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ENTREPRENEURSHIP ANDSMALL BUSINESS MANACEMENT

DONALD SEXTON L. PHILIPM.\AN AUKEN

EXPERIENCESIN

EXPERIENCES IN ENTREPRENEURSHIP AND BUSINESS SMALL MANACEMENT


DONALD L. SEXTON
Caruth ProJessor Entrepreneurship of Center for Pivate Enterprise and lintrepreneurship Baylor University

PHILIP M. VAN AUKEN


Centerfor Private Enterpise and Entrepreneurship Bavlor Universitv

Prentice-Hall, Inc., Englewood Cliffs, ltlew Jersey 07632

Library of Congress Cataloging in t\tblication

Datd

Sexton, Donald L. a ixperiences in entrepreneurship nd small busi n e s sm a n a g e m e n t . s 1 . - S m a l lb u s i n e s s - M a n a g e m e n t - C a s e t u d i e s ' 2.-Entrepreneur-Casestudies' I'-Van Auken, II.-Title. Philip M. 81-13803 6s8'.o22 HD6i.7.S4s AACR2 ISBN 0-13-294884-2

Editorial/production supervision and interior design bY Alice Lrdman Cover design by Carol Zawislak Manufacturing buyer: Ed O'Dougherty I o1982 by Prentice-Hall,nc., DnglcwoodCliffs, N'J 07532 All rights reselved. No part of this book may be rcproduced in anY form or by any means without permission in writing from the publisher. Printed in the United States of America

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rsBN0-1,3-a1'{88q-a

Prentice-HallInternational, lnc., London Prentice-Hallof Australia Pty. Limited, Sydney Prentice-Hallof Canada, Ltd., Toronto Prentice-Hallof India Private Limited, New Delhi Prentice-Hallof J aPan, lnc-, TokYo Prentice-Hallof Southeast Asia Pte. Ltd.' Singapore Whitehall Books Limite d,Ilellington, New Zealand

to CAROL and CAROLYN

contents

Prefacc

xv

lntroduction

xvii

l P E X P E R I E N C E H A S El : V e n t u r e n i t i a t i o n

1
3 D Wicker csigns ia en sit uati onoI manogem t cholIengesassoc ted wllh eachstageof the compznygrowth cycle

2
7 K The Klothes orner of 7ssessment alternativepro forma Jinancialplans

vut

contenrs

3
P h a r r o m p o s igS e r v i c e C n 13 eorly venturegrowth and finoncing,. relationship with a banker,.business buyou t o ffe r,' femole en trepreneur

4 Asphcric nterprises 23 E difficulties of new venture initiation; forminq the venture team

5 Peppy's Pizza 26
businassplan evulua! ion

6 Craig Nichols GaryHarwcll and 44


new venture strllegy and cornpetitive edge

E x p l o r a t i oG r a p h i c s n 46 new venlurefinancing,'timing growlh,,charat:leristics entrepreneurs of of

8 W a t c r h a u s u aS l i d e Aq 55 ossessment new venturepotential of

9 & S Farms 58 financial zssessmenl an agricultural venture,. of formers0s entrepreneurs

contents

lx

M P E X P E R I E N C E H A S EI l : V e n t u r e a n a g e m e n t

65

10
67 C u m b e r l a nC r a f t s d manogenlenl of manogement growth; operations

11
80 T h eM l l l i o n a i r e SSm ventu re i nvestment strategy,' osse ent of personoI entrepren eur i0| sty Ie

12
M Polymar anufacturing smalI businessPlanning 81

13
83 S u nC i t y D c l i v c r Y on of monogement growth and expansion,'dependence key customers, ur businessbuyout,' female en treprene

14
93 S B i SS k y W e s t e r n t o r e inventory system;competitivestrotegyfocused designof computeri/ecl on pricing

15
Ser.'rices 100 Telguard e growth ; strotegy evoIut i on; en trepreneuri oI Iead rship ; ro le of busi n ess companies in entrepreneurs larger

16
E m c r g e n cM o b i l e a r a g e y G promotionol strotegy 108

't7
V c s s eA p p a r e S h o p l l 110 entrep reneuri aI p lann i ng; operat i ons p lann i ng

18
S o n i c s y s t e m s - A u dA r t s S io 115 growth strategy; ossessing sm0ll compzny's performance copobility 0

19
A t k i n sM a c h i n i n g 122 smoll business monogerialresponsibilitiesand roles

20
MagicCarpetTravelAgency 124 responseto threateninggovernmentollegislotion

2't
OMNISkiProductions business forecasting 126

22
128 ColonialAmericanKitchens production monlgement; getting new venture through the keyhole; product innovation

contents

xi

23
f nfomatics Corporation business ethics 140

24
Chama teelworks S 142 smoll business sociol responsibility; public relotions

25
M i d w e s t u n i c i p aA i r p o r t M l 145 growth planning,.organizationsuruivol

26
E b e r h a r dP r o d u c t sI,n c . t morketing research 148

27
K a t h S u r g i c aE q u i p m e n t l cashflow plctnning 150

28
F a n t a s iM u s i c o m p a n y a C 152 profit management;monogeriolphilosophy

29
People roviders P 160 strotegicplanning,.competitive edge

contents

30
167 M C a m e r o n o b i l eH o m e s to lttem pted union izotion response

T P E X P E R I E N C E H A S El l l : V e n t u r e r a n s i t i o n

171

31
173 f a n e c kF u r n i t u r e plonning for exPonsion

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179 Bay Oilfield Servicing Prudhoe key portner death; strotegicreolignment

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183 P Philmark roductions to manogement professional moking the tronsition from entrepreneuriol

34
185 lron Kettle Restaurant tegi c reoI ign m ent on buyo u t d ec isi ; stra

3s
189 S C a s n eF i l t r a t i o n Y s t e m s r preporltion for smoll compony fomily tronsition in o small business; monogement

contents

xiii

36
A n i m a t o rT o y s 191 business relocotion decision;retail competition in molls; competitive strotegy

37
Sicorski and Associates 202 determining the finonciol worth of a company; techniquesfor buying ond selling businesses

38
NardisCreations 206 business turnaround; strotegic realignment

39
Goodbuy rocery G 212 strategic realignment;relocation decision

E X P E R I E N C E H A S E l V : T h e E n t r e p r e n e u r iL ilf e s t v l e P a

2'17

40
A n E n t r e p r e n c u rDs a r y 'i 219 The doily experiences and lifestyle of on entrepreneur

xiv

contents

41
Software,lnc' New Generation rsh n or i tY entrePreneu iP Mi

226

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231 RealtY McGowan r entrepreneu enterpreneuriotlifestyle; femole

43
e A R o u n d t a b lD i s c u s s i o n 236 al T h e K e y st o E n t r e p r e n e u r iS u c c e s s : foctors success of discussion entrepreneuriol a proctitioner's

44
241 --'rh-r DamonElectric ond fomily side of entrepreneurship rroonol

45
Potential? What'sYour Entrepreneurial q uesti onnoire en I se f assessm t 247

preface

f)xperiences in Entrepreneurship and Small BusinessManagernent is aimed at enrichingthe student's leamingexperience courses in concerned with initiatingand managing small business ventures. Courses entrepreneurship smallbusiness in and managementare flourishing in businessschools as never before, yet there is a noticeablegap in learningresources designed enrich small business to curricula. In the quest to prepare themselvesfor future entrepreneurialactivities, today's studentsneed, and want, more than standard textbook coverage small of business managerial issues. Cognitivelearningmust be creativelyapplied and emotionallyexperienced providea well-rounded to educational experience. Although there is ultimately no substitute for actually operatinga business venture, a pragmatic,applications-oriented, educationalbackgroundcan equip the student to make the successful transition from classroom ,.realworld." to Experiences in Entrepreneurship ancl small Businessfulanagementis designedto assistboth undergraduate and graduatestudentsin making this pivotal transition. The book contains a well-balanced variety of learningexperiences including comprehensivecases, focused incidents, interviews, experiential exercisesand structuredproblems.All have been classroom tested.A glanceat the annotated Table of Contentswill revealthe book's thoroughcoverage entrepreneurial of and smallbusiness management issues, both quantitativea.d qualitative. The authors have sought to make the book unique in several respects. First of all, the material is organizedaround a smallbusiness life-cycleformat consisting of four experientialphases:venture initiation (phaseI), venture strategyand

xvi

preJace

life(PhaseII), venture transition (PhaseIII), and the entrepreneurial management business strategyas well as operating style (Pha^se IV). Thus the book coverssmall issues. writing style feature of the book is its here-and-now A seconddistinguishing are own "lingo". The variouslearningexperiences featuringthe entrepreneur's to in realistic, convcrsational style to enablestudents getinto the situation written is and involved.All of the material up-to-date much of it relateto personalities ar.rd is written in the present, rather than in the past tense, to increasethe senseof immediacyand current relevance. of A third unique feature involvesthe book's mix of industriesand varieties are Additionally, femaleand minority entrepreneurs featured.The srnallbusinesses. geographical is coverage alsowell-balanced. A final feature concerns the range of analytical sophisticationwithin the studentsand vary in their capacityto challenge book. The variouslearningexercises respects: are stretchtheir skills.I{owever,the exercises all similarin two irnportant relevance and realism.Questionsfor analysisand learningare includedthroughout and to format as a stimulus studentpreparation learning. the book in a stop-action A11of the material in thc book is basedon actual, real-worldsituations, havebeendisguised. locations names and geographic althougb Manand One final mention: lixperiencesin Entrepreneurship SmallBusiness ogententis a flexible book which can be easilyadaptedto the instructor'sown to supplement smallbusiness teaching style. The book can be usedasa stirnulating with instructor lectures. texts or it canbe usedin conjunction and entrepreneurship who generously The authorsare greatlyindebtedto a nuntberof individuals this book. We thank the followingpeople devotedtheir time to us as we prepared Big Sky Helen Ligon of Baylor University, casesor exercises: for ccrnlributing 'trlestern Coktnial JamesWeir ol Southernlllinois University-Edwardsville; Store. Kath SurKitchens.and Hcrbert Kierulff of SeattlePacificUniversity, Anrcrican gical Flquipment. in at agues Baylorfor their assistailce We want to thank a nuntberof our colle preparing JustinLongecontent material:Dale Allen, Lowell Broom,Terry Frame, necker, Kris Moore,RichardScott,andMike Umble. Terry Maness, who We also extend our gratitude to the following friends and associates Campbell, Jr., in materialfor the book: RobertBradford, Lenelle assisted preparing Vicki Downing,Harold Fletcher,Marie Tarvin William Cardin,Nancy Carpenter, Garland,MarciaGrad, Robert Horton, A. J. Hutson,Timothy Jeffery,Jerry ManMcCartney,Fred Newman,David Newcomb,Brent seur, Darrell Massey,,Villiam Van Platt Turner,Charles Rickels, John Schoen, Charles Synder,JamieThompson, Auken, Betty Willis, and Tom Wooten.Thank you, Pat Carroll and SandyTighe,for to appreciation W. W Caruth,Jr. typing the manuscript. Finally, a word of sincere who provided,through the HillcrestFoundation,the Caruth Chair in Entrepre' neurshio. Donald L. Sexton P h i l i p . V a nA u k e n M

introduction

d T h i s b o o k h a so n e b a s i cp u r p o s et:o h e l p y o u b e c o m e e t t e ra c q u a i n t ew i t h t h e b ventures. The book'smany-faceted realities startingand managing of snrall business learningexperiences focus on what entrepreneurs the problems do, and cl'rallenges and how entrepreneurs think, feel, they face,their frustrations and satislactions, or.t a n da c t . your The book is organized learning scctions increase to into four interrelated understanding the evolving business clrallenges associated with eachstage the of of ventureinitiation activities, with small company lifecycle. PhaseI is concernecl plan development, formir.rg the includingsuchtopicsas growth financing, business planning. ventureteam,and strategic PhaseIl dealswith l.rowto manageeffectivelythe going-growing concern. I-earning experiences this section the book focuson both strategic operatin of and pricingstrategy, planning,inventory management, foreing issues: small business research, cash-flow analysis. addition,Phase In casting,advertising, marketing and II focuseson the more philosophical issuesof small business ethicsand social responsibility. PhaseIII deals with the srnallcompallyin transition;thebyword is change. family transition, buyouts, turnaroundstrategy, Specificissuesinclude business relocation,key partner death, and realignment cornpetitive of strategy. business The entrepreneurial lifestyleis exploredin PhaseIV. The focus here is on and lvl"rat enterpreneurs and how they feel about their work. Both the personal do family sideof entrepreneurship explored. are

introductktn

The book was written with you, the student, specifically in mind. The authorshave not sought to write just another academic volume. Rather they have tried to stressrealism and relevancethroughout. The book is narrated from the entrepreneur'spoint of view, using an informal, lively, conversational style. We hope you find it a freshchange ofpace. A Word about Case Analysis As you tackle the questionsfor analysisfound in the stop-actionformat throughout the book, rememberthat clearcut,simple answers managerial to problems rarely exist in the real world. Rather than searching vain for right-versusin wrong answers questions, to focus insteadon formulatingrecommendations that can be persuasively defendedin light of the factsat hand. Strive to make your recommendations specific,clear, and action-oriented. Would a practicingmanagerbe able to take action on the basisof what you have said? Could you successfully defend your action recommendations an experi to "bottom line" decision-maker? enced, Interject your own personal,individualpoint of view in the way you respond to questions. Entrepreneurship the domainfor individualism personal is and creativity. Commit yourselfin an articulate way on the book'sissues decisionsknow and where you stand and whyl Above all else, strive to make your recommendations specificquestions for tailor-madefor the business situation at hand and your interpretation of it. Consider the size of the company, the capabilitiesof the management team, the pastperformance track record, the competitive environment, and so on. Situational thinking is the key to profitable smallbusiness management. The book ultimately provides you with an opportunity to learn from the pragmaticbusinessexperiences others. The authors hope these experiences of in entrepreneurship and small business management the next best thing to being are there !

EXPERIENCES IN ENTREPRENEURSHIP AND BUSINESS SMALL MANACEMENT

ENCEPHASEI EXPERI initiation venture

igns wicker des

1
manufactures varietyof a Inc., locatedin Eau Claire,Wisconsin, Wicker Designs, monthsago by Ramond wicker and rattan furniture.Startedeighteen fashionable garage on reconverted Palacio,productionfacilitiesare housedin a medium-size, Ramondand his brotherVincent,the company the outskirtsof Eau Claire.Besides exfor employsa crew of twelve.Grosssales the first twelvemonthsof operation ceeded 124,000. $

a Although the company is solvent and on the vergeof generating profit for concernabout the company's the first time, the Palaciobrothers have expressed a future. They recently sharedtheir thoughts with Jay Caststevens, mutual friend and certified public accountantin Milwaukee. has Designs certainlycome a long way sinceI visitedyou last Caststevens-Wicker time. Looks to me like you havegotten off to a fine start both financiallyand competitively. How many statesdo you now distributeyour furniture in? we've penetratedsouthern Minmost of Wisconsin, Ramoncl Palacio-Besides We're nesota,all of Iowa, and the northern portion of Illinois-Chicago especially. working on a new retail chain prospectin St. Louis at the moment. you know how. I guess genuinelyimpressed with your business Caststevens-I'm both must feel pretty optimistic about the future. VincentPalacio-Actlally, Ramond and I are beginning to get cold feet.

Expericncc PhaseI: Vcnture Irtitiotktrt

Coststct'etts-Why you say that? ['vc just goneover your lateststatentents do and the companyis really in pretty solid shapefinancially. You're due to breakout of the red next quarteraren'tyou? RatttontlPalacio-oh, we're basicallypleased with the company'sfinancialsituation. I think what vince meantby gettingcold feet perrained our readiness to to take WickerDesigns throughall of the managerial changes that loom ahead. vinc'cnt Paloc'ioLike forecasting our sales,adding on to the plant, borrowing money,startingto advertise our fumiture line. We'reworried about our ability to manage company's the growth. Caststo,cnsBoy, I know a lot of struggling businessmen would love to have who t h o s e i n d so f w o r r i e s ! k vincant Palacio-Maybechallenges a better word than worries.Every month is confronts Ramond and me with new business challenges that we've never faced before. RamorttlPalacilt Yes,and the biggerwicker Designs becomes, rnoreimportant the daily decisions become.when we first opened lastyear,we could recover from our ntistakes with ease.But as the business expands, the mistakes becomemagnified and harder to reboundfrom. It's frightening contemplate to what decisions made today may do to us tomorrow. Caststcverts businessrnen All have to take risks.Tomorrow is alwaysa risk, especiallyin running a smallcompany.You just haveto do the best you can every day and trust that things will eventuallycome out all right. your capacityfor making sound business decisions depcndson your ability to anticipatefuture problems. RamondPalacb You've hit the nail on the headwith that laststatement. The key to decision makingis definitelytied to anticipation future problems. of That'swhat Vince and I want to talk with you about. vincent Palacio Exactly, Jay, you have specialized your accountingpractice in the small venturearea.You've seenhundreds companies of grow and die. In our opinion, you are superblyqualified to offer us someguidance the future. for your confidence me and will be glad to help you out Caststcvcns-l appreciate in any way that I can. Specifically how can I be of assistance? vincent Palocio-Explainto us how srnall companies typically grow the stages they evolvethrough and the management operations and challenges that come with eachstage. RamontlPalacio In other words,map out for us how you think wicker Designs is likely to expandand alert us to obstacles we're likely to encounter alongthe way. With this knowledge we can anticipate future problems and gearup before they sneak on us. up Caststcvcns You've got a pretty tall order there,but I think I can at leastdraw you a sketchof venture growth patterns. reallynot all that complicated. It's

Wicker Designs

Companiestypically progressthrough four n.rajorgrowth phases:start-up, fast growth, maturation, and then stability. After this the company will either decline and eventually go under or start on a new growth curve, perhapsvia the merger route. is of I would saythat Wicker Designs in the latter stages start-upand about to that meansa companyhasmadeit move through the key hole. That's an expression growth through its initial survivaltest and is poisedto take off alongthe bell-shaped curve. How fast you progressalong the four-stagecurve dependson the nature of and regulated industryis,the rate of technologithe the product,how competitive zoom along the growth curve while cal obsolescence, and so on. Some companies is success noted, the key to business others poke along.As you haveperceptively not trying to rush through the curve but rather taking situationally appropriate actionalongthe way. "taking situationally apwhat do you nteanwhen you say Vint'etrtPalat'io-Exactly propriateaction"? your operational declsions fit whereyou are to Just that you calibrate Caststcyens to cash the needs a company, of access capital, on the curve.For instance, financial ability, all change aiongwith growth. flow, useof leverage, forecasting and growth,key growth challenges In the areaof personnel would includeadding technical, sales, a:d rnaintenance). and line managers, hiring staff people(clerical, which evolve lbrmalizing the training process.Among marketing relatedvariables and volume,extensiveness content alongthe growth curveare suchthingsas sales of advertising, the role of R & D. and process layout and Manufacturing revolvearoundplant expansion, concerns keyedto organizaeconomies scale. of Growth variables engineering. achieving and proliferationof include use of externalconsultants, tional and managerial issues going public with the saleof stock,involvement forrnal policiesand procedures, from with unions,and makingthe transition with acquisitions and merger,dealing (owner-based) to entrepreneurial management professional. evolves Finally, and most importantly,the smallfirm's competitive strategy modify along the growth cycle.The companymay selectdifferentmarket niches, leader the industry in its competitive edge,and vacillate betweenbeinga proactive or a reactivefollower. growthis obviously no RontondPalat'b-Seewhy we havecold feet,Jay?Managing sirnpleaffair. wouldn't be fun if it were easy! Situational entrepreneurship Coststcvens-But growth management not really as complicatedas I've made it sound. To a large is along the The operatingchallenges extent, it's just a matter of common sense. growth curve are actually quite predictable. Vinc'entPalacio-Glad to hear you say that Jayl Would you do us one more favor? that you mentioned a minute ago relating to Take each of the operatingvariables finance, personnel, marketing, manufacturing, organizationalmanagement,and

Exoerience Phase I: Venture Initiation

competitive strategyand outline for us the situationalchallenges that exist in each operating area for every growth phase: start-up, fast growth, maturation, and stability. In other words, describe us how operatingproblemsand challenges for change as the companycontinuesto grow. With this understanding, Ramond and I can gain a much better feel for whereWicker Desisns headed. is Problems won't sneakuo on us that way!

A n a l y s i s :R e s p o n do V i n c e n tP a l a c i o 'rs q u e sa st h o r o u g h l y sy o u c a n .U s i n g h e t e t a t s i t u a t i o n a lo p e r a t i n gv a r i a b l e s e n t i o n e db y J a y C a s t s t e v e n d i s c u s s o w m s, h p m a n a g e r i a l r o b l e m sa n d c h a l l e n g ee v o l v ea l o n gw i t h c o m p a n yg r o w t h . U s e s i l l u s t r a t i ve x a m p l ew h e r ep o s s i b l e . e s

the klotheskorner

The Klothes Korner, located in Providence,Rhode Island, is a specialtyclothing store for children. Owned and operated by Marlene Conlee, the Klothes Korner sells new and previously owned children's clothing from newborn through early teens.Approximately 30 percentof sales of previouslyowned merchandise, are and clothing for girls outsellsboy's clothing two to one. Ten percent of sales accrue from custom-made dresses sold on commission. Repeatbusiness accountsfor 75 to 80 percent sales. of Marlene Conlee is thirty-four years old and holds a collegedegreein secondary education.She taught high school for two yearsbefore openingthe Klothes Korner in March 1977. Her husbandDuane is a junior-high-school princi assistant pal and helps with the business weekends. on The 1000 squarefoot storeis located in a mini shopping mall that caters to small crafts stores, candle shops, and boutiques. The primary new clothing lines carried include Polly Flinders clothes for girls, Play Palstogs for boys, Baby Bliss baby wear, and Shirley pajamas. Customm a d e d r e s s es e l l f o r $ 6 . 5 0t o $ 1 2 . 5 0 ; g i r l sd r e s s efs o m 9 1 6 . 5 0t o 9 1 8 . 5 0 ; i r l s ' r g ' p l a y s e t sf r o m $ 6 . 5 0 t o $ 1 0 . 5 0 ;b o y s ' p a n t sa n dj e a n sf r o m $ 7 . 5 0t o $ 9 . 5 0 ; a n d baby clothes range from $7.50 to $15.00. All salesare by cash,although major credit cardsare usedfor about 15 percentof sales. During Decemberof 1980, Marlene developedher pro forma business projection for the coming year. She generatedthree sets of data based upon a pessimistic projection, a realisticprojection, and an optimistic projection.Plan A, the

Experience Phose I: Venture Initiation

positionfor sales after the storemoved projection,assumes no-growth a pessimistic in March, 1979,and before the impact of the recessionwas into the new building that Marlenewould continueto operate felt in April 1980.This plan also assumes grossmarginon sellingprice,which is below the industry average with a 37 percent with roughlyl5 increase sales, in a of 48 to 52 percent.Plan B assumes 25 percent percent of this coming from inflation, and the balancecoming liom a highergross sales.In Plan B, the grossmargin on sellingprice is increased margin and increased , m n o p e r c e n tP l a nC a s s u m ea n i n c r e a sie s a l e s f 4 0 p e r c e n ta n d a g r o s s a r g i n . s to 42 of percent.Theseare shownin the following series exhibitsalongwith the of 45 financialdata for 1979 and the first elevenmonthsof 1980.

t s A n a l y s i s :A n a l y z ee a c ho f t h e b u s i n e sp l a n sf r o m t h e s t a n d p o i no f a s s u m p t i o n s a a D a p p a r e n t lm a d e . o y o u q u e s t i o n n y o f t h e s e s s u m p t i o n s ? y s g l f y o u w e r em a n a g i n T h e K l o t h e sK o r n e r ,w h i c h b u s i n e sp l a nw o u l d y o u a c c e p t for 1981? Compareprolectedfinancialratiosfor The KlothesKorner with industryaverages s f o r r e t a i l e ro f c h i l d r e n ' c l o t h i n g . s c l f y o u w e r e M a r l e n e o n l e e ' sb a n k e r ,w o u l d y o u l e n d h e r $ 2 0 , 0 0 0f o r w o r k i n g tal capi ? pricerange? what would be a fair negotiating lf the storewerc put up for sale,

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T2

pharr composing
SCTVICC

Cynthia Pharr is president and founder of Pharr ComposingServicein Memphis, Tennessee. Sinceits inception in May 1961, the companyhasgrown steadilyshowing a net income of $39,000on sales $357,000during 1979. Cynthiahas won of severalcivic awardsin Memphis,including the city's Business Woman of the Year award. Sheholds a B.B.A. degree from MemphisStateUniversity. Cindy, tell us how you got into this business. I startedit about thirteenyearsago when I went looking forapart-timejob that wouldn't iake rne away for long periodsfrom my threejunior-high kids.I age was very involved with footballpractices balletlessons didn't want to work and and full-time. I started working part-time for an appraisal putting together an service, publication. write the copy and then haveto get it produced. had to in-house I'd I haveone hundredcopiesof the publicationprinted eachtime, and I was very surprisedto learn how expensive the process was. It also struck me as strange that when I would go to get the negatives the printersand typesetters set, were often rudeandindifferent. Then I heardabout a woman in town who did typesetting her own home, in so I lookedher up and found that shewas lessexpensive much nicerto custoand mers. The only problem, though, wasthat shewas very slow and usuallywould not makemy deadline, I wasback in troubleagain. so

t3

14

Experiencc Phasc I: Venture Iniliatir-tn

It occuredto me that I had always liked to type and that the smalltypesetting machines shouldn't be all that difficult to operate.I decidedto try it out, so I got a lease a machinefor about $300. Although I found that there weremany on thingsthat I didn't know how to do on the machine, sooncaught to the typeI on settingprocess. BeforeI knew it, peoplewereasking if I would do odd jobs for me them. I quit my job and stayedat home for about six monthsworking on small jobs for other people.They came to me strictly by word-of-mouth. soon got I about whetherto exbusierand knew that I was goingto haveto make a decision pandmy operation. I decided go ahead and rent an office with one smallroom locatednearmy to house.It rentedfor about $100 a month. I had somefriendsin the office down the hall who had openeda business were needing part-timesecretary. a They said and to me, "Look, if you're worried about your space and makingthe rent on it, we'Il let you do a little typing for us and that will help pay your bills.That way you can minimizeyour risk." I took them up on the deal.I rentedthis little room and did somework for them and then met ConnieBrenners. Conniehad smallchildrenof her own but wantedpart-timework just like I had wanted in the beginning, I talkedher into comingon boardwith me. Connie so business. had the typing aptitude and was willing to learn about the typesetting Fortunately,I had the good sense let Conniepretty much sether own schedule to Over the years,I havedonethis with rnostof my aroundher kids and their needs. and havefound it to be a competitive edge.It has allowedme to keep employees somegreatpeopleon boardwho couldn'twork strictlyon an 8:00 to 5:00 basis. With Connie around, things continuedto get busier and busier so that we quickly neededanotherpersonto help us out. Connieknew Susan Kelly, who was a student majoring in accounting MemphisState.Susanworked with us one at summeron a part-timebasisand really beganto enjoy what we weredoing.When Susan graduated, she was so enthusiasticabout our businessthat she decided to stayin typesetting ratherthan starta career accounting. in We were quite a team. Not only were we women who did not havea long apprenticeship the printing industry, but we alsohad new equipmentwhich most in of the old-line typesettersmade fun of and said was of doubtful quality. I think they really resentedthe fact that we were women, so they endedup criticizingour nrachines. They just couldn't believethat women could be successful typesetting. in They couldn't understandthat typesettingwas very much like typewriting work. But we showedthe male professionthat we could be very successful what at we were doing. I think what really made the differencewas that we treatedour customersvery well. This was a lessonthat I had learnedat the start of my business, sawthat we enioyed and it's one that I haveneverforgotten. I think our customers our work and wanted to serve them in the very best possible way. jobs, so we Over time, we kept getting the better customers and the bigger decidedto go to some automatedequipment.This decisionbrought us to another cross-roads the business, in because the automatedequipment called for an invest-

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2 EXHIBIT .4

A FOR 1979 ND 1980 M O N T H L Y G R O S SS A L E S

r919
JanuarY FebruarY March April May June July August September October November December

1980
3210 4460 5460 37 0 0 4130 2690 38 9 0 6690 52 1 0
b /JU

I360 I 800 4700 4990 3690 39 0 0 4250 7300 65s0 6350 7200 9 30 0

6910

12

pharr composing
CC SCTVI

cynthia Pharr is president and founder of Pharr composing Servicein Memphis, showhas Sinceits inceptionin May 1967 the company grownsteadily Tennessee. , of ing a net income of $39,000on sales $357,000during 1979.Cynthiahas won Woman of the Year severalcivic awardsin Memphis,including the city's Business StateUniversity. from Memphis award.Sheholdsa B.B.A.degree Cindy, tell us how you got into this business. I startedit about thirteenyearsago when I went looking forapart-timejob age that wouldn't take me away for long periodsfrom my threejunior-high kids' I and didn't want to work and with footballpractices balletlessons was very involved full-time. putting together an service, I started working part-tintefor an appraisal I to get it produced. had to publication. write the copy and then have I'd in-house printed eachtime, and I was very sulhave one hundredcopiesof the publication that was. It also struck me as strange the process prised to learn how expensive were often printersand typesetters set, when I would go to get the negatives the rudeand indifferent. in Then I heardabout a woman in town who did typesetting her own home, and lessexpensive much nicerto custoso I looked her up and found that she was mers. The only problern,though,was that shewas very slow and usuallywould not makemy deadline, I wasback in troubleagain. so
13

14

Llxperience PhaseI: Venture Iniliotion

liked to type and that the smalltypesetting It occuredto me that I had always machinesshouldn't be all that difficult to operate.I decidedto try it out, so I got a leaseon a machinefor about $300. Although I found that there weremany I thingsthat I didn't know how to do on the machine, sooncaughton to the typeme BeforeI knew it, peoplewereasking if I would do odd jobs for settingprocess. them. I quit my job and stayedat home for about six monthsworking on small jobs for other people.They came to me strictly by word-of-mouth. soon got I busier and knew that I was going to have to make a decisionabout whether to expandmy operation. I decidedto go aheadand rent an office with one smallroom locatednearmy house.It rentedfor about $ 100 a month. I had somefriendsin the office down the They said a hall who had openeda business were needing part-timesecretary. and to me, "Look, if you're worried about your space and makingthe rent on it, we'll let you do a little typing for us and that will help pay your bills.That way you can minimizeyour risk." I took them up on the deal.I rentedthis little room and did somework for them and then met ConnieBrenners. Conniehad smallchildrenof her own but wantedpart-timework just like I so had wanted in the beginning, I talkedher into comingon boardwith me. Connie business. the typing aptitude and was willing to learn about the typesetting had to Fortunately,I had the good sense let Conniepretty much sether own schedule Over the years,I havedonethiswithrnostof my aroundher kids and their needs. edge.It has allowedme to keep and havefound it to be a competitive employees somegreatpeopleon boardwho couldn'twork strictlyon an 8:00 to 5:00 basis. With Connie around, things continuedto get busier and busier so that we Kelly, who was quickly neededanotherpersonto help us out. Connieknew Susan at a student majoring in accounting MemphisState.Susanworked with us one summeron a part-timebasisand really beganto enjoy what we weredoing.When that she decided about our business Susan graduated,she was so enthusiastic in ratherthan starta career accounting. to stay in typesetting We were quite a team. Not only were we women who did not havea long which most in apprenticeship the printingindustry,but we alsohad new equipment of the old-line typesettersmade fun of and said was of doubtful quality. I think they really resentedthe fact that we were women, so they endedup criticizingour in machines.They just couldn't believethat women could be successful typesetting. was very much like typewritingwork. that typesetting They couldn't understand at But we showedthe male professionthat we could be very successful what we were doing. I think what really made the differencewas that we treatedour customers very well. This was a lessonthat I had learnedat the start of my business, sawthat we enjoyed and it's one that I haveneverforgotten. I think our customers way. them in the very best possible our work and wanted to serve jobs, so we and the bigger Over time, we kept getting the better customers decidedto go to some automatedequipment.This decisionbrought us to another because the automatedequipmentcalled for an investcross-roads the business, in

Pharr ComPosing Senice

15

that we had been ment of at least $15,000. compared with the little machine that we would haveto get a lot more this was a giant step for us. We knew leasing, in business order to pay for the automatedequipment' Weprogressivelygotmoreandmoreautomated'anditseemedthatfortwo volume wasn't going or three iays after we;d get a new piece of equipment,our would alwaysmanageto new customers to be large enough to pay for it. But the It got to be a .o.., un? *. ,oon found the need to add evenmore equipment' was with all o-fthis success that we had to work predictablecycle. The big problem getting higlrly qualified people to work at night was very irarder and harder because which would be difficult. We had to work ai night to avoid buying more equipment usedonly during the daY. Successmeantgrowthproblemsforus.Wesoonoutglewthefirstroomthat doubled we had beenrenting,so weleasedanotheroffice next door.This new office outtent,butitgaveusconsiderablymoreroom.Weendedupstayingthereabout five years. ThoseyearsSawanawfullotofgrowthinthebusiness'Weexpandedwith But the overgrowth more and more equipment and addedabout fifteen employees. to haunt us again.we knew that we were either goingto need problemscame back work on our redesign more room, or that we were going to have to do somemajor and it was at that leasedfacilities. The landlord offered to sell me the building, just didn't have the point that I realized we needed to borrow some money' We like the building through volume of operationsto warrant making a major purchase need for credit brought up a problem becauseup to this retained .urningr. The our equipment point, we had neverneededto borrow money. we had alwaysleased had to go to a banker' from IBM. I had never

How should Analysis: ln what ways can growth pose problemsfor a business? counteracted? be these Problems is that a business growingtoo fast?Too slow? Whatarethe signs

at Tell us about your first experience borrowing money' However,it had been I can tell you, for sure, that it wasn't an easydecision. with time that our cashflow neededto be supplemented apparentfor quite some I hate to admit this, but our cashwasso tight that eachmonth some outside iunds. wecouldnotpayoffbothofourmajoraccounts,whichwerelBMformachine would pay IBM leasingand the IRS for tax installments'So on somemonths we Thank goodness and ilnore the taxes and do just the opposite the next month'

16

Exoerience Phase I: Venture Initiation

their monthly payments,or IBM was very, very decent to us and flexible regarding it during this liquidity crisis.But the handI don't know how we would havemade writing was on the wall that we were goingto needsomeextra money. I decidedon askingfor a loan of $500. for? That'sall you asked That's all I askedfor;just $500. I was scaredto borrow much money' With our tight working capital I figured I probably shouldn't be borrowing at all. Anyand went to visit the bank. way, I worked up my courage Well, it didn't take long. The loan officer looked me in the eye and saidflat out, "I can't loan you the money." I said,"Why? How do you know?" He said, "Becauseyou're a woman. We can't loan you any money; it's just that simple." "You're not even going to look at my situation and seewhat my And I said, can business do?" "I'm sorry;wejust can't loan you the money." He answered, and So I just picked up my portfolio and left. I cameback to the business did the only thing I could-I just worked hard. The expandingvolume of business finally caught up with me, and I had to work around the clock almostliterally. I'd go home, fool with the kids, do what I had to do, and then it was back to work. I didn't have the revenuecoming in to expand the payroll, so I had to do more and more work myself. In retrospect, though, I don't feel bad about that period and our lack of financing. Perhapsif I had had the supply of money coming in from the bank, I and not worked as hard as I did. That might have hurt might have gotten careless the company'soverallsuccess. Before long, connie and susan were also working daysand nightsalongwith yealswe worked practicallyconstantly,the longesthoursme. For the next several no one would believeit. we had to do it to make up for not havingenoughmoney. Then in 1973, the friend that I had originally sharedan office with sawour potential. He had gone on to biggerand better thingsand realizedthat our business "You're just crazy not to go should have been growing more than it was. He said, down to the bank and get the money that you needfor equipmentand employees."

m e d A n a l y s i s :D o y o u f e e l t h e p r o b l e m s x p e r i e n c eb y C y n t h i ai n b o r r o w i n g o n e y for femaleentrepreneurs? aretypical t f I n y o u r o p i n i o n ,d i d t h e b a n k e rh a v ea n y j u s t i f i c a t i o no r r e i e c t i n gh e $ 5 0 0 l o a n to Cynthia?

Tell us what you did at this point. As you can imagine, I wasn't too excited about going back to visit with bankers who had turned me down cold just a couple of years before. I hadn't really thought that much would have changed the meantime.My friend, howin ever, assuredme that he knew a good banker down at First National and that I gettingthe money. would haveno hassle I went down there and the banker couldn't have been nicer. I couldn't believe it. I borrowed $500 and paid it back in a couple of months. Then I think I bought a car next. Of course,one thing that had helpedin gettingthe credit line was the fact that, by this point, I had incorporatedmy business. That seems have to made a largedifferencein the banker'smind. Now that I had solvedmy funds-flow problem, at least for the time being,I still had to do somethingabout the lack of room in our building.We decidedthat we neededto expand to another location once again.The landlord,however,liked us and gave us a very strong inducementto stay. He said he would let us stay in the building if we bought it from him. No down payment was required and he offered us an 8 percentloan. That would make our paymentsabout $500 a month. It was a very inviting offer. However,the buildingjust wouldn't suit our needsover the long-run. Then one of my artists noticed two buildingsin Memphiswhich seemed to fit our needsquite well. So I went down to First National againand askedif I could havethe money to buy both of the buildings. How much did you askfor this time, Cindy? Sixty thousand dollars.That was in 1915. The banker was very nice, buthe said that he could give me only a five-yearloan. After I multiplied that out, I decided that I couldn't repay it. I couldn't afford the payment over so short a period. So I talked to my accountant,who seemed very much againstbuying the buildings. He said that I should leasefor tax purposes. told him that there was I somethingin me that went againstperpetualrenting. I guess just the old necesit's sity instinct, but I like to think that I'm getting equity in something.I had gone through the whole renting-versus-owning questionwith our equipment purchasers. I had decidedwith them that buying was the way to go once we got to the point we could afford it. I have not ever regrettedthat decision,because now I have a lot of paid-for equipmentthat is still very productive. As it turned out, the reasonmy accountantwas so much in favor of leasing was that he had some spare office spacethat he wanted to unload on us. Well, I saw through that in a hurry and decidedthat we had better get a new accountant. I was acquaintedwith a young man who had just left a CPA firm to go into businessfor himself. He very much wanted my account. I told him we would be glad to sign on with him because would be happy to have someone we who would pay

17

18

Experience Phasc I: Venture Initiation

close attention to our financial needs. He's been one of our biggestassets. He genuinelycaresabout us and is interested how the business doing. in is The new accountantadvisedus that getting an SBA loan would be no problem and that he would love to help guide us through the process.He said that there was a suburbanbank that grantedthe loans and that we ought to look into the possibility as soon as possible.It turned out to be the bank that had deniedme yearsbefore. I said,"No way will I go back to that bank." the $500 several "They've got He said, new personnel,a whole new management team. You'Il be treated differently." I said,"O.K., Chris,but I'm telling you, if they aren'tdecentto me, I'm not dealingwith them for five minutes." Chris and I put together a very simple proposal along with my financial statements.I went right into the bank and in so many words said, "This is who I am; I have an office around the corner. I do this. I've beenin business years, seven and I doubt that you'll loan me this money;but I want to buy a building,I need $60,000,and I haveto go through the SBA. Do you want to handleit or not?" To my surprisethe bankersaid,"Oh, I think we might be very interested." I said, "Look, I don't want to wastemy time here.If you're goingto turn me down I want you to do it quickly because don't have much time. The buildI ings are going to be sold quickly and I need to say, 'yes' or 'no'. Do you under" stand? So he askedme all about what I did and then said, "Do you mind if I come over and look around your business this afternoon?" Well, I went back to the office that afternoon and forgot about it. I became very, very busy. Before I knew it, he was there to look around.I didn't really pay any attention to him. But what do you know, the next morning he called and said,"Well, we haveapproved your loan." I said "What?" "We've your 1oan." approved I said, "You can't be serious-you haven't taken enough time yet. Don't you haveto go before a board or something?" He said,"No. Do you want me to signthe loan?" So we borrowed the money. We didn't even have to put anything down. Since that day, the bank has been wonderful to us. Now I can go and say that I need $10,000 for jobs I'm working on, and I get the money with no questions asked. It's easy to get money, but I certainly don't abusemy credit line. I never borrow anything that I don't really need.

A n a l y s i s :P r o v i d e u i d e l i n efs r a s m a l lb u s i n e sts f o l l o w i n d e v e l o p i na s u p p o r g o o g t i v e ,l o n g - t e r me l a t i o n s h iw i t h a b a n k . r p

is Cynthia,tell us how your business doingat present' I'm glad to say that at the end of 1919, we were very happy and making a for profit. I think we are making a very nice percentage the printing industry. we the time, and we are tackling quite are continuing to get bigger customersall in However, we have now reachedanother crossroads sophisticatedassignments. the business. Whatdo You mean? We to I guess a certainextent we'revictimsof our own success. havereached future rapid growth is going to depend on getting a whole new the stagewhere generationof sophisticatedequipment in here. I'm talking about word processing equipment and electronic automated equipment. We're looking at sonlewherein another our to of the neighborhood $120,000in new investments advance business forward. we're on the threshold of becoming a whole new kind of malo, step to company, offering services entirely new types of customersthan we havein the that we're currently facing has to do with a reother real big challenge past. The cent offer to buy us out. Tell us about that offer. by approached Fred in This all happened early 1979.ln April of 1979,1was in were very interested acquiringus because Lindsey of StagecraftIndustries.They of our big-customerclientele.They offered me ten times earnings,which in the previousyear had run about $37,000. So they were making me a buyout offer of around$370,000. I am very flattered, of course, to receivethe attention of Stagecraftbut I'm having a tough time decidingwhether or not to continuegrowingon our own' graphics customers, one of our largest To make matterseven more complicated, is want us to sellout. Jason worried doesn't absolutely Jason, up headed by Clifford we his long-time relationshipwith us because havedone somevery about breaking they are pretty dependenton us. I don't things for them and I guess sophisticated make it sound like there is no other personin town who could handlethe mean to Jason account, but we have jobs in progressfor him and have built up certain overnight. with his companythat would be hard to replace relationships

a A n a l y s i s :l s $ 3 7 0 , 0 0 0 g o o do f f e r f o r t h e b u s i n e s s ? e l W h a to t h e rr e a s o n a b t e r m so f p u r c h a sm i g h ta l s ob e o f f e r e d ?

t9

E X H I B I3 - 1 T P h a r r o m p o s i nS e r v i c eI,n c . C g I N C O I \ 4S T A T E M E N T E f o r t h e f i s c a y e a re n d e d e p t e m b e3 0 , 1 9 1 9 l S r
Sales Less Operating Expenses Materials Wagesand salaries Utilities Interest Depreciation Other Total Operating Expense Income Before Taxes Corporate Income Tax E,xpense NET INCOME

$357,13 I $ 1r,123 2 1 55 7 , 0 3,847 6,137 4,170 5,261 306, 08 I s 1,023 I I,727 39.296 $

Do you v/ant to continue working as hard in the future as you havein the past,Cindy? Now that is a very good question.You see,I'm nearly 50 yearsold and I do wonder how many more years I can put in going full-blast. There are so many daily problems and hassles put up with. sometimesthe idea of sellingout at a to good profit and then, maybe, either retiring early or going to work for the new companyat a nice salaryis mighty tempting. Can you tell us about your immediate plansand priorities? I surecan. Right now, I'm sweating blood overan audit by the IRS. Canyou believeit; I went on vacationa few months ago for the first time in many yearsand that's when the IRS decidedto audit us. while I was in Europe they sent a notice in the mail which Susanand connie didn't pay any attention to, thinking it was just somethingroutine about taxes.Before they knew what washappening, IRS the representative hold ofthem and saidthat shewould be down in the next couple got ofdays for an audit. susanand connie told her that the ownerwasout oftown and askedif the audit could wait? The IRS lady said,"we contacted you someweeksago about this, so you should be ready." connie and Susan explainedthat they hadn't openedthe mail since I was out of town. The woman wouldn't believeit. It seems that she was new in the IRS office and on her first case,so she wantedto make a good impressionwith her boss.well, connie and Susanfinally managed contact to

20

E X H I B I3 - 2 T P h a r r o m p o s i nS e r v i c eI,n c C g BALANCE HEEI S S e p t e m b e r0 , 1 9 7 9 3

Current Assets Cash Accounts receivable Supplies and materials Prepaid insurance Total Current Assets Plant and Equipment Building Less: accumulated depreciation Equipment and fixtures Less: accumulated depreciation Total PIant and Equipment TOTAL ASSETS

$ 59,647 28,696 26,378 1,500

sr16,22r
60,000 8,000 10 1, 2 0 0 34,500 54,000 66,'00 7

r20,100 s236,921

Equitv and Stockholder's Liabilities


Current Liabilities Trade accounts payroil Other Total Current Liabilities Lon g-terrnliabilities SBA notes payable Total Liabilities Stockholder's Equity Paid-Capital Retained earnings Total Stockholder's Equity

$ 16,394 s,126 $ 21,520 54 , 0 0 0 75 . 5 2 0 40,073 121,328 1 61 , 4 0 1

S T O T A L L I A B I L I T I E SA N D S T O C K H O L D E R 'E Q U I T Y

$235s4

the situationto and explained for me in Europe,apologized ruiningmy vacation, me. me I cameback franticallyto preparefor the audit.It scared to death-made weeks,but the investigaWe me physically i11. dealt with the IRS lady for several hangingovermy head.That'sjust an tion is not through.I've still got that hassle 21

exanrpleof some of the daily headaches that I encounter, althoughI feel quite confidentthat we'll eventually work thingsout satisfactorily. As for now, I have the IRS on my mind alongwith the big decision about whetherto expandthe business into electronic services sell out to Stagecraft. or I can tell you, it's not goingto be easyto makeup my mind. How do you feel about the buyout offer? As you can see,I havemixed feelings about it. I believeour business an has awful lot of potential,but the Stagecraft offer is attractive. But then, I don't wish to alienateany of my big customers cause break in any trustedrelationships or a built up over the years.I'm also not convinced that I can't continueto guideour business new heightson our own, usingretainedearnings our primarysource to as of financing.At this point, I'm not really sure what I want to do. A lot more thinkingis goingto haveto go into it.

A n a l y s i sW h a td o y o u t h i n kC y n t h i a h a r s h o u l d o ? : P r d t W h a td o y o u p r e d i cs h ew i l l d o ?

aspneflc

enterprises

Aspheric Enterprises was formed in 1978 by y. L. chung, an immigrantfrom Taiwan,who invented revolutionary procedure makingaspheric a for opticallenses. Basedoutside of chicago in Evanston,Illinois, the corporation was funded under private stock placement by five investorsled by sidney Blackmon, a chicago investment counselor.Two of the investorswere universityprofessors, one was a dentist,the other a memberof Chung'sfamily. In 1968, Dr. Chung received dual doctoratesin physics and mathematics from a prestigiousAmerican university. He was a researchscientist for a large multinational corporation at the time he patentedthe aspherictechnologyunder his own name. He subsequently left his corporateposition to form AsphericEnterprises. Dr. Chung's aspheric processproduces lenseswith a uniform focal point. unlike regular sphericallenses,such as those typically used for prescriptioneyewear, all points on an aspferic lens have the sameoptical acuity. No optical distortion occurs at any point on the lens. Potential applicationsexist for cameras, microscopes, generalpurposeoptical equipment. and Backedby $125,000of seedequity, Dr. Chungpatented aspheric the manufacturing processin 1979 and set about marketing his invention. He initially approachedseveralhigh technology companiesnear Palo Alto, california, usinghis patent-applicationblueprints and working papers as marketing documents.Al-

24

Experience Phase I: Ventwe Initiation

though severalfirms congratulatedhim for technical brilliance, Chung found no backersfor his invention. He then approached venture capitalpartnership Boston,Venture Search, a in which initially expressed interest in the project but eventuallydeclinedto bean came involved.The explanatory letter from the seniorpartner, L. HaynesSinclair, is contained Exhibit 4-1. in With capital beginningto run low in the summerof 1980, Dr. Chung conPatents,a private marketing firm headquartered Philadelphia. tacted Re-Search in Re-SearchPatents worked closely with universitiesand government-sponsored laboratoriesin marketing technicalproducts to the privatesectorfor 30 percentof the royalty rights. Chung and his five stockholdersagreedthat their venture sufferedfrom inadequatemarketing and saw the need for expert guidancein this area.However, Patents, they were reluctant to turn over such a large royalty shareto Re-Search especiallyso early in their venture history. For its part, Re-search agreed design to a marketing strategy for Aspheric Enterprisesupon signing of royalty agreement contracts. Before taking further action of any kind, Dr. Chung decidedto call a stockholder'smeetingin September 1980.After six and one-half of hoursof sometimes heated discussion,the meeting adjourned with no definitive decision reached regarding Re-Search the offer. Two stockholderswith 29 percentownershipfavoredturning over the entire project to Re-Search Patents due to the limited marketing expertiseof Aspheric. Majority holder Sidney Blackmon (40 percent ownership)opposedthe tie-in and that Aspheric continue to go it alone. Blackmon expressed willinghis suggested nessto investan additional $50,000 in the company. Aspheric'stwo other investorsexpressed ambivalence about future strategy and declined to contribute more equity. Dr. Chung offered to return to work for his former corporate employer until all five stockholderscould reach accord on Aspheric'sfuture strategy.

A n a l y s i s :A s y o u s e ei t , w h y h a sA s p h e r i c n t e r p r i s ea i l e dt o g e l ? E fs l f y o u h a da l r e a d yn v e s t e $ 2 5 , 0 0 0 n t h e c o m p a n yw o u l dy o u c o n t r i b u t e o r e ? i d i , m l f D r . C h u n gr e c e i v ea n o t h e r$ 5 0 , 0 0 0 r o m M r . B l a c k m o nh o w s h o u l d h e m o n e y s f , t bespent? E go Where hould spheric nterprises from here? s A

EXHIBIT4-1

S L E T T E RF R O MV E N T U R E E A R C H Dr. Y. L. Chung Drive 10094Mayhill Estates B Suite Illinois 60611 Evanston, DearDr. Chung: and Since talking with you last month, my associates I have had the opportunity to discussyour asphericlens project thoroughly. While we are genuinely intrigued with your invention, we must turn down your lequest for financial process the support. This was a difficult decisionfor us to reach,because aspheric to appears havesomemerit. Unfortunately, we were unable to do adequateforecastingwork on youl proposalsent to us. We would product due to the sketchy nature of the business and conplan with pro forma statements preferreda completebusiness have much marketing guidelines.While your patent report data were informative, they crete still did not enableus to gaugeoverallprofit and market potential adequately. One of our consultants, Dr. A' Barry Witten, professor of physics, was familiar with your work and vouched for its technical merits. However, he was optics. with potential marketsfor aspheric not conversant you to spend more time formulating In closing,let me strongly encourage will be greatly enhanced your businessplan. Your probability of eventualsuccess "numbers" to sellyour project. some when you can generate Thank you for considering and I wish you every future success. My associates our firm in your project'splans. Sincerely,

L. HaynesSinclair SeniorPartner Venture Search Boston,Massachusetts

25

peppY's pizza

The following business plan was developed Ted Latham and Leon Haliburton, by recent businessgraduatesof Indiana state University in Terre Haute. They are seriously committed to opening Peppy'sPizza outlets in Terre Haute and plan to submit the business plan to local bankersin the near future.

Competitive Strategy
Peppy's Pizza can succeed in the carry-out plzza business differentiatingitself by from the competition in severalways: l. 2. 3. 4. 5. Lower cost Betterproduct Faster service Reliable delivery Very accessible location

Lower cost. The marketing survey we conducted here in Terre Haute (see Exhibit 5-1 ahead) peppy'ssignifishowed that priceis veryimportantto customers. cantly lower overheadwill enableus to undercut our competition and still offer a better-tasting pizza.

26

Peppy's Pizza

27

Better Product. We firm1ybelieve,after tastingvariouspizzasinTerre Haute, It that our recipe is one of the best available. is significantlybetter than any of the chains,and customerswill definitely be able to taste the difference.Being able to "good pizza," "better quality," as provide a better product is a key advantage "the best," and "better ingredients" accounted for 19 percent of the surveyrepatronizinglocal pizzarestaurants. spondents' so is FasterService. The desirefor fast food and fast service increasing, being in town definitely will be an advanthe fastest and most reliable pizza restaurant tage. We are confident that Peppy'scan easily have pizzasready faster than pizza Typically, the on which place their primary emphasis dining customers. restaurants their orders,and they do not advertise local competition is slow in filling take-out carry-outservice. Reliable Delivery. Pizza restaurantsare notorious for not having take-out orders ready when they say they will and for having slow delivery to homes(for Every minute beyond the promisedtime those that do make home deliveries). waits is a minute that he or she wishesthe order had beenplaced that a customer elsewhere.By having the pizza ready when we promise it, we will become that somewhere else. Since Peppy's Pizza is strictly carry-out and free from other and delivery. we distractions, will haveno problem with prompt service delivery service will be a very important part of Peppy's operation, Our specialattention. We will have at least two vehiclesand two emso it deserves on ployeeswith driverslicenses every shift. This combinationis more than enough guaranteeexcellent home delivery of Peppy'sPizza.We will chargeone dollar to for delivery servicein order to encouragepick-up at Peppy's.To avoid problems with gas and vehicle wear and tear, the employeemaking a delivery will keep the dollar in addition to any tips. The delivery income will be in addition to regular but wages.Most Peppy'sPizza customerswill pick up their food at the restaurant' those who don't, we plan to have a delivery servicewhich will be friendly, for can operate without customers,so reliable, and as fast as possible.No business we plan to make ours happy. are not convenientlylovery AccessibleLocation. Most pizza restaurants on This is in keepingwith their emphasis sit-down for residentialcustomers. cated becausepeople are willing to drive a bit further for a sit-down meal. business, for to areas make it quicker and easier custoPeppy'swill locate closeto residential mersto pick up pizzaswhile they're still hot. In conclusion,our competitive edge will help to make Peppy'sPizzaa successful and welcome addition to Terre Haute. When a family would like to eat and fries than a harnburger preparedfood at home, pizza will be more appealing than chicken or fish. Buying frozen pizza from a store is and much lessexpensive pizza that will be also less appealingthan stopping by Peppy'sfor a freshly-made table.In addition,the menu will be nice and hot when it is put on the dining-room

Experience Phase I: Venture Initiation

rounded out with submarinesandwiches, spaghetti, and ravioli to please everybody in the family. As Peppy's Pizza becomessuccessful, is possiblethat the national chains it will begin to stresscarry-out servicein an attempt to force us out of the market. If they do indeed try this, we believe that peppy's will prevail, because our five competitive advantages will still exist. Also by the time we are recognized a as threat in the market place, Peppy'swill be well-established a quality company as that is hereto stay. other pizza restaurantswill not be concernedwith peppy's pizza at Lhe start, becausethey seem to believe either that the carry-out market is not large enough to support a business, that they don't needcarry-outgiventheir present or successwith the sit-down market. We believe that the national chains will not attempt to developcarry-out as a major part of their business unlessthey are s i g n i f i c a n t l h u r t b y P e p p y ' s E v e ni f t h i s w e r e t o o c c u r ,t h e y w o u l d s t i l l b e u n y . likely to vary strategies because their sizableinvestmentin the dine-in market. of Consumerconfusionresultingfrom sucha switch in pizzarestaurant strategywould only benefit Peppy'sPizza.

Peppy's Location From our discussions with survey respondentsit was apparent that, for peppy's Pizzato be as competitive as possible,a prime site location will be necessary. This is not to say that we will needan expensive with lots of elaborate site surroundings. what Peppy'sneedsis a high-trafficareacloseto residential housing.A 600 squarefoot area is more than enough room for peppy's to operate efficiently without feeling cramped.In addition, there will be no needto havemore than a few parking spaces front of Peppy'sbecause in customers will simply walk in, get thefupizza, and leave. After careful consideration,we have concluded that the two best locations for a Peppy's Pizza would be northern Mills Drive (or within one block of it) or near the Indiana State campus.A location near ISU would have the disadvantage of having very slow businessduring the summer months becauseof the small numberof students who attendsummerschool. Therefore, we would want to open up the initial peppy's pizza operation on northern Mills. once this locationprospers, think it would be a good idea we to open a secondnear the campus,which would close during the summermonths. The ISU location of Peppy's would most certainly generateenough business to justify its existenceduring the school year, so closingit for the summeris simply anotherpositivepoint in the alreadyexcellentpeppy'spizza scheme. while we were in the processof consideringvarious locations for peppy's initial operation, a real estate salesman was consulted for cost figures.After we explained the type of operation that we expectedto start, we were told that the

Peppy's Pizza

29

probable monttrly rent per square-footwould be 50 cents. At our optimal 600 square-footlocation, this translates into $300 per month for rent. We alsoinquired as to the problemswe were likely to encounterin finding a location that suitsour needs.The real estate agent told us that there would definitely be no problem, sincethere is an abundance shopsof that sizeavailable. of Another factor to be considered,when looking for specific sites, would obviously be the competition. One would intuitively think that the national and regional chainswould provide formidable competition, sincethey have the advantagesof sophisticatedadvertising,attractive and comfortable dining areas,choice of thin and thick pizza, and saladbars. However,we feel that there is a basic difference in philosophy between Peppy'sPizza and,the dine-in restaurants. Peppy's doesn't need elaborateadvertising, nice dining areas, a saladbar. We simply want or to provide the best pizza in town, in such a way that Terre Haute consumers can enjoy it in their homes.In light of the above facts, we want a location that is not right next door to a pizzarestaurant, but it could be within a block of one.

Analysis Survey of One of the questionswe asked surveyrespondents was whether they more often ate pizza in a restaurant took it home. The answers or were skewedtoward the "eat at the restaurant" end of the scale.This could be. on the surface.an indicator that people simply don't want to eat pizza at home. However,in discussions with the respondentsafter they had completed the questionnaire, discovered we that they basedtheir responseon the fact that no piz.zarestaurantproperly cateredto the carry-out market. As discussed earlier,Iocal pizza restaurants lessthan enthuare siastic toward carry-out orders. In our post-survey discussions, were delighted we to find an overwhelming positive responseto the Peppy's Pizza concept.Most people said that they would be overjoyedif an operationlike Peppy'swould open in Terre Haute. A related question in our survey askedwhether a carry-out pizza restaurant was a good idea. We were quite surprisedto find that only 36.7 percent of the respondents said that they thought it was a good idea. Again, in our post-survey discussions found out why the respondents we answered the way they did. In this particular instance,there were two reasons why peopletended to dislikethe carryout-only concept. The first stemmedfrom the fact that poor service has been associated with carry-out pizzas.People tended to think that poor servicewas an inherent part ofthis type of operation,and thus, they thought it would not succeed. After we explained Peppy's competitive advantages,the respondentsalmost universallyendorsedthe idea. They thought that it would be great to have good serviceon the occasions when they wanted to eat pizza at home as opposedto dining in a restaurant.In fact, about half of the respondents that they suggested would alwayseat their pizzaat home if they could get proper service.

Experience Phase I: Venture Initiation

The respondents also doubted that a carry-out pizza place would be able to generateenough business.There seemedto be some mystique that surroundsa restaurantthat has an elaboratedining room. When we beganto explain the conmost cepts of lower overheadand how this would allow lower pricesto be charged, peoplechanged their minds. In actuality, we simply had people filI out the surveyas a basisfor a short we have presentedwere taken from answersgiven discussion.The percentages we took place.From a time perspective, felt it would be too before the discussions much to ask respondents fill out another survey,so we decidedto presentthe to resultswe had and clarify them. The final question that requires clarification concerns competitors. In responseto why they favored a particular restaurant,44.2 percentof the respon"good pizza," 17.6 percentsaid it was the "best," ll.6 percentsaid dents said "better quality," and I 1.6 percent said "better ingredients."That's a total of 19 of percent saying they preferred their favorite restaurantbecause the good pizza. we are quite This particular question excited us more than any other, because confident that Peppy'sPizzamakesa pizza superiorto any found in Terre Haute.

Pizza Datafor Peppy's Costand Financial Much of the information compiled thus far in our report resultedfrom interviews with pizza restaurantowners and managers Terre Haute. An additional source in was the owner of Hungry Howie's pizza operalion in Livonia, Michigan.We feel theseinterviews, because current section the this is the appropriateplace to discuss of our report is basedalmost entirely upon data compiled during theseinterviews. The financial exhibits found aheadreflect a conservative average all the personal of that, even though the informainterviewsconducted.We would like to emphasize of tion may appearto be very optimistic, it falls below the averages our interviews. With an In other words, we feel we have drawn pessimisticfinancial estimates. effective and efficient operation,we are confident that Peppy'sPizza colld do even better.

Peppy's Products Peppy's Pizza wlll definitely offer severaldifferent sizesof pizza in addition to a wide variety of toppings. Our main question in developingthe product mix was In whether we should offer other items to complement the pizza business. the were asked if they thought it was a good idea to serveonly survey, respondents pizza. Of the total, 71.8 percent said they thought it was a good idea to also serve listed "vaitems other than pizza. However, only 3.6 percent of the respondents

Peppy's Pizza

31

riety" in answeringwhy they liked their favorite pizza restaurant.This apparent contradiction could be the result of peoplenot necessarily wanting other items but believingthat other foods would be required for apizza restaurant be successful. to Interviewswith several pizza restaurant gaveus another ownersand managers reason why we might want to serveseveralchoicesof food. Servingsubmarine sandwiches offers a good way to make use of food stocks that might otherwise spoil. Due to the fact that large quantitiesof most of the items must be purchased in order to get a reasonable price, there sometimesis too much stock on hand. Selling subs(we feel thirty-five a day is a conservative projection) would allow us to keep food stocks fresherand at the sametime have variety in the menu. After careful considerationof all relevantitems, we think the menu and price list shown in Exhibit 5-14is an excellent one.

Peppy's PizzaPromotion Price is definitely a factor that can be used in establishing Peppy's Pizza in the marketplace.Sixty-three percent of our survey respondents said that they do pay attention to price when they go out for pizza or take it home. Initial promotion of Peppy's should put emphasison lower-pricedpizzato attract what appears to be a very price-conscious public. Then the questionthat arises how to go about is attracting businesswith the lower prices. we decided to explore two different alternatives,both of which consistof not lowering pricesdirectly but using other meansto effectivelylower coststo consumers. The first of these consistsof offering a free quart of soda pop with every ptzza purchased. Secondly,we like the idea of giving with everypurchase, Peppy's tokens good toward a free pizza when four are collected. Responses both of to these ideas were extremely positive, as "yes" answers made up 82.1 percent and 89.7 percent respectively. The slightly lower percentage free sodapop is probfor ably due to some people not wanting soda pop with their pizza, for example, beerdrinkers. In trying to determine further the effectiveness discount coupons, reof spondentswere asked how often they used pizza coupons found in local newspapers.Of the total,23.1 percentsaid they alwaysuse them, 66.7 percentsaid they sometimesuse them (forgetting the coupons at home was a common problem), and 10.2 percent said they never use them. This adds additionalcredence to the price consciousness consumers. of After examiningthe aboveresponses and their implications,we havedecided to adopt the followinginitialstrategy: The cost of the tokens(31 centscachinlots of 2000) makes their use feasibleonly if Peppy'sneedsan additional boost to increasesales.we feel strongly that this boost will not be neededdue to our other competitive advantages. Therefore, we will stick with the coupon system, discounting at the outset. On Peppy's Pizza handbils, which will be distributed

32

Experience Phase I: Venture Initiation

throughout the local area, will be a completemenu and price list along with the following coupons:
o Free small pizza with purchase of an extra large o Monday only: buy a medium pizza and get the same size pizza free o . o r . r 2 quarts soda pop free with large or extralarge pizza 1 quart soda pop free with medium pizza $ 1 . 2 5 o f f e x t r a l a r g ep i z z a $1.00 offlargepizza $.75 off medium pizza One order of ravioli or spaghetti free with purchase of the same

The variety of coupons offered will undoubtedly appealto all pizza lovers. We are confident that the use of couponsin conjunction with regularnewspaper advertising will be sufficient to attract significantinitial business. This initial busi nesswill lead to referral businessthanks to the friendly and speedyservice, and greatpizzaat Peppy's.

Expansion Plans

As discussed earlier,once Peppy'sPizzahas becomesuccessful with its first outlet, we will expand to a secondlocation near the Indiana State campus.After both locations are operating smoothly, we will give considerationto opening other company-ownedstores throughout Indiana. This would obviously be dependent on finding capable and trustworthy managersto run the individual locations. Peppy's initial period of slow, controlled, growth will allow us to build up the necessary capital for a possiblefranchisesystem.It will also allow us to perfect the logisticsof openingand operatingnew units. It should be emphasized this point that our main concernis gettingstarted at in Terre Haute, not franchising.We could conceivablybe very content with our local operationsand not expand,or onJyopen a limited number of company-owned Peppy's around Indiana. The costs of starting a franchisesystem are very large. Entrepreneurswho have started franchise systemsestimate that a minimum of $250,000 is needed.The franchisor must pay a $4,000 registrationfee and file a disclosurestatement to satisfy governmentrequirements, with legal fees for this alone amounting to approximately $26,000. The franchisor must also develop training programs,promotional campaigns, system operationsguide, and other a related items to insure that a franchisee can profitably run the unit evenif he has had no experiencein business. conclusion,Peppy'sPizza wf.l first concentrate In on its Terre Haute units, which may lead to company expansionthrough owned

Peppy's Pizza

33

units or franchisesafter their successfulstart-up. We are very confident that Peppy'swill soon becomea welcomeaddition to the Terre Haute community.

A n a l y s i s :l s t h e p r e c e d i n g o c u m e n tw i t h s u b s e q u e n tx h i b i t sa n a d e q u a t e u s i d e b nessplan? Do you feel Lathamand Haliburtonhavecapablyplannedfor their p r o s p e c t i vn e w v e n t u r e ? o w c a nt h e d o c u m e nb e i m p r o v e d ? e H t Evaluatethe marketingresearch conductedby the entrepreneurs from the standp o i n t o f v a l i d i t y , o m p l e t e n e s sn do b j e c t i v i t yI.n w h a tw a y sc o u l di t h a v eb e e n c a, improved? A s a b a n k e r w o u l dy o u l o a ns e e d a p i t atl o P e p p y ' s i z z a ?f s o ,h o w m u c h ? , c P l

E X H I B I5 - 1 T R E S E A R C H UR V E YQ U E S T I O N N A IE S R l. What percentage the people your family like pizza? in of


2. How many times a month does your family get pizza from a pizza place? | 2 3 4 5 6 ormore 3. When you have pizza, which do you do most often? carry out for home carry out for work eat at restaurant 4. In your opinion, rs a pizza restaurant that is strictly carry-out a good idea? Y N 5. In your opinion, is it better for apizza restaurantto serve only pizza,ot to serveother items as well, such as submarine sandwiches,spaghetti,and ravioli? Y N 6. When you go out for ptzza, do you pay any attention to the price? Y N 7. Do you use the pizza coupons found in local newspapers when you buy ptzza from a restaurant? never sometimes always 8. Do you like the idea of apizzaplace giving a free quart of soda pop with every pizza bought? Y N 9. Do you like the idea of a pizza restaurant offering a free pizza with the redemption of four tokens (one given each time you purchased a pizza)? Y N 10. Overall, what are your two favorite pizza restaurantsin Terre Haute?

whv?
I l. Do you always go to one of your two favorite pizza restaurants? Y N

E X H I B I T 5 - 1C o n t i n u e d

12. What is your agerange? 10-19 40-49 20-29 50-59 30-39 60 13. What is your family incomerange? o $10,000 r undet I 1,000-19,000 20,000-29,000 3 0 , 0 0 0 -9 , 0 0 0 3 40,000-49,000 5 0 , 0 0 0 n du p a
E X HI B I T5 - 2 SURVEY RESULTS

All 1 Question 10 20 25 30 40 t.7%


J . J

ISU Only

'70 '75 80 83 90 100


2 Question I 2 3
A

)U

1.7 1.7 1,'7 10.0


t'7

10.0 6.7

3.8 11.5

r.7
55 . 0 84.6 26.9 38.s 15.4 154 . 3.8 8.0 t2.0 8.0 34.6 65.4

rs.o%
21.7
zJ.)

