify
three characteristics of entrepreneurial activity (Dollinger, 2003)
 Innovation. Entrepreneurship generally means offering a new product, applying
a new technique or technology, opening a new market, or developing a new
form of organization for the purpose of producing or enhancing a product.
 Running a business. A business combines resources to produce goods or
services. Entrepreneurship means setting up a business to make a profit.
 Risk taking. The term risk means that the outcome of the entrepreneurial
venture cannot be known. Entrepreneurs, therefore, are always working under
a certain degree of uncertainty, and they cannot know the outcomes of many of
the decisions that they have to make. Consequently, many of the steps they take
are motivated mainly by their confidence in the innovation and in their
understanding of the business environment in which they are operating.
Jarmila Šebestová; Entrepreneurship
- 17 Stages
mentioned in the picture above include four main bricks, which you have to
understand to start successfully your business life.
1. Invention and Innovation - generating an idea, identifying a market
opportunity, searching for information sources, developing supply for product or
service (chapters 1-4).
2. Triggering event – motivation to start a business, analyzing (chapters 5-7).
3. Implementation – setting up the adventure, setting the business model and
strategy (chapters 8-9).
4. Growth – adolescence of the business unit, maximizing profit, various types of
business (chapters 10-12).
SOLVED EXERCISE 3 UNDERSTANDING YOUR BELIEFS ABOUT
SUCCESSFUL ENTREPRENEURS
Read each of the following ten statements, and to the left of each indicate your
agreement or disagreement. If you fully agree with the statement, put a 10 on the line at the
left. If you totally disagree, put a one. If you tend to agree more than you disagree, give
a response between six and depending on how much you agree. If you tend to disagree, give
a response between two and five. (Kuratko, 2009)
____1. Successful entrepreneurs are often methodical and analytical individuals who carefully
plan what they are going to do and then do it.
____2. The most successful entrepreneurs are born with special characteristics such as high
achievement drive and a winning personality, and these traits serve them well in their
entrepreneurial endeavours.
____3. Many of the characteristics needed for successful entrepreneur ship can be learned
through study and experience.
____4. The most successful entrepreneurs are those who invent a unique product or service.
____5. Highly successful entrepreneurs tend to have very little formal schooling.
____6. Most successful entrepreneurs admit that dropping out of school was the best thing
they ever did.
____7. Because they are unique and individualistic in their approach to business, most
successful entrepreneurs find it hard to socialize with others; they just do not fit in.
____8. Research shows that although it is important to have adequate financing before
beginning an entrepreneurial venture, it is often more important to have man­agerial
competence and proper planning.
____9. Successful entrepreneurship is more a matter of preparation and desire than it is of luck.
____10. Most successful entrepreneurs do well in their first venture, which encourages them
to continue; failures tend to come later on as the enterprise grows.
Put your answers on the following list in this way:
(a) Enter answers to numbers 1, 3, 8, and 9 just as they appeal; and then b) subtract (S)
the answers to 2, 4,5,6,7, and 10 from 11 before entering them here. Thus, if you gave an
answer of S to number 1, put an eight before number 1 here. However, if you gave an answer
of 7 to number 2 here, place a 4 before number 2 here. Then add both columns of answers and
enter your total on the appropriate line.
____ 1 ____ 6*
____ 2* ____ 7*
____ 3 ____ 8
____ 4* ____ 9
____ 5* ____10*
____ Total
1 Introduction to Entrepreneurship
- 18 Interpretation:
This exercise measures how much you believe the myths of entrepreneurship. The
lower your total, the stronger your beliefs; the higher your total, the less strong your beliefs.
Numbers 1, 3, 8, and 9 are accurate statements; numbers 2, 4, 5, 6, 7, and 10 are inaccurate
statements. Here is the scoring key:
80-100 Excellent. You know the facts about entrepreneurs.
61-79 Good, but you still believe in a couple of myths.
41-60 Fair. You need to review the chapter material on the myths of entrepreneurship.
0-40 Poor. You need to reread the chapter material on the myths of entrepreneurship
and study these findings.
EXAMPLE 2 BE OR NOT TO BE? ...ENTREPRENEUR
First, identify five advantages of small business ownership. Next, rank these advantages
according to their importance to you. Why did you rank them as you did? What factors
discourage individuals from small business ownership? Indicate which of these factors might
discourage you from starting a business. Explain why.
EXAMPLE 3 PAUL'S FOUR SHORT COMINGS
Paul Enden has always been very reliable and a hard worker. For the past eight years,
Paul has been working in a large auto service garage. During this time, he has made a number
of recommendations to the owner regarding new services that could be provided to
cus­tomers. One of these is called the "'fast lube." With the service, people who want to have
their oil changed and their car lubricated do not have to leave the auto and come back later in
the day. Three service racks handle this job. It generally takes less than 10 minutes to take
care of a car, and most people can have the job completed within 25 minutes of the time they
arrive. The service, which has become extremely popular with customers, resulted in an
increase in overall profits of 5 percent last year.
Paul's wife believes he has a large number of ideas that could prove profitable. "You
ought to break away and open your own shop," she has told him, Paul would like to do so, but
he believes four things help account for entrepreneurial success and he has none of them.
Here is how he explained it to his wife:
"To be a successful entrepreneur, you have to be a thinker, not a doer. I am a doer.
Thinking bores me. I would not like being an entrepreneur. Second, those people who do best
as entrepreneurs tend to the inventors. I am not an inventor. If anything, I think of new
approaches to old ways of doing business. I am more of a tinkerer than an inventor. Third,
you have to be lucky to be a successful entrepreneur. I am hard working; I am not lucky.
Fourth, you have to have a lot of money to do well as an entrepreneur. I do not have much
money. 1 doubt whether €50,000 would get me started as an entrepreneur." (based on
Kuratko, 2009).
Questions
1. Does Paul need to be an inventor to be an effective entrepreneur? Explain your
answer.
2. How important is it that Paul has a lot of money if he hopes to be an entrepreneur?
Explain your answer.
3. What is wrong with Paul's overall thinking? Be sure to include a discussion of the
myths of entrepreneur’s hip in your answer.
Jarmila Šebestová; Entrepreneurship
- 19 -
2 POSITION OF SMALL BUSINESSES IN THE ECONOMY
“Micro, small and medium-sized enterprises (SMEs) are the engine of the European
economy. They are an essential source of jobs, create entrepreneurial spirit and innovation in
the EU and are thus crucial for fostering competitiveness and employment” (EU Commission,
2005).
In the enlarged European Union of 28 countries, some 23 million SMEs provide around
75 million jobs and represent around 99% of all enterprises in each country. They answer to
many crucial questions:
 Development of personal relationships - small businesses are well placed to
build personal relationships with customers, employees, and suppliers.
 Almost all small businesses respond flexibly to problems and challenges - in
a small business there is little hierarchy or chain of command, opposite to large
businesses which may have set ways of operating and establish procedures that
are hard to change.
 Inventiveness and innovation - small businesses are well positioned to
introduce and develop new ideas.
 Low overheads - due to the small scale of operation, small businesses have
lower overhead costs.
 Catering for limited or niche markets.
In addition, they complement the economic activity of large organizations by providing
them with components, services, and distribution of their products.
DEFINITION 2 SME SIZE IN THE EU COUNTRIES2
The category of micro, small and medium-sized enterprises (SMEs) is made up of
enterprises which employ fewer than 250 persons and which have an annual turnover not
exceeding 50 million euro, and/or an annual balance sheet total not exceeding 43 million euro.
The use of the definition is voluntary for Member States, but is widely recommended in
areas such as regional development and research funding within EU funded projects or to be
able to compare national data. Finally, under that guideline they defined criteria for capitalrelated
ties between enterprises to solve the problems with measurement of real balance sheet.
The unification of conditions solved the problems with:
 common definitions,
 size definitions,
 capital limits.
DEFINITION 3 AN ENTERPRISE
An enterprise is any entity engaged in an economic activity, irrespective of its legal
form (EU Commission, 2005, p.12).
2
Extract of Article 2 of the Annex of Recommendation 2003/361/EC
2 Position of Small Businesses in the Economy
- 20 It
means that the scope of the new SME definition is now clearly marked out. Thus, the
self-employed, family firms, partnerships and associations regularly engaged in an economic
activity may be considered as enterprises. When you start to collect the data, you must know
following numbers:
 staff headcount,
 annual turnover,
 annual balance sheet.
Figure 4 Criteria for being SME
Source: EU Commission, 2005, p. 14
To work out with the individual data, they will have to establish whether the enterprise
is autonomous – by far the most common category – a partner or linked.
DEFINITION 4 TYPES OF OWNERSHIP 3
Autonomous Enterprises do not have a partner or link to another enterprise or they
have a share to another enterprise less than 25%. You may still be ranked as autonomous, and
thus as not having any partner enterprises, even if this 25% threshold is reached or exceeded
by any of the following investors as:
1. Public investment corporations (Universities and non-profit research centres).
2. Institutional investors (including regional development funds).
3. Autonomous local authorities with an annual budget of less than 10 million euro
and fewer than 5,000 inhabitants.
Partner Enterprises represent the situation of enterprises, which establish major
financial partnerships with other enterprises, without one exercising effective direct or
indirect control over the other. They have a holding equal to or greater than 25%, of the
capital or voting rights in another enterprise and/or another enterprise has a holding equal to
or greater than 25% in other.
3
EU Commision, 2005 ,p. 16-22
Jarmila Šebestová; Entrepreneurship
- 21 Figure
5 Autonomous and Partners Enterprises
Source: EU Commission, 2005, p. 17, 19-20
DEFINITION 5 LINKED ENTERPRISES
Linked enterprises represent a form, when group through the direct or indirect control
of the majority of voting rights of an enterprise by another or through the ability to exercise
a dominant influence on an enterprise. Such cases are, thus, less frequent than the two
preceding types. A typical example of a linked enterprise is the wholly owned subsidiary.
(Compare fig. 5 and 6)
Figure 6 Linked Enterprises
Source: EU Commission, 2005, p. 24
2 Position of Small Businesses in the Economy
- 22 -
2.1 OTHER DEFINITIONS
Opposite of that, USA Small business Administration (SBA) uses 500 employees as the
limit for the business size. The SBA definition of a small business has evolved over time and
is dependent on the particular industry. In the 1950s, the SBA defined small business firm as
“independently owned and operated…and not dominant in its field of operation.” (Blackford,
2003, p. 4). This is still part of their definition. At that time, the SBA classified a small firm as
being limited to 250 employees for industrial organizations. Currently, this definition depends
on the North American Industry Classification System (NAICS) for a business. The SBA
recognizes that there are significant differences, across industries, with respect to
competitiveness, entry and exit costs, distribution by size, growth rates, and technological
change. Although the SBA defines 500 employees as the limit for the majority of industrial
firms and receipts of $7 million for the majority of service, retail, and construction firms,
there are different values for some industries (Cadden, Lueder, 2008, p.31).
Table 4 Quantitative differences in SME definition by number of Employees
Australia U.S EU
Micro 1-2 1-6 <10
Small <15 <250 <50
Medium <200 <500 <250
Large <500 <1000 <1000
Enterprise >500 >1000 >1000
Source: own
2.1.1 CONTRIBUTION TO THE ECONOMY
The majority of people first entered the business world by working for small businesses.
These enterprises are constantly creating jobs and providing opportunities for a vast number
of workers. Given the financial resources available to large businesses, you would expect
them to introduce virtually all the new products that hit the market. Over the years, the list of
important innovations by small firms has included the airplane and air-conditioning, the
defibrillator and DNA fingerprinting, oral contraceptives and overnight national delivery, the
safety razor, strobe lights, and the zipper.
Small business owners are also particularly adept at finding new ways of doing old
things. In 1994, for example, a young computer-science graduate working on Wall Street
came up with the novel idea of selling books over the Internet. During the first year of
operations, sales at Jeff Bezos’s new company—Amazon.com—reached half a million
dollars. In less than ten years, annual sales had topped $3 billion. Not only did his innovative
approach to online retailing make Bezos enormously rich, but it also established a viable
model for the e-commerce industry.
Why are small businesses so innovative? For one thing, they tend to offer environments
that appeal to individuals with the talent to invent new products or improve the way things are
done. Fast decision-making is encouraged, their research programs tend to be focused, and
their compensation structures typically reward top performers. According to one SBA study,
the supportive environments of small firms are roughly thirteen times more innovative per
employee than the less innovation-friendly environments in which large firms traditionally
operate.
Jarmila Šebestová; Entrepreneurship
- 23 The
success of small businesses in fostering creativity has been unnoticed by big
businesses. In fact, many large companies have responded by downsizing to act more like
small companies. Some large organizations now have separate work units whose purpose is to
spark innovation. Individuals working in these units can focus their attention on creating new
products that can then be developed by the company.
Small business is the portal through which many people enter the economic mainstream.
Business ownership allows individuals, including women and minorities, to achieve financial
success, as well as pride in their accomplishments. While the majority of small businesses are
still owned by white males, the past two decades have seen a substantial increase in the
number of businesses owned by women and minorities.
Small firms complement large firms in a number of ways. They supply many of the
components needed by big companies. Small firms also provide large ones with such services
as accounting, legal, and insurance. Many small firms provide outsourcing services to large
firms—that is, they hire themselves out to help with special projects or handle certain
business functions. A large firm, for example, might hire a small one to handle its billing or
collection services or to manage its health care benefits. A large company might contract with
a small information technology firm to manage its Web site or oversee software upgrades.
Small companies provide another valuable service to large companies by acting as sales
agents for their products. For example, automobile dealerships, which are generally small
businesses, sell vehicles for the big carmakers. Local sporting goods stores sell athletic shoes
made by industry giants, such as Adidas and Nike (Collins, 2008).
2.2 SME AND ENTREPRENEURSHIP POLICY
Entrepreneurship policy is primarily concerned with creating an environment and
support system that will foster the emergence of new entrepreneurs and the start-up and earlystage
growth of new firms. Lundstrom and Stevenson (2005) make an important distinction
between SME policy and Entrepreneurship policy. SME policy instruments are focused upon
existing businesses, so they include loans and grants or business advice. In this sense, SME
policy is conventional, industrial or sector-based policy targeted towards smaller firms.
Figure 7 Policy options
Source: Burns 2007, p.60
Entrepreneurship policy, however, is focused on influencing the creation of new firms,
so it focuses not on businesses but on individuals or groups of individuals. Examples of
Entrepreneurship policy include ‘enterprise awareness’ programmes in schools, colleges and
universities. It also includes the provision of information and advice to those considering
2 Position of Small Businesses in the Economy
- 24 starting
a business, often with a focus upon ‘under-represented’ groups such as young people,
females or those from ethnic minorities.
While the distinction between SME and Entrepreneurship policy is an important one,
the rationale for the existence of either policy must be based on evidence of market failure.
For example, those seeking to persuade governments to use taxpayer’s money to fund
‘enterprise-awareness’ campaigns need to show that, for some reason, the market provides
a sub-optimal number of enterprises, and that intervention will lead to a cost-effective move
towards optimality. The distinction between policies is clearly shown in table below. It takes
examples or elements of both SME and Entrepreneurship policy (Storey, 2008).
Table 5 Relationship between SME and Entrepreneurship policy
SME POLICY ENTREPRENEURSHIP POLICY
Reducing red-tape and paperwork
burden
Reducing red-tape and paperwork
burden
Access to capital/financing Access to micro loans and seed funds
Provision of information services Entrepreneurship education
Export and marketing services Facilitating networking services
Provision of training and consultancy Provision of information about start-
up
Technology transfer Highlighting entrepreneurs as role
models
Storey, 2008, p.251
From Table above it is clear that a number of elements are common to both SME and
Entrepreneurship policy, for example, both SME policy and entrepreneurship policy are
concerned to minimize bureaucratic and paper work burdens, although the precise nature of
these burdens does vary sharply between start-ups and established businesses. In addition,
bureaucratic burdens of establishing a limited company vary considerably from one country to
another. According that, we could define four main positions of SMEs in the economy.
Figure 8 Typology of policy and SME position
Storey, 2008, p.252
Unsurprisingly, different countries make different choices about this balance of policies
on lowering burdens and supporting SMEs. Most EU countries choose to have, comparatively
high impediments (support) to start a business, and they have considerable sums of public
money devoted to encouraging smaller enterprises, as compensating for the impediments. For
this reason, this box is labelled ‘compensating’. These countries also seem to place relatively
more emphasis on SME rather than Entrepreneurship policy.
The approach in the USA is very different. There is a low direct assistance, but also are
the barriers to starting a business. Competition is therefore seen as the focus of US policy and
this box is labelled ‘competing’. The US however, does have some exceptions to this, its
Jarmila Šebestová; Entrepreneurship
- 25 programmes
to promote the interests of technology-based firms, and in the promotion of
minorities. The barriers are low but there is a high level of direct assistance provided. This is
shown in the box labelled ‘nurturing’. Finally, there are many countries where the barriers to
starting a business are high, but where public assistance is low. This box is labelled as
‘limiting’ but contains often large numbers of less developed countries in Africa, South
America and some former communist countries.
2.2.1 ENTREPRENEURSHIP POLICY PRIORITIES
Each area of Entrepreneurship policy has to develop following areas:
 motivation to start the business,
 opportunity evaluation tools,
 business skills development.
According to Lundstrom et al. (2008), an ideal entrepreneurship policy support has to
include:
 Promotion
It means governmental incentives to promote entrepreneurship, the policy directives to
increase awareness of entrepreneurship, to promote award programmes for entrepreneurs,
whether the government cooperates with the mass media to promote entrepreneurship and
whether efforts are being made to track the attitudes of the population towards
entrepreneurship.
 Education
This section is concerned on entrepreneurship education system. There is the question,
for example, if the entrepreneurship is included in the National Educational Curriculum
Guidelines, as a plan to promote the teaching of entrepreneurship within funding support for
extracurricular entrepreneurial activities. It is also investigated to promote entrepreneurship
classes to be widely offered to university students. This is also an area of increasing interest
even if not much so far has been done in a number of countries. It is most common for
countries to have allocated a budget for the development of programmes in schools and to
support different initiatives especially specific programmes like Young Enterprise.
 Administrative Burden
This section of the policy has to serve to investigate the governments to ease the process
of starting a business. Is there a stated policy objective to ease this process? Has business
registration been streamlined for new firms? Does the government have a special unit for
simplifying the rules? Every country has, for example, a stated objective for the area and
makes efforts to examine barriers to entry and exit. In almost every country, there is also
a single entry point and the government has acted to reduce SME administrative burdens.
Least common are tax incentives to increase informal or formal venture capital for start-ups
and early-stage ventures.
 Financing
This section includes questions on the extent of access to start-up and early-stage
financing in the country. Has the government undertaken a review of financing gaps for new
entrepreneurs?; Does the government deliver its own loan or equity programmes for new and
early-stage firms and are there micro-loan programmes for underrepresented groups? Almost
every country also has an objective to increase financing activities in the area, to support
2 Position of Small Businesses in the Economy
- 26 angel
networks or to create databases between entrepreneurs and informal investors. It is less
common to bridge information gaps between private investors and early-stage entrepreneurs.
 Counselling and Information
In this sub-area, items raised include how the delivery system is built up, whether there
is a first- or one-stop-shop system, the use of web portals and whether there is a mentor
programme. All of the countries have networks of business enterprise centres. There is also an
incubator strategy in place in all countries. In general, there are high values for almost every
item. The exception is the item on whether there is a performance standard in place for service
providers.
From those areas, we would identify main possible factors, which have an influence for
start-up, such as political stability, security, access to finance, free flow for information and
good regulation on the business market. The summary of our knowledge is presented in the
figure below.
Figure 9 Model of Outcomes Entrepreneurship and innovation policy support system
Source: Lundström, Almerud, Stevenson, 2008, p.56
WHY SMALL ARE DIFFERENT?
Burns (2007) explained that all the “magic” of being small come from:
 personality of owner-manager,
 approach to risk & uncertainty,
 importance of cash,
 over dependence on single market,
 over dependence on small number of customers,
 effect of scale on economic decision-making.
Jarmila Šebestová; Entrepreneurship
- 27 WHAT
THE WORK FOR SMES CAN OFFER?
 Promotion prospects and job satisfaction are often higher with small companies.
 A higher profile within the business due to more specialization.
 Variety, early responsibility, the opportunity to work on your own initiative, to
work closely with other people (including senior management) and to have your
work noticed.
 Flexibility to get involved in a number of different tasks and functions
 A working environment that may be more informal and less bureaucratic than in
larger organisations
 Feeling that you are making a real contribution to the business.
 They do not offer, “graduate training schemes” – you are expected to learn on
the job and take responsibility for your own training.
 The pay and benefits will be less than in larger companies.
3 Developing a Well-conceived Business Plan
- 28 -
3 DEVELOPING A WELL-CONCEIVED BUSINESS PLAN
Developing a Well-conceived Business Plan According to the Small Business
Administration (SBA), a government agency that provides assistance to small businesses, the
most common reasons for starting a business are the following:4
 To be your own boss
 To accommodate a desired lifestyle
 To achieve financial independence
 To enjoy creative freedom
 To use your skills and knowledge
The SBA points out, though, that these are likely to be advantages only “for the right
person.” In addition, how do you know if you are one of the “right people”? The SBA
suggests that you assess your strengths and weaknesses by asking yourself a few relevant
questions:5
 Am I a self-starter? You will need to develop and follow through on your ideas.
You will need to be able to organize your time.
 How well do I get along with different personalities? You will need to develop
working relationships with a variety of people, including unreliable vendors and
sometimes-cranky customers.
 How good am I at making decisions? You will be making decisions constantly
and often under pressure.
 Do I have the physical and emotional stamina? Can you handle six or seven
workdays of as long as twelve hours every week?
 How well do I plan and organize? If you cannot stay organized, you will be
swamped by the details. In fact, poor planning is the culprit in most business
failures.
 Is my drive strong enough? You will need to be highly motivated to withstand
bad periods in your business, and simply being responsible for your business’s
success can cause you to burn out.
 How will my business affect my family? Family members need to know what to
expect before you begin a business venture, such as financial difficulties and
a more modest standard of living.
One business analyst cites four reservations (or fears) that prevent people from starting
businesses:6
 Money. Granted, without the cash, you cannot get very far. What to do: Conduct
some research to find out where funding is available.
 Security. Many people do not want to sacrifice the steady income that comes
with the nine-to-five job. What to do: Do not give up your day job. At least at
first, think about hiring someone to run your business while you are gainfully
employed elsewhere.
4
U.S. Small Business Administration, 2013. Follow These 10 Steps to Starting a Business | SBA.gov. [online]
[Accessed: 17 Oct 2013]. Available at: http://www.sba.gov/content/follow-these-steps-starting-business
5
U.S. Small Business Administration, Is Entrepreneurship For You? | SBA.gov. [online]. [Accessed: 17 Oct
2013]. Available at: http://www.sba.gov/content/entrepreneurship-you
6
Waters, S. 2013. Four Reasons People Don't Start a Business. [online] . [Accessed: 23 Oct 2013]Available at:
http://retail.about.com/od/startingaretailbusiness/tp/overcome_fears.htm
Jarmila Šebestová; Entrepreneurship
- 29 
Competition. Many people do not know how to distinguish their business ideas
from similar ideas. What to do: Figure out how to do something cheaper, faster,
or better.
 Lack of ideas. Some people simply do not know what sort of business they want
to get into. What to do: Find out what trends are successful. Turn a hobby into
a business. Think about a franchise.
If you are still interested in going into business for yourself, feel free to regard these
potential drawbacks as mere obstacles to be overcome by a combination of planning and
creative thinking.
When you definitely decide to start up, because you have an idea, you need to develop
your business plan first to be able to evaluate your potential in real situation. The process is
shown in the figure below.
Figure 10 Start-up process
Source: Burns, 2007, p.97
There are two main reasons for developing a comprehensive business plan:
1. A plan will be extraordinarily useful in ensuring the successful operation of
your business; and
2. If one is seeking to secure external funds from banks, venture capitalists, or
other investors, it is essential that you be able to demonstrate to them that they
will be recovering their money and making a profit.
Many small business owners operate under a mistaken belief, that the only time when
they need to create a business plan is at the birth of the company or in attempting to raise
additional capital from external sources. They fail to realize that a business plan can be an
important element in ensuring day-to-day success.
Every business plan should be written with a particular audience in mind. The business
plan should be written with a management team and for the employees who have to
implement the plan.
However, one of the prime reasons for writing a business plan is to secure investment
funds for the firm. Of course, funding the business could be done by an individual using own
personal wealth, personal loans, or extending credit cards. Individuals also can seek
investments from family and friends. The focus here will be on three other possible sources of
capital like banks, venture capitalists, and angel investors. It is important to understand what
they look for in a business plan. Remember that these three groups are investors, so they will
be anticipating, at the very least, the ability to recover their initial investment if not earn
a significant return (Cadden and Lueder, 2008, p.243).
Each business plan is particular-to-particular business and it is connected with special
needs in chosen industry. You have to ensure you, that you are clear and specific and each key
areas of your proposal. The main goals of the business plan are to market your company and
3 Developing a Well-conceived Business Plan
- 30 show
the excitement of the company. Finally, you present a clear and compelling strategy and
vision for your future investors.
Any business plan is a future-oriented document. Business plans are required to look
between three and five years into the future. To produce them and accurately forecast sales,
you will need estimates of expenses and other items, such as the required number of
employees, interest rates and general economic conditions (techniques and methods see
chapter 4).
Before you start writing your business plan, ask yourself or go through that advice:
 What is my product? What are you proposing to do?
 Who are my target customers? Who will buy my product? Classify customers by
demographic group, geography, income, etc.
 What problem is my product solving?
 May need to do background research first, before speaking with customers
 Talk to customers, experts, competitors
 Attend trade show conferences
 Research trade organizations and publications
 Google and public libraries
 Focus on published research, which may address you.
Table 6 Priorities in Business plan
What Interests a Banker What Interests an Equity Investor
A ‘safe’ (low risk) loan that can pay interest and repay
capital
Trustworthy and credible owner-manager and team
Trustworthy owner-manager An owner-manager and a team that understands the
business
An owner-manager that understands the business High growth, high return
CAMPARI style:
Character: show confidence business, style
Means: explain clear how you will use and repay the loan
Purpose: professionally presented, logical and display
knowledge of your industry and target markets.
Amount: clear financial part, with ratios
Repayment: repayment terms, milestones, security of loans
Insurance: protection of risk
A sustainable business model
Source: based on Burns, 2007
CASE STUDY 1 THE SHAKESPEAREAN GUIDE TO ENTREPRENEURSHIP
Everyone knows Shakespeare is the greatest writer in the English language. Did you
know he was also a highly successful entrepreneur?7
Everyone knows Shakespeare is the
greatest writer in the English language.
In the course of his career in the great city, Shakespeare became a shareholder in an
acting troupe called the Lord Chamberlain’s Men, who beat off fierce competition to become
the most famous and successful theatre company in the land. They played to packed houses of
paying customers and received regular summons to perform before Queen Elizabeth and King
James. Shakespeare rose from the ranks of commoners to the status of a person; taking great
pride in the coat of arms, he was awarded. In addition, he earned enough money to buy the
biggest house in his hometown and retire there in comfort.
This story does not quite fit the Romantic image of the starving artist or the poet
wandering lonely as a cloud – but Shakespeare lived 200 years before Romanticism, so
7
McGuinness, M, 2009. The Shakespearean Guide to Entrepreneurship. Lateral Action. [online] . [Accessed: 23
Oct 2013]. Available at: http://lateralaction.com/articles/shakespeare-entrepreneurship.
Jarmila Šebestová; Entrepreneurship
- 31 perhaps
we can forgive him. In fact, if you ask me, entrepreneurship was not only compatible
with Shakespeare’s art; it made him a better writer. Here is why.
The Problem with Working for Hire
Even as the sun with purple-colour’s face
Had taken his last leave of the weeping morn,
Rose-cheeked Adonis heeds him to the chase;
Hunting he loved, but love he laughed to scorn;
Sick-toughed Venus makes amain unto him,
And like a bold-faced suitor ‘gins to woo him.
Do not worry if they do not ring a bell for you – you are in the majority. Many people
have never heard of Shakespeare’s poem Venus and Adonis, let alone cracked the covers and
read these opening lines. I have read the whole thing – but only because I had to for my
English degree. Moreover, if I am perfectly honest, it was a bit of a chore. However, in
Shakespeare’s day the poem was a bestseller. For a long time, he was much more famous as
the poet of Venus and Adonis than as a dramatist. These days however, critics tend to agree
that if he had stuck to ‘pure’ poetry like this, Shakespeare would have been one of the alsorans
of English literature. Why was Shakespeare writing for such a narrow audience? Because
of his business model at the time. Shakespeare was working within an established tradition
of patronage, whereby a rich and noble patron would reward an artist for producing work in
his or her honour. Looking at the poems now, we can see that Shakespeare did a good job for
his client, but no one would argue that it was his best writing. This kind of work was not his
first choice. He already had several successful plays under his belt, but had turned to poetry,
when London’s theatres were closed because of the plague. The results suggest his heart was
not really in it.
Enter the Entrepreneur
‘To be, or not to be: that is the question.’
‘If music be the food of love, play on’
‘All the world’s a stage’
‘Is this a dagger which I see before me?’
‘The course of true love never did run smooth.’
‘Once more unto the breach dear friends!’
What accounts for the difference? How did Shakespeare go from writing conventional
verse to writing so many lines that are instantly recognisable and vivid after 400 years? There
are plenty of literary explanations, but I would like you to consider the difference made by his
change of business model. I put it to you that Shakespeare is writing blossomed when he gave
up being an artist in search of a patron and became an entrepreneur in earnest.
The English poet Ted Hughes8
, who knew the Bard’s work inside out, gives
a memorable description of Shakespeare’s attitude to business: “Throughout his life,
notoriously, the money-lending, corn-chandelling, property-speculating, wheeling and
dealing dramatist displayed a flexible opportunism, nimbly tuned to market forces”. I will
suggest what 21st-century creative entrepreneurs can learn from Shakespeare’s example.
1. Innovate with Your Business Model
While he relied on a patron, Shakespeare’s income was limited by the patron’s
generosity. Even an Earl’s pockets were not bottomless (Wriothesley was actually in financial
trouble at the time). In addition, while he relied on a single client, Shakespeare was vulnerable
– to the patron’s whims, illness or death, or fall from political favour. Elizabethan theatre, on
the other hand, was highly lucrative mass entertainment. It is estimated that the Globe Theatre
8
Ted Hughes, Shakespeare and the Goddess of Complete Being, 1992
3 Developing a Well-conceived Business Plan
- 32 held
almost 3,000 spectators. The ‘groundlings’ only paid a penny each to stand and watch the
plays in the theatre yard, exposed to the elements – but the pennies soon added up when the
crowds were packed inside. There were plenty of gentlefolk prepared to pay considerably
more for seats in the galleries.
Takeaway: Do not rely on a single source of income. Grow your revenue exponentially
by making your work available to a wider audience.
2. Good Partners Bring Out the Best in Each Other
Shakespeare was a competent actor, but he was not the star of the show. In performance,
he usually played minor parts, leaving the limelight to Elizabethan celebrity actors such as
Richard Burbage, William Kempe and Robert Armin. Where Shakespeare excelled, of course,
was in writing. Elizabethan audiences had an insatiable thirst for new plays containing
fantastic adventures in high fantastical language – which Shakespeare delivered in spades.
The partnership structure of the company meant that each shareholder could concentrate on
delivering exceptional value through his specialist expertise; when the individual
contributions were multiplied through collaboration, the creative and commercial results were
spectacular.
Takeaway: Do not try to do it all yourself. Find partners whose talents complement
yours, and allow you to do what you do best.
3. Work for Equity, Not for Hire
Shakespeare’s company, the Chamberlain’s Men, was the first in the history of the
English theatre where the actors were shareholders. Shakespeare invested £70 for his share of
the company – a significant amount, considering freelance playwrights were earning about £6
a play at the time. Nevertheless, it paid off handsomely over the course of his career. Because
he received a share of the profits on every performance by the company, he earned far more
than he would ever have managed as a freelancer.
Takeaway: If a job is worth doing, it is worth owning the results. You will get more
profit and pleasure from building a business you own than you ever will from working for
someone else.
4. Own Your Domain
The Lord Chamberlain’s men owned the Globe Theatre in which they performed for
most of their career. Unfortunately, they did not own the land in Shoreditch where it
originally stood – they leased it from the owner, Giles Allen. When the lease expired, the
landlord claimed ownership of the building, forcing the actors to desperate measures: on 28th
December 1598, while the landlord was still celebrating Christmas, they armed themselves,
and ‘liberated’ the theatre building, dismantling it and hiding it in a warehouse. They later
shipped it across the Thames to a new site in Southwark. Moreover, because the new site was
outside the official limits of the city, it meant they were beyond the jurisdiction of the city
leaders, who were often keen to close down the theatres.
Takeaway: Establish your business on your own domain – do not become someone
else’s user generated content. Otherwise, your enterprise will be ‘Like a fair house built on
another man’s ground’ (The Merry Wives of Windsor).
5. Play Live
Comparing Shakespeare’s courtly poetry with his plays is like comparing a studio
album with a live gig. While some artists thrive in the studio, Shakespeare came alive in front
of an audience. In addition, he faced the most demanding audience in the history of the
Jarmila Šebestová; Entrepreneurship
- 33 theatre.
At the actors’ feet was the rough-and-tumble of the crowd, like a football terrace.
These people were after entertainment – the more riotous and rude, the better – and they were
quick to heckle if they did not get what they wanted. As well as keeping them happy,
Shakespeare also had to ‘play to the gallery’, providing the educated elite in the posh seats
with sophisticated literary fare. Shakespeare responded with a unique mix of high art and low
entertainment, intermingling masters and servants, lords and peasants on the stage. He did the
same with his language, at one moment flinging a crude joke to the groundlings, then in the
next breath offering a philosophical reflection or a burst of pure poetry to the gallery. Words
like ‘puking’, ‘clot pole’ and ‘bastard’ rubbed shoulders with fancy new inventions such as
‘captious’, ‘intangible’, ‘multitudinous’ and ‘incarnadine’.
Takeaway: Get your work in front of an audience. If you are a writer, do not lock your
words in the study – write a blog, where the comments push up against your words, like the
crowd at the edge of a stage. The same goes for music, photography, design etc. The web
tools now available give you an unprecedented opportunity to get feedback on your work
from real people – and potential customers.
6. Keep the Content Coming
Elizabethan playgoers craved novelty and excitement – to keep them coming back and
to stay ahead of the competition, acting companies had to produce a constant stream of new
plays. A large part of Shakespeare’s success was down to stamina – 38 plays by him have
survived, and it is likely that several more have been lost. Most contemporary playwrights
resorted to co-authorship to keep up with demand. This could reduce the time taken to write
a new play from months to weeks – but it also reduced the fee each writer received,
contributing to the financial hardship suffered by many playwrights of the time. Unlike
Shakespeare, who was a shareholder and could therefore afford to devote most of his time to
sole authorship of plays that would bring him a handsome reward in his own theatre.
Takeaway: Creativity + productivity = success. Make sure your business is set up to
sustain your productivity.
7. An Experience Can’t Be Pirated
There was no copyright protection for authors in Shakespeare’s day. Every time he
premiered a new play, there would be bootleggers in the audience – representatives of other
theatre companies, memorising and writing down the script, to sell the text or use it in rival
productions. Legally, there was very little Shakespeare could do about this. Nevertheless, it
does not seem to have done him much harm, financially or artistically. Like most bootlegs,
the copies were poor quality, and rival productions were second to market and second best.
The bootlegs may even have benefited Shakespeare by introducing his work to new people.
None of the bootleggers built a reputation like the Chamberlain’s Men for quality, consistency
and sheer spectacle. The Globe remained the place to go for the real thing.
Takeaway: Your work is vulnerable if you reduce it to a simple format such as a text
file or MP3. However, it is impossible to pirate a live event or an interactive experience such
as a blog, forum or membership site.
Finally, each business needs not only good idea, but also a good plan!
3.1 COMPONENTS OF A BUSINESS PLAN
The most common use of a business plan is persuading investors, lenders, or both, to
provide financing. These two groups look for different things. Investors are particularly
interested in the quality of your business concept and the ability of management to make your
3 Developing a Well-conceived Business Plan
- 34 venture
successful. Bankers and other lenders are primarily concerned with your company’s
ability to generate cash to repay loans. To persuade investors and lenders to support your
business, you need a professional, well-written business plan that paints a clear picture of
your proposed business.
In preparing to build a business plan, there are some problem areas or mistakes that you
should be on guard to avoid. In preparing to build a business plan, there are some problem
areas or mistakes that you should be on guard to avoid. Some may be technical in nature,
while others relate to content issues. For the technical side, first, one should make sure that
there are no misspellings or punctuation errors. The business plan should follow a logical
structure. No ideal business plan clearly specifies the exact sections that need to be included
nor is there an ideal length. Literature concerning business plans indicates that the appropriate
length of the body of a business plan line should be between twenty and forty pages. This
does not include appendixes that might provide critical data for the reader.
There is no idealized structure for a business plan. The following subsections discuss
the outline of a plan for a business start-up and identify some of the major sections that should
be part of the plan.
COVER PAGE
The cover page provides the reader with information about the author either of the plan
or the person to contact concerning the business plan. It should contain all the pertinent
information to enable the reader to contact the author, such as the name of the business, the
business logo, and the contact person’s address, telephone number, and e-mail address. The
table of contents enables the reader to find the major sections and components of the plan. It
should identify the key sections and subsections and on which pages those sections begin.
This enables the reader to turn to sections that might be of particular importance.
EXECUTIVE SUMMARY
The executive summary is a section of critical importance and is perhaps the single most
important section of the entire business plan. Quite often, it is the first section that a reader
will turn to, and sometimes it may be the only section of the business plan that investor will
read. The executive summary should provide an accurate overview of the entire document,
which cannot be done until the whole document is prepared.
If the executive summary fails to adequate description the idea behind the business or if
it fails to do so in a captivating way, some readers may discard the entire business plan. As
one author put it, the purpose of the executive summary is to convince the reader to “read on.”
(Brown, 1996) The executive summary should contain the following pieces of information:
 What is the company’s business?
 Who are its intended customers?
 What will be its legal structure?
 What has been its history (where one exists)?
 What type of funding will be requested?
 What is the amount of that funding?
 What are the capabilities of the key executives?
All parts must be done in an interesting way. The great challenge is that executive
summaries should be relatively short, between one and three pages.
Jarmila Šebestová; Entrepreneurship
- 35 Main
components of an Executive Summary are:
 Business Concept:
o The business problem and the solution
o Analysis of Market size, Customer, and Industry
o Marketing and Sales Strategy
o Organization (type) and Key Leaders
o Company’s unusual qualifications
 Financial Plan:
o Four years of summary results (projection)
o Sources of Financing and Key investments Required
Even though the executive summary is the first thing read, it is written after the
other sections of the plan are completed. Therefore, chronologically, it should probably be
the last section written (Timmons et al., 2004). An effective approach in writing the executive
summary is to paraphrase key sentences from each section of the business plan. This process
will ensure that the key information of each section is included in the executive summary.
3.1.1 THE BUSINESS SECTION OF THE PLAN
GOALS
These are broad statements about what you would like to achieve some point in the near
future. Goals are useful, but they can mean anything to anyone. It is therefore necessary to
translate the goals into objectives to bring about real meaning so that they can guide the
organization. Ideally, objectives should be SMART—specific, measurable, achievable,
realistic, and have a specific timeline for completion (see table 7).
Table 7 SMART guideline
Letter Major Term Minor Terms
S Specific Significant, Stretching, Simple
M Measurable Meaningful, Motivational, Manageable
A Attainable
Appropriate, Achievable, Agreed, Assignable, Actionable, Action-oriented,
Ambitious, Aligned, Aspirational
R Relevant Realistic,Results/Results-focused/Results-oriented,Resourced,Rewarding
T Time-bound
Time-oriented, Time framed, Timed, Time-based, Time boxed, Timely, Time-Specific,
Timetabled, Time limited, Tractable, Tangible
Source: Burns, 2007
For example:
A goal is a significant rise in sales and profits. When translating that goal into an
objective, you might word the objectives as follows: a 15 percent increase in sales for the next
three years followed by a 10 percent increase in sales for the following two years and a 12.5
percent increase in profits in each of the next five years. These objectives are quite specific
and measurable.
In developing the plan, owners are often very happy to develop goals because they are
open to interpretation, but they will avoid objectives. Goals are sufficiently ambiguous,
whereas objectives tie you to particular values that you will have to hit in the future. People
may be concerned that they will be weighed on a scale and found wanting for failing to
3 Developing a Well-conceived Business Plan
- 36 achieved
their objectives. However, it is critical that your plan contains both goals and
objectives.
Objectives allow investors and your employees to see clearly, where the firm intends to
go. They produce targeted values to aim for and, therefore, are critical for the control of the
firm’s operations.
VISION AND MISSION STATEMENTS
There is some degree of confusion concerning the difference between a vision statement
and a mission statement. Vision statements articulate the long-term purpose and idealized
notion of what a business wishes to become.
Mission statements, which are much more common in small business plans, articulate
the fundamental nature of the business. This means identifying the type of business, how it
will leverage its competencies, and possibly the values that drive the business. Put simply,
a mission statement should address the following questions:
 Who are we? What business are we in?
 Whom do we see as our customers?
 How do we provide value for those customers?
Sometimes vision and mission statements are singularly written for external audiences,
such as investors or shareholders. They are not written for the audience for whom it would
have the greatest meaning—the management team and the employees of the business.
Sometimes a firm will write a mission statement that provides customers, investors, and
employees with a clear sense of purpose of that company.
EXAMPLE 4 EXAMPLES OF MISSION
“Our goal is to position Zappos as an online service leader. If we can get customers to
associate Zappos as the absolute best in service, then we can expand beyond shoes.”9
Ben & Jerry’s Ice Cream focuses both on defining their product and their values: “To
make, distribute and sell the finest quality all-natural ice cream and euphoric concoctions
with a continued commitment to incorporating wholesome, natural ingredients and promoting
business practices that respect the Earth and the Environment.”10
KEYS TO SUCCESS
This section identifies those specific elements of your firm that you believe will ensure
success. It is important for you to be able to define the competencies that you intend to
leverage to ensure success. What makes your product or service unique? What specific set of
capabilities do you bring to the competitive scene? These might include the makeup of and
the experience of your management team; your operational capabilities (e.g., unique skills in
design, manufacturing, or delivery); your marketing skill sets: your financial capabilities (e.g.,
the ability to control costs); or the personnel that make up the company.
9
Inc. 500 Mission Statements. Inc. 500 Mission Statements. [online]. [Accessed: 17 Sep 2013] Available at:
http://www.missionstatements.com/inc_500_mission_statements.html.
10
Ben & Jerry's. 2013. Mission Statement Ben & Jerry's. [online] [Accessed: 19 Sep 2013] Available at:
http://www.benjerry.com/activism/mission-statement.
Jarmila Šebestová; Entrepreneurship
- 37 Figure
11 Summary of key areas of Business plan
Source: Rae, 2007, p.151
INDUSTRY REVIEW
In this section, you want to provide a comprehensive overview of the industry. A thorough
understanding of the industry that you will be operating in is essential to understand the possible
returns that your company will earn within that industry. Investors want to know if they will recover
their initial investment. When will they see a profit? Remember, investors often carefully track
industries and are well aware of the strengths and limitations within a particular industry. Investors
are looking for industries that can demonstrate growth. They also want to see if the industry is
structurally attractive. This might include conducting Porter’s five forces analysis; however, this is
not required in all cases. If there appear to be some issues or problems with industry level growth,
then you might want to be able to identify some segments of the industry where growth is viable.
This section includes information from those areas:
1. Industry Analysis
 market size and relevant market size,
 market trends,
 customers and competition.
2. Customer analysis
 customer identification /definition,
 customer demographics, needs and decision-making,
 the customer’s customer.
3. Competitive analysis
 defining competition,
 describing competitors,
 competitive advantage.
3 Developing a Well-conceived Business Plan
- 38 PRODUCTS
OR SERVICES
This section should be an in-depth discussion of what you are offering to customers. It
should provide a complete and clear statement of the products or the services that you are
offering. It should also discuss the core competencies of your business. You should highlight
what is unique, such as a novel product or service concept or the possession of patents. You
need to show how your product or service specifically meets particular market needs. You
must identify how the product or the service will satisfy specific customers’ needs. If you are
dealing with a new product or service, you need to demonstrate what previously unidentified
needs it will meet and how it will do so.
 This section could include a discussion of technical issues. If the business is
based on a technological innovation—such as a new type of software or an
invention—then it is necessary to provide an adequate discussion of the specific
nature of the technology.
 This section also might discuss the future direction of the product or service,
where will you be changing the product or the service after the end of the current
planning horizon. This may require a discussion of future investment
requirements or the required time to develop new products and services.
 This section may also include a discussion of pricing the product or the service,
although a more detailed discussion of the issue of pricing might be found in the
marketing plan section.
 It is important to discuss how your pricing scheme will compare with
competitors. Will it be higher than average or below the average price? How
does the pricing fit in with the overall strategy of the firm?
This section must have a high degree of honesty. Investors will know much about the
industry and its limitations. You need to identify any areas that might be possible sources of
problems, such as government regulations, issues with new product development, securing
distribution channels, and informing the market of your existence. Further, it is important to
identify the current competitors in the industry and possible future competitors.
MARKETING PLAN
An introductory marketing course always introduces the four Ps: product, price, place, and
promotion (see chapter 7). The marketing section of the business plan might provide more indepth
coverage of how the product or the service better meets customer value than that of
competitors. It should identify your target customers and include coverage of who your
competitors are and what they provide. The comparison between your firm and its competitors
should highlight differences and point to why you are providing superior value. Pricing issues, if
not covered in the previous section, could be discussed or discussed in more detail.
The issue of location, particularly in retail, should be covered in detail. Perhaps one of
the most important elements of the marketing plan section is to specify how you intend to
attract customers, inform them of the benefits of using your product or service, and retain
customers. Initially, customers are attracted through advertising. This section should delineate
the advertising plan. What media will be used in real business like flyers, newspapers,
magazines, radio, television, web presence, direct marketing, and/or social media campaigns?
This section should cover any promotional campaigns that might be used. Do not forget to
analyse:
 products and services,
 price, placement, promotions, customer relationship,
 partnerships.
Jarmila Šebestová; Entrepreneurship
- 39 MANAGEMENT
TEAM
Readers of your business plan and potential investors should have a clear sense of the
management team that will be running a business. They should know the team with respect to
the team’s knowledge of the business, their experience and capabilities, and their drive to
succeed. The human resources available to a firm will play a critical role in determining its
success (see chapter 5 and 6).
This section of the business plan has several elements. It should contain an
organizational chart that will delineate the responsibilities and the chain of command for the
business. It should specify who would occupy each major position of the business. You might
want to explain who is doing what job and why. For every member of the management team,
you should have a complete résumé. This should include educational background (both formal
and informal) and past work experience, including the jobs they have held responsibilities,
and accomplishments. You might want to include some other biographical data such as age,
although that is not required.
Depending on the nature of the business, you might wish to include in this section the
personnel (employees) that will be required. You should identify the number of people that
are currently working for the firm or that will have to be hired; you should also identify the
skills that they need to possess. Further discussion should include the pay that will be
provided: whether they will be paid a flat salary or paid hourly, when you intend to use
overtime, and what benefits you intend to provide. In addition, you should discuss any
training requirements or training programs that you will have to implement.
An additional element of your discussion of the management team will be the intended
compensation schemes. You should specify the intended salaries for the management team
while also including issues of their benefits and bonuses or any stock position that they may
take in the company. This section should also identify any gaps in the management team.
Those fourteen sentences (Sahlman, 2008) could help you to mention main information
into your personnel plan:
 Where are the founders from?
 Where have they been educated?
 Where have they worked-and for whom?
 What have they accomplished-professionally and personally-in the past?
 What is their reputation within the business community?
 What experience do they have that is directly relevant to the opportunity they are
pursuing?
 What skills, abilities, and knowledge do they have?
 How realistic are they about the venture's chances for success and the
tribulations it will face?
 Who else needs to be on the team?
 Are they prepared to recruit high-quality people?
 How will they respond to adversity?
 Do they have the mettle to make the inevitable hard choices that have to be
made?
 How committed are they to this venture?
 What are their motivations?
Company Analysis could include:
 company profile,
 past accomplishments of company / team,
3 Developing a Well-conceived Business Plan
- 40 
unique qualifications,
 business milestones,
 funding, revenue, employee additions,
 exit strategy.
Management Team
 Description of key members,
 Identify management team gaps,
 Description of Board Members / Advisors.
Think about appropriate business form, because it has an influence on future financial
statements. There is a short description of advantages and disadvantages of common legal
forms (see fig.12)
Figure 12 Comparison of Common Business forms
Source: Burns, 2007
3.1.2 FINANCIAL STATEMENTS
The opening section of the financial statements section should also include, in summary
format, projections of sales, the sales growth rate, key expenses and their growth rates, net
income across the forecasting horizon, and assets and liabilities (more in chapter 9). The
financial statements section of the business plan should be broken down into three key
subsections (Hormozi et al., 2002):
 the income statement,
 the balance sheet, and
 The cash-flow statement.
The business plan should contain clear statements of the underlying assumptions that
were used to make these financial projections. The clearer the statements and the more
realistic the assumptions behind these statements, then the greater the confidence the reader
will have in these projections. The future planning horizon for financial projections is
normally between three and five years.
Jarmila Šebestová; Entrepreneurship
- 41 INCOME
STATEMENT
The income statement examines the overall profitability of a firm over a particular
period. As such, it is also known as a profit-and-loss statement. It identifies all sources of
revenues generated and expenses incurred by the business. For the business plan, one should
generate annual plans for the first three to five years. Some of the key terms found in the
income statement are as follows:
 Income (I). All revenues and additional incomes produced by the business
during the designated period.
 Cost of goods sold (CGS). Costs associated with producing products, such as
raw materials and costs associated directly with production.
 Gross profit margin (GPM). Income minus the cost of goods sold.
 Operating expenses (OE). Costs in doing business, such as expenses associated
with selling the product or the service, plus general administration expenses.
 Depreciation (D). Long-term assets (LTA), whose useful life is longer than one
year; decline in value over time. Depreciation considers this fact. This declining
value can be determined in several ways. It is a non-cash expenditure expense.
 Total expenses (TE). The cost of goods sold plus operating expenses and
depreciation.
 Net profit before interest and taxes. This is the gross profit minus operating
expenses; another way of stating net profit is income minus total expenses.
 Interest. The required payment on all debts for the period.
 Taxes. All tax payments for the firm.
 Net profit. This is the net profit after interest and taxes.
BALANCE SHEET
The balance sheet examines the assets, liabilities, and owner’s equity of the business at
some particular point in time. It is divided into two sections as the credit component (the
assets of the business) and the debit component (liabilities and equity). These two components
must equal each other. The business plan should have annual balance sheet for the three or
five-year planning horizon. The elements of the credit component are as follows:
 Current assets (CA). These are the assets that will be held for less than one
year, including cash, marketable securities, accounts receivable, notes
receivable, inventory, and prepaid expenses.
 Fixed assets (FA). These assets are not going to be turned into cash within the
next year; these include plants, equipment, and land. It may also include
intangible assets, such as patents, franchises, copyrights, and goodwill.
 Total assets (TA). This is the sum of current assets and fixed assets.
Liabilities consist of the following:
 Current liabilities(CL). These debts are to be paid within the year, such as lines
of credit, accounts payable, other items payable (including taxes, wages, and
rents), short-term loans, dividends payable and current portion of long-term
debt.
 Long-term liabilities (CTL). These are debts payable over a period greater than
one year, such as notes payable, long-term debt, pension fund liability, and longterm
lease obligations.
 Total liabilities (TL). This is the sum of current liabilities and long-term
liabilities.
3 Developing a Well-conceived Business Plan
- 42 
Owner’s equity. This represents the value of the shareholders’ ownership in the
business. It is sometimes referred to as net worth. It may be composed of items
such as preferred stock, common stock, and retained earnings.
CASH-FLOW STATEMENT
From a practical and survival standpoint, the cash-flow statement may be the most
important component of the financial statements. The cash-flow statement maps out where
cash is flowing into the firm and where it flows out. It recognizes that there may be
a significant difference between profits and cash flow. It will indicate if a business can
generate enough cash to continue operations, whether it has sufficient cash for new
investments, and whether it can pay its obligations.
Cash flows can be divided into three areas of analysis:
 Cash flow from operations. Cash flow from operations examines the cash
inflows from revenues and interest and dividends from investments held by the
business. It then identifies the cash outflows for paying suppliers, employees,
taxes, and other expenses.
 Cash flow from investing. Cash flow from investing examines the impact of
selling or acquiring current and fixed assets and
 Cash flow from financing. Cash flow from financing examines the impact on
the cash position from the changes in the number of shares and changes in the
short- and long-term debt position of the firm.
Financial Plan in short includes:
 pro-forma financial statements,
 validating assumptions and projections,
 sources and uses of funds
In preparing the financial section of your business plan, specify the company’s cash
needs and explain how you will be able to repay debt. This information is vital in obtaining
financing. It reports the amount of cash needed by the company for start-up and initial
operations and provides an overview of proposed funding sources. It presents financial
projections, including expected sales, costs, and profits (or losses). It refers to a set of
financial statements included in an appendix to the business plan.
Business plans are analyses of the future; they can be at the side of either optimistic
projections or conservative projections. From the standpoint of the potential investor, it is
always better to write it the side of conservatism. Regardless of either bias, business plans are
generally built because of expected futures and experience. Unfortunately, the future does not
always emerge in a clearly predicated manner. There is the reason, why it is so important to
know how to analyse business environment.
3.2 ADVANTAGES AND DISADVANTAGES OF OWNERSHIP
Several advantages generally speaking, come with success in business ownership:
 Independence. As a business owner, you are your own boss.
 Lifestyle. Because you are in charge, you decide when and where you want to
work.
 Financial rewards. In spite of high financial risk, running your own business
gives you a chance to make more money than if you were employed by someone
else.
