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Jones: Introduction To Business: How Companies Create Value for People

I. The Environment of Business

3. Entrepreneurs, Managers, and Employees

C H A P T E R

3 Learning Objectives After studying this chapter you should be able to:

Entrepreneurs, Managers, and Employees

WHY IS THIS IMPORTANT Do you want to start a new business and be your own boss? Maybe you picture yourself working on a prod- uct development team at Xerox to bring a new printer to market. How are entrepreneurs different from man- agers? Think of yourself as a product that you will bring to the labor market. Whether your goal is to be your own boss or to be a CEO, how will you develop a competitive advantage and maintain it through differ- ent stages in your career? How will your career oppor- tunities be affected by environmental factors such as changes in technology and globalization?

This chapter will explain how people create value in organizations through the functions of planning, organizing, leading, and controlling. Although there may be differences depending on the size, nature, and your position in a business, you will need to know how to increase an organization’s effectiveness and efficiency in order to advance your own goals.

?1. Describe the nature of entrepreneurship and the kinds of entrepreneurial opportunities that can increase the profitability of business commerce, occupations, and organizations.

2. Identify how the process of creative destruction leads to the emergence of new companies, the decline of established companies, and raises a society’s standard of living.

3. Appreciate the problems involved in aligning the interests of a manager with those of a company’s owners.

4. Distinguish between the three different levels of managers and understand the different roles they perform to increase efficiency, effectiveness, and profitability.

5. Differentiate between two main approaches employees can take to their jobs and the way their performance affects their long- term career prospects.

Jones: Introduction To Business: How Companies Create Value for People

I. The Environment of Business

3. Entrepreneurs, Managers, and Employees

make it easier for others to do so, too. By 1994,

however, it had become clear to Yahoo!’s cre-

ators that they could make money from their

directory if they allowed companies to advertise

their products on the site.

Because the Internet was rapidly expand-

ing, Filo and Yang realized they had to move

quickly to capitalize on Yahoo!’s popularity.

Although their directory was the first of its kind

to be up and running, they knew it could be imi-

tated by other entrepreneurs. Indeed, competi-

tive search-engines like Altavista had already

emerged. The virtue of Yahoo!, however, was

that unlike having just a search engine, sites

were handpicked for their usefulness. In other

words, Filo and Yang had already done the leg-

work for ordinary Internet users.

The problem facing Filo and Yang was getting

the funding they needed. Because they were

Yahoo!, an acronym for “Yet Another Hierarchical

Officious Oracle,” is the best-known Web site

directory on the Internet. The directory originated

as a hobby of Yahoo!’s founders, David Filo and

Jerry Yang. Filo and Yang, two Ph.D. candidates

in electrical engineering at Stanford University,

simply wanted a quick and easy way to revisit the

Web sites they liked best. They realized that as

the list of their favorite Web sites grew longer and

longer, the Internet began to lose its usefulness.

It was cumbersome to have to look through a

long list of URLs each time they wanted to find

something.

To reduce their search time Filo and Yang sub-

sequently found a way to break up their list of

Web sites into smaller, more manageable cate-

gories. Sites were grouped by their subject mat-

ter, such as sports or business. Eventually, each

of these subject categories also became large

and unwieldy, so Filo and Yang further divided

them into subcategories. Thus, Yahoo! was born.

Filo and Yang posted Yahoo! online for their

friends to use, and soon hundreds of people were

clicking on the site. By 1994 hundreds of thou-

sands of users were visiting the site every day.

When they first created their directory, Filo

and Yang had no idea they had a potential mon-

eymaking business on their hands. They enjoyed

surfing the Internet, and they just wanted to

A Question of Business Yahoo!’s Rough Ride Why did Yahoo!’s founders recruit a new CEO to plan its business model?

Jones: Introduction To Business: How Companies Create Value for People

I. The Environment of Business

3. Entrepreneurs, Managers, and Employees

This chapter explains the roles entrepreneurs, managers, and em- ployees play as a company goes about developing its business

model and putting it into operation. First, we discuss how entrepreneurs sense opportunities both in the environment and within their organizations. Second, we consider how managers use resources in order to profit from these opportunities. Third, we look at employees and how, by using an entrepreneurial mindset like that of their companies’ founders, they can contribute to this endeavor and their own personal success.

To help you develop an appreciation of the challenges you will face once you begin your career, we then examine the issue of what is appropriate employee behavior. Finally, we relate employee behavior to career opportunities over the course of a person’s work life and offer guidance about how to obtain a job and get promoted in a company. By the end of this chapter you will understand how the dif- ferent players in a business—entrepreneurs, managers, and employees—working together can create a successful business model—one that leads to profit for stock- holders and for themselves.

66 Chapter Three

students, they had little or no capital. However, they were able to find a venture capitalist, called Sequoia Capital, which was willing to put up the money. Sequoia had funded such well-known startups as Apple, Oracle, and Cisco Systems. It agreed to provide Filo and Yang with $2 mil- lion if they not only agreed to give Sequoia a major equity stake in their venture, but also agreed to hire experienced managers to head their company and develop its business model.

Sequoia’s partners had learned from experi- ence that entrepreneurs often do not make good managers when they become responsible for running a company. The skills needed to be a successful manager often diverge from those necessary to notice entrepreneurial opportuni- ties. This is particularly true if entrepreneurs have technical or scientific backgrounds and no exposure to how business operates.

Filo and Yang realized they did lack business experience and agreed to recruit a new manage- ment team. To be their chief executive officer (CEO), they hired Tim Koogle, an experienced ex-Motorola executive with an engineering back- ground. Jeffrey Mallett, an ex-Novell software manager with a marketing background, was hired as chief operating officer (COO). Filo and Yang became joint co-chairmen of Yahoo!, and under the control of Koogle and Mallett, who also received a significant share of the company’s

stock, the four executives created Yahoo!’s busi- ness model.

The success of the business model became clear with Yahoo!’s explosive growth. By the end of the 1990s, 15 million people a day were visit- ing Yahoo!, and it had become the leading portal on the Web. In the meantime, the amount of information and services Yahoo! provided cus- tomers also multiplied. The Web site began offer- ing personals, online stock brokerage and bank- ing services, instant messaging, chatrooms, and a host of other offerings. Its business model was based on the idea that the more services it offered, the greater the number of Internet users it would attract, and so the greater would be the advertising fees it could charge. (The cost of advertising is a function of the number of people that an advertising medium, such as radio, TV, or a Web site, can potentially reach.)

In 1996, Yahoo! went public, and in 2000, its stock price reached an astronomical height of $237.50 per share, giving the company a value of $220 billion. That’s not bad for a business started by a couple of college students. But just two years later, Yahoo!’s stock plummeted to just $9 a share, and at that point the company was worth less than $10 billion. Why? Because of a series of managerial mistakes at the top of the company combined with the dot.com bust. The nature of these mistakes is discussed later in the chapter.1 •

Overview

Jones: Introduction To Business: How Companies Create Value for People

I. The Environment of Business

3. Entrepreneurs, Managers, and Employees

Entrepreneurs, Managers, and Employees 67

The discussion of the history of business in the last chapter highlights how aristocrats, merchants, and capitalists acquired and utilized productive resources to create capital and wealth. Their business activities suggest the crucial role entrepreneurs play in starting and growing a business. An entrepreneur is

the person ready to supply the enterprise, that is, the hard-to-define mixture of energy, boldness, courage, expertise, insight, and often ruthlessness, necessary to:

• acquire productive resources; and • combine and use them efficiently and effectively; to • take advantage of business opportunities to create goods and services; that • customers want to buy and which creates profit.

Forms of Entrepreneurial Opportunities There are many different forms of opportunity in the environment that entrepreneurs can seize upon. They can then establish a business organization to take advantage of them. It is useful to examine the kinds of opportunities open to entrepreneurs in terms of the three main dimensions of business: commerce, occupation, and organi- zation. (See Figure 3.1.)

COMMERCIAL OPPORTUNITIES The first kind of opportunity comes from business as commerce, that is, from new kinds of commercial opportunities in pro- duction and trade. The last chapter discussed how discrepancies in the price of raw materials, labor, or finished products in different cities or countries can lead to com- mercial opportunities. Today, for example, the presence of plentiful inexpensive labor in developing countries around the world has led many U.S. companies to shift their manufacturing activities abroad to take advantage of this commercial opportu- nity. A shirt that might have cost $5 to make in a U.S. factory now costs only 50 cents to produce abroad in a country like Indonesia or Malaysia. Entrepreneurs who import these shirts can sell them to U.S. stores for around $2 and they can then be

sold to customers for $4.99—a price less than what it used to cost to make a shirt in the United States.

Levi-Strauss, the famous jeans maker, has suffered badly because it was late to take advantage of this global opportunity. Many of its competitors had no ties to workers in U.S. factories and quickly moved their production abroad. Levi’s, however, employed thou- sands of U.S. workers in its clothing factories and was reluctant to lay them off. When its competitors proceeded to undercut the price of Levi’s jeans, the company’s sales plummeted, and it lost billions of dollars in the late 1990s. Today, all of Levi’s U.S. clothing facto- ries have been shut down, and its workers have experienced the fate of millions of other U.S. factory workers—a loss of jobs because of low-cost global competition.

Another form of commercial opportunity is when entrepreneurs recognize the opportunities offered by advances in technology to find a new way to make or supply a product more cheaply. For example, Toyota was the first car company to develop low-cost, or “lean,” man- ufacturing technology in the 1980s. This allowed the Japanese automaker to charge lower prices for high-quality cars than its U.S. competitors could. In addition, companies that are the first to intro- duce new IT can often lower their prices and lure away their com- petitors’ customers. Wal-Mart has done this. By installing sophisti- cated new IT systems to track its inventory, for example, Wal-Mart has been able to lower its prices beyond those of its competitors.

The Role of the Entrepreneur

entrepreneur A person ready to supply the enterprise—energy, boldness, courage, spirit, expertise—necessary to start and grow a business.

Commercial Occupational

Entrepreneurial Opportunities

OrganizationalOrganizational

Figure 3.1 Forms of Entrepreneurial Opportunities

Jones: Introduction To Business: How Companies Create Value for People

I. The Environment of Business

3. Entrepreneurs, Managers, and Employees

The growth of e-business provides a recent example of the way in which entrepre- neurs can find new ways to supply products to customers that bypass established distri- bution channels and break existing companies’ hold on their customers. Amazon.com, for example, bypasses “bricks and mortar” bookstores to reach customers directly and offer them a customized shopping experience. As discussed in the opening case, Yahoo! rapidly expanded its online service to include bill paying and banking and in doing so, it bypassed bricks-and-mortar financial institutions.

Yet a third form of commercial opportunity arises when a company creates a new or improved product that better satisfies customer needs—even though the new product’s price may not be lower. Many people, for example, are willing to pay a higher price for a car with the latest features, or for the best new video games, or for the latest clothing fashions. When Porsche introduced its new Cayenne SUV it boasted that the Cayenne’s advanced engine and transmission drives as well as its famous sports cars. Is it any surprise, then, that its Cayenne sold well, even though it costs between $65,000-90,000? As you can see, if a company can find a better way to satisfy its cus- tomers, it can often charge a premium for its products.

From a commercial point of view, entrepreneurship is about creating price discrepan- cies by producing or providing something that customers just have to have—such as a Porsche SUV or a tablet computer or PDA with a color screen, built-in cell phone, digital camera, and web-browsing capability. Companies that are first to enter the market with a product that offers customers increased utility often obtain a first mover advantage. A first mover advantage is the acknowledgment, fame, or brand- name reputation gained from being first to innovate a new product. Competitors often rush to copy and imitate the first mover’s product to stop their customers from switching to it.

OCCUPATIONAL OPPORTUNITIES Many opportunities for entrepreneur- ship also exist when it comes to choosing a business occupation. A person who decides to invest ten years of his or her life to learn the complex and demanding skills necessary to become highly specialized in an occupation is acting like an entrepreneur. Would-be surgeons, musicians, teachers, artists, scientists and engi- neers are banking on their ability to succeed in their chosen line of work. They do not know in advance if they will be able to become an expert in their field of work so that they can command high prices for their services. They also have no idea if they will be able to invent or come up with new products that will make them a for- tune. Nonetheless, prospective profits motivate these people to devote enormous time and effort to learning a set of work skills. Short-term pleasure is sacrificed for long- term gain.

Alert people who notice changes in the business environment having an impact on occupational opportunities are frequently the first to develop new skills. These people are behaving entrepreneurially as it relates to their own careers. They know that the first people with the skills needed to perform these new jobs will be in scarce supply and that because of this, they will be able to command a high price, or wage. Over the last twenty years, for example, millions of new IT jobs have emerged— everything from creating moving animations or “rich media” for Web sites; to devel- oping new security programs to protect computer systems from viruses and hackers; to building, hosting, and managing Web sites.

