16.1: The Small Business
16.1.1: The Prevalence of Small Businesses
Industries with high concentrations of small and medium businesses generally do not require enormous capital investment up front.
Learning Objective
Describe the characteristics of industries that are represented largely by SMBs (SMEs)
Key Points
- If you’re going to start a business, it’s important to realize that there are specific forces acting upon each industry that affect profit.
- Industries with high concentrations of small and medium-sized businesses (SMBs) generally do not require an enormous amount of up-front capital investment (i.e., they have lower barriers to entry).
- Goods producers make and sell some sort of physical product or material, while service providers don’t make tangible goods. The service industry tends to be more SMB-friendly, as it (generally) requires fewer assets.
- Manufacturing goods competitively involves being able to do so in high volumes in order to remain cost efficient. This requires a large initial investment of capital and access. As a result, manufacturing is more commonly for larger enterprises.
Key Terms
- service provider
-
An organization that operates in areas such as finance, real estate, or buying products from a wholesaler and reselling them to consumers, but does not make tangible goods.
- goods-producers
-
An company that makes and sells some sort of physical product or material.
Barriers to Entry
If you’re going to start a business, it’s important to realize that there are specific forces acting upon each industry that affect profit. Industries with a high concentration of small and medium-sized businesses (SMBs) generally do not require an enormous amount of capital investment up front. The point here is that barriers to entry are central factors in determining the feasibility of the average business owner entering a given industry.
For example, it is not likely that you would start a company to build airplanes, as that would take a large investment of capital for property, plant, equipment, and labor. Many restaurants and bars, however, require simple premises and easy to find, local ingredients. This is a smaller barrier to entry, thus there are more SMBs in the restaurant industry than in the aerospace industry.
Goods or Services?
When thinking about businesses, it can be helpful to divide them into two sections: goods producers and service providers. Goods producers make and sell some sort of physical product or material, while service providers don’t make tangible goods. The service industry tends to be more SMB-friendly, as it (generally) requires fewer assets.
In the United States, roughly 20% of SMBs are concentrated in the goods-producing sector. The 80% of SMBs that reside in the service-providing sector is largely a reflection of the overall U.S. economy (services over goods), as well as the greater feasibility of service industries for small-scale entry.
The high concentration of SMBs in the service-providing sector also reflects a few realities of business. In a global economy, manufacturing goods competitively involves being able to do so in high volumes in order to remain cost efficient. This requires a large initial investment of capital and access to low-cost labor, which are both tough for SMBs to access domestically. Maintaining quality across hundreds of locations in the service-providing sector is also, as you might imagine, not an easy task.
Small-business owner
Small businesses often begin in the services sector due to a number of factors.
16.1.2: Small Businesses and U.S. Jobs
Half of the U.S. private sector is populated by small businesses and the other half by large businesses.
Learning Objective
Discuss the growth of small businesses in relation to the U.S. economy
Key Points
- The U.S. government often defines small and medium-sized businesses (SMBs, also referred to as small and medium-sized enterprises, or SMEs) as firms with fewer than 500 employees.
- While business has seen great consolidation in recent years, the share of employment in small firms has been relatively stable over the past few decades. Just over half of U.S. employees work for SMBs.
- Small businesses often serve as seeds for new industries, such as Apple and Google did in their early stages. By addressing a need left unmet or innovating more rapidly than large multinational corporations, small businesses are able to carve out new niches for themselves.
- Recent advancements in technology can reduce the amount of capital needed to start a small business and increase opportunities to scale up rapidly and cost efficiently.
- The primary hurdle for most SMBs, particularly when they are starting out, is acquiring funding.
Key Term
- employment
-
The work or occupation for which one is used, and often paid.
The private sector consists of a wide variance in business size, grouped into small, medium, and large organizations. The U.S. government often defines small and medium-sized businesses (SMBs, also referred to as small and medium-sized enterprises, or SMEs) as firms with fewer than 500 employees. Using this definition, just over one-half of the private sector is populated by small businesses and the other half by large businesses.
