Small Business Management Launching and Growing Entrepreneurial Ventures Justin G. Longenecker Baylor University Carlos W. Moore Baylor University 14e J. William Petty Baylor University Leslie E.
Palich Baylor University Australia • Brazil • Canada • Mexico • Singapore • Spain • United Kingdom • United States Small Business Management: Launching and Growing Entrepreneurial Ventures, 14e Justin G. William Petty, Leslie E. Palich VP/Editorial Director: Content Project Manager: Senior Art Director: Jack W. Calhoun Jacquelyn K Featherly Tippy McIntosh Editor-in-Chief: Technology Project Manager: Cover and Internal Designer: Melissa Acuna Kristen Meere Grannan Graphic Design Ltd.
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Longenecker Professor Emeritus of Management Hankamer School of Business Baylor University May 4, 1917–September 14, 2005 Carlos W. Moore Edwin Streetman Professor of Marketing Hankamer School of Business Baylor University February 3, 1943–May 27, 2007 It is with deep sadness that we inform you of the deaths of our two co-authors and dear friends. We cannot put into words the loss we feel. Their deaths cannot be mea- sured by their absence in revising this book.
They were not only our colleagues, but also our confidants and mentors. They were tremendous role models for us and for literally thousands of individuals who knew and loved them. In this book, we encourage you to consider the legacy you will leave at the end of your entrepreneurial journey. Justin and Carlos left a legacy that few can ever dream of leaving.
They will be missed for many years to come. In working with Justin and Carlos for over a decade, we have developed a shared vision about the book. So, while the specific responsibilities have changed for this edi- tion, the dream of helping others become entrepreneurs lives on. Be assured that we will continue to build on the great legacy of this textbook.
Justin and Carlos would be disap- pointed with anything less, and we are not about to let them down. iii This page intentionally left blank Brief Contents Part 1 Entrepreneurship: A World of Opportunity 1 1 THE ENTREPRENEURIAL LIFE 2 2 ENTREPRENEURIAL INTEGRITY AND ETHICS: A GATEWAY TO SMALL BUSINESS OPPORTUNITY 32 Part 2 Starting from Scratch or Joining an Existing Business 61 3 GETTING STARTED 62 4 FRANCHISES AND BUYOUTS 94 5 THE FAMILY BUSINESS 120 Part 3 Developing the New Venture Business Plan 149 6 THE BUSINESS PLAN 150 7 THE MARKETING PLAN 180 8 THE ORGANIZATIONAL PLAN: TEAMS, LEGAL FORMS, AND STRATEGIC ALLIANCES 206 9 THE LOCATION PLAN 236 10 THE FINANCIAL PLAN: PROJECTING FINANCIAL REQUIREMENTS 260 11 A FIRM’S SOURCES OF FINANCING 298 12 THE HARVEST PLAN 326 Part 4 Focusing on the Customer: Marketing Growth Strategies 347 13 BUILDING CUSTOMER RELATIONSHIPS 348 14 PRODUCT AND SUPPLY CHAIN MANAGEMENT 370 15 PRICING AND CREDIT DECISIONS 396 16 PROMOTIONAL PLANNING 420 17 GLOBAL MARKETING 443 Part 5 Managing Growth in the Small Business 471 18 PROFESSIONAL MANAGEMENT IN THE ENTREPRENEURIAL FIRM 472 19 MANAGING HUMAN RESOURCES 500 20 MANAGING OPERATIONS 524 21 MANAGING RISK 550 Part 6 Understanding What the Numbers Mean 571 22 MANAGING THE FIRM’S ASSETS 572 23 EVALUATING FINANCIAL PERFORMANCE 596 Cases 620 Appendix A Sample Business Plan 669 Appendix B Valuing a Business 690 v Contents Preface xv About the Authors xxiii Part 1 Quality