Jarmila Šebestová; Entrepreneurship
- 43 
Learning opportunities. As a business owner, you’ll be involved in all aspects
of your business
 Creative freedom and personal satisfaction. As a business owner, you will be
able to work in a field that you really enjoy, and you will gain personal
satisfaction from watching your business succeed.
There are also a number of potential disadvantages to consider in deciding whether to
start a small business:
 Financial risk. The financial resources needed to start and grow a business can
be extensive, and if things do not go well, you may face substantial financial
loss. In addition, you will have no guaranteed income.
 Stress. You’ll have a bewildering array of things to worry about competition,
employees, bills, equipment breakdowns, customer problems.
 Time commitment. Running a business is extremely time-consuming. In fact,
you will probably have less free time than you would have working for someone
else.
 Undesirable duties. You will be responsible for either doing or overseeing just
about everything that needs to be done, and you will probably have to perform
some unpleasant tasks, like firing people.
EXAMPLE 5 STARTING BUSINESS
Because you are convinced that the best way to get rich is to work for yourself, you are
thinking about starting your own business. You have an idea and €100,000 that you just
inherited from a great-aunt. You even have a location: Palo Alto, California, which (according
to a Forbes magazine article) is the best place in the United States to get rich.
However, there is a downside: to move to California and start your own business, you
will have to drop out of college. What financial risks should you consider in making your
decision? What are your chances of succeeding with your plan? Are you willing to take the
financial risk needed to start a business? Why, or why not? Are you likely to make more
money running your own business than working for someone else?
4 Environmental Assessment: Preparation for a New start-up
- 44 -
4 ENVIRONMENTAL ASSESSMENT: PREPARATION FOR
A NEW START-UP
The environment in which it operates and the success of any business is dependent on
its ability to adapt to its environment influences a business. A business is any activity that
provides goods or services to consumers for making a profit. A figure 13 sums up the
relationship among the participants in a business, its functional areas, and the external forces
that influence its activities.
Figure 13 Business and its Environment
Source: Collins, 2008
First step for completing successfully the business plan is to provide environmental
analysis to be sure in successful implementation of the plan. The analysis consists on some
individual steps, which are in one logical frame (see fig.14)
Figure 14 Environmental analyses in relationship with other parts of business plan
Source: Baard, Van Den Berg, 2003, p.3
Jarmila Šebestová; Entrepreneurship
- 45 The
complexity of this reality for business owners affects the fact that there are many
different environments within each business operates. There is the macro-environment, which
in today’s global economy refers to the whole world, where events often indirectly affect
businesses and there is the microenvironment, local events and circumstances that directly
affect and interact with a business:
 Macro – contextual level. The contextual level consists of ‘global forces’, think
about economic developments, demographics, politics, technological
developments and social developments.
 Meso – transactional level. The transactional level consists of ‘market forces’,
think about suppliers, supply and demand, distribution, competitors and strategic
alliances.
 Micro – organizational level. The organizational level involves forces that
address the internal environment of the firm. Think about vision, mission,
strategy, resources, processes, products and services.
4.1 ANALYSING MACRO-ENVIRONMENT
Macro environment factors are uncontrollable external forces that affect how a business
operates. They are largely out of the control of the business, and often require changes in
operating, management, production, and marketing. Analysts often categorize them using the
acronyms by using tools PEST or PESTLE. They exist some other techniques like:
 PEST (political, economic, socio-cultural, technological);
 PESTEL (political, economic, socio-cultural, technological, environmental or
ecological, legal);
 PESTLIED (political, economic, socio-cultural, technological, legal,
international, environmental or ecological, demographic);
 STEEPLE (socio-cultural, technological, environmental or ecological,
economic, political, legal, ethical).
Political factors. Examples of political factors could be a potential change of
government, with the corresponding changes to policies and priorities, or the introduction of
a new government initiative.
Economic factors may also be limited to the home country, but as global trade
continues to grow, economic difficulties in one nation tend to have a broad, often worldwide,
impact. Examples of economic factors could be the level of growth within an economy, or
market confidence in the economies within which the organisation operates.
Technological area covers factors arising from the development of technology.
There are two types of technological change: there can be developments in IT, and there can
be developments in technology specific to an industry or market, for example enhancements
to manufacturing technology.
Legal area - it is vital to consider factors arising from changes to the law, since the last
decade has seen a significant rise in the breadth and depth of the legal regulations within
which organisations have to operate. Legal compliance has become such an important issue
during this period that many business analysis assignments have been carried out for the
purpose of ensuring compliance with particular laws or regulations.
Ecological factors arising from concerns about the natural environment, in other
words the ‘green’ issues include increasing concerns about packaging and the increase of
pollution.
4 Environmental Assessment: Preparation for a New start-up
- 46 Table
8 Example of PEST analysis
Political
criteria examples
Economical
criteria examples
Social criteria
examples
Technological criteria
examples
 ecological/environment
al current legislation
 future legislation
 international legislation
 regulatory bodies and
processes
 government policies
 government term and
change
 trading policies
 funding, grants and
initiatives
 home market pressure-
groups
 international pressure-
groups
 wars and conflicts
 home economy
 economy trends
 overseas economies
 general taxation
 taxation specific to
product/services
 seasonality issues
 market/trade cycles
 specific industry factors
 market routes trends
 distribution trends
 customer/end-user
drivers
 interest/ exchange rates
 international trade and
monetary issues
 lifestyle trends
 demographics
 consumer attitudes and
opinions
 media views
 law changes affecting
social factors
 brand, company,
technology image
 consumer buying
patterns
 fashion and role models
 major events and
influences
 buying access and trends
 ethnic/religious factors
 advertising and publicity
 ethical issues
 competing technology
development
 research funding
 associated/dependent
technologies
 replacement technology/
solutions
 maturity of technology
 manufacturing maturity
and capacity
 information and
communications
 consumer buying
mechanisms/technology
 technology legislation
 innovation potential
 technology access,
licensing, patents
 intellectual property issues
 global communications
Source: Businessballs, 2009. [online] [Accessed: 19 Jan 2014] Available at:
http://www.businessballs.com/freepdfmaterials/pest-analysis-free-template.pdf.
Identifying factors might affect that issue in analysed area. Each factor would analyse to
see how it might affect the plan. Not all factors under consideration can consider equally
important, so it is very important to see which factors are most important so that decision
makers can focus on the ramifications of those factors in the analysis. Having identified the
relative importance of the factors, the next stage would be to develop a limited number of
possible scenarios (no more than two or three). Each scenario would map out possible
outcomes for each key factor. Based on these values, the group conducting the scenario
planning exercise would develop insights into this possible future world.
4.1.1 FORECASTING TECHNIQUES IN MACRO-ANALYSING
There are many different techniques and tools, which could be used to forecast these
items. These types of techniques are influenced by many factors, such as the following
(Cadden and Lueder, 2012):
 The size of the business. Smaller businesses may have fewer resources to apply
a wide variety of forecasting techniques.
 The analytical skills of people who will be conducting the forecast. The
owner of a home business may have no prior experience with forecasting
techniques.
 The type of the organization. A small firm is operating in a new or a chaotic
environment might have to rely on significantly different techniques.
 Historical records. Does the firm have historical records for sales that can be
used to project into the future?
Jarmila Šebestová; Entrepreneurship
- 47 A
brief review of basic forecasting techniques shows that it would be divided into two
broad classes: qualitative forecasting methods and quantitative forecasting methods. Actually,
these terms can be somewhat misleading because qualitative forecasting methods do not
imply that no numbers will be involved. A start-up business has no past sales that can be used
to project future sales. Likewise, if there is a significant change in the environment, one may
feel uncomfortable using past data to project into the future.
QUALITATIVE METHODS
 Simple extrapolation. This approach uses some data and simply makes
a projection based on these data. The data might indicate that a particular
section of town has many people walk through the section each day. Knowing
that number, a store might make a simple estimate of what sales might be. Its
success depends on the “correctness” of the assumptions and the ability to
carry them over to reality. You might have the correct number of people
passing your store, but that does not mean that they will buy anything.
 Sales force. In firms with dedicated sales forces, you would ask them to
estimate what future sales might be. These values would be pieced together
with a forecast for next year. The sales force should have the pulse of your
customers and a solid idea of their intentions to buy. Its greatest strength is in
the B2B environment. It is difficult to use in business-to-customer (B2C)
environments. Sales force members are compensated when they meet their
quotas, but this might be an incentive to “low-ball” their estimates.
 Expert opinion. Similar to sales force approach, this technique ask experts
within the company to produce estimates of future sales. These experts may
come from marketing, R&D, or top-level management. Sales forecasts of
experts should lead to better forecasts.
 Delphi method. A panel of outside experts would be asked to estimate sales
for a particular product or service. The results would be summarized in a report
and given to the same panel of experts. They would then be asked to read their
forecast. This might go through several iterations. Best used for entirely new
product service categories. One has to be able to identify and recruit
“experts” from outside the organization.
 Historical analogy. With this technique, one finds a similar product’s or
service’s past sales (life cycle) and extrapolates to your product or service.
A new start-up has developed an innovative home entertainment product, but
nothing like it has been seen in the market. It is relatively easy and quick to
develop. One can select the wrong past industry to compare, and the future
may not unfold in a similar manner.
 Market research. They use questionnaires and surveys to evaluate customer
attitudes toward a product or a service. One gains very useful insights into the
stated desires and interests of consumers. They can be highly accurate in the
short term. They can take time to conduct and are relatively expensive.
QUANTITATIVE SALES FORECASTING METHODS
 Trend analysis. This forecasting technique assumes that sales will follow some
form of pattern, for example, sales are projected to increase at 15 percent a year
for the next five years. Sales seldom follow the same growth rate over any
length of time.
4 Environmental Assessment: Preparation for a New start-up
- 48 
Moving average. This technique takes recent class data for N number of
periods, adds them together, and divides by the number N to produce a forecast.
The basic use of this type of model fails to consider the existence of trends or
seasonality in the data.
 Seasonality analysis. Many products and services do not have uniform sales
throughout the year. They exhibit seasonality. This technique attempts to
identify the proportion of annual sales sold for any given time. The sales of
swimming pool supplies in the Northeast, for example, would be much higher in
the spring and summer than in the fall and winter. Many products and services
have seasonal demand patterns. By considering such patterns, forecasts can be
improved. This technique requires several years of past data and careful
analysis. Useful for quarterly or monthly forecasts.
 Exponential smoothing. This analytical technique attempts to correct forecasts
by some proportion of the past forecast error. Incorporates and weighs most
recent data. Attempts to factor in recent fluctuations. Several types of this model
exist, and users must be familiar with their strengths and weaknesses. Requires
extensive data, computer software, and a degree of expertise to use and interpret
results.
 Causal models. Causal models, of which there are many, attempt to identify
why sales are increasing or decreasing. Regression is a specific statistical
technique that relates the value of the dependent variable to one or more
independent variables. The dependent variable sales might be affected by price
and advertising expenditures, which are independent variables. Can be used to
forecast and examine the possible validity of relationships, such as the impact on
sales by advertising or price. Requires extensive data, computer software, and
a high degree of expertise to use and interpret results.
Forecasting key items such as sales is crucial in developing a good business plan.
However, forecasting is a very challenging activity. The further out the forecast, the less
likely it will be accurate. Regardless of what technique is using of the data source employed
in building a forecast for business plan, one should be prepared to justify why you are
employing these forecasting models.
4.2 MESO-ENVIRONMENT ANALYSIS
Meso-environment decides the competitive position of the industry vis-a-vis the
organisation we study. The environment comprises all those organisations or groups with
which firm usually maintains contacts and the firm’s performance is being affected by those
groups. Let us discuss the supply chain, of which customers are also part, which affects the
performance largely. Meso-environment or competitive environment you can understand
through Porter’s Five Forces Industry Analysis. (Burns, 2007).
Jarmila Šebestová; Entrepreneurship
- 49 Figure
15 Porter´ s five forces
Source: Burns, 2007
• Industry: What is the level of competition for the products or services in competitors:
this industry? Is the organization in a good competitive position or is it a minor
player? Are there several competitors that hold the power in the industry?
• New entrants: Are there barriers to entry, such as the need for large amounts of
money or expertise? Is it possible to start up an organization offering these products or
services without financial support? What is the likelihood of new entrants coming into
the industry?
• Substitutes: What is the range of substitutes available? What is the position of the
organisation when compared to the suppliers of these substitutes?
• Buyers: How much choice do buyers have? Can they switch suppliers easily? Do they
have the power in the relationship or are they locked in to the supplier?
• Suppliers: How many suppliers are available? Is this a competitive situation where
the organisation has a choice of suppliers? Do the suppliers have the power in the
relationship because they operate in an area of limited supply?
4.2.1 MARKET RESEARCH
A market consists of all the consumers who purchase a particular type of good or
service. The market may be sub-divided into separate segments each of which can be
considered a separate market in its own right. It is very important for a business to be able to
define its market:
 estimate the size of the market,
 forecast the growth of the market,
 identify the competitors in the market,
 break the market down into relevant segments to create an appropriate marketing
mix to appeal to customers in the market.
Markets are typically structured into segments. Primary segmentation is between
customers buying entirely different products. The size of the market can be calculated in
terms of the number of customers that make up the market, or the value of sales in the market.
A business can then calculate its market share in terms of the number of customers its sells to,
4 Environmental Assessment: Preparation for a New start-up
- 50 or
the total value of its sales. A segmentation can be based on demographic and
psychographic factors. Ask yourself:
 What is the price for your solution?
 What is the quantity consumed annually?
 Use Web research, analyst reports for public companies, other experts
 Define your personal focus
 Define a focused market segment
 In your niche, identify target customers, product offering, and compelling reasons
to buy.
TYPES OF MARKET
 Business-to-Business (B2B) markets in which a business’s customers are other
businesses.
 Business to Consumer (B2C) markets in which businesses sell to other customers.
 Some markets take place in a physical location e.g. a street market, whereas others
may be virtual markets.
EXAMPLE 6 MARKET STRUCTURE
What type of market structure will your firm operate? Why? Which market structure do
you think benefits the producer the most?
Is there any possibility that your firm can operate in that type of market structure? Why
“yes” or why “not”?
4.3 MICRO ENVIRONMENTAL ANALYSIS
Microenvironment factors are factors close to a business that have a direct impact on its
business operations and success. Before deciding on corporate strategy, businesses should
carry out a full analysis of their microenvironment. From those factors came strength and
weaknesses of the future company (using SWOT analysis tool).
Perfect
Competition
Monopolistic
Competition
Oligopoly Monopoly
Number of sellers
Number of buyers
Barriers to exit
Prices higher or lower in
the long run?
Are the products that
firms produce the same,
or are they different?
Jarmila Šebestová; Entrepreneurship
- 51 The
analysis covers mostly performance ratios like financial ratios analysis, analysis of
value chains, analysis of current marketing strategies (see chapter 7), life cycle analysis,
portfolio analysis.
The SWOT example is first step to find a new business opportunity. Many criteria can
apply to more than one quadrant. You have to identify criteria appropriate to your own SWOT
situation. The SWOT analysis is the first step in developing strategy (chapter 8).
Strengths Criteria Examples Weaknesses Criteria Examples
Advantages of proposition?
Capabilities?
Competitive advantages?
USP's (unique selling points)?
Resources, Assets, People?
Experience, knowledge, data?
Financial reserves, likely returns?
Marketing - reach, distribution, awareness?
Innovative aspects?
Location and geographical?
Price, value, quality?
Accreditations, qualifications, certifications?
Processes, systems, IT, communications?
Cultural, attitudinal, behavioural?
Management cover, succession?
Philosophy and values?
Disadvantages of proposition?
Gaps in capabilities?
Lack of competitive strength?
Reputation, presence and reach?
Financials?
Own known vulnerabilities?
Timescales, deadlines and pressures?
Cashflow, start-up cash-drain?
Continuity, supply chain robustness?
Effects on core activities, distraction?
Reliability of data, plan predictability?
Morale, commitment, leadership?
Accreditations, etc?
Processes and systems, etc?
Management cover, succession?
Opportunities Criteria Examples Threats Criteria Examples
Market developments?
Competitors' vulnerabilities?
Industry or lifestyle trends?
Technology development and innovation?
Global influences?
New markets, vertical, horizontal?
Niche target markets?
Geographical, export, import?
New USP's?
Tactics: eg, surprise, major contracts?
Business and product development?
Information and research?
Partnerships, agencies, distribution?
Volumes, production, economies?
Seasonal, weather, fashion influences?
Political effects?
Legislative effects?
Environmental effects?
IT developments?
Competitor intentions - various?
Market demand?
New technologies, services, ideas?
Vital contracts and partners?
Sustaining internal capabilities?
Obstacles faced?
Insurmountable weaknesses?
Loss of key staff?
Sustainable financial backing?
Economy - home, abroad?
Seasonality, weather effects?
Source: Businessballs, 2009. [online] [Accessed: 19 Jan 2014] Available at:
www.businessballs.com/swotanalysisfreetemplate.htm
4.3.1 FINAL MODELLING FOR APPROPRIATE ACTION
PEST analysis (political, economic, social, and technological) assesses a market,
including competitors, from the standpoint of a particular proposition or a business (macro
analysis only). PEST analysis can be useful before SWOT analysis because PEST helps to
identify OT factors. SWOT stands for strengths, weaknesses (micro, internal), opportunities,
threats (macro, external).
4 Environmental Assessment: Preparation for a New start-up
- 52 Figure
16 PEST and SWOT connection
Source: own
What the process is seeking to achieve is an overlap between the business environment
and internal resources. The final match is to achieve sustainable competitive advantage. This
portfolio of resources is combined with various opportunities and treats to achieve company´s
goals in a future. (See fig. 17)
Figure 17 SWOT evaluation
Source: IVTO, 2012. ivto.org[online] [Accessed: 19 Jan 2014] Available at: http://www.ivto.org/publicaties/toekomst-
robuustheid-afzetmarkt-figuur-13-5.
Finally, we have to evaluate the information from the matrix. Environmental scanning is
the process of seeking information about this environment. A six-step procedure, outlined
below, systematically evaluates potential strategies by calculating the strategic value and the
strategic risk associated with each alternative (Tavana, Banerjee,1995, p.732):
1. Define environment-related weights. Such weights have been assessed in the
past directly by decision makers using a scale (e.g. ranging from 1 =
unimportant to 5 = very important).
2. Identify opportunities and threats, strengths and weaknesses within each
environment (macro, mezzo, micro analysis).
3. Define weights associated with opportunities and threats. Compute the weights
associated with each opportunity and threat.
Jarmila Šebestová; Entrepreneurship
- 53 -
4. Develop subjective probabilities for each alternative. We use probabilistic
phrases, like "impossible", 'possible", and "certain" to elicit required information
and then convert these into numeric probabilities.
5. Calculate the strategic value for each alternative. Calculate the strategic value of
each alternative by using the algebraic model. Relevant details of the model are
presented in the next section. The strategic value of an alternative represents the
attractiveness of an alternative calculated by subtracting the Total Threat Value
of the alternative from its Total Opportunity Value. These two values are in turn
calculated by summing the multiplication of the relative weight of each type of
environment to the relative weight of each factor within that environment and
the subjective probability of that factor for the selected alternative. The higher
the strategic value the more attractive that alternative will be.
Table 9 Verbal probabilistic expressions and perceived probability estimates
Verbal expression Probability
Impossible 0.00
Small possibility 0.10
Small chance 0.20
Somewhat doubtful 0.30
Possible 0.40
Toss-up 0.50
Somewhat likely 0.60
Likely 0.70
Very likely 0.80
Quite certain 0.90
Certain 1.00
Source: Tavana, Banerjee. 1995, p.733
6. Evaluate potential strategies. Compute the strategic value per unit of risk of an
alternative by dividing the strategic value by its strategic risk. Higher strategic
value increases the desirability, whereas higher risk decreases the desirability of
that alternative.
Table 10 SWOT based strategies
INTERNAL FACTORS /
EXTERNAL FACTORS
INTERNAL FACTORS
Internal Strengths (S) Internal Weaknesses (W)
External Opportunities (O) SO (MAXI-MAXI)
Strategy
WO (MINI – MINI)
Strategy
External Threats (T) ST (MAXI – MINI)
Strategy
WT (MINI – MINI)
Strategy
Source: Gierszewska, Romanowska, 2009
The process of strategy formulation starts with, and critically depends on, the appraisal
of the external and internal environment of the organization.
1. WT or the mini – mini strategy seeks to minimize the weaknesses and threats.
Some of the weaknesses may be overcome or minimized. For example,
managerial weaknesses may be solved by change of managerial personnel,
conducting training etc. Weaknesses due to excess manpower may be addressed
to by restructuring and volunteer retirement schemes. External threats may be
met by strategic alliance, or by other types of joint ventures.
4 Environmental Assessment: Preparation for a New start-up
- 54 -
2. WO or mini – maxi strategy aims at minimizing the weaknesses and
maximizing the opportunities. For an example: for a textile machinery
manufacturer in India the main weaknesses were dependence on foreign firms
for technology and the long-time taken on execute an order. The solutions are to
give focus on R & D to develop technology and measures to reduce the time lag
to be in a better position to the maximum the growing demand.
3. ST or maxi-mini strategy attempts to use the organizations strengths to deal
with the environmental threats.
4. SO or maxi-maxi strategy, which is the most desirable and advantageous
strategy, seeks to mass up a firm’s strengths to exploit the opportunities.
Therefore, it is clear to us that strategy formulation mainly based on strategic
analysis and strategy selection by standard criteria’s.
ALGEBRAIC METHOD OF DEFINING THE STRATEGY
1. Define the factors.
2. Give them the value (score), the best is to use the scale <-5;5>, the negative
influence mark with the negative value of the scale.
3. Evaluate the probability of influence of your own business in the future. Use the
table 9 to help you.
4. Compute real influence of each factor = step (2)* step (3)
5. Sum up each section
6. Use those relationships:
 market's position 𝑀𝑃 = 𝑆/(𝑆 + 𝑊)
 market's attractiveness 𝑀𝐴 =
𝑂
𝑂+𝑇
 probability of strategy success 𝑃𝑆𝑆 =
𝑀𝑃+𝑀𝐴
2
7. Draw the position from MP and MA and make a comment from index of
probability of success, choose the strategy.
Competitiveness strategy
maxi-maxi mini-maxi maxi-mini
mini-
mini
MP's value > 0.5 < 0.5 > 0.5 < 0.5
MA's value > 0.5 > 0.5 < 0.5 < 0.5
PSS value
Success
> 0.5
Fail
< 0.5
Source: Gierszewska, Romanowska, 2009, Obłój,1999
Jarmila Šebestová; Entrepreneurship
- 55 Figure
18 Graphic interpretation – An example
Source: own, interpretation: Let us have S, W, O, T value 35, 25, 15 and 20. O minus T = 5, when T˃O; S minus W=
10, when S ˃W. Finally we suggest maxi-mini strategy.MP index= 35/35+25=0.583(maxi); MA
index=15/15+20=0.43(mini); PSS= 0.583+0.43/2=0.506=˃ 50.6% probability of success.
CASE STUDY 2 ANALYTICAL EVALUATION OF PEST AND SWOT 11
The main goal of elaborating the business plan is to seek a business model, which would
guarantee the growth of our company. The idea came from the willingness to satisfy observed
need of potential customers. Evaluating the business plan might help us to emphasize the most
important factors of success. At this point, it is important to be aware of the high risk of our
project. Conducted analyzes will contribute to better understanding of our conception. The
business plan refers to the pre-incubation period, which lasts maximum two years. Every
analysis, which was made, and plans, which were involved in this paper, applies particularly
to the pre-incubation period.
Our mission is to provide a constant improving smart phone device which would allow
to create better entertainment offer in area of small and medium, local events, as well as open
a channel of contact between event organizers and participants, while ensuring values
necessary in economic growth.
The market of mobile application in Poland is still quite new and fresh. What is more,
there is still a lot of “undeveloped space” and many possibilities to run the business at this
field.
Macroeconomic analysis (PEST)
The PEST analysis was made to define the most important macroeconomic factors that
influence the project. The analysis of the environment helped us to get to know the most
favourable elements, and the ones, which we should be aware.
11
GWIZDOŃ, M and M. GŁUSZEK, 2013. Start-up plan – innovative smart phone application for
entertainment event promotion. Small and medium entrepreneurship – project. Karviná: SU OPF. p. 15-17.
Political factors
No. Factor probability scale P*S
1 Assistance programs 0,3 3 0,9
2 EU donations 0,1 2 0,2
3 Local regulations 0,1 2 0,2
4 Complicated and high taxation 0,3 -4 -1,2
5 Constantly changing and complicated law related to SMEs 0,2 -3 -0,6
Total 1 - -0,5
4 Environmental Assessment: Preparation for a New start-up
- 56 In
those tables, the scale was made positive for opportunities, negative for threats.
The sum for probability has to be 1 in total; be careful.
The most unfavourable environment is political. This is because of many difficult laws
and restrictions, which appears in the Polish statute system. Creating and running business is
very difficult and complicated. Moreover, the taxes are high, as well as the costs of running
the business.
Social and economic environment showed us standard structure, typical for start-ups
and typical for Visegrad countries.
The most positive environment is technical. The market of Smartphone apps is growing
rapidly, and we can observe more and more users of them. The trade of new technologies is
the one with the biggest perspectives. In addition, people are getting use-to-use mobile
applications in everyday life.
According to our analysis, we can observe that macroeconomic environment is
quite favourable for running into practice the idea of creating the application. That
might not last long, so we need to keep an eye on the situation at the market and react
for every change.
Microeconomic analysis (SWOT)
Microeconomic analysis was performed in order to identify the most important and
influencing factors related to our idea. The results of SWOT analysis point out the strategy
that should be chosen, as well as, the direction of future moves.
Economic factors
No. Factor probability
scale P*S
1 Possibilities of getting external capital 0,35 4 1,4
2 High costs of running a business 0,2 -3 -0,6
3 High costs of capital 0,2 -2 -0,4
4 Possibilities for taking a bank credit 0,1 1 0,1
5 Structure of investments 0,15 2 0,3
total 1 - 0,8
Social factors
No. Factor probability
scale P*S
1 Society's lifestyle 0,2 2 0,4
2 Age structure 0,2 -2 -0,4
3 Quality of relationships between people 0,3 3 0,9
4 Dependence on technology 0,1 3 0,3
5 Willingness to take part in entertainment events 0,2 3 0,6
SUM 1 - 1,8
Technological factors
No. Factor probability
scale P*S
1 Speeding the process of information exchange 0,2 4 0,8
2 Changing possibilities of capitalization 0,2 3 0,6
3 Facilitations in creating smart phone application 0,1 1 0,1
4 Common habit of using every-day technological utilities 0,3 4 1,2
5 Evaluating models of smart phones 0,2 -2 -0,4
total 1 - 2,3
Jarmila Šebestová; Entrepreneurship
- 57 Strength
factors resulted in the highest rating. The main reason is the innovative idea,
which is also based on social networking. It is always easier to create something new and
build your own position on the market than trying to enter the market, which is already grown
and full of competition.
The biggest issue for us is the lack of experience in running a business. We are aware
how complicated that process is. In order to overcome it we can use the opportunities given
by the business environment (trainings, counselling etc.). In addition, lack of technical
knowledge is a high rank problem resulting in necessity of cooperation with IT developers.
Finding the capital and investors is a big problem. Especially, the fact, that investors might
influence our vision and idea in undesirable way.
The most important opportunities for us are the market niche and growing market, that
we can use it on our benefit. Entering the new market, with weak competition is the
opportunity, which has to be used. The most important thing is to act quickly and definitely as
this opportunity might be taken advantage of by others.
Strengths
No. Factor probability scale P*S
1 Innovative idea 0,4 5 2
2 "Fresh look" 0,1 3 0,3
3 Proposed solution based on social media network 0,2 3 0,6
4 Motivated team 0,2 4 0,8
5 Independence in decision making process 0,1 3 0,3
Total 1 - 4
Weaknesses
No. Factor probability
scale P*S
1 Lack of experience in running a business 0,25 4 1
2 Huge responsibility and commitment 0,1 3 0,3
3 Need for external capital/investments 0,2 4 0,8
4 Dependence on potential investor's conditions 0,15 3 0,45
5 Lack of technical knowledge 0,3 4 1,2
Total 1 - 3,75
Opportunities
No. Factor probability
scale P*S
1 Growing market of smart phone applications 0,2 4 0,8
2 Different possibilities to arise the capital 0,2 3 0,6
3 Market niche 0,25 4 1
4 Growing number of smart phones 0,2 5 1
5 Contests for start-up plans 0,15 3 0,45
total 1 - 3,85
Threats
No. Factor probability
scale P*S
1 Competitors might use our idea 0,3 5 1,5
2 Necessity to cooperate with developers 0,2 4 0,8
3 High dependence on user's acceptance 0,15 3 0,45
4 Constantly changing and complicated law related to SMEs 0,15 3 0,45
5 Sceptical event organizers 0,2 2 0,4
Total 1 - 3,6
4 Environmental Assessment: Preparation for a New start-up
- 58 When
looking at opportunities and threats, PEST Analysis can help to ensure that you
do not overlook external factors, such as new government regulations, or technological
changes in your industry.
The SWOT analysis resulted in proposing the best strategy. In our case the
competitiveness strategy, which should be used, is maxi-maxi.
It means that our strengths overcome the weaknesses and opportunities overcome the
threats. In that situation, according to the management theory, we should enter the noticed
market, invest in our idea and build the competitiveness advantage.
In other words, the value of planning is really as a continuing process, repeated
regularly due to changes in the business environment. According those analysis you provide
your business (managing, preparing general strategy – chapter 8, prepare marketing strategy
(chapters 7); integrate operating needs like human resources (chapter 6) and financial needs
(chapter 9).
Algebraic method of defining the strategy
MP [S/(S+W)]- market's position = 0,5161
MA [O/(O+T)]- market's attractiveness = 0,5168
PSS [MP+MA/2] 0,51645
Competitiveness strategy
maxi-maxi mini-maxi maxi-mini
mini-
mini
MP's value > 0.5 < 0.5 > 0.5 < 0.5
MA's value > 0.5 > 0.5 < 0.5 < 0.5
PSS value
Success
> 0.5
Fail
< 0.5
Jarmila Šebestová; Entrepreneurship
- 59 EXAMPLE
7 TRY YOUR OWN DRAFT OF A BUSINESS PLAN
With lecturer´s help try to develop business plan according those story, see enclosure
no. 2 for initial help:
Let us start with three givens: (1) college students love chocolate chip cookies, (2) you
have a special talent for baking cookies, and (3) you are always broke. Given these three
conditions, you have come up with the idea of starting an on-campus business—selling
chocolate chip cookies to fellow students. As a business major, you want to do things right by
preparing a business plan. First, you identified a number of specifics about your proposed
business. Now, you need to put these various pieces of information into the relevant section of
your business plan. Using the business plan format described in this chapter, indicate the
section of the business plan into which you would put each of the following:
 You will bake the cookies in the kitchen of a friend’s apartment.
 You will charge €1 each or €10 per pack of 12 cookies.
 Your purpose is to make the best cookies on campus and deliver them fresh. You
value integrity, consideration of others, and quality.
 Each cookie will have ten chocolate chips and will be superior to those sold in nearby
bakeries and other stores.
 You expect sales of €6,000 for the first year.
Chocolate chip cookies are irresistible to college students. There is a lot of competition
from local bakeries, but your cookies will be superior and popular with college students. You
will make them close to campus using only fresh ingredients and sell them for €1 each. Your
management team is excellent. You expect first-year sales of €6,000 and net income of
€1,500. You estimate start-up costs at €600.
 You will place ads for your product in the college newspaper.
 You will hire a vice president at a salary of €100 a week.
 You can ship cookies anywhere in the Czech Republic and in Slovakia.
 You need €600 in cash to start the business.
 There are six bakeries within walking distance of the college.
 You will bake nothing but cookies and sell them to college students. You will make
them in an apartment near campus and deliver them fresh.
5 Managing the Small Business
- 60 -
5 MANAGING THE SMALL BUSINESS
In general, small entrepreneur in role of manager would need to be an effective planner,
organizer, problem solver and decision maker, and be able to manage people effectively
(Stokes, Wilson, 2010). All small businesses need to be concerned about management
principles. Management decisions will affect the success of a business, the health of its work
environment, its growth if growth is an objective, and customer value and satisfaction.
A manager, someone like you, to make sure that the operations involved in preparing
and selling notes were performed in both an effective and an efficient manner. You would
make the process effective by ensuring that the right things were done and that they all
contributed to the success of the enterprise. You would make the process efficient by ensuring
that activities were performed in the right way and used the fewest possible resources. As you
can see from Figure 19, “Managerial Efficiency and Effectiveness”, that is the job that you
perform as a manager: making a group of people more effective and efficient with you than
they would be without you (Collins, 2008).
Figure 19 Managerial Efficiency and Effectiveness
Source: Collins, 2008
You will accomplish this task through management: the process of planning,
organizing, directing, and controlling resources to achieve specific goals.
5.1 MANAGEMENT FUNCTIONS
5.1.1 PLANNING
Among the various functions of managing, planning perhaps contributes the most to
new business performance. Planning offers a defined activity of action for the critical first
initial period of the new business. Planning is often called the primary management function
because it establishes the basis for all other functions. Planning involves two important
elements: goals and plans.
Jarmila Šebestová; Entrepreneurship
- 61 Goals
are desired outcomes for individuals, groups, or entire organizations. Plans are
documents that outline how goals are going to be met and that typically describe resource
allocations, schedules, and other necessary actions to accomplish the goals. The three levels
of goals within an organization form a hierarchy of goals, with lower-level goals forming
a mean-end chain with the next level of goals.
Strategic goals are broadly defined targets or future results set by top management.
 Tactical goals are the targets or future results usually set by middle management for
specific departments or units.
 Operational goals are those targets or future end results set by lower management that
address specific, measurable outcomes required from the lower levels.
LINKAGE BETWEEN GOALS AND PLANS
Goal and plans are closely linked. Plans specify the means how to achieve the goals.
Plans, like goals, enter into a hierarchy of levels and priority.
Strategic plans are detailed action steps mapped out to reach strategic goals. Strategic
plans are organizational wide and are developed by top management. The time horizon tends
to be long 3 to 5 years or more.
Tactical plans are the means charted to support implementation of the strategic plan and
achievement of tactical goals. Tactical plans tend to be more specific and concrete than
strategic plans. Tactical plans are important to the success of strategic plans. The time horizon
tends to be intermediate in range 1 to 3 years.
Operational plans are the means devised to support implementation of tactical plans and
achievement of operational goals. Operational plans spell out specifically what must be
accomplished to achieve operational goals. The time horizon is relatively short-tem—usually
less than 1 year as a maximum.
Plans can be categorized according to the extent to which they will be used on
a recurring basis. Single-use plans are plans aimed at achieving a specific goal that, once
reached, will most likely not recur in the future.
 A program is a comprehensive plan that coordinates a complex set of activities
related to a major non-recurring goal.
 A project is a plan that coordinates a set of limited-scope activities that do not need
to be divided into several major projects in order to reach a major non-recurring
goal. Programs are broader than projects.
 Standing plans are plans that provide ongoing guidance for performing recurring
activities.
o A policy is a general guide that specifies the broad parameters within
which organization members are expected to operate in pursuit of
organizational goals.
o A procedure is a prescribed series of related steps to be taken under certain
recurring circumstances.
The overall planning process
Planning is a two-part function—setting goals and determining how to try to achieve the
goals. A goal (often used interchangeably with “objective”) is a future target or end result that
an organization wishes to achieve. A plan is the means devised for attempting to reach a goal.
An organization’s mission is the organization’s purpose or fundamental reason for
existence. A mission statement is a broad declaration of the basic, unique purpose and scope
of operations that distinguishes the organization from others of this type. A mission statement
5 Managing the Small Business
- 62 serves
a variety of purposes. For managers, a mission statement can be a benchmark against
which to evaluate success. For employees, mission statements define a common purpose,
nurture organizational loyalty, and help foster a sense of community among members. For
external groups, mission statements help provide unique insights into an organization’s values
and future directions. The mission statement typically defines the organization in terms of the
important attributes of the organization.
 Customers: Who are the organization’s customers?
 Products or services: What are the organization’s major products or services?
 Location: Where does the organization compete?
 Technology: What is the firms’ basic technology?
 Philosophy: What are the basic beliefs, values, aspirations, and philosophical priorities
of the organization?
 Self-concept: What are the organization’s major strengths and competitive
advantages?
 Concern for public image: what are the organization’s public responsibilities and what
image is desired?
 Concern for employees: What is the organization’s attitude toward its employees?
The planning process can be used to promote innovation in organizations. The
organizational mission statement can be a primary means of encouraging innovation. The
goals component can translate the mission in a way supporting innovation. The plans
component can provide actual plans for achieving innovative outcomes. Obstacles to planning
threaten the ability of organizations to develop effective plans.
 Plans in a rapidly changing environment require frequent revisions. Manager may
resist formalized planning if they believe planning is unnecessary. The pressure of
day-to-day responsibilities may keep managers from planning. Managers may be
poorly prepared. Staff specialists may come to dominate the planning process
 Organizations can take steps to reduce the obstacles to planning. Top-level managers
may demonstrate their support of the planning process.
 Planning staffs is a small group of individuals who assist top-level managers in
developing the various components of the planning process. This staff should focus on
helping rather than taking over the planning process.
 Contingency planning is the development of alternative plans for use in the event that
environmental conditions evolve differently than anticipated, rendering original plans
unwise or unfeasible.
Developing Plans
The process of developing plans is influenced by three contingency factors and by the
planning approach followed. Operational planning usually dominates the planning activities
of lower-level managers. As managers move up through the levels of the organization, their
planning becomes strategic. The greater the environmental uncertainty, the more plans should
be directional and emphasis placed on the short term. When uncertainty is high, plans should
be specific, but flexible.
 Managers must be prepared to rework and amend plans, or even to abandon their
plans.
 Planning for too long or for too short a time period is inefficient and ineffective.
Jarmila Šebestová; Entrepreneurship
- 63 -
5.1.2 ORGANIZING
The organizing function would involve developing an organizational structure through
job design, departmentalization, determining span of control, and delegating authority.
Effectively, these tasks would provide a structure of relationships and authority that
coordinates the organization’s efforts. Organization structure is the formal pattern of
interactions and coordination designed by management to link the tasks of individuals and
groups in achieving organizational goals. An organizational structure is the formal framework
by which job tasks are divided, grouped, and coordinated. Except for a small business run
solely by its owner, every small business needs a management hierarchy—no matter how
small. Each person in the business should know who is responsible for what, have the
authority to carry out his or her responsibilities, and not get conflicting instructions from
different bosses.
This formal pattern designed by management is to be distinguished from the informal
pattern of interactions that simply emerges within an organization. Organization design is the
process of developing an organization structure. Organizational design is the process of
developing or changing an organization’s structure. It involves decisions about six key
elements: work specialization, departmentalization, and chain of command, span of control,
centralization/decentralization, and formalization. We need to take a closer look at each of
these structural elements.
The organization chart is a line diagram that depicts the broad outlines of an
organization’s structure. While varying in detail from one organization to another, typically
organization charts show the major positions or departments in the organization, the way
positions are grouped together, reporting relationships for lower to higher levels, official
channels for communications, and possibly the titles associated with major positions in the
organization.
The organization chart provides a visual map of the chain of command, the unbroken
line of authority that ultimately links each individual with the top organizational position
thorough a managerial position at each successive layer in between. Nearly all organizations
having just a few members have an organization chart. Responsibility is the obligation or
expectation to perform and carry out duties and achieve goals related to a position. Authority
is the right inherent in a managerial position to tell people what to do and to expect them to do
it, right to make decisions and carry out actions to achieve organizational goals. While part of
a manager’s work may be delegated, the manager remains accountable for results.
 Accountability is the requirement of being able to answer for significant deviations
from duties or expected results.
 The fact that managers remain accountable for delegated work may cause them to
resist delegation.
Delegation is assignment of part of manager’s work to others along with responsibility
and authority. In addition to issues of accountability, managers may resist delegation for
a number of reasons.
 Managers may fear if subordinates fail.
 Managers may think they lack time to train subordinates.
 Managers may want to hold on to their power.
 Managers may enjoy doing the tasks subordinates could do.
 Managers may feel threatened by subordinates.
 Managers may not know how to delegate.
 Subordinates may resist delegation because of fear of failure or of risk taking.
 Failure to delegate may have serious negative consequences for a manager’s career.
5 Managing the Small Business
- 64 The
organizing process raises some important questions: What jobs need to be done?
Who does what? Who reports to whom? What are the formal relationships among people in
the organization? You provide answers to these questions by developing an organizational
structure: an arrangement of positions that is most appropriate for your company at a specific
point in time. Remember, given the rapidly changing environment in which businesses
operate a structure that works today might be outdated tomorrow. In building an
organizational structure, you engage in two activities: job specialization (dividing tasks into
jobs) and departmentalization (grouping jobs into units). We will now see how these two
processes are accomplished.
5.1.3 MANAGING PEOPLE IN THE SMALL BUSINESS (DIRECTING)
A critical requirement of effective entrepreneurship is effectively managing and
motivating employees. These activities make up the leadership function. This involves
encouraging employees to work to achieve the business’s goals by effectively communicating
the tasks, which have to be done, rewarding good performance, and creating an environment
that supports the employees’ efforts and individual needs (more in chapter 6). Directing is
providing focus and direction to others and motivating them to achieve organizational goals.
LEADERSHIP STYLES
Actually, it is fairly easy to pick up a baton, cue each section, and strike up the band.
However, it does not follow that the music will sound good. What if your cues are ignored,
misinterpreted, or ambiguous? Maybe your musicians don’t like your approach to making
music and will just walk away. On top of everything else, you don’t simply want to make
music: you want to inspire your musicians to make great music. How do you accomplish this
goal? How do you become an effective leader? What style, or approach, should you use to
motivate others to achieve organizational goals?
Unfortunately, there are no definitive answers to questions like these. Over time, every
manager refines his or her own leadership style, or way of interacting with and influencing
others. Despite a vast range of personal differences, leadership styles tend to reflect one of the
following approaches to directing and motivating people: the autocratic, the democratic, or
the laissez-faire. Let’s see how managerial styles reflect each of them in a work situation.
 Autocratic style. Managers who have developed an autocratic leadership style
tend to make decisions without soliciting input from subordinates. They exercise
authority and expect subordinates to take responsibility for performing the
required tasks without undue explanation.
 Democratic style. Managers who favour a democratic leadership style generally
seek input from subordinates while retaining the authority to make the final
decisions. They are also more likely to keep subordinates informed about things
that affect their work.
 Laissez-faire style. In practicing a laissez-faire leadership style, managers adopt
a “hands-off” approach and provide relatively little direction to subordinates.
They may advise employees but usually give them considerable freedom to
solve problems and make decisions on their own.
5.1.4 CONTROLLING
The process of comparing actual to planned performance and taking necessary
corrective action is called controlling. The-controlling function would involve establishing
Jarmila Šebestová; Entrepreneurship
- 65 standards,
obtaining information that provides a comparison of actual with desired results, and
taking actions to correct any adverse.
Control responsibilities differ according to managerial level. There are five commonly
identified steps in the controlling process.
Figure 20 Steps in the controlling process
Source: Collins, 2008
Setting performance standards is the first step. Standards let employees know what to
expect in terms of time, quality, quantity, and so forth. The second step is measuring
performance, where the actual performance or results are determined. Comparing
performance is step three. This is when the actual performance is compared to the standard.
The fourth and last step, taking corrective action, involves making whatever actions are
necessary to get things back on track. The controlling functions should be circular in motion,
so all the steps will be repeated periodically until the goal is achieved.
 Strategic control involves monitoring critical environmental factors that could affect
the viability of strategic plans, assessing the effects of organizational strategic actions,
and ensuring that strategic plans are implemented as intended. Strategic control is
typically the domain of top-level managers who must insure core competencies are
developed and maintained. Long periods are involved, although shorter periods may
be appropriate in turbulent environments.
 Tactical control focuses on assessing the implementation of tactical plans at
departmental levels, monitoring associated periodic results, and taking corrective
action as necessary. Tactical control is primarily under the direction of middle
managers, but top-level managers may at times get involved. Periods are periodic,
involving weekly or monthly reporting cycles. Tactical control involves departmentlevel
objectives programs, and budgets.
 Operational control involves overseeing the implementation of operating plans,
monitoring day-to-day results, and taking corrective action when required. Operational
control is the responsibility of lower-level managers. Control is a day-to-day process.
The concern is with schedules, budgets, rules, and specific outputs of individuals. For
controls and three levels to be effective, they must operate in concert with one another.
5 Managing the Small Business
- 66 Types
of controls
Controls can be classified according to their timing or place in the productive cycle.
 Feed forward control focuses on the regulation of inputs to ensure that they
meet the standards necessary for the transformation process. The emphasis is
upon preventing problems. Other names for feed forward control are
“preliminary control,” “pre-control,” “preventative control” and “steering
control.”
 Concurrent control involves the regulation of ongoing activities that are part of
the transformation process to ensure that conform to organizational standards.
Checkpoints are in place to determine whether to continue the process, take
corrective action, or stop worked altogether. Other names for concurrent control
are “screening” and “yes-no control.” This type of control is not appropriate for
work that requires creativity or innovation.
 Feedback control is regulation exercised after a product or service has been
completed in order to ensure that the final output meets organizational standards
and goals. Feedback control is used when feed forward and concurrent controls
are not feasible or are too costly. Other names for feedback control are “post
action control” or “output control.” Feedback control serves a number of
functions:
o To serve as a final means to check for deviations not detected earlier
o To provide information that will facilitate the planning process
o To provide information regarding employee performance
 Multiple control systems are systems that use two or more of the feed
forward, concurrent, and feedback control processes and involve several
strategic control points. Multiple control systems develop because of the
need to control various aspects of a productive cycle, including inputs,
transformation, and outputs. Computer software companies provide
examples of processes complex enough to require multiple controls.
Managers might use any of the following types of performance control tools:
financial controls, information controls, balanced scorecard approach, or
benchmarking best practices approach.
 Financial Controls. Financial ratios are calculated by taking numbers from
the organization’s primary financial statements—the income statement and
the balance sheet. The four key categories of financial ratios are as follows.
o Liquidity ratios measure an organization’s ability to meet its current
debt obligations.
o Leverage ratios examine the organization’s use of debt to finance its
assets and whether it is able to meet the interest payments on the
debt.
o Activity ratios measure how efficiently the firm is using its assets.
o Profitability ratios measure how efficiently and effectively the firm
is using its assets to generate profits. We have also discussed
budgets as a planning tool. However, budgets are also control tools.
They provide managers with quantitative standards against which to
measure and compare actual performance and resource
consumption.
o Other Financial Control Measures. Managers are using measures
such as EVA (economic value added) and MVA (market value
Jarmila Šebestová; Entrepreneurship
- 67 added).
Economic value added is a tool for measuring corporate and
divisional performance by calculating after-tax operating profit
minus the total annual cost of capital. Market value added adds
a market dimension by measuring the stock market’s estimate of the
value of a firm’s past and expected capital investment projects.
 Information Controls. Controlling information can be vital to an
organization’s success. We need to look at the development and use of
management information systems. A management information system is
a system that provides managers with needed and usable information on
a regular basis. Managers need usable information, not just data.
Information can help managers control the various organizational areas
efficiently and effectively. It plays a vital role in the controlling process.
 Balanced Scorecard Approach. The balanced scorecard is a performance
measurement tool that looks at four areas—financial, customer, internal
processes, and people/innovation/growth assets—that contribute to
a company’s performance. The intent of the balanced scorecard is to
emphasize that all of these areas are important to an organization’s success.
 Benchmarking of Best Practices. Benchmarking is the search for the best
practices among competitors or non-competitors that lead to their superior
performance. Internal benchmarking best practices program.
 Establishing Quality Management Systems. By implementing
international quality standards like ISO-9000, European Quality Award,
Deming Prize, or Malcom Balridge Award; an organization can boost its
productivity and quality. This will give advantage for a continuous
improvement and consistent quality products for customers and keeping the
employees happy as well. One can also adapt TQM philosophy of Deming,
Juran or Crosby or Taguchi to outperform their competitors in the global
market.
CASE STUDY 3 GREEN THUMB12
The motivation to set up your own business can come from deep inside and wait a long
time to find the best opportunity. The process is not linear or necessarily sequential – and
many might say luck is involved.
Case questions:
1. In what ways did Stephen minimise his start-up and growth costs?
2. How much of Stephen has success was down to luck?
3. Would Stephen have succeeded in any business?
Stephen Waring’s entrepreneurial instinct kicked in at the age of 14 when he started
framing old prints and selling them at local fetes around his hometown in North Wales in his
spare time. Stephen’s father was the sales director for a loft insulation firm and by the age of
16, he was helping canvas potential customers by knocking on doors. He was good at selling,
and so when he left school at 17 he set up his own loft insulation firm – it came naturally. He
was so successful he even persuaded his older brother to come and help him. Therefore, when
his brother married an American girl in 1985, Stephen went to the USA for his wedding.
There he met her uncle who owned a lawn treatment-company. He also found out that 24% of
homes in the USA hired someone to treat their lawns in some way.
Despite sceptical parents, Stephen researched the idea. First, he set out to find
competitors by looking through the Yellow Pages telephone directories, but he could not find
12
Burns, 2007, p.120
5 Managing the Small Business
- 68 anybody
offering the same service in the UK. The question was whether nobody else had
thought about this idea or whether there was no demand for this sort of service. Stephen could
not believe that a service that sold to millions of people in the USA would not sell in the UK
so he decided to persevere. Next, he set out to find the best mix of fertilizer ingredients for the
UK. He experimented on his parents’ lawn, turning it orange and black in the process. Having
perfected a suitable mix, Stephen next spent £64 on printing 1000 leaflets and hand delivered
them around housing estates near his home. Then he went around doing what he did best –
knocking on doors and selling. In this way, he secured 70 customers.
In this way Green Thumb was born. Stephen quickly developed a routine of visiting
customers four or five times a year to treat their lawns, like in the USA. The treatment worked
and word-of-mouth brought in more customers, so Stephen brought in his younger brother to
help him. By 1995, Green Thumb had several thousand regular customers and that was when
the next stage in the business’s development came about. A customer asked him to sell him
a Green Thumb franchise. By 1996, Stephen was selling franchises around the UK. By 2005
there were some 113 franchises servicing over seven million customers, each spending about
£26 on lawn treatment. Franchisees had sales of £25 million a year, giving the company
royalties of £5 million. Green Thumb is growing at 5% per year.
‘When people ask me if I ever imagined that my business would be as successful as it
has turned out to be, I have to say yes. And we are still embryonic in our growth….The
challenge was developing an industry from scratch as opposed to jumping on the bandwagon
of somebody else who was already doing it….It helps to have a strong belief in your abilities
and not to feel insecure.’
Sunday Times, 2 October 2005
Case suggestions:
1. To minimise costs Stephen did things himself like:
• Market research
• Product research
• Leaflet distribution
• Selling
- Used his family (brother)
- Grew the business through franchise
2. How much is luck and how much being alert to opportunities? He spotted the business
opportunity on a visit to the USA, but he customised it to UK conditions. A customer asked
him for a franchise, but he decided to roll it out in this way.
3. This is anybody’s guess. According this story, he would.
5.1.5 DECISION MAKING AND DECISION TAKING
Decision-making situations differ according to the types of problems that must be
handled. Certainty is a situation in which a manager can make accurate decisions because the
outcome of every alternative is known. However, this is not characteristic of most managerial
decisions. Uncertainty is a condition in which the decision maker chooses a course of action
without complete knowledge of the consequences that will follow implementation. Risk is the
possibility that a chosen action could lead to losses rather than the intended results.
 Uncertainty is seen as the reason why situation is risky.
 A rapidly changing environment is a major cause of uncertainty.
Jarmila Šebestová; Entrepreneurship
- 69 RATIONAL
DECISION-MAKING
Although we know about the decision-making process, we still do not know much about
the manager as a decision maker. In this session, we will look at how decisions are made, the
types of problems and decisions managers face, the conditions under which managers make
decisions, and decision-making styles. Decision-making is the process through which
managers identify organizational problems and attempt to resolve them. Decision makers face
three types of problems.
 A crisis problem is a serious difficulty requiring immediate action.
 A non-crisis problem is an issue that requires resolution, but does not
simultaneously have the importance and immediacy characteristics of crises.
 An opportunity problem is a situation that offers a strong potential for
significant organizational gain if appropriate actions are taken. Opportunities
involve ideas that could be sued, rather than difficulties that must be resolved.
Non-innovative managers tend to focus on problems rather than upon
opportunities.
TYPES OF PROBLEMS AND DECISIONS
Managers will face with different types of problems and will use different types of
decisions.
 Well-structured problems are straightforward, familiar, and easily defined. In
handling this situation, a manager can use a programmed decision, which is
a repetitive decision that can be handled by a routine approach. There are three
possible programmed decisions.
o A procedure is a series of interrelated sequential steps that can be used to
respond to a structured problem.
o A rule is an explicit statement that tells managers what they ought or
ought not to do. A policy is a guide that establishes parameters for
making decisions rather than specifically stating what should or should
not be done.
 Poorly structured problems are new or unusual problems in which information is
ambiguous or incomplete. These problems are best handled by a nonprogrammed
decision that is a unique decision that requires a custom-made
solution.
DECISION-MAKING STYLES
Managers have different styles when it comes to making decisions and solving
problems. One perspective proposes that people differ along two dimensions in the way they
approach decision-making.
 One dimension is an individual’s way of thinking—rational or intuitive. The other is the
individual’s tolerance for ambiguity—low or high.
 These two dimensions lead to a two by two matrix with four different decision-making
styles.
o The directive style is one that is characterized by low tolerance for ambiguity and
a rational way of thinking.
o The analytic style is one characterized by a high tolerance for ambiguity and
a rational way of thinking.
5 Managing the Small Business
- 70 o
The conceptual style is characterized by an intuitive way of thinking and a high
tolerance for ambiguity.
o The behavioural style is one characterized by a low tolerance for ambiguity and an
intuitive way of thinking.
 Most managers realistically probably have a dominant style and alternate styles, with
some relying almost exclusively on their dominant style and others being more flexible
depending on the situation.