Employment
While business has seen great consolidation in recent years, the share of employment in small firms has been relatively stable over the past few decades. It has fluctuated slightly in response to economic conditions, declining slightly when the economy is doing well and increasing when the economy struggles. This tracks with the slight decline in the small-business share of employment during the late 1990s and the leveling off in the 2000s.
Entrepreneurship
Small businesses often serve as seeds for new industries, such as Apple and Google did in their early stages. By addressing a need left unmet or innovating more rapidly than large multinational corporations, small businesses are able to carve out new niches for themselves. Recent advancements in technology can reduce the amount of capital needed to start a small business and increase opportunities to scale up rapidly and cost efficiently.
Small businesses’ share of employment, 1988–2006
The small-business share of employment is relatively stable, as shown in the graph above: the bold red line representing all small businesses stays at around 50 to 55% of the total share of employment.
Funding
The problem all (or at least most) entrepreneurs face on a daily basis is funding, particularly when first starting up. While different industries display differing degrees of entry barriers, most small businesses must obtain a certain amount of capital to begin operations. This can come from a variety of places, including:
- Self-financing by the owner through cash, equity, etc.
- Loans from friends or relatives
- Grants from private foundations
- Private stock issue
- Forming partnerships
- Angel investors (i.e. venture capital)
- Bank
16.2: Small Business Owners: A Profile
16.2.1: The Impact of Business Owners on Success and Failure Rates
As the creator, organizer, and manager of a business, a business owner is critical to the success or failure of a given venture.
Learning Objective
Recognize the significant impact a business owner has on the success of a small business
Key Points
- As the creator of a small business, and the primary source of strategic direction, business owners have substantial impact on the success or failure of a venture.
- Business owners are often tasked with the ability to build a business plan, hire a team, communicate a vision, and carry out a variety of core operations all on their own.
- Due to the number of hats a business owner is likely to wear when running their own organization, the capabilities of the owner will be closely related to the capabilities of the organization itself.
- Due to the high importance of a business owner’s tasks, and the inability to distribute risk across a high number of employees and work groups, a business owner shoulders a great deal of accountability for both success and failure.
Key Terms
- tactics
-
Operational approaches to pursuing goals.
- strategy
-
A plan of action designed specifically to accomplish a given objective or goal. In business, the foundation of how a business accomplishes its objectives.
Why Business Owners Matter
An entrepreneur or a small business owner is generally defined as an individual who creates, organizes, and manages an enterprise with considerable initiative (and usually shouldering considerable risk alongside it). Whatever the project, the business owner tends to sit firmly at the heart of the strategy, tactics, and structure that defines the organization.
As a result of this, the business owner is a central source of advantage (or potentially disadvantage) when executing the operations of the organization. Simply put, the success or failure of a small organization is inherently tied to the central figure who starts, organizes, and manages it.
What Determines Success or Failure
There are countless factors that determine success or failure when starting and running your own business. Each business is different, operating in a different competitive environment with different demands. Without getting too specific or detailed, there are a few central skills commonly required of owners across most small businesses:
Strategy
The first thing a business owner needs is a plan that lays out the strategy of their organization. This critical piece of guidance lays the foundation for how and why decisions are made. As the business owner is most commonly the author of this document, she will also be the person who determines the broader strategic strokes that guide the business in the short and long term.
Team
Another key consideration of a business owner is who (if anyone) to bring on board alongside them. Talent is an expensive business asset and the financial impact of good (or poor) hires can have an enormous effect on the quality of the organization. Leadership of a team to create synergy and ensure alignment is also of central importance and by default the responsibility of the owner.
Communication
Along similar lines, business owners need the capacity to communicate their vision to stakeholders. This includes customers, investors, potential hires, and partners. The ability to sell the idea itself is therefore another critical success factor for any business owner.
Relevant Skills
Different businesses require different skills. A small business owner involved in building websites will need the core relevant skills to create them from scratch. A small consulting group in a given industry will need extensive experience, contacts, and knowledge uniquely valuable to other incumbents in the industry. In short, most small business owners are the primary source of relevant skills for that particular business model (at least at first).
How This Impacts Success Rates
Combining the core importance of the business owner in the creation of the business and the variety of skills business owners can leverage to achieve success, business owners are often enough the primary influence on a small business’ potential success (and potential failure).
