MIDTERM NOTES ;]

UNIT6

SMALL BUSINESS

A business which functions on a small scale level involves less capital investment, less number of labour
and fewer machines to operate is known as a small business.

Small scale Industries or small business are the type of industries that produces goods and services on a
small scale. These industries play an important role in the economic development of a country. The
owner invests once on machinery, industries, and plants, or take is a lease or hire purchase. These
industries do not invest more than one crore. Few examples of small-scale industries are paper,
toothpick, pen, bakeries, candles, local chocolate, etc., industries and are mostly settled in an urban area
as a separate unit.

Characteristics of Small Scale Industries

Ownership: They have a single owner. So it is also known as a sole proprietorship.

Management: All the management works are controlled by the owner.

Limited Reach: They have restricted area of operation. So they may be a local shop or an industry
located in one area.

Labor Intensive: Their dependency on technology is very little because they are dependent on labours
and manpower.

Flexibility: Because they are small, they are open and flexible to sudden changes, unlike large industries.

Resources: They utilize local and immediately available resources. They do better utilization of natural
resources and limited wastage.

Strengths of Small Business

Spurs of innovation. Small businesses are the major sources of innovation in our civilization. Substantive
numbers of successful innovations are implemented by small businesses. They are the sources of new
materials, processes, ideas, services, and products that large business firms are reluctant to provide arc
being provided by small businesses. Thus, the small business acts as a spur of innovation lo millions of
entrepreneurs throughout the world.

Checks monopoly. Small businesses encourage competition by checking the development of monopolies
by large businesses. It produces new products, methods, and services and so forth and checks large
firms’ tendency to control the market. It also provides differentiated products that give the market a
wide spectrum of choices. Therefore, small businesses keep large firms on their toes.

Creates employment. Small, young, high technology businesses create jobs at a much higher rate than
do older, large businesses.

Empowers Small business has more intimate knowledge of its communities: therefore, take more
personal interest in them. It takes community projects. It produces people as well as goods and services.
It enables the community people to achieve a better-rounded balanced development than they could
enjoy in large organizations. It provides them a greater variety of learning experiences in work activities.
People have greater freedom in making decisions and in perforating a greater variety of activities. It
lends zest and interest to their work. It also trains people to become better leaders and to use their
talents and energies most effectively.

Contributes to dross Domestic Products. Small business contributes to the national economy of every
country of the world significantly. It generates 54 percent of the sales revenues and 40 percent of the
gross national product.

Higher financial performance. The small business earns higher returns on owners’ equity (ROE) than
large manufacture do. That is, for each dollar invested in the business, small business investors earn
more than do big-business investors.Because small business cart respond quicker and at less cost to
quickening rate of change in products and services, processes, and markets. It has also become more
attractive to talented, individualistic men and women who successfully utilize the fund.

Makes big business dependent. Small businesses provide business with many of the services, supplies,
and raw materials they need. General Motors, for example, buy from more than 10,000 suppliers, most
of whom are small. It is because bug businesses cannot supply product and services as cheaply as do
small businesses can effectively supply those goods and services cheaply whose sales volume is small,
whose sales demands close personal contact with customers, and whose supply requires meeting each
Customer’ s-untrue needs.They also sell most of the products made by big manufacturers to consumers.
Thus, bit; businesses are dependent on small businesses for their very survival in many respects.

Develops risk-takers and fosters flexibility. Small entrepreneurs have relative freedom to enter and leave
a business at will. They can start and grow, expand or contract, succeed, or fail as they feel comfortable
with the situation. This freedom is the essence of the free economy. It makes managers responsible for
customers, employees, investors, and the community. Moreover, they can switch their production
readily you meet changing market conditions, can adapt themselves quickly to chatty mu demands
within their fields and capacity, and even can chance field at low cost. This environment of small
businesses helps developing risk-takers in society and fosters flexibility in the practice of economic
activities.

Provides opportune grounds for women. Small businesses are the most opportune sources of self-
employment tor women.

The seedbed for the new venture. Small business is the seedbed for new ventures throughout the world.
Career for new graduates. Small business is the right venture for the new graduates who welcome the
challenge of innovative work, want to be decision-makers, want the freedom of owning a small business,
or want to have a financial incentive which one could never obtain by working for others.

Ease of entry. Small business does not require much formality to start. Financial requirements are not
high too. Entrepreneurs can choose almost any line of business they like. This freedom of opportunity
guarantees them the right to launch their ventures.

Reasons for the Failure of Small Business

Inadequate management. The lack of managerial knowledge and skills is the vital cause of failure of the
largest number of small businesses. It is more evident in the case of expanding a situation. Anybody with
any academic background and experience can go for starling his/her small venture. No law can stop
them from entering into their ventures. It is not recognized that managerial expertise is a priori
condition for starting and operating a business. This deters them from recognizing, hire, and tap the
talents they need to survive and grow.

Shortage of working capital. Working capital is the lifeblood of all business enterprises. Small businesses,
with a small capital base, faces a shortage of working capital to maintain a desirable level of operation. It
also thwarts its expansion and its capacity to avail profitable opportunities. Study shows that businesses
that start with loo little investment by owners have a greater chance of failure than businesses with
adequate investment by owners.

Lack of balance. The significant reasons for such imbalance are the lack of coordination between
production and marketing, lack of proper record-keeping, lack of effective selling techniques, lack of
coping with the increasing complexity of internal management, and lack of balance between having too
few products so that sales are lost and diversifying too fast. These lacks of balance make small
businesses vulnerable to failure.

Unabated entry. The chief reason for small business failure is the unabated entry. Any men and women
can enter into small business without any hindrance. They may have 20 years of experience in that line
or none at all. They may do a textbook job of searching their markets or plunge in with no information at
all. They may be millionaires or penniless. Yet regardless of their qualifications, the small business is
open to them.

Lack of business experience. Small business run by people without prior industry experience is
vulnerable to failure. People with any track record start small businesses and could not cope with
operational problems and crises. Inexperience in a fine of operation makes decisions faulty and
disastrous to the organizational continuity.

