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Own: Entrepreneurship, Innovation, and Forms of Ownership

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Chapter 7 Goals After experiencing this chapter, you’ll be able to:

1. Appreciate what it takes to be a successful entrepreneur.

2. Recognize innovation when you see it and justify its effect

on the triple bottom line.

3. Conduct a SWOT analysis to identify opportunities and drive

decisions.

4. Contrast the different flavors of entrepreneurship and legal

forms of ownership and understand the risk/reward trade-

offs that each implies.

5. Explain the critical components of a business plan.

6. Locate helpful resources for starting a business, and avoid

common mistakes.

At first, it was a matter of survival: If you didn’t want to end up eating cafeteria food three times a day, you had to teach yourself to cook. And cook you did, graduating quickly from slightly crunchy spaghetti to a full-fledged lasagna that you served up to a few friends who came by for dinner. The more recipes you learned, the

more excited you became. Making a cake for your dad’s birthday wasn’t a chore; it was ac-

tually fun, and everyone agreed that the cake was delicious. In fact, you became the

go-to chef for all of your family’s big events, and your friends started asking you to make your famous sweet potato fries and addictive apple crisp for their Saturday night get-togethers.

Now that you’ve practiced making tough business decisions and seeing the results of your choices in this chapter’s BizSkill, it’s time to translate those skills into plain English. And if you skipped the BizSkill,

You love helping your friends out, and you love cooking (or Web design or writing or playing guitar or skateboarding). But what if your hobby became some- thing more than a labor of love? What if you struck out on your own and turned that hobby into a business?

Starting your own business may sound intimidat- ing, but if there’s something in your life you care about doing, and you think other people would be willing to pay you for doing it, you may be on your way to being an entrepreneur, a person who takes the risks associated with organizing and managing a new business. With the skills you already have, plus a few pieces of advice you’ll find in this chapter, you may be able to turn your passion into the foundation for a successful business.

Do you have what it takes to be an entrepreneur?

Cooking Up a Business

156 Leadership Vision

1. Entrepreneurship: What It Takes Popular singer-songwriter Ani DiFranco doesn’t embrace the label entrepreneur—if you’re fa- miliar with her lyrics, you probably know she’s not the biggest fan of capitalism—but like it or not, DiFranco is a shining example of someone who’s turned her talent and her love of music into a successful business.1 DiFranco has been a musician since she was in her teens, but when she started making her own albums in her early 20s, she didn’t want to enlist the help of a major record label. Instead, she started her own company, Righteous Babe Records, in her struggling hometown of Buffalo, New York. DiFranco’s music label has taken off right along with her singing-songwriting career, and her entrepreneurial activities have energized Buffalo to the ex- tent that the New York Times declared DiFranco “a one-woman urban renewal project.”2

DiFranco may be a particularly righteous babe, but she’s hardly the only young, talented en- trepreneur who’s found success in unexpected places. Hip-hop beats brought Chris Lighty from the Bronx housing projects to the top of the music industry; Lighty started the record and artist man- agement company Violator in 1990. Violator, which represents such stars as LL Cool J and Missy Elliot, sang a sweet song in 2007 with $11 million in sales. In 2008, Lighty was named one of the top “40 Under Forty” rising stars in business by business publisher Crain’s Communications.3

A Few DOs of Entrepreneurship So, what does it take to be a successful entrepreneur? Even if you don’t feel like you’re a natural born leader, you can start developing specific skills that

will help you get ahead in business. In fact, you’ll probably find that

you’re already using many of these skills in your everyday life. Do you take responsibility for getting your room- mates to pay the rent on time? Do you put aside a few dollars each month to save up for a big purchase? After los-

ing a game or getting a low score on a test, do you figure out what went

wrong and how to fix your mis- takes next time? If you do any of these things, you’re already

acting like an entrepreneur. If you want to be a successful entrepreneur, there are a few DOs to follow. Let’s look at each of these DOs a bit.

When Larry Page and Sergey Brin met, they were graduate students at Stanford, presumably responsible for the usual things: getting work done on

time, reporting to academic advisors, and so on. When they launched the now- ubiquitous tech company Google, however, Page and Brin had to take on a lot of additional responsibilities.4

When you’re a student or an employee, your teachers and supervisors usu- ally tell you what to do (and, sometimes, how to do it). When you’re a

business owner, however, no one’s standing over you with a to-do list, a syllabus, or a job description. Instead, you have to figure out what needs to be done and either do it yourself or delegate the task to someone you trust. Today, Page and Brin are responsible not only for their own actions, but also for the actions of Google’s

Sophia

to be a successful entrepreneur, DO….

tak e o

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on sib

ilit y

cope w ith

risk stay optimistic

set goals and stick to them

solve

probl ems

and le arn

from them

inv es

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he

lon g t

er m

act with integrity

Sunbean Coffee

—Latin America—

give bac

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to t he

com mun

ity

DO Take on Responsibility

take on

respo nsibil

ity

Chapter 7 | Own: Entrepreneurship, Innovation, and Forms of Ownership 157

employees and for the performance of the company as a whole. Taking on that much responsibility can seem overwhelming, but it comes hand in hand with the freedom to do what you think is most important. So, ask yourself: Are you willing to be responsible for yourself and your company?

As an entrepreneur, you’ll face plenty of roadblocks, and while those roadblocks might be frustrating in the short term, they’ll also

present you with a good opportunity for learning how to do things better next time. A smart entrepreneur knows the importance of a problem. In fact, a good way to start a business is to have the business be an answer to some type of problem or need. This doesn’t have to be com- plicated—it could be as simple as making something more convenient. Just look at Netflix, the online movie rental service. There are plenty of places to rent movies, but Netflix took con-

venience to the next level and made renting movies as easy as clicking your mouse.

How do you feel about uncertainty and risk? Starting your own company can be a risky business, especially if you’re giving up the security of a regular paycheck for

the pursuit of a dream that might not work out in the long run—this is a major drawback to being an entrepreneur. Entrepreneurs know that risk is an inherent aspect of any business, and they don’t shy away from taking chances. However, successful entrepreneurs are not extreme risk-tak- ers. Instead, they’re calculated risk-takers. In other words, after assessing all the risks and weigh- ing all the possibilities, they make sure that their talents exceed any risks they encounter. They

write up detailed business plans, carefully obtain the amount of money they need, and proceed only when they know they have a reasonable chance of success.

When a friend comes to you for advice about a problem, you probably don’t tell her that her problem’s unfixable. Instead, you help her brainstorm some creative solutions.

That’s entrepreneurial behavior in action. Entrepreneurs realize that every business faces hard times and experiences failures, but they put a positive spin on difficult situations and take proac- tive measures to address those difficulties. Even in the face of a difficult economic climate, en- trepreneur Jeff Gebbia wasn’t deterred. He felt confident that his line of seat cushions would be successful. He claims that as a small-business owner he has to be his own cheerleader because no one else is going to be. Gebbia’s confidence was right on, and since the creation of his com-

pany in 2005, sales of his seat cushions have steadily increased.5

DO Cope with Risk

DO Solve Problems and Learn from Them

Former college basketball player Katie Kerrigan wanted just one thing: big shoes. She was fed up with the futile search to find dress shoes that

would fit her size-11 feet. As a business student, she wrote up a sample business plan for a company that would design and sell stylish women’s shoes in larger sizes. It’s not too hard to dream about a business you’d like to start, but after graduation, Kerrigan went a step further: She followed up on her business plan and founded KathrynKerrigan.com, which successfully sold shoes to hundreds of tall women desperate for the perfect pump. A few years later, Kerrigan’s site was so successful that she opened a retail store as well.6

Kerrigan’s business was a hit in part because Kerrigan set a goal for herself—sell shoes that tall women can wear—and went after that goal aggressively. Your own goals might range from lofty (be a millionaire by age 30) to eminently achievable (convince 20 friends to order your custom-made earrings), but whatever your goals are, your job as an entrepreneur is to keep your sights set on those goals and work to accomplish them.

DO Set Goals and Stick to Them

When you’re a business owner, no one’s standing over you with a to-do list, a

syllabus, or a job description.

Where do you see yourself in five years? In 10 years? How are you going to get there? These are good questions to ask yourself if you’re planning to

start a business (or even if you’re not). Entrepreneurs don’t work just for that biweekly pay- check; they think about long-term opportunities for their company. Just look at Microsoft. When the company created its own computer science research organization in 1991, it did so to not only stay on top of current technology, but also to look toward the future. One of the primary goals of the organization is to always be looking five to 10 years into the future. This is one of

the reasons Microsoft has been able to stay successful in a constantly changing industry.7

DO Invest in the Long Term

DO Stay Optimistic

cope with risk

set goals and stick to them

solve problems and learn

from them

stay optimistic

inves t in

the

long term

158 Leadership Vision

Oprah Winfrey once said, “Real integrity is doing the right thing, knowing that nobody’s going to know whether you did it or not.”8 Acting with integrity in the

business world is really no different from acting with integrity in any other aspect of your life. There’s a commonly held belief that businesspeople are only “in it for themselves,” and too often, we hear stories about greedy CEOs and ambitious employees who end up on the wrong side of the law. But this type of behavior isn’t characteristic of most entrepreneurs. On the contrary, cultivating an atmosphere of trust and respect with em-

ployees and customers can boost a company’s reputation and, by extension, its profits. Successful entrepreneurs are willing to do what they feel is right, even if that means making tough decisions.