Business owners with a strong strategic ability to plan, highly developed interpersonal skills, key industry skills/knowledge, and the willingness to take risks and be accountable are poised for the highest rates of success in small business ventures.
Going into business for yourself can be highly rewarding financially and fulfilling personally. However, entrepreneurship is notoriously linked with failure, and in such situations the entrepreneur is usually the one left wondering where they may have gone wrong.
16.2.2: Key Characteristics of Entrepreneurs
Successful entrepreneurs have a unique set of personal characteristics, including the drive to take risks and embrace failure.
Learning Objective
Discuss the factors that drive entrepreneurs to succeed
Key Points
- Entrepreneurs must be willing to accept risk and failure. The key is that when you fail, you must fail quickly and inexpensively. Test, analyze, figure out why you failed, evolve, and iterate. That is the meaning of drive.
- Focus and energy are two key attributes of drive. Unwavering diligence is required in light of the challenges that the entrepreneur is likely to face, and the ability and desire to work long hours in pursuit of that goal is necessary.
- Entrepreneurs often operate on limited budgets. This requires a great deal of frugality and self-discipline, both useful facets of a strong drive.
- It is also important that drive is directed toward some outcome, and that this outcome has the clarity required to derive perseverance. Vision, passion, and focus enable this.
Key Terms
- entrepreneur
-
A person who organizes and operates a business venture and assumes much of the associated risk.
- creativity
-
The quality or ability to create or invent something.
- perseverance
-
Continuing in a course of action without regard to discouragement, opposition, or previous failure.
Drive and Entrepreneurship
The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man. —George Bernard Shaw
Develop success from failures. Discouragement and failure are two of the surest stepping stones to success. No other element can do so much for a man if he is willing to study them and make capital out of them. —Dale Carnegie
Key Characteristics of Entrepreneurs
Entrepreneurs must be willing to accept risk and failure. The key is that when you fail, you must fail quickly and inexpensively. Test, analyze, figure out why you failed, evolve, and iterate. That is the meaning of drive.
Mark Cuban
Mark Cuban started Broadcast.com and became a billionaire. The most fascinating characteristic about him is that he is not content. He works relentlessly and has invested in hundreds of companies.
Entrepreneurs often possess immense focus and energy. Entrepreneurship requires extensive mental strength and determination because, as opposed to traditional occupations, there is no right or wrong path to achievement. Competition is intense and innovation is required to face the challenges that result from starting your own business.
Entrepreneurial Attributes That Enable Drive
Entrepreneurial drive is something of an umbrella term for the wide variety of characteristics that compel an individual to pursue a unique and untested path relentlessly, regardless of the failures and obstacles. The characteristics below all overlap with drive in some way, shape, or form, to ultimately create a template for the entrepreneurial mentality:
Vision: The entrepreneur must be able to create and communicate an easily understandable vision of what the new venture does in order to successfully launch a new business. This is accomplished while inspiring others to join you in your new enterprise.
Creativity: The entrepreneur must be able to inject imagination and uniqueness into a new business venture. It takes skill and ingenuity to create a new venture equipped with strategies to outsmart the competition.
Focus: The entrepreneur must be able to maintain the vision of the company with unwavering diligence. It’s very easy to get sidetracked, especially if you find it necessary to adapt the original vision. Ironically, there are many successful entrepreneurs who get bored easily.
Passion: Entrepreneurs must have a desire to succeed in a business venture under their own initiative.
Perseverance: The entrepreneur must be able to keep going even when faced with seemingly insurmountable obstacles.
Opportunistic nature: The entrepreneur must take advantage of an upcoming trend or unite unrelated processes to create a unique business venture. It helps, of course, to see the possibilities before they even exist.
Problem-solving ability:The entrepreneur must thrive on coming up with solutions to complex challenges.
Self-discipline: The entrepreneur must be organized and regimented in pursuit of a successful business venture. This includes frugality, which is knowing how to stretch every cent so that expenditures are as low as possible.
16.2.3: The Demographics of Modern Entrepreneurs
Due to technological aptitude, unemployment, and lack of dependents, a sizable percentage of U.S. entrepreneurs are young.