Fraud or Disaster. Small business is vulnerable to many situations due to its inability to 10 sustain the
damage. It may be caused by fraud, by fire, flood, burglary, criminal act, or by the death of owner-
manager or a key person of the business. It affects its continuity in the market or sometimes causes the
death of the firm.
Insufficient inventory turnover. Small business faces inventory turnover problem that docs not only
blocks the working capital but also risks the business for product obsolescence. It also affects profit due
to lack of sales and deters the smooth progress of the operation of the business,

Improper markup. Small business does not set its price policy with sufficient market information rather
goes on traditions cost-plus or competitive pricing. It sometimes does not cover the expected rates of
return necessary for maintaining the financial strengths of the firm. It is observed that small firms that
fail, they fail because of insufficient return on their investment.

Wrong location. Location is more vital in some industries than in others depending on whether
customers must travel to the entrepreneur’s place of business or the entrepreneur must travel to
customers, whether the business offers a unique product or service with little competition, or even on
whether convenience is a key selling point. However, it is well recognized that the wrong location
seriously affects the success of small businesses.

Poor credit-granting practice. Uncontrolled receivables or poor credit practices affect credit collection
and due position. It causes extra pressure on cash position and other working capital items; it also
seriously handicaps the firm to maintain the daily operation. Thus, many small businesses fail due to
excessive blocking of a fund with the debtors due to poor credit granting practice.

Non-business family background. It was noted from literatures that business owners whose parents did
not own business have a greater chance of failure than the owners whose parents did own a business.

Neglect. Little attention to the affairs of small businesses by the entrepreneur or owner-manager is a
strong reason for the failure of small businesses.Small businesses need absolute personal care,
attention, and dose supervision, as it does not sustain any set back of any kind. Therefore, many small
businesses fail due to neglect of their managing.

Too much investment in fixed assets. Small businesses that have made an excessive investment in fixed
assets face the problem of operating funds. It also requires high operating expenditures and, thus, needs
high financial obligations too. This heavy-head structure stalls the operative capacity and causes the
failure of the small venture.

Marketing inefficiency. The survival of the firm depends on generating sufficient sales from its market.
Market creation, maintenance, and expansion arc the pivotal tasks of small businesses. A study found
that business owners without marketing skills have a greater chance of failure than others with
marketing skills.

Inefficient succession. Lack of succession or inefficient succession is a strong reason for early death or
failure of small businesses. The majority of small businesses are sole-traders or partnership. The sudden
death of the entrepreneur or departure of partner/partners or incapability of entrepreneur calls for
successors to take up the business.

Lack of planning. Small businesses that do not prepare business plans have a greater chance of failure
than businesses that do. There is general neglect in small businesses toward preparing a plan for that it
loses its focus. Many small businesses fail because of unplanned action. The success of small businesses
depends on careful handling and overcoming the above-mentioned situations. Every entrepreneur
should rake necessary measures to prevent these reasons to protect his/her entrepreneurial venture
from failure.

Henry Fayol’s 14 Principles of Management

Henry Fayol’s 14 principles of management look at an organization from a top-down approach to help
managers get the best from employees and run the business with ease. Let’s take a look at them and
understand them in detail.

1. Division of Work

The first Henry Fayol principle of management is based on the theory that if an employee is given a
specific task to do, they will become more efficient and skilled in it. This is opposed to a multi-tasking
culture where an employee is given so many tasks to do at once. In order to implement this principle
effectively, look at the current skill sets of each employee and assign them a task that they can become
proficient at. This will help them to become more productive, skilled, and efficient in the long run.

2. Authority

This henry fayol principle of management states that a manager needs to have the necessary authority
in order to ensure that his instructions are carried out by the employees. If managers did not have any
authority, then they would lack the ability to get any work done. However, this authority should come
along with responsibility. According to Henri Fayol, there should be a balance between authority and
responsibility. If there is more authority than responsibility, the employees will get frustrated. If there is
more responsibility than authority, the manager will feel frustrated.

3. Discipline

This principle states that discipline is required for any organization to run effectively. In order to have
disciplined employees, managers need to build a culture of mutual respect. There should be a set of
organizational rules, philosophies, and structures in place that should be met by everyone. Bending rules
or slacking should not be allowed in any organization. In order to achieve this, there is a need for good
supervision and impartial judgment.

4. Unity of Command

This principle states that that should be a clear chain of command in the organization. The employees
should be clear on whose instructions to follow. According to Fayol, an employee should receive orders
from only one manager. If an employee works under two or more managers, then authority, discipline,
and stability are threatened. Moreover, this will cause a breakdown in management structure and cause
employees to burn out.
5. Unity of Direction

This henry fayol principle of management states that the work to be done should be organized in such a
way that employees work in harmony towards the same objective, using one plan, under the direction
of one manager. For example, if you have a range of marketing activities such as advertising, budgeting,
sales promotion, etc., there should be one manager using one plan for all the marketing activities. The
different activities can be broken down for different sub-managers, but they should all work towards a
common goal under the direction of one main person in charge of the whole thing.

6. Collective Interest Over Individual Interest

This principle states that the overall interest of the team should take precedence over personal ones.
The interest of the organization should not be sabotaged by the interest of an individual. If anyone goes
rogue, the organization will collapse.

7. Remuneration

This henry fayol principle of management states that employees should be paid fair wages for the work
that they carry out. Any organization that underpays its workers will struggle to motivate and keep
quality workers. This remuneration should include both financial and non-financial incentives. Also,
there should be a structure in place to reward good performance to motivate employees.

8. Centralization

Centralization refers to the concentration of power in the hands of the authority and following a top-
bottom approach to management. In decentralization, this authority is distributed to all levels of
management. In a modern context, no organization can be completely centralized or decentralized.
Complete centralization means that people at the bottom have no authority over their responsibilities.
Similarly, complete decentralization means that there will be no superior authority to control the
organization. To use this effectively today, there should be a balance of centralization and
decentralization. The degree to which this balance is achieved will differ from organization to
organization.