5
o Question 3

20.0 8.3 1 t. 7
)\ 5q^

I 2
J

44.0 305 36.7% 63.3

4 Question Yes No

34

EXHIBIT 5-2Continued

All Q u e s t i o n5 Yes No Q u e s t i o n6 Yes No Q u e s t i o n7 Never Sometimes Always Q u e s t i o n8 Yes No Question 9 yes No

ISU Only

'7 t.8 28.2 63.37o 36.7 to.0% 68.3 2l.7 86.7% 13.3 88.3% 1t . ' 1

56.0 44.0 69.2 30 . 8 7.7 76 . 9 ts.4 92.3 7.1 84.6 t5.4

First Favorite ISU AII


Q u e s t i o n1 0 P a p p aR o l l o ' s Mr. Gatti's Giovanni's Pizza PlaneL Ptzza lllt Ptzza lnn

Favorite Second ISU AIl t1.9% 24.0 48.0 3s6 5.1 16.0 11 . 9 23.7 8.0 4.0 11.9

1s.o% 30.8 38 . 5 26.7 6.'7 2 1. 1 23.1 3.8 I3.3 3.8 16.'7

AI
Why? Q u e s t i o nl 0 BetterQuality Good Pizza Atmosphere The Best Variety Big TV Better Ingredients W h e r eF r i e n d sG o Guys Questionl I Yes No

ISU Only 5.0 40.0 10.0

11.6% 44.2 '7.0 116 . '7.0 11 . 6


l-J

z.J

2.3 61.0% 39 . 0

15.0 25.0 5.0 5.0 68 . 0 32.0

?5

EXHIBIT 5-2Continued

All

ISUOnly 24.O 76.0

l Q u e s t i o n2 10-19 20-29 30-39 40-49 50-59 60+ 1 Question 3 10+ under 11 - 1 9 20-29 30-39 40-49 50+

tt.9% 74 . 6 13.6

333% 9.3 29.6 11.1 3.1 13.0

63.6 9.1
A .,\ < 1

5 EXHIBIT -3 P COSTAND FINANCIAL DATA ON PEPPY'S IZZA

To ItemsSubject DePreciation
Ovens: 10 yearlife $4,000 original cost Straightline dePreciation = S 4 0 0 / y e a rd e P r e c i a t i o n ( $ 3 3 . 3 3 / m o n t h ) 5 year life $ 2 , 0 0 0 o r i g i n a lc o s t Straight-line dePreciation n S400/yeadepreciatio= ($33.33/month) r i 0 year life $3,000cost Straight-line dePreciation d n $ 3 0 0 / y e a r e P r e c i a t i o= ( $ 2 5 l m o n t h ) 10 year life S 2 , 5 0 0c o s t Straight-line dePreciation n $ 2 50 / y e a rd e p r e c i a t i o = ( $ 2 0 . 8 3 / m o n t h )

s4,000.00

Mixer:

$2 , 0 0 0 . 0 0

Retarder:

$3,000.00

Cooler:

0 $2,5 0.00

TOTAL

$ r1 , s 0 0 . 0 0

5 EXHIBIT -4 N INITIAL SUPPLIES EEDED 100 lbs flour 2 casespizza sauce 40 lbs. mozzarella I 40 lbs. mozzarella II 25 lbs. pepperoni 56 tbs. imported ham L0 lbs. Italian sausage 20 lbs. hamburger 15 lbs. steak 2 boxes mushrooms 2 cans anchovies 4 cans yeast I caselettuce mild PePPers 2 cases hot pePPers 2 cases 2 boxes tomatoes 40 lbs. American cheese 2 jars black olives 2 dozen green peppers 2 dozen onions 10 lbs.bacon I 0 boxes spaghetti 2 casescanned ravioli 2000 pizzaboxes I 000 quart containers for PoP 1000straws Stapler and staPles 50 large sub buns 500 bags 40 gal. pop (Dr. PePPer,Coke, etc.) 10 screensto cook Pizza on 2 checkbooks Kitchen utensils Stainlesssteel storagePans 2 oil (cases) 25 lbs. salt 25 lbs. sugar I 2 oregano(can) I 2 basil (cans) I 2 parsley (cans) 24 pepper (cans) 12 crushed red PePPer I 2 cans garlic 24 grated Parmesan cheese(large shakers) 50 garbageliners

34.00 43.08 38 . 4 0 38 . 4 0 57 . 0 0 I 17.60 15.50 34.'t8 37.50 25 . 0 0 16.58 t'7.96 9.99 2s.98 2s.98 12.90 32 . 0 0 1 3 .0 5 3.92 4.68 19.60 8.90 4s.65 2 50 . 0 0 95 . 0 0 2.98 9.98 20.84 tt.75 64.96 40.00 30 . 0 0 s0 . 0 0 100.00 48.00 7.00 7.00 20.40 12.72 I 1.45 19.s0 12.12 30 . 0 0 36.00 5.5 0

E X H I B I T5 - 4C o n t i n u e d 2 mops 2 bleach (cases) 1 2 a m m o n i a( q u a r t s ) Miscellaneous and/or forgotten items

5.98 6.72 s .1 6 50 . 0 0 $1 , 6 4 9 . 0 0

EXHIBIT .5 5 START UP COSTS Food handling permit @ 5.00 per person Tile for floor (already provided) Restroom facilities for employees(already provided) Counter to work on and servecustomers Cash register Store-front sign Stainlesssteel tables (4 (@$300 each) Stainless steel sink Chairs for customers who are waiting (4) P l a n t st o m a k e i t l o o k n i c e Ovens, mixer, retarder, cooler (describedearlier) lnitial suppliesneeded (describedearlier)

s.00

150.00 499.00 s62.00 l,200.00 50 0 . 0 0 40.00 s0.00 $ 3,006.00 I 1,5 0.00 0 r.649.92 1 $ 1 6 , ss . 9 2

E X H I B I5 6 T R FINANCING EQUIRED 3 6 m o n t hl o a n A s s u m i n a l o a na t 2 O % o r $ 1 7 , 5 0 0 : g f
Monthly payments Total payments Less: principal Total interest Monthly interest payment

$ 650.36 23,413.06 17.000.00 $ 6,413.06 6,4t3.06 36 $ I78.14

-t8

E X H I B I5 - 7 T S A V E R A G EI N G R E D I E N TC O S TP E RP I Z Z A C o s to f d o u g h :
Water Yeast Salt Sugar Flour

$ 0.132 0.140 0.1 0 6 17.00 $17.43+70

Pizza sauce: Cheeses: Toppings: Spices: Box: Spoilage,overcooking, mistake orders: TOTAL AVERAGE COST OF PIZZA

$0.25 0.22 0.23 0.53 0.04 0.13 0.10 $1 . s 0

EXHIBIT .8 5 E X P E C T E DP I Z Z A S A L E S P E R D A Y Sunday Monday Tuesday Wednesday Thursday Friday Saturday Weekly

t'75 190 200 200 200 300 300

EXHIBIT 5-9

N N U M B E RO F E M P L O Y E E S E E D E D P E R D A Y Sunday Monday Tuesday Wednesday Thursday Friday Saturday


J J J J

3 5

39

5 EXHIBIT -10 P R O JE C T E D M O N T H L Y C O S T S Cost of goods sold Wages(including manager'ssalary) Advertising Rent Telephone Utilities suPPlies Miscellaneous Depreciation lnterest

$1 0 , 1 2 0 . 0 0 . 4 , 0 0 5 7| 500.00 0 30 0 . 0 25.00 120.00 175.00 112.49 8 17 .14 TOTAL


q 1( s ? 6 ? 4

Fixed portion: Fixed wages Advertising Rent Telephone Utilities Depreciation Interest Variable portion: Cost of goods sold Variable wages

$ 3,s60.00 500.00 30 0 . 0 0 25.00 120.00 112.49 118.14 $ 4,795.63 $l 0 , l 2 0 . 0 0 | 445.'7 $1 0 , 5 6 5 . 7 1

5 1 EXHIBIT .1 MONTHLY BREAK.EVEN POINT BEunitt fixed cost

sellingprice - variablecost Fixedcost price Selling c Variable ost BEunir" 4,195.63 0 | .57 5.5 = $ 4,795.63 = $ 5.50average = = $ 1 0 , 5 6 5 . 7+ 6 7 0 ' 7 $ l ' 5 7 a v e r a g e 1 = 1,220 izzas P

BEr

5.50X1,220=6,7IO.OO

pizzas' In actuality, the Note: We have assumed, fbr conservatism, that all revenue will be from generated from other food' The above figures are probably understated, because sales will be so breakdown would variable costs include the estimated cost of goods sold for the other items, be lower. We feel that the variance is not significant'

E X H t B t r5 - 1 2 M O N T H L Y I N C O ME S T A T E M E N T

Revenues:
Pizza Subs and other items TOTAL

9 $3 6 , 8 8 . 2 9 2 , 5 1 775 . 0 $39 , 4 7 . 0 4

Expenses:
Cost of goods sold $1 0 , 1 2 0 . 0 0 Wages(including manager's 4 , 0 0 5 7| salary) . Advertising 500.00 Rent 300.00 Telephone 25.00 Utilities 120.00 Miscellaneous 175.00 supplies Depreciation 1t2.49 Interest t 78 . 1 4 TOTAL Income Before Taxes

$1 5 , 5 3 6 . 3 4 $23,870.70

EXHIBIT -13 5 PEPPY'S ONTHLY CASH FLOW M

Sources Cash: of
Salesrevenue ftom pizza Salesrevenue from subs (etc.) TOTAL CASH GENERATED $36,889.29 2,517.75 $39,407.04

of Uses Cash: 2 Cost of goods sold $ 10 , 1 0 . 0 0 4,005.7 | Monthly wages(including manager) s0 0 . 0 0 Advertising 30 0 . 0 0 Rent 25.00 Telephone 120.00 Utilities Miscellaneous supplies 175.00 Payment on note (including interest) 65 0 . 0 0
TOTAL CASH APPLIED Increase in cash during month before taxes

$1 s , 8 9 6 . 0 7 s25,510.97

5 EXHIBIT -14

M PIZZA ENU
Pizzas Junior 6 pc. Small 8 pc. Medium Large l0 Pc. Extra Large 1 2 P c . 1 6P c ' s.05 5.90

3.9s 1.95 2.75 Cheese '7 -15 5.95 4.85 3.40 2.45 and one item Cheese '7 '85 6.85 5.50 4.r5 2.'70 Cheese and two items '1.40 8.45 6.05 4.55 3.05 Cheeseand three items 9.50 8.35 5.65 6.95 3.95 Special - anchovies on onion,and bacon (pepperoni, mushrooms, ham, green pepper, request) 8'4s 7 '40 6.05 4.55 3.05 Pizzaburger pepPer) onion, and green (cheese,hamburger, 7'8s 6.85 5.50 4.15 2.70 Italian Delight (cheese,Italian sausage, and mushrooms) 8.45 7.40 6.05 4'55 3'05 The Peppy
(steak, cheese, and mushrooms) '85 '75 '65 '55 '45 Extra items or double dough 9'50 8'35 6'95 5'65 3'95 e TacoSuprem Pizza hot sauce (taco meat, cheese,topped with lettuce, tomatoes' cheddar cheese' on the side) P i z z aT o p p i n g sT o C h o o s eF r o m l ! ! green Italian sausage' Mushrooms, cheese,pepperoni, hamburger, black olives, onion, anchovies,ham, bacon'

Chef Salad
olives,ham and cheese Lettuce, tomato, onron, green pepper' mushrooms, black 2.7 5 Dressing:French, Italian, or Thousand Island

Pasta
Spaghetti with meat sauce Ravioli with meat sauce Mushrooms .35 extra .60 extra Meatballs Above orders servedwith bread and cheese

2.25 2.25

Submarines
Deluxe combination Ham, pepperoni, and cheese Steak sub Steak and cheese Steak and mushrooms

Half 1.30 1.55 1.85 1.80

Whole 2.55 2.90 3.20 3.30

42

C 5 EXHIBIT -14 ontinued 3'60 2'lO S t e a k ,m u s h r o o m s ,a n d c h e e s e 2'20 1'15 Pizzasub green pepper' cheese'and pizza sauce Pepperoni,ham, mushrooms, onion' 2'60 l '45 Ham sub 2''70 1'55 Ham and cheese 2'60 1'45 Hamburger sub 2''7O l'55 Cheeseburgersub 2'10 l '55 s I t a l i a n s a u s a g eu b 2'80 1'65 and cheese Italian sausage 2'40 l '50 Meatball sub Spaghetti sauce and cheese 2'40 l '25 Vegetarian sub hot peppers' except onions' and All submarinesinclude lettuce, tomatoes' subs Pizza 40 on any whole sub .25 on anY half sub Additional Items

and craig nichols gary harwell

"We'vegot the merchandise facilities; we neednow is a competitive edge'" all and Craig Nichols summed up the statusof a new venturehe just initiated with Oregon,wherethey attended friend Gary Harwell. Craigand Gary residein Eugene, book collecting. and pursuetheir mutualhobby of science-fiction college "Craig and I are really into sciencefiction," Harwell explains."We have Van Vogt, pooled our book collection and have over 4,000 volumes-Heinlein, in Bester, Moorcock, Pohl. You name the book; it's somewhere our Asimov, collection." "Not only that," Nichols adds, "we've got sci-fimagazines goingback over years. neatlycatalogued indexed." and A11 twenty-five to During the summerof 1980, both Nicholsand Harwelldecided stay out storein Eugeneas a the possibility of openinga used-book of school to investigate their incomeyeal lound. Nicholsand Harwellelaborate: means supplementing of Nichols Gary and I figured that we might as well try to capitalizeon oul love of because storeoperations books and reading.Both of us arefalniliarwith used-book we havehauntedthem so regularlyin building our collection. all Harwell-Tltat's right. Going to bookstores over the Northwesthasbeena hobby operationin this part of the of ours. We'veseenjust about everyused-paperback to country.A lot ofthem seem be profiting. nearthe Universityof station here in Eugene IVichctlsGary's uncle owned a service 44

Craig Nichols and Gary Harwell

45

Oregoncampus.OPECput the station under in 1918, andit's beenvacantsince.We store.He agreed made a deal with his uncle to convertthe facility into a used-book to do it for 25 percentof our take for two years. Harwell-Not a bad deal, actually, since the station was located near the campus and in a good state of repair. To say the least, there ale hoardsof avid readersat the University. Nichols-Just three weeksafter lining up the station, Gary and I lucked into a deal outlet put his used-paperback over in Portland. The owner of a pretty good-sized quick cash to cover farming lossessuffered in merchandiseup for sale to raise Can you believehis luck? He had 200 acreswithin 50 miles southernWashington. of Mount St. Helens! and magazines, Harwell-We swung a good deal with him-over 10,000paperbacks, we borrowedthe money from for $3,500. That's about 35 cents apiece. comics some fraternity brothers, rented a U-Haul truck, and carted home our start-up inventory. Nichols-lt filled the servicestation about half way. We're currently in the process the of cataloging stuff. We definitely got a greatdeal.Most of the books are in good shapeand have recent copyrights.We got a good mixture of fiction and nonfiction, gothics,biographies, and a few technicalbooks. mysteries, includingwesterns, Harwell-We're virtually ready to open the doors, but we still haven't decidedon what competitivestrategyto use. Nichots-That's our problem. We don't want to be just another used-bookstore. different in our Eugenealreadyhas a half-dozenof those.We want to be something imageand in the way we operate. Harwell-We've kicked around a few ideasthat might provideus with a competitive edge, but we haven't really settled on anything.We're ready to open but want to wait until we havecrystalizedour strategy. basedon our differentiatedimage Nichols-We want to be ableto attract customers We'relooking to be somethinga little different. and unique style of operating. Harwell And profitable!

and competitiveedgefor the new bookAnalysis: Designa competitivestrategy namefor the store.Striveto satisfythe criteriaestabstore. Includea suggested t a b l i s h e d y N i c h o l s n d H a r w e l lt,o b e d i f f e r e n a n d p r o f i t a b l e .

exptorauon grapnrcs
l o

. .

Jamie Thompsonis presidentand managerof ExplorationGraphics, lnc., a computer services graphicsand interpretsgeographical company that prepares datafor the oil and gasindustry. The company is located in Midland, Texas,where Jamie wasborn and currentlyresides. Jamie graduatedfrom Midland High School in 1965 and has taken a variety of collegecoursessince then. She was recently chosen Texas magazine by Business asone of the top ten womenexecutives Texas. in Jamie's interestsrange from readingvariousbusiness periodicalsto outdoor recreationincluding hunting, fishing, camping,and swimming.She is a memberof the PermianToastmasters, Midland Business and Professional Women'sClub, West TexasGeologicalSociety, the High Sky Bass Club, and the Midland Rifle and Pistol Club. Jamie and her husband,Doyle, are the parentsof two girls, agessevenand five. Jamie,please tell us what ExplorationGraphics does-whatyour companyis you all about,and the kinds of services offer. Basically,we apply computerizationto oil-field-exploration This is analysis. a fancy way of sayingthat we provide our clientswith computerassisted analytical services. have a data file containingmore than a decade's We worth of information about oil and gas wells drilled in the PermianBasin region,which encompasses a large part of West Texas. We use this information to developcomputer printouts 46

Exploration Graphics

47

as or contour mapsfor many independentoil companies well as the majors. These computerized geographicalmaps show data such as which oil and gas wells are producing,what thesewells have done historically,patternsof well production in the area, and related concelns.We use a variety of information inputs cores,and so on. such as a basemap, correlatedelectric logs, scout data, samples, it We take this information, process by a computer, and melge it into convenient printouts for the busy geologistto use. In effect, we type, file, retrieve,draft, and for processdata which would be much too complexand cumbersome practitioners to use. boost the user's productivity by a minimum of 20 pelcent. These services weekscompiling Just imagine,the technicianwould haveto spenddaysand perhaps and processingthis geologicalinformation. Our computerization does this in a the Not only do we process information, but we package matter of a few seconds. when I say that I'm not bragging it in a useful, convenientway for the geologist. is our business reallyunique. Tell us how you got into sucha unique business. In 1965, I beganworking for the Mobil oil corporationassoonasI finished school.I startedout as a mail clerkbut in a few monthsI waspromotedto stenogat rapher. I went to work during the day and took classes the local junior college coulsesand had a strong interest in in the evening.I was taking data-plocessing at computer science the time. me The company noticed my interest in computersand encouraged to take a programmingskills. I did very series of in-company aptitude tests dealing with trainingwithin the company. extensive to well on the testsand was selected receive the friends I had made at me, because The training period was a tough time for They were jealous of my advancement. work in my clerical positions evidentally I was left to myself. They didn't even want to gave me the cold shoulder and with me much during the coffee breaks,so I used this time for further associate study. After awhile, the social isolation at work got to me, and I knew I was going I jobs. I was being completely ignoredby everyone. was offered to have to change job with the Midland IndependentSchool District and quickly took it. This gave a work. in me my initial experience doing data processing a 1969, I was ready to do contract programming,so I established firm In The business I DecoDataProcessing. took on a partner early in the business. called so did pretty well, but in 1975 my partner died. We had no survivor'sagreement, and I was faced with striking out in a partnershipwas automaticallydissolved, the direction. new commercial at Tell us what options you were considering this point. Basically,I had three options. First of all, I could go to work for someone else. A second option would have been to stay home and spend all of my time

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s g s E i S e J i F E E? z I ; ! E s i i e #E

50

Experience Phase I:

Venture Initiation

rearingmy children. The third option was the biggestchallenge all-to open my of own business.I sat down and analyzed, each alternativefrom the standpoint of plusesand minuses.I was having a very difficult time making up my mind exactly which way to go when I remembered someone knew who was a vice-president a I in Houston oil company. It occurred to me that he might be able to provide some sound advicegivenhis perspective the industry. on I phoned him and explained the situation. He was very graciousand said, "Please fly down any time. Just give me a day's notice and I'11meet with you." I quickly took him up on the offer and within a week spent a half-day at his office in Houston going over my variousoptions. During the meeting,I told him of my great interestin trying to computerize geologicaldata. I had what I thought were a lot of fairly innovativeideas,and I really wanted the opportunity to use my data processing knowledgein a new way. He was immediately interestedand felt I could help his company a great deal if I could make the ideaspan out in practice. One thing led to another, and before I knew it, he had made me an offer to do contract work for the company for a six-month period. They would cover my expenses during the time and help me to make some of my ideasready to use.In order to expedite the contractualobligations, formed Exploration Graphics. I That is how my presentcompanywas born. Did you haveany secondthoughtsabout goingit alonein a new business? Yes, I had a number of reservations about it, but I knew that I had an independentpersonality and would not be satisfiedstayingat home or working for someoneelse.I also knew that I didn't really want to establisha new relationship with anotherpartner.Don't get me wrong, the previouspartnership had worked out satisfactorily,but I had a strong desire,now, to do things on my own. I really wanted to accomplishsomethingautonomously.Besides, had a number of inI novativeideasand I'm not sureanyoneelsewould haveappreciated them and their potential.

A n a l y s i s :B e s i d e s e r t e c h n i c a l x p e r t i s e i t h c o m p u t e r sw h a t a d d i t i o n a s k i l l s h e w , l l a n d p e r s o n ac h a r a c t e r i s t ih e l p e d a m i ei n s u c c e s s f u llla u n c h i n g x p l o r a t i o n cs y E J Graphics? r I ,,r

1,.,

Tell us about your initial experiences running Exploration Graphics. in I started the cornpany and beganworking on the oil company contract in May of 1915. I had no financing or working capital whatsoever. The contract paid me on a month-by-month basis,so I had the benefit of being independent without the pressures paying my own way. I knew that I could pay my bills of month-to-monthbecause had the contract revenuecoming in on a regularbasis. I

Exploration GraPhics

51

and I was optimistic about the The half-yearproject turned out successfully on with the company in a short-term, contractual future. Rather than staying relationship, which they had offered me, I decided to go beat the bushesfor additional business.I had to go knocking on doors, and that's exactly what I a did. I leased small computer and wasready to go. my work was strictly on a The next few months were very erratic because project basis.Money would come in for awhile and then dry up until I was able to land another contract for someonein the PermianBasin.I went out and rented an office-a very small one-and, along with my computer, this was my entire plant and equipment. During this time my husband helped me a whole lot through emotional support and by providing a steady income. Also my mother helpedout in a number of ways by watching my kids during the day and offering me a lot of advice. solid business it After six months of hand-to-mouthexistence, becameapparentthat I needed in someoneto help me with the work. There was a need for one personto engage salesand client contact work practically full-time, and there was anothel slot resimply would volving around the technicalcomputerwork. The two responsibilities of not go togetherbecause the time requiredin both areas. I managedto hire someonewho could help handle some of the paperwork This freed up a lot of time for me to continueto plan and customerrelationships. and do the technicalpart of the business. Securing a loan through the Small BusinessAdministration was our next of priority. This seemedto be the most logicalsourceof financingbecause the low interest rate. It seemedto me that the company required around $500'000 over a period of two or three years to do all of the things we needed.After the usual we and amount of red tape, hassleS, buleaucraticmaneuvering, were ableto obtain growth for $150,000 from the SBA. This was the financialnucleusto considerable Exploration Graphics.From 1975 to 1979, the companygrew vely rapidly and oul certainly outnumberedour failures. successes

t A n a l y s i s :H o w c a n a f l e d g l i n gc o m p a n yd e t e r m i n e h e a m o u n t a n d t i m i n g o f growth-capital needed ?

Are your current problemsstill financialin nature? but it wasn't really enough. Exactly. The SBA loan was certainly a blessing, surehow to go after it. We need We still have a need for capital, but I'm not really and we haveto hire still more technical a biggercomputer,much more office space, We definitely need money to grow geological analysts. more personnel-especially my number one priority and problemon, and getting that money is currently

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54

Expertence Phase I:

Venture Initiation

A n a l y s i s :A n a l y z e E x p l o r a t i o nG r a p h i c s ' c u r r e n tf i n a n c i a ln e e d s ,b o t h s h o r t term and long-term. E v a l u a t a v a i l a b lfen a n c i n g p t i o n s n t e r m so f b e n e f i t s n dd r a w b a c k s . e i o i a Present concrete and specific recommendations the company's for future financing: amount of funding required, sources funding,fundstiming,and funds utilizaof tion.

aqua waterhaus slide

swimming pool contractor in Yuma, Arizona (popMickey Gerrard is a successful 30,000). He is currently studyingthe possibilityof building a water slideon ulation commercial property he owns in Yuma. Mr. Gerrard is convincedof the slide's recreationalappeal and profit potential but is concernedabout its longevity as a viablecommercialventure. "Water slides are extremely popular nationwide today," Mr. Gerrard com"and Yuma has no facility of this sort. There'sno questionthat theseslides ments, have strong profit potential for the near-term.Rental rates are very lucrative and construction costsare modest.My sole concernlies with whether or not the slideis strictly a fad item that will quickly run its coulse and then disappear from the scene-you know, like the giant metal slides fifteen years ago and trampoline in centers the 1950s. ..I'd be looking for a worthwile return on my investment,which I estimate would be in the neighborhoodof $30,000. If I could recoup my investmentand realizea decent return, I wouldn't really care if water slideswere only a passing fad. I'd make my money and move on to other ventures.The payback period on in." the slideis what I'm most interested Gerrard owns a large, developedland-tract in Yuma near a popular strip shopping center. His plan calls for construction of the water slide on that site under the name WaterhausAqua Slide. Mr. Gerrard outlines his venture idea as follows:

56

Experience Phase I: Venture Initiation

"I plan to have a complex of three water chutesemanatingfrom a common access tower. The chuteswould empty into a smallswimmingpool at the bottom of the tower's hill. Sliders would walk up one concrete sidewalk to reach the top. An unshadedobservationdeck would be constructedover the chutesmid-way up the hill. "To minimize initial expenses, would not havelocker rooms for changing we clothes.Customerswould have to come in their bathingsuits.The admission office area would resemblethat typically found at public swimming pools. There would be a small building to house employees, the plastic slide-mats, and several lockers for checkingvaluables. would have two soft-drink vendingmachinesas well as we machines candy and chips. for "I would anticipate openingfrom May 15 throughSeptember from l0:00 l5 A.M. to midnight daily. Three minimum wage employeeswould work on each shift: one to work the admissions booth and the other two to provideassistance in the slidetower. "I have good a friend in Tempewho operates slide.He assures that I can a me draw plenty of customertraffic at $3 per half-hour. I have also usedhis operating expenses the basisfor my financialplanning(Exhibit 8-l). as "The Waterhaus slideswould accommodateup to sixty people at any one time. The parking lot would hold forty-five to fifty cars.our only other facilities would consistof a loudspeaker systemand four polesof night lighting. "Having looked at my friend's financial statementsin Tempe, I know that water slidesare big profit producers.What's more, there are no other slides here in Yuma. I'll have a corner on the market. My decisionto go aheadwill hinge on my analysis paybackperiod and return on investment. plan to completethis soon." of I

lilaterhausAqua Slide

57

s p A n a l y s i s :A n a l y z et h e s h o r t - r u n r o f i t p o t e n t i a lo f W a t e r h a uA q u a S l i d e .D o e s t l h a v e u f f i c i e np o t e n t i ae v e ni f w a t e rs l i d e su r n o u t t o b e a f a d ?O n s t the venture s do w h a t a s s u m p t i o n s e sy o u r a n a l y s ir e s t ? d u S t a t ec o n d i t i o n s n d e rw h i c h y o u ( 1 ) w o u l d , a n d ( 2 ) w o u l d n o t r e c o m m e n t h a t b M r . G e r r a r d u i l dt h e s l i d e .

8 EXHIBIT -1

PRO,IECTEXPENSES D
ConstructionExPenses
S l i d ec o n s t r u c t i o n : Buildingconstruction: $ 2 1 5 , 0 0 0( 1 8 m o n t h l o a n a t 1 2 . 5 5 p e r c e n t ) $ 6 5 , 0 0 0 ( 2 4 m o n t h l o a n a t 1 1 . 7 5p e r c e n t )

During Open Season Monthly Expenses


Utilities: Payroll: Advertising: Insurance: Water purifiers: administrative: Miscellaneous

$2,s00 per (minimum at wage $3.50 hr') $4,500 $I ,000 $ 8s0 $ 150
$ 250

s & s farms

"well Don, what do you think? Do we take the deal or passit up?" askedBob. "I don't know," replied Don. "It soundsgood but there are so many variables. Farming is one of those businesses where the managerdoesn't havemuch control over the outcome. It's bad enoughthat the weathercan wipe out all your profits, but the federal government,which is supposed be helping the farmers, to doesmore damagethan it doesgood. Look at last year-the retaliationagainst the Russians invadingAfghanistanwas to stop corn shipments Russia. a result, for to As ear corn dropped from about $2.50 a bushel to $2.00. We could have lost our pants." Don sanderson and his brother-in-law, Bob Schneider,were discussing a potential farming venture.Don is a schoolteacherin Eldon, Missouri,a smalltown close to the Bagnell Dam which forms the lake of the ozarks in south central Missouri. Bob, a generalmanagerof a heating antl air-conditioningfirm in Jefferson city, grew up on a farm. He would provide the technicalknow-how for the business. The arrangement looked pretty good. Bill schneider,Bob's father and Don's father-in-law, was nearingretirement age.He had offered to lease 300-acre his farm to the two men. Bob and Don had agreedthat if they enteredinto the plan, Bob would perform most of the labor associated with plantingand harvesting crops, the while Don would provide the labor for repairingfencesand maintainingthe equipment. Don's teachingjob would allow him plenty of free time during the summers and Christmas vacationperiod.

58

S & S Farms

59

"He knows the farmingbusi"Dad will keep us out of trouble" asserted Bob. us nessand hasspenthis lifetime on the farm. He can advise what to plant, when to fertilize, and so forth." The two men had receivedan offer from Bill Schneiderto leasehis 300per acre farm. Under the agreement,the leasewas to run for three years at $70 period at the end ofthe three-year acre annually. The leasewould be renegotiated but could also be terminated at the end of any year if desiredby any two of the three parties involved. uke most of the hilly farms in the ozark foothills, only one third of the Schneiderfarm could be used for farming' The remaindercould be usedfor pasture. The tentative agreement also specified that the men could purchase thirty Herefordbull for $500' Mr' Schneider cowswith calvesat $400 eachand a registered The Black Baldy is a cross his had been developing herd to breedBlack Baldy calves. of yielding characteristics both breedsof beef between an Angus and a Hereford, Hereford, with the remainderof the cattle. The face of the animal is white, like a body black, like an Angus. The Black Baldiesnormally bring about $4 more per hundredpoundsat the centralMissourimarkets. had offered the two In addition to the purchaseof the cattle, Mr. Schneider long as they paid for all mainmen use of his existingequipment at no chargeso tenance and repairs.The equipment consistedof a Farmall tractor with a threepoint hydraulic lift; a four-row turning plow with disks and cultivator; a four-row corrrpicker; and an 1,800bushelgrain wagon. "but let's put the numbels .'It does soundlike a good dealBob," agreed Don, jobs, it's not like the to it to find out if we can make any money. with our present However,I would like to profit or starve. normal situation where we either make a than I could make find out if I can make more money farming during the summers at someother job." " "Ift me check with Dad about the expenses, saidBob, "and we'll figure it out the next time we get together." Two weekslater, Bob providedthe following information: "Dad and I checked his records on the farm. The normal yield is between 70 and 80 bushels of corn to the acre. I also asked about crop failure during drought conditions.The last time he lost his corn crop was during the drought of estimate a yield of 70 bushelsfor each acre' Ear 1934. so we can conservatively for about $2.50 per bushel, except during the grain corn lately has been selling when it droppedto about $2. We canplan on $2'50 perbushel' embargo "Our costs for a corn crop will run about $45 per acre for fertilizer, $5 an acre for seed corn, and around $5 per acre for weed killer. Our labor can be estimated on a 100-acrecrop. For the 100 acreswe can expect about ten days to plow, five days to disc, five days to plant, and ten daysto cultivateafter the corn is up. I can probably handlethis if we don't haveany rain delays' we can also expect to use about 20 gallons of gasolineper day. Sincewe don't pay federal or state taxes on gasolineused on the farm, we can estimate gasolinecostsat about 80 cents per gallon. During harvestwe will needabout five

60

Experience Phase I: Venture Initiation

days to pick the corn, and we will need to hire one person to haul the wagonsto the corn crib. We can pick up one of the localboys for this at about $3 an hour. "We can also use the farm to raise beef," Bob continued. "We will need to add more cattle but we won't be able to buy them at the $400 price offeredby Dad. We will probably have to pay $550 for cows with calvesat the livestock market.We have300 acres, and it takesabout three acres pasture to one cow and calf. Of course we'll need hay for the winter, so we can't use the entire acreage for pasture. "Assuming we sell our calvesin the fall, we'll still needabout one-and-a-half tons of hay to get each cow through the winter. If we plant alfalfa hay, the hay field will be good for three years.We can get three cuttingseachsummerfrom the field. The first cutting will be the best, about one-and-a-half tons of hay per acre. The yield from the secondand third cuttings will be less,unless get somegood we summer rains. Let's plan on a total of three tons of hay per acreoverall.It will cost us about $12 per ton to get the hay cut and baled,sincewe don't havethe equipment do this. to "I got some estimates the costsof putting in hay from the local on Co-op. We will need to plant 12 poundsof seedper acreat a cost of $1.75 per pound. We will also need to lime the field when we first plant. We will need two tons of lime per acre at about $12 per ton. Our fertilizercostswill be $20 per acre.Fertilizing will haveto be done eachspring.Once the hay field has beenplanted,we can cut for three yearsoff that field.After the first year,the only expenses be will for fertilizing,cutting,and baling.Our labor will be approximately same for the as plantingcorn-one day to plow and anotherday for discing and plantingfor every ten acfes. "If we sell our calvesas feedercalvesin October, they should weigh about 450 pounds and bring about $80 per hundred.This is a rough estimateand assumes that the cows will havetheir calves March.Somewill havecalves in earlierand some later, but we can use this figure as an average. can alwayscarry over the late We calvesand butcher some for our own use in Decemberor sell them at market in the springasyearlings. They won't bring $80, but they will be larger.I would rather not do this sincefeedingmay be difficult when the weathergetsbad. "There may be another reasonwhy we would want to sell calves,or corn for that matter, after the first of the year. For tax purposes, farming is done on what accountantscall the cashmethod. This meansthat costsare expensed the in year in which they're incurred.For example,eventhough our hay field will last for three years,we can claim the total expensefor tax purposesin the year we put in the hay field. In the samevein, we claim all the income from the saleof corn or beef in the year in which we receive our money. Theremay be someyearswhen we may want to sell only part of the crop during the season and hold the balancefor saleafter the first of the year." "There's another way we can savemoney too," added Don. "The federal government,for tax purposes,expects only 70 percent of the cows to have calveseach year. Bill thinks we can plan on about 90 percentto have calves.

S & S Farms

6I

We could always butcher one or two calvesa year for our own use.We wouldn't have to use income that we had paid income tax on to buy meat. Further, we wouldn't have to pay taxes on the beef we didn't sell. I don't want to pay the federal governmentany more taxes than I have to. If businesses were run as inefficiently as the government,they would go broke. All the governmentdoes is increase taxes." "We could also employ our boys at minimum wage to work on the farm," said Bob. "They don't pay taxes until they make more than $3,500 per year. With my two boys and your two, we could shelter$14,000of incomeeachyear." "Aren't we putting the cart before the horse?" askedDon. "We don't even know if we can make a profit, yet we are already thinking about ways to save taxes." "You're right, Don," Bob "but I'm really answered, excited about this. It's a real opportunity for us. If the numberslook good, I would certainly like to salt away $3,500 a year for future college expenses. I'm now in the 40 percenttax bracket,so I've got to make in excess $5,000 in order to save$3,500.Also we of eat two calvesa year. At $375 apieceand in my income tax bracket,this amounts to about $1,050 a year in taxable income. Just for meat and collegeexpenses, I could saveabout $ I I ,000 a year by beinginvolvedwith the farm." "We would need to form a partnership,"said Don. "What should we name our companyand how much will that cost us?" "Why not name it "You can tell your friends S & S Farms," Bob answered. that S & S stands for Sanderson and Schneider.I'11tell mine that it standsfor Schneider and Sanderson !" "Sounds good to me," Don laughed."How much will it cost, and what else do we needto do it?" "We can get Jim Woodsento draft papers,"Bob replied."He the partnership does all of Dad's legal work and probably won't chargeover $50 to set up the partnership.In addition, we'll need an Internal RevenueServiceemployernumber and a checking account. The IRS number doesn't cost anything. We just pick up the forms at the local office and mail them to KansasCity. To set up the bank account, all we need to do is sign the cardsso that either one of us can write checks on the account." joined the two men on the porch. About that time, Mr. Schneider "Sounds to me like you two boys are about to go into the farming business," he said. "Alice and I would like to seeyou run the farm. We'vespentour entire married life here, and here'swhere we raisedour family. It's been a good life, but now that I'm nearingretirementagewe would like to be free of the responsibilities. With you two running the farm, we know it will be kept in good shape. "Furthermore, once I start drawing Social Security,any income that I make beyond a certain amount will be deductedfrom my monthly check.I've paid into Social Security for more than forty years.Now they can start paying me. By leasing the farm, this income is consideredrental income which doesnot affect my checks.

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Exoerience Phase I: Venture Initiation

"I would like to seeyou run the farm. Tell you what I'll do. You can pay me All $10 per acre leaseand I will pay for the materialsusedin repairingthe fences. you needto do is providethe labor." "Dad," said Bob, "now that you are about to retire, sharewith us some of your thoughts about being a farmer. Did you ever think you would have been happieras a businessman?" .,I am a businessman,"replied Mr. Schneider."The farmer is America's most frequently overlooked entrepreneur.He sells a high-demandproduct under work extremelyhard, and must be profit oriented.Farmers high-riskcircumstances in own show, and haveto developan expertise numeroustechnicalareas. run their "Today's farmer couldn't possibly survivewithout management skills. You have to be able to forecastthe weather and commodity markets,make extremely be complicatedtax decisions, a good bookkeeperand evensomewhatof an engineer and mechanic. "I guess in activity I engage most is planning.I keep records the one business on practically everything to facilitate my planning efforts. I keep track of prices the during varioustimes of the year, when I plantedand harvested, cattle yield, and what the weatherwas doing and when. "I try to plan aheadmore than one calendaryear, but it's real tough to do with all of the uncertaintiesin agriculture.The one big certainty, though, is the need for financing.Farmershave to keep track of the cashflow just like any other Thesehaveto be and businessman watch how they time major capitalinvestments. so accordingto IRS regulations, planningis mandatory. depreciated ..Dealing with the banker is one other major planning aspectof farming. He forces it on you whether you like it or not. He wants to know what you're planting this year, how many acres,expected yields, and on and on' The bank to hasa stakein your farm too, so the pressure plan is understandable. ..I guessthe one thing no farmer is ever really preparedfor concerns contingencies-what ifs. What if the weather turns hostile;what if supply shootsup and Farming Russia. pricesfall;what if the Presidentinstitutes a grainembargoagainst is loadedwith ifs." "What type of problems could we anticipate in running the farm?" asked Don. "As I said before," replied Mr. Schneider," just about all of my problemsare causedby uncertainty: when to plant and harvest,when to sell,whether or not to sign futures contracts,and so on. Getting help during the busy times of the year is also tough. I generallyend up doing most thingsmyself. "It's always a problem setting priorities and using time wisely. Time is our only certainty. Evenwhen the weatheris bad, you can repairequipment,fix fences, and work with the herd. Wastedtime is wastedmoney. "The governmentis another problem, that's for sure.Just like the weather, it's so unpredictable.The governmenthas tried, through the years, to help out pretty well in areaslike the soil bank and it farmers,and I suppose has succeeded pricing policieshave failed. The disasterpayment programs.But the government's index,just doesn'tenable parity system,where pricesare peggedto a cost-of-living

S & S Farms

63

most farmersto cover costs.Inflation is eating us up because our costskeep going prices up,just as for everyone else, but selling haven't kept pace, eventhoughsupermarket priceshaveskyrocketed. "Profits are important to everyone,and I'm gladto seeyou boys arelooking at the numbers. But don't forget the psychological rewardsof being independent and self-sufficient. You are looking at this now solely for the additionalincome.But how long will it be before you begin to considerit as a careeropportunity? I suspect there are a lot of entrepreneurial characteristics eachof you." in

Analysis:What are some of the primary differences betweenrunninga farm and o t h e rt y p e so f n o n a g r i c u l t u rb u s i n e s s e s ? al

"We'11 you know let in a coupleof weeksDad," repliedBob. "Don is goingto look at the numbers to determineif we can make any money on the dealand what would be the best mix of corn and beef to produceto maximizeour profits. Then we'll be in a position to talk more seriously." Bill then said, "If you boys want to build the herd fast, I'll lend you whatever funds you need for your breedingstock.You can borrow the money from me at 8 percent and pay it back out ofyour profits. You shouldbe able to pay it back in five years." As the two men departedBob cautionedDon, "When you do the numbers, don't forget to considerthe risks of putting all our eggsin the samebasket.Some cattle will offset the drought that could wipe out a corn crop, and somecorn might be a hedgeagainst killing all our cattle." somedisease

A n a l y s i s :A r e B o b a n d D o n t r u e e n t r e p r e n e u rs i,n c et h e f a r m i n gv e n t u r e s n o t s i t h e i rp r i m a r ys o u r c e f i n c o m e ? h a ti s y o u r d e f i n i t i o n f e n t r e p r e n e u r s h i p ? o W o Have Bob and Don omitted any cost factors in their informalassessment the of S & S F a r m s e n t u r ed e a ? v i B o b a n d D o n m e n t i o n e dh e p o s s i b i l i t y f h e d g i n gh e i r l o s s e b y u t i l i z i n g m i x t o t s a . t u r e o f b e e fa n d c o r n p r o d u c t i o n I n y o u r o p i n i o n ,w o u l d t h i s b e a w i s ec o u r s e of action?lf so,what percent the farm shouldbe employed beefand what of for percent corn?Assume lease for the will be terminated threeyears. in Should Bob and Don form a fifty-fifty partnership? not, what arrangement lf would you recommend? What are the potentialdangers a fifty-fifty partnerof ship?

EXPERI ENCEPHASEII venture management

cumberlandcrafts

10
Ann Stanfield, presidentof CumberlandCrafts, Inc., comments,"I have believed in this business from the very beginning,and I think the basisfor any successful ventureis believingin what you are doing." Cumberland Crafts, Inc., is a wholesalerof craft suppliesand accessories located in Santa Fe, New Mexico, a town of approximately40,000 personsin the northern part of the state. CumberlandCrafts, as well as its retail counterpart, Craft Village, is owned and operated by Ann and Dick Stanfield.The Stanfields have been in the craft business since1975 when Ann openedCraft Village asa sole proprietorship. CumberlandCrafts is one of only four craft wholesalers the state of New in Mexico, the others being located in Albuquerque, Tucumcari, and Hobbs. The Stanfieldsprovide a wide variety of craft items (materials decoupage, for macrame, woodworking,plasticcastings, etc.) to 350-400retailersin a four-statearea.

Craftsand Craft Village Background and History of Cumberland Craft Village was begun in Ann Stanfield'sgarage a part-time outlet for her inas terest in crafts as a hobby. In 1973 Ann decidedto work toward the openingof a retail craft store by becoming as familiar as possiblewith crafts and craft accesyearsin this informal learningprocess. sories.Shespentsometwo-and-a-half "I didn't really know how I was going to use all I was learning,but I knew
67

68

Experience Phasc II: Venture Manogemcnt

they were so inI wanted to become professionallyinvolved with crafts because to teresting me." from a SantaFe ln 1975, Ann borrowed $5,000 (the maximum allowable) policiesand retirebank, withdrew the cashvaluesfrom the family's life insurance ment pension plan, and opened Craft Village in a small building that rented for in $175 per month. The total investment inventoryand fixtureswasapproximately "We startedout selling grew about $50 per day,and it gradually $S,000to $9,000. until it has now reachedabout $600 per day." Inventorywas storedat home, in duringthe earlymonthsof operations. the garage, The Stanfieldsinitially promoted Craft Villageby havingAnn put on demonln and clubs,localhigh schools, junior high schools. 1914, strations homemaker for the business, Craft Villagemoved across streetto a largerbuilding, due to increasing "This was definitely a good move, because helpedus to it where it is now housed. space."Also, in 1974, husbandDick quit his our salesand our classroom increase job teaching to join the growingbusiness. It was at this time that the Stanfieldsdecided to expand into wholesaling as in order to capitalizeon what they perceived a regionalboom in craft retailing. "Nobody in the areawas providingadequate We in service general. saw wholesaling to stepin." and wholesaler decided the needfor a generalist The wholesaling operation was originally located in a seriesof adjacent offices in one building which rented for $500 per month. While in this temporary location, the Stanfieldswere able to open a line of credit at the local bank, where "At this time we wereheavilyin debt they eventuallyborrowed a total of $36,000. we level for the kind of business weredoing,"commented but not to an excessive Ann. which operation, moved the wholesaling In August of 1978, the Stanfields rentingfor $500 per Crafts,into a centralwarehouse had beennamedCumberland provided7,500 square feet vs. month. For no additionalcost,this new warehouse Craftshad feet in the previouslocation.By mid-I978, Cumberland 2,500 square grown to the point where it employed four additional workers and was doing $20,000per month in sales. Crafts Also, during the summerof 1978, both Craft Village and Cumberland leading to financing problems with the local bank due to the were incorporated, from personalliability to limited liability. As a result, a secondmortchangeover gagewas placed on the Stanfield'shome, and their banker further recommended the surprise, SBA loan wasnot that they apply for an SBA loan. To the Stanfield's "I Ann explained, was approved despite the backing of their local Congressman. the pregnantwhen we applied for the loan, and I guess loan officer involveddidn't take me very seriously.At this time we were really needingsomefinancialbacking, growthperiod." we because werein a tremendous loan arrangement their patchwork refinanced In Januaryl976,lhe Stanfields to with the local bank by agreeing pay back the $36,000 on a monthly schedule a over a five-yearperiod. In addition, the bank approved $75,000line of credit. "So finally, after all those years of operation,we had adequatefinancial banking' We were able to begin really growingwithout our handsbeingtied."

Management the Company of "I have been the main leader in the business simply becauseI was the one that started both of them and I had the most craft retailing experience," comof mented Ann in discussing management Cumberland the Craftsand Craft Village. with Dick Stanfieldbeing secretary-treasurer Ann is presidentof both companies, for both firms. While Ann has responsibilityfor the overall administrationof the on and on finance.The recompany, Dick concentrates salesto retail customers maining managementteam consistsof three department headsand an asslstant manager Craft Village. at Kay Ridgewayheadsup the accountingfunction, including invoicing.Kay is the product of a vocational school and severalyears of bookkeepingexperience. Ann Stanfield feels, "She's really beena fantasticemployeefor us. Shewas a lucky find." Shipping and receivingis staffed by four shipping clerks, three warehouse people,and a supervisor. The shippingclerks pull ordersfrom inventory,write and price invoices,weigh,pack, and ship orders.The receiving crew checksarrivingmerand placesit in inventory. chandiseagainstpurchaseorders, prices merchandise, for Bill Cannon is warehouse supervisor, responsible the performanceof the other Dick comexperience. sevenemployees.Bill has had some previous plant-related He'll take what we tell him and execute ments: "Bill's a fairly good organizer. in logicalmanner." Jerolyn Poe is the customer-relations coordinator for CumberlandCrafts, and for explaining responsible meeting and greetingcustomers the warehouse for at sales and purchasing policies. She is additionally responsiblefor coordinating such as the customer seminars,workshops and other special customer services, Jerolyn has a degree agriculture,prein CumberlandCrafts catalogand newspaper. vious experiencewith the federal government,and with Craft Village. According for Jerolyn because she'svery bright to Ann, "We createdthis position especially job and knows crafts inside and out. She'sreally done an outstanding in laying out our fast-changing catalog." The Stanfields estimate that they spend 95 percent of their time on the wholesalingoperation and very little time on retailing. Craft Village is managed basis,with the assistant managercarrying most of very much on a decentralized "My main job at Craft Village is handling the the work load. Ann comments, promotions, which entails primarily running newspaperads. OccasionallyI go problems." over there to help iron out other types of managerial The assistantmanagerfor Craft Village, BarbaraCarnes,is also viewed in a very positivelight by Ann. "Barbara is a fantastic type of personin that shehasa great deal of loyalty, which is very important to me. Shehas faith in us as leaders. of makesher very conscious The fact that she believesin us and in the business doing what she thinks is right for Craft Village. She may not alwaysknow what's right, but she'll alwaystry to find out." in While the presentemployees generallydescribed positiveterms by Dick are and Ann, this has not always been the case.BetweenFebruary and May of 1979,
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Experience PhaseIL Venture Management

just about all of the warehouse turned over as the company grew and employees staff the performance expectations. Ann describes moraleof the present changed "For the most part, we have a beautiful and warehouseemployeesas healthy. working relationshipamongourselves." are Ann feels employeesin both organizations satisfiedwith their compen"Just becausean employeecomes in for a pay raisedoesn't sation and benefits. mean he or she automaticallygetsone. We try to evaluateour peopleon the basis We started our evaluationprogramrecentlyand havealready of their performance. coordinator given severalraises. From here on out, we intend to let the warehouse twice a year,and then we will sit down with eachemployee evaluatehis employees raises." and discuss Ann also feels that she and Dick are going to have to spendmore time in personnelmatters asthe companycontinuesto grow. "We really needto havemore and instructions.Our meetingswith employeesto better cementcommunications personnel is but not asgoodaswe would like it to be." situation tolerable "Our management style Ann states, In discussing the couple's management style has always been very informal and loose. Lately we've grown to the point We're going to where we definitely need more formal structureand management. lesseasygoing." and haveto be more definite with our employees As for future goals and plans, the Stanfieldsplan to stay in both retailing "We on and wholesaling and even plan to move into manufacturing a limited basis. don't anticipateas much growth for the future as we'vehad for the pastcoupleof years.We hope to reach a plateauat some point so we will get thingsunder better control." "The longestperiod I've been Ann commentsfurther on the future outlook: to able to plan aheadfor is about a year-and-a-half two years.I feel that the craft is so fickle that we can't plan aheadany more than this. The popularity business of different crafts changesfrom year to year, making it very difficult to forecast the craft industry is so young, it becomesdifficult to basefuture ahead.Because predictionson past trends. "For the short range,over the next year or two, I've pretty well figured what I think the business will do dollar-wise.When we get into our small-scale manufacturing,things will probably go wild for awhile. For the next five years I have a general idea that we'll still have Craft Village, although we'll probably switch locations, say to a shoppingmal1.I don't anticipatehaving a secondretail of store.We won't rule this out, but it's not a part of the plan simplybecause the enormous effort required. Further retail growth would also dependon the availatype. We'd haveto come up with a strongassistant-manager For bility of personnel. instance,Craft Village has not done nearly as well as it could if I gaveit my full at business the sametime has attention. Rurning both a retailing and wholesaling will be in presentedsome difficulties. In the future, however,our main emphasis wholesaling." problems and challenges, Ann states, of In her assessment future business "Our major problems at this point are those of employeeproductivity, employee

CumberlandCrafts

71

is evaluation and satisfaction,and inventory control, while our biggestchallenge we keeping up with our growth. Another challenge will face over the next year is I getting together a completestaff and a good group of employees. want our people to be compatible, to do as good a job as possible,and to be happy with what they're doing. "We get behind on some problemsbecause other larger problemsarise.For instance, we've been intending to write-up job descriptionsfor some time, but We inventory problemshave taken precedence. probably know where most of our presentproblemsare and amongus shouldknow how to solvethem."

rl o f m W l A n a l y s i s : h a t s p e c i ap r o b l e m s i g h ta r i s e r o m t h e s h a r i n g f m a n a g e r i ae s p o n f al M a b a s i b i l i t i e s y a h u s b a n d n d w i f e t e a m ? i g h tu n i q u e d v a n t a g e ss oa c c r u er o m s u c ha f a m i l ya r r a n g e m e n t ? is Do you agreewith Ann Stanfieldthat the craft business too fickle to permit planning eyond wo years? t b

Marketing of The Stanfieldsconsiderthat their primary market consists the 350 to 400 retail outlets in New Mexico, Arizona, Utah, and Colorado which purchaseproducts from CumberlandCrafts on a continuing basis.Ann feelsthat they do a good job "CumberlandCrafts is fairly closeto being a full-line craft with thesecustomers: We distribute in most of the product lines wanted by our retail custowholesaler. mers." "I Elaboratingon their product line Ann states, can't eventell you how many different crafts you can do by going out in our warehouse."Also Ann could not give an accurate estimateof the number of different items stockedin the warehouse "I or displayedin the wholesalingcatalog. can tell you in dollars,but I can't tell you by number of items." "Cumberland'scurrent market market shareAnn statesthat, In discussing in share of the wholesalingbusiness the four-state arca is not a big concern of mine. This is becauseI'm content with the amount of growth we've had here in New Mexico. For years the state never had much in the way of crafts retailing, Craftshavedone much I much lesswholesaling. think Craft Village and Cumberland are openingup all over this area,with most in this regard.A lot of small craft stores No of them on a shoestring. one really knowsjust how much demandis actuallyout from a great deal of greedand I think there'senoughbusiness there. I don't suffer Crafts and its competitors." out there for Cumberland they havemade While the Stanfieldsdo not worry much about market share, "Out comto learn somethingabout their competitors'Ann comments, an effort

72

Experience Phase II: Venture Management

petitors are not really very strong. The distributor in Tucumcarihandlesbicycles in and parts and thus doesn't really specialize crafts; the Albuquerquecompany greatly overprices items; and the Hobbs wholesalerdoeslittle more than supply its in his own retail shop. CumberlandCrafts is definitely the largestcrafts wholesaler the state of New Mexico. We get at least 35 percent of the New Mexico retail of and weaknesses The one thing I really strive to know is the strengths business. my competitors. "There are two or three things which separate from our competitorsand us perhapsgive us an advantage over them. One is the fact that we'vehad a designersomeonewho createsnew uses for a particular craft item. We try to find unique Another competitive sourcesand then build the demand through our designers. We edge is our fast service. try to give one-to-twoday serviceon most orders.We addedan extra shippingclerkjust to providefor this capability. "I would say that having unique sourcesis another competitiveadvantage; havenot been that is, havinggood sellingitems which most other major wholesalers of sources business, able to find a source of supply for. In the craft wholesaling supply are a real competitiveweapon.You haveto know whereto find the unusual with uncovering craft items that are being produced.We'vehad pretty fair success think I shouldbe sellingsources!" sources-somuch so that I sometimes "We've wanted He Dick is Cumberland Crafts' only salesman. comments, someoneelse to travel for us but so far have not been able to make the right arwhen you don't have a full-time salesrangements. It's hard to be real aggressive naturally come man. However,I think we are the type of companythat customers of to because our many competitiveadvantages." new The Stanfieldsdo not plan to spend a great deal of effort developing "We would like to seemost of our future growth come retail outlets. Ann states, we feel that our existing retailersalreadyknow from existing customersbecause haveto be taught how to buy and sell' how to do business with us. New customers I would much rather keep an old customer who alreadyknows thesethings and alreadybuilt up. However, of more because the business who is likely to purchase per month. I do anticipateaddingfour or five new customers "We are not really very aggressive the areaof seekingout new customers in becausethey will seek us out. We feel we get a good number of new customers we from yellow-page ads and from the newsletters send out. If Dick hearsabout a potential new account in an area,he certainly will call on them. Or if somebody givesme the name of a new store,I certainly will call on them. "We have never carried out a formal market research programwherewe went we pay attention to market out and tried to determinecustomerneeds.Of course, demand.When we go to a craft show, we alwaysmake a point to notice the best things at the show. Two yearsago, the hottest item was macratneand you could away. seeit bloom all of a sudden.Five yearsago,you couldn't givemacrame "Another way we do marketing research by talking to salesmen asking and is going on in is them about how business in different regions.For example,what's to California will, for sure,be big here two years fiom now. Our areaseems be the just lacked leadership the in very last to get all the new crafts. New Mexico has

CumberlandCrafts

73

craft industry. This is the leadership we're trying to provide.Fortunately,after the start-upof a craft business you soon reachthe point whereyou can make educated guesses about the market." cumberland's pricing policy follows the manufacturer's suggestedretail price on most items, which normally involvesa 40 percent mark-up. For other items not having the manufacturer's price, the Stanfieldsestablishprice suggested on the basisof what the market will bear. The largestprofit marginsare on those items which are manufacturedby cumberland crafts, suchassilk flowers.volume discountsare offered to retailerson the basisof a smallervolume discountreceived by cumberland crafts from its suppliers."we don't offer volume discountson many items because we don't purchasemany things on this basisourselves, and because makesthings pretty confusingfor our shippingclerks." it The Stanfieldsfeel they could generallybenefit by spendingmore time in the areas advertising of and promotion. "we're alreadyreaching point wherewe're a large enough to help mold demand.we can creativelypush a certain item and, in effect, manufacturedemand for it amongour retailers. this business, is so easy In it to create demand. If you know the right approach,you can createa demandfor anything relating to crafts. It all starts with showing the customer how to be creativewith somethingand then letting his or her interestcatchhold." Craft Village has generatedconsiderable customer interest by promoting crafts classes. Ann explains that a $3 fee per classis charged"because found we that people won't come to classunlessthey pay for it." The store'snormal procedure is to contract with free-lance instructorsto conduct the classes. According to Ann the wholesaleoperation also promotes through classes retailersas well for as instructions and demonstrationson new craft ideas."Usually we bring in outsidersto conduct these seminars because don't yet have the trained people in we SantaFe to do it." Cumberland Crafts advertisesin the national trade publication, Profitable CYafts Merchandising, and carriesyellow-pageads in Denver,Salt Lake City, and Phoenix, as well as in the several resort areas colorado and Utah. The stanfields in statethat their purposein advertising PCM magazine to giveCumberland in is Crafts the imageof a national supplier."This really helpsour imageand bringscustomers to our back door." While the adsin PCM and the yellow pagesare considered important by the stanfields, the firm's chief means of promotion are its monthly newsletter(sent to over five hundred retailers)and its merchandise catalogs. currently the company has two catalogswith a third in the works. customers can obtain catalogs for a small depositrefundableupon first order. The Stanfieldsare in the processof becomingsmall-scale manufacturers of selected craft items such as silk flowers.Ann estimates that the new manufacturing venture has the potential of generating$40,000 to $50,000 in additional sales per month. "Silk flowers havejust gonelike wildfire. We really basedour initial wholesaling businessaround flowers and are becoming more interested everyday in flowers and related sourcesof supply. Getting our program for manufacturing and distributing silk flowers is going to be one of our major challenges over the next

74

Experience Phase II'

Venture Management

year.Wearenotreallyevensurewhoourdistributorswillbe.Thiswillopenawhole new areafor us to tackle." TheStanfieldshavealreadyappliedforatrademarkonthesilkflowersand CumberlandCrafts to keep plan to market the product unit' u nute other than theircompetitors(whoarealsopotentialcustomers)fromknowing-thatCumber. might also feel compelled land is the manuf'acturer.Ann feeis that other wholesalers involvement' if io .ngug. in manufacturing they learnedof Cumberland's but feels hoi much it will cost to manufacture silk flowers Ann is not sure coststo buy them' lessthan the 9l cents it currently that it will be considerably for $2'25' at wholesaled a 30 percentmarkup and retailed The silk flowers are manufacturing side of the On the subject of long-range plans for the new at ..t wouid veiy much like alwaysto be manufacturing least Ann states, business, I know operate wholesalers someof the most successful one hot craft item, because is somemanufacturing a very healthy process"' in this way. I think

Analysis:DoesCumberlandCraftshaveadistinctcompetitiveedge?Shou|dthe as manufacturing a top priority? pursue silk-flower Stanfields

Finance TheStanfieldsemployaCPAfirmtoprovidethemwithamonthlybalancesheet is a vital part of the comand income statement.Ann feelsthat this information "I can't run this business the seatof my pants'I've got by pany's daily operations. -ly-oul accountant' to work with' In addition to reports prepared to have figures of the figures on our Some I take figures home with me and analyzethem at night' oul company may look a little out of line, but I would saythat financial statement is so strong'" our because future potential is in pretty good financialshape the very beginthat although both companiesmade money from Ann states Dick resignedhis teaching when ning, no salarieswere withlrawn until 1916' position.AnnfeelscertainthatCumberlandisprofitablebutconcedesthatthe ,,It's probably a mistake, but I don't bottom line is not trer frimary concern. I I do sales. do project salesfigures spend as much time thinking atout profit as salesare growing at a very rapid our and have been pretty ur.,,,ui! thus fai' I know rateandourbefore.taxprofitseemstoberunningataroundl0percent.'' good' In fact' Ann during tire first four months of 1980 was very Business have been "I've been very pleasantlysurprisedat how brisk our sales comments, trend, peakingin the a seasonal this year.,, Normally, tt . io-puny's sales.tttiUit up their inventoriesfor the period from Septemberto DecemLeras retailersbuild Christmasrush.SalesfallofffromDecember15toJanuarylandthenbasically stabilizeduring the remainingmonths' Inmid.1976'thefirminstalledaWATSteiephonelineformoststates

Cumberland Crafts

75

duringthe period to Ann with her customercontacts west of the Mississippi assist tool, but as using the telephone a sales The couple anticipates of her pregnancy. "We've never really used the WATS line to sell as we could. It Ann comments, has not yet becomethe sellingtool that I think it eventuallywill." During the early yearsof operation,profits havebeenusedalmostexclusively "Most of our assets tied up in inventory, are to build inventory. In fact, Ann states, which I feel is not about to go bad. I believe in having a good inventory in the whetheryou pay for it or not. Most of the peoplewe work with will give warehouse with no problems." on us short extensions our payables Crafts extendscredit terms of 2110, net 30, and has had less Cumberland Credit control is not a big than on 5 percent uncollectableaccountsreceivable. "We watch new retailers very closely, however, problem for repeat purchases. they are often startingon very shakyground." because While the Stanfieldsextend prompt payment discountsto their customers, "We they have their own philosophy concerning the taking of such discounts. we of generallydon't take advantage early payment discountsbecause like Cumberland Crafts to stay liquid. When we need cashin a hurry, as is frequently the case,I like to have it. Right now we seeour liquidity as mole important than discounts. Anyway, most creditors really give us sixty days before complaining,so a this is an additional reasonnot to take discounts.We'veestablished good leputation with creditors so that they believeus when we say we can and will pay them back. We'vehad only one companyevercut off our credit." The cost of capitalfor both of the operationsis approximately 9 percent, which the Stanfieldsview as quite reasonable their region. for Neither Craft Village nor CumberlandCrafts operateson any type of budget "We havetried doing by controlsis explained Ann: The lack of budgetary system. Dick and I complement one another, budgeting but haven't had much success. with financingand I'm very liberal. It'Il be hard for he's very conservative because us to budget much for at least another year until we can get a better grip on our salesand be able to better predict our overall operationalpicture. We do have a however.I don't think budgetinghas been a very closebudget on our advertising, We've kind of overgrowth. we bad problem for us, because haven'thad a cancerous beenableto controlthinss."

r h a r c A n a l v s i s :E v a l u a tC u m b e r l a n df' is r a n c i a l e a l t h n d p e r f o r m a n ctea c kr e c o r d .

Operations space CumberlandCrafts now occupies10,000 squarefeet in office and warehouse another 5,000 becomingavailablein the near future. Howevet,Dick Stanfield with "This additional room will provide us with adequatespacefor estimatesthat,

Experiencc PhaseII: Venture Management

probably no more than another year-then we'll have to move again." He com"Our present physical layout could be a lot better than it is. rnents further that, The facilities we have are adequateor just barely so. For instance,we need more We're curspace. office spaceand we could really use some additional classroom and trying to make more efficient use shelves rently in the processof rearranging We may soon reach the point where we'll have to quit buying of our warehouse. some items due to inadequatespace.We now have a lot of clutter in the aisles which we're slowly doing away with. Over the next five to eight years,Cumberland and I don't feet of space, of crafts will need in the neighborhood 25,000 square capability.Demandis so dynamic." really know how much manufacturing The new manufacturingproject is alsoputting demandon the alreadycritical floor space.Equipment for manufacturingsilk flowers has beenordered,including "The manufacturing one pressand tools for six varietiesof flowers. Dick explains, processis relatively simple, involving a clicker and dye. We were very fortunate recently to find someonehere in town who has a clicker for cutting silk and is our willing to subcontractthis phaseof making silk flowers. To have purchased the He estimates initial own clicker would havecost us $6,000.We'll buy the dies." "we ate set-up cost for manufacturing to be in the neighborhoodof $10,000. in readyto setthe equipment today." essentially By the Stanfield's own admission,inventory control is one of the biggest "Someoneknows where problems that cumberland faces.Accordingto Dick, certain items are kept, but not everyoneknows whereeveryitem is. We sometimes We'vegot to control for wastetime searching inventoryhidden in the warehouse. growth. this betterto preventcancerous .,one of our inventory difficulties stems from the fact that today a gleat large amountsof just one or who purchase number of craft retailersare specialists macrameshops are numerous items. For example,there currently two big-demand else.This meansthat we have to that carry many macrameproducts but nothing greatlyoverstock certainitems." "Many people in the craft Another problem pointed out by Dick is that, inindustry are inclined to go in too many directionsat the sametime, ourselves we currently are trying to get gripson what we havealready cluded. Consequently, started and to control our inventory growth better. We want to reach the point where we have a place to put every item in inventory and exert closercontrol over they need the each item. Only in this way can we giveour customers kind of service as few errorsaspossible. with ..In the area of inventory control and sales, haveone big advantage over a we with that catersto customers clothing company or some other kind of business comeup with a new usefor the item. we tastes. can haveour designer changing ,,weeding out items from our wholesalinginventory is no easymatter. we method for this. The only way we'vehad to do it so far don't have a cut-and-dried has obviouslybeensitting there to go out into the warehouse seeif something is to long. We're in the processof working up somedata cardson inventorieditems too to help with control. However, 35-45 percent of our inventory items are staples

CumberlandCrafts

77

spraypaint,instructionbooks, ielt, chenille, suchasglues, alwaysin strongdemand, etc. "My answer to our ever-growinginventory control problem is to go to a small computer. We're slowly getting our inventory system on a specialby-card setup designedto help us keep track of the inventory. We would like to take our control systemto the point where someonecould be hired to fulfull this function on a full-time basis."

f c A n a l y s i s :S h o u l di n v e n t o r y o n t r o lb e a t o p p r i o r i t yp r o j e c t o r t h e S t a n f i e l d s ? e ? H o w w o u l d a s m a l lc o m p u t e rb e b e n e f i c i a l D o y o u f e e l t h e p u r c h a s o f a c o m p u t e rw o u l db e c o s tj u s t i f i e d ?

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the millionaire

11
Supposeyou were given one million dollars to investanywayyou wanted.It could come as an unexpectedinheritancefrom a distant relative,or from holding a lucky is lottery ticket in Atlantic City, or from HowardHughes'will. The source reallyof no consequence. you have $1,000,000in liquid funds. It's all yours,no strings Just assume attached. Whatwill you do with it? Be asspecific you can. as

A n a l y s i s :W h a t d o e s y o u r m i l l i o n - d o l l as p e n d i n g p r e es a y a b o u t y o u r ( 1 ) p e r r s (; s o n a l i t y( 2 ) e n t r e p r e n e u r i a lc l i n a t i o n s 3 ) p e r s o n a l e e d s(;4 ) l i f e s t y l e ? ; n n y S u p p o s e o u r e c e i v e dh e m i l l i o n d o l l a r s u t w e r ee x p e c t e d y a b o a r do f t r u s t e e s t b b y t o m a x i m i z e o u r r e t u r no n i t o v e ra 3 6 - m o n t hp e r i o d . h a tw o u l d y o u d o t o W R m a x i m i z e O I ?A g a i n ,b e s p e c i f i c .

polymar manufacturing

12
and New York, manufactures in headquartered Syracuse, Polymar Manufacturing, Although machinistsand engineers. distributes specialty chemicalsfor industrial a healthy company with a creditable performancetrack-record,Polymar has experiencedforecastingand planning difficulties in recent years stemmingfrom market instability and burgeoningforeign competition. "We at Polymar havealways Polymar'spresident,Dwight Elkins, elaborates: prided ourselves our ability to forecastmarket demandaccuratelyand to filter on process. Even though we're not a big company this down to our manufacturing planning staff. we do our best to stay in close touch with our with a specialized specialty chemicalsmarket. Lately, the entire chemicalindustry has been so un' stablethat our planninghassuffered. "Our main problem lies with knowing what information should go into the planning process what to leavein and what to leaveout. Polymar'splanning system consists of nine interlocking steps which complement one other. By that I into the in mean that each stage planninggrowsout of the previousone and merges has certaininputs and outputs. next stage. This meansthat eachplanningstage "For example, when we hit the third stageof forecasting, considersuch we inputs as the state of the economy,cost of capital,foreignimports,the inflation rate, and so on. Forecastingoutputs include such things as identifying business plans. and threats, and contingency opportunities "I am currently engaged a dialoguewith my production and salesVPs in concerning planning inputs and outputs. With an unstable,competitive environof ment, we need to sharpenand clarify our understanding what goes into and
8I

Experience Phase IL' Venture Management

comesout of each planning stage.Only in this way can we go about improvingour overall planning capability. How can any company hope to plan well if it doesn't fully understand exactly what inputs and outputs are involved?"

A n a l y s i s :U s i n g E x h i b i t 1 2 - 1 , l i s t t h e i n p u t s n e e d e dt o e x e c u t ee a c h s t a g eo f p P o l y m a r ' s l a n n i n g y c l ea n d t h e r e s u l t i n g u t p u t s .I n p u t st o e a c hs t a g e o n s i s t c o c o f i n f o r m a t i o n n d m a n a g e r i a lc t i o n r e q u i r e d o r s u c c e s s f um p l e m e n t a t i o n . a a f il O u t p u t sc o n s i s o f i n f o r m a t i o n n d a c t i o nw h i c h w i l l l o g i c a l l y e s u l tf r o m s u c t a r cessfulimplementation. many instances, outputs of one stageserveas In the i n p u t st o t h e n e x t . P a y p a r t i c u l aa t t e n t i o nt o r e a l i s mT h a t i s , c o n s i d eirn p u t s r . a n d o u t p u t si n l i g h to f s m a l l ec o m p a n y i m i t a t i o n a n dc o n s t r a i n t s . r l s C a ny o u s u g g e s tn y i m p r o v e m e n t n P o l y m a r ' p l a n n i n gr a m e w o r k ? a is s f

E X H t E t1 2 - l T P O L Y M A R ' S L A N N I N GS Y S T E M P
Stages Planningcommitment

Organizing for planning

Forecasting

Formulation of competitive strategy

Goal formulation

Resourceallocation

P l a nt i m i n g

Plan implementation

Plan steeringand control

sun citYdeliverY

13
Texasmultipresident Sun City Delivery, Inc., an El Paso, of Marie Tarvin Garland, was namedRunner-upNational Small Business facetedcommercialdelivery service, Administration. Earlier she had been Person for l9l1 by the U.S. Small Business Personof the Year. honored as TexasSmall Business Ms. Tarvin was a student at the University of Prior to starting her business, pursued a Bachelor of Sciencedegreein Electrical Texas at El Paso where she and had been a Previouslyshe had worked in the restaurantbusiness Engineering. Universityin Las Cruces. scholarship studentat New Mexico State an Marie,tell us how you became entrepreneur. but I was goingto collegein El Paso,majoringin electricalengineering, found beer and wine as a it difficult to make ends meet. I took a job at a local bar serving me way of making extra money. One day the owner of the bar approached and asked if I would like to become a bookkeeper for his operations.I reactedwith surprisesaying, "A bookkeeper?You've got to be out of your mind. I may be a but I'm no bookkeeper.I don't know anything about accounting." mathematician and brought in a CPA to show me the basicprocedures But my boss persisted of bookkeeping.I found it really wasn't all that complicated.So during the day I went to class,and then from four in the afternoonuntil midnight I worked for the includingthe bookkeeping. bar doing a variety of assignments It occurred to me one day that perhapsI had chosenthe wrong major. I of enjoyed engineering because the technicaldemandsinvolved,but I realizedthat

84

Experience Phase II: Venture Management

wearinga white coat I was cut-out for working with people.I just couldn't visualize electronicmachines all my life or being locked up in somelaboratory with eighteen with no one around to talk to or to interact with. I had alreadyhad someexposure Laboratoriesat the to this kind of work in a co-op program with Schellenger university. I did computer programmingfor them and other technicaljobs. A1real though I enjoyed it, it was clear to me that I wantedto be out in the so-called world mixing it up with peopleevery day.

p s A n a l y s i s :C a n o n l y e x t r o v e r t e d e r s o n a l i t i eb e c o m es u c c e s s f u ln t r e p r e n e u r s ? e W h a t e n t r e p r e n e u r io p p o r t u n i t i ea r ea v a i l a b lte i n d i v i d u a lh a v i n g t e c h n i c a l al s s o a o r i e n t a t i o ns u c ha se n g i n e e r i nc h e m i s t r yo r c o m p u t e r c i e n c e s ? , g, , s

It just so happened that I recentlyhad started takingflying lcssons get my to pilot's license. group of us prospective pilots would meet at one of the local A clubs near the El Pasoairport occasionally, we'd shoot the breeze. and One day I happenedto be talking to a man who heardthat the airfreightcontractorwho was working for Continental Airlines in El Paso was putting his business for sale. up This seemed be an interesting to kind of business me, I guess to because it's of connection with flying. I happened know a person, to namedGary,who had some spare money and wasin the process lookingfor an investment. of I looked Gary up and told him what I had heard about the airfreight conpretty interested tractor going out of business. seemed He and saidthat he would put up the money if I would handlethe management end of the thing. So Gary and I put together what we thought was a fairly attractivepackage and I went down to the contractorand madehim a presentation. think we offeredhim about $50,000 I for his business. askedfor twice that amount and alsowantedto retain20 perHe cent ownership. told him in so many words that his counteroffer was absurd. I After all, his companydid not havea good reputationin town, they had no filing system,no record keeping-it was really wild. He got defensive about the whole thing and saidthat he wasnot goingto sellout at my offer. I told him for $100,000 I could start up an operationthat would put him in the shade. Well, I must have gotten to his egobecause daredme to eventry opening a business his. He he like up told me that he'd run me out of town. His challenge to was the best thing that had happened me in a numberof years.I went back to Gary and saidthat I had decided openup a freightbusiness to to givehim somecompetitioninsteadof buying him out. I negotiated dealwith a Gary where I would work out of a cornerof his office, payinghim $50 a month rent. I had a phone hooked up, borrowedsomemoney to buy a usedvan, and I wasin business.