Learning Objective
Identify the demographic trends in modern entrepreneurs, and the factors which influenced them.
Key Points
- With recent technological developments, starting a business requires far less capital than ever before.
- With new technologies and business infrastructure, businesses can be scaled up and replicated in other places much more easily than ever before.
- As a result of recent economic downturns and technological advances, younger generations have higher unemployment rates and are better equipped technologically, which has led to growth in youth entrepreneurship.
- Women are now a dominant force in small-business ownership, and they are succeeding in industries that were once taboo for women.
Key Term
- Barriers to entry
-
One of Porter’s five forces; these are the financial and nonfinancial obstacles for new entrants to entering a given industry.
Example
- A very simple and small-scale example of how technology has made entrepreneurship potentially simpler is the rise of smartphone technology. Nowadays, anyone with an innovative idea and knowledge of smartphone programming is able to develop an original app and release it commercially.
Entrepreneurs are catalysts for economic change. Research suggests that entrepreneurs are highly creative individuals with a tendency to imagine new solutions by finding opportunities for profit or reward. The ability of entrepreneurs to innovate is thought to relate to innate traits such as extroversion and a proclivity for risk taking.
Enabling Factors
There are entrepreneurs in all demographics and walks of life. There have never been lower barriers to entry when starting a new company. Thanks to developments in technology, less capital than ever before is required to start a business (depending on the industry). Moreover, advancements in engineering have allowed people to build software and Internet businesses from scratch with minimal obstacles.
The venture-capital sector has risen from nothing 40 years ago to investing billions in new businesses today. Technology has allowed for business to be scalable over a variety of countries and continents. Previously, scaling a new business would have taken extensive time, focus, and capital. Now there is infrastructure in place (e.g., the Internet, FedEx and UPS, and smartphones) that allows entrepreneurs to build a business that can be replicated in different cities globally.
Couple this with slow economic growth due to the banking collapse in the U.S. and a high number of over-educated and underemployed people and you get a great deal of people who are drawn to entrepreneurship as a way of creating their future.
Youth
All of these factors contribute to the trend of younger and younger business owners. The tendency of young people to take risks, coupled with the relative ease of starting a business in today’s environment, has driven down the average age of entrepreneurs. Also, the younger generations (i.e., recent graduates) are facing high levels of underemployment as a result of economic factors. The younger entrepreneurs also have an interest in and familiarity with technology that provides some advantage.
Organizations have even risen to service the ever-younger, emerging entrepreneurs. The Young Entrepreneur Council (YEC) is an American nonprofit organization that provides entrepreneurs with access to tools, mentorship, and resources that support each stage of their business’s development and growth. The organization has several hundred members—all successful young entrepreneurs and business owners, ages 17 to 40—including the founders and leaders of LivingSocial, Airbnb, Reddit, College Hunks Hauling Junk, Mint.com, myYearbook, Thrillist, Yodle, Threadless, ModCloth, Grasshopper, Likeable, HootSuite, and Blip.tv.
Trends and Statistics of Women in Business
Female entrepreneurship
Recent years have seen a dramatic rise in the number of businesses owned by female entrepreneurs. As the image shows, women are now founding businesses at a rate 1.5 times the national average; the most prevalent such businesses include healthcare / social assistance (15.8%) and professional / technical services (14.1%).
There are exciting things happening inside the world of female entrepreneurship. Women are now a dominant force in small-business ownership and they are succeeding in industries that were once taboo for women. Women are not only starting businesses, they are staying in business. Between 1997 and 2006, female-owned businesses grew at nearly twice the rate of all U.S. firms (42.3 percent vs. 23.3 percent). During the same time period, employment among female-owned firms grew 0.4 percent and annual sales grew 4.4 percent. In 2006, reports on women-owned (or majority owned by women) businesses in the United States returned the following impressive statistics.
- There were an estimated 10.4 million privately-held firms.
- These firms accounted for two in five (40.2 percent) of all businesses in the country.
- These firms generated $1.9 trillion in annual sales and employed 12.8 million people nationwide.
16.2.4: Trends in Business Owners: Age and Gender
Due to technology, unemployment and lack of dependents – a sizable portion of U.S. entrepreneurs are young risk-takers.
