Management Chapter 5 Services Service Providers Work For Others But Not Actually Produce Tangible Goods

Ferrell / Hirt / Ferrell:

Business

Instructor’s Manual – Chapter 5

Chapter 5: Small Business, Entrepreneurship,

and Franchising

Use this Instructor’s Manual to facilitate class discussion and incorporate the unique features of the text’s

highlights. Follow-up via the Connect exercises is then encouraged to provide a holistic understanding of the

chapter.

C H A P T E R F O R E C A S T

L E A R N I N G O B J E C T I V E S

LO 5-2 Investigate the importance of small business in the U.S. economy and why certain fields attract

small business.

LO 5-4 Summarize the disadvantages of small-business ownership, and analyze why many small

businesses fail.

LO 5-6 Evaluate the demographic, technological, and economic trends that are affecting the future of

small business.

LO 5-8 Assess two entrepreneurs’ plans for starting a small business.

L E A R N T H E T E R M S

business plan (p. 156)

franchiser (p. 159)

Small Business

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Instructor’s Manual – Chapter 5

K E Y T E R M S A N D D E F I N I T I O N S

business plan

A precise statement of the rationale for a business and a step-by–

step explanation of how it will achieve its goals.

entrepreneurship

The process of creating and managing a business to achieve desired

objectives.

franchise

A license to sell another’s products or to use another’s name in

business, or both.

franchisee

The purchaser of a franchise.

franchiser

The company that sells a franchise.

intrapreneurs

Individuals in large firms who take responsibility for the

development of innovations within the organizations.

small business

Any independently owned and operated business that is not

dominant in its competitive area and does not employ more than

500 people.

Small Business

Administration (SBA)

An independent agency of the federal government that offers

managerial and financial assistance to small businesses.

undercapitalization

The lack of funds to operate a business normally.

venture capitalists

Persons or organizations that agree to provide some funds for a new

business in exchange for an ownership interest or stock.

Ferrell / Hirt / Ferrell:

Business

Instructor’s Manual – Chapter 5

C O N T E N T O U T L I N E

The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, KEY TERMS

learners will need to take away from the course and a notation of when to use POWERPOINT SLIDES with

LO 5-1

Define entrepreneurship and small business.

• Introduction

• The Nature of Entrepreneurship

o What is a Small Business?

o The Role of Small Business in the American

Economy

Key Terms:

• Entrepreneurship

• Small business

• Small Business

Administration (SBA)

PowerPoint Slides

PPT 5.4

PPT 5.5

Lecture Outline and Notes:

I. The Nature of Entrepreneurship and Small Business

A. Entrepreneurship is the process of creating and managing a business to

achieve desired objectives. The entrepreneurship movement has been

accelerating.

1. Some entrepreneurs who start small businesses have the ability to

see emerging trends; in response, they create a company to provide

a product that meets customer needs.

2. Technology once available only to the largest firms can now be

obtained by small business.

3. Companies such as Procter & Gamble, McDonald’s, and Dell

Computers all started out as small businesses. Now they have

founded these businesses, such as Steve Jobs (Apple), Michael Dell

(Dell Computers), Larry Page and Sergey Brin (Google), and Bill Gates

(Microsoft) are recognized as some of the greatest entrepreneurs.

(Table 5.1)

1. The textbook’s definition of small business is any independently

Administration (SBA), an independent agency of the federal

government that offers managerial and financial assistance to small

businesses.

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Instructor’s Manual – Chapter 5

PPT 5.7

PPT 5.8

PPT 5.10

C. The Role of Small Business in the American Economy (Table 5.2)

1. Small businesses are vital to the soundness of the American

2. Over ninety-nine percent of all U.S. firms are classified as small

businesses, and they employ 50 percent of private workers.

contribute 33 percent of the value of these exports.

business.

5. Small businesses generate 63 percent of net new jobs.

alliances.

Women own more than 8 million businesses nationwide.

7. Minority-owned businesses have been growing faster than other

businesses. The number of minority-owned businesses is increasing

at a rate of 30 percent.

all businesses.

tape recorder, fiber-optic examining equipment, the heart valve,

optical scanner, personal computer, soft contact lenses, the Internet,

a. Founder and CEO of the small firm UniKey, Phil Dumas, invented

a new way for consumers to keep their doors locked

b. Invented Kevo, a motorized deadbolt that links to users’ iPhones

Home Depot

d. Just one example of a small company with the ability to innovate

and contribute to the benefit of customers

Ferrell / Hirt / Ferrell:

Business

Instructor’s Manual – Chapter 5

LO 5-2

Investigate the importance of small business in the U.S. economy

and why certain fields attract small business.