Tell us about your initial experience business. in My very first challenge was to get one client that I could start with. I went to a clothing shop where I had bought my clothesfor yearsand askedthem if I could make someof their deliveries. got the job, and for the first two weeksI remember I grossed the business something like $54.75.Nevertheless,incorporated busiI the nesscalling it Sun City Delivery. Another clothing retailerand a jewelry store signed at the end of that two weekperiod. on Findingadditionalcustomers provedto be a very elusive so challenge, about a month after I startedup I got the idea of talking to the phone companyabout making someof their deliveries. phonecompanyhad beendelivering The their new installations via taxicab, which obviously was a very inefficient and expensive means.I contacteda phone installerthat I happened know and did a little reto search how long it took the taxi to delivera phone.It quickly became on apparent to me that I could savethe phonecontpanyquite a bit of moneyby handling their deliveryservice. I got gutsy and decidedto call up Mountain Bell and discuss possibilities the of providingdeliveries them. I contacted Mr. Chryslerand askedfor an apfor a pointment to go over my proposition. my surprise, said,"Can you be in my To he office tomorrow at 2:00?" I quickly said "Yes sir;you bet I'11 there."I figuredthat I wasgoingto get be somekind of a courtesy meeting and a firm "thanksbut no thanks"from them. The next day I walked into Mr. Chrysler's office and there were about six peoplein the room. They had the warehouse a conference and everyone on call was looking at a big map of the city. I suddenlyrealized that MountainBell was very serious about my proposal, I made my pitch. Every now and then, they would so interrupt and check out my facts with the warehouse verify the research had to I done.As it turned out, they wereimpressed with my planning and mademe a conditional offer. I was given a ninety-day trial period to show Mountain Bell what I could do with half the city. I wasready. I started out making the deliveriesin a Cadillac, which was the only car I had besides the used van. Before long I found the need to enlist the help of my father'sold Plymouth,and I evengot my sisterto help us out occasionally with a little Pontiacshebought to go to schoolin. This wasmy corporate fleet,if you can believeitl Beforelong though thingsgot goingbetter,so I purchased anothervan and had two-wayradiosput in. A n a l y s i s :D o y o u t h i n k b e i n g a w o m a n h e l p e do r h i n d e r e d a r i e i n h e r e a r l y M b u sn e s s x p e r i e n c e s ? i e Did you make any money from the Mountain Bell deal, or were you just your namein the El Pasoarea? trying to establish

85

86

Experience Phase IL' Venture Management

The Mountain Bell contract was the best thing that could have happened volume cashflow and sales to Sun City Delivery-it put us on the map. It created that allowed us to purchaseadditional vehiclesand begin to considerother kinds of deliveriesbesidesphones. It also gaveus the prestigeof being able to say that we had a contractwith MountainBell. Our local reputation really began to develop in the four to five years that we did business with Bell. They finally got smart enoughto equip some of their own vehicles and handle their own delivery service.I was very proud that our companypavedthe way for them. What happenedto that guy who threatenedto run you out of business? He went bankrupt eighteenmonths later. He definitely should have sold his business, but I guessI'm glad now that he didn't acceptmy offer. I'm not sure through. I had enoughexperience financialcapabilityto havepulled the business or At that timd I really didn't know much about trucking or the airfreight business. But the experand someengineering concepts. All I really knew was bookkeeping me got working with Mountain Bell, and other smalljobs, prepared to exience I pandSun City Deliveryand to branchout in new directions.

A n a l y s i s H o w c a n a s m a l l - b u s i n eo w n e r k n o w w h e nh e o r s h ei s r e a l l yr e a d ya n d : ss eh an c a p a b l e f t a k i n go n t h e n e w c h a l l e n g e s d r e s p o n s i b i l i t i ws i c h c o m ef r o m o e x p a n s i o? n

after the phonecompanyexperience. Tell us aboutsomeof this expansion Things got to be a little slow evenwith the phone company.We still didn't to have enoughbusiness supportthe companyand me. As a matter of fact, I was forced to lease operate a bar which I promoted on nights and weekendswhile running Sun City during the day. One evening,my answeringservicesaid that a man's secretaryhad called and that he was on a flight to El Pasoto talk with me about a new freight deliverycontract. Later that eveningthis man walked into the bar wearinga suit. The cocktail bar this froze,because wasa neighborhood-type and, waitresses the bartenders and of wheneversomeonecame in wearinga suit, he was immediatelysuspected being Commission.When I saw the guy, I thought it was a on the Alcoholic Beverage out! But then he showedhis card and I saw that he was from raid. I almost passed I the Air BorneFreightCorporation. wasflabbergasted! and At that time Emery Airfreight was number one in the business Air Borne was no less than number two. I spent the eveningtalking with the man and was thrilled to find out that he was interestedin contractingwith Sun City to do Air area. in delivery the El Paso Borne's

SunCity Delivery

87

The next morning we met at my office and worked over the prices and details of the relationship.As I recall, I drove a pretty good bargainwith him, so that he added 25 cents to each shipment beyond his original offer. We were in business. Did this new contract with Air Borne Freight have a large impact on your volume? You better believeit; it was one heck of a deal.I really felt complimentedfor a major airfreight forwarder to seekme out to take on the airfreightbusiness when I really didn't have much experience this area.I guess was Sun City's excellent in it reputationthat made the difference. Then imaginemy surprisea month or so later when I got anothertelephone call. This one was from a representative the number one company, Emery. He of told me over the phone, "We're biggerthan Air Borne and we can give you more volume work. I'll be out in El Pasonext week and will come by to seeyou and discussour mutual interests."He did, spending two dayswith us checking with our clients, suppliers, bankers. and About six months passedand I didn't hear from him further, so I pretty much forgot about the whole deal. Then one day out of the blue, he calledme on "Are you the phoneand said, readyto signa contract?" They made arrangements fly me out to Dallas to negotiatewith them. to When I got there, they showed me their whole operation, even allowing me to watch a freighterload and unload.We signeda contract,and to my utter disbelief Sun City had the two biggest for This wasin February l91l . of carriers customers. suddenly there came another big opportunity With this incredible success, that just fell into our lap.

Analysis:What are the advantages disadvantages tying a small busineSs of and to large ompany lients? c c

Whatwasthat, Marie? It started when I receiveda call from a friend at Emery. He mentionedto me that I shouldn't become overly dependenton one or two accounts.I askedhim what he had in mind. He told me that I should give some serious to consideration dealingwith some of the airlinesin El Pasoand making deliveries them aswell. for This would be a major new sourceof revenue and spread our risk. It sounded highly attractive and promising, of course, but Sun City was nowhere near big enoughto handlethe volume of business that the airlinesoffered. Besides,there was already another local company, Airfreight Services, that had been doing an awful lot of contract work for the major airlines.

88

Experience Phase II: Venture Management

I got to thinking about Jeff Niemon, who owned Airfreight. Jeff washaving problems,and I felt I could add a whole lot to his operation. a lot of management So naturally the thought of a mergerquickly cameto mind. The airline opportunity was certainly worth initiating mergerdiscussions. "Look, the one thing that my company has I contacted Jeff and told him, You and I pretty well figured out how to do is make money in the freight business. of lot to the management your havethe town split in half. I think I can add a whole merger your best interest to discuss company and that it would be very much in with me." Jeff thought about it awhile and about three weeks later contacted me at "Marie, I don't really know that much about running home on a Sunday.He said, so the freight end of the airline business, maybe we shouldtalk about a merger." "You know, I an Sensing opportunity to becomemore aggressive, told him, I havedecidedthat I really don't needyour money. I'm confident I can get into the airline businesswithout even merging with you. Would you like to talk about sellingout insteadof merging?" "Yes, I think we may have somethingto talk Jeff hesitatedbut finally said, about." So we beganthe negotiationsthat would put Sun City into anotherbig, new areaof business. The negotiationsturned into a protracted legalbattle that went on for about months. The problemhad to do with the termshe demanded. four-and-a-half Tell us about the detailsof your negotiations. The problem all centeredaround an SBA loan. Jeff had a loan with them and "Fine. If the bank goes explained that he had an offer to sell out. The SBA said, to along with it, we'll go along with it." Jeffs bank was agreeable the deal,but few more weeks the SBA for some leasonbeganto get cold feet. They told after a Jeff that if he sold out, they were not going to allow him to passon the note to Sun City. Well, that fouled up his personalP & L, becausethe loan gavehim a con"If Sun City tingent liability of $19,000.Jeff tried to blameit on us by saying: were financially stronger,the SBA would let you take over the loan." He finally wound up wanting some small amount of money-$75 or $150 him for the a month until the SBA loan was paid off. This was to compensate P contingentliability he had to carry on his personal & L. I was tired of all the legal his hassling and was seriouslyconsidering terms. "Marie, I don't my CPA said, But the troublesweren't really over because think you're really comfortable about buying this company." I told him that he had it figured right, becauseI still had doubts about buying Jeffs balancesheet. that it I I really wanted nothing to do with his balancesheet because suspected yearsto contained a lot of undisclosedliabilities that would be haunting us for come. "Come on, let's Jeff heard about my cold feet and called me up and said, We haveone more meeting. canwork this out."

Sun City Delivery

89

w what is Airfreight orth? s A n a l y s i s : h o u l d s u n c i t y b u y o u t A i r f r e i g h tS e r v i c e s ? s t c l f M a r i e o m m i t s o a b u y o u t , w h a t t e r m ss h o u l d h eo f f e r ?

E X H I B I1 3 - 1 T In S u nC i t y D e l i v e r Y , c . B A L A N C ES H E E T

3 J a n u a r y1 , 1 9 7 4 Assets
Current Assets PettY cash Accounts receivable EmploYee advance Prepaid exPenses Total current assets Fixed Assets Autos and trucks Furniture and equiPment Lessaccumulated dePreciation Other Assets Covenant not to compete Goodwill

50.00 r 0 , 2 5 0 .9 3 42.00 | ,224.99 $11,567.38 20,365.05 to,204.67 30,569.'12 13,220.4r t7,349.31 32 5 . 0 0 900.00 1,225.00 TOTAL ASSETS 6 $ 3 0 , 1 4. 1 9

Liabilities
Current Liabilities Bank overdraft Accounts PaYable Notes payable-due within one year (Scheduled) Loans PaYable-stockholder Accrued taxes and expenses Total Current Liabilities Stockholders' Equity Capital-1,000 shares,$100 par value authorized 21 sharesissuedand outstanding Paid-in surPlus Retained earnings TOTAL

1s6.00 2,'780.07 9 I 1,3 8.80 I,998.00 1,295.68

$17,628.5s
$ 2,100.00 16,455.00 (6,041.86)

12,513.14 . $ 30 , 1 4 1 96

E X HB I T1 3 - 2 I S u nC i t y D e l i v e r yl,n c . I N C O M ES T A T E M E N T s i xm o n t h s n d e d a n u a r 3 1 , 1 9 7 4 e J y
Gross Income Less freight forwardings Gross Profit Operating Expenses Advertising and promotion Bad debt expense Bank service charges Claims and losses Depreciation Gas and oil Insurance Interest Leaseequipment Legal and accounting Miscellaneous Office expense Rent and utilities Salaries-officers Subcontracts Taxes and licenses Taxes payroll Telephone Travel and entertainment Truck and auto-repair and maintenance Operating Profit (loss) Other Income (Loss) on sale of assets Net Income Earnings per Share (2 I sharesissuedand outstanding)

$9s,849.06 29,514.14 $66,334.82 $ 459.60 300.00 28.57 472.35 4,351.73 4,415.18 2,776.81 683.2'.1 1,239.42 945.05 461.45 8s4. 6 I 2,427.96 1 3 , 9 5 76 2 . t9 ,653'14 . 166.7',| s20.48 |,939.42 2,303.2'l 677.20 5 , 75 3 . 3 4

64,387.29 s 1,947.53 (467.4r)

(467.4r)

q_rylgJ2
$ 70.48

90

E X H I B I1 3 - 3 T I, t A i r F r e i g h S e r v i c e sn c . I N C O M ES T A T E M E N T D r f o r t h e y e a re n d e d e c e m b e3 1 , 1 9 1 4
Gross Income Less freieht forwarding Gross Profit Operating Expenses Advertising and promotion Claims and losses Salaries Depreciation Gas and oil Insurance Interest Leaseequipment Legal and accounting Licensesand taxes Taxes-payroll Telephone Repair and maintenance NET INCOME

$ l 0 1, 6 0 0 . 0 0 32,400.00 $ 69,200.00 $ 236.00 210.00 42349.00 200.00 4 , 70 0 . 0 0 2,7 0.00 5 800.00 200.00 1,600.00 I ,100.00 4,200.00 2,200.00 0 8,3 0.00

68.845.00

355.00

E X HBI T 1 3 . 4 I t I, A i r F r e i g h S e r v i c e sn c . BALANCE SHEET

3 J a n u a r y1 , 1 9 7 4
Assets
Current Assets: Cash Accounts receivable Prepaid expenses Notes receivable from employees Total Current Assets Fixed Assets Autos and trucks Furniture and equrpment Less accumulated depreciation Other Assets Goodwill TOTAL ASSETS

$ l,s00.00 14,069.00 I , 0 31 . 0 0 1,000.00 $1 7 , 6 0 0 . 0 0 4,200.00 1,800.00 6,000.00 2,030.00

3,970.00 1,s00.00 $2 3 , 0 7 0 . 0 0

Liabilities and Stockholder's Equitv


Current Liabilities: Accounts payable T a x e sp a y a b l e Notes payable to SBA (current Portion) A c c o u n t s p a y a b l et o s t o c k h o l d e r s Long-term Debt Notes payable to SBA (non-current $ 60.00 210.00 1,500.00 3,000.00

$ 4,770.00

portion)
Total Liabilities Stockholder's Equity Capitai stock R e t a i n e de a r n i n g Total Stockholder's Equity TOTAL LIABILITIES AND STOCKHOLDER'S EQUTTY

1l4gjg
522,210.00 6,000.00 (5,200.00) 800.00 $23,070.0q

bi7 skywestern store

14
In July 1980, H. J. Ridley, Sr., owner of the Big SkyWesternStore in Rawlins' and other techniques Wyoming,was wonderinghow he could use data processing profit in his better control and greater modern methods of operationto achieve (1) inventorywhich interested two areas: controlling in He business. was especially for had grown from $94,000 to $207,000 in one year; and (2) havingavailable his bootsin quantity. sizes hand-made of the customers most demanded

Environment Competitive ln the Northwest many people own horsesand usually wear westernclothes, or especiallyboots and western dress-pants jeans. The Big Sky WesternStore is located in a part of Wyoming where a great deal of the social activity calls for in dressing westernstyles.Horseshowsare held from early May to late Octoberat all of the small, surroundingcommunities and even in many of the more metropolitanones. Law-enforcementagenciesare also outlets for western wear. Most of the law officers from the local deputy through the Wyoming Highway Patrol wear similarto thosesold by Big Sky. In closeproximity boots and westerndress-pants is a large university oriented toward agriculturewhpre studentsstill wear western hold various communities In dress. addition,surrounding clothesas their standard rodeosand fairs all through the spring,summer,and fall. Theseand the statewide 93

94

Experience Phase II: Venture Management

rodeosand fairs combine to encourage everyoneto wear westernclothes.Even for people who do not have horses and do not plan to attend rodeos, the informal of comfortableness westernclothesmakesthem attractive. At present Big Sky has no appreciablelocal competition, although several merchantsin the region have begun similar stores.One vendor openeda storein a thinking he would get the town six miles away and stockedwesternmerchandise overflow. Because store did not attract business, soon closedand sold much his he of his merchandise Big Sky at reducedprices.Twelve miles away another merto chant opened a similar store and immediately stocked it with much out-of-style westernwear. Currently he has an attractive,orderly store with quantitiesof merchandise-but few customers. from One deterrent to competition is the difficulty of buying merchandise wholesalers. At present in the westetn-*eit line, especiallyin the jeans group. . wholesalers very reluctant to open a new retail account.Their standard reply is are that they may be able to talk to a prospective new customer"next year." Still another roadblock to truly direct competition is the veqyl4rg9ilr.yenLqry carried by Big Sky. Most merchants who want to competecan hardly afford sucha substantialinitial investment,as least until they know whether or not their store will havecustomers.

A n a l y s i s : h a t s t r a t e g y o u l d y o u u s e t o c o m p e t ea g a i n s t h e B i g S k y W e s t e r n W w r Store?

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Overview RetailOperations of Originally Big Sky was the usual generalstore in a smalltown, sellingmerchandise typical of a rural community. The father of the presentowner started Big Sky in the 1920s.During the last ten years,under the guidance the currentowner,the of merchandise has becomemore and more "western flavored."In both 1978 and 7979, the store grossed over a million dollarsin revenues. popularity of discounthouses, As the presentowner recognized increasing the prices.Realizing the store began to offer quality merchandise very reasonable at that people generally appreciatea bargain, Mr. Ridley offers only top quality merchandise.No "seconds" are permitted in the store, although a favorite ploy of competitors is to imply that the reason for Big Sky's lower pricesis that the merchandise not first-class. is Current discounts on merchandise are appreciable, with many items being sold nearly at cost. For example,a Tony Lama hand-made for boot sold elsewhere $70 to $85, is retailedby Big Sky for $59.75.At the upperend of the boot pricerange, the genuinealligatorboot sellsaI$237.5O, with the $285 to $350 compared price typically askedby competitors.

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Big Sky llestern Store

95

for Word-of-mouthhas been partly responsible people realizingthat Big Sky is not the typical discount store ivhere only the most popular sizesare stocked. Instead,the store offers much more variety in both stylesand sizesthan the usual proud is discount operation. One of the things of which Mr. Ridley is especially that he stocks boots to fit men in sizesfrom 6-D to I4-AAA and ladiesin sizes beginningwith from 4-B to 9r/z-8.Children sizesare carried for all agecategories, one year. Divided into two parts, Big Sky consistsof a larger store housed in three connectedbuildings and a smaller economy store two doors down the street. In boots and Red Wing work boots are sold. Down the larger store, only hand-made boots for adultsare sold. the street,children'sboots and the lessexpensive Until the store started selling Tony Lama boots hand-madeboots manufactured in El Paso,Texas-that brand was not widely known in the Northwest. boots from Big Sky, Now, primarily due to the number of people who purchase Tony Lama is one of the two most popular brands of hand-madeboots in at Wyoming.Justinboots are alsovery big sellers Big Sky. As a matter of fact, in of who calledon the storewas the top salesman the 1979 the Justin boot salesman Justin line, principally as a result of the volume sold to Big Sky. at The appealof true quality merchandise a moderateprice is strongenough that people travel for many miles to purchasethis western wear. On numerous occasions,customershave flown in from Montana, Idaho, and the Dakotas. On one recent Saturday, customerscame from such distant and diverse places as Pocatello, Laramie, Boise,Fargo,and evenDenver. Boots have been mailed to Australia, England,and North Africa. Brown and Root constructionmen working on an off-shorerig off the coastof Africa regularly use their intercontinental phone line to call for Red Wing working boots to be mailedto them. crowds of customerscan get so large During the Christmasshoppingseason, that the store doors actually have to be locked. At certain times of the day, new customersare admitted to the store only as others leave.Peoplehave sometimes hours, even during the cold or rain. Recently the owner waited in line for several the addeda steelbuilding, across back of the three main buildings,as a comfortable waiting areafor eagershoppers. ability of In large measure, the success Big Sky stemsfrom the purchasing of prices,especially at Mr. Ridley. He has the knack of acquiringmerchandise bargain volume and turnover since he orders in such large quantities.High merchandise prices.Traffic through the store is of suchintensity that permit the unusuallylow "Even your mistakessell when so many different people one salesman remarked, comethrough." Overall volume is substantiallyincreasedby outfitting numerous sheriffs posses, riding clubs, and westernbands.Many high school western-drillteamsalso buy their boots from Big Sky. Unlike discount stores, where most of the serviceconsistsof the clerks "pointing" customersto the merchandise,Big Sky offers true servicein fitting to boots. Originally boots were openly displayedon shelvesto enablecustomers

96

Experience Phase II: Venture Management

grew and the inventory increased, the browse through the boxes. As the business for reasons. had to be abandoned several open-shelfmethod Customerswould often put boots back in the wrong box or put a boot of one kind and a boot of a different kind in the samebox. The open displaysystemalso lent itself to pilferage,especiallyon busy Saturdayswhen the crowds are so large. The open-shelfarrangement also made it difficult for clerksto find the sizeor type boot neededfor a particular sale, since customersoften moved boots from one locationto another.

ve p y A n a l y s i s :W h y i s a p r i c e - i n t e n s i s t r a t e g y a r t i c u l a r l a p p r o p r i a t t o t h e B i g S k y e Western Store? pricing situations wherean aggressive ldentify at leastthreeother differentretailing y E s t r a t e g y o u l dp r c b a b l y o t s u c c e e d . x p l a i n o u r r e a s o n i n g . w n

The Merchandise prevail. styles Stylesdo not In westernwear,just as in other typesof merchandise, changeas quickly in the western field, but they are definite. Quite a variety of in and typesof jeans, merchandise sold at the Big Sky Western is Store.All brands all fabrics from the favored blue denim to the recently added knits, are available. Western pants in the fabrics worn by the real cattlemen and ranchersare also stockedin many colors,materials, and sizes. Big Sky is uniquein that it handles up shirtswith extremelylargeneck sizes suchas 18, 19, or 20;westerndress-pants merchantis reluctantto to size 50; and westernsuits up to size52.The average stocksuchseldom-requested sizes. to Westernhats (which are custom-steamed the customer'sfavorite crease) follow the seasonal demand, with strawsfor spring and summerand felts for fall For example,Bailey and ResistolHats, and winter. Again, low pricing prevails. sell which retailfor $25 to $l l0 at other stores, for $20 to $65 at Big Sky. jackets, manufacturers, western Various-priced westernshirtsof name-brand western-style suits, and western vests are carried. For men, Nunn-Bushshoesare stylesand colors.One part of the storehandlesstapleitems, also availablein several and suchas underwear, socks,towels,sheets, materialfor makingwomen'sdresses, hose. Although numerous brandsof boots in wide price ranges sold, Big Sky's are two principal suppliers of boots are Tony Lama and Justin. For both of these brands,Big Sky sellsmore boots than any other singlestorein Wyoming.The wide variety of styles and sizesaccountsfor much of the volume. Very few retailers stock a variety of either styles or sizesfor immediatedelivery.Oftentimes,competitors require customersto order boots from the cataloguewith a six-to-ninemonth waiting period, especially the hard-to-fit sizes. for

Store Big Sky Western

97

for especially The Justin company makes some styles and fabrics of boots styles patternsor Big Sky, such as an ostri;h boot, which is a top seller.Several as specialorders for Big Sky havenow becomepart of ttrat were originally created the regularlines of both Tony Lama and Justin' volume by the Mr. Ridley categorizes store'smerchandise approximatesales as follows:
a a a a a a

FIats Jeans, pants, suits, shirts Children's boots Cheaperadult boots Tony Lama, Justin, Red Wing boots Miscellaneous

8% 20% 2%

rs%
48% 7Vo

lnventoryControl Challenge $111,000in inventory with about 50 percentconsisting A recent study revealed investmentin inventory can be reduced of boots. Mr. Ridley feelsthat considerable styles of Tony Lama and Justin boots in the most requested by keepingonly eight which are slzes.WniG Mr. Ridley and the salesstaff think they have an idea of styles' existsabout the eight best-selling no popular sizes, true consensus the more Mr.Ridleyanticipatesseveralproblemsinimplementinganyinventorycon. punched-card trol system. Aside from the mundane problem of coding items for paramountproblem centersaround clerk resistance' use,the is resistance sure method be implemented, Should an unfamiliar punched-card of the to appear if for no other reason than unfamiliarity of application.Most pulpose.In Mr. Ridley's of very little understanding a punched-card's clerks-have to will be likely to resentanything that appears make the salemore opinion, they derivefrom grosssales. sincetheir commissions especially time-consuming,

ProPosals Boot lnventorY-Coding biggest-selling Severalideas are under examination for identifying and coding the Lama company now puts a reordercard in styles and sizes.For example,the Tony do contain the bottom of each boot box. Theseare not punched cards,but they particular pair of boots. Thesecardsare often all pertinent information about the are awareof losi as a pair of boots may be shown many times before sold. Clerks that importanceto them. The owner believes the cards but typically attach little in eachbox upon request' Justin will placea similarcard Variouswaysofutilizingapunchedcardarebeingconsidered.Ifthecardis posplacedinside the box it can easily be lost. If it is attachedto the boot' it may might get ,ibly int.rfrre with the fitting. Even stapledon the boot box, the card lost.

98

Experience Phase II: Venture Management

Aninexpensive,plasticholderforpunchedcardsisalsounderconsideration. of the box much as price tags are attached The holder can be attached to the front fit in the holder and could be easily removed to items. The identifying card would would contain the style number' the comat the time of sale. fne"p'oposea card size of the boot in code and in full' pany name both coded and in full, and the Codeswoulclbedesignedforquickcomputelutilization,whiletheprintedname andsizewouldbenefitthesalesclerk.onthesurface,thisinformationseemssuf. ficient for present inventorycontrol needs' information about the bootSummarized betow is additional, miscellaneous proposals' inventory system and accompanying coding l . B o t h T o n y L a m a a n d J u s t i n b o o t s c o m e i n t h e f o l l o w i n g c o l o r s : c h o c o l atree te bone' sorrel' bay' black' olive' and brown, brown, tun, ,,rntun, benedictine tan' bark.Sinceelevencolorsareincluded,twocard-columnswouldbeneededforthe color code. exist: those for men and those for 2. Two general classes of western boots women.Withonlytwoclassifications,onecard-columncouldhandlethisinformation. and for women fro-m 4-B to9lz-B' 3. Sizes for men range from 6-D to 14-AAA' Threecard+olumnswouldthusbenecessaryforthesize,witha..5''beingusedto indicatethe"/2"-Numericalcodingprobablyshouldbeusedforthewidths'with one card-column being adequate' and Red Wing) could be coded 4. The three boot brands (Tony Lama, Justin' withonecolumnonthepunchcard.Eveniflower-pricebootsareaddedlater,one columnwouldstillbeadequate,becausethereareonlyfourotherbootsuppliers' 5.RedWing,sclassificationschemewouldbeeasiertocode,sincethereareonly descriptionsare: nine styles, in sizes6-16. These styles and their work boot, slip on a. 1l'77 _.ot1.-treated b. I 155-oil-treated sliP on c. ll22-crePe-sole work boot d. I 199 -rough-out leather work boot e. 967-climbing boot with 12" toP f. 617-climbing boot with 16" toP g. 214-unlined, shell-hide,lace-uphunting boot h. 812-lace-up, mock toe, insulated hunting boot i. 976-safety steel, wing-toe boot card, taking only four columns' The actual style number could be punched on the 6 . P r e s e n t l y . l . o n y L a m a p u t s a n i d e n t i f i c a t i o n c a r d i n e a c h b o x , w i thet h e s i z e t h Justin boot style. Mr. Ridley thinks and the pertinent information about that to do so' Company will include a card if requested style, with the number beingunique 7. Justin has a stock number for each boot heel' If the same style boot is sold in for a particular pattern, color, toe, top, and different number' When a boot is modified another color, Justin gives that boot a is placed in front of the original in any way, such as a different type sole, a letter

Big Sky lilestern Store

stocknumbeltodeslgnatetheStylechange.AnexampleofJustin'smethodisas follows: a.1536-mule-hideboot,withspurridgeonback,saddle-stitchedtop,round heel, leather toe, flat heel b.4601-thesamebootdescribedabovebutwithahypelonsole c2345-chocolate-brownbootwithal2-inchtop,nafrow,roundtoe,calf vamp with caribou algonquin plug on top of the foot d. 52345 the same boot as above except 1 l-inch top e. 5369-the same boot above in black leathers: kangaroo, 8. Both Tony Lama and Justin boots come in the following calf,lizard,alligator,sea-turtle,camel,elephant,andwaterbuffalo'Twocardbecauseother exotic leathersmay conceivably be used columns would be necessary, in the future. ,.pr.r..,t, g.TonyLamacalfbootscouldbeidentifiedbythesenames'althougheach a grade of calf leather: Kip, Kitty Tan, Flambeau' or Calf'

as their stock num10. A big problem is encountered with the Tony Lama boots' bersdonotidentifyauniqueboot.SincetheTonyLamastocknumbercanmean manythings,thecodingplocessiscomplicatedsomewhat.Theproblemcanbest boot box: by be assessed analyzing a schematicon the front of a Tony Lama

STYLE 8030 TOP 500 TOE R HEEL 3 HEIGHT 12" SIZE 490 L E A T H E R& C O L O R Alligator Lizard Brittle Peanut

height' size'width' of Note that there is a placefor the description the top, heel' and color. type of leather, Style8030couldhavevariationsofallsevenoftheseitems,orpossible currettt incombinations of these. In order to list correct information for the the style' itemswould haveto be codedalongwith of ventory,all seven these number, ih. To.ry Lama Companyeventuallyhopesto havean identification sevenof thesefeasimilar to Justin's,for eacrruniquestyle and to incorporateall that thereis though,is in the future.It appears turesin that style.That possibility, include all sevenof no alternativesolution flr the plesent other than to actually c i t h e s et e m so n t h e P u n c h e d a r d . f a p r o t o t y p eo r o p a A n a l y s i s D e s i g n c o m p u t e r u n c h - c a rfd r m a tt h a t c o u l ds e r v e sa : o C o n c e n t r a t e n m a k i n gy o u r c a r d f o r m a t y Big Sky's boot-inventorsystem. t l, l c o m p l e t e o g i c a a, n ds i m p l eo u t i l i z e ' p e r s o n n ei ln e t o g P r o v i d ep r a g m a t i c u i d e l i n efs r o v e r c o m i n gh e r e s i s t a n co f s a l e s ol h i m p l e m e n t i ntg e n e w i n v e n t o r y - c o n t rs y s t e m '

telguardservices

15
Services, Lyle Wanamacher majority shareholder boardchairman Telguard is and of securityindustry.In the followingwide-ranging a nationalleaderin the electronics interview, he discusses Telguard'scompetitive strategy,growth evolution, and highlights the entrefuture designs.Throughout the interview, Mr. Wanamacher phipreneurialspirit within Telguardand his own entrepreneurial management losophy. give us an overviewdescriptionof TelguardServices? Would you please Telguard is a diversified electronics company offering a range of security services both the residential for and commercial markets. started companyin I the l9l2 to market smoke-detector into a systemsalarms and graduallyexpanded products based, electronics securitycompany.We offer a full arrayof security and services, includingburglaryalarms, stations, and propertywatch. visual-monitoring however. this in By Telguardstresses completesecuritysystems marketing, I mean that we strive to provide our customers with securityprotectionin all areassimultaneously: fire, burglary,vandalism, and so on. By no meansare we a single-product single-service or firm. grossed ln 1979, Telguard with 700 employees and over $23 million in sales 145,000squarefeet of manufacturing facilities. havetwo plant locations, We one in Oakland and anotherin upperNew York state.I personally control86 percentof spread amongtwenty-one other stockholders. companystock,with the remainder

100

102

Exoerience Phase II: Venture Manasement

You know, in retrospect I never envisioned myself becomingthe head of a large manufacturingcompany. I had alwaysfelt that my callingwas in the financial community. Neither did I ever previously see myself getting into a hot growthindustry like security services.But I have been an entrepreneurall of my life. Even at age nine I was making spendingmoney sellingseeds. feel entrepreneurial I has management had a lot to do with the rapid growth and success Telguard. of Why do you say that, Lyle? I feel the company has been more than a little innovative in some of its marketing and manufacturingpractices.For example,Telguardpioneered unique a salesapproachwith smoke detectors,and we have carvedout a distinctiveniche in the securityindustry. Please explain your sales approachto us. Up until 1915, all smoke detectors were sold through traditional retail channelsof distribution. At that point in Telguard'sgrowth history, we simply didn't have the financial clout to build a big brand-name our smoke detector. for So I searchedfor some sort of a marketing edge to penetratethe market with. Ironically enough,we found it via the Occupationaland SafetyHealth Act. OSHA wascursed most corporations not by us. by but must OSHA stipulatesthat all companies with at least a hundred employees periodically hold safety meetings.I saw my opportunity right there. I designed a safetyorientation programwhich corporationscould hold in-house. Telguardwould becomesafetyconsultants thesecompanies. to We developed ten-minuteaudio-visual a slidepresentation that focusedon fire safety. We put this on for a company free in exchange allowing us to present for our smoke detector to employeesimmediately afterwards.For employeesinterestedin obtaining a smoke detector for residentialuse we offered a discount plan asa further incentive. Before long corporationsall acrossthe country were clamoringfor our program. We would run safety meetingsback-to-back a given company from 8:30 in in the morning until 5:00 in the afternoon. In some plants we even held meetings all night long for the graveyard shifts.Someof the office towershad thirty or more floors, like the Pennzoil building in Houston. We would spendweekswithin the samebuilding going from floor to floor. Fifty-two percent of employees ended up purchasing smokedetectorfrom a us. To show you what an extraordinarybatting average that really is, considerthat the sales closing-ratio the insurance for industry is only 10 percent. Over the five-year span from 1972 to 1976, we securedmore than five hundred corporate clients, almostall of which were in the Fortune 1000.rNe didn't haveto solicit them;they soughtus out. We took someof the stingoutof OSHA for them. They cooperated with us because reducedtheir workman'scompensawe tion and gavethem a channelfor providinggood employeePR.

Telguard Services

A n a l y s i s :C a n y o u t h i n k o f a d d i t i o n a le x a m p l e s f h o w s m a l lc o m p a n i e h a v e o s government benefited from federal legislation policy? or

Lyle, tell us somemore about Telguard's sales organization and approach. Currently we have around four hundred salesreps working the U.S. and Mexico. They're one of the finest trained sales forcesin the country. They work on a referral basisonly, rather than soliciting cold from door-to-door.The threebasic categories professionals rely on for the bulk of our referralsconstitute the of we key to our salessuccess. Thesethree groups are insurance agents,glass installation companies, locksmiths. and Stop and reflect a moment. Who's the first personyou call, after the police, when you've been burglarized? Your insurancerep. Then you call a glass company to repair the window where the burglar gainedentry. Finally you call a locksmith to install new locks or to changethe old ones.Our sales peoplehaveall three bases covered.We pay our contactsa generous finders fee for their efforts and thereby cementa nice long-termbusiness relationshipwith them. You know, simplicity is truth's most becominggarb.In marketingTelguard's products and services, have never lost track of simplicity. We market peaceof we mind. How did Telguard respondwhen the smokedetector market matured so quickly and pricesbeganto drop? Boy did they ever begin to drop! The samesmoke alarm sellingfor $66.50 in 1975 under our corporate discount plan currently goesfor $9.95 at any Sear's store. This left no doubt in our minds that we were going to have to broadenour product line, and quickly. ln 1971 sold smokealarms. Today six ,137 companies are left. That's what you call a shake-out! We recognizedthe enormouspotential of the securitybusiness general in and again went niche-picking.Here was a $400 million market up for grabs.Our new strategywas to expand into nonvolatilemarketsbuffered againstthe cyclical upsand-downs the economy. of We also wanted to pick a growth area technologicallyrelated to security equipment which offered marketing carryover.Once againthe answerwas simple: energy conservationand protection. Not only did we want to expand our traditional security services but we also wanted to offer companiesand homeowners protection againstenergywaste.With dramatic increases energycosts,the need in for protection was obvious. This is where we want to stake our claim for the remainderof the century. With our sophisticated monitoring equipment and telemetry,we can seeto it that commercial and residential customersdon't over air-condition or under-do it. We can control air temperature, humidity levels,insulation levels,and so forth.

104

Experience Phase II: Venture Management

Here's a growth market that is certainly a mandatednational priority and which years! will hardly run its coursein just seven your own entrepreneurial what is Telguard's Besides drive and innovativeness, most important resource? Unquestionably, our people.We have a truly outstanding and unique personnel force. For instance,Telguardhas an R&D staff of fifteen highly productive people.If one of our researchers patented productmarketed the company, has a by he realizesfull royalties.Most corporationswould make him sign a waiver,but we don't. One of our peoplemade$300,000lastyearfrom royalties received. I also like to surroundmyself with Ph.D.sas my vice presidents. course Of this goes contrary to the common stereotypethat academics useless eggheads are who don't know how to make a buck. My staff is not only profit-minded also but highly articulate,creative, and intellectuallystimulatingto work with. Telguard also places great stock in the plant employees.They are highly motivated and productive,largely because employ teamworkand encourage we healthycompetition betweenthe variouswork crews.Eventhough we don't practice paternalistic performers. management, companytriesdiligentlyto recognize the For example, at the end of each week the work team with the best weekly performancerecord is presented with a largeten-footJongbannerthat is hung over employeebirthdays and their work station for the following week. We recognize to anniversaries sendinga red rose to their home or by bankrolling supervisors by eat take them out to lunch. Most of the productionpeople out only at inexpensive it fast-food places.When their supervisortakes them out to a decent restaurant, makes lastingimpression. a My motto is simple: forget your people and forget your productivity.Telguard Services definitely recognizes that peopleare the building blocks of the company.We want everyone behave entrepreneurs. to as

h A n a l y s i s :W h a t d o y o u t h i n k L y l e W a n a m a c h e r e a n s h e n h e s a y s e w a n t sa l l w m T e l g u a r d m p l o y e ets b e h a v e se n t r e p r e n e u r s ? e o a sp l W h a tc a n l a r g e r o m p a n i ed o t o p r o m o t ea n i n t e r n a e n t r e p r e n e u r i a l i r i ta m o n g c s employees?

What are your future plansfor TelguardServices? We want to pursue acquisitionsin our identified growth niche relating to security and energy conservation. There's an awful lot of poorly run companies limping along out there that I'd like to go after. As Telguard'ssalescontinue to grow from $13 million to $50 million and more, we're not goingto be abletoinvest all of our excess cashinternally. Acquisitionswill becomevitally important.

TelguardServices

105

I also would like to step up my efforts in providing guidanceto fledgling guidance. have no desire I who need both capital and solid business entrepreneurs to become a venture capitalist and suck the blood out of new ventules.Rather, busiI get real satisfactionout of being able to lend a helping hand to struggling nesses. I take a certainpercentof the actix and then function sort of as chairmanof the board, questioning decisions, lending advice, and encouraginginnovative is performance.Any time the entrepreneur fed up with me, he can fire me and buy satisfaction,notthemoney' back my ownershipinterest. I'm in it for the personal I'm rich enoughalreadY.

s s l A n l a y s i s :W h a t g e n e r ag u i d e l i n ed o y o u t h i n k T e l g u a r d h o u l df o l l o w i n m a k i n g "game"is an entrey o u f e e l p l a y i n gt h e a c q u i s i t i o n s ? f u t u r e a c q u i s i t i o n sD o p r e n e u r i a lc t i v i t y ? a a b en I n w h a t w a y s c o u l d a n i n e x p e r i e n c e d t r e p r e n e u re n e f i tf r o m t h e a d v i c e n d your answer. in Be guidance Lyle Wanamacher? specific of

your lifestyle for us? describe In closing,Lyle, would you please and I am basicallya loner. I cherishmy personalindependence freedomand like to explessmy personalityand have a strong need to do things my own way. I individuality through mY work. I am driven by work. I have very little family life, evenlesssociallife. I have I'm not a very interI tunnel vision becauseI am so strongly goal-directed. guess I I'm so company-oriented. haveno hobbiesto estingpersonto be around because politics. My family suffersa greal speak of and few outside interestsother than in I I dealbecause am an entrepreneur.guess, a way, I'm a nut! My day beginsat 4:30 in the morning and I'm at the office by 5:45. For by the first fifteen minutes of each day, I plan my daily schedule setting action previousday' priorities.At 6:00 I go over the financialreportsfor the curlent tearn.We discuss with my executive From 6:30 to 7:00 I breakfast | meet pelsonallywith departproblemsand priorities.Between7:00 and 9:45 ment heads. I spend the remainder of the morning troubleshootingoperations problemsor gettinginvolvedwith projectsof one sort or another. executivein From 12:00 Io 12:3O I generally eat lunch with a business to the outsideworld in another firm, or with a politician. I try to exposemyself this way and gain exposurefor Telguard.From 1:00 to l:30 everyday I nap in my office. After that I return phone calls for an hour or so. The remainderof the from all through and managers afternoon is typically spentmeetingwith employees personalproblems. I try to take the company to discussboth work-relatedand my open-doorpolicy very seriously. I From 3:30 to 5:00 I study productionrepoltsand cost figures. am home by

106

Experience Phase II: Venture Management

5:30 to eat supperand visit with my family. I'm back at the office by 7:00 to work on competitive analysis until 10:00 or I l:00. I alsocatchup on my reading during this time. I'm in bed about 1l:00 to midnight. My daysare all busy but satisfying. you To be successful, haveto be willing to pay the price.

Analysis: ls effective time management prerequisite business a success? to W o u l d y o u p e r s o n a l l y e w i l l i n g t o w o r k a s h a r d a s M r . W a n a m a c h eo a c h i e v e b tr greatbusiness success? D o y o u f e e le n t r e p r e n e uc a ns u c c e eo n a n 8 : 0 0 t o 5 : 0 0 s c h e d u l e ? rs d

E X H I B I1 5 - 1 T Telguard ervices S B A L A N C ES H E E T D e c e m b e r1 , 1 9 1 9 3

Current Assets Cash Accounts receivable-trade Inventory-at estimated cost Property and Equipment Salesand manufacturing equipment Office furniture Automobiles Lessaccumulated depreciation Other Assets Leasedeposits Licenses TOTAL ASSETS

$ 178,310 r,870,92s 817,323


$1,3 19,287

$2,866,558

63,817 10,300 $ l ,393,404 317 27'1 , $ 1,350 5,082 6 $ 1, 0 7 , 1 2 7

6,432

u2!2]l
88,500

Liabilitiesand Stockholders' Eouitv


Current Liabilities Current maturities of notes payable Accounts payable- trade Federal income taxes payable Total Current Liabilities $

'7 5r ,650 203,133


$I , 0 4 3 , 2 8 3

E X H I B I T 1 5 - 1C o n t i n u e d

Long-term Debt Noncurrent portion of notes payable Notespayable stockholder

70,8s6 42,651
$ I 13,507

Stockholders' Equity
Capital stock Contributed capital Retained earnings Total Stockholders' Equity TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

6,000 100,000 2,686,32'l $2,792,327

w!2'J'.1

EXHIBIT'.2 5I Telguard ervices S I979 INCOME TATEMENT S


Sales Cost of Sales Gross Profit General and Administrative Expenses Officers' salaries Salesmens' salaries Office salaries Legal & professionalservices Rent -office & manufacturing Office expense Telephone Insurance Payroll taxes Advertising & promotion Postageexpense Freight expense Travel & entertainment Bad debts Interest expense D e p r e c i a t i o ne x p e n s e Equipment expense Total Expense Income before Federal Taxes Federal Income Taxes NET INCOME

7 $23,33,000 20,903,000 $ 2,434,000 s279,s60 I 53,900 14 ,3 0 8 0 47,920 57 , 0 0 0 31,800 23,5sO 36,r21 193,817 5I , 0 1 0 37,418 40,'tt7 s1,820 25 , 0 0 0 I 1,800 3r,787 $ l,246,853 $ 1,187,147 5 9 3 76 l s , $ s93,386
107

mobile emergencY garage

16
Nolan Wolfe established Emergency MobileGarage seventeen monthsagoin Davenport, Iowa. From his modified Chely van, Nolan operatesa fairly complete mechanic's shop equippedto troubleshoot auto and truck repairs, well asother as miscellaneous repairproblems. ExplainsNolan, "l go where the customer needs me-at home, at work, in a parkinglot, at the airport, or wherever. someone a car problem,they don't If has have to tow it to a garage. They can giveme a call, and most times I'11 there be within thirty minutes.I am literally a mobile garage." Approximatelyhalf of his calls come from peoplewith stalledcars.This is particularlytrue during Davenport's cold winter months,when radiators freeze up and batteriesrun down. Wolfe is also regularly called upon at varioustimes of the yearto fix lawn mowers, repairsmallappliances, to overhaul conditioners. and air Wolfe would prefer to confine his services motor vehicles,since this is to wherehis real expertise lies,and wherehe can makethe most money.However, in the relativelybrief time he has operatedEmergency Mobile, he hasnot received enough auto calls to permit specialization this one area.Nolan explains,"I in jobs to makea decent haveneeded other kinds of repair the living." Wolfe clearly recognizes need to begin advertising servicein order to the his expandhis auto repairclientele. Thusfar, he hasreliedsolelyon word-of-mouth for promotion. At the insistence his wife Adele, Nolan borrowed $5,000 from a of Davenport bank to usein promotingEmergency MobileGarage. "I was reluctant to make the loan," Wolfe admits,"but it's obvious that the business needsmore exposure.There is definitely a strong demandfor mobile r08

Emergency Mobile Garuge

t09

havebeenmore than willing to pay my $20 service repairs, because customers my so plus regular labor.Whenthey call me, thereoften is an emergency, money charge is a secondary consideration. "There'sno doubt in my mind that Davenport well. will supportmy service the It's just a matter of spreading word. That's my problem.I don't really know is how to put the $5,000 to the best use. Running a business all new to me. I realizethat $5,000is not a lot of money,but it's all I can afford right now. Besides, so I'm not that big a business, maybeI don't reallyneeda largersum. "The only thing I do know is that I want Davenportto be awareof Emerwill gency out,I'm confident that thebusiness prosper." Mobile.Oncethe word gets

t l y f A n a l y s i s D e s i g n p r o m o t i o n as t r a t e g yo r E m e r g e n cM o b i l eG a r a g eh a t w o u l d : a i m a k eo p t i m u mu s eo f W o l f e ' s 5 , 0 0 0 B e s p e c i f i cn y o u r r e c o m m e n d a t i o n s . $ .

apparel the vesse/ shop

17
owned and operatedby Edwin and Apparel Shop is a sole-proprietorship The Vessel SusanStockley. Located in the small rural farming community of Adairville,Kenfor tucky, the Apparel Shop carriesa line of sportsclothesand accessories men and women. Since taking over Vesselnirre months ago, the Stockleyshave more than doubled averageweekly sales on their product line. The store currently stocks The approximately$15,000 in inventory of thirty well-knownbrandsand labels. employone and still attending college, who areboth in their mid-thirties Stockleys, part-time service. sales clerk to help with customer The Stockleyspaid $16.000 for the store, which included $6,000 of merchandiseinventory, and agreedto pay off the principal over ten years in annual rent the buildingfrom the previous lump sum payments $l,600. They presently of ownerfor $100 per month. in Ed Stockleyhas no prior experience retailingbut has worked as a realtor part-timeposiEd salesrepresentative. currentlyholds several and manufacturer's justice and medicaltechnician police-court tions in Adairville,includingemergency in degrees of the peace.Both he and his wife are finishing up their undergraduate administrationat WesternKentucky University (locatedfifty-five miles to business as the northeastin Bowling Green).SueStockleyhashad prior retailingexperience a buyer for the Top Dollar General Store chain. She also worked for a county attorney'soffice. The Stockleyshaveno children. Ed Stockley felsthat the overalltrack record of the store over its thirteen "I yearsof previousownershipwas inconsistent. think the store had somegood

110

The VesselApparel Shop

III

yearsand some bad years.Still, when I looked into the business before purchasing it, I felt strongly that it could be doing better than it was. From talking with the previous owner, I know that there were some unprofitable years, but I have no idea when they were. One of the problemswith the previousownerswas that they would get into and out of different lines, such as children's clothes, and lose money." at Operational responsibilities Vesselare divided up faitly equally between Ed and his wife. Sue takes care of the merchandising activities,including buying, inventory control, and displays.Ed concentrates more on the financial end of the such as credit and bill-paying.Both the Stockleyswait on customers business, and "The day-to-day carry out maintenance duties on the physical facilities.Ed states, managementof the store is played by ear. We certainly don't fight over who's boss." In discussing goalsfor VesselApparel Shop, Ed Stockley comments,"As his far as the major goalsmy wife and I havediscussed the store,two broad alternafor tives are seen: expandingby setting up a chain of clothing storesin the Western Kentucky area or selling out, wheneverthe time is right. The real problem with either goal is finding someoneeither to help us expand or to buy us out. Finding peopleisn't easy." motivated, capable Ed plans to continue with running VesselApparel upon his graduationfrom "I college, but he doesn'tknow what he wantsto be doingoverthe long-run. know I want to continue as the town's medical technicianand that I want to buy a new house here in Adairville. However,I haven't really decidedon a long-rungoal, except that we know we won't stay with just one store for any length of time. We will either sell out or start a chain. We haven't beenin business long enoughto finalize our long-rangeplans. I do know that once I get clear of school and my term asjudge runs out in four months, I'll havea lot more time for planning." The Stockleys have not tried to formulate an overall competitivestrategy. Sue explains, "We don't have any competition-we're the only clothing store in plan to expand or sell out, they have not worked town." Beyond their long-range goalsor policies."Right now we pretty much try to make it up any operations from day to day. We really don't know where we stand after just eight months of operation.We are definitely open to suggestions from knowledgeable outsiderson whereto go with the business." Sue Stockley goesto trade showsin Louisville and Lexington, Kentucky, as well as Nashville,Tennessee, the where she purchases VesselShop'sline of sportswear for men and women. She shopsfor agethirteen and up, maintaininga slightly larger inventory for women than for men. Even with its limited inventory, Vessel styles.According to Sue, Apparel carriesa fairly full line of sizesand age-group "We try to cater to mainstreamfashionsbut definitely not youth-orientedfads. Adairville is a rural farming community and people are fairly conservative. do We carry quite a wide selectionof inventory, even though carrying enough sizesis difficult. We take careof most customers with no problemst\gugh." Besidessportswear,Vesselhandlesa few jewelry and gift items, as well as

I 12

Experience Phase II: Venture Management

"We don't carry watchesbecause they are belts, purses,wallets, and a few linens. good." the too expensive handle,and besides, mark-up on watchesisn't very to Vessel cateredlargelyto the fashionneedsof Under its previousmanagement, instead this trend and to emphasize older women. The Stockleysdecidedto reverse "We want to keep our older trade but at more youthful fashions.According to Ed, the sametime pick up more youngerpeople." "one of Ed stockley feels his store has difficulties marketing to older men. the problemswe have with older men is that they often don't realizethat we carry what they're looking for. The youngertrade know us better and they're profitable. They'll come in and pay as much money for a pair of fancy jeans as they will for slacks." dress a In the area of generating marketinginformation system,the Stockleyshave "Sue and I havetalked about doing some found lack of time to be a real problem. sort of a marketing survey, but we really haven't had the time." The Stockleys try to talk informally with customelsin order to get a better idea of their needs, "we try to gift items in the past has beenkept. and a list of customerspurchasing but there are plenty make sure that we know the namesof our better customers, whosenameswe neverhavelearned." of $5 and $10 customers constitutestheir most The Stockleysare uncertainwhich group of customers lately in the patronage profitable market, but they have observedquite an increase "50 to 60 percent of the people who come in Ed estimatesthat of teenagers. saleper customerreally usually buy something,but I'm not sure what our average is. We probably get from fifteen to twenty peoplein a day." In promoting VesselApparel, the Stockleyshave relied primarily on wordin with advertising a RusselThe storehasexperimented of-mouth local advertising. youth-orientedradio station, but ville, Kentucky newspaperand over that town's "Word-of-mouthis our best approach the Stockleysfelt the resultswere lackluster. The other, more costly, meansjust don't appearto be that effective to advertising. in a smalltown like this." Since taking over the store eight months ago, the Stockleyshave seensales beganat a level of $500 increaseat a fairly steadyrate. The Apparel Shop'ssales havereachedashigh as $ I ,200 weekly. The unfortunper week and since that time ate lack of financial records for previous years of operation has made it all but fluctuatrendsand seasonal for impossible the Stockleysto identify the store'ssales however, financial performance, information about Vessel's tions. Despitesketchy Ed Stockley perceivesthe store to be in satisfactoryfinancial shape.Humorously "I pretty well leaveit to my accountantto tell me if we're about to he explains, with that lady for about thirteen have any financial troubles. I've done business trust her adviceand thinking. As long as she acceptsmy years and have come to to must be okay. Whensherefuses take I check for her services, figure the business is the business in trouble!" know my check,then I'11 Commenting further on salesperformance,Stockley notes that salespeaked in December,dropped sharply in January,and then resumedgrowth in February. "We haven't had any week lessthan $500, however.This appears be our breakto

ShoP APParel The Vessel

I 13

even point as nearly as I can figure." Stockley feels confident that salescan con.,I think the growth is there if we canjust find a way to tap into it." tinue 1o grow. potentialis at least$2p00 to $3'000. weeklysales that the store's He projects Financialstatementsfor VesselApparel have been drawn up only once since the Stockleys assumedmanagement.Ed Stockley explains that he has been too "Once busy with running the businessthus far to study his accountant'sreports' about every six weeks'" thingssettle down, I expect to reviewfinancialstatements has been granteda credit and VesselApparel has no outstandingreceivables "Credit is no problem for us. We really can get line of $3,000 by the local bank. all we want from our banker. The problem is knowing if we can pay it back. Right now, we're not sure enoughof our cash-flowSituationto feel very confident about borrowing. This is the biggestfinancial mattel woffying me now." stockley feels sixty-day notes from the bank are sufficientfor handlingfinancialneeds occasional future. in the foreseeable Stockley refers to inventory financingashis number one operationalproblem He points to cash flow dilemmascausedby having to and managerialheadache. Inventory of often far in advance sales. purchaselarge inventoriesof merchandise by of the month specified the orderedat trade showsis shippedby the twenty-fifth of the following month. If pay' Stockleys,with payment due by the twenty-fifth of ment is made by the tenth of the followingmonth,a discount 8 percentaccrues for on available merchandise men' No on all ladies'fashions. suchdiscountsare "our inventory purchasingproblem: Stockley elaborateson his inventory payment scheduleand resultingcashbalanceare pretty much hit and miss.we try is io keep track of when ordered merchandise about to arrive and hope that there it." cashon hand to handle will be enough Stockley is also troubled by the absenceof a purchasingand inventory "It worriesme that we don't havea purchasing inventorybudget'but in or budget. to figure out thingswell enoughto lay out just eight months we haven't been able a budget. As a result,cashis a real problem,particularlyin financingthe inventory. I would like to be able to know how much we'fe going to pay for and sell each month." Ed estimatesthat inventory is purchasedapproximately four times a year for for women, and three times annuallyfor men. Fashions eachgloup are selected as "a vety difficult thing to do somethingStockley describes ahead, two seasons involved." of because the long lead-time "Getting back to the cash-flow thing, I'd have to say that our number one before we have a chanceto seeit' Occaproblem is having to pay for merchandise are slow. Coordinating comes in but sales a lot of ordered merchandise sionally, two has eludedus at times.You think that everythinghascome in but then find the a large shipment arriving that you had forgotten about. We haven't been able to well. It's sort of like usinga credit card;you don't realizeall plan our purchases you spentuntil you get the bill at the end of the month'" The Stockleys have not yet preparedany financial plans or cash-flowstateof of ments in their management VesselApparel. They are in the process gathering

1 14

Experience Phase II: Venture Management

salesinformation for the past eight months, however,which they hope to use in plottingsales trends. Ed Stockley offers thesecommentson his future financial plans for Vessel: "We have talked about openingup a secondclothing store in Adairville by transferring our men's apparel to a separate retail establishment. The banker seemsto be cooperativeabout this. We might even want to sell out, although I don't know that we could find someoneto pay what we'd want for the store."

Analysis: To what extent have the Stockleys activelyplannedfor Vessel's operat i o n so v e rt h e p a s tn i n em o n t h s ? h a tp l a n n i n g e f i c i e n c i e s ee v i d e n t ? W d ar In what specificareasis more planningwarranted the Stockleys? by What aspects o f t h e i r p e r s o n a il v e s e q u i r e d d i t i o n ap l a n n i n g ? l r a l What are the most important planning issues for Vesselin the short-run? The long-ru n? W h a td o e st h e c a s e l l u s t r a t e b o u tt h e r e a l i t i eo f e n t r e p r e n e u r ip l la n n i n g ? i a s a

mssyste sonics audio arts

1B
Sonics Systemsis a stereo componentsretail outlet located in Allentown, Pennsylvania.Co-ownedby Monty Cayman and Vernon Elder, SonicsSystemsspecializes in top gradestereocomponentsand sound reproductionequipment.The two in Audio Arts, specializing oWnersalso operate a commercial servicingbusiness, pagingdevices, and intercoms. commercialsoundsystems, is Monty cayman, the majority shareholder, forty-two years old and chief in opened 1980. venture,havingbeen is executive. SonicsSystems his first business for Mr. Caymanwas a commercialphotographer Polaroid. Previously Vernon Elder, thirty-nine, has 35 percent ownershipand servesas Sonics Systems'electronicsexpert. For the previouseight years,Mr. Elder worked ashead for engineer an Allentown radio station. "strip" shoppingcenter in the heart of AllenSonicsSystemsis located in a town's retailing district. Approximately $10,000 worth of inventory is carried in with another $5p00 in the Audio Arts commercialventure. the retail business, generated approximately $193,000 in revenues combined, the two businesses during 1981. SonicsSystemsemploys two permanent,full-time individuals:a bookkeeper employedon a Audio Arts is staffed solely by temporary personnel, and salesman. basis. subcontracting Sonicsin selling Two other merchantsin Allentown compete directly against and carry larger are well established top quality stereo components.Both firms inventoriesthan Sonics.A number of discount houses,led by K-Mart, offer comsoundsystems. petition with lower quality, single-unit
tI5

Marketing Monty Cayman is frank in his critical appraisalof Sonics'marketingperformance: "Our sales effort really leavesmuch to be desired.I guessour retailing problems stem from the store's inconvenientlocation. Although we're in a prime business location, our walk-in business limited. Our store occupiesthe corner slot in the is shopping center and is adjacent to three fast-flowing traffic arteries.Our small sign and window displaysare almost obscuredby traffic lights and streetsigns. It's not very easyto turn directly into our parking lot either, because the intersecof tion bottleneck.In short, Sonicssuffersfrom lousy visibility." On the other hand, the store is located closeto a popular record and tape store and a Radio Shack,situated at opposite ends of the shoppingcenter."These establishments what originally attractedus to the site. Beingcloseto recordand are radio storesis a plus for us as far as I'm concerned,"explains Mr..Cayman,"because people who purchaserecords are naturally interestedin top quality reproduction equipmerrt. The record storeand Radio Shackserveas free advertising Sonics." for Mr. Caymanand Mr. Elder agreethat gaininggreatercustomervisibilityis Sonics'most pressing currentmarketingproblem."Vern and I are both confident that sales will gel when peoplediscover whereabouts," our comments Cayman. Mr. "It's simply a matter of time and advertising beforethe storetakesoff. We'vebeen in existence for just a couple of years. Miracles don't happen overnight in this competitive business." Vernon Elder adds that, in his opinion, Sonicswill also benefit in the future "Marvin is from Marvin Norwood, the store'snew floor salesman. a born salesman, and he really knows electronics. hired him three months ago from a competitor We in town, and our customers seemto be very pleased with his attentiveness and know-how." Mr. Elder admits that Sonics suffered in the past from poor floor sales. "Monty and I did the best we could to work with customers, we really were but too busy with administrative matters.Besides, don't think either of us hasa real I flair for sales. Monty's an entrepreneur, I'm an engineer." and Cayman and Elder feel there is definitely a viable market for "top-drawer" stereo componentsin Allentown. With a local populationof 120,000and only two direct competitors,the two men are confident of Sonics'future potential. Accordingto Mr. Cayman,"Lack of capitalis reallythe only thing holdingus back right now. With more cash,we could crank up our advertisingand reallystimulate the store'smarket visibility.We havethe product,expertise, driveto propelus and ahead." "We also have Audio Arts," adds Vernon Elder, "which has virtually unlimited potentialin this town. It's our acein the hole." Audio Arts Audio Arts is the commercial arm of SonicsSystems, out of the back room of run the retail store. "We work on bid contracts,"explainsCayman,"for anyonein
116

Sonics Sy stems- Audio Ar ts

I17

town who needscommercialsoundwork done. This includesinstallationof in-plant communication systems,office intercoms, wiring for Musak-typesetupsin buildmost of the end of it, while Vernon handles ings, and so on. I run the business technicalstuff." Thus far Audio Arts had completedfourteenjobs, the majority beingsmallin "We'vehad mostly $500 to $ I hasn'tmade which obviously nature. ,000contracts, "However, we've gotten some very valuable experience us rich," explainsCayman. locally.The realbeautyof Audio Arts is that it a and begunto establish reputation is offers us an alternatesourceof income for when the retail business lagging." "We've had of the Cayman characterizes business Audio Arts as sporadic. as fat months and lean months. SometimesAudio Arts has generated much as 80 percentof our monthly revenue; other times,it has contributednothing.But the for us, because Audio has virtually no slow periods certainly aren't disastrous carriesthe fixed costs.Thus, Audio fixed costs-only current costs.SonicsSystems Vern poor on the retail floor at Sonics, is Arts pays its own way. When business contracts." out and I can makeendsmeetby seeking commercial of Audio Arts: further on the necessity operating Vernon Elder elaborates "The stereocomponents of is a strange one from the standpoint supply. business manufacturers, like Jensen, Maranlz, Fisher, and Sony, work Top-of-theJine to only. They won't sellmerchandise just any old through exclusive distributorships We is supply relationship essential. couldn'toperlong-termcontinuous retailer.A us which assures of our distribwithout SonicsSystems, ate Audio Arts, therefore, we utorship status.If we didn't operateSonicsSystems, couldn't operateAudio equipelectronics We Arts. Our supply would vanish. need too much sophisticated retaildistributorwork to freelanceit without a legitimate ment in our commercial ship." "and Sonics "So Audio Arts needsSonicsSystems," sumsup Mr. Cayman, The two needsAudio from the standpoint of cash flow and revenuegeneration. businesses actually complementone another quite well, eventhough the marketing dynamics of each are dissimilar.I feel both are closeto explodingwith successespecially Audio Arts. Vern and I havegot a bold new strategyin mind for it." highly lucraCayman feels that Audio Arts is on the vergeof landingseveral tive commercial contracts. Over the next eighteento twenty-four months, a large to apparelmanufactureris scheduled begin constructionon a new plant in Allenexpanhealth centerand spa plansto undergoconsiderable town; a local aerobics Mr. Caymanviewsall three sion; and a new indoor mall will be near completion. projects goldenopportunities Audio Arts. for as "We're talking about big bucks in contractsfor any of the three construction plant. projects-$50,000 and up. We'vealreadygot the insidetrack on the apparel soundsystem They are ready to acceptour bid of $58p00 to installa plant-wide contingenton our fronting the equipmentcostsof approximately$30,000.In other on words,we'vegot the job if we can financethe $30,000worth of equipment our own. "If we decide to sign with them, the contract will call for us to receivethe $58,000 in four equal installmentssynchronizedwith a three-monthcompletion timetable for the plant-wiringjob. However,I have a hunch that they are flexible

118

Experience Phase II: Venture Management

about the specificterms of the payout. As soon as I can find enoughtime to put pencil to paper, I'm going to work up an alternate proposal that hopefully will take some of the financial burden off our shoulders. Ideally, they would finance the $30,000 themselves and help us out that way. But even if they're not willing to go that far, I hope that their enthusiastic endorsement our bid will put them of in a compliantmood." Vernon Elder is currently engaged studying the other two construction in opportunities from a technical point of view. "I'm especiallyexcited about the "Their soundneeds mall," he comments. arenot ultra-sophisticated. canhandle We them easily from our backlog of experience. The size of the project is much larger than anything we've previously tackled, but Audio Arts isn't going to get off the ground until we land a big fish or two. We could usethe business badly." Elder views the aerobiccenter as a more sophisticated project, electronics but is undaunted."I love a challenge, and from what I've seenof the spa,we'd have somethingto really sink our teeth into. If we could pull that one off, our local reputation would be established. personallywould like for Audio Arts to be I known for its ability with both largeprojectsand sophisticated ones. Talk about a competitive edgel"

Financing no question about it, financingis the key to our future." Monty Caymanelaborates further: "Vern and I haveput about $26,000in equity into our two businesses, it hasn'tbeenenoughto keepoperations but fluid. Wehavealways had a funds-flow problem; our near-termfinancial situation has thereforealways been pinched. Now that we have fashioneda new growth plan for Audio Arts, we are on the vergeof developing long-termcapitalcrunch aswell. The age-old a adage that 'it takesmoney to make money' appliesperfectly to our present bind. I'm determined get the moneywe so desperately to require." Cayman's number one current financial priority is thus to attract new investors into the twin companies. has a commitmentfrom his bank to match He him with one dollar of debt for everydollar of new equity he is able to secure. Caymanestimates monthly breakeven his point for both operations be in to the vicinity of $12,000 to $13,000.Approximately33 percentof his financing needs tied up in financing are Sonics Systems' inventory. "Sonics' Accordingto Constance Hataski, bookkeeper the two businesses, for balancesheetneedscleaningup in the worst possible way. We'vegot payables over a-year-and-a-half old. Needless say, our chronic cashshortage to preventsus from taking advantage most purchasingdiscounts,which in our business of can sometimes run as much as 20 percent."constance estimates that sonics'monthlybreakevenpoint couldbe lowered15 to 20 percentby retiringexisting short-term debt. Monty Cayman attributes his persistentcashshortageto several factors,including the newnessof his business.extensiveinventory financing, shortageof "We'regoing equity, and the onsetof the 1980 recession. to turn the cornerwith "There'sjust

Arts Systems-Audio Sonics

119

our reach' If we the apparel account, or one of the other two big projectswithin will reviveus' Then can swing one or more of thosedeals,the massinfusion of cash will come courting us for a change'" investors

for Sonics Analysis: Formulate a short-termand long-run competitivestrategy S v s t e ma n d A u d i o A r t s . s

EXHIBtT 8-l 1 Sonics Systems-Audio Arts 1 9 8 1 C O N S O L I D A T E DI N C O M ES T A T E M E N T


Sales Retail merchandise Commercial contracts and misc. Total Sales Cost of Sales Retail Commercial Gross Profit Operating Expenses Advertising Accounting Automobile Factoring Bad debts Freight Insurance Interest Miscellaneous Office supplies and postage Contract labor Payroll taxes Rent Repairs and maintenance Salaries Store supplies Telephone Utilities Total Operating Expenses Operating Profit Other Expenses Depreciation Amortization of organizational expenses Total Other Expense NET PROFIT

$ 95,010 98,500 $193,s10

$ 48,491 78,000 $ 67,019

I,5s0 1,231 1,250 425 675 I,480 2,',l13 3,219 |,324 741 10,946 4,1t9 4,296 945 r8,444 1,394 2,694 1,455

$ 58,901 $ 8,1 8 1

2,204 519 s 2,723

[__t,32J

1 EXHIBIT 8-2 SYstems Audio Arts Sonics B 1 9 8 1 C O N S O L I D A T E D A L A N C ES H E E T Assets


Current Assets Cash and savingsaccounts Accounts receivable Inventory Total Current Assets Property and EquiPment Furniture and equiPment Auto Accumulated dePreciation Total ProPerty and Equipment Prepaid Expenses Prepaid rent Prepaid interest Organizational exPense Prepaid taxes Total Deferred Assets TOTAL ASSETS

2,081 32,119 16,894

$ s1,094

3,4s 6 I 3,89 ( 1,904)

$ 5,443

425 444 3,423 98

$ 4,390 $ 60,927

Equity Liabilitiesand Stockholders


Current Liabilities Note-auto Accounts payable Payroll taxes payable State and city taxes Payable Total Current Liabilities Long-term Liabilities Note G. Livingston Note-H. Jennings Total Long-term Liabilities Stockholder EquitY Common stock Retained earnings Total EquitY TOTAL LIABILITIES AND EQUITY

s r,294
5 50,66 265 894

$ s3,118 $ 2,4s0 2,900 5 $ s,3 0 $ 26,000 (23,s4r) $ 2,4s9 $ 60,92',1

121

atkins machining

t9
odell Atkins recently openeda smallmachineshopin cleveland.After working for fifteen years as head machinist for Hydraulic systems in cleveland, odell put together $93,000 of savings and borrowed capital to open a small machiningshop with two close associates. During 1980, the company'sfirst full year of operations, the shop grossed $345,000and employedfive full-time machinists. Atkins clearly relisheshis newfound entrepreneurial role. He commentsthat, althoughhe works long, hard hours,he enjoyshis job and no longer hasany motivational problemson Monday mornings. "It's amazinghow many new responsibilities have in managingthe shop. I We're mighty small, especially comparisonwith Hydrolic Systems, in but nonthelessI alwayshavemore than enoughto do. Sometimes much." too Atkins describes daily scheduleas "fragmented," because must engage his he in a wide variety of activities without much continuity. "I deal with a customer over the phone for a few minutes,then troubleshoota production problem,maybe write a letter,and so on. I wearan awful lot of hatsaioundhere!" According to well-known managementwriter Henry Mintzberg, managers must perform nine functions in addition to being entrepreneurs. Each role carries a certain set of performance responsibilities expectations. and The nine rolesare:
l. Coordinator: tieing together and synchronizing the work of others. 2. Disturbance handler: resolving conflicts and promoting beneficial compromise.

122

Atkins Machining

123

Resource allocator: estabiishing resource priorities and promoting efficient resource utilization. 4 . Leader: setting a professional example and motivating and directing employees. 5. Monitor: checking and evaluating the work of others' 6. Spokesperson: representing subordinates and the organization to others. 7. Figurehead: performing ceremonial functions. g. Negotiator: representing different viewpoints in making decisions. 9. Communicator: sending and receiving a broad array of messages'
J .

activity Analysis: For each of the nine roles above,cite at leastone managerial o o e x a m p l e f t h e r o l e . Y o u m a y u s eA t k i n s M a c h i n i n g ,r a n y o t h e r that is an o w y e n t r e p r e n e u r is i lt u a t i o n o u a r ef a m i l i a r i t h , a st h e b a s i s f y o u r e x a m p l e s . a of As the manager a small machineshop, which two or three rolesdo you feel s M r . A t k i n ss p e n d m o s to f h i st i m e p e r f o r m i n g ? of Which of the nine rolesdo you feel are most crucialto the success a new venture? t H ir a I n t e r v i e w n e n t r e p r e n e un y o u r c o m m u n i t y . a v eh i m o r h e r c o m m e n o n e a c h m find most challenging, ost timer o f t h e n i n e m a n a g e r i a lo l e s - w h i c ht h e y a c o n s u m i n g ,n d s o f o r t h .

magic carpettravel agencY

20
Brook Stevens, owner and managerof the MagicCarpetTravelAgencyin Trenton, New Jersey,is worried. According to the New JerseyTravel Agency Association (NJTAA), the state legislatureis giving seriousconsideration a new bill which to would grant airline passengers right to receiveticket purchase the discounts. The legislation, currently under committee review, would enable airline passengers receive a fare discount when they arrangetheir own reservations. to Such discountscurrently accrue only to travel agencies, which traditionally have reliedupon reservation services their commercial as mainstay. Consumer advocatesin New Jersey are pushing the new bill, dubbed the "discount equality" law, on the groundsthat individualswishing to make reservations directly havea right to receive the samefare rebates travelagencies as do. Mr. Stevens,along with the NJTAA, vociferouslyopposes the bill. "The socalled discount equality law would ruin travel agencies. Take away our airline rebates,and most agencies would havelittle business remaining. MagicCarpetherein Trentonwould be completely wiped oui, because derive85 percentof my revenue I from reservations." Stevenselaboratesfurther: "Travel agencies provide an invaluableserviceto passengers and airlines alike. Travel agentsare carefully trained individualswho perform an array of technical services. We understandhow the complicatedair reservation systemsoperate,and we are very conversant with the myriad of scheduling procedures employed by the variousairlines.We know how to placereservations properlyin airlinecomputers and how to issue and validate tickets.