9. Scalar Chain

A scalar chain refers to a clear chain of communication between employees and their superiors.
Employees should know where they stand in the hierarchy of the organization and who to go to in a
chain of command. To implement this in the workplace, Fayol suggests that there should be an
organizational chart drawn out for employees to see this structure clearly.
10. Order

This principle states that there should be an orderly placement of resources (manpower, money,
materials, etc.) in the right place at the right time. This ensures the proper use of resources in a
structured fashion. Misplacement of any of these resources will lead to misuse and disorder in the
organization.

11. Equity

Equity is a combination of kindness and justice. This principle states that managers should use kindliness
and justice towards everyone they manage. This creates loyalty and devotion among the employees
towards the organization they work for.

12. Stability of Tenure of Personnel

This principle states that an organization should work to minimize staff turnover and maximize
efficiency. Any new employee cannot be expected to get used to the culture of an organization right
away. They need to be given enough time to settle into their jobs to become efficient. Both old and new
employees should also be ensured job security because instability can lead to inefficiency. There should
also be a clear and effective method to handle vacancies when they arise because it takes time and
expense to train new ones.

13. Initiative

This principle states that all employees should be encouraged to show initiative. When employees have
a say as to how best they can do their job, they feel motivated and respected. Organizations should
listen to the concerns of their employees and encourage them to develop and carry out plans for
improvement.

14. Esprit de Corps

Esprit de Corps means “Team Spirit”. This henry fayol principle of management states that the
management should strive to create unity, morale, and co-operation among the employees. Team spirit
is a great source of strength in the organization. Happy and motivated employees are more likely to be
productive and efficient.

That was all about principles of management.

History of the 14 Principles of Management

Henry Fayol is known as the father of modern management theory. He was an engineer at the
Compagnie de Commentry-Fourchambault-Decazeville mining company and worked his way up to
become a manager during the peak of the Industrial Revolution in France. Under his watch, the
struggling company prospered.

In 1916, he wrote the book, "Administration Industrielle et Générale," where he shared his experiences
of managing a workforce. This laid the foundation for administrative theory and the 14 Principles of
Management. By focusing on administrative over technical skills, these principles became one of the
earliest examples of treating management as a true profession.

What Is the Importance of the 14 Principles of Management?

Henri Fayol was one of the first people who highlighted the difference between technical and
managerial skills. He stressed the idea that “manager” is a profession in and of itself - one that needs to
be researched, taught, and developed. Imagine a team where everyone has the best technical skills in
the world, but no clear management practices. Surely, skills without direction won’t produce any
efficient results.

Good technical skills don’t necessarily make you a good manager. You would also need a number of non-
technical skills for planning, forecasting, decision-making, process management, organization
management, coordination, and control. All these skills are taught in the 14 principles of management
to help managers understand how to effectively run an organization.

Are These Principles of Management Still Relevant Today?

Henry Fayol’s 14 principles of management are universally accepted and continually used as a guideline
for managers across the world. Though these principles of management are more than 100 years old,
without them, it would push us back hundreds of years back when technical skills reigned supreme and
people lacked managerial responsibility. If you are interested in diving into the field of marketing,
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Small Business Meaning

A business which functions on a small scale level involves less capital investment, less number of labour
and fewer machines to operate is known as a small business.

Small scale Industries or small business are the type of industries that produces goods and services on a
small scale. These industries play an important role in the economic development of a country. The
owner invests once on machinery, industries, and plants, or take is a lease or hire purchase. These
industries do not invest more than one crore. Few examples of small-scale industries are paper,
toothpick, pen, bakeries, candles, local chocolate, etc., industries and are mostly settled in an urban area
as a separate unit.

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Characteristics of Small Scale Industries

Ownership: They have a single owner. So it is also known as a sole proprietorship.

Management: All the management works are controlled by the owner.

Limited Reach: They have restricted area of operation. So they may be a local shop or an industry
located in one area.

Labor Intensive: Their dependency on technology is very little because they are dependent on labours
and manpower.

Flexibility: Because they are small, they are open and flexible to sudden changes, unlike large industries.

Resources: They utilize local and immediately available resources. They do better utilization of natural
resources and limited wastage.

Categories of Small Business

On the basis of capital invested, small business units can be divided into the following categories:

(1) Small Scale Industry (Before 2006)

They invest in fixed assets of machinery and plant, which does not surpass than one crore.

For export improvement and modernization, expenditure ceiling in machinery and plant is five crores.

(2) Ancillary Small Industrial Unit

This industry can hold the status of an ancillary small industry if it supplies a minimum 50 per cent of its
product to another business, i.e. the parent unit.

They can produce machine parts, components, tools or standard products for the parent unit.

(3) Export Oriented Units

This industry can possess the status of an export-oriented unit if it exports exceeds 50 per cent of its
manufactures.

It can opt for the compensations like export bonuses and other grants awarded by the government for
exporting units.

(4) Small Scale Industries Owned by Women

An enterprise operated by women entrepreneurs in which they alone or combined share capital
minimum of 51 per cent.

Such units can opt for the special grants from the government, with low-interest rates on loans, etc.

(5) Tiny Industrial Units

It is an Industrial or a company whose expenditure on machinery and plant does not exceed Rs. 25 lakhs.

(6) Small Scale Service and Business

It is a fixed asset investment on machinery and plant excluding land and building should not surplus Rs.
10 lakhs

(7) Micro Business Enterprises

It is a tiny and small business sector.

The investment in machinery and plant should not exceed Rs.1 lakh.

(8) Village Industries

The industries which are located in rural areas and manufacture any product performs any service with
or without the utilization of power is called village industries.

They have fixed investments on capital as per head, workers, and artisan, which does not exceed Rs.50,
000.

(9) Cottage Industries

It is also known traditional or rural industries.

These industries are not covered by the capital investment criterion.

Cottage industries are characterized by the following features :

These are organized by a single, with private resources.

Use family labour and local talent.

Simple instruments are used.

Small capital investment is involved.

Simple products are made.

Indigenous technology is utilised.

What Is a “Small Business”?