In addition to acting with integrity, entrepreneurs who give back to the community can expect the community to give back to them as

well. Look at Mike Ilitch, founder of Little Caesars Pizza. Ilitch was born and raised in Detroit, and when Little Caesars began growing, he started giving back to the com- munity. He initially focused on urban development by revitalizing landmarks and open- ing fine dining restaurants, but he eventually expanded into professional sports by bringing the Detroit Red Wings back to life.9 He has also been committed to feed-

ing the hungry. In 1985, he created the Little Caesars Love Kitchen, a traveling restaurant that feeds the hungry and helps provide food after natural disasters.10 It is ultimately the cus- tomer who decides whether a business is successful, and people pay attention to a business’s community relationships and charitable acts. This helped propel Little Caesars into a suc- cessful franchise.

DO Give Back to the Community

It’s time to step back and look at the big picture. How many of these en- trepreneurial DOs are you already doing every day? And how many do

you think you can take on in the future? You don’t need to have been born with a business plan in one hand and a Wall Street Journal in the other; if you’re willing and able to adopt these skills, you’ll have what it takes to be an entrepreneur. And even if you don’t plan on becoming an entrepreneur, when you cultivate these skills in your own life, you’re giving yourself an in- stant advantage in the business world.

Do You Have What It Takes?

DO Act with Integrity

Do It... 7.1: Identify the Impact What happens when any one of the DOs

is missing from an organization? Limit your response to one page, and be prepared to submit it electronically or present it to your class.

Now Debrief... • Successful entrepreneurs—people who take the

risks associated with organizing and managing a new business—often turn their passions into business opportunities.

• What do entrepreneurs do, exactly? They take on responsibility, cope with risk, stay optimistic, set goals and stick to them, solve problems and learn from them, invest in the long term, act with integrity, and give back to their community.

• When you cultivate these skills in your own life, you’re giving yourself an instant advantage in the business world.

Concept A

Concept B

Concept C

Concept D

act with integrity

give back to the

community

Chapter 7 | Own: Entrepreneurship, Innovation, and Forms of Ownership 159

2. Innovation: An Entrepreneur’s Best Friend

Imagine you’ve put your newly honed entrepreneurial skills to work and started that cater- ing business you dreamed about at the beginning of the chapter. Business is going well, but it isn’t always a piece of cake. In fact, cake is your main problem right now. Lots of profes-

sional bakers use a smooth, flexible product called fondant to make their cakes’ icing look flawless, and your fondant-covered cakes are definitely gorgeous. Unfortunately, though, fondant doesn’t taste very good. Your customers love the way your cakes look, and although they wish the cakes tasted a little better, they understand that unpleasant-tasting fondant can’t be avoided.

Or can it? With a lot of thought and effort, you and your team manage to whip up the world’s first fondant that’s both attractive and delicious. Your customers are thrilled, and the news about your fabulous fondant spreads like wildfire. Soon, your profits are up and your customer base has tripled in size, all because you had an innovative idea.

What’s innovation? You might think of it as a unique improvement that earns kudos (and cash) in the market. The goal of innovation is to make a positive change in something so that it increases in value. In some cases, innovative ideas can lead to revolu- tionary goods and services. Although you don’t have to be particularly inno- vative to be an entrepreneur, many entrepreneurs are innovation personified: They have a great idea for an improvement they can make to a good, service, or experience, and their customers are happy to pay for that improvement.

Innovation isn’t simply change; it’s change that customers reward with their purchasing power. Check out this example: The cell phone market is a competitive one, and Finnish telecommunications giant Nokia was putting what it thought was a load of innovative features on its phones to stand toe to toe with its competition.11 However, when Nokia actually inter- viewed customers about the new features, it discovered that customers found the features con- fusing and difficult to use. No matter how high-tech a change is, it isn’t an innovation if customers can’t figure out how to use it! So, Nokia took its customers’ advice and innovated differently, adding different colors, easy-to-use features, and other non-techy stuff to their phones. These new phones might not have resembled James Bond’s gadgets, but, to Nokia’s relief, they caught on with customers.

Levels of Innovation: From Simple to Supersized Some innovations (like the development of a new surgical technique) are truly life altering, whereas others (like the creation of tasty fondant) are useful on a smaller scale. If you’d like to be an innovator, don’t be afraid to dream big, but know that innovation doesn’t necessarily require

years of research. Maybe you have a plan to start a business that will help college students store their furniture over the summer in dry, safe storage facilities rather than in damp, moldy dorm basements. You’ll provide card- board boxes, packing tape, and scheduled pick-up and drop-off of storage

items for a low fee. Could college students come up with this type of inno- vation? You bet. In fact, students at Swarthmore College in Pennsylvania have done exactly that.12

As you look toward entrepreneurship in your own life, you might want to think about the following levels of innovation and decide which level you’re most willing and able to target, both now and in the future.

You don’t have to be particularly innovative to be an entrepreneur.

Many entrepreneurs are innovation personified: They have a great idea for an improvement they can make to a good, service, or experience, and their customers are happy to

pay for that improvement.

160 Leadership Vision

New Modes of Innovation: It’s All About You It’s been a typical morning. You’ve rolled out of bed, trudged to your computer, and launched your customized iGoogle home page. It tells you that the tem- perature outside is 56 degrees, you have five new e-mails, your favorite blogs have been updated, and there’s a class project due tomorrow (it’s listed on your Google Calendar and Google Tasks list). After reading the e-mail, you update

your Twitter status before clicking over to Facebook, where you check out some photos your brother posted. You then open iTunes to make sure last night’s episode of Lost has downloaded.

Congratulations: It’s only 9 A.M., and you’re already thoroughly steeped in what some peo- ple are calling the new wave of innovation. Author C. K. Prahalad refers to it as “the innovation of co-creation.”15 According to Prahalad and others, companies like Google, Facebook, and Apple are changing the nature of innovation by allowing customers to use technology to cre- ate unique, personalized experiences. No one else’s Google homepage or iTunes library is quite like yours. People like Prahalad are convinced that innovation is no longer a simple matter of creating a unique product and selling it. Now, innovation involves collaborating with customers and taking advantage of widely available, global technologies to help each customer design the exact product that fits his or her lifestyle best.

This isn’t to suggest that old models of innovation are irrelevant. Rather, it’s meant to show you that you may already be participating in one of the newest and most dynamic forms of in- novation. When customers become not only clients but also developers and collaborators, in- novation shines in a whole new light.

Innovation and the Triple Bottom Line Social networking sites such as Facebook and “Web 2.0” tools (such as blogs and virtual

communities) that represent the next big thing in innovation are concerned with profits, of

A simple improvement in current products or services is called an incremental innovation. All that’s required for such an innovation is some basic knowledge

within the sector or industry. For example, think about software and the different versions of Microsoft Word. The most recent version of Word got rid of traditional drop-down menus in favor of a “ribbon” that controls all of its functions. It also created a preview feature so you can see formatting changes before you make them. These were simple, incremental innovations, and Word remained essentially the same, but first-week sales of the new Microsoft Office 2007 more than doubled compared to its predecessor in 2003.13

While incremental innovations simply improve on an existing product, disruptive innovations are unprecedented products that transform an industry. A disruptive

innovation that you’re familiar with is the cell phone. Disruptive innovations are often spurred by new technology, and they’re marked by products or services that are substantially different from others in their field. The first cell phone in 1984 was so different from the landline phones that came before it that it created its own new market.

Incremental Innovation

Disruptive Innovation

The largest level of innovation, revolutionary innovation, extends past individual products and markets to transform society and create a new way of living. The

discovery of a new phenomenon, substance, or concept can give humans fundamentally differ- ent ways of getting things done. For example, the Internet is a revolutionary innovation that has fundamentally changed people’s behaviors. People spend less time face to face with other peo- ple because the Internet fulfills so many of their needs. Now, you don’t have to walk outside to get the paper or ask someone for directions. You don’t even need to hang out with your friends in person—you can simply chat online.

Revolutionary Innovation

“Innovation distinguishes between a leader and a follower.”

—Apple co-founder Steve Jobs14

Sustainability

P e o pl e

P la n e t P

r o f it

Chapter 7 | Own: Entrepreneurship, Innovation, and Forms of Ownership 161

course, but they’re also very clearly focused on people. Remind you of anything? If you said “the triple bottom line,” you’re right on target. (If you said “nope,” you might want to check out the discussion of the triple bottom line in Chapter 3 again.)