124

Magic Carpet Travel Agency

125

"My gosh,if the airlineshad to deal directly with all passengers, they'd have service staffs. Quality of reservation reservation to triple their alreadyoverworked would get tied to suffer. More mistakeswould occur, passengers would be bound up on the phones,and airport ticket counterswould be inundatedwith people.All of this would inevitablymeanhigher fares." The New JerseyTravel Agency Associationis meetingin three weeksto conplans to be in attendance sider options for opposingthe legislation.Brook Stevens to contribute what he can.

s t A n a l y s i s :W h a t a c t i o n ss h o u l dt h e N J T A A a n d B r o o k S t e v e n t a k e i n s e e k i n go " d i s c o u n e q u a l i t y "b i l l ? t t h w a r tt h e i t D o y o u f e e lt h e b i l l i s u l t i m a t e l yn t h e b e s ti n t e r e so f c o n s u m e r s ? b n t A s s u m i n gh a t t h e N J T A A i s s u c c e s s f iu l s t a l l i n gh e b i l l f o r t h e s h o r t - r u n u t t h a t t passage virtually assuredwithin five years,what strategicactions should is Stevens Magic Carpet? take in managing

omnl ski

proouctrons

. '

2t
OMNI Ski Productions,of Aspen,Colorado,manufacturers line of ski equipment a for advanced skiers.Startedin 1957 by DarrenPledger, former memberof the a U.S.WinterOlympicsteam,OMNI manufactures skis,poles, boots,and bindings. OMNI's financialcontroller,Lee Sklair,met with Mr. Pledger December, in 1980, to derivethe company's monthly sales forecast 1981.Pledger for voicedconsiderable displeasure Sklair'slacklusterforecasting at recordsfor 1979 and 1980, which were considerably the mark from actualsales. off Determinedto improve his 1981 forecastaccuracy, Sklair prepareda sea( s o n a li n d e x f o r O M N I ' ss a l e sr o m 1 9 7 6 - 1 9 8 0 .S e eE x h i b i t 2 1 - 1 . )H e a l s o d e r i v e d f period:Y' =2514 + 45.5(X),where the followingtrend equationfor that five-year y' = projectedmonthly forecastfor 1981 and X = numUei of months beyond January, 1976 (the X=0 baseperiod). Thus, the X valuefor January,l98l = 60 (being the sixtieth consecutive month after the startingbaseperiod in January of

1e76).
Sklair assuredPledgerthat this new forecastingapproachhad the advantage of considering yearshad seasonal variationin OMNI's sales. Forecasts previous in failed to make a seasonal adjustment,thus producinginaccuracy. Mr. Pledger expressed sincerehope that the company could straightenout its forecasting his problemsin order to expediteproduction scheduling and salesdeliveries during 1981 .

t26

Omni SkiProductions

127

s f A n a l y s i s :D e r i v e t h e 1 9 8 1 s a l e sf o r e c a s t o r O M N I S k i P r o d u c t i o n u s i n g L e e d S k l a i r ' s q u a t i o n n d t h e s e a s o n a la t ai n E x h i b i t2 1 - i . e a

E X H I B I T2 1 - 1 SEASONAL INDEX FOR OI\4NISKI PRODUCTIONS January February March APril May June JulY August September October November December

6 3 80 85 93 100 9'7 v) 98 t04 t20 130


IJ)

colonialamerican
KtcnenS
| .. t

22
On a beautiful New Englandautumn day in 1979,sixty-eightyear old Bill Bradley, the presidentof Colonial American Kitchens (CAK) and inventor of a new-shaped hot dog bun and hamburgerbun, sat in his small one-room office reviewingthe unexpectedfinancial events of the past two years.His company was experiencing and technicaldifficulties. "If problem,our Mr. Bradleyremarked, we could just solvethe automation troubles would be over. At this time we are only able to produceour Good Bunsin moline table-cutterrunning at a rate of a semi-automated manner using a scrapless 100-dozen buns per hour. We must find a way to get that rate up to 1000-dozen producers." to buns per hour before they will becomeacceptable the big wholesale First, he could market the He concluded that he had only two alternatives. who would sellthem to a buns more slowly on a local basis,usingbreadroute-men few key bakerieson a commissionbasis.At the same time he and his associate, Bob Towers, would continue to search for an automated production machine rate. The secondalternawhich would producethe buns at the required 1000-dozen patentsto a largebakingcompany tive was to sell his bread-pan and baking-process for approximatelyone million dollars and pay off his debts.That might be the end hot-dogand hamburger buns. of his dreamto revolutionize traditional the Bill Bradley was born in Wellesley,Massachusetts, l9ll, He enteredthe in and large-size baking trade early in his career,working in a number of small-size bakeries.Over time, Bill began to developan idea for a new hot dog bun shaped in like an ice cream cone. The goal of his efforts was to designa bun shaped a way that would prevent condiment spillage.He began to experiment with different t28

ColonialAmerican Kitchens

129

mixtures of dough and cone-shaped buns in his home kitchen. None provedsuccessful because they were hard to form and would not cook uniformly in the usualflat horizontal baking pans. One day he experimentedwith a dirtner tin by forming a hump in the center of the tin and placing dough around it. He baked it and, much to his surprise,it worked. The discoveryof the up-side-down raised-indentation bakingform wasnot experimentallyproven.From 1972 to 1914 he beganto experimentwith handmade wooden molds and tin foil materialsin his basement workshop.He was successful. He showedhis invention to his baker friends at work. They encouraged him to form a company, since he had acquired a patent on the process.One of the bakerswent so far as to circulate a list of personswho would like to buy stock in Bill's new invention. Twenty-five thousand dollars in savings were subsequently pledged. Bradley beganto get publicity in local newspaper articles.The pressures continued to build for the company to seekadditional process patents.In 1975, Bill retired from his bakery job and beganto pursuehis life's dream: to be known as the man who revolutionizedthe traditional hot dog and hamburger buns. Demand for Hamburger and Hot Dog Buns The consumption of soft buns-the "hots and hams"-reached $ I .5 billion in wholesalebusinessin 1978. This boom was rooted in the growing preference for eating more meals away from home. Fast-food firms, such as McDonald's and Wendy's, bought 270-million-dozenhamburger buns per year at an estimated $l00-million wholesalevalue. soft buns, in addition to variety buns, were the fastestgrowingsegments the wholesale of bakery industry. The food-serviceindustry had been growing at a 10 percent annual rate and was a $40 billion industry. Fast-foods operations accountedfor at least $12 to $15 billion of this amount. Market ResearchCorporation of America used a consumerpanel to keep diaries of family food consumption.Their revenuecensusshowed the following results for consumption of bread-type products per 1,000 individuals in 1912 through1978:

EXHIBIT 22-1 CONSUMPTION OF HAMBURGER AND HOT DOG BUNS, 1972-19]8

In Home
Hamburger Buns Hot Doe Buns

Net Away From Change Home +21% +35% 22,066 4,885

Net Change* Total +20 +31 35,325 13,662

Net Change +47 +32

13,259 8,777

EAdjusted for population increases.

Experience Phase II: Venture Management

goingafter bakery food business. The number were aggressively Supermarkets 1914 to ten thousandin from four thousandin of in-storebakerieshad increased $3 from $500 million to approximately salesincreased 1979. Correspondingly, percentto 85 percentofnewsupermarkets billion over this sameperiod. From 75 planned to include in-storebakery facilities.Grossprofits for such facilitiesordinarily ran from 65 to 70 percent. were experimentingwith combining their bakery shop Many supermarkets with either a coffee shop or deli. Thesecombined operationstypically accounted for 7 or 9 percent of total grocery sales.ITT's Continental Baking Corporation advisedits customersthat the bakery departmentprovidedan opportunity for one of the biggest dollar producers per squarefoot in the supermarket.One supermarket in Effingham, Illinois, averaged $8.75 in salesper squarefoot of bakery space. department

T l n i t i a lM a r k e t e s to f G o o d B u n s Colonial American Kitchens' managementbelieved that the market gains Good Buns might make during 1978, the first full year of test marketing,would be at the would be expenseof conventionalbun sales. They were confident that consumers eagerto try the new hamburgeror hot dog bun even at the cost of a slight price premium of five centsover conventional buns. was made with a regionalbakery,United StatesBakery,to An agreement chainsin a in test market approximately 50,000 packages Wellesleysupermarket spots six-week period, May through June. Various radio and televisionadvertising to were used to tempt consumers buy Good Buns. It was hoped that homemakers and teenagers would be eager to purchasethe product for its uniquenessand convenience. bun weretested. hot Both the boat-shaped dog bun and the round hamburger would It was believedthat six weeks would be long enough to seeif consumers switch from conventionalbuns. The test buns would be baked by the semi-automated molding table technique requiring manual intervention. This was the first time a largenumberof bunswerebaked. from two points of view. The initial market introduction was not successful United States Bakery, usingthe moldingtablemethod,saidthat it cost too much to producethe 50,000 buns. They had trouble producingthe buns using the semiautomated method.They felt it cost too much to placethe proofeddoughon the seemed specialcrown-typemolds by hand. Even more discouraging, consumers unwilling to purchasethe eight-packbuns for a 5-cent premium over conventional buns priced at seventy-nine cents per package.Only two-thirds of the buns were Most unsoldbunswerereturned found their way into dayor sold in supermarkets. old-bread stores. Mr. Bradley concluded that consumerbuying habits were too difficult to programwas necessary, but advertising changein four months. A more sustained

Colonial American Kitc hens

t31

the firm didn't have money for that in the summer of 1978. Bradley began to rethink the pricing policy adopted for the new buns.Apparently,Good Bunswere priced too high to get consumersto try them for the first time. Even with the the 5-cent premium was still too high. The coupons offered in daily newspapers, bun market proved to be much tougher to penetratethan anyonehad suspected, more than Mr. Bradleywas convinced even the United StatesBakery executives. lay ever that the key to success in getting the automated production perfected. this his to During 1978and 1979,he devoted entireenergies achieving goal. Production roblems P Exhibit 22-2 lllustates the production processdesignedto produce 100-dozen ColonialAmerican were mixed usingthe special Good Buns per hour. Ingredients of flour selected Good Buns.The flour was rolled into sheets dough,cut into for placedon crownexact dough shapes a specialcookie-cutter roller assembly, by type molds in baking pans,and put in the proofingboxesto cure.A bottom pan was used to form the dough on the indentation molds. The product was then into cartons. baked,cooled, wrapped, and packed Food Service During the latter part of 1978, the BakingDivisionof Johnson Group, a large supermarket chain, beganto work with CAK to perfecta cookiecutter roller assemblyand ingredient mixture which would allow molding-table productionof the new buns.Initial testsdemonstrated feasibility this manual of the productiontechnique. Correctlycut dough,readyto be bakedin CAK bakingpans, experimentation perfectthe to was produced. However, Johnson soondiscontinued productionruns. ingredient mixture and ceased test conducting Various problems developedin finding a proper ingredientmixture that Johnsonfelt that CAK should would reduce dough sticking on the roller assembly. favorabletest report wasnecessary befor A bear the expenses theseexperiments. ownerssellingGood fore Johnsonwould allow CAK to approachtheir chain-store Bunsdistributorship rights. the JohnsonchainCAK expected approach to After headquarters approval, purposeof sellingcontractsfor frozen Good Buns dough to store owners for the Johnson could be perfected, be baked in their stores.As soon as the technology product approvalletter to their chain stated that they would senda representatives In stores in exchangefor exclusiveproduction rights and other considerations. yet to negotiate package rights,responsibilities, and 1979, CAK had of this total duties. atSince 1977, Mr. Bradleyhad worked to perfecta roller cutter assembly production process that would be used to cut the tachment and the associated round and long dough shapes,roll them, and finally drop them preciselyin the for center of a specialmold producing the exact indentationsnecessary the hollow buns. Various productionproblemshad been encountered and solvedin the depervelopmentof this process. The roller cutter assembly was not satisfactorily

EXHIBIT22-2 C O L O N I A L A M E R I C A NK I T C H E N S P P SEMI.AUTOMATED RODUCTION ROCESS

Cut dough with patterned roller-cutter assembly

Drop cut pieceson crown and type molds

consultanthired. A new designtestedby Johnson fected by the first engineering Food Servicesseemedto work well, even though it continued to causesticking dough. A Teflon coatingwas expectedto solvethis problem. a There were continuing problemsin establishing suitableingredientmixture to which would produce a non-sticking dough necessary yield a precisedoughdrop on to the indentation mold. However, the most important technological problem facing the firm was to developa high speedproduction systemthat would automatically drop the dough preciselyon the center of the molds. This critical production problem had to be solved before CAK could go into the fully-autoof largenumbers consumers. productionnecessary serve to matedmass 132

Colo nitl American Kitchens

133

to Mr. Bradley had faith that this problem could be solved.He arranged have usingthe fullythe Donut Corporation of America advisehim on the feasibilityof automatedbaking techniqueemploying one of their modified donut baking units' Their initial report was due to be sent to Mr. Bradleyin early 1980' Chief MarketAssumption Colonial's Mr. Bradley believed that homemakers of middle-incomefamilies, and above, basisafter full acceptance would purchaseGood Buns on a regular once-a-week data could assistthe firm He further felt that market research had been obtained. both a profile of the typical consumerwho would tend to purchase in establishing iound bun styles. It remainedto be seenif the shapeof the bwr itself hot dog and buns. could win new buyersaway from the conventional might be tasteBradley believed that some middle-incomeconsumers Mr. He restated the firm's chief market as well as convenienceoriented. conscious of assumption:Good Buns will be acceptedby consumersprimarily because the of having an enclosedand fillable bun structure.However,taste was convenience in thought to be of utmost importance.The firm may later engage product-development activities in order to observethe effects of a variety of grainson consumer product-acceptance. activitieswere to be postponeduntil well into the next Thesedevelopmental phaseof product development,the regional test market period. Mr. Bradley adin mitted that the firm had not engaged extensivemarket researchto test this critical assumption.The most important problem he saw was perfectingthe massto production process produce 1000dozen buns per hour.

DistributionChannels Potential ultimately, Mr. Bradley believedthat there were two major multiregionalchannels of distribution feasible for Good Buns. The first was the regional mass-market in units, the supermarkets, which Mr. Bradley expectedto get 80 percentof the of after full consumeracceptance the product concept'After the firm's total sales would include the useof supermarkets introductory phase,full product-acceptance which had their own baking facilities. Bradley believedit would be easierfor him to monitor supermarketbakeries and control any baking production problems which might havearisenduring this period. the At a later stageof acceptance, products would be producedfor all types and quick-shopstores.The other 20 percentof fillable buns sales of supermarkets as would come from fast-food restaurants either an addition to the usual product as a product base around which a potential franchisecould be oriented. line, or when askedif these planshad been formalizedin writing, Mr. Bradleypointed out that the plans were still in the talking stagesincehe did not havethe staff to conduct formalizedplanning.

Team Management Colonial's At the height of CAK's growth, the firm consistedof personnelshown in Exhibit 22-3. Joyce and Jim Stork were silent partnerswho played no active part in the firm's daily management.Very early in the venture Bill Bradley admitted the limitations of his marketing knowledge. ln 1976, he decidedhe neededsomeone he to help him put his product on the market. A few of his friendssuggested should the be attemptingto franchise buns. One day he went to the library and found the name of a local business person in a franchisingperiodical. That person,Joseph Gene, agreedto become Bill's executive director. Mr. Gene was an impulsive, fast-moving,self-educated who had little formal educationand a habit of keepinghis cryptic sales' salesman expenserecordson his checkbookstub. He had no formal or practicalknowledge or of marketing,management, finance. He immediately began to aid Mr. Bradley in setting up and operating the Colonial American Kitchens Corporation. He formulated a plan for licensingbun by regionaldistributorships states.Gene production with the right of establishing national salescampaign.Within the next two years, then initiated tn aggressive more than four licensingcontracts had been signed.Cashbeganto flow into the company. meetingwas held. The officersof In October, 1977,a shareholder-investor's the firm distributed the financial information containedin Exhibits 224 and'22-5 to the more than fifty people who attended the informal meeting. Mr' Gene's to seemed have efforts were perceivedpositively at the meeting.His salesmanship made up for any lack of formal knowledge or experienceconcerningmarketing research, finance,planning,or recordkeeping. Technical problems persisted,however. One avenueafter another was pursued. Consultantswere hired to help find a way to produce dough on a fullyautomated production scale using a Pan-O-Maticattachment. Other technical problemswere under consideration. Roller assemblies both long and round buns for had to be designedso that the dough would not stick to the rollers. The designs for for two different styles of baking pans had not been firmly established highThe ingredientmixture required coordinateddevelopspeedproduction processes. ment as well. The firm operatedon the assumptionthat theseproblemswould eventually be solved. During this period no budgetsof any type were formulated or usedto control expenditures. In November 1977, Richard Thomas, one of the firm's Mr. Bradleyon financialmatters. investors, beganadvising

The CurrentSituation With the test-marketfailure in the summer of 1978, eventsbeganto run against Cash-flow the firm. The sale of licensingagreements was halted for legal reasons. 134

Colonial American Kitchens

135

problems arose immediately. The staff was advisedthat the firm had no available funds. Mr. Bradley sought legal assistance continued to work on the technical but problemsof meetingthe l000dozen per hour production requirement.In Uctober 1979, the letter illustrated in Exhibit 22-6 was prepared for mailing to stockholders. EXHIBIT 2-3 2 C O L O N I A L A M E R I C A NK I T C H E N S O R G A N I Z A T I O N A L E L A T I O N S H I P S9,7 7 R . I

BOARD Of DIRECTORS Bill Bradley lim Stork

C O O D B U N SA R E A DISTRIEUTORSHIP

PRODUCTS BAKINC DEVELOPMENT Bill Bradlev

P SATES ERSON Cal Weston Part time

SALES ND ADVER A Patricia Voss lean Bains

EXHIBfi 22-4 C o l o n i aA m e r i c a n i t c h e n s l K B A L A N C ES H E E T O c t o b e 3 1, 1 9 7 1 r

Cash* Deposit-royalty Prepaid expenses Insurance promotion Advertising and sales (Unamortized portion) Research development and Consulting fees Travel Product evelopment d TOTAL ASSETS Equity Shareholders' Capitalstock Commonstock "A" $ l p a r - 4 0 , 0 0 0a u t h o r i z e d issued and outstanding* 56,500 I "B" 5d par 60,000authorized issued and outstanding 590,000 Paid-in surplus Deficit B a l a n c eJ a n u a r y , 1 9 7 7 1 Fromcurrent perations** o T O T A L S H A R E H O L D E R SE Q U I T Y '

4,046 1,000

601 25,909 103,782 6,215 2 l , 81 0

26,510

131 807 , $163,363

$156,500 26,375 182,87s 37,500 ( 8,8'74) (48,138)

$220,375

(57,012) $163,363

*$27,500additionalcashdue to distributorship contributions and an $18,000increase paidin in surplus a total cashbalance $49,546. for of * *November expenses $6,750.

EXHIBIT 2-5 2 ColonialAmericanKitchens S T A T E M E N TO F O P E R A T I O N S 1 January ,1911 to October31,1971 Income OperatingExpenses


Selling costs Rent/Storage Telephone Office supplies Donation Equipment dePreciation Sales promotion/advertising TraveI Insurance Amortization Reserve and development NET INCOME (LOSS)

$ I,663 2,320 3,662 734 314 825 l,888 2,870 500 33,362

4 8 ,I 3 8 ( $ 4 8I 3 8 ) ,

137

EXHIBIT 22-6 C o l o n i a lA m e r i c a n K i t c h e n s

LETTER TO STOCKHOLDERS 3 October 1,1979

Dear Stockholders: Enclosed I would like to provide you with an evaluationof our recentoperations. is a financial summary for the year 1978.As you can see,we are currently in a loss position. kt me adviseyou of the stepsthe company has been taking to turn our venturearound. The biggest technological problem is to achieve automated bun production in time, oursemi-automatictechquantities 1,000 dozenper hour. At the present of nology will produce 100 dozen per hour and it requiresmanual intervention.We are investigatingtwo piecesof equipment which we believe can be satisfactorily modified to produce the desired production rate while maintaining the desired product quality. One is producedby the Donut Corporationof America,a division in of DCA Food Industries,with headquarters New York City. We havevisitedone Their production processes of their production facilities located here in Wellesley. A have certain apparent advantages which we are now evaluating. secondsystem by which, with modification, may be suitableto produceour buns,is manufactured Autoprod of Hyde Park, New York. Feasibilitystudiesare now underway. We will as keep you advisedof our progress we continue to evaluatetheseand other systems. processes hasnot and United StatesBakery has tested our existingsemi-automated achieved desirable results. Basically,we concluded that consumerswanted the During a product, as evidenced the June 1978 market introductoryprogram. by American of three-monthperiod we sold 46000 packages Good Buns.However, Bakeries could not foresee the possibility of producing the buns at the 1,000dozenbun rate with their edsting technology. or Our companyhasloanedpansto twelve companies individualsfor further baking tests. For example,Inglish Rolls Bakersis now producingour Good Buns for soft drink vendor carts. Our creditors are trying to help us by being patient in collectingwhat we owe. We are making every effort to meet our obligationsto them. I have worked with no I salarysince October, 1978. I will continueto work without salarybecause believe want our buns and, most importantly, I want to strive to protect that consumers your interests. r38

EXHIBIT 22-6

Continued

We are What is your company doing to try to find a solution to theseproblems? to solve our major technologicalproblem' We expect to rnoving very vigorously independent have some results on this soon. Second,we have moved to establish production techniques using our semi-automated merchandisers salesand delivery usingthis slowermarketin local bakeries.We feel we can ultimately be successful However, our major priority continuesto be to seekan automated ing approach. Process. May I make a personalrequest?I need your continuedpatiencewhile I implement the plans sketchedabove.Time is neededto work out theseproblems.I feel we are close to discoveringhow to achievethe desired production rate. Once that is ' to we accomplished, will havethe means make our future secure My pledgeto you is to work ashard as I can to solvethe problemsI haveoutlined. I will keep you advisedon the movesthat are being made. If you have any quescall tions,please me. Sincerely,

Bill Bradley,President

s d A n a l y s i s :W h a t a p p a r e n tm i s t a k e s i d M r . B r a d l e ya n d h i s a s s o c i a t em a k e i n d e v e l o p i nG o o d B u n s ? g nt H o w m i g h t t h e p r o d u c t - d e v e l o p m ep h a s eh a v e b e e n b e t t e r h a n d l e df r o m a p o i n to f v i e w ? marketing d K C l W h a ts h o u l d o l o n i aA m e r i c a n i t c h e n s o n o w ? h es W h a tr e s p o n s i b i l i t id o e sM r . B r a d l e y a v et o h i ss t o c k h o l d e r s ?

rntomaucs corporauon
f - .

23
computer terminalsfor public transportaInfomaticsCorporationmanufactures Harper Knowles was named chief operatingofficer nine months tion companies. abruptly upon convictionof DouglasSladek,resigned ago when his predecessor, charges. briberyand PerjurY in were convicted 1979 of paying Mr. Sladekand two Infomaticsexecutives on contracts Infoleasing long-term for of bribes in excess $100,000in exchange boardon by the Infomatics as HarperKnowleswas selected COO maticsterminals. fifteen-yeartrack record with Infomatics and his the basisof his highly successful for reputation honestyand integrity. Knowles pledged to the Board of Directors that the highestpossibleethical behastandardswould be maintainedduring his administration.To ensureethical that all Knowles requested vior on the part of the company's 128 employees, conethicalbusiness regarding post official policy statements operatingmanagers duct. Much to his chagrin,Knowles quickly learnedthat Infomatics had never dedone so. The on velopedpolicy statements ethics,nor had any of its competitors immediateaction to draft ethicalguidethat Knowles initiate board requested to employees follow. linesfor Infomatics Knowles appointed a specialcommittee to identify ethical issuesgermane The to company operations for which policy statementsshould be developed' in-house three weekslater on the resultsof an extensive committee reported back "survey of Ethical concernstbr Infomaticscorporastudy. The report, entitled

140

Infomatics Corporation

141

tion," recommended that formal policy statements be drafted, reviewed, and ap' proved pertaining to the following operating issues: l. 2. 3. 4. 5. 6. 7. Financial disclosure Expense accounts Executive stock options and perquisites Advertising and public relations Giving and receiving gifts Employee use of drugs and controlled substances Competitive tactics and standards

clear, above.Make the statements Analysis: Draft policy statements the issues for s p e c i f i ci,m p l e m e n t a b la n d t o u g h . e, I n a d d i t i o n t o f o r m a l i z i n g o m p a n yp o l i c y o n e t h i c s ,w h a t e l s es h o u l dH a r p e r c h h l K n o w l e s o t o m a i n t a i n i g he t h i c a s t a n d a r dts r o u g h o uItn f o m a t i c s ? d W h a tc o n s t i t u t ee t h i c a lb e h a v i o r ? s

chamastee/works

24
gateof ChamaSteelworks, mea newscrew pulled up to the entrance A television suburb.The two dium-sizesteel fabrication plant adjacentto a Denvermiddle-class "Frank Chamaain't securityguardsat the gateshook their headsat one another. to commented his partner. gonnabe too pleased this," one of the guards by number The guard immediately picked up the phone and dialedMr. Chama's inside the plant office. "Mr. Chama,Channel7 News from Denverwould like an yesterday?" interview with you. ShouldI run them off like I did the reporters "Yeah, tell Channel7 to Frank Chama groanedand clenchedhis teeth. stirring up hightail it back to the city where they belong.They have no business troubleout here." again' Chamalit a cigaretteand then suddenlypicked up the phone receiver "On second thought, Johnny, tell the news team to come right on in the plant lot." and park in the executive Chama tightenedhis loose tie, donnedhis suit jacket, and combedthrough his hair. "Might as well look decent if I'm going to be on T.V.," he thought to himself. "Hey Dale," Chama yelled across the hall to the adjoining office, "guess who's on the way in?" "Who?" queriedDaleStoner, personnel Directorfor ChamaSteelworks. the "Television from the city." reporters "You're kidding," venturedStoner,risingfrom his desk."Who let them past the gate?"

142

Chama Steelworks

143

"I did, Dale. Just got through inviting them in. They're pulling up in the lot now." "Are you nuts, Frank? We've got enough troubles as it is with that SIN of bunch. Now you're going to get us a passle bad publicity. Just what we need!" "Donlt get all hot and bothered," respondedChama. The generalpublic needsto hear our side of the story too. Can you think of a better forum than the biggestT.V. station in town?" "Frank, I sure hope you know what you're doing," moaned Stoner as he retreatedinto his office and shut the door behind him.

office, quickly set up their equipThe news team made its way into Chama's ment, and the taping oommenced: Reporter-Mr. Chama, do you intend to comply with the request of the group calling themselves Stop Industrial Noise? They want you to lower the noise level plant. of your steelworks Chama-Our compenyalreadyhas. Telson. Charlene Reporter-Not accordingto.SIN spokesperson, Chama-Ohl What has shetold you now? Reporter That Chama Steelworksrefusesto make further noise reductionsin the plant. I believeMs. Telson quoted you as telling her group that they could all go to hell. Is that correct Mr. Chama? Chama-ls what correct-that I refusedto lower noise levelsfurther or told them where they could go? Reporter-Did you tell them both things? Chama-'l,lell, I discussed the decibel thing with the lady but I can't really recall telling her whereto go. Reporter-You do admit, then, that you haverefusedto lower your plant's decibel level? invested Chamn-l-et's get a few facts straight.Eight months agoChamaSteelworks greatdeal of money,but our That's a $85,000 in decibelmoderationequipment. company is conscious being a good citizenin the community. We voluntarily carof ried out a significantnoisecontrol program. group formed, callingitself SIN. Without anyoneelse Then this neighborhood of in the neighborhoodaskingthem to, they cameup to my plant and made a series gratitude our $85,000program! for demands about decibel reduction. That'ssome Reporter-But the group contendsthat your plant is still too noisy, not to mention ahazard, cleanair. to has Chama-ChamaSteelworks one of the finest cleanair recordsin Colorado. Reporter-tVhat about noisepollution though,Mr. Chama?

144

Experience Phase IL Venture Management

has Chqma-l honestly don't think the neighborhood that much to complainabout. Our noisecontrol programhas really made a difference. Telsonand SIN say.Accordingto them ' . . Reporter-That's not what Charlene Most of them don't evenlive in Chama-SlN is made up of a bunch of malcontents. but I don't believeit. the They claim to represent neighborhood, the neighborhood. peacefullyfor over twenty years. Our plant hasresidedalong sidethe neighborhood Why the fuss all of a sudden? Reporter-According to Ms. Telson,your plant has recently undertakennight opof can't sleepat night because erations.She claims the people in the neighborhood it. Chama-Let's get another thing straight. Chama Steelworkslocated here over and open. Can we help it twenty years ago when this part of Coloradowas desolate if Denver'surban sprawl ended up in our lap? The people all moved here volunthrough the years. tarily. We were here first but havebeenmighty good neighbors Reporter-ls operatingat night behg a good neighborMr. Chama? Chama-l think so. You see,over thirty families in the neighborhoodowe their livelihood to Chama Steelworks.In some cases,both husband and wife are employed with us. By operatinga night shift, we can continue to providework for our force. employees and further expandthe personnel Reporter-SlN intends to bring suit againstyou if the plant's decibellevel is not substantiallyreduced.How will you respondto this Mr. Chama? Chama-We'vegot lawyerstoo! But I really seeno needfor SIN to wasteeveryone's legal action. I can only hope that the good peotime and money with irresponsible ple of this neighborhoodwake up to the trouble being precipitatedby SIN before memberof the comanything gets out of hand. Chama Steelworksis a responsible munity-always hasbeen and alwayswill be!

t e S s A n a l y s i s :l s C h a m a t e e l w o r k b e i n gi r r e s p o n s i b il n r e f u s i n go t a k ef u r t h e rn o i s e c o n t r o la c t i o n ? r lsSIN acting esponsibly? n ar l s W h a tp o l i t i c a r e a l i t i ea b o u tb u s i n e sm a n a g e m e n t ei l l u s t r a t e id t h i sc a s e ? s s E v a l u a t e r a n kC h a m a ' p u b l i cr e l a t i o ne f f e c t i v e n e s s . F s t t t , l f S I N d o e sb r i n gs u i t a g a i n sC h a m aw h a t a c t i o ns h o u l d h e c o m p a n y a k e ? a be h D o s m a l l e rc o m p a n i e s a v e a n y s o c i a lr e s p o n s i b i l i t i e s y o n dp r o v i d i n g p r o d u c t o r s e r v i c a n dj o b sf o r t h e i rl o c a lc o m m u n i t i e s ? e

municipal midwest airport

25
Gilbert Martinelli, aviation director for a small municipal airport in the upper railroad."In pastgeneraMidwest, likens the airline industry to a twentieth-century by tions, American communities by-passed the railroad were in big trouble. They Today cities that lack a viableairport areexperwere all but doomed to stagnation. iencingan array of civic growth problems.I'm afraid our city may be in this fix." by The community's 193,000 citizens are currently serviced only one comhaveinitiated and withdrawn muter airline, PeninsulaAirways. Threeother carriers in air commercialand passenger services the regionover the pastsix years. "The city's market for air services obviouslylimited, is CommentsMartinelli: A than we've received. coupleof better coverage but I honestly feel that we deserve carriersopenedhere for lessthan six months eachand then abruptly withdrew. You Currently Peninsula any real success. can't tell me that was long enoughto generate and Airways has all of the town's business, they're making no real effort to upgrade their meager services." and Ann Arbor. No other Peninsula flies three times daily to Detroit, Lansing, flights are currently scheduled.Martinelli would like to see severalnew routes He east acrossLake Michiganinto Milwaukeeand Chicago. comopened,especially "If our citizens want to get to Chicagoor Milwaukeethey either have to ments, drive or fly into Detroit to make connections." Martinelli points out that when one carrier pulls out, othersarenaturally reslump currently beingexluctant to open up. Compoundingthe problem is a severe An periencedby the airlines as part of the 1980 economic recession. increasing are stayinghome, and incoming air freight deliveries number of summer travelers
145

146

Exoerience Phase II: Venture Management

traffic at Midwest Airport is 22 per' are l8 percentbelow the 1979 level.Passenger cent below the 1979 average. The escalating cost of energy has worsenedthe airline industry's economic of woes,with fuel costsup 70 percentin twelvemonths. Other areas airport opera"For the past year-and-ations have also been affected.Mr. Martinelli comments, The half, I've beentrying to get airport runwaysandparkinglots resurfaced. price of work, comasphalt has skyrocketed,sinceit's made from petroleum. Resurfacing pletedin 19ll for $60,000, now costsin the vicinity of $175,000." Martinelli looks to the future with some optimism, however.He expectsthe airline slump to end by late 198I and for the industry to bounceback as the autotraveling. for uneconomical long distance mobile becomes increasingly in He is also pleasedwith continuing industrial development and around the "Although the town is predominantlyblue collar,a greaternumber of community. are white-collar type businesses moving here. Since travelingbusinessmen the are optimistic that the airport can attract a larger of bread-and-butter any airline, I'm clientele." airby Just sevenyears ago, the community wasserviced a largenortheastern jet flights daily. However,servicewas canceledin 1974 as energyline with three to conscious airlinesbeganswitchingfrom mid-sizeDC3s(40 seats) the largerDC9s (90 seats).When jet servicewas canceled, community lost flights to Chicago, the Milwaukee,and Lansing. Between 1976 and 1978, two small commuter lines briefly flirted with the after a few months.Martinelli explains city's market. Both withdrew their services and its that one of the companies,BeaconAirflight, failed to advertise schedules predecessor nine months, AirstreamAviation, soughtto was chronically late. Its by its community but never seemedto synchronize flights cater to the city's business with an 8:00 to 5:00 schedule. "That left us with only PeninsulaAirways," Martinelli notes, "and they're interestedsolely in a few bread-and-butter runs. They are unwilling to experiment with new routes." Convincingthe public of the needfor a more viableairport in the community is another obstaclefaced by Martinelli. Midwest Airport is 70 percentself-funded, with the city financing the remaining30 percent,which amountedto $65,000 in expanded,because they 1980. "The city officials would like to see our services clearly recognizethe linkage betweencivic growth and air traffic. But getting the average residentto realizethis is no easymatter." "I would for new air services the city. Martinelli's top priority is generating like to see new routes open up as well as some new competition for Peninsula," he comments. "I sincerelyhope that our citizensdon't wake up one day and rehas us alize that progress passed by." to Anafysis: Providesuggestions how Mr. Martinelli can attractnew business for M i d w e sA i r p o r t . t Do you agreewith Martinellithat civic growth is vitally linked to air traffic services?

E X H I B I2 5 - 1 T ARTICLE IN THE LOCAL NEWSPAPER S e p t e m b e 1,9 8 1 r traffic at Midwest Municipal A recessionary economy has reducedpassenger Gilbert Martinelli Airport l5 to 20 percentbelow the 1980 level,airport manager said Friday. Addressingthe airport board's monthly meeting, Martinelli said passenger This summer,however,sagging traffic generallyswells during the summer season. lessof economic conditions curtailed vacationtraffic. Martinelli saidhe anticipates travelingstabilizes. as a declinefor the month of September business alsoshoweda summerdecline,accordMost other airport utilization statistics ing to Martinelli. This included amount of fuel consumed,number of cars rented, and receiptsfor the airport's restaurant.One area,freight loaded,did show an infor crease the month of August. In other action, the airport Board approveda plan to leaseadditional land near the airport for placementof billboard advertisements.

147

products, eberhardt
INC.

26
Three years ago, in 1978, Cole Eberhardt opened a small production facility in Roanoke,Virginia, to manufacture and distributea rust-deterrent compoundfor automobiles.Called RustRid, the product chemicallytreats metal to resistrusting and generalcorrosion. It is distributed through 425 retul outlets in Virginia, West Virginia, North Carolina,Delaware, and Maryland. Salesgrew steadily throughout 1979 and 1980,and EberhardtProductsdoubled its plant capacity.Cole Eberhardt,sole stockholderand president,was elated with RustRid's excellent receptionin the market and readiedplansto manufacture a companion product to be calledReFinish.A liquid chemicallike RustRid, ReFinish wasdesigned restore to lusterto corroded metalandhard compounds. Eberhardt admitted that he was dragging feet in marketing ReFinish,behis causehe wanted time to developa meansfor gatheringmarketinginformation to use in selling the new product. He explained that, despite excellent salesfor RustRid, his knowledgeof why it sold was limited. He wantedto sharpen underhis standingbefore marketing ReFinish,so that the latter's introduction could be fully exploited. Specifically Eberhardt wanted to develop a consumer profile of RustRid users: age, income level, family status, geographic location, etc. In addition, he wanted to determinewhat kind of vehicles RustRid wasusedon and how frequently the product had beenpurchased and applied. Eberhardt professed havemore of an affinity for chemistrythan marketing to and was unsure of how to proceedin conductingmarket research. summedup He his feelingsas follows: "I know what I want out of this research. want to learn I 148

E b erhard t Produc ts, Inc.

149

how to market RustRid better and how to optimize the introduction of ReFinish. What I'm unsureof is, what information to gatherand how to go about gatheringit. on I really don't want to continue depending luck in sellingEberhardtproducts."

Products. sureto Be A n a l y s i s :D e s i g n m a r k e t i n ge s e a r cc a m p a i g f o r Eberhardt r h n a Make and how it is to be gathered. specify what informationis to be gathered your design realistic and pragmatic.

kathsurgical equrpment

27
Kath SurgicalEquipment, a subsidiaryof Jayton Corporation,is a small manufacturer of specialty hospital and surgicalequipment. Following unprofitable perforteam was replacedand a mance for the past eighteenmonths, Kath's management turnaround begun. of is Manager, in the process redesigning Chad Meador,Kath's new General to firm's accountingsystem,beginningwith the cash-flowstatement.He seeks the how much the company will have to invest to stimulatelong-run profdetermine itability and if any short-runfinancialproblemsare imminent. steel autoclavefor sterilizing Kath producestwo basic products: a stainless surgical instruments, and a pressurizedsteamer for cleaningsurgicalgowns and for for sells $5,000and the steamer $7'500. hospitallinens.The autoclave Autoclaveshave been sellingat a rate of five per month. Over the next four of months, Mr. Meador predictsautoclavesales ten, twelve, fourteen, and sixteen have been selling at a rate of four per for each respectivemonth. The steamers to month. Meador expectssalesto increase six in the third month. Price increases for arenot foreseen eitherproduct. about 30 percentof represent for Past data show that materials the autoclave selling price, while labor runs about 20 percent.Materialsfor the steamercost 25 percentof sellingprice, and the labor is 25 percent.Inventoryhas beendepleted of at and needsto be increased a rate of $2,000 per month. Because past late Payroll tax and certain employeebenepayments,Kath is COD with its suppliers. repand maintenance and wages.Shop supplies fits are l2 percent of grosssalaries on Rent is $24,000per year. Depreciation equipmentis resent2 percentof sales. 150

Kath SurgicalE quipment

t5I

at $36,000 annually. The shop employs two supervisors $24,000 per year each. Workman's compensationinsurancein the shop is 6 percent of grosssalaries and wages.A11other direct overheadcosts will amount to approximately$4,000 per month over the next four months. Meador will receivea salary of $48,000. His secretaryand office manager receives 1,100 per month. Workman'scompensation insurance for office workers $ is I percent of salaries. and promotion will run about 2 perCosts for advertising cent of sales, but no expenditurewill be madein the first month. Sales commissions are 5 percent of sales. All other expenses fixed at $3,000with the exceptionof are an equipmentloan outstandingagainst division.The equipmentprincipalplusinthe terest payment is $3,000 per month, due on the twelfth day of the month. The interestrate is 16.75 percenton the remainingprincipal balance. The accountsreceivable, of October31, will consistof $25,000between as thirty and sixty days old and $60,000betweenzero and thirty daysold. Typically, the company has collected all of its over thirty day accountsin the following month and two thirds of its current, that is, zero to thirty day accounts. Meadorconfidently estimates that a statement condition as of October of 31, 1979,will appear follows: as EXHIBIT 7-1 2 K a t hS u r g i c aE q u i p m e n t l STATEMENT F CONDITION O f o r t h e y e a re n d e d c t o b e r 1 , 1 9 1 9 O 3 Cash $ 3 0 , 0 0 0 Accounts Payable $ 98,000 Accounts Receivable 8 5 , 0 0 0 Current Portion of Long Term Debt 25,900 Inventory 15,000 Current Assets Equipment(Net)
Current Liabilities $1 3 0 , 0 0 0 2 0 8 , 0 0 0 Long Term Debt Equity

$ 33 8 , 0 0 0

$r 23,900 46,I 00 168,000 $338,000

Analysis: Develop a cash-flowstatementfor Kath for the four-month period yo b e g i n n i n w i t h N o v e m b e1 . S t a t ea n y a s s u m p t i o n s u m a k e . g r

mustc tantasta
f . o '

companY

2B
FantasiaMusic Company has been located in the samedowntown site in Winona, Minnesota,for forty-sevenyears. The store is owned and operatedby Doyle A1brecht, who purchasedit from its founder in 1974. Fantasiais a full-line music service company serving a clientele consistingprimarily of band and orchestra studentsin Winona'spublic schools. "varied," citing previousexhis Mr. Albrecht characterizes backgroundas of journalism,and sales. purchased Fantasia because his He periencein television, love for symphonic band music and fond memoties of band activities in high schooland college. "but I guess spend "I do a little of everything Fantasia," comments, I he at most of my time on music ordering and inventory control. Theseactivitiesare the heart of our business.Here's where my three biggestoperating problems come from." oll$CdnS$gstThe problems Mr. Albrecht refers to concernthe vagaries "I've got to order music for school bands during marching and contest seasons. -TRe-iight music at the right time and then figure how to get rid of what do-e-sn't "All this is easiersaid than done, because market is the sell,- eiplains Albrecht. will sellbest from just not all that certain. I can neverbe sure what kind of pieces year to year. That's my first challenge.Getting rid of dead i-nventory-composiwon't buy it back tions that nobody wants-is a secondproblem. The publishers and the music often becomesdated from year to year-kind of like pop tunes on the radio."
,

- - r . .

152

Fantasia MusicCompany l,'il

153

l i; t, ;';. Seasonalsalesis Mr. Albrecht's third and, in many ways, most perplexing problem. "We have two big salesperiodson music ordersduring the year. During music for the June and July the band directors come in and order marching-band the Then during late Novemberand early December, rush is coming football season. on for symphonic compositions for the concert seasonin the spring. In other \,.qleil[bslhe demand for sheetmusic is virtuallynenoristent- ry_I9-qStngcash-flow to crunch is very difficult for Fantasia absorb."

ProductLine Strategy and Fantasiacarries a full line of musicalinstruments,accessories, suppliesin ad"People come to us because have it a11," Mr. Albrecht we dition to sheet music. for explains. "This is the only way I can compensate the store'spoor location in Music is located in Wintown and our rather spartanphysical facilities." Fantasia has ona's outmoded downtown district which, as in so many communities, been renderedsemi-moribund the flight of retailersto suburbanmalls. by Fantasiacarries a complete line of top-quality musicalinstrumentsto facil"Although real itate its rental program with city schools. lnstlUglgl!,"re-ntalisnot,a which do and profi_tma-kgr us, it pavesthe way for saleof accessories supplies for have a nice mark-up. I figure if the schoolsand parentsseekus out to rent instruments, they will also purchasesupplies here and get their instruments repaired here." with the Winona school systemto arrangement Fantasiahas a long-standing rent instruments through the schoolsto beginningband and orchestrastudents. "The schooiboarddrivesa pretty hard bargain, the rentalprogram reallyjust a is so "However, we can turn around breakevenproposition for us," explainsAlbrecht. and sell the instrumentsto many of the studentswho decideto stick with the music program.We definitely make somemoney here." eventually that approximately40 percent of the students Albrecht estimates "The amount apply accumulatedrental towards the purchaseof their instruments. on depends how soon the of profit we make from convertinga rental to a purchase the conversionis made. The longer we have to carry a renter at breakeven, lesswe profit when purchasetakes place.We have a real incentiveto keep the rental period to a minimum." patMr. Albrecht has encountereddifficulties in predictingrental conversion to instrument,asmight be externs. The rate of conversion differs from instrument and pected. The smaller,lessexpensive such as coronets,clarinets, instruments, bass suchas Sousaphones, flutes have a high conversionratio. But the largerpieces, "Any profit we make drums, and baritones, are generallyleft in perpetualrental. here will haveto come from accessories supplies." and Profit margins on instrument support products (reeds, lubricants, mutes, polishes,and the like) average about 35 percent."Thesearegood items for the cash flow because the rapid and regularturnoverthroughout the schoolyear." of

t54

Experience Phase II: Venture Management

Fantasiahas a large repair servicehoused in the rear of the store. Subcontracted to an independentcraftsman,Travis Preevy,the repair serviceis another breakevenoperation for Fantasia."Trav does a darn good job for us, even if he doesn't make us much money. He charges flat rate of $18.50per hour to the a customer and gives us a 20 percent commission. We provide him with shop room to work in and purchase any capitalequipmenthe might requirefrom time to time. We're content with this arrangement, much for the even though it doesn'tgenerate bottom line, becauseskilled instrument repairmenare very scarceand the repair is service yet anothersourceof customertraffic."

Edge Competitive "Our solecompet:Mr. Albrecht assesses competitive dynamicsof his business. the itive edgeis seMce- Tliere are three other music storesin Winona,but Fantasiais the only one that really catersto band directorsand their needs. Our competitors are gearedup more for the generalpublic-what we call the walk-in trade. They carry only a few instrumentsand accessories, offer no repair,and don't really stock much in the way of sheetmusic outside of piano and guitar pop tunes.They make their money on pianos, organs, records, and stereo sales. "Even though there's no way to reflect it on the balancesheet,Flllasia'l _ lg$gst assetis goodwill. We have developedreal rapport with band directorsin Winona. They trust us and respectus for our knowledgeof the schoolmusic business.I have developed simpaticosense a with the directorsbecause love the bandI music literature right alongwith them. I'm well-versed who the favoriteand most in playablecomposers are, what's involved in choreographing marchingroutines,and what band clinics are all about. I talk the band director'slingo and relateto his own special world. I'm willing to go the extra mile to meettheir needs." Going the extra mile includes such servicesas taping band concerts for schools cost, distributingcomplementary at copiesof demonstration recordings of new music, and providing directors with a listeningroom. "FantasiaMusic is the band director's headquarters,"sums up Albrecht. "They come here because we appealto their professional interests.We're like a secondhome for many of them. No other music storein town can make that claim."

SheetMusicSales "We rise or fall on the basisof our sheet-music sales,"observes Albrecht. "Our competitive approach,basedon band director rapport, higlrlightsthe role of sheetsales. We simply have to have what the band people want-the right tunes,in the right style, and within the proper difficulty level."

Fantasia Music Company

r55

market. Albrecht prides himself on his "gut feel" for the band and orchestra musicaltastesand which are more \now which of my directorshaveconservative of almostexclusively contemporari. Some of them like a halftime show composed classicmarches-say from Sousa, Goldman, and King-while others want a contemporary, upbeat sound keyed to recentTop 40 type hits. I havenoticedmore of more and more of the direcbecause an infatuation lately for the pop stuff, I guess young. Disco arrangements have been particularly big in the last two seators are sons. on Albrecht orders from nine mainline music publishinghouses a continuous basisand from two or three othersintermittently. Ordersflow in at a heavypacein "Most of the early spring and fall in anticipation of the two distinct band seasons. publisherswill carry me for 90 days, and sometimes longer, which is vital to cash flow. If we had to pay for new music before peak salesseason, we'd really havea messed short-term financial picture. Sellingmusic is one heck of a seasonal up business.It's awfully volatile too, and becomingmore so every year giventhe growing popularity of Top 40 arrangements. You know how unstable and fast changing that whole business is." Albrecht laments that he has only limited control over the profitability of music sheet-music operations.Some publishers offer a largerdiscounton purchased than others do, with the amount rangingfrom 30 to 60 percent."Obviously,we'd rather sell the heavily discounted stuff, but it doesn't always fit the directors' needs.They aren't likely to purchase compositionjust because hasan attractive it a price. They're educators and artists,not purchasing agents. can only hope that the I most heavily discountedsheetswill alsobe amongthe most popular. Forecasting in this area is hit and miss at best and certainly not very scientific.This is why it is so essentialthat I keep in close touch with my local group of directorsand with national trends in the band market. Fortunately,nationalpatternsarebeginningto coalesce, although regionaldifferences what schoolswant to play are still somein what prevalent. "There's not really whole lot a I can do personallyto influencewhat music the directors will select.I try to maintain my credibility with them, so that they will be open to consultation.Beyond that, it's just a matter of havinga variety of thingson hand for them to look at during the key orderingseasons." DespiteMr. Albrecht's "insider" feel for the market,he confesses that nearly packages orders fail to sell. "I'm caughtbetweena one-third of the sheet-music he rock-and-a-hard-place ordering. If I get real cautiousabout how many new com- ,."1', in positionsI order, I run the risk of not havingenoughon hand to fire-up the enthusiasm of directors. the other hand, the more I over order,the more inventoryli, On ':; will end up havingto eat. Striking the happy medium is mostly a.mal-Lelollu{k." Publishers rarely extend refundson unsold orders,preferringnot to make their businessmore risky than it alreadyis. Consequently, they*l94d_Lo-AfayiIate. towards a strategy of flooding the market egch y9q yit-tt_1gmtgl-1ew composiprobabilities.Despitethe reluctance publishers make tions to increase of to success "I

156

Experience Phase II: Venture Management

refunds, they do cooperatecloselywith retailersin suchareas providingdemonas strationrecordings filling last-min-ijte orders. and rush "Anytime I find myself fretting too much over deadinventory, I remind myself that sellingmusic to Winonabandsand orchestras what Fantasia is MusicCompany is all about," Albrecht comments."our strategyrevolves aroundsheet-music volume. Some dead inventory is inevitable." Determiningwhat to do with this inventory has proved to be virtually an insolubleproblem. "occasionally,I can pawn it off on anotherstorein the region,but this is rare.If it won't sell in winona, it generallywon't sell anywhereelse nearby. I wish I could get rid of it merely by lowering the price, as in most areas retailing,but thingsjust don't work that way of in this funny industry."

Physical Facilities "I hate to saythis, but it's a realtestimonyto our service that Fantasia so many has loyal, long-term customers.our in-storeaccommodations not luxurious,to say are the least," Albrecht candidly admits. "Not only are we stuck down here in town where business dead, but our building is nearly a half-centuryold. we're definiteis ly not hurting for floor space,or anything like that, but our productsand services simplyaren'twell showcased." Albrecht factitiously describes Fantasia's furnishingas "early Americanmakedo. Most of our furniturewaseitherboughtusedor madefor us. And I don't mean made like it was manufacturcd; nreana guy sitting in his garage I with a hammer and nails ! "l suppose we had beltcLg,elin gearsomeday soon and fancy up the place. I've becn reluctantto do much about redecorating, however,until I-can get the bottom line slraighlened out. our financialpicturehasn'texactlybeenon an even k e e l s i n c eI t o o k o v e r i n ' 7 4 . 1 ' l l a d r n i tt h a t . B u t I ' m m o r ec o n c e r n ew i t h s e r v i n g d the musiceducationneedsof winona than I am with gettingrich. My heart's the in music, not the cash register. Fantasia offers a uniquekind of service a special to c l i e n t e l eI. t h i n k t h a t ' ss o m e t h i ntg b e r a t h e r r o u do f . , ' o p

A n a l y s i s :E v a l u a t eF a n t a s i a ' f i n a n c i a lp e r f o r m a n c e i n c e D o y l e A l b r e c h t t o o k s s o v e r . I n y o u r o p i n i o n ,h o w c o u l d t h e s t o r e b e c o m em o r e p r o f i t a b l e ? _ e q g n n R m e n da p p r o p r i a ta c t i o ni n t h i s r e g a r do r b o t h t h e s h o r t - r u n n d l o n g - r u n . e f a E v a l u a t e r . A l b r e c h t ' s a n a g e r i a lt r e n g t h s n d w e a k n e s s eD o y o u a d m i r eh i s M m s a s. p h i l o p p h y o f c u s t o m cs e r v i c e e f o r e r o f i t ? r b o
, l

,.'

EXHIBIT 8.1 2 P R O D U C TL I N E A N N U A L S A L E SV O L U M E (Thousands Dollars) of 1974


Instrument rental Instrument sales Instrument accessorie',, and supplies Instrument repair commissions Sheet music sales Miscellaneous Total

r975
$124 47

1976
$I 38 s9
J J

t911
$r47 77 48 4.9 87 l7

t9l8
$174 92 63 4.9 92 22

1979
$203 112 89 5.2 105 3l

$l1s 38
z)

29
2.3 78 13

1.5 '70 l0

3.3 84 t2

7 s 2 s . s s 2 9 3 . 3 3 2 9 . 3 S3 8 0 . 9 s 4 4 7 9 S 5 4 5 . 2 s .

E X H I B I T2 8 - 2 M O N T H L Y S A L E S A S A P E R C E N TO F A N N U A L S A L E S January February March April May June

6.7% 3.9 4.9 4.3 4.5 14.2

July August September October November December

l'1.7% 7.9 4.9 2.9 15.3 12.8

157

EXHIBIT 8.3 2 F a n t a s iM u s i c o m p a n y a C C O M P A R A T I V EI N C O M E S T A T E M E N T S 1 9 1 4 . 1 9 1 9 , (Thousands Dollars) of

4 197
Sales Less: returns Net sales Cost of Goods Sold Instrument rental Instrument sales Instrument accessories

t975 1976 1977 1978 1979


$ 2 9 3 $ 3 2 9 $ 3 8 1 $448 $54s 3 2 1 4 3 $ 2 9 0 $ 3 2 7 $ 3 8 0 $444 $542

$2s8
z

$rt6

76 l5 13 8 82 16 $210 46 4l I $ 4

88 2t l7 6 95 12

102 30 19 2 100 16

132 24 25 6 I 13 16

lss
J L

2t0
JJ

a n ds u p p l i e s Instrumentrepaircommissions Sheetmusicsales Miscellaneous T o t a l c o s to f g o o d ss o l d


Gross Profit on Sales Operating Expenses Income Before Taxes Income Taxes NET INCOME

25 l1 124 14

33 5 166 19

$237 $269 $315 $361 $466 53 46 7 2 58 65 50 53 8 1 2 3 4 83 59 22 76 63 13

__q

$ s $ s s 8 $ 1 4 $ 8

158

EXHIBIT 8-4 2 C F a n t a s iM u s i c o m p a n y a C O M P A R A T I V EB A L A N C E S H E E T S ,1 9 1 4 - 1 9 7 9 (Thousands Dollars) of

1974
Assets
Current Assets Cash Accounts receivable Inventories Total current assets Other Assets Equipment TOTAL ASSETS

t97s r976 r91l

1978 1979

$ 11 45 41 97 5 $1 0 2

$ 12 $ 15 $ 11 $ 12 $ l2 86 52 57 43 50 130 59 84 45 49 122 183 228 100 ll4 6 9 l0 l5 l'7

$ 1 0 6 $1 2 3 s l 3 2 $ 1 6 8 S 2 4 s

Liabilitiesand Capital
Current Liabilities Accounts payable Notes payable Total current liabilities Capital Capital stock Retained earnings Total capital TOTAL LIABILITIES AND CAPITAL

$ 4 3 15 $ s 8 40 4 44 $102

$ 2 7 $ 4 1 $ s s $ 7 8 $ s 2 28 14 34 15 30 $ s 7 $ 6 9 $ 7 0 $ 92 $129 40 9 49 40 14 54 40 22 62 40 36 76 72 44 116

$106 s l 2 3 $ 1 3 2 $168 $24s

t59

people providers

29
PeopleProvidersof New Haven,Connecticut(PPNH)is a smallemploymentagency managedby Felix Heinlein and Neal Albee. The New Havenoffice is tied to People Providersof America,a nationalemployeerecruitingchain with 178 local officesin the U.S. and Canada.PPNH specializes recruiting technicalpersonnelfor comin puter services and accountingfirms. Heinlein and A-lbee own equalinterests PPNH,which is set up asa partnerin ship. Felix Heinlein is thirty-five yearsold and holds an MBA degreefrom Northwestern. Before forming PPNH in 1978, he worked for the ConnecticutDepartment of Human Resources for three yearsas a specialist job placementof the in handicapped.Neal Albee, thirty-sevenyears old, started his careerwith Gulf Oil doing personnelwork. Then he worked two yearswith Manpower,Inc., leavingin 1978to go with People Providers. The two partners professto be "fairly satisfied"with how the New Haven office has performed in its first two years of operation but feel it has not come close to realizingits true potential. They discusstheir operationsand future designsin the following dialogue. Description Services of Albee-Just about all of our work is done over the telephonecontactingcompanies within a seventy mile radius of New Haven. Occasionally we may hop out a bit 160

Providers People

161

that farther than this. We work almost solely with personnelofficersin companies we amongaccountingand computer positions.Sometimes do have a lot of turnovef work directly with a computer centerdirector or staff accountant. with more than Heinlein-ln our two years of operations,we have done business 300 different offices. Some of these contactscame through sisterPeopleProvider o w f r a n c h i s e sn do t h e r s e i n i t i a t e d n o u r o w n . a Albee-l should explain that all PeopleProvider offices are independentlyowned whenwe opened, Providers fee We and operated. paid a $5,000franchise to People we can plug into their In and they receive8 percent of all our commissions. return information network as a valuablesourceof finding clients. Whenwe placea Heinlein-We have a fairly simple and straightforwardfee system. of from 10 percentto 30 percent the first year's personwith a company, receive we We salary.The higher their salary,the biggerour percentage. seldomhaveany probit getting the company to pay the fee, becausein most instances coststhe lems show that we generalmore to do their own placementwork. Our surveys company plus in placement expenses. ly save our clients20 percent become even more essentialin tight job marketssuch as our Albee-Our services and dataprocessing. accounting areas, two specialty in of Heinlein-Yes, there is a 30 percent shortage qualified personnel the DP field firms are so desperate of and accountingis almost as bad. Several our larger client for technicalemployeesthat they have what amountsto a standingorder with us to supplyX numberof jobs per month or quarter. Atbee-Of course, the most valuableservicewe offer is not so much just locating employeesfor companiesbut rather attaining a good fit between the two. Both about what set the employee and company have a preconceived of expectations good fit. The more awarewe are of thesecriteria, the more valuable constitutesa our service becomes. there-we're brokers of Heinlein-Neal has identified the real essence our business By and companies. that synergybetweenemployees We or matchmakers. generate relationship I mean simply that our serviceaddsmore to the employee-company than would be there without us. The employeeand the company need us and we certainly needthem.

OperatingStrategy contacts.Along with whatHeinlein-PPNHwould be nothing without marketplace conever goodwill and imageour office hasin the community, our only other asset we havebuilt up, in and around New Haven,and sistsof the network of contacts with other P.P.franchises. "Using what you haveto get what yo'r Albee-People Provider'snational motto is, future ones.For example, to need." In other words,use current contacts generate

162

Exoeience Phase IL' Venture Manasement

every time we get in a new resumeor vita we add to our contactsfrom the refercould possiblymultiply enceslisted of former bosses and co-workers.Ten resumes into a thousandor more contactsin chain letter fashion.Here againis the synergy conceptreferredto before. Heinlein-We strive very hard to form steady, long-term relationshipswith our client companies.Contacts are worthless if they don't cultivate anything. Repeat of serviceclients are essentialas the bread-and-butter the agency.They pay the overheadand give us some measureof stability in what otherwiseis a very fluid industry. Albee-Our recordsshow th'at about 30 percentof our clientshavecome back to us steadilyover Felix and I hope to raisethat percentage at least twice for placements. the next few years.

percentage customer its Analysis:Suggest ways in which PPNHcan increase repeat years. over the next few

is Heinlein-Placement percentage another performanceyardstick Neal and I use. We are concerned not only with the number of repeat customerswe have, but also with our success filling job vacancies in and placing those seekingemployproud of the fact that we successfully ment. On the demand side, Neal and I are In fill 60 percent of the openingsbrought to us by client companies. lessthan 10 percent of our placementshas the company ended up being dissatisfied with the months on the job. employeeafter six in On the supply side,we are successful finding jobs for better than 45 perthat many job cent of our employee clients. This is really fairly high considering huntersaren't really totally serious about making a new careermove. who is of Albee-That's one of the real headaches running an agency-determining really seriousabout wanting a new job. Some people who visit our office arewhat jobs but only in we call "tire kickers." They're not really interestedin changing seeing what they're worth in the market-just testingthe water. Heinlein-And for the seriousjob hunters, there's often emotional trauma associated with making a change.This sometimesbecomesa real impediment to our really comes placementefforts. When the client is uptight, our role as counselors to the fore. Neal and I haveto function as "securitv blankets."

p t A n a l y s i s :S u g g e s t a y si n w h i c h P P N Hc a n f u r t h e ri n c r e a sies p l a c e m e n t e r c e n t w ( e m p l o y e e )i d e s . ( ) s o a g e s n b o t h t h e d e m a n d c o m p a n ya n ds u p p l y

People Providers

163

Heinlein-People Providershelps each of their franchiseoffices developwhat they growth plan for the francall a grid for growth. This consistsof an overallstrategic chisein keepingwith its size,client mix, geographical area,and identifiedmarket niche.Naturally,eachoffice hasa uniquegrid. Albee-Felix and I are currently in the process crystalizing grid for the 1980 of our to 1985 period. We thought it would be a fairly easyexercise until we reallygot into it. For the past three-and-a-half monthswe'vebeen struggling with our strategy grid. Heinlein-You'd better believe it! We have some fairly definite ideasabout where we want to go with the agencybut the big pictureisn't clearto us yet. It's not so much a caseof Neal and I disagreeing about goalsand priorities it is our mutual as inability to clearly define these.After just two yearsin the business, both rewe alize that we havea lot to learn. Albee-Blt we heartily agreewith the nationalheadquarters grid that a strategy needs to be developed soon. They'vegiven us anothermonth to developsomething fairly concrete. far, we havedeveloped series shortstatementsFelix So a of likes to call them propositions-about PPNH.We view theseas our startingpoint in developingthe grid. It's quite possiblethat additionalpropositionswill be neededbefore the grid can be finalized,but the seven havedeveloped far will we so certainlyget us going.

A n a l y s i s :U s i n gt h e g r i d f o r m a t i n E x h i b i t 2 9 - 2 ,f o r m u l a t e h e o p t i m u m s i x - y e a r t strategyplan for PeopleProviders New Haven.Feelfree to alter any of the of p s t r a t e g y r o p o s i t i o nis E x h i b i t2 9 - 1 n .

EXHIBIT29.-I S T R A T E G Y P R O P O S I T I O N SF O R PEOPLE PROVIDERS OF NEW HAVEN. 1980-1985

1 . Generate at least $40,000 in annual salary for each partner by 1982. 2 . Minimize office overhead costs: secretarial help, furniture and decorating
appointments, size of office, and so forth.

3 . Specialize in accounting and data processing clientele. 4 . Strive for quality of relationship with clients rather than quantity: longterm relationship, repeat patronage.

5 . Branch out somewhat in client target markets and servicesoffered. 6 . Take maximum advantage of the People Providers national information
network.

7 . Build a higher profile in the New Haven-East Coast area.

EXHIBIT 9-2 2 S T R A T E G YG R I D F O R M F O R PEOPLE ROVIDER RANCHISE FFICES P F O

1980 l98l

1982 1983 1984 l98s

Target revenue

Placementpercentage

Repeat patronagepercentage

New clients: demand side

New clients: supply side Target markets *(client groups)

New servicesoffered*

*Requires in depth analysis on separate sheet.

164

EXHIBIT 9-3 2 People roviders P I N C O M ES T A T E M E N T f o r t h e y e a re n d e d e c e m b e3 1 , 1 9 7 8 D r


Fees Earned Less Operating Expenses Franchise commissions Wages and salaries Rent Supplies Postage Furniture and equipment depreciation Utilities Telephone Miscellaneous Total operating expenses NET INCOME

$1 0 8 , 7 6 5

$ 8,701 63,000 3,45 0 0 3,1 0 2,400 2,300 1,623

r , 1s 7
693 86,442 $ 22,323

EXHIBIT 9-4 2 People roviders P I N C O M ES T A T E M E N T r f o r t h e v e a re n d e dD e c e m b e3 1 , 1 9 7 9


Fees Earned Less Operating Expenses Franchise commissions Wages and salaries Rent Supplies Postage Furniture and equipment depreciation Utilities Telephone Miscellaneous Total operating expenses NET INCOME

5 s122,47
$ 9,798

68,ooo
3,600 2,400 2,184 2,300 1,824 1,200 784 92,090 $ 30,385

165

EXHIBIT 9.5 2 People Providers B A L A N C ES H E E T D e c e m b e3 1 , 1 9 7 9 r

Assets
Current Assets Cash Accountsreceivable Supplies
Total current assets Fixed Assets Equipment and furniture Less accumulated depreciation Franchise fee and deposits Total fixed assets TOTAL ASSETS

$ 3,628 7,380 302


$ 1 1,3 10

$23,000 4,600

18,400 5,300 23,'lOO $35,010

Liabilitiesand Capital
Current Liabilities Accounts payable Wagespayable Taxes payable Total current liabilities Long-Term Liabilities Notes payable Total liabilities Capital Albee, Capital Heinlein, Capital Total capital TOTAL t66 LIABILITIES AND CAPITAL $ 1,230 270 I 10 $ I,610

20,400 $22,010

6,500 6,500

13,000

ry,01q

cameronmoDIIe

.l

homes

30
.,The union is after my plant people,and I'm not about to give in." Boyce CamMobile Homes,relatedhis problem of eron, founderand chief executive Cameron "Ramsey,you relationsconsultantin Atlanta. to RamseyCurtis, a freelance labor have an excellent reputation in the Southeastfor your ability to troubleshoot union problems.would you giveme someadviceon how to ward off the union?" Cameron and Curtis sat down alone in the company'slarge executivemeetthe latest attempt to unionize ing room, poured coffee, and proceededto discuss CameronMobile Homes.Their dialoguefollows. please me in on your company's fill Curtis-Boyce,before we start talking specifics, background. Cameron-My father built Cameron Mobile Homes in 1923 on the outskirts of Atlanta. Today, of course, we're right in the middle of the industrial district. away' Currently My brother Lyle and I took over in 1959 when my father passed is treasurerand I'm head of plant operations.We make a variety of home Lyle in stylesin the plant and sell primarily to dealers Georgiaand Alabama' we're profitable and growing. Even with the lousy economy last year, we to grossed over $15 million in sales.1982 promises be a much better year if the economypicks up again. Curtis-How many peopledo you employ currently, Boyce? reps,and Cameron-As of the first of the month, 125 or so-17 in the office, 4 sales 167

168

Experience Phase II: Venture Management

the rest plant people. Nine months ago, in June of 1980, we layed off 40 of our We wagepeopledue to soft sales. still needto paredown the work force by a dozen, but we plan to do that strictly by attrition. Curtis-Did the union situationheat up after the layoffs? Cameron-obviously it did. Although very few peoplewith much senioritywere affected, the work force was not pleasedwith the layoffs. But what choice did I hurt companiesall acrossthe country. Cameronwas no have?The 1980 recession work for them' You can't employpeoplewhen thereisn't enough exception. exactly did the union do? Curtis-:V,lhat union out of Cameron-ln July, after the layoffs, representatives the steelworkers plant crew both in the plant and beganvisitingwith our Alabama, of Birmingham, outside. The union reps were fairly low key about it all, but they were persistent. I quickly got with my legalcounselbut found that everythingwas perfectly legit. Curtis-Did the union get any of your employeesto sign cardsindicating their inst? tere Cameron-l am not awareof any suchactivity but don't know for certainif itoccurred. I do know, however,that things seemedto die down going into the fall of '80. I beganto breatheeasy again.Then in Februaryof 1981, the union made another move. Again our plant people were visited and talked to. That was last month. Curtis-Has the union been real activein the last month? highly aggressive. Cameron-Yisiblebut not necessarily why did you tell me a few minutes ago that the union was definitely Curtis-Then after your people? Cameron-ltjust seemedawfully appalent to me. Why elsewould they be talking to Cameronworkers? Curtis-lt's possiblethat the union is still waiting for more employeeinterest to nowadays,and they rarely seek a represendevelop. Organizersare professionals tation electionuntil they're surethey've got the worker voteslined up. to Cameron-MaybeI haveover-reacted it all. wants to be hassledby unions. No businessman Curtis-That's understandable. union to It's entirely possible that things are not yet ripe for the steelworkers step in. At this point they may be simply testing the water. If they couldn't get enough votes lined up for an election immediately following the summer layoffs, they probably are poisedfor anotherattack. Cameron-Well, what should I do in the meantime to build employeerelations stayingunorganized? and better assure wish there were a simple set of rules I could passon to you that would Curtis-l guaranteesafety from unions. Unfortunately, the situation is alwaystoo complex for that. What a companydoesafter a union hasbeenvoted in is neveras important as what the companywas doing beforehand'

CameronMobile Homes

t69

Cameron-Whatdo you mean Ramsey? Boyce, at least not in Curtis-llnions don't get started by accidentin companies, as haven't traditionally been a part of the landscape they the South where unions Northeast. havein the Midwest and Unless a company has inherited a union, unionization generallysignalsa why bluebreakdown in labor relations.Job security is one of the classicreasons a union. But beyond that, employeestoday are very collar employeesside with demanding and hard to please.If they feel they're not participating enough in operating decisionsor not being treated like adults, they may start sympathizing with the union. Cameron-You're definitely right that workers today are a different breed of cat! They are demanding a lot of things besidesmoney and working conditions. So where doesthat leaveme?What can I do to staveoff the union? Curtis-Since they apparently have not gotten Cameron workers to sign union cards, I'd say the union is only trying to build up goodwill with your people at this point. An organizingdrive is sure to be in the planningstagebut perhapsnot keepingan eye out for further in the near future. My best adviceto you, besides union activities, to get your housein order. is Cameron-Exactly what do you mean,Ramsey? in Curtis-SIrive to createa working atmosphere the plant that keepspeoplereasonably satisfied.Don't give them any obvious reasonsto rekindle their interest in unionizing. Cameron You mean quit laving them offl Curtis-lVell, certainly that is a sore point for your plant. You definitely will have a to tread lightly there. But job security still won't guarantee union-freeshop.Today's blue collar worker wants not only job securitybut alsoa voice in determining and a decisions, the terms of employment, protection from arbitrary management has As feeling of self-respect. I saidbefore, Boyce,management to createa working climate that wins the respectand loyalty of employees. Cameron-How can I createthat kind of climate here? we're dealingwith the attitudes of Curtis-lL's tough to be real specific because to let me give you five guidelines follow. First, allow operative management. But managingtheir own jobs. Participationbreedscommitment. employeesto sharein of Second,make certain that employeessharein the success the overall company will have a strong reasonto want the companyto prosper.Third, proso that they vide all of your people with opportunities to develop and grow in their job-to mature professionally.Fourth, treat them like adults. That meansyou have to be Finally, and most open to compromise. and, at least occasionally, open-minded importantly, treat them fair and square.And if you don't know what that means, you arein trouble! how enoughto me. But tell me specifically Cqmeron-Nl right, that soundssensible to go about implementing your philosophy. What can upper-levelmanagement,

170

Experience Phase II: Venture Management

do working along with firstline supervisors, here at Cameron to createthe nonunion environmentvou've described?

q A n a l y s i s :A n s w e rM r . C a m e r o n ' s u e s t i o n s c o m p l e t e l y s y o u c a n .B e s p e c i f i c , a a concrete, and pragmatic.