• Industries That Attract Small Business

Key Terms:

PPT 5.11

PPT 5.12

PPT 5.13

D. Industries That Attract Small Business

1. Small businesses are found in every industry, but some areas are

especially attractive because they are relatively easy to enter,

require low initial financing, and/or offer relatively easy ways to

target a specific group of customers.

2. Retailing and Wholesaling

a. A retailer acquires goods from producers or wholesalers and sells

them to consumers. Retailing is attractive to small-business

owners because it is easy to gain experience and exposure in the

c. Many service providers are also retailers because they provide

their services to ultimate consumers.

4. Manufacturing

a. Small businesses can often customize products to meet specific

5. High Technology businesses depend heavily on advanced scientific

and engineering knowledge.

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Instructor’s Manual – Chapter 5

PPT 5.14

E. Ten Successful Traits of Entrepreneurs (Table 5.4)

1. Intuitive

2. Creative

3. Productive

4. Patient

5. Charismatic

6. Persistent

8. Frugal

9. Friendly

10. Fearless

LO 5-3

Specify the advantages of small-business ownership.

• Advantages of Small-Business Ownership

o Independence

o Reputation

Key Terms:

PPT 5.15

II. Advantages of Small-Business Ownership

A. Independence

1. Independence and the opportunity to better themselves are leading

reasons why entrepreneurs go into business for themselves.

B. Small businesses usually require less money to start and maintain than

large ones.

D. Small firms can focus their efforts on a precisely defined market niche—

a specific group of customers—to address a need that other companies

Ferrell / Hirt / Ferrell:

Business

Instructor’s Manual – Chapter 5

LO 5-4

Summarize the disadvantages of small-business ownership, and

analyze why many small businesses fail.

• Disadvantages of Small-Business Ownership

o High Stress Level

o High Failure Rate

Key Terms:

• Undercapitalization

PPT 5.18

PPT 5.19

III. Disadvantages of Small-Business Ownership

A. High Stress Level

1. Worries about the business, competition, or changing market

demand cause stress.

2. Long work days are the norm.

B. High Failure Rate (Table 5.5)

1. There is no guarantee of small business success.

a. Poor business management causes many failures.

b. Other causes include burdens imposed by government

regulation, insufficient funds during slow sales periods, and

competition from others.

4. The shortest path to failure in business is undercapitalization—

lacking sufficient funds needed to operate the business normally.

a growing business effectively.

a. Expanding a hobby into a business may work if a genuine market

niche exists, but all too often people start such a business

without identifying a real need for the goods or services.

6. Growth requires specialized management skills that the owner may

not have nor have the time to acquire.

a. Growth often requires the owner to give up a certain amount of

Ferrell / Hirt / Ferrell:

Business

Instructor’s Manual – Chapter 5

LO 5-5

Describe how you go about starting a small business and what

resources are needed.

• Starting a Small Business

o The Business Plan

o Forms of Business Ownership

o Financial Resources

o Approaches to Starting a Small Business

o Help for Small-Business Managers

Key Terms:

• Business plan

• Venture capitalists

• Franchise

• Franchiser

• Franchisee

PPT 5.20

PPT 5.21

connect

Need help

understanding How

an Entrepreneur Can

your Connect ebook

video tab for a brief

PPT 5.22

PPT 5.23

IV. Starting a Small Business

A. Creating a small business involves starting out with a concept or idea.

Then it involves creating a business plan. After, the entrepreneur must

devise a strategy to guide planning and development.

B. The Business Plan

1. A business plan is a precise statement of the rationale for the

business and a step-by-step explanation of how it will achieve its

goals.

2. It should include an explanation of the business, an analysis of the

competition, estimates of income and expenses, a strategy for

acquiring sufficient funds to keep the business going, and other

information.

4. It should be revised periodically to ensure that the firm’s goals and

strategies can adapt to changes in the environment.

product selection.

C. Forms of Business Ownership

1. After developing a business plan, the entrepreneur has to decide on

an appropriate legal form of business ownership, such as a sole

1. To make money from a small business, the owner must provide or

obtain money (capital) to start the business and to keep it running

smoothly. Financing options include loans, stocks, or equity

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Instructor’s Manual – Chapter 5

PPT 5.24

PPT 5.25

PPT 5.27

PPT 5.28

2. Equity Financing

a. Equity financing occurs when the owner uses real personal

assets rather than borrowing funds from outside sources to get

started in a new business.

b. Small businesses can also obtain equity financing by finding

investors for their operations.

1) They may sell stock in the business to family members,

friends, employees, or other investors.

2) Venture capitalists are persons or organizations that agree to

provide some funds for a new business in exchange for an

ownership interest or stock.

