Questions
An automobile company has decided to launch a CSR program in which they will be initiating...

An automobile company has decided to launch a CSR program in which they will be initiating several social and environmental cause activities. Suggest five measures/indicators for the company which can be used to evaluate the success of their

(a) Social initiatives

1.

2.

3.

4.

5.

(b) Environmental initiatives.

1.

2.

3.

4.

5.

In: Operations Management

4.The increasing number of competitors, which leads to the decline in the business profits of ABC...

4.The increasing number of competitors, which leads to the decline in the business profits of ABC Restaurant, has been brought to the attention of a senior manager. He believes that training should be given to regain the market lead in a highly competitive market. You, as a training manager, are approached by him for assistance. In a meeting with him, you are required to:

a. discuss the type of training needs analysis relevant to the situation and

b. elaborate how data are collected to analyse the training needs.

In: Operations Management

Please read the article and answer about questions. International Strategies When you are struggling to get...

Please read the article and answer about questions.

International Strategies

When you are struggling to get through that first year of business, international sales are about the last thing on your mind. The U.S. Department of Commerce, however, indicates that large compa- nies account for only about 4 percent of all exporters, meaning the other 98 percent of the exporters in 2010 were small businesses.22

Entrepreneurs typically fall into three categories. There are those who realistically will never go international (for example, a restaurant owner or dry cleaner working from a single site). There are those who intentionally start international businesses23 (for example, import-export businesses), such as Peter P., the director of procurement for a Russian trading company, who saw a trading opportunity with the opening up of Eastern Europe and the former Soviet Union. Educated in the United States, he is of Ukrainian descent and speaks both Russian and Ukrainian.24 Last, there are those who think international business might be something they’ll do someday way off in the future. This section is primarily for the last two categories.

Thanks to the Internet, once a company has a website, it is essentially an international business, a whole new breed of firms known as born internationals.25 Potential foreign customers see the website and before you know it—or before you are prepared—the first international order rolls in. Even “website–free” companies aren’t exempt. A foreign visitor comes across your products and sees a need for it in his or her country, and here comes that order.

Some international orders aren’t all that difficult to handle. If the order is small enough, if the product or service is not highly regulated domestically, and if the country is one with which the United States has rather liberal trade such as Canada, the order processing may offer few or no head- aches. The customer may use a credit card or international money order, and the product ships in the mail without much more effort than figuring the extra postage. That’s okay for the occasional order, but more complex situations will require more time and effort on the part of the entrepreneur. The ideal situation is to consider and prepare an international strategy before it becomes a hit-and-miss method that is too cumbersome or before serious and costly mistakes are made.

Entrepreneurs have available to them the same options as large companies including wholly owned subsidiaries, joint ventures, licensing, franchising, and exporting. For most, though, an ex- port strategy is sufficient and is all that is covered in this section. It’s usually inexpensive, quick to start, easy to change, and less risky than other ventures. It has the additional advantage of allowing the entrepreneur the opportunity to learn about doing business abroad in case the company reaches the point of moving further. For U.S. entrepreneurs, the U.S. government offers detailed and useful help for exporters, including seminars and other training, export assistance, websites and reports, financing, insurance, and legal and collection assistance.

Putting together an export strategy involves answering three questions:

1. Are we ready? 2. Where should we go? 3. Whom do we contact over there?

There are many sources for assistance in answering these questions, and many good ones are free or almost free. One excellent resource is the U.S. Commerce Department’s report entitled, “A Basic Guide to Exporting” that can be found at www.unzco.com/basicguide.

Question 1: Are you ready to export? Exporting requires a different kind of thinking and prepa- ration from selling locally or even nationally. Are you going to target one country, a region, or the whole world? Do you know what customers want? Do you know what the import requirements are? What aspects will you handle, and which ones will you contract out? Are you ready for the costs and headaches of exporting? To see how you are coming along, you can check your readiness online at the U.S. government’s exporting site www.export.gov/, which provides extensive exporting basics, including a “readiness test” at www.fas.usda.gov/agexport/exporttest.asp.

Consider your product as well. Will your U.S. designed product fit an international lifestyle or needs? Clothing sizes are different—both in how they are numbered and what the sizes mean. A woman’s medium in the United States is an XXL in mainland China. Electrical currents are

different, as are various other safety and product standards, and the United States is one of only two countries that’s not on the metric system.27

There are several ways you can export. One is to use online services such as eBay. Approximately one-fifth of eBay’s sales are out of country.28 If you’re handling your international business this way, a lot of the rest of this section isn’t really for you until you want or need to change methods. Another is to work from personal contacts gained through school, travel, or family. Most exporting small businesses start with countries where they have had personal experience or support.29 These two methods are called direct exporting, since you are selling directly to foreign buyers or distributors.

If you want to use outside experts, there are three intermediaries who can help. With indirect exporting, you use agents, export management companies, or export trading companies as inter- mediaries to handle most of the exporting process. Direct exporters can also get help from freight forwarders. Freight forwarders are specialists in export-related activities including tariff sched- ules, shipping, insurance, packing, transportation arrangements, customs clearing, and other export details. (By the way, many agents, export management companies, export trading companies, and freight forwarders are themselves small businesses. They know exactly what problems you’ve faced and are much easier to approach than some megacompany.) The Small Business Administration’s Export Assistance Center can help you find one.

Question 2: Where should we go? The United Nations has 193 member countries in the world; chances are not all of them are right for your product. Even if your product should have wide appeal, it makes good sense to pick one or two as first markets. One of the safest bets is to consider countries that are similar to the United States—Canada, United Kingdom, Australia, for example. In those countries, you have few language issues, the culture is pretty close, the governments and economies are stable, and the people there are likely to want or need about the same kinds of products as people in the United States do. Should you decide to go further afield, those are the same sorts of things you want to look for—language and culture issues, government and legal situations, economic situ- ations, and peoples’ wants and needs. Here’s a good time to use those personal contacts mentioned earlier; if they live there, they are likely to be able to tell you if the product makes sense or not.

International marketing research isn’t cheap and can be difficult to do. Contacts are a valuable resource. Additionally, the U.S. government and world trade centers can give a lot of free or low-cost assistance. See Table 11.1 for a list of some of the major ones.

TABLE 11.1   Sources of Export Assistanc Question 3: Whom do we contact over there? You may already have international contacts through school, friends, travel, or other methods. If so, you’re ahead of the game. Even if they cannot help you with specific questions, they probably know someone who can. On the other hand, if you do not have any contacts, a lot of the government services you have already used can provide lists of poten- tial intermediaries or end users. In addition to the free services available, U.S. Commercial Services (www.export.gov) provides a number of levels of fee-based customized services. For $500, they offer their International Partner Search service, which will identify up to five potential businesses to work with you as licensees, agents, distributors, or strategic partners, and prequalify them based on your criteria. The government’s www.export.gov site offers a database of sales leads that can be searched for free by industry, region, or country. They also are the point of contact for catalog exhi- bitions which can get your product or service catalogs into the hands of potential buyers in specific markets (or at specific trade shows) overseas.

Other good ways to make international contacts are to participate in trade shows and trade mis- sions. In a trade mission, a U.S. government official takes a small group of business owners to dif- ferent foreign countries in order to help establish relationships and promote exporting. There are not a lot of these missions, and they are usually specific to a particular type of business and region of the world, so they are not always appropriate. At an international trade fair, similar to domestic trade fairs, you have a booth displaying your products or services and the opportunity for exposure to thousands of potential clients. Again, some fairs are industry-specific, while others are more general. The U.S. government often has a U.S. pavilion featuring export-oriented companies. These companies often have the opportunity to tie into other U.S. government services such as meeting with local U.S. embassy officials, prearranged meetings with qualified customers, market research information, trade barrier information, transportation and customs information, and assistance and access to U.S. trade show experts. Even if you can’t exhibit in the fair, attending the fair may give you a chance to meet the sort of people you need to know.

The U.S. government through www.export.gov also provides such services as printed and video catalogs, online databases, and personalized (fee-based) contact services. The U.S. Commercial Service will also assist a company in arranging private promotional activities, including exhibitions, press releases, and receptions when appropriate.

Still another way is to look for foreign companies with a resident representative in the United States, a type of private importing agent. Often these representatives are interested in bringing U.S. products back to their home countries and will already have a good idea if your product is right, and how to promote and distribute it.30 To find these resident representatives, try a Google search with the terms “resident representative” US, importing-site:.gov.

The next step is to export your products. But there are a few other things to consider first. Pricing becomes complicated as you need to cover transportation, the additional documents you may need,

possible tariffs (taxes on incoming goods), potential currency valuation changes, the cost of convert- ing currencies, and the additional packaging necessary to ship abroad. The importer usually covers foreign taxes, tariffs, additional shipping charges, port handling fees, and the like, but this must be carefully spelled out in your contracts in order to avoid potential differences of opinion.

Shipping documentation and other paperwork are very specific to the product and the country to which it is going. The International Trade Administration (www.ita.doc.gov) provides extensive information about tariffs, taxes, specific country information, and other general exporting informa- tion. The U.S. Country Commercial guides also provide some assistance in this area, as do some country government websites. The Bureau of Export Administration (www.bxa.doc.gov) provides information about when export licensing is necessary and also information on exporting of politi- cally sensitive products. In addition, companies such as NetShip (www.netship.net) have arisen specifically to handle shipping and documentation issues for e-commerce.31

There are a variety of payment procedures available. The easiest for you is to require up-front cash payment prior to shipment (or credit card if appropriate). This eliminates your risk, but puts the customer at risk. Providing credit to your customers reverses the risk, and puts it all on you. Both of these are possible methods of receiving payments, but less often used. More typical meth- ods include letters of credit or documentary drafts. In both cases, the payment procedure now includes four parties—you, your customer, and both of your banks—and payments are made upon proper presentation of certain documents, including the letter of credit or draft, bills of lading, and other paperwork. Although the system is somewhat complex, it provides a lower level of risk for all parties than cash in advance or an open account. You can find assistance about these methods at your current bank.

Financing and insurance become important because of the length of time it may take for interna- tional payments to be processed and the risk of default, as well as the difficulty of recovery in case of default in international transactions. The Small Business Administration (www.sba.gov), the Ex-Im Bank (www.exim.gov), and the Overseas Private Investment Corporation (www.opic.gov) provide loans and insurance to cover exporting. In some cases, these loans may also be used to finance trade show participation, to translate brochures and catalogs for international distribution, to renovate or expand existing facilities necessary to produce products for export, to set up lines of credit for potential customers, to provide export working capital, and to provide funding for developing an export program.