EXPERI ENCEPHASEIII venture transition

furniture ianeck

31
Janeck Furniture, originally the SpringfieldFurniture Mart, is located in a thirtyyear-old building in downtown Springfield, Illinois. HershelJaneck, the current owner and sole proprietor, purchased the store and all of its assets from the Furniture Mart in 1966. Janeck Furniture sellsusedfurniture, unfinishedfurniture, and a line of modestly-pricednew furniture. The store'scrampedfloor space, limited inventory facility, and undesirable location have led Mr. Janeckto investigate the possibilities of expandingto a secondlocation in Springfield.His expansion feasibilitystudy, completedin 1978and submitted a localbanker,follows. to

Feasibility Study for Expansion .laneck of Furniture

Port l: Estimote of Soles Springfield's 1977 population was 97,000 with 38,800 households. Annual per capita expenditurein Springfieldfor furniture and home furnishings was $207 in 1977 Nineteenfurniturestores . directlyagainst Janeck currentlycompete Furniture with an aggregate of339,000 square sales floor space feet.

173

EXHIBIT .I.1 3 ESTIMATED ALESFLOORSPACE S (Square Feet) StoreName


Barney's Dawsons Goldblatt's Hendricks J.V. Grand Leaths Lee's Madisons Myers Brothers (2 Stores) Southtown Stahls Stern's (2 Stores) Tiskos Wolfsons SearsRoebuck Stix Baer & Fuller Famous Barr Total )\q * TOTAL

EstimatedFloor Space 12,000 4s,000 6,000 14,000 25 , 0 0 0 30,000 4,000 12,000 16,000 6,000 12,000 27,OOO 50,000 12,000 10,000 6,000 8,000 295,OOO 69,940 368,750

xEstimate of the floor space of Springfield retailers who sell furniture as a secondary oomp o n e n t o f t h e i r p r o d u c t l i n e ( e . g . ,W o o l c o , P e n n y s ,e t c . )

Shown in Exhibit 3l-2 is the analysisof excess sales demancl furniture in for Springfield.The figuresestimatethat Springfieldcould accommodate additional an 60,000 squarefeet of furniture showroom space.Assumingsales $50 per square of foot of space,currently the average Janeck's for downtown store,there currently is $3 million of untappedmarket demandin Springfieldfor furniture.
E X H I B I T3 1 - 2 ESTIMATE OF ADDITIONAL DEMAND FOR FURNITURE IN SPRINGFIELD Retail salesper household Furniture salesper household* ( . 0 4 x $ 1 3, 6 7s ) Individuals per household Potential furniture salesvolume per capita Total city population in 1977 174

$1 3 , 6 7 5 $s47 2.5 $2r9 97,000

EXHIBIT31-2 Continued Potential furniture salesvolume (97,000 x $219lres) Approximate out-of-city purchases ( l0% assumed) Net furniture salesvolume Square feet of furniture store salesspace in city Sales per square foot of showroom Salesgenerated by existing stores (339,000 ft' x $50/ft') Excesssalesdemand Square feet of salesarea needed at $50 of sale per sq. ft. ($2,969,700-$50 per sq.ft.)

$21,234,000 $2,724,300 1 $1 9 , 9 9 , 7 0 0 339,000ft, $s0/ft' $1 6 , 9 5 0 , 0 0 0 $ 2 , 9 6 9 ,O O 7


{g ?q4

*National of 4 business statistics indicate that residents spend approximatelypercent annual income furniture. on attainedby a To determinewhat shareof the $3 million could be reasonably will be assumed that the new store'scustomers secondJaneck Furniture store, it is (effectivegrossincome of under $15,000).In from low to middle income levels lgll , 19,OlO Springfieldhouseholdswere in this target category,distributed as follows: 9 ,826 2,641 6,603 19,070 than $8,000 householdsless households$8,000- $ I 0,000 households- 10,000-$ 15,000 $ households-average$10,700

estimate of the effectivebuying income of the target houseA conservative holds is $10,700. Assumingthe 4 percent annualincome expenditurefor furniture will spendapproximately$8,161'000 (Exhibit 31-2), rhe 19,070 target households approximately38 percentof the total for furniture during the year. This represents power in Springfield(921,243,000in Exhibit 31-2). It could furniture purchasing furniture demandwould go be expectedthat 38 percentof the $3 million in excess targetpopulationgroup,totaling$1,140,000. to Janeck's storecould capturedesecond which Janeck's The shareof the $1,140,000 pendson its location, quality of furniture offered,and extent of customerservices. with sellingto the target cusGiven the downtown store's past record of success tomer group (a 70 percent repeat customer rate from 1966 Io 1971) and the new venture planned attractiveness the secondstore,it is estimatedthat Janeck's of or capturehalf of the $1,140,000, $570,000.Ifjust 15 percent could realistically more patronagecould be elicited from income groups aboveJaneck'starget, the would be $650,000. secondstore'sprojectedannualgrossrevenue Future population growth projections for Springfield are auspicious.The inAnother 17.9percent growth rate for 1970to 1980is currentlyat 19.9percent. creaseis foreseenfor 1980 to 1990. Twenty-two thousandadditionalhousingunits are alsoprojectedfor the eighties.
175

Port ll: Estimate of Expenses Exhibit 3l-3 is a pro forma profit and loss statementfor Janeck'sproposed second store.Gross receipts $640,000, of derived from Part I above, assumed. are Plansare to constructa 16,000-square-foot structurein the southwestpart of Springfield. The building will be constructedand owned by Janeck Furniture on land that will be purchased that purpose. for Mr. Janeckwill providethe $80,000equity necessary purchase land. to the The construction of the building will be $270,000. This will be financed for yearsat I 1.5 percent twenty-five interest. Monthly loan payments will be $2715. The initial $80,000 inventory will alsobe financedwith a ten year-l lpercent note. Monthly paymentson this note will be $1102.Approximately$70,000of additional guaranteedfinancing will also be availableduring the start-up period. The guarantee would not cost anything unless called. In summary, 100 percentfinancing will requirepayments approximately of $38l7 per month, or $45,804 per year.The pro forma profit and lossstatement showsa profit of $23,183after the bank debt hasbeenserviced.

Part lll: Conclusions It is obvious from the precedinganalysisthat Janeck Furniture should expand to a second store. The local demand and future growth outlook for Springfield augerwell for the proposedexpansion. shouldbe undertaken the near It in term.

A n a l y s i s :c a r e f u l l ye v a l u a t e r . J a n e c k ' e x p a n s i o n t u d yf r o m t h e s t a n d p o i n to f M s s s t h o r o u g h n e sa d e q u a c y ,n d p e r s u a s i v e n e s s . ti m p r o v e m e n cs ny o u r e c o m s, a Wha ta m e n d ? es p e c i f i c . B l f y o u w e r eJ a n e c k ' b a n k e r w o u l dy o u b e w i l l i n gt o f i n a n c e i s n e wv e n t u r e ? , h s

176

EXHIBI31.3 T F I R S T Y E A R P R O F O R M A P R O F I TA N D L O S S STATEMENT Percent of Sales


Gross Receipts Cost of Goods Sold Opening inventory Materials Direct labor Subcontract costs Purchases Overhead Total Less Ending Inventory Cost of Goods Sold Gross Profit Expenses Employee wages Accounting & legal fees Advertising Depreciation Supplies Utilities Telephone Repairs Salestax Insurance Bad debts Miscellaneous (postage,etc.) TOTAL EXPENSES Net Profit (before taxes) Less federal income tax (50%) Less state income tax (4Vo) NET PROFIT (after taxes)

$640,000 $ 80,000 0 0 0 320,000 0

100.00 12.5

400,000

8o,oo0
320,000 320,000 30,000 6,250 30,000 13,000 1,000 21,000 3,000 600 10,000 4,500 3,000 4,200 126,550 193,450 (96,725) ('7 ,738) 50 . 0 50 . 0 4.68 .98 4.68 2.03 .15 3.28 .47 .09 1.56 0.70 .47 .66 19.77 30.22

$_r!f!z

177

EXHIBIT 1-4 3 P R O F O R M A P R O F I TA N D L O S SS T A T E M E N T W I T H I N T E R E S TE X P E N S E S Column1*


Gross Receipts Cost of Goods Sold Opening inventory Materials Direct labor Subcontract costs Purchases Overhead Total Less Ending Inventory Cost of Goods Sold Gross Profit Expenses Employee wages Accounting & legal fees Advertising Depreciation Supplies Utilities Telephone Repairs Taxes Insurance Bad debts Miscellaneous (postage,etc.) OPERATING EXPENSES

Column2* 100.00

$640,000 $ 80,000
U

100.00 12.6

0 0 320,000 0 400,000 80,000 320,000 320,000 30,000 6,250 30,000 13,000 I,000 21,000 3,000 600 10,000 4,500 3,000 5,200 $127,150

50.0 50 . 0 4.68 .98 4.68 2.03 .15 3.28 .47 .09 1.56 0.70 .47 .66 19.86

59 . 0 8 40.92 14.17 5.73

(Col. I excludes debt retirement) Net Profit (beforetaxes) Lessfederalincome tax Lessstateincome tax Net profit (after taxes) Lesswithdrawals N E T P R O F I TB E F O R ED E B T S E R V I C E Debt Service N E T P R O F I TA F T E R D E B T S E R V I C E

39.86

192,850 <96,425> <'l,'714> 88,71I (20,000) $66,7I1 45,804 $'0.'O?

30.1 3 l5.06 1.20 13.86

3.05

r.77

3.r2 10.42

+.4/o/e. Column I expresses eachexpense a percentage as ofnet sales. Column 2 represents the 1977 avengefor storesofcomparable sales. t78

prudhoe baY oilfield servicing

32
company located in prudhoe Bay oilfield Servicingis on oilfield generalservices maintenancework on oilin Prudhoe Bay, Alaska. PBOS specializes doing field as drilling rigslocatedin and around the Bay atea.Orgatized a three personpartnership in l-975,the company is currently in transition due to the suddendeath of Austin Beall,majoritY Partner. The company's other two partners,Nance Kizer and Mitchell Granger,are PrudhoeBay Oilfield and reshufflingtheii administrativeresponsibilities reassessing Nance Kizer was held Servicing'sfuture strategy. The following interview with nine months after the death of Austin in November1980'
Please provide us with background information about Prudhoe Bay oilfield Servicing.

in Austin and I formed the partnership 1975 with equalcontributions.Austin kicked in some additional funds in 1977 and becamemajority partner. Shortly percent thereafter, Mitch was invited in. At the time of Austin's death, I had 34 ownershipand Mitch had l0 percent.Austin had the rest' Prudhoe Bay oilfield Servicingwas originally founded to perform general welding work on oil rigsin the Bay region.As time went on, we graduallybranched out inio additional maintenanceservices,such as mud pumping and acidizing' Currently we are the largest freelance generalmaintenancecontractor operating in the Bay.
t79

t80

Experience Phase IIL

Venture Transition

We work largely on a subcontracting basis. PBOSmakescontactwith the rig, troubleshootsmaintenanceneeds,and then contractswith independentoperarors in the regionto do the work. In many instances can do the work ourselves we when it's modestin scope. Austin and I complementedeach other well in running the company. He handled most of the administrative matters in the office, while I spearheaded the technical work in the field. Austin coordinatedpersonnel,dealt with customers over the phone, and pretty much determinedwhat services would offer. I'm we troubleshooter problemsout on the work site. Although we both had engineering for degrees, talentslay in oppositedirections. our Mitch Grangerwas more-orlessa silent partnerwhile Austin was alive.Mitch runs a flying service here in the Bay and spendsmost of his time managing For it. the past several months he has steppedinto the vacuumhere to assist me. PBOS established good track record under Austin and me. In our five years a together,we tripled our assets and topped a million in sales. expanded we our mix of services greatly and laid the foundation for a professionally managed firm. Nance, describe us the transition for periodafter Austindied. our biggestproblem by far has been filling the administrative vacuumleft by Austin. Even though we had $250,000 in key-maninsuranceon him, money is hardly any substitute for the loss of our chief decision-maker. for the lossof a or closefriend. One day Austin was there in the office and the next he wasn't. That's how suddenlyand unexpectedlyhe died. Mitchell and I were in shock right alongwith Austin's family. The whole world suddenlychanged all of us.we weren't ready for for it: but who everis? Mitch and I met together six days after the funeral to somehow come to grips with the situation. Life had to go on for Austin's wife and two daughters, and PrudhoeBay Servicing facedits first severe crisis. I was the only person among all of our twenty-threeemployees who could even attempt to take over the office's administrative burden. Fortunately, we had just recently hired a secondengineerto assistme in the field. He is now going to have to go it alone. Mitch helped with some miscellaneous paperwork choresbut didn't really know enoughabout the business do much more. to Austin's wife, Maureen,was able to fill me in on a lot of the office routine since she had worked closely with our accountant to computerize our books. Between the two of us, we've managed keep the wheelsmoving for thesepast to nine months. Maureenhasbeena big, big help. I hate to admit this, but I really didn't know all that much about the inner workings of the company until my crashlearningprogrambegan.I knew quite a bit about welding and related maintenance services but comparativelylittle about such areasas our bookkeeping,personnelrecords,job scheduling, and cashflow. I've surebeenlearningthough!

Prudhoe Bay Oilfield Servicing

r81

Prudhoe Bay oilfield Servicinghas lost its continuity and momentum since Austin died. It's been strictly crisismanagement. New brushfiresbreak out everyday. I'm frankly worried about our ability to make more forward progress, usea to football analogy. I'm working sixteen to twenty hours daily just to barely keep up with all of the problems.But I have almost no time for looking aheador for doing any innovative thinking. I get togetherwith Mitch and Maureena coupleof times a week for lunch. That'sjust about the only time I havefor chartingour new course. What is Maureen's in the business this point? role at That's a very good question.I guess hasboth an informal and formal role. she Let me explain. when Austin died last November,Maureeninherited all of his ownershipinterest.She'snow the majority partnerin pBOS. You see,Austin, Mitchell, and I neverdrew up any sort of buy-sellagreement to allow us to redefineour ownershiproles.we were all tight with money and short of time, so we just never got around to seeing lawyer. I guess a that soundsawfully myopic, but we never dreamedany of us would die unexpectedly.we were all so wrapped up in making the companygo that we didn't make time to legallyplan for the future. without a buy-sell agreement, Maureen automatically assumedAustin's ownership position. Unfortunately, she also inherited Austin's liability for the company's debt. This amountsto $185,000 her alone.If pBos shouldgo bellyfor up in the near term, shewould be ruined financially. hate that realitybut can't I alterit. Maureen is an excellent businesswoman. She works thirty to forty hours a week in an informal role. she handlesa greatdealof paperwork,coordinates some jobs, and does great PR work with customers. She also has a very good strategic instinct and contributesto our planning discussions. The office en.rployees respect her, and sheenjoystheir company. Describe typicalwork day for you Nance. a It's not very glamorous. generally I arrive at the office by 6:00 A.M. and don't leaveuntil 9:00 or 10:00 in the evening. I've had only three daysoff inthe last six months.I spendabout a third of my time on the phone coordinatingjobs and talkingto clients. The restofthe day is spentgoingoverreports and figures and doing paperwork.I doubt if I ever stay with one job for more than thirty minutes due to endless interruptions. I zealouslylook forward to the time when I can get back to a more normal schedulethat affords me someleisuretime. I'm not cut out to be a ..workaholic" like Austin was. work was his whole life. I have alwayshad hobbies,such as remodelingold cars. I'm also looking forward to the day when somebodyelsecan step into the

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office management role. I miss field work, even in our cold Alaskaweather.I have profited greatly since assumingAustin's former role, but I don't want to stay in administrationforever. My management style is the exact oppositeof Austin's. He was autocratic, impatient, and a nondelegator.I delegatewell and don't push people nearly so hard. Maybe that's because lesscommitted to office administrationthan Austin I'm was. What is your future, long-runplan for PrudhoeBay Oilfield Servicing? kt me candidly say that a long-range plan has not yet crystalized. a way, In PBOSis a new business once again,now that I'm at the helm. Nine monthshasn't provided enough time for us to plan a definite future. It's too early to say yet. We're still very much in a stateof flux. I can say, though, that I plan to reduceour scopeof activitiesand services. Austin was much more ambitious than I in this regard.He wanted to expand our packageof oilfield maintenanceservices fast as possible.I'm not so strongly as growth oriented-especially now that I haveso many new responsibilities. Austin got us into several dealsthat just barely broke even.I don't want to repeat those mistakes,if I can help it. I think we needto pick a niche and stakeour claim there.Maybe in welding or mud pumping.Time will tell. In the meantime,Mitch and I plan to continueto work closelywith Maureen until we can get through the crisis phasecompletely. I think the three of us approachthe future optimistically.It won't be easy,but we'll make it.

A n a l y s i s : h a t m a j o r n e e d sd o e s P r u d h o eB a y o i l f i e l d S e r v i c i n g a v e i n t h e w h s h o r t - r u n H o w c a nt h e s e e m e t ?W h a tc h a n g ew o u l dy o u r e c o m m e n d ? ? b s D o y o u f e c l P r u d h o e a y o i l f i e l d S e r v i c i n g i l l c o n t i n u et o t h r i v eu n d e rN a n c e B w Kizer? W h a t a c t i o n sc a n s m a l l e rc o m p a n i e sa k e t o a v o i d t h e t r a n s i t i o np r o b l e m s x t e p e r i e n c eb y P B O S h e nM r . B e a l d i e d ? d w l

philmark proouctrons
| . .

33
can I know for sure when it's time to turn this operation over to a professional manager?" sheldon Doctorow, productions director and majority stockholder of Philmark Productions,was conferringwith his friend Charles Dante over lunch. "Are you thinking of retiring when you're just fifty-two yearsold, Sheny?" Charles Dante registered considerable surpriseat Doctorow's question. "No, I wouldn't retireCharlie,"Doctorowresponded,,.but would turn over I daily operationsto someoneelse.Maybe to Tony Davis.He knows our operation backwards and forwards." "Tony's good a man. As lead film editor I should know," Dante asserted. "I have worked closely with rony over the past year-and-a-half helping him with the MCA deal.Tony's the best project manager Philmark.But you're the mentor, at Shelly.You startedPhilmark elevenyearsago and haveguidedus with a surerudder all the way. Why are you considering turning it over to Davis?" Sheldon Doctorow leaned back in his chair for a moment and let his mind fondly reminisce.He had started Philmark Productionsin Los Angelesin 19j0. Everyonelaughedat the effort, sayingthe movie industry was alreadyoversupplied with fi lm-editing companies. But Doctorow had somethingnew-a lasertechnologyediting process-which the more innovativefilm production companies soon clamoredfor. philmark productions was suddenly very much in demand and quite profitable. subsequent diversificationlead Philmark into cabletelevision, home-movie film processing, and "How

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Exoerience Phase III:

Venture Transifion

most recently into distribution of video cassettes VTR's (video televisionrefor corders). Philmark was no longer a strugglingventureseekingto break out of the red. Saleshit $38 million in 1980. That's what was troubling Doctorow: had the company outgrown him? "Why am I consideringgiving it to Davis?" Doctorow finally answered, breakinghis reverie."I guess goesback to my self-concept. an entrepreneur. it I'm I love to dream up,.r-r-e-w and gadgetsand find a market for them. Lately, I've ideas beEn-fiamnf-Ib-spendmore and more time on administrativematters-perfornance evaluations, forecasting, budgeting.I don't have a lot of flair for that stuff and not a lot of interesteither. "Maybe it's time for me to get out of daily operationsand into some other phaseof the company. Mayby I should even sell out." Doctorow then stood up from the table and looked out the window. "What do you think I should do Charlie?" "Just don't rush into a decision Shelly. Maybe you're over-reacting all to those committee meetings lately. They could make anyone hate administrative work!" "No," answered Doctorow, "It's not anything that superficial. The company has been changinga lot in recent years, but I haven't been. I guess I'm like the paternalistic father who neverreally wantedhis kids at home to grow up. "One thing's for sure: I'm an entrepreneur,not a professionalmanager. Whether or not it's time to turn Philmark Productionsover to a professional the is tough questionI still haveto answer."

Analysis: How can a companydetermine when the time is right for a professional , i L) manager succeed entrepreneurial v-'t the founder? $. L,. "- ' - to t(., t,i'"1 ,'.',' .,_! ;iri.,,,,.,"., t,, What is the differencebetweenan entrepreneunar managerano a professional manager?. you feel many people have the capacityto be ,both types of Do m a n a g e r s ?| , : ' r ' \ lf ShetdonDoctorowirjveie tbrn ai,Erttl. auiii op.rations"f iilit'"J; Producto tions to Tony Davis,how could Doctorowcontinueto makevital contributions to the company? Assess optionsin this regard. his . i
\

positiongiven ls it really feasiblefor Doctorow to relinquish the chief executive t h a t h e i s m a j o r i t ys t o c k h o l d e r ?

\ : r .

J i , r . _ ,

i : , . r , .

i : . t ,

iron kettle restaurant

34
Louis J. Guinn is a successful real estate appraiserin Salina,Kansas, who is currently giving seriousconsiderationto the purchaseof a defunct local restaurant. Thanks to his prosperingrealty firm, Guinn has put together $135,000 which he wants to use as seedmoney for a new venture.Although Guinn has no intentions of personallymanagingthe new business, would like to serveas a supportive he consultant-stockholder. is especiallyattracted to the prospectof purchasing He a restaurant,sincehe made his start in business twenty-two yearsago asthe manager of a successful steakhousein Kansas City. In the following interview,Guinn detailsthe restaurant's pasttrackrecordand assesses future potential. its "The Iron Kettle here in Salina is up for saleby Hugh Dyer. Hugh owns a food-franchiseoperation called the chisholm Trail chuckwagon. He has four of thesein Kansas,including one unit here in town. The chuckwagonserves barbeque and cold trimmingson styrofoam platesin a stand-upcafeteria line. The restaurants are heavily decoratedin a cattledrive western motif-you know, lots of knotty wood-paneling, seats shaped like saddles, and six gunson the walls. "Based on over twelve years of success with the Chuckwagons, Dyer decided he would like to use the samefood formula in a slightly higher class setting.So in the summer of 1978, he opened up a place called the BarbequeBarn in a subdivision on the outskirts of salina. It sat on 3.29 aqes of land with a split-level stonehousebuilt during the fifties. "He paid in the neighborhoodof $60,000 for the property and then sunk another $10,000 to $15,000 into redecorating the house.He put in new plumbing
185

186

ExperiencePhase III: Venture Transition

and heating and air and recreated the western,cattle-drivetype motif inside.The settingwasmore elegantthan the Chuckwagon-moretastefuland lessgarish. "He set up a cafeteria-style plates and serving line again using disposable utensils.However,customerscould take their food to any of three largerooms and eat in quite comfortable surroundings. They could even go out back and dine on shaded picnic tables. The BarbequeBarn's menu was more varied than at the Chuckwagon and somewhat more expensive-inthe $5-$7range. "The Barn lastedjust about a year before folded. I it attribute its failure to lack of promotion and customerconfusion.Dyer did almost no advertising whatsoever,despite the fact that the Barn was almost hidden from public view on its large,shaded lot. "To make matters worse, the way he set up his menu was very confusing. He featured too many dinners that were almost alike. For example, the Barn served chopped barbeque beef, pinto beans and potato salad on the Trailblazer dinner. The Trailbossdinner had chopped beef, potato salad,and corn muffins. Then the Maverick dinner was simply a combination of the previoustwo: beef, potato salad, beans, and muffin. Very confusing. In all, thirteen dinners were served with little differentiation. And, incredibly, the Barn listed peanut butter sandwicheson the menu for $1.20 and large dill pickles for a buck each. Now who's goingto go to a supposedly nice restaurant and order that? "In a last ditch attempt to keep the doors open, Dyer unsuccessfully experimented with a few marketing gimmicks.He gaveaway free homemadeice cream with everymeal;he had an'all-you-can-eat'sirloin steaknight;he evengaveaway cheapie cowboy hats to children under eight years of age. All to no avail. The Barbeque Barn finally closedin July of 1979. "Then in November,Dyer reopenedthe restaurantunder the name 'TJ's.' He put his son-inlaw in chargeand undertook extensiveinterior remodeling. Two new stone fireplaceswere installed.The cafeterialine was abolished.Snazzycarpeting and drapeswere put up and a small dancefloor was installedover in one corner. "Dyer's son-in-lawintroduced a new decor to the place.He wanted it to be more cosmopolitanand sopfusticated. liquor licenseto servemixed drinks was A dbtained. The menu was completely reformulated,this time emphasizing chicken, shrimp, seafoods, and a massive salad-bar table molded into two largeletters,T and J. Customers were waited on at their tables. "TJ's made an attempt at advertising initially by putting a mobile signin the long driveway entranceway promoting the revisedmenu and availabilityof liquor. They also took out a small ad in the television-log sectionof the local newspaper. The ad read: 'Cometo TJ's for a memorable of evening dining elegance.' "Businessnever caught on at TJ's. I think Dyer had not learnedhis lesson from the BarbequeBarn experience.The image of TJ's was never really clearly defined for potential customers. TJ's divergedsharply in menu and decor from the BarbequeBarn, but you couldn't tell it from the rustic exterior of the buildingwhich wasn't renovatedat all-or from the meageradvertising. Peopledidn't seem to know whether or not it was a family restaurant of because the liquor. Also much

Iron Kettle Restaurant

t87

of the western motif left over from the BarbequeBarn lingeredat TJ's-like the paneledwalls and wrought iron fixtures. "Dyer's son-inlaw wasn't experienced the restaurant in business certainly and didn't excel as a manager. After five months of operation,he and Dyer mutually agreed closeTJ's. The son-in-law to went back to colleeefull-time. "In April of 1980, Dyer put the property up for sale.That was six weeksago. He wanted $175,000and offered to carry the mortgage himself for 10 percent, which was two-and-a-half points under the prevailingprime. The purchasing price included the land, building, and all restaurantequipment. Estimating somewhat conservatively, figure Dyer has $90,000 to $110,000 tied up in the place.How I desperate is to unloadit I don't reallyknow. he "Severalparties have looked at the property for possibleuse as something other than a restaurant.A group of doctors looked at it as a potential clinic site but lost interest when the need for extensive remodeling work became apparent.A local real estate firm toyed with the idea of moving their headquarters there but eventuallybackedoff. "I still have great faith that a restaurantcan be successful there. With some aggressive marketing and dedicated management,there's no real reason why a restaurant wouldn't succeed. would certainlymake for an interesting It challenge. "I could seecalling the place the Iron Kettle Restaurantand pitching it asa family-style eatery with home-cookingand moderateprices.The decor is already set up for this kind of operation. "The facility is located on a major highway next to an upper middle-class subdivisionin salina. It's not far from a new strip-type shoppingcenter presently under development.That should help traffic flow to this end of town and enhance surroundingproperty values. "I'm really intrigued with the idea of the Iron Kettle, although I haven't completely convinced myself to take the plunge. But the situation does look attractive; there's doubt about that.', no E X HB I T3 4 . 1 I D E S C R I P T I O O F P H Y S I C A LF A C I L I T I E S N Lot: 3.29 acres, includingnumerousshadetrees;200-yardlong winding driveway entrance;completelandscaping adjacentto the restaurant; underground sprinkler system;asphalt parkinglot for 150 cars;7redwoodpicnictables and benches. Building:4200 squarefeet; split-level rustic stoneexterior; screened back in porch dining area;44table and chair units seating150 people;nearlynew furnishings and interior decorating; wood panering throughout; 2 seiviceable fireplaces; danceareaand bandstand covering30 feet by 25 feet;fairly new central heatingand airconditioningsystem. Equipment and utensils:well-appointedkitchen with commercial microwave oven and dishwasher; completedining utensilsfor 200 people;smallcold-storage room.

t A n a l y s i s :S h o u l d M r . G u i n n p u r c h a s eh e p r o p e r t ya n d o p e n t h e l r o n K e t t l e ? e W h a tw o u l d b e a f a i r p u r c h a sp r i c e ? w w M t " t a k e t h e p l u n g e , " h a t a d v i c e o u l dy o u o f f e r A s s u m i n g r . G u i n n d e c i d e so promotethe venture's success? short-run and long-run him to

188

filtration casner systems

35
manufactures air-conditioningfilters, heatingfilters,and CasnerFiltration Systems specialtyfilters for heavy-dutyconstructionequipment.Startedin 1954 by Mendal through the yearsand currently employs 158 workersin Casner,the firm prospered plant. its downtown Minneapolis a he Mendal Casnervisited his physicianrecently and received grim surprise; was diagnosed being terminally ill with cancerand givenonly six months to live. as Casneracceptedthe news with remarkablecourage,insistingthat he had enjoyed a fifty-six contented yearsand had amassed rather sizableestateto passon to his family. He had just one concern revolving around his lifelong desireto passon his businessto his only son, Keith. Keith Casner was finishing up his B. B. A. degree and working part-time in the evenings a production supervisor the filter plant. as in Keith has always felt that he would, one day, succeed father in the business his but had hoped to pursue a careerin public accountingfor a few yearsbefore taking over Casner Filtration. His planshad changed abruptly. By mutual agreement with his son, Mendal Casnerwas determinedto spend Filtration his final months preparingKeith to assume the leadership role at Casner Both father and son were committed to makinga successful transition. Systems.

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Exoerience Phase IIL' Venture Transition

plan of actionfor the Casners follow in preparing to Analysis: Formulate detailed a FiltrationSystems. Bearin mind the limited Keith to take overthe reinsof Casner a m o u n to f t i m e t h e y h a v e v a i l a b l e . a K r W h a ta r et h e p r i m a r yp r o b l e m s e i t hC a s n eirs l i k e l yt o e n c o u n t ew h e nh e i n i t i a l l y takesoverthe comoanv?

animator toys

36
Animator Toys, Inc., is co-ownedand managed Boyd Dameronwho foundedthe by company in 1964 in Van Nuys, California,its presentheadquarters. Animator operatessevenretail storesof varying sizein a fivecity regionof southernCalifornia: Van Nuys, I store; Glendale,2 stores;Altadena, I store; Monrovia, I store; and Arcadia, 2 stores.Dameronholds 5l percent of the company'scommon stock. A1l other stock is held by three individuals: Burrell Dulany, Animator's treasurer,3l percent; ChesterWolske,operationssuperintendent, percent;and Alton Ballard, l5 a Van Nuys physician,3 percent. just over $5 million in grossrevIn 1980, Animator's sevenstoresgenerated enues,leavingan operatingprofit in excess $550,000. Fortycight full-time emof ployees in addition to the four ownerswork for the chain, including a warehouse crew of five. Besides the sevenretail outlets, Animator owns three smallinventory warehouses locatedadjacentto the headquarters storein Van Nuys. Boyd Dameron,who is fifty-two yearsold, beganhis retailingcareerwith the FederatedDepartment Store group in 1960. He developed acumenfor the toy his industry as a buyer of toys at Federated.ln 1964, he left Federatedand opened Animator's first store in Van Nuys. Since that time he has servedas Animator's chief executive officer. Dameron is well-known throughout California as a longdistancerunner, having won over fifty medalsand trophies for his age categoryin state marathons.He is also an avid hot-air ballonist and amateurmagician.As Mr. Dameronputs it: "No one has everaccused of leadinga dull life!" me

t9r

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Experience Phase III:

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In reviewing sixteen years of operations, Dameron points proudly to a number of business highpoints: adding a secondstore followed by five othersover sixteen years; expanding geographically in southern California; maintaining majority ownershipof the company;growingin sales and profits for elevenstraight years;steadily expandingthe product line to a wider rangeofage groups;avoiding all long-termdebt. Inoking further into the on-rushingdecade,Dameron is preoccupiedwith "Oh one large challenge-mall merchandising. sure," he explains,"there's always the problemsof inflation, recession, sales seasonalism, federalregulationin the and toy business,but we've dealt with them fairly capably in recent years. Most industries have been infected with these gremlins.What I'm honestly concerned about for Animator going into the '80s is the nationwidetrend to mall merchandising-you know, those giant encloseddevelopments that are practicallya city under one roof. "More and more retailers with flashy product lines are stakingtheir futures on malls. The more successful toy outlets are certainly no exception. They're closing down existing stores and openingup mall operationsright along with the jewelers,specialtyapparelshops,departmentstores, and book mass-merchandisers. I'm worried that if our stores don't jump on the bandwagonsoon, our larger national competitors will grab up all of the choice mall slots here in southern California."

Competitive Strategy "You name it, we've got it! Of courseI exaggerate somewhatbut Animator stores pride themselves offering a full-blown product line. No way do I want to hear on that customerscan't find what they want at one of our stores.If there'sone thing I really stressto our store managers to keep a full line of stuff in stock. This is it's our trademark-our competitiveedge." Boyd Dameron elaborates further on Animator's product-linestrategy: "We really market a great deal more than toys as people traditionally think of them. We'reheavily committed to hobbies,crafts,certainly electronicgames. sell loads We of bicycles,scooters, and even some unicycles,believeit or not. We sellnumerous items to collectors, from superherocomics and tournament Frisbeesto stamp mounting kits and high fashion dolls. We sellleather-tooling items,silk-flowerconstruction packets, decoupage supplies,and modeling clay. When Animator advertisesthat we are the store for toys, hobbies,and crafts,we definitely meanit." Dameron estimatesthat approximately 30 percent of salesgo to the adult market, which has more stable demand and fewer fads than the youth market. Dameron cautions,however,not to segment market into the simpledichotomy the of adult versus childrentoys. In reality, at leastseven market segments exist: infant, toddlers,youth, early schoolage,pre-teen, teen, and adult. Within eachsegment lies

Animator Tovs

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additional stratification as well, including male-female,disposable-durable, and "rough house" versus educationaltoys. "By no meansdo we have a simple marketing job," commentsMr. Dameron. "Toys, games, and amusement items appeal to people of all categories. Any way you sliceit, there'sgreatdemandfor what we sell." Dameron admits he finds it difficult to cope with the conceptof targetmarketing. "For yearsI struggled with the questionof which market segment Animator should really zero in on. Should it be the largestsegment faddist children'stoys, of or high-profit-marginadult toys, or the hobby-craftssegment? guessI knew the I answerall along-go after all marketslargeenoughto be profitable.This strategyis in keepingwith our full product line and extensive inventory.Why shouldwe limit our stores and passup opportunitiesto make money? I think our nonspecialized approachseparates from competitorsand persuades us customers form a lasting to relationshipwith us." The Animator stores strive to be competitivein pricing, but Damerondoes not endorsethe "discounting" approach.Although some items in the product line carry as much as a 50 percent price mark-up,most average about l0 percent."The whole idea of so-called discount pricing is a bogus concept in retailing today. Discounting from what, the manufacturer's suggestedprice? That practice has practically disappeared from the scene.It's an anachronism from the 1950swhen discount houses in the legitimate sensebegan mushrooming.But in 1981, price competition is not so simplistic and cut-and-dried.Animator beats K-Mart and Woolco in price on many toys, even though they may have brought in larger volume. They don't necessarily rock-bottom prices on every item-it's not a set part of their overall strategy.Likewise,Animator doesn'tjack up the price tag on everyitem, simply because isn't our overallstrategyto do so." it Dameron explains that price competition is toughest on toys designated as major-line,comprisingthe most popular and heavily advertised new offeringsfrom "We may not the mainline manufacturers (Mattel, Tonka, Fisher-Price, Marx, etc.). alwayshave the absolutelowest price in town on theseitems,but Animator is more likely to have them in stock at any given time of the year. Toy departments in many department storessuchas Sears and Penney's may carry a full inventory only during the Christmas season. Animator is reliableyear round." In addition to carrying a full product line, Animator offers severalother which Dameron feels provide an extra competitive dimension. customer services Theseinclude personalsalesservice,free product layaway, storefrontparking,free bicycle assembly,and gift wrapping priced at cost. Dameronfeelsthat Animator enjoysa high percentage ofreturn-customerpatronage,eventhoughhehasnohard data to prove it. The Animator storesemphasize imageorientedadvertising through radio and newspapers. Televisionis used only in Novemberand early December.Each store managerhandleshis own advertising, but all are encouraged Dameronto stress by product line and mix of services. Animator's wide-ranging According to Dameron, the ideal imagefor Animator is that of the "old fashion" personal service store.

Exoerience Phase III:

Venturc Transition

What are the pros and consof strategy. A n a l y s i s :E v a l u a t e n i m a t o r ' s a r k e t i n g A m " f u l l - b l o w n "p r o d u c tl i n e ?l s the company's targetmarket adequately h a v i n ga defined ?

StoreOperations Each of the seven Animator storesare organizedinto five profit centers:toys, the games, hobby and craft items,bicycles,and books.Exhibit 36-l summarizes profit margin volume. Exhibit 36-2 showsthe average contribution of each to sales productcategory. for eachgeneral

EXHIBIT36-1

PROFIT ENTER ONTRIBUTIONS C C (by percentagegross 1975-1 980) of sales volume,


Percentages 1977 1978 46% t7 9
a i

t915
Toys Games Hobby/Craft Bicycles Books 53% 15 6 24 2

1976
49%
t+

1979 4l% 24 2 9 19 7 100

1980 43Vo 23 8 18 8 100

8 25 4 100

4 100

42% 19 1 22 s 100

TOTAL PERCENTAGE lOO

E X HI B I T 3 5 - 2

P M AVERAGE ROFIT ARGIN (by product category, 1975-1 980)


Percentages 1977 1978 67o 6 30 15 8 57o 8 29 16 9

1975
Toys Games Hobby/Craft Bicycles Books

1976
8% 7 32 14 l0

1979
47o 8 28 t4 l0

1980
5% l0 28 12 7

7% 9 32 t4 12

Animator Toys

195

is Approximately As Exhibit 36-3 testifies,the toy business highly seasonal. are from October through Decem60 to 70 percent of annual revenues generated ber. In Dameron's words, "The only person who works harder than we do at Christmas old Santahimself!" is

E X H I B I T3 6 - 3

P E R C E N T A G E A N N U A LS A L E S O L U M E OF V (by months theyear) of


Percentages 1977 1978 2% 1 3 4 5 4 4 4 3 24
52

1915
January February March April May June July August September October November December TOTAL PERCENTAGE

1976
l7o
I

t919
I7o 2 5 5
J

1980
)q^
J

l7o 2 2 4 4
J J

2 7 6
J

4
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Business affects not only cash-flowpatternsbut also purchasing seasonalism Purchasing typically done at leastsix months in advance, and warehousing. is oftentimes even more on specialty items. Mr. Dameron attends severaltoy shows nationally during the spring months and does spot orderingas late in the year as Most of the ordered merchandise inventoriedby July or Augustand September. is in placefor the Christmas season. "Our biggestproblem with ordering is associated with cashflow," Dameron explains. "This is to be expectedin any seasonal Without liberal trade business. credit to carry us through the summer,we'd be in a fix. Fortunately,manufacturers understand our plight and generallygive us November and Decemberdating on orders.In the meantime,we havea whaleof a lot tied up in our warehouses." Animator's inventory warehouses all located in Van Nuys adjacentto the are headquarters store. Forty thousand squarefeet of inventory spaceare spreadout over a patchwork seriesof interconnecting warehouses immediatelybehind the retail showroom. "I guess we're lucky that the warehouses unobtrusive are and don't

r96

Experience Phase III:

Venture Transition

detract from the store's appearance,"observes Dameron. "Rarely can a retailer combineshowroomspace and warehousing a singlesite." on The outlying storesin Glendale, Altadena,Monrovia,and fucadia are serviced by trucks leased by Animator. The headquarters store in Van Nuys servesas a central distribution center. Dameron feels that a number of operatingefficiencies accrue from centralizedwarehousing, but concedes that it may limit further geographicalexpansion."Until Animator grows so large that our storesaren't within easyaccess truck, we'll keep the warehouses by here in Van Nuys."

TheMalllssue "Location is Animator's Achilles heel," Dameron candidly admits. "Most of our storeswere opened during the late 1960sand early 1970sbefore the enclosed malls capturedretailing. Malls are the wave of the eightiesas I seeit. Mall merchandising is certainly where our competitorsareheading.I don't want Animator to fall by the wayside. Animator's competition comesfrom every direction: discounthouses, department stores,sporting goods outlets, craft and hobby shops,and toy chains.The latter, both regional and national, are perceivedby Dameron to be Animator's strongest future threat. Included among these specialists various parts of the in country are Toys by Roy, CircusWorld, Kay-Bee Toys, Toys R Us, Kiddie City, and F.A.O. Schwartz. Dameron elaborateson the perceivedthreat to Animator: "The national firms, and even several the regionalones,are well financedand aggressively of expanding throughout California. When they enter an area for the first time, they naturally gravitatetoward malls. Therewe sit with a free-standing strip shopping or centerstore while the customers going to the malls. are "Don't get me wrong - our sevenstoresare attractive in appearance and in decent traffic patterns, but none are in malls. Of course,there are a number of business disadvantages mall retailing,but one hasto go wherethe action is." to Exhibit 364 describes physicalfacilitiesof Animator's seven the stores. Animator's three other stockholders ambivalentabout possible are relocation of storesin enclosedshoppingmalls. Burrell Dulany, Animator's treasurer, concurs with Mr. Dameron that mallsare currently popular but is reluctantto "messup the balancesheet" with substantial new capitalexpenditures stemmingfrom relocation. Operationssuperintendent,ChesterWolske, sayshe's not afraid to "plunge into debt" but has seriousreservations about the long-termstayingpower of malls. He tersely comments, "I'm not at all sure but what they're just another retailing fad." Alton Ballard, a Van Nuys generalpractitioner, tends to agreewith Boyd

Animator Toys

197

Dameron on the need to "beat our competitorsto the draw" on mall expansion. He notes, however, that the existing enclosedmalls in Van Nuys, Altadena,and Monrovia are as yet quite small in size and that the Glendaleand Arcadia malls phases. are only in the community-planning All four stockholdersare in unanimousagreementon one thing, however: to a any mall storesopenedby Animatorshouldbe largeenough accommodate full product line in keepingwith Animator'sdesired edge.As Mr. Dulany competitive puts it, "We're not about to let mall merchandising crampour style." TreasurerBurrell Dulany feels he has "done his homework" adequatelyin analyzingthe pros-and-cons mall retailing. "There are several of factors to be constore, we can pretty much sideredabout mall operations.By being a free-standing call our own shots the hours we will be open for business thingslike that. One and of the major disadvantages being in a mall is that we would have to stay open of approximately ten to elevenhours daily, even in the slow season when customer traffic is way off. "Another revolvesaround the costsof gettinginto a mall. Rent disadvantage would certainly double over our presentcosts,and that's not evenconsidering the two storeswe're free and clearon. Utilities would undoubtedlybe highertoo. "Another concernsthe sheer enormity of malls. Many people disadvantage much prefer a free-standingtype store where they can drive right up to the entrance.To get to any particular store in a mall, they may have to walk half a mile. "One more problem concernslack of protection againstcompetitive firms coming into the mall right along with us. We'd be behind the eight ball if Circus World or somebodylike that were to locate right there under the sameroof with us." Mr. Dulany concedes that his accounting orientationgives him a naturalbias againstrelocation. "I admit that I'm fiscally conservative, but I still don't think Animator needsto be in malls." Boyd Dameronis otherwisepersuaded about malls and not reluctantto air his views. "I have the highestpossiblerespectfor Burrell and to would be hard pressed guidance.However,I do feel he is being pennyrun Animator without his expert wise and dollar-foolishabout the mall issue.I mean, so what if we incur somenew operatingexpenses-most, not all, of our storesare in a pretty good position to if take on heavier leasepayments.We've done a darn good job of keepingour expenses down on mortgages.I'd much rather be in a mall, even with its high expenses, that's where the customers if are. "Neither would I mind havingto compete head on againstanotherspecialty toy store if they should happento alreadybe in a mall or move in subsequently. I think we can more than hold our own against competition." the Dameron concludes,"As the times change, we've got to changeright along with them. Marketing is what the toy business all about. Enclosed is mallsare with us to stay in retailing."

Towards The Future "Ideally, I'd like to expand all throughout southern California with Animator stores maybe add five or ten more by the end of the decade."Dameronthus sums up his future vision for Animator. "We havewhat I feel is a pretty fair track record '80s? so far, so what's to hold us back in the I wouldn't necessarily averse be to going public so long as I could maintain controlling ownership.The only thing I definitely don't want to do is stand pat with things as they now exist. Stagnation isn't part of my workingvocabulary."

A n a l y s i s :R e c o m m e n p o l i c y g u i d e l i n eo r t h e m a l l e x p a n s i o n s u eW h a ta r et h e d f is . i n h e r e n r i s k s n do p p o r t u n i t i eo f m a l le x p a n s i o n ? t a s

E X H I B I T3 6 - 4 ANIMATOR PHYSICAL FACILITIES

Store l,ocation Description


I

Age l6 years l3 years 12 years 12years 10 years 8 years 6 years

Size 3 5 0 0s q .f t . 3 3 0 0s q .f t . 4300 sq. ft. 5 2 0 0s q .f t . 6000 sq.ft. 5200 sq. ft. 7850 sq.ft.

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sicorski and associates

37
Davis Sicorski is managingpartner of Sicorski and Associates, venture capital a partnershipin San Franciscowhich specializes business in buy-outs.over the past nineteenyears,Mr. Sicorskihas served consultantin over two hundredbuvouts. as earninga reputationas a leadingexpert in pricing the going concern. Mr. Sicorski, what methodsdo you use in determiningthe worth of a company that is up for sale? Unfortunately, there is no simplemethod of evaluationthat will satisfyall of the parties involved in a buy-out. After all, the buyer wants to use a method that derivesthe lowest possibleprice for a firm. The sellerwants the very highestpossible price. Then, of course,there are frequently mitigatingconsiderations, suchas the buyer's desire for minimum cashinvolvementand the seller'sthoughts of tax avoidance deferred and income. However, there are four evaluation methods which are used with some frequency: net worth, market value of assets, capitalizationof earnings, and available tax loss. Each approachhas its advantages disadvantages and depending the on particularsituationat hand. l{ould you please give us a situationalassessment eachevaluation of method. Okay, let's start with the easiestmethod, net-worth evaluation.All you do here is subtract total liabilitiesfrom total assets. Obviouslythis is a poor technique,

202

S icorski and A ssociates

203

a because firm's balancesheetmay or may not givea good picture of what the firm the net is really worth. In most cases, worth understates true value. are For example,assets probably carried at deflated costsfrom an historical may be period with a lower inflation rate. The replacementprice of those assets value. drasticallydifferent than the balance-sheet evaluation.The Depreciationrates also have a large impact on balance-sheet taxation purposes,thus businessmay have greatly speededup depreciation for worth. the understating asset's do The evaluatormust also bear in mind that many smallercompanies not generally acceptedachave audited statementsand may not always adhere to counting principles.This can really distort the net-worth estimation. involvesappraising The secondevaluationapproach,market value of assets, at the firm's assets somemarket value.Determiningwhat market valueto useis the situation, replacement real challenge.Should it be market value in a forced-sale market value, or market value if the assetscould be sold gradually over time as buyersarelocated? I'Yhichmarket valueapproachdo you favor? Well, againit dependson the needsand expectationsof the partiesinvolved. market value would be logical only if immediateliquidation were The forced-sale shouldbe calledin' an anticipated.Under suchcircumstances, expert appraiser generallywould favor the sellerof the business, Market value for replacement value Market value and replacement since inflation hikes the price of most assets. basis. on are are similarwhen assets evaluated the soldover-time a If the buyer has some doubts about the firm's capacity to generate profit In assets. to attain a good dealon evaluating immediately,he should certainly strive "goodwill" or what's sometimes referredto particular,he should avoid paying for is as "blue sky." Trying to put a number on a company'simagewith customers generallytoo subjective. The third evaluationmethod, earningscapitalization,basicallyseeksto proof If ject future earningsfrom the company'spast performance. the future earnings could be detera company were known with certainty, the worth of any business mined easily. However, since few of us are clairvoyant,we use the next best approachof capitalizing earnings. Exactly how is this done, Mr. Sicorski? It involvessolvingtwo problems. First of all, you must determinewhich past or earningsto use. Secondly,you have to gaugeat what rate to capitalize, affix a Let growth percentage, thoseearnings. me explainbriefly. to Since the profit track-record of a company may be inconsistent,it is no rate to use in gaugingfuture simple matter to determinewhich historical earnings earnings.Some people merely take an averageof three or five past years, and I

Experience Phase III:

Venture Trunsition

generally find this acceptable. The evaluatormust take great care,however,if he uses recent earningsfor the projection. These can easily be distorted by a slick accountantwho is dressing business sale. the for In determiningwhat percentage rate to place on earnings, the buyer should considerhow risky the venture is and what alternateinvestmentopportunitieshe has available.The higher the risk and the more alternatives available, lower the the earnings shouldbe capitalized. The fourth evaluationmethod is availabletax loss.If the potential purchaser can lower the taxes of his presentcompanyby utilizing tax writeoffs accumulated from lossesof the for-salefirm, evenan unhealthy looking firm can be a prudent buy. of course,the buyer must have confidencethat he can turn the company around and quickly nurseit back to financialhealth. Is price always the most important consideration in buying or selling a business? Not always.Sometimes the terms of purchaseare far more important to the partiesinvolved than the price. For example,the sizeof the down paymentis often of critical importanceto the purchaser. Many entrepreneurs long on enthusiasm are and willingnessto work but short on cash.Their primary concernmay be simply to get enoughafter-tax dollars to pay for the business. fact, to get proper rerms,a In new entrepreneur shouldbe willing to pay a premium for an established business. Can you cite someexamples theseterms? of certainly. The sellermight accepta relatively small amount down, with the remainderpaid out of earnings over a time period long enoughto allow a cushion for businessfluctuations. or the buyer might purchase the controlling shareof a closely-held corporationand then purchase remainingshares over time. In one recent deal I was involved with, the sellerof a business surprised was to hear the buyer offer 20 percent more than the sellerhad asked.The buyer was willing to pay the premium in return for prorating paymentsgradually out of earnings.The seller was happy to close the deal because was in no particular he hurry for the money. It may also be possiblefor an entrepreneurto purchasea company while employed by its presentowner. If the buyer feelshe has skillsto more fully tap the company's potential, but he lacks purchasing capital, he might arrangeto pay for the firm out of earnings increaseshe ableto generate is while working there. Since terms are of major importance in a purchaseor sale,the prospective buyer should refrain from discussing price until the negotiations have nearly concluded. Too many times the first questionaskedis "what price do you want for your business?" when, in fact, the openingquestionshouldbe, "what do you plan to do with the funds that you derivefrom sellingyour business?" once the buyer understands the seller'sintentions, he is in a much better

Sicorski and A ssociates

205

position to discussterms of purchase.For example,if the seller intends to pay off his home mortgageand take a six-month vacationand then wants to live off interest income derived from selling his business,the buyer can calculate the total costsinvolved and offer a higher interest rate than the sellercould get otherwise. Both partiesclosethe dealamicably. In other situationswhere the sellerplans to reinvestonly a part of the funds derived from selling out, terms can be developedwhere the cash portion of the amount. As I mentioned earlier,the payment is staggered equal the reinvested to terms of a buy-out may often be more important than the sellingprice. worth? In the final analysis,Mr. Sicorski, what is a business Its ability to producefuture earnings.

preferto purchase existing business rather an Analysis:Why would an enterpreneur t h a ns t a r th i so r h e r o w n ? a To what extent is the worth of a business function of the time valueof money? t s b , B e s i d ets e t h i n g sm e n t i o n e d y M r . S i c o r s k iw h a t o t h e rf a c t o r s h o u l d h e b u y e r h c s o f a b u s i n e sc a r e f u l l y o n s i d e r ?

nardiscreations

3B
In late 1980, Todd Dodge was at the helm of Nardis Creations, small greetinga card company headquarteredin l,ong Island, New York. Since 1977, Nardis Creations had beenin the red, losing$250,000in 1980 alone.Former CEO John Carrisi steppeddown in April, 1980, to make room for Dodgewho had been brought in by the Nardisfamily to turn the companyaround by 1982. Dodge had a well-established reputation as a "turnaround artist," having re"dog" vitalized two companies into "stars" in a six-yearperiod. When brought on board Nardis Creationsin the summer of 1980,he wasgivenfree reignto shakeup the company as deemednecessary. The Nardis family wanted the firm to show a profit of $200,000 by the end of 1982, giving Dodgejust twenty-four months in which to make the $450,000 turnaround. A lucrative profit-sharingcontract was more than adequatemotivation for Dodge,who fanciedhimself as a modern day "gunslinger."

The NardisProductLine Hallmark and American Greeting dominatedthe greeting-card industry. A host of smaller companiescompeted in the industry, doing business the $3 million to in $10 million range. Nardis, with salesof $5 million, specialized Christmascards in and distributed a line of stationery and wrapping paper. It had also been experi mentingwith a gift line. 206

Nardis Creations

207

Nardis Christmascardssold at the very top of the price rangeat $40 to $250 per 100 cards. All cardswere tailor-madeto meet customerspecifications. Nardis offered 220 different covers,187 greetings,43distinctivetype styles,and 8 colors. Envelopes came in 8 separate colors and were either unlined or lined with gold or silverfoil. ln 1979 the average card order was $70 per customer. Nardis added stationery,wrapping paper,and gifts to its line in order to give its salesrepresentatives additional items to offer customers. The gift-wrappingline consistedof $15 and $25 packages containingpaper,appliques, and ribbon. Since its introduction in 1975, wrappingsales had beenminimal. The stationeryline consistedof twenty-five items rangingin price from $14 to $25 for twenty-five personalized sheets,twenty-five plain sheets, and twentyfive envelopes.Stationery salesvolume was about 25 percent of that for cards, but the averagestationery order was for only $17 versus$70 for cards.Over the past fourteen months, a rather sizableinventory of discontinuedstationerystyles had accumulated. The Nardis line of gifts, initiated in 1977, included jewelry, silver,crystal, and luggage.All pieceswere manufacturedby prestigecompanies such as Cartier and St. Croix. Introducedwith considerable fanfareand a splashy$50,000catalog, the gift line enjoyed little financial success. Since 1977, ordershave been on a 5 percent annual decline despitea growing per order average. Exhibits 38-1and 38-2 summarize1980 sales product line and greeting-card by category.

Operations Problems Todd Dodge saw a number of internal problem points plaguingNardis, including cash flow, composition of the card line, sales-force inadequacies, a disturbing and auditingreport. The company'scash-flowproblemscentered around the burgeoning inventory of stationery, an accumulation of receivables, and difficulties associated with financing finished-goods inventory. Most greetingcard customersdid not want to take delivery until after labor Day. Nardisthereforehad to keep a sizable quantity of inventory sitting idle during much of the year in anticipationof shipping.Dodge was concernedover poor salesfor three entriesin the firm's Christmas card line: Old Masters,scenic,and quotations and poems. He was also concernedwith the mismatchbetweenthe product offering and sales. The responsibilityfor designing and marketingcardslay with JeremyBlake,a 25-yearemployeeof Nardis.When askedby Dodgeto state his marketingphilosophy, Blake respondedthat his foremost goal was maintainingthe company's40year tradition of offering a completecatalogof holiday greetings cards. Dodge was alarmedover Nardis' nondynamicsalesforce consisting largelyof widowed women over sixty who sold cardsstrictly on a part-time basis.Although the top representative sold more than $40000 worth of merchandise annually,the vast majority of the 1,500 representatives lessthan $3,000 per year. sold

208

ExperiencePhase III: Venture Trunsition

Henry Gladstone,sixty-threeyears of age,headed-up the sales force. He was responsible for recruiting, determining territories, and training. Since health problems preventedhim from traveling,he dealt with the salesforce primarily by letter and telephone.Although Gladstone expressed concernover the lacklusterperformanceof much of his sales force, he praisedtheir loyalty and professionalism. One other "red flag" worrying Dodgewas a critical auditingreport just issued by Nardis' auditor. The report, excerptedin Exhibit 38-3, questioned number of a the company'scurrent financialand managerial practices. Working during the Christmasholiday of 1980, Todd Dodge preparedhis turnaround plan for l98l and 1982.He knew he was facedwith a formidablechallenge but resolved that he would successfullyrevive Nardis Creations.He had rescuedother sinking ships and was not about to lose this one. His reputation wason the line.

A n a l y s i s :D e v e l o p h e 1 9 8 1 a n d 1 9 8 2 t u r n a r o u n d l a n f o r N a r d i s r e a t i o n sR e c p t C . o m m e n d a c t i o n p r i o r i t i e sf o r t h e c o m p a n y ,i m p l e m e n t a t i og u i d e l i n e s , n d n a o r g a n i z a t i o nc h a n g e s . a k ey o u r p l a nr e s u l t s - o r i e n t ee a l i s t i c ,n d t i m e l y . al M r d, a W h a t d i f f i c u l t i e s s T o d d D o d g el i k e l y t o e n c o u n t e r n i m p l e m e n t i n y o u r t u r n i i g a r o u n dp l a n ? h a ta d v i c e o u l dy o u o f f e r h i m ? W w l s a " t u r n a r o u n d r t i s t "a t r u ee n t r e p r e n e u r ? a

EXHIBIT 8-1 3

,I980 P R O D U CL I N EO R D E R S T
Cards
January February March April May June July August September October November December TOTALS

Stationery 520 633 2',70


z3J

Gifts

Totals t,652 r,320 686 739 9,249 12,789 18,632 tr,247 7,464 10,40s 7,238 I,383 82,804

1,1l5

6s0
4t6 504 8,6t4 I 1,336 t4,052 8,180 5,033 7,333
( o.)')

t7 37

1,185 64,340

534 1,216 4,396 2,853 2,216 2,901 |,225 181 17 , 1 0 8

ror
237 184 2t4 2t5 l7l 9l 17 r,284

3 EXHIBIT &4 C Nardis reations I . C O M P A R A T I V E N C O M ES T A T E M E N T 1 9 7 8 - 1 9 8 0

1980
Net Sales Cost and Expenses Cost of salesand operating expenses Selling expenses General and administrative expenses Interest expense Total NET INCOME BEFORE TAXES

r979
$3,864,308

t978
8 $3 , 4 9 3 , 58

$4,839,700

2,317,566 I ,935,880 654,386 r27,900

1,880,301 1,545,723 400,590 107,348

1,7 4,126 8 1 , 3 9 ',t5 4 3 258,t99 83,491 3,523,359

3,933,962 5, 0 3 5 , 7 3 2 ( $1 9 6 , 0 3 2 ) ( $ 6 e , 6 s 4 )

($

29,s0r)

210

EXHIBIT 8-5 3 NardisCreations B C O M P A R A T I V E A L A N C ES H E E T ,1 9 7 8 - 1 9 8 0

Assets
Current Assets Cash Accounts receivable Allowance for doubtful accounts Inventory Prepaid expenses Total Current Assets Property and Equipment Leaseholdimprovements Machinery and equipment Office furniture and fixtures Transportation equipment Total Less accumulated depreciation Total Property and Equipment TOTAL ASSETS

1980
$

t919

t978

r2,2s'7 $ 1 6 , 3 9 1$ 2 9 6 , r 5 7 ' to 7 < t t 230,867 245,085 (20,000) (2s,000) (3s,000) 429,182 758,061 635,7ll 36,376 68,420 31,689 r,0r2,092 9 2 6 , 3 8 9 9 3 9 , 2 3 7 t94,647 346,376 85,659 643,326 424,234 2t9,092 4 18 8 , 1 8 340,205 83,871 13,126 s 6 2 5 , 30 35t,32r 274,029 t82,285 234,323 r 81,67 3,366 s01,645 3l 1,580 190,065

$1231J84

T]T*M F,roo-313
1979 1978

Liabilities
Current Liabilities Notes payable to bank Accounts payable Accrued liabilities (Salaries,wages,taxes, roYalties, commissions) Advancesby customers Total Current Liabilities Long-term Liabilities Total Liabilities Stockholder's Equity Net Earnings Additional Paid-in Capital Total Stockholder's Equity TOTAL LIABILITIES AND EQUITY

1980

$ 4 5 4 , 8 7 4 $ 428,304 $ 3 4 8 , 1 4 5 313,056 279,667 367,374 257,290 277,258 354,318 't,254 885,102 34,200 919,302 51,000 tt7,491 4t,509 210,000

10,834

1 , 1 8 7 , 4 0 0 1,025,872 34,200 34,200 1,221,600 51,000 (r48,19s) 106,7'79 9,584 $1,231,184 |,060,072 5l,000 47,837 4l,509 140,346

qr2qry_Lq1 2 9 , 3 0 2 $r,
2II

goodbuygrocery

39
"Goodbuy has a new leaseon life and I'm goingto take full advantage it. Three of with a Today we are blessed months ago, it looked like we were out of business. golden opportunity that can literally put us back on the map, If we play our cards the right by making prudent decisions, future will be much brighter than the past." Roger Herrington, owner of Goodbuy Grocery,just receiveda check in the company.A fire, judged tobe accidental, amount of $125,000from his insurance had completely gutted Goodbuy three months earlier. After the usual insurance doubts and delays,Mr. Herringtonwas awardedthe casualtyclaim.He immediately Goodbuy's to consideration revamping made plans to rebuild but wasgivingserious strategyaswell as relocatingat a new site in Canton. sales In 1967, Herrington built Goodbuy in an older, residentialareaon Canton's east side. Managingthe storewith his son Lester,Herringtoncarvedout a neighborhood niche. The store generated fairly healthy income for the Herringtonsfrom a deteriorationin 1977 and continuedto 1967 to 1976 but entereda period of sales declinethroughout 1978 and 1979.The ruinousfire in Februaryof 1980 closedthe store. "The fire may havebeena blessing disguise. Kroger in CommentsHerrington, was the beginningof the end for Goodbuy. The handwritingwas on the wall. With my insurancemoney, we can put Goodbuy back on the Canton map. A new location and marketingphilosophyshouldgiveus the fresh start we need."

Store The No-Frills "the up-and-coming "As I seeit," Herrington observes, thing in canton and across the nation is discount food retailing.More and more storesare switchingto the nothe their pricespretty much across board." frills approachand slashing offer a limited array Discount outlets. often referredto as food warehouses, pricesrather than pricesmarkedon each of products, no shoppingbags,and posted individual item. Oftentimesproductsare displayeddirectly in open boxes.Discount little and frequently stores typically employ only a skeletoncrew, they advertise such as refrigerateddisequiprnent, food-maintenance dispensewith all expensive generallyare fresh produce,dairy items, and perishables play cases. Consequently, labeled. not stocked.Many items are generically no-frills stores require less In comparison with conventionalsupermarkets, in fixtures. According to infloor spaceand operateon a much lower investment would refoot conventionalsupermarket dustry statistics,a typical 25,00O-square store would require only quire $800,000 in fixtures and inventory. A no-frills The no-frills out$50,000 to start and have one-tlird to one-halfof the floorspace. percenton most durableitems,such let would offer price discountsfrom 10 to 30 as cannedgoods,sugar,and flour. Mr. Herrington expressesunreserved support for the no-frills concept. "Judging from the success Kroger's no-frills operation near Goodbuy's old site, of of today's food shopperis keenly conscious price'" Kroger's Bi-Lo stores pursue a strategy of combining discount pricing with "all Bi-Lo products are not only product quality. Kroger ads make the claim that but often superiorto their famousnamebrand equivalents'" comparable

E X H I B I T3 9 . 1 SUPERMARKET COMPETITION IN CANTON

Houchens Winn-Dixie
Number of Stores Years in Canton Averagesize of store (sq. ft.) Location in city

IGA

Kroger* 2 6 2 1, 0 0 0 Northwest East

J I 2 q A t6 14,5 0 0 22,OOO 16,000 Northwest Northwest Northwest South Southwest East

Approximate local market share


xDoes not include Bi-Lo store

2T

t3

l9

25

213

Supermarket Competition Canton in According to Herrington, the chancesof succeeding with a new no-frills store in Canton hinge on two factors: store location and competition. "Kroger has proven to me that the no-frills approachcan work in Canton. I think they could have picked a much better location than they did, though. Canton'seast side has quit growing. I should know, sinceI operatedthere for more than a decade.But their mistake is potentially my gain. There'sno reasonwhy I have to rebuild Goodbuy in the old location. I can relocatein the suburbswhere all the growth is occurring. "From the standpoint of local competition, the time is now ripe for opening another discount store. This is especially true for the suburbs, whereno-frills competition is absentaltogether." Canton is presently servicedby four supermarkets: Houchens,Winn-Dixie, dataabouteach. IGA, and Kroger.Exhibits39-1 and 39-2 present competitive
EXHIBIT39-2 PRICE COMPARISONOF CANTON SUPERMARKETS

Houchens
( Cheerios l5 oz.) Sugar (5 lb.) Tuna fish (6.5 oz.) Dog food (14.5 oz.) Sliced peaches Vegetable oil Bar soap (5 oz) Alka Seltzer I gallon whole milk I lb. butter
*Does not inolude Bi-Lo store

Winn-Dixie .95 I.13 .59 .29 2.0dloz 3.1(loz .39 5.8dltab N/A N/A

IGA .89 I .09 .74 .34 2.64loz 4 . 2 (l o z .33 3.2(ltab 1.95 1.39

Kroger* .98 I .13 .59 .29 2.0(loz 3 . 7( l o z .39 5.8dltab 2.t6 t.79

.95 1.09 .65 .31 2.8(loz 3 .1(loz .39 3.2(ltab r.69 r.49

Exhibit 39-3 presentsdemographicdata for Canton's four dominant resleast,northwest. dentialareas: south,southwest,

A New Lease Life? On "I have given considerablethought to opening another no-frills venture here in Canton. I've got the capital and experience do it, and the presentcompetitive to "I've situation is giving me the greenlight. Furthermore," Herrington points out, got a definite competitivestrategyin mind.

214

EXHIBIT39-3 1980 DEMOGRAPHIC DATA FOR CANTON

(by residential area) South


Average home as percent of Canton mean value: Population as percent of total Canton population Percent minority group Percent over 62 years Percent under 18 years Annual population growth-rate

Southwest

East

Northwest

88% 227o

91% 24% 9Vo r7% 407o

s3% 34% 41%

115% 20% O7o

r9%
7%

3s%
28%

r2%
42%

4r%
7%

( l 9 7s - r9 8 0 )

rr%

-s%

2r%

"I plan to locate in the affluent, mushroomingnorthwest side with 16,000 squarefeet. I'll be open sevendays a week, sixteenhours a day. We'll carry around items displayedin cut-off boxes,and somerefrigerated six hundred non-perishable items. National brandswill be carriedfor someitems, aswell as regionaland private will featuregeneric labels.Thirty to forty percent of the cannedgoods and staples labelingonly. "Although the new store definitely will be no-frills, I plan to carry some to shopping bags and will allow customers write checkson local accounts.In my should advertisingI don't want the store to developa cheapimage,so theseservices help. "My projected earningslook decent enough,particularly in comparison with what they were at the old Goodbuy Grocery.With my son and I doing most of the on work. I don't seehow the store could fail. Like I saidbefore,it's a new lease life for us!"

for strategy Goodbuy.Do you agree Analysis: Critique Mr. Herrington'stransition With the relocation with the proposed switch to no-frills merchandising? to are decision? What other promisingtransitionstrategies available Herrington? beforefinalizing In what ways could Herringtonbenefit from marketingresearch p l a n s ? u g g e s t u i d e l i n efs r h i m t o f o l l o w i n c o n d u c t i n gh e r e g t o his transition S search. an lf Goodbuy does reopenas a no-frillsstore in Canton,recommend advertising for to strategy Herrington follow. Be specific.

215

E X HI B I T 3 9 - 4 PRO FORMA STATEMENTS Projected weekly sales Cost of Sales Gross Profit MiscellaneousIncome Total Income before Expenses Expenses Wages(checkers,stock clerks) Payroll taxes (checkers, stock clerks Wages(owner, manager) Payroll taxes (owner, manager) Workmen's compensation, group medical Buying Service Charge Drayage (trucking charges) Advertising Rent Licenses & Taxes Insurance Accounting Depreciation Interest Total Expenses Net Profit before Income Tax Provision for federal & state income tax NET PROFIT

$30,000 $26,2s0

$3,7s0 $ 2 7
$3,77'l $ $ $ $ $ $ $ $ $ $ $ $ $ s00 4 7 400 25 297 660 4s0 s 0 300 4 3 7 8 0 7 9 $2,981 't96 $ {. rss

$ s4l

216

EXPERI ENCEPHASEIV the entrepreneurial lifestyle

an entrepreneLtr's diary

40
Stephen Tanner owns and operatesa car-rentalagencyin Reno, Nevada(RenoRental) and is part-owner of a theater chain in Nevadaand Utah (Innertainment Corporation). He has been self-employed sincegraduating from collegein 1957 and conservatively estimates personal worth at well over $3 million. his net Mr. Tannerdescribes himselfashard-working, success-motivated, eternaland ly optimistic. Forty-three years old, he plansto sellout all business interests within sevenyears and pursue "a life of leisure." He is married and has three teen-age children. During the month of February,Mr. Tanneragreed keep a diary of his daily to businessexperiences. the close of each day, he highlighted his activities and At provided personal impressions. Februory 2 (Monday) three problem-solving meetingstoday for RenoRental.Met with Dyer and Kennerman[operations manager and controller] to go over the bank's tightenedcredit line and determinemonthly cashneeds. The bank is gettingawfully tight-fisted.They blame it on the Fed'santi-inflationcampaign. "Met with Ted Aurno [representative General for Motors] to go over possibilities for getting more small car rentals-especiallyCitation and Chevette.No dice. They're alreadybehind on dealerorders.We'lI haveto stick with Malibusand the old Chevettes.
219

"Attended

220

Experience Phase III:

Venture Transition

"Ate lunch with Lennie [konard Stouffer, maintenancesupervisor] and authorized new vacuum. the Madea note to order 50 new cases oil." of

Februory 3 (Tuesdoy) "Got a call from a Mr. Brad Rangierwho wanted to discusspossibilities of using RenoRentalautomobilesto host the Miss Reno beauty pageantin April. Sounded promising to me as long as we could get RenoRental's name in print a few times during the pageant. They'd have to supply the chauffeurs though, because simply don't havethe available we manpower. "Spent most of the afternoon helping up front [in the rental agencyoffice] dealingwith customers. Dianewas sick today."