The people who develop and learn these new kinds of skills will not be able to charge a high price for them forever, though. Other people will move quickly to develop similar skills. As the supply of people with a specific kind of skill increases, the wages paid for these skills falls. If the skills they develop are unique or hard to imitate, however, people can expect to earn a premium from them for longer peri- ods of time—such as famous architects, musicians, and CEOs. Business in Action profiles the way the Rolling Stones developed a set of unique skills and a business model that over the course of many years, have made them the wealthiest rock band in the world.

68 Chapter Three

first mover advantage The competitive advantage gained by being first to develop a new product or process.

Jones: Introduction To Business: How Companies Create Value for People

I. The Environment of Business

3. Entrepreneurs, Managers, and Employees

Entrepreneurs, Managers, and Employees 69

Business in Action

The Rolling Stones Are Not Gathering Moss The Rolling Stones have been one of the world’s leading rock bands since the early 1960s when they burst onto the music scene as the “bad boys” of rock and roll. Like most rock groups, in their early days, the Stones were an unproven prod- uct with no track record. Desperate to sign recording contracts, they were in a weak bargaining position compared to the record companies they were dealing with. As a result, despite their enormous initial success, the Stones received a rela- tively small percentage of the profits their best-selling records were generating. Later, after the Stones had become world famous, they were able to renegotiate their contracts on their own terms. But the Stones didn’t stop there. They contin- ued to find new avenues for entrepreneurship.

Under the leadership of Mick Jagger (the CEO of Rolling Stones Inc.), the Stones have continually found new ways to generate profits. Since 1989 they have earned more than $1.5 billion, but only about $500 million of it has come from royalties earned on their records. Incredibly, the rest of it has been generated from concert ticket sales, merchandising, and company sponsorships associated with their tours.

The way the Stones “create” their world tours shows how entrepreneurial they are. It all began with the band’s “Steel Wheels” tour in 1989 when, for the first time, working with a Canadian promoter named Michael Cohl, the Stones took total control over all aspects of their tour. Before this, like most rock bands, they had put together a schedule of cities to tour and then contacted well-known pro- moters in those cities to stage the concert and sell tickets. The Stones would then receive a percentage of total concert revenues as their payment. Under this busi- ness model the promoters were walking away with over 60% of the revenues.

Cohl proposed a new model whereby he would assume responsibility for all 40 concert venues on the Steel Wheels tour and guarantee to pay the Stones $1 mil- lion per concert—a much higher amount than they had ever received before. Cohl felt he could do this because his approach cut out the profits earned by the pro- moters. He also agreed to personally negotiate the merchandising contracts for Stones T-shirts, posters, and so on and to get corporate sponsorship for the tour.

However, after the Stones had played in their first few venues, Cohl realized he was losing money on each one. To make the tour a success, he and the members of the band would all have to find new ways to cut costs and increase revenues. From this point on the Stones became directly involved in every decision concerning staging, music, advertising, and promotion, and even the price of concert tickets—

which have continued to climb with each new tour. The Stones, and particularly Jagger, faced a huge task to learn how to improve the concert tour busi- ness model, but the band persevered, and step-by- step have continued to refine and develop their approach in every subsequent tour.

In the end, the Steel Wheels tour made over $260 million, and the Stones made far more than the $40 million they were promised. In later tours, from “Packing Them In” to the huge “Voodoo” tour in 1995, world revenues from Stones concerts surged. When Mick Jagger and Keith Richard, who are both now in their 60s, were asked how long they planned to go on touring, their answer was “until we drop.” Indeed, in May 2005 they announced the Stones would begin yet a new multi-city tour kicking off in Boston in the fall.2

After years of paying promoters nearly 60% of the revenues from their concert tours, the Rolling Stones decided to take control of their business and become directly involved in every financial decision.

Jones: Introduction To Business: How Companies Create Value for People

I. The Environment of Business

3. Entrepreneurs, Managers, and Employees

People who act like entrepreneurs and take advantage of occupational opportuni- ties notice the changing trends in business and keep track of advances in their own occupations. The Stones, for example, have spent considerable time and money dis- covering exciting new ways to stage and present their concerts. Similarly, given one’s personal interests and talents, people who think the Internet will become more important in the future would be wise to develop skills that match the different kinds of occupational opportunities it offers. Likewise, people whose interests move towards the personal assistant direction, would be wise to enroll in courses to learn how to use new kinds of business software.

It is important to realize that, just as in any other area of business, a competitive market is operating in the occupational or job market. In most industries, dozens, if not hundreds, of people are competing for the same jobs. Having some kind of unique or scarce skill, or the willingness to acquire it, is a selection criterion that potential employers use to evaluate job candidates. But being able to think and act like an entrepreneur like the Stones did is something that will help you not only in your job search but also with the opportunities you will face during the rest of your life. It will affect your long-term ability to build human capital and personal wealth.

ORGANIZATIONAL OPPORTUNITIES The third main form of opportunity for entrepreneurs is to create new business organization forms and find new ways to design and control a business’s organiza- tional structure to increase its profitability. Perhaps, for example, a new way of grouping employees through the use of web-based IT will allow them to communicate and cooperate better with each other and with customers. For a company, the result of finding better ways to organize is lower operating costs and the ability to make better prod- ucts that command higher prices in the marketplace.

In the last decade, new forms of global business organization, using new kinds of IT, have changed the way companies make and sell their products and increased company profitability. In the 1990s, for example, Chrysler regrouped its employees into teams comprised of people from all the different occupational functions such as market- ing, research and development, and manufacturing. The result was that Chrysler was able to reduce its operating costs and increase its vehicle quality dramatically. This has helped the company compete more successfully against Japanese carmakers. Similarly, Citicorp developed software giving its employees a better understanding of the needs of its customers, which improved customer-service quality. By 2003 the marketplace had rewarded Citicorp with millions of new global customer accounts.

Finding new, more profitable ways to run a business, large or small, is as entrepreneurial an activity as creating better products. Whenever employees take even small, incremental steps to improve the quality of a particular product or operation in a firm, they are behaving entre-

preneurially. If all employees are on the lookout for ways to improve the firm’s processes and products, the firm will be more competitive.

Countless opportunities exist for entrepreneurs to found new companies with viable business models. Often, it is small companies, founded by one or a group of entrepreneurs such as Dell, Apple, and Microsoft, which introduce the new products that change the business and social world. At the same time, a substantial amount of entrepreneurship takes place in large companies that invest huge amounts in new research and development to advance technology and create new and improved goods and services. Intrapreneurship is the entrepreneurial activity that takes place inside an established company. Often, it is the capital spent by large global companies on Intrapreneurship that fires the advances in technology that can, and have, revolu- tionized business in the last decades.

70 Chapter Three

In order to compete successfully against Japanese carmakers, Chrysler grouped its employees into teams of people from all of the company’s different functional groups. This lowered Chrysler’s operating costs and increased vehicle quality.

intrapreneurship Entrepreneurial activity that takes place inside of an established company.

Jones: Introduction To Business: How Companies Create Value for People

I. The Environment of Business

3. Entrepreneurs, Managers, and Employees

Why Be an Entrepreneur? The reason established companies, individual entrepreneurs, and other investors like venture capitalists, are willing to risk or lend their capital to pursue new ventures is that the potential profits are enormous. In the last chapter we discussed how mer- chants and companies could charge premium or above-average prices when they had a monopoly. Entrepreneurs and companies that create products customers perceive as valuable also can charge premium prices that lead to high profits. Michael Dell, for example, created a highly profitable small business by selling low-priced computers over the telephone. Today Dell Computer is the leading PC maker and its founder is a rich man. The same is true for Filo and Yang (and for Sequoia capital), who profited handsomely by launching Yahoo!

Of course, entrepreneurship is also fraught with great risks. Many entrepreneurs make mistakes, their businesses collapse, and their companies go bankrupt. There are several reasons for this.

First, entrepreneurs frequently overestimate their ability to create new products customers desire and are willing to pay a high price for.

Second, they underestimate how difficult it is to actually reach prospective cus- tomers and get them to try their products—even when they are excellent. The impor- tance of marketing and advertising—and its high cost—is often not given enough weight in a new company’s business model.

Third, entrepreneurs may not realize how much ready cash is needed to see a small business through its critical, initial “birth” period, which can sometimes take up to two years. This is the time period in which most new businesses fail because they lack cash flow—the money that must be constantly available to pay the cost of the business’s everyday operations.

Given the potential risks and returns of entrepreneurship, most scholars agree that although capital and wealth may be the ultimate reward, many entrepreneurs are not driven by money. Rather, they are driven by the challenge of creating valu- able new goods and services. The profit they receive is essentially the by-product of their drive to bring their new products to market and watch them succeed.

The point here is that many entrepreneurs are intrinsically motivated, meaning they are driven by personal or inner motives, such as the need for achievement or the need to create new and better things for themselves and others to use. They are not always

extrinsically motivated, meaning that they are not driven solely by the desire for money and personal wealth. When Michael Dell started his PC business from his dorm room when he was a student at the University of Texas in Austin, he had no idea he would end up becom- ing a multibillionaire. He was driven by his vision of competing with, and beating, companies like IBM and Compaq at the business of delivering less expensive PCs to computer users. The inventors of the earliest video games were driven by their own enjoyment of playing their games, not by the prospect of making a fortune. Many successful high-fashion clothes designers are driven by the vision of themselves in their own creations. Successful chefs are motivated by their desire to produce food dishes with flavors unlike any other. Figure 3.2 out- lines the different types of entrepreneurship people engage in and their motivation.

Enterprise, and the number of new small business startups that result from it, are commonly seen as one of the major indicators of a particular society’s present and future prosperity. If entrepreneurs do not rise to the chal- lenges of succeeding in a changing global environment,

Entrepreneurs, Managers, and Employees 71

Enterprise

Entrepreneurship Intrapreneurship

Intrinsic Motivation Extrinsic Motivation

Figure 3.2 Types and Motives for Enterprise

Jones: Introduction To Business: How Companies Create Value for People

I. The Environment of Business

3. Entrepreneurs, Managers, and Employees

a nation’s economic growth may be stifled. To encourage entrepreneurship, many countries provide education, training, and “seed money,” or startup capital, to foster the establishment of small businesses and nurture the entrepreneurial spirit of their cit- izens. Nowhere is this truer than in the United States. It has been said that the “busi- ness of America is business.” Perhaps in part due to its “frontier” heritage, people around the world see the United States as a place where ordinary people can succeed.

Entrepreneurship as “Creative Destruction” Economists refer to the widespread changes brought about by increasing global com- petition and advancing technology as the process of “creative destruction.” This process drives old, inefficient companies out of business as they are replaced by new, more efficient ones. When small companies, like Dell, Apple, and Microsoft, launched by a single entrepreneur or group of entrepreneurs, introduce new products that change our lives, larger established companies that fail to invest in new technolo- gies can find themselves driven out of business. And its not just companies but entire industries that get driven out of business. The Industrial Revolution, discussed in the last chapter, is an example of how creative destruction works. The old agricultural age where wealth depended on land and physical labor gave way to the age of steam- powered machinery and transportation; capitalists created new low-cost industries and products making craftspeople largely a thing of the past.

It is not surprising, then, that smaller companies with cutting-edge products often become the takeover targets of larger, more-established companies that want their products, technology, or expertise. The larger companies know it’s a matter of their survival. Even Google, which is presently enjoying great success, knows it has to evolve to stay at the top of its game. In May 2005, for example, Google purchased a small networking company called Dodgeball.com. Dodgeball.com has developed software that, through cell phones, signals people when they are in close proximity to one another—so they can meet for coffee and such.

Nonetheless, a substantial amount of entrepreneurship definitely takes place in large companies. Most large companies invest huge amounts of capital in their own research and development endeavors. Often, it has been this capital that has fueled the advances in technology revolutionizing business and our lives in the last century.

Today, of course, the emergence of new industries, such as the computer hardware and software, biotechnology, robotics, fuel cell, and home videogame industries, have created massive disruptions in the business world. The experience of the Levi- Strauss’s workers has been repeated across most industries including the industries for steel, cars, clothing, footwear, electronics, and so forth. As you can see, the cre-

ative destruction process affects not just companies and industries, but individual people and workers too.

But there is a flipside to the creative destruction process. Although improved communications and information technology destroyed many jobs in the United States in the last decade (particularly manufac- turing jobs), it has created many millions more, includ- ing jobs in research, engineering, design, sales, consul- tancy, health and human services to provide new goods and services such as wireless phones, physical rehabilitation, home videogames, and heath care to businesses and ordinary people. Many of these jobs are higher paying jobs than the manufacturing jobs that have been lost to workers in countries abroad. Some people believe that this new wave of disruptive change will ultimately lead to a higher standard of living and better quality of life for the average U.S. worker.

72 Chapter Three

Rapid enhancement in IT has spawned the growth of employment in many industries related to digital and electronic-based computing, such as wireless phones, personal digital assistants (PDAs), and home video games.