Performance 16 Entrepreneurship: A World of Integrity and Responsibility 16 Opportunity 1 LIVING THE DREAM A Customer-Oriented Body Shop 17 Innovation 17 1 THE ENTREPRENEURIAL LIFE 2 Special Niche 18 In the Video Spotlight: Bridgecreek 2 Getting Started 18 Entrepreneurial Opportunities 4 Age and Entrepreneurial Opportunity 18 Three Success Stories 4 Characteristics of Successful Entrepreneurs 19 Evidence of Opportunities 6 LIVING THE DREAM Reading, Writing, Running a Company 20 Entrepreneurship and Small Business 6 Taking the Plunge 21 Who Are the Entrepreneurs? 6 Finding “Go-To” Persons 21 What Is Small Business? 7 Growing and Managing the Business 21 LIVING THE DREAM In the Pink 8 HOW THEY SEE IT The Go-To Team 22 LIVING THE DREAM Don’t Go It Alone— The Payoff of Entrepreneurship 8 Find Mentors 23 Make Money (Profit) 9 Be Your Own Boss (Independence) 9 Success in Business and Success in Life 24 Escape a Bad Situation (Freedom) 10 Looking Back at an Entrepreneurial Career 24 Enjoy a Satisfying Life (Personal Satisfaction) 10 Evaluating Accomplishments 24 LIVING THE DREAM Thinking Entrepreneurially Winning the Wrong Game 24 Works for Any Kind of Startup 11 HOW THEY SEE IT On Mentoring 25 Crafting a Worthy Legacy 27 The Many Varieties of Entrepreneurship 12 Beginning with the End in Mind 28 Founder Entrepreneurs versus Other Business Owners and Franchisees 12 2 ENTREPRENEURIAL INTEGRITY AND ETHICS: High-Potential Ventures versus Attractive Small Firms and Microbusinesses 12 A GATEWAY TO SMALL BUSINESS Artisan versus Opportunistic Entrepreneurs 13 OPPORTUNITY 32 LIVING THE DREAM The Guitar Man 14 In the Video Spotlight: Joseph’s Lite Cookies 32 Women Entrepreneurs 14 Entrepreneurial Teams 15 Integrity and Entrepreneurship 33 What Is Integrity? 35 The Winning Hand of Entrepreneurship 15 HOW THEY SEE IT Doing the Right Thing 35 Customer Focus 16 Doing the Right Thing 36 vi Contents vii A Framework for Integrity 36 Integrity in an Expanding Economy 47 Promoting the Owners’ Interests 38 Integrity and the Internet 48 Respecting Customers 39 International Issues of Integrity 49 Valuing Employees 39 LIVING THE DREAM Ethics Training Is Building a Business with Integrity 49 Good. and Good for Business 40 A Strong Foundation 50 LIVING THE DREAM Clean and Green 41 Leading with Integrity 50 Social Responsibility and Small Business 42 A Supportive Organizational Culture 51 LIVING THE DREAM Skills-Based Volunteering— An Ethical Decision-Making Process 53 Help That Is Right on the Beat 43 Governmental Laws and Regulations 44 HOW THEY SEE IT An Ethical Dilemma 45 Social Entrepreneurship: A Fast-Emerging Trend 54 The Burden of Environmentalism 55 The Potential of Environmentalism 56 The Challenges and Benefits of Acting Ethically 46 The Vulnerability of Small Companies 46 The Integrity Edge 47 Part 2 Starting from Scratch or Joining an Putting It All Together 88 Existing Business 61 4 FRANCHISES AND BUYOUTS 94 In the Spotlight: Firehouse Subs 94 3 GETTING STARTED 62 In the Video Spotlight: Cybex/Avocent 62 The Pros and Cons of Franchising 95 Advantages of Franchising 96 Identifying Startup Ideas 64 LIVING THE DREAM Got Junk? 97 LIVING THE DREAM Are You Ready to Work? 98 Creating a New Business from Scratch 65 Limitations of Franchising 99 HOW THEY SEE IT Getting Started 67 Franchising Options and the Structure of the Finding Startup Ideas 67 Franchising Industry 101 Types of Startup Ideas 67 Franchising Options 101 Sources of Startup Ideas 68 The Structure of the Franchising Industry 102 LIVING THE DREAM So You Think You Have a Great Business Idea? In Your Dreams! 