Remember that profit is only one leg of the triple bottom line. Companies like Google are concerned with turning a profit, to be sure, but they’re also concerned with creating individu- alized, user-friendly experiences, which means they’re focusing on another leg of the triple bot- tom line: people. Google’s tools are designed to enhance people’s quality of life, and people aren’t required to pay for the privilege of using Google’s e-mail service, chat service, or search engine. For many companies, innovation isn’t just a moneymaking tool; it’s a way of connecting directly to customers and giving them exactly what they want.

How about the third leg of the triple bottom line: planet? As it turns out, innovation is absolutely crucial when it comes to creating a culture of environmental sustainability. If you want to run a sustainable company, how would you ensure that the company’s waste was re- duced and disposed of properly? How would you ensure that you could connect with peo- ple around the world in an efficient, low-cost manner? These questions require innovative answers, and people have come up with innovations that allow companies to go green with- out breaking the bank.

Getting Innovation Into Your Life By now, you’ve heard a lot about how important innovation is to entrepreneurs, but what does it mean for you right now? Fear not:

You don’t have to be Bill Gates to bring innovation from the busi- ness world into your everyday life. Here are some thoughts from

Tom Kelly, the general manager of California-based design and in- novation consultancy IDEO, about how to prime yourself for inno- vation every day:16

1. Act like you are a traveler. When you go to a new place, you’re apt to pay attention to small details and see the world in a different way. Even if you aren’t going on vacation, you can act like a traveler every day by noticing things around you while you’re getting up in the morning, going to class, or heading out to lunch. Write down your

emotions and ideas as you observe, because no one is experiencing the world the same way that you are.

2. Think like an experimenter. Imagine that you are discovering a new cure for a deadly dis- ease. Be an experimenter, researcher, and discoverer of something brand-new in life.

3. Be an avid seeker of knowledge. Every day, a wealth of information is readily available to us, and we just have to absorb it. Learn as much as you can, but while you’re learning, be sure to ask questions. Both the information you learn and the questions you ask could give you ideas for innovations that no one else has thought of.

4. Use all of your brain. The left side of the brain excels at logic and reasoning, while the right side of the brain is the center of creative expression and emotion. “Left-brainers” tend to be practical, analytical, and good at math and science. “Right-brainers” are more apt to use their intuition, be imaginative, and take risks. Make an effort to embrace both your analyt- ical side and your intuitive side. Innovation requires logic and reasoning, of course, but it also requires imagination.

5. Remain young at heart. Reach a happy balance between what you are naturally good at and what people will pay you to do. Most of all, resist other people’s attempts to quash your creative and entrepreneurial spirit.

Once you prime yourself for innovative ideas, you need to figure out if the idea is worth embracing. In the next section, you’ll learn how to analyze your idea to see if it will be a success.

Prime Yourself for Innovation

1. Act like you are a traveler. 2. Think like an experimenter. 3. Be an avid seeker of

knowledge. 4. Use all of your brain. 5. Remain young at heart.

162 Leadership Vision

3. Got a Great Idea? SWOT It! So, you’ve got what it takes to be an entrepreneur, and you have an innovative idea that you think will knock the socks off your future customers. But will your creativity and determination really help your company be successful? How can you tell if your new business will thrive?

Never fear; SWOT analysis is here! You probably remember SWOT from Chapter 2. As you learned, SWOT can help you identify a company’s Strengths, Weaknesses, Opportunities, and Threats. But you can really SWOT anything: new ideas, an industry, even yourself.

Let’s say you’re deciding what major to pursue in college. You can SWOT that major: What strengths and weaknesses would a degree in English have? How about a degree in physics? Or let’s say you’re preparing for a job interview: What are your strengths and weak- nesses in interview situations? What makes you perfect for this job, and what makes you a less than ideal candidate? What opportunities will help you get the job, and what outside threats do you face?

You get the idea. SWOT can be a handy tool in your everyday toolbox. Furthermore, as we’ll discuss in this section, entrepreneurs can use a SWOT analysis to locate new op- portunities, find competitive advantages, and make decisions.

The Strategic Balance Sheet How can an entrepreneur use SWOT analysis to create a competitive advantage? One way is by creating a strategic balance sheet. On this sheet, all of the company’s pluses (its internal strengths and external opportunities) are listed together, as are all of the company’s minuses (its internal weaknesses and external threats). Entrepreneurs can study this sheet to determine

Do It... 7.2: Innovate a Product Together with a team of two or three students, innovate an existing product (good, service, or experi- ence) of your choice. For example, you may choose to create a

better package or improve a feature. Describe your innovation in one page, and be prepared to submit it electronically or present it to your class.

Now Debrief... • Many entrepreneurs are successful because they em-

brace innovation, a unique improvement that the mar- ket rewards.

• Innovations can range in size and scale from incremental innovations to disruptive innovations to revo- lutionary innovations.

• The definition of innovation is changing: Companies at the cutting edge of innovation use technology to help individual customers “co-create” personalized content and experiences.

• Innovation relates to every facet of the triple bottom line, but it’s not just a tool for current CEOs. You can bring innovative thinking into your own life by looking at things in new ways, thinking critically, being an active learner, thinking both analytically and intuitively, and bal- ancing your passions with your career prospects.

Concept A

Concept B

Concept C

Concept D

Chapter 7 | Own: Entrepreneurship, Innovation, and Forms of Ownership 163

whether the pluses outweigh the minuses. If the pluses are swamped by minuses, entrepreneurs need to think about how they can maximize their pluses, create new pluses, and minimize (or eliminate) the minuses.

Take, for example, this strategic balance sheet for your fictitious catering company:

“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”

—Sir Winston Churchill17

Strategic Balance Sheet Your Catering Company

Pluses Minuses

• Food tastes delicious. • Slightly higher menu prices.

• Staff is well trained. • Since the company is small, you can’t accept all the jobs you’d like to.

• People are looking for companies • The low-carb craze is slowing that use fresh, organic, locally down sales of baked goods. grown ingredients.

Based on this information, you might decide to look for ways to lower your prices, develop more desserts that aren’t so heavy on the carbs, and hire more employees.

Who are the employees of your catering company, anyway? Are they Paris- trained chefs, knowledgeable home cooks, or your college roommates who

were desperate for jobs? In other words, what core competencies do they bring to the business?

Core competencies are skills and areas of expertise that a company’s employees pos- sess that are considered better than those of people in other companies within the industry. On a SWOT analysis, these core competencies would be listed in the “internal strengths” cat- egory because they make the company competitive and unique.

Core competencies are important to a company because they provide extra abilities when opportunities arise or when the competition tries something different. When companies don’t develop their core competencies, they are at a distinct disadvantage because developing those core competencies after the fact takes a lot of time and money.

Core competencies are important not only to business owners but also to employees. What are your core competencies? What unique, valuable skills do you bring to the table? The employees with the most core competencies are usually the most secure when layoffs occur because they’re seen as valuable to the company. The woman with the master’s degree in com- puter science and 15 patents to her credit is valuable to the success of her tech company, and the man with the Ph.D. in archaeology is valuable to the success of the natural history museum that employs him. When the heads of these businesses perform SWOT analyses and create a strategic balance sheet, they take their employees’ valuable traits and skills into account on the “plus” side of the ledger.

SWOT Is a Constant Process SWOT analysis isn’t a one-time process. There are always new opportunities and threats around the corner. Once you’ve SWOT-ed yourself through that job interview and landed a

Core Competencies

164 Leadership Vision

good job, are you going to stop looking for opportunities? Probably not. If you like your job, you’ll use SWOT to figure out what opportunities are available for you within your company, and if you’re less than thrilled with your new career, you might use SWOT to identify oppor- tunities that are a better fit for you.

And you need to keep re-evaluating those threats too. The other potential candidates for the job are no longer a threat to you, but the economic downturn in your industry could be a very real threat to your job. (Time to remind your boss of the core competencies you bring to the company.)

Just like the rest of us, entrepreneurs can use SWOT analysis frequently to identify new opportunities. “Going green” has become particularly popular lately, and companies that man- ufacture chemical-laden household products might have seen the new “all-natural” focus as a threat. But some of those companies turned that threat into an opportunity by developing “nat- ural” dishwashing detergents and soaps that allowed them to tap into the newly robust green market. In a few years, the allure of eco-friendliness may still remain, but there may be other factors that customers care about more, and companies will have to adjust their products and tactics once again to grab new opportunities and minimize new threats.

Do It... 7.3: Conduct a SWOT Analysis Conduct a SWOT for yourself

as a candidate for an internship or full-time career. What are your in- ternal strengths and weaknesses (relative to others who might be com- peting for the same position), and what opportunities and threats do you face in the market? Limit your response to one page, and be prepared to submit it electronically or present it to your class.

Now Debrief... • SWOT analysis can be useful for anyone who needs

to make a decision, but in particular, it helps entre- preneurs evaluate their employees and ideas, seize opportunities, and think strategically.