February 4 (Wednesdoy) to Provo for tomorrow's Board meetingwith Innertainment.Motel didn't have my reservation when I got there. Waited ninety minutes until I could eet a no-show'sroom. "Had dinner with Aaron [Aaron Iange, majority owner of Innertainment] and went over the PalmerMall option [a six-month option to reserve spacefor a new theater in Salt lake City's Palmershoppingmall, projectedfor construction completion in 1984] . Aaron thinks we should not exercise the option yet. By delaying, we'll have time to run a market study on the mall site to determineif it wouldn't be smarterto locate the theatera quarterof a mile away on cheaper land. We also needto decidewhether to so with two screens four." or "Drove

February 5 (Thursdoy) an unusually long Board meeting. Stayed past supper (another free meal!), cancellingplans to make it back to Reno today. Just aswell, because that's somelong trek. "Tovar and Hines [Board members] thought we shouldn't wastethe Palmer option. It'll be the largestmall in Salt l-ake and supposedly prime retail drawinga card. Aaron reminded them of the sky-highrental but agreedthat Innertainment didn't want to give away the theater rights to GC [GeneralCinema] or a local yokel. "I had to agreewith Tovar and Hines and encouraged Aaron to exercise the option. I imaginehe will, although he was still noncommittal when we closedthe meetins." "Had

Februory 6 (Friday) "Aaron twistedmy arm (!) and convinced to stayoverfor a long weekend me wife] down, leaving kids with the Paines the of skiing.I flew Joanne[Tanner's [the Tanner's . neighbors] The IRS can treat me to a mini vacation!"

February 9 (Mondoy) "A day for brushfires!Had a rental car stolenand dumpedin CarsonCity. It wasstripped and virtuallya total loss.Spentovertwo hourson the phonedealing w i t h t h e p o l i c e n d t h e i n s u r a n cg u y . e a "Spent the better part of the afternoonhelpingRick Kennerman tracedown from a couple of hot-checkwritersand trying to collecta raft of late receivables Hate to cut them off, but what canyou do when they steadycorporatecustomers. don't pay up? "Finally got home about 8:25 p.m. A long day for sure!"

February l0 (Tuesdoy) "Spent most of the day researching possibilities addingsingle-engine the of at airplanes our rental fleet. Talked to VegasAir Service the airportand learned to my way in return for a pieceof the they would be willing to throw customers action. The owner of Vegas,Hal Gholson,offered to form a fifty-fifty partnership plus personnel. with me. He'sgot the planes; I've got the local reputation "Plan to defer a definite decision until I can look into all of the insurance angles. What would happenif a client were to crash,and so forth? "The dealdoesappear havethe srnell money." to of

February 11 (llednesday) "Met with Hank of theaters] Sylvester [manager Reno'sthreeInnertainment in the morningto look at his P&L for December and January. lnokslikeit'stime pricesare about as high as we can go to raiseticket pricesagain.The concession with them. "Reno's not exactly your typical town not evena typical tourist stop. The theatersare open all night long, just like the casinos. Getting someoneto sell hot butteredpopcornat 3:00 A.M. is easier saidthan done! "Got a letter from the mayor'scivic committee,askingme to serveon Reno's Tourism Committee. I'm flattered, of course.Talk about a goldmine for business " contacts !

221

Februory I 2 (ThursdoY) ',Mostly routine paperwork today-cooped-up in the darn office all day' of checks; Signed umpteen insuranceforms; authorizedthe payroll; signeda slew rental clients who recently madethe Reno scene; prospective lrtt.r, to four *-t. exmaintenance sent off my resumeto the Tourism Committee;approvedseveral penditures. ..I sure am tired. I wonder why, since I haven't accomplished anythingof all substance daY." FebruarY l3 (FridaY) ..The month is flying by. Had coffee with Gholson againtoday and moved a I step closerto firming up some kind of a deal to rent airplanes. really would like point of view, but my knowlto te the controlling partner from a decision-making edgeof the air rental market is awfully sketchy' ..ordereda wATS line today for my calls to vegas,Provo,and Salt Lake. are about it, but accountants like that' Got wasn't overly enthusiastic Kennerman to spendsomemoney in the short-runto savesomeover the long-run' "Had to fire two of our maintenance carswhich people today for releasing hadn,t been cleanedor checked-outmechanically.claim they forgot, but it happenedto them twice beforethis month." Februory 14 (SoturdaY) "Went to the office early (5:30 A.M.) to finish up somelooseends. Met Stu two lawyer friendsat the golf courseat 1 l:30 for a fast nine holes' To lambert and showyou how bad they played,I cameback $35 richer.Doesn'thappenoften! ,'went back to the office and helpedwith customers a few hours. Almost for else are the lot of cars.Saturdays something in Reno'" cleared Februory 16 (MondoY) ..Thought I'd start the week out right by using our new WATS line to drum in called nine travel agencies utah and southerncalifornia and up some business. rates. Lots of tourists stay in the Reno made them a pitch about our hourly rental airport for a few hours betweenflights with nothing in particularto do. why not All rent them a car for an hour or two so they can make the casinoscene? but two to stopover clients. saidthey would mention the service of the agents ..Gholsonmust really be seriousabout wanting the partnership.He dropped by today and offered me free flying lessons!It would be nice not to haveto drive any more to Provo for the Innertainmentmeetings.

222

r's A n Entrepreneu DiarY

223

"Interviewed three people to replacethe two maintenance guys cannedlast week. wasn't overly impressedwith their looks, but for $5.65 an hour, what can you honestly expect? ,,Took a long lunch-hour to attend the first Tourism Committee meeting. Turned out to be more stimulating than anticipated. Made the 10:00 news." Februory I 7 (TuesdoY) ..Devotedthe morning to a skull session with carl Dyer. Had to cull out a Sold that had outlived their usefulness. number of automobilesfrom the rental fleet percent off original list. Not a bad deal for them to a local used lot for about 70 either of us really. "Spent the remainderof the day negotiatinga new floor-financing loan with get some new cars in GMAC [General Motors AcceptanceCorporation]. Got to soon."

Februory | 8 (llednesdaY) ..Drove to the U. of Nevada-LasVegascampustoday to guestlecture in a Things have certainly changeda lot since Iwent to schoolthere. couple of classes. older!" The kids are all smarter,and I'm hopelessly

February 19 (ThursdaY) ..Tough day today. we got held up. can you believeit? In broad daylight no less.Some guy doing the ski mask routine hit the smalldowntown office and made we because aren'tspendable, off with $1200.Too bad for him credit card receipts had a lot more than $1200in them on hand. .,Fortunately my employeescoopelated in every way, so no one got hurt. ..Pretty much blew the whole day on this mess.what will take longer, the paperwork?" police reportsor the insurance Februory 20 (Friday) "It was the insurance paperwork that took up the most time after the robbery. We'Il get our money back though. Police haven't caught the guy yet' however. ..Radio shack deliveredthe mini-computertoday that we orderedin January. Found a nice spot for it in Dyer's office; he'll be the main personusingit. Should Keepingtrack of really be a boost to our budget-controland inventory-planning. 345 carstakestimel

224

Experience Phase III:

Venture Transition

"Got a call in the afternoon from Metro Marketing [RenoRental's advertising agency]. Will visit with them next week to plan our spring and summer media campaign. Watch out Avis and Hertzt"

Februory 21 (Saturday) "Couldn't manage to leavethe office any earlierthan 5:00 today. Had to get with Dyer to work up some pro formas for the banker. We need a $35,000threemonth loan for financing replacementtires for the fleet. Thank goodness GMAC will finance our rolling stock inventory. No way we could pay the bank'shigh rates for a loan that large. "Also made an appointment to talk with Goodrich'srep on Thursday.They really seemto want our business."

Februory 23 (Mondoy) down to las VegasSunday night for the travel agencyconvention today. Spent the entire day drumming up new business and making contacts.Ate breakfasttwice and lunch three times. I've got this wining and dining down to an art ! "Drove back to Reno at 7:30 P.M. and didn't get home until mighty late." "Drove

February 24 (Tuesdoy) the day with Dolph Artis [owner of Metro Marketing] goingover our new ad campaignfor the warm season. We decided to stick with the samebasic theme 'RenoRentalis your auto rental alternative'-but to put more of a spotlight on our nonauto rentals.Looks like I definitely may want to cement the airplanedeal." "Spent

Februory 2 5 (Wednesday) "Had a productive day. Bought out the two Scott theatersin downtown Reno, which Innertainmenthad been after for five years.Got a good enoughprice to make our remodelingplanscostcffective.We plan to convertthe two old screens into four new ones.Appearsto be a good downtown market-especially revival for runs [reshowing old classic of films] . "Also got our bank loan okayed for tire financing.Will put me in a good bargainingpositionwith Goodrichtomorrow."

Februory 26 (Thursday) "Closed the Goodrich deal in lessthan an hour. Decidedto go with polyglass instead steelradials. Saved bundle. a of "Worked with Carl [Dyer] on getting the fleet computerized.Not nearly as as much of a hassle I anticipated." February 27 (Fridoy) "Had a slight cold today, so I stayed home and caught up on some of my reading." February 28 (Saturday) "Still under the weather,but had to signchecksat the office. Also worked on plan for our employees. a revisedfringe-benefit "Another month has flown by! I think my business are interests all better off than they were in January.Got a long way to go though."

p m S T lif : A n a l y s i s D e s c r i b e t e p h e n a n n e r ' s r o f e s s i o n a l e s t y l e h o w h e s p e n d s o s to f : , p r i o r i t i e sh i s p r o b l e m sh i s s a t i s f a c t i o na n d s o o n . l s h e , s, h i s t i m e , h i sa p p a r e n t t'l t)0' ) t. I an entrepreneur? W h y d o y o u t h i n k M r . T a n n e r c o n t i n u e st o w o r k s o h a r d d e s p i t eb e i n g a .rt (i";l. ! r ): millionaire? lk tJ. ) ,! s i a s W h a t d o h i sd i a r ye n t r i e sn d i c a t e b o u tt l i e r e a l i i i e J t s m a l lb u s i n e sm a n a g e m e n t ? r4''l' - i : ' , n W h a tm a n a g e r i s k i l l s r ei l l u s t r a t e id t h e d i a r ye n t r i e s ? al a

22s

new generauon software, inc.

4t
New Generation Software, Inc. of Aberdeen, South Dakota,manufactures disand tributes software packages for computer systems and a variety of data-processing paper supplies,including printer paper, coding forms, and keypunch-machine ribbons. The companywas startedin 1975 by HarrisMonahan, black entrepreneur a who grew up in East St. louis, Illinois. In the following interview,Mr. Monahan traces the growth of New GenerationSoftware and assesses experienceas a his minority entrepreneur. Harris,would you please give us an overviewdescriptionof your company? I'm proud to say that we're entering our fifth profitable year of operations and it seemscertain that we'll go over $500,000in sales this year. New Generation is a leading producer of EDP softwareand paper products.we're especially wellknown nationally for our software systemsrelating to medicalaccounting.More doctor's offices use our software for bookkeepingpurposes than all of the other competitive packages together.New Generation alsoa major manufacturer put is of ink ribbonsusedin keypunch machines. we have one production facility located here in Aberdeen.we employ approximately thirty-four people in the plant and use manufacturer'sreps for our sales force. I am presidentand headof R&D. Fill us in on your personal background. I grew up in Illinois in East St. Iouis, where my father wasan entrepreneur of sorts. He operateda small grocery store with my mother and alsomanaged small a 226

New Generation Software, Inc.

227

piece of land for a farmer. I grew up helping out in the storelearningthe ABCs of business from my parents. but quit mid-way I attended a college in St. Louis majoring in engineering away, so I had to father had passed firm. My through to work for an audio-visual lay out of school to assistmy mother in sellingthe grocerystore.BeforeI knew it, I was married and looking for a better payingjob. This was in 1973. My education wasjust goingto haveto wait. to rep I signedon with Xerox as a sales and was transferred Rapid city, south two yearsor so learninga lot about technicalproducts Dakota. I worked there for and marketing. In late 1914, I got wind of a deal through a client I called on regularlyin plant up in Aberdeenthat was going Rapid City. He knew of a paper-processing for liquidated.The ownerwanted$139,000 the plant,lockunder and about to be stock-and-barrel. My client, whose namewas Rollin Davids,askedme if I knew anything about computer products and if I would be interestedin helping him launch a new venIt ture relating to EDP services. just so happenedthat I had beentaking computel softwarematerial. had someideasfor developing courses night schooland in the gel and before I knew it, Rollin and I purchased Well, things began to just $88,500.We struck a mutually beneficialdeal with the Aberdeen facility for equipment and former owner where he would keep some of the paper-processing with the building. I personallyinvested$52,000 in equity, using leave us the rest and borrowing somefrom my mother'ssavings. somemoney I had saved Rollin, who is also black, and I beganNew GenerationSoftwarein May of 1975, manufacturingpaper for computer printers and ribbons for keypunch developedover a dozen software equipment. As time went on, we successfully pertaining to medical bookkeeping.Thus we have been able to attain a packages blend of manufacturingand R&D work in our company. to Rollin soldout his interest me in February1980,so I am currentlythe sole however, He owner of New Generation. still staysin closetouch with the business, our and throwsa lot of new customers way. are Harris,how conscious you of beinga minority entrepreneur? This may sound odd, but the only time I'm really consciousof my racial competing backgroundis when others bring it up. I considermyself a businessman but product.certainly I'm proud of my blackheritage, in the market with a useful is my business reallyno differerltfrornany other. with other minority-owned To what extent do you strive to do business companies? It's tough to find many minority-owned firms that purchaseEDP products. Most of my salescome from the majority community. I do go out of my way' from minority firms. raw materialsupplies however,to purchase

Exoerience Phase III:

Venture Transition

in To what extent haveyou relied upon governmentassistance your growth? I've As little as possible. Certainlyno more than any other smallbusiness. had agencies customers, for but that's a couple of SBA loans and a few governmental for minority the extent of it. What people hear about government assistance businessis mostly myth. Lucrative governmentties are very difficult to come by involved. and most of the time not worth the extraordinaryhassle minority or majority, would I'm firmly convincedthat most small companies, out privatesectorrather than public their time seeking be much better off spending sectorbusiness. much time and paperworkis involvedwith public sectorstuff, So not to mention uncertainty and unpredictability.The governmentcan help minority firms out basically in the same way it can help out majority firms: cut taxesand regulations controlinflation. and Do you feel minority firms face any unique problemsor challenges? Oh sure,there'sno gettingaroundthe realities occasional of racialdiscriminais tion. But I would againmention that the key to any business the bottom line. Minority businessmen face all of the sarneoperatingproblemsas anyoneelse.It takes a good product or servicebacked up by skilled management run any to business. That'swherethe realchallenge always is. problemfacedby minority companies how I guess is the primary race-related and clients.Fortunately, the daysof blatant we are perceived white customers by discriminationare mostly history. However, a sensitivityto affirmative-action mandates doesexist. By that I mean that many majority-owned companies havethe feelingthat we have soughtthem out solelyon the hope that they would want to play ball with peoplebelieve a rninority company.In other words,somewhite business that black erroneous. firmswant special treatment. notion is nearlyalways That New GenerationSoftwarehustlesbusiness aggressively of the time. We all to expectto be treateddifferentlybecause ofrace. We want our products be don't focusof attention.I'm suremost other blackentrepreneurs the same feel way. the a because our society's of obsession with afSonretimes funny thing happens firmative-action statistics. Occasionally one nf our customers who doesnot know me personally is will learnthat New Generation minority owned.They will then becorne disgruntled because they weren't able to report their dealwith us as being supportiveof an affirrnative-action effort. To us, it was simply a straightbusiness proposition. would havebeento them too, exceptfor the federal government! It If you were to start New GenerationSoftwareover again,what would you do differently? I would prepare myselfmore diligently.I would gainmore financial expertise, plan to read up more on management techniques, and developa detailedbusiness help launchthe business.

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229

I also would control the company'sgrowth better, slowingit down somewhat. I would have sought-outmore outside advice and consultation especially roadbeforeme. down the same who from other entrepreneurs had traveled what advicewould you passon to other minority-groupindividualsabout to launch a new venture? them to start out working for someother companyin First, I would advise would like to operate in. Learn the tricks of the trade and the industry they becomefamiliarwith the terrainwhile you're gettingpaid for it. Ungettinga good formaleducation. I Secondly, would stronglyrecommend knowledgeas possible. schooland soakup as much general like me, finish the Third, don't expect others to do you specialfavors-especially governloansand It's hard to overcomethe temptation to dependon government ment. that over the long run, you will haveto makeit on your Just remember contracts. own. to minority entrepreneurs reFinally, and most importantly,I would advise They not emberthat, first and foremost,they are businessmen blacksor whatever. ability. Busibut alsoproud of their managerial should be proud of their heritage nesspeople of any race or color who can't make a profit are ultimately a drain on society.

s A n a l y s i s :D o y o u f e e l H a r r i sM o n a h a n 'v i e w sa r e t y p i c a lo f o t h e r b l a c kb u s i n e s s e s D o w n e r s ? o a n y o f h i ss t a t e m e n ts u r p r i s y o u ? s l I n w h a t w a y sh a st h e f e d e r a g o v e r n m e n to u g h tt o p r o m o t em i n o r i t yc a p i t a l i s m ? b W h a te l s e o y o u f e e ls h o u l d e d o n ei n t h i s r e g a r d ? d s l n w h a t w a v s c a n t h e w h i t e b u s i n e sc o m m u n i t yl e n ds u p p o r t o m i n o r i t yf i r m s ?

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MeredithMcGowan,majoritypartnerofMcGowanRealtyinPensacola'Florida' realtorssince1973. In that year,she has been one of the naiion's top-producing years "Rookie of the Year" real-estate In award-winner' subsequent was Pensacola's performanceand civic awards.Meredithis a graduate she has won numerousother She Specialist. hasbeenmarof the Realtor'sInstitute and is a certified Residential children' yearsand has four ried seventeen Meredith'tellusalittleaboutyourcompanyMcGowanRealty. learning Pensacola ln 1973 and 1974,I worked for Milam Real Estateherein my profession'I quickly established reputationin town and my way around in the just under$37'000U.gunio developa client following.My income inl914 was only in experience college,and with previousbusiness not bad for a gal with no waiting tablesand driving a rural schoolbus' Milam' I really Although I very Luch enjoyed working with the folks at to turning overhalf of my commissions the agency'So, wasn,t all that thrilled with withmyhusband'sencouragement,It'rtMilamandworkedforayearinasmall partnership. Thatgotoldquick,becauselsorelymissedthestaffsupportprovidedbyan agency-anoffi..,telephone,Xeroxmachine,andsoforth.Iwashavingtowork with my family's It out of my house.That was no way to succeed. kept interfering a lot more hectic for me' home life, and they madethings

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It finally becameobvious that I neededto set up an office away from home where I could do my own thing without causing family problems.Givenmy distaste for sharingcommissions, only real option was to start my own agency.So I did. my I alreadywaslicensedand had sellingexperience. I rented and renovatedan old office near Pensacola's fastestgrowing residential area and hired-awaytwo other top performing gals from Milam. We had always liked one another and knew how to work together.We formed a three-way partnershipwith me taking the lead. This was in September 1976. of Since then, the agencyhas added a dozen more repsand three full-time staff people. We're the third largest agency in Pensacola and rising fast. Our reps are highly productive and make better than average money. We have a successful operation becausewe're customer-oriented, knowledgeable,professional-and darn hard working. What rolesdo you and your two partnershavein the agency? They manageand I sell. Both Marjorie and June like to manage. They handle the administrativepaperwork, coordinate our salesforce, and stay in touch with the accountant.They both still find time to do someselling,but it's not their main thrust. As for me, I like to put maximum distance betweenme and the management routine. Don't get me wrong; I appreciate what Marjorieand June do, but I'm motivated by sellingand meeting new people. I was born in June and I guessI'm a typical Gemini I like peopleand a fast pace. I think I set a good example for our other salesagents.They respectme becauseI perform, and I can help them troubleshoot problems becauseI'm a fellow agent. We work togetherwell in the agencybecause everyonepretty-much gets to do what they enjoy most and are successful We're all working so hard at. that we don't havemuch time to createinternal problems. Tell us what a typical day is like for you, Meredith. In my business, there'sno suchthing as a typical day. If variety is the spiceof life, then I lead a very spicy edstence! My job revolves aroundpeople.I meetat leasttwo or threepeopleeveryday. Every time I strike up a new relationship,my professional reputation is on the line. After all, the only thing I have to sell is service-my knowledgeof real estateand my professionalism. the final analysis, In resultsare all that count. If a realtor can't produce,shecan't do anything. Sellingreal estateis hardly an 8:00 to 5:00 job with Saturday and Sunday off. No matter what I'm doing, it seems like I alwaysend up taking care of some business. I go to the beauty shop, I usuallywind up talking real estatewith someIf one. Samething at church and eventhe grocerystore. I make a point neverto bring

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it up outside the office, but people I meet always want to talk real estate. I'm generallymore than happy to obligethem! eight to fourteen hours a day exceptfor I work sevendays a week averaging On Sundays. SundayI work in the afternoonafter church. Could you work lessif you wanted to? Somewhat;but people who think real estatecan be done part-time are just In fooling themselves. order to win the confidenceof clients,I haveto exert myself get to the fullest. And that takestime. I haveto look at houses, to know my clients closetouch with personally,keep up with new legislation,and stay in reasonably my partnersand the agency.You can't do all this on just a few hours a day. I The more buyers and sellers You know, success does indeed breed success. I come through for, the more people call on me for my services. can hardly turn when it's brought to me practically on a silver platter. So, I away new business stay busy. But I wouldn't haveit any other way, at leastfor the time being. Meredith,what are the primary joys and frustrationsof your job? People. I can't think of a more peopleoriented career than mine. So, naturally, people make up both the high points and low points of my work. Let me giveyou an exampleof a low point. We One time I had this little couple who had three preschoolers. had been out all day in the hot summer looking at homes. We must have looked at every listing in Pensacola twice! But nothing was good enough.So we calledit a day and for started back to the office. I stopped by a place and got snowcones the kids. Before I knew what hit me, one kid deliberatelydumped his down my back while I'm driving. Did I belt him like I would have my own kid? Hardly, I just had to stay cool, which wasn't easyto do evenwith the ice down my back! "charge" But most of the time I enjoy my contactswith peopleand get a real for out of helping them. Buying or sellinga house can be a traumatic experience Knowing that many people,especially when they're being uprootedin the process. I can be of help to them is a gratifyingpart of my job-and of my life. Other things I don't particularly love about my job revolvearound managing the agency.Eventhough my partnerscarry the load here,I still haveto get involved paying bills, tax dein more ways than I care to. Things like committee meetings, cisions.They're no fun, but they come with the territory. You just haveto learn to take the bad alongwith the good. I guessone other joy I would mention involvesthe constantfeeling of ac"score" on the job-to successfully complishment.To put it indelicately,I love to buy and sell homes for my clients.There'sno doubt about when you've done your job: a customer smiles,a contract is signed,and a commissionis made. You've scoreda touchdown.

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You've made it no secret that you dislike management work. why is this, Meredith?

It's not so much that I dislikemanagement, just that I like to let othersdo it's it! seriously,though,I've askedmyself the samequestionmore than once.I guess the reason is that, in my profession,managinggets in the way of performingscoringtouchdownsas I said before. The more time I spendpouring over budgets, making personneldecisions, and so forth, the lesstime I havefor buying and selling homes.That'sthe way I look at it. Sellingand meetingpeopleis what I enjoy and excelat. It would be a disserviceto the agencyto stick me behind a desk.Eventhough the agencydoescarry my name,there'sno reasonI haveto be the most activemanager. me represent Let the agencyout in the field. What impact doesyour job haveon your family life? Plenty, but we've managedto handleit okay. My husbandand four kids have backed my careerall the way and thereforedeserve most of the credit for whatever success I've attained. They put up with my long hours and fragmentedschedule. They answerthe phone for me and take messages leasta d.ozentimes at daily. They really arejewels. My husbandis a warehouse superintendent. Fortunately, hasa steady, he predictable scheduleand is able to be here every eveningand on weekends. He's the sourceof stability everyfamily hasto have. My kids are proud of my success and wouldn't have my life any other way. Although I must admit that problemsdo occasionally arise.Like the time I missed my oldest daughter'sjunior-high graduation becauseI was closins a deal. That definitely hurt her feelings. Is your job a stressful one, Meredith? Much of the time it is. I think I've adjusted to the stresspretty well, but nonetheless is there. I'm under stresssimply because it my clients are under stress when they needmy services. Peoplehardly ever buy or sell a home under relaxedcircumstances. Most of the time they're under pressure make the transition. Maybe a relativejust died, to and the house has to be disposed or maybe the husbandhas been transferred of. suddenly,and he needsto get out from under two housepayments.The emotions run high, and I'm right in the middle trying to make thingswbrk out. Besides this constantpressure perform, there'sthe stress to that comesfrom a work scheduleruled by interruptions.The phone rings for me at the office and at home all day and night. You hardly sit down to dinner but what somehor prospect is in town for a few hours and needsyour services immediately. Also, there's the pressure from my agencyaffiliation. Meetings attend,the to

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My two managing banker to wine and dine, occasional personnel squabbles. partnerscertainly can't handleeverythingby themselves' picture in my comments.without Don't let me createan overly pessimistic andbecomeboring. A]so, somestress I,m some StreSS, afraid my job would stagnate as I don't view stress my if is necessary I'm to perform up to my fullest potential. friend, but it certainly isn't my arch enemyeither' in Why have you been so successful your job? people' and perHard work, discipline, family support, love of meeting it's only in retrospectthat I Also sometuck and good breaks.You know, severance. really thought of I've of notice myself having attained some measure success. never story' gal-certainly not as a success myself as anything other than a hard-working to think about establishing I've always been too wrapped-upin my daiiy activities beingrejob are constantly somesort of a glamoror^ira.t record.My careerand past hasn't beenin my consciousness newed and revitalized.what I've done in the I'm constantly has much. To me, success alwaysbeen one step aheadin the futurehavingattainedit' working toward it rather than contemplating What are Your long-termgoals? Toretirewithmyhusbandwithinsixyears.Thenestwillbeemptythenand and havea lot of Joel and I can start a new life. We'd both love to travel extensively We'vepaid our dues' time to ourselves. Whatadvicedoyouhavetoofferotherswhowouldliketolaunchabusiness of their own? Set to committedand dedicated excellence, attainWork hard. Be supremely a bit. View money strictly asa by-product of excelable goalsthat stretch iou lust and integrity at all to lent performance,not as the reason perform. Uphold honesty people for who they are not just for what they can do for times. lrarn how to like Do you. Don't take yourselftoo seriously' your own thing in your own way'

p r o f i l eo f a t y p i c a le n t r e f M A n a l y s i s :I n w h a t w a y sd o e sM e r e d i t h c G o w a n i t t h e preneu ? r of ls her lifestylerepresentative other entrepreneurs? goal? at Are you surprised all by her long-term with her professionally? Wouldyou tradeplaces

me KeYS

r L

to entrepreneurial
5UCCeSS.' u ,orndtable discussion

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In December1980, four business professionals collaborated a roundtabledisfor cussioncenteringon the keys to entrepreneurial participating success. were: Coy Hantphill, a small business consultant from chicago; Erik Sawyer,a new venture banker from Miarni; Gloria cisneros,who manages public accountingfirm in New a Orleans; and OrsonMcCord,a venturecapitalist from New york City. The paneladdressed itselfto four questions: l. what are the most common mistakes made by entrepreneurs small and business managers? 2. Whatis the profile of a successful entrepreneur? 3. what are the most difficult problemsand challenges faced by entrepreneursand smallbusiness ownerstoday? 4. what advicewould you offer to someoneseriously contemplating starting a new business? Coy Hamphill describes himself as a self-made millionaire who thrives on assistingothers in accomplishing samefeat. He developed the one of Chicago'slargest warehousing cooperatives during the 1960s,sellingout in 196g.Sincethattimehe has operatedhis own consultingfirm, Midwest ventures, specializing consulting in supportto new retailventures. Erik Sawyer heads up a prosperingbank in Miami which catersto new and small businesses. previouslyowned and operatedan import firrn, with manuHe

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facturing facilities in Haiti, which was expropriatedby the Haitian governmentin 1972.He holds a doctoratein liberal arts from Emory University' partner of CisnerosPublic Accounting in San Gloria Cisnerosis matraging Diego. Since openingas a limited bookkeepingservicein 1974,the firm hasgrown into one of the largest independently operated public accounting offices in and on California. Ms. Cisnerosis also part-ownerof three other local companies of four firms. Born in Mexico City, sheis a naturalizedAmericancilizen. the boards Orson McCord is seniorpartnerof McCord,Alexander,and Purcell' a venturecapital partnershipin New York City. He receivedhis C.P.A. in 1962 and worked firm. In 1915,he formed his present brokerage for twelve yearsin an investment products' firm which catersto high-technology venture-capital and smallbusi what are the most common mistakesmade by entrepreneurs nessmanagers?

Coy Hamphill--I supposethe most common mistake I've personallyobservedinidea that he in who gets so wrapped-up the new-venture volvesthe entrepreneur very real start-upproblemssoon to be faced: the investigate doesn't adequately and partnerhassles, thingslike that. I've found that too many paralysis, cash-flow fail to have contingencyfunds on hand during the first year of entrepreneurs They make problemsand emergencies. unforeseen operationto usein overcoming planning for the first year as though it were somethingstableand the mistake of routine.Nothingcould be further from the truth. Iirik Sawyer-There are a couple of blunders that I seecommonly repeatedfrom my vantagepoint as a banker for new ventures.One I will term the tunnel vision on typically havesinglevision their attentionis focused Entrepreneurs syndrome. idea to the exclusionof practicallyeverythingelse.In their singlethe new-venture moneyin of supportmechanisms business' they overlookthe essential mindedness, flowin just assureastoThey act as though fundingwill automatically particular. s m o r r o wm o r n i r r g 's u n r i s e . are people.Entrepreneurs The secondrecurringmistake is insensitivity-to bears and my bankingexperiencc notorious for being impatient and hard'driving' l-reqtrerttly this out. In their hasteto make things work out right, entrepreneuls F,ntreptellcurs chew up a lot of people,includingtheir own familiessometimes. poor listeners, and always on the iililve. The tend to be autocraticmanagers, potential for peopleproblemsis obviouslyhigh. Gloria Cisneros-I must echo the fiqalc-e theme. New venturesthat ar9-ttgd.e-rcapitalizedare almost doomed to failure. The reasonfor this is fundamental;the you can get away with. Thus, only more you're under financed,the fewer mistakes patchy financing. firms can readily overcome superbly-managed location. I guessone other mistake I see frequently involves,poql b,$!llgts. to where they open up, only to give only scant consideration Many entrepreneurs

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later discovermany better-suitedlocations.By then the investmentis alreadysunk and irretrievable.Also, many entrepreneurs never consider opening their venture in another city altogether.Every community has a need for certain types of busi nesses-especially mundane ones-but these businesses not always evenly disare tributed geographically. OrsonMcCord-I concur that undercapitalization the most common shortcoming is of new ventures.The entrepreneur fashions elaborate, an detailedbusiness plan and subsequently fails to obtain all of the financingthe plan callsfor. What doeshe do? He attempts to implement the plan as originally put together but with lesscapital than anticipated.Pretty soon the entrepreneur having to cut cornersto hold the is plan together.Beforemuch longer,it beginsto fall through completely. One other mistake my partnersand I often seeinvolvesthe entrepreneur who has not developedhis or her business plan to the fullest. An incompleteplanning documentis an obviousred flag for a venturecapitalist. What is the profile of a successful entrepreneur? Coy Hamphil/ That's mighty tough to distill into a brief summary,but I'll giveit a try. Most successful entrepreneurs know have a see-mingly I boundless-store. of wor! hard and shgw resultsfor it. Success19.{gy'{-rive,and-dplermination. Tbqy .- ful entrepreneurs have to be generalists capable dabblingin all phases their of of business. This is especially true in dealingwith externaltechnical consultants such as lawyersand accountants. Consultants easily off track if you can't follow too get what they'redoing. To be successful, is essential be a good judge of charactgr.Entrepreit to neurs deal with so many key people who must be trustworthy. Success hinges also on being able to define and solveproblemsefficiently by cutting through all the garbage.Finally, I too would mention that successful entrepreneurs know-.hsw.to work with other people.If you're dependent others,you certainlyhad better on be ableto work with them daily. Erik sawyer I have spent a great deal of time pondering the question of what makes one entrepreneur success a and another a failure. Certainly there is no simplistic answerto sucha tough question;iftherewere,I'd be the bestloan maker that evergraced financial a institution! There is one thing, however,that I've observed everysuccessful of business owner I know, and that is perseverance. Successful people in a-!_yql!s of life are consumed with what they're doing-1e1u11t committedand dedicatedl This is frequentlythe only thing that keepsthem goingand rebounding people from setbacks. who desperately want to succeed one thing usuallydo. at Gloria Cisneros-Successful entrepreneursare self-starters-internallymotivated. They do lots of routine,behind-the scenes work and generally willing to put in are however many hoursarenecessary get the job done right. to The successful entrepreneur generally plenty of insightand awareness. has He

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and limitations. I capabilities and weaknesses, or sheknows his or her own strengths and of havinga mellow attitude-a sense perspective confidence. refer to this as basedon operatorsmake decisions business I would also say that successful the picture. The long-runwelfareof the entire companyis considered first the total for is priority. The entrepreneur willing to make short-run sacrifices long-runprosperity. orson McCord-From a venture capitalist'spoint of view, I can tell you that I look at an entrepreneur'spersonality and characterbefore I look at his pro formas. that really turn me off in an entreprepersonalitycharacteristics There are several "Cs": cuties, neur wanting financial backing. I like to refer to these as the four and credit cards. Cadillacs, cruisers, a who obviously lavishes lot of money on girl A cutie is a male entrepreneur furs with our money. A Cadillac friends.We don't want him buying diamondsand spend is an entrepreneurwho spendslots of buckson luxury automobiles'Cruisers financeall of the aboveon credit! who big on yachts.Credit cardsare entrepreneurs their proflieven for one minute because I won't deal with one of these characters gatelifestyle simply isn't conduciveto success. sucthat is deadlyto entrepreneurial The one o,therpersonalitycharacteristic few peoplearoundwho becamemillioncommitment. Thereare darn cessis lack o_f aireswith a part-timejob. If a client of mine is not willing to commit himselflife' I body, and soulto his business,want nothingto do with him. faced by entrepreneurs what are the most difficult problemsand challenges owners todaY? and small business coy Hamphill-The three toughestproblemsI know of are interrelated:c4gh:fuy, cash,flow properly requires budgqting,and--timq.-Toput it succinctly,to.co-nt-rol operatorssay they constantbudgetingand that requirestime. Most small business never find enoughtime to budget and control cashflow. No wonder! You haveto make time for these-first things first! Erik Sawyer-I see three additional, horrible problems victimizing entrepreneurs regulation,inflation, and energy.Theseare all external forces today: go-v-eqnment beyond your direct conperson can directly influence.Problems which no business for entrepreneurs to deal with, and especially trol are always the most frightening and self-sufficiency' on who pride themselves their independence Big businessoften can absorb these external problems through passingon but few smallfirms enjoy sucha luxury. Day-to-daysurvival coststo the consumer, for the smallguy today. can be very tenuous the Gloria Cisneros-Besides financial problems already alluded to, entrepreneurs have a devil of a time today finding qualiled employeeswho will stay with the managelI've talked to in company through thick and thin. Almost every business about this problem,and they haveno easysolutions. recentyearsis concerned problem facedby many OrsonMcCord-Besideslack of capital, I think the biggest

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entrepreneurs isl,qg-mUCh.optimisrn. seetoo many hot shotswho think they're I going to become millionairesovernightsimply because they think they've got some grand schemeor idea. They proceed to spend money like a millionaire, painting themselves into a corner. I guess what I'm really sayingis that too many entrepreneursare their own worst enemy they make problemsfor themselves. what advicewould you offer someone seriouslycomtemplating startinga new business? Coy Hamphil/-I would highlight two things. First of all, Qpncentrate heavily on good day-to-day planning and surrounj yourself with qualified people capable of executingthe plans. Secondly,make absolutelycertain that you haveenoughcash to sustainyou through the initial twelve to eighteenmonths. Do thesetwo things, and you will be able to stay on top of problemson a daily basis. That's wherelongrun survivaland prosperitywill come from. Erik sawyer-once again, I'll echo the theme of commitment. I'd tell the prospective entrepreneur that he or shemust want the business badly as to be willing so to sacrificepractically everythingfor it. They should have the itch so deep that it can't be scratched. the individual has a lot of other interests values. If or thev had better work for someone else. Gloria Cisneros-First of all, I would advisethe entrepreneur make absolutely to certain that he or shehad a minimum of three professionals backingup the venture t e a m :a - Q P A , l a w y e r ,a n d a b a n k e r . o t j u s t a n y o l d C p A , l a w y e i o r b a n k e r u t a N , b ones who will give the business decentpriority. Shop around and find somegood a professionals. Don't settlefor mediocreconsultants. Also shop around fo-1 fi.p;1nci..ng. Banks differ a lot more on interest ratesand loan demandsthan most peoplesuspect. Somebankswant to play games with you; othersgenuinelywant to go the extra mile for you. one final piece of advice concernspremature growth. Far too many small companiesget intoxicated with their first smell of success and immediately expand sometimestoo far too fast. uncontrolled growth is usually worse than no growth at all. orson Mccord-The first thing I would tell someone to make sureyou're serious is about wantingto go into business yourself.Withoutincredible for dedication,you won't be able to pay the duesrequired. secondly, I would advisesomeoneto make certain that they have thought through the business well on paper. The time to make mistakesis on paper,not when you've alreadyspenta bundle. Look beforeyou leap!

Analysis: Based the roundtable on discussion, your own integrated develop analysis of the keysto entrepreneurial success. What is your own profileof the successful entrepreneur?

damone/ectric

44
Damon Mclver is president and sole owner of Damon Electric Corporation in Mr. Mclver founded the company in 1917 for the purposeof Seattle,Washington. repairing large electrical equipment such as transformersand generators.After graduatingfrom the University of California in 1966 with a double major in math large and physics,Mr. Mclver worked in a seriesof marketing positionsfor several an including a leadingelectriccontractor.He received M.B.A. industrial companies, in financefrom St. Louis Universityin 1975' for Damon, describeyour business us in generalterms and give us the story of your start-uP. We repair large pieces of electrical equipment, such as transformers,genbuilding and nine erators, motors, and switch gear. I've got a 13,000-square-foot grossed $150,000. In full-time employees. 1980 the business I got the idea for Damon Electric in 1977 when I noticed that only two of were in the business repairinglargeelectricalequipmentfor the major companies and Siemens.There were a lot of small of General Electric, Westinghouse, likes piecesof equipment, in mom and pop outfits that specialized repairsfor selected coveledthe waterfront. I figured surelythere was room for two companies but only a third major repair company. never somenew kind of business I had no desireto lead the way in pioneering if entrepreneur, in eistence. I might be what could be calleda conservative before
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such an animal exists. Getting into a large market with limited competition was enoughopportunity for me. beOnce I clarified the basic nature of Damon Electric, my next challenge, sides physically locating somewhere,was to establishcredibility with the large will GeneralElectricor Westinghouse not hire just anyoneto fix electriccompanies. a $50,000 transformer.I knew I had to come up with a strategicplan that would encourage and friendsto acceptme. GE My approachwas simple: build credibility through hiring creditablepeople.I becameMorgan the Pirate and beganstealingaway the creamof the crop from my former employer. I hired away one guy who had been in the power-transformer business for 22 years, a shop foreman with 15 years of power-transformer backgrounds. and four engineers with production-shop experience, The next thing I neededwas a facility-one large enoughfor a cranecapable of lifting up to 25 tons. Finding the right layout at a price that wouldn't immediatelybankrupt me was not goingto be easy-at leastso I thought. I was playing handball one day at a local club in Seattlewhen I ran into an old buddy I hadn't seenin years.He askedme what I was up to thesedaysand I said, "I'm looking for a high bar crane." To my utter surprise, my friend "Come responded, seeme tomorrow.I think I've got just what you'relookingfor." And sure enough he did. He worked for an engineering firm which had recently purchased fabricationbusiness a with excess facilities.What was excess them was to madeto order for me. Whatluck!

A n a l y s i s D o y o u f e e l " l u c k " p l a y sa n i m p o r t a n tp a r t i n t h e s u c c e so f m a n yn e w : s v e n t u r e sC i t es e v e r a l l u s t r a t i ve x a m p l e s . ? i e To what extent do you feel entrepreneurs often "make their own breaks"? Again, c i t e i l l u s t r a t i ve x a m p l e s . e

Tell us how you got Damon Electricoff the ground. Well, there I was with a lot of fixed costs,$2,500 monthly for the building I fast. I and over four grand a month for employeesalaries. neededsomebusiness managedto scareup a list of 2,300 companies acrossthe country who potentially neededelectricalrepair work. I developed seriesof mailingspromoting Damon's a services sent them out on four successive and weeks. My aggressive merchandising worked. Within six weekswe had enoughjobs to keep our small crew working overtime. From Novembetof l9ll to September of 1978 we continued to expand rapidly so much so that we outgrewour facility and contractedfor additionalspace. In October 1977 | made an even more aggressive expansiondecision,purchasinganother plant facility in Grand Island,Nebraska. got 9,000 square I feet for

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$173,000.Now I had a Midwest facility to balanceout the Northwestsite.The company's ability to serve national customers was greatly enhanced.Damon comElectric was definitely beginningto establisha solid reputation asa first-class industry. petitor in the electricalmaintenance of What were your toughestproblemsat this stage the game? in growth capital.Fortunately,I havepart interests Cashflow and generating out funds both Kelly Girl-type operations.I have siphoned two other businesses, consistentlyfrom both to put into Damon Electric. They havebeenexcellentcash cows thus far. Other than this, Damon has been financedon debt-mostly short' term. with about 20 is The electrical repair business actually very self-sustaining, for large amounts of long-term percent net profit on salesafter taxes. The need capital is thereforefairly manageable. Is Damon Electric, with its two locations, becoming too large for you to handlesinglehandedly? will soon manager It's not quite there yet but well on the way. A professional needto conof of needed, just because the sizebut alsobecause my personal not be can ideas. No mature business really toleratean entrestantly pursuenew business preneur in the driver's seat for very long. Both growth and stability would be threatened.

can be successfully Analysis:Why does Damon Mclver state that no business w t h e l o n gr u n ?D o y o u a g r e e i t h h i m ? guided y anentrepreneur er ov b w d H o w c a n a n e n t r e p r e n e u re t e r m i n e h e n t h e t i m e i s r i p e f o r t u r n i n go v e rd a i l y manager? to operations a professional business

Damon,haveyou alwaysthought of yourselfas an entrepreneur? When I was a corporate managerseveralyears ago, I was Not necessarily. At constraints. least when I got to do quite content working within organizational comingout in me after all! things my own way. Maybe that was the entrepreneur If you were content working for others,why did you decideto go it alone? Had to-I was fired. ln 1976my employerdecidedit couldn't put up with my ironically. wheelingand dealingin their repair division.I was too successful,

Experience Phase IV: The Entrcpreneuriol LiJ'est),le

The companyhad me in charge their maintenance of services locatedin St. Louis. I was supposed oversee to technical operations and keep my noseclean.In six months or so the technical stuff was old hat to me, so I challenged myselfby hustlingup new clientsfor them. They didn't appreciate entrepreneurial the spirit from an operations manager. In March 1977 | got a telegram home: "Effectivetomorrowyou aretermat inated." I had been on vacation. They had decidedto extendit indefinitelyyou might say! My wife Stacy told me that getting fired was the best thing that could have happenedto me because helpedme figure out what I was really cut out for. it I guess was right. she If you had not been fired, do you think you would have ever started your own company? I honestlycan't say. I like to think that eventually would have,but I sure I was comfortablewith my $50,000annualincome.The future had seemed fairlv bright too. But not asbright as it seems now!

A n a l y s i s :W h y e x a c t l y o y o u t h i n k D a m o nw a sf i r e d ? d I n w h a t w a y s c a n c n t r e p r e n e u r se d i s r u p t i v eo c o m p a n i e sW h a ta c t i o n s a n a b t ? c l a r g e o m p a n yt a k e t o a c c o m m o d a te n t r e p r e n e us s c c e s s f u liln i t s p e r s o n n e l c e ru y ranks?

Damon, have you ever regrettedthe decisionto go it alone in your own venture? Let'sjust say I've had to fight off pessimistic moodsnumerous times.I don't know that I've ever really secondguessed myself, but I periodically becomedepressed over the wrenchingchallenge keepingthe companyperking. of The mental and physical energy required is horribly draining at times, especially in the wee hours of the morning when I'm all alone at the office. The alonenessand darknesscan have a depressive effect on even the most ebullient optimist. But the low-lows produce high-highs. can't tell you how much lastingsatisI faction I derive from doing my own thing, as the cliche goes.Owning your own givesyou a real senseof purposein life. It is your life. when my time business comes, fully intendto die sittingbehindmy desk! I Is the company your foremostpriority in life comingbeforefamily and other pursuits? My wife is first eventhough I spendmore time on the business than with her. Stacy is my life-support system. In no way does she resentmy dedicationto the companybecause knows that family also playsan important role in my life. she

Damon Electric

job the Do you know of many other wives who would call losing a $50,000 unified team best thing that had ever happenedto her husband?Stacy and I are a with single-minded PurPose. But if Sure, I'd love to spendmore time with Stacy and my two daughters' that lifestyle,I'm convinced achieving *y doing so meant abandoning independent, I would the family would lose out in the long-run.Stacyand I would losea dream. our lives' lose self-fulfillment.We'd all be losers.The vitality would be taken from

" w o r k a h o l i c s " C a n b u s i n e ss u c c e sc o m e ? s s ra A n a l y s i s :D o e n t r e p r e n e u hs v et o b e anywayotherthanthroughall-outpersonalcommitmentanddedication? DoyoupersonalIyfeelyouwouIdbebetteroffstayingsing|eifyouintndedto ve s t a r tv o u r o w n b u s i n e s s n t u r e ?

with Damon'swife, StacyMclvcr: The following is an interviewconducted Stacy,describeDamon'sentrepreneuriallifestylefromyoutownpersonal point of view. in Although I'm not involvedin runningthe business any direct way' I keep That Damon works hard is undeniablytrue, in fairly closetouch with daily events. loveswhat he'sdoing.He thriveson it' but he sincerely Heusuallygetshomeeacheveningaround8:00'althoughtwicelastweekhe preis stayedat the office past midnight. His schedule hardly what you would call nights.work is his life and he is my life. Therealthoughhe is home most dictable, way I can. in fore,I don,t mind beingflexibleand supportive whatever Isuppose,ideally,IwouldlikeDamontohaveamoretraditional8:00to him from enjoyinghis work. I'm more but not if it prevented 5:00 schedule, time I spendwith him than the quantity. in interested the quality of I've alwaysseenthe desirein him to be his own bossand to call the shotsin How many his own company. He's very well-adjustedin his job and successful' that? peoplecan really say I knew when I first met Damon that he had different qualitiesfrom most His and aggressiveness. nervousenergy people. He's alwayshad so much confidence prop.l, him from one idea to the next, and he can hardly wait to put thern into action. Damoncallsyouhislife.suppoftsystem.Explainwhathemeansbythis. Well, that's very flattering for him to say. I'm sure he's referringto the fact about givinghis careerall-out support' that I don't have any qualmsor reservations we both havededicatedour livesto making Damon Electric successful. his It's not really a matter of putting his interestsahead of mine, because

Experience Phase IV: The Entrepreneurial Lifestyle

interestsare my interests.I have never had a desireto strike out on a careerof my own. I'm fulfilled through Damon'ssuccess the livesof my children. and I know that all soundstrite and old-fashioned, especially light of today's in E.R.A. trends, but it's the way I feel. I don't seehow any entrepreneur could be very successful early in his careerwithout strongfamily support.

A n a l y s i s :D i d y o u a g r e e i t h S t a c yM c l v e rt h a t f e w e n t r e p r e n e ucs u l de s t a b l i s h w ro t h e m s e l v e si t h o u ts t r o n g a m i l ys u p p o r t ? f w What sacrifices you feel an entrepreneur's do spouse childrenhaveto make? and

What advicewould you havefor the wivesof other entrepreneurs? I really hesitate to hand out any generaladvicefor others because realize I that not all women are like me. I certainly don't begrudgeany woman the opportunity to pursueher own career. just ask them not to put me down because I I have chosen to support my husband'swork. Entrepreneurs require freedom and flexibility. Hopefully the entrepreneur's family will not impede that freedom to any significantextent. The business owner has enoughwork-relatedproblemswithout alsohavingto fight domesticbattles.Something to give. has There'sgreat satisfactionin teamingup with your spouse a project that is on truly meaningful to you both. That's what marriageis supposed be all about, to isn't it?

Analysis: Besides family supportand encouragement, what other externalfactors ca y a C m u s tb e r i g h tb e f o r e n e n t r e p r e n e u r ns u c c e s s f u llla u n c h n e w v e n t u r e ? i t e a i ll u s t r a t i v e x a m p l e s . external factors lf you had a viableventureideayou wantedto pursue, would these g i v e y o u t h e " g r e e nl i g h t " o r " r e d l i g h t " ?W h a t w o u l d h a v et o c h a n g en y o u r i l i f e b e f o r e o u c o u l ds u c c e s s f u liln i t i a t e n e w b u s i n e s s n t u r e ? a ve y v

what'syour entrepreneurial potential?

45
There is no questionnaire,or assessment instrument, that can predict with abin success. Success the solute accuracyyour chancesof achievingentrepreneurial growing body of empirical research real world eludessimple formulas.However,a is making it increasingly clear that individualswith certain personalcharacteristics patterns are more likely to initiate business venturesand to establish and behavior performance records. track successful your own entreThe following questionnaire designedto help you assess is preneurial potential more intelligently. By no stretch of the imagination is the questionnaire foolproof as a predictiveinstrument. But that's not its purpose.The purposeof the questionnaire to stimulateyour own thinking about the peris sole Hopefully, the questionnaire sonal dynamicsof entrepreneurship. will help you to "know better thyself." Scoring instructions: Respond to each of the statementsbelow. Put ,4 in the placea D in the blank if you answerblank if you basicallyagree with the statement; basicallydisagree. It is important that you reflect on the statementa few momentsbefore you respond. Avoid "shooting from the hip" in your responses. For questionsconcerninginterpersonalsituations, might help you to seekout the opinionsand perit spectiveof closeacquaintances. some areasof your behavior,other peoplemay In know you better than you know yourself!

t.''

l. Mistakesprevent success. 2. I am willing to take risks in order to meet my goals.

t ---+.' '-i ). L '' ,t t

3:*J generally like to do things exactly my way. 4. Nothing ventured, nothing gained! 5. I can be relied on to get the job done. 6. People sometimes tell me to slow down and not work so hard. 7. I feel guilty when I have a lot of free time on my hands. 8. I don't hesitate to make my opinions known to others. is 9. Ultimately the best measureof success money. 10. It generally takes strong external prepsure to really get me working. I 1. I value my security more than my freedom. 12. I tend to do most things like other people do. 14. Illness is no strangerto me. 15. Luck and factors beyond my immediate control have determined much of my life. 16. I tend to let other people set the standards;I strive to attain them. 17, I have more energy and pep then most of my friends. 18. I am frequently conscious of being different from other people. 19. I see most situations in life as opportunities for competition. 20. I am what I do. Zt. I would rather work by myself than with other people. 22. I get sick and run down more often than most people. 23. I am conscious of setting goals for myself everyday. I generally know about what time it is. Wealth should be distributed to everyone equally. lhave been fairly successfulin most of my past undertakings. I am in control of my life. Conformists usually get ahead. Money is a poor measure of success. ,,' I often doubt my ability. Losers make more mistakesthan winners. I value status above accomplishment. I fear failure. What others think of me is more important than what I think. If you want something done right, do it yourself! The best teacher is experience. People seldom misunderstandme. 3 9 . frequently duck problems hoping they will eventually go away. 40. set high, but attainable, standards for myself. 4t. enjoy leisure activities more than work. 42. Money is very important to me. 43. Being fired from a job represents an opportunity rather than a failure. 44. I am a tougher competitor than most people I know. 45. Efficiency is still a virtue. 46. Competition is healthy. 47. Children should be required to earn part of their allowance. 48. I have little desire to get something for nothing. 49 . F ate plays a large role in the lives of many people. 50. I know what I'm going to do tomorrow.

i '' , t'

I L'

25. 26. 27. --rti' l!. 28. 29. "---430. 31. 32. i 33. l,' 34. 35. t', 36. ---j:-37. i ' 38.

---'s.-i) :

,,
jt-,, I j

-1i

--+:-j/J: i ----+ 248

EXPERIENCES IN

ENTREPRENELJRSHIP ANDSMALL BUSINESS MANACEMENT


L DONALD SEXTON M.\ANAUKEN PHILIP
the In Experiences Entrepreneurship Small BusinessManagement in and "realworld" approach initiating operating a to and authorshavedesigneda this Thoughthereis no substitutefor actualexperience, venture. business practical from book will help to equipthe studentto makethe transition classroom the businessworld. to variety DonaldL. Sexton and Philip M. \hn Auken offer a carefully-balanced focusedincidents, cases, of learning experiences such as comprehensive problems. and structural interviews, experiential exercises, highlightthis book: Manyspecialfeatures . Realistic they Co depictionof the daily lifestyleof entrepreneurs-what and how they feel . Casesabout femaleand minorityentrepreneurs . Livelywriting style in the entrepreneur's own lingo . Diversity ventures geographic coverage of and balanced . Small-business venturestrategy and lifecycle format.ventureinitiation, lifestyle venturetransition, entrepreneural management,

lNC., PRENTICE-HALL, Englewood Cliffs,N.J.07632

rsBN0-11-a1q8Bq-a

ENTREPRENELJRSHIP ANDSMALL i BUSINESS MANACEMENT


DONALD SEXTON L. PHILIPM AUKEN \AN

EXPERIENCESIN

INSTRUCTOR'S NUAL MA

INSTRUCTOR'S NUAL MA

EXPERIENCES IN ENTREPRENEURSHIP AND SMALL BUSINESS MANACEMENT


DONALD L. SEXTON Caruth Profe r of Entrepreneurship sso
Center for Pivate Enterprise and Entrepreneurship Baylor Univenity

PHILIP M. VAN AUKEN


Centerfor Pivate Enterpise and Entrepreneurship Baylor Univenity

Prentice-Hall,Inc., Englewood Cliffs, New Jersey 07632

l. O 1 9 8 2 b y P R E N T I C E - H A L Ln c . Cliffs, N.J. 07632 Englewood

All rights rsarvecl

ISBN:G13'295063-4 Printed in the United States of America

ltt

INTRODUCTION

Thie the

instructorrs

nanual

ls

deslgned

to asslst for

teachers

ln

preparlng dlscusslon.

bookrs for

caaes and varloue each case or

learnlng

exerclees

claeeroom the

Notes

exercise

are organlzed the book.

around

"stop-actlon" to an6r{er

questlon

fornat

used throughout as thoroughly will

The authors but

have tried that

each questlon dual to lnstructor

as possible,

we recognlze

each lndivl-

have hls

or her own additional in the nanual will at

thoughts leaet

and analysis serve as a good

contrLbute. polnt

The connentary for answerlng

startlng

the quescions. Experlencee the "real ln Entrepreyour

We slncerely neurshlp studentsr llke using to lt. and Snall

hope that Bueiness

you w111 enJoy uslng Managenent and that of the

book w111 enhance world."

undersEanding hear your

and appreclatlon about the

We would experLence Ln

comnents for

book and your teachlng

classroorn

Best wishes

a rewarding

experLence.

Don Sexton Phl1 Van Auken

WICKER DESIGNS

Issues
t. thesnallbusinessllfecyclefornataround.whlchthebook To introduce is organlzed' buslness Danagenature of snall to the situational evolve as the To expose students tii-oppott""ltles Manageri-al problems' challengesl ment. firm grows and changes'

Z.

" fttel Answer Vi,tte"t Ptltcto' i-is how olgrgll scr i


continues evolve a possible. to wlth comPan

qg99!19o-a9-!h9!9 an!-shal .bl"tt i6Fituational l-EEEJllustrative

Ly as es cha

ratl
roblems exan

can. e a s the comes menvar IIe and c s where

response sinplified there ls no clear-cut' obviously .""i':.-"a"te '"""oir"a.a management actlon at approprlate situationally key issues and concerns io"tt'er' "t.titt-.y"r". hlghllghted: can be lu.r. o#""
Venture 1. 2. 3. Start-uP the business plan team' cash and fl-nancial includlng to package

to che question of of a cmPanYrs ltith each life

Developing Coalescing

the venture

external the

consultants conpany through early

C'enerating a posltive oPeraring hurdles Developing a viable

flow

sustain

4. 5.

competltive

edge to attract to sustaln

custoners products/servlces belng

Making lnltial marketed Developing growth

capital

expendltures

6.

the external

relaElonships

(financial

supplles, """to'lil"'li''i-'ii"r'
Perlod Growth additional Obtalning tntt^itli (Recognlze Retaining Evaluatlng Hirlng earnlngs the to equity gittr'"g fuel

'iii

;;;;ia'

the baseror tt* fast

organizatlons'

Fast 1.

capital' bulld-up fl-nanclng to sustaln whlie naking a proflt)' io'!o-;;;k; trtt" internal of golng staff growth public as well wl-th ownershlp as llne managers pollcles

2. 3. 4. 5. 6. 7.

possibillty supportive

additlonal

Formalizlng Systenatlzlng

organlzatlon

structure work

and personnel flow will

the oPerations

to establlsh Strlving nest comPetitlon

a narket

share that

dlscourage

addltlonal

In at thls stage ls difficult. structure Developlng the organlzatlonal people hard-to-flnd the courpany the owner ls torn between htrlng stafftng grows versus obeolete as the organlzatlon thst w111 not become technically For example, a Proafford. people that Ehe cornPany can currently hlrlng for a 15 Person operati.on may or may not be the producsupervLsor ductlon eurploys 80-100 workers. tlon manager needed 1n 3-4 years when the operatlon Maturlty Stab11lty

@reae1ngnurnberofroanagerla1actlv1t1esfronentrepremanager neur to professlonal 2. Increasing Seeklng 4. 5. 6. 7. 8. concern for stockholder share relatlone and dlvidends

to nalntaln

narket

Considerlng Organizlng Increasing Exploring

acqulsltlon around concern profit for

offers centera research and developnent lntegratlon oPPortunltles

dlverslflcatlon

and vertlcal or varlations whlch

Looking for rnodlflcatlons additlonal conplemenlary

Products

products and/or of exlstlng growth w1l1 provlde addltlonal firm. The

to a slngle product The organizatlonal life cycle applles growth cycle can be prolonged by new product developrent.

Sales

The above graph shows urultiple growth plotted, the organizatlonts

If curves over time. curve has a different

cornblned sales appearance:

are

Sales Time

TIIE KLOTHES KORNER

Issues
1. Use of pro fonna flnancial staEenents plannlng on sma1l conpany operations

,
1

BusLness Inpaet of

forecastlng external

and financlal econonlc

conditlons

4.

Buslness buy out

terms plan frorn Lhe "t"rdpoi.t ""*rrpii6i!?--of """*pti.

Analy?e each bqsiless question any of !}-"""

Marrene shourd be congratulaEed for deveroping three alternate flnanclal plans; many srnal1 buslness nanagers donrt de;e1op any. The pivotal element ln her planning ls when the prevallir,g ."."""io.rary perroa wirl end and econonic recovery begln. The garment industry ts freqlentty one of the first to feel the effec.s of a recJsslon and one of the first Eo recover a fterward. Business plan "A," labefed pesslmlstic, assunes that The Klothes Korner will be able only to naintain the pasE revel of sales wlthout any lncrease during the recessionary period. pian a projects sales of g67 per square foot of retail floor ( for a 1000 sq. it. space b , _ r t 1 d i . r g) , a s c o m p a r e d r { r i t h a national average of g70-glo0 per square foot. plan I'p.oju"a" $g3lsquare foot, and Plan C projects $93/square foot. Plan B projects a 25 percent sales lncrease, cornpared with 40 percent growth in Plan C. f13l f assumes the gross margin on selling prlce wlll rise from 37 percent (p1an A) to 42 peicent. A gross margin of 45 percent is assumed in plan C. In surveying the three p1ans, sone students are apt Lo question no increases in operating expenses accornpanying projected srles ir...ases. The authors feel additional sales can be."t,iu.r.a r.rithout comparable expense increases because of the fixed nature of most overhead costs and our perception chat the storers srna1l sales staff is presently under utillzed. ott

accept

for

1981?

The authors would reject plan A outright, since it projects no growth and no salary for the or^'ner. Marrene conlee would be u"tti. off golng out of business. The feaslblrity of plan B hinges on when Ehe recesslon wirl end. The plan ls aEtalnabre if the recession ends in the first quarter of 1981. Attainment of plan c is contingent on substantial economlc recovery and aggressive merchandising ability. The authors feer plan c nlght be appropriate for L982 but not for 19g1. The authors would therefoie go wlth Plan B. re pro ted financial ratios for The K l o t h e s of ch drenr s clot Klothes Korner PlanA B C Neg. 11 17 Korner wlth industr

s for r e t a i l e r s

Industry Norms
High Mediurn
l o

Net income as Z of sa1es, no sa 1a ry fo r oumer Net income as of sa1es, $8,000 annual salary for owner ratio days sales 'l

Low

4.5

0.7

Neg.

1.7 1. 6 7

12.7

o.7

Current A/R to

3.9
25

cash & carry

tenns

41

59

1
Tctal debt to equity (%) ( times) 1.46

r27
l.B2 2.04

46,3
15' 5

136.5 306.3
I 1' 4 5'21

*NeE sal,es to

inventory

*Assume lnventory of $46,000. This is developed under the assumption that for the bank loan of $27,600, and that inventory was pledged as collateral the bank loaned this amoun! on 60 percent of the inverttory' If you were Marlene Conleets capi ta1 ? banker, would you loan her $20'000 for working

The authors feel Ehe bank should grant such a loan; Conlee is sufIt should be solvent and appears to have a promising fuEure. ficiently statenoted Ehat bankers often consider many factors other than financial In a recent survey conducted by the authors' it nents in loan decisions. factor on loan dec-isions was determining was found that the most inportant the that app,licants would require further banking services;'n the likelihood was followed in order of importance by creCit This criterion future. statements' worthiness of the firn and then analysis of pro forma financial

I_$"

"t.."

""t.

P"t "P f

g would be a fqir

!9gljitjfa_f::SS-

r9"egi
value or the This can be approxilnated using either:. clle adjusted'look consi.ceriig the adjusted book value present value of future earnings. "proxy" bal:rnce sheet' as it is necessary to develcp a merhoi first, follows: . ' F R O X Y ' ' B A L A N C ES H E E T F O R T i l E K KLOTT1ES ORI'IBR ASSETS

Current Assets SuPPlies ( I ) roventory (2) Toral FixeC Assets SLore Equipment (3) Tota I Total Assecs

$1 4 0 4 5 ,C ) 0 0 $ 4 6 ,1 1 0
3,120

__3 , 120 $49,260

!I!B-Mlry!
Current Liabilities leUt (4) C ap i t a l Owner Equity 'lotai Liabi lit Les and CaPital Notes:

6 $27, C0 2!,664

j1130

I. 2.
?

= $3' 120 Based on 52 property tax. $156/.05 r ^ 7 1 t hn o b a n k l o a n i n g o v e r 6 [ J Z o f i t s Assume inventory as collaieral' va1ue. $27,600/.60 = $46'000 = $3,120 9156/'05 llased on property tax of $156 per year, at 5Z'

a'

Based on interest payments of rate. $4, 140/.f5 = $27,600

$4,140 per year,

r^rith an estlurated

l5Z

using the "proxy" balance sheeL, adjusEed book varue = assets ($49r260) * ownerrs equiry ($21,660) - liabilities (27,600) = $43,320. Goodwlll would be in the neighborhood of g10,000 prlce $r5,000, leaving a total negotiating range of about g53,000 - $58,000. using the present value of future earnlngs method and assuming plan B, one could project earnings for 5 to l0 years. The authors feel a 6 year earnings projection is reasonable. Risk free money during the prevailing period of 1981 was approxirnately tine 14 percent. Addlng rn a 2 percent risk discounting factor, a capitalization rate of l6 per-ent results. Assuming 15 percent growth for 3 years and 1eve1 ""r.rirrg" for the next 3, a rough estimate of precapitalized earni.ngs would be $75,000. The present value of such future earnings, discounted at 16 percent, is approxlnately

$30,000 $35,000.

clearly the adjusted book value method produces a higher se1l out bargaining range. obviously other valuation approaches exist based on dlfferent sets of assumptions. Update Actual sales were as follows: for

The Klothes Korner for the first January: $3690 February: 4090 March: 6170 April: 7180 PHARR COMPOSING SERVICE

four months of lggl

Issues 1. 2. 3. 4. 5. Managerial Controlled problems caused by business versus uncontrolled female gror^rth enlrepreneurs with a bank growLh

Discrirnination EsEablishing

against a business

relationship

Company buyout decision pose problems and cash flow sales for a business?

In what ways can growth I. 2, 3. 4. 5. Undercapitalizatlon Preoccupatlon Backorders Swelling Increased flow with

straln of profit scheduling

to the detriment on production and bad debts

and geEting accounts problems

behind

receivable

of management coordination

and synchronized

work

6.

the capabillthe demands always outweight In a rapid growth situation, "back to the wa11" that the new an owner has her Itrs only after ties. uhe daily currently person is added or the new equlpnent is obtained. "brush planning is fires" take up so much tine that the longer-range neglected. Ehese growth problems be counteracted?

How should l. 2. 3. 4. 5. Careful Use of Infuslon Possibly

and continuous syscems analysis of new growth

funds management and budgeting and work engineerlng equitY debt into longer-terur amounts to

refinancing

short-tern

Greater concern for setting prlorities, "time-management" for the owner Delegation the (The owner cantt slgns that

which really

6.

do everything.) is growlng Eoo fast?

What are l. 2. 3. 4. 5.

a business

Constant

shorlage

of cash

Patchwork debt Breakdown in Chronic

sEructure communicati'on

organizational

production sales,

bottlenecks diurinishing profit

Increaslng

to make a profit. The key is to always remernber that a business exlsts when they owner/managers many tlmes becone preoccupied with sales dollars "no" tasks is to say profits. One of the nost difficult should be thinking a customer Ehat has been with you for a long to a custoner--especially tine. What are I. 2. 3. 4. 5. the signs that a business is growing too slow?

Stagnating

sales/Profits caPacitY

Excess production Excessive liquiditY

Sales basically Unconfortable

1evel

or only narginal "idle" or "free"

increases time in for the owner money are

amount of

Do you feel Ehe Problems experienced typical of feurale enErePreneurs?

by Cynthia

borrowing

i! is proto make slreeping generalizalions, Although it ls very risky are women entrepreneurs prospecEive and established bably true Ehat rnany than male counterparts' consideration glven less credit

Hor^7ever' times are changing rather rapidly as !/ornen are enterrng and excelling in one traditlonally male occupa.tion after another. This is graphlcally borne out in the con!inuatLon of the pharr case, where cynthia Pharr goes on to successfully obtain adequate bank credit. Changes in governrnent regulations now rnake it difficult to discrlninate on the basls of sex. Although this still does occur, females can norr use the threat of a sex discriurinatlon suit to keep people,,honest.,, ,?!ini9n, ll-Y35 9id_the $500 loan to Cynrhla? banker have any jusrificarlon for rejecting rhe

"a. t"".t""4 b.*er made it abundantly crear that elther the bank policy or his own personal bias precluded rnaking roans to wonen. ceitainly such a policy is no longer viewed to be justifiable by malnstream soclety. rn effect, this banker was bowlng to (now largely passe) sociar tradltlon and chauvinisur. Good, solld loans are as inportant to a bank as good, dependable people "1uxury,, are to an organization. Few firrns can afford the of discrirnlnating in the nnarketplace today lf they are to meeE their profltabilitv goals. fTovidg guidelinestive, long-@ l. 2. Automatically for a smalr buslness to folrow in developlng a suppor-

provide

the bank with

updated financial

statenenrs.

Do your before ureeting for a loan: pro formas, budgets, strateglc plans, etc., as we1J. as knowledge of the industry. Bankers cannot be expected to know the details of all lndustries. rf you can "industry compare your operation with so ca1led standards,,, you glve your banker additional information for the declsion maklns Drocess. A well developed business plan shows the banker that you haie given considerable thought to your business. rt urakes you look professional. $370,000 a good offer for the buslness?

"hornework"

Is

The business rea11y didnrt begin to take off rmtil 1925. So basicarly the sales growth of $350,000 has occurred in the last 4 years, or an increase of $90,000 per year. Even on the basis of straight ilne growth, which is unrealistic, the business will be at about a rniliion dorlars in another 6-7 years. Further, the pretax profit of $5I,000 represencs a return on sales of 14 percent. The printing industry, or at least this sectlon of the industry, ls expected Lo grow considerably for the next several years and should experlence' profltable returns for the sarne period. A rnore reallstic growth projectlon would be to reach the I rnillion sales figure in abouE 5 yeirs. tr{ith a 4 percent pretax return, earnings will be roughly $140,000 per year. A $370'000 flgure provides the buyer wich a better deal than the seller. Prlce is not always the most 50 and beglnning to look towards be enhanced if she sold ouE in 4 larger and more profltable. Ten Eo 91,400,000. inportant consideration. cynthla is now relirement. However, her posrtion wourd or 5 years when the buslness 1s much times earnings in 4 or 5 years wilr arnount

What other reasonable terns of purchase rnighE also be offered?

style, she night be life If Cynthia is serious about a more leisurely "X" arnenable to a sales arrangement that would guarantee her a salary for this In practice, years if she continued to run che operation. number of which night not appeal !o Cynthiat a 5 year provision normally carries She also has strong since she would only be 55 at the tiure of reEirement. comniEments to oEher people in the firm, even though they do not own a share of the business. Perhaps the best approach would be a purchase !o Cynthia. life annuity guarantee a comfortable What do you think do? Cynthia Pharr should do? annuity plan that would

What do you predict

she will

being hassled by the I.R.S. and appears Although Cynthia is currently the authors feel that to be ambivalent about SEagecraftts buy-out offer, "sweat in the business to sell out at invested equity" she has too much this rather early juncture. with Pharr composing service would appear to have a very rosy future, word processing equipnent' in electronic the rapid growth opportunity a the prospect of tackling appears to fu11y relish cynthia In addiLion, conpany could sving such a profitable certainly new project. challenging r h e $ 1 2 0 , 0 0 0 i n f i n a n c i n g r e q u i r e d t o o b t a i n t h e n e i ^ rg e n e r a t i o n o f e q u i p ment . Realities follows: A. B. C. D. She is She felt supporting a sel1 out scenario on Cynthiars part are as

50 years

o1d. at Stagecraft's offer. offer' enjoys her

"flattered"

Ten time earnings (370'000) isnrt hard Cynthia has worked awfully present hassles with the I.R.S. against a sell out:

a paltry since

1967 and hardly

Realities A. B. c.

Strong commitment to employees. Children what else bles. have now grown and would she do? "1eft the nest." had the Eine to develop hob-

She has not

D.

"lifetime" salary to get her to quit' It would Eake a good shers not she can look forward Eo about 10-15 rnore years. sit around and knit. The I.R.S. hassle, although frustrating, is only tenporary'

AE 50 ready to

E. F.

Strong commitment Eo customers.

Case Update: Cynthia did not se11. She applied for and was loaned $120,000 through SBA. Business is sti1l booming. She is now getting a 15 percent proon sales. She still is working just as hard as ever. was a hassle, she only paid the I.R.S. an additlonal

the fit

Although the audit $1,700 in taxes.

ASPHERICENTERPRISES

Iqqrsr
I. 2. 3. 4. Getcing a new venture Forming the venture sEraEegy ability of an inventor bl"._pLi:g{-1g{_!g_gg1t on che part off the ground leam

N e \ , rv e n t u r e

Entrepreneurial

As you see it, 1.

why iras Aspheric

Lack of entrepreneurial knor,r-hcw anC nanagenent capability of Dr. Cirung. He is a sclentist, not a manager. Lack of potent marketing strategy and financlal business

Z. 3. 4. 5.

plan.

