Copyright © 2003 by South-Western. All Rights Reserved. CHAPTER FIVE OPTIONS FOR ORGANIZING SMALL AND LARGE BUSINESSES Text by Profs. Gene Boone & David Kurtz Multimedia Presentation by Prof. Milton Pressley The University of New Orleans

Copyright © 2003 by South-Western. All Rights Reserved. Distinguish between small and large businesses, and identify the industries in which most small firms are established Distinguish between small and large businesses, and identify the industries in which most small firms are established Discusses the economic and social contributions of small business Discusses the economic and social contributions of small business Compare the advantages and disadvantages of small business Compare the advantages and disadvantages of small business Describe how the Small Business Administration assists small-business owners Describe how the Small Business Administration assists small-business owners Explain how franchising can provide opportunities for both franchisors and franchisees Explain how franchising can provide opportunities for both franchisors and franchisees LEARNING GOALS

Copyright © 2003 by South-Western. All Rights Reserved. Summarize the three basic forms of business ownership and the advantages and disadvantages of each form Summarize the three basic forms of business ownership and the advantages and disadvantages of each form Identify the levels of corporate management Identify the levels of corporate management Describe recent trends in mergers and acquisitions Describe recent trends in mergers and acquisitions Differentiate among private ownership, public ownership, and collective ownership (cooperatives) Differentiate among private ownership, public ownership, and collective ownership (cooperatives) LEARNING GOALS

Copyright © 2003 by South-Western. All Rights Reserved. CHAPTER OVERVIEW Variables affecting the organization of your business include: Variables affecting the organization of your business include: How easily can you set up this type of organization? How easily can you set up this type of organization? How much financial liability can you afford to accept? How much financial liability can you afford to accept? What financial resources do you have? What financial resources do you have? What strengths and weaknesses do you see in others? What strengths and weaknesses do you see in others? What are your own strengths and weaknesses? What are your own strengths and weaknesses? © PhotoDisc

Copyright © 2003 by South-Western. All Rights Reserved. MOST BUSINESSES ARE SMALL BUSINESSES 98 percent have fewer than 100 employees 98 percent have fewer than 100 employees Over 14 million people in the U.S. are earning business income without any employees Over 14 million people in the U.S. are earning business income without any employees Almost half the sales in U.S. are made by small businesses Almost half the sales in U.S. are made by small businesses © PhotoDisc

Copyright © 2003 by South-Western. All Rights Reserved. What Is a Small Business? Small business: firm that is independently owned and operated, is not dominant in its field, and meets industry specific size standards for income or number of employees Small business: firm that is independently owned and operated, is not dominant in its field, and meets industry specific size standards for income or number of employees © PhotoDisc

Copyright © 2003 by South-Western. All Rights Reserved. Figure 5.1: the SBA’s Web Page Leading to Criteria for Defining a Small-business Figure 5.1: the SBA’s Web Page Leading to Criteria for Defining a Small-business

Copyright © 2003 by South-Western. All Rights Reserved. Typical Small Business Ventures Most nonfarming small businesses have been concentrated in retailing in the service industries Most nonfarming small businesses have been concentrated in retailing in the service industries © PhotoDisc

Copyright © 2003 by South-Western. All Rights Reserved. Figure 5.2 Top Five Industries for Small Business

Copyright © 2003 by South-Western. All Rights Reserved. Typical Small Business Ventures Almost half of small businesses in the U.S. are home based businesses (firms operated from the residence of the business owner) Almost half of small businesses in the U.S. are home based businesses (firms operated from the residence of the business owner) © PhotoDisc

Copyright © 2003 by South-Western. All Rights Reserved. CONTRIBUTIONS OF SMALL BUSINESS TO THE ECONOMY Creating New Jobs Creating New Jobs Creating New Industries Creating New Industries Attracting New Industries Attracting New Industries © PhotoDisc

Copyright © 2003 by South-Western. All Rights Reserved. ADVANTAGES OF A SMALL BUSINESS Small businesses differ greatly in: Small businesses differ greatly in: Forms of organization Forms of organization Market positions Market positions Staff capabilities Staff capabilities Managerial styles Managerial styles Organizational structures Organizational structures Financial resources Financial resources These differences usually seem like advantages to small-business owners These differences usually seem like advantages to small-business owners © PhotoDisc