• Core competencies are skills and areas of expertise that a company’s employees possess that are con- sidered better than those of people in other com- panies within the industry. On a SWOT, these core competencies are listed in the “internal strengths” category.

• SWOT analysis is not a one-time activity, but a constant process that businesses can use to ensure that they are using their employees effectively, taking advantage of new situa- tions, and dodging ever-changing threats.

Concept A

Concept B

Concept C

Concept D

4. The Flavors of Entrepreneurship and Forms of Ownership

Would you describe yourself as a true revolutionary? Do you have brilliant ideas but tend to drive other people crazy? Would you prefer to work for a boss or be the boss yourself? Does the idea of working from home sound like a dream or a nightmare to you?

Chapter 7 | Own: Entrepreneurship, Innovation, and Forms of Ownership 165

If you and a few friends answered each of these questions, each of you would probably come up with different answers. That’s because questions like these get at your entrepreneur- ial style, and not all entrepreneurs are the same. They all have good ideas and a drive to be suc- cessful, but in other ways, they’re as different as chocolate, vanilla, and strawberry. There are different forms of entrepreneurship based on the degree of control and freedom that the forms provide the entrepreneur, along with the amount of risk, financial commitment, and security they provide. However, once you figure out your "flavor," your job isn’t finished. You still have a big decision to make: which form of ownership works best for you?

The Five Flavors of Entrepreneurship If you go to your local ice cream parlor and ask for a vanilla cone, you know pretty much what you’re get- ting. You’ve tasted vanilla before; it’s safe and deli- cious. If you go to Japan, though, you might be

offered ice cream flavored with saury, a saltwater fish.18 Fish ice cream isn’t for everyone, but if you take a chance and try it, you just might find it’s

your new favorite flavor.

Just like there are differ- ent ice cream flavors, there are different “flavors” of en- trepreneurship. Some flavors are more traditional, like vanilla; others are more un- usual, like fish. In this section, we’ll look at each flavor. As you read, think about which type of entrepreneurship might suit you best. Are you a

vanilla cone, a fish sundae, or somewhere in between?

Not everyone is willing to accept the risks associated with being an entrepreneur, but they may still have the drive and innovation to make a difference in their organiza-

tion. An intrapreneur is a person who uses his or her entrepreneurial skills inside an or- ganization. You might say these types of people are employee-entrepreneurs. Being an

intrapreneur is a low-risk way to flex your entrepreneurial skills. Examples of intrapre- neurs range from CEOs of successful companies to managers, to anyone else who wants to show an organization what he or she can do.

If you’ve ever used a Post-It note manufactured by the company 3M, you’ve appreciated the work of an intrapreneur firsthand. Many years ago, a 3M chemical engineer named Arthur Fry got frustrated when his paper bookmarks kept falling out of his hymnal at church. Then, Fry had a brainstorm: What if the paper slips had strips

of not-too-sticky adhesive along their sides? Fry brought his idea to his bosses at 3M, who encouraged employees to spend part of their time on independent projects like this one, and the Post-It was born.19

Intrapreneur

Sometimes entrepreneurs come up with great ideas that do more than offer an innovative product. Social entrepreneurs are people who blend tradi-

tional entrepreneurial business development with social objectives for the greater good of

Social Entrepreneur

What flavor of entrepreneur are you?

Ice Cream

A&B

Business purchaser

Ice Cream

A&B

Franchise e

Ice Cream

A&B

Intrapre neur

Ice Cream

A&B

Social

entrepre neur

Ice Cream

A&B

Classic entrepreneur

A&B Flavors of Entrepreneurship

"That's my flavor right there."

A&B

Ice Cream

A&B

Intrapre neur

166 Leadership Vision

society. They act as “change agents,” seeking to effect long-term societal change. Whereas traditional entrepreneurs are often driven by a profit motive, social entre- preneurs are more focused on “social value,” improving the lives of others.20 Take social entrepreneur Mimi Silbert. In 1971, she formed the Delancey Street

Foundation, a San Francisco-based residential center that provides recovering drug addicts and criminals with a place to learn how to lead drug- and crime- free lives. The organization does not accept government funding or charge its residents; rather, it earns revenue by running over 20 businesses, such as a restau- rant and a catering business, that help give Delancey residents marketable skills and train them to become productive members of society.21 Today the organiza- tion has locations in San Francisco, Los Angeles, New Mexico, North Carolina, and New York.22

Perhaps you don’t want to work from within a company or don’t have an idea for big sweeping change. Another way to become an entrepreneur is to be- come a “business purchaser” by buying an existing business that’s already suc-

cessful. You don’t have to create a business from the ground up; you simply buy it from someone who’s already done the foundation work.

Buying a successful, established business definitely has some advantages. If you don’t want a lot of risk, for example, this flavor might be for you. However, before taking the plunge, business purchasers should investigate why the owner is selling. Is he retiring? Is she having financial problems? Successful business purchasers are inquisitive, smart, and savvy. Because they’re not starting the business from scratch, they have to take care to ensure that every aspect of the business they’re inheriting is shipshape.

Business Purchaser

You’ve probably eaten at a Subway or shipped a package from a UPS Store, but did you know that, if you wanted to, you could run your own Subway or UPS Store? It’s

true, and it’s all thanks to franchising.

Here’s how it works: The prospective business owner, or the franchisee, buys into the business of the franchisor, or the business owner who agrees to sell the franchise. The fran- chisee purchases the right to distribute the franchisor’s techniques, products, trademarks, or

other relevant items. The franchisee is also given various benefits such as training, advertising, and other support services. In exchange, the franchisor usually gets a

percentage of the gross monthly sales and a royalty fee. One of the benefits of franchising is the limited risk involved. Since the franchisor provides training and support, the business owner knows the ins and outs of the business before the doors open.

If you think that franchisee might be your favorite flavor of entre- preneurship, you’re in luck—there are myriad successful franchises in the United States. Many of them, such as Pizza Hut, KFC, and Sonic Drive-In

Restaurants, are food businesses, but if food isn’t your thing, you could run a hotel like the Hampton Inn, a tutoring business like Sylvan Learning Centers, or a hair salon like Supercuts, just to name a few options.23

Franchisee

If you’re a classic entrepreneur, you’re one of the original flavors

that never goes out of style. Classic entrepreneurs start businesses from scratch and build them into successful, profitable companies. Of course, “classic” isn’t a synonym for “old-fashioned.” Plenty of tech companies and products of the dot-com boom were created from nothing by classic entrepreneurs with a little creativity and a knack for grabbing on to opportunities.

Classic Entrepreneur

Ice Cream

A&B

Social

entrepre neur

Ice Cream

A&B

Business purchaser

Ice Cream

A&B

Franchise e

There are different forms of entrepreneurship based on the degree of control and freedom that the forms provide the entrepreneur, along with the amount of risk, financial commitment,

and security they provide.

Chapter 7 | Own: Entrepreneurship, Innovation, and Forms of Ownership 167

Many classic entrepreneurs start small businesses. Small businesses—in- dependently owned businesses that generally have fewer than 500 employees,

depending on the industry—are the heart of business in the United States. In fact, 99.7 percent of firms in the United States are small businesses. That’s over

27 million businesses.24 As a result, small businesses generate the majority of new in- novative products on the market. That’s no small feat!

Many of the big companies you are familiar with today, such as Disney, Apple, Ford, and Hershey Chocolate, started off as small businesses. In fact, classic entrepreneurs started many of these while operating from their homes. These home-based business owners run their home business from an office within the home that (for tax reasons) is

dedicated only to business pursuits. The home business might be a one-person operation, or the home-based business owner might hire a small number of employees to help out.

For instance, Paul Allen and Bill Gates founded Microsoft Corporation. But on April 4, 1975, Allen and Gates were living at 199 California Street N.E. in Albuquerque, New Mexico, having just started the company Microsoft.25 The house is considered the first place to house Microsoft.

Now that you’ve had a look at the menu, answer this: Which entrepreneurial flavor best suits you? For example, if you don’t like the idea of being in charge

of a bevy of employees, you’re probably better off as an intrapreneur than as a classic entre- preneur. Remember, not all entrepreneurs have to operate in the same way or follow the same path; the most successful choose the path that works best for them.

Forms of Ownership By now, you’ve determined that you’re mint chocolate chip. (Or maybe not, but you have some idea about your entrepreneurial “flavor.”) Now that you know which type of entrepreneurship suits you best, you’re ready to consider the different forms of ownership you can choose from when you start a business.

Which Flavor Are You?

When you think about owning your own business, you’re probably envisioning a sole proprietorship, which is a business that is owned and operated by a

single person. Anyone can have a sole proprietorship. When you start your catering business by baking trays of gingersnaps and selling them to your friends for 50 cents each, you’re a sole proprietor as soon as you receive that first payment.

Sole proprietorships are the most common type of business because they’re so easy to start. There’s no special paperwork, and you have complete control of your business. Not

only that, but you’re truly your own boss. There are also no spe- cial tax forms to figure out. When you’re a sole proprietor, there is no legal difference between you and your business, so all of the money you generate from your business is claimed on your indi- vidual tax returns. And then there’s pride; many sole proprietors have a strong sense of pride in themselves and in the businesses they’ve built.