Before we talk about the role of small businesses in the U.S. economy, it’s important to first specify
what we mean by “small.” The Small Business Administration (SBA) uses size standards to determine
whether a business counts as small. These thresholds indicate the largest that a business concern,
including all of its affiliates, can be and still qualify as a small business for most SBA and federal
programs. The SBA has established two widely used size standards, expressed either in terms of average
number of employees during the previous twelve months or the average annual receipts during the
previous three years: five hundred (or fewer) employees for most manufacturing and mining industries
and $7.5 million (or less) in average annual receipts for many non-manufacturing industries. (There are
exceptions to these size standards, however; these are spelled out in the SBA’s Small Business Size
Regulations). In addition to qualifying on the basis of its number of employees or total receipts, small
businesses must also meet the following SBA requirements:

Is organized for profit

Has a place of business in the U.S.

Operates primarily within the U.S. or makes a significant contribution to the U.S. economy through
payment of taxes or use of American products, materials, or labor

Is independently owned and operated

Is not dominant in its field on a national basis

The business may be a sole proprietorship, partnership, corporation, or any other legal form. The
definition of “small business” varies somewhat according to industry, but generally when we talk about
small business we’re referring to companies that employ fewer than five hundred people.

Small Business Is BIG!

Consider the following impressive statistics:

The 28 million small businesses in America account for 54 percent of all U.S. sales.

Small businesses provide 55 percent of all jobs and 66 percent of all net new jobs since the 1970s.

The 600,000+ franchised small businesses in the U.S. account for 40 percent of all retail sales and
provide jobs for some 8 million people.

The small business sector in America occupies 30 percent–50 percent of all commercial space—an
estimated 20 billion to 34 billion square feet.

And, the small business sector is growing rapidly. While corporate America has been downsizing, the
number of small business start-ups has grown, and the rate of small-business failure has declined.

The number of small businesses in the United States has increased 49 percent since 1982.

Since 1990, as big business eliminated 4 million jobs, small businesses added 8 million new jobs.

Economic Contributions of Small Business

Small business and entrepreneurs contribute to the larger economy in four very distinct ways:

Job creation

Innovation

Opportunities for individuals to achieve financial success and independence

Support large business by providing component parts, services, and product distribution.

Each of these contributions is critical to the overall economic growth and prosperity of the U.S.
economy.

Job Creation

Small businesses (firms with 1–499 employees) continue to add more net new jobs than large
businesses (500+ employees). Through the first three quarters of 2014, small businesses added 1.4
million net new jobs. Firms with 1–49 employees have contributed the most to job growth recently. The
Bureau of Labor Statistics (BLS) reported that firms of this size accounted for 39 percent of net new jobs
in the first three quarters of 2014, while ADP (a national payroll-processing service) reported an even
higher 44 percent for the same period. As shown in the graphic, below, it’s clear that the economic
recovery since the downturn of 2009 has, in large part, been fueled by small businesses.
Pie chart showing share of net job creation since the end of the downturn by employment size of firm.
Firms employing 1–499 people account for 74%; firms employing more than 500 people account for only
26%

On January 15, 2015, Maria Contreras-Sweet, an SBA administrator, reported the following about the
role of small business in job creation:

American businesses added back 252,000 jobs and the unemployment rate fell to its lowest level since
June 2008. We’re in the midst of 58 month of consecutive job growth—the longest streak on record
since the mid-1990s. Once again, it was not large corporations driving this train, but entrepreneurs and
small businesses powering us out of the greatest economic crisis since the Great Depression. Small
businesses created nearly 2 million of the roughly 3 million private-sector jobs generated in 2014. More
than 7 million of the 11 million jobs created during our recovery have been generated by start-ups and
small enterprises. . . . Entrepreneurs have been our life preserver in this economic storm, because of
their resilience in budgeting wisely and effectively deploying their capital.

Innovation

Innovation in the United States has been one of the driving forces in our development as one of the
leading economies in the world. Innovations commercialized by U.S. companies have also benefited our
society by allowing us to attain prosperity and a good quality of life. While large corporations and the
federal government play important roles in the development of innovative products and services, the
story is incomplete without the significant contributions and role of individual entrepreneurs and small,
agile, high-growth businesses in developing innovative products in the fields of science, technology, and
engineering.[1]

Small businesses are especially leading the way when it comes to the development of “green”
technologies. Small, innovative firms are sixteen times more productive than large innovative firms in
terms of patents per employee. Small firms’ green-technology patents are cited 2.5 times as often as
large firms in other patent applications, indicating that small firms’ patents are more original and
influential. In green technologies, while four times as many large as small innovative firms have at least
one green patent, small firms are more likely than larger firms to have green technology as a core part
of their business.

Innovation is not confined to high-tech or green industries, either. In fact, many of the products and
services that we use on a day-to-day basis are the result of innovations created in a small business
environment.

Photo of Burt's Bee's Hand Salve

For example, Burt’s Bees is by far one of the biggest names in natural personal care products. Even
though it’s a multi-million-dollar enterprise, the company had very humble beginnings. In 1984, Burt
Shavitz and Roxanne Quimby founded Burt’s Bees, a mom-and-pop candle company in Maine. They used
the excess beeswax from Shavitz’s honey business to make the candles in an abandoned one-room
schoolhouse that they rented, and Quimby began making homemade personal care products from the
wax and other natural ingredients. In 1991, Burt’s Bees incorporated, and the company started selling
natural soap, perfume, and their best-selling lip balm. In 2007, company was purchased by Clorox for a
reported $925 million.

In addition to inventing new products, small businesses change the way we do things. When he founded
Amazon—initially a small business—Jeff Bezos transformed the way we read books, watch movies, and
shop for everyday household items. The following short video explains:

Opportunities

Small business is the portal through which many people enter the economic mainstream. Business
ownership helps individuals, including women and minorities, to achieve financial success and also take
pride in their accomplishments. While the majority of small businesses are still owned by white males,
the past two decades have seen a substantial increase in the number of businesses owned by women
and minorities. From 2011 to 2016, the SBA’s flagship 7(a) loan program increased lending to Hispanic
American small business owners by 65 percent, by 45 percent to African American small business
owners, 44 percent to Asian American small business owners, 33.8 percent to women-owned small
businesses, and 12.9 percent to veteran-owned small businesses.[2]

In 2016 the U.S. Census Bureau released its inaugural Annual Survey of Entrepreneurs, which provides
annual estimates on the number of employer firms by economic sector, gender, ethnicity, race, and
veteran status. This survey found that:
About one-third of employer firms (33.6 percent) in the accommodation and food services sector were
minority owned.