Copyright © 2003 by South-Western. All Rights Reserved. Figure 5.3 Advantages Business Ownership

Copyright © 2003 by South-Western. All Rights Reserved. Typically develop twice as many product innovations per employee as larger firms Also obtain the more patents per sales dollar than larger businesses Key innovations developed by small businesses include the airplane, audio tape recorder, double-knit fabrics, optical scanner, PC, soft contact lenses, and the zipper Demographic © PhotoDisc Innovation ADVANTAGES OF A SMALL BUSINESS

Copyright © 2003 by South-Western. All Rights Reserved. Small firms can operate with greater flexibility This allows tailoring of product lines and services to the needs of customers Innovation © PhotoDisc Superior Customer Service ADVANTAGES OF A SMALL BUSINESS

Copyright © 2003 by South-Western. All Rights Reserved. Small firms may be able to provide goods and services at prices that large firms cannot match Overhead costs are usually minimized Typically, organizations are lean -- with the smallest staffs and few support personnel Innovation © PhotoDisc Superior Customer Service Low Costs ADVANTAGES OF A SMALL BUSINESS

Copyright © 2003 by South-Western. All Rights Reserved. Large businesses tend to focus on the large segments of the overall market Growth prospects of market niches are too limited, and expenses involved in serving them to great, for large firms This creates opportunity for small firms Innovation © PhotoDisc Superior Customer Service Low Costs Filling Isolated Market Niches ADVANTAGES OF A SMALL BUSINESS

Copyright © 2003 by South-Western. All Rights Reserved. DISADVANTAGES A OF SMALL BUSINESS In addition to being vulnerable to economic downturns, primary disadvantages include: In addition to being vulnerable to economic downturns, primary disadvantages include: Management shortcomings Management shortcomings Inadequate financing Inadequate financing Government regulations Government regulations © PhotoDisc

Copyright © 2003 by South-Western. All Rights Reserved. Figure 5.4 Business Failures

Copyright © 2003 by South-Western. All Rights Reserved. Management Shortcomings People often go into business with little, if any, business training People often go into business with little, if any, business training Owners often hesitate to turn to consultants for advice in areas were they lack knowledge or experience Owners often hesitate to turn to consultants for advice in areas were they lack knowledge or experience Frequently struggle with “rose-colored-glasses syndrome” Frequently struggle with “rose-colored-glasses syndrome” © PhotoDisc

Copyright © 2003 by South-Western. All Rights Reserved. Inadequate Financing Too often, new business owners assume a that they will generate enough funds in the first few weeks or months to finance continuing operations Too often, new business owners assume a that they will generate enough funds in the first few weeks or months to finance continuing operations Provisions must be made for uneven cash flows Provisions must be made for uneven cash flows Banks often very reluctant to make small business loans Banks often very reluctant to make small business loans © PhotoDisc

Copyright © 2003 by South-Western. All Rights Reserved. Figure 5.5 Sources of Small-Business Financing

Copyright © 2003 by South-Western. All Rights Reserved. Government Regulation Small-business owners often complain bitterly of excessive government regulation and red tape Small-business owners often complain bitterly of excessive government regulation and red tape Paperwork costs account for billions of small-business dollars each year Paperwork costs account for billions of small-business dollars each year Taxes are another burdensome expense for small businesses Taxes are another burdensome expense for small businesses © PhotoDisc

Copyright © 2003 by South-Western. All Rights Reserved. INCREASING OF THE LIKELIHOOD OF BUSINESS SUCCESS Two critical recommendations: Two critical recommendations: Develop a business plan Develop a business plan Use resources provided by such agencies as the SBA and local business incubators for information, advice, funding, and networking opportunities Use resources provided by such agencies as the SBA and local business incubators for information, advice, funding, and networking opportunities © PhotoDisc