As a sole proprietor, the good news (and the bad news) is that you’re 100 percent re- sponsible for your business. Why isn’t this always a pro rather than a con? Well, if a batch of your lasagna makes people sick, you might have a lawsuit on your hands because you—and only you—are liable for that lasagna. (Being liable means you are legally obligated to cover the costs or damages your business creates.) Sole proprietors also have unlimited liability, which means they’re responsible for all debts created by the business. So, if you have a busi- ness debt that your business assets can’t pay, you may have to sacrifice your personal assets to cover the expense. Worst-case scenario: If you’re sued because your food made people sick, you could lose everything you have—your home, car, savings, retirement fund, invest- ments—everything.

Sole Proprietorships

“The two most important requirements for major success are: first, being in the right place at the

right time, and second, doing something about it.” —McDonald’s founder Ray Kroc26

Ice Cream

A&B

Classic entrepreneur

168 Leadership Vision

If you prefer to share responsibility for tasks, rewards, and failures, a partnership may be a better option for you. A partnership describes two or more people who share

ownership of a business. This means that the partners involved share the profits and the losses. For example, imagine that you enlist your best friend (who happens to be in culinary school) as a co-owner of your catering company. The two of you have just formed a partnership. If your company is a hit, you’ll both reap the rewards; if it’s a flop, you’ll both be down in the dumps.

Why start a partnership? One of the big pluses is money. Partners bring money to the table, so having more people in a partnership translates into starting a business with more money. This is why banks are more likely to lend money to a business with multiple owners—they feel more confident that partnerships will be able to repay loans.

Another perk of partnership is flexibility. Having more hands on deck can give each of you more free time, whether you use that time to increase sales and marketing efforts or take a vacation. Partnerships also allow you to divvy up the work so that each partner can play to his or her strengths. Let’s say you hate paperwork, but you love interacting with customers. Your partner actually enjoys paperwork, but he’s not great at small talk and selling. In a situation like this, each partner gets to work primarily on the tasks he or she enjoys.

Despite the benefits, partnerships aren’t all a bed of roses. Have you ever worked in a group with someone you didn’t get along with? If so, you’re already acquainted with one of the main drawbacks of a partnership. Before you jump into this type of business, you need to be very particular about the people you choose to work with. If you don’t get along with your part- ner, you might be heading toward disaster. Do you and your partner have similar work ethics? Are your working and communication styles similar (or at least compatible)?

It’s especially important for you to trust your business partner because partnerships are an- other type of business with unlimited liability; if your partner screws up, both of you are held responsible. This is why business partners often create a partnership agreement before they enter into ownership together. Creating a partnership agreement forces partners to hash out tough issues before problems arise.

If you’ve decided to enter into a partnership, you have a couple different options for that partnership’s structure:

• General partnerships are the default arrangement, in which all partners own, operate, and are fully liable for the business. As you might guess, a general partner is someone who owns the business, runs the business, and is fully liable.

• Limited partnerships are a little more complicated; they involve a combination of at least one general partner and at least one limited partner. A limited partner is simply an investor in the company. Limited partners do not participate in running the business, and they’re only liable up to the amount they’ve invested.

Partnerships

So, what options do you have if you don’t want unlimited liability for your catering company? For starters, you might found a corporation. A corporation is a business

that is its own separate legal entity, distinct from its owners. It can buy and sell property, and it has limited liability, which means that the owners are only liable up to the amount they’ve in- vested in the business. This protects owners’ and investors’ personal assets. If your corporation is liable for something, the corporation’s assets are used as payment, and you’re not in danger of having to pay with your own savings.

Corporations also look attractive to some entrepreneurs because they can provide credibility to a new business by having “Co.” or “Inc.” at the end of a business’s name. Corporations also have more options when it comes to raising money compared to sole proprietorships and partnerships. Corporations have an easier time obtaining money from banks and venture capitalists, and they also

Corporations

Chapter 7 | Own: Entrepreneurship, Innovation, and Forms of Ownership 169

have the option of going public and selling stock. Investors can buy stock in the corporation, gen- erating a lot of money that owners can use to fund the company’s growth.

Incorporation may help a company grow and profit, but there are strings attached. Once a company “goes inc.,” it faces new hurdles, most of which involve plenty of paperwork. In order to stay transparent, corporations need to maintain records of financial transactions, re- ports, meeting minutes, and other important details.

There’s one other issue to think about before you take the leap and incorporate your catering business: double taxation. In a corporation, the business pays taxes on its profits, and shareholders also pay taxes on the income generated from their investments.

Want to take advantage of the limited-liability benefits of a corpora- tion but avoid double taxation? Maybe you’d be interested in forming

an LLC. Limited liability companies (LLCs) combine the limited liability benefits of corpo- rations with the tax benefits of partnerships. Although some types of companies, like insurance companies and banks, can’t be LLCs, they are an option for many business owners. An LLC might have only one owner (called a “member”), or it might have lots of members; there’s no maximum number. Profits from LLCs are reported on investors’ personal tax returns, so an in- crease in profits can raise investors’ taxes. Different states have different rules for LLCs, but in general, forming an LLC is a good way to protect yourself from lawsuits against your company while avoiding double taxation.27

To clarify the different forms of ownership, see Table 7.1.

Limited Liability Companies (LLCs)

Table 7.1 | Comparing Forms of Ownership

Form Advantages Disadvantages

Sole Proprietorship: • Easy to start • Unlimited liability owned and operated • Owner has complete • Pays all taxes by a single person control • Difficult to raise

• No special tax form money for expansion • Retains all profit or start-up

• No one else to lean on

Partnership: two or • More start-up money • Work ethic differences more people share • Flexible • Management style ownership • Shared resources variations

• Limited partners: • General partners: limited liability unlimited liability

Corporation: • Limited liability • Increased paperwork separate from owners; • Easy to raise money • Double taxation is its own legal entity

Limited Liability • No double taxation • Increased profit can Company (LLC): • Limited liability raise personal taxes combines the limited liability advantages of a corporation with the tax advantages of a partnership

170 Leadership Vision

5. A Plan for Success: The Business Plan So, you’ve performed a SWOT analysis of your new business idea, and it turns out

that there are plenty of opportunities ripe for the picking in the catering biz. You’ve also looked at the options you have for forming your own business. It looks like your new catering company will be able to move from dream to re-

ality. But do you have a plan?

Although there’s no single “formula” for success in entrepreneurship, one way to improve your chances of succeeding is to create a business plan.28 A business

plan is a detailed, step-by-step plan that distinctly states your goals and explains how you plan to reach those goals. It is a crucial document because writing and researching it help you clarify what you want to accomplish with your business. As you create your business plan, you’ll ask (and, ideally, answer) pertinent questions about such areas as marketing, operations, finances, personnel, and long-term development. Here are just a few of the questions you’ll need to address:

1. Who is my target customer?

2. Who are my competitors, and what are their strengths and weaknesses?

3. Who should I hire, and what skills should my employees have?

4. How much is launching and sustaining the business going to cost?

5. What are my product offerings, or what are the kinds of goods, services, and experiences I will offer to customers?

In the past, business plans were lengthy, sometimes dull documents with reams of spread- sheets. Today, business plans tend to be shorter and more interesting to read. They must stand out to the banker, chief executive officer, or venture capitalist who may invest money in your venture. Let’s look at the elements in a standard business plan.

Do It... 7.4: Figure Out Your Flavor Which “flavor” of entrepreneur are

you most likely to be, and why? Which form of ownership would seem to fit best with that flavor? Limit your response to one page, and be prepared to submit it electronically or present it to your class.

Now Debrief... • There are many ways to be an entrepreneur,

and you can choose the “flavor” that’s right for you based on your skill level, your financial goals, and your tolerance for risk. All five flavors of en- trepreneurship—intrapreneur, social entrepre- neur, business purchaser, franchisee, and classic entrepreneur—are equally valid, but it’s impor- tant to know which flavor most closely matches your strengths and weaknesses.

• Similarly, there are lots of different ways to be a business owner. You can run a sole pro- prietorship, partnership, corporation, or limited liability company. The form of ownership you choose for your business will depend on the risks you’re willing to take, the amount of control you want to have, and your ultimate goals for the business.

Concept A

Concept B

Concept C

Concept D

A business plan states your goals and how you plan to reach them.

The Business Plan* The Executive Summary * The Business Description, Vision,

and Mission * The Competitive Market Analysis * The Management Team

* The Marketing Plan * The Financial Analysis

Chapter 7 | Own: Entrepreneurship, Innovation, and Forms of Ownership 171

“The Idea”: The Executive Summary The first part of a business plan, called the executive summary, is pretty much what it sounds like: a summary of the main points of your plan. The summary should include a brief descrip- tion of the business, identify goals and objectives, and let the reader know what the business is seeking from potential investors, bankers, or partners, and how their investment in the com- pany will benefit them. When you write an executive summary, be clear, concise, and com- pelling—and avoid technical jargon that might alienate your readers.