Last is the consideration of conflict resolution. Although the possibility exists for pirating, prod- uct misuse, and other unfortunate occurrences, the primary areas for conflict resolution include nonpayment and contract default issues. There is no universal court of law that can handle these situations. The U.S. Department of Commerce can provide advice and offer reputable local coun- sel, but only for sizable losses, typically several thousand dollars or more. The U.S. Council of the International Chamber of Commerce (www.iccwbo.org) provides international arbitration services and offers some other suggestions, but arbitration, too, is costly and probably not worthwhile un- less the loss is significant. This difficulty in international dispute resolution underscores the need to carefully select partners and to do a thorough job of prescreening. This is an area in which various government agencies can help you. The U.S. Commerce Department, for example, prequalifies potential customers in many cases prior to recommending them; you should check the particular program specifics to verify. Ex-Im Bank provides credit information on potential customers and, as mentioned earlier, many agencies provide insurance for export payments.

Importing

Importing strategy is similar to exporting, but with the buyers and sellers reversed. Instead of cus- tomers to buy your products, you are looking for sources to sell products to you (which, of course, you’ll eventually resell). If you have the opportunity to travel abroad, look for products that are selling well in the country you’re visiting and aren’t available in the United States or products that are considerably cheaper than similar ones found in the United States (labor and manufacturing costs are often cheaper in other countries than the United States). Trade mission and domestic and international trade shows are also good sources. If you can’t travel, ask your international contacts for this information. Next, find out who manufactures them and write the manufacturer a letter, introducing yourself and your company and the potential you see in your market for its product. You’re selling yourself, so be sure to tell the producer why you are the best person or company to be representing the product (i.e., experience in that product or in importing, contacts and distribution systems already in place, familiarity with the market, etc.). International mail can be painfully slow, so a fax or e-mail letter is probably best. Also, avoid slang terms (e.g. “your product is da bomb!”) and idiomatic expressions (like “break the ice”) that are likely to be misunderstood. Since English is rapidly becoming the language of business, a translation is usually not necessary. Follow up with a phone call or visit in which you can pitch the specifics of your marketing plan for the product.32 One way to conduct international calls for free is to register for Skype, an Internet service which lets you use a broadband connected computer to call other Skype users for free (www.skype.com). If you and the overseas company both use Skype, having long conversations to get an understanding of each other will not pose a financial problem. Along the same lines, it is worthwhile these days to check to find out whether an overseas company has video capabilities. Video cameras for PCs are inexpensive, and videoconferencing services are often available on campuses or at commercial locations such as FedEx Kinko’s for low costs.

With importing, many of the paperwork and insurance details will be your source’s responsibil- ity. Import buying works the same way as export selling, that is, the same sorts of paperwork and procedures are followed only in reverse.

Concluding Thoughts on International Business

One of the major mistakes commonly made by U.S. businesspeople (entrepreneurs or major compa- nies) is being insensitive to cultural differences. You’re likely to make some mistakes, but take time to learn at least the basics about the culture you’re dealing with to avoid the biggest errors. Travel guides and U.S. government country reports often offer brief cultural assistance as do books such as Kiss, Bow or Shake Hands and a plethora of “doing business in ———” guides.33

Although international business might seem a little daunting with all the paperwork and regula- tions, small businesses just like yours do it every day. There’s a lot of free or very inexpensive help out there; make use of it.

Location

When you ask real estate agents the best three things to look for in a house, they will tell you, “Loca- tion, location, location.” The same holds true in your business. What location—in particular, good location—means for your business is highly dependent on what your business is, the amount of money you can afford to budget for it, your particular business philosophy, and the marketing niche you are seeking. Let’s start with some general information about location, then move onto specific issues for services (including retailing) and manufacturing businesses. We then discuss some spe- cific choices such as site selection and layout and the buy, build, or lease option.

The first choice, and often only choice, for many entrepreneurs is their hometown because it offers convenience and a familiar setting, and it eliminates a lot of possible family issues. There may also be valid business reasons for this choice: The local banker knows you and is more likely to loan you money; you know your market—the potential customers in the area—and understand their wants and needs; you have seen an unmet need that you can fill; and, for many entrepreneurs, friends and family (usually local) are often the first customers and are great at spreading the word about your business. (Remember that word-of-mouth is often the first method of getting to your customers.)

There may also be some compelling reasons to consider a different location. What are the busi- ness laws like in your area? Local zoning ordinances specify what sorts of businesses are allowed and not allowed in specific locations.34 Certain types of businesses—usually those deemed hazard- ous or that produce foul odors—may be banned or severely restricted. State and local pollution standards, worker’s compensation, wage rates, and other such legislation might increase the cost of doing business to the point that other locations become much more favorable. State and local taxes in particular vary considerably from state to state. For example, Wyoming has no personal or corpo- rate income tax, while California has relatively high rates. On the other hand, certain locations often offer attractive incentives for new businesses ranging from tax credits to low-interest loans, from favorable business laws to business incubators (discussed later). Most of this information can be found on the Internet. Try the state or city business development office (a good place to start is the Federation of Tax Administrators’ state list at www.taxadmin .org/fta/rate/tax_stru.html) or the local chambers of commerce (look in the phone book or at www.uschamber.com/chambers/directory/default to find your local Chamber affiliate). There is also information by state available for your state at business.USA.gov, and the Small Business Ad- ministration offers links to state-based resources at www.sba.gov/category/navigation-structure/ counseling-training. Site Selection Magazine’s website (www.siteselection.com) has a number of tools that can help you find the right location. Many of these require being a registered user, but registration is free.

Other reasons to consider other locations are tied to your customer. Your hometown may not be the best place for you to find your target market customers. Are you close to the people who will use your product or service? Other considerations include population growth or decline (especially in your target sector), income levels, and predicted increases or decreases in income. Is the location expanding economically or slowly dying? Perhaps the best source for this infor- mation is the US Census Bureau. State and local municipality business development offices may also carry such information, but they are likely to be slanted toward attracting new businesses. Being positioned to benefit your customer can also be key. Zappos’s primary distribution hub was placed in Louisville, Kentucky, to be close to a major UPS air cargo hub in order to speed delivery.

Also consider the type of business you are planning. Do you need skilled labor? If so, what areas will provide you with the necessary employees? Do you need to be near raw materials or particular methods of transportation? These issues will help determine your choices. Where are your competitors? Certain industries tend to be clustered in certain regions where they can make efficient use of services and employees. Think of California’s Silicon Valley or the financial district of New York City.

Doing business in your hometown may be perfectly appropriate; however, the cost of moving a company—whether across town or across the country—can be very expensive. It pays to plan ahead.

Service Firms

There are three typical locations for services: at the client’s location, at a mutually accessible loca- tion, and at your firm’s location. Traditionally, services may have been tied to one or another of these, but marketing niches have been carved out by people daring to be different. Typically, dry cleaning and restaurant dining are services provided at a place accessible to both parties, but some dry cleaners now offer pick up and delivery from the client’s home, and not only pizza restaurants offer delivery these days. Thanks to the Internet, video rental like Netflix.com and other services are handled electronically, and the customer and service provider may never meet face to face. Whatever innovative niche you select, there are a few things to keep in mind.

At the Client’s Location

Typically, these services include things such as house or office cleaning, pest control, remodeling, lawn and gardening services, carpet cleaning, and similar services which must be performed at the client’s location. Business headquarters can be a home office with enough room to store and maintain any necessary equipment used in the service. Reliable transportation, preferably modified to organize and store tools efficiently, is imperative. More importantly, the range of your client’s locations must be planned to prevent transportation times from being unmanageable. For example, facing a one-hour drive to a client’s location might mean you have tied up two hours in commuting. If you cannot charge for travel and do not have other clients nearby, it means you have two hours in which you cannot make any money that day.

If you’ve done your homework carefully, you already know the geographic area(s) most likely to use your service. Certain services may be organized into a rotating schedule. For example, a house cleaning service may clean a certain set of neighborhoods on Monday, different set on Tuesday, and so on. In other cases, more remote clients may be charged a transportation fee. In some cases, a mile- age fee may be appropriate for your business (delivery services, for example).

As the firm grows, it may outgrow its home-based headquarters. As your clients seldom, if ever, visit you, you have more latitude in where you can be located and the ability to seek out low-cost space (see site selection section below). Reasonable distance to the clients and adequate storage room for your expanded fleet and equipment are key to choosing a site.

Mutually Accessible Location

Services using this approach often have too much specialized equipment to be readily transported and a need for at least some client involvement. Barbershops, dentist offices, video rental stores, and restaurants are services typically located at a site that is extremely convenient for the client and reasonably so for the owner and employees.

Even though your service may be traditionally located in a mutually accessible area, consider what you might do to make it home-based (see Chapter 5). Your watch repair shop might generate clientele by being located in a shopping center, but will the added sales be offset by the high cost of rent, utilities, insurance, and other payments? Can you offer pickup and delivery and do the work at

home? Your restaurant idea might work as a catering service. Instead of a specialized clothing shop, why not try mail order or Internet-based sales?

Remote Location

In this type of service, face-to-face meetings with the client are infrequent. Typical services that meet this criterion include medical transcription, data processing, fulfillment centers, and some consulting work. These services generally are ideal for home-based businesses. Certain services, for example, fulfillment centers, generally take more space—at the minimum, an attic, garage, or basement. The biggest advantage of these sorts of businesses is that they can be located anywhere in the world. U.S. hospitals, for example, use medical transcription services located in India. One such company, Infoflow/TSVI, operates from a U.S. sales base (which makes handling calls from U.S. hospitals easier) with transcription being done in India, managed there by a co-owner, who is a cousin and long-time friend of one of the two American owners (www.tsviinc.com).35 Other than perhaps some initial sales meetings, all business is transacted via phone, fax, electronic exchanges, or mail.

Manufacturers

What if you are selling a product and not a service? What are your considerations about location now? Where you make the product is really dependent on the product. Some products that do not require a lot of specialized or bulky equipment can be produced at home unless zoning ordinances forbid it. In addition to whatever office space is needed, adequate work space is also required. The basement, a garage, or a home workshop may be adequate for some time. As business expands and as you add employees, it will become awkward if not illegal to continue production at home (see Chapter 5).

Some products require bulky and specialized equipment, utility demands atypical of homes, or sizable warehousing requirements and are never suitable for home businesses. Certain production characteristics—for example, use of hazardous materials and materials with strong odors or noisy operations—may make a home-based business undesirable. Many cities have zoning ordinances prohibiting manufacturing in residential areas. When you start to hire employees, providing the amenities they will expect or that are required by law will usually require moving the business from your home.

Contract manufacturing might be a better option, at least for awhile. In this case, a firm with the capabilities to produce your product is contracted to manufacture it for you, usually for a flat per unit fee and a possible setup charge. Some firms will also assist in marketing and sales as well. Trade magazines in your field often list ads for contract manufacturers. An interesting possibility here is to use sheltered workshops to perform light manufacturing or assembly sorts of businesses. These workshops exist in nearly every state and offer very competitive pricing, often including tax benefits for the business.

