Chapter OneIntroduction to the Small Business Life:

A Large Contribution to the U.S. Economy

Defining the Small Business In the United States, owning and operating

a small business is a highly respected career.

Studying effective small business management may be the most important way to understand the U.S. economy.

An accurate definition of “small” depends on developing limits that are truly appropriate for a given industry.

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Defining the Small Business

Company A has 400 employees. Is it a small business?

Company B generates $20 million annually in sales. Is it a small business?

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Government Definition According to the Small Business Act of 1953, a

small business is one that is independently owned and operated, and is not dominant in its field of operation. (www.sba.gov/size)

An SBA size standard is usually stated in number of employees or average annual receipts (sometimes both).

Four characteristics:Management is independent.Capital is supplied by, and ownership is held by,

one individual or a few individuals.The area of operations is primarily local, although

the market isn’t necessarily local.The firm is small when compared to the largest

competitors in its own industry.

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Small Business OWNER vs. Entrepreneur

Small business owners manage their business with a long-term perspective, aiming for stable sales and profits, and for modest growth.

Entrepreneurs are usually seeking rapid growth and immediate profits. 62% are opportunity entrepreneurs, and 38% start

a business due to necessity. Serial entrepreneurs repeatedly start businesses

and grow them, then start other businesses. Types include: Leapfroggers, who start a company, grow it until

they get bored, then sell it to start another. Jugglers, who start multiple companies and run

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Women as small business owners Businesses started by women tend to be

smaller and require half as much start-up capital as those men start.

Nearly one in three small businesses (32%) are owned by women (http://www.census.gov/econ/sbo/get07sof.html?8)

Women owned businesses tend to grow more slowly than those owned by men, but they have a higher survival rate.

Office of Women’s Business Ownership (OWBO) aids small business owners who are women: http://www.sba.gov/womeninbusiness

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Minorities as small business owners Minority-owned businesses are a rapidly

growing segment of the small business population.

Hispanics, Asians, and African-Americans (respectively) are the minority groups most likely to become small business owners.

More than one in five (21.3%) small businesses are owned by minorities (http://www.census.gov/econ/sbo/get07sof.html?5)

Businesses owned by African-Americans are the fastest growing segment of small businesses.

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How many U.S. businesses are “small” businesses?

10%23% 57%78%99%

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Contributions

About 99 percent of the country’s 23.3 million non-farm businesses are small as defined by the SBA.

Small businesses employ 53 percent of the private non-farm workforce, contribute 47 percent of all sales in the country, and are responsible for 51 percent of the private gross domestic product.

Small businesses provided about 67 percent of initial job opportunities.

Small firms produce 55 percent of innovations.

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Contributions

Small firms play an important role in the introduction of new goods and services to the marketplace.

Small firms are more likely to employ less-skilled workers and those with no prior experience.

Small firms purchase, use, and revitalize used capital equipment.

AdvantagesIndependenceFinancial OpportunitiesCommunity ServiceJob SecurityFlexibilityFamily EmploymentChallengeFun

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DisadvantagesSales FluctuationCompetitionIncreased ResponsibilitiesFinancial LossesEmployee RelationsLaws and RegulationsRisk of Failure

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Small Business Failure

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True or False:

Most small businesses will fail.

Small Business Failure

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First two years: 70%; first five years: 50% (U.S. Dept. of Commerce, 2009) Most businesses fail when they are unable to pay debt. Year after year, the major reason that businesses fail is incompetence. The second most common reason businesses fail is unbalanced experience. Other common causes of business failure include neglect, fraud, and disaster.

Reasons for Small Business FailureInadequate RecordsExpansion beyond ResourcesLack of Information about CustomersFailure to Diversify MarketLack of Market ResearchLegal ProblemsNepotism

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Reasons - ContinuedOne-person ManagementLack of Technical CompetenceAbsentee Management

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Ethics - IssuesFor business owners developing one ethical

code that suits all people in all situations is nearly impossible.

In one study, 65 percent of those surveyed said executives would do everything they could to make a profit, even if it meant ignoring society’s needs.

Many businesses turn to a code of conduct

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Coca-Cola’s Code of business Conduct

Core values: Act with integrity. Be honest. Follow the law. Comply with the code. Be accountable.

Ethics The entrepreneur-owner’s value system

is the key to establishing an ethical organization.

An owner has the unique opportunity to display honesty, integrity, and ethics in all key decisions.

In small businesses, the ethical influence of the owner is more powerful than in larger corporations

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Social Responsibility

Social responsibility has emerged as a major issue in the business world.

Social responsibility consists of the obligations a business has to society.

Three categories to describe the level of corporate commitment to social concerns: Social Obligation Social Responsibility Social Responsiveness

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Social Responsiveness

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Social Entrepreneurship

A social entrepreneur is someone who recognizes a social problem and uses entrepreneurial principles to organize, create, and manage a venture to make social change.

Whereas a business entrepreneur typically measures performance in profit and return, a social entrepreneur focuses on creating social capital.

http://www.youtube.com/watch?v=jk5LI_WcosQ

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Group WorkThe owner of a manufacturing company is

interested in obtaining small-business loans to help her expand her operations, but is not sure if her business is still considered “small.” The business was founded in 1978. She bought the company in 2001, and is the primary owner and manager, but has a few investors that own stock in the company. The firm has one plant employing about 200 employees and enjoys sales of $24 million each year, with products shipping to all of the lower 48 states. The manufacturer is about the fourth largest firm in the industry, which is comprised of seven firms. Does this firm meet the definition of “small” as established by the SBA? If so, why? If no, why not?

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