Copyright © 2003 by South-Western. All Rights Reserved. Creating a Business Plan Business plan: written document that provides an orderly statement of the company’s goals, the methods by which it intends to achieve those goals, and the standard by which it will measure achievements Business plan: written document that provides an orderly statement of the company’s goals, the methods by which it intends to achieve those goals, and the standard by which it will measure achievements Typically includes following components: Typically includes following components: Executive summary Executive summary Introduction Introduction Marketing Marketing Financials Financials Resumes of principles Resumes of principles © PhotoDisc

Copyright © 2003 by South-Western. All Rights Reserved. Small Business Administration Small Business Administration (SBA): federal agency that assists small businesses by providing management training and consulting, financial advice, and support in securing government contracts Small Business Administration (SBA): federal agency that assists small businesses by providing management training and consulting, financial advice, and support in securing government contracts © PhotoDisc

Copyright © 2003 by South-Western. All Rights Reserved. Small Business Administration Financial Assistance Financial Assistance Guarantees loans Guarantees loans Other Specialized Assistance Other Specialized Assistance Government procurement set-aside programs Government procurement set-aside programs Information and advice Information and advice © PhotoDisc

Copyright © 2003 by South-Western. All Rights Reserved.

Small Business Administration Business incubator: organization that provides low-cost, shared facilities to small, start-up ventures Business incubator: organization that provides low-cost, shared facilities to small, start-up ventures © PhotoDisc

Copyright © 2003 by South-Western. All Rights Reserved. © PhotoDisc Corporations often devise special programs aimed at solving small- business problems Corporations often devise special programs aimed at solving small- business problems Recognition of the size of the small- business market, its growth rate and buying power, and the financial rewards of supporting small businesses Recognition of the size of the small- business market, its growth rate and buying power, and the financial rewards of supporting small businesses Large Corporations Assisting Small Businesses © PhotoDisc

Copyright © 2003 by South-Western. All Rights Reserved. Figure 5.6 Figure 5.6 UPS: A Large Firm Providing Specialized Services for Small Business UPS: A Large Firm Providing Specialized Services for Small Business

Copyright © 2003 by South-Western. All Rights Reserved. SMALL-BUSINESS OPPORTUNITIES FOR WOMEN AND MINORITIES Women-owned and minority- owned businesses are growing much faster than than the overall growth in U.S. businesses Women-owned and minority- owned businesses are growing much faster than than the overall growth in U.S. businesses © PhotoDisc

Copyright © 2003 by South-Western. All Rights Reserved. © PhotoDisc Women-Owned Businesses Over 28 million women-owned firms Over 28 million women-owned firms Almost 40 percent of U.S. businesses Almost 40 percent of U.S. businesses Provide employment for almost 28 million people Provide employment for almost 28 million people 1 of every 8 owned by minority women 1 of every 8 owned by minority women

Copyright © 2003 by South-Western. All Rights Reserved. Minority-Owned Businesses Growth in number of businesses owned via a African-Americans, Hispanics, and Asian Americans has far out past the growth in number of U.S. businesses overall recently Growth in number of businesses owned via a African-Americans, Hispanics, and Asian Americans has far out past the growth in number of U.S. businesses overall recently © PhotoDisc

Copyright © 2003 by South-Western. All Rights Reserved. Figure 5.7 Types of Businesses Owned by Racial and Ethnic Minorities

Copyright © 2003 by South-Western. All Rights Reserved. THE FRANCHISING ALTERNATIVE Franchising: Contractual agreement that specifies the methods by which a dealer can produce and market a product © PhotoDisc

Copyright © 2003 by South-Western. All Rights Reserved. THE FRANCHISING ALTERNATIVE Franchising growing rapidly U.S. franchises generate $1 trillion in sales annually and employing over 8 million people Franchising is also popular overseas Franchising Sector © PhotoDisc

Copyright © 2003 by South-Western. All Rights Reserved. THE FRANCHISING ALTERNATIVE Franchisee: small business owner who contracts to sell the goods or service of the franchisor in exchange for some payment Franchisor: owner of the franchise Franchisor typically provides name recognition, building plans, site selection help, accounting systems, and other services Franchising Sector Franchising Agreements © PhotoDisc

Copyright © 2003 by South-Western. All Rights Reserved. THE FRANCHISING ALTERNATIVE Advantages include: A prior performance record Recognizable company name Business model that has proven successful Tested management program Business training Franchising Sector Franchising Agreements Benefits and Problems of Franchising © PhotoDisc