Site Selection

Once you have determined the general location of your business, you need to determine the exact location for your operation. What you should look for falls into three main categories: home-based businesses (covered in Chapter 5), high customer contact (e.g., retail), and low customer contact (e.g., manufacturing). Each has certain criteria to be considered.

High Customer Contact Businesses

Businesses with high customer contact include such diverse operations as medical or legal offices, restaurants, retail establishments, dry cleaners, and other businesses that are highly dependent on being convenient to the customer. For these operations, there are three critical site selection consid- erations: traffic, customer ease, and competition.36

First of all, you want a site that is convenient to your target market and to enough of the customers to make you profitable. If you are considering a franchise, many will offer site criteria to help you make your selection. If you are going it alone, consider the population density of the area and how many of the people in the area meet your target market criteria. The U.S. Census Bureau website

and a number of free nongovernment sites like www.zipwho.com and www.city-data.com can be a good starting place for free information. See Skill Module 11.2 and the Online Learning Center. If plowing through the Census Bureau website doesn’t get you what you want, several commercial services mentioned in Chapter 10 including Prizm and ESRI will sell you data about the population in a particular zip code for several hundred dollars. More detailed and specific commercial infor- mation is also available and can range in price from several thousand dollars to over $100,000 and is probably not an option for most entrepreneurs.37 Again, the website of Site Selection Magazine (www.siteselection.com) mentioned above has tools and additional articles that can help. Another consideration is the presence of traffic generators in the area. These are other busi- nesses that draw customers to the area and may include supermarkets, office complexes, schools, and malls. If the customers are drawn there, for example, to grocery shop, might they not stop at your video store next door? Reflect on the type of customer you are seeking and the likelihood of these businesses in attracting them. If you want a teen customer, a location near a high school works well. If you are looking for evening clientele, offices that close at five aren’t the right traffic genera- tors for you. Drive around likely areas and locate possible sites. Visit during the hours you anticipate to be peak times for your business and evaluate foot and car traffic.38 Look at the crowds or lines in similar businesses and decide whether there is room for you. If most businesses seem empty, you probably will be too.

Intersections of major streets offer high automobile traffic, but because of divided roads and other barriers, they may not make it easy for your customers to get to you. Businesses along inter- states have high visibility, but the frontage roads can be so convoluted that the clients seek easier- to-get-to competitors. Even some malls and shopping centers have such tortuous access problems that customers avoid them when possible. Sometimes entry is easy, but getting out is difficult. For example, no signals for left turns when most of the traffic needs to head in that direction can turn off customers.

Parking is also an issue. Is it conveniently located to your place of business? Do customers need to cross busy streets to get to you? Is parking free or paid? Are parking areas well lit and safe? Are there wheelchair ramps or other accommodations for disabled customers?

Customers have strong ideas about how far they should have to drive for things. These vary some- what from major metropolitan areas to more rural towns and from one region of the United States to another. Generally convenience stores, fast-food restaurants, and gas stations need to be close to con- sumers. Grocery stores and banks can be somewhat farther away, but not much. Discount stores and midscale restaurants can be even farther away, while specialty stores, upscale restaurants, and malls can be relatively remote. Where does your business fit? How far are customers willing to drive to get to you?

Malls are great traffic generators, but space at malls is costly. If it is appropriate for your product, you might consider a kiosk or cart in the mall as a way of testing the market and location without making a large investment.39 Neighborhood shopping centers (those anchored by a supermarket, drugstore, or major retailer) or strip centers (shopping centers without major anchors) are more modestly priced, but lack the drawing power of malls.4 Generally, competition in the area can draw away valuable clients, but this is not true in every case. Many cities have a restaurant row, an antique district, or an automobile mile (as well as other business types) where many competitors cluster. Clients wish to comparison shop or have choices and are drawn to areas where they can see several similar businesses at one time. Locating far from these will mean that you are free from competition, but this benefit may easily be offset by the cost of at- tracting customers to a different place. Additionally, you can capitalize on competitive advertisements that bring potential customers to the area. Your competitor’s high-budget TV ad might get customers to the neighborhood, but the “sale” sign in your window may get them to stop at your place instead.

Another instance when you want to be near competitors is when your business provides a strong contrast to the competition in the area. Do you offer better assistance, additional services, unique advantages, or other benefits that can easily be seen by customers? They may be drawn to the area by a well-known competitor’s name, but they may select your establishment instead because of what you offer that differentiates you.

Low Customer Contact Businesses

Generally low customer contact businesses are manufacturing businesses, the headquarters of client location-based services, or remote location services. Customer access is relatively unimportant. More critical are access for your employees, reasonable cost, and the space necessary to do your business. Certain manufacturing operations will need adequate utilities and specialized transportation too. Unless you plan to use some of this space as a high-traffic showroom, commercial space in a business park or light industrial park might be appropriate. These parks are located near major transportation routes, often have rail spurs, and are designed for industrial utilities; that is, they have adequate electricity, gas, water, waste water treatment, and the like. Frequently, support businesses will be located in or near the park such as warehousing, shipping firms, copy centers, and office supply stores. Industrial or business park space tends to be cheaper in smaller cities and rural towns than in major metropolitan areas. If distribution to customers can be arranged, these locations are certainly cost-effective.

Some major metropolitan areas offer empowerment zones. These zones, often in economically depressed areas, offer businesses low-cost space and tax advantages for locating there. For more information, see www.rurdev.usda.gov/BCP-EZEC-Home.html or www.siteselection.com.

A third possibility is a business incubator. The National Business Incubator Association (www .nbia.org) shows over 1,400 business incubators in North America sponsored by government, uni- versities, or private investment groups. These business incubators are specifically designed for the entrepreneur, and, in addition to relatively low cost space, they offer a multitude of small business support services. These services range from copy machines, faxes, and conference rooms to ac- counting, finance, and consulting services. Since the building is populated by other entrepreneurs, it’s a great place to talk to others who might have had some of the same problems or to brainstorm new ideas. Most incubators require a stake in your company in exchange for their assistance— maybe as much as 50 percent—and often have quite a bit to say about how you run your business. Opinion is mixed on how much real help a company can get; just like all businesses, there are better and worse incubators, so do your homework.42

General Comments on Site Selection

How do you go about finding potential sites? Looking for “for sale” and “for rent” signs is a start, but not all space will be advertised that way. Just as a good real estate agent can warn you about the pro- posed freeway project going through the backyard of the house you are considering or let you know about houses not yet listed but likely to be, an experienced real estate broker will also be able to assist you in your search for your business location. Many have relationships with landlords that can work to your benefit. They are also likely to have at least some of the market statistics you may need to help you decide if the location is right for your business.43 Level with them about what you can spend. You have your business plan and know the cost per square foot you can afford and be profitable. If you are looking at property more expensive than that, you’ll need to cut corners elsewhere.44

Leasing

It is rare that a small business start-up buys its first location. The reason is financial. It takes a lot of money to buy a place, and beyond that a long-term commitment to pay for it. For most small busi- nesses, it is not a worthwhile risk. It makes more sense to rent or lease your facility to leave more money for other aspects of the business. But leasing is one of the most complex of the issues an entrepreneur faces when starting a business.

In reality, most landlords (especially those from big national commercial real estate and mall companies) have fairly standard contracts which they don’t like to change. These typically start out as very pro-landlord. That said, in many cases they are also likely to accept certain standard clauses that are more tenant-friendly. However, it is unlikely they will offer those. You will need to ask for them. In this section you will learn about the major types of tenant-friendly clauses you might want to seek. However, it makes tremendous sense to get a real estate lawyer involved to help you. They should be able to tell you what kinds of clauses are typical, and who else offers them in your area, and if there are any other likely traps in the lease. You can learn how to choose a lawyer in Chapter 18.

You should start the leasing process by looking for locations. You can start using the local news- paper’s or business journal’s classified ads for commercial real estate. If you know of a great loca- tion, but there is no “for rent” or “for lease” on it, consider asking the owner or current renter about subleasing a portion of the location. If your product or service complements the current tenant, you could find a home. Local real estate websites may also have listings, and there are national websites like LoopNet.com which compile listings from a variety of sources. There is a how-to video for

using LoopNet on the Online Learning Center. You may contact a real estate agent with commercial experience to help you, but make sure you know how the agent is making his or her money. You want the agent to work in your best interests.

It helps to have two or three possibilities identified before you begin negotiating leases. This is a use of the idea of the power of rivalry from Chapter 7. This gives you a basis for comparison, and an alternative for leasing when negotiating. But note that the more alike the properties, the greater your power at the negotiating table. Also, if you are opening a franchised operation, you will want to contact your franchisor before you start looking for locations. Most franchisors have specifications for locations, and advice on costs and other features. They often have a lease review department to help you with this process.45

The best way to start thinking about the clauses is to separate them into those clauses related to choosing a property, day-to-day operations, and endings. In reality, though, all of these clauses will get negotiated when you and the landlord discuss the lease agreement.

There are several issues that could pop up as you are narrowing your choices and trying to decide which location and deal is the best for you. These are:46

?          “As is” versus compliant property: If the location has problems, who should fix them? The landlord would like to have you do it, and will try to push you to accept the property “as is.” You, of course, want the landlord to fix it before you move in, so you would ask the property to be “in compliance with all applicable laws, rules, and regulations.” Realize that the landlord will get back the money paid for repairs eventually, through fees or higher rents, but it can save you money on the front end.

?          HVAC: This is the commercial jargon for “heating, ventilation, and air conditioning.” It can be the most expensive type of repair, and since it is mechanical, one of the types most likely to go wrong. The landlord wants it to be your responsibility. You want it to be the landlord’s. This is particularly important if the location has a central air system so everyone shares the same air conditioner and heating equipment. This type of equipment needs to be the landlord’s responsibility. For any type of equipment, you want the landlord to at least guarantee the first year of operation.

?          Signs: Called “signage” in the business, it can be on the street, on the building, or around the door. You probably have ideas for your signs. If you are a franchise, you face signage require- ments from the franchisor. You want a landlord who will work with you on the size, place- ment, and visibility of signs. Make sure you have written

agreement on the signs and, if possible, a clause that says approval cannot be unreasonably denied for future changes.

There are other benefits possible if you know to ask for them. Often these are called concessions. Examples include “leasehold improvements,” which are permanent changes made to the loca- tion to fit your business’s needs. You cover these by seeking a “tenant improvement allowance” or “construction allowance” which are rent dollars (typically $5 to $25 a square foot) they agree to let you put into improving your location.47 This amount should be based on a firm estimate from a construction profes- sional. Another concession is a “rent-free use period” which cov- ers the time while you prepare your location prior to opening.