Above all else, you want the executive summary to convince potential investors that your idea is brilliant and that your business will be a success. If readers aren’t impressed with the ex- ecutive summary, they won’t read any further. Here’s how an executive summary for your catering business might begin:

Sweet Tooth Foods is a catering company that brings vibrant local flavors and first-class service to customers throughout southern New England. . .The company has already secured contracts with new customers and is looking to increase its customer base in the near future. . .

“The Company”: The Business Description, Vision, and Mission After you give your readers an executive summary of your plan, you’ll want to provide a few basic details about your business. Among other things, this section should state the business’s legal name and form, its location, its vision and mission statement, and the products it provides.

What’s in a name? Maybe more than you think. A company’s legal name isn’t always the same as its commonly used name. For instance, the legal name of

IBM is actually International Business Machines Corporation. In a business plan, it might be stated as ”International Business Machines Corporation, doing business as (dba) IBM or I.B.M.”

This section should also state the legal form of your business, whether it’s a sole propri- etorship, a partnership, a corporation, or an LLC.

Legal Name and Form

Choosing a location for your business may seem simple, but it’s actually one of the most influential factors in determining the success of your business. Your business plan should

include a description of the location, such as a physical description and a list of the pros and cons. You should also include a demographics analysis of the area that enables potential in- vestors to understand the types of customers you will be catering to.

If you haven’t decided on a final location yet, your business plan should include a list of po- tential sites along with the pros and cons of each.

As you learned in Chapter 6, a company’s vision explains where the company wants to go. Including the company’s vision is not only helpful for investors, it

also helps unify and motivate employees toward a common goal.

In addition to explaining the company’s long-term vision, it’s a good idea to include the mission statement, which explains the present purpose of the company along with specific goals. Don’t get too bogged down by specifics here. Rather than explaining that your catering company’s purpose is to cook pasta for exactly seven minutes before plating it, covering it with homemade marinara sauce, and serving it to wedding guests, you might want to stick with the following:

Our mission is to improve our customers’ quality of life by providing fresh, healthy food and cour- teous, caring service.

We’ll discuss mission statements in more detail in Chapter 9.

Location

Vision and Mission Statements

172 Leadership Vision

What services or experiences does your company provide? What goods do you sell? How will your products benefit the customer? It can be tricky to list specific details about

your company’s products without overwhelming readers, but with a little work, you can strike a balance between specificity and brevity.

For your catering company, you certainly don’t need to list every item on your company’s menu. Instead, describe the company’s products and give a few specific examples:

Sweet Tooth Foods will provide pre-cooked meals to customers’ specifications. Our services include a preliminary menu consultation with the head chef, a tasting session, linen and china rental, and up to eight hours of on-site service before, during, and after the event. Customers may choose from a full and varied menu of appetizers, meat and vegetarian entrees, desserts, and beverages.

“The Opponents”: The Competitive Market Analysis In any competition, it’s helpful to know what you’re up against, and business competition is no exception. In this section, you’ll explain who your competitors are, describe their strengths and weaknesses, and point out how your own company is poised to be successful in the market. (This is a great place to include the results of the SWOT analysis you performed earlier.) In the process of identifying the competition, it is necessary to identify the market niche—or subset of the market on which your product is focusing—that has been left open and not addressed by the competition.

For example, the direct competition to your new catering company will include other catering companies in the area. How much do they cost? What services do they provide? Is their food any good? And how do your costs and services stack up?

You’ll also need to analyze other aspects of your market to give investors a clear idea of how your company will fit into the big picture. How are local restaurants doing, and what in- formation do they give you about food service? How is the catering industry performing as a whole? You’ll want to point out the strengths, weaknesses, opportunities, and threats that your competitors face, and you’ll need to convince readers that your own company’s strengths and opportunities will give you a good shot at success in the market.

“The Players : The Management Team People are the essence of an organization, and the quality of your management team will be a deciding factor in your success. When investors and lenders look into your business plan, they’ll be especially interested to see your management team’s qualifications. This section therefore lists the key people in your company and explains their roles.

At the top of this list is the founder: you. As the founder, you’ll most likely serve as a top management person, such as president or chief executive officer. In addition to your key man- agement team, include members of the board of directors, if there is one, members of any ex- isting advisory boards, and specialists or consultants. Any people who are essential or necessary to your operations, such as a scientist performing critical research, should also be listed. You’ll want to describe each team member’s education, experiences, successes, and strengths.

In addition, you may want to state the management style you plan to accept as your company’s culture, and explain how that style will add value to your company and is necessary for its success. For example, the style of management at Yahoo! has been described as “laid-back” and “relaxed,” not caring what employees wear to work as long as they deliver their services to customers.

“The Buyers”: The Marketing Plan Wouldn’t it be nice if you proclaimed your company open for business and, as if by magic, cus- tomers immediately flocked to your door? Unfortunately, in real life, you’ll have to forego magic

Products

Chapter 7 | Own: Entrepreneurship, Innovation, and Forms of Ownership 173

in favor of a solid marketing plan. So, what goes into a marketing plan? Here are a few ques- tions you’ll need to address in this section:

• What are the strengths and weaknesses of your product?

• What message do you want to convey to your customers? How will you convince poten- tial customers that your company or product will meet their needs?

• How does your product stack up against the competition?

• How will sales take place? Will you have sales people? Will you have a brick-and-mortar store or a Web site for conducting sales?

• What are you forecasting in terms of sales and units sold?

• Once you’ve made a sale, how will you ensure that your customers return?

Your answers to these questions will depend on the type of business you’re starting and on your target clientele. For example, if you want your catering company to cater weddings, you might target brides- and grooms-to-be by advertising in wedding magazines and on Web sites like www.theknot.com.

“The Money”: The Financial Analysis Your innovative ideas may sound great, but how’s your company doing when it comes to

money? Potential investors will want to see some hard numbers, so you’ll need to present a financial analysis as part of your business plan. Not only will your financial records tell in- vestors how you’re doing and what to expect in the future, the plan also gives you infor-

mation to help plan for the future.

Your financial analysis should be down-to-earth and practical. It should include projections for funding, income, and expenses. Explain to the reader how you came up with these numbers, such as researching trends in the industry. It’s also a good idea to provide different scenarios for the future, such as best- and worst-case.

In addition, remember the cash flow statement and income statement from Chapter 1 and the balance sheet from Chapter 2? All of these statements or esti- mates of them should be included in this section of your business plan. Before send- ing it out, double- or even triple-check your numbers to make sure everything adds up. Incorrect calculations can make a very bad impression on potential investors.

A Business Plan for Life You’ve probably figured out by now that, if and when you decide to launch your own com- pany, your business plan will be crucial to your company’s success. But what if you aren’t start- ing your own company right away (or ever)? Should you bother to care about business plans?

Well, you don’t have to care passionately about them—that’s a lot to ask, after all—but you should know that anyone who has a plan in life can learn a thing or two from the business plan model. That’s because business plans are all about thinking critically, looking ahead, and making sure you have all the tools you need to succeed ahead of time.

Try applying a business-plan frame of mind to your post-college life. What are your own personal vision and mission statement for your life? Maybe you want to devote your life to help- ing people who are less fortunate than you are, or you want to share your love for music with the world. What concrete steps are you going to take in order to achieve that mission? How are you going to make money, and what are your short- and long-term plans for spending that money? What opportunities and strengths will help you rise above your competitors? You’re the president and CEO of your own life, and a little careful planning will help you steer your- self toward success.

174 Leadership Vision

6. Where to Find Help Starting Your Business

Let’s say you’ve started practicing your entrepreneurial DOs, you’ve come up with an innova- tive idea and analyzed it using SWOT, you’ve figured out your flavor of entrepreneurship, you know which type of ownership is best for you, and you’ve created a business plan to turn your dream into a reality. What’s next? For some, it’s time to get out there and start a business!

Feeling a little daunted? That’s understandable; starting a business is intimidating, especially if you don’t have much experience or if you’re entering a tough economic climate. But there are resources out there that can give you the support you need to start a company of your own, whether that support is legal, financial, structural, or emotional. And while you’ll probably make mistakes, there are a few steps you can take to avoid the most common traps that trip up new entrepreneurs.

Finding Funding Aside from getting a traditional bank loan, where do you go to get funding? Let’s look at some other sources for financing.

Do It... 7.5: Create a Business Plan Imagine that you’re about to enter the

job market, positioning yourself for a promotion or trying to break into a different career, and apply the business plan components described above to write a business plan outline for You, Inc. Limit your plan to two pages and use bullet points to highlight the key

points. Be prepared to submit your outline electronically.

Now Debrief... • If you’re starting a business or heading down a new

path in life, you’ll need a business plan—a detailed, step-by-step plan that distinctly states your goals and explains how you plan to reach those goals.