5.2 A MANAGER AND CURRENT BUSINESS STAGE
A classic study by Churchill and Lewis (1983) identified five stages of small business
growth: existence, survival, success, take-off, and resource maturity. Each stage has its own
challenges and requirement to the management position.
Stage I: Existence. This is the beginning. The business is up and running. The primary
problems will be obtaining customers and establishing a customer base, producing products or
services, and tracking and conserving cash flow. The organization is simple, with the owner
doing everything, including directly supervising a small number of subordinates. Systems and
formal planning do not exist. The companies that stay in business move to Stage II.
Managerial position is creative, mainly connected with the owner.
Figure 21 Business stage by Churchill and Lewis
Source: Churchill and Lewis, 1983 p.34
Stage II: Survival. The business is now a viable operation. There are enough
customers, and they are being satisfied well enough for them to stay with the business. The
company’s focal point shifts to the relationship between revenues and expenses. Owners will
be concerned with (1) whether they can generate enough cash in the short run to break even
and cover the repair/replacement of basic assets and (2) whether they can get enough cash
flow to stay in business and finance growth to earn an economic return on assets and labour.
The organizational structure remains simple. Little systems development is evident, cash
forecasting is the focus of formal planning, and the owner still runs everything. Managerial
position is innovative.
Stage III: Success. The business is now economically healthy, and the owners are
considering whether to leverage the company for growth or consider the company as a means
Jarmila Šebestová; Entrepreneurship
- 71 of
support for them as they disengage from the company. There are two tracks within the
success stage. The first track is the success-growth sub stage, where the small business owner
pulls all the company resources together and risks them all in financing growth. Systems are
installed with forthcoming needs in mind. Operational planning focuses on budgets. Strategic
planning is extensive, and the owner is deeply involved. The management style is functional,
but the owner is active in all phases of the company’s business. The second track is
the success-disengagement sub stage, where managers take over the owner’s operational
duties, and the strategy focuses on maintaining the status quo. Cash is plentiful, so the
company should be able to maintain itself indefinitely, barring external environmental
changes. The owners benefit indefinitely from the positive cash flow or prepare for a sale or
a merger. The first professional managers are hired and basic financial, marketing, and
production systems are in place. Managerial position is focused on task.
Stage IV: Take-off. This is a critical time in a company’s life. The business is
becoming increasingly complex. The owners must decide how to grow rapidly and how to
finance that growth. There are two key questions: (1) Can the owner delegate responsibility to
others to improve managerial effectiveness? (2) Will there be enough cash to satisfy the
demands of growth? The organization is decentralized and may have some divisions in place.
Both operational planning and strategic planning are being conducted and they involve
specific managers. If the owner rises to the challenges of growth, it can become a very
successful big business. If not, it can usually be sold at a profit. Managerial position is to get
confidence.
Stage V: Resource Maturity. The company has arrived. It has the staff and financial
resources to engage in detailed operational and strategic planning. The management structure
is decentralized, with experienced senior staff, and all necessary systems are in place. The
owner and the business have separated both financially and operationally. The concerns at this
stage are to (1) consolidate and control the financial gains that have been brought on by the
rapid growth and (2) retain the advantage of a small size (e.g., response flexibility and the
entrepreneurial spirit). If the entrepreneurial spirit can be maintained, there is a strong
probability of continued growth and success. If not, the company may find itself in a state of
ossification. These are common traits in large corporations. Managerial position is
independent from the owner.
5.3 A MANAGER AND THE LEGAL FORM SELECTION
Selecting the form of business organization that is adopted by a business depends on
many factors. One could begin by anticipating the eventual size and nature of the
business. The complexity of a business may dictate the type of business organization that is
adopted. However, many of the factors that go into this determination are either directly or
indirectly financial in nature. The indirect factors are as follows: the extent to which
a business owner wishes to attain control of the business, the relationship that the owner
would have with partners or investors, and the perceived risk associated with the business.
This last factor is tied to the question of the extent to which the owner will invest his or her
own money and assets. The direct financial factors that go into selecting the type of the
business organization include the following: expected profits or losses, tax issues, the
vulnerability and threat from lawsuits, and the ability to extract profits from the business for
the owner’s use. Decide whether you are running this business by yourself or with others
involved
 If by yourself, you will be running a sole proprietorship.
 Is it more important to you to have a simple business and tax structure or less
personal liability for debts and corporate judgements?
5 Managing the Small Business
- 72 
If you want a simple business and tax structure with more than one person,
choose a partnership.
 If you want to limit your personal liability for debts, choose to incorporate.
 If you were incorporating, would you trade more flexibility for greater confusion
in the tax laws?
To establish a company in another country than the Czech Republic, it is critical to
make a comparative analysis of future costs of carrying on business in our republic and the
EU.
Table 11 Main areas of Start-up costs
Section Criterion
Goods and services free mobility  Basic principles in the integrated EU market
Free mobility of persons
 Wages and salaries costs,
 Insurance costs paid by employer
 Long-term residence in EU, permission for working in another
country
Free mobility of capital
 Amount of registered capital for foundation of common company
forms such as limited liability company, joint stock company or self
proprietor
 administrative costs and barriers,
 VAT rate
When we intend to carry on business in the Czech Republic, we are obliged to follow
the Czech Commercial Code, which stipulates the amount of the registered capital, which
depends on the company legal form. In order to be permitted to establish a company with
limited liability in the Czech Republic, you will need CZK 200,000 and for Joint Stock
Company you need CZK 2,000,00013
.
Other business forms exist in our business law, such as self-proprietor, partnerships,
limited partnerships, where you do not need to have a registered capital except in the case of
a co-operative, but on our market, there are only two dominating forms - company with
limited liability and Joint Stock Company.
Let´s compare main advantages and disadvantages in management style according
chosen legal form.
Small businesses are normally:
 Sole proprietorships. The advantage of sole ownership is that you make all the
decisions and take all the profits. However, the sole trader has a lot of
responsibility and will need to work extremely hard.
 Partnerships. Forming a partnership makes it possible to share the workload,
but profits have to be shared and there may be disagreements between partners.
 Privately owned corporations. Forming a private company makes it possible to
raise extra capital for the business by selling shares, but setting up a company
requires time and paperwork. In addition, shareholders take a share of the
profits.
Every small business must select a legal form of ownership. The most common forms
are sole proprietorship, partnership, and corporation. A limited liability company (LLC) is
a relatively new business structure that is now allowed by all fifty states. Before a legal form
is selected, however, several factors must be considered, not the least, which are legal and tax
options. The legal form of the business is one of the first decisions that a small business
owner will have to make. Because this decision will have long-term implications, it is
13
New request in 2014: JSC: 80 000€, limited lability company 1 CZK
Jarmila Šebestová; Entrepreneurship
- 73 important
to consult an attorney and an accountant to help make the right choice. The
following are some factors the small business owner should consider before making the
choice:
 The owner’s vision. Where does the owner see the business in the future (size,
nature, etc.)?
 The desired level of control. Does the owner want to own the business personally
or share ownership with others? Does the owner want to share responsibility for
operating the business with others?
 The level of structure. What is desired—a very structured organization or
something more informal?
 The acceptable liability exposure. Is the owner willing to risk personal assets? Is
the owner willing to accept liability for the actions of others?
 Tax implications. Does the owner want to pay business income taxes and then pay
personal income taxes on the profits earned?
 Sharing profits. Does the owner want to share the profits with others or personally
keep them?
 Financing needs. Can the owner provide all the financing needs? If outside
investors are needed, how easy will it be to get them?
 The need for cash. Does the owner want to be able to take cash out of the business?
The final selection of a legal form will require consideration of these factors and
tradeoffs between the advantages and disadvantages of each form. No choice will be perfect.
Even after a business structure is determined, the favourability of that choice over another will
always be subject to changes in the laws
5.3.1 SOLE PROPRIETORSHIP
The sole proprietorship is the simplest business form under which one can operate
a business.
DEFINITION 6 SOLE PROPRIETORSHIP
The sole proprietorship is not a legal entity. It simply refers to a person who owns the
business and is personally responsible for its debts.
A sole proprietorship can operate under the name of its owner or it can do business
under a fictitious name. The fictitious name is simply a trade name--it does not create a legal
entity separate from the sole proprietor owner. A business that legally has no separate
existence from its owner. Income and losses are taxed on the individual's personal income tax
return. The sole proprietorship is a popular business form due to its simplicity, ease of setup,
and nominal costs14
.
Advantages:
 Easiest and least expensive form of ownership to organize.
 Sole proprietors are in complete control, and within the parameters of the law,
may make decisions as they see fit.
 Sole proprietors receive all income generated by the business to keep or reinvest.
14
Entrepreneur, 2013. Sole proprietorship Definition . Small Business Encyclopedia. [online] [Accessed: 19 Dec
2013] Available at: http://www.entrepreneur.com/encyclopedia/sole-proprietorship
5 Managing the Small Business
- 74 
Profits from the business flow-through directly to the owner's personal tax
return.
 The business is easy to dissolve, if desired.
Disadvantages:
 Have unlimited liability and are legally responsible for all debts against the
business. Their business and personal assets are at risk. May be at
a disadvantage in raising funds and are often limited to using funds from
personal savings or consumer loans.
Sole Proprietorship
+Easy to Organize
+ Owner Has Complete Control
+ Owner Receives All Income
- Owner Has Unlimited Liability
- Benefits Are Not Tax Deductions
Many small businesses operated by a single individual adopt sole proprietorship format
of business organization. It is the most basic type of business organization. It is also the least
expensive to create and the easiest to operate and dissolve. Sole proprietorships can be
incorporated if the owner so desires. Not being a legal entity, single scratch sole
proprietorships disappear after the death of the owner. This type of business is essentially
a format for a single-person business (although many have between one and ten employees),
where the owner makes all the decisions related to the business’s operations. The owner can
extract all profits from the business for his or her personal use, or the owner can decide to
reinvest any portion of the profits back into the business. Because a single proprietorship is
not a legal entity, any income generated by the business goes directly on the owner’s personal
tax return. However, the single owner is also personally responsible for any debts that the
business acquires. This means that the owner may put his or her own personal assets at risk. In
addition, this business organization means unlimited liability for its owner. The format means
that there is very little opportunity to raise funds from sources other than the owner’s own
capital or consumer loans.
5.3.2 PARTNERSHIPS
DEFINITION 7 PARTNERSHIP
Partnership is a legal form of business operation between two or more individuals, who
share management and profits.
The two most common are general and limited partnerships. Generally, two or more
people share ownership of a single business15
.
Advantages:
 Partnerships are relatively easy to establish; however, time should be invested in
developing the partnership agreement.
 With more than one owner, the ability to raise funds may be increased.
 The profits from the business flow directly through to the partners' personal tax
returns.
 Prospective employees may be attracted to the business if given the incentive to
become a partner.
 The business usually will benefit from partners who have complementary skills.
15
Entrepreneur, 2013. Partnership Definition . Small Business Encyclopedia. [online] [Accessed: 19 Dec 2013]
Available at: http://www.entrepreneur.com/encyclopedia/partnership
Jarmila Šebestová; Entrepreneurship
- 75 -
Disadvantages:
 Partners are jointly and individually liable for the actions of the other partners.
 Profits must be shared with others.
 Since decisions are shared, disagreements can occur.
 Some employee benefits are not deductible from business income on tax returns.
 The partnership may have a limited life; it may end upon the withdrawal or
death of a partner
PARTNERSHIP TYPES
 Limited Partnership and Partnership with limited liability
"Limited" means that most of the partners have limited liability (to the extent of their
investment) as well as limited input regarding management decisions, which generally
encourages investors for short term projects, or for investing in capital assets. This form of
ownership is not often used for operating retail or service businesses. Forming a limited
partnership is more complex and formal than that of a general partnership.
 General Partnership
Partners divide responsibility for management and liability, as well as the shares of
profit or loss according to their internal agreement. Equal shares are assumed unless there is
a written agreement that states differently.
 Joint Venture Acts
They are like a general partnership, but are clearly for a limited period of time or
a single project. If the partners in a joint venture repeat the activity, they will be recognized as
an ongoing partnership and will have to file as such, and distribute accumulated partnership
assets upon dissolution of the entity.
Partnership
+ Easy to Organize, But Needs Agreement
+ Partners Receive All Income
- Partners Have Unlimited Liability
- Partners May Disagree
- Life of Business May Be Limited
Partnerships generally are unincorporated businesses. From a financial standpoint,
partnerships offer a few advantages over sole proprietorship. By having more than one owner
(investor), it is often easier to raise additional capital. In some businesses, such as law firms
and accounting firms, the prospect of becoming a partner may be an attractive inducement to
gain employees. There are several versions of partnerships.
The general partnership is composed of two or more owners who contribute the initial
capital of the business and share in the profits and any losses. It is similar to a sole
proprietorship in that all partners are personally responsible for all the debts and the liabilities
of the business. A general partnership is comparable to a sole proprietorship in that neither is
a taxable entity; therefore, the partners’ profits are taxed as personal income. They can deduct
any business losses from their personal income taxes. The exact proportion of ownership of
the firm is generally found in a written document known as the partnership agreement.
A limited partnership is a business that may have several general partners and several
partners that are more limited. The major difference with a general partnership is that the
limited partners do not have unlimited liability. Their losses are limited to their original
investment in the business. Common practice means that these limited partners do not play
a major decision-making role in the life of the business.
5 Managing the Small Business
- 76 -
5.3.3 CORPORATIONS
The owners of a corporation are its shareholders. The shareholders elect a board of
directors to oversee the major policies and decisions. The corporation has a life of its own and
does not dissolve when ownership changes.
DEFINITION 8 CORPORATIONS
Corporations are viewed as legal entities, meaning that they can enter into legal
agreements with individuals and other corporations. They are also subject to numerous local
and state regulations. This often results in extensive paperwork that can be costly. Their
shareholders own corporations.
Advantages:
 Shareholders have limited liability for the corporation's debts or judgments
against the corporations.
 Generally, shareholders can only be held accountable for their investment in
stock of the company. (Note however, that officers can be held personally liable
for their actions, such as the failure to withhold and pay employment taxes.)
 Corporations can raise additional funds through the sale of stock.
 A corporation may deduct the cost of benefits it provides to officers and
employees.
 Can elect corporation status if certain requirements are met. This election
enables company to be taxed similar to a partnership.
Disadvantages:
 The process of incorporation requires more time and money than other forms of
organization.
 Corporations are monitored by state or some local agencies, and as a result may
have more paperwork to comply with regulations.
 Incorporating may result in higher overall taxes. Dividends paid to shareholders
are not deductible form business income, thus this income can be taxed twice.
General types of corporations
 Limited Liability Company
A form of business organization with the liability-shield advantages of a corporation and
the flexibility and tax pass-through advantages of a partnership Under the LLC rules,
however, an individual isn't responsible for the firm's debt, provided he or she didn't
secure them personally, as with a second mortgage, a personal credit card or by putting
personal assets on the line.16
A limited liability company is an organizational form that can be limited to a single
individual or several other owners or shareholders. Like a general partnership, there is
a requirement for documents that define the distribution of responsibilities, profits, or losses.
Generally, the members of a limited liability company are liable for the debts of the company.
This format may provide tax and financial benefits for the participants. This format cannot be
used in the banking or insurance industries.
 Joint stock company
16
Entrepreneur, 2013. Limited Liability Company Definition . Small Business Encyclopedia. [online] [Accessed:
19 Dec 2013] Available at: http://www.entrepreneur.com/encyclopedia/limited-liability-company
Jarmila Šebestová; Entrepreneurship
- 77 A
joint-stock company is a business entity, which is owned by shareholders. Each
shareholder owns the portion of the company in proportion to his or her ownership of the
company's shares (certificates of ownership). This allows for the unequal ownership of
a business with some shareholders owning a larger proportion of a company than others do.
Shareholders are able to transfer their shares to others without any effects to the continued
existence of the company17
.
Corporation
+ Shareholders Have Limited Liability
+ Can Raise Funds Through Sale of Stock
+ Life of Business Is Unlimited
- Incorporating Takes Time and Money
- May Result in Higher Taxes Overall
The shareholders are liable only for their original investment in the business. They
cannot be sued for more than that amount. One of the major advantages of adopting
a corporate format is that in this type of business, it is sometimes much easier to raise capital
through either debt or the issuance of stock. Profits derived from this type of business are
taxed at the corporate rate. It is important to note that dividends paid to shareholders, unlike
interest expenses, are not deductible. Therefore, actually, this form of income is doubly taxed.
5.3.4 KEYS FOR SUCCESS
Being successful as a business owner requires more than coming up with a brilliant idea
and working hard. You need to learn how to manage and grow your business. In the process,
you will face numerous challenges, and your ability to meet them will be a major factor in
your success (or failure). To give yourself a fighting chance in making a success of your
business, you should do the following (Collins, 2008):
 Know your business. It seems obvious, but it is worth mentioning: successful
businesspeople know what they are doing. They are knowledgeable about the
industry in which they operate (both as it stands today and where it is headed), and
they know who their competitors are. They know how to attract customers and
who the best suppliers and distributors are, and they understand the impact of
technology on their business.
 Know the basics of business management. You might be able to start a business
based on a great idea, but to manage it you need to understand the functional areas
of business—accounting, finance management, marketing, and production. You
need to be a salesperson, as well as a decision maker and a planner.
 Have the proper attitude. When you own a business, you are the business. If you
are going to devote the time and energy needed to transform an idea into
a successful venture, you need to have a passion for your work. You should
believe in what you are doing and make a strong personal commitment to your
business.
 Get adequate funding. It takes a lot of money to start a business and guide it
through the start-up phase (which can last for over a year). You can have the most
brilliant idea in the world, the best marketing approach, and a talented
management team, yet if you run out of cash, your career as a business owner
could be brief. Plan for the long term and work with lenders and investors to
ensure that you will have sufficient funds to get open, stay open during the start-up
phase, and, ultimately, expand.
17
Courtney, Thomas B. The Law of Private Companies (2nd edition ed.). p. 26. ISBN 1-85475-265-0.
5 Managing the Small Business
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Manage your money effectively. You will be under constant pressure to come up
with the money to meet payroll and pay your other bills. That is why you need to
keep an eye on cash flow—money coming in and money going out. You need to
control costs and collect money that has owed you, and, generally, you need to
know how to gather the financial information that you require to run your
business.
 Manage your time efficiently. A new business owner can expect to work sixty
hours a week. If you want to grow a business and have some type of no work life
at the same time, you will have to give up some control—to let others take over
some of the work. Thus, you must develop time-management skills and learn how
to delegate responsibility.
 Know how to manage people. Hiring, keeping, and managing good people are
crucial to business success. As your business grows, you will depend more on your
employees. You need to develop a positive working relationship with them, train
them properly, and motivate them to provide quality goods or services.
 Satisfy your customers. You might attract customers through impressive
advertising campaigns, but you will keep them only by providing quality goods or
services. Commit yourself to satisfying—or even exceeding—customer needs.
 Know how to compete. Find your niche in the marketplace, keep an eye on your
competitors, and be prepared to react to changes in the marketplace. The history of
business (and much of life) can be summed up in three words: “Adapt or perish.”
EXAMPLE 8 GINA´S DECISION
When Gina Wilson18
opened her boutique six years ago, she had only one full-time
employee. Since then Gina has added two general partners and greatly expanded the
operation. Over the past year, it has become obvious that the group could open another
boutique that would be equally successful. The problem is money. The partnership lacks
funds for expansion. Gina’s banker has suggested that the company borrow €200,000 from the
bank and pledge the firm's assets as collateral. "This will get you the money you need, and
once you have the boutique going, you can repay the money," he told them. The idea sounds
fine to the partners, although they are concerned about the risk involved. If the second
boutique does not do well, it could affect the success of the first boutique by siphoning off
funds to repay the loan.
Gina has been thinking about incorporating the business, selling stock, and using these
funds for expansion purposes. She has not shared this idea with her banker because she wants
to give it more thought, but she intends to talk it over with her partners later in the week. She
is also pondering the value of a corporation. She has heard her accountant talk about this legal
form, although she is unsure of the type of legal arrangement it involves.
Questions
1. What are the benefits of the company is becoming a corporation? Is this a better idea than
the banker's proposal of taking a $200,000 loan? Why or why not?
2. How does a corporation work? Would this be a good idea for the firm? Why or why not?
3. What would you recommend to Gina? Explain in detail.
18
Based on Kuratko, 2009.
Jarmila Šebestová; Entrepreneurship
- 79 -
6 HUMAN RESOURCES IN THE SMALL BUSINESS
Many small businesses operate without employees. In many cases, they cooperate with
friends or family members and do not care about any personnel politics. Unfortunately, due to
business development, the owner has to pass through information about all the processes in
running your business. Do not forget, that the owner and a management team are bringing
people together and there is a lot more work than just write resumes. It is what makes
a company work or not work (Berry, 1998, p.59). The reason is simple; human resources are
the most important assets we have in most small businesses.
DEFINITION 9 HUMAN RESOURCES
Human Resources refer to the labour, physical and mental abilities that the people in
your organization contribute to producing the goods and services of your business.19
Small business employees have a direct impact on the working environment,
relationship with final customers and the business success. Many small businesses prefer to
get smaller jobs done through contractors who have contract labour. This is particularly true
in the initial stages of the business. As operations expand, the business owner has to decide
whether he would like to continue with his contracting arrangement or opt for recruiting full
time employees, a task which the personnel manager can assist. When a one-person small
business adds employees, some kind of hierarchy will be needed to indicate who does what.
This hierarchy often becomes the formal organization—that is, the details of the roles and
responsibilities of all employees.
Employees provide an organization’s human capital. The Society of Human Resource
Management’s Research Quarterly defined an organization’s human capital as follows: “A
company’s human capital asset is the collective sum of the attributes, life experience,
knowledge, inventiveness, energy and enthusiasm that its people choose to invest in their
work” (Weatherly, 2003).
6.1 MANAGEMENT OF HUMAN RESOURCES (HR) IN GENERAL
The new principles of management, however, require a focus on outcomes and results,
not just numbers and compliance. Just as lawyers count how many cases they’ve won; not just
how many words they used so, too must HR professionals track how employees are using the
skills they’ve learned to attain goals, not just how many hours they’ve spent in training. To
avoid outsourcing, HR needs to stay relevant and accept accountability for its business results.
In short, the people strategy needs to be fully aligned with the company’s business strategy.
Beyond the basic need for compliance with HR rules and regulations, the four key
elements of HR are summarized in the following figure. In high-performing companies, each
element of the HR system is designed to reflect best practice and to maximize employee
performance. The different parts of the HR system are strongly aligned with company goals.
The management of human resources involves those activities20
:
19
SMALLBUSINESSNOTES.COM., 2013. Small Business Human Resources - Small Business Notes. [online]
[Accessed: 19 Nov 2013] Available at: http://www.smallbusinessnotes.com/managing-your-business/human-
resources/#ixzz2jb74jtke
20
Employmentoptionsemploi.ca. 2013. Managing Human Resources A Guide for Small Business Owners
[online] [Accessed: 10 Dec 2013]Available at:
http://www.employmentoptionsemploi.ca/pdfs/pdfs/Employeur_ENG.pdf.
6 Human Resources in the Small Business
- 80 Figure
22 Key HR elements
Source: Employmentoptionsemploi.ca. 2013. Managing Human Resources A Guide for Small Business Owners
[online] [Accessed: 10 Dec 2013] Available at:
http://www.employmentoptionsemploi.ca/pdfs/pdfs/Employeur_ENG.pdf
6.1.1 SELECTION AND PLACEMENT (STAFFING)
You have to begin your search by having a well-defined idea of what you want. All
businesses want to attract, develop, and retain enough qualified employees to perform the
activities necessary to accomplish the organizational objectives of the business. As an
employer, you should prepare a job description before initiating the recruitment process.
A good job description describes the major areas of an employee’s job or position: the duties
to be performed, who the employee will report to, the working conditions, responsibilities,
and the tools and equipment that must be used on the job. Except in the most informal of
situations, hiring should always be done with an offer letter. The letter should spell out all
the particulars of the job including:
 compensation,
 benefits,
 responsibilities,
 performance expectations,
 probationary period,
 reporting requirements,
 desired start date,
 work location.
It needs to be made clear at the start what is being offered, and what is expected. If it is in
writing, then it is difficult to have a misunderstanding. The offer letter helps document the
contractual relationship between the new employee and the employer.
Jarmila Šebestová; Entrepreneurship
- 81 Figure
23 Selection and Placement process
Source: Kurtz, 2011, p. 289.
Because hiring a new employee is an expensive process, it is important to choose
sources that have the greatest potential for reaching the people who will most likely be
interested in what a small business has to offer. Unfortunately, it is not always possible to
know what those sources are, so selecting a mix of sources makes good sense.
 Internet. The Internet offers a wealth of places to advertise a job opportunity.
Monster.com, CareerBuilder.com, and LinkedIn.com are among the largest and
most well known sites, but there may be local or regional job sites that might
work better, particularly if a business is very small. A business will not have the
resources to bring people in from great distances. If a business has a Facebook
or a Twitter presence, this is another great place to let people know about job
openings. There may also be websites that specialize in particular occupations.
 Schools and colleges. Depending on the nature of the job, local schools and
colleges are great sources for job candidates, particularly if the job is part time.
Full-time opportunities may be perfect for the new high school or college
graduate. It would be worth checking out college alumni offices as well because
they often offer job services.
 Employee referrals. Referrals are always worth consideration, if only on
a preliminary basis. The employee making the referral knows the business and
the person being referred. Going this route can significantly shorten the search
process…if there is a fit.
6 Human Resources in the Small Business
- 82 
Promoting from within is a time-honoured practice. The owner sends
a positive signal to employees that there is room for advancement and
management cares about its employees. It is significantly less costly and quicker
than recruiting outside, candidates are easier to assess because more information
is available, and it improves morale and organization loyalty. On the downside,
there may be problems between the person who is promoted and former coworkers,
and the organization will not benefit from the fresh ideas of someone
hired from the outside.
 Want ads. Want ads can be very effective for a small business, especially if
a business is looking locally or regionally. The more dynamic they want ad, the
more likely it will attract good candidates.
When hiring, acquaint prospective new hires with the nature of the jobs they will be
expected to fulfil. This includes explaining the technical competencies needed (for example,
collecting statistical data) and defining behavioural competencies. Behavioural competencies
may have a customer focus, such as the ability to show empathy and support of customers’
feelings and points of view, or a work management focus, such as the ability to complete
tasks efficiently or to know when to seek guidance.
In addition, make the organization’s culture clear by discussing the values that underpin
the organization—describe your organization’s “heroes.” For example, are the heroes of your
company the people who go the extra mile to get customers to smile? Are they the people who
toil through the night to develop new code? Are they the ones who can network and reach
a company president to make the sale? By sharing such stories of company heroes with your
potential hires, you will help reinforce what makes your company unique. This, in turn, will
help the job candidates determine whether they will fit into your organization’s culture.
In addition to what is asked, it is also important that interviewers understand what they
should not ask, largely because certain questions lead to answers that may be used to
discriminate. There are five particularly sensitive areas:
 First, the only times you can ask about age are when it is a requirement of a job
duty or you need to determine whether a work permit is required.
 Second, it is rarely appropriate or legal to ask questions regarding race, colour,
national origin, or gender.
 Third, although candidates may volunteer religious or sexually orientated
information in an interview, you still need to be careful not to discriminate. Ask
questions that are relevant to work experience or qualifications.
 Fourth, firms cannot discriminate for health or disabilities; you may not ask
about smoking, health-related questions, or disabilities in an interview.
 Finally, you may not ask questions about marital status, children, personal life,
pregnancy, or arrest record. These kinds of questions could be tempting to ask if
you are interviewing for a position requiring travel; however, you can only
explain the travel requirements and confirm that the requirements are acceptable.
In addition to interviews, many employers use testing to select and place job applicants.
Any tests given to candidates must be job related and follow guidelines set forth by the Equal
Opportunity Employment Commission to be legal. The rationale behind testing is to give the
employer more information before making the selection and placement decision—information
vital to assessing how well a candidate is suited to a particular job. Most preemployment
assessment tests measure thinking styles, behavioural traits, and occupational interests. The
results are available almost immediately after a candidate completes the roughly hour-long
questionnaire. Thinking styles tests can tell the potential employer how fast someone can
learn new things or how well he or she can verbally communicate. Behavioural traits
Jarmila Šebestová; Entrepreneurship
- 83 assessments
measure energy level, assertiveness, sociability, manageability, and attitude. For
example, a high sociability score would be a desirable trait for salespeople (Mrosko, 2006).
6.1.2 JOB DESIGN
Design jobs that involve doing a whole piece of work and are challenging but
doable. Job design refers to the process of putting together various elements to form a job,
bearing in mind organizational and individual worker requirements, as well as considerations
of health, safety, and ergonomics. Train employees to have the knowledge and skills to
perform all parts of their job and give them the authority and accountability to do so.
Job performance refers to the level to which an employee successfully fulfils the factors
included in the job description. For each job, the content of job performance may differ.
Measures of job performance include quality and quantity of work performed by the
employee, the accuracy and speed with which the job is performed, and the overall
effectiveness of the person on the job.
TRAINING AND DEVELOPMENT
 Initial Training
 Training Needs Analysis
 Preparation of training programs
 Management and supervisory development
It would be nice if employees came pre-programmed with all the skills they need to do
their jobs. It would also be nice if job requirements stayed the same: once you have learned
how to do a job (or been pre-programmed), you would know how to do it forever. In reality,
new employees must be trained; moreover, as they grow in their jobs or as their jobs change,
they will need additional training. Unfortunately, training is costly and time-consuming.
POLICIES AND PROCEDURES
 Instituting health and safety standards
 Privacy Issues
 Handling of employee grievances
 Preparing employee handbooks
 Setting employee work hours
 Union relations
RECORDKEEPING
 Making certain you adhere to all labour laws governing employers
 Maintaining individual employee files
 Maintaining all of the department records
 Preparing departmental reports for top management
TERMINATION
Firing someone is never a pleasant activity. It is something you hope you never have to
do. Employees should see that they are a misfit and "fire" themselves voluntarily. If not, you
will have to do the job for them.
First, make certain that you have gone "all the way through it" to be sure that you are
making the right decision. Often discussion with the poor performing employee is necessary
to be certain you have justification for their dismissal.
6 Human Resources in the Small Business
- 84 Next,
sit down with the employee and discuss their performance, your attempts to
change their performance to suit your needs, and explain that their performance has not met
your expectations. Provide examples of unsatisfactory performance and explain that they are
no longer a match for your organization.
6.1.3 COMPENSATION AND REWARDS
Evaluate and pay people based on their performance, not simply for showing up on the
job. Offer rewards for skill development and organizational performance, emphasizing
teamwork, collaboration, and responsibility for performance. Help employees identify new
skills to develop so that they can advance and achieve higher pay and rewards. Compensation
systems that include incentives, gain sharing, profit sharing, and skill-based pay reward
employees who learn new skills and put those skills to work for the organization. Employees
who are trained in a broad range of skills and problem solving are more likely to grow on the
job and feel more satisfaction. Their training enables them to make contributions that are
more valuable to the company, which, in turn, gains them higher rewards and greater
commitment to the company.
When employees have access to information and the authority to act on that
information, they are more involved in their jobs and more likely to make the right decision
and take the necessary actions to further the organization’s goals. Similarly, rewards need to
be linked to performance, so that employees are naturally inclined to pursue outcomes that
will gain them rewards and further the organization’s success at the same time.
PAY SYSTEM ELEMENTS
As summarized in the following table, pay can take the form of direct or indirect
compensation. Nonmonetary pay can include any benefit an employee receives from an
employer or job that does not involve tangible value. This includes career and social rewards,
such as job security, flexible hours and opportunity for growth, praise and recognition, task
enjoyment, and friendships. Direct pay is an employee’s base wage. It can be an annual
salary, hourly wage, or any performance-based pay that an employee receives, such as profitsharing
bonuses.
Table 12 Elements of a Pay System
Nonmonetary pay Includes benefits that do not involve tangible value.
Direct pay Employee’s base wage
Indirect pay Everything from legally required programs to health insurance, retirement, housing, etc.
Basic pay
Cash wage paid to the employee. Because paying a wage is a standard practice, the competitive
advantage can only come by paying a higher amount.
Incentive pay
A bonus paid when specified performance objectives are met. May inspire employees to set and
achieve a higher performance level and is an excellent motivator to accomplish goals.
Stock options
A right to buy a piece of the business that may be given to an employee to reward excellent service.
An employee who owns a share of the business is far more likely to go the extra mile for the
operation.
Bonuses
A gift given occasionally to reward exceptional performance or for special occasions. Bonuses can
show an employer appreciates his or her employees and ensures that good performance or special
events are rewarded.
Source: Cadden and Lueder, 2008.
Jarmila Šebestová; Entrepreneurship
- 85 Indirect
compensation is far varied, including everything from legally required public
protection programs such as social security to health insurance, retirement programs, paid
leave, childcare, or housing. Law requires some indirect compensation elements: social
security, unemployment, and disability payments. Other indirect elements are up to the
employer and can offer excellent ways to provide benefits to the employees and the employer
as well. For example, a working parent may take a lower-paying job with flexible hours that
will allow him or her to be home when the children get home from school. A recent graduate
may be looking for stable work and an affordable place to live.
SETTING PAY LEVELS
When setting pay levels for positions, managers should make sure that the pay level is
fair relative to what other employees in the position are being paid. Part of the pay level is
determined by the pay level at other companies. If your company pays substantially less than
others do, it is going to be the last choice of employment unless it offers something
overwhelmingly positive to offset the low pay, such as flexible hours or a fun, congenial work
atmosphere. Besides these external factors, companies conduct a job evaluation to determine
the internal value of the job—the more vital the job to the company’s success, the higher the
pay level. Jobs are often ranked alphabetically—“A” positions are those on which the
company’s value depends, “B” positions are somewhat less important in that they don’t
deliver as much upside to the company, and “C” positions are those of least importance—in
some cases, these are outsourced.
The most vital jobs to one company’s success may not be the same as in other
companies. For example, information technology companies may put top priority on their
software developers and programmers, whereas for retailers such as Nordstrom, the “A”
positions are those frontline employees who provide personalized service. For an airline,
pilots would be a “B” job because, although they need to be well trained, investing further in
their training is unlikely to increase the airline’s profits. “C” positions for a retailer might
include back office bill processing, while an information technology company might classify
customer service as a “C” job.
When setting reward systems, it is important to pay for what the company actually
hopes to achieve. Steve Kerr, vice president of corporate management at General Electric,
talks about the common mistakes that companies make with their reward systems, such as
saying, they value teamwork but only rewarding individual effort. Similarly, companies say
they want innovative thinking or risk taking, but they reward people who “make the
numbers.” (Kerr, 1995)
 Pay for Performance
As its name implies, pay for performance ties pay directly to an individual’s
performance in meeting specific business goals or objectives. Managers (often together with
the employees themselves) design performance targets to which the employee will be held
accountable. The targets have accompanying metrics that enable employees and managers to
track performance. The metrics can be financial indicators, or they can be indirect indicators
such as customer satisfaction or speed of development. Pay-for-performance schemes often
combine a fixed base salary with a variable pay component (such as bonuses or stock options)
that varies with the individual’s performance.
 Pay Structures for Groups and Teams
So far, we have discussed pay in terms of individual compensation, but many employers
also use compensation systems that reward all of the organization’s employees as a group or
6 Human Resources in the Small Business
- 86 various
groups and teams within the organization. Let us examine some of these less
traditional pay structures.
 Gain sharing
Sometimes called profit sharing, gain sharing is a form of pay for performance. In gain
sharing, the organization shares the financial gains with employees. Employees receive
a portion of the profit achieved from their efforts. How much they receive is determined by
their performance against the plan. Here is how gain sharing works: First, the organization
must measure the historical (baseline) performance. Then, if employees help improve the
organization’s performance on those measures, they share in the financial rewards achieved.
This sharing is typically determined by a formula. The effectiveness of a gain-sharing plan
depends on employees seeing a relationship between what they do and how well the
organization performs. The larger the size of the organization, the harder it is for employees to
see the effect of their work. Therefore, gain-sharing plans are more effective in companies
with fewer than 1,000 people. Gainsharing success also requires the company to have good
performance metrics in place so that employees can track their process. The gain-sharing plan
can only be successful if employees believe and see that if they perform better, they will be
paid more. The pay should be given as soon as possible after the performance so that the tie
between the two is established. When we design systems to measure performance, realize that
performance appraisals need to focus on quantifiable measures. Designing these measures
with input from the employees helps make the measures clear and understandable to
employees and increases their buy-in that the measures are reasonable.
 Team-Based Pay
Many managers seek to build teams, but face the question of how to motivate all the
members to achieve the team’s goals. As a result, team-based pay is becoming increasingly
accepted. With increasing acceptance and adoption come different choices and options of how
to structure team-based pay. One way to structure the pay is to first identify the type of team
you have—parallel, work, project, or partnership—and then choose the pay option that is
most appropriate to that team type. Let us look at each team type in turn and the pay structures
best suited for each.
Parallel teams are teams that exist alongside (parallel to) an individual’s daily job. (For
example, a person may be working in the accounting department but also be asked to join
a team on productivity). Parallel teams are often inter-departmental; they meet part time, and
they are formed to deal with a specific issue. The reward for performance on this team would
typically be a merit increase or a recognition award (cash or noncash) for performance on the
team.
A project team is likewise a temporary team, but it meets full time for the life of the
project. For example, a team may be formed to develop a new project and then disband when
the new product is completed. The pay schemes appropriate for this type of team include
profit sharing, recognition rewards, and stock options. Team members evaluate each other’s
performance.
A partnership team is formed around a joint venture or strategic alliance. Here, profit
sharing in the venture is the most common pay structure. Finally, with the work team, all
individuals work together daily to accomplish their jobs. Here, skill-based pay and gain
sharing are the payment schemes of choice, with team members evaluating one another’s
performance.
Jarmila Šebestová; Entrepreneurship
- 87 WAGE
AND SALARY ADMINISTRATION
 Job analysis
 Preparation of job descriptions
 Pay surveys
 Compensation
 Employment Taxes
 Fringe benefits
While it is true that money is not everything when it comes to employee satisfaction,
fair and equitable remuneration practices are essential to positive employee relations and
employee retention. Most organizations offer some level of employee benefits to their
employees. They do so in order to attract new talent, retain employees, increase
competitiveness in the marketplace, and protect the overall well being of their employees.
Evaluating overall organizational goals will help determine the structure of your employee
benefits package. Common Employee Benefits include:
 Health Insurance (Medical, Dental, Vision, Flexible Spending
Accounts)
 Income Protection (Life Insurance, Short and Long Term Disability)
 Retirement Plans
 Other (Gym Memberships, Onsite Child Care, Car Allowances,
Expense Accounts)
6.1.4 DIVERSITY MANAGEMENT
In past decades, “diversity” meant avoiding discrimination against women and
minorities in hiring. Today, diversity goes far beyond this limited definition; diversity
management involves actively appreciating and using the differing perspectives and ideas that
individuals bring to the workplace. Diversity is an invaluable contributor to innovation and
problem-solving access.
Diversity helps company teams to come up with more creative and effective solutions.
Teams whose members have complementary skills are often more successful because
members can see one another’s blind spots. Members will be more inclined to make different
kinds of mistakes, which mean that they will be able to catch and correct those mistakes.
Selecting the right employees and placing them in the right positions within the
company is a key HR function and is vital to a company’s success. Companies should devote
as much care and attention to this “soft” issue as they do to financial planning because errors
will have financial impact and adverse effects on a company’s strategy.
SOLVED EXERCISE 4 JOB DESCRIPTION
Walt has a problem. He works as a manager in a medium-sized company and considers
himself fortunate that the organizational chart allows him a full-time administrative assistant
(AA). However, in the two years Walt has been in his job, five people have held this AA job.
The most recent AA, who resigned after four weeks, told Walt that she had not known what
the job would involve. “I don’t do numbers, I’m not an accountant,” she said. “If you want
someone to add up figures and do calculations all day, you should say so in the job
description. Besides, I didn’t realize how long and stressful my commute would be—the
traffic between here and my house is murder!”
6 Human Resources in the Small Business
- 88 Taken
aback, Walt contacted the company’s HR department to clarify the job
description for the AA position. What he learned was that the description made available to
applicants was, indeed, inadequate in a number of ways. Chances are that frequent turnover in
this AA position is draining Walt’s company of resources that could be used for much more
constructive purposes. An accurate and complete job description is a powerful strategic HR
tool that costs little to produce and can save a bundle in reduced turnover. While the realistic
description may discourage some applicants (for example, those who lack an affinity for
calculations might not bother to apply for Walt’s AA position), those who follow through
with the application process are much more likely to be satisfied with the job once hired.
Result:
In addition to summarizing what the worker will actually be doing all day, here are
some additional suggestions for writing an effective job description:
 List the job requirements in bullet form so that job seekers can scan the posting
quickly.
 Use common industry terms, which speak to knowledgeable job seekers.
 Avoid organization-specific terms and acronyms, which would confuse job
seekers.
 Use meaningful job titles (not the internal job codes of the organization).
 Use key words taken from the list of common search terms (to maximize the
chance that a job posting appears on a job seeker’s search).
 Include information about the organization, such as a short summary and links to
more detailed information.
 Highlight special intangibles and unusual benefits of the job and workplace (e.g.,
flexitime, travel, etc.).
 Specify the job’s location (and nearest large city) and provide links to local
community pages (to entice job seekers with quality-of-life information).
6.2 DEVELOPING A STAFFING PLAN
Before you start to think about hiring, you will need at least a basic staffing plan. The
plan should sort out how many employees you expect to hire, the type of employee you are
looking for, and what they will be expected to do. The plan should also address how the
employee expenses will be covered.
A staffing plan should be well coordinated with your business plan, and it should
address items of discussion that will likely take place during candidate interviews. The plan
does not have to be detailed or lengthy, just something that addresses the key issues at
a satisfactory level so that wise management decisions can be made based on its content. Here
are the basics of a staffing plan.
 objectives, both near and long term
 characteristics and culture of your employee(s)
 approach to finding new employees
 how you're going to keep good employees
 training and transition
 job descriptions
 organization chart
 funding of employees
Jarmila Šebestová; Entrepreneurship
- 89 The
staffing plan has to provide a business vision. In the absence of a vision, it is easy
to go off course or go nowhere at all. In addition to helping you understand your plans for
growth, a staffing plan is also useful to help communicate to lenders and prospective
employees just what kind of organization you are trying to create and maintain.
The organizational structure of a company is what you frequently see as an
organizational chart. Make sure you explain how job descriptions work and how the main
company functions are divided up. Are your organizational lines drawn clearly? Is the
authority properly distributed? Do you have jobs that include responsibility without authority?
Do your resources seem in line with your organizational needs? Include summaries of their
backgrounds and experience, using them like brief resumes. Describe their functions with the
company. Resumes should be attached to the back of a plan.
Finally, you have to develop a personnel table to project personnel costs, including
direct compensation and indirect costs. The indirect costs include vacation pay, sick pay,
insurance benefits, education, and of course payroll taxes and some other costs.
If you are working as a sole proprietor in a home office, you should still include your own
compensation as part of your business plan. What you pay yourself should be added into the profit
and loss as an expense. However, in this case you do not really need to include payroll burden,
because these additional expenses are irrelevant until you include additional employees.
A good personnel plan varies according to your business and business plan needs. You
may want a simple list of names, titles, or groups, each of which is assigned a monthly cost.
Having a business organization structure will give potential investors and funding
institutions a window into how the business organizes its operations. The structure also lets
investors and lenders know what kind of talent is needed, how soon they will be needed, and
how the business will find and attract them. 21
6.3 MANAGERS VERSUS LEADERS
There are distinctions between managers and leaders. Managers are appointed and have
legitimate power within the organization. Leaders are those persons who are able to influence
others and who possess managerial authority. Leadership, then, is the ability to influence
a group toward the achievement of goals. Leadership, the foundation of the management
function of leading, is the process of influencing others toward the achievement of
organizational goals. The different types of power can engender different levels of
subordinate motivation. Power is the capacity to affect the behaviour of others. There are
different types of power depending upon their sources originally identified by French and
Raven.
 Legitimate power stems from a position’s placement in the managerial
hierarchy and the authority vested in the position.
 Reward power is based on the capacity to control and provide valued rewards to
others.
 Coercive power is based on the ability to obtain compliance through fear of
punishment.
 Expert power is based on the possession of expertise that is valued by others.
 Information power result from access to and control over the distribution of
important information about organizational operations and plans.
 Referent power results from being admired, personally identified with, or liked
by others.
21
A Strong Business Organization Structure Is Paramount to Business Success,” The Business Plan, accessed
February 2, 2012, www.the-business-plan.com/business-organization-structure.html
6 Human Resources in the Small Business
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6.3.1 MANAGERIAL COMMUNICATION WITH EMPLOYEES
Communication between managers and employees provides the information necessary
to get work done effectively and efficiently in organizations. In this and following lecture,
basic concepts in managerial communications will be presented including: the interpersonal
communication process, methods of communicating, and barriers to effective communications
and ways to overcome these barriers, communication flow and communication networks, and
contemporary issues and challenges associated with electronic communications and
information technology.
Communication is the transfer and understanding of meaning. If no information or
ideas have been conveyed or transferred, communication has not taken place. For
communication to be successful, the meaning must be imparted and understood. Good
communication does not require agreement with the message; just clear understanding of the
message. Managerial communication encompasses both interpersonal communication
(between two or more people) and organizational communication (all the patterns, networks,
and system of communication within an organization). Communication and associated
interpersonal processes are important ingredients of organizational effectiveness.
Communication is the exchange of messages between people for achieving common
meanings. Managers use two types of communication in their work.
 Verbal communication is the use of words to communicate.
o Written communication includes letters, memoranda, reports, newsletters,
policy manuals, etc.
o Disadvantage includes the fact that the conversations may be time-consuming
and difficult to terminate, and that additional time may have to be spent to
document what was said.
 Nonverbal communication is communication by means of elements and behaviours
that are not coded into words. Nonverbal Communication is communication
transmitted without words. The best-known types of nonverbal communication are
body language and verbal intonation. Body language refers to gestures, facial
expressions, and other body movements that convey meaning.
 Verbal intonation refers to the emphasis someone gives to words or phrases that
convey meaning.
Barriers to Effective Interpersonal Communication
 Filtering is the deliberate manipulation of information to make it appear more
favourable to the receiver. As information is communicated up through the
organizational levels, it is condensed and synthesized, and that doing the
condensing filter communication through their personal interests and perceptions
of what is important. The more that organizational cultural reward emphasizes
style and appearance, the more those managers will be motivated to filter
communications in their favour.
 Selective perception means when people selectively interpret what they see or
hear, what is based on their interests, background, experience, and attitudes.
 Emotions influence how a receiver interprets a message when it is received. It is
best to avoid reacting to a message when the receiver is upset because he/she is
not likely to be thinking clearly.
 Information overload happens when the information we have to work with
exceeds our processing—such as 600 waiting e-mail messages in the inbox.
Receivers tend to select out, ignore, pass over, or forget information when they
Jarmila Šebestová; Entrepreneurship
- 91 have
too much information. Alternatively, receivers may put off further
processing until the overload situation is over - still ineffective communication.
 Defensiveness - engaging in behaviours such as verbally attacking others,
making sarcastic remarks, being overly judgmental, and questioning others’
motives—happens when people feel that they are being threatened.
 Language -words mean different things to different people. Age, education, and
cultural background can influence language use and definition given to words
Jargon is specialized terminology or technical language that members of a group
use to communicate among themselves.
 National culture can affect the way a manager chooses to communicate.
7 Marketing in Small Business
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7 MARKETING IN SMALL BUSINESS
Small businesses are particularly suited to abiding by the marketing concept because
they are more nimble and closer to the customer than are large companies. They made more
quickly in response to customer wants and needs. Today’s marketers recognize that they must
have a complete, comprehensive, and cohesive approach that goes beyond the traditional
applications of the marketing concept (Kotler, Keller, 2009). Marketing plays a key role in
creating and delivering value to a customer.
7.1 MARKETING ENVIRONMENT
The marketing environment includes all the factors that affect a small business. Small
businesses are particularly vulnerable to changes in the external marketing environment
because they do not have multiple product and service offerings and/or financial resources to
insulate them.
Figure 24 Marketing environment structure
Source: Kotler, Keller, 2009.
The external marketing environment must be understood by the business if it hopes to
plan intelligently. This environment, not controllable by management, consists of the
following components (Kotler, Keller, 2009):
 Social factors - cultural and sub cultural values, attitudes, beliefs, norms,
customs, and lifestyles.
 Demographics - population growth, age, gender, ethnicity, race, education, and
marital status.
 Economic environment - income distribution, buying power and willingness to
spend, economic conditions, trading blocs, and the availability of natural
resources.
 Political and legal factors -regulatory environment, regulatory agencies, and
self-regulation.
 Technology - the nature and rate of technological change.
Jarmila Šebestová; Entrepreneurship
- 93 
Competition - existing firms, potential competitors, bargaining power of buyers
and suppliers, and substitutes.
 Ethics - appropriate corporate and employee behaviour.
The internal marketing environment refers to the company: its existing products and
strategies; culture; strengths and weaknesses; internal resources; capabilities with respect to
marketing, manufacturing, and distribution; and relationships with stakeholders (e.g., owners,
employees, intermediaries, and suppliers). This environment is controllable by management,
and it will present both threats and opportunities.
However, this vulnerability is offset to some degree by small businesses being in
a strong position to make quick adjustments to their strategies if the need arises. Small
businesses are also ideally suited to take advantage of opportunities in a changing external
environment because they are more nimble than large corporations that can be bogged down
in the lethargy and inertia of their bureaucracies. Firstly, you need to make marketing research
to be sure, which marketing tools you could use for your business.
7.2 MARKETING RESEARCH
Marketing research is about gathering the information that is needed to make decisions
about a business as an important precursor to the development of a marketing strategy.
Marketing research can help the small business identify and refine the segments that offer the
greatest opportunities. Part of that process will be to identify segments that meet the
requirements of measurability, substantiality, stability, accessibility, action ability, and
differential response. Meeting these requirements will increase the chances for successful
segmentation.
DEFINITION 10 MARKETING RESEARCH
A research involves the systematic design, collection, recording, analysis,
interpretation, and reporting of information pertinent to a particular marketing decision facing
a company (Lascu, Clow, 2007, p. 191)
It means that information relevant to the market, the competition, and the marketing
environment should be gathered and analyzed in an orderly and objective way. Marketing
research for small business offers many benefits like:
 companies can find hidden niches,
 design customer experiences,
 build customer loyalty,
 identify new business opportunities,
 design promotional materials,
 select channels of distribution,
 find out which customers are profitable and which are not,
 determine what areas of the company’s website are generating the most revenue,
and
 identify market trends that are likely to have the greatest impact on the business.
Answers can be found for the important questions that all small businesses face, such as
the following (Lewin, 2006):
 How are market trends affecting my business?
 How does our target market make buying decisions?
 What is our market share and how can we increase it?
7 Marketing in Small Business
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How does customer satisfaction with our products or services measure up to that
of the competition?
 How will our existing customers respond to a new product or service?
The specific nature and extent of any marketing research effort will, however,
a function of the product, the size and nature of the business, the industry, and the smallbusiness
owner or manager. There is no single approach to the research, which is suitable for
all the situations.
TYPES OF MARKETING RESEARCH
Small businesses can conduct primary or secondary marketing research or
a combination of the two. Primary marketing research involves the collection of data for
a specific purpose or project. For example, asking existing customers why they purchase from
the business and how they heard about it would be considered primary research. Another
example would be conducting a study of specific competitors with respect to products and
services offered and their price levels. These would be either simple marketing research
projects for a small business, business-to-consumer (B2C) or business-to-business (B2B), and
would not require the services of a professional research company. Such companies would be
able to provide more sophisticated research, but their cost might be too high for the many
small businesses. Data gathering techniques in primary marketing research can include
observation, surveys, interviews, questionnaires, and focus groups. A focus group is six to ten
people carefully selected by a researcher and brought together to discuss various aspects of
interest at length (Kotler, Keller, 2009).
Secondary marketing research is based on information that has already been gathered
and published. Corporations are viewed as legal entities, meaning that they can enter into
legal agreements with individuals and other corporations. They are also subject to numerous
local and state regulations. This often results in extensive paperwork that can be costly. Some
of the information may be free-public library databases and collections, certain websites,
company information, and some trade associations to which the company belongs—or it can
be bought. Secondary research would also be appropriate when looking for things such as
economic trends, online consumer purchasing habits, and competitor identification.
Table 13 Types of Marketing Research
Primary Marketing Research Secondary Marketing Research
Data for a specific purpose or for a specific
project Information that has already been gathered and published
Tends to be more expensive Tends to be lower cost
Customized to meet a company’s needs May not meet a company’s needs
Fresh, new data Data are frequently outdated (e.g., using US 2000 census data in 2011)
Proprietary—no one else has it Available to competitors
Examples: in-person surveys, customer
comments, observation, and
SurveyMonkey online survey
Examples: Wall Street Journal, Bloomberg Business Week, US Census
2010, Bureau of Labour Statistics, Fed Stats, MarketingSherpa,
ResearchInfo, and eMarketer
Source: McGowen and Kelly, 2013, p.147.
Jarmila Šebestová; Entrepreneurship
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7.2.1 MARKETING RESEARCH QUESTIONS
The need for marketing research before and during a venture will depend on the type of
venture. However, typical research questions might include the following, which are divided by
subject (Kuratko, 2009):
SALES
 Do you know all you need to know about your competitors' sales performance
by type of product and territory?
 Do you know which accounts are profitable and how to recognize a potentially
profitable one?
 Is your sales power deployed where it can do the most good, maximizing your
investment in selling costs?
DISTRIBUTION
 If you are considering introducing a new product or line of products, do you
know all you should about distributors and dealers' attitudes toward it?
 Are your distributors and dealers' salespeople saying the right things about your
products or services?
 Has your distribution pattern changed along with the geographic shifts of your
markets?
MARKETS
 Do you know all that would be useful about the differences in buying habits and
tastes by territory and kind of product?
 Do you have as much information as you need on brand or manufacturer loyalty
and repeat purchasing in your product category?
 Can you now plot, from period to period, your market share of sales by
products?
ADVERTISING
 Is your advertising reaching the right people?