As you start thinking about how you would operate day-to- day, there will be several different issues you will face. These include:

?          Hidden charges: Many leases include charges that do not have to be listed in the term sheet given you for the prop- erty. An example is a monthly operating expense. This may be justified. You may be leasing a thousand feet of space, but there are also common areas, restrooms, parking and the like that the landlord keeps up for everyone. Ask spe- cifically for a list of all expenses or charges for which you will be liable, and compare to other locations. Also make sure to learn the conditions under

which you can lose all or part of your security deposit. ?     Use of premises: You specify in the lease what you will sell or do at the leased location, but

too exact a description could prevent you from expanding the products or services you offer. Try to add the clause “and related goods and services” to any description you give to provide reasonable flexibility.

?          Noncompete: If you have a pet store in a strip mall, you’d like to be the only one there. For many types of businesses, you negotiate a clause limiting the landlord’s ability to lease to a competing business. This can be just for your facility or for a radius. You should expect to pay for the exclusivity and the farther you want it, the more it will cost. Note that competition in terms of different types of restaurants, or another store selling some of your products, is still likely.

?          Hours of operation: Mall landlords want stores open the same hours and days, and landlords of other types of properties may have some of the same desires. You need to negotiate times that fit your business model. Look for stores in the landlord’s properties that match your hours. Precedence helps here.

?          Rent default: When you are late paying rent, all sorts of penalties and problems emerge. It also hurts your credit rating. Some leases require the renter to keep track. Ask to change the lease to specify the landlord needs to alert you immediately on the rent due date in written or telephonic (usually fax) form, and get the 5–10 day default period for paying rent before default starts from that notice.

?          Moves and remodels: There may be a clause that gives the landlord the right to move your business elsewhere, at their discretion. If this is to update or repair an area, fine, but what if it is to get a higher-paying tenant in your space? Set time limits and return rights on any forced move. Similarly, if the landlord decides to remodel, you should not have to pay for it.

As an entrepreneur negotiating a lease, you need to prepare for the good and the bad as time moves along. The good is the prospect your business grows and you need more space. The bad is that your business doesn’t do well, and you need to get out of your lease before the end of the term. Dealing with these issues is like worrying about a prenuptial agreement while you are taken with the romance of getting married. It might be painful to imagine, but it is important to keeping what is yours.

If your business falters, you are obligated to continue paying your monthly rent and fees for the duration of the lease. A landlord has the power to let you out of a lease, but he or she is only likely to do this if a better tenant is lined up. Once you tell your landlord you may need to vacate the prem- ises, she or he is supposed to look for a replacement tenant, but not all do, or do a good job of it. If you can find a replacement tenant, it can help this process along, but you need to make sure there is a clause that lets you sublease the property, and further, that the landlord can’t unreasonably deny the sublease. If your pet store is closing, finding a dress shop is probably reasonable (as long as it doesn’t violate some other tenant’s noncompete clause), but finding an adult book store is probably not a reasonable replacement.

Three other ways to handle an early termination are to set up a short-term (e.g., 6 months) lease initially, ask for a bailout clause, or for a “cap” or limit on how long you need to continue paying rent. The bailout clause lets you out of the lease if sales do not meet an agreed-to level. You negotiate this with the landlord up front. To understand a cap, think about a three-year lease. If you close down after only six months, you are still obligated to pay 30 more months’ rent. With a one-year cap you are only obligated to pay 6 months’ more rent. This is like a type of insurance, and like insurance policies, you will probably have to pay a slightly higher rent from the start to cover this possibility.

Realize there can be problems you face caused by the property itself. What if you move into a mall with a major chain like Sears, Penny’s or Macy’s, or a strip mall with a major supermarket or discount store. Part of what you are paying a premium for is the traffic and reputation these anchor stores bring. What if they leave? Your location’s quality could dramatically drop. To get out of your lease under these unfortunate circumstances, you want to ask for a cotenancy clause.

Although we’ve segmented a renter’s concerns by stage of the leasing process, all of these issues need to be negotiated at the start when crafting a lease. Although landlords often start with a lease they call “standard,” nearly everything about it can be negotiated. But be fair; the space may mean a lot to you, but it is a drop in the bucket to large commercial realtors. You can learn more about negotiating in general in Chapter 18, but there are some special considerations for lease negotia- tions. Because so many aspects are potentially negotiable and areas have different norms for what are typical tenant-friendly clauses, work with a real estate lawyer of your own to help you in the negotiation and phrasing of the lease terms.

Layout

Since so much of this is particular to the type of business you are in, what you’ll read below is a general guide. Check out competitors or similar types of businesses to see what you like and don’t like, what seems to work well, and what seems to cause a lot of problems. In addition, certain categories—restaurants and retailing, for example—have numerous books from college textbooks to do-it-yourself books, like the “For Dummies” series. Try your local library or bookstore.

The layout of a potential site must be considered carefully. Is the building setup appropriate for your use? A restaurant will have different needs than a retail area or a manufacturing plant. The amount of area allocated to the “front room” (e.g., eating or retail areas) versus “back room” (storage, kitchen, warehouse, and office areas) needs to be adequate for the purpose of your business. If you are operating a restaurant or retail operation, how important is space in the front room? A coffee shop or fast-food restaurant squeezes in more customers per square foot than a gourmet restaurant. Do you need specialized areas, such as a kitchen or laboratory that are expensive to retrofit into existing buildings? Is there adequate storage area? How much dock space is appropriate for your business? A manufacturing firm usually needs more dock space and storage than a retailer or a restaurant, while a service company may need very little of either. Retail operations need display windows, while manufacturers do not. For restaurants or other services, this need varies. Is there room for expansion should the business grow? Remember: Moving can be expensive. A good strategy is to rough out the desired layout of your operation on graph paper to get a basic idea of the square footage needed and how it should look. What exactly you want may not be out there, but you’ll be able to see what’s close and what’s impos- sible to live with.

Consider the amenities that are already there. Carpeting may be appropriate for a retail area and perhaps the office or dining area of a restaurant, but not appropriate for manufacturing or cooking areas. What about the walls? What sort of ceilings and lighting is appropriate? Again, a visit to the competition will help you decide what works and what doesn’t, as well as where you want to be different.

Check the exterior, too. Is the building attractive and inviting? Are the sidewalks and landscaped areas in decent shape? Is parking adequate, well lit, and safe? Is employee parking separate from customer parking? What about handicap accessibility? The 1990 Americans with Disabilities Act (ADA) specifies that businesses (with few exceptions) must accommodate persons with disabilities. Many buildings have been brought up to code, and all new construction should meet the require- ments of this act, but keep your eyes open.

Once the building has been selected, how you lay out the interior also needs to be considered. While retailers, restaurants, offices, and manufacturers all have different layout needs and consider- ations, two facts hold true: (1) layouts need to be designed so as to eliminate unnecessary and exces- sive employee movement, and (2) the layout says something about who you are to your customers, employees, and visitors. In retailing, this last factor is called atmospherics. While the opportunities for variation are limitless, let’s consider the major types of retail and manufacturing layouts as well as what atmospherics might mean to a business.

Traditionally, manufacturing processes are laid out in one of two formats: production line layout and process layout displayed in Figure 11.2. In the production line layout, material flows in on one side of the operation and continues to the other end of the operation. Most assembly manufacturing is done this way, often with conveyors moving subassemblies from one station to another. Although a rather rigid flow, it works well for mass production and high-volume manufacturing. The second method, process layout, groups similar machines/or functions together, not unlike a typical machine shop. This format is much more appropriate for lower-volume, flexible manufacturing.

There are also two traditional layouts for retail operations, which are shown in Figure 11.3. The first one, the grid layout, has aisles running from the front of the store to the back like the typical grocery, discount, or convenience store. It’s a very efficient and organized layout although it lacks some visual impact. The second layout, the free-form layout, alleviates this problem. In this layout, the store is laid out in sections with aisles that angle or meander through the store. This is the layout more typically found in upscale department stores, clothing stores, and the like.

Atmospherics include all the ambiance items that might be considered in your business. An up- scale women’s clothing store is likely to have wider aisles, deep carpeting, soft “elevator music,” indirect lighting, and, perhaps, a lightly perfumed aroma. These are appropriate atmospherics for the target market. A shop catering to edgy teen fashions may be done in black and chrome with loud rock or alternative music and strobe or black lights. Both of these send a message about whom the store is likely to appeal to. Restaurants use atmospherics, too. Compare a family restaurant to a gourmet restaurant to an ethnic restaurant. Services and the office and public areas of manufacturing firms do this as well in their choice of colors, furniture styles, and background music.48

Build, Buy, or Lease49

Ultimately, there are three choices available to the business: build, buy, or lease. Building has the advantage of having the perfect layout in the perfect location and the street appeal of a new build- ing, but it is costly and slow. Buying something already in existence shortens the time and may be

somewhat cheaper, but any remodeling or retrofitting that needs to be done may overshadow any time or money savings. In both cases, though, business owners have an asset that they can leverage, as well as the depreciation tax advantage. They have the flexibility to make the changes they need and know what the long-term costs will be.

Leasing, which we detailed earlier in the chapter, is an option with a considerably lower initial cash outlay, and it is often the only feasible choice for new businesses. Lease expenses are deduct- ible business expenses. One of the main downsides of leasing is that you are usually limited in the renovations you can do. Another one is that leases tend to get higher with each renewal contract, and your landlord may choose not to extend a lease, forcing you to move before you are ready to do so.

The issues of location and distribution are decisions that business owners make only occasion- ally. Many businesses operate from the same location for their entire existence. Distribution deci- sions may come up more often. For example, a business started on eBay develops its own website, and then grows into a store in the city’s commercial center. Regardless of how often these decisions are made, they are central to the success of the small business, because placing a business in the right location and equipping it with the right channels of distribution are essential to finding and connecting with customers. Done right, managing the issues of location and distribution can turn an average firm into a major success.

1. According to this chapter, what are three key considerations in determining the location of your business?

2. According to this chapter, what are the typical locations for service businesses?

3. What are the advantages and disadvantages of buying, building or leasing your business’ facility?

In: Operations Management

Question 1. Create a swat analysis on the HelloFresh meal kit organisation in Australia.

Question 1. Create a swat analysis on the HelloFresh meal kit organisation in Australia.

In: Operations Management

What conditions or circumstances in your own department should you consider before deciding to reduce staff

What conditions or circumstances in your own department should you consider before deciding to reduce staff

In: Operations Management

Topic: Business Ethics . 1. Introduction (100 words) 2. Importance of Business Ethics (150 words) 3....

Topic: Business Ethics
.
1. Introduction (100 words)
2. Importance of Business Ethics (150 words)
3. Importance of Business Ethics (150 words)
4. Example of business ethics (100 words)
5. Conclusion (100 words)
.
Note: please do not copy from internet plagiarism is strictly prohibited

In: Operations Management

Need some assistance or ideas with this discussion question. Thanks in advance What are barriers to...