• The executive summary summarizes the main points of the business plan.

• Next, the business plan should include basic infor- mation about the business, such as its legal name, form, location, vision and mission statement, and product information.

• A competitive market analysis helps a business know what it's up against. • The management team should also be listed on the business plan, so potential

investors can review the team’s qualifications. • Finally, the business plan should include the marketing plan and the financial analysis,

so people can see how you’re going to get your business noticed and keep it running.

Concept A

Concept B

Concept C

Concept D

If you have assets of your own, you might finance your business through cash or through an equity loan on your house or other valuable possessions. If, like many

people, you don’t have the assets to self-fund your business, you might want to search for

Personal Sources

Chapter 7 | Own: Entrepreneurship, Innovation, and Forms of Ownership 175

Wealthy individuals may provide capital for your business if they think the venture has a good chance for success. These generous folks are called angel investors, or business angels, but they don’t invest out of the goodness of their hearts. They want some level of ownership in the business. Venture capitalists are another source of funds. These professional money managers might be interested in investing their clients’ money in your promising new busi- ness in exchange for partial ownership and a high return on the investment. You might also want to contact a stockbroker or investment banker. These individuals often know of wealthy individuals looking to invest in start-up companies.

For start-up companies, funding is also available from state and federal pro- grams designed to assist start-up companies. Finally, Entrepreneur and INC maga- zines often list possible financing sources and are good resources for budding

entrepreneurs wishing to see how others have financed their businesses.

Finding Help Sure, you need some money to get your company started, especially if you’re a first-time business owner, but you also need some good, sound advice. Fortunately, there are plenty of places you can turn to for help—and even more fortunately, many of these resources are cheap or free. Table 7.2 lists some helpful free and low-cost resources. As noted above, Entrepreneur and INC also provide helpful resources. Let’s look at some other sources in more detail.

Outside Sources

Table 7.2 | Free and Low-Cost Resources for Starting a Business

Small Business Administration (SBA) Independent agency that assists, counsels, and www.sba.gov protects small-business interests

Small Business Development Centers (SBDC) Branch of the SBA, with offices located www.sba.gov/aboutsba/sbaprograms/sbdc/index.html nationwide, that provides assistance in all

areas related to small business

Service Corp of Retired Executives (SCORE) Nonprofit association composed of experienced www.score.org volunteers who spend time counseling and

mentoring small-business owners

National Association of the Self-Employed (NASE) Nonprofit organization that provides benefits www.nase.org and resources for self-employed and micro

businesses, such as day-to-day support and buying power

U.S. Chamber of Commerce Small Business Center Online library full of information for small- www.uschamber.com/sb business owners, along with small-business

“toolkits” that offer advice about hiring, sales, marketing, and other key entrepreneurial activities

business partners who can afford to help you get the company off the ground. If you don’t feel awkward asking friends and relatives for help, you could consider them as another source of funding. (Just keep in mind that if the business goes south, so could your relationships, so tread carefully.)

176 Leadership Vision

What can you do to get yourself and your business out in the real world? If you go to an industry conference or a trade show, you’ll

get to network with others in the biz, hear the latest industry news, and meet people in your area who could wind up becoming your customers.

• To find a conference near you, point your Web browser to AllConferences.com, which of- fers calendars for a wide range of business-related conferences.

• Looking for conferences related to a specific industry? A quick Internet search can proba- bly help you find what you need. (For example, ConferenceGuru.com can give you plenty of details about technology conferences.)

• Finally, if you’d like to attend a trade show, go to TSNN.com for a comprehensive list of upcoming events.

Industry Conferences and Trade Shows

If you don’t have a business space or an office staff, or if you’re looking for additional support for your start-up, a business incubator might be able to help you. Business

incubators provide a wide range of management support services and resources for newly minted entrepreneurs, including shared office space that several start-ups can use simultane- ously to reduce overhead costs. Incubators generally provide office equipment, meeting rooms, and a fee-based business support staff to answer phones and perform other basic administra- tive work.

Incubators

The Small Business Administration (SBA) is a government agency that helps get businesses up and running and also provides training

and loans to keep the businesses going.29 Visit the SBA online at www.sba.gov and check out their Start-Up Assessment Tool. After a short registration process, you can take free, self-paced, 30- to 45-minute courses on the site.30 If you prefer to work in the non-virtual world, you can visit one of the SBA’s many district offices to find information that’s relevant to your own state and locality.

The Service Corp of Retired Executives (SCORE), a nonprofit or- ganization that’s part of the SBA, is dedicated to helping entrepreneurs in all aspects of their businesses.31 It has nearly 400 chapters and around 11,800 volunteers (with about 600 different business skills) throughout the United States and its territories. These volunteers are retired and working executives, corporate leaders, and small-business owners willing to donate their time to further the cause of entrepreneurship. Since 1964, SCORE volunteers have helped over eight million entrepreneurs. The organization also offers online learning, business templates, how-to articles, low- cost workshops, and a large resource library. You can check out SCORE’s Web site at www.score.org.

The SBA also runs the Office of Small Business Development Centers (SBDC), a network of about 1,100 branch offices that provides counseling, training, and technical assistance in many aspects of small-business manage- ment. Many of the centers are on or near university and college campuses. If you go to an SBDC office with a simple draft of your business plan and plenty of questions, it can help you develop your business. Take a look at the SBDC locator map, found on the SBA’s Web site, to find an office near you.

Small Business Administration Resources

Chapter 7 | Own: Entrepreneurship, Innovation, and Forms of Ownership 177

These incubation sites are usually geared toward entrepreneurs who can’t afford to set up their own business space or don’t want to work out of a home office. For a new busi- ness, an incubator can be a great short-term solution. To find a business incubator in the United States or internationally, visit the National Business Incubation Association at www.nbia.org.

Avoiding Common Mistakes Even with expert help and advice, chances are good that you’re going to make some mistakes when you start your business. Let’s look at some common errors entrepreneurs make. By being aware of these mistakes, you will hopefully avoid them.

1. I don’t know how to run a business! An entrepreneur may have a good idea for a new busi- ness but may lack the necessary experience to make the business a success. Not having experience in finance or management can cause an entrepreneur to make poor decisions that may be detrimental to the business.

2. I have too much debt! Starting a business can cost a lot of money. Often, entrepreneurs don’t have this money in cash, so they take loans or use credit to get started. These re- sources generally charge interest, so debt can add up so fast that the business can’t recover.

3. I was overly optimistic about my cash flow projections! Some entrepreneurs expect their cash inflows to be higher than they actually are, leading to cash flow problems.

4. I incorrectly forecasted my sales channels! Some entrepreneurs miscalculate which sales channels will be available and find that those that are available are inadequate or too small to generate the volume of business they need.

5. My operating expenses forecast was unrealistic! Some entrepreneurs underestimate just how much it will cost to create their product and run the company, especially when it comes to salaries, benefits, and marketing budgets.

Do It... 7.6: Prevent Common Mistakes Pick any three of the sources

of help for business start-ups described in this section, and for each, explain how they could help prevent some of the mistakes that entre- preneurs often make. Limit your response to one page, and be pre- pared to submit it electronically or present it to your class.

Now Debrief... • Personal sources of funding for start-ups include an

equity loan, business partners, and friends and rela- tives. Outside sources of funding include angel in- vestors, venture capitalists, and government sources.

• Opening a small business can be daunting, but re- sources are available to provide support. Inexpensive or free resources include Small Business Administration resources, industry conferences, trade shows, and business incubators.

• One way to help your business succeed is by avoiding common mistakes such as lacking experience and accumulating too much debt.

Concept A

Concept B

Concept C

Concept D

178 Leadership Vision

1. Appreciate what it takes to be a successful entrepreneur. (pp. 156–158)

• If you have a passion and can think of a way to turn that passion into a busi- ness, you can be an entrepreneur, a person who takes risks associated with organizing and managing a new business.

• Successful entrepreneurs don’t all share specific character traits, but they do act in certain ways. To act like an entrepreneur, DO take on responsibility, cope with risk, stay optimistic, set goals and stick to them, solve problems and learn from them, invest in the long term, act with integrity, and give back to the community.

Summary: Adopting specific skills are necessary if you want to become an entrepreneur. However, even if you don’t want to have your own business, cultivating these skills can give you an instant advantage in whatever you do.

Chapter 7 Visual Summary

2. Recognize innovation when you see it and justify its effect on the triple bottom line. (pp. 159–162)

• Innovation is a unique change or improvement that the market rewards.

• There are three primary levels of innovation: incremental innovation, disruptive innova- tion, and revolutionary innovation. An incremental innovation is a small im- provement or change. A disruptive in- novation is an unprecedented change that transforms an industry, and a revolu- tionary innovation transforms society and creates a new way of living.

• Facebook, iTunes, and other forms of social interactive media exemplify “the innovation of co-creation,” which some experts see as the next wave of innovation.