 Do you know how effective your advertising is in comparison to that of your
competitors?
 Is your budget allocated appropriately for greater profit—according to products,
territories, and market potentials?
PRODUCTS
 Do you have a reliable quantitative method for testing the market acceptability
of new products and product changes?
 Do you have a reliable method for testing the effect on sales of new or changed
packaging?
 Do you know whether adding higher or lower quality levels would make new
profitable markets for your products?
7 Marketing in Small Business
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7.2.2 THE MARKETING RESEARCH PROCESS
Most small-business owners do marketing research every day—without being aware of
it. They analyze returned items, ask former customers why they switched to another company,
and look at a competitor’s prices. Formal marketing research simply makes this familiar
process orderly by providing the appropriate framework. Effective marketing research follows
the following six steps (Cadden and Lueder, 2008, p. 328):
 Define the problem and the research objectives. Care must be taken not to
define the problem too broadly or too narrowly—and not to identify a symptom
as the problem. The research objectives should flow from the problem
definition.
 Develop the research plan. This is a plan for gathering the needed information,
part of which will include cost. In addition, to be determined is the following:
whether primary research, secondary research, or some combination of the two
will be used. The specific techniques will be identified, and a timetable will be
established.
 Collect the information. This phase is typically the most expensive and the
most error prone.
 Analyze the information. Analysis involves extracting meaning from the raw
data. It can involve simple tabulations or very sophisticated statistical
techniques. The objective is to convert the raw data into actionable information.
 Present the findings. The findings are presented to the decision maker(s). In
many small businesses, the owner or the manager may conduct the research, so
the findings are presented in a format that will make sense for the owner and
other members of the decision-making team.
 Make the decision. The owner or manager must consider the information and
decide how to act on it. One possible result is that the information gathered is
not sufficient for making a decision. The problem may be a flawed marketing
research process or problems obtaining access to appropriate data. The question
becomes whether the situation is important enough to warrant additional
research.
7.2.3 MARKET SEGMENTATION
Market segmentation is the process of identifying a specific set of characteristics that
differentiate one group of consumers from the rest (Kuratko, 2009). Market segmentation
requires some marketing research. The purpose of segmenting a market is to focus the
marketing and sales efforts of a business on those prospects who are most likely to purchase
the company’s product(s) or service(s), thereby helping the company (if done properly) earn
the greatest return on those marketing and sales expenditures.22
Market segmentation maintains two very important things: (1) there
are relatively homogeneous subgroups (no subgroup will ever be exactly alike) of the total
population that will behave the same way in the marketplace, and (2) these subgroups will
behave differently from each other. Market segmentation is particularly important for small
businesses because they do not have the resources to serve large aggregate markets or
maintain a wide range of different products for varied markets.
Many small business owners have a good intuitive sense of the segments that make
sense for the business, and they choose to go with that intuition in devising their marketing
22
Center for Business Planning, 2011. Market Segmentation. Businessplans.org. [online] [Accessed: 19 Jan
2014]. Available at: http://www.businessplans.org/segment.html
Jarmila Šebestová; Entrepreneurship
- 97 strategy.
However, that intuition may not be precise or current enough to be of the most help
in planning a marketing strategy. Marketing research can be of help here, even to the smallest
of businesses.
Table 14 Market Segmentation
Consumer Segmentation Examples Business Segmentation Examples
Geographic Segmentation
Region (e.g., Northeast or Southwest)
City or metro size (small, medium, or large)
Density (urban, suburban, or rural)
Climate (northern or southern)
Demographic Segmentation
The industry or industries to be served
The company sizes to be served (revenue, number of
employees, and number of locations)
Demographic Segmentation
Age, Family size, Family life cycle (e.g., single or married
without kids), Gender
Income
Occupation, Education
Religion
Race/ethnicity,Generation,Nationality
Social class
Operating Variables
The customer technologies to be focused on
The users that should be served (heavy, light, medium, or
nonusers)
Whether customers needing many or few services should
be served
Psychographic Segmentation
Personality
Lifestyle
Behavioural occasions (regular or special occasion)
Values
Purchasing Approaches: Which to Choose?
Highly centralized versus decentralized purchasing
Engineering dominated, financially dominated, and so
forth
Companies with whom a strong relationship exists or the
most desirable companies
Companies that prefer leasing, service contracts, systems
purchases, or sealed bidding
Companies seeking quality, service, and price
Behavioural Segmentation
Benefits of the product (e.g., toothpaste with tartar control)
User status (nonuser, regular user, or first-time user)
Usage rate (light user, medium user, or heavy user)
Loyalty status (none, medium, or absolute)
Attitude toward the product (e.g., enthusiastic or hostile)
Situational Factors: Which to Choose?
Companies that need quick and sudden delivery or
service
Certain application of the product instead of all
applications
Large or small orders or something in-between
Personal Characteristics: Which to Choose?
Companies with similar people and values
Risk-taking or risk-aversive customers
Companies that show high loyalty to their suppliers
Other Characteristics
Status in industry (technology or revenue leader)
Need for customization (specialized computer systems)
Source: adapted from Kotler and Keller, 2009, p. 214, 227.
DEFINITION 11 MARKET SEGMENTATION
Segmentation is dividing a market into relatively homogeneous subgroups that behave
much the same way in the marketplace, is the necessary precursor to selecting a target market
or target markets (Lascu, Clow, 2007).
7 Marketing in Small Business
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multiple segments have been identified, it is necessary to select a target market or
target markets. If only a single segment has been identified, it becomes the target market.
Nevertheless, each segment has to reach those points:
 Measurability. Is it easy to identify and estimate the size of a segment? A small
business that moves forward without a clear definition of its market segments is
working blind. Intuition can only go so far.
 Substantiality. Is the segment large and profitable enough to justify an
investment? A small business may not require a huge number of customers to be
profitable, but there should be enough people interested in the product or the
service being offered to make operating the business worthwhile.
 Stability. Stability has to do with consumer preferences. Are they stable over
time? Although segments will change over time, a small business needs to be
aware of preferences that are continuously changing. Small businesses can be
more nimble at adapting their businesses to change, but too much volatility can
be damaging to a business’s operations.
 Accessibility. Can a business communicate with and reach the segment? A small
business interested in women who work outside the home will present greater
communication challenges than will stay-at-home wives and mothers.
 Actionability. Is a small business capable of designing an effective marketing
program that can serve the chosen market segment?
 Differential response. Market segments, which are easily distinguishable from
each other, respond differently to company marketing strategies. For the small
business that chooses only one segment, this is not an issue. However, the small
manufacturer of ramen noodles in New York City needs to know whether there
are different segments for the product and whether the marketing strategy will
appeal to those segments in the same positive way.
The selection of a target market or target markets will be based on the segments that
have been identified as having the greatest potential for the business. Selecting the target
market should be guided by several considerations:
 Financial condition of the firm. Limited resources may dictate the selection of
only one target market.
 Whether the competition is ignoring smaller segments. If yes, this may be
a ready-made target market.
 Is the market new to the firm? If yes, concentrating on one target market may
make the most sense.
 Specific need or want. Does the proposed target market have a specific need or
want for the product or the service?
 Ability to buy. Does the proposed target market have the resources to buy the
product or the service?
 Willingness to buy. Is the proposed target market willing to buy the product or
the service?
 Will this target market be profitable? There needs to be enough demand to
make money.
Choosing the right target market is a critical part of the marketing strategy of a small
business. The target market should be the best match for a company’s products and services,
thus helping to maximize the efficiency and effectiveness of its marketing efforts.
Jarmila Šebestová; Entrepreneurship
- 99 If
a small business wants to go with a niche market, the same considerations apply.
A niche market is a small, more narrowly defined market that is not being served well or at all
by mainstream product or service marketers.
7.3 MARKETING MIX
Whether market segments and target markets are selected based on intuition, marketing
research, or a combination of the two, they are the basis for creating an effective marketing
mix for any small business.
Marketing mix is easily one of the most well known marketing terms. More commonly
known as “the four Ps,” the traditional marketing mix refers to the combination of product,
price, promotion, and place (distribution). The company controls each component, but they
are all affected by factors both internal and external to the company. Additionally, each
element of the marketing mix is impacted by decisions made for the other elements. What this
means is that an alteration of one element in the marketing mix will likely alter the other
elements as well. They are inextricably interrelated. No matter the size of the business or
organization, there will always be a marketing mix.
Figure 25 The Marketing Mix
Source: Burns, 2007
The business owner may not think about it in these specific terms, but it is there
nonetheless. It is very important in marketing to distinguish between the customer and the
consumer. The customer, the person or the business that actually buys a product or a service,
will determine whether a business succeeds or fails. The marketing mix should follow the
determination of customer needs, wants, and desires. However, there are instances in which
a product is created before the target market is selected and before the rest of the marketing
mix is designed.
The consumer is the person or the company that uses or consumes a product. For
example, the customer of a dry cleaning service is the person who drops off clothes, picks
them up, and pays for the service. The consumer is the person who wears the clothes. Another
example is a food service that caters business events. The person who orders lunch on behalf
of the company is the customer
7 Marketing in Small Business
- 100 There
are two major types of customer markets: business-to-business (B2B) customer’s
andindividual consumers or end users (business-to-consumer [B2C]).
 B2B customers are organizations such as corporations; small businesses;
government agencies; wholesalers; retailers; and nonprofit organizations, such
as hospitals, universities, and museums. In terms of dollar volume, the B2B
market is where the action is. More money and products change hands in sales to
business buyers than to individual consumers or end users. The B2B market
offers many opportunities for the small business. Examples of B2B products
include office supplies and furniture, machinery, ingredients for food
preparation, telephone and cell phone service, and delivery services such as
FedEx or DHL.
 The B2C market consists of people who buy for themselves, their households,
friends, coworkers, or other non-business-related purposes. Examples of B2C
products include cars, houses, clothing, food, telephone and cell phone service,
cable television service, and medical services. Opportunities in this market are
plentiful for small businesses.
The problem is that many if not most small businesses probably do not take the time to
do what it takes to understand their customers.
PRODUCT
Product refers to tangible, physical products as well as to intangible services. Examples
of product decisions include design and styling, sizes, variety, packaging, warranties and
guarantees, ingredients, quality, safety, brand name and image, brand logo, and support
services. In the case of a services business, product decisions also include the design and
delivery of the service, with delivery including such things as congeniality, promptness, and
efficiency. Without the product, nothing else happens. Product also includes a company’s
website.
The key element in the marketing mix is the product. Without it, price, promotion, and
place are moot. The same is true for marketing strategy. The product must lead fulfilling
a company’s vision and mission and achieving its marketing objectives. Multiple decisions
and considerations factor into product or service development:
 features and benefits,
 product mix,
 design,
 brand,
 the product life cycle,
 and the company website.
Jarmila Šebestová; Entrepreneurship
- 101 Figure
26 Product mix
Cadden and Lueder, 2012, s.357
 Product Features and Benefits
A product has multiple layers: core, augmented, and symbolic. These three layers can
help a small business owner understand the product features and benefits that will best deliver
value to current and prospective customers. These layers also provide the bases for
differentiating and positioning the product.
o The core layer is the details of a product, its physical anatomy, and its basic features.
It is also the basic benefit or problem solution, which B2C or B2B customers are
looking for. Someone buying an airline ticket, for example, is buying transportation.
Someone buying an ice cream cone is buying a delicious and fun treat. The core layer
is also, where considerations of quality begin. Quality “refers to overall product
quality, reliability, and the extent to which [the product or the service] meets
consumers’ needs,” and the perception of quality has the greatest impact on customer
satisfaction. (Lascu, Clow, 2007). Decisions about design, manufacturing,
preparation, ingredients, service delivery, component parts, and process materials all
reflect a business’s philosophy about quality.
o The augmented layer is where additional value is added via things such as
packaging, promotion, warranties, guarantees, brand name, design, financing
opportunities where appropriate, prompt and on-time service, and additional services
that may enhance a product. Consider the ice cream cone that is purchased in an oldfashioned
ice cream parlor will likely of greater value to many customers than the ice
cream cone purchased at Modern cafeteria. It is this layer where many marketing
mistakes are made because opportunities are missed.
o The symbolic layer captures the meaning of a product to a consumer—its
emotional and psychological connections. The old-fashioned ice cream parlor
will engender nostalgia and create powerful emotional ties.
The most serious marketing errors are made when the symbolic product layer is either
ignored or not understood. The power of symbolism should never be underestimated.
Every small business should look at its products within the context of the product
layers. It is the creativity and imagination of the small business owner with the product layers
that can set a business apart. They provide an excellent basis for dissecting an existing
product to see where opportunities may have been missed, features could be added or
changed, and features or enhancements could be explained more effectively in promotional
7 Marketing in Small Business
- 102 activities.
The product layers should also be used to develop new products that the business
plans to introduce.
 Product Mix
All small businesses have a product mix, the selection of products or services that is
offered to the marketplace. With respect to the product mix for small companies, a company
will usually start out with a limited product mix. No matter the approach, the product mix
needs to be created so that it is responsive to the needs, wants, and desires of the small
business’s target market.
 Product Design
Product design involves aesthetic properties such as colour, shape, texture, and entire
form, but it also includes a consideration of function, ergonomics, technology, and usability as
well as touch, taste, smell, sight, and sound. The pulling together of these things, as
appropriate to the specific product or service being designed, should result in a design that
matches customer expectations. “Design represents a basic, intrinsic value in all products and
services.” (Lascu, Clow, 2007; Kotler, Keller, 2009)
Design is particularly important in making and marketing retail services, apparel,
packaged goods, and durable equipment. The designer must figure out how much to invest in
form, feature development, performance, conformance, durability, reliability, reparability, and
style. To the company, a well-designed product is one that is easy to manufacture and
distribute. To the customer, a well-designed product is one that is pleasant to look at and easy
to open, install, use, repair, and dispose of. The designer must consider all these factors.
Design issues also apply to services. Some of the design issues for services that are
delivered in a store (e.g., dry cleaning, repair, and restaurant) are the same as for any retail
store: the design of the physical space, the appearance of the personnel, the helpfulness of the
personnel, the ease of ordering, and the quality of service delivery. For services that are
performed at a customer’s home or at a business site, the design issues include timeliness; the
appearance and helpfulness of personnel; the quality of installation, service, and repair; and
the ease of ordering the service.
 Packaging Design
The design of the product or the service package is another decision component of the
product. Packaging can be defined as “all the activities of designing and producing the
container for a product.” (Kotler, Keller, 2009, p.239) Thus, the package communicates both
emotional and functional benefits to the buyer, and it can be a powerful means of product
differentiation. A well-designed package can build brand equity and drive sales. Although the
manufacturers and retailers may see difficult-to-open packaging as necessary, it does not do
much for a positive customer experience.
 Brand
A brand is defined by the American Marketing Association as “a name, term, sign,
symbol, or design, or a combination of them, intended to identify the goods or services of one
seller or group of sellers and to differentiate them from those of competitors…A brand may
identify one item, a family of items, or all items of that seller. If used for the firm as a whole,
the preferred term is trade name.”23
A brand is a promise to the consumer that certain
expectations will be met, a promise that—if broken—may result in the loss of that customer.
A company’s brand is probably its most important asset.
23
“ American Marketing Association, 2011. Brand. Dictionary. [online] Marketingpower.com. [Accessed: 1 Dec
2013] Available at: http://marketingpower.com/_layouts/Dictionary.aspx?dLetter=B.
Jarmila Šebestová; Entrepreneurship
- 103 Building
a brand is an ongoing process for a small business because it wants
a memorable identity. It is important for the business to monitor constantly its brand to ensure
that it represents the core values and needs of its existing and potential customers. The brand
needs to reach people on an emotional level because customers ultimately make decisions on
an emotional level, not a logical level. For this reason, a small business should think in terms
of tapping into as many senses as possible with its brand. “Almost our entire understanding of
the world is experienced through our senses. Our senses are our link to memory and can tap
right into emotion.” (Lindstrom, 2005, p.10) Scenting the air of a store with a fresh fragrance
could be a powerful contributor to the store’s brand.
Whether a small business wants to keep its brand (but may be monitoring it) or is
looking to rebrand (changing the brand). There are four fundamental qualities of great brands,
which should be kept in mind (Barwise and Sean Meehan, 2010):
o They offer and communicate a clear, relevant customer promise, such as
fun, speedy delivery, or superior taste.
o They build trust by delivering on that promise. Keeping a customer
informed when something goes wrong can help build and retain trust.
o They drive the market by continually improving the promise. A small
business should always be looking to make things better for its
customers. Think in terms of the total customer experience.
o They seek further advantage by innovating beyond the familiar. If
a small business focuses on the customer experience, there are
undoubtedly ways to improve the brand by adding the unexpected.
 Product Life Cycle
Small-business owners should understand the product life cycle because there are
specific implications for marketing strategy (Burns, 2007).
o The product development (incubation) stage is when a product is being
prepared for sale. There are costs but no sales. The product introduction
stage is when a product is available to buy for the first time. Sales will
generally be low but increasing, marketing expenses will be high, and
profits will be typically low or non-existent. The focus of the marketing
strategy will be to create awareness, establish a market, and create demand
for the product.
o The product growth stage is when sales grow rapidly as the target market
adopts a product and competition enters the marketplace once it observes
the success. Marketing strategy should focus on differentiation and building
a brand preference. There is substantial profit improvement. Rapid growth
must be managed carefully so that the company does not succeed into
failure.
o The product maturity stage is characterized by slow growth because most
of the buyers interested in a product have bought it. Sales may increase but
slowly due to intense price competition. Profits stabilize or decline. The
marketing strategy must focus on getting people to switch brands by using
special promotions and incentives.
o The product decline stage is when sales decline and profits erode.
A product has become obsolete because of an innovation (or the tastes of
the target market have changed. The marketing strategy works to reinforce
the brand image of the product. The product may be dropped from the
product line or rejuvenated if possible and practical.
7 Marketing in Small Business
- 104 Many
small business owners may not see the life cycle as applying to their products or
services. Thinking this way would be a mistake. The lifecycle provides guidance for watching
how a product or a service progresses in the marketplace so that the necessary marketing
strategy steps can be taken.
 The New Product Development Process
If the development of a new product is being considered, the following steps are
suggested as guidance (Lascu, Clow, 2007):
o Generate new product ideas. Search for ideas for new products.
o Screen new product ideas. Make sure the product fits the target market
and the overall mission of the business.
o Develop and evaluate new product concepts. Develop product concepts
and determine how consumers will view and use the product.
o Perform a product business analysis. Calculate projected business costs,
return on investment, cash flow, and the long-term fixed and variable
costs. Long-term fixed costs are production costs that do not vary with
the number of units produced (e.g., annual rent). Long-term variable
costs are production costs that vary with the number of units produced
(e.g., selling more hot dogs will require more hot dogs, ketchup, mustard,
and relish).
o Design and develop the product. Develop a product prototype. A product
prototype is an exact match to the product description developed in the
concept development and evaluation stages. It is a sample.
o Test market the product. Introduce the product to a market to find out
how the product will be received when it is introduced for real. The test
market should be as close as possible in terms of characteristics (e.g.,
demographics) as the target market. For a small business, an appropriate
test market might be a few select customers.
o Launch the product or the service. The product is introduced to the full
marketplace.
 The Company Website
A company’s website is part of its product or service. The conventional wisdom is that
all businesses should have a website. The reality is that there are many small businesses,
which do very well without a web presence. The small local deli, accounting or insurance
services, a legal firm, a liquor store, or a dental office may not see the need for a website. At
the same time, customers are increasingly expecting a web presence, so any small business
that does not have a website runs the risk of losing sales because of it. The time may also be
approaching when not having a website will be perceived as odd, with questions raised as to
the seriousness of the business. Every small business without a website should determine
whether this matters to them or not. The goal is to have an interesting and speedy site.
7.3.1 PRICE
Price is what it will cost for someone to buy the product. Although the exchange of
money is what we traditionally consider as price, time and convenience should be considered.
Examples of pricing decisions include pricing strategy selection (e.g., channel pricing and
customer segment pricing), retail versus wholesale pricing, credit terms, discounts, and the
means of making online payments. Channel pricing occurs when different prices are charged
depending on where the customer purchases the product (Cadden and Lueder, 2018, p.385)
Jarmila Šebestová; Entrepreneurship
- 105 PRICING
OBJECTIVES
Pricing objectives (what the company wants to accomplish with its pricing strategy)
should be related to a company’s objectives and should follow the decision about where
a company wants to position its products or services. Different small businesses in the same
industry may have different pricing objectives (Kotler, Keller, 2009):
 Sales-based objectives. Increasing sales volume and market share relative to the
competition may involve penetration pricing, where a business prices a new
product below that of the competition to quickly penetrate the market at the
competitor’s expense, acquire a large market share, and then gradually raise the
price. This objective might be appropriate for a small business that is
introducing a new product or service to a very competitive marketplace.
 Profit-maximization objectives. Quickly recovering the costs of product
development while providing customer value may involve price skimming,
where a new product is priced higher than that of the competition to maximize
profit. This objective would work for a small business with customers who are
more concerned with quality, uniqueness, and status rather than price. However,
a product’s image and quality must warrant the high price.
 Status-quo-based objectives. Used to minimize the impact of competitors,
government, or channel members and to avoid a sales decline, these objectives
are reactive rather than proactive, so they should be adopted for the short term
only. Small businesses must be able to meet the needs of their target market.
PRICING STRATEGY
Once the pricing objectives are set, a small business must determine a pricing strategy.
The small business owner can consider a variety of approaches. How goods and services are
priced tells consumers a lot about what to expect from a small business.
 Discount Pricing
Discount pricing is used with customers who buy in large quantities, customers who
buy during off-peak times (seasonal), promotions used to increase traffic, and loss leaders
(products that are discounted to get customers in the door in the hope that they will also buy
more profitable products). Discount pricing can be used in the online environment in ways
similar to brick-and-mortar stores. If the discounting is short term, inventory can be reduced,
and revenues are increased temporarily. An important disadvantage, however, is that
customer’s often-associate low price with low quality, particularly if a brand name is
unfamiliar. A discount pricing strategy could lead to a product or a service being perceived as
low quality. In addition, price reductions can be easily matched by the competition,
eliminating any but the earliest advantage
 Cost-Based Pricing
Cost-based pricing is a very simple approach. A company figures out how much it costs
to make a product or deliver a service and then sets the price by adding a profit to the cost.
Cost-based pricing is very easy to use. It is flexible (allowing different profit percentages to
be added to different product lines), allows for easy price adjustments if costs go up or down,
and is simple to calculate. On the downside, cost-based pricing ignores product demand, what
the competition is doing with pricing, and positioning, and it provides no incentive for cost
efficiencies.
7 Marketing in Small Business
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Prestige Pricing
Prestige pricing (or premium pricing) taps into the belief that a high price means high
quality. Although this relationship exists in many instances, it is not true in all cases.
Nonetheless, prestige pricing is “a strategy based on the premise that consumers will feel that
products below a particular price will have inferior quality and will not convey a desired
status and image.” Prestige pricing can be very effective at improving brand identity in
a particular market. However, it is not typically used when there is direct competition because
such competition tends to have a downward effect on pricing. Unique products usually have
the best chance of succeeding with prestige pricing.
 Even-Odd Pricing
Also known as the “nine and zero effect,” even-odd pricing can be used to communicate
quality or value. It assumes that consumers are not perfectly rational, which is true. Emotion plays
a much larger role in consumer behaviour than rationality. Odd-numbered prices give consumers the
impression that they are getting a great value. It is a psychological effect with no basis in logic.
 Geographic Pricing
Some small companies will use a geographic pricing strategy. This pricing strategy
takes the geographic location of a customer into consideration, the rationale being that
distribution can increase product delivery costs and thus the cost of the product. Taxes, the
cost of advertising, competitors who benefit from government subsidies, consumer demand,
differences in costs of living, and the general cost of doing business are other factors that
enter into the decision to use geographic pricing. This strategy might also be appropriate when
selling in different states.
7.3.2 PLACE
Place is another word for distribution. The objective is to have products and services available
where customers want them when they want them. Examples of decisions made for place include
inventory, transportation arrangements, channel decisions (e.g., making the product available to
customers in retail stores only), order processing, warehousing, and whether the product will be
available on a very limited (few retailers or wholesalers) or extensive (many retailers or wholesalers)
basis. A company’s website is also part of the distribution domain.
A small business may choose the direct, retail, wholesale, service, or hybrid channels. In
general, business-to-business (B2B) distribution channels parallel those of business-toconsumer
(B2C) businesses.
Figure 27 Channels
Source: Cadden and Lueder, 2008, p.392
Jarmila Šebestová; Entrepreneurship
- 107 The
direct channel provides close contact with the customer and full control of all
aspects related to the marketing of a company’s products. Many B2B sellers also use the
direct channel. Service businesses use the direct channel because there is no way to do
otherwise. Services are performed and consumed at the same time; there is no role for
intermediaries. The Internet has increased the opportunities for small businesses to use the
direct channel as the only means of distribution or as an additional sales channel.
Many small businesses may choose to produce or manufacture products and distribute
them to retailers for sale. This is considered an indirect channel because the retailer is
an intermediary between the producer or manufacturer and the final consumer. If a small
business that makes one-of-a-kind, handcrafted picture frames sells its frames to a pictureframing
business that in turn sells the frames to its customers, this would be an example of
using the retail channel. Although selling through retailers may expand the distribution
coverage to a small business’s target market, the business must give up some control over
pricing and promotion. In addition, the business should expect to get a wholesale price from
the retailer that is significantly lower than what it would get if it sold directly to the final
consumer (Collins, 2005).
Wholesalers are also intermediaries. A small business that chooses to use wholesalers
is also using an indirect channel of distribution. Using a wholesaler makes sense when
a business makes a product that it wants to sell in many stores that would not be easily or
conveniently reachable through the direct channel or the retail channel. Although any small
business that uses wholesalers will see a reduction in profit, there are several advantages to
wholesaling. For example, wholesalers are able to sell and promote to more customers at
a reduced cost, they can deliver more quickly to buyers because wholesalers are closer to
them, and wholesalers can inventory products, thereby reducing inventory costs and risks to
their suppliers and customers. Small businesses that produce only one or a few products
commonly use the wholesale channel of distribution. Retail outlets may not be placing orders
from the small business because it is not known. The wholesaler can put the product in front
of them. (Madura, 2010)
Multichannel Distribution. A small business may choose
multichannel distribution system (or hybrid channel). This channel option uses two or more
channels of distribution to reach one or more customer segments, offering customers multiple
purchase and communication options. The multichannel approach offers three important
advantages (Kotler, Keller, 2009):
 Increased market coverage. More customers are able to shop for a company’s
product in more places, and customers who buy in more than one channel are
often more profitable than one-channel customers.
 Lower channel cost. Selling by phone or online is cheaper than selling via
personal visits to small customers.
 More customized selling. A technical sales force could be added to sell
equipment that is more complex.
PHYSICAL DISTRIBUTION (LOGISTICS)
Physical distribution (logistics) involves “all the activities involved in the physical flow
and storage of materials, semi finished goods, and finished goods to customers in a manner
that is efficient and cost effective.” Lascu, Clow, 2007, 307). Logistics can be performed by
the producer or the manufacturer, intermediaries, or the customer. Deciding on the right
logistics solution may be the differentiator that puts a company ahead of its competition.
Logistics are relevant to both online and on ground companies. Retailers that offer a wide
assortment of products will spend more on logistics because transportation and storage costs
7 Marketing in Small Business
- 108 will
increase as the number of carried products increases. Logistics involve the following four
primary functions:
1. Transportation. The transportation choices for a small business will determine
whether products will arrive at their destination in good condition and on time.
Transportation costs will increase product price. The choices include truck, rail, air,
water, and pipeline. The selection of the best mode or combination of transportation
modes depends on a variety of factors, including cost, speed, and appropriateness
for the type of good, dependability, and accessibility.
2. Warehousing. Producers and manufacturers must store goods before they are sold
because production and consumption rarely match. Some inventory may be kept at
or near the point of production or manufacture, but the rest is located in warehouses.
Some warehouses also provide assembly, packaging, and promotional display
construction services…all for a fee, of course.
3. Inventory control. Inventory control is about ensuring that goods are where customers
want them when they want them. In other words, it is about avoiding the “out of stock”
situation that irritates customers. Small-business owners must understand how much
inventory will be needed to address their customers’ needs on a timely basis and at the
appropriate cost (think pricing strategy). Small businesses should think of inventory as
a wasting asset: it does not improve with time and, in fact, becomes less valuable with
every day that passes taking up space and incurring heat, light, power, handling, and
interest charges. The goal is to keep inventory as low as possible.
4. Order processing. Every small business should want to shorten the elapsed time
between an order’s receipt, delivery, and payment. Although there are typically
multiple steps involved, the reality is that the longer the cycle, the lower the
customer’s satisfaction, the higher the company’s costs, and the lower the
company’s profits. Streamlining the process should be a priority.
There are several things that small businesses can do to increase the efficiency and the
effectiveness of their logistics. For example, a business can select a logistics company that is
industry specific (e.g., wine or clothing) because that company will understand the shipping
needs of the products or use small business logistics services.
7.3.3 PROMOTION
Having the best product in the world is not worth much if people do not know about it.
This is the role of promotion getting the word out. Examples of promotional activities include
advertising (including on the Internet), sales promotion (e.g., coupons, sweepstakes, and 2for-1
sales), personal sales, public relations, trade shows, webinars, videos on company
websites and YouTube, publicity, social media such as Facebook and Twitter, and the
company website itself. Word-of-mouth communication, where people talk to each other about
their experiences with goods and services, is the most powerful promotion of all because the
people who talk about products and services do not have any commercial interest.
Promotion, the fourth P in the marketing mix, is now more commonly referred to
as marketing communications. Marketing communications can be defined as “the means by
which firms attempt to inform, persuade, and remind customers—directly or indirectly—
about the products and brands they sell. In a sense, marketing communications represent the
‘voice’ of the company and its brands and are a means by which it can establish a dialogue
and build relationships with consumers.” (Kottler, Keller, 2009, p.407). Small-business
owners should be familiar and comfortable with all three terms because at least one of them
will be the basis of conversations with vendors, employees, and other businesses. Prior to
Jarmila Šebestová; Entrepreneurship
- 109 selecting
and designing any communications, however, objectives must be established for the
marketing communications program.
Every small business must decide what it wants to accomplish with its marketing
communication plan. Although many marketing communication plans may be oriented toward
a single objective, it is possible for a program to accomplish more than one objective at
a time. The problem is that this may be confusing to potential customers.
Orientation to the local product sourcing in the retailers’ promotion policy when
communicating to their customers becomes topical even in the Czech Republic (Pícha et
al, 2013 p.1062)
MARKETING COMMUNICATIONS MIX
The marketing communications mix for a small business, either pure-play or brick-and-click,
will consist of some combination of the following major modes of communication: advertising,
sales promotion, events and experiences, public relations (PR) and publicity, direct marketing,
interactive marketing, word-of-mouth communication, and personal selling. (Kotler, Keller, 2009,
p. 470) Each mode of communication has its own advantages and disadvantages, which should all
be considered carefully before any final selections should be made.
Figure 28 The Marketing Communications Mix
Source: Kotler and Keller, 2009, p. 473.
 Advertising
Advertising is “any paid form of nonperson presentation and promotion of ideas, goods,
or services by an identified sponsor.” (Kotler, Keller, 2009, p. 472) Advertising is around us
all the time—for example, ads are on television and radio, in newspapers and magazines, in
train stations and on trains, on the sides and inside of buses, in public restrooms, in taxis, on
websites, and on billboards. Ads can also be found in other places, and the locations are
limited only by the creativity of the company placing the ads. Small businesses must
choose advertising media (e.g., radio, television, newspapers, billboards, the Internet, and
magazines) based on its product, target audience, and budget. Advertising on the Internet is
also a consideration for the marketing communications mix of any business with a web
presence. Advertising offers several advantages to the small business. For example,
advertising is able to reach a diverse and geographically dispersed audience; it allows the
seller to repeat a message many times; and it provides the opportunity for dramatizing the
company and its products through the artful use of print, colour, and sound. Whether the
advantages of advertising outweigh the costs and disadvantages is something that must be
decided by each small business.
7 Marketing in Small Business
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Sales Promotion
Given the expense of advertising and the fact that consumers are exposed to so many
advertising messages every day, many companies correctly believe that advertising alone is not
enough to get people to try a product a product or a service. Enter lower-cost sales promotion
techniques. Sales promotion refers to the variety of short-term incentives to encourage trial or
purchase of a product or a service. Examples of commonly used sales promotions include contests,
sweepstakes, coupons, premiums and gifts, product samples, rebates, low-interest financing, price
discounting, point-of-sale displays, and frequent user or loyalty programs.
 Events and Experiences
Events and experiences are “company-sponsored activities and programs designed to
create daily or special brand interactions.” There are several advantages to events and
experiences: (1) A well-chosen event or experience can be very effective because the
consumer gets personally involved. (2) Experiences are more actively involving for
consumers because they are real time. (3) Events are not hard sell, and most consumers will
appreciate the softer sell situation. By having special events, a small business will stand out
from the rest, and they will create desirable publicity for the company (Schmitt, 1999, p.22)
 Public Relations and Publicity
Public relations (PR) and publicity are designed to promote a company’s image or its
individual products. A small business can also use PR to clarify information in response to
negative publicity. Traditional PR tools include press releases and press kits that are sent to
the media to generate positive press on behalf of the business. A press kit, the most widely
used PR tool, pulls together company and product information to make a good, solid first
impression. A press kit can be particularly useful for small businesses, although the smallest
of businesses may not see the need. Increasingly, companies are using the Internet: interactive
social media, such as blogs, Twitter, and Facebook, home-page announcements for specific
occasions (e.g., messages of sympathy for the victims of a disaster) and e-mail.
Most small businesses are not likely to have PR departments. Instead, there will be one
person whose job includes among many other things PR and publicity. The key is for PR and
marketing to work closely together so that “every piece of communication produced by the
company speaks with one voice.” Getting publicity for a small business is usually free. Stories
about events and experiences might be of interest to the media. One great idea is to have
a group of people outside the business with positive picketing, holding signs such as “Low
prices” or “Beware of friendly employees.” This was actually done by a small business, and it
resulted in the business being on the front page of the local paper (Lascu, Clow, 2007).
 Direct Marketing
Direct marketing is the “promotion of a product from the producer directly to the consumer or
business user without the use of any type of channel members.” Common direct marketing
platforms include catalogues; direct mailing; telemarketing; television shopping; electronic
shopping; fax mail; voice mail; blogs; websites; [30]
e-mail; direct response radio, television, and
Internet; social media, such as Facebook and Twitter; and mobile devices. Because channel
members are bypassed, direct marketing normally allows for greater profitability; perhaps more
importantly, however, it can develop stronger brand loyalty with customers.
 Interactive Marketing
Interactive marketing refers to “online activities and programs designed to engage customers
or prospects and directly or indirectly raise awareness, improve image, or elicit sales of products and
services.” Everything is personalized and individualized from the website content to the products
Jarmila Šebestová; Entrepreneurship
- 111 being
promoted. Common interactive marketing tools include e-mail, websites, online shopping,
videos, webinars and webcasts, blogs, and social media such as Facebook and Twitter. Because email,
websites, online shopping, webinars and webcasts have been mentioned previously, the focus
here will be on videos, blogs, and social media. Social media “generally refers to websites featuring
user-generated content or material created by visitors rather than the website publishers. In turn,
these sites encourage visitors to read and respond to that material.” Social media is changing the
way that people communicate and behave. Social media outlets such as Facebook, LinkedIn, and
Twitter are, among other things, driving purchases—and they should be seen “like a virtual cocktail
party where all attendees can discuss [a company’s] products, services, experiences, and new ideas.”
(Thomas, 1999, p.99). Many small businesses in the B2B sector are already using social media for
business as a resource, to engage in initiatives, or both. Despite the surrounding social media, and
the fact that many small businesses are already connected, small businesses must still consider the
use of social media just as carefully as the other modes of marketing communications.
 Personal Selling
A small business owner needs to connect with customers before a sale can take place.
Sometimes personal selling is the best way to do that. Personal selling, “the process of
communicating with a potential buyer (or buyers) face-to-face with the purpose of selling
a product or service,” is essential in the marketing communications mix of a small business.
History has shown that the most successful entrepreneurs have been skilled salespeople who
were able to represent and promote their companies and products in the marketplace. It makes
sense that successful small business owners should have the same sales skills. Although
personal selling plays an important role in the sale of consumer products, it is even more
important in the sale of industrial and business products. More than four times as many
personal selling activities are directed toward industrial and business customers than toward
consumers (Ivancevich et al., 2007)
Like all other forms of marketing communications, personal selling offers both
advantages and disadvantages. On the plus side, personal selling is flexible and dynamic,
providing companies with the best opportunity to tailor a message to satisfy customers’ needs.
Personal selling’s interactive nature also makes it the most effective promotional method for
building relationships with customers, particularly in the B2B market, and it is the most
practical promotional method for reaching customers who are not easily reached through
other methods. Personal selling can help a small business build strong, loyal relationships
with customers and consumers.
On the minus side, the biggest disadvantage may be the negative perceptions that many
people have of salespeople: pushy, annoying, slippery, and willing to do anything for the sale
whether legal or not. The reality, of course, is that most salespeople (unfortunately, not all) do
not fit this stereotype. The successful salesperson is the person who focuses his or her efforts
on satisfying customers over the long term as opposed to his or her own selfish interests. Also
on the negative side is the high cost of personal selling. Personal sales contacts are very
expensive, with the costs incurred (compensation plus sales support) whether the sale is made
or not. Then there are the costs of training the sales staff on product knowledge, industry
information, and perhaps selling skills. Depending on the size of the company, small
businesses will have varying numbers of salespeople, so some of the costs will vary as well.
7.4 MARKETING STRATEGY CONCEPT
Small-business marketing and big business marketing are not the same. The basic
marketing principles that guide both are the same, but there are important differences with
respect to scope, budget, risk factors, and areas of opportunity. The difference between
marketing strategy and marketing management is an important one.
7 Marketing in Small Business
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strategy involves selecting one or more target markets, deciding how to
differentiate and position the product or the service, and creating and maintaining a marketing
mix that will improve successfully with the selected target market(s)—all within the context
of marketing objectives. Differentiation involves a company’s efforts to set its product or
service apart from the competition. Positioning “entails placing the brand [whether store,
product, or service] in the consumer’s mind in relation to other competing products, based on
product traits and benefits that are relevant to the consumer Cadden and Lueder, 2012, 336.
Small businesses cannot compete with the marketing budgets of big companies. As
a result, small businesses do not have the luxury of large staffs and the staying power that
comes with high profits. There is little room for error. Failed strategies can lead to ruin.
The scope of small business marketing does not extend across the same level of multiple
products and services that characterize most big businesses. Combined with having few if any
products in the pipeline, this significantly reduces the insulation that small businesses have
against difficulties in the marketplace or strategic failures. “Small business marketing
strategies have to be more targeted, cost-effective and more elaborately planned [s]o as to
minimize the losses in case the strategy fails.”
Opportunity areas for small businesses are also very different from those of big
businesses. The small business can take advantage of niche markets and local needs and
wants. They are much better able to emphasize personal, one-to-one interactions and can
market real time in ways that cannot be matched by big businesses. Given the special
marketing vulnerabilities of small businesses, the importance of understanding the
components of a marketing strategy should be clear. A marketing strategy involves selecting
one or more target markets, deciding how to differentiate and position the product or the
service, and creating and maintaining a marketing mix that will prove successful with the
selected target market(s) all within the context of marketing objectives. Marketing objectives
are what a company wants to accomplish with its marketing strategy: “Strategy is not a wish
list; set of goals, mission statement, or litany of objectives…A marketing strategy is a clear
explanation of how you’re going to get there, not where or what there is. An effective
marketing strategy is a concise explanation of your stated plan of execution to reach your
objectives…Marketing without strategy is the noise before failure.”
7.4.1 MARKETING OBJECTIVES
Marketing objectives are what a company wants to accomplish with its marketing. They
lay the groundwork for formulating the marketing strategy. Although formulated in a variety
of ways, their achievement should lead to sales. The creation of marketing objectives is one of
the most critical steps a business will take. The company needs to know, as precisely as
possible, what it wants to achieve before allocating any resources to the marketing effort.
Marketing objectives should be SMART: specific, measurable, achievable, realistic, and timebased
(i.e., have a stated period for achievement). It has been recommended that small businesses
limit the number of objectives to a maximum of three or four. If you have fewer than two objectives,
you are not growing your business, as you should be in order to keep up with the market. Having
more than four objectives will divide your attention, and this may result in a lacklustre showing on
each objective and no big successes. If a small business has multiple marketing objectives, they will
have to be evaluated to ensure that they do not conflict with each other. The company should also
determine if it has the resources necessary to accomplish all its objectives.
For small businesses that already have, or are looking to have, a web presence and sell
their products or services online, e-marketing objectives must be included with all other
marketing objectives. The ultimate objective, however, will be “the comprehensive
integration of e-marketing and traditional marketing to create seamless strategies and tactics.”
(Strauss and Frost, 2009, p.6)
Jarmila Šebestová; Entrepreneurship
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7.4.2 MARKETING PLAN
Many small businesses do not have a marketing plan, choosing instead to market their
products and services on an intuitive, sometimes seat-of-the-pants basis. As long as there is
regular and effective communication with the rest of the people in the organization, a formal
written plan may not be necessary. However, as the business grows and regular and effective
communication becomes more difficult, a written marketing plan should be seriously
considered. For the small businesses that do have a marketing plan, few actually use it.
There are many reasons why so many small businesses do not have marketing plans.
Among the reasons are the following:
 They do not have enough knowledge of marketing.
 They take a scattergun approach to marketing.
 They do not know how to go about developing a marketing plan.
 They do not have enough money to do marketing properly.
 They do not have enough time to do marketing properly.
 They do not have good people or resources to help them with marketing.
DEFINITION 12 MARKETING PLAN
A marketing plan “is a written document that summarizes what the marketer has learned
about the marketplace and indicates how the firm plans to reach its marketing objectives. It
contains tactical guidelines for the marketing programs and financial allocations over the
planning period.” (Kotler, Keller, 2009, p.56)
A marketing plan provides a specific marketing direction for a small business and is a very
valuable tool if it is done correctly. Because the ultimate purpose of the plan is to generate efficient,
profitable action, the marketing plan should consist of usable, practical instructions that are designed
to ensure that resources are properly applied. A good marketing plan will provide the reader with
a good general idea of its main contents even after only a quick skim in fifteen minutes or less. No
matter the length, the plan should be practical, to the point, with useful graphics as appropriate and
worded clearly with no flowery or legalistic language.
The plan should cover one year, which is often the best way to think about marketing for the
small company. This is not to say that you should not also think about the long term. It just means
that things change more rapidly in the short term. People leave, markets evolve, and customers
come and go. A marketing plan is a very important part of the small business roadmap to success.
There are many good reasons for developing a marketing plan, including the following:
 It forces you to identify the target market. A company’s best customers, and
hopefully the ideal customer, should be in the target market.
 You get a higher return on investment (ROI). Every dollar will work harder
when it is focused.
 It forces you to think about both short- and long-term marketing strategies.
Focusing only on the short term can be devastating to the future of the company.
 It provides a basis on which to evaluate a company against its industry or market
in terms of strengths, weaknesses, opportunities, and threats.
 You can eliminate waste by building efficiency. Limited resources can be
allocated to create the greatest return.
 It will be easier to see where past decisions have helped or hindered the growth
of a business. The plan will provide a guide for measuring progress and
outcomes.
 It will help you to minimize risk, mistakes, and failures.
7 Marketing in Small Business
- 114 
It helps you to establish a timeline, keeping people accountable for the growth
and success of operation.
 It gives clarity to who does what, when, and with what marketing tools.
 It lays out a company’s game plan. If people leave, if new people arrive, if
memories falter, if events bring pressure to alter the givens, the information in
the written marketing plan is a reminder of what you agree.
Because many small businesses seem to operate successfully without a marketing plan,
depending on how you want to define successfully, the absence of marketing plan does not
mean automatic failure. However, there are some distinct disadvantages to not having
a marketing plan. The following are some examples:
 Not having a marketing plan, whether it be a stand-alone document or a section
in the business plan, will put you at a significant disadvantage when trying to get
any type of business loan.
 Not having a marketing plan can push a business into a meandering mode that
could result in slowed growth, missed opportunities, and ignored threats.
 The target market may not be defined correctly.
 Not having a marketing plan may force you to focus on the short term with little
or no attention to the long term. This can be devastating to the future of
a company.
 Potential efficiencies will not be realized.
 Risk will likely increase.
In short, not having a marketing plan means that you will not realize the advantages of
having one. Even if you are an owner-only business, a marketing plan can provide a discipline
and a structure for growing the business if that is desired. On the other hand, if an owner is
perfectly satisfied with where and how things are, a marketing plan will most likely not be
helpful. Just remember that change is constant. Without a marketing plan, a business may not
be ready for change.
7.4.3 THE MARKETING STRATEGY
With its focus being on achieving the marketing objectives, marketing strategy involves
segmenting the market and selecting a target or targets, making differentiation and positioning
decisions, and designing the marketing mix. The design of the product (one of the four Ps)
will include design of the company website.
Differentiation refers to a company’s efforts to set its product or service apart from the
competition, and positioning is placing the brand (whether store, product, or service) in the
consumer’s mind in relation to other competing products based on product traits and benefits
that are relevant to the consumer. It has been said “in some cases strategy just happens
because a market and a product find each other and grow organically. However, small
businesses that understand the power of an overarching marketing strategy, they filtered and
infused in every tactical process, will usually enjoy greater success.
Jarmila Šebestová; Entrepreneurship
- 115 Figure
29 Initial Marketing strategies
Source: Mutiso, P., Mutiso, P. and V. Rarr,. 2012. 4 Types Of Marketing Strategies To Use As An Entrepreneur.
[online] [Accessed: 19 Jan 2014]. Available at: http://www.mybusinesstricks.com/2012/09/4-types-of-marketing-
strategies-to-use.html#.Une7YOJ_vDw
 Market Leader Strategies
Under this strategy, there are three ways, in which you could use it to establish yourself
as a market leader. The first way is to expand your total market. This is done by applying
strategies that will increase the numbers of consumers using your product or services. To lead
you must find new uses of existing products or targeting a new market. In identifying new
markets, you might have to source consumers in locations where your product is not known.
Defending the market share you are in control of is the second strategy. The most
effective ways of defending your current market is by capitalizing on improving the quality of
your products to be able to retain consumers. Market segmentation helps in defending your
market share. You need to segment products to be able to tap and retain consumers who
would go to your competitor if you engaged in a single segment business.
The third strategy is to expand your market share. To expand your market share you
need to counter aggressively completion.
A business can deal with completion by doing what your competitor does not. An
example of ways of expanding market share is to advertise products using appropriate
promotion mix the suits your business.
 Market Challenger Marketing Strategy
The market challenger marketing strategy means that you research and identify minor
unmet needs that you believe your business can cater for competitively. There is little or no
competition here, and it makes it easy to establish yourself in the market. Challengers use the
weaknesses of their competitors as their selling point.
 Market Niche Marketing Strategy
Having a market niche means that your market is differentiated into fine tuned
segments. The niches make it easier to address the need of consumers in each of the market
niches. This is a fundamental type of marketing strategy as you are able to address the
differing preferences of diverse consumers as well as moving with current trends in the
market. Diversifying the market will enable you to reach out to a wider market.
 Market Follower Marketing Strategy
The market follower depend waits for his competitors to identify markets and carry out
research consumer preferences. As a follower, you need to be keen your competitor’s
weaknesses and improve on them. This marketing strategy saves you on cost arising from
7 Marketing in Small Business
- 116 having
to carry out research because you only have to work on your competitors weaknesses
to better your products.
The above-mentioned examples of marketing strategies and tactics are very important
for promoting small businesses and large-scale businesses. Other kinds of approaches to use
as entrepreneur are the digital and social marketing strategies. The main aim of business is to
make profits; proper advertising is required for the objectives of the business to be realized.
EXAMPLE 9 FOR COOKS ONLY
When Phil Hartrack was a young man, he already knew what he wanted to be a
salesperson. His mother was delighted. "Salespeople make great money," she explained to
him. "And with your appetite, you’re going to need all of the money you can make. You’ve
got the biggest appetite in the family."
After graduating from college, Phil took a job with a consumer-goods firm. For the next
ten years, he was one of its leading salespeople every year. At the end of this time, however,
Phil admitted to himself that although he enjoyed selling, what he really wanted to do was sell
books. "I want to own my own bookstore," he told his wife. "I know it sounds silly because
I have had no experience in bookstore selling, but I've always loved books, and I'm a terrific
salesperson." After researching the market, Phil and his wife had to face a very important fact:
The competition in this business is extremely aggressive. Most small bookstores do not last
more than three years, and the majors such as Walden and Doubleday dominate the industry.
Phil refused to admit defeat. "There has to be a market niche somewhere in this field
that the majors are not addressing. I'm going to find that niche and go after it," he told his
banker. Six months ago, Phil concluded that he had found this niche. "Cookbooks are the
wave of the future," he explained to his wife. "The average person today buys twice as many
cookbooks as ten years ago. It is the fastest-growing segment of the book market. Moreover,
with your cooking skills and my appetite, we are a natural for this market. We love food, and
we have sales skills."
Taking all of their savings, Phil and his wife opened their bookstore in a popular
subur­ban mall. It is called For Cooks Only and it sells cookbooks only. By the end of the first
month, the Hartracks realized they had made the right choice. Their wide selection of
cookbooks and their familiarity with many of the books helped them build a loyal clien­tele.
They even installed a photocopying machine. If someone wants a recipe but does not want to
buy the book, a photocopy of it is made for the individual. This service has re­sulted in many
people coming by to get a recipe and then returning within a couple of weeks to buy the book.
Although Phil is quite happy over the business's success, he realizes that his limited
market niche could dry up in a short period. He feels that the best way to prevent this from
happening is by conducting marketing research, seeing if he can add any additional books or
services to the line, and developing the strongest possible clientele loyalty. The first place to
begin, in his opinion, is by examining the current purchasing habits of customers and then
using this as a foundation for deciding where to go from here.
Questions
1. From the customer's viewpoint, what type of good is a cookbook? Defend your answer.
2. Why is Phil's store doing so well? Include in your answer his philosophy of marketing
3. In his marketing research efforts, what type of information would you suggest Phil collect?
How can he go about doing this? Be complete in your answer.24
24
Based on Kuratko, 2009, chapter 8.
Jarmila Šebestová; Entrepreneurship
- 117 -
8 BUSINESS MODELS AND STRATEGIES
Strategic management is a process through which managers formulate and implement
strategies geared to optimizing goal achievement, given available environmental and internal
conditions. Strategic management is that set of managerial decisions and actions that
determines the long-run performance of an organization. It entails all of the basic
management functions like planning, organizing, leading, and controlling (see chapter 5).
When an organization has a long-term purpose, articulated in clear goals and objectives,
and these goals and objectives can be rolled up into a coherent plan of action, then we would
say that the organization has a strategy. It has a good or even great strategy when this plan
also takes advantage of unique resources and capabilities to exploit a big and growing
external opportunity.
The word strategy is derived from the Greek word strategos, which roughly translates
into the art of the general, namely a military leader. Generals are responsible for marshalling
required resources and organizing the troops and the basic plan of attack. Much in the same
way, executives as owners of businesses are expected to have a general idea of the desired
outcomes, acquire resources, hire and train personnel, and generate plans to achieve those
outcomes. In this sense, all businesses, large and small, have strategies, whether they are
clearly written in formal business plans or they reside in the mind of the owner of the business
(Cadden and Lueder, 2008, p.230)
Strategy then, is the central, integrated, externally oriented concept of how an
organization will achieve its objectives (Hambrick, Fredrickson, 2001, p. 2).
DEFINITION 13 A STRATEGY DEFINITION
A strategy is a pattern of objectives, purposes or goals and the major policies and plans
for achieving these goals, stated in such a way as to define what business the company is in or
is to be in and the kind of company it is or to be (Arrow, 1971,p. 28)
The determination of the long-run goals and objectives of an enterprise, and the
adoption of courses of action and the allocation of resources necessary for carrying out these
goals (Chandler,1962,p. 13)
What business strategy is all about, in a word, is competitive advantage (Ohmae, 1982,
p.6).
PURPOSES OF STRATEGIC MANAGEMENT
Strategic management is important to organizations because it helps organizations
identify and develop a competitive advantage, a significant edge over the competition in
dealing with competitive forces; provides a sense of direction so that organization members
know where to expend their efforts; helps highlight the need for innovation and provides an
organized approach for encouraging new ideas related to strategies. Strategies are large-scale
action plans for interacting with the environment in order to achieve long-term goals. Most
well run organizations attempt to develop and follow strategies.
 One reason strategic management is important is that it is involved in many of
the decisions that managers make.
 Another reason is that studies of the effectiveness of strategic planning and
management have found that, in general, companies with formal strategic
management systems had higher financial returns than those companies with no
such systems.
8 Business Models and Strategies
- 118 
Strategic management has moved beyond for-profit organizations to include all
types of organizations, including not-for-profit.
Figure 30 Strategy and its relationships
Source: Cadden and Lueder, 2012, p.230
Therefore, Strategy formulation is concerned with developing right strategies and
policies by finding: Matching with corporation’s Vision, Mission and Long-term objectives.
8.1 LEVELS OF STRATEGIES
Strategy formulation is not just a task for top executives or small business owners.
Middle and lower level managers too must be involved in the strategic planning process to the
extent possible. It is important to note that all levels / all persons responsible for strategic
planning at the various levels. Although most entrepreneurs do some form of planning for
their ventures, it often tends to be informal and unsystematic. 1 The actual need for systematic
planning will vary with the nature, size, and structure of the business. In other words, a small
two-person operation may successfully use informal planning because little complexity is
involved. But an emerging venture that is rapidly expanding with constantly increasing
personnel size and market oper­ations will need to formalize its planning because a great deal
of complexity exists.
