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Key Terms/Concepts

Co-preneurs—entrepreneurial couples who are both actively involved in the ownership and operation of a small business.

Entrepreneur—an individual who faces risk and takes on the challenge of creating a new business with profit and growth as business objectives. Has the ability to transform an idea into the reality of a small business.

Entrepreneurial Spirit—the confidence and courage to take on the risks and challenges of starting and operating one or more small businesses.

Small Business—independently owned and operated and not dominant in its field. Further distinguished by size standards such as number of employees and annual receipts.

Small Business Administration (SBA)—established by Congress via the Small Business Act of 1953 to provide financial, educational, and advisory services to the small business.

 

Understanding Small Business

Our economy is in a state of constant change. Throughout our history the public's interest in and emphasis on business has fluctuated. We can recall the swing in interest between small and large business. In our country's early years the economic foundation was built upon the small business, the family farm, the local inn, the village specialty shop, the town pub. As we grew and technological advances and inventions increased, the larger business also grew to dominate the center of public and media attention. But even during the mid-1900s, the heyday of big business, there has always been that foundation of small businesses supporting a major portion of our economic development. Over 75 percent of new jobs continue to be created by small business.

Small businesses make up over 95 percent of the total number of U.S. businesses, and over the past 20 years the number of business starts has almost tripled. Statistics now show that new business starts hover around three-quarters of a million each year. Along with the increasing number of small businesses being formed, trends show that small businesses offer the greatest opportunities for jobs. Think of all the reports you hear daily about this corporation laying off so many hundreds or thousands or that corporation restructuring and downsizing. The statistics support the reports we are hearing—employment opportunity favors small business for both the new worker entering the workforce and the corporate employee either disillusioned with big business or forced to gain new employment after falling victim to corporate downsizing. Interest in entrepreneurship is developing at a younger age with nearly 10 percent of the start-ups being generated by individuals under the age of 25. Thousands of colleges and universities offer courses and degrees in entrepreneurship.

Small businesses have also become an even more attractive alternative for women, minorities, and individuals seeking the freedom of working from their homes. With the continued growth of e-commerce, entrepreneurs can reach new customers in national and international markets with limited investment in bricks and mortar.

 

Defining Small Business

Americans have historically supported small businesses. We smile when we think of the local restaurant hang-out, the barber shop, the flower shop a mile or so away, or even (to be more nostalgic) the corner grocery store. We appreciate the customer concern and service we receive from these community business people. But what is a "small business"? The definition varies when specifics are considered, but all tend to agree with the basic guidelines provided in the Small Business Act of 1953. A small business is independently owned and operated and is not dominant in its field of operation. The obvious differences appear when the number of employees, the size of sales or receipts and other quantitative factors are considered. For this course, the Small Business Act definition will be used, but we need to keep in mind others' definitions as well.

Small Business Opportunities and Risks

The small business contributes to society and can offer numerous opportunities for an enterprising businessperson. Job opportunities and customer focus are just two benefits society obtains from the multitude of small businesses. An entrepreneur gains many personal opportunities by starting a business—creativity, independence, and potential for success, to name just a few. But these contributions and opportunities are not obtained without traversing many pitfalls and taking many risks along the way. Small businesses are generally started with limited funding, limited business knowledge on the part of the owner, competition hurdles to overcome, and a need for long hours, hard work, and commitment beyond anticipated expectations. For these and many other reasons, the failure rate for the small business is significant compared to the number of new business starts reported each year. Over 60 percent of new businesses fail during the first six years. Businesses that survive the first six years are much more likely to continue on for the next ten years or more. Poor management continues to be the primary cause of failure, and the reason why employees leave for new opportunities.

But the risk of failure and loss has not been great enough to deter entrepreneurial Americans who have been raised to believe that personal initiative, hard work, and innovation are a big piece of the necessary ingredients to make it in our society. Much can be said about operating a small business, but as long as the entrepreneurial spirit and opportunity exist, the small business will continue to flourish. The opportunities presented by small business ownership to women, minorities, and immigrants are causing unprecedented growth. Women-owned businesses are no longer limited to the service sector; women are starting technology and manufacturing companies across the country.

 

Strategic Management

One aspect of today's world is the constancy of change. Each business must first accept this, then face its effect, predict its impact, and plan how to adapt and use change to its benefit. Expanding technologies, global markets, and an increasing number of businesses provide for a keener competition for any one firm. Ongoing planning is a primary tool for understanding this competition and creating advantageous situations whereby the business can successfully compete and remain financially sound. Critical to success is identifying the business's core competencies and then leveraging them to gain a long-term sustainable advantage over their competition and provide superior value to their customers. As businesses grow and evolve it will be critical that they recognize and leverage the key assets of the organization. The reality is that the intellectual capital of the owner(s) and employees of the business may be more valuable than any tangible assets.

The importance of planning cannot be emphasized enough for any business. Planning forces an organization and its management to look ahead, evaluate, and define itself, its products, and services. Planning is one of the primary functions of management and tends to be one of the most difficult activities to establish as a systematic, routine process of the organization. Studies have shown that the failure to follow a systematic planning process is one of the main reasons businesses fail.

The planning process for a small business differs from a large corporation in its scope, length of time, and in the planning structure. For the small business owner/manager the process of planning, although considered essential, is also often neglected and considered to be very difficult. The reasons are many and different for each business but there are several reasons that stand out: 1) The overwhelming stress of day-to-day operational activities leaves little time or energy for planning; 2) many small business owner/managers do not have the skills and knowledge needed for effective planning; and 3) many are afraid of the problems planning will disclose and the resources necessary to deal with these problems. The final step in the strategic planning process is developing a set of controls to compare actual performance with stated goals and objectives. Small businesses must regularly revisit their strategic plan and recognize the need to be flexible and respond appropriately to environmental changes and shifts in customer expectations.

Lesson Assignment

Please answer the questions (in discussion form unless otherwise indicated; be sure to read the Syllabus for more explanation of course objectives and expectations).