Need some assistance or ideas with this discussion question. Thanks in advance

What are barriers to communication, and how do you remove them?

In: Operations Management

Mr. Alex is the head of operations at TractParts Pvt. Ltd., a well known Indian manufacturer...

Mr. Alex is the head of operations at TractParts Pvt. Ltd., a well known Indian manufacturer of pumps, engines, electric motors and transformers. The company is one of India’s earliest industrial groups established in the 1980 which has grown to be a big player in the Indian manufacturing industry. TractParts under the supervision of Mr. Alex has been supplying modern tractor engines to the leading tractor manufacturing firms like Sonalika and John Dear. The bulk of demand for tractors comes during the months from October to March. As a result of this seasonality in demand, the demand for the tractor engines also keeps fluctuating throughout the year as shown in Exhibit 1. Exhibit 1 shows the orders placed with TractParts by the firms Sonalika and John Dear in advance based on their own forecasting models.

Exhibit 1:

Month Sonalika John Dear Total
April 500 400 900
May 300 200 500
June 100 150 250
July 125 100 225
August 200 150 350
September 300 350 650
October 1500 1450 2950
November 3000 3200 6200
December 3200 3500 6700
January 3800 3500 7300
February 2200 2150 4350
March 2200 2400 4600

To meet the demands, the company can follow chase strategy or level strategy In the chase strategy, the monthly production takes place as per the total demand in that month and to follow this strategy, the company can hire new employees during higher demand and fire the employees during lower demand. This strategy basically saves on the inventory carrying cost and hence the total cost. In the level strategy, the company produces the average demand in a month and the excess units are stored as inventory and all stock outs are backlogged and supplied from the following month’s production. This strategy particularly saves on the employee hiring and firing cost. Moreover, the backorder quantity is also directly proportion to the demand placed by the tractor manufacturing firms in order to give equal treatments to them.

At the beginning of the period, there are 100 workers in the TractParts manufacturing facility and a total of 200 working hours (8 hours/day * 25 days/month) are available per worker per month. Due to the strict government policies, the company canny allow overtime.

Mr. Alex is concerned about the fluctuating demand and understands that these companies can change their demand pattern based on the promotion and discount offered to them. In order to enhance the total profit, Mr. Alex wanted to optimize costs while meeting the demand pattern. He had therefore asked to one of his associates to find out the associated costs and the cost structure. The associate presented cost structure for the engine manufacturing line as is shown in Exhibit 2.

Exhibit 2:

Component Cost Unit
Material Cost 140 $/unit
Inventory Cost 15 $/unit/month
Stock-Out Cost 20 $/unit/month
Hiring Cost 450 $/worker
Firing Cost 750 $/worker
Labor Hours Required 4 per unit
Regular Labor Rate 4 $/hour
Beginning Inventory 750 units
Desired Closing Inventory 400 units
Selling Price 280 $/unit

Mr. Alex had asked the associate to find out the possibility of discount that could be offered to the tractor manufacturers. Mr Alex was informed that at max 10% discount could be given to them and as per company policy, discount would be offered for only one month. The associate also pointed out that whenever such kinds of discounts are offered, the tractor manufacturers have a tendency to order more in that month. However, the order size for following months is significantly reduced compared to the previous month.

After going through some previous data, Mr. Alex has made some observations. For Sonalika, 10% decrease in price for a particular month results in 45 % increase in the demand for the same month followed by 15% decrease in demand for the next two months. And in the case of John Dear, 10% decrease in price for a particular month results in 80% increase in the demand for the same month followed by 25% decrease in demand for the next two months. However, Mr. Alex also observed that if the TractPart offers a discount in the last 2 months of the financial year, there is no change in the demand pattern since there is a very fixed demand of tractors in the end of season.

Mr. Alex faced a unique problem as the TractParts had proven itself over the years and was considered a symbol of quality, reliability and accountability. Being a part of this value system, Mr. Alex knew that any unfair treatment with the tractor manufacturers would not be tolerated. Mr. Alex has a meeting with the company’s Sr. VP the next morning. He is concerned about the production policy to be adapted and discount to be given offered to increase the total profit. Please help Mr. Alex to take the decision focusing on the following questions.

Questions:

1. Estimate the profit made by TractParts when it follows the level strategy and no discount is offered to the tractor manufacturing firms.

2. Estimate the profit made by TractParts when it follows the chase strategy and no discount is offered to the tractor manufacturing firms

3. Estimate the profit made by TractParts when it follows the level strategy and a 10% discount is offered to the tractor manufacturing firms in October.

4. Find out the month having the peak demand in which 10% discount can be offered to the tractor manufacturing firms, when TractParts follows the level strategy. (Hint: Estimate the profit made by TractParts when it follows the level strategy and a 10% discount has been offered to the tractor manufacturing firms in various months.)

5. Estimate the profit made by TractParts when it follows the chase strategy and a 10% discount is offered to the tractor manufacturing firms in October.

6. Find out the month having the peak demand in which 10% discount can be offered to the tractor manufacturing firms, when TractParts follows the chase strategy. (Hint: Estimate the profit made by TractParts when it follows the chase strategy and a 10% discount has been offered to the tractor manufacturing firms in various months.)

I REALLY NEED HELP WITH 4 AND 6. PLEASE INCLUDE EXCEL SHEET. THANK YOU IN ADVANCE.

In: Operations Management

The US President Donald Trump and his advisors have repeatedly said that they intended to get...

The US President Donald Trump and his advisors have repeatedly said that they intended to get rid of the US trade deficit.

Question 01: As of April 8th 2018, list the goods and the countries for which the US has decided to create new tariffs. For these goods, what are the amounts currently imported by the US? (Words 250)

Question 02: List the US goods for which China has decided to create new tariffs. For these goods, what are the amounts currently imported by China? (Words 200)

Question 03: Assume that the new tariffs will decrease both US exports to China and Chinese exports to the US by 30% (only for the targeted goods). Building on your answer on questions 1 to 4, what would be the impact of the new tariffs on the US-China trade deficit? Support your answer with numbers (Words 200)

In: Operations Management

Please read the article and answear about questions. The Five Paths to Business Ownership There may...

Please read the article and answear about questions.

The Five Paths to Business Ownership

There may be “50 ways to leave your lover,”2 as the song states, but there are only five ways to get into small business management:

?          You may start a new business. ? You may buy an existing business. ?        You may franchise a business. ?    You may inherit a business. ?            You may be hired to be the professional manager of a small business.

Although everyone gets into business by one of these five paths, the specific details of going into business are unique to each person.3 Start-ups may be deliberate, well planned, and financed. On the other hand, many start-up businesses “just happen.” Often a compelling hobby slowly morphs into a profitable business, or a chance occurrence leads to a new busi- ness venture. Purchases of existing businesses may occur in any number of ways, from cash purchases to “earn-outs” in which the business is bought over a period of time with money earned from the business. Franchises may range from “turnkey,” in which every part of setting up the business is handled by professionals, to those in which the only thing that is franchised is the right to use the business name. Some business managers work their way to the top from a beginning part-time employee position. Other professional managers are recruited to become the chief executive. It is common for hired management to use leveraged buyouts or employee stock option plans to purchase the firms for which they work. This chapter examines the details of these paths of entry into small business: start-ups, purchasing, franchising, inheritance, and professional management.

Starting a New Business

Starting a new business is at once the most risky path into business and the path that promises the greatest rewards for success. The success rate of start-up businesses is a matter of some controversy. As we note in Chapter 1, while the Small Business Administration (SBA) reports that 66% of new employers survive two years or more, 50% survive at least four years, and 40% survive more than six years,4 those businesses that get help last much longer. Eighty-seven percent of start-ups that begin in business incubators are still in operation five years later,5 and the survival rates for students from entrepreneurship programs and entrepreneurs seeking help from Small Business Development Centers are about twice that of businesses in general.6 Even for those who get help in starting their business, one must admire the courage and optimism of a person who chooses to start a new business (see Figure 6.1). Despite the rather high failure rate, creating a start-up is not, as some maintain, a triumph of hope over reality. Many businesses that end do so not because they failed, but because the owner took advantage of a better opportunity.7 The rewards, both financial and personal, of starting a successful new business can be most impressive.

Advantages of Start-Ups

There are many reasons that people choose to start a new business rather than purchasing an existing business, franchising, or being an employee:

start-up

A new business that is started from scratch.

buyout

The purchase of substantially all of an existing business.

LO2

Compare the rewards with the pitfalls of starting a new business.

?

A start-up begins with a “clean slate.” There are no existing employee problems, debts, law- suits, contracts, or other legal commitments that must be satisfied.

?          A start-up provides the owner with the opportunity to use the most up-to-date technologies. There are no “legacy” locations, buildings, equipment, or software that can hamper productivity. ?    A start-up can provide new, unique products or services that are not available from existing businesses or franchises. Existing businesses and franchises exist because of their success in

providing proven products and services. ? A start-up can be kept small deliberately to limit the magnitude of possible losses. A

purchased business or franchise requires immediate and constant cash flows to meet ongoing obligations.

Disadvantages of Start-Ups

Offsetting the advantages of starting a new business are several disadvantages:

?          A start-up business has no initial name recognition. An existing business or franchise has in- vested in developing its market. The brand rights can guarantee immediate acceptance of the business.

? A start-up will require significant time to become established and provide positive cash flows. An established business or franchise has built-in customers to provide immediate cash inflows.

?          A start-up can be very difficult to finance. Established businesses and franchises provide im- mediate assets, sales, and cash inflows that can be used to obtain financing for the business. ? A start-up usually cannot easily gain revolving credit from suppliers and financial institu- tions. An existing business or franchise often has lines of credit that transfer with the business. ?        A start-up may not have experienced managers and workers. Established businesses and fran-

chises provide experienced workforces, training, and management support.

Creating a New Business

The vast majority of start-up businesses are “me-too” enterprises. The business idea is simply to create another occurrence of a common business: a beauty shop, a restaurant, a bar or lounge, a rock band, a sign company, plumbing service, yard care, and so on. Starting a copycat business provides some protection from business failure. It is not necessary to define the business to the market be- cause everyone knows what a beauty shop, restaurant, or lounge provides.

On the other hand, this type of start-up can be very difficult to differentiate from other similar businesses. Often, the only competitive advantage may be the location of the start-up. This is why owners of common businesses go to so much effort to try to make a difference between their busi- ness and other, essentially identical, firms. An example is how Morton’s of Chicago and the Ruth’s Chris steak houses operate. Careful sampling of each firm’s steaks reveals no significant difference in price, quality, tenderness, size, or taste. The restaurants have similar menus and wine lists. Each, however, has distinctive interior decorating and presentation of their meals. Morton’s brings a selec- tion of huge uncooked steaks to each table for patrons to make their choices. The cooked steaks are served on oversized china plates. Ruth’s Chris provides equally large steaks, selected from a printed menu, served on plates that are heated to a high temperature to create the trademark “sizzle.”