Jones: Introduction To Business: How Companies Create Value for People

I. The Environment of Business

3. Entrepreneurs, Managers, and Employees

Another trend occurring alongside the loss of former high-paying manufacturing jobs has been the growth of low-paying jobs in the service sector in the United States. This has once again created a large class of workers being paid at, or just above, the minimum wage. Many U.S. workers who lack the skills needed in the new IT age have been forced into low-paying jobs in retail stores and fast-food restaurants. Wal- Mart, for example, is currently the largest U.S. employer. In 2005 the company employed over 1,000,000 workers who earn at or just above the minimum wage and receive little or no health insurance benefits. Of course, low wages are one reason Wal-Mart is able to charge lower prices.

It is still not clear how the new business system that is emerging will affect the pros- perity of the average person. However, Adam Smith’s invisible hand of the market offers hope that most people and classes in the United States and all countries will ben- efit from changes in technology and competition. Once again, however, there is no rule that says everyone is made better off by capitalism. In many instances, government intervention and international agreements are needed for this to happen. For example, governments can help people adapt to changing conditions in the marketplace by pro- viding them with the training and education programs needed to learn new skills.

The lesson to be learned from the process of creative destruction is that it is always occurring. Most experts now predict that the average worker should expect to make at least three occupational changes in his or her lifetime. It is therefore vital that you continue to acquire and hone new skills. This can help lessen the challenging and sometimes adverse human effects of the changes that constantly occur as the process of creative destruction unfolds.

Entrepreneurs, Managers, and Employees 73

It is one thing to have a good business idea; it is quite another to get that business up and running. Just as the survival of a clan or tribe depended on cooperation of its members, entrepreneurs need help to operate a business of any size. The work and coop-

eration of many people is always needed in business. But getting people to work together to achieve a common goal is not an easy thing to do.

To continue to grow a business, entrepreneurs have to recruit people to take over the various functional tasks that must be performed to get products to customers. Recruiting skilled, honest, and reliable people is a difficult and time-consuming process. The information provided by job applicants must be scrutinized, for exam- ple, and new recruits may require considerable training in their new tasks. All the other aspects of employing people, such as monitoring and evaluating their perfor- mance and deciding how to reward them, also have to be managed.

The Agency Problem: The Separation of Ownership from Control Clearly, to run a business of any size, an entrepreneur will have to delegate, or give up, some decision-making authority. Delegating is difficult for entrepreneurs. Many of them are used to having total control of their businesses and making all of the impor-

tant decisions. Hopefully the people an entrepreneur hires will act entre- preneurially as well and take respon- sibility for sensing new opportunities both in the marketplace and within the organization. The question is, will they? Why would these people want to work as hard as the firm’s

The Role of Management

delegate Giving up decision-making authority to other people.

Did You Know? “It was not until the mid-nineteenth century that the concept of the business manager began to appear as an agent, operating between the owners and the workers.” —Anthony Sampson3

Jones: Introduction To Business: How Companies Create Value for People

I. The Environment of Business

3. Entrepreneurs, Managers, and Employees

owner? How can they be trusted to make good decisions about how to use the firm’s resources when it is not their money at stake? Even if the owner hires good employees, these employees can always leave the company should a better opportunity come along. How can the owner prevent this from happening?

This problem is called the agency problem. It is inevitable whenever there is a sep- aration between the ownership and control of a business. The aristocrat who delegated control over his estates to land agents had to rely on them to monitor the performance of tenant farmers and make sure they made good use of the land. The merchants who equipped and manned their ships had to watch them sail away under the control of a captain (an agent) upon whose skills the success of the voyage depended. The problem facing owners is to find people skilled in running a business—managers—who can be trusted and motivated to work hard in their interests. Managers are the employees to whom a company’s owners delegate responsibility for creating profitable goods and ser- vices. Managers control and develop a company’s business operations, such as manu- facturing, marketing, accounting, and so on. They are also responsible for designing a company’s organizational structure. The success of the firm lies in their hands.

To motivate managers to perform at a high level the owners or stockholders of companies provide managers, and particularly top managers, with extremely high financial rewards. These rewards are directly linked to a company’s profitability so that managers’ interests become aligned or consistent with its owners’ interests. (Remember, stockholders benefit when a company’s increasing profitability causes the value of its shares to increase.)

These rewards can take several different forms. First, managers can be paid a high salary. Second, they can be paid on a bonus system contingent upon the firm meeting certain revenue and profitability goals. Such a bonus might consist of an extra percent- age of the manager’s salary, say, 30%, as a bonus. Third, many large companies moti- vate their managers by granting them stock options. Stock options give managers the right to buy a stock at a certain price, say $10 a share. If in the future the company’s share price increases to, say, $25 a share, then the managers can exercise their options to buy the stock at $10. They will therefore receive a $15 profit on each share they own if they choose to sell the stock at $25. Since top managers often receive tens of thou- sands of stock options, they stand to profit to the tune of millions of dollars. Over one thousand of Microsoft’s managers have become millionaires as a result of that com- pany’s stock option program. Its top executive, Steve Balmer, has received stock options that today are worth more than $500 million. Such a reward structure will motivate a manager to work hard to make the company succeed and the stock price climb. Figure 3.3 outlines the steps owners can take to overcome the agency problem.

Levels of Managers Creating a reward structure is not the only way the owners of a company try to en- sure managers work towards increasing its profitability, however. Owners or share- holders also create a monitoring and control system enabling them to scrutinize man- agers’ business decisions and actions. The first step involved with this process is to create a board of directors. A firm’s board of directors consists of experienced busi-

ness executives from inside and outside of the company who are elected by a com- pany’s shareholders to act as their representatives. These people oversee the company’s business dealings to ensure its resources are being put to their best use. The board also has the authority to recruit, oversee, reward, and fire the

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agency problem The problem that arises because of the separation of the ownership and control of a business. It occurs when the firm’s owner delegates authority to managers.

managers Employees to whom a company’s owners delegate responsibility for using its resources to create profitable goods and services.

Did You Know? Some nations are more entrepreneurial than others. Ecuador’s total entre- preneurial activity, for example, is nearly twice that of the United States and Canada. Uganda has nearly three times the entrepreneurship per capita as North America, and Peru has nearly four times. Singapore, Denmark, and South Africa, however, have about half as many entrepreneurs per capita as exist in North America.4

stock options The right to buy a stock at a certain price and to benefit from increases in the stock’s value in the future by selling it.

board of directors Experienced business executives from inside and outside of a company who are elected by a company’s shareholders to act as their representatives.

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company’s chief executive officer (CEO). The CEO is the company’s top man- ager—the person ultimately responsible for operating the company and using its capi- tal in a way that makes a profit.

The task of the CEO is then to create a hierarchy of managers in which managers at higher levels scrutinize managers at lower levels—much as the board of directors scrutinizes the CEO’s performance. In most companies, it is possible to distinguish between three main levels of managers: top managers, middle managers, and first- line managers (as shown in Figure 3.4).

TOP MANAGERS Top managers report to the CEO. Or sometimes they report to the president of the organization—the firm’s second-in-command. The CEO and president are responsible for developing good working relationships among the top managers, who usually head up the firm’s various major functions, manufacturing and marketing, for example. (These managers are often given the title of vice presi- dent.) Top managers establish the company’s major goals, such as its revenue and profit targets, and they decide how the company’s different functions should work together to achieve those goals. In particular, they are responsible for monitoring and controlling the actions of middle managers (discussed next).

One example of a CEO who has had great success is Ann Mulcahy, who became the CEO of struggling Xerox Corp in 2001. At the time, Xerox was in terrible shape. Its revenues were falling because its sales managers were fighting with its product development and manufacturing managers. The company was also involved in a scandal over illegal accounting practices. Mulcahy proved relentless in finding solu- tions to Xerox’s problems. She terminated a large number of top and middle man- agers in business lines she felt were the source of Xerox’s problems, and she demanded strict financial accountability. She also focused on finding a range of new products that would “re-attract” Xerox’s customers. By 2005, Mulcahy had returned the company to profitability. (Mulcahy is the subject of the “Exploring the Web” exer- cise at the end of the chapter.)

MIDDLE MANAGERS Middle managers are in charge of the nuts and bolts of running the company’s various functions. These people make the thousands of daily decisions that go into the production of goods and services: Which first-line supervi- sors should be chosen to control a particular project? Where can the most highly skilled scientists and the highest-quality inputs or parts be found? How should employees be organized? Should they work as individuals or in teams? Very often, the suggestions that middle managers make to top managers help promote the level of entrepreneurship inside a company and spur it toward greater success.

A major part of the middle manager’s job is to develop a function’s occupational skills and know-how, such as manufacturing, human resource, or marketing exper- tise. Within the sales force, middle managers are responsible for training, motivating,

Entrepreneurs, Managers, and Employees 75

Separation of ownership and control results in an

agency problem

Solving agency problem requires aligning interests of managers and

stockholders

Interests are aligned by:

Result is an increase in company profitability

1. Creating a motivating reward program 2. Designing a hierarchy of authority

Figure 3.3 The Agency Theory Problem

chief executive officer A company’s top manager. The CEO is responsible for overseeing the operations of the company and ensuring its capital is used to create the most profit possible.

top managers Employees who are responsible for developing a company’s business model and who, along with the CEO, are ultimately responsible for its success or failure.

middle managers Employees in charge of a company’s various functions and who are responsible for using the company’s functional resources productively to increase its profitability.

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and rewarding individual salespeople. Behind a team that develops a new life-saving drug, for example, look for the team leader—the middle manager responsible for steering the project past the many obstacles it will face.

Middle managers also monitor the performance of the managers lower in the com- pany’s hierarchy. Business in Action explains the way in which Deborah Kent, the most senior African-American middle manager in charge of an important Ford pro- duction plant, performs her job of managing the production of Ford’s minivans.

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CEO

Top Managers

Middle Managers

First-Line Managers

Figure 3.4 Levels of Management

Business in Action

How to Be an Effective Plant Manager When Deborah Kent took control of Ford Motor Company’s manufacturing plant in Avon Lake, Ohio, the first thing she did was walk the production line. Kent believed that the only way to know how goods are produced is to watch it happen and learn from the employees who actually perform the tasks necessary to get the job done. Kent’s hands-on approach is the result of a 17-year career in the automo- bile industry, first with General Motors and then with Ford. The experience she gained in manufacturing, quality control, and customer relations has given her the know-how she needs to manage these crucial areas of the manufacturing process and rise up through the ranks.

An industrial psychologist with a degree from Washington University in St. Louis, Kent is known for her open, accessible management style and for her insis- tence that both managers and employees below her feel free to approach her with their opinions and suggestions about how to alter work procedures to improve quality in the car plant. She continually looks for feedback from her subordinates and nurtures, develops, and motivates them to find new ways to be more efficient.

Kent’s hardworking, no-nonsense style also sits well with officials from the United Auto Workers (UAW) union. The UAW is cooperating with Ford’s man- agers to increase quality in order to protect their members’ jobs at a time of intense

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FIRST-LINE MANAGERS At the base of the managerial hierarchy, first-line managers (often called supervisors) are found in all functions and departments of an organization. They are responsible for the daily supervision of nonmanagerial employees—the people whose job it is to perform the different work activities neces- sary to get the product to the customer. Examples of first-line managers include the supervisor of a work team in the manufacturing department of a food product plant, the head nurse in the emergency room of a hospital, and the chief mechanic oversee- ing a crew of mechanics in the service department of a car dealership.

Types of Managers Because so much of managers’ responsibility is to acquire and develop productive resources, they are typically a member of one of a company’s functions. Managers inside a function possess a certain type of occupational or job-specific skill and are known as, for example, marketing managers or manufacturing managers. As Figure 3.5 indicates, first-line, middle, and top managers, who differ from one another by virtue of their job-specific knowledge and responsibilities, are found in each of a company’s major functions. Inside each function, the three main levels of management emerge.

One of the major reasons managers are divided into functions is to obtain the advan- tages of specialization and the division of labor discussed in the last chapter. These advantages arise for several reasons. First, inside each function, people further up the managerial hierarchy can mentor those below and help them improve their ability to create better products. Second, when people are grouped together because they share similar knowledge or use the same skills, it is easier for managers to scrutinize their per- formance. Third, the highest performing employees in every function can expect to be promoted to a higher level of management and receive a higher salary and bonuses. This also encourages individual employees to behave entrepreneurially.

Profitability: Efficiency and Effectiveness As we discussed earlier, a company’s owners expect its managers to behave entrepre- neurially, that is, to search for opportunities to develop better, more profitable goods and services. At a managerial level profitability is often viewed from two related per- spectives—in terms of efficiency and effectiveness.

Efficiency is a measure of how well or how productively a company’s resources are being used to produce goods and services. Companies are efficient when managers minimize the amount of resources (such as labor, raw materials, and component parts) or the amount of time needed to produce a given output of goods or services. For exam- ple, McDonald’s recently developed a more efficient fat fryer that not only reduces (by 30%) the amount of oil used in cooking, but also speeds up the cooking of French fries.