Copyright © 2003 by South-Western. All Rights Reserved. THE FRANCHISING ALTERNATIVE Disadvantages include: Expensive franchise fees and future payments The fact that the franchisee is linked to the reputation and management of the franchise The potential unsuitability of the franchisee Franchising Sector Franchising Agreements Benefits and Problems of Franchising © PhotoDisc

Copyright © 2003 by South-Western. All Rights Reserved. SMALL BUSINESS GOES GLOBAL Role of the Internet in International Expansion Role of the Internet in International Expansion Global reach of the Internet allows companies to reach international markets quickly Global reach of the Internet allows companies to reach international markets quickly © PhotoDisc

Copyright © 2003 by South-Western. All Rights Reserved. SMALL BUSINESS GOES GLOBAL Growth Strategies for Small Businesses Growth Strategies for Small Businesses Licensing agreements allow firms to grow without major capital investment Licensing agreements allow firms to grow without major capital investment Export management, and export trading, companies allow small firms to achieve exporting success Export management, and export trading, companies allow small firms to achieve exporting success © PhotoDisc

Copyright © 2003 by South-Western. All Rights Reserved. ALTERNATIVES FOR ORGANIZING A BUSINESS Sole proprietorships are the most common form of business ownership Sole proprietorships are the most common form of business ownership Figure 5.8 Forms of Business Ownership

Copyright © 2003 by South-Western. All Rights Reserved.

Sole Proprietorships Sole proprietorship: form of business ownership in which the company is owned and operated by one person Sole proprietorship: form of business ownership in which the company is owned and operated by one person © PhotoDisc

Copyright © 2003 by South-Western. All Rights Reserved. PartnershipsPartnerships Partnership: form of business ownership in which the company is operated by two or more people who are co-owners by voluntary legal agreement Partnership: form of business ownership in which the company is operated by two or more people who are co-owners by voluntary legal agreement © PhotoDisc

Copyright © 2003 by South-Western. All Rights Reserved. CorporationsCorporations Corporation: business that stands as a legal entity with assets and liabilities separate from those of its owner(s) Corporation: business that stands as a legal entity with assets and liabilities separate from those of its owner(s) © PhotoDisc

Copyright © 2003 by South-Western. All Rights Reserved. Figure 5.9 Double Taxation: A Disadvantage of the Corporate Form of Organization

Copyright © 2003 by South-Western. All Rights Reserved. Changing Legal Structures to Meet Changing Needs Considerations of the appropriate legal structure include: Considerations of the appropriate legal structure include: Personal financial situations and the need for additional funds Personal financial situations and the need for additional funds Management skills and limitations Management skills and limitations Management styles and capabilities for working with others Management styles and capabilities for working with others Concerns about exposure to personal liability Concerns about exposure to personal liability © PhotoDisc

Copyright © 2003 by South-Western. All Rights Reserved. ORGANIZING AND OPERATING A CORPORATION A firm is considered a domestic corporation in the state where it is incorporated When company does business in a state other than the one where it has filed incorporation papers, it is registered as a foreign corporation in each of those states Types of Corporations Types of Corporations © PhotoDisc

Copyright © 2003 by South-Western. All Rights Reserved. ORGANIZING AND OPERATING A CORPORATION A firm incorporated in one nation that operates in another is known as an alien corporation where it operates Multinational corporations are firms with significant operations and marketing activities outside of their home countries Types of Corporations Types of Corporations © PhotoDisc

Copyright © 2003 by South-Western. All Rights Reserved. ORGANIZING AND OPERATING A CORPORATION Procedures for creating a new corporation include decisions about: Where to Incorporate The Corporate Charter Types of Corporations © PhotoDisc The Incorporation Process The Incorporation Process

Copyright © 2003 by South-Western. All Rights Reserved. Figure 5.10 Articles of Incorporation

Copyright © 2003 by South-Western. All Rights Reserved. ORGANIZING AND OPERATING A CORPORATION Depending on its size, a corporation will have some or all of the ownership and management levels shown in the figure on the next slide... Types of Corporations © PhotoDisc The Incorporation Process Corporate Management Corporate Management