Figure 31 Strategy pyramid
Source: own
Jarmila Šebestová; Entrepreneurship
- 119 Top-level
management / business owner and the board of directors develop
corporate-level strategy. The corporate-level strategy seeks to determine what businesses
a corporation should be in or wants to be in. Two popular approaches for answering the
question of what business (es) should we be in are the grand strategies framework and the
corporate portfolio matrix. These strategies address:
o What business the organization will be coordinated to strengthen the
organization’s competitive position.
o How the strategies of those businesses will be coordinated to strengthen the
organization’s competitive position.
o How resources will be allocated among businesses.
Process generally involves a selection of a Grand Strategy and using portfolio strategy
approaches to determine the type of business. GS is the general plan of major action by which
a firm intends to achieve its long-term goals. It provides basic direction for the strategic action
of a firm.
Strategy falls into four general categories:
(1) Growth / expansion – Internal (exploited through intensification or
Diversification) and External – through Mergers, Take over, joint ventures
(JV).
(2) Stability Strategy: growing in a methodical but slow manner, firm follow
‘Safety – oriented, Status quo – type strategy without effecting any major
changes in its present operations.
(3) Retrenchment Strategy: when the firm’s performance is disappointed or when
its survival is at stake, it is forced to effect across the board cuts in Personnel &
Expenditure.
(4) Combination Strategy: Large diversified org. generally used as a mixture of
stability, expansion or retrenchment strategy either simultaneously or
sequentially.
Business-level strategy concentrates on the best means of competing within a particular
business while also supporting the corporate-level strategy.
o The distinction between corporate-level and business-level strategy applies
only to organizations with separate divisions that compete in different
industries.
o A strategic business unit (SBU) is a distinct business, with its own set of
competitors that can be managed reasonably independently of other businesses
within the organization.
Business strategies focus on improving the competitive position of a company’s or
business unit’s products or services within the specific industry or market segments that
the company serves.
Business Strategy can be:
(1) Competitive strategy
(2) Cooperative strategy or both
1. Competitive Strategy (e.g. Porter´s generic strategies):
Battling against all competitors for competitive advantage raises two questions:
 Should the firm compete based on low cost or should the business differentiate it
products or services?
 Should the firm compete head to head with major competitors for profitable
segment of the market?
8 Business Models and Strategies
- 120 -
2. Cooperative Strategy:
When the business units or firm is working with one or more competitors to gain
advantages against other competitors called cooperative strategy or strategic alliance.
Strategic alliance is nothing but mutual benefits and broadly, it is JV.
Functional-level strategy focuses on action plans for managing a particular functional
area within a business in a way that supports the business-level strategy.
o Functional areas include operations, marketing, finance, human resources
management, accounting, research and development, and engineering.
o Functional strategies are usually developed by functional managers and are
typically reviewed by business unit heads.
Coordinating strategies across these three levels is critical in maximizing strategic
impact. According to David Aaker, in any case while selecting appropriate strategies at
corporate business & functional level, the following strategy selection criteria should be kept
in mind:
 Strategies are responsive to the External environment.
 Strategies are offering sustainable competitive advantages.
 They are consistent with other strategies in the organization.
 They provide adequate flexibility for the business & the organization.
 They conform to the organization’s mission and long-term objectives.
 They are organizationally feasible in terms of Cost effective, Creative and
Constructive (C3).
8.2 STRATEGIC MANAGEMENT PROCESS
8.2.1 VALUE, VISION, STRATEGY AND TACTICS RELATIONSHIP
Clearly specifying your strategy should be seen as an end in itself. Requiring a company
to specify its strategy forces that company to think about its core issues, such as the following:
 Who are your customers?
 How are you going to provide value to those customers?
 Who are your current and future competitors?
 What are your resources?
 How are you going to use these resources?
Figure 32 Strategic chain
Source: Burns, 2007
Let´s define those terms in the text below.
Jarmila Šebestová; Entrepreneurship
- 121 DEFINITION
14 VISION ATTRIBUTES
Vision is a shared mental image of a desired future state, which provides a sense of
meaning and purpose of your business. A vision is:
 Inspirational
 Aspirational
 Motivating
Nevertheless, must be realistic, credible and attractive and so often includes core values
of the company.
DEFINITION 15 MISION ATTRIBUTES
The (company) aims to use its (competitive advantage) to achieve/maintain (aspirations)
in providing (product scope) which offers (benefits) to satisfy the (needs) of (customer scope).
In doing this the company will at all times strive to uphold (values).
8.2.2 COMPONENTS OF THE PROCESS
The strategic management process is made up of several components.
Strategy formulation is the part of the strategic management process that includes:
 Identifying the mission and strategic goals.
 Conducting competitive analysis
 Developing specific strategies
Strategy implementation is the part of the strategic management process that focuses on:
 Carrying strategic plans.
 Maintaining control over how those plans are carried out.
Figure 33 Strategic planning process
Source: Burns, 2007
The first step is identifying the organization’s current mission, objectives, and
strategies. Every organization needs a mission, which defines the purpose of the organization.
What is the organization’s reason for being in business? It is also important to identify the
organization’s current objectives and strategies, as well.
8 Business Models and Strategies
- 122 Step
2 is analyzing the external environment. It is important to analyze the environment
because, to a large degree, it defines management’s strategic options. A successful strategy is
one that aligns well with the environment. This step is complete when managers have an
accurate grasp of what is taking place in the external environment and are aware of important
trends that might affect the organization.
The third step is identifying opportunities and threats. After analyzing the external
environment, managers need to assess what opportunities to exploit and what threats to avoid.
Opportunities are positive external environmental factors. Threats are negative external
environmental factors.
Step 4 is analyzing the organization’s resources. In this internal analysis, managers are
looking at the organization’s specific assets, skills, and work activities. Managers look for
core competencies, which are an organization’s major value-creating skills, capabilities, and
resources that determine its competitive advantage. This step forces managers to realize that
every organization, no matter how large or powerful, is constrained in some way by its
resources and skills.
Step 5 is identifying strengths and weaknesses. The analysis in step 4 should lead to
a clear assessment of the organization’s internal resources. Strengths are those activities the
firm does well or the unique resources it controls. Weaknesses are those activities the firm
does not do well or the resources it needs but does not possess. One area that is often
overlooked in this step is an analysis of the organization’s culture and its strengths and
weaknesses. Remember that culture is the organization’s personality. The strength of the
culture is a result of how much employees understand and support the shared values. A strong
culture should make it easy for managers to convey to employees the organization’s
distinctive competencies. However, the strong culture will make it more difficult to change, if
needed. Strategic choices will also be influenced by the culture’s tolerance of risk and
innovation. The culture can also promote or hinder an organization’s strategic actions.
 The merging of steps 3 and 5 results in a SWOT analysis, which is an analysis of an
organization’s strengths, weaknesses, opportunities, and threats. It brings together the
internal and external analyses in order to identify a strategic niche the organization
might exploit.
 In light of the SWOT analysis, managers need to re-evaluate the organization’s current
mission and objectives.
Step 6 is formulating strategies. Strategies need to be established for the corporate,
business, and functional levels of the organization. In formulating strategies, managers hope
to give the organization a competitive advantage.
The next step is implementing strategies. The strategies must now be put into action.
Strategies are only as good as their implementation.
The eighth (and final) step in the strategic management process is evaluating results.
Managers must evaluate the results to determine how effective their strategies have been and
what corrections are necessary.
8.3 STRATEGY FORMULATION
Before an effective strategy to gain a competitive advantage can be formulated, the
organization’s competitive situation needs to be carefully analyzed.
BASIC INFORMATION FOR STRATEGY PREPARATION
The process of strategy formulation starts with, and critically depends on, the appraisal
of the external and internal environment of the organization. So what are the inputs into
Jarmila Šebestová; Entrepreneurship
- 123 strategizing?
At the most basic level, you will need to gather information and conduct analysis
about the internal characteristics of the organization and the external market conditions. This
means an internal appraisal and an external appraisal. On the internal side, you will want to
gain a sense of the organization’s strengths and weaknesses; on the external side, you will
want to develop some sense of the organization’s opportunities and threats. Together, these
four inputs into strategizing are often called SWOT analysis, which stands for strengths,
weaknesses, opportunities, and threats (see the chapter 4). It does not matter if you start this
appraisal process internally or externally, but you will quickly see that the two need to mesh
eventually. At the very least, the strategy should leverage strengths to take advantage of
opportunities and mitigate threats, while the downside consequences of weaknesses are
minimized or managed.
An assessment of strengths and weaknesses occurs as a part of organizational analysis;
that is, it is an audit of the company’s internal workings, which are relatively easier to control
than outside factors. Conversely, examining opportunities and threats is a part of
environmental analysis—the company must look outside of the organization to determine
opportunities and threats, over which it has lesser control.
Andrews’s original conception of the strategy model that preceded the SWOT asked
four basic questions about a company and its environment: (1) what can we do? (2) What do
we want to do? (3) What might we do? In addition (4), what do others expect us to do?
8.3.1 FORMULATING CORPORATE-LEVEL STRATEGY
A grand strategy (master strategy) provides the basic strategic direction at the
corporate level of the organization. Four grand strategies have been identified:
1. Growth strategies are grand strategies that involve organizational expansion along
some major dimension.
a. Concentration focuses on effecting the growth of a single product or service or
a small number of closely related products or services.
o Market development is gaining a larger share of a current market or
expanding into new ones.
o Product development is improving a basic product or service or
expanding into closely related products or services.
o Horizontal integration is adding one or more business that is similar,
usually by purchasing such business.
b. Vertical integration involves effecting growth through the production of inputs
previously provided by suppliers or through the replacement of a customer role
(Such as that of a distributor) by disposing of one’s own outputs.
o Backward integration occurs when a business grows by becoming its
own supplier
o Forward integration occurs when organizational growth encompasses
a role previously fulfilled by a customer.
c. Diversification entails effecting growth through the development of new areas
that are clearly distinct from current businesses.
o Conglomerate diversification takes place when an organization
diversifies into areas that are unrelated to its current business.
o Concentric diversification occurs when an organization diversifies into
a related, but distinct, business.
8 Business Models and Strategies
- 124 These
growth strategies can be implemented through a number of means:
 Internal growth occurs as the organization expands by building on its own
internal resources.
 An acquisition is the purchase of all or part of one organization by another.
 A merger is the combining of two or more companies into one organization.
 A joint venture occurs when two or more organizations provide resources to
support a given project or product offering.
2. A stability strategy is a second type of grand strategy that involves maintaining the
status quo or growing in a methodical, but slow, manner.
 Small, privately owned businesses are most likely to adopt this strategy.
 Some of the reasons for adopting a stability strategy are that it
 Avoids the risks or hassles of aggressive growth.
 Provides the opportunity to recover after a period of accelerated growth.
 Lets the company hold on to current market share.
 May occur through default.
3. Defensive strategies, the third class of grand strategies, are sometimes called
retrenchment strategies. They tend to focus on the desire or need to reduce organizational
operations usually through cost reductions, such as cutting back on non-essential expenditures
and instituting hiring freezes, and/or asset reductions such as selling land, equipment, or the
business itself.
 Harvest entails minimizing investments while attempting to maximize short-run
profits and cash flow, with the long-run intention of existing with the market.
 A turnaround is designed to reverse a negative trend and restore the organization to
appropriate levels of profitability.
 A divestiture involves an organization’s selling or divesting of a business or part of
a business.
 A bankruptcy is a means whereby an organization that is unable to pay its debts
can seek court protection from creditors and from certain contract obligations
while it attempts to regain financial stability.
 Liquidation entails selling or dissolving an entire organization.
4. A portfolio strategy approach is a method of analyzing an organization’s mix of
businesses in terms of both individual and collective contributions to strategic goals. Two
portfolio approaches are used most frequently. Each uses a two-dimensional matrix, and each
may apply either to the existing or to potential strategic business units (SBUs).
8.3.2 THE PORTFOLIO CONCEPT
The portfolio concept is analogous to an individual’s selecting a portfolio of stocks to
achieve balance in terms of risk, long-term growth, etc.
The Boston Consulting Groups (BCG) growth-share matrix compares various
businesses in an organization’s portfolio based on relative market share and market growth
rate. The corporate portfolio matrix approach has been a popular approach to determining
corporate-level strategy. A business portfolio is the collection of SBU that makes up
a corporation. The optimal business portfolio is one that fits perfectly to the company's
strengths and helps to exploit the most attractive industries or markets. The BCG growth share
Jarmila Šebestová; Entrepreneurship
- 125 matrix
is directly derived from the experience curve and based on the pattern of cash flow.
The aim of the analysis is:
 Analyze its current business portfolio and decide which SBUs’ should receive
more or less investment,
 Develop growth strategies for adding new products and businesses to the
portfolio, and
 Decide which businesses or products should no longer be retained.
Figure 34 BCG matrix
Source: own
The matrix defines four business groups. SBUs plotted on the BCG matrix can be
categorized:
STARS (HIGH GROWTH, HIGH MARKET SHARE)
 Stars are in the upper left quadrant of the matrix.
 They grow rapidly
 They use large amounts of cash
 Are leaders in the business so they should also generate large amounts of cash?
 There is generally a balance on net cash flow.
Over time, all growth slows. Therefore, stars eventually become sources of income if
they hold their market share. If they fail to hold market share, they become dogs.
CASH COWS (LOW GROWTH, HIGH MARKET SHARE)
 Sources of income are in the lower left quadrant of the matrix.
 Such products are profitable and cash generation is high,
 Because of the low growth, investments needed should be low.
 Keep profits high
 They form the foundation of an organization.
Sources of income pay the dividends, pay the interest on debt and cover the corporate
overhead.
8 Business Models and Strategies
- 126 DOGS
(LOW GROWTH, LOW MARKET SHARE)
 Dogs are in the lower right quadrant.
 These products need to be avoided. You should try to minimize the number of
dogs in a company.
 Beware of expensive ‘turn around plans’.
 As soon as they stop delivering cash, they should be phased out or otherwise
liquidated
They are essentially worthless and are generally cash traps.
QUESTION MARKS (HIGH GROWTH, LOW MARKET SHARE)
 They are in the upper right quadrant.
 These products have the worst cash characteristics of all, because high demands
and low returns due to low market share
 If nothing is, done to change the market share, question marks will simply
absorb great amounts of cash and later, as the growth stops, turn into dogs.
 Either invests heavily or sells off; or invests nothing and generates whatever
cash it can. You should either increase market share or deliver cash.
Question marks are the real gambles. Their cash needs are great because of their growth.
Yet, their cash generation is very low because their market share is low.
STRATEGIES SUGGESTED BY THE SBU’S POSITION ON THE MATRIX
1. Use funds from sources of income to duns stars and possibly question marks.
2. Divest dogs and less desirable question mark.
3. The product/market evolution matrix (sometimes called the life-cycle portfolio
matrix) is a 15-cell matrix in which business is plotted according to the business
unit’s business strengths or competitive position, and the industry’s stage in the
evolutionary product/market life cycle.
 While the BCG matrix measures market growth rate the product/market
evolution matrix shows the industry’s stage in the evolutionary life cycle.
 The maturity and saturation stage is particularly important because it may
last for an extended period and is a stage that presents special challenges to
preserve market share while facing the prospect of the decline stage.
 In assessing these portfolio matrixes, remember that each model offers
a somewhat different perspective. Portfolio matrices do not provide advice
about specific business within the organization-such specifics are derived
at the business level.
Jarmila Šebestová; Entrepreneurship
- 127 Figure
35 BCG matrix strategies
Source: Burns, 2007
The BCG matrix (and the portfolio concept) has lost much of its merit because:
 Not every organization has found that increased market share leads to lower costs.
 The portfolio concept assumes that an organization’s businesses can be divided
into reasonable number of independent units.
 Contrary to predictions, many so-called dogs have shown consistently higher
levels of profitability than their growing competitors with dominant market
shares have.
 Given the rate at which the economy has been growing and the fact that a market
can have only one leader, well over half of all businesses by definition fall into
the dog category.
 Strategic implications of the BCG matrix are: “milk” the sources of income;
invest resources in the stars; liquidate or sell the dogs; and sell off or invest in
the question marks.
8.3.3 FORMULATING BUSINESS-LEVEL STRATEGY
Business-level strategies provide advice about specific strategies for various
businesses. Michael E. Porter has developed three business-level strategies that are generic,
i.e., widely applicable to a variety of situations.
1. A cost leadership strategy involves emphasizing organizational efficiency so that
the overall costs of providing products and services are lower than of competitors.
 The business should have a cost advantage that is not easily to be imitated.
 Managers should consider making those product or service innovations that
are most important to customers.
2. A differentiation strategy involves attempting to develop products and services that
are viewed as unique in the industry.
 Differentiation may occur in brand image, technology, customer service,
features, quality, and election.
 Costs are not as important as product or service uniqueness.
8 Business Models and Strategies
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3. A focus strategy entails specializing by establishing a position of overall cost
leadership, differentiation, or both, but only within a particular portion, or segment,
or an entire market.
These four generic strategies can be applied to small businesses. We will examine each
strategy and then discuss what is required to implement them successfully.
Figure 36 Strategies based on Porter
Source: Cadden and Lueder, 2008
LOW-COST ADVANTAGE
A cost leadership strategy requires that a firm be in the position of being the lowest cost
producer in its competitive environment. By being the lowest cost producer, a firm has several
strategic options open to it. It can sell its product or service at a lower price than its
competitors can. If price is a major driver of customer value, then the firm with the lowest
price should sell more. The low-cost producer also has the option of selling its products or
services at prices that are comparable to its competitors. However, this would mean that the
firm would have a much higher margin than its competitors would.
Obviously, following a cost leadership strategy dictates that the business be good at
curtailing costs. It might appear that cost leadership strategies are most suitable for large
firms, which can exploit economies of scale. This is not necessarily true. Smaller firms can
compete based on cost leadership. They can position themselves in low-cost areas, and they
can exploit their lower overhead costs. Family businesses can use family members as
employees, or they can use a web presence to market and sell their goods and services.
DIFFERENTIATION
A differentiation strategy involves providing products or services that meet customer
value in some unique way. This uniqueness may be derived in several ways. A firm may try to
build a particular brand image that differentiates itself from its competitors. Other firms will
try to differentiate themselves because of the services that they provide. Differentiation also
can be achieved by offering a unique design or features in the product or the service.
Adopting a differentiation strategy requires significantly different capabilities than those
that were outlined for cost leadership. Firms that employ a differentiation strategy must have
a complete understanding of what constitutes customer value. Further, they must be able to
respond rapidly to changing customer needs. Often, a differentiation strategy involves
offering these products and services at a premium price. A differentiation strategy may accept
lower sales volumes because a firm is charging higher prices and obtaining higher profit
margins. A danger in this approach is that customers may no longer place a premium value on
the unique features or quality of the product or the service. This leaves the firm that offers
a differentiation strategy open to competition from those that adopt a cost leadership strategy.
Jarmila Šebestová; Entrepreneurship
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COST OR DIFFERENTIATION
Porter identifies the third strategy—focus. He said that focus strategies could be
segmented into a cost focus and a differentiation focus.
In a focus strategy, a firm concentrates on one or more segments of the overall market.
Focus can also be described as a niche strategy. Focus strategy entails deciding to some extent
that we do not want to have everyone as a customer. There are several ways that a firm can
adopt a focus perspective:
 Product line. A firm limits its product line to specific items of only one or more
product types. California Cart Builder produces only catering trucks and mobile
kitchens.
 Customer. A firm concentrates on serving the needs of a particular type of
customer. Weight Watchers concentrates on customers who wish to control their
weight or lose weight.
 Geographic area. Many small firms, out of necessity, will limit themselves to
a particular geographic region. Microbrewers generally serve a limited
geographic region.
 Particular distribution channel. Firms may wish to limit themselves with
respect to the means by which they sell their products and services.
The selection of a generic strategy by a firm should not be seen as something to be done
on a whim. Once a strategy is selected, all aspects of the business must be tied to
implementing that strategy.
Table 15 Summary of Generic Strategies
Generic
Strategy Required Activities Issues
Costleadership
Economies of scale
Reduce overhead costs
Lower cost of supplies
Capital investment in technology to reduce cost
Labour cost reduction through supervision,
outsourcing, and work design
Low-cost distribution
Reduce cost of manufacturing or providing service
Tight financial control
Operate in lower cost environments
Production-based incentives
Product or service becomes a commodity with no
brand loyalty
Changing technology cuts your cost advantage
New entrants can produce at even lower costs (e.g.,
China)
Focus on cost reduction means that you miss
changing customer tastes
Differentiation
Unique or highly improved products or services
Brand image
Creative approach to marketing
Reputation for quality and product or service
innovation
Ability to attract creative personnel
Effective coordination among R&D, marketing,
and operations
Qualitative difference between you and low-cost
producer may not be enough to sustain sales
Differentiating factor may no longer be attractive to
customers
Imitation narrows perceived differences
8 Business Models and Strategies
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Generic
Strategy Required Activities IssuesFocus—lowcost
Reduce overhead costs
Lower cost of supplies
Labour cost reduction through supervision,
outsourcing, and work design
Low-cost distribution
Tight financial control
Operate in lower cost environments
Production-based incentives
Cost advantage of focused firms is lost with respect
to broader competitors
Differentiation advantage with a focused market is
lost
Competitors find even smaller markets to focus on
Focus—
differentiation
Unique or highly improved products or services
Creative approach to marketing
Reputation for quality and product/service
innovation
Ability to attract creative personnel
Effective coordination among R&D, marketing,
and operations
Cost advantage of focused firms is lost with respect
to broader competitors
Differentiation advantage with a focused market is
lost
Competitors find even smaller markets to focus on
Source: Porter, 1980, p. 21.
8.3.4 FORMULATING FUNCTIONAL-LEVEL STRATEGY
Strategies at the functional level are important in supporting a business-level strategy.
Functional areas develop the distinctive competencies that lead to potential competitive
advantages.
8.4 STRATEGY IMPLEMENTATION
Strategies at the functional level are important in supporting a business-level strategy.
Functional areas develop the distinctive competencies that lead to potential competitive
advantages. Strategy implementation includes the various management activities that are
necessary to put the strategy in motion, institute strategic controls that monitor progress, and
ultimately achieve organizational goals. Managers need to synchronize major factors within
an organization needed to put a chosen strategy into action.
 Technology is the knowledge, tool, equipment, and work technique used by an
organization in delivering its product or service.
 Human resources are the individuals who are members of the organization.
 Reward systems include bonuses, awards, or promotions provided by others, as well as
rewards related to internal experiences, such as feeling of achievement and challenge.
 Decision processes include the means of resolving questions and problems that occur
in organizations.
 Organization structure is the formal pattern of interactions and coordination designed
by management to link the tasks of individuals and groups in achieving organizational
goals.
Managers need to be able to monitor progress through strategic control. Strategic
control involves monitoring critical environmental factors that could affect the viability of
strategic plans, assessing the effects of organizational strategic actions, and ensuring that
strategic plans are implemented as intended. Strategic control systems include information
systems that provide feedback on the implementation and effectiveness of strategic plans.
Jarmila Šebestová; Entrepreneurship
- 131 CASE
STUDY 4 STRATEGY THINKING
Solomon and Friedman recounted a prime example of true strategic thinking (Cadden
and Lueder, 2012, s.232). Wilson Harrell took a small, closely held, cleaning spray company
known as Formula 409 to the point of having national distribution. In 1967, the position that
Formula 409 held was threatened by the possible entry of Procter & Gamble into the same
spray cleaning market. Procter & Gamble was a huge consumer products producer, noted for
its marketing practical understanding. Procter & Gamble began a program of extensive market
research to promote its comparable product they called Cinch. Clearly, the larger firm had
a much greater advantage.
Harrell knew that Procter & Gamble would perform test market research. He decided to
do the unexpected. Rather than directly confront this much larger competitor, he began
a program where he reduced advertising expenditures in Denver and stopped promoting his
Formula 409.
The outcome was that Procter & Gamble had spectacular results, and the company was
extremely excited with the potential for Cinch. Procter & Gamble immediately begin
a national sales campaign. However, before the company could begin, Harrell introduced
a promotion of his own.
He took the Formula 409 sixteen-ounce bottle and attached it to a half-gallon size
bottle. He then sold both at a significant discount. This quantity of spray cleaner would last
the average consumer six to nine months. The market for Procter & Gamble’s Cinch was
significantly reduced. Procter & Gamble was confused and confounded by its poor showing
after the phenomenal showing in Denver. Confused and uncertain, the company chose to
withdraw Cinch from the market. Wilson Harrell’s display of brilliant strategic thinking had
bested them.
He leveraged his small company’s creative thinking and flexibility against the
tremendous resources of an international giant. Through superior strategic thinking, Harrell
was able to best Procter & Gamble.
8.5 BUSINESS MODELS
A business model describes the rationale of how an organization creates, delivers, and
captures value to the customer. Osterwalder and Pigneur (2009; p.15-35). The creative version
of the model consists from nine bricks putted into one canvas.
Figure 37 Business model and its relatives
Source: own
A repeatable and scalable business model is the foundation for an effective business
plan. Once you find one, then think about spending time and effort on the business plan.
8 Business Models and Strategies
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8.5.1 ELEMENTS OF A BUSINESS MODEL
This tool resembles a painter’s canvas - preformatted with the nine blocks, which allows
you to paint pictures of new or existing business models according your previous analysis.
Figure 38 Canvas model
Source: Osterwalder and Pigneur, 2009, p.44
The model is divided into two parts; logical part and emotional part (see enclosure no. 4
and 5)
1. EMOTIONAL PART – value for your business
CUSTOMER SEGMENTS (CS)
The Customer Segments Building Block defines the different groups of people or
organizations an enterprise aims to reach and serve Customers comprise the heart of any
business model. Without (profitable) customers, no company can survive for long. In order to
better satisfy customers, a company may group them into distinct segments with common
needs, common behaviours, or other attributes. A business model may define one or several
large or small Customer Segments. An organization must make a conscious decision about
which segments to serve and which segments to ignore. Once this decision is made, a business
model can be carefully designed around a strong understanding of specific customer needs
(segments – see chapter 7.2).
 Who is the customer?
 Is our offering relevant to this customer?
Customer groups represent separate segments if:
 Their needs require and justify a distinct offer
 They are reached through different Distribution Channels
Jarmila Šebestová; Entrepreneurship
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They require different types of relationships
 They have substantially different profitability
 They are willing to pay for different aspects of the offer
Finally, choose the market:
 Mass Market - Business models focused on mass markets don’t distinguish
between different Customer Segments
 Niche Market Business models targeting niche markets cater to specific,
specialized Customer Segments. The Value Propositions, Distribution Channels,
and Customer Relationships are all tailored to the specific requirements of a niche
market. Such business models are often found in supplier-buyer relationships.
 Segmented- distinguish between market segments with slightly different needs
and problems (one service for different type of customers – books for scholars,
kids, academicians)
 Diversified- An organization with a diversified customer business model serves
two unrelated Customer Segments with very different needs and problems. For
example, in 2006 Amazon.com decided to diversify its retail business by selling
“cloud computing” services: online storage space and on-demand server usage.
Thus it started catering to a very different Customer Segment — Web companies
— with a very different Value Proposition. The strategic rationale behind this
diversification can be found in Amazon.com’s powerful IT infrastructure, which
can be shared by its retail sales operations and the new cloud computing service
unit.
 Multi-Sided Market- Some organizations serve two or more interdependent
Customer Segments. A credit card company, for example, needs a large base of
credit card holders and a large base of merchants who accept those credit cards.
Similarly, an enterprise offering free newspapers needs a large reader base to
attract advertisers. On the other hand, it also needs advertisers to finance
production and distribution.
VALUE PROPOSITION (VP)
 What are the unique benefits?
The Value Propositions Building Block describes the bundle of products and services
that create value for a specific Customer Segment. It solves a customer problem or satisfies
a customer need. Each Value Proposition consists of a selected bundle of products and/or
services that caters to the requirements of a specific Customer Segment. In this sense, the
Value Proposition is an aggregation, or bundle, of benefits that a company offers customers.
Some Value Propositions may be innovative and represent a new or disruptive offer. Others
may be similar to existing market offers, but with added features and attributes.
Values may be quantitative (e.g. price, speed of service) or qualitative (e.g. design,
customer experience). The Value attributes are:
 Newness
Some Value Propositions satisfy an entirely new set of needs that customers previously
did not perceive because there was no similar offering. This is often, but not always,
technology related.
8 Business Models and Strategies
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Performance
Improving product or service performance has traditionally been a common way to
create value. However, improved performance has its limits.
 Customization
Tailoring products and services to the specific needs of individual customers or
Customer Segments creates value. In recent years, the concepts of mass customization and
customer co-creation have gained importance. This approach allows for customized products
and services, while still taking advantage of economies of scale.
 “Getting the job done”
Value can be created simply by helping a customer get certain jobs done. Rolls-Royce
understands this very well: its airline customers rely entirely on Rolls- Royce to manufacture
and service their jet engines. This arrangement allows customers to focus on running their
airlines. In return, the airlines pay Rolls- Royce a fee for every hour an engine runs.
 Design
Design is an important but difficult element to measure. A product may stand out
because of superior design.
 Brand/status
Customers may find value in the simple act of using and displaying a specific brand.
Wearing a Rolex watch signifies wealth, for example.
 Price
Offering similar value at a lower price is a common way to satisfy the needs of pricesensitive
Customer Segments.
 Cost reduction
Helping customers reduce costs is an important way to create value. Salesforce.com, for
example, sells a hosted Customer Relationship management (CRM) application. This relieves
buyers from the expense and trouble of having to buy, install, and manage CRM software
themselves.
 Risk reduction
Customers value reducing the risks, when they purchasing products or services. For
a used car buyer, a one-year service guarantee reduces the risk of post-purchase breakdowns
and repairs.
 Accessibility
Making products and services available to customers who previously lacked access to
them is another way to create value. This can result from business model innovation, new
technologies, or a combination of both.
 Convenience/usability
Making things more convenient or easier to use can create substantial value.
Jarmila Šebestová; Entrepreneurship
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(CH)
The Channels Building Block describes how a company communicates with and
reaches its Customer Segments to deliver a Value Proposition. Communication, distribution,
and sales Channels comprise a company's interface with customers. Channels are customer
touch points that play an important role in the customer experience. Channels serve several
functions, including:
 Raising awareness among customers about a company’s products and services
 Helping customers evaluate a company’s Value Proposition
 Allowing customers to purchase specific products and services
 Delivering a Value Proposition to customers
 Providing post-purchase customer support
Finding the right mix of Channels to satisfy how customers want to be reached is crucial
in bringing a Value Proposition to market.
An organization can choose between reaching its customers through its own Channels,
through partner Channels, or through a mix of both. Owned Channels can be direct, such as an
in-house sales force or a Web site, or they can be indirect, such as retail stores owned or
operated by the organization.
Partner Channels are indirect and span whole range of options, such as wholesale
distribution, retail, or partner-owned Web sites. Partner Channels lead to lower margins, but
they allow an organization to expand its reach and benefit from partner strengths. Owned
Channels and particularly direct ones have higher margins, but can be costly to put in place
and to operate. The trick is to find the right balance between the different types of Channels to
integrate them in a way to create a great customer experience, and to maximize revenues.
Figure 39 Channels types and phases
Source: Osterwalder and Pigneur, 2009, p.27
CUSTOMER RELATIONSHIPS (CR)
The Customer Relationships Building Block describes the types of relationships
a company establishes with specific Customer Segments. Relationships can range from
personal to automate. Customer relationships may be driven by the following motivations:
 Customer acquisition
 Customer retention
 Boosting sales (up selling)
8 Business Models and Strategies
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can distinguish between several categories of Customer Relationships, which may
co-exist in a company’s relationship with a particular Customer Segment:
 Personal assistance
This relationship is based on human interaction. The customer can communicate with
a real customer representative to get help during the sales process or after the purchase is
complete. This may be happen onsite at the point of sale, through call centres, by e-mail, or
through other means.
 Dedicated personal assistance
This relationship involves dedicating a customer representative specifically to an
individual client. It represents the deepest and most intimate type of relationship and normally
develops over a long period. Similar relationships can be found in other businesses in the
form of key account managers who maintain personal relationships with important customers.
 Self-service
In this type of relationship, a company maintains no direct relationship with customers.
It provides all the necessary means for customers to help themselves.
 Automated services
This type of relationship mixes a more sophisticated form of customer self-service with
automated processes. Automated services can recognize individual customers and their
characteristics, and offer information related to orders or transactions.
 Communities
Increasingly, companies are utilizing user communities to become more involved with
customers/prospects and to facilitate connections between community members. Many
companies maintain online communities that allow users to exchange knowledge and solve
each other’s problems. Communities can also help companies better understand their
customers.
 Co-creation
More companies are going beyond the traditional customer-vendor relationship to cocreate
value with customers. Some companies engage customers to assist with the design of
new and innovative products.
REVENUE STREAMS (RS)
The Revenue Streams Building Block represents the cash a company generates from
each Customer Segment (costs must be subtracted from revenues to create earnings). Each
Revenue Stream may have different pricing mechanisms, such as fixed list prices, bargaining,
auctioning, market dependent, volume dependent, or yield management. A business model
can involve two different types of Revenue Streams:
 Transaction revenues resulting from one-time customer payments
 Recurring revenues resulting from ongoing payments to either deliver a Value
Proposition to customers or provide post-purchase customer support
Jarmila Šebestová; Entrepreneurship
- 137 There
are several ways to generate Revenue Streams:
 Asset sale
The most widely understood Revenue Stream derives from selling ownership rights to
a physical product. Amazon.com sells books, music, consumer electronics, and more online.
Fiat sells automobiles, which buyers are free to drive, resell, or even destroy.
 Usage fee
This Revenue Stream is generated by the use of a particular service. The more a service
is used, the more the customer pays. A telecom operator may charge customers for the
number of minutes spent on the phone. Hotel charges customers for the number of nights
rooms are used.
 Subscription fees
This Revenue Stream is generated by selling continuous access to a service. A gym sells
its members monthly or yearly subscriptions in exchange for access to its exercise facilities.
 Lending/Renting/Leasing
This Revenue Stream is created by temporarily granting someone the exclusive right to
use a particular asset for a fixed period in return for a fee. For the lender this provides the
advantage of recurring revenues. Renters or lessees, on the other hand, enjoy the benefits of
incurring expenses for only a limited time rather than bearing the full costs.
 Licensing
This Revenue Stream is generated by giving customers permission to use protected
intellectual property in exchange for licensing fees. Licensing allows rights holders to
generate revenues from their property without having to manufacture a product or
commercialize a service. Licensing is common in the media industry, where content owners
retain copyright while selling usage licenses to third parties. Similarly, in technology sectors
patent holders grant other companies the right to use a patented technology in return for
a license fee.
 Brokerage fees
This Revenue Stream derives from intermediation services performed on behalf of two
or more parties. Credit card providers, for example, earn revenues by taking a percentage of
the value of each sales transaction executed between credit card merchants and customers.
Brokers and real estate agents earn a commission each time they successfully match a buyer
and seller.
 Advertising
This Revenue Stream results from fees for advertising a particular product, service, or
brand. Traditionally, the media industry and event organizers relied heavily on revenues from
advertising. In recent years, other sectors, including software and services, have started
relying more heavily on advertising revenues.
8 Business Models and Strategies
- 138 Figure
40 Pricing mechanisms
Source: Osterwalder and Pigneur, 2009, p.33
Each Revenue Stream might have different pricing mechanisms. The type of pricing
mechanism chosen can make a big difference in terms of revenues generated.
2. LOGICAL PART – efficiency of your business proposition
KEY RESOURCES (KR)
Every business model requires Key Resources. The Key Resources Building Block
describes the most important assets required to make a business model work. These resources
allow an enterprise to create and offer a Value Proposition, reach markets, maintain
relationships with Customer Segments, and earn revenues. Different Key Resources are
needed depending on the type of business model. Key resources can be physical, financial,
intellectual, or human. Key resources can be owned or leased by the company or acquired
from key partners. Key Resources can be categorized as follows:
 Physical
This category includes physical assets such as manufacturing facilities, buildings,
vehicles, machines, systems, point-of-sales systems, and distribution networks. Retailers rely
heavily on physical resources, which are often capital-intensive. The former has an enormous
global network of stores and related logistics infrastructure. The latter has an extensive IT,
warehouse, and logistics infrastructure.
 Intellectual
Intellectual resources such as brands, proprietary knowledge, patents and copyrights,
partnerships, and customer databases are increasingly important components of a strong
business model. Intellectual resources are difficult to develop but when successfully created
may offer substantial value.
Jarmila Šebestová; Entrepreneurship
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Human
Every enterprise requires human resources, but people are particularly prominent in
certain business models. For example, human resources are crucial in knowledge-intensive
and creative industries.
 Financial
Some business models call for financial resources and/or financial guarantees, such as
cash, lines of credit, or a stock option pool for hiring key employees.
KEY ACTIVITIES (KA)
The Key Activities Building Block describes the most important things a company must
do to make its business model work. Like Key Resources, they are required to create and offer
a Value Proposition, reach markets, maintain Customer Relationships, and earn revenues. In
addition, like Key Resources, Key Activities differ depending on business model type. Key
Activities can be categorized as follows:
 Production
These activities relate to designing, making, and delivering a product in substantial
quantities and/or of superior quality. Production activity dominates the business models of
manufacturing firms.
 Problem solving
Key Activities of this type relate to coming up with new solutions to individual
customer problems. The operations of consultancies, hospitals, and other service
organizations are typically dominated by problem solving activities. Their business models
call for activities such as knowledge management and continuous training.
 Platform/network
Business models designed with a platform as a Key Resource are dominated by
platform or network related Key Activities. Networks, matchmaking platforms, software, and
even brands can function as a platform. Key Activities in this category relate to platform
management, service provisioning, and platform promotion.
KEY PARTNERSHIP (KP)
The Key Partnerships Building Block describes the network of suppliers and partners
that make the business model work. Companies forge partnerships for many reasons, and
partnerships are becoming a cornerstone of many business models. Companies create
alliances to optimize their business models, reduce risk, or acquire resources. We can
distinguish between four different types of partnerships:
 Strategic alliances between non-competitors
 Competition: strategic alliances between competitors
 Joint ventures to develop new businesses
 Buyer-supplier relationships to assure reliable supplies
8 Business Models and Strategies
- 140 It
can be useful to distinguish between three motivations for creating partnerships:
 Optimization and economy of scale
The most basic form of partnership or buyer-supplier relationship is designed to
optimize the allocation of resources and activities. It is illogical for a company town all
resources or perform every activity by itself. Optimization and economy of scale partnerships
are usually formed to reduce costs, and often involve outsourcing or sharing infrastructure.
 Reduction of risk and uncertainty
Partnerships can help reduce risk in a competitive environment characterized by
uncertainty. It is not unusual to form a strategic alliance in one area for competitors, while
they are competing in another. Blu-ray, for example, is an optical disc format jointly
developed by a group of the world’s leading consumer electronics, personal computer, and
media manufacturers.
 Acquisition of particular resources and activities
Few companies own all the resources or perform all the activities described by their
business models. Rather, they extend their own capabilities by relying on other firms to
furnish particular resources or perform certain activities. Such partnerships can be motivated
by needs to acquire knowledge, licenses, or access to customers.
COST STRUCTURE (CS)
The Cost Structure describes all costs incurred to operate a business model. This
building block describes the most important costs incurred while operating under a particular
business model. Creating and delivering value, maintaining Customer Relationships, and
generating revenue all incur costs. Such costs can be calculated relatively easily after defining
Key Resources, Key Activities, and Key Partnerships. Some business models, though, are
more cost-driven than others are. Naturally enough, costs should be minimized in every
business model. However, low Cost Structures are more important to some business models
than to others. Therefore, it can be useful to distinguish between two broad classes of business
model Cost Structures like cost-driven and value-driven (many business models fall in
between these two extremes):
 Cost-driven
Cost-driven business models focus on minimizing costs wherever possible. This
approach aims at creating and maintaining the leanest possible Cost Structure, using low price
Value Propositions, maximum automation, and extensive outsourcing.
 Value-driven
Some companies are less concerned with the cost implications of a particular business
model design, and instead focus on value creation. Premium Value Propositions and a high
degree of personalized service usually characterize value-driven business models.
Cost Structures can have the following characteristics:
1. Fixed costs. Costs that remain the same despite the volume of goods or services
produced. Examples include salaries, rents, and physical manufacturing facilities.
A high proportion of fixed costs characterize some businesses, such as
manufacturing companies.
Jarmila Šebestová; Entrepreneurship
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2. Variable costs. Costs that vary proportionally with the volume of goods or services
produced. A high proportion of variable costs characterize some businesses, such as
music festivals.
ECONOMIES OF SCALE
Cost advantages that a business enjoys as its output expands. Larger companies, for
instance, benefit from lower bulk purchase rates. This and other factors cause average cost per
unit to fall as output rises.
ECONOMIES OF SCOPE
Cost advantages that a business enjoys due to a larger scope of operations. In a large
enterprise, for example, the same marketing activities or Distribution Channels may support
multiple products.
8.5.2 BUSINESS MODEL PATTERNS
Finally, we could distinguish four main patterns for final business model canvas (see
enclosure no. 4)
LONG TAIL
Traditional business models sell many units of small number of hit products, but long
tail sells many smaller units of greater number of products or you sell a large number of niche
products, each of which sells infrequently
• E.g. Netflix, eBay, Lego
Figure 41 Long tail
Source: own
MULTI-SIDED PLATFORMS
You choose this type when:
 you bring together two or more distinct but inter-dependent groups of customers
 value to one group of customers only if the other groups of customers are
present
 Creates value by facilitating interactions between the different groups
 Grows in value to the extent that it attracts more users (network effect)
 e.g. Visa, Google, eBay, Microsoft Windows
8 Business Models and Strategies
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you can answer those questions:
o Can we attract sufficient numbers of customers for each side of the
platform?
o Which side is more price sensitive
o Can that side be enticed by a subsidized offer
o Will the other side of the platform generate sufficient revenues to cover
the subsidies?
Figure 42 Platform examples
Source: Osterwalder and Pigneur, 2009
FREE
 At least one Customer Segment continuously benefits from a free-of charge (or
low cost) offer
 Non-paying customers are financed by another part of the business model or by
another Customer Segment
 e.g. Flicker, Skype, Google, Gillette
 three free models to consider:
1. free offer, which is based on multi-sided platforms
2. freemium, where free basic services exists and premium services are
optional
3. bait and hook, where free/inexpensive initial offer lures customers into
repeating purchases
OPEN BUSINESS MODELS
Create and capture value by systematically collaborating with outside partners to create
innovations.
Jarmila Šebestová; Entrepreneurship
- 143 Figure
43 Open Business Model
Source: Osterwalder and Pigneur, 2009
 “Outside in” exploits external ideas from within the firm
 “Inside out” provides external parties with ideas or assets lying idle within the
firm e.g. P&G, GlaxoSmithKline, Open Source
Figure 44 Principles of innovations
Source: Osterwalder and Pigneur, 2009, p.111
8 Business Models and Strategies
- 144 SOLVED
EXERCISE 5 EVALUATE CANVAS OF SKYPE
Which business model does Skype use? Compare the information from Canvas with
previous information and real knowledge about Skype on skype.com.
Answer:
The model used is “Free”, multi sided platform now, previously freemium
8.6 STRATEGIES FOR COOPERATION
Traditionally, small businesses have had to face challenges for their survival with their
limited resources and with little support from governments. This unfavourable scenario gets
worse in uncertain economic periods like the current crisis because they do not have access to
capital markets and their sources of external financing for innovations (see chapter 12). One
popular alternative for small firms is the adoption of cooperative approaches with other
organizations.
The framework also includes the factors influencing business collaboration (Casals,
2011, p.120):
 Internal factors: This category includes variables related with the profile of the
SME. Variables like the size (number of employees), age, sector, languages,
business activity, location, management style or profile of the employees are just
some internal factors that should be considered when analysing SME
collaboration because they have an important influence when interacting with
other partners.
 External factors: This group includes factors external to the SME. They are
characteristics of the market and the environment that could affect the
collaboration process in some moment. Size and trend of the market, number of
competitors, type of industry, governmental regulations and the presence of
private/public funding organizations.
Jarmila Šebestová; Entrepreneurship
- 145 -
8.6.1 TYPES OF COOPERATION
According to Šúbertová and Gajdová (2010, p.322) they are existing four main types of
cooperation:
 Franchising
 Co-operative
 Cluster
 Union, association or alliances
FRANCHISING
According to the International Franchise Association, "Franchising is a method of
distributing products or services. At least two levels of people are involved in a franchise
system: 1) the franchisor, who lends his trademark or trade name and a business system; and
2) the franchisee, who pays a royalty and often an initial fee for the right to do business under
the franchisor's name and system." 25
There are two primary forms of franchising:
 Product/trade name franchising
Franchisor owns the right to the name or trademark and sells that right to a franchisee.
 Business format franchising
Franchisor and franchisee have an ongoing relationship, and the franchisor often
provides a full range of services, including site selection, training, product supply, marketing
plans and even assistance in obtaining financing.
In fact, it is necessary to provide the partner´s organisation with some kind of
operational manual, handbook, or the „franchise bible“ that should comprise following items:
 File of marketing information about the market, its trends, entrepreneurial
environment
 Elements of the marketing mix
 Operational handbook
 Legal terms and supervision operations.
COOPERATIVE
Cooperatives focuses on the individual who wishes to start or expand a business
including small and medium enterprise (SME) to better their socio-economic life and
individuals who can be considered entrepreneurial lead this. Clearly, cooperative societies
from their antecedents have not contributed only to the development of small-scale business
but they are in themselves small-scale businesses. In comparison with cluster, within the
cooperation, the co-operative has individual status in the fact that although it is also the
regional activity there is no need attendance of research institutions, universities or local
authorities.
CLUSTER
SMEs-clustering has been of considerable interest over the last decade and is associated
with regional development. Chung and Tibben (2006, p. 390) constructed a working
25
Franchising.com. 2014. The Basics of Franchising. [online] Available at:
http://www.franchising.com/guides/what_is_franchising_the_basics.html#sthash.x4DxSKQa.dpuf [Accessed: 25
Jan 2014].
8 Business Models and Strategies
- 146 definition
of SME Cluster as follows: “SME clusters are interconnected (inter-networked)
firms based on common business goals, and are composed of SMEs in related industries and
connected in particular fields that compete but also co-operate, and are preferably located in
some degree of proximity.”
Companies can find ”the common language“ in different areas. Among the most
frequent one could mention marketing and common business policy, research and innovation,
human resources or lobbying (Šúbertová, Gajdová, 2010, p. 320)
ALLIANCES (ASSOCIATIONS)
Small to Medium sized Enterprises (SMEs) are increasingly entering into strategic
alliances to achieve market growth and gaining access to new markets. A strategic alliance is
a relationship between firms to create more value than they can on their own. The firms unite
to pursue agreed upon goals, while remaining independent.
Figure 45 Summary of cooperative strategies
Source:Šúbertová, Gajdová, 2010, p.322
8.7 EXIT STRATEGIES
This very personal decision and the hardest decision to make - is when and how to exit
the business. The strategy should be developed early in the business, and it should be
reviewed and changed periodically because conditions change. Unfortunately, many small
business owners have no exit strategy. This will make an already very emotional decision and
process even more difficult. The term failure can have several meanings. Small-business
failure is often measured by the cessation of a firm’s operation, but several things can bring
this about:
 An owner can die or simply choose to discontinue operations.
 The owner may recognize that the business is not generating sufficient return to
warrant the effort that is being put into it. This is sometimes referred to as the failure
of opportunity cost.
 A firm that is losing money may be terminated to avoid losses to its creditors.
 There can be losses to creditors that bring about cessations of the firm’s operations.
Jarmila Šebestová; Entrepreneurship
- 147 
The firm can experience bankruptcy. Bankruptcy is probably what most people
think of when they hear the term business failure. However, the evidence indicates
that bankruptcies constitute only a minor reason for failure.
Table 16 Reasons for Small Business Failure
Managerial Inadequacy Financial Inadequacy External Factors
Failure in planning (initial start-up plan
and subsequent plans)
Inexperience with managing business
operation
Ineffective staffing
Poor communication skills
Failure to seek or respond to criticism
Failure to learn from past failures
Ignoring customers’ needs
Ignoring competition
Failure to diversify customer base
Failure to innovate
Ineffective marketing strategies
Cash-flow problems
Insufficient initial capitalization
Inadequate financial records
Not using accountants’ insights
Inadequate capital acquisition
strategies
Failure to deal with financial issues
brought about by growth
Downturn in economy
Rising unemployment
Rising interest rates
Product or service no longer
desired by customers
Unmatchable foreign competition
Fraud
Disaster
Source: Cadden and Lueder, 2012, p. 44
A small business owner can consider many exit strategies:
 Liquidation or walk away,
 family succession,
 selling the business,
 bankruptcy and taking the company public.
Selecting an exit strategy is important because the way in which an owner exits can
affect the following26
:
 The value that the owner and/or shareholders (if any) can realize from
a business.
 Whether a cash deal, deferred payments, or staged payments are received.
 The future success of the business and its products or services (unless one is
closing the business).
 Whether the owner wants to retain any involvement in or control of the business.
 Tax liabilities.
Figure 46 Possible Exit Strategies
Source: Cadden and Lueder, 2012
26
Exit Strategies. [online] [Accessed: 19 Jan 2014].Available at: http://2012books.lardbucket.org/books/modern-
management-of-small-businesses/s18-04-exit-strategies.html
8 Business Models and Strategies
- 148 The
owner must first decide what he or she wants to walk away with money,
management control, or intellectual property. If interested only in money, selling the business
on the open market or to another business may be the best choice.
LIQUIDATION OR WALKAWAY
There are times when a small business owner may decide that enough is enough, so he
or she simply calls it quits, closes the business doors, and stops for the day. This closing of
the business involves liquidation, the selling of all assets. If all debts are paid, it can also be
referred to as a walkaway.
To make any money with the liquidation exit strategy, a business must have valuable
assets to sell—for example, land or expensive equipment. The name of the business may have
some value, so it could be purchased by someone for cents per euro and restarted with
different owners. There is also a possibility that there may be a substantial amount of
goodwill or even badwill if a business has been around for a long time. Goodwill is an
intangible asset that reflects the value of intangible assets, such as a strong brand name, good
customer relationships, good employee relationships, patents, intellectual property, size and
quality of the customer list, and market penetration. However, if a business is simply closed,
the value of the goodwill will drop, and the selling price will be lower than it would have been
closed. For the small business owner who wants to close under these circumstances, there will
be nothing much to sell but tangible assets because the business will have very little, if any,
market value.
In all instances of liquidation, the proceeds from the sale of assets must first be used to
repay creditors. The remaining money is divided among the shareholders (if any), the partners
(if any), and the owner.27
In an ideal walkaway situation, the following occurs (Katz, Green,
2003):
 All bills are paid off (or scheduled).
 All taxes are paid, and the various levels of government are informed of the
closure.
 Contracts, leases, and the like are fulfilled or formally terminated.
 Employees are let go to find other jobs.
 Assets or inventory is depleted.
 No lawsuits are consuming money and time.
 Customers are placed so that they get needed goods or services.
 If needed, insurance is continued to cover unexpected claims after the firm
closes.
The walkaway is the cleanest and best way to exit, but it is not always possible for all
businesses that decide to close their doors. There will be those instances in which the owner
closes the business and takes off, leaving a mess behind.
FAMILY SUCCESSION
Many small business owners dream of passing the business to a family member.
Keeping the business in the family allows the owner’s legacy to live on, which is clearly an
attractive option. However, given that very few family firms survive beyond the first
generation and even fewer survive into the third generation, ]succession is the most critical
issue facing family firms.
27
Robbins, S, 2005. Business - Exit Strategies for Your Business. [online] [ Accessed: 6 Jan 2012] Available at:
http://www.entrepreneur.com/article/78512
Jarmila Šebestová; Entrepreneurship
- 149 The
owner will be burdened with problems that will likely lead to business failure.
Succession in family firms is a multistage, complex process that should begin even before the
heirs enter the business, and effects extend beyond the point in time when they are named as
successors. Further, because succession is usually followed by changes in the organization,
particularly the change in the top position, it is thought to be an indicator of the future of the
business. The better prepared and committed the successor is, the greater the likelihood of
a successful succession process and business.
The ideal is for the family business to have engaged in formal succession planning:
planning for the family business to be transferred to a family member or members. The failure
to plan for succession is seen as a fundamental human resource problem as well as the
primary cause for the poor survival rate of family businesses. Unfortunately, a very small
percentage of family businesses plan appropriately for succession, and those that do
frequently have mental, not written, plans (Handler, 1994).
BANKRUPTCY
Bankruptcy is an extreme form of business termination that uses a legal method for
closing a business and paying off creditors when the business is failing and the debts are
substantially greater than the assets. Because bankruptcy is a complicated legal process, it is
important to get an attorney involved as soon as possible. There may be options other than
bankruptcy, and consulting with an attorney will help. The owner must understand how
bankruptcy works and which the options that are available, are. It is also good to know that
not all bankruptcies are voluntary; creditors can petition the court for a business to declare
bankruptcy.
Alternatives to Bankruptcy
Instead of going the bankruptcy route, a small business owner could do the following
things28:
 Negotiate debt. This involves trying to reorganize a business’s finances outside
a legal proceeding. The owner can work with the creditors to renegotiate the
terms of payment and the amount owed to each creditor. If a business is
profitable but the debt situation is due to an unusual circumstance, such as
a lawsuit or a temporary industry slowdown, this could be a successful solution.
 Improve operations. If the owner is in a position to fix the cash problem by
fixing the underlying problems in the business, it may not be necessary to
declare bankruptcy. An owner should look at cash-flow controls; eliminate
unprofitable products, services, and divisions; and restructure into a leaner and
meaner organization.
 Turn around and restructure the business. This alternative combines debt
negotiation and operational improvement, perhaps the best choice. By doing
both things at the same time, an owner will be in an even stronger position to
improve the balance sheet, cash flow, and profitability and avoid insolvency.
TAKING A COMPANY PUBLIC
An initial public offering (IPO) is a stock offering in which the owner or owners of
equity in a formerly private company have their private holdings transferred into issues
tradable in public markets. From the initial owners’ perspective, an IPO is often seen as
28
Small-business-bankruptcy.com. 2012. Small Business Bankruptcy Options for Your Troubled Firm. [online]
[Accessed: 6 Feb 2013]. Available at: http://www.small-business-bankruptcy.com
8 Business Models and Strategies
- 150 liquidation,
but it is also a money event for a company. For this reason, an IPO makes sense
only if a small business can benefit from a substantial infusion of cash.