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first-line managers Employees at the base of the managerial hierarchy. They are often called supervisors.

competition from other makers of minivans, especially Chrysler, the minivan industry leader. Kent knows that the quality and reliability of the minivans are the result of her managerial abilities and her plant’s performance. She often asks own- ers what they think of their vehicles, and on the rare occasions when she sees one broken down, she stops to find out the cause and to offer assistance. Kent believes that this type of involvement is part of her responsibility.

To perform her job effectively, Kent begins each workday with a walk through the plant to get a feel for the problems and issues at hand. Responsible for manag- ing two shifts—including 3,746 employees and 420 robots—and for the quality and performance of the over 400,000 vehicles that her plant produces every year, she finds it hard to leave her responsibilities behind. Deborah Kent works long hours to make her plant one of Ford’s highest-performing operations; she is a good example of a committed middle manager.5

efficiency A cost- focused measure of how productively a company’s resources are being used to produce goods and services.

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Efficiency is directed at the cost side of the profit equation. By becoming more efficient and increasing productivity, a company can become more profitable over time.

By contrast, effectiveness is attention directed at the revenue side of the profit equa- tion. Effectiveness is a measure of the competitiveness of the firm’s business model and its ability to meet its sales goals. By becoming more effective, a company can also increase its profitability.

Some years ago managers at McDonald’s changed the restaurant’s business model to include selling breakfast food. The goal of this change was to increase McDonald’s revenues by 15%. The new model proved successful. Breakfast food now accounts for not just 15% of McDonald’s revenues but a full 30% of its revenues.

One simple way to differentiate between these two concepts is to view effective- ness as “doing the right things,” and efficiency as “doing things right.” Profitable orga- nizations like Campbell Soup, McDonald’s, Wal-Mart, Intel, and Home Depot, are simultaneously efficient and effective, as shown in Figure 3.6.

Thus, a company’s owners want managers and employees to be enterprising in two ways: to “do the right things” (be effective) and to “do things right” (be efficient). One of the most important determinants of managers’ ability to do this is the way they perform the four main functions of a manager, discussed next.

Managerial Functions Managers perform four essential functions: planning, organizing, leading, and control- ling. (See Figure 3.7.) French manager Henri Fayol first outlined the nature of these managerial activities around the turn of the century. Managers at all levels and in all functions—whether they work in small or large companies, for-profit or not-for-profit companies, or domestic or international companies—are responsible for performing these four functions, and we will look at each in turn. How well managers perform them determines how efficient and effective their companies are.

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Figure 3.5 Levels and Types of Managers

effectiveness A revenue-focused measure of how competitive the firm’s business model is.

CEO

Top Managers

Middle Managers

Research and development

function

Marketing and sales function

Manufacturing function

Accounting function

Materials managerial

function

First-Line Managers

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PLANNING Planning is a process that managers use to identify and select the appropriate business model and goals for their company. Recall from Chapter 1 that a business model is a plan of action that describes which goods and services a company intends to develop and how a company intends to use its productive resources to make a profit. There are three stages in the planning process; managers must:

1. Choose which business model to pursue. 2. Decide how to allocate the organization’s resources to pursue the business model. 3. Select the goals or targets that will be used to measure how efficiently and effec- tively the business model is working.

How well managers plan often determines how profitable their companies are. Planning is a difficult activity because the future success of a particular business model is not known. Committing an organization’s resources to pursue a particular business model is risky. Managers have to make these decisions based on their knowledge and hunches. Both success and failure are possible outcomes of the planning process.

Consider Yahoo!’s planning mistakes discussed in the opening case to this chapter. Under CEO Tim Koogle, Yahoo!’s business model was to develop more Web content, become the number one portal on the Web, and buy other dot.com companies to expand its range of services. This, in turn, would attract more people to Yahoo!, generate even greater advertising revenues, and the process would begin all over again. Yahoo! would continue to grow as a result. The problem with the model was that it made Yahoo!’s profitability (and therefore its stock price) totally dependent on the size of its advertising revenues. And, after the dot.com bust of the early 2000s, Yahoo!’s advertising revenues (and stock price) plummeted. Critics said that when Yahoo!’s stock price was high, it should have purchased a company that was generating revenue by some other

Entrepreneurs, Managers, and Employees 79

Low efficiency/ High effectiveness

Manager chooses the right goals to pursue, but does a poor job of using resources

to achieve these goals.

Result: Zero Profitability A product that customers want,

but that is too expensive for them to buy.

High efficiency/ High effectiveness

Manager chooses the right goals to pursue, and makes

good use of resources to achieve these goals.

Result: High Profitability A product that customers want

at a quality and price that they can afford.

Low efficiency/ Low effectiveness

Manager chooses the wrong goals to pursue and makes

poor use of resources.

Result: Bankruptcy A low-quality product that

customers do not want.

High efficiency/ Low effectiveness

Manager chooses inappropriate goals, but

makes good use of resources to pursue these goals.

Result: Zero Profitability A high-quality product that

customers do not want.

High

Efficiency

E ff

e c

ti v e

n e

s s

Low

Low High

planning A process that managers use to select the best business model and goals for their company.

Figure 3.6 The Relationship Between Efficiency, Effectiveness, and Profitability

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means than advertising. That way, if ad revenues tanked (which they did), Yahoo! wouldn’t have been so vulnerable. In fact, Yahoo! had considered purchasing eBay. (eBay’s revenues are largely generated from a commission on the sale of products on its site.) However, infighting among Yahoo!’s top managers prevented that from occurring.

Yahoo!’s board eventually replaced both Koogle and Mallett with new top man- agers. A new CEO, Terry Semel, was hired. Semel decided Yahoo! could not rely solely on advertising dollars. His solution was to develop a new business model based on a new goal of making Yahoo’s content and services so useful and attractive that customers would be willing to pay for it. These services would include things like personal ads and ads to sell or rent merchandise like cars or homes. This new business model has worked much better for Yahoo! Over 40% of its revenues now come from this source.

ORGANIZING Organizing is the process managers follow to create a company’s organizational structure. Recall, that the organizational structure is the formal system of task and reporting relationships that coordinates and motivates members so that they work together to achieve the organization’s goals. Organizing involves grouping people into functions according to the kinds of job-specific tasks they perform. Managers also lay out the lines of authority and responsibility between different individuals and groups, and they decide how best to coordinate across functions.

A second outcome of organizing is a business’s organizational culture, the shared set of values, norms, beliefs, and feelings that determine how people in the organization behave and work together—for example whether or not they feel loyal to their company and are willing to work hard to further its interests—or, whether they resent their co- workers and bosses and put their own interests above those of the company. To a large degree, a company’s efficiency and effectiveness is a result of the choices managers make about the design of its organizational structure and culture. These issues are discussed in greater depth in Chapter 8, but consider how CEO Paul Pressler (profiled in Business in Action) has performed the organizing and planning functions at Gap Inc.

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organizing A process managers use to create a company’s organizational structure.

Organizing

Planning Leading

Controlling

Figure 3.7 The Four Functions of Managers

Business in Action

A Turnaround at The Gap During the 1990s, Mickey Drexler, then the CEO of Gap Inc., revolutionized the U.S. apparel retailing industry by adding two chains—Banana Republic and Old Navy—to the company’s lineup. By 2002 Gap had opened over 3,000 new stores, and its profits and revenues had increased through much of that time period. But in 2001, although its revenues totaled nearly $14 billion, The Gap failed to make a profit. In 2002, its sales actually dropped by more than 10%, and its losses widened.

organizational culture The set of values, norms, and beliefs shared by members of an organization that determine how well they work together to further the company’s goals.

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Analysts wondered what had happened at The Gap. It seemed that Mickey Drexler had lost his magic touch.

The Gap’s board decided that it was time to bring in a new CEO with a fresh perspective to fashion a new strat- egy and structure for the ailing company. But what kind of background should the new CEO have and what kinds of changes were necessary? All of The Gap’s top managers were highly experienced in the apparel industry, but they had been unable to figure out a way to turn around the company’s performance. Gap’s board decided on a radi- cal move. It chose to hire Paul Pressler, then the head of Walt Disney’s global theme parks and resorts, as The Gap’s new CEO.

Pressler had no experience in the apparel industry and no background in clothing fashion or design. Some ana- lysts were wondering how he could help The Gap. What did he bring to the table that retail insiders couldn’t? But the fact is that Pressler had been in charge of Disney’s retail stores for three years. Moreover, from a manage- ment perspective, each of Disney’s theme parks could be viewed as a giant retail location: Once visitors entered the park, the goal was to get them to spend as much as possi- ble on food, souvenirs, rides, and so forth. What The Gap’s board wanted from Pressler were his retail planning and marketing skills —skills he could use to develop a new marketing approach the company could take.

Before Pressler became CEO, The Gap, Banana Republic, and Old Navy were led by different management teams, and each team made decisions based on its own brand. Pressler saw that there were many opportunities for managers in one chain to learn from managers in the other chains how to better position each brand. He sub- sequently hired a top advertising agency, Leo Burnett USA, to research each of the chain’s consumers, brand positioning, and business models. Based on Leo Burnett’s advice Pressler decided to reorganize the marketing and operations of the three chains to better position the brands and reduce the operating costs of each.

Pressler also decided that The Gap had lost contact with its customers. Its cloth- ing and accessories were being designed without an understanding of their needs. He then conducted extensive market research to better position Gap’s three brands to fit these needs. He decided clothing would be selected and designed knowing what customers wanted—not what The Gap’s designers thought they wanted. This was a radically different approach to planning, one that caused quite a stir.

Nonetheless, by 2003 sales at Gap Inc.’s stores were up by 5%, compared to the drop of 11% in the previous year. In 2004—2005 the company’s performance con- tinued to improve, and the value of its stock increased by 50%. Pressler credited this to a change in the product mix each store offered it customers as a result of Gap’s better understanding of their needs. Analysts who had questioned his appointment were now “on board” and acknowledged that, so far, Pressler has reenergized The Gap and led it back to profitability.6

LEADING Leading involves being able to articulate a clear vision for a com- pany’s members and motivate them to pursue it. This requires power, influence, vision, persuasion, and communication skills. Although The Gap felt it had to bring in new leadership to reenergize the company, J. Crew, another major clothing store chain, decided that Mickey Drexler, with his vast retailing expertise was just the right person for them. In 2003, J. Crew named Drexler chairman and CEO, hoping he

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Paul Pressler brought a little of Disney magic with him when he became the CEO of Gap Inc. Pressler managed to increase sales by reorganizing the company’s retail chains and putting the needs of customers first.

leading The ability to develop a plan and motivate others to pursue it.

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could turn the company around. He succeeded. By 2005 J. Crew was once again highly profitable, and Drexler, who owns 22% of its stock was proud of the way he had handled his new challenge.

Leadership is not just a trait exhibited by individual managers, however. It also occurs when groups of managers pool their talents to achieve cooperation via cross- functional teams. Cross-functional teams consist of groups of people from a firm’s different functions working together on a particular project. These teams are often vital when it comes to developing new and improved products that can be launched quickly. Whether it occurs at the individual or the group level, the outcome of effec- tive leadership is a high level of motivation and commitment among an organiza- tion’s members. These issue of motivation, leadership, and teams are discussed in detail in Chapter 6.

CONTROLLING Controlling is the process of evaluating whether or not a company is achieving its goals and taking action if it is not. As noted earlier in the chapter, to evaluate the success of its business model, managers monitor and measure how efficiently and effectively employ- ees, individual functions, and the company as a whole are operating. These measures are frequently reflected on the organization’s balance sheet in terms of its revenues, costs, and profitability. If the measures indicate efficiency or effectiveness is dropping, or if there is evidence that the company’s competitors are operating more efficiently and effec- tively, managers need to take action.

The practice of comparing a business’s strengths and weaknesses to those of its competitors is called benchmarking. Benchmarking is a tech- nique widely used to increase profitability. Managers first choose a com- pany that they believe is operating more efficiently than a functional area in their own company. The functional area might be related to customer service or new product development, for example. Second, they study it to try to determine the sources of their competitor’s superior performance. Third, they change the way their company operates to match, or bench- mark, the way the other company operates.

The relative importance of planning, organizing, leading, and control- ling—the four managerial functions—and how much time a particular manager spends on any one of them—depends on the manager’s position in the hierarchy. Top managers devote most of their time to planning and organizing as it relates to the firm’s business model, long-term goals, and profitability. Lower-level managers spend more time leading and control- ling first-line managers or nonmanagerial employees to meet those goals.

After winning their fourth consecutive World Series in 2000, the New York Yankees served as a benchmark for all other baseball organizations. (Could it be because the Yankees’ owner, George Steinbrenner, is controlling?)

cross-functional team A group of people from the different functions who work together on a particular project.

controlling The process of evaluating whether or not a company is achieving its goals and taking action if it is not.

Although managers are employees—they work for a company’s owners—we typically think of them as being different from “ordinary” employees because they have decision-making authority over the organization’s resources. What is the role of nonmanagerial employees—the people who actually perform

the many jobs and tasks necessary to make and sell a product? What kind of expecta- tions does a company have of its employees—and what can employees reasonably expect from a company in return for their labor? Moreover, how does a person get a job and become an employee, keep that job over time, and get promoted?