Learning Objective
Explain how new technologies are allowing more young people and women to become entrepreneurs
Key Points
- With recent technological developments, starting a business requires far less capital than ever before.
- With the new technologies and business infrastructure, businesses can be scaled up and replicated in other places much more easily than ever before.
- As a result of recent economic downturns and technological advances, younger generations are better equipped technologically and underemployed professionally. This has led to growth in youth entrepreneurship.
- Women are now a dominant force in small business ownership, and succeeding in industries that were once taboo for women.
Key Term
- entrepreneurs
-
People who organize and operate a business venture and assume much of the associated risk.
Example
- A very simple and small-scale example of how technology has made entrepreneurship potentially simplier is the rise of smartphone technology. Nowadays, anyone with an innovative idea with commercial potential, and the knowledge of smartphone programming, is able to develop an innovative and original app, and release it commercially.
Entrepreneurs are catalysts for economic change. Researchers suggest that entrepreneurs are highly creative individuals with a tendency to imagine new solutions by finding opportunities for profit or reward. The ability of entrepreneurs to innovate is thought to relate to innate traits such as extroversion and a proclivity for risk-taking.
Demographics of Entrepreneurs
Enabling Factors
There are entrepreneurs in all demographics and walks of life. There have never been lower barriers to entry when starting a new company. Thanks to developments in technology, there is less capital required than ever before to start a business (depending on the industry). Moreover, advancements in engineering have allowed people to build software and internet businesses from scratch with minimal obstacles.
The venture capital sector has risen from nothing 40 years ago to investing billions in new businesses today. Technology has allowed for business to be scalable over a variety of countries and continents. Previously, scaling a new business would have taken extensive time, focus, and capital. Now, there is infrastructure in place, such as the Internet, FedEx and UPS, and smartphones, which allow entrepreneurs to build a business that can be replicated in different cities globally.
Couple this with slow economic growth due to the banking collapse in the U.S., and a high degree of the over-educated and underemployed, a great deal of people are drawn to entrepreneurship as a way of creating their future.
Youth
All of these factors contribute to the trend of younger and younger business owners. The tendency of young people to take risks, coupled with the relative ease of starting a business in today’s environment, has driven down the average age of entrepreneurs. Also – the younger generations (i.e. recently graduates) are facing high degrees of underemployment as a result of economic factors. The younger entrepreneurs also have an interest and familiarity with technology that provides some advantage to innovating with those fields.
Organizations have even risen to service the ever-younger sector entrepreneurs. The Young Entrepreneur Council (YEC) is an American non-profit organization that provides entrepreneurs with access to tools, mentor-ship, and resources that support each stage of their business’s development and growth. The organization has several hundred members, all successful young entrepreneurs and business owners, ages 17 to 40—a group that includes the founders and leaders of LivingSocial, Airbnb, Reddit, College Hunks Hauling Junk, Mint.com, myYearbook, Thrillist, Yodle, Threadless, ModCloth, Grasshopper, Likeable, HootSuite, and Blip.tv.
Trends and Statistics for Women in Business
There are exciting things happening inside the world of female entrepreneurship. Women are now a dominant force in small business ownership, and succeeding in industries that were once taboo for women . Women are not only starting businesses, they are staying in business. Between 1997 and 2006, female-owned businesses grew at nearly twice the rate of all U.S. firms (42.3 percent vs. 23.3 percent). During this same time period, employment among female-owned firms grew 0.4 percent, and annual sales grew 4.4 percent. In 2006, reports on women-owned (or majority owned by women) businesses in the United States returned the following impressive statistics.
- There were an estimated 10.4 million privately-held firms;
- These firms accounted for two in five (40.2 percent) of all businesses in the country;
- These firms generated $1.9 trillion in annual sales and employed 12.8 million people nationwide.
Female Entrepreneurship
Recent years have seen a dramatic rise in the number of businesses owned by female entrepreneurs. As the image shows, women are now founding businesses at a rate 1.5 times the national average; the most prevalent such businesses include healthcare / social assistance (15.8%) and professional / technical services (14.1%).