Among all employer firms in the educational services and the health care and social assistance sectors,
28.0 percent were owned by women.

About one-quarter (254,260, or 24.0 percent) of all women-owned employer firms were minority
owned. More than half (137,321, or 54.0 percent) of these minority-women-owned employer firms
were Asian owned.

Additional demographic information can be found in Table 1, below.

Owners

Under 35 15.6

Age 35 to 49 32.7

50 to 88 51.7

Male 64.6
Gender
Female 35.4

Non-Minority 85.9
Race
Minority 14.1

High School or Less 28.0

Education Some College 32.8

Bachelor’s or Higher 39.2

Metro 79.1

Location Non-Metro 16.7

Not Identified 4.2

Table 1: Demographic Characteristics of Business Owners and Employees, 2013 (percent)

Source: U.S. Small Business Administration, Office of Advocacy. Source data from U.S. Census Bureau,
2004 Survey of Income and Program Participation (SIPP), 2008 SIPP Wave 15 (2013 data).
Small Businesses to Big Businesses

Small firms complement large firms in a number of ways. In many industries, component parts are
manufactured by small businesses and then used to assemble products bearing a big-business name.
This relationship was recognized in 2012 when, as part of the Obama Administration’s American
Supplier initiative, IBM created a coalition of more than a dozen corporations that together spend $300
billion on outside suppliers. This Supplier Connection effort invites businesses to register online
(http://www.supplier-connection.net) for a chance to sell to large corporations. Companies with less
than $50 million in revenue or fewer than 500 employees fill in their basic information, and large
businesses can then search the site looking for potential suppliers. Another way that small business
supports its larger counterparts is through outsourcing. Since the smaller firms can provide fast, flexible,
and cost-effective services, many larger companies are passing off nonessential operations to these
other companies. Food service, accounting, customer service, and tech support are just a few of the
services that small businesses provide to meet the needs of larger companies. Most obvious to the
average consumer is the use of small business as a distributor for the products produced by big
business. From the local deli that sells Coca-Cola from its soda machine to the fashion boutique selling
Tory Burch handbags, each of these small businesses is serving the role of distributor/marketer/sales
force. Without a network of small retailers across the country, big business would have to establish a
massive network of outlets and a distribution chain to support these outlets. So, when a small business
opens in your hometown and sells brand-name clothing, computers, or sporting goods, they are fulfilling
a critical role. Big business needs small business to survive.

UNIT7

Creativity, Innovation, and Invention

Concept Description

ability to develop something original, particularly an idea or a representation of an idea,

Creativity
with an element of aesthetic flair

Innovation change that adds value to an existing product or service

truly novel product, service, or process that, though based on ideas and products that
Invention
have come before, represents a leap, a creation truly novel and different

One way we can consider these three concepts is to relate them to design
thinking. Design thinking is a method to focus the design and development decisions
of a product on the needs of the customer, typically involving an empathy-driven
process to define complex problems and create solutions that address those problems.
Complexity is key to design thinking. Straightforward problems that can be solved with
enough money and force do not require much design thinking. Creative design thinking
and planning are about finding new solutions for problems with several tricky variables
in play.
Creativity
Entrepreneurial creativity and artistic creativity are not so different. You can find
inspiration in your favorite books, songs, and paintings, and you also can take
inspiration from existing products and services. You can find creative inspiration in
nature, in conversations with other creative minds, and through formal ideation
exercises, for example, brainstorming. Ideation is the purposeful process of opening up
your mind to new trains of thought that branch out in all directions from a stated purpose
or problem. Brainstorming, the generation of ideas in an environment free of judgment
or dissension with the goal of creating solutions, is just one of dozens of methods for
coming up with new ideas.
Innovation
Peter Drucker, the key point about innovation is that it is a response to both changes
within markets and changes from outside markets. Drucker summarized the sources of
innovation into seven categories, as outlined. Firms and individuals can innovate by
seeking out and developing changes within markets or by focusing on and cultivating
creativity. Firms and individuals should be on the lookout for opportunities to
innovate. Drucker’s Seven Sources of Innovation:

Source Description

Looking for new opportunities in the market; unexpected product

The unexpected
performance; unexpected new products as examples

The incongruity Discrepancies between what you think should be and what is reality

Process need Weaknesses in the organization, product, or service

Changes in industry/market New regulations; new technologies

Demographics Understanding needs and wants of target markets

Changes in perceptions Changes in perceptions of life events and values

New knowledge New technologies; advancements in thinking; new research

One innovation that demonstrates several of Drucker’s sources is the use of cashier
kiosks in fast-food restaurants. McDonald’s was one of the first to launch these self-
serve kiosks. Historically, the company has focused on operational efficiencies (doing
more/better with less). In response to changes in the market, changes in demographics,
and process need, McDonald’s incorporated self-serve cashier stations into their stores.
These kiosks address the need of younger generations to interact more with technology
and gives customers faster service in most cases.
Disruptive innovation is a process that significantly affects the market by making a
product or service more affordable and/or accessible, so that it will be available to a
much larger audience. One example of a disruptive innovation is Uber and its impact
on the taxicab industry. Uber’s innovative service, which targets customers who might
otherwise take a cab, has shaped the industry as whole by offering an alternative that
some deem superior to the typical cab ride.
One key to innovation within a given market space is to look for pain points, particularly
in existing products that fail to work as well as users expect them to. A pain point is a
problem that people have with a product or service that might be addressed by creating
a modified version that solves the problem more efficiently. For example, you might be
interested in whether a local retail store carries a specific item without actually going
there to check. Most retailers now have a feature on their websites that allows you to
determine whether the product (and often how many units) is available at a specific
store. This eliminates the need to go to the location only to find that they are out of your
favorite product. Once a pain point is identified in a firm’s own product or in a
competitor’s product, the firm can bring creativity to bear in finding and testing solutions
that sidestep or eliminate the pain, making the innovation marketable. This is one
example of an incremental innovation, an innovation that modifies an existing product
or service.
In contrast, a pioneering innovation is one based on a new technology, a new
advancement in the field, and/or an advancement in a related field that leads to the
development of a new product. Firms offering similar products and services can
undertake pioneering innovations, but pioneering the new product requires opening up
new market space and taking major risks.
Is a pioneering innovation an invention? A firm makes a pioneering innovation when it
creates a product or service arising from what it has done before. Pokémon GO is a
great example of pioneering innovation. Nintendo was struggling to keep pace with
other gaming-related companies. The company, in keeping with its core business of
video games, came up with a new direction for the gaming industry. Pokémon GO is
known worldwide and is one of the most successful mobile games launched. It takes
creativity to explore a new direction, but not every pioneering innovation creates a
distinctly new product or capability for consumers and clients.
An example of an incremental innovation is the trash receptacle you find at fast-food
restaurants. For many years, trash cans in fast-food locations were placed in boxes
behind swinging doors. The trash cans did one job well: They hid the garbage from
sight. But they created other problems: Often, the swinging doors would get ketchup
and other waste on them, surely a pain point. Newer trash receptacles in fast-food
restaurants have open fronts or open tops that enable people to dispose of their trash
more neatly. The downside for restaurants is that users can see and possibly smell the
food waste, but if the restaurants change the trash bags frequently, as is a good
practice anyway, this innovation works relatively well.