What Is Appropriate Employee Behavior? When people accept jobs in organizations they typically sign some kind of written agreement, a legal contract, that specifies the nature of their job responsibilities and employment conditions concerning pay, benefits, and so on. Managers now have the

The Role of the Employee

benchmarking The practice of comparing a business’s strengths and weaknesses to those of its competitors.

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legal right to direct and supervise these new employees. Employees have also accepted the legal obligation to follow orders and to perform the work they were hired to do. Contracts can never be written to spec- ify everything an employee should or should not do, however. Indeed, a company would not want such contracts because factors such as chang- ing technology might require employees to perform new or different job-related activities at any time. Employees might then argue, “But that’s not in our contract.” Also, writing such contracts would be very time consuming and result in high and unnecessary transaction costs.

Because of the many “gray” or unspecified areas in a job contract, employees have some freedom to decide how to perform their company roles. A role is the set of tasks a person is expected to perform because of his or her job or position in an organization. On the one hand, an employee could decide to perform at some “minimum” level and just do what is required and no more. At the other extreme, an employee could choose to perform at a high level and work efficiently throughout the day. They might even decide to come into work early and leave late if an unusually large amount of work needs to be completed. An employee could also pull apart the various tasks involved in a job to figure out how it could be done more efficiently. Companies also differ with regard to what they expect from their employees. Some companies simply expect employees to follow their job descriptions and perform a “fair day’s work for a fair day’s pay.” Other companies demand people who will work long hours and strive to find better ways to do their jobs.

In general, however, employees will increase their chances of being promoted within their companies if they are proactive—if they take an enterprising approach to their jobs and are on the lookout for ways to improve their work performance. The problem is that managers usually do not “spell this out” for employees. Astute employ- ees, however, understand this and behave proactively rather than simply doing what they are told. These employees eventually are promoted because their supervisors see them as people who demonstrate initiative, commitment, and loyalty. The employees become more trusted and are given more interesting tasks to perform and more responsibility over company resources.

At the same time, continually trying to discover better ways to work helps an employee build his or her own personal or human capital. Recall from Chapter 1 that human capital is the set of skills, knowledge, and expertise that a person develops from pursuing a specialized job over time. People who develop human capital are investing in themselves. Moreover, this capital is their own: It goes with them when they take a job in a new company or start their own business. For most people, human capital is what gives them their best opportunity to accumulate wealth. If employees take a short-term view and believe the extra effort necessary to be proactive “isn’t worth it,” their careers are likely to be hampered. The fact is the extra effort simply is not rewarded with more money now.

Successful people take a long- term time perspective. They know that the extra work they do now will pay off in the future in the form of the building of a reputation for being competent and trustworthy, acquiring the respect of one’s supe- riors and co-workers, and receiving excellent letters of recommenda- tion if they choose to change jobs and companies. It is also important to recognize that companies spend enormous amounts of money train- ing and educating their employees.

Being a proactive employee often results in career progress in a company and generates greater rewards. In what ways can an employee be proactive?

role The set of tasks a person is expected to perform because of the position he or she holds in an organization.

Did You Know? Companies and the capital that launched them:

$1,300—Apple Computer $1,000—Dell $175—Raging Bull (financial information company) $50—Water Wonders (decorative water fountain manufacturer) $15—DataMark (college and university marketing) Paper, envelopes, and stamps—Jasc Software (originator of PaintShop Pro)7

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High performance ratings and the recommendations of the boss are the selection cri- teria used to determine which employees receive this training—advanced skills-based training and even financial support to obtain a bachelor’s or master’s degree. Because this training builds human capital, it is an important source of future career success and the rewards that go with it.

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After you graduate your goal will likely be to land a satisfying, well-paying job in a business organization. Or perhaps you plan to start your own business. If either is the case, it will be worth your while to examine the path of your career develop-

ment in some depth. A model that illustrates the different stages in a person’s career, and the work issues related to them, is presented in Figure 3.8.

Stage 1: Preparing for Work The single most important thing you can to do to prepare for work is to obtain some kind of advanced certification or degree because it unlocks the door into better-paying jobs in companies known to be good employers. Some people find it hard to get that degree and put it off. This is a serious mistake.

Studying is a state of mind. It is never easy, but it gets much more difficult if a per- son takes a break. The focus and concentration needed to study efficiently is lost—and it takes much more time and effort to get back into it later. Then, when people do start school again, they sometimes find getting back up to speed is too much to bear. This is why people end up dropping out during the semester or getting poorer grades than if they had stayed the course all along. Starting afresh several times over, espe- cially when this involves changing subject areas mid-course and additional course work can significantly stretch out the time it takes to complete a degree—and time is money. In the long run, every “unnecessary” year spent on education reduces a per- son’s future income stream by a substantial amount.

Once again, if people do not think carefully about career issues they may benefit in the short run but this may cost them dearly in the long-run. Research shows that the size of a person’s lifetime income stream is closely related to the number of years he or she spends in school and the highest degree he or she obtains. The difference in the lifetime income of a high school graduate versus someone with a bachelor’s degree, master’s degree, or PhD can run into hundreds of thousands and even millions of dollars.

But what degree should you get? In the preparing-for-work stage of their lives, people are considering the kinds of jobs and occupations they seem most suited for and would enjoy doing the most. They must also find out what abilities and qualifications are needed to pursue these jobs and occupations. In this way they can assess whether there is a “fit” between their personal talents and desires and the kinds of careers they are con- sidering. Utilizing resources such as career centers, the Internet and company Web sites can help people find out about different careers and companies.

Although searching for career information is an important first step, in practice most people do not end up pursuing exactly the kind of occupation or job that they originally anticipated they would. Someone once said, “Life is what happens to us

while we are making other plans.” The fact is that unexpected events occur during one’s career. If you’re not absolutely certain about what you want to do, and you become too specialized in your career, too early, it’s pos- sible you could end up locked into a career path that might prove to be a dead end or a poor match for your talents. This is why people pursue general degrees in, for exam- ple, liberal arts and business. It gives them

Career Management

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Jones: Introduction To Business: How Companies Create Value for People

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time to assess their skills and future opportunities. Working part-time in several differ- ent jobs, or as an intern, also helps expose people to different occupations. Some- times they find that the occupation is not what they expected or that they are not suited to it.

Stage 2: Entering the Workforce Choosing the right kind of company to join is, in many cases, as important as choos- ing the right occupation. For example, does the company offer good on-the-job expe- rience, skills training, or educational opportunities? Or does it simply require employees to perform routine tasks? This will necessitate collecting information from job advertisements, job fairs, and of course, the Internet. Don’t, however, discount “word of mouth” information about jobs. The fact is that most jobs are filled via the “grapevine”—when someone who knows about a job opening tells someone else who is looking for a job. It is also common to receive many letters of rejection after sub- mitting an application or no letter at all from companies. For every one hundred resumes sent out, a person might get 10 responses, five interviews, and one job offer if lucky. Once again it takes enormous time and effort to find the right job, but the fact is that almost all people do find jobs. The crucial thing is to get one’s foot in the door. Then as you gain experience, establish a track record, and get to know other people in your industry, you will find it easier to move into other positions and companies.

However, before a company makes a job offer in the first place, it will consider the following: First, does the candidate possess the level of functional and job-specific knowledge needed to do the job? Or can he or she be trained to do it? Second, will the candidate “fit into” their organization? Does he or she have the right attitude for the job? Does the candidate seem enthusiastic, agreeable, and able to work well with the other people in the company?

One model of how the recruitment process works is as follows: Over time, employees in a particular company develop a set of characteristic work styles and company-specific values, norms, and work attitudes. Very often these work styles and values and norms are those of the company’s founder, who tends to recruit people who have similar values and norms. In turn, these employees hire people who are similar to them, and so on. Over time a definite kind of work culture, or “climate,” develops in the company. Prospective employees may be attracted to a particular company because of its particular work styles, values, and norms. But if they are to be “selected” by this company they must possess the kinds of values and attitudes it desires, or be able to quickly develop them.

There are some important steps you can take to make yourself more attractive to a company you are interested in working for. Even getting an interview is not easy. Most people are eliminated during the resume screening process. Thus, it pays to do a good job designing and writing your resume. Think about what kind of skills, atti- tudes, abilities, a company is likely to want from a prospective employee. Then, tailor your resume to match those strengths whenever possible.

Prior to the interview (assuming you are granted one) think about what you think the company expects from its employees. Those attributes are likely to be loyalty, commitment, enthusiasm, respectfulness, open-mindedness, and the willingness to work with others. Bear in mind that everything you say during your interview, how you talk about your family, hobbies, likes and dislikes, or personal strengths and weaknesses are being thought of from this perspective. Suppose you are interviewing for a job with a major bank or hotel chain for a position as a bank teller, desk clerk, or managerial trainee. What kinds of personal characteristics, skills, and attitudes are these companies likely to be looking for? How do they expect their employees to dress and act? Imagine you went to the bank job interview wearing a brightly patterned shirt or blouse, or if you had forgotten to shave or make sure your nails were clean. Would you make a good impression? Suppose you were then asked about your hobbies and you said you liked mainly to read books, collect stamps, and play Yahoo!’s online games and didn’t like to go out much. What impression have you made on the interviewer?

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Stage 1 Preparing for Work

Stage 2 Entering the workforce

Stage 3 Early Career

Stage 4 Midcareer

Stage 5 Late Career

Figure 3.8 Stages and Career Management

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Bank tellers and hotel clerks are constantly meeting different kinds of people dur- ing the workday. They are expected to be polite, helpful, tactful, and professional and do their best to satisfy customers. A recruiter from these companies would be looking for someone who likes to meet people and interact with them. An interviewee who smiles often, asks intelligent questions, is courteous, agreeable, clean, neat, and dresses smartly is likely to be well received. It is unlikely that the company would hire an interviewee who is rude or arrogant, talks too much and doesn’t seem to lis- ten, who never laughs except at his or her own jokes, and who dresses garishly or is unkempt. All too often people go into an job interview not understanding the impor- tance of just being clean and neat and wearing well-pressed clothes.

Also, given the fact that companies usually want to hire people who are enthusias- tic, enterprising, and work well with others, it is important that people develop these

social skills. Although much of this develop- ment occurs naturally as a person progresses through school, joins clubs, and makes friends in life, good social skills can also be deliber- ately learned and practiced. People join toast- masters to hone their public speaking skills, for example. Likewise, volunteering in one’s community or serving on a committee can help a person become a better negotiator and team player.

Prospective employees need to act like detectives. First, they need to think about what kinds of work values and attitudes com-

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Video Small

Business in Action

Switching Careers Summary: The federal government’s data indicate that the average adult will change careers three times during their work life as shown in this BusinessWeek TV segment on your Student DVD. People in their 30’s and 40’s are most likely to switch careers. These people most often have advanced degrees and therefore, more opportunity. There are several reasons for switching from successful careers. These include seeking higher levels of job satisfaction and job status.

Often times, switching careers involves significant reductions in pay. Two exam- ples are featured in the segment. The first, Nicole, is a mother who returned to College to work on a degree in environmental science. She was formerly a dental hygienist. After the birth of her child, it appears that her “career” was no longer fulfilling. The second example focuses on Jimmy who left the successful law prac- tice. He moved into a substantially different career working in the marketing and sale of real estate projects. While he experienced a 50% reduction in pay, the level of responsibility, interest and challenge are all significantly more rewarding. He couldn’t see himself practicing law and litigating for the rest of his adult life. His career change was a “leap of faith.” However, he is far more satisfied in his new career. In order to make the transition successful and rewarding, Jimmy tells us that “you have to have confidence in yourself that it will work out.”

Discussion Questions 1. What is organizational culture and how might it have had an impact on

Jimmy’s decision to leave the successful law practice? 2. Why did Nicole leave the career that she had gone to school for and return to

college to study environmental science? 3. For both Nicole and Jimmy, what stage of their career would you place them

in?

An interviewee needs to keep in mind that throughout the interview, the employer is looking for people with qualities such as loyalty, commitment, and agreeableness.

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panies, in general, expect. Second, to get an impression of what is unique or different about a company they should also visit a company’s Web site, or visit its stores or offices, or talk to people who work for it to find out. Then, in the job interview, it is always important that the interviewee demonstrates that they understand that com- pany’s business model.

At the same time, however, it is important to ask the company’s recruiters ques- tions abut the firm, for example, how it operates and even how the interviewers came to be hired. After all, the recruitment process is a two-way street. You are gathering information about the company and gauging whether it seems like a good match for you, just as the company is gathering information about you. Recruiters therefore expect you to ask questions. In fact, asking the recruiters no questions about what they do is often taken as a sign that interviewees are not really interested in the job or that you are unlikely to be good future colleague. Think about the kinds of people you would like to work with on a day-to-day basis and be around 40 hours or more a week. This is more time than most people spend with their partners or children in today’s world!