Amy Conti, of San Antonio, provides an example of an accidental business start-up. She initially did babysitting for a few friends. When demand for her services exceeded her available time, she began having some of her friends, whom she knew to be competent, sub contract for her. She re- quired her “subs” to have advanced Red Cross first-aid certification and she closely supervised their sitting engagements. Her strict standards and ability to pay for standby sitters has made her service unique. The high reliability of her service and the confidence that parents have in the abilities of her sitters have made a business that is usually considered to be a part-time thing for the girl next door into a professional and profitable business for its founder.

The specific concept that leads to a start-up business usually comes from the experience of the person starting the business. Two-thirds of all start-ups are based on ideas from prior work experience, hobbies, and family businesses.12 These businesses are generally more likely to succeed than are businesses based on ideas from other sources. Research into the indicators of successful start-ups shows that one of the best predictors of success is the level of experience of the founders. Random events, suggestions from friends and associates, and specific education courses are the sources of only a relatively few start-up ideas.

Increasing the Odds of Start-Up Success

The probability of creating a successful start-up is increased greatly when the founder has certain attributes and when the founder takes certain actions. Doing the following things has been shown to be the most effective route to success (see Exhibit 6.1).

?          Start the business in a business incubator: A business incubator is an organization that pro- vides financial, technical, and managerial help to start-up businesses. Most incubators are asso- ciated with economic development agencies and are integrated into the community. Incubators provide access to angel investors, public grants for seed money, and technology support.

Business incubators are created to strengthen the local economy by helping create jobs through the establishment of successful small businesses. But incubators do much more than just create new jobs. They aid in the commercialization of new technologies, the revitaliza- tion of distressed neighborhoods, and the creation of wealth. The best incubators provide inexpensive office space with full-time on-site managers who can assist the entrepreneur in many ways. Incubator participants share common office services, such as telephone answer- ing, and production and copying of documents. Perhaps most important, incubators pro- vide legitimacy by furnishing the business with a location and with established business processes.

?          Take part in a mentoring program: Successful business owners and corporate executives do well by doing good. They can, by helping others, in a way repay the many people who helped them achieve success. Executive volunteers contribute their time and energy to assist- ing start-up and struggling small businesses as a public service. Because of their experience, mentors can help you avoid mistakes and make good business decisions.

?          Have a detailed start-up budget: The start-up phase is usually the most difficult time you will have in business. You are required to make myriad decisions concerning location, prod- uct, target market, promotion, sales, and all the facets of starting and operating a business. And you must juggle all these demands while simultaneously seeing that you have enough cash. A detailed start-up budget provides a road map for necessary spending during the start- up phase, when cash inflows are likely to be small or nonexistent. Companies that carefully plan their start-up activities and avoid any unnecessary spending are much more likely to succeed.

?          Produce a product or service for which there is a proven demand: It is an unfortunate fact that most new products and services fail to gain acceptance. NewProductWorks of Ann Arbor, Michigan, maintains a “failed product museum” that contains samples of over 73,000 items, all of which were commercial failures. During the dot-com bubble of 1998–2001, many busi- nesses started with novel and completely untested products and services. Examples are Beenz .com, which was started to facilitate Internet transactions; webvan.com and yourgrocer.com, both of which sold groceries online for home delivery; and estamp.com, which offered online purchasing of U.S. postage, to be printed on the user’s printer. All four of these businesses failed to gain success with their products. None of these businesses survived the “dot-com” bust of 2001, although the domain and patents of e-stamp.com were purchased by the cur- rently operating company, stamps.com.

Large corporations, such as Procter & Gamble or Sony, spend millions of dollars annu- ally testing the market acceptance of new products. Despite their huge resources and years of experience, they regularly introduce products that fail. (Are you old enough to remember “New Coke”?) Your start-up business will not have either the experience or the resources to absorb the loss from product failure. By producing a product or service for which there is a proven demand, the risk of product failure can be reduced or eliminated.

?          Secure outside investment: Securing outside investment accomplishes two things: First, the process of obtaining investment funds means that your business will be critically examined by outsiders who have no vested interest in your idea, product, or service. Second, the fact that you were able to convince outsiders to invest in your business indicates a level of belief in the business and you that provides legitimacy.

? Start with more than one founder: Starting with more than one founder provides the business with more experience, skills, and resources than can be furnished by a single indi- vidual. Having more founders in the business also provides an opportunity for synergy, in which the business results are greater than the sum of the input. Multiple founders can also provide a forum for examining ideas, evaluating information, and making good business decisions.

?          Have experience managing small firms: Managing a small business requires attention very much like that displayed by a person spinning plates on sticks. As a performer must move quickly from plate to plate, many demands of small business management require that you have the ability to quickly move from task to task, without allowing any task to ultimately go uncompleted.

The process can be overwhelming for inexperienced managers. Those entrepreneurs who have experience in small business management are more likely to be able to meet the many simultaneous demands of guiding a successful start-up than would a person new to small business.

?          Have industry experience: Each industry has its own peculiarities. Only through experience can you learn the methods, sources, and markets for any specific one. Even simple tasks, such as buying necessary material, can be nearly impossible without industry knowledge.

For example, suppose that you plan to start a quality steak house, similar to Ruth’s Chris or Morton’s of Chicago. Where do you buy prime beef of the required cut and quality? How do you cook the meat? Or, consider making high-tech, lightweight bicycles. Where can you buy titanium tubing? What does it cost? What do you need to cut, shape, and weld it? How will you sell the bikes? Are bicycles sold through wholesalers? Are they sold directly to bicycle shops? Or maybe you want to start a sign company to make sand-blasted signs. Where will you buy the resist material to protect the wood you don’t want blasted away?

The less you know about something, the easier it appears to be. A true expert makes a task seem effortless. Watching Tiger Woods play golf might lead you to believe that it is an incredibly easy game. Just stand up, hit the ball, and watch it fly to the green. Sure it’s easy: So why do fewer than 2 percent of golfers ever make a course par? The same is true of busi- ness. Businesspeople, such as Michael Dell, Scott McNealy, and Warren Buffet, make the process of succeeding in business seem effortless. But if you have been in the business, you know better. Being experienced won’t make your start-up easy, but at least you have firsthand knowledge of how your industry works that will make your task easier.

? Have previous experience in creating a start-up business: “Nothing succeeds like suc- cess.” In the 150 years since Dumas made this famous statement, it has come to be an un- questioned part of our language. It is just succinct enough, just truthful enough, to seem like a universal truth. For entrepreneurs, it is fortunate that the statement is also not completely true. Although one may learn from successes, most learners acquire expertise through a process of repetition, which only occasionally results in successes. One study of entrepreneurs who had successfully created a start-up business found that on average an entrepreneur suffered three start-up failures before achieving success. Thus it is more nearly correct to state that no entrepreneur succeeds without having prior experience in failing.

? Choose a business that produces high margins: High margins, the amount by which sales prices exceed product costs, provide a buffer for lots of mistakes. The single greatest hurdle to a successful start-up is obtaining and maintaining sufficient cash to support both operations and growth. When margins are low, loss of any one sale or customer has an

immediate effect. However, the problem of replacing the lost margin is much easier if you have to make only one or two sales or get one or two new customers to make up for the lost business.

?          Start the business with established customers: When you start with established customers, you know that you will immediately have cash inflows. There are basically three ways that you can go about obtaining committed customers prior to start-up: (1) You can start your new business as a spin-off from your current employer’s business. (2) You can start a business to specifically go into competition with your employer. (3) Or, you can start a business to sub- contract services to your employer or to other established businesses.

(1) Creating a spin-off is a regular business practice that is done by businesses of all sizes and at all stages of development. Some spin-offs are created to get rid of “noncore” activities. By disposing of the noncore activity, the parent firm reduces capital requirements and pro- vides a tighter focus for management on the remaining businesses. Other spin-offs are created when the parent lacks either the interest or the resources to pursue the opportunity. By being spun off, the start-up can gain access to resources other than those of the parent.

(2) Going into competition with your current employer is also a common practice. Of course, this almost always results in resentments and often ends in lawsuits over issues of trade secrets, rights to intellectual property, and abridgment of contractual provisions. You will have to make difficult ethical decisions. From a legal point of view, the contract be- tween employer and employee is satisfied when all wages and other benefits have been paid in return for you accomplishing the tasks for which you were hired. Absent a specific con- tract providing otherwise, neither party, employer nor employee, is obligated beyond this exchange. However, not so easily answered are the questions: (1) Is it ethical to use your employment to build relationships with customers that subsequently can be used to start a new business? and (2) Is it ethical for you to use knowledge and skill received through training and education furnished by your employer to go into business competing with your employer?

(3) Subcontracting services to an existing business is somewhere between doing a spin-off and starting a competing business. Services that are often contracted include sales, janitorial services, accounting, research, and product development. It is a common, accepted practice for the contractual relationship to be created prior to starting a business.

? Build trust in your “story”: Building trust is essential to the success of all start-ups. You must be able to convince suppliers, employees, and, most importantly, customers that the business is now successful and will be in the future. Not only is there an understandable reluctance for people to be associated with a potential “loser,” but customers, vendors, and employees all take risks by doing business with an unknown and unproven start-up.

Suppliers are often reluctant to deal with start-ups, even if you make your purchases in cash. Most new businesses are small compared to established businesses in the same industry. There is a good reason why you, as the owner of a new business, would prefer to make numer- ous orders of small quantities of the goods and services you need. Doing so reduces cash flow requirements and reduces the risk of your being stuck with old or obsolete inventory. For the vendor, however, accepting your frequent small orders greatly increases the cost of providing goods and services to you. Most vendors, especially wholesalers, work on very small margins. The cost of accepting and filling numerous orders for a new customer may well make such business unprofitable. It is, therefore, essential that the vendor believes in your eventual suc- cess and that you will become a valuable customer in the future.

Employees take on significant risks when they go to work for a start-up business. Not only may the start-up fail, but frequently the cash flow problems of start-ups cause payments for wages to be late or missed entirely. This is one reason why so many start-ups offer stock options and stock bonuses to employees. The start-up doesn’t have enough cash to pay high wages right now, but if it’s successful, employees will share the rewards in the future.

Customers can similarly be at risk when purchasing from a start-up business. In the event that the start-up fails, there is no recourse for warranty problems, for maintenance, or for up- grades to the product. This risk is especially acute when the product or service of the start-up affects the core business of its customers. For example, the San Antonio Bed & Breakfast

immediate effect. However, the problem of replacing the lost margin is much easier if you have to make only one or two sales or get one or two new customers to make up for the lost business.