Invention
An invention is a leap in capability beyond innovation. Some inventions combine several
innovations into something new. Invention certainly requires creativity, but it goes
beyond coming up with new ideas, combinations of thought, or variations on a theme.
Inventors build. Developing something users and customers view as an invention could
be important to some entrepreneurs, because when a new product or service is viewed
as unique, it can create new markets. True inventiveness is often recognized in the
marketplace, and it can help build a valuable reputation and help establish market
position if the company can build a future-oriented corporate narrative around the
invention.
Besides establishing a new market position, a true invention can have a social and
cultural impact. At the social level, a new invention can influence the ways institutions
work. For example, the invention of desktop computing put accounting and word
processing into the hands of nearly every office worker. The ripple effects spread to the
school systems that educate and train the corporate workforce. Not long after the
spread of desktop computing, workers were expected to draft reports, run financial
projections, and make appealing presentations. Specializations or aspects of
specialized jobs—such as typist, bookkeeper, corporate copywriter—became necessary
for almost everyone headed for corporate work. Colleges and eventually high schools
saw software training as essential for students of almost all skill levels. These additional
capabilities added profitability and efficiencies, but they also have increased job
requirements for the average professional.
Some of the most successful inventions contain a mix of familiarity and innovation that
is difficult to achieve. With this mix, the rate of adoption can be accelerated because of
the familiarity with the concept or certain aspects of the product or service. As an
example, the “videophone” was a concept that began to be explored as early as the late
1800s. AT&T began extensive work on videophones during the 1920s. However, the
invention was not adopted because of a lack of familiarity with the idea of seeing
someone on a screen and communicating back and forth. Other factors included
societal norms, size of the machine, and cost. It wasn’t until the early 2000s that the
invention started to take hold in the marketplace. The concept of a black box is that
activities are performed in a somewhat mysterious and ambiguous manner, with a
serendipitous set of actions connecting that result in a surprisingly beneficial manner.
An example is Febreeze, a chemical combination that binds molecules to eliminate
odors. From a black box perspective, the chemical engineers did not intend to create
this product, but as they were working on creating another product, someone noticed
that the product they were working on removed odors, thus inadvertently creating a
successful new product marketed as Febreeze.
file:///C:/Users/Admin/Downloads/Notes77.pdf

NOTE8

BUSINESS PLANNING

Business plans are developed for both internal and external purposes. Internally, entrepreneurs develop
business plans to help put the pieces of their business together. The most common external purpose for
a business plan is to raise capital.

Internal Purposes

defines the vision for the company

establishes the company’s strategy

describes how the strategy will be implemented

provides a framework for analysis of key issues

provides a plan for the development of the business

is a measurement and control tool

helps the entrepreneur to be realistic and to put theories to the test

External Purposes

The business plan is often the main method of describing a company to external audiences such as
potential sources for financing and key personnel being recruited. It should assist outside parties to
understand the current status of the company, its opportunities, and its needs for resources such as
capital and personnel. It also provides the most complete source of information for valuation of the
business.

Business plan is a formal document used for the long-range planning of a company’s operation. It
typically includes background information, financial information, and a summary of the business.
Investors nearly always request a formal business plan because it is an integral part of their evaluation
of whether to invest in a company. Although nothing in business is permanent, a business plan typically
has components that are more “set in stone” than a business model canvas, which is more commonly
used as a first step in the planning process and throughout the early stages of a nascent business. A
business plan is likely to describe the business and industry, market strategies, sales potential, and
competitive analysis, as well as the company’s long-term goals and objectives. An in-depth formal
business plan would follow at later stages after various iterations to business model canvases. The
business plan usually projects financial data over a three-year period and is typically required by banks
or other investors to secure funding. The business plan is a roadmap for the company to follow over
multiple years.

Business Planning Principles

Business Plan Communication Principles

As Hindle and Mainprize (2006) note, business plan writers must strive to communicate their
expectations about the nature of an uncertain future. However, the liabilities of newness make
communicating the expected future of new ventures difficult (more so than for existing businesses).
They outline five communications principles:

Expectations. Translation of your vision of the venture and how it will perform into a format compatible
with the expectations of the readers. Communicate that

you have identified and understood the key success factors and risks

the projected market is large and you expect good market penetration

you have a strategy for commercialization, profitability, and market domination

you can establish and protect a proprietary and competitive position

Milestones. Anchoring key events in the plan with specific financial and quantitative values.
Communicate that

your major plan objectives are in the form of financial targets

you have addressed the dual need for planning and flexibility

you understand the hazards of neglecting linkages between certain events

you understand the importance of quantitative values (rather than just chronological dates)