Stage 3: Early Career Once a person has found a job, he or she enters the early career stage. At this stage, it is vital for people to quickly learn the task specific skills necessary to do their jobs. Frequently, the early career stage also involves a change of jobs Proactive employees are often offered new, more challenging job assignments after a few months or years. Sometimes they are transferred to new locations. Other people change companies entirely to find better-paying or more challenging jobs. Still other people realize they have made the wrong career choice. They then begin to search for different kinds of jobs or companies, or they go back to school to learn a new occupation.

It is important to be open to the idea of changing jobs early in one’s career. Most experts recommend that a person should change companies in the early career stage to learn a variety of skills and to learn how different companies operate. This will make you more marketable, and you are less likely to get “pigeon-holed” in a posi- tion. Pigeonholing occurs when people have been in their jobs for so long that their managers can’t envision them doing anything else.

Although many companies offer a variety of jobs and career opportunities worth pursuing, others do not. What you want to avoid is ending up in the proverbial “dead end” job. Remember, you are not working for a firm to be just a good employee. You are in business for yourself—to build your own human capital and personal wealth. Therefore, it is important to have an entrepreneurial outlook and remain alert for bet- ter opportunities.

Indeed, building one’s human capital isn’t just a good idea these days. It’s becom- ing a matter of financial survival. Layoffs and the offshoring and outsourcing of jobs are now widespread. What this means is that the relationship between companies and their employees is changing. In the past, employees believed that if they worked hard

for a particular company, they could expect to receive a long-term career and benefits from it. As they watch their companies rou- tinely lay off employees and employ tempo- rary or contract workers, many employees now view their jobs as short term rather than long term.

As result, it is especially important that employees in the early career stage evaluate their companies in terms of what they have to offer now and in the future. It is a sad fact of life that many jobs do not stretch employ- ees skill-wise: Employees learn what they

Entrepreneurs, Managers, and Employees 87

Did You Know? Small businesses in the United States9:

• Represent 99.7% of all employer firms • Generated 60 to 80% of net new jobs annually over

the past decade • Produce 13 to 14 times more patents per employee

than large patenting firms • Make up 97% of all identified exporters

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need to do and then just repeat daily the same activities over and over again. This is why it is important for employees to be alert to opportunities, be enthusiastic, and develop the human capital that will help them get more interesting, better-paying jobs.

Stage 4: Midcareer By the midcareer stage employees have often settled into a particu- lar company. It might be the fourth or fifth company they have worked for. At this stage, they are focused on achieving success in that company and are working hard to be promoted. Keep in mind, however, that the higher a person rises in a company’s hierarchy, the fewer and fewer opportunities there are to rise further. An orga- nization is shaped like a pyramid, top jobs are few, and competition to get them is fierce. In this competitive job market, employees must continually work at developing new company-specific skills that will allow them to perform at a higher level. The people who rise to the top are those who have work achievements that are directly attributable to their personal actions and qualities.

Of course, many people are perfectly happy with the position in the hierarchy they occupy and feel no desire to compete for these top jobs. However, this can be a mistake. At any level in the hierar- chy, people who are content to stay in one position can lose their edge when their familiarity with a job blinds them to new opportu- nities arising around them. For example, a person who has headed a marketing department for 20 years might not recognize the grow- ing importance of the Internet and new customer relationship man-

agement (CRM) software for reaching consumers. If a person stays in the same job and company, he or she must do all they can to keep informed about changes affect- ing their department, the company as a whole, and their industry in general. They can do this by attending job-related seminars and learning programs, for example.

Stage 5: Late Career Finally, in the late career stage employees, no matter what their position or level in a company, are anticipating their retirement. Given all the years of experience these people possess, companies need to ensure what they know is passed on to other employees in their early and midcareer stages. For example, an experienced market- ing manager might be encouraged to conduct training classes for new and established employees. Often, managers can help their companies and younger employees by acting as mentors, people who provide advice, guidance, and technical expertise to help others advance in their careers. Sometimes this is a formal relationship estab- lished between employees by the company. Other times mentors and mentees develop a relationship informally just by working together. Mentors and mentees also change as people switch jobs and move around in their careers.

Mentorship is important because so much of a company’s knowledge is not written down. It is held in the heads of experienced employees. A close personal relationship between mentors and their mentees is an excellent vehicle for transferring this knowl- edge. Note that mentorship takes place at every level in a company. Even a com- pany’s CEO is responsible for mentoring the managers who are next in line for the top job and for deciding which subordinate seems to have the skills that make them best suited to become the next CEO.

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In efforts to remain afloat, many companies are laying off employees. As a result, employees increasingly view their jobs as short term rather than as long term.

mentor A person who provides advice, guidance, and technical knowledge to other people (mentees) in order to help them advance their careers.

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Companies oper- ate in a competi- tive environment where the search for ways to in-

crease efficiency and effectiveness often determines their very survival. This chapter discussed how entrepreneurs, managers, and employees, using their ingenuity and enterprise, each contribute to this effort. Harmonizing the interests of these groups so they work together toward that goal is crucial to a business’s success. This chapter made the following major points:

1. An entrepreneur is the person who supplies the mixture of energy, boldness, courage, spirit, expertise, insight, and often ruthlessness necessary to create or develop new or improved products.

2. Entrepreneurship is the process of acquiring and combining productive resources to create goods and services customers want to buy and that create profit.

3. Opportunities for entrepreneurs arise as business commerce, occupations, and organizations change.

4. The reason entrepreneurs are willing to risk their capital to pursue new ventures is that the potential profits are enormous. Many entrepreneurs do make mistakes, however. Three common ones are over- estimating the value of a new product to potential customers, failing to realize the difficulty of reaching these customers, and underestimating the amount of cash needed to sustain a business until it is profitable.

5. The widespread changes brought about by increasing global competition and advancing technology is known as the process of “creative destruction.” This process leads old, inefficient companies, and even entire industries, to be driven out of business by new, more efficient ones.

6. It is one thing to have a good business idea; it is quite another to get a business off the ground. For a business to prosper and grow, its founder needs to recruit managers to oversee the functions needed to get the product to the customer.

7. The agency problem—the misalignment of the interests of managers and owners—occurs whenever there is a separation of a business’s control and ownership. The agency problem can be solved by creating a motivating reward structure for managers and developing a hierarchy of authority that allows stockholders to scrutinize managers’ business decisions.

8. Managers are the employees to whom a company’s owners delegate the responsibility of using its resources to create profitable goods and services. Managers are responsible for developing the company’s business model and controlling its operations and functions (manufacturing, marketing, accounting, and so on).

9. There are three main levels of managers: top managers, middle managers, and first-line managers. Managers typically are also members of a business function who possess a certain type of occupational or job-specific skill.

10. Managers measure companies in terms of their efficiency and effectiveness. Efficiency is a measure of how well or how productively a company’s resources are used to produce goods and services. Effectiveness is a measure of the competitiveness of the business model that managers have selected for the organization to pursue. Profitable organizations are simultaneously efficient and effective.

11. Four essential managerial functions are planning, organizing, leading, and controlling a company’s productive resources. How well managers perform these functions determines the profitability of a company’s business model.

12. Employees have some freedom to decide how to perform their company roles. They can perform at some “minimum” level—do just what is required of them and no more—or they can perform in an enterprising way that improves the company’s efficiency and effectiveness as well as their own success.

13. People experience several different stages in their careers. The stages are as follows: the preparing- for-work and entering-the-workforce stages, and the early-career, midcareer, and late-career stages. How well people manage the challenges involved at each stage determines their long-term prosperity and well-being.

Summary of the Chapter

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Developing Business Skills

1. What are the main differences between the roles played by entre- preneurs and managers? 2. Give an example of an entre-

preneurial opportunity that arises from changes in business (a) commerce,

(b) occupations, and (c) organizations. Describe how these changes can lead to entrepreneurship and increased profitability. 3. Action. Find someone in your city who has recently opened a new business. Try to discern what opportunity he or she noticed and what busi- ness model he or she used to take advantage of the opportunity.

4. What is the agency problem that arises between owners and managers? How can it be solved? 5. How can managers of (a) a large computer maker, (b) a department store, and (c) a hospital measure how efficiently and effectively they are operating? 6. Why is planning such a difficult function to per- form? Find a manager responsible for some kind of planning activity and discuss the obstacles to creat- ing an effective plan. 7. What opportunities and problems are likely to arise at each of the different stages of a person’s career?

QUESTIONS FOR DISCUSSION AND ACTION

Why Do Businesses Experience Agency Problems?

Agency problems can sometimes lead to major ethical problems for

firms. With this issue in mind think about the following issues:

• Why would there be a conflict of interest between managers and stockholders? Why is this an ethical issue?

• Give some examples of the ethical issues that can arise as managers perform their functions.

• What are some of the ethical issues involved when it comes to aligning the interests of man- agers and employees?

ETHICS IN ACTION

We’re in the Restaurant Business Now

Read the following then break up into groups of three or four people and

answer the discussion questions. Be pre- pared to share your discussion with the class.

You are the founding partners of a new sandwich and snack restaurant opening in your city to take advan- tage of people’s desire to eat healthier food. You know you will have to hire at least 50 waiters, 20 cooks, and 20 busboys to operate the restaurant. You have to decide how to design an organizational struc- ture and create a set of task and authority relation- ships that will give your business the best chance in the competitive restaurant market. You know most new restaurants fail within three years of opening.

SMALL GROUP EXERCISE

1. What kinds of managerial roles will each of you play and what functions will you perform once the restaurant is up and running? To increase the restau- rant’s efficiency and effectiveness, what authority will each of you have over the restaurant’s opera- tions? 2. What other kinds of managers will you need to employ? Draw a picture of the hierarchy of authority that will best suit your restaurant. For example, how many levels will the hierarchy have, and what kinds of functions will each of them perform? 3. How will you try to align the interests of your managers and employees with your own interests to increase efficiency, effectiveness, and profitability?

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Managing Your Career

All too often people do not think carefully enough about what it takes to manage their own careers.

Imagine you have been hired by a major electronics retailer in an entry-

level sales position. You have been told that you are viewed as a likely candidate for assuming a supervi- sory, or management, position once you have hands- on experience.

1. What important things should you need to ini- tially learn about your tasks, job responsibilities, and the company? What is the best way to gather this information?

2. What kinds of behaviors and attitudes should you try to cultivate to increase your chances of being selected for management training?

3. What kinds of new skills and human capital should you try to develop that you will be able to use in any job in sales and marketing?

DEVELOPING GOOD BUSINESS SENSE

Anne Mulcahy Transforms Xerox

Go the Xerox’s Web site, and click on the “About Xerox” tab. Then look

through the information in Xerox’s “Online Fact Book.” Type Anne Mulcahy

in the search box to bring up a list of articles about her. Then answer the following questions. For more Web activities, log on to www.mhhe.com/jonesintro.

1. What skills and qualities does Anne Mulcahy bring to her job as CEO of Xerox? 2. What kinds of managerial functions and roles did she adopt as the head of Xerox to turn around the company’s performance? 3. What kind of attitudes and behaviors does Mul- cahy expect from Xerox’s managers and employees to help it succeed?

EXPLORING THE WEB

CASE FOR DISCUSSION

Want to Be an Instant Enrepreneur?

You’re a student on a college campus, and you have entrepreneurial dreams. Before you forge ahead, lis- ten up: This is your professor speaking. As a chaired entrepreneurship professor at the Kellogg School of Management at Northwestern University, I teach students like you. And my message is that it’s OK— in fact, it’s probably preferable—to slow down and delay your entrepreneurial pursuits for a year or two after graduation.

I speak also from the perspective of having run my own company, Akar Corporation., a collection of two manufacturers and a retail concern in the lampshade industry, for seven years in the 1990s. In fact, as a stu- dent at the Harvard Business School in the 1980s, I had attended for one reason: to acquire the skills nec- essary to launch a company. A classmate and I were rather cocky about this objective, foolishly ridiculing classmates as “sellouts” for pursuing jobs.

Flash forward to today. Having learned from the toughest teacher of all, namely experience, that

building a business is grueling work, I now advise students that it’s perfectly acceptable to put on a suit and go to work for a company that isn’t their own. I tell them that it’s a good idea to learn the ropes on someone else’s time and someone else’s dime.

VOICE OF EXPERIENCE. Most students lack experience in one or more of the critical disciplines, such as management, sales, marketing, and finance, necessary to build companies. Moreover, they gener- ally aren’t adept at dealing with the continual vagaries of entrepreneurial life in the real world.

In my case, shortly after graduating from business school in 1985, I rejected an offer to buy a McDon- ald’s franchise in Boston, because I felt the purchase price was too high. I had participated in the formal owner/operator training program for two years, learning everything about running a restaurant and franchising. Instead, I went to work for Bain & Com- pany, the Boston-based consulting firm, to build a financial cushion and learn the applied science of problem-solving.