Inadequate

search for

interested

rrenture backers. team. a

Lack of a scphisticated,

capable venture

Aspheric has an idea and a patent but has not pui together either markeEing or business p1an" Many inventlons die at this stage. invesled $25,000 in the coinpa'y, would you contrlbute

If you had already more?

The authors would not invest more untj.l Dr. Chung and tean ',got their act togecher" an<i wenl about forrnalizing the new venture in a truly professional way. Having a promising rrew inventlon is only the starting po1nt for a new technical venture. If Dr. Chung receives money be spent? another $J0,000 from Mr. Blackrnon, how should Ehe

The authors feel Ehat the services of a consultant should be seriously consldered to aid the venture tearn in pr:ofessionarly launchlng the new venture. Given Dr. chungrs obvious lack of managerial experience, perhaps the services of Re-Search Patents should be seriously considered. This rnight even circunvent the need for additional seed equity on Mr. Blackmonrs part. The Leam needs to bear in nind that 70 percent of the royaltles on a produ.t that has reached Ehe narket is better than 100 percent of one tha! probably never reach the market. wiil

Where should Aspherlc

Enterprises

go from here?

mus! recognize the need for professionally Dr. chung and investors out a way to get the venture figure They rnust either Aspheric. organlzing they urust In short, need for outside help. or adrnlt their goitrg ttrerselves cut bait. fish or either of a new venture ls lack of an one of the rnajor reasons for failure sales and plan. A business plan does much more than project adequate It forces the owners to come to grips r^/ith inportant data. financlal a Through the process of developing to the new venture. issues relating needs, marketing straEegy, manufacissues such as capital plan, critical etc.' must be processes and/or techniques, personnel requirements' iuring addressed and resolved.

PEPPYS PIZZA I

Issues I. 2. 3. 4. N e \ , tv e n t u r e Business Strategic Market start-uP

plan develoPnent Planning

research a n ? Do s ctive feel Lathan How new v e n t u r e ?

!e business "t I" th" pj=t=9i.9_!9"ttn..l_ lanned for Eheir have caPablY and Haliburcon can the docunnent be imProved? Evaluate che marketi standDolnts o validi t It have been mproved ? research conducted completeness and ob--i

urs from the the entre In what ways could

by unwarranted assumpon the whole, the business plan is characterj-zed Can the cost of pizza rea]-l-y conclusions. tions and unwarranted optirnistic pizza outlets Do larger lowered due to lower overhead? be substantially Is Peppyr s plzza real1y better tasting? enjoy sizable economies of scale? with just Ewo employees? How wise is Can ieppy's Eruly have fast delivery esEablished pizza restaurant? it to locate just a block away frorn a larger, queslions can be raised' Any nurnber of other unsettling an exercise in self-fulfil1ing The marketing research was basically did not If reipondents (randornly chosen and representative?) prophecy. continued had hoped, the two entrepreneurs answer as Latharn and Haliburton It seems fairly the desired response resulEed. rephraslng questlons until exactly obvlous to th" authors Ehat respondents told Latham and Haliburton what they wanted Eo hear. and nebul0us. estimates appear quite oPtimlstic The teamrs financial the cash flow to consider nade no effort For example, they apparently coupons, ftee pizza, tokens' etc' inpact of offering

As a banker,

would you loan

seed capital

to Peppyts Pizza?

Bankers in general are reluctant to make loans for new venture startups. The authors would not grant a loan r:nless nore valid rnarketlng research were conducted, rnonthly sales estlmates were defended, and unless a better explanatlon could be roade regarding fast dellveries.

CMIG Issues 1. 2. 3. 4. New venture Developing Establishing Role of marketing a conpetitive a narket

NICHOLS AND GARY HARWELL

strategy edge niche in new venture strategy

creativity

and innovation

comDetltive stra ve to satlsfy Ehe criteria

and competiEive established

e for the new bookstore. Nichols and }larwe11: to

Possible alternatives following: / 1.\ \-,

for

Nichols

and Harwell

to consider

include

the

/:,

and Harwell offer their services as book selection to customers, particularly in Ehe science fictlon area. Presumably many neophyte science fiction readers, as well as those unfaniliar wiEh other genre, would enjoy lnformal advice and guidance on i^rhich books are most sElmulating and enjoyable. Organize and shelve books in an easy Lo follow manner rnaking customer selection both efficient and pleasant. Promote Ehe storers easy locator arrangement. by custoners but

"Have Nlchols "consultanEs"

2.

Otter to put out a market search for books requested { 3.1 not in stock. Promote this reader search feaEure. \/' [4.) U' 5. 6. 7. Organize collector Northwest. Sell gift fares and conventions for

book collectors

in

the

certificates a bargain table

during of

the Christmas

season. turned over. at

Maintain

books which

havenrt

Periodically hold cut rate Drices.

special

sales offering

the entire

book lnventory

[ 8., |/ (91 L/

Employ a coupon system whlch free or bonus books.

custorners

can use to build

up credit

for

Open during the evening hours when nany readers, especially college students, are apt to have the tiure and inclinaElon to browse. Nichols and Harwell should book trade-ins and pricing. avoid setting They should a rlgld, blanket policy on swap books, buy back books,

1I

0n1y by bear' lhe narket will and price books on Ehe basis of what minirnize dead invenEhemselves in this nanner can the duo protecting llost used botk stores and especially tory and maximize cash flow' usedconicbookstores,subscribetoaservicewhichlistsbuyingand selling Prices for all books' ll. ProminenEly decor. feaEure the universityts colors and emblems in the store's

12.

posting results and comFeature a readerrs poll of well known books' "personally readers to ge! Encourage menLary on store wal1s' lnvolved" with their reading' the store'

IncluCe a suggested name for 1. 2. 3. li. 5. Reading World Bargain Books The Book ShoP The Book Store Reading EmPorium

E K P L O R A T I O NG R A P H I C S L s_sues 1. 2. 3. Venture initj-etion and gro'rth of growtir capitai filancial planning SnoluLers' what a<iciitional 9kilrs ald

Anount and tining Short-tern

anC long-term

Besi,les her te:hnical

exp'-rtise'4L

ffi 9r"P!i!:?
1. 2" Goai se;ting (going

-ramie-i:l herPed
school)

to night

and perseverance Dedic:tion shunnirg at the office) Arn'bitiousness (forming

(continuing

to train

despite

social

3. 4.

a partnership (wcrking

and subsequently with

a corporation) oil corn-

conpetence Interpersonal pany executive) Innovativeness rnarke t s) (applying

fruitfully

the I{ouston

5.

c o m p u t e r technology

in

new ways lo

EaP new

tey

},tanycorporalemanagerspossess-theiternsmentionedinl-4above.The "nd a real desire to have ones o\tn company' here is innovative"lss

HoI^rcanafledgllilgconpanydeterminetheamountandtimingofgrowthcaplEal needed?

The cornpany must of course have crystalized its growth A fuzzy tomorrow cannot be adequately operating approach. today. Fundarnental flnanclal profit capitaL budgeting, tion, etc. analysis plannlng,

objectives and prepared for

planr,ing: is the obvious key to capltal pro forrna preparacash flow analysls,

The energing/growing more on what lt can venture nust concentrate do realistically rather than on what it should ideally do financially This means that the entrepreneur to some vague strateglc node1. according plans to provide for future operating financial must prepare alternate pessimistlc, An optlmistlc, and reallstlc uncertainty and contingencies. hthat the plan should be formulated in vlsualizing Eo aid the entrepreneur Even though the future rnay bring--the range of alternatlves and scenarlos. he or she can the future with great certaintyr entrepreneur cannot forecast "feel" get a good for the parameters and boundaries involved. certainly With an eye grow themselves into bankruptcy. Many companies actually investments the additional tends to forget only on sa1es, the entrepreneur More flrrns go etc. required in lnventory, equipment, accounts receivable, and Income statenents broke frorn lack of cash than frorn lack of proflts. essential Cash flow planning 1s absolutely balance sheets are not enough. in a growing company. Analyze Ex l o r a t i o n -Long-term. Gra hicsr current financial needs, boEh shorE-term and

Exploration Graphics followine tabies:

has certainly

had an erratlc

past'

as shown in

the

1979-80
Net Earnings as percenE of sales: a step 43'l in

7B-79
237"

77-78
47" directlon

76-77
l4Z since

7s-76
IB7" the

Clearly Exploration has taken in 1977-78. disaster

the rlght

pattern financial One must questlon how a firm can have a predictable r1'hen net income for 1979-80 was $194,000 and net worth has increased quLte fron $40,000 in 1975-76 to $474,000 in 1979-80. steadily, to che big Normally ltith profits such as these, one looks dlrectly Inor accounts recel-vable. requirements for funds, that is lnventory for Exploration Graphlcs is rninimal, but the accounts receivable ventory The lnvestment in A/R for 1979-80 was $3341000 on are way out of line. The picture has been looklng worse for the last few sales of 9446,000. years as shown by inventory Eurns. 1979-80 Inventory turns: 1.3 78-79 f.3 77-78 3.7 76-77 6.6 75-76 6.2

3.7 tirnes ln 1979-80 as done Graphics had turned lnventory If Exploration and had in 1977-78, Ehe conpany would have had only $120'000 in lnvenrory or to reduce debt. an additlonal $213,000 for equlpment and bulldlngs Long-term income. With planning means nore lt nust come policy sales, expenses, and than forecastlng guidelines for investrnent Ln inventory

l3

and A/R.

Exploration

Graphics

needs to establish

guidelines

in

these

lmpacE on the A/R can sales and their that credit It nust be recognized Sales increased 62 percent frorn 1978-79 to be a rnarketing strategy. inpact on these increases. Credit terms could have had a direct 1979-80. all companies tend Eo deEeriorate, when economic conditions Further, However, this alone does stretch payables to the maximum of 90-120 days' not account for E.G.rs large inveslment in A/R'

AQUA SLIDE WATERHAUS

Issues l. 2. 3. 4. Analysis Breakeven of new business Point analYsis analYsis proflt potential

Payback Period Financial the

Planning short-run profit pgtgntial yo.r 9! t'laterhalr9-Aqua Slide' rest? recommend that Dogs the

Analyze @s state

analysls

conditions

under which you (1)

would and (2) would not

The success of Waterhaus depends on the number of customers it can renaln a fad, and whether or not Gerrard has draw, how long slides In order to breakeven each year, the s1lde esEimated his costs. correctly on average per half hour, 28 people in year 1, 18 would need to attract Assurning and subsequent years' people in year 2, and 4 people in Ehe third an annual return on investment of $30,000, to breakrequires thal Cerr"ra on average per half hour, 3l even each yu.. ihu slide would need to attract people in year l, 2I people in year 2, and 7 people in year 3 and subsequent years. (See Appendix for calculations)'

Thepybackperiod(therirneittakestorecovertheinitlalcostof 2.45 years if there is a 30 would be as follor^rs: the slide and building) per customer oer half hour average; 3.93 years if there is a 20 custorner per half hour half hour average; and 8.03 years if Ehere is a l0 customer are based on the assumptions that loan payments are These figures average. and that there are no other costs in the roade rnonthlyr taxes do not exist, by Gerrard' future other than those listed Recommendations if the 3 conEhe waterslide Mr. Gerrard should go ahead and build If they are not met, he should avoid the risk and below are met. ditions Lnvest his uroneY elsewhere. 1. Data convLnces Gerrard tllat he can average 30 people per half hour' Therlskofwaterslidesbeingastrort-livedfadistoogreattorisk any longer PaYback Period.

L4

2.

The financial statenents frorn the Tenpe operations to provlde a realistic pLcture of expectation for area. Mr. Gerrard worse, 1.e.

"adjusted,' rnust be Ehe srnaller yuna

3.

could afford to lose his entire investment he wouldnrt be cornpletely wiped ouE. Appendix Breakeven Polnt A Analysis

lf

worse came co

124 business

days per year I custorner per

$6 per hour x 14 hours per day = $84 revenue per day for (93 per half hour x 28 half hour d a y = 9 8 4 ) half hour Breakeven year l: 9 2 8 7 , 2 0 8 . 4 0 + 1 2 4 d , a y s = 28 people -----

per half

$s-473t-

hour average

Breakeven yeat

2:

+ 1 8 0 , 4 1 7 . 4 0 I 2 4 d a y s = 1 8 people 37.000.00 + 124 days = $8 4 / d a y

per half

hour average

Breakeven year

3:

4 people per half

hour average

F o r 9 3 0 , 0 0 0a n n u a l R . 0 . I . : B r e a k e v e ny e a r I : $ 3 1 7 , 2 0 8 . 4 0+ 1 2 ! d a y s = 3 l p e o p l e p e r h a l f -------5847d.y2 1 0 , 4 7 7 . 4 0 + 1 2 4 d a y s = 2l $ B 4/ d a Y 67,000.00 : 124 days = $84/day Appendix B Payback Period Initial Revenue: 30 people/ha1f 20 people/ha1f l0 people/ha1f Net Inflow hour: hour: hour: (30 outlay = 9215,000 for slide + $65,000 for building = g280,000. people per half hour average

Brealteven yeat 2:

hour average

Breakeven year 3:

7 people

per half

hour average

124days x (g84/dayx 30 people) = $312,480 124 days x (984/day x 20 people) = $208,320 124 days x (984/dayx l0 people) = $104,160
le) Net Inflow (20
le) | Net

Inflow

(10

I 2
a

$2s,
13 2 ,0 6 3 2 75 , 4 8 O

5 6 7 8 o

$78,888 2 7, 9 0 3 L7 ,320 | L7 ,32O 7

$r83, ( 76 , 2 5 7 ) 6 7, 1 6 0 67, 160 6 7, 1 6 0 6 7, L 6 O 67, 160 67,160 6 7, 1 6 0

Pavback Derlod: per half For]6-dp1. For 20 pu"pf" per half For l0 people per half

hour average = 2'45 years hour average = 3'93 years hour average = B'03 years

since taxes were not conare optimistic Note that the above estimates sidered,andGerrardfailedtoincludeotherpotentialcostssuchasrepair work and conEingencies.

S & S F'ARMS

Issues l. 2. 3. 4. Farming as a business ProfiE planning venture

and maximization analYsis resources d i f f e r = t t 9 e - sbecttett r"tting

Return on investment Alternative some of

deployrnent of the prinary

What are

i. 2. 3. 4. 5. 6,

Critical Variable

role

of weaEher schedule regulations

worklng

Unique government VirtuallY

no market control

No Product differentiation Extrernely difficult forecasting entrepreneurs, since the farnin ?

Are Bob and Don true

to the extent they have organized a Bob and Don are entrepreneurs risk (this and psychological financlal venture involving profit-oriented To the extent of entrepreneurship)' authorrs sirnple definiiion ieing the for entrepreneurshlp' is a necessary requirement that one feels innovation as entrepreneurs' Bob and Don do not qualify Have Bob and Don ornitted any cost & S Farrns venture idea? l. 2. 3. 4. Veterinarlan Cost of Selling Possible parts expenses for to repalr corn factors in t inforural assessment of

catEle

equipment and cattle

expense for exPense for

a truck

16

5. 6.

Stock and crop Tractor

lnsurance

costs

malntenance expenses the in

What is the maximum earninqs before taxes that could be enerated b farm.renture? t p r c d u c t m i x o c a t t l e and corn would ide the reatest return on investment? ume c ease wi terxnlnated three years).

"hedglng" Bob and Don mentioned the possibility of thelr losses by utll izing-a mix thls be a wise course of action? If so, whac percent of the farur should be "rployed for beef The authors have tackled the question of how to naxinize through analyzing several resource deployrnent alternatlves: Alternative Alternative Al-ternaEive Alternative Alteri-rative l: 2: 3: 4: 5: A11 cattle - no corn renaining a c - r - e a g e( 2 2 . 5 ) for for corn profits

43 cows, 2 bulls 30 cows, 1 bull

remai.nlng a c r e a g e ( 8 4 ) renaining

corn corn

14 corrs, I bull No catLle a1l

acreage (92.5)

for

c-orn

As indicated in the follor"ing series of calculacions, alternative 4 ( l4 cows, I bull - 92.5 acres for corn) rnaxlmizes profits over a 3 year perlod: The ocher 4 alEer:natives are rank.ed in descending order of pro$43,292. fitability as foilor.rs: /i3: /12: $33,203 before $33,986 before tax proflt; tax profit; /ll: $32,961; //5: S23"67C The calculations fol1o'rirrg estimates : for each of the 5 allernatives are based on the

Cost. Estinafes Cost of Hay Per Acre Iitilized for

for

S & S l'arms

Cattle

Year l
Leasc expense (per acre) S e e d : 1 2 p o u n d s a E $ 1 . 7 5 Der Lb. Lime: 2 t o n s a t $ 1 2 p e r to i:r Fert i1 izer Cutting and baling hay: 3 tons per acre, $I2 per ion Gasoline: needed .2 of a day at gi6 per day TOTAL

Year 2

Islrj
$:: 20 36

$10
z1

u::
20
JO

24 20 36 3.20

9TI4.26

$66

$66

Cost of

Corn Per Acre Utilized Year I Year 2

Year 3 $10

Lease

expense

$10

$r0

t l

Seed Fert i1 iz er Weed ki11er needed . 35 of a day at Gasoline: Per daY $16 needed .05 of a day at Labor: $24 per daY TOTAL Corn yield Corn profit Per acre: Per acre: 70 bushels $175 at

5 45 5 5 .6 0 1 .2 0

45

45

5.60
...:...::::i.'::

5.60 1.20 $ 7I . 8 0
^

F
$ 2 . 50 per bushel =

1.20 $ 7L. 8 0

= (l7s

$71.80

$r03.20
Alternative /ll

Calculations

for

Resource Data no corn cattle, I;--TEa;ce;11 per anirnal B. 3 a c r e s f o r P a s t u r e a I / 2 a c t e o f hay 300 acres + 3Uz = 85 cattle C. 8 2 cows I bu1l Per 30 cows = 3 bulls' D. I n v e s t m e n t i n : C a t t l_ : e 30 cows at $4UUeacn cows at $550 each 52 addltional I bul1 at $500 bul1s at $650 each 2 additional TOTAL Annual loan payment on $42,400 Pretax Earnings 65 calves at

$12,000 2 8 ,6 0 0 500 l, 300

j40
87. for 3 Years = 916'393
= $23'400 $360 each I \eat 2 Year 3 't

of Calculation 82 cows x .8

Year Revenue Expenses Lease on 257.5 actes of pascure Loan Pa.Yment- cattle llay - 42.5 acres L o a n p a y n e n t - h a Y ( $ 4 ' 8 5 3 a t 8% for 9 rnonths) TOTAL Pretax profit Total * pretax Profic

s73:?oo
258 1 6 ,3 9 3 4853 291

$23,40-0258 1 6 ,3 9 3 280 291

saz700
258 1 6 ,3 9 3 280 291 cl7 n, $25,178

EflJqs
$ 1,605

EI7;M

$ b'l /u

for3years=$32'961

Three be sold at present market prices' Assunes that lhe herd will in Ehe market worth of difference years does not make an appreciable they are 10-12 years o1d' caLEle, since cows ".t U... calves until ll2

Calculatlons

for

Alternative

Resource Data A: Produce 43 cows, 2 b u l 1 s , 7 7 . 5 a c r e s f o r c o r n t lf2 acte 45 cattle for h"y: Acreage requirenent B. - 22.5 = 77.5 acres for corn acres' leaving 100

per anirnal = 22'5

I8

C.

135 acres required of Pretax

for

pasture,

leaving

65 acres

unused

Calculation

Earnlngs Year I Year 2 Year 3

Revenue carlle (43 x .8 = 34 ar g360) Corn TOTAL Expenses Lease - unused land and pasture *g20,300 at Loan paynent - cattle 87" for 3 years) Hay expense - 22.5 aetes Corn expense - 77.5 acres Loan expense - corn and hay ($8,133 at BZ for 9 monrhs) TOTAL Pretax Total profit pretax profit

$12,24O 13,562 25,902

$12,240 13.562

zt:Bdz

$20,300 t3,562

3'.6a

$ 2,000 7,949 2,569 5, 564 488

$ 2,000 7,949 l,485 5,564

$ 2,000 7,949 1,485 5,564

13,4-69 $ 7,333

t6,897 $ 8,905

L6,gg7 |jj96s

for 3 years = 933,203

*
Investment ln Cattle J0 cows ac 9400 each 13 additional cows ar g550 each I bull ar 9500 I additional bu1l ar 9650 TOTAL InEeres t

$12,000 7 ,1 5 0 s00 650

5m;00

3,244 $23,544 : I = 97,848


/13

Calculatlons

for

Alternative

Resource Data A.--EoAuce 30 cows, I bul1, 84 acres for corn B. 3l cattle require 9l acres of pa.sture, reaving CalculaEion of Pretax Earnings

r09 acres

urused

Year I
Revenue Cattle Corn (30 x .8 yield 84 acres TOTAL = 24 at

Year 2

Year 3

$360)$ 8,640 1 4, 7 o o -rT346

$ 8,640 I4,700 23,340

$17,150 14,700

@
2,000 4,933 1,827 6,031

Expenses Lease -

200 acres unused land and pasture Loan payment - caEtle (912,500 at 87" fot 3 years) Hay expense Corn expense Loan pa.ynent - corn and hay ($71858 at 87" fot 9 nonths) TOTAL

$ 2,000 4,933 1,927 6,031

2,000 4,933 r,927 6,031 ---*

r5;r3z-

471

---* T4;69T-

l9

Prati',v r,rnfi t Total preia: profit for

S 8' I78 3 yeais =' $13,'185 in year 1. f4

$ E "5 4 9

sl7, i5!l

*Fina;rcing

pr:ovided b,. prcfit

i:atc.ttatrlons

fc'r nfternative

Resource Data proa"ce t4 cows, 1 bull, 92'5 acres for corn I Requires 7.5 acres for hay' leaving 92'-i acres for coi:n B. requi.re oniy 45 acres for paslure, leaving i55 acres 15 cattle C. lized

unuti*

.!li :yi.

5ar.'I I q.s I Lio_.,_.o_P-;: I a1_


'le...t.f_ 'l-e::_) i 1,,'ir1rr.i

It.::ll -:t.
S17|"C . ()tj I /r_,,7 3l,85C

li,evLtrrue 9 crrf -ie (,-rri. T 0'i/ii. i,\.q v. . i3 i-i.el ,i = q,. -) .1:rcs

i j- "a

tjtit)

$ c s ,t r 4 i r

)!:'19e zI !!i:
a i r)ilii ::

\:'l:)-t: -3')*
tt-, lllat) r ili

11i: r sa s lr:c , : r ; l i a - : 0 a l : ? a 1 ' ' j a .r n ' i s : r r i . , ) a 1 1 1 . : ] i , 1 ? , r i - i . : : . . r , . ' - i iilf l l r : 1 - i ' ' , , . t 8i, it't 3 i'(l'l:s liaY cr:Penses -- /' 5 ai'rr':s C a . n i ' x - ' e t t s e - ' 9 t -. 5 a c : : ' = s : i , o , 1 i i i r av r r i 3 n c - ' c c r i l a i r i i l i : " 7 ( i { " 6 4 1 a r 8i.i for 9 nciiihs) TOTAL P i - e t a x p r : o f i .t : Totai prctax ptofir for

':

:1, {)(-!(l '

2" . 1 t j 3 !f: 6-6!\ 'rl:l 8

i'rl

49' 6,5it1
Ti-. ag

49t 6,64\

__:_:, l:;' S.:0"


I I ,49 i

s T 10 8 8 .

,r-n;B1l

3 yea;:s -- Sq3'292

Ca I c u la t j on s -f tr_{!!9l"1!t". Resource l)ata A.- Produce all corn, no c2-ttie Oniy i00 acreFj are trsed for ccrn, B. Caiculati-orr of Pr:etax Earnir'-gs

-lt-:-

leaving

2CC ac-res idle

Isr-1
Revenue Corrr 100 acres

YEAT

Year 3

s-!l-.lqo2,000 7,lB0
-o-

c1? 5nn

$17,500 2,000 7,180 430 9,610 $-7;6qo-

E x p e n s es Lease - 200 unused acres Corn expenses - 100 acres L c a n P a Y m e n t- c o r t r ( $ 7 ' 1 8 0 a t 87. fot 9 rnonths) TOTAL Pretax ptofit Total preEax profit for

2,000 7 ,i 8 o 430 9.610 $-7,-690

430
Aln

$7, B90

3 years = $23'670

2A

Should Bob and Dor foj*_._jg:jg_j".!."!shlp? tgqd you recommend? What are the partnei;Eitt-

If

not,

what arrangenenEs

The proposition of a 50-50 pa.rtnership sounds nice ln theory but rarely r^rorks out well in the real wor1d. one partner or the other is bound to dominate, depending on the declslon at hand. rn Ehe case of s & s Fanns, it rnakes sense that Bob Schneider should have controlling lnterest because he intends to carry a heavier share of the workload. The inherent danger of a 50-50 arrangenent ls that if the partners cannot reach agreement on a declsion, operational paralysls results. Another probren relates to possible death of one of the partners, which would brlng the business to an end unless careful legal arrangements had been made in advance.

CIMBERLAND CMFTS

rssues 1. 2. Strategy and operations for a rapidly of expanding n e r ^ ,v e n t u r e team sharlng

The advantages and disadvantages rnanagerial responsibillties Forecasting Product Viability EvaluaEion line of of and planning expansion existing cornpetitve track in a fast

a husband and wife

3. 4. 5. 6. 7.

changing

industry

edge record

performance

Lnventory control proPfegrs might arise fror rh" "h"ri.g of *.r"g.

Wlil.:p:cial sibilitiesb@ I. 2, confusion

or discord

over declsion-naking d u e t o lack of

responsibility

and authority input from non-

Narrowness of thinking family enployees

decision-making

3.

Interpersonal d i s h a r m o n y d u e to overexposure as well as aE home) unique advantages also accrue

to one another

(on

the

job

Migh! I. 2. 3.

frour such a family commitnent

arrangeurent?

Closer

cooperation

and greater expenses could

Eo cornpany goals

Saving on salary

Personal compatability patablli ty. lessened likellhood of

quice

possibly

lead

to

professlonal

cor-

4-

estrangernent

from

faurily

due to long

work

hours

2L

thtt !o vj9=qr!:--Y1!!-411-$g11!i"1d oerrnit-pl'anning beyond two years?


l.

th"

"ttf

point here given Ehe Ann nay have a valid extent, To a conslderable However, planning for rnarketing business. of the crafts faddish nature Cmberland to a company' is not the sole area of planning available canalsoplanforthemorestableandcertainfunctionalareas'suchas geographical expansion' etc' physical faclllties, personnel,

2.Ifnothingelse,theSEanfieldscanformulatecontingencyplanswith They can thus prepare the company for which to approach the future' scenarios. alternate and only to the product offering applies The faddish rrature of crafts Cumberland's present prcblem is that they no! to the buslness lCself. whoiesale' cr rnanufacturing" dontt know what business they are in*-reEail, D o es C u r n b e r l a n d C r a f r s have a disrinct coln!e!!tit/9-tjC"? ccrnpetilive edges enjoved by

A11 of the followi.ng ccnstiEute Jntentjal Cumberland over regional wholesalers: 1. 2. 3. 4. Extensi.re 0peraEion Craf!s inventory of a retail seleclion business

to conplement the 'tholesaie

classes

and source network and sales prcnotion (inciu<iing catalog and

Aggresslve l,lATTS line) Potential Excellent On1:r fu1l Shiprnents Technical Informal

advertising

5. 6. 7. 8. 9, 10.

silk

flower

rilanufactr-rring sources in of sripply

and rcrnetimes exclusive line in craft one to operalions two CaYs the crafLs effective

the region

cornpetence in but apparently

area market research as a top priority?

Should the Stanfiel<is Arg'.r,'r.ents in l. Apoarent Ease of High

P u r s u e silk

f1or.,er manufacturing

favo r : der,and for: che product and limited supply

strong

self-manufaciure nargin their frositjon ils a wl'rolesaler (backward integration)

arofir-

Strengthens

Arguments agalnst: 1. wiLh nay alrea<ly be spreading thernselves too thin The Stanfields business' pJ-us the neglecled retail operations explocling wholesaiing

22

2. 3. 4. 5.

Demand forecast Distributors for

is

shaky and uncertain flowers not yet lined up

silk

Cost projections

uncertain for two years in advance, how could they rnake and equiprnent or other long-tern manufacturlng

rf they canrt forecast decisions on machinery inve stment s ?

The authors feel the stanfields should probably bypass silk flower manufacturing in or<ier to devote more tlme to controlling present growth and straightening out the inventory probleni. Evaluate I' cumberrandts financial health and perfornance !rack record trend in

sales and profit sonewhat erratic, ttre overall industry.

perhaps due co a seasonal

2.

cost of goocis sold even more erratic, periraps reflecting inventory problerns' contror Gross margins show less Ehan 25 percent rnark up" Profit margin averages beLideen 3 arrd 4 percent, which is certainly none too healthy. Ann Stanflel-dts statement that shers nore concerned with sales than profit is wcil borne out. The firn's li.quidit,v is very high when invenLory is included. Lritlrout inventory, the short-tern financlal picture is not solid. However, they are turning their i'veniory about 4-5 rimes per year, which is not bad. A11 in all, with ils rarge lnventory ancr comrnitment to expansion, cumberland appears to be a flrm that is laying a healthy ioundatlon future growth. The stanfiel.ds must becorne rnore profit consci.ous, however, and begin to Eake advantage of the "dues" paid thus far i' getting the wholesaling operation off the groun<l. .."tr.l the Stqnfieids?

11.

4.

5.

for

$:fg_r""""t".V 1.

Along with concern for profit vis a vis sa1es, in'entory control shouLd be cumberland's gulding priori.ty, A wholesallng operatlon lacklng inventory control is headed for nothing but trouble. Attention nust also be given io the maintenance of gross margins. _1"_ygg._!gg_ge purchase of a

How would a _sqra]l conpurer !! beneficial? computer would bE coGT-Ju-siJTf 1.

A small computer r./ould be a good thing provided that the existlng manuaf system opel:ates r/ell" Too often firrns think conputers are a magic ansvJer to poor reporEing p?:ocedures, etc. Computers for inven_ tory control, payables, and receivables for smaller firrns can be purchased for around $5,000. Deveroping the software packages courd easi.ly double this figure. The A. B. C. computer's usefulness would be contingent on several events: Designing a system for organizi.ng inventory Designing a system for handling inventory Seeurlng the services of a qualified systems analyst/computer programmer

2.

23

THE }4ILLIONAIRE

Issues l.
2.

The studentr s entrepreneurial


Investments s t r a Ee g y

personaliry

and inclinations

sPendi dollar What does Your million inc enErepreneurial r sonal i tY ? 1i fe style ? behavioral Sorne of the underlying are as follows: introspection l. 2. 3. 4. 5. 5. Risk taking ProPenslty

sDree sa ina t ion s

our (l)
rsonal needs?

issues

addressed

bY the above

SecuritY

needs

Achievement needs Desire Level Level for autonomY

of ambition of social conformity

more than-superficially ged o in S t u d e n t s s h o u l d b e e n c o u r a " b e h atv i o r a lt r o s p e c t If theyrre even half way issues' precealng with resPect to the in the future' activities entrepreneurial serious about possibJ-y pursuing personal inclinacions' with their to be farnlliar "."a ttr"y "Whatrs questionnaire should be used in tandem with Ehe This exercise found at the end of the book' Pocential?" Your Entrepreneurial Suppose you recgiYed the million trustees to *"*'*r," < vou do to uraximize R0l? dollars but were expected by a board of Id

with the ro this quesrion should be conpared ffionse The student investment strategy differences' response .o i""ot" previous Which investthem' and to explain should be asked Eo cornpare differences To whai Traditional? Innovative? nent strategy is more conservaEive? verto work for the boardrs interests Ehe student be willing extent would srrs Personal inEerests? with Ehe Kogan may \^/ant to use this case in conjuction The instruccor a n d W a l l a c k C h o i c e D i l e m m a Q u e s E i o n n a i r e o r E h e E d w a r d s P e r s o n a pirto p ors efd l e l yP o i the studentrs In reviewing the answers to these tests test. It gives the stutesE' of Ehe results actions can be cornpared with the to learn about themselves' opportunity dents an excellent

POLYMARMANUFACTURING

Issues
1. Srnall business Planning

Z.

i"lanaqenent in.iornatj.on

sysienr

ttsing tlxhifriE 1, Ijst

i n p u t b a n d o u L p u t s t o e : , . t hs t a g e o f p o l - y m a r ' sn i r r c

g !t" p-_ii_r.,-rli. " pp- i" i' .__ Inputs


t. Plannlng St a g e PJ anning commitnent ---), Output s Deslgnation of planning time perlod and place Iorinalizaticn of plannlng inform.atlon system

Daily schedules of 4 planners

I
2" 0rganizing

Ideniificatjon of ---) line and slaff p e ! :s o . r n e l t o b e involi'ed in plann i.i,g Anal.ysis of exiernai*)3. a rand ii and inLe rila i.
I'SiSO rae S U

I vf o r
I

planning ---+

i;ore,'asl irp
,v-., r -,.4!

v
I
i Identi.ficatic-n of business opl,orEur,i1^ioc rna lhi'orrcpJ.aris ccintilgcnc;.

I I I

.4.uli.i t

-1'

ccinDc ti ti'r.. ari weeii-

-.'!.'

"

l'ot:tl,riJ-,iL.ior- of iiive $i.r-.-i:cqt

coliri:l-

-----&Cln!e

Li;tive

e{!Ee

9!..cgiiis IreSS[::; Ccs;;a r:a!lve s a : , ,[ e n e n t J s 5 years Gcals; pro s

I I {t I
I

tjn:trrciar-*5. J.]r' ii-{t-

Coai

fcnnlla

gi6,r *.****-p'

Shori-term anci i.cng-tctrr goai,s

{orna--t-*}

5.

lte s.i urce

.rl iore f i-on **.-+.

v
I I

B u d g et s

s i:a tenent

->7. BLrdgel-s; contractr; flow cash stiitements

Pian tlming

v
I {
I 'v -=_---'>

0peraiioris schedul.ing; -iob


coor<li naticn Llne supervislon

0pera tions Standards;


!cyur ^. L5,

schedules-) progress--)9.
fi-^-.^: Llrrdltcf -1 da

8.

Plan inplernenl'ation I Plan steeriug

an,l controf-->

Ma-nageneut by e z : c ep t i o n

s ta temenE Can you suggest any improvenerrts in Polyrnarts lannin framework?

Polynarrs President Dr-ight Elkins must of course recognize that a planning system is worth no more than the informacion whlch goes lnto iC. The real utility of company planning is not how tightly designed the system is but rather whether or not lt generates accurate and tl.orough lnforuratlon in a tinely fashion. rn other words, the infornal comnunication dynamics of planning are more inportant than the formal design-on-paper aspects. Above all e1se, planning is a communication process between a companyrs operating units. Polymar would do well to focus its standards here rather than on fine tuning the aesthetics of its forrnalized planning systen.

,q

SUN CITY DELIVERY

Issues l. 2. 3. 4, 5. Personality Fenale characteristics of entrepreneurs

entrepreneurs for expansion

Readiness of a buslness Reliance

of a sma11 company on a few key custoners decision becorne successful entrepreneurs?

Business acquisiElon extroverted

Can only

personalities

characIn dealing wlth somethlng as complex and subtle as behavioral and stereotypes must vague generallzations terLstics of entrepreneurs' entrepreto classify it Is not posslble Certainly obvlously be avoided. Indeed the whole extroverts or introverts. neurs as belng predorninantly scherne is discredited. classification generalizatlons less glaring Perhaps the followlng neurial success are a step closer to reality: 1. To be successful, other people. Entrepreneurs r esul t s. entrepreneurs about entrepre-

must know how to work with

and through

2.

must be asserEive

enough lnterpersonally

to assure

3.

personallty type is Possessing a certain success as is the abllity entrepreneurial an organized framework. sources within opportunlties

not so much the key to Eo nanage people and re-

What entrepreneurlal technlcal ori.ntatlo

are available

to

having individuals ry' or computer

fields thaE the rnost glarnorous and in these technical It is precisely of the pasE two decades have success stories entrepreneurial dranatlc (the faured Callfornia in and around Palo Alto, Particularly blossorned. "Sillcon producing such flourished, entrepreneurship Va11ey") has technical success sEories as Arodahl, Cray Research, and Syntex. linked innovaEion have been inseparably and technical Entrepreneurship The up and coming century Promises this century. ln Arnerlca throughout with a profor the entrepreneur perhaps even nore spectacular oPportunity or whlch outrnodes exisElng duct thaE creates new markets and technologies ones. do not start-ups While many ne!, venture "spin-offs" from technical show that studies engineers, have the highest success rate. success' meeE with spectacular flrms, usually rnanaged by

Do you think experaence

bein

a women hel

or

hindered

Marle

in

her earl

business

Undoubtedly l,larie faced more of an up-hi1l fight in some respects than would have a conparable male counterpart. New companies must depend upon the Erust and good faith of numerous partles, including bankers, con"general sultants, custoners, and the public." Fernale entrepreneurs are 1ike1y to encounter rnore frequent hurdres and roadblocks ln building ttre trust and support of externals than would be the case for comparable rnales. rn short, sorne people are apt to give less respect and serlousness of conslderation to feurale entrepreneurs. Nonetheless, Marie a male or fenale, this Tarvin made Sun City Delivery a success; is what entrepreneurship is all about. owner know vrhen he or she is rea11 For elther

How can a sma11 business

It is perhaps easier expand. Expansion would l. The business o pera t lons . cannot

to identlfy when an entrepreneur seem prenature or unwise when: slay on top of its present orders

is

not

ready

and volurne of

2. 3. 4. 5.

The company has experienced Custoners Expanslon in the present

cash

flow market

problems

for

several

months.

target

are largely debt or

untapped. trade credit.

rnust be financed

largely

through

The business owner is provisions for getting

presently the help

overworked or has not made adequate of someone else ln expansion. production or lnventory discon-

6.

The courpany has been experiencing t inui ty . The entrepreneur is necessarily proflt.

7.

expa.nding so1e1y Eo increase

sales

but noc

{hat are the advantages large company clients?


A r--^-! ^^^ AuvdrrLdtEs. ^ .

and disadvantages

of

tylng

a small

business

to

l. 2. 3. 4.

Big

bucks

from a few sources

Social

prestige would probably wlth becoure more predictable other large cornpanies and guaranteed

Cash flow Additlonal

contacts

DlsadvanEages: I. Dependency reduces porrer.

2,

ihe J,arge c'.lstomer$ mav gr.,4 iiisler be acle to keep rlt' Yjth. Llrge custcmcrs oflcn and rtlher competitive

ihan th4 smalier

servicing

firm

rnay

3.

have tit: economlc muscl= tc derive a.lv.rntages. have a significanL

price

breaks

The lc'cs of a singie cusLcrncl: could firmrs income and prof:itabilicY. ShoulC Srrn City llarie cotl*lt.sE

i m p a c i on ihe

Services? buy r;u; Airfr:eight snoriv;nat terms ffih" u y o u t ,

t r ^ J h aic A i r l r e i s .f f..?

lrt wor Lh?

If

The crux of fhe isstre is how rnuch is a company worCh that is gen:rating The information $1C0,00 iri saies, yeL not making a Profit ($355). of net present value of avai.lable docs not lerrd itsel.f tc ca1cuiaiicn 0l d cechnique. t-orward anai-ytical l'uture incone or any other straight "horse logic seems approprlate. iradiug" fashion g Br,r1]1 un Ciry and {ir f reight have cornparabl-e sales ( $101' 600 versLls n e t i n c o m e i s s o m e w h a tn o l e s u b s t a n but Sun clty's $95,50C rcspectively), It seens fait:ly tial. (Sl,48O versus $350), thcugh nothing spectacular. ciear tirai lhe only i:eason why )larie would want Eo purchase Airfreight woulri be if some sori of si'nergisEic effect could be achieved. In analyzi.ng each firmrs income statement, Ehere ap[ars co be little through cutEing operating expenses signifiior hyping profit opporcunity About the only unchangeable. carrrly, as these are minimal or basically is fcr cost cutting expense lhal represents an opporrunity operating It is conceivable that personnel). (perhaps through consoliCaring salarjes could be generated here. up to $20,000 in profit that the firm is not very profitrecognizing The owner of Airfreight, sej'1ing price cf $45'000' ask for an effective ab1e, might realistically to the bock value of total assests ($23,070) and assumpThis is equivalent v'tant to discount ($22,270) " Sun Caty would most likely i i i o i r o f - l _a b i l i t i e s by about 50 percent, or $7,000, and negotiate further on the receivables (negative retai-ned earnii-tgs). is unprofitable basis that Airfreight If Marie were to discount tocal asse!s by $7,000 ($14'000 she rnight cr,me in with an offer in the neighborhood of $18,000. would not view such an cffer very positively. Airfreight $7'000)' Obviously

Perhap; there would be some room for compromise if the salary-cutting If Sun City would consider were to materialize. scenario m.:ntioned earlier by receivables consider discounting the $45,00J asking price and Airfreight subsequent salary reductions of even just $10,000 night sweeten the $7,000, purchasing price of $38'000 The resuiting deal enough for Sun CiEy. ($45,000 - $7,C00) would produce a payback period on the buyout of apptoxifour years (assuning $10,000 annual profit. resultin-g from Ehe salary nately This rqould not be a bad deal for Sun City" cuts).

B I G S K Y W E S T E R NS T O R E

Issues 1. Computerized inventory control

28

2. 3. 4.

Retail

cornpetitive

strategy strategy

Price-intensive

merchandising

Use of computers in

smal1 business lgai"st the Big Sky than can be afforded ? by

Whur " i. Greater a large Attraclive Better

personal. service and customer atcentlon di-scount operaElon like Big Sky ma1l location of sizes and scyles

2. 3.

selection

of merchandise appropriare to rhe Big Sky

!.lU_1 " g_!f!e_44ll"i"9 i^=rt-ern St.r"? t,

strategy

parlicul-ar1y

Western wear clothirrg carries a fairly does nost apparel. Price discounting

substantial is therefore

retail mark-up, feasible.

as

2.

The physicai facilities at Big Sky are fairly customers wi-l1 rreed a strong economic::eason The owner, purchasing at Mr. Ridiey, seems to have a real a.nd ec,;nomies of scale. three otirer different retailln.q

plain and basic, so to patronlze the store. knack for econornlcal

3"

Identify

least

situacions

where an

i.

Pet stores: Customers would undcubtedly correlale price with the (lior+ever. pet supplies would probably health and quaiity of anirnals, L'e appropriate for price discounting). Prestige l'ledical apparel and furnishings

2. 3.

equipment and produccs

the authors did not find this questlon particularly easy Quite frankly, to answer. Price is such an important ingredient of most products, that 1t is difficult to think of nany retail situations where prlce is strictly secondary in importance. Deslgn cal, a cornputer punch card that could serve as a plotgtype for Big Skyrs

and simple

to utilize. Posslble Punched Card Solution

Columns l-10: l1: 72: 13-16: 17-18: I9-2O: 21-23: 24t

Name in Fu11 (Tony Larna; Justln) C o d e d N a r n e( l ; 2 ) Class (M; W; Coded) Style (Mfg.; Asslgned) Leather Coded (Lizard; 0strlch; etc.) Color Code (Black; Brown; ecc.) S i z e ( I / 2 ; C o d , e dA s ; 5 ; i 0 5 ; f o r l 0 f 2 ) Width Coded (AA; A; B; ...; EEE; Coded)

25'. 26t 27-28. 29:

Stitch Coded (Nurnber of rows of Toe Coded (R; J; T; X; etc) Heighr ( i1"; 16") Heel (l; 8)

stiches

or

pattern

coded)

represent the Codes should be created in order that numbers (digtts) None of these ltems has fewer card coLumns. items, thus utilizing various the arrangement above is not comcard colunn, i.e., to be ln a particular pulsory. The only requirrment would be that EVERY card had lhe same cate(A11 classes should be in column 12 in colunns. gorles ln the identical the exarnple). the resistance for overconing Provide praguratic guidelines systern. control sonnel in irnplernenting the ner^rinventory 1. of sales per-

sharing system hrhere cost savings enabled a profit Institute system can be share<i by sales ernployees. computerized Hold group sessions wiEh the sales force designed to carefully its many benefics. the new syslem to then and to highlight bit mor:e Eime spent in ringing Show employees hcw a litt1e saves even more tine in inventory orderlng and control.

by the new

2.

explain

3.

up sales

4.

techniques stracegically: positive reinforcenent Utilize the new computerized employees when lmplementing A. CongraCulating system successfullY. feedback on cost savings altained B. Providing employees with tinely inventory. anC improvemen!s in controlling sales personnel meetings to discuss the Ilolding formal and informal c. feedback from them on of the new systen and receive status problens, etc.

T E L G U A R DS E R V I C E S

Issues
1. 2. 3. Coping wtth Interf, Ehe pace of proCuct growrh artd obsolescence federai government within a pro-

ce belween

srna11 companies and the

(prornotlrrg entrepreneurship Errploy:e entrePreneurship fesslo raliy rnanaged cornpanY) Acqui:iLions strategy lifesLYle over the Past decade \thlch

4. 5.

The entrepreneurlal products

Nane other curve s . 1.


a L .

narketed

had rapid

growth

Calculators
r \ i ^ i l ^ 1 u rB r Lda - . - . ^ L ^ ^ w aL! r r s r

3.

Electronic

games and toYs

30

4. 5.

Foreign Polyester

automoblles fabrics do Lo avoid product other other obsolescence? products customer needs utllize Lhe sarne rnanuchannels

What can conpanies t. 2. 3. Research Marketing

and de..'elopment lnto research Eo determine

Diversification especlally into products which facturing technology and marketing distrlbution

exanples of how sma11 companieq have beneflted 9an yo_u think of additional frorn federal governmenc legislatlon or p 1. 2. 3. Sinall Business Tariff AdminisEration loans and nanagenent asslstance

prorection

oSHA and EPA created niany snall companies: alarn systems, emergency lightlng, safety guards, pollution rnonitoring devices, eEc. Federal procurement policy mino ri t les . Developrnent of Proposed special CriaduaCed tax inventions speciflces l5 percent of contracts to

4"

5. 6. 7.

through National

Science Foundation arants

tax legislation income a1i Telguard

on net

Wanamacher: means when he says he wanrs il$!_gg_lgg_$Il_!y1e employees Co Denave as entrepreneurs? t" 1. 7-. 3. ."^." Feel """; free to suggest new ideas arrd innovatlve operating

approaches. thelr the jobs. fornal

show ini-tiative Enphasize job o rganiza tion. stress

and assertiveness prcdrrctivlty over

:-n the way thy bureaucratic

perforrn

manaeement of

4.

individualisn

rather -

than group consensus or commlttee approach. lnternal entrepreneurial splrit

.." t"rg". ""rp Ih"t among employees? l. 2. ,?. 4Reward individual

creaEivlty

whenever possible.

De-emphaslze management by cornrnitlee and groups. Stress infornal conmunlcaticns ideas of rtiore than forrnal (bureaucratlc). popularized by

subsidize the creatlve Texas Instruments).

employees (an approach

31

5.

"job ownership" to Er<tencl zaEion of decision-rnaking Use Ehe profir center

ernployees thtrough delegation power' approach' should

and decentrali-

6.

organizational

What general guidelines future ecquisitions?

do you think

Telguard

fol1ow- in making

l.NarrowdownthechoicesnorethanmerelystaEing'.securityandenergy " congervation. 2. 3. Choose companies/products which could benefit further from R & D' gror'vth or additionaf

Choose candidates that require cash for conpetence' management technical

4-

llri:ess candidaEes having a strong marketing Telguard rs strong rnarkeiing orientation' playing -"ng-a:g"jirllens -"game

capalility

io

prallel

D o 1 ' o r - rf e e l

i s - a n e n t r e p r e n e y - r : ! ! L - ] - a c l c : iv i t Y ?

with sr:ar:ting Even thorrgh people customarily associate eiltrepreneurship nucieus of a Eherrr iso is at:he new businesses fron scratch, acquiring sLrategies for entrepieneurial ioLe;tial activit-y" enlrepreneuria-l acquired firms would incl.u<ie: i. 2. Turnarounds (breathing new vitality into staici or moribunC comp:nies)' into e compa;ly whose gi"owtir ha::

invescmeni (pour:ing new equity Capital been stunted bY lack of caPital)' Strategic segments'

3.

the acquir:ed firn into real-ignrneni (r:epositioning edge' etc')' competitive an alternate p.t.uti.g

neu market

rnethod of can be consitlereri as a new and irrnovative Entrepreneurship innovalion' I^Jhat it 'loes is bring about change tLirough a business. running jnrr':duced a new for years, but Roy Krock Haurbui:lers have been arounci rnarketing technique w:-th f{acDonalds' In what ways could an--inexpellelced ""d s"ida"ce of LYle Wananacher? 1. Rec.eiving nerv contacts etc.) Development of Assitance Strategy with to entrepreneul-benefit fron the ad

sustain

the business

(bankert

investors'

2. 3. 4. 5. 6. 7.

a realisti-c anticipating

business

plan

problerns and hurdles

developrnent

and refining

Assessment of comPetitors l'lora1 support A mentor sultation and encouragenent fledgling entrePreneur can go for advice and con-

to whom the

l.s_-ef i:1:li 1I, _Liii':e me_ljue-rrierl: _.i_f r:e!9gri ii!l_!e

*b_gjln9l|_rysgg s ! ?

T h e n i a n a p ; e r :w h l r c a n r t r l a n . l g e h i s o r l i e r o r , n L i r : n e , p r c b a i : l y a o i r ! t be very ploflcier.tt il! inan:rging fhe cj'me of sui:ordi_nates. Ai1 managers have er'acti y ther same anourli of tiuie; scmo rise it r.'i- eiy r.rhile others sqwrnder: s it. Time is c:eriainlv a Fcre vaitrable resorlrce Lhan noney ic na'y hard "woi:kalrcl.ic" pressed, eni:repreueurs.
Dc yori feel entrecrerieur{j c_an

:g::crg.d j,n _-1 ! , O!_fS 5 : 00 schedu ie ?

No one putsuing ary challenilg endeavcr .Jan aetain sr-tccess by working iust 40 h.urs a week. This is especiaiiy true or errrepreneurs today, who face a nc're hostile and lhreatening external envirotunent than ever before. Even foi: the f1or.l::ishin;1 firn, success can rarely be.,nalntained via the t : 00 t,: !i: O0 i:oute. A 'unrber cf sr:rveys have showri Lha! entrepreneurs rilork in typicall-v e>:cess of 60 hoursT/rveek, anci nan./ put in as many- as 80. Most entrepreneurs coult-i, thtough tine marr.rgenent, acccmpli.sh just as much in fewer nours" 5ut ail enirepre*eur cylrically views his husiness as a baby--he concelved i-r, nurtured ii, a'd w111 probably viant to "baby slt" it i'cr- the rest of his life. lio wcnder so $any tours are worked!

EI1ERGEI.ICY riOBILii

CARA,GE

1"ry.u
1. 2" Promotional sEraLes./ for a ne\d venture thar would make Inage creation

. p."t"ti. str?_t5g1to3_Ir..ffIsJ_l'tg!l]S_!grage -l."ig" opt.inum use of l.Jolfers S5,000_

wolfers first c-onsi.deration should be running a permanent ad in the Davenport telephone book yelro.,r pages. The ad shculd be large enough t<r attr:act the attention of somecne quickly scanning the yellow pag"s icr emergency auto repai.r. woife shouid ruo the ad untler "Autornobile Repairing "Garage-:\,utcnobiie.', anC Ser'.'ice" anC perhaps even under A significant yellow page listing is 1ike1y to use up about half of lio-lfe's prornising pronotlonal budget. $5,000 prourotlonal avenues fcr hfto to use in addiEion to the yellow page ad might include the following: 1. Referral service from Davenport garages trJoife would pay a "fincierts fee"). Having his truck professionally "mobile promotion." This could and service sLatlons (where

'2.

$ 2 ,s 0 0 .

painted and decoraled to becorne a be accomplished with the remaining

wolfe would probably not be putting hls money to good use over radio, television, or even newspape;: because of the tenporary impact of these rnedia. Eurergency llobile Garage must be accesslble to potentlal customers on a permanent basis.

THE VESSEL APPAREL SHOP Issues 1. 2. 3. Entrepreneurial operations Planning pl-anning

planning for personal lifestyle actively pl"nn eJ "r. e*tidettt?

To what extent

have the

Stocqleys

no have engaged in virtually the Stockleys In managi.ng Vessel so far, Ed Stockley even admits as much at several points in the plannlng at all. of so many other inexperienced srnall business owners' Characteristic case. ad hoc plannlng approach. have evidenced a reactive, the Stockleys The following 1. Lack of
norfnmenan

planning

deficiencies

are

conspicuous

in

the case: and current

financlal

inforuraEion

about Vesselrs

hisgorlcal

2. 3. 4. 5. 6.

Indecislon Indecision

about Vesselts abou! personal

long-run career

goals and lifestyle conPetitive target goals stralegy market, and promotion

Conplece absence of a formalized Indecision Absence of c onEro1. about Vesselts financial

product mix' including

planning,

budgetlng

and inventory

about lack of inforrnatlon for the Stockleyts There ls rea11y no excus fron the checkbook. Past expenses can be derived directly business. their they could not remlt sales tax. Monthly sales must be known; otherwlse price (this ls products 50 percent on selling Assurnlng ttey mark up their "keysEoning")r 1t is easy the same as 100 percent on cost and is known as giving Expenses are deducted frorn gross nargin, to determlne gross urargln. proflts. nonthly a spring/summer season and a The retail buslness has two seasons: stores do 60 percent of thelr yearly MosE retail season. fall/Christmas Planning is therefore and Christmas. business beEween Thanksgiving s iurpl i fled . In what speciflc aspects of their More plannlng areas: l. 2. 3. Budgeting Cash Inventory ordering, financing, and control areas is personal ls nore planning lives require warranted additional Vessel by the Stockle planning Apparel in the followlng

desperately

needed for

and forecasting

34

4. 5. 6. 7. 8. 9.

Pro

forma analysls stracegy arrd carnpalgn

Advertislng

Product mix deflnitlon Conpetitive Target edge clarification

market

Long range goals

The Stockleys must "get their personally act together" and seek .to personal 1lves and professlonal integrate their pursuits. Both Ed and Sue are overcommitted vrith finishlng up co11ege, holdlng down part-tlne conjobs, etc. munity service Both rnust take stock of thelr current lives through clarifying lifestyle-leisure preferences, plans to have chlldren, and through identlfying what they would ideally like to accornplish over the next five years. Clearly che Stockleys should not consider openlng anolher store or a chain of stores until they know thelr existlng business. As the business expands linearly, the problerns expa.nd exponentially. For theur to consider selling the business, they need to know considerably more in order to set a price. Mjusted book value of assets would be easy to determine but would underprlce a growing buslness. If lhey donrt knor,r their lncone, they certainly could not set a prLce base or present value of future earnlngs. determine What are the nost rne long-run ! importanE plannlng issues for Vessel in the short-run?

The SEockleys must concentrate in the shorE-run on flnanclal planning and malntainlng the solvency of Vessel Apparel: cash flow planning, weekly and rnonthly budgeting, inventory coordinatlon and control, and profit plannlng. Longer-range planning conslderations (for such a sma11 operation "long-run" as Vessel, the may be no more than 18 to 24 nonths) are prlnnarily marketing product mix, target market, courpetitive relaEed: edge, advertising, etc. This type of planning ls so easy that 1t could be done Ln a couple of hours each uronth. They could use a yearly plan and at the erd of each nonth drop that nonth and add another to the end of the year. Retall stores generally plan on a seasonal basis and do two plans per year. What does ,this plannlng? case illustrate abouE the realities of entre neurlal

The Vessel Apparel case hlghllghts the crltlcal role of lnformation in planning, business especlally flnanclal and marketlng lnformation. The case further illustrates the interdependency between the nanagerrs personal and professlonal r o l e s a n d b e E \ ^ r e e ns h o r t - r a n g e planning and long-range issues. The case also lllustrates the relative, or sltuatlonal, nature of "abstract" pl,anning--that organlzations cannot be planned for ln the but rather must focus on situation-specific goa1s, constralnts, resources, etc.

35

rylf-

S O I i I C S S Y S T I i { S - A I J D I OA R . T S ]

l:",91
i. 2. 3. 4. 5. Gror;!lt sirateg,,- (<iir:1 conpanies) S y n e r L l j - 'b e c r ^ r e e nt w o i n t e j a r e l a t e c l Growiiig; at a nanageable pace anC contrc>l btrsjnesses

F ; ' . r . , a . r r t j . a lp l a n n i n g Def ining

i:oinpan)' scope and :nission

*#F:#ff

::Ii*es-sl.]

rg"e:I:" . gr.' ps!{:r u_g!rs_L%J. _s:.o r jJ r nts ler Len I

The first step in straLegic planning j_nvclves the situational auCit. of ecnparing strengfhs and weaknessno, opp"atlr.iti"u and threats, resource capal-.i1ities, etc, The follcwing o b s e n , a t i o n s a r e r:elevant !:o i:tie clirreni situation cf Sorrj-cs Sys.rens and Audio Arts: 1' The t\"/o*tleadeci '::oinpany is currently urderstaf fed. ca-ymon and rirder w11i be increasinlly hard pressed to handle both aclurinistratlve anil technical operacicns fmcEic:ns for two busirresses. r'uture groirih sen6 greatly constrained in this regard. The sonics systens retail operation har:ciry appears healtrry: location, poorly promoteC, casli slarved, u.c.derslaffecl . lackluster

2"

3'

caymon and Elder a1r buc admit that sonics systens is toLerated oniy because of ics ability to supply Au,lio ArEs w.ith equi,pmeat and com_ poncnts. Although the drive of caynon to land a "big fish" for Audio Arts is connen<iable, the g30,Occ of financing is potentialry a .r.arge stumbiing block. The joint venture is already experiencing cash frow probJ_ens
d r a L ! s .

4'

The two partners must he very careful not to bite off can chew in the way of nerd contracts for Ar:dic Arts. sidering not only very large projects but technically "Rome ones as wel1. was not built in a <iay.

more than they They are corr_ sopi_risticated

6.

Sonics Systemstinventory is tying up some fun<iing; however, it belng turned nearly 5 times per year. The balance sheet defii-ritely possible way. requires cleaning up in the worst

is

7.

In a normal situation, with a "messy', balance sheet.the accounEs receivable can often be reduced by 40 to 50 percent. However, thls is only "ru1e a of thumb" ancl an aging of the accounts is necessary to determine which ones should be vrritcen off or turned over to a coliection agency. collection agencies nornarly charge 50 percent of the amount colrected. inventory also probably contains some old or obsolete ltems. These should be urarked down ln an effort to recover the cash tied up in ttre slow moving items. 'rhe

36

T h e C \ . { oc o m ; : r n i e s I. Improve Stablli.ze
Tnnrorco

have the

following

short-term

needs:

cash inflow revenues


qtrFfino

2.
?

4.
q

Stlmul.ete retail Reduce curreni

sales

for

Sonics Systens

liabil.iEies

I n r p r o v i n g c a s h f l o w r v i ' - l _ ln o t b e a n e a s y t a s k . Cash flow nonrally tollows sales if the accounts receivable can be coj.lecced ln a short perlod of tirne. The gross rrrargins on the retail sales are comparable in the 50 percent range. Howeve;:, in the commercial contracts they are only about 30 percent and this is reclucecleven further when the nearly $11,000 for contract iabor j.s considereti" rt seems as though the o',qners look upon retail s a l e s a s d n e t - - e s s it y t b r t h e c o n t t : a c t o p e r a E i o n w h e n , i n f a c t , r e t a i l revenue is the profit generator. Revenues car be s*,abilized only when both operations have been esr-ablished. ilowever, effor;s should be nade to increase reta11 sal-es to the point that the revenue generated covers overhead anC scme contrlbutlon to profit, Al tha! point, confract saies could be consiCered as srrnolaneotal revenue. Additional p.ecple r.ri11 be requirec for ihe retail operatlon unless one of. ihe owners nakes thls a pricriry item for hls efforts, The impaci of additional personnel on profit rnargins nust be considered. Nothing is seated about advertisjng except an expenditure of $1,55C. This is about the cost of an ad in the yel.Low pages. The current leve1 of advertising is hardly enough to generate an iurage for a new store. Once again, the irnpact cf increaseri expenditures on profit urust be consldered. clearly additional $50,000 in payables. retained earnings. Long-run I. 2. Either needs for bring capital and some long-term debt are needed with However, chis wi1l, not be easy wlth the negatlve the

Sonics

and Audio Arts

lnclude

the

following: it down receive the

new vitality retail

to Sonlcs Systelrls or close buslness or conLractine

Deterrnine whether lhe top growth priority Define Attract target narkets

should

3. 4.

for

each business into the buslnesses

addltional

equity

rt appears that Sonics Systems ls providing most of the lncorne for the courbined operatlon. Some plannlng is necessary to determine rdhaE the markeL ls and how uruch of it sonics systens can obtaln. rt is clear Ehat for the next 2-3 years, this rrril1 be the "cash cow" of the operation and consideration should be given toi.Tards expanding lt. The two businesses for each business complement each olher. The owners nust based on proflts generated. set prLori-

ties

37

Sonlcs Systems should be emphasized in ln the opinion of the authors, in Audio Arts' to provide ch'e frlrds necessary for growth near future the "tuned in" to the Audio Arts buslness' which are Both Caymon and Elder The auLhors canfor both nen' potential future sufficlent seems to offer products cannot be obtained not accept Caymon's statement lhat electronic firms contracting Electronlcs way except through Sonics' by Audio Arts any Either outlets' are not tied to retall narionwide, and most are thriving supply dynamlcs or he was Caymon Lras mistaken l" i'ti" assessment of industry Perhaps he too excuse for keeping Sonics open' uslng a convenient a source of revenue' whi'le Audio Arts ls recognizes chat sonics provides "through the keyhole"' jusE gettlng

ATKINS MACHINING

Issues
l. 2. 3. The managerial Enlrepreneurs Classiflcation activities of entrePreneurs

as generallsts of entrePreneurlal cl.te at actlvities least one erj-al activit that is

For each of
an example

the nine r o l e s , the rcr O

1.

Coordinator:synchronl.zingmanufacturingandinventorycontrol;systenwork of ernployees; cash florn' planning' ;Tizii[-EEE Disturbance ffi;tilization; handler: nediating in employee disputes; setting procedures and rules. draft.ing Priority settlng' priori-

2.

Resource al-locator: 4.

budgetlng;

Leader:lnitiatingoperationalactlvities;presidingovermeetings; TssuitU work directives' following reports; analysis of financial llonitor; issued; observing coopetitors' ind dtrectives up on insEructions

6.

Spokesperson: e-=;a;rs; Figurehead: ffiaitle Nesotiator: r

h/riElng correspondencel meeting with strategies' advertising designing

emplcyees' cusEom-

7.

events; presiding uver company parttes and special heading the board of directors' and $rquisites; work areasl meecing wlth enployees from differenr bargalning wittr suppllers and customers' official"s; formulating interpersonal and proceduresl policies encouncers'
EWO Or

use of

8"
o

dealing

communicator: aofidsaE6;;

telephone

r o f a srnall rnachine shoP, whlch As nana s most of his time f e e l F l r . Arklns to t ire rnost crucial you r o . L es

r formi

three of the roles do ? Which o f t h e n l n e succe s s o f a n e w venture ? for struggle of contrnunication,

is the real The authors feel Ehat daY to day survival the rnanagerial activities highlighting nost new ventures,

38

resource financial

allocatlon, stability

and monitoring. Only as organizations do most of the other slx roles come to

grow and gain the fore.

The roles of the enlrepreneur differ with Lhe type of business. The instructor may want to refer to the varlous classifications of entreDren e u r s a s d e f i n e d b y KarI Vesper in I'lew Ventgre Management, prenEice-Ilal1, 1980.

MAGIC CARPET TMVEL AGENCY

Issues I. 2. S m a 1 1b u s i n e s s r e s p o n s e Vulnerability
to external to leglslative threat and Brook Stevens take in seekl to thwart threat

What actlons should the NJTM lscount equalit.y" bl

sirnple, straightforward solutions to politlcal problerns of thls nature are elusive. The cliche about fightlng eity ha1,l certalnly applies here. rn general, the NJTAA nust let out all stops in lobbylng against the bl1l in tte New Jersey legislature. Hopefully the NJTAA has slgnlflcant politica1 power. This nay be lts only prayer. Brook stevens should mosi certainly conrnunicate with his and keep ln close touch with NJTAA activities. Realistically littfe else he can do in the short run. co'gressnan lhere is

Tbis situation ls similar to the current efforts by consumer groups Eo provide a 5 percent discount when bil1s are paid by cash instead of uslng credlt cards" To date this issue has recelved rnuch verbage but 1itt1e acticn, an<l only a handful of businesses provide the discount. Do you feel the bl1l is ultimately ln the best interest of consumers?

The arguments agalnst the bill presented in the case are rather convincing in the opinion of ihe authors. To us it seems that the bur<ien of p r o o f s h o u l d l i e w i t h | t r e wJ e r s e y c o n s r m e r i s t s sponsoring the legislation. They should be requireci to show how alrline prices are inflaLed Licket by travel agency services. The authors feel this would be easier said than done. The real advantage of using a travel agency cver an alrline Ls that ihe travel agency has access to all airline schedules and prlces. Assuning actions that should the NJTAA is successful 1n stalllng the b111 for the short-

."rt,u"t tlrit@liti"-?i"J

yu..", "r."E ur..r.gr"

This is indeed a difficult question Eo address given the trernendous dependence of travel agencies on airlines. Stevens and travel agenEs in general would have to begin exploring alternative revenue strategies. Presurnably the need for travel agency services would not disappear with the discount equality bi11. stevens rvould slmply have to consider innovative approaches to marketing his service: heavier advertlsing, package speclal deals, discounts for regular paErons, etc. The bottour line would be bound to suffer. A nurnber of travel agencies derive a portion of their income from motel and hotel bocklngs. rf Magic carpet is not provlding thls service, it ls foregoing profit opportunities.

39

OMNI SKI PRODUCTIONS Issues l. Z. SaIes forecastlng Seasonal business dernand for OMNI Skl Productions DresenLed below. using Lee Sklairrs

Derive the 19Bl sales forecast eouation and the seasonal data

for each rnonEh is shown below. Al1 uronthly The 1981 sales forecast steps. Using values were derived using the same sequence of conputational January as an example, these steps are as follows: Formula: 2574 + 45.5 (x), where x = number of months having lEssed since January l97b ( tlre beginning of the period for which Oltti{Its seasonal sal.es trend was derived). January = 2574 + 45.5 (60) = nonseasonallzed forecast = 5304" The 5304 x .63 (January's seasonalized forecast is derived by nultiplying seasonal index) = 3341, the seasonally adjusced forrcast for january. February = 2574 + 45.5 (61) = 5349.5 ("80) = 4279.6 (or 4280 rounded Tirus, OMNI can expeci- to sel1 approximately 42BO pair of skis in off). Febru:ry,1961. Seasonal1y Adjusted Se a s o n a l U n a dj u s t e d Foreca st Forecast Index 1,cE I January (60) February (61) t'larch (62) April (6,3) Itay (61) june (65) July (66) August ( 67) September (68) October(69) November ( 7C) D e c e m b e r( 7 i ) 63 BC 85 93 lOC 97 9: 98 104 l2A 130 135

5 30 4 5349. 5 5 3 95 5440.5 5486 5577 5622.5 5668 5 75 9 5 8 0 4 .s


ob, b)l

33 4 1 4280 42:E6 506C 5486 5366 529t 55 1 0 5 89 5 6 685 7 487 7 836 b b ,i u r

Lhe seasonThe accuracy of this forecast is dependent on two factors: accurate This is a relatively index and the 5 year trend equation. ality methods, lt asstrmes that all factors approach but, like nost forecasting The forecaster must take into this year will be the same as last year. price points' cold weather, such factors as advertising, consideration snow, etc. Every manufacturer snow in July! and retailer of winter equipment starts praying for

40

COLOI]IAL AMERICAN KITCI{EI]S

8",:9"
i. 2. .1" 4. ir, jn P r o d u , : t i c n r n a n a g e n r e: l,{oving a sii:ugr;l.i.ng neli venture Coaiescing the venture of leam io sLockhoiders through the keyhole

Responsibiliiy Product

an entrepreneur

innovation I1r. Bradle and his associates make in devel-

Wh;ri apparenl Lil--sLakes dld ,cpir'g Cocd Bun s? 1,

Tco much enphasis on technical devetopment of the bun baking a L - r dn o t e n o u g t r c o n s j . , J e r a t i o n o f e v e n t u a l c o n s u m e r a c c e p t a n c e prodrrct and how :nuch ii would cost to galn that acceptance.

process of the

2.

i,ack of financial oianning for controiling the expenditures of the company" i'lr. Geners rcccrd keeping pra.ct.ices are highly undeslrable. Lack cf solid narket researctr data. first stages of

i, !.

Iacli of inifial rJevelopnent.

caslr Lo sce the projecE through its

Cevelopmeqt l9j_ggE_jlg_product rna;:keting poin! of view?

phase have been better

handled

fron

A linited local market development stralegy would have been advisable in crder Eo perfecr the baking technclogy on a semi-autonated basis and to :est consumer desire for the new buns. This strafegy would have been useful because it wotrld have generaEed the necessary cash flows to contintre cperaticns. Later the automated process cculd have been developed if the limited venture proved to be successful. Otherwise the company would have neen able to cut its investnent losses anC lirnlt investor liabilities. What should Various
'I

Colonial

Arnerican Kitchens for Mr.

do now? to consider incl.uCe the followlng: either

alternatives

Bradley

This alternative would hold no benefits for .Declare bankruptcy. licensees or creditors, who would lose their entire investment.

2.

Se1l out to a large baker:y chain possessing the financial and urarketing ivherewiEhal to succeed with Good Buns. Under this p1an, Mr. Bradley '^rould at lest i@ith creditors to transfer indebtedness to the new parent company. However, all that Mr. Bradley had iloped to acconplish personally would be lost. Seek venture capital to develop Good Buns. Mr. Bradley would likely have difficulties raising growth capital from this source. Even if he somehow succeeded with these sophisticated investors, he i,rould in all probability Lose control He could perhaps stay on with of his venture. Colonial as a technicaL consultant.

4.

Should Mr. Bradley . ahe infonn stockholders of Colonialrs and then resume atte!0Pts to work out technical condition true flnanctal another 12 does not come after probleurs. If a breakthrough production Mr. Bradley w111 have to lmplernent one of the other months of striving, above. options listed Continue ln the attenPt to forge bakery having funds necesgary -to develop tlrq Merge with a larger would Mr. Bradley and his lnvestors autornated bakGg equipment. although Mr. Bradley himself could @y, ownership t^iith lts his personal goal of urajority realize longer gains and income. for long-term capital tial does Mr. Bradley have to his stockholders? solve fgl1l' obtain no poten-

5.

what responslblliEies 1.

To keep then r,rell infonned about progress the firrn is making to problems and to achleve rnarketing breakthroughs. technical problens technlcal To develop a reasonable plan for correcting marketing progress' clated with Good Buns and for achieving To malntain To take accurate records precautions on bow funds to are being spent. funds'

2.

asso-

3. 4.

reasonable

safeguard

stockholder

INFOMATICS CORPORATION
ISSUeS

l. 2.