Opportunities. Nothing lasts forever—things can change to impact the opportunity: tastes, preferences,
technological innovation, competitive landscape. Communicate these four aspects to distinguish the
business concept, distinctive competencies, and sustainable advantages:

the new combination upon which venture is built

magnitude of the opportunity or market size

market growth trends

venture’s value from the market (% of market share proposed or market share value in dollars)
Context. Four key aspects describing context within which new venture is intended to function (internal
and external environment). Communicate

how the context will help or hinder the proposal

how the context may change & affect the business & the range of flexibility or response that is built into
the venture

what management can or will do in the event the context turns unfavourable

what management can do to affect the context in a positive way

THE STAGES OF BUSINESS PLAN DEVELOPMENT

Essential Initial Research

A business plan writer should analyze the environment in which they anticipate operating at each of the
societal, industry, market, and firm levels of analysis. This stage of planning, the essential initial
research, is a necessary first step to better understand the trends that will affect their business and the
decisions they must make to lay the groundwork for, and to improve their potential for success. In some
cases, much of the essential initial research should be included in the developing business plan as its
own separate section to help build the case for readers that there is a market need for the business
being considered and that it stands a good chance of being successful. In other cases, a business plan
will be stronger when the components of the essential initial research are distributed throughout the
business plan as a way to provide support for the plans and strategies outlined in the business plan. For
example, the industry or market part of the essential initial research might outline the pricing strategies
used by identified competitors and might be best placed in the pricing strategy part of the business plan
to support the decision made to employ a particular pricing strategy.

Business Model

Inherent in any business plan is a description of the business model chosen by the entrepreneur as the
one that they feel will best ensure success. Based upon their essential initial research of the setting in
which they anticipate starting their business (their analysis from stage one) an entrepreneur should
determine how each element of their business model—including their revenue streams, cost structure,
customer segments, value propositions, key activities, key partners, and so on—might fit together to
improve the potential success of their business venture

For some types of ventures, at this stage an entrepreneur might launch a lean start-up and grow their
business by continually pivoting, or constantly adjusting their business model in response to the real-
time signals they get from the markets’ reactions to their business operations. In many cases, however,
an entrepreneur will require a business plan. In those cases, their initial business model will provide the
basis for that plan.

Initial Business Plan Draft

The Business Plan Draft stage involves taking the knowledge and ideas developed during the first two
stages and organizing them into a business plan format. An approach preferred by many is to create a
full draft of the business plan with all of the sections, including the front part with the business
description, vision, mission, values, value proposition statement, preliminary set of goals, and possibly
even a table of contents and lists of tables and figures all set up using the software features enabling
their automatic generation. Writing all of the operations, human resources, marketing, and financial
plans as part of the first draft ensures that all of these parts can be appropriately and necessarily
integrated. The business plan will tell the story of a planned business startup in two ways by using
primarily words along with some charts and graphs in the operations, human resources, and marketing
plans and in a second way through the financial plan. Both ways must tell the same story.

Making Business Plan Realistic

The first draft of a business plan will almost never be realistic. As the entrepreneur writes the plan, it will
necessarily change as new information is gathered. Another factor that usually renders the first draft
unrealistic is the difficulty in making certain that the written part—in the front part of the plan along
with the operations, human resources, and marketing plans—tells the exact same story as the financial
part does. This stage of work involves making the necessary adjustments to the plan to make it as
realistic as possible.

The Making Business Plan Realistic stage has two possible feedback loops. The first goes back to the
Initial Business Plan Draft stage in case the initial business plan needs to be significantly changed before
it is possible to adjust it so that it is realistic. The second feedback loop circles back to the Business
Model stage if the business developer need to rethink the business model. As shown in Figure 8 by its
enclosure in the progressive research box, the business plan developer might need conduct further
research before finishing the Making Business Plan Realistic stage and moving on to the Making Plan
Appeal to Stakeholders stage.

Making Plan Appeal to Stakeholders and Desirable to the Entrepreneur

A business plan can be realistic without appealing to potential investors and other external
stakeholders, like employees, suppliers, and needed business partners. It might also be realistic (and
possibly appealing to stakeholders) without being desirable to the entrepreneur. During this stage the
entrepreneur will keep the business plan realistic as they adjust plans to appeal to potential investors
and to themselves. If, for example, investors will be required to finance the business start, some
adjustments might need to be relatively extensive to appeal to potential investors’ needs for an exit
strategy from the business, to accommodate the rate of return they expect from their investments, and
to convince them that the entrepreneur can accomplish all that is promised in the plan. In this case, and
in others, the entrepreneur will also need to get what they want out of the business to make it
worthwhile for them to start and run it. So, this stage of adjustments to the developing business plan
might be fairly extensive, and they must be informed by a superior knowledge of what targeted
investors need from a business proposal before they will invest.

The caution with this stage is to balance the need to make realistic plans with the desire to meet the
entrepreneur’s goals while avoiding becoming discouraged enough to drop the idea of pursuing the
business idea. If an entrepreneur is convinced that the proposed venture will satisfy a valid market need,
there is often a way to assemble the financing required to start and operate the business while also
meeting the entrepreneur’s most important goals. To do so, however, might require significant changes
to the business model.

Finishing the Business Plan

The final stage involves putting all of the important finishing touches on the business plan so that it will
present well to potential investors and others. This involves making sure that the math and links
between the written and financial parts are accurate. It also involves ensuring that all the needed
corrections are made to the spelling, grammar, and formatting. The final set of goals should be written
to appeal to the target readers and to reflect what the business plan says. An executive summary should
be written and included as a final step.

Suggested Executive Summary Components for Business Plan

Section

Description

Company summary
Brief overview (one to two paragraphs) of the problem, solution, and potential customers

Customer analysis

Description of potential customers and evidence they would purchase product

Market analysis

Size of market, target market, and share of market

Product or service

Current state of product in development and evidence it is feasible

Intellectual property

If applicable, information on patents, licenses, or other IP items

Competitive differentiation

Describe the competition and your competitive advantage

Company founders, management team, and/or advisor

Bios of key people showcasing their expertise and relevant experience

Financials

Projections of revenue, profit, and cash flow for three to five years
Amount of investment

Funding request and how funds will be used

Marketing Plan

It is a given that you must provide some assessment of the economic situation as it relates to your
business. For example, you might conclude that the current economic crisis will reduce the potential to
export your product and it may make it more difficult to acquire credit with which to operate your
business. Of course, conclusions such as these should be matched with your assessment as to how your
business will make the necessary adjustments to ensure it will thrive despite these challenges, or how it
will take advantage of any opportunities your assessment uncovers.