3) This form of equity financing requires that the small business

a. Banks are the main suppliers of external debt financing to small

for loans of long-term funds or other assets, such as computers

or automobiles that are exchanged for an ownership interest in

a business.

2) The small business owner may also have to offer some

personal property as collateral, such as a home, in which

case the loan is called a mortgage.

f. Small businesses may also obtain funding from their suppliers in

the form of trade credit; suppliers allow the business to take

loans, especially to minority businesspeople or for development

in certain areas.

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Instructor’s Manual – Chapter 5

PPT 5.29

PPT 5.30

E. Approaches to Starting a Small Business

1. Starting from Scratch Versus Buying an Existing Business

a. Buying an already existing business has the advantage of

providing a network of existing customers and suppliers.

b. However, the entrepreneur must deal with the problems the

business already has.

2. Franchising

a. A license to sell another’s products or to use another’s name in

business, or both, is a franchise.

b. The franchisee acquires the rights to a name, logo, methods of

operation, national advertising, products, and other elements

associated with the franchiser’s business in return for a financial

commitment and the agreement to conduct business in

franchisees buy equipment, pay for training, and obtain a

mortgage or lease. The franchisee also pays the franchiser a

monthly or annual fee based on the percentage of sales or

profits.

d. Dunkin’ Donuts, Subway, and Jiffy Lube are examples of

franchises. (Table 5.6)

2) Management training and support

3) Brand-name appeal

4) Standardized quality of goods and services

5) National and local advertising programs

6) Financial assistance

7) Proven products and business formats

8) Centralized buying power

9) Site selection and territorial protection

10) Greater chance for success

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Instructor’s Manual – Chapter 5

PPT 5.33

f. Disadvantages of franchising

1) Franchise fees and profit sharing with the franchiser

2) Strict adherence to standardized operations

3) Restrictions on purchasing

4) Limited product line

5) Possible market saturation

6) Less freedom in business decisions

g. The practice of franchising first began in the United States in the

19th century when Singer used it to sell sewing machines. The

concept of franchising grew especially rapidly during the 1960s,

when it expanded to diverse industries.

F. Help for Small Business Managers

1. Many organizations exist to help small businesses

a. Small Business Administration

1) Small Business Development Centers

2) Service Corps of Retired Executives

3) Active Corps of Executives

4) Small Business Institutes

b. College courses and seminars

c. Chambers of Commerce and U.S. Department of Commerce

d. National publications such as Inc. and Entrepreneur, as well as

weekly business journals/newspapers.

f. Networking

1) Networking—building relationships and sharing information

with colleagues—is vital for any businessperson.

LO 5-6

Evaluate the demographic, technological, and economic trends that

are affecting the future of small business.

• The Future of Small Business

o Technological and Economic Trends

Key Terms:

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Instructor’s Manual – Chapter 5

PPT 5.34

PPT 5.35

PPT 5.36

V. The Future for Small Business

A. Demographic Trends

1. The baby boom generation (those born between 1946 and 1964) is

wealthy and aging, but not actively pursued by most small

businesses.

2. Another market with huge potential for small business is the echo

boomers (those born between 1977 and 1994; also called Millennials

or Generation Y), who shop frequently and spend lavishly. Millennials

number about 75 million.

3. The growing number of immigrants living in the United States

represent about 16 percent of the population.

B. Technological and Economic Trends

1. Technological advances have opened many new markets to small

business.

a. Jack Dorsey founded the idea for Twitter on a sketchpad. He says

2. Small businesses can react quickly to changes in the economy.

companies to customize their services quickly for international

customers.

and in fuel conservation has spawned many small businesses.

C. Top cities to start a small business (Table 5.7)

LO 5-7

Explain why many large businesses are trying to “think small”.

Key Terms:

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Business

Instructor’s Manual – Chapter 5

PPT 5.38

VI. Making Big Businesses Act “Small”

A. The success and competitiveness of small businesses have led many

large corporations to take a closer look at what makes their smaller

rivals tick.

within the large organization.

LO 5-8

Assess two entrepreneurs’ plans for starting a small business.

Key Terms:

PPT 5.39

PPT 5.40

VII. Solve the Dilemma—The Small-Business Challenge

small business

1. Jack had developed recipes for fat-free and low-fat cookies and

muffins to satisfy his personal health needs

2. Bruce had extensive experience in managing food-service

C. Each had $35,000 to invest and with their homes and other resources,

they had borrowing power of an additional $125,000

D. Remaining decisions:

1. What form of organization to use

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Business

Instructor’s Manual – Chapter 5

small business management may be advisable for Bruce and Jack to

create ties with other small business owners. Also, Bruce and Jack

should maintain a very strict management of their operations and