70 Evaluating Franchise Opportunities 103 Applying Innovative Thinking to Business Ideas 72 Selecting a Franchise 103 HOW THEY SEE IT Build on Your Strengths 73 Investigating the Potential Franchise 103 LIVING THE DREAM A Three-Word Revolution: HOW THEY SEE IT Buying a Franchise 103 “Buy It Used” 75 LIVING THE DREAM Get into the Wing Zone 106 Finding Global Franchising Opportunities 108 Using Internal and External Analyses to Considering Legal Issues in Franchising 109 Evaluate an Opportunity 75 Outside-In Analysis 76 Buying an Existing Business 109 Inside-Out Analysis 79 Reasons for Buying an Existing Business 110 Integrating Internal and External Analyses 80 Finding a Business to Buy 111 LIVING THE DREAM When a Side Business Investigating and Evaluating Available Businesses 111 Hits the Skids, It Might Be Time to “Bag It” 82 LIVING THE DREAM Do Your Homework 111 Valuing the Business 113 Selecting Strategies That Capture Opportunities 83 Nonquantitative Factors in Valuing a Business 113 Broad-Based Strategy Options 83 Negotiating and Closing the Deal 114 Focus Strategies 84 LIVING THE DREAM A Part-Time Focus Strategy, but a Full-Time Challenge 86 viii Contents 5 THE FAMILY BUSINESS 120 LIVING THE DREAM Having Babies Gives Birth In the Spotlight: Aquascape, Inc. 120 to a Business 133 In-Laws In and Out of the Business 134 The Entrepreneur’s Spouse 134 The Family Business: A Unique Institution 121 HOW THEY SEE IT An “Out-Law’s” Perspective 135 What Is a Family Business? 122 Family and Business Overlap 122 Competition Between Business and Family 123 Professional Management of the Family Firm 136 Advantages of a Family Business 124 The Need for Good Management 136 Nonfamily Employees in a Family Firm 136 Family Retreats 137 Family Business Momentum 126 Family Councils 138 The Founder’s Imprint on the Family Business Culture 126 Family Business Constitutions 138 The Commitment of Family Members 127 Why Should Anyone Care About Commitment? 128 Breaking with the Past 128 The Process of Leadership Succession 138 Available Family Talent 139 LIVING THE DREAM An Entrepreneur with a Family Roles and Relationships 129 Special Place for Mom in His Heart Mom or Dad, the Founder 130 and Business 140 Husband–Wife Teams 130 Stages in the Process of Succession 141 Sons and Daughters 130 Reluctant Parents and Ambitious Children 142 LIVING THE DREAM A Marriage That Is Always Transfer of Ownership 142 in Fashion 131 HOW THEY SEE IT Plan Early 143 Sibling Cooperation, Sibling Rivalry 132 Part 3 Developing the New Venture 7 THE MARKETING PLAN 180 In the Video Spotlight: eHarmony 180 Business Plan 149 What Is Small Business Marketing? 182 6 THE BUSINESS PLAN 150 Marketing Philosophies Make a Difference 183 In the Spotlight: Luxe Jewels 150 A Consumer Orientation—The Right Choice 183 An Overview of the Business Plan 151 The Formal Marketing Plan 184 The Purpose of a Business Plan 151 Market Analysis 184 Do You Really Need a Business Plan? 152 The Competition 185 HOW THEY SEE IT Getting Started 154 Marketing Strategy 185 How Much Planning? 155 HOW THEY SEE IT Choosing a Product Name 187 LIVING THE DREAM Will Your Plan Win a Prize?