You must provide an assessment of the industry coupled with descriptions of how your venture will
prosper in those circumstances. A common approach used to assess the industry is to apply Porter’s
(1985) Five Forces Model.

If you apply the Five Forces Model, do so in the way in which it was meant to be used to avoid
significantly reducing its usefulness while also harming the viability of your industry analysis. This model
is meant to be used to consider the entire industry—not a subcomponent of it (and it usually cannot be
used to analyze a single organization).

Your competitor analysis might fit within your assessment of the industry or it might be best as a section
within your marketing plan. Usually a fairly detailed description of your competitors is required,
including an analysis of their strengths and weaknesses. In some cases, your business may have direct
and indirect competitors to consider. Be certain to maintain credibility by demonstrating that you fully
understand the competitive environment.

Assessments of the economic conditions and the state of the industry appear incomplete without
accompanying appraisals outlining the strategies the organization can/should employ to take advantage
of these economic and industry situations. So, depending upon how you have organized your work, it is
usually important to couple your appraisal of the economic and industry conditions with accompanying
strategies for your venture. This shows the reader that you not only understand the operating
environment, but that you have figured out how best to operate your business within that situation.

Market Analysis
Usually contains customer profiles, constructed through primary and secondary research, for each
market targeted

Contains detailed information on the major product benefits you will deliver to the markets targeted

Describes the methodology used and the relevant results from the primary market research done

If there was little primary research completed, justifies why it is acceptable to have done little of this
kind of research and/or indicate what will be done and by when

Includes a complete description of the secondary research conducted and the conclusions reached

Describes potential customers

Competition

Fully describes the nature of your competitors

However, this information might fit instead under the market analysis section.

Describes all your direct competitors

Describes all your indirect competitors

If you can, includes a competitor positioning map to show where your product will be positioned relative
to competitors’ products

Marketing Strategy. Covers all aspects of the marketing mix including the promotional decisions you
have made, product decisions, distribution decisions related to how you will deliver your product to the
markets targeted, and pricing decisions. This outlines how you plan to influence your targeted
customers to buy from you (what is the optimum marketing mix, and why is this one better than the
alternatives)

Product Strategy. Identifies your product/service and why this particular product/service will appeal to
your targeted customers more than the alternatives. If your product or service is standardized, you will
need to compete on the basis of something else – like a more appealing price, having a superior
location, better branding, or improved service. If you can differentiate your product or service you might
be able to compete on the basis of better quality, more features, appealing style, or something else.

Pricing Strategy. Outlines your pricing strategies and explains what makes these strategies better than
the alternatives. If you intend to accept payment by credit card (which is probably a necessity for most
companies), you should be aware of the fee you are charged as a percentage of the value of each
transaction.
Identifies your sales forecasts and explains why are these realistic. Sales forecasts must be done on at
least a monthly basis if you are using a projected cash flow statement. These must be accompanied by
explanations designed to establish their credibility for readers of your business plan. Remember that
many readers will initially assume that your planned time frames are too long, your revenues are
overstated, and you have underestimated your expenses. Well crafted explanations for all of these
numbers will help establish credibility.

Distribution Strategy. Describes your distribution strategies and explains what makes these strategies
better than the alternatives. If you plan to use e-commerce, you should include all the costs associated
with maintaining a website and accepting payments over the Internet.

Promotions Strategy. Answers the following key questions: As a new entrant into the market, must you
attract your customers away from your competitors they currently buy from or will you be creating new
customers for your product or service (i.e. not attracting customers away from your competitors)?

If you are attracting customers away from competitors, how will these rivals respond to the threat you
pose to them?

If you intend to create new customers, how will you convince them to reallocate their dollars toward
your product or service (and away from other things they want to purchase)?

In what ways will you communicate with your targeted customers? When will you communicate with
them? What specific messages do you plan to convey to them? How much will this promotions plan
cost?

Outlines the anticipated responses that competitors will have to your entrance into the market,
especially if your success depends upon these businesses losing customers to you. If your entry into the
market will not be a threat to direct competitors, it is likely you must convince potential customers to
spend their money with you rather than on what they had previously earmarked those dollars toward.
In your business plan you must demonstrate an awareness of these issues.

Maps out your promotional expenditures according to the method used and time frame. Consider listing
the promotional methods in rows on a spreadsheet with the columns representing weeks or months
over probably about 18 months from the time of your first promotional expenditure. This can end up
being a schedule that feeds the costs into your projected cash flow statement and from there into your
projected income statements.
If you phone or visit newspapers, radio stations, or television stations seeking advertising costs, you
must go only after you have figured out details like on which days you would like to advertise, at what
times on those days, whether you want your print advertisements in color, and what size of print
advertisements you want.

Carefully consider which promotional methods you will use. While using a medium like television may
initially sound appealing, it is very expensive unless your ad runs during the non-prime times. If you
think this type of medium might work for you, do a serious cost-benefit analysis to be sure.

Some promotional plans are developed around newspaper ads, promotional pamphlets, printing
business cards, and other more obvious mediums of promotion. Be certain to, include the costs of
advertising in telephone directories, sponsoring a little league soccer team, producing personalized pens
and other promotional client give-always, donating items to charity auctions, printing and mailing client
Christmas cards, and doing the many things businesses find they do on-the-fly. Many businesses find it
to be useful to join the local chamber of commerce and relevant trade organizations with which to
network. Some find that setting a booth up at a trade fair helps launch their business.

If you are concerned you might have missed some of these promotional expenses, or if you want to have
a buffer in place in case you feel some of these opportunities are worthwhile when they arise, you
should add some discretionary money to your promotional budget. A problem some companies get into
is planning out their promotions in advance only to reallocate some of their newspaper advertisement
money, for example, toward some of these other surprise purposes resulting in less newspaper
advertising than had been intended.