?          Start the business with established customers: When you start with established customers, you know that you will immediately have cash inflows. There are basically three ways that you can go about obtaining committed customers prior to start-up: (1) You can start your new business as a spin-off from your current employer’s business. (2) You can start a business to specifically go into competition with your employer. (3) Or, you can start a business to sub- contract services to your employer or to other established businesses.

(1) Creating a spin-off is a regular business practice that is done by businesses of all sizes and at all stages of development. Some spin-offs are created to get rid of “noncore” activities. By disposing of the noncore activity, the parent firm reduces capital requirements and pro- vides a tighter focus for management on the remaining businesses. Other spin-offs are created when the parent lacks either the interest or the resources to pursue the opportunity. By being spun off, the start-up can gain access to resources other than those of the parent.

(2) Going into competition with your current employer is also a common practice. Of course, this almost always results in resentments and often ends in lawsuits over issues of trade secrets, rights to intellectual property, and abridgment of contractual provisions. You will have to make difficult ethical decisions. From a legal point of view, the contract be- tween employer and employee is satisfied when all wages and other benefits have been paid in return for you accomplishing the tasks for which you were hired. Absent a specific con- tract providing otherwise, neither party, employer nor employee, is obligated beyond this exchange. However, not so easily answered are the questions: (1) Is it ethical to use your employment to build relationships with customers that subsequently can be used to start a new business? and (2) Is it ethical for you to use knowledge and skill received through training and education furnished by your employer to go into business competing with your employer?

(3) Subcontracting services to an existing business is somewhere between doing a spin-off and starting a competing business. Services that are often contracted include sales, janitorial services, accounting, research, and product development. It is a common, accepted practice for the contractual relationship to be created prior to starting a business.

? Build trust in your “story”: Building trust is essential to the success of all start-ups. You must be able to convince suppliers, employees, and, most importantly, customers that the business is now successful and will be in the future. Not only is there an understandable reluctance for people to be associated with a potential “loser,” but customers, vendors, and employees all take risks by doing business with an unknown and unproven start-up.

Suppliers are often reluctant to deal with start-ups, even if you make your purchases in cash. Most new businesses are small compared to established businesses in the same industry. There is a good reason why you, as the owner of a new business, would prefer to make numer- ous orders of small quantities of the goods and services you need. Doing so reduces cash flow requirements and reduces the risk of your being stuck with old or obsolete inventory. For the vendor, however, accepting your frequent small orders greatly increases the cost of providing goods and services to you. Most vendors, especially wholesalers, work on very small margins. The cost of accepting and filling numerous orders for a new customer may well make such business unprofitable. It is, therefore, essential that the vendor believes in your eventual suc- cess and that you will become a valuable customer in the future.

Employees take on significant risks when they go to work for a start-up business. Not only may the start-up fail, but frequently the cash flow problems of start-ups cause payments for wages to be late or missed entirely. This is one reason why so many start-ups offer stock options and stock bonuses to employees. The start-up doesn’t have enough cash to pay high wages right now, but if it’s successful, employees will share the rewards in the future.

Customers can similarly be at risk when purchasing from a start-up business. In the event that the start-up fails, there is no recourse for warranty problems, for maintenance, or for up- grades to the product. This risk is especially acute when the product or service of the start-up affects the core business of its customers. For example, the San Antonio Bed & Breakfast Association contracted with a start-up business to develop and maintain a web-based avail- ability and reservation service for the association’s members. The start-up failed during the dot-com bust of 2001. When problems with the system subsequently developed, there was no one to fix them. The system was complex and the source code incomprehensible. As a result, the association lost a core service that provided value to its members.

The issue of building trust in your story is a catch-22. If customers, vendors, and employees do not have trust in the entrepreneur and in the business, quite simply, there is no business. How- ever, there must be a business, or you don’t need customers, vendors, and employees. There are several ways for a start-up business to build trust and legitimacy, and these are detailed in Chap- ter 2. Specific examples for the kinds of businesses discussed in this chapter include obtaining a performance bond that will pay vendors and customers if your business fails. Restaurants, lodging establishments, barbers, beauty shops, and other businesses that deal with issues of cleanliness as a business requirement can obtain licenses and join industry groups that perform inspections. Displaying licenses and certificates of inspection provides assurance that you are at least meeting minimum standards. Manufacturing businesses and construction businesses may hire engineers to certify design and construction details. Warranty service can be contracted to an independent company that specializes in providing such services. Rigorously maintaining business procedures that ensure on-time delivery of products and services and on-time payment of bills, wages, and loan payments will, in time, result in the start-up being trusted.

Many businesses have been successfully created which lacked one or more of these indicators. It is also true that many start-up businesses have failed, despite having all these characteristics. No one knows what makes the difference between such successes and failures. Some have speculated that the one indispensable trait of people who create successful businesses is determination to make the business work.

“LEAN” Entrepreneurial Methods

You may have read or heard about the currently popular idea of the “lean start-up.” “Lean” is the lat- est name for a set of tried-and-true methods that can lessen the capital requirements and, as a result, reduce the financial risk of a start-up. We discussed the similar concept of bootstrapping in Chapter 5. You remember that bootstrapping includes methods for “finding ways to achieve desired business goals and objectives when start-up capital is limited.” Both lean operations and bootstrapping are based on and share three underlying ideas:

1.         Waste not, want not. That this thought appears in a 1576 book when Shakespeare was a mere 12-years-old tells you how old this latest fashion is. Avoiding waste is one obvious way to achieve this, but so is borrowing something rather than renting it, and renting rather than buy- ing. Making do with an older but free laptop would be another example, as would saving every penny you can.

2.         Create, standardize, repeat. About the same time as Shakespeare, shipbuilders in Venice created a ship made of standard parts. It made creating subsequent ships much faster and easier. You do this when you make a form letter to solicit customers, when you create a cell phone app that thousands of people can download, or when you buy in bulk to save money. Some firms standardize their most important characteristics so customers get the same result wher- ever they buy, for example, in franchise restaurants. If your most important characteristics are built uniquely, you can still benefit from standardizing by applying it to the supporting, repeti- tive aspects of your business.

3.         Keep in touch. Central to the lean start-up is being close to your customer. It helps you know if your product or service is doing its job. It alerts you to problems earlier so you can correct them, and it is just a good business practice in general. Customers and their needs change, and to keep up, you need to keep in touch. As you learn what is needed, adjust your product or service to op- timally fit needs. Most cell phone apps get updated every few weeks. This is because as the app makers find out about bugs or glitches, they can fix them and get the fixed version out to users.13

Today’s lean start-up and bootstrapping stress the need for creativity and innovation in all aspects of business start-ups and operations. Eric Reis, the modern father of the lean start-up writes that

start-ups should attempt to produce the “minimum viable product,” ship it to paying customers, measure its success, apply what is learned to improving the product. There is an older quality control model that checks for problems before the product leaves the firm, and where safety is an issue, that is the best way to go. But for many other types of products or services, the minimum viable product approach is a better one.

Thomas Caldbeck, whose story introduces this chapter, exemplifies many aspects of the lean approach. He did not start into business until after he had mastered the basic management skills needed for success. His garage, van truck, and a spare bedroom in his home became his business location. He expanded into additional areas of business only after a customer had been obtained for that service. This way Tom relied on revenues to provide funds for growth. He maintained close contact with customers to ensure that they were satisfied with the work he was doing. He used his own funds for the start-up and leveraged their value by using bank financing for his truck and equip- ment. Part-timers and subcontractors who are paid only for work actually completed, met the need for employees.

Your current employer may provide assistance if your new venture is not going to be a direct competitor. Often, a new product or service idea arises from the work being done in the current employment of the start-up founder, as in the case of UltimateKeychains.com. The employer may, however, have no interest in pursuing the opportunity. In such cases, the start-up may well proceed with the employer’s active support.

Buying an Existing Business

The second most common way to enter small business management is to purchase an existing busi- LO3 ness. Buying an existing business has important advantages over creating a start-up. However, pur- chasing a business has its own, unique set of risks.

Advantages of Purchasing an Existing Business

There are some advantages to buying an existing business:

? Established customers provide immediate sales and cash inflows. Because the business is already successful, it has proven that there is sufficient demand for its products and services to operate profitably.

?          Business processes are already in place in an existing, operating business. This eliminates the need to hire employees, find vendors, set up accounting systems, and establish production processes.

?          Purchasing a business often requires less cash outlay than does creating a start-up. The seller will often provide financing that makes it possible for you to buy the business.

Disadvantages of Purchasing an Existing Business

Disadvantages to buying an existing business include:

?          Finding a successful business for sale that is appropriate for your experience, skills, and edu- cation is difficult and time-consuming.

?          It is very difficult to determine what a small business is worth. The value of a small business can never be known with certainty. You must rely on analyses, comparisons, and estimates.

? Existing managers and employees may resist change. It can be very difficult to convince employees to adapt to new business methods, procedures, and processes that can provide increased profits.

?          The reputation of the business may be a hindrance to future success. Sellers are usually reluc- tant to tell you about problems that the business has. Business owners are especially sensitive about discussing past disputes and lawsuits with vendors and customers.

?          The business may be declining because of changes in technology. ?           The facilities and equipment may be obsolete or in need of major repair.

You will greatly increase your chances of finding the right business by using multiple sources. Make some calls: Contact business brokers and ply your own network. You should be actively read- ing advertising of businesses for sale in newspapers and magazines and on the Internet. You might consider asking your employer if his or her business is for sale. Keep in mind that every business is for sale at a high enough price. If you hear of a business that is interesting, contact the owners and ask what it would take to buy it.

Brokers advertise and facilitate the sale of businesses for a fee, most usually a percentage of the ultimate selling price. Most states have laws that require brokers to work solely for the interest of the seller and to obtain the highest selling price possible. This creates a conflict of interest between the broker and you. The broker is trying to get the highest price. You’re trying to get the lowest.

The quality of broker services ranges from excellent to outright rip-offs. Only a few states have any education or licensing requirements, although some, such as Illinois, do require business bro- kers to register by filing a simple form. Accusations of misrepresentation and fraud by brokers are common in the business press.

Networking is an excellent way to find businesses for sale. While most businesses are for sale at any time, for competitive reasons most owners do not want to say so explicitly. Because customers, vendors, and employees are likely to feel threatened, openly advertising a business for sale can lead to the loss of revenue, credit from vendors, and key employees. For these reasons, it is common for business owners to make their intention to sell known only to trusted confidants in the industry and in the community. Attorneys, bankers, accountants, and insurance agents all will provide you with information only if they know that they can trust your discretion. You can usually get solid leads just by telling other businesspeople that you’re interested in buying a business.