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Then my wife and I moved to the Midwest, where we wanted to raise our family, and I launched my entrepreneurial dream by purchasing Fenchel Lamp- shade, a family-owned manufacturer. With two sub- sequent company purchases, I had formed Akar.

In my view, business is about being a generalist, with a wide range of experience, confidence, and competence, rather than pursuing a specific idea. I agree with most business specialists who argue that entrepreneurship is about being able to execute on a plan. My four years at Cummins Engine, supervising union employees and negotiating contracts for diesel-engine parts, along with the two years each at McDonald’s and Bain, had given me the confidence that I could operate a company.

ON-THE-JOB TRAINING. At Akar, however, I soon learned that building a business was tougher than I had expected—so tough that the Akar story has become a Harvard Business School case study. In an industry that was no more than $100 million, I wasn’t able, as I had planned, to increase revenue through organic growth. It was hard taking business from competitors, and the number of potential retail- ers was declining.

Managing cash flow proved to be a monthly crisis. Collecting from customers was tougher by a factor of 10 than the discussions we had had in finance classes. Instead, I learned that collecting was related to the vagaries of getting and keeping customers, and the entrepreneur’s expectations for those accounts. You may think you are assured an account, for example, only to get a call saying the customer is dropping you.

Businesses, in short, rarely operate according to plan. They are living and breathing organisms that change frequently. After seven years in business, my sales had reached a little less than $5 million and profits were solid, but I concluded that I wouldn’t be able to reach my goal of building a $50 million com- pany in an industry that wasn’t expanding. Those years, however, had allowed me to live and learn the countless realities of entrepreneurship.

LESSONS FROM THE TRENCHES. So, with the entrepreneurial experience under my belt and a Kellogg offer in hand, I sold my company and turned to full-time teaching, which I expected to do for a couple of years while I looked for another, larger business to purchase. This enabled me to find my true passion in life—teaching entrepreneurship!

Therefore, as a professor and former experienced entrepreneur, I am not a sideline cheerleader for entrepreneurship. Please don’t get me wrong. I absolutely love it. I understand that our country (and, indeed, our global village) desperately needs high-growth entrepreneurs, because they create jobs. I have said repeatedly that these people are my per- sonal heroes and she-roes.

It’s just that, as a professor, it would be something akin to malpractice if I were not completely honest about the difficulties involved. It is also my duty to downplay the romanticism of it. Rather than prodding students to become immediate entrepreneurs, I want them to be successful when they decide to pursue it.

From my own entrepreneurial experience, I’ve compiled six lessons that fledgling campus entrepre- neurs might want to consider before taking the plunge:

The Odds. Your chances of success with a campus-launched

business are very, very slim. To let megafounders, such as Gates, Jobs, and Dell, persuade you other- wise would be like attempting to become an NBA player straight out of high school because of the suc- cess that Kevin Garnett has had. As my colleague, Professor Lloyd Shefsky, says: “Open a business as a student only if you think you are the next Bill Gates or Michael Dell. Otherwise, get more business expe- rience first.” For every Microsoft, there are at least 10,000 entrepreneurial failures.

The Cash. From my experience at Akar, I cannot say enough

about the difficulty of managing cash flow. When accounts are unpaid, your company takes a hit. Moreover, accounts are usually pulled unexpectedly, meaning you can’t easily recover. That’s the real world thumbing its nose at your plans. Cash manage- ment is the difference between a company’s life and death; it is a skill especially worth honing at a com- pany other than your own.

The Expectations. As I’ve mentioned, businesses are messy; there

hasn’t ever been one that met expectations. That’s because the real world gets in the way. You want to sell sweaters, for example, and you’ve designed the sweater to die for. Only the weather turns hot, and no one is buying sweaters. So much for your busi- ness “plan.”

The Ethics. Students might be familiar with the professorial

admonishments to avoid lying, stealing, and cheating. The Philosophy. Did you know that it’s you and not your idea—even

if yours is the ultimate better mousetrap—that gets companies off the ground. An “A” entrepreneur with a “C” idea stands a better chance than the reverse. There is an old adage in entrepreneurial circles “that the investment is in the jockey, not the horse.”

The Salesmanship. This one is a killer. Many of the nation’s best busi-

ness schools don’t teach salesmanship, perhaps because the skill smacks of “trade school” training. Don’t be fooled. Sales are central to your business. An entrepre- neur must learn, even if the first experience is at a flea market, how to sell to customers at a profit. Selling isn’t

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hanging up a corporate shingle, nor is it developing, marketing, or shipping a product—that thinking was the downfall of many a dot.com dream.

DREAMS AND REALITIES. Campuses are wonderful places. Colleges and business schools alike offer environments that nurture impressionable students with entrepreneurial dreams. All around are eager peers, supportive professors, and an aura of excitement about the possibilities.

What they don’t offer, however, is entrepreneurial reality: that the odds are heavily against the student founder succeeding. To beat those odds, you need to take a different route, or at least understand what you will encounter if you nonetheless persist. As a stu- dent, how can you best prepare for your future entre- preneurial endeavor? Consider the following steps:

• Take as many courses in entrepreneurship that are offered by your school. Primary considera- tion should be given to courses in finance, sales, and organizational behavior.

• Participate in your school’s entrepreneurial intern- ship program. Instead of taking a summer job with an investment-banking firm, become an intern with an entrepreneurial firm. It is well worth sac- rificing compensation for the great experiential learning experience.

• Participate in your school’s entrepreneurship clubs and programs, including attending con- ferences, panel discussions, and guest speaker presentations.

• Pursue jobs that will allow flexibility in job assign- ments. If you have no experience in finance, go to

a company where you can get a job in that area to strengthen that weakness.

• Continue to improve your management, inter- personal, and leadership skills. If you have never managed people before, become a coach of a lit- tle league baseball or basketball team. Learn how to manage people toward a common goal.

ONE STEP AT A TIME. So, students, let me release you from any feeling of obligation to become an entrepreneur during, or immediately after, your school years. A survey of entrepreneurs who did not succeed found that they attributed their failure to “lack of training and too much on-the-job training,” which is quite expensive due to the common occur- rence of mistakes.

Be wise and slow down. Believe it or not, you are much younger than you think. The entrepreneurial opportunity and your interest, if you are sincerely committed to becoming an entrepreneur, will be there when you are truly ready.

QUESTIONS

1. What are some of the key skills a person needs to acquire to be a successful entrepreneur? 2. What practical real-time activities could you engage in now to promote your chances of being a successful entrepreneur? 3. Would you rather be an entrepreneur or a manager?

Source: Steven Rogers, “Want to Be an Instant Entrepreneur?” BusinessWeek Online, October 6, 2004.

CASE FOR DISCUSSION

Family Business: A Clan on the Cutting Edge

At Buck family dinners every night, C.J. Buck always sits down with his five adolescent kids to discuss the day’s happenings. But the subject matter is far from the school updates and allowance requests one would expect. Instead, issues like globalization, outsourcing, entrepreneurship, and supply-chain management often come up—with heated debates ensuing. And for C.J., president and CEO of Buck Knives, his family wouldn’t have it any other way. “They all have some- thing to say,” C.J. says. “It’s good for them to discuss the business.”

C.J. Buck is the fourth-generation CEO of Buck Knives, a century-old knife-maker based in San

Diego. His father, Chuck Buck, is chairman of the board, his brother-in-law, Joe Houser, is head of cus- tomer service, and his eldest daughter, Sarah, works in the company store giving weekend tours of the manufacturing plant.

Having made multi-use pocket and hunting knives since 1902, Buck Knives enjoys all the bene- fits of a successful and storied family business: a tra- dition of customer service, a loyal following, and an impeccable reputation for quality. It also has experi- enced some of the drawbacks of family businesses.

“I would say that the biggest challenge is being the boss’s kid,” says C.J. who graduated from college but has never worked for anyone but his father. “We did have a rough patch there for a while.”

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RESTRUCTURED TEAM. When C.J. took over as CEO in 1999, at just 39, he admits there was some “floundering.” He wasn’t ready to fill his father’s shoes, but 63-year-old Chuck Buck was more than ready to retire. Struggling with the transition, Buck Knives experienced its first losses in decades, a tough pill to swallow for a company that had been a rousing success story from day one.

By transforming Buck Knives and its operation gradually, and growing increasingly comfortable being at the helm, C.J. has turned a seven-figure loss into a six-figure profit in five years. “Life is looking much better now,” says C.J., who recently decided to relocate the business from San Diego to Post Falls, Idaho, to help trim operating costs and overhead.

The recovery wasn’t easy. In 1999, C.J. had to go outside the family for help. He completely restruc- tured the executive team to incorporate three outside members on the board of directors and only two company insiders—he and his dad. The previous setup always had three Bucks and two outsiders.

LEAN MODEL. “My approach was to be as transparent as possible and realize that I needed help to take this business and grow it,” says C.J. Together, the team developed a new three-year business plan to help salvage the company and keep manufactur- ing in the United States, because all the Bucks agree, “we’ve always been a great American brand.”

The plan’s immediate provisions called for a revamping of the production line to a “lean cellular manufacturing” model. Where it once took six weeks to make a product from start to finish, Buck reorga- nized workers into pods, or “cells,” and can now crank out a Hunter folding-blade knife in about 20 minutes. The ability to make a knife quickly elimi- nates the need to have huge inventories. Buck says the company has also cut scrap numbers in half since implementing the new plan in 2001.

Relocating to Idaho was the next part. Buck esti- mates he’ll save $3 million annually in the new loca- tion because of lower costs for energy, salaries, and worker’s compensation insurance. “California is not a good place to have a manufacturing business,” he says.

MOVING SHOP. That Buck Knives was able to absorb the hiccup of the past few years and go on to prosper again is an accomplishment, says Daniel Van Der Vliet, director of the Vermont Family Business Initiative at the University of Vermont. “To keep the business in the family for three or four generations is becoming very rare,” he says, estimating that only about 3% of family-owned businesses now reach their fourth generation.

Buck Knives is back in the black—and on the road to the Gem State. In November, it officially shut down its Southern California operations and started the move up north, laying off about 80 of its 270 employees and relocating 50. Once things are settled in the new Idaho plant, C.J. plans to hire about 100 more employees there, with the goal of getting back up to the 250 level. While the restaffing effort is under way, Buck will import some products from overseas manufacturers to help ease the move.

Now, C.J. is busy taking what he learned in the past five years and grooming the next generation—two of his five kids are interested in the knife business—to take over. As C.J. is discovering, succession is a perennial thorn for many family businesses. The most valuable lesson he plans to impart on his kids when passing on the family trade? Get input from outside experts. C.J. calls bringing in an additional outside board member one of his “key victories” when making the transition to CEO.

MADE IN USA. In the years ahead, both C.J. and his father agree that the new digs in Idaho may also quell some of those heated dinner conversations with their kids about outsourcing by keeping the manufacturing jobs in the United States.

QUESTIONS

1. Why is entrepreneurship and succession plan- ning so important in a family business? 2. What kinds of management challenges do the owners of small businesses face? 3. How did this small business alter the way it operated to remain competitive?

Source: Erin Chambers, “A Clan on the Cutting Edge,” BusinessWeek Online, January 27, 2005.

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Developing the skills and knowledge for the career you want by taking courses and getting degrees will not be enough. The difference between

those who succeed and those who get stuck is often the factor known as

Emotional Intelligence (EI). It differs from mental intelligence (IQ), because it involves your

ability to understand and manage your emotions and interpersonal relationships. It is helpful to assess your EI because these skills can also be learned. You can begin to manage your emotions and relation- ships better by assessing where you are now. To do so, go to the exercise titled “Assessing Your Emo- tional Intelligence” on your Student DVD.

BUILDING YOUR MANAGEMENT SKILLS Know Thyself

Syl Tang is a Chinese American woman living and working in New York City. She also happens to be the CEO of HipGuide.com, an

entrepreneurial business pioneered by Tang.

Tang is the true entrepreneur. She is very passionate about her business. She sees herself as waking each day with a belief in her business, its mis- sion, and the need for constant enthusiasm. Being an entrepreneur is a very rewarding experience; how- ever, it can be quite lonely as well.

Tang recommends that a business plan be carefully articulated as it is the most important document for those in financial roles for the business. This group includes bankers, accountants, and potential investors. She is firm about starting out by having a destination in mind, a roadmap. But, she says, one must remain

flexible as there are events that occur that cannot be anticipated by even the best business plan.

To be a successful CEO, Tang believes that you must realize that one cannot know everything. The goal is to surround yourself with people who are ex- perts in those areas that are critical to your business. Finally, she advises that one must “listen” first and be a cheerleader for your people and the business.

1. If HipGuide.com founder and owner Syl Tang were to choose the right goals to pursue for the busi- ness model but does a poor job in the area of effi- ciency, what is the likely result? 2. What qualities does Tang have that ensure her success as an entrepreneur? 3. Syl Tang is an independent owner of her busi- ness. How might she differentiate between efficiency and effectiveness?