• Innovation, especially the innovation of co-creation, is inter- twined with each aspect of the triple bottom line. Innovations drive profits, connect companies with the people they serve, and provide eco-friendly solutions to help the planet.

• You can bring innovative thinking into your own life by looking at things in new ways, thinking critically, being an active learner, thinking both analytically and intuitively, and balancing your passions with your career prospects.

Summary: Many entrepreneurs are successful because they have made a worthwhile innovation on an existing product, and customers are willing to pay for the improvement.

3. Conduct a SWOT analysis to identify opportunities and drive decisions. (pp. 162–164)

• You can use SWOT analysis to analyze the strengths, weaknesses, opportunities, and threats that face your innovative idea or your company.

• As an entrepreneur, you can use SWOT tech- niques to create a strategic balance sheet that illus- trates your company’s strengths and weaknesses.

• SWOT helps identify core competencies, which are skills and areas of expertise that the company possesses that are considered better than those of other companies within the industry.

• Entrepreneurs use SWOT constantly to evaluate new opportunities and avoid threats in their industry.

Summary: SWOT is a good analysis tool for any- thing, even if it doesn’t relate to business.

Leadership Vision | Chapter 6: Lead Chapter 7: Own Chapter 8: Act

Strategic Balance Sheet Your Catering Company

Pluses Minuses

• Food tastes delicious. • Slightly higher menu prices.

• Staff is well trained. • Since the company is small, you can’t accept all the jobs you’d like to.

• People are looking for companies • The low-carb craze is slowing that use fresh, organic, locally down sales of baked goods. grown ingredients.

Sophia

to be a successful entrepreneur, DO….

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cope w ith

risk stay optimistic

set goals and stick to them

solve

probl ems

and le arn

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inv es

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Sunbean Coffee

—Latin America—

give bac

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Chapter 7 | Own: Entrepreneurship, Innovation, and Forms of Ownership 179

4. Contrast the different flavors of entre- preneurship and legal forms of owner- ship and understand the risk/reward trade-offs that each implies. (pp. 164–170)

• There are many different types, or “flavors,” of entrepre- neurship. Not all entrepreneurs are identical, and each person can find the flavor that he or she likes best.

• An intrapreneur is a person who uses his or her entrepreneurial skills inside an organization.

• Social entrepreneurs are people who blend traditional entrepreneurial business development with social objectives for the greater good of society.

• Business purchasers buy established companies from other people.

• Franchisees buy into a busi- ness and return some profits to the franchisor—the business owner who agrees to sell the franchise.

• Classic entrepreneurs start and run their own businesses from scratch.

• There are also several different forms of ownership.

• A sole proprietorship is a business that is owned and operated by a single person.

• A partnership is shared ownership of a business by two or more people, and it comes in two forms: general partnerships and limited partnerships.

• A corporation is a business that is its own separate legal entity that is distinct from its owners.

• Limited liability companies (LLCs) combine the limited liability benefits of corporations with the tax benefits of partnerships.

Summary: Entrepreneurship and ownership are not one-size-fits-all terms. Instead, it’s up to you to decide what type of business owner you want to be and what type of business you want to own.

5. Explain the critical components of a business plan. (pp. 170–174)

• A business plan states a com- pany’s goals and the strategies it will employ to meet them.

• The executive summary summa- rizes the main points of the business plan.

• The business descrip- tion states the busi- ness’s legal name, form, location, vision and mission statement, and its products.

• The competitive market analysis describes competitors' strengths and weaknesses, and explains why your com- pany will be successful.

• The management team section lists the key decision makers of the business.

• The marketing plan explains how you’re going to pro- mote and sell your product.

• The financial analysis includes projections for funding, in- come, and expenses, as well as cash flow statements, income statements, and balance sheets.

Summary: A business plan is crucial for a business’s success.

6. Locate helpful resources for starting a business, and avoid common mistakes. (pp. 174–177)

• Entrepreneurs can find funding through equity loans, business partners, friends and family, angel investors, venture capitalists, and other sources.

• The Small Business Administration helps get small businesses up and running and provides training and loans.

• Business incubators provide shared office space and other forms of support for small start-ups.

• Some common business mis- takes include lack of experi- ence and financial mismanagement.

Summary: Starting a business can be daunting, but with the right planning and resources, the term “start- up” doesn’t have to be synonymous with “long shot.”

Ice Cream

A&B

Business purchaser

Ice Cream

A&B

Franchise e

Ice Cream

A&B

Intrapre neur

Ice Cream

A&B

Social

entrepre neur

Ice Cream

A&B

Classic entrepreneur

A&B Flavors of Entrepreneurship

"That's my flavor right there."

A&B

The Business Plan* The Executive Summary * The Business Description,

Vision, and Mission

* The Competitive Market Analysis * The Management Team

* The Marketing Plan * The Financial Analysis

180 Leadership Vision

Key Words

1. Appreciate what it takes to be a successful entrepreneur. (pp. 156–158) Entrepreneur (p. 155)

2. Recognize innovation when you see it and justify its effect on the triple bottom line. (pp. 159–162)

3. Conduct a SWOT analysis to identify opportunities and drive decisions. (pp. 162–164) Core competencies (p. 163)

4. Contrast the different flavors of entrepreneurship and legal forms of ownership and understand the risk/reward trade-offs that each implies. (pp. 164–170) Intrapreneur (p. 165)

Social entrepreneurs (p. 165)

Franchisee (p. 166)

Franchisor (p. 166)

Classic entrepreneur (p. 166)

Small businesses (p. 166)

Sole proprietorship (p. 167)

Liable (p. 167)

Unlimited liability (p. 167)

Partnership (p. 168)

General partnership (p. 168)

General partner (p. 168)

Limited partnership (p. 168)

Limited partner (p. 168)

Corporation (p. 168)

Limited liability (p. 168)

Limited liability company (LLC) (p. 169)

5. Explain the critical components of a business plan. (pp. 170–174) Business plan (p. 170)

6. Locate helpful resources for starting a business and avoid common mistakes. (pp. 174–177)

Angel investors (p. 175)

Venture capitalists (p. 175)

Small Business Administration (SBA) (p. 176)

Service Corp of Retired Executives (SCORE) (p. 176)

Business incubator (p. 176)

• Apply your skills in an interactive environment with more BizSkill experiences...and see if you have what it takes

• Think critically and talk with your peers on hot business topics in BizChats

• Flex your business communication skills and build your own portfolio with the Communication Plan exercises

• Watch the chapter material come together with Just Plain Business videos

• Study on-the-go with Audio Chapter Summaries in MP3 format

• Brush up on the lecture and content with Audio PowerPoints

• Discover how well you are doing and see what areas you need to improve on with the Pre-Tests and Post-Tests

Get the most out of what you just read by practicing your skills and actually DOING something with the material! The best place to do this is at www.mybizlab.com. Here’s just some of what is available to you there:

These key words and more are also available as flash cards to practice with at www.mybizlab.com.

Chapter 7 | Own: Entrepreneurship, Innovation, and Forms of Ownership 181

Prove It... Now, let’s put on one of the BizHats. With the Employee BizHat squarely on your head,

look at the following exercise:

Since you were a child, you’ve always wanted to start your own business. As a kid, you had your own lemonade stands, and you often baked cookies for school fundraisers.

Now that you’re older, your dream is to open a bakery and sell bread and baked goods from recipes that have been in your family for generations.

You’re three years out of college and have $10,000 saved for the job, but you don’t think that’s enough to get started. Up to this point, you’ve worked as a dietitian for a corporate food manufacturer, so you have some experience working for a big business. You recently met with a potential investor, who’s interested in your business but wants to know more. Put

what you learned in this chapter to work and conduct a SWOT analysis. Then, create an ex- ecutive summary to give the investor.

Prove It

Flip It... After you come up with an executive summary for your bakery, flip over to the Owner/Investor BizHat.

Imagine yourself as an entrepreneurial consultant/investor who has spent the last 20 years building a successful small business into a multi- million-dollar medium-sized business. You received an executive summary from a young entrepreneur who is only three years out of college and who has only $10,000 to start her business. This is what you know about the entrepreneur and her business:

• She has worked for three years at a major corporate food manufacturer as a dietitian.

• As a child and teenager she always loved to start business en- terprises such as a lemonade stand outside her home and making cookies for school projects to raise money.

• Her special interest is making homemade breads and baked goods from recipes handed down from her grandmother.

Considering her age, financial situation, special interests, goals, education, expe- rience, and other such factors, do you think this has the potential to be a suc- cessful business? Provide specific feedback. Are you willing to invest your time and money to help develop the business?

own er/

inve sto

r

ID

Owne r/I

nves tor

Worker Bee

ID

Employee

Now Debrief It... Compare the perspectives of the BizHats described above. When you had on the Owner/Investor BizHat, what did you expect from the Employee? When you were wearing the Employee BizHat did you think you had covered everything in your executive sum- mary? Was there anything missing? If so, what?

Concept A

Concept B

Concept C

Concept D

Employee

ID

Employee