Why are the numbers so small? The IPO process is costly, labour intensive, and usually
requires an up-front investment of more than €100,000. Detailed reports are required on
a business’s financials, staffing, marketing, operations, management, and so forth. For some
small businesses, although not many, an IPO might make sense and may even be necessary.
For most, however, an IPO is clearly not a viable exit strategy.29
SELLING THE BUSINESS
Another possible exit strategy is selling the business. Although the sale of a business is
sometimes described as the end of entrepreneurship or as failure or defeat, selling the business
can also be a relief and the beginning of the next phase of the owner’s personal and
professional life. The owner should address the following questions:
 Can the business be sold? There are many things that make a business
attractive to buyers: a solid history of profitability, a large and loyal base of
customers, a good reputation, a competitive advantage (e.g., intellectual property
rights, patents, long-term contracts with clients, and exclusive distributorships),
and opportunities for growth, a desirable location, a skilled workforce, and
a loyal workforce. If a business does not have at least some of these things or
others of equal value, it will not likely generate much interest in the market.
 Is the owner ready to sell or does the owner need to sell? Selling a business,
when it is a choice, requires emotional and financial readiness. The owner must
think about what life will be like after the business is sold. What will be a source
of income? How will time be spent? Has the owner “sold out” or could more
have been done with the business? Does the owner love what he or she is doing?
Many small business owners suffer real remorse after handing their businesses
over to a new owner. Selling the business because the owner is forced to will
engender very different emotional and financial challenges.
 What is the business worth? The owner may have no idea. For example, the
owner of a small professional services firm felt the firm was worth more than €1
million. After a lengthy search, however, the owner received less than one-half
that amount from the buyer. On the other side of the coin, the owner of an
information technology (IT) company planned to sell the company to an
employee for €200,000. However, after advertising the business for sale
nationwide, the owner sold it for one dollar shy of €1 million.
It is recommended that an owner start planning for a sale at least three to four years in
advance. Sometimes, even five years is not long enough. It is very easy to become overly
attached to a business, so it will be difficult to see how the business really looks to an
outsider. Selling a business is an art and a science. If the asking price is too high, this may
signal to potential buyers that the owner is not interested in selling. Because there are several
methods used to value a business, it is a good idea to hire a professional.30
29
Clarke, A., 2006. Exit Strategies for Small Business Owners. [online] [Accessed: 19 Jan 2012]. Available at:
http://www.experts.com/Articles/Exit-Strategies-for-Small-Business-Owners-By-Andrew-Clarke.
30
Taylor, B., 2010. How to Sell Your Business, The New York Times. [online] [Accessed: 6 Jan 2013]. Available
at: http://www.nytimes.com/2010/01/07/business/smallbusiness/07guide.html.
Jarmila Šebestová; Entrepreneurship
- 151 Figure
47 Four Ways to Sell a Small Business
Source: Cadden and Lueder, 2008
 Acquisition
Businesses buy other businesses for all kinds of reasons—for example, as a quick path
to expansion or diversification, to get rid of the competition. Acquisition is one of the most
common exit strategies for a small business. One key to success is to target the potential
acquirer(s) in advance, position the business accordingly, and convince the acquirer that the
small business is worth the asking price. Another way to become the target of an acquisition is
to be successful in the marketplace. In an acquisition, the owner negotiates the price—a good
thing because public markets value a business relative to its industry, which limits the value
of a business. In an acquisition, however, there is no limit on the perceived value of
a company. Why? The person making the acquisition decision is rarely the owner of the
acquiring company, so there is no problem with the checkbook. It is someone else’s money.
 Friendly Buyout
A friendly buyout occurs when ownership is transferred to family members, customers,
employees, current managers, children, or friends. It is still considered selling the business,
but the terms and nature of the transaction are usually very different. No matter who the
“friendly” buyer may be, figure on starting to plan early—and engage a professional before,
during, and after the sale.
 Selling to Employees
Selling the business to employees and/or managers is another option to consider. The
owner can accomplish this process by setting up an employee stock option plan (ESOP),
a stock equity plan that lets employees buy ownership in the business. However, because the
owner is giving control of the business to the employees, a transition plan is critical to make
sure that they are ready to carry on the business after the owner leaves. It is a good idea to hire
an ESOP specialist. Keep in mind, though, that only corporations are eligible to form an
ESOP. An ESOP is expensive to set up and maintain, so this might not be the best choice. For
a worker-owned cooperative to work, the business owner(s) must be totally committed to the
sale of the business to the employees. It is a good option if the business is small (fewer than
twenty-five employees), profitable, relatively debt free, already has a culture of participatory
management, and the owners are willing to stay on throughout the transition.
 Selling on the Open Market
Selling a business on the open market is the most popular exit strategy for small businesses.
Most savvy business buyers use the Internet to research available businesses for sale, so post the sale
notice on the two largest websites: BizBuySell.com, self-described as the “Internet’s Largest Business
for Sale Marketplace,” and BizQuest.com, self-described as the “Original Business for Sale Website.”
9 Financing Small Businesses
- 152 -
9 FINANCING SMALL BUSINESSES
However, even after the initial business plan is created, these financial statements
provide critical information that will be required for the successful operation of the business.
They not only are necessary for tax purposes but also provide critical insights for managing
the firm and addressing issues such as the following:
 Are we profitable?
 Are we operating efficiently?
 Are we too heavily in debt or could we acquire more debt?
 Do we have enough cash to continue operations?
 What is this business worth?
There are three key financial statements: the balance sheet, the income statement, and
the cash-flow statement. Every business owner or manager needs to be able to interpret
correctly these statements if he or she expects to continue successful operations. It should be
pointed out that all three financial statements follow general formats. The degree of detail or
in some cases terminology may differ slightly from one business to another.
9.1 THE BALANCE SHEET STATEMENT
One should think of the balance sheet statement as a photograph, taken at a particular
point in time, which images the financial position of a firm. The balance sheet is dominated
by what is known as the accounting equation. Put simply, the accounting equation separates
what is owned from who owns it.
Formally, the accounting equation states the following:
𝒂𝒔𝒔𝒆𝒕𝒔 = 𝒍𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 + 𝒐𝒘𝒏𝒆𝒓’𝒔 𝒆𝒒𝒖𝒊𝒕𝒚 (9–1)
9.1.1 ASSETS EVALUATION
Assets (A) are economic resources that are expected to produce a benefit in the future
They consist of liabilities, which are the amount of money owed to outside claims (i.e., money
owed to people outside the business) and owner’s equity, also known as stockholders’
equity—represents the claims on the business by those who own the business. As specified in
the accounting equation, the dollar value of assets must equal the value of the business’s
liabilities plus the owner’s equity (Harrison, Charles Lungren, 2010).
1. Current assets (CA) are assets that will be held for less than one year. These are
listed in a specific order. The order is based on the degree of liquidity of each asset.
Naturally, cash is the most liquid of all assets. All firms should have cash readily
available. The exact amount of the desirable amount of cash to be held at hand will
be determined by the sales level of the anticipated cash receipts and the cash needs
of the business. They include:
 Cash(Ca),
 Marketable securities (MaS) which are stocks and bonds that a business may
hold in the hope that they would provide a greater return to the business rather
than just letting cash “sit” in a bank account. Most of these securities can be
easily turned into cash—should the need arise.
 Accounts receivables (AcR) represent the amount of money due to a business
from prior credit sales. Not all firms operate on a strictly cash sales basis. Many
firms will offer customers the opportunity to purchase on a credit basis. As an
Jarmila Šebestová; Entrepreneurship
- 153 example,
a furniture store sells a bedroom set worth €6,000 to a newlywed
couple. The couple puts down €2,500 to fix the sale and then signs a contract to
pay the remaining €3,500 within the next year. That €3,500 would be listed as
accounts receivable for the furniture firm.
 Prepaid expense (PrE) is an accrual accounting term that represents a payment
that is made in advance of their actual occurrence. Insurance would be an
example of a prepaid expense because a company is paying premiums to cover
damages that might occur in the near future. If a year’s worth of rent were paid
at one time, it too would be viewed as a prepaid expense
 Inventory (In) is the tangible goods held by a business for the production of
goods and services. Inventory can fall into three categories: raw materials, workin-process
(WIP), and finished goods. Raw materials inventory represents items
or commodities purchased by a firm to create products and services. WIP
inventory represents “partially completed goods, part or subassemblies that are
no longer part of the raw materials inventory and not yet finished goods.” The
valuation of WIP should include the cost of direct material, direct labour, and
overhead put into the WIP inventory. Finished inventory represents products that
are ready for sale. Generally Accepted Accounting Principles (GAAP) requires
that a business value its inventory on either the cost price or the market price—
whichever is lowest. This inherent conservative approach to valuation is due to
the desire to prevent the overestimation of inventory during inflationary periods.
Total current assets are the summation of the aforementioned items and are defined as
follows:
𝑻𝒐𝒕𝒂𝒍 𝒄𝒖𝒓𝒓𝒆𝒏𝒕 𝒂𝒔𝒔𝒆𝒕𝒔 = 𝑪𝒂 + 𝑴𝒂𝑺 + 𝑨𝒄𝑹 + 𝑷𝒓𝑬 + 𝑰𝒏 (9– 𝟐)
2. Long-term assets are those assets that will not be turned into cash within the next
year. Long-term assets may include a category known as investments. These items
management holds for investment purposes, and they do not intend to “cash in”
within the upcoming year. They might consist of other companies’ stock, notes, or
bonds. In some cases, they may represent specialized forms—money put away for
pension funds.
 The next major category of long-term assets is fixed assets (FA). Fixed assets
include plant (PL), equipment (Eq), and land (L). Generally, these are valued at
their original cost. The value of these assets will decline over time. As an
example, you purchase a new car for €25,000. If you were to sell the same car
one, two, or five years later, its value would be less than the original purchase
price. This recognition is known as depreciation, which is a noncash expense
that specifically recognizes that assets decline in value over time. 31
In the
example of the car, assume you purchased this car for company use. You intend
to use it for five years, and at the end of the five years, you plan to scrap the car
and expect that its salvage value will be zero.
31
Accumulated depreciation is a running total of all depreciation on assets. Depreciation is also found on the
income statement. Its presence in that financial statement enables a business to reduce its taxable income. There
are many methods by which you can compute the depreciation value on fixed assets. These methods can be split
into two broad categories: straight-line depreciation and accelerated depreciation. Straight-line depreciation is
fairly easy to illustrate.
9 Financing Small Businesses
- 154 Table
17 Depreciation Calculations
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Depreciation €0 €5,000 €5,000 €5,000 €5,000 €5,000
Accumulated depreciation €0 €5,000 €10,000 €15,000 €20,000 €25,000
Net asset value €25,000 €20,000 €15,000 €10,000 €5,000 €0
Because the useful lifetime of the vehicle was five years, the original value of the vehicle was divided by
five; therefore, the annual depreciation would equal €5,000 (€25,000/5 = €5,000 per year). The accumulated
depreciation simply sums up the prior years’ depreciation for that particular asset.
Accelerated depreciation methods attempt to recapture a major portion of the
depreciation earlier in the life of an asset. Accelerated depreciation yields tax-saving benefits
earlier in the life of any particular fixed asset.
 The last category of long-term assets is intangible assets (InA); assets that
provide economic value to a business but do not have a tangible, physical
presence. Intangible assets include items such as patents, franchises, copyrights,
and goodwill. Thus the value of long-term assets can be calculated as follows:
𝒍𝒐𝒏𝒈 − 𝒕𝒆𝒓𝒎 𝒂𝒔𝒔𝒆𝒕𝒔 = 𝒊𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕𝒔 + 𝑭𝑨 − 𝒂𝒄𝒄𝒖𝒎𝒖𝒍𝒂𝒕𝒆𝒅 𝒅𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 + 𝑰𝒏𝑨 (9–2)
The last element on the asset side of the balance sheet is the total assets. This is the
summation of current assets and long-term assets.
9.1.2 LIABILITIES AND OWNER´S EQUITY STRUCTURE
On the other side of the balance sheet, we have liabilities plus owner’s equity. The
elements of liabilities consist of current liabilities and long-term liabilities. These represent
what a business owes to others.
1. Current liabilities (CuL) are debts and obligations that are to be paid within a year.
These include notes payable, accounts payable, other items payable (e.g., taxes,
wages, and rents), dividends payable, and the current portion of long-term debt.
 Notes payable (NP) represents money that is owned and which must be repaid
within a year. It is inclusive because it may include lines of credit from banks
that have been used, short-term bank loans, mortgage obligations, or payments
on specific assets that are due within a year.
 Accounts payable (AP) are short-term obligations that a business owes to
suppliers, vendors, and other creditors. It may consist of all the supplies and
materials that were purchased on credit.
 Other items payable (OIP) can include items such as the payroll and tax
withholdings owed to employees or the government but which have not as of yet
been paid.
 Dividends payable (DP) is a term that is appropriate for businesses structured
as corporations. This category represents the amount that a business plans to pay
its shareholders.
 The current portion of long-term debt (LTD) represents how much of the
long-term debt must be repaid within the upcoming fiscal year. This would
include the portion of the principal that is due in this fiscal year.
Jarmila Šebestová; Entrepreneurship
- 155 In
equation form,
𝒄𝒖𝒓𝒓𝒆𝒏𝒕 𝒍𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 = 𝑵𝑷 + 𝑨𝑷 + 𝑶𝑰𝑷 + 𝑫𝑷 + 𝑳𝑻𝑫 (9– 𝟑)
2. The other portion of liabilities is represented by long-term liabilities. These are
debts payable over a period greater than one year and include long-term debt
(LTDe), pension fund liability (PFL), and long-term lease obligations (LTLO). In
equation form,
𝒍𝒐𝒏𝒈 − 𝒕𝒆𝒓𝒎 𝒍𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 = 𝑳𝑻𝑫𝒆 + 𝑷𝑭𝑳 + 𝑳𝑻𝑳𝑶 (9–4)
Total liabilities are the sum of current liabilities and long-term liabilities.
Table 18 Balance sheet structure
Source: Cadden and Lueder, 2008
The other major component of the right side of the balance sheet is owner’s (or
stockholders’) equity. Owner’s equity represents the value of the shareholders’ ownership in
a business. It is sometimes referred to as net worth. It may be composed of items such as paid
in capital and retained earnings. Paid in capital is the amount of money provided by investors
through the issuance of common or preferred stock. Retained earnings are the cumulative net
income which has been reinvested in a business and which has not been paid out to
shareholders as dividends.
9 Financing Small Businesses
- 156 -
9.2 THE INCOME STATEMENT
Whereas the balance sheet looks at a firm at a particular point (date) in time,
the income statement examines the overall profitability of a firm over a particular length or
period. Normally, there are several times that may be used as fiscal year, fiscal quarter, or
monthly. The income statement is also known as a profit and loss statement. It identifies all
sources of revenues generated by a business and all the expenses incurred. The income
statement provides the best insight into whether a business is profitable.
The income statement begins by identifying the sales or income for the designated
period. Sales would be all the revenues derived from all the products and services sold during
that time. The term income represents all revenues and additional incomes produced by
a business during the designated period.
The next item in the income statement is the cost of goods sold (COGS), which is
composed of all costs associated with the direct production of goods and services that were
sold during the period. It would include the costs of the raw materials used to produce the
goods and those costs associated with production, such as direct labour. With these two
values, the first measure of profit as gross profit can be calculated:
𝒈𝒓𝒐𝒔𝒔 𝒑𝒓𝒐𝒇𝒊𝒕 = 𝒊𝒏𝒄𝒐𝒎𝒆 – 𝑪𝑶𝑮𝑺 (9–5)
The next element in the income statement is operating expenses as expenses that are
incurred during the normal operation of a business. Operating expenses can be broken down
into four broad categories: selling expenses, general and administrative expenses,
depreciation, and other overhead expenses. Selling expenses would include all salaries and
commissions paid to the business’s sales staff. It would also include the cost of promotions,
advertising expenses, and other sales expenditures. Promotion costs might consist of costs
associated with samples or giveaways. Advertising expenses would include all expenditures
for print, radio, television, or Internet ads. Other sales expenditures would include money
spent on meals, travel, meetings, or presentations by the sales staff.
General and administrative expenses are those associated with the operation of
a business beyond COGS and direct-selling expenses. Expenditures in this category would
include salaries of office personnel, rent, and utilities. Depreciation was covered in the
previous subsection. The balance sheet has a component designated accumulated
depreciation. This is the summation of several years’ worth of depreciation on assets. In the
income statement, depreciation is the value for a particular period. The last component of
operating expenses would be other overhead costs a generic category that may include items
such as office supplies, insurance, or a variety of services a business might use. Having
identified all the components of operating expenses, one is now in a position to compute
a second measure of profitability—operating profit, which is sometimes referred to as
earnings before interest and taxes (EBIT):
𝒐𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝒑𝒓𝒐𝒇𝒊𝒕 (𝑬𝑩𝑰𝑻) = 𝒈𝒓𝒐𝒔𝒔 𝒑𝒓𝒐𝒇𝒊𝒕 − 𝒐𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝒆𝒙𝒑𝒆𝒏𝒔𝒆𝒔 (9– 𝟔)
The next section of the income statement is designated other revenues and expenses.
This segment would include other nonoperational revenues (such as interest on cash or
investments) and interest payments on loans and other debt instruments. When the other
revenues and expenses are subtracted from the operating profit, one is left
with earnings before taxes (EBT):
𝑬𝑩𝑻 = 𝒐𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝒑𝒓𝒐𝒇𝒊𝒕 − 𝒐𝒕𝒉𝒆𝒓 𝒓𝒆𝒗𝒆𝒏𝒖𝒆𝒔 𝒂𝒏𝒅 𝒆𝒙𝒑𝒆𝒏𝒔𝒆𝒔 (9–7)
Jarmila Šebestová; Entrepreneurship
- 157 Taxes
are then computed on the EBT and then subtracted. This includes all state, and
local tax payments that a business is obligated to pay. This brings us to our last measure of
profitability as a net profit:
𝒏𝒆𝒕 𝒑𝒓𝒐𝒇𝒊𝒕 = 𝑬𝑩𝑻 – 𝒕𝒂𝒙𝒆𝒔 (9– 𝟖)
If a business does not pay out dividends, the net profit becomes an addition to retained
earnings. The income statement is the item that most individuals look at to determine the
success of business operations.
Figure 48 The Income Statement
Source: Cadden and Lueder, 2008
9.3 THE CASH-FLOW STATEMENT
The third component of financial statements is the cash-flow statement. There are two
types of cash-flow statements—one examines cash flows for a given period (historic), and the
other is a projection of future cash flows. The historic cash-flow statement is similar to the
income statement in that it looks at cash inflows and cash outflows for a business during
a specified period. Like the income statement, these periods can be the fiscal year, the fiscal
quarter, or a month. The cash-flow projections statement attempts to identify cash flows into
a firm and cash flows from a firm for some future period. This projection is extremely
important because it may identify future sub periods in which a firm is producing a negative
cash flow—where cash outflows exceed cash inflows.
From the standpoint of a small business owner, cash-flow statements provide insight
into where cash flows are coming and going. The cash-flow projections statement may be the
most important component of all the financial statements. Its importance stems from the fact
that the flow of cash into a firm may not be synchronized with its cash outflows. Should there
be a significant mismatch with cash outflows being significantly higher than cash inflows,
a business may be in great difficulty with respect to meeting its current obligations, such as
payroll, paying suppliers, and meeting short-term creditors. As we will see, cash-flow
projection statements require several forecasts. These are discussed later in this section.
At some point, many businesses will experience negative cash flow. In fact, a negative cash
flow is quite common in start-up operations and high-growth businesses where there is a pressing
need for capital expenditures, research and development expenditures, and other significant cash
9 Financing Small Businesses
- 158 outflows.
One can also see the recurring presence of negative cash flows in businesses with seasonal
sales. Short-term borrowing can cover negative cash flows. However, this type of borrowing brings
up two important issues. First, any type of borrowing raises the overall debt level of a business,
which might have an impact on the interest rate on the debt. Second, either when a negative cash
flow exists because of an unforeseen exigency or because a business owner has failed to properly
conduct a cash-flow projection analysis, a lender might look at a business in a jaundiced manner,
which could have long-term consequences for a business.
In looking at the income statement, one could find a positive net income (profit) and
then examine the cash-flow statement and discover that a business has a significant negative
cash flow. The cash-flow statement specifically maps out where cash is flowing into a firm
and where it flows out. A properly developed cash-flow statement will show if a business will
be generating enough cash to continue operations, whether it has sufficient cash for new
investments, and whether it can pay its obligations. As previously stated, many of the
uninitiated will look singularly at profits, while those who have greater expertise in business
will always believe that cash is king.
As a way of visualization, the cash-flow statement bears some similarity to the bank
statement you may receive at the end of the month. A bank statement shows the beginning
cash balance, deposits (cash inflows), and checks you have written (cash outflows) for that
month. I hope that you have a positive cash flow as if cash inflows are greater than cash
outflows and you have not bounced any checks. Unlike the bank statement, the cash-flow
statement is broken into three major categories: operations, financing, and investing. Cash
flow from operations examines the cash inflows from all revenues, and interest and dividend
payments from investments held by a business. It then identifies the cash outflows for paying
suppliers, employees, taxes, and other expenses. Cash flow from investing examines the
impact of selling or acquiring current and fixed assets. Cash flow from financing examines the
impact on the cash position from the changes in the number of shares and changes in the short
and long-term debt position of a firm.
Cash inflows from operating activities consist of the following:
 Cash derived from the sale of goods or services.
 Cash derived from accounts receivable.
 Any cash derived from interest or dividends.
 Any other cash derived that is not identified with financing or investments.
The cash outflows from operating activities consist of the following:
 Cash outlays for goods purchased in the creation of goods and services.
 Cash outlays for payment to suppliers.
 Cash outlays to employees.
 Cash paid for taxes or interest paid to creditors.
Financing focuses on the cash flows associated with debt or equity. Some of the cash
inflows associated with financing activities consist of the following:
 Cash from the sale of a company’s stock.
 Cash received from borrowing (debt).
Cash outflows associated with financing consist of the following:
 Cash outlays to repay principal on long- and short-term debt.
 Cash outlays to repurchase preferred stocks.
 Cash outlays to pay for dividends on either common or preferred stock.
Jarmila Šebestová; Entrepreneurship
- 159 The
third category is investing. The sources of cash flow from investing activities
consist of the following:
 Cash received from the sale of assets.
 Cash received from the sale of equity investments.
 Cash received from collections on a debt instrument.
Cash outflows associated with investing activities consist of the following:
 Cash outlays to acquire a debt instrument of another business.
 Cash payments to buy equity interest in other businesses.
 Cash outlays to purchase a productive asset.
Figure 49 Cash Flow Breakdown
Source: Cadden and Lueder, 2008.
9.4 FINANCIAL RATIOS
One way of putting financial data into a comparative context is known as financial ratio
analysis. From a financial accounting standpoint, ratio analysis enables external
constituencies to evaluate the performance of a firm with respect to other firms in that
particular industry. This is sometimes referred to as comparative ratio analysis. From
a managerial accounting standpoint, ratio analysis can assist a management team to identify
areas that might be of concern. The management team can track the performance on these
ratios across time to determine whether the indicators are improving or declining. This is
9 Financing Small Businesses
- 160 referred
to as trend ratio analysis. There are literally scores of financial ratios that can be
calculated to evaluate a firm’s performance.
Because many small businesses are not publicly held and have no publicly traded stock,
market ratios play no role in analyzing a small firm’s performance. This section will review
some of the most commonly used ratios in each category. Financial ratios can be grouped into
five categories:
1. liquidity ratios,
2. financial leverage ratios,
3. profitability ratios,
4. asset management or efficiency ratios, and
5. market value ratios.
LIQUIDITY RATIOS
Liquidity ratios provide insight into a firm’s ability to meet its short-term debt
obligations. It draws information from a business’s current assets and current liabilities that
are found on the balance sheet. The most commonly used liquidity ratio is the current ratio
given by the formula
𝒄𝒖𝒓𝒓𝒆𝒏𝒕 𝒓𝒂𝒕𝒊𝒐 = 𝒄𝒖𝒓𝒓𝒆𝒏𝒕 𝒂𝒔𝒔𝒆𝒕𝒔 / 𝒄𝒖𝒓𝒓𝒆𝒏𝒕 𝒍𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 (9–9)
The normal rule of thumb is that the current ratio should be greater than one if a firm is
to remain solvent. The greater this ratio is above one, the greater its ability to meet short-term
obligations. As with all ratios, any value needs to be placed in context. This is often done by
looking at standard ratio values for the same industry.
Another ratio used to evaluate a business’s ability to meet in short-term debt obligations
is the quick ratio; also known as the acid test. It is a more stringent version of the current ratio
that recognizes that inventory is the least liquid of all current assets. A firm might find it
impossible to transfer immediately the euro value of inventory into cash to meet short-term
obligations. Thus the quick ratio, in effect, values the inventory dollar value at zero. The
quick ratio is given by the following formula:
𝒒𝒖𝒊𝒄𝒌 𝒕𝒆𝒔𝒕 = 𝒄𝒖𝒓𝒓𝒆𝒏𝒕 𝒂𝒔𝒔𝒆𝒕𝒔 − 𝒊𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 / 𝒄𝒖𝒓𝒓𝒆𝒏𝒕 𝒍𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 (9– 𝟏𝟎3)
FINANCIAL LEVERAGE RATIOS
Provide information on a firm’s ability to meet its total and long-term debt obligations.
It draws on information from both the balance sheet and the income statement. The first of
these ratios- the debt ratio- illustrates the extent to which a business’s assets are financed with
debt. The formula for the debt ratio is as follows:
𝒅𝒆𝒃𝒕 𝒓𝒂𝒕𝒊𝒐 = 𝒕𝒐𝒕𝒂𝒍 𝒅𝒆𝒃𝒕 / 𝒕𝒐𝒕𝒂𝒍 𝒂𝒔𝒔𝒆𝒕𝒔 (9– 4)
A variation on the debt ratio is the ratio of debt to the total owner’s equity (the debt-toequity
ratio). As with the other ratios, one cannot target a specific, desirable value for the
debt-to-equity ratio. Median values will vary significantly across different industries. The
automobile industry, which is rather capital intensive, has debt-to-equity ratios above two.
Other industries, such as personal computers, may have debt-to-equity ratios under 0.5. The
formula for the debt-to-equity ratio is as follows:
𝒅𝒆𝒃𝒕 − 𝒕𝒐 − 𝒆𝒒𝒖𝒊𝒕𝒚 𝒓𝒂𝒕𝒊𝒐 = 𝒕𝒐𝒕𝒂𝒍 𝒅𝒆𝒃𝒕 / 𝒕𝒐𝒕𝒂𝒍 𝒐𝒘𝒏𝒆𝒓’𝒔 𝒆𝒒𝒖𝒊𝒕𝒚 (9– 5)
One can refine this ratio by examining only the long-term portion of total debt to the
owner’s equity. Comparing these two debt-to-equity ratios gives insight into the extent to
Jarmila Šebestová; Entrepreneurship
- 161 which
a firm is using long-term debt versus short-term debt. The formula for the long-term
debt-to-owner’s equity ratio is as follows:
𝒅𝒆𝒃𝒕 − 𝒕𝒐 − 𝒐𝒘𝒏𝒆𝒓’𝒔 𝒆𝒒𝒖𝒊𝒕𝒚 𝒓𝒂𝒕𝒊𝒐 = 𝒍𝒐𝒏𝒈 − 𝒕𝒆𝒓𝒎 𝒅𝒆𝒃𝒕 / 𝒕𝒐𝒕𝒂𝒍 𝒐𝒘𝒏𝒆𝒓’𝒔 𝒆𝒒𝒖𝒊𝒕𝒚 (9– 6)
The interest coverage ratio examines the ability of a firm to cover or meet the interest
payments that are due in a designated period. The formula for the interest coverage ratio is as
follows:
𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒄𝒐𝒗𝒆𝒓𝒂𝒈𝒆 𝒓𝒂𝒕𝒊𝒐 = 𝑬𝑩𝑰𝑻/𝒕𝒐𝒕𝒂𝒍 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒄𝒉𝒂𝒓𝒈𝒆𝒔 (9– 7𝟒)
PROFITABILITY RATIOS
The next grouping of ratios is the profitability ratios. Essentially, these ratios look at the
amount of profit that is being generated by each dollar of sales (revenue). Remember, from
the review of the income statement, we can identify three different measures of profit: gross
profit, operating profit, and net profit. Each measure of profit can be examined with respect to
the net sales of a business, and each can give us a different insight into the overall efficiency
of a firm in generating profit.
The first profitability ratio examines how much gross profit is generated by each euro of
revenue and is given by the following formula:
𝒈𝒓𝒐𝒔𝒔 𝒑𝒓𝒐𝒇𝒊𝒕 𝒎𝒂𝒓𝒈𝒊𝒏 = 𝒈𝒓𝒐𝒔𝒔 𝒑𝒓𝒐𝒇𝒊𝒕 / 𝒓𝒆𝒗𝒆𝒏𝒖𝒆 (9–15)
The next examines operating profit per euro of sales and it is calculated in the following
manner:
𝒐𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝒑𝒓𝒐𝒇𝒊𝒕 𝒎𝒂𝒓𝒈𝒊𝒏 = 𝒐𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝒑𝒓𝒐𝒇𝒊𝒕 𝒓𝒆𝒗𝒆𝒏𝒖𝒆 (9– 8)
Lastly, the net profit margin is the one that is mostly used to evaluate the overall
profitability of a business. It is determined as follows:
𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 = 𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 / 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 (9– 𝟏𝟕)
The last category of financial ratios is the asset management or efficiency ratios. These
ratios are designed to show how well a business is using its assets. These ratios are extremely
important for management to determine its own efficiency. There are many different activity
or efficiency ratios. Here we will examine just a few. The sales-to-inventory ratio computes
the number of dollars of sales generated by each dollar of inventory. Firms that are able to
generate greater sales volume for a given level of inventory are perceived as being more
efficient. This ratio is determined as follows:
𝑠𝑎𝑙𝑒𝑠 𝑡𝑜 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 =
𝑠𝑎𝑙𝑒𝑠
𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
(9– 𝟏𝟖)
Other efficiency ratios look at how well a business is managing its inventory. Some
look at the number of days of inventory on hand; others look at the number of times inventory
is turned over during the year. Both can be used to measure the overall efficiency of the
inventory policy of a firm. For simplicity’s sake, these ratios will not be reviewed in this text.
The sales-to-fixed-asset ratio is another efficiency measure that looks at the number of
dollars of sales generated by a business’s fixed assets. Again, one is looking for a larger value
than the industry average because this would indicate that a business is more efficient in using
its fixed assets. This ratio is determined as follows:
𝑠𝑎𝑙𝑒𝑠 𝑡𝑜 𝑓𝑖𝑥𝑒𝑑 𝑎𝑠𝑠𝑒𝑡𝑠 =
𝑠𝑎𝑙𝑒𝑠
𝑓𝑖𝑥𝑒𝑑 𝑎𝑠𝑠𝑒𝑡𝑠
(9– 𝟏𝟗)
Another commonly used efficiency ratio is the days-in-receivables ratio. This ratio
shows the average number of days it takes to collect accounts receivables. The desired trend
9 Financing Small Businesses
- 162 for
this ratio is a reduction, indicating that its customers are paying a firm more quickly. This
ratio is determined as follows:
𝑑𝑎𝑦𝑠 𝑖𝑛 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 = 𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒
(
𝑠𝑎𝑙𝑒𝑠
365
)
⁄ (9– 𝟐𝟎)
The 365 in the denominator represents the number of days in a year.
Financial ratios serve an extremely useful purpose for small business owners who are
attempting to identify trends in their own operations and see how well their business’s stand
up against its competitors. As such, owners should periodically review their financial ratios to
get a better understanding of the current position of their firms.
9.5 FINANCIAL PLAN
For most small businesses, the major source of external financing comes from banks.
However, there exist many other possibilities how to set up external financial plan.
Perhaps the major source of equity financing for most small start-up businesses comes
from personal savings. The term bootstrapping refers to using personal, family, or friends’
money to start a business. The use of one’s own money (or that of family and friends) is
a strong indicator that a business owner has a strong commitment to and belief in the success
of the business. If a business is financed totally from one’s personal savings that means the
owner or the operator has total control of the business.32
9.5.1 STAGES OF FUNDING
Many individuals start small businesses with the express purpose of finding
independence and control over their own economic and business lives. This desire for
independence may make many small business owners averse to the idea of equity financing
because that might mean ceding business control to equity partners (Sapienza et al, 2003).
Figure 50 Sources of Funding
Source: Cadden and Lueder, 2008
Equity financing raises money by selling a certain share of the ownership of the
business. It involves no explicit obligation or expectation, on the part of the investors, to be
repaid their investment. The value of equity financing lies in the partial ownership of the
32
Financing,” Small Business Notes, accessed December 2, 2011,www.smallbusinessnotes.com/business-
finances/financing.
Jarmila Šebestová; Entrepreneurship
- 163 business.
Another issue that makes some small business owners averse to acquiring additional
equity partners is the simple fact that the acquisition of these partners means less profit to the
business owner. This factor in the control issue must be considered when the small business
owner is looking to raise additional capital through venture capitalist and angel investors
Venture capitalists are looking for substantial returns on their initial investment—five, ten,
sometimes even twenty-five times their original investment. They will be looking for firms
that can rapidly generate significant profits or significant growth in sales. Angel investors
may be more attracted to their interest in the small business concept than in reaping
significant returns. This is not to say that they are not interested in recouping their original
investment with some type of significant return. It is much more likely that angel investors, as
compared to venture capitalists, will play a much more active role in the decision-making
process of the small business.
Debt financing represents a legal obligation to repay the original debt plus interest.
Most debt financing involves a fixed payment schedule to repay both principal and interest.
A failure to meet the schedule has serious consequences, which might include the bankruptcy
of the business. Those who provide debt financing expect that the principal will be repaid
with interest, but they are not formal investors in the business. There are numerous sources for
debt financing. Some small businesses begin with financing by borrowing from friends and
family. Some firms may choose to finance business operations by using either personal or
corporate credit cards. This approach to financing can be extraordinarily expensive given the
interest rates charged on credit cards and the possibility that the credit card companies may
change (by a significant amount) the credit limit associated with the credit card.
Another source of capital is the generation of internal funding. This simply means that
a business flow it is retained earnings back into the business. This is a viable source of capital
when a business is highly profitable.
The last source of capital is trade credit. Trade credit involves purchasing supplies or
equipment through financing made available by vendors. This approach may allow someone
to acquire inventory of materials and supplies without having the full price at the time of
purchase.
STEPS IN FINANCIAL PLANNING
 Step 1: Summarize the financial aspects of your business plan.
Table 19 Start-up plan
Requirements amount amount
Start-up Expenses Start-up Assets
Expense 1 € Cash Assets €
Expense 2 € Other Current Assets €
Expense 3 € Long-term Assets €
Expense 4 € Total Assets €
Expense 5 €
Expense 6 € Total Requirements €
Total Start-up Expenses €
 Step 2: Explain where your funding will come from, in what form (as
investments and/or loans), and how this funding will cover the start-up
requirements outlined in the Start-up table.
9 Financing Small Businesses
- 164 Table
20 Start-up Funding Start-up Expenses to Fund
Start-up Assets to Fund Amount in €
Total Funding Required amount€
Assets Amount in € Liabilities and Capital Amount in €
Non-cash Assets from Start-up €
Cash Requirements from Start-up € Liabilities amount
Additional Cash Raised € Current Borrowing €
Cash Balance on Starting Date € Long-term Liabilities €
Total Assets € Accounts Payable (Outstanding Bills) €
Other Current Liabilities (interest-free) €
Total Liabilities €
Capital amount
Planned Investment €
Owner €
Investor €
Additional Investment Requirement €
Total Planned Investment €
Loss at Start-up (Start-up Expenses) €
Total Capital €
Total Capital and Liabilities €
Total Funding €
 Step 3: Explain the important points of your Profit and Loss projections, such as
percentage increase in sales and profits, your gross margins, and key budget
items
Table 21 Sales Forecast
Sales Year 1 Year 2 Year 3
Total Sales € € €
Direct Cost of Sales Year 1 Year 2 Year 3
Subtotal Direct Cost of Sales € € €
Year 1 Year 2 Year 3
Sales € € €
Direct Cost of Sales € € €
Other Costs of Sales € € €
Total Cost of Sales € € €
Gross Margin € € €
Gross Margin % % % %
Expenses
Expense 1 € € €
Expense 2 € € €
Depreciation € € €
Rent € € €
Utilities € € €
Insurance € € €
Payroll Taxes € € €
Other € € €
Total Operating Expenses € € €
Profit Before Interest and Taxes € € €
EBITDA € € €
Interest Expense € € €
Taxes Incurred € € €
Net Profit € € €
Net Profit/Sales % % %
Jarmila Šebestová; Entrepreneurship
- 165 CASE
STUDY 5 CAPITAL STRUCTURE ISSUES IN PRACTICE
Let us envision a small family-based manufacturing firm that until now has been able to
grow through the generation of internal funds and the equity that has been invested by the
original owners. Presently, the firm has no long-term debt. It has a revolving line of credit, but
in the last few years, it has not had to tap into this line of credit largely. The income statement
for the year 2010 and the projected income statement for 2011 are given in Table as Income
Statement for 2010 and Projections for 2011". In preparing the projected income statement for
2011, the firm assumed that sales would grow by 7.5 percent due to a rapidly rising market. In
fact, the sales force indicated that sales could grow at a much higher rate if the firm can
significantly increase its productive capacity. The projected income statement estimates the
cost of goods sold to be 65 percent of the firm’s revenue. This estimate is predicated on the
past five years’ worth of data. The return on assets (ROA) and the return on equity (ROE) for
2010 and the projected values for 2011 are provided in the bottom of the table.
After preparing these projections, the owners were approached by a company that
manufactures computer-controlled machinery. The owners were presented with a series of
machines that will not significantly raise the productive capacity of their business while also
reducing the unit cost of production. The owners examined in detail the productive increase in
improved efficiency that this computer-controlled machinery would provide. They estimated
that demand in the market would increase if they had this new equipment, and sales could
increase by 25 percent in 2011, rather than 7.5 percent as they had originally estimated.
Further, the efficiencies brought about by the computer-controlled equipment would
significantly reduce their operating costs. A rough estimate indicated that with this new
equipment the cost of goods sold would decrease from 65 percent of revenue to 55 percent of
revenue. These were remarkably attractive figures. The only reservation that the owners had
was the cost of this new equipment. The sales price was €200,000, but the business did not
have this amount of cash available. To raise this amount of money, they would either have to
Income Statement for 2010 and Projections for 2011 Abbreviated Balance Sheet
2010 2011 2010 2011
Revenue €475,000 €510,625 Total assets €750,000 €765,000
Cost of
goods sold
€308,750 €331,906 Long-term debt €— €—
Gross profit €166,250 €178,719 Owners’ equity €750,000 €765,000
General sales
and
administrative
€95,000 €102,125
Total debt and
equity
€750,000 €765,000
EBIT €71,250 €76,594
ROA and ROE Values for 2010 and Projections for
2011
Interest €— €— 2010 (%) 2011 (%)
Taxes €21,375 €22,978 Return on assets 6.65 7.01
Net profit €49,875 €53,616 Return on equity 6.65 7.01
9 Financing Small Businesses
- 166 bring
in a new equity partner who would supply the entire amount, borrow the €200,000 as
a long-term loan, or have some combination of equity partnership and debt. They first
approached a distant relative who has successfully invested in several businesses. This
individual was willing to invest €50,000, €100,000, €150,000, or the entire €200,000 for
taking an equity position in the firm. The owners also went to the bank where they had line of
credit and asked about their lending options. The bank was impressed with the improved
productivity and efficiency of the proposed new machinery. The bank was also willing to lend
the business €50,000, €100,000, €150,000, or the entire €200,000 to purchase the computercontrolled
equipment. The bank, however, stipulated that the lending rate would depend on
the amount that was borrowed. If the firm borrowed €50,000, the interest rate would be 7.5
percent; if the amount borrowed were €100,000, the interest rate would increase to 10 percent;
if €150,000 were the amount of the loan, the interest rate would be 12.5 percent; and if the
firm borrowed the entire €200,000, the bank would charge an interest rate of 15 percent.
To analyze correctly this investment opportunity, the owners could employ several
financial tools and methods, such as net present value (NPV). This approach examines
a lifetime stream of additional earnings and cost savings for an investment. The cash flow that
might exist is then discounted by the cost of borrowing that money. If the NPV is positive,
then the firm should undertake the investment; if it is negative, the firm should not undertake
the investment. This approach is too complex—for the needs of this text—to be examined in
any detail. For the purpose of illustration, it will be assumed that the owners began by looking
at the impact of alternative investment schemes on the projected results for 2011. Obviously,
any in-depth analysis of this investment would have to entail multiyear projections.
They examined five scenarios:
 Their relative provides the entire €200,000 for an equity position in the business.
 They borrow €50,000 from the bank at an interest rate of 7.5 percent, and their
relative provides the remaining €150,000 for a smaller equity position in the
business.
 They borrow €100,000 from the bank at an interest rate of 10 percent, and their
relative provides the remaining €100,000 for a smaller equity position in the
business.
 They borrow €150,000 from the bank at an interest rate of 12.5 percent, and
their relative provides the remaining €50,000 for an even smaller equity position
in the business.
 They borrow the entire €200,000 from the bank at an interest rate of 15 percent.
All five scenarios begin with the assumption that the new equipment would improve
productive capacity and allow sales to increase, in 2011, by 25 percent, rather than the 7.5
percent that had been previously forecasted. Likewise, all five scenarios have the same cost of
goods sold, which in this case is 55 percent of the revenues rather than the anticipated 65
percent if the new equipment is not purchased.
Jarmila Šebestová; Entrepreneurship
- 167 -
1) Income Statement for the Five Scenarios
All five scenarios have the same EBIT. The scenarios differ, however, in the interest
payments. The first scenario assumes that a relative who is taking an equity position in the
firm would provide all €200,000. This is not a loan, so there are no interest payments. In the
remaining four scenarios, the interest payments are a function of the amount borrowed and the
corresponding interest rate. The payment of interest obviously affects the earnings before
taxes (EBT) and the amount of taxes that have to be paid. Although the tax bill for those
scenarios where money has been borrowed is less than the scenario where the €200,000 is
provided by equity, the net profit also declines as the amount borrowed increases.
2) Abbreviated Balance Sheet for the Five Scenarios
The owners then calculated the ROA and the ROE for the five scenarios when they
examined these results; they noticed that the greatest ROA occurred when the new machinery
was financed exclusively by equity capital.
Borrow
€0
Borrow
€50,000
Borrow
€100,000
Borrow
€150,000
Borrow
€200,000
Revenue €593,750 €593,750 €593,750 €593,750 €593,750
Cost of goods sold €326,563 €326,563 €326,563 €326,563 €326,563
Gross profit €267,188 €267,188 €267,188 €267,188 €267,188
General sales and
administrative
€118,750 €118,750 €118,750 €118,750 €118,750
EBIT €148,438 €148,438 €148,438 €148,438 €148,438
Interest €— €3,750 €10,000 €18,750 €30,000
Taxes €44,531 €43,406 €41,531 €38,906 €35,531
Net profit €103,906 €101,281 €96,906 €90,781 €82,906
Borrow
€0
Borrow
€50,000
Borrow
€100,000
Borrow
€150,000
Borrow
€200,000
Total assets €965,000 €965,000 €965,000 €965,000 €965,000
Long-term debt €— €50,000 €100,000 €150,000 €200,000
Owners’ equity €965,000 €915,000 €865,000 €815,000 €765,000
Total debt and equity €965,000 €965,000 €965,000 €965,000 €965,000
9 Financing Small Businesses
- 168 -
3) ROE and ROA in Five scenarios
The ROA declined as they began to fund new machinery with debt: the greater the debt,
the lower the ROA. However, they saw a different situation when they looked at the ROE for
each scenario. The ROE was greater in each scenario where the machinery was financed
either exclusively or to some extent by debt. In fact, the lowest ROE (the firm borrowed the
entire €200,000) was 50 percent higher than if the firm did not acquire the new equipment.
A further examination of the ROE results provides a very interesting insight. The ROE
increases as the firm borrows up to €100,000 of debt. When the firm borrows more money
(€150,000 or €200,000), the ROE ratio declines. This is a highly simplified example of
optimal capital structure. There is a level of debt beyond which the benefits measured by
ROE, which begins to decline. Small businesses must be able to identify their “ideal” debt-toequity
ratio.
The owners decided to carry their analysis one-step further; they wondered if the sales
projections were too enthusiastic. They were concerned about the firm’s ability to repay any
loan should there be a drop in sales. Therefore, they decided to examine a worst-case
scenario. Such analyses are critical if one is to evaluate fully the risk of undertaking debt. .
They ran the numbers to see what the results would be if there was a 25 percent decrease in
sales in 2011 rather than a 25 percent increase in sales compared to 2010 (see the next table)
4) Income Statement for the Five Scenarios Assuming a 25 Percent Decrease in
Sales
Borrow €0 Borrow €50,000 Borrow €100,000 Borrow €150,000 Borrow €200,000
ROA 10.77% 10.50% 10.04% 9.41% 8.59%
ROE 10.77% 11.07% 11.20% 11.14% 10.84%
Borrow
€0
Borrow
€50,000
Borrow
€100,000
Borrow
€150,000
Borrow
€200,000
Revenue €356,250 €356,250 €356,250 €356,250 €356,250
Cost of goods sold €195,938 €195,938 €195,938 €195,938 €195,938
Gross profit €160,313 €160,313 €160,313 €160,313 €160,313
General sales and
administrative
€71,250 €71,250 €71,250 €71,250 €71,250
EBIT €89,063 €89,063 €89,063 €89,063 €89,063
Interest €— €3,750 €10,000 €18,750 €30,000
Taxes €26,719 €25,594 €23,719 €21,094 €17,719
Net profit €62,344 €59,719 €55,344 €49,219 €41,344
Jarmila Šebestová; Entrepreneurship
- 169 Even
with a heavy debt burden for the five scenarios, the firm is able to generate
a profit, although it is a substantially lower profit compared to if sales increased by 25
percent. They examined the impact of this proposed declining sales on ROA and ROE. These
results are found in Table "ROA and ROE for the Five Scenarios under the Condition of
Declining Sales
5) ROA and ROE for the Five Scenarios under the Condition of Declining Sales
9.5.2 BREAKEVEN ANALYSIS
A breakeven analysis is remarkably useful to someone considering starting up
a business. It examines a business’s potential costs—both fixed and variable—and then
determines the sales volume necessary to produce a profit for given selling price. This
information enables one to determine if the entire concept is feasible. After all, if one has to
sell five million shoes in a small town to turn a profit, one would immediately recognize that
there might be a severe problem with the proposed business model.
A breakeven analysis begins with several simplifying assumptions. In its most basic
form, it assumes that you are selling only one product at a particular price, and the production
cost per unit is constant over a wide range of values. The purpose of a breakeven analysis is to
determine the sales volume that is required so that you neither lose money nor make a profit.
This translates into a situation in which the profit level is zero. Put in equation form, this
simply means:
𝒕𝒐𝒕𝒂𝒍 𝒓𝒆𝒗𝒆𝒏𝒖𝒆 (𝑻𝑹) − 𝒕𝒐𝒕𝒂𝒍 𝒄𝒐𝒔𝒕𝒔(𝑻𝑪) = €𝟎 (9–21)
By moving terms, we can see that the break-even point occurs when total revenues
equal total costs:
𝑡𝑜𝑡𝑎𝑙 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 = 𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡𝑠 (9–22)
We can define total revenue (TR) as the selling price (SP) of the one-product times the
number of units sold (Q), which can be represented as follows:
TR = SP × Q (9–23)
Total costs are seen as being composed of two parts: fixed costs and total variable costs.
Fixed costs exist whether or not a firm produces any product or have any sales and consist of
rent, insurance, property taxes, administrative salaries, and depreciation. Total variable costs
are those costs that change across the volume of production. As part of the simplifying
assumptions of the breakeven analysis, it is assumed that there is a constant unit cost of
production. This would be based on the labour input and the amount of materials required
making one unit of product.
As production increases, the total variable cost (TVC) will likewise increase, which can
be represented as follows:
𝑇𝑉𝐶 = 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 × 𝑄 (9–24)
Borrow €0 Borrow €50,000 Borrow €100,000 Borrow €150,000 Borrow €200,000
ROA 6.46% 6.19% 5.74% 5.10% 4.28%
ROE 6.46% 6.53% 6.40% 6.04% 5.40%
9 Financing Small Businesses
- 170 Total
costs (TC) are simply the summation of fixed costs (FC) plus the total variable
costs (TVC):
𝑇𝐶 = 𝐹𝐶 + 𝑇𝑉𝐶 (9–25)
The original equation for the break-even point can now be rewritten as follows:
[(𝑆𝑃) × (𝑄)] − (𝑇𝐶) = €0 (9– 26)
At the break-even point, revenues equal total costs, so this equation can be rewritten
as:
SP × Q = TC (9-27)
Given that, the total costs (TC) equal the fixed costs (FC) and the total variable costs
(TVC); this equation can now be extended as follows:
𝑆𝑃 × 𝑄 = 𝐹𝐶 + 𝑇𝑉𝐶 (9-28)
 This equation can be expanded by incorporating the definition of total variable
costs as a function of sales volume (Q):
𝑆𝑃 × 𝑄 = 𝐹𝐶 + (𝑉𝐶 × 𝑄) (9-29)
 This equation can now be rewritten to solve for the sales value:
(𝑆𝑃 × 𝑄) − (𝑉𝐶 × 𝑄) = 𝐹𝐶 (9-30)
Because the term sales volume is present in both terms on the left-hand side of the
equation, it can be factored to produce:
𝑄 × (𝑆𝑃 − 𝑉𝐶) = 𝐹𝐶 (9-31)
The sales value to produce the break-even point can now be solved for in the following
equation:
𝑄 = 𝐹𝐶 / (𝑆𝑃 − 𝑉𝐶) (9-32)
CASE STUDY 6 CARL JACOBS
Carl Jacobs, a retired engineer, was a lifelong enthusiast of making plastic aircraft
models. Over thirty years, he entered many regional and national competitions and received
many awards for the quality of his model building. Part of this success was due to his ability
to cast precision resin parts to enhance the look of his aircraft models. During the last ten
years, he acquired a reputation as being an expert in this field of creating these resin parts.
A friend of his, who started several businesses, suggested that Carl look at turning this hobby
into a small business opportunity in his retirement. This opportunity stemmed from the fact
that Carl had created a mould into which he could cast the resin part for a particular aircraft
model; this same mould could be used to produce several hundred or several thousand copies
of the part, all at relatively low cost.
Carl had experience only with sculpturing and casting parts in extremely low volumesone
to five parts at a time. If he were to create a business format for this hobby, he would
have to have a significant investment in equipment. There would be a need to create multiple
metal moulds of the same part so that they could be cast in volume. In addition, there would
be a need for equipment for mixing and melting the chemicals that are required to produce the
resin.
After researching, he could buy top-of-the-line equipment for a total of €33,000. He also
found second hand but somewhat less efficient equipment. Carl estimated that the total cost of
acquiring all the necessary second hand equipment would be close to €15,000. After
reviewing the equipment specifications, he concluded that with new equipment, the unit cost
of producing a set of resin parts for a model would run €9.25, whereas the unit cost for using
Jarmila Šebestová; Entrepreneurship
- 171 the
second hand equipment would be €11.00. After doing some market research, Carl
determined that the maximum price he could set for his resin sets would be €23.00. This
would be true whether the resin sets were produced with new or second hand equipment.
Carl wanted to determine how many resin sets would have to be sold to break even with
each set of equipment. For simplicity’s sake, he assumed that the initial purchase price of both
options would be his fixed cost.
From this analysis, he could see that although the second hand equipment is not as
efficient (hence, the higher variable cost per unit), it will break even at a significantly lower
level of sales than the new equipment. Carl was still curious about the profitability of the two
sets of equipment at different levels of sales. Therefore, he ran the numbers to calculate the
profitability for both sets of equipment at sales levels of 1,000 units, 3,000 units, 5,000 units,
7,500 units, and 10,000 units.
From these results, it is clear that the second hand equipment is preferable to the new
equipment. At 10,000 units, the highest annual sales that Carl anticipated, the overall profits
would be greater with second hand equipment.
It should not be too surprising to find that good financial management can benefit
tremendously when a firm’s cash flow is improved.
Option Fixed Costs Variable Cost
Selling
Price break-even point
New equipment €33,000 €9.25/unit €23.00
Q = €33,000 / (€23.00 − €9.25)
Q = €33,000 / €13.75
Q = 2,400 units
Second hand equipment €15.000 €11.00/unit €23.00
Q = €15,000 / (€23.00 − €11.00)
Q = €15,000 / €12.00
Q = 1,250 units
Second hand Equipment New Equipment
Sales
Level Revenue
Fixed
Cost
Total
Variable
Costs Profit Revenue
Fixed
Cost
Total
Variable
Costs Profit
1,000 €23,000 €15,000 €11,000 €(3,000) €23,000 €33,000 €9,250 €(19,250)
3,000 €69,000 €15,000 €33,000 €21,000 €69,000 €33,000 €27,750 €8,250
5,000 €115,000 €15,000 €55,000 €45,000 €115,000 €33,000 €46,250 €35,750
7,500 €172,500 €15,000 €82,500 €75,000 €172,500 €33,000 €69,375 €70,125
10,000 €230,000 €15,000 €110,000 €105,000 €230,000 €33,000 €92,500 €104,500
10 Family Business
- 172 -
10 FAMILY BUSINESS
While the majority of family business owners would like to see their business
transferred to the next generation, it is estimated that 70% will not survive into the 2nd
generation and 90% will not make it to the 3rd generation (Walsh, 2011).
Family businesses are different and what makes them different is the family component.
The potential impact the family component can have on the management and ownership of
the business is such that it needs to be understood and effectively managed. Many family
businesses have successfully managed their family components and have done so by applying
proven family business ‘best practices’.