There is a trade journal for every industry that exists. People in the mortuary business bone up with Embalmer and American Funeral Director. The replacement window industry looks through Fenestration. The electric sign industry is energized by Signs of the Times. The folks who process dead and decomposing animals into useable products digest Render magazine. The construction industry digs Rock and Dirt. No matter what type of business you might be considering, there is a magazine for it. They all have advertisements of businesses for sale.

The Internet also has numerous sites that advertise businesses for sale. A search using Google with the keyword “business” and the phrase “for sale” resulted in over 38 million pages listed. None of the advertisements that were inspected during the research for this book provided the name or the exact location of the advertised business. Rather, the sites have various ways you can obtain ad- ditional information. Some provide a link by which you can request more information. A very few listed phone numbers you can call. Others require becoming a member and paying a fee for access.

Your current employer is probably a ready source of information about businesses for sale in your industry. Most managers of small businesses are members of formal and informal groups of businesspeople, for example, the Chamber of Commerce, Rotary, Kiwanis, and other groups that have meetings and provide resources. Also, your employer probably has information about competi- tors and vendors in the area. Don’t forget the example of UltimateKeychains.com—your employer just might be interested in selling his or her business, as well.

Investigating Entrepreneurial Opportunities:

Performing Due Diligence

Suppose you’ve actually found a business you’d like to buy. Your job has just begun. Finding an appropriate business is merely the first, and easiest, step in the process. Buying a business is a lot like getting married—it is easy to get into, but if it turns out bad, it’s very hard to get out. Now that you’ve found that “perfect” business, you must make an exhaustive investigation to tell if it is re- ally suitable. Unlike residential real estate, which is highly regulated in the United States, sellers of businesses are not legally required to make disclosures of impairments or deficiencies. If you are outside the United States, your laws may be different. For example, in Canada, sales of businesses for a price less than $200,000 are tightly regulated. Sales for amounts greater than $200,000 are not regulated at all. As in the United States, it is your responsibility to fully investigate the business and to come to your own independent evaluation of its value.

Due diligence is the process of investigating to determine the full and complete implications of buying a business. During the process of due diligence every aspect of the business is examined in exacting detail. Nothing is taken for granted. No statement is accepted without evidence. Evidence is, itself, substantiated with sources external to the company. Properly performing due diligence minimizes the risk of failure and maximizes the probability of success by identifying the strengths and weaknesses of the business.

When a business is acquired, there is a clear order of steps that should be followed:

1.         Conduct extensive interviews with the sellers of the business. 2.      Study the financial reports and other records of the business. 3.           Make a personal examination of the site (or sites) of the business. 4. Interview customers and suppliers of the business. 5.       Develop a detailed business plan for the acquisition. 6.            Negotiate an appropriate price for the business, based on the business plan projections. 7. Obtain sufficient capital to purchase and operate the business.

The first five steps together make up the process of due diligence.18 A basic tenet of business law is caveat emptor, or “let the buyer beware.” This does not mean

that a seller can freely lie to you about the business. Deliberate misrepresentations can lead to law- suits and may be prosecuted as fraud. However, except for specific representations by the seller, you are responsible for understanding the condition and the facts of the business. It’s kind of a “don’t ask—don’t tell.” If you don’t ask the right questions, the seller has no obligation to tell you the right answers. Thus, as the buyer, you must determine how the business is currently being operated, and you must substantiate (or disprove) representations made by the seller regarding the existence and value of assets, liabilities, financial performance, and the condition of the business.

Due diligence has two primary goals. First, you are attempting to find any wrongdoing: (1) fraud committed by the owners or managers; (2) misrepresentations of the sellers, such as improperly recognized revenues or expenses; and (3) missing information, including pending or threatened xes. Second, you are trying to find any inefficiencies, unnoticed opportunities, waste, and mis- management. The first goal is information that greatly affects the value of the business and the advisability of purchasing it. The second goal is how you, as a new owner, can make changes to increase its value. Both goals can give you a negotiating advantage.

The first information that you get is usually a set of financial statements. There are four reasons why this is so: (1) the seller usually has financial statements available and incurs little added cost in providing them, (2) you, as a business person, are most likely familiar with financial statements and can extract useful information from them, (3) financial statements are accepted as representative of the business by bankers and investors, and (4) financial statements are considered to be indicators of future business results.

Financial statements should include (1) a balance sheet, (2) an income statement, and (3) a state- ment of cash flows. You should also examine the federal and state tax returns for at least the last five years. Information forms for partnerships, corporations, or limited liability companies should be examined also. Any financial statement prepared by or for the seller must be treated with skepti- cism. Some financial statements that you see will have been subjected to rigorous examination by professionals outside the business; some will have been dashed off by the owner at midnight on April 15. To be believable, the statements must be substantiated by external sources.

When you examine the income statement, you should focus on corroborating the amount and timing of revenues and expenses. Be aware that the income statements of small businesses are com- monly misstated. To avoid taxes, owners often charge personal expenses to the business, such as cars, country club memberships, travel, and even home office expenses. On the other hand, when preparing to sell the business, owners are motivated to overstate revenues and understate expenses to show the highest profit.

Balance sheet items that are likely to be misstated are intangibles, that is, things that have no physical existence, but rather are legal rights and obligations. Intangibles include accounts receiv- able, patents, licenses, and liabilities. Assets claimed on the balance sheet must be examined to ensure that they exist and that the stated value is reasonable. Because liabilities are legal require- ments to give up economic value in the future, such as debts for borrowed money or merchandise purchased on account, your risk is that there will be liabilities that are not disclosed. Your problem is that you are attempting to prove the absence of something. Once the examination is complete, you should adjust the amounts, contents, and format of the statements to reflect what you have discov- ered through due diligence.

During due diligence you should also try to answer many nonfinancial questions. Why is the business for sale? Who are key employees? What is the extent of obsolescence of equipment and key technologies? What are the prospects for the firm’s products and services? What opportunities can the firm reasonably expect to have in the near future?

1. According to this chapter, what are the 5 ways to get into small business management?

2. According to this chapter, what are the 12 ways to increase the chance of business start-up success?

3. What is the predominant method by which entrepreneurs open new businesses?

4. What is the greatest advantage of a franchise?

5. According to this chapter, what magazine is a good source of franchisors eager to sell you a franchise?

6. Before you as a potential franchisee sign on the dotted line what two documents should you study carefully?

In: Operations Management

Why is it essential for MNEs to consider coordination systems when implementing an organizational structure? Briefly...

  1. Why is it essential for MNEs to consider coordination systems when implementing an organizational structure? Briefly describe each approach to coordination.

In: Operations Management

Just the Best answer Please 1. What is job bidding? A. A procedure for informing employees...

Just the Best answer Please

1. What is job bidding?

A. A procedure for informing employees that job openings exist

B. A way for an employee of the company to recommend a friend or associate as a possible member of the company

C. A way to locate talent internally and support the concept of promotion from within

D. A procedure that allows employees to bid on the schedule they will work

E. A procedure that permits employees who believe that they possess the required qualifications to apply for a posted job

2. Which of the following occurs if women and minorities are NOT hired at the rate of at least 80 percent of the best achieving group?

A. Disparate treatment

B. Affirmative action

C. The enforcement of the escalator principle

D. Adverse impact

E. A violation of the GINA guidelines

3. Which of the following would be most effective when working with employees with different learning styles to create a richer, more meaningful development experience?

A. Benchmarking

B. On-demand training

C. Just-in-time training

D. Transfer of training

E. Blended training

4. Which of the following is an advantage to just-in-time training?

A. It fosters increased team-oriented efforts.

B. It uses several methods of training to better serve all learning styles.

C. It allows for practical application.

D. It can be delivered anytime, anywhere.

E. It allows adults to retain as much as 90 percent of the information they hear.

5. Executives are increasingly demanding additional skills of their new hires. Which of the following is one of those skills?

A. Collaboration

B. Social media awareness

C. Promptness

D. Extended hours

E. Flexibility

In: Operations Management

Millennium Liquors is a wholesaler of sparkling wines. Their most popular product is the French Bete...

Millennium Liquors is a wholesaler of sparkling wines. Their most popular product is the French Bete Noire which is shipped directly from France. Weekly demand is for 45 cases. Millennium purchases each case for $125, there is a $275 fixed cost for each order (independent of the quantity ordered) and their annual holding cost is 25 percent.

a.What order quantity minimizes Millennium’s annual ordering and holding costs?

b.If Millennium chooses to order 350 cases each time, what is the sum of their annual ordering and holding costs? (Round your answer to 2 decimal places.)

c.If Millennium chooses to order 125 cases each time, what is the sum of the ordering and holding costs incurred by each case sold? per cases

d.If Millennium is restricted to order in multiples of 50 cases (e.g., 50, 100, 150, etc.) how many cases should they order to minimize their annual ordering and holding costs? cases

e.Millennium is offered a 5.00% discount if they purchase at least 1,000 cases. If they decide to take advantage of this discount, what is the sum of their annual ordering and holding costs?

In: Operations Management

In this time of crisis, the university president has asked you to use Blue Ocean Strategy...

In this time of crisis, the university president has asked you to use Blue Ocean Strategy to reimagine the University. Provide the analysis and let me know what your mvp would be. Be sure to indicate how your solution meets and exceeds the BOS criteria. How would it be 10x? How would the four action framework apply? What would the KPIs be? Write an elevator pitch for your new venture?

In: Operations Management

16. How do small businesses handle human resource management issues? A. Small businesses are exempt from...

16. How do small businesses handle human resource management issues?

A. Small businesses are exempt from employment laws and do not need to concern themselves about human resource management issues.

B. All HR activities are outsourced.

C. Line managers in the company usually handle HR activities.

D. They let their HR department deal with those issues

E. Their HR departments deal with all issues that are not outsourced.

17. Which of the following would NOT be a factor as to whether the EEOC will pursue litigation?

A. The type of charge

B. Compliance evaluations and complaint investigations of federal contractors and subcontractors

C. The amount of money involved in the charge

D. The number of people affected by the alleged practice

E. Other charges against the employer

18. Which of the following BEST ties sustainability to each aspect of the organization and encourages employee support for the sustainability goal?

A. Cutting carbon emissions from production facilities

B. Pursuing the goals of alternative energy vehicles, even if it is at a financial loss

C. Using a plastic made from plants instead of oil

D. Attaching bonuses and rewards to meeting sustainability goals

E. Informing institutional investors of sustainability plans

19. Evaluating an employee compared to other employees instead of performance standards can most directly result in what kind of error?

A. Halo effect

B. Leniency error

C. Contrast error

D. Strictness error

E. Similar-to-me effect

20. Companies that aligned talent management programs with their business strategy produced a return on investment (ROI) that was approximately ________ percent higher over a five-year period than companies without such an orientation.

A. 20

B. 10

C. 437

D. 38

E. 6

In: Operations Management