Buslness ethics Setting company ethical statenents for standards the seven ethical issues ldentifled by

policy Draft In fomat ic s.

should The followlng criterla develoPed bY students: statement 1. Clarity: how easily

be used in

appralsing

the ethlcs

policy

does a policy

lend

itself

to mlsinterpretatlon

and

z.

does che policy specificity: acEion so that the manager ;" versus vlolated? Loplementation effecEiveness:

parametels statement delineate clear-cut has been enforced knor,rs when the policy

3.

@pleurenting zational changes, altered 4.

and problems would difficulties organithe policy guidellnes: precedents, revised operating procedures. what be punished the crine"? severely enough to it be tlmely Will

will violators Degree of toughness: "fit punishment Wm de-tJ others? adrnlnistered ?

the stancode which fulfills example of an ethlcal For an excellent "weyerhaeuserrs Reputation--A in Shared Responsibilltyr" dards above, see Conduct by Earl A. Case Studles in Corpora!9_locia1 Responsive iapitalism:

In addition

to

forr"li"hg

.orp.ry

pol

hat

else

should tf""Z

Knowles nust be gulded by the old adage that actlons speak louder than words. He rnust strlve to set an exarnple for the companyrs personnel, especla1ly 1lne rnanagers. Several studies* of buslness ethlcal practlces have lndicaEed that senlor executives exert a rnajor influence on the ethlcal pracElces of their subordinates. seeningly the nost effectlve way of attalnlng personnel is for their lower level bosses to act What constitutes ethical behavior? ethlcal behavlor froro in an ethical manner.

The debate here has scarcely been resolved. The authors certainly donrt have anything new or orlginal to add to the accunulation of viewpolnts, but we can pass on two pragnatlc guidellnes that we have found he1pful. To us, an action rnay be well on the way to qualifylng as ethlcal lf it: l) is well wirhin the spirlt of rhe 1aw and 2) would noc apear ro take advantage of anyone lnvolved. Murittedly these guldelines are somewhat vague and sfuoplistlc, but we nonetheless feel they have a sErong potential for guiding the behavior of conscientLous managers. *See especially Brenner and Earl A. February, 1977). "Is t h e E t h l c s o f B u s l n e s s Changlng?" by Steven N. Molander, Harvard Buslness Review (January-

CHAMA STEELWORKS

Issues l. 2. 3. 4. 5. Is Social responsibillty of sna1l business

Cornurunity relations Pub1lc relations Dealing Speclal with the nass media group politics

interest

C h a . r n aS t e e l w o r k s

case reallties 1.

which could

be used to verify

chamats irresponslbility: a tiure perlod

The company had not which is guaranteed

traditionally operated at nlgh!, to be a neighborhood nuisance. certainly

z.

Frank chamars abrasive uncooperative deneanor note a responsible attitude on his part. charna has not in any way documented the $85,000 declbel noderation equiDment.

does noc con-

3.

purporEed

effectiveness

of

the

Case realities which might sibility against Charna:

be used to refute

charges

of

irrespon-

43

l" 2"

Denverrs

urban sprawl

cane to Chana nct vice

':ersa. sum of rnoney seeking

spent a fairly Chama has reporiedfy to abaEe the noise Probiein. Chaura does provide a nurnber of jobs

considerable

3. 4.

to

the loca1

community'

If Chaurats statement Ehat the 1ocal rreighbors are noL cornplaining about i.s being raised by people then the noise complaint Ehe noise is true, in any way, and the complaint may not be who are not affected j us ti fied . SIN act_ing responsibly?

Is

tc evalis provided. in the case, it is <jiffrlcult infonnation so 1itt1e It wculc be Lrelpful to know if the group is indeed cornposedof date sIN. neighbornood residents and exactl.y what remedies the arorip pioposes for the nc-ise probiem.. As is so oflen the case in lhe real vrorld, insufticient a dif fic,'tlc one io i n f o r n a t j - c n r i i a k - e st h e q u e s t i o n o f S I N r s r e s p o n s i b i l i t y asstess. Qui.te frei1uenL1,v, gror:ps such.rs SIN are compJsed oi I cc-atlons and, ir-i nany cases' peoplc f;:om other sLaies. 'lhar-qc.!lt5al-_r_11!1t:ir:-s abc':i business p^:op1: frcill oLirel'

na-kgsneni-gl-iil-1-sl1:.1iS4..t-t-t:t's-

:.:"'i
l. j c o i r , p a n. o s c f a j . l grcups. interest sizc$ nust deal , at least oc,:asiorrally. i { i Lj - r s p e c i a i

2.

rto icngei: have the luxury corporaiions l n i - o c i a y ts s o c i a i c i i r r a t e , purs.ring profit as f:he sole goaj- and priorily. Trade offs inevitably m u s t b e r r i a d eb e t v r e e n j o b s a n d s o c i a l re.Iations e ffectlveness.

of

3.

objectives"

Evaluate

Frank Charrrais public

"buli in rhe Frank cbama is quil_e cbvjously his own q/orst eneny--a real Even though and myopic. arrogent' His actions are abrasive' China shop," of public in behaving ru<ie1y, the reaiities he perhaps feels jusl-ified to imagine how It is difficull strongly dictace against it. relations anyone could have sympathy for ttre company gi.ven Chamars rtegative per formance. lf SIN does bring suit against Charna, what action should t-!9-!:rrPgg-!3L9?

already generated by Frank chana on televiGiven the adverse publicity ln to stay oui of hot water in the future. slon, the company should strive out the company would probably be best off by settling the event of a suit, Other\'tise they may be rn danger of of court as arnicably as possible. "winning the battle only to lose lhe war." Do srnaller companies have any social and Eoduct/service responsibilites beyond providing ? a

quesEion which has scarcely been resolved Ttris is a controversial The authorts perspective is pragmatic: debates over the past decade. harrnoniously with the to interrelate panies of all sizes must strive

in com-

/+4

external environrnent. rf prevalllng socieEal expectatlons for buslcall ness involvement in nonprofit-oriented behavLors, cornpanles would be "soclal foolish Eo stubbornly resist. rn the 1980s, sorne lnvolvenent ln responsibility" prograrns 1s becorning necessary for corporate survival rlght along with the need to renain profltable. At the same time, rnany marginal conpanies can be forced into r,rnprofitable operations and eventually out of business if the cost of the social obllgaLlons are excesslve.

MIDWEST MIJNICIPAL AIRPORT

Issues l. 2. 3. RevitalizaEion Relationship Strategies of a sEagnant business between community and buslness for growth for how Mr. Martinelli can attract new business to

Provide suggestions Mldwest Airport

Martinelli faces an r:nusually difflcult probleur because of the airportrs complete dependency on the loca1 cornmunlty. Llttle can be done to stimulate demand for alrport servlces given the cityrs population 1eve1 and rnix. Martinelli is furthered constralned by ornnlpresent governrnent regulations and the consequent reduction of operatlons f1exlbl1ity. still, 1. Martinelli does have some options for revltalizlng the alrport:

Attract additional commuter airlines through offering subscantial breaks on airport rental and utilizatlon fees. rnvestlgate the posslbllities of grantlng new carriers free advertising, cooperatlve advertising, or at least cut-rate advertising. strlve to attain promoting alrport strong support frorn the loca1 chamber of services and in attracElng new carrlers. comnerce ln

2.

3.

Renew a dialogue with Beacon Airflight, Airstrean Aviation, and Allegheny to assess possibllities for their re-entry under new inducements. Renegotiate lntensively wlth pennlnsula Airways to cetermine what concessions could be made by the airport to elicit addiEional flights and new routes.

This mldwestern community is experiencing the very same air servlce probrerns currently being faced by many medium size cities. Dramatically rising fuel costs, deregulation of the airline induscry, and a populatlon "sunbelt" shift to che have courbined to danpen both supply and dernand. ree with serv Martinelli that civic rorrth is vita11 llnked to aLr

traffic

Although such a reality may exlst for some comrounitles, it ls difficult !o make a strong case for Midwest. HisLorlcally the town had relied on heavy lndustry for its gror^/th, not on lts accessibility to cosmopolitan travel. The authors feel that for the rnajority of sna11 and rnedlum Arnerican communitLes, civic growth is much urore closely correlated with availability of highway faciliEles rhan wlrh alrporrs.

EBERMRDT PRODUCTS rssues l. 2. Marketlng Marketing research strategy

Be sure to Design a marketing research carnpaign for Eberhardt Products. is to be gathered and how it is to be Sathered. specify whaE inforrnation and pragmatic. Make your design realistic is for to Sathering marketing information Perhaps che simplisE solution a well designed warrantee card or a rebate coupon for Eberhardt to utillze sense donrt Even thcugh watrantees in the sErictest each of his products. EberhardE could apply to products like RustRid and ReFinlsh, ordinarily devise something innovatl-ve : l. A price rebate canpalgn whereby consumers must ccmplete information card in order to receive the rebaEe. Some sort of form. entry a contest vrhere thre narketing inforr.ation the marketlng

2.

card

is

the

3.

A free bookle! on car lnfornation narketing At a ninimum, the

care and paint card. card

maintenance

in

exchange

for

the

informatlon (for

should

contain

the

following: mail canpaigns)

l. 2. 3. 4. 5.

Cuscomer narne and address Who purchased Store in whlch use of the product

possible

fulure

direct

purchase product

was nade

Intended

AntlcipaEed

frequencY of

use

KATH SUR.GICALEQUIPMENT Issues 1. 2. Cash flow analysis Financial planning monEh period beginning

Develop a cash flow stateurent for Kath for the. four State any assumptions you make. with l{overnber 1. Cash Budget Month I Beginning cash balance Cash receipts Cash avail-able Cash disbursements: I'lonth 2

}lonth

Month 4

$-i0,000 65,000 l5,oo0

$22,339 73,333 95,672

$ i 5 ,i 4 6 _8i,65! loi,813

$ 5,489 106,627_ 112,156

46

purchase s Other cash expnses Tctal cash disbursements Subtotal of cash Repayment of loan Cash balance before addiElonal borrowing Assume that sales

57,470 12,t97
oy, bbl ?\ ??o

63,030 L --.-4 , 4 9 6
r t,)lb

Tzz;l3e

3,000

E;ia6
;)1),l4b

--s-;4Ee=
2 J r J - _

7 7, 0 6 5 16,259 qT-57

A)

Aa<

16,964 9 9 ,5 g g
LZr)O/

3,000

-F-s;aet
constant.

- 3,000

- ? n n n $ 9,567

and nanufacturing

expenses are

Sales Schedule

ffi#F|=--;;rc
3 4 60,000 7o,ooa 80,coo

M^^|L

ooo I 25,000 The above sar'es schedule assumes that Mr. r'reaaorr s sar.es forecast rccurare (i.e., is "":::1"": sales oi io,-"t2,. l4 and 1 ; - ; ; ^ ' i . , i" i " u r " . a' 4' b and 6 respectively sates of over tire next- fbur ,ont',or, remain constant at iirat prices will $5,000 for uu"', u,.rio"r.ve and gz,i6o*i:J.-"ach sieaner.
Cash Receipt i"lonth of O c! o b e r Schedule_ Mr

.15,

?n v ^v J v ! nu^ 45' ooo

9o'ooo

r 15'oco

$nG;Eer-:i'{onrh I Month2 Month 3

Sale

Month I

40' ooo

$20' oco 53,333

$26,667 60,000

l'otar

$30,000

-$7J,33-5_ sBi-;66?-

,ffi

rnonrh.,\ss,rme ;ff:ili"?"ii*:":.:J"j::i*:f ;;.;Tnjf


Dlrect Labor

:ffT:rjt::orli":t.i"tlar

amounr sales is collecred of in',;"ir,u afrer rhe rnonrh

ro'oJ"g

Laborror auroclaves G$I,000/unir t?ltl*t'l:!i3 Laborror sEeaxners esi]eiii,li;"

rorai direcrrabor

Fiffi
Direc-. Materials

F###

4 Tglt*,: Y:".1 , Monrrr ttr': $140o-0---$i6;00-0 ?13

### _: -t-

###

Y"ig*,4 TH**--*++f---l9"rh Mareriarsautoclave @g1,500,/unlt ro,"t.."u. G$i,t;;i;;;":i:99 :lSA roear directLnaterlars lilgf-TT* j",sor=
Assune that

Materiars ror

-szi#

the

produccs

ffi

are manufactured

ffi

ln

the month they are

soi<i.

47

Cost of Goods Sold Month 4 Month 3 Month 2 MonEh I s s t z , s o o - t s , r o o $ 2 5 , 2 5 0 $ 2 7, 2 5 0 Direct labor 4,000 4,000 4 ,o o o 4,000 2 Supervisors 3l, 250 29,250 ToEal shop wages and salaries 35,250 32,250 25,500 22,500 Material s 3,750 3,510 2,820 2,580 (12% ot and benefits Eax Payroll shoP wages & salaries) 1,87 5 1,755 1,410 r,290 Workments Cornp. (62 of shop wages & salar ies ) 2,500 2,300 1 ,8 0 0 S u p p l i e s a n d m a i n t e n a n c e ( 2 ' ' Ao f s a l e s ) 1 , 6 0 0

-fr;md

--;m0

Rent other costs Total

2,000 4,000

2,000 4,000

355776

$6r;o3_0

2,0oo 4,000 $/),ub)

2,000 4,000

336,6t5

N o t e t h a t d e p r e c i a t i o n h a s b e e n e x c l u d e d f r o m c o s E o f g o o d s s " slud s l in s e i t o ppi ec and expense of Asstrme that naintenance is nOt a cash expense. mai.ntenance'.lsnotpartofwagesandsalaries.Otherwise,addillonal workerts compensation must be paid'

Purchases Schedule Purchases = ending inventory - beginning inventory + cost of goods sold' As specified in the case, ending inventory is increased $2'000 each monlh' Month 1: Month 2: Month 3: Month 4: P u r c h a s e s= P u r c h a s e s= P u r c h a s e s= P u r c h a s e s= 17,00019,00021,00023,0001 5 , 0 0 0+ 1 7 , 0 0 0+ 19'000+ 2i,000 + 55,470= 61,030 = 75,065 = 80,625 = $57,470 $63'030 $77'065 $82,625

0ther

Cash ExPenses

Montl-rI
Meadorr s salarY SecretarYr s salarY Sales comrnissions (5% of sales) salarles Total office Workmenrs ComP (I% of office wages & salaries) & Promotion (2% Advertising of sales) 0ther Total

Month 2 1,100 4,500 -q:66d

Month 3 l,100 5 , 75 0

Month 4 I' 100 6,250

I,100 4.000

lio-d
91 o
3,000 $12,19i

m;650
109 2 ,3 0 0
3,000

lTllm

96 1,800
3 .0 0 0

11 4 2'500
3,000

$T4;4q6 sTilziq

$l6p6a

FANTASIA I,IUSIC COMPANY

Issues 1.
2. 3.

P r o f i t analysis
Assessrnent of Conpetitive

and Planning financial performance

strategy

48

4" 5.

Personal

strenglhs

and weaknesses cf tor*ards proi.i.t

an enrrepreneur arrd custoner servlce

llanagemenr phlloscphy

Evaluaie Fantasiars p e r f o r n a n c e s i n c e L r o y - l eA l b r e c h t t o o k o v e r . financial ln yorlr opinion, how ccufd the store becorne rnore profitable? Recommend

approprr

;trffi

Fantasiars net ilcome has increased significantly as a percentage slnce 1974 (Erhibit 3) but the absolute increase ls negligible (54000 in l97i versus 98000 in f979). During the sarne six year ti,oe perlod, sales have more than doubled and sliown steady expansion. Without question, Faatasia has been experien,:ing ptofitability problems. Sales have grown inpresprofit sivcly; has slagnate.i. The conparr;l's filrancia--L diienna can bc reaCiJ.y Jiagncseii by l.:nparing t-ire annua,r sa,ies rrrl-une of each Dt:oJrct l-ine {Exhibi:1) with fhe c . . , ; . ' r ' e F j l c L l d i n gr : o . i L o i g o o d s s ' : 1 d ( I l : l h i b i t IrantasLa appliars i,_\ bc suc3)" .:ecdini :rdinii:ably *lih insiir;rnejit reni:.1i., sllrrs, ir,.1 at:cesscries :nC supli.i.:s" i:'i;sii jvL pi:cf it nargins atie cv;.dent for these ii.ir:ee pzrri lc6l.ar (;crlrrisi;i.ons oir i.',st-r.ddlcni repaiis tr:oiir-lat lines. ani sheea ni:.sic sales are j a t n c t i . ] e s ' r - c' t e n t i r t i l , r . i 411oi.ri.ng rirac rcpaiis are vj.er:eC a.s a ._crsi ceriier bv rlll.:.:tr!, stieel cius;rr:::a1es iirpear iO i-+: lhe (:,lIirrii e::plair.i:ing j..,1-(: f j nanc-iai ie rfo i'i:r:li:,ce i; om i97 4- 19 7 9. ii-n1: a: ia t :; .l.aci.:.1. f Rttcomj];ej.ii:itiar!9 a.e cbvi.r-.us I sheel itirrsic sa1es trusi +i tll..tr be Sl-,ore<i up an<i *r'ie !::cf-iLable or i;:rp1ed, i\lbrecirt woi-rld urrdoub'tedill refuse 16 Crop sireel nusic sal.es. since ne i'iclrs this tc be F:rntaslats fi.:sori tcr 'lne being il L,.isiness. crrtire coopeiirj-'/c slrateg), of Fantasia is casi ii:!o tloLlbt. lL sne.rs thac 41i:rechr-t s pencharri for pro'.riclng "iendcr lov{rrg cai:e" lc arra bar:d:.:ia sheet::lusic has rio profitable Sonething has besis. 'Lo give. Addiricnal relevarit recommend;rlloiis are as foilow>;: 8ot l 2. Turn inStrurr,entt raiL: irs ;ntn r nr,rf i i Cen-ter thrOugn ralsilrg rateS,,

Exp.ei:irn:nt wL'-tit some syslern for ailor,-i.ng band directors to exalnine s h e e t n u s l c w ' r t h o u E F a n t a s i a h a v i r , g E o I ' 3 y l o r i t l n a d v a r , l ' . eo f o r d e r c lieing received. Raise prices on instiument awfully slinr. rental or drop the servlce" Hargins arr:

3.

4.

Contirrue to pusb accessories I erop n - , - f-i - - r r.r- - J r n . r I . (

ar'd supplies

aggressively

glven

their

Evaluale Mr. Al'orechtts nanagerial !!s ptrilosophy of cuscomer service

sirengths and weaknesses. before profit?

Do you adnire

;.,*
1. Extensive prog rans. knowledge of muslc literature and secondary school rnuslc

2"

Good persoiral

relalionship

with

l,linona band directors.

W e a k n es s e s I. Lack of aftentiveness to financial perforrnance and profitablilty.

49

2.

Linited

business

experlence.

enlhuslasm and genuine concern for The authors admlre Albrechtts cease, however, were Thls adrniration would abruptly customer satisfactlon. A bankrupE business profitabllity. Fantasia to go bankrupt due Lo failing neednrE apoldbrecht customer needs. to satisfy ls hardly l-n any positlon in ways deslgned to betEer guarantee longoperations oglze for alterlng run survlval.

PEOPLE PROVIDERS

Issues
l. 2. 3. Snal1 business strategic planning

Franchise Marketing

operations strategy' including target market its rePeat customer Percentage over

suggest ways ln whlch the next few years. l. 2. Offer service

PPNH can increase

discounts

for

repeat

business. personnel officers in cllent

with Develop a close working relaEionship relationships. to encourage long-run flrns placements Follow up on all company satisfaction. to demonstrate

3.

lotal

commltment to client

4.

cornpa.nies sorne form of send pa.st cllent Periodlcally update to maLntain connunications.

a newsletter

or

ils Plscenent ilcre?se suggesr lrays ln whlgh PPNH gan {urthel o" both the deta-d (company) and suPPIy (eurployee) sldes'

percentages

in naxiurlzing placernent percentages should be -*ideration tt""" r"t" strategy whlch emphasizes to continue with Ehe rnarket segnentation large or PPNH is not sufficlently and conputer personnel. accountlog "a11 peop1e." By limiting things to all to be to attenpt sophlsticated Heinlein and Albee can to a narrov, range of personnel, recruiting thelr ernphasizing personalized relationships client to develop long-term continue edge for PPNH' a potent competitive This constitutes service. the on the denand (courpany) side, placement percentages: increaslng Contlnued aggressLve use of Mvertislng for qualified with following ideas could be consldered

for l. 2. 3.

resumes !o generate candidates offices in of

contacls'

job

ner^/spaper want ads' 1oca1 colleges and tech-

ties Establlshing nical schools.

placenent

4.

flnder fees to pa.st cllents offer poEentially and associates friends replacement.

to willing interested

provlde the names of in a career change or

50

placernent for lncreasing Ideas to conslder (eurployee) side include the following: l.

percentages

on the

supply

Establlsh of firms who ernploy the servlces contacts wiEh a wlde varlety Do not restrict and conputer personnel. cctnpany conof accountants Eacts only to bookkeeplng firurs and EDP servlce conpa.nies. Strlve to rnake maxfuntrm use of network. Strive !o offer cllents the People Provlders natlonal inforrnation

2.

3.

relocatlon

counsellng

lf

requested.

Uslng the grid fornat in Exhibit 2, formulate the optimum slx year strategy plan for People Provlders You rnay alter, of New Haven. change, or add to I. any of the strategy propositions ln Exhibit

t97 9

8t
130 150 180

83 200
687"

85

Target

revenue

r22
607"

220
702

z)v

Placement

602

637.

657"

70:l

Repeat paEronage %

30i(
60%

307" 307"
oz /"

302
667"

30'.
68"t

307"
70%

30i(

New cllents:

demand side

642

7iv

New clients:

supply

side

45i(

467"

477"

48z

497"

502

507"

Target

narkets

(c1lent

groups)

?Superv sory

> s i t i < r s ? ? < e c u E ye Po

tions

New services

offered

,|
CAMERON MOBILE HOMES

Issues l. 2. 3. S m a 1 1 ,b u s i n e s s unlonization effort

Ernployee relatlons Personnel policies as cornpletely as you can. ("I,ihat can uPpef

Answer Mr.

Carneronts question

Speciflc anployee-oriented slder lnclude the followlne:

prograrns of

actLon

which

Cameron night

con-

51

1. 2. 3. 4. 5. 6. 7. B.

Management by objectives Profit-sharing Bonus plan Flextime tied to productivity standards

work

scheduling benefits

Group fringe

Company news lelter Recognj,tion of eurployee birthdays, anniversaries, etc.

Attempt by top management to know employee names and cai_l thern by nane whenever possible Recognition a long way. by management of a job well done. A sirnple "good job" goes

9.

The whole question of motivators versus satisfiers is 1ike1y to emerge potentially at this point, opening the proverbial can of worms concerning Cameronrs efforts to build labor relations. The issue is really a moot one as far as Ehe authors are concerned, because Caoeron must strive to take situationally appropriate action rather than follow some academic model. The cornpany would do well to engage in irnmediate and continuous supervlsory developnnent to rid the organizatlcn of blatant and conspicuous human probiens. relatlons A11 coo frequently, unloirs get their foot in the door "Theory because of supervisory bungling and X" atritudes. In short, possible Cameron must do everything to creaEe an organizational cllmate not conducive to unionization. This invariably requires concern for basic hurnan relaclons, open communication, and prosilive reinforcenent of produclive ernployee behavior. 51lck girnrnicks or crash programs will never serve as substitutes for a humane organizational cliorate . People basically people. \^rant to be treated Academics call like R e a l r i o r l d p e o p l e c a i l i t c o m m o nc o l r r t e s y . motlvatlonal technique. "Please" "lhank you" go a-nol a long way. ttris a

JANECK FUR}IITURE

Issues I. 2. 3. Business expansion and relocation Growth financing and planning

Marke! analysis

Carefully eval-uate Mr. Janeckrs expansion sLudy frorn the standpoints of thoroughness, adequacy, and persuasiveness. WhaE improvements can you recomrnend ?

The primary we.kness of Mr. Janeckrs expansion proposal concerns hls estlmates of sales aud expenses. His use of natlonal averages ln derlvlng market demand is highly questionable, since the Springfield narket,.y.roi flt national averages. There is also the classic p.obler of uslng generalized averages to fit particular circumstances. Janeck's assumption that sprlngfield has an excess furnlture denand of is ursettling. rf such a surplus of denand acEually exlsts, $3 million Springfleld residents must be shopplng outslde of the city. They would have to travel either to chicago or st. Louis, both over i00 ,i1us "r.y. rt seens quite doubtful that many springfield resldents would travel so far for furniture, especially considering the income level of Janeckfs target narket. t r , I h yi s n r t Janeck's existlng store doing more buslness? what rslll happen when the new Janeck store starts competing ralth the old one? Accord:'-ng to an o1d retaillng adage, the three most inportant sales factors are location, location and location. Janeck plans to locate ln southwest Springfield, but is thls definitely where the rnarket is? Does Janeck know for sure thaE future metropolitan growth rdll be in the this area or even if springfield will continue to grow? 0n what basis does Janeck conclude that his stores will capture half of the narkeL? Janeckrs parison with questionable. esrimate NaEional of operating expenses for the new store ln cour_ Home Furnishing Association composlte averages is

Janeck
Cost of goods sold Gross profit Employee wages Adverti sing Total expenses Net proflt before taxes

NHFA -sn
4l

50 4.68 4.68
10 1a

1 4 .t 7 5.73 39.86
? nq

30.22

A cornparison of figures reveals substanLial differences becween Janeckr s estimates and NIIFA averagea. while recognlzing the linlted validiry of averages, the authors wonder if Janeck might ooi be overly optlnistlc in his low estinate of expenses. rn short, the authors wonder how thorcughly and accurately done his honework. rs he so deternined to open a second store closed his nind to buslness realitv? were Janeckts venture banker, would ou be wi1li to finance Janeck has that he has

his

new

The authors would not, even considering thaE Janeck is w1lllng to put up $801000 of his own money. Hi.s expa.nsion plan has too many flaws and questionable assrmpt ions.

PRUDI1OE BAY OILFIELD

SERVICING

I ssue s I. Key partner death

2. 3.

Strategic

realignnent

New rnanagement transition servicing have in the short-run?

what rnajor needs does Prudhoe Bay oilfield l. 2. 3. Obtaining Formallzing Systenati.c adxninlslrative help for

Nance Kizer in the conpany and long-range planning

Maureen Beallrs intermediaEe-(2 short-run

role to

4 years)

How can these l.

needs be net?

What chanees do

Klzer should inorediately hlre a capable execuElve secretary to assrme many of the routlne office administratlon rnatters. Klzer shouldnrt be spending his tine doing paperwork and supervlslng personnel. offlce perhaps Maureen IIls role should be one of strateglc decislon naking. Beall could assutre thls role ternporarlly or cake the lead in tralnlng a new Person. Klzer, ln conjunction rdlth Maureen Bea11 and Mitch Granger, musE streamllne the operatlons and actlvities of PBOS ln every posslble way: withdraw from low prlority projects, delay inminent expansion, consolldate resources wherever posslble. Kizer cannot continue worklng 100 hour weeks lndefinltely. Mitch Granger and Maureen Bea1l nust crystalize their involvement in operatlng the busLness ls must be laid to further lncrease personnel. their role ln PBOS. If to be temporary, plans

2.

3.

Maureen Bea1l, as a major stockholder, musL decide exactly what her role ls golng to be. As the major sLockholder she can appoint herself as presldent, offlce manager or nhat have you. Or, she could sell out to the other two partners. Do you feel Prudhoe Bay Oilfield Nance Kizer? l. Servlcing w111 continue to thrive under

This is a perplexlng questlon given that his operating philosophy seems to dlverge sharply frorn the one pursued by Austin Bea11, which apparently was successful. There are sorne lndicatlons that Kizer ls less adventureous than was Bea1l and perhaps not as tenperamentally suited for entrepreneurial work. On the other hand, Kizer for professlonal a flair has evinced nanagement. a tremendous capacity for work and

2.

3.

the real key Eo the conpa.ny's future vitallty lles wlth Qulte posslbly developing a good worklng "chernlstry" bet\.reen Kizer and whoever else ultimately emerges as a key decision-uraker for PBOS. Does Kizer have "lone the capaclEy to excell as a wolf" entrepreneur, or does he require a team effort? The answer to this question will determine what blueprint PBOS should adop! for the future. can snaller companies take to avoid the transitlon problerns

What actions

54

Few smal1 companies would be able to snoothly absorb the sudden loss a key decision naker. There slmp1y.r..r,t any workable ans!7ers to the question of how could tte death of a key person be handled wlth dlspatch. About a1l a sna11 conpany could realistlcally adverse funpacts of key partner posslbLe denise. regard include the followlng: l. Draw up a 1ega11y blndlng buy-sell agreenent partner death' Normally a flrm shouid carry partner the to buy out his share ln event of Malntaln key person insurance. do ls action nlninlze Ehe guidellnes ln

of

thls

1n the event of key enough ltie-rnsurance a death.

for

2. 3.

Strlve t o e n s u r e t h a t k e y enployees trnderstand the business enough to permit thelr active involvement Indivldual partners should avold over

lnnerworklngs of the trnder an *Iag".r"y.

4. 5.

dependence on one another.

The ownershlp operatlons of for granted.

rofe of family rnembers not directly lnvolved in daily the buslness should be clearly "p"it.d orrt ana not taken

6.

A s s o o n a s the firn can absorb the additional overhead, a back up per_ s o n s h o u l d be h i r e d - f o r each partner. These back ,.rp peopfe would then be capable o f assuning rnanagerlal responslbility sfrouia a pa.rtner die. PHILMARK PRODUCTIONS

Issues t. 2. Transitlon Role of from entrepreneurial in to professlonal

management

encrepreneurs

professionally

nanaged cornpanles

Theoretlcally the answer to this questlon lies with examlnlng the conpanyrs complexlty and rate of grorih. once a "*p.rrv-l.gins to diversify in a signlficant $/ay and gror to the polnt of needing severaf line nanagers, it generally becomes *nposslble for one rnalvldLi to pu'l all of the power levers. The need for piotu""ional executlrr"" ,or1d appear obvious at such a polnt. However, ln the nontheoretical real wor1d, where academlc ideals are ofEen irrelevant, founding ".raa.p.u.ru.r.s not infrequently place Chelr deslre for continued courpany control ahead of nanagerlal perforrnance. Founding entrepreneurs donri.n"."""".iiy-thrnk 11k! p.or"""ion.r nanagers do' nor do they necessarlly have to rn itre absence of external stockholder deurands' Entrepreneurs are urost likely to pass on the relns when they feel like it' whiqh nay or may not be when they should fron the standpolnt of academic ldea1s. What is the difference be trreen a n e n t r e r e n e u r l a l manaqer and a profeel many Deo have the capaclt to be both

fe s sionaf

r"n-gEii--I6

types of managers?

Although sorne might disagree w-j.th us, the authors view the essence of pursuing new new ventures, rnanagement to be lnitiating entrepreneurial The essence of or doing things ln innovative ways. business opportunities, of and enhancing the vitality professional management is naintaining "golng" "new" venture becomes a At what point a going/growlng ventures. l'le feel that so long as a moot issue wi.th the authors. one remalns largely and seeking new on the search for new enterprises a manager is continually "mental The set" is whalrs cruhorizons, he or she is an entrepaeneur. cia1, not the companyrs gross sales volume, number of eurployees, etc. The authors dontt feel there are many people who have what lt takes and professlonal manatemperamentally to succeed as both entrepreneurial on the the Ewo orientations gers. i^Ie say this again based on our defining managers are As the authors see il, entrepreoeurial basis of mental set. opportunities; with searching ou! new profit-generating concerned primarily professlonal nangers en,phasize how to maximize rate of return on capital organized conpanies. working within well defined and tightly I f S h e l d o n D o c t o r o w w e r e t o E u r n o v e r t h e d a i l y o p e r a t i o n s o f Philnark v].s could Doctorow continue to make vlta Productions to Ton to the company? Assess his options in this contributions Ehe authors feel that so long as Tooy At thls risk of sounding cynical, DocEorollrs prominent role Davis needed Doctorowrs innovative brillance' However, were Doctorow to turn within ttre conpany would be rnai.ntained. over the relns to Davis and no longer be able to sustain his innovativedecline. and lofluence would inevitably ness, Doctorowr s contrlbutions Possible 1. options for Doctorow Eo pursue lnclude the following: to halt addi-

Philmark hats wlfhin Contlnue to wear nultiple tional drift beEween Doctorcr^i and the conpany. Make Tony Davls chief operating officer board chalrnan and senior strategist.

and strive

2.

and redeflne

Doctorowrs

role

as

3.

projects and new ventures and let hlm Put Doctorow in charge of special in forming He could rnake a contribution exert hixnself in this ro1e. into the parenc conpany. which would be incorporated new ventures Have Doctorow se1l out pursue new ventures. his ownershlp interest and use the proceeds to

4.

Is 1t rea11y feasible tlon given that he is

for Doctorow to relinquish stockholder? najority

the chief

executive

posi-

The authors feel that such an arrangement would indeed not be feasible. ultinate declthat someone lacking wrusual situation It would be a highly llere is could capably assume cE0 responslbilities. sion making authority Doctorow canrt have his cake apparent dilenma: the real key to Philnarkts and eat it too.

IRON KETTLE R-ESTAURANT

I ssues I. Revltalization of a failed business 56

2. 3.

SErategic

realignment

Buyout decision and o n the Iron Kettle?

Should Mr. Cuinn purchase

1.

Guinn seens to have a good grasp of mistakes made by previous a n d c o u l d p e r h a p s g e t the business off the ground. Guinn has had previous A new shopping center res taurant. experience is presently ln the restaurant business. adjacent

owners

2. 3.

under developnent

to

the

4'

The restaurantrs facilities immediate reopenning. The restaurant The seller, package. is located

and decor are attractlve

and conpfete

for

5. 6.

next

to

a najor

highway. an attractive financing

Mr. Dyer,

s e e m s t o be offering

Arguments Against 1. The restaurant may have developed char-rges of ownershlp and decor. a dubious reputation with so many

2"

rt is quite possible that such uncontrollable factors as l.cation, rather Ehan mismanagement, doomed previous incarnations of the restaurant. Guinn already has a lucrative ful1 time job and mey not the new restaurant the attentlcn ii will require. lsi. p.urcha se price ? be able to g{ve

3.

!iha!_lpl]g_!g_.

Guinh estimat.js that- the previous proprietor, Hugh Dyer, has put $90'0001 to 9110,000 in rhe buslness. oy.r is asleing gl75,0oo, which does seem somewhat high in so far as Guinnrs cost estimates are accurate. The l0 percent nortgage rate offerecl by Dyer is a definlte sl/eetener, but GuLnn has no apparent need for much financlng given hls seed capital of gI35,000. Beyond these few facts not nuch else can be deduced about a "farr" purchase price. ultimately this w111 probably be declded by how much Dyer wants to unload the property versus how strongly Guinn has ih" tt.h to star! up the Iron Kettle.

*::TrgrJ:.{g{aj:ggr!-i, off.r him to prorol


1'

"rake rhe plunse," whar advice would you


par.-tlne. f,. f,.a

Dontt expect to make the restaurant successful worklng only If Guinn doesnrt plan on personally managlng the operatlor,, better hlre an experienced fu11 time manager. conduct some marketing research restaurants were perceived. to deterrnlne how the prevlous

2'

settle decor

on a family-oriented seems slanted in this the restaurantrs promotion.

strategy, direction. irnage ln

since

the restaurantrs

present

Crystallze aggresslve

the publlcrs

nind

through

Do not purchase the facility at a preniun price, since $135r000 could go a long way towards building a new restauranE tailored to Guinnrs exact specificatlons.

CASNER FILTMTION

SYSTN,IS

I ssues l. 2. 3. Passing on a business Preparation Probleurs of for from father to son and management

sma11 business

ownership

transition

from one nanagemenE team to another


DreDar

u auteil.d loTyfute Kej.th to take o


the the

ple! of acrion for the Casners ro fo11or,rl n


t have avallable. to encounter when t are the lni t 1a

lixnlted anount of time ens Keith Casner is courpany?

r 1n mind

r
takes over

rt ls not possible in just six months for Mendal casner to urake his son proficlent ln all of the technical areas of buslness such as flnanclal analysis, budgetlng, and inventory control. Kelth will have to depend upon his business school education and subsequent on-the-job tralning for hls operations expertise. rn ttre tiure remainlng to the -.".ru.", they should "envlrorunental concentraLe on the aspects" of the buslness: learning the filtration industry and its conpecitive dynamics, farnillarlty wlth key custoners and suppllers, tmderstanding all phases of plant operatlons, erc. Mendal casner nust also lnltiate irnrnediate actlon to bring KelEh on board the firmrs managenent team. Fortunately Kelthr" "rp"r.,i."ory experlence on the nlght shift should prove helpful in this regard as well as,wlth learning the external varlabres delineated above. rt wourd be rnost unfortunate if in his night shift work Keith had failed to win the respect of- the conpanyts employees. To be suddenly Ehrust into the leadershlp role wlthout such respect would greatly reduce chances for a smooth transitlon. Lastly, and perhaps of greatest importance, the casners must chart a long-range growth plan for the business so that Keith can betEer overcome myopic, short sighted decision-maklng in the transitlon period. By revlewing the current short-term and long-range p1ans, Kelth will galn a good feel of the company. During the next six months the casners should go through the entire planning pio.."". This should not onry conslder strateglc planning but should get down to the detalrs of budgetlng, cash f1ow, producL planning, etc. Mendal casner must of course straighten out a1r of so as to avoid leaving Keith and family with a tangled his estate pranning 1ega1 legacy.

58

ANII',IATOR TOYS issues I. 2. 3. 4. 5. 6. Marketlng Definition Contrlbutions Retal1lng Store in straLegy of target of narket lines to overall mal1s conpany proflt

product

enclosed

shopplng

relocatlon retailing strategy strategy.

Long-range

Evaluate

Aninatorr

s xnarketlng

At flrst glance, one gets the inpresslon that Animator has gone overboard with lts product 1ine, trylng lo be all thlngs to all people. However the companyrs proflt peifoir..rc. and financial growth are quite successful. Nothlng succeeds 1lke success. A 100k at Exhlblt I shows each of Anlmatorrs flve product lines to be roaklng a slgnificant contrlbution to overall proflt. Exhlbit 2 reflects fairly healthy proflt margins for each of the lines and very healthy margins for hobby/craft items and blcycles. A11 in all, Aninator,s narketlng straEegy appears effective. Further, the expansion into hobby/craft items and bicycles offset some of the seasonality ln the toy business. a Pro s 1. 2. 3. 4' Enables Provides promotlon of ,,one for stop shopping,, thene and innovatlon "ful1 blown" t tends to

line?

wherewithal

marketing

experirnentatlon

Spreads risk Permits frnanlcal seasonal trends, "synergy" etc.) (balancing of proflt marglns, counteractlng

Cons l. 2' Heavy tie up of cash in inventory performing products may

Threat of over commltmentr where a few poorly sap the success of successful ones Difficulty of viclng, etc. the conpanyts provlding adeq'ate sales

3.

expertlse,

after-Ehe-sa1e

ser-

Is

target

market

adequately

defined?

Dameron seems to have a good understanding of the various market segments in the toy industry, but he clearly has rejected any notion of carget marketing ("go after all narkets large enough to be profirable"). Gauglng from Aninatorrs successful slx year track record (Exhibit 5), the "I following statement by Dameron rvould not appear to be idle boasting: think our nonspecialized approach separates us from competltors and persuades customers to form a lasEing relationship with us." past success, Anlmator cannot seriously Despite expect to be all thlngs people. to all Such a strategy could be suicide over the long haul for a sma11 company. If Darneron resists his target narket by age clarifying groups, he should at least attempt to better spe11 out his product line ( w h l c h i t e m s h e r ^ r o u 1 dr n o s t l i k e strategy to se1l to each urarket segment he inlends to cater to). Recornmendpolicy guidelines for the ma1l expansion issue.

The authors canrt help but conclude that Dameron 1s being blinded by what he perceives to be the glamor of na11s. The wlsdon of converting currently successful sEores to na11 operations is hardly apparent to the authors, even though rnal1s do geoerate a predictable anount of traffic flow during the tollday season. Dameron adnits that his preseni stores are attractlve in appearance anC iocated in good traffic The finanF.tterns. cial success cf the AnLnator chain tns already been aliuded to. ln short, there appears to be no compelling rational reason why Dameron lrould want to get into the higher rent and overhead associated with ma11s, some of which are not yet even built. Dameron night do well to ask hinself what he is in business for: to generate a healthy profit or tc be at the forefront of ne\r retal1lng trends. What are the inherent risks and opportunities of rna11 expanslon?

Burrell Dulany enumerates rnost of these towards the end of the case. The authors would only add one other thought. Boyd Daroeron must bear in mlnd Ehat the success of locating in a rnall ls by no neans assured. He seems to assume that ina11s are some sort of a retalling In necca. actualiEy rna11s are sinply one more business situation requi-ring rational analysis and applicat:lon of business common sense. To abandon a good "sure thing" in favor of a possi.ble better thing would hardly appear !o be econoprudent. Ma11 sLore operations normally change ownership qulte mically Frequently often. the third ovlner of a store ln a mal1 1s the first Lo generate any real profits.

SICORSKIAND ASSOCIATES

Issues l. 2. 3. Techniques Financiai Business for buying and selling of a business businesses

evaluation buy-out

tactlcs *"o purchase an ex_fgli-r1A-lgglryjj_Ig$9!

I.Jhy would an errtrepreneur prefer than start his or her own?

l.

He or tunity

she may be experleneed ln the lndustry and percelve to sEimulate the companyrs perfornance. may be able co acqulre assets at

an oppor_

The entrepreneur start-up value. He or

be10w replacement

or

she nay feel

the rnarket will

not

support

another

conpetltor. hassles and

4.

The entrepreneur may slmply wlsh to avold the nunerous worries associated with new venture start_up.

Even though the entrepreneur nay be buylng sone headaches, he or she ls also buying an ongoing business wlth a "rr"toru. base, suppllers es-tabllshed, a recognlzed name, and in sone cases, an already devel0ped relationship with the flnancial communltv. 6' Loans are much easier to obtain for startlng a nei^rone. for buylng an existlng buslness than

noney

lon

of

the

tine

vaLue of

urtinately any business must be appralsed on the basis of what return 1ts owners/investors could earn on allernate lnvestments; hence buslness worth is virtually synonynous wlth the tlne value of oroney. Frorn the standpoint of how the lrorth of money declines over tlme aL to inflatlon, business valuation 1s agaln a f,nction of rnoneyrs tlne value. Ar.r. four of the evaluatlon urethods discussed by sicorskl revolve around tlme value consideratlons. As the rlsk free lnterest rate lncreases, the flrnrs xnent must also increase. r]nder current conditlons wlth paying about 19 percent, a relatlvely stable firn would least 20-23 percent. Besldes the thlnes mentloned by Mr. Slcorskr, what other return on lnvestrlsk free noney need co return at

factors

should

-nager1a1ab11ityandknow1edgeofthebus1nessandits lndus try 2. The flrnrs strengths cornpetl'lve standing, and weaknesses the lncluding market share, lnage, and

3. 4. 5. 6. 7. 8. 9.

Dependency of Pendlng

conpany on a few key custoners against the conpa.ny

lawsults

Lease arrangenents Depreciatlon schedule

Union contracts Supplier Exlstlng contracts credit policy

10.
l !

Age of

accounts of

recelvable and furniture

Condition

equipment

NARDIS CREATIONS

I ssue s l. 2. 3. Business Strategic Business turnaround realignment reorganizatlon plan for Nardis turnaround the company, inplernentation Creations. guldelines, Recommend and organiza-

Develop the l981-1982 prioritles actlon for tlonal changes. Dodgers I. turnaround

prloritles

should

be the

followlng:

Weeding out and renixing the product llne: glft drop the falllng line; reduce Ehe types of staEionery carrled to only the rnost profitable; reduce the number of cards offered, agaln ln keeping with profitability; trin down Ehe number of envelope options to enable (The profitabllity productlon runs. longer, more efficlent analysis product 1ines, the estlmated assoclated wlth the various savings, and pro forma cash flows are presenLed ln Appendix A, B, and C ahead.) Replace the controller sulEants to redesi-gn hrith someone nore qualified and retain conthe Nardls accountlng and informatlon systems. lnventory lonedlately to generate needed

2.

3.

Sell off the dead staElonery working capltal. ReLire unrketing

4. 5. 6.

head Jererny Blake

and sales force.

director

Henry Gladstone.

Revltallze

the nondvnamic Nardis infusion

sales

Conslder a new equity long-term debt. is

to bolster

Ehe cornpanyrs conslderable

What dlfficulties

Todd Dodge 1lke1y

to encounter

in

irnplementlng

your

Dlfficulties: l. 2. Employee resistance UnwlJ.lingness tlve ideas of to personnel changes to retlre or to accept any lnnova-

Blake

and Gladstone

3.

Further communication breakdowns belween Controller Manager as the new financial inforrnation sysEen is Opposltion from present Nardls sales representatives

and Accountlng implemented to sales changes

4.

oz

5.

Unwillingness

of Nardls

fanlly

to generate

additional

equlty

Advlce l. 2.

to Todd Dodge unequlvocal support of the Nardls ro nlnirnlze

C,et the conplete,

family. reslsrance. rine

,t:r:;':il 3' :i:':;:l;":nd 4'

:::il:::.."a1 persuaslvelv

changes swlfrly

explain

to

personnel

the reasons

for

each of

Be prepared

to accept

crltlclsn

and be ernbrolled ?

ln

controversv.

The answer to thls questl0n depends on the organlzatlonal context: large 11 ls' how the u"*::: of a..,tonon! ".j"t.o uy ttri t,r.r..or-d usually Eanager, etc. Eurnaround irtrsrs .." p.oi.""io.r.r ,"r.gu." ;h;-;;*.ther peoplers companles rather than their own. I"-i;i; context, t h e y i l ;w o,u l d n o t b e . ;;. classlfled as entrepreneurs in the rradlrlonal sense. as change agents w'thln thelr organlzatl.ns, turnaround managers nlght be thought of as entrepreneurs-_internal opportunlty seeRers. APPENDIX A Proflrabiliry Analysls

(000,s)

:: GS d C : " : a n. o p e r .
conrrlburion Ratlonale l. Sales -

lelrrlq

G & A

t,g}4
6oq 1 88

-ah
-;;

',ii:

tt l
(50)

r zoAt

,i:

2,318

,i

:'Jii
(68)

g70 per o1d9r- fo1 cards, gl7 per order for Subtracr rotals from toiai s"ie" on f.r.or. Remalnder 1s glft sa1es. -

starLonery. ;;;;;;""..

2'

cGS & oper'

(a) Nuurber of orders of statlonery Is 251 0f thar of cards. Cosr of urarerials is estlnated-;; ;; rhe sane. cost of packaging rhe saure. cosE of J""igi'a.rirr.a.ry more for cards. Cost of an order of stationery 1s estl_ nared

a r 7 5 2o t a n o r d e r o f c a r d s . l s i . - " i isz = rcZ (b) cffrs were figured at 0 . 9 " 1 f t o t " i C C S - p f , r$ 5 0 , 0 0 0 o " for the catalog.
on percenr of sales _ srarlonery at 62 and gifts statlonery 67., glfts at

c & A ;iB;:* 4. Selling -

Flgured on percent of sales:

0.97..

APPENDIX B Savlngs Estirnations l. D i _ s c o nt l l r u e S t a E i o n e r , v rates Uperations

$343,000

G & A Selllng

Expense

3 9 ,0 0 0 1I6,000

$498,000

-D i s c o n t i n u e G i f E s Cosr;F Saies & Operarlons G & A Transport & Storage Catalogue Se11 Excess InvenEorv statlonery & Gifts Other (Sel1 at 402)

$ 2I,500 6,000 4,900 50,000

qg:lqo

$53,000 12,000 $ 65,000

8!!90
$33,000 $13,000 $ 5,000

4.

Sell

Statlonery

Machines

(sel1 Ar 40%) 5.
Reduced Interest Expense Froro Shlftlng to Long-TErrn-nebt

Pro ----

APPENDIX C Forma Cash Flow \ Lard s unly)

SALES (est. 182 growrh rate) Cost of Goods and Oper. G & A Selling Total Expenses Operatlon Profit Inte rest Increase ln Receivables Incorne before Taxes Taxes Net Profir Depreciation One Tine Cash Flows Sale of Inventory Sale of Machinery Net Cash Flow Notes: 1. 2. 3. 1980 sales reduced

r9B0

s r,eoz

1981

1982

T:m
-l
-T

609 1,903 189 I28 6l 0


o1

z2d6
7r,o 2,050 4,97 5 338 r25 t5 ---19=8 5 --r33 60

isrq
848 2,479 5,826 444 r05 l5
aar

l7o
r)4

73 2 1 -T733 6

43

0 o $ 253

0 0 $--l9-.7

by 77" to give

sales

of

cards

on1y. chart. being 2 " / "b e L o v

Expenses breakdown cornes from profitability

analysis

Cost of Goods and operating expense has history of lncrease in sales. So used 16% increase per year. G & A and selling expense - used lg%.

4. 5'

rnterest is reduced as one tr.ne c-ash flows flows are used to reduce debt.

and subsequent

positlve

cash

o.{

6,

Taxes in

l98l

are

1ow <lue to $250,000 loss GOODBUYGROCERY

carry

forward.

Issues l. 2. 3. 4. 5" 6. 7. No-fri11s Store grocery retalling

relocation product nix strategy

Merchandlslng, Competitive Realignnent Advertising Markeling

taciics of straceg5,

strategy research

*rfr" *F*+ffi:"""ffi
Herr ing ton? The autlior:s cornplrment,Mr. Herrington for his deternlnatl.n ro reopen Goodbuy Grocery and hls wlllingness tJ inr,o.rutu. He seens to be ccnsclous of Lhe need for cevel0plng a cimpetltive eage and for thlnking strateglcally. Thls is somev;hat remarkable given tire muncrane na.ure of rhe busi_ ness and Herringtonrs llmited entrepreieurial background. l{erringtonrs prlmary challenge, and the real key to thls case, Iles wlth assessing the financlal pot"nir.r of no-frl11s-ro..h..rJi"rng. Information presented in the case in this regard is qrt{gq lLrnited in scope, thereby closely paralleling ihe way the ,,real world,.'tyfi".ii1, i.. Rarely wouid an entrepreneur suc-h as Herrington have nnr,rch ore lnformatlon n available with which- to fashion a coipeLitlr,e straLegy" students are thrust in the unserrllng role typicaliy faced ly "rrti"p..nu.r.", havinEi to make crliical cieclsions on cbe basls oi linited lnfor'ration and only pa.rfiali,y informed speculati.on. No-fri11s nerchandisr.'g woulcr appear Lo have sorne markec appeal an<i staying power r.rnder the presenE "concrlc rn11ieu. tJhat ls rts rL\ng run 'be potenlial and stabil ity remalns to seen, as is the case for nost lnnova_ tive ventures' students mlght profit frorn conductlng sorne secondary research i'to no-fril1s rnerchandising. The pro fcrml 1n e*hiirt 5, to what_ ever extent ltrs va1id, doesnrt foreiell spectacular perfornance, but the venture would appear to ha,re some vlability. The declslon to rel'cate in cantonr s affluent northwest srde ceitalnly sppears to have sone nerlt on the surface. ordlnarlly it ls prudent to open a new buslness in the thrivlng ,,wherl end of town tte-acifon fs.., However, there nay be soroe who tak! the pcsitr.on that Goodbuy Grocery should rel0cate ln cne of che less affi.uent canton nelghborhoods whose resi<ients night be expected to better patronlze a discour,t priciig grocery store' on the other hand, more affluent shoppers "oaa"iniy',-r"r"*ru bargains as ruer-1. The authors feel tirat the rccation decision should not

Critique

Mr. Herrl

65

: h:i':..':il

be^based on demographic trends a10ne but shourd ar-so carefufly olrrerences in construction site costs-lna "orrrng-.ugJi"ii".".

"i":':,fii:i:'

" "t,r.,8, "i[i;::r#:"." u"g"nr"nu.r.'"" may


available

consider Further,

are

The .n.. ";:,:Tl.t::,:l'"f; ;;#i, j:ilj":jf.:":,L{j.:fr" i":;i:.;d';j;:. ::;:""higher, bur able to conpete with the "hJ"::*"Th"ir c u s t c bn e r s a r e w i l l i n g Ie n to pay for the ""."""f.r.". bene fl t prlces

ro ";.*" "::;:","o"i tuu* i";;;;."l "lTitl' ".t p.. : ii"ii lil"'lr Jir i:: tTffiff tl;.^oll,what competltive eage-wo"ii^'trJ"tlJ"r authors suspecr

Few other realistlc transition __ strate Herrinsron. He could invest ;a"-;,;i;;;sl:"^"0f.:.

ductlns rfrEEGEE?iEl

ffi

frorr n a r k e t i
u l d e lne s

r e s e a r c h b e f o r e flnaor him to ol1ow in con-

-;; _iiJ.?o-uo"r,,g res. il#:.:ilL;"L,il51:33jj ;:;:,, rs sro ;x;" f


l. 2. 3' 4. 5. How successful Is there has Kroger,s Canton fs3gulss for are By_Lo no_fri1ls store in Canton been? roon in a second no_fri11s popular wlth store? are not?

Herrington should eurpl0y the servlces of a consultant research' to conduct the The authors feel- such i""".."r, ls lmportant the additionar enough Eo warrant expense'- Herringtor *r"":ll needs to aeterfiine more about

which

no-fri11s

consumers and which

How valid

and accurate in

are Herringtonrs

pro forma projectlons? to. best support a new

Which nelghborhood no_frills store?

C a n t o n w o u lrd b e e x p e c t e d u q De

6. If

Where do the custoners Good does

live

that

shop at store

By_Lo? in Canton, recomnen4 an adver_

as a no-frills Herri

rn tte op'nion of the authors, the forl0wlng advertislng be stressed (in a newspa.per themes should and door_to_door handbill ".rpign,1, l. Iow prices ( '.f ight infla tion,,)

2.
fi::;tt"".
J .

shopping

(siurpliciry,

back

ro the

.,o1d

fashlon.,

basics,

Home owrrershlp Centralized Product locatlon assured

4.

quality

66

AN ENTREPRENEURIS DIARY Iesuee l. 2. 3. Da11y actlvltles Entrepreneurlal Realltlee of an entrepreneur llfeetyle buslness rnanagellent

of soall

The followrng observatrona hls dlary entrles: l. 2'

about Tannerrs lrfestyle and full

can be gleaned f-ron

His schedule is nulttfaceted Ite antlclpates the fact. aome actlvltles

of varlety. to others after

ln advance and react'

3'

Ile works long hours and not necessarlly routine.


He has rnultiple He concerns pollcles. He continually He nulls over projects wlth and prlorltles both short-run

accordrng to a strlct
golng

daily

4. 5.
6. 7. 8. 9' 10.

slnuLtaneouely. declslone and

hlneelf

and l0ng-run

searches certain

for

new buelness for

opportunltles. ttne perlod.

decislons

an extended

IIe performs He nalntar'ns

hls

share of mrmdane work actlvitles. of optrnisrn and dlsplays a posrtlve fanlly outlook.

a sprrlt

He strlves to balance conslderatlons. Tanner an entrepreneur?

work responsiblllttes

wlth

Is

unq'estlonably he ls. He has several business projects golng at the sane tloe; he ls contr.nually on the search for addltionir opd"trrrrrtlee; he ca11s the 6hots wlthln hls conpany; he ls a generallat; he 1s certalnly a f lnanclaJly-orlented achlever.

Numerous personal needs could, and probably do, lle efforts. Posslbllltiee lnclude tfre fotlowfng: l. 2. Strong achlevenent need Strong securlty need

behtnd rannerrs

67

3. 4. 5. 6.

Love of Deslre

"wheellng to achleve

and dealing" a certain rate of return on lnvested caDltar

Enjoyxoent of managerlal Absence of pursul t s Reluctance strong

actlvlties lnterests, lncludlng hobbies and lelsure

nonbuslness

7.

to

sel1

out

or

remove Mnself about

fron

"runnlng of

the small

show" buslness .

what do hls rnanagerentf

diary

entrles

indlcate

the realitles

The dlary conmentary clearly reflects that small business managers musc be generallsts capable of perfornlng a broad array of lnterrelated actlvitles. Entrepreneurs must be able to acconrnodate lnternal and external threats, ldentlfy and evaluate opportunities, nalntaln operatlons flexlbillty, work $rlth people smoothly, and be continualry self motlvated. The qualltles perslstence, of hard work, self-confidence, and individqalisn are also spotlLghted in the dlary entries.

NEW GENEMTION SOFTWARE

Issues 1. 2. Minorlty group entrepreneurshi.p of sma11 buslness are typlcal of other black business

Government

support

Do you_fee1 Ilarrls owners? Do any of

Monahants vlews hls statene

While lt ls difficult to generallze about any group of people, the authors feel that Mr. Monahanrs vlews are wldely shared by other black entrepreneurB. Monahan cones across very much as a pragmatist, more concerned ltith excellently fulfl11lng his buslness r."por,"ib11itles than wlth polenlcs. soclal while obvlously proud of hls ethnlc herltage, he ls also proud of his ablllty to succeed within the establlshed sociai system. He "color is truly bllnd" ln the most adnlrable sense. The authorsf experiences wlth other rnlnorLty entrepreneurs have been qulte siurl-lar. The authors did not react wlth greaE surprlse to any of Monahanrs statenents. He revealed hlurself to be hard worklng, optlnlstlc in outlook, 1ndivlduallstic, and reallty orlented--just llke most other ,,typlcal.. entrepreneurs known by the authors. In whag.ways governnent -qas the federal capitallsrn? What else do you sought to plongte urinorlty

For an e><ce11ent up-to-date revlew of thls subject, the authors "Hor.7 rnend the arltcle Mlnority Buslness can Build on rts strengthr', Rlchard F. Aunerlca, Harvard Buslness Revlew (l4ay-June, t9g0). The prinary thrusts tallsrn has come 1n the

reconby

of federal government asslstance to nlnority capiform of MESBrcs (Minority Enterprlse srnall Buslness

68

rnvestment government

cornpanles) and the SBAIs & Program which contracts for nlnorlty flms.

has sought

to generate

rn addresslng the questlon of further governnent asslstance to nlnority enterprlae, the authors would only erho Harrls Monahanrs suggestlon for berter government control of lnflatbn and the economy. vthlt Il flrns? l. 2. 3. 4. ways can the w ss :ornnuntty lend support to rnlnority

Serve ae cuatomers Serve as dlrectors Coslgn loans s e r v l - c e a n d prlces, on nlnority conpany boards

When satlsfled wlth the ninorJty flnnrs othere 1n the corporate commullty.

lnforn

REALTY MCGOWAN Issueg I. 2. 3. Characteristlcs Entrepreneurlal Entrepreneurlal of a fenale entr?preneur

lifestyle phllosophy of a ent

In what ways does Meredlth McGowan flt the proflle reneur? Is her lifestyle representacive of other at all by her long-tern

Meredlth comes acroas very loud and clear as an entrepreneur: she disllkes adnlnlstratlve work, enJoys lnterrelatlng with people, works long hours, Le opportunlstic, and she ls an achlever. Iler descrLbed entreDreneurLal llfestyle certalnly does not seen atyplcal. Her goal of retlrlng with her husband to travel hardly eeeme rmusual glven the procllvlty of nany business orrrlers to sel1 out after havlng been at the heln for eone tlne. Whether or not Meredlth wll1 ever be able to "score" overcome her need to ln real estate recnalns to be seen. Would you trade places wlth her professlonally? questlon, one would ln turn need

to I. 2. 3.

In order to reallstlcally answer thls ask the followlng questlons: subjectlve I'Iould I be wl11lng to work lrith all as hard sorts the

and contlouously of people?

aa Meredlth?

Do I enJoy worklng Ao I a self boss? Would I nlnd starter

poesessLng

dlsclpllne

requlred

to

be my own

4.

lnternlng1lng

fanlly

1lfe

wlth

ny work?

69

5. 5.

D o I requlre

the securlty

of a rtable uronthly salary?

D o I have an afflnlty

for cashlng in on opportuntty?

TIiE KEYS TO ENTREIRENEURIAL SUCCESS: A ROUNDTABU DISCUSSION


Issues t. 2. 3. 4. 5. Entrepreneurlal Mietakes Problens Guldellnes Practltionerte noet success connonly factorg nade by entrepreneurs faced by er,trepreneurs

and challenges for startlng guLdelinee

a new venture to entrepreneurshtp devel0p your own lntegrated analysls of

Based on the

roundtabre

dlscusslon,

cessful entrepffi
the vlews -,,sunnarlzlng followlng portralt of the l. 2. 3. 4. 5. 6. 7. 8. 9. Engages ln Interpersonal Plentlful GeneralLst Tru6tworthy Perseverance Internally Self well inslghr prepared flnanclarly for and total notlvated conmltment sltuatlonal sensltlvlty strong

," yo,r, or., paofff" ffi


of the fotn roundtable particlpants successful entrepreneur: (contlngency) plannlng

produces

the

and conpetence success drive

energy,

orlentatlon

the compa.nyfs start

up and rnltlar

growth

DAMONELECTRIC Issues l. 2. 3. The entrepreneurrs The role Transitlon of "good fron lifestyle breaks,' ln entrepreneurlal to professlonal success managenent

entrepreneurlal

70

4.

The potentlal

dleruptlveness

of entrefeneura ln large cmpanles onfamlly 11fe


to entepreneurial guccess

5.
6.

ftnpact of entrePreneurial
Llfestyle and fanlly

llfestyle

conetralntg

"luck" Do you feel venturee? To what extent breake

tant entre

the success of
euls often

"luq" explanatlons of entrepreThe authore are not synpathetlc wlth ttnt ma6g61{a1 acumen lies behlnd neurlal succeas. l,le strongly belleve most succeas breakthroughs for a enall- buelnee. What the uneophlettcated to a stroke of good irtune, the authore would obeerver mlght attribute Eo good conpany organlzatlor'and rnanagerlal plannlng--the tend to atEilbute cornpanyrs wherewLthal to take advantage of protslng buelnese opportunltles as they arise. doee Danon llclver Etate that an entrePreneur orel lhg- f.S.-ry
statement Mclverrs a sarrnPt lons : 1. would

qo llglne|lggbg

gC99"9g!Cl

aeem to be predlcatl

on two qtnllfylng

la That the easence of entrepreneurshlp ones' opposed to roanaglng establlghed

startlg

new ventures

ag

2.

woul-d not be expected to early rnake the transltl'on That entrepreneur6 managementr or even have the de11g to do 8o. professlonal to

vier 36ey"' they are not hls own personal statlng ls probably Mclver Ce:alnlY Mclverrs of all entrePreneurs. representatlve necessarlly "breed'. ln the btlngss world, but of enErepreneur 1s well repreeented on longlrro managenent and breed that thrlves ls also a dlff"."nt there for that comPany' seeklng a succegslon of new obrtunltles 0f one control than a series of new buslnesses' one buslness rather How can an entrepreneyr @ elhen.the_tlBg_1l-flPqor detemlne nanager? a professlonal turnlng over

in the ca6("Phllnark ls addressed ln more detall Thls questlon lssue Iloweverr lt can be nentloned here that the:ransltlon Productlons." lnvo\6. lb optlnal for the entrePreneur a personal declslon ls strlctly entrePr'eur The lndlvldual Eust decide entrePreneurs. apply for all rules and energy be best be (herself) where hls (her) talents tor nfnsefi ltlth a successloof oppOron a succeBslon of new venturesr applled: a-91\ wlthln projects by flrn, one company, \tlth splnoff for trnrltles -;;;;t;; vra new product development and R tp, "1"' in acquisitlotts, Why exactly do you think Darnon was flred by hls prevlous enplc"r3

there is in the case ls somewhat sketc'' provlded A1-though lnfornatl-on play by the rulee in rnanaglng the matenance that Damon didnti evl.dence "wheellng and deallng",and."hustllogo t'"* to hls Ile refers services. nanageme style perhaps iconoclastl'c an aggreselve, indlcatlng cire.rtsr" too nancorperhaps cuttlng he went overboard, EvldenCly on hLs pa.rt. "mold.'' whether or not \ corthe corporatLonrs to fll "nd falled ,r"r", ' ls not mentioned and constrictive was unduly bureaucrarlc poratlon Damon.

7l

In what ways can entrepreneurs l. 2. 3. Denandlng extensive

be d_sruptive a.onony

to conpanies? rnaklng latltude.

personal

and decrslon

Eschewlng group

deliberatlon

ad consensus. dolng thlngs differently

Preoccupa.tlorr wlth innovationand ( unconventionally) . Overlooklng or consclously lnoring take ranki

4.

Ehe establlshed to succe ss fully

chaln

of

cornnand. entrepre-

What actlons can a lar neurs anong lts personnel I. Asslgn skllls Minlnlze

acconmodate

them to speclal ploects or "frlnge" departnents requiring,the of a creative, aasetlve, and lndepend"rra ,"nag"a.-'expectatrons foFerenonlal and "group thlnk.' actlvltles.

.,
2

open up and malntaln q1s-'lines gers and entrepreneurs g reduce and protocol conflict.

of cornrnunlcatlons the potential for

between 11ne mana_ terrltori.i-ar"p,rtu"

4.

Make a long-tern commltent to internal entrepreneurshlp becomes more than mere.' a "falr weather.. experftoent. Publlclze support. lnternally .trepreneurial "workaholtcs"? successes attalned

so that

rt

5.

to build

llne

Do entrepreneurs

have

other
sEarElng

Can buslness

than rhroqCh .L_99!_!grgq!al tter o wo


your own busLrss venture?

connlTienr

and

success cone atlon? Do

1n

Th9 authors nightacetlously comment that entrepreneurs dio" .r t h a v e t o - tnu be workahollcs in ord,j.to be successful, but lt sure helpsi can be no questionlng that unconmon dedrcatlon the rflity and zeal "." po.ruqursites success ln todayrs lnhospltabru-t,r"rrr""" to entrepreurlal envlrorunent. The o'spectlve entrepreneur 1s kiddin! hlmself (rrerself) to Jven lndivlduals believe otherwlse. of brl11lant builness ..rr.r, nusr pay that "sereat equlty rt shourd 5" lnted out that many "fast track" nanagement executlves are arso workahotss and possess roany of the charactet"ti"" .ro.r"rry attrrbuted to entrepr.eurs. Regardlng nriage, obvlously the entrepreneur nust oake thls declslon , fron a persona'perspectlve. one thlng nust be rorrr. rn ,iidr-^'horu*r.r: human belngs p not capable of, pursulng nany challengirg;;;i"'slmulta_ neously. Abo. average acconpllshnent requlres .boue-.rrErlge ccmnltment. The potentl"'fo-r-buslness pursults and pioblems ao pru"ipii.tJ narttal rwell establlshed. difflculty unfortunately, all .""o^pii"t*"ncs carry a prlce. nust declde how nuch of a prlce 11t -ndivldual tu'o. "i" ls willtng succeas. to pay foruslness

oo-yon "%fer

"rt."preneurs

could e s t a b l l s h
feel an

then-

72

supports the to common sense, strongly in addltlon The literature, as success (or fallure), plays ln entrePreneurlal plvotal role fanlly launchlng a new venture 18 of successfuLly The challenge to above. alluded of the strong endorsement and asslstance requlres so great that it usually and friends. faurlly which The sacrlflces have to make are leglon: l. 2. 3. 4. Less tine less tlme wlth for father an entrepreneurrs farnlly w111 ln all llkellhood

(or

nother). relaxed weekends, and fanlly recreatlon. brought hone.

vacatlons, business wealth

Accomrnodatlon of Foregoing buslness. naterial

problems, durlng

stressesr

and stralns bulld-up

the early,

phase of

the new

5.

Intermlngling sent worry of fauril

o f f a m l l y wealth wlth personal bankruptcy. and encouragenent,

buslness

wealth

and the

ever

Pre-

Besldes "r be

elhat other

factors must external unch a new venture? ln hls New

Llles Patrlck Business Ventures The crltical l. 2. 3. 4. Low financial Dissatisfactlon Identlficatlon Perceived

here analysis has probably nade the definltive (Richard D. I r w i n , 1 9 7 4 ) . and the Entrepreneur external varlables cited by Ll1es lnciude the

followlng:

constralnts w"lth present of new venture wedge job ldea

conpetltive

WHATIS YOUR ENTREPRENEURIALPOTENTIAL?

Issue s
l. 2. Personallty and behavioral self characterlstlcs of entrepreneurs

Entrepreneurlal

assessment

the authors have no to thls exerclse, in the lntroductlon As stated It 1s not validity. scientiflc pretenses about the questionnalrers potentlal. Rather measure of entrepreneurlal to be a deflnltive deslgned to help students purpose of the questlonnalre: 1s the chlef lntrospectlon cornponents of entreprebehavloral wlth the essentlal becorne farnlllar and how they (at least according to a consensus of the llterature) neurship personally stack up. uP the should total Students ls slnple. Scorlng the questionnalre the The greater the key be1ow. responses agreeing wlth number of to Poasesg the nore the student perceLves hftoself (herself) agreenent,

73

behavioral characterlstics neurs 1n the llterature. l.

consonant wlth those aseoclated wlth entrepreThese characterlstlcg are as follows: to learn fron experlence (q'estlons l, 32,

Ablllty and deternlnatlon 37, 43) Wllllngness

2. 3. 4.

to aaaure rlske (questlona 2, 26, 4g) 21, 3 6 )

Deslre for personal autonotly and lndependence (questlone 3, ll, orlentatlon tonard hard work and personal productlvlty

13, 25, 45, 50) 5.


6. 7.

(questlons 4, 6 ,

Tendencyto gauge personal success ln flnanclal


42)

terns (questlons 9, 30,

Achlevenent drlve (questions 7, 20, 23, 33, 34, 41, 47) rnternal locue of control (be1lef ln at least ones destlny) (questlone 15, 28, 49) self motlvatlon by lnternally 10,16,35,40) partlally deternlning

8.

ftoposed perforroance standarde (questions

9.

Tendency towardB noncornforrolty or dolng things (quesrlons 12, L8, 29) Conpetltlveness (questlons 19, 44, 46) Hlgh energy level and robust health (questlons

unconventlonally

10. 11. L2. 13.

L4, 77, 22)

Assertlveness (questlons 8, 24, 38, 39) Self-confldence (questions 5, 27, 3l)

Scorlng Key l. D 2. A 3 . A 4. A 5. A 6. A 7. A 8 . A 9 A 10. D ll. 12, 3 . 11. t5. 16. t7 8 . 19. 20. D D A D D D A A A A 2L.
tt

A
n

23. 24. 25. 26. 27. 28. 29. 30.

A A A D A D D A

31. D 32. D 33. D 34. D 35. D 36. A 37. A 38. A 39. D 40. A

4t. 42. 43. 44. 45. 46. 47. 48. 49. 50.

D A A A A A A A D A

rt 1s unlikely that elEher Lnstructor or students w111 agree w"rth the authorar key Eo every questlon. Thls is predictable glven the lnchoate sEatus of the llterature and subJectlve nature of the questlonnalre. However to the extent that dlsagreement lrlth the key spa.rks discusslon, debate, and healthy dissent, the questlonnalrets role has been excellently fu1fll1ed !

74