There is no agreed-on definition of a family business. The percentage of ownership, the
strategic control, the involvement of multiple generations, and the intention for the business to
remain in the family are among the many criteria that experts use to distinguish family
businesses from other types of businesses. For the purposes of this chapter, however, a family
business is defined as a business that is actively owned and/or managed by more than one
member of the same family (Cadden and Lueder 2008, p.130).
10.1 ADVANTAGES AND DISADVANTAGES OF A FAMILY FIRM
There are benefits to a family business, but there are disadvantages that must be
considered as well. Starting a family business is not for everyone. A family business offers the
following advantages:
 One of the popular misconceptions about family businesses is that they are
unable to adapt easily to increasing competitiveness and technological progress.
The reality is that family businesses frequently have the advantage of
entrepreneurial spirit, flexibility, and opportunism.
 It is believed by some that family firms are “too soft” and rarely reach their
potential. The reality is that family businesses actually outperform public
companies. Oftentimes, the marketplace forces public companies to make shortterm
decisions, whereas a family business has the advantage of having more
freedom to make its decisions.
 Family businesses can adapt to market fluctuations more easily because they can
afford to be patient. They have common goals, shared values, and a commitment
to brand building.
 Family-owned businesses are often seen as ideal because family members form
a “grounded and loyal foundation” for the company, and family members tend to
exhibit more dedication to their common goals.
 Family businesses are becoming more and more attractive to undergraduate
business students who face a bleak job and salary outlook for new graduates.
 Many family-owned businesses tend to be stable and optimistic, even when
economic times are uncertain. They seem to be better able to weather economic
difficulties and stabilize the economy than their nonfamily counterparts.
However, this is a function of the industry and the size of the business.
 Family businesses may be more open to flexible or part-time schedules or
choosing your hours. This presents a very attractive work environment for
people who need to tend to children, parents, or other family members in need.
 Family businesses tend to operate more ethically. In fact, many family
businesses believe that their ethical standards are more stringent than those of
their competitors are.
Jarmila Šebestová; Entrepreneurship
- 173 
Family businesses also exhibit more social responsibility than their competitors
do. This has been attributed to their concern about image and local reputation as
well as their closeness to the community.
 Family businesses may incur lower costs because of the greater willingness of
family members to make financial sacrifices for the sake of the business.
Accepting lower pay than they would get elsewhere to help the business in the
longer term or deferring wages in a cash-flow crisis are examples of family
altruistic behaviour.
 Family businesses, in general, have greater independence of action because they
have less (or no) pressure from the stock market and less (or no) takeover risk.
 Family businesses tend to be more resilient in hard times because they are
willing to flow profits back into the business.
 Family businesses are less bureaucratic and less impersonal, which allows for
greater flexibility and quicker decision-making.
 Family businesses offer the possibility of great financial success. (Kets de Vries,
1993)
Disadvantages
As attractive as family businesses are on many fronts, they have the following
disadvantages:
 Family businesses tend to be stable organizations. Although this is a good thing in
many instances, stability can also make it difficult to change. A new, younger family
member coming into the business will find tradition and structure. Changing that is not
simple. The key to changing a family business lies in defining tradition in terms of the
company’s core values, not in specific ways of doing things.
 Family closeness can lead to sibling rivalry or problems when both the parent and the
child want control. By the third or fourth generation, with many cousins possibly
sharing ownership, governance can become very complicated.
 There may be times when the interests of a family member conflict with the interests
of the business. One family member may want to expand the business, but other
family members may not share this person’s desire. The needs of the business are not
in harmony with the needs of the family.
 Family ties have a downside. Family members frequently will be expected to work
harder, make more of a commitment, and will be paid less than other employees in the
business.
 Family business owners may automatically promote someone from the family or give
family members a job even if they do not have adequate skills for the job. A nonfamily
employee may be better qualified. This can cause dissension and resentment among
other employees.
 The family business may be a breeding ground for jealousies, resentment, anger, and
sabotage. Family problems may spill over into the workplace. The business may be
plagued with managerial incompetence, the lack of exposure to other businesses, and
the inability to separate family and work.
 Family businesses have limited sources of external capital because they tend to avoid
sharing equity with nonfamily members. (Sirmon, Hitt, 2003)
 Family businesses frequently have a confusing organization, with “messy structure
and no clear division of tasks.” Authority and responsibility lines are unclear; jobs
may overlap; executives may hold a number of different jobs; and the decision-making
10 Family Business
- 174 hierarchy
may be completely ignored, existing only to be bypassed. This can create
a dysfunctional working environment.
 Family businesses frequently have paternalistic or autocratic rule that is characterized
by a resistance to change, secrecy, and the attraction of dependent personalities.
10.2 CHALLENGES IN THE FAMILY BUSINESS
The owners and managers of family businesses face many unique challenges. These
challenges stem from the overlap of family and business issues and include communication,
employing family and nonfamily members, professional management, employment
qualifications, salaries and compensation, and succession.
 Communication is important in any business, but the complexities of
communication in a family business are particularly problematic. Experts say
that communication is one of the most difficult parts of running a family
business. The approach to communication needs to include commitment, the
avoidance of secrecy, and an understanding of the risks of bad communication.
 Commitment. In a family business, it is critical that there be a commitment to
communicate effectively with family and nonfamily members of the business.
“Business leaders should be open about their awareness of the potential for
communication issues to evolve and their willingness to accept feedback and
input from all employees about opportunities for improvement and areas of
concern
 Secrecy. In family businesses, it is particularly important not to convey the
impression that family members are more knowledgeable than other employees
are. Even when this is not the case, the potential for the perception of exclusivity
may exist. Steps should be taken to address any issues that may arise openly,
honestly, and without preference for family members.
 Risks of Bad Communication. These difficulties can be overcome if the family
business makes a concerted effort to create and maintain an environment of open
communication where people feel comfortable voicing opinions and concerns. It
is important that family and nonfamily members have an equal opportunity to
express their views.
 Employing Family and Nonfamily Members. It is natural for a family
business to employ family members, especially in management positions.
Family members tend to be the first people hired when a small business gets
started, and as the business grows, so do their roles. There are both pros and
cons to hiring family members. Both need to be considered carefully. Who to
hire may well be the biggest management challenge that a family business owner
faces.
 Hiring Nonfamily Members. There will be times when the better decision may
be to hire a nonfamily person for a particular job. Experience has shown that
a family business is less likely to be successful if it employs only family
members; bringing in the fresh thinking that comes with external expertise can
be valuable at all levels of a business. In addition, nonfamily members can offer
stability to a family business by offering a fair and impartial perspective on
business issues. Because it is likely that a growing family business will need to
hire people from the outside, it is important that the business come to terms with
that necessity. Policies and procedures can help with the transition, but the most
important thing is to prepare the family culture of the business to accept
a nonfamily member. Not surprisingly, this is much easier said than done.
Jarmila Šebestová; Entrepreneurship
- 175 
Professional Management. The decision to hire a professional manager is one
of the most important and difficult hiring decisions that a family business owner
will have to make. The typical definition of professional managers equates them
with external, nonfamily, no owner managers, thus declaring professional
management and family management as mutually exclusive. There are several
problems with this way of thinking.
1. First, it perpetuates the outdated notion that family members are not
professional, that the smartest thing for a family business to do is to
bring in professional management—as quickly as possible.
2. Second, professional managers are not always prepared to deal with the
special nature of family-owned businesses. This does an injustice to the
unique workings of a family-owned business.
3. Third, a professional manager from the outside is not always prepared,
perhaps not even most of the time, to deal with the special nature of family
companies. The dominant view on professional management downplays the
importance of the social and the cultural context. The hiring of an outside
manager, therefore, should include an assessment of both formal
competence and cultural competence. Formal competence refers to formal
education, training, and experience outside the family business. Although it
is certainly helpful and appropriate, formal competence is not sufficient for
managerial effectiveness. It needs to be supplemented with cultural
competence, an understanding of the culture of a specific firm. One concern
of family businesses may be that the hiring of a nonfamily manager will
result in the loss of their “familiness.”
 Employment Qualifications. One of the more difficult challenges that
a family business must face is determining employment qualifications for
employees, both family and nonfamily. The lack of a clear employment
policy and process can lead to major conflicts in the company.
Unfortunately, it would appear that, despite their benefit, most family
businesses have a family employment policy. As a result, many family
businesses may end up with more employees from the family than the
company needs, and some of these people may not even be qualified or
suitable for the jobs they have been given. A written family-business
employment policy can solve a myriad of problems because it spells out the
specific terms for family and nonfamily members with respect to recruiting,
hiring, promoting, compensating, and terminating. There are no rules that
dictate the content of family business employment policy, so differences
from one family business to another can be expected. The benefits of an
employment policy notwithstanding, the idea may be met with resistance.
There may be the feeling that hiring decisions for family members should
be separate from the hiring decisions for nonfamily members because being
a family member provides special qualifications that cannot be matched by
someone outside the family. How to proceed will ultimately fall on the
shoulders of the family business owner.
 Salaries and Compensation. As difficult as hiring decisions may be for
the family business, decisions about salaries and compensation are
probably even worse. No matter how well intentioned and well designed
the company’s compensation plan may be, there will still be jealousies,
hard feelings, severed sibling relationships, and even lawsuits, particularly
among those family members who feel they have been treated unfairly.
10 Family Business
- 176 Family
businesses often make several common mistakes when developing their
compensation plans. They consider fair compensation to be equal compensation for all family
members, sometimes even for the owner. This creates a very sticky situation because not all
family members have treated equally.
Family members employed in the business will be paid according to the standards in our
region, as reported by our trade association, for a specific position, in companies of our size. In order
to retain good employees we will pay all employed family members and other managers within the
top quartile of our industry’s standards. Additional compensation will be based on success in
reaching specific company goals, with bonuses shared among all members of the management
team. Individual incentives will be determined according to measurable goals for job performance
determined each year, and reviewed by the appropriate manager.
Another important issue that is particularly difficult for family businesses is succession.
As mentioned, succession is about passing the business to the next generation. Decisions have
to be made about who will take over the leadership and/or ownership of the company when
the current generation dies or retires. There are family businesses that manage the transition
across generations quite easily because the succession process chooses only the children
willing and able to join and work with the prevailing family, business values, and goals.
Unfortunately, there are also instances in which children have had to leave school as soon as
legally allowed, not equipped to manage the business, their lives, or their family.
These are powerful forces working against succession planning, but they need to be
overcome for the good of the founder, the family, and the business. It will be tricky to balance
the needs of all three and fold them into a good succession plan.
10.3 THE SUCCESSION PLAN
The Three Circle Model outlined below is often used to illustrate the interaction/impact of the
family component on the management and ownership of family businesses. The Three Circle Model
is represented by the ownership circle, the management circle, and the family circle.
Figure 51 Three Circle Model
Source: Walsh, 2011 p.8
The ownership circle represents the interaction/impact that the owners have on the
family and on the management of the business. The management circle represents the
interaction/impact that management has on the family and on the ownership of the business.
The family circle represents the interaction/impact that the family has on the management and
ownership of the business. The ownership circle and the management circle are common to all
Jarmila Šebestová; Entrepreneurship
- 177 businesses.
The family circle is unique to family business and is what differentiates it from its
nonfamily business counterparts. In many family businesses, the family permeates the
management and the ownership of the business, making it a significant, if not the major
component in the overall running of the family business. It is easy to see how the interaction
between these three components can create family, management, and ownership challenges,
as well as provide unique opportunities.
The Three Circle Model illustrates how each of the components interacts with each
other and how all three circles meet in the middle, indicating that at some stage of the family
business, ownership, management, and family are mixed together. The family business plan
of succession comprises two processes, the ‘management’ succession process and the
‘ownership’ succession process. Numerous succession activities are outlined for each of the
two processes to achieve the desired succession outcomes. The management and ownership
succession processes can be undertaken simultaneously or one at a time.
Figure 52 Life cycle of Family Business
Source: Burns, 2007
It is recommended the management succession process to be carried out first so that the
ownership succession plan reflects and supports the management succession. Although each
succession plan will be different, the following components should be seen as necessary for
a good succession plan:
 Establish goals and objectives. As the family business owner, you must
establish your personal goals and vision for the business and your future role in
its operation. You should include your retirement goals, family member goals,
goals of other stakeholders (e.g., partners, shareholders, and employees), and
goals relating to what should happen in the case of your illness, death, or
disability.
 Family involvement in the decision-making process. If the family and
stakeholders who are involved in the decision-making process are kept informed
of the decisions being made, many of the problems related to inheritance,
management, and ownership issues will be alleviated. Communication, the
process for handling family change and disputes, the family vision for the
business, and the relationship between the family and the business should be
addressed. The surest path to family discord is developing the succession plan
on your own and then announcing it.
10 Family Business
- 178 
Identify successor(s). This section of the plan will address the issue of who
takes over ownership and management of the business. Identification of the
potential successor(s), training of the successor(s), building support for the
successor(s), and teaching the successor(s) to build vision for the business are
included here. Working with your successor for a year or two before you, hand
over the business will increase the chances for success.
 Estate planning. Estate planning is important if you are planning to retire or
want to take precautionary measures regarding the future of the business in the
event you are unable to continue operation of the family business due to illness,
disability, or death. You should consult a lawyer, an accountant,
a financial/estate planner, and a life insurance representative so that your
benefits will be maximized. You will need to consider taxation, retirement
income, provisions for other family members, and active/no-active family
members.
 Contingency planning. Contingency planning is about unforeseen
circumstances. It is about strategizing for the most likely “what if” scenarios
(e.g., your death or disability). By thinking in terms of the unforeseen, you will
be taking a proactive rather than reactive approach.
 Company structure and transfer methods. This section of the succession plan
involves the review and updating of the organizational and structural plan for the
organization taking into account the strengths and weaknesses of the successor.
The following needs to be identified: the roles and the responsibilities of the
successor, the filling of key positions, structuring of the business to fit the
successor, the potential roles for the retiring owner, any legal complications, and
financial issues.
 Business valuation. This section is relevant only if the business is being sold.
Passing the business to a family member would not involve a business valuation.
 Exit strategy. With any succession, ownership will be transferred, and you will
remove yourself from the day-to-day operations of the business. Alternatives
will be compared, and a framework for making your final choices will be
developed. The transfer method and the timelines are decided. The exit plan
should then be published and distributed to everyone who is involved in the
succession process.
 Implementation and follow-up. The succession plan should be reviewed
regularly and revised as situations change. It should be a dynamic and a flexible
document.
As difficult as the planning process can be, the goal should be a succession plan that
will be in the best interests of all—or most—of the parties involved. Business interests should
be put ahead of family interests, and merit should be emphasized over family position.
10.3.1 SOURCES OF CONFLICTS AND EXIT
Several other sources of conflict can occur in a family-owned business. A sampling of
those sources is discussed here. All have the potential to affect adversely family relationships,
business operations, and business results.
Jarmila Šebestová; Entrepreneurship
- 179 Table
22 Potential sources of conflict
Family Business
Emotional Unemotional
Loyal Self interest
Caring Task based
Sharing Reward performance
Inward-looking Perform or leave
Lifetime membership Outward-looking
Source: Burns, 2007
 Rivalry. Levinson (1971) maintains that, “the fundamental psychological
conflict in family businesses is rivalry, compounded by feelings of guilt, when
more than one family member is involved.” This rivalry can occur between
father and son, siblings, husband and wife, father and daughter, and in-laws with
members of the family that own the business.
 Differing vision. Family members will often disagree with the founder and with
each other about the vision and strategy for the business. Rivalries that spill into
the workplace can get nasty, leading to destructive behaviours.
 Jealousy. There is always the potential for jealousy in the family business. It can
arise from feelings of unfairness in such things as compensation, job
responsibilities, promotions, “having the ear” of the business founder, and stock
distributions. It can also arise with respect to the planned successor when there is
a difference of opinion about who it should be. If it is not resolved, jealousy has
the potential to divide the family and destroy the business.
 Succession. Succession is always a big obstacle for a family business. In some
cases, the founder may feel that his or her children are not capable of running the
business. This, in turn, becomes problematic for succession. It is also true that
while the founder of the business wants to continue family ownership and
leadership of the business, this may not be true of his or her immediate family or
later-generation family members. (Davis, Harveston, 2001) This can create
substantive conflict during succession planning.
 Playing by different rules. This cause of negative conflict “often presents itself
as a form of elitism or entitlement that exists simply by virtue of being in
a family that owns a business. Examples show up in allowing one or more
family members to exhibit deficient standards of conduct or performance that
violate sound business practices or important requirements that all other
employees are expected to follow.
 Decision making. If roles and responsibilities are not clearly defined, conflict
will arise over who can make decisions and how decisions should be made. This
will lead to confusion, uncertainty, and haphazard decisions that will put the
company at risk.
 Compensation and benefits. “This is one of the most frequent sources of
conflict, especially among members of the younger generation.” A person’s
compensation is inextricably linked to his or her feelings of importance and self-
worth.
10 Family Business
- 180 AVOIDING
CONFLICT
Some measure of family squabbling is expected in a family business. Some of the
arguments will be logical and necessary. The negative effects of family squabbling are as
follows33
:
 Unprofessional image. Family squabbling conjures up images of children immaturity
and pettiness. This sends a signal to customers and other employees that
they are not in a professional environment that focuses on the right things.
 Uncomfortable environment. It is embarrassing to witness squabbling. No one likes
to be in an awkward atmosphere; squabbling can cost you customers and employees,
and it may result in expensive and unpleasant lawsuits. This can affect your bottom
line very quickly.
 Discrimination. Nepotism is one of the biggest dangers of working in a family
business. Arguing with relatives will only reinforce to other employees that they are in
a family business. This can quickly lead to feelings of disparate treatment, which, in
turn, can lead to discrimination charges.
 Legal troubles. In the worst cases of family squabbling, disagreements over business
can lead to lawsuits. If one family member’s role is minimized and his or her authority
is restricted, this is violating the person’s rights as a shareholder. This can lead to an
oppressed minority shareholder suit against the family business. This would be
expensive, it would be ugly, and it could lead to the demise of the company.
Avoiding conflict is no easy feat. However, a family business should consider several
things. First, there are consultants who engage in conflict resolution for a living. The
possibilities should be checked out. If the budget can handle the costs of a consultant, it could
be the best choice. A consultant, having no reason to take one side or the other, will bring the
necessary objectivity to resolution of the conflict.
EXAMPLE 10 CHILDREN AND ME
The founder of XYZ Company has decided to retire. He wants one of three children to
take over leadership of the business—and he knows exactly, whom it should be. Other
members of the family have their ideas as well. One segment of the family wants the oldest
son, Michael, to take over, but the founder thinks Michael is a melon head.
The second son, Christopher, is a well-meaning and hard-working part of the business,
but he just does not have what it takes to be a leader. Nonetheless, another group of family
members favours him.
Samantha, the youngest child, is as sharp as a tack, with solid experience and
accomplishments under her belt. On an objective basis, Samantha would be the best choice
for the business. She is the founder’s choice to take over the company and has other family
supporters as well, although not as many as for Michael or Christopher. This is a situation
tailor-made for conflict.
How does the founder finesse the selection of Samantha and minimize the conflict
that is bound to occur? Can he win?
(based on Cadden and Lueder, 208, p.169)
33
National Federation of Independent Business, 2010. How Family Squabbling Affects Other Employees—and
Customers. [online] [Accessed: 23 Jan 2013].Available at: http://www.nfib.com/article/how-family-squabbling-
affects-other-employees-and-customers-52150.
Jarmila Šebestová; Entrepreneurship
- 181 We
have learned over the years that the best exit strategies for a family business are
those for which the terms and conditions of the exit (death, disability, and voluntary exit) are
pre-determined, agreed upon, and outlined in the shareholders agreement. This has proven to
reduce much of the family conflict that can and does arise when a family member exits the
ownership ranks of the family business. It also removes much of the uncertainty surrounding
the impact to the business and to the family. As previously mentioned, in order to achieve this
objective it may be necessary to forego tax efficiencies.
11 Social Entrepreneurship
- 182 -
11 SOCIAL ENTREPRENEURSHIP
The concept of social entrepreneurship (SE) is, in practice, recognized as encompassing
a wide range of activities as enterprising individuals devoted to making a difference from
social purpose business ventures dedicated to adding for-profit motivations to the nonprofits
sector, new types of philanthropists supporting venture capital-like ‘investment ‘portfolios;
and nonprofits organizations that are reinventing themselves by drawing on lessons learned
from the business world (Perrini and Vurro, 2006, p.58)
SE is a composite phenomenon and can initially be explained by the strengthening
requests from various stakeholders to the non-profit sector to enhance its economic efficiency
and effectiveness, as well as to the for-profit sector to encourage the adoption of socially
responsible behaviour.
DEFINITION 16 SOCIAL ENTREPRENEUR
Social entrepreneur as ‘a path breaker with a powerful new idea, who combines
visionary and real world problem solving creativity, who has a strong ethical fibre and who is
“totally possessed” by his or her vision for change’ (Bornstein,1998, p.36)
Dees (1998, p.4) who defines social entrepreneurs as people whom: play the role of
change agents in the social sector, by:
 Adopting a mission to create and sustain social value (not just private value),
 Recognizing and relentlessly pursuing new opportunities to serve that mission,
 Engaging in a process of continuous innovation, adaptation and learning,
 Acting boldly without being limited by resources currently in hand, and
 Exhibiting heightened accountability to the constituencies served and for the outcomes
created.
11.1 SOCIAL ENTERPRISE AND THE SOCIAL ECONOMY
Social enterprise could be characterised as (Burns, 2007, p.456):
 Having a primary social purpose with a secondary commercial activity
 Achieving that purpose by engaging in trade
 Reinvesting profits in the enterprise or new social ventures
 Democratically involving members in governance
 Open accountability
This situation is shown in the figure below. The first system is private sector, which
concentrates on trading with the maximum of profit as an objective. However, even this has
its legal and illegal sectors. It operates from a local to a global basis. The second is the public
services and government, which operates in a planned, non-trading way.
Jarmila Šebestová; Entrepreneurship
- 183 Figure
53 Three systems of economy
Source Burns, 2007, p.456
It is bureaucratic and inefficient. It also operates from a local to a global basis. The third
system is the social economy that includes social enterprise, voluntary and charity
organizations and the family economy. It is community based, could be planned, but is not
homogenous.
DEFINITION 17 SOCIAL ENTREPRENEUR SKILLS
Who are they? Socially driven, ambitious leaders, with great skills in communicating
a mission and inspiring staff, users and partners. In all cases, they have been capable of
creating impressive schemes with virtually no resources. (Burns, 2007, p.457)
11.2 TYPICAL BEHAVIOUR OF SE
Current literature agrees in recognizing three main steps, which, although typical of
business entrepreneurship, take on anew value and therefore become useful in the overall
comprehension of the SE phenomenon. They are:
 Opportunity definition.
 Organizational launch and functioning.
 Financial resource collection and leveraging.
These phases are not temporally consequent but can both follow one another in a very
different order as well as be concomitant.
OPPORTUNITY DEFINITION
The first step of the SE process comprises opportunity definition: the cognitive process
followed by entrepreneurs as they intentionally identify a solution to a specific problem or
need because of diverse motivations, including financial rewards. Surprisingly, now, social
entrepreneurial opportunity is the aspect of SE most explored by scholars. They consider
entrepreneurial opportunities as ‘opportunities to bring into existence new goods, services,
raw materials, and organizing methods that allow outputs to be sold at more than their cost of
production’ and affirm that a central way to differentiate between traditional business
entrepreneurship and SE is by looking at the identification of opportunities. In this sense, even
11 Social Entrepreneurship
- 184 if
social opportunities share the same source as their business counterparts, that is, arising
from unsatisfied needs whether they are social or not, in SE process the interest is centred on
the possibility to ‘meet a social need in a sustainable matter, and thus to (partially) alleviate
social problems.
Hockerts (2006) identifies, in activism, self-help, and philanthropy, the three main
sources of social entrepreneurial opportunities. In particular, an entrepreneur’s previous
personal experience combines with social needs, ‘gaps between socially desirable conditions
and the existing reality’, social assets, and change to stimulate entrepreneurial ideas or
innovations for social impact.
Finally, they identify three major types of social innovation.
1. The first, building local capacity, refers to the possibility of enhancing local
conditions by giving power to underused local capacities: ‘Local actors may
solve many of their own problems given increases in local capacities’
2. The second consists of disseminating a package of innovations through the
reconfiguration of products, resources and management practices into forms that
fit better with local specificities.
3. Thirdly, they identify as socially innovative, the possibility to contribute in
building a movement, giving voice to marginalized groups.
Table 23 Sources of opportunities
Opportunity Main actors Economic value
proposition
Social value proposition
Activism Activists Provides moral
legitimization to the social
enterprise.
Communication and
distribution through
activist networks
Social concerns
championed by the
activist group
Self-help Beneficiaries Cheap labour and
marketing Cheap and
patient capital Loyal and
patient clients
Social needs or concerns
of main beneficiaries of
the social enterprise
Philanthropy Donors Charitable grants and
donations Business
development advice
Networking with other
Social issues social
defined by the donor
entrepreneurs
Source: Hockerts, 2006, p. 144
ORGANIZATIONAL LAUNCH AND FUNCTIONING
The circle is closed only when, by adopting an opportunity-oriented mindset, SEs
transforms a viable idea into a functioning organization. This leads us towards the next step of
the SE process: organizational launch and functioning. To become concrete, a social
innovation needs a social impact theory, a specific business model and a composite social
strategy. However, it is possible to list some preliminary features that have been claimed as
typical and specific of SE functioning:
 SEs makes the production of goods and services on an ongoing basis, with a firm
orientation towards problem solving and emphasis on the ability to obtain measurable
results.
 A low dependence level and, therefore, a high level of autonomy characterize SEs:
they may receive public grants but public actors do not manage them directly or
indirectly.
Jarmila Šebestová; Entrepreneurship
- 185 
In the management of SEs, decisional power is not dependent on capital shares;
individual behaviour aimed at profit maximization and company rights is generally
excluded within SEs; powers are widened and shared by all stakeholders.
 Operations within SEs are based on a complex mix of monetary and nonmonetary
resources (for example, volunteers) and are oriented towards a collaborative and
participatory spirit.
 Partially tied to the former point, training and capacity building is crucial in all the
phases of the SE process, because of both the difficulty to achieve skill replication and
the consequent necessity to build an organizational environment in which
competencies and skills can easily flow around.
 In general, practice shows how regularities in building organizational capacity are still
not present. Even if SE initiatives vary considerably, the larger the organizational size,
the more sophisticated are the organizational systems and arrangements. In any case,
now, the organizational form does not seem to be the driver of social entrepreneurial
character. On the contrary, the focus remains on the nexus among entrepreneurial
aptitude, innovation, and social change and its results.
FINANCIAL RESOURCE COLLECTION AND LEVERAGING
The third major step of the SE process refers to the collecting and leveraging of
financial resources. In parallel with analysis of the SE concept and features of SEVs, research
on the financial aspects of SE and, in particular, on the innovative sources of such financing,
are becoming widespread. Among others, the most quoted source of financing is a particular
kind of patient capital social venture capital or venture philanthropy (VP).
Figure 54 Social Entrepreneurship concept
Source Burns, 2007, p. 457
11.2.1 ENTREPRENEURIAL MODEL
Looking at the way SE manage social transformation, the most evident component of
the business style of SEs is their orientation towards the market. SEs declares they to be
explicitly market driven, directing their efforts to customer and stakeholder satisfaction.
Microcredit and community venture capital are two examples of what knowledge of the
consumer base means for SEs. In looking for business where others (typically business actors)
see nothing. SEs starts the entrepreneurial process from an explicit, combined evaluation of
11 Social Entrepreneurship
- 186 social
and economic potential. In this sense, SEs declares them to start business by evaluating
their own aptitude to help the community and their ability to be self-sustaining. The key to
sustainability is constantly pursued through combining low costs with efficiency, quality and
profitability.
This tension also arises from a further characteristic element: the analysed SEs manifest
rising trends and underline the adoption of a proper scalable business/social strategy. In
particular, the growth attitude is considered to be strictly linked to three factors:
 Networking: SE´s share a strong attitude to sustain growth with partnerships
and collaborations with non-profit partners, companies and public actors. The
reasons that justify this behaviour are diverse. SE´s can tend both to eliminate
duplicative costs and excess capacity through shared facilities, services or
activities, or can be pushed by critical input combinations. In fact, no single
entity has all the inputs necessary to address effectively an identified social
need. Other reasons that explain partnership-orientation are to be found in the
necessity to increase impact by bringing together complementary capabilities or,
on the other hand, to enlarge market or client base sand also to acquire new
expertise or enhance contractual power towards funding institutions.
 Flexibility: most of the SE’s organizational structures are extremely flexible,
participatory and transparent. This characteristic can be explained by the
newness that characterizes the phenomenon. In such a situation, where the
scarcity of models of reference and acknowledged best practices makes the links
among growth, innovation and the unpredictability of outcomes and impacts
considerably strong, it becomes critical to share information and let it flow
easily at each level of the organization in order to stimulate creativity.
 Balancing the local dimension with the global dimension: this last growth
specificity has been noticed to be quite a constant of SE’s behaviour. To be sure,
of not losing out in quality, SE´s tend to maximize impact at each site through
a sort of tied-up diversification. In other words, they add new sites through
a targeted new site development plan, often helping communities to
independently replicate a community-built model. This can be read as an attempt
to maintain a constant level of personality in the provision of social services and
avoid the proved ineffectiveness of improving social conditions through
standardized services.
In generalizing, we can say that SEs aim at creating an overall vision that embraces both
non-profit and business culture. They constantly look for synergy, leveraging transferable
skills and best practices, and business or social partners in order to enhance the general
impact. They are based on a learning and participatory organizational structure, in order to
promote innovative solutions. As a result, SE emerges as an extremely adaptive culture.
This objective is often supported by technology with a process of progressive
dissemination and adaptation of technological progress to the different communities. Finally,
a general consideration: as innovation, social change is anything but a one-dimensional
construct. SEs tends to pursue voluntarily and involuntarily simultaneously, different social
outcomes. In light of the argument developed so far in the shift from theory to practice, we
can now suggest a tentative framework for the SE process, as follows (Figure 54):
Jarmila Šebestová; Entrepreneurship
- 187 Figure
55 SE process
Source: Perrini and Vurro, 2006, p.78
CASE STUDY 7 BIG ISSUE
The magazine The Big Issue is a weekly entertainment and news magazine styled like
a commercial magazine, which is sold on the streets of many British cities by homeless
people. The aim is to provide work for them so they can earn their own income. This is
intended to raise their awareness for their own situation and poverty and their willingness to
take over control of their lives again. Another (indirect) aim is to call attention to social
grievances. The magazine is positioned through the quality of the thematic contents. It is not
just designed as a means to the end of collecting donations.
The magazine is sold on the streets exclusively and not in shops or newspaper kiosks.
When customers are asked if they want to buy the magazine they find themselves in a face-toface
situation with the vendor. The price of the magazine is 2 GBP (2, 50 Euro
approximately). The street vendors buy the magazine for 1 GBP from the Big Issue Ltd. and
sell it at a price of 2 GBP to the customers on the streets. Each (certified) new vendor receives
short instructions for the sale of the magazine and 5 free copies (in London 10). Copies,
which are not sold, cannot be returned and no money is refunded. Any further turnover of the
magazine, for example from advertisements, is realized directly by the Big Issue Foundation.
The organization behind The Big Issue is divided into two parts: On the one hand, there
is Big Issue Limited Company (Big Issue Ltd), which produces the magazine and sells it to
a street vendor network. On the other hand, there is the Big Issue Foundation, a non-profit
foundation that aims at helping the street vendors regain control of their lives. The Big Issue
Foundation offers counselling services and references in the areas housing, health, financial
independence and (career) expectations.
The government only to a minimum extent supports the Big Issue organization. The
whole organization depends almost exclusively on (voluntary) donations. Without the
generosity of the individual donors and charitable organizations, the magazine and the
counselling services could not be provided. Currently the organization supports 2,900
11 Social Entrepreneurship
- 188 homeless
people all over Great Britain. Every week 670,000 copies of The Big Issue are sold.
This magazine in its present form is (almost) unique in Great Britain now.
Is this an example of social entrepreneurship? If so, why?
Is the big issue a social enterprise?
Is the best response to the social problem?
Answers:
1. Yes. The definition of social entrepreneurship is ‘the use of
entrepreneurial behaviour for social rather than profit objectives’.
Here we have a magazine start-up with the profits going to the
homeless who sell the magazine. The definition fits.
2. Yes, because after initial pump priming it is primarily a selffunding
response, it involves getting the homeless to work for their
reward and finally because it is an innovative idea.
3. This is a big question because the Big Issue is only one part of the
totality of the response needed to move the homeless into housing.
How will the individual find their way back into other
employment? Are there other social or psychological problems with
the individual that need to be addressed? How will they find
a home? Research indicates most homeless are there at least partly
by choice, so how can that decision be reversed. Indeed, should we
attempt to do so, or should the Big Issue simply be there to support
the homeless in their chosen life style?
This is a list of the fields in which social transformation is expected to be reached in the
social entrepreneurship:
 Arts, culture and humanities
 Children and youth
 Community and economic development
 Disaster relief
 Education and research
 Employment training
 Environment and sustainable development
 Health enhancement
 Homelessness
 Hunger and poverty relief
 Rehabilitative services
Yet these are only fields of action: to be more specific, what kinds of social
transformation can be identified in current practice? Nevertheless, the contribution of SEs, in
this sense, is not limited to the employment-training field, they may ‘help in developing both
demand and supply, as well as in reconfiguring public expenditure composition’. The fact that
SEs often employs low-income or at-risk workers does not imply quality reduction or less
attention to attracting the best skills.
On the contrary, these are major strengths of the SE approach. SEs adapt traditional
business practices to unexpected resources that are not characterized by low growth potential
but that only need to be stimulated and balanced in accordance with innovative approaches.
Furthermore, SEs’ social outcomes extend to the field of access to information. Especially,
encouraged by those SEVs that work at the bottom of the pyramid, gaining access to
Jarmila Šebestová; Entrepreneurship
- 189 information
through technological progress is the main driver to enhance democracy and
reduce overall asymmetry. Thirdly, SEVs can actually contribute to changing patterns of
interaction in order to enhance social cohesion through personalization and participative
approaches.
By contributing to solving or to alleviating the problems of specific groups, and by
favouring the integration of disadvantaged people into the labour market with higher wages
than those paid by sheltered employment workshops and sometimes for-profit companies,
social enterprises also contribute to improving life conditions, the well-being of communities
and the level of social integration’.
DANGERS IN SE
 Mixing social and commercial values – what is core mission?
 Conflict of social and commercial behaviour – which comes first?
 Over dependence on aid - sustainability?
 Impact of market values on democracy and citizenship – How to accounting for
both market and social activities?
 The market model places too little emphasis on democratic ideals like fairness and
justice
Remember, social business has the same life cycle as normal business unit without
any social mission!
Figure 56 Life cycle of SE
Source: Burns, 2007 p.458
12 Innovations in the Small Business
- 190 -
12 INNOVATIONS IN THE SMALL BUSINESS
Innovation is an important topic in the study of economics, business, sociology, and
other social sciences. Since innovation is also considered a major driver of the economy, the
factors that lead to innovation are also considered critical to policy makers.
Everybody has a good idea. Companies thrive and survive on good ideas. Those who
place a priority on generating and acting on good ideas frequently assume market leadership.
Too often, corporations allow good ideas - indeed, not-so-good ideas as well - to exist merely
within the structure. They are treated as wisps and allowed to float unchecked. Companies
often fail to consider ideas as a business asset and fail to care for them as they would other
assets. In today's hyper-competitive business environment that can be a multimillion-dollar
mistake. Companies owe it to themselves, their stockholders and their customers to consider
turning the collection and development of ideas into an innovation management process, just
as they would any other business operation (Hisrich et al.2010, p. 24-25)
Innovation management, however, is typically one of the last business processes within
an organization to be systematized and computerized. Unlike other business processes,
innovation can be highly difficult to manage, mostly due to the challenges associated with
creating the ideal environment in which to foster innovation. Organizations that can capture
the elements of innovation and systemize them create cultures that can outlast all other
competitors. However, creating this culture is no easy task. It begins by creating innovation
marketplaces, integrating multidisciplinary views into the innovation process and encouraging
early data capture and decision making. In practical application, the basic tenets of innovation
are sometimes hard to implement, but the results are well worth the effort.
In practice, for all the difficulty in creating an innovative environment, the rewards are
even more spectacular, such as industry-beating profitability, growth and stock performance,
not to mention employee career enhancement and personal satisfaction. Without a doubt,
innovation is a purely human quality that can be nurtured and coaxed to bear fruit on behalf of
the organization. This explains why innovation, radical innovation, is perhaps the only way to
maintain competitive advantage in this fiercely competitive world.
Three types of innovation:
 Ordinary - New products with little technological change.
 Technological – New products with significant technological advancement.
 Breakthrough – New products with some technological change.
The innovation can be, of course, of varying degrees of uniqueness. Most innovations
introduced to the market are ordinary innovations with little uniqueness or technology. As
expected, there are fewer technological innovations and breakthrough innovations with the
number of actual innovations decreasing as the technology involved increases. Regardless of
its level of uniqueness or technology, each innovation (particularly the latter two types)
evolves into, develops toward commercialization, and generates economic wealth.
In addition to dividing innovations into types, innovation is often characterized by its
impact on existing markets or businesses. Sustaining innovations allows organizations to
continue to approach markets the same way, such as the development of a faster or more fuelefficient
car. Disruptive innovations on the other hand, significantly change a market or
product category, such as the invention of a cheap, safe personal flying machine that could
replace cars.
Similarly, incremental innovation is evolutionary innovation, a step forward along
a technology trajectory, with a high chance of success and low uncertainty about outcomes.
Jarmila Šebestová; Entrepreneurship
- 191 Radical
innovation, on the other hand, involves larger leaps in the advancement of
a technology or process.
Figure 57 Types of innovations
Hisrich et al., 2010, p.25
It is possible that small size will pose an advantage with respect to being more
innovative. The reasons for this have been attributed to several factors (Cornwall, 2009):
 Passion. Small-business owners are interested in making businesses successful
and are more open to new concepts and ideas to achieve that end.
 Customer connection. Being small, these firms better know their customers’
needs and therefore are better positioned to meet them.
 Agility. Being small, these firms can adapt more readily to changing
environment.
 Willingness to experiment. Small-business owners are willing to risk failure on
some experiments.
 Resource limitation. Having fewer resources, small businesses become adept at
doing more with less.
 Information sharing. Smaller size may mean that there is a tighter social
network for sharing ideas.
In business and economics, innovation is often divided into five types:
 Product innovation, which involves the introduction of a new good or service
that is substantially improved. This might include improvements in functional
characteristics, technical abilities, ease of use, or any other dimension
 Process innovation involves the implementation of a new or significantly
improved production or delivery method.
 Marketing innovation is the development of new marketing methods with
improvement in product design or packaging, product promotion or pricing.
12 Innovations in the Small Business
- 192 
Organizational innovation (also referred as social innovation) involves the
creation of new organizations, business practices, and ways of running
organizations or new organizational behaviour.
Innovation systems are also highly sensitive to disruption. People are not typically
judged on how well they innovate. Although the concept is difficult to embody in software,
careful understanding of the cultural and political aspects of the organization will lead to
higher and sustained participation on the part of the inventors. There are companies
responding to this new practical view of innovation management with software that empowers
businesses and their employees with the ability to manage their innovation assets or
commercialization assets - intangible assets - under similar demands as their physical asset
counterparts.
Considering the nature of the innovation process, one of the most critical aspects is
building a process that is respected within the organization. People look for consistency and
respect in everything they do, from the law to how they deal with their children. Universally,
if a person believes that he or she is being treated fairly and the process is fair, even if the
outcome is not what he or she wanted, it is possible to feel still satisfied with the result.
The process by which innovation is captured, managed and mediated must be equally
respected. If employees believe their ideas are judged differently than others or if they never
receive feedback, they lose respect for the process and eventually stop participating. The
leading downfall of "idea collection" applications is that there is a huge turnout for the first
couple of months, and then the submission rate slowly falls until it is near zero.
To offset this, people must believe that their submissions are beneficial to their own
goals in addition to the organization goals. (Think of the "what's in it for me" syndrome.) By
nature, people do not usually like to waste time on activities with little or no obvious personal
benefit. How do people decide that something has a benefit? They receive clear, timely
feedback about their input; they perceive that success is attainable based on merit and not
based on politics; and success results in positive reinforcement in the form of recognition,
participation in the success, job security and financial well being. Management must listen
and respond to all high-quality suggestions - it is critical for repeat participation.
The majority of individuals do require some guiding principles to use to spur new
thinking. Management support is also needed to outline and clarify the strategic goals of the
organization with regard to its business objectives. A methodology of communicating these
goals to the company at large should be established to reinforce the stated direction of the
company. The market-facing groups must also have the ability to broadcast the voice of the
customer to the company, focusing the innovative process on real and tangible targets.
Providing a mechanism that cultivates this type of communication creates that "innovation
community" environment enabling the full use of the creative talent and tacit knowledge
within the organization.
Innovation in business is achieved in many ways, with much attention now given to
formal research and development for "breakthrough innovations." However, innovations may
be developed by less formal on-the-job modifications of practice, through exchange and
combination of professional experience and by many other routes. The more radical and
revolutionary innovations tend to stem from R&D, while more incremental innovations may
emerge from practice - but there are many exceptions to each of these trends.
Another key source of innovation is user innovation, innovations developed by
individuals when existing products do not meet their current needs. User innovators may
become entrepreneurs, selling their product, or they may choose to freely reveal their
innovations, using methods like open source. In such networks of innovation, the creativity of
the users or communities of users can further develop technologies and their use.
Jarmila Šebestová; Entrepreneurship
- 193 Encouraging,
rather than allowing, employees to use unsupervised, freethinking time to
dream and develop the next product or business concept or participate in the analysis of ideas
is a powerful ingredient in this innovation recipe. For example, it is widely known that 3M
encourages employees to spend no less than 15% of their time at work developing their own
new ideas and projects. This policy helps make 3M an industry leader in innovation.
Categorizing an innovation management system according to its functionality and
architecture in an organizational environment helps an organization decide what system of
innovation management is right for them. When the system needs to be deployed to a large
audience, the employee's experience, expectations and requirements are broad and,
consequently, the application must accommodate all possible situations. Depending on the
view of innovation and its relative importance within the organization, there will be a natural
equilibrium with respect to software complexity.
Many current processes for capturing and managing innovation and its associated
intellectual property are surprisingly archaic. Some help companies decide early on (prior to
significant investment) which assets to focus on - and, importantly, which assets to discard.
This saves money once earmarked for those irrelevant technologies, but also produces a byproduct
of focus and corporate alignment for priority technologies. Benefits seen through
a successful innovation management program include early "kill" decisions, overall better
record management, better overall company understanding of corporate direction, cultural
improvement, better corporate compliance, governance and accounting of intangible assets
and more effective utilization of intangibles in the commercialization process.
Leading companies have moved to advanced levels of innovation asset management
deploying true multidisciplinary approaches, incorporating business, legal and technological
views into the commercialization process at the earliest relevant moments. Many desire
a system that is capable of expanding across their enterprise, and that can handle the complex
business processes associated with orchestrating the innovation process from unmet market
needs to breakthrough products.
A successful system, capable of handling those business processes, must incorporate
software, methodology and approach, and be able to provide companies with an upfront
understanding of opportunity areas, enabling refined workflow, capture, catalogue and
evaluation of innovation assets, incorporating all relevant views (i.e., legal, technological and
business) into the process. The result is better overall understanding of innovation assets of all
types, properly catalogued, valued and propagated downstream into established
commercialization and IP docketing processes.
Innovation is traditionally related to products and processes. This is "new technology".
New technology disrupts traditional business models, machineries and a trained workforce.
Any innovation, gadget or contrivance can turn in to disruptive technology if it has the
following basic qualities.
 It expands the scope of operations at negligible cost.
 Common employees can comfortably use the technology with nominal training.
 It cuts down cost, efforts, time and/or all three involved in performance of any
remunerative activity.
 Inputs required to implement the technology are available abundantly at low cost.
 It is difficult to patent the technology.
Any new technology with any one of the above attributes can disrupt existing systems.
Any technology that bears all these attributes is highly disruptive.
Innovation has no bar in time and place. It can transform anything at any time. It can
upset centuries old traditions in one single stroke of intellectual application. Innovative
thinking is a genetic inheritance, which cannot be learned. An innovative person is always
12 Innovations in the Small Business
- 194 thinking
of doing something new or doing it in new manner. If he has resources to implement
his thinking he will do so, else he will wait until he gets those resources. The intellectual
process involved in innovation may be complete; resource constraint may compel it to be
implemented at later date. Resource allocation fuels innovation during boom times. Survival
instinct fuels innovation in doom times.
Broad level innovation can be classified in three categories.
 Expected innovation. This is something that everyone wants. We want a cure for
Aids, we want a substitute for fossil fuels, etc., etc., these innovations are project
specific. There is conscious allocation of specific resources and definite period to
complete it. We are aware of it and we are prepared for it. Boom times fuels this
type of innovation.
 Unexpected innovation. When normal processes go haywire, a normal person will
take steps to bring them to normalcy. An alert and flexible mind can spot
implication of abnormal processes and define how they can be advantageous in
a different context. Chance impurities in chemical process can lead to the synthesis
of new product, which may have value in different application. Lots of innovation
has come thru analysis of waste realized from misfired processes.
 Innovation in process of evolution. Each product or process is not complete and
appropriate at all times. As time marches on, environment changes, market
requirements alter, processes demand change etc., etc. Each product and process has
to evolve to survive and fulfil the market demands. This evolution is possible thru
innovation in product design and process parameter.
Innovation in all three categories has drastic implications for entrepreneurs. It sends
traditional products and services into oblivion, plant and machinery becomes redundant,
technology becomes outdated, work force becomes useless and highly profitable enterprise is
faced with red balance sheets.
This does not mean innovation is bad. It spells doom for those who are not innovative
themselves. When scientists and technologists burn candles to innovate products and
processes; an entrepreneur has to burn his candles to innovate management practices. Luckily,
innovation in management practices can be learned. All you have to do is change the mindset
- your own mindset and that of everybody in the organization, right from peon to the
managing director.
Successful implementation of innovative management practices can help an enterprise
to change and effectively exploit opportunities created by new technology to mint money.
Innovation in management of business includes:
 Definition of new application of existing products and services offered by the
company. Effectively this implies innovation of new market segment.
 Definition of new application of existing resources. The men, machine, material
and technology can be effectively redeployed to gainful purposes.
 Definition of probable new application to which existing resources can be applied
with slight modification to enhance returns.
12.1 PROTECTION OF INNOVATION
The inability of competitors to imitate a strategic resource is a key to leveraging the
resource to achieve long–term competitive advantages. Companies are clever, and effective
imitation is often very possible. However, resources that involve intellectual property reduce
or even eliminate this risk. As a result, developing intellectual property is important to many
organizations.
Jarmila Šebestová; Entrepreneurship
- 195 Intellectual
property refers to creations of the mind, such as inventions, artistic products,
and symbols. The four main types of intellectual property are patents, trademarks,
copyrights, and trade secrets. If a piece of intellectual property is also valuable, rare, and no
substitutable, it constitutes a strategic resource. Even if a piece of intellectual property does
not meet all four criteria for serving as a strategic resource, it can be bundled with other
resources and activities to create a resource.
A variety of formal and informal methods is available to protect a firm’s intellectual
property from imitation by rivals. Some forms of intellectual property are best protected by
legal means, while defending others depends on surrounding them in secrecy
DEFINITION 18 PATENTS
Patents34
are legal decrees that protect inventions from direct imitation for a limited
period. Obtaining a patent involves navigating a challenging process. To earn a patent from
the US Patent and Trademark Office, an inventor must demonstrate than an invention is new,
no obvious, and useful. If the owner of a patent believes that a company or person has
infringed on the patent, the owner can sue for damages. Patents can be renewed for
a maximum of 20 years.
DEFINITION 19 TRADEMARKS ®, ™
Trademarks ®,™are phrases, pictures, names, or symbols used to identify a particular
organization. Trademarks are important because they help an organization stand out and build
an identity in the marketplace. Some trademarks are so iconic that almost all consumers
recognize them, including McDonald’s golden arches, the Nike swoosh, and Apple’s outline
of an apple. Trademarks have to be renewed every 10 years.
Trademarks are important to colleges and universities. Schools earn tremendous sums of
money through royalties on T-shirts, sweatshirts, hats, backpacks, and other consumer goods
sporting their names and logos. On any given day, there are probably several students in your
class wearing one or more pieces of clothing featuring your school’s insignia; your school
benefits every time items like this are sold.
DEFINITION 20 COPYRIGHTS ©
Copyrights © provide exclusive rights to the creators of original artistic works such as
books, movies, songs, and screenplays Sometimes copyrights are sold and licensed. Copyright
does not protect ideas. The work must be fixed (e.g. written or recorded). There is no official
registration system for copyright. It is an automatic right. A Copyright work could be marked
with ©, the owner's name, and the year it was created.
DEFINITION 21 TRADE SECRETS
Trade secrets refer to formulas, practices, and designs that are central to a firm’s
business and that remain unknown to competitors. Trade secrets are protected by laws on
theft, but once a secret is revealed, it cannot be a secret any longer. This leads firms to rely
mainly on silence and privacy rather than the legal system to protect trade secrets.
34
Intellectual Property Office - Trade marks. [online] [Accessed: 23 Nov 2013]Available at:
http://www.ipo.gov.uk/types/tm.htm
12 Innovations in the Small Business
- 196 DEFINITION
22 REGISTERED DESIGN
A Registered Design grants exclusive rights in the look and appearance of your product.
You can stop people making, offering, putting on the market, importing, exporting, using or
stocking for those purposes, a product to which your design is applied.
It looks very simple in theory, but it is very difficult to implement in practice. Just as "if
someone invents a car to move from place to place, you don't flog your horse to beat the car.'
That way your horse will probably die and you have to walk on foot. The smart thing to do is
to sell your horse and something else along-with it at first available chance to buy a car". This
applies to everything that an enterprise does. Nobody can change equipments, systems and
work force overnight. The process has to be gradual. This is where innovative management
practices are most effective.
Innovation is the implementation of a new or significantly improved idea, good, service,
process or practice that is intended to be useful. Scholars who have studied innovation
generally differentiate among five main types of innovation: product innovation, process
innovation, organizational innovation, marketing innovation and business model innovation.
SOLVED EXERCISE 6 LEGO COMPANY
LEGO35
– the well-known children’s building system – has been around for a long time
and, in an age when new toys come and go with astonishing rapidity and technology-based
toys like video games; are reaching astonishing heights of sophistication, it might be difficult
to understand the enduring market appeal of these basic building blocks. Well the answer is
that LEGO has changed with the market and the company, currently owned by the founder’s
grandson Kjeld Kirk Christiansen, continues to invest large sums around the world to
understand changes in children’s tastes and to explore new product developments based
around its mission ‘to inspire children to explore and challenge their own creative potential’.
Concept and product development take place primarily at the Concept Centre within the
company’s headquarters in Billund. This creative core is made up of 120 designers
representing about 15 nationalities, most of who trained at art school. The company also has
what it calls ‘listening posts’ – otherwise known as Concept Labs – in Munich, Barcelona,
Los Angeles and Tokyo. At these Labs children from four very different countries are
encouraged to try out different combinations with the same LEGO pieces and create worlds of
their own, which the company can incorporate into its ‘play themes’. The Labs try to
spottrends in children’s play, to understand the motivations behind this and to translate them
into what it means for the company and new product development – effectively trying to
understand systematically children’s creativity by observing them at play. The Labs also take
an active role in the product concept and early development phase of any new product.
1 Why is innovation important to each of these companies?
2 How do they link creativity and innovation with market opportunities?
3 What are the lessons for a start-up business?
Possible answer:
1. Innovation is important to all three firms but for different reasons. Lego needs to
innovate to keep abreast of how children play. This helps them influence their marketing (just
look at the web site to see how they ‘suggest’ children might play with their products) and
their product development.
2. This is a very difficult question with no easy, straightforward answer. Only the
issues can be explored with these three mini cases. Lego links creativity and innovation with
35
Burns, P.,2011.
Jarmila Šebestová; Entrepreneurship
- 197 developments
in the market place. Lego observe how children play with their products. They
use the creativity of some children to develop ‘play themes’ and to pass these on to others
about how they might use Lego – go to the web site. They also use children to both see
opportunities to develop new products, understanding children’s motivations about how the
product is used, sometimes unsuccessfully, by children to play games and to try out new
products Lego have developed.
3. These are enduring big firms. Lego spends a lot of time observing children at
play, understanding their motivations, trying to spot new trends. They stay close to their
customer.
12.2 INNOVATION MANAGEMENT
Innovation management is an important part of growing your business. You need to
understand the specific techniques and strategies that you can implement to get the most out
of your innovation activities.
 Scanning the Market
Market scanning refers to recognising emerging or future markets, analysing your own
target market for changes and looking for commercial opportunities. Market scanning not
only helps you to identify opportunities, but to recognise also the potential threats to your
business.
 Research and Development Managing Innovation
Research and development plays a key role in the innovation process for many
organisations.
1. Research - a systematic approach to gaining new knowledge or building a better
understanding of concepts.
2. Development - the process of applying and using the research and knowledge
to generate new ideas that can be applied in the market.
Research and development plays an important part in gaining a competitive advantage.
Without investing in some form of R&D, you are relying on others to come up with new
ideas, new products and new technology. This puts your organisation at a disadvantage as you
are forever playing catch up with your competition, merely copying what works and not being
a leader in your field.
 Managing Innovative Projects
The effective management of an innovative project is crucial to its success. A good
manager will be able to take good ideas forward and work with the team to develop a product
with market potential. Even a great idea will fail to reach ever its potential if each stage of the
innovation process is not managed in a coordinated manner.
Effective management of innovative projects involves:
 Identifying processes and policies that your team can follow when implementing
ideas.
 Developing a work plan for every project and implement procedures to work
within specified periods.
 Developing budgets and constraints to control costs and resources.
 Efficiently utilising resources and delegating tasks effectively to ensure the skills
and experience of your team are utilised to maximum effect.