Copyright © 2003 by South-Western. All Rights Reserved. Figure 5.11 Levels of Management in a Corporation

Copyright © 2003 by South-Western. All Rights Reserved. ORGANIZING AND OPERATING A CORPORATION Stockholders: people who buy shares of stock in a corporation and are entitled the profits Stock Ownership and Stockholder Rights Preferred stock owners have limited voting rights; receive dividends before others Common stock owners have voting rights but only residual claims on assets and are the last to receive any income distributions Types of Corporations © PhotoDisc The Incorporation Process Corporate Management Corporate Management

Copyright © 2003 by South-Western. All Rights Reserved. ORGANIZING AND OPERATING A CORPORATION Board of Directors: the elected governing body of a corporation Sets policy, authorizes major transactions, and hires and supervises the CEO Corporate Officers and Managers Make most major corporate decisions Types of Corporations © PhotoDisc The Incorporation Process Corporate Management Corporate Management

Copyright © 2003 by South-Western. All Rights Reserved. ORGANIZING AND OPERATING A CORPORATION Employee ownership: where workers buy shares of stock in the company that employees them Corporate ownership stays the same Most stockholders are also employees Types of Corporations © PhotoDisc The Incorporation Process Corporate Management Employee-Owned Corporations Employee-Owned Corporations

Copyright © 2003 by South-Western. All Rights Reserved. ORGANIZING AND OPERATING A CORPORATION Organizations that pursue objectives other than returning profits to owners Include: Museums Libraries Religious and human-service organizations Zoos Thousands of other groups Types of Corporations © PhotoDisc The Incorporation Process Corporate Management Employee-owned Corporations Not-for-Profit Corporations Not-for-Profit Corporations

Copyright © 2003 by South-Western. All Rights Reserved. Figure 5.12 Web Site for a Not-for-Profit Corporation

Copyright © 2003 by South-Western. All Rights Reserved. WHEN BUSINESS JOIN FORCES Mergers and Acquisitions Mergers and Acquisitions Merger: combination of two or more firms to form one company Merger: combination of two or more firms to form one company Acquisition: procedure in which one firm purchases the property and assumes the obligations of another Acquisition: procedure in which one firm purchases the property and assumes the obligations of another © PhotoDisc

Copyright © 2003 by South-Western. All Rights Reserved. Figure 5.13 Spending on U.S. Mergers and Acquisitions

Copyright © 2003 by South-Western. All Rights Reserved. WHEN BUSINESS JOIN FORCES Joint Ventures – Specialized Partnerships Joint Ventures – Specialized Partnerships Joint Venture: a partnership between companies formed for a specific undertaking Joint Venture: a partnership between companies formed for a specific undertaking © PhotoDisc

Copyright © 2003 by South-Western. All Rights Reserved. PUBLIC AND COLLECTIVE OWNERSHIP Public Ownership Public Ownership When a unit or agency of government owns and operates an organization When a unit or agency of government owns and operates an organization Government-Owned Corporations Government-Owned Corporations Used When: Used When: Private investors are not willing to invest in high-risk projects Private investors are not willing to invest in high-risk projects When private ownership has failed When private ownership has failed Operating public companies can be used to foster competition Operating public companies can be used to foster competition © PhotoDisc

Copyright © 2003 by South-Western. All Rights Reserved. Customer-Owned Businesses: Cooperatives Cooperative: an organization whose owners join forces to collectively operate all or part of the functions in their industry Cooperative: an organization whose owners join forces to collectively operate all or part of the functions in their industry © PhotoDisc PUBLIC AND COLLECTIVE OWNERSHIP

Copyright © 2003 by South-Western. All Rights Reserved. WHAT’S AHEAD Examination of the differences between a small-business owner and an entrepreneur Examination of the differences between a small-business owner and an entrepreneur Identification of personality traits typical of entrepreneurs Identification of personality traits typical of entrepreneurs Summarize the process of launching a new venture Summarize the process of launching a new venture Explores a method for infusing the entrepreneurial spirit into established firms Explores a method for infusing the entrepreneurial spirit into established firms © PhotoDisc