CHAPTER VIDEO The Syl Tang Story

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As we discuss in Chapter 1, a company’s business model outlines the way it will use its resources to cre- ate products that give it a competitive advantage. Recall, a company has a competitive advantage when it can make and sell products that have more value to customers than similar products offered by other companies. The business plan is a highly-detailed, written statement that explains the purpose of creat- ing a new venture—either a new company or a new project in an existing company—to provide products to customers. A business plan contains several impor- tant kinds of information: (1) It explains the new ven- ture or company’s business model describing what kinds of product it will make and sell and why they will appeal to customers; (2) it explains why and how the new venture will be able to compete successfully against established competitors; and (3) it explains how the entrepreneur, business owner, or manager intends to obtain, use, and organize the resources the company will need to make and sell these products.

If the assumptions in the business plan work out as intended, a company will have created a competitive business model that attracts customers and generates sales revenues that exceed expenses and lead to a profit. If the business plan does not work out because entrepreneurs and managers have chosen the wrong business model and made mistaken assumptions about customers’ needs, or underestimated how much it will cost to make and sell the product, expenses will exceed revenues, and the new venture will be unprofitable. It will likely go out of business and people will lose the capital they invested in it.

To avoid this financial disaster, it is therefore vital that the entrepreneur or managers planning the new venture, and the banks or venture capitalists who loan their money to fund it, do an accurate and thorough job of developing and testing the business model to increase their chances of success. Given that new ven- tures are highly risky and many fail, this planning process is crucial.

improved good or service for the entire market or for a specific market segment (see Chapter 10). Simi- larly, planning for a new business venture or project inside of an established company begins when an intrapreneur notices an opportunity. On the one hand, an entrepreneur might notice an opportunity in the fast-food market to provide customers with healthy fast food such as rotisserie chicken served with fresh vegetables. This is what the founders of the Boston Market restaurant chain did. On the other hand, an intrapreneur at McDonald’s might notice an opportunity to create a new kind of ham- burger or fast-food product to attract more cus- tomers. And, in fact, the idea for the Big Mac and Egg McMuffin came from two of McDonald’s fran- chisees who independently developed and tested these new products and then shared them with the whole McDonald’s Company.

There is no formalized way in which a person can “come up” with a new idea for an attractive new product. Many successful new products result from continuous hard thinking and from intuition and luck. They can also result from a formal, in-house strategic planning process whereby product develop- ment and marketing managers brainstorm ideas for new products or new ways to package and deliver them to customers. Once a new product idea has been generated, the crucial next step in creating a business plan is to test the feasibility of the new idea and the business model behind it.

To accomplish this, an entrepreneur or functional experts perform a detailed SWOT analysis, which is a kind of strategic planning exercise. SWOT analysis is a technique that focuses on identifying the internal Strengths and Weaknesses of the proposed new venture— such as the financial resources available for the proj- ect and the skills and experience of the entrepreneur and functional experts in marketing or manufacturing responsible for launching the new product. SWOT analysis also focuses on assessing external Opportunities and Threats in the competitive environment that will promote or impede the success of the new venture (hence, the term SWOT analysis). Figure 1 outlines some of the essential questions to ask when conduct- ing a SWOT analysis.

Take the fast-food example earlier. To assess the viability of selling rotisserie chicken served with fresh vegetables, the entrepreneur needs to analyze

Appendix to Chapter 3

Creating a Business Plan to Implement a New Venture

Planning for a new business venture begins when an entre-

preneur notices an opportunity to develop a new or

Developing a Business Plan

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opportunities and threats. One potential threat might be that if the new idea succeeds, McDonald’s or KFC might decide to imitate the idea and rush to do so. If this happens, whatever competitive advantage the entrepreneur may have had will be short-lived. (KFC actually did this after Boston Market was suc-

cessfully launched.) As the entrepreneur conducts a thorough analysis of the competitive environment, he or she must be willing to abandon an idea if it seems likely that the threats and risks are too great for an acceptable profit to be earned. Entrepreneurs must not become so committed to their ideas that

Does the venture have experienced, creative leaders

and researchers?

Does it have a well-developed and researched

business model?

Does it have a well-designed product that better

satisfies customers’ needs?

Are market segments accurately targeted?

Does its personnel have good marketing skills and the

product, the right marketing mix?

Does it have an efficient operations and materials

management system?

Are the distribution channels chosen and the sales

force trained?

Does it have human resource competencies in

recruitment and compensation areas?

Does it have an appropriate leadership and

management style?

Does it have a well-designed organizational structure

and culture?

Does it have sufficient capital in reserve to make

and sell the product for six months to a year?

Is customer demand in the targeted market

segments increasing?

Can the existing product range be widened

to target new market segments?

Can the company ’ s R&D skills be used

to create new and improved products?

Are there opportunities to develop new

distribution channels and be more responsive

to customers?

Will it be possible to improve employees ’

value-creation skills to increase efficiency,

lower costs, and improve product quality?

Are there opportunities to enter new product

markets or expand globally?

Strengths Opportunities

Does the venture have a poorly thought-out

business model?

Have customer needs been defined inaccurately

and market segments incorrectly identified?

Does the venture have an inappropriate or poorly

designed marketing plan and mix?

Are operations and materials management systems

not developed or in place?

Is the choice of distribution channels poor?

Is the sales force training program poorly designed?

Are human resources and competencies poor?

Do managers have an inappropriate leadership style?

Does the venture have a poorly thought out

organizational structure and culture?

Is there insufficient capital to keep the business

in operation for six months to a year?

Weakness Threats

Has the venture failed to anticipate the reactions of

competitors?

Are changes in customer tastes occurring

rapidly?

Are new or substitute products from competitors

under development?

Is competition in the industry increasing?

Are changes in demographic factors affecting

customer tastes?

Is the market experiencing changes in economic

and global factors such as the rise of low-cost

competitors?

How quickly will rivals be able to develop

competing products?

Are there ways competitors can reduce the cost

of value-creating functional activities chosen

by the venture?

Figure 1 Testing the Business Plan Using SWOT Analysis

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they discount potential threats and forge ahead—only to lose all of their capital.

If the environmental analysis suggests that the product idea is feasible, the next step is to examine the strengths and weaknesses of the idea. For a new company venture the main strength is likely to be the resources possessed by the entrepreneur. Does the entrepreneur have access to an adequate source of funds? Does the entrepreneur have any experi- ence in the fast-food industry such as having been a chef or managed a restaurant?

To identify weaknesses, the entrepreneur needs to assess what kinds of functional resources will be nec- essary to establish a viable new venture—such as a chain of chicken restaurants—and how much capital will be required. This analysis might reveal that the new product idea might make a profit, but it will not generate a sufficient return on investment, that is, be profitable enough to justify risking the capital that will be needed to fund the venture. Thus the first three steps in creating a business plan for a new venture are as follows:

• Notice a product opportunity, and develop a basic business model that focuses on the product, customer needs, and potential markets. (Chap- ters 10 and 11 discuss different marketing and product development techniques to use for this purpose.)

• Conduct a strategic (SWOT) analysis to identify opportunities, threats, strengths, and weaknesses.

• Make an initial assessment of whether the busi- ness model is feasible. If it is, then it is time to write the detailed business plan.

organization’s business model, mission, goals, and financial objectives. The summary also contains a statement of the organization’s strategic objectives, including an in-depth analysis of a new product’s market potential based on the SWOT analysis that has already been conducted. Finally, it outlines the strategies needed to use an organization’s resources and core competencies to compete effectively in the market or industry. In particular, these strategies should explain how the new venture will obtain a sustainable competitive advantage, one that will allow it to perform effectively over time and adapt to chang- ing competitive conditions as needed.

Company Background Information The second part of the business plan provides a short history of the entrepreneur and the new ven- ture company that has been founded, or, in the case of a venture within an established company, specific details about a new project team’s history. This should include:

• The age of the new venture, or company, and time of its founding.

• The number people involved in the venture, including its owners, senior managers, scientists, researchers, and other functional experts, and what their background, experience, and compe- tencies are.

• Existing and projected annual sales figures. • The current and future location of the facilities

that will be used to make and sell the product.

• The current and future form of the legal owner- ship structure of the business, for example, whether it will be organized as a sole proprietor- ship, partnership, entrepreneurial startup, private corporate startup, publicly traded corporation, or not-for-profit organization.

Functional and Organizational Strategies and Resources The third and very important section of a business plan contains a detailed account of the set of func- tional subplans and strategies that will be required to implement the business model and organize the new venture. Some of these subplans are a marketing plan, operations and materials management plan, financial plan, and human resource plan. A short description of each is as follows:

Once these steps are com- pleted, the hard work of writing up the detailed business plan

begins. The business plan will be used to (1) continue the process of testing, assessing, and fine-tuning the proposed business model, and (2) attract the banks or investors who will provide the capital needed to launch the venture (or, in the case of an existing company, get the buy-in of top managers). Business plans are formatted in many ways, but a typical for- mat is as follows:

The Executive Summary The executive summary is an opening, two-page executive summary that contains a statement of the

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1. Marketing Plan describes

• The competitive industry environment. • Customers’ needs, priorities, and location. • The product strategy. • The pricing strategy. • The promotion and advertising strategy. • The distribution strategy. 2. Operations and Material Management Plan describes

• All production and manufacturing processes. • The requirements of the production facility,

including its size, layout, capacity, and location.

• The inventory and supply chain management plan for raw materials and finished goods inven- tory, and the warehouse space needed for each.

• Production and computer equipment require- ments.

3. Financial Plan describes

• The size, source, and amount of initial equity capital needed.

• The monthly operating budget for the first year. • Three years of projected quarterly balance sheets

and profit/loss statements.

• The expected and potential financial return (profitability) of the project.

• A breakeven analysis of the project, that is, the minimum amount of revenue it will need to earn to just “break even,” (earn) zero profit but not suffer a loss.

• The monthly estimated cash flow. • Existing loans and liabilities. 4. Human Resource Plan describes

• The allocation of authority and responsibility. • The skills and training requirements personnel

will need.

• The venture’s recruitment and employee selec- tion policies.

• The performance evaluation and compensation plans for the venture’s members.

Time Line and Major Milestones Finally, a business plan contains a detailed description and roadmap of how and when a new venture intends to meet the overall goals and objectives set out in the other sections of the business plan. In particular, it con- tains a detailed timeline for purchasing resources, hir- ing new personnel, and creating the functional and organizational infrastructure that will be needed to

implement the business model. Examples include the target dates for the final design, construction, and opening of the first chicken restaurant. Such a roadmap allows the entrepreneur, employees, and investors to assess how much progress has been made in getting the new product to market. It also provides a way of assessing how new issues and problems may have emerged because of changing internal strengths and weaknesses and external opportunities, and threats.

As you can see developing a detailed busi- ness plan that provides an in- depth explana-

tion of how entrepreneurs or intrapreneurs will implement a business model is a complex, time- consuming, and extremely creative task. Yet it must be done to more accurately assess the potential risks and returns of the new venture. And, as we discuss in Chapter 15, the higher the risk, the higher the poten- tial returns investors will require, so a breakeven analysis and assessment of a new product’s potential profitability is an important part of this analysis.

Unlike intrapreneurs in established companies, many individual entrepreneurs do not have a team of expert functional managers to help them develop a detailed business plan. Also, they typically lack the in-house financial resources intrapreneurs can draw upon. This is one reason why franchising has become such a popular method of starting a new business in the United States. A prospective entrepreneur can purchase and draw upon the proven business plan of an already existing company, and, in this way, reduce the problems and risks associated with open- ing a new business. Of course, in return, a franchisee often pays a significant percentage of the franchise’s revenues and profits to the franchising company. The founders of chains like Subway Sandwiches and Stanley Steamer have made a fortune by selling the rights to use their business model.

A useful exercise to help you appreciate the amount of thought and effort that goes into opening a new busi- ness is to prepare a simplified business plan along the lines suggested above. (Some instructors make this a required part of a semester-long course.) But a good place to start—either by yourself or with others as a team—is to “brainstorm” about a novel product idea that you think might have commercial possibilities. Then test the idea by performing a SWOT analysis using some of the questions in Figure 1. Write down your responses to these questions, and after you have examined the strengths, weakness, opportunities, and

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threats associated with your new business idea, you can assess how viable it is. You may decide it is not, so then start another round of brainstorming.

Once you have found a viable new product idea, write a simplified business plan. Start by describing your business model. Then, utilize the concepts, techniques, and tools contained in the chapters in Part 3 of this book, which discuss the main value-cre- ation functions needed to develop and implement your idea. Be sure to describe the series of subplans for marketing, operations and materials manage- ment, HRM, finance, and so on.

A good way to test your detailed business plan is then to give copies of it to classmates or friends and have them assess its viability. Also, develop a slide- show presentation of your business model and plan, and then allow other people or teams to question and probe its details and assumptions. In this way you will gain an appreciation of the many complex issues involved in the “great game of business.” You will get a much better understanding of how much hard work and effort it takes for people to found, organize, and manage companies that provide cus- tomers with valuable goods and services.