Jarmila Šebestová; Entrepreneurship
- 198 -
SUMMARY
In recent decades, the role of entrepreneurs has been considered of very great
significance in accelerating the pace of growth and economic development in both developed
and developing countries. An entrepreneur is a person who perceives opportunities, organises
the resources needed to develop the opportunity and sets up an enterprise. The process of
setting up an enterprise is called entrepreneurship.
An enterprise is a business venture. It is an undertaking that involves uncertainty and
risk as well as innovation. An individual has the right to choose any income generating
activity or self-employment or entrepreneurship as a career option. Functional income
generating and self-employment activities are the initial stages of entrepreneurship.
The most important functions of an entrepreneur are innovation, risk and uncertainty
bearing and organisation building. An entrepreneur usually has to perform all the functions of
production, marketing, finance, human relations etc. particularly at the time of the start-up and
establishing the enterprise.
After studying this textbook, you will not have obtained a set of instructions on how to
secure the success of your business plan, but you will have learned how to eliminate potential
problems in your future business and how to discover these problems.
Secondly, you will understand the uniqueness of small businesses and their dominant
position in the labour market. You will learn the initial steps of opportunity evaluation before
you decide to start up a business.
Finally you will understand that external and internal factors exist which have an
influence on the business. The decisions in the case of retail or wholesale businesses are also
different. When you establish a business, the motivation is to ensure your business grows. It is
important to recognize the lifecycle of your business and prevent any future crisis by
preparing a proper strategy and business model.
Jarmila Šebestová; Entrepreneurship
- 199 THE
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Jarmila Šebestová; Entrepreneurship
- 203 ENCLOSURE
NO. 1 DETERMINE YOUR EQ
(ENTREPRENEURIAL QUOTIENT)36
Definition: An "EN-TRE-PRE-NEUR" is an individual who creates, develops, and
manages a business venture, with personal risk, for a potential profit.
Description: The EQ, more commonly known as the Entrepreneur Quotient, is a selfdirected
learning tool. It is not a test, but rather a method by which an individual can compare
his or her own personal characteristics with those of successful entrepreneurs.
Instructions: Answer each question to the best of your ability. There is no time limit.
Correct answers are given to each question to further stimulate your interest.
Interpretation: Remember, this is not a test. If you cannot answer any of the questions,
do not be alarmed. You can learn to be an entrepreneur. For those individuals who prefer
a scoring format, the procedure below provides rough guidelines.
1. As a child, did you have a paper route, sell candy or magazine subscriptions, or shine shoes
for money? Yes ___ No ___
2. Did you come from a family that owned a business? Yes ___ No___
3. Do you have a relative who is in business? Yes ___ No ___
4. Have you ever worked for a small firm where you had close contact with the owner?
Yes ___ No___
5. Are you between the ages of 16 and 44? Yes ___ No ___
6. Have you ever worked for a large company where you worked closely with a top manager?
Yes___ No___
7. Have you ever been fired from a job? Yes ___ No ___
8. Do you have experience in organization, planning, budgeting, personnel, marketing,
advertising, administration, or evaluation? Yes___ No___
9. If you are married, is your spouse supportive of the personal and financial risks involved in
starting a business? Yes___ No___
10. Do you have a library of "self-help" success books? Yes ___ No___
11. Are you respected by your peers at work and by your friends in other areas of your life?
Yes ___ No___
12. Are you inquisitive, inventive, creative, innovative, and aggressive? Yes___ No___
13. Do you enjoy solving problems? Yes ____ No ____
14. Would you rather be your own boss? Yes ___ No ___
15. Do you like to make things happen? Yes ___ No ___
16. Do you enjoy taking personal and financial risks? Yes ___ No ___
17. Were you a first-born child in your family? Yes ____ No ____
18. Are you male or female? Male ___ Female ___
19. Are you married or single? Married ___ Single ___
20. Do you consider yourself a free and independent spirit? Yes___ No___
21. Do you have a high need for achievement? Yes ___ No ___
22. Did you have a good relationship with your father? Yes___ No___
23. Small businesses employ more than 50 percent of the work force, generate 50 percent of all
new jobs, and account for 44 percent of the gross national product. True ___ False ___
24. Do you take rejection personally? Yes ___ No ___
25. Do you like to move around a lot? Yes ____ No ___
26. Is it true that entrepreneurs make good managers? Yes ____ No____
36
Based on Kuratko, 2009, chapter 2
Jarmila Šebestová; Entrepreneurship
- 204 -
27. To be a successful entrepreneur, an individual needs a lot of good luck. True____ False___
28. Successful entrepreneurs often use the advice of expert outside consultants.
True___ False____
29. Do you believe that you can control your own destiny? Yes___ No____
30. Are you a consistent goal setter and a results-oriented individual? Yes___ No____
31. Have you ever been forced to move, gone through a divorce, or suffered a death of a spouse
or parent? Yes___ No___
32. Do you have specific experience in the area of business you plan to go into? Yes___ No___
33. Personal savings is the most important source of start-up funds for entrepreneurs.
True___ False___
34. Do you have managerial skills? Yes ___ No ___
35. Are you willing to work longer hours for the same salary you now make? Yes___ No___
36. Do you have a college degree or special skills and knowledge from a vocational or technical
school? Yes___ No___
37. Do you know how to raise money for starting a business? Yes___ No___
38. Do you like people? Yes ___ No ____
39. Can you make quick decisions? Yes ___ No ___
40. Do you have a high energy level? Yes ___ No ___
41. Do your friends and acquaintances place a great deal of faith and trust in you? Yes___ No___
42. Do you follow through with implementation when a decision has been made? Yes___ No___
43. Do you believe in your own power to accomplish goals? Yes___ No___
44. Are you willing to change your negative habit patterns? Yes___ No___
45. Do you have high moral and ethical standards? Yes ____ No ____
46. Do you have a good idea or product and/or know how to get one? Yes___ No ___
47. Do you know how to tap the power of your subconscious mind? Yes___ No___
48. Are you dedicated and committed to being in business for you? Yes ___ No ___
49. Do you know how to develop a business plan for presentation to a group of investors?
Yes___ No___
50. Can you inspire and motivate other individuals? Yes ____ No ____
51. Do you know how to use radio, TV, direct mail, and space advertising? Yes___ No___
52. Do you know what the four Ps of marketing are? Yes ___ No ___
53. Are you familiar with the OPM (Other People Money) principle? Yes ___ No ___
54. Do you know how to multiply your talents? Yes ___ No ___
55. Do you know how the 20/80 rule affects success? Yes ____ No ____
56. Have you ever assessed your personality characteristics? Yes ___ No ____
57. Have you ever determined your net worth? Yes ___ No ____
58. Do you know what the 12 laws of universal success are? Yes___ No___
59. Have you ever explored your career potential? Yes ___ No ___
60. Do you believe in the power and success of self-directed learning? Yes___ No___
61. Do you wake up happy 99 percent of the time? Yes ___ No ___
62. Do you provide a period during each day for thinking, studying, planning, or relaxation?
Yes___ No___
63. Do you consider yourself ambitious? Yes ___ No ___
64. Do you enjoy power, control, and authority? Yes ___ No ___
65. Would you be willing to quit your job today and start at the bottom? Yes___ No___
66. Do you know how to determine the "break-even" point? Yes___ No___
67. Do you know what motivates customer behaviour and buying habits? Yes___ No___
68. Student organizations such as ATA, VICA, DECA, FFA, and others help students learn
about entrepreneurship. True___ False___
69. Do you know where to get information on franchising? Yes___ No___
Jarmila Šebestová; Entrepreneurship
- 205 -
70. Do you know the rules of buying an existing business? Yes___ No___
71. Are you willing to follow a proven success system even if it differs from yours?
Yes___ No___
72. The National Federation of Business is the largest small business organization in the United
States. True___ False___
73. Can you accept failure without admitting defeat? Yes ___ No ____
74. Do you know how to project cash flow? Yes ___ No ___
75. Do you know how to read a balance sheet and profit and loss statement? Yes___ No___
76. Are you familiar with the current business and tax laws? Yes___ No___
77. Are you familiar with the laws affecting recruitment and selection of personnel?
Yes___ No___
78. Do you know, or are you willing to learn, how to sell? Yes__ No___
79. Do you consider yourself enthusiastic, imaginative, and tenacious? Yes___ No___
80. Are you willing to participate in both the profits and losses of a business? Yes___ No___
81. Do you know how to protect your ideas from thieves? Yes___ No___
82. Do you have a savings account? Yes ___ No ___
83. Are you familiar with the principles of bartering? Yes ___ No ___
84. Are you familiar with the rules and laws pertaining to investments? Yes___ No___
85. Are you familiar with the 30,000 occupational titles in the United States? Yes___ No___
86. Do you know how to get free publicity for your product or service? Yes___ No___
87. Are you dissatisfied with your present employment or schoolwork? Yes___ No___
88. Women entrepreneurs represent about 7 percent of all self-employed. True___ False___
89. Minority entrepreneurs represent about 5.5 percent of all self-employed. True___ False___
90. On the average, incorporated self-employed persons make more than self-employed
proprietors do. True___ False___
91. On the average, women entrepreneurs make less than men do. True___ False___
92. Do you know where to find business and operating ratios for specific industries?
Yes___ No___
93. Are you familiar with the differences between a general corporation, partnership and
proprietorship? Yes___ No___
94. Do you know how to find adult training programs in entrepreneurship? Yes___ No___
95. Are you familiar with the services offered by the SBA? Yes___ No___
96. Are you familiar with the services offered by the Minority Business Development Agency
and the Minority Business Development Centres? Yes___ No___
97. Are you familiar with federal government contracting and R&D monies available to small
business? Yes___ No___
98. If you are a parent or teenager, are you familiar with entrepreneur programs available in high
schools and colleges? Yes___- No___
99. Are you familiar with business control systems such as accounting, record keeping,
financial analysis, bookkeeping, profit centre, collections, forecasting, and so on?
Yes___ No____
100. Do you know the secrets of working with bankers, accountants, and attorneys?
Yes___ No____
101. The failure rate of most small-business start-ups is about 80 percent within the first three
years.True___False___
102. Immigrants have a high rate of entrepreneurship in the United States. True___ False___
103. More than 90 percent of all businesses in the United States are small, employ fewer than 20
persons, and are organized as sole proprietorships. True___ False__
Jarmila Šebestová; Entrepreneurship
- 206 Correct
Answers
1.Yes 12. Yes
23. True 34. Yes 45. Yes 56. Yes 68. True 80. Yes 92. Yes
103. True
2. Yes 13. Yes 24. No 35. Yes 46. Yes 57. Yes 69. Yes 81. Yes 93. Yes
3. Yes 14. Yes 25. Yes 36. Yes 47. Yes 58. Yes 70. Yes 82. Yes 94. Yes
4. Yes 15. Yes 26. No 37. Yes 48. Yes 60. Yes 71. Yes 83. Yes 95. Yes
5. Yes 16. Yes 27. True 38. Yes 49. Yes 61. Yes 72. True 84. Yes 96. Yes
6. Yes 17. Yes 28. True 39. Yes 50. Yes 62. Yes 73. Yes 85. Yes 97. Yes
7. Yes 18. Either 29. Yes 40. Yes 51. Yes 63. Yes 75. Yes 86. Yes 98. Yes
8. Yes 19. Either 30. Yes 41. Yes 52. Yes 64. Yes 76. Yes 87. Yes 99. Yes
9. Yes 20. Yes 31. Yes 42. Yes 53. Yes 65. Yes 77. Yes 88. True 100. Yes
10. Yes 21. Yes 32. Yes 43. Yes 54. Yes 66. Yes 78. Yes 90. True 101. True
11. Yes 22. Yes 33. True 44. Yes 55. Yes 67. Yes 79. Yes 91. True
102. True
Correct Number:
100 If you are not already an entrepreneur, you should be.
85 You are compatible. Get started.
70 You have potential. Study the rules.
55 You are behind, but you can still make it.
40 You do not seem to be interested, but that does not mean you cannot make it.
25 You still have a chance. Go for it.
0 You're probably dead.
Jarmila Šebestová; Entrepreneurship
- 207 ENCLOSURE
NO. 2 BUSINESS PLAN TEMPLATE
Table of
Contents
This section should: After reviewing this
section the reader
should (know):
Executive
Summary
 Be written last
 Provide an enthusiastic snapshot of your company,
 explaining who you are, what you do and why
 Be less than 2 pages
 Want to learn more about your business
 Have a basic understanding about your
company
Business
Description
& Vision
 Mission statement (business purpose)
 Company vision (statement about company
growth)
 Business goals and objectives
 Brief history of the business
 List of key company principals
 Mission statement (business purpose)
 Company vision (statement about
company growth)
 Business goals and objectives
 Brief history of the business
 List of key company principals
Definition of
the Market
 Describe your business industry and outlook
 Define the critical needs of your perceived or
existing market
 Identify your target market
 Provide a general profile of your targeted
clients
 Describe what share of the market you
currently have and/or anticipate
 Basic information about the industry
you operate in and the customer needs
you are fulfilling
 The scope and share of your business
market, as well as who your target
customers are
Description
of Products
and Services
 Specifically describe all of your products and
services
 Explain how your products and services are
competitive
 If applicable, reference a picture or brochure of
your products, which would be included in the
plan’s appendix
 Why you are in business
 What your products and services are
and how much they sell for
 How and why your products &
services are competitive
Organization
&
Management
 Provide a description of how your company is
organized as well as an organization chart, if
available
 Describe the legal structure of your business
(proprietorship, partnership, corporation, etc.)
 Identify necessary or special licenses and/or
permits your business operates with
 Provide a brief bio description of key managers
within the company
 The legal form of ownership for your
business
 Who the leaders are in your business
as well as thein roles
 The general flow of operations within
the firm
Marketing
and Sales
Strategy
 Identify and describe your market – who your
 customers are and what the demand is for your
 products & services
 Describe your channels of distribution
 Explain your sales strategy, specific to pricing,
 promotion, products and place (4Ps)
 Who your market is and how you will
reach it
 How your company will apply
pricing, promotion, product
diversification and channel
distribution to sell your products and
services competitively
Financial
Management
New Business
 Estimate of start-up costs
 Projected balance sheet (1 year forward)
 Projected income statement (1 year forward)
 Projected cash flow statement (12 months
forward)
Existing Business
 Balance sheets (last 3 years)
 Have a good understanding regarding
the financial capacity and/or
projections for your company
Jarmila Šebestová; Entrepreneurship
- 208 
Income statements (last 3 years)
 Cash flow statement (12 months)
If Applying for a Loan
 Current personal financial statement on each
principal
 Tax return for prior year
Appendices Include:
 Company brochures
 Resumes of key employees
 List of business equipment
 Copies of press articles and advertisements (if available)
 Pictures of your business location and products (optional)
 Information supporting the growth of your industry and/or products (optional)
 Key business agreements, such as lease, contracts, etc. (optional)
Source: SBA.gov,2011. How to Write a Business Plan . [online] [Accessed: 3 Oct 2013]. Available at:
http://www.sba.gov/category/navigation-structure/starting-managing-business/starting-business/writing-business-plan
Jarmila Šebestová; Entrepreneurship
- 209 ENCLOSURE
NO. 3 EXAMPLE OF REAL BUSINESS PLAN
This business plan is for company development. Source: Cadden and Lueder,2008, pp.870-898
FRANK’S BARBEQUE
EXECUTIVE SUMMARY
Frank’s BarBeQue has operated for decades
in the southern Bavaria, Germany shore region.
With a tradition of superlative food at fair prices
served in a family-friendly atmosphere, the owners
now believe it is time to open a second restaurant
and expand the production and the distribution of
Frank’s signature barbecue sauces. This second
restaurant will be in Darien, Bavaria, Germany, and
will be nearly twice as large, in terms of seating
capacity, as the current Rosenheim restaurant. The
company also plans to ramp up production of its
sauces and increase their sales fourfold in the next
three years.
Objectives
The owners of Frank’s BarBeQue and other
investors plan to put €160,000 of their own money
into the second restaurant and expand the
production of the signature sauces. They seek to
raise an addition €175,000 from a bank loan that
will be repaid in two years.
BUSINESS DESCRIPTION & VISION
Vision Statement
To produce the best barbecue food in the
southern Bavaria (Germany).
Mission Statement
The mission of Frank’s BarBeQue is to provide
the southern Bavaria, Germany shore region with the
finest barbecue food in four major regional styles at
affordable prices in a family-friendly setting. As we
grow, we will never forget and remain faithful to those
factors that have made us a success.
Keys to Success
Frank’s BarBeQue has been in business for
nearly forty years. It has weathered good times and
bad times through all types of economic conditions.
We have survived because Frank’s has remained
committed to several principles.
The only objective of a restaurant is to serve
the finest food it can prepare. Good food—not more
gimmicks or advertising—brings in customers and,
more importantly, keeps customers. Preparing the
finest foods means a commitment to excellence,
which means obtaining the best ingredients and
a dedication to cooking barbecue properly, which
means cooking carefully and slowly.
In addition to providing the finest food, we
remain committed to providing excellent service.
To means friendly, this knowledgeable staff
members and us who make the customers feel like
they are dining with family. We provide the right
atmosphere. Our goal is to have a setting that says
“barbecue.” We do not provide a fancy setting; our
basic setting complements the food we serve.
Company Summary
Frank’s BarBeQue has been a highly
successful restaurant in Rosenheim, Bavaria,
Germany, for nearly forty years. It was started and
is still managed by Frank Rainsford. Its food and
sauces have won awards at both regional and
national barbecue cook-offs. In addition, Frank’s
has been voted the best barbecue establishment in
Bavaria, Germany numerous times by many local
newspapers and magazines.
The management team of Frank’s BarBeQue
has decided that now is the time to expand to an
additional location. After careful analysis, a second
Frank’s BarBeQue can and should be opened in
Darien, Bavaria, Germany. This restaurant will be
larger and geared to tap better into the growing
premade, take-home dinner market.
In the last few years, Frank’s has been
selling its four signature barbecue sauces—Beccy
and Carolina in local supermarkets. Although this
represents a small portion of overall revenues, sales
have been growing at a remarkable pace. This
market must be exploited. Preliminary market
research indicates that this segment of the business
will grow at 20 percent per year for the next five
years.
Company Ownership
Presently, Frank’s BarBeQue is a limited
liability partnership with Frank Rainsford and his
wife Betty as owners. Each has a 50 percent share
in the business.
The plans for expansion will bring in capital
from three other investors: Robert Rainsford, Susan
Rainsford Rogers, and Alice Jacobs. Robert
Rainsford and Susan Rainsford Rogers are the son
and daughter of Frank and Betty. Both have
extensive work experience at Frank’s. Alice Jacobs
has been the restaurant’s accountant for over twenty
years. To assist the financing of the expansion,
Robert Rainsford and Susan Rainsford Rogers will
each invest €50,000, while Alice Jacobs will invest
€60,000. The new limited liability partnership will
result in the investors holding the following equity
percentages:
Jarmila Šebestová; Entrepreneurship
- 210 Frank
Rainsford 40.00%
Betty Rainsford 40.00%
Robert Rainsford 6.25%
Susan Rainsford Rogers 6.25%
Alice Jacobs 7.50%
Company History
Frank’s BarBeQue was founded in 1972 by
Frank Rainsford. Although a native Englander,
Frank learned about cooking barbecue while
serving in the US Air Force. During his twelve
years of service, he learned about the four major
styles of American barbecue-Texas, Memphis,
Kansas City, and Carolina. His plan was to
introduce people in southern Bavaria, Germany
to real barbecue that entailed high-quality meats
properly cooked and smoked over an appropriate
length of time.
In the beginning, Frank’s BarBeQue was
a small facility; it could seat about thirty people. It
was located near the Rosenheim railroad station and
was the first full-service barbecue restaurant in
Rosenheim. Frank’s placed an emphasis on
featuring the food; it had a highly simplified decor
where the tables were covered with butcher paper,
not linen tablecloths. The restaurant was an
immediate hit, received considerable local press,
and won several food awards. This success enabled
Frank’s to move to a larger facility in Rosenheim
on the town’s main thoroughfare Rosenheim Post
Road. The new location was a midsize restaurant of
about eighty seats. Frank has built this location into
a relatively successful and locally well-known
enterprise. It has been at the present location since
the early 1980s. It shares a parking lot with several
other stores in the small mall in which it is located.
Frank’s has won many awards at regional
and national barbecue cook-offs (for both the food
and the sauces), which is unusual for a barbecue
business in southern Bavaria. The restaurant has
been written up, repeatedly, in the local and
German newspapers for the quality of its food and
its four signature barbecue sauces. In the last few
years, Frank’s has sold small lots of these sauces in
local supermarkets. They have been distributed
because of Frank’s personal connections with the
store managers. Frank Rainsford has been
approached by a major regional supermarket to sell
his sauces. The supermarket is willing to find
a facility that could produce Frank’s sauces in
significantly larger volumes, which would represent
a substantial increase in the sales of sauces.
Table Past Performance of Frank’s
BarBeQue" provides a summary of key financial
figures for the last three years-2008 to 2010.
Past
Performance 2008 2009 2010
Sales €1,637,610 €1,696,564 €1,793,268
Gross margin €851,557 €909,358 €943,259
Gross margin % 52.00% 53.60% 52.60%
Operating
expenses €542,080 €577,315 €600,408
Inventory
turnover 13.20 12.10 12.90
Balance Sheet 2008 2009 2010
Current Assets
Cash €102,665 €125,172 €102,665
Inventory €391,238 €331,045 €345,678
Other current
assets €278,372 €230,074 €278,372
Total current
assets €772,275 €686,291 €726,715
Long-Term Assets
Long-term assets €504,580 €388,820 €423,675
Accumulated
depreciation €180,856 €135,739 €145,765
Total long-term
assets €323,724 €253,081 €277,910
Total assets €1,095,999 €939,372 €1,004,625
Current Liabilities
Accounts
payable €155,534 €132,206 €145,321
Current
borrowing €170,000 €150,000 €135,000
Other current
liabilities
(interest free) €81,888 €63,972 €74,329
Total current
liabilities €407,422 €346,178 €354,650
Long-term
liabilities €220,000 €190,000 €175,000
Total liabilities €627,422 €536,178 €529,650
Paid-in capital €75,000 €75,000 €75,000
Jarmila Šebestová; Entrepreneurship
- 211 -
Retained
earnings €281,838 €234,377 €287,114
Earnings €111,739 €93,817 €112,861
Total capital €468,577 €403,194 €474,975
Total capital and
liabilities €1,095,999 €939,372 €1,004,625
Other Inputs
Payment Days 30 30 30
DEFINITION OF THE MARKET
Company Locations and Facilities
Frank’s BarBeQue has been in Rosenheim,
Bavaria, Germany, for decades. It has a reputation
throughout the southern Bavaria, Germany shore
region for excellent food and it has received
numerous awards. The management team
determined that a second location could tap into this
local name recognition. Several towns in the region
were evaluated for total population, population
density, family income, and home value. These
factors were considered because of their impact on
generating traffic and consumers being able to pay
for meals that are priced slightly higher than typical
fast-food outlets. In addition, the average family
size and the percentage of family households were
considered because Frank’s is a family restaurant.
Lastly, data were gathered on the average
travel time to and from work for residents and the
real estate tax rate. Because the new location of
Frank’s will emphasize prepared meals, we felt that
individuals with longer commutes would be more
likely to order meals and pick them up at Frank’s.
A summary of these data is provided in Table
"Demographic Data for Selected Bavaria, Germany
Towns—Part 1" and Table "Demographic Data for
Selected Bavaria, Germany Towns—Part 2".
After thorough analysis, it was concluded
that Darien, Bavaria, Germany, would be the best
location for the new branch of Frank’s BarBeQue.
It has a high-income population and a high
population density, and a large percentage of its
inhabitants are members of family households.
They have longer commuting times, which increase
the potential need for prepared meals.
Table Demographic Data for Selected Bavaria,
Germany Towns—Part 1
Item
Rosenhei
m Town 1 Town 2 Darien
Town
3
Populatio
n 57,578 25.884 7,383 19,375
83,80
2
Populatio
n density 1,917 1,293 269 1,508 3,675
Income €108,209 €155,322 €162,688
€180,47
4
€79,6
93
House
value €589,179
€1,169,0
81 €868,622
€1,430,5
89
€504,
100
Percenta
ge of
family
househol
ds 72.6% 74.6% 84.3% 81.7% 64.1%
Travel
time
(minutes) 31.3 39.4 34.8 36.4 25.4
Real
estate tax
rate 1.3% 0.9% 1.3% 0.8% 1.1%
Family
size 3.07 2.70 3.0 3.0 2.50
Jarmila Šebestová; Entrepreneurship
- 212 Table
Demographic Data for Selected
Bavaria, Germany Towns—Part 2
Item
Town 1 Town 2 Town 3 Town 4 State of
Bavaria,
German
y
Populatio
n 121,026 10,199 17,771 34,422
3,574,09
7
Populatio
n density 3,206 515 659 478
739/sq.
mile
Income €81,206 €190,080 €183,252
€103,01
9 €68,595
House
value
€612,90
0
€1,198,6
15
€1,044,3
16
€492,62
3
€306,00
0
Percentag
e of
family
househol
ds 63.8% 84.9% 82.3% 81.5% 67.7%
Travel
time
(minutes) 24.0 41.6 39.2 27.1
Real
estate tax
rate 0.7% 1.1% 1.2% 1.5% 1.8%
Family
size 2.50 3.0 3.25 2.80
A specific location has been identified in
Darien for the second Frank’s BarBeQue. It is in
a small mall and is large enough to have a seating
capacity of 150–160 plus takeout facilities. The
mall has, more than adequate parking for future
customers. The mall is located three blocks from
the railroad station and is four blocks from the
Darien I-95 exit. It is therefore well positioned to
attract traffic from both car and rail commuters. The
lease fee for a three-year contract is very reasonable
for a property of this size.
Market Analysis Summary
Since the 1930s, the German public has
spent at least 5 percent of its disposable income on
eating out. Even with annual fluctuations, this is
a strong indicator of the viability of this industry.
This can be illustrated by reviewing industry results
for the last few years.
Both 2009 and 2010 were difficult years for
the restaurant industry. In 2008, sales increased by
3.8 percent. However, sales fell by nearly 0.75
percent in 2009. This was the first year in the
history of the industry that sales actually
declined. The restaurant industry’s sales in 2009
were €566 billion, down from over €570 billion.
Prices rose by 2.2 percent in 2009. The increase in
sales for 2010 was 0.5 percent, and price increases
stabilized at 0.75 percent.
It is anticipated that there will be significant
price competition in every segment of the restaurant
industry. Some analysts argued that the poor
performances for the restaurant industry in both
2009 and 2010 could be attributed to declines in
both business and personal travel. Hotel occupancy
rates in 2009 were down by nearly 10 percent.
A study conducted by the National Restaurant
Association argued that 20 percent of the sales in
casual dining restaurants might be due to travellers
and visitors. Frank’s BarBeQue relies to a far lesser
extent on travellers as customers. A rough estimate
based on credit card receipts, for the period 2006–
2010, indicated that travellers represented less than
2 percent of Frank’s sales. The pressure on the
restaurant industry has been felt by many chain
restaurants, which significantly curtailed their
expansion plans.
Even though the recession was in full bloom
in 2009, many food prices rose significantly. Beef
prices rose between 4 percent and 12 percent, while
pork prices rose between 5 percent and 13 percent.
Numerous studies have indicated that the increase
in commodity prices will not be a transitory
phenomenon.
With 925,000 food service locations in
operation in Germany, this translates into 1
restaurant for every 330 Germans.
The Mintel Group, a market research firm,
found that consumers who are interested in quality
opt for independent restaurants over chain outlets.
An increasing consumer focus on health translates
into an emphasis on natural ingredients. In the
barbecue industry, this translates into naturally
raised meats (i.e., the avoidance of artificial growth
hormones in cattle), which are a hallmark of
Frank’s BarBeQue.
The National Restaurant Association
estimated that sales in full-service restaurants in
2010 would exceed €184 billion—an increase of
1.2 percent from 2009 sales.
Several macroeconomic factors make
opening a restaurant in Darien attractive, including
the following:
Increase in the growth domestic product
(GDP). The GDP is estimated to grow 1.7 percent
in 2011 and 1.5 percent in 2012. The estimates for
Rosenheim County are significantly higher.
Disposable personal income. The national
level of personal income should rise nearly 4
percent in 2011, and there is an expectation of 3
percent growth in 2012. These numbers appear to
be much stronger in the Rosenheim County area.
Although 2010 was not a banner year for the
restaurant industry—it was one where more
restaurants closed than opened each month—there
was one bright spot: Chain barbecue restaurants
Jarmila Šebestová; Entrepreneurship
- 213 grew
between 2 percent and 3 percent—an
auspicious sign even for independent operators.
The home meal replacement market and the
existing investment in restaurant equipment provide
a nice growth opportunity for restaurants. It is been
estimated that takeout sales in limited service chain
restaurants might be as large as 60 percent of total
sales. The same study found that takeout food has
been growing twice as fast as the overall restaurant
industry. Natural competitors in this market are
supermarkets that offer pre-packaged meals.
However, we feel that few—if any—supermarkets
provide the quality barbecue food that can be found
at Frank’s.
Market Segmentation
Frank’s BarBeQue views its major market
segment as suburbanites in the south shore region
of Bavaria, Germany. One way of further
segmenting the market is by the type of meal being
provided. Table "Market Analysis" provides
estimated growth rates for each type of meal (plus
sauce sales) and projected number of meals (and
jars of sauce) for the period 2011 to 2015.
Table Market Analysis
Potential
Customer
s
Growt
h 2011 2012 2013 2014 2015
Lunch 8% 17,0 18,2 19,6 21,11 22,70
Potential
Customer
s
Growt
h 2011 2012 2013 2014 2015
0 7 4
Dinner 5%
40,0
0
42,0
0
44,1
0 46,30 48,62
Takeout 20%
10,0
0
12,0
0
14,4
0 17,28 20,73
Sauces 15%
12,0
0
13,8
0
15,8
7 18,25 20,98
Total 9.37%
79,0
0
86,0
7
94,0
1
102,9
5
113,0
4
Market Needs
We believe that the market centres on
excellent barbecue food served at reasonable prices
and served in a family-friendly manner. We further
believe that a growing segment of the market will
want prepared meals that can be conveniently
picked up and served at home. Table "Market
Analysis" provides a projected breakdown of the
potential customers for the next five years. This
breakdown is predicated on the type of meals
served and includes the sale of sauces. We provide
estimated growth rates and forecasted sale of meals
(and bottles of sauces) for the period 2011 to 2015.
DESCRIPTION OF PRODUCTS AND SERVICES
Products and Services
Frank’s BarBeQue specializes in the finest
barbecue served in a family-friendly format. It uses
the finest cuts of meats that are free of any growth
hormones. It is known for a variety of slow-smoked
and slow-cooked meats, such as ribs, beef, pulled
pork, and chicken. These are served with Frank’s
famous and award-winning sauce varieties, which
represent the four major styles of barbecue cooking.
Frank’s is also noted for its side dishes and desserts.
Our goal is to expand operations to a second
location in Darien, Bavaria, Germany. This outlet
will be significantly larger and will have a section
devoted to takeout meals.
Competitive Comparison
There are approximately forty specialty
barbecue restaurants in Bavaria, Germany. They are
spread throughout the state, but only four (including
Frank’s BarBeQue) are in the southern shore
region. The three competitors are smaller
operations. None of the barbecue restaurants in
Bavaria, Germany has the history, reputation,
acclaim, or awards that match Frank’s BarBeQue. It
is not an exaggeration to say that Frank’s is the
preeminent barbecue restaurant in Bavaria,
Germany. It has a loyal following that reaches as
far as Munich.
Frank’s is the only barbecue restaurant in
Bavaria, Germany where supermarkets are vying
for the right to market Frank’s signature barbecue
sauces. This sideline business promises to be
extremely profitable and support the overall
marketing efforts for both locations of Frank’s
BarBeQue.
Fulfilment
Frank’s BarBeQue has always been
committed to providing the absolute best in
barbecue food. This has meant assuring the highest
quality ingredients in food preparation. Frank has
established a decades-long relationship with
suppliers in the Munich and Bavaria, Germany
areas. He selects nothing but the choicest selections
of beef, pork, and chicken. He has always made
sure that his meats come from suppliers who are
committed to quality ingredients and who never use
Jarmila Šebestová; Entrepreneurship
- 214 growth
hormones. This long-term relationship with
a variety of key suppliers enables Frank to secure
the best cuts at reasonable prices. Frank is equally
careful in using the finest spices for his barbecue
sauces. The same is true for all the side dishes that
Frank’s BarBeQue offers its customers.
This commitment to quality is not limited to
the selection of meats and ingredients. Frank and
his staff recognize that top-quality barbecue food
requires a knowledgeable and deep commitment to
cooking the food properly. All meats must be
cooked and smoked slowly. This requires time,
effort, expense, and commitment, but the results are
spectacular. Some cuts of meat at Frank’s may
require as many as eleven hours of preparation and
cooking. Excellence is not achieved without
a commitment to effort. This effort has been
recognized with numerous awards at national
barbecue cook-offs. Frank has clearly recognized
that the meal is clearly a function of the quality of
the meat, quality ingredients, and careful
preparation.
Future Products and Services
Frank’s BarBeQue is ready to accept new
challenges. Opening a second restaurant will
significantly increase sales, but the second location
is only the beginning of new directions for Frank’s.
Although Frank has been selling his regional
barbecue sauces in local outlets for years, he is now
ready to sign a contract with a major regional
supermarket chain to market and sell these sauces
throughout southern Bavaria. Preliminary studies
indicate that Frank can anticipate a 20 percent
annual growth rate in the sales of sauces for the
next five years.
With the growth of two-income families,
less and less time is available to prepare meals at
home. Recognizing this simple fact, Frank’s
BarBeQue plans to offer a variety of pre-packaged
barbecue meals that can be picked up at the
restaurant and reheated at home. As part of its new
commitment to a web-based presence, customers
will be able to order these meals by regular phone,
with Smartphone’s, or through the Internet.
Customers will be able to select from a list of prepackaged
dinner meals or any combination of
items. Customers can designate the time to pick up
the meals, and the meals will be ready for them.
This service promises significant revenue growth.
ORGANIZATION & MANAGEMENT
Currently, Frank Rainsford is the CEO and chief
operating officer of Frank’s BarBeQue. He is also
the restaurant manager at the Rosenheim restaurant.
During the week, his daughter (Susan Rainsford
Rogers) often replaces Frank as the restaurant
manager. The Rosenheim restaurant has a full-time
cook who operates under Frank’s supervision, and
two other full-time employees function as waiters
and waitresses. These full-time employees are
supplemented by six part-time employees.
Under the new management structure, Frank
Rainsford will hold the position of CEO. His wife,
Betty Rainsford, will be designated the president
and chief operating officer. Their daughter, Susan
Rainsford Rogers, will be given the title vice
president for operations. She will be responsible for
the day-to-day operations of the Darien, Bavaria,
Germany, and restaurant. Robert Rainsford will
have the title of vice president of marketing. He
will be responsible for all marketing activities and
the operation of the website. Alice Jacobs will be
the vice president of finance and the comptroller of
Frank’s BarBeQue.
Organizational Structure
The new management structure of Frank’s
BarBeQue is a basic functional layout appropriate
for this type of business and is shown in Figure
"Organizational Chart".
Figure Organizational Chart
Jarmila Šebestová; Entrepreneurship
- 215 Personnel
Plan
Table "Forecasts of Personnel" is a five-year
breakdown of the types and costs of personnel.
Personnel
Plan 2011 2012 2013 2014 2015
Cooks Personnel
Cook
(Rosenhei
m) €54,000 €54,600 €55,000 €55,500 €56,000
Cook
(Darien) €66,000 €66,000 €66,500 €67,000 €67,500
Subtotal
€120,00
0
€120,60
0
€121,50
0
€122,50
0
€123,50
0
Servers Personnel
Full-time
servers
(Rosenhei
m) €28,800 €28,800 €16,000 €17,500 €18,000
Full-time
servers
(Darien) €57,600 €57,600 €24,500 €25,000 €2,600
Personnel
Plan 2011 2012 2013 2014 2015
Part-time
servers
both
locations
€192,00
0
€192,00
0
€192,00
0
€192,00
0
€192,00
0
Subtotal
€278,40
0
€278,40
0
€232,50
0
€234,50
0
€212,60
0
General and Administrative Personnel
Restaurant
manager
(Rosenhei
m) €42,000 €42,000 €43,000 €43,500 €44,000
Restaurant
manager
(Darien) €54,000 €54,600 €56,000 €56,500 €57,000
Subtotal €96,000 €96,600 €99,000
€100,00
0
€101,00
0
Total
people 39 39 39 39 39
Total
payroll
€494,40
0
€495,60
0
€453,00
0
€457,00
0
€437,10
0
MARKETING AND SALES STRATEGY
Web Plan Summary
Presently, Frank’s BarBeQue has a very
simple website. The website provides minimal
information—listing some of the menu items and
the restaurant’s telephone number. A college
student, who was working at Frank’s, created it
eight years ago.
Robert Rainsford’s professional expertise is
in the area of website development. After
graduating from college, Robert was hired by a firm
that specialized in developing web and social media
presences for other companies. He worked for that
firm in New York City for seven years. Robert rose
rapidly through the company’s ranks, eventually
becoming one of its vice presidents. His expertise
in this area will enable Frank’s BarBeQue to
enhance significantly its web presence. Rather than
just having a website that identifies the restaurant’s
location and telephone number, along with a brief
summary of its menu, the new website will be far
richer in content and capability. It will provide
a complete menu listing, identifying all items with
corresponding images. The new website will enable
customers to place orders through the Internet for
lunch, dinner, or takeout items. The section devoted
to takeout items will enable a customer to purchase
prepared meals or choose from all items on the
menu to develop a pre-packaged meal. Customers
will be able to identify the time that they will arrive
for the pickup.
The website will have links to the Facebook
and Twitter accounts of Frank’s BarBeQue. These
connections will enhance its social media presence.
Customers will be asked to post comments about
their dining experience and suggestions on how
Frank’s can improve its operations and service. It
will enable Frank’s to expand operations and still
maintain the same close customer relationship that
currently exists at the Rosenheim restaurant.
Website Marketing Strategy
The new web presence for Frank’s
BarBeQue will be geared to developing a new level
of customer relationships. Customers at both
restaurants will be asked to fill out forms where
they will supply an e-mail address and a birthdates.
(This information can also be supplied through
Frank’s new website.) This information will enable
Frank’s to keep customers informed of specials and
offer coupons and the new rewards card program
for special occasions, such as holidays or birthdays.
We view the website of Frank’s BarBeQue
as a major component of enhancing our relationship
with our customers. It should provide convenience
to customers through their ability to see what is on
the menu, identify new specials, and order meals
and pick them up at their convenience. The use of
social media will expand awareness of Frank’s and
enable it to develop closer relationships with
present and future customers.
Jarmila Šebestová; Entrepreneurship
- 216 Development
Requirements
Robert Rainsford tapped into his expertise in
social media and has already developed a far more
sophisticated website for Frank’s BarBeQue. He
has secured the necessary server capacity to handle
additional traffic on the website. In addition, he has
set up several social media accounts for Frank’s
BarBeQue, including Facebook and Twitter. Robert
also created a program linked to a database that will
monitor customer purchases through the rewards
card program. This program will send out birthday
notices, discounts to customers, and will inform
them of their status in the rewards card program.
Robert contacted several former colleagues
at his former place of employment and has
identified several candidates for the role of website
manager. This individual will be responsible for
updating the website and the social media sites on
a daily basis. He or she will also be responsible for
analyzing the flow of information that comes
through these sites and preparing management
reports.
Strategy and Implementation Summary
The core strategy of Frank’s BarBeQue is to
continue what has made it a success at a new
location. Simply put, our strategy is to provide our
customers with the finest barbecue food in Bavaria,
Germany, at reasonable prices, in a family-friendly
environment. In addition, we hope to improve our
ability to meet customer needs by making life more
convenient for our customers. We believe that these
fundamentals are universally applicable.
SWOT Analysis
A strengths, weaknesses, opportunities, and
threats (SWOT) analysis was undertaken for
Frank’s BarBeQue (very simple; in real need to be
more detailed).
 Strengths
The key strength of Frank’s BarBeQue is the
quality of its food and service. It has been the
recipient of numerous local and national awards for
its foods and sauces. Other strengths include
a highly knowledgeable management team with
expertise in operating a barbecue restaurant, a close
working relationship with suppliers of premier cuts
of meats, and a loyal clientele in the south shore
region.
 Weaknesses
The weaknesses associated with this
business plan centre on operating an additional
restaurant with a much larger capacity than the
Rosenheim, Bavaria, Germany, and restaurant. The
second location will require an experienced
restaurant manager. This plan calls for a significant
increase in prepared (takeout) meals. Orders will be
placed either by phone or through the website.
Current personnel have little experience in
ratcheting up the takeout portion of the business.
 Opportunities
This business plan offers significant
opportunities for Frank’s BarBeQue. A second,
larger location will translate into a significant
increase in sales. Finalizing a business relationship
with the regional supermarket chain will enable
Frank’s to increase significantly the production and
the sales of its signature sauces. The sales of sauces
are expected to increase by 20 percent per year for
the next five years.
 Threats
Any expansion with the opening of a new
location always entails some risk. The principals of
Frank’s BarBeQue will be investing a significant
amount of capital and will be borrowing money
from a bank to open a second location. It is strongly
believed that the second location will capitalize on
the success of the Rosenheim restaurant and will
become a success.
Competitive Edge
The competitive edge of Frank’s BarBeQue
resides mainly in the quality of its food and its
commitment to serve the food in a family-friendly
environment. The quality of its food is unmatched
in the entire state. No other barbecue restaurant has
received the awards and the accolades that Frank’s
BarBeQue has received for the past forty years. Its
reputation for quality gives it an edge that no other
barbecue restaurant or chain can match.
Marketing Strategy
The target market for Frank’s BarBeQue is
essentially suburban families in the south shore
region of Bavaria, Germany. These people
appreciate the finest barbecue food at reasonable
prices. It is expected that an important group within
this target market will be families with two incomes
whose busy schedules would make prepared meals
a very attractive option. We further assume that this
market is technically sophisticated and will
appreciate the convenience of ordering these meals
via the Internet.
A key component of the marketing strategy
of Frank’s BarBeQue is to use the Internet and
technology to enhance the relationship with its
customer base. Frank’s will use the website,
Facebook, Twitter, and e-mails to inform customers
of special food items or discounts based on holidays
and customers’ birthdays. We intend to use the
website as a mechanism to gain an improved insight
into customer needs and wants.
Frank’s BarBeQue will also initiate
a rewards card program. Customers will sign up for
the rewards card program either at the two locations
or online. They can use this program every time
they make a purchase either at the restaurants or
online. After a set number of visits (seven),
customers will be entitled to either discounts or free
items. The rewards card program will enable
Frank’s BarBeQue to track customers’ buying
Jarmila Šebestová; Entrepreneurship
- 217 patterns
and anticipate the ways in which they can
better serve their customers.
Sales Forecasts
We provide a five-year forecast of the dollar
value of sales broken down by the two restaurants
and the sauces in Table "Sales Forecast".
Sales 2011 2012 2013 2014 2015
Frank’s
(Rosenhei
m)
€1,907,1
83
€1,954,8
63
€2,003,7
34
€2,053,8
27
€2,105,1
73
Frank’s
(Darien)
€2,222,0
00
€2,555,3
00
€2,810,8
30
€3,091,9
13
€3,401,1
04
Sauces €62,500 €75,000 €90,000
€108,00
0
€130,00
0
Total
sales
€4,191,6
83
€4,585,1
63
€4,904,5
64
€5,253,7
40
€5,636,2
77
Direct
Cost of
Sales 2011 2012 2013 2014 2015
Frank’s
(Rosenhei
m)
€953,59
4
€977,43
0
€1,001,8
67
€1,026,9
14
€1,052,5
87
Frank’s
(Darien)
€1,111,0
00
€1,277,6
50
€1,405,4
15
€1,545,9
57
€1,700,5
52
Sauces €31,250 €37,500 €45,000 €54,000 €64,800
Subtotal
direct cost
of sales
€2,095,8
44
€2,292,5
80
€2,452,2
82
€2,626,8
71
€2,817,9
39
FINANCIAL MANAGEMENT
Frank’s BarBeQue will be financing the
creation of a second restaurant through
a combination of private investment and a bank
loan. The private investment will raise €160,000,
and Frank’s will seek another €175,000 as a twoyear
loan. These funds will be used to pay for
equipment and leasing expenses associated with
opening a second restaurant.
Important Assumptions
The assumptions associated with the grow
rates of sales each year for the next five years are
the keys to the financial planning process. We
began with very modest assumptions of 8 percent
growth in lunch sales and 5 percent growth in
dinner sales. We anticipate vigorous growth in
takeout meals (20 percent) and sauces (15 percent).
Although these are large growth rates, we do not
feel that they are unrealistic.
Key Financial Indicators
Figure "Key Financial Indicators" provides
historical (2008–2010) and forecasted (2011–2015)
values for the key financial indicators.
Figure Key Financial Indicators
Breakeven Analysis
In Table "Breakeven Analysis" and Figure
"Breakeven Analysis", we show the results of our
breakeven analysis for Frank’s BarBeQue. The
results indicate that with sales of approximately
€110,000 each month, Frank’s BarBeQue will
break even.
Jarmila Šebestová; Entrepreneurship
- 218 Table
Breakeven Analysis
Monthly revenue €112,627
Assumptions
Average variable cost 50%
Estimated monthly fixed cost €56,313
Figure Breakeven Analysis
Projected Profit and Loss
Our analysis anticipates significant growth
in profits in the next five years with the opening of
a second Frank’s BarBeQue in Darien. The profit
margins should increase from in excess of €850,000
in 2011 to nearly €1,600,000 by 2015 and should be
in excess of 20 percent for all five years.
A complete analysis of the profit and loss
statements is in Table "Profit and Loss". The annual
profits are illustrated in Figure "Yearly Profits".
Table Profit and Loss
Pro
Forma
Profit
and Loss 2011 2012 2013 2014 2015
Sales
€4,191,6
83
€4,585,1
63
€4,904,5
64
€5,253,74
0
€5,636,
277
Direct
cost of
sales
€2,095,8
44
€2,292,5
80
€2,452,2
82
€2,626,87
1
€2,817,
939
Cooks
payroll
€120,00
0
€120,60
0
€121,50
0 €122,500
€123,5
00
Other
costs of
sales €0 €0 €0 €0 €0
Total cost
of sales
€2,215,8
44
€2,413,1
80
€2,573,7
82
€2,749,37
1
€2,941,
439
Gross
margin
€1,975,8
39
€2,171,9
83
€2,330,7
82
€2,504,36
9
€2,694,
838
Gross
margin % 47.14% 47.37% 47.52% 47.67% 47.81%
Pro
Forma
Profit
and Loss 2011 2012 2013 2014 2015
Operating Expenses
Servers
payroll
€278,40
0
€278,40
0
€232,50
0 €234,500
€212,6
00
Advertisi
ng/promot
ion €0 €0 €0 €0 €0
Other
servers
expenses €0 €0 €0 €0 €0
Total
servers
expenses
€278,40
0
€278,40
0
€232,50
0 €234,500
€212,6
00
Servers % 6.64% 6.07% 4.74% 4.46% 3.77%
General and Administrative Expenses
General
and
administr
ative
payroll €96,000 €96,600 €99,000 €100,000
€101,0
00
Marketing
/promotio
n €12,000 €0 €0 €0 €0
Depreciati
on €0 €0 €0 €0 €0
Rent
€180,00
0 €0 €0 €0 €0
Utilities €13,200 €0 €0 €0 €0
Jarmila Šebestová; Entrepreneurship
- 219 -
Pro
Forma
Profit
and Loss 2011 2012 2013 2014 2015
Insurance €22,000 €0 €0 €0 €0
Payroll
taxes €74,160 €74,340 €67,950 €68,550
€65,56
5
Other
general
and
administr
ative
expenses €0 €0 €0 €0 €0
Total
general
and
administr
ative
expenses
€397,36
0
€170,94
0
€166,95
0 €168,550
€166,5
65
General
and
administr
ative % 9.48% 3.73% 3.40% 3.21% 2.96%
Other Expenses
Other
payroll €0 €0 €0 €0 €0
Consultan
ts €0 €0 €0 €0 €0
Other
expenses €0 €0 €0 €0 €0
Total
other
expenses €0 €0 €0 €0 €0
Other % 0.00% 0.00% 0.00% 0.00% 0.00%
Total
operating
expenses
€675,76
0
€449,34
0
€399,45
0 €403,050
€379,1
65
Profit
before
interest
and taxes
€1,300,0
79
€1,722,6
43
€1,931,3
32
€2,101,31
9
€2,315,
673
EBITDA
(Earnings
Before
Interest,
Taxes,
Depreciati
on, and
Amortizat
ion)
€1,300,0
79
€1,722,6
43
€1,931,3
32
€2,101,31
9
€2,315,
673
Interest
expense €43,755 €34,995 €30,980 €30,980
€30,98
0
Taxes
incurred
€376,89
7
€506,29
4
€570,10
6 €621,102
€685,4
08
Net profit €879,42 €1,181,3 €1,330,2 €1,449,23 €1,599,
Pro
Forma
Profit
and Loss 2011 2012 2013 2014 2015
7 54 46 7 285
Net
profit/sal
es 20.98% 25.76% 27.12% 27.58% 28.37%
Projected Cash Flow
Table „Cash Flow Forecast" is a five-year
forecast of cash flows for Frank’s BarBeQue. The
forecast shows extremely strong and positive cash
flows for each year.
Pro Forma Cash Flow
Cash
Received 2011 2012 2013 2014 2015
Cash from Operations
Cash
sales
€4,191,
683
€4,585,
163
€4,904,
564
€5,253,
740
€5,636,
277
Subtotal
cash from
operation
s
€4,191,
683
€4,585,
163
€4,904,
564
€5,253,
740
€5,636,
277
Subtotal
cash
received
€4,366,
683
€4,585,
163
€4,904,
564
€5,253,
740
€5,636,
277
Expendit
ures 2011 2012 2013 2014 2015
Expenditures from Operations
Cash
spending
€494,4
00
€495,6
00
€453,0
00
€457,0
00
€437,1
00
Bill
payments
€2,500,
504
€2,911,
392
€3,085,
406
€3,338,
682
€3,587,
794
Subtotal
spent on
operation
s
€2,994,
904
€3,406,
992
€3,538,
406
€3,795,
682
€4,024,
894
Other
liabilities
principal
repaymen
t
€54,00
0
€54,00
0
€54,00
0 €0 €0
Long-
term
liabilities
principal
repaymen
t
€87,60
0
€87,60
0 €0 €0 €0
Subtotal
cash
spent
€3,296,
504
€3,548,
592
€3,592,
406
€3,795,
682
€4,024,
894
Jarmila Šebestová; Entrepreneurship
- 220 Pro
Forma Cash Flow
Net cash
flow
€1,070,
179
€1,036,
571
€1,312,
158
€1,458,
058
€1,611,
383
Cash
balance
€1,172,
844
€2,209,
415
€3,521,
573
€4,979,
631
€6,591,
014
Projected Balance Sheet
Table "Balance Sheet Forecast" is a balance
sheet forecast for Frank’s BarBeQue.
Pro Forma Cash Flow
Assets 2011 2012 2013 2014 2015
Current Assets
Cash
€1,172,8
44
€2,209,4
15
€3,521,5
73
€4,979,6
31
€6,591,0
14
Inventory €72,421 €79,197
€109,29
6
€117,24
5
€125,95
4
Other
current
assets
€278,37
2
€278,37
2
€278,37
2
€278,37
2
€278,37
2
Total
current
assets
€1,523,6
36
€2,566,9
83
€3,909,2
41
€5,375,2
49
€6,995,3
41
Long-Term Assets
Long-
term
assets
€583,67
5
€583,67
5
€583,67
5
€583,67
5
€583,67
5
Accumula
ted
depreciati
on
€145,76
5
€145,76
5
€145,76
5
€145,76
5
€145,76
5
Total
long-term
assets
€437,91
0
€437,91
0
€437,91
0
€437,91
0
€437,91
0
Total
assets
€1,961,5
46
€3,004,8
93
€4,347,1
51
€5,813,1
59
€7,433,2
51
Liabilities
and
Capital 2011 2012 2013 2014 2015
Pro Forma Cash Flow
Current Liabilities
Accounts
payable
€189,41
6
€193,00
9
€259,02
1
€275,79
1
€296,59
7
Current
borrowing
€135,00
0
€135,00
0
€135,00
0
€135,00
0
€135,00
0
Other
current
liabilities €20,329
(€33,67
1)
(€87,67
1)
(€87,67
1)
(€87,67
1)
Subtotal
current
liabilities
€344,74
5
€294,33
8
€306,35
0
€323,12
0
€343,92
6
Long-
term
liabilities
€262,40
0
€174,80
0
€174,80
0
€174,80
0
€174,80
0
Total
liabilities
€607,14
5
€469,13
8
€481,15
0
€497,92
0
€518,72
6
Paid-in
capital €75,000 €75,000 €75,000 €75,000 €75,000
Retained
earnings
€399,97
5
€1,279,4
02
€2,460,7
55
€3,791,0
02
€5,240,2
39
Earnings
€879,42
7
€1,181,3
54
€1,330,2
46
€1,449,2
37
€1,599,2
85
Total
capital
€1,354,4
02
€2,535,7
55
€3,866,0
02
€5,315,2
39
€6,914,5
24
Total
liabilities
and
capital
€1,961,5
46
€3,004,8
93
€4,347,1
51
€5,813,1
59
€7,433,2
51
Net
worth
€1,354,4
02
€2,535,7
55
€3,866,0
02
€5,315,2
39
€6,914,5
24
These figures clearly demonstrate that the
proposed opening of a second restaurant is more
than economically viable; it is an extremely
lucrative project, which promises to increase the net
worth of the firm by 500 percent in five years.
Jarmila Šebestová; Entrepreneurship
- 221 ENCLOSURE
NO. 4 BUSINESS MODEL CANVAS
Jarmila Šebestová; Entrepreneurship
- 222 ENCLOSURE
NO. 5 CANVAS MODEL STRUCTURE